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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 2002
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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
LONE STAR STEAKHOUSE & SALOON, INC.
(Exact name of Registrant as specified in its charter)
Delaware 48-1109495
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
224 East Douglas, Suite 700
Wichita, Kansas 67202
(Address of principal executive offices) (Zip code)
(316) 264-8899
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes /x/ No / /
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes /x/ No / /
As of June 11, 2002, the aggregate market value of the Registrant's Common
Stock held by non-affiliates of the Registrant was $485,735,766. 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 10, 2003, there were 21,263,052 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
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............................26
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...................................................26
PART III
10. Directors and Executive Officers of the Registrant.................... 26
11. Executive Compensation................................................ 26
12. Security Ownership of Certain Beneficial Owners and
Management........................................................ 26
13. Certain Relationships and Related Transactions........................ 27
14. Controls and Procedures .............................................. 27
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......27
Signatures.............................................................30
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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
BACKGROUND
As of March 10, 2003, 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. The Company also
operates a mid-priced restaurant operating as Frankie's Italian Grille
("Frankie's"). 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 20 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 2002, the United States Department of Agriculture
estimated the average annual per capita consumption of beef to be 67.8 pounds,
up slightly from 2001. 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 Sullivan's
restaurants are distinguished by featuring high quality, top end choice of beef
whereas Del Frisco's restaurants are distinguished by featuring high quality,
USDA prime graded steaks. In addition, Sullivan's and Del Frisco's feature
specialized new 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. Lone Star restaurants embrace a Texas-style
concept that features Texas artifacts and country and western music. The
authentic "Texas Roadhouse" concept was developed to capitalize on the enduring
popularity of Texas related themes. Lone Star is further distinguished by its
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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 2002 of approximately $12.00 at
lunch and $18.00 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 $85.00.
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 $63.00.
Frankie's Italian Grille is a mid-priced casual dining restaurant
featuring traditional Italian cuisine in large portions. Frankie's features a
high energy, vibrant atmosphere and is open seven days a week, serving lunch and
dinner, with check averages of $12.00 at lunch and $27.00 at dinner.
CORPORATE STRATEGY
During 2002, the Company did not open any new restaurants. Two
domestic Lone Stars were closed: one burned down and was not rebuilt, and one
lease was not renewed due to a shift in market demographics surrounding the
restaurant. Five underperforming Australian units were closed.
The Company is currently evaluating development opportunities for
all concepts for late 2003 and beyond, depending on site availability, the
economy and other considerations. In addition, the Company plans to test and
evaluate remodeling certain domestic Lone Star locations and is in the process
of developing a new prototype building.
During 2002, the Company continued its focus on operational
consistency, improved guest satisfaction and management staffing and retention.
Average guest satisfaction scores as measured by mystery shopper
scores conducted by independent third parties continue to improve at all
domestic restaurants.
Domestic Lone Stars have continued a direct mail promotional
advertising campaign and focused more on wine, beer and alcohol beverage sales.
Both Sullivan's and Del Frisco's have continued the print branding
campaign in such upscale publications as Wine Spectator and Cigar Aficionado.
The menus in each of these concepts remain basically unchanged in the last year.
The Company's strategy is to grow its unit base modestly in late
2003 with no more than 6-10 new units, and to evaluate further expansion in
light of the economy, site availability and other considerations. However, to
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date the Company has entered into a lease with respect to one additional
location and has not purchased any new real estate with respect to any
prospective locations and there can be no assurance that the Company will be
able to achieve its expansion goals. Lone Star remodels, if successfully tested
could roll out more rapidly, but would entail the costs associated with
retaining and retraining staff and lost revenue during the time restaurants are
closed for remodeling, as well as the cost of the remodeling.
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 2002. Of the
249 Lone Star restaurants open at March 10, 2003, 90 were leased facilities and
had an average cash investment of approximately $1.0 million and 159 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, king crab, 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 12% 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 37% 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 memorabilia, thereby
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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 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.
Sullivan's' 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.
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 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
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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 61% 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 2002. As
of March 10, 2003, 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, check average, guest counts
and labor.
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.
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.
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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
operations. 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 10, 2003, the Company employed approximately 17,850
persons, 7 of whom are executive officers, 88 of whom are office support
personnel, 10 of whom are regional managers, 33 of whom are district managers,
approximately 1,100 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.
WEBSITE ACCESS
The Company's website address is www.lonestarsteakhouse.com. The
Company's filings with the Securities and Exchange Commission ("SEC") are
available at no cost on its website as soon as practicable after the filing of
such reports with the SEC.
ITEM 2. PROPERTIES.
As of March 10, 2003, the Company leased 90 and owned 159 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.
In addition, the Company has entered into one additional lease for
land in Hampton, Virginia for construction of a Lone Star restaurant. The
location will be in front of a Bass Pro Shop that is under construction and
slated for opening in the fall of 2003.
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RESTAURANT LOCATIONS AS OF MARCH 10, 2003
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, Sullivan's (15) restaurants
and (1) Frankie's Restaurant
LONE STAR Chicago (10) MICHIGAN Jacksonville TENNESSEE
Decatur Battle Creek Raleigh (3) Jackson
ALABAMA Effingham Bay City Rocky Mount Johnson City
Anniston Hodgkins Brighton Salisbury Memphis (2)
Birmingham (2) Mt. Vernon Dearborn Heights Southern Pines
Huntsville Peoria Detroit (6) Winston-Salem
Mobile Rockford Flint UTAH
Montgomery Springfield Grand Rapids NORTH DAKOTA Centerville
Trussville Jackson Fargo Layton
Tuscaloosa INDIANA Mt. Pleasant Salt Lake City
Anderson Saginaw OHIO Sugarhouse
ALASKA Evansville Ypsilanti Akron
Anchorage Ft. Wayne Canton VIRGINIA
Indianapolis (4) MISSISSIPPI Cincinnati (2) Alexandria
ARIZONA Lafayette Hattiesburg Cleveland (3) Centreville
Mesa Merrillville Jackson Columbus (4) Chesapeake
Phoenix (4) South Bend Dayton (2) Fairfax
Terre Haute MISSOURI Findlay Fredericksburg
ARKANSAS Branson Lancaster Herndon
Ft. Smith IOWA Independence Middletown Norfolk
Little Rock (2) Cedar Rapids Kansas City Niles Potomac Mills
Springdale Coralville Springfield Springfield Richmond (3)
Davenport St. Louis (5) Toledo (2) Sterling
COLORADO Des Moines Youngstown Virginia Beach
Colorado Springs Waterloo NEBRASKA
Denver (6) Lincoln OKLAHOMA WEST VIRGINIA
Ft. Collins KANSAS Omaha (2) Lawton Beckley
Loveland Garden City Oklahoma City Charleston
Hutchinson NEVADA Tulsa (2) Huntington
DELAWARE Overland Park Las Vegas (4)
Dover PENNSYLVANIA WISCONSIN
Wilmington (2) KENTUCKY NEW JERSEY Allentown Racine
Bowling Green Atlantic City Easton
FLORIDA Florence Bridgewater Harrisburg SULLIVAN'S
Bradenton Lexington Cherry Hill Johnstown Anchorage, AK
Clearwater Louisville Delran King of Prussia Austin, TX
Ft. Lauderdale Hanover Township Lancaster Baton Rouge, LA
Ft. Myers LOUISIANA Hazlet Middletown Charlotte, NC
Lakeland Baton Rouge (2) Marlton Philadelphia Chicago, IL
Ocala Houma Ocean County Pittsburgh (5) Dallas, TX
Orlando Lafayette Scotch Plains Pottstown Denver, CO
Pensacola Monroe Turnersville Reading Houston, TX
Port Orange New Orleans (3) Voorhees Scranton Indianapolis, IN
Port Richey Wayne Wilkes-Barre King of Prussia, PA
Sarasota MAINE York Naperville, IL
St. Petersburg South Portland NEW MEXICO Palm Desert, CA
Tampa Albuquerque RHODE ISLAND Raleigh, NC
MARYLAND Warwick Tucson, AZ
GEORGIA Bel Air NEW YORK Wilmington, DE
Atlanta Columbia Albany SOUTH CAROLINA
Augusta Frederick Greenville
Gaithersburg Myrtle Beach (2) DEL FRISCO'S
IDAHO Laurel NORTH CAROLINA Denver, CO
Boise Lexington Park Asheville Dallas, TX
Waldorf Boone SOUTH DAKOTA Fort Worth, TX
ILLINOIS Westminster Charlotte (4) Sioux Falls Las Vegas, NV
Bloomington Durham New York, NY
Bradley MASSACHUSETS Fayetteville
Carbondale Boston Greensboro (2) FRANKIE'S
Champaign Greenville Charlotte, NC
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ITEM 3. LEGAL PROCEEDINGS
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.
The Company has indemnified present and former Directors with respect to
the shareholders derivative action filed by CalPERS by contractual agreement, as
well as by the Articles of Incorporation of the Company as provided in
accordance with the Delaware General Corporation Law.
On January 9, 2002, CalPERS filed an amended complaint and added a class
action 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 all defendants on February 8, 2002, seeking to dismiss
all claims of CalPERS. Discovery was stayed pending a court decision on the
motion to dismiss.
The Vice Chancellor issued his decision on December 18, 2002 dismissing
numerous counts and also substantially reduced the scope of two other claims,
both involving the repricing of stock options. Two of the counts sustained by
the court involve challenges to change of control agreements which have now
expired. On January 17, 2003, the Vice Chancellor agreed to permit the plaintiff
to proceed with its discovery to obtain certain documents from certain third
parties and the named defendants, and ordered the plaintiff to timely file its
motion to amend its complaint.
On March 6, 2003, CalPERS filed a second amended complaint, which contains
several new allegations pertaining to various events subsequent to the date the
original complaint was filed. The plaintiffs did not make any new claims or add
any new parties.
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 31,
2002.
-11-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock (ticker symbol: STAR) is traded
over-the-counter on the Nasdaq National Market (Nasdaq). The following table
sets forth, for the periods indicated, the high and low prices for the Common
Stock, as reported by Nasdaq.
Prices
------
Calendar 2002 High Low
------------- ---- ---
First Quarter $21.02 $14.25
Second Quarter $21.95 $16.00
Third Quarter $24.81 $18.02
Fourth Quarter $22.07 $17.35
Prices
------
Calendar 2001 High Low
------------- ---- ---
First Quarter $10.25 $ 7.94
Second Quarter $14.00 $ 8.69
Third Quarter $13.72 $10.48
Fourth Quarter $14.90 $ 9.60
DIVIDENDS
The Company initiated the payment of quarterly cash dividends in April
2000 and paid cash dividends at the rate of $0.125 per share each quarter until
January 2002. In January 2002, the Company increased its quarterly cash dividend
to $0.15 per share. On February 5, 2003, the Company announced that it would
increase the Company's quarterly cash dividend from $.15 to $.165 commencing in
the second quarter of 2003. 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 10, 2003, there were approximately 425 holders of record of
the Company's Common Stock. The Company believes there are in excess of 10,000
beneficial owners of the Company's Common Stock.
EQUITY COMPENSATION PLAN INFORMATION
The information required by this item 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.
-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 31, 2002 and December 25, 2001, and for each of
the three years in the period ended December 31, 2002, were derived from the
Company's audited consolidated financial statements. The selected consolidated
financial data of the Company as of December 26, 2000, December 28, 1999, and
December 29, 1998, and for each of the two years in the period ended December
28, 1999, were derived from the Company's audited consolidated financial
statements, after giving effect to the Company's 2002 retroactive adoption of
the fair value recognition provisions of Statement of Financial Accounting
Standards (SFAS) No. 123 for stock-based employee compensation. 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 years
2001, 2000, 1999 and 1998 to give retroactive effect for the non-amortization
provisions of SFAS No. 142 requiring that goodwill and intangible assets deemed
to have indefinite lives no longer be amortized, but are subject to annual
impairment tests in accordance with SFAS No. 142, which was adopted by the
Company effective as of the beginning of fiscal 2002.
-13-
Year Ended In December(1)
----------------------------------------------------------------------------
(Amounts in thousands, except share data)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Income Statement Data:
Net sales $ 615,715 $ 592,459 $ 569,077 $ 576,821 $ 606,448
Costs and expenses:
Costs of sales 201,716 202,786 199,035 204,680 228,286
Restaurant operating expenses 280,973 279,801 273,483 258,650 265,066
Restaurant depreciation and
amortization 25,579 27,361 28,017 30,290 25,377
General and administrative expenses 44,031 41,933 42,472 38,057 32,070
Abandoned merger expenses 2,990 -- -- -- --
Non-cash stock compensation expense 2,949 3,212 12,016 14,944 22,394
Contribution - "Dine for America" -- 2,124 -- -- --
Provision for impaired assets and
restaurant closings 792 1,551 3,335 37,875 4,646
------------ ------------ ------------ ------------ -------------
Total costs and expenses 559,030 558,768 558,358 584,496 577,839
------------ ------------ ------------ ------------ -------------
Income (loss) from operations 56,685 33,691 10,719 (7,675) 28,609
Other income, net 3,249 4,239 2,530 2,190 2,906
------------ ------------ ------------ ------------ -------------
Income (loss) from continuing operations before
provision for income taxes 59,934 37,930 13,249 (5,485) 31,515
Benefit (provision) for income taxes (19,869) (13,315) (4,543) 1,511 (13,997)
------------ ------------ ------------ ------------ -------------
Income (loss) from continuing operations 40,065 24,615 8,706 (3,974) 17,518
Discontinued operations:
Income (loss) from operations of discontinued
restaurants (834) (2,679) (1,544) (1,108) 346
Income tax benefit (provision) 296 966 544 383 (135)
------------ ------------ ------------ ------------ -------------
Income (loss) on discontinued operations (538) (1,713) (1,000) (725) 211
------------ ------------ ------------ ------------ -------------
Income (loss) before cumulative effect of change in
accounting principles 39,527 22,902 7,706 (4,699) 17,729
Cumulative effect of change in accounting principles
(net of income tax of $190 and $2,921) (4) (318) -- -- -- (6,904)
------------ ------------ ------------ ------------ -------------
Net income (loss) (2) $ 39,209 $ 22,902 $ 7,706 $ (4,699) $ 10,825
============ ============ ============ ============ =============
Basic earnings (loss) per share:
Continuing operations $ 1.75 $ 1.02 $ .33 $ (.11) $ .44
Discontinued operations (.02) (.07) (.04) (.02) --
------------ ------------ ------------ ------------ -------------
Income before cumulative effect of
change in accounting principle 1.73 .95 .29 (.13) .44
Cumulative effect of change
in accounting principle (.02) -- -- -- (.17)
------------ ------------ ------------ ------------ -------------
Basic earnings (loss) per share $ 1.71 $ .95 $ .29 $ (.13) $ .27
============ ============ ============ ============ =============
Weighted average shares outstanding 22,908,821 24,036,942 26,189,600 35,089,084 39,989,091
============ ============ ============ ============ =============
Pro forma net income (loss) (3) 39,527 23,825 8,789 (3,638) $ 11,609
============ ============ ============ ============ =============
Pro forma basic earnings (loss) per share $ 1.73 $ .99 $ .33 $ (.10) $ .29
============ ============ ============ ============ =============
-14-
At fiscal year end in December, (1)
---------------------------------------------------------
(Dollars in thousands)
2002 2001 2000 1999 1998
Balance Sheet Data (2):
Working capital (deficit) $ 44,575 $ 48,284 $ (1,716) $ 20,215 $ 67,593
Total assets 473,313 536,025 517,274 558,330 628,518
Stockholders' equity 419,759 475,435 466,135 509,177 573,376
(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 1998, 1999, 2000, 2001, and 2002 fiscal years ended on December
29, 28, 26, 25, and 31, respectively. Fiscal 2002 included 53 weeks of
operations while fiscal 2001, 2000, 1999 and 1998 included 52 weeks.
(2) The amounts of net income and certain balance sheet data for fiscal 2001,
2000, 1999 and 1998 have been restated from amounts previously reported to
reflect adjustments for stock-based compensation resulting from the
retroactive application of the Company's adoption in fiscal 2002 of the
fair value recognition provisions of Statement of Financial Accounting
Standards No. 123, as more fully described in Notes 1 and 6 to the Notes
to Consolidated Financial Statements. The retroactive application effect
on the results of operations for the years presented is as follows:
2001 2000 1999 1998
---- ---- ---- ----
Net income as previously reported $ 13,256 $ 16,130 $ 5,401 $ 25,507
Adjustment to non-cash stock compensation expense 9,646 (8,424) (10,100) (14,682)
-------- -------- -------- --------
As adjusted $ 22,902 $ 7,706 $ (4,699) $ 10,825
======== ======== ======== ========
Increase (decrease) in basic earnings per share $ .40 $ (.32) $ (.28) $ (.37)
======== ======== ======== ========
(3) Pro forma net income (loss) amounts reflect the adjustments for fiscal
2001, 2000, 1999 and 1998 to give retroactive effect to the change in
accounting for the non-amortization provisions of SFAS No. 142, Goodwill
and Other Intangible Assets, as adopted by the Company effective as of the
first quarter of fiscal 2002.
(4) The cumulative effect of change in accounting principles for fiscal 2002
reflect the impairment charge of goodwill related to certain Australian
investments resulting from the adoption of SFAS No. 142 in the first
quarter of fiscal 2002. The cumulative effect amount for fiscal 1998 gives
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, where by pre-opening
costs are required to be expensed as incurred rather than capitalized and
amortized.
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.
The Company opened four restaurants in fiscal 2000, eleven in fiscal 2001
and none in fiscal 2002.
There were 249 operating domestic Lone Star restaurants as of March 10,
2003. 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
and was not rebuilt.
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.
In addition, during 2002 the Company closed a Mexican food concept
restaurant.
Internationally, the Company currently operates 20 Lone Star Steakhouse
& Saloon restaurants in Australia and a licensee operates one restaurant in
Guam. The Company closed five restaurants in Australia in fiscal 2002 and six in
2001.
-15-
CRITICAL ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)
The consolidated financial statements are prepared in accordance with
accounting principles generally 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 represent accounting policies
that may involve a higher degree of judgment and complexity.
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 31, 2002, the Company incurred a pre-tax charge of $250 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 requires 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 Financial Accounting Standards Board ("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 are no
longer amortized but are subject to annual impairment tests. The Company first
applied the new accounting rules beginning in the first quarter of fiscal 2002.
As more fully described in Note 2 to the Notes to Consolidated Financial
Statements the adoption of the provisions of SFAS No. 142 resulted in a charge
for the cumulative effect of an accounting change of $318 or $.02 per share net
of income taxes to reflect the impairment of certain goodwill related to
Australian investments.
INCOME TAXES - DEFERRED INCOME TAX The Company accounts for income taxes
in accordance with SFAS No. 109, Accounting for Income Taxes, which requires
that deferred tax assets and liabilities be recognized for the effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and amounts used for income tax purposes. SFAS No.
109 also requires that deferred tax assets be reduced by a valuation allowance
if it is more likely than not that some portion or all of the deferred tax asset
will not be realized. The Company reviews the recoverability of any deferred tax
assets reflected in the balance sheet and provides any necessary allowances as
required. Any adjustment to the deferred tax asset would be charged to income in
the period such determination was made.
-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.
Year Ended
-------------------------------------------
December 31, December 25, December 26,
2002 2001 2000
-------------------------------------------
(Dollars in thousands)
Statement of Income:
Net sales 100% 100% 100%
Costs and expenses:
Costs of sales 32.8 34.2 35.0
Restaurant operating expenses 45.6 47.2 48.0
Depreciation and amortization 4.2 4.6 4.9
Provision for impaired assets and restaurant closings 0.1 0.3 0.6
----- ----- -----
Restaurant costs and expenses 82.7 86.3 88.5
----- ----- -----
Restaurant operating income 17.3 13.7 11.5
General and administrative expenses 7.1 7.1 7.5
Abandoned merger expenses 0.5 -- --
Non-cash stock compensation expense 0.5 0.5 2.1
Contribution - "Dine for America" -- 0.4 --
----- ----- -----
Income from operations 9.2 5.7 1.9
Other income, net 0.5 0.7 0.4
----- ----- -----
Income from continuing operations before income taxes
and cumulative effect of accounting change 9.7 6.4 2.3
Provision for income taxes 3.2 2.2 .8
----- ----- -----
Income from continuing operations before cumulative
effect of accounting change 6.5 4.2 1.5
Loss from discontinued operations, net of applicable income taxes (0.1) (0.3) (0.2)
----- ----- -----
Income before cumulative effect of accounting change 6.4 3.9 1.3
Cumulative effect of accounting change, net of tax (0.1) -- --
----- ----- -----
Net income 6.3% 3.9% 1.3%
===== ===== =====
-17-
LONE STAR STEAKHOUSE & SALOON, INC.
Year ended December 31, 2002 compared to Year ended December 25, 2001
(Dollar amounts in thousands)
Net sales increased $23,256 or 3.9% to $615,715 for the year ended
December 31, 2002 ("fiscal 2002"), compared to $592,459 for the year ended
December 25, 2001 ("fiscal 2001"). The increase was attributable to (1) the fact
fiscal 2002 was a 53 week period compared to a 52 week period in fiscal 2001,
allowing the Company to have two New Year's eve sales days in 2002 and (2)
incremental sales of $11,800 from eleven new domestic Lone Star restaurants
opened during fiscal 2001. Blended 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 32.8% from 34.2% 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 $1,172 to $280,973 in fiscal 2002
compared to $279,801 in fiscal 2001, and decreased as a percentage of net sales
from 47.2% to 45.6%. The decrease is attributable to improved labor costs
resulting both from the leverage in 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 $1,782 in fiscal 2002 compared
with fiscal 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 increased $2,098 in fiscal 2002
compared with fiscal 2001. As a percentage of net sales, general and
administrative expenses for both fiscal 2002 and 2001 were 7.1%. The increase in
absolute dollars is due primarily to the extra week of costs incurred in fiscal
2002 relating to the 53 week accounting period. The increase for fiscal 2002
also reflects increased costs for director and officer liability insurance and
certain legal and professional costs, offset in part by decreased recruiting and
travel costs and consulting costs related to information technology.
Abandoned merger expenses of $2,990 for fiscal 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 fiscal 2002 was $2,949 compared to
$3,212 in fiscal 2001. As previously described, the Company changed its method
of accounting for stock-based compensation in fiscal 2002 and adopted the fair
value recognition provisions of SFAS No. 123 on a retroactive basis and has
restated all periods presented. See Notes 1 and 6 to the Notes to Consolidated
Financial Statements included elsewhere herein for additional information.
Provision for impaired assets and restaurant closings in fiscal 2002 were
$792 compared to $1,551 in fiscal 2001. The provision in fiscal 2002 reflects a
pre-tax charge of $250 for the write-down of one underperforming domestic Lone
Star restaurant, while fiscal 2001 includes a similar charge of $1,273 for the
write-down of certain underperforming restaurants, primarily in Australia. In
addition, the provision for fiscal 2002 includes $542 of costs incurred for
stores closed in previous years, while fiscal 2001 includes a charge of $278
related to closing one Australian restaurant.
Other income, net for fiscal 2002, was $3,249, compared to $4,239 for
fiscal 2001. The decrease is attributable to an increase in credit availability
fees, a decrease in interest income and a decrease in gain on sale of assets.
The effective income tax rates for fiscal 2002 and fiscal 2001 were 33.1%
and 35.0%, respectively. The difference in the effective tax rate is primarily
attributable to the impact of tax benefits related to the exercise during fiscal
2002 of certain incentive stock options as well as FICA Tip and other tax
credits.
-18-
Discontinued operations reflect the operations of restaurants closed
during fiscal 2002 which are required to be reported as discontinued operations
pursuant to SFAS No. 144. See Note 12 to the Notes to 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
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 the
Company's Australian operations (see Note 2 to the Notes to Consolidated
Financial Statements for additional information.)
-19-
LONE STAR STEAKHOUSE & SALOON, INC.
Year ended December 25, 2001 compared to Year ended December 26, 2000
(Dollar amounts in thousands)
Net sales increased $23,382 or 4.1% to $592,459 for the year ended
December 25, 2001 ("fiscal 2001"), compared to $569,077 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 open 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 34.2% from 35.0% 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 $6,318 from
$273,483 in fiscal 2000 to $279,801 but decreased as a percentage of net sales
from 48.0% to 47.2%. 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 $656 in fiscal 2001 compared to
fiscal 2000. The decrease is attributable primarily to the restaurants closed
since August 2000.
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 $3,212 compared to
$12,016 in fiscal 2000. In fiscal 2000, the Company repriced 4,591,757 options
held by certain employees. Since a substantial portion of the options were
vested prior to the date of the repricing the related fair value assigned to
such options from the option pricing model resulted in a charge to expense of
approximately $9,000 in fiscal 2000.
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.
Provisions for impaired assets and restaurant closings in fiscal 2001 were
$1,551 compared to $3,335 in fiscal 2000. The provisions in fiscal 2001 reflect
a pre-tax charge of $1,273 for the write-down of certain under performing
restaurants primarily in Australia, and fiscal 2000 also reflects a pre-tax
charge of $2,025 for the write down of certain under-performing Australian
restaurants. In addition, the provisions 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.
Other income, net for fiscal 2001, was $4,239, 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.
-20-
The effective income tax rate for fiscal 2001 and fiscal 2000 were 35.0%
and 34.2% respectively. The increase in the effective tax rate is primarily
attributable to the impact of FICA Tip and other tax credits on the higher
pre-tax income for fiscal 2001 as compared to fiscal 2000.
Discontinued operations reflect the operations of restaurants closed
during fiscal 2002 which are required to be reported as discontinued operations
pursuant to SFAS No. 144. See Note 12 to the Notes to Consolidated Financial
Statements for additional information.
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. Historically, as 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 (Dollars in thousands, except share amounts)
The following table presents a summary of the Company's cash flows for the years
ended:
December 31, December 25, December 26,
2002 2001 2000
--------- ------------ ----------
Net cash provided by operating activities $ 75,854 $ 63,120 $ 48,813
Net cash provided by (used in) investment activities 5,240 5,840 (12,271)
Net cash used by financing activities (98,843) (15,382) (58,710)
Effect of exchange rate changes on cash 363 4 (8)
Net cash provided by (used in) discontinued operations (164) 308 532
-------- -------- --------
Net increase (decrease) in cash and cash equivalents $(17,550) $ 53,890 $(21,644)
======== ======== ========
During fiscal 2002, 2001, and 2000, the Company's purchases of property
and equipment were $2,776 $3,924, and $21,665, respectively. In fiscal 2002,
2001, and 2000, the Company received proceeds from the sale of assets of $7,879,
$10,098 and $10,213, respectively.
The Company has opened 15 restaurants in the past three fiscal years of
which four opened during fiscal 2000, eleven in fiscal 2001, and none in fiscal
2002.
During fiscal 2002, the Company received net proceeds of $23,351 from the
issuance of 2,058,838 shares of its common stock due to the exercise of stock
options compared to proceeds of $2,024 and $181 from the issuance of 242,838 and
22,140 shares in fiscal 2001 and 2000, respectively.
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. Excluding the 4,000,000 shares repurchased in the
tender offer as previously described, during fiscal 2002, the Company purchased
-21-
1,140,000 shares at a cost of $22,374. In fiscal 2001 and 2000, the Company
purchased 468,687 and 5,605,074 shares at a cost of $5,145 and $49,261,
respectively.
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. The Company recently
announced that it would increase its quarterly cash dividend from $.15 to $.165
per share commencing in the second quarter of fiscal 2003. During fiscal 2002,
2001 and 2000, the Company paid cash dividends as follows:
Amount Per Share
------ ---------
Fiscal 2002 $13,719 $0.60
Fiscal 2001 $12,019 $0.50
Fiscal 2000 $ 9,630 $0.375
At December 31, 2002, the Company had $65,369 in cash and cash
equivalents. The Company had available $55,000 in unsecured revolving credit
facilities. At December 31, 2002, the Company had no outstanding borrowings. See
Note 4 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 contractual obligations at December 31, 2002 are for
operating leases as follows:
2003 $11,055
2004 8,364
2005 5,639
2006 3,132
2007 1,942
Thereafter 3,141
--------
Total operating lease obligations $33,273
=======
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 December
31, 2002, the Company had no positions in futures contracts.
IMPACT OF RECENTLY ISSUED FINANCIAL STANDARDS
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
only when the liability is incurred and measured at fair value. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The Company does not expect the initial adoption of this Statement will
have a material impact on its results of operations or financial position.
-22-
RISK FACTORS
FISCAL 2002 RESULTS MAY NOT BE INDICATIVE OF 2003 RESULTS.
Our fiscal 2002 consisted of a 53 week period which included sales for two
New Year's Eves. In contrast, Fiscal 2003 will be a 52 week period with no New
Year's Eve sales. This change will impact comparability for sales and net
income for the first and fourth quarters of fiscal year 2003. We estimate that
the extra week in fiscal 2002 added $12,600,000 in revenues, $2,000,000 or $.09
per share ($.08 diluted) to net income. Accordingly, our results for fiscal 2002
may not be indicative of our results for fiscal 2003.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH OUR COMPETITORS, WE WILL NOT BE
ABLE TO INCREASE REVENUES OR GENERATE PROFITS.
Our inability to increase revenues is directly related to our ability to
compete effectively with our competitors. Key competitive factors include:
o The quality and numbers of employees needed to adequately staff our
restaurants;
o the quality and value of the food products offered;
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.
We compete with other steakhouse restaurants specifically and with all
other restaurants generally. We compete with national and regional chains, as
well as individually owned restaurants. The restaurant industry has few
non-economic barriers to entry, and as our 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 RESTAURANTS'
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, the cost of
gasoline, 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.
-23-
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, energy and utilities 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.
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.
-24-
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 groups, which fluctuations may be
unrelated to the operating results or other circumstances of a particular
company. Such fluctuations may adversely affect the liquidity of our common
stock, as well as price that holders may achieve for their shares upon any
future sale
STAGGERED BOARD; BLANK-CHECK PREFERRED STOCK.
Our 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. 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.
A SINGLE VENDOR DISTRIBUTES MOST OF OUR CONSUMABLE PRODUCTS.
Approximately 61% 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. We closed nine Australian restaurants in 2000, six in 2001,
five in 2002, 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. We
continue to evaluate our investment strategies in Australia; however, there is
no assurance that we can achieve acceptable operating results in the future.
-25-
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.
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.
-26-
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.
ITEM 14. CONTROLS AND PROCEDURES
Disclosure controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in the Company's reports
under the Securities Exchange Act of 1934, such as this Form 10-K is reported in
accordance with the Securities and Exchange Commission's rules. Disclosure
controls are also designed with the objective of ensuring that such information
is accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer as appropriate to allow timely decisions
regarding required disclosure.
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
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.
Certifications of the Chief Executive Officer and Chief Financial Officer
regarding, among other items, disclosure controls and procedures are included
immediately after the signature section of this Form 10-K.
PART IV
ITEM 15. 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 (the "Director's Plan").
****10.3 1992 Lone Star Steakhouse & Saloon, Inc. Incentive
and Non-qualified Stock Option Plan (the "Plan") as
amended
-27-
**10.4 Form of Indemnification Agreement for officers and
directors of the Company
*****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
******10.20 Non-Qualified Deferred Compensation Plan
*******10.21 Revolver Loan Agreement dated August 10, 2001
between the Company and Sun Trust Bank
*10.23 Lone Star Steakhouse & Saloon, Inc. Stock Option
Deferred Compensation Plan dated September 30,
2002
*10.24 Deferred Compensation Agreement dated October 4,
2002 between LS Management, Inc. and Jamie B.
Coulter
********10.25 Agreement dated as of April 24, 2002 between the
Company and Mark Saltzgaber
*********10.26 Amendment to the Director's Plan
*********10.27 Amendment to the Plan
*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
*99.1 Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act
*99.2 Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act
- ---------------
(b) Reports on Form 8-K filed in the fourth quarter of 2002: The Company
filed one Form 8-K under Item #5 - Other Events for the quarter
ended December 31, 2002.
* 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 Quarterly Report on 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
-28-
****** 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).
******* Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 4, 2001.
******** Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 11, 2002.
********* Incorporated by reference to the Company's Registration Statement on
Form S-8, filed with the Commission on July 24, 2002 (Commission
File No. 333-97271).
-29-
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 14th day of March 2003.
LONE STAR STEAKHOUSE & SALOON, INC.
(Registrant)
/s/ Randall H. Pierce
-------------------------------------------
Randall H. Pierce
Chief Financial Officer and
Principal Accounting Officer
-30-
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 14, 2003
Jamie B. Coulter Principal Executive
/s/ John D. White Executive Vice March 14, 2003
- ------------------------ President,
John D. White Treasurer and Director
/s/ Randall H. Pierce Chief Financial Officer
- ------------------------ and Principal March 14, 2003
Randall H. Pierce Accounting Officer
/s/ Clark R. Mandigo Chairman of the Board
- ------------------------ and Director March 14, 2003
Clark R. Mandigo
/s/ Anthony Bergamo
- ------------------------ Director March 14, 2003
Anthony Bergamo
/s/ Fred B. Chaney
- ------------------------ Director March 14, 2003
Fred B. Chaney
/s/ William B. Greene
- ------------------------ Director March 14, 2003
William B. Greene
-31-
/s/ Thomas C. Lasorda
- ------------------------ Director March 14, 2003
Thomas C. Lasorda
/s/ Michael A. Ledeen
- ------------------------ Director March 14, 2003
Michael A. Ledeen
/s/ Mark Saltzgaber
- ------------------------ Director March 14, 2003
Mark Saltzgaber
-32-
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Section 302 Certification
I, JAMIE B. COULTER, certify that:
(1) I have reviewed this annual report on Form 10-K of LONE STAR
STEAKHOUSE & SALOON, INC, a Delaware corporation (the "registrant");
(2) Based on my knowledge, this annual 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 annual report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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 annual 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 annual report (the
"Evaluation Date"); and
(c) Presented in this annual 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
(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 annual report whether 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: March 14, 2003
By: /s/ Jamie B. Coulter
------------------------
Jamie B. Coulter
Chief Executive Officer
-33-
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Section 302 Certification
I, RANDALL H. PIERCE, certify that:
(1) I have reviewed this annual report on Form 10-K of LONE STAR
STEAKHOUSE & SALOON, INC., a Delaware corporation (the
"registrant");
(2) Based on my knowledge, this annual 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 annual report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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 annual 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 annual report (the
"Evaluation Date"); and
(c) Presented in this annual 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
(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 annual report whether 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: March 14, 2003
By: /s/ Randall H. Pierce
-------------------------
Randall H. Pierce
Chief Financial Officer
-34-
CONSOLIDATED FINANCIAL STATEMENTS
Lone Star Steakhouse & Saloon, Inc.
Years Ended December 31, 2002, December 25, 2001, and December 26, 2000
Lone Star Steakhouse & Saloon, Inc.
Index to Financial Statements
Pages
-----
Report of Independent Auditors........................................................F-1
Consolidated Balance Sheets as of December 31, 2002 and December 25, 2001.............F-2
Consolidated Statements of Income for the years ended December 31, 2002,
December 25, 2001, and December 26, 2000...........................................F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002, December 25, 2001, and December 26, 2000........................F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, December 25, 2001, and December 26, 2000........................F-7
Notes to Consolidated Financial Statements............................................F-8
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 31, 2002
and December 25, 2001, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2002. 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 31, 2002 and December 25,
2001, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, effective
December 26, 2001, the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. In addition, as discussed in Note 1, effective
December 26, 2001, the Company adopted the provisions of SFAS No. 142, Goodwill
and Other Intangible Assets. Also as discussed in Note 1, effective December 26,
2001, the Company adopted the provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.
/s/ Ernst & Young LLP
Kansas City, Missouri
February 14, 2003
F-1
Lone Star Steakhouse & Saloon, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
December 31, December 25,
2002 2001
---------------------------------
Assets
Current assets:
Cash and cash equivalents $ 65,369 $ 82,919
Accounts receivable 790 856
Inventories 12,390 12,466
Deferred income taxes 3,138 2,872
Other 5,384 4,574
------------------------------
Total current assets 87,071 103,687
Property and equipment:
Land 117,175 120,173
Buildings 170,005 172,895
Leasehold improvements 112,283 112,634
Equipment 100,620 99,795
Furniture and fixtures 20,430 20,874
------------------------------
520,513 526,371
Less accumulated depreciation and amortization 181,778 156,488
------------------------------
338,735 369,883
Deferred compensation plan investments 8,878 5,059
Other assets:
Goodwill 11,513 12,971
Intangible assets, net 11,521 11,618
Deferred income taxes 13,171 30,249
Other 2,424 2,558
------------------------------
38,629 57,396
------------------------------
Total assets $473,313 $536,025
==============================
F-2
December 31, December 25,
2002 2001
---------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 13,378 $ 13,360
Sales tax payable 2,706 3,156
Accrued payroll 10,851 10,100
Real estate taxes 2,407 2,126
Gift certificates 8,562 9,208
Income taxes payable -- 11,541
Other 4,592 5,912
--------- ---------
Total current liabilities 42,496 55,403
Long-term liabilities, principally deferred
compensation obligations 11,058 5,187
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares
authorized; none issued -- --
Common stock, $.01 par value, 98,000,000 shares
authorized; 20,994,608 shares issued
and outstanding (24,049,770 in 2001) 210 240
Additional paid-in capital 189,908 272,527
Retained earnings 241,601 216,111
Accumulated other comprehensive loss (11,960) (13,443)
--------- ---------
Total stockholders' equity 419,759 475,435
--------- ---------
Total liabilities and stockholders' equity $ 473,313 $ 536,025
========= =========
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 31, December 25, December 26,
2002 2001 2000
-----------------------------------------
Net sales $ 615,715 $ 592,459 $ 569,077
Costs and expenses:
Costs of sales 201,716 202,786 199,035
Restaurant operating expenses 280,973 279,801 273,483
Depreciation and amortization 25,579 27,361 28,017
Provision for impaired assets and restaurant closings 792 1,551 3,335
------------------------------------
Restaurant costs and expenses 509,060 511,499 503,870
------------------------------------
Restaurant operating income 106,655 80,960 65,207
General and administrative expenses 44,031 41,933 42,472
Abandoned merger expenses 2,990 -- --
Noncash stock compensation expense 2,949 3,212 12,016
Contribution - "Dine for America" -- 2,124 --
------------------------------------
Income from operations 56,685 33,691 10,719
Other income, net 3,249 4,239 2,530
------------------------------------
Income from continuing operations before income taxes and cumulative
effect of accounting changes 59,934 37,930 13,249
Provision for income taxes (19,869) (13,315) (4,543)
------------------------------------
Income from continuing operations before cumulative effect of 40,065 24,615 8,706
accounting change
Discontinued operations:
Loss from operations of discontinued restaurants (834) (2,679) (1,544)
Income tax benefit 296 966 544
------------------------------------
Loss on discontinued operations (538) (1,713) (1,000)
------------------------------------
Income before cumulative effect of accounting change 39,527 22,902 7,706
Cumulative effect of accounting change, net of tax (318) -- --
------------------------------------
Net income $ 39,209 $ 22,902 $ 7,706
====================================
F-4
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Income (continued)
(In Thousands, Except for Per Share Amounts)
For the Year Ended
----------------------------------------------------
December 31, December 25, December 26,
2002 2001 2000
----------------------------------------------------
Basic earnings per share:
Continuing operations $ 1.75 $ 1.02 $ .33
Discontinued operations (.02) (.07) (.04)
Cumulative effect of accounting change (.02) -- --
--------- ----------- ----------
Basic earnings per share $ 1.71 $ .95 $ .29
========= =========== ==========
Diluted earnings per share:
Continuing operations $ 1.52 $ .97 $ .33
Discontinued operations (.02) (.07) (.04)
Cumulative effect of accounting change (.01) -- --
--------- ----------- ----------
Diluted earnings per share $ 1.49 $ .90 $ .29
========= =========== ==========
Pro forma amounts assuming retroactive
application of accounting change:
Net income $ 39,527 $ 23,825 $ 8,789
========= =========== ==========
Pro forma basic earnings per share $ 1.73 $ .99 $ .33
========= =========== ==========
Pro forma diluted earnings per share $ 1.50 $ .94 $ .33
========= =========== ==========
See notes to consolidated financial statements.
F-5
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Amounts)
Additional
Preferred Common Stock Paid-In Retained
Stock Number Amount Capital Earnings
----------------------------------------------------------------------
Balance, December 28, 1999, as previously reported -- 29,858,553 $ 299 $ 238,000 $ 253,923
Cumulative effect on prior year of retroactive effect of
accounting change for stock-based compensation -- -- -- 71,569 (46,771)
----------------------------------------------------------------------
Balance, December 28, 1999, as restated -- 29,858,553 299 309,569 207,152
Stock options exercised -- 22,140 1 180 --
Common stock purchased and retired -- (5,605,074) (57) (49,204) --
Cash dividends ($.375 per share) -- -- -- -- (9,630)
Noncash stock compensation expense -- -- -- 12,016 --
Tax provision related to options exercised -- -- -- (38) --
Comprehensive income:
Net income -- -- -- -- 7,706
Foreign currency translation adjustments -- -- -- -- --
----------------------------------------------------------------------
Comprehensive income
----------------------------------------------------------------------
Balance, December 26, 2000 -- 24,275,619 243 272,523 205,228
Stock options exercised -- 242,838 2 2,022 --
Tax benefit related to options exercised -- -- -- 152 --
Common stock purchased and retired -- (468,687) (5) (5,140) --
Cash dividends ($.50 per share) -- -- -- -- (12,019)
Redemption of preference rights -- -- -- (242) --
Noncash stock compensation expense -- -- -- 3,212 --
Comprehensive income:
Net income -- -- -- -- 22,902
Foreign currency translation adjustments -- -- -- -- --
----------------------------------------------------------------------
Comprehensive income
----------------------------------------------------------------------
Comprehensive income
Balance, December 25, 2001 -- 24,049,770 240 272,527 216,111
Stock options exercised -- 2,058,838 21 23,530 --
Tax provision related to options exercised -- -- -- (474) --
Common stock purchased and retired -- (5,114,000) (51) (108,624) --
Cash dividends ($.60 per share) -- -- -- -- (13,719)
Noncash stock compensation expense -- -- -- 2,949 --
Comprehensive income:
Net income -- -- -- -- 39,209
Foreign currency translation adjustments -- -- -- -- --
----------------------------------------------------------------------
Comprehensive income
----------------------------------------------------------------------
Balance, December 31, 2002 -- 20,994,608 $ 210 $ 189,908 $ 241,601
======================================================================
F-6
Accumulated
Other
Comprehensive
(Loss) Income Total
----------------------------
Balance, December 28, 1999, as previously reported $ (7,843) $ 484,379
Cumulative effect on prior year of retroactive effect of
accounting change for stock-based compensation -- 24,798
---------------------------
Balance, December 28, 1999, as restated (7,843) 509,177
Stock options exercised -- 181
Common stock purchased and retired -- (49,261)
Cash dividends ($.375 per share) -- (9,630)
Noncash stock compensation expense -- 12,016
Tax provision related to options exercised -- (38)
Comprehensive income:
Net income -- 7,706
Foreign currency translation adjustments (4,016) (4,016)
---------------------------
Comprehensive income 3,690
---------------------------
Balance, December 26, 2000 (11,859) 466,135
Stock options exercised -- 2,024
Tax benefit related to options exercised -- 152
Common stock purchased and retired -- (5,145)
Cash dividends ($.50 per share) -- (12,019)
Redemption of preference rights -- (242)
Noncash stock compensation expense -- 3,212
Comprehensive income:
Net income -- 22,902
Foreign currency translation adjustments (1,584) (1,584)
---------------------------
Comprehensive income 21,318
---------------------------
Balance, December 25, 2001 (13,443) 475,435
Stock options exercised -- 23,551
Tax provision related to options exercised -- (474)
Common stock purchased and retired -- (108,675)
Cash dividends ($.60 per share) -- (13,719)
Noncash stock compensation expense -- 2,949
Comprehensive income:
Net income -- 39,209
Foreign currency translation adjustments 1,483 1,483
---------------------------
Comprehensive income 40,692
---------------------------
Balance, December 31, 2002 $ (11,960) $ 419,759
===========================
See notes to consolidated financial statements.
F-6
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
For the Year Ended
----------------------------------------
December 31, December 25, December 26,
2002 2001 2000
----------------------------------------
Operating activities
Net income $ 39,209 $ 22,902 $ 7,706
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 28,455 28,673 29,112
Amortization 1,047 2,622 2,902
Noncash stock compensation 2,949 3,212 12,016
Provision for impaired assets and restaurant closings 250 1,551 3,335
Gain on sales of assets (1,971) (2,223) (1,304)
Cumulative effect of accounting change 508 -- --
Deferred income taxes 16,812 108 (4,288)
Loss from discontinued operations 538 1,713 1,000
Net change in operating assets and liabilities:
Accounts receivable 66 (626) 606
Inventories 103 206 (1,335)
Other current assets (784) (1,431) 702
Accounts payable (432) 442 3,763
Income taxes payable (11,541) 10,485 (3,352)
Other liabilities 645 (4,514) (2,050)
-------------------------------------
Net cash provided by operating activities of continuing operations 75,854 63,120 48,813
Investing activities
Purchases of property and equipment (2,776) (3,924) (21,665)
Proceeds from sales of assets 7,879 10,098 10,213
Other 137 (334) (819)
-------------------------------------
Net cash provided by (used in) investing activities of continuing
operations 5,240 5,840 (12,271)
Financing activities
Net proceeds from issuance of common stock 23,551 2,024 181
Proceeds from revolver -- -- 6,955
Payment on revolver -- -- (6,955)
Common stock repurchased and retired (108,675) (5,145) (49,261)
Dividends paid (13,719) (12,019) (9,630)
Redemption of preference rights -- (242) --
-------------------------------------
Net cash used in financing activities of continuing operations (98,843) (15,382) (58,710)
Effect of exchange rate changes on cash 363 4 (8)
Net cash provided by (used in) discontinued operations (164) 308 532
-------------------------------------
Net increase (decrease) in cash and cash equivalents (17,550) 53,890 (21,644)
Cash and cash equivalents at beginning of year 82,919 29,029 50,673
-------------------------------------
Cash and cash equivalents at end of year $ 65,369 $ 82,919 $ 29,029
=====================================
Supplemental disclosure of cash flow information
Cash paid for income taxes $ 15,175 $ 1,755 $ 11,484
=====================================
See notes to consolidated financial statements
F-7
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
December 31, 2002
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 31, 2002, the Company owns and operates 249 Lone Star
Steakhouse & Saloons in the United States and 20 in Australia. In addition, the
Company owns and operates five Del Frisco's Double Eagle Steak Houses, 15
Sullivan's Steakhouses and one Frankie's Italian Grille.
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 of
approximately $47,293 and $63,243 at December 31, 2002 and December 25,
2001, respectively, in investment grade securities with municipal, state,
and U.S. government agencies.
F-8
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 considers carrying amounts of cash and cash equivalents,
receivables, and accounts payable to approximate fair value.
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 31, 2002 or 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.
o Inventories
Inventories consist of food and beverages and are stated at the lower of
cost (first-in, first-out) or market.
F-9
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 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, trademarks, intellectual properties,
and licensing permits. Effective December 26, 2001, the Company adopted
the provisions of Statement of Financial Accounting Standards (SFAS) No.
142 requiring that goodwill and intangible assets deemed to have
indefinite lives can no longer be amortized, but subjected to an annual
impairment test, or more frequent tests if indicators of impairment exist.
For those intangibles which continue to be subject to amortization, the
Company amortizes on a straight-line basis over the estimated periods of
benefit, generally 10 to 20 years. See Note 2 for additional information.
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
F-10
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 sheets reflect such investments as
assets with an offsetting liability for deferred compensation reflected in
long-term liabilities.
o Impairment of Long-Lived Assets
Property and equipment and definite life intangibles 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.
As noted above, goodwill and indefinite life intangibles are reviewed
annually for impairment, or more frequently if indicators of impairment
exist. Goodwill is tested by comparing net book value of the reporting
unit to its estimated fair value. Indefinite life intangibles are tested
by comparing book value to estimated fair value.
o Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 2002, December 25, 2001, and December 26, 2000
was $14,195, $18,050, and $18,065, respectively.
F-11
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o Accounting for Stock-Based Compensation
At December 31, 2002, the Company has two stock-based employee
compensation plans, which are described more fully in Note 6. Prior to
2002, the Company had applied the recognition and measurement provisions
of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for those plans. While options
granted under those plans generally had an exercise price equal to the
market value of the underlying common stock on the date of grant,
previously reported results did reflect stock-based employee compensation
expense related to re-priced options which were accounted for as
compensatory options using variable accounting treatment in accordance
with the provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 44 (FIN 44), Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of APB No. 25. As a result
of applying the provision of FIN 44, the Company previously recorded
noncash stock compensation of $19,985 in fiscal 2001. Effective December
26, 2001, the Company adopted the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation, for stock-based
employee compensation. The Company now values stock options issued based
upon an option pricing model and recognizes this value as an expense over
the period in which the options vest. All prior periods presented have
been restated to reflect the compensation expense that would have been
recognized had the recognition provisions of SFAS No. 123 been applied to
all awards granted to employees after December 28, 1994.
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-12
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supercedes SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived 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.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement requires that
a liability for a cost associated with an exit or disposal activity be
recognized only when the liability is incurred and measured at fair value.
SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not expect the initial
adoption of this Statement will have a material impact on its results of
operations or financial position.
F-13
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
2002 included 53 weeks of operations, while 2001, and 2000 each included
52 weeks of operations.
o Reclassifications
Certain amounts from the prior year have been reclassified to conform with
the current year's presentation.
2. INTANGIBLE ASSETS AND GOODWILL
At December 31, 2002
---------------------------------------------
Gross
Carrying Accumulated Estimated
Amount Amortization Useful Lives
---------------------------------------------
Amortized intangible assets:
Licenses $ 3,285 $(1,182) 20 years
Intellectual properties 9,839 (4,068) 10 years
----------------------------
Total $13,124 $(5,250)
============================
Unamortized intangible assets:
Licenses $ 3,471
Other 176
--------
Total $ 3,647
========
Aggregate amortization expense:
For the fiscal year ended 2002 $ 1,047
========
Estimated amortization expense:
For the fiscal year ended 2003 $ 1,047
For the fiscal year ended 2004 1,047
For the fiscal year ended 2005 1,047
For the fiscal year ended 2006 1,047
For the fiscal year ended 2007 1,047
F-14
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
2. INTANGIBLE ASSETS AND GOODWILL (CONTINUED)
Certain liquor licenses are not subject to amortization as such licenses have
indefinite lives and are transferable through open markets in the jurisdictions
where the licenses were granted. These licenses are reviewed at least annually
for impairment by comparing their book value to estimated market value. The
estimated market value is established by reference to recent market
transactions.
The Company adopted the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets, effective as of the beginning of fiscal 2002. SFAS No. 142
requires that goodwill and certain intangible assets deemed to have indefinite
lives are no longer to be amortized, but are subject to annual impairment tests.
In the first quarter of fiscal 2002, 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 $0.02 per share, net of income taxes of $190, to
reflect the impairment of certain goodwill related to Australian investments.
The pro forma effects of the adoption of SFAS No. 142 on net income and basic
and diluted earnings per share are as follows:
2002 2001 2000
------------------------------------
Reported income before cumulative effect of
accounting change $ 39,527 $ 22,902 $ 7,706
Add back:
Goodwill amortization, net of tax benefit -- 523 523
Adjust amortization for indefinite lived
intangibles, net of tax benefit -- 400 560
-----------------------------------
Pro forma net income $ 39,527 $ 23,825 $ 8,789
===================================
Basic earnings per share:
Earnings as reported before cumulative
effect of accounting change $ 1.73 $ .95 $ .29
Goodwill amortization, net tax benefit -- .02 .02
Intangibles amortization, net of tax benefit -- .02 .02
-----------------------------------
Pro forma per share $ 1.73 $ .99 $ .33
===================================
Diluted earnings per share:
Earnings as reported before cumulative
effect of accounting change $ 1.50 $ .90 $ .29
Goodwill amortization, net tax benefit -- .02 .02
Intangibles amortization, net of tax benefit -- .02 .02
-----------------------------------
Pro forma per share $ 1.50 $ .94 $ .33
===================================
F-15
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
2. INTANGIBLE ASSETS AND GOODWILL (CONTINUED)
Excluding the impairment for goodwill related to the change in accounting for
adopting SFAS No. 142 as discussed above, there were no changes in goodwill
carrying amounts during 2002.
3. 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. Excluding the 4,000,000 shares repurchased in the
tender offer as previously disclosed, the Company has purchased 1,114,000,
468,687, and 5,605,074 shares of its common stock at average prices of $20.08,
$10.98, and $8.79 per share during the fiscal years ended 2002, 2001, and 2000,
respectively. The Company is accounting for the repurchases 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.
4. LONG-TERM REVOLVERS
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 revolving credit agreement. At the
time of each borrowing, the Company may elect to pay interest at either the
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 agreement. The Company is
required to pay on a quarterly basis a facility fee equal to 0.25% per annum on
the daily unused amount of the credit facility. At December 31, 2002 and
December 25, 2001, there were no borrowings outstanding pursuant to the credit
facility.
F-16
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
4. LONG-TERM REVOLVERS (CONTINUED)
The Company also has entered into a $5,000 revolving term loan agreement with a
bank, under which no borrowings were outstanding at December 31, 2002 or
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 0.50% below
the daily prime rate as published in the "Wall Street Journal". In addition, the
Company pays a facility fee of 0.25% per annum on the daily unused portion of
the credit facility.
5. 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.
6. STOCK OPTIONS
As previously described in Note 1, prior to fiscal 2002, the Company had applied
the recognition and measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
stock-based employee compensation plans. While options granted under those plans
generally had an exercise price equal to the market value of the underlying
common stock on the date of grant, previously reported results did reflect
stock-based employee compensation expense related to re-priced options which
F-17
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
6. STOCK OPTIONS (CONTINUED)
were accounted for as compensatory options using variable accounting treatment
in accordance with the provisions of FIN 44 Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of APB No. 25. As a result of
applying the provisions of FIN 44, the Company previously recorded noncash stock
compensation of $19,985 in fiscal 2001. Effective December 26, 2001, the Company
adopted the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, for stock-based employee compensation. The Company now
values stock options based upon an option pricing model and recognizes this
value as an expense over the period in which the options vest. The effect of
this change was to increase net income by $14,416 ($.63 per share for basic
earnings and $.55 per share for diluted earnings) for fiscal 2002. All prior
periods presented have been restated to reflect the compensation expense that
would have been recognized had the recognition provisions of SFAS No. 123 been
applied to all awards granted to employees after December 28, 1994. Retained
earnings and additional paid-in capital have been adjusted for the retroactive
application of the new method of accounting as set forth in the Consolidated
Statements of Stockholders' Equity. The retroactive application effect on the
results of operations for the years presented is as follows:
Increase (Decrease) Increase (Decrease)
Increase (Decrease) Basic Net Income Diluted Net Income
Year Net Income Per Share Per Share
- --------------------------------------------------------------------------------------------
2001 $9,646 $.40 $.38
2000 (8,424) (.32) (.32)
The fair value for those options granted during the fiscal years presented were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 2002, 2001, and 2000,
respectively: risk-free interest rates of 3.1%, 4.1%, and 6.3%; volatility
factors of the expected market price of the Company's common stock of 0.506,
0.503, and 0.470; a weighted average expected life of the option ranging from
four to five years; and a dividend yield of 3% for fiscal 2002 and 2001 and no
yield for fiscal 2000.
2002 2001 2000
--------------------------------
Weighted-average fair value of options
granted during the year $5.45 $3.95 $3.31
F-18
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
6. STOCK OPTIONS (CONTINUED)
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 ten-year
terms and vest equally over a three-year period commencing from the date
of grant.
Both of the above plans expired in January 2002, and the Company currently has
no other stock option plans in effect for employees, including executive
officers, or for directors.
A summary of the Company's stock option activity and related information for the
years ended December 31, 2002, December 25, 2001, and December 26, 2000 is as
follows:
2002 2001 2000
------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Options Exercise Options Exercise Options
Price (000) Price (000) Price (000)
------------------------------------------------------------
Outstanding at beginning of year $ 9.67 7,919 $ 9.57 7,827 $ 16.57 6,456
Granted 14.80 48 10.44 461 8.55 6,394
Exercised 11.44 (2,059) 8.33 (243) 8.16 (22)
Canceled 12.71 (88) 9.09 (126) 17.32 (5,001)
------ ------ ------
Outstanding at end of year $ 8.98 5,820 $ 9.67 7,919 $ 9.57 7,827
====== ====== ======
F-19
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
6. STOCK OPTIONS (CONTINUED)
On January 7, 2000, the Board of Directors approved the repricing of 4,443,357
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.
For options outstanding as of December 31, 2002, 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 31, Exercise Remaining
Range of Prices 2002 Price Contract Life
- --------------------------------------------------------------------------------
$6.69 to $9.38 5,443,923 $ 8.52 3.97 years
$14.30 to $18.81 376,388 16.68 5.51 years
The number of shares and weighted-average exercise price of options exercisable
at December 31, 2002 are as follows:
Options Exercisable
- --------------------------------------------------------------------------------
Number Weighted-
Exercisable at Average
December 31, Exercise
Range of Prices 2002 Price
- --------------------------------------------------------------------------------
$6.69 to $9.38 4,813,923 $ 8.49
$14.30 to $18.81 269,191 17.57
F-20
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
7. RELATED-PARTY TRANSACTIONS
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 2002, 2001, and 2000 were $27, $37, and
$30, respectively. In addition, in 2002, 2001, and 2000 the Company purchased
business gifts and awards from a retail store owned by Jamie B. Coulter totaling
$2, $2, and $56, respectively.
The Company believes the charges reimbursed are at least as favorable as the
charges that would have been incurred for similar services or purchases from
unaffiliated third parties.
One of the Company's directors received a fee of $250 in consideration of
providing certain services in connection with a proposed transaction between the
Company and Bruckmann, Rosser, Sherill & Co., Inc. See Note 14 for more
information regarding the proposed transaction.
8. LEASES
The Company leases certain facilities under noncancelable operating leases
having terms expiring between 2003 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 2002,
2001, and 2000 was $12,515, $12,619, and $12,310, respectively, including
contingent rentals of approximately $751, $444, and $228, respectively.
Lease payments under noncancelable operating leases for each of the next five
years and in the aggregate are as follows at December 31, 2002:
Operating
Leases
----------
2003 $11,055
2004 8,364
2005 5,639
2006 3,132
2007 1,942
Thereafter 3,141
--------
Total minimum lease payments $33,273
========
F-21
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
2002 2001 2000
---------------------------------------
Numerator:
Numerator for basic and diluted
earnings per share - income available
to common stockholders $ 39,209 $ 22,902 $ 7,706
=======================================
Denominator:
Denominator for basic earnings per
share - weighted-average shares 22,908,821 24,036,942 26,189,600
Effect of dilutive employee stock
options 3,400,961 1,336,391 --
---------------------------------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares 26,309,782 25,373,333 26,189,600
=======================================
Basic earnings per share $ 1.71 $ 0.95 $ 0.29
=======================================
Diluted earnings per share $ 1.49 $ 0.90 $ 0.29
=======================================
10. INCOME TAXES
The components of the provision for income taxes consist of the following:
2002 2001 2000
-------------------------------
Current tax expense:
Federal $ 949 $ 10,512 $ 6,960
State 1,622 1,729 1,327
-------------------------------
Total current 2,571 12,241 8,287
Deferred tax expense (benefit):
Federal 16,642 (387) (3,062)
Foreign -- 536 (886)
State 170 (41) (340)
-------------------------------
Total deferred 16,812 108 (4,288)
-------------------------------
Total provision for income taxes $ 19,383 $ 12,349 $ 3,999
===============================
F-22
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
10. INCOME TAXES (CONTINUED)
The 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:
2002 2001 2000
----------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
----------------------------------------------------------------------
Income tax expense at federal statutory rate $ 20,507 35% $ 12,338 35%
$ 4,096 35%
State tax expense, net 1,113 2 1,207 3 579 5
Tax benefit from foreign stock deduction (8,128) (14) -- -- -- --
Valuation allowance 7,411 13 -- -- -- --
Other items, net, principally tip credits (1,520) (3) (1,196) (3) (676) (6)
-----------------------------------------------------------------------
Actual provision for income taxes $ 19,383 33% $ 12,349 35% $ 3,999 34%
=======================================================================
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 31, December 25,
2002 2001
--------------------------
Deferred tax assets:
Foreign NOL carryforward $ 11,250 $ 10,854
Accrued liabilities 1,406 1,510
Stock-based compensation 22,536 28,490
Deferred compensation 3,291 1,903
Other 1,966 1,741
--------------------
40,449 44,498
Valuation allowance (11,250) (3,839)
--------------------
Total deferred tax assets 29,199 40,659
Deferred tax liabilities:
Property and equipment 5,764 4,578
Basis differences in foreign investments 5,760 2,185
Intangible assets 1,349 --
Other 17 775
--------------------
Total deferred tax liabilities 12,890 7,538
--------------------
Net deferred tax assets $ 16,309 $ 33,121
====================
F-23
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
10. INCOME TAXES (CONTINUED)
As of December 31, 2002, the Company has net operating loss (NOL) carryforwards
of approximately $37,500 for foreign tax purposes with indefinite expiration
dates.
The valuation allowance for deferred tax assets at December 31, 2002 was
$11,250. 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 no longer believes it is more likely than not it will realize the
benefits of the deferred tax assets associated with the foreign NOL carryforward
and has increased the valuation allowance accordingly.
Pretax net loss attributable to foreign operations was $1,234 and $3,510 for the
years ended December 31, 2002 and December 25, 2001, respectively.
11. 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
estimates, judgments, and projections considered necessary.
During 2002, the Company recorded a provision related to continuing operations
of $250 for the write-down to estimated fair value of an underperforming
domestic restaurant. In addition, the Company recorded a provision of $542 for
certain costs associated with certain restaurants closed in previous years.
F-24
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
11. PROVISION FOR IMPAIRED ASSETS AND RESTAURANT CLOSINGS (CONTINUED)
During 2001, the Company recorded a provision related to continuing operations
of $1,273 for the write-down to estimated fair value of impaired property,
plant, and equipment relating primarily to certain underperforming Australian
restaurants. In addition, a charge of $278 was recorded to continuing operations
for severance, rents, and certain other costs associated with closing an
Australian restaurant.
During 2000, the Company recorded a provision to continuing operations of $2,025
for the write-down to estimated fair value of impaired property, plant, and
equipment relating to certain underperforming Australian restaurants. In
addition, a charge of $1,310 was recorded to continuing operations for
severance, rents, and certain other costs associated with closing 14 Australian
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 continuing operating results
were $-0-, $611, and $7,026 and operating losses at the restaurant level were
$-0-, $112, and $860 for the years ended 2002, 2001, and 2000, respectively.
12. DISCONTINUED OPERATIONS
Pursuant to the provisions of SFAS No. 144 as previously described in Note 1 to
the consolidated financial statements, the Company has closed seven restaurants
during the fiscal year ended December 31, 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:
2002 2001 2000
------------------------------
Loss from operations $ (834) $(2,679) $(1,544)
Income tax benefit 296 966 544
-----------------------------
Net loss from discontinued operations $ (538) $(1,713) $(1,000)
=============================
Net sales from discontinued operations $ 2,362 $ 5,558 $ 6,786
=============================
F-25
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
13. 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 2002,
2001, and 2000, the Company's contributions to the Plans were $1,984, $1,978,
and $1,953, respectively.
14. ABANDONED MERGER EXPENSES
On May 4, 2002, the nonbinding 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 consolidated statements of income under the caption
"Abandoned Merger Expenses."
15. QUARTERLY FINANCIAL SUMMARIES (UNAUDITED)
The table below sets forth consolidated quarterly results of operations for
fiscal 2002 and 2001. As discussed more fully in Note 6, the Company has
restated the results of fiscal 2002 and 2001, including the individual quarters,
to reflect the retroactive application of SFAS No. 123. In addition, net sales
and restaurant operating income have been adjusted to reflect the impact of
certain discontinued operations to the extent such amounts were reclassified.
F-26
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
15. QUARTERLY FINANCIAL SUMMARIES (UNAUDITED) (CONTINUED)
First Quarter 2002(A) Second Quarter 2002(A)
-------------------------------------------------------
As Previously As Previously
Reported Restated Reported Restated
--------------------------- --------------------------
Net sales $ 148,808 $ 147,908 $ 139,720 $ 139,118
Restaurant operating income 29,877 30,205 23,276 23,500
Income (loss) from continuing operations
before cumulative effect of an
accounting change (a) (3,508) 12,719 2,684 6,202
Net income (loss) (3,826) 12,193 2,684 6,057
Basic earnings (loss) per share:
Continuing operations $ (0.15) $ 0.53 $ 0.11 $ 0.25
Net income (loss) (0.16) 0.50 0.11 0.24
Diluted earnings (loss) per share:
Continuing operations $ (0.15) $ 0.46 $ 0.10 $ 0.22
Net income (loss) (0.16) 0.44 0.10 0.21
Third Quarter 2002(A)
-------------------------- Fourth
As Previously Quarter
Reported Restated 2002
----------------------------------------
Net sales $ 134,492 $ 133,992 $ 194,697
Restaurant operating income 20,654 20,745 32,205
Income from continuing operations before
cumulative effect of an accounting change (b) 13,591 8,244 12,900
Net income 13,573 8,198 12,761
Basic earnings per share:
Continuing operations $ 0.61 $ 0.37 $ 0.61
Net income 0.61 0.37 0.60
Diluted earnings per share:
Continuing operations $ 0.55 $ 0.32 $ 0.53
Net income 0.55 0.32 0.53
(a) The second quarter of fiscal 2002 includes a charge to earnings of $2,967
($1,854 net of income tax) related to costs incurred in connection with a
proposed merger which was abandoned in the quarter.
(b) The fourth quarter of fiscal 2002 includes gains on sale of assets of
$2,098 ($1,215 net of income tax) arising from property sales during the
quarter.
(A) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly per share amounts does not
equal the total for the year due to the impact of stock transactions which
occurred during the periods presented.
F-27
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
15. QUARTERLY FINANCIAL SUMMARIES (UNAUDITED) (CONTINUED)
First Quarter 2001(A) Second Quarter 2001(A)
-----------------------------------------------------
As Previously As Previously
Reported Restated Reported Restated
-----------------------------------------------------
Net sales $ 143,753 $ 142,375 $ 136,069 $ 134,736
Restaurant operating income 19,691 19,910 15,693 15,959
Income (loss) from continuing operations 8,240 7,661 (5,320) 3,177
Net income (loss) 8,240 7,520 (5,320) 3,006
Basic earnings (loss) per share:
Continuing operations $ 0.34 $ 0.32 $ (0.22) $ 0.13
Net income (loss) 0.34 0.31 (0.22) 0.13
Diluted earnings (loss) per share:
Continuing operations $ 0.34 $ 0.32 $ (0.22) $ 0.13
Net income (loss) 0.34 0.31 (0.22) 0.12
Third Quarter 2001(A) Fourth Quarter 2001(A)
-------------------------------------------------------
As Previously As Previously
Reported Restated Reported Restated
-------------------------------------------------------
Net sales $ 135,685 $ 135,115 $ 181,730 $ 180,233
Restaurant operating income (a) 16,957 17,066 26,410 28,025
Income from continuing operations (a),
(b), and (c) 7,310 4,692 3,320 9,085
Net income 7,016 4,328 3,320 8,048
Basic earnings per share:
Continuing operations $ 0.30 $ 0.20 $ 0.14 $ 0.38
Net income 0.29 0.18 0.14 0.33
Diluted earnings per share:
Continuing operations $ 0.29 $ 0.18 $ 0.13 $ 0.35
Net income 0.28 0.17 0.13 0.31
(a) The fourth quarter of fiscal 2001 includes a charge to earnings of $1,551
($992 net of income tax) related to a provision for asset impairment and
store closing costs for certain underperforming restaurants.
(b) The fourth quarter of fiscal 2001 includes a charge of $2,124 ($1,327 net
of income tax) for the Company's contribution to the American Red Cross in
connection with the restaurant industry's "Dine for America" program, as
the Company contributed 100% of its restaurant sales on October 11, 2001.
(c) The fourth quarter of fiscal 2001 includes gains on sale of assets of
$2,244 ($1,451 net of income tax) arising from property sales during the
quarter.
(A) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly per share amounts does not
equal the total for the year due to the impact of stock transactions which
occurred during the periods presented.
F-28
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
16. OTHER INCOME, NET
The components of other income, net are as follows:
2002 2001 2000
-------------------------------
Interest income $ 1,591 $ 2,055 $ 1,431
Interest expense, principally credit
availability fees (297) (39) (327)
Gain on sale of assets 1,942 2,223 1,304
Other 13 -- 122
-----------------------------
$ 3,249 $ 4,239 $ 2,530
=============================
17. 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 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 a motion to amend its complaint, which
included 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. The Delaware Court took under advisement the
motion to amend and stayed discovery pending a court decision on the motion to
dismiss.
On December 18, 2002, the Delaware Court dismissed a number of claims and
retained several others. On January 7, 2003, the Delaware Court agreed to permit
CalPERS to proceed with its discovery, requesting specific documents, if any,
from certain third parties and from the named defendants and ordered CalPERS to
timely file its motion to amend its complaint.
F-29
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
17. LITIGATION (CONTINUED)
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.
18. DIVIDEND DECLARATION
On January 9, 2003, the Board of Directors declared the Company's quarterly cash
dividend of $.15 per share, payable February 5, 2003, to stockholders of record
on January 22, 2003.
F-30