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 26,2000
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______ to ______
Commission file number 0-19907
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LONE STAR STEAKHOUSE & SALOON, INC.
(Exact name of Registrant as specified in its charter)
Delaware 48-1109495
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
224 East Douglas, Suite 700
Wichita, Kansas 67202
(Address of principal executive offices) (Zip code)
(316) 264-8899
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes /X/ No / /
As of March 19, 2001, the aggregate market value of the Registrant's
Common Stock held by non-affiliates of the Registrant was $203,356,230. Solely
for the purpose of this calculation, shares held by directors and officers of
the Registrant have been
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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 19, 2001, there were 24,031,614 shares outstanding of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III will be incorporated by reference to
certain portions of a definitive proxy statement, which is expected to be filed
by the Registrant within 120 days after the close of its fiscal year.
TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Business.................................................................3
2. Properties...............................................................9
3. Legal Proceedings.......................................................11
4. Submission of Matters to a Vote of Security Holders.....................11
PART II
5. Market for the Registrant's Common Equity
and Related Stockholder Matter........................................11
6. Selected Financial Data.................................................12
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................14
7a. Quantitative and Qualitative Disclosures about Market Risk..............22
8. Financial Statements and Supplementary Data.............................22
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................22
PART III
10. Directors and Executive Officers of the Registrant......................22
11. Executive Compensation..................................................22
12. Security Ownership of Certain Beneficial Owners and Management..........22
13. Certain Relationships and Related Transactions..........................22
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........23
Signatures..............................................................26
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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,
the impact of specific events such as the outbreak of "mad cow disease" or
"foot/mouth disease", retail merchandise, labor, and employee benefits, our
ability to continue to acquire and retain prime locations at acceptable lease or
purchase terms, 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
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Background
As of March 19, 2001, Lone Star Steakhouse & Saloon, Inc. (the
"Company") owned and operated 243 mid-priced, full service, casual dining
restaurants located in the United States, which operate under the trade name
Lone Star Steakhouse & Saloon ("Lone Star" or " Lone Star Steakhouse & Saloon"),
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. In addition, a licensee operates three
Lone Star restaurants in California and a licensee operates a Del Frisco's
restaurant in Orlando.
Internationally, the Company operates 26 Lone Star Steakhouse &
Saloon restaurants in Australia. In addition, licensees operate a Lone Star
Steakhouse & Saloon restaurant in Guam and a Lone Star theme restaurant under
the trade name Texas Star Steakhouse & Saloon in Canada. The Company does not
own exclusive rights to the Lone Star name in Canada.
Steak continues to be one of the most frequently ordered dinner
entrees at restaurants. In 2000, the United States Department of Agriculture
estimated the average annual per capita consumption of beef to be 69.6 pounds,
up slightly from 1999. Company management believes the limited menu of its
restaurants, which concentrates primarily on high quality USDA choice-graded
steaks, and the appeal of its "Texas Roadhouse" ambiance, distinguishes the Lone
Star restaurants and provides the Company with a competitive advantage. Company
management believes its emphasis on attentive service and consistent, high
quality food products distinguishes its upscale concepts and provides them with
a competitive advantage.
The Company's focus on selection, training and in-store execution
along with Lone Star's continued marketing initiatives, the successful creation
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 three
(3) distinct steak restaurant concepts, it has positioned itself as "The Steak
Company".
Restaurant Concepts
Lone Star restaurants are positioned as "destination restaurants" that
attract loyal clientele. The Lone Star restaurants embrace a Texas-style concept
that features Texas artifacts and country and western music. The authentic
"Texas Roadhouse" concept was developed to capitalize on the enduring popularity
of Texas
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related themes. Lone Star is further distinguished by its high quality, USDA
choice-graded steaks which are hand-cut fresh daily at each restaurant and
mesquite grilled to order. Meals are generous "Texas-sized" portions and full
bar service is available. The exciting and vibrant atmosphere created by the
restaurants' "Texas Roadhouse" ambiance includes neon beer signs and specially
selected upbeat country 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 2000 of approximately $12.50 at lunch and
$17.00 at dinner.
Del Frisco's Double Eagle Steak House is designed to serve a sophisticated
clientele, including business related dining occasions, and is the recipient of
the prestigious Ivy Award and has been elected to the fine dining hall of fame.
The Del Frisco's concept embraces an elegant and timeless early twentieth
century motif. The concept features old ways of cooking, such as master broiling
and roasting. Del Frisco's decor and ambiance include dark woods, fabric walls,
fireplaces, separate dining rooms and soft background music. These elements
enhance the dining experience and establish a distinct identity for Del
Frisco's. Del Frisco's is further distinguished by its high quality, USDA
prime-graded steaks hand cut in each restaurant. Del Frisco's restaurants serve
dinner only, except for the New York City restaurant which is also open for
lunch, and are generally open Monday through Saturday with an average guest
check of approximately $80.00.
Sullivan's Steakhouse was named after the legendary boxer, John L.
Sullivan, and embraces a Chicago style 1940's steakhouse theme with nostalgic
influences that feature jazz and swing music. In 1997, Sullivan's was named the
hot concept of the year by Nation's Restaurant News. The bar features live jazz
music several nights a week. The decor includes an open kitchen, separate dining
rooms, dark wood paneling, carpeted floors, warm lighting, and white
tablecloths. Sullivan's is distinguished by its high quality, well-aged,
mid-west grain fed steaks, chops, and seafood. Most Sullivan's restaurants serve
dinner only, and are generally open Monday through Sunday with an average guest
check of approximately $57.00.
Corporate Strategy
During 2000, the Company opened one Lone Star restaurant, one Sullivan's
restaurant and two Del Frisco's restaurants. In addition, the Company's licensee
in Canada opened one restaurant.
During 2000, the Company closed (i) 14 restaurants in Australia, (ii) 24
domestic Lone Star restaurants and (iii) one Mexican food restaurant. The
Company periodically assesses the performance and potential of each of its
restaurants and selectively closes those which future performance is deemed
marginal.
As of March 19, 2001, the Company had eight Lone Star restaurants where
construction is substantially completed, but will not open for business until
these restaurants can be adequately staffed with personnel who meet the
Company's required standards. The Company expects to open all of these
restaurants in 2001.
In 1998, the Company suspended the aggressive growth of the Lone Star
concept to focus on implementing certain improvement initiatives in existing
restaurants. These improvements include (a) improving operational consistency
and guest satisfaction at existing Lone Star restaurants; (b) improving
management and financial systems including installing Point of Sale (P.O.S.)
Systems in all units; (c) improving the quality of management at its restaurants
and on the regional manager and general manager levels; and (d) testing and
implementing selective marketing and advertising programs. A number of these
improvements have been successfully implemented and management continues to
focus on improving operation efficiencies at its Lone Star restaurants. In
fiscal 2001, the Company has no plans to expand its number of Lone Star
restaurants other than the opening of the eight completed units.
The Company believes it can continue to distinguish itself in the upscale
market by employing many of the strategies that have been successful in the
mid-priced steakhouse market. The Company will continue to
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actively monitor expansion opportunities for its upscale operations and is
currently active in seeking additional sites for future expansion in the upscale
markets.
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 $1.85 million in sales on an annualized basis during 2000. Of the
243 Lone Star restaurants open at March 19, 2001, 89 were leased facilities and
had an average cash investment of approximately $1.0 million and 154 were owned
and had an average cost for land acquisition, construction and equipment of
approximately $1.9 million.
The Company anticipates the average total investment per restaurant for a
typical Del Frisco's restaurant and Sullivan's restaurant will range from $3.0
million to $5.0 million. The Del Frisco's, which opened in New York City on
March 7, 2000, cost approximately $13 million to complete.
Menu
The dinner menu at a Lone Star restaurant features a limited selection of
high quality, specially seasoned and mesquite grilled steaks, prime rib, ribs,
chicken, fish, shrimp and various combinations. Most dinners offer a complete
meal including salad, bread and butter and a choice of baked potato, baked sweet
potato, steak fries or Texas rice. The lunch menu offers a selection of
hamburgers, chicken sandwiches, luncheon steaks, ribs, soups and salads.
Depending on local availability and quality, a fresh fish selection is also
offered at lunch and dinner. The lunch and dinner menus also include appetizers
and desserts, together with a full bar service. Alcoholic beverage service
accounts for approximately 10% of the restaurant's net sales.
The menu at Sullivan's features high quality, well-aged, mid-west grain
fed steaks, chops, seafood and quality side dishes. Sullivan's also features a
number of high quality wines and full bar. Alcoholic beverage service accounts
for approximately 40% of the restaurants' sales.
The menu at Del Frisco's features high quality USDA prime-graded steaks,
chops, seafood, and quality side dishes. Del Frisco's wine list offers over 300
high quality wines and a full bar. Alcoholic beverage service accounts for
approximately 38% of the restaurants' sales.
Site Selection
The Company believes site selection is critical for the potential success
of a particular restaurant and senior management devotes significant time and
resources to analyzing each prospective site. Among the factors considered in
site selection are the specific steakhouse concept to be developed, local market
demographics, and site visibility. Consideration is given to accessibility and
proximity to significant generators of potential customers such as major
retailers, retail centers and office complexes, office and hotel concentrations,
and entertainment centers (stadiums, arenas, theaters, etc.). The Company also
reviews potential competition and attempts to analyze the profitability of other
national chain restaurants operating in the area.
Leases are negotiated generally with initial terms of three to five years,
with multiple renewal options. The Company has generally required between 150
and 280 days after the signing of a lease or the closing of a purchase to
complete construction and open a new restaurant. Additional time is sometimes
required to obtain certain government approvals and licenses, such as liquor
licenses.
Restaurant Layout
The Company believes the decor and interior design of its restaurants
significantly contribute to its success. The Lone Star Steakhouse & Saloon
restaurants' open layout permits dining customers to view the
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bar and Texas memorabilia and enhance 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. The Company
anticipates future Lone Star restaurants will average approximately 5,500 square
feet with less in small town markets.
The original Del Frisco's restaurant in Dallas, Texas is approximately
10,000 square feet and seats approximately 350 persons and includes an extended
wine cellar and a cigar lounge with private dining available in the wine cellar.
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 8,000 and 12,000
square feet and seat approximately 300 and 360 persons, respectively. The New
York City location is approximately 16,500 square feet and the Las Vegas
location is approximately 11,000 square feet. Future Del Frisco's restaurants
are planned to be approximately 7,000-8,000 square feet and will include a
dining area for approximately 175-200 customers.
The first Sullivan's restaurant, in Austin, Texas has been expanded to
12,000 square feet and can now seat 320 customers. A separate jazz bar area
called "Ringside" is utilized at the Baton Rouge, Louisiana, Dallas and Houston,
Texas Sullivan's restaurants. The Sullivan's bar area is separate from the
dining room and is designed to be a destination unto itself, featuring live jazz
music six nights a week and an upbeat, convivial atmosphere. Future Sullivan's
restaurants are planned to be approximately 8,000-9,000 square feet and will
include a dining area for approximately 175-200 customers.
Marketing
Lone Star Steakhouse & Saloon restaurants are "destination location
restaurants" that focus on the mid-priced full service casual dining market
segments. The Company has relied principally on its commitment to customer
service, an excellent price-value relationship and the unique "Texas Roadhouse"
ambiance of its restaurants to attract and retain customers. Accordingly, the
Company has focused its resources on providing its customers with superior
service, value and an exciting and vibrant atmosphere, and has relied primarily
on word of mouth to attract new customers. The Company also utilizes radio and
billboard advertising to promote its restaurants and build customer awareness.
The Company also employs some print and direct mail advertising, and conducts
some local restaurant promotions. To create additional Lone Star name
recognition and customer identification, the Company sells T-shirts and other
items bearing the Lone Star name and logo. In 2000, the Company spent
approximately $9,000,000 for radio and television advertising campaigns in the
domestic Lone Star markets. The Company plans to continue its use of radio and
television advertising in those markets where it is cost effective.
Sullivan's and Del Frisco's both utilize print and radio along with
charitable event promotions throughout the year.
Restaurant Operations and Management
The Company strives to maintain quality and consistency in its restaurants
through careful hiring, training and supervision of personnel and the
establishment of standards relating to food and beverage preparation,
maintenance of facilities and conduct of personnel.
The typical Lone Star management team consists of one general manager and
four managers. Each restaurant also employs a staff consisting of approximately
50 to 90 hourly employees, many of whom work part-time. 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
and preparation, customer satisfaction, alcoholic beverage
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service, governmental regulations compliance, liquor liability avoidance and
employee relations. Restaurant management is also provided with a proprietary
operations manual relating to food and beverage preparation, all areas of
restaurant management and compliance with governmental regulations. Working in
concert with restaurant managers, the Company's senior management defines
operations and performance objectives for each restaurant and monitors
implementation. An incentive cash bonus program has been established in which
each restaurant's management team participates. Awards under the incentive plan
are tied to achievement of specified operating targets. Senior management
regularly visits Company restaurants and meets with the respective management
teams to ensure the Company's strategies and standards of quality are met in all
respects of restaurant operations and personnel development.
The Company's commitment to customer service and satisfaction is evidenced
by several practices and policies, including periodic visits by restaurant
management to customers' tables, active involvement of restaurant management in
responding to customer comments, and assigning wait persons to a limited number
of tables, generally three for dinner and four for lunch. Teamwork is emphasized
through a runner system for delivering food to the tables that is designed to
serve customers in an efficient and timely manner.
Each new restaurant employee of the Company participates in a training
program during which the employee works under the close supervision of a
restaurant manager. Management strives to instill enthusiasm and dedication in
its employees and create a stimulating and rewarding working environment where
employees know what is expected of them in measurable terms. Management
continuously solicits employee feedback concerning restaurant operations and
strives to be responsive to employee concerns.
Purchasing
Approximately 60% of the consumable products used in the restaurants are
distributed through and delivered by a single vendor. The Company negotiates
directly with suppliers for food and beverage products to ensure consistent
quality and freshness of products and to obtain competitive prices. The Company
purchases substantially all food and beverage products from local or national
suppliers. Food and supplies are shipped directly to the restaurants, although
invoices for purchases are sent to the Company for payment. The Company does not
maintain a central product warehouse or commissary. The Company has not
experienced any significant delays in receiving restaurant supplies and
equipment. From time to time, the Company engages in forward pricing and may
consider other risk management strategies with regard to its meat and other food
costs in order to minimize the impact of potential fluctuations in prices. This
practice could help stabilize the Company's food costs during times of
fluctuating prices. As of March 19, 2001, the Company has no significant forward
pricing contracts.
Management Information Systems
The Company continually monitors its management information system to take
advantage of technological improvements. The P.O.S. 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, bank deposit and variance
data.
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.
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Additionally, the Company monitors the average check, customer count, product
mix and other sales trends on a daily basis.
The Company expects to continue to develop its management information
systems to improve efficiencies and assist management in analyzing business
results and opportunities.
Competition
The restaurant industry is intensely competitive with respect to price,
service, location and food quality, and there are many well-established
competitors with substantially greater financial and other resources than the
Company. Some of the Company's competitors have been in existence for a
substantially longer period than the Company and may be better established in
the markets where the Company's restaurants are or may be located. The
restaurant business is often affected by changes in consumer tastes, national,
regional or local economic conditions, demographic trends, traffic patterns and
the type, number and location of competing restaurants. In addition, factors
such as inflation, increased food, labor and benefits costs and the availability
of experienced management and hourly employees may adversely affect the
restaurant industry in general and the Company's restaurants in particular. The
Company believes that its concepts, attractive price-value relationship and
quality of food and service enable it to differentiate itself from its
competitors. The Company believes that its ability to compete will depend upon
attracting and retaining high quality employees and continuing to offer high
quality, competitively priced food in a full service, distinctive dining
environment.
Government Regulation
The Company's restaurants are subject to numerous federal, state and local
laws affecting health, sanitation, safety and ADA accessibility standards, as
well as to state and local licensing regulation of the sale of alcoholic
beverages. Each restaurant has appropriate licenses from regulatory authorities
allowing it to sell liquor, beer and wine, and has food service licenses from
local health authorities. The 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 minimum wage could
increase the Company's labor costs.
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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), and Sullivan's
Steakhouse(R) as having significant value and as being an important factor in
the marketing of its restaurants. The Company is aware of names and marks
similar to the service marks of the Company used by other persons in certain
geographic areas. However, the Company believes such uses will not have a
material adverse effect on the Company's financial condition or its results of
operation. The Company's policy is to pursue registration of its marks whenever
possible and to oppose vigorously any infringement of its marks the Company has
obtained registration of its marks in numerous foreign countries.
Employees
As of March 19, 2001, the Company employed approximately 18,200 persons, 9
of whom are executive officers, 87 of whom are office support personnel, 8 of
whom are regional managers, 28 of whom are district managers, approximately
1,120, 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.
Item 2. Properties.
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As of March 19, 2001, the Company leased 89 and owned 154 of its
Lone Star restaurant locations. At such date, the Company leased three and owned
two Del Frisco's restaurants locations. Of the 15 Sullivan's restaurants 13 are
leased, and two are owned. 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.
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RESTAURANT LOCATIONS AS OF MARCH 19, 2001
The following table sets forth the location of the Company's existing, open
domestic Lone Star Steakhouse & Saloon (243) Restaurants, Del Frisco's (5)
restaurants, and Sullivan's (15) restaurants
LONE STAR Carbondale MASSACHUSETTS Durham SOUTH DAKOTA
Champaign Boston Fayetteville Sioux Falls
ALABAMA Chicago (10) Greensboro (2)
Anniston Decatur MICHIGAN Greenville
Birmingham (2) Hodgkins Ann Arbor Jacksonville TENNESSEE
Huntsville Mt. Vernon Battle Creek Raleigh (3) Jackson
Mobile Peoria Bay City Rocky Mount Johnson City
Montgomery Rockford Brighton Salisbury Memphis (2)
Trussville Springfield Dearborn Heights Southern Pines
Tuscaloosa Detroit (6) Winston-Salem
INDIANA Grand Rapids UTAH
ALASKA Anderson Jackson NORTH DAKOTA Centerville
Anchorage Evansville Saginaw Fargo Layton
Ft. Wayne Salt Lake City
ARIZONA Indianapolis (4) MISSISSIPPI OHIO
Mesa Lafayette Hattiesburg Akron VIRGINIA
Phoenix (4) Merrillville Jackson Canton Alexandria
South Bend Cincinnati (2) Centreville
ARKANSAS Terre Haute MISSOURI Cleveland (3) Chesapeake
Ft. Smith Branson Columbus (4) Fairfax
Little Rock IOWA Independence Dayton (2) Fredericksburg
Springdale Cedar Rapids Kansas City Lancaster Herndon
Coralville Springfield Middletown Norfolk
COLORADO Davenport St. Louis (5) Niles Potomac Mills
Colorado Springs Des Moines Springfield Richmond (3)
Denver (6) Waterloo NEBRASKA Toledo (2) Sterling
Ft. Collins Lincoln Youngstown Virginia Beach
Loveland KANSAS Omaha (2)
Garden City OKLAHOMA WEST VIRGINIA
DELAWARE Hutchinson NEVADA Lawton Beckley
Dover Overland Park Las Vegas (4) Oklahoma City Charleston
Wilmington (2) Tulsa (2) Huntington
KENTUCKY NEW JERSEY
FLORIDA Bowling Green Atlantic City PENNSYLVANIA WISCONSIN
Bradenton Florence Bridgewater Allentown Racine
Clearwater Lexington Cherry Hill Easton
Ft. Lauderdale Louisville Delran Harrisburg SULLIVAN'S
Ft. Myers Hanover Township Johnstown Anchorage, AK
Gainesville LOUISIANA Hazlet King of Prussia Austin, TX
Lakeland Baton Rouge (2) Marlton Lancaster Baton Rouge, LA
Ocala Houma Ocean County Middletown Charlotte, NC
Orlando Lafayette Scotch Plains Philadelphia Chicago, IL
Pensacola Monroe Turnersville Pittsburgh (5) Dallas, TX
Port Richey New Orleans (3) Voorhees Pottstown Denver, CO
Sarasota Wayne Reading Houston, TX
St. Petersburg MAINE Scranton Indianapolis, IN
Tampa South Portland NEW MEXICO Wilkes-Barre King of Prussia, PA
Albuquerque York Naperville, IL
GEORGIA MARYLAND Palm Desert, CA
Atlanta Bel Air NEW YORK RHODE ISLAND Raleigh, NC
Augusta Columbia Albany Warwick Tucson, AZ
Frederick Wilmington, DE
IDAHO Gaithersburg SOUTH CAROLINA
Boise Laurel NORTH CAROLINA Greenville
Lexington Park Asheville Myrtle Beach (2) DEL FRISCO'S
ILLINOIS Waldorf Boone Denver, CO
Bloomington Westminster Charlotte (4) Dallas, TX
Bradley Fort Worth, TX
Las Vegas, NV
New York, NY
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Item 3. Legal Proceedings
-----------------
The Company is involved from time to time in litigation arising in
the ordinary course of business, none of which is expected to have a material
adverse effect on the financial condition or results of operations of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of the holders of the Company's Common
Stock during the fourth quarter of the Company's fiscal year ended December 26,
2000.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Market Information
The Company's Common Stock (ticker symbol: STAR) is traded
over-the-counter on the Nasdaq National Market (Nasdaq). The following table
sets forth, for the periods indicated, the high and low sale prices for the
Common Stock, as reported by Nasdaq.
Bid Prices
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Calendar 2000 High Low
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First Quarter 9 7/16 7 27/32
Second Quarter 12 3/4 8 3/4
Third Quarter 11 9/16 7 29/32
Fourth Quarter 8 15/16 6 11/16
Bid Prices
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Calendar 1999 High Low
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First Quarter 11 1/4 6 5/8
Second Quarter 12 3/8 9 7/16
Third Quarter 10 7/16 7 1/4
Fourth Quarter 10 1/8 7
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Dividends
The Company initiated the payment of quarterly cash dividends in April
2000 and has paid cash dividends at the rate of $0.125 per share each quarter
thereafter. The Company plans to continue the quarterly dividend payments for
the foreseeable future.
Number of Stockholders
As of March 19, 2001, there were approximately 450 holders of record of
the Company's Common Stock. The Company believes there are in excess of 15,000
beneficial owners of the Company's Common Stock.
Item 6. Selected Financial Data
-----------------------
The following table sets forth selected consolidated financial data and is
qualified by reference to and should be read in conjunction with the
consolidated financial statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K. The selected consolidated financial data
of the Company as of December 26, 2000, December 28, 1999, December 29, 1998,
December 30, 1997, and December 31, 1996, and for each of the five years in the
period ended December 26, 2000, were derived from the Company's audited
consolidated financial statements. The pro forma data set forth below for the
periods presented are unaudited and have been prepared by management solely to
facilitate period-to-period comparison and do not represent the actual results
of operations for the periods presented. The pro forma amounts reflect the
adjustment amounts applicable for the fiscal years 1996 and 1997 to give
retroactive effect to the change in accounting for pre-opening costs adopted in
fiscal 1998 (see Note 4 to the Company's Consolidated Financial Statements).
-12-
The following table should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Form 10-K.
Year Ended In December,(1)
-----------------------------------------------------------------
(Amounts in thousands, except share data)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Income Statement Data:
Net sales $ 575,863 $ 585,755 $616,692 $585,357 $491,754
Costs and expenses:
Costs of sales 202,343 207,696 231,787 211,571 172,338
Restaurant operating expenses 276,974 263,940 270,495 215,805 167,871
Restaurant depreciation and
amortization 28,574 30,970 26,346 30,590 28,384
General and administrative expenses 42,472 38,057 32,070 21,649 21,285
Provision for impaired assets and
restaurant closings 4,310 38,931 4,646 -- --
Loss on divestiture of foreign operations -- -- -- -- 8,557
------------ --------- -------- ------ -------
Total costs and expenses 554,673 579,594 565,344 479,615 398,435
-------- ------- -------- ---------- -------
Income from operations 21,190 6,161 51,348 105,742 93,319
Other income, net 2,530 2,190 2,906 4,109 3,682
---------- ----------- ----------- ---------- ------------
Income before provision for income
taxes and minority interest 23,720 8,351 54,254 109,851 97,001
Provision for income taxes (7,590) (2,950) (21,843) (40,075) (37,518)
Minority interest -- -- -- (968) 584
---------- ------------- ----------- ------------- ------------
Income before cumulative effect of
change in accounting principle 16,130 5,401 32,411 68,808 60,067
Cumulative effect of change in accounting
principle (net of income tax of $2,921) -- -- (6,904) -- --
---------- ------------- ----------- ------------- ------------
Net income $ 16,130 $ 5,401 $ 25,507 $ 68,808 $ 60,067
========= =========== ========== ========= ===========
Basic earnings per share:
Income before cumulative effect of
change in accounting principle $ .62 $ .15 $ .81 $ 1.68 $ 1.53
Cumulative effect of change
in accounting principle -- -- (.17) -- --
---------- ------------- ----------- ------------- ------------
Basic earnings per share $ .62 $ .15 $ .64 $ 1.68 $ 1.53
============ ============== =========== =========== ============
Weighted average shares
outstanding 26,189,600 35,089,084 39,989,091 41,013,749 39,383,891
========== ========== ========== ========== ==========
Pro forma net income (2) $ 66,815 $ 62,498
========== ===========
Pro forma basic earnings per share $ 1.63 $ 1.59
========== ===========
-13-
At fiscal year end in December, (1)
----------------------------------------------
(Dollars in thousands)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital (deficit) $ (1,716) $ 20,215 $ 67,593 $ 117,127 $ 126,244
Total assets 488,923 533,533 608,583 620,812 542,152
Long-term debt,
including current portion -- -- -- -- 387
Stockholders' equity 437,783 484,379 553,441 566,148 495,239
(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 1996, 1997, 1998, 1999, and 2000 fiscal years ended on
December 31, 30, 29, 28, and 26 respectively. 1996 included 53-weeks
of operations, and all other fiscal years were 52-week fiscal years.
(2) Pro forma net income amounts reflect the adjustments for fiscal
years 1996 and 1997 to give retroactive effect to the change in
accounting for pre-opening costs adopted in fiscal 1998 (see Note 4
to the Company's consolidated financial statements).
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.
In May 1998, the Company temporarily suspended development of new Lone
Star restaurants other than properties which had been committed for or were
under construction. During 1998, the Company completed the remodel/construction
of twelve of these restaurants. The Company opened one restaurant in 1999, one
in 2000 and two to date in fiscal 2001. The Company intends to open the
remaining eight restaurants during fiscal 2001.
In addition, the Company has seven sites available for future development,
five of which are owned and two of which are under lease. There were 243
operating domestic Lone Star restaurants as of March 19, 2001. In addition,
licensees operate three Lone Star restaurants in California, one in Guam, and
one in Canada.
The Company currently operates five Del Frisco's, including the New York
City and Las Vegas, Nevada restaurants which opened in 2000. A licensee operates
a Del Frisco's in Orlando, Florida.
The Company currently operates fifteen Sullivan's restaurants, including
the Sullivan's restaurant opened in Tucson, Arizona in November 2000.
Internationally, as of March 19, 2001, the Company currently operates 26
Lone Star Steakhouse & Saloon restaurants in Australia. The Company closed nine
restaurants in Australia during 2000 and an additional five restaurants in
January 2001.
-14-
Results of Operations
The following table sets forth for the periods indicated (i) the
percentages which certain items included in the Consolidated Statements of
Income bear to net sales, and (ii) other selected operating data.
Years Ended
----------------------------------------------------
December 26, December 28, December 29,
2000 1999 1998
------------ ------------- -------------
(Dollars in thousands)
Income Statement Data:
Net sales 100% 100% 100%
Costs and expenses:
Costs of sales 35.1 35.5 37.6
Restaurant operating expenses 48.1 45.1 43.9
Provision for impaired assets and restaurant closings .7 6.6 .7
Depreciation and amortization 5.0 5.3 4.3
------ ------ ------
Restaurant costs and expenses 88.9 92.5 86.5
------ ------ ------
Restaurant operating income 11.1 7.5 13.5
General and administrative expenses 7.4 6.5 5.2
------ ------ ------
Income from operations 3.7 1.0 8.3
Other income .4 .4 .5
------ ------ ------
Income before income taxes and cumulative effect
of change in accounting principle 4.1 1.4 8.8
Provision for income taxes 1.3 .5 3.5
------ ------- ------
Income before cumulative effect of change
in accounting principle 2.8 .9 5.3
Cumulative effect of change in accounting principle - - (1.2)
------- ------- --------
Net income 2.8% .9% 4.1%
======= ======= ========
Restaurant Operating Data:
Average sales per restaurant on an
annualized basis (1) $1,938 $1,810 $1,957
====== ====== ======
Number of restaurants at end of period(2) 287 298 322
Number of full restaurant periods open
during the period (3) 3,863 4,204 4,178
--------------------------------------
(1) Average sales per restaurant on an annualized basis are computed by
dividing a restaurant's total sales for full accounting periods by
the number of full accounting periods open in the reporting period,
and annualizing the result.
(2) Restaurants open at end of period after giving effect to five
Australian restaurants closed in January 2001.
(3) Full restaurant periods are four-week accounting periods within the
fiscal year (excluding the first partial accounting period of
operations) that a restaurant is open.
-15-
LONE STAR STEAKHOUSE & SALOON, INC.
Year ended December 26, 2000 compared to Year ended December 28, 1999
(Dollar amounts in thousands)
Net sales decreased $9,892 (1.7%) to $575,863 for the year ended December
26, 2000 ("fiscal 2000"), compared to $585,755 for the year ended December 28,
1999 ("fiscal 1999"). The decrease was principally attributable to closing 24
domestic Lone Star restaurants in January 2000, and nine Lone Star restaurants
in Australia in August 2000 partially offset by additional sales of $10,800 from
one domestic Lone Star restaurant, one Sullivan's restaurant and two Del
Frisco's restaurants opened in fiscal 2000. Same store sales decreased 0.1% from
fiscal 1999.
Costs of sales, primarily food and beverages, decreased as a percentage of
net sales to 35.1% from 35.5% due primarily to improved procedures in controlled
food and beverage costs.
Restaurant operating expenses for fiscal 2000 increased $13,034 from
$263,940 in fiscal 1999 to $276,974, and increased as a percentage of net sales
from 45.1% to 48.1%. The increase in restaurant operating expenses is primarily
attributable to an $8,072 increase in media advertising. In addition, increased
costs were incurred for restaurant labor, building maintenance and pre-opening
expenses.
Depreciation and amortization decreased $2,396 in fiscal 2000, compared to
fiscal 1999. The decrease is primarily attributable to restaurants closed during
fiscal 2000.
Provisions for impaired assets and restaurant closings in fiscal 2000 were
$4,310 compared to $38,931 in fiscal 1999. The provision in fiscal 2000 reflects
a pre-tax charge of $3,000 for the write down of certain under-performing
Australian restaurants and $1,310 related to costs of closing 14 Australian
restaurants. The pre-tax charges for fiscal 1999 include $35,797 for the write
down of both domestic and Australian impaired assets and $3,134 related to costs
of closing 25 domestic restaurants. The Company periodically reviews its
long-lived assets for indications of impairment.
General and administrative expenses increased $4,415 in fiscal 2000
compared to fiscal 1999. This increase was primarily attributable to (1)
salaries and wage-related expenses reflecting the costs associated with the new
positions added to strengthen the Company's corporate infrastructure, general
salary increases and costs related to employee retirement benefit plans, (2)
costs for software amortization and (3) travel and recruiting expenses.
Other income, net for fiscal 2000 was $2,530, compared to $2,190 in fiscal
1999. The increase is attributable to gains on the sale of assets of $1,305
offset in part by an increase in interest expense and a decrease in interest
income.
The effective income tax rate for fiscal 2000 was 32.0% compared to 35.3%
in fiscal 1999. The difference in the effective tax rate is primarily
attributable to a mix of foreign and domestic income and the impact of FICA tip
credits on the relative pre-tax income for the two years.
-16-
LONE STAR STEAKHOUSE & SALOON, INC.
Year ended December 28, 1999 compared to Year ended December 29, 1998
(Dollar amounts in thousands)
Net sales decreased $30,937 to $585,755 for fiscal 1999 compared to
$616,692 for the fiscal year ended December 29, 1998 ("fiscal 1998"). The
decrease is principally attributable to a decline in average sales per
restaurant resulting from lower customer counts during fiscal 1999 partially
offset by additional sales of $8,038 from one new domestic Lone Star and four
Sullivan's restaurants opened in fiscal 1999. Same store sales decreased 7.6%
from fiscal 1998.
Costs of sales, primarily food and beverages, decreased as a percentage of
net sales to 35.5% from 37.6% due primarily to improved margins as a result of
lower promotional discounting of menu prices and lower beef prices. During most
of fiscal 1999, the Company purchased beef under contracted prices that provided
the Company a favorable pricing advantage compared with cash market pricing.
Restaurant operating expenses for fiscal 1999 decreased $6,555 from
$270,495 in fiscal 1998 to $263,940, and increased as a percentage of net sales
from 43.9% to 45.1%. The absolute dollar amounts reflect the impact of increased
operating costs for the new restaurants opened during fiscal 1998, and increased
costs related to manager training expenses and certain insurance costs. The
increases were partially offset by decreases in hourly labor costs related to
cost control measures taken to improve operating efficiencies at the restaurants
and by decreases in costs for operating supplies and building and equipment
maintenance expenses. In addition, fiscal 1998 includes costs incurred in
connection with a national advertising campaign, which was not renewed during
fiscal 1999. The increase as a percentage of sales primarily reflects the fixed
cost components of restaurant operating expenses on lower average restaurant
sales experienced in fiscal 1999.
Depreciation and amortization increased $4,624 in fiscal 1999 compared to
fiscal 1998. The increase is attributable to restaurants open less than a full
year in fiscal 1998 and to restaurants opened in fiscal 1999. In addition,
fiscal 1999 reflects depreciation related to the installations of new point of
sale systems during the year.
Provisions for impaired assets and restaurant closings in fiscal 1999 were
$38,931 compared to $4,646 in fiscal 1998. The decision was made in the fourth
quarter of fiscal 1999 to close 24 domestic Lone Star restaurants and one
domestic Mexican restaurant. The pretax charge includes $35,797 for the write
down of both domestic and Australian impaired assets and $3,134 related to costs
of closing the 25 domestic restaurants.
General and administrative expenses increased $5,987 in fiscal 1999
compared to fiscal 1998. The increase was primarily attributable to increased
(i) travel costs incurred in connection with restaurant operation review
programs (ii) recruiting costs related to the recruitment of new managers and
(iii) costs related to expenses incurred in connection with the installation of
the point-of-sale systems and the new database information systems.
Other income, principally interest, for fiscal 1999 was $2,190 compared to
$2,906 in fiscal 1998. The decrease is attributable to reduced funds available
for short-term investment purposes.
The effective income tax rate for fiscal 1999 was 35.3% compared to 42.6%
in fiscal 1998. The decrease in fiscal 1999 is due in part to a lower valuation
allowance attributable to Australian operating losses in fiscal 1999, as well as
the impact of FICA tip credits on lower pre-tax earnings. The decrease in the
rate was partially offset by the impact of Australian losses resulting in higher
effective state income taxes on domestic earnings.
-17-
The cumulative effect of change in accounting principle represents the
effect of adoption of Statement of Position 98-5, "Reporting on Costs of Start
Up Activities". This statement impacted the Company's accounting for pre-opening
costs (see Note 4 of Notes to the Consolidated Financial Statements).
Impact of Inflation
The primary inflationary factors affecting the Company's
operations include food and labor costs. A large number of the Company's
restaurant personnel are paid at Federal and state established minimum wage
levels and, accordingly, changes in such wage levels affect the Company's labor
costs. As costs of food and labor have increased, the Company has historically
been able to offset these increases through economies of scale and improved
operating procedures, although there is no assurance that such offsets will
continue. To date, inflation has not had a material impact on operating margins.
Liquidity and Capital Resources
The following table presents a summary of the Company's cash flows for the years
ended:
December 26, December 28, December 29,
2000 1999 1998
----------- ------------ ------------
Net cash provided by operating activities $ 49,345 $ 70,886 $ 62,598
Net cash used in investment activities (12,271) (33,637) (73,251)
Net cash used by financing activities (58,710) (76,453) (35,378)
Net effect of exchange rate changes on cash (8) 30 (119)
---------- ----------- ----------
Net decrease in cash and cash equivalents $ (21,644) $ (39,174) $ (46,150)
========== ========== ==========
During fiscal 2000, 1999, and 1998, the Company's purchases of property
and equipment were $21,665, $34,085, and $63,122, respectively. In fiscal 2000,
the Company received proceeds from the sale of assets of $10,213.
The Company has opened 11 restaurants in the past three fiscal years of
which two opened during 1998, five in 1999 and four in 2000. The Company does
not have significant accounts receivable or inventory.
At December 26, 2000, the Company had $29,029 in cash and cash
equivalents. The Company has entered into a $20,000 revolving term loan
agreement with a bank. At December 26, 2000, the Company had no outstanding
borrowings.
The Company's Board of Directors has authorized the repurchase of shares
of the Company's common stock from time to time in the open market or in
privately negotiated transactions. During fiscal 2000, the Company purchased
5,605,074 shares at a cost of $49,261. During fiscal 1999 and 1998, the Company
purchased 8,758,005 shares at a cost of $76,488, and 2,610,000 shares at a cost
of $36,375, respectively.
In the second quarter of fiscal 2000, the Company began paying dividends
on its common stock. For the year, the Company paid cash dividends of $9,630, or
$0.375 per share.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB No. 25. The Interpretation requires,
among other things, that stock options which have been modified after December
15, 1998 to reduce the exercise price must be accounted for as variable. The
Company has adopted the accounting change for modified stock options on a
prospective basis effective July 1, 2000, as required by the Interpretation.
Pursuant to the rules for the initial application of the Interpretation, imputed
non-cash compensation expense is to be recognized on a prospective basis to the
extent that the market price of the Company's common stock after July 1, 2000
exceeds the common stock price on July 1, 2000, of $10.125. The Company has
repriced options during fiscal 1999 and in January 2000, which are subject to
the Interpretation. At December 26, 2000, there were approximately 4,731,000
shares subject to the
-18
Interpretation. These options are accounted for as variable from July 1, 2000,
until the options are excised, forfeited or expire unexercised. Prior to the
adoption of the Interpretation, the Company accounted for these repriced options
as fixed. Because the market price of the Company's common stock was lower on
December 26, 2000 than on July 1, 2000, the adoption of the Interpretation had
no effect upon the Company's net income for year ended December 26, 2000;
however, the Company may incur significant volatility in reporting earnings in
future periods as fluctuations in market prices of its common stock may greatly
impact non-cash expenses on a periodic basis.
On January 3, 2001, the Board of Directors declared the Company's
quarterly cash dividend of $0.125 per share, payable January 26, 2001 to
stockholders of record on January 12, 2001.
From time to time, the Company utilizes derivative financial instruments
in the form of commodity futures contracts to manage market risks and reduce its
exposure in the price of meat resulting from fluctuations in the market. The
Company uses live beef cattle futures contracts in an attempt 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. As of December 26, 2000, the Company had no positions
in futures contracts.
Risk Factors
If we are unable to compete effectively with our competitors we will not
be able to increase revenues or generate profits.
Our inability to increase revenues is directly related to our ability to
compete effectively with our competitors. Key competitive factors include:
o The quality and numbers of employees needed to adequately staff our
restaurants;
o the quality and value of the food products offered;
o the quality of service;
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.
Changing consumer preferences and discretionary spending patterns and other
factors affecting the availability of beef could force us to modify our
restaurant's concept and menu and could result in a reduction in our revenues.
Even if we are able to successfully compete with other restaurant companies
with similar concepts, we may be forced to make changes in one or more of our
concepts in order to respond to changes in consumer tastes or dining patterns.
Consumer preferences could be affected by health concerns about the consumption
of beef, the primary item on our menus, or by specific events such as the
outbreak of "mad cow disease" or "foot/mouth disease" which occurred in the
Untied Kingdom. In addition, these events could reduce the
-19-
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, 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. Our dependence on frequent deliveries of fresh food
supplies means that shortages or interruptions in supply could materially and
adversely affect our operations. In addition, unfavorable trends or developments
concerning the following factors could adversely affect our results:
o Inflation, food, labor 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.
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 The 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
-20-
restaurants. In addition, factors such as inflation, increased food, labor and
employee benefit costs and the availability of experienced management and hourly
employees may also adversely affect the restaurant industry in general and our
restaurants in particular.
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 strategical direction of our Company,
operating our business, identifying areas for expansion and arranging necessary
financing. These key personnel include Jamie B. Coulter, our Chairman and Chief
Executive Officer, and certain of our other executive officers. Although we feel
that there is a significant pool of talented personnel in the restaurant
industry, if these members of our senior management team become unable or
unwilling to continue in their present positions, it could adversely affect our
business and development.
Shareholders May Not Be Able to Resell Their Stock or May Have to Sell At A
Price Substantially Lower Than the Price They Paid For It.
The trading price for our common stock has been highly volatile and could
continue to be subject to significant fluctuations in response to variations in
our quarterly operating results, general conditions in the restaurant industry
or the general economy, and other factors. In addition, the stock market is
subject to price and volume fluctuations affecting the market price for public
companies generally, or within broad industry groups, which fluctuations may be
unrelated to the operating results or other circumstances of a particular
company. Such fluctuations may adversely affect the liquidity of our common
stock, as well as price that holders may achieve for their shares upon any
future sale.
Staggered Board; Blank-Check Preferred Stock; Poison Pill; Change of Control
Agreements.
Our certificate of incorporation and bylaws provide for three classes of
directors, to be elected on a staggered basis. This enables existing management
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.
Furthermore, our certificate of incorporation authorizes, and we have
adopted in 1997, a preferred share purchase rights plan, commonly referred to as
a "poison pill." The terms of the rights and the circumstances under which they
may be exercised are contained in a rights agreement, which has been filed with
the SEC. These terms have been designed to deter hostile takeovers of us, even
though our stockholders might favor a takeover, especially if it were to afford
them an opportunity to sell their stock at a price above the prevailing market
rate. Finally, our executive officers and certain employees are entitled to
receive severance payments under certain circumstances if there has been a
change of control of the company. The terms and the circumstances under which
the executive officers will receive the severance payments are contained in
change of control agreements which have been filed as exhibits to this Form
10-K.
-21-
Item 7. A. Quantitative and Qualitative Disclosures about Market Risks
Not applicable.
Item 8. Financial Statements and Supplementary Data
See the Consolidated Financial Statements listed in the accompanying Index
to Financial Statements on Page F-1 herein. Information required for financial
schedules under Regulation S-X has been omitted since the required information
is not present.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
Item 11. Executive Compensation
The information required by this Item 11 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item 12 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item 13 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
-22-
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements.
See Index to Financial Statements which appears on
page F-1 herein.
All financial statement schedules have been omitted
since the required information is not present.
Exhibits
INDEX TO EXHIBITS
Exhibit Exhibit
Number
**3.1 Company's Certificate of Incorporation as amended.
*******3.2 Rights Agreement, dated as of October 3, 1997, between
Lone Star Steakhouse & Saloon, Inc. and First Union
National Bank, which includes the Form of Certificate of
Designations setting forth the terms of the Series A
Participating Preference Stock, par value $.01 per share,
as Exhibit A, and the Summary of Rights to Purchase
Preference Shares as Exhibit B.
***3.3 Company's Amended and Re-Stated By-Laws.
******10.1 Agreement, date October 19, 1998, between LS Management,
Inc., a wholly-owned subsidiary of Lone Star Steakhouse &
Saloon, Inc., and Coulter Enterprises, Inc., date October
19, 1998.
**10.2 1992 Lone Star Steakhouse & Saloon, Inc. Directors' Stock
Option 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.
**10.5 Non-Competition, Confidentiality and Non-Solicitation
Agreement between the Company and Jamie B. Coulter, dated
March 12, 1992.
*10.6 Amended Agreement dated January 1, 1999 between the
Company and Jamie B. Coulter.
********10.7 Employment Agreement between the Company and Gerald T.
Aaron, dated March 22, 2000.
********10.8 Employment Agreement between the Company and Randall H.
Pierce, dated March 22, 2000.
********10.9 Employment Agreement between the Company and T.D.
O'Connell, dated March 22, 2000.
-23-
********10.10 Employment Agreement between the Company And Jeffrey
Bracken, dated March 22, 2000.
********10.11 Employment Agreement between the Company and Robert A.
Martin, dated March 22, 2000.
********10.12 Employment Agreement between the Company and John D.
White, dated March 22, 2000.
*10.13 Change of Control Agreement between the Company and Jamie
B. Coulter dated January 3, 2001.
*10.14 Change of Control Agreement between the Company and
Gerald T. Aaron dated January 3, 2001.
*10.15 Change of Control Agreement between the Company and
Randall H. Pierce dated January 3, 2001.
*10.16 Change of Control Agreement between the Company and T. D.
O'Connell dated January 3, 2001.
*10.17 Change of Control Agreement between the Company and
Jeffrey Bracken dated January 3, 2001.
*10.18 Change of Control Agreement between the Company and John
D. White dated January 3, 2001.
*10.19 Change of Control Agreement between the Company and
Deidra Lincoln dated January 3, 2001.
*********10.21 Non-Qualified Deferred Compensation Plan
*21.1 Subsidiaries of the Company.
*23.1 Independent Auditors' consent to the incorporation by
reference in the Company's Registration Statements on
Form S-8 of the independent auditors' report included
herein.
-----------------------------
(b) Reports on Form 8-K filed in the fourth quarter of 2000: none
* 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 Form 10-Q for the
quarter ended June 13, 2000.
**** Incorporated by reference to the Company's Registration
Statement on Form S-8, filed with the Commission on January 12,
1996 (Commission File No. 33-00280), as amended.
***** Incorporated by reference to the Company's Form 10-K for the
quarter ended March 24, 1998.
****** Incorporated by reference to the Company's Form 10-Q for the
quarter ended September 8, 1998.
-24-
******* Incorporated by reference to the Company's Form 8-A12G/A filed
October 9, 1997.
******** Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 28, 1999.
********* 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).
-25-
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 26th day of March 2001.
LONE STAR STEAKHOUSE & SALOON, INC.
(Registrant)
/s/ Randall H. Pierce
----------------------------------------
Randall H. Pierce
Chief Financial Officer and
Principal Accounting Officer
-26-
SIGNATORIES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons in the capacities and on
the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jamie B. Coulter Chairman of the Board March 26, 2001
-------------------------- and Chief Executive Officer
Jamie B. Coulter
/s/ John D. White Executive Vice March 26, 2001
-------------------------- President
John D. White Treasurer and Director
/s/ Randall H. Pierce Chief Financial Officer March 26, 2001
------------------------- and Principal
Randall H. Pierce Accounting Officer
/s/ Fred B. Chaney Director March 26, 2001
------------------------
Fred B. Chaney
/s/ Clark R. Mandigo Director March 26, 2001
------------------------
Clark R. Mandigo
/s/ William B. Greene Director March 26, 2001
------------------------
William B. Greene
-27-
Steakhouse & Saloon, Inc.
Index to Financial Statements
Pages
-----
Report of Independent Auditors..................................................F-1
Consolidated Balance Sheets as of December 26, 2000 and December 28, 1999.......F-2
Consolidated Statements of Income for the years ended December 26, 2000,
December 28, 1999,and December 29, 1998......................................F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 26, 2000, December 28, 1999, and December 29, 1998..................F-5
Consolidated Statements of Cash Flows for the years ended
December 26, 2000, December 28, 1999, and December 29, 1998..................F-6
Notes to Consolidated Financial Statements......................................F-7
Report of Independent Auditors
The Board of Directors and Stockholders
Lone Star Steakhouse & Saloon, Inc.
We have audited the accompanying consolidated balance sheets of Lone Star
Steakhouse & Saloon, Inc. (the Company) and subsidiaries as of December 26, 2000
and December 28, 1999, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 26, 2000. 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 auditing standards generally accepted
in the 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 26, 2000 and December 28,
1999, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 26, 2000, in conformity
with accounting principles generally accepted in the United States.
Kansas City, Missouri
February 2, 2001
F-1
Lone Star Steakhouse & Saloon, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
December 26, December 28,
2000 1999
---- ----
Assets
Current assets:
Cash and cash equivalents .................... $ 29,029 $ 50,673
Accounts receivable .......................... 230 836
Inventories .................................. 12,704 11,440
Deferred income taxes ........................ 1,997 2,430
Other ........................................ 3,188 3,990
------------------
Total current assets ............................ 47,148 69,369
Property and equipment:
Land ......................................... 123,841 128,457
Buildings .................................... 174,849 181,262
Leasehold improvements ....................... 116,145 116,378
Equipment .................................... 99,673 90,342
Furniture and fixtures ....................... 21,364 21,693
-------------------
535,872 538,132
Less accumulated depreciation and amortization 129,111 107,650
-------------------
406,761 430,482
Deferred compensation plan investments .......... 2,276 --
Other assets:
Intangible assets, net ....................... 27,322 30,757
Deferred income taxes ........................ 2,880 1,713
Other ........................................ 2,536 1,212
------------------
32,738 33,682
------------------
Total assets .................................... $488,923 $533,533
==================
F-2
December 26, December 28,
2000 1999
--------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 12,918 $ 9,155
Sales tax payable 2,748 2,571
Accrued payroll 9,801 8,473
Real estate taxes 2,070 2,875
Gift certificates 8,209 7,478
Income taxes payable 1,207 4,520
Restaurant closure accrual 2,209 3,134
Other 9,702 10,948
----------------------
Total current liabilities 48,864 49,154
Deferred compensation obligation 2,276 --
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000
shares authorized; none issued - -
Common stock, $.01 par value, 98,000,000
shares authorized; 24,275,619 shares issued
and outstanding (29,858,553 in 1999) 243 299
Additional paid-in capital 188,976 238,000
Retained earnings 260,423 253,923
Accumulated other comprehensive loss (11,859) (7,843)
----------------------
Total stockholders' equity 437,783 484,379
----------------------
Total liabilities and stockholders' equity $ 488,923 $ 533,533
======================
See notes to consolidated financial statements.
F-3
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Income
(In Thousands, Except for Per Share Amounts)
For the Year Ended
---------------------------------------------------------------
December 26, December 28, December 29,
2000 1999 1998
---------------------------------------------------------------
Net sales $575,863 $585,755 $616,692
Costs and expenses:
Costs of sales 202,343 207,696 231,787
Restaurant operating expenses 276,974 263,940 270,495
Depreciation and amortization 28,574 30,970 26,346
Provision for impaired assets and restaurant closings 4,310 38,931 4,646
---------------------------------------------------------------
Restaurant costs and expenses 512,201 541,537 533,274
---------------------------------------------------------------
Restaurant operating income 63,662 44,218 83,418
General and administrative expenses:
Related parties - - 4,367
Other 42,472 38,057 27,703
---------------------------------------------------------------
Income from operations 21,190 6,161 51,348
Other income, net 2,530 2,190 2,906
---------------------------------------------------------------
Income before income taxes and cumulative
effect of a change in accounting principle 23,720 8,351 54,254
Provision for income taxes (7,590) (2,950) (21,843)
---------------------------------------------------------------
Income before cumulative effect of a change
in accounting principle, net of income
taxes of $2,921 16,130 5,401 32,411
Cumulative effect of change in accounting
principle - - (6,904)
---------------------------------------------------------------
Net income $ 16,130 $ 5,401 $ 25,507
===============================================================
Basic earnings per share:
Income before cumulative effect of a
change in accounting principle $ 0.62 $ 0.15 $ 0.81
Cumulative effect of change in accounting
principle - - (0.17)
---------------------------------------------------------------
Basic earnings per share $ 0.62 $ 0.15 $ 0.64
===============================================================
Diluted earnings per share:
Income before cumulative effect of a
change in accounting principle $ 0.61 $ 0.15 $ 0.81
Cumulative effect of change in accounting principle - - (0.17)
---------------------------------------------------------------
Diluted earnings per share $ 0.61 $ 0.15 $ 0.64
===============================================================
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 30, 1997 - 41,156,151 $411 $349,608
Stock options exercised - 61,817 1 996
Tax benefit related to options exercised - - - 111
Common stock repurchased and retired - (2,610,000) (26) (36,349)
Comprehensive income:
Net income - - - -
Foreign currency translation adjustments - - - -
Comprehensive income
----------------------------------------------------------------------------
Balance, December 29, 1998 - 38,607,968 386 314,366
Stock options exercised - 8,590 1 34
Common stock purchased and retired - (8,758,005) (88) (76,400)
Comprehensive income:
Net income - - - -
Foreign currency translation adjustments - - - -
Comprehensive income
----------------------------------------------------------------------------
Balance, December 28, 1999 - 29,858,553 299 238,000
Stock options exercised - 22,140 1 180
Common stock purchased and retired - (5,605,074) (57) (49,204)
Cash dividends ($0.375 per share) - - - -
Comprehensive income:
Net income - - - -
Foreign currency translation adjustments - - - -
Comprehensive income
----------------------------------------------------------------------------
Balance, December 26, 2000 - 24,275,619 $243 $188,976
============================================================================
Accumulated
Other
Retained Comprehensive
Earnings Loss Total
---------------------------------------------------------------------------
Balance, December 30, 1997 $223,015 $ (6,886) $566,148
Stock options exercised - - 997
Tax benefit related to options exercised - - 111
Common stock repurchased and retired - - (36,375)
Comprehensive income:
Net income 25,507 - 25,507
Foreign currency translation adjustments - (2,947) (2,947)
------------------------
Comprehensive income 22,560
---------------------------------------------------------------------------
Balance, December 29, 1998 248,522 (9,833) 553,441
Stock options exercised - - 35
Common stock purchased and retired - - (76,488)
Comprehensive income:
Net income 5,401 - 5,401
Foreign currency translation adjustments - 1,990 1,990
------------------------
Comprehensive income 7,391
---------------------------------------------------------------------------
Balance, December 28, 1999 253,923 (7,843) 484,379
Stock options exercised - - 181
Common stock purchased and retired (49,261)
Cash dividends ($0.375 per share) (9,630) - (9,630)
Comprehensive income:
Net income 16,130 - 16,130
Foreign currency translation adjustments - (4,016) (4,016)
------------------------
Comprehensive income 12,114
---------------------------------------------------------------------------
Balance, December 26, 2000 $260,423 $(11,859) $437,783
===========================================================================
See notes to consolidated financial statements.
F-5
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
For the Year Ended
--------------------------------------------------------------------
December 26, December 28, December 29,
2000 1999 1998
--------------------------------------------------------------------
Operating activities
Net income $16,130 $ 5,401 $ 25,507
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 2,902 2,800 1,609
Depreciation 29,669 30,732 26,643
Provision for impaired assets and restaurant closings 4,310 38,931 4,646
Gain on sales of assets (1,304) - -
Cumulative effect of accounting change - - 9,825
Deferred income taxes (734) (13,067) 1,588
Net change in operating assets and liabilities:
Accounts receivable 606 663 131
Inventories (1,335) 4,485 (4,997)
Other current assets 702 (366) (91)
Accounts payable 3,763 1,181 (6,514)
Income taxes payable (3,313) 2,078 1,122
Other current liabilities (2,051) (1,952) 3,129
--------------------------------------------------------------------
Net cash provided by operating activities 49,345 70,886 62,598
Investing activities
Purchases of property and equipment (21,665) (34,085) (63,122)
Proceeds from sales of assets 10,213 - -
Payment for acquisition of business from related party - - (10,500)
Other (819) 448 371
---------------------------------------------------------------------
Net cash used in investing activities (12,271) (33,637) (73,251)
Financing activities
Net proceeds from issuance of common stock 181 35 997
Proceeds from revolver 6,955 - -
Payment on revolver (6,955) - -
Common stock repurchased and retired (49,261) (76,488) (36,375)
Dividends paid (9,630) - -
--------------------------------------------------------------------
Net cash used in financing activities (58,710) (76,453) (35,378)
Increase (decrease) in cash and cash equivalents
Effect of exchange rate changes on cash (8) 30 (119)
--------------------------------------------------------------------
Net decrease in cash and cash equivalents (21,644) (39,174) (46,150)
Cash and cash equivalents at beginning of year 50,673 89,847 135,997
--------------------------------------------------------------------
Cash and cash equivalents at end of year $29,029 $50,673 $ 89,847
====================================================================
Supplemental disclosure of cash flow information
Cash paid for income taxes $11,484 $14,908 $ 16,416
====================================================================
See notes to consolidated financial statements.
F-6
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)
December 26, 2000
1. Background and Significant Accounting Policies
Background
Lone Star Steakhouse & Saloon, Inc. (the Company) owns and operates a chain of
mid-priced full service, casual dining restaurants in the United States, as well
as in Australia. The restaurants serve mesquite-grilled steaks, ribs, chicken,
and fish in a "Texas Roadhouse" atmosphere that is positioned to attract local
clientele. 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 26, 2000, the Company owns and operates 241 Lone Star
Steakhouse & Saloons in the United States and 26 in Australia. In addition, the
Company owns and operates five Del Frisco's Double Eagle Steak Houses and 15
Sullivan's Steakhouses.
Significant Accounting Policies
o Principles of Consolidation
The consolidated financial statements include the accounts of Lone Star
Steakhouse & Saloon, Inc. 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 revenue and expenses are
translated at average exchange rates prevailing during the year.
Translation adjustments are reported as a component of comprehensive
income in stockholders' equity.
o Concentration of Credit Risk
The Company's financial instruments exposed to concentration of credit
risk consist primarily of cash and short-term investments (cash
equivalents). The Company places its cash with high credit quality
financial institutions and, at times, such cash may be in excess of the
federal depository insurance limit. The Company has cash equivalents
F-7
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)
of approximately $21,089 and $37,751 at December 26, 2000 and December 28,
1999, respectively, in investment grade securities with municipal, state,
and U.S. government agencies.
o Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
o Cash and Cash Equivalents
The Company considers cash and cash equivalents to include currency on
hand, demand deposits with banks or other financial institutions, and
short-term investments with maturities of three months or less when
purchased. Cash and cash equivalents are carried at cost which
approximates fair value.
o Financial Instruments
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 held no live
beef cattle futures contracts at December 26, 2000. These instruments are
with counterparties of high credit quality; therefore, the risk of
nonperformance by the counterparties is considered to be negligible.
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)
o Inventories
Inventories consist of food and beverages and are stated at the lower of
cost (first-in, first-out) or market.
o Property and Equipment
Property and equipment are stated at cost. Maintenance, repairs, and
renewals which do not enhance the value of or increase the life of the
assets are expensed as incurred.
Buildings are depreciated using the straight-line method over 20 years,
which is the estimated useful life of the assets. Leasehold improvements
are amortized on the straight-line method over the lesser of the maximum
life of the lease or 20 years or the estimated useful lives of the assets.
Equipment and furniture and fixtures are depreciated using the
straight-line method over seven years, which is the estimated useful life
of the assets.
o Preopening Costs
Prior to 1998, labor costs and costs of hiring and training personnel and
certain other costs relating to opening new restaurants were capitalized
until the restaurant opened and then were amortized over the subsequent 12
months. During 1998, the Company changed its method of accounting for
preopening costs (see Note 4) and now expenses preopening costs when the
costs are incurred.
o Intangible Assets
Intangible assets include goodwill, intellectual properties, and licensing
permits which are amortized on a straight-line basis over the estimated
periods of benefit, generally 10 to 20 years. Accumulated amortization for
intangible assets as of December 26, 2000 and December 28, 1999 is $9,975
and $7,073, respectively.
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 Deferred Compensation Plan
In connection with the Company's deferred compensation plan, the Company
has created a trust to which it contributes amounts equal to employee
participant's qualified deferrals and the Company's matching portion. The
funds are invested by a financial institution, as trustee for the Company,
in a selected list of mutual funds. An account balance is maintained for
each participant reflecting elected deferrals, the employer match, plus or
minus investment gains or losses. A participant may direct the trustee to
invest an amount equal to his assigned account balance in any investment
identified in the selected list; however, the Company has reserved the
right to veto any investment direction of the participant. All assets held
by the trust remain the unrestricted 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 investments held by the trustee are
carried at the fair value of the underlying assets. Because the investment
assets of the deferred compensation plan are assets of the Company, the
accompanying consolidated balance sheet reflects such investments as
assets with an offsetting liability for deferred compensation reflected in
long-term liabilities.
o Impairment of Long-Lived Assets
Long-lived assets and certain intangibles, including goodwill, are
reviewed for impairment whenever events or changes in circumstances
indicate that 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.
F-10
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
1. Background and Significant Accounting Policies (continued)
o Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 26, 2000, December 28, 1999, and December 29, 1998
are $18,065, $8,591, and $9,268, respectively.
o Accounting for Stock-Based Compensation
In accordance with Accounting Principles Board (APB) Opinion No. 25 and
related interpretations, the Company uses the intrinsic value-based method
for measuring stock-based compensation cost which measures compensation
cost as the excess, if any, of the quoted market price of company common
stock at the grant date over the amount the employee must pay for the
stock (see Note 4). Required pro forma disclosures of compensation expense
determined under the fair value method of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, are presented in Note 7.
o Earnings Per Share
Basic earnings per share amounts are computed based on the
weighted-average number of shares outstanding. For purposes of diluted
computations, the number of shares that would be issued from the exercise
of dilutive stock options has been reduced by the number of shares which
could have been purchased from the proceeds of the exercise at the average
market price of the Company's stock or the price of the Company's stock on
the exercise date.
o Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities,
which the Company adopted effective December 27, 2000. The statement
requires the Company to recognize all derivatives on the consolidated
balance sheet at fair value. Derivatives not considered hedges must be
adjusted to fair value through income. If a derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
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)
derivative will either be offset against the change in fair value of the
hedged asset, liability, or firm commitment through earnings or recognized
in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value
will be immediately recognized in earnings. The Company's adoption of SFAS
No. 133 will not have a significant effect on its results of operations or
financial position.
o Reclassifications
Certain reclassifications have been made to the 1999 and 1998 consolidated
financial statements to conform with the 2000 presentation.
o Fiscal Year
The Company operates on a 52- or 53-week fiscal year ending the last
Tuesday in December. The fiscal quarters for the Company consist of
accounting periods of 12, 12, 12, and 16 or 17 weeks, respectively. Fiscal
2000, 1999, and 1998 each included 52 weeks of operations.
2. Acquisition of Business From Related Party
On October 19, 1998, the Company acquired the operations and purchased certain
assets and assumed certain liabilities of Coulter Enterprises, Inc. (CEI), a
restaurant management services company owned by Jamie B. Coulter, the Company's
Chairman of the Board of Directors and Chief Executive Officer. CEI had provided
accounting and administrative services to the Company since the Company's
inception. The aggregate purchase price was approximately $11,432, consisting of
$10,500 of internally generated cash with the balance comprised of assumed
liabilities. The Company accounted for the transaction using the purchase method
of accounting. In connection with the purchase price allocation, the Company
recorded an intangible asset of approximately $9,760 representing intellectual
properties which are being amortized over a period of 10 years. The acquisition
was approved by the Company's independent directors. In addition, the Company
engaged an independent financial advisor who rendered an opinion that the
transaction was fair to the Company and its stockholders from a financial point
of view. Pro forma amounts are not presented since the amounts would not be
significant.
F-12
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
3. Treasury Stock Transactions
The Board of Directors has authorized the Company to purchase shares of the
Company's common stock in open market or in privately negotiated transactions.
Pursuant to such authorization, the Company has purchased 5,605,074, 8,758,005,
and 2,610,600 shares of its common stock at average prices of $8.79, $8.73, and
$13.93 per share during the fiscal years ended 2000, 1999, and 1998,
respectively. The Company is accounting for the purchases using the constructive
retirement method of accounting wherein the aggregate par value of the stock is
charged to the common stock account and the excess of cost over par value is
charged to paid-in capital.
4. Accounting Changes
o Stock Options
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB No. 25. The Interpretation
requires, among other things, that stock options which have been modified
after December 15, 1998 to reduce the exercise price must be accounted for
as variable. The Company has adopted the accounting change for modified
stock options on a prospective basis effective July 1, 2000, as required
by the Interpretation. Pursuant to the rules for the initial application
of the Interpretation, imputed non-cash compensation expense is to be
recognized on a prospective basis to the extent that the market price of
the Company's common stock after July 1, 2000 exceeds the common stock
price on July 1, 2000, of $10.125. The Company has repriced options during
fiscal 1999 and in January 2000, which are subject to the Interpretation.
At December 26, 2000, there were approximately 4,731,000 shares under
options subject to the Interpretation. These options are accounted for as
variable from July 1, 2000, until the options are exercised, forfeited, or
expire unexercised. Prior to the Interpretation, the Company accounted for
these repriced options as fixed. Because the market price of the Company's
common stock was lower on December 26, 2000 than on July 1, 2000, the
adoption of the Interpretation had no effect on the Company's net income
for the year ended December 26, 2000.
F-13
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
4. Accounting Changes (continued)
o Preopening Costs
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, Reporting the Costs of Start-Up
Activities, requiring the costs related to start-up activities be expensed
as incurred. Prior to 1998, the Company capitalized certain preopening
costs incurred in connection with the opening of new restaurant locations.
The Company adopted the provisions of the SOP in its consolidated
financial statements for the year ended December 29, 1998. The effect of
the adoption of the SOP was to decrease net income in 1998 by $2,703
($0.07 per share) and to record a charge for the cumulative effect of an
accounting change of $6,904, net of income taxes of $2,921 ($0.17 per
share), to expense costs that had been capitalized prior to 1998.
5. Long-Term Revolver
The Company has entered into a $20,000 revolving term loan agreement with a
bank, under which no borrowings were outstanding at December 26, 2000. The loan
commitment matures in April 2005 and requires interest only payments through
April 2003, at which time the loan will convert to a term note with monthly
principal and interest payments sufficient to amortize the loan over its
remaining term. The interest rate is at the daily prime rate as published in The
Wall Street Journal. In addition, the Company pays a facility fee of 1/4 of one
percent on the unused portion of the facility.
6. Preferred Stock
The Company's Board of Directors has the authority to issue up to 2,000,000
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges, and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preference,
and the numbers of shares constituting any series or the designation of such
series.
F-14
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
7. Stock Options
The Company has elected to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations in accounting for its employee
stock options because, as described below, the alternative fair value accounting
provided under SFAS No. 123 requires use of option valuation models that were
not developed for use in valuing employee stock options.
o 1992 Stock Option Plan
In January 1992, the Board of Directors adopted a stock option plan (the
Plan), last amended in June 1996, providing for incentive and nonqualified
stock options pursuant to which up to 10,000,000 shares of common stock
are available for issuance. Options granted under this Plan vest in
periods ranging from three to five years in equal annual installments
commencing from the date of grant.
o Directors Stock Option Plan
In January 1992, the Board of Directors adopted a stock option plan as
amended June 9, 2000, providing for nondiscretionary grants to nonemployee
directors pursuant to which up to 700,000 shares of common stock are
available for issuance. All options granted under this plan have 10-year
terms and vest equally over a three-year period commencing from the date
of grant.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 using the fair value method of that statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 2000, 1999,
and 1998, respectively: risk-free interest rates of 6.0%, 6.0%, and 6.5%; no
dividend yields; volatility factors of the expected market price of the
Company's common stock of 0.436, 0.443, and 0.357; and a weighted-average
expected life of the option ranging from four to five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock
F-15
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
7. Stock Options (continued)
options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information follows:
2000 1999 1998
---------------------------------------------------------------
Pro forma net income $3,020 $2,704 $22,095
Pro forma earnings per share:
Basic 0.12 0.08 0.55
Diluted 0.11 0.08 0.55
Weighted-average fair value of options
granted during the year 3.68 3.84 2.81
A summary of the Company's stock option activity and related information for the
years ended December 26, 2000, December 28, 1999, and December 29, 1998 is as
follows:
2000 1999 1998
-------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Exercise Average Exercise
Exercise Price Options (000) Price Options (000) Price Options (000)
-------------------------------------------------------------------------------------------------
Outstanding at beginning of
year $16.57 6,456 $16.91 6,982 $18.08 8,154
Granted 8.55 6,394 8.15 616 10.43 1,180
Exercised 8.16 (22) 4.01 (9) 16.12 (62)
Canceled 17.32 (5,001) 13.04 (1,133) 18.23 (2,290)
------------------ ------------------ ----------------
Outstanding at end of year 9.57 7,827 16.57 6,456 16.91 6,982
================== ================== ================
F-16
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
7. Stock Options (continued)
On January 7, 2000, the Board of Directors approved the repricing of 4,591,757
options held by certain current employees, including officers of the Company
with an exercise price in excess of the closing price of the Company's common
stock on that date of $8.47 and whose options were not repriced at the time of
the December 14, 1998 repricing. Other than the change in the exercise price,
there was no other change in the terms of the original options as granted.
On September 10, 1999, the Company repriced 148,400 options where the previous
exercise price of the options was in excess of the closing price of the
Company's stock on that date of $7.94. The options were held by nonemployee
directors. The terms of the repriced options were the same as the original
options, except that the expiration date was extended five years.
The options repriced on January 7, 2000 and September 10, 1999, of which
4,731,000 are outstanding at December 26, 2000, are subject to the application
of variable accounting pursuant to FASB Interpretation No. 44.
On December 14, 1998, the Company canceled 1,711,253 options previously
outstanding and reissued 767,584 new options with an exercise price of $8.00.
The options were held by current officers and employees, excluding the Company's
Chairman and Chief Executive Officer. The terms of the new options were the same
as the original options, except the new options vest equally over a three-year
period commencing one year from the date of grant.
For options outstanding as of December 26, 2000, 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 Remaining
December 26 Exercise Contract Life
Range of Prices 2000 Price
---------------------------------------------------------------------------------------------------------------------------
$3.38 to $7.94 227,136 $ 7.41 4.52
$8.00 to $17.94 6,760,211 8.57 5.94
$18.25 to $18.81 839,448 18.28 4.05
F-17
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
7. Stock Options (continued)
The number of shares and weighted-average exercise price of options exercisable
at December 26, 2000 are as follows:
Options Exercisable
-----------------------------------------------------------------------------
Number Weighted-
Exercisable at Average
Range of Prices December 26, Exercise
2000 Price
-----------------------------------------------------------------------------
$3.38 to $7.94 145,724 $ 7.33
$8.00 to $17.94 4,852,912 8.53
$18.25 to $18.81 839,051 18.29
8. Related-Party Transactions
Prior to the acquisition of CEI on October 19, 1998, the Company utilized its
affiliate to provide certain accounting, computer and administrative services.
The Company incurred fees of $4,367, related to such services for the fiscal
year 1998. In addition, the Company reimbursed CEI $856 during fiscal 1998 for
the use of an airplane and pilot services provided by an affiliated entity.
The Company leases on a month-to-month basis meeting room space, parking lot
space and document storage space from entities owned by Jamie B. Coulter, the
Company's Chairman and Chief Executive Officer. Total rental fees paid to these
related entities in 2000, 1999, and 1998 were $30, $47, and $38, respectively.
In addition, in 2000, 1999, and 1998 the Company purchased business gifts and
awards from a retail store owned by Jamie B. Coulter totaling $56, $8, and $24,
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.
9. Leases
The Company leases certain facilities under noncancelable operating leases
having terms expiring between 2001 and 2025. The leases have renewal clauses of
five to 20 years, which are exercisable at the option of the lessee. In
addition, certain leases contain
F-18
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
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 2000, 1999, and 1998 was $12,310,
$11,575, and $10,227, respectively, including contingent rentals of
approximately $228, $266, and $273, respectively.
Lease payments under noncancelable operating leases for each of the next five
years and in the aggregate are as follows at December 26, 2000:
Operating Leases
---------------------
2001 $12,161
2002 10,792
2003 8,453
2004 5,989
2005 3,326
Thereafter 4,970
---------------------
Total minimum lease payments $45,691
=====================
10. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
2000 1999 1998
--------------------------------------------------------------------
Numerator:
Numerator for basic and diluted earnings
per share - income available to
common stockholders
$ 16,130 $ 5,401 $ 25,507
====================================================================
Denominator:
Denominator for basic earnings per share -
weighted-average shares 26,189,600 35,089,084 39,989,091
Effect of dilutive employee stock options 296,333 101,207 44,789
--------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted-average shares 26,485,933 35,190,291 40,033,880
====================================================================
Basic earnings per share $ 0.62 $ 0.15 $ 0.64
====================================================================
Diluted earnings per share $ 0.61 $ 0.15 $ 0.64
====================================================================
F-19
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
11. Income Taxes
Income taxes are included in the consolidated statements of income as follows:
2000 1999 1998
----------------------------------
Income tax expense on income before
cumulative effect of change
in accounting principle $7,590 $2,950 $21,843
Cumulative effect of income tax benefit
for change in accounting principle - - (2,921)
-----------------------------------
Total provision for income taxes $7,590 $2,950 $18,922
===================================
The components of the provision for income taxes consist of the following:
2000 1999 1998
--------------------------------------
Current tax expense:
Federal $6,997 $14,526 $15,778
State 1,327 1,491 1,556
--------------------------------------
Total current 8,324 16,017 17,334
Deferred tax expense (benefit):
Federal 137 (17,861) 1,456
Foreign (886) 6,981 -
State 15 (2,187) 132
--------------------------------------
Total deferred (734) (13,067) 1,588
--------------------------------------
Total provision for income taxes $7,590 $ 2,950 $18,922
======================================
The difference between the reported provision for income taxes and taxes
determined by applying the applicable U.S. federal statutory income tax rate to
income before taxes is reconciled as follows:
2000 1999 1998
-------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
-------------------------------------------------------------------------------------------
Income tax expense at federal
statutory rate $8,302 35% $2,923 35% $15,550 35%
State tax expense, net 878 4 1,105 13 1,099 2
Valuation allowance - - 78 3 3,761 9
Other items, net, principally
tip credits (1,590) (7) (1,156) (16) (1,488) (3)
-------------------------------------------------------------------------------------------
Actual provision for income
taxes $7,590 32% $2,950 35% $18,922 43%
===========================================================================================
F-20
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
11. 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 26, December 28,
2000 1999
-------------------------
Deferred tax assets:
Foreign NOL carryforward $ 7,612 $ 8,450
Preopening costs 1,077 --
Accrued liabilities 1,107 1,411
Deferred compensation 930 --
Other 2,183 1,139
----------------------
12,909 11,000
Valuation allowance (3,839) (3,839)
----------------------
Total deferred tax assets 9,070 7,161
Deferred tax liabilities:
Property and equipment 1,814 723
Basis differences in foreign investments 2,185 2,139
Other 194 156
----------------------
Total deferred tax liabilities 4,193 3,018
----------------------
Net deferred tax assets $ 4,877 $ 4,143
======================
As of December 26, 2000, the Company has net operating loss (NOL) carryforwards
of approximately $22,069 for foreign tax purposes currently having indefinite
expiration dates.
The valuation allowance for deferred tax assets at December 26, 2000 was $3,839.
The valuation allowance is unchanged for the year ended December 26, 2000 and
increased $78 for the year ended December 28, 1999. In assessing the
realizability of the deferred tax assets, the Company considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of the deferred
F-21
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
11. Income Taxes (continued)
tax assets associated with the Foreign NOL carryforward is dependent on the
generation of future taxable income in Australia during the periods in which the
underlying temporary differences can be used to offset taxable income. The
Company has considered the projected future taxable income and tax planning
strategies in making this assessment. Based on the relevant factors considered,
the Company believes it is more likely than not that it will realize the
benefits of the deferred tax assets, net of the existing valuation allowance, at
December 26, 2000.
Pretax net loss attributable to foreign operations was $9,274 and $15,157 for
the years ended December 26, 2000 and December 28, 1999, respectively.
12. Provision for Impaired Assets and Restaurant Closings
The Company periodically reviews its long-lived assets for indications of
impairment. Based on those reviews, the trends of operations of certain
restaurants indicated the undiscounted cash flows from their operations would be
less than the carrying value of the long-lived assets of the restaurants. As a
result, the carrying values were written down to the Company's estimates of fair
value. Fair value was estimated utilizing the best information available using
whatever estimates, judgments, and projections were considered necessary.
In the third and fourth quarters of 2000, the Company recorded a provision of
$3,000 for the write-down of impaired assets relating to certain underperforming
Australian restaurants. In addition, a charge of $1,310 was recorded for
severance, rents, and certain other costs associated with closing 14 Australian
restaurants.
In the third and fourth quarters of 1999, the Company recorded a provision of
$38,931 which included approximately $35,797 for the write-down of impaired
assets related to certain underperforming restaurants and $3,134 related to the
costs of closing 25 domestic restaurants. The Company also incurred an
impairment charge of $4,646 to reflect the write-down of certain underperforming
restaurants in the fourth quarter of 1998.
To the extent there are "assets held for disposal" recorded in the Company's
consolidated balance sheets, such amounts are included in property and equipment
at the lower of cost or fair market value less estimated selling costs. The
remaining carrying value of the
F-22
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
12. Provision for Impaired Assets and Restaurant Closings (continued)
related assets is not significant. Net sales for all closed restaurants included
in the Company's operating results were $6,196, $32,050, and $39,741 and
operating losses at the restaurant level were $827, $4,144, and $4,956 for the
years ended 2000, 1999, and 1998, respectively.
13. Retirement Plans
In August 1999, the Company approved the adoption of two plans which 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 their annual salaries of up
to 15% under the 401(k) plan and up to 20% under the deferred compensation plan.
The Company may make additional contributions at the discretion of the Board of
Directors. The Plans were effective beginning October 7, 1999, and during 2000
and 1999, the Company's contributions to the Plans were $1,953 and $475,
respectively.
14. Quarterly Financial Summaries (Unaudited)
The following table summarizes the unaudited consolidated quarterly results of
operations for fiscal 2000 and 1999:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
----------------------------------------------------------------------
2000
Net sales $139,254 $134,187 $130,953 $171,469
Restaurant operating income (a) and (b) 21,938 17,687 12,415 11,622
Net income (a) and (b) 7,102 5,858 2,547 623
Basic earnings per share 0.25 0.22 0.10 0.05
Diluted earnings per share 0.25 0.22 0.10 0.04
(a) The third quarter of fiscal 2000 includes a charge to earnings of $541
($352 net of income tax) related to the provision for Australian
restaurant store closings recorded in the quarter.
(b) The fourth quarter of fiscal 2000 includes a charge to earnings of
$3,769 ($2,480 net of income tax) related to the provision for asset
impairment and store closing costs recorded in the quarter for certain
Australian restaurants.
F-23
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)
14. Quarterly Financial Summaries (Unaudited) (continued)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------------------------------------------------------------------------
1999
Net sales $139,938 $134,753 $134,801 $176,263
Restaurant operating income (loss) (a) and (b) 20,690 19,042 (1,779) 6,265
Net income (loss) (a) and (b) 7,781 7,083 (5,316) (4,147)
Basic earnings (loss) per share 0.21 0.20 (0.15) (0.11)
Diluted earnings (loss) per share 0.21 0.20 (0.15) (0.11)
(a) The third quarter of fiscal 1999 includes a charge to earnings of
$19,365 ($12,103 net of income tax) related to the provision for asset
impairment recorded in the quarter.
(b) The fourth quarter of fiscal 1999 includes a charge to earnings of
$19,566 ($12,304 net of income tax) related to the provision for asset
impairment and store closing costs recorded in the quarter.
15. Other Income, Net
The components of other income, net are as follows:
2000 1999 1998
---------------------------------------------------------------------
Interest income $1,431 $2,171 $2,838
Interest expense (327) - -
Gain on sale of assets 1,304 - -
Other 122 19 68
---------------------------------------------------------------------
$2,530 $2,190 $2,906
=====================================================================
16. Subsequent Events
On January 3, 2001, the Board of Directors declared the Company's quarterly cash
dividend of $.125 per share, payable January 26, 2001, to stockholders of record
on January 12, 2001.
F-24