sec document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended Commission file number
September 4, 2001 0-19907
----------------- -------
LONE STAR STEAKHOUSE & SALOON, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 48-1109495
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
224 EAST DOUGLAS, SUITE 700
WICHITA, KANSAS 67202
(Address of principal executive offices) (Zip code)
(316) 264-8899
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
/X/ YES / / NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at October 15, 2001
Common Stock, $.01 par value 24,059,322 shares
LONE STAR STEAKHOUSE & SALOON, INC.
INDEX
PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS 2
AT SEPTEMBER 4, 2001 AND DECEMBER 26, 2000
CONDENSED CONSOLIDATED STATEMENTS OF 3
INCOME FOR THE TWELVE WEEKS ENDED
SEPTEMBER 4, 2001 AND SEPTEMBER 5, 2000
CONDENSED CONSOLIDATED STATEMENTS OF 4
INCOME FOR THE THIRTY-SIX WEEKS ENDED
SEPTEMBER 4, 2001 AND SEPTEMBER 5, 2000
CONDENSED CONSOLIDATED STATEMENTS OF 5
CASH FLOWS FOR THE THIRTY-SIX WEEKS ENDED
SEPTEMBER 4, 2001 AND SEPTEMBER 5, 2000
NOTES TO CONDENSED CONSOLIDATED 6
FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND 9
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE 15
DISCLOSURES ABOUT MARKET RISKS
PART II. OTHER INFORMATION
ITEMS 1 THROUGH 3 AND ITEM 5 HAVE BEEN OMITTED
SINCE THE ITEMS ARE EITHER INAPPLICABLE OR THE
ANSWER IS NEGATIVE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 16
HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
-1-
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
September 4, 2001 December 26, 2000
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 57,501 $ 29,029
Inventories 12,340 12,704
Other current assets 5,412 5,415
-------- ----------
Total current assets 75,253 47,148
Property and equipment, net 384,106 406,761
Intangible and other assets, net 39,296 35,014
-------- ----------
Total assets $498,655 $ 488,923
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,804 $ 12,918
Other current liabilities 30,577 35,946
-------- ----------
Total current liabilities 48,381 48,864
Deferred compensation obligation 3,997 2,276
Stockholders' equity:
Preferred stock -- --
Common stock 241 243
Additional paid-in capital 197,764 188,976
Retained earnings 261,347 260,423
Accumulated other comprehensive loss (13,075) (11,859)
-------- ----------
Total stockholders' equity 446,277 437,783
-------- ----------
Total liabilities and stockholders' equity $498,655 $ 488,923
======== ==========
See accompanying notes.
-2-
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Statements of Income
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
For the twelve weeks ended
------------------------------------------
September 4, 2001 September 5, 2000
----------------- -----------------
Net sales $ 136,465 $ 130,953
Costs and expenses:
Costs of sales 47,971 46,904
Restaurant operating expenses 65,229 64,504
Depreciation and amortization 6,428 6,589
Provision for impaired assets and restaurant closings -- 541
--------- ---------
Restaurant costs and expenses 119,628 118,538
--------- ---------
Restaurant operating income 16,837 12,415
General and administrative expenses 10,221 8,747
Non-cash stock compensation benefit (3,170) --
--------- ---------
Income from operations 9,786 3,668
Other income, net 490 271
--------- ---------
Income before income taxes 10,276 3,939
Provision for income taxes 3,260 1,392
--------- ---------
Net income $ 7,016 $ 2,547
========= =========
Basic earnings per share $ 0.29 $ 0.10
========= =========
Diluted earnings per share $ 0.28 $ 0.10
========= =========
See accompanying notes.
-3-
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Statements of Income
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
For the thirty-six weeks ended
---------------------------------------
September 4, 2001 September 5, 2000
----------------- -----------------
Net sales $416,287 $404,395
Costs and expenses:
Costs of sales 145,295 141,790
Restaurant operating expenses 199,461 190,275
Depreciation and amortization 19,310 19,749
Provision for impaired assets and restaurant closings -- 541
-------- --------
Restaurant costs and expenses 364,066 352,355
-------- --------
Restaurant operating income 52,221 52,040
General and administrative expenses 29,264 29,102
Non-cash stock compensation expense 11,265 --
-------- --------
Income from operations 11,692 22,938
Other income, net 2,817 1,080
-------- --------
Income before income taxes 14,509 24,018
Provision for income taxes 4,573 8,510
-------- --------
Net income $ 9,936 $ 15,508
======== ========
Basic earnings per share $ 0.41 $ 0.58
======== ========
Diluted earnings per share $ 0.40 $ 0.57
======== ========
See accompanying notes.
-4-
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the thirty-six weeks ended
--------------------------------------
September 4, 2001 September 5, 2000
----------------- -----------------
Cash flows from operating activities:
Net income $ 9,936 $ 15,508
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 22,062 22,020
Provision for impaired assets and restaurant closings -- 541
Non-cash stock compensation expense 11,265 --
Gain on sale of assets (1,801) --
Net change in operating assets and liabilities:
Change in operating assets (4,155) (827)
Change in operating liabilities (484) 790
-------- --------
Net cash provided by operating activities 36,823 38,032
Cash flows from investing activities:
Purchases of property and equipment (2,373) (19,012)
Proceeds from sale of assets 5,462 5,697
Other 47 (2,182)
-------- --------
Net cash provided by (used in) investing activities 3,136 (15,497)
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,063 181
Common stock repurchased and retired (3,542) (38,913)
Proceeds from revolver -- 6,955
Payment on revolver -- (6,955)
Cash dividends paid (9,011) (6,508)
-------- --------
Net cash used in financing activities (11,490) (45,240)
Effect of exchange rate on cash 3 (8)
-------- --------
Net increase (decrease) in cash and cash equivalents 28,472 (22,713)
Cash and cash equivalents at beginning of period 29,029 50,673
-------- --------
Cash and cash equivalents at end of period $ 57,501 $ 27,960
======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 549 $ 11,028
======== ========
See accompanying notes.
-5-
LONE STAR STEAKHOUSE & SALOON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include all
adjustments, consisting of normal, recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for the periods presented. The results for the thirty-six
weeks ended September 4, 2001 are not necessarily indicative of the results to
be expected for the full year ending December 25, 2001. This quarterly report on
Form 10-Q should be read in conjunction with the Company's audited consolidated
financial statements in its annual report on Form 10-K for the year ended
December 26, 2000.
2. COMPREHENSIVE INCOME
Comprehensive income is comprised of the following:
For the twelve weeks ended For the thirty-six weeks ended
-------------------------- ------------------------------
Sept. 4, 2001 Sept. 5, 2000 Sept. 4, 2001 Sept. 5, 2000
------------- ------------- ------------- -------------
Net income $7,016 $2,547 $ 9,936 $15,508
Foreign currency translation
adjustments (164) (1,044) (1,216) (3,548)
------ -------- -------- --------
Comprehensive income $6,852 $1,503 $ 8,720 $11,960
====== ======== ======= ========
3. EARNINGS PER SHARE
Basic earnings per share amounts are computed based on the weighted
average number of shares actually outstanding. For purposes of diluted
computations, the number of shares that would be issued from the exercise of
stock options has been reduced by the number of shares which could have been
purchased from the proceeds at the average market price of the Company's stock
or price of the Company's stock on the exercise date if options were exercised
during the period presented.
The weighted average shares outstanding for the periods presented are as
follows (in thousands):
For the twelve weeks ended For the thirty-six weeks ended
------------------------------ ------------------------------
Sept. 4, 2001 Sept. 5, 2000 Sept. 4, 2001 Sept. 5, 2000
------------- ------------- ------------- --------------
Basic average shares outstanding 24,031 25,680 24,032 26,763
Diluted average shares outstanding 25,453 26,227 25,099 27,299
-6-
4. LONG - TERM REVOLVERS
In August 2001, the Company expanded its credit facilities by entering
into an unsecured revolving credit agreement with a group of banks led by
SunTrust Bank. The new credit facility allows the Company to borrow up to
$50,000. The commitment terminates at June 30, 2004; however, it is subject to
acceleration in the event of a change of control of the Company as that term is
defined in the agreement. At the time of each borrowing, the Company may elect
to pay interest at either the banks published prime rate or a rate determined by
reference to the Adjusted LIBOR rate. The Company is required to achieve certain
financial ratios and to maintain certain net worth amounts as defined in the
agreement. The Company is required to pay on a quarterly basis a facility fee
equal to .25% per annum on the daily unused amount of the credit facility. At
September 4, 2001, there were no borrowings outstanding pursuant to the credit
facility.
The Company also has entered into a $5,000 revolving term loan agreement
with a bank, under which no borrowings were outstanding at September 4, 2001 or
December 26, 2000. The loan commitment matures in August 2004 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 .50% below
the daily prime rate as published in the Wall Street Journal. In addition, the
Company pays a facility fee of .25% per annum on the daily unused portion of the
credit facility.
5. TREASURY STOCK TRANSACTIONS
The Board of Directors has authorized the Company to purchase shares of
the Company's common stock in the open market or in privately negotiated
transactions. Pursuant to the authorization, the Company purchased 346,187
shares of its common stock during the thirty-six weeks ended September 4, 2001,
at an average price of $10.23 per share and 4,202,475 shares of its common stock
during the thirty-six weeks ended September 5, 2000, at an average price of
$9.26 per share. The Company is accounting for the purchases using the
constructive retirement method of accounting wherein the aggregate par value of
the stock is charged to the common stock account and the excess of cost over par
value is charged to paid-in capital.
6. STOCK BASED COMPENSATION
Financial Accounting Standards Board Interpretation No. 44 (FIN 44),
"ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN
INTERPRETATION OF APB NO. 25" became effective July 1, 2000. FIN 44 requires,
among other things, that stock options, which have been modified after December
15, 1998 to reduce the exercise price, be accounted for as variable. Under
variable plan accounting, compensation expense is adjusted for increases or
decreases in the fair market value of the Company's common stock based upon the
changes in the common stock price from the value of $10.125 per share at July 1,
2000. Variable plan accounting is applied to the modified awards until the
options are exercised, forfeited or expire unexercised. The Company repriced
options in fiscal 1999 and 2000 which are subject to the accounting provisions
of FIN 44, and at September 4, 2001, outstanding options to purchase
approximately 4,690,000 shares were affected by this accounting requirement. In
connection with the application of FIN 44 for the twelve-week and thirty-six
weeks ended September 4, 2001, the Company recorded non-cash stock compensation
(benefit) expense of ($3,176) and $11,265, respectively. In each subsequent
quarter, the Company will record an additional non-cash charge or benefit
related to the repriced options then outstanding based upon the change in the
Company's common stock price as compared to the price at the beginning of the
previous quarter.
-7-
7. STOCK OPTIONS
During the thirty-six weeks ended September 4, 2001, the Company granted to
non-executive employees and non-employee directors stock options to purchase
300,608 and 60,400 shares of common stock, respectively, at exercise prices
ranging from $8.875 to $10.75 per share, the market price at date of grant,
pursuant to its 1992 stock option plans.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 balance sheet at fair value. Derivatives not considered
hedges must be adjusted to fair value through income. If a derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedged
asset, liability or firm commitment through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company's adoption of SFAS No. 133 did not have a
significant effect on its results of operations or financial position.
In June 2001, the FASB issued SFAS No. 141 "Business Combinations" and
SFAS No. 142 "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of the Statement is expected to result in an
increase in net income in fiscal 2002 of approximately $575 ($.02 per share),
subject to the identification of separately recognized intangibles which would
continue to be amortized under the new rules. During 2002, the Company will
perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of December 26, 2001 and has not yet determined what
the effect of these tests will be on the earnings and financial position of the
Company.
9. SUBSEQUENT EVENT
In October 2001, the Board of Directors declared the Company's quarterly cash
dividend of $.125 per share payable October 26, 2001 to stockholders of record
on October 12, 2001.
-8-
LONE STAR STEAKHOUSE & SALOON, INC.
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 condensed consolidated financial statements including the notes thereto
included elsewhere in this Form 10-Q.
There were 246 operating domestic Lone Star Steakhouse & Saloon ("Lone
Star") restaurants as of September 4, 2001. In addition, licensees operate three
Lone Star restaurants in California, one in Guam, and one in Canada. The Company
intends to open four Lone Star restaurants during the remainder of fiscal 2001.
The Company currently operates five Del Frisco's Double Eagle Steak House
("Del Frisco's") restaurants, 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 Steakhouse ("Sullivan's")
restaurants, including the Sullivan's restaurant opened in Tucson, Arizona in
November 2000.
Internationally, the Company currently operates 26 Lone Star restaurants in
Australia. The Company closed nine restaurants in Australia during 2000 and an
additional five restaurants in January 2001.
-9-
LONE STAR STEAKHOUSE & SALOON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated (i) the
percentages which certain items included in the condensed consolidated statement
of income bear to net sales, and (ii) other selected operating data:
TWELVE WEEKS ENDED (1) THIRTY-SIX WEEKS ENDED
---------------------- ----------------------
SEPT. 4, 2001 SEPT. 5, 2000 SEPT. 4, 2001 SEPT. 5, 2000
------------- ------------- ------------- -------------
(DOLLARS IN THOUSAND)
STATEMENT OF OPERATIONS:
Net sales 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales .................................. 35.2 35.8 34.9 35.1
Restaurant operating expenses ................... 47.8 49.3 47.9 47.0
Depreciation and amortization ................... 4.7 5.0 4.7 4.9
Provision for impaired assets and
restaurant closings ........................... -- 0.4 -- 0.1
----- ----- ---- -----
Restaurant costs and expenses .............. 87.7 90.5 87.5 87.1
----- ----- ---- -----
Restaurant operating income ........................... 12.3 9.5 12.5 12.9
General and administrative expenses ................... 7.5 6.7 7.0 7.2
Non-cash stock compensation (benefit) expense ......... (2.3) -- 2.7 --
----- ----- ---- -----
Income from operations ................................ 7.1 2.8 2.8 5.7
Other income, net ..................................... 0.4 0.2 0.7 0.2
----- ----- ---- -----
Income before income taxes ............................ 7.5 3.0 3.5 5.9
Provision for income taxes ............................ 2.4 1.1 1.1 2.1
----- ----- ---- -----
Net income ............................................ 5.1% 1.9% 2.4% 3.8%
======== ======== ======== ========
RESTAURANT OPERATING DATA:
Average sales per restaurant on an annualized basis (2) $ 2,014 $ 1,908 $ 2,064 $ 1,951
Number of restaurants at end of the period ............ 295 292 295 292
(1) The Company operates on a fifty-two or fifty-three week fiscal year ending
the last Tuesday in December. The fiscal quarters for the Company consist
of accounting periods of twelve, twelve, twelve and sixteen or seventeen
weeks, respectively.
(2) Average sales per restaurant on an annualized basis are computed by
dividing a restaurant's total sales for full accounting periods open
during the reporting period, and annualizing the result.
-10-
LONE STAR STEAKHOUSE & SALOON, INC.
TWELVE WEEKS ENDED SEPTEMBER 4, 2001 COMPARED TO TWELVE WEEKS
ENDED SEPTEMBER 5, 2000
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales increased $5,512 (4.2%) to $136,465 for the twelve weeks ended
September 4, 2001 compared to $130,953 for the twelve weeks ended September 5,
2000. The increase was principally attributable to additional sales of $3,702
from six new domestic Lone Star restaurants and one new Sullivan's restaurant
opened since September 2000. In addition, increased sales also resulted from an
expanded number of Sullivan's restaurants opened on Sundays during fiscal 2001.
The increases were partially offset by the impact of the 14 Australian Lone
Star's closed subsequent to August 2000. Same store sales increased 2.6%
compared with the prior year.
Costs of sales, primarily food and beverages, decreased as a percentage of
sales to 35.2% from 35.8% due primarily to a small increase in menu prices, a
change in the menu mix in the upscale restaurants and a decrease in beef costs.
The decreases were partially offset by the impact of promotional pricing
from the Company's direct mail campaigns.
Restaurant operating expenses for the twelve weeks ended September 4, 2001
increased $725 from $64,504 in 2000, to $65,229 and decreased as a percentage of
net sales from 49.3% to 47.8%. The decrease in restaurant operating expenses as
a percentage of net sales is attributable to decreases in advertising, building
and equipment maintenance expenses, and pre-opening expenses. The decreases were
partially offset by increased utility costs and labor costs, primarily
attributable to costs associated with hiring and training new managers and
retaining existing personnel. The decrease in advertising resulted from a
strategic decision during the quarter to decrease spending for broadcast media
and institute a program of print advertising featuring slightly discounted
promotional pricing on selected menu items.
Depreciation and amortization decreased $161 in the twelve weeks ended
September 4, 2001 compared to the same period in 2000. The decrease is
attributable primarily to the restaurants closed since August 2000.
Provision for impaired assets and store closings for the twelve-weeks
ended September 5, 2000 reflects the costs associated with the closing of nine
restaurants in Australia in August 2000.
General and administrative expenses increased $1,474 compared to the same
period in 2000. The increases in general and administrative expenses were
attributable primarily to increases in professional fees, recruiting costs and
salaries and related costs for increased staffing in the number of field
supervisory personnel for domestic operations. The increases were partially
offset by decreases in similar field supervisory costs related to those
Australian restaurants closed since August 2000.
Non-cash stock compensation benefit for the twelve weeks ended September
4, 2001 was $3,170. Financial Accounting Standards Board Interpretation No. 44
(FIN 44), "ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN
INTERPRETATION OF APB NO. 25" became effective July 1, 2000. FIN 44 requires,
among other things, that stock options, which have been modified after December
15, 1998 to reduce the exercise price, be accounted for as variable. Under
variable plan accounting, compensation expense is adjusted for increases or
decreases in the fair market value of the Company's common stock based upon the
changes in the common stock price from the value of $10.125 per share at July 1,
-11-
2000. Variable plan accounting is applied to the modified awards until the
options are exercised, forfeited or expire unexercised. The Company repriced
options in fiscal 1999 and 2000 which are subject to the accounting provisions
of FIN 44, and at September 4, 2001, outstanding options to purchase
approximately 4,690,000 shares were affected by this accounting requirement.
In each subsequent quarter, the Company will record an additional non-cash
expense or benefit related to the repriced options then outstanding based upon
the change in the Company's common stock price as compared to the price at the
beginning of the previous quarter.
Other income, net, for the twelve weeks ended September 4, 2001 was $490,
compared to $271 in 2000. The increase is primarily attributable to a gain on
sale of assets of $188.
The effective income tax rates for the twelve weeks ended September 4,
2001 and the twelve weeks ended September 5, 2000 were 31.7% and 35.4%,
respectively. The change in the effective tax rate is primarily attributable to
the impact of FICA Tip and other tax credits.
-12-
LONE STAR STEAKHOUSE & SALOON, INC.
THIRTY-SIX WEEKS ENDED SEPTEMBER 4, 2001 COMPARED TO THIRTY-SIX
WEEKS ENDED SEPTEMBER 5, 2000
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales increased $11,892 (2.9%) to $416,287 for the thirty-six weeks
ended September 4, 2001 compared to $404,395 for the thirty-six weeks ended
September 5, 2000. The increase was principally attributable to additional sales
of $7,946 from six new domestic Lone Star restaurants and one new Sullivan's
restaurant opened since September 2000. In addition, increased sales also
resulted from an expanded number of Sullivan's restaurants opened on Sundays
during fiscal 2001. The increases were partially offset by the impact of the 14
Australian Lone Star's closed subsequent to August 2000. Same store sales
increased 1.7% compared with the comparable prior year period.
Costs of sales, primarily food and beverages, decreased as a percentage of
sales to 34.9% from 35.1% due primarily to a (i) small increase in menu prices
initiated primarily in the second quarter (ii) change in the menu mix in the
upscale restaurants and (iii) decrease in beef costs. The decreases were
partially offset by the impact of promotional pricing from the Company's direct
mail campaigns initiated late in the second quarter of 2001.
Restaurant operating expenses for the thirty-six weeks ended September 4,
2001 increased $9,186 from $190,275 in 2000, to $199,461 and increased as a
percentage of net sales from 47.0% to 47.9%. The increase in restaurant
operating expenses is attributable to increases in labor, advertising,
maintenance of buildings and equipment, certain insurance costs and increased
utility rates, primarily natural gas. The increases in labor were attributable
to increased hourly labor costs created by a continuing tight labor market and
costs associated with hiring and training new managers and retaining existing
personnel. In addition, labor costs increased due to new store openings. The
increases in restaurant operating expenses were partially offset by a decrease
in pre-opening expenses.
Depreciation and amortization decreased $439 in the thirty-six weeks ended
September 4, 2001 compared to the same period in 2000. The decrease is
attributable primarily to the restaurants closed since August 2000.
General and administrative expenses increased $162 compared to the same
period in 2000. The increases were attributable primarily to increases in
professional fees, recruiting costs and salaries and related costs for increased
staffing of field supervisory personnel for domestic operations. The increases
were partially offset by decreases in software consulting and development costs,
and field supervision costs including salaries and travel related to those
Australian restaurants closed since August 2000.
Non-cash stock compensation expense for the thirty-six weeks ended
September 4, 2001 was $11,265. See Note 6 to the Notes To Condensed Consolidated
Financial Statements included elsewhere herein for additional information.
Other income, net, for the thirty-six weeks ended September 4, 2001 was
$2,817, compared to $1,080 in 2000. The increase is primarily attributable to
gains on sale of assets of $1,800.
The effective income tax rates for the thirty-six weeks ended September 4,
2001 and the thirty-six weeks ended September 5, 2000 were 31.5% and 35.4%,
respectively. The decrease in the effective tax rate is primarily attributable
to the impact of FICA Tip and other tax credits.
-13-
IMPACT OF INFLATION
The primary inflationary factors affecting the Company's operations
include food and labor costs. A number of the Company's restaurant personnel are
paid at the federal and state established minimum wage levels and, accordingly,
changes in such wage levels affect the Company's labor costs. However, since the
majority of personnel are tipped employees, minimum wage changes generally have
little effect on overall labor costs. Recently the Company has experienced
significant increases in utility costs, particularly natural gas. Historically,
as food, labor, and most recently, utility costs have increased, the Company has
been able to offset these increases through menu price increases and economies
of scale; however, there may be delays in the implementation of such menu price
increases or in effecting timely economies of scale, as well as competitive
pressures which may limit the Company's ability to recover any cost increases in
its entirety. 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
each of the thirty-six weeks ended September 4, 2001 and September 5, 2000 (in
thousands):
Thirty-six weeks ended
Sept. 4, 2001 Sept. 5, 2000
------------- -------------
Net cash provided by operating activities..................... $ 36,823 $ 38,032
Net cash provided by (used in) investment activities.......... 3,136 (15,497)
Net cash used in financing activities......................... (11,490) (45,240)
Effect of exchange rate on cash............................... 3 (8)
---------- ---------
Net increase (decrease) in cash............................... $ 28,472 $ (22,713)
========== ==========
During the thirty-six week period ended September 4, 2001, the Company's
investment in property and equipment was $2,373 compared to $19,012 for the same
period in 2000. In the thirty-six week period ended September 4, 2001, the
Company received $5,462 in proceeds from the sale of assets compared to $5,697
for the same period in 2000.
The Company does not have significant receivables or inventory.
At September 4, 2001, the Company had $57,501 in cash and cash
equivalents. During August 2001, the Company expanded its credit facilities and
at September 4, 2001 has available an aggregate of $55,000 in unsecured
revolving credit arrangements. At September 4, 2001, the Company had no
outstanding borrowings. See Note 4 to the Notes to Condensed Consolidated
Financial Statements in this Form 10-Q for a further description of the
Company's credit facilities.
The Company's Board of Directors has authorized the purchase of shares of
the Company's common stock from time to time in the open market or in privately
negotiated transactions. During the thirty-six weeks ended September 4, 2001,
the Company purchased 346,187 shares at a cost of $3,542 and in the thirty-six
week period ended September 5, 2000 purchased 4,202,475 shares at a cost of
$38,913.
In the second quarter of fiscal 2000, the Company began paying quarterly
dividends on its common stock. During the thirty-six weeks ended September 4,
2001, the Company paid out dividends of $9,011 or $.375 per share and $6,508 or
$.25 per share for the thirty-six weeks ended September 5, 2000.
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The Company 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 for the period were not significant. As of September 4, 2001, the
Company's had no positions in futures contracts.
As described in Note 6 to the Notes to Condensed Consolidated Financial
Statements, the Company has options outstanding to purchase approximately
4,690,000 shares subject to variable plan accounting. The Company may incur
significant volatility in reporting earnings in future periods as fluctuations
in market prices of its common stock may greatly impact reported non-cash
compensation expenses on a periodic basis.
IMPACT OF RECENTLY ISSUED FINANCIAL STANDARDS
In June 2001, the FASB issued SFAS No. 141 "Business Combinations"
and SFAS No. 142 "Goodwill and Other Intangible Assets", effective for fiscal
years beginning after December 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with the
Statements.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of the Statement is expected to result in an
increase in net income in fiscal 2002 of approximately $575 ($.02 per share),
subject to the identification of separately recognized intangibles which would
continue to be amortized under the new rules. During 2002, the Company will
perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of December 26, 2001 and has not yet determined what
the effect of these tests will be on the earnings and financial position of the
Company.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Stockholders are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to open new restaurants, general market
conditions, competition and pricing and other risks set forth in the Company's
Annual Report on Form 10-K for the fiscal year ended December 26, 2000. Although
the Company believes the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
contained in the report will prove to be accurate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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THE COMPANY'S EXPOSURE TO MARKET RISKS WAS NOT SIGNIFICANT DURING
THE THIRTY-SIX WEEKS ENDED SEPTEMBER 4, 2001.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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FOR INFORMATION RELATING TO THE COMPANY'S ANNUAL MEETING OF
STOCKHOLDERS HELD ON JULY 6, 2001, PLEASE SEE PART II. OTHER
INFORMATION - ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR
THE QUARTERLY PERIOD ENDED JUNE 12, 2001, THE CONTENTS OF WHICH ARE
INCORPORATED HEREIN BY REFERENCE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT 99 LOAN AGREEMENT DATED AUGUST 10, 2001
BETWEEN THE COMPANY AND SUNTRUST BANK
(b) REPORTS ON FORM 8-K NONE
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LONE STAR STEAKHOUSE & SALOON, INC.
(Registrant)
Date October 19, 2001 /s/ Randall H. Pierce
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Randall H. Pierce
Chief Financial Officer
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