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
June 11, 2002 0-19907
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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 July 19, 2002
----- ----------------------------
Common Stock, $.01 par value 21,953,502 shares
Lone Star Steakhouse & Saloon, Inc.
Index
Page
Number
------
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at June 11, 2002 and December 25, 2001 2
Condensed Consolidated Statements of
Operations for the twelve weeks ended
June 11, 2002 and June 12, 2001 3
Condensed Consolidated Statements of Operations
for the twenty-four weeks ended June 11, 2002
and June 12, 2001 4
Condensed Consolidated Statements of
Cash Flows for the twenty-four weeks ended
June 11, 2002 and June 12, 2001 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative
Disclosures about Market Risks 16
PART II. OTHER INFORMATION
-------- -----------------
Items 1, 2, 3 and 5 have been omitted
since the items are either inapplicable or the
answer is negative
Item 4. Submission of matters to a vote of stockholders 16
Item 6. Exhibits and Reports on Form 8-K 17
-1-
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
June 11, 2002 December 25, 2001
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 121,431 $ 82,919
Inventories 12,119 12,466
Other current assets 7,857 8,302
--------- ---------
Total current assets 141,407 103,687
Property and equipment 526,350 526,371
Less accumulated depreciation and amortization (168,766) (156,488)
--------- ---------
357,584 369,883
Other assets:
Deferred income taxes 22,053 9,253
Intangible and other assets, net 32,640 32,206
--------- ---------
Total assets $ 553,684 $ 515,029
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,715 $ 16,516
Other current liabilities 29,754 38,887
--------- ---------
Total current liabilities 46,469 55,403
Long term liabilities, principally defered compensation obligations 8,108 5,187
Stockholders' equity:
Preferred stock -- --
Common stock 253 240
Additional paid-in capital 257,414 205,982
Retained earnings 253,201 261,660
Accumulated other comprehensive loss (11,761) (13,443)
--------- ---------
Total stockholders' equity 499,107 454,439
--------- ---------
Total liabilities and stockholders' equity $ 553,684 $ 515,029
========= =========
See accompanying notes.
-2-
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Statements of Operations
(In thousands, except for per share amounts)
(Unaudited)
For the twelve weeks ended
-------------------------------------
June 11, 2002 June 12, 2001
------------- -------------
Net sales $ 139,720 $ 136,069
Costs and expenses:
Costs of sales 46,320 47,621
Restaurant operating expenses 64,194 66,327
Depreciation and amortization 5,930 6,428
--------- ---------
Restaurant costs and expenses 116,444 120,376
--------- ---------
Restaurant operating income 23,276 15,693
General and administrative expenses 10,243 9,885
Abandoned merger expenses 2,967 --
Non-cash stock compensation expense 6,374 14,435
--------- ---------
Income (loss) from operations 3,692 (8,627)
Other income, net 263 628
--------- ---------
Income (loss) before income taxes 3,955 (7,999)
Provision (benefit) for income taxes 1,271 (2,679)
--------- ---------
Net income (loss) $ 2,684 $ (5,320)
========= =========
Basic earnings (loss) per share $ 0.11 $ (0.22)
========= =========
Diluted earnings (loss) per share $ 0.10 $ (0.22)
========= =========
Pro forma amounts assuming retroactive application of
accounting change:
Net income (loss) $ 2,684 $ (5,120)
========= =========
Pro forma basic earnings (loss) per share $ 0.11 $ (0.21)
========= =========
Pro forma diluted earnings (loss) per share $ 0.10 $ (0.21)
========= =========
See accompanying notes.
-3-
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Statements of Operations
(In thousands, except for per share amounts)
(Unaudited)
For the twenty-four weeks ended
----------------------------------
June 11, 2002 June 12, 2001
------------- -------------
Net sales $ 288,528 $ 279,821
Costs and expenses:
Costs of sales 95,150 97,324
Restaurant operating expenses 128,299 134,232
Depreciation and amortization 11,927 12,882
--------- ---------
Restaurant costs and expenses 235,376 244,438
--------- ---------
Restaurant operating income 53,152 35,383
General and administrative expenses 19,489 19,042
Abandoned merger expenses 2,967 --
Non-cash stock compensation expense 32,571 14,435
--------- ---------
Income (loss) from operations (1,875) 1,906
Other income, net 647 2,327
--------- ---------
Income (loss) before income taxes and cumulative effect of
accounting change (1,228) 4,233
Provision (benefit) for income taxes (404) 1,313
--------- ---------
Income (loss) before cumulative effect of accounting change (824) 2,920
Cumulative effect of accounting change, net of tax (318) --
--------- ---------
Net income (loss) $ (1,142) $ 2,920
========= =========
Basic earnings (loss) per share
Income (loss) before cumulative effect of accounting change $ (0.04) $ 0.12
Cumulative effect of accounting change (0.01) --
--------- ---------
Basic earnings (loss) per share $ (0.05) $ 0.12
========= =========
Diluted earnings (loss) per share
Income (loss) before cumulative effect of accounting change $ (0.04) $ 0.12
Cumulative effect of accounting change (0.01) --
--------- ---------
Diluted earnings (loss) per share $ (0.05) $ 0.12
========= =========
Pro forma amounts assuming retroactive application of
accounting change:
Net income (loss) $ (824) $ 3,321
========= =========
Pro forma basic earnings (loss) per share $ (0.04) $ 0.14
========= =========
Pro forma diluted earnings (loss) per share $ (0.04) $ 0.13
========= =========
See accompanying notes.
-4-
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
For the twenty-four weeks ended
-------------------------------
June 11, 2002 June 12, 2001
------------- -------------
Cash flows from operating activities:
Net income (loss) $ (1,142) $ 2,920
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 13,702 14,725
Non-cash stock compensation expense 32,571 14,435
(Gain) loss on sale of assets 141 (1,605)
Cumulative effect of accounting change 508 --
Deferred income taxes (12,800) (5,614)
Net change in operating assets and liabilities:
Change in operating assets 851 (50)
Change in operating liabilities (4,464) 2,668
--------- ---------
Net cash provided by operating activities 29,367 27,479
Cash flows from investing activities:
Purchases of property and equipment (1,088) (1,085)
Proceeds from sale of assets 1,234 2,554
Other 14 18
--------- ---------
Net cash provided by investing activities 160 1,487
Cash flows from financing activities:
Net proceeds from issuance of common stock 15,891 657
Common stock repurchased and retired -- (3,458)
Cash dividends paid (7,317) (6,008)
--------- ---------
Net cash provided by (used in) financing activities 8,574 (8,809)
Effect of exchange rate on cash 411 3
--------- ---------
Net increase in cash and cash equivalents 38,512 20,160
Cash and cash equivalents at beginning of period 82,919 29,029
--------- ---------
Cash and cash equivalents at end of period $ 121,431 $ 49,189
========= =========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 14,794 $ 487
========= =========
See accompanying notes.
-5-
LONE STAR STEAKHOUSE & SALOON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Basis of Presentation
---------------------
The unaudited condensed consolidated financial statements include all
adjustments, consisting of normal, recurring accruals, which 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 twenty-four
weeks ended June 11, 2002 are not necessarily indicative of the results to be
expected for the full year ending December 31, 2002. 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 25, 2001.
Certain amounts for the prior year have been reclassified to conform with
the current year's presentation.
2. Comprehensive Income (Loss)
---------------------------
Comprehensive income (loss) is comprised of the following:
For the twelve weeks ended For the twenty-four weeks ended
-------------------------- -------------------------------
June 11, 2002 June 12, 2001 June 11, 2002 June 12, 2001
------------- ------------- ------------- -------------
Net income (loss) $2,684 $(5,320) $(1,142) $ 2,920
Foreign currency translation
adjustments 1,269 851 1,682 (1,052)
------ ------- ------- --------
Comprehensive income (loss) $ 3,953 $(4,469) $ 540 $ 1,868
======= ======== ======= ========
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 twenty-four weeks ended
-------------------------- -------------------------------
June 11, 2002 June 12, 2001 June 11, 2002 June 12, 2001
------------- ------------- ------------- -------------
Basic average shares outstanding 24,747 24,032 24,473 24,033
Diluted average shares outstanding 27,399 24,032(a) 24,473(a) 24,900
(a) Basic and diluted shares outstanding are the same for the twenty-four week
period ended June 11, 2002 and the twelve weeks ended June 12, 2001, since the
diluted share computations would be antidilutive.
-6-
4. Long - Term Revolver
--------------------
The Company has a credit facility pursuant to an unsecured revolving
credit agreement with a group of banks led by SunTrust Bank. The credit facility
allows the Company to borrow up to $50,000. The commitment terminates at June
30, 2004; however, it is subject to acceleration in the event of a change of
control of the Company as that term is defined in the credit agreement. At the
time of each borrowing, the Company may elect to pay interest at either SunTrust
Bank's published prime rate or a rate determined by reference to the Adjusted
LIBOR rate. The Company is required to achieve certain financial ratios and to
maintain certain net worth amounts as defined in the credit agreement. The
Company is required to pay on a quarterly basis a facility fee equal to .25% per
annum on the daily unused amount of the credit facility. At June 11, 2002 and on
December 25, 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 June 11, 2002 and on
December 25, 2001. 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 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 twenty-four weeks ended June 11, 2002, and purchased 339,187 shares
of its common stock during the twenty-four weeks ended June 12, 2001, at an
average price of $10.22 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. See Note 10 for additional
information.
6. Stock Based Compensation
------------------------
Financial Accounting Standards Board (FASB) 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 which was the initial base period fair value used to measure the non-cash
stock compensation charge or benefit for variable options outstanding 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 prior years, which are subject to the accounting provisions of FIN
44, and at June 11, 2002, outstanding options to purchase approximately
4,440,000 shares were affected by this accounting requirement. In addition
during fiscal 2002, the Company has accelerated the vesting of certain stock
options which are subject to the application of FIN 44. As a result of the
application of FIN 44, the Company recorded non-cash stock compensation expense
of $6,374 and $14,435 for the twelve weeks ended June 11, 2002 and June 12,
2001, respectively, and $32,571 and $14,435 for the twenty-four weeks ended June
11, 2002 and June 12, 2001, respectively. In future periods, the Company will
-7-
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 last reporting period. If the Company's common stock price at
the beginning and end of any reporting period is less than $10.125 per share, no
charge or benefit will be reflected.
7. Accounting Changes
------------------
In June 2001, the FASB issued Statement of Financial Accounts Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets, requiring that 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
SFAS No. 142. The Company adopted the provisions of SFAS No. 142 in its
financial statements as required effective December 26, 2001. The effect of the
application of the non-amortization rules on accounting for goodwill and other
intangible assets was to increase net income for the twelve weeks ended and the
twenty-four weeks ended June 11, 2002 by $200 and $401, respectively or $0.00
and $0.01 per share, respectively. In addition, the Company completed the
measurement tests for measurement of impairment loss for both goodwill and
indefinite lived intangible assets, which resulted in a charge for the
cumulative effect of an accounting change of $318 or $0.01 per share, net of
income taxes of $190 to reflect impairment of certain goodwill related to its
Australian investments.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of and resolves significant implementation issues that had
evolved since the issuance of SFAS No. 121. SFAS No. 144 also establishes a
single accounting model for long-lived assets to be disposed of by sale. The
Company adopted SFAS No. 144 effective December 26, 2001. Adoption of SFAS No.
144 did not have a significant impact on the Company's consolidated results of
operations or financial position.
8. Dividend Declaration
--------------------
The Board of Directors declared the Company's quarterly cash dividend of
$.15 per share payable July 12, 2002 to stockholders of record on June 28, 2002.
9. Abandoned Merger Expenses
-------------------------
On May 4, 2002, the non-binding Letter of Intent previously signed with
Bruckmann, Rosser, Sherrill & Co. LLC ("BRS") with respect to the proposed
sale and merger of the Company expired, as the Company and BRS were unable to
complete a definitive agreement. The direct costs incurred by the Company
associated with the proposed merger, primarily consisting of fees paid to the
Company's investment advisors and legal counsel as well as certain costs
reimbursed by the Company to BRS in connection with its due diligence efforts
pursuant to the terms of the Letter of Intent were expensed and have been
included in the accompanying condensed consolidated statements of operations
under the caption "Abandoned Merger Expenses."
10. Modified Dutch Auction and Subsequent Event
-------------------------------------------
On May 9, 2002, the Company commenced a Modified Dutch Auction tender offer
whereby it offered to purchase up to 4,000,000 shares of its common stock. Under
the terms of the tender offer, the Company invited shareholders to tender their
shares at prices specified by the tendering shareholders at a purchase price not
in excess of $22.50 nor less than $20.50 per share.
-8-
The tender offer was completed subsequent to June 12, 2002, and as a
result, the Company purchased 4,000,000 shares of its common stock at a price of
$21.375 per share or a total of $85,500 excluding the costs of the tender offer.
The transaction was financed from the Company's existing available cash.
-9-
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.
The Company opened eleven Lone Star Steakhouse & Saloon ("Lone Star")
restaurants in fiscal 2001.
There were 249 operating domestic Lone Star restaurants as of June 11,
2002. In addition, a licensee operates three Lone Star restaurants in
California. The Company closed one domestic Lone Star restaurant in February
2002, and a domestic Lone Star restaurant was destroyed by fire in March 2002.
The Company currently operates five Del Frisco's Double Eagle ("Del
Frisco's") restaurants. In addition, a licensee operates one Del Frisco's
restaurant. The Company currently operates fifteen Sullivan's Steakhouse
("Sullivan's") restaurants.
Internationally, the Company currently operates 24 Lone Star restaurants in
Australia and a licensee operates one Lone Star restaurant in Guam. The Company
closed five Lone Star restaurants in Australia in January 2001, one Lone Star
Australian restaurant in December 2001 and one Lone Star Australian restaurant
subsequent to June 11, 2002.
-10-
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 operations bear to net sales, and (ii) other selected operating data:
Twelve Weeks Ended (1) Twenty-four Weeks Ended
---------------------- -----------------------
June 11, 2002 June 12, 2001 June 11, 2002 June 12, 2001
------------- ------------- ------------- -------------
(dollars in thousands)
Statement of Operations:
Net sales ................................ 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales ..................... 33.2 35.0 33.0 34.8
Restaurant operating expenses ...... 45.9 48.7 44.5 48.0
Depreciation and amortization ...... 4.2 4.7 4.1 4.6
-------- ----- ----- ------
Restaurant costs and expenses . 83.3 88.4 81.6 87.4
-------- ----- ----- ------
Restaurant operating income .............. 16.7 11.6 18.4 12.6
General and administrative expenses ...... 7.4 7.3 6.7 6.8
Abandoned merger expenses ................ 2.1 -- 1.0 --
Non-cash stock compensation expense ...... 4.6 10.6 11.3 5.1
-------- ----- ----- ------
Income (loss) from operations ............ 2.6 (6.3) (0.6) 0.7
Other income, net ........................ 0.2 0.4 0.2 0.8
-------- ----- ----- ------
Income (loss) before income taxes and
cumulative effect of accounting change . 2.8 (5.9) (0.4) 1.5
Provision (benefit) for income taxes ..... 0.9 (2.0) (0.1) .5
-------- ----- ----- ------
Income (loss) before cumulative effect
of accounting change ................... 1.9 (3.9) (0.3) 1.0
Cumulative effect of accounting change ... -- -- (0.1) --
-------- ----- ----- ------
Net income (loss) ........................ 1.9% (3.9)% (0.4)% 1.0%
======== ===== ===== ======
Restaurant Operating Data:
Average sales per restaurant on an
annualized basis (2) ..................... $ 2,039 $ 2,029 $ 2,106 $ 2,089
Number of restaurants at end of the period 294 293 294 293
(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.
-11-
LONE STAR STEAKHOUSE & SALOON, INC.
Twelve weeks ended June 11, 2002 compared to Twelve weeks ended June 12, 2001
(Dollar amounts in thousands, except per share amounts)
Net sales increased $3,651 or 2.7% to $139,720 for the twelve weeks ended
June 11, 2002, compared to $136,069 for the twelve weeks ended June 12, 2001.
The increase was principally attributable to incremental sales of $3,347 from
seven new domestic Lone Star restaurants opened since June 2001. Same store
sales increased 0.7% compared with the comparable prior year period.
Costs of sales, primarily food and beverages, decreased as a percentage of
net sales to 33.2% from 35.0% due primarily to a decrease in beef costs. The
decrease was partially offset by the impact of promotional pricing from the
Company's direct mail campaigns initiated late in the second quarter of fiscal
2001.
Restaurant operating expenses for the twelve weeks ended June 11, 2002
decreased $2,133 to $64,194 for the twelve weeks ended June 11, 2002 compared to
$66,327 in the comparable period in 2001, and decreased as a percentage of net
sales from 48.7% to 45.9%. The decrease is attributable to improved labor costs
resulting both from increased sales volumes and improved labor controls, and
decreases in broadcast media costs, pre-opening expenses and natural gas costs.
The decrease in restaurant operating expenses was partially offset by increased
costs for print media advertising costs, and certain insurance costs.
Depreciation and amortization decreased $498 for the twelve weeks ended
June 11, 2002 compared with the comparable period in 2001. The decrease is
attributable to the impact of the non-amortization rules on accounting for
goodwill and certain other intangibles and to a reduction in the depreciable
base for certain assets that became fully depreciated.
General and administrative expenses increased $358 for the twelve weeks
ended June 11, 2002 compared to the comparable period in 2001. The increase is
due primarily to increased costs in legal and professional fees, increased
salaries due to the increase in the number of regional and district managers,
and increased costs for directors and officers liability insurance. The
increases were offset by reductions in consulting costs related to information
technology and decreases in travel and recruiting expenses.
Abandoned merger expenses of $2,967 for the twelve weeks ended June 11,
2002 reflect the costs incurred related to the proposed sale and merger of the
Company which was terminated on May 4, 2002. Such costs include fees paid to
investment advisors and legal counsel as well as certain costs reimbursed by the
Company to the potential buyer in connection with its due diligence efforts.
Non-cash stock compensation expense for the twelve weeks ended June 11,
2002 was $6,374 compared to $14,435 for the comparable period in 2001. 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, which was the initial
base period fair value used to measure the non-cash stock compensation charge or
benefit. Variable plan accounting is applied to the modified awards until the
options are exercised, forfeited or expire unexercised. The Company repriced
options in prior years, which are subject to the accounting provisions of FIN
44, and at June 11, 2002, outstanding options to purchase approximately
-12-
4,440,000 shares were affected by this accounting requirement. In addition
during fiscal 2002, the Company accelerated the vesting of certain stock options
which are subject to the application of FIN 44. In each subsequent period, 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 last reporting
period.
Other income, net for the twelve weeks ended June 11, 2002 was $263
compared to $628 for the comparable period in 2001. The decrease is primarily
attributable to a decrease in gain on sale of assets.
The effective income tax rates for the twelve weeks ended June 11, 2002
and June 12, 2001 were 32.1% and 33.5%, respectively. The difference in the
effective tax rates is primarily attributable to the impact of FICA Tip and
other tax credits.
-13-
LONE STAR STEAKHOUSE & SALOON, INC.
Twenty-four weeks ended June 11, 2002 compared to
Twenty-four weeks ended June 12, 2001
(Dollar amounts in thousands, except per share amounts)
Net sales increased $8,707 or 3.1% to $288,528 for the twenty-four weeks
ended June 11, 2002, compared to $279,821 for the twenty-four weeks ended June
12, 2001. The increase was principally attributable to incremental sales of
$7,206 from seven new domestic Lone Star restaurants opened since June 2001.
Same store sales increased 0.6% compared with the comparable prior year period.
Costs of sales, primarily food and beverages, decreased as a percentage of
net sales to 33.0% from 34.8% due primarily to a decrease in beef costs. The
decrease was partially offset by the impact of promotional pricing from the
Company's direct mail campaigns initiated late in the second quarter of fiscal
2001.
Restaurant operating expenses for the twenty-four weeks ended June 11, 2002
decreased $5,933 to $128,299 for the twenty-four weeks ended June 11, 2002
compared to $134,232 in the comparable period in 2001, and decreased as a
percentage of net sales from 48.0% to 44.5%. The decrease is attributable to
improved labor costs resulting both from increased sales volumes and improved
labor controls, and decreases in broadcast media costs, pre-opening expenses and
natural gas costs. The decrease in restaurant operating expenses was partially
offset by increased costs for print media advertising costs, and certain
insurance costs.
Depreciation and amortization decreased $955 for the twenty-four weeks
ended June 11, 2002 compared with the comparable period in 2001. The decrease is
attributable to the impact of the non-amortization rules on accounting for
goodwill and certain other intangibles and to a reduction in the depreciable
base for certain assets that became fully depreciated.
General and administrative expenses increased $447 for the twenty-four
weeks ended June 11, 2002 compared to the comparable period in 2001. The
increase is due primarily to increased costs in legal and professional fees,
increased salaries due to the increased number of regional and district
managers, and increased costs for directors and officers liability insurance.
The increases were largely offset by reductions in consulting costs related to
information technology and decreases in travel and recruiting expenses.
Abandoned merger expenses of $2,967 for the twenty-four weeks ended June
11, 2002 reflect the costs incurred related to the proposed sale and merger of
the Company which was terminated on May 4, 2002. Such costs include fees paid to
investment advisors and legal counsel and certain costs reimbursed by the
Company to the potential buyer in connection with its due diligence efforts.
Non-cash stock compensation expense for the twenty-four weeks ended June
11, 2002 was $32,571 compared to $14,435 in the comparable period in 2001. See
Note 6 to the Notes to Condensed Consolidated Financial Statements included
elsewhere herein for additional information.
Other income, net for the twenty-four weeks ended June 11, 2002 was $647
compared to $2,327 for the comparable period in 2001. The decrease is primarily
attributable to a decrease in gain on sale of assets.
The effective income tax rates for the twenty-four weeks ended June 11,
2002 and June 12, 2001 were 32.9% and 31.0%, respectively. The difference in the
effective tax rates is primarily attritutable to the impact of FICA Tip and
other tax credits.
The cumulative effect of accounting change reflects the effect of adoption
of the provision of SFAS No. 142, "Goodwill and Other Intangible Assets." The
Company adopted the provisions of SFAS No. 142 effective December 26, 2001. The
cumulative effect of the change in accounting resulted in a one-time charge of
$318, net of income taxes, to reflect the impairment of goodwill related to its
Australia operations (see Note 7 to the Notes to Condensed Consolidated
Financial Statements for additional information).
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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 will have
little effect on overall labor costs. Historically as costs of 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 (Dollar amounts in thousands, except share
amounts).
The following table presents a summary of the Company's cash flows for
each of the twenty-four weeks ended June 11, 2002 and June 12, 2001:
Twenty-four weeks ended
June 11, 2002 June 12, 2001
------------- -------------
Net cash provided by operating activities............ $ 29,367 $ 27,479
Net cash provided by investment activities........... 160 1,487
Net cash provided by (used in) financing activities.. 8,574 (8,809)
Effect of exchange rate on cash...................... 411 3
-------------- ------------
Net increase in cash................................. $ 38,512 $ 20,160
============== ============
During the twenty-four week period ended June 11, 2002, the Company's
investment in property and equipment was $1,088 compared to $1,085 for the same
period in fiscal 2001. In the twenty-four week period ended June 11, 2002, the
Company received $1,234 in proceeds from the sale of assets compared to $2,554
in fiscal 2001.
During the twenty-four week period ended June 11, 2002, the Company
received net proceeds of $15,891 from the issuance of 1,275,908 shares of its
common stock due to the exercise of stock options compared to proceeds of $657
from the issuance of 80,295 shares in the same period in fiscal 2001.
The Company does not have significant receivables or inventory.
At June 11, 2002, the Company had $121,431 in cash and cash equivalents.
The Company had available $55,000 in unsecured revolving credit facilities. At
June 11, 2002, the Company had no outstanding borrowings. See Note 4 to the
Notes to Condensed Consolidated Financial Statements in the 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 twenty-four weeks ended June 11, 2002, the
Company did not purchase any common stock and in the twenty-four week period
ended June 12, 2001 purchased 339,187 shares at a cost of $3,458.
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Subsequent to June 12, 2002, the Company completed a Modified Dutch
Auction tender offer for the purchase of 4,000,000 shares of its common stock at
a price of $21.375 per share or a total of $85,500, excluding the costs of the
tender offer. The transaction was financed from the Company's existing available
cash. See Note 10 to Notes to Condensed Consolidated Financial Statements for
additional information.
The Company has paid quarterly cash dividends on its common stock since
the second quarter of fiscal 2000. In January 2002, the Company increased its
quarterly cash dividend from $.125 to $.15 per share. During the twenty-four
weeks ended June 11, 2002, the Company paid cash dividends of $7,317 or $.30 per
share as compared to $6,008 or $.25 per share in fiscal 2001.
The Company from time to time may utilize derivative financial instruments
in the form of live beef cattle futures contracts to manage market risks and
reduce its exposure resulting from fluctuations in the price of meat. Realized
and unrealized changes in the fair values of the derivative instruments are
recognized in income in the period in which the change occurs. Realized and
unrealized gains and losses for the period were not significant. As of June 11,
2002, the Company had no positions in futures contracts.
As described in Note 6 to the Notes to the Condensed Consolidated
Financial Statements, the Company has options outstanding to purchase
approximately 4,440,000 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.
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 25, 2001. 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
-----------------------------------------------------------
The Company's exposure to market risks was not significant during
the twelve weeks ended June 11, 2002.
Item 4. Submission of Matters to a Vote of Stockholders
-----------------------------------------------
On July 15, 2002, the Company held its Annual Meeting of
Stockholders (the "Meeting"). At the Meeting, the stockholders
re-elected Fred. B. Chaney, Ph.D. and William B. Greene, Jr. to the
Board of Directors to serve until the 2005 Annual Meeting of
Stockholders and until their successors have been duly elected and
qualified. As to the newly re-elected Directors, there were
22,814,596 votes "For" and 1,149,169 votes "Withheld" for Fred B.
Chaney, Ph.D. and 22,789,796 votes "For" and 1,173,969 votes
"Withheld" for William B. Greene, Jr. The proposal to amend the
Company's Certificate of Incorporation and By-laws to declassify the
-16-
organization of the Board of Directors did not receive the requisite
vote for approval. As to the proposal, there were 15,333,954 votes
"For," 2,557,746 votes "Against" and 19,835 votes "Abstained." The
stockholders ratified the appointment of Ernst & Young LLP as the
Company's independent auditors for the year ending December 31,
2002. As to the ratification of auditors, there were 23,193,744
votes "For", 767,513 votes "Against" and 2,508 votes "Abstained".
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits.
99 - Agreement dated as of April 29, 2002 between the Company
and Mark Saltzgaber.
(b) Reports on Form 8-K.
During the twelve weeks ended June 11, 2002, the Company filed
Form 8-Ks on the following dates under Item 5 - Other Events:
April 8, 2002
April 29, 2002
May 8, 2002
-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______________________ /s/ Randall H. Pierce
-----------------------------------
Randall H. Pierce
Chief Financial Officer
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