-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H2ZeVQF8dsNjA7akeiBnDxiiuPplrkwA/+KfveE/6Zg1vkEik708YXbIOKBGi/2g ndFIwUOo3K6quaoe2TDiBg== 0000016099-98-000012.txt : 19981126 0000016099-98-000012.hdr.sgml : 19981126 ACCESSION NUMBER: 0000016099-98-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981125 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LUBYS CAFETERIAS INC CENTRAL INDEX KEY: 0000016099 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 741335253 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08308 FILM NUMBER: 98759968 BUSINESS ADDRESS: STREET 1: 2211 NE LOOP 410 STREET 2: P O BOX 33069 CITY: SAN ANTONIO STATE: TX ZIP: 78265-3069 BUSINESS PHONE: 2106549000 FORMER COMPANY: FORMER CONFORMED NAME: CAFETERIAS INC DATE OF NAME CHANGE: 19810126 10-K 1 FORM 10-K TEXT FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended August 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _________________ to ______________________ Commission file number: 1-8308 LUBY'S CAFETERIAS, INC. ______________________________________________________________________________ (Exact name of registrant as specified in its charter) Delaware 74-1335253 _________________________ ____________________________________` (State of Incorporation) (I.R.S. Employer Identification No.) 2211 Northeast Loop 410 Post Office Box 33069 San Antonio, Texas 78265-3069 Area Code 210 654-9000 _______________________________________ _______________________________ (Address of principal executive office) (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: Name of exchange on Title of Class which registered ______________ ______________________ Common Stock ($.32 par value) 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 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 ___ ___ 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. [ ] The aggregate market value of the shares of Common Stock of the registrant held by non-affiliates of the registrant as of November 10, 1998, was approximately $329,676,000 (based upon the assumption that directors and officers are the only affiliates). As of November 10, 1998, there were 22,964,475 shares of the registrant's Common Stock outstanding, exclusive of 4,438,592 treasury shares. Portions of the following documents are incorporated by reference into the designated parts of this Form 10-K: annual report to shareholders for the fiscal year ended August 31, 1998, (in Part II) and proxy statement relating to 1999 annual meeting of shareholders (in Part III). Item 1. Business. Luby's Cafeterias, Inc. was originally incorporated in Texas in 1959 and was reincorporated in Delaware on December 31, 1991. The Company's executive offices are at 2211 Northeast Loop 410, P. O. Box 33069, San Antonio, Texas 78265-3069. Luby's Cafeterias, 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 cafeteria operations are conducted by the partnership. Unless the context indicates otherwise, the word "Company" as used herein includes the partnership and the consolidated corporate subsidiaries of Luby's Cafeterias, Inc. The Company operates 223 cafeteria-style restaurants under the name "Luby's" located in close proximity to retail centers, business developments, and residential areas in Arizona, Arkansas, Florida, Kansas, Louisiana, Mississippi, Missouri, New Mexico, Oklahoma, Tennessee, and Texas. Of the 223 restaurants operated by the Company, 133 are at locations owned by the Company and 90 are on leased premises. Strategic Plan In August 1998 the Company announced plans to close 14 restaurants over the next year as part of its strategic planning efforts. The strategic plan includes relocating several restaurants over the next few years, improving current store sales and profits, creating a more profitable business in markets outside of Texas, building new restaurants in smaller Texas markets, and building the food-to-go business. The Company is testing a variety of initiatives, including expanded beverage offerings, breakfast, extended hours of operation, and the addition of drive-thru windows to selected restaurants. Management believes there is excellent potential in smaller Texas communities for a smaller prototype restaurant. A new prototype is being developed for introduction later in the current fiscal year. Marketing The Company's product strategy is to provide a wide variety of freshly prepared foods in an attractive and informal environment. The Company's research has shown that its products appeal to a broad range of value-oriented consumers with particular success among families with children, seniors, shoppers, and business people looking for a quick, healthy meal at a reasonable price. Prior to 1991 the Company relied primarily on customers' word-of-mouth recommendations and community relations activities to promote its business, spending approximately .5% of sales annually on these efforts. In 1991 the Company began developing a new marketing program. Based on favorable results of radio and television advertising tests, the marketing budget increased to approximately two percent of sales. During fiscal 1998, the Company ran a series of product-specific promotions, including the Chicken Lover's Special, Seafarer's Special, and Pasta Fest, which were well-received by customers and positively impacted customer traffic. The Company intends to increase the marketing budget in fiscal 1999 to approximatley two and one-half percent of sales and to continue expending the majority of the marketing budget on television and radio advertising. Operations The Company's operations combine the food quality and atmosphere of a good restaurant with the simplicity and visual food selection of cafeteria service. Food is prepared in small quantities throughout serving hours, and frequent quality checks are made. Each cafeteria offers a broad and varied menu and normally serves 12 to 14 entrees, 12 to 14 vegetable dishes, 15 to 20 salads, and 18 to 20 desserts. The Company's restaurants cater primarily to shoppers and office or store personnel for lunch and to families for dinner. The Company's restaurants are open for lunch and dinner seven days a week. All of the restaurants sell take-out orders, and most of them have separate food-to-go entrances. Take- out orders accounted for approximately 11 percent of sales in fiscal 1998. Each restaurant is operated as a separate unit under the control of a manager who has responsibility for day-to-day operations, including food purchasing, menu planning, and personnel employment and supervision. Each restaurant manager is compensated on the basis of his or her restaurant's profits. Management believes that granting broad authority to its restaurant managers and compensating them on the basis of their performance are significant factors in the profitability of its restaurants. Of the 223 managers employed by the Company, 177 have been with the Company for more than ten years. Generally, an individual is employed for a period of seven to eight years before he or she is considered qualified to become a manager. Each restaurant cooks or prepares substantially all of the food served, including breads and pastries. The restaurants prepare food from the same recipes, with minor variations to suit local tastes, although menus are not uniform in all of the Company's restaurants on any particular day. Menus are prepared to reflect local and seasonal food preferences and to take advantage of any special food purchasing opportunities. The restaurants are not dependent upon any one supplier, and the Company believes that alternative sources of supply are readily available. Quality control teams, each consisting of experienced cooks and a supervisor, help to maintain uniform standards of food preparation. The teams primarily assist in the training of new personnel during the opening of new restaurants. The teams also visit the restaurants periodically and work with the regular staffs to check adherence to the Company's recipes, train personnel in new techniques, and evaluate procedures for possible use throughout the Company. The Company conducts a training program comprised of both on-the-job training and classroom instruction in its training facilities in San Antonio. The training program is approximately three months in duration. Management personnel receive one week of classroom instruction and spend the remaining time on practical training in operating restaurants. In order to draw management trainees from regional talent pools, the Company has set up satellite training schools in several key restaurants to make on-the-job training more accessible on a local level. As of August 31, 1998, the Company had approximately 12,800 employees, consisting of 11,919 nonmanagement restaurant personnel; 739 restaurant managers, associate managers, and assistant managers; and 142 executive, administrative, and clerical personnel. Employee relations are considered to be good, and the Company has never had a strike or work stoppage. The Company is not subject to any collective bargaining agreements. Expansion During the fiscal year ended August 31, 1998, the Company opened five new restaurants in Phoenix, Arizona; Clearwater, Florida; Meridian, Mississippi; and Greenville and Tyler, Texas. During the 1998 fiscal year the Company closed five cafeterias in Little Rock, Arkansas; Leavenworth, Kansas; Albuquerque, New Mexico; Muskogee, Oklahoma; and Dallas, Texas. There was no net increase in the number of restaurants for the 1998 fiscal year. Since August 31, 1998, the Company has opened a new restaurant in Tulsa, Oklahoma, and has closed seven restaurants in Phoenix and Scottsdale, Arizona; Wichita, Kansas; Joplin, Missouri; Albuquerque, New Mexico, and Memphis, Tennessee. During fiscal 1999 the Company expects to open aproximately six new restaurants, inclusive of the one already opened. The Company expects to close approximately 12 restaurants during the 1999 fiscal year, inclusive of the ones already closed. The Company continually evaluates prospective new restaurant sites and typically has several sites for new restaurants under active consideration at any given time. The rate at which new restaurants are opened is governed by the Company's policy of controlled growth, which takes into account the resources and capabilities of all departments involved, including real estate, construction, equipment, and operations. It has been the Company's experience that new restaurants generally become profitable within a few months after opening. The costs of opening new restaurants vary widely, depending on whether the facilities are to be leased or owned, and if owned, on site acquisition and construction costs. The Company estimates that in recent years it has cost $2,500,000 to $2,700,000 to construct, equip, and furnish a new restaurant in a freestanding building under normal conditions, including land acquisition costs. The approximate cost to finish out, equip, and furnish a new restaurant in a leased facility has ranged from $1,200,000 to $1,400,000. The Company is reviewing its current restaurant design and plans to reduce the size and change the physical features of the restaurant to make it more appealing to guests. In addition, the Company is working on plans for an even smaller prototype (approximately 6,000 square feet) to be built in smaller Texas markets. Waterstreet Joint Venture In January 1996 the Company announced a joint venture agreement with Waterstreet, Inc., a seafood restaurant company operating in Corpus Christi, Fort Worth, and San Antonio, Texas. The agreement provides for the opening of up to five "Water Street Seafood Company" restaurants during the term of the joint venture. Three of the restaurants are open in Austin, Lewisville, and San Antonio, Texas. One of the restaurants which opened in Houston, Texas, was subsequently closed. Service Marks The Company uses several service marks, including "Luby's" and believes that such marks are of material importance to its business. The Company has federal service mark registrations for several of such marks. The Company is not the sole user of the name "Luby's" in the cafeteria business. One cafeteria using the name "Luby's" and one cafeteria using the name "Pat Luby's" are being operated in two different cities in Texas by two different owners not affiliated with the 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 cafeteria business in the United States and that such other users can be precluded from expanding their use of the name as a service mark. Competition and Other Factors The foodservice business is highly competitive, and there are numerous restaurants and other foodservice operations in each of the markets where the Company operates. The quality of the food served, in relation to its price, and public reputation are important factors in foodservice competition. Neither the Company nor any of its competitors has a significant share of the total market in any area in which the Company competes. The Company believes that its principal competitors are conventional restaurants and other cafeterias. The Company's facilities and food products are subject to state and local health and sanitation laws. In addition, the Company's operations are subject to federal, state, and local regulations with respect to environmental and safety matters, including regulations concerning air and water pollution and regulations under the Americans with Disabilities Act and the Federal Occupational Safety and Health Act. Such laws and regulations, in the Company's opinion, have not materially affected its operations, although compliance has resulted in some increased costs. Forward-looking Statements Certain statements in this report are forward-looking statements and the Company can give no assurance that the expectations or potential occurrences reflected in such statements will be realized. Efforts to close, sell, or improve operating results of underperforming stores depend on many factors not within the Company's control such as the negotiation of settlements of existing lease obligations under acceptable terms, availability of qualified buyers for owned locations, customer traffic, and general business conditions. Item 2. Properties. The Company owns the underlying land and buildings in which 133 of its restaurants are located. In addition, the Company owns several restaurant sites being held for future development and several properties are held for sale. Of the 223 restaurants operated by the Company, 90 are at locations held under leases, including 54 in regional shopping malls. Most of the leases provide for a combination of fixed-dollar and percentage rentals. Most of the leases require the lessee to pay additional amounts related to property taxes, hazard insurance, and maintenance of common areas. See Notes 5 and 8 of Notes to Financial Statements for information concerning the Company's lease rental expenses, lease commitments, and construction commitments. Of the 90 restaurant leases, the current terms of 31 expire from 1999 to 2003, 23 from 2004 to 2008, and 36 thereafter. Seventy-three of the leases can be extended beyond their current terms at the Company's option. A typical restaurant seats 250 to 300 guests and contains 9,000 to 10,500 square feet of floor space. Most of the restaurants are located in modern buildings and all are in good condition. It is the Company's policy to refurbish and modernize restaurants as necessary to maintain their appearance and utility. The equipment in all restaurants is well maintained. Several of the Company's restaurant properties contain excess building space which is rented to tenants unaffiliated with the Company. The towns and cities in which the Company's 223 cafeterias are located are listed below, with numbers in parentheses indicating the number of units in each locale: Arizona (12) Baytown (1) Chandler (1) Beaumont (1) Glendale (1) Bedford (1) Mesa (2) Bellmead (1) Peoria (1) Brownsville (2) Phoenix (4) Bryan/College Station (2) Surprise (1) Carrollton (1) Tucson (2) Conroe (1) Corpus Christi (4) Dallas (11) Arkansas (6) Deer Park (1) Fayetteville (1) Del Rio (1) Fort Smith (1) Denton (1) Hot Springs (1) DeSoto (1) Little Rock (2) Duncanville (1) North Little Rock (1) El Paso (5) Fort Worth (8) Florida (7) Galveston (1) Clearwater (2) Garland (1) Pinellas Park (1) Grand Prairie (1) St. Petersburg (1) Grapevine (1) Sebring (1) Greenville (1) Tampa (2) Harlingen (2) Houston (31) Kansas (1) Humble (1) Mission (1) Irving/Las Colinas (2) Jacinto City (1) Kerrville (1) Louisiana (2) Killeen (1) Bossier City (1) Kingwood (1) Shreveport (1) Lake Jackson (1) Laredo (2) Mississippi (2) Lewisville (1) Hattiesburg (1) Longview (1) Meridian (1) Lubbock (1) Lufkin (1) Missouri (3) McAllen (3) Independence (1) McKinney (1) Kansas City (2) Mesquite (3) Midland (1) Mission (1) New Mexico (3) New Braunfels (1) Albuquerque (1) North Richland Hills (1) Las Cruces (1) Odessa (1) Santa Fe (1) Orange (1) Pasadena (1) Oklahoma (9) Pharr (1) Bartlesville (1) Plano (2) Broken Arrow (1) Port Arthur (2) Oklahoma City (3) Richardson (1) Shawnee (1) Rosenberg (1) Tulsa (3) Round Rock (1) San Angelo (1) Tennessee (11) San Antonio (21) Franklin (1) San Marcos (1) Memphis (4) Sherman (1) Morristown (1) Stafford (1) Murfreesboro (1) Sugar Land (1) Nashville (3) Temple (1) Oak Ridge (1) Texarkana (1) The Woodlands (1) Texas (167) Tomball (1) Abilene (2) Tyler (3) Amarillo (2) Victoria (1) Arlington (3) Waco (1) Austin (7) Weslaco(1) The Company's corporate offices are located in a building owned by the Company containing approximately 40,000 square feet of office space. The Company utilizes the space for its executive offices and related facilities The Company maintains public liability insurance and property damage insurance on its properties in amounts which management believes to be adequate. Item 3. Legal Proceedings. The Company is from time to time subject to pending claims and lawsuits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of such claims and lawsuits will not have a material adverse effect on the Company's operations or consolidated financial position There are no material legal proceedings to which any director, officer, or affiliate of the Company, or any associate of any such director or officer, is a party, or has a material interest, adverse to the 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, 1998, to a vote of security holders of the Company. Item 4A. 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 the 1999 annual meeting of shareholders and until his or her successor is duly elected and qualified. Served as Officer Positions with Company and Name Since Principal Occupation Last Five Years Age ________________________ ________ ____________________________________ ___ David B. Daviss 1997 Chairman of the Board (since Oct. 62 1997); Acting Chief Executive Officer (May-Oct. 1997); Director since 1984; Chairman of the Executive Committee and member of the Corporate Governance Committee; investor. Barry J.C. Parker 1997 President, Chief Executive Officer, 51 and Director (since Oct. 1997); member of the Executive Committee; Chairman of the Board, President, and Chief Executive Officer of County Seat Stores, Inc. (1989-1996); principal of Hoak Capital Corp. (1997). Laura M. Bishop 1995 Senior Vice President and Chief 37 Financial Officer (since Jan. 1997); Vice President-Finance (1996); Vice President-Financial Planning (1995); Director of Financial Planning (1993-1995); Director of Internal Audit (1992-1993). Robert P. Burke 1996 Senior Vice President-Marketing 49 (since Jan. 1997); Vice President- Marketing (1996); Vice President of Sales and Marketing, Pace Foods/ Campbell Soup Company prior to 1996. Alan M. Davis 1998 Senior Vice President-Real Estate 46 Development (since May 1988); Vice President of Real Estate, Boston Chicken, Inc. and Boston Chicken Real Estate Investments, Inc. prior to May 1998. Boston Chicken, Inc. filed a petition for reorgani- zation under Chapter 11 of the U.S. Bankruptcy Code in October 1998. Sue Elliott 1998 Senior Vice President-Human 48 Resources (since May 1998); Vice President of Friday's Hospitality prior to May 1998. Raymond C. Gabrysch 1988 Senior Vice President-Operations 47 (since Sept. 1997); Senior Vice President-Human Resources (Jan.- Aug. 1997); Vice President-Human Resources (1996); Area Vice President prior to 1996. Clyde C. Hays III 1985 Senior Vice President-Operations 47 (since Jan. 1996); Vice President- Operations prior to 1996. James R. Hale 1980 Secretary; Member of law firm of 69 Cauthorn Hale Hornberger Fuller Sheehan & Becker Incorporated. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Stock Prices and Dividends The Company's 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 from the consolidated transaction reporting system and the per share cash dividends declared on the common stock. Fiscal Quarters Quarterly Ended High Low Cash Dividend _________________ ______ ______ ______________ November 30, 1996 $24.38 $20.75 $.20 February 28, 1997 22.88 19.88 .20 May 31, 1997 20.63 17.63 .20 August 31, 1997 20.63 18.81 .20 November 30, 1997 21.38 18.88 .20 February 28, 1998 19.69 16.00 .20 May 31, 1998 19.50 17.13 .20 August 31, 1998 18.94 15.25 .20 As of September 11, 1998, there were approximately 5,036 record holders of the Company's common stock. Item 6. Selected Financial Data. Five Year Summary of Operations (Thousands of dollars except per share data) Years ended August 31,
1998 1997 1996 1995 1994 ________ ________ ________ ________ ________ Sales $508,871 $495,446 $450,128 $419,024 $390,692 Costs and expenses: Cost of food 129,126 121,287 110,008 103,611 98,223 Payroll and related costs 155,152 146,940 124,333 113,952 104,543 Occupancy and other operating expenses 154,501 150,638 132,595 123,907 113,546 General and administrative expenses 22,061 19,451 20,217 18,672 15,330 Provision for asset impairments and store closings 36,852 12,432 - - - ________ ________ ________ ________ ________ 497,692 450,748 387,153 360,142 331,642 ________ ________ ________ ________ ________ Income from operations 11,179 44,698 62,975 58,882 59,050 Other income (expenses): Interest expense (5,078) (4,037) (2,130) (1,749) - Interest and other 1,778 2,001 1,697 1,805 1,385 ________ ________ ________ ________ ________ (3,300) (2,036) (433) 56 1,385 ________ ________ ________ ________ ________ Income before income taxes and accounting change 7,879 42,662 62,542 58,938 60,435 Provision for income taxes 2,798 14,215 23,334 21,923 22,663 ________ ________ ________ ________ ________ Income before accounting change 5,081 28,447 39,208 37,015 37,772 Cumulative effect of change in accounting for income taxes - - - - 1,563 ________ ________ ________ ________ ________ Net income (a) $ 5,081 $ 28,447 $ 39,208 $ 37,015 $ 39,335 Income per share before accounting change $ 0.22 $ 1.22 $ 1.66 $ 1.55 $ 1.45 Net income per common share - basic $ 0.22 $ 1.22 $ 1.66 $ 1.55 $ 1.51 Net income per common share - assuming dilution $ 0.22 $ 1.21 $ 1.64 $ 1.53 $ 1.49 Cash dividend declared per common share $ .80 $ .80 $ .74 $ .68 $ .62 At year-end: Total assets $339,041 $368,778 $335,290 $312,380 $289,668 Long-term debt $ 73,000 $ 84,000 $ 41,000 $ - $ - Number of cafeterias 229 229 204 187 176 (a) Net income in 1994 includes the cumulative effect of change in accounting for income taxes of $1,563, or $.06 per share.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources During the last three years the Company has funded all capital expenditures from internally generated funds, cash equivalents, and long-term debt. Capital expenditures for fiscal 1998 were $26,015,000, a 58% decrease from fiscal 1997. This decrease resulted from the opening of five new restaurants in fiscal 1998 as compared to 29 in fiscal 1997, which included two relocations. Fiscal 1997 capital expenditures included the purchase of 20 locations from Triangle FoodService Corporation, formerly Wyatt Cafeterias, Inc., for approximately $14 million in cash. After additional capital expenditures of approximately $5 million to repair and refurbish these units, 15 of the 20 locations were opened as "Luby's" and are included in the 29 openings in fiscal 1997. In addition, during fiscal 1998 the Company purchased one site as land held for future use compared to eight in fiscal 1997. The Company also spent approximately $5 million to upgrade the restaurant information systems during fiscal 1998. Plans for fiscal 1999 include the opening of approximately six new restaurants - four on sites owned by the Company and two on land held under long-term ground leases. The Company also expects fiscal 1999 capital expenditures to include approximately $12 million related to strategic initiatives, including food-to-go expansions, new self-service drink stations, and 10 to 15 remodels with updated design features. In addition, as part of its strategic initiative to expand into smaller Texas markets, planned expenditures for fiscal 1999 include approximately $5 million for the opening of the first location by the end of the fiscal year and the purchase of several other land sites for fiscal 2000 openings. The Company anticipates that proceeds from property held for sale will partially offset future capital requirements. As part of a joint venture agreement with Waterstreet, Inc. signed in January 1996, the Company opened two seafood restaurants in fiscal 1998. During fiscal 1998, the company closed one seafood restaurant which was opened the prior year. No seafood restaurants are planned to open in fiscal 1999. These "Water Street Seafood Company" restaurants are leased by the joint venture from the Company and operated by Waterstreet, Inc. As of August 31, 1998, the Company owned three undeveloped restaurant sites, and several land site acquisitions were in varying stages of negotiation. As a result of more new store openings planned for next year, the Company expects an increase in total capital expenditures for fiscal 1999. Construction costs for new restaurants are expected to be funded by cash flow from operations, cash currently held in cash equivalent investments, and long- term debt. The Company generated cash from operations of $47,957,000 in fiscal 1998. The Company had $73,000,000 outstanding at August 31, 1998, under a $125,000,000 credit facility with a syndication of four banks. At August 31, 1998, the Company had a working capital deficit of $32,324,000 which compares to the prior year's working capital deficit of $29,711,000. The working capital position declined slightly during fiscal 1998 due primarily to the decrease in cash and cash equivalents of $2,670,000. The Company typically carries current liabilities in excess of current assets because cash generated from operating activities is reinvested in capital expenditures. The Company believes that funds generated from operations and short-term or long-term financing from external sources, which can be obtained on terms acceptable to the Company, are adequate for its foreseeable needs. Results of Operations Fiscal 1998 Compared to Fiscal 1997 Sales increased $13,425,000, or 3%, due to the addition of five new restaurants in fiscal 1998 and 27 restaurants in fiscal 1997. This increase was partially offset by the closing of two restaurants on August 31, 1997, and three others during fiscal 1998. The average sales volume for all restaurants that were open in both years increased slightly to $2,250,000 in fiscal 1998 from $2,244,000 in fiscal 1997. The same-store customer counts were down by 1% but were offset by higher average tray revenues. Cost of food increased $7,839,000, or 6%, due primarily to the increase in sales, new menu item testing, and higher fish and other commodity prices overall. Payroll and related costs increased $8,212,000, or 6%, due primarily to the increase in sales and the higher Federal minimum wage which increased first on October 1, 1996, and again on September 1, 1997. Occupancy and other operating expenses increased $3,863,000, or 3%, due primarily to the increase in sales and the opening of five new restaurants. This increase was partially offset by lower managers' salaries, which are based on the profitability of the restaurants. General and administrative expenses increased $2,610,000, or 13%, due primarily to higher legal and professional fees associated with the Company's strategic planning project. In addition, fiscal 1998 included a higher provision for bonuses since none were incurred in fiscal 1997 and a higher Company contribution to the profit sharing plan. As part of its strategic planning efforts, the Company completed an assessment of underperforming restaurants and recorded a $36.9 million pretax charge during the fourth quarter of fiscal 1998. The charge included $14.7 million for the closing of 14 underperforming restaurants, $10.7 million for the write-down of 16 restaurants which will be relocated to optimize their market potential, and $11.4 million for the write-down of certain restaurant properties which the Company plans to continue to operate. Additionally, the Company revised its estimate of the net realizable value of surplus properties which the Company plans to sell resulting in an additional write-down of $0.1 million. The charge for the closing of the 14 underperforming restaurants and the restaurants to be relocated related to the write-down of property and equipment to net realizable value, costs to settle lease obligations, and severance costs. As of August 31, 1998, two of the 14 restaurants were closed, and the remaining restaurants are planned for closure during fiscal 1999. Interest expense of $5,078,000 for fiscal 1998 was incurred in conjunction with borrowings under the credit facility and is net of $276,000 capitalized on qualifying properties. The increase over fiscal 1997 of $1,041,000, or 26%, was due primarily to lower capitalized interest on qualifying properties as a result of less construction in the current period. The average borrowing rate was also slightly higher in fiscal 1998. The provision for income taxes decreased $11,417,000, or 80%, due to lower income before income taxes. The Company's effective income tax rate increased from 33.3% in fiscal 1997 to 35.5% in fiscal 1998. The fiscal 1997 rate was low due to a nonrecurring decrease in the deferred tax liability resulting from a lower expected state tax rate. The Company anticipates that the effective tax rate for fiscal 1999 will approximate the rate during fiscal 1998. Fiscal 1997 Compared to Fiscal 1996 Sales increased $45,318,000, or 10%, due to the addition of 27 new restaurants in fiscal 1997 and 18 restaurants in fiscal 1996. The average sales volume of restaurants opened over one year decreased to $2,264,000 in fiscal 1997 from $2,332,000 in fiscal 1996 due primarily to a negative trend in customer counts. This trend was a result of intense competition in the restaurant industry and sales transfer from our established restaurants caused by the significant number of fiscal 1997 and 1996 openings in our existing markets. The impact of the same-store customer count decline was partially offset by a 3.5% increase in average tray revenues. The Company implemented a price increase on September 15, 1996, to help offset the pressure on profit margins from the increase in the Federal minimum wage. Cost of food increased $11,279,000, or 10%, due primarily to the increase in sales. Payroll and related costs increased $22,607,000, or 18%, due primarily to the increase in sales, the increase in the Federal minimum wage which became effective October 1, 1996, and higher wage costs associated with increased expansion over the prior year. Although a price increase was implemented to help offset higher wage rates, the decline in same-store sales experienced during fiscal 1997 resulted in significant pressure on labor costs. Occupancy and other operating expenses increased $18,043,000, or 14%, due primarily to the increase in sales and the opening of 27 new restaurants. Preopening expenses and start-up costs, which are expensed as incurred, totaled approximately $3 million for new openings in fiscal 1997. The decline in same- store sales caused fixed costs within this expense category to increase as a percent of sales. However, managers' salaries, which are based on the profitability of the restaurants, decreased as a percent of sales due to lower store profits. General and administrative expenses decreased $766,000, or 4%. As a result of lower earnings, the Company's contribution to the profit sharing plan totaled $1.5 million, or $3.6 million less than fiscal 1996. This decrease was partially offset by retirement costs, executive search firm fees, and higher legal and professional fees associated with the Company's restructuring into a holding company. In addition, manager trainee salaries and moving expenses were higher than fiscal 1996 due to the increased expansion. During fiscal 1997 the Company adopted Financial Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and recorded a $12.4 million pretax charge during the fourth quarter. The charge included $4.6 million for the closing of four restaurants, $3 million for the write-down of certain cafeteria properties which the Company plans to continue to operate, the write-down of $2.1 million for surplus properties the Company plans to sell, $1.4 million for the write-down of computer hardware, and $1.3 million for various other charges. Interest expense of $4,037,000 for fiscal 1997 was incurred in conjunction with borrowings under the credit facility and is net of $1,029,000 capitalized on qualifying properties. The increase over fiscal 1996 of $1,907,000, or 86%, was due to higher average outstanding borrowings relating to the increase in expansion during fiscal 1997 and the purchase of treasury stock. The provision for income taxes decreased $9,119,000, or 39%, due to lower income before income taxes and lower state taxes resulting from the Company's restructuring into a holding company. The Company's effective income tax rate decreased from 37.3% in fiscal 1996 to 33.3% in fiscal 1997. A portion of the decline in the provision for income taxes in fiscal 1997 was nonrecurring since it resulted from lowering the deferred tax liability based on a lower expected state tax rate. Inflation The Company's policy is to maintain stable menu prices without regard to seasonal variations in food costs. General increases in costs of food, wages, supplies, and services make it necessary for the Company to increase its menu prices from time to time. To the extent prevailing market conditions allow, the Company intends to adjust menu prices to maintain profit margins. The Year 2000 Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognizes a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, code invoices, or engage in similar normal business activities. The Company does not expect that the year 2000 issue will materially affect future financial results. The Company has formed a Year 2000 committee and has developed a plan to inventory critical systems and replace or develop solutions to those systems that are found to have date-related deficiencies. The completion of the solution phase is estimated to be prior to any anticipated impact on our systems. The Company is also surveying suppliers and customers to determine the status of their year 2000 compliance programs. Forward-Looking Statements Except for the historical information contained in this annual report, certain statements made herein are forward looking regarding cash flow from operations, restaurant openings, operating margins, capital requirements, the availability of acceptable real estate locations for new restaurants, and other matters. In addition, efforts to close, sell, or improve operating results of underperforming stores depend on many factors not within the Company's control such as the negotiation of settlements of existing lease obligations under acceptable terms, availability of qualified buyers for owned locations, and customer traffic. These forward-looking statements involve risks and uncertainties and, consequently, could be affected by general business conditions, the impact of competition, the success of operating initiatives, changes in cost and supply of food and labor, the seasonality of the Company's business, taxes, inflation, and governmental regulations, which could cause actual results to differ materially from current plans. Management does not expect to update such forward-looking statements continually as conditions change, and readers should consider that such statements pertain only to the date hereof. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. See information in Item 8 of Part II of this Report appearing in the Notes to Consolidated Financial Statements under the caption "Interest-Rate Swap Agreements" in Note 1 and in Note 4. Item 8. Financial Statements and Supplementary Data. LUBY'S CAFETERIAS, INC. FINANCIAL STATEMENTS Years Ended August 31, 1998, 1997, and 1996 with Report of Independent Auditors Report of Independent Auditors The Board of Directors and Shareholders Luby's Cafeterias, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Luby's Cafeterias, Inc. and Subsidiaries at August 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended August 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Luby's Cafeterias, Inc. and Subsidiaries at August 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 1998, in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, in fiscal 1997 the Company changed its method of accounting for the impairment of long-lived assets and for long-lived assets to be disposed of. ERNST & YOUNG LLP San Antonio, Texas October 5, 1998 Luby's Cafeterias, Inc. Consolidated Balance Sheets August 31, 1998 1997 ________ _______ (Thousands of dollars) Assets Current assets: Cash and cash equivalents $ 3,760 $ 6,430 Trade accounts and other receivables 704 510 Food and supply inventories 5,072 4,507 Prepaid expenses 4,375 3,586 Deferred income taxes 1,201 937 ________ ________ Total current assets 15,112 15,970 Property held for sale 17,340 12,680 Investments and other assets - at cost: Land held for future use 1,582 1,582 Other assets 6,410 4,529 ________ ________ Total investments and other assets 7,992 6,111 Property, plant, and equipment - at cost, less accumulated depreciation and amortization 298,597 334,017 ________ ________ Total assets $339,041 $368,778 ________ ________ Liabilities and Shareholders' Equity Current liabilities: Accounts payable - trade $ 12,482 $ 13,584 Dividends payable 4,654 4,653 Accrued expenses and other liabilities 28,231 25,038 Income taxes payable 2,069 2,406 ________ ________ Total current liabilities 47,436 45,681 Long-term debt 73,000 84,000 Deferred income taxes and other credits 7,019 19,018 Reserve for store closings 6,172 1,239 Commitments and contingencies - - Shareholders' equity: Common stock, $.32 par value; authorized 100,000,000 shares, issued 27,403,067 shares 8,769 8,769 Paid-in capital 27,012 26,945 Retained earnings 262,540 276,140 Less cost of treasury stock, 4,132,392 shares in 1998 and 4,136,693 shares in 1997 (92,907) (93,014) ________ ________ Total shareholders' equity 205,414 218,840 ________ ________ Total liabilities and shareholders' equity $339,041 $368,778 ________ ________ See accompanying notes. Luby's Cafeterias, Inc. Consolidated Statements of Income Years Ended August 31, 1998 1997 1996 ________ ________ ________ (Thousands of dollars except per share data) Sales $508,871 $495,446 $450,128 Costs and expenses: Cost of food 129,126 121,287 110,008 Payroll and related costs 155,152 146,940 124,333 Occupancy and other operating expenses 154,501 150,638 132,595 General and administrative expenses 22,061 19,451 20,217 Provision for asset impairments and store closings 36,852 12,432 - ________ ________ ________ 497,692 450,748 387,153 ________ ________ ________ Income from operations 11,179 44,698 62,975 Interest expense (5,078) (4,037) (2,130) Other income, net 1,778 2,001 1,697 ________ ________ ________ Income before income taxes 7,879 42,662 62,542 Provision (benefit) for income taxes: Current 15,515 17,616 20,940 Deferred (12,717) (3,401) 2,394 ________ ________ ________ 2,798 14,215 23,334 ________ ________ ________ Net income $ 5,081 $ 28,447 $ 39,208 ________ ________ ________ Net income per share - basic $ 0.22 $ 1.22 $ 1.66 ________ ________ ________ Net income per share - assuming dilution $ 0.22 $ 1.21 $ 1.64 ________ ________ ________ See accompanying notes. Luby's Cafeterias, Inc. Consolidated Statements of Shareholders' Equity
Common Stock Total Issued Treasury Paid-In Retained Shareholders' Shares Amount Shares Amount Capital Earnings Equity __________________________________________________________________________________________ (Amounts in thousands except per share data) Balance at August 31, 1995 27,403 $8,769 (4,090) $(91,983) $26,945 $248,973 $192,704 Net income for the year - - - - - 39,208 39,208 Common stock issued under employee bene- fit plans, net of shares tendered in partial payment and including tax benefits - - 916 20,565 - (3,218) 17,347 Cash dividends, $.74 per share - - - - - (17,589) (17,589) Purchases of treasury stock - - (252) (5,997) - - (5,997) ______ ______ ______ _______ _______ _______ _______ Balance at August 31, 1996 27,403 8,769 (3,426) (77,415) 26,945 267,374 225,673 Net income for the year - - - - - 28,447 28,447 Common stock issued under employee bene- fit plans, net of shares tendered in partial payment and including tax benefits - - 186 4,319 - (1,027) 3,292 Cash dividends, $.80 per share - - - - - (18,654) (18,654) Purchases of treasury stock - - (897) (19,918) - - (19,918) ______ ______ ______ _______ _______ _______ _______ Balance at August 31, 1997 27,403 8,769 (4,137) (93,014) 26,945 276,140 218,840 Net income for the year - - - - - 5,081 5,081 Common stock issued under employee bene- fit plans, net of shares tendered in partial payment and including tax benefits - - 5 107 67 (65) 109 Cash dividends, $.80 per share - - - - - (18,616) (18,616) ______ ______ ______ _______ _______ _______ _______ Balance at August 31, 1998 27,403 $8,769 (4,132) $(92,907) $27,012 $262,540 $205,414 ______ ______ ______ _______ _______ ________ ________ See accompanying notes.
Luby's Cafeterias, Inc. Consolidated Statements of Cash Flows Years Ended August 31, 1998 1997 1996 ________ ________ ________ (Thousands of dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,081 $28,447 $ 39,208 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 21,121 20,196 17,693 Provision for asset impairments and store closings 36,852 12,132 - Gain on disposal of property held for sale - - - (Gain) loss on disposal of property, plant, and equipment 142 (110) 31 ________ ________ ________ Cash provided by operating activities before changes in operating assets and liabilities 62,492 60,665 56,932 Changes in operating assets and liabilities: (Increase) decrease in trade accounts and other receivables (194) 31 (230) (Increase) decrease in food and supply inventories (565) 10 (483) Increase in prepaid expenses (789) (391) (346) Increase in other assets (1,881) (226) (1,115) Increase (decrease )in accounts payable-trade (1,102) 174 2,441 Increase (decrease) in accrued expenses and other liabilities 3,260 817 (337) Increase (decrease) in income taxes payable (337) (48) 1,263 Increase (decrease) in deferred income taxes and other credits (12,263) (3,664) 2,229 Decrease in reserve for store closings (664) - - _______ ________ ________ Net cash provided by operating activities 47,957 57,368 60,354 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from disposal of property held for sale 4,888 - - Proceeds from disposal of property, plant, and equipment 73 2,803 153 Purchases of land held for future use (933) (11,649) (5,776) Purchases of property, plant, and equipment (25,082) (50,783) (42,753) _______ ________ ________ Net cash used in investing activities (21,054) (59,629) (48,376) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock under stock option plans 42 2,878 16,145 Net payments of short-term borrowings - - (57,000) Proceeds from long-term debt 908,000 979,000 268,000 Reductions of long-term debt (919,000) (936,000) (227,000) Purchases of treasury stock - (21,077) (4,839) Dividends paid (18,615) (18,797) (16,989) _______ _______ _______ Net cash provided by (used in) financing activities (29,573) 6,004 (21,683) _______ _______ _______ Net increase (decrease) in cash and cash equivalents (2,670) 3,743 (9,705) Cash and cash equivalents at beginning of year 6,430 2,687 12,392 ________ ________ ________ Cash and cash equivalents at end of year $ 3,760 $ 6,430 $ 2,687 ________ ________ ________ See accompanying notes. Luby's Cafeterias, Inc. Notes to Consolidated Financial Statements August 31, 1998, 1997, and 1996 1. Nature of Operations and Significant Accounting Policies Nature of Operations Luby's Cafeterias, Inc. and Subsidiaries (the Company), based in San Antonio, Texas, owns and operates restaurants in the southern United States. As of August 31, 1998, the Company operated a total of 229 units. The Company locates its restaurants convenient to shopping and business developments as well as to residential areas. Accordingly, the restaurants cater primarily to shoppers and store and office personnel at lunch and to families at dinner. Principles of Consolidation Effective February 1, 1997, the Company was restructured into a holding company. The accompanying consolidated financial statements include the accounts of Luby's Cafeterias, Inc. and its wholly owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. 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 stated at the lower of cost or estimated net realizable value. Depreciation and Amortization The Company depreciates the cost of plant and equipment over their estimated useful lives using both straight-line and accelerated methods. Leasehold improvements are amortized over the related lease lives, which are in some cases shorter than the estimated useful lives of the improvements. 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. Impairment losses are also recorded for long-lived assets that are expected to be disposed of. Statement of Cash Flows For purposes of the statement of cash flows, the Company considers all highly liquid financial instruments purchased with an original maturity of three months or less to be cash equivalents. Preopening Expenses New store preopening costs are expensed as incurred. Advertising Expenses Advertising costs are expensed as incurred. Advertising expense as a percentage of sales approximates two percent for fiscal years 1998, 1997, and 1996. 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. Stock-Based Compensation During 1997 the Company adopted FAS Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123), which encourages, but does not require, the Company to record compensation cost for stock-based compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB 25. Earnings Per Share During 1998 the Company adopted FAS Statement No. 128, "Earnings Per Share" (FAS 128). FAS 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Earnings per share amounts for all periods have been restated to conform to the requirements of FAS 128. Interest-Rate Swap Agreements The Company enters into interest-rate swap agreements to modify the interest characteristics of its outstanding debt. Each interest-rate swap agreement is designated with all or a portion of the principal balance and term of a specific debt obligation. These agreements involve the exchange of amounts based on a fixed interest rate for amounts based on variable interest rates over the life of the agreement without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change is accrued and recognized as an adjustment to interest expense related to the debt. The related amount payable to or receivable from counterparties is included in other liabilities or assets. The fair values of these agreements are estimated by obtaining quoted market prices. Use of Estimates In preparing financial statements in conformity with 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. 2. Impairment of Long-Lived Assets The Company recorded a $36.9 million charge during the fourth quarter of 1998 related to the adoption of its strategic plan which includes the disposition, relocation, or write-down of several restaurants that have not met management's financial return expectations. The charge included $14.7 million for the closing of 14 underperforming restaurants, $10.7 million for the write-down of 16 restaurants which will be relocated to optimize their market potential, and $11.4 million for the write-down of certain restaurant properties which the Company plans to continue to operate. Additionally, the Company revised its estimate of the net realizable value of surplus properties which the Company plans to sell resulting in an additional write-down of $0.1 million. The charge for the closing of the 14 underperforming restaurants and the restaurants to be relocated related to the write-down of property and equipment to net realizable value, costs to settle lease obligations, and severance costs. For those assets which the Company plans to continue to operate, the carrying values were written down to estimated future discounted cash flows or fully written off in the case of negative future cash flows. All charges were recorded in the provision for asset impairments and store closings. The Company expects to dispose of closed restaurant properties and surplus properties held for sale within two year. As a result of the Company adopting FAS Statement No. 121, "Accounting For the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," during 1997, a charge to operating costs of $12.4 million was recorded. The charge included $4.6 million for the closing of four underperforming restaurants, $3 million for the write-down of certain restaurant properties which the Company plans to continue to operate, the write-down of $2.1 million for surplus properties the Company plans to sell, $1.4 million for the write-down of computer hardware, and $1.3 million for various costs consisting primarily of the write-off of development costs of future sites the Company no longer intends to pursue. The charge for the restaurant closings and asset impairments was based on the same factors as discussed above in the 1998 charge. The surplus properties which the Company previously intended to use for future development are now being actively marketed and were written down to the lower of their carrying amount or estimated net realizable value. The Company also made a decision to implement a new point-of-sale system, and the remaining book value of the old computer equipment to be replaced was written off. All charges were recorded in the provision for asset impairments and store closings. The results of operations from the restaurants to be disposed of are not material. 3. Property, Plant, and Equipment The cost and accumulated depreciation of property, plant, and equipment at August 31, 1998 and 1997, together with the related estimated useful lives used in computing depreciation and amortization, are reflected below: Estimated 1998 1997 Useful Lives ________ ________ _______________ (Thousands of dollars) Land $ 71,244 $ 78,540 - Restaurant equipment and furnishings 124,334 124,188 3 to 10 years Buildings 209,276 222,316 20 to 40 years Leasehold and leasehold improvements 41,314 52,833 Term of leases Office furniture and equipment 4,759 3,540 5 to 10 years Transportation equipment 738 657 5 years Construction in progress 3,846 8,788 - ________ ________ 455,511 490,862 Less accumulated depreciation and amortization 156,914 156,845 ________ ________ $298,597 $334,017 ________ ________ Total interest expense incurred for 1998, 1997, and 1996 was $5,354,000, $5,066,000, and $3,230,000, respectively, which approximated the amount paid in each year. The amounts capitalized on qualifying properties in 1998, 1997, and 1996 were $276,000, $1,029,000, and $1,100,000, respectively. 4. Debt During 1996 the Company entered into a $100 million credit facility with a syndication of four banks. As part of this credit facility, the Company has a revolving credit agreement which allows borrowings for varying periods through February 27, 2001, at the lower of the prime rate or other rate options available at the time of borrowing. The credit facility includes a maximum commitment for letters of credit of $20 million. The credit facility contains business covenants which, among other things, impose certain financial restrictions on the Company relating primarily to leverage and net worth. During 1997 the Company increased the credit facility to $125 million, extended the agreement through June 30, 2002, and negotiated a facility fee of .085% on the total commitment. Additionally, the Company entered into two Interest Rate Protection Agreements (swaps) to fix the rate on a portion of the floating-rate debt outstanding under its revolving line of credit. The swaps are fixed-rate agreements in the notional amounts of $30 million and $15 million. Both swaps have an interest rate of 6.4975% and a termination date of June 30, 2002. At August 31, 1998, the Company estimates it would have to pay $1,670,000 to terminate the agreements. As of August 31, 1998, the balance outstanding under the revolving credit agreement was $73,000,000 at an interest rate of 6.46%. At August 31, 1998, letters of credit of approximately $7,234,000 have been issued as security for the payment of insurance obligations classified as accrued expenses on the balance sheets. 5. Leases The Company conducts a major part of its operations from facilities which are leased under noncancelable lease agreements. Most of the leases are for periods of ten to 25 years and provide for contingent rentals based on sales in excess of a base amount. Approximately 80% of the leases contain renewal options ranging from five to 30 years. Annual future minimum lease payments under noncancelable operating leases as of August 31, 1998, are as follows: Years ending August 31: (Thousands of dollars) 1999 $ 6,686 2000 6,607 2001 6,242 2002 5,827 2003 5,523 Thereafter 37,924 _______ Total minimum lease payments $68,809 _______ Total rent expense for operating leases for the years ended August 31, 1998, 1997, and 1996 was as follows: 1998 1997 1996 _______ ________ ________ (Thousands of dollars) Minimum rentals $7,286 $6,884 $5,807 Contingent rentals 976 996 1,126 ______ ______ ______ $8,262 $7,880 $6,933 ______ ______ ______ 6. Employee Benefit Plans and Agreements Incentive Compensation The Company has various incentive compensation plans covering officers and other key employees that are based upon the achievement of specified earnings goals and performance factors. Awards under the plans are payable in cash and/or in shares of common stock. Charges to expense for current and future distributions under the plans amounted to $658,000, $-0-, and $400,000 in 1998, 1997, and 1996, respectively. During the years ended August 31, 1998, 1997, and 1996, -0-, 4,790, and 10,590 shares of common stock were issued under the plans out of treasury stock, respectively. Stock Option Plans The Company has a Management Incentive Stock Plan to provide for market-based incentive awards, including stock options, stock appreciation rights, restricted stock, and performance share awards. Under the terms of the Management Incentive Stock Plan, nonqualified stock options, incentive stock options, and other types of awards for not more than 2,700,000 shares of the Company's common stock may be granted to eligible employees of the Company, including officers. Stock options may be granted at prices not less than 100% of fair market value at date of grant. Options granted to the participants of the plan are exercisable over staggered periods and expire, depending upon the type of grant, in five to ten years. The plan provides for various vesting methods, depending upon the category of personnel. Following is a summary of activity in the stock option plans for the three years ended August 31, 1998, 1997 and 1996: Weightd Average Exercise Price Per Share-Options Options Options Outstanding Outstanding Exercisable ________________ ___________ ___________ Balances - August 31, 1995 $19.07 1,747,114 554,836 Granted 21.62 223,648 - Became exercisable - - 1,167,766 Cancelled or expired 20.59 (53,415) (38,903) Exercised 18.23 (980,600) (980,600) _________ _________ Balances - August 31, 1996 20.48 936,747 703,099 Granted 22.90 33,675 - Became exercisable - - 173,658 Cancelled or expired 21.55 (295,623) (281,723) Exercised 17.80 (277,501) (277,501) _________ _________ Balances - August 31, 1997 21.76 397,298 317,533 Granted 19.33 488,498 - Became exercisable - - 11,119 Cancelled or expired 22.63 (111,175) (92,573) Exercised 16.25 (10,375) (10,375) _________ _________ Balances - August 31, 1998 $20.17 764,246 225,704 _________ _________ Exercise prices for options outstanding as of August 31, 1998, ranged from $16.50 to $23.75 per share. The weighted average remaining contractual life of these options is 5.8 years. The options exercisable as of August 31, 1998, have a weighted average exercise price of $21.47 per share. At August 31, 1998 and 1997, the number of stock option shares available to be granted under the plan was 277,230 and 654,553 shares, respectively. The Company has elected to follow APB 25, "Accounting for Stock Issued to Employees." Accordingly, since employee stock options are granted at market price on the date of grant, no compensation expense is recognized. However, FAS 123 requires presentation of pro forma net income and earnings per share as if the Company had accounted for its employee stock options granted under the fair value method of that statement. The weighted average fair value of the individual options granted during 1998, 1997, and 1996 is estimated at $3.25, $4.42, and $3.22, respectively, on the date of grant. The impact on net income is minimal; therefore, the pro forma disclosure requirements prescribed by FAS 123 are not significant to the Company. The fair values were determined using a Black-Scholes option pricing model with the following assumptions: 1998 1997 1996 ____ ____ ____ Dividend yield 4.4% 3.5% 3.3% Volatility .18 .14 .12 Risk-free interest rate 7.0% 7.0% 7.0% Expected life 5.16 6.86 4.13 Deferred Compensation Deferred compensation agreements exist for several key management employees, all of whom are current or former officers. Under the agreements, the Company is obligated to provide for each such employee or his beneficiaries, during a period of ten years after the employee's death, disability, or retirement, annual benefits ranging from $15,500 to $43,400. The estimated present value of future benefits to be paid is being accrued over the period from the effective date of the agreements until the expected retirement dates of the participants. The net expense incurred for this plan for the years ended August 31, 1998, 1997, and 1996, amounted to $49,000, $47,000, and $239,000, respectively. The Company also has a Supplemental Executive Retirement Plan (SERP) for key executives and officers. The SERP is a "target" benefit plan, with the annual lifetime benefit based upon a percentage of average salary during the final five years of service at age 65, offset by several sources of income including benefits payable under deferred compensation agreements, if applicable, the profit sharing plan, and Social Security. SERP benefits will be paid from the Company's assets. The net expense incurred for this plan for the years ended August 31, 1998 and 1997, was $163,000 and $120,000, respectively, and the unfunded accumulated benefit obligation as of August 31, 1998 and 1997, was approximately $284,000 and $315,400, respectively. Profit Sharing The Company has a profit sharing plan and retirement trust covering substantially all employees who have attained the age of 21 years and have completed one year of continuous service. The plan is administered by a corporate trustee, is a "qualified plan" under Section 401(a) of the Internal Revenue Code, and provides for the payment of the employee's vested portion of the plan upon retirement, termination, disability, or death. The plan is funded by contributions of a portion of the net earnings of the Company. The plan provides that for each fiscal year in which the Company's net income (before income taxes and before any contribution to the plan) meets certain minimum standards, the Company is obligated to contribute to the plan, at a minimum, an amount equal to a defined percentage of the participants' compensation. In no event will the required contribution exceed 10% of the Company's income before income taxes and before any contribution to the plan. At the discretion of the board of directors, the Company can make a greater contribution than required, subject to certain limitations. The Company's annual contribution to the plan amounted to $1,800,000, $1,500,000, and $5,100,000 for 1998, 1997, and 1996, respectively. During 1997 the Company established a voluntary 401(k) employee savings plan to provide substantially all salaried and hourly employees of the Company an opportunity to accumulate personal funds for their retirement. These contributions may be made on a before-tax basis to the plan. The Company does not match the participants' contributions to the plan. 7. Income Taxes The tax effect of temporary differences results in deferred income tax assets and liabilities as of August 31 as follows: 1998 1997 ________ ___________ (Thousands of dollars) Deferred tax assets: Workers' compensation insurance $ 1,201 $ 937 Deferred compensation 827 651 Asset impairments and store closing reserves 16,135 3,453 _______ _______ Total deferred tax assets 18,163 5,041 Deferred tax liabilities: Amortization of capitalized interest 414 439 Depreciation and amortization 19,573 18,960 Other 1,523 1,706 _______ _______ Total deferred tax liabilities 21,510 21,105 _______ _______ Net deferred tax liability $ 3,347 $16,064 _______ _______ The reconciliation of the provision for income taxes to the expected income tax expense (computed using the statutory tax rate) is as follows: 1998 1997 1996 Amount % Amount % Amount % ______ ____ _______ ____ _______ ____ (Thousands of dollars and as a percent of pretax income) Normally expected income tax expense $2,758 35.0% $14,932 35.0% $21,890 35.0% State income taxes 114 1.4 745 1.7 1,488 2.4 Jobs tax credits (26) (.3) (101) (.2) (1) - Other differences (48) (.6) (1,361) (3.2) (43) (.1) ______ ____ _______ ____ _______ ____ $2,798 35.5% $14,215 33.3% $23,334 37.3% ______ ____ _______ ____ _______ ____ During 1997 the Company restructured into a holding company which effectively decreased future expected state taxes. The deferred tax assets and liabilities were reduced accordingly, and the effect on total income tax expense is included above with "Other differences." Cash payments for income taxes for 1998, 1997, and 1996 were $15,852,000, $17,664,000, and $19,677,000, respectively. 8. Commitments and Contingencies At August 31, 1998, the Company had one restaurant under construction. The aggregate unexpended cost under the construction contract was approximately $484,000. The Company has unconditionally guaranteed a $2,000,000 loan under a line of credit for an unrelated limited partnership in exchange for advertising rights and a participation in future profits of the venture. The Company is presently, and from time to time, subject to pending claims and lawsuits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of these pending legal proceedings will not have a material adverse effect on the Company's operations or consolidated financial position. 9. Common Stock 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 rights may become exercisable under circumstances described in the Plan if any person or group (an Acquiring Person) becomes the beneficial owner of 15% or more of the common stock. Once the rights become exercisable, each right will be exercisable to purchase, for $27.50 (the Purchase Price), one-half of one share of common stock, par value $.32 per share, of the Company. If any person becomes the beneficial owner of 15% or more of the common stock, each right will entitle the holder, other than the Acquiring Person, to purchase for the Purchase Price a number of shares of the Company's common stock having a market value of four times the Purchase Price. The Board of Directors authorized the purchase in the open market of up to 1,000,000 shares of the Company's outstanding common stock through December 31, 1998, of which 149,700 shares were purchased in fiscal year 1997. Under this and previous authorizations, the Company purchased 897,500 and 252,200 shares of its common stock at a cost of $19,918,000 and $5,997,000 during 1997 and 1996, respectively, which are being held as treasury stock. 10. Per Share Information A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share for the years ended August 31, 1998, 1997, and 996, is shown in the table below. August 31, 1998 1997 1996 ________ __________ __________ (Thousands of dollars except per share data) Numerator: Net income $ 5,081 $28,447 $39,208 ________ __________ __________ Denominator for basic earnings per share - weighted average shares 23,271 23,406 23,689 Effect of dilutive securities: Employee stock options 2 19 232 ________ __________ __________ Denominator for earnings - per share - assuming dilution - adjusted weighted average shares 23,273 23,425 23,921 ________ __________ __________ Net income per share - basic $ 0.22 $ 1.21 $ 1.66 Net income per share - assuming dilution $ 0.22 $ 1.21 $ 1.64 ________ __________ __________ 11. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities at August 31 consist of: 1998 1997 _______ _______ (Thousands of dollars) Salaries and bonuses $ 7,520 $ 6,662 Rent 748 721 Taxes, other than income 6,928 7,245 Profit sharing plan 1,864 1,452 Insurance 10,482 7,747 Other 689 1,211 _______ _______ $28,231 $25,038 _______ _______ 12. Quarterly Financial Information (Unaudited) The following is a summary of quarterly unaudited financial information for 1998 and 1997: Three Months Ended November 30, February 28, May 31, August 31, 1997 1998 1998 1998 ________ ________ ________ _________ (Thousands of dollars except per share data) Sales $124,672 $123,204 $131,230 $129,765 Gross profit 53,505 54,913 59,314 56,861 Net income (loss) 6,207 6,941 8,147 (16,214)* Net income (loss) per share .27 .30 .35 (.70)* Three Months Ended November 30, February 28, May 31, August 31, 1996 1997 1997 1997 ________ ________ ________ _________ (Thousands of dollars except per share data) Sales $122,287 $118,830 $127,630 $126,699 Gross profit 55,887 54,908 59,387 57,037 Net income 8,166 8,404 9,583 2,294* Net income per share .35 .36 .41 .10* *See Note 2 for discussion of charges recorded during the fourth quarter of 1998 and 1997. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 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's definitive proxy statement for the 1999 annual meeting of shareholders appearing therein under the captions "Election of Directors," "Information Concerning Directors and Committees," and "Certain Relationships and Related Transactions." See also the information in Item 4A of Part I of this Report. Item 11. Executive Compensation. There is incorporated in this Item 11 by reference that portion of the Company's definitive proxy statement for the 1999 annual meeting of shareholders appearing therein under the captions "Executive Compensation," "Deferred Compensation," "Certain Relationships and Related Transactions," and "Compensation of Chief Executive Officer." Item 12. Security Ownership of Certain Beneficial Owners and Management. There is incorporated in this Item 12 by reference that portion of the Company's definitive proxy statement for the 1999 annual meeting of shareholders appearing therein under the captions "Principal Shareholders" and "Management Shareholders." Item 13. Certain Relationships and Related Transactions. There is incorporated in this Item 13 by reference that portion of the Company's definitive proxy statement for the 1999 annual meeting of shareholders appearing therein under the caption "Certain Relationships and Related Transactions." PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Documents. 1. Financial Statements The following financial statements are filed as part of this Report: Consolidated balance sheets at August 31, 1998 and 1997 Consolidated statements of income for each of the three years in the period ended August 31, 1998 Consolidated statements of shareholders' equity for each of the three years in the period ended August 31, 1998 Consolidated statements of cash flows for each of the three years in the period ended August 31, 1998 Notes to consolidated financial statements Report of independent auditors 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. 3. Exhibits The following exhibits are filed as a part of this Report: 2 - Agreement and Plan of Merger dated November 1, 1991, between Luby's Cafeterias, Inc., a Texas corporation, and Luby's Cafeterias, Inc., a Delaware corporation (filed as Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1991, and incorporated herein by reference). 3(a) - Certificate of Incorporation of Luby's Cafeterias, Inc., a Delaware corporation, as currently in effect (filed as Exhibit 3(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1994, and incorporated herein by reference). 3(b) - Bylaws of Luby's Cafeterias, 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) - Credit Agreement dated February 27, 1996, among Luby's Cafeterias, Inc., Certain Lenders, and NationsBank of Texas, N.A. (filed as Exhibit 4(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 29, 1996, and incorporated herein by reference). 4(f) - First Amendment to Credit Agreement dated January 24, 1997, among Luby's Cafeterias, Inc., Certain Lenders, and NationsBank of Texas, N.A. (filed as Exhibit 4(f) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997, and incorporated herein by reference). 4(g) - ISDA Master Agreement dated June 17, 1997, between Luby's Cafeterias, Inc. and NationsBank, N.A., with Schedule and Confirmation dated July 7, 1997 (filed as Exhibit 4(g) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, and incorporated herein by reference). 4(h) - ISDA Master Agreement dated July 2, 1997, between Luby's Cafeterias, Inc. and Texas Commerce Bank National Association, with Schedule and Confirmation dated July 2, 1997 (filed as Exhibit 4(h) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, and incorporated herein by reference). 4(i) - Second Amendment to Credit Agreement dated July 3, 1997, among Luby's Cafeterias, Inc., Certain Lenders, and NationsBank of Texas, N.A. (filed as Exhibit 4(i) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, and incorporated herein by reference). 10(a) - Form of Deferred Compensation Agreement entered into between Luby's Cafeterias, Inc. and various officers (filed as Exhibit 10(b) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1981, and incorporated herein by reference). 10(b) - Form of Amendment to Deferred Compensation Agreement between Luby's Cafeterias, Inc. and various officers and former officers adopted January 14, 1997 (filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997, and incorporated herein by reference). 10(c) - Incentive Bonus Plan of Luby's Cafeterias, Inc. adopted October 19, 1983 (filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1983, and incorporated herein by reference). 10(d) - Amendment to Incentive Bonus Plan of Luby's Cafeterias, Inc. adopted January 14, 1997 (filed as Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997, and incorporated herein by reference). 10(e) Luby's Cafeterias, Inc. Incentive Bonus Plan for Fiscal 1998 adopted January 9, 1998 (filed as Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998, and incorporated herein by reference). 10(f) - Performance Unit Plan of Luby's Cafeterias, Inc. approved by the shareholders on January 12, 1984 (filed as Exhibit 10(f) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1984, and incorporated herein by reference). 10(g) - Amendment to Performance Unit Plan of Luby's Cafeterias, Inc. adopted January 14, 1997 (filed as Exhibit 10(h) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997, and incorporated herein by reference). 10(h) - Employment Contract dated January 8, 1988, between Luby's Cafeterias, Inc. and George H. Wenglein (filed as Exhibit 10(h) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1988, and incorporated herein by reference). 10(i) - 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(j) - 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(k) - 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(l) - 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(m) 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(n) - Nonemployee Director Stock Option Plan of Luby's Cafeterias, Inc. approved by the shareholders on January 13, 1995 (filed as Exhibit 10(h) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1995, and incorporated herein by reference). 10(o) - Amendment to Nonemployee Director Stock Option Plan of Luby's Cafeterias, Inc. adopted January 14, 1997 (filed as Exhibit 10(o) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997, and incorporated herein by reference). 10(p) - Employment Contract dated January 12, 1996, between Luby's Cafeterias, Inc. and John B. Lahourcade (filed as Exhibit 10(i) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 29, 1996, and incorporated herein by reference). 10(q) - 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(r) - 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(s) 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(t) - Luby's Cafeterias, Inc. Welfare Benefit Plan Trust dated July 18, 1996 (filed as Exhibit 10(k) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, and incorporated herein by reference). 10(u) - Retirement Agreement dated March 17, 1997, between Luby's Cafeterias, Inc. and Ralph Erben (filed as Exhibit 10(t) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997, and incorporated herein by reference). 10(v) - Employment Agreement dated September 15, 1997, between Luby's Cafeterias, Inc. and Barry J.C. Parker (filed as Exhibit 10(u) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, and incorporated herein by reference). 10(w) - Term Promissory Note of Barry J.C. Parker in favor of Luby's Cafeterias, Inc., dated November 10, 1997, in the original principal sum of $199,999.00 (filed as Exhibit 10(v) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, and incorporated herein by reference). 10(x) - Stock Agreement dated November 10, 1997, between Barry J.C. Parker and Luby's Cafeterias, Inc. (filed as Exhibit 10(w) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, and incorporated herein by reference). 10(y) Luby's Cafeterias, Inc. Nonemployee Director Phantom Stock Plan adopted March 19, 1998 (filed as Exhibit 10(aa) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998, and incorporated herein by reference). 10(z) Agreement of Resignation, Severance, Confidentiality, Non- Solicitation, Arbitration and General Release of All Claims dated April 30, 1998, between Luby's Cafeterias, Inc. and William E. Robson (filed as Exhibit 10(bb) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1998, and incorporated herein by reference). 10(aa) Salary Continuation Agreement dated May 14, 1998, between Luby's Cafeterias, Inc. and Sue Elliott (filed as Exhibit 10(cc) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1998, and incorporated herein by reference). 10(bb) Salary Continuation Agreement dated June 1, 1998, between Luby's Cafeterias, Inc. and Alan M. Davis (filed as Exhibit 10(dd) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1998, and incorporated herein by reference). 10(cc) Luby's Incentive Stock Plan adopted October 16, 1998. 10(dd) Executive Bonus Plan for Fiscal 1999 adopted October 16, 1998. 11 - Statement re computation of per share earnings. 21 - Subsidiaries of Luby's Cafeterias, Inc. 27 - Financial Data Schedule. 99(a) - Corporate Governance Guidelines of Luby's Cafeterias, Inc adopted by the Board of Directors on March 19, 1998 (filed as Exhibit 99 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998, and incorporated herein by reference). 99(b) - Consent of Ernst & Young LLP. (b) Reports on Form 8-K. No reports on Form 8-K have been filed during the last quarter of the period covered by this Report. SIGNATURES 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. Date: November 25, 1998 LUBY'S CAFETERIAS, INC. (Registrant) By: BARRY J.C. PARKER ____________________________ Barry J.C. Parker, 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 __________________ __________________________ DAVID B. DAVISS David B. Daviss, Chairman _______________________________ of the Board November 25, 1998 BARRY J.C. PARKER Barry J.C. Parker, President, _______________________________ Chief Executive Officer, November 25, 1998 and Director LAURA M. BISHOP Laura M. Bishop, Senior Vice ________________________________ President and Chief Financial November 25, 1998 Officer PAULA Y. GOLD-WILLIAMS Paula Gold-Williams, Controller ________________________________ November 25, 1998 RONALD K. CALGAARD Ronald K. Calgaard, Director ________________________________ November 25, 1998 LAURO F. CAVAZOS Lauro F. Cavazos, Director ________________________________ November 25, 1998 JUDITH B. CRAVEN Judith B. Craven, Director ________________________________ November 25, 1998 ARTHUR R. EMERSON Arthur R. Emerson, Director ________________________________ November 25, 1998 ROGER R. HEMMINGHAUS Roger R. Hemminghaus, Director ________________________________ November 25, 1998 JOHN B. LAHOURCADE John B. Lahourcade, Director ________________________________ November 25, 1998 WALTER J. SALMON Walter J. Salmon, Director ________________________________ November 25, 1998 GEORGE H. WENGLEIN George H. Wenglein, Director ________________________________ November 25, 1998 JOANNE WINIK Joanne Winik, Director ________________________________ November 25, 1998 EXHIBIT INDEX Exhibit 2 - Agreement and Plan of Merger dated November 1, 1991, between Luby's Cafeterias, Inc., a Texas corporation, and Luby's Cafeterias, Inc., a Delaware corporation (filed as Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1991, and incorporated herein by reference). 3(a) - Certificate of Incorporation of Luby's Cafeterias, Inc., a Delaware corporation, as currently in effect (filed as Exhibit 3(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1994, and incorporated herein by reference). 3(b) - Bylaws of Luby's Cafeterias, 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) - Credit Agreement dated February 27, 1996, among Luby's Cafeterias, Inc., Certain Lenders, and NationsBank of Texas, N.A. (filed as Exhibit 4(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 29, 1996, and incorporated herein by reference). 4(f) - First Amendment to Credit Agreement dated January 24, 1997, among Luby's Cafeterias, Inc., Certain Lenders, and NationsBank of Texas, N.A. (filed as Exhibit 4(f) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997, and incorporated herein by reference). 4(g) - ISDA Master Agreement dated June 17, 1997, between Luby's Cafeterias, Inc. and NationsBank, N.A., with Schedule and Confirmation dated July 7, 1997 (filed as Exhibit 4(g) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, and incorporated herein by reference). 4(h) - ISDA Master Agreement dated July 2, 1997, between Luby's Cafeterias, Inc. and Texas Commerce Bank National Association, with Schedule and Confirmation dated July 2, 1997 (filed as Exhibit 4(h) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, and incorporated herein by reference). 4(i) - Second Amendment to Credit Agreement dated July 3, 1997, among Luby's Cafeterias, Inc., Certain Lenders, and NationsBank of Texas, N.A. (filed as Exhibit 4(i) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, and incorporated herein by reference). 10(a) - Form of Deferred Compensation Agreement entered into between Luby's Cafeterias, Inc. and various officers (filed as Exhibit 10(b) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1981, and incorporated herein by reference). 10(b) - Form of Amendment to Deferred Compensation Agreement between Luby's Cafeterias, Inc. and various officers and former officers adopted January 14, 1997 (filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997, and incorporated herein by reference). 10(c) - Incentive Bonus Plan of Luby's Cafeterias, Inc. adopted October 19, 1983 (filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1983, and incorporated herein by reference). 10(d) - Amendment to Incentive Bonus Plan of Luby's Cafeterias, Inc. adopted January 14, 1997 (filed as Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997, and incorporated herein by reference). 10(e) Luby's Cafeterias, Inc. Incentive Bonus Plan for Fiscal 1998 adopted January 9, 1998 (filed as Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998, and incorporated herein by reference). 10(f) - Performance Unit Plan of Luby's Cafeterias, Inc. approved by the shareholders on January 12, 1984 (filed as Exhibit 10(f) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1984, and incorporated herein by reference). 10(g) - Amendment to Performance Unit Plan of Luby's Cafeterias, Inc. adopted January 14, 1997 (filed as Exhibit 10(h) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997, and incorporated herein by reference). 10(h) - Employment Contract dated January 8, 1988, between Luby's Cafeterias, Inc. and George H. Wenglein (filed as Exhibit 10(h) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1988, and incorporated herein by reference). 10(i) - 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(j) - 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(k) - 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(l) - 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(m) 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(n) - Nonemployee Director Stock Option Plan of Luby's Cafeterias, Inc. approved by the shareholders on January 13, 1995 (filed as Exhibit 10(h) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1995, and incorporated herein by reference). 10(o) - Amendment to Nonemployee Director Stock Option Plan of Luby's Cafeterias, Inc. adopted January 14, 1997 (filed as Exhibit 10(o) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997, and incorporated herein by reference). 10(p) - Employment Contract dated January 12, 1996, between Luby's Cafeterias, Inc. and John B. Lahourcade (filed as Exhibit 10(i) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 29, 1996, and incorporated herein by reference). 10(q) - 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(r) - 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(s) 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(t) - Luby's Cafeterias, Inc. Welfare Benefit Plan Trust dated July 18, 1996 (filed as Exhibit 10(k) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, and incorporated herein by reference). 10(u) - Retirement Agreement dated March 17, 1997, between Luby's Cafeterias, Inc. and Ralph Erben (filed as Exhibit 10(t) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997, and incorporated herein by reference). 10(v) - Employment Agreement dated September 15, 1997, between Luby's Cafeterias, Inc. and Barry J.C. Parker (filed as Exhibit 10(u) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, and incorporated herein by reference). 10(w) - Term Promissory Note of Barry J.C. Parker in favor of Luby's Cafeterias, Inc., dated November 10, 1997, in the original principal sum of $199,999.00 (filed as Exhibit 10(v) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, and incorporated herein by reference). 10(x) - Stock Agreement dated November 10, 1997, between Barry J.C. Parker and Luby's Cafeterias, Inc. (filed as Exhibit 10(w) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, and incorporated herein by reference). 10(y) Luby's Cafeterias, Inc. Nonemployee Director Phantom Stock Plan adopted March 19, 1998 (filed as Exhibit 10(aa) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998, and incorporated herein by reference). 10(z) Agreement of Resignation, Severance, Confidentiality, Non- Solicitation, Arbitration and General Release of All Claims dated April 30, 1998, between Luby's Cafeterias, Inc. and William E. Robson (filed as Exhibit 10(bb) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1998, and incorporated herein by reference). 10(aa) Salary Continuation Agreement dated May 14, 1998, between Luby's Cafeterias, Inc. and Sue Elliott (filed as Exhibit 10(cc) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1998, and incorporated herein by reference). 10(bb) Salary Continuation Agreement dated June 1, 1998, between Luby's Cafeterias, Inc. and Alan M. Davis (filed as Exhibit 10(dd) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1998, and incorporated herein by reference). 10(cc) Luby's Incentive Stock Plan adopted October 16, 1998. 10(dd) Executive Bonus Plan for Fiscal 1999 adopted October 16, 1998. 11 - Statement re computation of per share earnings. 21 - Subsidiaries of Luby's Cafeterias, Inc. 27 - Financial Data Schedule. 99(a) - Corporate Governance Guidelines of Luby's Cafeterias, Inc adopted by the Board of Directors on March 19, 1998 (filed as Exhibit 99 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998, and incorporated herein by reference). 99(b) - Consent of Ernst & Young LLP. EX-10 2 LUBY'S INCENTIVE STOCK PLAN AND INCENTIVE BONUS PLAN Exhibit 10(cc) LUBY'S INCENTIVE STOCK PLAN 1. Objectives. The Luby's Incentive Stock Plan (the "Plan") is designed to benefit the shareholders of the Company by encouraging and rewarding high levels of performance by individuals who are key to the success of the Company by increasing the proprietary interest of such individuals in the Company's growth and success. To accomplish these objectives, the Plan authorizes incentive Awards through grants of stock options, restricted stock, and performance shares to those individuals whose judgment, initiative, and efforts are responsible for the success of the Company. 2. Definitions. "Award" means any award described in Section 5 of the Plan. "Award Agreement" means an agreement entered into between the Company and a Participant, setting forth the terms and conditions applicable to the Award granted to the Participant. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Committee" means the Compensation Committee of the Board or other committee designated by the Board to administer the Plan. The Committee shall be constituted to comply with Rule 16b-3 promulgated under the Securities Exchange Act of 1934 or any successor rule. "Common Stock" means the common stock of the Company (par value $.32 per share) and shall include both treasury shares and authorized but unissued shares. "Company" means Luby's Cafeterias, Inc. "Fair Market Value" means the closing price of the Common Stock as reported by the composite tape of New York Stock Exchange issues (or such other reporting system as shall be selected by the Committee) on the relevant date, or if no sale of Common Stock is reported for such date, the next following day for which there is a reported sale. "Participant" means an individual who has been granted an Award pursuant to the Plan. "1989 Plan" means the Management Incentive Stock Plan of the Company which was adopted in 1989. 3. Eligibility. All employees of any of the following entities are eligible to receive Awards under the Plan: (i) the Company, (ii) any corporation or other entity that has elected to be taxed as a corporation for federal income tax purposes (collectively "Entities"), other than the Company, in an unbroken chain of Entities beginning with the Company if each of the Entities other than the last Entity in the unbroken chain owns stock or interests possessing more than fifty percent (50%) of the total combined voting power of all classes of stock or interests in one of the other Entities in such chain, (iii) partnerships and any other business entities in which the Company, directly or indirectly, owns more than fifty percent (50%) of the capital and profit interests. With regard to the issuance of incentive stock options, all employees of any of the entities described in (i) and (ii) are eligible to receive Awards under the Plan. 4. Common Stock Available for Awards. Subject to the adjustment provisions of Section 10, the number of shares of Common Stock that may be issued for Awards granted under the Plan is equal to the sum of: (a) 2,000,000 shares; (b) any shares of Common Stock available for future awards under the 1989 Plan as of the Effective Date; and (c) any shares of Common Stock represented by awards granted under the 1989 Plan which are forfeited, expire, or are canceled without delivery of Common Stock after the Effective Date, or which result in the forfeiture of Common Stock back to the Company. In no event will the number of shares of Common Stock which may be issued under the Plan exceed 2,500,000. No Participant may receive, under the Plan, stock options for more than 100,000 shares in any one year, except that stock options may be granted to a newly hired employee for not more than 200,000 shares in the first year of employment. Shares of Common stock related to Awards which (i) are forfeited, (ii) expire unexercised, (iii) are settled in such manner that all or some of the shares covered by an Award are not issued to a Participant, (iv) are exchanged for Awards that do not involve Common Stock, or (v) are tendered by a Participant upon exercise of a stock option in payment of all or a portion of the option price shall be added back to the pool and shall immediately become available for Awards. 5. Awards. The Committee shall select the persons who are to receive Awards and shall determine the type or types of Award(s) to be made to each Participant and shall set forth in the related Award Agreement the terms, conditions, performance requirements, and limitations applicable to each Award. Awards may be granted singly, in combination, or in tandem. Awards may include but are not limited to the following: (a) Nonqualified Stock Options. A nonqualified stock option is a right to purchase a specified number of shares of Common Stock at a fixed option price equal to the Fair Market Value of the Common Stock on the date the Award is granted, during a specified time, not to exceed ten years, as the Committee may determine. The option price shall be payable: (i) in U.S. dollars by personal check, bank draft, or by money order payable to the order of the Company or by money transfer or direct account debit; or (ii) if the Committee so determines, through the delivery of shares of Common Stock of the Company with a Fair Market Value equal to all or a portion of the option price for the total number of options being exercised; or (iii) by a combination of the methods described in subsections (i) and (ii) next above. (b) Incentive Stock Options. An incentive stock option ("ISO") is an Award which, in addition to being subject to applicable terms, conditions, and limitations established by the Committee, complies with Section 422 of the Code. Among other limitations, Section 422 of the Code currently provides (i) that the aggregate Fair Market Value (determined at the time the option is granted) of Common Stock for which ISOs are exercisable for the first time by a Participant during any calendar year shall not exceed $100,000, (ii) that ISOs shall be priced at not less than 100% of the Fair Market Value on the date of the grant, and (iii) that ISOs shall be exercisable for a period of not more than ten years. The Committee may provide that the option price under an ISO can be paid by one or more of the methods described in subsection (a) next above. (c) Restricted Stock. Restricted Stock is Common Stock of the Company that is subject to restrictions on transfer and/or such other restrictions on incidents of ownership as the Committee may determine, for a required period of continued employment of not less than three years as set by the Committee at the time of Award. Restricted Stock Awards shall require no payments of consideration by the Participant, either on the date of grant or the date the restriction(s) are removed, unless specifically required by the terms of the Award Agreement. The maximum number of shares of Restricted Stock which may be issued under the Plan is 200,000. (d) Performance Shares. A Performance Share is Common Stock of the Company, or a unit valued by reference to Common Stock, that is subject to restrictions on transfer and/or such other restrictions on incidents of ownership as the Committee may determine. The elimination of restrictions on a Performance Share and the number of shares ultimately earned by a Participant shall be contingent upon achievement of one or more performance targets specified by the Committee. Performance Shares may be paid in Common Stock, cash, or a combination thereof. The Committee shall establish minimum performance targets with respect to each Performance Share. Performance targets may be based on financial criteria consisting of (i) revenue growth, (ii) diluted earnings per share, (iii) net operating profit after taxes, (iv) cash flow, (v) economic value added, or (vi) a combination of such criteria. No Participant may receive, under the Plan, a Performance Share Award for any award cycle in excess of 25,000 performance units or 25,000 shares of Common Stock. 6. Certain Changes. Except as may be permitted under the provisions of Section 10 or Section 11, no stock option issued pursuant to the Plan may be (i) canceled by the Company or (ii) amended so as to reduce the option price, unless such cancellation or amendment is approved by the shareholders of the Company. 7. Award Agreements. Each Award under this Plan shall be evidenced by an Award Agreement consistent with the provisions of the Plan setting forth the terms and conditions applicable to the Award. Award Agreements shall include: (a) Non-Assignability. A provision that no Award shall be assignable or transferable except by will or by the laws of descent and distribution and that during the lifetime of a Participant, the Award shall be exercised only by such Participant. (b) Termination of Employment. Provisions governing the disposition of an Award in the event of the retirement, disability, death, or other termination of a Participant's employment or relationship to the Company or any affiliate of the Company. (c) Rights as a Shareholder. A provision that a Participant shall have no rights as a shareholder with respect to any shares covered by an Award until the date the Participant or his nominee becomes the holder of record. Except as provided in Section 9 hereof, no adjustment shall be made for dividends or other rights for which the record date is prior to such date, unless the Award Agreement specifically requires such adjustment. (d) Withholding. A provision requiring the withholding of all taxes required by law from all amounts paid in cash. In the case of payments of Awards in shares of Common Stock, the Participant may be required to pay the amount of any taxes required to be withheld prior to receipt of such shares. A Participant must in all instances pay the required withholding taxes in cash. The withholding of shares to pay taxes shall not be permitted. (e) Other Provisions. Such other terms and conditions, including the criteria for determining vesting of Awards and the amount or value of Awards, as the Committee determines to be necessary or appropriate. Without limiting the generality of the foregoing, any stock option granted under the Plan may provide, if the Committee so determines, that upon the occurrence of a "change of control" (as defined in Section 11) the option shall immediately become exercisable and shall remain exercisable for a period of one year after termination of the optionee's employment but not later than the expiration date of the option. 8. Administration. The Plan shall be administered by the Committee, which shall have full and exclusive power to interpret the Plan, to grant waivers of Award restrictions, and to adopt such rules, regulations, and guidelines for carrying out the Plan as it may deem necessary or proper, all of which powers shall be executed in the best interests of the Company and in keeping with the objectives of the Plan. All questions of interpretation and administration with respect to the Plan and Award Agreements shall be determined by the Committee, and its determination shall be final and conclusive. The Committee may delegate to the Chief Executive Officer of the Company its administrative functions and authority to grant Awards under the Plan pursuant to such conditions and limitations as the Committee may establish, except that only the Committee may select, and grant Awards to, Participants who are subject to Section 16 of the Securities Exchange Act of 1934. 9. Amendment, Modification, Suspension, or Discontinuance of the Plan. The Board may amend, modify, suspend, or terminate the Plan for the purpose of meeting or addressing any changes in legal requirements or for any other purpose permitted by law. Subject to changes in law or other legal requirements that would permit otherwise, the Plan may not be amended without the consent of the holders of a majority of the shares of Common Stock then outstanding (i) to increase the aggregate number of shares of Common Stock that may be issued under the Plan (except for adjustments pursuant to Section 9 of the Plan), (ii) to decrease the option price, (iii) to materially modify the requirements as to eligibility for participation in the Plan, (iv) to withdraw administration of the Plan from the Committee, or (v) to extend the period during which Awards may be granted. 10. Adjustments. In the event of any change in the outstanding Common Stock of the Company by reason of a stock split, stock dividend, combination or reclassification of shares, recapitalization, merger, or similar event, the Committee may adjust proportionally (a) the number of shares of Common Stock (i) reserved under the Plan, (ii) for which Awards may be granted to an individual Participant, and (iii) covered by outstanding Awards denominated in stock or units of stock; (b) the stock prices related to outstanding Awards; and (c) the appropriate Fair Market Value and other price determinations for such Awards. In the event of any other change affecting the Common Stock or any distribution (other than normal cash dividends) to holders of Common Stock, such adjustments as may be deemed equitable by the Committee, including adjustments to avoid fractional shares, may be made to give proper effect to such event. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Committee shall be authorized to issue or assume stock options, whether or not in a transaction to which Section 424(a) of the Code applies, by means of substitution of new stock options for previously issued stock options or an assumption of previously issued stock options. The issuance of new stock options for previously issued stock options or the assumption of previously issued stock options in connection with a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation shall not reduce the number of shares of Common stock available for Awards under the Plan. 11. Change of Control. (a) In the event of a change of control of the Company, or if the Board reaches agreement to merge or consolidate with another corporation and the Company is not the surviving corporation or if all, or substantially all, of the assets of the Company are sold, or if the Company shall make a distribution to shareholders that is nontaxable under the Code, or if the Company shall dissolve or liquidate (a "Restructuring Event"), then the Committee may, in its discretion, recommend that the Board take any of the following actions as a result of, or in anticipation of, any such Restructuring Event to assure fair and equitable treatment of Participants: (i) accelerate time periods for purposes of vesting in, or realizing gain from, any outstanding Award made pursuant to the Plan; (ii) offer to purchase any outstanding Award made pursuant to the Plan from the holder for its equivalent cash value, as determined by the Committee, as of the date of the Restructuring Event; and (iii) make adjustments or modifications to outstanding Awards as the Committee deems appropriate to maintain and protect the rights and interests of Participants following such Restructuring Event. (b) Any such action by the Board shall be conclusive and binding on the Company and all Participants. Notwithstanding the foregoing, the Committee shall retain full authority to take, in its discretion, any of the foregoing actions with respect to Awards held by Participants who are directors, and the Board shall have no authority to act in any such matter. (c) For purposes of this Section, "change of control" shall mean (i) the acquisition by any person of voting shares of the Company, not acquired directly from the Company, if, as a result of the acquisition, such person, or any "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934 of which such person is a part, owns at least 20% of the outstanding voting shares of the Company; or (ii) a change in the composition of the Board such that within any period of two consecutive years, persons who (a) at the beginning of such period constitute the Board or (b) become directors after the beginning of such period and whose election or nomination for election by the shareholders of the Company was approved by a vote of at least two-thirds of the persons who were either directors at the beginning of such period or whose subsequent election or nomination was previously approved in accordance with this clause (b), cease to constitute at least a majority of the Board; or (iii) a merger, consolidation, reorganization, or similar restructuring involving the Company is consummated and, as a result, the shareholders of the Company immediately prior to such event own less than 50% of the voting shares of the surviving entity outstanding immediately after such event. 12. Unfunded Plan. Insofar as it provides for Awards of cash and Common Stock, the Plan shall be unfunded. Although bookkeeping accounts may be established with respect to Participants who are entitled to cash, Common Stock, or rights thereto under the Plan, any such accounts shall be used merely as a bookkeeping convenience. The Company shall not be required to segregate any assets that may at any time be represented by cash, Common Stock, or rights thereto, nor shall the Plan be construed as providing for such segregation, nor shall the Company or the Board or the Committee be deemed to be a trustee of any cash, Common Stock, or rights thereto to be granted under the Plan. Any liability of the Company or any of its affiliates to any Participant with respect to a grant of cash, Common Stock, or rights thereto under the Plan shall be based solely upon any contractual obligations that may be created by the Plan and any Award Agreement; no such obligation of the Company or any of its affiliates shall be deemed to be secured by any pledge or other encumbrance on any property of the Company. Neither the Company nor the Board nor the Committee shall be required to give any security or bond for the performance of any obligation that may be created by the Plan. 13. Right of Discharge Reserved. Nothing in the Plan or in any Award shall confer upon any employee or other individual the right to continue in the employment or service of the Company or any affiliate of the Company or affect any right the Company or any affiliate of the Company may have to terminate the employment or service of any such employee or other individual at any time for any reason. 14. Nature of Payments. All Awards made pursuant to the Plan are in consideration of services performed for the Company or an affiliate of the Company. Any gain realized pursuant to such Awards constitutes a special incentive payment to the Participant and shall not be taken into account as compensation for purposes of any of the employee benefit plans of the Company or any affiliate of the Company. 15. Limited Stock Purchase Loans. During the period from the Effective Date to March 25, 1999, the Company may, with the approval of the Committee, make or guarantee loans to Participants who are officers of the rank of Vice President and above, for the purpose of purchasing Common Stock. Each such loan shall be for a maximum of five years, shall not exceed an amount equal to 50% of the Participant's annual base salary, and shall be subject to such conditions as the Committee may prescribe with respect to recourse, interest, security, and payment. 16. Notice. Any notice to the Company required by any of the provisions of the Plan shall be addressed to the chief human resources officer or to the Chief Executive Officer of the Company in writing and shall become effective when it is received by the office of either of them. 17. Governing Law. The Plan shall be governed by, construed and enforced in accordance with the laws of the State of Texas without regard to the conflicts of law provisions in any jurisdiction. 18. Effective and Termination Dates. The Plan shall become effective on January 1, 1999, subject to approval of the shareholders of the Company at the 1999 annual meeting of shareholders. The Plan shall terminate on December 31, 2008, unless sooner terminated by the Board, after which no Awards may be made under the Plan, but any such termination shall not affect Awards then outstanding or the authority of the Committee to continue to administer the Plan. Exhibit 10(dd) LUBY'S CAFETERIAS, INC. INCENTIVE BONUS PLAN FOR FISCAL 1999 1. Purpose. The Incentive Bonus Plan for Fiscal 1999 (the "Plan") of Luby's Cafeterias, Inc. (the "Company") is intended to provide (i) additional incentives for Participants to improve their job performance, (ii) drive the achievement of performance objectives that are aligned with the Company's strategic plan, and (iii) to retain and attract highly talented executives. 2. Participants. Participants include the Chief Executive Officer, Senior Vice Presidents, Vice Presidents, Department Directors, Assistant Vice Presidents, and Assistant Secretaries. 3. Eligibility. A employee must be a Participant in the Plan for a minimum of three months during the plan year to be eligible for an award for that plan year. 4. Target Award Percentages. Award levels are set for each Participant in the organization based on level of responsibility. 5. Cash Bonus Pool. The Company shall establish a Cash Bonus Pool based upon the sum of target award percentages multiplied by each Participant's salary. The target award percentages are set for each level by the Compensation Committee. 6. Performance Goals. At the recommendation of the Chief Executive Officer, the Compensation Committee of the Board of Directors has approved certain Strategic Objectives and a threshold earnings goal for the Company for fiscal 1999. If the threshold earnings goal is met or exceeded, the Compensation Committee will then authorize the pool. The amount of the pool will be determined based on the following: 50% of the Pool: Earnings Per Share versus established goals, according to the following schedule for 1999: Performance vs. Goal % of Target Pool Generated Stretch Performance: 106.5% or more 150% of pool Performance at Goal: 100% 100% of pool Threshold: 93.5% of Goal 50% of pool Straight-line interpolation between or above points The other 50% of the pool will be based on performance versus the strategic objectives, as determined by the CEO and approved by the Compensation Committee of the Board of Directors. 7. Job Performance Evaluations. At the end of each fiscal year, the management of the Company shall review the job performance of each Participant during the fiscal year and shall evaluate his or her performance based upon the achievement of written objectives established for the year. In addition, each Participant will be evaluated on the basis of general job performance criteria. 8. Cash Bonuses. Upon completion of the Job Performance Evaluations of all Participants at the end of the fiscal year, the management of the Company shall allocate the approved Cash Bonus Pool among the Participants based upon the evaluations. The Company's evaluation of each Participant's performance and the Company's determination of the amount to be awarded to each Participant out of the Cash Bonus Pool shall be final and conclusive and shall be binding upon all Participants in the Plan. The amount awarded to each Participant out of the Cash Bonus Pool shall be in addition to his or her base salary and other benefits. 9. Adjustments for Extraordinary Items. The Compensation Committee of the Board shall be authorized to made adjustments in the method of calculating attainment of Performance Goals in recognition of: (i) extraordinary or non-recurring items, (ii) changes in tax laws, (iii) changes in generally accepted accounting principles or changes in accounting policies, (iv) charges related to restructured or discontinued operations, (v) restatement of prior period financial results, and (vi) any other unusual, non-recurring gain or loss that is separately identified and quantified in the Company's financial statements. 10. Withholding Tax. The Company shall have the right to deduct from all payments made under the Plan any taxes required by law to be withheld with respect to such payments. 11. Interpretation of the Plan. Any disagreement or dispute with respect to the interpretation or application of the Plan shall be resolved by the Executive Committee of the Board of Directors of the Company. The decision of the Executive Committee with respect to any such matter shall be final and conclusive and shall be binding upon all Participants in the Plan. 12. Amendment and Discontinuance of the Plan. The Plan may be discontinued or amended by the Board of Directors of the Company at any time. No Participant shall be entitled to receive a bonus under the Plan until such time as the bonus has been awarded by the Board of Directors in accordance with the Plan. 13. No Right To Continued Employment or Awards. No employee shall have any claim or right to be made an award, and the making of an award shall not be construed as giving a participant the right to be retained in the employ of the Company. Further, the Company expressly reserves the right at any time to terminate the employment of any Participant free from any liability under the Plan. EX-11 3 COMPUTATION OF PER SHARE EARNINGS Exhibit 11 COMPUTATION OF PER SHARE EARNINGS The following is a computation of the weighted average number of shares outstanding which is used in the computation of per share earnings for Luby's Cafeterias, Inc. for the three and twelve months ended August 31, 1998 and 1997. Three months ended August 31, 1998 23,270,675 x shares outstanding for 92 days 2,140,902,100 Divided by number of days in the period 92 _____________ 23,270,675 Twelve months ended August 31, 1998 23,266,374 x shares outstanding for 18 days 418,794,732 23,266,921 x shares outstanding for 17 days 395,537,657 23,268,328 x shares outstanding for 9 days 209,414,952 23,270,675 x shares outstanding for 321 days 7,469,886,675 _____________ 8,493,634,016 Divided by number of days in the period 365 _____________ 23,270,230 Three months ended August 31, 1997 23,266,374 x shares outstanding for 92 days 2,140,506,408 Divided by number of days in the period 92 _____________ 23,266,374 Twelve months ended August 31, 1997 23,892,819 x shares outstanding for 30 days 716,784,570 23,666,720 x shares outstanding for 31 days 733,668,320 23,281,927 x shares outstanding for 30 days 698,457,810 23,329,990 x shares outstanding for 31 days 723,229,690 23,404,092 x shares outstanding for 31 days 725,526,852 23,409,028 x shares outstanding for 28 days 655,452,784 23,410,574 x shares outstanding for 31 days 725,727,794 23,406,574 x shares outstanding for 30 days 702,197,220 23,280,909 x shares outstanding for 31 days 721,708,179 23,266,374 x shares outstanding for 92 days 2,140,506,408 _____________ 8,543,259,627 Divided by number of days in the period 365 _____________ 23,406,191 EX-21 4 SUBSIDIARIES Exhibit 21 SUBSIDIARIES OF LUBY'S CAFETERIAS, INC. 1. Luby's Holdings, Inc., a Delaware corporation, doing business under its corporate name 2. Luby's Limited Partner, Inc., a Delaware corporation, doing business under its corporate name 3. Luby's Management, Inc., a Delaware corporation, doing business under its corporate name 4. LUBCO, Inc., a Delaware corporation, doing business under its corporate name 5. L & W Seafood, Inc., a Delaware corporation, doing business under its corporate name 6. Luby's Restaurants Limited Partnership, a Texas limited partnership, doing business under the names "Luby's," "Luby's Cafeteria" and "Luby's Cafeterias" 7. Luby's Bevco, Inc., a Texas corporation, doing business under its corporate name EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR AUG-31-1998 AUG-31-1998 3,760 0 704 0 5,072 15,112 455,511 156,914 339,041 47,436 0 0 0 8,769 196,645 339,041 508,871 508,871 284,278 284,278 154,501 36,852 5,078 7,879 2,798 5,081 0 0 0 5,081 0.22 0.22 Other stockholders' equity amount is less cost of treasury stock of $92,907.
EX-99 6 CONSENT Exhibit 99(b) Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-36791) pertaining to the Luby's Cafeterias, Inc. Management Incentive Stock Plan, (Form S-8 No. 33-10559) pertaining to the Luby's Cafeterias, Inc. Performance Unit Plan, and (Form S-8 No. 333-19283) pertaining to the Luby's Cafeterias Savings and Investment Plan of Luby's Cafeterias, Inc. of our report dated October 5, 1998, with respect to the consolidated financial statements of Luby's Cafeterias, Inc. incorporated by reference in the Annual Report (Form 10-K) for the year ended August 31, 1998. ERNST & YOUNG LLP San Antonio, Texas November 24, 1998 -----END PRIVACY-ENHANCED MESSAGE-----