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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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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 25, 2001
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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
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LONE STAR STEAKHOUSE & SALOON, INC.
(Exact name of Registrant as specified in its charter)
Delaware 48-1109495
(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
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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
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As of March 19, 2002, the aggregate market value of the Registrant's
Common Stock held by non-affiliates of the Registrant was $435,980,483. 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 19, 2002, there were 24,333,233 shares outstanding of the
Registrant's Common Stock.
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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
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PART I
1. Business.................................................................3
2. Properties...............................................................9
3. Legal Proceedings.......................................................11
4. Submission of Matters to a Vote of Security Holders.....................11
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matter....................................................12
6. Selected Financial Data.................................................13
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................15
7A. Quantitative and Qualitative Disclosures about Market Risk..............26
8. Financial Statements and Supplementary Data.............................27
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..............................................27
PART III
10. Directors and Executive Officers of the Registrant.....................27
11. Executive Compensation.................................................27
12. Security Ownership of Certain Beneficial Owners and Management.........27
13. Certain Relationships and Related Transactions.........................27
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......28
Signatures.............................................................31
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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, risks associated with
litigation, our ability to continue to acquire and retain prime locations at
acceptable lease or purchase terms, the impact of specific events such as the
outbreak of "mad cow disease" or "foot/mouth disease", 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
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Background
As of March 19, 2002, Lone Star Steakhouse & Saloon, Inc. (the
"Company") owned and operated 249 mid-priced, full service, casual dining
restaurants located in the United States, which operate under the trade name
Lone Star Steakhouse & Saloon or Lone Star Cafe ("Lone Star" or " Lone Star
Steakhouse & Saloon"), and 20 upscale steakhouse restaurants, five operating as
Del Frisco's Double Eagle Steak House ("Del Frisco's") restaurants and 15
operating as Sullivan's Steakhouse ("Sullivan's") restaurants. In addition, a
licensee operates three Lone Star restaurants in California and a licensee
operates a Del Frisco's restaurant in Orlando, Florida.
Internationally, the Company operates 25 Lone Star Steakhouse &
Saloon restaurants in Australia. In addition, a licensee operates a Lone Star
Steakhouse & Saloon restaurant in Guam.
Steak continues to be one of the most frequently ordered dinner
entrees at restaurants. In 2001, the United States Department of Agriculture
estimated the average annual per capita consumption of beef to be 63.4 pounds,
down slightly from 2000. 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 and excellent service
distinguishes Lone Star restaurants. Company management believes the Sullivan's
restaurants are distinguished by featuring high quality, top end choice of beef
whereas the Del Frisco's restaurants are distinguished by featuring high
quality, USDA prime graded steaks. In addition, Sullivan's and Del Frisco's
feature specialized fresh entrees, award-winning wine lists, an exciting
ambiance and attentive team service.
The Company's focus on selection, training and in-store execution
along with Lone Star's continued marketing initiatives and the successful
creation of the Sullivan's upscale concept and the development of the Del
Frisco's concept, differentiate the Company from other restaurant companies that
operate steakhouse restaurants. The Company believes that through its operation
of three (3) distinct steak restaurant concepts, it has positioned itself as
"The Steak Company."
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
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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 2001 of approximately $12.50 at
lunch and $17.50 at dinner.
Del Frisco's 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. These elements enhance the
dining experience and establish a distinct identity for Del Frisco's. Del
Frisco's is further distinguished by its high quality, USDA prime-graded steaks
hand cut in each restaurant. Del Frisco's restaurants serve dinner only, except
the New York City restaurant which is also open for lunch, and are generally
open Monday through Saturday with an average dinner guest check of approximately
$86.00.
Sullivan's 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
wood paneling, carpeted floors, warm lighting, and white tablecloths. Sullivan's
is distinguished by its high quality, well aged, midwest grain fed steaks,
chops, and seafood. Most Sullivan's restaurants serve dinner only, and are
generally open seven days a week with an average guest check per customer of
approximately $66.00.
Corporate Strategy
During 2001, the Company opened eleven Lone Star restaurants of which nine
were new and two represented re-openings of restaurants temporarily closed for
repairs. In the first half of 2002, the Company has no plans to develop new
restaurants, but will evaluate development opportunities in the last half of
2002 depending on the economy and other considerations.
During 2001, the Company continued its focus in its Lone Star restaurants
on operational consistency and improved guest satisfaction. New food products
were featured such as signature lettuce wedge, fettuccine Alfredo, king crab
legs, steamed vegetables and prime sirloin. The Company believes these new
products have received excellent acceptance based upon feedback from our guests.
The Company continued to improve the quality of its management teams, including
at the Regional Manager, District Manager and General Manager levels. In
addition, the Company changed its marketing strategy at the end of the second
quarter of 2001 to move from television and radio media to targeted product and
limited price promotions sent by direct mail. The Company believes improved
operations and consistency that result from better managers and the change in
marketing strategy have helped increase sales at its Lone Star restaurants.
During 2001, the Sullivan's restaurants added new products such as steak
tartar, escargot, portebello mushrooms and stone crab claws and also featured
additional fresh seafood entrees. In response to the economic slow down, which
negatively affected business travel and business entertainment, Sullivan's
introduced a $10.00 bar menu featuring entrees such as a classic burger, steak
sandwich, chicken and seafood. A number of new wines which are featured at lower
prices were also introduced.
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During 2001, the Del Frisco's restaurants added nightly fresh seafood
specialties. The economic slowdown and effect of September 11th negatively
affected restaurant sales for both Sullivan's and Del Frisco's.
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 $1.9 million in sales on an annualized basis during 2001. Of the
249 Lone Star restaurants open at March 19, 2002, 89 were leased facilities and
had an average cash investment of approximately $1.0 million and 160 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.
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 consist of a
complete meal including salad, bread and butter and a choice of baked potato,
baked sweet potato, steak fries, steamed vegetables or Texas rice. The lunch
menu offers a selection of hamburgers, chicken sandwiches, luncheon steaks,
ribs, soups and salads. Depending on local availability and quality, fish
selections are also offered at lunch and dinner. Appetizers and desserts,
together with a full bar service is available. Alcoholic beverage service
accounts for approximately 11% of Lone Star's net 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 36% of Del Frisco's sales.
The menu at Sullivan's features high quality, well aged, midwest grain fed
steaks, chops, seafood and quality side dishes. Sullivan's also features a
number of high quality wines and a full bar. Alcoholic beverage service accounts
for approximately 39% of Sullivan's sales.
Site Selection
The Company believes site selection is critical for the potential success
of a particular restaurant and senior management devotes significant time and
resources to analyzing each prospective site. Among the factors considered in
site selection are 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.
Leases are negotiated generally with a primary term 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.
Restaurant Layout
The Company believes the decor and interior design of its restaurants
significantly contribute to its success. The Lone Star restaurants' open layout
permits its customers to view the bar and Texas
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memorabilia, thereby enhancing the casual dining atmosphere. The Company also
designs its kitchen space for efficiency of workflow, 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 provides additional
seating. The original Del Frisco's restaurant in Dallas, Texas is approximately
10,000 square feet and seats approximately 350 persons and includes an extended
wine cellar and a cigar lounge with private dining available in the wine cellar.
In addition, Del Frisco's features a bar area adjacent to the dining room
primarily to accommodate customers waiting for tables. 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. The New
York City location is approximately 16,500 square feet and the Las Vegas
location is approximately 11,000 square feet. The first Sullivan's restaurant in
Austin, Texas was expanded in 1997 by 4,500 square feet to 12,000 square feet
and now seats 320 customers. The other Sullivan's restaurants range from 7,000
to 9,000 square feet. 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.
Marketing
Lone Star restaurants are "destination location restaurants" that focus on
the mid-priced full service casual dining market segments. The Company is
committed to customer service, providing an excellent price-value relationship
and coupled with the unique "Texas Roadhouse" ambiance of its restaurants is
able 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 billboard advertising to
promote its restaurants and build customer awareness. At the end of the second
quarter of 2001, the Company changed its marketing strategy for its Lone Star
restaurants to primarily utilize direct mail featuring new products and limited
price promotions in lieu of media advertising. This strategy enables the Company
to provide marketing support for all its Lone Star restaurants.
Sullivans' and Del Frisco's utilize high quality print ads in Cigar
Aficionado and Wine Spectator, which are national publications and reach the
Company's target audience. Special promotions are also utilized featuring a
specific wine vineyard and local charitable event promotions.
On October 11, 2001, all of the Company's steak restaurants participated
in the "Dine for America" promotion to benefit the victims and families of
September 11th. The Company donated all of its sales for the day to the American
Red Cross, which resulted in a contribution of $2,124,000.
Restaurant Operations and Management
The Company strives to maintain quality and consistency in all of 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 typical Lone Star management team consists of one general manager and
four managers. 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 in all areas of the operation including food quality,
safety and preparation, customer satisfaction, alcoholic
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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 revenue and 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 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 employee concerns.
Purchasing
Approximately 59% 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 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 may engage in forward pricing or
consider other risk management strategies with regard to its meat and other food
costs to minimize the impact of potential price fluctuations. This practice
could help stabilize the Company's food costs during times of fluctuating
prices. The Company did not engage in any forward pricing or hedging in 2001. As
of March 19, 2002, the Company had no significant forward pricing contracts.
Management Information Systems
The Company continually monitors its management information system to take
advantage of technological improvements. Its P.O.S. system 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
daily reports for the Company's management on sales, bank deposit and variance
data.
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 which are wire
transferred periodically to the Company's principal operating account.
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The Company generates weekly, consolidated sales reports and food and labor
cost variance reports at its corporate headquarters, and 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.
The Company expects to continue to develop its management information
systems to improve efficiencies and assist management in analyzing business
results and opportunities.
Competition
The restaurant industry is intensely competitive with respect to price,
service, location and food quality, and there are many well-established
competitors with substantially greater financial and other resources than the
Company. Some of the Company's competitors have been in existence for a
substantially longer period than the Company and may be better established in
the markets where the Company's restaurants are or may be located. The
restaurant business is often affected by changes in consumer tastes, national,
regional or local economic conditions, demographic trends, traffic patterns and
the type, number and location of competing restaurants. In addition, factors
such as inflation, increased food, labor and benefits costs and the availability
of experienced management and hourly employees may adversely affect the
restaurant industry in general and the Company's restaurants in particular. The
Company believes that its concepts, attractive price-value relationship and
quality of food and service enable it to differentiate itself from its
competitors. 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.
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.
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Trademarks
The Company regards its primary 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 have not had a
material adverse effect on the Company's financial condition or its results of
operation. The Company's policy is to pursue registration of its marks whenever
possible and to oppose vigorously infringements of its marks. The Company has
obtained registration of its marks in numerous foreign countries.
Employees
As of March 19, 2002, the Company employed approximately 18,425 persons, 9
of whom are executive officers, 84 of whom are office support personnel, 9 of
whom are regional managers, 32 of whom are district managers, approximately
1,332 of whom are restaurant management personnel and the remainder of whom are
hourly restaurant personnel. While none of the Company's employees are currently
covered by a collective bargaining agreement, a Union has been certified to
represent certain of the Company's employees at its Atlantic City, New Jersey
restaurant. To date, negotiations have not commenced with this Union and there
can be no assurance that the Company will be able to negotiate a contract with
this Union on terms acceptable to the Company. The Company considers its
employee relations to be good.
Item 2. Properties.
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As of March 19, 2002, the Company leased 89 and owned 160 of its
Lone Star restaurant locations. At such date, the Company leased three and owned
two Del Frisco's restaurants locations. Of the 15 Sullivan's restaurants 13 are
leased, and two are owned. 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.
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RESTAURANT LOCATIONS AS OF MARCH 19, 2002
The following table sets forth the location of the Company's existing, open
domestic Lone Star Steakhouse & Saloon (249) Restaurants, Del Frisco's (5)
restaurants, and Sullivan's (15) restaurants
LONE STAR
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ALABAMA Chicago (10) MICHIGAN Jacksonville TENNESSEE
Anniston Decatur Battle Creek Raleigh (3) Jackson
Birmingham (2) Effingham Bay City Rocky Mount Johnson City
Huntsville Hodgkins Brighton Salisbury Memphis (2)
Mobile Mt. Vernon Dearborn Heights Southern Pines
Montgomery Peoria Detroit (6) Winston-Salem
Trussville Rockford Flint UTAH
Tuscaloosa Springfield Grand Rapids NORTH DAKOTA Centerville
Jackson Fargo Layton
ALASKA INDIANA Mt. Pleasant Salt Lake City
Anchorage Anderson Saginaw OHIO Sugarhouse
Evansville Ypsilanti Akron
ARIZONA Ft. Wayne Canton VIRGINIA
Mesa Indianapolis (4) MISSISSIPPI Cincinnati (2) Alexandria
Phoenix (4) Lafayette Hattiesburg Cleveland (3) Centreville
Merrillville Jackson Columbus (4) Chesapeake
ARKANSAS South Bend Dayton (2) Fairfax
Ft. Smith Terre Haute MISSOURI Findlay Fredericksburg
Little Rock (2) Branson Lancaster Herndon
Springdale IOWA Independence Middletown Norfolk
Cedar Rapids Kansas City Niles Potomac Mills
COLORADO Coralville Springfield Springfield Richmond (3)
Colorado Springs Davenport St. Louis (5) Toledo (2) Sterling
Denver (6) Des Moines Youngstown Virginia Beach
Ft. Collins Waterloo NEBRASKA
Loveland Lincoln OKLAHOMA WEST VIRGINIA
KANSAS Omaha (2) Lawton Beckley
DELAWARE Garden City Oklahoma City Charleston
Dover Hutchinson NEVADA Tulsa (2) Huntington
Wilmington (2) Overland Park Las Vegas (4)
PENNSYLVANIA WISCONSIN
FLORIDA KENTUCKY NEW JERSEY Allentown Racine
Bradenton Bowling Green Atlantic City Easton
Clearwater Florence Bridgewater Harrisburg SULLIVAN'S
Ft. Lauderdale Lexington Cherry Hill Johnstown ----------
Ft. Myers Louisville Delran King of Prussia Anchorage, AK
Lakeland Hanover Township Lancaster Austin, TX
Ocala LOUISIANA Hazlet Middletown Baton Rouge, LA
Orlando Baton Rouge (2) Marlton Philadelphia Charlotte, NC
Pensacola Houma Ocean County Pittsburgh (5) Chicago, IL
Port Orange Lafayette Scotch Plains Pottstown Dallas, TX
Port Richey Monroe Turnersville Reading Denver, CO
Sarasota New Orleans (3) Voorhees Scranton Houston, TX
St. Petersburg Wayne Wilkes-Barre Indianapolis, IN
Tampa MAINE York King of Prussia, PA
South Portland NEW MEXICO Naperville, IL
GEORGIA Albuquerque RHODE ISLAND Palm Desert, CA
Atlanta MARYLAND Warwick Raleigh, NC
Augusta Bel Air NEW YORK Tucson, AZ
Columbia Albany SOUTH CAROLINA Wilmington, DE
IDAHO Frederick Greenville
Boise Gaithersburg Myrtle Beach (2)
Laurel NORTH CAROLINA DEL FRISCO'S
ILLINOIS Lexington Park Asheville ------------
Bloomington Waldorf Boone SOUTH DAKOTA Denver, CO
Bradley Westminster Charlotte (4) Sioux Falls Dallas, TX
Carbondale Durham Fort Worth, TX
Champaign MASSACHUSETS Fayetteville Las Vegas, NV
Boston Greensboro (2) New York, NY
Greenville
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Item 3. Legal Proceedings
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California Public Employees Retirement System ("CalPERS") filed a
shareholders derivative action on October 16, 2001 against certain present and
former Directors alleging breach of fiduciary duties by certain present and
former Directors and that certain of such defendants were unjustly enriched
through related party transactions and by the re-pricing of stock options
previously issued. The lawsuit also seeks to prevent enforcement of certain
change of control agreements granted to executive officers of the Company, seeks
declaratory and injunctive relief and seeks damages to be paid to the Company.
The Company is a nominal defendant.
On January 9, 2002, CalPERS filed an amended complaint and added a
claim to attempt to certify a class action based on their allegation that a
provision in the change of control agreements violates Delaware law. A motion to
dismiss was filed by certain defendants on February 8, 2002, seeking to dismiss
all claims of CalPERS. Discovery has been stayed pending a court decision on the
motion to dismiss.
The Company is involved from time to time in litigation arising in
the ordinary course of business as well as the matter set forth above. The
Company believes the outcome of such matters will not have a material adverse
effect on its consolidated financial position or results of operations.
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 25,
2001.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
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Matters
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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 bid prices for the
Common Stock, as reported by Nasdaq.
Bid Prices
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Calendar 2001 High Low
------------- ---- ---
First Quarter 10.25 8.31
Second Quarter 14.00 8.97
Third Quarter 13.72 10.91
Fourth Quarter 14.90 10.14
Bid Prices
----------
Calendar 2000 High Low
------------- ---- ---
First Quarter 9.44 7.84
Second Quarter 12.75 8.75
Third Quarter 11.56 7.91
Fourth Quarter 8.94 6.69
Dividends
The Company initiated the payment of quarterly cash dividends in April
2000 and has paid cash dividends at the rate of $0.125 per share each quarter
thereafter. On January 9, 2002, the Company increased its quarterly cash
dividend to $0.15 per share. The Company plans to continue the quarterly
dividend payments for the foreseeable future; however, there can be no assurance
that such cash dividends will continue to be paid.
Number of Stockholders
As of March 19, 2002, there were approximately 425 holders of record of
the Company's Common Stock. The Company believes there are in excess of 9,800
beneficial owners of the Company's Common Stock.
-12-
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 financial data
of the Company as of December 25, 2001, December 26, 2000, December 28, 1999,
December 29, 1998, and December 30, 1997, and for each of the five years in the
period ended December 25, 2001, 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 the
adjustment amounts applicable for fiscal year 1997 to give retroactive effect to
the change in accounting for pre-opening costs adopted in fiscal 1998 to comply
with the American Institute of Certified Public Accountants SOP 98-5, "Reporting
the Costs of Start-up Activities," whereby pre-opening costs are required to be
expensed as incurred rather than capitalized and amortized.
-13-
Year Ended In December,(1)
-------------------------------------------------------------------------------------------
(Amounts in thousands, except share data)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Income Statement Data:
Net sales $ 598,017 $ 575,863 $ 585,755 $ 616,692 $ 585,357
Costs and expenses:
Costs of sales 205,451 202,343 207,696 231,787 211,571
Restaurant operating expenses 283,352 276,974 263,940 270,495 215,805
Restaurant depreciation and
amortization 27,753 28,574 30,970 26,346 30,590
General and administrative expenses 41,933 42,472 38,057 32,070 21,649
Non-cash stock compensation expense 19,985 -- -- -- --
Contribution - "Dine for America" 2,124 -- -- -- --
Provision for impaired assets and
restaurant closings 2,830 4,310 38,931 4,646 --
------------ ------------ ------------ ------------ ------------
Total costs and expenses 583,428 554,673 579,594 565,344 479,615
------------ ------------ ------------ ------------ ------------
Income from operations 14,589 21,190 6,161 51,348 105,742
Other income, net 3,889 2,530 2,190 2,906 4,109
------------ ------------ ------------ ------------ ------------
Income before provision for income
taxes and minority interest 18,478 23,720 8,351 54,254 109,851
Provision for income taxes (5,222) (7,590) (2,950) (21,843) (40,075)
Minority interest -- -- -- -- (968)
------------ ------------ ------------ ------------ ------------
Income before cumulative effect of
change in accounting principle 13,256 16,130 5,401 32,411 68,808
Cumulative effect of change in accounting
principle (net of income tax of $2,921) -- -- -- (6,904) --
------------ ------------ ------------ ------------ ------------
Net income $ 13,256 $ 16,130 $ 5,401 $ 25,507 $ 68,808
============ ============ ============ ============ ============
Basic earnings per share:
Income before cumulative effect of
change in accounting principle $ .55 $ .62 $ .15 $ .81 $ 1.68
Cumulative effect of change
in accounting principle -- -- -- (.17) --
------------ ------------ ------------ ------------ ------------
Basic earnings per share $ .55 $ .62 $ .15 $ .64 $ 1.68
============ ============ ============ ============ ============
Weighted average shares
outstanding 24,036,942 26,189,600 35,089,084 39,989,091 41,013,749
============ ============ ============ ============ ============
Pro forma net income (2) $ 66,815
============
Pro forma basic earnings per share $ 1.63
============
-14-
At fiscal year end in December, (1)
------------------------------------------------------------
(Dollars in thousands)
2001 2000 1999 1998 1997
Balance Sheet Data:
Working capital (deficit) $ 48,284 $ (1,716) $ 20,215 $ 67,593 $ 117,127
Total assets 515,029 488,923 533,533 608,583 620,812
Stockholders' equity 454,439 437,783 484,379 553,441 566,148
(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 1997, 1998, 1999, 2000, and 2001 fiscal years ended on December
30, 29, 28, 26 and 25, respectively.
(2) Pro forma net income amounts reflect the adjustments for fiscal year 1997
to give retroactive effect to the change in accounting for pre-opening
costs adopted in fiscal 1998.
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 Lone Star
restaurants other than properties which had been committed for or were under
construction. The Company opened one restaurant in 1999, one in 2000 and eleven
in fiscal 2001.
In addition, the Company owns two sites that are available for future
development. There were 249 operating domestic Lone Star restaurants as of March
19, 2002. In addition, a licensee operates three Lone Star restaurants in
California. The Company closed one domestic Lone Star restaurant in February
2002, and a domestic Lone Star restaurant was destroyed by fire in March 2002.
The Company currently operates five Del Frisco's restaurants. In addition,
a licensee operates one Del Frisco's restaurant. The Company currently operates
fifteen Sullivan's restaurants.
Internationally, the Company currently operates 25 Lone Star Steakhouse &
Saloon restaurants in Australia and a licensee operates one restaurant in Guam.
The Company closed five restaurants in Australia in January 2001 and one
additional Australian restaurant in December 2001.
Critical Accounting Policies
The consolidated financial statements are prepared in accordance with
generally accounting principles accepted in the United States, which require the
Company to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and notes thereto (see Note 1 to the Notes
to Consolidated Financial Statements). The Company believes that of its
significant accounting policies, the following may either involve accounting
policies which may cause the Company to incur significant volatility in
reporting earnings in future periods or policies that may involve a higher
degree of judgment and complexity.
Variable accounting for stock options - The Company has stock options
outstanding to purchase approximately 4,628,000 shares of common stock subject
to variable plan accounting under Accounting Principles Board opinion No. 25 and
related interpretations (see Note 5 to the Notes to Consolidated Financial
Statements). The Company may incur significant volatility in reporting earnings
in future periods as fluctuations in market prices of its common stock may
greatly impact reported non-cash compensation
-15-
expense on a periodic basis. During the year ended December 25, 2001, the
Company recorded a non-cash stock compensation expense of $19,985.
Impairment of long-lived assets - Underperforming Restaurants The Company
periodically reviews its long-lived assets related to its restaurant operations
for indications of impairment. Such reviews require assessments of the current
and future economic trends for certain restaurants in a variety of locations.
The assessment process requires the use of estimates and projections which are
subject to a high degree of judgment and complexity. During the year ended
December 25, 2001, the Company incurred a pre-tax charge of $2,552 for
impairments related to its restaurant operations.
Impairment of long-lived assets - Goodwill and Intangibles The Company
periodically reviews the recoverability of its goodwill and other intangible
assets which require the Company to make assumptions regarding estimated future
cash flows and other factors to determine the fair value of the respective
assets. If these estimates or their related assumptions change in the future,
the Company may be required to record impairment charges for these assets. In
June 2001, the FASB issued SFAS No. 142 effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangibles deemed to
have an indefinite life will no longer be amortized but will be subject to
annual impairment tests in accordance with SFAS No. 142. The Company will apply
the new accounting rules beginning in the first quarter of fiscal 2002.
Application of the non-amortization provisions of SFAS No. 142 is expected to
result in an increase in net income in fiscal 2002 of approximately $900 ($.04
per share) subject to identification of separately recognized intangibles which
would continue to be amortized under the new rules. During fiscal 2002, the
Company will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of December 26, 2001, and has not yet
determined what the effect of these tests will be on the results of operations
or financial position of the Company.
-16-
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 25, December 26, December 28,
2001 2000 1999
----------- ------------ -------------
(Dollars in thousands)
Income Statement Data:
Net sales 100% 100% 100%
Costs and expenses:
Costs of sales 34.4 35.1 35.5
Restaurant operating expenses 47.4 48.1 45.1
Provision for impaired assets and restaurant closings .5 .7 6.6
Depreciation and amortization 4.6 5.0 5.3
-------- -------- --------
Restaurant costs and expenses 86.9 88.9 92.5
-------- -------- --------
Restaurant operating income 13.1 11.1 7.5
General and administrative expenses 7.0 7.4 6.5
Non-cash stock compensation expense 3.3 -- --
Contribution - "Dine for America" .4 -- --
-------- -------- --------
Income from operations 2.4 3.7 1.0
Other income, net .7 .4 .4
-------- -------- --------
Income before income taxes 3.1 4.1 1.4
Provision for income taxes .9 1.3 .5
-------- -------- --------
Net income 2.2% 2.8% .9%
======== ======== ========
Restaurant Operating Data:
Average sales per restaurant on an
annualized basis (1) $ 2,044 $ 1,938 $ 1,810
======== ======== ========
Number of restaurants at end of period 296 287 298
Number of full restaurant periods open
during the period (2) 3,804 3,863 4,204
- -----------------------------
(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.
(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.
-17-
LONE STAR STEAKHOUSE & SALOON, INC.
Year ended December 25, 2001 compared to Year ended December 26, 2000
(Dollar amounts in thousands)
Net sales increased $22,154 or 3.8% to $598,017 for the year ended December
25, 2001 ("fiscal 2001"), compared to $575,863 for the year ended December 26,
2000 ("fiscal 2000"). The increase was principally attributable to incremental
sales of $15,700 from eleven new domestic Lone Star restaurants, one new
Sullivan's restaurant, and one new Del Frisco's restaurant opened since July
2000. An expanded number of Sullivan's restaurants opened on Sundays during
fiscal 2001 also contributed to this increase. The increases were partially
offset by the impact of the 14 Australian Lone Star's closed subsequent to
August 2000. Same store sales increased 2.2% compared to fiscal 2000.
Costs of sales, primarily food and beverages, decreased as a percentage of
net sales to 34.4% from 35.1% due primarily to a (i) small increase in menu
prices initiated primarily in the second quarter (ii) change in the menu mix in
the upscale restaurants and (iii) decrease in beef costs. The decreases were
partially offset by the impact of promotional pricing from the Company's direct
mail campaigns initiated late in the second quarter of fiscal 2001.
Restaurant operating expenses for fiscal 2001 increased $6,378 from
$276,974 in fiscal 2000 to $283,352 but decreased as a percentage of net sales
from 48.1% to 47.4%. The increase in restaurant operating expenses in terms of
absolute dollars results from increased sales volumes. The decrease as a
percentage of net sales is attributable to improved labor costs resulting both
from increased sales volumes and improved labor controls and decreases in
pre-opening expenses and costs for certain maintenance expenses. The decrease in
restaurant operating expenses were partially offset by increased costs for
utilities, primarily natural gas, and certain insurance costs.
Depreciation and amortization decreased $821 in fiscal 2001 compared to
fiscal 2000. The decrease is attributable primarily to the restaurants closed
since August 2000.
Provisions for impaired assets and restaurant closings in fiscal 2001 were
$2,830 compared to $4,310 in fiscal 2000. The provisions in fiscal 2001 reflect
a pre-tax charge of $2,552 for the write-down of certain under performing
restaurants primarily in Australia, and fiscal 2000 also reflects a pre-tax
charge of $3,000 for the write down of certain under-performing Australian
restaurants. In addition, the provision in fiscal 2001 and 2000 reflect the cost
of closing one Australian restaurant in fiscal 2001 and 14 Australian
restaurants in fiscal 2000. The Company periodically reviews its long-lived
assets for indications of impairment.
General and administrative expenses decreased $539 compared to fiscal 2000.
The decrease was primarily attributable to reductions in software consulting and
development costs as well as reductions in administrative salaries and travel
related to the Australian restaurants closed in fiscal 2000. The decreases were
offset in part by an increase in professional fees related to the proxy fight
and review of strategic alternatives for enhancing shareholder value.
Non-cash stock compensation expense for fiscal 2001 was $19,985. Financial
Accounting Standards Board Interpretation No. 44 (FIN 44), "Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB No.
25" became effective July 1, 2000. FIN 44 requires, among other things, that
stock options, which have been modified after December 15, 1998 to reduce the
exercise price, be accounted for as variable. Under variable plan accounting,
compensation expense is adjusted for increases or decreases in the fair market
value of the Company's common stock based upon the changes in the common stock
price from the value of $10.125 per share at July 1, 2000, which was the initial
base period fair value used to measure the non-cash stock compensation charge or
benefit. Variable plan accounting is applied to the modified awards until the
options are exercised, forfeited or expire unexercised. The Company repriced
options in fiscal 1999 and 2000 which are subject to the accounting provisions
of FIN 44, and at December
-18-
25, 2001, outstanding options to purchase approximately 4,628,000 shares were
affected by this accounting requirement. In each subsequent period, the Company
will record an additional non-cash expense or benefit related to the repriced
options then outstanding based upon the change in the Company's common stock
price as compared to the price at the beginning of the last reporting period.
Contribution - In connection with the restaurant industry's "Dine for
America" fund raising program, the Company contributed to the American Red Cross
100% of its restaurant sales of $2,124 on October 11, 2001.
Other income, net for fiscal 2001, was $3,889, compared to $2,530 in fiscal
2000. The increase is primarily attributable to an increase in interest income
as a result of increased funds available for investment and an increase in gain
on sale of assets.
The effective income tax rate for fiscal 2001 and fiscal 2000 were 28.3%
and 32% respectively. The decrease in the effective tax rate is primarily
attributable to a the impact of FICA Tip and other tax credits on the lower
pre-tax income for fiscal 2001 as compared to fiscal 2000.
-19-
LONE STAR STEAKHOUSE & SALOON, INC.
Year ended December 26, 2000 compared to Year ended December 28, 1999
(Dollar amounts in thousands)
Net sales decreased $9,892 or 1.7% to $575,863 for fiscal 2000, compared to
$585,755 for the year ended December 28, 1999 ("fiscal 1999"). The decrease was
principally attributable to closing 24 domestic Lone Star restaurants in January
2000, and nine Lone Star restaurants in Australia in August 2000 partially
offset by additional sales of $10,800 from one domestic Lone Star restaurant,
one Sullivan's restaurant and two Del Frisco's restaurants opened in fiscal
2000. Same store sales decreased 0.1% from fiscal 1999.
Costs of sales, primarily food and beverages, decreased as a percentage of
net sales to 35.1% from 35.5% due primarily to improved procedures in controlled
food and beverage costs.
Restaurant operating expenses for fiscal 2000 increased $13,034 from
$263,940 in fiscal 1999 to $276,974, and increased as a percentage of net sales
from 45.1% to 48.1%. The increase in restaurant operating expenses is primarily
attributable to an $8,072 increase in media advertising. In addition, increased
costs were incurred for restaurant labor, building maintenance and pre-opening
expenses.
Depreciation and amortization decreased $2,396 in fiscal 2000, compared to
fiscal 1999. The decrease is primarily attributable to restaurants closed during
fiscal 2000.
Provisions for impaired assets and restaurant closings in fiscal 2000 were
$4,310 compared to $38,931 in fiscal 1999. The provision in fiscal 2000 reflects
a pre-tax charge of $3,000 for the write down of certain under-performing
Australian restaurants and $1,310 related to costs of closing 14 Australian
restaurants. The pre-tax charges for fiscal 1999 include $35,797 for the write
down of both domestic and Australian impaired assets and $3,134 related to costs
of closing 25 domestic restaurants. The Company periodically reviews its
long-lived assets for indications of impairment.
General and administrative expenses increased $4,415 in fiscal 2000
compared to fiscal 1999. This increase was primarily attributable to (1)
salaries and wage-related expenses reflecting the costs associated with the new
positions added to strengthen the Company's corporate infrastructure, general
salary increases and costs related to employee retirement benefit plans, (2)
costs for software amortization and (3) travel and recruiting expenses.
Other income, net for fiscal 2000 was $2,530, compared to $2,190 in fiscal
1999. The increase is attributable to gains on the sale of assets of $1,305
offset in part by an increase in interest expense and a decrease in interest
income.
The effective income tax rate for fiscal 2000 was 32.0% compared to 35.3%
in fiscal 1999. The difference in the effective tax rate is primarily
attributable to a mix of foreign and domestic income and the impact of FICA tip
credits on the relative pre-tax income for the two years.
-20-
Impact of Inflation
The primary inflationary factors affecting the Company's
operations include food and labor costs. A number of the Company's restaurant
personnel are paid at the federal and state established minimum wage levels and,
accordingly, changes in such wage levels affect the Company's labor costs.
However, since the majority of personnel are tipped employees, minimum wage
changes generally have little effect on overall labor costs. During the first
two quarters of fiscal 2001, the Company experienced significant increases in
utility costs, particularly natural gas. Historically, as food, labor and most
recently, utility costs have increased, the Company has been able to offset
these increases through menu price increases and economies of scale; however,
there may be delays in the implementation of such menu price increases or in
effecting timely economies of scale, as well as, competitive pressures which may
limit the Company's ability to recover any cost increases in its entirety. 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 25, December 26, December 28,
2001 2000 1999
------------ ----------- ----------
Net cash provided by operating activities $ 63,428 $ 49,345 $ 70,886
Net cash provided by (used in) investment activities 5,840 (12,271) (33,637)
Net cash used by financing activities (15,382) (58,710) (76,453)
Net effect of exchange rate changes on cash 4 (8) 30
-------- -------- --------
Net increase (decrease) in cash and cash equivalents $ 53,890 $(21,644) $(39,174)
======== ======== ========
During fiscal 2001, 2000, and 1999, the Company's purchases of property
and equipment were $3,924, $21,665, and $34,085, respectively. In fiscal 2001,
the Company received proceeds from the sale of assets of $10,098 as compared to
$10,213 in fiscal 2000.
The Company has opened 20 restaurants in the past three fiscal years of
which five opened during fiscal 1999, four in fiscal 2000, and eleven in fiscal
2001. The Company does not have significant accounts receivable or inventory.
At December 25, 2001, the Company had $82,919 in cash and cash
equivalents. In August 2001, the Company expanded its credit facilities and at
December 25, 2001 has available $55,000 in unsecured revolving credit
arrangements. At December 25, 2001, the Company had no outstanding borrowings.
See Note 3 to the Notes to Consolidated Financial Statements in this Form 10-K
for a further description of the Company's credit facilities.
The Company's Board of Directors has authorized the repurchase of shares
of the Company's common stock from time to time in the open market or in
privately negotiated transactions. During fiscal 2001, the Company purchased
468,687 shares at a cost of $5,145. During fiscal 2000 and 1999, the Company
purchased 5,605,074 shares at a cost of $49,261, and 8,758,005 shares at a cost
of $76,488, respectively.
In the second quarter of fiscal 2000, the Company began paying dividends
on its common stock. In fiscal 2001 and 2000, the Company paid cash dividends of
$12,019, or $0.50 per share and $9,630, or $0.375 per share, respectively. On
January 9, 2002, the Company increased its quarterly cash dividend to $0.15 per
share.
The Company from time to time may utilize derivative financial instruments
in the form of live beef cattle futures contracts to manage market risks and
reduce its exposure resulting from fluctuations in the price of meat. Realized
and unrealized changes in the fair values of the derivative instruments are
recognized
-21-
in income in the period in which the change occurs. Realized and unrealized
gains and losses for the period were not significant. As of December 25, 2001,
the Company had no positions in futures contracts.
As described in Note 5 to the Notes to Consolidated Financial Statements,
the Company has options outstanding to purchase approximately 4,628,000 shares
subject to variable plan accounting. The Company may incur significant
volatility in reporting earnings in future periods as fluctuations in market
prices of its common stock may greatly impact reported non-cash compensation
expenses on a periodic basis.
As part of its continuing review of options for enhancing stockholder
value, the Company has engaged UBS Warburg to advise the Board of Directors on a
broad range of strategic alternatives for the use of the Company's balance sheet
and cash flow, including continued share buy backs, possible acquisitions or
other strategies including the possible sale of the Company. The Company's
exploration of strategic alternatives may not be successful. To date, the
Company has not adopted any alternative and is still in the process of exploring
strategic alternatives. There can be no assurance as to which, if any,
alternative will ultimately be adopted, the terms and conditions of any
alternative that is selected or when any such alternative would be consummated.
Impact of Recently Issued Financial Standards
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets," effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill and intangible assets deemed to have indefinite lives will
no longer be amortized but will be subject to annual impairment tests in
accordance with the Statement.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of SFAS No. 142 is expected to result in an increase
in net income in fiscal 2002 of approximately $900 ($.04 per share), subject to
the identification of separately recognized intangibles which would continue to
be amortized under the new rules. During 2002, the Company will perform the
first of the required impairment tests of goodwill and indefinite lived
intangible assets as of December 26, 2001 and has not yet determined what the
effect of these tests will be on the earnings and financial position of the
Company.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of which resolve significant implementation issues that had evolved
since the issuance of SFAS No. 121. SFAS No. 144 also establishes a single
accounting model for long-lived assets to be disposed of by sale. The Company
will adopt SFAS No. 144 in the first quarter of fiscal 2002. Adoption of SFAS
No. 144 is not expected to have a significant impact on the Company's
consolidated results of operations or financial position.
Risk Factors
If the Company is unable to compete effectively with its competitors, the
Company 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:
o The quality and numbers of employees needed to adequately staff our
restaurants;
o the quality and value of the food products offered;
-22-
o the quality of service;
o the cost of our raw products;
o the price of the food products offered;
o the restaurant locations; and
o the ambiance of facilities.
The Company competes with other steakhouse restaurants specifically and
with all other restaurants generally. The Company competes with national and
regional chains, as well as individually owned restaurants. The restaurant
industry has few non-economic barriers to entry, and as our 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.
Changing consumer preferences and discretionary spending patterns, potential
outbreaks of "mad cow disease" or "foot/mouth disease" and other factors
affecting the availability of beef could force us to modify our restaurant's
concept and menu and could result in a reduction in our revenues.
Even if we are able to successfully compete with other restaurant companies
with similar concepts, we may be forced to make changes in one or more of our
concepts in order to respond to changes in consumer tastes or dining patterns.
Consumer preferences could be affected by health concerns about the consumption
of beef, the primary item on our menus, or by specific events such as the
outbreak of "mad cow disease" or "foot/mouth disease" which occurred in the
United Kingdom. In addition, these events could reduce the available supply of
beef or significantly raise the price of beef. If we change a restaurant
concept, we may lose additional customers who do not prefer the new concept and
menu, and we may not be able to attract a sufficient new customer base to
produce the revenue needed to make the restaurant profitable. In addition, we
may have different or additional competitors for our intended customers as a
result of such a concept change and may not be able to successfully compete
against such competitors. Our success also depends on numerous factors affecting
discretionary consumer spending, including economic conditions, disposable
consumer income and consumer confidence. Adverse changes in these factors could
reduce guest traffic or impose practical limits on pricing, either of which
could reduce revenues and operating income.
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:
o Inflation, food, labor and employee benefit costs; and
o 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 purchasing practices or quickly or readily pass on
increased costs to customers, our business could be materially affected.
-23-
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:
o Obtaining of licenses for the sale of food and alcohol beverages;
o national and local health sanitation laws and regulations;
o national and local employment and safety laws and regulations; and
o local zoning, building 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, 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
and hourly employees to successfully operate the restaurants 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 strategic direction of our Company,
operating our business, identifying, recruiting and training key personnel,
identifying areas for expansion and arranging necessary financing. These key
personnel include Jamie B. Coulter, our Chief Executive Officer, T.D. O'Connell,
our Senior Vice President of Operations, and certain of our other executive
officers. Although we believe 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
-24-
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. Finally, since we announced that we had
engaged UBS Warburg to explore strategic alternative for us, the trading price
of our common stock has increased. While we are unable to determine whether such
announcement has had any impact on the price of our stock, if such announcement
has had a positive impact on our stock price and if we are unable to consummate
a transaction which might enhance stockholder value or corresponds to the
expectations of investors, the price of our common stock could be adversely
impacted.
Staggered Board; Blank-Check Preferred Stock; Change of Control Agreements.
Our current certificate of incorporation and bylaws provide for three
classes of directors to be elected on a staggered basis. This enables existing
directors to exercise significant control over our affairs, and may act as an
impediment to any future attempts by third parties to take control of our board
of directors. The Company plans to ask stockholders to approve a charter
amendment at its 2002 annual meeting to eliminate the present staggered terms
and have directors elected annually starting with its 2003 annual meeting. 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 by third
parties to take control of our board of directors.
Finally, our executive officers and certain employees are entitled to
receive a lump sum equal to 2.99 one year's annual compensation plus other
payments and incidental benefits under certain circumstances if there has been a
change of control of the Company. Mr. Coulter's change of control agreement is a
single "trigger" contract in that he will receive the benefits provided for in
the agreement if there is a change of control (as defined in the contract) while
the change of control contract for the other executive officers and employees is
a double trigger agreement in that there must be a change of control and a
second event to occur within 730 days of the change of control.
A Single Vendor Distributes Most of Our Consumable Products.
Approximately 59% of the consumable products used in our restaurants
are distributed through and delivered by a single vendor. While we believe we
could replace this vendor, any disruption of services by this vendor or any
change to a new vendor could adversely affect our restaurants.
We Are Uncertain as to the Future of Our Australian Operations.
The sales and operating margins of our Australian restaurants have
been negatively impacted by the effects of the National General Sales Tax
implemented by the Australian government in July 2000 and the weakening of the
overall Australian economy has had a negative impact on restaurant sales in
Australia. We closed 14 Australian restaurants in 2000, one in 2001, and
additional units may need to be closed in the future, due to, among other
things, the failure of the market trade area surrounding various locations to
develop as originally anticipated, thus, such market areas may not achieve
sufficient demographics to support a profitable level of business. We also
incurred a pre-tax charge for impaired assets in each of fiscal 2000 and fiscal
2001 for the write-down of impaired assets at certain under-performing
Australian restaurants. These write-downs require the use of estimates and
projections which are subject to a high degree of judgment and complexity. If
consumer spending in restaurants continues to be negatively impacted, we may be
required to make additional write-downs of impaired assets in Australia.
-25-
We Had Non-Cash Stock Compensation Expenses for Fiscal Year 2001 of $19,985,000
and Our Future Reported Earnings Will Be Impacted By Previous Stock Repricings.
We currently have options outstanding to purchase approximately
4,628,000 shares subject to variable plan accounting. Until such options are
exercised, forfeited or expire unexercised, as long as the price of our common
stock continues to close above $10.125 at the end of subsequent fiscal quarters,
we will record an additional non-cash expense or benefit related to the repriced
options then outstanding based upon the change in our common stock price as
compared to the price at the beginning of the last reporting period. This could
result in extreme volatility in reported earnings which could increase
volatility in our stock price. For fiscal year 2001 we had a non-cash
compensation expense of $19,985,000 and our stock price at the end of fiscal
2001 was $14.37.
Our Exploration of Strategic Alternatives May Not Be Successful
We engaged UBS Warburg to advise us in exploring a broad range of
strategic alternatives for enhancing the Company's stockholder value. We are
uncertain as to what strategic alternatives may be available to us or what
impact any particular strategic alternative will have on our stock price if
accomplished. Uncertainties and risks relating to our exploration of strategic
alternatives include:
o the exploration of strategic alternatives may disrupt
operations, affect morale and distract management, which could
have a material adverse effect on our operating results,
o the process of exploring strategic alternatives may be more
time consuming and expensive than we currently anticipate,
o we may not be able to successfully achieve the benefits of the
strategic alternative recommended to us by our financial
advisor and our board, and
o perceived uncertainties as to the future direction of our
company may result in the loss of employees or business
partners.
The Impact of the Recent Terrorist Attacks and the Risk of Future Terrorist
Attacks May Adversely Impact Our Revenue.
As a result of the terrorist attacks on the United States on September 11,
2001, a number of our restaurants, particularly our Del Frisco's and Sullivan's
restaurants, were negatively affected. Additionally, recent terrorist warnings,
both in the United States and internationally, suggest the possibility of future
terrorist attacks, which together with the unpredictability of future military
action and other responses to such terrorist attacks has resulted in economic
uncertainty. The occurrence of future terrorist attacks may adversely affect our
business and make it more difficult to forecast our future results of operation
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
Not applicable.
-26-
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 has been omitted since the required information
is not present.
Item 9. Changes in and Disagreements with Accountants
---------------------------------------------
on Accounting and Financial Disclosure
--------------------------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
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.
-27-
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
***3.3 Company's Amended and Re-Stated By-Laws
******10.2 1992 Lone Star Steakhouse & Saloon, Inc. Directors'
Stock Option Plan as amended.
****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 Amended Agreement dated January 1, 1999 between
the Company and Jamie B. Coulter
*****10.7 Employment Agreement between the Company and
Gerald T. Aaron, dated March 22, 2000.
*****10.8 Employment Agreement between the Company and
Randall H. Pierce, dated March 22, 2000
*****10.9 Employment Agreement between the Company and
T.D. O'Connell, dated March 22, 2000
*****10.10 Employment Agreement between the Company
And Jeffrey Bracken, dated March 22, 2000
*****10.11 Employment Agreement between the Company and
John D. White, dated March 22, 2000
******10.12 Change of Control Agreement between the Company
and Jamie B. Coulter dated January 3, 2001.
******10.13 Change of Control Agreement between the Company and
Gerald T. Aaron dated January 3, 2001.
-28-
******10.14 Change of Control Agreement between the Company and
Randall H. Pierce dated January 3, 2001.
******10.15 Change of Control Agreement between the Company and
T. D. O'Connell dated January 3, 2001.
******10.16 Change of Control Agreement between the Company and
Jeffrey Bracken dated January 3, 2001.
******10.17 Change of Control Agreement between the Company and
John D. White dated January 3, 2001.
******10.18 Change of Control Agreement between the Company and
Deidra Lincoln dated January 3, 2001.
*********10.19 Acknowledgment letters to Change of
Control Agreements dated April 18, 2001
between the Company and the signatories
who had Change of Control Agreements.
*******10.20 Non-Qualified Deferred Compensation Plan
********10.21 Revolver Loan Agreement dated August 10, 2001
between the Company and Sun Trust Bank.
*10.22 Letters of Acknowledgement to Change of Control
Agreements dated 11-14-01 executed by the
signatories who had Change of Control Agreements.
*21.1 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' report included
herein
- -----------------------------
(b) Reports on Form 8-K filed in the fourth quarter of
2001: The Company filed one Form 8-K under Item #5
- Other Events for the quarter ended December 25,
2001.
* Filed herewith.
** 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 Form 10-Q for
the quarter ended June 12, 2001.
**** 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 Annual Report on Form 10-K
for the fiscal year ended December 28, 1999.
****** Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 26, 2000.
******* Incorporated by reference to the Company's Registration Statement on
Form S-8, filed with the Commission on March 31,
2000 (Commission File No. 333-33762).
-29-
******** Incorporated by reference to the Company's Form 10-Q for the
quarter ended September 4, 2001.
********* Incorporated by reference to the Company's Annual Report on
Form 10-K-A for the fiscal year ended December 26, 2000.
-30-
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 25th day of March 2002.
LONE STAR STEAKHOUSE & SALOON, INC.
(Registrant)
/s/ Randall Pierce
-----------------------------------
Randall H. Pierce
Chief Financial Officer and
Principal Accounting Officer
-31-
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 Chief Executive Officer March 25, 2002
- -------------------------------------
Jamie B. Coulter
Executive Vice March 25, 2002
/s/ John D. White President,
- ------------------------------------- Treasurer and Director
John D. White
Chief Financial Officer
/s/ Randall H. Pierce and Principal March 25, 2002
- ------------------------------------- Accounting Officer
Randall H. Pierce
Chairman of the Board
/s/ Clark R. Mandigo and Director March 25, 2002
- -------------------------------------
Clark R. Mandigo
Director March 25, 2002
- -------------------------------------
Guy W. Adams
/s/ Fred B. Chaney Director March 25, 2002
- -------------------------------------
Fred B. Chaney
/s/ William B. Greene Director March 25, 2002
- -------------------------------------
William B. Greene
/s/ Thomas C. Lasorda Director March 25, 2002
- -------------------------------------
Thomas C. Lasorda
/s/ Michael A. Ledeen Director March 25, 2002
- -------------------------------------
Michael A. Ledeen
/s/ Mark Saltzgaber Director March 25, 2002
- -------------------------------------
Mark Saltzgaber
-32-
Lone Star Steakhouse & Saloon, Inc.
Index to Financial Statements
Pages
-----
Report of Independent Auditors.....................................................F-1
Consolidated Balance Sheets as of December 25, 2001 and December 26, 2000..........F-2
Consolidated Statements of Income for the years ended December 25, 2001,
December 26, 2000, and December 28, 1999...........................................F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 25, 2001, December 26, 2000, and December 28, 1999.....................F-5
Consolidated Statements of Cash Flows for the years ended
December 25, 2001, December 26, 2000, and December 28, 1999.....................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. (the Company) and subsidiaries as of December 25, 2001
and December 26, 2000, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 25, 2001. 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 25, 2001 and December 26,
2000, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 25, 2001, in conformity
with accounting principles generally accepted in the United States.
Kansas City, Missouri
February 12, 2002
F-1
Lone Star Steakhouse & Saloon, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
December 25, December 26,
2001 2000
---------------------------
Assets
Current assets:
Cash and cash equivalents $ 82,919 $ 29,029
Accounts receivable 856 230
Inventories 12,466 12,704
Deferred income taxes 2,872 1,997
Other 4,574 3,188
---------------------------
Total current assets 103,687 47,148
Property and equipment:
Land 120,173 123,841
Buildings 172,895 174,849
Leasehold improvements 112,634 116,145
Equipment 99,795 99,673
Furniture and fixtures 20,874 21,364
---------------------------
526,371 535,872
Less accumulated depreciation and amortization 156,488 129,111
---------------------------
369,883 406,761
Deferred compensation plan investments 5,059 2,276
Other assets:
Intangible assets, net 24,589 27,322
Deferred income taxes 9,253 2,880
Other 2,558 2,536
---------------------------
36,400 32,738
---------------------------
Total assets $515,029 $488,923
===========================
F-2
December 25, December 26,
2001 2000
--------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 13,360 $ 12,918
Sales tax payable 3,156 2,748
Accrued payroll 10,100 9,801
Real estate taxes 2,126 2,070
Gift certificates 9,208 8,209
Income taxes payable 11,541 1,207
Restaurant closure accrual 672 2,209
Other 5,240 9,702
--------------------------------
Total current liabilities 55,403 48,864
Long-term liabilities, principally deferred
compensation obligations
5,187 2,276
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares
authorized; none issued - -
Common stock, $.01 par value, 98,000,000 shares
authorized; 24,049,770 shares issued and
outstanding (24,275,619 in 2000) 240 243
Additional paid-in capital 205,982 188,976
Retained earnings 261,660 260,423
Accumulated other comprehensive loss (13,443) (11,859)
--------------------------------
Total stockholders' equity 454,439 437,783
--------------------------------
Total liabilities and stockholders' equity $ 515,029 $ 488,923
================================
See notes to consolidated financial statements.
F-3
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Income
(In Thousands, Except for Per Share Amounts)
For the Year Ended
------------------------------------------
December 25, December 26, December 28,
2001 2000 1999
------------------------------------------
Net sales $ 598,017 $ 575,863 $ 585,755
Costs and expenses:
Costs of sales 205,451 202,343 207,696
Restaurant operating expenses 283,352 276,974 263,940
Depreciation and amortization 27,753 28,574 30,970
Provision for impaired assets and restaurant closings 2,830 4,310 38,931
------------------------------------------
Restaurant costs and expenses 519,386 512,201 541,537
------------------------------------------
Restaurant operating income 78,631 63,662 44,218
General and administrative expenses 41,933 42,472 38,057
Non-cash stock compensation expense 19,985 -- --
Contribution - "Dine for America" 2,124 -- --
------------------------------------------
Income from operations 14,589 21,190 6,161
Other income, net 3,889 2,530 2,190
------------------------------------------
Income before income taxes 18,478 23,720 8,351
Provision for income taxes (5,222) (7,590) (2,950)
------------------------------------------
Net income $ 13,256 $ 16,130 $ 5,401
==========================================
------------------------------------------
Basic earnings per share $ 0.55 $ 0.62 $ 0.15
==========================================
------------------------------------------
Diluted earnings per share $ 0.52 $ 0.61 $ 0.15
==========================================
See notes to consolidated financial statements.
F-4
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Amounts)
Common Stock Additional
Preferred --------------------- Paid-In
Stock Number Amount Capital
--------------------------------------------------------
Balance, December 29, 1998 - 38,607,968 $386 $314,366
Stock options exercised - 8,590 1 34
Common stock purchased and retired - (8,758,005) (88) (76,400)
Comprehensive income:
Net income - - - -
Foreign currency translation adjustments - - - -
Comprehensive income
--------------------------------------------------------
Balance, December 28, 1999 - 29,858,553 299 238,000
Stock options exercised - 22,140 1 180
Common stock purchased and retired - (5,605,074) (57) (49,204)
Cash dividends ($0.375 per share) - - - -
Comprehensive income:
Net income - - - -
Foreign currency translation adjustments - - - -
Comprehensive income
--------------------------------------------------------
Balance, December 26, 2000 - 24,275,619 243 188,976
Stock options exercised - 242,838 2 2,022
Tax benefit related to options exercised - - - 381
Common stock purchased and retired - (468,687) (5) (5,140)
Cash dividends ($.50 per share) - - - -
Redemption of preference rights - - - (242)
Non-cash stock compensation expense - - - 19,985
Comprehensive income:
Net income - - - -
Foreign currency translation adjustments - - - -
Comprehensive income - - - -
--------------------------------------------------------
Balance, December 25, 2001 - 24,049,770 $240 $205,982
========================================================
Accumulated
Other
Retained Comprehensive
Earnings Loss Total
----------------------------------------------
Balance, December 29, 1998 $248,522 $(9,833) $553,441
Stock options exercised - - 35
Common stock purchased and retired - - (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 253,923 (7,843) 484,379
Stock options exercised - - 181
Common stock purchased and retired (49,261)
Cash dividends ($0.375 per share) (9,630) - (9,630)
Comprehensive income:
Net income 16,130 - 16,130
Foreign currency translation adjustments - (4,016) (4,016)
-----------------
Comprehensive income 12,114
----------------------------------------------
Balance, December 26, 2000 260,423 (11,859) 437,783
Stock options exercised - - 2,024
Tax benefit related to options exercised - - 381
Common stock purchased and retired - - (5,145)
Cash dividends ($.50 per share) (12,019) - (12,019)
Redemption of preference rights - - (242)
Non-cash stock compensation expense - - 19,985
Comprehensive income:
Net income 13,256 - 13,256
Foreign currency translation adjustments - (1,584) (1,584)
-----------------
Comprehensive income - - 11,672
----------------------------------------------
Balance, December 25, 2001 $261,660 $(13,443) $454,439
==============================================
F-5
See notes to consolidated financial statements.
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
For the Year Ended
------------------------------------------------------------------
December 25, December 26, December 28,
2001 2000 1999
------------------------------------------------------------------
Operating activities
Net income $13,256 $16,130 $ 5,401
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 2,622 2,902 2,800
Depreciation 29,065 29,669 30,732
Non-cash stock compensation 19,985 - -
Provision for impaired assets and restaurant
closings 2,830 4,310 38,931
Gain on sales of assets (1,873) (1,304) -
Deferred income taxes (7,248) (734) (13,067)
Net change in operating assets and liabilities:
Accounts receivable (626) 606 663
Inventories 206 (1,335) 4,485
Other current assets (1,431) 702 (366)
Accounts payable 442 3,763 1,181
Income taxes payable 10,715 (3,313) 2,078
Other liabilities (4,515) (2,051) (1,952)
------------------------------------------------------------------
Net cash provided by operating activities 63,428 49,345 70,886
Investing activities
Purchases of property and equipment (3,924) (21,665) (34,085)
Proceeds from sales of assets 10,098 10,213 -
Other (334) (819) 448
------------------------------------------------------------------
Net cash provided by (used in) investing activities 5,840 (12,271) (33,637)
Financing activities
Net proceeds from issuance of common stock 2,024 181 35
Proceeds from revolver - 6,955 -
Payment on revolver - (6,955) -
Common stock repurchased and retired (5,145) (49,261) (76,488)
Dividends paid (12,019) (9,630) -
Redemption of preference rights (242) - -
------------------------------------------------------------------
Net cash used in financing activities (15,382) (58,710) (76,453)
Increase (decrease) in cash and cash equivalents
Effect of exchange rate changes on cash 4 (8) 30
------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 53,890 (21,644) (39,174)
Cash and cash equivalents at beginning of year 29,029 50,673 89,847
-----------------------------------------------------------------
Cash and cash equivalents at end of year $82,919 $29,029 $50,673
==================================================================
Supplemental disclosure of cash flow information
Cash paid for income taxes $ 1,755 $11,484 $14,908
==================================================================
See notes to consolidated financial statements.
F-6
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
December 25, 2001
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. 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 25, 2001, the Company owns and operates 251 Lone Star
Steakhouse & Saloons in the United States and 25 in Australia. In addition, the
Company owns and operates five Del Frisco's Double Eagle Steak Houses and 15
Sullivan's Steakhouses.
Significant Accounting Policies
o Principles of Consolidation
The consolidated financial statements include the accounts of Lone Star
Steakhouse & Saloon, Inc. and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
o Foreign Currency Translation
Assets and liabilities of the Company's foreign operations in Australia
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.
o 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
(All Amounts in Thousands, Except Share and Per Share Amounts)
1. Background and Significant Accounting Policies (continued)
of approximately $63,243 and $21,089 at December 25, 2001 and December 26,
2000, respectively, in investment grade securities with municipal, state,
and U.S. government agencies.
o 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.
o 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.
o Financial Instruments
The Company sometimes utilizes 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 have not been significant. The Company held no live
beef cattle futures contracts at December 25, 2001. 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
(All Amounts in Thousands, Except Share and Per Share Amounts)
1. Background and Significant Accounting Policies (continued)
o Inventories
Inventories consist of food and beverages and are stated at the lower of
cost (first-in, first-out) or market.
o 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.
o Preopening Costs
Preopening costs, including labor costs and costs of hiring and training
personnel and certain other costs relating to opening new restaurants are
expensed when the costs are incurred.
o 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 25, 2001 and December 26, 2000 is $12,340
and $9,975, respectively.
F-9
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
1. Background and Significant Accounting Policies (continued)
o Deferred Compensation Plan
In connection with the Company's deferred compensation plan, the Company
has created a grantor trust to which it contributes amounts equal to
employee participants' qualified deferrals and the Company's matching
portion. The plan is informally funded using life insurance policies held
by the grantor trust. All assets held by the grantor trust remain the
property of the Company; however, the Company does not currently intend to
use such assets for any purpose other than to fund payments to the
participants pursuant to the terms of the deferred compensation plan. The
assets of the Plan consist principally of cash surrender values of the
life insurance policies. Because the investment assets of the deferred
compensation plan are assets of the Company, and would be subject to
general claims by creditors in the event of the Company's insolvency, the
accompanying consolidated balance sheet reflects such investments as
assets with an offsetting liability for deferred compensation reflected in
long-term liabilities.
o Impairment of Long-Lived Assets
Long-lived assets and certain intangibles, including goodwill, are
reviewed for impairment whenever events or changes in circumstances
indicate 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.
F-10
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
1. Background and Significant Accounting Policies (continued)
o Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 25, 2001, December 26, 2000, and December 28, 1999,
are $18,050, $18,065, and $8,591, respectively.
o Accounting for Stock-Based Compensation
In accordance with Accounting Principles Board (APB) Opinion No. 25 and
related interpretations, 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 5.
The Company adopted Financial Accounting Standards Board Interpretation
No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB No. 25, effective July 1, 2000. In
accordance with FIN 44, repriced options are accounted for as compensatory
options using variable accounting treatment (see Note 5).
o 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.
F-11
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
1. Background and Significant Accounting Policies (continued)
o Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities,
which the Company adopted effective December 27, 2000. The statement
requires the Company to recognize all derivatives on the consolidated
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's adoption of SFAS
No. 133 did not have a significant effect on its results of operations or
financial position.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001.
Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with SFAS No. 142. The Company will apply
the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of 2002. Application of the
non-amortization provisions of SFAS No. 142 is expected to result in an
increase in net income in fiscal 2002 of approximately $900 ($.04 per
share), subject to the identification of separately recognized intangibles
which would continue to be amortized under the new rules. During fiscal
2002, the Company will perform the first of the required impairment tests
of goodwill and indefinite lived intangible assets as of December 26, 2001
and has not yet determined what the effect of these tests will be on the
consolidated results of operations or financial position of the Company.
F-12
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
1. Background and Significant Accounting Policies (continued)
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, and resolves significant implementation issues that had evolved since the
issuance of SFAS No. 121. SFAS No. 144 also establishes a single accounting
model for long-lived assets to be disposed of by sale. The Company will adopt
SFAS No. 144 in the first quarter of fiscal 2002. Adoption of SFAS No. 144 is
not expected to have a significant impact on the Company's consolidated results
of operation or financial position.
o 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
2001, 2000, and 1999 each included 52 weeks of operations.
2. Treasury Stock Transactions
The Board of Directors has authorized the Company to purchase shares of the
Company's common stock in open market or in privately negotiated transactions.
Pursuant to such authorization, the Company has purchased 468,687, 5,605,074,
and 8,758,005 shares of its common stock at average prices of $10.98, $8.79, and
$8.73 per share during the fiscal years ended 2001, 2000, and 1999,
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.
3. Long-Term Revolvers
In August 2001, the Company expanded its credit facilities by entering into an
unsecured revolving credit agreement with a group of banks led by SunTrust Bank.
The new credit facility allows the Company to borrow up to $50,000. The
commitment terminates at June 30, 2004; however, it is subject to acceleration
in the event of a change of control of the Company, as that term is defined in
the revolving credit agreement. At the time of each borrowing, the Company may
elect to pay interest at either the banks published prime rate or a rate
F-13
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
3. Long-Term Revolvers (continued)
determined by reference to the Adjusted LIBOR rate. The Company is required to
achieve certain financial ratios and to maintain certain net worth amounts as
defined in the agreement. The Company is required to pay on a quarterly basis a
facility fee equal to .25% per annum on the daily unused amount of the credit
facility. At December 25, 2001, there were no borrowings outstanding pursuant to
the credit facility.
The Company also has entered into a $5,000 revolving term loan agreement with a
bank, under which no borrowings were outstanding at December 25, 2001 or
December 26, 2000. The loan commitment matures in August 2004 and requires
interest only payments through April 2003, at which time the loan will convert
to a term note with monthly principal and interest payments sufficient to
amortize the loan over its remaining term. The interest rate is at .50% below
the daily prime rate as published in the Wall Street Journal. In addition, the
Company pays a facility fee of .25% per annum on the daily unused portion of the
credit facility.
4. Preferred Stock and Redemption of Preference Rights
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.
In 1997, the Company issued in the form of a dividend one preference share
purchase right (the "Right" and Collectively the "Rights") for each share of
Company common stock outstanding on October 10, 1997. Each right represented the
right to purchase one-hundredth of a preference share, upon the terms set forth
in the rights agreement dated October 3, 1997. On November 15, 2001, the Board
of Directors pursuant to the provisions of the rights agreement, exercised its
option to redeem all of the outstanding rights at a redemption price of $.01 per
right and the rights were redeemed on December 10, 2001.
F-14
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
5. 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 requires use of option valuation models that were
not developed for use in valuing employee stock options.
o 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.
o Directors Stock Option Plan
In January 1992, the Board of Directors adopted a stock option plan as
amended June 9, 2000, providing for nondiscretionary grants to nonemployee
directors pursuant to which up to 700,000 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.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 using 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 2001, 2000,
and 1999, respectively: risk-free interest rates of 4.5%, 6.0%, and 6.0%;
volatility factors of the expected market price of the Company's common stock of
0.488, 0.436, and 0.443; a weighted-average expected life of the option ranging
from four to five years; and a dividend yield of 3.0% and no yield for 2000 and
1999.
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
F-15
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
5. Stock Options (continued)
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:
2001 2000 1999
--------------------------------------
Pro forma net income (loss) $23,184 $7,914 $(4,180)
Pro forma earnings (loss) per share:
Basic 0.96 0.30 (0.12)
Diluted 0.92 0.30 (0.12)
Weighted-average fair value of options
granted during the year 3.72 3.68 3.84
A summary of the Company's stock option activity and related information for the
years ended December 25, 2001, December 26, 2000, and December 28, 1999 is as
follows:
2001 2000 1999
-----------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Options Exercise Options Exercise Options
Price (000) Price (000) Price (000)
-----------------------------------------------------------------------------
Outstanding at beginning of year $ 9.57 7,827
$16.57 6,456 $16.91 6,982
Granted 10.44 461 8.55 6,394 8.15 616
Exercised 8.33 (243) 8.16 (22) 4.01 (9)
Canceled 9.09 (126) 17.32 (5,001) 13.04 (1,133)
-------------------------- ---------- -----------
Outstanding at end of year $ 9.67 7,919 9.57 7,827 16.57 6,456
========== ========== ===========
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. Other than the change in the exercise price, there
was no other change in the terms of the original options as granted.
F-16
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
5. Stock Options (continued)
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.
Financial Accounting Standards Board Interpretation No. 44 (FIN 44), Accounting
for Certain Transactions Involving Stock Compensation, an Interpretation of APB
No. 25, became effective July 1, 2000. FIN 44 requires, among other things, that
stock options, which have been modified after December 15, 1998 to reduce the
exercise price, be accounted for as variable. Under variable plan accounting,
compensation expense is adjusted for increases or decreases in the fair market
value of the Company's common stock based upon the changes in the common stock
price from the value of $10.125 per share which was the initial base period fair
value used to measure the non-cash stock compensation charge or benefit at July
1, 2000. Variable plan accounting is applied to the modified awards until the
options are exercised, forfeited, or expire unexercised. The options which were
repriced in fiscal 1999 and 2000 are subject to the accounting provisions of FIN
44, and at December 25, 2001, outstanding options to purchase approximately
4,628,000 shares were affected by this accounting requirement. As a result of
the application of FIN 44, the Company recorded non-cash stock compensation
expense of $19,985 in fiscal 2001. In future periods, the Company will record an
additional non-cash charge or benefit related to the repriced options then
outstanding based upon the change in the Company's common stock price as
compared to the last reporting period. If the Company's common stock price at
the beginning and end of any reporting period is less than $10.125, no charge or
benefit will be reflected.
F-17
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
5. Stock Options (continued)
For options outstanding as of December 25, 2001, 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
December 25, Exercise Remaining
Range of Prices 2001 Price Contract Life
-----------------------------------------------------------------------------
$3.38 to $7.94 220,267 $ 7.41 3.45 years
$8.00 to $17.94 6,859,760 8.69 5.09 years
$18.25 to $18.81 839,448 18.28 3.10 years
The number of shares and weighted-average exercise price of options exercisable
at December 25, 2001 are as follows:
Options Exercisable
-----------------------------------------------------------------------------
Number Weighted-
Exercisable at Average
December 25, Exercise
Range of Prices 2001 Price
-----------------------------------------------------------------------------
$3.38 to $7.94 169,753 $ 7.40
$8.00 to $17.94 5,353,454 8.54
$18.25 to $18.81 839,448 18.28
6. Related-Party Transactions
The Company leases on a month-to-month basis parking lot space and document
storage space and prior to April 1, 2001, meeting room space, from entities
owned by Jamie B. Coulter, the Company's Chief Executive Officer. Total rental
fees paid to these related entities in 2001, 2000, and 1999 were $37, $30, and
$47, respectively. In addition, in 2001, 2000, and 1999 the Company purchased
business gifts and awards from a retail store owned by Jamie B. Coulter totaling
$2, $56, and $8, respectively.
F-18
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
6. Related-Party Transactions (continued)
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.
7. Leases
The Company leases certain facilities under noncancelable operating leases
having terms expiring between 2002 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 2001,
2000, and 1999 was $12,619, $12,310, and $11,575, respectively, including
contingent rentals of approximately $444, $228, and $266, respectively.
Lease payments under noncancelable operating leases for each of the next five
years and in the aggregate are as follows at December 25, 2001:
Operating
Leases
------------
2001 $11,595
2002 9,566
2003 6,836
2004 4,069
2005 2,260
Thereafter 4,465
------------
Total minimum lease payments $38,791
============
F-19
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
8. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
2001 2000 1999
----------------------------------------
Numerator:
Numerator for basic and diluted earnings
per share - income available to
common stockholders $ 13,256 $ 16,130 $ 5,401
========================================
Denominator:
Denominator for basic earnings per
share - weighted-average shares 24,036,942 26,189,600 35,089,084
Effect of dilutive employee stock
options 1,287,214 296,333 101,207
----------------------------------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares 25,324,156 26,485,933 35,190,291
========================================
Basic earnings per share $ 0.55 $ 0.62 $ 0.15
========================================
Diluted earnings per share $ 0.52 $ 0.61 $ 0.15
========================================
9. Income Taxes
The components of the provision for income taxes consist of the following:
2001 2000 1999
----------------------------------------------
Current tax expense:
Federal $10,714 $6,997 $14,526
State 1,756 1,327 1,491
----------------------------------------------
Total current 12,470 8,324 16,017
Deferred tax expense (benefit):
Federal (7,007) 137 (17,861)
Foreign 536 (886) 6,981
State (777) 15 (2,187)
----------------------------------------------
Total deferred (7,248) (734) (13,067)
----------------------------------------------
Total provision for income taxes $ 5,222 $7,590 $ 2,950
==============================================
F-20
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
9. Income Taxes (continued)
The difference between the reported provision for income taxes and taxes
determined by applying the applicable U.S. federal statutory income tax rate to
income before taxes is reconciled as follows:
2001 2000 1999
-----------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
-----------------------------------------------------------------
Income tax expense at federal statutory
rate $ 6,467 35% $ 8,302 35% $ 2,923 35%
State tax expense, net 635 3 878 4 1,105 13
Valuation allowance -- -- -- -- 78 3
Other items, net, principally tip credits (1,880) (10) (1,590) (7) (1,156) (16)
-----------------------------------------------------------------
Actual provision for income taxes $ 5,222 28% $ 7,590 32% $ 2,950 35%
=================================================================
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.
Significant components of deferred tax liabilities and assets are presented
below:
December 25, 2001 December 26, 2000
-------------------------------------------------
Deferred tax assets:
Foreign NOL carryforward $10,854 $ 7,612
Preopening costs 154 1,077
Accrued liabilities 1,510 1,107
Stock based compensation 7,480
Deferred compensation 1,903 930
Other 1,601 2,183
-------------------------------------------------
23,502 12,909
Valuation allowance (3,839) (3,839)
-------------------------------------------------
Total deferred tax assets 19,663 9,070
Deferred tax liabilities:
Property and equipment 4,578 1,814
Basis differences in foreign investments 2,185 2,185
Other 775 194
-------------------------------------------------
Total deferred tax liabilities 7,538 4,193
-------------------------------------------------
Net deferred tax assets $12,125 $ 4,877
=================================================
F-21
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
9. Income Taxes (continued)
As of December 25, 2001, the Company has net operating loss (NOL) carryforwards
of approximately $26,563 for foreign tax purposes with indefinite expiration
dates.
The valuation allowance for deferred tax assets at December 25, 2001 was $3,839.
The valuation allowance is unchanged for the year ended December 25, 2001 and
December 26, 2000. 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 associated with the Foreign NOL carryforward is
dependent on the generation of future taxable income in Australia during the
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 it will
realize the benefits of the deferred tax assets, net of the existing valuation
allowance, at December 25, 2001.
Pretax net loss attributable to foreign operations was $3,510 and $9,274 for the
years ended December 25, 2001 and December 26, 2000, respectively.
10. Provision for Impaired Assets and Restaurant Closings
The Company periodically reviews its long-lived assets for indications of
impairment. Based on those reviews, 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 the fourth quarter of 2001, the Company recorded a provision of $2,552 for
the write-down of impaired assets relating primarily to certain underperforming
Australian restaurants. In addition, a charge of $278 was recorded for
severance, rents, and certain other costs associated with closing an Australian
restaurant.
F-22
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
10. Provision for Impaired Assets and Restaurant Closings (continued)
In the third and fourth quarters of 2000, the Company recorded a provision of
$3,000 for the write-down of impaired assets relating to certain underperforming
Australian restaurants. In addition, a charge of $1,310 was recorded for
severance, rents, and certain other costs associated with closing 14 Australian
restaurants.
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 domestic restaurants.
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 $611,
$7,026, and $33,143 and operating losses at the restaurant level were $112,
$860, and $4,186 for the years ended 2001, 2000, and 1999, respectively.
11. Retirement Plans
In August 1999, the Company approved the adoption of two plans which 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 80% 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 2001,
2000 and 1999, the Company's contributions to the Plans were $1,978, $1,953 and
$475, respectively.
F-23
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
12. Quarterly Financial Summaries (Unaudited)
The following table summarizes the unaudited consolidated quarterly results of
operations for fiscal 2001 and 2000:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
----------------------------------------------
2001
Net sales $ 143,753 $ 136,069 $ 136,465 $ 181,730
Restaurant operating income (c) 19,691 15,693 16,837 26,410
Net income (loss) (a), (b), and (c) 8,240 (5,320) 7,016 3,320
Basic earnings (loss) per share 0.34 (0.22) 0.29 0.14
Diluted earnings (loss) per share 0.34 (0.22) 0.28 0.13
(a) The second, third, and fourth quarters include non-cash stock
compensation charges (credits) net of income taxes of $9,094, $(2,053),
and $5,450, respectively.
(b) The fourth quarter includes a charge net of income taxes of $1,327 for
the Company's contribution to the American Red Cross in connection with
the restaurant industry's "Dine for America" fund raising program as
the Company contributed 100% of its restaurant sales on October 11,
2001.
(c) The fourth quarter of fiscal 2001 includes a charge to earnings of
$2,830 ($1,822 net of income tax) related to a provision for asset
impairment and store closing costs for certain under performing
restaurants, principally in Australia.
F-24
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
12. Quarterly Financial Summaries (Unaudited) (continued)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-----------------------------------------
2000
Net sales $139,254 $134,187 $130,953 $171,469
Restaurant operating income (a) and (b) 21,938 17,687 12,415 11,622
Net income (a) and (b) 7,102 5,858 2,547 623
Basic earnings per share 0.25 0.22 0.10 0.05
Diluted earnings per share 0.25 0.22 0.10 0.04
(a) The third quarter of fiscal 2000 includes a charge to earnings of $541
($352 net of income tax) related to the provision for Australian
restaurant store closings recorded in the quarter.
(b) The fourth quarter of fiscal 2000 includes a charge to earnings of
$3,769 ($2,480 net of income tax) related to the provision for asset
impairment and store closing costs recorded in the quarter for certain
Australian restaurants.
13. Other Income, Net
The components of other income, net are as follows:
2001 2000 1999
-----------------------------------------------
Interest income $2,055 $1,431 $2,171
Interest expense (39) (327) -
Gain on sale of assets 1,873 1,304 -
Other - 122 19
-----------------------------------------------
$3,889 $2,530 $2,190
===============================================
F-25
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
14. Litigation
California Public Employees Retirement System ("CalPERS") filed a shareholders
derivative action on October 16, 2001 against certain present and former
Directors alleging breach of fiduciary duties by certain present and former
Directors and that certain of such defendants were unjustly enriched through
related party transactions and by the repricing of stock options previously
issued. The lawsuit also seeks to prevent enforcement of certain change of
control agreements granted to executive officers of the Company, seeks
declaratory and injunctive relief and seeks damages to be paid to the Company.
The Company is a nominal defendant.
On January 9, 2002, CalPERS filed an amended complaint and added a claim to
attempt to certify a class action based on their allegation that a provision in
the change of control agreements violates Delaware law. A motion to dismiss was
filed by certain defendants on February 8, 2002, seeking to dismiss all claims
of CalPERS. Discovery has been stayed pending a court decision on the motion to
dismiss.
The Company is involved from time to time in litigation arising in the ordinary
course of business as well as the matter set forth above. The Company believes
the outcome of such matters will not have a material adverse effect on its
consolidated financial position or results of operations.
15. Subsequent Events
On January 8, 2002, the Board of Directors declared the Company's quarterly cash
dividend of $.15 per share, payable February 1, 2002, to stockholders of record
on January 18, 2002.
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