LUBYS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 4, 2005
or


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to

Commission file number 1-8308

Luby’s, Inc.

(Exact name of registrant as specified in its charter)


Delaware		74-1335253

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

13111 Northwest Freeway, Suite 600
Houston, Texas 77040

(Address of principal executive offices, including zip code)

(713) 329-6800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

As of June 1, 2005, there were 22,631,858 shares of the registrant’s Common Stock outstanding, which does not include 4,902,209 treasury shares.

Page 1

Part I - FINANCIAL INFORMATION

Item 1. Financial Statements

Luby’s, Inc.
Consolidated Balance Sheets
(In thousands except share and per share amounts)


	May 4,			August 25,
	2005			2004
				(Restated,
				see Note 2)

	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents (see Note 4)	$	5,995		$	3,311
Short-term investments (see Note 4)		2,284			2,284
Trade accounts and other receivables, net		252			101
Food and supply inventories		2,037			2,092
Prepaid expenses		1,189			1,028
Deferred income taxes (see Note 5)		256			1,073

Total current assets		12,013			9,889
Property, plant, and equipment, net (see Note 6)		187,786			194,042
Property held for sale (see Note 9)		11,267			24,594
Investments and other assets		1,797			3,756

Total assets	$	212,863		$	232,281


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	15,129		$	15,888
Accrued expenses and other liabilities		16,438			18,006

Total current liabilities		31,567			33,894
Credit facility debt (see Note 7)		29,800			28,000
Term debt (see Note 7)		—			23,470
Convertible subordinated notes, net-related party (see Note 7)		1,964			2,091
Other liabilities		9,107			9,715
Deferred income taxes (see Note 5)		4,368			5,061
Reserve for restaurant closings (see Note 9)		500			500

Total liabilities		77,306			102,731


SHAREHOLDERS’ EQUITY

Common stock, $.32 par value; authorized 100,000,000 shares, issued 27,539,067 shares at May 4, 2005 and 27,410,567 shares at August 25, 2004, respectively		8,812			8,771
Paid-in capital		43,567			43,564
Retained earnings		187,294			181,986
Less cost of treasury stock, 4,902,209 shares at May 4, 2005 and 4,933,063 shares at August 25, 2004 in 2004		(104,116	)		(104,771	)

Total shareholders’ equity		135,557			129,550

Total liabilities and shareholders’ equity	$	212,863		$	232,281

See accompanying notes.

Page 3

Luby’s, Inc.
Consolidated Statements of Operations (unaudited)
(In thousands except share and per share data)


	Quarter Ended						Three Quarters Ended
	May 4,			May 5,			May 4,			May 5,
	2005			2004			2005			2004
				(Restated,						(Restated,
				see Note 2)						see Note 2)

	(84 days)			(84 days)			(252 days)			(252 days)
SALES	$	77,029		$	72,345		$	219,093		$	207,563

COSTS AND EXPENSES:
Cost of food		20,365			19,245			59,309			55,632
Payroll and related costs		19,251			19,143			56,496			56,816
Other operating expenses		23,202			21,959			68,799			64,188
Depreciation and amortization		3,425			3,707			10,602			11,425
Relocation and voluntary severance costs		75			—			655			—
General and administrative expenses		4,455			4,333			13,238			14,045
Provision for (reversal of) asset impairments and restaurant closings (see Note 9)		(367	)		(569	)		(396	)		456

		70,406			67,818			208,703			202,562

INCOME FROM OPERATIONS		6,623			4,527			10,390			5,001
Interest expense		(773	)		(2,060	)		(2,435	)		(6,437	)
Other income, net		269			209			459			702

Income (loss) from continuing operations before income taxes		6,119			2,676			8,414			(734	)
Provision (benefit) for income taxes (see Note 5)		—			—			—			—

Income (loss) from continuing operations		6,119			2,676			8,414			(734	)
Discontinued operations, (see Note 9)		(2,415	)		(2,301	)		(3,106	)		(8,252	)

NET INCOME (LOSS)	$	3,704		$	375		$	5,308		$	(8,986	)

Income (loss) per share - before discontinued operations - basic	$	0.27		$	0.12		$	0.37		$	(0.03	)
- assuming dilution^(a)		0.24			0.12			0.34			(0.03	)

Loss per share - from discontinued operations - basic	$	(0.11	)	$	(0.10	)	$	(0.14	)	$	(0.37	)
- assuming dilution^(a)		(0.09	)		(0.10	)		(0.12	)		(0.37	)

Net income (loss) per share
- basic	$	0.16		$	0.02		$	0.23		$	(0.40	)
- assuming dilution^(a)		0.15			0.02			0.22			(0.40	)

Weighted average shares outstanding:
- basic		22,632			22,470			22,578			22,470
- assuming dilution^(a)		26,671			22,652			26,635			22,470

(a)

In loss periods, earnings per share assumingdilution equals basic earnings per share since potentially dilutive securities are antidilutive. See Note 12

See accompanying notes.

Page 4

Luby’s, Inc.
Consolidated Statements of Cash Flows (unaudited)
(In thousands)


	Three Quarters Ended
	May 4,			May 5,
	2005			2004
				(Restated,
				see Note 2)

	(84 days)			(84 days)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	5,308		$	(8,986	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
(Reversal of) provision for asset impairments, net of gains on property sales - discontinued operations		(1, 473	)		2,965
Provision for asset impairments		—			770
Depreciation and amortization - discontinued operations		236			578
Depreciation and amortization - continuing operations		10,602			11,425
Amortization of discount on convertible subordinated notes		(127	)		1,703
(Gain) loss on disposal of property, plant, and equipment		(115	)		45
Noncash executive compensation expense		—			679

Cash provided by operating activities before changes in operating assets and liabilities		14,431			9,179
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts and other receivables		(151	)		159
Decrease (increase) in food and supply inventories		55			(98	)
(Increase) decrease in prepaid expenses		(161	)		226
Decrease in other assets		1,959			421
(Decrease) increase in accounts payable		(679	)		1,159
Decrease in accrued expenses, other liabilities and deferred income taxes payable		(2,052	)		(4,923	)
Decrease in reserve for restaurant closings		—			(1,163	)

Net cash provided by operating activities		13,402			4,960


CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of property held for sale		15,789			11,175
Purchases of property, plant, and equipment		(5,536	)		(4,291	)
Proceeds from disposal of property, plant, and equipment		—			100

Net cash provided by investing activities		10,253			6,984


CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on line of credit, net		1,800			—
Repayment of term debt		(23,470	)		—
Repayment of credit facility		—			(13,069	)
Proceeds received on exercise of stock options		699			—

Net cash used in financing activities		(20,971	)		(13,069	)

Net increase in cash		2,684			(1,126	)
Cash at beginning of period		3,311			19,085

Cash at end of period	$	5,995		$	17,959

See accompanying notes.

Page 6

Luby’s, Inc.
Notes to Consolidated Financial Statements (unaudited)
May 4, 2005

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements of Luby’s, Inc. (the “Company” or “Luby’s”) have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements as are prepared for the Company’s Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and fiscal year-to-date ended May 4, 2005, are not necessarily indicative of the results that may be expected for the fiscal year ending August 31, 2005.

The balance sheet dated August 25, 2004, and included in this Form 10-Q, has been derived from the audited financial statements at that date. However, this Form 10-Q does not include all of the information and footnotes required by GAAP for an annual filing of complete financial statements. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and footnotes included in Luby’s Annual Report on Forms 10-K and 10-K/A for the year ended August 25, 2004.

Certain accounts and prior period results have been restated to provide more meaningful comparability to the Company’s current information. Prior period results have been reclassified to show the retroactive effect of discontinued operations per the Company’s business plan. As stores are closed in the future and presented in discontinued operations, quarterly and annual financial amounts, where applicable, will be reclassified for further comparability.

Note 2. Restatement of Financial Statements

During the second quarter of fiscal 2005, like many other retail and restaurant companies that operate properties on long-term leases, the Company completed a review of its historical lease accounting methods. The purpose of the review was to determine whether these methods were in accordance with the views expressed by the Office of the Chief Accountant of the Securities and Exchange Commission (“SEC”) on February 7, 2005 in a letter to the American Institute of Certified Public Accountants and other recent interpretations regarding certain operating lease accounting issues and their application under GAAP. As a result of its review, the Company determined that its historical methods of accounting for scheduled rent increases, and of determining lives used in the calculation of depreciation of leasehold improvements for certain leased properties, were not in accordance with GAAP.

The Company historically recognized scheduled rent increases as they occurred over the lease term. The Company annually reviewed its lease accounting expense calculations to determine whether the amounts calculated were materially in accordance with GAAP. However, under current interpretations of GAAP, the Company determined that the lease term used in calculating straight-line rent expense should commence on the date the Company takes possession of the leased space, which is generally six months prior to a store’s opening date. Additionally, the Company determined that rent expense should be recorded on a straight-line basis over lease periods that are consistent with or greater than the number of periods over which depreciation of leasehold improvements is recorded. Historically, the life used for rent expense purposes in some instances was shorter than the life used for depreciation purposes.

The Company has restated the consolidated statements of operations and cash flows for periods ended May 5, 2004 and the Company’s consolidated balance sheet as of August 25, 2004.

Following is a summary of the effects of these accounting corrections on the consolidated balance sheet as of August 25, 2004 and the consolidated statements of operations for the fiscal quarter and three fiscal quarters ended May 5, 2004 (in thousands):

Page 7


	Previously
August 25, 2004	Reported		Adjustments			Restated

Property and equipment-at cost, net	$	196,541	$	(2,499	)	$	194,042
Total assets		234,780		(2,499	)		232,281
Accrued expenses and other liabilities		25,280		(7,274	)		18,006
Total current liabilities		41,168		(7,274	)		33,894
Other liabilities		5,385		4,330			9,715
Long-term deferred income tax liability		1,073		3,988			5,061
Total liabilities		101,687		1,044			102,731
Retained earnings		185,529		(3,543	)		181,986
Total shareholders’ equity		133,093		(3,543	)		129,550
Total liabilities and shareholders’ equity	$	234,780	$	(2,499	)	$	232,281


	Previously
Fiscal quarter ended May 5, 2004	Reported			Adjustments			Restated

Occupancy and other operating expenses	$	21,986		$	(27	)	$	21,959
Depreciation and amortization		3,672			35			3,707
Income (loss) from operations		4,535			(8	)		4,527
Income (loss) before income taxes		2,684			(8	)		2,676
Income (loss) from continuing operations		2,684			(8	)		2,676
Discontinued operations, net of taxes		(2,303	)		2			( 2,301	)
Net income (loss)	$	381		$	(6	)	$	375

Page 8


	Previously
Three fiscal quarters ended May 5, 2004	Reported			Adjustments			Restated

Occupancy and other operating expenses	$	64,269		$	(81	)	$	64,188
Depreciation and amortization		11,320			105			11,425
Income (loss) from operations		5,025			(24	)		5,001
Income (loss) before income taxes		(710	)		(24	)		(734	)
Income (loss) from continuing operations		(710	)		(24	)		(734	)
Discontinued operations, net of taxes		(8,416	)		164			( 8,252	)
Net income (loss)	$	(9,126	)	$	140		$	(8,986	)

These accounting corrections had no effect on net cash (used in) provided by operating activities, investing activities or financing activities, as stated in the consolidated statements of cash flows.

Note 3. Accounting Periods

The Company’s fiscal year ends on the last Wednesday in August. As such, each fiscal year normally consists of 13 four-week periods, accounting for 364 days. Because the Company’s normal 364-day fiscal year is not aligned with the number of days in each calendar year, occasionally the last Wednesday in August occurs five weeks after the end of the prior period. As is the case with fiscal year 2005, this results in a fiscal year consisting of 12 four-week periods and one five-week period (371 days). Comparability between accounting periods is affected by varying lengths of the periods, as well as the seasonality associated with the restaurant business.

Note 4. Cash and Cash Equivalents and Short-Term Investments

The Company manages its cash and cash equivalents and short-term investments jointly in order to internally fund operating needs. Short-term investments as of May 4, 2005, and August 25, 2004, consisted primarily of time deposits. As of May 4, 2005, approximately $2.3 million of the Company’s $8.3 million in cash and cash equivalents and short-term investments was pledged as collateral for four separate letters of credit. There have been no draws upon these letters of credit.


	May 4,		August 25,
	2005		2004
	(In thousands)
Cash and cash equivalents	$	5,995	$	3,311
Short-term investments		2,284		2,284


Total cash and cash equivalents and short-term investments	$	8,279	$	5,595

Note 5. Income Tax

Following is a summarization of deferred income tax assets and liabilities as of the current quarter and prior fiscal year-end:


	May 4,			August 25,
	2005			2004
	(In thousands)
Deferred long-term income tax liability		(4,368	)		(5,061	)
Plus: Deferred short-term income tax asset		256			1,073

Net deferred income tax liability	$	(4,112	)	$	(3,988	)

Page 9

The following table details the categories of income tax assets and liabilities resulting from the cumulative tax effects of temporary differences as of the end of each period presented:


	May 4,			August 25,
	2005			2004
	(In thousands)
Deferred income tax assets:
Workers’ compensation, employee injury, and general liability claims	$	1,996		$	2,552
Deferred compensation		2,302			2,302
Asset impairments and restaurant closure reserves		11,493			14,636
Net operating losses		19,472			16,032
General Business Credits		568			529
Other		1,529			1,557

Subtotal		37,360			37,608
Valuation allowance		(19,687	)		(18,432	)

Total deferred income tax assets		17,673			19,176


Deferred income tax liabilities:
Depreciation and amortization		19,187			21,293
Other		2,598			1,871

Total deferred income tax liabilities		21,785			23,164

Net deferred income tax liability	$	4,112		$	3,988

Relative only to continuing operations, the reconciliation of the expense (benefit) for income taxes to the expected income tax expense (benefit) — computed using the statutory tax rate — was as follows:


				Quarter Ended									Three Quarters Ended
	May 4,						May 5,						May 4,						May 5,
	2005						2004						2005						2004
	Amount			%			Amount			%			Amount			%			Amount			%
	(In thousands and as a percent of income (loss) from continuing operations before income taxes.)
Income tax expense (benefit) from continuing operations at federal rate	$	2,142			35.0	%	$	937			35.0	%	$	2,945			35.0	%	$	(257	)		(35.0	)%

Permanent and other differences		4			0.1			216			8.1			11			0.1			645			87.9

Change in valuation allowance		(2,146	)		(35.1	)		(1,153	)		(43.1	)		(2,956	)		(35.1	)		(388	)		(52.9	)

Income tax expense (benefit) from continuing operations	$	—			—	%	$	—			—	%	$	—			—	%	$	—			—	%

For the three quarters ended May 4, 2005, including both continuing and discontinued operations, the Company generated gross taxable operating losses of approximately $10.0 million, which will expire in 2025 if not utilized. Cumulative net tax benefits for book purposes are netted against a valuation allowance because loss carrybacks were exhausted with the fiscal 2002 tax filing, making the realization of loss carryforwards uncertain.

For the fiscal years 2003 and 2004, including both continuing and discontinued operations, the Company generated gross taxable operating losses of approximately $31.7 million and $3.8 million, respectively, which will expire in 2023 and 2024, respectively, if not utilized.

Page 10


		Page

Part I - Financial Information

Item 1	Financial Statements		3

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3	Quantitative and Qualitative Disclosures about Market Risk		26

Item 4	Controls and Procedures		26

Part II - Other Information


Item 6	Exhibits		27

Signatures			28
Rule 13a-14(a)/15d-(14) Certification of the Principal Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer
Section 1350 Certification of the Principal Executive Officer
Section 1350 Certification of the Principal Financial Officer

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	Common Stock															Total
	Issued				Treasury						Paid-In			Retained		Shareholders’
	Shares		Amount		Shares			Amount			Capital			Earnings		Equity

BALANCE AT AUGUST 25, 2004		27,411	$	8,771		(4,933	)	$	(104,771	)	$	43,564		$	181,986	$	129,550
Net income for the year to date		—		—		—			—			—			5,308		5,308
Common stock issued under nonemployee director benefit plans		—		—		31			655			(655	)		—		—
Common stock issued under employee benefit plans		128		41		—			—			658			—		699

BALANCE AT May 4, 2005		27,539	$	8,812		(4,902	)	$	(104,116	)	$	43,567		$	187,294	$	135,557