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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended Commission file number
September 7, 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 October 11, 2004
COMMON STOCK, $.01 PAR VALUE 20,536,499 SHARES
LONE STAR STEAKHOUSE & SALOON, INC.
INDEX
PAGE
NUMBER
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at September 7, 2004 and December 30, 2003 2
Condensed Consolidated Statements of
Income for the Twelve Weeks Ended
September 7, 2004 and September 9, 2003 3
Condensed Consolidated Statements of
Income for the Thirty-Six Weeks Ended
September 7, 2004 and September 9, 2003 4
Condensed Cconsolidated Statements of
Cash Flows for the Thirty-Six Weeks Ended
September 7, 2004 and September 9, 2003 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative
Disclosures About Market Risks 16
Item 4. Controls and Procedures 17
Part II. Other Information
Items 1, 3, 4 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 17
Item 6. Exhibits and Reports on Form 8-k 18
- 1 -
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
September 7, 2004 December 30, 2003
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 80,228 $ 96,230
Inventories 12,093 12,955
Other current assets 11,947 11,880
--------- ---------
Total current assets 104,268 121,065
Property and equipment 535,154 507,268
Less accumulated depreciation and amortization (209,260) (195,048)
--------- ---------
325,894 312,220
Other assets:
Deferred income taxes 21,365 16,228
Intangible and other assets, net 37,773 38,982
--------- ---------
Total assets $ 489,300 $ 488,495
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,026 $ 12,166
Other current liabilities 29,328 36,955
--------- ---------
Total current liabilities 44,354 49,121
Long term liabilities, principally deferred compensation obligations 19,892 18,275
Stockholders' equity:
Preferred stock -- --
Common stock 212 211
Additional paid-in capital 171,998 177,844
Retained earnings 256,507 246,707
Common stock held by Trust (3,663) (3,663)
--------- ---------
Total stockholders' equity 425,054 421,099
--------- ---------
Total liabilities and stockholders' equity $ 489,300 $ 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
--------------------------
September 7, 2004 September 9, 2003
----------------- -----------------
Net sales $ 148,045 $ 130,312
Costs and expenses:
Costs of sales 54,271 47,325
Restaurant operating expenses 71,986 62,789
Depreciation and amortization 4,690 4,655
--------- ---------
Restaurant costs and expenses 130,947 114,769
General and administrative expenses 11,431 10,117
Non-cash stock compensation expense (credit) (290) 75
--------- ---------
Income from operations 5,957 5,351
Other income (expense), net 787 (35)
--------- ---------
Income from continuing operations before income taxes 6,744 5,316
Provision for income taxes 2,164 1,678
--------- ---------
Income from continuing operations 4,580 3,638
Discontinued operations:
Income (loss) from operations before income tax (30) 226
Income tax expense (29) (200)
--------- ---------
Income (loss) from discontinued operations (59) 26
--------- ---------
Net income $ 4,521 $ 3,664
========= =========
Basic earnings per share:
Continuing operations $ 0.21 $ 0.18
Discontinued operations -- --
--------- ---------
Basic earnings per share $ 0.21 $ 0.18
========= =========
Diluted earnings per share:
Continuing operatons $ 0.18 $ 0.15
Discontinued operations -- --
--------- ---------
Diluted earnings per share $ 0.18 $ 0.15
========= =========
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 thirty-six weeks ended
------------------------------
September 7, 2004 September 9, 2003
----------------- -----------------
Net sales $ 464,171 $ 407,627
Costs and expenses:
Costs of sales 168,051 142,906
Restaurant operating expenses 218,878 190,073
Depreciation and amortization 14,010 14,490
--------- ---------
Restaurant costs and expenses 400,939 347,469
General and administrative expenses 32,351 30,691
Non-cash stock compensation expense 505 1,201
--------- ---------
Income from operations 30,376 28,266
Other income, net 814 298
--------- ---------
Income from continuing operations before income taxes 31,190 28,564
Provision for income taxes 10,182 9,057
--------- ---------
Income from continuing operations 21,008 19,507
Discontinued operations:
Income from operations before income tax 13 1,051
Income tax expense (15) (536)
--------- ---------
Income (loss) from discontinued operations (2) 515
--------- ---------
Net income $ 21,006 $ 20,022
========= =========
Basic earnings per share:
Continuing operations $ 0.99 $ 0.94
Discontinued operations -- 0.02
--------- ---------
Basic earnings per share $ 0.99 $ 0.96
========= =========
Diluted earnings per share:
Continuing operatons $ 0.88 $ 0.82
Discontinued operations -- 0.02
--------- ---------
Diluted earnings per share $ 0.88 $ 0.84
========= =========
Dividends per share $ 0.525 $ 0.480
========= =========
See accompanying notes.
- 4 -
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the thirty-six weeks ended
------------------------------
September 7, 2004 September 9, 2003
----------------- -----------------
Cash flows from operating activities:
Net income $ 21,006 $ 20,022
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 15,965 16,638
Non-cash stock compensation expense 505 1,201
Gain on sale of assets (1,271) (34)
Deferred income taxes 625 (4,437)
(Income) loss from discontinued operations 2 (515)
Change in operating assets and liabilities, net of effect of acquisition:
Change in operating assets 2,016 (549)
Change in operating liabilities (9,482) 4,164
-------- --------
Net cash provided by operating activities of continuing operations 29,366 36,490
Cash flows from investing activities:
Acquisition of TX.C.C. Inc., net of cash acquired (12,579) --
Purchases of property and equipment (16,399) (3,834)
Proceeds from sale of assets 1,816 1,401
Other 1,317 477
-------- --------
Net cash used in investing activities of continuing operations (25,845) (1,956)
Cash flows from financing activities:
Net proceeds from issuance of common stock 5,855 5,884
Common stock repurchased and retired (15,607) (18,454)
Cash dividends (11,205) (10,127)
-------- --------
Net cash used in financing activities of continuing operations (20,957) (22,697)
Effect of exchange rate changes on cash -- 872
Net cash provided by discontinued operations 1,434 2,915
-------- --------
Net increase (decrease) in cash and cash equivalents (16,002) 15,624
Cash and cash equivalents at beginning of period 96,230 65,369
-------- --------
Cash and cash equivalents at end of period $ 80,228 $ 80,993
======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 13,758 $ 2,305
======== ========
Non cash investing activities:
Issuance of common stock in connection with TX.C.C., Inc. acquisition $ 2,679 $ --
======== ========
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 thirty-six weeks ended September 7, 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 thirty-six weeks ended
------------------------------- -------------------------------
Sept. 7, 2004 Sept. 9, 2003 Sept. 7, 2004 Sept. 9, 2003
------------- ------------- ------------- -------------
Net income $ 4,521 $ 3,664 $21,006 $20,022
Foreign currency translation
adjustments -- (292) -- 2,659
------- ------- ------- -------
Comprehensive income $ 4,521 $ 3,372 $21,006 $22,681
======= ======= ======= =======
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 in
accordance with the treasury stock method (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.
In addition, for purposes of diluted computations, net income has been adjusted
for the twelve weeks ended September 7, 2004 and for the thirty-six weeks ended
September 7, 2004 to reflect the dilutive effect on net income of the assumed
settlement of certain deferred compensation liabilities. The effect of shares
issuable to settle the deferred compensation liabilities are included for the
twelve and thirty-six week periods for fiscal 2004 and excluded from the fiscal
2003 periods as their effect would have been anti-dilutive.
- 6 -
The following table sets forth computation of basic and diluted earnings per
share (amounts in thousand, except per share amouns):
For the twelve weeks ended For the thirty-six weeks ended
------------------------------ --------------------------------
Sept. 7, 2004 Sept. 9, 2003 Sept. 7, 2004 Sept. 9, 2003
------------- ------------- ------------- -------------
Basic earnings per share computation:
Numerator:
Income from continuing operations $ 4,580 $ 3,638 $ 21,008 $ 19,507
Discontinued operations, net of Income Tax (59) 26 (2) 515
-------- -------- --------- ---------
Net Income $ 4,521 $ 3,664 $ 21,006 $ 20,022
======== ======== ========= =========
Denominator:
Weighted average number of shares outstanding 21,452 20,584 21,224 20,787
======== ======== ========= =========
Basic earings per share:
Continuing operations $ 0.21 $ 0.18 $ 0.99 $ 0.94
Discounted operations, net of income tax - - - 0.02
-------- -------- --------- ---------
Basic earnings per share $ 0.21 $ 0.18 $ 0.99 $ 0.96
======== ======== ========= =========
Diluted earnings per shar computation:
Numerator:
Income form continuing operations $ 4,580 $ 3,638 $ 21,008 $ 19,507
Adjustment for assumed settlement of
deferred compensation liabilites (237) - 110 -
-------- -------- --------- ---------
Diluted Income from continuing opeations 4,343 3,638 21,118 19,507
Discontinued operations, net of Income tax (59) 26 (2) 515
-------- -------- --------- ---------
Diluted net income $ 4,284 $ 3,664 $ 21,116 $ 20,022
======== ======== ========= =========
Denominator:
Weighted average number of shares outstanding 21,452 20,584 21,224 20,787
Effect of dilutive employee stock options 2,394 3,119 2,567 3,027
Effect of shares issuable to settle deferred
comparisation liabilities 177 - 177 -
-------- -------- --------- ---------
24,023 23,703 23,968 23,814
======== ======== ========= =========
Diluted earnings per share:
Continuing operations $ 0.18 $ 0.15 $ 0.88 $ 0.82
Discontinued operations - - - 0.02
-------- -------- --------- ---------
Diluted earnings per share $ 0.18 $ 0.15 $ 0.88 $ 0.84
======== ======== ========= =========
- 7 -
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 $30,000 with an accordian feature permitting
for an increase in the credit facility in an amount up to $20,000 such that the
total amount of the credit facility does not exceed $50,000. The additional
borrowing is subject to the approval of the lenders. The credit agreement
terminates in October 2007; 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 the higher of SunTrust Bank's published prime rate or the Federal Funds Rate
plus one-half of one percent (.50%); or the LIBOR Rate plus one and one-half
percent (1.5%). The Company is required to achieve certain financial ratios and
to maintain certain net worth requirements as defined in the credit agreement.
The Company is required to pay on a quarterly basis a facility fee equal to .25%
per annum on the daily unused amount of the credit facility. At September 7,
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 September 7, 2004 and
December 30, 2003. The term loan agreement matures in October 2007. The interest
rate is at .50% below the daily prime rate as published in the Wall Street
Journal. In addition, the Company pays a facility fee of .25% per annum on the
daily unused portion of the credit facility.
5. COMMON STOCK TRANSACTIONS
The Board of Directors has authorized the Company from time to time to
purchase shares of the Company's common stock in the open market or in privately
negotiated transactions. The Company purchased 670,300 shares of its common
stock during the thirty-six weeks ended September 7, 2004. The Company purchased
891,000 shares of its common stock during the thirty-six weeks ended September
9, 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 "Deferred 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 the
thirty-six weeks ended September 9, 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 Deferred 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 Deferred
Plan, Participants may elect to change the Deferred 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 September 7, 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 September 7, 2004 and September 9, 2003 was a credit of
$(379) and $(95), respectively, relating to the changes in market price for such
shares. The charges for the thirty-six weeks ended September 7, 2004 and
September 9, 2003 were $173 and $314, respectively.
- 8 -
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 $23,945, including cash acquired of
$2,145. The Company's purchase price consisted of $14,724 in cash, 119,485
shares of the Company's common stock valued at $2,679, and liabilities assumed
of $6,542.
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) $ 1,221
Property and equipment 14,476
Other assets 6,103
-------
Total assets acquired 21,800
-------
Current liabilities 6,542
-------
Total liabilities assumed 6,542
-------
Net assets acquired $15,258
=======
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 September 22, 2004, the Board of Directors declared the Company's
quarterly cash dividend of $.175 per share payable October 18, 2004 to
stockholders of record on October 4, 2004.
- 9 -
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 thirty-six weeks ended
-------------------------- ------------------------------
Sept. 7, Sept. 9, Sept. 7, Sept. 9,
2004 2003 2004 2003
---- ---- ---- ----
Income (loss) from operations $ (30) $ 226 $ 13 $ 1,051
Income tax expense (29) (200) (15) (536)
-------- -------- -------- --------
Income (loss) from
discontinued operations $ (59) $ 26 $ (2) $ 515
======== ======== ======== ========
Net sales from discontinued
operations $ -- $ 6,246 $ -- $ 17,081
======== ======== ======== ========
9. INCOME TAX
The effective income tax rate from continuing operations was 32.1% and
31.6% for the twelve weeks ended September 7, 2004 and September 9, 2003,
respectively, and 32.6% and 31.7% for the thirty-six weeks ended September 7,
2004 and September 9, 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.
- 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)
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 no restaurants during the twelve weeks ended September
7, 2004, and none during the twelve weeks ended September 9, 2003. The Company
opened two restaurants during the thirty-six weeks ended September 7, 2004, and
none during the thirty-six weeks ended September 9, 2003.
There were 251 operating domestic Lone Star Steakhouse & Saloon
restaurants ("Lone Star") as of September 7, 2004. In addition, a licensee
operates three Lone Star restaurants in California.
The Company currently operates five Del Frisco's Double Eagle Steak House
("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 & 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.
- 11 -
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) Thirty-Six Weeks Ended
---------------------- ----------------------
Sept. 7, 2004 Sept. 9, 2003 Sept. 7, 2004 Sept. 9, 2003
------------- ------------- ------------- -------------
STATEMENT OF OPERATIONS DATA:
Net sales ........................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales .................................. 36.7 36.3 36.2 35.1
Restaurant operating expenses ................... 48.6 48.2 47.2 46.6
Depreciation and amortization ................... 3.2 3.6 3.0 3.6
----- ----- ----- -----
Restaurant costs and expenses .............. 88.5 88.1 86.4 85.3
General and administrative expenses ................. 7.7 7.8 7.0 7.5
Non-cash stock compensation expense (credit) ........ (0.2) -- 0.1 0.3
----- ----- ----- -----
Income from operations .............................. 4.0 4.1 6.5 6.9
Other income, net ................................... 0.5 -- 0.2 0.1
----- ----- ----- -----
Income from continuing operations before income taxes 4.5 4.1 6.7 7.0
Provision for income taxes .......................... 1.4 1.3 2.2 2.2
----- ----- ----- -----
Income from continuing operations ................... 3.1 2.8 4.5 4.8
Income from discontinued operations, net of
applicable income taxes ............................ -- -- -- 0.1
----- ----- ----- -----
Net income .......................................... 3.1% 2.8% 4.5% 4.9%
===== ===== ===== =====
(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.
- 12 -
LONE STAR STEAKHOUSE & SALOON, INC.
TWELVE WEEKS ENDED SEPTEMBER 7, 2004 COMPARED TO TWELVE WEEKS ENDED SEPTEMBER 9,
2003 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales increased $17,733 or 13.6% to $148,045 for the twelve weeks
ended September 7, 2004, compared to $130,312 for the twelve weeks ended
September 9, 2003. Sales for the twelve weeks ended September 7, 2004 include
approximately $13,725 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 2.9%. The Company's average check
increased 0.1% and guest counts increased 3.0%. In addition, sales comparisons
for the twelve weeks ended September 7, 2004 were favorably impacted by
approximately $1,800 due to the inclusion of Father's Day sales in the quarter
for 2004. In 2003, Father's Day fell in the Company's fiscal second quarter.
Costs of sales, primarily food and beverages, increased as a percentage of
net sales to 36.7% from 36.3% due primarily to increased costs of dairy
products.
Restaurant operating expenses for the twelve weeks ended September 7, 2004
increased $9,197 to $71,986 compared to $62,789 in the prior year period and
increased as a percentage of net sales to 48.6% from 48.2%. Labor costs
increased .3% primarily as a result of increased costs for worker's compensation
and employee medical expenses. Occupancy costs were up .5%, due primarily to the
impact of higher rent expenses applicable to the TXCC stores. The increases were
offset in part by decreases in advertising costs.
Depreciation and amortization increased $35 for the twelve weeks ended
September 7, 2004 compared with the prior period. The increase is attributable
to depreciation of assets related to the TXCC acquisition, which is mostly
offset by the continued reduction in depreciation for certain assets that have
become fully depreciated for the Company's historical concepts.
General and administrative expenses increased $1,314 for the twelve weeks
ended September 7, 2004 compared to the prior year period. General and
administrative expenses reflect an increase of approximately $573 for increases
related to the TXCC acquisition. In addition the increase reflects higher
compensation related costs and increased costs in professional fees.
Non-cash stock compensation expense for the twelve weeks ended September
7, 2004 was a credit of $290 compared to a charge of $75 for the prior year
period. The change is primarily attributable to a credit of $379 compared to a
credit of $95 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 September 7, 2004
was $787 compared to $(35) for the prior year. The increase in other income
results primarily from an increase in gains from sale of assets in 2004 as
compared to 2003.
The effective income tax rate from continuing operations was 32.1% and
31.6% for the twelve weeks ended September 7, 2004 and September 9, 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.
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).
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LONE STAR STEAKHOUSE & SALOON, INC.
THIRTY-SIX WEEKS ENDED SEPTEMBER 7, 2004 COMPARED TO THIRTY-SIX WEEKS ENDED
SEPTEMBER 9, 2003 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales increased $56,544 or 13.9% to $464,171 for the thirty-six weeks
ended September 7, 2004, compared to $407,627 for the thirty-six weeks ended
September 9, 2003. Sales for the thirty-six weeks ended September 7, 2004
include approximately $37,462 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 4.0%. The Company's average check
increased 1.6% and guest counts increased 3.0%.
Costs of sales, primarily food and beverages, increased as a percentage of
net sales to 36.2% from 35.1% due primarily to increased costs of beef and dairy
products.
Restaurant operating expenses for the thirty-six weeks ended September 7,
2004 increased $28,805 to $218,878 compared to $190,073 in the prior year period
and increased as a percentage of net sales to 47.2% from 46.6%. Labor costs
increased .2 % primarily as a result of increased costs for worker's
compensation and employee medical expenses. Advertising costs increased
approximately .2% reflecting increased printing costs. These increases were
partially offset by a decrease in building and maintenance costs which decreased
..2%. 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 thirty-six weeks ended September 7, 2004 include approximately
$539 of pre-opening costs compared to none in the prior year period.
Depreciation and amortization decreased $480 for the thirty-six weeks
ended September 7, 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 of assets related to the TXCC acquisition.
General and administrative expenses increased $1,660 for the thirty-six
weeks ended September 7, 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 $1,683. The increase was partially
offset by decreases in travel related costs and professional fees.
Non-cash stock compensation expense for the thirty-six weeks ended
September 7, 2004 decreased $696 compared to the prior year period. The change
reflects a decrease of $138 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 there was a decrease of $558 in the amortization of
other stock based compensation expense in 2004 as compared to 2003.
Other income, net for the thirty-six weeks ended September 7, 2004 was
$814 compared to $298 for the prior year. The increase is attributable to an
increase in interest income and gains from sales of assets in 2004 compared to
2003. The increase for 2004 was partially offset by foreign exchange losses
related to Australian funds which were repatriated during the period.
The effective income tax rate from continuing operations was 32.6% and
31.7% for the thirty-six weeks ended September 7, 2004 and September 9, 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 compared to 2004.
- 14 -
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 2004, 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 thirty-six weeks ended September 7, 2004 and September 9, 2003:
Thirty-six weeks ended
----------------------
Sept. 7, 2004 Sept. 9, 2003
------------- -------------
Net cash provided by operating activities .......... $ 29,366 $ 36,490
Net cash used in investing activities .............. (25,845) (1,956)
Net cash used in financing activities .............. (20,957) (22,697)
Effect of exchange rate changes on cash ............ -- 872
Net cash provided by discontinued operations ....... 1,434 2,915
-------- --------
Net increase (decrease) in cash and cash equivalents $(16,002) $ 15,624
======== ========
The decrease in net cash provided by operating activities for the
thirty-six week period ended September 7, 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 thirty-six week period ended September 7, 2004, the Company's
investment in property and equipment was $16,399 compared to $3,834 for the same
period in 2003.
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 $12,579
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.
- 15 -
During the thirty-six week period ended September 7, 2004, the Company
received net proceeds of $5,855 from the issuance of 689,565 shares of its
common stock due to the exercise of stock options compared to net proceeds of
$5,884 from the issuance of 697,371 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 thirty-six weeks ended September 7, 2004
the Company purchased 670,300 shares of common stock at an average cost of
$23.28 per share or an aggregate cost of $15,607. During the same period in
2003, the Company purchased 891,000 shares of its common stock at an average
cost of $20.71 per share or an aggregate cost of $18,454. At September 7, 2004,
the Company may repurchase up to 1,402,500 shares of its common stock pursuant
to the December 23, 2003 authorization by the Board of Directors.
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 thirty-six weeks ended September 7, 2004, the
Company paid dividends of $11,205 or $.525 per share compared to $10,127 or $.48
per share in the same period in 2003.
At September 7, 2004, the Company had $80,228 in cash and cash
equivalents. As described in Note 4 to the Notes to Condensed Consolidated
Financial Statements in the Form 10-Q, the Company has unsecured revolving
credit facilities that may permit borrowings of up to $55,000 which expire in
October 2007. At September 7, 2004, the Company had no outstanding borrowings.
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. As of and for the
thirty-six weeks ended September 7, 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
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements contained in the report will prove to be
accurate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's exposure to market risks was not significant during the
thirty-six weeks ended September 7, 2004.
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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
119,485 shares of common stock (of which 2,019 shares were issued during
the twelve weeks ended September 7, 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.
Pursuant to the Bankruptcy Order and Title 11 U.S.C. SS1145, the Company
relied on the exemption provided for under Section 3(a)(10) of the
Securities Act of 1933, as amended, in issuing these shares of common
stock. For further information with respect to the foregoing, see Note 6
to the Notes to Condensed Consolidated Financial Statements.
The table below provides information concerning the repurchase of shares
of the Company's common stock during the twelve weeks ended September 7,
2004. The Board of Directors on December 23, 2003 authorized the Company
to repurchase up to 2,122,800 shares of the Company's common stock.
Since commencing the most recent authorization for share repurchase, the
Company has repurchased 720,300 shares of its common stock, including
50,000 shares repurchased in December of 2003.
- 17 -
ISSUER PURCHASES OF EQUITY SECURITIES
(a) Total (c)Total number of
Number of Shares (or Units) (d) Maximum Number of
Shares (or (b) Average Price Purchased as Part of shares that May Yet Be
Units) Paid per Share (or Publicly Announced Purchased Under the
Period Purchased Unit) Plans or Programs Plans or Programs
June 16,
through -- -- -- 2,072,800
July 13
July 14,
through 130,200 $ 22.92 130,200 1,942,600
August 10
August 11,
through 540,100 $ 23.37 540,100 1,402,500
September 7 ------- ----- ------- ---------
Total 670,300 $ 23.28 670,300 1,402,500
======= ===== ======= =========
(1) Repurchases are subject to prevailing market prices, may be made in
open market or in privately negotiated transactions, may occur or be
discontinued at any time. There can be no assurance that the Company
will repurchase any shares.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
During the twelve weeks ended September 7, 2004, the Company filed a
Form 8-K on the following date under Item 5.02--Departure of
Directors or Principal Officers; Election of Directors; Appointment
of Principal Officers:
September 2, 2004
The Company also filed Form 8-K's under Item 8.01--Other Events (or
Item 5 under the pre-August 23, 2004, 8-K reporting rules) as
follows:
August 26, 2004, August 17, 2004 and June 30, 2004
In addition, the Company filed one Form 8-K on July 9, 2004 under
Item 12--Results of Operations and Financial Condition under the
pre-August 23, 2004, 8-K reporting rules.
(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
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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
- 19 -
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)
/s/ John D. White
Date: October 18, 2004 -----------------------------------
John D. White
Chief Financial Officer
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