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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 29, 1998
/ / 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
(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 23, 1999, the aggregate market value of the Registrant's
Common Stock held by non-affiliates of the Registrant was $342,459,575. Solely
for the purpose of this calculation, shares held by directors and officers of
the Registrant have been excluded. Such exclusion should not be deemed a
determination by or an admission by the Registrant that such individuals are, in
fact, affiliates of the Registrant.
As of March 23, 1999, there were 35,812,766 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...........................................................15
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............................................16
6. Selected Financial Data..............................................17
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................25
7.a. Quantitative and Qualitative Disclosures about Market Risk...........25
8. Financial Statements and Supplementary Data..........................26
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................26
PART III
10. Directors and Executive Officers of the Registrant...................26
11. Executive Compensation...............................................26
12. Security Ownership of Certain Beneficial
Owners and Management..........................................26
13. Certain Relationships and Related Transactions.......................26
PART IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................................27
Signatures.........................................................29
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PART I
ITEM 1. BUSINESS
BACKGROUND
As of March 23, 1999, Lone Star Steakhouse & Saloon, Inc. ("the
Company") owned and operated a chain of 267 mid-priced, full service, casual
dining restaurants located in the United States which operate under the trade
name Lone Star Steakhouse and Saloon ("Lone Star" or "Lone Star Steakhouse &
Saloon"), and fifteen upscale steakhouse restaurants, three operating as Del
Frisco's Double Eagle Steak House restaurants and twelve operating as Sullivan's
Steakhouse restaurants. The Lone Star restaurants embrace a Texas-style concept
featuring Texas artifacts and music and serve mesquite grilled steaks, ribs,
chicken and fish. Internationally, the Company owns a 65% interest in a joint
venture, (the "Australian Joint Venture"), which operates 40 Lone Star
Steakhouse & Saloon restaurants.
In 1998 the United States Department of Agriculture estimated the
average annual per capita consumption of beef to be 64 pounds, up slightly more
than 1% from 1997. 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.
During 1998, the Company opened two new domestic Lone Star restaurants
and the Australian Joint Venture opened six. In addition, the Company's licensee
in California opened two restaurants.
In May 1998, the Company temporarily suspended development of new Lone
Star restaurants other than properties which had been committed for or were
under construction. During 1998 the Company completed remodel/construction of
twelve additional restaurants (including one that was damaged by fire and
rebuilt), but the Company elected not to open the restaurants pending completion
of certain operations improvement initiatives currently in process. The Company
anticipates opening all twelve restaurants in 1999.
In 1995, the Company formulated a strategy to become "The Steak Company"
and developed, a market niche approach to exploit this opportunity. In support
of this strategy in September 1995, the Company acquired the intellectual
property rights, marks and trade name 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 and the third Del Frisco's restaurant opened 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 developed another upscale steak restaurant concept which
utilizes the trade name Sullivan's Steakhouse ("Sullivan's"). The Company opened
two Sullivan's in 1996 and an additional two were opened in 1997. In 1998, new
Sullivan's Steakhouse restaurants were opened in the following cities:
Anchorage, Alaska King of Prussia, Pennsylvania
Dallas, Texas Naperville, Illinois
Charlotte, North Carolina Houston, Texas
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As of March 23, 1999, the Company had opened two additional Sullivan's
restaurants, in Denver, Colorado and in Palm Desert, California. The average
check per customer in this segment is approximately $42. See "Expansion into
Upscale Market" for a description of the Sullivan's concept.
RESTAURANT CONCEPTS
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. 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 generous "Texas-sized" portions and full liquor bar service is
available. The exciting and vibrant atmosphere created by the restaurants'
"Texas Roadhouse" ambiance includes neon beer signs and specially selected
upbeat country western music. The decor includes planked wooden floors, dim
lighting, flags and other Texas memorabilia, all of which enhance the casual
dining experience and establish a distinct identity. Lone Star restaurants are
open seven days a week and most serve both lunch and dinner with an average
check per customer for 1998 of approximately $9.50 at lunch and $20 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 Chicago style 1940's steakhouse theme with
nostalgic influences that feature jazz and swing music. The bar features live
jazz music nightly. The decor includes an open kitchen, separate dining rooms,
dark wood paneling, carpeted floors, warm lighting, and white tablecloths.
Sullivan's is distinguished by its high quality, 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 $44.
CORPORATE STRATEGY
The Company's strategy is to position itself as "The Steak Company,"
operating three distinct steakhouse restaurant concepts. Lone Star Steakhouse &
Saloon restaurants emphasize the following strategic elements:
o Positioning in the mid-priced, full-service casual dining segment
of the restaurant industry.
o 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.
o Generous "Texas-sized" portions offered at moderate prices.
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o High quality and attentive service with each wait person generally
being assigned to no more than three tables at dinner to ensure
customer satisfaction.
o Consistent high quality products through careful ingredient
selection, food preparation and aging of steaks.
The Company believes it can continue to 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 Concepts" for a description of
the elements of these concepts.
While the Company still believes that it can substantially develop all
of its concepts, it has suspended its aggressive growth to focus on the
implementation of certain operations improvement initiatives in existing
restaurants, which involve the following elements:
1. Curtailing development of new restaurants, temporarily reducing
the need for additional managers.
2. Focusing on existing Lone Star restaurants in order to improve
operational consistency and guest satisfaction.
o Improving the experience and effectiveness of District
Managers and reducing the span of control, permitting them
to increase time spent in the restaurants coaching and
training personnel.
o Adding an additional support manager at the unit level,
resulting in one General Manager and four support managers:
Kitchen Manager, Assistant Kitchen Manager, Service Manager,
and Bar Manager.
3. Improving management and financial systems including
implementation of Point of Sale systems in all units, to reduce
the manual administrative functions required of management and
enables them to focus on guest satisfaction and proper training
of staff.
o Re-implementing the Operations Review Process which occurs
every four weeks and brings management together on a
regional, district, and unit level to review and discuss
operational issues, procedures, best practices and policies.
o Improving the labor matrix which tracks all positions at the
unit level and allows the Company to monitor the adequacy of
staffing and development in all units on a daily basis.
4. Improving quality of management.
o Substantially reducing emphasis from the previous "Promote
from Within Program", allowing the Company to target
experienced management with proven multi-unit experience.
o Utilizing executive recruiters to identify and screen
experienced restaurant managers for consideration.
o Improving selection, testing and qualifications of potential
restaurant and multi-unit management candidates.
The Company believes that all of its concepts have international
development opportunities, however, development in Australia is substantially
complete. Until the Company completes the domestic operations improvement
initiatives there is no active plan for further international development.
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UNIT ECONOMICS
The Company's management team focuses on selecting locations with the
potential of producing significant revenues while controlling capital
expenditures and occupancy costs as a percentage of net sales. The Company's
Lone Star restaurants averaged approximately $1.95 million in sales on an
annualized basis during 1998, however the current annualized sales rate is
approximately $1.82 million. Of the 267 Lone Star restaurants open at March 23,
1999, 102 were leased facilities and had an average cash investment of
$1,120,000 and 165 were owned and had an average cost for land acquisition,
construction, equipment and pre-opening expenses of $2,065,000.
The Company anticipates the average total investment per restaurant for
a typical Del Frisco's restaurant and Sullivan's restaurant will range from $2.5
million to $3.5 million. The Del Frisco's currently under construction in New
York City is expected to cost approximately $11 million to complete.
MENU
The dinner menu at a Lone Star restaurant features a limited selection
of high quality, specially seasoned and mesquite grilled steaks, ribs, chicken,
fish, shrimp and feature various combinations. 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 13% of the Company's net sales.
The menu at Sullivan's features high quality Certified Angus Beef(TM)
steaks, chops, seafood and quality side dishes. Sullivan's also features a
number of high quality wines and full bar. Alcoholic beverage service accounts
for approximately 40% of the restaurants' 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 35% 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 site selection. Theses include the
specific steakhouse concept to be developed, local market demographics, and site
visibility. Consideration is given to accessibility and proximity to significant
generators of potential customers such as major retailers, retail centers and
office complexes, office and hotel concentrations, and entertainment centers
(stadiums, arenas, theaters, etc.). The Company also reviews potential
competition and attempts to analyze the profitability of other national chain
restaurants operating in the area.
The Company will continue to purchase additional sites in the future,
when it is cost effective. The Company utilizes a prototype building for its
Lone Star restaurants when it acquires or leases vacant land. Currently, there
are 97 prototype units open and six prototype units are completed but not
opened. Leases are negotiated generally with initial terms of three to five
years, with
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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 open as of March 23, 1999, two are owned and
one is leased and the Company has entered into lease agreements for two
additional Del Frisco's restaurants in New York City and Las Vegas, Nevada. Of
the twelve Sullivan's restaurants; eleven are leased and one is owned. The
Company has entered into two lease agreements for additional Sullivan's
locations and owns one site which is currently under construction.
RESTAURANT LAYOUT
The Company believes 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 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 future Lone Star restaurants will average approximately
5,500 square feet and less in small town markets.
The original Del Frisco's restaurant in Dallas, Texas is approximately
10,000 square feet and seats approximately 350 persons. In the first quarter of
1998 an extended wine cellar and a cigar bar were added with private dining
available in the wine cellar. The Ft. Worth, Texas and Denver, Colorado Del
Frisco's restaurants are approximately 8,000 and 12,000 square feet and seat
approximately 300 and 360 persons, respectively. In addition, Del Frisco's
features a bar area adjacent to the dining room primarily to accommodate
customers waiting for tables. 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 New York City location will be
approximately 16,000 square feet and the Las Vegas location will be
approximately 11,000 square feet.
The first Sullivan's restaurant, in Austin, Texas was 7,500 square feet
and included a dining area for approximately 180-200 customers. In 1997, this
restaurant was expanded by 4,500 square feet to accommodate additional dining
and a jazz bar area called "Ringside". The addition provides space for private
parties and overflow from the Sullivan's restaurant. This location now seats 320
customers. The "Ringside" concept is also utilized at the Baton Rouge,
Louisiana, Dallas and Houston, Texas Sullivan's restaurants. The Sullivan's bar
area is separate from the dining room and is designed to be a destination unto
itself, featuring live jazz music six nights a week and an upbeat, convivial
atmosphere. Future Sullivan's restaurants are planned to be approximately
8,000-9,000 square feet and will include a dining area for approximately 175-200
customers.
EXPANSION STRATEGY - LONE STAR STEAKHOUSE AND SALOON RESTAURANTS
The Company opened, domestically, 36 restaurants in 1993, 48 restaurants
in 1994, 45 restaurants in 1995, 45 restaurants in 1996, 60 restaurants in 1997,
and two in 1998. As of March 23, 1999 the Company had twelve restaurants which
have been constructed but will not open for business until such time as
operations improvement initiatives have been implemented. However, the Company
anticipates that all twelve will open during 1999.
As of March 23, 1999, the Company had sites for eight additional
restaurants, six of which were acquired by purchase and two by lease. The
Company does not anticipate that any of the eight sites will be constructed or
opened in 1999.
SMALL MARKETS AND EXPANSION OF FOREIGN MARKETS
In 1997, the Company opened seven Lone Star restaurants in small town
markets generally having a population of approximately 35,000 to 40,000 but
having a regional trade area draw of between 70,000 and 100,000 people. The Lone
Star restaurants in these areas are approximately 4,700 to 5,000 square feet.
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The Company is not pursuing expansion of Lone Star Steakhouse & Saloon
business outside the United States at this time. Pursuant to a joint venture
arrangement covering Australia and New Zealand (the "Australian Joint Venture"),
the Australian Joint Venture owns and operates 40 restaurants. The Company does
not plan to open any additional units in Australia in 1999. A licensed Lone Star
Steakhouse & Saloon restaurant opened in Guam in mid-1995.
EXPANSION INTO UPSCALE MARKETS
In September 1995, the Company entered the upscale steakhouse niche by
acquiring the intellectual property rights, marks and trade name of Del Frisco's
Double Eagle Steak House. The Del Frisco's restaurants are located in Dallas and
Ft. Worth, Texas, and Denver, Colorado. The Company also became the licensor of
two Del Frisco's restaurants in Houston, Texas and Orlando, Florida. The Company
has no plans for future franchising of the Del Frisco's concept. The Company has
leased approximately 16,000 square feet of space in Rockefeller Plaza in New
York City and will open a Del Frisco's restaurant in early summer of 1999. The
Company also expects to open a Del Frisco's restaurant in Las Vegas, Nevada in
1999.
The Company developed and operates a second upscale steak restaurant
concept, Sullivan's Steakhouse, where the average check per customer is
approximately $44. The Company opened its first Sullivan's restaurant in May
1996 in Austin, Texas and a second unit in November 1996 in Indianapolis,
Indiana. In 1997, two Sullivan's and, in 1998, six Sullivan's were opened. The
Company expects to open five or six Sullivan's restaurants in 1999 in the United
States.
While the Company intends to have substantial and increasing presence in
the mid-priced, full service, casual dining steakhouse restaurant niche, the
Company believes considerable opportunities exist in the upscale steakhouse
market. However, the Company has temporarily curtailed the development of its
upscale steakhouse concepts and future development will be evaluated on a
site-by-site basis with no current commitments to open additional upscale units
beyond the two Del Frisco's and three Sullivan's restaurants scheduled to open
in 1999.
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. In 1998, the Company selected an advertising agency and
spent approximately $4,300,000 for a radio and television advertising campaign
in markets covering approximately 45% of the domestic Lone Star's. The results
were disappointing and the Company does not plan additional expenditures for
radio and television advertising until it has completed the operations
improvement initiatives in the existing restaurants. (See Restaurant Operations
and Management).
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RESTAURANT OPERATIONS AND MANAGEMENT
The Lone Star Steakhouse & Saloon concept has evolved from various
steakhouse restaurants that certain of the Company's founders had operated since
1985. In addition, the restaurant operations and management systems are an
outgrowth of systems and controls developed by the Company's senior management
and 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.
Since 1996, the management team for a typical Lone Star restaurant has
consisted of one general manager and three managers. The Company is currently in
the process of hiring an additional management position for each of its
restaurants, which would bring the management team to one General Manager and
four support managers for each restaurant. Each restaurant also employs a staff
consisting of approximately 50 to 90 hourly employees, many of whom work
part-time. Typically, each general manager reports directly to a district
manager who reports to a regional manager. Restaurant managers complete an
eight-week training program during which they are instructed in 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
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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 visit Company
restaurants and meets with the respective management teams to ensure the
Company's strategies and standards of quality are met in all respects of
restaurant operations and personnel development.
The Company 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, complete financial statements are
produced and, subsequently, the district managers and the Company's senior
management 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
operations. The Company believes the peer review system enables each general
manager to benefit from the collective experience of all of the Company's
management.
The Company believes 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 wait persons to a limited number of tables, generally three for dinner
and four for lunch. Teamwork is emphasized through a runner system for
delivering food to the tables that is designed to serve customers in an
efficient and timely manner.
Each new restaurant employee of the Company participates in a training
program during which the employee works under the close supervision of a
restaurant manager. Management strives to instill enthusiasm and dedication in
its employees and 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.
During 1998, the Company completed a recertification training program to
re-train the regional, district, and general managers. The Company believes this
re-training will help maintain and enhance management congruence and
re-emphasize the Company's dedication to superior service, food quality, and
operating performance.
In May 1998, the Company reduced the span of control for its District
Managers and the number of District Managers was increased from eleven to twenty
three. In addition, the Company has improved its processes for selecting and
training for the District Manager position.
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PURCHASING
Approximately 60% of the consumable products used in the restaurants are
distributed through and delivered by a single vendor. The Company negotiates
directly with suppliers for food and beverage products to ensure consistent
quality and freshness of products and to obtain competitive prices. The Company
purchases substantially all food and beverage products from local or national
suppliers. Food and supplies are shipped directly to the restaurants, although
invoices for purchases are sent to the Company for payment. The Company does not
maintain a central product warehouse or commissary. The Company has not
experienced any significant delays in receiving restaurant supplies and
equipment. From time to time, the Company engages in forward pricing and may
consider other risk management 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. The Company had no forward pricing contracts at December 29,
1998. As of March 23, 1999, the Company has committed to forward pricing and
quantities for approximately 80% of its projected meat purchases through 1999.
These forward pricing agreements are at prices slightly less than the average
spot market prices for the meat items in 1998.
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.
In 1998, the Company began implementation of a point-of-sale (P.O.S.)
system. As of March 23, 1999, the P.O.S. system had been installed in 220 of the
267 domestic Lone Star restaurants, with the remaining installations expected to
be completed in the second quarter of 1999. The cost of the P.O.S. system
implementation is expected to be approximately $9 million.
For the Company to better utilize the data provided from the restaurants
P.O.S. system the Company is installing a database enterprise resource
management system. The implementation and conversion process began in November
1998, and the basic systems are expected to go live the second quarter of 1999,
with further conversions throughout 1999. The total cost of the enterprise
resource management system is expected to be approximately $4 million.
ACCOUNTING AND ADMINISTRATIVE SERVICES
Prior to October of 1998, the Company utilized certain accounting and
administrative services provided by Coulter Enterprises, Inc., (C.E.I.) pursuant
to the terms of a services agreement. For 1998, the annualized fixed fee was
$3,737,000 and the per restaurant, per 28-day accounting period fee was $466.
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On October 19, 1998, the Company acquired the operations and purchased
certain assets and assumed certain liabilities of Coulter Enterprises, Inc. from
Jamie B. Coulter, the Company's Chairman of the Board and Chief Executive
Officer. C.E.I. had provided accounting and administrative services to the
Company since the Company's inception.
COMPETITION
Competition in the restaurant industry is increasingly intense. The
Company operates its mid-scale and upscale 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. While the Company believes 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
categories 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 has food service licenses from
local health authorities. The Companys' licenses to sell alcoholic beverages
must be renewed annually and may be suspended or revoked at any time for cause,
including violation by the Company or its employees of any law or regulation
pertaining to alcoholic beverage control, such as those regulating the minimum
age of patrons or employees, advertising, wholesale purchasing, and inventory
control. The failure of a restaurant to obtain or retain liquor or food service
licenses could have a material adverse effect on its operations. In order to
reduce this risk, each restaurant is operated in accordance with standardized
procedures designed to ensure compliance with all applicable codes and
regulations.
The Company may be subject in certain states to "dram-shop" statutes,
which generally provide a person injured by an intoxicated person the right to
recover damages from an establishment that wrongfully served alcoholic beverages
to the intoxicated person. The Company carries liquor liability coverage as part
of its existing comprehensive general liability insurance.
Any future development and construction of additional restaurants will
be subject to compliance with applicable zoning, land use and environmental
regulations. The Company's restaurant operations are also subject to federal and
state minimum wage laws governing such matters as working conditions, overtime
and tip credits and other employee matters. Significant numbers of the Company's
food service and preparation personnel are paid at rates related to the federal
minimum wage and, accordingly, further increases in the minimum wage could
increase the Company's labor costs.
-12-
TRADEMARKS
The Company regards its marks, Lone Star Steakhouse & Saloon(R), 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.
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. On February 17, 1999,
the United States District Court for the Southern District of Texas, Houston
Division, entered summary judgement in favor of the Company holding that the
Houston licensee breached the license agreement and infringed on the Del
Frisco's mark from the date of expiration of the license, which was June 2,
1996. The Court has set a hearing date of April 27, 1999, to determine the
amount of attorney fees and damages to be assessed against the Houston
ex-licensee. The Houston ex-licensee has ceased using Del Frisco's marks.
EMPLOYEES
As of March 23, 1999, the Company employed approximately 19,440
persons, 4 of whom are executive officers, 79 of whom are office support
personnel, 6 of whom are regional managers, 25 of whom are district managers,
approximately 1,749 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-
RESTAURANT LOCATIONS AS OF MARCH 24, 1999
THE FOLLOWING TABLE SETS FORTH THE LOCATION OF THE COMPANY'S EXISTING, OPEN
DOMESTIC LONE STAR STEAKHOUSE & SALOON (267) RESTAURANTS, DEL FRISCO'S (3)
RESTAURANTS, AND SULLIVAN'S (12) RESTAURANTS:
ALABAMA ILLINOIS MASSACHUSETTS NORTH CAROLINA SOUTH DAKOTA
Anniston Bloomington Boston (2) Asheville Sioux Falls
Birmingham (2) Bradley Boone
Huntsville Carbondale MICHIGAN Charlotte (4) TENNESSEE
Mobile Champaign Ann Arbor Durham Jackson
Montgomery Chicago (11) Battle Creek Fayetteville Johnson City
Trussville Decatur Bay City Greensboro (2) Knoxville
Tuscaloosa Hodgkins Brighton Greenville Memphis (3)
Mt. Vernon Dearborn Jacksonville
ALASKA Peoria Detroit (7) Raleigh (3) UTAH
Anchorage Rockford Grand Rapids Rocky Mount Centerville
Springfield Jackson Salisbury Layton
ARIZONA Saginaw Southern Pines Salt Lake City
Mesa INDIANA Waterford Winston-Salem
Phoenix (4) Anderson VIRGINIA
Evansville MISSISSIPPI NORTH DAKOTA Alexandria
ARKANSAS Fort Wayne Hattiesburg Fargo Centreville
Ft. Smith Indianapolis (4) Jackson Chesapeake
Little Rock (2) Lafayette OHIO Fairfax
Springdale Merrillville MISSOURI Akron Falls Church
South Bend Branson Canton Fredericksburg
COLORADO Terre Haute Independence Cincinnati (4) Herndon
Colorado Springs Kansas City Cleveland (5) Norfolk
Denver (6) IOWA Springfield Columbus (5) Potomac Mills
Fort Collins Cedar Rapids St. Louis (5) Dayton (2) Richmond (3)
Loveland Coralville Lancaster Sterling
Davenport NEBRASKA Middletown Virginia Beach
DELAWARE Des Moines Lincoln Niles
Dover Waterloo Omaha (2) Springfield WEST VIRGINIA
Wilmington (2) Toledo (2) Beckley
KANSAS NEVADA Youngstown Charleston
FLORIDA Garden City Las Vegas (4) Huntington
Bradenton Hutchinson OKLAHOMA Vienna
Clearwater Overland Park NEW JERSEY Lawton
Coral Springs Atlantic City Oklahoma City WISCONSIN
Fort Lauderdale KENTUCKY Bridgewater Tulsa Appleton
Fort Myers Bowling Green Cherry Hill Racine
Gainesville Florence Delran PENNSYLVANIA
---------------------
Lakeland Lexington Eatontown Allentown SULLIVAN'S
Ocala Louisville Edison Easton LOCATIONS
---------------------
Orlando Hanover Township Erie Anchorage, AK
Pensacola LOUISIANA Hazlet Harrisburg Austin, TX
Port Richey Alexandria Marlton Johnstown Baton Rouge, LA
Sarasota Baton Rouge (2) Ocean County King of Prussia Charlotte, NC
St. Petersburg Lafayette Scotch Plains Lancaster Dallas, TX
Tampa Monroe Turnersville Middletown Denver, CO
New Orleans (4) Voorhees Philadelphia (3) Houston, TX
GEORGIA Shreveport Wayne Pittsburgh (5) Indianapolis, IN
Atlanta Pottstown King of Prussia, PA
Augusta MARYLAND NEW MEXICO Reading Naperville, IL
Bel Air Albuquerque Scranton Palm Desert, CA
IDAHO Columbia Wilkes-Barre Wilmington, DE
Boise Frederick NEW YORK York
---------------------
Gaithersburg Albany DEL FRISCO'S
Laurel Buffalo SOUTH CAROLINA LOCATIONS
---------------------
Lexington Park Poughkeepsie Greenville Denver, CO
Waldorf Rochester (2) Myrtle Beach (2) Dallas, TX
Westminster Spartanburg Ft. Worth, TX
-14-
ITEM 2. PROPERTIES
As of March 23, 1999, the Company leased 102 and owned 165 of its
domestic Lone Star restaurant locations. At such date, the Company leased one
and owned two Del Frisco's Steak House restaurant locations. Of the twelve
Sullivan's restaurants, eleven are leased and one is owned. Lease terms are
generally 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 maintenance. The Company intends to continue to purchase
restaurant locations where cost-effective.
The Company's executive offices are located at 224 East Douglas, Suite
700, Wichita, Kansas, 67202 which space is leased from an unaffiliated third
party. The Company believes 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.
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 29, 1998.
-15-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock (ticker symbol: STAR) is traded
over-the-counter on the Nasdaq National Market (Nasdaq). The following table
sets forth, for the periods indicated, the high and low sale prices for the
Common Stock, as reported by Nasdaq.
BID PRICES
----------
CALENDAR 1998 HIGH LOW
- ---------------- ---- ---
First Quarter 23 7/16 17 1/8
Second Quarter 23 1/4 12 1/2
Third Quarter 14 1/8 6
Fourth Quarter 9 1/4 6 5/8
BID PRICES
----------
CALENDAR 1997 HIGH LOW
- --------------- ---- ---
First Quarter 28 1/2 22 3/4
Second Quarter 26 18 1/4
Third Quarter 25 1/16 17 1/8
Fourth Quarter 23 3/16 16 1/8
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 26, 1999, there were 581 holders of record of the Company's
Common Stock. The Company believes there are in excess of 15,000 beneficial
owners of the Company's Common Stock.
-16-
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data and
is qualified by reference to and should be read in conjunction with the
consolidated financial statements and the notes thereto and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K. The selected consolidated data of the
Company as of December 29, 1998, December 30, 1997, December 31, 1996, December
26, 1995, and December 29, 1994, and for each of the five years in the period
ended December 29, 1998, were derived from the Company's audited consolidated
financial statements. The pro forma data set forth below for the periods
presented are unaudited and have been prepared by management solely to
facilitate period-to-period comparison and do not represent the actual results
of operations for the periods presented. The pro forma adjustments reflect (1)
the adjusment amounts applicable for the fiscal years 1994 through 1997 to give
retroactive effect to the change in accounting for pre-opening costs adopted in
fiscal 1998 (see Note 4 to the Company's consolidated financial statements) and
(2) the adjustments for fiscal 1994 and 1995 for the income tax provisions at
the estimated effective federal and state income tax rates applicable to the
operations of a group of related entities which were operated under common
control (collectively, the "CCC Group). The transaction was accounted for as a
pooling of interest and the pooled companies were taxed as S-Corporations for
income tax purposes prior to their acquisition by the Company in August 1995.
-17-
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)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Income Statement Data:
Net sales $ 616,692 $ 585,358 $ 491,754 $ 340,857 $ 215,800
Costs and expenses:
Costs of sales 231,787 211,571 172,338 120,871 76,888
Restaurant operating expenses 270,495 215,805 167,871 116,703 71,996
Restaurant depreciation and
amortization 26,346 30,590 28,384 19,817 12,989
General and administrative expenses 32,070 21,649 21,285 12,693 8,117
Provision for impaired assets 4,646 -- -- -- --
Loss on divestiture of foreign operations -- -- 8,557 -- --
---------- ---------- ---------- ---------- ----------
Total costs and expenses 565,344 479,615 398,435 270,084 169,990
---------- ---------- ---------- ---------- ----------
Income from operations 51,348 105,743 93,319 70,773 45,810
Other income, net 2,906 4,108 3,682 2,910 1,263
---------- ---------- ---------- ---------- ----------
Income before provision for income
taxes and minority interest 54,254 109,851 97,001 73,683 47,073
Provision for income taxes 21,843 40,075 37,518 26,820 16,900
Minority interest -- (968) 584 705 --
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
Change in accounting principle 32,411 68,808 60,067 47,568 30,173
Cumulative effect of change in accounting
Principle (net of income tax of $2,922) (6,904) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net Income $ 25,507 $ 68,808 $ 60,067 $ 47,568 $ 30,173
========== ========== ========== ========== ==========
Basic earnings per share:
Income before cumulative effect of
Change in accounting principle $ .81 $ 1.68 $ 1.53 $ 1.31 $ 0.88
Cumulative effect of change
In accounting principle $ (.17) -- -- -- --
---------- ---------- ---------- ---------- ----------
Basic earnings per share $ .64 $ 1.68 $ 1.53 $ 1.31 $ 0.88
========== ========== ========== ========== ==========
Weighted average shares
outstanding 39,989,091 41,013,749 39,383,891 36,432,464 34,295,830
========== ========== ========== ========== ==========
Pro forma net income (2) -- $ 66,815 $ 62,498 $ 44,315 $ 27,791
========== ========== ========== ==========
Pro forma basic earnings per share -- $ 1.63 $ 1.59 $ 1.22 $ .81
========== ========== ========== ==========
-18-
At Fiscal Year End In December, (1)
------------------------------------------------------------
(Dollars in thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $ 67,592 $117,127 $126,244 $ 59,880 $ 37,618
Total assets 608,583 620,812 542,152 358,218 204,028
Long-term debt,
including current
portion -- -- -- 3,874,318 4,318
Stockholders' equity 553,441 566,148 495,239 322,811 180,072
(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 1994 fiscal year ended on December 29 and its 1995, 1996,
1997, and 1998 fiscal years ended on December 26, 31, 30, and 29,
respectively. 1996 included 53 weeks of operations and all other fiscal
years were 52 weeks.
(2) Pro forma net income amounts reflect (1) the adjustments for fiscal
years 1994 through 1997 to give retroactive effect to the change in
accounting for pre-opening costs adopted in fiscal 1998 (see Note 4 to
the Company's consolidated financial statements) and (2) the
adjustments for fiscal years 1994 and 1995 to reflect the income tax
provisions applicable to the operations of a group of affiliated
companies acquired in 1995 in a transaction accounted for as a pooling
interest which were taxed as S-Corporations for income tax purposes
prior to their acquisition.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the information set forth under "Selected Financial Data" and the consolidated
financial statements including the notes thereto included elsewhere in this Form
10-K.
The Company began 1996 with 160 Lone Star domestic restaurants, opened
45 restaurants during 1996, 60 restaurants during 1997, and two in the year
ended December 29, 1998.
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 has a licensee which
operates a Del Frisco's restaurant in Orlando, Florida.
The Company has also developed another upscale steak restaurant concept
under the trade name Sullivan's Steakhouse, where the average check per customer
is approximately $44. The Company opened the first restaurant in May 1996, in
Austin, Texas and opened an additional restaurant in 1996, two in 1997, and six
additional restaurants in 1998 in the following cities:
Charlotte, North Carolina Anchorage, Alaska Naperville, Illinois
King of Prussia, Pennsylvania Houston, Texas Dallas, Texas
In January 1999,the Company opened Sullivan's restaurants in Denver,
Colorado and Palm Desert, California.
-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
- ----------------------------------------------------------------------------------------------
December 29, December 30, December 31,
1998 1997 1996
------------ ------------ ------------
(Dollars in thousands)
Income Statement Data:
Net Sales 100.0 100.0 100.0
Costs and expenses:
Costs of sales 37.6 36.1 35.1
Restaurant operating expense 43.9 36.9 34.1
Provision for impairment losses .7 -- --
Depreciation and amortization 4.3 5.2 5.8
------ ------ ------
Restaurant costs and expenses 86.5 78.2 75.0
------ ------ ------
Restaurant operating income 13.5 21.8 25.0
General and administrative expenses 5.2 3.7 4.3
Loss on divestiture of foreign operations -- -- 1.7
------ ------ ------
Income from operations 8.3 18.1 19.0
Other income and minority interest .5 .5 .7
------ ------ ------
Income before provision for income
taxes 8.8 18.6 19.7
Provision for income
taxes 3.5 6.8 7.5
------ ------ ------
Income before cumulative effect of change
in accounting principle 5.3% 11.8% 12.2%
Cumulative effect of change in accounting principle (1.2)% -- --
------ ------ ------
Net Income 4.1% 11.8% 12.2%
====== ====== ======
Restaurant Operating Data:
Average sales per restaurant on an
annualized basis (1) $1,957 $2,255 $2,509
====== ====== ======
Number of restaurants at end of period 322 308 232
Number of full restaurant periods open
during the period (2) 4,178 3,335 2,546
- --------------------------------------
(1) 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.
(2) Full restaurant periods are four-week accounting periods within the
fiscal year (excluding the first partial accounting period of
operations) that a restaurant is open.
-20-
YEAR ENDED DECEMBER 29, 1998 COMPARED TO YEAR ENDED DECEMBER 30, 1997
Net sales increased $31,334,000 (5.4%) for the year ending December 29,
1998, compared to the year ended December 30, 1997. Consolidated sales for the
international joint venture restaurants (Australian) increased $3,700,000. Same
store sales decreased 9.3% for the year.
Costs of sales, primarily food and beverages increased as a percentage
of sales to 37.6% for the year from 36.1% due to slightly higher beef prices as
well as some discounted menu items and free appetizers offered in a national
marketing campaign. During most of 1997, the Company purchased beef under
contracted prices which allowed the Company to maintain more stable beef costs.
Such contracts expired in September 1997 and during 1998 most purchases were at
the cash market prices.
Restaurant operating expenses increased $54,690,000 (25.3%) from
$215,805,000 in 1997. Most of the increase is attributable to the 22.5% increase
in restaurant operating weeks due primarily to a full year's operation in the 76
restaurants opened in 1997. Advertising expense increased 47% due to the
expenditure of $3.2 million for the eight week television and radio campaign in
July and August 1998. Training expenses increased $2.1 million due to the
recertification training in the first half of the year, and the eight week
training for new managers in the second half of the year. Pre-opening costs of
$3,437,000 are included in 1998 while such costs had been capitalized and
amortized in 1997. In addition, the increase as a percent of sales is affected
by the fixed cost components on lower average restaurant sales.
Provisions for impairment losses reflect the charge made in the fourth
quarter for the write down of certain under-performing restaurant assets. The
Company periodically reviews its long lived assets which are held and used in
its restaurant operations for indications of impairment (see Note 12 to
Consolidated Financial Statements).
Depreciation and amortization decreased $4,244,000 (13.9%) for 1998
compared to 1997. The decrease was attributed to the fact that 1998 does not
include amortization of pre-opening costs as compared to amortization in 1997 of
approximately $9,673,000. The decrease for pre-opening costs was offset by 1998
depreciation and amortization reflecting depreciation relating to the new
restaurants opened in late fiscal 1997 and during fiscal 1998.
General and administrative expenses increased $10,421,000 (48.1%) from
1997. Advertising consultant and commercial production costs for the eight week
media campaign were approximately $1,100,000. Increased multi unit supervisor
costs were $1,805,000 and the travel, lodging, and out-of-pocket costs for the
recertification training were up $581,000. Recruiting costs for new managers
increased $309,000 primarily in the last half of 1998. Variable home office
support costs increased proportionately with the 22.5% increase in restaurant
operating weeks in 1998.
Prior to October 1998, certain accounting and administrative services
were contracted from C.E.I. The service agreement provided for specified
accounting and administrative services to be provided on a cost pass-through
basis. The Company paid a fixed annualized charge of $3,737,000, plus an
additional fee of $466 per restaurant per 28-day accounting period, plus
reimbursement of out-of-pocket costs and expenses. On October 19, 1998, the
Company acquired the operations of C.E.I. for a purchase price of $11.4 million.
As a result of the acquisition, the Company will internally provide the
accounting and administrative services previously provided by C.E.I. (see Note 2
to Consolidated Financial Statements).
-21-
Other income, primarily interest, for the year was $2,906,000, a
$1,202,000 decrease from 1997. This decrease is attributable to reduced funds
available for short term investment purposes.
The effective income tax rate for the year was 42.6% compared to 36.8%
for 1997. The increase in the effective tax rate was primarily attributable to
the valuation allowance reflected in 1998 related to Australian net operating
loss carry forwards where uncertainty exists regarding the realization of
certain future tax benefits. The impact of the valuation allowance was slightly
offset by a decrease in the effective state income tax rates and the increased
impact of the earned FICA tip credit as a result of lower pretax earnings.
The cumulative effect of change in accounting principle represents the
effect of adoption of Statement of Position 98-5, "Reporting on Costs of Start
Up Activities". This statement impacted the Company's accounting for pre-opening
costs (see Note 4 to Consolidated Financial Statements).
YEAR ENDED DECEMBER 30, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales increased $93,604,000 (19%) for the year ended December 30,
1997 compared to the year ended December 31, 1996 principally attributable to
$60,703,000 in additional sales from units opened the full year in 1997 versus a
partial year in 1996, $43,350,000 in sales from the 60 new domestic Lone Star
restaurants opened in 1997, and $7,038,000 in additional sales from the
Sullivan's and Del Frisco's restaurants opened in 1997. Consolidated sales for
international joint venture restaurants (Australian) increased $20,565,000. Same
store sales were down 6.3% for the year.
Costs of sales, primarily food and beverages increased as a percentage
of sales to 36.1% for the year ended December 30, 1997 from 35.1% due to
slightly higher beef prices as well as some discounted menu items and free
appetizers offered in a national marketing campaign. During these periods, the
Company purchased beef under contracted prices which allowed the company to
maintain more stable beef costs. Such contracts expired in September, 1997
although there may be a possibility of contracting prices in the future. If the
Company is unable to contract prices in the future, beef costs could be less
stable.
Restaurant operating expenses for the year ended December 30, 1997
increased $47,934,000 (28.6%) from $167,871,000 in the year ended December 31,
1996 to $215,805,000 and such expenses increased as a percentage of net sales
from 34.1% to 36.9%. This increase is attributable to the national marketing
efforts the Company has employed in addition to higher fixed costs in the way of
building and equipment maintenance costs on the domestic Lone Star restaurants
as well as higher labor and occupancy costs in the Australian restaurants, and
the effect of other fixed cost components on lower average restaurant sales.
Depreciation and amortization increased $2,206,000 (7.8%) in the year
ended December 30, 1997 over the year ended December 31, 1996 principally
reflecting the depreciation of equipment relating to the opening of 60 new
restaurants in 1997, and increases in deprecitation relating to additional owned
properties. General and administrative expenses for the year ended December 30,
1997 increased $364,000 (1.7%) from 1996.
Certain accounting and administrative services were contracted from
C.E.I., a restaurant management services and consulting company owned by the
Company's Chairman of the Board and Chief Executive Officer. The service
agreement provided 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 $2,010,000, plus an additional fee of $440 per restaurant per
28 day accounting period, plus reimbursement of out of pocket costs and expenses
during the fiscal year
-22-
ended December 30, 1997. The sevice agreement was renewed for fiscal 1998 with
the fixed annual charge increasing to $3,737,000 and the per restaurant, per
accounting period fee increasing to $466.
In June 1996, 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 do not operate as Lone Star Steakhouse &
Saloon restaurants.
Other income, principally interest, for the year ended December 30,
1997, was $4,108,000 a $426,000 increase from 1996. This increase is
attributable to the investment for a full year of the remaining net proceeds of
the Company's public offering in May 1996.
The effective income tax rate for the year ended December 30, 1997 was
36.8% compared to 38.4% for 1996. The decrease in the rate is primarily due to
certain losses in 1996 resulting from the write off of the European Joint
Venture that were not available for deduction. Without the impact of the
European Joint Venture write off, the effective rate was 36.9% in 1996.
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:
December 29, December 30, December 31,
1998 1997 1996
------------ ------------ ------------
Net cash provided by operating activities $ 62,597,724 $ 87,549,170 $ 105,646,602
Net cash used in investment activities (73,249,766) (108,356,293) (131,501,646)
Net cash provided (used) by financing activities (35,378,938) 7,328,065 109,401,300
Net effect of exchange rate changes on cash (119,006) (1,245,232) (249,854)
Net increase (decrease) in cash (46,149,986) (14,724,290) 83,296,402
During the year ended December 29, 1998, the Company's purchases of
property and equipment were $63,121,876.
The Company has opened 137 restaurants in the past three fiscal years of
which 59 opened during 1996, 76 in 1997 and two in 1998. The Company does not
have significant accounts receivable 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 capital expenditures.
At December 29, 1998, the Company had $89,847,000 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 three leases for new locations. The Company is not
-23-
actively negotiating purchase or lease of additional sites. In the future, the
Company anticipates that a greater proportion of its new restaurant locations
will be purchased rather than leased.
During 1998, the Company's Board of Directors authorized the purchase of
up to 5,900,000 shares of the Company's common stock from time to time in the
open market or in privately negotiated transactions. As of December 29, 1998,
2,610,000 shares with a cumulative cost of approximately $36,375,000 had been
purchased under the program.
Beginning in the fourth quarter of 1998 the Company began utilizing
derivative financial instruments in the form of commodity futures contracts to
manage market risks and reduce its exposure resulting from fluctuations in the
prices of meat. The Company uses live beef cattle futures contracts to
accomplish its objective. Realized and unrealized changes in the fair values of
the derivative instrument are recognized in income in the period in which the
change occurs. Realized and unrealized gains and losses for the period have not
been significant. At December 29, 1998, the Company's exposure for open
positions in futures contracts were not significant.
YEAR 2000 COMPUTER ISSUE
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company has instituted a Year 2000 project to prepare its computer
systems and communication systems for the Year 2000. The project includes
identification and assessment of all software, hardware and equipment that could
potentially be affected by the Year 2000 Issue and remedial action and further
testing, if necessary.
In the fourth quarter of 1998 the Company committed to a program to
install new point-of-sale devices and systems in most of its restaurants. In
addition, the Company is installing a new data base information system that will
provide significant enhancements to its capabilities to process and analyze data
provided by the new point-of-sale systems. The Company expects these systems to
be fully implemented by mid-1999. The hardware and software providers of the new
systems have warranted that the new systems are Year 2000 compliant. The Company
believes that certain existing software, hardware and equipment which will
continue to be utilized with the new systems are substantially Year 2000
compliant, but will require some modification and replacement; however if such
modifications and replacements are not made, or are not completed timely, the
Year 2000 Issue could have a significant impact on the operations of the
Company.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing, and implementation. To date, the
Company has fully completed its assessment of all systems that, it believes,
could be significantly affected by the year 2000. The completed assessment
indicated that certain parts of the Company's significant information technology
systems could be affected, particularly the financial reporting systems. In
addition, the Company is gathering information about the year 2000 compliance
status of its significant suppliers and service providers and continues to
monitor their compliance.
For its information technology exposures, to date the Company estimates
that it is 85% complete on the remediation phase and expects to complete
software reprogramming and replacement no later than June 1, 1999. Once software
is reprogrammed or replaced for a system, the Company begins testing and
implementation. These phases run concurrently for different systems. To date,
the Company has completed 90% of its testing and has implemented 75% of its
remediated systems. Completion of the testing phase for all significant systems
in expected by April 15, 1999, with all recommended systems fully tested and
implemented by May 15, 1999, with 100% completion targeted for July 31, 1999.
The Company has queried its significant suppliers and service providers
that do not share information systems with the Company (external agents). To
date, the Company is not aware of any external agent with a year 2000 issue that
would materially impact the Company's results of
-24-
operations, liquidity, or capital resources. However, the Company has no means
of ensuring that external agents will be year 2000 ready. The inability of
external agents to complete their year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-compliance by
external agents is not determinable.
The Company will utilize both internal and external resources to
reprogram, replace, test and implement the software and hardware equipment for
year 2000 modifications. The total cost of the Year 2000 Issue is estimated to
be less than $100,000 and the Company expects most of the costs will be
expensed. All costs are being funded through operating cash flow. The projected
costs do not include the costs of the new point-of-sale devices and systems and
the costs of equipment, software, and installation of the new data base
information system previously discussed.
Management of the Company believes it has an effective program in place
to resolve the Year 2000 Issue in a timely manner. As noted above, the Company
has not yet completed all necessary phases of the Year 2000 project. In the
event that the Company does not complete any additional phases, the Company
might be unable to process transactional and financial reporting information. In
addition, disruptions in the economy generally resulting from the year 2000
issues could also materially adversely affect the Company. The Company could be
subject to litigation for computer systems product failure, for example,
equipment shutdown or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
The Company has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds, increasing inventories, and adjusting
staffing strategies.
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 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 the forward-looking
statements included in this report will prove to be accurate. Factors that could
cause actual results to differ from the results discussed in the forward-looking
statements include, but are not limited to certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Although the
Company believes the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance the forward-looking statements contained 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 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Not applicable.
-25-
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.
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.
-26-
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.
All financial statement schedules have been omitted since
the required information is not present.
Exhibits
INDEX TO EXHIBITS
Exhibit EXHIBIT
Number -------
------
***3.1 Company's Certificate of Incorporation as amended
***3.2 Company's By-Laws
******10.1 Agreement, dated October 19, 1998, between LS
Management, Inc., a wholly-owned subsidiary of
Lone Star Steakhouse & Saloon, Inc. and Coulter
Enterprises, Inc. and Coulter Enterprises, Inc.,
dated October 19, 1998.
*****10.2 Employment Agreement between the Company and John
D. White, dated February 1, 1998
****10.3 1992 Lone Star Steakhouse & Saloon, Inc. Incentive
and Non-qualified Stock Option Plan (the "Plan")
as amended
***10.4 Form of Indemnification Agreement for officers and
directors of the Company
***10.5 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 Employment Agreement between the Company and Mike
Archer, dated February 1, 1998
*****10.8 Employment Agreement between the Company and
Gerald T. Aaron, dated February 1, 1998.
*******11.1 Subsidiaries of the Company
*23.1 Independent Auditors' consent to the incorporation
by reference to the Company's Registration
Statement on Form S-8 of the independent auditors'
report included herein
*27.0 Financial data schedule
-----------------------------
(b) Reports on Form 8-K filed in the fourth quarter of 1998: none
-27-
* 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 Quarterly Report on Form
10-Q for the quarter ended March 24, 1998.
****** Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 8, 1998.
******* Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 30, 1997
-28-
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 29th day of March 1999.
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
-29-
SIGNATORIES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons in the capacities and on
the date indicated.
SIGNATURE TITLE DATE
/s/Jamie B. Coulter
- ------------------------ Chairman of the Board March 26, 1999
Jamie B. Coulter and Chief Executive
Officer
/s/ John D. White
- ------------------------ Executive Vice
John D. White President,
Chief Financial Officer March 26, 1999
and
Principal Accounting
Officer
Treasurer and Director
/s/ Michael J. Archer
- ------------------------ Chief Operating Officer March 26, 1999
Michael J. Archer Del Frisco's/Sullivan's
and Director
/s/ William H. Tilley
- ------------------------ Director March 26, 1999
William H. Tilley
/s/ Clark R. Mandigo
- ------------------------ Director March 26, 1999
Clark R. Mandigo
/s/ Fred B. Chaney
- ------------------------ Director March 26, 1999
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 29, 1998 and December 30, 1997----F-3
Consolidated Statements of Income for the years ended December 29, 1998,
December 30, 1997 and December 31, 1996---------------------------------F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 29, 1998, December 30, 1997 and December 31, 1996--------------F-6
Consolidated Statements of Cash Flows for the years ended
December 29, 1998, December 30, 1997 and December 31, 1996--------------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 29, 1998 and December 30, 1997 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 29, 1998. 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 29, 1998 and December 30, 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 29, 1998, in conformity with generally
accepted accounting principles.
As described in Note 4 to the consolidated financial statements, in 1998 the
Company adopted Statement of Position 98-5, Reporting the Costs of Start-Up
Activities, as issued by the American Institute of Certified Public Accountants.
Wichita, Kansas
March 26, 1999
/s/ Ernst & Young LLP
F-2
Lone Star Steakhouse & Saloon, Inc.
Consolidated Balance Sheets
December 29, December 30,
1998 1997
--------------------------
Assets
Current assets:
Cash and cash equivalents $ 89,847,010 $135,996,996
Accounts receivable 1,489,577 1,614,839
Inventories 15,893,916 10,955,361
Preopening costs, net -- 9,825,442
Deferred income taxes 1,504,304 1,282,954
Other 3,570,650 3,475,581
--------------------------
Total current assets 112,305,457 163,151,173
Property and equipment:
Land 139,513,959 132,201,161
Buildings 182,617,876 170,852,451
Leasehold improvements 112,904,419 93,681,898
Equipment 82,791,250 67,864,866
Furniture and fixtures 23,058,063 19,244,098
--------------------------
540,885,567 483,844,474
Less accumulated depreciation and amortization 79,820,488 54,521,936
--------------------------
461,065,079 429,322,538
Other assets:
Intangible assets, net 33,863,513 26,613,342
Other assets 1,348,795 1,724,877
--------------------------
35,212,308 28,338,219
--------------------------
Total assets $608,582,844 $620,811,930
==========================
F-3
December 29, December 30,
1998 1997
--------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 9,577,150 $ 14,221,099
Sales tax payable 967,971 2,525,505
Accrued payroll 12,975,613 10,475,393
Real estate taxes 2,738,579 1,740,529
Gift certificates 7,503,621 8,409,558
Income taxes payable 2,441,783 1,431,779
Other 8,508,671 7,220,411
--------------------------------------
Total current liabilities 44,713,388 46,024,274
Deferred income taxes 10,428,705 8,619,262
Minority interest - 19,927
Stockholders' equity
Preferred stock, $.01 par value, 2,000,000 shares
authorized; none issued
- -
Common stock, $.01 par value, 98,000,000 shares
authorized; 38,607,968 shares
issued and outstanding (41,156,151 in 1997)
386,080 411,562
Additional paid-in capital 314,365,697 349,607,732
Retained earnings 248,522,149 223,015,141
Accumulated other comprehensive loss (9,833,175) (6,885,968)
--------------------------------------
Total stockholders' equity 553,440,751 566,148,467
--------------------------------------
Total liabilities and stockholders' equity $ 608,582,844 $ 620,811,930
======================================
See notes to consolidated financial statements.
F-4
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Income
For the year ended
December 29, December 30, December 31,
1998 1997 1996
---------------------------------------------------------------
Net sales $ 616,691,926 $ 585,357,637 $ 491,754,270
Costs and expenses:
Costs of sales 231,787,445 211,571,507 172,338,134
Restaurant operating expenses 270,495,325 215,805,009 167,871,293
Depreciation and amortization 26,345,579 30,589,748 28,384,168
Provision for impaired assets 4,646,000 -- --
---------------------------------------------------------------
Restaurant costs and expenses 533,274,349 457,966,264 368,593,595
---------------------------------------------------------------
Restaurant operating income 83,417,577 127,391,373 123,160,675
General and administrative expenses:
Related parties 4,367,152 3,366,080 2,215,467
Other 27,702,409 18,282,740 19,068,740
Loss on divestiture of European joint venture -- -- 8,557,176
---------------------------------------------------------------
Income from operations 51,348,016 105,742,553 93,319,292
Other income:
Other income, net (principally interest) 2,906,098 4,108,545 3,681,493
---------------------------------------------------------------
Income before income taxes and minority interest 54,254,114 109,851,098 97,000,785
Provision for income taxes (21,843,298) (40,075,457) (37,517,693)
Minority interest -- (968,032) 584,202
---------------------------------------------------------------
Income before cumulative effect of a change
in accounting principle 32,410,816 68,807,609 60,067,294
Cumulative effect of change in accounting
principle (net of income
tax of $2,921,634) (6,903,808) -- --
---------------------------------------------------------------
Net income $ 25,507,008 $ 68,807,609 $ 60,067,294
===============================================================
Basic earnings per share:
Income before cumulative effect of a change
in accounting principle $ .81 $ 1.68 $ 1.53
Cumulative effect of change in accounting
principle (net of income tax) (.17) -- --
---------------------------------------------------------------
Basic earnings per share $ .64 $ 1.68 $ 1.53
===============================================================
Diluted earnings per share:
Income before cumulative effect of a change
in accounting principle $ .81 $ 1.65 $ 1.49
Cumulative effect of change in accounting
principle (net of income tax) (.17) -- --
---------------------------------------------------------------
Diluted earnings per share $ .64 $ 1.65 $ 1.49
===============================================================
Pro forma net income assuming retroactive
application of accounting change $ 66,815,027 $ 62,498,473
===================================
Pro forma basic earnings per share $ 1.63 $ 1.59
===================================
Pro forma diluted earnings per share $ 1.60 $ 1.55
===================================
See notes to consolidated financial statements.
F-5
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Stockholders' Equity
Accumulated
Other
Preferred Common Stock Additional Retained Comprehensive
---------------------
Stock Number Amount Paid-in Capital Earnings Loss Total
--------------------------------------------------------------------------------------------------
Balance, December 26, 1995 -- 37,587,974 $375,879 $ 228,578,790 $ 94,140,238 $ (284,364) $ 322,810,543
Shares issued in public offering -- 2,650,000 26,500 101,399,750 -- -- 101,426,250
Stock options exercised -- 464,751 4,648 8,034,952 -- -- 8,039,600
Tax benefit related to options
exercised -- -- -- 3,145,000 -- -- 3,145,000
Comprehensive income:
Net income -- -- -- -- 60,067,294 -- 60,067,294
Foreign currency
translation adjustments -- -- -- -- -- (249,854) (249,854)
-------------------------
Comprehensive income -- -- -- -- -- -- 59,817,440
------------------------------------------------------------------------------------------------
Balance, December 31, 1996 -- 40,702,725 407,027 341,158,492 154,207,532 (534,218) 495,238,833
Stock options exercised -- 453,426 4,535 7,398,801 -- -- 7,403,336
Tax benefit related to
options exercised -- -- -- 1,050,439 -- -- 1,050,439
Comprehensive income:
Net income -- -- -- -- 68,807,609 -- 68,807,609
Foreign currency
translation adjustments -- -- -- -- -- (6,351,750) (6,351,750)
-------------------------
Comprehensive income -- -- -- -- -- -- 62,455,859
------------------------------------------------------------------------------------------------
Balance, December 30, 1997 -- 41,156,151 411,562 349,607,732 223,015,141 (6,885,968) 566,148,467
Stock options exercised -- 61,817 618 996,078 -- -- 996,696
Tax benefit related to
options exercised -- -- -- 111,421 -- -- 111,421
Common stock repurchased -- (2,610,000) (26,100) (36,349,534) -- -- (36,375,634)
Comprehensive income:
Net income -- -- -- -- 25,507,008 -- 25,507,008
Foreign currency
translation adjustments -- -- -- -- -- (2,947,207) (2,947,207)
-------------------------
Comprehensive income -- -- -- -- -- -- 22,559,801
================================================================================================
Balance, December 29, 1998 -- 38,607,968 $386,080 $ 314,365,697 $ 248,522,149 $ (9,833,175) $ 553,440,751
================================================================================================
See notes to consolidated financial statements.
F-6
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Cash Flows
For the year ended
-------------------------------------------------------
December 29, December 30, December 31,
1998 1997 1996
-------------------------------------------------------
Operating activities
Net income $ 25,507,008 $ 68,807,609 $ 60,067,294
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 1,608,748 10,775,039 13,693,946
Depreciation 26,643,216 20,169,425 15,013,033
Provision for impaired assets 4,646,000 -- --
Cumulative effect of accounting change 9,825,442 -- --
Loss on divestiture of European joint venture -- -- 6,759,848
Deferred income taxes 1,588,093 614,110 938,071
Minority interest -- 968,032 (584,202)
Net change in operating assets and liabilities:
Accounts receivable 130,890 618,280 (924,254)
Inventories (4,996,723) (6,301,613) (571,716)
Preopening costs -- (12,585,828) (8,632,004)
Refundable income taxes -- -- 5,006,856
Other current assets (91,635) (2,992,980) (693,465)
Accounts payable (6,513,881) 5,856,172 (1,043,215)
Income taxes payable 1,121,425 (2,616,242) 8,243,460
Other current liabilities 3,129,141 4,237,166 8,372,950
-------------------------------------------------------
Net cash provided by operating activities 62,597,724 87,549,170 105,646,602
Investing activities
Purchases of property and equipment (63,121,876) (103,827,087) (127,026,171)
Payment for acquisition of business from
related party (10,500,000) -- --
Cash paid in divestiture of European joint venture -- -- (1,797,328)
Other 372,110 (4,529,206) (2,678,147)
-------------------------------------------------------
Net cash used in investing activities (73,249,766) (108,356,293) (131,501,646)
Financing activities
Net proceeds from issuance of common stock 996,696 7,403,336 109,465,850
Payment of notes payable and capital lease obligations
-- (75,271) (64,550)
Common stock repurchased and retired (36,375,634) -- --
-------------------------------------------------------
Net cash provided (used) by financing activities (35,378,938) 7,328,065 109,401,300
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 29, December 30, December 31,
1998 1997 1996
----------------------------------------------------------------
Effect of exchange rate changes on cash $ (119,006) $ (1,245,232) $ (249,854)
Net increase (decrease) in cash and cash equivalents (46,149,986) (14,724,290) 83,296,402
Cash and cash equivalents at beginning of year 135,996,996 150,721,286 67,424,884
----------------------------------------------------------------
Cash and cash equivalents at end of year $ 89,847,010 $ 135,996,996 $ 150,721,286
================================================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ - $ 7,105
Cash paid for income taxes 16,415,563 40,829,142 23,329,306
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) 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 29, 1998, the Company owns and operates
267 Lone Star Steakhouse & Saloons in the United States as well as 40 in
connection with the joint venture in Australia. In addition, the Company owns
and operates three Del Frisco's Double Eagle Steak Houses and ten Sullivan's
Steakhouses.
Significant Accounting Policies
o 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.
o Foreign Currency Translation
Assets and liabilities of the Company's foreign joint venture are
translated at current exchange rates, while revenue and expenses are
translated at average exchange rates prevailing during the year.
Translation adjustments are reported as a component of stockholder's
equity.
o Concentration of Credit Risk
The Company's financial instruments exposed to concentration of credit
risk consist primarily of cash and short-term investments (cash
equivalents). The Company places its cash with high credit quality
financial institutions and, at times, such cash may be in excess of the
Federal Depository insurance limit. The Company has cash equivalents in
investment grade securities with municipal, State and U.S. government
agencies of approximately $58,280,000 and $97,361,000 at December 29, 1998
and December 30, 1997, respectively.
F-9
1. Background and Significant Accounting Policies (continued)
o 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.
o Cash and Cash Equivalents
The Company considers cash and cash equivalents to include currency on
hand, demand deposits with banks or other financial institutions, and
short-term investments with maturities of three months or less when
purchased. Cash and cash equivalents are carried at cost which
approximates fair value.
o Financial Instruments
Beginning in the fourth quarter of 1998, the Company began utilizing
derivative financial instruments in the form of commodity futures
contracts to manage market risks and reduce its exposure resulting from
fluctuations in the prices of meat. The Company uses live beef cattle
futures contracts to accomplish its objective. Realized and unrealized
changes in the fair values of the derivative instrument are recognized in
income in the period in which the change occurs. Realized and unrealized
gains and losses for the period have not been significant. At December 29,
1998, the Company had futures contracts to purchase live beef cattle in
the amount of $15,200,000. All of the contracts are scheduled to settle in
less than one year. The estimated fair value and carrying value of these
contracts was $250,000 at December 29, 1998. These instruments are with
counterparties of high credit quality; therefore, the risk of
nonperformance by the counterparties is considered to be negligible.
o Inventories
Inventories consist of food and beverages, and are stated at the lower of
cost (first-in, first-out) or market.
o Property and Equipment
Property and equipment are stated at cost. Maintenance, repairs and
renewals which do not enhance the value of or increase the life of the
assets are expensed as incurred.
Buildings are depreciated using the straight-line method over 20 years,
which is the estimated useful life of the assets. Leasehold improvements
are amortized on the straight-line method over the lesser of the maximum
life of the lease or 20 years, or
F-10
1. Background and Significant Accounting Policies (continued)
the estimated useful lives of the assets. Equipment and furniture and
fixtures are depreciated using the straight-line method over seven years,
which is the estimated useful life of the assets.
o Preopening Costs
Prior to 1998, labor costs and costs of hiring and training personnel and
certain other costs relating to opening new restaurants were capitalized
until the restaurant opened and then were amortized over the subsequent 12
months. During 1998, the Company changed its method of accounting for
preopening costs (See Note 4) and now expenses preopening costs when the
costs are incurred.
o Intangible Assets
Intangible assets include goodwill, intellectual properties and licensing
permits which are amortized on a straight-line basis over the estimated
periods of benefit, generally 10 to 20 years. Accumulated amortization for
intangible assets as of December 29, 1998 and December 30, 1997 is
$3,969,245 and $2,360,497, respectively.
o Impairment of Long-Lived Assets
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121 (SFAS 121), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, on January 1, 1996.
This statement requires that long-lived assets and certain intangibles,
including goodwill, being held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company applies
the guidance of the statement by reviewing its applicable intangible
assets and its long-lived assets related to each restaurant on a periodic
basis. When such events or changes in circumstances indicate an asset may
not be recoverable, the Company estimates the future cash flows expected
to result from the use of the asset. If the sum of the expected
undiscounted future cash flows is less than the carrying value of the
asset, an impairment loss is recognized. The impairment loss is recognized
by measuring the difference between the carrying value of the assets and
the fair market value of the assets. Fair values of the assets are
determined by using the present value of expected cash flows. The
estimation of future cash flows requires management judgment and actual
results may vary significantly.
o Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 29, 1998, December 30, 1997 and December 31, 1996,
are $10,604,574, $8,759,175 and $5,678,874, respectively.
F-11
1. Background and Significant Accounting Policies (continued)
o Accounting for Stock-Based Compensation
In accordance with Accounting Principles Board Opinion (APBO) No. 25, the
Company uses the intrinsic value-based method for measuring stock-based
compensation cost which measures compensation cost as the excess, if any,
of the quoted market price of Company common stock at the grant date over
the amount the employee must pay for the stock. Required pro forma
disclosures of compensation expense determined under the fair value method
of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation, are presented in Note 6.
o Earnings per Share
Basic earnings per share amounts are computed based on the weighted
average number of shares outstanding. For purposes of diluted
computations, the number of shares that would be issued from the exercise
of dilutive stock options has been reduced by the number of shares which
could have been purchased from the proceeds of the exercise at the average
market price of the Company's stock or the price of the Company's stock on
the exercise date.
o Comprehensive Income and Accumulated Other Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards 130 (SFAS 130), Reporting Comprehensive Income. SFAS
130 establishes new rules for the reporting and display of comprehensive
income and its components; however, this statement had no impact on the
Company's net income or stockholders' equity. The statement requires the
Company to report separately the foreign currency translation adjustments
in stockholders' equity and to include the current year adjustments for
such amounts in comprehensive income. Prior years' financial statements
have been reclassified to conform with the requirements of SFAS 130.
o Segment Reporting
In June 1997, the FASB issued Statement No. 131 (SFAS 131), Disclosure
about Segments of an Enterprise requiring disclosure of certain
information about reportable segments. As the Company operates in only one
segment, adoption of this statement in 1998 had no impact on the Company's
financial statements.
F-12
o Recent Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133 (SFAS 133), Accounting for
Derivative Instrurments and Hedging Activities, which is required to be
adopted in years beginning after June 15, 1999. The Statement permits
early adoption as of the beginning of any fiscal quarter after its
issuance. The Company expects to adopt the new Statement effective
December 29, 1999. The Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives not considered
hedges must be adjusted to fair value through income. If a derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
the derivative will either be offset against the change in fair value of
the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Companry
does not anticipate the adoption of this Statement will have a significant
effect on its resluts of operations or financial position.
o Reclassifications
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform with the 1998 presentation.
o Fiscal Year
The Company operates on a 52 or 53 week fiscal year ending the last
Tuesday in December. The fiscal quarters for the Company consist of
accounting periods of 12, 12, 12 and 16 or 17 weeks, respectively. Fiscal
1998 and 1997 each included 52 weeks of operations and fiscal 1996
included 53 weeks of operations.
2. Acquisition of Business from Related Party
On October 19, 1998, the Company acquired the operations and purchased certain
assets and assumed certain liabilities of Coulter Enterprises, Inc. (CEI) a
restaurant management services company owned by Jamie B. Coulter, the Company's
Chairman of the Board of Directors and Chief Executive Officer. CEI had provided
accounting and administrative services to the Company since the Company's
inception. The aggregate purchase price was approximately $11,432,000,
consisting of $10,500,000 of internally generated cash with the balance
comprised of assumed liabilities. The Company accounted for the transaction
using the purchase method of accounting. In connection with the purchase price
allocation, the Company recorded an intangible asset of approximately $9,760,000
representing intellectual properties which are being amortized over a period of
ten years. The acquisition was approved by the Company's independent directors.
In addition, the Company engaged an independent financial advisor who rendered
an opinion that the transaction was fair to the Company and its stockholders
from a financial point of view.
F-13
2. Acquisition of Business from Related Party (continued)
Pro forma amounts are not presented since the amounts would not be significant.
See Note 7 for additional related party information.
3. Treasury Stock Transactions
During 1998, the Board of Directors authorized the Company to purchase up to
5,900,000 shares of the Company's common stock in open market or in privately
negotiated transactions. Pursuant to the authorization, the Company has
purchased 2,610,000 shares of its common stock during the year ending December
29, 1998 at an average price of $13.93 per share. The Company is accounting for
the purchases using the constructive retirement method of accounting wherein the
aggregate par value of the stock is charged to the common stock account and the
excess of cost over par value is charged to paid-in capital.
4. Accounting Change
In April 1998, the American Institute of Certified Public Accountants issued SOP
98-5, Reporting the Costs of Start-Up Activities, requiring the costs related to
start-up activities be expensed as incurred. Prior to 1998, the Company
capitalized certain preopening costs incurred in connection with the opening of
new restaurant locations. The Company adopted the provisions of the SOP in its
financial statements for the year ended December 29, 1998. The effect of the
adoption of the SOP was to decrease net income in 1998 by $2,702,545 ($0.07 per
share) and to record a charge for the cumulative effect of an accounting change
of $6,903,808, net of income taxes of $2,921,634 ($0.17 per share), to expense
costs that had been previously capitalized prior to 1998.
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 APBO No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its employee stock
options because, as described below, the alternative fair value accounting
provided under SFAS No. 123, Accounting for Stock-Based Compensation, requires
use of option evaluation models that were not developed for use in valuing
employee stock options. Since the
F-14
6. Stock Options (continued)
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), last amended in June 1996, providing for incentive and nonqualified
stock options pursuant to which up to 10,000,000 shares of Common Stock
are available for issuance. All options granted under this Plan have
ten-year terms and vest in five equal annual installments commencing from
the date of grant, except for certain options granted on December 14, 1998
in connection with an option re-pricing which vest equally over a three
year period commencing from the date of grant.
o 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 equally over
a three year period commencing from the date of grant.
o 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 an 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
SFAS No. 123, which also requires 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 1998,
1997 and 1996, respectively: risk-free interest rates of 5.0%, 6.50% and 6.53%,
no dividend yields; volatility factors of the expected market price of the
Company's Common Stock of 0.357, 0.380 and 0.940 and a weighted-average expected
life of the option ranging from four to five years.
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,
F-15
6. Stock Options (continued)
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):
1998 1997 1996
-------------------------------
Pro forma net income $22,095 $57,457 $53,263
Pro forma earnings per share:
Basic 0.55 1.40 1.35
Diluted 0.55 1.38 1.32
Weighted average fair value of
options granted during the year $2.81 $7.99 $26.59
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect is not fully reflected in 1998 nor
indicative of future years.
A summary of the Company's stock option activity and related information for the
years ended December 29, 1998, December 30, 1997 and December 31, 1996, is as
follows:
1998 1997 1996
----------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average Options
Exercise Options Exercise Options Exercise (000)
Price (000) Price (000) Price
----------------------------------------------------------------------
Outstanding beginning of year $18.08 8,154 $28.69 4,739 $24.34 4,575
Granted 10.43 1,180 21.26 12,652 32.21 1,745
Exercised 16.12 (62) 22.59 (453) 38.08 (465)
Canceled 18.23 (2,290) 25.91 (8,784) 28.91 (1,116)
============ ============= ===========
Outstanding end of year 16.91 6,982 18.08 8,154 28.69 4,739
============ ============= ===========
On April 24, 1997, the Company re-priced 8,123,745 options with an exercise
price in excess of the closing price of the Company's stock on that date of
$18.25. The options were held by current employees, including officers of the
Company. The original options were canceled and replaced by new grants with the
same vesting schedule as contained in each separate grant. All other terms and
conditions remained the same as the original grant with the exception of
re-pricing the exercise price.
F-16
6. Stock Options (continued)
On December 14, 1998, the Company canceled 1,711,253 options previously
outstanding and reissued 767,584 new options with an exercise price of $8.00.
The options are held by current officers and employees, excluding the Company's
Chairman and Chief Executive Officer. The original options canceled were
replaced by the new options based upon the number of options previously held by
the holder in accordance with a formula providing for a reduced number of new
options depending upon the ratio of the holder's original option price compared
to the new option price. The terms of the new options were the same as the
original options, except the new options vest equally over a three year period
commencing one year from the date of grant.
For options outstanding as of December 29, 1998, the number of options,
weighted-average exercise price and weighted-average remaining contract life for
each group of options are as follows:
Options Outstanding
--------------------------------------------------------------------------------------
Number Weighted
Outstanding at Weighted Average
Range of December 29, Average Exercise Remaining
Prices 1998 Price Contract Life
--------------------------------------------------------------------------------------
$3.38 to 7.88 51,121 $ 5.55 6.63 years
$8.00 to 17.94 999,849 9.23 9.79 years
$18.00 to 24.50 5,931,419 18.30 8.34 years
The number of shares and weighted average exercise price of options exercisable
at December 29, 1998, are as follows:
Options Exercisable
---------------------------------------------------------------------------------------
Number Exercisable at Weighted Average
Range of Prices December 29, 1998 Exercise Price
---------------------------------------------------------------------------------------
$3.38 to 7.88 24,633 $ 3.38
$8.00 to 17.94 23,951 16.88
$18.00 to 24.50 3,728,731 18.27
7. Related Party Transactions
Prior to the acquisition of CEI on October 19, 1998, the Company utilized its
affiliate to provide certain accounting, computer and administrative services.
The Company incurred fees of $4,367,152, $3,366,080 and $2,215,467, related to
such services for fiscal years 1998, 1997 and 1996, respectively.
Prior to the acquisition of CEI, the Company reimbursed CEI for the use of an
airplane and pilot services provided by an affiliated entity. Amounts reimbursed
for the use of the
F-17
7. Related Party Transactions (continued)
aircraft and pilot services were $856,016, $1,157,775 and $842,905 in 1998, 1997
and 1996, respectively.
In connection with the acquisition of CEI, the Company assumed month-to-month
lease obligations to entities owned by Jamie B. Coulter for meeting room space,
parking lot space and document storage space. Total rental fees paid to these
related entities in 1998 were $37,900. In addition, in 1998 the Company
purchased business gifts and awards from a retail store owned by Jamie B.
Coulter totaling $24,505.
The Company believes the charges reimbursed are at least as favorable as the
charges that would have been incurred for similar services or purchases from
unaffiliated third parties.
8. Leases
The Company leases certain facilities under noncancelable operating leases
having terms expiring between 1999 and 2025. The leases have renewal clauses of
5 to 20 years, and are 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 fiscal years ended 1998, 1997 and 1996
was $10,227,478, $8,426,165 and $6,878,459, respectively, including contingent
rentals of approximately $272,531, $347,349 and $422,820, respectively.
Lease payments under non cancelable operating leases for each of the next five
years and the aggregate are as follows at December 29, 1998:
Operating
Leases
-------------------
1999 $ 9,366,740
2000 7,703,352
2001 5,981,595
2002 4,917,056
2003 3,650,371
Thereafter 10,736,674
-------------------
Total minimum lease payments $42,355,788
===================
F-18
9. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
1998 1997 1996
------------------------------------------------------------
Numerator:
Numerator for basic and diluted earnings
per share - income available
to common stockholders $25,507,008 $68,807,609 $60,067,294
Denominator:
Denominator for basic earnings per
share - weighted-average shares 39,989,091 41,013,749 39,383,891
Effect of dilutive employee stock options 44,789 748,753 1,013,974
---------------------------------------------------------
Denominator for diluted earnings
per share - adjusted
weighted-average-shares
40,033,880 41,762,502 40,397,865
=========================================================
Basic earnings per share $ .64 $ 1.68 $ 1.53
=========================================================
Diluted earnings per share $ .64 $ 1.65 $ 1.49
============================================================
For purposes of the diluted computations, the 1998, 1997 and 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 the periods presented.
10. Income Taxes
Income taxes are included in the Consolidated Statements of Income as follows:
1998 1997 1996
-------------------------------------------------------
Income tax expense on income
before cumulative effect of
change in accounting principle $ 21,843,298 $ 40,075,457 $ 37,517,693
Cumulative effect of income tax
benefit for change in
accounting principle
(2,921,634) -- --
=======================================================
Total provision for income taxes $ 18,921,664 $ 40,075,457 $ 37,517,693
=======================================================
F-19
10. Income Taxes (continued)
The components of the provision for income taxes consists of the following:
1998 1997 1996
-------------------------------------------------------------------
Current tax expense:
Federal $15,775,392 $33,720,084 $32,080,619
State 1,556,179 5,741,263 4,499,003
-------------------------------------------------------------------
Total current 17,333,571 39,461,347 36,579,622
Deferred tax expense:
Federal 1,456,025 531,356 819,155
State 132,068 82,754 118,916
-------------------------------------------------------------------
Total deferred 1,588,093 614,110 938,071
-------------------------------------------------------------------
Total provision for income taxes $18,921,664 $40,075,457 $37,517,693
===================================================================
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.
1998 1997 1996
----------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
----------------------------------------------------------------------
Income tax expense at Federal statutory rate $ 15,550,035 35% $ 38,109,073 35% $ 34,154,745 35%
State tax expense, net 1,098,660 2 3,789,611 3 3,001,647 3
Valuation allowance 3,761,344 9 -- -- -- --
Other items, net, (1,488,375) (3) (1,819,227) (1) 361,301 --
======================================================================
Actual provision for income taxes $ 18,921,664 43% $ 40,075,457 37% $ 37,517,693 38%
======================================================================
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and amounts used for income tax purposes. Significant components of deferred tax
liabilities and assets are presented below:
December 31, December 30,
1998 1997
------------------------------
Deferred tax assets:
Foreign NOL carryforward $ 5,737,854 $ 1,976,509
Preopening costs 2,345,234 -
Accrued liabilities 1,018,426 1,370,073
Other 986,179 124,033
------------------------------
10,087,693 3,470,615
Valuation allowance (3,761,344) -
------------------------------
Total deferred tax assets 6,326,349 3,470,615
Deferred tax liabilities:
Preopening costs - 279,316
Property and equipment 12,361,110 10,527,607
Basis differences in foreign investments 2,733,543 -
Other 156,097 -
------------------------------
Total deferred tax liabilities 15,250,750 10,806,923
------------------------------
$ 8,924,401 $ 7,336,308
==============================
As of December 29, 1998, the Company has net operating loss (NOL) carryforwards
of approximately $16,400,000 for foreign tax purposes currently having
indefinite expiration dates.
In fiscal 1998, the Company established a valuation allowance for certain
foreign net operating loss carryforwards related to its Australian operations.
The Company's ability to utilize these loss carryforwards is largely dependent
upon the Australian entity's ability to generate future taxable income. Due to
recurring operating losses arising from its foreign operations, the Company
believes sufficient uncertainty exists regarding the realization of certain of
these losses that a valuation allowance is required.
F-20
11. Commitments
The Company has entered into operating lease agreements, subject to certain
contingencies, on three additional sites. Such leases generally have initial
lease terms of five years and the aggregate future minimum lease payments total
approximately $2,507,000.
The Company is in the process of installing new point-of-sale devices and
systems in all of its domestic Lone Star Steakhouse restaurants. Additionally,
the Company is converting to a database information management system that will
provide enhanced capabilities to process and analyze the data provided by the
new point-of-sale systems.
The Company expects these systems to be fully implemented by mid-1999. The
expenditures are expected to aggregate approximately $13,000,000.
12. Provision for Impaired Assets
In the fourth quarter of 1998, the Company recorded an impairment charge of
$4,646,000 reflecting the write-down of certain underperforming restaurants. In
accordance with the provisions of SFAS 121, the Company periodically reviews its
long-lived assets which are held and used in its restaurant operations for
indications of impairment. Based upon that review, the trends in the operations
of certain restaurants indicated the undiscounted future cash flows from their
operations would be less than the carrying value of the long-lived assets
related to the restaurants. The provision charge reflects the difference between
the carrying value of the related property and equipment related to such
restaurants, and the fair value of these assets based on discounted estimated
future cash flows.
13. Quarterly Financial Summaries (Unaudited)
The following table summarizes the unaudited consolidated quarterly results of
operations for fiscal 1998 and 1997 (in thousands, except per share amounts):
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
---------------------------------------------------------
1998 (As restated) (a)
- ----------------------
Net Sales $153,514 $141,023 $142,157 $186,440
Restaurant operating income 28,886 18,980 13,646 21,906
Income before cumulative effect of a change in
accounting principle (b)
16,127 8,477 4,304 3,503
Cumulative effect of a change
in accounting principle (6,904) - - -
Net income 9,223 8,477 4,304 3,503
Basic earnings per share 0.22 0.21 0.11 0.09
Diluted earnings per share 0.22 0.21 0.11 0.09
(a) As previously described in Note 4, the Company adopted the provisions of
SOP 98-5 in the fourth quarter of 1998, which requires the Company to
expense preopening costs as incurred. The SOP requires the Company to
adopt the provisions at the beginning of the year and restate previously
reported quarterly earnings set forth above. The restated amounts differ
from previously reported quarterly earnings for fiscal 1998 as follows:
F-21
13. Quarterly Financial Summaries (Unaudited) (continued)
1st 2nd 3rd
Quarter Quarter Quarter
-----------------------------------
*
Previously reported earnings $14,711 $7,027 $3,734
Change in accounting for preopening costs 1,416 1,450 570
===================================
Restated earnings $16,127 $8,477 $4,304
===================================
Previously reported earnings per share
Basic $0.36 $0.17 $0.10
Diluted 0.36 0.17 0.10
(b) The fourth quarter of fiscal 1998 includes a charge to earnings of
$2,926,980, net of tax related to a provision for impairment reflecting
the write-down of assets for certain under-performing restaurants.
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------------------------------------------
1997 (Historical)
Net Sales $130,256 $133,360 $135,302 $186,440
Restaurant operating income 32,478 32,856 27,807 34,249
Net income 18,204 18,546 15,055 17,003
Basic earnings per share $0.45 $0.45 $0.37 $0.41
Diluted earnings per share $0.44 $0.44 $0.36 $0.41
Pro forma amounts assuming the
change in accounting
principle for preopening
costs is applied retroactively
Net income $ 18,498 $ 18,626 $ 14,382 $ 15,310
Basic earnings per share 0.45 0.45 0.35 0.37
Diluted earnings per share 0.45 0.44 0.34 0.37
F-22