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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 28, 2004
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/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______ TO ______
Commission file number 0-19907
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LONE STAR STEAKHOUSE & SALOON, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 48-1109495
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(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
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)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed all 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. Yes /x/ No /_/
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes /x/ No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes /x/ No /_/
As of June 15, 2004, the aggregate market value of the Registrant's Common
Stock held by non-affiliates of the Registrant was $499,238,829. Solely for the
purpose of this calculation, shares held by directors and officers of the
Registrant have been excluded. Such exclusion should not be deemed a
determination by or an admission by the Registrant that such individuals are, in
fact, affiliates of the Registrant.
As of March 7, 2005, there were 20,472,707 shares outstanding of the
Registrant's Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III will be incorporated by reference to
certain portions of a definitive proxy statement, which is expected to be filed
by the Registrant within 120 days after the close of its fiscal year.
TABLE OF CONTENTS
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ITEM PAGE
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PART I
1. Business................................................................................ 3
2. Properties ............................................................................. 9
3. Legal Proceedings.......................................................................11
4. Submission of Matters to a Vote of Security Holders ....................................11
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matter and Issuer's
Purchases of Equity Securities..........................................................12
6. Selected Financial Data.................................................................14
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations..............................................................................16
7A. Quantitative and Qualitative Disclosures about Market Risk..............................29
8. Financial Statements and Supplementary Data.............................................29
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..............................................................................29
9A. Controls and Procedures.................................................................29
9B. Other Information.......................................................................31
PART III
10. Directors and Executive Officers of the Registrant......................................32
11. Executive Compensation..................................................................32
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.....................................................................32
13. Certain Relationships and Related Transactions..........................................32
14. Principal Accountant Fees and Services..................................................32
PART IV
15. Exhibits and Financial Statement Schedules..............................................33
Signatures..............................................................................35
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PART I
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act, and Section 21E of the
Exchange Act, which are intended to be covered by the safe harbors created
thereby. Stockholders are cautioned that all forward-looking statements involve
risks and uncertainty, including without limitation, changes in costs of food,
retail merchandise, labor, and employee benefits, risks associated with
litigation, our ability to continue to acquire and retain prime locations at
acceptable lease or purchase terms, the impact of specific events such as the
outbreak of "mad cow disease" or "foot/mouth disease", as well as general market
conditions, competition, and pricing. Although we believe that the assumptions
underlying the forward-looking statements included in this Annual Report will
prove to be accurate, in light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by us or any other person that our
objectives and plans will be achieved. Our forward-looking statements may be
identified by words such as "believes," "expects," "anticipates," "intends,"
"estimates" or similar expressions.
ITEM 1. BUSINESS
BACKGROUND
As of March 7, 2005, Lone Star Steakhouse & Saloon, Inc. (the "Company")
owned and operated 251 mid-priced, full service, casual dining restaurants
located in the United States, which operate under the trade name Lone Star
Steakhouse & Saloon or Lone Star Cafe ("Lone Star" or " Lone Star Steakhouse &
Saloon"), 20 Texas Land & Cattle Co. ("Texas Land & Cattle") restaurants, and 20
upscale steakhouse restaurants, five operating as Del Frisco's Double Eagle
Steak House ("Del Frisco's") restaurants and 15 operating as Sullivan's
Steakhouse ("Sullivan's") restaurants. The Company also operates a mid-priced
restaurant operating as Frankie's Italian Grille ("Frankie's"). In addition, a
licensee operates three Lone Star restaurants in California and a licensee
operates a Del Frisco's restaurant in Orlando, Florida. Internationally,
licensees operate 12 Lone Star Steakhouse & Saloon restaurants in Australia
and one in Guam.
The Texas Land & Cattle restaurants were purchased out of bankruptcy on
January 28, 2004, and their operating results are included in the Company's
accompanying financial information for the year ended December 28, 2004 from the
date of acquisition.
Steak continues to be one of the most frequently ordered dinner entrees at
restaurants. In 2004, the United States Department of Agriculture estimated the
average annual per capita consumption of beef to be 66.3 pounds an increase of
2.1 pounds over 2003. Company management believes the limited menu of its
restaurants, which features high quality USDA graded, well aged steaks, and the
appeal of its roadhouse ambiance and excellent service distinguishes Lone Star
restaurants. Texas Land & Cattle restaurants are distinguished by warm and
comfortable Texas ranch house ambiance featuring fireplaces, a broad menu
featuring high quality USDA choice and prime graded steaks and attentive
service. Company management believes Sullivan's restaurants are distinguished by
featuring high quality, top end choice of beef whereas Del Frisco's restaurants
are distinguished by featuring high quality, USDA prime graded steaks. In
addition, Sullivan's and Del Frisco's feature specialized new entrees,
award-winning wine lists, an exciting ambiance and attentive team service.
The Company's focus on selection, training and in-store execution along
with Lone Star's continued marketing initiatives, the successful integration of
Texas Land & Cattle into the Company's operations, the successful development of
the Sullivan's upscale concept, and the development of the Del Frisco's concept,
differentiate the Company from other restaurant companies that operate
steakhouse restaurants. The Company believes that through its operation of four
(4) distinct steak restaurant concepts, it has positioned itself as "The Steak
Company."
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RESTAURANT CONCEPTS
Lone Star restaurants are positioned as "destination restaurants" that
attract loyal clientele. Lone Star restaurants embrace a Texas-style concept
that features Texas artifacts and country and western music. The authentic
roadhouse concept was developed to capitalize on the enduring popularity of
Texas related themes. Lone Star is further distinguished by its high quality,
USDA graded, well aged steaks which are hand-cut fresh daily at each restaurant
and mesquite grilled to order. Meals are generous "Texas-sized" portions and
full bar service is available. The exciting and vibrant atmosphere created by
the restaurants' roadhouse ambiance includes neon beer signs and specially
selected upbeat country and western music. The decor includes planked wooden
floors, dim lighting, flags and other Texas memorabilia, all of which enhance
the casual dining experience and establish a distinct identity. Lone Star
restaurants are open seven days a week and most serve both lunch and dinner with
an average check per customer for 2004 of approximately $12.00 at lunch and
$18.50 at dinner.
Texas Land & Cattle restaurants are mid-priced full service dining
restaurants located in Texas (19) and New Mexico (1). The concept features
authentic Texas ranch house settings with large fireplaces, serving lunch and
dinner seven days per week. The average check per customer is approximately
$13.00 at lunch and $19.00 at dinner.
Sullivan's was named after the legendary boxer, John L. Sullivan, and
embraces a Chicago style 1940's steakhouse theme with nostalgic influences that
feature jazz and swing music. In 1997, Sullivan's was named the hot concept of
the year by Nation's Restaurant News. The bar features live jazz music several
nights a week. The decor includes an open kitchen, separate dining rooms, dark
wood paneling, carpeted floors, warm lighting, and white tablecloths. Sullivan's
is distinguished by its high quality, well aged, USDA inspected beef, chops, and
seafood. Most Sullivan's restaurants serve lunch and dinner, and are generally
open seven days a week with an average guest check per customer of approximately
$60.00.
Del Frisco's is designed to serve a sophisticated clientele, including
business related dining occasions, is the recipient of the prestigious Ivy Award
and has been elected to the fine dining hall of fame. The Del Frisco's concept
embraces an elegant and timeless early twentieth century motif. The concept
features old ways of cooking, such as master broiling and roasting. Del Frisco's
decor and ambiance include dark woods, fabric walls, fireplaces, separate dining
rooms and soft background music. These elements enhance the dining experience
and establish a distinct identity for Del Frisco's. Del Frisco's is further
distinguished by featuring high quality, USDA prime-graded steaks hand cut in
each restaurant. Del Frisco's restaurants serve dinner only, except the New York
City and Denver restaurants which are also open for lunch, and are generally
open Monday through Saturday with an average dinner guest check of approximately
$84.00.
Frankie's Italian Grille is a mid-priced casual dining restaurant featuring
traditional Italian cuisine in large portions. Frankie's features a high energy,
vibrant atmosphere and is open seven days a week, serving lunch and dinner, with
check averages of approximately $13.00 at lunch and $29.00 at dinner.
CORPORATE STRATEGY
In January 2004 the Company made a significant acquisition of the Texas Land
& Cattle restaurants, a 20-unit chain. These restaurants give the Company a
greatly increased presence in the state of Texas where the Company also operates
three Sullivan's and two Del Frisco's Double Eagle Steak Houses, but has no Lone
Star Steakhouse & Saloon restaurants.
During 2004 several different remodelings of restaurants were completed. These
remodelings can be described as ranging from a minor refurbishment to a
completely new look for the interior and exterior of the building. The Company
now believes that all future remodelings need to be considered on a unit-by-unit
basis; consequently, there is not a singular remodeling package that will be
utilized with broad application.
As in past years, the Company continues its focus on operational consistency,
with the primary emphasis on improved management staffing and retention, which
is expected to result in greater employee and guest satisfaction in our
restaurants. The marketing effort for all concepts continues to emphasize both
direct mail and print advertising in prestigious local and internationally known
publications.
Significant progress was made in real estate development during the year and we
have secured a meaningful number of future restaurant sites, which are in
various stages of the development process.
During 2004 the Company opened one new and remodeled seven Lone Star Steakhouse
& Saloon restaurants. Current plans call for an acceleration of new
development and restaurant remodels for all brands during 2005.
As in past years, the Company will look for opportunities to continue the
previously announced Stock Repurchase Program as part of its ongoing effort to
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increase shareholder value. Any repurchases of common stock are subject to
prevailing market prices, may be made in open market or in privately negotiated
transactions and may occur or be discontinued at any time. In addition, there
can be no assurance that the Company will repurchase any shares or as to the
amount, if any, of any cash dividends. Subject to the availability of an
adequate number of financially attractive real estate sites, meat prices and
other economic considerations, the Company's overall strategy continues to
include a combination of share repurchase, dividend payment, improved
operational efficiencies, new unit development and opportunistic acquisitions.
UNIT ECONOMICS
The Company's management team focuses on selecting locations with the
potential of producing significant revenues while controlling capital
expenditures and occupancy costs. The Company's Lone Star restaurants averaged
approximately $1.9 million in sales on an annualized basis during 2004. Of the
251 Lone Star restaurants open at March 7, 2005, 90 were leased facilities and
had an average cash investment of approximately $1.0 million and 161 were owned
and had an average cost for land acquisition, construction and equipment of
approximately $1.9 million.
The Company anticipates the average total investment per restaurant for a
typical Del Frisco's restaurant and Sullivan's restaurant will range from $3.0
million to $5.0 million, excluding the cost of land.
MENU
The dinner menu at a Lone Star restaurant features a limited selection of
high quality, specially seasoned and mesquite grilled steaks, prime rib, ribs,
chicken, fish, king crab, shrimp and various combinations. Most dinners consist
of a complete meal including salad, bread and butter and a choice of baked
potato, baked sweet potato, steak fries, steamed vegetables or Texas rice. The
lunch menu offers a selection of hamburgers, chicken sandwiches, luncheon
steaks, ribs, soups and salads. Depending on local availability and quality,
fish selections are also offered at lunch and dinner. Appetizers and desserts,
together with a full bar service is available. Alcoholic beverage service
accounts for approximately 11% of Lone Star's net sales.
The menu at Texas Land & Cattle restaurants features a selection of high
quality, mesquite grilled steaks, smoked sirloin, as well as prime rib, ribs,
chicken, fish, shrimp and combinations. Most dinners consist of a complete meal
including salad, bread and butter and a choice of side dish. The lunch menu
offers a selection of hamburgers, sandwiches, luncheon steaks, soups and salads.
Appetizers and desserts, together with a full bar service is available.
Alcoholic beverage service accounts for approximately 11% of Texas Land & Cattle
net sales.
The menu at Sullivan's features high quality, well aged, USDA inspected
beef, chops, seafood and quality side dishes. Sullivan's also features a number
of high quality wines and a full bar. Alcoholic beverage service accounts for
approximately 38% of Sullivan's net sales.
The menu at Del Frisco's features high quality USDA prime-graded steaks,
chops, seafood, and quality side dishes. Del Frisco's wine list offers over
1,000 high quality wines and a full bar. Alcoholic beverage service accounts for
approximately 36% of Del Frisco's net sales.
SITE SELECTION
The Company believes site selection is critical for the potential success
of a particular restaurant and senior management devotes significant time and
resources to analyzing each prospective site. Among the factors considered in
site selection are the specific steakhouse concept to be developed, local market
demographics, and site visibility. Consideration is given to accessibility and
proximity to significant generators of potential customers such as major
retailers, retail centers and office complexes, office and hotel concentrations,
and entertainment centers (stadiums, arenas, theaters, etc.). The Company also
reviews potential competition and attempts to analyze the profitability of other
national chain restaurants operating in the area.
Leases are negotiated generally with short initial terms with multiple
renewal options. The Company has generally required between 150 and 280 days
after the signing of a lease or the closing of a purchase to complete
construction and open a new restaurant. Additional time is sometimes required to
obtain certain government approvals and licenses, such as liquor licenses.
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RESTAURANT LAYOUT
The Company believes the decor and interior design of its restaurants
significantly contribute to its success. The Lone Star restaurants' open layout
permits customers to view the bar and Texas memorabilia, thereby enhancing the
casual dining atmosphere. The Company also designs its kitchen space for
efficiency of workflow, thereby minimizing the amount of space required.
Lone Star restaurants currently average approximately 5,800 square feet and
include a dining area with seating for approximately 220 customers. In addition,
a bar area is located adjacent to the dining room primarily to accommodate
customers waiting for dining tables or to accommodate overflow. In some
restaurants, an outside patio area provides additional seating.
A new prototype Lone Star building has been developed which features an
open view kitchen, with the interior decor utilizing newer and vibrant colors
and quality materials of granite and stone. The building exterior features earth
tones with cultured stone and a stucco finish. The prototype building is
approximately 6,800 sq. ft. with a seating count of 260 people.
Texas Land & Cattle restaurants average approximately 7,300 sq. ft. and
have seating for approximately 280 customers.
The first Sullivan's restaurant in Austin, Texas was expanded in 1997 by
4,500 square feet to 12,000 square feet and now seats 320 customers. The other
Sullivan's restaurants range from 7,000 to 9,000 square feet, with seating
capacity for approximately 250 customers. A separate jazz bar area called
"Ringside" is utilized at the Baton Rouge, Louisiana, and Dallas and Houston,
Texas Sullivan's restaurants. The Sullivan's bar area is separate from the
dining room and is designed to be a destination unto itself, featuring live jazz
music and an upbeat, convivial atmosphere.
The original Del Frisco's restaurant in Dallas, Texas is approximately
12,000 square feet and seats approximately 440 customers and includes an
extended wine cellar, with private dining available. In addition, Del Frisco's
features a bar area adjacent to the dining room primarily to accommodate
customers waiting for tables. The Ft. Worth, Texas and Denver, Colorado Del
Frisco's restaurants are approximately 11,000 and 12,000 square feet and seat
approximately 320 and 360 customers, respectively. The New York City location is
approximately 16,500 square feet, with seating capacity for approximately 460
customers and the Las Vegas location is approximately 11,000 square feet, with
seating capacity for approximately 320 customers.
MARKETING
Lone Star restaurants are "destination location restaurants" that focus on
the mid-priced full service casual dining market segments. The Company is
committed to customer service, providing an excellent price-value relationship
and coupled with the unique "Texas Roadhouse" ambiance of its restaurants
attracts and retains customers. Accordingly, the Company has focused its
resources on providing customers with superior service, value and an exciting
and vibrant atmosphere, and relied primarily on word of mouth to attract new
customers. The Company also utilizes billboard advertising to promote its
restaurants and build customer awareness. The Company utilizes direct mail
featuring new products and limited price promotions in lieu of media
advertising. This marketing strategy enables the Company to provide marketing
support for all its Lone Star restaurants.
The Company utilizes high quality print ads featuring all of its steak
concepts in Cigar Aficionado and Wine Spectator, which are national publications
and reach the Company's target audience. Special promotions are also utilized
featuring a specific wine vineyard and local charitable event promotions. Texas
Land & Cattle utilizes local store marketing and local print publications. In
addition, radio is utilized in the Dallas/Ft. Worth market sponsoring a popular
local sports talk program.
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RESTAURANT OPERATIONS AND MANAGEMENT
The Company strives to maintain quality and consistency in all of its
restaurants through careful hiring, training and supervision of personnel and
the establishment of standards relating to food and beverage preparation,
maintenance of facilities and conduct of personnel.
The typical Lone Star management team consists of one general manager and
four managers. Each restaurant also employs a staff consisting of approximately
50 to 90 hourly employees, many of whom work part-time. The regional managers
report to a regional vice-president. Typically, each general manager reports
directly to a district manager who reports to a regional manager. Restaurant
managers complete an eight-week training program during which they are
instructed in all areas of the operation including food quality, safety and
preparation, customer satisfaction, alcoholic beverage service, governmental
regulations compliance, liquor liability avoidance and employee relations.
Restaurant management is also provided with a proprietary operations manual
relating to food and beverage preparation, all areas of restaurant management
and compliance with governmental regulations. Working in concert with restaurant
managers, the Company's senior management defines operations and performance
objectives for each restaurant and monitors implementation. An incentive cash
bonus program has been established in which each restaurant's management team
participates. Awards under the incentive plan are tied to achievement of
specified revenue and operating targets. Senior management regularly visits
Company restaurants and meets with the respective management teams to ensure the
Company's strategies and standards of quality are met in all respects of
restaurant operations and personnel development.
The Company's commitment to customer service and satisfaction is evidenced
by several practices and policies, including periodic visits by restaurant
management to customers' tables, active involvement of restaurant management in
responding to customer comments, and assigning wait persons to a limited number
of tables, generally three for dinner and four for lunch. Teamwork is emphasized
through a runner system for delivering food to the tables that is designed to
serve customers in an efficient and timely manner.
Each new restaurant employee of the Company participates in a training
program during which the employee works under the close supervision of a
restaurant manager. Management strives to instill enthusiasm and dedication in
its employees and create a stimulating and rewarding working environment where
employees know what is expected of them in measurable terms. Management
continuously solicits employee feedback concerning restaurant operations and
strives to be responsive to employee concerns.
PURCHASING
Approximately 54% of the consumable products used in the restaurants are
distributed through and delivered by a single vendor. The Company negotiates
directly with suppliers for food and beverage products to ensure consistent
quality and freshness of products and to obtain competitive prices. The Company
purchases substantially all food and beverage products from local or national
suppliers. Food and supplies are shipped directly to the restaurants, although
invoices for purchases are sent to the Company for payment. The Company does not
maintain a central product warehouse or commissary. The Company has not
experienced any significant delays in receiving restaurant supplies and
equipment. From time to time, the Company may engage in forward pricing or
consider other risk management strategies with regard to its meat and other food
costs to minimize the impact of potential price fluctuations. This practice
could help stabilize the Company's food costs during times of fluctuating
prices. The Company did not engage in any forward pricing or hedging in 2004. As
of March 7, 2005, the Company had no significant forward pricing contracts.
MANAGEMENT INFORMATION SYSTEMS
The Company continually monitors its management information system to take
advantage of technological improvements. Its point-of-sale system is designed to
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improve labor scheduling and food cost management, provide corporate management
quicker access to financial data and reduce the restaurant manager's
administrative time. Each general manager uses the system for production
planning, labor scheduling and food cost variance analysis. The system generates
daily reports for the Company's management on sales, check average, guest counts
and labor.
The Company maintains financial and accounting controls for each of its
restaurants through the use of centralized accounting and management information
systems. Sales information is collected daily from each restaurant, and
restaurant managers are provided with daily, weekly and twenty-eight day period
operating statements for their locations. Cash is controlled through daily
deposits of sales proceeds in local operating accounts which are wire
transferred periodically to the Company's principal operating account.
The Company generates weekly, consolidated sales reports and food and labor
cost variance reports at its corporate headquarters, and detailed profit and
loss statements for each restaurant every four weeks. Additionally, the Company
monitors the average check, customer count, product mix and other sales trends
on a daily basis.
The Company expects to continue to develop its management information
systems to improve efficiencies and assist management in analyzing business
results and opportunities.
COMPETITION
The restaurant industry is intensely competitive with respect to price,
service, location and food quality, and there are many well-established
competitors with substantially greater financial and other resources than the
Company. Some of the Company's competitors have been in existence for a
substantially longer period than the Company and may be better established in
the markets where the Company's restaurants are or may be located. The
restaurant business is often affected by changes in consumer tastes, national,
regional or local economic conditions, demographic trends, traffic patterns and
the type, number and location of competing restaurants. In addition, factors
such as inflation, increased food, labor and benefits costs and the availability
of experienced management and hourly employees may adversely affect the
restaurant industry in general and the Company's restaurants in particular. The
Company believes that its concepts, attractive price-value relationship and
quality of food and service enable it to differentiate itself from its
competitors. The Company believes that its ability to compete will depend upon
attracting and retaining high quality employees and continuing to offer high
quality, competitively priced food in a full service, distinctive dining
environment.
GOVERNMENT REGULATION
The Company's restaurants are subject to numerous federal, state and local
laws affecting health, sanitation, safety and Americans with Disabilities Act
accessibility standards, as well as to state and local licensing regulation of
the sale of alcoholic beverages. Each restaurant has appropriate licenses from
regulatory authorities allowing it to sell liquor, beer and wine, and has food
service licenses from local health authorities. The Company's licenses to sell
alcoholic beverages must be renewed annually and may be suspended or revoked at
any time for cause, including violation by the Company or its employees of any
law or regulation pertaining to alcoholic beverage control, such as those
regulating the minimum age of patrons or employees, advertising, wholesale
purchasing, and inventory control. The failure of a restaurant to obtain or
retain liquor or food service licenses could have a material adverse effect on
its operations. In order to reduce this risk, each restaurant is operated in
accordance with standardized procedures designed to ensure compliance with all
applicable codes and regulations.
The Company may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. The Company carries liquor liability coverage as part of its
existing comprehensive general liability insurance.
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Any future development and construction of additional restaurants will be
subject to compliance with applicable zoning, land use and environmental
regulations. The Company's restaurant operations are also subject to federal and
state minimum wage laws governing such matters as working conditions, overtime
and tip credits and other employee matters. Significant numbers of the Company's
food service and preparation personnel are paid at rates related to the federal
minimum wage and, accordingly, further increases in the federal, state or local
minimum wage could increase the Company's labor costs.
TRADEMARKS
The Company regards its primary marks, Lone Star Steakhouse & Saloon(R),
Lone Star Cafe(R), Del Frisco's(R) Double Eagle Steak House(R), Sullivan's
Steakhouse(R) and Texas Land & Cattle Company Steak House(R) as having
significant value and as being an important factor in the marketing of its
restaurants. The Company is aware of names and marks similar to the service
marks of the Company used by other persons in certain geographic areas. However,
the Company believes such uses have not had a material adverse effect on the
Company's financial condition or its results of operations. The Company's policy
is to pursue registration of its marks whenever possible and to oppose
vigorously infringements of its marks. The Company has obtained registration of
its marks in numerous foreign countries.
EMPLOYEES
As of March 7, 2005, the Company employed approximately 19,700 persons, 10
of whom are executive officers, 93 of whom are office support personnel, 6 of
whom are regional managers, 33 of whom are district managers, approximately
1,215 of whom are restaurant management personnel and the remainder of whom are
hourly restaurant personnel. None of the Company's employees are currently
covered by a collective bargaining agreement. The Company considers its employee
relations to be good.
WEBSITE ACCESS
The Company's website address is www.lonestarsteakhouse.com. The Company's
filings with the Securities and Exchange Commission ("SEC") are available at no
cost on its website as soon as practicable after the filing of such reports with
the SEC.
ITEM 2. PROPERTIES.
As of March 7, 2005, the Company leased 90 and owned 161 of its Lone Star
restaurant locations. At such date, the Company leased three and owned two Del
Frisco's restaurants locations. Of the 15 Sullivan's restaurants, 13 are leased
and two are owned. The Company leases 18 Texas Land & Cattle restaurants and two
are owned. Lease terms are generally five years, with multiple renewal options.
All of the Company's leases provide for a minimum annual rent and some provide
for additional rent based on sales volume at the particular location over
specified minimum levels. Generally, the leases are triple net leases, which
require the Company to pay the costs of insurance, taxes and maintenance. The
Company intends to continue to purchase restaurant locations where
cost-effective. In addition to the operating restaurant properties described
above, during the past two years, the Company has acquired land sites in Dundee,
Michigan, Pearl, Mississippi, Kansas City, Kansas, and Clayton, North Carolina
and entered into leases for sites in Mitchell, South Dakota, Columbia, Missouri
and Oklahoma City, Oklahoma for construction of Lone Star Restaurants. The
Company has acquired a site in Englewood, Colorado for a Sullivan's restaurant.
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RESTAURANT LOCATIONS AS OF MARCH 7, 2005
The following table sets forth the location of the Company's existing, open
domestic Lone Star Steakhouse & Saloon (251) Restaurants, Del Frisco's (5)
restaurants, Sullivan's (15) restaurants, Texas Land & Cattle (20) restaurants,
and (1) Frankie's Restaurant
LONE STAR Effingham Dearborn Heights NORTH DAKOTA Sugarhouse
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Mt. Vernon Flint VIRGINIA
ALABAMA Peoria Grand Rapids OHIO Alexandria
Anniston Rockford Jackson Akron Centreville
Birmingham (2) Springfield Mt. Pleasant Canton Chesapeake
Huntsville Saginaw Cincinnati (2) Fairfax
Mobile INDIANA Ypsilanti Cleveland (3) Fredericksburg
Montgomery Anderson Columbus (4) Hampton
Trussville Evansville MISSISSIPPI Dayton (2) Herndon
Tuscaloosa Ft. Wayne Hattiesburg Findlay Norfolk
Indianapolis (4) Jackson Lancaster Potomac Mills
ALASKA Lafayette Mentor Richmond (3)
Anchorage Merrillville MISSOURI Middletown Sterling
South Bend Branson Niles Virginia Beach
ARIZONA Terre Haute Independence Springfield
Mesa Kansas City Toledo (2) WEST VIRGINIA
Phoenix (4) IOWA Springfield Youngstown Beckley
Cedar Rapids St. Louis (5) Charleston
ARKANSAS Coralville OKLAHOMA Huntington
Ft. Smith Davenport NEBRASKA Lawton
Little Rock (2) Des Moines Lincoln Oklahoma City WISCONSIN
Springdale Waterloo Omaha (2) Tulsa (2) Racine
COLORADO KANSAS NEVADA PENNSYLVANIA SULLIVAN'S
Colorado Springs Garden City Las Vegas (4) Allentown ----------
Denver (6) Hutchinson Easton Anchorage, AK
Ft. Collins Overland Park NEW JERSEY Harrisburg Austin, TX
Loveland Atlantic City Johnstown Baton Rouge, LA
KENTUCKY Bridgewater King of Prussia Charlotte, NC
DELAWARE Bowling Green Cherry Hill Lancaster Chicago, IL
Dover Florence Delran Middletown Dallas, TX
Wilmington (2) Lexington Hanover Township Philadelphia Denver, CO
Louisville Hazlet Pittsburgh (5) Houston, TX
FLORIDA Marlton Pottstown Indianapolis, IN
Bradenton LOUISIANA Ocean County Reading King of Prussia, PA
Clearwater Baton Rouge (2) Scotch Plains Scranton Naperville, IL
Ft. Lauderdale Houma Turnersville Wilkes-Barre Palm Desert, CA
Ft. Myers Lafayette Voorhees York Raleigh, NC
Lakeland Monroe Wayne Tucson, AZ
Ocala New Orleans (3) RHODE ISLAND Wilmington, DE
Orlando NEW MEXICO Warwick
Pensacola MAINE Albuquerque TEXAS LAND & CATTLE
Port Orange South Portland SOUTH CAROLINA ------------------------
Port Richey NEW YORK Greenville Dallas, TX (7)
Sarasota MARYLAND Albany Myrtle Beach (2) Austin, TX (4)
St. Petersburg Bel Air Houston, TX (4)
Tampa Columbia San Antonio, TX (3)
Frederick NORTH CAROLINA SOUTH DAKOTA Lubbock, TX
GEORGIA Gaithersburg Asheville Sioux Falls Albuquerque, NM
Atlanta Laurel Boone
Augusta Lexington Park Charlotte (4) TENNESSEE DEL FRISCO'S
Waldorf Durham Jackson ------------
IDAHO Westminster Fayetteville Johnson City Denver, CO
Boise Greensboro (2) Memphis (2) Dallas, TX
MASSACHUSETS Greenville Fort Worth, TX
ILLINOIS Boston Jacksonville Las Vegas, NV
Bloomington Raleigh (3) UTAH New York, NY
Bradley MICHIGAN Rocky Mount Centerville
Carbondale Battle Creek Salisbury Layton FRANKIE'S
Champaign Bay City Southern Pines Salt Lake City Charlotte, NC
Chicago (10) Brighton Winston-Salem
Decatur
-10-
ITEM 3. LEGAL PROCEEDINGS
California Public Employees Retirement System ("CalPERS") filed a
shareholders derivative action on October 16, 2001 against certain present and
former Directors alleging breach of fiduciary duties by certain present and
former Directors and that certain of such defendants were unjustly enriched
through related party transactions and by the re-pricing of stock options
previously issued. The lawsuit also seeks to prevent enforcement of certain
change of control agreements granted to executive officers of the Company, seeks
declaratory and injunctive relief and seeks damages to be paid to the Company.
The Company is a nominal defendant.
The Company has indemnified present and former Directors with respect to
the shareholders derivative action filed by CalPERS by contractual agreement, as
well as by the Articles of Incorporation of the Company as provided in
accordance with the Delaware General Corporation Law.
On January 9, 2002, CalPERS filed an amended complaint and added a class
action claim to attempt to certify a class action based on their allegation that
a provision in the change of control agreements violates Delaware law. A motion
to dismiss was filed by all defendants on February 8, 2002, seeking to dismiss
all claims of CalPERS. Discovery was stayed pending a court decision on the
motion to dismiss.
The Vice Chancellor issued his decision on December 18, 2002 dismissing
numerous counts and also substantially reducing the scope of two other claims,
both involving the repricing of stock options. Two of the counts sustained by
the court involve challenges to change of control agreements which have now
expired. On January 17, 2003, the Vice Chancellor agreed to permit the plaintiff
to proceed with its discovery to obtain certain documents from certain third
parties and the named defendants, and ordered the plaintiff to timely file its
motion to amend its complaint.
On April 16, 2003, CalPERS filed a Motion for Leave to Amend Plaintiff's
First Amended Complaint, which complaint added no additional causes but added
allegations which are subsequent to the date of the first complaint and
allegations which also address counts which were dismissed by the Vice
Chancellor on December 18, 2002. All defendants filed objections to CalPERS
attempt to amend and oral argument was heard by the Vice Chancellor on August
21, 2003. On May 26, 2004, the Court rendered its decision and allowed CalPERS
to amend their complaint. The parties are involved in pre-trial discovery.
The Company is involved from time to time in litigation arising in the
ordinary course of business as well as the matter set forth above. The Company
believes the outcome of such matters will not have a material adverse effect on
its consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 15, 2004, the Company held a Special Meeting of Stockholders to
vote upon the proposed Lone Star Steakhouse & Saloon, Inc. 2004 Stock Option
Plan, (the "2004 Plan"). A majority of the Company's outstanding shares voted to
approve the 2004 Plan with 11,486,660 votes "For", 6,006,619 votes "Against" and
37,817 votes "Abstaining".
-11-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS AND ISSUER'S PURCHASES OF EQUITY SECURITIES
The table below provides information concerning the repurchase of shares of
the Company's common stock during the sixteen weeks ended December 28, 2004. On
December 23, 2003 and on November 17, 2004, the Board of Directors authorized
the Company to repurchase up to 2,122,800 and 2,026,190 shares, respectively of
the Company's common stock. During the sixteen weeks ended December 28, 2004,
the Company completed the repurchase of shares pursuant to the December 23, 2003
authorization. Since commencing the most recent authorization for share
repurchase, the Company has not repurchased any shares of its common stock
through December 28, 2004.
ISSUER PURCHASES OF EQUITY SECURITIES
(d) Maximum
(c)Total Number Number of
of Shares Shares that May
Purchased as Part Yet Be
(a) Total Number (b) Average of Publicly Purchased
of shares Price Paid per Announced Plans Under the Plans
Period Purchased Share or Programs or Programs
- -------------------------------------------------------------------------------------------------------
1,402,500
September 8,
through
October 3 598,900 25.35 598,900 803,600
October 4,
through
October 31, 384,341 25.64 384,341 419,259
November 1,
through
November 28, 419,259 25.68 419,259 2,026,190
November 29,
through
December 28, - - - 2,026,190
Total 1,402,500 25.53 1,402,500 2,026,190
(1) Repurchases are subject to prevailing market prices, may be made in open
market or in privately negotiated transactions and may occur or be discontinued
at any time. There can be no assurance that the Company will repurchase any
shares.
-12-
MARKET INFORMATION
The Company's Common Stock (ticker symbol: STAR) is traded over-the-counter
on the Nasdaq National Market (Nasdaq). The following table sets forth, for the
periods indicated, the high and low prices for the Common Stock, as reported by
Nasdaq.
PRICES
------
CALENDAR 2004 HIGH LOW
------------- ---- ---
First Quarter $29.98 $23.15
Second Quarter $33.03 $24.73
Third Quarter $27.47 $20.70
Fourth Quarter $28.17 $23.84
PRICES
------
CALENDAR 2003 HIGH LOW
------------- ---- ---
First Quarter $21.99 $18.32
Second Quarter $23.10 $18.84
Third Quarter $23.34 $20.66
Fourth Quarter $23.49 $20.35
DIVIDENDS
The Company initiated the payment of quarterly cash dividends in April 2000
and paid cash dividends at the rate of $0.125 per share each quarter until
January 2002. The Company increased its quarterly cash dividend to $0.15 per
share in January 2002, to $.165 per share in February 2003, to $.175 per share
in February 2004 and to $.195 per share in January 2005. The Company plans to
continue the quarterly dividend payments for the foreseeable future; however,
there can be no assurance that such cash dividends will continue to be paid or
as to the amount of the cash dividend.
NUMBER OF STOCKHOLDERS
As of March 7, 2005, there were approximately 350 holders of record of the
Company's Common Stock. The Company believes there are in excess of 7,000
beneficial owners of the Company's Common Stock.
EQUITY COMPENSATION PLAN INFORMATION
The information required by this item will be in the Company's definitive
proxy materials to be filed with the Securities and Exchange Commission and is
incorporated in this Annual Report on Form 10-K by this reference.
-13-
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data and is
qualified by reference to and should be read in conjunction with the
consolidated financial statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K. The selected consolidated financial data
of the Company as of December 28, 2004 and December 30, 2003, and for each of
the three years in the period ended December 28, 2004, were derived from the
Company's audited consolidated financial statements. The selected consolidated
financial data of the Company as of December 31, 2002, December 25, 2001 and
December 26, 2000, and for each of the two years in the period ended December
25, 2001, were derived from the Company's audited consolidated financial
statements, after giving effect to the restatement from amounts previously
reported as described in Item 7 - Restatement of Prior Financial Information and
Note 1 to the Consolidated Financial Statements. The pro forma data set forth
below for the periods presented are unaudited and have been prepared by
management solely to facilitate period-to-period comparison and do not represent
the actual results of operations for the periods presented. The pro forma
amounts reflect the adjusted amounts applicable for fiscal years 2001 and 2000
to give retroactive effect for the non-amortization provisions of SFAS No. 142
requiring that goodwill and intangible assets deemed to have indefinite lives no
longer be amortized, but are subject to annual impairment tests in accordance
with SFAS No. 142, which was adopted by the Company effective as of the
beginning of fiscal 2002.
-14-
YEAR ENDED IN DECEMBER(1)
-----------------------------------------------------------------------
(Amounts in thousands, except share data)
2003 (3) 2002 (3) 2001 (3) 2000 (3)
2004 (2) RESTATED RESTATED RESTATED RESTATED
-------- -------- -------- -------- --------
Income Statement Data:
Net sales $669,527 $591,401 $593,617 $571,115 $544,111
Costs and expenses:
Costs of sales 239,660 212,593 194,183 195,707 190,730
Restaurant operating expenses 317,005 275,027 266,533 265,688 258,473
Restaurant depreciation and amortization 20,268 20,852 24,516 25,955 26,434
Provision for impaired assets and
restaurant closings 1,167 - 792 565 3,142
General and administrative expenses 45,269 43,346 45,085 41,884 40,422
Abandoned merger expenses - - 2,990 - -
Non-cash stock compensation expense (4) 1,193 1,474 2,949 3,212 12,016
Contribution - "Dine for America" - - - 2,124 -
------------ ------------ ------------ ------------ ------------
Total costs and expenses 624,562 553,292 537,048 535,135 531,217
------------ ------------ ------------ ------------ ------------
Income from operations 44,965 38,109 56,569 35,980 12,894
Other income, net 1,737 553 2,986 4,906 3,350
------------ ------------ ------------ ------------ ------------
Income from continuing operations before
provision for income taxes 46,702 38,662 59,555 40,886 16,244
Provision for income taxes 15,420 11,760 19,715 14,325 5,564
------------ ------------ ------------ ------------ ------------
Income from continuing operations 31,282 26,902 39,840 26,561 10,680
Discontinued operations (5):
Loss from operations of discontinued restaurants (86) (10,774) (1,322) (6,644) (5,625)
Income tax benefit 17 2,117 467 2,354 1,972
------------ ------------ ------------ ------------ ------------
Loss on discontinued operations (69) (8,657) (855) (4,290) (3,653)
------------ ------------ ------------ ------------ ------------
Income before cumulative effect of change in
accounting principle 31,213 18,245 38,985 22,271 7,027
Cumulative effect of change in accounting principle
(net of income tax of $190) (6) - - (318) - -
------------ ------------ ------------ ------------ ------------
Net income $ 31,213 $ 18,245 $ 38,667 $ 22,271 $ 7,027
============ ============ ============ ============ ============
Basic earnings (loss) per share:
Continuing operations $ 1.49 $ 1.29 $ 1.74 $ 1.10 $ 0.40
Discontinued operations (5) - (.41) (.03) (.18) (.14)
------------ ------------ ------------ ------------ ------------
Income before cumulative effect of
change in accounting principle 1.49 0.88 1.71 0.92 0.26
Cumulative effect of change
in accounting principle - - (.02) - -
------------ ------------ ------------ ------------ ------------
Basic earnings per share $ 1.49 $ 0.88 $ 1.69 $ 0.92 $ 0.26
============ ============ ============ ============ ============
Weighted average shares outstanding $ 20,962,919 20,801,894 22,908,821 24,036,942 26,189,600
============ ============ ============ ============ ============
Pro forma net income (7) $ 31,213 $ 18,245 $ 38,985 $ 23,194 $ 8,110
============ ============ ============ ============ ============
Pro forma basic earnings per share $ 1.49 $ 0.88 $ 1.71 $ 0.96 $ 0.31
============ ============ ============ ============ ============
-15-
AT FISCAL YEAR END IN DECEMBER, (1)
---------------------------------------------------------------------
(Dollars in thousands)
2004 2003 2002 2001 2000
Balance Sheet Data:
Working capital (deficit) $ 39,332 $ 68,369 $ 41,000 $ 48,284 $ (1,716)
Total assets 498,292 499,988 478,586 537,462 518,412
Stockholders' equity 392,781 414,680 413,761 469,979 461,309
Cash dividends per common share $ .70 $ .645 $ .60 $ .50 $ .375
(1) The Company operates on a 52 or 53-week fiscal year ending the last Tuesday
in December. The fiscal quarters for the Company consist of accounting
periods of 12, 12, 12, and 16 or 17 weeks, respectively. The Company's
2000, 2001, 2002, 2003 and 2004 fiscal years ended on December 26, 25, 31,
30 and 28, respectively. Fiscal 2002 included 53 weeks of operations while
fiscal 2004, 2003, 2001, and 2000 included 52 weeks.
(2) On January 28, 2004, the Company acquired 20 Texas Land & Cattle
restaurants for approximately $23,496, which consisted of $12,579 of cash
net of $2,145 of cash acquired, 119,485 shares of the Company's common
stock valued at $2,679, and the assumption of approximately $6,093 of
certain liabilities. The transaction was accounted for as a purchase.
Accordingly, the results of operations of acquired restaurants are included
in the Company's consolidated results of operations since the date of
acquisition. See Note 19 to the Consolidated Financial Statements for
additional information.
(3) The amounts of net income and certain balance sheet data for fiscal 2003,
2002, 2001 and 2000 have been restated from amounts previously reported to
reflect certain adjustments as described in Item 7-Restatement of Financial
Information and Note 1 to Notes to Consolidated Financial Statements. The
retroactive application effect on the results of operations for the years
presented is as follows:
2003 2002 2001 2000
---- ---- ---- ----
Net income, as previously reported $18,666 $39,209 $22,902 $7,706
Adjustments to rent expenses, depreciation
and amortization, net of taxes (421) (542) (631) (679)
----- ----- ----- -----
Net income, as adjusted $18,245 $38,667 $22,271 $7,027
======= ======= ======= ======
Decrease in basic earnings per share ($0.02) ($0.02) ($0.03) ($0.03)
----- ----- ----- -----
(4) In January 2000, the Company repriced certain stock options which were
fully vested resulting in additional stock compensation expense of
approximately $9,000 ($5,800 net of tax).
(5) During fiscal 2003, the Company announced a plan to divest all of its
Australian operations. In December 2003, the Company completed the sale to
a licensee of 13 of its 19 restaurants in Australia and closed the
remaining six restaurants. The losses included in discontinued operations
for fiscal 2003 include aggregate pre-tax charges of approximately $12,000
incurred in connection with its exit activities from Australia, including
impairment losses related to assets either sold or to be sold, termination
costs associated with employees and certain lease obligations, and losses
related to the realization of the Company's cumulative foreign currency
translation adjustments. See Note 12 to the Consolidated Financial
Statements for additional information.
(6) The cumulative effect of change in accounting principle for fiscal 2002
reflect the impairment charge of goodwill related to certain Australian
investments resulting from the adoption of SFAS No. 142 in the first
quarter of fiscal 2002.
(7) Pro forma net income amounts reflect the adjustments for fiscal 2002, 2001
and 2000 to give retroactive effect to the change in accounting for the
non-amortization provisions of SFAS No. 142, Goodwill and Other Intangible
Assets, as adopted by the Company effective as of the first quarter of
fiscal 2002.
ITEM 7. 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 information set forth under "Selected Financial Data" and the Consolidated
Financial Statements including the Notes thereto included elsewhere in this Form
10-K.
The Company opened one domestic Lone Star restaurant and reopened one
completely remodeled Lone Star restaurant in fiscal 2004. The Company opened no
restaurants in fiscal 2002 and 2003.
-16-
There were 251 operating domestic Lone Star restaurants as of March 7,
2005. In addition, a licensee operates three Lone Star restaurants in
California.
The Company currently operates five Del Frisco's restaurants. In addition,
a licensee operates one Del Frisco's restaurant. The Company currently operates
15 Sullivan's restaurants, 20 Texas Land & Cattle restaurants and one Frankie's
restaurant.
Internationally, licensees operate 12 Lone Star Steakhouse & Saloon
restaurants in Australia and one in Guam. During fiscal 2003, the Company sold
13 restaurants to a licensee in Australia and closed an additional seven
restaurants in Australia. During fiscal 2004, the Australian licensee closed one
restaurant.
On January 28, 2004, the Company acquired 20 Texas Land & Cattle
restaurants which are located primarily in Texas. The operating results of those
restaurants are included in the Company's consolidated operating results from
the date of acquisition.
RESTATEMENT OF PRIOR FINANCIAL INFORMATION (DOLLARS IN THOUSANDS)
Following a review of accounting adjustments cited in filings with the
Securities and Exchange Commission by a number of restaurant companies in
December 2004, and after discussions with the Company's independent auditors,
Ernst & Young LLP, the Company determined that certain items related to its
accounting for property leases were inappropriate. As a result, the Company has
restated its consolidated financial statements for fiscal 2003 and all prior
year periods presented.
The Company has corrected its computation of straight-line rent expense and
the related deferred rent liability. Historically, when accounting for leases
with renewal options, rent expense was recorded on a straight-line basis over
the initial non-cancelable lease term. Building and leasehold costs and
improvements for those properties were amortized on the straight-line method
over the lesser of the estimated useful lives of the assets or the expected term
of the lease, including option renewal periods. The Company has determined that
it should recognize rent expense on a straight-line basis over the expected term
of the lease, including cancelable option periods when failure to exercise such
options would result in an economic penalty to the Company. In addition, the
Company determined that in a few instances the leasehold amortization period
being used was greater than the expected lease term.
As a result of the above, the Company has restated its financial statements
to recognize rent expense on a straight-line basis over the expected lease term
including cancelable lease renewal option periods when failure to exercise such
options would result in an economic penalty. In addition, the restatement
includes an adjustment to depreciation expense to correct the depreciable lives
being used for certain leasehold cost and improvements where the contractual
term of the lease was shorter than the historical depreciation period previously
used to record depreciation expense.
The restatement is further discussed in Note 1 "Restatement of Prior
Financial Information" - See Notes to Consolidated Financial Statements and in
Item 6. Selected Financial Data included in this Form 10-K.
The cumulative effect of the restatement through fiscal 2003 is an increase
in long-term liabilities of $8,336, an increase of deferred tax assets of
$3,852, an increase in accumulated depreciation of $1,935 and a decrease in
retained earnings of $6,419. The restatement decreased reported net income by
$421 and $542, for fiscal 2003 and 2002, respectively. The restatement did not
have any impact on the Company's previously reported cash position, cash flows
or revenues.
CRITICAL ACCOUNTING POLICIES (Dollars in thousands)
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require the
Company to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and notes thereto (see Note 1 to the
-17-
Consolidated Financial Statements). The Company believes that of its significant
accounting policies, the following represent accounting policies that may
involve a higher degree of judgment and complexity.
IMPAIRMENT OF LONG-LIVED ASSETS - UNDERPERFORMING RESTAURANTS AND DEFINITE LIFE
INTANGIBLES Property and equipment and definite life intangibles are reviewed
for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. The Company reviews applicable
intangible assets and long-lived assets related to each restaurant on a periodic
basis. When events or changes in circumstances indicate an asset may not be
recoverable, the Company estimates the future cash flows expected to result from
the use of the asset. If the sum of the expected undiscounted future cash flows
is less than the carrying value of the asset, an impairment loss is recognized.
The impairment loss is recognized by measuring the difference between the
carrying value of the assets and the fair market value of the assets. The
Company's estimates of fair values are based on the best information available
and require the use of estimates, judgments, and projections as considered
necessary. The actual results may vary significantly.
IMPAIRMENT OF LONG-LIVED ASSETS - GOODWILL AND INDEFINITE LIFE INTANGIBLES
Goodwill and certain intangible assets deemed to have indefinite lives which are
not subject to amortization are subjected to an annual impairment test, or more
frequent tests if indicators of impairment exist. In assessing recoverability of
goodwill, the Company may be required to make assumptions regarding estimated
future cash flow and other factors to determine the fair value. The amount of
fair value for certain intangible assets having indefinite lives are made by
reference to recent market transactions. An impairment loss is recognized when
the estimates of fair value are less than the carrying value of the assets.
SELF-INSURANCE RESERVES Beginning in fiscal 2003, the Company adopted
self-insurance programs for its worker's compensation, general liability, and
medical benefits programs. In order to minimize the exposure under the
self-insurance programs, the Company has purchased stop-loss coverage both on a
per occurrence and on an aggregate basis. The self insured losses under the
programs are accrued based upon the Company's estimate of the ultimate expected
liability for both claims incurred and on an incurred but not reported basis.
The establishment of such accruals for self-insurance involve certain management
judgments and assumptions regarding the frequency or severity of claims, the
historical patterns of claim development and the Company's experience with claim
reserve management and settlement practices. To the extent actual results may
differ from the assumptions used to develop the accrual estimate amounts, such
unanticipated changes may produce significantly different amounts of expense
than those estimated under the self-insurance program.
INCOME TAXES - DEFERRED INCOME TAX Deferred tax assets and liabilities are
recognized for the effect of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and amounts used for
income tax purposes. Deferred tax assets are reduced by a valuation allowance if
it is more likely than not that some portion or all of the deferred tax asset
will not be realized. The Company reviews the recoverability of any deferred tax
assets reflected in the balance sheet and provides any necessary allowances as
required. Any adjustment to the deferred tax asset would be charged to income in
the period such determination was made.
-18-
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages
which certain items included in the Consolidated Statements of Income bear to
net sales.
YEAR ENDED
-----------------------------------------------------------
December 30, December 31,
December 28, 2003 2002
2004 (RESTATED) (RESTATED)
-------------- ------------ ----------------
STATEMENT OF INCOME:
Net sales 100% 100% 100%
Costs and expenses:
Costs of sales 35.8 36.0 32.7
Restaurant operating expenses 47.3 46.5 44.9
Depreciation and amortization 3.0 3.5 4.1
Provision for impaired assets and restaurant closings 0.2 - 0.2
------- ------ ------
Restaurant costs and expenses 86.3 86.0 81.9
General and administrative expenses 6.8 7.3 7.6
Abandoned merger expenses - - 0.5
Non-cash stock compensation expense 0.2 0.3 0.5
------ ------ ------
Income from operations 6.7 6.4 9.5
Other income, net 0.3 0.1 0.5
------ ------ ------
Income from continuing operations before income taxes
and cumulative effect of accounting change 7.0 6.5 10.0
Provision for income taxes 2.3 2.0 3.3
------ ------ ------
Income from continuing operations before cumulative 4.7 4.5 6.7
effect of accounting change -
Loss from discontinued operations, net of applicable income taxes - (1.4) (0.1)
------ ------ ------
Income before cumulative effect of accounting change 4.7 3.1 6.6
Cumulative effect of accounting change, net of tax - - (0.1)
------ ------ ------
Net income 4.7% 3.1% 6.5%
====== ====== ======
-19-
LONE STAR STEAKHOUSE & SALOON, INC.
YEAR ENDED DECEMBER 28, 2004 COMPARED TO YEAR ENDED DECEMBER 30, 2003
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales increased $78,126 or 13.2% to $669,527 for the year ended
December 28, 2004 ("fiscal 2004"), compared to $591,401 for the year ended
December 30, 2003 ("fiscal 2003"). Sales for fiscal 2004 include approximately
$56,020 attributable to the acquisition of Texas Land & Cattle. The Company
experienced sales growth in all its restaurant concepts as blended same store
sales representing net sales, by store, for all the Company owned restaurant
concepts, opened for more than 18 months in the current and comparable prior
year period increased 3.6%. The Company's average check increased 1.6% and guest
counts increased 2.7%.
Costs of sales, primarily food and beverages, decreased as a percentage of
net sales to 35.8% from 36.0% due to declining beef costs occurring primarily
during the fourth quarter of fiscal 2004. The decline in beef costs were offset
in part by increased costs for dairy products.
Restaurant operating expenses in fiscal 2004 increased $41,978 to $317,005
compared to $275,027 in fiscal 2003, and increased as a percentage of net sales
to 47.3% from 46.5%. Labor costs increased .3% primarily as a result of
increased costs for worker's compensation and employee medical expenses.
Advertising costs increased approximately .1% reflecting increased printing
costs. Occupancy costs were up .4% due primarily to the impact of higher rent
expenses applicable to the Texas Land & Cattle stores. In addition, restaurant
operating expenses for fiscal 2004 include approximately $555 of pre-opening
costs compared to none in fiscal 2003.
Depreciation and amortization decreased $584 in fiscal 2004 compared to
fiscal 2003. The decrease is attributable primarily to a reduction in
depreciation for certain assets that have become fully depreciated for the
Company's historical concepts, offset in part by depreciation of assets related
to the Texas Land & Cattle acquisition.
Provision for impaired assets of $1,167 in fiscal 2004 reflects the
write-down of five underperforming restaurants to their estimated fair value.
General and administrative expenses increased $1,923 in fiscal 2004
compared with fiscal 2003. The primary reason for the increase is additional
general and administrative costs applicable to Texas Land & Cattle of $2,500. In
addition, the increase reflects higher compensation related costs of
approximately $1,525 which were mostly offset by decreases in travel and
directors and officer's liability insurance costs and a favorable insurance
settlement.
Non-cash stock compensation expense in fiscal 2004 decreased $281 compared
to fiscal 2003. The change reflects a decrease of $681 in the amortization of
stock based compensation in fiscal 2004 as compared to fiscal 2003. In addition,
the decrease is offset by an increase of $400 for stock compensation 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 3 to the Notes
to Consolidated Financial Statements).
Other income, net in fiscal 2004, was $1,737, compared to $553 in fiscal
2003. The increase is attributable to an increase in interest income and gains
from sales of assets in fiscal 2004 compared to fiscal 2003. The increase for
fiscal 2004 was partially offset by foreign exchange losses related to
Australian funds which were repatriated during the fiscal year.
The effective income tax rate from continuing operations was 33.0% and
30.4% for fiscal 2004 and fiscal 2003, 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. While 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, tax benefits may arise at the time the incentive options are
exercised to the extent that the exercise is followed by a disqualifying
disposition of the shares by the optionee. The fiscal 2003 period reflects a
greater amount of tax benefits associated with incentive stock options exercised
during the year compared to fiscal 2004.
-20-
Discontinued operations reflect the operations of restaurants closed
subsequent to fiscal 2002 which are reported as discontinued operations pursuant
to SFAS No. 144, (see Note 12 to the Notes to Condensed Consolidated
Statements).
-21-
LONE STAR STEAKHOUSE & SALOON, INC.
YEAR ENDED DECEMBER 30, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales decreased $2,216 or .4% to $591,401 for the year ended December
30, 2003 ("fiscal 2003"), compared to $593,617 for the year ended December 31,
2002 ("fiscal 2002"). The decrease was attributable principally to the fact that
fiscal 2003 was a 52 week period compared to a 53 week period in fiscal 2002. In
addition, since fiscal 2002 ended on December 31, the Company had two New Year's
Eve revenue days in fiscal 2002 compared to no New Year's Eve revenues for
fiscal 2003. The Company estimates that the extra week for fiscal 2002 provided
additional sales of approximately $11,900. Blended same store sales increased
1.9%. The Company's average check increased 1.9% and guest counts decreased
2.3%.
Costs of sales, primarily food and beverages, increased as a percentage of
net sales to 36.0% from 32.7% due primarily to increased beef costs.
Restaurant operating expenses in fiscal 2003 increased $8,494 to $275,027
compared to $266,533 in fiscal 2002, and increased as a percentage of net sales
to 46.5% from 44.9%. The increase is primarily attributable to (1) approximately
$3,400 due to salaries for increased manager staffing and indirect labor for
payroll related taxes and insurance costs, (2) approximately $1,500 for
increased advertising spending, (3) approximately $670 for increased building
and equipment repairs and (4) approximately $1,200 for increased utilities.
Depreciation and amortization decreased $3,664 in fiscal 2003 compared to
fiscal 2002. The decrease is attributable primarily to a reduction in
depreciation for certain assets that have become fully depreciated.General and
administrative expenses decreased $1,739 in fiscal 2003 compared to fiscal 2002.
Fiscal 2003 expense decreased as a result of (1) an approximately $2,100
decrease for salary related costs, reflecting primarily a decrease in incentive
compensation and (2) a decrease in professional fees and related costs of
approximately $1,700. These decreases were offset in part by increases in
directors and officers' liability insurance costs as well as increased costs for
travel and recruiting.
Non-cash stock compensation expense in fiscal 2003 decreased $1,475
compared to fiscal 2002. The decrease reflects approximately $1,906 for lower
amortization of such costs. The decrease was partially offset by a charge of
$431 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
3 to the Consolidated Financial Statements for additional information.
Other income, net for fiscal 2003, was $553, compared to $2,986 in fiscal
2002. The decrease is attributable to a decrease in gain on sale of assets and 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 from continuing operations was 30.4% and
33.1% for fiscal 2003 and fiscal 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 at the time the incentive options are exercised
to the extent that the exercise is followed by a disqualifying disposition of
the shares by the optionee. The decrease in the effective tax rate for fiscal
2003 reflects (1) both the impact of a decrease in the amount of amortization of
stock option compensation and an increase in tax benefits resulting from
disqualifying disposition of shares related to incentive stock options, and (2)
the impact of FICA Tip and other tax credits on the lower pre-tax income for
fiscal 2003 compared with fiscal 2002.
Discontinued operations reflect the operations of restaurants closed during
fiscal 2003 and 2002 which are required to be reported as discontinued
operations pursuant to SFAS No. 144. Discontinued operations include the
applicable operations of Australia. In December 2003, the Company completed the
-22-
sale of 13 of its restaurants in Australia to a licensee, and the Company closed
six other restaurants in Australia prior to December 30, 2003. The discontinued
operations for fiscal 2003 include aggregate pre-tax charges of approximately
$12,000 incurred in connection with its exit activities from Australia,
including impairment losses, termination costs associated with employees and
certain lease obligations, and losses related to the realization of the
Company's cumulative foreign currency translation adjustments. See Note 12 to
the Consolidated Financial Statements for additional information.
The cumulative effect of accounting change in fiscal 2002 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 2 to the
Consolidated Financial Statements for additional information.)
-23-
IMPACT OF INFLATION
The primary inflationary factors affecting the Company's operations include
food and labor costs. A number of the Company's restaurant personnel are paid at
the federal and state established minimum wage levels and, accordingly, changes
in such wage levels affect the Company's labor costs. However, since the
majority of personnel are tipped employees, minimum wage changes generally have
little effect on overall labor costs. 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 their entirety. Historically, inflation has not
had a material impact on operating margins. During fiscal 2004, the Company
experienced significant volatility in beef prices as such prices for the year
were generally above historical levels. To the extent that beef prices continue
to be significantly above historical levels, it will have a material negative
impact on operating margins.
LIQUIDITY AND CAPITAL RESOURCES (Dollars in thousands, except share amounts) The
following table presents a summary of the Company's cash flows for the years
ended:
December 30, December 31,
December 28, 2003 2002
2004 RESTATED RESTATED
---- -------- --------
Net cash provided by operating activities $ 61,004 $ 54,138 $ 74,792
Net cash provided by (used in) investment activities (65,334) (8,106) 5,240
Net cash used by financing activities (54,788) (27,149) (98,843)
Effect of exchange rate changes on cash - 1,486 363
Net cash provided by discontinued operations 1,403 10,492 898
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents $ (57,715) $ 30,861 $ (17,550)
============= ============ ============
The increase in net cash provided by operating activities for fiscal 2004
compared to fiscal 2003 is due primarily to an increase in net income during
fiscal 2004 as compared to fiscal 2003.
During fiscal 2004, 2003 and 2002, the Company's investment in property and
equipment was $22,245, $6,928 and $2,776, respectively. In fiscal 2004, 2003 and
2002, the Company received proceeds from the sale of assets of $2,035, $1,730
and $7,879, respectively.
During fiscal 2004, the Company invested $33,500 in short term securities
primarily consisting of investments in auction rate securities with contractual
maturities of up to 30 years. These auction rate securities have interest re-set
dates that occur every 7 to 90 days and can be actively marketed at ongoing
auctions that occur every 7 to 90 days. These investments are in
investment-grade debt instruments such as government-backed securities. Auction
rate securities are classified as available-for-sale and are reported on the
balance sheet at par value, which equals market value, as the rate on such
securities resets every 7 to 90 days. Consequently, interest rate movements do
not affect the balance sheet valuation of these fixed income investments.
The Company opened one domestic Lone Star restaurant and reopened one
completely remodeled Lone Star restaurant in fiscal 2004. The Company opened no
restaurants in fiscal 2002 and 2003.
As more fully described in Note 6 to the Notes to Consolidated Condensed
Financial Statements, on January 28, 2004, the Company acquired TXCC which
operates 20 Texas Land & Cattle Steak House(R) restaurants located primarily in
Texas. The cash portion of the purchase price, net of cash acquired of $2,145
was $12,579 and was funded from the Company's existing cash balance.
-24-
During fiscal 2004, the Company received net proceeds of $11,454 from the
issuance of 1,350,065 shares of its common stock due to the exercise of stock
options compared to proceeds of $10,224 and $23,551 from the issuance of
1,210,682 and 2,058,838 shares in fiscal 2003 and 2002, respectively.
In June 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. The aggregate cost to repurchase the shares was $86,301 including the
costs of the tender offer. The transaction was financed from the Company's
existing available cash.
The Company's Board of Directors has authorized the purchase of shares of
the Company's common stock from time to time in the open market or in privately
negotiated transactions. The most recent authorization was November 17, 2004
when the Board of Directors approved the repurchase of up to 2,026,190 shares of
the Company's common stock. In fiscal 2004, the Company purchased 2,072,800
shares of its common stock at a cost of $51,410. In fiscal 2003 and 2002, the
Company purchased 1,132,500 and 1,114,000 shares at a cost of $23,833 and
$22,374, respectively. The shares repurchased exclude the 4,000,000 shares in
the tender offer as previously described.
The Company has paid quarterly cash dividends on its common stock since the
second quarter of fiscal 2000. In January 2004, the Company increased its
quarterly cash dividend from $.165 to $.175 per share. The Company recently
announced in 2005 that it would increase its quarterly cash dividend from $.175
to $.195 per share. During fiscal 2004, 2003, and 2002, the Company paid cash
dividends as follows:
AMOUNT PER SHARE
------ ---------
Fiscal 2004 $14,832 $0.70
Fiscal 2003 $13,560 $0.645
Fiscal 2002 $13,719 $0.60
At December 28, 2004, the Company had $72,015 in cash and cash equivalents
and short term investments. The Company has available $55,000 in unsecured
revolving credit facilities which expire in October 2007. At December 28, 2004,
the Company had no outstanding borrowings under such facilities. See Note 4 to
the Consolidated Financial Statements in this Form 10-K for a further
description of the Company's credit facilities. The Company expects to fund
future requirements for normal investing and financing activities through cash
provided from operations and existing cash and cash equivalent balances and
short term investment assets.
The Company's obligations at December 28, 2004 are for operating leases as
follows:
2005 $13,991
2006 13,952
2007 13,652
2008 13,900
2009 13,856
Thereafter 113,468
--------
Total operating lease obligations $182,819
========
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 December
-25-
28, 2004 and during the fiscal year then ended, the Company had no positions in
futures contracts.
RISK FACTORS
CHANGING CONSUMER PREFERENCES AND DISCRETIONARY SPENDING PATTERNS, POTENTIAL
OUTBREAKS OF "MAD COW DISEASE" OR "FOOT/MOUTH DISEASE" AND OTHER FACTORS
AFFECTING THE AVAILABILITY OF BEEF COULD FORCE US TO MODIFY OUR RESTAURANTS'
CONCEPT AND MENU AND COULD RESULT IN A REDUCTION IN OUR REVENUES.
Even if we are able to successfully compete with other restaurant companies
with similar concepts, we may be forced to make changes in one or more of our
concepts in order to respond to changes in consumer tastes or dining patterns.
Consumer preferences could be affected by health concerns about the consumption
of beef, the primary item on our menus, or by specific events such as the
recently confirmed cases of "mad cow disease" by the Canadian government or
"foot/mouth disease" which occurred in the United Kingdom. In addition, these
events could reduce the available supply of beef or significantly raise the
price of beef. If we change a restaurant concept, we may lose additional
customers who do not prefer the new concept and menu, and we may not be able to
attract a sufficient new customer base to produce the revenue needed to make the
restaurant profitable. In addition, we may have different or additional
competitors for our intended customers as a result of such a concept change and
may not be able to successfully compete against such competitors. Our success
also depends on numerous factors affecting discretionary consumer spending,
including economic conditions, the cost of gasoline, disposable consumer income
and consumer confidence. Adverse changes in these factors could reduce guest
traffic or impose practical limits on pricing, either of which could reduce
revenues and operating income.
UNFORESEEN COST INCREASES COULD ADVERSELY AFFECT OUR PROFITABILITY.
Our profitability is highly sensitive to increases in food, labor and other
operating costs. During fiscal 2004, our beef prices were generally above
historical levels. To the extent that beef prices continue to be significantly
above historical levels, it will have a material negative effect on operating
margins. In addition, our dependence on frequent deliveries of fresh food
supplies means that shortages or interruptions in supply could materially and
adversely affect our operations. Moreover, unfavorable trends or developments
concerning the following factors could adversely affect our results:
o Inflation, food, labor, energy and utilities and employee benefit costs;
and
o rent increases resulting from rent escalation provisions in our leases.
We may be unable to anticipate or react to changing prices. If we are
unable to modify our purchasing practices or quickly or readily pass on
increased costs to customers, our business could be materially affected.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH OUR COMPETITORS, WE WILL NOT BE
ABLE TO INCREASE REVENUES OR GENERATE PROFITS. OUR INABILITY TO INCREASE
REVENUES IS DIRECTLY RELATED TO OUR ABILITY TO COMPETE EFFECTIVELY WITH OUR
COMPETITORS. KEY COMPETITIVE FACTORS INCLUDE:
o The quality and numbers of employees needed to adequately staff our
restaurants;
o the quality and value of the food products offered;
o the quality of service;
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o the cost of our raw products;
o the price of the food products offered;
o the restaurant locations; and
o the ambiance of facilities.
We compete with other steakhouse restaurants specifically and with all
other restaurants generally. We compete with national and regional chains, as
well as individually owned restaurants. The restaurant industry has few
non-economic barriers to entry, and as our competitors expand operations,
competition from steakhouse restaurants with concepts similar to ours can be
expected to intensify. Many of our competitors are well established in the
upscale and mid-scale steak segments and certain competitors have substantially
greater financial, marketing and other resources than us. Such increased
competition could adversely affect our revenues.
FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD ADVERSELY AFFECT OUR
OPERATING PERFORMANCE.
Our restaurant operations are subject to certain federal, state and local
laws and government regulations, such as:
o Obtaining of licenses for the sale of food and alcohol beverages;
o national and local health sanitation laws and regulations;
o national and local employment and safety laws and regulations; and
o local zoning, building code and land-use regulations.
While we have never experienced any significant difficulties in obtaining
necessary governmental approvals, the failure to obtain or retain food and
liquor licenses or any other governmental approvals could have a material
adverse effect on our operating results.
We may be subjected to "dram-shop" liability, which generally provides a
person injured by an intoxicated person with the right to recover damages from
an establishment that wrongfully served alcoholic beverages to the intoxicated
person. Although we carry liquor liability coverage as part of our comprehensive
general liability insurance, if we lost a lawsuit related to this liability, our
business could be materially harmed.
THE RESTAURANT INDUSTRY IS AFFECTED BY A NUMBER OF TRENDS, AS WELL AS BY
COMPETITION.
The restaurant industry is affected by changes in consumer tastes and by
national, regional, and local economic conditions and demographic trends. The
performance of individual restaurants may be affected by factors such as traffic
patterns, demographic considerations and the type, number and location of
competing restaurants. In addition, factors such as inflation, increased food,
labor and employee benefit costs and the availability of experienced management
and hourly employees to successfully operate the restaurants may also adversely
affect the restaurant industry in general and our restaurants in particular.
CONSUMER PERCEPTIONS OF FOOD SAFETY COULD ADVERSELY AFFECT OUR BUSINESS
Our business could be adversely affected by consumer perceptions of food
safety in the United States or in the market areas in which we operate, whether
such perceptions are based on fact or not. In addition, adverse publicity
resulting from poor food quality, illness, injury or other health concerns at
-27-
one or a limited number of our restaurants could have a material adverse effect
on our business, results of operations and financial condition.
OUR BUSINESS DEPENDS ON A LIMITED NUMBER OF KEY PERSONNEL, THE LOSS OF WHOM
COULD ADVERSELY AFFECT US.
Some of our senior executives are important to our success because they
have been instrumental in setting the strategic direction of our Company,
operating our business, identifying, recruiting and training key personnel,
identifying areas for expansion and arranging necessary financing. These key
personnel include Jamie B. Coulter, our Chief Executive Officer, T.D. O'Connell,
our President of Lone Star Restaurants, and certain of our other executive
officers. Although we believe there is a significant pool of talented personnel
in the restaurant industry, if these members of our senior management team
become unable or unwilling to continue in their present positions, it could
adversely affect our business and development.
SHAREHOLDERS MAY NOT BE ABLE TO RESELL THEIR STOCK OR MAY HAVE TO SELL AT A
PRICE SUBSTANTIALLY LOWER THAN THE PRICE THEY PAID FOR IT.
The trading price for our common stock has been highly volatile and could
continue to be subject to significant fluctuations in response to variations in
our quarterly operating results, general conditions in the restaurant industry
or the general economy, and other factors. In addition, the stock market is
subject to price and volume fluctuations affecting the market price for public
companies generally, or within broad industry groups, which fluctuations may be
unrelated to the operating results or other circumstances of a particular
company. Such fluctuations may adversely affect the liquidity of our common
stock, as well as the price that holders may achieve for their shares upon any
future sale.
STAGGERED BOARD; BLANK-CHECK PREFERRED STOCK.
Our current certificate of incorporation and bylaws provide for three
classes of directors to be elected on a staggered basis. This enables existing
directors to exercise significant control over our affairs, and may act as an
impediment to any future attempts by third parties to take control of our board
of directors. In addition, our board of directors has the authority without
further action by the stockholders to issue shares of preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof. The exercise of this authority may act as a further impediment to any
future attempts by third parties to take control of our board of directors.
A SINGLE VENDOR DISTRIBUTES MOST OF OUR CONSUMABLE PRODUCTS.
Approximately 54% of the consumable products used in our restaurants are
distributed through and delivered by a single vendor. While we believe we could
replace this vendor, any disruption of services by this vendor or any change to
a new vendor could adversely affect our restaurants.
THE RISK OF FUTURE TERRORIST ATTACKS MAY ADVERSELY IMPACT OUR REVENUE.
As a result of the terrorist attacks on the United States on September 11,
2001, a number of our restaurants, particularly our Del Frisco's and Sullivan's
restaurants, were negatively affected. Additionally, recent terrorist warnings,
both in the United States and internationally, suggest the possibility of future
terrorist attacks, which together with the unpredictability of future military
action and other responses to such terrorist attacks has resulted in economic
uncertainty. The occurrence of future terrorist attacks may adversely affect our
business and make it more difficult to forecast our future results of operation.
-28-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included in a separate section of this report.
See "Index to Consolidated Financial Statements" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures that are designed
to ensure that information required to be disclosed by us in the reports filed
by us under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
is recorded, processed, summarized and reported pursuant to and within the time
periods specified in the SEC's rules and forms.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-15(e) promulgated under the Exchange Act . Based on
this evaluation, our principal executive officer and our principal financial
officer concluded that our disclosure controls and procedures were effective as
of the end of the period covered by this annual Form 10-K report.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the
participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting as of December 28, 2004 based on
the framework in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Based on that
evaluation, our management concluded that our internal control over financial
reporting was effective as of December 28, 2004.
Management's assessment of the effectiveness of our internal control over
financial reporting as of December 28, 2004 has been audited by Ernst & Young
LLP, an independent registered public accounting firm, as stated in their report
which is included below.
CHANGE IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the fourth quarter ended December 28, 2004, management reviewed the
Company's lease accounting and leasehold depreciation practices. As a result of
this review, management concluded that the Company's controls over the selection
and monitoring of appropriate assumptions and factors affecting lease accounting
and leasehold depreciation practices were insufficient. As a result, the Company
changed its controls and accounting policies surrounding the review, analysis
and recording of new and current leases, including the selection and monitoring
of appropriate assumptions and guidelines to be applied during the review and
analysis of all leases. Furthermore, management determined that the Company's
annual rent and depreciation expense over the last several years had been
understated and its previously issued financial statements were restated to
reflect the correction in the Company's lease accounting and leasehold
depreciation practices.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Lone Star Steakhouse & Saloon, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Lone Star
Steakhouse & Saloon, Inc. and subsidiaries maintained effective internal control
over financial reporting as of December 28, 2004, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Lone Star
-29-
Steakhouse & Saloon, Inc. and subsidiaries' management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Lone Star Steakhouse & Saloon, Inc.
and subsidiaries maintained effective internal control over financial reporting
as of December 28, 2004, is fairly stated, in all material respects, based on
the COSO criteria. Also, in our opinion, Lone Star Steakhouse & Saloon, Inc. and
subsidiaries, maintained, in all material respects, effective internal control
over financial reporting as of December 28, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Lone Star Steakhouse & Saloon, Inc. and subsidiaries as of December 28, 2004 and
December 30, 2003, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 28, 2004 of Lone Star Steakhouse & Saloon, Inc. and subsidiaries
and our report dated March 10, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Kansas City, Missouri
March 10, 2005
-30-
ITEM 9B. OTHER INFORMATION
On December 28, 2004, the Company's Compensation/Stock Option Committee
approved the fiscal 2004 cash bonuses and stock options to be granted to
executive officers of the Company and approved the salaries of the executive
officers for 2005.
The bonuses, option grants and salaries for the Company's executive
officers are as follows:
Named Executive Officer 2005 Base Salary 2004 Cash Bonus Stock Option Grants(1)
Jamie B Coulter $866,250 $412,500 65,000
Tomlinson D. O'Connell $400,000 $175,000 100,000
John D. White $675,000 $175,000 60,000
Gerald T. Aaron $275,000 $72,500 35,000
Dee Lincoln $260,000 $42,500 20,000
(1)Granted pursuant to the Company's 2004 Stock Option Plan. The options
shall vest in equal installments on each of the first four anniversaries of the
date of the grant.
The Company entered into separate employment agreements with each of
Messrs. White, Aaron, and O'Connell, on April 29, 2003. These agreements have
been previously filed by the Company with the Securities and Exchange Commission
and a description of the material terms of these agreements was provided in the
Company's Form 10-K/A for the fiscal year ended December 30, 2003, filed April
28, 2004.
Mr. Coulter and Ms. Lincoln do not have written employment agreements with
the Company. Their base salary and cash bonus are set each year by the
Compensation/Stock Option Committee.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item 12 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 will be in the Company's definitive
proxy materials to be filed with the Securities and Exchange Commission and is
incorporated in this Annual Report on Form 10-K by this reference.
-32-
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1) Financial Statements.
See Index to Financial Statements which appears herein.
All financial statement schedules have been omitted since the
required information is not present.
Exhibits
INDEX TO EXHIBITS
Exhibit EXHIBIT
NUMBER
**3.1 Company's Certificate of Incorporation as amended
***3.3 Company's Amended and Restated By-Laws
******10.2 1992 Lone Star Steakhouse & Saloon, Inc. Directors'
Stock Option Plan as amended the "Director's Plan"
****10.3 1992 Lone Star Steakhouse & Saloon, Inc. Incentive
and Non-qualified Stock Option Plan (the "Plan") as
amended
**10.4 Form of Indemnification Agreement for officers and
directors of the Company
*****10.7 Employment Agreement between the Company and Gerald
T. Aaron, dated April 24, 2003.
*****10.9 Employment Agreement between the Company and T.D.
O'Connell, dated April 24, 2003
*****10.11 Employment Agreement between the Company and John D.
White, dated April 24, 2003
******10.20 Non-Qualified Deferred Compensation Plan
********10.23 Lone Star Steakhouse & Saloon, Inc. Stock Option
Deferred Compensation Plan dated September 30, 2002
********10.24 Deferred Compensation Agreement dated October 4,
2002 between LS Management, Inc. and Jamie B.
Coulter
*******10.26 Amendment to the Director's Plan
*******10.27 Amendment to the Plan
*********10.28 Revolver Credit Loan Agreement dated October 8, 2004
between the Company and Suntrust Bank
**********10.29 2004 Stock Option Plan
*21.1 Subsidiaries of the Company
*23.1 Independent Auditors' consent to the incorporation
by reference in the Company's Registration
Statements on Form S-8 of the independent auditors'
report included herein
*31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
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*31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
*32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
*32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
- -----------------
* Filed herewith.
** Incorporated by reference to the Company's Registration
Statement on Form S-1, filed with the Commission on January
31, 1992 (Commission File No. 33-45399), as amended.
*** Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 12, 2001.
**** Incorporated by reference to the Company's Registration
Statement on Form S-8, filed with the Commission on January
12, 1996 (Commission File No. 33-00280), as amended.
****** Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 17, 2003.
****** Incorporated by reference to the Company's Registration
Statement on Form S-8, filed with the Commission on March
31, 2000 (Commission File No. 333-33762).
******* Incorporated by Reference to the Company's Registration
Statement on Form S-8, filed with the Commission on July 24,
2002 (Commission File No. 333-97271).
******** Incorporated by Reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.
********* Incorporated by Reference to the Company's Periodic Report
on Form 8-K, filed with the Commission on October 14, 2004.
********** Incorporated by Reference to the Company's Periodic Report
on Form 8-K, filed with the Commission on December 20, 2004.
-34-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Wichita, State of Kansas, on this 14th day of March 2005.
LONE STAR STEAKHOUSE & SALOON, INC.
(Registrant)
/s/ John D. White
--------------------------------------------
John D. White
Chief Financial Officer and
Principal Accounting Officer
-35-
SIGNATORIES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons in the capacities and on
the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jamie B. Coulter Chief Executive Officer
- ----------------------------- Principal Executive March 14, 2005
Jamie B. Coulter Officer
/s/ John D. White Chief Financial Officer
- ----------------------------- and Principal Accounting March 14, 2005
John D. White Officer, Executive Vice
President, Treasurer and
Director
/s/ William B. Greene Chairman of the Board March 14, 2005
- ----------------------------- and Director
William B. Greene
/s/ Anthony Bergamo Director March 14, 2005
- -----------------------------
Anthony Bergamo
/s/ Fred B. Chaney Director March 14, 2005
- -----------------------------
Fred B. Chaney
/s/ Thomas C. Lasorda Director March 14, 2005
- -----------------------------
Thomas C. Lasorda
/s/ Michael A. Ledeen Director March 14, 2005
- -----------------------------
Michael A. Ledeen
-36-
/s/ Clark R. Mandigo Director March 14, 2005
- -----------------------------
Clark R. Mandigo
/s/ Mark Saltzgaber Director March 14, 2005
- -----------------------------
Mark Saltzgaber
-37-
CONSOLIDATED