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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______ TO ______
Commission file number 0-19907
LONE STAR STEAKHOUSE & SALOON, INC.
(Exact name of Registrant as specified in its charter)
Delaware 48-1109495
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
224 East Douglas, Suite 700
Wichita, Kansas 67202
(Address of principal executive offices) (Zip code)
(316) 264-8899
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes /X
/ No / /
As of March 11, 1997, the aggregate market value of the Registrant's
Common Stock held by non-affiliates of the Registrant was $975,204,378.
As of March 11, 1997, there were 40,957,556 shares outstanding of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III will be incorporated by reference to
certain portions of a definitive proxy statement which is expected to be filed
by the Registrant within 120 days after the close of its fiscal year.
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Business .................................................. 3
2. Properties .................................................. 14
3. Legal Proceedings............................................. 15
4. Submission of Matters to a Vote of Security Holders........... 15
PART II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters.............................. 15
6. Selected Financial Data...................................... 16
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 19
8. Financial Statements and Supplementary Data.................. 24
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................. 24
PART III
10. Directors and Executive Officers of the Registrant.......... 24
11. Executive Compensation...................................... 24
12. Security Ownership of Certain Beneficial Owners
and Management......................................... 25
13. Certain Relationships and Related Transactions.............. 25
PART IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.................................. 25
Signatures................................................. 27
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PART I
ITEM 1. BUSINESS
BACKGROUND
As of March 11, 1997, Lone Star Steakhouse & Saloon, Inc. (the
"Company") owned and operated a chain of 207 mid-priced, full service, casual
dining restaurants located in the United States which operate under the
tradename Lone Star Steakhouse and Saloon("Lone Star" or "Lone Star Steakhouse &
Saloon"). In addition, as of March 11, 1997 the Company owned and operated five
upscale steakhouse restaurants, three operating as Del Frisco's Double Eagle
Steak House and two operating as Sullivan's Steakhouse. Internationally, the
Australian Joint Venture operates 21 restaurants in Australia. The Lone Star
restaurants embrace a Texas-style concept featuring Texas artifacts and music.
The Lone Star restaurants serve mesquite grilled steaks, ribs, chicken and fish.
Americans consumed an estimated 68 pounds of beef on a per capita basis
in 1996 (Source: United States Department of Agriculture), up from an estimated
63 pounds of beef in 1993, and steak continues to be one of the most frequently
ordered dinner entrees at restaurants. Company management believes the limited
menu of its restaurants, which concentrates primarily on high quality USDA
choice-graded steaks, and the appeal of its "Texas Roadhouse" ambiance,
distinguishes the Lone Star restaurants and provides the Company with a
competitive advantage.
The Company opened 45 new domestic Lone Star restaurants, two
Sullivan's Steakhouses, one Del Frisco's, and the Australian Joint Venture
opened eleven new Lone Star restaurants in 1996.
In 1995 the Company decided to develop additional steak restaurant
concepts in the upscale segment. The Company entered the upscale steakhouse
market in September 1995, by acquiring the intellectual property rights, marks
and tradename of Del Frisco's Double Eagle Steak House restaurant ("Del
Frisco's"), the existing Del Frisco's restaurant located in Dallas, Texas, and a
Del Frisco's restaurant under construction in Fort Worth, Texas (the "Del
Frisco's Acquisition"). The Fort Worth location opened in April of 1996. The
Company opened the third Del Frisco's unit in Denver, Colorado in January of
1997. The average check per customer for the Del Frisco's concept is
approximately $60. See "Expansion into Upscale Markets" for a description of the
Del Frisco's Acquisition.
The Company also developed another upscale steak restaurant concept
under the tradename of Sullivan's Steakhouse ("Sullivan's"). The average check
per customer in this market is approximately $40. The Company's first Sullivan's
Steakhouse restaurant opened in Austin, Texas in May 1996 and a second
Sullivan's Steakhouse opened in Indianapolis, Indiana in November 1996. See
"Expansion into Upscale Market" for a description of the Sullivan's concept.
RESTAURANT CONCEPT
Lone Star restaurants are positioned as "destination restaurants" that
attract loyal clientele. The Lone Star restaurants embrace a Texas-style concept
that features Texas artifacts and country and western music. The authentic
"Texas Roadhouse" concept was developed to capitalize on the enduring popularity
of Texas related themes. The exciting and vibrant atmosphere created by the
restaurants' "Texas Roadhouse" ambiance is enhanced by free buckets of roasted
peanuts, specially selected upbeat country western music, neon beer signs and
peanut-shell-littered floors. The decor includes planked wooden floors, dim
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lighting, flags and other Texas memorabilia, all of which enhance the casual
dining experience and establish a distinct identity for the Lone Star Steakhouse
& Saloon restaurant chain. Lone Star is further distinguished by its high
quality, USDA choice-graded steaks which are hand-cut fresh daily at each
restaurant and mesquite grilled to order. A meat counter visible from the dining
area enables customers to have the opportunity to view and personally select
their own steaks. Meals are served in generous "Texas-sized" portions and full
liquor and bar service is available. Lone Star restaurants are open seven days a
week and serve both lunch and dinner with an average check per customer for 1996
of approximately $9.00 at lunch and $19.50 at dinner.
Del Frisco's is designed to serve a sophisticated clientele, including
business related dining occasions. The Del Frisco's concept embraces an elegant
and timeless early twentieth century motif. The concept features old ways of
cooking, such as master broiling and roasting. Del Frisco's decor and ambiance
include dark woods, fabric walls, fireplaces, separate dining rooms and soft
background music featuring old favorites. All of these elements enhance the
dining experience and establish a distinct identity for the Del Frisco's
restaurant. Del Frisco's is further distinguished by its high quality USDA
prime-graded steaks which are hand-cut in each restaurant. Del Frisco's
restaurants serve dinner only, and are open Monday through Saturday with an
average guest check of approximately $60.
Sullivan's embraces a 1940's steakhouse theme with nostalgic art deco
influences that feature music from the big band era. The decor includes an open
kitchen, separate dining rooms, dark wood paneling, carpeted floors, warm
lighting and white table cloths. Sullivan's is distinguished by its high quality
Certified Angus BeefTM steaks, chops and seafood. Sullivan's restaurants serve
dinner only, and are open Monday through Saturday with an average guest check of
approximately $40.
CORPORATE STRATEGY
The Company has positioned itself as "The steak company," which will
operate three distinct steakhouse restaurant concepts. The primary growth
vehicle will be the Lone Star Steakhouse & Saloon restaurants concept which
operate in the mid-scale steak segment. Lone Star Steakhouse & Saloon
restaurants emphasize the following strategic elements:
. Positioning in the mid-priced, full-service casual dining
segment of the restaurant industry.
. The popular brand of Texas provides a unique and enduring
attraction to a broad and diverse demographic and
socio-economic mix of customers in the 25 to 54 age group.
. Generous "Texas-sized" portions offered at moderate prices.
. High quality and attentive service with each waitperson
generally being assigned to no more than three tables at
dinner to ensure customer satisfaction.
. Consistent high quality products through careful ingredient
selection, food preparation and aging of steaks.
The Company believes that it can distinguish itself in the upscale market by
employing many of the strategies that have been successful in the mid-priced
steakhouse market. The Company will continue to emphasize attentive service and
consistent, high quality food products. The Company expects that it can
successfully apply its restaurant operations and management systems to the
upscale markets. See "Restaurant Concept" for a description of the elements of
these concepts.
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Internationally, the Company will continue to develop Lone Star
Steakhouse & Saloon restaurants in various countries aligning itself with proven
local operators. The Company also believes that its two upscale steak concepts
have international development opportunities.
UNIT ECONOMICS
The Company's management team focuses on selecting locations with the
potential of producing significant revenues while controlling capital
expenditures and rent as a percentage of net sales. The Company's Lone Star
restaurants averaged approximately $2.5 million in sales on an annualized basis
during 1996. Of the 207 Lone Star restaurants open at March 11, 1997, 82 were
leased facilities and had an average cash investment of $1,050,000 and 125 were
owned and had an average cost for land acquisition, construction, equipment and
pre-opening expenses of $2,091,000. In the future, the Company anticipates that
a greater proportion of its new Lone Star restaurant locations will be purchased
rather than leased, and anticipates an average total cost per unit of between
$1.6 million and $2.2 million.
The Company anticipates the average total investment per restaurant for
a typical Del Frisco's restaurants and Sullivan's restaurants will range from
$1.6 million to $2.5 million, but expects that the sales to investment ratio
will be similar to that of the Lone Star Steakhouse & Saloon restaurants.
MENU
The dinner menu at a Lone Star Steakhouse & Saloon restaurant features
a limited selection of high quality, specially seasoned and mesquite grilled
steaks, ribs, chicken and fish. All dinners offer a complete meal including
salad, bread and butter and a choice of baked potato, baked sweet potato, steak
fries or Texas rice. The lunch menu offers a selection of hamburgers, chicken
sandwiches, luncheon steaks, ribs, soups and salads. Depending on local
availability and quality, a fresh fish selection is also offered at lunch and
dinner. The lunch and dinner menus also include appetizers and desserts,
together with a full bar service. Alcoholic beverage service accounts for
approximately 15% of the Company's net sales.
The menu at Del Frisco's features high quality USDA prime-graded
steaks, chops, seafood, and quality side dishes. Del Frisco's wine list offers
over 300 high quality wines and a full bar. Alcoholic beverage service accounts
for approximately 30% of the restaurants sales.
The menu at Sullivan's features high quality Certified Angus Beefo
steaks, chops, seafood and quality side dishes. Sullivan's also features a
number of high quality wines and full bar service. Alcoholic beverage service
accounts for approximately 40% of the restaurants sales.
SITE SELECTION
The Company believes the site selection process is critical in
determining the potential success of a particular restaurant and senior
management devotes significant time and resources to analyzing each prospective
site. A variety of factors are considered in the site selection process,
including the specific steakhouse concept to be developed, local market
demographics, site visibility and accessibility and proximity to significant
generators of potential customers such as major retailers, retail centers and
office complexes, office and hotel concentrations and entertainment centers
(stadiums, arenas, theaters, etc.). The Company also reviews potential
competition and attempts to analyze the profitability of other national chain
restaurants operating in the area.
Of the 207 existing Lone Star Steakhouse & Saloon restaurants at March 11,
1997, 82 are leased and 125 are owned locations. As of March 11, 1997, the
Company has entered into agreements to open 49 additional locations, 18 under
lease and 31 by purchase. The Company
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will continue to purchase additional sites in the future, when it is cost
effective. The Company utilizes a prototype building for its Lone Star
Steakhouse & Saloon restaurants, of which, currently, there are 83 units open
and 21 units under development. Leases are negotiated generally with initial
terms of three to five years, with multiple renewal options. The Company has
generally required between 150 and 280 days after the signing of a lease, or the
closing of a purchase to complete construction and open a new restaurant.
Additional time is sometimes required to obtain certain government approvals and
licenses, such as liquor licenses.
Of the three Del Frisco's as of March 11, 1997 two are owned and one is
leased. As of March 11, 1997 the two existing Sullivan's are both leased and the
Company has entered into lease agreements for three additional Sullivan's
locations.
RESTAURANT LAYOUT
The Company believes that the decor and interior design of its
restaurants are significant factors in its success. The Lone Star Steakhouse &
Saloon restaurants' open layout permits dining customers to view the bar and
Texas memorabilia and enhance the casual dining atmosphere. The Company also
designs its kitchen space for efficiency of work flow, thereby minimizing the
amount of space required.
Lone Star Steakhouse & Saloon restaurants currently average
approximately 5,800 square feet and include a dining area with seating for
approximately 220 customers. In addition, a bar area is located adjacent to the
dining room primarily to accommodate customers waiting for dining tables or to
accommodate overflow. In some restaurants, an outside patio area can provide
additional seating. The Company anticipates that future Lone Star restaurants
will average approximately 5,500 square feet.
The initial Del Frisco's restaurant is approximately 10,000 square feet
and seats approximately 350 persons. Future Del Frisco's restaurants are planned
to be approximately 7,000-8,000 square feet and will include a dining area for
approximately 175-200 customers. The first Sullivan's restaurant, in Austin,
Texas was 7,500 square feet and includes a dining area for approximately 180-200
customers. In August of 1996 the Company executed an amendment to lease an
additional 4,500 square feet of space which will increase the space to 12,000
square feet and increase overall seating to 320. Future Sullivan's restaurants
are planned to be approximately 7,000-8,000 square feet and will include a
dining area for approximately 175-200 customers. In addition, Del Frisco's
features a bar area adjacent to the dining room primarily to accommodate
customers waiting for dining tables. Sullivan's bar area is separate from the
dining room and is designed to be a destination unto itself, featuring live
music and an upbeat, convivial atmosphere.
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RESTAURANT LOCATIONS AS OF MARCH 11, 1997
The following table sets forth the location of the Company's
existing (207) domestic Lone Star Steakhouse & Saloon restaurants:
ALABAMA GEORGIA MARYLAND NORTH CAROLINA SOUTH CAROLINA
Anniston Atlanta Columbia Asheville Greenville
Birmingham Augusta Gaithersburg Charlotte (4) Myrtle Beach (2)
Huntsville Laurel Durham Spartanburg
Mobile IDAHO Waldorf Fayetteville
Montgomery Boise Greensboro (2) SOUTH DAKOTA
Tuscaloosa MICHIGAN Greenville Sioux Falls
ILLINOIS Ann Arbor Jacksonville
ALASKA Bloomington Detroit (7) Raleigh (3) TENNESSEE
Anchorage Bradley Jackson Rocky Mount Jackson
Champaign Grand Rapids Winston-Salem Johnson City
ARIZONA Chicago (9) Memphis (3)
Mesa Peoria MISSISSIPPI NORTH DAKOTA
Phoenix (3) Rockford Hattiesburg Fargo UTAH
Springfield Jackson Layton
ARKANSAS OHIO Salt Lake City
Ft. Smith INDIANA MISSOURI Akron
Little Rock (2) Anderson Branson Canton VIRGINIA
Springdale Evansville Independence Cincinnati (3) Alexandria
Fort Wayne Springfield Cleveland (4) Centreville
COLORADO Indianapolis (4) St. Louis (4) Columbus (5) Chesapeake
Colorado Springs Lafayette Dayton (2) Falls Church
Denver (6) South Bend NEBRASKA Lancaster Fredericksburg
Fort Collins Lincoln Middletown Herndon
Loveland IOWA Omaha (2) Niles Norfolk
Cedar Rapids Springfield Potomac Mills
DELAWARE Coralville NEVADA Toledo (2) Richmond (3)
Dover Davenport Las Vegas (4) Youngstown Virginia Beach
Wilmington (2) Des Moines
Waterloo NEW JERSEY OKLAHOMA WEST VIRGINIA
FLORIDA Bridgewater Oklahoma City Beckley
Bradenton KENTUCKY Cherry Hill Tulsa Charleston
Clearwater Bowling Green Eatontown Huntington
Coral Springs Florence Hanover Township PENNSYLVANIA
Fort Lauderdale Lexington Hazlet Allentown WISCONSIN
Fort Myers Louisville Marlton Harrisburg Appleton
Gainesville Turnersville Johnstown Racine
Lakeland LOUISIANA Vorhees Lancaster
Ocala Baton Rouge Wayne Philadelphia
Orlando Lafayette Pittsburgh (4)
Pensacola Monroe NEW MEXICO Pottstown
Port Richey New Orleans (2) Albuquerque Reading
Sarasota Shreveport Wilkes-Barre
St. Petersburg York
Tampa
The following table sets forth the location of the Company's existing (3) Del
Frisco's restaurants and (2) Sullivan's restaurants:
DEL FRISCO'S SULLIVAN'S
Denver, CO Indianapolis, IN
Dallas, TX Austin, TX
Fort Worth, TX
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EXPANSION STRATEGY - LONE STAR STEAKHOUSE AND SALOON RESTAURANTS
The Company is continuing its Lone Star Steakhouse & Saloon expansion
program pursuant to which it opened 36 restaurants in 1993, 48 restaurants in
1994, 45 restaurants in 1995, 45 restaurants in 1996 and intends to open at
least 60 Lone Star Steakhouse & Saloon restaurants in 1997, all of which are
expected to be Company-owned and operated. The Company plans to develop such new
restaurants in its existing markets and expand into new markets that meet the
Company's criteria.
As of March 11, 1997, the Company had entered into agreements to open
49 additional Lone Star Steakhouse & Saloon locations, 18 under lease and 31 by
purchase. The Company is also actively negotiating for additional leases or
purchases at a number of sites for all three steakhouse concepts.
The Company intends to continue to expand its Lone Star Steakhouse &
Saloon business outside the United States. Pursuant to a joint venture
arrangement covering Australia and New Zealand (the "Australian Joint Venture"),
the Australian Joint Venture owns and operates 21 restaurants. The Company plans
to open ten units in Australia in 1997. A licensed Lone Star Steakhouse & Saloon
restaurant opened in Guam in mid-1995. The Company is also contemplating
entering into restaurant development joint ventures, licensing or other
corporate partnership arrangements in other foreign countries.
In June 1996 the Company terminated its joint venture in Europe wherby
it divested its interest in three existing restaurants and one under
construction. Such restaurants will no longer operate as Lone Star Steakhouse &
Saloon restaurants.
EXPANSION INTO UPSCALE MARKETS
While the Company intends to continue to have a substantial and
increasing presence in the mid-priced, full service, casual dining steakhouse
restaurant market, the Company believes that expansion opportunities exist in
the upscale steakhouse markets.
To enter the upscale market, in September 1995, the Company acquired
the intellectual property rights, marks and tradename of Del Frisco's Steak
House, the existing Del Frisco's located in Dallas, Texas, and a Del Frisco's
under construction in Fort Worth, Texas which opened in April 1996. The Company
also became the licensor of two Del Frisco restaurants in Houston, Texas and
Orlando, Florida. The Company has no plans for future franchising.
The Company opened an additional Del Frisco's restaurant, in Denver,
Colorado in January 1997. The Company plans to expand its entry into the upscale
steakhouse market, where average checks are $60 or more, by developing the Del
Frisco's format and concept primarily in the U.S. The Company expects to open
two or three Del Frisco's restaurants in 1997 in the United States.
-8-
The Company also developed a second upscale steak restaurant concept
under the tradename Sullivan's Steakhouse, where the average check per customer
is approximately $40. The Company opened the first restaurant in May 1996 in
Austin, Texas and opened an additional restaurant in November 1996 in
Indianapolis, Indiana. The Company expects to open four to six Sullivan's units
in 1997 in the United States.
MARKETING
Lone Star Steakhouse & Saloon restaurants are "destination location
restaurants" that focus on the mid-priced full service casual dining market
segments. The Company has relied principally on its commitment to customer
service, an excellent price-value relationship and the unique "Texas Roadhouse"
ambiance of its restaurants to attract and retain customers. Accordingly, the
Company has focused its resources on providing its customers with superior
service, value and an exciting and vibrant atmosphere, and has relied primarily
on word of mouth to attract new customers. The Company also utilizes radio and
billboard advertising to promote its restaurants and build customer awareness.
The Company utilizes a similar strategy for its Del Frisco's and Sullivan's
restaurants, in addition to various local store marketing efforts. The Company
also employs some print and direct mail advertising, and conducts some local
restaurant promotions. To create additional Lone Star name recognition and
customer identification, the Company sells T-shirts and other items bearing the
Lone Star name and logo.
RESTAURANT OPERATIONS AND MANAGEMENT
The Lone Star Steakhouse & Saloon concept has evolved from various
steakhouse restaurants that certain of the Company's principal stockholders have
operated since 1985. In addition, the restaurant operations and management
systems are an outgrowth of systems and controls that were developed by the
Company's senior management and have been successfully used to manage a large
number of restaurants located in numerous states. Management utilizes
substantially the same operational, financial and management systems for all
three steakhouse concepts.
The Company strives to maintain quality and consistency in its
restaurants through careful hiring, training and supervision of personnel and
the establishment of standards relating to food and beverage preparation,
maintenance of facilities and conduct of personnel.
The Company maintains financial and accounting controls for each of its
restaurants through the use of centralized accounting and management information
systems. Sales information is collected daily from each restaurant, and
restaurant managers are provided with daily, weekly and twenty-eight day period
operating statements for their locations. Cash is controlled through daily
deposits of sales proceeds in local operating accounts, the balances of which
are wire transferred weekly to the Company's principal operating account.
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The management team for a typical Company restaurant consists of one
general manager and three managers. Each restaurant also employs a staff
consisting of approximately 50 to 90 hourly employees, many of whom work
part-time. Typically, each general manager reports directly to a district
manager who, in turn, reports to the Company's senior vice president of
operations. Restaurant managers complete an eight week training program during
which they are instructed in areas including food quality and preparation,
customer satisfaction, alcoholic beverage service, governmental regulations
compliance, liquor liability avoidance and employee relations. Restaurant
management is also provided with a proprietary operations manual relating to
food and beverage preparation, all areas of restaurant management and compliance
with governmental regulations. Working in concert with restaurant managers, the
Company's senior management defines operations and performance objectives for
each restaurant and monitors implementation. An incentive cash bonus program has
been established in which each restaurant's management team participates. Awards
under the incentive plan are tied to achievement of specified operating targets.
Senior management regularly visits Company's restaurants and meets with the
respective management teams to ensure that the Company's strategies and
standards of quality in all respects of restaurant operations and personnel
development.
The Company utilizes a comprehensive peer review reporting system for
its general managers and district managers. Within seven days after the close of
each twenty-eight day accounting period, profit and loss statements are produced
and, subsequently, the district managers and the Company's senior management
meet in person to review operating results for each district. The next week a
meeting is arranged during which the general manager of each restaurant reviews
the profit and loss statement of the restaurant with a district manager and
other general managers who report to the district manager. The participants
offer each other feedback on their respective performances and suggest ways of
improving profitability. The Company believes that the peer review system
enables each general manager to benefit from the collective experience of all of
the Company's management.
The Company believes that customer service and satisfaction are keys to
the success of restaurant operations. The Company's commitment to customer
service and satisfaction is evidenced by several Company practices and policies,
including periodic visits by restaurant management to customers' tables, active
involvement of restaurant management in responding to customer comments and
assigning waitpersons to a limited number of tables, generally three for dinner
and four for lunch. Teamwork is emphasized through a runner system for
delivering food to the tables that is designed to serve customers in an
efficient and timely manner.
Each new restaurant employee of the Company participates in a training
program during which the employee works under the close supervision of a
restaurant manager, or experienced key employee. Management strives to instill
enthusiasm and dedication in its employees and to create a stimulating and
rewarding working environment where employees know what is expected of them in
measurable terms. Management continuously solicits employee feedback concerning
restaurant operations and strives to be responsive to the employees' concerns.
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PURCHASING
The Company negotiates directly with suppliers for food and beverage
products to ensure consistent quality and freshness of products and to obtain
competitive prices. The Company purchases substantially all food and beverage
products from local or national suppliers. Food and supplies are shipped
directly to the restaurants, although invoices for purchases are sent to the
Company for payment. The Company does not maintain a central product warehouse
or commissary. The Company has not experienced any significant delays in
receiving restaurant supplies and equipment.
From time to time, the Company engages in forward pricing and may
consider other hedging strategies with regard to its meat and other food costs
in order to minimize the impact of potential fluctuations in prices. This
practice could help stabilize the Company's food costs during times of
fluctuating prices.
MANAGEMENT INFORMATION SYSTEMS
The Company utilizes an in-store computer-based management support
system which is designed to improve labor scheduling and food cost management,
provide corporate management quicker access to financial data and reduce the
restaurant manager's administrative time. Each general manager uses the system
for production planning, labor scheduling and food cost variance analysis. The
system generates reports on sales, bank deposit data and variance data to the
Company's management on a daily basis.
The Company generates weekly consolidated sales reports and food and
labor cost variance reports at its corporate headquarters, as well as detailed
profit and loss statements for each restaurant every four weeks. Additionally,
the Company monitors the average check, customer count, product mix and other
sales trends on a daily basis.
ACCOUNTING AND ADMINISTRATIVE SERVICES
The Company utilizes certain accounting and administrative services
provided by Coulter Enterprises, Inc. pursuant to the terms of a services
agreement. These services were provided to the Company during 1996 at an annual
fee of $1,272,000, plus an additional fee of $416 per restaurant per 28-day
period plus reimbursement of all out-of-pocket costs and expenses. For 1997, the
fixed annual charge is $2,010,000 and the per restaurant per 28-day period fee
is $440. The increase in the fixed charge is due to an increase in the number of
restaurants operated by the Company. In the future, the Company may satisfy its
accounting and administrative needs by hiring employees directly. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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COMPETITION
Competition in the restaurant industry is increasingly intense. The
Company operates full service restaurants primarily on the basis of quality of
food and service, ambiance, location and price-value relationship. The Company
also competes with a number of other restaurants within its markets, including
both locally owned restaurants and regional or national chains. The Company
believes that its "Texas Roadhouse" concept, attractive price-value relationship
and quality of food and service enable it to differentiate itself from its
competitors. The Company has limited operating experience in the upscale
steakhouse market. While the Company believes that its restaurants are
distinctive in design and operating concept, it is aware of restaurants that
operate with similar concepts. The Company also competes with other restaurants
and retail establishments for sites. Many of the Company's competitors are
well-established in the mid-priced mid-scale and upscale dining segment and
certain competitors have substantially greater financial, marketing and other
resources than the Company. The Company believes that its ability to compete
effectively will continue to depend upon its ability to offer high quality,
competitively priced food in a full service, distinctive dining environment.
GOVERNMENT REGULATION
The Company's restaurants are subject to numerous federal, state and
local laws affecting health, sanitation, safety and ADA accessibility standards,
as well as to state and local licensing regulation of the sale of alcoholic
beverages. Each restaurant has appropriate licenses from regulatory authorities
allowing it to sell liquor, beer and wine, and each restaurant has food service
licenses from local health authorities. The Company's licenses to sell alcoholic
beverages must be renewed annually and may be suspended or revoked at any time
for cause, including violation by the Company or its employees of any law or
regulation pertaining to alcoholic beverage control, such as those regulating
the minimum age of patrons or employees, advertising, wholesale purchasing, and
inventory control. The failure of a restaurant to obtain or retain liquor or
food service licenses could have a material adverse effect on its operations. In
order to reduce this risk, each restaurant is operated in accordance with
standardized procedures designed to assure compliance with all applicable codes
and regulations.
The Company may be subject in certain states to "dram-shop" statutes,
which generally provide a person injured by an intoxicated person the right to
recover damages from an establishment that wrongfully served alcoholic beverages
to the intoxicated person. The Company carries liquor liability coverage as part
of its existing comprehensive general liability insurance.
A stockholder of the Company is also the owner of a wholesale liquor
distributorship in the State of Kansas. Because of this relationship,
"tied-house" laws may prohibit the Company from obtaining liquor licenses in
certain states. However, the Company has not experienced difficulties in
obtaining licenses at any of its restaurants. The Company does not believe that
its relationship with such stockholder will have a material adverse effect on
the Company's future operations.
The development and construction of additional restaurants will be subject to
compliance with
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applicable zoning, land use and environmental regulations. The Company's
restaurant operations are also subject to federal and state minimum wage laws
governing such matters as working conditions, overtime and tip credits and other
employee matters. Significant numbers of the Company's food service and
preparation personnel are paid at rates related to the federal minimum wage and,
accordingly, further increases in the minimum wage could increase the Company's
labor costs.
TRADEMARKS
The Company regards its marks, Lone Star Steakhouse & Saloon(R) and
Lone Star Cafe(R), Del Frisco's(R), Double Eagle Steak House(R), and Sullivan's
Steakhouse(R) as having significant value and as being an important factor in
the marketing of its restaurants. The Company is aware of names and marks
similar to the service marks of the Company used by other persons in certain
geographic areas. However, the Company believes such uses will not have a
material adverse effect on the Company. The Company's policy is to pursue
registration of its marks whenever possible and to oppose vigorously any
infringement of its marks.
In December 1993, the Company filed a trademark infringement suit
against a restaurant operator who operated two steakhouse restaurants in
metropolitan Atlanta utilizing the mark and tradename Lone Star Steaks. By Order
dated April 24, 1995, the United States District Court for the Northern District
of Georgia, entered a permanent injunction barring the Company from using or
displaying the "Lone Star Steahouse & Saloon name , trademark or service mark"
or any similar imitation of that mark or the "Lone Star Steaks" mark in
connection with the operation of any restaurant in Georgia. The permanent
injunction also encompasses any other acts within that state that unfairly
compete with Lone Star Steaks, Inc., trade off that company's reputation or
goodwill, or unlawfully injure its business reputation in any manner. The
permanent injunction also encompasses the Company's use of its mark in
connection with clothing within the state of Georgia. The Court further awarded
$60,000 in compensatory and liquidated damages and approximately $113,000 in
attorney's fees and costs. On February 24, 1997, the Court of Appeals of the
Eleventh Circuit issued its decision whereby it affirmed all of the district
court's rulings, except for the portion which granted attorney fees under the
Georgia Fair Business Practices Act. The issue of attorney fees was vacated and
remanded to the district court for consideration pursuant to the Federal Lanham
Act. The Company has filed an appeal en banc.
On June 2, 1996, the License Agreement for the Del Frisco's restaurant
in Houston, Texas expired. The licensee refused to cease using the Company's
marks. Accordingly, a lawsuit was filed in Federal District Court in the State
of Texas on September 9, 1996 seeking to enjoin licensee from further use of the
Company's marks and seeking damages for infringement.
EMPLOYEES
As of March 11, 1997, the Company employed approximately 15,800
persons, 9 of whom are executive officers, 14 of whom are district managers,
approximately 798 of whom are restaurant management personnel and the remainder
of whom are hourly restaurant personnel. None of the Company's employees are
covered by a collective bargaining agreement. The Company considers its employee
relations to be good.
-13-
ITEM 2. PROPERTIES
As of March 11, 1997, the Company leased 82 and owned 125 of its Lone
Star restaurant locations. As to Del Frisco's, the Company owned two and leased
one Del Frisco's Steakhouses. The Company leased two locations for its Sullivan
's concept. Lease terms are generally from three to five years, with multiple
renewal options. All of the Company's leases provide for a minimum annual rent,
and some leases provide for additional rent based on sales volume at the
particular location over specified minimum levels. Generally, the leases are net
leases which require the Company to pay the costs of insurance, taxes and a pro
rata portion of lessors' common area costs.
The Company intends to continue to purchase restaurant locations where
cost-effective. As of March 11, 1997, the Company had entered into agreements to
open 49 additional Lone Star locations, 18 under lease and 31 by purchase.
Additionally the Company had entered into agreements to open three additional
Sullivan's under leases.
The Company's executive offices are located at 224 East Douglas, Suite
700, Wichita, Kansas, 67202 which space is provided pursuant to the terms of the
existing management agreement with Coulter Enterprises, Inc. The Company
believes that there is sufficient office space available at favorable leasing
terms in the Wichita, Kansas area to satisfy the additional needs of the Company
that may result from future expansion.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the financial condition or results of operations of the
Company. See "Business-Trademarks" for a description of litigation involving the
use of trademarks.
-14-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the holders of the Company's
Common Stock during the fourth quarter of the Company's fiscal year ended
December 31, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock is traded over-the-counter on the Nasdaq
National Market System (ticker symbol: STAR). The following table sets forth,
for the periods indicated, the high and low sale prices for the Common Stock, as
reported by Nasdaq.
BID PRICES
----------
CALENDAR 1996 HIGH LOW
- ------------------------ ---- ---
First Quarter 40 7/8 31 1/8
Second Quarter 45 37 3/8
Third Quarter 39 7/8 30
Fourth Quarter 32 25 3/8
BID PRICES
----------
CALENDAR 1995 HIGH LOW
- ------------------------ ---- ---
First Quarter 30 3/8 18 (1/2)
Second Quarter 34 15/16 27 1/8
Third Quarter 45 29 7/8
Fourth Quarter 42 3/4 34 7/8
DIVIDENDS
The Company has not paid any cash dividends on its Common Stock and
does not intend to pay cash dividends on its Common Stock for the foreseeable
future. The Company intends to retain future earnings to finance future
development.
NUMBER OF STOCKHOLDERS
As of March 11, 1997, there were 546 holders of record of the Company's
Common Stock. The Company believes that there are in excess of 8,000 beneficial
owners of the Company's Common Stock.
-15-
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data.
The selected consolidated data of the Company as of December 31, 1996, December
26, 1995, December 27, 1994, December 28, 1993, and December 29, 1992, and for
each of the five years in the period ended December 31, 1996, were derived from
the Company's audited consolidated financial statements. The pro forma data set
forth below for the periods presented are unaudited and have been prepared by
management solely to facilitate period-to-period comparison and do not represent
the actual results of operations for the periods presented. Said pro forma
adjustments reflect the income tax provisions at the estimated effective federal
and state income tax rates applicable to the operations of the CCC Group (see
Note 2 to the Company's consolidated financial statements) which were taxed as
S-Corporations for income tax purposes prior to their acquisition by the Company
in August 1995.
-16-
The following table should be read in conjunction with the Financial Statements
and Notes thereto included elsewhere in this Form 10-K.
YEAR ENDED IN DECEMBER,(1)
-------------------------------------------------------------------------------
(Dollars in thousands except share data)
1996 1995 1994 1993 1992(2)
---- ---- ---- ---- ----
Income Statement Data:
Net sales $491,754 $ 340,857 $ 215,800 $ 112,263 $ 40,602
Costs and expenses:
Costs of sales 172,338 120,871 76,888 40,981 14,941
Restaurant operating expenses 167,871 116,703 71,996 36,979 15,726
General and administrative expenses 21,285 12,693 8,117 3,916 1,359
Loss on divestiture of foreign operations 8,557 - - - -
Depreciation and
amortization 28,384 19,817 12,989 6,744 1,658
---------- ----------- ----------- ---------- ------------
Total costs and expenses 398,435 270,084 169,990 88,620 3,684
---------- ----------- ----------- ----------- ---------
Income from operations 93,319 70,773 45,810 23,643 6,918
Other income, net 3,682 2,910 1,263 1,840 359
---------- ----------- ----------- ---------- ------------
Income before provision for
income taxes and minority
interest 97,001 73,683 47,073 25,483 7,277
Provision for income taxes 37,518 26,820 16,900 9,112 2,765
Minority interest 584 705 - - -
---------- ----------- ----------- ---------- ------------
Net income $ 60,067 $ 47,568 $ 30,173 $ 16,371 $ 4,512
========== =========== =========== ========== ============
Primary net income per share $ 1.49 $ 1.27 $ 0.87 $ 0.49 $ 0.16
========== =========== =========== ========== ============
Primary weighted average shares
outstanding 40,393,813 37,537,891 34,608,610 33,339,007 28,872,151
========== ========== ========== ========== ==========
Unaudited pro forma information based
on providing for income taxes
on pooled S-Corporations of
CCC Group prior to acquisi-
tion at the estimated tax rate:
Income before income
taxes, net of minority
interest $ 74,388 $ 47,073 $ 25,483 $ 7,277
Pro forma provision for
income taxes 27,653 17,884 9,696 2,813
----------- ----------- ---------- ------------
Pro forma net income $ 46,735 $ 29,189 $ 15,787 $ 4,464
=========== =========== ========== ============
Pro forma primary net income per
share $ 1.25 $ 0.84 $ 0.47 $ 0.15
=========== =========== ========== ============
-17-
At fiscal year end in December, (1)
-----------------------------------------------------------
(Dollars in thousands except share data)
1996 1995 1994 1993 1992 (2)
-------- -------- -------- ------ -------
Balance Sheet Data:
Working capital $126,244 $ 59,880 $ 37,618 $ 83,606 $ 39,131
Total assets 542,152 358,218 204,028 164,763 71,029
Long-term debt,
including current
portion - 387 4,318 2,953 3,350
Stockholders' equity 495,239 322,811 180,072 151,768 61,891
- ------------------
(1) The Company operates on a 52 or 53 week fiscal year ending the last
Tuesday in December. The fiscal quarters for the Company consist of
accounting periods of 12, 12, 12, and 16 or 17 weeks, respectively.
The Company's 1992 fiscal year ended on December 29 and its 1993,
1994, 1995, and 1996 fiscal years ended on December 28, 29, 26, and
31, respectively.
(2) Reflects the operations of eight restaurants acquired on March 19,
1992, from Lone Star Steakhouse & Saloon Group concurrently with the
Company's Initial Public Offering in an exchange transaction whereby
the Company issued 5,308,432 shares of its common stock. The
acquisition was accounted for using the purchase method of
accounting.
-18-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction
with the information set forth under "Selected Financial Data" and the
consolidated financial statements and including the notes thereto included
elsewhere herein.
The Company began 1994 with 67 Lone Star restaurants, opened 48
restaurants during 1994, 45 restaurants during 1995 and 45 restaurants during
the year ended December 31, 1996.
Pre-opening costs include labor costs, costs of hiring and training
personnel and certain other costs relating to opening new restaurants, and are
capitalized and amortized over a 12 month period, beginning in the period that
the restaurants opens.
After acquiring the rights to operate the Del Frisco's Double Eagle
Steak House restaurant located in Dallas, Texas, the Company opened two
additional Del Frisco's restaurants, one in Fort Worth, Texas in April 1996 and
one in Denver, Colorado in January 1997. The Company also licenses a Del
Frisco's restaurant in Orlando, Florida. The Company plans to expand its entry
into the upper-end steakhouse market, where average checks are $60 or more, by
developing the Del Frisco's Double Eagle Steakhouse format and concept. The
Company expects to open two or three Del Frisco's Double Eagle Steak House
restaurants in 1997.
The Company is also developing another upscale steak restaurant concept
under the tradename Sullivan's Steakhouse, where the average check per customer
is approximately $40. The Company opened the first restaurant in May 1996 in
Austin, Texas and opened an additional restaurant in November 1996 in
Indianapolis, Indiana. The Company intends to develop four to six additional
Sullivan's restaurants in 1997.
-19-
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated (i) the
percentages which certain items included in the Condensed Consolidated Statement
of Income bear to net sales, and (ii) other selected operating data.
YEARS ENDED (1)
December 31, December 26, December 27,
1996 1995 1994
----------------- ------------------ ------------------
(Dollars in thousands)
Income Statement Data:
Net sales 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales 35.1 35.5 35.6
Restaurant operating expense 34.1 34.2 33.4
Depreciation and amortization 5.8 5.8 6.0
-------- -------- --------
Restaurant costs and expenses 75.0 75.5 75.0
-------- -------- --------
Restaurant operating income 25.0 24.5 25.0
General and administrative expenses 4.3 3.7 3.8
Loss on divestiture of foreign operations 1.7 -- --
-------- -------- --------
Income from operations 19.0 20.8 21.2
Other income, and minority interest 0.7 1.0 0.6
-------- -------- --------
Income before provision for income
taxes 19.7 21.8 21.8
Provision for income
taxes (2) 7.5 8.1 8.3
-------- -------- --------
Net income (2) 12.2% 13.7% 13.5%
======== ======== ========
Restaurant Operating Data:
Average sales per restaurant on an
annualized basis (3) $ 2,509 $ 2,536 $ 2,481
Number of restaurants at end of period 232 175 116
Number of full restaurant periods open
during the period (4) 2,546 1,783 1,114
- --------------------------------------
(1) The Company operates on a 52 or 53 week fiscal year ending the last
Tuesday in December. The fiscal quarters for the Company consist of
accounting periods of 12, 12, 12 and 16 or 17 weeks, respectively.
(2) Gives pro forma effect to providing for income taxes on pooled S
corporations of CCC Group prior to the 1995 Lone Star Acquisition at
the estimated effective tax rate; thus the 1996 amounts are historical.
(3) Average sales per restaurant on an annualized basis are computed by
dividing a restaurant's total sales for full accounting periods by the
number of full accounting periods open in the reporting period, and
annualizing the result.
(4) Full restaurant periods are four-week accounting periods within the
fiscal year (excluding the first partial accounting period of
operations) that a restaurant was open.
20-
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 26, 1995
Net sales increased $150,897,000 (44.3%) for the year ended December
31, 1996 compared to the year ended December 26, 1995 principally attributable
to $77,609,000 in additional sales from units opened the full year in 1996
versus partial year in 1995, $42,038,000 in sales from the 45 new domestic Lone
Star restaurants opened in 1996, and $13,425,000 in additional sales from the
Sullivan's and Del Frisco's restaurants in 1996. Consolidated sales for
international joint venture restaurants (primarily Australian) increased
$46,866,000. Same store sales were down 1.9% for the year.
Costs of sales, primarily food and beverages decreased as a percentage
of sales to 35.1% for the year ended December 31, 1996 from 35.5% due to
slightly lower beef prices and improved controls. The Company continues to
purchase beef and some seafood at contracted prices.
Restaurant operating expenses for the year ended December 31, 1996
increased $51,168,000 (43.8%) from $116,703,000 in the year ended December 26,
1995 to $167,871,000 and such expenses decreased as a percentage of net sales
from 34.2% to 34.1%.
Depreciation and amortization increased $8,567,000 (43.2%) in the year
ended December 31, 1996 over the year ended December 26, 1995 principally
reflecting the amortization of capitalized pre-opening expenses relating to the
opening of 59 new restaurants in 1996, and increases in depreciation relating to
additional owned properties. General and administrative expenses for the year
ended December 31, 1996 increased $8,592,000 (67.7%) from the comparable period
in 1995. The increase reflects the first full year of consolidated foreign joint
venture administration expenses in 1996, as well as the costs associated with
additional multi-unit supervisors.
Certain accounting and administrative services are contracted from
Coulter Enterprises, Inc., a restaurant management services and consulting
company owned by the Company's Chairman of the Board and Chief Executive
Officer. The service agreement provides for specified accounting and
administration services to be provided on a cost pass-through basis under which
the Company paid a fixed annual charge of $1,272,000, plus an additional fee of
$416 per restaurant per 28-day accounting period plus reimbursement of
out-of-pocket costs and expenses during the fiscal year ended December 31, 1996.
The service agreement was renewed for fiscal 1997 with the fixed annual charge
increasing to $2,010,000 and the per restaurant, per accounting period fee
increasing to $440. Should the service agreement not be renewed in the future,
the Company would incur direct costs for accounting and administration,
personnel, rent and other costs associated with a separate office; however, the
Company believes that such direct costs would not be materially different than
the costs under the contractual arrangement. In June 1996 the Company terminated
its joint venture in Europe wherby it divested its interest in three existing
restaurants and one under construction. This resulted in a charge to earnings of
$5,964,664 net of the tax benefit of $2,592,512. Such restaurants will no longer
operate as Lone Star Steakhouse & Saloon restaurants.
Other income, principally interest, for the year ended December 31,
1996 was $3,682,000 a $772,000 increase from the comparable period in 1995. This
increase is attributable to the investment of the remaining net proceeds of the
Company's public offering in May 1996.
The effective income tax rate for the year ended December 31, 1996 and
the effective pro forma income tax rate for the year ended December 26, 1995 was
38.4% and 37.2%, respectively. The increase in the rate is primarily due to
certain losses resulting from the write-off of the European Joint Venture that
are not currently available for deduction. Without the impact of the European
Joint Venture write-off, the effective rate was 36.9%.
-21-
YEAR ENDED DECEMBER 26, 1995 COMPARED TO YEAR ENDED DECEMBER 27, 1994
Net sales increased $125,057,000 (58%) for the year ended December 26,
1995, principally attributable to $41,324,000 in sales from the 45 new
restaurants opened in 1995. Same store sales increased 1.6% primarily due to the
growth in customer counts. In addition, since June 1995, the Company included
the results of its Australian Joint Venture in its consolidated financial
statements.
Costs of sales, primarily food and beverages, decreased slightly as a
percentage of sales to 35.5% for the year ended December 26, 1995, from 35.6%
due to slightly lower beef prices.
Restaurant operating expenses for the year ended December 26, 1995
increased $44,707,000 (62%) to $116,703,000. Such expenses increased as a
percentage of net sales to 34.2% from 33.4%. The increase is due in part to
slightly higher labor rates, and the consolidation of the Company's
international operations which have higher restaurant operating expense rates
than domestic units. Prior to the third quarter of 1995, international
operations were accounted for using the equity method.
Depreciation and amortization increased $6,828,000 (53%) in the year
ended December 26, 1995, principally reflecting the amortization of capitalized
pre-opening expenses relating to the opening of 45 new restaurants in 1995 and
increases in depreciation related to additional owned properties. General and
administrative expenses for the year ended December 26, 1995 increased
$4,576,000 (56%), reflecting the costs associated with new store opening
personnel and the district manager positions being in existence for all of 1995
as well as increased legal and third party consulting expenses.
Certain accounting and administrative services are contracted from
Coulter Enterprises, Inc., a restaurant management services company owned by the
Company's Chairman of the Board and Chief Executive Officer. The service
agreement provides for specified accounting and administration services to be
provided on a cost pass-through basis under which Lone Star paid a fixed annual
charge in fiscal 1995 of $837,000, plus an additional fee of $406 per restaurant
per 28 day accounting period and reimbursement of out-of-pocket costs and
expenses during the fiscal year ended December 26, 1995. Should the service
agreement not be renewed in the future, the Company would incur direct costs for
accounting and administration, personnel, rent and other costs associated with a
separate office; however, the Company believes that such direct costs would not
be materially different than the costs under the contractual arrangement.
Other income, principally interest, for the year ended December 26,
1995, increased $1,646,000 to $2,910,000 compared to $1,263,000 in 1994. This
increase is attributable to the investment of the net proceeds of the Company's
public offering in April, 1995.
The effective pro forma income tax rate for the year ended December 26,
1995 and December 27, 1994 was 37.2% and 38.0%, respectively. The decrease in
the rate is primarily the result of a decrease in the effective state income tax
rate.
-22-
IMPACT OF INFLATION
The primary inflationary factors affecting the Company's operations
include food and labor costs. A large number of the Company's restaurant
personnel are paid at Federal and state established minimum wage levels and,
accordingly, changes in such wage levels affect the Company's labor costs. As
costs of food and labor have increased, the Company has historically been able
to offset these increases through economies of scale and improved operating
procedures, although there is no assurance that such offsets will continue. To
date, inflation has not had a material impact on operating margins.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents a summary of the Company's cash flows for
the years ended:
Years Ended
-------------------------------------------------
December 31, December 26, December 27,
1996 1995 1994
---- ---- ----
Net cash provided by operating activities $ 105,323,791 $ 63,824,777 $ 41,571,882
Net cash used in investment activities (131,178,835) (124,028,705) (78,839,427)
Net cash provided by (used in) financing activities 109,401,300 82,052,141 (504,561)
Net increase (decrease) in cash 83,296,402 21,563,850 (37,772,106)
During the year ended December 31, 1996, the Company's purchases of property and
equipment was $126,703,360.
The Company has opened 152 restaurants in the past three fiscal years
of which 48 opened in 1994 and an additional 45 opened during the year ended
December 26, 1995 and 59 in the year ended December 31, 1996. The Company does
not have significant receivables or inventory and receives trade credit based
upon negotiated terms in purchasing food and supplies. Because funds available
from cash sales are not needed immediately to pay for food and supplies, or to
finance inventory, they may be considered as a source of financing for
noncurrent capital expenditures.
At December 31, 1996, the Company had $150,721,286 in cash and cash
equivalents. While the Company has not established a credit facility, the
Company believes it could establish a facility on suitable terms. The Company
has entered into two leases for new locations. In addition, at such date the
Company had acquired nine sites and signed contracts or options to purchase 25
sites. The Company was also actively negotiating purchase or lease of
approximately 64 additional sites. In the future, the Company anticipates that a
greater proportion of its new restaurant locations will be purchased rather than
leased. The Company expects to expend approximately $130,000,000 to open new
restaurants in fiscal 1997.
-23-
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act, and Section 21E of the Exchange
Act which are intended to be covered by the safe harbors created thereby.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, and any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this report will prove to be
accurate. Stockholders are cautioned that all forward-looking statements involve
risks and uncertainty, including without limitation, the ability of the Company
to continue its aggressive expansion strategy, changes in costs of food, labor,
and employee benefits, the ability of the Company to continue to acquire prime
locations at acceptable lease or purchase terms, as well as general market
conditions, competition and pricing. Although the Company believes that 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 included in this Form 10-K
will prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements listed in the accompanying
Index to Financial Statements on Page F-1 herein. Information required for
financial schedules under Regulation S-X is either not applicable or is included
in the financial statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
-24-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements.
See Index to Financial Statements which appears on
page F-1 herein.
(2) Exhibits
INDEX TO EXHIBITS
Exhibit
Number Exhibit
------ -------
***3.1 Company's Certificate of Incorporation as amended
***3.2 Company's By-Laws
*10.1 Services Agreement as amended between the Company
and Coulter Enterprises, Inc., dated February 8,
1997
*****10.2 Employment Agreement between the Company and John D.
White, dated February 1, 1995
****10.3 1992 Lone Star Steakhouse & Saloon, Inc. Incentive
and Non-qualified Stock Option Plan (the "Plan") as
amended
***10.4 Form of Indemnification Agreement for officers and
directors of the Company
-25-
***10.5 Purchase Agreement between the Company and Max
Shayne, Inc., dated January 22, 1992
***10.6 Non-Competition, Confidentiality and Non-Solicitation
Agreement between the Company and Jamie B. Coulter,
dated March 12, 1992
**10.7 Non-Competition, Confidentiality and Non-Solicitation
Agreement between the Company and Dennis L. Thompson,
dated March 12, 1992 Employment Agreement between the
Company and Mike Archer, dated April 20, 1995
*10.8 Employmemt Agreement between the Company and Mike
Archer, dated April 20, 1995
*11.1 Statement regarding Computation of Per Share Earnings
*21.0 Subsidiaries of the Company
*23.1 Accountants' consent to the incorporation by
reference to the Company's Registration Statement on
Form S-8 of the independent auditors' report
included herein Financial data schelule
*27.0 Financial data schedule
- -----------------------------
(b) Reports on Form 8-K filed in the fourth quarter of 1995: none
* Filed herewith.
** Incorporated by reference to the Company's Registration
Statement on Form S-1, filed with the Commission on October 1,
1992 (Commission File No. 33-52678) as amended.
*** Incorporated by reference to the Company's Registration
Statement on Form S-1, filed with the Commission on January
31, 1992 (Commission File No. 33-45399), as amended.
**** Incorporated by reference to the Company's Registration
Statement on Form S-8, filed with the Commission on January
12, 1996 (Commission File No. 33-00280), as amended.
***** Incorporated by reference to the Company's Form 10-K for the
year ended December 27, 1994.
-26-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Wichita, State of Kansas, on this 31st day of March 1997.
LONE STAR STEAKHOUSE & SALOON, INC.
(Registrant)
/S/ John D. White
------------------------------------
John D. White
Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer,
Treasurer and Director
SIGNATORIES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons in the capacities and on
the date indicated.
-27-
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jamies B. Coulter Chairman of the Board March 31, 1997
- -------------------------- and Chief Executive Officer
Jamie B. Coulter
Executive Vice President,
/s/ John D. White Chief Financial Officer and March 31, 1997
- -------------------------- Principal Accounting Officer
John D. White Treasurer and Director
/s/ Dennis L. Thompson Senior Vice President- March 31, 1997
- -------------------------- Real Estate and Director
Dennis L. Thompson
/s/ Michael J. Archer Chief Operating Officer March 31, 1997
- -------------------------- Del Frisco's / Sullivan's
Michael J. Archer and Director
/s/ Clark R. Mandigo Director March 31, 1997
- --------------------------
Clark R. Mandigo
Director March 31, 1997
- --------------------------
Fred B. Chaney
Lone Star Steakhouse & Saloon, Inc.
Index to Financial Statements
Pages
Report of Independent Auditors ...................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and December 26,
1995................................................................... F-3
Consolidated Statements of Income for the years ended December 31, 1996,
December 26, 1995, and December 27, 1994......................... F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, December 26, 1995, and December 27, 1994...... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
December 26, 1995, and December 27, 1994......................... F-7
Notes to Consolidated Financial Statements............................. F-9
F-1
Report of Independent Auditors
The Board of Directors and Stockholders
Lone Star Steakhouse & Saloon, Inc.
We have audited the accompanying consolidated balance sheets of Lone Star
Steakhouse & Saloon, Inc. as of December 31, 1996 and December 26, 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lone Star
Steakhouse & Saloon, Inc. at December 31, 1996 and December 26, 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
-----------------
ERNST & YOUNG LLP
Wichita, Kansas
January 14, 1997
F-2
Lone Star Steakhouse & Saloon, Inc.
Consolidated Balance Sheets
DECEMBER 31, 1996 DECEMBER 26, 1995
---------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $150,721,286 $ 67,424,884
Accounts receivable 2,233,119 1,308,865
Inventories 4,728,071 4,156,355
Preopening costs, net 6,250,241 10,328,686
Refundable income taxes - 5,006,856
Deferred income taxes (Note 10) 584,780 -
Other current assets 783,557 90,092
----------- --------------
Total current assets 165,301,054 88,315,738
Property and equipment:
Land 102,501,716 68,887,543
Buildings 143,620,384 94,712,993
Leasehold improvements 68,049,332 55,209,000
Equipment 56,311,330 37,159,906
Furniture and fixtures 14,975,975 8,598,569
----------- -------------
385,458,737 264,568,011
Less accumulated depreciation and amortization (34,870,491) (19,233,055)
------------ -------------
350,588,246 245,334,956
Other assets:
Intangible and other assets, net (principally goodwill) 26,262,455 24,567,805
----------- ------------
Total assets $542,151,755 $358,218,499
============ =============
F-3
DECEMBER 31, 1996 DECEMBER 26, 1995
------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 8,202,116 $ 9,245,331
Other current liabilities:
Sales tax payable 2,310,128 1,367,263
Accrued payroll 4,875,218 4,824,664
Gift certificates 6,595,403 4,677,964
Income taxes payable 5,098,460 -
Deferred income taxes (Note 10) - 1,817,159
Current portion of capital lease obligation (Note 8) 75,271 64,550
Other 11,900,454 6,438,362
------------------------------------------
Total current liabilities 39,057,050 28,435,293
Capitalized lease (Note 8) 247,510 322,781
Deferred income taxes (Note 10) 7,306,978 3,966,968
Minority interest 301,384 2,682,914
Commitments (Note 11) - -
Stockholders' equity (Notes 3, 5 and 6):
Preferred stock, $.01 par value, 2,000,000 shares authorized; none issued
(Note 5)
- -
Common stock, $.01 par value, 98,000,000 shares authorized; 40,702,725 shares
issued and outstanding (37,587,974 in 1995)
407,027 375,879
Additional paid-in capital 341,158,492 228,578,790
Retained earnings 154,207,532 94,140,238
Translation adjustment (534,218) (284,364)
------------------------------------------
Total stockholders' equity 495,238,833 322,810,543
------------------------------------------
Total liabilities and stockholders' equity $542,151,755 $358,218,499
==========================================
See notes to consolidated financial statements.
F-4
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Income
FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 26, DECEMBER 27,
1996 1995 1994
----------------------------------------------------
Net sales $491,754,270 $340,857,223 $215,800,477
Costs and expenses:
Costs of sales 172,338,134 120,870,646 76,887,928
Restaurant operating expenses 167,871,293 116,703,192 71,996,039
Depreciation and amortization 28,384,168 19,816,823 12,989,178
----------------------------------------------------
Restaurant costs and expenses 368,593,595 257,390,661 161,873,145
----------------------------------------------------
Restaurant operating income 123,160,675 83,466,562 53,927,332
General and administrative expenses:
Related parties (Note 7) 2,215,467 1,443,312 792,913
Other 19,068,740 11,249,957 7,324,744
Loss on divestiture of European joint venture (Note 4)
8,557,176 - -
----------------------------------------------------
Income from operations 93,319,292 70,773,293 45,809,675
Other income (expense):
Other income, net (principally interest) 3,681,493 3,137,760 1,538,443
Interest expense - (228,532) (275,033)
----------------------------------------------------
3,681,493 2,909,228 1,263,410
----------------------------------------------------
Income before income taxes and minority interest 97,000,785 73,682,521 47,073,085
Provision for income taxes (Note 10) (37,517,693) (26,819,591) (16,900,130)
Minority interest 584,202 705,160 -
----------------------------------------------------
Net income $ 60,067,294 $ 47,568,090 $ 30,172,955
====================================================
Primary net income per share $ 1.49 $ 1.27 $ 0.87
====================================================
Fully diluted net income per share $ 1.49 $ 1.26 $ 0.87
====================================================
Unaudited pro forma information based on providing for income taxes on pooled
S-Corporations prior to acquisition at the estimated effective tax rate:
Income before income taxes, net of minority interest
$ 74,387,681 $ 47,073,085
Pro forma provision for income taxes 27,652,784 17,883,699
-------------------------------------
Pro forma net income $ 46,734,897 $ 29,189,386
=====================================
Pro forma primary net income per share $ 1.25 $ 0.84
=====================================
Pro forma fully diluted net income per share $ 1.23 $ 0.84
=====================================
See notes to consolidated financial statements.
F-5
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Stockholders' Equity
COMMON STOCK
PREFERRED ------------------------------------------
STOCK NUMBER AMOUNT
------------------------------------------------------------------
Balance, December 28, 1993 $ - 34,288,455 $ 342,884
Stock options exercised - 14,113 141
Capital contributions of pooled companies
- - -
Dividends paid by pooled companies
- - -
Net income - - -
------------------------------------------------------------------
Balance, December 27, 1994 - 34,302,568 343,025
Shares issued in public offering - 2,906,710 29,067
Translation adjustment - - -
Stock options exercised - 172,446 1,724
Tax benefit related to options exercised
- - -
S-Corporation deferred taxes - - -
Shares issued for Del Frisco Group - 206,250 2,063
Dividends paid by pooled companies
- - -
Net income - - -
------------------------------------------------------------------
Balance, December 26, 1995 - 37,587,974 375,879
Shares issued in public offering - 2,650,000 26,500
Translation adjustment - - -
Stock options exercised - 464,751 4,648
Tax benefit related to options exercised
- - -
Net income - - -
------------------------------------------------------------------
Balance, December 31, 1996 $ - 40,702,725 $ 407,027
==================================================================
ADDITIONAL TRANSLATION RETAINED
PAID-IN CAPITAL ADJUSTMENT EARNINGS TOTAL
------------------------------------------------------------------------------------
Balance, December 28, 1993 $131,300,464 $ - $ 20,124,766 $ 151,768,114
Stock options exercised 97,666 - - 97,807
Capital contributions of pooled companies
84,559 - - 84,559
Dividends paid by pooled companies
- - (2,051,613) (2,051,613)
Net income - - 30,172,955 30,172,955
-----------------------------------------------------------------------------------
Balance, December 27, 1994 131,482,689 - 48,246,108 180,071,822
Shares issued in public offering 85,638,616 - - 85,667,683
Translation adjustment - $(284,364) - (284,364)
Stock options exercised 1,970,382 - - 1,972,106
Tax benefit related to options exercised
1,239,166 - - 1,239,166
S-Corporation deferred taxes - - (16,503) (16,503)
Shares issued for Del Frisco Group 8,247,937 - - 8,250,000
Dividends paid by pooled companies
- - (1,657,457) (1,657,457)
Net income - - 47,568,090 47,568,090
-----------------------------------------------------------------------------------
Balance, December 26, 1995 228,578,790 (284,364) 94,140,238 322,810,543
Shares issued in public offering 101,399,750 - - 101,426,250
Translation adjustment - (249,854) - (249,854)
Stock options exercised 8,034,952 - - 8,039,600
Tax benefit related to options exercised
3,145,000 - - 3,145,000
Net income - - 60,067,294 60,067,294
-----------------------------------------------------------------------------------
Balance, December 31, 1996 $341,158,492 $(534,218) $ 154,207,532 $ 495,238,833
===================================================================================
See notes to consolidated financial statements.
F-6
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 26, DECEMBER 27,
1996 1995 1994
-------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 60,067,294 $ 47,568,090 $ 30,172,955
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization 14,048,571 9,324,951 7,471,514
Depreciation 14,690,222 10,491,872 5,517,664
Deferred compensation - - (422,760)
Equity in net loss from investment in joint venture
- 311,282 -
Loss on divestiture of European joint venture 6,759,848 - -
Deferred income taxes 938,071 3,113,315 1,322,187
Minority interest (584,202) (705,160) -
Net change in operating assets and liabilities:
Accounts receivable (924,254) (467,868) (243,028)
Inventories (571,716) (1,510,680) (892,826)
Preopening costs (8,986,629) (13,060,622) (9,480,268)
Refundable income taxes 5,006,856 (2,368,198) (480,442)
Other current assets (693,465) 1,491,275 (89,586)
Accounts payable (1,043,215) (560,084) 4,773,994
Income taxes payable 8,243,460 - -
Other current liabilities 8,372,950 10,196,604 3,922,478
-------------------------------------------------------------
Net cash provided by operating activities 105,323,791 63,824,777 41,571,882
INVESTING ACTIVITIES
Purchases of property and equipment (126,703,360) (104,787,485) (76,909,289)
Purchase of assets of Del Frisco (Note 12) - (14,600,000) -
Contribution to capital by minority interest - 1,748,189 -
Cash acquired in consolidation of joint venture (Note 4)
- 495,873 -
Cash paid in divestiture of European joint venture (1,797,328) - -
Investment in joint venture - (2,436,689) (1,105,198)
Other (2,678,147) (4,448,593) (824,940)
-------------------------------------------------------------
Net cash used in investing activities (131,178,835) (124,028,705) (78,839,427)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 109,465,850 87,639,789 97,807
Additions to long-term debt - - 2,160,517
Payment of notes payable and capital lease
obligation on company acquired (64,550) (3,930,191) (795,831)
Capital contributions by pooled companies - - 84,559
Dividends on prior S-Corporation income - (1,657,457) (2,051,613)
-------------------------------------------------------------
Net cash provided by (used in) financing
activities 109,401,300 82,052,141 (504,561)
F-7
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Cash Flows (continued)
Increase (Decrease) in Cash and Cash Equivalents
FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 26, DECEMBER 27,
1996 1995 1994
----------------------------------------------------------------
Effect of exchange rate changes on cash $ (249,854) $ (284,363) $ -
Net increase (decrease) in cash and cash equivalents
83,296,402 21,563,850 (37,772,106)
Cash and cash equivalents at beginning of period 67,424,884 45,861,034 83,633,140
-----------------------------------------------------
Cash and cash equivalents at end of period $ 150,721,286 $ 67,424,884 $ 45,861,034
=====================================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 7,105 $ 75,170 $ 275,033
Cash paid for income taxes 23,329,306 23,282,127 16,058,385
Supplemental schedule of noncash investing and financing activities:
As described in Note 12, in September 1995 the Company issued 206,250 shares
of common stock having a market value of $8,250,000 in connection with the
acquisition of Del Frisco Group.
See notes to consolidated financial statements.
F-8
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
Lone Star Steakhouse & Saloon, Inc. (the "Company") currently owns and operates
a chain of mid-priced full service, casual dining restaurants in the United
States, as well as in Australia, through participation in an international joint
venture. The restaurants serve mesquite-grilled steaks, ribs, chicken and fish
in a "Texas Roadhouse" atmosphere that are positioned to attract local
clientele. During 1995, the Company expanded into the upscale steakhouse market
with the acquisition of Del Frisco's Double Eagle Steakhouse and the development
of Sullivan's Steakhouse. As of December 31, 1996, the Company owns and operates
205 Lone Star Steakhouse & Saloons in the United States as well as 20 in
connection with the joint venture in Australia. In addition, the Company owns
and operates two Del Frisco's Double Eagle Steak House and two Sullivan's
Steakhouses.
SIGNIFICANT ACCOUNTING POLICIES
. Principles of Consolidation
The consolidated financial statements include the accounts of Lone Star
Steakhouse & Saloon, Inc., its wholly owned subsidiaries and its majority
owned foreign joint venture. All significant intercompany accounts and
transactions have been eliminated in consolidation.
. Concentration of Credit Risk
The Company's financial instruments that are exposed to concentration of
credit risk consist primarily of cash and short-term investments (cash
equivalents). The Company places its cash with high credit quality
financial institutions and, at times, such cash may be in excess of the
Federal Depository insurance limit. The Company has cash equivalents in
investment grade securities with municipal, State and U.S. government
agencies of approximately $110,835,000 and $46,361,000, at December 31,
1996 and December 26, 1995, respectively.
. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from estimates.
F-9
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
. Income Taxes
The Company accounts for income taxes under the liability method in
accordance with FASB Statement No. 109 "Accounting for Income Taxes."
. Cash and Cash Equivalents
The Company considers cash and cash equivalents to include currency on
hand, demand deposits with banks or other financial institutions, and
short-term investments with maturities of three months or less when
purchased. Cash and cash equivalents are carried at cost which
approximates fair value.
. Inventories
Inventories consist of food and beverages, and are stated at the lower of
cost (first-in, first-out) or market.
. Property and Equipment
Property and equipment are stated at cost. Maintenance, repairs and
renewals which do not enhance the value of or increase the life of the
assets are expensed as incurred.
Buildings are depreciated using the straight-line method over 20 years,
which is the estimated useful life of the assets. Leasehold improvements
are amortized on the straight-line method over the lesser of the maximum
life of the lease or 20 years, or the estimated useful lives of the
assets. Equipment and furniture and fixtures are depreciated using the
straight-line method over seven years, which is the estimated useful life
of the assets.
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, which requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company adopted Statement 121 in 1996. The effect of adoption was not
material to the accompanying financial statements.
F-10
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
. Preopening Costs
Labor costs and costs of hiring and training personnel and certain other
costs relating to opening new restaurants are capitalized until the
restaurant is open and then amortized over the subsequent 12 months.
Accumulated amortization related to stores opened during 1996 and 1995 was
approximately $2,930,000 and $3,059,000 at December 31, 1996 and December
26, 1995, respectively.
. Intangibles and Other Assets
Intangibles and other assets principally represent goodwill. Such goodwill
represents the excess of the cost of companies acquired over the fair
value of their net assets at dates of acquisition and is being amortized
on a straight-line method over 20 years. The remaining intangibles and
other assets are being amortized by the straight-line method over the
estimated useful life of the related assets. Accumulated amortization for
intangibles and other assets as of December 31, 1996 and December 26,
1995, is $1,261,470 and $351,144, respectively.
. Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 1996, December 26, 1995 and December 27, 1994,
are $5,006,152, $4,041,337 and $3,472,764, respectively.
. Accounting for Stock-Based Compensation
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation, which prescribed accounting and reporting
standards for all stock-based compensation plans, including employee stock
options, restricted stock, and stock appreciation rights. Statement No.
123 did not require companies to change their existing accounting for
employee stock options under APB Opinion No. 25, Accounting for Stock
Issued to Employees, but instead encouraged companies to recognize expense
for stock-based awards on their estimated fair value on the date of grant.
Companies electing to continue to follow present accounting rules under
APB 25 are required to provide pro forma disclosures of what net income
and earnings per share would have been had the new fair value method been
used. The Company has elected to continue to apply the existing accounting
results contained in APB 25 and the required pro forma disclosures under
the new method have been presented (see Note 6).
F-11
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
. Fiscal Year
The Company operates on a 52 or 53 week fiscal year ending the last
Tuesday in December. The fiscal quarters for the Company consist of
accounting periods of 12, 12, 12 and 16 or 17 weeks, respectively. Fiscal
1996 included 53 weeks of operations and fiscal 1995 and 1994 each
included 52 weeks of operations.
2. ACQUISITION OF CCC GROUP
On August 6, 1995, the Company completed the acquisition of 11 licensed Lone
Star Steakhouse & Saloon restaurants as well as three additional restaurants
from a group of related entities which were operated under common control,
collectively, hereinafter referred to as the "CCC Group." The transaction was
accounted for as a pooling of interests and, accordingly, the accompanying
financial statements have been restated to include the accounts and operations
of the CCC Group for all periods presented prior to the acquisition. The Company
exchanged 580,433 shares of its common stock for all of the common stock and
related net assets of the various entities acquired.
3. ADDITIONAL PUBLIC OFFERINGS
On April 12, 1995, the Company completed an offering of 2,906,710 additional
shares of its Common Stock at $31.00 per share. Total net proceeds to the
Company of approximately $86 million are being used for continued development
and funding of the Company's new upscale steakhouse concept.
On May 21, 1996, the Company completed an offering of 2,650,000 additional
shares of its Common Stock at $40.125 per share. Total net proceeds to the
Company of approximately $101 million are being used for continued development
and funding of the Company's core Lone Star Steakhouse & Saloon restaurants and
its new upscale steakhouse concepts.
4. INVESTMENT IN AND ADVANCES TO JOINT VENTURE
The Company has a joint venture agreement with an unrelated third party to
develop and operate a chain of restaurants in Australia under the Company's
trademark "Lone Star." Prior to June 1995, the Company owned a 50% interest in
the joint venture and accounted for its investment using the equity method of
accounting. The Company's equity portion of the results of operations, which are
not significant, are included in the accompanying financial statements for the
year ended December 27, 1994 and for the 24 weeks ended June 13, 1995.
F-12
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
4. INVESTMENT IN AND ADVANCES TO JOINT VENTURE (CONTINUED)
In June 1995, the Company increased its ownership interest in the Australian
joint venture from 50% to 65%. The Company consolidated the accounts of the
joint venture effective with the change in control.
During 1995, the Company entered into a second joint venture agreement with an
unrelated third party to build and operate a chain of restaurants in Europe
under the Company's trademark "Lone Star." The Company owned a 65% interest in
the joint venture and, accordingly, its net assets and operations were
consolidated with the Company in the accompanying consolidated financial
statements for the year ended December 26, 1995 and through June 1996, when the
Company terminated its joint venture in Europe whereby it divested its interest
in three existing restaurants and one under construction. This resulted in a
charge to earnings of $5,964,664, net of the tax benefit of $2,592,512. Such
restaurants will no longer operate as Lone Star Steakhouse & Saloon restaurants.
5. PREFERRED STOCK
The Company's Board of Directors has the authority to issue up to 2,000,000
shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preference
and the numbers of shares constituting any series or the designation of such
series.
6. STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
O 1992 Stock Option Plan
In January 1992, the Board of Directors adopted a stock option plan (the
"Plan") which was last amended in June 1996, which provides for incentive
and nonqualified stock options pursuant to which up to 10,000,000 shares
of Common Stock are
F-13
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCK OPTIONS (CONTINUED)
available for issuance. All options granted under this Plan have ten-year
terms and vest according to the following schedule:
Year 1 10%
Year 2 25%
Year 3 50%
Year 4 75%
Year 5 100%
. Directors Stock Option Plan
In January 1992, the Board of Directors adopted a stock option plan
providing for nondiscretionary grants to nonemployee directors pursuant to
which up to 400,000 shares of Common Stock are available for issuance. All
options granted under this Plan have ten-year terms and vest according to
the following schedule:
Year 1 33%
Year 2 66%
Year 3 100%
. Other Options
In connection with the Australian joint venture agreement, options to
acquire 513,800 shares of the Company's Common Stock, $.01 par value, were
granted to certain individuals of the unrelated third party. The exercise
price of such options granted was $14.50 per share which was the fair
market value of the Common Stock on the date of grant.
Pro forma information regarding net income and earnings per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994, under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1996
and 1995, respectively: risk-free interest rates of 6.53% and 7.05% no dividend
yields; volatility factors of the expected market price of the Company's Common
Stock of .940 and 1.037; and a weighted-average expected life of the option of
seven years.
F-14
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCK OPTIONS (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
1996 1995
------- ------------
Pro forma net income $42,340 $41,445
Pro forma earnings per share:
Primary 1.05 1.10
Fully diluted 1.05 1.09
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.
A summary of the Company's stock option activity and related information for the
years ended December 31, 1996, December 26, 1995, and December 27, 1994, are as
follows:
1996 1995 1994
----------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE PRICE OPTIONS (000) EXERCISE PRICE OPTIONS (000) EXERCISE PRICE OPTIONS (000)
---------------- ----------------- ----------------- --------------- -------------- -------------
Outstanding beginning of year 24.34 4,575 20.54 2,657 18.31 1,431
Granted 32.21 1,745 23.20 2,141 21.70 1,317
Exercised 38.08 (465) 28.15 (172) 14.67 (14)
Canceled 28.91 (1,116) 23.04 (51) 17.45 (77)
Outstanding end of year 28.69 4,739 24.34 4,575 20.54 2,657
Weighted average fair value of
options granted during the
year 26.50 16.68
F-15
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCK OPTIONS (CONTINUED)
For options outstanding as of December 31, 1996, the number of options,
weighted-average exercise price and weighted-average remaining contract life for
each group of options is as follows:
OPTIONS OUTSTANDING
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OUTSTANDING AT DECEMBER 31, WEIGHTED AVERAGE REMAINING
1996 (000) WEIGHTED AVERAGE EXERCISE PRICE CONTRACT LIFE
RANGE OF PRICES
- ------------------------------------------------------------------------------------------------------------------------------------
$3.38 to 9.38 88 4.48 5.29 years
$14.50 to 19.50 1,288 18.75 7.82
$20.00 to 29.50 1,798 24.81 8.29
$30.00 to 31.75 453 31.59 9.48
$32.00 to 33.75 909 32.68 9.11
$34.00 to 41.50 188 37.98 8.91
The number of shares and weighted average exercise price of options exercisable
at December 31, 1996, are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------------------------------------
NUMBER EXERCISABLE AT WEIGHTED AVERAGE
RANGE OF PRICES DECEMBER 31, 1996 EXERCISE PRICE
(000)
- -------------------------------------------------------------------------------------------------------------
$3.38 to 9.38 57 5.04
$14.50 to 19.50 536 18.70
$20.00 to 29.50 1,256 23.23
$30.00 to 31.75 75 30.56
$32.00 to 33.75 1 32.75
$34.00 to 41.50 25 37.86
7. RELATED PARTY TRANSACTIONS
The Company utilizes an affiliate to provide certain accounting, computer and
administrative services. The Company incurred fees of $2,215,467, $1,443,312,
and $792,913 related to such services for fiscal years 1996, 1995, and 1994,
respectively.
F-16
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
8. LEASES
The Company leases one restaurant facility which is accounted for as a capital
lease and other facilities under noncancelable operating leases having terms
expiring between 1997 and 2023. The leases have renewal clauses of 5 to 20
years, exercisable at the option of the lessee. In addition, certain leases
contain escalation clauses based upon a fixed percentage increase and provisions
for contingent rentals based on a percentage of gross revenues, as defined.
Total rental expense for the years ended December 31, 1996, December 26, 1995,
and December 27, 1994, was $5,982,830, $4,962,163, and $3,847,077, respectively,
including contingent rentals of approximately $422,820, $419,357, and $316,601,
respectively.
Information regarding the Company's leasing activities at December 31, 1996 are
as follows:
CAPITAL OPERATING
LEASES LEASES
--------------- -----------------------
1997 $ 120,000 $ 5,185,397
1998 120,000 4,370,219
1999 120,000 3,202,000
2000 60,000 1,789,114
2001 - 960,673
Thereafter - 2,972,492
------------------------------------
Total minimum lease payments 420,000 $ 18,479,895
============
Less imputed interest (97,219)
-----------------------
Present value of capital lease obligations 322,781
Less current portion (75,271)
-----------------------
Long-term portion $ 247,510
=======================
The net carrying value of assets under capital lease at December 31, 1996 and
December 26, 1995, is $211,952 and $267,308, respectively (net of accumulated
amortization of $676,836 and $621,480).
9. EARNINGS PER SHARE
Primary earnings per share amounts are computed based on the weighted average
number of shares actually outstanding plus the shares that would be outstanding
assuming exercise of dilutive stock options which are considered to be common
stock equivalents. The number of shares that would be issued from the exercise
of stock options has been reduced by the number of shares that could have been
purchased from the proceeds at the
F-17
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
9. EARNINGS PER SHARE (CONTINUED)
average market price of the Company's stock. The number of shares resulting from
this computation for 1996, 1995, and 1994 was 40,393,813, 37,537,891, and
34,608,610, respectively.
For purposes of fully diluted computations, the 1996 computation of shares that
would be issued from the exercise of stock options has been reduced by the
number of shares that could have been purchased from the proceeds at the average
market price of the Company's stock or the price of the Company's stock on the
exercise date if the options were exercised during 1996. The 1995 and 1994
computations of shares that would be issued from the exercise of stock options
has been reduced by the number of shares which could have been purchased from
the proceeds at the market price of the Company's stock on the last day of the
fiscal year because that price was higher than the average market prices during
the year. The number of shares resulting from these computations of fully
diluted earnings per share for 1996, 1995, and 1994 were 40,397,865, 37,867,716,
and 34,608,693, respectively.
10. INCOME TAXES
As discussed in Note 1, the Company accounts for income taxes in accordance with
FAS 109. Income tax expense consists of the following:
YEARS ENDED
DECEMBER 31, DECEMBER 265 DECEMBER 27,
1996 1995 5 1994
----------------------------------------------------------------------------
Current tax expense:
Federal $ 32,080,619 $ 20,145,697 $ 12,410,595
State 4,499,003 3,560,579 3,167,348
----------------------------------------------------------------------------
Total current 36,579,622 23,706,276 15,577,943
Deferred tax expense:
Federal 819,155 2,976,342 1,123,188
State 118,916 136,973 198,999
----------------------------------------------------------------------------
Total deferred 938,071 3,113,315 1,322,187
----------------------------------------------------------------------------
Total provision for income taxes $ 37,517,693 $ 26,819,591 $ 16,900,130
========================------------------------------======================
F-18
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
The difference between the reported provision for income taxes and a tax
determined by applying the applicable U.S. Federal statutory income tax rate to
income before taxes, is reconciled as follows.
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1996 DECEMBER 26, 1995 DECEMBER 27, 1994
-------------------------- --------------------------------- --------------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------------- ----------- --------------------- ----------- -------------------- -----------
Income tax expense at Federal
statutory rate $ 34,154,745 35% $ 25,788,882 35% $ 16,475,580 35%
State tax expense, net 3,001,647 3 2,403,409 3 2,464,990 5
Effect of income tax related to
CCC Group which were not
taxed because of S-Corporation
status - - (833,193) (1) (983,369) (2)
Other items, net, none of which
individually exceeds 5% of
Federal taxes at
statutory rate
361,301 - (539,507) (1) (1,057,071) (2)
============== =========== ===================== =========== ==================== ===========
Actual provision for income taxes $ 37,517,693 38% $ 26,819,591 36% $ 16,900,130 36%
============== =========== ===================== =========== ==================== ===========
The tax effects of temporary differences that give rise to significant portions
of deferred tax liabilities are presented below:
DECEMBER 31, 1996 DECEMBER 26, 1995
----------------------------------------------
Deferred tax assets:
Foreign NOL carryforward $ 954,383 $ -
Accrued liabilities 856,925 -
----------------------------------------------
Total deferred tax assets 1,811,308 -
Deferred tax liabilities:
Preopening costs 272,145 1,817,159
Property and equipment 8,261,361 3,966,968
----------------------------------------------
Total deferred tax liabilities 8,533,506 5,784,127
----------------------------------------------
$ 6,722,198 $5,784,127
==============================================
F-19
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
11. COMMITMENTS
As of December 31, 1996, the Company has entered into purchase or option
contracts to purchase 16 additional sites for future restaurant locations. Such
contracts aggregate approximately $9,296,500. The Company has also entered into
operating lease agreements, subject to certain contingencies, on nine additional
sites. Such leases generally have initial lease terms of five years and the
aggregate future minimum lease payments total approximately $415,335.
Subsequent to December 31, 1996, the Company has entered into purchase
contracts, subject to certain contingencies, for four additional sites totaling
approximately $2,958,000.
12. ACQUISITION OF THE DEL FRISCO GROUP
On September 16, 1995, the Company acquired substantially all the operating
assets, real estate and related operations that comprised Del Frisco's Double
Eagle Steakhouse Group in Dallas, Texas, including a restaurant under
construction in Fort Worth, Texas, for an aggregate purchase price of $22.8
million, consisting of $14.6 million of internally generated cash and 206,250
shares of the Company's Common Stock. The Company accounted for the transaction
using the purchase method of accounting. In connection with the purchase price
allocation, the Company recorded goodwill of approximately $16.5 million which
is being amortized over a period of twenty years. The following supplemental pro
forma information presents the combined results of operations of the Company as
though the acquisition had occurred at the beginning of periods presented. The
pro forma information is unaudited and not necessarily indicative of the results
of the Company had the acquisition occurred at the beginning of such periods.
FOR THE YEAR ENDED
DECEMBER 26, 1995 DECEMBER 25, 1994
------------------------- ---------------------
(Dollars in thousands except per share amounts)
Revenues $ 347,630 $ 225,163
Net income 48,494 31,162
Primary net income per share $ 1.29 $ 0.90
F-20
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
13. ACQUISITION OF GROUND ROUND RESTAURANT REAL ESTATE
Pursuant to the Company's contract of purchase dated June 28, 1996, with Ground
Round, the Company acquired eleven restaurant locations for approximately
$11,000,000.
The Company did not acquire the business interest from Ground Round as the
facilities purchased under this contract will be converted to Lone Star
Steakhouse & Saloon operating units.
14. QUARTERLY FINANCIAL SUMMARIES (UNAUDITED)
Summarized quarterly financial data for 1996 and 1995 are as follows:
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------------------------------------------------------------------------
(In thousands, except per share data)
1996
Net Sales $106,375 $107,768 $ 113,746 $ 163,864
Restaurant operating income 24,759 26,786 28,877 42,739
Net income 12,936 8,103 15,838 23,190
Primary net income per share 0.33 0.21 0.38 0.56
Fully diluted net income per share 0.33 0.21 0.38 0.56
1995
Net Sales $ 69,393 $ 71,695 $ 81,633 $ 118,136
Restaurant operating income 17,371 17,498 20,569 28,029
Pro forma net income (a) 8,870 9,615 11,845 16,405
Pro forma primary net income per share 0.26 0.26 0.31 0.42
Pro forma fully diluted net income per share 0.25 0.26 0.30 0.42
(a) Pro forma net income for 1995 gives effect to providing for income taxes
at the estimated tax rate on pooled S-Corporations of CCC Group prior to
the acquisition of CCC Group in 1995.
(b) The second quarter of 1996 includes a change to earnings of $5,964,664,
net of tax benefits resulting from the Company's terminated joint venture
in Europe.
F-21