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 17, 2003 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 by check mark whether the Registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act.)
/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 25, 2003
----- ----------------------------
Common Stock, $.01 par value 20,758,913 shares
LONE STAR STEAKHOUSE & Saloon, Inc.
Index
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 2
at June 17, 2003 and December 31, 2002
Condensed Consolidated Statements of 3
Income for the twelve weeks ended
June 17, 2003 and June 11, 2002
Condensed Consolidated Statements of 4
Income for the twenty-four weeks ended
June 17, 2003 and June 11, 2002
Condensed Consolidated Statements of 5
Cash Flows for the twenty-four weeks ended
June 17, 2003 and June 11, 2002
Notes to Condensed Consolidated 6
Financial Statements
Item 2. Management's Discussion and 11
Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative 19
Disclosures about Market Risks
Item 4. Controls and Procedures 19
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 vote of stockholders 19
Item 6. Exhibits and Reports on Form 8-K 20
-1-
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
June 17, 2003 December 31, 2002
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 74,293 $ 65,369
Inventories 12,554 12,390
Other current assets 10,146 9,312
--------- ---------
Total current assets 96,993 87,071
Property and equipment 521,851 520,513
Less accumulated depreciation and amortization (192,737) (181,778)
--------- ---------
329,114 338,735
Other assets:
Deferred income taxes 16,238 13,171
Intangible and other assets, net 34,688 34,336
--------- ---------
Total assets $ 477,033 $ 473,313
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,679 $ 16,084
Other current liabilities 28,948 26,412
--------- ---------
Total current liabilities 43,627 42,496
Long term liabilities, principally defered compensation obligations 16,152 11,058
Stockholders' equity:
Preferred stock -- --
Common stock 206 210
Additional paid-in capital 178,468 189,908
Retained earnings 251,252 241,601
Common stock held by Trust (3,663) --
Accumulated other comprehensive loss (9,009) (11,960)
--------- ---------
Total stockholders' equity 417,254 419,759
--------- ---------
Total liabilities and stockholders' equity $ 477,033 $ 473,313
========= =========
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
--------------------------------
June 17, 2003 June 11, 2002
------------- ---------------
Net sales $ 143,673 $ 139,118
Costs and expenses:
Costs of sales 50,131 45,720
Restaurant operating expenses 66,883 63,277
Depreciation and amortization 5,000 5,901
--------- ---------
Restaurant costs and expenses 122,014 114,898
--------- ---------
Restaurant operating income 21,659 24,220
General and administrative expenses 11,322 10,963
Abandoned merger expense -- 2,967
Non-cash stock compensation expense 733 753
--------- ---------
Income from operations 9,604 9,537
Other income, net 357 264
--------- ---------
Income from continuing operations before income taxes 9,961 9,801
Provision for income taxes 2,879 3,599
--------- ---------
Income from continuing operations 7,082 6,202
Discontinued operations:
Income (loss) from operations of discontinued restaurants 839 (224)
Income tax benefit (provision) (293) 79
--------- ---------
Income (loss) on discontinued operations 546 (145)
--------- ---------
Net income $ 7,628 $ 6,057
========= =========
Basic earnings (loss) per share:
Continuing operations $ 0.34 $ 0.25
Discontinued operations 0.03 (0.01)
--------- ---------
Basic earnings per share $ 0.37 $ 0.24
========= =========
Diluted earnings (loss) per share:
Continuing operatons $ 0.30 $ 0.22
Discontinued operations 0.02 (0.01)
--------- ---------
Diluted earnings per share $ 0.32 $ 0.21
========= =========
See accompanying notes.
-3-
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Statements of Income
(In thousands, except for per share amounts)
(Unaudited)
For the twenty-four weeks ended
-------------------------------
June 17, 2003 June 11, 2002
------------- -------------
Net sales $ 288,151 $ 287,026
Costs and expenses:
Costs of sales 99,368 93,736
Restaurant operating expenses 133,244 126,351
Depreciation and amortization 10,287 11,794
--------- ---------
Restaurant costs and expenses 242,899 231,881
--------- ---------
Restaurant operating income 45,252 55,145
General and administrative expenses 21,368 20,929
Abandoned merger expense -- 2,967
Non-cash stock compensation expense 1,126 1,562
--------- ---------
Income from operations 22,758 29,687
Other income, net 475 646
--------- ---------
Income from continuing operations before income taxes
and cumulative effect of accounting change 23,233 30,333
Provision for income taxes 7,421 11,411
--------- ---------
Income from continuing operations before cumulative
effect of accounting change 15,812 18,922
Discontinued operations:
Income (loss) from operations of discontinued restaurants 839 (552)
Income tax benefit (provision) (293) 198
--------- ---------
Income (loss) on discontinued operations 546 (354)
--------- ---------
Income before cumulative effect of accounting change 16,358 18,568
Cumulative effect of accounting change, net of tax -- (318)
--------- ---------
Net income $ 16,358 $ 18,250
========= =========
Basic earnings (loss) per share:
Continuing operations $ 0.76 $ 0.77
Discontinued operations 0.02 (0.01)
Cumulative effect of accounting change -- (0.01)
--------- ---------
Basic earnings per share $ 0.78 $ 0.75
========= =========
Diluted earnings (loss) per share:
Continuing operatons $ 0.66 $ 0.67
Discontinued operations 0.02 (0.01)
Cumulative effect of accounting change -- (0.01)
--------- ---------
Diluted earnings per share $ 0.68 $ 0.65
========= =========
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 17, 2003 June 11, 2002
------------- -------------
Cash flows from operating activities:
Net income $ 16,358 $ 18,250
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 11,811 13,569
Non-cash stock compensation expense 1,126 1,562
(Gain) loss from sale of assets (34) 141
Cumulative effect of accounting change -- 508
Deferred income taxes (3,067) (239)
(Income) loss from discontinued operations (546) 354
Net change in operating assets and liabilities:
Change in operating assets (917) 851
Change in operating liabilities 1,879 (5,408)
--------- ---------
Net cash provided by operating activities of continuing operations 26,610 29,588
Cash flows from investing activities:
Purchases of property and equipment (2,341) (1,088)
Proceeds from sale of assets 963 1,234
Other 459 14
--------- ---------
Net cash provided by (used in) investing activities of continuing operations (919) 160
Cash flows from financing activities:
Net proceeds from issuance of common stock 5,260 15,891
Common stock repurchased and retired (18,454) --
Cash dividends (6,707) (7,317)
--------- ---------
Net cash provided by (used in) financing activities of continuing operations (19,901) 8,574
Effect of exchange rate changes on cash 969 411
Net cash provided by (used in) discontinued operations 2,165 (221)
--------- ---------
Net increase in cash and cash equivalents 8,924 38,512
Cash and cash equivalents at beginning of period 65,369 82,919
--------- ---------
Cash and cash equivalents at end of period $ 74,293 $ 121,431
========= =========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 2,031 $ 14,794
========= =========
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 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. The results for the twenty-four weeks ended June 17, 2003 are
not necessarily indicative of the results to be expected for the full year
ending December 30, 2003. 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 31, 2002.
Certain amounts for the prior year have been reclassified to conform with
the current year's presentation.
2. COMPREHENSIVE INCOME
Comprehensive income is comprised of the following:
For the twelve weeks ended For the twenty-four weeks ended
June 17, 2003 June 11, 2002 June 17, 2003 June 11, 2002
------------- ------------- ------------- -------------
Net income $ 7,628 $ 6,057 $16,358 $18,250
Foreign currency translation
adjustments 1,996 1,269 2,951 1,682
------- ------- ------- -------
Comprehensive income $ 9,624 $ 7,326 $19,309 $19,932
======= ======= ======= =======
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, average shares outstanding has been adjusted to reflect (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 have not been presented for the
periods as their effect would have been anti-dilutive.
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 17, 2003 June 11, 2002 June 17, 2003 June 11, 2002
------------- ------------- ------------- -------------
Basic average shares outstanding 20,717 24,747 20,888 24,473
Diluted average shares outstanding 23,740 28,472 23,959 28,048
-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 17, 2003 and at
December 31, 2002, 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 17, 2003 and at
December 31, 2002. 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. 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 purchased 891,000 shares of its common
stock during the twenty-four weeks ended June 17, 2003, and made no purchases of
its common stock during the twenty-four weeks ended June 11, 2002. 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.
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. During the
twenty-four weeks ended June 17, 2003, the Company issued 300,000 shares of its
common stock to effect the exercise of such stock options in exchange for
122,855 shares of the Company's common stock as payment for such shares. The
122,855 shares received by the Company were cancelled. The Company issued
122,855 shares to the optionee and pursuant to the terms of the Plan, 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 ("Participant(s)"). 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
-7-
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 June 17, 2003, the Trust held 177,145
shares of the Company's common stock. Included in non-cash stock compensation
expense for the twelve and twenty-four weeks ended June 17, 2003 was a charge of
$409 relating to the accounting for such shares.
6. STOCK BASED COMPENSATION
In December 2002, the Financial Accounting Standards Boards ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148, ACCOUNTING
FOR STOCK BASED COMPENSATION TRANSITION AND DISCLOSURE, AN AMENDMENT OF SFAS NO.
123. Accordingly, effective with the first quarter of fiscal 2002, the Company
changed its method of accounting as the Company adopted the fair value
recognition provision of SFAS No. 123 for employee stock-based compensation. The
Company now values stock options based upon an option pricing model and
recognizes their value as an expense over the period in which options vest. The
Company elected to apply the retroactive restatement method as provided in SFAS
No. 148 and as a result all prior periods presented have been restated to
reflect the compensation expense that would have been recognized had SFAS No.
123 been applied to all awards granted to employees after January 1, 1995. The
effect of this change was to increase net income $3,373 ($0.13 per share for
basic earnings and $0.11 per share for diluted earnings) and $19,392 ($0.79 per
share for basic earnings and $0.69 per share for diluted earnings) for the
twelve weeks and the twenty-four weeks ended June 11, 2002, respectively.
7. ACCOUNTING CHANGES
During the first quarter of fiscal 2002, the Company adopted the
provisions of SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, requiring that
goodwill and intangible assets deemed to have indefinite lives will no longer be
amortized. The application of the impairment provisions of SFAS No. 142 resulted
in a charge for the cumulative effect of an accounting change of $318,000 or
$.02 per basic share, net of income taxes of $190,000, to reflect impairment of
certain goodwill related to 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 established a single
accounting model for long-lived assets to be disposed of by sale or abandonment.
Additionally, SFAS No. 144 expanded the scope of financial accounting and
reporting of discontinued operations previously addressed in APB No. 30 to
require that all components of an entity that have either been disposed of (by
sale, by abandonment, or in a distribution to owners) or are held for sale and
whose operations and cash flows can be clearly distinguished, operationally and
for financial reporting purposes from the rest of the entity, should be
presented as discontinued operations. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
provisions for presenting the components of an entity as discontinued operations
are effective only for disposal activities initiated by the Company after the
effective date of the Statement. The Company adopted the provisions of SFAS No.
144, effective December 26, 2001. Pursuant to SFAS No. 144, each Company
restaurant is a component of the entity whose operations can be distinguished
from the rest of the Company; therefore, when a restaurant is closed and the
-8-
restaurant is either held for sale or abandoned, the restaurant's operations
will be eliminated from the ongoing operations of the Company. Accordingly, the
operations of such restaurants, net of applicable income taxes, have been
presented as discontinued operations and prior period financial statements have
been reclassified.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
only when the liability is incurred and measured at fair value. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002. The
Company has adopted this Statement effective January 1, 2003, and it did not
have a material impact on its results of operations or financial position.
8. 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 income under
the caption "Abandoned Merger Expenses."
9. SUBSEQUENT EVENTS
On July 3, 2003, the Board of Directors declared the Company's quarterly
cash dividend of $0.165 per share payable July 28, 2003 to stockholders of
record on July 14, 2003.
10. DISCONTINUED OPERATIONS
Pursuant to the provisions of SFAS No. 144 as previously described in Note
7 to the condensed consolidated financial statements, the Company closed certain
restaurants during the year ended December 31, 2002 which met the criteria for
the operations of the restaurants to be accounted for as discontinued
operations. The components of the loss from discontinued operations are as
follows:
For the twelve weeks ended For the twenty-four weeks ended
-------------------------- -------------------------------
June 17, June 11, June 17, June 11,
2003 2002 2003 2002
---- ---- ---- ----
Loss from operations $ - $ (224) $ - $ (552)
Gain on disposal of assets 839 - 839 -
Income tax benefit (provision) (293) 79 (293) 198
------ ------- -------- -------
Income (loss) from
discontinued operations $ 546 $ (145) $ 546 $ (354)
====== ======= ======== =======
Net sales from discontinued
operations $ - $ 602 $ - $ 1,502
====== ======= ======== =======
-9-
11. INCOME TAX
The effective income tax rate was 28.9% and 36.7% for the twelve weeks
ended June 17, 2003 and June 11, 2002, respectively, and 31.9% and 37.6% for the
twenty-four weeks ended June 17, 2003 and June 11, 2002, 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 amortization 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 effective tax rates for the 2003 periods reflect both the impact
of the tax benefits arising from disqualifying dispositions of incentive stock
options for tax purposes, as well as, a decrease in the amount of amortization
of stock option compensation attributable to incentive stock options as compared
to the prior year periods.
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 did not open any restaurants during the twenty-four weeks
ended June 17, 2003 or during the year ended December 31, 2002.
There were 249 operating domestic Lone Star restaurants as of June 17,
2003. 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
and was not rebuilt.
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 and one Frankie's Italian Grille restaurant.
Internationally, the Company currently operates 20 Lone Star restaurants
in Australia and a licensee operates one Lone Star restaurant in Guam. The
Company closed five Lone Star restaurants in Australia during the year ended
December 31, 2002.
-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) Twenty-four Weeks Ended
---------------------- -----------------------
June 17, June 11, June 17, June 11,
2003 2002 2003 2002
---- ---- ---- ----
Statement of Operations Data:
Net sales............................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales.................................... 34.9 32.9 34.5 32.7
Restaurant operating expenses..................... 46.6 45.5 46.2 44.0
Depreciation and amortization..................... 3.5 4.2 3.6 4.1
---- ---- ---- ----
Restaurant costs and expenses............... 85.0 82.6 84.3 80.8
---- ---- ---- ----
Restaurant operating income............................. 15.0 17.4 15.7 19.2
General and administrative expenses..................... 7.9 7.9 7.4 7.3
Abandoned merger expenses............................... -- 2.1 -- 1.0
Non-cash stock compensation expense..................... 0.5 0.5 0.4 0.5
---- ---- ---- ----
Income from operations.................................. 6.6 6.9 7.9 10.4
Other income, net....................................... 0.3 0.2 0.2 0.2
---- ---- ---- ----
Income from continuing operations before income taxes
and cumulative effect of accounting change............ 6.9 7.1 8.1 10.6
Provision for income taxes.............................. 2.0 2.6 2.6 4.0
---- ---- ---- ----
Income from continuing operations before cumulative
effect of accounting change........................... 4.9 4.5 5.5 6.6
Income (loss) from discontinued operations, net of
applicable income taxes................................ 0.4 (0.1) 0.2 (0.1)
---- ---- ---- ----
Income before cumulative effect of accounting change.... 5.3 4.4 5.7 6.5
Cumulative effect of accounting change, net of tax...... -- -- -- (0.1)
---- ---- ---- ----
Net income ............................................ 5.3% 4.4% 5.7% 6.4%
==== ==== ==== ====
(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 June 17, 2003 compared to Twelve weeks ended June 11, 2002
(Dollar amounts in thousands, except per share amounts)
Net sales increased $4,555 or 3.3% to $143,673 for the twelve weeks ended
June 17, 2003, compared to $139,118 for the twelve weeks ended June 11, 2002.
Same store sales increased 2.9% compared with the prior year period. In
addition, sales for the twelve-weeks ended June 17, 2003 were increased by
approximately $1,800 by the inclusion of Father's Day sales. In 2002, Father's
Day sales were in the fiscal third quarter.
Costs of sales, primarily food and beverages, increased as a percentage of
net sales to 34.9% from 32.9% due primarily to increased beef costs.
Restaurant operating expenses for the twelve weeks ended June 17, 2003
increased $3,606 to $66,883 compared to $63,277 in the prior year period, and
increased as a percentage of net sales to 46.6% from 45.5%. The increase is
primarily attributable to (1) approximately $750 due to increased costs of
indirect labor for payroll related taxes and insurance costs, (2) approximately
$840 for increased costs in building and equipment repairs, (3) approximately
$550 for increased costs of utilities and (4) approximately $250 for increased
costs of manager training.
Depreciation and amortization decreased $901 for the twelve weeks ended
June 17, 2003 compared with the prior year period. The decrease is attributable
primarily to a reduction in depreciation for certain assets that have become
fully depreciated.
General and administrative expenses increased $359 for the twelve weeks
ended June 17, 2003 compared to the prior year period. The increase is due
primarily to increased costs of approximately $770 for directors and officers
liability insurance and travel and recruiting costs. The increases were
partially offset by reductions in professional fees and software depreciation
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 17,
2003 decreased $20 compared to the prior year period. The decrease reflects
approximately $429 for lower amortization of expenses arising from the
amortization of such costs over the underlying vesting periods of the options.
The decrease was largely offset by a charge of $409 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 5 to the Notes to Condensed
Consolidated Financial Statements for additional information.
Other income, net for the twelve weeks ended June 17, 2003, was $357
compared to $264 for the prior year period. The increase is attributable to an
increase in gains from sales of assets offset in part by a decline in interest
income as a result of lower interest rates and reduced amounts of excess funds
available for investment.
The effective income tax rate was 28.9% and 36.7% for the twelve weeks
ended June 17, 2003 and June 11, 2002, 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 amortization 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 effective tax rates
for the 2003 periods reflect both the impact of the tax benefits arising from
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disqualifying dispositions of incentive stock options for tax purposes, as well
as, a decrease in the amount of amortization of stock option compensation
attributable to incentive stock options as compared to the prior year periods.
Discontinued operations reflect the operations of restaurants closed
during the year ended December 31, 2002 which are required to be reported as
discontinued operations pursuant to SFAS No. 144. The income for the twelve
weeks ended June 17, 2003 results from a gain on the disposal of assets. See
Note 10 to the Notes to Condensed Consolidated Financial Statements for
additional information.
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LONE STAR STEAKHOUSE & SALOON, INC.
Twenty-four weeks ended June 17, 2003 compared to Twenty-four
weeks ended June 11, 2002
(Dollar amounts in thousands, except per share amounts)
Net sales increased $1,125 or 0.4% to $288,151 for the twenty-four weeks
ended June 17, 2003, compared to $287,026 for the twenty-four weeks ended June
11, 2002. Same store sales increased 0.2% compared with the prior year. The net
increase in sales is primarily attributable to an increase in the foreign
currency exchange rates in Australia.
Costs of sales, primarily food and beverages, increased as a percentage of
net sales to 34.5% from 32.7% due primarily to increased beef costs.
Restaurant operating expenses for the twenty-four weeks ended June 17,
2003 increased $6,893 to $133,244 compared to $126,351 in the prior year period,
and increased as a percentage of net sales to 46.2% from 44.0%. The increase is
primarily attributable to (1) approximately $1,160 due to increased costs of
indirect labor for payroll related taxes and insurance costs, (2) approximately
$650 for increased spending on advertising, (3) approximately $1,590 for
increased costs in building and equipment repairs and (4) approximately $780 for
increased costs of utilities.
Depreciation and amortization decreased $1,507 for the twenty-four weeks
ended June 17, 2003 compared with the prior year period. The decrease is
attributable primarily to a reduction in depreciation for certain assets that
have become fully depreciated.
General and administrative expenses increased $439 for the twenty-four
weeks ended June 17, 2003 compared to the prior year period. The increase is due
primarily to increased costs of approximately $1,100 for directors and officers
liability insurance and travel and recruiting costs. The increases were largely
offset by reductions in professional fees.
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 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 twenty-four weeks ended June
17, 2003 decreased $436 compared to the prior year period. The decrease reflects
approximately $845 for lower amortization expense arising from the amortization
of such costs over the underlying vesting periods of the options. The decrease
was partially offset by a charge of $409 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 5 to the Notes to Condensed
Consolidated Financial Statement for additional information.
Other income, net for the twenty-four weeks ended June 17, 2003, was $475
compared to $647 for the prior year period. The decrease is attributable to a
decline in interest income as a result of lower interest rates and reduced
amounts of excess funds available for investment.
The effective income tax rate was 31.9% and 37.6% for the twenty-four
weeks ended June 17, 2003 and June 11, 2002, 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 amortization 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
effective tax rates for the 2003 periods reflect both the impact of the tax
benefits arising from disqualifying dispositions of incentive stock options for
tax purposes, as well as, a decrease in the amount of amortization of stock
option compensation attributable to incentive stock options as compared to the
prior year periods.
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Discontinued operations reflect the operations of restaurants closed
during the year ended December 31, 2002 which are required to be reported as
discontinued operations pursuant to SFAS No. 144. The income for the twenty-four
weeks ended Jun 17, 2003 results from a gain on the disposal of assets. See Note
10 to the Notes to Condensed Consolidated Financial Statements for additional
information.
The cumulative effect of accounting change reflects the effect of adoption
of the provisions 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 the
Company's Australian 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 should have
little effect on overall labor costs. Historically as costs of food and labor
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 (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 17, 2003 and June 11, 2002:
Twenty-four weeks ended
-----------------------
June 17, 2003 June 11, 2002
------------- -------------
Net cash provided by operating activities................ $ 26,610 $29,588
Net cash provided by (used in) investing activities...... (919) 160
Net cash provided by (used in) financing activities...... (19,901) 8,574
Effect of exchange rate changes on cash.................. 969 411
Net cash provided by (used in) discontinued operations... 2,165 (221)
---------- ---------
Net increase in cash..................................... $ 8,924 $ 38,512
========== =========
The decrease in net cash provided by operating activities for the
twenty-four week period ended June 17, 2003 compared to the prior year period is
due to a decrease in net income and a decrease in depreciation and amortization.
During the twenty-four week period ended June 17, 2003, the Company's
investment in property and equipment was $2,341 compared to $1,088 for the same
period in 2002. In the twenty-four week period ended June 17, 2003, the Company
received $963 in proceeds from the sale of assets compared to $1,234 in the same
period in 2002.
During the twenty-four week period ended June 17, 2003, the Company
received net proceeds of $5,260 from the issuance of 624,933 shares of its
common stock due to the exercise of stock options compared to proceeds of
$15,891 from the issuance of 1,275,908 shares issued pursuant to stock option
exercises in the same period in 2002.
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 week period ended June 17, 2003
the Company purchased 891,000 shares of its common stock at a cost of $20.71 per
share or an aggregate cost of $18,454. The Company did not purchase any common
stock during the same period in 2002.
The Company has paid quarterly cash dividends on its common stock since
the second quarter of fiscal 2000. In January 2003, the Company increased its
quarterly cash dividend from $.15 to $.165 per share commencing in the second
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quarter of fiscal 2003. During the twenty-four week period ended June 17, 2003,
the Company paid dividends of $6,707 or $.315 per share as compared to $7,317 or
$.30 per share in the same period in 2002.
At June 17, 2003, the Company had $74,293 in cash and cash equivalents.
The Company has available $55,000 in unsecured revolving credit facilities. At
June 17, 2003, the Company has no outstanding borrowings. See Note 4 to the
Notes to Condensed Consolidated Financial Statements in this Form 10-Q for a
further description of the Company's credit facilities.
The Company 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 17,
2003, the Company had no positions in futures contracts.
IMPACT OF RECENTLY ISSUED FINANCIAL STANDARDS
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
only when the liability is incurred and measured at fair value. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The Company has adopted this Statement effective January 1, 2003, and it
did not have a material impact on its results of operations or financial
position.
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 31, 2002. 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.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's exposure to market risks was not significant during
the twelve and twenty-four weeks ended June 17, 2003.
Item 4. CONTROLS AND PROCEDURES
Disclosure controls are procedures that are designed with the
objective of ensuring that information required to be disclosed in
the Company's reports under the Securities Exchange Act of 1934,
such as this Form 10-Q, is reported in accordance with the
Securities and Exchange Commission's rules. Disclosure controls are
also designed with the objective of ensuring that such information
is accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer as appropriate to
allow timely decisions regarding required disclosure.
Within the 90 days prior to the date of this report, the Company
carried out an evaluation under the supervision and with the
participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to the Securities
Exchange Act Rule 13a-14. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be in the
Company's periodic SEC filings. There were no significant changes in
the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation.
Certifications of the Chief Executive Officer and Chief Financial
Officer regarding, among other items, disclosure controls and
procedures are included immediately after the signature section of
this Form 10-Q.
Part II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
On July 11, 2003, the Company held its Annual Meeting of
Stockholders (the "Meeting"). At the Meeting, the stockholders
re-elected Clark D. Mandigo, John D. White and Thomas G. Lasorda to
the Board of Directors to serve until the 2006 Annual Meeting of
Stockholders and until their successors have been duly elected and
qualified. As to the newly re-elected Directors, there were
17,944,529 votes "For" and 820,399 votes "Withheld" for Clark D.
Mandigo, and 18,595,673 votes "For" and 169,255 votes "Withheld" for
John D. White, and 18,388,088 votes "For" and 376,840 votes
"Withheld" for Thomas G. Lasorda. The stockholders ratified the
appointment of Ernst & Young LLP as the Company's independent
auditors for the year ending December 30, 2003. As to the
ratification of auditors, there were 18,022,045 votes "For", 738,325
votes "Against" and 4,558 votes "Abstained".
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
During the twelve weeks ended June 17, 2003, the Company filed
Form 8-K on the following dates under Item 5 - Other Events:
April 11, 2003 First Quarter Earnings Results
(b) Exhibits
99.1 Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act
99.2 Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act
99.3 Employment agreement, dated April 29, 2003 between
the Company and John D. White
99.4 Employment agreement, dated April 29, 2003 between
the Company and T.D. O'Connell
99.5 Employment agreement, dated April 29, 2003 between
the Company and Gerald T. Aaron
99.6 Employment agreement, dated April 29, 2003 between
the Company and Randall H. Pierce
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lone Star Steakhouse & Saloon, Inc.
(Registrant)
Date: August 1, 2003 /s/ Randall H. Pierce
----------------------------------
Randall H. Pierce
Chief Financial Officer
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Section 302 Certification
I, JAMIE B. COULTER, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of LONE STAR STEAKHOUSE &
SALOON, INC, a Delaware corporation (the "registrant");
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: August 1, 2003
By: /s/ Jamie B. Coulter
-----------------------
Jamie B. Coulter
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Section 302 Certification
I, RANDALL H. PIERCE, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of LONE STAR STEAKHOUSE &
SALOON, INC, a Delaware corporation (the "registrant");
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: August 1, 2003
By: /s/ Randall H. Pierce
-------------------------
Randall H. Pierce
Chief Financial Officer