Luby’s,
Inc.
13111
Northwest Freeway
Suite
600
Houston,
Texas 77040
713-329-6800
www.lubys.com
December
12, 2005
Dear
Shareholders:
On
behalf
of our Board of Directors, we are pleased to invite you to attend the 2006
Annual Meeting of Shareholders of Luby's, Inc. to be held on Thursday, January
19, 2006, at 9:00 a.m., Central time, at the Crowne Plaza Hotel, 12801 Northwest
Freeway, Houston, Texas 77040. All record holders of Luby's outstanding common
shares at the close of business on December 1, 2005, are eligible to vote
on
matters brought before this meeting.
At
this
year's meeting, you will have an opportunity to vote on several important
matters, including new terms proposed for three incumbent directors, approval
of
amendment and restatement of Luby's Incentive Stock Plan, ratification of
the
appointment of Ernst & Young LLP as independent auditor for fiscal 2006, a
non-binding shareholder proposal and such other matters as may properly come
before the meeting. The following meeting notice and proxy statement provide
information you need about the election of directors, as well as information
regarding other matters to be voted on at the meeting. There will be time
allocated to address questions from the shareholders in attendance.
Please
review the following proxy statement carefully. Your vote is important, so
be
sure to vote your shares as soon as possible. Please review the enclosed
proxy
for specific voting instructions.
Thank
you
for your loyalty and support.
|
Sincerely,
|
Sincerely,
|
|
/s/
GASPER MIR, III
|
/s/
CHRISTOPHER J. PAPPAS
|
|
Gasper
Mir, III
|
Christopher
J. Pappas
|
|
Chairman
of the Board
|
President
and CEO
|
LUBY'S,
INC.
13111
Northwest Freeway, Suite 600
Houston,
Texas 77040
NOTICE
OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD
JANUARY
19, 2006
NOTICE
IS
HEREBY GIVEN that the 2006 Annual Meeting of Shareholders of Luby's, Inc.,
a
Delaware corporation, will be held at the Crowne Plaza Hotel, 12801 Northwest
Freeway, Houston, Texas 77040, on Thursday, January 19, 2006, at 9:00 a.m.,
Central time, for the following purposes:
(1) To
elect
three directors to serve until the 2009 Annual Meeting of
Shareholders;
(2) To
ratify
the appointment of Ernst & Young LLP as independent auditor for the 2006
fiscal year;
(3) To
approve the amendment and restatement of the Luby’s Incentive Stock
Plan;
(4) To
act
upon one non-binding shareholder proposal to declassify the board of directors;
and
(5) To
act
upon such other matters as may properly come before the meeting or any
adjournment or postponement thereof.
The
Board
of Directors has determined that shareholders of record at the close of business
on December 1, 2005, will be entitled to vote at the meeting.
A
complete list of shareholders entitled to vote at the meeting will be on
file at
Luby's corporate office at 13111 Northwest Freeway, Suite 600, Houston, Texas,
for a period of ten days prior to the meeting. During such time, the list
will
be open to the examination of any shareholder during ordinary business hours
for
any purpose germane to the meeting.
Shareholders
who do not expect to attend the meeting in person are urged to review the
enclosed proxy for specific voting instructions and to choose the method
they
prefer for casting their votes.
By
Order
of the Board of Directors,
Peter
Tropoli
Senior
Vice President and General Counsel
Dated:
December 12, 2005
2
LUBY'S,
INC.
13111
Northwest Freeway, Suite 600
Houston,
Texas 77040
PROXY
STATEMENT
_______________
This
Proxy Statement and the accompanying proxy are being provided to shareholders
in
connection with the solicitation of proxies by the Board of Directors of
Luby's,
Inc. (the "Company") for use at the Annual Meeting of Shareholders of the
Company to be held on Thursday, January 19, 2006, or at any adjournment or
postponement thereof (the "Annual Meeting"). This Proxy Statement and the
accompanying proxy are first being mailed to shareholders on or about December
12, 2005.
VOTING
PROCEDURES
Your
Vote is Very Important
Whether
or not you plan to attend the meeting, please take the time to vote your
shares
as soon as possible.
Shares
Outstanding, Voting Rights, and Quorum
Only
holders of record of common stock of the Company at the close of business
on
December 1, 2005, will be entitled to vote at the meeting or at adjournments
or
postponements thereof. There were 26,000,055 shares of common stock outstanding
on the record date, exclusive of 1,676,403 treasury shares.
Each
share of common stock outstanding is entitled to one vote. The presence in
person or by proxy of the holders of a majority of the shares of common stock
outstanding will constitute a quorum at the meeting.
Methods
of Voting
•Shares
Held in Shareholder's Name. If
your
shares are held in your name, you may vote by mail, via the Internet, or
by
telephone. You may also vote in person by attending the meeting.
•Shares
Held in "Street Name" Through a Bank or Broker.
If your
shares are held through a bank or broker, you can vote via the Internet or
by
telephone if your bank or broker offers these options. Please see the voting
instructions provided by your bank or broker for use in instructing your
bank or
broker how to vote. Your bank or broker cannot vote your shares without
instructions from you. You will not be able to vote in person at the meeting
unless you obtain a signed proxy from the record holder giving you the right
to
vote the shares.
If
your
proxy card is signed and returned without specifying choices, the shares
represented will be voted as recommended by the Board of Directors (the "Board")
of the Company.
Revoking
Your Proxy
•Shares
Held in Shareholder's Name. If
your
shares are held in your name, whether you vote by mail, the Internet, or
by
telephone, you may later revoke your proxy by delivering a written statement
to
that effect to the Secretary of the Company prior to the date of the Annual
Meeting, by a later-dated electronic vote via the Internet, by telephone,
by
submitting a properly signed proxy with a later date, or by voting in person
at
the Annual Meeting.
•Shares
Held in "Street Name" Through a Bank or Broker.
If you
hold your shares through a bank or broker, the methods available to you to
revoke your proxy are determined by your bank or broker, so please see the
instructions provided by your bank or broker.
3
Vote
Required
A
plurality of the votes cast at the Annual Meeting is required for the election
of a director nominee. "Plurality" means that the nominees receiving the
largest
number of votes cast are elected as directors up to the maximum number of
directors to be elected at the meeting. Approval of the appointment of auditors
requires the affirmative vote of a majority of the shares present or represented
at the meeting. Approval of the non-binding shareholder proposal described
in
the following paragraphs and on page 23 requires the affirmative vote of
a
majority of the shares present or represented by proxy at the meeting. If
the
non-binding shareholder proposal receives approval at the Annual Meeting
and the
Board decides to submit the proposed amendment to a vote at a subsequent
meeting
of shareholders, an affirmative vote of at least 80% of the outstanding shares
of common stock at such subsequent meeting is required to amend that portion
of
the Company's certificate of incorporation providing for a classified board.
Abstentions and broker nonvotes will be included in determining the presence
of
a quorum at the meeting. However, abstentions and broker nonvotes will not
be
included in determining the number of votes cast on any matter.
Recommendation
of the Board of Directors
The
Board
unanimously recommends that you vote your shares "FOR" each of the nominees
to
the Board, "FOR" the amendment and restatement of Luby's Incentive Stock
Plan,
and "FOR" the appointment of Ernst & Young LLP as independent auditor for
the 2006 fiscal year. The Board unanimously recommends that you vote your
shares
"AGAINST" the non-binding shareholder proposal sponsored by the Harold J.
Mathis, Jr. Family Limited Partnership and Harold J. Mathis, Jr. relating
to the
manner of election of directors of the Company.
Other
Business
The
Board
knows of no other matters that may be presented for shareholder action at
the
meeting. If other matters are properly brought before the meeting, the persons
named as proxies in the accompanying proxy card intend to vote the shares
represented by them in accordance with their best judgment.
Confidential
Voting Policy
It
is the
Company's policy that any proxy, ballot, or other voting material that
identifies the particular vote of a shareholder and contains the shareholder's
request for confidential treatment will be kept confidential, except in the
event of a contested proxy solicitation or as may be required by law. The
Company may be informed whether or not a particular shareholder has voted
and
will have access to any comment written on a proxy, ballot, or other material
and to the identity of the commenting shareholder. Under the policy, the
inspectors of election at any shareholder meeting will be independent parties
unaffiliated with the Company.
ELECTION
OF DIRECTORS (Item 1)
The
shareholders elect approximately one-third of the members of the Board of
Directors annually. The Board is divided into three classes, as nearly equal
in
number as possible, with the members of each class serving three-year terms.
Currently, the Board is comprised of ten members, three whose terms expire
at
the 2006 Annual Meeting, three whose terms expire at the 2007 annual meeting
of
shareholders, and four whose terms expire at the 2008 annual meeting of
shareholders.
The
terms
of J.S.B. Jenkins, Joe C. McKinney and Harris J. Pappas will expire at the
2006
Annual Meeting of shareholders. The Board nominates J.S.B. Jenkins, Joe C.
McKinney and Harris J. Pappas for election as directors to serve until the
2009
annual meeting of shareholders or until their successors are elected and
qualified. The Board recommends a vote "FOR" all such nominees.
4
The
Board
has nominated Harris J. Pappas to serve until the 2009 annual meeting of
shareholders. His brother, Christopher J. Pappas, is currently serving
until the 2007 annual meeting of shareholders, and, as with all directors,
each
of them would serve until his or her successor is duly elected and qualified.
Pursuant to the terms of the First Amendment to Purchase Agreement dated
June 7,
2004, among the Company, Christopher J. Pappas and Harris J. Pappas, the
Company
agreed that Messrs. Pappas would have the right to nominate a number of
directors for election to the Board which, if such nominees are elected,
would
result in Messrs. Pappas having nominated three of the then serving directors
of
the Company. Messrs. Pappas are entitled to exercise this right for so long
as
they are both executive officers of the Company. Messrs. Pappas designated
themselves and Frank Markantonis as their nominees for director. The Board
recommends a vote "FOR" Harris J. Pappas.
All
such
nominees named above have indicated a willingness to serve as directors,
but
should any of them decline or be unable to serve, proxies may be voted for
another person nominated as a substitute by the Board.
The
following information is furnished with respect to each of the nominees and
for
each of the directors whose terms will continue after the Annual Meeting.
Such
information includes all positions with the Company and principal occupations
during the last five years.
Nominees
for Election to Terms Expiring in 2009
J.S.B.
JENKINS is President, Chief Executive Officer, and a Director of Tandy Brands
Accessories, Inc. (since November 1990). Previously, he served in several
executive capacities within that company, including President of Tex Tan
Welhausen Co., a division of Tandy Brands, Inc. He has also served as the
Executive Vice President of the Bombay Company, Inc. Mr. Jenkins is 62 years
of
age and has served on the Board of Directors of Luby’s, Inc. since January of
2003. He is Chairman of the Executive Compensation Committee; Vice-Chairman
of
the Finance and Audit Committee; a member of the Nominating and Corporate
Governance Committee; and a member of the Executive Committee. He also currently
serves on the Boards of Directors for Hardware Resources and for the Southwest
(Northern) Advisory Board of Liberty Mutual Insurance Company. He is a member
of
the Texas A&M University College of Business Administration/Graduate School
of Business Development Council, the Texas A&M University President's
Council, the Advisory Board of Directors for the Texas A&M University 12th
Man Foundation, and the Board of Directors for the Cotton Bowl Athletic
Association.
JOE
C.
McKINNEY is Vice-Chairman of Broadway National Bank (since October 1, 2002).
He
formerly served as Chairman of the Board and Chief Executive Officer of JPMorgan
Chase Bank-San Antonio (commercial banking) until his retirement on March
31,
2002. He is 59 years of age and has been a director of the Company since
January
of 2003 and serves as Chairman of the Finance and Audit Committee, as a member
of the Nominating and Corporate Governance Committee, and member of the
Executive Committee. He is a director of Broadway National Bank; Broadway
Bancshares, Inc.; Columbia Industries; USAA Real Estate Company; Tampa Equities
REIT I (USAA); Houston REIT (USAA); U.S. Industrial REIT I (USAA); and Cobalt
Industrial REIT (USAA). He was a director of Prodigy Communications Corporation
and served on its Special Shareholder Committee and the Audit and Compensation
Committee. He served from January 2001 to November 2001 when the company
was
sold to SBC Communications, Inc.
HARRIS
J.
PAPPAS is Chief Operating Officer of the Company (since March 7, 2001). He
is
also President of Pappas Restaurants, Inc. (since 1980). He is 61 years of
age
and has been a director of the Company since March of 2001. He is a member
of
the Executive Committee and the Personnel and Administrative Policy Committee.
He is a director of Oceaneering International, Inc.; Memorial Hermann Affiliated
Services, Inc.; and the YMCA of Greater Houston. He is also an advisory trustee
of Schreiner's College and an advisory board member of Frost National
Bank-Houston.
Incumbents
Whose Terms Expire in 2008
JUDITH
B.
CRAVEN is President of JAE & Associates LLC (since June 2002). She was
President of United Way of the Texas Gulf Coast from 1992 to 1998. She is
60
years of age and has been a director of the Company since January of 1998.
She
is Vice Chair of the Board of Directors, Chair of the Personnel and
Administrative Policy Committee, Vice-Chair of the Executive Compensation
Committee and the Executive Committee, and a member of the Nominating and
Corporate Governance Committee. She is also a director of Belo Corporation;
Sysco Corporation; Sun America Fund; and Valic Corp. She serves on the Board
of
Regents of the University of Texas at Austin. Previously she served as a
director of Compaq Computer Corp.
5
ARTHUR
R.
EMERSON is Chairman/CEO of GRE Creative Communications, an advertising and
public relations firm (since June 2000). Prior to such he was Vice President
and
General Manager of the Texas stations of the Telemundo television network.
He is
60 years of age and has been a director of the Company since January of 1998.
He
is a member of the Finance and Audit Committee. Mr. Emerson is also a director
of USAA Federal Savings Bank, Chairman of its Credit Committee, and former
Chairman of its Trust Committee.
FRANK
MARKANTONIS is an attorney licensed to practice in Texas since 1973. He is
57
years of age and has been a director of the Company since January of 2002.
He is
a member of the Personnel and Administrative Policy Committee. Mr. Markantonis
has worked extensively in the real estate and corporate areas for over 30
years.
He is a member of the State Bar of Texas and the District of Columbia Bar.
His
principal client is Pappas Restaurants, Inc.
GASPER
MIR, III is currently serving as Executive General Manager of Strategic
Partnerships for the Houston Independent School District. Mr. Mir is a principal
owner and founder of the public accounting and professional services firm
Mir•Fox & Rodriguez, P.C. (since 1988). He is currently on a leave of
absence from the accounting firm. He is 59 years
of
age and has been a director of the Company since January of 2002. He is Chairman
of the Board of Directors, Chairman of the Executive Committee and the
Nominating and Corporate Governance Committee, and a member of the Finance
and
Audit Committee.
Mr.
Mir
is also a director of the Memorial Hermann Hospital System; the Sam Houston
Council of Boy Scouts; the Advisory Board of the University of Houston-Downtown
School of Business; and the Houston Region Board of Directors of JPMorgan
Chase
Bank of Texas.
Incumbent
Directors Whose Terms Expire in 2007
JILL
GRIFFIN is a business consultant, best-selling business book author and
international speaker. She is a principal of the Griffin Group, founded by
her
in 1988, which specializes in customer loyalty research, customer relationship
program development, and management training. She is 51 years of age and
has
been a director of the Company since January of 2003. She is Vice-Chair of
the
Personnel and Administrative Policy Committee and a member of the Executive
Compensation Committee. Previously, she served as senior brand manager for
RJR/Nabisco's largest brand. She then joined AmeriSuites Hotels where she
served
as national director of sales and marketing. She has also served on the
marketing faculty at the University of Texas at Austin.
CHRISTOPHER
J. PAPPAS is President and Chief Executive Officer of the Company (since
March
7, 2001). He also has been Chief Executive Officer of Pappas Restaurants,
Inc.
(since 1980). He is 58 years of age and has been a director of the Company
since
March of 2001. He is also a director of Amegy Bank N.A. (formerly Southwest
Bank
of Texas N.A.), and previously served on its advisory board; the National
Restaurant Association; the University of Houston Conrad Hilton School of
Hotel
and Restaurant Management Dean's Advisory Board; the Greater Houston Partnership
Board; and the Sam Houston Council of Boy Scouts of America Board. He is
a
member of the Executive Committee.
JIM
W.
WOLIVER is a retired former officer of the Company. He was Senior Vice
President-Operations from 1995 to 1997 and Vice President-Operations from
1984
to 1995. He is 68 years of age and has been a director of the Company since
January of 2001. He is a member of the Personnel and Administrative Policy
Committee and the Executive Compensation Committee.
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE DIRECTOR
NOMINEES.
6
OWNERSHIP
OF EQUITY SECURITIES IN THE COMPANY
The
following table sets forth information concerning the beneficial ownership
of
the Company's common stock, as of December 1, 2005, for (a) each director
currently serving on the Company's Board, (b) each nominee for election as
a
director at the 2006 Annual Meeting, (c) each of the officers named in the
Summary Compensation Table not listed as a director, and (d) all directors
and
executive officers as a group. In general, "beneficial ownership" includes
those
shares a director or executive officer has the power to vote or transfer
and
shares that the director or executive officer has the right to acquire within
60
days after December 1, 2005.
|
Name(1)
|
Shares
Beneficially
Owned
|
Percent
of
Common
Stock
|
|
Judith
B. Craven (2)
|
32,356
|
*
|
|
Arthur
R. Emerson (3)
|
34,450
|
*
|
|
Jill
Griffin (4)
|
10,022
|
*
|
|
J.S.B.
Jenkins (5)
|
10,324
|
*
|
|
Frank
Markantonis (6)
|
16,000
|
*
|
|
Joe
C. McKinney (7)
|
10,628
|
*
|
|
Gasper
Mir, III (8)
|
13,751
|
*
|
|
Christopher
J. Pappas (9)
|
3,404,803
|
12.55%
|
|
Harris
J. Pappas (10)
|
3,404,803
|
12.55%
|
|
Ernest
Pekmezaris (11)
|
28,010
|
*
|
|
Peter
Tropoli (12)
|
25,000
|
*
|
|
Jim
W. Woliver (13)
|
34,323
|
*
|
|
All
directors and executive officers of the Company, as a
group
(14 persons) (14)
|
7,107,202
|
24.95%
|
__________
*
Represents beneficial ownership of less than one percent of the shares of
the
Company's common stock issued and outstanding on December 1, 2005.
(1) Except
as
indicated in these notes and subject to applicable community property laws,
each
person named in the table owns directly the number of shares indicated and
has
the sole power to vote and to dispose of such shares. Shares of phantom stock
held by a nonemployee director convert into an equivalent number of shares
of
the Company's common stock when the nonemployee director ceases to be a director
of the Company on account of resignation, retirement, death, disability,
removal, or any other circumstance. The shares of common stock payable upon
conversion of the phantom stock are included in this table because it is
possible for the holder to acquire the common stock within 60 days if his
or her
directorship terminated. Under the Company’s Nonemployee Director Stock Option
Plan, restricted stock awards may become unrestricted when a nonemployee
director ceases to be a director of the Company for any reason. The shares
of
restricted common stock awarded to directors are included in this table because
it is possible for the holder to acquire unrestricted common stock within
60
days if his or her directorship terminates.
(2) The
shares shown for Ms. Craven include 1,500 shares held for her benefit in
a
custodial account, 19,388 shares which she has the right to acquire within
60
days under the Nonemployee Director Stock Option Plan and 11,468 shares of
phantom stock held under the Nonemployee Director Phantom Stock
Plan.
(3) The
shares shown for Mr. Emerson include 3,237 shares held jointly with his wife
in
a custodial account, 19,388 shares which he has the right to acquire within
60
days under the Nonemployee Director Stock Option Plan and 11,825 shares of
phantom stock held under the Nonemployee Director Phantom Stock
Plan.
(4) The
shares shown for Ms. Griffin include 10,022 shares which she has the right
to
acquire within 60 days under the Nonemployee Director Stock Option
Plan.
7
(5) The
shares shown for Mr. Jenkins include 10,324 shares which he has the right
to
acquire within 60 days under the Nonemployee Director Stock Option
Plan.
(6) The
shares shown for Mr. Markantonis include 100 shares held for his benefit
in a
custodial account, 12,022 shares which he has the right to acquire within
60
days under the Nonemployee Director Stock Option Plan and 3,878 shares of
phantom stock held under the Nonemployee Director Phantom Stock
Plan.
(7) The
shares shown for Mr. McKinney include 10,628 shares which he has the right
to
acquire within 60 days under the Nonemployee Director Stock Option
Plan.
(8) The
shares shown for Mr. Mir include 11,299 shares which he has the right to
acquire
within 60 days under the Nonemployee Director Stock Option Plan and 2,452
shares
of phantom stock held under the Nonemployee Director Phantom Stock
Plan.
(9) The
shares shown for Christopher J. Pappas include 671,900 shares held for his
benefit in a custodial account, 1,120,000 shares which he has the right to
acquire within 60 days pursuant to stock options granted in connection with
his
employment by the Company in 2001, and 1,612,903 shares arising from his
conversion of subordinated debt to equity on August 31, 2005. (See "Certain
Relationships & Related Transactions" beginning on page 15).
(10) The
shares shown for Harris J. Pappas include 671,900 shares held for his benefit
in
a custodial account, 1,120,000 shares which he has the right to acquire within
60 days pursuant to stock options granted in connection with his employment
by
the Company in 2001, and 1,612,903 shares arising from his conversion of
subordinated debt to equity on August 31, 2005. (See "Certain Relationships
& Related Transactions" beginning on page 15).
(11) The
shares shown for Mr. Pekmezaris include 3,010 shares held for his benefit
in a
custodial account. The shares shown include 25,000 shares which he has the
right
to acquire within 60 days under Luby's Incentive Stock Plan.
(12) The
shares shown for Mr. Tropoli include 25,000 shares which he has the right
to
acquire within 60 days under Luby's Incentive Stock Plan.
(13) The
shares shown for Mr. Woliver include 21,601 shares held in a custodial account
for the benefit of Mr. Woliver and his wife, and 12,722 shares which he has
the
right to acquire within 60 days under the Nonemployee Director Stock Option
Plan.
(14) The
shares shown for all directors and executive officers as a group include
2,430,793 shares which they have the right to acquire within 60 days under
the
Company's various benefit plans, and 60,475 shares of phantom stock held
by
nonemployee directors under the Nonemployee Director Phantom Stock
Plan.
8
PRINCIPAL
SHAREHOLDERS
The
following table sets forth information as to the beneficial ownership of
the
Company's common stock by each person or group known by the Company to own
beneficially more than 5% of the outstanding shares of the Company's common
stock as of December 1, 2005 and, unless otherwise indicated, is based
on
disclosures made by the beneficial owners in SEC filings under Section 13
of the
Exchange Act:
|
Name
and Address of Beneficial Owner (1)
|
Shares
Beneficially
Owned
|
Percent
of
Common
Stock
|
|
Christopher
J. Pappas (2)
|
3,404,803
|
12.55%
|
|
642
Yale
Street
|
||
|
Houston,
Texas
77007
|
||
|
Harris
J. Pappas (3)
|
3,404,803
|
12.55%
|
|
642
Yale
Street
|
||
|
Houston,
Texas
77007
|
__________
(1) Except
as
indicated in these notes and subject to applicable community property laws,
each
person named
in
the table owns directly the number of shares indicated and has the sole power
to
vote and to dispose
of such shares.
(2) The
shares shown for Christopher J. Pappas include 671,900 shares held for his
benefit in a custodial account,
1,120,000 shares which he has the right to acquire within 60 days pursuant
to
stock options granted
in connection with his employment by the Company in 2001, and 1,612,903 shares
arising from his
conversion of subordinated debt to equity on August 31, 2005. (See "Certain
Relationships & Related Transactions"
beginning on page 15).
(3) The
shares shown for Harris J. Pappas include 671,900 shares held for his benefit
in
a custodial account, 1,120,000
shares which he has the right to acquire within 60 days pursuant to stock
options granted in connection
with his employment by the Company in 2001, and 1,612,903 shares arising
from
his conversion
of subordinated debt to equity on August 31, 2005. (See "Certain Relationships
& Related Transactions"
beginning on page 15).
9
INFORMATION
CONCERNING MEETINGS, COMMITTEES OF THE BOARD,
AND
COMPENSATION OF DIRECTORS
The
Board
of Directors held four regular meetings and one special meeting during the
fiscal year ended August 31, 2005. Each director attended more than
75% of
the aggregate of all meetings of the Board and the committees of the Board
on
which he or she served during the last fiscal year.
The
Board
has affirmatively determined that Messrs. Emerson, Jenkins, McKinney, Mir,
and
Woliver, Ms. Craven and Ms. Griffin, are "independent" directors
under
the New York Stock Exchange listing standards. The membership, charters,
and key
practices of each of these committees are available on the Company's website
at
www.lubys.com.
The
Board
currently has the following committees: Finance and Audit, Nominating and
Corporate Governance, Personnel and Administrative Policy, Executive
Compensation, and Executive. The Finance and Audit Committee and the Personnel
and Administrative Policy Committee typically meet prior to each regularly
scheduled meeting of the Board; otherwise, all committees meet as necessary
to
fulfill their responsibilities, including regular quarterly meetings of the
Finance and Audit Committee with management and the Company's independent
accountants to review the results of operations and the overall financial
status
of the Company. The committees have been directed by the Board to consider
matters within their respective areas of responsibility and to make
recommendations to the full Board for action on these matters. Only the
Executive Committee is empowered to act on behalf of the Board, and the specific
powers of that committee may be exercised only in extraordinary
circumstances.
Membership
and principal responsibilities of the committees of the Board are described
below.
Finance
and Audit Committee
The
members of the Finance and Audit Committee are:
Joe
C.
McKinney (Chair)
J.S.B.
Jenkins (Vice-Chair)
Arthur
R.
Emerson
Gasper
Mir, III
The
Finance and Audit Committee met twelve times during the last fiscal year.
The
Finance and Audit Committee is a standing audit committee established to
oversee
the Company's accounting and financial reporting processes and the audit
of the
Company's financial statements. Its primary functions are to monitor and
evaluate corporate financial plans and performance and to assist the Board
in
monitoring (1) the integrity of the financial statements of the Company;
(2) the
compliance by the Company with legal and regulatory requirements; (3) the
independent auditor's qualifications and independence; and (4) the performance
of the Company's internal audit function and its independent auditor. The
Finance and Audit Committee is also directly responsible for the appointment,
compensation, retention, and oversight of the work of the Company's independent
auditor and the preparation of the Finance and Audit Committee Report, beginning
on page 25.
All
members of the Finance and Audit Committee are independent as that term is
defined in the listing standards of the New York Stock Exchange.
The
Board
determined that Gasper Mir, III and Joe C. McKinney are "audit committee
financial experts" as defined in rules of the Securities and Exchange Commission
adopted pursuant to the Sarbanes-Oxley Act of 2002.
At
least
quarterly, committee members have the opportunity to meet privately with
representatives of the Company's independent auditor and with the Company's
Director of Internal Audit. The Board of Directors has adopted a written
charter
for the Finance and Audit Committee. A copy of the current Finance and Audit
Committee Charter adopted by the Board is attached to this Proxy Statement
as
Annex A and is available on the Company's website at www.lubys.com.
10
Nominating
and Corporate Governance Committee
The
members of the Nominating and Corporate Governance Committee are:
Gasper
Mir, III (Chair)
Judith
B.
Craven (Vice-Chair)
J.S.B
Jenkins
Joe
C.
McKinney
The
Nominating and Corporate Governance Committee met three times during the
last
fiscal year. The primary functions of this committee are (1) to maintain
oversight of the development, structure, performance, and evaluation of the
Board; (2) to seek and recommend candidates to fill vacancies on the Board;
and
(3) to recommend appropriate Board action on renewal terms of service for
incumbent members as their terms near completion. A copy of the Nominating
and
Corporate Governance Committee Charter, as currently in effect, is available
on
the Company's website at www.lubys.com.
All
members of the Nominating and Corporate Governance Committee are independent
as
that term is defined in the listing standards of the New York Stock
Exchange.
Director
Nominations
Director
Qualifications and Nomination Process
The
Nominating and Corporate Governance Committee considers candidates for Board
membership suggested by its members and other Board members, as well as
management and shareholders. The committee may retain a third-party search
firm
to assist it in identifying candidates.
Once
the
Nominating and Corporate Governance Committee has identified a prospective
nominee, the committee makes an initial determination as to whether to conduct
a
full evaluation of the candidate. The initial determination is based on whatever
information is provided to the committee with the recommendation of the
prospective candidate, as well as the committee's own knowledge of the
prospective candidate, which may be supplemented by inquiries of the person
making the recommendation or others. The preliminary determination is based
primarily on the need for additional Board members to fill vacancies or expand
the size of the Board and the likelihood that the prospective nominee can
satisfy the evaluation factors described below.
If
the
committee determines, in consultation with the Board, as appropriate, that
additional consideration is warranted, it may request a third-party search
firm
to gather additional information about the prospective nominee's background
and
experience and report its findings to the committee. The committee then
evaluates the prospective nominee against the standards and qualifications
set
out in our Corporate Governance Guidelines and the charter of the Nominating
and
Corporate Governance Committee, including:
● a
candidate's expertise and experience;
● independence
(as defined by applicable New York Stock Exchange and SEC rules);
● financial
literacy and understanding of business strategy, business environment,
corporate
governance, and board operation knowledge;
● commitment
to our core values;
● skills,
expertise, independence of mind, and integrity;
● relationships
with the Company;
● service
on the boards of directors of other companies;
11
● openness,
ability to work as part of a team and willingness to commit the required
time;
and
● familiarity
with the Company and its industry.
The
Nominating and Corporate Governance Committee also considers the diversity
of,
and the optimal enhancement of the current mix of talent and experience on,
the
Board and other factors as it deems relevant, including the current composition
of the Board, the balance of management and independent directors, and the
need
for audit committee expertise.
In
connection with its evaluation, the committee determines whether to interview
the prospective nominee and, if warranted, one or more members of the committee,
and others as appropriate, may interview prospective nominees in person.
After
completing this evaluation and interview, the committee makes a recommendation
to the full Board as to the persons who should be nominated by the Board,
and
the Board determines the nominees after considering the recommendation and
report of the committee.
We
did
not pay any third party a fee to assist in the process of identifying or
evaluating nominees for election at the Annual Meeting. We did not receive
any
director candidates for election at the Annual Meeting put forward by a
shareholder or group of shareholders who beneficially own more than five
percent
of our common stock, other than Harris Pappas as stated above. All nominees
for
election as directors at the Annual Meeting are incumbent directors of the
Company standing for re-election.
Submission
of Shareholder Nominations to the Board of Directors
A
shareholder who wishes to recommend a prospective nominee for election to
the
Board should send the recommendation to the attention of the Corporate Secretary
or any member of the Nominating and Corporate Governance Committee in care
of
the Corporate Secretary, at Luby's, Inc., 13111 Northwest Freeway, Suite
600,
Houston, Texas 77040. The notice should include whatever supporting
material the shareholder considers appropriate. The Nominating and Corporate
Governance Committee will also consider whether to recommend for nomination
any
person nominated by a shareholder pursuant to the provision of our bylaws
relating to shareholder nominations as described in "Director Nominations
For
2007 Annual Meeting" below, beginning page 32.
Shareholder
Communications to the Board of Directors
Shareholders
and other parties interested in communicating directly with the Chairman
of the
Board, the non-management directors as a group or the Board itself regarding
the
Company may do so by writing to the Chairman of the Board, in care of the
Corporate Secretary at Luby's, Inc., 13111 Northwest Freeway, Suite 600,
Houston, Texas 77040. Instructions on how to communicate with the Board are
also
available on our Investor Relations website, which can be reached through
a link
at http://www.lubys.com.contactboard.asp.
The
Board
has approved a process for handling letters received by the Company and
addressed to non-management members of the Board. Under that process, our
Corporate Secretary reviews all such correspondence that, in the opinion
of the
Corporate Secretary, deals with the function of the Board or committees thereof
or that the Corporate Secretary otherwise determines requires their attention.
Directors may at any time request copies of all correspondence received by
the
Company that is addressed to members of the Board. Concerns relating to
accounting, internal controls or auditing matters are immediately brought
to the
attention of our internal audit department and handled in accordance with
procedures established by the Finance and Audit Committee with respect to
such
matters.
Director
Attendance at Annual Meetings
Although
we do not have a formal policy regarding director attendance at our annual
meetings, all of our directors attended the 2005 annual meeting and we expect
all members will be present for the 2006 Annual Meeting.
12
Personnel
and Administrative Policy Committee
The
members of the Personnel and Administrative Policy Committee are:
Judith
B.
Craven (Chair)
Jill
Griffin (Vice-Chair)
Frank
Markantonis
Harris
J.
Pappas
Jim
W.
Woliver
The
Personnel and Administrative Policy Committee met four times during the last
fiscal year. The primary functions of the Personnel and Administrative Policy
Committee are to monitor and evaluate the policies and practices of (1) human
resource management and administration; (2) management development; (3)
non-executive officer compensation and benefits (other than Board and executive
compensation); (4) retirement/savings and investment plan administration;
(5)
marketing and public relations strategies; (6) safety and security policies;
and
(7) investor relations and communications on matters other than financial
reporting.
None
of
the members of the Committee is an officer or employee, or a former officer
or
employee of the Company, except Messrs. Woliver and Pappas. Mr. Woliver retired
as an officer and employee of the Company in 1997, and Mr. Pappas is currently
Chief Operating Officer of the Company.
Executive
Compensation Committee
The
members of the Executive Compensation Committee are:
J.S.B.
Jenkins (Chair)
Judith
B.
Craven (Vice-Chair)
Jill
Griffin
Jim
W.
Woliver
The
Executive Compensation Committee met three times during the last fiscal year.
The primary functions of the Executive Compensation Committee are (1) to
discharge the Board's responsibilities relating to compensation of the Company's
executives and its Board; and (2) to communicate to shareholders the Company's
executive compensation policies and the reasoning behind such policies.
All
members of the Executive Compensation Committee are independent as that term
is
defined in the listing standards of the New York Stock Exchange.
Executive
Committee
The
members of the Executive Committee are:
Gasper
Mir, III (Chair)
Judith
B.
Craven (Vice-Chair)
Joe
C.
McKinney
J.S.B.
Jenkins
Christopher
J. Pappas
Harris
J.
Pappas
The
Executive Committee did not meet during the last fiscal year. The primary
functions of this Committee are (1) to facilitate action by the Board between
meetings of the Board; and (2) to develop and periodically review the Company's
Corporate Governance Guidelines and recommend such changes as may be determined
appropriate to the Board so as to reflect the responsibilities of the Board
and
the manner in which the enterprise should be governed in compliance with
best
practices.
13
Compensation
of Directors
Each
nonemployee director other than the Chairman of the Board is currently paid
an
annual retainer of $25,000. The Chairman of the Board is currently paid an
annual retainer of $50,000. In addition to the base annual retainer of $25,000,
the Chairman of the Finance and Audit Committee is currently paid an additional
annual retainer of $7,000, and the Chair of each other Board committee is
currently paid an additional annual retainer of $3,000.
All
nonemployee directors are also paid the following meeting fees for each meeting
he or she attends: (i) $1,500 per day for each meeting of the Board, including
committee meetings attended on the same day as a meeting of the Board, so
long
as the total duration of the meeting(s) attended on that day exceeds four
hours;
(ii) $750 per day for each meeting of the Board, including committee meetings
attended on the same day as a meeting of the Board, if the meeting is conducted
by telephone or its total duration is less than four hours; (iii) $1,000
per day
for each meeting of any Board committee held on a day other than a Board
meeting
day; and (iv) $500 per day for each meeting of any Board committee conducted
by
telephone on a day other than a Board meeting day.
Under
the
Company's Nonemployee Director Stock Option Plan, as previously amended and
restated (the "Option Plan"), each nonemployee director is required to use
at
least $10,000 of the annual $25,000 retainer to purchase restricted stock.
Further, each nonemployee director, prior to the end of any calendar year,
may
file with the Board or its designee an irrevocable written election to receive
an Elective Retainer Award, whereupon on the first day of each January, April,
July, and October during the term of the plan, each nonemployee director
elects
to purchase shares of restricted stock with the director's meeting and annual
retainer fees and is granted an additional number of whole shares of restricted
stock equal to twenty percent (20%) of the number of whole shares of restricted
stock issued in payment of the Elective Retainer Award for the quarterly
period
beginning on such date.
Further,
under the Option Plan, directors may be periodically granted nonqualified
options to purchase shares of the Company's common stock at an option price
equal to 100% of fair market value on the date of grant. Each option terminates
upon the expiration of ten years from the date of grant or one year after
the
optionee ceases to be a director, whichever first occurs. An option may not
be
exercised prior to the expiration of one year from the date of grant, subject
to
certain exceptions specified in the Option Plan. No Nonemployee Director
may
receive options for more than 5,000 shares in any 12 month period.
Pursuant
to the provisions of the Option Plan, options to acquire 2,000 shares of
common
stock at a price of $6.45 per share were granted on January 20, 2005, to
each of
Judith B. Craven, Arthur R. Emerson, Jill Griffin, J.S.B. Jenkins,
Frank
Markantonis, Joe C. McKinney, Gasper Mir, III, and Jim W. Woliver.
Under
the
Company's Nonemployee Director Phantom Stock Plan, as amended and restated
(the
"Phantom Stock Plan"), nonemployee directors were previously required and
encouraged to defer their director retainer and meeting fees into a phantom
share account which is credited with dollar amounts in the form of phantom
shares priced at current market value of the Company's common stock. Nonemployee
directors were required to defer at least 50% of their director retainer
fees
until they acquired at least $100,000 of the Company's common stock based
on its
average closing price over the preceding 365-day period. In addition,
nonemployee directors were encouraged to defer the balance of their director
retainer fees and their meeting fees into their respective phantom share
accounts by provisions of the Phantom Stock Plan, which provides an additional
credit to their account of 25% of any amounts voluntarily deferred. The phantom
share accounts were also credited with dollar amounts equal to dividends,
if
any, paid on the common stock. When a participant ceases to be a director,
the
number of phantom shares in his or her account is converted into an equal
number
of shares of the Company's common stock. Because the number of authorized
shares
under the Phantom Stock Plan has been fully depleted, directors may no longer
defer payment into the Phantom Stock Plan of cash compensation which would
otherwise be payable to nonemployee directors.
The
Company's Nonemployee Director Deferred Compensation Plan permits nonemployee
directors to defer all or a portion of their directors' fees in accordance
with
applicable regulations under the Internal Revenue Code. Deferred amounts
bear
interest at the average interest rate of U.S. Treasury ten-year obligations.
The
Company's obligation to pay deferred amounts is unfunded and is payable from
general assets of the Company.
14
The
Company's Corporate Governance Guidelines establish guidelines for share
ownership. Currently, Directors are expected to accumulate, over time, common
shares with a market value of at least $100,000.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
On
July
23, 2002, the Company entered into an Indemnification Agreement with each
member
of the Board of Directors under which the Company obligated itself to indemnify
each director to the fullest extent permitted by applicable law so that he
or
she will continue to serve the Company free from undue concern regarding
liabilities. The Company has also entered into an Indemnification Agreement
with
each person becoming a member of the Board of Directors since July 23, 2002.
The
Board of Directors has determined that uncertainties relating to liability
insurance and indemnification have made it advisable to provide directors
with
assurance that liability protection will be available in the
future.
The
Company obtains certain services from entities owned and controlled by
Christopher J. Pappas, President and Chief Executive Officer of the Company,
and
Harris J. Pappas, Chief Operating Officer of the Company, pursuant to the
terms
of an Affiliate Services Agreement dated August 28, 2001, and then amended
and
restated as of July 23, 2002. The types of services periodically provided
to the
Company by these entities are the supply of goods and other services necessary
for the operation of the Company. When the Affiliate Services Agreement was
amended, a Master Sales Agreement with such entities was entered into on
July
23, 2002, to more properly reflect the current relationship between the Company
and those entities regarding the provisions of services and goods. Both the
Amended and Restated Affiliate Services Agreement and Master Sales Agreement
expire on December 31, 2005. On December 6, 2005, the Board of Directors
voted
to approve the renewal of the Master Sales Agreement, with substantially
similar
terms as the expiring agreement.
During
the 2005 fiscal year, the entities owned or controlled by Messrs. Pappas
(the
"Pappas Entities") provided goods to the Company under the Master Sales
Agreement in the amount of approximately $176,000. During the 2004 fiscal
year,
the Pappas Entities provided goods to the Company under the Master Sales
Agreement in the amount of approximately $113,000. No services were provided
in
fiscal 2004 under the Affiliate Services Agreement. From September 1,
2005,
through November 30, 2005, the Company incurred costs in the amount of
approximately $2,000 from
the
Pappas Entities under either the Master Sales Agreement or the Affiliate
Services Agreement.
Consistent
with past practices, the Finance and Audit Committee of the Board of Directors
reviewed on a quarterly basis all applicable amounts related to either the
Master Sales Agreement or the Affiliate Services Agreement. That committee
is
composed entirely of nonemployee directors.
The
Company anticipates that payments to such entities under the Master Sales
Agreement during the current fiscal year will
not
exceed $500,000. Such payments will be primarily for goods purchased pursuant
to
the terms of the Master Sales Agreement. In the opinion of the Finance and
Audit
Committee, the fees paid by the Company for such goods and/or services are
primarily at or below the level which the Company would pay for comparable
goods
and/or services (if available) from a party unaffiliated with the
Company.
The
Company leases real property from the Pappas Entities under a separate
agreement, dated September 28, 2001 and amended as of May 20, 2003,
for use
as the Company's service center. The amount paid by the Company under this
lease
agreement was approximately $88,000 in fiscal 2005, and $82,000 in fiscal
2004.
From September 1, 2005, through November 30, 2005, the Company incurred
lease costs for the service center in the amount of $14,000. The Company
has
contracted to pay $6,800 per month in rent pursuant to said lease agreement
to
the Pappas Entities during the current fiscal year. The Company is obligated
to
pay all related repairs and maintenance, insurance, and pro-rata portion
of
utilities under said lease. The current term of this lease is
month-to-month.
The
Company previously leased a location from an unrelated third party. That
location is used to house increased equipment inventories due to prior store
closures. The Company considered it more prudent to lease this location rather
than to pursue purchasing a storage facility, as its strategy is to focus
its
capital expenditures on its operating restaurants. In a separate transaction,
the third-party property owner sold the location to the Pappas Entities during
the fourth quarter of fiscal 2003, with the Pappas Entities becoming the
Company's
15
landlord
for that location effective August 1, 2003. The storage site complements
the
Company's Houston service center with approximately 27,000 square feet of
warehouse space. The amount paid by the Company under this lease arrangement
was
approximately $72,000 in fiscal 2005. From September 1, 2005, through
November 30, 2005, the Company incurred lease costs for the storage
site of
approximately $11,000. The Company has contracted to pay $5,559 per month
in
rent pursuant to said lease agreement to the Pappas Entities during the current
fiscal year. The Company is obligated to pay all related repairs and
maintenance, insurance, and pro-rata portion of utilities under said lease.
The
current term of this lease is month-to-month.
Late
in
the third quarter of fiscal 2004, Messrs. Pappas became partners in a limited
partnership which purchased a retail strip center in Houston, Texas. Messrs.
Pappas own a 50% limited partnership and a 50% general partnership interest.
One
of the Company’s restaurants has rented approximately 7% of the space in that
center since July of 1969. No changes were made to the Company’s lease terms as
a result of the transfer of ownership of the center to the new partnership.
The
amount paid by the Company pursuant to the terms of this lease was $56,000
in
fiscal 2004, and $167,000 in fiscal 2005, and $41,000 from September 1,
2005, to November 30, 2005. No amendments shall be made to this lease without
the approval of the Finance and Audit Committee.
The
Company entered into a purchase agreement (the "Purchase Agreement") with
Messrs. Pappas on March 9, 2001. Pursuant to the terms of the Purchase
Agreement, Messrs. Pappas became obligated to purchase convertible subordinated
promissory notes (the "Pappas Notes") from the Company in the aggregate amount
of $10 million upon satisfaction of certain conditions specified in the Purchase
Agreement. Messrs. Pappas each purchased two convertible subordinated promissory
notes dated June 29, 2001, from the Company in the face amounts of $1.5 million
and $3.5 million each (the “Original Notes”), resulting in the receipt of $10
million in proceeds by the Company. The Original Notes were unsecured, and
the
rights of Messrs. Pappas to receive payments under the Pappas Notes were
subordinated to the rights of the Company's senior secured creditors. As
previously reported in the Company’s Current Report on Form 8-K filed May 23,
2003 and in the Company’s periodic filings, the Company’s default under the
terms of its senior indebtedness which occurred in January of 2003 triggered
a
default under cross-default provisions in the Original Notes. In connection
with
the refinancing of the Company’s senior indebtedness and with the negotiation of
new employment contracts with Messrs. Pappas (to replace the contracts which
expired in March of 2004), a committee of independent directors of the Company,
which was advised by independent advisors, negotiated an amendment of the
Original Notes. These negotiations resulted in the curing of all defaults
under
the Original Notes and the issuance of two new notes, each in the face amount
of
$5 million to each of Christopher and Harris Pappas (the “Amended Notes”).
Messrs. Pappas surrendered the Original Notes to the Company in connection
with
the issuance of the Amended Notes.
The
Amended Notes accrued interest at an annual rate of prime plus 5% for as
long as
the senior debt equaled or exceeded $60 million. When the senior debt was
reduced below $60 million, interest was at prime plus 4.00%. In either case,
the
rate could not exceed 12.00% or the maximum legal rate. The Amended Notes
were
unsecured and subordinated to the rights of the holders of the Company’s senior
indebtedness. The Original Notes were convertible into the Company’s common
stock at $5.00 per share for 2.0 million shares. The terms of the Amended
Notes
provided that, at the earlier of June 7, 2005, a default under the senior
debt,
or a “change in control,” as that term is defined in the Amended Notes, the
conversion price would lower from $5.00 to $3.10 per share.
On
August
31, 2005, Messrs. Pappas each voluntarily converted all of the convertible
senior subordinated notes they held into common stock of the Company. Each
of
them converted $5.0 million principal amount of convertible senior subordinated
notes at a conversion price of $3.10 per share into 1,612,903 shares of common
stock of the Company. The shares issued pursuant to the conversion were treasury
shares that had previously been reserved for such a conversion.
The
Company’s treasury shares have also been reserved for two other purposes - the
issuance of shares to Messrs. Pappas upon exercise of the options granted
to
them on March 9, 2001, and for shares issuable under the Company’s Nonemployee
Director Phantom Stock Option Plan. In accordance with an agreement between
Messrs. Pappas and the Company dated June 7, 2004, Christopher and Harris
Pappas
have agreed to limit their exercise of stock options to a number that will
ensure the “net treasury shares available” are not exceeded.
16
Pursuant
to the terms of that agreement, the Company indicated that it will use
reasonable efforts to list on the New York Stock Exchange additional shares
which would permit
full
exercise of those options.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Securities Exchange Act of 1934 requires the Company's directors,
executive officers, and any persons beneficially owning more than ten percent
of
the Company's common stock to report their initial ownership of the Company's
common stock and any subsequent changes in that ownership to the Securities
and
Exchange Commission and the New York Stock Exchange, and to provide copies
of
such reports to the Company. Based upon the Company's review of copies of
such
reports received by the Company and written representations of its directors
and
executive officers, the Company believes that during the year ended August
31,
2005, all Section 16(a) filing requirements were satisfied on a timely
basis.
CORPORATE
GOVERNANCE
During
fiscal 2003, the Board adopted amendments to the Company's Policy Guide on
Standards of Conduct and Ethics, which applies to all directors, officers,
and
employees of the Company. The Board also adopted Supplemental Standards of
Conduct and Ethics that apply to the Company's Chief Executive Officer, Chief
Financial Officer, Controller, and all senior financial officers. These
documents, as well as all Board Committee Charters and Corporate Governance
Guidelines are available in print to Shareholders upon request or on the
Company's website at www.lubys.com.
The
Chairman of The Board of Directors currently presides over the executive
sessions of non-management directors. If the offices of Chief Executive Officer
and Chairman are not separate or, for any other reason, the Chairman is not
independent, the independent directors will elect one of the independent
directors to preside over the executive sessions of non-management
directors.
Code
of Conduct and Ethics for All Directors, Officers, and
Employees
In
fiscal
2003, the Board amended the existing Policy Guide on Standards of Conduct
and
Ethics, which is applicable to all directors, officers, and employees, to
comply
with the amended corporate governance standards proposed by the New York
Stock
Exchange as approved by the Securities and Exchange Commission. It is the
intent
of the Policy Guide on Standards of Conduct and Ethics to promote observance
of
fundamental principles of honesty, loyalty, fairness, and forthrightness
and
adherence to the letter and spirit of the law. There shall be no waiver of
any
part of the Policy Guide on Standards of Conduct and Ethics for any director
or
executive officer except by a vote of the Board or a designated Board committee
that shall ascertain whether a waiver is appropriate under all the
circumstances. The Company intends to disclose any waivers of the Policy
Guide
on Standards of Conduct and Ethics granted to directors and executive officers
on the Company's website at www.lubys.com.
Code
of Ethics for the Chief Executive Officer and Senior Financial
Officers
During
fiscal 2003, the Board also adopted Supplemental Standards of Conduct and
Ethics
that apply to the Company's Chief Executive Officer, Chief Financial Officer,
Controller, and all senior financial officers ("Senior Officers' Code").
The
Senior Officers' Code is designed to deter wrongdoing and to
promote:
| · |
honest
and ethical conduct, including the ethical handling of actual or
apparent
conflicts of interest between personal and professional
relationships;
|
| · |
full,
fair, accurate, timely, and understandable disclosure in reports
and
documents that a registrant files with, or submits to, the Securities
and
Exchange Commission and in other public communications made by
the
registrant;
|
| · |
compliance
with governmental laws, rules, and regulations;
|
| · |
the
prompt internal reporting to an appropriate person or persons identified
in the Senior Officers' Code of violations of the Senior Officers'
Code;
and
|
17
| · |
accountability
for adherence to the Senior Officers' Code.
|
Waivers
of the Senior Officers' Code for the Chief Executive Officer, Chief Financial
Officer, and the Controller are permitted only by a vote of the Board or
a
designated Board committee that shall ascertain whether a waiver is appropriate
under all the circumstances. The Company intends to disclose any waivers
of the
Senior Officers' Code granted to the Chief Executive Officer, Chief Financial
Officer, or the Controller on the Company's website at
www.lubys.com.
Corporate
Governance Guidelines
For
many
years, the Company has had in place Corporate Governance Guidelines which
evidence the views of the Company on such matters as the role and
responsibilities of the Board, composition of the Board, Board leadership,
functioning of the Board, functioning of committees of the Board, and other
matters. These guidelines are reviewed at least annually and modified when
deemed appropriate by the Board. On October 28, 2004, the Board of Directors
adopted amendments to the Company's Corporate Governance Guidelines which
were
intended to clarify the Company's expectations concerning the composition
of the
Board of Directors. The current version of the Company's Corporate Governance
Guidelines can be found on the Company's website at
http://www.lubys.com/corporategovernanceguidelines.asp.
Receipt
and Retention of Complaints Regarding Accounting and Auditing
Matters
To
facilitate the reporting of questionable accounting, internal accounting
controls or auditing matters, the Company has established an anonymous reporting
hotline through which employees can submit complaints on a confidential and
anonymous basis. Any concerns regarding accounting, internal accounting
controls, auditing, or other disclosure matters reported on the hotline shall
be
reported to the Chairman of the Finance and Audit Committee. These reports
are
confidential and anonymous. Procedures are in place to investigate all reports
received by the hotline that concern questionable accounting, internal
accounting controls, or auditing matters and to take any corrective action,
if
necessary. The Board shall be notified of these reports at every quarterly
Board
meeting, or sooner if necessary.
Any
person who has concerns regarding accounting, internal accounting controls,
or
auditing matters may address them to the attention of Chairman, Finance and
Audit Committee, Luby's, Inc., 13111 Northwest Freeway, Suite 600, Houston,
Texas 77040.
Nonretaliation
for Reporting
The
Company's policies prohibit retaliation against any director, officer, or
employee for any report made in good faith. However, if the reporting individual
was involved in improper activity, the individual may be appropriately
disciplined even if he or she was the one who disclosed the matter to the
Company. In these circumstances, the Company may consider the conduct of
the
reporting individual in promptly reporting the information as a mitigating
factor in any disciplinary decision.
APPOINTMENT
OF AUDITORS (Item 2)
The
Board
of Directors of the Company has appointed the firm of Ernst & Young LLP to
audit the accounts of the Company for the 2006 fiscal year. Representatives
of
Ernst & Young LLP are expected to be present at the Annual Meeting with the
opportunity to make a statement if they desire to do so and are expected
to be
available to respond to appropriate questions.
Ratification
of the appointment of auditors is not a matter which is required to be submitted
to a vote of shareholders, but the Board of Directors considers it appropriate
for the shareholders to express or withhold their approval of the appointment.
If shareholder ratification should be withheld, the Board would consider
an
alternative appointment for the succeeding fiscal year. The affirmative vote
of
a majority of the shares present at the meeting in person and by proxy is
required for approval.
18
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE APPOINTMENT
OF ERNST & YOUNG LLP.
LUBY’S
AMENDED AND RESTATED INCENTIVE
STOCK
PLAN (Item 3)
The
Luby's Incentive Stock Plan (the "Plan") was adopted by the Board of Directors
on October 16, 1998 and approved by the shareholders on January 8,
1999. On
December 6, 2005, the Board approved amendments to, and a restatement of,
the
Plan, subject to the approval of the shareholders at the Annual Meeting.
The
Amended and Restated Luby's Incentive Stock Plan (referred to herein as the
"Amended Plan") is intended to fully restate the 1999 Plan effective as of
the
Annual Meeting date.
Plan.
The Plan
became effective on January 8, 1999. It provides for discretionary grants
of
stock awards to employees of the Company or its subsidiaries or affiliated
entities. The maximum number of shares of common stock issuable, or otherwise
allocable, under the Plan is 2,000,000, subject to the adjustment provisions
of
the Plan. The employees as a group have been granted options under the Plan
to
purchase an aggregate of 2,857,257 shares of common stock of the Company
at
option prices equal to 100% of market value on the date of the grant. As
of
December 1, 2005, 267,200 of these options have been exercised and 485,950
are
outstanding.
Additionally, as of December 1, 2005, the employees as a group have been
awarded
11,450 shares of restricted stock and no performance shares under the Plan.
As
of
December 1, 2005, 1,235,400 shares of common stock remain available for future
issuance under the Plan.
Principal
Changes.
The
provisions and terms of the Amended Plan are substantially identical to the
provisions and terms of the Plan. The Amended Plan will differ from the Plan
in
the following principal ways:
|
(a)
|
The
Amended Plan will increase the number of shares of common stock
of the
Company which may be issued under the Plan by 100,000
shares.
|
|
(b)
|
The
Plan currently provides that the maximum number of shares of restricted
stock that may be issued under the Plan is 200,000 shares. The
Amended
Plan will eliminate this 200,000 share limitation. Awards of restricted
stock will continue to be subject to the limitations described
below under
"Shares Available for Awards".
|
|
(b)
|
The
Amended Plan extends the expiration date of the Plan from December
31,
2008 to December 5, 2015.
|
Summary.
The
following summary of the Amended Plan is qualified in its entirety by reference
to the complete text of the Amended Plan attached as Annex B to this Proxy
Statement. The term "Company" as used in this summary refers only to Luby's,
Inc.
Purpose.
The
Amended 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 Amended Plan authorizes the award of (i) options to purchase shares of
the
Company's common stock, (ii) shares of restricted stock, and (iii) performance
shares.
Participants.
The
persons eligible to receive awards under the Amended Plan are all employees
of
the Company and all employees of any corporation or other business entity
in
which the Company owns, directly or indirectly, more than 50% of the capital
and
profit interests.
Administration.
The
Amended Plan will be administered by the Executive Compensation Committee
of the
Board of Directors (the "Administrator"). The Administrator has full and
exclusive power to interpret the Amended Plan,
to
grant waivers of award restrictions, and to adopt such rules, regulations,
and
guidelines for carrying out the Amended Plan as it may deem necessary or
proper.
The Administrator may delegate to the Chief Executive Officer of the Company
its
administrative functions and authority to grant awards under the Amended
Plan
pursuant to such conditions and limitations as the Administrator may establish,
except that only the Administrator may select, and grant awards to, participants
who are subject to Section 16 of the Securities Exchange Act of
1934.
19
Grants.
The
Administrator shall select the employees who are to be granted awards under
the
Amended Plan and shall determine the terms, conditions, and limitations
applicable to each such award.
Types
of Awards.
The
Amended Plan authorizes the granting of stock options and performance shares
and
the award of restricted stock. Options granted under the Amended Plan will
include options which do not meet the requirements of Section 422 of the
Internal Revenue Code, known as "nonqualified stock options," as well as
options
that do meet the requirements of Section 422 of the Internal Revenue Code,
known
as "incentive stock options."
Option
Terms.
A stock
option confers upon the participant the right to purchase a certain number
of
shares of common stock at an established exercise price. The exercise price
of
each stock option granted under the Amended Plan may not be less than the
fair
market value of a share of common stock on the date the option is granted,
determined with reference to the closing price of the Company's common stock
on
the New York Stock Exchange, with respect to both nonqualified stock options
and
incentive stock options. On December 1, 2005, the last sale price
of
the Company's common stock on the New York Stock Exchange as reported in
the
consolidated transaction reporting system was
$12.85 per share. The term of option grants and the schedule for vesting
and
exercise of stock options shall be as specified by the Administrator in the
option grant, provided that the exercise of a stock option may not occur
more
than ten years after the option grant award date. No participant may receive
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.
Restricted
Stock Terms. Restricted
stock is common stock which is subject to restrictions on transfer and/or
ownership for a required period of continued employment. Restricted stock
awards
may be granted without payment of consideration by the participant. The
restrictions on the stock shall continue for a period of employment of at
least
three years as set by the Administrator at the time of the award.
Performance
Shares. A
performance share is common stock or a unit valued with reference to common
stock that is subject to restrictions on transfer and/or ownership. Performance
shares may be paid in common stock or cash, or both. Performance shares shall
be
subject to the attainment of performance targets established by the
Administrator 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 a performance share award for any award cycle in
excess
of 25,000 performance units or 25,000 shares of common stock.
Shares
Available for Awards.
Subject
to the adjustment provisions of the Amended Plan, the number of shares of
common
stock of the company which may be issued under the Amended Plan is equal
to the
sum of: (a) 2,100,000 shares; (b) any shares of common stock that
were
authorized to be awarded under the 1989
Management Incentive Stock Plan (the "1989 Plan") but
were
not awarded under the 1989 Plan;
and (c)
any shares of common stock represented
by awards granted under the 1989 Plan which have been or will be forfeited,
expire, or canceled without delivery of common stock, or which have resulted
or
will result in the forfeiture of common stock back to the Company.
In no
event will the number of shares of common stock issuable under the Amended
Plan
exceed 2,600,000. Shares covered by an award which are not issued become
available for future awards.
Adjustments
to Shares Available for Awards.
In the
event of a change in the outstanding common stock by reason of a stock split,
stock dividend, combination or reclassification of shares, recapitalization,
merger, or other event, the Administrator shall make proportionate or other
equitable adjustments in the number of shares of common stock (i) reserved
under
the Amended Plan, (ii) for which awards may be granted to an individual
participant, (iii) covered by outstanding awards denominated in stock or
units
of stock and shall make appropriate adjustments in stock prices related to
outstanding awards, and price determinations related to outstanding
awards.
Award
Agreements and Terms. Each
Award will be evidenced by an award agreement containing provisions consistent
with the Amended Plan and such other terms and conditions as the Administrator
deems necessary or appropriate. Stock option agreements shall include 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 the
employee, the award shall be exercised only by such employee.
20
Term,
Amendment, and Termination.
To the
extent permitted by law, the Board of Directors may amend, suspend, or terminate
the Amended Plan. However, the approval of the shareholders holding a majority
of the Company's common stock then outstanding is required for any amendment
which (i) increases the maximum number of shares issuable under the plan
other
than pursuant to the adjustment provisions, (ii) decreases the exercise price
for option grants, (iii) materially modifies the requirements as to eligibility,
or (iv) withdraws administration of the Amended Plan from the Administrator.
Subject to earlier termination by the Board of Directors, the Amended Plan
will
remain in effect until the earlier of the date when the maximum number of
shares
issuable under the plan have been issued or December 5, 2015.
Unfunded
Plan. Insofar
as the Amended Plan provides for awards in common stock or cash, it shall
be an
unfunded plan without any obligation on the part of the Company to segregate
assets relating to the Amended Plan.
Tax
Consequences.
The tax
consequences of the issuance and exercise of options granted under the Amended
Plan are set forth in Annex C to this Proxy Statement.
Shareholder
Vote.
The
affirmative vote of a majority of the shares present at the meeting in person
and by proxy is required for approval of the Amended Plan.
THE
BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" APPROVAL OF
THE
AMENDED PLAN.
New
Plan Benefits
Future
grants and awards under the Amended Plan are subject to the discretion of
the
Administrator. Accordingly, the benefits and amounts that will be
received
in the future by participants in the Amended Plan cannot be determined at
this
time. The Company did not grant any stock options or stock appreciation rights
to the Named Officers during fiscal 2005. On October 10, 2005, the Board
approved grants of options to purchase 18,000 shares of common stock under
the
Plan to each of Ernest Pekmezaris, the Company's Senior Vice President and
Chief
Financial Officer, and Peter Tropoli, the Company's Senior Vice President
and
General Counsel. The exercise price of the stock options is $13.45, and the
options vest and become exerciseable at a rate of 25% per year. On November
8,
2005, the Board approved grants of options to purchase 65,500 shares of common
stock under the Plan to each of Christopher J. Pappas, the Company's President
and Chief Executive Officer, and Harris J. Pappas, the Company's Chief Operating
Officer. The exercise price of the stock options is $12.92 and the options
vest
and become exerciseable at a rate of 25% per year. Vested options must be
exercised within 6 years of grant. For additional information concerning
executive compensation, please see "Executive Compensation" beginning on
page 29
of this Proxy Statement.
21
SECURITIES
AUTHORIZED FOR ISSUANCE
UNDER
EQUITY COMPENSATION PLANS(1)
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
(a)
|
(b)
|
(c)
|
|
|
Equity
compensation plans approved by shareholders
|
344,882
|
$7.68
|
1,994,607
|
|
Equity
compensation plans not approved by shareholders
|
2,269,625(2)
|
5.02
|
-
|
|
Total
|
2,614,507
|
$5.37
|
1,994,607
|
(1)
The
table
above does not include the additional shares that would be issuable under
the
Amended Plan.
(2)
Includes
2,240,000 shares subject to stock options granted to Christopher J. Pappas
and
Harris J. Pappas in connection with their employment and 29,625 shares issuable
under the Nonemployee Director Phantom Stock Plan (see “Director Compensation”
on p. 14 for a brief description of the Nonemployee Director Phantom Stock
Plan).
22
SHAREHOLDER
PROPOSAL (Item 4)
The
proponent of the following shareholder proposal has notified the Company
that he
intends to cause the proposal set out below to be presented at the Annual
Meeting. If the proponent, or a representative of the proponent who is qualified
under state law, is present and submits the proposal for a vote, then the
proposal will be voted upon at the Annual Meeting. In accordance with federal
securities regulations, we have included the proposal and its supporting
statement exactly as submitted by the proponent. We are not responsible for
the
truthfulness or accuracy of any of the material provided by the proponent.
The
following proposal contains assertions that, in the judgment of the Board,
are
incorrect and in many cases are based solely on opinion and are not supported
by
fact. Rather than recite all of these inaccuracies and refute each of these
assertions, the Board has recommended a vote "AGAINST" the proposal for the
broader policy reasons set forth following the proponent's
proposal.
Proponent's
Proposal
"RESOLVED:
That
the stockholders of Luby’s, Inc., assembled in annual meeting in person or by
proxy, hereby request that the Board of Directors take the needed steps to
provide that at future elections of directors, new directors be elected annually
and not by classes, as is now provided, and that on expiration of present
terms
of directors their subsequent elections shall also be on an annual
basis.”
REASONS
Luby’s
Shareholders believe that the board of directors should be declassified,
as
evidenced by a majority of the votes cast in 2001, 2002, 2003, 2004 and 2005.
These shareholders have affirmed the proponent’s belief that classification of
the board of directors is not in the best interest of Luby’s, Inc. because it
makes a board less accountable when all directors do not stand for election
each
year. The annual election of directors fosters board independence, a crucial
element of good governance.
Arthur
Levitt, former chairman of the SEC has said: “in my view it’s best for the
investor if the entire board is elected once a year. Without annual election
of
each director shareholders have far less control over who represents
them.”
“Take
on the Street” by
Arthur Levitt
Governance
experts say that if all the proposals in 2005 to end tiered-term boards pass,
the year could end with fewer than half of the S&P 500 companies still
having a classified board of directors.
The
Wall Street Journal June
8,
2005-09-29
THE
CURRENT TREND IS AWAY FROM STAGGERED BOARDS
Our
board continues to ignore this trend and four past majority votes supporting
similar proposals.
- Consider
the Boards arguments in opposition to this proposal------Luby’s 80% super
majority rule,
and the claim of significant benefit to shareholders, while 58.01% of
shareholders casting votes (in 2005) disagreed with the Board's defence of
a
staggered system.
- Consider,
In light of current trends reflecting better corporate governance, the Board’s
defence of
a
classified system approved fourteen years ago in 1991.
If
you
are tired of the same old stale rhetoric in opposition to this proposal and
the
Board’s refusal to submit a binding proposal to shareholders, please vote YES
for this initiative submitted by Harold Mathis with an address of P.O. Box
1209,
Richmond, Texas 77046-1209, to elect each director annually.
PLEASE
MARK YOUR PROXY IN FAVOR OF THIS PROPOSAL.
23
Board's
Statement Opposing the Proposal
In
1991,
the Company's shareholders approved the current classification system for
the
Board, dividing the Board into three equal or nearly equal classes, each
to
serve for a term of three years, with one class elected each year. The staggered
election of directors is a common practice that has been approved by the
shareholders of many corporations.
It
is the
Board's belief that a classified board provides for continuity and stability
and
enhances the Board's ability to implement the Company's long-term strategy
and
to focus on long-term performance. Each current member of the Board brings
valuable knowledge and experience to the Company and a majority of the directors
at any given time will have prior experience as directors of the Company
and
will be familiar with the Company's business strategies and operations. The
Board values the wisdom and insight that come with the knowledge of its
directors. The Board believes that a de-classified Board would risk losing
the
core knowledge of the Company inherent in the Board of Directors without
the
opportunity to obtain such knowledge and experience. A classified Board permits
a more orderly process for directors to consider, in the exercise of their
fiduciary responsibilities, any and all alternatives to maximize shareholder
value. Directors have fiduciary duties that do not depend on how often they
are
elected. Directors who are elected to three-year terms are just as accountable
to shareholders as directors who are elected on an annual basis. In addition,
because a classified Board makes it more difficult for a substantial shareholder
to change the entire Board abruptly without the cooperation of the incumbent
Board, it enhances the ability of the Board to consider whether initiatives
proposed by such a substantial shareholder are in the best interests of the
Company and all of its shareholders.
The
proponent presented this proposal at prior annual meetings of shareholders.
Although the proposal received support, in all such years the proposal received
far less than the 80% of the outstanding shares necessary to amend the specific
section of the Company's certificate of incorporation addressing the election
of
directors to require annual elections.
Shareholders
should be aware that approval of the proposal would not declassify the Board.
To
declassify the Board, the Board must propose to the shareholders an amendment
to
the relevant section of the certificate of incorporation, following which
80% of
the total outstanding shares of common stock must approve the proposed amendment
at a subsequent meeting of shareholders. Any shareholder approval of this
proponent's proposal at the Annual Meeting would be only a recommendation
to the
Board.
Subsequent
to the Annual Meeting in each of the last four years, the Personnel and
Administrative Policy Committee of the Board, and then the full Board, undertook
a review of the corporate governance structure of the Company, including
the
structure and function of the Board and its committees. In addition, the
Personnel and Administrative Policy Committee and the full Board spent
considerable time to extensively evaluate the proposal. As a result of this
review and evaluation, the Board has concluded that the classification of
director terms continues to provide significant benefits to the Company's
shareholders.
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" THE SHAREHOLDER
PROPOSAL.
24
FINANCE
AND AUDIT COMMITTEE REPORT
The
primary responsibility of the Finance and Audit Committee is to oversee the
Company's accounting and financial reporting process on behalf of the Board
and
report the results of its activities to the Board. Management is responsible
for
preparing the financial statements, and the independent auditor is responsible
for auditing those financial statements.
In
fulfilling its oversight responsibilities, the committee reviewed and discussed
with management and the independent auditor the Company's audited financial
statements in the annual report on Form 10-K and their judgment about
the
quality and appropriateness of accounting principles and financial statement
presentations, the reasonableness of significant judgments, the clarity of
the
disclosures in the financial statements, and major issues as to the adequacy
of
the Company's internal controls. In addition, the committee discussed any
matter
required to be communicated under generally accepted auditing standards.
The
committee discussed with the independent auditor matters required to be
discussed by Statement on Auditing Standards No. 61 (Communication with Audit
Committees). In addition, the committee has discussed with the independent
auditor the auditor's independence from the Company and management, including
matters in the written disclosures provided by the independent auditor to
the
Finance and Audit Committee as required by the Independence Standards Board
Standards No. 1 (Independence Discussions with Audit Committees). The committee
also considered the compatibility of nonaudit services with the independent
auditor's independence.
In
reliance on the reviews and discussions referred to above, the committee
recommended to the Board, and the Board has approved, that the audited financial
statements be included in the Annual Report on Form 10-K for the year ended
August 31, 2005, for filing with the Securities and Exchange Commission.
Based
upon the recommendation of the committee, the Board has affirmed the committee's
decision to retain Ernst & Young LLP as the Company's independent auditor
for the 2006 fiscal year.
Members
of the Finance and
Audit Committee are:
Joe
C.
McKinney (Chair)
J.S.B.
Jenkins (Vice-Chair)
Arthur
R.
Emerson
Gasper
Mir, III
FEES
PAID TO THE INDEPENDENT AUDITOR
The
table
below shows aggregate fees for professional services rendered for the Company
by
Ernst & Young LLP for the fiscal years ended August 31, 2005, and August 25,
2004. Certain fees for 2004 have been reclassified to conform with the current
year’s presentation:
|
|
2005
|
2004
|
|
(in
thousands)
|
||
|
Audit
Fees
|
$502
|
$150
|
|
Audit-Related
Fees
|
23
|
68
|
|
Tax
Fees
|
5
|
33
|
|
All
Other Fees
|
-
|
-
|
|
Total
|
$
530
|
$251
|
Audit
Fees
for the
fiscal years ended August 31, 2005, and August 25, 2004, were for professional
services in connection with the audits of the annual consolidated financial
statements of the Company, review of financial statements included in the
Company's Quarterly Reports on Form 10-Q, and consents and assistance with
the
review of documents filed with the Securities and Exchange
Commission.
Audit-Related
Fees
for the
fiscal years ended August 31, 2005, and August 25, 2004, were mainly for
assurance and related services in reviewing and providing feedback on the
Company’s implementation of Section 404 of the Sarbanes-Oxley Act of
2002.
25
Tax
Fees
for the
fiscal years ended August 31, 2005, and August 25, 2004, were for services
related to the review of the Company’s federal income tax returns. Services for
fiscal year 2004 also included assistance provided in coordinating audits
conducted by the Internal Revenue Service.
All
Other Fees
are not
applicable for either of the fiscal years ended August 31, 2005, or August
25,
2004.
The
Finance and Audit Committee has considered whether the provision of the above
services other than audit services is compatible with maintaining Ernst &
Young LLP's independence.
PREAPPROVAL
POLICIES AND PROCEDURES
All
auditing services and nonaudit services provided by Ernst & Young LLP must
be preapproved by the Finance and Audit Committee. Generally, this approval
will
take place each year at the August meeting of the Finance and Audit Committee
for the subsequent fiscal year and as necessary during the year for unforeseen
requests. The nonaudit services specified in Section 10A(g) of the Securities
Exchange Act of 1934 may not be, and are not, provided by Ernst & Young LLP.
Ernst & Young LLP will provide a report to the Chair of the Finance and
Audit Committee prior to each regularly scheduled Finance and Audit Committee
meeting detailing all fees, by project, incurred by Ernst & Young LLP
year-to-date and an estimate for the fiscal year. The Chair of the Finance
and
Audit Committee will review the Ernst & Young LLP fees at each Finance and
Audit Committee meeting. The Finance and Audit Committee will periodically
review such fees with the full Board of Directors.
The
de
minimis exception was not used for any fees paid to Ernst & Young
LLP.
EXECUTIVE
OFFICERS
Certain
information is set forth below concerning the executive officers of the Company,
each of whom has been elected to serve until his successor is duly elected
and
qualified:
|
Name
|
Served
as
Officer
Since
|
Positions
with Company and
Principal
Occupation Last Five Years
|
Age
|
|
Christopher
J. Pappas
|
2001
|
President
and CEO (since March
|
58
|
|
2001),
CEO of Pappas Restaurants,
|
|||
|
Inc.
|
|||
|
Harris
J. Pappas
|
2001
|
Chief
Operating Officer (since March
|
61
|
|
2001),
President of Pappas
|
|||
|
Restaurants,
Inc.
|
|||
|
Ernest
Pekmezaris
|
2001
|
Senior
Vice President and CFO (since
|
61
|
|
March
2001), Treasurer and former
|
|||
|
CFO
of Pappas Restaurants, Inc.
|
|||
|
Peter
Tropoli
|
2001
|
Senior
Vice President-Administration, General Counsel
(since
March 2001), attorney
in private practice.
|
33
|
|
|
|||
EXECUTIVE
COMPENSATION COMMITTEE REPORT
The
Executive Compensation Committee of the Board presents the following report
on
executive compensation. The report describes the Company's executive
compensation programs and the bases on which the committee made recommendations
for compensation decisions for fiscal 2005, with respect to the Company's
executive officers, including those named in the compensation
tables.
Compensation
Objectives
The
committee annually evaluates the effectiveness of the Company's executive
compensation program in incentivizing and rewarding executive performance
that
leads to long-term enhancement of shareholder value and encouraging executives
who deliver such performance to continue with the Company for the long-term.
The
Company's executive compensation program currently consists of the elements
summarized below.
26
•Base
Salary.
Base
salaries that are fair and competitive while being consistent with the Company's
position in the foodservice industry are used to compensate ongoing performance
throughout the year. Base salaries are reviewed annually.
•Annual
Bonus.
Annual
bonuses are awarded to executives based on an evaluation of both corporate
performance and the executive's individual contribution to the long-term
interests of shareholders.
•Long-Term
Incentives.
Long-term incentives, such as stock options, are used to (i) incentivize
performance that leads to enhanced shareholder value and (ii) encourage
retention.
•Stock
Ownership.
Stock
ownership guidelines are used to more closely align the interests of the
Company's executives with the interests of shareholders.
The
Company's executive compensation program is designed to enable the Company
to
attract, retain, and motivate the highest quality of management
talent.
Annual
Base Salaries
The
committee annually advises the Board on the appropriateness and reasonableness
of the base salaries to be paid to the Company's executive officers and approves
base salaries and salary increases for executives. The committee evaluates
base
salaries with reference to the Company's performance for the prior fiscal
year
and competitive compensation data, as well as a subjective evaluation of
each
executive's contribution to the Company's performance, each executive's
experience, responsibilities, and management abilities. Company performance
is
measured by net income, total sales, comparable store sales, return on
shareholders' equity, and other financial factors.
Since
compensation of the Chief Executive Officer and Chief Operating Officer is
fixed
by contract (See "Compensation of Chief Executive Officer" page 29),
the
committee's responsibility in regard to their compensation has been limited
to
consideration of a bonus and/or equity compensation as discussed in the
aforementioned employment agreements. The employment contracts for the Chief
Executive Officer and Chief Operating Officer expire August 31, 2008. Members
of
the committee, along with members of the Finance and Audit Committee, were
involved in advising the Board on the appropriateness and reasonableness
of the
compensation packages for these executive officers.
Stock
Options
The
committee administers the Company's stock option, ownership, and other
equity-based compensation plans. Historically, the committee generally
considered on an annual basis the granting of incentive stock options to
eligible executive officers and other key employees. The options, which were
granted at 100% of market price on the date of grant, were typically for
six-year terms. The number of option shares granted each year was typically
determined by a formula based on a dollar amount divided by the option's
exercise price.
Stock
Ownership Guidelines
The
Board
of Directors has adopted guidelines for ownership of the Company's common
stock
by executives and directors to help demonstrate alignment of the interests
of
the Company's executives and directors with the interests of its shareholders.
The guidelines provide that executives and directors are expected to attain
the
following levels of stock ownership within five years of election to the
specified director or officer position:
27
|
Position
|
Share
Ownership
|
|
Chief
Executive Officer
|
4
times annual base salary
|
|
President
and Senior Vice President
|
2
times annual base salary
|
|
Vice
President
|
Equal
to annual base salary
|
|
Nonemployee
Director
|
Shares
with a market value of at least
$100,000
|
Phantom stock and stock equivalents in the nonemployee director deferred
compensation plan are considered common stock for purposes of the guidelines
since they are, in effect, awarded in lieu of cash compensation for board
services.
Stock
Purchase Loans Made in 1999
In
fiscal 1999, to
facilitate the purchase of Company stock by certain Company officers pursuant
to
the Company's Incentive Stock Plan, the Company guaranteed loans of
approximately $1.9 million related to open-market purchases of Company stock
by
various officers of the Company pursuant to the terms of a shareholder-approved
plan. Under the officer loan program, shares were purchased by certain Company
officers with funding obtained from JPMorgan Chase Bank (“JPMorgan”), one of the
four members of the bank group that participates in the Company’s credit
facility. In accordance with the original terms of the agreements, these
instruments only required annual interest to be paid by the individual debtors,
with the entire principal balances due upon their respective maturity dates,
which occurred during the first three months of calendar 2004, unless extended
by the note holders. None of the individual debtors under these officer loan
notes are current senior executives or directors of the Company.
The
terms of the Company’s agreement with JPMorgan provided that in the event of
debtor defaults, the Company would be required to purchase the loans from
JPMorgan, and become the holder of the notes. The purchased Company stock
has
been and could be used by borrowers to satisfy a portion of their loan
obligations.
In
connection with the refinancing of the Company’s senior indebtedness in June
2004, JPMorgan required the Company to secure its obligation to purchase
any
loans in default upon demand by JPMorgan in exchange for JPMorgan agreeing
to
defer the Company’s obligation to purchase the loan until September 30, 2004.
The Company secured that obligation with a letter of credit in the amount
of
$1.2 million, being the aggregate outstanding balance of the loans, plus
accrued
interest, on June 7, 2004. Prior to September 30, 2004, in anticipation of
the
maturity of its obligation to purchase the loans, the Company arranged
settlement agreements with some of the debtors. Pending the execution of
these
settlement agreements, JPMorgan granted the Company an extension on its
obligation to purchase the loans. On December 14, 2004, the Company purchased
all of the outstanding loans from JPMorgan, the letter of credit was cancelled,
and the Company established accounts receivable for the amount of the loans
purchased. As of the end of fiscal year 2005, there were no amounts due under
these accounts receivable, as all accounts had either been prepaid or applied
to
the Company’s reserve for uncollectible accounts.
Employment
Agreements
The
Company is a party to employment agreements with Christopher J. Pappas
(President and Chief Executive Officer) and Harris J. Pappas (Chief Operating
Officer). The employment agreements were filed with the Securities and Exchange
Commission as exhibits to the Company's Report on Form 10-K, filed November
14,
2005. Each agreement provides for a fixed base annual salary of $400,000,
plus
bonus compensation at the discretion of the Board or appropriate Board
committee.
Change
in Control Agreements
The
employment agreements of Christopher J. Pappas and Harris J. Pappas each
provide
that the employee will be entitled to receive all of his compensation and
benefits under the contract until August 31, 2008, if his employment is
terminated by the Company without cause (as therein defined) or if he terminates
his employment for good reason (as therein defined).
Salary
Continuation Agreements
The
Company currently has no salary continuation agreement, or agreement having
similar effect, in place with any employee of the Company.
Compensation
of Chief Executive Officer
The
employment agreement entered into with Mr. Pappas, which was approved by
the
Board in 2004, fixed Mr. Pappas' previous base salary at $400,000
for the
first year and $300,000 for the second year, with the ability to earn a bonus
of
up to $200,000. In Fiscal 2005, The Company paid Christopher J. Pappas an
annual
base salary of $400,000 per year. In lieu of a lump sum bonus provided for
under
the employment agreement, Mr. Pappas received a bonus of $45,763 paid in
monthly
installments from April 1, 2005 through August 31, 2005. Prior to the expiration
of the previous employment agreement, the Company and Mr. Pappas executed
a
new employment agreement fixing his salary at $400,000 per year and expiring
on
August 31, 2008. Mr. Pappas was granted 65,500 stock options on November
8, 2005
at $12.92 per share. Pursuant to his initial employment agreement in 2001,
Mr.
Pappas was granted stock options on March 9, 2001, for 1,120,000 shares of
common stock at $5.00 per share. (Other than those listed above). See
"Employment Agreements" page 28.
Members
of the Executive Compensation Committee:
J.S.B
Jenkins (Chair)
Judith
B.
Craven (Vice-Chair)
Jill
Griffin
Jim
W.
Woliver
EXECUTIVE
COMPENSATION
The
table
below contains information concerning annual and long-term compensation of
the
current Chief Executive Officer, all persons who served as Chief Executive
Officer of the Company during the last fiscal year, and the most highly
compensated individuals who made in excess of $100,000 and who served as
executive officers during the last fiscal year (the "Named Officers"), for
services rendered in all capacities for the fiscal years ended August 31,
2005,
August 25, 2004, and August 27, 2003.
Summary
Compensation Table
|
|
|
|
Long-Term
Compensation
|
|
||||
|
|
|
Annual
Compensation
|
Awards
|
Payouts
|
|
|||
|
Name
and Principal Position
|
Fiscal
Year
|
Salary
|
Bonus
|
Other
Annual
Compensation
(1)
|
Restricted
Stock
Awards
|
Securities
Underlying
Options/
SARs
(2)
|
LTIP
Payouts
|
All
Other
Compensation
|
|
Christopher
J. Pappas
|
2005
|
$358,083
|
$45,763
|
$0
|
$
|
0
|
$0
|
$0
|
|
President
and Chief
|
2004
|
221,154
|
0
|
0
|
0
|
0
|
0
|
0
|
|
Executive
Officer
|
2003
|
100,000
|
0
|
0
|
0
|
0
|
0
|
0
|
|
Harris
J. Pappas
|
2005
|
358,083
|
45,763
|
0
|
0
|
|||
|
Chief
Operating Officer
|
2004
|
221,154
|
0
|
0
|
0
|
0
|
0
|
0
|
|
2003
|
100,000
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
Ernest
Pekmezaris
|
2005
|
207,692
|
0
|
0
|
0
|
0
|
||
|
Senior
Vice President
|
2004
|
200,000
|
50,000
|
0
|
0
|
0
|
0
|
0
|
|
and
Chief Financial Officer
|
2003
|
200,000
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
||||||||
|
Peter
Tropoli
|
2005
|
150,000
|
0
|
0
|
0
|
0
|
0
|
0
|
|
Senior
Vice President —
|
2004
|
150,000
|
50,000
|
0
|
0
|
0
|
0
|
0
|
|
Administration
and General
|
2003
|
150,000
|
0
|
24,662
|
0
|
0
|
0
|
0
|
|
Counsel
|
||||||||
__________
(1) Perquisites
and other personal benefits that did not exceed the lesser of $50,000 or
10% of
the total amount of annual salary and bonus for any Named Officer have been
excluded.
28
(2) The
Company has not issued any stock appreciation rights to the Named
Officers.
There
were no grants of stock options or stock appreciation rights ("SARs") to
the
Named Officers during fiscal 2005.
The
table
below reports exercises of stock options and SARs by the Named Officers during
fiscal 2005, and the value of their unexercised stock options and SARs as
of
August 31, 2005. Except for the stock options granted to Messrs. Pappas,
which
were granted pursuant to their employment agreements with the Company, the
stock
options were granted under the Company's Incentive Stock Plans. The Company
has
not granted SARs to any of the Named Officers.
Aggregated
Options/SAR Exercises in Last Fiscal Year
and
Fiscal Year-End Option/SAR Values
|
Name
|
Shares
Acquired
on
Exercise
|
Value
Realized
|
Number
of Securities
Underlying
Unexercised
Options/SARs
at FY-End
Exercisable/Unexercisable
|
Value
of Unexercised
In-the-Money
Options/SARs
at
FY-End (1)
Exercisable/Unexercisable
|
|
Christopher
J. Pappas
|
0
|
$0
|
1,120,000/0
|
$9,116,800/0
|
|
Harris
J. Pappas
|
0
|
0
|
1,120,000/0
|
9,116,800/0
|
|
Ernest
Pekmezaris
|
0
|
0
|
25,000/0
|
112,500/0
|
|
Peter
Tropoli
|
0
|
0
|
25,000/0
|
112,500/0
|
__________
(1) The
value
of unexercised options is based on a price of $13.14 per common share at
August
31, 2005.
DEFERRED
COMPENSATION
The
Company has a Supplemental Executive Retirement Plan (“SERP”) which is designed
to provide benefits for selected officers at normal retirement age with 25
years
of service equal to 50% of their final average compensation offset by Social
Security, profit sharing benefits, and deferred compensation. Some of the
officers designated to participate in the plan have retired and are receiving
benefits under the plan. Accrued benefits of all actively employed participants
become fully vested upon termination of the plan or a change in control (as
defined in the plan). The plan is unfunded, and the Company is obligated
to make
benefit payments solely on a current disbursement basis. None of the Named
Officers is currently entitled to participate in the Supplemental Executive
Retirement Plan. On December 6, 2005, the Board of Directors voted to amend
the
SERP and suspend the further accrual of benefits and participation. As of
August
31, 2005, the current reserve for anticipated SERP payments is
$336,667.
29
STOCK
PERFORMANCE GRAPH
The
following graph compares the cumulative total shareholder return on the
Company's common stock for the five fiscal years ended August 31, 2005, with
the
cumulative total return on the S&P SmallCap 600 Index and an industry peer
group index. The peer group index is comprised of Bob Evans Farms, Inc.;
Ryan's
Family Steak Houses, Inc.; Ruby Tuesday Inc.; and CBRL Group Inc. These
companies are multi-unit family restaurant operators in the mid-price
range.
The
cumulative total shareholder return computations set forth in the performance
graph assume an investment of $100 on August 31, 2001, and the reinvestment
of
all dividends. The returns of each company in the peer group index have been
weighted according to the respective company's stock market
capitalization.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG
LUBY'S, INC., THE S&P SMALLCAP 600 INDEX
AND
A
PEER GROUP
*$100
invested on 8/31/01 in stock or index-including reinvestment of dividends.
Fiscal year ending August 31.
S&P
SmallCap 600 Data Copyright (C)2005, Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. All rights reserved.
|
|
8/01
|
8/02 | 8/03 | 8/04 | 8/05 | |
|
Luby's,
Inc.
|
$100
|
$57.16
|
$27.90
|
$74.02
|
$149.64
|
|
|
S&P
SmallCap 600
|
100
|
90.47
|
111.02
|
127.50
|
161.29
|
|
|
Peer
Group
|
100
|
112.78
|
136.68
|
139.90
|
135.81
|
30
SHAREHOLDER
PROPOSALS FOR 2007 ANNUAL MEETING
Proposals
of shareholders for inclusion in the Company's proxy statement and form of
proxy
for the Company's 2007 Annual Meeting of Shareholders submitted pursuant
to Rule
14a-8 under the Securities Exchange Act of 1934 must be received in writing
by
the Company at its corporate office no later than August 18,
2006.
Notice of a shareholder proposal submitted outside the processes of Rule
14a-8
with respect to the Company's 2007 Annual Meeting of Shareholders will be
considered untimely if received by the Company after November
2,
2006.
DIRECTOR
NOMINATIONS FOR 2007 ANNUAL MEETING
The
Company's Bylaws provide that candidates for election as directors at an
Annual
Meeting of Shareholders shall be nominated by the Board of Directors or by
any
shareholder of record entitled to vote at the meeting, provided the shareholder
gives timely notice thereof. To be timely, such notice shall be delivered
in
writing to the Secretary of the Company at the principal executive offices
of
the Company not later than 90 days prior to the date of the meeting of
shareholders at which directors are to be elected and shall include (i) the
name
and address of the shareholder who intends to make the nomination; (ii) the
name, age, and business address of each nominee; and (iii) such other
information with respect to each nominee as would be required to be disclosed
in
a proxy solicitation relating to an election of directors pursuant to Regulation
14A under the Securities Exchange Act of 1934.
PROXY
SOLICITATION
The
cost
of soliciting proxies will be borne by the Company. The transfer agent and
registrar for the Company's common stock, American Stock Transfer & Trust
Company, as a part of its regular services and for no additional compensation
other than reimbursement for out-of-pocket expenses, has been engaged to
assist
in the proxy solicitation. Proxies may be solicited through the mail and
through
telephonic or telegraphic communications to, or by meetings with, shareholders
or their representatives by directors, officers, and other employees of the
Company who will receive no additional compensation therefor.
The
Company requests persons such as brokers, nominees, and fiduciaries holding
stock in their names for the benefit of others, or holding stock for others
who
have the right to give voting instructions, to forward proxy material to
their
principals and to request authority for the execution of the proxy, and the
Company will reimburse such persons for their reasonable expenses.
By
Order
of the Board of Directors,
Peter
Tropoli
Senior
Vice President and General Counsel
Dated:
December 12, 2005
31
ANNEX
A
LUBY'S,
INC.
FINANCE
AND AUDIT COMMITTEE CHARTER
LUBY’S,
INC.
FINANCE
AND AUDIT COMMITTEE CHARTER
SCOPE
AND PURPOSE:
The
Finance and Audit Committee (the “committee”) of the Board of Directors (the
“board”) of Luby’s, Inc. (the “company”) is formed by the board to monitor and
evaluate corporate financial plans and performance and to assist the board
in
monitoring:
1. The
integrity of the
financial statements of the company.
2. The
compliance by the company
with legal and regulatory requirements.
3. The
independent auditor’s
qualifications and independence.
4. The
performance of the
internal audit function and the independent auditors.
The
committee shall regularly and fully report its actions and findings to
the
board.
The
committee shall prepare the report required by the rules of the Securities
and
Exchange Commission (the “Commission”) to be included in the company’s annual
proxy statement.
The
committee shall have the authority to retain special legal, accounting
or other
advisors to advise the committee, as the committee deems necessary or
appropriate. The company shall provide for appropriate funding, as determined
by
the committee, for payment of compensation to the independent auditor for
the
purpose of rendering or issuing an audit report and to any special legal,
accounting or other advisors employed by the committee.
The
committee may request any officer or employee of the company, the company’s
outside counsel or independent auditor(s) to attend a committee meeting
or to
meet with any members of, or advisors to, the committee.
FUNCTIONS:
The
duties and responsibilities of the committee include, but are not limited
to,
the following:
Financial
Statements
1. Review
and discuss with
management and the independent auditor major issues regarding accounting
principles and financial statement presentations, including without limitation
the selection, application and disclosure of critical accounting principles,
policies and practices, any significant changes in the company’s selection or
application of accounting principles and major issues as to the adequacy
of the
company’s internal controls and any special audit steps adopted in light of
material control deficiencies.
2. Review
and discuss with
management and the independent auditor quarterly reports from the independent
auditor addressing
a.
all
critical accounting policies and practices used by the company;
b.
all
alternative accounting treatments of financial information within generally
accepted accounting principles that have been discussed with management,
including the ramifications of the use of such alternative disclosures
and
treatments and the treatment recommended by the independent auditor;
and
c.
other
material written communications between the accounting firm and management
of
the company.
3. Review
and discuss with
management and the independent auditor the company’s annual audited financial
statements, including the company’s disclosures under “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” and recommend to
the board each year whether or not the audited consolidated financial statements
should be included in the company’s annual report on Form 10-K.
4.
Review
and discuss with management and the independent auditor the company’s quarterly
financial statements prior to the filing of its Form 10-Q, including the
results
of the independent auditor’s review of the quarterly financial
statements.
5.
Review
and discuss with management and the independent auditor the effect of any
offbalance sheet transactions, arrangements, obligations (including contingent
obligations) and any other relationships of the company with unconsolidated
entities that may have a current or future material effect on the company’s
financial statements.
6.
Review
and discuss with management the effect of regulatory and accounting initiatives,
as well as off-balance sheet structures, on the financial statements of
the
company.
7.
Review
the asset/liability valuation methods used by management. Such review should
include, but not be limited to, a review of reports concerning nonproducing
assets and the adequacy of reserve balances.
8.
Review
an analysis prepared by management and the independent auditor of significant
financial reporting issues and judgments made in connection with the preparation
of the company’s financial statements.
9.
Review
the company’s tax status, including the status of tax reserves and significant
tax planning issues.
10.
Review legal, regulatory and tax matters that may have a material impact
on the
financial statements, related compliance policies and programs and reports
received from regulators and provide a summary to the board.
11.
Discuss generally the types of information to be disclosed and the presentation
to be made in earnings releases, including the use of “pro forma” or “adjusted”
non-GAAP information, as well as financial information and earnings guidance
(if
any) given to analysts and rating agencies.
Oversight
of the Relationship with the Independent Auditor
1.
Appoint, retain, terminate and replace the independent auditor, subject,
if
applicable, to shareholder ratification. The independent auditor shall
report
directly to the committee.
2.
Resolve disagreements between management and the independent auditor.
3.
Approve all audit engagement fees and terms and all significant non-audit
engagements with the independent auditor.
4.
Preapprove all auditing services and permitted non-audit services (including
the
fees and terms thereof) to be performed for the company by its independent
auditor, subject to the de minimis exceptions for non-audit services described
in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934, as amended
(the
“Exchange Act”), which are approved by the committee prior to the completion of
the audit.
5.
Review
annually a report by the independent auditor describing:
a.
The
firm’s internal quality-control procedures.
b.
Any
material issues raised by the most recent internal quality-control review
or
peer review of the firm or by any inquiry or investigation by governmental
or
professional authorities, within the preceding five years, respecting one
or
more independent audits carried out by the firm and any steps taken to
deal with
such issues.
c.
All
relationships between the independent auditor and the company.
6.
Review
the external and internal audit scopes and plans and the coordination of
internal and external audit efforts to ensure completeness, reduction of
redundant efforts and the effective use of audit resources. Review any
changes
required in the planned scope of the internal audit plan.
2
7.
Review
and evaluate independent audit reports, including the matters related to
the
conduct of the audit which are to be communicated to the committee under
generally accepted auditing standards.
8.
Review
and evaluate the lead partner of the independent auditor team.
9.
Ensure
the regular rotation of the audit partners as required by law and consider
whether, in order to assure continuing auditor independence, there should
be
regular rotation of the audit firm itself.
10.
Actively engage in a dialogue with the independent auditor with respect
to any
disclosed relationships or services that may impact the objectivity and
independence of the independent auditor and recommend that the board take
appropriate action in response to the independent auditor’s report to satisfy
itself of the independent auditor’s independence.
11.
Review and discuss with the independent auditor:
a.
Accounting adjustments that were identified or proposed by the independent
auditor and were not implemented.
b.
Any
problems or difficulties the independent auditor encountered in the course
of
the audit work and management’s response thereto, including without limitation
any restrictions on the scope of the independent auditor’s activities or on
access to requested information and any significant disagreements with
management.
c.
The
responsibilities, budget and staffing of the company’s internal
audit.
d.
Assurance from the independent auditor that section 10A(b) of the Exchange
Act,
which refers to “Required Response to Audit Discoveries,” has not been
implicated.
e.
Communications between the audit team and the firm’s national office relating to
auditing or accounting issues presented by the engagement.
f.
Any
“management letter” or “internal control letter” issued or proposed to be issued
by the independent auditor to the company and any other material written
communications between the independent auditor and the management.
g.
Internal audit compliance with the Institute of Internal Auditors’ Standards for
the Professional Practice of Internal Auditing (Standards).
3
12.
Taking into consideration the views of the internal auditor and management,
annually review and evaluate the qualifications, performance and independence
of
the independent auditor and the senior members of the independent auditor
team.
The committee’s review and evaluation shall take into consideration, among other
things, the rotation of the lead audit and reviewing partners, the disclosures
of the independent auditor required by Independent Standards Board Standard
No.
1, the adequacy of the auditor’s quality controls and whether the provision of
non-audit services is compatible with maintaining the auditor’s independence.
The committee shall report its conclusions to the board.
13.
Periodically meet with the managing partner having responsibility for the
company’s account and, in all cases, meet with the managing partner when such
responsibility passes to another partner.
14.
Set
clear hiring policies for employees and former employees of the independent
auditor. At a minimum, ensure compliance with the “cooling-off” period required
by the rules and regulations of the Commission.
15.
Discuss with the national office of the independent auditor issues on which
they
were consulted by the company’s audit team and matters of audit quality and
consistency.
16.
Meet
with the independent auditor prior to the audit to discuss the planning
and
staffing of the audit.
Oversight
of the Internal Audit Function
1.
Review
the independence of the internal audit department and the ability of the
department to raise issues to the appropriate level of authority, including
direct access to the chief executive officer.
2.
Ensure
that the internal audit function, in addition to its support of the chief
financial officer and chief executive officer, is responsive to the needs
of the
committee and ultimately the board; direct access between the board and
the
committee and the director of internal audit must be preserved by the committee
and recognized by management.
3.
Review
the responsibilities, organizational structure, budget and qualifications
of the
internal audit function. Discuss with the independent auditor and management,
the internal audit department’s responsibilities, budget and staffing and any
changes in the planned scope of the internal audit.
4.
Review
and approve any recommendation from management to reassign, appoint, replace
or
dismiss the director of internal audit.
4
5.
Review
the significant reports to management prepared by the internal auditing
department and management’s responses.
6.
At
least annually, review and assess the adequacy of the Internal Audit charter
and
recommend any proposed revisions to the board for approval.
Business
Risks
1.
Consider and review with management, the independent auditor and the director
of
internal audit the adequacy of internal controls, including computerized
information system controls. Review any significant changes in the company’s
internal controls or in other factors that could significantly affect these
controls and any special audit steps adopted in light of control
deficiencies.
2.
Discuss with management the company’s major risk exposures and the steps
management has taken to monitor and control such exposures, including the
company’s risk assessment and risk management policies. Review and discuss with
management, the director of internal audit and the independent auditor
the
company’s system of internal controls and policies relating to risk assessment
and management.
3.
Review, analyze and recommend for approval to the board, management’s policies
and plans regarding:
a.
Financial management, including but not limited to major acquisitions,
investments and capital expenditures; and
b.
Business risk management, including credit risks, control risks, asset/liability
management risks (such as nonproducing assets), regulatory risks (such
as tax
exposure items), operations risks and management risks.
4.
Review
annually the adequacy and costs of the company’s risk management
program.
5.
Review
with the company’s general counsel:
a.
Any
legal matter that could have a significant impact on the company’s financial
statements or the company’s compliance policies.
b.
The
effectiveness of the company’s compliance program in detecting and preventing
violations of law and the company’s code of conduct.
5
6.
Establish procedures for the receipt, retention and treatment of complaints
received by the company regarding accounting, internal accounting controls
or
auditing matters and the confidential, anonymous submissions by employees
or
contractors of concerns regarding questionable accounting or auditing
matters.
7.
Review
the company’s code of ethics for senior officers.
8.
Review
disclosures made to the committee by the company’s CEO and CFO during their
certification process for Form 10-K and Form 10-Q about any significant
deficiencies in the design or operation of disclosure controls and internal
controls over financial reporting or material weaknesses therein and any
fraud
involving management or other employees who have a significant role in
the
company’s internal controls.
9.
At
least annually, review and assess the adequacy of the charter of the Disclosure
Committee and recommend proposed revisions to the CEO and CFO.
Corporate
Financial Status and Performance
1.
Review
management’s financial plans, projections and forecasts and report (with
appropriate recommendations) to the board.
2.
Review
and evaluate corporate financial performance on a periodic basis and ensure
that
management provides appropriately definitive quarterly summaries to the
board.
3.
Review
proposed operating and capital budgets, and propose such approval actions
as are
appropriate to the board.
4.
At
least semi-annually review the company’s balance sheet and report findings to
the board.
5.
Approve the planned issuance of debt and equity and the repurchase of company
equity.
6.
Review
and approve adequacy and significant changes in the company’s bank credit
agreement and report such findings and actions to the full board.
7.
Review
plans to acquire or dispose of assets that in aggregate exceed $5,000,000
in any
fiscal year or any individual assets that exceed $3,000,000.
Finance
and Audit Committee Performance
1.
At
least annually, review and assess the adequacy of the committee’s charter and
recommend any proposed revisions to the board for approval.
6
2.
Periodically, but no less frequently than annually, review and update the
working Addendum,
and ensure it is used during the year.
3.
At
least biennially, perform a self-assessment of committee
performance.
4.
Perform any other activities consistent with this charter, the company’s by-laws
and certificate of incorporation as the committee or the board deems necessary
or appropriate.
SEC
Reports
1.
Review
the financial report required by the rules of the Commission to be included
in
the company’s annual proxy statement.
2.
Review
the periodic filings required under the rules of the Commission with management
and the independent auditor prior to filing.
3.
Review
with management and the independent auditor any correspondence with regulators
or government agencies and any employee complaints or published reports
that
raise material issues regarding the company’s financial statements or accounting
policies.
4.
Review
and discuss with management and the independent auditor any pro forma
information proposed to be included in the company’s financial statements or any
other public disclosure.
5.
Obtain
reports from management, the Director of Internal Audit and the independent
auditor that the company and its subsidiary/affiliated entities are in
conformity with applicable legal requirements. Review reports and disclosures
of
insider and affiliated party transactions. Advise the board with respect
to the
company’s policies and procedures regarding compliance with applicable laws and
regulations.
DURATION
The
committee shall continue in existence on a permanent basis until dissolved
by
the board.
CHAIR
The
chair
and the vice chair of the committee shall be appointed by the board with
due
consideration given to nominee(s) presented by the Executive
Committee.
7
MEMBERSHIP
AND ORGANIZATION
The
committee shall consist of at least three members. Each member shall meet
the
independence, experience and financial literacy requirements of applicable
rules
and regulations, including, without limitation, the listing standards of
the New
York Stock Exchange, Section 10A(m)(3) of the Exchange Act and the rules
and
regulations of the Commission, as such are amended from time to time. In
addition, at least one member shall qualify as a “financial expert” as that term
is defined by rules and regulations of the Commission. Members shall not
simultaneously serve on the audit committees of more than two other public
companies.
The
members of the committee shall be appointed by the board governance committee,
subject to approval by the board, at its next meeting following the annual
meeting of shareholders and shall serve until the first meeting of the
board
following the annual meeting of shareholders and until their successors
are
elected or until their earlier death, resignation or removal, with or without
cause, in the discretion of the board. Unless a chair is appointed by the
board,
the members of the committee shall elect a chair by majority vote of the
full
committee membership.
The
committee may form and delegate authority to a subcommittee or subcommittees,
when appropriate, including the authority to preapprove the retention of
the
independent auditor for performance of audit and non-audit services not
prohibited under Section 10A(g) of the Exchange Act and not subject to
the de
minimis exception under Section 10A(i)(1)(B) of such Act, provided that
the
terms of the engagement and fee for such services shall be presented to
the full
committee at the next scheduled meeting following the preapproval.
The
committee shall promptly inform the board of the actions taken or issues
discussed at its meetings. This will generally take place at the board
meeting
following a committee meeting.
MEETINGS
The
committee shall meet at such times and shall conduct such business as is
more
specifically described in the working addendum. The committee shall meet
periodically with management, the internal auditors and the independent
auditor
in separate executive sessions. The chief financial officer will coordinate
meetings between the committee and the independent auditor and director
of
internal audit. However, the committee and each member of the committee
has the
right to contact the independent auditor or the director of internal audit
directly. The independent auditor(s) and the director of internal audit
and
other members of the internal audit team have the right to contact the
committee
or any member of the committee directly. Agendas
and advance materials will be provided to the committee members in advance
of
meetings. Special meetings may be held as called by the chair of the committee;
the chair shall honor the request of any committee member to call a special
meeting.
8
Meetings
are to be attended by members of the committee, the appointed recorder,
the
chief financial officer and any guest whose attendance is approved in advance
by
the chair. The chief financial officer will be the primary point of contact
and
provide administrative support to the committee.
Three
members shall constitute a quorum. If a quorum is present, a majority of
the
members present shall decide any questions brought before the committee.
Any
member of the committee may call a meeting of the committee upon due notice
to
each other member at least forty-eight hours prior to the meeting.
MINUTES
& REPORTS
The
board
chair in collaboration with the chair of the committee shall designate
a person
to record the proceedings of the committee’s meetings and to distribute such
record as directed by the chair. The records of the committee meetings
shall be
confidential, but shall be distributed to all board members and retained
as
directed by the board chair for a period of at least ten years.
The
chair
may authorize the creation and distribution of reports or position papers
as
appropriate.
EFFECTIVE
DATE
This
charter was reviewed by the committee and approved by the board on February
26,
2004, in order to govern the subsequent operation of the committee.
Note:
While
the committee has the responsibilities and powers set forth in this charter,
it
is not the duty of the committee to plan or conduct audits or to determine
that
the company’s financial statements are complete and accurate and are in
accordance with generally accepted accounting principles. This is the
responsibility of management and the independent auditor. Nor is it the
duty of
the committee to conduct investigations or to assure compliance with laws
and
regulations and the company’s Policy Guide on Standards of Conduct and Ethics
and the Supplemental Standards of Conduct and Ethics. It is management’s
responsibility to ensure that appropriate reports are made to the
board.
.
9
ANNEX
B
LUBY'S
INCENTIVE STOCK PLAN
Amended
and Restated as of December 6, 2005
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 Executive 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, Inc., a Delaware corporation.
"Effective
Date" means December 6, 2005.
"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.
“Plan”
means this Luby's Incentive Stock Plan, Amended and Restated as of December
6,
2005.
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)
2,100,000 shares; (b) any shares of Common Stock that were authorized to
be
awarded under the 1989 Plan but were not awarded under the 1989 Plan; and
(c)
any shares of Common Stock represented by awards granted under the 1989 Plan
which have been or will be forfeited, expire, or canceled without delivery
of
Common Stock, or which have resulted or will result in the forfeiture of
Common
Stock back to the Company. Notwithstanding the foregoing, the maximum aggregate
number of shares of Common Stock that may be issued under the Plan is 2,600,000.
Any of the authorized shares may be used for any of the types of Awards
described in the Plan. 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.
(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) Nonassignability.
With
respect to nonqualified stock options, incentive stock options and Performance
Shares, 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. 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.
16. 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.
17. Effective
and Termination Dates.
The
Plan originally became effective on January 1, 1999, and was approved by
the
shareholders of the Company at the 1999 annual meeting of shareholders. The
Plan
as amended and restated shall become effective on December 6, 2005, subject
to
approval of the shareholders of the Company at the 2006 annual meeting of
shareholders. If the Plan is approved by the shareholders at the 2006 annual
meeting, the Plan shall terminate on December 5, 2015, 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.
ANNEX
C
TAX
CONSEQUENCES OF PLAN
Tax
Consequences of Plan
Status
of Options. The
federal income tax consequences both to the participant and the Company of
options granted under the Amended Plan differ depending on whether an option
is
an incentive stock option or a nonqualified stock option.
Nonqualified
Stock Options. No
federal income tax is imposed on the participant upon the grant of a
nonqualified stock option. Generally, upon the exercise of a nonqualified
stock
option, the participant will be treated as receiving compensation taxable
as
ordinary income in the year of exercise, in an amount equal to the excess
of the
fair market value of the shares at the time of exercise over the exercise
price
paid for such shares. Upon a subsequent disposition of the shares received
upon
exercise of a nonqualified stock option, any difference between the amount
realized on the disposition and the basis of the shares (exercise price plus
any
ordinary income recognized upon exercise of the option) would be treated
as
long-term or short-term capital gain or loss, depending on the holding period
of
the shares. Upon a participant's exercise of a nonqualified stock option,
the
Company may claim a deduction for compensation paid at the same time and
in the
same amount as compensation income is recognized by the
participant.
Incentive
Stock Options. No
federal income tax is imposed on the participant upon the grant or exercise
of
an incentive stock option. The difference between the exercise price and
the
fair market value of the shares on the exercise date will, however, be included
in the calculation of the participant's alternative minimum tax liability,
if
any. If the participant does not dispose of shares acquired pursuant to the
exercise of an incentive stock option within two years from the date the
option
was granted or within one year after the shares were transferred to him,
the
difference between the amount realized upon a subsequent disposition of the
shares and the exercise price of the shares would be treated as long-term
capital gain or loss. In such event, the Company would not be entitled to
any
deduction in connection with the grant or exercise of the option or the
disposition of the shares so acquired. If a participant disposes of shares
acquired pursuant to his exercise of an incentive stock option prior to the
end
of the two-year or one-year holding periods noted above, the disposition
would
be treated as a disqualifying disposition and the participant would be treated
as having received, at the time of disposition, compensation taxable as ordinary
income equal to the excess of the fair market value of the shares at the
time of
exercise (or the amount realized on such sale, if less) over the exercise
price.
Any amount realized in excess of the fair market value of the shares at the
time
of exercise would be treated as long-term or short-term capital gain, depending
on the holding period of the shares. In such event, the Company may claim
a
deduction for compensation paid at the same time and in the same amount as
compensation income recognized by the participant.
Restricted
Stock. No
federal income tax is imposed on a participant at the time shares of restricted
stock are granted, nor will the Company be entitled to a tax deduction at
that
time. Instead, when either the transfer restriction or the forfeiture risk
lapses, such as on the vesting date, the participant will recognize ordinary
income in an amount equal to the fair market value of the shares of restricted
stock over the amount, if any, paid for such shares. Notwithstanding the
foregoing, unless restricted by the agreement relating to such grant, a
participant receiving restricted stock can elect to include the excess of
the
fair market value of the restricted stock over the amount (if any) paid for
such
stock in income at the time of grant by making an appropriate election under
Section 83(b) of the Code within 30 days after the restricted stock is issued
to
the participant. Subsequent appreciation in the fair market value of the
stock
will be taxed as capital gains when the participant disposes of the stock.
However, if a participant files such an election and the restricted stock
is
subsequently forfeited, the participant is not allowed a tax deduction for
the
amount previously reported as ordinary income due to the election. At the
time
the participant recognizes ordinary income with respect to shares issued
pursuant to a restricted stock award, the Company will be entitled to a
corresponding deduction.
Performance
Shares. Generally,
a holder of a performance share will not recognize income when the award
is
granted, unless the performance share vests immediately and has no substantial
restrictions or limitations. If the performance share vests only upon the
satisfaction of certain performance criteria, a holder will recognize ordinary
income only when such award vests and any restrictions regarding forfeiture
are
removed. The Company will generally be allowed to deduct from its taxes the
amount of ordinary income a participant must recognize.
Section
162(m)
of the Internal Revenue Code
Section
162(m) of the Code generally disallows a public company's tax deduction for
compensation to the chief executive officer and the four other most highly
compensated executive officers in excess of $1 million in any calendar year.
Compensation that qualifies as "performance based compensation" (as defined
for
purposes of Section 162(m)) is excluded from the $1 million limitation, and
therefore remains fully deductible by the company that pays it. Assuming
the
Amended Plan is approved by the shareholders of the Company, the Company
believes that options granted with an exercise price at least equal to 100%
of
the fair market value of the underlying common stock at the date of grant
will
qualify as "performance based compensation," although other awards under
the
Amended Plan may not so qualify.