sec document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q/A
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For quarter ended Commission file number
September 9, 2003 0-19907
----------------- -------
LONE STAR STEAKHOUSE amp; SALOON, INC.
(Exact name of registrant as specified in its charter)
Delaware 48-1109495
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
224 EAST DOUGLAS, SUITE 700
WICHITA, KANSAS 67202
(Address of principal executive offices) (Zip code)
(316) 264-8899
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
/X/ Yes / / No
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act.)
/X/ Yes / / No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS Outstanding at October 17, 2003
----- 20,837,479 SHARES
COMMON STOCK, $.01 PAR VALUE
LONE STAR STEAKHOUSE & SALOON, INC.
Index
Page
Number
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 2
at September 9, 2003 and December 31, 2002
Condensed Consolidated Statements of 3
Income for the twelve weeks ended
September 9, 2003 and September 3, 2002
Condensed Consolidated Statements of 4
Income for the thirty-six weeks ended
September 9, 2003 and September 3, 2002
Condensed Consolidated Statements of 5
Cash Flows for the thirty-six weeks ended
September 9, 2003 and September 3, 2002
Notes to Condensed Consolidated 6
Financial Statements
Item 2. Management's Discussion and 11
Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative 19
Disclosures about Market Risks
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
-----------------
Items 1, 2, 3, and 5 have been omitted
since the items are either inapplicable or the
answer is negative
Item 4. Submission of Matters to a Vote of Stockholders 20
Item 6. Exhibits and Reports on Form 8-K 20
-1-
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 9, 2003 December 31, 2002
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 81,139 $ 65,369
Inventories 12,288 12,390
Other current assets 10,037 9,312
--------- ---------
Total current assets 103,464 87,071
Property and equipment 522,077 520,513
Less accumulated depreciation and amortization (197,607) (181,778)
--------- ---------
324,470 338,735
Other assets:
Deferred income taxes 17,608 13,171
Intangible and other assets, net 35,102 34,336
--------- ---------
Total assets $ 480,644 $ 473,313
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,857 $ 16,084
Other current liabilities 31,573 26,412
--------- ---------
Total current liabilities 45,430 42,496
Long term liabilities, principally defered compensation obligations 16,620 11,058
Stockholders' equity:
Preferred stock -- --
Common stock 208 210
Additional paid-in capital 179,854 189,908
Retained earnings 251,496 241,601
Common stock held by Trust (3,663) --
Accumulated other comprehensive loss (9,301) (11,960)
--------- ---------
Total stockholders' equity 418,594 419,759
--------- ---------
Total liabilities and stockholders' equity $ 480,644 $ 473,313
========= =========
See accompanying notes.
-2-
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for per share amounts)
(Unaudited)
For the twelve weeks ended
-------------------------------------------
September 9, 2003 September 3, 2002
----------------- -----------------
Net sales $ 136,394 $ 133,798
Costs and expenses:
Costs of sales 49,460 43,735
Restaurant operating expenses 65,909 62,817
Depreciation and amortization 4,871 5,829
--------- ---------
Restaurant costs and expenses 120,240 112,381
--------- ---------
Restaurant operating income 16,154 21,417
General and administrative expenses 10,578 10,334
Non-cash stock compensation expense 75 711
--------- ---------
Income from operations 5,501 10,372
Other income, net 47 198
--------- ---------
Income from continuing operations before income taxes 5,548 10,570
Provision for income taxes 1,880 2,325
--------- ---------
Income from continuing operations 3,668 8,245
Discontinued operations:
Loss from operations of discontinued restaurants (6) (73)
Income tax benefit 2 26
--------- ---------
Loss on discontinued operations (4) (47)
--------- ---------
Net income $ 3,664 $ 8,198
========= =========
Basic earnings per share:
Continuing operations $ 0.18 $ 0.37
Discontinued operations -- --
--------- ---------
Basic earnings per share $ 0.18 $ 0.37
========= =========
Diluted earnings per share:
Continuing operatons $ 0.15 $ 0.32
Discontinued operations -- --
--------- ---------
Diluted earnings per share $ 0.15 $ 0.32
========= =========
Dividends per share $ 0.165 $ 0.15
========= =========
See accompanying notes.
-3-
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for per share amounts)
(Unaudited)
For the thirty-six weeks ended
--------------------------------------------
September 9, 2003 September 3, 2002
----------------- -----------------
Net sales $ 424,167 $ 420,504
Costs and expenses:
Costs of sales 148,702 137,359
Restaurant operating expenses 198,886 188,933
Depreciation and amortization 15,157 17,621
--------- ---------
Restaurant costs and expenses 362,745 343,913
--------- ---------
Restaurant operating income 61,422 76,591
General and administrative expenses 31,945 31,263
Abandoned merger expense -- 2,967
Non-cash stock compensation expense 1,201 2,273
--------- ---------
Income from operations 28,276 40,088
Other income, net 522 850
--------- ---------
Income from continuing operations before income taxes
and cumulative effect of accounting change 28,798 40,938
Provision for income taxes 9,307 13,749
--------- ---------
Income from continuing operations before cumulative
effect of accounting change 19,491 27,189
Discontinued operations:
Income (loss) from operations of discontinued restaurants 817 (660)
Income tax benefit (provision) (286) 237
--------- ---------
Income (loss) on discontinued operations 531 (423)
--------- ---------
Income before cumulative effect of accounting change 20,022 26,766
Cumulative effect of accounting change, net of tax -- (318)
--------- ---------
Net income $ 20,022 $ 26,448
========= =========
Basic earnings (loss) per share:
Continuing operations $ 0.94 $ 1.14
Discontinued operations 0.02 (0.02)
Cumulative effect of accounting change -- (0.01)
--------- ---------
Basic earnings per share $ 0.96 $ 1.11
========= =========
Diluted earnings (loss) per share:
Continuing operatons $ 0.82 $ 1.00
Discontinued operations 0.02 (0.02)
Cumulative effect of accounting change -- (0.01)
--------- ---------
Diluted earnings per share $ 0.84 $ 0.97
========= =========
Dividends per share $ 0.48 $ 0.45
========= =========
See accompanying notes.
-4-
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the thirty-six weeks ended
--------------------------------------
September 9, 2003 September 3, 2002
----------------- -----------------
Cash flows from operating activities:
Net income $ 20,022 $ 26,448
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 17,370 20,302
Non-cash stock compensation expense 1,201 2,273
Provision for impaired assets and restaurant closings -- 200
Loss from sale of assets 112 149
Cumulative effect of accounting change -- 508
Deferred income taxes (4,437) (392)
(Income) loss from discontinued operations (531) 423
Net change in operating assets and liabilities:
Change in operating assets (549) 1,006
Change in operating liabilities 4,164 (7,348)
-------- --------
Net cash provided by operating activities of continuing operations 37,352 43,569
Cash flows from investing activities:
Purchases of property and equipment (3,834) (1,653)
Proceeds from sale of assets 1,401 2,806
Other 477 53
-------- --------
Net cash provided by (used in) investing activities of continuing operations (1,956) 1,206
Cash flows from financing activities:
Net proceeds from issuance of common stock 5,884 22,521
Common stock repurchased and retired (18,454) (86,301)
Cash dividends (10,127) (10,572)
-------- --------
Net cash used in financing activities of continuing operations (22,697) (74,352)
Effect of exchange rate changes on cash 872 273
Net cash provided by (used in) discontinued operations 2,199 (187)
-------- --------
Net increase (decrease) in cash and cash equivalents 15,770 (29,491)
Cash and cash equivalents at beginning of period 65,369 82,919
-------- --------
Cash and cash equivalents at end of period $ 81,139 $ 53,428
======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 2,305 $ 13,997
======== ========
See accompanying notes.
-5-
LONE STAR STEAKHOUSE & SALOON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
---------------------
The unaudited condensed consolidated financial statements include all
adjustments, consisting of normal, recurring accruals, which Lone Star
Steakhouse & Saloon, Inc. (the "Company") considers necessary for a fair
presentation of the financial position and the results of operations for the
periods presented. The results for the thirty-six weeks ended September 9, 2003
are not necessarily indicative of the results to be expected for the full year
ending December 30, 2003. This quarterly report on Form 10-Q should be read in
conjunction with the Company's audited consolidated financial statements in its
annual report on Form 10-K for the year ended December 31, 2002.
Certain amounts for the prior year have been reclassified to conform
with the current year's presentation.
2. COMPREHENSIVE INCOME
--------------------
Comprehensive income is comprised of the following:
For the twelve weeks ended For the thirty-six weeks ended
-------------------------- ------------------------------
Sept. 9, 2003 Sept. 3, 2002 Sept. 9, 2003 Sept. 3, 2002
------------- ------------- ------------- -------------
Net income $ 3,664 $ 8,198 $20,022 $26,448
Foreign currency translation
adjustments (292) (566) 2,659 1,116
------- ------- ------- -------
Comprehensive income $ 3,372 $ 7,632 $22,681 $27,564
======= ======= ======= =======
3. EARNINGS PER SHARE
------------------
Basic earnings per share amounts are computed based on the weighted
average number of shares actually outstanding. For purposes of diluted
computations, average shares outstanding has been adjusted to reflect (1) the
number of shares that would be issued from the exercise of stock options,
reduced by the number of shares which could have been purchased from the
proceeds at the average market price of the Company's stock or price of the
Company's stock on the exercise date if options were exercised during the period
presented and (2) the number of shares that may be issuable to effect the
settlement of certain deferred compensation liabilities pursuant to the
Company's Stock Option Deferred Compensation Plan. The effect of shares issuable
to settle the deferred compensation liabilities are included for the twelve
weeks ended September 9, 2003 and have not been presented for any other periods
as their effect would have been anti-dilutive.
The weighted average shares outstanding for the periods presented are
as follows (in thousands):
For the twelve weeks ended For the thirty-six weeks ended
------------------------------ -----------------------------------
Sept. 9, 2003 Sept. 3, 2002 Sept. 9, 2003 Sept. 3, 2002
------------- ------------- ------------- -------------
Basic average shares outstanding 20,584 22,263 20,787 23,736
Diluted average shares outstanding 23,703 25,625 23,814 27,318
-6-
4. TERM REVOLVER
-------------
The Company has a credit facility pursuant to an unsecured revolving
credit agreement with a group of banks led by SunTrust Bank. The credit facility
allows the Company to borrow up to $50,000. The commitment terminates at June
30, 2004; however, it is subject to acceleration in the event of a change of
control of the Company as that term is defined in the credit agreement. At the
time of each borrowing, the Company may elect to pay interest at either SunTrust
Bank's published prime rate or a rate determined by reference to the Adjusted
LIBOR rate. The Company is required to achieve certain financial ratios and to
maintain certain net worth amounts as defined in the credit agreement. The
Company is required to pay on a quarterly basis a facility fee equal to .25% per
annum on the daily unused amount of the credit facility. At September 9, 2003
and at December 31, 2002, there were no borrowings outstanding pursuant to the
credit facility.
The Company also has entered into a $5,000 revolving term loan agreement
with a bank, under which no borrowings were outstanding at September 9, 2003 and
at December 31, 2002. The loan commitment matures in August 2004 and required
interest only payments through April 2003, at which time the loan converted to a
term note with monthly principal and interest payments sufficient to amortize
the loan over its remaining term. The interest rate is at .50% below the daily
prime rate as published in the Wall Street Journal. In addition, the Company
pays a facility fee of .25% per annum on the daily unused portion of the credit
facility.
5. COMMON STOCK TRANSACTIONS
-------------------------
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. The Company purchased 891,000 shares of its common
stock during the thirty-six weeks ended September 9, 2003, and excluding the
4,000,000 shares repurchased in the tender offer as previously described, made
no purchases of its common stock during the thirty-six weeks ended September 3,
2002. The Company is accounting for the purchases using the constructive
retirement method of accounting wherein the aggregate par value of the stock is
charged to the common stock account and the excess of cost over par value is
charged to paid-in capital.
In September 2002, the Company adopted a Stock Option Deferred
Compensation Plan (the "Plan"), which allows certain key executives to defer
compensation arising from the exercise of stock options granted under the
Company's 1992 Incentive and Nonqualified Stock Option Plan. During the
thirty-six weeks ended September 9, 2003, the Company issued 300,000 shares of
its common stock to effect the exercise of such stock options in exchange for
122,855 shares of the Company's common stock as payment for such shares. The
122,855 shares received by the Company were cancelled. The Company issued
122,855 shares to the optionee and pursuant to the terms of the 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 ("Participant(s)"). 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
-7-
INVESTED ("EITF No. 97-14"). Accordingly, shares issued to the Trust were
recorded at fair market value at the date issued by the Company in the amount of
$3,663, which is reflected in the accompanying Condensed Consolidated Balance
Sheets as Common Stock Held By Trust. The corresponding amount was credited to
deferred compensation obligations. Each period, the shares owned by the Trust
are valued at the closing market price, with corresponding changes in the
underlying shares being reflected as adjustments to compensation expense and
deferred compensation obligations. At September 9, 2003, the Trust held 177,145
shares of the Company's common stock. Included in non-cash stock compensation
expense for the twelve and thirty-six weeks ended September 9, 2003 was a credit
of $95 and a charge of $314, respectively, relating to the accounting for such
shares.
6. STOCK BASED COMPENSATION
------------------------
In December 2002, the Financial Accounting Standards Boards ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148, ACCOUNTING
FOR STOCK BASED COMPENSATION TRANSITION AND DISCLOSURE, AN AMENDMENT OF SFAS NO.
123. Accordingly, effective with the first quarter of fiscal 2002, the Company
changed its method of accounting as the Company adopted the fair value
recognition provision of SFAS No. 123 for employee stock-based compensation. The
Company now values stock options based upon an option pricing model and
recognizes their value as an expense over the period in which options vest. The
Company elected to apply the retroactive restatement method as provided in SFAS
No. 148 and as a result all prior periods presented have been restated to
reflect the compensation expense that would have been recognized had SFAS No.
123 been applied to all awards granted to employees after January 1, 1995. The
effect of this change was to decrease net income $5,375 ($0.24 per share for
basic earnings and $0.21 per share for diluted earnings) and increase net income
$14,017 ($0.59 per share for basic earnings and $0.51 per share for diluted
earnings) for the twelve weeks and the thirty-six weeks ended September 3, 2002,
respectively.
7. ACCOUNTING CHANGES
------------------
During the first quarter of fiscal 2002, the Company adopted the
provisions of SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, requiring that
goodwill and intangible assets deemed to have indefinite lives will no longer be
amortized. The application of the impairment provisions of SFAS No. 142 resulted
in a charge for the cumulative effect of an accounting change of $318,000 or
$0.01 per basic share, net of income taxes of $190,000, to reflect impairment of
certain goodwill related to Australian investments.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 supersedes SFAS No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF and resolves significant implementation issues that had
evolved since the issuance of SFAS No. 121. SFAS No. 144 established a single
accounting model for long-lived assets to be disposed of by sale or abandonment.
Additionally, SFAS No. 144 expanded the scope of financial accounting and
reporting of discontinued operations previously addressed in APB No. 30 to
require that all components of an entity that have either been disposed of (by
sale, by abandonment, or in a distribution to owners) or are held for sale and
whose operations and cash flows can be clearly distinguished, operationally and
for financial reporting purposes from the rest of the entity, should be
presented as discontinued operations. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
provisions for presenting the components of an entity as discontinued operations
are effective only for disposal activities initiated by the Company after the
effective date of the Statement. The Company adopted the provisions of SFAS No.
144, effective December 26, 2001. Pursuant to SFAS No. 144, each Company
restaurant is a component of the entity whose operations can be distinguished
from the rest of the Company; therefore, when a restaurant is closed and the
restaurant is either held for sale or abandoned, the restaurant's operations
will be eliminated from the ongoing operations of the Company. Accordingly, the
-8-
operations of such restaurants, net of applicable income taxes, have been
presented as discontinued operations and prior period financial statements have
been reclassified.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
only when the liability is incurred and measured at fair value. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002. The
Company has adopted this Statement effective January 1, 2003, and it did not
have a material impact on its results of operations or financial position.
8. ABANDONED MERGER EXPENSES
-------------------------
On May 4, 2002, the non-binding Letter of Intent previously signed with
Bruckmann, Rosser, Sherrill & Co., LLC ("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 condensed consolidated statements of income under
the caption "Abandoned Merger Expenses."
9. SUBSEQUENT EVENTS
-----------------
On September 25, 2003, the Board of Directors declared the Company's
quarterly cash dividend of $0.165 per share payable October 20, 2003 to
stockholders of record on October 6, 2003.
10. DISCONTINUED OPERATIONS
-----------------------
Pursuant to the provisions of SFAS No. 144 as previously described in Note
7 to the condensed consolidated financial statements, the Company closed certain
restaurants during the year ended December 31, 2002 which met the criteria for
the operations of the restaurants to be accounted for as discontinued
operations. In addition, the Company closed and abandoned one Australian leased
restaurant during the twelve weeks ended September 9, 2003. The components of
the loss from discontinued operations are as follows:
For the twelve weeks ended For the thirty-six weeks ended
------------------------------ ------------------------------
Sept. 9, 2003 Sept. 3, 2002 Sept. 9, 2003 Sept. 3, 2002
------------- ------------- ------------- -------------
Loss from operations $ (16) $ (73) $ (32) $ (660)
Gain on disposal of assets 10 - 849 -
Income tax benefit (provision) 2 26 (286) 237
------------- ------------- ------------- -------------
Income (loss) from
discontinued operations $ (4) $ (47) $ 531 $ (423)
============= ============= ============= =============
Net sales from discontinued
operations $ 164 $ 694 $ 541 $ 2,517
============= ============= ============= =============
11. INCOME TAX
----------
The effective income tax rate was 33.9% and 22.0% for the twelve weeks
ended September 9, 2003 and September 3, 2002, respectively, and 32.3% and 33.6%
for the thirty-six weeks ended September 9, 2003 and September 3, 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
-9-
with such options in the income statement. However, tax benefits may arise
related to the incentive stock options at the time the options are exercised to
the extent that the exercise is followed by a disqualifying disposition of the
shares by the optionee. The effective rate for the twelve weeks ended September
3, 2002 is significantly impacted by the tax benefit arising from disqualifying
dispositions of shares related to incentive stock options.
-10-
LONE STAR STEAKHOUSE & SALOON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
GENERAL
The following discussion and analysis should be read in conjunction with
the condensed consolidated financial statements including the notes thereto
included elsewhere in this Form 10-Q.
The Company did not open any restaurants during the thirty-six weeks ended
September 9, 2003 or the year ended December 31, 2002.
There were 249 operating domestic Lone Star restaurants as of September 9,
2003. In addition, a licensee operates three Lone Star restaurants in
California. The Company closed one domestic Lone Star restaurant in February
2002, and a domestic Lone Star restaurant was destroyed by fire in March 2002
and was not rebuilt.
The Company currently operates five Del Frisco's Double Eagle ("Del
Frisco's") restaurants. In addition, a licensee operates one Del Frisco's
restaurant. The Company currently operates fifteen Sullivan's Steakhouse
("Sullivan's") restaurants and one Frankie's Italian Grille restaurant.
Internationally, the Company currently operates 19 Lone Star restaurants
in Australia and a licensee operates one Lone Star restaurant in Guam. The
Company closed one Lone Star restaurant in Australia in August 2003 and five
Lone Star restaurants in Australia during the year ended December 31, 2002.
The Company's operating margins are impacted by the price of beef which
has increased significantly during the thirty-six weeks ended September 9, 2003.
-11-
LONE STAR STEAKHOUSE & Saloon, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands, except per share amounts)
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages
which certain items included in the condensed consolidated statement of
operations bear to net sales.
TWELVE WEEKS ENDED (1) THIRTY-SIX WEEKS ENDED
---------------------------- -----------------------------
Sept. 9, 2003 Sept. 3, 2002 Sept. 9, 2003 Sept. 3, 2002
------------- ------------- ------------- -------------
Statement of Operations Data:
Net sales ........................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales ................................ 36.3 32.7 35.1 32.7
Restaurant operating expenses ................. 48.3 46.9 46.9 44.9
Depreciation and amortization ................. 3.6 4.4 3.5 4.2
------------- ------------- ------------- -------------
Restaurant costs and expenses ........... 88.2 84.0 85.5 81.8
------------- ------------- ------------- -------------
Restaurant operating income ......................... 11.8 16.0 14.5 18.2
General and administrative expenses ................. 7.7 7.7 7.5 7.4
Abandoned merger expenses ........................... - - - 0.7
Non-cash stock compensation expense ................. 0.1 0.5 0.3 0.5
------------- ------------- ------------- -------------
Income from operations .............................. 4.0 7.8 6.7 9.6
Other income, net ................................... 0.1 0.1 0.1 0.2
------------- ------------- ------------- -------------
Income from continuing operations before income taxes
and cumulative effect of accounting change ........ 4.1 7.9 6.8 9.8
Provision for income taxes .......................... 1.4 1.7 2.2 3.3
------------- ------------- ------------- -------------
Income from continuing operations before cumulative
effect of accounting change ....................... 2.7 6.2 4.6 6.5
Income (loss) from discontinued operations, net of
applicable income taxes ............................ - (0.1) 0.1 (0.1)
------------- ------------- ------------- -------------
Income before cumulative effect of accounting change 2.7 6.1 4.7 6.4
Cumulative effect of accounting change, net of tax .. - - - (0.1)
------------- ------------- ------------- -------------
Net income .......................................... 2.7% 6.1% 4.7% 6.3%
============= ============= ============= =============
(1) The Company operates on a fifty-two or fifty-three week fiscal year ending
the last Tuesday in December. The fiscal quarters for the Company consist
of accounting periods of twelve, twelve, twelve and sixteen or seventeen
weeks, respectively.
-12-
LONE STAR STEAKHOUSE & SALOON, INC.
TWELVE WEEKS ENDED SEPTEMBER 9, 2003 COMPARED TO TWELVE WEEKS ENDED
SEPTEMBER 3, 2002 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales increased $2,596 or 1.9% to $136,394 for the twelve weeks ended
September 9, 2003, compared to $133,798 for the twelve weeks ended September 3,
2002. Sales were negatively impacted in the current quarter by the fact that
there was a calendar shift in the timing of Father's Day, an important sales day
for domestic Lone Star restaurants, as Father's Day occurred during the second
quarter of 2003 and the third quarter in 2002. The decline in sales attributable
to the shift in Father's Day is estimated to be approximately $1,800; however,
the decline was more than offset by increased sales at the Company's upscale
restaurants and the impact of more favorable foreign exchange rates in
Australia. In the aggregate, same store sales increased 1.2% compared with the
prior year period.
Costs of sales, primarily food and beverages, increased as a percentage of
net sales to 36.3% from 32.7% due primarily to increased beef costs.
Restaurant operating expenses for the twelve weeks ended September 9, 2003
increased $3,092 to $65,909 compared to $62,817 in the prior year period, and
increased as a percentage of net sales to 48.3% from 46.9%. The increase is
primarily attributable to (1) approximately $1,100 due to increased salaries for
increased manager staffing and indirect labor for payroll related taxes and
insurance costs, (2) approximately $410 for increased building and equipment
repairs, (3) approximately $350 for increased utilities and (4) approximately
$460 for increased advertising spending.
Depreciation and amortization decreased $958 for the twelve weeks ended
September 9, 2003 compared with the prior year period. The decrease is
attributable primarily to a reduction in depreciation for certain assets that
have become fully depreciated.
General and administrative expenses increased $244 for the twelve weeks
ended September 9, 2003 compared to the prior year period. The increase is due
primarily to increased costs of approximately $890 for directors and officers
liability insurance and travel costs. The increases were largely offset by
reductions in incentive compensation, professional fees and software
amortization expenses.
Non-cash stock compensation expense for the twelve weeks ended September
9, 2003 decreased $636 compared to the prior year period. The decrease is
primarily attributable to lower amortization of such costs.
Other income, net for the twelve weeks ended September 9, 2003, was $47
compared to $198 for the prior year period. The decrease is attributable to a
decrease in gains from sales of assets and a decline in interest income as a
result of lower interest rates.
The effective income tax rate was 33.9% and 22.0% for the twelve weeks
ended September 9, 2003 and September 3, 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 effective tax rate for the 2002
period was significantly impacted by tax benefits arising from disqualifying
dispositions of shares related to incentive stock options for tax purposes. The
2003 period reflects both a decrease in the amortization of stock option
compensation and a decrease in tax benefits resulting from disqualifying
disposition of shares related to incentive stock options.
Discontinued operations reflect the operations of restaurants closed
during the year ended December 31, 2002 and the twelve weeks ended September 9,
2003 which are required to be reported as discontinued operations pursuant to
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SFAS No. 144. See Note 10 to the Notes to Condensed Consolidated Financial
Statements for additional information.
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LONE STAR STEAKHOUSE & SALOON, INC.
THIRTY-SIX WEEKS ENDED SEPTEMBER 9, 2003
COMPARED TO THIRTY-SIX WEEKS ENDED SEPTEMBER 3, 2002
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales increased $3,663 or 0.9% to $424,167 for the thirty-six weeks
ended September 9, 2003, compared to $420,504 for the thirty-six weeks ended
September 3, 2002. Same store sales increased 0.6% compared with the prior year.
The increase in net sales is primarily attributable to an increase in sales at
the Company's upscale restaurants and by the impact of more favorable foreign
currency exchange rates in Australia.
Costs of sales, primarily food and beverages, increased as a percentage of
net sales to 35.1% from 32.7% due primarily to increased beef costs.
Restaurant operating expenses for the thirty-six weeks ended September 9,
2003 increased $9,953 to $198,886 compared to $188,933 in the prior year period,
and increased as a percentage of net sales to 46.9% from 44.9%. The increase is
primarily attributable to (1) approximately $3,200 due to increased salaries for
increased manager staffing and indirect labor for payroll related taxes and
insurance costs, (2) approximately $1,100 for increased advertising spending,
(3) approximately $1,890 for increased building and equipment repairs and (4)
approximately $1,100 for increased utilities.
Depreciation and amortization decreased $2,464 for the thirty-six weeks
ended September 9, 2003 compared with the prior year period. The decrease is
attributable primarily to a reduction in depreciation for certain assets that
have become fully depreciated.
General and administrative expenses increased $682 for the thirty-six
weeks ended September 9, 2003 compared to the prior year period. The increase is
due primarily to increased costs of approximately $2,100 for directors and
officers liability insurance and travel and recruiting costs. The increases were
largely offset by reductions in incentive compensation, professional fees and
software amortization expense.
Abandoned merger expenses of $2,967 for the thirty-six weeks ended
September 3, 2002 reflect the costs incurred related to the proposed sale and
merger of the Company which was terminated on May 4, 2002. Such costs include
fees paid to investment advisors and legal counsel as well as certain costs
reimbursed by the Company to the potential buyer in connection with its due
diligence efforts.
Non-cash stock compensation expense for the thirty-six weeks ended
September 9, 2003 decreased $1,072 compared to the prior year period. The
decrease reflects approximately $1,385 for lower amortization of such costs. The
decrease was partially offset by a charge of $313 relating to the accounting for
certain shares of the Company's common stock held by a Rabbi Trust pursuant to a
deferred compensation arrangement. See Note 5 to the Notes to Condensed
Consolidated Financial Statements for additional information.
Other income, net for the thirty-six weeks ended September 9, 2003, was
$522 compared to $850 for the prior year period. The decrease is attributable to
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 was 32.3% and 33.6% for the thirty-six weeks
ended September 9, 2003 and September 3, 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 2003 primarily reflects the impact of a decrease in the amount of
amortization of stock option compensation attributable to incentive stock
options as compared to the prior year period.
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Discontinued operations reflect the operations of restaurants closed
during the year ended December 31, 2002 and the thirty-six weeks ended September
9, 2003 which are required to be reported as discontinued operations pursuant to
SFAS No. 144. The income for the thirty-six weeks ended September 9, 2003
results primarily from a gain on the disposal of assets. See Note 10 to the
Notes to Condensed Consolidated Financial Statements for additional information.
The cumulative effect of accounting change 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 7 to the Notes to Condensed
Consolidated Financial Statements for additional information.
-16-
IMPACT OF INFLATION
The primary inflationary factors affecting the Company's operations
include food and labor costs. A number of the Company's restaurant personnel are
paid at the federal and state established minimum wage levels and, accordingly,
changes in such wage levels affect the Company's labor costs. However, since the
majority of personnel are tipped employees, minimum wage changes should have
little effect on overall labor costs. Historically as costs of food and labor
have increased, the Company has been able to offset these increases through menu
price increases and economies of scale; however, there may be delays in the
implementation of such menu price increases or in effecting timely economies of
scale, as well as competitive pressures which may limit the Company's ability to
recover any cost increases in its entirety. Historically, inflation has not had
a material impact on operating margins. During fiscal 2003 the Company has
experienced significant increases in beef prices. If the price of beef continues
at its current level, it will continue to have a material impact on operating
margins
LIQUIDITY AND CAPITAL RESOURCES (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The following table presents a summary of the Company's cash flows for
each of the thirty-six weeks ended September 9, 2003 and September 3, 2002:
Thirty-six weeks ended
----------------------
Sept. 9, 2003 Sept. 3, 2002
------------- -------------
Net cash provided by operating activities ............ $ 37,352 43,569
Net cash provided by (used in) investing activities .. (1,956) 1,206
Net cash used in financing activities ................ (22,697) (74,352)
Effect of exchange rate changes on cash .............. 872 273
Net cash provided by (used in) discontinued operations 2,199 (187)
------------- -------------
Net increase (decrease) in cash and cash equivilants . $ 15,770 $(29,491)
============= =============
The decrease in net cash provided by operating activities for the
thirty-six week period ended September 9, 2003 compared to the prior year period
is due to a decrease in net income and a decrease in depreciation and
amortization.
During the thirty-six week period ended September 9, 2003, the Company's
investment in property and equipment was $3,834 compared to $1,653 for the same
period in 2002. In the thirty-six week period ended September 9, 2003, the
Company received $1,401 in proceeds from the sale of assets compared to $2,806
in the same period in 2002.
During the thirty-six week period ended September 9, 2003, the Company
received net proceeds of $5,884 from the issuance of 697,371 shares of common
stock due to the exercise of stock options compared to proceeds of $22,521 from
the issuance of 1,980,708 shares issued pursuant to stock option exercises in
the same period in 2002.
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.
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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. During the thirty-six week period ended September 9,
2003 the Company purchased 891,000 shares of common stock at a cost of $20.71
per share or an aggregate cost of $18,454. Except for the 4,000,000 shares
repurchased in the tender offer previously described, the Company did not
purchase any common stock during the same period in 2002.
The Company has paid quarterly cash dividends on its common stock since
the second quarter of fiscal 2000. In January 2003, the Company increased its
quarterly cash dividend from $.15 to $.165 per share commencing in the second
quarter of fiscal 2003. During the thirty-six week period ended September 9,
2003, the Company paid dividends of $10,127 or $.48 per share as compared to
$10,752 or $.45 per share in the same period in 2002.
At September 9, 2003, the Company had $81,139 in cash and cash
equivalents. The Company had available $55,000 in unsecured revolving credit
facilities. At September 9, 2003, the Company had no outstanding borrowings. See
Note 4 to the Notes to Condensed Consolidated Financial Statements in this Form
10-Q for a further description of the Company's credit facilities.
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 2003 and 2002 periods were not significant.
As of September 9, 2003, the Company had no positions in futures contracts.
IMPACT OF RECENTLY ISSUED FINANCIAL STANDARDS
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
only when the liability is incurred and measured at fair value. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The Company has adopted this Statement effective January 1, 2003, and it
did not have a material impact on its results of operations or financial
position.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Stockholders are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to open new restaurants, general market
conditions, the price of beef, competition and pricing and other risks set forth
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2002. Although the Company believes the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements contained in the report will prove to be
accurate.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
-----------------------------------------------------------
The Company's exposure to market risks was not significant during the
twelve and thirty-six weeks ended September 9, 2003.
Item 4. CONTROLS AND PROCEDURES
-----------------------
Disclosure controls are procedures that are designed with the
objective of ensuring that information required to be disclosed in the
Company's reports under the Securities Exchange Act of 1934, such as
this Form 10-Q, is reported in accordance with the Securities and
Exchange Commission's rules. Disclosure controls are also designed
with the objective of ensuring that such information is accumulated
and communicated to management, including the Chief Executive Officer
and Chief Financial Officer as appropriate to allow timely decisions
regarding required disclosure.
As of the end of the period covered by the Form 10-Q, the Company
carried out an evaluation under the supervision and with the
participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to the Securities Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to
material information relating to the Company (including its
consolidated subsidiaries) required to be in the Company's periodic
SEC filings. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
Certifications of the Chief Executive Officer and Chief Financial
Officer regarding, among other items, disclosure controls and
procedures are included immediately after the signature section of
this Form 10-Q.
Part II. OTHER INFORMATION
-------- -----------------
Item 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
-----------------------------------------------
On July 11, 2003, the Company held its Annual Meeting of Stockholders
(the "Meeting"). At the Meeting, the stockholders re-elected Clark D.
Mandigo, John D. White and Thomas G. Lasorda to the Board of Directors
to serve until the 2006 Annual Meeting of Stockholders and until their
successors have been duly elected and qualified. As to the newly
re-elected Directors, there were 17,944,529 votes "For" and 820,399
votes "Withheld" for Clark D. Mandigo, and 18,595,673 votes "For" and
169,255 votes "Withheld" for John D. White, and 18,388,088 votes "For"
and 376,840 votes "Withheld" for Thomas G. Lasorda. The stockholders
ratified the appointment of Ernst & Young LLP as the Company's
independent auditors for the year ending December 30, 2003. As to the
ratification of auditors, there were 18,022,045 votes "For", 738,325
votes "Against" and 4,558 votes "Abstained".
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Reports on Form 8-K
During the twelve weeks ended September 9, 2003, the Company
filed Form 8-Ks on the following dates under Item 5 - Other
Events: July 9, 2003 and July 17, 2003
In addition, the Company filed a Form 8-K under Item 9 -
Regulation FD Disclosure on July 8, 2003.
(b) Exhibits
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act.
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
-20-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LONE STAR STEAKHOUSE & Saloon, Inc.
(Registrant)
Date: October 24, 2003 /s/ Randall H. Pierce
----------------------------------------
Randall H. Pierce
Chief Financial Officer
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LONE STAR STEAKHOUSE & Saloon, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LONE STAR STEAKHOUSE & Saloon, Inc.
(Registrant)
Date: October 24, 2003 /s/ Randall H. Pierce
----------------------------------------
Chief Financial Officer
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