UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For quarter ended Commission file number
June 15, 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 July 23, 1999
Common Stock, $.01 par value 35,721,366 shares
<PAGE>
Lone Star Steakhouse & Saloon, Inc.
Index
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at June 15, 1999 and December 29, 1998 2
Condensed Consolidated Statements of
Income for the twelve weeks ended
June 15, 1999 and June 16, 1998 3
Condensed Consolidated Statements of
Income for the twenty-four weeks ended
June 15, 1999 and June 16, 1998 4
Condensed Consolidated Statements of
Cash Flows for the twenty-four weeks ended
June 15, 1999 and June 16, 1998 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative
Disclosure about Market Risks 15
PART II. OTHER INFORMATION
Items 1 through 3 and Item 5 have been omitted
since the items are either inapplicable or the
answer is negative
Item 4. Submission of matters to a vote of stockholders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature page 17
-1-
<PAGE>
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 15,1999 December 29, 1998
------------ -----------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 64,152 $ 89,847
Inventories 13,581 15,894
Other current assets 5,538 6,565
--------- ---------
Total current assets 83,271 112,306
Property and equipment, net 474,047 461,065
Intangible and other assets, net 34,387 35,212
--------- ---------
Total assets $ 591,705 $608,583
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,983 $ 10,545
Other current liabilities 29,313 34,168
--------- ---------
Total current liabilities 36,296 44,713
Deferred income taxes 12,406 10,429
Stockholders' Equity:
Preferred stock
Common stock 358 386
Additional paid-in capital 287,542 314,366
Retained earnings 263,387 248,522
Accumulated other comprehensive income (loss) (8,284) (9,833)
--------- --------
Total stockholders' equity 543,003 553,441
--------- --------
Total liabilities and stockholders' equity $ 591,705 $608,583
========= ========
</TABLE>
See accompanying notes.
-2-
<PAGE>
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Statements of Income
(In thousands, except for per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the twelve weeks ended
-----------------------------------------------------------------
June 15,1999 June 16,1998
----------------------------- ---------------------------------
(Restated)
<S> <C> <C>
Net sales $ 134,753 $ 141,023
Costs and expenses:
Costs of sales 47,805 53,448
Restaurant operating expenses 61,087 62,713
Depreciation and amortization 6,819 5,882
------------ ------------
Restaurant costs and expenses 115,711 122,043
------------ ------------
Restaurant operating income 19,042 18,980
General and administrative expenses 8,101 7,589
------------ ------------
Income from operations 10,941 11,391
Other income, principally interest 333 1,373
------------ ------------
Income before income taxes 11,274 12,764
Provision for income taxes 4,191 4,287
------------ ------------
Net Income $ 7,083 8,477
============ ============
Basic earnings per share $ 0.20 $ 0.21
============ ============
Diluted earnings per share $ 0.20 $ 0.21
============ ============
</TABLE>
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 twenty-four weeks ended
-----------------------------------------------------------------
June 15,1999 June 16,1998
----------------------------- ---------------------------------
(Restated)
<S> <C> <C>
Net sales $ 274,691 $ 294,537
Costs and expenses:
Costs of sales 98,191 110,663
Restaurant operating expenses 122,717 124,414
Depreciation and amortization 14,051 11,594
----------- ------------
Restaurant costs and expenses 234,959 246,671
----------- ------------
Restaurant operating income 39,732 47,866
General and administrative expenses 16,390 13,031
----------- ------------
Income from operations 23,342 34,835
Other income, principally interest 580 2,828
----------- ------------
Income before income taxes 23,922 37,663
Provision for income taxes 9,057 13,059
----------- ------------
Income before cumulative effect of a change
in accounting principle 14,865 24,604
Cumulative effect of change in accounting principle - (6,904)
----------- ------------
Net Income $ 14,865 $ 17,700
=========== ============
Basic earnings per share:
Income before cumulative effect of a change
in accounting principle $ 0.41 $ 0.60
Cumulative effect of change in accounting principle - (0.17)
----------- ------------
Basic earnings per share $ 0.41 $ 0.43
=========== ============
Diluted earnings per share:
income before cumulative effect of a change
in accounting principle $ 0.40 $ 0.60
Cumulative effect of change in accounting principle - (0.17)
----------- ------------
Diluted earnings per share $ 0.40 $ 0.43
=========== ============
</TABLE>
See accompanying notes.
-4-
<PAGE>
LONE STAR STEAKHOUSE & SALOON, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the twenty-four weeks ended
---------------------------------------------------
June 15,1999 June 16,1998
----------------------------- -------------------
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,865 $ 17,700
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 14,881 11,594
Cumulative effect of accounting change - 6,904
Net change in operating assets and liabilities:
Change in operating assets 3,387 (1,667)
Change in operating liabilities (6,440) (10,946)
-------- -----------
Net cash provided by operating activities 26,693 23,585
Cash flows from investing activities:
Purchases of property and equipment (25,344) (32,735)
Other (240) (431)
-------- -----------
Net cash used in investing activities (25,584) (33,166)
Cash flows from financing activities:
Net proceeds from issuance of common stock 12 997
Common stock repurchased and retired (26,864) (24,959)
-------- -----------
Net cash provided by (used in) financing activities (26,852) (23,962)
Effect of exchange rate on cash 48 (10)
-------- -----------
Net decrease in cash and cash equivalents (25,695) (33,553)
Cash and cash equivalents at beginning of period 89,847 135,997
-------- -----------
Cash and cash equivalents at end of period $ 64,152 $ 102,444
======== ===========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 7,316 $ 1,504
</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 twenty-four
weeks ended June 15, 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 is comprised of the following (in thousands):
<TABLE>
<CAPTION>
For the twelve weeks ended For the twenty-four weeks ended
-------------------------- -------------------------------
June 15, 1999 June 16, 1998 June 15, 1999 June 16, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Income $7,083 $8,477 $14,865 $17,700
Foreign currency translation adjustments 616 (7,746) 1,549 ($5,990)
------- ------ ------- -------
$7,699 $ 731 $16,414 $11,710
====== ====== ========= =======
</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 twenty-four weeks ended
-------------------------- -------------------------------
June 15, 1999 June 16, 1998 June 15, 1999 June 16, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic average share outstanding 35,813 40,780 36,663 40,973
Basic average share outstanding 36,078 41,060 36,845 41,323
</TABLE>
-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 $6,904,000, net of income taxes of $2,922,000 ($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.
Treasury Stock Transactions
- ---------------------------
In 1998, the Board of Directors authorized the Company to purchase up to
5,900,000 shares of the Company's common stock in the open market or in
privately negotiated transactions. Pursuant to the authorization, the Company
purchased 2,798,000 shares of its common stock during the twenty-four weeks
ended June 15, 1999 at an average price of $9.60 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.
5. 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 the new
Statement effective January 2, 2001. The Statement 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 the
Statement will have a significant effect on its results of operations or
financial position.
-7-
<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 rebuilt), and anticipates opening all twelve in 1999. The
Company opened 45 restaurants in 1995, 45 restaurants in 1996, 60 restaurants in
1997, and two in 1998. As of June 15, 1999, the Company had not opened any new
restaurants, but had development sites available for eight additional
restaurants, six of which were acquired 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 June 15, 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 with no current commitments to open additional upscale units
beyond the two Del Frisco's restaurants and three Sullivan's restaurants
scheduled to open in 1999, described below.
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 1999.
As of June 15, 1999 the Company was operating twelve Sullivan's steakhouse
restaurants. In the first quarter of 1999 restaurants were opened in Denver,
Colorado and Palm Desert, California. In the second quarter the Company opened a
Sullivan's restaurant in Chicago, Illinois. The Company expects to open two more
Sullivan's restaurants in 1999 in Raleigh, North Carolina and 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.
-8-
<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 income bear to net sales, and (ii) other selected operating data:
<TABLE>
<CAPTION>
Twelve Weeks Ended (1) Twenty-four Weeks Ended (1)
June 15, June 16, June 15, June 16,
1999 1998 1999 1998
---- ---- ---- -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Income Statement Data:
Net Sales 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales.................................. 35.5 37.9 35.7 37.6
Restaurant operating expenses................... 45.3 44.4 44.7 42.3
Depreciation and amortization................... 5.1 4.2 5.1 3.9
----- ---- ---- -----
Restaurant costs and expenses................ 85.9 86.5 85.5 83.8
----- ---- ---- -----
Restaurant operating income........................... 14.1 13.5 14.5 16.2
General and administrative expenses................... 6.0 5.4 6.0 4.4
----- ---- ---- -----
Income from operations................................ 8.1 8.1 8.5 11.8
Other income, principally interest.................... 0.3 1.0 0.2 1.0
----- ---- ---- -----
Income before provision for income taxes.............. 8.4 9.1 8.7 12.8
Provision for income taxes............................ 3.1 3.1 3.3 4.4
----- ---- ---- -----
Income before cumulative effect of change
in accounting principle......................... 5.3 6.0 5.4 8.4
Cumulative effect of change in accounting principle... -- -- -- (2.4)
--- --- --- -----
Net Income............................................ 5.3% 6.0% 5.3% 6.0%
===== ===== ==== =====
Restaurant Operating Data:
Average sales per restaurant on an annualized basis (2) $1,811 $1,945 $1,843 $2,044
Number of restaurants at end of the period 322 315 322 315
</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.
-9-
<PAGE>
Lone Star Steakhouse & Saloon, Inc.
Twelve Weeks Ended June 15, 1999 Compared to Twelve Weeks Ended June 16, 1998
(Dollar amounts in thousands)
Net sales decreased $6,270 (4.4%) to $134,753 for the twelve weeks ended
June 15, 1999 compared to $141,023 for the twelve weeks ended June 15, 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 $6,589 from 2 new Lone Star restaurants in Australia, and
7 Sullivan's restaurants opened since June 1998.
Costs of sales, primarily food and beverages, decreased as a percentage of
sales to 35.5% from 37.9% 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 June 15, 1999
decreased $1,626 from $62,713 in the twelve weeks ended June 16, 1998 to $61,087
and increased as a percentage of net sales from 44.4% to 45.3%. The absolute
dollar amounts reflect the impact of increased operating costs for the new
restaurants opened since June 1998, as well as increased costs related to
manager training expenses and certain uninsured claim amounts. The increases
were partially offset by decreases in labor costs related to cost control
measures taken to improve operating efficiencies at the restaurants and by a
decrease in building and equipment maintenance expenses. 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 quarter.
Depreciation and amortization increased $937 (15.9%) in the twelve weeks
ended June 15, 1999 over the twelve weeks ended June 16, 1998. The increase is
attributable primarily to the restaurants opened since June of 1998 and
depreciation beginning in fiscal 1999 related to the installation of new point
of sale systems.
General and administrative expenses increased $512 (6.7%) as compared to
1998. The increases in general and administrative expenses were attributable
primarily to costs related to the recruitment of new managers and increased
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.
Other income, principally interest, for the twelve weeks ended June 15,
1999 was $333 as compared to $1,373 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 June 15, 1999
and the twelve weeks ended June 16, 1998 were 37.1% and 33.6%, respectively. The
increase in the effective tax rate is due primarily to valuation allowances
provided in fiscal 1999 related to certain Australian losses.
-10-
<PAGE>
Lone Star Steakhouse & Saloon, Inc.
Twenty-four Weeks Ended June 15, 1999 Compared to Twenty-four Weeks Ended
June 16, 1998
(Dollar amounts in thousands)
Net sales decreased $19,846 (6.7%) to $274,691 for the twelve weeks ended
June 15, 1999 compared to $294,537 for the twenty-four weeks ended June 16, 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 $14,217 from 2 new Lone Star restaurants in Australia,
and 7 Sullivan's restaurants opened since June 1998.
Costs of sales, primarily food and beverages, decreased as a percentage of
sales to 35.7% from 37.6% 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 twenty-four weeks ended June 15,
1999 decreased $1,697 from $124,414 in the twenty-four weeks ended June 16, 1998
to $122,717 and increased as a percentage of net sales from 42.3% to 44.7%. The
absolute dollar amounts reflect the impact of increased operating costs for the
new restaurants opened since June 1998, as well as increased costs related to
manager training expenses and certain uninsured claim amounts. The increases
were partially offset by decreases in labor costs related to cost control
measures taken to improve operating efficiencies at the restaurants and by a
decrease in building and equipment maintenance expenses. 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 quarter.
Depreciation and amortization increased $2,457 (21.2%) in the twenty-four
weeks ended June 15, 1999 over the twenty-four weeks ended June 16, 1998. The
increase is attributable primarily to the restaurants opened since June of 1998
and depreciation beginning in 1999 related to the installation of new point of
sale systems.
General and administrative expenses increased $3,359 (25.8%) as compared
to 1998. The increases in general and administrative expenses were attributable
primarily to increased legal costs, increased travel and recruiting costs
related to the recruitment of new managers and increased 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. Various other costs
increased as a result of the variable costs associated with the increase in the
number of restaurants opened since June 1998.
Other income, principally interest, for the twenty-four weeks ended June
15, 1999 was $580 as compared to $2,828 in 1998. The decrease is attributable to
reduced funds available for short term investment purposes.
The effective income tax rates for the twenty-four weeks ended June 15,
1999 and the twenty-four weeks ended June 16, 1998 were 37.9% and 36.4%,
respectively. The increase in the effective tax rate is due primarily to
valuation allowances provided in fiscal 1999 related to certain Australian
losses.
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 31, 1997. The
cumulative effect of the change in accounting of $6,904,000, net of taxes was
recorded on a one time charge in the first quarter of 1998.
-11-
<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 is 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. The Company expects these systems to
be fully implemented by September 30,1999. The hardware and software providers
of the new systems have warranted that the new systems are Year 2000 compliant.
The Company believes that certain existing software, hardware and equipment
which will continue to be utilized with the new systems are substantially Year
2000 compliant, but will require some modification and replacement; however, if
such modifications and replacements are not made, or are not completed timely,
the Year 2000 issue could have a significant impact on the operations of the
Company.
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. The completed assessment
indicated that certain parts of the Company's significant information technology
systems could be affected, particularly the financial reporting systems. 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.
-12-
<PAGE>
For its information technology exposures, to date the Company estimates
that it is 90% complete on the remediation phase and expects to complete
software reprogramming and replacement no later than July 31, 1999. 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 95% of its testing and has implemented 90% of
its remediated systems. Completion of the testing phase for all significant
systems is expected by July 31, 1999, with all recommended systems fully tested
and implemented by August 31, 1999, with 100% completion targeted for September
30, 1999.
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 will utilize 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 is estimated to
be less than $100,000 and the Company expects that most of the costs will be
expensed. All costs are being funded through operating cash flow. The projected
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. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 project. In the event
that the Company does not complete any additional phases, 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 has contingency plans for certain critical applications and is
working on such plans for others. These contingency plans involve, among other
actions, manual workarounds, increasing inventories, and adjusting staffing
strategies.
-13-
<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 twenty-four weeks ended June 15, 1999 and June 16, 1998.
Twenty-four weeks ended
-----------------------
June 15, 1999 June 16, 1998
-------------- (Restated)
---------
Net cash provided by operating activities $ 26,693 $ 23,585
Net cash used in investment activities (25,584) (33,166)
Net cash used in financing activities (26,852) (23,962)
Effect of exchange rate on cash 48 (10)
--------- -------
Net decrease in cash $(25,695) $(33,553)
======== ========
During the twenty-four week period ended June 15, 1999, the Company's
investment in property and equipment was $25,344.
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 as a
source of financing for non-current capital expenditures.
At June 15, 1999, the Company had $64,152 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 of additional restaurant sites.
During 1998, the Company's Board of Directors authorized the purchase of
up to 5,900,000 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 2,798,000 shares at a cost of $26,864 and since
inception of the program it has purchased 5,408,000 shares with a cumulative
cost of approximately $63,239.
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 June 15, 1999, the Company's exposure for open positions
in futures contracts was not significant.
-14-
<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 about Market Risks
----------------------------------------------------------
Not Applicable
-15-
<PAGE>
LONE STAR STEAKHOUSE & SALOON, INC.
Item 4. Submission of Matters to a Vote of Stockholders
-----------------------------------------------
On May 27, 1999, the Company held its Annual Meeting of Stockholders (the
"Meeting"). At the Meeting the stockholders elected Michael J. Archer and Fred
B. Chaney to the Board of Directors to serve until the 2002 Annual Meeting of
Stockholders and until their succesors have been duly elected and qualified. As
to the newly elected Directors, there were 32,268,056 votes "For" and 489,701
votes "Withheld" for Michael J. Archer and 32,323,452 votes "For" and 434,306
votes "Withheld" for Fred B. Chaney. In addition, the stockholders ratified the
appointment of Ernst & Young LLP as the Company's independent auditors for the
year ending December 28, 1999. As to the ratification of auditors there were
32,702,523 votes "For" 37,167 votes "Against", and 18,068 votes "Abstained.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits:
(a) Exhibit 27 .....................Financial Data Schedule
(b) Forms on 8-K..................None
-16-
<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 July 30, 1999 /s/John D. White
----------------------------------------
Chief Financial and Principal Accounting
Officer, Executive Vice President,
Treasurer and Director
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED JUNE 15, 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> DEC-30-1998
<PERIOD-END> JUN-15-1999
<CASH> 64,152
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 13,581
<CURRENT-ASSETS> 83,271
<PP&E> 474,047
<DEPRECIATION> 0
<TOTAL-ASSETS> 591,705
<CURRENT-LIABILITIES> 36,296
<BONDS> 0
0
0
<COMMON> 358
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<TOTAL-LIABILITY-AND-EQUITY> 391,705
<SALES> 274,691
<TOTAL-REVENUES> 274,691
<CGS> 98,191
<TOTAL-COSTS> 234,959
<OTHER-EXPENSES> 16,390
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 580
<INCOME-PRETAX> 23,922
<INCOME-TAX> 9,057
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<NET-INCOME> 14,865
<EPS-BASIC> 0.41
<EPS-DILUTED> 0.40
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