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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 28, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______ to ______
Commission file number 0-19907
LONE STAR STEAKHOUSE & SALOON, INC.
(Exact name of Registrant as specified in its charter)
Delaware 48-1109495
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
224 East Douglas, Suite 700
Wichita, Kansas 67202
(Address of principal executive offices) (Zip code)
(316) 264-8899
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes /X/ No / /
As of March 21, 2000, the aggregate market value of the Registrant's
Common Stock held by non-affiliates of the Registrant was $218,369,493. Solely
for the purpose of this calculation, shares held by directors and officers of
the Registrant have been excluded. Such exclusion should not be deemed a
determination by or an admission by the Registrant that such individuals are, in
fact, affiliates of the Registrant.
As of March 21, 2000, there were 26,887,952 shares outstanding of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III will be incorporated by reference to
certain portions of a definitive proxy statement, which is expected to be filed
by the Registrant within 120 days after the close of its fiscal year.
TABLE OF CONTENTS
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ITEM PAGE
PART I
1. Business....................................................................3
2. Properties.................................................................13
3. Legal Proceedings..........................................................15
4. Submission of Matters to a Vote of Security Holders........................15
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters..15
6. Selected Financial Data....................................................16
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations...............................................................18
7a. Quantitative and Qualitative Disclosures about Market Risk................25
8. Financial Statements and Supplementary Data................................25
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................25
PART III
10. Directors and Executive Officers of the Registrant........................26
11. Executive Compensation....................................................26
12. Security Ownership of Certain Beneficial Owners and Management............26
13. Certain Relationships and Related Transactions............................26
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........26
Signatures................................................................27
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PART I
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act, and Section 21E of the
Exchange Act, which are intended to be covered by the safe harbors created
thereby. Stockholders are cautioned that all forward-looking statements involve
risks and uncertainty, including without limitation, changes in costs of food,
retail merchandise, labor, and employee benefits, our ability to continue to
acquire and retain prime locations at acceptable lease or purchase terms, as
well as general market conditions, competition, and pricing. Although we believe
that the assumptions underlying the forward-looking statements included in this
Annual Report will prove to be accurate, in light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by us
or any other person that our objectives and plans will be achieved. Our
forward-looking statements may be identified by words such as "believes,"
"expects," "anticipates," intends," "estimates" or similar expressions.
Item 1. BUSINESS
BACKGROUND
As of March 21, 2000, Lone Star Steakhouse & Saloon, Inc. (the "Company")
owned and operated a chain of 241 mid-priced, full service, casual dining
restaurants located in the United States, which operate under the trade name
Lone Star Steakhouse & Saloon ("Lone Star" or "Lone Star Steakhouse & Saloon"),
and 18 upscale steakhouse restaurants, four operating as Del Frisco's Double
Eagle Steak House restaurants and 14 operating as Sullivan's Steakhouse
restaurants. In addition, a licensee operates three Lone Star restaurants in
California and a licensee operates a Del Frisco's restaurant in Orlando.
Internationally, the Company owns a 65% interest in a joint venture (the
"Australian Joint Venture"), which operates 40 Lone Star Steakhouse & Saloon
restaurants. In addition, a licensee operates a Lone Star Steakhouse & Saloon
restaurant in Guam. In Canada, a licensee will open a Lone Star themed
restaurant under the trade name Texas Star Steakhouse & Saloon in the summer of
2000. The Company does not own exclusive rights to the Lone Star name in Canada.
Steak continues to be one of the most frequently ordered dinner entrees at
restaurants. In 1999, the United States Department of Agriculture estimated the
average annual per capita consumption of beef to be 69.2 pounds, up slightly
from 1998. Company management believes the limited menu of its restaurants,
which concentrates primarily on high quality USDA choice-graded steaks, and the
appeal of its "Texas Roadhouse" ambiance, distinguishes the Lone Star
restaurants and provides the Company with a competitive advantage.
During 1999, the Company opened one new domestic Lone Star restaurant and
opened four Sullivan's restaurants. In addition, the Company's licensee in
California opened one restaurant.
In May, 1998, the Company suspended development of new Lone Star
restaurants. During 1998, the Company completed the remodel/construction of 12
additional Lone Star restaurants (including one that was damaged by fire and
rebuilt), but opened only one in 1999. The Company expects to open the remaining
restaurants, but due to the high standards it requires in staffing new
restaurants and the extremely tight labor market, the Company is currently
uncertain as to when the units will open. See "Expansion Strategy."
The Company closed 24 under-performing Lone Star restaurants and one
Mexican food restaurant on January 4, 2000. The Company owns ten of the closed
locations and fifteen are leased.
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The Company is currently seeking to sell substantially all of the closed
properties. Closing the under-performing restaurants will allow the Company to
continue focusing on its existing program of additional staffing and operating
improvements in the remaining restaurants.
The Company has positioned itself as "The Steak Company." In support of
this strategy, in September, 1995, the Company acquired the Del Frisco's Double
Eagle Steak House restaurant located in Dallas, Texas, including the
intellectual property rights, marks and trade name. In addition, the Company
acquired the Del Frisco's restaurant under construction in Fort Worth, Texas,
which opened in April 1995. The third Del Frisco's restaurant opened in Denver,
Colorado in January 1997 and the Company opened its fourth Del Frisco's
restaurant in Rockefeller Center in New York, New York on March 7, 2000.
The Company's upscale position is further supported by its creation and
development of another upscale steak restaurant concept, which utilizes the
trade name Sullivan's Steakhouse ("Sullivan's). The Company opened two
Sullivan's restaurants in 1996, two in 1997, six in 1998 and four in 1999. The
Sullivan's restaurant in Tucson, Arizona is scheduled to open in the summer of
2000.
The Company's focus on selection, training and in-store execution along
with Lone Star's new marketing initiatives, the successful creation of the
Sullivan's upscale concept and the development of the Del Frisco's Double Eagle
Steak House concept, set the Company apart from other restaurant companies that
operate steakhouse restaurants.
RESTAURANT CONCEPTS
Lone Star restaurants are positioned as "destination restaurants" that
attract loyal clientele. The Lone Star restaurants embrace a Texas-style concept
that features Texas artifacts and country and western music. The authentic
"Texas Roadhouse" concept was developed to capitalize on the enduring popularity
of Texas related themes. Lone Star is further distinguished by its high quality,
USDA choice-graded steaks which are hand-cut fresh daily at each restaurant and
mesquite grilled to order. Meals are generous "Texas-sized" portions and full
bar service is available. The exciting and vibrant atmosphere created by the
restaurants' "Texas Roadhouse" ambiance includes neon beer signs and specially
selected upbeat country and western music. The decor includes planked wooden
floors, dim lighting, flags and other Texas memorabilia, all of which enhance
the casual dining experience and establish a distinct identity. Lone Star
restaurants are open seven days a week and most serve both lunch and dinner with
an average check per customer for 1999 of approximately $10.50 at lunch and $17
at dinner.
Del Frisco's Double Eagle Steak House is designed to serve a sophisticated
clientele, including business related dining occasions and is the recipient of
the prestigious Ivy Award and has been elected to the fine dining hall of fame.
The Del Frisco's concept embraces an elegant and timeless early twentieth
century motif. The concept features old ways of cooking, such as master broiling
and roasting. Del Frisco's decor and ambiance include dark woods, fabric walls,
fireplaces, separate dining rooms and soft background music. All of these
elements enhance the dining experience and establish a distinct identity for the
Del Frisco's restaurant. Del Frisco's is further distinguished by its high
quality, USDA prime-graded steaks which are hand cut in each restaurant. Del
Frisco's restaurants serve dinner only, and are open Monday through Saturday
with an average guest check of approximately $68.
Sullivan's Steakhouse was named after the legendary boxer, John L.
Sullivan, and embraces a Chicago style 1940's steakhouse theme with nostalgic
influences that feature jazz and swing music. In 1997 Sullivan's was named the
hot concept of the year by Nation's Restaurant News. The bar features live jazz
music several nights a week. The decor includes an open kitchen, separate dining
rooms, dark
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wood paneling, carpeted floors, warm lighting, and white tablecloths. Sullivan's
is distinguished by its high quality, Certified Angus BeefTM steaks, chops, and
seafood. Most Sullivan's restaurants serve dinner only, and are open Monday
through Saturday with an average guest check of approximately $47.
CORPORATE STRATEGY
The Company believes it can continue to distinguish itself in the upscale
market by employing many of the strategies that have been successful in the
mid-priced steakhouse market. The Company will continue to emphasize attentive
service and consistent, high quality food products. See "Restaurant Concepts"
for a description of the elements of these concepts.
While the Company still believes that it can substantially develop all of
its concepts, it suspended its aggressive growth of the Lone Star concept in
1998 to focus on the implementation of certain improvement initiatives in
existing restaurants, which involved the following elements:
1. Curtailing development of new restaurants, temporarily reducing the need
for additional managers.
2. Focusing on existing Lone Star restaurants in order to improve operational
consistency and guest satisfaction.
/ / Improving the experience and effectiveness of District Managers and
reducing the span of control, permitting them to increase time spent
in the restaurants coaching and training personnel.
/ / Adding an additional support manager at the unit level, resulting in
one General Manager and four support managers: Kitchen Manager,
Assistant Kitchen Manager, Service Manager, and Bar Manager.
3. Improving management and financial systems including installing Point of
Sale (P.O.S.) systems in all units, to reduce the manual administrative
functions required of management thus enabling them to focus on guest
satisfaction and proper training of staff.
/ / Re-emphasizing the Operations Review Process which occurs every four
weeks and brings management together on a regional, district, and unit
level to review and discuss operational issues, procedures, best
practices and policies.
/ / Improving the labor matrix which tracks all positions at the unit
level and allows the Company to monitor the adequacy of staffing and
development in all units on a daily basis to insure proper staffing
levels at all restaurants.
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4. Improving quality of management.
/ / In addition to providing career paths leading to promotion from
within, the Company utilizes the services of more than 20 executive
recruiters to identify and screen experienced restaurant managers for
consideration.
/ / The Company's competitive position has been enhanced by ongoing
improvements in the process of identifying, recruiting, testing and
training of management personnel.
5. Testing of marketing and advertising programs.
/ / As markets or groups of restaurants achieve operational consistency
and higher staffing levels, advertising and marketing tests are being
implemented to invite new customers to visit the restaurant.
Some of the improvement initiatives were completed in 1998 and 1999 and
certain of the improvement initiatives represent ongoing efforts on behalf of
the Company. The Company remains fully committed to the continuous improvement
of these initiatives.
In 1999, the Company implemented new P.O.S. systems in all of its Lone
Star restaurants and, in order to better utilize the expanded unit level data
provided by the P.O.S. systems, the Company also installed an enterprise
resource planning software, which provides enhanced reporting capabilities,
comprehensive HR tracking, improved fixed asset management and access to
detailed historical information.
The Company believes that all of its concepts have international
development opportunities, and development in Australia is substantially
complete for the Lone Star concept. Until the Company completes the domestic
operations improvement initiatives there is no active plan for further
international development of any of the Company's restaurants.
UNIT ECONOMICS
The Company's management team focuses on selecting locations with the
potential of producing significant revenues while controlling capital
expenditures and occupancy costs. The Company's Lone Star restaurants averaged
approximately $1.75 million in sales on an annualized basis during 1999. Of the
241 Lone Star restaurants open at March 21, 2000, 87 were leased facilities and
had an average cash investment of approximately $1.0 million and 154 were owned
and had an average cost for land acquisition, construction and equipment of
approximately $1.9 million.
The Company anticipates the average total investment per restaurant for a
typical Del Frisco's restaurant and Sullivan's restaurant will range from $3.0
million to $5.0 million. The Del Frisco's which opened in New York City on March
7, 2000, cost approximately $13 million to complete and contains approximately
16,500 square feet. The New York Del Frisco's will also serve lunch Monday
through Friday.
MENU
The dinner menu at a Lone Star restaurant features a limited selection of
high quality, specially seasoned and mesquite grilled steaks, prime rib, ribs,
chicken, fish, shrimp and various combinations. Most dinners offer a complete
meal including salad, bread and butter and a choice of baked potato, baked sweet
potato, steak fries or Texas rice. The lunch menu offers a selection of
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hamburgers, chicken sandwiches, luncheon steaks, ribs, soups and salads.
Depending on local availability and quality, a fresh fish selection is also
offered at lunch and dinner. The lunch and dinner menus also include appetizers
and desserts, together with a full bar service. Alcoholic beverage service
accounts for approximately 9% of the restaurant's net sales.
The menu at Sullivan's features high quality Certified Angus Beef(TM)
steaks, chops, seafood and quality side dishes. Sullivan's also features a
number of high quality wines and full bar. Alcoholic beverage service accounts
for approximately 40% of the restaurants' sales.
The menu at Del Frisco's features high quality USDA prime-graded steaks,
chops, seafood, and quality side dishes. Del Frisco's wine list offers over 300
high quality wines and a full bar. Alcoholic beverage service accounts for
approximately 35% of the restaurants' sales.
SITE SELECTION
The Company believes the site selection process is critical in determining
the potential success of a particular restaurant and senior management devotes
significant time and resources to analyzing each prospective site. A variety of
factors are considered in site selection. These include the specific steakhouse
concept to be developed, local market demographics, and site visibility.
Consideration is given to accessibility and proximity to significant generators
of potential customers such as major retailers, retail centers and office
complexes, office and hotel concentrations, and entertainment centers (stadiums,
arenas, theaters, etc.). The Company also reviews potential competition and
attempts to analyze the profitability of other national chain restaurants
operating in the area.
The Company will continue to purchase additional sites in the future, when
it is cost effective. The Company utilizes a prototype building for its Lone
Star restaurants when it acquires or leases vacant land. Currently, there are 93
prototype units open and six prototype units are completed but not opened.
Leases are negotiated generally with initial terms of three to five years, with
multiple renewal options. The Company has generally required between 150 and 280
days after the signing of a lease or the closing of a purchase to complete
construction and open a new restaurant. Additional time is sometimes required to
obtain certain government approvals and licenses, such as liquor licenses.
Of the four Del Frisco's open as of March 21, 2000, two are owned and two
are leased and the Company has entered into a lease agreement for one additional
Del Frisco's restaurant in Las Vegas, Nevada. Of the fourteen Sullivan's
restaurants, twelve are leased and two are owned. The Company has entered into
one lease agreement for an additional Sullivan's which is currently under
construction in Tuscon, Arizona.
RESTAURANT LAYOUT
The Company believes the decor and interior design of its restaurants are
significant factors in its success. The Lone Star Steakhouse & Saloon
restaurants' open layout permits dining customers to view the bar and Texas
memorabilia and enhance the casual dining atmosphere. The Company also designs
its kitchen space for efficiency of work flow, thereby minimizing the amount of
space required.
Lone Star restaurants currently average approximately 5,800 square feet
and include a dining area with seating for approximately 220 customers. In
addition, a bar area is located adjacent to the dining room primarily to
accommodate customers waiting for dining tables or to accommodate overflow. In
some restaurants, an outside patio area can provide additional seating.
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The Company anticipates future Lone Star restaurants will average approximately
5,500 square feet and less in small town markets.
The original Del Frisco's restaurant in Dallas, Texas is approximately
10,000 square feet and seats approximately 350 persons. In the first quarter of
1998 an extended wine cellar and a cigar bar were added with private dining
available in the wine cellar. The Ft. Worth, Texas and Denver, Colorado Del
Frisco's restaurants are approximately 8,000 and 12,000 square feet and seat
approximately 300 and 360 persons, respectively. In addition, Del Frisco's
features a bar area adjacent to the dining room primarily to accommodate
customers waiting for tables. The New York City location is approximately 16,500
square feet and the Las Vegas location will be approximately 11,000 square feet.
Future Del Frisco's restaurants are planned to be approximately 7,000-8,000
square feet and will include a dining area for approximately 175-200 customers.
The first Sullivan's restaurant, in Austin, Texas was 7,500 square feet
and included a dining area for approximately 180-200 customers. In 1997 this
restaurant was expanded by 4,500 square feet to accommodate additional dining.
This location now seats 320 customers. A separate jazz bar area called
"Ringside" is utilized at the Baton Rouge, Louisiana, Dallas and Houston, Texas
Sullivan's restaurants. The Sullivan's bar area is separate from the dining room
and is designed to be a destination unto itself, featuring live jazz music six
nights a week and an upbeat, convivial atmosphere. Future Sullivan's restaurants
are planned to be approximately 8,000-9,000 square feet and will include a
dining area for approximately 175-200 customers.
EXPANSION STRATEGY - LONE STAR STEAKHOUSE AND SALOON RESTAURANTS
As of March 21, 2000, the Company had eleven restaurants where
construction is substantially completed, but will not open for business until
such time as the restaurants can be adequately staffed with personnel who meet
the Company's required standards.
As of March 21, 2000, the Company had sites for eight additional
restaurants, six of which were acquired by purchase and two by lease. The
Company does not currently anticipate that any of the eight sites will be
constructed or opened in 2000.
Internationally, a licensed Lone Stark style restaurant is currently
scheduled to open in Canada under the name Texas Star Steakhouse and Saloon in
mid year 2000.
EXPANSION INTO UPSCALE MARKETS
In September 1995, the Company entered the upscale steakhouse niche by
acquiring the intellectual property rights, marks and trade name of Del Frisco's
Double Eagle Steak House. The Del Frisco's restaurants are located in Dallas and
Ft. Worth, Texas, Denver, Colorado and New York City. The Company also became
the licensor of a Del Frisco's restaurant in Orlando, Florida. The Company has
no plans for future licensing of the Del Frisco's concept. The Company expects
to open a Del Frisco's restaurant in Las Vegas, Nevada in the summer of 2000.
The Company developed and opened a second upscale steak restaurant
concept, Sullivan's Steakhouse. Two Sullivan's restaurants were opened in 1996
with the first unit opening in Austin, Texas. The Company opened two Sullivan's
in 1997, six in 1998 and four in 1999. The Company expects to open one
Sullivan's restaurant in 2000 in Tuscon, Arizona.
The Company has temporarily curtailed the development of both upscale
steakhouse concepts while it digests the recent expansion program in an effort
to ensure proper staffing and execution in all upscale restaurants. Future
development will be
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evaluated on a site by site basis with no current commitments to open additional
upscale units beyond one Del Frisco's in Las Vegas and one Sullivan's restaurant
in Tucson, Arizona, both of which are scheduled to open in the summer of 2000.
MARKETING
Lone Star Steakhouse & Saloon restaurants are "destination location
restaurants" that focus on the mid-priced full service casual dining market
segments. The Company has relied principally on its commitment to customer
service, an excellent price-value relationship and the unique "Texas Roadhouse"
ambiance of its restaurants to attract and retain customers. Accordingly, the
Company has focused its resources on providing its customers with superior
service, value and an exciting and vibrant atmosphere, and has relied primarily
on word of mouth to attract new customers. The Company also utilizes radio and
billboard advertising to promote its restaurants and build customer awareness.
The Company also employs some print and direct mail advertising, and conducts
some local restaurant promotions. To create additional Lone Star name
recognition and customer identification, the Company sells T-shirts and other
items bearing the Lone Star name and logo. In 1998, the Company spent
approximately $4,300,000 for a radio and television advertising campaign in
markets covering approximately 45% of the domestic Lone Star's. The results were
disappointing and the marketing expenditures were put on hold until the Company
completed the operations improvement initiatives in the existing restaurants.
(See "Restaurant Operations and Management.") In October 1999, the Company
tested television and radio advertising in four markets which included 16
restaurants. In January 2000, an additional test was implemented in three other
markets, which included 26 additional restaurants. The Company anticipates more
markets will be tested throughout 2000.
Sullivan's and Del Fisco's both utilize print and radio along with
charitable events promotions throughout the year.
RESTAURANT OPERATIONS AND MANAGEMENT
The restaurant operations and management systems are an outgrowth of
systems and controls developed by the Company's senior management and
successfully used to manage a large number of restaurants located in numerous
states.
The Company strives to maintain quality and consistency in its restaurants
through careful hiring, training and supervision of personnel and the
establishment of standards relating to food and beverage preparation,
maintenance of facilities and conduct of personnel.
The Company maintains financial and accounting controls for each of its
restaurants through the use of centralized accounting and management information
systems. Sales information is collected daily from each restaurant, and
restaurant managers are provided with daily, weekly and twenty-eight day period
operating statements for their locations. Cash is controlled through daily
deposits of sales proceeds in local operating accounts, the balances of which
are wire transferred weekly to the Company's principal operating account.
A typical Lone Star management team consists of one general manager and
three managers. The Company is currently in the process of hiring an additional
management position for each of its restaurants, which would bring the
management team to one General Manager and four support managers for each
restaurant. Each restaurant also employs a staff consisting of approximately 50
to 90 hourly employees, many of whom work part-time. Typically, each general
manager reports directly to a district manager who reports to a regional
manager. Restaurant managers complete an eight-week training program during
which they are instructed
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in all areas of the operation including food quality and preparation, customer
satisfaction, alcoholic beverage service, governmental regulations compliance,
liquor liability avoidance and employee relations. Restaurant management is also
provided with a proprietary operations manual relating to food and beverage
preparation, all areas of restaurant management and compliance with governmental
regulations. Working in concert with restaurant managers, the Company's senior
management defines operations and performance objectives for each restaurant and
monitors implementation. An incentive cash bonus program has been established in
which each restaurant's management team participates. Awards under the incentive
plan are tied to achievement of specified operating targets. Senior management
regularly visits Company restaurants and meets with the respective management
teams to ensure the Company's strategies and standards of quality are met in all
respects of restaurant operations and personnel development.
The Company's commitment to customer service and satisfaction is evidenced
by several practices and policies, including periodic visits by restaurant
management to customers' tables, active involvement of restaurant management in
responding to customer comments, and assigning wait persons to a limited number
of tables, generally three for dinner and four for lunch. Teamwork is emphasized
through a runner system for delivering food to the tables that is designed to
serve customers in an efficient and timely manner.
Each new restaurant employee of the Company participates in a training
program during which the employee works under the close supervision of a
restaurant manager. Management strives to instill enthusiasm and dedication in
its employees and to create a stimulating and rewarding working environment
where employees know what is expected of them in measurable terms. Management
continuously solicits employee feedback concerning restaurant operations and
strives to be responsive to the employees' concerns.
PURCHASING
Approximately 60% of the consumable products used in the restaurants are
distributed through and delivered by a single vendor. The Company negotiates
directly with suppliers for food and beverage products to ensure consistent
quality and freshness of products and to obtain
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competitive prices. The Company purchases substantially all food and beverage
products from local or national suppliers. Food and supplies are shipped
directly to the restaurants, although invoices for purchases are sent to the
Company for payment. The Company does not maintain a central product warehouse
or commissary. The Company has not experienced any significant delays in
receiving restaurant supplies and equipment. From time to time, the Company
engages in forward pricing and may consider other risk management strategies
with regard to its meat and other food costs in order to minimize the impact of
potential fluctuations in prices. This practice could help stabilize the
Company's food costs during times of fluctuating prices. As of March 21, 2000,
the Company has no forward pricing contracts.
MANAGEMENT INFORMATION SYSTEMS
The Company utilizes an in-store computer-based management support system
which is designed to improve labor scheduling and food cost management, provide
corporate management quicker access to financial data and reduce the restaurant
manager's administrative time. Each general manager uses the system for
production planning, labor scheduling and food cost variance analysis. The
system generates reports on sales, bank deposit data and variance data to the
Company's management on a daily basis.
The Company generates weekly, consolidated sales reports and food and
labor cost variance reports at its corporate headquarters, as well as detailed
profit and loss statements for each restaurant every four weeks. Additionally,
the Company monitors the average check, customer count, product mix and other
sales trends on a daily basis.
During 1999, the Company completed implementation of a P.O.S. system at a
cost of approximately $8 million, which has allowed the Company to better
control its restaurant operations and improve its operating efficiencies. In
addition, the Company rolled out enterprise resource software at a cost of
approximately $5 million, which provides enhanced reporting capabilities,
comprehensive HR tracking, improved asset management controls and reporting, as
well as improved access to detailed historical information. Additionally, the
enterprise resource planning software provides an ongoing platform for continued
enhancements to the Company's financial reporting, analysis and control
capabilities.
COMPETITION
Competition in the restaurant industry is increasingly intense. The
Company operates primarily on the basis of quality of food and service,
ambiance, location and price-value relationship. The Company also competes with
a number of other restaurants within its markets, including both locally owned
restaurants and regional or national chains. The Company believes that its
concepts, attractive price-value relationship and quality of food and service
enable it to differentiate itself from its competitors. While the Company
believes its restaurants are distinctive in design and operating concept, it is
aware of restaurants that operate with similar concepts. The Company also
competes with other restaurants and retail establishments for sites and
employees. Many of the Company's competitors are well established and certain
competitors have substantially greater financial, marketing and other resources
than the Company. The Company believes that its ability to compete will depend
upon attracting and retaining high quality employees and continuing to offer
high quality, competitively priced food in a full service, distinctive dining
environment.
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GOVERNMENT REGULATION
The Company's restaurants are subject to numerous federal, state and local
laws affecting health, sanitation, safety and ADA accessibility standards, as
well as to state and local licensing regulation of the sale of alcoholic
beverages. Each restaurant has appropriate licenses from regulatory authorities
allowing it to sell liquor, beer and wine, and has food service licenses from
local health authorities. The Company's licenses to sell alcoholic beverages
must be renewed annually and may be suspended or revoked at any time for cause,
including violation by the Company or its employees of any law or regulation
pertaining to alcoholic beverage control, such as those regulating the minimum
age of patrons or employees, advertising, wholesale purchasing, and inventory
control. The failure of a restaurant to obtain or retain liquor or food service
licenses could have a material adverse effect on its operations. In order to
reduce this risk, each restaurant is operated in accordance with standardized
procedures designed to ensure compliance with all applicable codes and
regulations.
The Company may be subject in certain states to "dram-shop" statutes,
which generally provide a person injured by an intoxicated person the right to
recover damages from an establishment that wrongfully served alcoholic beverages
to the intoxicated person. The Company carries liquor liability coverage as part
of its existing comprehensive general liability insurance.
Any future development and construction of additional restaurants will be
subject to compliance with applicable zoning, land use and environmental
regulations. The Company's restaurant operations are also subject to federal and
state minimum wage laws governing such matters as working conditions, overtime
and tip credits and other employee matters. Significant numbers of the Company's
food service and preparation personnel are paid at rates related to the federal
minimum wage and, accordingly, further increases in the minimum wage could
increase the Company's labor costs.
TRADEMARKS
The Company regards its marks, Lone Star Steakhouse & Saloon(R), Lone Star
Cafe(R), Del Frisco's(R) Double Eagle Steak House(R), and Sullivan's
Steakhouse(R) as having significant value and as being an important factor in
the marketing of its restaurants. The Company is aware of names and marks
similar to the service marks of the Company used by other persons in certain
geographic areas. However, the Company believes such uses will not have a
material adverse effect on the Company. The Company's policy is to pursue
registration of its marks whenever possible and to oppose vigorously any
infringement of its marks the Company has obtained registration of its marks in
numerous foreign countries.
EMPLOYEES
As of March 21, 2000, the Company employed approximately 18,180 persons, 9
of whom are executive officers, 92 of whom are office support personnel, 9 of
whom are regional managers, 21 of whom are district managers, approximately 990
of whom are restaurant management personnel and the remainder of whom are hourly
restaurant personnel. None of the Company's employees are covered by a
collective bargaining agreement. The Company considers its employee relations to
be good.
-12-
Item 2. PROPERTIES.
As of March 21, 2000, the Company leased 87 and owned 154 of its Lone Star
restaurant locations. At such date, the Company leased two and owned two Del
Frisco's restaurants locations and had one leased location under construction.
Of the 14 Sullivan's restaurants which are opened, 12 are leased, two are owned,
and an additional leased location is under construction. Lease terms are
generally five years, with multiple renewal options. All of the Company's leases
provide for a minimum annual rent and some provide for additional rent based on
sales volume at the particular location over specified minimum levels.
Generally, the leases are triple net leases, which require the Company to pay
the costs of insurance, taxes and maintenance. The Company intends to continue
to purchase restaurant locations where cost-effective.
The Company closed 24 under-performing Lone Star restaurants and one
Mexican food restaurant on January 4, 2000. The Company owns ten of the closed
locations and fifteen are leased. The Company currently is seeking to sell
substantially all of the closed properties.
-13-
RESTAURANT LOCATIONS AS OF MARCH 21, 2000
The following table sets forth the location of the Company's existing,
open domestic Lone Star Steakhouse & Saloon (241) Restaurants,
Del Frisco's (4) restaurants, and Sullivan's (14) restaurants
LONE STAR Carbondale MASSACHUSETTS Fayetteville TENNESSEE
- --------- Champaign Boston Greensboro (2) Jackson
Chicago (11) Greenville Johnson City
ALABAMA Decatur MICHIGAN Jacksonville Memphis (2)
Anniston Hodgkins Ann Arbor Raleigh (3)
Birmingham (2) Mt. Vernon Battle Creek Rocky Mount
Huntsville Peoria Bay City Salisbury UTAH
Mobile Rockford Brighton Southern Pines Centerville
Montgomery Springfield Dearborn Heights Winston-Salem Layton
Trussville Detroit (6) Salt Lake City
Tuscaloosa INDIANA Grand Rapids NORTH DAKOTA
Anderson Jackson Fargo VIRGINIA
ALASKA Evansville Saginaw Alexandria
Anchorage Ft. Wayne OHIO Centreville
Indianapolis (4) MISSISSIPPI Akron Chesapeake
ARIZONA Lafayette Hattiesburg Canton Fairfax
Mesa Merrillville Jackson Cincinnati (2) Fredericksburg
Phoenix (4) South Bend Cleveland (3) Herndon
Terre Haute MISSOURI Columbus (4) Norfolk
ARKANSAS Branson Dayton (2) Potomac Mills
Ft. Smith IOWA Independence Lancaster Richmond (3)
Little Rock Cedar Rapids Kansas City Middletown Sterling
Springdale Coralville Springfield Niles Virginia Beach
Davenport St. Louis (5) Springfield
COLORADO Des Moines Toledo (2) WEST VIRGINIA
Colorado Springs Waterloo NEBRASKA Youngstown Beckley
Denver (6) Lincoln Charleston
Ft. Collins KANSAS Omaha (2) OKLAHOMA Huntington
Loveland Garden City Lawton
Hutchinson NEVADA Oklahoma City WISCONSIN
DELAWARE Overland Park Las Vegas (4) Tulsa Racine
Dover
Wilmington (2) KENTUCKY NEW JERSEY PENNSYLVANIA SULLIVAN'S
Bowling Green Atlantic City Allentown Anchorage, AK
FLORIDA Florence Bridgewater Easton Austin, TX
Bradenton Lexington Cherry Hill Harrisburg Baton Rouge, LA
Clearwater Louisville Delran Johnstown Charlotte, NC
Ft. Lauderdale Hanover Township King of Prussia Chicago, IL
Ft. Myers LOUISIANA Hazlet Lancaster Dallas, TX
Gainesville Baton Rouge (2) Marlton Middletown Denver, CO
Lakeland Lafayette Ocean County Philadelphia Houston, TX
Ocala Monroe Scotch Plains Pittsburgh (5) Indianapolis, IN
Orlando New Orleans (3) Turnersville Pottstown King of Prussia, PA
Pensacola Voorhees Reading Naperville, IL
Port Richey MARYLAND Wayne Scranton Palm Desert, CA
Sarasota Bel Air Wilkes-Barre Raleigh, NC
St. Petersburg Columbia NEW MEXICO York Wilmington, DE
Tampa Frederick Albuquerque
Gaithersburg RHODE ISLAND
GEORGIA Laurel NEW YORK Warwick DEL FRISCO'S
Atlanta Lexington Park Albany Denver, CO
Augusta Waldorf SOUTH CAROLINA Dallas, TX
Westminster NORTH CAROLINA Greenville Fort Worth, TX
IDAHO Asheville Myrtle Beach (2) New York, NY
Boise Boone
Charlotte (4) SOUTH DAKOTA
ILLINOIS Durham Sioux Falls
Bloomington
Bradley
-14-
Item 3. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the financial condition or results of operations of the
Company. See "Business-Trademarks" for a description of litigation involving the
use of trademarks.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the holders of the Company's Common
Stock during the fourth quarter of the Company's fiscal year ended December 28,
1999.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock (ticker symbol: STAR) is traded
over-the-counter on the Nasdaq National Market (Nasdaq). The following table
sets forth, for the periods indicated, the high and low sale prices for the
Common Stock, as reported by Nasdaq.
Bid Prices
----------
Calendar 1999 High Low
------------- ---- ---
First Quarter 11 1/4 6 5/8
Second Quarter 12 3/8 9 7/16
Third Quarter 10 7/16 7 1/4
Fourth Quarter 10 1/8 7
Bid Prices
----------
Calendar 1998 High Low
------------- ---- ---
First Quarter 23 7/16 17 1/8
Second Quarter 23 1/4 12 1/2
Third Quarter 14 1/8 6
Fourth Quarter 9 1/4 6 5/8
DIVIDENDS
The Company has not paid any cash dividends on its Common Stock.
-15-
NUMBER OF STOCKHOLDERS
As of March 21, 2000, there were approximately 520 holders of record of
the Company's Common Stock. The Company believes there are in excess of 15,000
beneficial owners of the Company's Common Stock.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data and is
qualified by reference to and should be read in conjunction with the
consolidated financial statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K. The selected consolidated data of the
Company as of December 28, 1999, December 29, 1998, December 30, 1997, December
31, 1996, and December 26, 1995, and for each of the five years in the period
ended December 28, 1999, were derived from the Company's audited consolidated
financial statements. The pro forma data set forth below for the periods
presented are unaudited and have been prepared by management solely to
facilitate period-to-period comparison and do not represent the actual results
of operations for the periods presented. The pro forma amounts reflect (1) the
adjustment amounts applicable for the fiscal years 1995 through 1997 to give
retroactive effect to the change in accounting for pre-opening costs adopted in
fiscal 1998 (see Note 4 to the Company's consolidated financial statements) and
(2) the adjustments for fiscal 1995 for the income tax provisions at the
estimated effective federal and state income tax rates applicable to the
operations of a group of related entities which were operated under common
control (collectively, the "CCC Group"). The transaction was accounted for as a
pooling of interests and the pooled companies were taxed as S-Corporations for
income tax purposes prior to their acquisition by the Company in August 1995.
-16-
The following table should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Form 10-K.
Year Ended In December,(1)
---------------------------------------------------------------
(Amounts in thousands, except share data)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Income Statement Data:
Net sales $ 585,755 $ 616,692 $ 585,357 $ 491,754 $ 340,857
Costs and expenses:
Costs of sales 207,696 231,787 211,571 172,338 120,871
Restaurant operating expenses 263,940 270,495 215,805 167,871 116,703
Restaurant depreciation and
amortization 30,970 26,346 30,590 28,384 19,817
General and administrative expenses 38,057 32,070 21,649 21,285 12,693
Provision for impaired assets and
restaurant closings 38,931 4,646 -- -- --
Loss on divestiture of foreign operations -- -- -- 8,557 --
---------- ---------- ---------- ---------- ----------
Total costs and expenses 579,594 565,344 479,615 398,435 270,084
---------- ---------- ---------- ---------- ----------
Income from operations 6,161 51,348 105,742 93,319 70,773
Other income, net 2,190 2,906 4,109 3,682 2,910
---------- ---------- ---------- ---------- ----------
Income before provision for income
taxes and minority interest 8,351 54,254 109,851 97,001 73,683
Provision for income taxes (2,950) (21,843) (40,075) (37,518) (26,820)
Minority interest -- -- (968) 584 705
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
change in accounting principle 5,401 32,411 68,808 60,067 47,568
Cumulative effect of change in accounting
principle (net of income tax of $2,921) -- (6,904) -- -- --
---------- ---------- ---------- ---------- ----------
Net income $ 5,401 $ 25,507 $ 68,808 $ 60,067 $ 47,568
========== ========== ========== ========== ==========
Basic earnings per share:
Income before cumulative effect of
change in accounting principle $ .15 $ .81 $ 1.68 $ 1.53 $ 1.31
Cumulative effect of change
in accounting principle -- $ (.17) -- -- --
---------- ---------- ---------- ---------- ----------
Basic earnings per share $ .15 $ .64 $ 1.68 $ 1.53 $ 1.31
========== ========== ========== ========== ==========
Weighted average shares
outstanding 35,089,084 39,989,091 41,013,749 39,383,891 36,432,464
========== ========== ========== ========== ==========
Pro forma net income (2) $ 66,815 $ 62,498 $ 44, 315
========== ========== ==========
Pro forma basic earnings per share $ 1.63 $ 1.59 $ 1.22
========== ========== ==========
-17-
At fiscal year end in December, (1)
-------------------------------------
(Dollars in thousands)
1999 1998 1997 1996 1995
------ --------- --------- ------------- ---------
Balance Sheet Data:
Working capital $ 20,215 $ 67,593 $ 117,127 $126,244 $ 59,880
Total assets 533,533 608,583 620,812 542,152 358,218
Long-term debt,
including current
portion - - - 387 4,318
Stockholders' equity 484,379 553,441 566,148 495,239 322,811
(1) The Company operates on a 52 or 53 week fiscal year ending the last
Tuesday in December. The fiscal quarters for the Company consist of
accounting periods of 12, 12, 12, and 16 or 17 weeks, respectively. The
Company's 1995 fiscal year ended on December 26 and its 1996, 1997, 1998,
and 1999 fiscal years ended on December 31, 30, 29, and 28, respectively.
1996 included 53 weeks of operations, and all other fiscal years were 52
week fiscal years.
(2) Pro forma net income amounts reflect (1) the adjustments for fiscal years
1995 through 1997 to give retroactive effect to the change in accounting
for pre-opening costs adopted in fiscal 1998 (see Note 4 to the Company's
consolidated financial statements) and (2) the adjustments for fiscal year
1995 for the income tax provisions applicable to the operations of a group
of affiliated companies acquired in 1995 in a transaction accounted for as
a pooling of interests which were taxed as S-Corporations for income tax
purposes prior to their acquisition.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the information set forth under "Selected Financial Data" and the consolidated
financial statements including the notes thereto included elsewhere in this Form
10-K.
In May 1998, the Company temporarily suspended development of new Lone
Star restaurants other than properties which had been committed for or were
under construction. During 1998, the Company substantially completed the
remodel/construction of twelve of these restaurants (including one that was
damaged by fire and rebuilt). One of the restaurants was opened in 1999. The
Company has no immediate plans to open the remaining restaurants until such
time, as the restaurants can be adequately staffed and in the opinion of
management are capable of operating effectively and efficiently. The Company
opened 60 domestic Lone Star restaurants in 1997 and 2 in 1998. In addition, the
Company has eight sites available for future development, six of which are owned
and two which are under lease. During 1999, the Company closed two domestic Lone
Star restaurants and in December 1999, decided to close an additional 24
restaurants all of which were closed in early January 2000. After giving effect
to the January 2000 store closings, there were 241 operating domestic Lone Star
restaurants as of December 28, 1999.
Although, the Company believes considerable opportunities exist in the
upscale steakhouse market, the Company has temporarily curtailed the development
of its upscale concepts. Future development will be evaluated on a site-by-site
basis. There are no current commitments to open additional upscale units beyond
the two Del Frisco's restaurants and one Sullivan's restaurant scheduled to open
in 2000.
The Company is currently operating four Del Frisco's restaurants,
including the New York restaurant with approximately 16,000 square feet of space
in Rockefeller Plaza in New York City which opened on March 7, 2000. There is
one Del Frisco's restaurant under construction in Las Vegas, Nevada which the
Company expects to open in 2000.
-18-
As of December 28, 1999, the Company was operating fourteen Sullivan's
steakhouse restaurants. During 1999, Sullivan's steakhouse restaurants were
opened in Denver, Colorado; Palm Desert, California and Raleigh, North Carolina.
The Company expects to open a Sullivan's restaurant in 2000 in Tucson, Arizona.
Internationally, there are 41 Lone Star Steakhouse & Saloon restaurants,
40 in Australia, operated through a joint venture, and one in Guam operated by a
licensee. Although there are currently no plans for further international
development, the Company believes that all of its concepts have international
development potential.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated (i) the
percentages which certain items included in the Consolidated Statements of
Income bear to net sales, and (ii) other selected operating data.
Years Ended
- --------------------------------------------------------------------------------
December 28, December 29, December 30,
1999 1998 1997
------------ ------------ ------------
(Dollars in thousands)
Income Statement Data:
Net sales 100% 100% 100%
Costs and expenses:
Costs of sales 35.5 37.6 36.1
Restaurant operating expenses 45.1 43.9 36.9
Provision for impaired assets
and restaurant closings 6.6 .7 -
Depreciation and amortization 5.3 4.3 5.2
-- ------- ------- --------
Restaurant costs and expenses 92.5 86.5 78.2
-- ------- ------- --------
Restaurant operating income 7.5 13.5 21.8
General and administrative expenses 6.5 5.2 3.7
-- ------- ------- --------
Income from operations 1.0 8.3 18.1
Other income and minority interest .4 .5 .5
-- ------- ------- --------
Income before provision for income
taxes and cumulative effect of change 1.4 8.8 18.6
in accounting principle
Provision for income
taxes .5 3.5 6.8
-- ------- ------- --------
Income before cumulative effect of change
in accounting principle .9 5.3 11.8
Cumulative effect of change in
accounting principle - (1.2) -
-- ------- ------- --------
Net income .9% 4.1% 11.8%
======= ======= ========
Restaurant Operating Data:
Average sales per restaurant on an
annualized basis (1) $ 1,810 $ 1,957 $ 2,255
------- ------- --------
Number of restaurants at end of period 298 322 308
Number of full restaurant periods open
during the period (2) 4,204 4,178 3,335
- --------------------------------------
(1) Average sales per restaurant on an annualized basis are computed by
dividing a restaurant's total sales for full accounting periods by the
number of full accounting periods open in the reporting period, and
annualizing the result.
-19-
(2) Full restaurant periods are four-week accounting periods within the
fiscal year (excluding the first partial accounting period of operations)
that a restaurant is open.
LONE STAR STEAKHOUSE & SALOON, INC.
Year ended December 28, 1999 compared to Year ended December 29, 1998
(Dollar amounts in thousands)
Net sales decreased $30,937 to $585,755 for the fiscal year ended December
28, 1999 compared to $616,692 in 1998. The decrease is principally attributable
to a decline in average sales per restaurant resulting from lower customer
counts during the year. The decrease was partially offset by additional sales of
$8,038 from one new domestic Lone Star and four Sullivan's restaurants opened in
fiscal 1999. Same store sales decreased by 7.6% from fiscal 1998.
Costs of sales, primarily food and beverages, decreased as a percentage of
net sales to 35.5% from 37.6% due primarily to improved margins as the result of
lower promotional discounting of menu prices and lower beef prices. During most
of 1999, the Company purchased beef under contracted prices that provided the
Company a favorable pricing advantage as compared with cash market pricing.
Restaurant operating expenses for fiscal 1999 decreased $6,555 from
$270,495 in 1998 to $263,940, and increased as a percentage of net sales from
43.9% to 45.1%. The absolute dollar amounts reflect the impact of increased
operating costs for the new restaurants opened during 1998, and increased costs
related to manager training expenses and certain insurance costs. The increases
were partially offset by decreases in hourly labor costs related to cost control
measures taken to improve operating efficiencies at the restaurants and by
decreases in costs for operating supplies and building equipment maintenance
expenses. In addition, the fiscal 1998 year includes the costs incurred in
connection with a national advertising campaign, which was not renewed during
fiscal 1999. The increase as a percentage of sales primarily reflects the fixed
cost components of restaurant operating expenses on lower average restaurant
sales experienced in fiscal 1999.
Depreciation and amortization increased $4,624 (17.6%) in fiscal 1999 as
compared to 1998. The increase is attributable to restaurants opened less than a
full year in 1998 and to restaurants opened in fiscal 1999. In addition, fiscal
1999 reflects, depreciation related to the installations of new point of sale
systems during, the year.
Provisions for impaired assets and restaurant closings in fiscal 1999 were
$38,931 as compared to $4,646 in 1998. The decision was made in the fourth
quarter of 1999 to close 24 domestic Lone Star restaurants and one of the
domestic Mexican restaurants. The pretax charge includes $35,797 for the write
down of both domestic and Australian impaired assets and $3,134 related to costs
of closing the 25 domestic restaurants. The Company periodically reviews its
long-lived assets for indications of impairment. (See Note 11 of Notes to
Consolidated Financial Statements).
General and administrative expenses increased $5,987 (18.7%) in fiscal 1999
as compared to 1998. The increase in general and administrative expenses was
attributable primarily to increased (i) travel costs incurred in connection with
restaurant operation review programs (ii) recruiting costs related to the
recruitment of new managers and (iii) costs related to expenses incurred in
connection with the installation of the point-of-sale systems as well as the new
database information systems.
Other income, principally interest, for fiscal 1999 was $2,190 as compared
to $2,906 in 1998. The decrease is attributable to reduced funds available for
short-term investment purposes.
-20-
The effective income tax rate for fiscal 1999 was 35.3% as compared 42.6%
in 1998. The decrease in 1999 is due in part to a lower valuation allowance
attributable to Australian operating losses in 1999, as well as the impact of
FICA tip credits on lower pre-tax earnings. The decrease in the rate was
partially offset by the impact of Australian losses resulting in higher
effective state income taxes on domestic earnings.
YEAR ENDED DECEMBER 29, 1998 COMPARED TO YEAR ENDED DECEMBER 30, 1997
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales increased $31,335 (5.4%) for the year ended December 29, 1998
compared to the year ended December 30, 1997. Consolidated sales for the
international joint venture restaurants (Australian) increased $3,700. Same
store sales decreased by 9.3% from fiscal 1997.
Costs of sales, primarily food and beverages increased as a percentage of
net sales to 37.6% for the year from 36.1% due to slightly higher beef prices as
well as some discounted menu items and free appetizers offered in a national
marketing campaign. During most of 1997, the Company purchased beef under
contracted prices which allowed the Company to maintain more stable beef costs.
Such contracts expired in September 1997 and during 1998 most purchases were at
the cash market prices.
Restaurant operating expenses increased $54,690 (25.3%) from $215,805 in
1997. Most of the increase is attributable to the 22.5% increase in restaurant
operating weeks due primarily to a full year's operation in the 76 restaurants
opened in 1997. Advertising expense increased 47% due to the expenditure of
$3,200 for the eight week television and radio campaign in July and August 1998.
Training expenses increased $2,100 due to the recertification training in the
first half of the year, and the eight week training for new managers in the
second half of the year. Pre-opening costs of $3,437 are included in 1998 while
such costs had been capitalized and amortized in 1997. In addition, the increase
as a percentage of sales is affected by the fixed cost components on lower
average restaurant sales.
Provisions for impairment losses reflect the charge made in the fourth
quarter of 1998 for the write down of certain under-performing restaurant
assets. The Company periodically reviews its long lived assets which are held
and used in its restaurant operations for indications of impairment (see Note 11
of Notes to Consolidated Financial Statements).
Depreciation and amortization decreased $4,244 (13.9%) for 1998 compared to
1997. The decrease was attributed to the fact that 1998 does not include
amortization of pre-opening costs as compared to amortization in 1997 of
approximately $9,673. The decrease for pre-opening costs was offset by 1998
depreciation and amortization reflecting depreciation relating to the new
restaurants opened in late fiscal 1997 and during fiscal 1998.
General and administrative expenses increased $10,421 (48.1%) from 1997.
Advertising consultant and commercial production costs for the eight week media
campaign were approximately $1,100. Increased multi-unit supervisor costs were
$1,805 and the travel, lodging, and out-of-pocket costs for the recertification
training were up $581. Recruiting costs for new managers increased $309
primarily in the last half of 1998. Variable home office support costs increased
proportionately with the 22.5% increase in restaurant operating weeks in 1998.
Prior to October 1998, certain accounting and administrative services were
contracted from Coulter Enterprises, Inc. (C.E.I). The service agreement
provided for specified accounting and administrative services to be provided on
a cost pass-through basis. The Company paid a fixed annualized charge of $3,737
plus an additional fee of $.466 per restaurant per 28-day accounting period,
plus reimbursement of out-of-pocket costs and expenses. On October 19, 1998, the
-21-
Company acquired the operations of C.E.I. for a purchase price of $11,432. As a
result of the acquisition the Company will internally provide the accounting and
administrative services which were previously provided by C.E.I. (see Note 2 of
Notes to Consolidated Financial Statements).
Other income, primarily interest, for the year was $2,906 a $1,203 decrease
from 1997. This decrease is attributable to reduced funds available for short
term investment purposes.
The effective income tax rate for the year was 42.6% compared to 36.8% for
1997. The increase in the effective tax rate was primarily attributable to the
valuation allowance reflected in 1998 related to certain Australian net
operating loss carry forwards. The impact of the valuation allowance was
slightly offset by a decrease in the effective state income tax rates and the
increased impact of the earned FICA tip credit as a result of lower pretax
earnings.
The cumulative effect of change in accounting principle represents the
effect of adoption of Statement of Position 98-5, "Reporting on Costs of Start
Up Activities". This statement impacted the Company's accounting for pre-opening
costs (see Note 4 of Notes to Consolidated Financial Statements).
IMPACT OF INFLATION
The primary inflationary factors affecting the Company's operations include
food and labor costs. A large number of the Company's restaurant personnel are
paid at Federal and state established minimum wage levels and, accordingly,
changes in such wage levels affect the Company's labor costs. As costs of food
and labor have increased, the Company has historically been able to offset these
increases through economies of scale and improved operating procedures, although
there is no assurance that such offsets will continue. To date, inflation has
not had a material impact on operating margins.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents a summary of the Company's cash flows for the years
ended:
December 28, December 29, December 30,
1999 1998 1997
-------------- ------------- ------------
Net cash provided by operating activities $ 70,886 $ 62,598 $ 87,549
Net cash used in investment activities (33,637) (73,251) (108,356)
Net cash provided (used) by financing activities (76,453) (35,378) 7,328
Net effect of exchange rate changes on cash 30 (119) (1,245)
Net decrease in cash and cash equivalents (39,174) (46,150) (14,724)
During the fiscal years ended 1999, 1998 and 1997, the Company's purchases
of property and equipment were $34,085, $63,122 and $103,827, respectively.
The Company has opened 83 restaurants in the past three fiscal years of
which 76 opened during 1997, 2 in 1998 and 5 in 1999. The Company does not have
significant accounts receivable or inventory and receives trade credit based
upon negotiated terms in purchasing food and supplies. Because funds available
from cash sales are not needed immediately to pay for food and supplies, or to
finance inventory, they may be considered as a source of financing for capital
expenditures.
At December 28, 1999, the Company had $50,673 in cash and cash equivalents.
While the Company plans to finance its future expansion from operating cash
flows, it believes it could establish a credit facility on suitable terms, if
the need were to arise.
The Company is not actively negotiating purchase or lease of additional
sites.
-22-
During 1999 and 1998, the Board of Directors has authorized the Company to
purchase shares of the Company's common stock in open market or privately
negotiated transactions. The authorization in 1998 was for 5,900,000 shares of
common stock and in 1999 for 6,685,604 shares of common stock. Pursuant, to the
authorizations, the Company purchased 8,758,005 shares of common stock during
fiscal 1999 and 2,610,000 shares of common stock in fiscal 1998. On January 19,
2000, the Board of Directors approved an authorization to purchase up to an
additional 2,850,000 shares subject to certain conditions.
Beginning in the fourth quarter of 1998 the Company began utilizing
derivative financial instruments in the form of commodity futures contracts to
manage market risks and reduce its exposure resulting from fluctuations in the
prices of meat. The Company uses live beef cattle futures contracts to
accomplish its objective. Realized and unrealized changes in the fair values of
the derivative instrument are recognized in income in the period in which the
change occurs. Realized and unrealized gains and losses for the period have not
been significant. At December 28, 1999 the Company's exposure for open positions
in futures contracts were not significant.
In March 1999, the FASB issued an exposure draft as a proposed
interpretation "Accounting for Certain Transactions Involving Stock
Compensation: an interpretation of APB opinion No. 25". The proposal, among
other things, would require that certain modifications as to outstanding stock
options to a direct change to the exercise price (repricings) or the number of
shares or an indirect change to the exercise price or number of shares
(sometimes referred to as "synthetic pricings") must be accounted for using
variable-award accounting. The FASB Interpretation, when adopted, will require
compensation accounting for all awards for which share repricings or synthetic
pricings occurred after December 15, 1998. Compensation expense is to be
recognized only to the extent that the market price of the stock exceeds the
stock price on the date of the issuance of the FASB Interpretation and increases
thereafter; consequently, the last measurement of compensation expense would
occur at the date the options are exercised. The Company has repriced
approximately 4,740,000 option shares during fiscal 1999 and in January 2000,
which will be subject to the proposed interpretation when it becomes effective.
Currently, the proposed effective date is July 1, 2000. The Company may incur
significant volatility in reporting of earnings in future periods as
fluctuations in market prices of its common stock may greatly impact reported
compensation expense on periodic basis.
RISK FACTORS
If we are unable to compete effectively with our competitors we will not be able
to increase revenues or generate profits.
Our inability to increase revenues is directly related to our ability to
compete effectively with our competitors. Key competitive factors include:
/ / the quality and numbers of high quality employees needed to adequately
staff our restaurants;
/ / the quality and value of the food products offered;
/ / the quality of service;
/ / the price of the food products offered;
/ / the restaurant locations; and
/ / the ambiance of facilities
We compete with other steakhouse restaurants specifically and with all
other restaurants generally. We compete with national and regional chains, as
well as individually owned restaurants. The restaurant industry has few
non-economic barriers to entry, and as our
-23-
competitors expand operations, competition from steakhouse restaurants with
concepts similar to ours can be expected to intensify. Many of our competitors
are well established in the upscale and mid-scale steak segments and certain
competitors have substantially greater financial, marketing and other resources
than us. Such increased competition could adversely affect our revenues.
UNFORESEEN COST INCREASES COULD ADVERSELY AFFECT OUR PROFITABILITY.
Our profitability is highly sensitive to increases in food, labor and other
operating costs. Our dependence on frequent deliveries of fresh food supplies
means that shortages or interruptions in supply could materially and adversely
affect our operations. In addition, unfavorable trends or developments
concerning the following factors could adversely affect our results:
/ / inflation, food, labor and employee benefit costs; and
/ / rent increases resulting from rent escalation provisions in our leases.
We may be unable to anticipate or react to changing prices. If we are
unable to modify our purchases practices or quickly or readily pass on increased
costs to customers, our business could be materially affected.
FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD ADVERSELY AFFECT OUR
OPERATING PERFORMANCE.
Our restaurant operations are subject to certain federal, state and local
laws and government regulations, such as:
/ / the obtaining of licenses for the sale of food and alcohol beverages;
/ / national and local health sanitation laws and regulations;
/ / national and local employment and safety laws and regulations; and
/ / local zoning, builing code and land-use regulations.
While we have never experienced any significant difficulties in obtaining
necessary governmental approvals, the failure to obtain or retain food and
liquor licenses or any other governmental approvals could have a material
adverse effect on our operating results.
We may be subjected to "dram-shop" liability, which generally provides a
person injured by an intoxicated person with the right to recover damages from
an establishment that wrongfully served alcoholic beverages to the intoxicated
person. Although we carry liquor liability coverage as part of our comprehensive
general liability insurance [and have never been named as a defendant in a
lawsuit involving "dram-shop" statues], if we lost a lawsuit related to this
liability, our business could be materially harmed.
THE RESTAURANT INDUSTRY IS AFFECTED BY A NUMBER OF TRENDS, AS WELL AS BY
COMPETITION.
The restaurant industry is affected by changes in consumer tastes and by
national, regional, and local economic conditions and demographic trends. The
performance of individual restaurants may be affected by factors such as traffic
patterns, demographic considerations and the type, number and location of
competing restaurants. In addition, factors such as inflation, increased food,
labor and employee benefit costs and the availability of experienced management
-24-
and hourly employees may also adversely affect the restaurant industry in
general and our restaurants in particular.
OUR BUSINESS DEPENDS ON A LIMITED NUMBER OF KEY PERSONNEL, THE LOSS OF WHOM
COULD ADVERSELY AFFECT US.
Some of our senior executives are important to our success because they
have been instrumental in setting the strategical direction of our Company,
operating our business, identifying areas for expansion and arranging necessary
financing. These key personnel include Jamie B. Coulter, our Chairman and Chief
Executive Officer, and certain of our other executive officers. Although we feel
that there is a significant pool of talented personnel in the restaurant
industry, if these members of our senior management team become unable or
unwilling to continue in their present positions, it could adversely affect our
business and development.
SHAREHOLDERS MAY NOT BE ABLE TO RESELL THEIR STOCK OR MAY HAVE TO SELL AT A
PRICE SUBSTANTIALLY LOWER THAN THE PRICE THEY PAID FOR IT.
The trading price for our common stock has been highly volatile and could
continue to be subject to significant fluctuations in response to variations in
our quarterly operating results, general conditions in the restaurant industry
or the general economy, and other factors. In addition, the stock market is
subject to price and volume fluctuations affecting the market price for public
companies generally, or within broad industry groups, which fluctuations may be
unrelated to the operating results or other circumstances of a particular
company. Such fluctuations may adversely affect the liquidity of our common
stock, as well as price that holders may achieve for their shares upon any
future sale.
STAGGERED BOARD; BLANK-CHECK PREFERRED STOCK.
Our certificate of incorporation and bylaws provide for three classes of
directors, to be elected on a staggered basis. This enables existing management
to exercise significant control over the our affairs, and may act as an
impediment to any future attempts to by third parties to take control of our
board of directors. In addition, our board of directors has the authority
without further action by the stockholders to issue shares of preferred stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof. The exercise of this authority may act as a further
impediment to any future attempts to by third parties to take control of our
board of directors.
Item 7. A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements listed in the accompanying Index
to Financial Statements on Page F-1 herein. Information required for financial
schedules under Regulation S-X have been omitted since the required information
is not present.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-25-
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report: (1)
Financial Statements.
See Index to Financial Statements which appears on page F-1
herein.
All financial statement schedules have been omitted since the
required information is not present.
Exhibits
INDEX TO EXHIBITS
Exhibit Exhibit
Number
***3.1 Company's Certificate of Incorporation as amended
***3.2 Company's By-Laws
******10.1 Agreement, date October 19, 1998, between LS
Management, Inc., a wholly-owned subsidiary of
Lone Star Steakhouse & Saloon, Inc., and Coulter
Enterprises, Inc., date October 19, 1998
****10.3 1992 Lone Star Steakhouse & Saloon, Inc. Incentive
and Non-qualified Stock Option Plan (the "Plan")
as amended
***10.4 Form of Indemnification Agreement for officers and
directors of the Company
***10.5 Non-Competition, Confidentiality and
Non-Solicitation Agreement between the Company and
Jamie B. Coulter, dated March 12, 1992
*10.6 Employment Agreement between the Company and
Gerald T. Aaron, dated March 22, 2000
*10.7 Employment Agreement between the Company and
Randall H. Pierce, dated March 22, 2000
*10.8 Employment Agreement between the Company
and T.D. O'Connell, dated March 22, 2000
*10.9 Employment Agreement between the Company
and Jeffrey Bracken, dated March 22, 2000
*10.10 Employment Agreement between the Company and
Robert A. Martin, dated March 22, 2000
*10.11 Employment Agreement between the Company and
John D. White, dated March 22, 2000
*******11.1 Subsidiaries of the Company
*23.1 Independent Auditors' consent to the incorporation
by reference in the Company's Registration
Statements on Form S-8 of the independent
auditors' refffffport included herein
*27.0 Financial data schedule
-----------------------------
(b) Reports on Form 8-K filed in the fourth quarter of 1999: none
* Filed herewith.
** Incorporated by reference to the Company's Registration
Statement on Form S-1, filed with the Commission on October 1,
1992 (Commission File No. 33-52678) as amended.
*** Incorporated by reference to the Company's Registration
Statement on Form S-1, filed with the Commission on January
31, 1992 (Commission File No. 33-45399), as amended.
**** Incorporated by reference to the Company's Registration
Statement on Form S-8, filed with the Commission on January
12, 1996 (Commission File No. 33-00280), as amended.
***** Incorporated by reference to the Company's Form 10-Q for the
quarter ended March 24, 1998.
****** Incorporated by reference to the Company's Form 10-Q for the
quarter ended September 8, 1998.
******* Incorporated by reference to the Company's Form 10-K for the
year ended December 30, 1997.
-26-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Wichita, State of Kansas, on this 27th day of March 2000.
LONE STAR STEAKHOUSE & SALOON, INC.
(Registrant)
/s/ Randall H. Pierce
------------------------------------------
Randall H. Pierce
Chief Financial Officer and
Principal Accounting Officer,
-27-
SIGNATORIES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons in the capacities and on
the date indicated.
SIGNATURE TITLE DATE
-------- ----- ----
/s/ Jamie B. Coulter
- ------------------------- Chairman of the Board March 27, 2000
Jamie B. Coulter and Chief Executive
Officer
/s/ John D. White
- ------------------------- Executive Vice March 27, 2000
John D. White President
Treasurer and Director
/s/ Randall H. Pierce
- ------------------------- Chief Financial Officer March 27, 2000
Randall H. Pierce and Principal
Accounting Officer
/s/ Fred B. Chaney
- ------------------------- Director March 27, 2000
Fred B. Chaney
/s/ William B. Greene
- ------------------------- Director March 27, 2000
William B. Greene
/s/ Clark R. Mandigo
- ------------------------- Director March 27, 2000
Clark R. Mandigo
-28-
Lone Star Steakhouse & Saloon, Inc.
Index to Financial Statements
Pages
Report of Independent Auditors..............................................F-1
Consolidated Balance Sheets as of December 28, 1999 and December 29, 1998...F-2
Consolidated Statements of Income for the years ended December 28, 1999,
December 29, 1998 and December 30, 1997..................................F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 28, 1999, December 29, 1998 and December 30, 1997...............F-5
Consolidated Statements of Cash Flows for the years ended
December 28, 1999, December 29, 1998 and December 30, 1997...............F-6
Notes to Consolidated Financial Statements..................................F-7
Report of Independent Auditors
The Board of Directors and Stockholders
Lone Star Steakhouse & Saloon, Inc.
We have audited the accompanying consolidated balance sheets of Lone Star
Steakhouse & Saloon, Inc. and subsidiaries as of December 28, 1999 and December
29, 1998, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
28, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lone Star
Steakhouse & Saloon, Inc. and subsidiaries at December 28, 1999 and December 29,
1998, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 28, 1999, in conformity
with accounting principles generally accepted in the United States.
Ernst & Young LLP
Kansas City, Missouri
February 3, 2000
F-1
Lone Star Steakhouse & Saloon, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
December 28, December 29,
1999 1998
-------------------------
Assets
Current assets:
Cash and cash equivalents $ 50,673 89,847
Accounts receivable 836 1,490
Inventories 11,440 15,894
Deferred income taxes 2,430 1,504
Other 3,990 3,571
--------------------------
Total current assets 69,369 112,306
Property and equipment:
Land 128,457 139,514
Buildings 181,262 182,618
Leasehold improvements 116,378 112,904
Equipment 90,342 82,791
Furniture and fixtures 21,693 23,058
--------------------------
538,132 540,885
Less accumulated depreciation and amortization 107,650 79,820
--------------------------
430,482 461,065
Other assets:
Intangible assets, net 30,757 33,863
Deferred income taxes 1,713 -
Other assets 1,212 1,349
--------------------------
33,682 35,212
--------------------------
Total assets $533,533 $608,583
==========================
F-2
December 28, December 29,
1999 1998
-------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 9,155 $ 9,577
Sales tax payable 2,571 968
Accrued payroll 8,473 12,976
Real estate taxes 2,875 2,738
Gift certificates 7,478 7,503
Income taxes payable 4,520 2,442
Closed restaurants 3,134 -
Other 10,948 8,509
-------------------------
Total current liabilities 49,154 44,713
Deferred income taxes - 10,429
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares
authorized; none issued - -
Common stock, $.01 par value, 98,000,000
shares authorized; 29,858,553 shares issued
and outstanding (38,607,968 in 1998) 299 386
Additional paid-in capital 238,000 314,366
Retained earnings 253,923 248,522
Accumulated other comprehensive income (7,843) (9,833)
-------------------------
Total stockholders' equity 484,379 553,441
-------------------------
Total liabilities and stockholders' equity $533,533 $608,583
=========================
F-3
See notes to consolidated financial statements.
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Income
(In Thousands, Except for Per Share Amounts)
For the year ended
---------------------------------------------------
December 28, December 29, December 30,
1999 1998 1997
---------------------------------------------------
Net sales $585,755 $616,692 $585,357
Costs and expenses:
Costs of sales 207,696 231,787 211,571
Restaurant operating expenses 263,940 270,495 215,805
Depreciation and amortization 30,970 26,346 30,590
Provision for impaired assets and restaurant closings 38,931 4,646 -
---------------------------------------------------
Restaurant costs and expenses 541,537 533,274 457,966
---------------------------------------------------
Restaurant operating income 44,218 83,418 127,391
General and administrative expenses:
Related parties - 4,367 3,366
Other 38,057 27,703 18,283
---------------------------------------------------
Income from operations 6,161 51,348 105,742
Other income, net (principally interest) 2,190 2,906 4,109
---------------------------------------------------
Income before income taxes and minority interest and cumulative
effect of a change in accounting principle
8,351 54,254 109,851
Provision for income taxes (2,950) (21,843) (40,075)
Minority interest - - (968)
---------------------------------------------------
Income before cumulative effect of a change in accounting
principle 5,401 32,411 68,808
Cumulative effect of change in accounting principle - (6,904) -
---------------------------------------------------
Net income $ 5,401 $ 25,507 $ 68,808
===================================================
Basic earnings per share:
Income before cumulative effect of a change
in accounting principle $ .15 $ .81 $ 1.68
Cumulative effect of change in accounting principle - (.17) -
===================================================
Basic earnings per share $ .15 $ .64 $ 1.68
===================================================
Diluted earnings per share:
Income before cumulative effect of a change in accounting principle
$ .15 $ .81 $ 1.65
Cumulative effect of change in accounting principle - (.17) -
===================================================
Diluted earnings per share $ .15 $ .64 $ 1.65
===================================================
Pro forma net income assuming retroactive application of accounting
change $ 66,815
================
Pro forma basic earnings per share $ 1.63
================
Pro forma diluted earnings per share $ 1.60
=================
See notes to consolidated financial statements.
F-4
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Amounts)
Accumulated
Common Stock Additional Other
Preferred ----------------- Paid-in Retained Comprehensive
Stock Number Amount Capital Earnings Income Total
----------------------------------------------------------------------------------
Balance, December 31, 1996 - 40,702,725 $407 $341,159 $154,207 $ (534) $495,239
Stock options exercised - 453,426 4 7,399 - - 7,403
Tax benefit related to options exercised - - - 1,050 - - 1,050
Comprehensive income:
Net income - - - - 68,808 - 68,808
Foreign currency translation adjustments - - - - - (6,352) (6,352)
-------------
Comprehensive income 62,456
----------------------------------------------------------------------------------
Balance, December 30, 1997 - 41,156,151 411 349,608 223,015 (6,886) 566,148
Stock options exercised - 61,817 1 996 - - 997
Tax benefit related to options exercised - - - 111 - - 111
Common stock repurchased and retired - (2,610,000) (26) (36,349) - - (36,375)
Comprehensive income:
Net income - - - - 25,507 - 25,507
Foreign currency translation adjustments - - - - - (2,947) (2,947)
-------------
Comprehensive income 22,560
----------------------------------------------------------------------------------
Balance, December 29, 1998 - 38,607,968 386 314,366 248,522 (9,833) 553,441
Stock options exercised - 8,590 1 34 - - 35
Common stock purchased and retired - (8,758,005) (88) (76,400) - - (76,488)
Comprehensive income:
Net income - - - - 5,401 - 5,401
Foreign currency translation adjustments - - - - - 1,990 1,990
-------------
Comprehensive income 7,391
----------------------------------------------------------------------------------
Balance, December 28, 1999 - 29,858,553 $299 $238,000 $253,923 $(7,843) $484,379
==================================================================================
See notes to consolidated financial statements.
F-5
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
For the year ended
-------------------------------------------------------------
December 28, December 29, December 30,
1999 1998 1997
-------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 5,401 $ 25,507 $ 68,808
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 2,800 1,609 10,775
Depreciation 30,732 26,643 20,169
Provision for impaired assets and restaurant
closings 38,931 4,646 -
Cumulative effect of accounting change - 9,825 -
Deferred income taxes (13,067) 1,588 614
Minority interest - - 968
Net change in operating assets and liabilities:
Accounts receivable 663 131 618
Inventories 4,485 (4,997) (6,301)
Preopening costs - - (12,586)
Other current assets (366) (91) (2,993)
Accounts payable 1,181 (6,514) 5,856
Income taxes payable 2,078 1,122 (2,616)
Other current liabilities (1,952) 3,129 4,237
-------------------------------------------------------------
Net cash provided by operating activities 70,886 62,598 87,549
INVESTING ACTIVITIES
Purchases of property and equipment (34,085) (63,122) (103,827)
Payment for acquisition of business from related party - (10,500) -
Other 448 371 (4,529)
-------------------------------------------------------------
Net cash used in investing activities (33,637) (73,251) (108,356)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 35 997 7,403
Payment of notes payable and capital lease obligations - - (75)
Common stock repurchased and retired (76,488) (36,375) -
-------------------------------------------------------------
Net cash provided by (used in) financing activities (76,453) (35,378) 7,328
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Effect of exchange rate changes on cash 30 (119) (1,245)
-------------------------------------------------------------
Net decrease in cash and cash equivalents (39,174) (46,150) (14,724)
Cash and cash equivalents at beginning of year 89,847 135,997 150,721
-------------------------------------------------------------
Cash and cash equivalents at end of year $ 50,673 $ 89,847 $ 135,997
=============================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes $ 14,908 $ 16,416 $ 40,829
=============================================================
See notes to consolidated financial statements.
F-6
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
December 28, 1999
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
Lone Star Steakhouse & Saloon, Inc. (the Company) owns and operates a chain of
mid-priced full service, casual dining restaurants in the United States, as well
as in Australia, through participation in an international joint venture. The
restaurants serve mesquite-grilled steaks, ribs, chicken and fish in a "Texas
Roadhouse" atmosphere that is positioned to attract local clientele. In
addition, the Company operates restaurants in the upscale steakhouse market
through Del Frisco's Double Eagle Steak House and Sullivan's Steakhouse. As of
December 28, 1999, the Company owns and operates 241 Lone Star Steakhouse &
Saloons in the United States as well as 40 in connection with the joint venture
in Australia. In addition, the Company owns and operates three Del Frisco's
Double Eagle Steak Houses and 14 Sullivan's Steakhouses.
SIGNIFICANT ACCOUNTING POLICIES
/ / Principles of Consolidation
The consolidated financial statements include the accounts of Lone Star
Steakhouse & Saloon, Inc., its wholly-owned subsidiaries and its
majority-owned foreign joint venture. All significant intercompany
accounts and transactions have been eliminated.
/ / Foreign Currency Translation
Assets and liabilities of the Company's foreign joint venture are
translated at current exchange rates, while revenue and expenses are
translated at average exchange rates prevailing during the year.
Translation adjustments are reported as a component of comprehensive
income in stockholders' equity.
/ / Concentration of Credit Risk
The Company's financial instruments exposed to concentration of credit
risk consist primarily of cash and short-term investments (cash
equivalents). The Company places its cash with high credit quality
financial institutions and, at times, such cash may be in excess of the
federal depository insurance limit. The Company has cash equivalents
F-7
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
in investment grade securities with municipal, state and U.S. government
agencies of approximately $37,751 and $58,280 at December 28, 1999 and
December 29, 1998, respectively.
/ / Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
/ / Cash and Cash Equivalents
The Company considers cash and cash equivalents to include currency on
hand, demand deposits with banks or other financial institutions, and
short-term investments with maturities of three months or less when
purchased. Cash and cash equivalents are carried at cost which
approximates fair value.
/ / Financial Instruments
Beginning in the fourth quarter of 1998, the Company began utilizing
derivative financial instruments in the form of commodity futures
contracts to manage market risks and reduce its exposure resulting from
fluctuations in the prices of meat. The Company uses live beef cattle
futures contracts to accomplish its objective. Realized and unrealized
changes in the fair values of the derivative instruments are recognized in
income in the period in which the change occurs. Realized and unrealized
gains and losses related to these derivative instruments for the period
have not been significant. At December 28, 1999 and December 29, 1998, the
Company had futures contracts to purchase live beef cattle in the amount
of $8,900 and $15,200, respectively. All of the contracts are scheduled to
settle in less than one year. The estimated fair value and carrying value
of these contracts were $300 and $250 at December 28, 1999 and December
29, 1998, respectively. These instruments are with counterparties of high
credit quality; therefore, the risk of nonperformance by the
counterparties is considered to be negligible.
F-8
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thusands, Except Share and Per Share Amounts)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
/ / Inventories
Inventories consist of food and beverages and are stated at the lower of
cost (first-in, first-out) or market.
/ / Property and Equipment
Property and equipment are stated at cost. Maintenance, repairs and
renewals which do not enhance the value of or increase the life of the
assets are expensed as incurred.
Buildings are depreciated using the straight-line method over 20 years,
which is the estimated useful life of the assets. Leasehold improvements
are amortized on the straight-line method over the lesser of the maximum
life of the lease or 20 years or the estimated useful lives of the assets.
Equipment and furniture and fixtures are depreciated using the
straight-line method over seven years, which is the estimated useful life
of the assets.
/ / Preopening Costs
Prior to 1998, labor costs and costs of hiring and training personnel and
certain other costs relating to opening new restaurants were capitalized
until the restaurant opened and then were amortized over the subsequent 12
months. During 1998, the Company changed its method of accounting for
preopening costs (see Note 4) and now expenses preopening costs when the
costs are incurred.
/ / Intangible Assets
Intangible assets include goodwill, intellectual properties and licensing
permits which are amortized on a straight-line basis over the estimated
periods of benefit, generally 10 to 20 years. Accumulated amortization for
intangible assets as of December 28, 1999 and December 29, 1998 is $6,867
and $4,058, respectively.
F-9
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
/ / Impairment of Long-Lived Assets
Long-lived assets and certain intangibles, including goodwill, are reviewed
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The Company reviews
applicable intangible assets and long-lived assets related to each
restaurant on a periodic basis. When events or changes in circumstances
indicate an asset may not be recoverable, the Company estimates the future
cash flows expected to result from the use of the asset. If the sum of the
expected undiscounted future cash flows is less than the carrying value of
the asset, an impairment loss is recognized. The impairment loss is
recognized by measuring the difference between the carrying value of the
assets and the fair market value of the assets. The Company's estimates of
fair values are based on the best information available and require the use
of estimates, judgments and projections as considered necessary. The actual
results may vary significantly.
/ / Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 28, 1999, December 29, 1998 and December 30, 1997 are
$8,591, $9,268 and $8,759, respectively.
/ / Accounting for Stock-Based Compensation
In accordance with Accounting Principles Board (APB) Opinion No. 25, the
Company uses the intrinsic value-based method for measuring stock-based
compensation cost which measures compensation cost as the excess, if any,
of the quoted market price of company common stock at the grant date over
the amount the employee must pay for the stock. Required pro forma
disclosures of compensation expense determined under the fair value method
of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation," are presented in Note 6.
F-10
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
/ / Earnings per Share
Basic earnings per share amounts are computed based on the weighted-average
number of shares outstanding. For purposes of diluted computations, the
number of shares that would be issued from the exercise of dilutive stock
options has been reduced by the number of shares which could have been
purchased from the proceeds of the exercise at the average market price of
the Company's stock or the price of the Company's stock on the exercise
date.
/ / Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in
years beginning after June 15, 2000. The statement permits early adoption
as of the beginning of any fiscal quarter after its issuance. The Company
expects to adopt the new statement effective January 2, 2001. The statement
will require the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives not considered hedges must be adjusted to fair
value through income. If a derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivative will either be
offset against the change in fair value of the hedged asset, liability or
firm commitment through earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings. The ineffective
portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company does not anticipate the adoption of
SFAS No. 133 will have a significant effect on its results of operations or
financial position.
In March 1999, the FASB issued an exposure draft as a proposed
interpretation, "Accounting for Certain Transactions Involving Stock
Compensation: An Interpretation of APB Opinion No. 25." The proposal, among
other things, would require that certain modifications to outstanding stock
options as to a direct change to the exercise price (repricings) or the
number of shares or an indirect change to the exercise price or number of
shares (sometimes referred to as "synthetic pricings") must be accounted
for using variable-award accounting. The FASB interpretation, when adopted,
will require compensation accounting for all awards for which share
repricings or synthetic pricings occurred after December 15, 1998.
Compensation expense is to be
F-11
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognized only to the extent that the market price of the stock exceeds
the stock price on the date of the issuance of the FASB interpretation and
increases thereafter; consequently, the last measurement of compensation
expense would occur at the date the options are exercised. The Company has
repriced certain options during fiscal 1999 and in January 2000 which will
be subject to the proposed statement which currently is to become effective
on July 1, 2000. The impact of the proposed FASB interpretation is not
currently determinable.
/ / Reclassifications
Certain reclassifications have been made to the 1998 and 1997 consolidated
financial statements to conform with the 1999 presentation.
/ / Fiscal Year
The Company operates on a 52- or 53-week fiscal year ending the last
Tuesday in December. The fiscal quarters for the Company consist of
accounting periods of 12, 12, 12 and 16 or 17 weeks, respectively. Fiscal
1999, 1998 and 1997 each included 52 weeks of operations.
2. ACQUISITION OF BUSINESS FROM RELATED PARTY
On October 19, 1998, the Company acquired the operations and purchased certain
assets and assumed certain liabilities of Coulter Enterprises, Inc. (CEI), a
restaurant management services company owned by Jamie B. Coulter, the Company's
Chairman of the Board of Directors and Chief Executive Officer. CEI had provided
accounting and administrative services to the Company since the Company's
inception. The aggregate purchase price was approximately $11,432, consisting of
$10,500 of internally generated cash with the balance comprised of assumed
liabilities. The Company accounted for the transaction using the purchase method
of accounting. In connection with the purchase price allocation, the Company
recorded an intangible asset of approximately $9,760 representing intellectual
properties which are being amortized over a period of 10 years. The acquisition
was approved by the Company's independent directors. In addition, the Company
engaged an independent financial advisor who rendered an opinion that the
transaction was fair to the Company and its stockholders from a financial point
of view. Pro forma amounts are not presented since the amounts would not be
significant. See Note 7 for additional related-party information.
F-12
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
3. TREASURY STOCK TRANSACTIONS
During 1999 and 1998, the Board of Directors authorized the Company to purchase
shares of the Company's common stock in open market or in privately negotiated
transactions. The authorization in 1998 was for 5,900,000 shares and in 1999 for
6,685,604 shares. Pursuant to the authorizations, the Company has purchased
8,758,005 shares of its common stock during the year ending December 28, 1999
and 2,610,000 shares in 1998 at average prices of $8.73 and $13.93 per share,
respectively. The Company is accounting for the purchases using the constructive
retirement method of accounting wherein the aggregate par value of the stock is
charged to the common stock account and the excess of cost over par value is
charged to paid-in capital.
4. ACCOUNTING CHANGE
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting the Costs of Start-Up Activities,"
requiring the costs related to start-up activities be expensed as incurred.
Prior to 1998, the Company capitalized certain preopening costs incurred in
connection with the opening of new restaurant locations. The Company adopted the
provisions of the SOP in its consolidated financial statements for the year
ended December 29, 1998. The effect of the adoption of the SOP was to decrease
net income in 1998 by $2,703 ($0.07 per share) and to record a charge for the
cumulative effect of an accounting change of $6,904, net of income taxes of
$2,921 ($0.17 per share), to expense costs that had been capitalized prior to
1998.
5. PREFERRED STOCK
The Company's Board of Directors has the authority to issue up to 2,000,000
shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preference
and the numbers of shares constituting any series or the designation of such
series.
F-13
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
6. STOCK OPTIONS
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its employee
stock options because, as described below, the alternative fair value accounting
provided under SFAS No. 123, "Accounting for Stock-Based Compensation," requires
use of option valuation models that were not developed for use in valuing
employee stock options. Since the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
/ / 1992 Stock Option Plan
In January 1992, the Board of Directors adopted a stock option plan (the
Plan), last amended in June 1996, providing for incentive and nonqualified
stock options pursuant to which up to 10,000,000 shares of Common Stock
are available for issuance. Options granted under this Plan vest in
periods ranging from three to five years in equal annual installments
commencing from the date of grant.
/ / Directors Stock Option Plan
In January 1992, the Board of Directors adopted a stock option plan
providing for nondiscretionary grants to nonemployee directors pursuant to
which up to 400,000 shares of Common Stock are available for issuance. All
options granted under this plan have 10-year terms and vest equally over a
three-year period commencing from the date of grant.
/ / Other Options
In connection with the Australian joint venture agreement, options to
acquire 513,800 shares of the Company's Common Stock were granted to
certain individuals of the joint venture. The exercise price of such
options granted was $14.50 per share which was the fair market value of
the Common Stock on the date of grant.
F-14
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
6. STOCK OPTIONS (CONTINUED)
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, which also requires the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994, under the fair value method of that statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1999,
1998 and 1997, respectively: risk-free interest rates of 6.0%, 6.5% and 6.5%; no
dividend yields; volatility factors of the expected market price of the
Company's Common Stock of 0.443, 0.357 and 0.380; and a weighted-average
expected life of the option ranging from four to five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information follows:
1999 1998 1997
------------------------------------
Pro forma net income $2,704 $22,095 $57,451
Pro forma earnings per share:
Basic 0.08 0.55 1.40
Diluted 0.08 0.55 1.38
Weighted-average fair value of options
granted during the year
3.84 2.81 7.99
F-15
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
6. STOCK OPTIONS (CONTINUED)
A summary of the Company's stock option activity and related information for the
years ended December 28, 1999, December 29, 1998 and December 30, 1997, is as
follows:
1999 1998 1997
----------------------------------------------------------------------------------
Weighted Weighted Weighted-
Average Average Average
Exercise Options Exercise Options Exercise Options
Price (000) Price (000) Price (000)
----------------------------------------------------------------------------------
Outstanding beginning of year $16.91 6,982 $18.08 8,154 $28.69 4,739
Granted 8.15 616 10.43 1,180 21.26 12,652
Exercised 4.01 (9) 16.12 (62) 22.59 (453)
Canceled 13.04 (1,133) 18.2 (2,290) 25.91 (8,784)
------ ------ ------
Outstanding end of year 16.57 6,456 16.91 6,982 18.08 8,154
===== ===== =====
On April 24, 1997, the Company repriced 8,123,745 options with an exercise price
in excess of the closing price of the Company's stock on that date of $18.25.
The options were held by current employees, including officers of the Company.
The original options were canceled and replaced by new grants with the same
vesting schedule as contained in each separate grant. All other terms and
conditions remained the same as the original grant with the exception of
repricing the exercise price.
On December 14, 1998, the Company canceled 1,711,253 options previously
outstanding and reissued 767,584 new options with an exercise price of $8.00.
The options were held by current officers and employees, excluding the Company's
Chairman and Chief Executive Officer. The terms of the new options were the same
as the original options, except the new options vest equally over a three-year
period commencing one year from the date of grant.
On September 10, 1999, the Company repriced 148,400 options where the previous
exercise price of the options was in excess of the closing price of the
Company's stock on that date of $7.94. The options were held by nonemployee
directors. The terms of the repriced options were the same as the original
options, except that the expiration date was extended five years. In addition,
the Company repriced additional options on January 7, 2000 (see Note 14).
F-16
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
6. STOCK OPTIONS (CONTINUED)
For options outstanding as of December 28, 1999, the number of options,
weighted-average exercise price and weighted-average remaining contract life for
each group of options are as follows:
Options Outstanding
- --------------------------------------------------------------------------------
Number Weighted- Weighted-
Outstanding at Average Average
Range of December 28, Exercise Remaining
Prices 1999 Price Contract Life
- --------------------------------------------------------------------------------
$3.38 to $7.88 227,792 $ 7.41 5.5 years
$8.00 to $17.94 915,580 9.00 8.66 years
$18.25 to $24.50 5,312,445 18.27 5.71 years
The number of shares and weighted-average exercise price of options exercisable
at December 28, 1999 are as follows:
Options Exercisable
-------------------------------------------------------------
Number Weighted-
Exercisable at Average
Range of December 28, Exercise
Prices 1999 Price
-------------------------------------------------------------
$3.38 to $7.88 114,529 $ 7.22
$8.00 to $17.94 200,062 10.73
$18.25 to $24.50 4,520,857 18.26
7. RELATED-PARTY TRANSACTIONS
Prior to the acquisition of CEI on October 19, 1998, the Company utilized its
affiliate to provide certain accounting, computer and administrative services.
The Company incurred fees of $4,367 and $3,366, related to such services for
fiscal years 1998 and 1997, respectively. In addition, the Company reimbursed
CEI for the use of an airplane and pilot services provided by an affiliated
entity. Amounts reimbursed for the use of the aircraft and pilot services were
$856 and $1,158 in 1998 and 1997, respectively.
F-17
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
7. RELATED-PARTY TRANSACTIONS (CONTINUED)
In connection with the acquisition of CEI, the Company assumed month-to-month
lease obligations to entities owned by Jamie B. Coulter for meeting room space,
parking lot space and document storage space. Total rental fees paid to these
related entities in 1999 and 1998 were $47 and $38, respectively. In addition,
in 1999 and 1998 the Company purchased business gifts and awards from a retail
store owned by Jamie B. Coulter totaling $8 and $24, respectively.
The Company believes the charges reimbursed are at least as favorable as the
charges that would have been incurred for similar services or purchases from
unaffiliated third parties.
8. LEASES
The Company leases certain facilities under noncancelable operating leases
having terms expiring between 2000 and 2025. The leases have renewal clauses of
five to 20 years, which are exercisable at the option of the lessee. In
addition, certain leases contain escalation clauses based on a fixed percentage
increase and provisions for contingent rentals based on a percentage of gross
revenues, as defined. Total rental expense for the fiscal years ended 1999, 1998
and 1997 was $11,575, $10,227 and $8,426, respectively, including contingent
rentals of approximately $266, $273 and $347, respectively.
Lease payments under noncancelable operating leases for each of the next five
years and in the aggregate are as follows at December 28, 1999:
Operating
Leases
---------
2000 $10,765
2001 9,061
2002 7,663
2003 5,855
2004 3,682
Thereafter 8,102
---------
Total minimum lease payments $45,128
=========
F-18
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
1999 1998 1997
------------------------------------------------------
Numerator:
Numerator for basic and diluted earnings
per share - income available to common
stockholders
$ 5,401 $ 25,507 $ 68,808
======================================================
Denominator:
Denominator for basic earnings per share -
weighted-average shares 35,089,084 39,989,091 41,013,749
Effect of dilutive employee stock options 101,207 44,789 748,753
------------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted-average shares
35,190,291 40,033,880 41,762,502
======================================================
Basic earnings per share $ .15 $ .64 $ 1.68
======================================================
Diluted earnings per share $ .15 $ .64 $ 1.65
======================================================
For purposes of the diluted computations, the 1999, 1998 and 1997 computation of
shares that would be issued from the exercise of stock options has been reduced
by the number of shares that could have been purchased from the proceeds at the
average market price of the Company's stock or the price of the Company's stock
on the exercise date if the options were exercised during the periods presented.
10. INCOME TAXES
Income taxes are included in the consolidated statements of income as follows:
1999 1998 1997
------------------------------------
Income tax expense on income before
cumulative effect of change in
accounting principle $2,950 $21,843 $40,075
Cumulative effect of income tax benefit
for change in accountingprinciple - (2,921) -
====================================
Total provision for income taxes $2,950 $18,922 $40,075
====================================
F-19
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
10. INCOME TAXES (CONTINUED)
The components of the provision for income taxes consist of the following:
1999 1998 1997
--------------------------------------------
Current tax expense:
Federal $14,526 $15,778 $33,720
State 1,491 1,556 5,741
--------------------------------------------
Total current 16,017 17,334 39,461
Deferred tax expense (benefit):
Federal (17,861) 1,456 (1,349)
Foreign 6,981 - 2,208
State (2,187) 132 (245)
--------------------------------------------
Total deferred (13,067) 1,588 614
--------------------------------------------
Total provision for income taxes $ 2,950 $18,922 $40,075
============================================
The difference between the reported provision for income taxes and a tax
determined by applying the applicable U.S. federal statutory income tax rate to
income before taxes, is reconciled as follows.
1999 1998 1997
-----------------------------------------------------------
Amount Rate Amount Rate Amount Rate
-----------------------------------------------------------
Income tax expense at federal
statutory rate $2,923 35% $15,550 35% $38,109 35%
State tax expense, net 1,105 13 1,099 2 3,789 3
Valuation allowance 78 3 3,761 9 - -
Other items, net, principally
tip credits (1,156) (16) (1,488) (3) (1,823) (1)
===========================================================
Actual provision for income
taxes $2,950 35% $18,922 43% $40,075 37%
===========================================================
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and amounts used for income tax purposes.
F-20
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
10. INCOME TAXES (CONTINUED)
Significant components of deferred tax liabilities and assets are presented
below:
December 28, December 29,
1999 1998
-------------------------------
Deferred tax assets:
Foreign NOL carryforward $ 8,450 $ 5,738
Preopening costs - 2,345
Accrued liabilities 1,411 1,018
Other 1,139 986
-------------------------------
11,000 10,087
Valuation allowance (3,839) (3,761)
-------------------------------
Total deferred tax assets 7,161 6,326
Deferred tax liabilities:
Property and equipment 723 12,361
Basis differences in foreign investments 2,139 2,734
Other 156 156
-------------------------------
Total deferred tax liabilities 3,018 15,251
-------------------------------
Net deferred tax assets (liabilities) $ 4,143 $ (8,925)
===============================
As of December 28, 1999, the Company has net operating loss (NOL) carryforwards
of approximately $26,511 for foreign tax purposes currently having indefinite
expiration dates. Pretax net loss attributable to foreign operations was $15,157
for the year ended December 28, 1999.
The valuation allowance for deferred tax assets at December 28, 1999 was $3,839.
The valuation allowance increased $78 and $3,761 for the years ended December
28, 1999 and December 29, 1998, respectively. In assessing the realizability of
the deferred tax assets, the Company considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of the deferred tax assets is dependent on the
generation of future taxable income in Australia during the
F-21
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
10. INCOME TAXES (CONTINUED)
periods in which the underlying temporary differences can be used to offset
taxable income. The Company has considered the projected future taxable income
and tax planning strategies in making this assessment. Based on the relevant
factors considered, the Company believes it is more likely than not that it will
realize the benefits of the deferred tax assets, net of the existing valuation
allowance, at December 28, 1999.
11. PROVISION FOR IMPAIRED ASSETS AND RESTAURANT CLOSINGS
In the third and fourth quarters of 1999, the Company recorded a provision of
$38,931 which included approximately $35,797 for the write-down of impaired
assets related to certain underperforming restaurants and $3,134 related to the
costs of closing 25 restaurants. The Company also incurred an impairment charge
of $4,646 to reflect the write-down of certain underperforming restaurants in
the fourth quarter of 1998.
The Company periodically reviews its long-lived assets for indications of
impairment. Based on that review, the trends of operations of certain
restaurants indicated the undiscounted cash flows from their operations would be
less than the carrying value of the long-lived assets of the restaurants. As a
result, the carrying values were written down to the Company's estimates of fair
value. Fair value was estimated utilizing the best information available using
whatever estimates, judgments and projections were considered necessary.
In making its assessments of asset impairment, the Company decided to close 25
restaurant locations. To the extent there are "assets held for disposal"
recorded in the Company's consolidated balance sheets, such amounts are included
in property and equipment at the lower of cost or fair market value less
estimated selling costs. The remaining carrying value of the related assets is
not significant. Net sales for all closed restaurants included in the Company's
operating results were $21,094, $28,381 and $30,851 and operating income
(losses) at the restaurant level were $(3,156), $(4,731) and $1,979 for the
years ended 1999, 1998 and 1997, respectively. The Company expects to have
disposed of most of the assets within one year.
F-22
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
12. RETIREMENT PLANS
In August 1999, the Company approved the adoption of two plans which will
provide retirement benefits to the participants. The salary reduction plans are
provided through a qualified 401(k) plan and a nonqualified deferred
compensation plan (the Plans). Under the Plans, employees who meet minimum
service requirements and elect to participate may make contributions of their
annual salaries of up to 15% under the 401(k) plan and up to 20% under the
deferred compensation plan. The Company may make additional contributions at the
discretion of the Board of Directors. The Plans were effective beginning October
7, 1999, and during 1999, the Company's contributions to the Plans were $475.
13. QUARTERLY FINANCIAL SUMMARIES (UNAUDITED)
The following table summarizes the unaudited consolidated quarterly results of
operations for fiscal 1999 and 1998:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------------------------------------------
1999
Net sales $139,938 $134,753 $134,801 $176,263
Restaurant operating income (loss)
(a) and (b) 20,690 19,042 (1,779) 6,265
Net income (loss) (a) and (b) 7,781 7,083 (5,316) (4,147)
Basic earnings (loss) per share 0.21 0.20 (0.15) (0.11)
Diluted earnings (loss) per share 0.21 0.20 (0.15) (0.11)
(a) The third quarter of fiscal 1999 includes a charge to earnings of $19,365
($12,103 net of income tax) related to the provision for asset impairment
recorded in the quarter.
(b) The fourth quarter of fiscal 1999 includes a charge to earnings of $19,566
($12,304 net of income tax) related to the provision for asset impairment
and store closing costs recorded in the quarter.
F-23
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
13. QUARTERLY FINANCIAL SUMMARIES (UNAUDITED) (CONTINUED)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
----------------------------------------
1998
Net sales $153,514 $141,023 $142,157 $179,998
Restaurant operating income (b) 28,886 18,980 13,646 21,906
Income before cumulative effect of a
change in accounting principle 16,127 8,477 4,304 3,503
Cumulative effect of a change in
accounting principle (a) (6,904) - - -
Net income (b) 9,223 8,477 4,304 3,503
Basic earnings per share 0.22 0.21 0.11 0.09
Diluted earnings per share 0.22 0.21 0.11 0.09
(a) As previously described in Note 4, the Company adopted the provisions of
SOP 98-5 in the fourth quarter of 1998, which required the Company to
expense preopening costs as incurred. The SOP required the Company to
adopt the provisions at the beginning of the year.
(b) The fourth quarter of fiscal 1998 includes a charge to earnings of $4,646
($2,927 net of tax) related to a provision for impairment reflecting the
write-down of assets for certain underperforming restaurants.
14. SUBSEQUENT EVENTS
On January 7, 2000, the Board of Directors approved the repricing of 4,591,757
options held by certain current employees, including officers of the Company
with an exercise price in excess of the closing price of the Company's Common
Stock on that date of $8.47 and whose options were not repriced at the time of
the December 14, 1998 repricing. Other than the change in the exercise price,
there was no other change in the terms of the original options as granted.
F-24
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
14. SUBSEQUENT EVENTS (CONTINUED)
In addition, on January 7, 2000 the Board of Directors granted options for
446,258 shares of Common Stock at an exercise price of $8.47 per share pursuant
to its 1992 stock option plan. All of the options granted vest ratably over a
three-year period from the date of grant.
On January 19, 2000, the Board of Directors approved an additional repurchase of
up to 2,850,000 shares of the Company's Common Stock subject to certain
conditions.
F-25