sec document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/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 28, 2004
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/_/ 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
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LONE STAR STEAKHOUSE & SALOON, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 48-1109495
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(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
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
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes /x/ No /_/
As of June 15, 2004, the aggregate market value of the Registrant's Common
Stock held by non-affiliates of the Registrant was $499,238,829. 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 7, 2005, there were 20,472,707 shares outstanding of the
Registrant's Common Stock.
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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
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ITEM PAGE
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PART I
1. Business................................................................................ 3
2. Properties ............................................................................. 9
3. Legal Proceedings.......................................................................11
4. Submission of Matters to a Vote of Security Holders ....................................11
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matter and Issuer's
Purchases of Equity Securities..........................................................12
6. Selected Financial Data.................................................................14
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations..............................................................................16
7A. Quantitative and Qualitative Disclosures about Market Risk..............................29
8. Financial Statements and Supplementary Data.............................................29
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..............................................................................29
9A. Controls and Procedures.................................................................29
9B. Other Information.......................................................................31
PART III
10. Directors and Executive Officers of the Registrant......................................32
11. Executive Compensation..................................................................32
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.....................................................................32
13. Certain Relationships and Related Transactions..........................................32
14. Principal Accountant Fees and Services..................................................32
PART IV
15. Exhibits and Financial Statement Schedules..............................................33
Signatures..............................................................................35
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PART I
This Annual Report on Form 10-K 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. Stockholders are cautioned that all forward-looking statements involve
risks and uncertainty, including without limitation, changes in costs of food,
retail merchandise, labor, and employee benefits, risks associated with
litigation, our ability to continue to acquire and retain prime locations at
acceptable lease or purchase terms, the impact of specific events such as the
outbreak of "mad cow disease" or "foot/mouth disease", as well as general market
conditions, competition, and pricing. Although we believe that the assumptions
underlying the forward-looking statements included in this Annual Report 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 us or any other person that our
objectives and plans will be achieved. Our forward-looking statements may be
identified by words such as "believes," "expects," "anticipates," "intends,"
"estimates" or similar expressions.
ITEM 1. BUSINESS
BACKGROUND
As of March 7, 2005, Lone Star Steakhouse & Saloon, Inc. (the "Company")
owned and operated 251 mid-priced, full service, casual dining restaurants
located in the United States, which operate under the trade name Lone Star
Steakhouse & Saloon or Lone Star Cafe ("Lone Star" or " Lone Star Steakhouse &
Saloon"), 20 Texas Land & Cattle Co. ("Texas Land & Cattle") restaurants, and 20
upscale steakhouse restaurants, five operating as Del Frisco's Double Eagle
Steak House ("Del Frisco's") restaurants and 15 operating as Sullivan's
Steakhouse ("Sullivan's") restaurants. The Company also operates a mid-priced
restaurant operating as Frankie's Italian Grille ("Frankie's"). In addition, a
licensee operates three Lone Star restaurants in California and a licensee
operates a Del Frisco's restaurant in Orlando, Florida. Internationally,
licensees operate 12 Lone Star Steakhouse & Saloon restaurants in Australia
and one in Guam.
The Texas Land & Cattle restaurants were purchased out of bankruptcy on
January 28, 2004, and their operating results are included in the Company's
accompanying financial information for the year ended December 28, 2004 from the
date of acquisition.
Steak continues to be one of the most frequently ordered dinner entrees at
restaurants. In 2004, the United States Department of Agriculture estimated the
average annual per capita consumption of beef to be 66.3 pounds an increase of
2.1 pounds over 2003. Company management believes the limited menu of its
restaurants, which features high quality USDA graded, well aged steaks, and the
appeal of its roadhouse ambiance and excellent service distinguishes Lone Star
restaurants. Texas Land & Cattle restaurants are distinguished by warm and
comfortable Texas ranch house ambiance featuring fireplaces, a broad menu
featuring high quality USDA choice and prime graded steaks and attentive
service. Company management believes Sullivan's restaurants are distinguished by
featuring high quality, top end choice of beef whereas Del Frisco's restaurants
are distinguished by featuring high quality, USDA prime graded steaks. In
addition, Sullivan's and Del Frisco's feature specialized new entrees,
award-winning wine lists, an exciting ambiance and attentive team service.
The Company's focus on selection, training and in-store execution along
with Lone Star's continued marketing initiatives, the successful integration of
Texas Land & Cattle into the Company's operations, the successful development of
the Sullivan's upscale concept, and the development of the Del Frisco's concept,
differentiate the Company from other restaurant companies that operate
steakhouse restaurants. The Company believes that through its operation of four
(4) distinct steak restaurant concepts, it has positioned itself as "The Steak
Company."
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RESTAURANT CONCEPTS
Lone Star restaurants are positioned as "destination restaurants" that
attract loyal clientele. Lone Star restaurants embrace a Texas-style concept
that features Texas artifacts and country and western music. The authentic
roadhouse concept was developed to capitalize on the enduring popularity of
Texas related themes. Lone Star is further distinguished by its high quality,
USDA graded, well aged steaks which are hand-cut fresh daily at each restaurant
and mesquite grilled to order. Meals are generous "Texas-sized" portions and
full bar service is available. The exciting and vibrant atmosphere created by
the restaurants' roadhouse ambiance includes neon beer signs and specially
selected upbeat country and 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 2004 of approximately $12.00 at lunch and
$18.50 at dinner.
Texas Land & Cattle restaurants are mid-priced full service dining
restaurants located in Texas (19) and New Mexico (1). The concept features
authentic Texas ranch house settings with large fireplaces, serving lunch and
dinner seven days per week. The average check per customer is approximately
$13.00 at lunch and $19.00 at dinner.
Sullivan's was named after the legendary boxer, John L. Sullivan, and
embraces a Chicago style 1940's steakhouse theme with nostalgic influences that
feature jazz and swing music. In 1997, Sullivan's was named the hot concept of
the year by Nation's Restaurant News. The bar features live jazz music several
nights a week. 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, well aged, USDA inspected beef, chops, and
seafood. Most Sullivan's restaurants serve lunch and dinner, and are generally
open seven days a week with an average guest check per customer of approximately
$60.00.
Del Frisco's is designed to serve a sophisticated clientele, including
business related dining occasions, is the recipient of the prestigious Ivy Award
and has been elected to the fine dining hall of fame. 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. These elements enhance the dining experience
and establish a distinct identity for Del Frisco's. Del Frisco's is further
distinguished by featuring high quality, USDA prime-graded steaks hand cut in
each restaurant. Del Frisco's restaurants serve dinner only, except the New York
City and Denver restaurants which are also open for lunch, and are generally
open Monday through Saturday with an average dinner guest check of approximately
$84.00.
Frankie's Italian Grille is a mid-priced casual dining restaurant featuring
traditional Italian cuisine in large portions. Frankie's features a high energy,
vibrant atmosphere and is open seven days a week, serving lunch and dinner, with
check averages of approximately $13.00 at lunch and $29.00 at dinner.
CORPORATE STRATEGY
In January 2004 the Company made a significant acquisition of the Texas Land
& Cattle restaurants, a 20-unit chain. These restaurants give the Company a
greatly increased presence in the state of Texas where the Company also operates
three Sullivan's and two Del Frisco's Double Eagle Steak Houses, but has no Lone
Star Steakhouse & Saloon restaurants.
During 2004 several different remodelings of restaurants were completed. These
remodelings can be described as ranging from a minor refurbishment to a
completely new look for the interior and exterior of the building. The Company
now believes that all future remodelings need to be considered on a unit-by-unit
basis; consequently, there is not a singular remodeling package that will be
utilized with broad application.
As in past years, the Company continues its focus on operational consistency,
with the primary emphasis on improved management staffing and retention, which
is expected to result in greater employee and guest satisfaction in our
restaurants. The marketing effort for all concepts continues to emphasize both
direct mail and print advertising in prestigious local and internationally known
publications.
Significant progress was made in real estate development during the year and we
have secured a meaningful number of future restaurant sites, which are in
various stages of the development process.
During 2004 the Company opened one new and remodeled seven Lone Star Steakhouse
& Saloon restaurants. Current plans call for an acceleration of new
development and restaurant remodels for all brands during 2005.
As in past years, the Company will look for opportunities to continue the
previously announced Stock Repurchase Program as part of its ongoing effort to
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increase shareholder value. Any repurchases of common stock are subject to
prevailing market prices, may be made in open market or in privately negotiated
transactions and may occur or be discontinued at any time. In addition, there
can be no assurance that the Company will repurchase any shares or as to the
amount, if any, of any cash dividends. Subject to the availability of an
adequate number of financially attractive real estate sites, meat prices and
other economic considerations, the Company's overall strategy continues to
include a combination of share repurchase, dividend payment, improved
operational efficiencies, new unit development and opportunistic acquisitions.
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. The Company's Lone Star restaurants averaged
approximately $1.9 million in sales on an annualized basis during 2004. Of the
251 Lone Star restaurants open at March 7, 2005, 90 were leased facilities and
had an average cash investment of approximately $1.0 million and 161 were owned
and had an average cost for land acquisition, construction and equipment of
approximately $1.9 million.
The Company anticipates the average total investment per restaurant for a
typical Del Frisco's restaurant and Sullivan's restaurant will range from $3.0
million to $5.0 million, excluding the cost of land.
MENU
The dinner menu at a Lone Star restaurant features a limited selection of
high quality, specially seasoned and mesquite grilled steaks, prime rib, ribs,
chicken, fish, king crab, shrimp and various combinations. Most dinners consist
of a complete meal including salad, bread and butter and a choice of baked
potato, baked sweet potato, steak fries, steamed vegetables 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,
fish selections are also offered at lunch and dinner. Appetizers and desserts,
together with a full bar service is available. Alcoholic beverage service
accounts for approximately 11% of Lone Star's net sales.
The menu at Texas Land & Cattle restaurants features a selection of high
quality, mesquite grilled steaks, smoked sirloin, as well as prime rib, ribs,
chicken, fish, shrimp and combinations. Most dinners consist of a complete meal
including salad, bread and butter and a choice of side dish. The lunch menu
offers a selection of hamburgers, sandwiches, luncheon steaks, soups and salads.
Appetizers and desserts, together with a full bar service is available.
Alcoholic beverage service accounts for approximately 11% of Texas Land & Cattle
net sales.
The menu at Sullivan's features high quality, well aged, USDA inspected
beef, chops, seafood and quality side dishes. Sullivan's also features a number
of high quality wines and a full bar. Alcoholic beverage service accounts for
approximately 38% of Sullivan's net sales.
The menu at Del Frisco's features high quality USDA prime-graded steaks,
chops, seafood, and quality side dishes. Del Frisco's wine list offers over
1,000 high quality wines and a full bar. Alcoholic beverage service accounts for
approximately 36% of Del Frisco's net sales.
SITE SELECTION
The Company believes site selection is critical for the potential success
of a particular restaurant and senior management devotes significant time and
resources to analyzing each prospective site. Among the factors considered in
site selection are 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.
Leases are negotiated generally with short initial terms with multiple
renewal options. The Company has generally required between 150 and 280 days
after the signing of a lease or the closing of a purchase to complete
construction and open a new restaurant. Additional time is sometimes required to
obtain certain government approvals and licenses, such as liquor licenses.
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RESTAURANT LAYOUT
The Company believes the decor and interior design of its restaurants
significantly contribute to its success. The Lone Star restaurants' open layout
permits customers to view the bar and Texas memorabilia, thereby enhancing the
casual dining atmosphere. The Company also designs its kitchen space for
efficiency of workflow, 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 provides additional seating.
A new prototype Lone Star building has been developed which features an
open view kitchen, with the interior decor utilizing newer and vibrant colors
and quality materials of granite and stone. The building exterior features earth
tones with cultured stone and a stucco finish. The prototype building is
approximately 6,800 sq. ft. with a seating count of 260 people.
Texas Land & Cattle restaurants average approximately 7,300 sq. ft. and
have seating for approximately 280 customers.
The first Sullivan's restaurant in Austin, Texas was expanded in 1997 by
4,500 square feet to 12,000 square feet and now seats 320 customers. The other
Sullivan's restaurants range from 7,000 to 9,000 square feet, with seating
capacity for approximately 250 customers. A separate jazz bar area called
"Ringside" is utilized at the Baton Rouge, Louisiana, and 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 and an upbeat, convivial atmosphere.
The original Del Frisco's restaurant in Dallas, Texas is approximately
12,000 square feet and seats approximately 440 customers and includes an
extended wine cellar, with private dining available. In addition, Del Frisco's
features a bar area adjacent to the dining room primarily to accommodate
customers waiting for tables. The Ft. Worth, Texas and Denver, Colorado Del
Frisco's restaurants are approximately 11,000 and 12,000 square feet and seat
approximately 320 and 360 customers, respectively. The New York City location is
approximately 16,500 square feet, with seating capacity for approximately 460
customers and the Las Vegas location is approximately 11,000 square feet, with
seating capacity for approximately 320 customers.
MARKETING
Lone Star restaurants are "destination location restaurants" that focus on
the mid-priced full service casual dining market segments. The Company is
committed to customer service, providing an excellent price-value relationship
and coupled with the unique "Texas Roadhouse" ambiance of its restaurants
attracts and retains customers. Accordingly, the Company has focused its
resources on providing customers with superior service, value and an exciting
and vibrant atmosphere, and relied primarily on word of mouth to attract new
customers. The Company also utilizes billboard advertising to promote its
restaurants and build customer awareness. The Company utilizes direct mail
featuring new products and limited price promotions in lieu of media
advertising. This marketing strategy enables the Company to provide marketing
support for all its Lone Star restaurants.
The Company utilizes high quality print ads featuring all of its steak
concepts in Cigar Aficionado and Wine Spectator, which are national publications
and reach the Company's target audience. Special promotions are also utilized
featuring a specific wine vineyard and local charitable event promotions. Texas
Land & Cattle utilizes local store marketing and local print publications. In
addition, radio is utilized in the Dallas/Ft. Worth market sponsoring a popular
local sports talk program.
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RESTAURANT OPERATIONS AND MANAGEMENT
The Company strives to maintain quality and consistency in all of 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 typical Lone Star management team consists of one general manager and
four managers. Each restaurant also employs a staff consisting of approximately
50 to 90 hourly employees, many of whom work part-time. The regional managers
report to a regional vice-president. 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 all areas of the operation including food quality, safety and
preparation, customer satisfaction, alcoholic beverage service, governmental
regulations compliance, liquor liability avoidance and employee relations.
Restaurant management is also provided with a proprietary operations manual
relating to food and beverage preparation, all areas of restaurant management
and compliance with governmental regulations. Working in concert with restaurant
managers, the Company's senior management defines operations and performance
objectives for each restaurant and monitors implementation. An incentive cash
bonus program has been established in which each restaurant's management team
participates. Awards under the incentive plan are tied to achievement of
specified revenue and operating targets. Senior management regularly visits
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's commitment to customer service and satisfaction is evidenced
by several 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 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 employee concerns.
PURCHASING
Approximately 54% 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 may engage in forward pricing or
consider other risk management strategies with regard to its meat and other food
costs to minimize the impact of potential price fluctuations. This practice
could help stabilize the Company's food costs during times of fluctuating
prices. The Company did not engage in any forward pricing or hedging in 2004. As
of March 7, 2005, the Company had no significant forward pricing contracts.
MANAGEMENT INFORMATION SYSTEMS
The Company continually monitors its management information system to take
advantage of technological improvements. Its point-of-sale system is designed to
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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
daily reports for the Company's management on sales, check average, guest counts
and labor.
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 which are wire
transferred periodically to the Company's principal operating account.
The Company generates weekly, consolidated sales reports and food and labor
cost variance reports at its corporate headquarters, and 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.
The Company expects to continue to develop its management information
systems to improve efficiencies and assist management in analyzing business
results and opportunities.
COMPETITION
The restaurant industry is intensely competitive with respect to price,
service, location and food quality, and there are many well-established
competitors with substantially greater financial and other resources than the
Company. Some of the Company's competitors have been in existence for a
substantially longer period than the Company and may be better established in
the markets where the Company's restaurants are or may be located. The
restaurant business is often affected by changes in consumer tastes, national,
regional or local economic conditions, demographic trends, traffic patterns and
the type, number and location of competing restaurants. In addition, factors
such as inflation, increased food, labor and benefits costs and the availability
of experienced management and hourly employees may adversely affect the
restaurant industry in general and the Company's restaurants in particular. The
Company believes that its concepts, attractive price-value relationship and
quality of food and service enable it to differentiate itself from its
competitors. The Company believes that its ability to compete will depend upon
attracting and retaining high quality employees and continuing 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 Americans with Disabilities Act
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 Company's licenses to sell
alcoholic beverages must be renewed annually and may be suspended or revoked at
any time for cause, including violation by the Company or its employees of any
law or regulation pertaining to alcoholic beverage control, such as those
regulating the minimum age of patrons or employees, advertising, wholesale
purchasing, and inventory control. The failure of a restaurant to obtain or
retain liquor or food service licenses could have a material adverse effect on
its operations. In order to reduce this risk, each restaurant is operated in
accordance with standardized procedures designed to 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.
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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 federal, state or local
minimum wage could increase the Company's labor costs.
TRADEMARKS
The Company regards its primary marks, Lone Star Steakhouse & Saloon(R),
Lone Star Cafe(R), Del Frisco's(R) Double Eagle Steak House(R), Sullivan's
Steakhouse(R) and Texas Land & Cattle Company Steak House(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 have not had a material adverse effect on the
Company's financial condition or its results of operations. The Company's policy
is to pursue registration of its marks whenever possible and to oppose
vigorously infringements of its marks. The Company has obtained registration of
its marks in numerous foreign countries.
EMPLOYEES
As of March 7, 2005, the Company employed approximately 19,700 persons, 10
of whom are executive officers, 93 of whom are office support personnel, 6 of
whom are regional managers, 33 of whom are district managers, approximately
1,215 of whom are restaurant management personnel and the remainder of whom are
hourly restaurant personnel. None of the Company's employees are currently
covered by a collective bargaining agreement. The Company considers its employee
relations to be good.
WEBSITE ACCESS
The Company's website address is www.lonestarsteakhouse.com. The Company's
filings with the Securities and Exchange Commission ("SEC") are available at no
cost on its website as soon as practicable after the filing of such reports with
the SEC.
ITEM 2. PROPERTIES.
As of March 7, 2005, the Company leased 90 and owned 161 of its Lone Star
restaurant locations. At such date, the Company leased three and owned two Del
Frisco's restaurants locations. Of the 15 Sullivan's restaurants, 13 are leased
and two are owned. The Company leases 18 Texas Land & Cattle restaurants and two
are 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 provide
for additional rent based on sales volume at the particular location over
specified minimum levels. Generally, the leases are triple 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. In addition to the operating restaurant properties described
above, during the past two years, the Company has acquired land sites in Dundee,
Michigan, Pearl, Mississippi, Kansas City, Kansas, and Clayton, North Carolina
and entered into leases for sites in Mitchell, South Dakota, Columbia, Missouri
and Oklahoma City, Oklahoma for construction of Lone Star Restaurants. The
Company has acquired a site in Englewood, Colorado for a Sullivan's restaurant.
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RESTAURANT LOCATIONS AS OF MARCH 7, 2005
The following table sets forth the location of the Company's existing, open
domestic Lone Star Steakhouse & Saloon (251) Restaurants, Del Frisco's (5)
restaurants, Sullivan's (15) restaurants, Texas Land & Cattle (20) restaurants,
and (1) Frankie's Restaurant
LONE STAR Effingham Dearborn Heights NORTH DAKOTA Sugarhouse
--------- Hodgkins Detroit (6) Fargo
Mt. Vernon Flint VIRGINIA
ALABAMA Peoria Grand Rapids OHIO Alexandria
Anniston Rockford Jackson Akron Centreville
Birmingham (2) Springfield Mt. Pleasant Canton Chesapeake
Huntsville Saginaw Cincinnati (2) Fairfax
Mobile INDIANA Ypsilanti Cleveland (3) Fredericksburg
Montgomery Anderson Columbus (4) Hampton
Trussville Evansville MISSISSIPPI Dayton (2) Herndon
Tuscaloosa Ft. Wayne Hattiesburg Findlay Norfolk
Indianapolis (4) Jackson Lancaster Potomac Mills
ALASKA Lafayette Mentor Richmond (3)
Anchorage Merrillville MISSOURI Middletown Sterling
South Bend Branson Niles Virginia Beach
ARIZONA Terre Haute Independence Springfield
Mesa Kansas City Toledo (2) WEST VIRGINIA
Phoenix (4) IOWA Springfield Youngstown Beckley
Cedar Rapids St. Louis (5) Charleston
ARKANSAS Coralville OKLAHOMA Huntington
Ft. Smith Davenport NEBRASKA Lawton
Little Rock (2) Des Moines Lincoln Oklahoma City WISCONSIN
Springdale Waterloo Omaha (2) Tulsa (2) Racine
COLORADO KANSAS NEVADA PENNSYLVANIA SULLIVAN'S
Colorado Springs Garden City Las Vegas (4) Allentown ----------
Denver (6) Hutchinson Easton Anchorage, AK
Ft. Collins Overland Park NEW JERSEY Harrisburg Austin, TX
Loveland Atlantic City Johnstown Baton Rouge, LA
KENTUCKY Bridgewater King of Prussia Charlotte, NC
DELAWARE Bowling Green Cherry Hill Lancaster Chicago, IL
Dover Florence Delran Middletown Dallas, TX
Wilmington (2) Lexington Hanover Township Philadelphia Denver, CO
Louisville Hazlet Pittsburgh (5) Houston, TX
FLORIDA Marlton Pottstown Indianapolis, IN
Bradenton LOUISIANA Ocean County Reading King of Prussia, PA
Clearwater Baton Rouge (2) Scotch Plains Scranton Naperville, IL
Ft. Lauderdale Houma Turnersville Wilkes-Barre Palm Desert, CA
Ft. Myers Lafayette Voorhees York Raleigh, NC
Lakeland Monroe Wayne Tucson, AZ
Ocala New Orleans (3) RHODE ISLAND Wilmington, DE
Orlando NEW MEXICO Warwick
Pensacola MAINE Albuquerque TEXAS LAND & CATTLE
Port Orange South Portland SOUTH CAROLINA ------------------------
Port Richey NEW YORK Greenville Dallas, TX (7)
Sarasota MARYLAND Albany Myrtle Beach (2) Austin, TX (4)
St. Petersburg Bel Air Houston, TX (4)
Tampa Columbia San Antonio, TX (3)
Frederick NORTH CAROLINA SOUTH DAKOTA Lubbock, TX
GEORGIA Gaithersburg Asheville Sioux Falls Albuquerque, NM
Atlanta Laurel Boone
Augusta Lexington Park Charlotte (4) TENNESSEE DEL FRISCO'S
Waldorf Durham Jackson ------------
IDAHO Westminster Fayetteville Johnson City Denver, CO
Boise Greensboro (2) Memphis (2) Dallas, TX
MASSACHUSETS Greenville Fort Worth, TX
ILLINOIS Boston Jacksonville Las Vegas, NV
Bloomington Raleigh (3) UTAH New York, NY
Bradley MICHIGAN Rocky Mount Centerville
Carbondale Battle Creek Salisbury Layton FRANKIE'S
Champaign Bay City Southern Pines Salt Lake City Charlotte, NC
Chicago (10) Brighton Winston-Salem
Decatur
-10-
ITEM 3. LEGAL PROCEEDINGS
California Public Employees Retirement System ("CalPERS") filed a
shareholders derivative action on October 16, 2001 against certain present and
former Directors alleging breach of fiduciary duties by certain present and
former Directors and that certain of such defendants were unjustly enriched
through related party transactions and by the re-pricing of stock options
previously issued. The lawsuit also seeks to prevent enforcement of certain
change of control agreements granted to executive officers of the Company, seeks
declaratory and injunctive relief and seeks damages to be paid to the Company.
The Company is a nominal defendant.
The Company has indemnified present and former Directors with respect to
the shareholders derivative action filed by CalPERS by contractual agreement, as
well as by the Articles of Incorporation of the Company as provided in
accordance with the Delaware General Corporation Law.
On January 9, 2002, CalPERS filed an amended complaint and added a class
action claim to attempt to certify a class action based on their allegation that
a provision in the change of control agreements violates Delaware law. A motion
to dismiss was filed by all defendants on February 8, 2002, seeking to dismiss
all claims of CalPERS. Discovery was stayed pending a court decision on the
motion to dismiss.
The Vice Chancellor issued his decision on December 18, 2002 dismissing
numerous counts and also substantially reducing the scope of two other claims,
both involving the repricing of stock options. Two of the counts sustained by
the court involve challenges to change of control agreements which have now
expired. On January 17, 2003, the Vice Chancellor agreed to permit the plaintiff
to proceed with its discovery to obtain certain documents from certain third
parties and the named defendants, and ordered the plaintiff to timely file its
motion to amend its complaint.
On April 16, 2003, CalPERS filed a Motion for Leave to Amend Plaintiff's
First Amended Complaint, which complaint added no additional causes but added
allegations which are subsequent to the date of the first complaint and
allegations which also address counts which were dismissed by the Vice
Chancellor on December 18, 2002. All defendants filed objections to CalPERS
attempt to amend and oral argument was heard by the Vice Chancellor on August
21, 2003. On May 26, 2004, the Court rendered its decision and allowed CalPERS
to amend their complaint. The parties are involved in pre-trial discovery.
The Company is involved from time to time in litigation arising in the
ordinary course of business as well as the matter set forth above. The Company
believes the outcome of such matters will not have a material adverse effect on
its consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 15, 2004, the Company held a Special Meeting of Stockholders to
vote upon the proposed Lone Star Steakhouse & Saloon, Inc. 2004 Stock Option
Plan, (the "2004 Plan"). A majority of the Company's outstanding shares voted to
approve the 2004 Plan with 11,486,660 votes "For", 6,006,619 votes "Against" and
37,817 votes "Abstaining".
-11-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS AND ISSUER'S PURCHASES OF EQUITY SECURITIES
The table below provides information concerning the repurchase of shares of
the Company's common stock during the sixteen weeks ended December 28, 2004. On
December 23, 2003 and on November 17, 2004, the Board of Directors authorized
the Company to repurchase up to 2,122,800 and 2,026,190 shares, respectively of
the Company's common stock. During the sixteen weeks ended December 28, 2004,
the Company completed the repurchase of shares pursuant to the December 23, 2003
authorization. Since commencing the most recent authorization for share
repurchase, the Company has not repurchased any shares of its common stock
through December 28, 2004.
ISSUER PURCHASES OF EQUITY SECURITIES
(d) Maximum
(c)Total Number Number of
of Shares Shares that May
Purchased as Part Yet Be
(a) Total Number (b) Average of Publicly Purchased
of shares Price Paid per Announced Plans Under the Plans
Period Purchased Share or Programs or Programs
-------------------------------------------------------------------------------------------------------
1,402,500
September 8,
through
October 3 598,900 25.35 598,900 803,600
October 4,
through
October 31, 384,341 25.64 384,341 419,259
November 1,
through
November 28, 419,259 25.68 419,259 2,026,190
November 29,
through
December 28, - - - 2,026,190
Total 1,402,500 25.53 1,402,500 2,026,190
(1) Repurchases are subject to prevailing market prices, may be made in open
market or in privately negotiated transactions and may occur or be discontinued
at any time. There can be no assurance that the Company will repurchase any
shares.
-12-
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 prices for the Common Stock, as reported by
Nasdaq.
PRICES
------
CALENDAR 2004 HIGH LOW
------------- ---- ---
First Quarter $29.98 $23.15
Second Quarter $33.03 $24.73
Third Quarter $27.47 $20.70
Fourth Quarter $28.17 $23.84
PRICES
------
CALENDAR 2003 HIGH LOW
------------- ---- ---
First Quarter $21.99 $18.32
Second Quarter $23.10 $18.84
Third Quarter $23.34 $20.66
Fourth Quarter $23.49 $20.35
DIVIDENDS
The Company initiated the payment of quarterly cash dividends in April 2000
and paid cash dividends at the rate of $0.125 per share each quarter until
January 2002. The Company increased its quarterly cash dividend to $0.15 per
share in January 2002, to $.165 per share in February 2003, to $.175 per share
in February 2004 and to $.195 per share in January 2005. The Company plans to
continue the quarterly dividend payments for the foreseeable future; however,
there can be no assurance that such cash dividends will continue to be paid or
as to the amount of the cash dividend.
NUMBER OF STOCKHOLDERS
As of March 7, 2005, there were approximately 350 holders of record of the
Company's Common Stock. The Company believes there are in excess of 7,000
beneficial owners of the Company's Common Stock.
EQUITY COMPENSATION PLAN INFORMATION
The information required by this item 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.
-13-
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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K. The selected consolidated financial data
of the Company as of December 28, 2004 and December 30, 2003, and for each of
the three years in the period ended December 28, 2004, were derived from the
Company's audited consolidated financial statements. The selected consolidated
financial data of the Company as of December 31, 2002, December 25, 2001 and
December 26, 2000, and for each of the two years in the period ended December
25, 2001, were derived from the Company's audited consolidated financial
statements, after giving effect to the restatement from amounts previously
reported as described in Item 7 - Restatement of Prior Financial Information and
Note 1 to the 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
amounts reflect the adjusted amounts applicable for fiscal years 2001 and 2000
to give retroactive effect for the non-amortization provisions of SFAS No. 142
requiring that goodwill and intangible assets deemed to have indefinite lives no
longer be amortized, but are subject to annual impairment tests in accordance
with SFAS No. 142, which was adopted by the Company effective as of the
beginning of fiscal 2002.
-14-
YEAR ENDED IN DECEMBER(1)
-----------------------------------------------------------------------
(Amounts in thousands, except share data)
2003 (3) 2002 (3) 2001 (3) 2000 (3)
2004 (2) RESTATED RESTATED RESTATED RESTATED
-------- -------- -------- -------- --------
Income Statement Data:
Net sales $669,527 $591,401 $593,617 $571,115 $544,111
Costs and expenses:
Costs of sales 239,660 212,593 194,183 195,707 190,730
Restaurant operating expenses 317,005 275,027 266,533 265,688 258,473
Restaurant depreciation and amortization 20,268 20,852 24,516 25,955 26,434
Provision for impaired assets and
restaurant closings 1,167 - 792 565 3,142
General and administrative expenses 45,269 43,346 45,085 41,884 40,422
Abandoned merger expenses - - 2,990 - -
Non-cash stock compensation expense (4) 1,193 1,474 2,949 3,212 12,016
Contribution - "Dine for America" - - - 2,124 -
------------ ------------ ------------ ------------ ------------
Total costs and expenses 624,562 553,292 537,048 535,135 531,217
------------ ------------ ------------ ------------ ------------
Income from operations 44,965 38,109 56,569 35,980 12,894
Other income, net 1,737 553 2,986 4,906 3,350
------------ ------------ ------------ ------------ ------------
Income from continuing operations before
provision for income taxes 46,702 38,662 59,555 40,886 16,244
Provision for income taxes 15,420 11,760 19,715 14,325 5,564
------------ ------------ ------------ ------------ ------------
Income from continuing operations 31,282 26,902 39,840 26,561 10,680
Discontinued operations (5):
Loss from operations of discontinued restaurants (86) (10,774) (1,322) (6,644) (5,625)
Income tax benefit 17 2,117 467 2,354 1,972
------------ ------------ ------------ ------------ ------------
Loss on discontinued operations (69) (8,657) (855) (4,290) (3,653)
------------ ------------ ------------ ------------ ------------
Income before cumulative effect of change in
accounting principle 31,213 18,245 38,985 22,271 7,027
Cumulative effect of change in accounting principle
(net of income tax of $190) (6) - - (318) - -
------------ ------------ ------------ ------------ ------------
Net income $ 31,213 $ 18,245 $ 38,667 $ 22,271 $ 7,027
============ ============ ============ ============ ============
Basic earnings (loss) per share:
Continuing operations $ 1.49 $ 1.29 $ 1.74 $ 1.10 $ 0.40
Discontinued operations (5) - (.41) (.03) (.18) (.14)
------------ ------------ ------------ ------------ ------------
Income before cumulative effect of
change in accounting principle 1.49 0.88 1.71 0.92 0.26
Cumulative effect of change
in accounting principle - - (.02) - -
------------ ------------ ------------ ------------ ------------
Basic earnings per share $ 1.49 $ 0.88 $ 1.69 $ 0.92 $ 0.26
============ ============ ============ ============ ============
Weighted average shares outstanding $ 20,962,919 20,801,894 22,908,821 24,036,942 26,189,600
============ ============ ============ ============ ============
Pro forma net income (7) $ 31,213 $ 18,245 $ 38,985 $ 23,194 $ 8,110
============ ============ ============ ============ ============
Pro forma basic earnings per share $ 1.49 $ 0.88 $ 1.71 $ 0.96 $ 0.31
============ ============ ============ ============ ============
-15-
AT FISCAL YEAR END IN DECEMBER, (1)
---------------------------------------------------------------------
(Dollars in thousands)
2004 2003 2002 2001 2000
Balance Sheet Data:
Working capital (deficit) $ 39,332 $ 68,369 $ 41,000 $ 48,284 $ (1,716)
Total assets 498,292 499,988 478,586 537,462 518,412
Stockholders' equity 392,781 414,680 413,761 469,979 461,309
Cash dividends per common share $ .70 $ .645 $ .60 $ .50 $ .375
(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
2000, 2001, 2002, 2003 and 2004 fiscal years ended on December 26, 25, 31,
30 and 28, respectively. Fiscal 2002 included 53 weeks of operations while
fiscal 2004, 2003, 2001, and 2000 included 52 weeks.
(2) On January 28, 2004, the Company acquired 20 Texas Land & Cattle
restaurants for approximately $23,496, which consisted of $12,579 of cash
net of $2,145 of cash acquired, 119,485 shares of the Company's common
stock valued at $2,679, and the assumption of approximately $6,093 of
certain liabilities. The transaction was accounted for as a purchase.
Accordingly, the results of operations of acquired restaurants are included
in the Company's consolidated results of operations since the date of
acquisition. See Note 19 to the Consolidated Financial Statements for
additional information.
(3) The amounts of net income and certain balance sheet data for fiscal 2003,
2002, 2001 and 2000 have been restated from amounts previously reported to
reflect certain adjustments as described in Item 7-Restatement of Financial
Information and Note 1 to Notes to Consolidated Financial Statements. The
retroactive application effect on the results of operations for the years
presented is as follows:
2003 2002 2001 2000
---- ---- ---- ----
Net income, as previously reported $18,666 $39,209 $22,902 $7,706
Adjustments to rent expenses, depreciation
and amortization, net of taxes (421) (542) (631) (679)
----- ----- ----- -----
Net income, as adjusted $18,245 $38,667 $22,271 $7,027
======= ======= ======= ======
Decrease in basic earnings per share ($0.02) ($0.02) ($0.03) ($0.03)
----- ----- ----- -----
(4) In January 2000, the Company repriced certain stock options which were
fully vested resulting in additional stock compensation expense of
approximately $9,000 ($5,800 net of tax).
(5) During fiscal 2003, the Company announced a plan to divest all of its
Australian operations. In December 2003, the Company completed the sale to
a licensee of 13 of its 19 restaurants in Australia and closed the
remaining six restaurants. The losses included in discontinued operations
for fiscal 2003 include aggregate pre-tax charges of approximately $12,000
incurred in connection with its exit activities from Australia, including
impairment losses related to assets either sold or to be sold, termination
costs associated with employees and certain lease obligations, and losses
related to the realization of the Company's cumulative foreign currency
translation adjustments. See Note 12 to the Consolidated Financial
Statements for additional information.
(6) The cumulative effect of change in accounting principle for fiscal 2002
reflect the impairment charge of goodwill related to certain Australian
investments resulting from the adoption of SFAS No. 142 in the first
quarter of fiscal 2002.
(7) Pro forma net income amounts reflect the adjustments for fiscal 2002, 2001
and 2000 to give retroactive effect to the change in accounting for the
non-amortization provisions of SFAS No. 142, Goodwill and Other Intangible
Assets, as adopted by the Company effective as of the first quarter of
fiscal 2002.
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 opened one domestic Lone Star restaurant and reopened one
completely remodeled Lone Star restaurant in fiscal 2004. The Company opened no
restaurants in fiscal 2002 and 2003.
-16-
There were 251 operating domestic Lone Star restaurants as of March 7,
2005. In addition, a licensee operates three Lone Star restaurants in
California.
The Company currently operates five Del Frisco's restaurants. In addition,
a licensee operates one Del Frisco's restaurant. The Company currently operates
15 Sullivan's restaurants, 20 Texas Land & Cattle restaurants and one Frankie's
restaurant.
Internationally, licensees operate 12 Lone Star Steakhouse & Saloon
restaurants in Australia and one in Guam. During fiscal 2003, the Company sold
13 restaurants to a licensee in Australia and closed an additional seven
restaurants in Australia. During fiscal 2004, the Australian licensee closed one
restaurant.
On January 28, 2004, the Company acquired 20 Texas Land & Cattle
restaurants which are located primarily in Texas. The operating results of those
restaurants are included in the Company's consolidated operating results from
the date of acquisition.
RESTATEMENT OF PRIOR FINANCIAL INFORMATION (DOLLARS IN THOUSANDS)
Following a review of accounting adjustments cited in filings with the
Securities and Exchange Commission by a number of restaurant companies in
December 2004, and after discussions with the Company's independent auditors,
Ernst & Young LLP, the Company determined that certain items related to its
accounting for property leases were inappropriate. As a result, the Company has
restated its consolidated financial statements for fiscal 2003 and all prior
year periods presented.
The Company has corrected its computation of straight-line rent expense and
the related deferred rent liability. Historically, when accounting for leases
with renewal options, rent expense was recorded on a straight-line basis over
the initial non-cancelable lease term. Building and leasehold costs and
improvements for those properties were amortized on the straight-line method
over the lesser of the estimated useful lives of the assets or the expected term
of the lease, including option renewal periods. The Company has determined that
it should recognize rent expense on a straight-line basis over the expected term
of the lease, including cancelable option periods when failure to exercise such
options would result in an economic penalty to the Company. In addition, the
Company determined that in a few instances the leasehold amortization period
being used was greater than the expected lease term.
As a result of the above, the Company has restated its financial statements
to recognize rent expense on a straight-line basis over the expected lease term
including cancelable lease renewal option periods when failure to exercise such
options would result in an economic penalty. In addition, the restatement
includes an adjustment to depreciation expense to correct the depreciable lives
being used for certain leasehold cost and improvements where the contractual
term of the lease was shorter than the historical depreciation period previously
used to record depreciation expense.
The restatement is further discussed in Note 1 "Restatement of Prior
Financial Information" - See Notes to Consolidated Financial Statements and in
Item 6. Selected Financial Data included in this Form 10-K.
The cumulative effect of the restatement through fiscal 2003 is an increase
in long-term liabilities of $8,336, an increase of deferred tax assets of
$3,852, an increase in accumulated depreciation of $1,935 and a decrease in
retained earnings of $6,419. The restatement decreased reported net income by
$421 and $542, for fiscal 2003 and 2002, respectively. The restatement did not
have any impact on the Company's previously reported cash position, cash flows
or revenues.
CRITICAL ACCOUNTING POLICIES (Dollars in thousands)
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require the
Company to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and notes thereto (see Note 1 to the
-17-
Consolidated Financial Statements). The Company believes that of its significant
accounting policies, the following represent accounting policies that may
involve a higher degree of judgment and complexity.
IMPAIRMENT OF LONG-LIVED ASSETS - UNDERPERFORMING RESTAURANTS AND DEFINITE LIFE
INTANGIBLES Property and equipment and definite life intangibles are reviewed
for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. The Company reviews applicable
intangible assets and long-lived assets related to each restaurant on a periodic
basis. When 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. The
Company's estimates of fair values are based on the best information available
and require the use of estimates, judgments, and projections as considered
necessary. The actual results may vary significantly.
IMPAIRMENT OF LONG-LIVED ASSETS - GOODWILL AND INDEFINITE LIFE INTANGIBLES
Goodwill and certain intangible assets deemed to have indefinite lives which are
not subject to amortization are subjected to an annual impairment test, or more
frequent tests if indicators of impairment exist. In assessing recoverability of
goodwill, the Company may be required to make assumptions regarding estimated
future cash flow and other factors to determine the fair value. The amount of
fair value for certain intangible assets having indefinite lives are made by
reference to recent market transactions. An impairment loss is recognized when
the estimates of fair value are less than the carrying value of the assets.
SELF-INSURANCE RESERVES Beginning in fiscal 2003, the Company adopted
self-insurance programs for its worker's compensation, general liability, and
medical benefits programs. In order to minimize the exposure under the
self-insurance programs, the Company has purchased stop-loss coverage both on a
per occurrence and on an aggregate basis. The self insured losses under the
programs are accrued based upon the Company's estimate of the ultimate expected
liability for both claims incurred and on an incurred but not reported basis.
The establishment of such accruals for self-insurance involve certain management
judgments and assumptions regarding the frequency or severity of claims, the
historical patterns of claim development and the Company's experience with claim
reserve management and settlement practices. To the extent actual results may
differ from the assumptions used to develop the accrual estimate amounts, such
unanticipated changes may produce significantly different amounts of expense
than those estimated under the self-insurance program.
INCOME TAXES - DEFERRED INCOME TAX Deferred tax assets and liabilities are
recognized for the effect of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and amounts used for
income tax purposes. Deferred tax assets are reduced by a valuation allowance if
it is more likely than not that some portion or all of the deferred tax asset
will not be realized. The Company reviews the recoverability of any deferred tax
assets reflected in the balance sheet and provides any necessary allowances as
required. Any adjustment to the deferred tax asset would be charged to income in
the period such determination was made.
-18-
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages
which certain items included in the Consolidated Statements of Income bear to
net sales.
YEAR ENDED
-----------------------------------------------------------
December 30, December 31,
December 28, 2003 2002
2004 (RESTATED) (RESTATED)
-------------- ------------ ----------------
STATEMENT OF INCOME:
Net sales 100% 100% 100%
Costs and expenses:
Costs of sales 35.8 36.0 32.7
Restaurant operating expenses 47.3 46.5 44.9
Depreciation and amortization 3.0 3.5 4.1
Provision for impaired assets and restaurant closings 0.2 - 0.2
------- ------ ------
Restaurant costs and expenses 86.3 86.0 81.9
General and administrative expenses 6.8 7.3 7.6
Abandoned merger expenses - - 0.5
Non-cash stock compensation expense 0.2 0.3 0.5
------ ------ ------
Income from operations 6.7 6.4 9.5
Other income, net 0.3 0.1 0.5
------ ------ ------
Income from continuing operations before income taxes
and cumulative effect of accounting change 7.0 6.5 10.0
Provision for income taxes 2.3 2.0 3.3
------ ------ ------
Income from continuing operations before cumulative 4.7 4.5 6.7
effect of accounting change -
Loss from discontinued operations, net of applicable income taxes - (1.4) (0.1)
------ ------ ------
Income before cumulative effect of accounting change 4.7 3.1 6.6
Cumulative effect of accounting change, net of tax - - (0.1)
------ ------ ------
Net income 4.7% 3.1% 6.5%
====== ====== ======
-19-
LONE STAR STEAKHOUSE & SALOON, INC.
YEAR ENDED DECEMBER 28, 2004 COMPARED TO YEAR ENDED DECEMBER 30, 2003
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales increased $78,126 or 13.2% to $669,527 for the year ended
December 28, 2004 ("fiscal 2004"), compared to $591,401 for the year ended
December 30, 2003 ("fiscal 2003"). Sales for fiscal 2004 include approximately
$56,020 attributable to the acquisition of Texas Land & Cattle. The Company
experienced sales growth in all its restaurant concepts as blended same store
sales representing net sales, by store, for all the Company owned restaurant
concepts, opened for more than 18 months in the current and comparable prior
year period increased 3.6%. The Company's average check increased 1.6% and guest
counts increased 2.7%.
Costs of sales, primarily food and beverages, decreased as a percentage of
net sales to 35.8% from 36.0% due to declining beef costs occurring primarily
during the fourth quarter of fiscal 2004. The decline in beef costs were offset
in part by increased costs for dairy products.
Restaurant operating expenses in fiscal 2004 increased $41,978 to $317,005
compared to $275,027 in fiscal 2003, and increased as a percentage of net sales
to 47.3% from 46.5%. Labor costs increased .3% primarily as a result of
increased costs for worker's compensation and employee medical expenses.
Advertising costs increased approximately .1% reflecting increased printing
costs. Occupancy costs were up .4% due primarily to the impact of higher rent
expenses applicable to the Texas Land & Cattle stores. In addition, restaurant
operating expenses for fiscal 2004 include approximately $555 of pre-opening
costs compared to none in fiscal 2003.
Depreciation and amortization decreased $584 in fiscal 2004 compared to
fiscal 2003. The decrease is attributable primarily to a reduction in
depreciation for certain assets that have become fully depreciated for the
Company's historical concepts, offset in part by depreciation of assets related
to the Texas Land & Cattle acquisition.
Provision for impaired assets of $1,167 in fiscal 2004 reflects the
write-down of five underperforming restaurants to their estimated fair value.
General and administrative expenses increased $1,923 in fiscal 2004
compared with fiscal 2003. The primary reason for the increase is additional
general and administrative costs applicable to Texas Land & Cattle of $2,500. In
addition, the increase reflects higher compensation related costs of
approximately $1,525 which were mostly offset by decreases in travel and
directors and officer's liability insurance costs and a favorable insurance
settlement.
Non-cash stock compensation expense in fiscal 2004 decreased $281 compared
to fiscal 2003. The change reflects a decrease of $681 in the amortization of
stock based compensation in fiscal 2004 as compared to fiscal 2003. In addition,
the decrease is offset by an increase of $400 for stock compensation relating to
the accounting for certain shares of the Company's common stock held by a Rabbi
Trust pursuant to a deferred compensation arrangement (See Note 3 to the Notes
to Consolidated Financial Statements).
Other income, net in fiscal 2004, was $1,737, compared to $553 in fiscal
2003. The increase is attributable to an increase in interest income and gains
from sales of assets in fiscal 2004 compared to fiscal 2003. The increase for
fiscal 2004 was partially offset by foreign exchange losses related to
Australian funds which were repatriated during the fiscal year.
The effective income tax rate from continuing operations was 33.0% and
30.4% for fiscal 2004 and fiscal 2003, respectively. The factors which cause the
effective tax rates to vary from the federal statutory rate of 35% include state
income taxes, the impact of FICA Tip and other credits, certain non-deductible
expenses, and the tax effect of incentive stock options. While there is
generally no tax impact to the Company associated with incentive stock options
and the related amortization associated with such options in the income
statement, tax benefits may arise at the time the incentive options are
exercised to the extent that the exercise is followed by a disqualifying
disposition of the shares by the optionee. The fiscal 2003 period reflects a
greater amount of tax benefits associated with incentive stock options exercised
during the year compared to fiscal 2004.
-20-
Discontinued operations reflect the operations of restaurants closed
subsequent to fiscal 2002 which are reported as discontinued operations pursuant
to SFAS No. 144, (see Note 12 to the Notes to Condensed Consolidated
Statements).
-21-
LONE STAR STEAKHOUSE & SALOON, INC.
YEAR ENDED DECEMBER 30, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales decreased $2,216 or .4% to $591,401 for the year ended December
30, 2003 ("fiscal 2003"), compared to $593,617 for the year ended December 31,
2002 ("fiscal 2002"). The decrease was attributable principally to the fact that
fiscal 2003 was a 52 week period compared to a 53 week period in fiscal 2002. In
addition, since fiscal 2002 ended on December 31, the Company had two New Year's
Eve revenue days in fiscal 2002 compared to no New Year's Eve revenues for
fiscal 2003. The Company estimates that the extra week for fiscal 2002 provided
additional sales of approximately $11,900. Blended same store sales increased
1.9%. The Company's average check increased 1.9% and guest counts decreased
2.3%.
Costs of sales, primarily food and beverages, increased as a percentage of
net sales to 36.0% from 32.7% due primarily to increased beef costs.
Restaurant operating expenses in fiscal 2003 increased $8,494 to $275,027
compared to $266,533 in fiscal 2002, and increased as a percentage of net sales
to 46.5% from 44.9%. The increase is primarily attributable to (1) approximately
$3,400 due to salaries for increased manager staffing and indirect labor for
payroll related taxes and insurance costs, (2) approximately $1,500 for
increased advertising spending, (3) approximately $670 for increased building
and equipment repairs and (4) approximately $1,200 for increased utilities.
Depreciation and amortization decreased $3,664 in fiscal 2003 compared to
fiscal 2002. The decrease is attributable primarily to a reduction in
depreciation for certain assets that have become fully depreciated.General and
administrative expenses decreased $1,739 in fiscal 2003 compared to fiscal 2002.
Fiscal 2003 expense decreased as a result of (1) an approximately $2,100
decrease for salary related costs, reflecting primarily a decrease in incentive
compensation and (2) a decrease in professional fees and related costs of
approximately $1,700. These decreases were offset in part by increases in
directors and officers' liability insurance costs as well as increased costs for
travel and recruiting.
Non-cash stock compensation expense in fiscal 2003 decreased $1,475
compared to fiscal 2002. The decrease reflects approximately $1,906 for lower
amortization of such costs. The decrease was partially offset by a charge of
$431 relating to the accounting for certain shares of the Company's common stock
held by a Rabbi Trust pursuant to a deferred compensation arrangement. See Note
3 to the Consolidated Financial Statements for additional information.
Other income, net for fiscal 2003, was $553, compared to $2,986 in fiscal
2002. The decrease is attributable to a decrease in gain on sale of assets and a
decline in interest income as a result of lower interest rates and reduced
amounts of excess funds available for investment.
The effective income tax rate from continuing operations was 30.4% and
33.1% for fiscal 2003 and fiscal 2002, respectively. The factors which cause the
effective tax rates to vary from the federal statutory rate of 35% include state
income taxes, the impact of FICA Tip and other credits, certain non-deductible
expenses, and the tax effect of incentive stock options. There is generally no
tax impact to the Company associated with incentive stock options and the
related amortization associated with such options in the income statement.
However, tax benefits may arise at the time the incentive options are exercised
to the extent that the exercise is followed by a disqualifying disposition of
the shares by the optionee. The decrease in the effective tax rate for fiscal
2003 reflects (1) both the impact of a decrease in the amount of amortization of
stock option compensation and an increase in tax benefits resulting from
disqualifying disposition of shares related to incentive stock options, and (2)
the impact of FICA Tip and other tax credits on the lower pre-tax income for
fiscal 2003 compared with fiscal 2002.
Discontinued operations reflect the operations of restaurants closed during
fiscal 2003 and 2002 which are required to be reported as discontinued
operations pursuant to SFAS No. 144. Discontinued operations include the
applicable operations of Australia. In December 2003, the Company completed the
-22-
sale of 13 of its restaurants in Australia to a licensee, and the Company closed
six other restaurants in Australia prior to December 30, 2003. The discontinued
operations for fiscal 2003 include aggregate pre-tax charges of approximately
$12,000 incurred in connection with its exit activities from Australia,
including impairment losses, termination costs associated with employees and
certain lease obligations, and losses related to the realization of the
Company's cumulative foreign currency translation adjustments. See Note 12 to
the Consolidated Financial Statements for additional information.
The cumulative effect of accounting change in fiscal 2002 reflects the
effect of adoption of the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets. The Company adopted the provisions of SFAS No. 142 effective
December 26, 2001. The cumulative effect of the change in accounting resulted in
a one-time charge of $318, net of income taxes, to reflect the impairment of
goodwill related to the Company's Australian operations (see Note 2 to the
Consolidated Financial Statements for additional information.)
-23-
IMPACT OF INFLATION
The primary inflationary factors affecting the Company's operations include
food and labor costs. A number of the Company's restaurant personnel are paid at
the federal and state established minimum wage levels and, accordingly, changes
in such wage levels affect the Company's labor costs. However, since the
majority of personnel are tipped employees, minimum wage changes generally have
little effect on overall labor costs. Historically, as costs of food and labor
have increased, the Company has been able to offset these increases through menu
price increases and economies of scale; however, there may be delays in the
implementation of such menu price increases or in effecting timely economies of
scale, as well as, competitive pressures which may limit the Company's ability
to recover any cost increases in their entirety. Historically, inflation has not
had a material impact on operating margins. During fiscal 2004, the Company
experienced significant volatility in beef prices as such prices for the year
were generally above historical levels. To the extent that beef prices continue
to be significantly above historical levels, it will have a material negative
impact on operating margins.
LIQUIDITY AND CAPITAL RESOURCES (Dollars in thousands, except share amounts) The
following table presents a summary of the Company's cash flows for the years
ended:
December 30, December 31,
December 28, 2003 2002
2004 RESTATED RESTATED
---- -------- --------
Net cash provided by operating activities $ 61,004 $ 54,138 $ 74,792
Net cash provided by (used in) investment activities (65,334) (8,106) 5,240
Net cash used by financing activities (54,788) (27,149) (98,843)
Effect of exchange rate changes on cash - 1,486 363
Net cash provided by discontinued operations 1,403 10,492 898
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents $ (57,715) $ 30,861 $ (17,550)
============= ============ ============
The increase in net cash provided by operating activities for fiscal 2004
compared to fiscal 2003 is due primarily to an increase in net income during
fiscal 2004 as compared to fiscal 2003.
During fiscal 2004, 2003 and 2002, the Company's investment in property and
equipment was $22,245, $6,928 and $2,776, respectively. In fiscal 2004, 2003 and
2002, the Company received proceeds from the sale of assets of $2,035, $1,730
and $7,879, respectively.
During fiscal 2004, the Company invested $33,500 in short term securities
primarily consisting of investments in auction rate securities with contractual
maturities of up to 30 years. These auction rate securities have interest re-set
dates that occur every 7 to 90 days and can be actively marketed at ongoing
auctions that occur every 7 to 90 days. These investments are in
investment-grade debt instruments such as government-backed securities. Auction
rate securities are classified as available-for-sale and are reported on the
balance sheet at par value, which equals market value, as the rate on such
securities resets every 7 to 90 days. Consequently, interest rate movements do
not affect the balance sheet valuation of these fixed income investments.
The Company opened one domestic Lone Star restaurant and reopened one
completely remodeled Lone Star restaurant in fiscal 2004. The Company opened no
restaurants in fiscal 2002 and 2003.
As more fully described in Note 6 to the Notes to Consolidated Condensed
Financial Statements, on January 28, 2004, the Company acquired TXCC which
operates 20 Texas Land & Cattle Steak House(R) restaurants located primarily in
Texas. The cash portion of the purchase price, net of cash acquired of $2,145
was $12,579 and was funded from the Company's existing cash balance.
-24-
During fiscal 2004, the Company received net proceeds of $11,454 from the
issuance of 1,350,065 shares of its common stock due to the exercise of stock
options compared to proceeds of $10,224 and $23,551 from the issuance of
1,210,682 and 2,058,838 shares in fiscal 2003 and 2002, respectively.
In June 2002, the Company completed a Modified Dutch Auction tender offer
for the purchase of 4,000,000 shares of its common stock at a price of $21.375
per share. The aggregate cost to repurchase the shares was $86,301 including the
costs of the tender offer. The transaction was financed from the Company's
existing available cash.
The Company's Board of Directors has authorized the purchase of shares of
the Company's common stock from time to time in the open market or in privately
negotiated transactions. The most recent authorization was November 17, 2004
when the Board of Directors approved the repurchase of up to 2,026,190 shares of
the Company's common stock. In fiscal 2004, the Company purchased 2,072,800
shares of its common stock at a cost of $51,410. In fiscal 2003 and 2002, the
Company purchased 1,132,500 and 1,114,000 shares at a cost of $23,833 and
$22,374, respectively. The shares repurchased exclude the 4,000,000 shares in
the tender offer as previously described.
The Company has paid quarterly cash dividends on its common stock since the
second quarter of fiscal 2000. In January 2004, the Company increased its
quarterly cash dividend from $.165 to $.175 per share. The Company recently
announced in 2005 that it would increase its quarterly cash dividend from $.175
to $.195 per share. During fiscal 2004, 2003, and 2002, the Company paid cash
dividends as follows:
AMOUNT PER SHARE
------ ---------
Fiscal 2004 $14,832 $0.70
Fiscal 2003 $13,560 $0.645
Fiscal 2002 $13,719 $0.60
At December 28, 2004, the Company had $72,015 in cash and cash equivalents
and short term investments. The Company has available $55,000 in unsecured
revolving credit facilities which expire in October 2007. At December 28, 2004,
the Company had no outstanding borrowings under such facilities. See Note 4 to
the Consolidated Financial Statements in this Form 10-K for a further
description of the Company's credit facilities. The Company expects to fund
future requirements for normal investing and financing activities through cash
provided from operations and existing cash and cash equivalent balances and
short term investment assets.
The Company's obligations at December 28, 2004 are for operating leases as
follows:
2005 $13,991
2006 13,952
2007 13,652
2008 13,900
2009 13,856
Thereafter 113,468
--------
Total operating lease obligations $182,819
========
The Company from time to time may utilize derivative financial instruments
in the form of live beef cattle futures contracts to manage market risks and
reduce its exposure resulting from fluctuations in the price of meat. Realized
and unrealized changes in the fair values of the derivative instruments are
recognized in income in the period in which the change occurs. Realized and
unrealized gains and losses for the period were not significant. As of December
-25-
28, 2004 and during the fiscal year then ended, the Company had no positions in
futures contracts.
RISK FACTORS
CHANGING CONSUMER PREFERENCES AND DISCRETIONARY SPENDING PATTERNS, POTENTIAL
OUTBREAKS OF "MAD COW DISEASE" OR "FOOT/MOUTH DISEASE" AND OTHER FACTORS
AFFECTING THE AVAILABILITY OF BEEF COULD FORCE US TO MODIFY OUR RESTAURANTS'
CONCEPT AND MENU AND COULD RESULT IN A REDUCTION IN OUR REVENUES.
Even if we are able to successfully compete with other restaurant companies
with similar concepts, we may be forced to make changes in one or more of our
concepts in order to respond to changes in consumer tastes or dining patterns.
Consumer preferences could be affected by health concerns about the consumption
of beef, the primary item on our menus, or by specific events such as the
recently confirmed cases of "mad cow disease" by the Canadian government or
"foot/mouth disease" which occurred in the United Kingdom. In addition, these
events could reduce the available supply of beef or significantly raise the
price of beef. If we change a restaurant concept, we may lose additional
customers who do not prefer the new concept and menu, and we may not be able to
attract a sufficient new customer base to produce the revenue needed to make the
restaurant profitable. In addition, we may have different or additional
competitors for our intended customers as a result of such a concept change and
may not be able to successfully compete against such competitors. Our success
also depends on numerous factors affecting discretionary consumer spending,
including economic conditions, the cost of gasoline, disposable consumer income
and consumer confidence. Adverse changes in these factors could reduce guest
traffic or impose practical limits on pricing, either of which could reduce
revenues and operating income.
UNFORESEEN COST INCREASES COULD ADVERSELY AFFECT OUR PROFITABILITY.
Our profitability is highly sensitive to increases in food, labor and other
operating costs. During fiscal 2004, our beef prices were generally above
historical levels. To the extent that beef prices continue to be significantly
above historical levels, it will have a material negative effect on operating
margins. In addition, our dependence on frequent deliveries of fresh food
supplies means that shortages or interruptions in supply could materially and
adversely affect our operations. Moreover, unfavorable trends or developments
concerning the following factors could adversely affect our results:
o Inflation, food, labor, energy and utilities and employee benefit costs;
and
o rent increases resulting from rent escalation provisions in our leases.
We may be unable to anticipate or react to changing prices. If we are
unable to modify our purchasing practices or quickly or readily pass on
increased costs to customers, our business could be materially affected.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH OUR COMPETITORS, WE WILL NOT BE
ABLE TO INCREASE REVENUES OR GENERATE PROFITS. OUR INABILITY TO INCREASE
REVENUES IS DIRECTLY RELATED TO OUR ABILITY TO COMPETE EFFECTIVELY WITH OUR
COMPETITORS. KEY COMPETITIVE FACTORS INCLUDE:
o The quality and numbers of employees needed to adequately staff our
restaurants;
o the quality and value of the food products offered;
o the quality of service;
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o the cost of our raw products;
o the price of the food products offered;
o the restaurant locations; and
o the ambiance of facilities.
We compete with other steakhouse restaurants specifically and with all
other restaurants generally. We compete with national and regional chains, as
well as individually owned restaurants. The restaurant industry has few
non-economic barriers to entry, and as our competitors expand operations,
competition from steakhouse restaurants with concepts similar to ours can be
expected to intensify. Many of our competitors are well established in the
upscale and mid-scale steak segments and certain competitors have substantially
greater financial, marketing and other resources than us. Such increased
competition could adversely affect our revenues.
FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD ADVERSELY AFFECT OUR
OPERATING PERFORMANCE.
Our restaurant operations are subject to certain federal, state and local
laws and government regulations, such as:
o Obtaining of licenses for the sale of food and alcohol beverages;
o national and local health sanitation laws and regulations;
o national and local employment and safety laws and regulations; and
o local zoning, building code and land-use regulations.
While we have never experienced any significant difficulties in obtaining
necessary governmental approvals, the failure to obtain or retain food and
liquor licenses or any other governmental approvals could have a material
adverse effect on our operating results.
We may be subjected to "dram-shop" liability, which generally provides a
person injured by an intoxicated person with the right to recover damages from
an establishment that wrongfully served alcoholic beverages to the intoxicated
person. Although we carry liquor liability coverage as part of our comprehensive
general liability insurance, if we lost a lawsuit related to this liability, our
business could be materially harmed.
THE RESTAURANT INDUSTRY IS AFFECTED BY A NUMBER OF TRENDS, AS WELL AS BY
COMPETITION.
The restaurant industry is affected by changes in consumer tastes and by
national, regional, and local economic conditions and demographic trends. The
performance of individual restaurants may be affected by factors such as traffic
patterns, demographic considerations and the type, number and location of
competing restaurants. In addition, factors such as inflation, increased food,
labor and employee benefit costs and the availability of experienced management
and hourly employees to successfully operate the restaurants may also adversely
affect the restaurant industry in general and our restaurants in particular.
CONSUMER PERCEPTIONS OF FOOD SAFETY COULD ADVERSELY AFFECT OUR BUSINESS
Our business could be adversely affected by consumer perceptions of food
safety in the United States or in the market areas in which we operate, whether
such perceptions are based on fact or not. In addition, adverse publicity
resulting from poor food quality, illness, injury or other health concerns at
-27-
one or a limited number of our restaurants could have a material adverse effect
on our business, results of operations and financial condition.
OUR BUSINESS DEPENDS ON A LIMITED NUMBER OF KEY PERSONNEL, THE LOSS OF WHOM
COULD ADVERSELY AFFECT US.
Some of our senior executives are important to our success because they
have been instrumental in setting the strategic direction of our Company,
operating our business, identifying, recruiting and training key personnel,
identifying areas for expansion and arranging necessary financing. These key
personnel include Jamie B. Coulter, our Chief Executive Officer, T.D. O'Connell,
our President of Lone Star Restaurants, and certain of our other executive
officers. Although we believe there is a significant pool of talented personnel
in the restaurant industry, if these members of our senior management team
become unable or unwilling to continue in their present positions, it could
adversely affect our business and development.
SHAREHOLDERS MAY NOT BE ABLE TO RESELL THEIR STOCK OR MAY HAVE TO SELL AT A
PRICE SUBSTANTIALLY LOWER THAN THE PRICE THEY PAID FOR IT.
The trading price for our common stock has been highly volatile and could
continue to be subject to significant fluctuations in response to variations in
our quarterly operating results, general conditions in the restaurant industry
or the general economy, and other factors. In addition, the stock market is
subject to price and volume fluctuations affecting the market price for public
companies generally, or within broad industry groups, which fluctuations may be
unrelated to the operating results or other circumstances of a particular
company. Such fluctuations may adversely affect the liquidity of our common
stock, as well as the price that holders may achieve for their shares upon any
future sale.
STAGGERED BOARD; BLANK-CHECK PREFERRED STOCK.
Our current certificate of incorporation and bylaws provide for three
classes of directors to be elected on a staggered basis. This enables existing
directors to exercise significant control over our affairs, and may act as an
impediment to any future attempts by third parties to take control of our board
of directors. In addition, our board of directors has the authority without
further action by the stockholders to issue shares of preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof. The exercise of this authority may act as a further impediment to any
future attempts by third parties to take control of our board of directors.
A SINGLE VENDOR DISTRIBUTES MOST OF OUR CONSUMABLE PRODUCTS.
Approximately 54% of the consumable products used in our restaurants are
distributed through and delivered by a single vendor. While we believe we could
replace this vendor, any disruption of services by this vendor or any change to
a new vendor could adversely affect our restaurants.
THE RISK OF FUTURE TERRORIST ATTACKS MAY ADVERSELY IMPACT OUR REVENUE.
As a result of the terrorist attacks on the United States on September 11,
2001, a number of our restaurants, particularly our Del Frisco's and Sullivan's
restaurants, were negatively affected. Additionally, recent terrorist warnings,
both in the United States and internationally, suggest the possibility of future
terrorist attacks, which together with the unpredictability of future military
action and other responses to such terrorist attacks has resulted in economic
uncertainty. The occurrence of future terrorist attacks may adversely affect our
business and make it more difficult to forecast our future results of operation.
-28-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included in a separate section of this report.
See "Index to Consolidated Financial Statements" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures that are designed
to ensure that information required to be disclosed by us in the reports filed
by us under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
is recorded, processed, summarized and reported pursuant to and within the time
periods specified in the SEC's rules and forms.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-15(e) promulgated under the Exchange Act . Based on
this evaluation, our principal executive officer and our principal financial
officer concluded that our disclosure controls and procedures were effective as
of the end of the period covered by this annual Form 10-K report.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the
participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting as of December 28, 2004 based on
the framework in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Based on that
evaluation, our management concluded that our internal control over financial
reporting was effective as of December 28, 2004.
Management's assessment of the effectiveness of our internal control over
financial reporting as of December 28, 2004 has been audited by Ernst & Young
LLP, an independent registered public accounting firm, as stated in their report
which is included below.
CHANGE IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the fourth quarter ended December 28, 2004, management reviewed the
Company's lease accounting and leasehold depreciation practices. As a result of
this review, management concluded that the Company's controls over the selection
and monitoring of appropriate assumptions and factors affecting lease accounting
and leasehold depreciation practices were insufficient. As a result, the Company
changed its controls and accounting policies surrounding the review, analysis
and recording of new and current leases, including the selection and monitoring
of appropriate assumptions and guidelines to be applied during the review and
analysis of all leases. Furthermore, management determined that the Company's
annual rent and depreciation expense over the last several years had been
understated and its previously issued financial statements were restated to
reflect the correction in the Company's lease accounting and leasehold
depreciation practices.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Lone Star Steakhouse & Saloon, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Lone Star
Steakhouse & Saloon, Inc. and subsidiaries maintained effective internal control
over financial reporting as of December 28, 2004, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Lone Star
-29-
Steakhouse & Saloon, Inc. and subsidiaries' management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Lone Star Steakhouse & Saloon, Inc.
and subsidiaries maintained effective internal control over financial reporting
as of December 28, 2004, is fairly stated, in all material respects, based on
the COSO criteria. Also, in our opinion, Lone Star Steakhouse & Saloon, Inc. and
subsidiaries, maintained, in all material respects, effective internal control
over financial reporting as of December 28, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Lone Star Steakhouse & Saloon, Inc. and subsidiaries as of December 28, 2004 and
December 30, 2003, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 28, 2004 of Lone Star Steakhouse & Saloon, Inc. and subsidiaries
and our report dated March 10, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Kansas City, Missouri
March 10, 2005
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ITEM 9B. OTHER INFORMATION
On December 28, 2004, the Company's Compensation/Stock Option Committee
approved the fiscal 2004 cash bonuses and stock options to be granted to
executive officers of the Company and approved the salaries of the executive
officers for 2005.
The bonuses, option grants and salaries for the Company's executive
officers are as follows:
Named Executive Officer 2005 Base Salary 2004 Cash Bonus Stock Option Grants(1)
Jamie B Coulter $866,250 $412,500 65,000
Tomlinson D. O'Connell $400,000 $175,000 100,000
John D. White $675,000 $175,000 60,000
Gerald T. Aaron $275,000 $72,500 35,000
Dee Lincoln $260,000 $42,500 20,000
(1)Granted pursuant to the Company's 2004 Stock Option Plan. The options
shall vest in equal installments on each of the first four anniversaries of the
date of the grant.
The Company entered into separate employment agreements with each of
Messrs. White, Aaron, and O'Connell, on April 29, 2003. These agreements have
been previously filed by the Company with the Securities and Exchange Commission
and a description of the material terms of these agreements was provided in the
Company's Form 10-K/A for the fiscal year ended December 30, 2003, filed April
28, 2004.
Mr. Coulter and Ms. Lincoln do not have written employment agreements with
the Company. Their base salary and cash bonus are set each year by the
Compensation/Stock Option Committee.
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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 AND
RELATED STOCKHOLDER MATTERS
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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 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.
-32-
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1) Financial Statements.
See Index to Financial Statements which appears 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
***3.3 Company's Amended and Restated By-Laws
******10.2 1992 Lone Star Steakhouse & Saloon, Inc. Directors'
Stock Option Plan as amended the "Director's Plan"
****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
*****10.7 Employment Agreement between the Company and Gerald
T. Aaron, dated April 24, 2003.
*****10.9 Employment Agreement between the Company and T.D.
O'Connell, dated April 24, 2003
*****10.11 Employment Agreement between the Company and John D.
White, dated April 24, 2003
******10.20 Non-Qualified Deferred Compensation Plan
********10.23 Lone Star Steakhouse & Saloon, Inc. Stock Option
Deferred Compensation Plan dated September 30, 2002
********10.24 Deferred Compensation Agreement dated October 4,
2002 between LS Management, Inc. and Jamie B.
Coulter
*******10.26 Amendment to the Director's Plan
*******10.27 Amendment to the Plan
*********10.28 Revolver Credit Loan Agreement dated October 8, 2004
between the Company and Suntrust Bank
**********10.29 2004 Stock Option Plan
*21.1 Subsidiaries of the Company
*23.1 Independent Auditors' consent to the incorporation
by reference in the Company's Registration
Statements on Form S-8 of the independent auditors'
report included herein
*31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
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*31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
*32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
*32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
-----------------
* Filed herewith.
** 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 Quarterly Report
on Form 10-Q for the quarter ended June 12, 2001.
**** 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 June 17, 2003.
****** Incorporated by reference to the Company's Registration
Statement on Form S-8, filed with the Commission on March
31, 2000 (Commission File No. 333-33762).
******* Incorporated by Reference to the Company's Registration
Statement on Form S-8, filed with the Commission on July 24,
2002 (Commission File No. 333-97271).
******** Incorporated by Reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.
********* Incorporated by Reference to the Company's Periodic Report
on Form 8-K, filed with the Commission on October 14, 2004.
********** Incorporated by Reference to the Company's Periodic Report
on Form 8-K, filed with the Commission on December 20, 2004.
-34-
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 14th day of March 2005.
LONE STAR STEAKHOUSE & SALOON, INC.
(Registrant)
/s/ John D. White
--------------------------------------------
John D. White
Chief Financial Officer and
Principal Accounting Officer
-35-
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 Chief Executive Officer
----------------------------- Principal Executive March 14, 2005
Jamie B. Coulter Officer
/s/ John D. White Chief Financial Officer
----------------------------- and Principal Accounting March 14, 2005
John D. White Officer, Executive Vice
President, Treasurer and
Director
/s/ William B. Greene Chairman of the Board March 14, 2005
----------------------------- and Director
William B. Greene
/s/ Anthony Bergamo Director March 14, 2005
-----------------------------
Anthony Bergamo
/s/ Fred B. Chaney Director March 14, 2005
-----------------------------
Fred B. Chaney
/s/ Thomas C. Lasorda Director March 14, 2005
-----------------------------
Thomas C. Lasorda
/s/ Michael A. Ledeen Director March 14, 2005
-----------------------------
Michael A. Ledeen
-36-
/s/ Clark R. Mandigo Director March 14, 2005
-----------------------------
Clark R. Mandigo
/s/ Mark Saltzgaber Director March 14, 2005
-----------------------------
Mark Saltzgaber
-37-
CONSOLIDATED FINANCIAL STATEMENTS
Lone Star Steakhouse & Saloon, Inc.
Years Ended December 28, 2004, December 30, 2003, and December 31, 2002
Lone Star Steakhouse & Saloon, Inc.
Index to Financial Statements
PAGES
Report of Independent Registered Public Accounting Firm..................... F-1
Consolidated Balance Sheets as of December 28, 2004 and December 30, 2003... F-3
Consolidated Statements of Income for the years ended December 28, 2004,
December 30, 2003, and December 31, 2002................................. F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 28, 2004, December 30, 2003, and December 31, 2002.............. F-7
Consolidated Statements of Cash Flows for the years ended
December 28, 2004, December 30, 2003, and December 31, 2002.............. F-8
Notes to Consolidated Financial Statements..................................F-10
Report of Independent Registered Public Accounting Firm
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. (the Company) and subsidiaries as of December 28, 2004
and December 30, 2003, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 28, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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. and subsidiaries at December 28, 2004 and December 30,
2003, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 28, 2004, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company has
restated its financial statements for the years ended December 30, 2003, and
December 31, 2002.
As discussed in Note 2, effective December 26, 2001, the Company adopted the
provisions of SFAS No. 142, Goodwill and Other Intangible Assets.
F-1
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Lone Star
Steakhouse & Saloon, Inc. and subsidiaries' internal control over financial
reporting as of December 28, 2004, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 10, 2005, expressed an
unqualified opinion thereon.
Kansas City, Missouri /s/ Ernst & Young, LLP
March 10, 2005
F-2
Lone Star Steakhouse & Saloon, Inc.
Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 28, DECEMBER 30,
2004 2003
--------------------------
AS RESTATED
ASSETS
Current assets:
Cash and cash equivalents $ 38,515 $ 96,230
Short-term investments 33,500 --
--------------------------
72,015 96,230
Inventories 12,765 12,955
Deferred income taxes 7,532 5,151
Prepaid insurance deposits 14,537 6,913
Other 6,225 5,817
--------------------------
Total current assets 113,074 127,066
Property and equipment:
Land 119,117 112,933
Buildings 174,628 166,795
Leasehold improvements 118,203 109,091
Equipment 107,872 99,621
Furniture and fixtures 19,267 18,828
--------------------------
539,087 507,268
Less accumulated depreciation and amortization 217,837 196,983
--------------------------
321,250 310,285
Deferred compensation plan investments 13,903 11,670
Other assets:
Goodwill 11,513 11,513
Intangible assets, net 9,519 10,452
Deferred income taxes 24,434 23,655
Other 4,599 5,347
--------------------------
50,065 50,967
--------------------------
Total assets $498,292 $499,988
==========================
F-3
DECEMBER 28, DECEMBER 30,
2004 2003
---------------------------
AS RESTATED
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,845 $ 12,166
Sales tax payable 2,817 3,018
Accrued payroll 9,947 8,118
Real estate taxes 3,239 2,380
Accrued self insurance 15,094 7,296
Gift certificates 10,973 9,207
Income taxes payable 9,786 10,592
Other 8,051 5,920
---------------------------
Total current liabilities 73,752 58,697
Long-term liabilities, principally deferred
compensation obligations 21,263 17,322
Deferred rent obligations 10,496 9,289
---------------------------
Total liabilities 105,511 85,308
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares
authorized; none issued -- --
Common stock, $.01 par value, 98,000,000
shares authorized; 20,469,540 shares issued and
outstanding (21,072,790 in 2003) 205 211
Additional paid-in capital 139,570 177,844
Retained earnings 256,669 240,288
Common stock held by trust (3,663) (3,663)
---------------------------
Total stockholders' equity 392,781 414,680
---------------------------
Total liabilities and stockholders' equity $498,292 $ 499,988
===========================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Income
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED
-------------------------------------------
DECEMBER 28, DECEMBER 30, DECEMBER 31,
2004 2003 2002
-------------------------------------------
AS RESTATED AS RESTATED
Net sales $ 669,527 $ 591,401 $ 593,617
Costs and expenses:
Costs of sales 239,660 212,593 194,183
Restaurant operating expenses 317,005 275,027 266,533
Depreciation and amortization 20,268 20,852 24,516
Provision for impaired assets and restaurant
closings 1,167 -- 792
-------------------------------------------
Restaurant costs and expenses 578,100 508,472 486,024
General and administrative expenses 45,269 43,346 45,085
Abandoned merger expenses -- -- 2,990
Non-cash stock compensation expense 1,193 1,474 2,949
-------------------------------------------
Income from operations 44,965 38,109 56,569
Other income, net 1,737 553 2,986
-------------------------------------------
Income from continuing operations before income
taxes and cumulative effect of accounting change 46,702 38,662 59,555
Provision for income taxes 15,420 11,760 19,715
-------------------------------------------
Income from continuing operations before
cumulative effect of accounting change 31,282 26,902 39,840
Discontinued operations:
Loss from operations of discontinued restaurants (86) (10,774) (1,322)
Income tax benefit 17 2,117 467
-------------------------------------------
Loss on discontinued operations (69) (8,657) (855)
-------------------------------------------
Income before cumulative effect of accounting
change 31,213 18,245 38,985
Cumulative effect of accounting change, net of tax -- -- (318)
-------------------------------------------
Net income $ 31,213 $ 18,245 $ 38,667
===========================================
F-5
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Income (continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED
-----------------------------------------------------
DECEMBER 28, DECEMBER 30, DECEMBER 31, 2002
-----------------------------------------------------
AS RESTATED AS RESTATED
Basic earnings per share:
Continuing operations $ 1.49 $ 1.29 $ 1.74
Discontinued operations -- (.41) (.03)
Cumulative effect of accounting change -- -- (.02)
-----------------------------------------------------
Basic earnings per share $ 1.49 $ .88 $ 1.69
=====================================================
Diluted earnings per share:
Continuing operations $ 1.33 $ 1.13 $ 1.51
Discontinued operations -- (.36) (.03)
Cumulative effect of accounting change -- -- (.01)
-----------------------------------------------------
Diluted earnings per share $ 1.33 $ .77 $ 1.47
=====================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Stockholders' Equity
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ADDITIONAL
PREFERRED COMMON STOCK PAID-IN RETAINED
STOCK NUMBER AMOUNT CAPITAL EARNINGS
------------------------------------------------------------------
Balance, December 25, 2001, as previously reported -- 24,049,770 $240 $272,527 $216,111
Cumulative effect on prior year of retroactive restatement -- -- -- -- (5,456)
------------------------------------------------------------------
Balance, December 25, 2001, as restated -- 24,049,770 240 272,527 210,655
Stock options exercised -- 2,058,838 21 23,530 --
Tax effect related to options exercised -- -- -- (474) --
Common stock purchased and retired -- (5,114,000) (51) (108,624) --
Cash dividends ($.60 per share) -- -- -- -- (13,719)
Non-cash stock compensation expense -- -- -- 2,949 --
Comprehensive income:
Net income -- -- -- -- 38,667
Foreign currency translation adjustments -- -- -- -- --
Comprehensive income
------------------------------------------------------------------
Balance, December 31, 2002 -- 20,994,608 210 189,908 235,603
Stock options exercised -- 1,210,682 12 10,232 --
Tax effect related to options exercised -- -- -- 483 --
Common stock purchased and retired -- (1,132,500) (11) (23,822) --
Cash dividends ($.645 per share) -- -- -- -- (13,560)
Non-cash stock compensation expense -- -- -- 1,043 --
Common stock held by trust (177,145 shares) -- -- -- -- --
Comprehensive income:
Net income -- -- -- -- 18,245
Foreign currency translation adjustments -- -- -- -- --
Comprehensive income
------------------------------------------------------------------
Balance, December 30, 2003 -- 21,072,790 211 177,844 240,288
Stock options exercised -- 1,350,065 14 11,440 --
Tax effect related to options exercised -- -- -- (1,365) --
Common stock purchased and retired -- (2,072,800) (21) (51,389) --
Cash dividends ($.70 per share) -- -- -- -- (14,832)
Non-cash stock compensation expense -- -- -- 362 --
Common stock issued in purchase of TXCC -- 119,485 1 2,678 --
Net income -- -- -- -- 31,213
Balance, December 28, 2004 -- 20,469,540 $205 $139,570 $256,669
================================================================
ACCUMULATED
COMMON OTHER
STOCK COMPREHENSIVE
HELD BY TRUST (LOSS) INCOME TOTAL
--------------------------------------------
Balance, December 25, 2001, as previously reported $ -- $(13,443) $475,435
Cumulative effect on prior year of retroactive restatement -- -- (5,456)
--------------------------------------------
Balance, December 25, 2001, as restated -- (13,443) 469,979
Stock options exercised -- -- 23,551
Tax effect related to options exercised -- -- (474)
Common stock purchased and retired -- -- (108,675)
Cash dividends ($.60 per share) -- -- (13,719)
Non-cash stock compensation expense -- -- 2,949
Comprehensive income:
Net income -- -- 38,667
Foreign currency translation adjustments -- 1,483 1,483
-----------
Comprehensive income 40,150
--------------------------------------------
Balance, December 31, 2002 -- (11,960) 413,761
Stock options exercised -- -- 10,244
Tax effect related to options exercised -- -- 483
Common stock purchased and retired -- -- (23,833)
Cash dividends ($.645 per share) -- -- (13,560)
Non-cash stock compensation expense -- -- 1,043
Common stock held by trust (177,145 shares) (3,663) -- (3,663)
Comprehensive income:
Net income -- -- 18,245
Foreign currency translation adjustments -- 11,960 11,960
-----------
Comprehensive income 30,205
--------------------------------------------
Balance, December 30, 2003 (3,663) -- 414,680
Stock options exercised -- -- 11,454
Tax effect related to options exercised -- -- (1,365)
Common stock purchased and retired -- -- (51,410)
Cash dividends ($.70 per share) -- -- (14,832)
Non-cash stock compensation expense -- -- 362
Common stock issued in purchase of TXCC -- -- 2,679
Net income -- -- 31,213
-----------
Balance, December 28, 2004 $(3,663) $ -- $392,781
=====================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Cash Flows
(IN THOUSANDS)
FOR THE YEAR ENDED
-----------------------------------------------------------
DECEMBER 28, DECEMBER 30, DECEMBER 31,
2004 2003 2002
-----------------------------------------------------------
AS RESTATED AS RESTATED
OPERATING ACTIVITIES
Net income $31,213 $18,245 $38,667
Adjustments to reconcile net income to net cash
provided by operating activities of continuing
operations:
Depreciation 21,883 22,914 27,140
Amortization 1,067 1,047 1,047
Non-cash stock compensation 1,193 1,474 2,949
Provision for impaired assets and restaurant
closings 1,167 -- 250
(Gain) loss on sales of assets (1,250) 42 (1,971)
Cumulative effect of accounting change -- -- 508
Deferred income taxes 2,964 (5,323) 12,912
Loss from discontinued operations 69 8,657 855
Changes in operating assets and liabilities,
net of the effects of the acquisition:
Inventories 598 (490) 103
Prepaid insurance deposits (7,624) (6,913) --
Other current assets 43 407 (718)
Accounts payable 45 (1,212) (432)
Accrued self-insurance 7,573 7,296 --
Income taxes payable (806) 7,017 (7,966)
Other liabilities 2,869 977 1,448
-----------------------------------------------------------
Net cash provided by operating activities of
continuing operations 61,004 54,138 74,792
INVESTING ACTIVITIES
Acquisition, net of cash acquired (12,579) -- --
Purchases of short-term investments (33,500) -- --
Purchases of property and equipment (22,245) (6,928) (2,776)
Proceeds from sales of assets 2,035 1,730 7,879
Other 955 (2,908) 137
-----------------------------------------------------------
Net cash provided by (used in) investing activities
of continuing operations (65,334) (8,106) 5,240
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 11,454 10,244 23,551
Common stock repurchased and retired (51,410) (23,833) (108,675)
Dividends paid (14,832) (13,560) (13,719)
-----------------------------------------------------------
Net cash used in financing activities of continuing
operations (54,788) (27,149) (98,843)
Effect of exchange rate changes on cash -- 1,486 363
Net cash provided by discontinued operations 1,403 10,492 898
-----------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (57,715) 30,861 (17,550)
F-8
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Cash Flows (continued)
(IN THOUSANDS)
FOR THE YEAR ENDED
---------------------------------------------
DECEMBER 28, DECEMBER 30, DECEMBER 31,
2004 2003 2002
---------------------------------------------
AS RESTATED AS RESTATED
Cash and cash equivalents at beginning of year $96,230 $65,369 $82,919
---------------------------------------------
Cash and cash equivalents at end of year $38,515 $96,230 $65,369
=============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes $14,610 $6,875 $15,175
=============================================
Shares issued in connection with acquisition $ 2,679 $ -- $ --
=============================================
Non-cash investing and financing activities:
Shares issued to trust $ -- $3,663 $ --
=============================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-9
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
December 30, 2004
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
Lone Star Steakhouse & Saloon, Inc. (the Company) owns and operates two
mid-priced full service, casual dining restaurant concepts in the United States
which operate under the names Lone Star Steakhouse & Saloon and Texas Land &
Cattle Steakhouse (TXCC). In addition, the Company operates restaurants in the
upscale steakhouse market through Del Frisco's Double Eagle Steak House and
Sullivan's Steakhouse. As of December 28, 2004, the Company owns and operates
251 Lone Star Steakhouse & Saloons and 20 Texas Land & Cattle Steakhouses. In
addition, the Company owns and operates five Del Frisco's Double Eagle Steak
Houses, 15 Sullivan's Steakhouses, and one Frankie's Italian Grille. All of the
Company's restaurants are in the United States. The Company acquired TXCC
effective January 28, 2004. (See Note 19).
SIGNIFICANT ACCOUNTING POLICIES
o Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
o Foreign Currency Translation
Assets and liabilities of the Company's foreign operations in Australia
are translated at current exchange rates, while revenues and expenses are
translated at average exchange rates prevailing during the year. Prior to
December 30, 2003, translation adjustments were reported as a component of
comprehensive income in stockholders' equity; however, as a result of the
Company's divestiture of its Australia operations in fiscal 2003, as
described in Note 12, the foreign currency translation adjustments were
realized and are included as a component of loss from discontinued
operations.
F-10
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o Concentration of Credit Risk
The Company's financial instruments exposed to concentration of credit
risk consist primarily of cash, cash equivalents, and short-term
investments. 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 of
approximately $13,626 and $73,014 at December 28, 2004, and December 30,
2003, respectively, in money market mutual funds. The Company's short-term
investments of $33,500 at December 28, 2004, primarily include auction
rate, investment grade securities with municipal, state, and U.S.
government agencies.
o Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes.
Actual results could differ from those 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 Short-Term Investments
The Company's short-term investments of $33,500 at December 28, 2004,
primarily consist of investments in auction rate securities with
contractual maturities of up to 30 years. These auction rate securities
have interest re-set dates that occur every 7 to 90 days and can be
actively marketed at ongoing auctions that occur every 7 to 90 days. These
investments are investment-grade debt instruments such as
government-backed securities. Auction rate securities are classified as
available-for-sale and are reported on the balance sheet at par value,
which equals market value, as the rate on such securities resets every 7
to 90 days. Consequently, interest rate movements do not affect the
balance sheet valuation of these investments.
F-11
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o Financial Instruments
The Company considers carrying amounts of cash and cash equivalents,
short-term investments, receivables, and accounts payable to approximate
fair value.
The Company sometimes utilizes 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
instruments are recognized in income in the period in which the change
occurs. Realized and unrealized gains and losses related to these
derivative instruments have not been significant. The Company had no
positions in futures contracts as of December 28, 2004, and December 30,
2003. These instruments, when used, 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 using the first-in, first-out method, or market.
o Prepaid Insurance Deposits
In connection with its self-insurance programs, the Company is required to
make deposits with its insurance carrier pursuant to the terms of its
insurance agreements. The funds held by the insurance carrier may be used
solely to reimburse the insurance carrier for any amounts paid or advanced
by the insurance carrier in its capacity as the administrative agent for
the Company relative to any claims or expenses under its insurance
program.
o Property and Equipment
Property and equipment are stated at cost. Maintenance, repairs, and
renewals that do not enhance the value of or increase the life of the
assets are expensed as incurred.
F-12
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Buildings are depreciated using the straight-line method over their
estimated useful lives of 20 years. Leasehold improvements are amortized
on the straight-line method over the lesser of the estimated useful lives
of the assets of 20 years or the expected term of the lease, including
cancelable option periods when failure to exercise such options would
result in an economic penalty to the Company. 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
Preopening costs, including labor costs, costs of hiring and training
personnel, and certain other costs related to opening new restaurants, are
expensed when the costs are incurred.
o Intangible Assets
Intangible assets include goodwill, trademarks, intellectual properties,
and licensing permits. Effective December 26, 2001, the Company adopted
the provisions of Statement of Financial Accounting Standards (SFAS) No.
142 requiring that goodwill and intangible assets deemed to have
indefinite lives no longer be amortized, but subjected to an annual
impairment test or more frequent tests if indicators of impairment exist.
The Company amortizes other intangibles on a straight-line basis over the
estimated periods of benefit, generally 10 to 20 years. See Note 2 for
additional information.
o Deferred Compensation Plan
In connection with the Company's deferred compensation plan, the Company
has created a grantor trust to which it contributes amounts equal to
employee participants' qualified deferrals and the Company's matching
portion. The plan is informally funded using life insurance policies held
by the grantor trust. All assets held by the grantor trust remain the
property of the Company; however, the Company does not currently intend to
use such assets for any purpose other than to fund payments to the
participants pursuant to the terms of the deferred compensation plan. The
assets of the plan consist principally of cash surrender values of the
F-13
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
life insurance policies. Because the investment assets of the deferred
compensation plan are assets of the Company and would be subject to
general claims by creditors in the event of the Company's insolvency, the
accompanying consolidated balance sheets reflect such investments as
assets with an offsetting liability for deferred compensation reflected in
long-term liabilities.
During fiscal 2002, the Company adopted a Stock Option Deferred
Compensation Plan, which allows certain key executives to defer
compensation arising from the exercise of stock options. See Note 3 for
additional information.
o Impairment of Long-Lived Assets
Property and equipment and definite life intangibles are reviewed for
impairment whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. The Company reviews
applicable intangible assets and long-lived assets related to each
restaurant on a periodic basis. When 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. The Company's estimates of
fair values are based on the best information available and require the
use of estimates, judgments, and projections, as considered necessary. The
actual results may vary significantly.
As noted above, goodwill and indefinite life intangibles are reviewed
annually for impairment, or more frequently if indicators of impairment
exist. Goodwill is tested by comparing net book value of the reporting
unit to its estimated fair value. Indefinite life intangibles are tested
by comparing book value to estimated fair value.
F-14
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o Self-Insurance Reserves
During fiscal 2003, the Company adopted self-insurance programs for its
workers' compensation, general liability, and medical benefits programs.
In order to minimize the exposure under the self-insurance programs, the
Company has purchased stop-loss coverage both on a per occurrence and on
an aggregate basis. The self-insured losses under the programs are accrued
based on the Company's estimate of the ultimate expected liability for
both claims incurred and on an incurred but not reported basis. The
establishment of such accruals for self-insurance involves certain
management judgments and assumptions regarding the frequency or severity
of claims, the historical patterns of claim development, and the Company's
experience with claim reserve management and settlement practices. To the
extent actual results may differ from the assumptions used to develop the
accrual estimate amounts, such unanticipated changes may produce
significantly different amounts of expense than those estimated under the
self-insurance programs.
o Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 28, 2004, December 30, 2003, and December 31, 2002,
was $17,502, $15,033, and $13,528, respectively.
o Accounting for Stock-Based Compensation
The Company uses the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, for stock-based employee
compensation. The Company values stock options issued based upon an option
pricing model and recognizes this value as an expense over the period in
which the options vest.
o Revenue Recognition
Revenue from restaurant sales is recognized when food and beverage
products are sold. Proceeds from the sale of gift certificates are
recorded as a liability at the time of sale. Upon redemption of gift
certificates, sales are recognized.
F-15
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, average shares outstanding have been adjusted to reflect,
(1) the number of shares that would be issued from the exercise of stock
options, reduced by the number of shares that could have been purchased
from the proceeds at the average market price of the Company's stock or
price of the Company's stock on the exercise date if options were
exercised during the period presented and (2) the number of shares that
may be issuable to effect the settlement of certain deferred compensation
liabilities pursuant to the Company's Stock Option Deferred Compensation
Plan. The effect of shares issuable to settle the deferred compensation
liabilities has not been included for any periods, as their effect would
have been antidilutive.
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 which include 12, 12, 12, and 16 or 17 weeks,
respectively. Fiscal 2004 and 2003 each included 52 weeks of operations,
while 2002 included 53 weeks of operations.
o Reclassifications
Certain amounts from the prior years have been reclassified to conform
with the current year's presentation. Such reclassifications have also
been applied in presenting the as previously reported amounts discussed
below.
o Restatement of Prior Financial Information
In December 2004, the Company commenced a review of its lease accounting
and leasehold depreciation policies. As result of that review, the Company
determined it appropriate to restate its prior financial statements.
F-16
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Historically, rent expense was recorded on a straight-line basis over the
initial noncancelable lease term. Building and leasehold costs and
improvements for those properties were amortized on the straight-line
method over the lesser of the estimated useful lives of the assets, 20
years, or the expected term of the lease, including option renewal
periods. The Company has determined that it should recognize rent expense
on a straight-line basis over the expected lease term, which includes
cancelable optional renewal periods that are reasonably assured to be
exercised when failure to exercise such renewal options would result in an
economic penalty to the Company. In addition, the Company determined
leasehold improvements should be amortized on the lesser of the estimated
useful lives of the assets of 20 years or the expected lease term.
As result of the above, the Company has restated its financial statements
to adjust depreciation for certain leasehold improvements and to recognize
rent expense on a straight-line basis over the expected lease term,
including lease renewal option periods where failure to exercise such
options would result in an economic penalty. As a result of the
restatement, the Company's previously reported consolidated financial
statements have been adjusted as follows:
AS PREVIOUSLY AS
REPORTED ADJUSTMENTS RESTATED
------------------------------------------
FISCAL YEAR 2003
Consolidated Balance Sheet:
Property and equipment, net $312,220 $(1,935) $310,285
Deferred income taxes 19,803 3,852 23,655
Total other assets 47,115 3,852 50,967
Deferred rent obligations 953 8,336 9,289
Retained earnings 246,707 (6,419) 240,288
F-17
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AS PREVIOUSLY AS
REPORTED ADJUSTMENTS RESTATED
------------------------------------------------
FISCAL YEAR 2003 (CONTINUED)
Consolidated Statement of Income:
Restaurant operating expenses $274,388 $639 $275,027
Depreciation and amortization 20,817 35 20,852
Restaurant costs and expenses 507,798 674 508,472
Income from operations 38,783 (674) 38,109
Income from continuing operations before income taxes 39,336 (674) 38,662
Provision for income taxes 12,013 (253) 11,760
Income from continuing operations 27,323 (421) 26,902
Net income 18,666 (421) 18,245
Basic earnings per share from continuing operations 1.31 (0.02) 1.29
Basic earnings per share 0.90 (0.02) 0.88
Diluted earnings per share from continuing operations 1.15 (0.02) 1.13
Diluted earnings per share 0.79 (0.02) 0.77
F-18
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AS PREVIOUSLY AS
REPORTED ADJUSTMENTS RESTATED
--------------------------------------------------------
FISCAL YEAR 2002
Consolidated Statement of Income:
Restaurant operating expenses $265,730 $803 $266,533
Depreciation and amortization 24,452 64 24,516
Restaurant costs and expenses 485,157 867 486,024
Income from operations 57,436 (867) 56,569
Income from continuing operations before income taxes 60,422 (867) 59,555
Provision for income taxes 20,040 (325) 19,715
Income from continuing operations before cumulative effect
of accounting change 40,382 (542) 39,840
Income before cumulative effect of accounting change 39,527 (542) 38,985
Net income 39,209 (542) 38,667
Basic earnings per share from continuing operations 1.76 (0.02) 1.74
Basic earnings per share 1.71 (0.02) 1.69
Diluted earnings per share from continuing operations 1.53 (0.02) 1.51
Diluted earnings per share 1.49 (0.02) 1.47
The cumulative impact of the adjustments for all years prior to fiscal year
2002 was $5,456, which was recorded as an adjustment to retained earnings at
December 25, 2001. The adjustments had no effect on net cash flows from
operating, investing and financing activities, cash position, or revenues.
The impact of the restatement on 2004 and 2003 quarterly information is
reflected in Note 15. In addition, certain amounts reflected in Notes 8, 9,
and 10 have been restated to reflect the adjustments described above.
F-19
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. INTANGIBLE ASSETS AND GOODWILL
ESTIMATED
USEFUL
LIVES 2004 2003
----------------------------------------------------------
Amortized intangible assets:
Gross carrying amount:
Licenses 20 years $ 3,227 $ 3,229
Intellectual properties 10 years 9,839 9,839
--------------------------------------
Subtotal 13,066 13,068
Accumulated amortization:
Licenses (1,319) (1,223)
Intellectual property (5,967) (5,018)
--------------------------------------
Subtotal (7,286) (6,241)
--------------------------------------
Net amortized intangible assets $ 5,780 $ 6,827
======================================
Unamortized intangible assets:
Goodwill $ 11,513 $ 11,513
Licenses 3,583 3,449
Other 156 176
--------------------------------------
$ 15,252 $ 15,138
======================================
Aggregate amortization expense $ 1,067 $ 1,047
======================================
The Company has estimated that amortization expense will amount to approximately
$1,047 annually for 2005 through 2008 and $149 for 2009.
Certain liquor licenses are not subject to amortization, as such licenses have
indefinite lives and are transferable through open markets in the jurisdictions
in which the licenses were granted. These licenses are reviewed at least
annually for impairment by comparing their book values to estimated market
values. The estimated market value is established by reference to recent market
transactions.
F-20
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. INTANGIBLE ASSETS AND GOODWILL (CONTINUED)
The Company adopted the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets, effective as of the beginning of fiscal 2002. SFAS No. 142
requires that goodwill and certain intangible assets deemed to have indefinite
lives are no longer amortized, but are subject to annual impairment tests. In
the first quarter of fiscal 2002, the Company completed the measurement tests
for measurement of impairment loss for both goodwill and indefinite lived
intangible assets, which resulted in a charge for the cumulative effect of an
accounting change of $318, or $0.02 per share, net of income taxes of $190, to
reflect the impairment of certain goodwill related to Australian investments.
Excluding the impairment for goodwill recorded in fiscal 2002 related to the
change in accounting as discussed above, there were no changes in goodwill
carrying amounts during 2004 or 2003.
3. COMMON STOCK TRANSACTIONS
In May 2002, the Company commenced a Modified Dutch Auction tender offer. Under
the terms of the tender offer, the Company invited shareholders to tender their
shares at prices specified by the tendering shareholder at a purchase price not
in excess of $22.50 nor less than $20.50 per share. The tender offer was
completed in June 2002, and as a result, the Company purchased 4,000,000 shares
of its common stock at a price of $21.375 per share. The aggregate cost to
repurchase the shares was $86,301, including the cost of the tender offer. The
transaction was financed from the Company's existing available cash.
The Board of Directors has from time to time authorized the Company to purchase
shares of the Company's common stock in the open market or in privately
negotiated transactions. Excluding the 4,000,000 shares repurchased in the
tender offer in fiscal 2002 as previously described, the Company has purchased
2,072,800, 1,132,500, and 1,114,000 shares of its common stock at average prices
of $24.80, $21.05, and $20.08 per share during the fiscal years ended 2004,
2003, and 2002, respectively. The Company is accounting for the repurchases
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 additional paid-in capital.
F-21
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. COMMON STOCK TRANSACTIONS (CONTINUED)
In September 2002, the Company adopted a Stock Option Deferred Compensation Plan
(the Plan), which allows certain key executives to defer compensation arising
from the exercise of stock options granted under the Company's 1992 Incentive
and Nonqualified Stock Option Plan. During 2003, the Company issued 300,000
shares of its common stock to effect the exercise of such stock options in
exchange for 122,855 shares of the Company's common stock as payment for such
shares. The 122,855 shares received by the Company were canceled. The Company
issued 122,855 shares to the optionee and, pursuant to the terms of the Plan,
the Company issued 177,145 shares to a Rabbi Trust (the Trust) with Intrust
Bank, NA serving as the trustee. The Trust holds the shares for the benefit of
the participating employees (Participants). Under the terms of the Plan,
Participants may elect to change the Plan's investments from time to time, which
may result in the sale of the shares. Since the shares held by the Trust are
held pursuant to a deferred compensation arrangement whereby amounts earned by
an employee are invested in the stock of the employer and placed in the Trust,
the Company accounts for the arrangement as required by Emerging Issues Task
Force (EITF) consensus on Issue No. 97-14, Accounting for Deferred Compensation
Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested (EITF
No. 97-14). Accordingly, shares issued to the Trust were recorded at fair market
value on the date issued by the Company in the amount of $3,663, which is
reflected in the accompanying consolidated balance sheets as common stock held
by trust. The corresponding amount was credited to deferred compensation
obligations. Each period, the shares owned by the Trust are valued at the
closing market price, with corresponding changes in the underlying shares being
reflected as adjustments to compensation expense and deferred compensation
obligations. At December 28, 2004, the Trust held 177,145 shares of the
Company's common stock. Included in non-cash stock compensation expense for
years ended December 28, 2004, and December 30, 2003, were charges of $831 and
$431, respectively, relating to the changes in market price for such shares.
4. TERM REVOLVERS
The Company has a credit facility pursuant to an unsecured revolving credit
agreement with a group of banks led by SunTrust Bank. The credit facility allows
the Company to borrow up to $30,000 with an accordion feature permitting an
increase in the credit facility in an amount up to $20,000 such that the total
amount of the credit facility does not exceed $50,000. The additional borrowing
is subject to the approval of the lenders. The credit agreement terminates in
October 2007; however, it is subject to acceleration in the event of a change of
control of the Company as that term is defined in the credit agreement. At the
F-22
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
4. TERM REVOLVERS (CONTINUED)
time of each borrowing, the Company may elect to pay interest at the higher of
SunTrust Bank's published prime rate or the Federal Funds Rate plus one-half of
one percent (0.50%) or LIBOR rate plus one and one-half percent (1.50%). The
Company is required to achieve certain financial ratios and to maintain certain
net worth requirements as defined in the credit agreement. The Company is
required to pay on a quarterly basis a facility fee equal to .25% per annum on
the daily unused amount of the credit facility. At December 28, 2004, and at
December 30, 2003, there were no borrowings outstanding pursuant to the credit
facility.
The Company also has entered into a $5,000 revolving term loan agreement with a
bank, under which no borrowings were outstanding at December 28, 2004, and
December 30, 2003. The term loan agreement matures in October 2007. The interest
rate is at .50% below the daily prime rate as published in The Wall Street
Journal. In addition, the Company pays a facility fee of .25% per annum on the
daily unused portion of the credit facility.
5. 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
As previously described in Note 1, the Company accounts for stock-based
compensation following the provisions of SFAS No. 123, which establishes a fair
value-based method of accounting for stock-based compensation. The fair value of
stock options is determined at the date of grant under the Company's stock
option plans and are charged to compensation expense over the vesting period of
the options.
The aggregate non-cash stock compensation expense, including amounts
attributable to non-cash stock compensation arising from the common shares held
by the Trust as described in Note 3, for the years ended December 28, 2004,
December 30, 2003, and December 31, 2002, was $1,193, $1,474, and $2,949,
respectively.
F-23
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. STOCK OPTIONS (CONTINUED)
The fair values for those options granted during the fiscal years presented were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 2004 and 2002, respectively:
risk-free interest rates of 4.0% and 3.1%, volatility factors of the expected
market price of the Company's common stock of 0.201 and 0.506, a weighted
average expected life of the option of seven years and five years, and a
dividend yield of 2.5% and 3.0%. There were no stock options granted in fiscal
2003.
2004 2003 2002
--------------------------------------------------
Weighted-average fair value of options
granted during the year $5.80 $ -- $5.45
O 2004 Stock Option Plan
In December 2004, the stockholders of the Company approved the 2004 Stock
Option Plan (the 2004 Plan). The 2004 Plan provides for grants of
incentive and nonqualified stock options to employees, directors,
consultants, and advisors. A total of 3,000,000 shares are available for
issuance pursuant to the 2004 Plan, of which 500,000 are available for non
employee directors. The maximum number of shares that may be granted under
the 2004 Plan to any individual shall not exceed 600,000. Options granted
under the 2004 Plan have ten-year terms and generally vest equally over a
four-year period commencing one year after the date of grant.
O 1992 Stock Option Plans
In January 1992, the Board of Directors adopted the 1992 Incentive and
Non-Qualified Stock Option Plan (the 1992 Plans), 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.
Options granted under the 1992 Plan vest in periods ranging from three to
five years in equal annual installments commencing from the date of grant.
In addition, in January 1992, the Board of Directors adopted a stock
option plan as amended June 9, 2000, providing for nondiscretionary grants
to nonemployee directors, pursuant to which up to 700,000 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. Both of the plans adopted in 1992 expired in January
2002.
F-24
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. STOCK OPTIONS (CONTINUED)
A summary of the Company's stock option activity and related information for the
years ended December 28, 2004, December 30, 2003, and December 31, 2002, is as
follows:
2004 2003 2002
-------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS
PRICE (000) PRICE (000) PRICE (000)
-------------------------------------------------------------------------------
Outstanding at beginning of year $8.98 4,519 $8.98 5,867 $ 9.67 7,919
Granted 27.67 1,453 -- -- 14.80 48
Exercised 8.48 (1,350) 9.58 (1,334) 11.44 (2,059)
Canceled 11.95 (25) 9.84 (14) 12.71 (41)
------ ------ ------
Outstanding at end of year $15.02 4,597 8.98 4,519 8.98 5,867
====== ====== ======
For options outstanding as of December 28, 2004, the number of options,
weighted-average exercise price, and weighted-average remaining contract life
for each group of options are as follows:
OPTIONS OUTSTANDING (IN THOUSANDS)
--------------------------------------------------------------------------------
NUMBER WEIGHTED- WEIGHTED-
OUTSTANDING AT AVERAGE AVERAGE
RANGE OF PRICES DECEMBER 28, EXERCISE REMAINING
2004 PRICE CONTRACT LIFE
-----------------------------------------------------------------------------
$7.43 to $9.00 2,876 $ 8.53 2.64 years
$14.30 to $19.00 262 15.96 5.09 years
$22.25 to $27.80 1,459 27.64 9.97 years
The number of shares and weighted-average exercise price of options exercisable
at December 28, 2004, are as follows:
OPTIONS EXERCISABLE (IN THOUSANDS)
--------------------------------------------------------------------------------
NUMBER WEIGHTED-
EXERCISABLE AT AVERAGE
RANGE OF PRICES DECEMBER 28, EXERCISE
2004 PRICE
--------------------------------------------------------------------------------
$7.43 to $9.00 2,875 $ 8.53
$14.30 to $19.00 262 15.96
$22.25 to $27.80 7 22.25
F-25
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. RELATED-PARTY TRANSACTIONS
The Company leases on a month-to-month basis parking lot space and document
storage space from entities owned by Jamie B. Coulter, the Company's Chief
Executive Officer. Total rental fees paid to these related entities in 2004,
2003, and 2002 were $19, $26, and $27, respectively. In addition, in 2002, the
Company purchased business gifts and awards from a retail store owned by Jamie
B. Coulter totaling $2.
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.
During 2002, one of the Company's directors received a fee of $250 in
consideration of providing certain services in connection with a proposed
transaction between the Company and Bruckmann, Rosser, Sherrill & Co., Inc. See
Note 14 for more information regarding the transaction.
8. LEASES
The Company leases certain facilities under noncancelable operating leases
having terms expiring between 2005 and 2029. The leases have renewal clauses of
5 to 20 years, which are exercisable at the option of the lessee. In addition,
certain leases contain escalation clauses based on 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 2004, 2003, and 2002
was $16,017, $12,270, and $12,191, respectively, including contingent rentals of
approximately $1,456, $832, and $751, respectively.
Lease payments under noncancelable operating leases include renewal option
periods for certain leases when such option periods are included for purposes of
calculating straight-line rents. Such rents for each of the next five years and
in the aggregate are as follows at December 28, 2004:
2005 $ 13,991
2006 13,952
2007 13,652
2008 13,900
2009 13,856
Thereafter 113,468
---------
Total minimum lease payments $182,819
=========
F-26
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
2004 2003 2002
---------------------------------------
Numerator:
Numerator for basic and diluted
earnings per share - income available
to common stockholders $ 31,213 $ 18,245 $ 38,667
=======================================
Denominator:
Denominator for basic earnings per
share - weighted-average 20,962,919 20,801,894 22,908,821
Effect of dilutive employee stock
options 2,433,792 2,961,703 3,400,961
---------------------------------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares 23,396,711 23,763,597 26,309,782
=======================================
Basic earnings per share $ 1.49 $ .88 $ 1.69
=======================================
Diluted earnings per share $ 1.33 $ .77 $ 1.47
=======================================
10. INCOME TAXES
The components of the provision for income taxes consist of the following:
2004 2003 2002
------------------------------------------------------
Current tax expense:
Federal $10,951 $13,229 $4,524
State 1,488 1,737 1,622
------------------------------------------------------
Total current 12,439 14,966 6,146
Deferred tax expense (benefit):
Federal 2,660 (5,129) 12,764
State 304 (194) 148
------------------------------------------------------
Total deferred expense (benefit) 2,964 (5,323) 12,912
------------------------------------------------------
Total provision for income taxes $15,403 $9,643 $19,058
======================================================
F-27
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
10. INCOME TAXES (CONTINUED)
The difference between the reported provision for income taxes and taxes
determined by applying the applicable U.S. federal statutory income tax rate to
income before taxes is reconciled as follows:
2004 2003 2002
----------------------------------------------------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------------------------------------------------------------------
Income tax expense at federal
statutory rate $16,316 35% $9,760 35% $20,203 35%
State tax expense, net 1,165 2 624 2 1,092 2
Nondeductible foreign losses -- -- 1,239 4 -- --
Tax benefit from foreign stock
deduction -- -- -- -- (8,128) (14)
TIP and work opportunity credits (2,843) (6) (2,479) (9) (2,209) (4)
Valuation allowance -- -- -- -- 7,411 13
Other items, net 765 2 499 2 689 1
----------------------------------------------------------------------
Provision for income taxes $15,403 33% $9,643 34% $19,058 33%
======================================================================
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 28, DECEMBER 30,
2004 2003
-----------------------
Deferred tax assets:
TXCC NOL carryforward $5,282 $ --
Deferred rent liabilities 3,387 3,126
Accrued liabilities 8,238 4,327
Stock-based compensation 15,158 20,582
Deferred compensation 5,818 4,775
Other 1,050 2,080
-----------------------
Total deferred tax assets 38,933 34,890
Deferred tax liabilities:
Property and equipment 4,635 3,282
Intangible assets 1,596 2,220
Other 736 582
-----------------------
Total deferred tax liabilities 6,967 6,084
-----------------------
Net deferred tax assets $31,966 $28,806
=======================
F-28
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
10. INCOME TAXES (CONTINUED)
In prior years, the Company reported the tax benefits associated with its net
operating loss (NOL) carryforwards related to its Australian operations as a
deferred tax asset that was offset in full by a valuation allowance. As a result
of the Company's decision to divest its Australian operations during the year
ended December 30, 2003, the Company has determined that such NOL carryforwards
will not be realized and accordingly has reduced the deferred tax asset and
valuation allowance by the amount of deferred tax asset previously recognized.
In connection with the acquisition of TXCC, the Company has net operating loss
carryforwards of approximately $15,000 to reduce future taxable income. Such
carryforwards expire at various times through 2023. At December 28, 2004, the
Company has recorded a deferred tax asset of $5,282 pertaining to the net
operating loss carryforward. The Company has not provided any valuation
allowance with respect to this amount, as management believes its realization is
"more likely than not" based upon its expectations that future taxable income
will be sufficient to utilize the net operating loss carryforward.
11. PROVISION FOR IMPAIRED ASSETS AND RESTAURANT CLOSINGS
The Company periodically reviews its long-lived assets for indications of
impairment. Based on those reviews, the trends of operations of certain
restaurants indicated the undiscounted cash flows from their operations would be
less than the carrying value of the long-lived assets of the restaurants. As a
result, the carrying values were written down to the Company's estimates of fair
value. Fair value was estimated utilizing the best information available,
including management's estimates, judgments, and projections as considered
necessary.
During the fourth quarter of 2004, the Company recorded a provision of $1,167 to
write down the estimated fair value of impaired properties relating to five
underperforming restaurants.
During 2002, the Company recorded a provision related to continuing operations
of $250 for the write-down to estimated fair value of an underperforming
domestic restaurant. In addition, the Company recorded a provision of $542 for
certain costs associated with certain restaurants closed in previous years.
To the extent there are "assets held for disposal" recorded in the Company's
consolidated balance sheets, such amounts are included in property and equipment
at the lower of cost or fair market value less estimated selling costs. The
remaining carrying value of the related assets is not significant.
F-29
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
12. DISCONTINUED OPERATIONS
In December of fiscal 2003, the Company announced its plan to divest all of its
Australian operations. Prior to and including 2003, the Company experienced
operating losses in Australia and had closed over 20 restaurants. As a result of
the underperforming Australian operations, the Company determined the
divestiture and discontinuance of its Australian operations was in its best
interests. On December 29, 2003, the Company closed six of the restaurants and
on December 30, 2003, the Company completed the sale of its remaining Australian
operations to an investor group consisting of former management of the
Australian operations. Pursuant to the terms of the sale, the Company received
approximately $3,150 in cash and $2,750 in notes secured by real estate. In
connection with its exit activities from Australia, the Company incurred a
pretax loss of approximately $12,000, including impairment losses related to
assets either sold or held for sale of $3,600, termination costs associated with
employees and certain lease obligations of $1,000, and losses of $7,400 related
to the realization of its cumulative foreign currency translation adjustments.
All of the losses incurred are included in discontinued operations. The Company
will account for its remaining exit costs in accordance with the provisions of
SFAS No. 146, Accounting for Costs Associated With Exit or Disposal Activities,
which requires that such costs be expensed in the period such costs are
incurred. The Company believes that such additional costs will not be
significant.
As described in Note 1 to the consolidated financial statements, the Company
accounts for its closed restaurants in accordance with the provisions of SFAS
No. 144. Therefore, when a restaurant is closed, and the restaurant is either
held for sale or abandoned, the restaurant's operations are eliminated from the
ongoing operations. Accordingly, the operations of such restaurants, net of
applicable income taxes, are presented as discontinued operations and prior
period consolidated financial statements are reclassified. The table below
reflects as discontinued operations the applicable operations of the Company's
Australian business and certain other restaurants closed subsequent to fiscal
2001, which meet the criteria for such presentation.
2004 2003 2002
---------------------------
Loss from operations $(86) $(10,774) $(1,322)
Income tax benefit 17 2,117 467
---------------------------
Net loss from discontinued operations $(69) $ (8,657) $(855)
===========================
Net sales from discontinued operations $ -- $ 25,631 $24,460
===========================
F-30
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
13. RETIREMENT PLANS
In August 1999, the Company approved the adoption of two plans that provide
retirement benefits to the participants. The salary reduction plans are provided
through a qualified 401(k) plan and a nonqualified deferred compensation plan
(the Plans). Under the Plans, employees who meet minimum service requirements
and elect to participate may make contributions of up to 15% of their annual
salaries under the 401(k) plan and up to 80% under the deferred compensation
plan. The Company may make additional contributions at the discretion of the
Board of Directors. During 2004, 2003, and 2002, the Company's contributions to
the Plans were $3,509, $2,146, and $1,984, respectively.
14. ABANDONED MERGER EXPENSES
On May 4, 2002, a nonbinding letter of intent previously signed with Bruckmann,
Rosser, Sherrill & Co., Inc. (BRS) with respect to the proposed sale and merger
of the Company expired, as the Company and BRS were unable to complete a
definitive agreement. The direct costs incurred by the Company associated with
the proposed merger, primarily consisting of fees paid to the Company's
investment advisors and legal counsel, as well as certain costs reimbursed by
the Company to BRS in connection with its due diligence efforts pursuant to the
terms of the letter of intent, were expensed and have been included in the
accompanying consolidated statements of income under the caption abandoned
merger expenses.
15. QUARTERLY FINANCIAL SUMMARIES (UNAUDITED)
The table below sets forth consolidated quarterly results of operations for
fiscal 2004 and 2003. As described more fully in Note 1, the Company has
restated the results of fiscal 2004 and 2003, including the individual quarters,
to reflect adjustments to certain rent and depreciation expense amounts. In
addition, net sales has been adjusted to reflect the impact of certain
discontinued operations to the extent such amounts were reclassified.
Fiscal 2004 and 2003 each include 52 weeks of operations. Quarters one, two, and
three each include twelve weeks of operations and the fourth quarter includes 16
weeks of operations.
F-31
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
15. QUARTERLY FINANCIAL SUMMARIES (UNAUDITED) (CONTINUED)
FIRST QUARTER 2004 SECOND QUARTER 2004
------------------------------------------------------------------------
AS ORIGINALLY AS ORIGINALLY
REPORTED RESTATED REPORTED RESTATED
------------------------------------------------------------------------
Net sales (A) $160,596 $160,596 $155,529 $155,529
Income from continuing operations 11,047 10,936 5,381 5,270
Net income (A) 11,113 11,002 5,372 5,261
Basic earnings per share (C):
Continuing operations 0.53 0.52 0.25 0.25
Net income 0.53 0.52 0.25 0.25
Diluted earnings per share (C):
Continuing operations 0.47 0.46 0.22 0.22
Net income (loss) 0.47 0.46 0.22 0.22
THIRD QUARTER 2004
---------------------------
AS ORIGINALLY FOURTH
REPORTED RESTATED QUARTER 2004
-----------------------------------------------
Net sales (A) $148,045 $148,045 $205,357
Income from continuing operations 4,580 4,468 10,608
Net income (A) 4,521 4,409 10,541
Basic earnings per share (C):
Continuing operations 0.21 0.21 0.52
Net income 0.21 0.21 0.52
Diluted earnings per share (C):
Continuing operations 0.18 0.17 0.47
Net income 0.18 0.17 0.47
FIRST QUARTER 2003 SECOND QUARTER 2003
------------------------------------------------------------------------
AS ORIGINALLY AS ORIGINALLY
REPORTED RESTATED REPORTED RESTATED
------------------------------------------------------------------------
Net sales $139,373 $139,373 $137,942 $137,942
Income from continuing operations 8,971 8,874 6,898 6,801
Net income 8,730 8,633 7,628 7,531
Basic earnings per share (C):
Continuing operations 0.43 0.42 0.33 0.33
Net income 0.41 0.41 0.37 0.36
Diluted earnings per share (C):
Continuing operations 0.37 0.37 0.29 0.29
Net income 0.36 0.36 0.32 0.32
F-32
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
15. QUARTERLY FINANCIAL SUMMARIES (UNAUDITED) (CONTINUED)
THIRD QUARTER 2003 FOURTH QUARTER 2003
------------------------------------------------------------------------
AS ORIGINALLY AS ORIGINALLY
REPORTED RESTATED REPORTED RESTATED
------------------------------------------------------------------------
Net sales $130,312 $130,312 $183,774 $183,774
Income from continuing operations 3,638 3,541 7,816 7,686
Net income (loss) (B) 3,664 3,567 (1,356) (1,486)
Basic earnings (loss) per share (C):
Continuing operations 0.18 0.17 0.37 0.37
Net income 0.18 0.17 (0.06) (0.07)
Diluted earnings (loss) per share (C):
Continuing operations 0.15 0.15 0.33 0.32
Net income (loss) 0.16 0.15 (0.06) (0.06)
(A) On January 28, 2004, the Company acquired TXCC, which operated 20 Texas
Land & Cattle Steak House restaurants. The operations of TXCC are
included in the Company's consolidated results since the date of
acquisition date. See Note 19 for additional information.
(B) The fourth quarter of fiscal 2003 includes a charge to discontinued
operations of approximately $12,000 ($9,270 net of income taxes) related to
the Company's divestiture of its Australian operations. See Note 12 for
additional information.
(C) Earnings per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly per share amounts does not
necessarily equal the total for the year due to the impact of stock
transactions that occurred during the periods presented.
16. OTHER INCOME, NET
The components of other income, net are as follows:
2004 2003 2002
-----------------------------
Interest income $1,394 $789 $1,312
Interest expense, principally credit
availability fees (185) (194) (297)
Gain (loss) on sale of assets 1,250 (42) 1,971
Foreign exchange loss (521) -- --
Other expense (201) -- --
-----------------------------
$1,737 $553 $2,986
=============================
F-33
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
17. LITIGATION
California Public Employees Retirement System (CalPERS) filed a shareholders
derivative action on October 16, 2001, against certain present and former
Directors, alleging breach of fiduciary duties by certain present and former
Directors and that certain of such defendants were unjustly enriched through
related-party transactions and the repricing of stock options previously issued.
The lawsuit also seeks to prevent enforcement of certain change of control
agreements granted to executive officers of the Company, seeks declaratory and
injunctive relief, and seeks damages to be paid to the Company. The Company is a
nominal defendant.
On January 9, 2002, CalPERS filed a motion to amend its complaint, which
included a claim to attempt to certify a class action based on its allegation
that a provision in the change of control agreements violates Delaware law. A
motion to dismiss was filed by certain defendants on February 8, 2002, seeking
to dismiss all claims of CalPERS. The Delaware Court took under advisement the
motion to amend and stayed discovery pending a court decision on the motion to
dismiss.
On December 18, 2002, the Delaware Court dismissed a number of claims and
retained several others. On January 7, 2003, the Delaware Court agreed to permit
CalPERS to proceed with its discovery, requesting specific documents, if any,
from certain third parties and from the named defendants and ordered CalPERS to
timely file its motion to amend its complaint.
On April 16, 2003, CalPERS filed a Motion for Leave to Amend Plaintiff's First
Amended Complaint, which complaint added no additional causes but added
allegations that are subsequent to the date of the first complaint and
allegations that also address counts that were dismissed by the Vice Chancellor
on December 18, 2002. All defendants filed objections to CalPERS' attempt to
amend, and an oral argument was heard by the Vice Chancellor on August 21, 2003.
On May 26, 2004, the Court rendered its decision and allowed CalPERS to amend
its complaint. The parties are involved in pre-trial discovery.
The Company is involved from time to time in litigation arising in the ordinary
course of business as well as the matter set forth above. The Company believes
the outcome of such matters will not have a material adverse effect on its
consolidated financial position or results of operations.
F-34
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
18. DIVIDEND DECLARATION
On December 15, 2004, the Board of Directors declared the Company's quarterly
cash dividend of $.175 per share, payable January 10, 2005, to stockholders of
record on December 27, 2004. In addition, on January 4, 2005, the Board of
Directors increased its quarterly dividend from $.175 to $.195 beginning in the
second quarter of 2005.
19. ACQUISITION OF TEXAS LAND AND CATTLE STEAK HOUSE
On January 28, 2004, the Company's Joint Plan of Reorganization (the Plan) to
purchase TX.C.C., Inc. and affiliated entities TXCC-Preston and
TXLC-Albuquerque, (collectively, TXCC) was confirmed by the United States
Bankruptcy Court for the District of Texas, Dallas Division, and the Company
acquired 100% of TXCC on that date. The Company's consolidated financial
statements include TXCC's operations from January 28, 2004. TXCC operates 20
Texas Land & Cattle Steak House(R) restaurants located primarily in Texas. The
acquisition of TXCC allows the Company to expand its steakhouse concepts,
provides strategic growth opportunities, and significantly increases its
presence in the Texas market. Pursuant to the terms of the Plan, the prepetition
creditors at their option were entitled to receive either cash or common stock
of Lone Star Steakhouse & Saloon, Inc. in settlement of their claims. The cash
portion of the acquisition was funded from the Company's existing cash balances.
The aggregate purchase price was $23,496 and consisted of $12,579 of cash, net
of $2,145 in cash acquired, $6,093 of assumed liabilities, and 119,485 shares of
the Company's common stock valued at $2,679.
The following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition.
Current assets (net of cash acquired of $2,145) $1,221
Property, plant, and equipment 14,027
Deferred income taxes 5,762
Other assets 341
-------
Total assets acquired 21,351
Total liabilities assumed 6,093
-------
Net assets acquired $15,258
=======
Pro forma results giving effect to the acquisition of TXCC are not presented for
the periods as such amounts are not significant.
F-35