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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 30, 2003
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______ to ______
Commission file number 0-19907
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LONE STAR STEAKHOUSE & SALOON, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 48-1109495
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
224 EAST DOUGLAS, SUITE 700
WICHITA, KANSAS 67202
(Address of principal executive offices) (Zip code)
(316) 264-8899
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. Yes /X/ No / /
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 17, 2003, the aggregate market value of the Registrant's
Common Stock held by non-affiliates of the Registrant was $411,873,919. 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 February 23, 2004, there were 21,136,692 shares outstanding of
the Registrant's Common Stock.
-1-
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.......................................................12
4. Submission of Matters to a Vote of Security Holders ....................12
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matter.....................................................13
6. Selected Financial Data.................................................14
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations..........................................................16
7A. Quantitative and Qualitative Disclosures about Market Risk..............28
8. Financial Statements and Supplementary Data..............................28
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...................................................28
9A.Controls and Procedures..................................................28
PART III
10. Directors and Executive Officers of the Registrant......................29
11. Executive Compensation..................................................29
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters........................................29
13. Certain Relationships and Related Transactions..........................29
14. Principal Accountants Fees and Services.................................29
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........30
Signatures..............................................................32
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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 February 23, 2004, Lone Star Steakhouse & Saloon, Inc. (the
"Company") owned and operated 250 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"), 20 Texas Land & Cattle Co. ("Texas Land & Cattle")
restaurants, 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.
The Texas Land & Cattle restaurants were purchased out of bankruptcy
on January 28, 2004, and none of their operating results are included in the
accompanying financial information relating to the year ended December 30, 2003
or prior years.
Internationally, licensees operate 13 Lone Star Steakhouse & Saloon
restaurants in Australia and one in Guam.
Steak continues to be one of the most frequently ordered dinner
entrees at restaurants. In 2003, the United States Department of Agriculture
estimated the average annual per capita consumption of beef to be 65.2 pounds,
down slightly from 2002. 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 four (4) distinct steak restaurant concepts, it has positioned itself as "The
Steak Company."
-3-
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
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 2003 of approximately $12.00 at
lunch and $19.00 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 $87.00.
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 lunch
and dinner, and are generally open seven days a week with an average guest check
per customer of approximately $65.00.
Texas Land & Cattle restaurants are mid-priced full service dining
restaurants located in Texas (19) and New Mexico (1). The concept features
authentic Texas ranch house settings with large fireplaces, serving lunch and
dinner seven days per week. The average check per customer is approximately
$13.00 at lunch and at $18.00 at dinner.
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 approximately $12.00 at lunch and $28.00 at
dinner.
CORPORATE STRATEGY
During 2003, the Company did not open any new restaurants. During
2003, the Company sold 13 Lone Star restaurants in Australia to a licensee and
closed an additional seven Australian Lone Star restaurants.
The Company is currently evaluating development opportunities for
all concepts for 2004 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 2003, 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.
-4-
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 2004
with no more than 6-10 new units, and to evaluate further expansion in light of
the economy, site availability and other considerations. 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.
As of February 23, 2004, the Company has opened one new Lone Star in
2004, one new Lone Star restaurant under construction, and secured sites for
three additional restaurants.
UNIT ECONOMICS
The Company's management team focuses on selecting locations with
the potential of producing significant revenues while controlling capital
expenditures and occupancy costs. The Company's Lone Star restaurants averaged
approximately $1.9 million in sales on an annualized basis during 2003. Of the
250 Lone Star restaurants open at February 23, 2004, 90 were leased facilities
and had an average cash investment of approximately $1.0 million and 160 were
owned and had an average cost for land acquisition, construction and equipment
of approximately $1.9 million.
The Company anticipates the average total investment per restaurant
for a typical Del Frisco's restaurant and Sullivan's restaurant will range from
$3.0 million to $5.0 million.
MENU
The dinner menu at a Lone Star restaurant features a limited
selection of high quality, specially seasoned and mesquite grilled steaks, prime
rib, ribs, chicken, fish, 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.
The menu at Texas Land & Cattle Steak House restaurants features a
selection of high quality, mesquite grilled steaks, smoked sirloin, as well as
prime rib, ribs, chicken, fish, shrimp and combinations. Most dinners consist of
a complete meal including salad, bread and butter and a choice of side dish. The
lunch menu offers a selection of hamburgers, sandwiches, luncheon steaks, soups
and salads. Appetizers and desserts, together with a full bar service is
available. Alcoholic beverage service accounts for approximately 11% of Texas
Land & Cattle Steak House net sales.
-5-
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 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 customers to view the bar and Texas memorabilia, thereby
enhancing the casual dining atmosphere. The Company also designs its kitchen
space for efficiency of workflow, thereby minimizing the amount of space
required.
Lone Star restaurants currently average approximately 5,800 square
feet and include a dining area with seating for approximately 220 customers. In
addition, a bar area is located adjacent to the dining room primarily to
accommodate customers waiting for dining tables or to accommodate overflow. In
some restaurants, an outside patio area provides additional seating.
The original Del Frisco's restaurant in Dallas, Texas is
approximately 10,000 square feet and seats approximately 350 persons and
includes an extended wine cellar, with private dining available. 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 and an upbeat, convivial atmosphere.
Texas Land & Cattle restaurants average approximately 7,300 sq. ft.
and have seating for approximately 280 customers.
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 attracts and retains customers. Accordingly, the Company has focused
its resources on providing customers with superior service, value and an
exciting and vibrant atmosphere, and relied primarily on word of mouth to
attract new customers. The Company also utilizes billboard advertising to
promote its restaurants and build customer awareness. The Company utilizes
direct mail featuring new products and limited price promotions in lieu of media
advertising. This marketing strategy enables the Company to provide marketing
support for all its Lone Star restaurants.
-6-
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
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 2003. As
of February 23, 2004, the Company had no significant forward pricing contracts.
-7-
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.
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
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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 federal, state or local
minimum wage could increase the Company's labor costs.
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),
Sullivan's Steakhouse(R) and Texas Land & Cattle Company Steak House(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 February 23, 2004, the Company employed approximately 19,440
persons, 11 of whom are executive officers, 94 of whom are office support
personnel, 7 of whom are regional managers, 35 of whom are district managers,
approximately 1,400 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, there have been several
negotiating sessions, but none since December 19, 2002. 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 February 23, 2004, the Company leased 90 and owned 160 of its
Lone Star restaurant locations. At such date, the Company leased three and owned
two Del Frisco's restaurants locations. Of the 15 Sullivan's restaurants, 13 are
leased and two are owned. All of the Texas Land & Cattle restaurants are leased.
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.
During 2003, the Company acquired a land site in Dundee, Michigan for
construction of a Lone Star Restaurant.
-9-
In addition, the Company has entered into three additional leases
for land for construction of Lone Star restaurants in Hampton, Virgina
(currently under construction), Mitchell, South Dakota, and Columbia, Missouri.
-10-
RESTAURANT LOCATIONS AS OF FEBRUARY 23, 2004
The following table sets forth the location of the Company's
existing, open domestic Lone Star Steakhouse & Saloon (250) Restaurants, Del
Frisco's (5) restaurants, Sullivan's (15) restaurants, Texas Land & Cattle (20)
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
-11-
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 reducing 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 April 16, 2003, CalPERS filed a Motion for Leave to Amend
Plaintiff's First Amended Complaint, which complaint added no additional causes
but added allegations which are subsequent to the date of the first complaint
and allegations which also address counts which were dismissed by the Vice
Chancellor on December 18, 2002. All defendants filed objections to CalPERS
attempt to amend and oral argument was heard by the Vice Chancellor on August
21, 2003. As of this date, no decision has been rendered and discovery by both
parties continues.
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 30, 2003.
-12-
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 2003 High Low
------------- ---- ---
First Quarter $21.99 $18.32
Second Quarter $23.10 $18.84
Third Quarter $23.34 $20.66
Fourth Quarter $23.49 $20.35
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
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. The Company increased its quarterly cash dividend to $0.15
per share, in January 2002, to $.165 per share and in February 2003 and to $.175
per share in February 2004. 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 or as to the amount of the cash
dividend.
NUMBER OF STOCKHOLDERS
As of February 23, 2004, there were approximately 350 holders of
record of the Company's Common Stock. The Company believes there are in excess
of 7,000 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.
-13-
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 30, 2003 and December 31, 2002, and for each of
the five years in the period ended December 30, 2003, were derived from the
Company's audited consolidated financial statements. The pro forma data set
forth below for the periods presented are unaudited and have been prepared by
management solely to facilitate period-to-period comparison and do not represent
the actual results of operations for the periods presented. The pro forma
amounts reflect the adjusted amounts applicable for fiscal years 2001, 2000, and
1999 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.
-14-
Year Ended In December(1)
---------------------------------------------------------------------------
(Amounts in thousands, except share data)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Income Statement Data:
Net sales $ 591,401 $ 593,617 $ 571,115 $ 544,111 $ 545,901
Costs and expenses:
Costs of sales 212,593 194,183 195,707 190,730 194,313
Restaurant operating expenses 274,388 265,730 264,758 257,458 242,953
Restaurant depreciation and
amortization 20,817 24,452 25,876 26,363 28,533
General and administrative expenses 43,346 45,085 41,884 40,422 33,949
Abandoned merger expenses -- 2,990 -- -- --
Non-cash stock compensation expense 1,474 2,949 3,212 12,016 14,944
Contribution - "Dine for America" -- -- 2,124 -- --
Provision for impaired assets and
restaurant closings -- 792 565 3,142 37,875
------------ ------------ ------------ ----------- -----------
Total costs and expenses 552,618 536,181 534,126 530,131 552,567
------------ ------------ ------------ ----------- -----------
Income (loss) from operations 38,783 57,436 36,989 13,980 (6,666)
Other income, net 553 2,986 4,906 3,350 2,171
------------ ------------ ------------ ----------- -----------
Income (loss) from continuing operations before
provision for income taxes 39,336 60,422 41,895 17,330 (4,495)
Benefit (provision) for income taxes (12,013) (20,040) (14,703) (5,971) 1,165
------------ ------------ ------------ ----------- -----------
Income (loss) from continuing operations 27,323 40,382 27,192 11,359 (3,330)
Discontinued operations:
(Loss) from operations of discontinued restaurants (10,774) (1,322) (6,644) (5,625) (2,098)
Income tax benefit 2,117 467 2,354 1,972 729
------------ ------------ ------------ ----------- -----------
Loss on discontinued operations (8,657) (855) (4,290) (3,653) (1,369)
------------ ------------ ------------ ----------- -----------
Income (loss) before cumulative effect of change in
accounting principle 18,666 39,527 22,902 7,706 (4,699)
Cumulative effect of change in accounting principle
(net of income tax of $190) (3) -- (318) -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) (2) $ 18,666 $ 39,209 $ 22,902 $ 7,706 $ (4,699)
============ ============ ============ ============ ============
Basic earnings (loss) per share:
Continuing operations $ 1.31 $ 1.76 $ 1.13 $ .43 $ (.09)
Discontinued operations (4) (.41) (.03) (.18) (.14) (.04)
------------ ------------ ------------ ------------ ------------
Income (loss) before cumulative effect of
change in accounting principle .90 1.73 .95 .29 (.13)
Cumulative effect of change
in accounting principle -- (.02) -- -- --
------------ ------------ ------------ ------------ ------------
Basic earnings (loss) per share $ .90 $ 1.71 $ .95 $ .29 $ (.13)
============ ============ ============ ============ ============
Weighted average shares outstanding 20,801,894 22,908,821 24,036,942 26,189,600 35,089,084
============ ============ ============ ============ ============
Pro forma net income (loss) (2) $ 18,666 $ 39,527 $ 23,825 $ 8,789 $ (3,638)
============ ============ ============ ============ ============
Pro forma basic earnings (loss) per share $ .90 $ 1.73 $ .99 $ .33 $ (.10)
============ ============ ============ ============ ============
-15-
At fiscal year end in December, (1)
--------------------------------------------------------
(Dollars in thousands)
2003 2002 2001 2000 1999
Balance Sheet Data:
Working capital (deficit) $ 71,944 $ 44,575 $ 48,284 $ (1,716) $ 20,215
Total assets 488,495 473,313 536,025 517,274 558,330
Stockholders' equity 421,099 419,759 475,435 466,135 509,177
(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 1999, 2000, 2001, 2002 and 2003 fiscal years ended on December
28, 26, 25, 31 and 30, respectively. Fiscal 2002 included 53 weeks of
operations while fiscal 2003, 2001, 2000, and 1999 included 52 weeks.
(2) Pro forma net income (loss) amounts reflect the adjustments for fiscal
2001, 2000, and 1999 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.
(3) 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.
(4) During fiscal 2003, the Company announced a plan to divest all of its
Australian operations. In December 2003, the Company completed the sale to
a licensee of 13 of its 19 restaurants in Australia and closed the
remaining six restaurants. The losses included in discontinued operations
for fiscal 2003 include aggregate pre-tax charges of approximately $12,000
incurred in connection with its exit activities from Australia, including
impairment losses related to assets either sold or to be sold, termination
costs associated with employees and certain lease obligations, and losses
related to the realization of the Company's cumulative foreign currency
translation adjustments. See Note 12 to the Consolidated Financial
Statements for additional information.
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 eleven restaurants in fiscal 2001, and none in
fiscal 2002 and 2003. The Company opened one domestic Lone Star restaurant in
February 2004.
There were 250 operating domestic Lone Star restaurants as of
February 23, 2004. 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, licensees operate 13 Lone Star Steakhouse & Saloon
restaurants in Australia and one restaurant in Guam. During fiscal 2003, the
Company sold 13 restaurants to a licensee in Australia and closed an additional
seven restaurants in Australia. The Company closed five restaurants in Australia
in fiscal 2002.
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 Consolidated Financial Statements). The Company believes that of its
-16
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 AND DEFINITE LIFE
INTANGIBLES 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.
IMPAIRMENT OF LONG-LIVED ASSETS - GOODWILL AND INDEFINITE LIFE INTANGIBLES
Goodwill and certain intangible assets deemed to have indefinite lives which are
not subject to amortization are subjected to an annual impairment test, or more
frequent tests if indicators of impairment exist. In assessing recoverability of
goodwill, the Company may be required to make assumptions regarding estimated
future cash flow and other factors to determine the fair value. The amount of
fair value for certain intangible assets having indefinite lives are made by
reference to recent market transactions. An impairment loss is recognized when
the estimates of fair value are less than the carrying value of the assets.
SELF-INSURANCE RESERVES During fiscal 2003, the Company adopted self-insurance
programs for its worker's compensation, general liability, and medical benefits
programs. In order to minimize the exposure under the self-insurance programs,
the Company has purchased stop-loss coverage both on a per occurrence and on an
aggregate basis. The self insured losses under the programs are accrued based
upon the Company's estimate of the ultimate expected liability for both claims
incurred and on an incurred but not reported basis. The establishment of such
accruals for self-insurance involve certain management judgments and assumptions
regarding the frequency or severity of claims, the historical patterns of claim
development and the Company's experience with claim reserve management and
settlement practices. To the extent actual results may differ from the
assumptions used to develop the accrual estimate amounts, such unanticipated
changes may produce significantly different amounts of expense than those
estimated under the self-insurance program.
INCOME TAXES - DEFERRED INCOME TAX Deferred tax assets and liabilities are
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. Deferred tax assets are 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.
-17-
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the
percentages which certain items included in the Consolidated Statements of
Income bear to net sales.
Year Ended
-------------------------------------
December 30, December 31, December 25,
2003 2002 2001
------- ------- -------
(Dollars in thousands)
Statement of Income:
Net sales 100% 100% 100%
Costs and expenses:
Costs of sales 36.0 32.7 34.3
Restaurant operating expenses 46.4 44.8 46.4
Depreciation and amortization 3.5 4.1 4.5
Provision for impaired assets and restaurant closings -- 0.1 0.1
------- ------- -------
Restaurant costs and expenses 85.9 81.7 85.3
------- ------- -------
Restaurant operating income 14.1 18.3 14.7
General and administrative expenses 7.3 7.6 7.3
Abandoned merger expenses -- 0.5 --
Non-cash stock compensation expense 0.2 0.5 0.6
Contribution - "Dine for America" -- -- 0.4
------- ------- -------
Income from operations 6.6 9.7 6.4
Other income, net 0.1 0.5 0.9
------- ------- -------
Income from continuing operations before income taxes
and cumulative effect of accounting change 6.7 10.2 7.3
Provision for income taxes 2.1 3.4 2.6
------- ------- -------
Income from continuing operations before cumulative
effect of accounting change 4.6 6.8 4.7
Loss from discontinued operations, net of applicable income taxes (1.4) (0.1) (0.7)
------- ------- -------
Income before cumulative effect of accounting change 3.2 6.7 4.0
Cumulative effect of accounting change, net of tax -- (0.1) --
------- ------- -------
Net income 3.2% 6.6% 4.0%
======= ======= =======
-18-
LONE STAR STEAKHOUSE & SALOON, INC.
YEAR ENDED DECEMBER 30, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales decreased $2,216 or .4% to $591,401 for the year ended
December 30, 2003 ("fiscal 2003"), compared to $593,617 for the year ended
December 31, 2002 ("fiscal 2002"). The decrease was attributable principally to
the fact that fiscal 2003 was a 52 week period compared to a 53 week period in
fiscal 2002. In addition, since fiscal 2002 ended on December 31, the Company
had two New Year's Eve revenue days in fiscal 2002 compared to no New Year's Eve
revenues for fiscal 2003. The Company estimates that the extra week for fiscal
2002 provided additional sales of approximately $11,900. Blended same store
sales increased 1.9%.
Costs of sales, primarily food and beverages, increased as a
percentage of net sales to 36.0% from 32.7% due primarily to increased beef
costs. Restaurant operating expenses in fiscal 2003 increased $8,658 to $274,388
compared to $265,730 in fiscal 2002, and increased as a percentage of net sales
to 46.4% from 44.8%. The increase is primarily attributable to (1) approximately
$3,400 due to salaries for increased manager staffing and indirect labor for
payroll related taxes and insurance costs, (2) approximately $1,500 for
increased advertising spending, (3) approximately $670 for increased building
and equipment repairs and (4) approximately $1,200 for increased utilities.
Depreciation and amortization decreased $3,635 in fiscal 2003
compared with fiscal 2002. The decrease is attributable primarily to a reduction
in depreciation for certain assets that have become fully depreciated.
General and administrative expenses decreased $1,739 in fiscal 2003
compared with fiscal 2002. Fiscal 2003 expense decreased as a result of (1) an
approximately $2,100 decrease for salary related costs, reflecting primarily a
decrease in incentive compensation and (2) a decrease in professional fees and
related costs of approximately $1,700. These decreases were offset in part by
increases in directors and officers' liability insurance costs as well as
increased costs for travel and recruiting.
Non-cash stock compensation expense in fiscal 2003 decreased $1,475
compared with fiscal 2002. The decrease reflects approximately $1,906 for lower
amortization of such costs. The decrease was partially offset by a charge of
$431 relating to the accounting for certain shares of the Company's common stock
held by a Rabbi Trust pursuant to a deferred compensation arrangement. See Note
3 to the Consolidated Financial Statements for additional information.
Other income, net for fiscal 2003, was $553, compared to $2,986 in
fiscal 2002. The decrease is attributable to a decrease in gain on sale of
assets and a decline in interest income as a result of lower interest rates and
reduced amounts of excess funds available for investment.
The effective income tax rate was 30.5% and 33.2% for fiscal 2003
and fiscal 2002, respectively. The factors which cause the effective tax rates
to vary from the federal statutory rate of 35% include state income taxes, the
impact of FICA Tip and other credits, certain non-deductible expenses, and the
tax effect of incentive stock options. There is generally no tax impact to the
Company associated with incentive stock options and the related amortization
associated with such options in the income statement. However, tax benefits may
arise at the time the incentive options are exercised to the extent that the
exercise is followed by a disqualifying disposition of the shares by the
optionee. The decrease in the effective tax rate for fiscal 2003 reflects (1)
both the impact of a decrease in the amount of amortization of stock option
compensation and an increase in tax benefits resulting from disqualifying
disposition of shares related to incentive stock options, and (2) the impact of
FICA Tip and other tax credits on the lower pre-tax income for fiscal 2003
compared with fiscal 2002.
Discontinued operations reflect the operations of restaurants closed
during fiscal 2003 and 2002 which are required to be reported as discontinued
operations pursuant to SFAS No. 144. Discontinued operations include the
applicable operations of Australia. In December 2003, the Company completed the
-19-
sale of 13 of its restaurants in Australia to a licensee, and the Company closed
six other restaurants in Australia prior to December 30, 2003. The discontinued
operations for fiscal 2003 include aggregate pre-tax charges of approximately
$12,000 incurred in connection with its exit activities from Australia,
including impairment losses, termination costs associated with employees and
certain lease obligations, and losses related to the realization of the
Company's cumulative foreign currency translation adjustments. See Note 12 to
the Consolidated Financial Statements for additional information.
-20-
LONE STAR STEAKHOUSE & SALOON, INC.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 25, 2001
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales increased $22,502 or 3.9% to $593,617 for fiscal 2002,
compared to $571,115 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 32.7% from 34.3% 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 increased $972 to $265,730 in fiscal
2002 compared to $264,758 in fiscal 2001, but decreased as a percentage of net
sales to 44.8% from 46.4%. The decrease as a percent of sales largely reflects
the leverage from increased sales volumes. In addition, the Company experienced
lower overall labor costs as a result of improved labor efficiencies and
controls. In terms of absolute dollars, the increase is primarily attributable
to (1) approximately $3,400 for increased building and equipment maintenance
costs and (2) approximately $2,300 for increased general liability and other
insurance costs. The increases were largely offset by (1) a decrease in
advertising expenses of approximately $3,300 as the Company decreased its
spending for broadcast media and focused its advertising efforts in print media
and (2) a decrease of approximately $1,900 in pre-opening expenses.
Depreciation and amortization decreased $1,424 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.
Provision for impaired assets and restaurant closings in fiscal 2002
was $792 compared to $565 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. In addition, the provision for fiscal 2002 includes $542 of
costs incurred for stores closed in previous years.
General and administrative expenses increased $3,201 in fiscal 2002
compared with fiscal 2001. 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. Fiscal 2002 expense increased as a result of (1)
approximately $2,500 increase for salary related costs, reflecting a general
inflationary increase in salary levels, an increase in the number of field
supervisory personnel and an increase in incentive compensation and (2)
approximately $1,500 for increased costs of directors and officers liability
insurance and certain legal and professional expenses. These increases were
partially offset by decreases in recruiting, travel and information technology
consulting costs.
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 decreased $263
compared with fiscal 2001 reflecting a decrease in the amortization of the
vested compensation amounts.
Other income, net for fiscal 2002, was $2,986, compared to $4,906
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.
-21-
The effective income tax rate was 33.1% and 35.1% for fiscal 2003
and fiscal 2002, respectively. The factors which cause the effective tax rates
to vary from the federal statutory rate of 35% include state income taxes, the
impact of FICA Tip and other credits, certain non-deductible expenses, and the
tax effect of incentive stock options and the related amortization associated
with such options in the income statement. However, tax benefits may arise at
the time the incentive options are exercised to the extent that the exercise is
followed by a disqualifying disposition of the shares by the optionee. The
decrease in the effective tax rate for fiscal 2002 primarily reflects an
increase in tax benefits resulting from the disqualifying disposition of shares
related to incentive stock options as compared with fiscal 2001.
Discontinued operations reflect the operations of the Company's
Australian business and certain other restaurants closed subsequent to fiscal
2001 which are required to be reported as discontinued operations pursuant to
SFAS No. 144. See Note 12 to the 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
Consolidated Financial Statements for additional information.)
-22-
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 costs of food and labor
have increased, the Company has been able to offset these increases through menu
price increases and economies of scale; however, there may be delays in the
implementation of such menu price increases or in effecting timely economies of
scale, as well as, competitive pressures which may limit the Company's ability
to recover any cost increases in their entirety. Historically, inflation has not
had a material impact on operating margins. During fiscal 2003, the Company
experienced significant increases in beef prices. If the price of beef continues
at its recent levels, it will continue to have a material negative 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 30, December 31, December 25,
2003 2002 2001
---------- ----------- ----------
Net cash provided by operating activities $ 54,138 $ 74,792 $ 62,235
Net cash provided by (used in) investment activities (8,106) 5,240 5,840
Net cash used by financing activities (27,149) (98,843) (15,382)
Effect of exchange rate changes on cash 1,486 363 4
Net cash provided by discontinued operations 10,492 898 1,193
-------- -------- --------
Net increase (decrease) in cash and cash equivalents $ 30,861 $(17,550) $ 53,890
======== ======== ========
The decrease in net cash provided by operating activities for fiscal
2003 compared with fiscal 2002 is due to a decrease in net income and a decrease
in depreciation and amortization. The increase in net cash provided by operating
activities in fiscal 2002 compared to fiscal 2001 is due to an increase in net
income.
During fiscal 2003, 2002, and 2001, the Company's purchases of
property and equipment were $6,928, $2,776, and $3,924, respectively. In fiscal
2003, 2002, and 2001, the Company received proceeds from the sale of assets of
$1,730, $7,879, and $10,098, respectively.
The Company opened 11 restaurants in the past three fiscal years all
of which opened during fiscal 2001.
During fiscal 2003, the Company received net proceeds of $10,244
from the issuance of 1,210,682 shares of its common stock due to the exercise of
stock options compared to proceeds of $23,551 and $2,024 from the issuance of
2,058,838 and 242,838 shares in fiscal 2002 and 2001, 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. In fiscal 2003, the Company purchased
1,132,500 shares of its common stock at a cost of $23,833. In fiscal 2002 and
-23-
2001, the Company purchased 1,114,000 and 468,687 shares at a cost of $22,374
and $5,145, respectively. The shares repurchased exclude the 4,000,000 shares in
the tender offer as previously described.
The Company has paid quarterly cash dividends on its common stock
since the second quarter of fiscal 2000. In January 2003, the Company increased
its quarterly cash dividend from $.15 to $.165 per share. The Company recently
announced in 2004 that it would increase its quarterly cash dividend from $.165
to $.175 per share. During fiscal 2003, 2002, and 2001 the Company paid cash
dividends as follows:
Amount Per Share
------ ---------
Fiscal 2003 $13,560 $0.645
Fiscal 2002 $13,719 $0.60
Fiscal 2001 $12,019 $0.50
At December 30, 2003, the Company had $96,230 in cash and cash
equivalents. The Company had available $55,000 in unsecured revolving credit
facilities. At December 30, 2003, the Company had no outstanding borrowings. See
Note 4 to the Consolidated Financial Statements in this Form 10-K for a further
description of the Company's credit facilities. The Company expects to fund
future requirements for normal investing and financing activities through cash
provided from operations and existing cash and cash equivalent balances.
The Company's contractual obligations at December 30, 2003 are for
operating leases as follows:
2004 $10,312
2005 8,137
2006 5,777
2007 3,969
2008 2,693
Thereafter 4,339
-------
Total operating lease obligations $35,227
=======
In addition to the contractual obligations set forth above, the
Company has assumed certain contractual obligations as of January 28, 2004 for
operating leases in connection with its acquisition of TX.C.C., Inc. as
described elsewhere herein. Such lease obligations are as follows:
2004 $ 3,019
2005 3,340
2006 3,376
2007 3,424
2008 3,467
Thereafter 23,464
-------
$40,090
=======
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
30, 2003, the Company had no positions in futures contracts.
-24
RECENT DEVELOPMENTS
On January 28, 2004, the Company's Joint Plan of Reorganization to
purchase TX.C.C., Inc., and affiliated entities TXCC-Preston and
TXLC-Albuquerque (collectively "TXCC") was confirmed by the United States
Bankruptcy Court for the District of Texas, Dallas Division. The Plan will be
funded by the Company and provides that the TXCC creditors will receive cash or
Lone Star Steakhouse & Saloon, Inc. common stock, at the option of the creditor.
TXCC presently operates twenty Texas Land & Cattle Steak House(R) restaurants
located primarily in Texas. The Company will fund any cash requirements from its
current available cash balances. The Company expects that the aggregate purchase
price, including the funding of payments to the prepetition creditors and the
assumption of post petition liabilities will approximate $21,000.
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 has adopted the provisions of this statement in connection
with such activities for transactions entered into subsequent to December 31,
2002.
RISK FACTORS
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 recently confirmed case of "mad cow disease" by the Department of
Agriculture in the State of Washington 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.
UNFORESEEN COST INCREASES COULD ADVERSELY AFFECT OUR PROFITABILITY.
Our profitability is highly sensitive to increases in food, labor
and other operating costs. During fiscal 2003, the Company experienced a
significant increase in beef prices. If the price of beef continues at its
recent levels, it will continue to have a material negative effect on operating
margins. In addition, our dependence on frequent deliveries of fresh food
supplies means that shortages or interruptions in supply could materially and
adversely affect our operations. Moreover, unfavorable trends or developments
concerning the following factors could adversely affect our results:
-25-
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.
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.
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
-26-
intoxicated person. Although we carry liquor liability coverage as part of our
comprehensive general liability insurance, if we lost a lawsuit related to this
liability, our business could be materially harmed.
THE RESTAURANT INDUSTRY IS AFFECTED BY A NUMBER OF TRENDS, AS WELL AS BY
COMPETITION.
The restaurant industry is affected by changes in consumer tastes
and by national, regional, and local economic conditions and demographic trends.
The performance of individual restaurants may be affected by factors such as
traffic patterns, demographic considerations and the type, number and location
of competing restaurants. In addition, factors such as inflation, increased
food, labor and employee benefit costs and the availability of experienced
management and hourly employees to successfully operate the restaurants may also
adversely affect the restaurant industry in general and our restaurants in
particular.
OUR BUSINESS DEPENDS ON A LIMITED NUMBER OF KEY PERSONNEL, THE LOSS OF WHOM
COULD ADVERSELY AFFECT US.
Some of our senior executives are important to our success because
they have been instrumental in setting the strategic direction of our Company,
operating our business, identifying, recruiting and training key personnel,
identifying areas for expansion and arranging necessary financing. These key
personnel include Jamie B. Coulter, our Chief Executive Officer, T.D. O'Connell,
our President of Lone Star Restaurants, 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 the 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.
-27-
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. 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.
ITEM 9A. 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.
As of the end of the period covered by the Form 10-K, 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 the 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 as exhibits to this Form 10-K.
-28-
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 AND
RELATED STOCKHOLDER MATTERS
The information required by this Item 12 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 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.
-29-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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 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
**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 April 24, 2003.
*****10.8 Employment Agreement between the Company and Randall H.
Pierce, dated April 24, 2003
*****10.9 Employment Agreement between the Company and T.D.
O'Connell, dated April 24, 2003
*****10.11 Employment Agreement between the Company and John D.
White, dated April 24, 2003
******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
-30-
*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
*31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
*31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
*32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
*32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
-----------------
(b) Reports on Form 8-K: During the fourth quarter of 2003, the
Company filed four reports on Form 8-K under Item #5 - Other
Events on the following dates, December 2, 2003, December 10,
2003, December 22, 2003 and December 23, 2003.
* 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 Quarterly Report on
Form 10-Q for the quarter ended June 17, 2003.
****** 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).
********** Incorporated by Reference to the Company's Annual Report on Form
10-K for the year ended December 31, 2002.
-31-
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 10th day of March 2004.
LONE STAR STEAKHOUSE & SALOON, INC.
(Registrant)
/s/ Randall H. Pierce
-------------------------------------
Randall H. Pierce
Chief Financial Officer and
Principal Accounting Officer
-32-
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 10, 2004
- ----------------------- Principal Executive
Jamie B. Coulter
/s/ John D. White Executive Vice March 10, 2004
- ----------------------- President,
John D. White Treasurer and Director
/s/ Randall H. Pierce Chief Financial Officer March 10, 2004
- ----------------------- and Principal
Randall H. Pierce Accounting Officer
/s/ William B. Greene
- ----------------------- Chairman of the Board March 10, 2004
William B. Greene and Director
/s/ Anthony Bergamo
- ----------------------- Director March 10, 2004
Anthony Bergamo
/s/ Fred B. Chaney
- ----------------------- Director March 10, 2004
Fred B. Chaney
/s/ Thomas C. Lasorda
- ----------------------- Director March 10, 2004
Thomas C. Lasorda
/s/ Michael A. Ledeen
- ----------------------- Director March 10, 2004
Michael A. Ledeen
-33-
/s/ Clark R. Mandigo
- ----------------------- Director March 10, 2004
Clark R. Mandigo
/s/ Mark Saltzgaber
- ----------------------- Director March 10, 2004
Mark Saltzgaber
-34-
CONSOLIDATED FINANCIAL STATEMENTS
Lone Star Steakhouse & Saloon, Inc.
Years Ended December 30, 2003, December 31, 2002, and December 25, 2001
Lone Star Steakhouse & Saloon, Inc.
Index to Financial Statements
Pages
-----
Report of Independent Auditors.............................................F-1
Consolidated Balance Sheets as of December 30, 2003 and December 31, 2002..F-2
Consolidated Statements of Income for the years ended December 30, 2003,
December 31, 2002, and December 25, 2001................................F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 30, 2003, December 31, 2002, and December 25, 2001.............F-6
Consolidated Statements of Cash Flows for the years ended
December 30, 2003, December 31, 2002, and December 25, 2001.............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 30, 2003
and December 31, 2002, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 30, 2003. 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 30, 2003 and December 31,
2002, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 30, 2003, in conformity
with accounting principles generally accepted in the United States.
As discussed in Note 1, effective December 26, 2001, the Company adopted the
provisions of SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. In addition,
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 20, 2004
F-1
Lone Star Steakhouse & Saloon, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
December 30, December 31,
2003 2002
Assets
Current assets:
Cash and cash equivalents $ 96,230 $ 65,369
Inventories 12,955 12,390
Deferred income taxes 5,151 3,138
Other 6,729 6,174
-------------------------
Total current assets 121,065 87,071
Property and equipment:
Land 112,933 117,175
Buildings 166,795 170,005
Leasehold improvements 109,091 112,283
Equipment 99,621 100,620
Furniture and fixtures 18,828 20,430
-------------------------
507,268 520,513
Less accumulated depreciation and amortization 195,048 181,778
-------------------------
312,220 338,735
Deferred compensation plan investments 11,670 8,878
Other assets:
Goodwill 11,513 11,513
Intangible assets, net 10,452 11,521
Deferred income taxes 16,228 13,171
Other 5,347 2,424
-------------------------
43,540 38,629
-------------------------
Total assets $488,495 $473,313
=========================
F-2
December 30, December 31,
2003 2002
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,166 $ 13,378
Sales tax payable 3,018 2,706
Accrued payroll 8,118 10,851
Real estate taxes 2,380 2,407
Gift certificates 9,207 8,562
Income taxes payable 7,017 --
Other 7,215 4,592
----------------------------
Total current liabilities 49,121 42,496
Long-term liabilities, principally deferred
compensation obligations 18,275 11,058
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares
authorized; none issued -- --
Common stock, $.01 par value, 98,000,000 shares
authorized; 21,072,790 shares issued and
outstanding (20,994,608 in 2002) 211 210
Additional paid-in capital 177,844 189,908
Retained earnings 246,707 241,601
Common stock held by trust (3,663) --
Accumulated other comprehensive loss -- (11,960)
----------------------------
Total stockholders' equity 421,099 419,759
----------------------------
Total liabilities and stockholders' equity $ 488,495 $ 473,313
============================
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 30, December 31, December 25,
2003 2003 2001
--------------------------------------------
Net sales $ 591,401 $ 593,617 $ 571,115
Costs and expenses:
Costs of sales 212,593 194,183 195,707
Restaurant operating expenses 274,388 265,730 264,758
Depreciation and amortization 20,817 24,452 25,876
Provision for impaired assets and restaurant closings -- 792 565
-----------------------------------------
Restaurant costs and expenses 507,798 485,157 486,906
-----------------------------------------
Restaurant operating income 83,603 108,460 84,209
General and administrative expenses 43,346 45,085 41,884
Abandoned merger expenses -- 2,990 --
Non-cash stock compensation expense 1,474 2,949 3,212
Contribution - "Dine for America" -- -- 2,124
-----------------------------------------
Income from operations 38,783 57,436 36,989
Other income, net 553 2,986 4,906
-----------------------------------------
Income from continuing operations before income
taxes and cumulative effect of accounting changes 39,336 60,422 41,895
Provision for income taxes (12,013) (20,040) (14,703)
-----------------------------------------
Income from continuing operations before
cumulative effect of accounting change 27,323 40,382 27,192
Discontinued operations:
Loss from operations of discontinued restaurants (10,774) (1,322) (6,644)
Income tax benefit 2,117 467 2,354
-----------------------------------------
Loss on discontinued operations (8,657) (855) (4,290)
-----------------------------------------
Income before cumulative effect of accounting change 18,666 39,527 22,902
Cumulative effect of accounting change, net of tax -- (318) --
-----------------------------------------
Net income $ 18,666 $ 39,209 $ 22,902
=========================================
F-4
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Income (continued)
(In Thousands, Except for Per Share Amounts)
For the Year Ended
-----------------------------------------
December 30, December 31, December 25,
2003 2002 2001
-----------------------------------------
Basic earnings per share:
Continuing operations $ 1.31 $ 1.76 $ 1.13
Discontinued operations (.41) (.03) (.18)
Cumulative effect of accounting change -- (.02) --
------------------------------------
Basic earnings per share $ .90 $ 1.71 $ .95
====================================
Diluted earnings per share:
Continuing operations $ 1.15 $ 1.53 $ 1.07
Discontinued operations (.36) (.03) (.17)
Cumulative effect of accounting change -- (.01) --
------------------------------------
Diluted earnings per share $ .79 $ 1.49 $ .90
====================================
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 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 ($.50 per share) -- -- -- -- (12,019)
Redemption of preference rights -- -- -- (242) --
Non-cash stock compensation expense -- -- -- 3,212 --
Comprehensive income:
Net income -- -- -- -- 22,902
Foreign currency translation adjustments -- -- -- -- --
Comprehensive income
------------------------------------------------------------------------
Balance, December 25, 2001 -- 24,049,770 240 272,527 216,111
Stock options exercised -- 2,058,838 21 23,530 --
Tax provision related to options exercised -- -- -- (474) --
Common stock purchased and retired -- (5,114,000) (51) (108,624) --
Cash dividends ($.60 per share) -- -- -- -- (13,719)
Non-cash 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
Stock options exercised -- 1,210,682 12 10,232 --
Tax benefit related to options exercised -- -- -- 483 --
Common stock purchased and retired -- (1,132,500) (11) (23,822) --
Cash dividends ($.645 per share) -- -- -- -- (13,560)
Non-cash stock compensation expense -- -- -- 1,043 --
Common stock held by trust (177,145 shares) -- -- -- -- --
Comprehensive income:
Net income -- -- -- -- 18,666
Foreign currency translation adjustments -- -- -- -- --
Comprehensive income
------------------------------------------------------------------------
Balance, December 30, 2003 -- 21,072,790 $ 211 $ 177,844 $ 246,707
========================================================================
Accumulated
Common Other
Stock Comprehensive
Held By Trust (Loss) Income Total
-------------------------------------------
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 ($.50 per share) -- -- (12,019)
Redemption of preference rights -- -- (242)
Non-cash stock compensation expense -- -- 3,212
Comprehensive income:
Net income -- -- 22,902
Foreign currency translation adjustments -- (1,584) (1,584)
-----------
Comprehensive income 21,318
-------------------------------------------
Balance, December 25, 2001 -- (13,443) 475,435
Stock options exercised -- -- 23,551
Tax provision related to options exercised -- -- (474)
Common stock purchased and retired -- -- (108,675)
Cash dividends ($.60 per share) -- -- (13,719)
Non-cash 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
Stock options exercised -- -- 10,244
Tax benefit related to options exercised -- -- 483
Common stock purchased and retired -- -- (23,833)
Cash dividends ($.645 per share) -- -- (13,560)
Non-cash stock compensation expense -- -- 1,043
Common stock held by trust (177,145 shares) (3,663) -- (3,663)
Comprehensive income:
Net income -- -- 18,666
Foreign currency translation adjustments -- 11,960 11,960
-----------
Comprehensive income 30,626
-------------------------------------------
Balance, December 30, 2003 $ (3,663) $ -- $ 421,099
===========================================
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 30, December 31, December 25,
2003 2002 2001
---------------------------------------
Operating activities
Net income $ 18,666 $ 39,209 $ 22,902
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 22,879 27,076 27,012
Amortization 1,047 1,047 2,622
Non-cash stock compensation 1,474 2,949 3,212
Provision for impaired assets and restaurant
closings -- 250 565
(Gain) loss on sales of assets 42 (1,971) (3,038)
Cumulative effect of accounting change -- 508 --
Deferred income taxes (5,070) 16,812 108
Loss from discontinued operations 8,657 855 4,290
Net change in operating assets and liabilities:
Inventories (490) 103 206
Other current assets (505) (718) (2,057)
Accounts payable (1,212) (432) 442
Income taxes payable 7,017 (11,541) 10,485
Other liabilities 1,633 645 (4,514)
-------------------------------------
Net cash provided by operating activities of continuing
operations 54,138 74,792 62,235
Investing activities
Purchases of property and equipment (6,928) (2,776) (3,924)
Proceeds from sales of assets 1,730 7,879 10,098
Other (2,908) 137 (334)
-------------------------------------
Net cash provided by (used in) investing activities of continuing
operations (8,106) 5,240 5,840
Financing activities
Net proceeds from issuance of common stock 10,244 23,551 2,024
Common stock repurchased and retired (23,833) (108,675) (5,145)
Dividends paid (13,560) (13,719) (12,019)
Redemption of preference rights -- -- (242)
-------------------------------------
Net cash used in financing activities of continuing
operations (27,149) (98,843) (15,382)
Effect of exchange rate changes on cash 1,486 363 4
Net cash provided by discontinued operations 10,492 898 1,193
-------------------------------------
Net increase (decrease) in cash and cash equivalents 30,861 (17,550) 53,890
Cash and cash equivalents at beginning of year 65,369 82,919 29,029
-------------------------------------
Cash and cash equivalents at end of year $ 96,230 $ 65,369 $ 82,919
=====================================
Supplemental disclosure of cash flow information
Cash paid for income taxes $ 6,875 $ 15,175 $ 1,755
=====================================
Shares issued to trust $ 3,663 $ -- $ --
=====================================
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 30, 2003
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. 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 30, 2003, the Company owns and operates 249 Lone Star Steakhouse &
Saloons in the United States. 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. Prior to
December 30, 2003, translation adjustments were reported as a component of
comprehensive income in stockholders' equity; however, as a result of the
Company's divestiture of its Australia operations in fiscal 2003, as
described in Note 12, the foreign currency translation adjustments were
realized and are included as a component of loss from discontinued
operations.
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 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 $73,014 and $47,293 at December 30, 2003 and December 31,
2002, respectively, in investment grade securities with municipal, state,
and U.S. government agencies.
o Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
o Cash and Cash Equivalents
The Company considers cash and cash equivalents to include currency on
hand, demand deposits with banks or other financial institutions, and
short-term investments with maturities of three months or less when
purchased. Cash and cash equivalents are carried at cost which
approximates fair value.
o Financial Instruments
The Company 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
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)
derivative instruments have not been significant. The Company held no live
beef cattle futures contracts at December 30, 2003 or December 31, 2002.
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.
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
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)
indefinite lives 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
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.
During fiscal 2002, the Company adopted a Stock Option Deferred
Compensation Plan, which allows certain key executives to defer
compensation arising from the exercise of stock options. See Note 3 for
additional information.
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
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)
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 Self-Insurance Reserves
During fiscal 2003, the Company adopted self-insurance programs for its
workers' compensation, general liability, and medical benefits programs.
In order to minimize the exposure under the self-insurance programs, the
Company has purchased stop-loss coverage both on a per occurrence and on
an aggregate basis. The self-insured losses under the programs are accrued
based on the Company's estimate of the ultimate expected liability for
both claims incurred and on an incurred but not reported basis. The
establishment of such accruals for self-insurance involves certain
management judgments and assumptions regarding the frequency or severity
of claims, the historical patterns of claim development, and the Company's
experience with claim reserve management and settlement practices. To the
extent actual results may differ from the assumptions used to develop the
accrual estimate amounts, such unanticipated changes may produce
significantly different amounts of expense than those estimated under the
self-insurance programs.
o Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 30, 2003, December 31, 2002, and December 25, 2001
was $15,033, $13,528, and $16,802, respectively.
o Accounting for Stock-Based Compensation
At December 30, 2003, the Company has two stock-based employee
compensation plans, which are described more fully in Note 6. The Company
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)
uses the fair value recognition provisions of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, for stock-based employee compensation. The
Company 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.
o Earnings Per Share
Basic earnings per share amounts are computed based on the
weighted-average number of shares actually outstanding. For purposes of
diluted computations, average shares outstanding have been adjusted to
reflect (1) the number of shares that would be issued from the exercise of
stock options, reduced by the number of shares which could have been
purchased from the proceeds at the average market price of the Company's
stock or price of the Company's stock on the exercise date if options were
exercised during the period presented and (2) the number of shares that
may be issuable to effect the settlement of certain deferred compensation
liabilities pursuant to the Company's Stock Option Deferred Compensation
Plan. The effect of shares issuable to settle the deferred compensation
liabilities has not been included for any periods as their effect would
have been antidilutive.
o Recent Accounting Pronouncements
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 has applied the provisions
of this statement in connection with such activities for transactions
entered into subsequent to December 31, 2002. The application of SFAS No.
146 did not have a material impact on the Company's consolidated financial
statements.
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
2003 and 2001 each included 52 weeks of operations, while 2002 included 53
weeks of operations.
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 Reclassifications
Certain amounts from the prior years have been reclassified to conform
with the current year's presentation.
2. INTANGIBLE ASSETS AND GOODWILL
Estimated Useful
Lives 2003 2002
------------------------------------
Amortized intangible assets:
Gross carrying amount:
Licenses 20 years $ 3,229 $ 3,285
Intellectual properties 10 years 9,839 9,839
--------------------
Subtotal 13,068 13,124
Accumulated amortization:
Licenses (1,223) (1,182)
Intellectual property (5,018) (4,068)
---------------------
Subtotal (6,241) (5,250)
---------------------
Net amortized intangible assets $ 6,827 $ 7,874
=====================
Unamortized intangible assets:
Goodwill $ 11,513 $ 11,513
Licenses 3,449 3,471
Other 176 176
---------------------
$ 15,138 $ 15,160
=====================
Aggregate amortization expense $ 1,047 $ 1,047
=====================
Estimated amortization expense:
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
For the fiscal year ended 2008 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:
2003 2002 2001
-------------------------------------
Reported income before cumulative effect of
accounting change $ 18,666 $ 39,527 $ 22,902
Add back:
Goodwill amortization, net of tax benefit -- -- 523
Adjust amortization for indefinite lived
intangibles, net of tax benefit -- -- 400
------------------------------------
Pro forma net income $ 18,666 $ 39,527 $ 23,825
====================================
Basic earnings per share:
Earnings as reported before cumulative
effect of accounting change $ .90 $ 1.73 $ .95
Goodwill amortization, net tax benefit -- -- .02
Intangibles amortization, net of tax benefit -- -- .02
------------------------------------
Pro forma per share $ .90 $ 1.73 $ .99
====================================
Diluted earnings per share:
Earnings as reported before cumulative
effect of accounting change $ .79 $ 1.50 $ .90
Goodwill amortization, net tax benefit -- -- .02
Intangibles amortization, net of tax benefit -- -- .02
------------------------------------
Pro forma per share $ .79 $ 1.50 $ .94
====================================
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 recorded in fiscal 2002 related to the
change in accounting for adopting SFAS No. 142 as discussed above, there were no
changes in goodwill carrying amounts during 2002 or 2003.
3. COMMON 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 in fiscal 2002 as previously described, the Company has purchased
1,132,500, 1,114,000, and 468,687 shares of its common stock at average prices
of $21.05, $20.08, and $10.98 per share during the fiscal years ended 2003,
2002, and 2001, 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.
In September 2002, the Company adopted a Stock Option Deferred Compensation Plan
(the Plan), which allows certain key executives to defer compensation arising
from the exercise of stock options granted under the Company's 1992 Incentive
and Nonqualified Stock Option Plan. During 2003, the Company issued 300,000
shares of its common stock to effect the exercise of such stock options in
exchange for 122,855 shares of the Company's common stock as payment for such
shares. The 122,855 shares received by the Company were canceled. The Company
issued 122,855 shares to the optionee and, pursuant to the terms of the Plan,
the Company issued 177,145 shares to a Rabbi trust (the Trust) with Intrust
Bank, NA serving as the trustee. The Trust holds the shares for the benefit of
the participating employees (Participants). Under the terms of the Plan,
Participants may elect to change the Plan's investments from time to time which
may result in the sale of the shares. Since the shares held by the Trust are
F-16
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
3. COMMON STOCK TRANSACTIONS (CONTINUED)
held pursuant to a deferred compensation arrangement whereby amounts earned by
an employee are invested in the stock of the employer and placed in the Trust,
the Company accounts for the arrangement as required by Emerging Issues Task
Force (EITF) consensus on Issue No. 97-14, Accounting for Deferred Compensation
Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested (EITF
No. 97-14). Accordingly, shares issued to the Trust were recorded at fair market
value at the date issued by the Company in the amount of $3,663, which is
reflected in the accompanying consolidated balance sheets as common stock held
by trust. The corresponding amount was credited to deferred compensation
obligations. Each period, the shares owned by the Trust are valued at the
closing market price, with corresponding changes in the underlying shares being
reflected as adjustments to compensation expense and deferred compensation
obligations. At December 30, 2003, the Trust held 177,145 shares of the
Company's common stock. Included in non-cash stock compensation expense for year
ended December 30, 2003 was a charge of $431 relating to the changes in market
price for such shares.
4. 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 30, 2003 and
December 31, 2002, there were no borrowings outstanding pursuant to the credit
facility.
The Company also has entered into a $5,000 revolving term loan agreement with a
bank, under which no borrowings were outstanding at December 30, 2003 or
December 31, 2002. The loan commitment matures in August 2004 and required
interest only payments through April 2003, at which time the loan converted 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.
F-17
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
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, the Company accounts for stock-based
compensation following the provisions of SFAS No. 123 which establishes a fair
value-based method of accounting for stock-based compensation. Pursuant to SFAS
No. 123, the fair value of stock options are determined at the date of grant
under the Company's stock option plans and are charged to compensation expense
over the vesting period of the options.
The aggregate non-cash stock compensation expense, including amounts
attributable to non-cash stock compensation arising from the common shares held
by the Rabbi Trust as described in Note 3, for the years ended December 30,
2003, December 31, 2002, and December 25, 2001 was $1,474, $2,949, and $3,212,
respectively.
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 and 2001, respectively:
risk-free interest rates of 3.1% and 4.1%; volatility factors of the expected
market price of the Company's common stock of 0.506 and 0.503; a weighted
average expected life of the option ranging from four to five years; and a
dividend yield of 3%. There were no stock options granted in fiscal 2003.
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)
2003 2002 2001
--------------------------------
Weighted-average fair value of options
granted during the year $ - $5.45 $3.95
o 1992 Stock Option Plan
In January 1992, the Board of Directors adopted the 1992 Incentive and
Non-Qualified 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 30, 2003, December 31, 2002, and December 25, 2001 is as
follows:
2003 2002 2001
--------------------------------------------------------------------
Weighted Weighted Weighted-
Average Average Average
Exercise Options Exercise Options Exercise Options
Price (000) Price (000) Price (000)
--------------------------------------------------------------------
Outstanding at beginning of year $ 8.98 5,867 $ 9.67 7,919 $ 9.57 7,827
Granted -- -- 14.80 48 10.44 461
Exercised 9.58 (1,334) 11.44 (2,059) 8.33 (243)
Canceled 9.84 (14) 12.71 (41) 9.09 (126)
------ ------ ------
Outstanding at end of year $ 8.98 4,519 $ 8.98 5,867 $ 9.67 7,919
====== ====== ======
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)
For options outstanding as of December 30, 2003, 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 30, Exercise Remaining
Range of Prices 2003 Price Contract Life
------------------------------------------------------------------------------
$6.69 to $9.38 4,238,890 $ 8.51 3.17 years
$14.30 to $18.81 279,813 $16.19 5.88 years
The number of shares and weighted-average exercise price of options exercisable
at December 30, 2003 are as follows:
Options Exercisable
-----------------------------------------------------------------------------
Number Weighted-
Exercisable at Average
December 30, Exercise
Range of Prices 2003 Price
-----------------------------------------------------------------------------
$6.69 to $9.38 4,176,305 $ 8.51
$14.30 to $18.81 226,218 $16.60
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 2003, 2002, and 2001 were $26, $27, and
$37, respectively. In addition, in 2002 and 2001, the Company purchased business
gifts and awards from a retail store owned by Jamie B. Coulter totaling $2, and
$2, 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.
F-21
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
7. RELATED-PARTY TRANSACTIONS (CONTINUED)
During 2002, 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, Sherrill & 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 2004 and 2025. The leases have renewal clauses of
5 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 2003, 2002, and 2001
was $11,631, $11,388, and $11,321, respectively, including contingent rentals of
approximately $832, $751, and $444, respectively.
Lease payments under noncancelable operating leases for each of the next five
years and in the aggregate are as follows at December 30, 2003:
Operating
Leases
-------
2004 $10,312
2005 8,137
2006 5,777
2007 3,969
2008 2,693
Thereafter 4,339
-------
Total minimum lease payments $35,227
=======
F-22
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:
2003 2002 2001
-----------------------------------------------
Numerator:
Numerator for basic and diluted
earnings per share - income available
to common stockholders $ 18,666 $ 39,209 $ 22,902
==============================================
Denominator:
Denominator for basic earnings per
share - weighted-average shares 20,801,894 22,908,821 24,036,942
Effect of dilutive employee stock options 2,961,703 3,400,961 1,336,391
----------------------------------------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares 23,763,597 26,309,782 25,373,333
==============================================
Basic earnings per share $ .90 $ 1.71 $ 0.95
==============================================
Diluted earnings per share $ .79 $ 1.49 $ 0.90
==============================================
10. INCOME TAXES
The components of the provision for income taxes consist of the following:
2003 2002 2001
-------------------------------------------------------
Current tax expense:
Federal $13,229 $ 949 $10,512
State 1,737 1,622 1,729
--------------------------------------------------------
Total current 14,966 2,571 12,241
Deferred tax expense (benefit):
Federal (4,885) 16,642 (387)
Foreign - - 536
State (185) 170 (41)
--------------------------------------------------------
Total deferred expense (benefit) (5,070) 16,812 108
--------------------------------------------------------
Total provision for income taxes $ 9,896 $19,383 $12,349
========================================================
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)
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:
2003 2002 2001
------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
------------------------------------------------------------------------
Income tax expense at federal statutory rate $ 9,997 35% $ 20,507 35% $ 12,338 35%
State tax expense, net 640 2 1,113 2 1,207 3
Nondeductible foreign losses 1,239 4 -- -- -- --
Tax benefit from foreign stock deduction -- -- (8,128) (14) -- --
Opportunity credits (2,479) (9) (2,209) (4) (2,160) (6)
Valuation allowance -- -- 7,411 13 -- --
Other items, net 499 2 689 1 964 3
------------------------------------------------------------------------
Actual provision for income taxes $ 9,896 34% $ 19,383 33% $ 12,349 35%
==========================================================================
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and amounts used for income tax purposes.
Significant components of deferred tax liabilities and assets are presented
below:
December 30, December 31,
2003 2002
---------------------------------
Deferred tax assets:
Foreign NOL carryforward $ -- $ 11,250
Accrued liabilities 4,327 1,406
Stock-based compensation 20,582 22,536
Deferred compensation 4,775 3,291
Other 2,080 1,966
-----------------------------
31,764 40,449
Valuation allowance -- (11,250)
-----------------------------
Total deferred tax assets 31,764 29,199
Deferred tax liabilities:
Property and equipment 4,008 5,764
Basis differences in foreign investments 3,575 5,760
Intangible assets 2,220 1,349
Other 582 17
-----------------------------
Total deferred tax liabilities 10,385 12,890
-----------------------------
Net deferred tax assets $ 21,379 $ 16,309
=============================
F-24
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)
In prior years, the Company reported the tax benefits associated with its net
operating loss (NOL) carryforwards related to its Australian operations as a
deferred tax asset which was offset in full by a valuation allowance. As a
result of the Company's decision to divest its Australian operations during the
year ended December 30, 2003, the Company has determined that such NOL
carryforwards will not be realized and accordingly has reduced the deferred tax
asset and valuation allowance by the amount of deferred tax asset previously
recognized.
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.
During 2001, the Company recorded a provision related to continuing operations
of $287 for the write-down to estimated fair value of impaired property, plant,
and equipment. In addition, a charge of $278 was recorded to continuing
operations for severance, rents, and certain other costs associated with
restaurant closings.
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. Fiscal 2001
results included net sales of $611 for all closed restaurants in the Company's
continuing operating results and related operating losses of $112 at the
restaurant level.
F-25
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
12. DISCONTINUED OPERATIONS
In December of fiscal 2003, the Company announced its plan to divest all of its
Australian operations. Over the past few years, the Company has experienced
operating losses in Australia and had closed over 20 restaurants. As a result of
the underperforming Australian operations, the Company determined the
divestiture and discontinuance of its Australian operations was in its best
interests. On December 29, 2003, the Company closed six of the restaurants and
on December 30, 2003 the Company completed the sale of its remaining Australian
operations to an investor group consisting of former management of the
Australian operations. Pursuant to the terms of the sale, the Company received
approximately $3,150 in cash and $2,750 in notes secured by real estate. In
connection with its exit activities from Australia, the Company incurred a
pretax loss of approximately $12,000, including impairment losses related to
assets either sold or held for sale of $3,600, termination costs associated with
employees and certain lease obligations of $1,000, and losses of $7,400 related
to the realization of its cumulative foreign currency translation adjustments.
All of the losses incurred are included in discontinued operations. The Company
will account for its remaining exit costs in accordance with the provisions of
SFAS No. 146, Accounting for Costs Associated With Exit or Disposal Activities,
which requires that such costs be expensed in the period such costs are
incurred. The Company believes that such additional costs will not be
significant.
As described in Note 1 to the consolidated financial statements, the Company
accounts for its closed restaurants in accordance with the provisions of SFAS
No. 144. Therefore, when a restaurant is closed and the restaurant is either
held for sale or abandoned, the restaurant's operations are eliminated from the
ongoing operations. Accordingly, the operations of such restaurants, net of
applicable income taxes, are presented as discontinued operations and prior
period consolidated financial statements are reclassified. The table below
reflects as discontinued operations the applicable operations of the Company's
Australian business and certain other restaurants closed subsequent to fiscal
2001 which meet the criteria for such presentation.
2003 2002 2001
---------------------------------------------
Loss from operations $(10,774) $ (1,322) $ (6,644)
Income tax benefit 2,117 467 2,354
---------------------------------------------
Net loss from discontinued
operations $(8,657) $ (855) $ (4,290)
=============================================
Net sales from discontinued
operations $25,631 $24,460 $26,902
=============================================
F-26
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 up to 15% of their annual
salaries 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 2003, 2002, and 2001, the Company's contributions to the Plans were
$2,146, $1,984, and $1,978, respectively.
14. ABANDONED MERGER EXPENSES
On May 4, 2002, the nonbinding Letter of Intent previously signed with
Bruckmann, Rosser, Sherrill & Co., Inc. (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 set forth consolidated quarterly results of operations for
fiscal 2003 and 2002. The results have been adjusted to reflect the impact of
certain discontinued operations to the extent such amounts were reclassified.
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------------------------------------------
Net sales $ 139,373 $ 137,942 $ 130,312 $183,774
Restaurant operating income 23,344 21,272 15,543 23,444
Income from continuing operations 8,971 6,898 3,638 7,816
Net income (loss) (A) 8,730 7,628 3,664 (1,356)
Basic earnings (loss) per share (B):
Continuing operations $ 0.43 $ 0.33 $ 0.18 $ 0.37
Net income (loss) 0.41 0.37 0.18 (.06)
Diluted earnings (loss) per share (B):
Continuing operations $ 0.37 $ 0.29 $ 0.15$ 0.33
Net income (loss) 0.36 0.32 0.16 (0.06)
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)
(A) The fourth quarter of fiscal 2003 includes a charge to discontinued
operations of approximately $12,000 ($9,270 net of income tax) related
to the Company's divestiture of its Australian operations. See Note 12
for additional information.
(B) Earnings per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly per share amounts may
not equal the total for the year due to the impact of stock
transactions which occurred during the periods presented.
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------------------
2002
Net sales $143,251 $134,077 $128,738 $187,551
Restaurant operating income 30,949 24,101 21,161 32,249
Income from continuing operations before cumulative
effect of an accounting change(A) and (B) 13,008 6,471 8,296 12,607
Net income 12,193 6,057 8,198 12,761
Basic earnings per share (C):
Continuing operations $ 0.54 $ 0.26 $ 0.37 $ 0.59
Net income 0.50 0.24 0.37 0.60
Diluted earnings per share (C):
Continuing operations $ 0.47 $ 0.23 $ 0.32 $ 0.52
Net income 0.44 0.21 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 during 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.
(C) Earnings per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly per share amounts may
not equal the total for the year due to the impact of stock
transactions which occurred during the periods presented.
16. OTHER INCOME, NET
The components of other income, net are as follows:
2003 2002 2001
--------------------------------------------
Interest income $ 789 $1,312 $1,868
Interest expense, principally credit
availability fees (194) (297) -
Gain (loss) on sale of assets (42) 1,971 3,038
--------------------------------------------
$ 553 $2,986 $4,906
============================================
F-28
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
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.
On April 16, 2003, CalPERS filed a Motion for Leave to Amend Plaintiff's First
Amended Complaint, which complaint added no additional causes but added
allegations which are subsequent to the date of the first complaint and
allegations which also address counts which were dismissed by the Vice
Chancellor on December 18, 2002. All defendants filed objections to CalPERS'
attempt to amend, and oral argument was heard by the Vice Chancellor on August
21, 2003. As of this date, no decision has been rendered and discovery by both
parties continues.
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.
F-29
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
18. DIVIDEND DECLARATION
On January 5, 2004, the Board of Directors increased its quarterly dividend from
$.165 to $.175 and declared the Company's quarterly cash dividend of $.175 per
share, payable February 2, 2004, to stockholders of record on January 19, 2004.
19. ACQUISITION OF TEXAS LAND AND CATTLE STEAK HOUSE
On January 28, 2004, the Company's Joint Plan of Reorganization to purchase
TX.C.C., Inc. and affiliated entities TXCC-Preston and TXLC-Albuquerque,
(collectively, "TXCC") was confirmed by the United States Bankruptcy Court for
the District of Texas, Dallas Division. The plan will be funded by the Company
and provides that the TXCC creditors will receive cash or Lone Star Steakhouse &
Saloon, Inc. common stock, at the option of the creditor. TXCC presently
operates 20 Texas Land & Cattle Steak House(R) restaurants located primarily in
Texas. The Company will fund any cash requirements from its current available
cash balances. The Company expects that the aggregate purchase price, including
the funding of payments to the prepetition creditors and the assumption of post
petition liabilities, will approximate $21,000.
F-30