UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For quarter ended Commission file number
September 7, 1999 0-19907
----------------- -------
LONE STAR STEAKHOUSE & SALOON, INC.
(Exact name of registrant as specified in its charter)
Delaware 48-1109495
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
224 East Douglas, Suite 700
Wichita, Kansas 67202
(Address of principal executive offices) (Zip code)
(316) 264-8899
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
/X/ Yes / / No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at October 22, 1999
Common Stock, $.01 par value 33,092,668 shares
<PAGE>
Lone Star Steakhouse & Saloon, Inc.
Index
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at September 7, 1999 and December 29, 1998 2
Condensed Consolidated Statements of
Operations for the twelve weeks ended
September 7, 1999 and September 8, 1998 3
Condensed Consolidated Statements of
Income for the thirty-six weeks ended
September 7, 1999 and September 8, 1998 4
Condensed Consolidated Statements of
Cash Flows for the thirty-six weeks ended
September 7, 1999 and September 8, 1998 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative 17
Disclosure of Market Risk
PART II. OTHER INFORMATION
Items 1 through 5 have been omitted
since the items are either inapplicable or the
answer is negative
Item 6. Exhibits and Reports on Form 8-K 17
<PAGE>
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Balance Sheets
(In thousandss)
(Unaudited)
<TABLE>
<CAPTION>
September 7, 1999 December 29, 1998
----------------- -----------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 71,389 $ 89,847
Inventories 11,876 15,894
Other current assets 4,958 6,565
----------- -----------
Total current assets 88,223 112,306
Property and equipment, net 449,679 461,065
Intangible and other assets, net 33,034 35,212
----------- -----------
Total assets $ 570,936 $ 608,583
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,672 $ 10,545
Other current liabilities 28,146 34,168
------------ ---------
Total current liabilities 38,818 44,713
Deferred income taxes 4,662 10,429
Stockholders' Equity:
Preferred stock -- --
Common stock 345 386
Additional paid-in capital 276,645 314,366
Retained earnings 258,071 248,522
Accumulated other comprehensive income (loss) (7,605) (9,833)
------------ ---------
Total stockholders' equity 527,456 553,441
------------ ---------
Total liabilities and stockholders' equity $ 570,936 $ 608,583
============ =========
</TABLE>
See accompanying notes.
-2-
<PAGE>
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Statements of Operations
(In thousands, except for per share amounts)
(Unaudited)
For the twelve weeks ended
---------------------------
September 7,1999 September 8,1998
---------------- ----------------
(Restated)
Net sales $134,801 $142,157
Costs and expenses:
Costs of sales 47,314 54,329
Restaurant operating expenses 62,418 68,208
Depreciation and amortization 7,483 5,973
Provision for impaired assets 19,365 --
------------ ------------
Restaurant costs and expenses 136,580 128,510
------------ ------------
Restaurant operating income (loss) (1,779) 13,647
General and administrative expenses 7,651 8,113
------------ ------------
Income (loss) from operations (9,430) 5,534
Other income, principally interest 639 861
------------ ------------
Income (loss) before income taxes (8,791) 6,395
Provision (benefit) for income taxes (3,475) 2,091
------------ ------------
Net income (loss) $ (5,316) $ 4,304
============ ============
Basic earnings (loss) per share $ (0.15) $ 0.11
============ ============
Diluted earnings (loss) per share $ (0.15) $ 0.11
============ ============
See accompanying notes.
-3-
<PAGE>
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Statements of Income
(In thousands, except for per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the thirty-six weeks ended
---------------------------------
September 7,1999 September 8,1998
---------------- ----------------
(Restated)
<S> <C> <C>
Net sales $ 409,492 $ 436,694
Costs and expenses:
Costs of sales 145,504 164,992
Restaurant operating expenses 185,135 192,622
Depreciation and amortization 21,535 17,567
Provision for impaired assets 19,365 --
--------- ---------
Restaurant costs and expenses 371,539 375,181
--------- ---------
Restaurant operating income 37,953 61,513
General and administrative expenses 24,040 21,144
--------- ---------
Income from operations 13,913 40,369
Other income, principally interest 1,219 3,689
--------- ---------
Income before income taxes 15,132 44,058
Provision for income taxes 5,583 15,150
--------- ---------
Income before cumulative effect of a change
in accounting principle 9,549 28,908
Cumulative effect of change in accounting principle -- (6,904)
--------- ---------
Net income $ 9,549 $ 22,004
========= =========
Basic earnings per share:
Income before cumulative effect of a change
in accounting principle $ 0.26 $ 0.71
Cumulative effect of change in accounting principle -- (0.17)
--------- ---------
Basic earnings per share $ 0.26 $ 0.54
========= =========
Diluted earnings per share:
Income before cumulative effect of a change
in accounting principle $ 0.26 $ 0.71
Cumulative effect of change in accounting principle -- (0.17)
--------- ---------
Diluted earnings per share $ 0.26 $ 0.54
========= =========
</TABLE>
See accompanying notes.
-4-
<PAGE>
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the thirty-six weeks ended
---------------------------------
September 7,1999 September 8,1998
---------------------------------
(Restated)
Cash flows from operating activities:
<S> <C> <C>
Net income $ 9,549 $ 22,004
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 23,112 17,567
Provision for impaired assets 19,365 --
Cumulative effect of accounting change -- 6,904
Net change in operating assets and liabilities:
Change in operating assets 5,729 (76)
Change in operating liabilities (11,662) (9,600)
----------- -----------
Net cash provided by operating activities 46,093 36,799
Cash flows from investing activities:
Purchases of property and equipment (26,970) (46,357)
Other 148 (1,585)
----------- -----------
Net cash used in investing activities (26,822) (47,942)
Cash flows from financing activities:
Net proceeds from issuance of common stock 12 997
Common stock repurchased and retired (37,774) (32,163)
----------- -----------
Net cash used in financing activities (37,762) (31,166)
Effect of exchange rate on cash 33 (2)
----------- -----------
Net decrease in cash and cash equivalents (18,458) (42,311)
Cash and cash equivalents at beginning of period 89,847 135,997
----------- -----------
Cash and cash equivalents at end of period $ 71,389 $ 93,686
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 11,353 $ 16,776
</TABLE>
See accompanying notes.
-5-
<PAGE>
LONE STAR STEAKHOUSE & SALOON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed consolidated financial statements include all
adjustments, consisting of normal, recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for the periods presented. The results of the thirty-six
weeks ended September 7, 1999 are not necessarily indicative of the results to
be expected for the full year ending December 28, 1999. This quarterly report on
Form 10-Q should be read in conjunction with the Company's audited consolidated
financial statements in its 1998 Form 10-K.
The 1998 condensed consolidated financial statements have been restated to
reflect the adoption of SOP 98-5 Reporting the Costs of Start-Up Activities.
Certain reclassifications have been made to the 1998 condensed
consolidated financial statements to conform to the 1999 presentation.
2. Comprehensive Income
Comprehensive income (loss) is comprised of the following (in thousands):
<TABLE>
<CAPTION>
For the twelve weeks ended For the thirty-six weeks ended
September 7, 1999 September 8, 1998 September 7, 1999 September 8, 1998
-------------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $(5,316) $4,304 $ 9,549 $22,004
Foreign currency translation adjustments 679 528 2,228 ( 5,462)
------- ------ -------- --------
Comprehensive income (loss) $(4,637) $4,832 $ 11,777 $16,542
======== ====== ======== =======
</TABLE>
3. Earnings Per Share
Basic earnings per share amounts are computed based on the weighted
average number of shares actually outstanding. For purposes of diluted
computations, the number of shares that would be issued from the exercise of
stock options has been reduced by the number of shares which could have been
purchased from the proceeds at the average market price of the Company's stock
or the price of the Company's stock on the exercise date if options were
exercised during the period presented.
The weighted average shares outstanding for the periods presented are as
follows (in thousands):
<TABLE>
<CAPTION>
For the twelve weeks ended For the thirty-six-weeks ended
September 7, 1999 September 8, 1998 September 7, 1999 September 8, 1998
------------------------------------ -------------------------------------
<S> <C> <C> <C> <C>
Basic average share outstanding 35,395 39,236 36,241 40,394
Diluted average share outstanding 35,395(a) 39,255 36,394 40,430
</TABLE>
(a) Basic and diluted shares outstanding are the same for the twelve-week
period ended September 7, 1999, since the diluted share computations would
be antidilutive.
-6-
<PAGE>
4. ACCOUNTING CHANGE
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5-Reporting the Costs of Start-Up Activities (the SOP), requiring
the costs related to start-up activities be expensed as incurred. Prior to 1998,
the Company capitalized certain pre-opening costs incurred in connection with
the opening of new restaurant locations. The Company adopted the provisions of
the SOP in its financial statements for the year ended December 29, 1998, and
retroactively made it effective the beginning of 1998. The effect of the
adoption of the SOP resulted in a charge for the cumulative effect of the
accounting change of $6,904, net of income taxes of $2,922 ($0.17 per share), to
expense costs that had been capitalized prior to 1998. This is reflected in the
restated condensed consolidated statements of income and cash flows for the
periods presented in 1998.
5. PROVISION FOR IMPAIRED ASSETS
In the third quarter of 1999, the Company recorded an impairment charge of
$19,365 reflecting the write-down of certain under-performing restaurants. In
accordance with the provisions of SFAS 121, the Company periodically reviews its
long-lived assets which are held and used in its restaurant operations for
indications of impairment. Based upon that review, the trends in the operations
of certain restaurants indicated that the undiscounted future cash flows from
their operations would be less than the carrying value of the long-lived assets
related to the restaurants. The charge reflects the difference between the
carrying value of the related restaurant property and equipment and the fair
value of the assets based on discounted estimated future cash flows.
6. TREASURY STOCK TRANSACTIONS
In August 1999, the Board of Directors authorized the Company to purchase
up to 3,500,000 shares of the Company's common stock in the open market or in
privately negotiated transactions. The 1999 action along with similar
authorizations in 1998 brings the total shares authorized for repurchase to
9,400,000 shares. Pursuant to the authorizations, the Company purchased
4,093,000 shares of its common stock during the thirty-six weeks ended September
7, 1999, at an average price of $9.23 per share. The Company is accounting for
the purchases using the constructive retirement method of accounting wherein the
aggregate par value of the stock is charged to the common stock account and the
excess of cost over par value is charged to paid-in capital.
7. STOCK OPTIONS
During the thirty-six week period ended September 7, 1999, the Company
granted stock options for 581,600 shares of Common Stock at exercise prices
ranging from $6.69 to $8.38 per share pursuant to its 1992 stock option plan for
employees.
8. RETIREMENT PLANS
In August 1999, the Company approved the adoption of two plans, which will
provide retirement benefits to the participants. The salary reduction plans
are provided through a qualified 401(k) plan and a non-qualified deferred
compensation plan (the Plans). Under the Plans, employees who meet minimum
service requirements and elect to participate, may make contributions of their
annual salaries of up to 15% under the 401(k) plan and up to 20% under the
deferred compensation plan. The Company is required to make a matching
contribution equal to 50% of the employee's contribution. The Company may make
additional contributions at the discretion of the Board of Directors. The
Plans are effective beginning October 7, 1999.
-7-
<PAGE>
9. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133 (SFAS 133), Accounting for
Derivative Instruments and Hedging Activities, which is required to be adopted
in years beginning after June 15, 2000. The Company expects to adopt SFAS 133
effective January 2, 2001. SFAS 133 will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives not considered
hedges must be adjusted to fair value through income. If a derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedged
asset, liability or firm commitment through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company does not anticipate the adoption of SFAS 133
will have a significant effect on its results of operations or financial
position.
-8-
<PAGE>
LONE STAR STEAKHOUSE & SALOON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto included elsewhere in this Form 10-Q.
In May 1998, the Company temporarily suspended development of new Lone
Star restaurants other than properties which had been committed for or were
under construction. During 1998, the Company substantially completed
remodel/construction of twelve additional restaurants (including one that was
damaged by fire and then rebuilt), and anticipates opening two of these
restaurants in late 1999 and the remainder in 2000. The Company opened 45
restaurants in 1995, 45 restaurants in 1996, 60 restaurants in 1997, and two in
1998. As of September 7, 1999, the Company had not opened any new restaurants,
but had development sites available for eight additional restaurants, six of
which were acquired in 1999 by purchase and two by lease. The Company does not
anticipate that any of the eight sites will be constructed or opened in 1999.
During the second quarter of 1999, the Company closed two underperforming
domestic Lone Star restaurants. As of September 7, 1999, there were 264
operating domestic Lone Star restaurants.
Although, the Company believes considerable opportunities exist in the
upscale steakhouse market, the Company has temporarily curtailed the development
of its upscale steakhouse concepts. Future development will be evaluated on a
site-by-site basis. There are no current commitments to open additional upscale
units beyond the two Del Frisco's restaurants and one Sullivan's restaurant
scheduled to open in the first half of 2000.
The Company is currently operating three Del Frisco's restaurants and has
two additional restaurants under construction; one with approximately 16,000
square feet of space in Rockefeller Plaza in New York City and one in Las Vegas,
Nevada. The Company expects to open both of these restaurants in the first half
of 2000.
As of September 7, 1999, the Company was operating fourteen Sullivan's
steakhouse restaurants. In the first three quarters of 1999, Sullivan's
steakhouse restaurants were opened in Denver, Colorado; Palm Desert, California
and Raleigh, North Carolina. The Company expects to open a Sullivan's restaurant
in the first half of 2000 in Tucson, Arizona.
Internationally, there are 41 Lone Star Steakhouse & Saloon restaurants,
40 in Australia, operated through a joint venture, and one in Guam operated by a
licensee. Although there are currently no plans for further international
development, the Company believes that all of its concepts have international
development potential.
-9-
<PAGE>
LONE STAR STEAKHOUSE & SALOON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated (i) the
percentages which certain items included in the condensed consolidated statement
of operations bear to net sales, and (ii) other selected operating data:
<TABLE>
<CAPTION>
Twelve Weeks Ended (1) Thirty-six Weeks Ended (1)
September 7, September 8, September 7, September 8,
1999 1998 1999 1998
---- ---- ---- ----
(dollars in thousands)
Income Statement Data:
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales 35.1 38.2 35.5 37.8
Restaurant operating expenses 46.3 48.0 45.2 44.1
Depreciation and amortization 5.5 4.2 5.3 4.0
Provision for impaired assets 14.4 - 4.7 -
----- ---- ---- ----
Restaurant costs and expenses 101.3 90.4 90.7 85.9
----- ---- ---- ----
Restaurant operating income (loss) (1.3) 9.6 9.3 14.1
General and administrative expenses 5.7 5.7 5.9 4.9
----- ---- ---- ----
Income (loss) from operations (7.0) 3.9 3.4 9.2
Other income, principally interest 0.5 0.6 0.3 0.9
----- ---- ---- ----
Income (loss) before provision for income taxes (6.5) 4.5 3.7 10.1
Provision (benefit) for income taxes (2.6) 1.5 1.4 3.5
----- ---- ---- ----
Income before cumulative effect of change
in accounting principle (3.9) 3.0 2.3 6.6
Cumulative effect of change in accounting principle - - - (1.6)
----- ---- ---- ----
Net income (loss) (3.9)% 3.0% 2.3% 5.0%
===== ==== ==== ====
Restaurant Operating Data:
Average sales per restaurant on an annualized basis (2) $ 1,810 $ 1,955 $ 1,830 $ 2,031
Number of restaurants at end of the period 324 318 324 318
</TABLE>
(1) The Company operates on a fifty-two or fifty-three week fiscal year ending
the last Tuesday in December. The fiscal quarters for the Company consist
of accounting periods of twelve, twelve, twelve and sixteen or seventeen
weeks, respectively.
(2) Average sales per restaurant on an annualized basis are computed by
dividing a restaurant's total sales for full accounting periods open
during the reporting period, and annualizing the result.
-10-
<PAGE>
LONE STAR STEAKHOUSE & SALOON, INC.
TWELVE WEEKS ENDED SEPTEMBER 7, 1999 COMPARED TO TWELVE WEEKS ENDED SEPTEMBER 8,
1998
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales decreased $7,356 (5.2%) to $134,801 for the twelve weeks ended
September 7, 1999, compared to $142,157 for the twelve weeks ended September 8,
1998, principally attributable to a decline in average sales per restaurant
resulting from lower customer counts during the period. The decrease was
partially offset by additional sales of $2,702 from one new Lone Star restaurant
in Australia, and four Sullivan's restaurants opened since September 1998.
Costs of sales, primarily food and beverages, decreased as a percentage of
sales to 35.1% from 38.2% due primarily to improved margins as the result of
lower promotional discounting of menu prices and lower beef prices. During 1999,
the Company began to purchase beef under contracted prices that cover
approximately 70% of the Company's estimated usage for the remainder of the
year.
Restaurant operating expenses for the twelve weeks ended September 7, 1999
decreased $5,790 from $68,208 in the twelve weeks ended September 8, 1998 to
$62,418 and decreased as a percentage of net sales from 48.0% to 46.3%. The
decreases were the result of improved operating efficiencies with reductions in
the costs of hourly labor, building and maintenance expenses and operating
supplies. In addition, the fiscal 1998 period includes the costs incurred in
connection with a national advertising campaign, which was not renewed during
fiscal 1999. The decreases in fiscal 1999 were offset in part by increased costs
for manager salaries, manager training expenses and certain uninsured claim
amounts.
Depreciation and amortization increased $1,510 (25.3%) in the twelve weeks
ended September 7, 1999 over the twelve weeks ended September 8, 1998. The
increase is attributable primarily to the restaurants opened since September
1998 and depreciation beginning in fiscal 1999 related to the installation of
new point-of-sale systems.
General and administrative expenses decreased $462 (5.7%) as compared to
fiscal 1998. The decrease was attributable to elimination in fiscal 1999 of
expenses incurred for national advertising production costs and in the reduction
of certain professional fees. The reduction of these costs were offset in part
by increases in the fiscal 1999 period for costs associated with the
installation of the new point-of-sale systems and the new database information
systems.
Provision for impaired assets of $19,365 reflects the charge made in the
twelve weeks ended September 7, 1999 for the write down of certain
under-performing restaurants. The Company periodically reviews its long-lived
assets on a store-by-store basis for indications of impairment.
Other income, principally interest, for the twelve weeks ended September
7, 1999 was $639 as compared to $862 in 1998. The decrease is attributable to
reduced funds available for short-term investment purposes.
The effective income tax rates for the twelve weeks ended September 7,
1999 and the twelve weeks ended September 8, 1998 were 39.5% and 32.7%,
respectively. The increase in the effective tax rate is due primarily to
valuation allowances provided related to certain Australian losses.
-11-
<PAGE>
LONE STAR STEAKHOUSE & SALOON, INC.
THIRTY-SIX WEEKS ENDED SEPTEMBER 7, 1999 COMPARED TO THIRTY-SIX WEEKS ENDED
SEPTEMBER 8, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales decreased $27,202 (6.2%) to $409,492 for the thirty-six weeks
ended September 7, 1999 compared to $436,694 for the thirty-six weeks ended
September 8, 1998, principally attributable to a decline in average sales per
restaurant resulting from lower customer counts during the period. The decrease
was partially offset by additional sales of $5,429 from one new Lone Star
restaurant in Australia, and four Sullivan's restaurants opened since September
1998.
Costs of sales, primarily food and beverages, decreased as a percentage of
sales to 35.5% from 37.8% due primarily to improved margins as the result of
lower promotional discounting of menu prices and lower beef prices. During 1999,
the Company began to purchase beef under contracted prices that cover
approximately 70% of the Company's estimated usage for the remainder of the
year.
Restaurant operating expenses for the thirty-six weeks ended September 7,
1999 decreased $7,487 from $192,622 in the thirty-six weeks ended September 8,
1998 to $185,135, and increased as a percentage of net sales from 44.1% to
45.2%. The absolute dollar amounts reflect the impact of increased operating
costs for the new restaurants opened since September 1998, as well as increased
costs related to manager training expenses and certain uninsured claim amounts.
The increases were partially offset by decreases in hourly labor costs related
to cost control measures taken to improve operating efficiencies at the
restaurants and by decreases in costs for operating supplies and building and
equipment maintenance expenses. In addition, the fiscal 1998 period includes the
costs incurred in connection with a national advertising campaign, which was not
renewed during fiscal 1999. The increase as a percentage of sales primarily
reflects the fixed cost components of restaurant operating expenses on lower
average restaurant sales experienced in the fiscal 1999 period.
Depreciation and amortization increased $3,968 (22.6%) in the thirty-six
weeks ended September 7, 1999 over the thirty-six weeks ended September 8, 1998.
The increase is attributable primarily to the restaurants opened since September
of 1998 and depreciation beginning in 1999 related to the installation of new
point-of-sale systems.
Provision for impaired assets of $19,365 reflects the charge made in the
twelve weeks ended September 7, 1999 for the write down of certain
under-performing restaurants. The Company periodically reviews its long-lived
assets on a store-by-store basis for indications of impairment.
General and administrative expenses increased $2,896 (13.7%) as compared
to 1998. The increase in general and administrative expenses was attributable
primarily to increased (i) travel costs incurred in connection with restaurant
operation review programs (ii) recruiting costs related to the recruitment of
new managers and (iii) costs related to expenses incurred in connection with the
installation of the new point-of-sale systems as well as the new database
information systems. The increases in general and administrative costs were
partially offset by decreases attributable to (i) the elimination in fiscal 1999
of expenses incurred for national advertising production costs and (ii) the
reduction of certain professional fees.
Other income, principally interest, for the thirty-six weeks ended
September 7, 1999 was $1,219 as compared to $3,689 in 1998. The decrease is
attributable to reduced funds available for short-term investment purposes.
The effective income tax rates for the thirty-six weeks ended September 7,
1999 and the thirty-six weeks ended September 8, 1998 were 36.9% and 35.7%,
respectively. The increase in the effective tax rate is due primarily to
valuation allowances provided in fiscal 1999 related to certain Australian
losses.
-`2-
<PAGE>
The cumulative effect of change in accounting principle represents the
effect of adoption of Statement of Position 98-5, "Reporting on Costs of Start
Up Activities". The adoption of this statement impacted accounting for
pre-opening costs and as a result the Company began to report pre-opening costs
as a component of restaurant operating expenses effective December 30, 1997. The
cumulative effect of the change in accounting of $6,904, net of taxes, was
recorded as a one-time charge in the first quarter of 1998.
-13-
<PAGE>
LONE STAR STEAKHOUSE & SALOON, INC.
IMPACT OF INFLATION
The primary inflationary factors affecting the Company's operations
include food and labor costs. A large 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. Since
the majority of personnel are tipped employees, minimum wage changes will have
little effect on labor costs. As costs of food and labor have increased, the
Company has historically been able to offset these increases through economies
of scale, although there is no assurance that such offsets will continue. To
date, inflation has not had a material impact on operating margins.
Year 2000 Computer Issue
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company has instituted a year 2000 project to prepare its computer
systems and communication systems for the year 2000. The project includes
identification and assessment of all software, hardware and equipment that could
potentially be affected by the year 2000 issue and remedial action and further
testing, if necessary.
In the fourth quarter of 1998, the Company committed to a program to
install new point-of-sale devices and systems in most of its restaurants. In
addition, the Company committed to installing a new data base information system
that will provide significant enhancements to its capabilities to process and
analyze data provided by the new point-of-sale systems. These systems have now
been fully implemented. The hardware and software providers of the new systems
have warranted that the new systems are year 2000 compliant. The Company has
substantially completed the modifications and replacement of its software,
hardware and equipment which it will continue to utilize with the new systems
and believes such systems are substantially year 2000 compliant.
The Company's plan to resolve the year 2000 issue involves the following
four phases: assessment, remediation, testing, and implementation. To date, the
Company has fully completed its assessment of all systems that, it believes,
could be significantly affected by the year 2000. In addition, the Company is
gathering information about the year 2000 compliance status of its significant
suppliers and service providers and continues to monitor their compliance.
For its information technology exposures, the Company has completed the
remediation and software reprogramming and replacement phases. Once software is
reprogrammed or replaced for a system, the Company begins testing and
implementation. These phases run concurrently for different systems. To date,
the Company has completed its testing and implemented 100% of its remediated
systems. Completion of the testing phase for all significant systems was
completed in July 1999 and all significant systems have been fully tested.
-14-
<PAGE>
The Company has queried its significant suppliers and service providers
(external agents) that do not share information systems with the Company. To
date, the Company is not aware of any external agent with a year 2000 issue that
would materially impact the Company's results of operations, liquidity, or
capital resources. However, the Company has no means of ensuring that external
agents will be year 2000 ready. The inability of external agents to complete
their year 2000 resolution process in a timely fashion could materially impact
the Company. The effect of non-compliance by external agents is not
determinable.
The Company has utilized both internal and external resources to
reprogram, replace, test and implement the software and hardware equipment for
year 2000 modifications. The total cost of the year 2000 issue was not
significant and the Company expensed most of the costs. The costs do not include
the costs of the new point-of-sale devices and systems and the costs of
equipment, software, and installation of the new data base information system
previously discussed.
Management of the Company believes it has an effective program in place to
resolve the year 2000 issue in a timely manner In the event that the Company's
efforts to prepare and deal with the year 2000 issue are not substantially
successful in a timely manner, the Company might be unable to process
transactional and financial reporting information. In addition, disruptions in
the economy generally resulting from the year 2000 issues could also materially
adversely affect the Company. The Company could be subject to litigation for
computer systems product failure, for example, equipment shutdown or failure to
properly date business records. The amount of potential liability and lost
revenue cannot be reasonably estimated at this time.
The Company is considering contingency plans for certain critical
applications and is working on such plans for others. These contingency plans
involve, among other actions, alternate vendors where available, manual
workarounds, increasing inventories, and adjusting staffing strategies.
-15-
<PAGE>
LONE STAR STEAKHOUSE & SALOON, INC.
LIQUIDITY AND CAPITAL RESOURCES (DOLLAR AMOUNTS IN THOUSANDS)
The following table presents a summary of the Company's cash flows for
each of the thirty-six weeks ended September 7, 1999 and September 8, 1998.
<TABLE>
<CAPTION>
Thirty-six weeks ended
September 7, 1999 September 8, 1998
(Restated)
<S> <C> <C>
Net cash provided by operating activities.............. $ 46,093 $ 36,799
Net cash used in investment activities................. (26,822) (47,942)
Net cash used in financing activities.................. (37,762) (31,166)
Effect of exchange rate on cash........................ 33 (27)
--------- ---------
Net decrease in cash................................... $ (18,458) $ (42,311)
========= =========
</TABLE>
During the thirty-six week period ended September 7, 1999, the Company's
investment in property and equipment was $26,970.
The Company does not have significant receivables or inventory and
receives trade credit based upon negotiated terms in purchasing food and
supplies. Because funds available from cash sales are not needed immediately to
pay for food and supplies, or to finance inventory, they may be considered a
source of financing for non-current capital expenditures.
At September 7, 1999, the Company had $71,389 in cash and cash
equivalents. While the Company has not established a credit facility, the
Company believes it could establish a facility on suitable terms. The Company is
not actively negotiating to purchase or lease additional restaurant sites.
During 1999 and 1998, the Company's Board of Directors authorized
the purchase of up to 9,400,000 shares of the Company's common stock from time
to time in the open market or in privately negotiated transactions. During the
current year, the Company has purchased 4,093,000 shares at a cost of $37,774
and since inception of the program it has purchased 6,703,000 shares with a
cumulative cost of approximately $74,149.
In August 1999, the Company approved the adoption of two plans, which will
provide retirement benefits to its participants. The salary reduction plans are
provided through a qualified 401(k) plan and a non-qualified deferred
compensation plan (the Plans). Under the Plans, employees who meet minimum
service requirements and elect to participate, may make contributions of their
annual salaries of up to 15% under the 401(k) plan and up to 20% under the
deferred compensation plan. The Company is required to make a matching
contribution equal to 50% of the employee's contribution. The Company may make
additional contributions at the discretion of the Board of Directors. The Plans
are effective beginning October 7, 1999.
Beginning in the fourth quarter of 1998, the Company began utilizing
derivative financial instruments in the form of commodity futures contracts to
manage market risks and reduce its exposure resulting from fluctuations in the
prices of meat. The Company uses live beef cattle futures contracts to
accomplish its objective. 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 have not
been significant. As of September 7, 1999, the Company's exposure for open
positions in futures contracts was not significant.
-16-
<PAGE>
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, amended. Stockholders are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to open new restaurants, general market
conditions, competition and pricing. Although the Company believes the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements contained in the report will
prove to be accurate.
Item 3. Quantitative and Qualitative Disclosure of Market Risk
Not applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
(a) Exhibit 27 .....................Financial Data Schedule
(b) Forms on 8-K..... .............None
-7-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
LONE STAR STEAKHOUSE & SALOON, INC.
(Registrant)
Date: October 22, 1999 /s/ John D. White
----------------------------------------
John D. White
Chief Financial and Principal Accounting
Officer, Executive Vice President,
Treasurer and Director
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 7, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1999
<PERIOD-START> JUN-16-1999
<PERIOD-END> SEP-07-1999
<CASH> 71,308
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 11,876
<CURRENT-ASSETS> 88,223
<PP&E> 449,679
<DEPRECIATION> 0
<TOTAL-ASSETS> 570,936
<CURRENT-LIABILITIES> 38,818
<BONDS> 0
0
0
<COMMON> 345
<OTHER-SE> 527,111
<TOTAL-LIABILITY-AND-EQUITY> 570,936
<SALES> 134,801
<TOTAL-REVENUES> 134,801
<CGS> 47,314
<TOTAL-COSTS> 136,580
<OTHER-EXPENSES> 7,651
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 639
<INCOME-PRETAX> (8,791)
<INCOME-TAX> (3,475)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,316)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
