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
MARCH 21, 2006 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 by check mark whether the Registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.)
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell Company (as defined in
Rule 12b-2 of the Exchange Act).
|_| YES |X| 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 April 25, 2006
COMMON STOCK, $.01 PAR VALUE 20,887,234 SHARES
LONE STAR STEAKHOUSE & SALOON, INC.
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS 2
AT MARCH 21, 2006 AND DECEMBER 27, 2005
CONDENSED CONSOLIDATED STATEMENTS OF 3
INCOME FOR THE TWELVE WEEKS ENDED
MARCH 21, 2006 AND MARCH 22, 2005
CONDENSED CONSOLIDATED STATEMENTS OF 4
CASH FLOWS FOR THE TWELVE WEEKS ENDED
MARCH 21, 2006 AND MARCH 22, 2005
NOTES TO CONDENSED CONSOLIDATED 5
FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND 11
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE 16
DISCLOSURES ABOUT MARKET RISKS
ITEM 4. CONTROLS AND PROCEDURES 16
PART II. OTHER INFORMATION
ITEMS 3, 4 AND 5 HAVE BEEN OMITTED
SINCE THE ITEMS ARE EITHER INAPPLICABLE OR THE
ANSWER IS NEGATIVE
ITEM 1A. RISK FACTORS 16
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 17
ITEM 6. EXHIBITS 17
- 1 -
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
March 21, 2006 December 27, 2005
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 18,950 $ 18,390
Short-term investments 40,907 45,212
---------- ----------
59,857 63,602
Inventories 11,945 12,859
Prepaid insurance deposits 12,870 16,346
Assets held for sale 20,113 22,614
Other current assets 17,457 17,764
---------- ----------
Total current assets 122,242 133,185
Property and equipment 554,251 532,930
Less accumulated depreciation and amortization (228,918) (214,416)
---------- ----------
325,333 318,514
Other assets:
Deferred income taxes 24,332 24,013
Intangible and other assets, net 42,035 42,101
---------- ----------
Total assets $ 513,942 $ 517,813
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,449 $ 17,484
Accrued self insurance 20,102 21,406
Other current liabilities 27,490 31,026
---------- ----------
Total current liabilities 65,041 69,916
Long term liabilities, principally defered compensation obligations 25,221 24,290
Deferred rent obligations 10,080 11,266
---------- ----------
Total liabilities 100,342 105,472
Stockholders' equity:
Preferred stock -- --
Common stock 209 207
Additional paid-in capital 144,707 143,797
Retained earnings 272,347 272,000
Common stock held by Trust (3,663) (3,663)
---------- ----------
Total stockholders' equity 413,600 412,341
---------- ----------
Total liabilities and stockholders' equity $ 513,942 $ 517,813
========== ==========
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
-----------------------------------
March 21, 2006 March 22, 2005
-------------- --------------
Net sales $ 160,781 $ 156,284
Costs and expenses:
Costs of sales 58,671 52,925
Restaurant operating expenses 76,261 70,493
Depreciation and amortization 4,238 4,077
---------- ----------
Restaurant costs and expenses 139,170 127,495
General and administrative expenses 13,425 12,145
---------- ----------
Income from operations 8,186 16,644
Other income, net 264 146
---------- ----------
Income from continuing operations before income taxes 8,450 16,790
Provision for income taxes 2,783 5,567
---------- ----------
Income from continuing operations 5,667 11,223
Discontinued operations:
Loss from operations before income tax (2,974) (408)
Income tax benefit 1,093 94
---------- ----------
Loss from discontinued operations (1,881) (314)
---------- ----------
Income before cumulative effect of accounting change 3,786 10,909
Cumulative effect of accounting change, net of tax 601 --
---------- ----------
Net income $ 4,387 $ 10,909
========== ==========
Basic earnings (loss) per share:
Continuing operations $ 0.27 $ 0.55
Discontinued operations (0.09) (0.01)
Cumulative effect of accounting change 0.03 --
---------- ----------
Basic earnings per share $ 0.21 $ 0.54
========== ==========
Diluted earnings (loss) per share:
Continuing operations $ 0.25 $ 0.50
Discontinued operations (0.08) (0.01)
Cumulative effect of accounting change 0.03 --
---------- ----------
Diluted earnings per share $ 0.20 $ 0.49
========== ==========
Dividends per share $ 0.195 $ 0.175
========== ==========
See accompanying notes.
- 3 -
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the twelve weeks ended
----------------------------------
March 21, 2006 March 22, 2005
-------------- --------------
Cash flows from operating activities:
Net income $ 4,387 $ 10,909
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 5,000 4,732
Non-cash stock compensation expense 1,211 692
Loss on sale of assets -- 95
Cumulative effect of accounting change (619) --
Deferred income taxes 636 (991)
Loss from discontinued operations 1,881 314
Net change in operating assets and liabilities:
Change in operating assets 3,741 1,396
Change in operating liabilities (4,759) 3,320
---------- ----------
Net cash provided by operating activities of continuing operations 11,478 20,467
Cash flows from investing activities:
Sales (purchases) of short-term investments 4,305 (20,270)
Purchases of property and equipment (11,808) (7,885)
Proceeds from sale of assets -- 113
Other 13 173
---------- ----------
Net cash used in investing activities of continuing operations (7,490) (27,869)
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,101 30
Cash dividends (4,040) (3,581)
---------- ----------
Net cash used in financing activities of continuing operations (2,939) (3,551)
Cash flow of discontinued operations:
Operating cash flows (489) 6
---------- ----------
Total (489) 6
---------- ----------
Net increase (decrease) in cash and cash equivalents 560 (10,947)
Cash and cash equivalents at beginning of period 18,390 38,515
---------- ----------
Cash and cash equivalents at end of period $ 18,950 $ 27,568
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 1,112 $ 1,437
========== ==========
See accompanying notes.
- 4 -
LONE STAR STEAKHOUSE & SALOON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting of normal, recurring accruals, which Lone Star
Steakhouse & Saloon, Inc. (the "Company") considers necessary for a fair
presentation of the financial position and the results of operations for the
periods presented have been included. The results for the twelve weeks ended
March 21, 2006 are not necessarily indicative of the results to be expected for
the full year ending December 26, 2006. 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 27,
2005.
Certain amounts for the prior year have been reclassified to conform with
the current year's presentation.
2. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 2005, the FASB issued FASB Staff Position No. FAS 13-1,
ACCOUNTING FOR RENTAL COSTS INCURRED DURING A CONSTRUCTION PERIOD (FSP 13-1).
FSP 13-1 requires rental costs associated with ground or building operating
leases incurred during a construction period to be recognized as rental expense.
FSP 13-1 is effective for reporting periods beginning after December 15, 2005.
Retroactive application is permitted, but not required. The Company adopted the
provision FSP 13-1 effective December 28, 2005 on a prospective basis, and its
adoption had no significant effect upon the Company's financial statements.
3. EARNINGS PER SHARE
Basic earnings per share amounts are computed based on the weighted
average number of shares outstanding during the periods. For purposes of diluted
computations, average shares outstanding have been adjusted to reflect in
accordance with the treasury stock method (1) the number of shares that would be
issued from the exercise of stock options, reduced by the number of shares which
could have been purchased from the proceeds at the average market price of the
Company's stock or price of the Company's stock on the exercise date if options
were exercised during the period presented and (2) the number of shares that may
be issuable to effect the settlement of certain deferred compensation
liabilities pursuant to the Company's Stock Option Deferred Compensation Plan.
The effect of shares issuable to settle the deferred compensation liabilities
has not been included for any periods as their effect would have been dilutive.
The weighted average shares outstanding for the periods presented are as follows
(in thousands):
For the twelve weeks ended
March 21, 2006 March 22, 2005
-------------- --------------
Basic average shares outstanding 20,651 20,296
Diluted average shares outstanding 22,234 22,211
- 5 -
4. STOCK-BASED COMPENSATION
In December 2004, the stockholders of the Company approved the 2004 Stock
Option Plan (the 2004 Plan). The 2004 Plan provides for grants of incentive and
nonqualified stock options to employees, directors, consultants, and advisors. A
total of 3,000,000 shares are available for issuance pursuant to the 2004 Plan,
of which 500,000 are available for nonemployee directors. The maximum number of
shares that may be granted under the 2004 Plan to any individual shall not
exceed 600,000. Options granted under the 2004 Plan have ten-year terms and
generally vest equally over a four-year period commencing one year after the
date of grant.
In September 2002, the Company adopted a Stock Option Deferred Compensation Plan
(the "Plan"), which allows certain key executives to defer compensation arising
from the exercise of stock options granted under the Company's 1992 Incentive
and Nonqualified Stock Option Plan. In fiscal 2003, pursuant to the terms of the
Plan relating to the exercise of certain stock options by a participant, the
Company issued 177,145 shares to a Rabbi trust (the "Trust") with Intrust Bank,
NA serving as the trustee. The Trust holds the shares for the benefit of the
participating employees ("Participants"). Under the terms of the Plan,
Participants may elect to change the Plan's investments from time to time, which
may result in the sale of the shares. Since the shares held by the Trust are
held pursuant to a deferred compensation arrangement whereby amounts earned by
an employee are invested in the stock of the employer and placed in the Trust,
the Company accounts for the arrangement as required by Emerging Issues Task
Force ("EITF") consensus on Issue No. 97-14, ACCOUNTING FOR DEFERRED
COMPENSATION ARRANGEMENTS WHERE AMOUNTS EARNED ARE HELD IN A RABBI TRUST AND
INVESTED ("EITF No. 97-14"). Accordingly, shares issued to the Trust were
recorded at fair market value at the date issued by the Company in the amount of
$3,663, which is reflected in the accompanying condensed consolidated balance
sheets as Common Stock Held By Trust. The corresponding amount was credited to
deferred compensation obligations. Each period, the shares owned by the Trust
are valued at the closing market price, with corresponding changes in the
underlying shares being reflected as adjustments to compensation expense and
deferred compensation obligations. At March 21, 2006, the Trust held 177,145
shares of the Company's common stock. Included in general and administrative
expenses was non-cash stock compensation expense for the twelve weeks ended
March 21, 2006 and March 22, 2005 was a charge of $781 and $204, respectively,
relating to the changes in market price for such shares.
Prior to December 28, 2005, the Company elected to expense the cost of employee
stock options in accordance with the fair value method contained in Statement of
Financial Accounting Standards (SFAS) No. 123, "ACCOUNTING AND DISCLOSURE OF
STOCK-BASED COMPENSATION." Under SFAS No. 123, the fair value for options is
estimated at the date of grant using a Black-Scholes-Merton ("Black-Scholes")
option-pricing model, which requires the input of highly subjective assumptions
including the expected stock price volatility. The election was retroactively
applied to all awards granted to employees after December 28, 1994.
In December 2004, the FASB issued SFAS No. 123(R), "SHARE-BASED PAYMENT," (SFAS
123R) which is a revision of FASB Statement No. 123. As required, we adopted the
provisions of SFAS 123R effective at the beginning of our fiscal year 2006,
using the modified-prospective method. Upon adoption of SFAS 123R, we elected to
continue using the Black-Scholes option-pricing model. If we had adopted SFAS
123R in prior years, the impact on our 2005 net income of that standard would
have been a credit to income of $601, net of tax. This amount is reflected in
the accompanying statement of income as a cumulative effect of change in
accounting as required by the new standard. This cumulative effect resulted from
the Company not estimating forfeitures as required by the new standard but
- 6 -
recording these forfeitures at actual amounts as they occurred which was allowed
under SFAS No. 123. SFAS 123R also requires the benefit of tax deductions in
excess of recognized compensation expense to be reported as a financing cash
flow, rather than as an operating cash flow in the accompanying consolidated
statements of cash flows. This excess tax benefit was not significant during the
twelve weeks ended March 21, 2006. Operating income and cash flow operating
results for 2005 have not been restated for the adoption of SFAS 123R.
During the twelve weeks ended March 21, 2006 and March 22, 2005, we recorded
$1,211 and $692 respectively, in aggregate stock-based employee compensation
expense which includes amounts attributable to noncash stock compensation
arising from the common shares held by the Trust as described above. This
compensation expense is included in the general and administration expenses in
the accompanying statements of income. At March 21, 2006, there was $5,633 of
unrecognized compensation cost related to nonvested option awards, of which the
Company expects to recognize over the remaining weighted average vesting period
of 3.0 years.
During the twelve weeks ended March 21, 2006 and March 22, 2005, a total of 156
and 3 options were exercised, respectively. The total intrinsic value of the
options exercised during the twelve weeks ended March 21, 2006 and March 22,
2005 was $2,593 and $64, respectively. Cash received upon the exercise of these
stock options was $1,101 and $30 during the twelve weeks ended March 21, 2006
and March 22, 2005, and the related tax benefits realized were $972 and $24
during the corresponding periods.
The weighted average fair value per option at the date of grant for options
granted in the first quarter of 2006 and 2005 was $5.76 and $7.05, respectively,
as valued using the Black-Scholes option-pricing model with the following
weighted average assumptions:
For the twelve weeks ended
March 21, 2006 March 22, 2005
-------------- --------------
Risk-free interest rate 4.50% 3.99%
Expected dividend yield 2.60% 2.50%
Expected volatility 0.28 0.30
Expected term (in years) 4.96 5.00
The estimated volatility is based on the historical volatility of our stock and
other factors. The expected term of options represents the period of time that
options granted are expected to be outstanding. The risk free interest rate is
based upon the Treasury Constant Maturity Rate as quoted by the Federal Reserve
at the time of the grant for a term equivalent to the expected term of the
grant.
Information pertaining to option activity for the twelve weeks ended March 21,
2006 is as follows (number of options and aggregate intrinsic value in
thousands):
Weighted
Average Aggregate
Number of Exercise Intrinsic
Options Price Value
---------- ---------- ----------
Outstanding-beginning of year 4,429 $ 16.61
Granted 167 23.42
Exercised (156) 8.47
Cancelled (88) $ 27.39
---------- ---------- ----------
Outstanding at March 21, 2006 4,352 $ 16.95 $ 47,186*
========== ========== ==========
Exercisable at March 21, 2006 3,051 $ 12.65 $ 45,989*
========== ========== ==========
- 7 -
* The intrinsic value of a stock option is the amount by which the market
value of the underlying stock exceeds the exercise price of the option.
The market value of our stock was $27.71 at March 21, 2006.
For options outstanding as of March 21, 2006, 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
March 21, Exercise Remaining
Range of Prices 2006 Price Contract Life
--------------------------------------------------------------------------------
(In Thousands)
$7.43 to $9.00 1,340 $ 8.55 1.84 years
$12.47 to $18.81 1,379 $13.03 1.28 years
$22.25 to $31.24 1,633 $27.14 8.94 years
The number of shares and weighted-average exercise price of options exercisable
at March 21, 2006, are as follows:
Options Exercisable
--------------------------------------------------------------------------------
Number Weighted
Exercisable At Average
March 21, Exercise
Range of Prices 2006 Price
--------------------------------------------------------------------------------
(In Thousands)
$7.43 to $9.00 1,340 $ 8.55
$12.47 to $18.81 1,379 $13.03
$22.25 to $31.24 332 $27.54
5. TERM REVOLVER
The Company has an unsecured revolving credit agreement with a group of
banks led by SunTrust Bank. The credit facility allows the Company to borrow up
to $30,000 with an accordian feature permitting for an increase in the credit
facility in an amount up to $20,000 such that the total amount of the credit
facility does not exceed $50,000. The additional borrowing is subject to the
approval of the lenders. The credit agreement terminates in October 2007;
however, it is subject to acceleration in the event of a change of control of
the Company as that term is defined in the credit agreement. At the time of each
borrowing, the Company may elect to pay interest at the higher of SunTrust
Bank's published prime rate or the Federal Funds Rate plus one-half of one
percent (0.50%); or the LIBOR rate plus one and one-half percent (1.50%). The
Company is required to achieve certain financial ratios and to maintain certain
net worth requirements as defined in the credit agreement. The Company is
required to pay on a quarterly basis a facility fee equal to .25% per annum on
the daily unused amount of the credit facility. At March 21, 2006 and at
December 27, 2005, there were no borrowings outstanding under 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 March 21, 2006 and
December 27, 2005. The term loan agreement matures in October 2007. The interest
rate is at .50% below the daily prime rate as published in the Wall Street
Journal. In addition, the Company pays a facility fee of .25% per annum on the
daily unused portion of the credit facility.
6. COMMON STOCK TRANSACTIONS
The Board of Directors has from time to time authorized the Company to
purchase shares of the Company's common stock in the open market or in privately
negotiated transactions. The Company made no purchases of its common stock
during the twelve weeks ended March 21, 2006 or during the twelve weeks ended
- 8 -
March 22, 2005. The Company is accounting for any 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. At March 21, 2006, the Company may purchase
up to 2,026,190 shares of its common stock pursuant to its current authorization
by the Board of Directors.
7. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
During the twelve weeks ended March 21, 2006, the Company closed 30
underperforming Lone Star Steakhouse & Saloon ("Lone Star") restaurants. The
group of restaurants closed consisted of 13 owned locations and 17 leased
locations. The restaurant closings were the result of management's analysis of
not only the performance of these restaurants, but also the related return on
investment targets, the geographical location of these restaurants as compared
to other Company owned restaurant locations and the impact of demographic
changes in the local markets surrounding these restaurant locations. All of the
owned locations are currently held for sale. The Company is seeking to minimize
its losses for all leased locations through either negotiated lease termination
arrangements with the landlords or sublease of the restaurant location. In
connection with the restaurant closings, the Company incurred a pretax loss of
$1,260 including impairment losses of approximately $2,468 related to assets
abandoned or to be sold offset by a credit of $1,208 to reflect the estimated
fair value of the remaining lease liabilities less the recognition of the
remaining deferred rent obligations related to the leased locations. All of the
losses incurred are included in discontinued operations. The Company will
account for its remaining exit costs in accordance with the provisions of SFAS
No. 146 ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES, which
requires that such costs be expensed in the period such costs are incurred. The
Company believes that such additional costs will not be significant. At March
21, 2006, and December 27, 2005, the Company classified $20,113 and $22,614,
respectively, of net property and equipment, consisting primarily of real
estate, as "Assets Held for Sale" which are recorded at the lower of cost or
fair value less estimated selling costs.
The Company accounts for its closed restaurants in accordance with the
Provisions of SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS. Therefore, when a restaurant is closed and the restaurant is
either held for sale or abandoned, the restaurant's operations are eliminated
from ongoing operations. Accordingly, the operations of such restaurants, net of
applicable income taxes, are presented as discontinued operations and prior
period consolidated financial statements are reclassified. The table below
reflects as discontinued operations the applicable operations of the Company's
closed restaurants which meet the criteria for such presentation.
For the twelve weeks ended
--------------------------
March 21, 2006 March 22, 2005
-------------- --------------
Loss from operations $ (2,974) $ (408)
Income tax benefits 1,093 94
---------- ----------
Net loss from discontinued operations $ (1,881) $ (314)
========== ==========
Net sales from discontinued operations $ 6,941 $ 9,069
========== ==========
- 9 -
8. INCOME TAX
The effective income tax rate from continuing operations was 32.9% and
33.2% for the twelve weeks ended March 21, 2006 and March 22, 2005,
respectively. The factors which cause the effective tax rates to vary from the
federal statutory rate of 35% include state income taxes, the impact of FICA Tip
and other credits, certain non-deductible expenses, and the tax effect of
incentive stock options. There is generally no tax impact to the Company
associated with incentive stock options and the related compensation associated
with such options in the income statement. However, tax benefits may arise
related to the incentive stock options at the time the options are exercised to
the extent that the exercise is followed by a disqualifying disposition of the
shares by the optionee. The decrease in the effective tax rate for fiscal 2006
reflects the impact of FICA Tip and other credits on the lower pre-tax income
for fiscal 2006 compared with 2005.
9. DIVIDEND DECLARED
On March 11, 2006, the Board of Directors declared the Company's quarterly
cash dividend of $.205 per share payable April 10, 2006 to shareholders of
record on March 27, 2006.
- 10 -
LONE STAR STEAKHOUSE & SALOON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
GENERAL
The following discussion and analysis should be read in conjunction with
the condensed consolidated financial statements including the notes thereto
included elsewhere in this Form 10-Q.
The Company opened two restaurants in the twelve weeks ended March 21,
2006 and no restaurants during the twelve weeks ended March 22, 2005.
The Company has plans to open an additional 20 Lone Star Steakhouse &
Saloon ("Lone Star") restaurants throughout the remainder of 2006 or early 2007.
The Company also plans to open seven Texas Land & Cattle restaurants, five
Sullivan's Steakhouse restaurants and one Del Frisco's Double Eagle Steak House
restaurant during the remainder of 2006 or early 2007. This time frame is
predicated by our experience that, assuming the Company can obtain certain
governmental approvals and licenses, such as liquor licenses, it generally takes
from 9 to 12 months after the signing of a lease or the closing of a purchase to
complete construction and open a new restaurant. If a significant number of
restaurants do not open when the Company expects them to open, it could
negatively impact our future results of operations.
There were 223 operating domestic Lone Star restaurants as of March 21,
2006 including three restaurants in New Orleans, closed due to Hurricane
Katrina. In addition, a licensee operates four Lone Star restaurants in
California.
The Company currently operates five Del Frisco's Double Eagle restaurants.
In addition, a licensee operates one Del Frisco's restaurant. The Company
currently operates 15 Sullivan's Steakhouse restaurants, 20 Texas Land and
Cattle Steak House(R) restaurants and one Frankie's Italian Grille restaurant.
Internationally, licensees operate 12 Lone Star Steakhouse & Saloon
restaurants in Australia and one in Guam.
During the twelve weeks ended March 21, 2006, the Company closed 30
underperforming Lone Star restaurants. The group of restaurants closed consisted
of 13 owned locations and 17 leased locations. The restaurants closed were the
result of management's analysis of not only the performance of these
restaurants, but also the related return on investment targets, the geographical
location of these restaurants as compared to other Company owned restaurant
locations and the impact of demographic changes in the local markets surrounding
these restaurant locations. All of the owned locations are currently held for
sale. The Company is seeking to minimize its losses for all leased locations
through either negotiated lease termination arrangements with the landlords or
is seeking to sublease the restaurant locations. See Note 7 to the condensed
consolidated financial statements for additional information.
- 11 -
LONE STAR STEAKHOUSE & SALOON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages
which certain items included in the condensed consolidated statement of
operations bear to net sales:
Twelve Weeks Ended (1)
----------------------
March 21, 2006 March 22, 2005
-------------- --------------
Statement of Operations Data:
Net sales ........................................... 100.0% 100.0%
Costs and expenses:
Costs of sales .................................. 36.5 33.9
Restaurant operating expenses ................... 47.4 45.1
Depreciation and amortization ................... 2.6 2.6
----- -----
Restaurant costs and expenses .............. 86.5 81.6
General and administrative expenses ................. 8.4 7.7
----- -----
Income from operations .............................. 5.1 10.7
Other income, net ................................... 0.2 0.1
----- -----
Income from continuing operations before income taxes 5.3 10.8
Provision for income taxes .......................... 1.8 3.6
----- -----
Income from continuing operations ................... 3.5 7.2
Loss from discontinued operations, net of
applicable income taxes ............................ (1.2) (0.2)
Cumulative effect of accounting change, net of tax .. 0.4 --
----- -----
Net income .......................................... 2.7% 7.0%
===== =====
(1) The Company operates on a fifty-two or fifty-three week fiscal year ending
the last Tuesday in December. The fiscal quarters for the Company consist
of accounting periods of twelve, twelve, twelve and sixteen or seventeen
weeks, respectively.
- 12 -
LONE STAR STEAKHOUSE & SALOON, INC.
TWELVE WEEKS ENDED MARCH 21, 2006 COMPARED TO TWELVE WEEKS ENDED MARCH 22, 2005
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales increased $4,497 or 2.9% to $160,781 for the twelve weeks ended
March 21, 2006, compared to $156,284 for the twelve weeks ended March 22, 2005.
The increase in sales is due in part to the opening of new restaurants since
March 22, 2005. The Company's blended same store sales, representing net sales,
by store, for all the Company owned restaurant concepts opened for more than 18
months in the current and comparable prior year period increased 1.9%. The
Company's average check increased .8% and guest counts increased 1.2%.
Costs of sales, primarily food and beverages, increased as a percentage of
net sales to 36.5% from 33.9% due primarily to increased costs for beef and by
increased costs for produce items.
Restaurant operating expenses for the twelve weeks ended March 21, 2006
increased $5,768 to $76,261 compared to $70,493 in the prior year period and
increased as a percentage of net sales to 47.4% from 45.1%. Labor costs
increased 1.0% primarily as the result of increased management staffing at the
restaurants. Advertising costs increased .7% as the result of increased media
print costs related to direct marketing and costs related to the Company's
sponsorship of a NASCAR car beginning in 2006. Utility costs, primarily for gas,
increased .5% and preopening costs increased by .3%. These increases were
partially offset by decreased insurance costs and decreased building and
maintenance costs.
Depreciation and amortization increased $161 for the twelve weeks ended
March 21, 2006 compared with the prior period. The increase is attributable
primarily to the depreciation related to the new stores opened by the Company.
General and administrative expenses increased $1,280 for the twelve weeks
ended March 21, 2006 compared to the prior period. General and administrative
expense reflects an increase in professional fees offset in part by a decrease
in bonus compensation expense. Additionally, non-cash stock compensation expense
for the twelve weeks ended March 21, 2006 was $1,211 compared to $692 for the
prior year period. The change reflects a decrease of $58 related to the
amortization of stock based compensation in 2006 compared to 2005. In addition,
the 2006 period includes a charge of $781 compared to $204 in the prior period
relating to the accounting for certain shares of the Company's common stock held
by a Rabbi Trust pursuant to a deferred compensation arrangement (see Note 4 to
condensed financial statements).
Other income, net for the twelve weeks ended March 21, 2006 was $264
compared to $146 for the prior year. The increase for 2006 primarily reflects an
increase in interest income compared to 2005.
The effective income tax rate from continuing operations was 32.9% and
33.2% for the twelve weeks ended March 21, 2006 and March 22, 2005,
respectively. The factors which cause the effective tax rates to vary from the
federal statutory rate of 35% include state income taxes, the impact of FICA Tip
and other credits, certain non-deductible expenses and the tax effect of
incentive stock options. There is generally no tax impact to the Company
associated with incentive stock options and the related compensation associated
with such options in the income statement. However, tax benefits may arise at
the time incentive options are exercised to the extent that the exercise is
followed by a disqualifying disposition of the shares by the optionee. The
decrease in the effective tax rate for fiscal 2006 reflects the impact of FICA
Tip and other credits on the lower pre-tax income for fiscal 2006 compared with
2005.
Discontinued operations reflect the operations of the 30 Lone Star
restaurants closed during the twelve weeks ended March 21, 2006 and two Lone
Star restaurants closed in fiscal 2005 which are required to be reported as
discontinued operations pursuant to SFAS No. 144 (see Note 7 to the condensed
consolidated statements).
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The cumulative effect of the accounting change reflects the adoption of the
provisions of SFAS 123R The Company adopted the provisions of SFAS 123R
effective at the beginning of fiscal 2006. The cumulative effect of the change
in accounting resulted in a one time credit of $601, net of income tax (see Note
4 to the condensed consolidated financial statements).
IMPACT OF INFLATION
The primary inflationary factors affecting the Company's operations
include food and labor costs. A number of the Company's restaurant personnel are
paid at the federal and state established minimum wage levels and, accordingly,
changes in such wage levels affect the Company's labor costs. However, since the
majority of personnel are tipped employees, minimum wage changes should have
little effect on overall labor costs. Historically, as costs of food and labor
increased, the Company has been able to offset these increases through menu
price increases and economies of scale; however, there may be delays in the
implementation of such menu price increases or in effecting timely economies of
scale, as well as competitive pressures which may limit the Company's ability to
recover any cost increases in its entirety. Historically, inflation has not had
a material impact on operating margins. During the past twenty-four month
period, the Company experienced significant volatility in beef prices as such
prices for the periods were generally above historical levels. To the extent
that beef prices continue to be above historical levels, it will have a material
negative impact on operating margins.
LIQUIDITY AND CAPITAL RESOURCES (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The following table presents a summary of the Company's cash flows for
each of the twelve weeks ended March 21, 2006 and March 22, 2005:
Twelve weeks ended
------------------
March 21, 2006 March 22, 2005
-------------- --------------
Net cash provided by operating activities ............ $ 11,478 $ 20,467
Net cash used in investing activities ................ (7,490) (27,869)
Net cash used in financing activities ................ (2,939) (3,551)
Net cash provided by (used in) discontinued operations (489) 6
---------- ----------
Net increase (decrease) in cash and cash equivalents . $ 560 $ (10,947)
========== ==========
The decrease in net cash provided by operating activities for the twelve
week period ended March 21, 2006 compared to the prior period is due primarily
to a decrease in net income during fiscal 2006 as compared to fiscal 2005 and to
a decrease in income tax liabilities.
Net cash used in investing activities decreased primarily due to the
Company selling $4,305 of its investments in short-term securities for the
twelve weeks ended March 21, 2006 as compared to investment purchases of $20,270
in the comparable period of 2005. This decrease was partially offset by
increases in property and equipment additions. During the twelve week period
ended March 21, 2006, the Company's investment in property and equipment was
$11,808 compared to $7,885 for the same period in 2005.
The Company's short-term investments primarily consist of auction rate
securities with contractual maturities of up to 30 years. These auction rate
securities have interest re-set dates that occur every 7 to 90 days and can be
actively marketed at ongoing auctions that occur every 7 to 90 days. These
investments are in investment-grade debt instruments such as government-backed
securities. Auction rate securities are classified as available-for-sale and are
reported on the balance sheet at par value, which equals market value, as the
rate on such securities resets every 7 to 90 days. Consequently, interest rate
movements do not affect the balance sheet valuation of these fixed income
investments.
The Company has opened two Lone Star restaurants during the twelve weeks
ended March 21, 2006. The Company has plans to open an additional 20 Lone Star
restaurants throughout the remainder of fiscal 2006 or early 2007. In addition,
the Company has plans to open seven Texas Land & Cattle restaurants, five
Sullivan's Steakhouse restaurants and one Del Frisco's Double Eagle Steak House
restaurant during the remainder of fiscal 2006 or early 2007. During the twelve
weeks ended March 21, 2006, the Company closed 30 underperforming Lone Star
restaurants.
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The Company anticipates the remaining aggregate costs to complete the
store development currently in process or planned will range from $70,000 to
$90,000 relating primarily to construction and equipment costs for new
restaurants, the acquisition of additional restaurant sites and the installation
of the new web-based POS system in its existing stores.
During the twelve week period ended March 21, 2006, the Company received
net proceeds of $1,101 from the issuance of 156,175 shares of its common stock
due to the exercise of stock options compared to proceeds of $30 from the
issuance of 3,367 shares in the comparable period of 2005.
The Company's Board of Directors has authorized the purchase of shares of
the Company's common stock from time to time in the open market or in privately
negotiated transactions. The most recent authorization was November 17, 2004
when the Board of Directors approved the repurchase of up to 2,026,190 shares of
the Company's common stock. During the twelve weeks ended March 21, 2006 and
March 22, 2005, the Company made no purchases of its common stock. At March 21,
2006, the Company may purchase up to 2,026,190 shares of its common stock
pursuant to its current authorization by the Board of Directors.
The Company has paid quarterly cash dividends on its common stock since
the second quarter of fiscal 2000. In January 2006, the Company increased its
quarterly cash dividend from $.195 to $.205 per share commencing with the
dividend payment to be paid April 10, 2006. During the twelve weeks ended March
21, 2006, the Company paid dividends of $4,040 or $.195 per share as compared to
$3,581 or $.175 per share in the same period in 2005.
At March 21, 2006, the Company had $59,857 in cash and cash equivalents
and short term investments. As described in Note 5 to the condensed consolidated
financial statements in the Form 10-Q, the Company has unsecured revolving
credit facilities that may permit borrowings of up to $55,000 which expire in
October 2007. At March 21, 2006, the Company had no outstanding borrowings.
The Company from time to time may utilize derivative financial instruments
in the form of live beef cattle futures contracts to manage market risks and
reduce its exposure resulting from fluctuations in the price of meat. Realized
and unrealized changes in the fair values of the derivative instruments are
recognized in income in the period in which the change occurs. As of and for the
twelve weeks ended March 21, 2006, the Company had no positions in futures
contracts.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 2005, the FASB issued FASB Staff Position No. FAS 13-1,
ACCOUNTING FOR RENTAL COSTS INCURRED DURING A CONSTRUCTION PERIOD (FSP 13-1).
FSP 13-1 requires rental costs associated with ground or building operating
leases incurred during a construction period to be recognized as rental expense.
FSP 13-1 is effective for reporting periods beginning after December 15, 2005.
Retroactive application is permitted, but not required. The Company adopted the
provision FSP 13-1 effective December 28, 2005 on a prospective basis, and its
adoption had no significant effect upon the Company's financial statements.
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In December 2004, the FASB issued STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO. 123 (revised 2004) "SHARE-BASED PAYMENT" (SFAS 123R). SFAS 123R is
a revision of SFAS No. 123, "Accounting for Stock-Based Compensation." Among
other items, SFAS 123R eliminates the use of the intrinsic value method of
accounting, and requires companies to recognize the cost of awards of equity
instruments granted in exchange for employee services received, based on the
grant date fair value of those awards, in the financial statements. In addition,
SFAS 123R also amends SFAS 95, "Statement of Cash Flows," requiring the benefits
of tax deductions in excess of recognized compensation costs to be reported as
financing cash flows, rather than as operating cash flows as previously
required. The effective date of SFAS 123R was the first interim period beginning
after June 15, 2005; however, on April 14, 2005, the Securities and Exchange
Commission announced that the effective date of SFAS 123R was postponed until
the first annual period beginning after June 15, 2005. Prior to the adoption of
SFAS 123R, the Company recognized the cost of its awards of equity instruments
granted in exchange for employee services received, based on the grant date fair
value of those awards in accordance Statement of Financial Accounting Standards
No. 123 in its financial statements. The Company adopted the provisions of SFAS
123R effective December 28, 2005 using the modified prospective method. See Note
4 to the condensed consolidated financial statements for additional information.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Stockholders are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to open new restaurants, general market
conditions, the price of beef, competition and pricing and other risks set forth
in the Company's Annual Report on Form 10-K for the fiscal year ended December
28, 2004. 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 1A. RISK FACTORS
There are no material changes to the Risk Factors included in the Company's
Form 10-K for the fiscal year ended December 27, 2005. The impact of the
circumstances and events described in such Risk Factors could result in
significant adverse effects on our financal position, results of operations and
cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's exposure to market risks was not significant during the
twelve weeks ended March 21, 2006.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer,
we conducted an evaluation of our disclosure controls and procedures, as
such term is defined under Rules 13a-15(e) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Based on this evaluation, our
principal executive officer and our principal financial officer concluded
that our disclosure controls and procedures were effective as of the end
of the period covered by this Form 10-Q.
No change in the Company's internal control over financial reporting (as
defined in Rule 13a-15(f) of the Exchange Act) occurred during the period
covered by this report that materially affected or is reasonably likely to
materially affect the Company's internal control over financial reporting.
- 16 -
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Board of Directors on November 17, 2004 authorized the Company to
repurchase up to 2,026,190 shares of the Company's common stock. The
Company has not repurchased any shares of its common stock through March
21, 2006.
(1) Repurchases are subject to prevailing market prices, may be made in open
market or in privately negotiated transactions, may occur or be
discontinued at any time. There can be no assurance that the Company will
repurchase any shares.
ITEM 6. EXHIBITS
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act
- 17 -
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: May 1, 2006 /s/ John D. White
-----------------------------------
John D. White
Chief Financial Officer