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Luby’s defends board in letter to shareholders

HOUSTON Luby’s Inc., in a letter sent Tuesday to shareholders, is urging them to support management and the current board in the face of a dissident shareholder’s recent nomination of four candidates to the 10-seat board.

"Luby's has the right board of directors in place," wrote Gasper Mir III, chairman of the 128-unit cafeteria chain's board.

Earlier in October, Ramius Capital Group LLC of New York said it wanted Luby's to form a more independent board and to seek strategic alternatives for the company, including a possible sale. Ramius Capital, which through its funds and subsidiaries holds 7.1 percent of Luby's outstanding stock, nominated four candidates for Luby's board of directors. Luby's next shareholder meeting is scheduled for Jan. 15 in Houston.

"As Luby's largest independent shareholder, we firmly believe the company is undervalued," Ramius partner Jeffrey C. Smith said. "While we are excited about the potential growth prospects for the business, we believe the board can be strengthened to enable a higher probability of the most successful outcome."

In his letter on Tuesday, Mir said: "Luby's board of directors is independent, diverse and open-minded, and our interests are closely aligned with those of all Luby's shareholders. Luby's 10-member board includes a majority of independent directors, an independent chairman, and the company's CEO, Chris Pappas, and COO, Harris Pappas."

In July, Ramius charged that there were conflicts of interest for members of Luby's management team, especially Chris and Harris Pappas. The Pappas brothers also serve as executives at Pappas Restaurants, a group of more than 70 restaurants also based in Houston. At that time, Ramius had said it was "concerned that significant potential conflicts of interest and time" exist because of the dual corporate roles.

Mir defended the Pappas brothers in the letter, saying that they had helped return Luby's to profitability, eliminated more than $120 million in debt and improved same-store sales. He also said Chris and Harris Pappas had agreed to remain executives until Aug. 21, 2009, and to invest an additional $11.2 million in Luby's, increasing their ownership from 17 percent to 24 percent of outstanding shares from stock options granted in 2001. They also retained the right to increase their investment to 33 percent.

Ramius also has lobbied for Luby's to explore sale-leaseback options to fund share repurchases and a one-time shareholder dividend.

Mir said Luby's board had considered "certain recommendations for financial engineering and releveraging the company's balance sheet through the sale and leaseback of our real estate that were suggested earlier this year by the dissident shareholder." However, he said, the board had concluded that "by owning rather than leasing our properties, we generate better operating margins and greater cash flow returns, which better positions the company for growth."

Mir said the company's first new store in years, a prototype that opened in August in Cypress, Texas, "is already outperforming the system average." He said it was on track to generate an annual unit volume of $3.25 million, which is 30 percent higher than LubyÕs current annual unit volume of $2.5 million. He also said the company was expanding its culinary contract business, such as the one at the new dining facility at Baylor College of Medicine in Houston.

Earlier this month, Luby's reported that its latest annual net income fell 44.5 percent from a year earlier to $10.9 million, or 40 cents per share. Sales for the year ended Aug. 29 slipped 1.3 percent to $320.4 million. Same-store sales fell 1.5 percent. In July, Luby's secured a credit facility of $100 million to finance growth.

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