sec document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 27, 2005
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______ TO ______
Commission file number 0-19907
LONE STAR STEAKHOUSE & SALOON, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 48-1109495
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(State or other jurisdiction of (I.R.S. employer identification no.)
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 the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act Yes |_| No |X|
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 (ss. 229.405 of this chapter) 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. |X|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12-b-2 of the Exchange Act). Yes |_| No |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes |X| No |_|
As of June 14, 2005, the aggregate market value of the Registrant's Common
Stock held by non-affiliates of the Registrant was $559,730,900. 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 6, 2006, there were 20,680,756 shares outstanding of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III will be incorporated by reference to
certain portions of a definitive proxy statement, which is expected to be filed
by the Registrant within 120 days after the close of its fiscal year.
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TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Business............................................................ 3
1A. Risk Factors........................................................ 10
1B. Unresolved Staff Comments........................................... 13
2. Properties ......................................................... 13
3. Legal Proceedings................................................... 15
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matter and Issuer's Purchases of Equity Securities.................. 16
6. Selected Financial Data............................................. 16
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 18
7A. Quantitative and Qualitative Disclosures about Market Risk.......... 27
8. Financial Statements and Supplementary Data......................... 27
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................ 27
9A. Controls and Procedures............................................. 27
9B. Other Information................................................... 29
PART III
10. Directors and Executive Officers of the Registrant.................. 30
11. Executive Compensation.............................................. 30
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters..................................... 30
13. Certain Relationships and Related Transactions...................... 30
14. Principal Accountant Fees and Services.............................. 31
PART IV
15. Exhibits and Financial Statement Schedules.......................... 31
Signatures.......................................................... 33
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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 6, 2006, Lone Star Steakhouse & Saloon, Inc. (the "Company")
owned and operated 250 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 four 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.
On March 11, 2006, the Company's Board of Directors approved management's
recommendation to close certain Lone Star Steakhouse & Saloon restaurants.
As a result, the Company will immediately close 30 under-performing stores. This
group of stores consists of 13 owned locations and 17 leased locations with net
carrying values of land, buildings, leasehold improvements and equipment of
approximately $10,577,000, $6,014,000, $3,984,000 and $812,000 respectively and
deferred rent obligations of $1,343,000. These identified store closings
resulted from management's analysis of not only the performance of these stores
but also related return on investment targets, the geographical location of
these stores as compared to other Company owned stores, and demographic changes
in the local markets surrounding these stores.
The operations of the closed stores for the years ended December 27, 2005,
December 28, 2004, and December 30, 2003 are as follows:
2005 2004 2003
Net Sales $32,900,000 $35,589,000 $36,787,000
Loss from operations $ 4,637,000 $ 2,298,000 $ 1,267,000
The decision to close these restaurants is the result of a lengthy
process, spanning several months, which included among other things, analyzing
the identified restaurants sales trends, earnings before interest taxes and
depreciation and amortization (EBITDA), and pretax profit contribution.
Although limited in number, the Company's newest Lone Star Steakhouse
& Saloon restaurants are opening at projected volumes in excess of $3.4
million. These sales levels are similar to the opening volumes reported by
several of the Company's direct competitors and if these volumes are achieved
should provide substantial increases in all metrics when compared with those of
the recently closed restaurants.
Since the start of the 2006 fiscal year, the Company has opened two new
Lone Star Steakhouse & Saloon restaurants and has plans to open an
additional 20 new units throughout the year, or early 2007. There are also seven
Texas Land & Cattle restaurants, five Sullivan's Steakhouses and one Del
Frisco Double Eagle Steakhouse that will open throughout 2006 or early in 2007.
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 2005, the United States Department of Agriculture estimated the
average annual per capita consumption of beef to be 66.5 pounds an increase of
..6 pounds over 2004. Company management believes the limited menu of its Lone
Star restaurants, which feature high quality USDA graded and 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 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 2005
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 a week. The average check per customer is approximately $13.60
at lunch and $20.60 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 a 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 and warm lighting. 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 $63.00.
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 National Restaurant Association 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 $86.00.
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 $30.00 at
dinner.
CORPORATE STRATEGY
The focus of the Company's corporate strategy is to increase the Company's
earnings per share and Shareholder value. The Company is in the process of
considering a number of initiatives to achieve this goal including:
o Opening new restaurants for all concepts;
o Evaluating opportunity for new concepts developed internally;
o Share repurchases from existing cashflow;
o Instituting menu, operational and marketing initiatives aimed at
incresing unit volumes and margins;
o Review and institute cost cutting initiatives;
o Reviewing other alternatives for enhancing shareholder value
including closing and/or relocating additional underperforming units;
o Evaluating strategic acquisitions; and
o Franchising existing or undeveloped markets both domestically and
internationally.
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There can be no assurance that these initiatives will be successfully
implemented or as to the timing of these initiatives and the Company currently
has no agreements, commitments or understandings with respect to any strategic
acquisition or franchising opportunity.
Since the start of the 2006 fiscal year, the Company has opened two new
Lone Star Steakhouse & Saloon restaurants and has plans to open an additional 20
new units throughout the year, or early 2007. There are also seven Texas Land &
Cattle resturants, five Sullivan Steakhouses and one Del Frisco Double Eagle
Steakhouse that will open throughout 2006 or early in 2007. In addition, we are
evaluating the results of our Lone Star remodel program that began in 2004, and
expect additional Lone Stars will be remodeled in 2006. While the results of the
remodels of existing Lone Stars has been mixed, the new units opened with the
revised decor and image have opened at higher volumes than the existing
restaurants.
We believe that our strong financial position, significant ownership of
properties, and consistent cashflow will allow us to restart growth in all
concepts, continue returning value to shareholders through dividends and
potentially share repurchases, and still enable us to have the capacity through
cash reserves or a modest amount of debt, to be able to act quickly and
strategically to effectuate acquisitions or franchising opportunities or other
attractive options to increase shareholder value.
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. Of the 250 Lone Star restaurants open at
March 6, 2006, 89 were leased facilities and had an average cash investment of
approximately $1.1 million and 161 were owned and had an average cost for land
acquisition, construction and equipment of approximately $2.0 million.
The Company expects the following revenue and unit costs excluding land
for typical new restaurants:
Projected
Unit development costs Initial
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Concept Capitalized Pre-opening Annual Revenue
------- ----------- ----------- ---------------
Lone Star Steakhouse & Saloon $1,900 $250 $3,400
Texas Land & Cattle 2,000 $250 $3,400
Sullivan's 3,250 $350 $5,000
Del Frisco's 5,500 $350 $8,000
There are and the Company anticipates that there will be exceptional
sites, particuarly for the Sullivan's and Del Frisco's concepts where the
Company believes that the development costs and expected revenues should exceeed
those shown above.
There can be no assurance that these revenue and cost assumptions will be
achieved.
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 12% 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.
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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 generally takes from 9 to 12 months 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.
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 approximately 260 people.
Texas Land & Cattle restaurants average approximately 7,300 sq. ft. and
have seating for approximately 280 customers.
The Sullivan's restaurant in Austin, Texas is currently 12,000 square feet
and seats 320 customers. The other Sullivan's restaurants range from 7,000 to
9,000 square feet, with seating capacity for approximately 250 customers. 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. A separate jazz bar area called "Ringside" is utilized in four of
the Sullivan's restaurants.
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
The Company has committed to sponsor a NASCAR car for 2006 and 2007. For
17 races each season, Lone Star will be the primary sponsor, and will be the
associate sponsor for the remaining 19 races. While the Company believes that
the advertising and marketing benefit from this commitment will more than
recover the cost, there can be no assurance that it will, and the Company may
need to continue and/or increase its traditional marketing program and
associated expense.
Lone Star restaurants 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 texas roadhouse ambiance
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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 of 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.
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.
Depending upon the volume of the units, the typical Lone Star management
team consists of one general manager and two to 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.
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PURCHASING
Approximately 53% 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 2005. As
of March 6, 2006, the Company had no significant forward pricing contracts.
MANAGEMENT INFORMATION SYSTEMS
The Company has spent the last ten months evaluating various new POS
systems for use in its restaurants. Beginning in March 2006, the Company will
begin to install new, web based POS systems in its restaurants with the
conversion of all units expected by May 2006. The estimated cost of this
enhancement is $5 million to $6 million. The new system will also feature
enhancements to the back of the house cost monitoring and reporting, labor
scheduling, and ease of training that we anticipate will reduce ongoing variable
costs per unit.
The Company continually monitors its management information system to take
advantage of technological improvements. Its point-of-sale system is designed to
improve labor scheduling and food cost management, provide corporate management
quicker access to financial data and reduce the restaurant manager's
administrative time. Each general manager uses the system for production
planning, labor scheduling and food cost variance analysis. The system generates
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
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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.
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 6, 2006, the Company employed approximately 19,750 persons, 12
of whom are executive officers, 95 of whom are office support personnel, 9 of
whom are regional managers, 31 of whom are district managers, approximately
1,230 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.
-9-
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 1A. 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 cases of "mad cow disease" or "foot/mouth disease". 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 2005 and 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:
-10-
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;
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.
-11-
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
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 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 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 53% 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
-12-
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.
A KEY ELEMENT OF OUR STRATEGY IS OPENING NEW RESTAURANTS. IF WE ARE UNABLE TO
OPEN A SIGNIFICANT NUMBER OF THESE RESTAURANTS WHEN WE EXPECT THEM TO OPEN OR
OUR SALES VOLUMES FOR THESE RESTAURANTS ARE SIGNIFICANTLY BELOW OUR
EXPECTATIONS, OUR RESULTS OF OPERATIONS WILL SUFFER.
Part of our corporate strategy is to open new restaurants. Since the start of
the 2006 fiscal year, we have opened two new Lone Star Steakhouse & Saloon
restaurants and have commitments to open an additional 20 new units throughout
the year, or early 2007. We also believe that seven Texas Land & Cattle
restaurants, five Sullivan Steakhouses and one Del Frisco Double Eagle
Steakhouse will open during 2006 or early in 2007. This time frame is predicated
by our experience that, assuming we can obtain certain governmental approvals
and license, such as liquor licenses, it generally takes from 9 to 12 months
after the signing of a lease or the closing of a purchase to complete
construction and open a new restaurant. If a significant number of restaurants
do not open when we expect them to open, it could negatively impact our future
results of operations. In addition, although limited in number, our newest Lone
Star Steakhouse & Saloon restaurants are opening at projected annualized sales
volumes in excess of $3.4 million. If this trend continues for such restaurants
and the additional Lone Star Steakhouse & Saloon restaurants we intend to open,
it should provide substantial increases in all metrics when compared with those
of our recently closed restaurants. If we fail to achieve our projected volume
for our new Lone Star Steakhouse & Saloon restaurants as well as the volumes for
the new restaurants in other concepts our results of operations will be
negatively impacted.
WE RECENTLY DECIDED TO CLOSE 30 RESTAURANTS AND PART OF OUR STRATEGY IS TO CLOSE
UNDER-PERFORMING UNITS.
On March 11, 2006, our Board of Directors approved management's recommendation
to close certain Lone Star Steakhouse & Saloon restaurants. As a result, we will
immediately close 30 under-performing stores. Part of our corporate strategy is
to review other alternatives for enhancing stockholder value including closing
and/or relocating under-performing units. Accordingly, if other units
under-perform we will need to consider closing additional restaurants and our
results of operations could be negatively impacted.
WE ARE UNABLE TO PREDICT WHETHER WE WILL RECEIVE ANY BENEFIT FROM OUR
ADVERTISING AND MARKETING EFFORTS.
While we have primarily relied on word of mouth to promote our restaurants and
build customer awareness, we do utilize other marketing and advertising
strategies. Recently we agreed to sponsor a NASCAR car for 2006 and 2007. While
we believe that the advertising and marketing benefit from the NASCAR
sponsorship and other advertising strategies will more than recover the cost,
there can be no assurance that it will and we may need to continue and/or
increase our traditional marketing programs and associated expenses.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
ITEM 2. PROPERTIES
As of March 6, 2006, the Company leased 89 and owned 161 of its Lone Star
restaurant locations. On March 11, 2006, the Comapny approved the closing of 30
under-performing restaurants, of which 13 are owned locations and 17 are leased
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 restaurant properties described above, the Company currently
owns land at nine additional locations.
-13-
RESTAURANT LOCATIONS AS OF MARCH 6, 2006
The following table sets forth the location of the Company's existing,
domestic Lone Star Steakhouse & Saloon (250) Restaurants, Del Frisco's (5)
restaurants, Sullivan's (15) restaurants, Texas Land & Cattle (20) restaurants,
and (1) Frankie's Restaurant
LONE STAR Effingham Dundee Salisbury Salt Lake City
--------- Hodgkins Flint Southern Pines Sugarhouse
Mt. Vernon Grand Rapids Winston-Salem
ALABAMA Peoria Jackson VIRGINIA
Anniston Rockford Mt. Pleasant NORTH DAKOTA Alexandria
Birmingham (2) Springfield Saginaw Fargo Centreville
Huntsville Ypsilanti Chesapeake
Mobile INDIANA OHIO Fairfax
Montgomery Anderson MISSISSIPPI Akron Fredericksburg
Trussville Evansville Hattiesburg Canton Hampton
Tuscaloosa Ft. Wayne Jackson Cincinnati (2) Herndon
Indianapolis (4) Cleveland (3) Norfolk
ALASKA Lafayette MISSOURI Columbus (3) Potomac Mills
Anchorage Merrillville Branson Dayton (2) Richmond (3)
South Bend Independence Findlay Sterling
ARIZONA Terre Haute Kansas City Lancaster Virginia Beach
Mesa Springfield Mentor
Phoenix (4) IOWA St. Louis (5) Middletown WEST VIRGINIA
Cedar Rapids Niles Beckley
ARKANSAS Coralville NEBRASKA Springfield Charleston
Ft. Smith Davenport Lincoln Toledo (2) Huntington
Little Rock (2) Des Moines Omaha (2) Youngstown
Springdale Waterloo WISCONSIN
NEVADA OKLAHOMA Racine
COLORADO KANSAS Las Vegas (4) Lawton
Colorado Springs Garden City Oklahoma City SULLIVAN'S
Denver (6) Hutchinson NEW JERSEY Tulsa (2) ----------
Ft. Collins Overland Park Atlantic City Anchorage, AK
Loveland Bridgewater PENNSYLVANIA Austin, TX
KENTUCKY Cherry Hill Allentown Baton Rouge, LA
DELAWARE Bowling Green Delran Easton Charlotte, NC
Dover Florence Hanover Township Harrisburg Chicago, IL
Wilmington (2) Lexington Hazlet Johnstown Dallas, TX
Louisville Marlton King of Prussia Denver, CO
FLORIDA Ocean County Lancaster Houston, TX
Bradenton LOUISIANA Scotch Plains Middletown Indianapolis, IN
Clearwater Baton Rouge (2) Turnersville Philadelphia King of Prussia, PA
Ft. Lauderdale Houma Voorhees Pittsburgh (5) Naperville, IL
Ft. Myers Lafayette Wayne Pottstown Palm Desert, CA
Lakeland Monroe Reading Raleigh, NC
Ocala New Orleans (3) NEW MEXICO Scranton Tucson, AZ
Orlando Albuquerque Wilkes-Barre Wilmington, DE
Pensacola MAINE York
Port Orange South Portland NEW YORK TEXAS LAND & CATTLE
Port Richey Albany SOUTH CAROLINA -------------------
Sarasota MARYLAND Greenville Dallas, TX (7)
St. Petersburg Bel Air NORTH CAROLINA Myrtle Beach (2) Austin, TX (4)
Tampa Columbia Asheville Houston, TX (4)
Frederick Boone SOUTH DAKOTA San Antonio, TX (3)
GEORGIA Gaithersburg Clayton Sioux Falls Lubbock, TX
Augusta Laurel Charlotte (4) Albuquerque, NM
Lexington Park Durham TENNESSEE
IDAHO Waldorf Fayetteville Jackson DEL FRISCO'S
Boise Westminster Greensboro (2) Johnson City ------------
Greenville Memphis Denver, CO
ILLINOIS MICHIGAN Jacksonville Dallas, TX
Bloomington Battle Creek Mt. Airy UTAH Fort Worth, TX
Bradley Bay City Raleigh (3) Centerville Las Vegas, NV
Carbondale Brighton Roanoke Rapids Layton New York, NY
Champaign Dearborn Heights Rocky Mount
Chicago (10) Detroit (6) FRANKIE'S
Decatur ---------
Charlotte, NC
-14-
ITEM 3. LEGAL PROCEEDINGS
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.
-15-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS AND ISSUER'S PURCHASES OF EQUITY SECURITIES
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 during the day
for the Common Stock, as reported by Nasdaq.
Prices
------
Calendar 2005 High Low
------------- ---- ---
First Quarter $29.60 $25.66
Second Quarter $31.98 $27.61
Third Quarter $31.14 $24.02
Fourth Quarter $27.07 $22.56
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
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, to $.195 in January 2005 and to $.205 in January 2006. 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 6, 2006, there were approximately 350 holders of record of the
Company's Common Stock. The Company believes there are in excess of 6,000
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.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data and
certain pro forma 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 has been derived from the Company's audited
consolidated financial statements. The pro forma data set forth below for the
periods presented are unaudited and have been prepared by management solely to
facilitate period-to-period comparison and do not represent the actual results
of operations for the periods presented. The pro forma amounts reflect the
adjusted amounts applicable for fiscal year 2001 to give retroactive effect for
the non-amortization provisions of SFAS No. 142 requiring that goodwill and
intangible
-16-
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.
Year Ended In December(1)
----------------------------------------------------------------------------
(Amounts in thousands, except share data)
2005 2004 (2) 2003 2002 2001
---- -------- ---- ---- ----
Income Statement Data:
Net sales $ 669,355 $ 667,546 $ 589,235 $ 591,442 $ 568,816
Costs and expenses:
Costs of sales 235,903 238,925 211,785 193,442 194,864
Restaurant operating expenses 332,648 315,621 273,640 265,192 264,260
Restaurant depreciation and amortization 19,362 20,181 20,638 24,376 25,816
Provision for impaired assets 410 1,167 -- 792 565
General and administrative expenses 46,650 45,269 43,346 45,085 41,884
Abandoned merger expenses -- -- -- 2,990 --
Hurricane disaster relief donation 1,853
Provision for casualty losses 535
Non-cash stock compensation expense 1,575 1,193 1,474 2,949 3,212
Contribution - "Dine for America" -- -- -- -- 2,124
------------ ------------ ------------ ------------ ------------
Total costs and expenses 638,936 622,356 550,883 534,826 532,725
------------ ------------ ------------ ------------ ------------
Income from operations 30,419 45,190 38,352 56,616 36,091
Other income, net 1,258 1,737 553 2,986 4,906
------------ ------------ ------------ ------------ ------------
Income from continuing operations before
provision for income taxes 31,677 46,927 38,905 59,602 40,997
Provision for income taxes 10,371 15,503 11,850 19,732 14,366
------------ ------------ ------------ ------------ ------------
Income from continuing operations 21,306 31,424 27,055 39,870 26,631
Discontinued operations (3,4):
Loss from operations of discontinued restaurants (627) (311) (11,017) (1,369) (6,755)
Income tax benefit 10,282 100 2,207 484 2,395
------------ ------------ ------------ ------------ ------------
Income (loss) on discontinued operations 9,655 (211) (8,810) (885) (4,360)
------------ ------------ ------------ ------------ ------------
Income before cumulative effect of change in
accounting principle 30,961 31,213 18,245 38,985 22,271
Cumulative effect of change in accounting principle
(net of income tax of $190) (5) -- -- -- (318) --
------------ ------------ ------------ ------------ ------------
Net income $ 30,961 $ 31,213 $ 18,245 $ 38,667 $ 22,271
============ ============ ============ ============ ============
Basic earnings (loss) per share:
Continuing operations $ 1.04 $ 1.50 $ 1.30 $ 1.74 $ 1.10
Discontinued operations (4) .47 (.01) (.42) (.03) (.18)
------------ ------------ ------------ ------------ ------------
Income before cumulative effect of
change in accounting principle 1.51 1.49 0.88 1.71 0.92
Cumulative effect of change
in accounting principle -- -- -- (.02) --
------------ ------------ ------------ ------------ ------------
Basic earnings per share $ 1.51 $ 1.49 $ 0.88 $ 1.69 $ 0.92
============ ============ ============ ============ ============
Weighted average shares outstanding 20,416,840 20,962,919 20,801,894 22,908,821 24,036,942
============ ============ ============ ============ ============
Pro forma net income (6) $ 30,961 $ 31,213 $ 18,245 $ 38,985 $ 23,194
============ ============ ============ ============ ============
Pro forma basic earnings per share $ 1.51 $ 1.49 $ 0.88 $ 1.71 $ 0.96
============ ============ ============ ============ ============
-17-
At fiscal year end in December, (1)
--------------------------------------------------------
(Dollars in thousands, except per share data)
2005 2004 2003 2002 2001
Balance Sheet Data:
Working capital $ 40,655 $ 39,332 $ 68,369 $ 41,000 $ 48,284
Total assets 517,813 498,292 499,988 478,586 537,462
Stockholders' equity 412,341 392,781 414,680 413,761 469,979
Cash dividends per common share $ .76 $ .70 $ .645 $ .60 $ .50
(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 2001, 2002, 2003, 2004, and 2005 fiscal years ended on December
25, 31, 30, 28, and 27 respectively. Fiscal 2002 included 53 weeks of
operations while fiscal 2005, 2004, 2003, and 2001 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) Fiscal 2005 includes tax benefits of $10,100 resulting from the release of
tax contingency reserves related to tax matters which were resolved during
fiscal 2005. The adjustments relate primarily to the Company's investments
in Australia which were discontinued in fiscal 2003. Accordingly the tax
benefits are included in discontinued operations.
(4) 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.
(5) 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.
(6) Pro forma net income amounts reflect the adjustments for fiscal 2002 and
2001 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 two Lone Star restaurants in fiscal year 2005 and one
in fiscal 2004. During fiscal 2005, the Company closed two underperforming Lone
Star restaurants and one restaurant was destroyed by fire. Through March 6,
2006, the Company has opened two Lone Star restaurants.
On March 11, 2006, the Company's Board of Directors approved management's
recommendation to close certain Lone Star Steakhouse & Saloon restaurants. As a
result, the Company will immediately close 30 under-performing stores. This
group of stores consists of 13 owned locations and 17 leased locations with net
carrying values of land, buildings, leasehold improvements and equipment of
approximately $10,577, $6,014, $3,984, and $812, respectively and deferred rent
obligations of $1,343. These identified store closings resulted from
management's analysis of not only the performance of these stores but also
related return on investment targets, the geographical location of these stores
as compared to other Company owned stores, and demographical changes in the
local markets surrounding these stores.
The operations of the closed stores for the years ended December 27, 2005,
December 28, 2004, and December 30, 2003 are as follows:
2005 2004 2003
Net Sales $32,900 $35,589 $36,787
Loss from operations $ 4,637 $ 2,298 $ 1,267
The decision to close these restaurants is the result of a lengthy process,
spanning several months, which included among other things, analyzing the
identified restaurants sales trends, EBITDA, and pretax profit contribution.
Although limited in number, the Company's newest Lone Star Steakhouse &
Saloon restaurants are opening at projected volumes in excess of $3.4 million.
These sales levels are similar to the opening volumes reported by several of the
Company's direct competitors and should provide substantial increases in all
metrics when compared with those of the recently closed restaurants.
The Company has commitments to open an additional 20 new units throughout
the year, or early 2007. There are also seven Texas Land & Cattle restaurants,
five Sullivan's Steakhouses and one Del Frisco Double Eagle Steakhouse that will
open throughout 2006 or early in 2007.
There were 250 operating domestic Lone Star restaurants as of March 6,
2006, before consideration of store closings described above including three
restaurants in New Orleans, temporarily closed due to Hurricane Katrina. These
restaurants will not likely be repaired and reopened until mid to late 2006. In
addition, a licensee operates four Lone Star restaurants in California.
-18-
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.
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
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 FINITE LIFE
INTANGIBLES Property and equipment and finite 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. Fair value
was estimated utilizing the best information available, including management's
estimates and judgments, independent appraisals of fair value 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. 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.
-19-
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.
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 27, December 28, December 30,
2005 2004 2003
---- ---- ----
Statement of Income:
Net sales 100% 100% 100%
Costs and expenses:
Costs of sales 35.2 35.8 36.0
Restaurant operating expenses 49.7 47.3 46.4
Depreciation and amortization 2.9 3.0 3.5
Provision for impaired assets 0.1 0.2 --
------ ------ ------
Restaurant costs and expenses 87.9 86.3 85.9
General and administrative expenses 6.9 6.8 7.3
Hurricane disaster relief donation 0.3 -- --
Provision for casualty loss 0.1 -- --
Non-cash stock compensation expense 0.3 0.2 0.3
------ ------ ------
Income from operations 4.5 6.7 6.5
Other income, net 0.2 0.3 0.1
------ ------ ------
Income from continuing operations before income taxes 4.7 7.0 6.6
Provision for income taxes 1.5 2.3 2.0
------ ------ ------
Income from continuing operations 3.2 4.7 4.6
Income (loss) from discontinued operations, net of applicable income taxes 1.4 -- (1.5)
------ ------ ------
Net income 4.6% 4.7% 3.1%
====== ====== ======
-20-
LONE STAR STEAKHOUSE & SALOON, INC.
YEAR ENDED COMPARED TO DECEMBER 27, 2005
COMPARED TO YEAR ENDED DECEMBER 28, 2004
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales increased $1,809 or .3% to $669,355 for the year ended December
27, 2005 ("fiscal 2005"), compared to $667,546 for the year ended December 28,
2004 ("fiscal 2004"). Sales for fiscal 2005 include fifty-two weeks of sales for
TXCC compared with the prior period for fiscal 2004 which includes sales of TXCC
covering a forty-eight week period. The Company's blended same store sales,
representing net sales, by store, for all the Company owned restaurant concepts
opened for more than 18 months in the current and comparable prior year period
decreased .5%. The Company's average check increased 2.4% and guest counts
decreased 2.8%.
Costs of sales, primarily food and beverages, decreased as a percentage of
net sales to 35.2% from 35.8% due primarily to decreased costs for beef partly
offset by increased costs for seafood items as a result of changes in the
menu-mix.
Restaurant operating expenses for fiscal 2005 increased $17,027 to
$332,648 compared to $315,621 in the prior year period and increased as a
percentage of net sales to 49.7% from 47.3%. Labor costs increased .9% primarily
as the result of increased management staffing at the restaurants. Advertising
costs increased .4%. Building maintenance costs increased .4% and utility costs
increased .2%. Remodel expenses increased .1%. The increases were partially
offset by a decrease in certain insurance costs.
Depreciation and amortization decreased $819 in fiscal 2005 compared with
the prior period. The decrease is attributable to the continued reduction in
depreciation for certain assets that have become fully depreciated for the
Company's historical concepts. This decrease is partially offset by the
depreciation of assets related to the TXCC acquisition.
General and administrative expenses increased $1,381 in fiscal 2005
compared to the prior period. General and administrative expenses reflect an
increase of approximately $300 for increases related to the TXCC acquisition for
the additional four week period included in fiscal 2005 as compared with the
prior period. In addition, general and administrative costs reflect higher
travel expenses and costs for restaurant development. The increases are offset
in part by a decrease in incentive compensation.
Provision for impaired assets of $410 in fiscal 2005 reflects the
write-down of five underperforming restaurants to their estimated fair value.
Hurricane disaster relief donation in fiscal 2005 reflects the Company's
contribution to the American Red Cross in connection with disaster relief for
the victims of Hurricane Katrina. The Company donated 100% of its restaurant
sales of $1,853 on Labor Day, September 5, 2005.
Provision for casualty loss in fiscal 2005 reflects the Company's estimate
of losses associated with its restaurants which were damaged by Hurricane
Katrina. Such losses primarily relate to estimated property damages for which
insurance recoveries will not be available due to limitations of insurance
deductible amounts.
Non-cash stock compensation expense in fiscal 2005 was $1,575 compared to
$1,193 for the prior year period. The change is primarily attributable to an
increase in the amortization of stock compensation expense in fiscal 2005
compared to fiscal 2004, reflecting the impact of stock options granted in
December 2004 and during 2005. In addition, the 2005 period includes a credit of
$797 compared to a charge of $831 in the prior year 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 2005 was $1,258 compared to $1,737 for the
prior year. The decrease in other income results primarily from a decrease in
gains on sale of assets in 2005 as compared to 2004.
The effective income tax rate from continuing operations was 32.7% and
33.0% for fiscal 2005 and fiscal 2004, respectively. The factors which cause the
effective tax rates to vary from the federal statutory rate of
-21-
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 compensation associated with such options in the income
statement. However, tax benefits may arise at the time incentive options are
exercised to the extent that the exercise is followed by a disqualifying
disposition of the shares by the optionee.
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 Consolidated Statements). The tax
benefit included in discontinued operations reflects the resolution of tax
matters related to Australian operations which were discontinued in fiscal 2003.
-22-
LONE STAR STEAKHOUSE & SALOON, INC.
YEAR ENDED DECEMBER 28, 2004 COMPARED TO YEAR ENDED DECEMBER 30, 2003
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales increased $78,311 or 13.3% to $667,546 for the year ended
December 28, 2004 ("fiscal 2004"), compared to $589,235 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 $41,981 to $315,621
compared to $273,640 in fiscal 2003, and increased as a percentage of net sales
to 47.3% from 46.4%. 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 $457 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
-23-
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.
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 Consolidated Statements).
-24-
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 the past two fiscal years,
the Company experienced significant volatility in beef prices as such prices for
the periods 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 27, December 28, December 30,
2005 2004 2003
---- ---- ----
Net cash provided by operating activities of continuing operations $ 47,143 $ 61,059 $ 54,077
Net cash used in investment activities of continuing operations (55,824) (65,334) (8,106)
Net cash used in financing activities of continuing operations (13,177) (54,788) (27,149)
Effect of exchange rate changes on cash -- -- 1,486
Net cash provided by discontinued operations 1,920 1,348 10,553
-------- -------- --------
Net increase (decrease) in cash and cash equivalents $(19,938) $(57,715) $ 30,861
======== ======== ========
The decrease in net cash provided by operating activities for fiscal 2005
compared to fiscal 2004 is due primarily to a decrease in net income during
fiscal 2005 as compared to fiscal 2004.
During fiscal 2005, 2004, and 2003, the Company's investment in property
and equipment was $44,725, $22,245, and $6,928, respectively. In fiscal 2005,
2004, and 2003, the Company received proceeds from the sale of assets of $1,036,
$2,035, and $1,730, respectively.
During fiscal 2005 and fiscal 2004, the Company invested $11,525 and
$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 two domestic Lone Star restaurant in fiscal 2005, one
in fiscal 2004 and none in fiscal 2003. During fiscal 2005, the Company closed
two underperforming Lone Star restaurants and one restaurant was destroyed by
fire.
Since the start of the 2006 fiscal year, the Company has opened two new
Lone Star Steakhouse & Saloon restaurants and has plans to open an additional 20
new units throughout the year, or early 2007. There are also seven Texas Land &
Cattle resturants, five Sullivan Steakhouses and one Del Frisco Double Eagle
Steakhause that will open throughout 2006 or early in 2007.
As more fully described in Note 19 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. In May
2005, the Company acquired for $1,200 in cash, the remaining 40% minority
interest of certain limited partners in TXCC-Preston, L.P.
-25-
During fiscal 2005, the Company received net proceeds of $2,453 from the
issuance of 247,186 shares of its common stock due to the exercise of stock
options compared to proceeds of $11,454 and $10,244 from the issuance of
1,350,065 and 1,210,682 shares in fiscal 2004 and 2003, respectively.
The Company's Board of Directors has authorized the purchase of shares of
the Company's common stock from time to time in the open market or in privately
negotiated transactions. The most recent authorization was November 17, 2004
when the Board of Directors approved the repurchase of up to 2,026,190 shares of
the Company's common stock. During fiscal 2005, the Company made no purchases of
its common stock. In fiscal 2004 and 2003, the Company purchased 2,072,800 and
1,132,500 shares at a cost of $51,410 and $23,833, respectively. At December 27,
2005, the Company may purchase up to 2,026,190 shares of common stock pursuant
to its current authorization by the Board of Directors.
The Company has paid quarterly cash dividends on its common stock since
the second quarter of fiscal 2000. In January 2005, the Company increased its
quarterly cash dividend from $.175 to $.195 per share. The Company recently
announced in 2006 that it would increase its quarterly cash dividend from $.195
to $.205 per share. During fiscal 2005, 2004, and 2003, the Company paid cash
dividends as follows:
Amount Per Share
------ ---------
Fiscal 2005 $15,630 $0.76
Fiscal 2004 $14,832 $0.70
Fiscal 2003 $13,560 $0.645
The Company anticipates that its aggregate costs to complete the store
development currently in process or planned will range from $100,000 to $110,000
relating primarily to construction and equipment costs for new restaurants, the
acquisition of additional restaurant sites and the installation of the new
web-based POS system in its existing stores. As of December 27, 2005,
approximately $20,000 of this aggregate cost was already incurred by the
Company.
At December 27, 2005, the Company had $18,577 in cash and cash equivalents
and $45,025 in short term investments. The Company has available $55,000 in
unsecured revolving credit facilities which expire in October 2007. At December
27, 2005, 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 investing and financing activities, including its
capital expenditure requirements, through cash expected to be provided from
operations, existing balances in cash and cash equivalent and short term
investments and existing credit facilities.
The Company's obligations at December 27, 2005 are for operating leases as
follows:
2006 $ 14,519
2007 14,071
2008 14,220
2009 14,179
2010 13,833
Thereafter 113,332
--------
Total operating lease obligations $184,154
========
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
27, 2005 and during the fiscal year then ended, the Company had no positions in
futures contracts.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 2005, the FASB issued FASB Staff Position No. FAS 13-1,
ACCOUNTING FOR RENTAL COSTS INCURRED DURING A CONSTRUCTION PERIOD (FSP 13-1).
FSP 13-1 requires rental costs associated with ground or
-26-
building operating leases incurred during a construction period to be recognized
as rental expense. FSP 13-1 is effective for reporting periods beginning after
December 15, 2005. Retroactive application is permitted, but not required. Had
FSP 13-1 been effective, the impact would have been insignificant to the
Company's financial statements for fiscal years 2005, 2004 and 2003.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004). "Share-Based Payment," (SFAS 123R). SFAS 123R
is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation." Among
other items, SFAS 123R eliminates the use of the intrinsic value method of
accounting, and requires companies to recognize the cost of awards of equity
instruments granted in exchange for employee services received, based on the
grant date fair value of those awards, in the financial statements. The
effective date of SFAS 123R was the first interim period beginning after June
15, 2005; however, on April 14, 2005, the Securities and Exchange Commission
announced that the effective date of SFAS 123R was postponed until the first
annual period beginning after June 15, 2005. The Company currently recognizes
the cost of its awards of equity instruments granted in exchange for employee
services received, based on the grant date fair value of those awards in
accordance Statement of Financial Accounting Standards No. 123 in its financial
statements. Therefore, the Company does not believe the adoption of SFAS 123R
will have a significant impact to its financial statements.
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
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the chief executive officer
and the chief financial officer, of the effectiveness of the design and
operation of the disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Based upon that evaluation, the Company's chief executive
officer and chief financial officer concluded that the Company's disclosure
controls and procedures are effective, as of the end of the period covered by
this Report (December 27, 2005), in ensuring that material information relating
to Lone Star Steakhouse & Saloon, Inc. including its consolidated subsidiaries,
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC rules and forms. There were no changes in
the Company's internal control over
-27-
financial reporting during the quarter ended December 27, 2005, that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Lone Star Steakhouse & Saloon, Inc., is responsible for
establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process to provide reasonable
assurance regarding the reliability of our financial reporting for external
purposes in accordance with accounting principles generally accepted in the
United States of America. Internal control over financial reporting includes
maintaining records that in reasonable detail accurately and fairly reflect our
transactions; providing reasonable assurance that transactions are recorded as
necessary for preparation of our financial statements; providing reasonable
assurance that receipts and expenditures of company assets are made in
accordance with management authorization; and providing reasonable assurance
that unauthorized acquisition, use or disposition of company assets that could
have a material effect on our financial statements would be prevented or
detected on a timely basis. Because of its inherent limitations, internal
control over financial reporting is not intended to provide absolute assurance
that a misstatement of our financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework and criteria established
in Internal Control - Integrated Framework , issued by the Committee of
Sponsoring Organizations of the Treadway Commission. This evaluation included
review of the documentation of controls, evaluation of the design effectiveness
of controls, testing of the operating effectiveness of controls and a conclusion
on this evaluation. Based on this evaluation, management concluded that the
Company's internal control over financial reporting was effective as of December
27, 2005. Management's assessment of the effectiveness of our internal control
over financial reporting as of December 27, 2005 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as stated in their
report which is included below.
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 Report of
Management on Internal Control over Financial Reporting, that Lone Star
Steakhouse & Saloon, Inc. and subsidiaries maintained effective internal control
over financial reporting as of December 27, 2005, 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
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.
-28-
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 27, 2005, 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 27, 2005, 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 27, 2005 and
December 28, 2004, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 27, 2005 of Lone Star Steakhouse & Saloon, Inc. and subsidiaries
and our report dated March 6, 2006, (except for note 20, as to which the date is
March 11, 2006) expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Kansas City, Missouri
March 6, 2006
ITEM 9B. OTHER INFORMATION
In December 2005, the Company's Compensation/Stock Option Committee approved the
fiscal 2005 cash bonuses and stock options to be granted to executive officers
of the Company and approved the salaries of the executive officers for 2006.
The bonuses, option grants and salaries for the Company's executive
officers are as follows:
Named Executive Officer 2006 Base Salary 2005 Cash Bonus Stock Option Grants(1)
Jamie B Coulter $866,250 1,500 --
Mark Mednansky 300,000 151,500 75,000
John D. White 675,000 1,500 --
Gerald T. Aaron 275,000 45,213 --
Dee Lincoln 260,000 55,105 --
-29-
(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 Mednansky, on April 29, 2003. The agreements for
Messrs. White and Aaron have been previously filed by the Company with the
Securities and Exchange Commission and the employment agreement for Mr.
Mednansky is being filed with this Form 10-K. The material terms of the
employment agreements for Messrs. White, Aaron and Mednansky have been described
in prior Company filings with the Securities Exchange Comission. In connection
with his appointment as the Comapny's Chief Operating Officer, the Comapny is in
the process of negotiating a new employment contract with Mr. Mednansky.
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.
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.
-30-
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.
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
Number Exhibit
------ -------
**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 Mark
Mednansky, 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
-31-
*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
*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.
-32-
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 13th day of March 2006.
LONE STAR STEAKHOUSE & SALOON, INC.
(Registrant)
/s/ John D. White
-----------------------------------
John D. White
Chief Financial Officer and
Principal Accounting Officer
-33-
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 March 13, 2006
----------------------------- Principal Executive
Jamie B. Coulter Officer
/s/ John D. White Chief Financial Officer and March 13, 2006
----------------------------- Principal Accounting Officer
John D. White and Principal Financial
Officer, Executive Vice
President,
Treasurer and Director
/s/ Fred B. Chaney Chairman of the Board March 13, 2006
----------------------------- and Director
Fred B. Chaney
/s/ Anthony Bergamo Director March 13, 2006
-----------------------------
Anthony Bergamo
/s/ William B. Greene Director March 13, 2006
-----------------------------
William B. Greene
/s/ Thomas C. Lasorda Director March 13, 2006
-----------------------------
Thomas C. Lasorda
/s/ Michael A. Ledeen Director March 13, 2006
-----------------------------
Michael A. Ledeen
/s/ Clark R. Mandigo Director March 13, 2006
-----------------------------
Clark R. Mandigo
/s/ Mark Saltzgaber Director March 13, 2006
-----------------------------
Mark Saltzgaber
-34-
CONSOLIDATED FINANCIAL STATEMENTS
Lone Star Steakhouse & Saloon, Inc.
Years Ended December 27, 2005, December 28, 2004, and December 30, 2003
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 27, 2005, and December 28, 2004..F-2
Consolidated Statements of Income for the years ended December 27, 2005,
December 28, 2004, and December 30, 2003.................................F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 27, 2005, December 28, 2004, and December 30, 2003..............F-5
Consolidated Statements of Cash Flows for the years ended
December 27, 2005, December 28, 2004, and December 30, 2003..............F-6
Notes to Consolidated Financial Statements..................................F-8
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 27,
2005, and December 28, 2004, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 27, 2005. 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 27, 2005, and December
28, 2004, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 27, 2005, in conformity
with U.S. generally accepted accounting principles.
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 27, 2005, 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 6, 2006,
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Kansas City, Missouri
March 6, 2006, except for
Note 20, as to which the
date is March 11, 2006
F-1
Lone Star Steakhouse & Saloon, Inc.
Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 27, December 28,
2005 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 18,577 $ 38,515
Short-term investments 45,025 33,500
----------------------
63,602 72,015
Inventories 12,859 12,765
Deferred income taxes 8,888 7,532
Prepaid insurance deposits 16,346 14,537
Other 8,876 6,225
----------------------
Total current assets 110,571 113,074
Property and equipment:
Land 127,273 118,672
Buildings 185,936 174,628
Leasehold improvements 125,507 118,203
Equipment 117,968 107,872
Furniture and fixtures 21,418 19,267
----------------------
578,102 538,642
Less accumulated depreciation and amortization 237,674 217,837
----------------------
340,428 320,805
Deferred compensation plan investments 17,646 13,903
Other assets:
Goodwill 12,219 11,513
Intangible assets, net 8,960 9,964
Deferred income taxes 24,013 24,434
Other 3,976 4,599
----------------------
49,168 50,510
----------------------
Total assets $517,813 $498,292
======================
F-2
December 27, December 28,
2005 2004
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,655 $ 13,845
Sales tax payable 3,110 2,817
Accrued payroll 10,322 9,947
Real estate taxes 3,315 3,239
Accrued self-insurance 21,406 15,094
Gift certificates 11,156 10,973
Income taxes payable -- 9,786
Other 7,952 8,051
-------------------------
Total current liabilities 69,916 73,752
Long-term liabilities, principally deferred compensation
obligations 24,290 21,263
Deferred rent obligations 11,266 10,496
-------------------------
Total liabilities 105,472 105,511
Stockholders' equity:
Preferred stock, $0.01 par value, 2,000,000 shares
authorized; none issued -- --
Common stock, $0.01 par value, 98,000,000 shares authorized;
20,716,726 shares issued and outstanding (20,469,540 in 2004) 207 205
Additional paid-in capital 143,797 139,570
Retained earnings 272,000 256,669
Common stock held by trust (3,663) (3,663)
-------------------------
Total stockholders' equity 412,341 392,781
-------------------------
Total liabilities and stockholders' equity $ 517,813 $ 498,292
=========================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Income
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended
--------------------------------------------
December 27, December 28, December 30,
2005 2004 2003
--------------------------------------------
Net sales $ 669,355 $ 667,546 $ 589,235
Costs and expenses:
Costs of sales 235,903 238,925 211,785
Restaurant operating expenses 332,648 315,621 273,640
Depreciation and amortization 19,362 20,181 20,638
Provision for impaired assets 410 1,167 --
-----------------------------------------
Restaurant costs and expenses 588,323 575,894 506,063
General and administrative expenses 46,650 45,269 43,346
Hurricane disaster relief donation 1,853 -- --
Provision for casualty losses 535 -- --
Noncash stock compensation expense 1,575 1,193 1,474
-----------------------------------------
Income from operations 30,419 45,190 38,352
Other income, net 1,258 1,737 553
-----------------------------------------
Income from continuing operations before income taxes 31,677 46,927 38,905
Provision for income taxes 10,371 15,503 11,850
-----------------------------------------
Income from continuing operations 21,306 31,424 27,055
Discontinued operations:
Loss from operations of discontinued restaurants (627) (311) (11,017)
Income tax benefit 10,282 100 2,207
-----------------------------------------
Income (loss) on discontinued operations 9,655 (211) (8,810)
-----------------------------------------
Net income $ 30,961 $ 31,213 $ 18,245
=========================================
Basic earnings per share:
Continuing operations $ 1.04 $ 1.50 $ 1.30
Discontinued operations 0.47 (0.01) (0.42)
-----------------------------------------
Basic earnings per share $ 1.51 $ 1.49 $ 0.88
=========================================
Diluted earnings per share:
Continuing operations $ 0.93 $ 1.34 $ 1.14
Discontinued operations 0.43 (0.01) (0.37)
-----------------------------------------
Diluted earnings per share $ 1.36 $ 1.33 $ 0.77
=========================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Stockholders' Equity
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Common Stock Additional
Preferred -------------------- Paid-In
Stock Number Amount Capital
---------------------------------------------
Balance, December 31, 2002 -- 20,994,608 $210 $189,908
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 ($0.645 per share) -- -- -- --
Noncash stock compensation expense -- -- -- 1,043
Common stock held by trust (177,145 shares) -- -- -- --
Comprehensive income:
Net income -- -- -- --
Foreign currency translation adjustments -- -- -- --
Comprehensive income
---------------------------------------------
Balance, December 30, 2003 -- 21,072,790 211 177,844
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 ($0.70 per share) -- -- -- --
Noncash stock compensation expense -- -- -- 362
Common stock issued in purchase of TXCC -- 119,485 1 2,678
Net income -- -- -- --
---------------------------------------------
Balance, December 28, 2004 -- 20,469,540 205 139,570
Stock options exercised -- 247,186 2 2,451
Tax effect related to options exercised -- -- -- 1,148
Tax effect of upward repricing of stock options -- -- -- (1,744)
Cash dividends ($0.76 per share) -- -- -- --
Noncash stock compensation expense -- -- -- 2,372
Net income -- -- -- --
---------------------------------------------
Balance, December 27, 2005 -- 20,716,726 $207 $143,797
=============================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Stockholders' Equity
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Accumulated
Common Other
Retained Stock Held Comprehensive
Earnings Held by Trust (Loss) Income Total
--------------------------------------------------
Balance, December 31, 2002 $235,603 $ -- $(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 ($0.645 per share) (13,560) -- -- (13,560)
Noncash stock compensation expense -- -- -- 1,043
Common stock held by trust (177,145 shares) -- (3,663) -- (3,663)
Comprehensive income:
Net income 18,245 -- -- 18,245
Foreign currency translation adjustments -- -- 11,960 11,960
--------
Comprehensive income 30,205
--------------------------------------------------
Balance, December 30, 2003 240,288 (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 ($0.70 per share) (14,832) -- -- (14,832)
Noncash stock compensation expense -- -- -- 362
Common stock issued in purchase of TXCC -- -- -- 2,679
Net income 31,213 -- -- 31,213
--------------------------------------------------
Balance, December 28, 2004 256,669 (3,663) -- 392,781
Stock options exercised -- -- -- 2,453
Tax effect related to options exercised -- -- -- 1,148
Tax effect of upward repricing of stock options -- -- -- (1,744)
Cash dividends ($0.76 per share) (15,630) -- -- (15,630)
Noncash stock compensation expense -- -- -- 2,372
Net income 30,961 -- -- 30,961
--------------------------------------------------
Balance, December 27, 2005 $272,000 $(3,663) $ -- $412,341
==================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5A
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Cash Flows
(IN THOUSANDS)
Year Ended
------------------------------------------
December 27, December 28, December 30,
2005 2004 2003
------------------------------------------
OPERATING ACTIVITIES
Net income $ 30,961 $ 31,213 $ 18,245
Adjustments to reconcile net income to net cash
provided by operating activities of continuing
operations:
Depreciation 21,387 21,796 22,700
Amortization 1,038 1,067 1,047
Noncash stock compensation 1,575 1,193 1,474
Provision for impaired assets 410 1,167 --
Loss (gain) on sales of assets 164 (1,250) 42
Provision for casualty losses 535 -- --
Deferred income taxes (2,746) 2,964 (5,323)
(Income) loss from discontinued operations (9,655) 211 8,810
Changes in operating assets and liabilities,
net of the effects of the acquisitions:
Inventories (94) 598 (490)
Prepaid insurance deposits (1,809) (7,624) (6,913)
Other current assets (337) 43 407
Accounts payable (1,190) 45 (1,212)
Accrued self-insurance 5,777 7,573 7,296
Income taxes payable (2,000) (806) 7,017
Other liabilities 3,127 2,869 977
--------------------------------------
Net cash provided by operating activities of
continuing operations 47,143 61,059 54,077
INVESTING ACTIVITIES
Acquisitions, net of cash acquired (1,200) (12,579) --
Purchases of short-term investments (11,525) (33,500) --
Purchases of property and equipment (44,725) (22,245) (6,928)
Proceeds from sales of assets 1,036 2,035 1,730
Other 590 955 (2,908)
--------------------------------------
Net cash used in investing activities of
continuing operations (55,824) (65,334) (8,106)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 2,453 11,454 10,244
Common stock repurchased and retired -- (51,410) (23,833)
Dividends paid (15,630) (14,832) (13,560)
--------------------------------------
Net cash used in financing activities of
continuing operations (13,177) (54,788) (27,149)
F-6
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Cash Flows (continued)
(IN THOUSANDS)
Year Ended
------------------------------------------
December 27, December 28, December 30,
2005 2004 2003
------------------------------------------
Effect of exchange rate changes on cash $ -- $ -- $ 1,486
Cash flow of discontinued operations
(revised):
Operating cash flows (300) (277) 2,525
Investing cash flows 2,220 1,625 8,028
--------------------------------------
Total 1,920 1,348 10,553
--------------------------------------
Net (decrease) increase in cash and cash
equivalents (19,938) (57,715) 30,861
Cash and cash equivalents at beginning of year 38,515 96,230 65,369
--------------------------------------
Cash and cash equivalents at end of year $ 18,577 $ 38,515 $ 96,230
======================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes $ 13,744 $ 14,610 $ 6,875
======================================
NONCASH OPERATING ACTIVITIES
Reversal of income tax contingency reserves $ 10,100 $ -- $ --
======================================
NONCASH INVESTING AND FINANCING ACTIVITIES
Shares issued in connection with acquisition $ -- $ 2,679 $ --
======================================
Shares issued to trust $ -- $ -- $ 3,663
======================================
Impact of litigation settlement on deferred taxes
and additional paid-in capital $ 1,744 $ -- $ --
======================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
December 27, 2005
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 Steak House (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 27, 2005, the Company owns and operates
250 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.
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
F-8
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)
in excess of the federal depository insurance limit. The Company has
cash equivalents of approximately $6,726 and $13,626 at December 27,
2005, and December 28, 2004, respectively, in money market mutual
funds. The Company's short-term investments of $45,025 and $33,500
at December 27, 2005, and December 28, 2004, respectively, 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
Cash and cash equivalents include currency on hand, demand deposits
with banks or other financial institutions, credit card receivables,
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 $45,025 and $33,500 at
December 27, 2005, and December 28, 2004, respectively, primarily
consist of investments in auction-rate securities with contractual
maturities of up to 30 years. These auction-rate securities have
interest reset 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-9
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 27, 2005, and December 28, 2004. 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 lives of
the assets are expensed as incurred.
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)
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 three to seven years, which is the
estimated useful life of the assets.
o Rent Expense
Rent expense is recognized on a straight-line basis over the
expected term of the lease, which includes cancelable optional
renewal periods that are reasonably assured to be exercised and
where failure to exercise such renewal options would result in an
economic penalty to the Company.
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. The Company applies the
provisions of Statement of Financial Accounting Standards (SFAS) No.
142 requiring that goodwill and intangible assets deemed to have
indefinite lives are not amortized but are 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
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)
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 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 finite-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 initially 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-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)
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 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 27, 2005, December 28, 2004, and December
30, 2003, was $19,782, $17,502, and $15,033, 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 and
gift cards are recorded as a liability at the time of sale. Upon
redemption of gift certificates, sales are recognized.
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)
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 shares
issuable to settle the deferred compensation liabilities have been
included only for periods where their effect has been dilutive.
o Segment Reporting
Due to the similar economic characteristics, as well as a single
type of product, production process, distribution system, and
similar customers, the Company reports the operations of its
different concepts on an aggregated basis and does not separately
report segment information. Revenues from external customers are
derived primarily from the sale of food and beverage sales. The
Company does not rely on any major customers as a source of revenue.
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 2005, 2004, and 2003 each included 52 weeks of
operations.
o Cash Flows from Discontinued Operations
In fiscal 2005, the Company has separately disclosed the operating,
investing, and financial position of the cash flows attributable to
its discontinued operations, which in prior periods were reported on
a combined basis as a single amount.
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 Recently Issued Accounting Standards
In October 2005, the Financial Accounting Standards Board (FASB)
issued FASB Staff Position 13-1, ACCOUNTING FOR RENTAL COSTS
INCURRED DURING A CONSTRUCTION PERIOD (FSP 13-1). FSP 13-1 requires
rental costs associated with ground or building operating leases
incurred during a construction period to be recognized as rental
expense. FSP 13-1 is effective for reporting periods beginning after
December 15, 2005. Retroactive application is permitted, but not
required. Had FSP 13-1 been effective, the impact would have been
insignificant to the Company's financial statements for fiscal years
2005, 2004, and 2003.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS 123R). SFAS 123R is a revision of SFAS No.
123, Accounting for Stock-Based Compensation. Among other items,
SFAS 123R eliminates the use of the intrinsic value method of
accounting and requires companies to recognize the cost of awards of
equity instruments granted in exchange for employee services
received, based on the grant date fair value of those awards, in the
financial statements. The effective date of SFAS 123R was the first
interim period beginning after June 15, 2005; however, on April 14,
2005, the Securities and Exchange Commission announced that the
effective date of SFAS 123R was postponed until the first annual
period beginning after June 15, 2005. The Company currently
recognizes the cost of its awards of equity instruments granted in
exchange for employee services received, based on the grant date
fair value of those awards in accordance with SFAS No. 123 in its
financial statements. Therefore, the Company does not believe the
adoption of SFAS 123R will have a significant impact to its
financial statements.
o Reclassifications
Certain amounts from the prior years have been reclassified to
conform with the current year's presentation.
F-15
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 2005 2004
-----------------------------------
Amortized intangible assets:
Gross carrying amount:
Licenses 20 years $ 9,004 $ 8,970
Intellectual properties 10 years 9,839 9,839
---------------------
Subtotal 18,843 18,809
Accumulated amortization:
Licenses (3,122) (3,034)
Intellectual property (6,917) (5,967)
---------------------
Subtotal (10,039) (9,001)
---------------------
Net amortized intangible assets $ 8,804 $ 9,808
=====================
Unamortized intangible assets:
Goodwill $ 12,219 $ 11,513
Other 156 156
---------------------
$ 12,375 $ 11,669
=====================
Aggregate amortization expense $ 1,038 $ 1,067
=====================
The Company has estimated that amortization expense will amount to approximately
$1,054 annually for 2006, 2007, and 2008, $158 for 2009, and $69 for 2010.
Licenses primarily consist of liquor licenses, which are amortized over their
estimated useful lives to their estimated residual values and are reviewed for
impairment in accordance with SFAS No. 144, ACCOUNTING FOR IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS.
The Company applies the provisions of SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, which requires that goodwill and certain intangible assets
deemed to have indefinite lives are not amortized but are subject to annual
impairment tests. The Company performed annual tests for impairment of goodwill
and has concluded that no impairment existed for the fiscal years ended 2005,
2004, and 2003; accordingly, no impairment losses were recorded.
F-16
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
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. During fiscal 2005, the Company made no purchases of
its common stock. The Company purchased 2,072,800 and 1,132,500 shares of its
common stock at average prices of $24.80 and $21.05 per share during the fiscal
years ended 2004 and 2003, 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. At
December 27, 2005, the Company may purchase up to 2,026,190 shares of its common
stock pursuant to its current authorization by the Board of Directors.
In September 2002, the Company adopted a Stock Option Deferred Compensation Plan
(the Plan), which allows certain key executives to defer compensation arising
from the exercise of stock options granted under the Company's 1992 Incentive
and Nonqualified Stock Option Plan. 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.
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 27, 2005,
F-17
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)
the Trust held 177,145 shares of the Company's common stock. Included in noncash
stock compensation expense for the years ended December 27, 2005, December 28,
2004, and December 30, 2003, were (credits) charges of $(797), $831, and $431,
respectively, relating to the changes in market price for such shares.
4. TERM REVOLVERS
The Company has 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 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 0.25% per annum on the daily unused
amount of the credit facility. At December 27, 2005, and at December 28, 2004,
there were no borrowings outstanding pursuant to the credit facility.
The Company also has entered into a $5,000 revolving term loan agreement with a
bank, under which no borrowings were outstanding at December 27, 2005, and
December 28, 2004. The term loan agreement matures in October 2007. The interest
rate is at 0.50% below the daily prime rate as published in THE WALL STREET
JOURNAL. In addition, the Company pays a facility fee of 0.25% per annum on the
daily unused portion of the credit facility.
5. PREFERRED STOCK AND REDEMPTION OF PREFERENCE RIGHTS
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.
F-18
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. STOCK OPTIONS
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 nonemployee 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.
As 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 is charged to compensation expense over the vesting period of the
options.
The aggregate noncash stock compensation expense, including amounts attributable
to noncash stock compensation arising from the common shares held by the Trust
as described in Note 3, for the years ended December 27, 2005, December 28,
2004, and December 30, 2003, was $1,575, $1,193, and $1,474, respectively.
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 2005 and 2004, respectively:
risk-free interest rates of 4.2% and 4.0%, volatility factors of the expected
market price of the Company's common stock of 0.295 and 0.201, a
weighted-average expected life of the option of four years and five years, and a
dividend yield of 2.5% and 2.5%. There were no stock options granted in fiscal
2003.
2005 2004 2003
-------------------------------------
Weighted-average fair value of options granted during
the year $6.625 $5.80 $ --
F-19
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 27, 2005, December 28, 2004, and December 30, 2003, is as
follows:
2005 2004 2003
-----------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Options Exercise Options Exercise Options
Price (000's) Price (000's) Price (000's)
-----------------------------------------------------------------
Outstanding at beginning of year $15.02 4,597 $ 8.98 4,519 $8.98 5,867
Granted 27.25 305 27.67 1,453 - -
Exercised 9.46 (247) 8.48 (1,350) 9.58 (1,334)
Canceled 27.06 (226) 11.95 (25) 9.84 (14)
------- ------- -------
Outstanding at end of year 16.61 4,429 15.02 4,597 8.98 4,519
======= ======= =======
For options outstanding as of December 27, 2005, the number of options,
weighted-average exercise price, and weighted-average remaining contract life
for each group of options are as follows:
Options Outstanding
--------------------------------------------------------------------------------
Number Weighted- Weighted-
Outstanding at Average Average
December 27, Exercise Remaining
Range of Prices 2005 Price Contract Life
--------------------------------------------------------------------------------
(In Thousands)
$7.43 to $9.00 1,496 $ 8.54 1.9 years
$12.47 to $18.81 1,379 13.03 1.5 years
$22.25 to $31.24 1,554 27.55 9.1 years
F-20
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 number of shares and weighted-average exercise price of options exercisable
at December 27, 2005, are as follows:
Options Exercisable
--------------------------------------------------------------------------------
Number Weighted-
Exercisable at Average
December 27, Exercise
Range of Prices 2005 Price
--------------------------------------------------------------------------------
(In Thousands)
$7.43 to $9.00 1,496 $ 8.54
$12.47 to $18.81 1,379 13.03
$22.25 to $31.24 44 25.85
7. RELATED-PARTY TRANSACTIONS
The Company leases on a month-to-month basis document storage space and parking
space for 2004 and 2003 from entities owned by Jamie B. Coulter, the Company's
Chief Executive Officer. Total rental fees paid to these related entities in
2005, 2004, and 2003 were $12, $19, and $26, respectively.
The Company believes the charges reimbursed are at least as favorable as the
charges that would have been incurred for similar services or purchases from
unaffiliated third parties.
8. LEASES
The Company leases certain facilities under noncancelable operating leases
having terms expiring between 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 2005, 2004, and 2003
was $16,455, $16,017, and $12,270, respectively, including contingent rentals of
approximately $1,759, $1,456, and $832, respectively.
F-21
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
8. LEASES (CONTINUED)
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 27, 2005:
2006 $ 14,519
2007 14,071
2008 14,220
2009 14,179
2010 13,833
Thereafter 113,332
--------
Total minimum lease payments $184,154
========
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share.
2005 2004 2003
-------------------------------------------------
Basic earnings per share computation:
Numerator:
Income from continuing operations $ 21,306 $ 31,424 $ 27,055
Discontinued operations, net of income tax 9,655 (211) (8,810)
-------------------------------------------------
Net income $ 30,961 $ 31,213 $ 18,245
=================================================
Denominator:
Weighted-average number of shares outstanding 20,416,840 20,962,919 20,801,894
=================================================
Basic earnings per share:
Continuing operations $ 1.04 $ 1.50 $ 1.30
Discontinued operations 0.47 (0.01) (0.42)
-------------------------------------------------
Basic earnings per share $ 1.51 $ 1.49 $ 0.88
=================================================
F-22
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 (CONTINUED)
2005 2004 2003
--------------------------------------------------
Diluted earnings per share computation:
Numerator:
Income from continuing operations $ 21,306 $ 31,424 $ 27,055
Adjustment for assumed settlement of
deferred compensation liabilities (498) -- --
--------------------------------------------------
Diluted income from continuing operations 20,808 31,424 27,055
Discontinued operations, net of income tax 9,655 (211) (8,810)
--------------------------------------------------
Diluted net income $ 30,463 $ 31,213 $ 18,245
==================================================
Denominator:
Weighted-average number of shares outstanding 20,416,840 20,962,919 20,801,894
Effect of dilutive employee stock options 1,815,561 2,433,792 2,961,703
Effect of shares issuable to settle deferred
compensation liabilities 177,145 -- --
--------------------------------------------------
22,409,546 23,396,711 23,763,597
==================================================
Diluted earnings per share:
Continuing operations $ 0.93 $ 1.34 $ 1.14
Discontinued operations 0.43 (0.01) (0.37)
--------------------------------------------------
Diluted earnings per share $ 1.36 $ 1.33 $ 0.77
==================================================
10. INCOME TAXES
The components of the provision for income taxes from continuing operations
consist of the following:
2005 2004 2003
-------------------------------------
Current tax (benefit) expense:
Federal $ 10,803 $ 11,039 $ 15,180
State 2,314 1,500 1,993
-------------------------------------
Total current tax expense 13,117 12,539 17,173
Deferred tax (benefit) expense:
Federal (2,423) 2,660 (5,129)
State (323) 304 (194)
-------------------------------------
Total deferred tax (benefit) expense (2,746) 2,964 (5,323)
-------------------------------------
Total provision for income taxes $ 10,371 $ 15,503 $ 11,850
=====================================
F-23
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 total (benefit) provision for income taxes is as follows:
2005 2004 2003
--------------------------------------
Total (benefit) provision for income taxes is
as follows:
Continuing operations $ 10,371 $ 15,503 $ 11,850
Discontinued operations (10,282) (100) (2,207)
--------------------------------------
$ 89 $ 15,403 $ 9,643
======================================
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 from continuing operations is reconciled as follows:
2005 2004 2003
----------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
----------------------------------------------------------------------
Income tax expense at federal
statutory rate $11,087 35% $16,425 35% $13,616 35%
State tax expense, net 919 3 1,173 2 973 2
Nondeductible foreign losses - - - - 1,239 3
TIP and work opportunity credits (2,990) (9) (2,843) (6) (2,479) (6)
Other items, net 1,355 4 748 2 (1,499) (4)
----------------------------------------------------------------------
Provision for income taxes $10,371 33% $15,503 33% $11,850 30%
======================================================================
In the fourth quarter of fiscal 2005, the Company recognized an income tax
benefit of $10,100 resulting from the release of tax contingency reserves. The
adjustment of the tax contingency reserves related primarily to the resolution
of the Company's investments in Australia, which were discontinued in fiscal
2003. The tax benefits are included in the tax provision for discontinued
operations.
F-24
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)
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 27, December 28,
2005 2004
------------------------------
Deferred tax assets:
TXCC NOL carryforward $ 4,340 $ 5,282
Deferred rent liabilities 3,700 3,387
Accrued liabilities 10,893 8,238
Stock-based compensation 13,254 15,158
Deferred compensation 7,244 5,818
Other -- 1,050
-------------------------
Total deferred tax assets 39,431 38,933
Deferred tax liabilities:
Property and equipment 1,003 4,635
Intangible assets 2,191 1,596
Other 3,336 736
-------------------------
Total deferred tax liabilities 6,530 6,967
-------------------------
Net deferred tax assets $32,901 $31,966
=========================
In connection with the acquisition of TXCC, the Company has net operating loss
carryforwards of approximately $12,401 to reduce future taxable income. Such
carryforwards expire at various times through 2023. At December 27, 2005, the
Company has recorded a deferred tax asset of $4,340 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.
F-25
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
11. PROVISION FOR IMPAIRED ASSETS
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 and judgments, independent appraisals of fair
value, and projections as considered necessary.
During the fourth quarter of 2005 and 2004, the Company recorded a provision of
$410 and $1,167, respectively, to write down the estimated fair value of
impaired properties relating to five underperforming restaurants in each year.
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
carrying value of the related assets is not significant.
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
F-26
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
12. DISCONTINUED OPERATIONS (CONTINUED)
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 domestic restaurants closed subsequent to
fiscal 2001, which meet the criteria for such presentation.
2005 2004 2003
--------------------------------------
Loss from operations $ (627) $ (311) $(11,017)
Income tax benefit 10,282 100 2,207
--------------------------------------
Net income (loss) from discontinued operations $ 9,655 $ (211) $ (8,810)
======================================
Net sales from discontinued operations $ 1,353 $ 1,981 $ 27,797
======================================
The income tax benefit includes $10,100 reflecting the release of a tax
contingency reserve related to Australian tax matters which were resolved in
fiscal 2005 (see Note 10).
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 2005, 2004, and 2003, the Company's contributions to
the Plans were $3,142, $3,509, and $2,146, respectively.
F-27
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
14. HURRICANE RELATED COSTS
In connection with disaster relief for the victims of Hurricane Katrina, the
Company donated to the American Red Cross an amount of $1,853. The amount
donated was 100% of its restaurant sales on Labor Day, September 5, 2005.
In addition, the Company provided $535 as a casualty loss provision associated
with its restaurants that were damaged by Hurricane Katrina. The principal
amount of such losses relate to estimated property damages for which insurance
recoveries will not be available due to limitations of insurance deductible
amounts.
15. QUARTERLY FINANCIAL SUMMARIES (UNAUDITED)
The table below sets forth consolidated quarterly results of operations for
fiscal 2005 and 2004. The results have been adjusted to reflect the impact of
certain discontinued operations to the extent such amounts were reclassified.
Fiscal 2005 and 2004 each include 52 weeks of operations. Quarters one, two, and
three each include 12 weeks of operations, and the fourth quarter includes 16
weeks of operations.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------
2005
Net sales $164,899 $153,189 $148,409 $202,858
Income from continuing operations 11,020 5,387 1,063 3,836
Net income (C) 10,909 5,257 963 13,832
Basic earnings per share (B):
Continuing operations 0.54 0.26 0.05 0.19
Net income 0.54 0.26 0.05 0.67
Diluted earnings per share (B):
Continuing operations 0.50 0.24 0.05 0.15
Net income 0.49 0.24 0.04 0.60
F-28
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 Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------
2004
Net sales (A) $160,040 $155,068 $147,608 $204,830
Income from continuing operations 10,945 5,309 4,505 10,665
Net income 11,002 5,261 4,409 10,541
Basic earnings per share (B):
Continuing operations 0.52 0.25 0.21 0.52
Net income 0.52 0.25 0.21 0.52
Diluted earnings per share (B):
Continuing operations 0.46 0.22 0.17 0.47
Net income 0.46 0.22 0.17 0.47
(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. See
Note 19 for additional information.
(B) 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.
(C) Income for the fourth quarter of fiscal 2005 includes tax benefits arising
from the release of tax contingency reserves in the aggregate amount of
$10,100 which is included in discontinued operations (see Note 10).
16. OTHER INCOME, NET
The components of other income, net are as follows:
2005 2004 2003
-----------------------------------
Interest income $ 2,028 $ 1,394 $ 789
Interest expense, principally credit
availability fees (167) (185) (194)
(Loss) gain on sale of assets (164) 1,250 (42)
Foreign exchange loss (390) (521) --
Other expense (49) (201) --
-----------------------------------
$ 1,258 $ 1,737 $ 553
===================================
F-29
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
17. LITIGATION
On August 15, 2005, the Company received an Order and Final Judgment from the
Court of Chancery of the State of Delaware relating to the Stipulation of
Settlement of the class action and derivative lawsuit brought by the California
Public Employees Retirement System (CalPERS) against the Company. The settlement
resolves all claims raised by the parties in litigation. In connection with the
settlement, the parties agreed to release each other from any and all current
and future claims related to the litigation. As part of the settlement, certain
of the Company's current and former Directors agreed to an upward repricing of
certain stock options or personally make payments to the Company as additional
proceeds in connection with certain options previously exercised. In addition,
the Company's insurance provider made a payment in the amount of $3,000 under
the Company's Directors, Officers, and Corporate insurance policy, of which
$2,500 was an award for attorneys' fees and expenses on behalf of CalPERS. The
remaining $500 was paid to the Company for reimbursement of legal costs and
expenses and is included in general and administrative expenses in the
accompanying consolidated financial statements.
The aggregate effect of the repricing provisions of the settlement will result
in additional proceeds to the Company of approximately $4,700 if all options are
ultimately exercised. The Company received $115 in cash from certain Directors
which represented additional proceeds from options previously exercised, and
accordingly, such amounts were recorded as additional paid-in capital. The
upward repricing of the remaining stock options will result in additional
proceeds when the options are exercised which will be credited to additional
paid-in capital. In connection with the upward repricing of the stock options,
the Company recorded a charge to additional paid-in capital in the amount of
$1,744 to reflect a reduction of the related deferred tax assets applicable to
such repricing.
The Company is involved from time to time in litigation arising in the ordinary
course of business. The Company believes the outcome of such matters will not
have a material adverse effect on its consolidated financial position or results
of operations.
18. DIVIDEND DECLARATION
On December 15, 2005, the Board of Directors declared the Company's quarterly
cash dividend of $0.195 per share, payable January 10, 2006, to stockholders of
record on December 27, 2005. In addition, on January 9, 2006, the Board of
Directors increased its quarterly dividend from $0.195 to $0.205 beginning in
the first quarter of 2006.
F-30
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
In May 2005, the Company acquired for $1,200 in cash the remaining 40% interest
of certain limited partners in TXCC-Preston, L.P., a Texas limited partnership
in which the Company owned a 60% interest. The limited partnerships owned two of
the TXCC restaurants that were operated by the Company.
F-31
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
20. SUBSEQUENT EVENT
On March 11, 2006, the Company's Board of Directors approved management's
recommendation to close certain Lone Star Steakhouse & Saloon stores. As a
result, the Company will immediately close 30 underperforming stores. This group
of stores consists of 13 owned locations and 17 leased locations with aggregate
net carrying values of land, buildings, leasehold improvements and equipment of
approximately $10,577, $6,014, $3,984 and $812, respectively and deferred rent
obligations of $1,343. These identified store closings resulted from
management's analysis of not only the performance of these stores but also
related return on investment targets, the geographical location of these stores
as compared to other Company owned stores, and demographical changes in the
local markets surrounding these stores.
Additionally, the Company expects to exit these stores through the abandonment
or sale of such locations. The operations of these closed stores for the years
ended December 27, 2005, December 28, 2004, and December 30, 2003, are as
follows:
2005 2004 2003
-----------------------------------
Net sales $32,900 $35,589 $36,787
Loss from operations 4,637 2,298 1,267
F-32