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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
MARCH 22, 2005 0-19907
-------------- -------
LONE STAR STEAKHOUSE & SALOON, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 48-1109495
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification 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 April 23, 2005
COMMON STOCK, $.01 PAR VALUE 20,519,094 SHARES
LONE STAR STEAKHOUSE & SALOON, INC.
INDEX
PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS 2
AT MARCH 22, 2005 AND DECEMBER 28, 2004
CONDENSED CONSOLIDATED STATEMENTS OF 3
INCOME FOR THE TWELVE WEEKS ENDED
MARCH 22, 2005 AND MARCH 23, 2004
CONDENSED CONSOLIDATED STATEMENTS OF 4
CASH FLOWS FOR THE TWELVE WEEKS ENDED
MARCH 22, 2005 AND MARCH 23, 2004
NOTES TO CONDENSED CONSOLIDATED 5
FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND 9
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE 14
DISCLOSURES ABOUT MARKET RISKS
ITEM 4. CONTROLS AND PROCEDURES 14
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 14
ITEM 6. EXHIBITS 15
-1-
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
March 22, 2005 December 28, 2004
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 27,568 $ 38,515
Short-term investments 53,770 33,500
--------- ---------
81,338 72,015
Inventories 11,989 12,765
Prepaid insurance deposits 14,250 14,537
Other current assets 13,609 13,757
--------- ---------
Total current assets 121,186 113,074
Property and equipment 546,960 539,087
Less accumulated depreciation and amortization (222,845) (217,837)
--------- ---------
324,115 321,250
Other assets:
Deferred income taxes 25,239 24,434
Intangible and other assets, net 39,877 39,534
--------- ---------
Total assets $ 510,417 $ 498,292
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,549 $ 13,845
Accrued self insurance 16,618 15,094
Other current liabilities 42,575 44,813
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Total current liabilities 76,742 73,752
Long term liabilities, principally defered compensation obligations 22,322 21,263
Deferred rent obligations 10,706 10,496
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Total liabilities 109,770 105,511
Stockholders' equity:
Preferred stock -- --
Common stock 205 205
Additional paid-in capital 140,108 139,570
Retained earnings 263,997 256,669
Common stock held by Trust (3,663) (3,663)
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Total stockholders' equity 400,647 392,781
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Total liabilities and stockholders' equity $ 510,417 $ 498,292
========= =========
See accompanying notes.
-2-
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
For the twelve weeks ended
-----------------------------------------
March 22, 2005 March 23, 2004
--------------- ---------------
As Restated
Net sales $ 165,353 $ 160,596
Costs and expenses:
Costs of sales 56,085 55,953
Restaurant operating expenses 76,412 72,984
Depreciation and amortization 4,396 4,622
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Restaurant costs and expenses 136,893 133,559
General and administrative expenses 11,453 10,295
Non-cash stock compensation expense 692 910
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Income from operations 16,315 15,832
Other income, net 146 447
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Income from continuing operations before income taxes 16,461 16,279
Provision for income taxes 5,472 5,343
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Income from continuing operations 10,989 10,936
Discontinued operations:
Income (loss) from operations before income tax (78) 51
Income tax provision (benefit) 2 (15)
--------- ---------
Income (loss) from discontinued operations (80) 66
--------- ---------
Net income $ 10,909 $ 11,002
========= =========
Basic earnings per share:
Continuing operations $ 0.54 $ 0.52
Discontinued operations -- --
--------- ---------
Basic earnings per share $ 0.54 $ 0.52
========= =========
Diluted earnings per share:
Continuing operatons $ 0.49 $ 0.46
Discontinued operations -- --
--------- ---------
Diluted earnings per share $ 0.49 $ 0.46
========= =========
Dividends per share $ 0.175 $ 0.175
========= =========
See accompanying notes.
-3-
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the twelve weeks ended
---------------------------------
March 22, 2005 March 23, 2004
---------------- ---------------
Cash flows from operating activities: As Restated
Net income $ 10,909 $ 11,002
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 5,051 5,262
Non-cash stock compensation expense 692 910
Loss (gain) on sale of assets 95 (63)
Deferred income taxes (991) (2,050)
(Income) loss from discontinued operations 80 (66)
Net change in operating assets and liabilities:
Change in operating assets 1,397 4,041
Change in operating liabilities 3,320 5,296
--------- ---------
Net cash provided by operating activities of continuing operations 20,553 24,332
Cash flows from investing activities:
Acquisition of TX.C.C. Inc., net of cash acquired -- (12,505)
Purchases of short-term investments (20,270) --
Purchases of property and equipment (7,885) (3,804)
Proceeds from sale of assets 113 69
Other 173 778
--------- ---------
Net cash used in investing activities of continuing operations (27,869) (15,462)
Cash flows from financing activities:
Net proceeds from issuance of common stock 30 672
Cash dividends (3,581) (3,688)
--------- ---------
Net cash used in financing activities of continuing operations (3,551) (3,016)
Net cash provided by (used in) discontinued operations (80) 837
--------- ---------
Net increase (decrease) in cash and cash equivalents (10,947) 6,691
Cash and cash equivalents at beginning of period 38,515 96,230
--------- ---------
Cash and cash equivalents at end of period $ 27,568 $ 102,921
========= =========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 1,437 $ 900
========= =========
Non cash investing activities:
Issuance of common stock in connection with acquisition $ -- $ 1,542
========= =========
See accompanying notes.
-4-
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 twelve weeks ended March 22, 2005 are not
necessarily indicative of the results to be expected for the full year ending
December 27, 2005. 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 28, 2004.
Certain amounts for the prior year have been reclassified to conform with
the current year's presentation.
2. RESTATEMENT OF PRIOR FINANCIAL INFORMATION
In December 2004, the Company commenced a review of its lease accounting
and leasehold depreciation policies. As a result of that review, the Company
determined it appropriate to restate its prior financial statements. The
information for the twelve weeks ended March 23, 2004, has been restated to
reflect depreciation for certain leasehold improvements and to recognize rent
expense on a straight line basis over the expected lease term, including renewal
option periods where failure to exercise such options would result in an
economic penalty. See Note 1 to the Consolidated Financial Statements in the
Company's 2004 Form 10-K for further discussion.
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 has not been included for any
periods as their effect would have been antidilutive.
-5-
The weighted average shares outstanding for the periods presented are as
follows (in thousands):
For the twelve weeks ended
--------------------------------
March 22, 2005 March 23, 2004
-------------- --------------
Basic average shares outstanding 20,296 20,955
Diluted average shares outstanding 22,211 23,682
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 (0.50%); or LIBOR rate plus one and one-half
percent (1.50%). 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 March 22, 2005
and at December 28, 2004, 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 March 22, 2005 and
December 28, 2004. 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 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 twelve weeks ended March 22, 2005, or during the twelve weeks ended
March 23, 2004. The Company is accounting for any 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. At March 22, 2005, the Company may purchase
up to 2,026,190 shares of its common stock pursuant to its current authorization
by the Board of Directors.
In September 2002, the Company adopted a Stock Option Deferred
Compensation Plan (the "Plan"), which allows certain key executives to defer
compensation arising from the exercise of stock options granted under the
Company's 1992 Incentive and Nonqualified Stock Option Plan. In fiscal 2003,
pursuant to the terms of the Deferred Plan in the exercise of certain stock
options by a participant, the Company issued 177,145 shares to a Rabbi trust
(the "Trust") with Intrust Bank, NA serving as the trustee. The Trust holds the
shares for the benefit of the participating employees ("Participants"). Under
the terms of the Plan, Participants may elect to change the Plan's investments
from time to time which may result in the sale of the shares. Since the shares
held by the Trust are held pursuant to a deferred compensation arrangement
-6-
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 being reflected as adjustments to compensation expense and
deferred compensation obligations. At March 22, 2005, the Trust held 177,145
shares of the Company's common stock. Included in non-cash stock compensation
expense for the twelve weeks ended March 22, 2005 and March 23, 2004 was a
charge of $204 and $760, respectively, relating to the changes in market price
for such shares.
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 aggregate purchase price was $23,496 and consisted of cash, shares
of the Company's common stock and the assumption of certain liabilities. The
cash portion of the acquisition was funded from the Company's existing cash
balances. In connection with the acquisition, the Company issued an aggregate of
119,485 shares of its common stock valued at $2,679. At March 23, 2004, the
Company had issued 68,747 shares of such shares valued at $1,542. Pro forma
results giving effect to the acquisition of TXCC are not presented for the
periods as such amounts are not significant.
7. 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.
-7-
For the twelve weeks ended
---------------------------------
March 22, March 23,
2005 2004
---- ----
Income (loss) from operations $ (78) $ 51
Income tax benefit (expense) (2) 15
----------- ----------
Net income (loss) from
discontinued operations $ (80) $ 66
=========== ==========
8. INCOME TAX
The effective income tax rate from continuing operations was 33.2% and
32.8% for the twelve weeks ended March 22, 2005 and March 23, 2004,
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 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 2004 effective tax rates reflect a greater amount of
tax benefits arising from the impact of incentive stock options as compared to
2005.
9. SUBSEQUENT EVENTS
On March 31, 2005, the Board of Directors declared the Company's quarterly
cash dividend of $.195 per share payable April 25, 2005 to shareholders of
record on April 11, 2005.
-8-
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 in either the twelve weeks ended March
22, 2005, or the twelve weeks ended March 23, 2004.
There were 251 operating domestic Lone Star Steakhouse & Saloon ("Lone
Star") restaurants as of March 22, 2005. 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.
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.
RESTATEMENT OF PRIOR FINANCIAL INFORMATION
In December 2004, the Company commenced a review of its lease accounting
and leasehold depreciation policies. As a result of that review, the Company
determined it appropriate to restate its prior financial statements. The
information for the twelve weeks ended March 23, 2004, has been restated to
reflect depreciation for certain leasehold improvements and to recognize rent
expense on a straight line basis over the expected lease term, including renewal
option periods where failure to exercise such options would result in an
economic penalty. See Note 1 to the Consolidated Financial Statements in the
Company's 2004 Form 10-K for further discussion.
-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)
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)
-------------------------------
MARCH 22, 2005 MARCH 23, 2004
-------------- --------------
AS RESTATED
STATEMENT OF OPERATIONS DATA:
Net sales ........................................... 100.0% 100.0%
Costs and expenses:
Costs of sales ................................ 33.9 34.8
Restaurant operating expenses ................. 46.2 45.5
Depreciation and amortization ................. 2.7 2.9
----- -----
Restaurant costs and expenses ............ 82.8 83.2
General and administrative expenses ................. 6.9 6.4
Non-cash stock compensation expense ................ 0.4 0.6
----- -----
Income from operations .............................. 9.9 9.8
Other income, net ................................... 0.1 0.3
----- -----
Income from continuing operations before income taxes 10.0 10.1
Provision for income taxes .......................... 3.3 3.3
----- -----
Income from continuing operations ................... 6.7 6.8
Income (loss) from discontinued operations, net of
applicable income taxes ........................... (0.1) 0.1
----- -----
Net income .......................................... 6.6% 6.9%
===== =====
(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.
-10-
LONE STAR STEAKHOUSE & SALOON, INC.
TWELVE WEEKS ENDED MARCH 22, 2005 COMPARED TO TWELVE WEEKS ENDED MARCH 23,
2004 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales increased $4,757 or 3.0% to $165,353 for the twelve weeks ended
March 22, 2005, compared to $160,596 for the twelve weeks ended March 23, 2004.
Sales for the twelve weeks ended March 22, 2005 include twelve weeks of sales
for TXCC as compared with the prior period for fiscal 2004 which includes sales
of TXCC of approximately $9,800 covering an eight week period from the date of
acquisition. 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 decreased .7%. The
Company's average check increased 2.1% and guest counts decreased 2.75%.
Costs of sales, primarily food and beverages, decreased as a percentage of
net sales to 33.9% from 34.8% due primarily to decreased costs for beef which is
partly offset by increased costs for seafood items as a result of changes in the
menu-mix.
Restaurant operating expenses for the twelve weeks ended March 22, 2005
increased $3,428 to $76,412 compared to $72,984 in the prior year period and
increased as a percentage of net sales to 46.2% from 45.5%. Labor costs
increased .4% primarily as the result of increased management staffing at the
restaurants. Building maintenance costs increased .3% and utility costs,
primarily for natural gas, increased .2%. The increases were partially offset by
a decrease in the costs related to preopening expenses as such expenses for
fiscal 2005 were approximately $46 compared to $287 in the prior year period.
Depreciation and amortization decreased $226 for the twelve weeks ended
March 22, 2005 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 is partially
offset by the depreciation of assets related to the TXCC acquisition.
General and administrative expenses increased $1,158 for the twelve weeks
ended March 22, 2005 compared to the prior period. General and administrative
expenses reflect an increase of approximately $300 for increases related to the
TXCC acquisition for the additional four week period included in fiscal 2005 as
compared with the prior period. In addition, general and administrative costs
reflect higher compensation related costs, increased travel expenses, increased
Sarbanes-Oxley compliance costs as well as increased costs for legal services.
Non-cash stock compensation expense for the twelve weeks ended March 22,
2005 was $692 compared to $910 for the prior year period. The change is
primarily attributable to a charge of $204 compared to a charge of $760 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 an increase in the
amortization of other stock based compensation in 2005 compared to 2004.
Other income, net for the twelve weeks ended March 22, 2005 was $146
compared to $447 for the prior year. The decrease in other income results
primarily from a decrease in interest income and a decrease in gains from the
sale of assets in 2005 as compared to 2004.
The effective income tax rate from continuing operations was 33.2% and
32.8% for the twelve weeks ended March 22, 2005 and March 23, 2004,
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 incentive options are exercised to the extent that the exercise is
followed by a disqualifying disposition of the shares by the optionee. The 2004
-11-
period reflects a greater amount of tax benefits associated with the impact from
incentive stock options during the period as compared to 2005.
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 7 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 increase in its entirety. Historically, inflation has not had a
material impact on operating margins. During fiscal 2004, the Company
experienced significant volatility in beef prices as such prices for the year
were generally above historical levels. During the first quarter of 2005, beef
prices were below 2004 levels. However, to the extent that beef prices during
the remainder of fiscal 2005 were to rise 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 the
twelve weeks ended March 22, 2005 and March 23, 2004:
Twelve weeks ended
------------------
March 22, 2005 March 23, 2004
-------------- --------------
Net cash provided by operating activities ............ $ 20,553 $ 24,332
Net cash used in investing activities ................ (27,869) (15,462)
Net cash used in financing activities ................ (3,551) (3,016)
Net cash provided by (used in) discontinued operations (80) 837
-------- --------
Net increase (decrease) in cash and cash equivalents . $(10,947) $ 6,691
======== ========
The decrease in net cash provided by operating activities for the twelve
week period ended March 22, 2005 compared to the prior period is due primarily
to decreases in certain operating assets and increases in certain operating
liabilities during fiscal 2005 as compared to fiscal 2004.
Net cash used in investing activities increased primarily due to increases
in property and equipment additions and the purchase of short-term securities
partially offset by the acquisition of TXCC in 2004.
During the twelve week period ended March 22, 2005, the Company's
investment in property and equipment was $7,885 compared to $3,804 for the same
period in 2004.
During the twelve weeks ended March 22, 2005, the Company invested $20,270
in short term securities primarily consisting of investments in auction rate
securities with contractual maturities of up to 30 years. There were no
investments in short-term securities in the comparable period of 2004. These
auction rate securities have interest re-set dates that occur every 7 to 90 days
-12-
and can be actively marketed at ongoing auctions that occur every 7 to 90 days.
These investments are in investment-grade debt instruments such as
government-backed securities. Auction rate securities are classified as
available-for-sale and are reported on the balance sheet at par value, which
equals market value, as the rate on such securities resets every 7 to 90 days.
Consequently, interest rate movements do not affect the balance sheet valuation
of these fixed income investments.
On January 28, 2004, the Company acquired TXCC for an aggregate purchase
price of $23,496 which consisted of cash, shares of the Company's common stock
and the assumption of certain liabilities. The cash portion of the acquisition
was funded from the Company's existing cash balances and was $12,505, net of
cash acquired.
During the twelve week period ended March 22, 2005, the Company received
net proceeds of $30 from the issuance of 3,367 shares of its common stock due to
the exercise of stock options compared to proceeds of $672 from the issuance of
75,213 shares in the comparable period of fiscal 2004.
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 November 17, 2004
when the Board of Directors approved the repurchase of up to 2,026,190 shares of
the Company's common stock. During the twelve weeks ended March 22, 2005 and
March 23, 2004, the Company made no purchases of its common stock. At March 22,
2005, the Company may purchase up to 2,026,190 shares of its common stock
pursuant to its current 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 2005, the Company increased its
quarterly cash dividend from $.175 to $.195 per share commencing in the second
quarter of fiscal 2005. During the twelve weeks ended March 22, 2005, the
Company paid dividends of $3,581 or $.175 per share as compared to $3,688 or
$.175 per share in the same period in 2004.
At March 22, 2005, the Company had $81,338 in cash and cash equivalents
and short term investments. 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 March 22, 2005, 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
twelve weeks ended March 22, 2005, 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
28, 2004. 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's exposure to market risks was not significant during
the twelve weeks ended March 22, 2005.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rules 13a-15(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
Based on this evaluation, our principal executive officer and our
principal financial officer concluded that our disclosure controls
and procedures were effective as of the end of the period covered by
this Form 10-Q.
No change in the Company's internal control over financial reporting
(as defined in Rule 13a-15(f) of the Exchange Act) occurred during
the period covered by this report that materially affected or is
reasonably likely to materially affect the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The table below provides information concerning the repurchase of
shares of the Company's common stock during the twelve weeks ended
March 22, 2005. The Board of Directors on November 17, 2004
authorized the Company to repurchase up to 2,026,190 shares of the
Company's common stock. Since commencing the most recent
authorization for share repurchase, the Company has not repurchased
any shares of its common stock through March 22, 2005.
ISSUER PURCHASES OF EQUITY SECURITIES
(c)Total number (d) Maximum
of shares Number of Shares
(a) Total Purchased as Part that May Yet Be
Number of (b) Average of Publicly Purchased Under
Shares Price Paid per Announced Plans the Plans or
Period Purchased Share or Programs Programs
December 29, through - - - 2,026,190
January 25
January 26, through - - - 2,026,190
February 22
February 23, through - - - 2,026,190
March 22
Total - - - 2,026,190
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(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) 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: May 2, 2005 /s/ John D. White
------------------------
John D. White
Chief Financial Officer
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