SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, For Use of the
[X] Definitive Proxy Statement Commission Only (as permitted
[_] Definitive Additional Materials by Rule 14a-6(e)(2))
[_] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
Lone Star Steakhouse & Saloon, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
________________________________________________________________________________
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________________________________________________________________________________
2) Aggregate number of securities to which transaction applies:
________________________________________________________________________________
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
[_] Fee paid previously with preliminary materials:
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[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
1) Amount previously paid:
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3) Filing Party:
4) Date Filed:
<PAGE>
LONE STAR STEAKHOUSE & SALOON, INC.
224 East Douglas
Suite 700
Wichita, Kansas 67202-3414
----------
NOTICE OF 1999 ANNUAL MEETING OF STOCKHOLDERS
to be held on May 27, 1999
----------
To the Stockholders:
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Stockholders (the
"Meeting") of LONE STAR STEAKHOUSE & SALOON, INC., a Delaware corporation (the
"Company"), will be held at the Sullivan's Steakhouse restaurant located at
1745-61 Wazee Street, Denver, Colorado 80202-1231, on May 27, 1999, at 12:00
p.m. local time, for the following purposes:
1. To elect two (2) members of the Board of Directors to serve until the
2002 Annual Meeting of Stockholders and until their successors have
been duly elected and qualified;
2. To ratify the appointment of Ernst & Young, LLP as the Company's
independent auditors for the fiscal year ending December 28, 1999; and
3. To transact such other business as may properly be brought before the
Meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on April 12, 1999 as
the record date for the Meeting. Only stockholders of record on the stock
transfer books of the Company at the close of business on that date are entitled
to notice of, and to vote at, the Meeting.
By Order of the Board of Directors
GERALD T. AARON,
Secretary
Dated: April 19, 1999
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, YOU ARE
URGED TO FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE
ENVELOPE THAT IS PROVIDED, WHICH REQUIRES NO POSTAGE IF
MAILED IN THE UNITED STATES.
<PAGE>
LONE STAR STEAKHOUSE & SALOON, INC.
224 East Douglas
Suite 700
Wichita, Kansas 67202-3414
----------
PROXY STATEMENT
FOR
1999 ANNUAL MEETING OF STOCKHOLDERS
May 27, 1999
----------
INTRODUCTION
This Proxy Statement is being furnished to stockholders by the Board of
Directors of Lone Star Steakhouse & Saloon, Inc., a Delaware corporation (the
"Company"), in connection with the solicitation of the accompanying Proxy for
use at the 1999 Annual Meeting of Stockholders of the Company (the "Meeting") to
be held at its Sullivan's Steakhouse restaurant located at 1745-61 Wazee Street,
Denver, Colorado 80202-1231, on May 27, 1999 at 12:00 p.m., local time, or at
any adjournments thereof.
The principal executive offices of the Company are located at 224 East
Douglas, Suite 700, Wichita, Kansas 67202. The approximate date on which this
Proxy Statement and the accompanying Proxy will first be sent or given to
stockholders is April 19, 1999.
RECORD DATE AND VOTING SECURITIES
Only stockholders of record at the close of business on April 12, 1999, the
record date (the "Record Date") for the Meeting, will be entitled to notice of,
and to vote at, the Meeting and any adjournments thereof. As of the close of
business on the Record Date, there were outstanding 35,812,768 shares of the
Company's common stock, $.01 par value (the "Common Stock"). Each outstanding
share of Common Stock is entitled to one vote. There was no other class of
voting securities of the Company outstanding on the Record Date. A majority of
the outstanding shares of Common Stock present in person or by proxy is required
for a quorum.
ATTENDANCE AT THE ANNUAL MEETING
Only stockholders, their proxy holders and the Company's invited guests may
attend the Meeting. For admission to the Meeting, stockholders who own shares of
Common Stock in their own names should come to the stockholders check-in table,
where their ownership will be verified. Those who have beneficial ownership of
Common Stock that is held of record by a bank or broker (often referred to as
"holding in street name") should also come to the stockholders check-in table;
they must bring account statements or letters from their banks or brokers
indicating that they owned the Company's Common Stock as of the Record Date.
The doors to Sullivan's Steakhouse will be opened at 11:30 a.m. and the
Meeting will begin at 12:00 p.m.
VOTING OF PROXIES
Shares of Common Stock represented by Proxies, which are properly executed,
duly returned and not revoked, will be voted in accordance with the instructions
contained therein. If no specification is indicated on the Proxy, the shares of
Common Stock represented thereby will be voted (i) for the election as Directors
of the persons who have been nominated by the Board of Directors, (ii) for the
ratification of the appointment of Ernst & Young, LLP as the Company's
independent auditors for the fiscal year ending December 28, 1999 and (iii) for
any other matter that may properly be brought before the Meeting in accordance
with the judgment of the person or persons voting the Proxy. The execution of a
Proxy will in no way affect a stockholder's right to attend the Meeting and vote
in person. Any Proxy executed and returned by a stockholder may be revoked at
any time thereafter if written notice of revocation is given to the Secretary of
the Company prior to the vote to be taken at the Meeting, or by execution of a
subsequent proxy which is presented to the Meeting, or if the stockholder
attends the Meeting and votes by ballot, except as to any matters upon which a
vote shall have been cast pursuant to the authority conferred by such Proxy
prior to such revocation. For purposes of determining the presence of a quorum
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for transacting business at the Meeting, abstentions and broker "non-voters"
(i.e., proxies from brokers or nominees indicating that such persons have not
received instructions from the beneficial owner or other persons entitled to
vote shares on a particular matter with respect to which the brokers or nominees
do not have discretionary power) will be treated as shares that are present but
which have not been voted.
The cost of solicitation of the Proxies being solicited on behalf of the
Board of Directors will be borne by the Company. In addition to the use of the
mails, proxy solicitation may be made by telephone, telegraph and personal
interview by officers, directors and employees of the Company. The Company will,
upon request, reimburse brokerage houses and persons holding Common Stock in the
names of their nominees for their reasonable expenses in sending soliciting
material to their principals.
SECURITY OWNERSHIP
The following table sets forth information concerning ownership of the
Company's Common Stock, as of April 12, 1999, by each person known by the
Company to be the beneficial owner of more than five percent of the Common
Stock, each director, each executive officer as defined in Item 402(a)(3) of
Regulation S-K ("Item 402(a)(3)") and by all directors and executive officers of
the Company as a group. Unless otherwise indicated, the address for five percent
stockholders, directors and executive officers of the Company is 224 East
Douglas, Suite 700, Wichita, Kansas 67202-3414.
<TABLE>
<CAPTION>
Name and Address Shares Percentage
of Beneficial Owner Beneficially Owned of Class
------------------- ------------------ --------
<S> <C> <C>
Jamie B. Coulter ............................................ 4,595,393(1) 12.1
John D. White ............................................... 948,025(2) 2.6
Michael J. Archer ........................................... -0-(3) *
Gerald T. Aaron ............................................ 512,706(4) 1.4
Clark R. Mandigo ............................................ 66,267(5) *
Fred B. Chaney ............................................. 50,000(6) *
William H. Tilley .......................................... 63,734(7) *
First Pacific Advisors, Inc ................................. 2,615,268(8) 7.3
Lazard Freres & Co. LLC ..................................... 2,868,389(9) 8.0
All directors and executive officers as a group
(7) persons (1) (2) (3) (4) (5) (6) (7) ................... 6,236,125 14.7
</TABLE>
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* Less than 1%
(1) Excludes shares held of record by the adult children of Mr. Coulter. Mr.
Coulter disclaims beneficial ownership of these shares. Includes presently
exercisable options to purchase 2,200,000 shares of Common Stock.
(2) Includes presently exercisable options to purchase 800,000 shares of Common
Stock.
(3) Effective December 14, 1998, the Board of Directors of the Company offered
optionees, except for Mr. Coulter, under the Company's 1992 Incentive and
Non-Qualified Plan the opportunity to have their stock options re-issued
and re-priced ("Re-issued and Re-priced Program"). Pursuant to the
Re-issued and Re-priced Program, Mr. Archer's outstanding options as of
December 14, 1998, were canceled and new options to purchase 283,177 shares
of Common Stock were issued at an exercise price of $8.00 per share with a
new vesting schedule. (The Re-issued and Re-priced Program is more fully
described under "Executive Compensation -- Re-issuing and Re-Pricing of
Stock Options" herein ).
(4) Includes presently exercisable options to purchase 475,000 shares of Common
Stock.
(5) Includes presently exercisable options to purchase 32,267 shares of Common
Stock
(6) Includes presently exercisable options to purchase 46,000 shares of Common
Stock.
(7) Includes 10,400 shares of Common Stock owned by a California corporation of
which Mr. Tilley is the principal stockholder and presently exercisable
options to purchase 13,334 shares of Common Stock.
(8) Based on a joint Schedule 13G filed in February, 1999, First Pacific
Advisors, Inc. beneficially holds 2,615,268 shares of the Company's Common
Stock. The address of First Pacific Advisors, Inc., is 11400 West Olympic
Boulevard, Suite 1200, Los Angeles, CA 90064.
(9) Based on a Schedule 13G filed in February, 1999, Lazard, Freres & Co., LLC
beneficially holds 2,868,389 shares of the Company's Common Stock. The
address of Lazard Freres & Co., LLC is 30 Rockefeller Plaza, New York, NY
10020.
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PROPOSAL I - ELECTION OF DIRECTORS
Article Fifth, Paragraph A of the Certificate of Incorporation of the
Company, and Article Two, Section 2.2 of its By-Laws provide for the
organization of the Board of Directors into three classes. The number of
Directors is established by the By-Laws pursuant to Board authorization.
Currently, the Board is composed of six (6) Directors. The nominees for
Directors are currently directors of the Company. Michael J. Archer and Fred B.
Chaney were appointed to the Board in September, 1996 and April, 1995
respectively. All Directors are chosen for a full three-year term to succeed
those whose terms expire. It is therefore proposed that two (2) Directors be
elected to serve until the Annual Meeting of Stockholders to be held in 2002 and
until their successors are elected and shall have qualified.
Unless otherwise specified, all Proxies received will be voted in favor of
the election of Michael J. Archer and Fred B. Chaney, the nominees. Directors
shall be elected by a plurality of the votes cast, in person or by proxy, at the
Meeting. Abstentions from voting and broker nonvotes on the election of
directors will have no effect since they will not represent votes cast at the
Meeting for the purpose of electing directors. The terms of the nominees expire
at the Meeting and when their successors are duly elected and shall have
qualified. Management has no reason to believe that any of the nominees will be
unable or unwilling to serve as a director, if elected. Should any of the
nominees not remain a candidate for election at the date of the Meeting, the
Proxies will be voted in favor of those nominees who remain candidates and may
be voted for substitute nominees selected by the Board of Directors.
The following table sets forth the ages and terms of office of the
Directors of the Company:
Term of Office
Name Age as Director Expire
---- --- -------------
Jamie B. Coulter ............................. 58 2001
John D. White ................................ 51 2000
Michael J. Archer ............................ 38 1999
Fred B. Chaney ............................... 62 1999
Clark R. Mandigo ............................. 55 2000
William H. Tilley ............................ 59 2000
Jamie B. Coulter has served as Chairman and Chief Executive Officer of the
Company since January 1992 and President of the Company from January, 1992 to
June, 1995 (and has been a director and executive officer of various
subsidiaries of the Company since 1991). From 1964 to 1970 Mr. Coulter was a
major franchisee of Kentucky Fried Chicken. From 1965 to May, 1997, Mr. Coulter
was a Pizza Hut franchisee and owned in excess of 100 Pizza Hut restaurants.
Since 1980, Mr. Coulter has been the sole stockholder and President of Coulter
Enterprises, Inc., a management consulting company that provided accounting and
administrative services for certain affiliated and non-affiliated businesses and
the Company. In October, 1998 the Company acquired the assets and assumed
certain liabilities of Coulter Enterprises, Inc. (See "Certain Relationships and
Related Transactions").
John D. White has been the Chief Financial Officer and a Director of the
Company since January 1992, a director and executive officer of various
subsidiaries of the Company since 1991 and Executive Vice President since June,
1995. Prior to joining the Company, Mr. White was employed for eleven years as
Senior Vice President of Finance for Coulter Enterprises, Inc. From 1970 to
1980, Mr. White was a certified public accountant with Arthur Young & Company.
Michael J. Archer, has been Chief Operating Officer -- Del
Frisco's/Sullivan's since August, 1996 and a Director of the Company since
September, 1996. From April, 1995 until August, 1996 Mr. Archer had been Senior
Vice President -- Operations of the Company. Prior to joining the Company, Mr.
Archer was employed in various capacities, including President, of Morton's of
Chicago, Inc., a subsidiary of Quantum Restaurant Group, Inc. for thirteen
years.
Fred B. Chaney, Ph.D, has been a director of the Company since May, 1995.
Dr. Chaney was President and Chief Executive Officer of TEC's parent company,
Vedax Sciences Corporation, until March, 1998 when he sold his interest. Dr.
Chaney through the TEC organization had formed a network of various management
organizations in several countries, including the United States where
approximately 4,000 presidents of companies meet on a
3
<PAGE>
quarterly basis. Dr. Chaney's early business career was with the Boeing Company
and Rockwell, where he implemented management systems and quality motivational
programs. In 1968 he co-authored the book Human Factors in Quality Assurance
with Dr. D. H. Harris. Dr. Chaney has authored numerous publications and
professional papers and has taught management classes for the University of
Southern California. Dr. Chaney is a board member of Hobie Sports.
Clark R. Mandigo has been a Director of the Company since March 1992. Mr.
Mandigo has been a Papa John's Pizza franchisee since 1995. From 1986 to 1991,
he was President, Chief Executive Officer and Director of Intelogic Trace, Inc.,
a corporation engaged in the sale, lease and support of computer and
communications systems and equipment. From 1985 to 1997, Mr. Mandigo served on
the Board of Directors of Physician Corporation of America, a managed health
care company and from 1993 to 1997, Mr. Mandigo served on the Board of Palmer
Wireless, Inc., a cellular telephone system operator. Mr. Mandigo currently
serves on the Board of Directors of Horizon Organic Holdings Corporation and as
a Trustee of Accolade Funds.
William H. Tilley has been a Director of the Company since December, 1997.
Mr. Tilley currently serves as Chairman and Chief Executive Officer of The
Jacmar Companies which was founded in 1964. Mr. Tilley also founded Pacific
Ventures, Ltd., a restaurant operating company in the United States Territory of
Guam. Pacific Ventures, Ltd. has license agreements with Taco Bell, Sizzler and
the Company to operate restaurants in Guam. Mr. Tilley is the principal
stockholder of California Star Restaurants, Inc., a licensee of the Company,
which owns and operates three (3) Lone Star restaurants in California. Mr.
Tilley also teaches graduate business courses at USC and UCLA. Mr. Tilley
currently serves on the Board of Directors of Hollis-Eden Pharmaceuticals, Inc.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE
NOMINEES.
Meetings
For the fiscal year ended December 29, 1998, there were ten (10) meetings
of the Board of Directors. From time to time, the members of the Board of
Directors act by unanimous written consent pursuant to the laws of the State of
Delaware. The Board of Directors does not have a standing nominating committee.
The Board of Directors has created an Audit Committee, a Compensation
Committee and a Stock Option Committee. The Audit Committee is composed of all
of the Company's non-management directors and is charged with reviewing the
Company's annual audit and meeting with the Company's independent auditors to
review the Company's internal controls and financial management practices. The
Compensation Committee, which is also composed of all of the Company's
non-management directors, recommends to the Board of Directors compensation for
the Company's key employees. The Stock Option Committee consists of two of the
non-management directors and administers the Company's 1992 Incentive and
Non-Qualified Stock Option Plan, as amended (the "Plan") and awards stock
options thereunder. The members of the Audit Committee and Compensation
Committee are Messrs. Chaney, Mandigo, and Tilley. The members of the Stock
Option Committee are Messrs. Chaney and Mandigo. During 1998, there were four
meetings of the Audit Committee, two meetings of the Compensation Committee and
two meetings of the Stock Option Committee.
Other Executive Officers
Gerald T. Aaron, 58, has been Senior Vice President -- Counsel and
Secretary of the Company since January 1994 and an officer of various
subsidiaries of the Company since December, 1997. From November 1991 to January
1994, Mr. Aaron was employed as General Counsel for Coulter Enterprises, Inc.
From March 1989 to November 1991, Mr. Aaron operated a franchise consultant
practice. From 1969 to 1984 Mr. Aaron was Vice President -- Counsel for Pizza
Hut, Inc. and from 1984 to 1989, Mr. Aaron was President of International Pizza
Hut Franchise Holders Association.
4
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years indicated, all
compensation awarded to, earned by or paid to the chief executive officer
("CEO") and the four most highly compensated executive officers of the Company
(collectively with the CEO the "Named Executive Officers") other than the CEO
whose salary and bonus exceeded $100,000 with respect to the fiscal year ended
December 29, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------- ----------------------------------------------
Number of
Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus($) Compensation Options(#) Compensation (1)
--------------------------- ---- ------ -------- ------------ ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Jamie B. Coulter..............
Chairman of the Board 1998 $300,000 -- -- -- --
and Chief Executive 1997 $275,000 -- -- -- --
Officer 1996 $250,000 -- -- 1,200,000 --
John D. White.................
Executive Vice President 1998 $283,000 -- -- -- --
Chief Financial Officer 1997 $259,600 -- -- -- --
and Treasurer 1996 $236,000 -- -- 600,000 --
Robert M. Kendall (2).........
Former - Chief Operating 1998 $250,000 -- -- -- --
Officer 1997 $200,000 -- -- -- --
1996 $150,000 -- -- 225,000 --
Michael J. Archer (3).........
Chief Operating Officer 1998 $250,000 $125,000 -- -- --
Del/Frisco's/Sullivan's 1997 $214,000 $100,000 -- -- --
1996 $214,000 -- -- 400,000 --
Gerald T. Aaron...............
Senior Vice President - 1998 $228,000 -- -- -- --
Counsel & Secretary 1997 $209,000 -- -- -- --
1996 $190,000 -- -- 300,000 --
</TABLE>
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(1) Perquisites and other personal benefits, securities or property received by
each executive officer did not exceed the lesser of $50,000 or 10% of such
executive officer's annual salary and bonus.
(2) Mr. Kendall voluntarily resigned on December 29, 1998.
(3) In August, 1996, the Company provided Mr. Archer with a $100,000
non-interest bearing loan payable upon demand. In April, 1997, the Company
agreed to cancel the debt and treat the $100,000 as 1997 employee
compensation.
Option Grants
With the exception of Mr. Archer, who elected to re-issue and re-price his
existing stock options, the Company granted no stock options to the CEO and
other Named Executive Officers during the fiscal year ended December 29, 1998.
Option Exercise Table
No options were exercised by the CEO and the other Named Executive Officers
during the fiscal year ended December 29, 1998. The following table sets forth
certain information concerning unexercised options held as of December 29, 1998
by the CEO and the other Named Executive Officers.
5
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FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at December 29, 1998 at December 29, 1998 ($) (1)
----------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Jamie B. Coulter ........................ 2,200,000 400,000 -0- -0-
John D. White ........................... 800,000 200,000 -0- -0-
Michael J. Archer ....................... 0 283,177 -0- -0-
Robert M. Kendall ....................... 203,704 175,000 -0- -0-
Gerald T. Aaron ......................... 475,000 100,000 -0- -0-
</TABLE>
- ----------
(1) Such amounts are based on the closing price of a share of Common Stock
$7.875 as reported by the Nasdaq National Market ("NASDAQ") on December 29,
1998.
Directors Compensation
Directors who are not employees of the Company receive an annual fee of
$5,000 and a fee of $1,250 for each Board of Directors meeting attended and are
reimbursed for their expenses. Employees who are Directors are not entitled to
any compensation for their service as a Director. Non-employee Directors are
also entitled to receive grants of options under the Company's 1992 Directors
Stock Option Plan (the "Directors Plan"). Generally, upon election to the Board,
each director who is not an executive officer is granted a one-time stock option
to acquire 40,000 shares of Common Stock and receives an annual option grant
upon the anniversary date of 6,800 shares. The exercise price for such shares is
equal to the closing sale price of the Common Stock as reported on NASDAQ on the
date of grant. Currently, options to purchase an aggregate of 155,200 shares of
Common Stock are outstanding under the Directors Plan at exercise prices ranging
from $7.43 per share to $21.688 per share. In 1998, the Company's outside
Directors were automatically granted options to purchase an aggregate of 20,400
shares of Common Stock under the Directors Plan at exercise prices ranging from
$7.43 to $21.688 per share.
Employment Agreements
The Company has entered into separate employment agreements, with each of
Messrs. White, Archer, and Aaron, dated as of January 1, 1999, providing for the
employment of such individuals as Executive Vice President and Chief Financial
Officer, Chief Operating Officer -- Del Frisco's/Sullivan's , and Senior Vice
President -- Counsel, respectively. Each employment agreement provides that the
officer shall devote substantially all of his professional time to the business
of the Company. Each agreement terminates in February, 2002, but the Company has
the option to extend the term annually for additional one year periods. Each
agreement contains non-competition, confidentiality and non-solicitation
provisions which apply for eighteen months after cessation of employment.
Messrs. White, Aaron and Archer's employment agreements provide that in the
event of a change of control of the Company (as defined therein), they would
have the option to terminate their respective agreements upon 10 days' notice to
the Company in which event, the non-solicitation and non-competition provisions
would terminate.
Mr. Coulter has also entered into a non-competition, confidentiality and
non-solicitation agreement with the Company. Mr. Coulter's agreement has been
amended, effective January 1, 1999 to provide that in the event of a change of
control of the Company (as defined therein), Mr. Coulter would have the option
to terminate his agreement upon 10 days' notice to the Company in which event,
the non-solicitation and non-competition provisions would terminate.
6
<PAGE>
Joint Report by the Compensation Committee and the
Stock Option Committee on Executive Compensation
General
The Compensation Committee determines the cash and other incentive
compensation (with the exception of stock options which are granted by the Stock
Option Committee), if any, to be paid to the Company's executive officers and
key employees. Messrs. Chaney, Mandigo and Tilley, non-employee directors of the
Company, serve as members of the Compensation Committee and, Audit Committee.
Messrs. Chaney and Mandigo serve as members of the Stock Option Committee and
are "disinterested directors" (within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended). Mr. Mandigo serves as Chairman of
the Compensation Committee and of the Stock Option Committee. Mr. Tilley serves
as Chairman of the Audit Committee. During fiscal 1998, there were two meetings
of the Compensation Committee, four meetings of the Audit Committee and two
meetings of the Stock Option Committee.
Compensation Philosophy
The Compensation Committee's executive compensation philosophy is to base
management's pay, in part, on the achievement of the Company's annual and
long-term performance goals, to provide competitive levels of compensation, to
recognize individual initiative, achievement and length of service to the
Company, and to assist the Company in attracting and retaining qualified
management. The Compensation Committee historically established executives' base
salaries at relatively low levels. However, the Compensation Committee has
decided to increase executives' base salaries closer to the median for the
restaurant industry. It is the philosophy of the Compensation Committee in
tandem with the Stock Option Committee to provide officers with the opportunity
to realize potentially significant financial gains through the grants of stock
options. The Compensation Committee also believes that the potential for equity
ownership by management is beneficial in aligning management's and stockholders'
interest in the enhancement of stockholder value. However, the decision to
ultimately grant stock options is based primarily on the criteria set forth
under "Stock Option Plan" below.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), prohibits a publicly held corporation, such as the Company, from
claiming a deduction on its federal income tax return for compensation in excess
of $1 million paid for a given fiscal year to the chief executive officer (or
person acting in that capacity) at the close of the corporation's fiscal year
and the four most highly compensated officers of the corporation, other than the
chief executive officer, at the end of the corporation's fiscal year. The $1
million compensation deduction limitation does not apply to "performance-based
compensation." The Company believes that any compensation received by executive
officers in connection with the exercise of options granted under the Plan
qualifies as "performance-based compensation." Accordingly, the Company has not
established a policy with respect to Section 162(m) of the Code because the
Company has not and does not currently anticipate paying compensation in excess
of $1 million per annum to any employee.
Salaries
Base salaries for the Company's executive officers are determined initially
by evaluating the responsibilities of the position held and the experience of
the individual, food service and management experience, and by reference to the
competitive marketplace for management talent, including a comparison of base
salaries for comparable positions at comparable companies within the Company's
industry, which includes companies which comprise the Company's Peer Group, (as
defined herein). Such companies are comparable in that they are fast-growth
companies in the casual dining segment of the restaurant industry. The Company
believes salaries for its officers remain below average as compared to the
companies reviewed. Annual salary adjustments are determined in descending level
of importance by (i) evaluating the financial results achieved by the Company,
which includes revenues, earnings, unit growth and profit margins of the
Company, (ii) the performance of the executive particularly with respect to the
ability to manage growth and profitability of the Company, (iii) the length of
the executive's service to the Company and (iv) any increased responsibilities
assumed by the executive. There are no restrictions on salary adjustments of the
Company. The Company has employment agreements with Messrs. White, Archer and
Aaron, which set the base salaries for such individuals. These base salaries are
based on and are reviewed annually in accordance with the factors described in
this paragraph and the terms of the employment agreements. See "Executive
Compensation -- Employment Agreements."
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<PAGE>
Annual Bonuses
The Company does not currently have a formal bonus plan for its executives
and no bonuses were paid to executives for the 1998 fiscal year, with the
exception of Mr. Archer who is contractually entitled to receive a bonus up to
sixty percent (60%) of his salary for any annual period. The bonus is paid at
the discretion of the Company and is based upon Mr. Archer's achieving certain
goals and objectives agreed upon between Mr. Archer and the Company. The Company
may in the future adopt an executive bonus plan. As indicated under "Stock
Option Plan" below, the Company has granted options in the past to the Named
Executive Officers in part to reward their performance, but no options were
granted for the 1998 fiscal year.
Compensation of Chief Executive Officer
Mr. Coulter's base salary is based upon the factors described in the
"Salaries" paragraph above. Mr. Coulter's salary, by design, is below the
average as compared to the salaries of executive officers of restaurant
companies of similar size reviewed by the Company. As noted above, the Company
does not presently have a formal bonus plan for executives and no bonus was paid
to Mr. Coulter for the 1998 fiscal year.
Stock Option Plan
It has historically been the philosophy of the Stock Option Committee to
tie a significant portion of an executives' total opportunity for financial gain
to increases in stockholder value, thereby aligning the long-term interest of
the stockholders with the executives and to retain such key employee. All
salaried employees, including executives and part-time employees, of the Company
and its subsidiaries, are eligible for grants of stock options pursuant to the
Plan. In addition, because the executives' base salaries are currently set below
the average of similar positions in comparable companies within the Company's
industry, which includes companies which comprise the Company's Peer Group and
because the Company presently maintains neither a qualified retirement program
nor a bonus plan for executives, the Plan is intended to provide executives with
opportunities to supplement their base compensation.
Effective December 14, 1998, the Board of Directors offered optionees, with
the exception of Mr. Coulter, under the Plan, the opportunity to have their
stock options re-issued and re-priced (Re-issued and Re-priced Program"). The
Re-issued and Re-priced Program provides that existing options as of December
14, 1998, with an exercise price of more than $8.00 per share would be re-priced
to $8.00 per share if the optionee agreed to accept a reduced number of options
with a new vesting period commencing on the date of acceptance. The number of
options re-issued at $8.00 per share was the number derived by multiplying the
number of current option shares by the quotient of $8.00 divided by the option
price of the surrendered options. Under the Re-issued and Re-priced Program
options to purchase 1,711,253 shares of the Company's Common Stock were canceled
and new options to purchase 767,584 shares of the Company's Common Stock were
re-issued at a price of $8.00 per share. Messrs. Coulter, White and Aaron did
not participate in the Re-issued and Re-priced Program. Mr. Archer did elect to
have his existing options canceled and new options re-issued.
Compensation Committee: Clark R. Mandigo, Chairman
Fred B. Chaney
William H. Tilley
Stock Option Committee: Clark R. Mandigo, Chairman
Fred B. Chaney
8
<PAGE>
Compensation Committee Interlocks
The Compensation Committee consists of Messrs. Chaney, Mandigo and Tilley.
Except as set forth in "Certain Relationships and Related Transactions -- Other
Affiliated Transactions," none of such Directors was a party to any transaction
with the Company which requires disclosure under Item 402(j) of Regulation S-K.
Re-issuing and Re-pricing of Stock Options
<TABLE>
<CAPTION>
Length of
Number of Market price new option
securities of stock at Exercise price term at
Date of underlying time of at time of date of
Re-issued & options Re-issued & Re-issued & New Re-priced and
Re-priced repriced or Re-priced Re-priced exercise Re-issued
Name Program amended (#) Program ($) Program ($) price ($) Program
- ---- ------------ ----------- ------------ --------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Archer* ........ 12/14/98 171,000 $8.00 $18.25 $8.00 10 years
12/14/98 75,000 $8.00 $18.25 $8.00 10 years
12/14/98 400,000 $8.00 $18.25 $8.00 10 years
</TABLE>
- ----------
* The number of shares of Common Stock underlying stock options was reduced
from 646,000 to 283,177. The Re-issued and Re-priced options vest equally
over a three (3) year period commencing December 14, 1999.
The following table sets forth information relating to the Company's
re-pricing of stock options in 1997.
Re-pricing of Stock Options
<TABLE>
<CAPTION>
Length of
Number of Market price original
securities of stock at Exercise price optionterm
underlying time of at time of remaining
options repricing or repricing or New at date of
Date of repriced or amendment amendment exercise repricing or
Name repricing amended (#) ($) ($) price ($) amendment
- ---- ------------ ----------- ------------ --------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jamie B. Coulter .......... 4/25/97 300,000 $18.25 $20.75 $18.25 6 years
4/25/97 400,000 $18.25 $22.00 $18.25 7 years
4/25/97 500,000 $18.25 $19.00 $18.25 8 years
4/25/97 200,000 $18.25 32.625 $18.25 9 years
4/25/97 1,200,000 $18.25 28.375 $18.25 10 years
John D. White ............. 4/25/97 75,000 $18.25 $20.75 $18.25 6 years
4/25/97 100,000 $18.25 $22.00 $18.25 7 years
4/25/97 125,000 $18.25 $19.00 $18.25 8 years
4/25/97 100,000 $18.25 32.625 $18.25 9 years
4/25/97 600,000 $18.25 28.375 $18.25 10 years
Michael J. Archer ......... 4/25/97 171,000 $18.25 $31.00 $18.25 8 years
4/25/97 75,000 $18.25 32.625 $18.25 9 years
4/25/97 400,000 $18.25 28.375 $18.25 10 years
Dennis L. Thompson ........ 4/25/97 75,000 $18.25 $20.75 $18.25 6 years
4/25/97 100,000 $18.25 $22.00 $18.25 7 years
4/25/97 100,000 $18.25 $19.00 $18.25 8 years
4/25/97 100,000 $18.25 32.625 $18.25 9 years
4/25/97 133,333 $18.25 28.375 $18.25 10 years
Gerald T. Aaron ........... 4/25/97 100,000 $18.25 $22.00 $18.25 7 years
4/25/97 100,000 $18.25 $19.00 $18.25 8 years
4/25/97 75,000 $18.25 32.625 $18.25 9 years
4/25/97 300,000 $18.25 28.375 $18.25 10 years
</TABLE>
9
<PAGE>
Common Stock Performance
The following graph compares the total return on the Company's Common Stock
from January 1, 1993, to the total returns of the Standard & Poor's Mid-Cap 400
Index and the Standard & Poor's Restaurant Industry Index (the "Peer Group").
COMPARISON OF TOTAL RETURN
FROM JANUARY 1, 1993 TO DECEMBER 29, 1998
AMONG
LONE STAR STEAKHOUSE & SALOON, INC.
THE STANDARD & POOR'S MID-CAP 400 INDEX AND THE PEER GROUP
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Base Return Return Return Return Return
Period To To To To To
Company/Index Name Dec 93 27 Dec 94 26 Dec 95 31 Dec 96 30 Dec 97 29 Dec 98
- ------------------ ------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Lone Star Steakhouse Saloon.............. 100 71.82 145.46 101.39 66.33 29.85
S&P MIDCAP 400 Index .................... 100 96.00 125.31 149.37 197.55 256.59
RESTAURANTS-500.......................... 100 99.23 146.33 144.58 155.24 243.29
</TABLE>
Assumes $100 invested on January 1, 1993 in the Company's Common Stock, the
Standard & Poor's Mid-Cap 400 Index and the Peer Group. The calculations in the
table were made on a dividends reinvested basis.
There can be no assurance that the Company's Common Stock performance will
continue with the same or similar trends depicted in the above graph.
10
<PAGE>
PROPOSAL II -- RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed Ernst & Young, LLP as the Company's
independent auditors for the fiscal year ending December 28, 1999. Although the
selection of independent auditors does not require ratification, the Board of
Directors has directed that the appointment of Ernst & Young, LLP be submitted
to stockholders for ratification due to the significance of their appointment to
the Company. If stockholders do not ratify the appointment of Ernst & Young, LLP
as the Company's independent auditors, the Board of Directors will consider the
appointment of other certified public accountants. A representative of Ernst &
Young, LLP will be present at the Meeting and will be available to respond to
appropriate questions. The approval of the proposal to ratify the appointment of
Ernst & Young, LLP requires the affirmative vote of a majority of the votes cast
by all stockholders represented and entitled to vote thereon. An abstention,
withholding of authority to vote or broker non-vote, therefore, will not have
the same legal effect as an "against" vote and will not be counted in
determining whether the proposal has received the required stockholder vote.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE "FOR" THE
RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG, LLP AS THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 28, 1999.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Services Agreement
The Company had a services agreement with Coulter Enterprises, Inc.
pursuant to which the Company utilized certain accounting and administrative
services provided by Coulter Enterprises, Inc., which is owned by Jamie B.
Coulter. The services agreement initially expired on December 31, 1992 and was
renewable thereafter on a year-to-year basis. For fiscal year 1998, the fixed
annual charge was $3,737,000 and the per restaurant per 28-day accounting period
fee was $466 plus reimbursement of all direct out-of-pocket costs and expenses.
From December 30, 1997 through October 19, 1998, the Company paid fees of
$4,367,152 under the services agreement. On October 19, 1998, the Company
acquired the operations, purchased certain assets and assumed certain
liabilities of Coulter Enterprises, Inc., for a purchase price of $10,500,000
plus the assumption of liabilities. The acquisition was approved by the
non-management directors of the Company. The Company also engaged Houlihan,
Lokey, Howard & Zukin Financial Advisors, Inc. who rendered an opinion that the
consideration paid by the Company in connection with the transaction was fair to
the Company and its stockholders from a financial point of view.
In connection with the acquisition of Coulter Enterprises, Inc., the
Company assumed certain month-to-month lease obligations to entities owned by
Mr. Coulter. The month-to-month leases provide for additional meeting room
space, document storage and parking lot space to be utilized by the Company.
Total rent paid to these related-party entities in 1998 was $37,900.
Prior to the acquisition of certain assets of Coulter Enterprises, Inc.
there were intercompany advances between the Company and Coulter Enterprises,
Inc. While the Company had substantial cash at all time periods (primarily
invested in short-term, investment grade, interest-bearing securities), these
intercompany advances allowed the Company to fund on a short-term basis,
construction costs and property purchases without terminating investments. At
other times, the Company advanced funds to Coulter Enterprises, Inc. to fund
negative working capital. These advances were repayable with interest. In 1998,
the maximum amount owed by Coulter Enterprises, Inc. was $1,575,602 (on June 12,
1998) and the maximum amount owed by the Company was $5,650,776 (on April 21,
1998). The interest rate on the loans were intended to be neutral to the lender
on a pre-tax basis and for 1998, the Company paid Coulter Enterprises, Inc. a
net interest amount of $170,000. As of October 19, 1998, all amounts owed by
either the Company or Coulter Enterprises, Inc. had been repaid.
Other Affiliated Transactions
Prior to the acquisition of Coulter Enterprises, Inc., the Company
reimbursed Coulter Enterprises, Inc. for the use of an airplane and pilot
services provided by another related entity. Amounts reimbursed for the use of
the airplane and pilot services was $856,016, in 1998. The Company believes that
the foregoing transactions are on terms at least as favorable as the terms that
the Company would have received from unaffiliated third parties.
11
<PAGE>
In 1998, the Company made miscellaneous expenditures to a retail
establishment owned by Mr. Coulter totaling $24,505. In addition, Mr. Coulter
paid the Company $21,008 for reimbursement of various services which were
provided by employees of the Company during 1998.
In December, 1997, the Company provided Michael J. Archer with a $400,000
loan bearing interest at the rate of 7.5% per annum, payable on demand. The loan
is secured by a mortgage on real estate and improvements.
Mr. Tilley, a director, is owner of a majority interest in Pacific
Ventures, Ltd., which is a fifty percent owner of Restaurants of Micronesia,
which is a licensee of the Company and operates a Lone Star restaurant in the
United States Territory of Guam. During 1998, the licensee paid the Company
$66,291 in royalty fees.
Mr. Tilley is the principal stockholder of California Star Restaurants,
Inc., a licensee of the Company which owns and operates three (3) Lone Star
restaurants in California. The first and second Lone Star restaurants opened in
1998 and the third Lone Star restaurant opened in January, 1999. During 1998,
the licensee paid the Company $60,000 in initial license fees and $79,019 in
royalty fees. The Company believes that the foregoing transactions are on at
least as favorable as the terms the Company would have received from
unaffiliated third parties.
STOCKHOLDER PROPOSALS
In order to be considered for inclusion in the proxy materials to be
distributed in connection with the next Annual Meeting of Stockholders of the
Company, stockholder proposals for such meeting must be submitted to the Company
no later than December 21, 1999.
On May 21, 1998 the Securities and Exchange Commission adopted an amendment
to Rule 14a-4, as promulgated under the Securities and Exchange Act of 1934, as
amended. The amendment to Rule 14a-4(c)(1) governs the Company's use of its
discretionary proxy voting authority with respect to a stockholder proposal
which is not addressed in the Company's proxy statement. The amendment provides
that if the Company does not receive notice of the proposal at least 45 days
prior to the first anniversary of the date of mailing of the prior year's proxy
statement, then the Company will be permitted to use its discretionary voting
authority when the proposal is raised at the annual meeting, without any
discussion of the matter in the proxy statement.
With respect to the Company's year 2000 Annual Meeting of Stockholders, if
the Company is not provided notice of a stockholder proposal, which has not been
timely submitted, for inclusion in the Company's proxy statement by March 5,
2000, the Company will be permitted to use it discretionary voting authority as
outlined above.
ANNUAL REPORT
All stockholders of record as of April 12, 1999 have been sent, or are
concurrently herewith being sent, a copy of the CompanyOs Annual Report for the
fiscal year ended December 29, 1998. Such report contains certified consolidated
financial statements of the Company and its subsidiaries for the fiscal year
ended December 29, 1998.
By Order of the Company,
GERALD T. AARON
Secretary
Dated: Wichita, Kansas
April 19, 1999.
The Company will furnish, without charge, a copy of its Annual Report on Form
10-K for the fiscal year ended December 29, 1998 (without exhibits) as filed
with the Securities and Exchange Commission to stockholders of record on the
Record Date who make written request therefor to Gerald T. Aaron, Secretary,
Lone Star Steakhouse & Saloon, Inc., 224 E. Douglas, Suite 700, Wichita, Kansas
67202.
12
