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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For quarter ended Commission file number
JUNE 15, 2004 0-19907
------------- -------
LONE STAR STEAKHOUSE & SALOON, INC.
(Exact name of registrant as specified in its charter)
Delaware 48-1109495
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
224 EAST DOUGLAS, SUITE 700
WICHITA, KANSAS 67202
(Address of principal executive offices) (Zip code)
(316) 264-8899
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) /X/ Yes / / No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 19, 2004
----- ----------------------------
COMMON STOCK, $.01 PAR VALUE 21,946,835 SHARES
LONE STAR STEAKHOUSE & SALOON, INC.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at June 15, 2004 and December 30, 2003 2
Condensed Consolidated Statements of
Income for the twelve weeks ended
June 15, 2004 and June 17, 2003 3
Condensed Consolidated Statements of
Income for the twenty-four weeks ended
June 15, 2004 and June 17, 2003 4
Condensed Consolidated Statements of
Cash Flows for the twenty-four weeks ended
June 15, 2004 and June 17, 2003 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative
Disclosures about Market Risks 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Items 1, 3 and 5 have been omitted
since the items are either inapplicable or the
answer is negative
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds 16
Item 4. Submission of matters to vote of stockholders 16
Item 6. Exhibits and Reports on Form 8-K 17
-1-
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
June 15, December 30,
2004 2003
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 91,460 $ 96,230
Inventories 12,670 12,955
Other current assets 12,513 11,880
--------- ---------
Total current assets 116,643 121,065
Property and equipment 529,750 507,268
Less accumulated depreciation and amortization (204,496) (195,048)
--------- ---------
325,254 312,220
Other assets:
Deferred income taxes 22,379 16,228
Intangible and other assets, net 37,882 38,982
--------- ---------
Total assets $ 502,158 $ 488,495
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,342 $ 12,166
Other current liabilities 30,507 36,955
--------- ---------
Total current liabilities 45,849 49,121
Long term liabilities, principally deferred compensation obligations 19,110 18,275
Stockholders' equity:
Preferred stock -- --
Common stock 217 211
Additional paid-in capital 184,868 177,844
Retained earnings 255,777 246,707
Common stock held by Trust (3,663) (3,663)
--------- ---------
Total stockholders' equity 437,199 421,099
--------- ---------
Total liabilities and stockholders' equity $ 502,158 $ 488,495
========= =========
See accompanying notes.
-2-
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
For the twelve weeks ended
-----------------------------
June 15, 2004 June 17, 2003
------------- -------------
Net sales $ 155,529 $ 137,943
Costs and expenses:
Costs of sales 57,828 48,117
Restaurant operating expenses 74,067 63,769
Depreciation and amortization 4,704 4,785
--------- ---------
Restaurant costs and expenses 136,599 116,671
General and administrative expenses 10,624 10,924
Non-cash stock compensation (114) 733
--------- ---------
Income from operations 8,420 9,615
Other income (expense), net (421) 282
--------- ---------
Income from continuing operations before income taxes 7,999 9,897
Provision for income taxes 2,618 2,999
--------- ---------
Income from continuing operations 5,381 6,898
Discontinued operations:
Income (loss) from operations before income tax (7) 903
Income tax expense (2) (173)
--------- ---------
Income (loss) from discontinued operations (9) 730
--------- ---------
Net income $ 5,372 $ 7,628
========= =========
Basic earnings per share:
Continuing operations $ 0.25 $ 0.33
Discontinued operations -- 0.04
--------- ---------
Basic earnings per share $ 0.25 $ 0.37
========= =========
Diluted earnings per share:
Continuing operatons $ 0.22 $ 0.29
Discontinued operations -- 0.03
--------- ---------
Diluted earnings per share $ 0.22 $ 0.32
========= =========
Dividends per share $ 0.175 $ 0.165
========= =========
See accompanying notes.
-3-
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
For the twenty-four weeks ended
-------------------------------
June 15, 2004 June 17, 2003
------------- -------------
Net sales $ 316,126 $ 277,315
Costs and expenses:
Costs of sales 113,781 95,581
Restaurant operating expenses 146,890 127,284
Depreciation and amortization 9,320 9,835
--------- ---------
Restaurant costs and expenses 269,991 232,700
General and administrative expenses 20,921 20,575
Non-cash stock compensation expense 795 1,126
--------- ---------
Income from operations 24,419 22,914
Other income, net 27 333
--------- ---------
Income from continuing operations before income taxes 24,446 23,247
Provision for income taxes 8,018 7,378
--------- ---------
Income from continuing operations 16,428 15,869
Discontinued operations:
Income from operations before income tax 44 825
Income tax benefit (expense) 13 (336)
--------- ---------
Income from discontinued operations 57 489
--------- ---------
Net income $ 16,485 $ 16,358
========= =========
Basic earnings per share:
Continuing operations $ 0.78 $ 0.76
Discontinued operations -- 0.02
--------- ---------
Basic earnings per share $ 0.78 $ 0.78
========= =========
Diluted earnings per share:
Continuing operatons $ 0.69 $ 0.66
Discontinued operations -- 0.02
--------- ---------
Diluted earnings per share $ 0.69 $ 0.68
========= =========
Dividends per share $ 0.350 $ 0.315
========= =========
See accompanying notes.
-4-
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
For the twenty-four weeks ended
-------------------------------
June 15, 2004 June 17, 2003
------------- -------------
Cash flows from operating activities:
Net income $ 16,485 $ 16,358
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 10,584 11,317
Non-cash stock compensation expense 795 1,126
Gain on sale of assets (551) (34)
Deferred income taxes (1,909) (3,067)
(Income) loss from discontinued operations (57) (489)
Change in operating assets and liabilities, net of effect of acquisition:
Change in operating assets 1,232 (917)
Change in operating liabilities (9,743) 1,879
-------- --------
Net cash provided by operating activities of continuing operations 16,836 26,173
Cash flows from investing activities:
Acquisition of TX.C.C. Inc., net of cash acquired (12,505) --
Purchases of property and equipment (9,245) (2,341)
Proceeds from sale of assets 783 963
Other 1,232 459
-------- --------
Net cash used in investing activities of continuing operations (19,735) (919)
Cash flows from financing activities:
Net proceeds from issuance of common stock 4,028 5,260
Common stock repurchased and retired -- (18,454)
Cash dividends (7,415) (6,707)
-------- --------
Net cash used in financing activities of continuing operations (3,387) (19,901)
Effect of exchange rate changes on cash -- 969
Net cash provided by discontinued operations 1,516 2,602
-------- --------
Net increase (decrease) in cash and cash equivalents (4,770) 8,924
Cash and cash equivalents at beginning of period 96,230 65,369
-------- --------
Cash and cash equivalents at end of period $ 91,460 $ 74,293
======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 13,723 $ 2,031
======== ========
Non cash investing activities:
Issuance of common stock $ 2,633 $ --
======== ========
See accompanying notes.
-5-
LONE STAR STEAKHOUSE & Saloon, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management all adjustments,
consisting of normal, recurring accruals, which Lone Star Steakhouse & Saloon,
Inc. (the "Company") considers necessary for a fair presentation of the
financial position and the results of operations for the periods presented have
been included. The results for the twenty-four weeks ended June 15, 2004 are not
necessarily indicative of the results to be expected for the full year ending
December 28, 2004. This quarterly report on Form 10-Q should be read in
conjunction with the Company's audited consolidated financial statements in its
annual report on Form 10-K for the year ended December 30, 2003.
Certain amounts for the prior year have been reclassified to conform with
the current year's presentation.
2. COMPREHENSIVE INCOME
Comprehensive income is comprised of the following:
For the twelve weeks ended For the twenty-four weeks ended
-------------------------- -------------------------------
June 15, June 17, June 15, June 17,
2004 2003 2004 2003
------------ -------- -------- ----------
Net income $ 5,372 $ 7,628 $16,485 $16,358
Foreign currency translation
adjustments -- 1,996 -- 2,951
------- ------- ------- -------
Comprehensive income $ 5,372 $ 9,624 $16,485 $19,309
======= ======= ======= =======
3. EARNINGS PER SHARE
Basic earnings per share amounts are computed based on the weighted
average number of shares outstanding during the periods. 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 are included for the twelve
weeks ended June 15, 2004 and excluded in all other periods presented as their
effect would have been antidilutive.
-6-
The weighted average shares outstanding for the periods presented are as
follows (in thousands):
For the twelve weeks ended For the twenty-four weeks ended
-------------------------- -------------------------------
June 15, June 17, June 15, June 17,
2004 2003 2004 2003
------------ -------- -------- ----------
Basic average shares outstanding 21,264 20,717 21,110 20,888
Diluted average shares outstanding 24,021 23,740 23,764 23,959
4. TERM REVOLVER
The Company has a credit facility pursuant to an unsecured revolving
credit agreement with a group of banks led by SunTrust Bank. The credit facility
allows the Company to borrow up to $50,000. The commitment terminates in August
2004; however, it is subject to acceleration in the event of a change of control
of the Company as that term is defined in the credit agreement. At the time of
each borrowing, the Company may elect to pay interest at either SunTrust Bank's
published prime rate or a rate determined by reference to the Adjusted LIBOR
rate. The Company is required to achieve certain financial ratios and to
maintain certain net worth amounts as defined in the credit agreement. The
Company is required to pay on a quarterly basis a facility fee equal to .25% per
annum on the daily unused amount of the credit facility. At June 15, 2004 and at
December 30, 2003, 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 June 15, 2004 and
December 30, 2003. The loan commitment matures in August 2004. The interest rate
is at .50% below the daily prime rate as published in the Wall Street Journal.
In addition, the Company pays a facility fee of .25% per annum on the daily
unused portion of the credit facility.
Both of the Company's credit facilities terminate in August 2004. The
Company is currently negotiating its credit facility arrangements and believes
it will be able to adequately provide for its credit facility needs when the
present facilities expire.
5. COMMON STOCK TRANSACTIONS
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. The Company made no purchases of its common stock
during the twenty-four weeks ended June 15, 2004. The Company purchased 891,000
shares of its common stock during the twenty-four weeks ended June 17, 2003. The
Company is accounting for the purchases using the constructive retirement method
of accounting wherein the aggregate par value of the stock is charged to the
common stock account and the excess of cost over par value is charged to paid-in
capital.
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 Plans. During the
twenty-four weeks ended June 17, 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 cancelled. 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,
-7-
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
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 Condensed 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 reflected as adjustments to compensation expense and deferred
compensation obligations. At June 15, 2004, the Trust held 177,145 shares of the
Company's common stock. Included in non-cash stock compensation expense for the
twelve weeks ended June 15, 2004 and June 17, 2003 was a (credit) charge of
$(205) and $760, respectively, relating to the changes in market price for such
shares. The charges for the twenty-four weeks ended June 15, 2004 and June 17,
2003 were $554 and $409, respectively.
6. ACQUISITION OF TEXAS LAND AND CATTLE STEAK HOUSE
On January 28, 2004, the Company's Joint Plan of Reorganization ("the
Plan") 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 and the Company
acquired 100% of TXCC on that date. The Company's consolidated financial
statements include TXCC's results of operations from January 28, 2004. TXCC
presently operates 20 Texas Land & Cattle Steak House(R) restaurants located
primarily in Texas. The acquisition of TXCC allows the Company to expand its
steakhouse concepts, provides strategic growth opportunities and significantly
increases its presence in the Texas market. Pursuant to the Plan, the
pre-petition creditors at their option were entitled to receive either cash or
common stock of Lone Star Steakhouse & Saloon, Inc. in settlement of their
claims. The cash portion of the acquisition was funded from the Company's
existing cash balances.
The preliminary aggregate purchase price was $23,870, including cash
acquired of $2,145. The Company's purchase price consisted of $14,650 in cash,
117,466 shares of the Company's common stock valued at $2,633, and liabilities
assumed of $6,587.
The following table summarizes the preliminary estimated fair values of
the assets acquired and liabilities assumed at the date of acquisition. The
Company is in the process of determining the final settlement amounts with
certain pre-petition creditors; thus additional adjustments to the purchase
price allocation, including estimated assumed liabilities, may still be
required.
At January 28, 2004
-------------------
Current assets (net of cash acquired of $2,145) $ 1,581
Property and equipment 15,561
Other assets 4,583
---------
Total assets acquired 21,725
---------
Current liabilities 6,587
---------
Total liabilities assumed 6,587
---------
Net assets acquired $ 15,138
=========
-8-
Pro forma results giving effect to the acquisition of TXCC are not
presented for the periods as such amounts are not significant.
7. SUBSEQUENT EVENTS
On June 29, 2004, the Board of Directors declared the Company's quarterly
cash dividend of $.175 per share payable July 23, 2004 to stockholders of record
on July 9, 2004.
8. DISCONTINUED OPERATIONS
The Company accounts for its closed restaurants in accordance with the
Provisions of SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS. Therefore, when a restaurant is closed and the restaurant is
either held for sale or abandoned, the restaurant's operations are eliminated
from 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 domestic restaurants closed which meet the
criteria for such presentation.
For the twelve weeks ended For the twenty-four weeks ended
-------------------------- -------------------------------
June 15, June 17, June 15, June 17,
2004 2003 2004 2003
---- ---- ---- ----
Income (loss) from operations $ (7) $ 903 $ 44 $ 825
Income tax benefit (expense) (2) (173) 13 (336)
-------- -------- -------- --------
Income (loss) from
discontinued operations $ (9) $ 730 $ 57 $ 489
======== ======== ======== ========
Net sales from discontinued
operations $ -- $ 5,730 $ -- $ 10,103
======== ======== ======== ========
9. INCOME TAX
The effective income tax rate from continuing operations was 32.7% and
30.3% for the twelve weeks ended June 15, 2004 and June 17, 2003, respectively,
and 32.8% and 31.7% for the twenty-four weeks ended June 15, 2004 and June 17,
2003, 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
related to the incentive stock options at the time the options are exercised to
the extent that the exercise is followed by a disqualifying disposition of the
shares by the optionee. The 2003 effective tax rates reflect a greater amount of
tax benefits arising from disqualifying dispositions of incentive stock options
as compared to 2004.
-9-
LONE STAR STEAKHOUSE & SALOON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
GENERAL
The following discussion and analysis should be read in conjunction with
the condensed consolidated financial statements including the notes thereto
included elsewhere in this Form 10-Q.
The Company opened one restaurant during the twelve weeks ended June 15,
2004, and none during the twelve weeks ended June 17, 2003. The Company opened
two restaurants during the twenty-four weeks ended June 15, 2004, and none
during the twenty-four weeks ended June 17, 2003.
There were 251 operating domestic Lone Star restaurants as of June 15,
2004. In addition, a licensee operates three Lone Star restaurants in
California.
The Company currently operates five Del Frisco's Double Eagle ("Del
Frisco's") restaurants. In addition, a licensee operates one Del Frisco's
restaurant. The Company currently operates 15 Sullivan's Steakhouse
("Sullivan's") restaurants, 20 Texas Land and Cattle Steak House(R) ("TXCC")
restaurants and one Frankie's Italian Grille restaurant.
Internationally, licensees operate 12 Lone Star Steakhouse & Saloon
restaurants in Australia and one in Guam. During fiscal 2003, the Company sold
13 restaurants to a licensee in Australia and closed an additional seven
restaurants in Australia. During fiscal 2004, the Australian licensee closed one
restaurant.
On January 28, 2004, the Company acquired 20 TXCC restaurants which are
located primarily in Texas. The operating results of those restaurants are
included in the Company's consolidated operating results from the date of
acquisition.
-10-
LONE STAR STEAKHOUSE & SALOON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages
which certain items included in the condensed consolidated statement of
operations bear to net sales:
Twelve Weeks Ended (1) Twenty-four Weeks Ended
---------------------- -----------------------
June 15, 2004 June 17, 2003 June 15, 2004 June 17, 2003
------------- ------------- ------------- -------------
STATEMENT OF OPERATIONS DATA:
Net sales 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales ..................................... 37.2 34.9 36.0 34.5
Restaurant operating expenses ...................... 47.6 46.2 46.5 45.9
Depreciation and amortization ...................... 3.0 3.5 2.9 3.5
------ ------ ------- -------
Restaurant costs and expenses ................ 87.8 84.6 85.4 83.9
General and administrative expenses ...................... 6.8 7.9 6.6 7.4
Non-cash stock compensation expense (credit) ............. (0.1) 0.5 0.3 0.4
------ ------ ------- -------
Income from operations ................................... 5.5 7.0 7.7 8.3
Other income (expense), net .............................. (0.3) 0.2 -- 0.1
------ ------ ------- -------
Income from continuing operations before income taxes .... 5.2 7.2 7.7 8.4
Provision for income taxes ............................... 1.7 2.2 2.5 2.7
------ ------ ------- -------
Income from continuing operations ........................ 3.5 5.0 5.2 5.7
Income from discontinued operations, net of
applicable income taxes ................................. -- 0.5 -- 0.2
------ ------ ------- -------
Net income ............................................... 3.5% 5.5% 5.2% 5.9%
====== ====== ======= =======
(1) The Company operates on a fifty-two or fifty-three week fiscal year ending
the last Tuesday in December. The fiscal quarters for the Company consist
of accounting periods of twelve, twelve, twelve and sixteen or seventeen
weeks, respectively.
-11-
LONE STAR STEAKHOUSE & SALOON, INC.
TWELVE WEEKS ENDED JUNE 15, 2004 COMPARED TO TWELVE WEEKS ENDED JUNE 17, 2003
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales increased $17,586 or 12.7% to $155,529 for the twelve weeks
ended June 15, 2004, compared to $137,943 for the twelve weeks ended June 17,
2003.
Sales for the twelve weeks ended June 15, 2004 include approximately
$13,880 attributable to the acquisition of TXCC. The Company's blended same
store sales representing net sales, by store, for all the Company owned
restaurant concepts opened for more than 18 months in the current and comparable
prior year period increased 2.5%. The Company's average check increased 1.6% and
guest counts increased 1.5%. In addition, sales comparisons for the twelve weeks
ended June 15, 2004 were adversely affected by approximately $1,800 due to the
inclusion of Father's Day sales in the quarter for 2003. In 2004, Father's Day
falls in the Company's fiscal third quarter.
Costs of sales, primarily food and beverages, increased as a percentage of
net sales to 37.2% from 34.9% due primarily to increased costs of beef and dairy
products and to a lesser extent chicken.
Restaurant operating expenses for the twelve weeks ended June 15, 2004
increased $10,289 to $74,067 compared to $63,769 in the prior year period and
increased as a percentage of net sales to 47.6% from 46.2%. Labor costs
increased .4% primarily as a result of increased costs for worker's compensation
and employee medical expenses. Advertising costs were up approximately .4%
reflecting increased costs for printing. Occupancy costs were up .6%, due
primarily to the impact of higher rent expenses applicable to the TXCC stores.
In addition, restaurant operating expenses for the twelve weeks ended June 15,
2004 include approximately $220 of pre-opening costs as compared to none in the
prior year period.
Depreciation and amortization decreased $81 for the twelve weeks ended
June 15, 2004 compared with the prior period. The decrease is attributable to
the continued reduction in depreciation for certain assets that have become
fully depreciated for the Company's historical concepts, which are mostly offset
by depreciation related to the TXCC acquisition.
General and administrative expenses decreased $300 for the twelve weeks
ended June 15, 2004 compared to the prior year period. General and
administrative expenses reflect an increase of approximately $600 for increases
related to the TXCC acquisition. The increase was more than offset by decreases
for travel related expenses and professional fees.
Non-cash stock compensation expense for the twelve weeks ended June 15,
2004 was a credit of $114 compared to a charge of $733 for the prior year
period. The change is primarily attributable to a credit of $205 compared to a
charge of $409 in the prior year period 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 5 to the Notes to Condensed
Consolidated Financial Statements). In addition, the change also reflects a
decrease in the amortization of other stock based compensation in 2004 compared
to 2003.
Other income (expense), net for the twelve weeks ended June 15, 2004 was
$(421) compared to $282 for the prior year. The expense reflects foreign
exchange losses in 2004 related to Australian funds which were repatriated
during the period. The losses were partially offset by an increase in gains from
sale of assets in 2004 as compared to 2003.
The effective income tax rate was 32.7% and 30.3% for the twelve weeks
ended June 15, 2004 and June 17, 2003, 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 2003 period reflects a greater amount of tax
benefits associated with incentive stock options exercised during the period.
-12-
Discontinued operations reflect the operations of restaurants closed
subsequent to fiscal 2002 which are required to be reported as discontinued
operations pursuant to SFAS No. 144, (see Note 8 to the Notes to Condensed
Consolidated Statements).
LONE STAR STEAKHOUSE & SALOON, INC.
TWENTY-FOUR WEEKS ENDED JUNE 15, 2004 COMPARED TO TWENTY-FOUR
WEEKS ENDED JUNE 17, 2003
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales increased $38,811 or 14.0% to $316,126 for the twenty-four weeks
ended June 15, 2004, compared to $277,315 for the twenty-four weeks ended June
17, 2003. Sales for the twenty-four weeks ended June 15, 2004 include
approximately $23,737 attributable to the acquisition of TXCC. The Company
experienced sales growth in all its restaurant concepts as blended same store
sales representing net sales, by store, for all the Company owned restaurant
concepts, opened for more than 18 months in the current and comparable prior
year period increased 5.4%. The Company's average check increased 2.3% and guest
counts increased 3.5%. In addition, sales for the twenty-four weeks ended June
15, 2004 were adversely affected by approximately $1,800 due to the inclusion of
Father's Day sales in the second quarter in 2003. In 2004, Father's Day falls in
the Company's fiscal third quarter.
Costs of sales, primarily food and beverages, increased as a percentage of
net sales to 36.0% from 34.5% due primarily to increased costs of beef and dairy
products and to a lesser extent produce and chicken.
Restaurant operating expenses for the twenty-four weeks ended June 15,
2004 increased $19,606 to $146,890 compared to $127,284 in the prior year period
and increased as a percentage of net sales to 46.5% from 45.9%. Labor costs
increased .1 % primarily as a result of increased costs for worker's
compensation and employee medical expenses. Advertising costs were up
approximately .3% reflecting increased costs for printing. Building and
maintenance costs decreased .3% while utility costs increased .1%. Occupancy
costs were up .4%, due primarily to the impact of higher rent expenses
applicable to the TXCC stores. In addition, restaurant operating expenses for
the twenty-four weeks ended June 15, 2004 include approximately $507 of
pre-opening costs compared to none in the prior year period.
Depreciation and amortization decreased $515 for the twenty-four weeks
ended June 15, 2004 compared with the prior period. The decrease is attributable
primarily to a reduction in depreciation for certain assets that have become
fully depreciated for the Company's historical concepts which are offset in part
by depreciation related to the TXCC acquisition.
General and administrative expenses increased $346 for the twenty-four
weeks ended June 15, 2004 compared to the prior year period. The primary reason
for the increase is attributable to the additional general and administrative
costs applicable to TXCC of $1,110. The increase was partially offset by
decreases in travel related costs and professional fees.
Non-cash stock compensation expense for the twenty-four weeks ended June
15, 2004 decreased $331 compared to the prior year period. The change reflects
an increase of $145 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 5 to the Notes to Condensed Consolidated Financial
Statements). The impact of the increased charge was more than offset by a
decrease of $476 in the amortization of other stock based compensation expense
in 2004 as compared to 2003.
Other income, net for the twenty-four weeks ended June 15, 2004 was $27
compared to $333 for the prior year. The decrease reflects foreign exchange
losses in 2004 related to Australian funds which were repatriated during the
period. The losses were partially offset by an increase in interest income and
gains from sale of assets in 2004 compared to 2003.
The effective income tax rate was 32.8% and 31.7% for the twenty-four
weeks ended June 15, 2004 and June 17, 2003, 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
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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 2003 period reflects a greater
amount of tax benefits associated with incentive stock options exercised during
the period compared to 2004.
Discontinued operations reflect the operations of restaurants closed
subsequent to fiscal 2002 which are required to be reported as discontinued
operations pursuant to SFAS No. 144, (see Note 8 to the Notes to Condensed
Consolidated Statements).
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 should have
little effect on overall labor costs. Historically, as costs of food and labor
have increased, the Company has been able to offset these increases through menu
price increases and economies of scale; however, there may be delays in the
implementation of such menu price increases or in effecting timely economies of
scale, as well as competitive pressures which may limit the Company's ability to
recover any cost increases in its entirety. Historically, inflation has not had
a material impact on operating margins. During fiscal 2003, the Company
experienced significant increases in beef prices and the prices continue to be
above historical levels and have been somewhat volatile. To the extent that beef
prices continue to be significantly above historical levels, it will have a
material negative impact on operating margins.
LIQUIDITY AND CAPITAL RESOURCES (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The following table presents a summary of the Company's cash flows for
each of the twenty-four weeks ended June 15, 2004 and June 17, 2003:
Twenty-four weeks ended
-----------------------
June 15, 2004 June 17, 2003
------------- -------------
Net cash provided by operating activities ............... $ 16,836 $ 26,173
Net cash used in investing activities ................... (19,735) (919)
Net cash used in financing activities ................... (3,387) (19,901)
Effect of exchange rate changes on cash ................. -- 969
Net cash provided by discontinued operations ............ 1,516 2,602
-------- --------
Net increase (decrease) in cash and cash equivalents..... $ (4,770) $ 8,924
======== ========
The decrease in net cash provided by operating activities for the
twenty-four week period ended June 15, 2004 compared to the prior period is due
primarily to an increase in income tax payments during fiscal 2004 as compared
to fiscal 2003.
During the twelve week period ended June 15, 2004, the Company's
investment in property and equipment was $9,245 compared to $2,341 for the same
period in 2003.
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As more fully described in Note 6 to the Notes to Consolidated Condensed
Financial Statements, on January 28, 2004, the Company acquired TXCC which
operates 20 Texas Land & Cattle Steak House(R) restaurants located primarily in
Texas. The cash portion of the purchase price, net of cash acquired, was $12,505
and was funded from the Company's existing cash balance. The aggregate purchase
price may change as the Company resolves certain claims of pre-petition
creditors.
During the twenty-four week period ended June 15, 2004, the Company
received net proceeds of $4,028 from the issuance of 468,034 shares of its
common stock due to the exercise of stock options compared to net proceeds of
$5,260 from the issuance of 624,933 shares in the same period in 2003.
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. The most recent authorization was December 23, 2003
when the Board of Directors approved the repurchase of up to 2,122,800 shares of
the Company's common stock. During the twenty-four weeks ended June 15, 2004 the
Company did not purchase any common stock. During the same period in 2003, the
Company purchased 891,000 shares of its common stock at a cost of $20.71 per
share or an aggregate cost of $18,454.
The Company has paid quarterly cash dividends on its common stock since
the second quarter of fiscal 2000. In January 2004, the Company increased its
quarterly cash dividend from $.165 to $.175 per share commencing in the first
quarter of fiscal 2004. During the twenty-four weeks ended June 15, 2004, the
Company paid dividends of $7,415 or $.35 per share as compared to $6,707 or
$.315 per share in the same period in 2003.
..
At June 15, 2004, the Company had $91,460 in cash and cash equivalents.
The Company has available $55,000 in unsecured revolving credit facilities which
expire in August 2004. At June 15, 2004, the Company had no outstanding
borrowings. See Note 4 to the Notes to Condensed Consolidated Financial
Statements in the Form 10-Q for a further description of the Company's credit
facilities. The Company is currently negotiating its credit facility
arrangements and believes it will be able to adequately provide for its credit
facility needs when the present credit facilities expire.
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 June 15,
2004, the Company had no positions in futures contracts.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Stockholders are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to open new restaurants, general market
conditions, the price of beef, competition and pricing and other risks set forth
in the Company's Annual Report on Form 10-K for the fiscal year ended December
30, 2003. Although the Company believes the assumptions underlying the
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forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements contained in the report will prove to be
accurate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Comany's exposure to market risks was not significant during the
twenty-four weeks ended June 15, 2004.
ITEM 4. 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-Q 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-Q, 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 immediately after the signature section of
this Form 10-Q.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In connection with the acquisition of TXCC, the Company has issued
117,466 shares of common stock (of which 48,719 shares were issued
during the twelve weeks ended June 15, 2004), pursuant to the terms
of the Findings of Fact, Conclusions of Law and Order Confirming
First Amended Joint Plan of Reorganization of TX.C.C., Inc., TX.C.C.
- Preston, L.P., TXLC Albuquerque Restaurant, L.L.C., Debtors, dated
January 28, 2004. For further information with respect to the
forgoing, see Note 6 to the Notes to Condensed Consolidated
Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
On June 2, 2004, the Company held its Annual Meeting of Stockholders
(the "Meeting"). At the Meeting, the stockholders re-elected Anthony
Bergamo, Michael A. Ledeen, Ph.D. and Mark G. Saltzgaber to the
Board of Directors to serve until the 2007 Annual Meeting of
Stockholders and until their successors have been duly elected and
qualified. As to the newly re-elected Directors, there were
19,409,868 votes "For" and 91,576 votes "Withheld" for Anthony
Bergamo, 19,409,868 votes "For and 91,576 votes "Withheld" for
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Michael A. Ledeen, Ph.D., and 19,400,639 votes "For" and 100,805
votes "Withheld" for Mark G. Saltzgaber. The stockholders ratified
the appointment of Ernst & Young LLP as the Company's independent
auditors for the year ending December 28, 2004. As to the
ratification of auditors, there were 18,799,276 votes "For", 684,512
votes "Against" and 17,656 votes "Abstained".
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
During the twelve weeks ended June 15, 2004, the Company
filed Form 8-Ks on the following dates under Item 5 - Other
Events and Item 7 - Financial Statements, Pro Forma Financial
Information and Exhibits:
April 9, 2004, April 23, 2004, and May 28, 2004
In addition, the Company filed a Form 8-K on April 14, 2004
under Item 7 - Financial Statements, Pro Forma Financial
Information and Exhibits and Item 12 - Results of Operations
and Financial Condition. The Company also filed a Form 8-K
under Item 5 - Other Events on May 5, 2004.
(b) EXHIBITS
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
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LONE STAR STEAKHOUSE & SALOON, INC.
(Registrant)
Date: July 26, 2004 /s/ Randall H. Pierce
--------------------------------
Randall H. Pierce
Chief Financial Officer
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