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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For quarter ended Commission file number
September 3, 2002 0-19907
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
incorporation or organization) Identification Number)
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)
Indicate by check mark whether the registrant (1) has filed all
documents and 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.
/X/ Yes / / No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at October 11, 2002
Common Stock, $.01 par value 20,961,962 shares
LONE STAR STEAKHOUSE & Saloon, Inc.
Index
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 2
at September 3, 2002 and December 25, 2001
Condensed Consolidated Statements of 3
Income for the twelve weeks ended
September 3, 2002 and September 4, 2001
Condensed Consolidated Statements of Income 4
for the thirty-six weeks ended September 3, 2002
and September 4, 2001
Condensed Consolidated Statements of 5
Cash Flows for the thirty-six weeks ended
September 3, 2002 and September 4, 2001
Notes to Condensed Consolidated 6
Financial Statements
Item 2. Management's Discussion and 10
Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative 17
Disclosures about Market Risks
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Items 1, 2, 3 and 5 have been omitted
since the items are either inapplicable or the
answer is negative
Item 4. Submission of matters to a vote of stockholders 17
Item 6. Exhibits and Reports on Form 8-K 18
-1-
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
September 3, December 25,
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 53,428 $ 82,919
Inventories 11,822 12,466
Other current assets 7,981 8,302
--------- ---------
Total current assets 73,231 103,687
Property and equipment 524,474 526,371
Less accumulated depreciation and amortization (174,849) (156,488)
--------- ---------
349,625 369,883
Other assets:
Deferred income taxes 18,053 9,253
Intangible and other assets, net 32,999 32,206
--------- ---------
Total assets $ 473,908 $ 515,029
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,632 $ 16,516
Other current liabilities 28,839 38,887
--------- ---------
Total current liabilities 43,471 55,403
Long term liabilities, principally defered compensation obligations 8,751 5,187
Stockholders' equity:
Preferred stock -- --
Common stock 220 240
Additional paid-in capital 170,274 205,982
Retained earnings 263,519 261,660
Accumulated other comprehensive loss (12,327) (13,443)
--------- ---------
Total stockholders' equity 421,686 454,439
--------- ---------
Total liabilities and stockholders' equity $ 473,908 $ 515,029
--------- ---------
See accompanying notes.
-2-
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Statements of Income
(In thousands, except for per share amounts)
(Unaudited)
For the twelve weeks ended
--------------------------
September 3, September 4,
2002 2001
---- ----
Net sales $ 134,492 $ 135,685
Costs and expenses:
Costs of sales 44,532 47,698
Restaurant operating expenses 63,451 64,646
Depreciation and amortization 5,855 6,384
--------- ---------
Restaurant costs and expenses 113,838 118,728
--------- ---------
Restaurant operating income 20,654 16,957
General and administrative expenses 9,614 10,221
Non-cash stock compensation expense (benefit) (9,228) (3,170)
--------- ---------
Income from operations 20,268 9,906
Other income, net 197 840
--------- ---------
Income from continuing operations before income taxes 20,465 10,746
Provision for income taxes 6,874 3,436
--------- ---------
Income from continuing operations 13,591 7,310
Discontinued opeartions:
Loss from operations of discontinued restaurants (29) (470)
Income tax benefit 11 176
--------- ---------
Loss on discontinued operations (18) (294)
--------- ---------
Net income $ 13,573 $ 7,016
========= =========
Basic earnings (loss) per share:
Continuing operations $ 0.61 $ 0.30
Discontinued operations -- (0.01)
--------- ---------
$ 0.61 $ 0.29
========= =========
Diluted earnings (loss) per share:
Continuing operations $ 0.55 $ 0.29
Discontinued operations -- (0.01)
--------- ---------
$ 0.55 $ 0.28
========= =========
Pro forma amounts assuming retroactive application of
accounting change:
Net income $ 13,573 $ 7,242
========= =========
Pro forma basic earnings per share $ 0.61 $ 0.30
--------- ---------
Pro forma diluted earnings per share $ 0.55 $ 0.28
========= =========
See accompanying notes.
-3-
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Statements of Income
(In thousands, except for per share amounts)
(Unaudited)
For the thirty-six weeks ended
------------------------------
September 3, 2002 September 4, 2001
----------------- -----------------
Net sales $ 422,339 $ 413,810
Costs and expenses:
Costs of sales 139,414 144,408
Restaurant operating expenses 191,098 197,648
Depreciation and amortization 17,695 19,175
--------- ---------
Restaurant costs and expenses 348,207 361,231
--------- ---------
Restaurant operating income 74,132 52,579
General and administrative expenses 29,103 29,264
Abandoned merger expenses 2,967 --
Non-cash stock compensation expense 23,343 11,265
--------- ---------
Income from operations 18,719 12,050
Other income, net 844 3,167
--------- ---------
Income from continuing operations before income taxes
and cumulative effect of accounting change 19,563 15,217
Provision for income taxes 6,589 4,837
--------- ---------
Income from continuing operations before cumulative
effect of accounting change 12,974 10,380
Discontinued opeations:
Loss from operations of discontinued restaurants (356) (708)
Income tax benefit 131 264
--------- ---------
Loss on discontinued operations (225) (444)
--------- ---------
Income before cummulative effect of accounting change 12,749 9,936
Cumulative effect of accounting change, net of tax (318) --
--------- ---------
Net income $ 12,431 $ 9,936
========= =========
Basic earnings per share:
Continuing operations $ 0.54 $ 0.43
Discontinued operations (0.01) (0.02)
Cumulative effect of accounting change (0.01) --
--------- ---------
Basic earnings per share $ 0.52 $ 0.41
========= =========
Diluted earnings per share:
Continuing operations $ 0.49 $ 0.41
Discontinued operations (0.01) (0.01)
Cumulative effect of accounting change (0.01) --
--------- ---------
Diluted earnings per share $ 0.47 $ 0.40
========= =========
Pro forma amounts assuming retroactive application of
accounting change:
Net income $ 12,749 $ 10,563
========= =========
Pro forma basic earnings per share $ 0.53 $ 0.44
========= =========
Pro forma diluted earnings per share $ 0.48 $ 0.42
========= =========
See accompanying notes.
-4-
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
For the thirty-six weeks ended
-------------------------------------
September 3, 2002 September 4, 2001
----------------- -----------------
Cash flows from operating activities:
Net income $ 12,431 $ 9,936
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 20,377 21,927
Non-cash stock compensation expense 23,343 11,265
Provision for impaired assets and restaurant closings 200 --
(Gain) loss on sale of assets 149 (2,151)
Cummulative effect of accounting change 508 --
Deferred income taxes (8,800) (4,462)
Loss from discontinued operations 225 445
Net change in operating assets and liabilities:
Change in operating assets 1,006 307
Change in operating liabilities (5,993) (484)
-------- --------
Net cash provided by operating activities 43,446 36,783
Cash flows from investing activities:
Purchases of property and equipment (1,653) (2,373)
Proceeds from sale of assets 2,806 5,462
Other 53 47
-------- --------
Net cash provided by investing activites 1,206 3,136
Cash flows from financing activities:
Net proceeds from issuance of common stock 22,521 1,063
Common stock repurchased and retired (86,301) (3,542)
Cash dividends paid (10,572) (9,011)
-------- --------
Net cash used in financing activities (74,352) (11,490)
Effect of exchange rate on cash 273 3
Cash provided by (used in) discontinued operations (64) 40
-------- --------
Net increase (decrease) in cash and cash equivalents (29,491) 28,472
Cash and cash equivalents at beginning of period 82,919 29,029
-------- --------
Cash and cash equivalents at end of period $ 53,428 $ 57,501
======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 13,997 $ 549
======== ========
See accompanying notes.
-5-
LONE STAR STEAKHOUSE & Saloon, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Basis of Presentation
---------------------
The unaudited condensed consolidated financial statements include all
adjustments, consisting of normal, recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for the periods presented. The results for the thirty-six
weeks ended September 3, 2002 are not necessarily indicative of the results to
be expected for the full year ending December 31, 2002. This quarterly report on
Form 10-Q should be read in conjunction with the Company's audited consolidated
financial statements in its annual report on Form 10-K for the year ended
December 25, 2001.
Certain amounts for the prior year have been reclassified to conform with
the current year's presentation.
2. Comprehensive Income
--------------------
Comprehensive income is comprised of the following:
For the twelve weeks ended For the thirty-six weeks ended
-------------------------- ------------------------------
Sept. 3, 2002 Sept. 4, 2001 Sept. 3, 2002 Sept. 4, 2001
------------- ------------- ------------- -------------
Net income $13,573 $ 7,016 $ 12,431 $ 9,936
Foreign currency translation
adjustments (566) (164) 1,116 (1,216)
------- -------- --------- --------
Comprehensive income $13,007 $ 6,852 $ 13,547 $ 8,720
======= ======== ======= ========
3. Earnings Per Share
------------------
Basic earnings per share amounts are computed based on the weighted
average number of shares actually outstanding. For purposes of diluted
computations, the number of shares that would be issued from the exercise of
stock options has been reduced by the number of shares which could have been
purchased from the proceeds at the average market price of the Company's stock
or price of the Company's stock on the exercise date if options were exercised
during the period presented.
The weighted average shares outstanding for the periods presented are as
follows (in thousands):
For the twelve weeks ended For the thirty-six weeks ended
---------------------------- ------------------------------
Sept. 3, 2002 Sept. 4, 2001 Sept. 3, 2002 Sept. 4, 2001
------------- ------------- ------------- -------------
Basic average shares outstanding 22,263 24,031 23,736 24,032
Diluted average shares outstanding 24,582 25,453 26,254 25,099
-6-
4. Long - Term Revolver
--------------------
The Company has a credit facility pursuant to an unsecured revolving
credit agreement with a group of banks led by SunTrust Bank. The 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 credit agreement. At the
time of each borrowing, the Company may elect to pay interest at either SunTrust
Bank's published prime rate or a rate 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 credit 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 September 3, 2002
and 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 September 3, 2002 and
December 25, 2001. 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.
5. Treasury Stock Transactions
---------------------------
In May 2002, the Company commenced a Modified Dutch Auction tender offer.
Under the terms of the tender offer, the Company invited shareholders to tender
their shares at prices specified by the tendering shareholder at a purchase
price not in excess of $22.50 nor less than $20.50 per share. The tender offer
was completed in June 2002, and as a result, the Company purchased 4,000,000
shares of its common stock at a price of $21.375 per share. The aggregate cost
to repurchase the shares was $86,301 including the cost of the tender offer. The
transaction was financed from the Company's existing available cash.
The Board of Directors has from time to time authorized the Company to
purchase shares of the Company's common stock in the open market or in privately
negotiated transactions. Except for the 4,000,000 shares repurchased in the
tender offer, the Company made no additional purchases of its common stock
during the thirty-six weeks ended September 3, 2002, and purchased 346,187
shares of its common stock during the thirty-six weeks ended September 4, 2001,
at an average price of $10.23 per share. 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 additional paid-in capital.
6. Stock Based Compensation
------------------------
Financial Accounting Standards Board (FASB) 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 for variable options outstanding at July 1,
2000. Variable plan accounting is applied to the modified awards until the
-7-
options are exercised, forfeited or expire unexercised. The Company repriced
options in prior years, which are subject to the accounting provisions of FIN
44, and at September 3, 2002, outstanding options to purchase approximately
4,119,000 shares were affected by this accounting requirement. In addition,
during fiscal 2002, the Company has accelerated the vesting of certain stock
options which are subject to the application of FIN 44. As a result of the
application of FIN 44, the Company recorded non-cash stock compensation expense
(benefit) of $(9,228) and $(3,170) for the twelve weeks ended September 3, 2002
and September 4, 2001, respectively, and $23,343 and $11,265 for the thirty-six
weeks ended September 3, 2002 and September 4, 2001, respectively. 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 per share, no charge or benefit will be reflected.
7. Accounting Changes
------------------
In June 2001, the FASB issued Statement of Financial Accounts Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets, requiring that 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 adopted the provisions of SFAS No. 142 in its
financial statements as required effective December 26, 2001. The effect of the
application of the non-amortization rules on accounting for goodwill and other
intangible assets was to increase net income for the twelve weeks ended and the
thirty-six weeks ended September 3, 2002 by $226 and $627, respectively, or
$0.01 and $0.02 per share, respectively. In addition, the Company completed the
measurement tests for measurement of impairment loss for both goodwill and
indefinite lived intangible assets, which resulted in a charge for the
cumulative effect of an accounting change of $318 or $0.01 per share, net of
income taxes of $190 to reflect impairment of certain goodwill related to its
Australian investments.
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 established a single
accounting model for long-lived assets to be disposed of by sale or abandonment.
Additionally, SFAS No. 144 expanded the scope of financial accounting and
reporting of discontinued operations previously addressed in APB No. 30 to
require that all components of an entity that have either been disposed of (by
sale, by abandonment, or in a distribution to owners) or are held for sale and
whose operations and cash flows can be clearly distinguished, operationally and
for financial reporting purposes from the rest of the entity, should be
presented as discontinued operations. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
provisions for presenting the components of an entity as discontinued operations
are effective only for disposal activities initiated by the Company after the
effective date of the Statement. The Company adopted the provisions of SFAS No.
144 effective December 26, 2001. Pursuant to SFAS No. 144, each Company
restaurant is a component of the entity whose operations can be distinguished
from the rest of the Company; therefore, when a restaurant is closed and the
restaurant is either held for sale or abandoned, the restaurant's operations
will be eliminated from the ongoing operations of the Company. Accordingly, the
operations of such restaurants, net of applicable income taxes, have been
presented as discontinued operations and prior period consolidated income
statements have been reclassified.
-8-
8. Dividend Declaration
--------------------
The Board of Directors declared the Company's quarterly cash dividend of
$.15 per share payable October 18, 2002 to stockholders of record on October 4,
2002.
9. Abandoned Merger Expenses
-------------------------
On May 4, 2002, the non-binding Letter of Intent previously signed with
Bruckmann, Rosser, Sherrill & Co. LLC ("BRS") with respect to the proposed
sale and merger of the Company expired, as the Company and BRS were unable to
complete a definitive agreement. The direct costs incurred by the Company
associated with the proposed merger, primarily consisting of fees paid to the
Company's investment advisors and legal counsel as well as certain costs
reimbursed by the Company to BRS in connection with its due diligence efforts
pursuant to the terms of the Letter of Intent were expensed and have been
included in the accompanying condensed consolidated statements of operations
under the caption "Abandoned Merger Expenses."
10. Discontinued Operations
-----------------------
Pursuant to the provisions of SFAS No. 144 as previously described in Note
7 to the consolidated financial statements, the Company has closed three
restaurants during the thirty-six weeks ended September 3, 2002 which meet the
criteria for the operations of the restaurants to be accounted for as
discontinued operations. The components of the loss from discontinued operations
are as follows:
For the twelve weeks ended For the thirty-six weeks ended
-------------------------- ------------------------------
September 3, September 4, September 3, September 4,
2002 2001 2002 2001
----------- ----------- ------------ --------------
Loss from operations $ 35 $ 470 $ 362 $ 708
Loss on disposal (6) -- (6) --
Income tax benefit (11) (176) (131) (263)
------- ------- ------- -------
Net loss from discontinued
operations $ 18 $ 294 $ 225 $ 445
======= ======= ======= =======
Net sales from discontinued
operations $ -- $ 780 $ 681 $ 2,477
======= ======= ======= =======
-9-
LONE STAR STEAKHOUSE & SALOON, INC.
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 condensed consolidated financial statements including the notes thereto
included elsewhere in this Form 10-Q.
The Company opened eleven Lone Star Steakhouse & Saloon ("Lone Star")
restaurants in fiscal 2001.
There were 249 operating domestic Lone Star restaurants as of September 3,
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 Double Eagle ("Del
Frisco's") restaurants. In addition, a licensee operates one Del Frisco's
restaurant. The Company currently operates fifteen Sullivan's Steakhouse
("Sullivan's") restaurants.
Internationally, the Company currently operates 24 Lone Star restaurants in
Australia and a licensee operates one Lone Star restaurant in Guam. The Company
closed five Lone Star restaurants in Australia in January 2001, one Lone Star
Australian restaurant in December 2001 and one Lone Star Australian restaurant
in June 2002.
-10-
LONE STAR STEAKHOUSE & SALOON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth for the periods indicated (i) the
percentages which certain items included in the condensed consolidated statement
of income bear to net sales, and (ii) other selected operating data:
Twelve Weeks Ended (1) Thirty-six Weeks Ended
---------------------- ----------------------
Sept. 3, Sept. 4, Sept. 3, Sept. 4,
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands)
Statement of Income:
Net sales ............................................................................. 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales .................................................................. 33.1 35.2 33.0 34.9
Restaurant operating expenses ................................................... 47.2 47.6 45.2 47.8
Depreciation and amortization ................................................... 4.4 4.7 4.2 4.6
----- ----- ----- -----
Restaurant costs and expenses ................................................... 84.7 87.5 82.4 87.3
----- ----- ----- -----
Restaurant operating income ........................................................... 15.3 12.5 17.6 12.7
General and administrative expenses ................................................... 7.1 7.5 6.9 7.1
Abandoned merger expenses ............................................................. -- -- .7 --
Non-cash stock compensation (benefit) expense ......................................... (6.9) (2.3) 5.5 2.7
----- ----- ----- -----
Income from operations ................................................................ 15.1 7.3 4.5 2.9
Other income, net ..................................................................... 0.1 0.6 0.2 0.8
----- ----- ---- -----
Income from continuing operations before income taxes
and cumulative effect of accounting change .......................................... 15.2 7.9 4.7 3.7
Provision for income taxes ............................................................ 5.1 2.5 1.6 1.2
---- ----- ----- -----
Income from continuing operations before cumulative
effect of accounting change ......................................................... 10.1 5.4 3.1 2.5
Loss from discontinued operations, net of applicable income
taxes -- (0.2) (0.1) (0.1)
------ ------ ----- ------
Income before cumulative effect of accounting change .................................. 10.1 5.2 3.0 2.4
Cumulative effect of accounting change, net of tax .................................... -- -- (0.1) --
------ ------ ----- ------
Net income ........................................................................... 10.1% 5.2% 2.9% 2.4%
====== ====== ===== ======
Restaurant Operating Data:
Average sales per restaurant on an annualized basis (2).......................... $ 1,982 $ 2,014 $ 2,065 $ 2,064
Number of restaurants at end of the period....................................... 294 295 294 295
(1) The Company operates on a fifty-two or fifty-three week fiscal year ending
the last Tuesday in December. The fiscal quarters for the Company consist
of accounting periods of twelve, twelve, twelve and sixteen or seventeen
weeks respectively.
(2) Average sales per restaurant on an annualized basis are computed by
dividing a restaurant's total sales for full accounting periods open
during the reporting period, and annualizing the result.
-11-
LONE STAR STEAKHOUSE & SALOON, INC.
Twelve weeks ended September 3, 2002 compared to Twelve weeks ended
September 4, 2001 (Dollar amounts in thousands, except per share amounts)
Net sales decreased $1,193 or 0.8% to $134,492 for the twelve weeks ended
September 3, 2002, compared to $135,685 for the twelve weeks ended September 4,
2001. The decrease was principally attributable to a decline in same store sales
of 2.4% compared to the comparable period last year offset in part by
incremental sales of $2,408 from five new domestic Lone Star restaurants opened
since September 2001.
Costs of sales, primarily food and beverages, decreased as a percentage of
net sales to 33.1% from 35.2% due primarily to a decrease in beef costs.
Restaurant operating expenses decreased $1,195 to $63,451 for the twelve
weeks ended September 3, 2002 compared to $64,646 in the comparable period in
2001, and decreased as a percentage of net sales from 47.6% to 47.2%. The
decrease is attributable to improved labor costs resulting from improved labor
controls, and decreases in advertising expenses and pre-opening expenses. The
decrease in restaurant operating expenses was partially offset by increased
costs for building and equipment maintenance expense and certain insurance
costs.
Depreciation and amortization decreased $529 for the twelve weeks ended
September 3, 2002 compared with the comparable period in 2001. The decrease is
attributable to the impact of the non-amortization rules on accounting for
goodwill and certain other intangibles and a reduction in the depreciable base
for certain assets that became fully depreciated.
General and administrative expenses decreased $607 for the twelve weeks
ended September 3, 2002 compared to the comparable period in 2001. The decrease
is due primarily to decreased costs in legal and professional fees and decreases
in recruiting expenses. The decreases were offset in part by increased costs for
directors and officers liability insurance costs.
Non-cash stock compensation benefit for the twelve weeks ended September
3, 2002 was $9,228 compared to $3,170 for the comparable period in 2001.
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 prior years, which are subject to the accounting provisions of FIN
44, and at September 3, 2002, outstanding options to purchase approximately
4,119,000 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. In addition, during fiscal 2002, the Company
accelerated the vesting of certain stock options which are subject to the
application of FIN 44.
Other income, net for the twelve weeks ended September 3, 2002, was $197
compared to $840 for the comparable period in 2001. The decrease is primarily
attributable to a decrease in gain on the sale of assets and, to a lesser
extent, by a decrease in interest income as a result of lower interest rates and
a reduced amount of excess funds available for investment.
The effective income tax rates for the twelve weeks ended September 3,
2002 and September 4, 2001 were 33.6% and 32.0%, respectively. The difference in
the effective tax rates from the federal statutory rate is primarily
attributable to the impact of FICA Tip and other tax credits.
-12-
Discontinued operations reflect the operating results for the twelve-weeks
ended September 3, 2002 and the comparable period in 2001 for those restaurants
closed during the thirty-six weeks ended September 3, 2002 which are required to
be reported as discontinued operations pursuant to SFAS No. 144 Accounting for
the Impairment or Disposal of Long-Lived Assets see Note 10 to the Notes to
Condensed Consolidated Financial Statements for additional information.
-13-
LONE STAR STEAKHOUSE & SALOON, INC.
Thirty-six weeks ended September 3, 2002 compared to Thirty-six weeks
ended September 4, 2001
(Dollar amounts in thousands, except per share amounts)
Net sales increased $8,529 or 2.1% to $422,339 for the thirty-six weeks
ended September 3, 2002, compared to $413,810 for the thirty-six weeks ended
September 4, 2001. The increase was principally attributable to incremental
sales of $8,007 from five new domestic Lone Star restaurants opened since
September 2001. Same store sales decreased 0.4% compared with the comparable
prior year period.
Costs of sales, primarily food and beverages, decreased as a percentage of
net sales to 33.0% from 34.9% due primarily to a decrease in beef costs. The
decrease was 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 decreased $6,550 to $191,098 for the
thirty-six weeks ended September 3, 2002 compared to $197,648 in the comparable
period in 2001, and decreased as a percentage of net sales from 47.8% to 45.2%.
The decrease is attributable to improved labor costs resulting both from
increased sales volumes and improved labor controls, and decreases in broadcast
media costs, pre-opening expenses and natural gas costs. The decrease in
restaurant operating expenses was partially offset by increased costs for print
media advertising costs, and certain insurance costs.
Depreciation and amortization decreased $1,480 for the thirty-six weeks
ended September 3, 2002 compared with the comparable period in 2001. The
decrease is attributable to the impact of the non-amortization rules on
accounting for goodwill and certain other intangibles and to a reduction in the
depreciable base for certain assets that became fully depreciated.
General and administrative expenses decreased $161 for the thirty-six weeks
ended September 3, 2002 compared to the comparable period in 2001. The decrease
is due primarily to decreased costs for recruiting and travel and a reduction in
consulting costs related to information technology. The decreases were offset in
part by increased costs for director and officer liability insurance and legal
and professional costs.
Abandoned merger expenses of $2,967 for the thirty-six weeks ended
September 3, 2002 reflect the costs incurred related to the proposed sale and
merger of the Company which was terminated on May 4, 2002. Such costs include
fees paid to investment advisors and legal counsel and certain costs reimbursed
by the Company to the potential buyer in connection with its due diligence
efforts.
Non-cash stock compensation expense for the thirty-six weeks ended
September 3, 2002 was $23,343 compared to $11,265 in the comparable period in
2001. See Note 6 to the Notes to Condensed Consolidated Financial Statements
included elsewhere herein for additional information.
Other income, net for the thirty-six weeks ended September 3, 2002 was $844
compared to $3,167 for the comparable period in 2001. The decrease is primarily
attributable to a decrease in gain on sale of assets.
The effective income tax rates for the thirty-six weeks ended September 3,
2002 and September 4, 2001 were 33.5% and 31.5%, respectively. The difference in
the effective tax rates is primarily attributable to the impact of FICA Tip and
other tax credits.
Discontinued operations reflect the operations of restaurants closed
during the thirty-six weeks ended September 3, 2002 which are required to be
reported as discontinued operations pursuant to SFAS No. 144. See Note 10 to the
Notes to Condensed Consolidated Financial Statements for additional information.
The cumulative effect of accounting change reflects the effect of adoption
of the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. The
Company adopted the provisions of SFAS No. 142 effective December 26, 2001. The
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cumulative effect of the change in accounting resulted in a one-time charge of
$318, net of income taxes, to reflect the impairment of goodwill related to its
Australia operations (see Note 7 to the Notes to Condensed Consolidated
Financial Statements for additional information).
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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 will have
little effect on overall labor costs. Historically, as costs of food and labor
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 (Dollar amounts in thousands, except share amounts)
The following table presents a summary of the Company's cash flows for
each of the thirty-six weeks ended September 3, 2002 and September 4, 2001:
Thirty-six weeks ended
----------------------
September 3, 2002 September 4, 2001
----------------- -----------------
Net cash provided by operating activities ............ $ 43,446 $ 36,783
Net cash provided by investment activities ........... 1,206 3,136
Net cash used in financing activities ................ (74,352) (11,490)
Effect of exchange rate on cash ...................... 273 3
Net cash provided by (used in) discontinued operations (64) 40
-------- --------
Net increase (decrease) in cash ...................... $(29,491) $ 28,472
======== ========
During the thirty-six week period ended September 3, 2002, the Company's
investment in property and equipment was $1,653 compared to $2,373 for the same
period in fiscal 2001. In the thirty-six week period ended September 3, 2002,
the Company received $2,806 in proceeds from the sale of assets compared to
$5,462 in fiscal 2001.
During the thirty-six week period ended September 3, 2002, the Company
received net proceeds of $22,521 from the issuance of 1,980,708 shares of its
common stock due to the exercise of stock options compared to proceeds of $1,063
from the issuance of 128,222 shares in the same period in fiscal 2001.
In June 2002, the Company completed a Modified Dutch Auction tender offer
for the purchase of 4,000,000 shares of its common stock at a price of $21.375
per share. The aggregate cost to repurchase the shares was $86,301 including the
costs of the tender offer. The transaction was financed from the Company's
existing available cash.
The Company's Board of Directors has authorized the purchase of shares of
the Company's common stock from time to time in the open market or in privately
negotiated transactions. Except for the 4,000,000 shares repurchased in the
tender offer as previously described, during the thirty-six weeks ended
September 3, 2002, the Company did not purchase any common stock and in the
thirty-six week period ended September 4, 2001 purchased 346,187 shares at a
cost of $3,542.
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The Company has paid quarterly cash dividends on its common stock since
the second quarter of fiscal 2000. In January 2002, the Company increased its
quarterly cash dividend from $.125 to $.15 per share. During the thirty-six
weeks ended September 3, 2002, the Company paid cash dividends of $10,572 or
$.45 per share as compared to $9,011 or $.375 per share in fiscal 2001.
At September 3, 2002, the Company had $53,428 in cash and cash
equivalents. The Company had available $55,000 in unsecured revolving credit
facilities. At September 3, 2002, the Company had no outstanding borrowings. See
Note 4 to the Notes to Condensed Consolidated Financial Statements in the Form
10-Q for a further description of the Company's credit facilities.
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 in income in the period in which the change occurs. Realized and
unrealized gains and losses for the period were not significant. As of September
3, 2002, the Company had no positions in futures contracts.
As described in Note 6 to the Notes to the Condensed Consolidated
Financial Statements, the Company has options outstanding to purchase
approximately 4,119,000 shares of its common stock 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.
Forward looking statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Stockholders are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to open new restaurants, general market
conditions, competition and pricing and other risks set forth in the Company's
Annual Report on Form 10-K for the fiscal year ended December 25, 2001. Although
the Company believes the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
contained in the report will prove to be accurate.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The Company's exposure to market risks was not significant during
the twelve weeks ended September 3, 2002.
Item 4. Controls and Procedures
-----------------------
Within the 90 days prior to the date of this report, the Company
carried out an evaluation under the supervision and with the
participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Securities Exchange
Act Rule 13a-14. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included
in the Company's periodic SEC Filings. There were no significant
changes in the Company's internal controls or in other factors
that could significantly affect these controls subsequent to the
date of their evaluation.
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On July 15, 2002, the Company held its Annual Meeting of
Stockholders (the "Meeting"). At the Meeting, the stockholders
re-elected Fred. B. Chaney, Ph.D. and William B. Greene, Jr. to the
Board of Directors to serve until the 2005 Annual Meeting of
Stockholders and until their successors have been duly elected and
qualified. As to the newly re-elected Directors, there were
22,814,596 votes "For" and 1,149,169 votes "Withheld" for Fred B.
Chaney, Ph.D. and 22,789,796 votes "For" and 1,173,969 votes
"Withheld" for William B. Greene, Jr. The proposal to amend the
Company's Certificate of Incorporation and By-laws to declassify the
organization of the Board of Directors did not receive the requisite
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vote for approval. As to the proposal, there were 15,333,954 votes
"For," 2,557,746 votes "Against" and 19,835 votes "Abstained." The
stockholders ratified the appointment of Ernst & Young LLP as the
Company's independent auditors for the year ending December 31,
2002. As to the ratification of auditors, there were 23,193,744
votes "For", 767,513 votes "Against" and 2,508 votes "Abstained".
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Reports on Form 8-K. The Company filed a Form 8-K on June 21,
2002 under Item 5 - Other Events.
(b) Exhibits
99.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sabranes-Oxley Act
99.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lone Star Steakhouse & Saloon, Inc.
(Registrant)
Date October 18, 2002 /s/ Randall H. Pierce
---------------- -------------------------------------
Randall H. Pierce
Chief Financial Officer
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LONE STAR STEAKHOUSE & SALOON, INC.
a Delaware corporation
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Section 302 Certification
I, JAMIE B. COULTER, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of LONE STAR STEAKHOUSE &
SALOON, INC, a Delaware corporation (the "registrant");
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
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(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 18, 2002
By: /s/ Jamie B. Coulter
------------------------
Jamie B. Coulter
Principal Executive Officer
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LONE STAR STEAKHOUSE & SALOON, INC.
a Delaware corporation
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Section 302 Certification
I, RANDALL H. PIERCE, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of LONE STAR STEAKHOUSE &
SALOON, INC., a Delaware corporation (the "registrant");
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarerly report is
being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
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(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 18, 2002
By: /s/ Randall H. Pierce
-------------------------
Randall H. Pierce
Principal Financial Officer
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