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SCHEDULE 14A
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INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
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/_/ Preliminary Proxy Statement
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/_/ Definitive Proxy Statement
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LONE STAR STEAKHOUSE & SALOON, INC.
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(Name of Registrant as Specified in Its Charter)
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This filing consists of the following information announced by Lone
Star Steakhouse & Saloon, Inc. (the "Company") in a press release on November 7,
2006, including a letter to stockholders of the Company sent on such date, in
connection with the special meeting of stockholders of the Company to be held on
November 30, 2006:
LONE STAR STEAKHOUSE & SALOON SENDS LETTER TO STOCKHOLDERS TO
CORRECT PUBLIC MISCONCEPTIONS ABOUT PROPOSED MERGER
WICHITA, Kansas, November 7, 2006 -- Lone Star Steakhouse & Saloon, Inc.
(Nasdaq: STAR) announced today that its Board of Directors has sent the
following letter to stockholders in response to recent public speculation and
misinformation surrounding the sale of the Company for $27.10 per share in cash
pursuant to a merger agreement that will be voted on by the Company's
stockholders at a special meeting to be held on November 30, 2006.
LONE STAR STEAKHOUSE & SALOON, INC.
224 EAST DOUGLAS
SUITE 700
WICHITA, KANSAS 67202
November 7, 2006
Dear Fellow Stockholder:
LONE STAR STEAKHOUSE & SALOON, INC. WILL HOLD A SPECIAL MEETING OF STOCKHOLDERS
ON NOVEMBER 30, 2006 TO CONSIDER AND VOTE ON A PROPOSAL TO ADOPT A MERGER
AGREEMENT PURSUANT TO WHICH YOU WILL RECEIVE $27.10 PER SHARE IN CASH IN
EXCHANGE FOR YOUR SHARES. The transactions contemplated by the merger agreement,
which we refer to as the "transactions," will result in the sale of our entire
company to affiliates of Lone Star Funds, a Dallas-based private equity firm.
In response to various articles and misinformation in the public domain, the
Board of Directors felt compelled to provide you with a better understanding of
the process we undertook in reaching the decision to sell the Company and our
views on the valuation of the Company. The Board of Directors has unanimously
determined that the transactions are fair to, and in the best interest of, our
stockholders and unanimously recommends that you vote FOR the approval of the
transactions.
OUR RATIONALE
o The casual dining sector has been severely impacted by a variety
of factors that have negatively affected both sales and profits
of many companies. These factors have contributed to the
deterioration of our financial results over the past several
quarters, and this downward trend is expected to continue.
o The process culminating in the transaction with Lone Star Funds
was fair, potential buyers continue to have every opportunity to
make an offer to acquire us (and the break-up fee payable in the
event we accept such an offer is below the average of recent
comparable transactions) and no other purchaser has emerged to
buy the Company.
o The purchase price of $27.10 per share represents more than 12
times our trailing 12 months EBITDA, which is significantly
greater than the average multiple for comparable restaurant
company sale transactions completed in the past several years.
o We believe that our real estate assets are worth significantly
less than the $400 million figure that has been estimated by some
in the public domain, even without taking into account the tax
consequences of a sale of our owned real properties.
o THE MEMBERS OF THE MANAGEMENT AND THE BOARD OF DIRECTORS OF THE
COMPANY ARE NOT PARTICIPATING WITH LONE STAR FUNDS OR ITS
AFFILIATES IN THE PURCHASE OF THE COMPANY AND HAVE NO
ARRANGEMENTS WITH LONE STAR FUNDS OR ITS AFFILIATES PROVIDING FOR
THEIR CONTINUED INVOLVEMENT WITH THE COMPANY FOLLOWING
CONSUMMATION OF THE TRANSACTIONS.
PROCESS
The Board of Directors spent several months and consulted with four prominent
investment banks to determine the best alternative for the Company to maximize
stockholder value. Our directors carefully considered a broad list of strategic
alternatives, including:
o Maintaining our current capital structure;
o A sale/leaseback of our real estate assets;
o A spin-off of our upscale brands;
o A partial sale of our casual dining concepts;
o A leveraged recapitalization; and
o A sale of the Company.
After a rigorous review process conducted together with these investment banks,
the Board of Directors unanimously concluded that a sale of the Company was the
best and most certain option available to our stockholders to maximize the value
of their investment in the Company.
After engaging in discussions with Lone Star Funds, we approached five
additional, highly qualified potential buyers. These buyers were selected based
on discussions with our financial advisor and the potential buyers' financial
resources, experience and interest in the restaurant industry. These potential
buyers and one additional potential buyer who contacted us were immediately
provided with access to an electronic "data room", which included ALL of the due
diligence information provided to Lone Star Funds. These potential buyers were
provided sufficient time to thoroughly review this information. Ultimately, none
of these potential buyers chose to make an offer to buy the Company.
The Lone Star Funds proposal contains no financing contingency and limited
closing conditions, which allow the transactions to be concluded on an expedited
basis with greater certainty versus conducting a formal auction process. This is
especially important given our deteriorating operating and financial results,
which have showed no signs of stabilizing or improving. The negative responses
we received from the six highly qualified potential buyers led our financial
advisor to believe that a broader process involving more potential private
equity buyers would not result in a superior offer and, given our deteriorating
financial results, would put the Lone Star Funds transaction at risk. Based on
their knowledge of the restaurant industry and preliminary conversations with
potential strategic buyers, and the fact that many potential strategic buyers
were in the process of divesting assets or conducting their own evaluations of
strategic alternatives, our financial advisor concluded that there was little
chance of garnering serious interest from qualified strategic buyers.
The merger agreement with Lone Star Funds was structured to enable a potential
buyer who contacts us with an alternative proposal, even if it does not
initially represent a superior offer, to enter into discussions with us and
receive any confidential information needed to conduct a thorough due diligence
investigation. The break-up fee payable in the event that we determine to engage
in a transaction with another buyer is below the average of recent comparable
transactions. IN THE MORE THAN TWO MONTHS SINCE WE ANNOUNCED THE SIGNING OF THE
MERGER AGREEMENT ON AUGUST 18, 2006, WE HAVE NOT BEEN APPROACHED BY, NOR
RECEIVED ANY OFFER OR INDICATION OF INTEREST FROM, ANY POTENTIAL BUYERS.
THE VALUATION
The purchase price of $27.10 per share represents greater than 12 times our
trailing 12 months EBITDA. THIS MULTIPLE IS SIGNIFICANTLY GREATER THAN THE
AVERAGE MULTIPLE FOR COMPARABLE RESTAURANT COMPANY SALE TRANSACTIONS COMPLETED
IN THE PAST SEVERAL YEARS. We received TWO fairness opinions from nationally
recognized investment banks with significant experience in mergers and
acquisitions and the restaurant industry. In rendering their fairness opinions
(which are included in the proxy statement previously mailed to you), these
investment banks performed a variety of valuation analyses, and the average of
the majority of these analyses placed the valuation of the Company BELOW (and in
certain cases significantly below) $27.10.
There have also been public statements made as to the "break-up value" of the
Company, determined by analyzing the value of our various concepts and our real
estate. There are factual errors and omissions in these analyses, including
incorrect, overly aggressive assumptions for the EBITDA of our respective
divisions and no discussion of the negative tax ramifications of selling our
concepts or real estate. These analyses do not take into account the one-time
and ongoing costs of pursuing certain transactions and the lack of certainty in
ultimately realizing the "break-up value" for our stockholders.
OUR REAL ESTATE
Last fall, we contacted several of the leading, nationally recognized
sale/leaseback providers in an attempt to better understand the value of our
owned real estate assets. As part of this process, these groups signed
confidentiality agreements and were provided with the information they requested
in order to thoroughly evaluate the properties and provide us with formal
indications of interest. We ultimately received FORMAL, WRITTEN INDICATIONS OF
INTEREST, ALL OF WHICH PLACED THE VALUE OF OUR REAL ESTATE IN A SALE/LEASEBACK
TRANSACTION SIGNIFICANTLY BELOW THE $400 MILLION FIGURE THAT HAS BEEN ESTIMATED
BY SOME IN THE PUBLIC DOMAIN.
These indications were based on latest 12 months financial results as of the end
of the third quarter of 2005. Our financial results have worsened significantly
since that time, with the bulk of the deterioration coming from our Lone Star
Steakhouse & Saloon restaurants, which represent the overwhelming majority of
our owned real estate. As a result, it is reasonable to conclude that these
indications of value would be revised downward based on our more recent results.
These figures also do not take into account the taxes we would have to pay on
the gains realized or any potential liabilities existing at these properties,
environmental or otherwise.
NO CONFLICTS OF INTEREST
DESPITE PUBLIC SPECULATION TO THE CONTRARY, NO MEMBERS OF THE MANAGEMENT OR THE
BOARD OF DIRECTORS OF THE COMPANY WILL BE PARTICIPATING WITH LONE STAR FUNDS OR
ITS AFFILIATES IN THE PURCHASE OF THE COMPANY. THERE ARE NO AGREEMENTS OR
UNDERSTANDINGS, ORAL OR WRITTEN, RELATING TO ANY FUTURE TRANSACTIONS OR
EMPLOYMENT BETWEEN LONE STAR FUNDS OR ITS AFFILIATES AND ANY MEMBERS OF THE
MANAGEMENT OR THE BOARD OF DIRECTORS OF THE COMPANY. NO MEMBERS OF THE
MANAGEMENT OR THE BOARD OF DIRECTORS OF THE COMPANY IS ENTITLED TO RECEIVE ANY
CHANGE OF CONTROL OR SEVERANCE PAYMENTS AS A RESULT OF THE TRANSACTION WITH LONE
STAR FUNDS.
OUR RESULTS
Unfortunately, as we have announced, our financial results have worsened in the
past several quarters, and this trend continues. Comparable store sales at our
Lone Star Steakhouse & Saloon restaurants declined 9.4% in the third quarter and
declined 9.9% in the four weeks ended October 3, 2006. There are a number of
contributing factors, many of which we believe are not short-term, that drove us
to believe that the time is right to sell the Company, notably:
o The negative demographic shifts and deterioration in many of the
markets in which our Lone Star Steakhouse & Saloon restaurants
are located;
o The costs involved in renovating, closing and/or relocating
under-performing or older units;
o The negative overall performance of the casual dining sector
driven by, among other things, declining consumer disposable
income, higher gas prices and higher interest rates;
o The proliferation of discount pricing in the casual dining
segment;
o The over-saturation of the casual dining industry coupled with an
increased number of restaurants in the casual dining segment
which offer or have added steak as part of their menus;
o The expected over-saturation of the upscale steakhouse segment;
o The spread of "living-wage" ordinances on a local basis, setting
a minimum wage exceeding the federally mandated minimum wage;
o The continued price of beef above historical levels;
o Significant increases in labor, occupancy, taxes, insurance and
common area expenses, as well as escalating construction costs;
o The difficulty in identifying, recruiting, training and retaining
senior management and other key personnel in adequate numbers to
properly staff our restaurants; and
o Lone Star Steakhouse & Saloon restaurants are not media
efficient, making television advertising too expensive, thereby
placing the Lone Star Steakhouse & Saloon concept at a
disadvantage compared to larger casual dining chains.
WE URGE YOU TO VOTE FOR THE TRANSACTIONS
YOUR VOTE IS EXTREMELY IMPORTANT. Approval of the transactions requires the
affirmative vote of the holders of a majority of the Company's outstanding
shares. NOT VOTING OR ABSTAINING FROM VOTING YOUR SHARES HAS THE SAME EFFECT AS
A VOTE AGAINST THE TRANSACTIONS. Accordingly, please sign, date and return the
enclosed proxy card in the envelope provided, or submit your vote by telephone
or over the Internet following the instructions on the proxy card, to vote FOR
the transactions TODAY! If you hold your shares through a broker, please follow
the procedures provided to you by your broker regarding how to instruct your
broker to vote your shares, otherwise your shares will not be voted.
The proxy statement that we have previously sent to you contains important
information about the transactions. We urge you to read it carefully. If you
have any questions or need assistance in voting your shares, please call our
proxy solicitor, Innisfree M&A Incorporated, toll-free at (877) 456-3488.
Thank you for your support.
On behalf of the Board of Directors,
Fred Chaney
Chairman of the Board of Directors
Lone Star currently owns and operates 217 domestic Lone Star Steakhouse & Saloon
restaurants, 15 Sullivan's Steakhouse restaurants; five Del Frisco's Double
Eagle Steak House restaurants, one Frankie's Italian Grille restaurant and 23
Texas Land & Cattle Steak House restaurants. Licensees operate four domestic and
13 international Lone Star restaurants, and one domestic Del Frisco's Double
Eagle Steak House restaurant.
This press release 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. Although the Company
believes the assumptions underlying the forward-looking statements contained
herein, including future operating performance, comparable sales and the
development plans of the Company, are reasonable, any of the assumptions could
be inaccurate, and therefore, there can be no assurance that the forward-looking
statements contained in the press release will prove to be accurate.
CERTAIN INFORMATION CONCERNING PARTICIPANTS
The Company has made a definitive filing with the Securities and Exchange
Commission of a proxy statement and accompanying proxy card to be used to
solicit votes in favor of the transactions at the special meeting of
stockholders of the Company to be held on November 30, 2006 (the "Special
Meeting").
THE COMPANY STRONGLY ADVISES ALL STOCKHOLDERS OF THE COMPANY TO READ THE PROXY
STATEMENT AND OTHER PROXY MATERIALS RELATING TO THE SPECIAL MEETING BECAUSE THEY
CONTAIN IMPORTANT INFORMATION. SUCH PROXY MATERIALS ARE AVAILABLE AT NO CHARGE
ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV. IN
ADDITION, A STOCKHOLDER WHO WISHES TO RECEIVE A COPY OF THE DEFINITIVE PROXY
MATERIALS, WITHOUT CHARGE, SHOULD SUBMIT THIS REQUEST TO THE COMPANY'S PROXY
SOLICITOR, INNISFREE M&A INCORPORATED, AT 501 MADISON AVENUE, 20TH FLOOR, NEW
YORK, NEW YORK 10022 OR BY CALLING INNISFREE TOLL-FREE AT (877) 456-3488.
The Company and its directors, executive officers and other members of its
management and employees may be deemed to be participants in the solicitation of
proxies from its stockholders in connection with the transactions. Information
concerning the interests of the Company and the other participants in the
solicitation is set forth in the Company's definitive proxy statement filed with
the Securities and Exchange Commission in connection with the transactions and
Annual Reports on Form 10-K, previously filed with the Securities and Exchange
Commission.
Source: Lone Star Steakhouse & Saloon, Inc.
Contact: Michael C. Brinn, Innisfree M&A Incorporated, 212-750-8253