sec document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended Commission file number
September 5, 2006 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 by check mark whether the Registrant is a large accelerated
filer an accelerated filer or a non-accelerated filer. See definition of
"accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange
Act.
LARGE ACCELERATED FILER / / ACCELERATED FILER /X/ NON-ACCELERATED FILER / /
Indicate by check mark whether the registrant is a shell Company (as
defined in Rule 12b-2 of the Exchange Act).
/ / YES /X/ 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 9, 2006
COMMON STOCK, $.01 PAR VALUE 21,434,908 SHARES
LONE STAR STEAKHOUSE & SALOON, INC.
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS 2
AT SEPTEMBER 5, 2006 AND DECEMBER 27, 2005
CONDENSED CONSOLIDATED STATEMENTS OF 3
INCOME FOR THE TWELVE WEEKS ENDED
SEPTEMBER 5, 2006 AND SEPTEMBER 6, 2005
CONDENSED CONSOLIDATED STATEMENTS OF INCOME 4
FOR THE THIRTY-SIX WEEKS ENDED SEPTEMBER 5, 2006 AND
SEPTEMBER 6, 2005
CONDENSED CONSOLIDATED STATEMENTS OF 5
CASH FLOWS FOR THE THIRTY-SIX WEEKS ENDED
SEPTEMBER 5, 2006 AND SEPTEMBER 6, 2005
NOTES TO CONDENSED CONSOLIDATED 6
FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND 14
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE 21
DISCLOSURES ABOUT MARKET RISKS
ITEM 4. CONTROLS AND PROCEDURES 21
PART II. OTHER INFORMATION
---------------------------
ITEMS 3 AND 4 HAVE BEEN OMITTED
SINCE THE ITEMS ARE EITHER INAPPLICABLE OR THE
ANSWER IS NEGATIVE
ITEM 1. LEGAL PROCEEDINGS 22
ITEM 1A. RISK FACTORS 22
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 22
ITEM 5. OTHER INFORMATION 23
ITEM 6. EXHIBITS 23
-1-
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 5, 2006 December 27, 2005
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 22,364 $ 18,390
Short-term investments 33,697 45,212
---------------- ----------------
56,061 63,602
Inventories 11,163 12,859
Prepaid insurance deposits 14,416 16,346
Assets held for sale 15,483 22,614
Other current assets 17,656 17,764
---------------- ----------------
Total current assets 114,779 133,185
Property and equipment 560,825 532,930
Less accumulated depreciation and amortization (222,647) (214,416)
---------------- ----------------
338,178 318,514
Other assets:
Deferred income taxes 24,696 24,013
Intangible and other assets, net 42,268 42,101
---------------- ----------------
Total assets $ 519,921 $ 517,813
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21,663 $ 17,484
Accrued self insurance 21,576 21,406
Other current liabilities 24,573 31,026
---------------- ----------------
Total current liabilities 67,812 69,916
Long term liabilities, principally deferred compensation obligations 25,621 24,290
Deferred rent obligations 10,618 11,266
---------------- ----------------
Total liabilities 104,051 105,472
Stockholders' equity:
Preferred stock -- --
Common stock 213 207
Additional paid-in capital 150,600 143,797
Retained earnings 268,720 272,000
Common stock held by Trust (3,663) (3,663)
---------------- ----------------
Total stockholders' equity 415,870 412,341
---------------- ----------------
Total liabilities and stockholders' equity $ 519,921 $ 517,813
================ ================
See accompanying notes.
-2-
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for per share amounts)
(Unaudited)
For the twelve weeks ended
---------------------------------------
September 5, 2006 September 6, 2005
----------------- -----------------
Net sales $ 138,407 $ 139,992
Costs and expenses:
Costs of sales 47,773 48,572
Restaurant operating expenses 72,193 71,483
Depreciation and amortization 4,676 4,178
Provision for impaired assets 1,823 --
---------------- ----------------
Restaurant costs and expenses 126,465 124,233
General and administrative expenses 10,822 10,620
Hurricane disaster relief donation -- 1,853
Provision for casualty losses -- 800
Merger expenses 2,712 --
---------------- ----------------
Income (loss) from operations (1,592) 2,486
Other income, net 1,471 584
---------------- ----------------
Income (loss) from continuing operations before income taxes (121) 3,070
Provision (benefit) for income taxes (163) 974
---------------- ----------------
Income from continuing operations 42 2,096
Discontinued operations:
Income (loss) from operations before income tax 242 (1,632)
Income tax benefit (provision) (70) 500
---------------- ----------------
Income (loss) from discontinued operations 172 (1,132)
---------------- ----------------
Net income $ 214 $ 964
================ ================
Basic earnings (loss) per share:
Continuing operations $ -- $ 0.10
Discontinued operations 0.01 (0.05)
---------------- ----------------
Basic earnings per share $ 0.01 $ 0.05
================ ================
Diluted earnings (loss) per share:
Continuing operations $ -- $ 0.07
Discontinued operations 0.01 (0.05)
---------------- ----------------
Diluted earnings per share $ 0.01 $ 0.02
================ ================
Dividends per share $ 0.205 $ 0.195
================ ================
See accompanying notes.
-3-
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for per share amounts)
(Unaudited)
For the thirty-six weeks ended
---------------------------------------
September 5, 2006 September 6, 2005
----------------- -----------------
Net sales $ 445,832 $ 439,069
Costs and expenses:
Costs of sales 158,725 152,445
Restaurant operating expenses 223,181 209,318
Depreciation and amortization 13,368 12,311
Provision for impaired assets 1,823 --
---------------- ----------------
Restaurant costs and expenses 397,097 374,074
General and administrative expenses 33,817 34,599
Hurricane disaster relief donation -- 1,853
Provision for casualty losses -- 800
Merger expenses 2,712 --
---------------- ----------------
Income from operations 12,206 27,743
Other income, net 2,408 796
---------------- ----------------
Income from continuing operations before income taxes 14,614 28,539
Provision for income taxes 4,405 9,515
---------------- ----------------
Income from continuing operations 10,209 19,024
Discontinued operations:
Loss from operations before income tax (2,367) (2,646)
Income tax benefit 952 751
---------------- ----------------
Loss from discontinued operations (1,415) (1,895)
---------------- ----------------
Income before cumulative effect of accounting change 8,794 17,129
Cumulative effect of accounting change, net of tax 601 --
---------------- ----------------
Net Income $ 9,395 $ 17,129
================ ================
Basic earnings (loss) per share:
Continuing operations $ 0.49 $ 0.93
Discontinued operations (0.07) (0.09)
Cumulative effect of accounting change 0.03 --
---------------- ----------------
Basic earnings per share $ 0.45 $ 0.84
================ ================
Diluted earnings (loss) per share:
Continuing operations $ 0.46 $ 0.85
Discontinued operations (0.06) (0.09)
Cumulative effect of accounting change 0.02 --
---------------- ----------------
Diluted earnings per share $ 0.42 $ 0.76
================ ================
Dividends per share $ 0.605 $ 0.565
================ ================
See accompanying notes.
-4-
LONE STAR STEAKHOUSE & SALOON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
For the thirty-six weeks ended
---------------------------------------
September 5, 2006 September 6, 2005
----------------- -----------------
Cash flows from operating activities:
Net income $ 9,395 $ 17,129
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 15,599 14,400
Non-cash stock compensation expense 2,269 1,677
Loss (gain) on sale of assets (575) 145
Provision for asset impairment 1,823 122
Provision for casualty loss -- 800
Cumulative effect of accounting change (619) --
Deferred income taxes 137 (1,375)
Loss from discontinued operations 1,415 1,895
Tax benefits from stock option exercises (772) 1,155
Net change in operating assets and liabilities:
Change in operating assets 2,914 985
Change in operating liabilities (4,000) (834)
---------------- ----------------
Net cash provided by operating activities of continuing operations 27,586 36,099
Cash flows from investing activities:
Acquisitions, net of cash acquired -- (1,200)
Sales (purchases) of short-term investments 11,515 (21,325)
Purchases of property and equipment (36,353) (30,704)
Proceeds from sale of assets 713 113
Other (472) 191
---------------- ----------------
Net cash used in investing activities of continuing operations (24,597) (52,925)
Cash flows from financing activities:
Net proceeds from issuance of common stock 5,104 2,038
Tax benefits from stock option exercises 772 --
Cash dividends (12,675) (11,600)
---------------- ----------------
Net cash used in financing activities of continuing operations (6,799) (9,562)
Cash flow of discontinued operations:
Operating cash flows (2,430) (908)
Investing cash flows 10,214 1,744
---------------- ----------------
Total 7,784 836
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 3,974 (25,552)
Cash and cash equivalents at beginning of period 18,390 38,515
---------------- ----------------
Cash and cash equivalents at end of period $ 22,364 $ 12,963
================ ================
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 4,904 $ 12,089
================ ================
Non cash investing activities:
Purchase of property and equipment with operating liabilities $ 3,901 $ --
================ ================
Non cash financing activities:
Impact of litigation settlement on deferred taxes and additional
paid-in capital $ -- $ 1,744
================ ================
See accompanying notes.
-5-
LONE STAR STEAKHOUSE & SALOON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal, recurring accruals, which Lone Star Steakhouse & Saloon, Inc. (the
"Company") considers necessary for a fair presentation of the financial position
and the results of operations for the periods presented have been included. The
results for the thirty-six weeks ended September 5, 2006 are not necessarily
indicative of the results to be expected for the full year ending December 26,
2006. This quarterly report on Form 10-Q should be read in conjunction with the
Company's audited consolidated financial statements in its annual report on Form
10-K for the year ended December 27, 2005.
Certain amounts for the prior year have been reclassified to conform with
the current year's presentation.
2. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 2005, the FASB issued FASB Staff Position No. FAS 13-1,
ACCOUNTING FOR RENTAL COSTS INCURRED DURING A CONSTRUCTION PERIOD (FSP 13-1).
FSP 13-1 requires rental costs associated with ground or building operating
leases incurred during a construction period to be recognized as rental expense.
FSP 13-1 is effective for reporting periods beginning after December 15, 2005.
Retroactive application is permitted, but not required. The Company adopted the
provision FSP 13-1 effective December 28, 2005 on a prospective basis, and its
adoption had no significant effect upon the Company's financial statements.
3. EARNINGS PER SHARE
Basic earnings per share amounts are computed based on the weighted average
number of shares outstanding during the periods. For purposes of diluted
computations, average shares outstanding have been adjusted to reflect in
accordance with the treasury stock method (1) the number of shares that would be
issued from the exercise of stock options, reduced by the number of shares which
could have been purchased from the proceeds at the average market price of the
Company's stock or price of the Company's stock on the exercise date if options
were exercised during the period presented and (2) the number of shares that may
be issuable to effect the settlement of certain deferred compensation
liabilities pursuant to the Company's Stock Option Deferred Compensation Plan.
In addition, for purposes of diluted computations, net income has been adjusted
for the twelve and thirty-six week periods ended September 6, 2005 to reflect
the dilutive effect on net income of the assumed settlement of certain deferred
compensation liabilities. The twelve and thirty-six week periods ended September
5, 2006 have not been adjusted as the effect on net income of the assumed
settlement of the deferred compensation liabilities would be anti-dilutive.
-6-
The following table sets forth the computation of basic and diluted earnings per share (amounts in thousands, except per
share amounts):
For the twelve weeks ended For the thirty-six weeks ended
-------------------------------- ---------------------------------
Sept. 5, 2006 Sept. 6, 2005 Sept. 5, 2006 Sept. 6, 2005
------------- ------------- ------------- -------------
Basic earnings per share computation:
Numerator:
Income from continuing operations $ 42 $ 2,096 $ 10,209 $ 19,024
Discontinued operations, net of
income tax 172 (1,132) (1,415) (1,895)
Cumulative effect of accounting change -- -- 601 --
-------- -------- -------- --------
Net Income $ 214 $ 964 $ 9,395 $ 17,129
======== ======== ======== ========
Denominator:
Weighted average number of shares
outstanding 21,115 20,476 20,862 20,381
======== ======== ======== ========
Basic earnings (loss) per share:
Continuing operations $ -- $ 0.10 $ 0.49 $ 0.93
Discontinued operations 0.01 (0.05) (0.07) (0.09)
Cumulative effect of accounting
change -- -- 0.03 --
-------- -------- -------- --------
Basic earnings per share $ 0.01 $ 0.05 $ .45 $ 0.84
======== ======== ======== ========
Diluted earnings per share computation:
Numerator:
Income from continuing operations $ 42 $ 2,096 $ 10,209 $ 19,024
Adjustment for assumed settlement of
deferred compensation liabilities -- (474) -- (65)
-------- -------- -------- --------
Diluted income from continuing
operations 42 1,622 10,209 18,959
Discontinued operations, net of
income tax 172 (1,132) (1,415) (1,895)
Cumulative effect of accounting
change -- -- 601 --
-------- -------- -------- --------
Diluted net income $ 214 $ 490 $ 9,395 $ 17,064
======== ======== ======== ========
Denominator:
Weighted average number of shares
outstanding 21,115 20,476 20,862 20,381
Effect of dilutive employee stock
options 1,290 1,799 1,452 1,867
Effect of shares issuable to settle
deferred compensation liabilities -- 177 -- 177
-------- -------- -------- --------
22,405 22,452 22,314 22,425
======== ======== ======== ========
Diluted earnings (loss) per share:
Continuing operations $ -- $ 0.07 $ 0.46 $ 0.85
Discontinued operations 0.01 (0.05) (0.06) (0.09)
Cumulative effect of accounting
change -- -- 0.02 --
-------- -------- -------- --------
Diluted earnings per share $ 0.01 $ 0.02 $ 0.42 $ 0.76
======== ======== ======== ========
-7-
4. STOCK-BASED COMPENSATION
In December 2004, the stockholders of the Company approved the 2004 Stock
Option Plan (the "2004 Plan"). The 2004 Plan provides for grants of incentive
and nonqualified stock options to employees, directors, consultants, and
advisors. A total of 3,000,000 shares are available for issuance pursuant to the
2004 Plan, of which 500,000 are available for nonemployee directors. The maximum
number of shares that may be granted under the 2004 Plan to any individual shall
not exceed 600,000. Options granted under the 2004 Plan have ten-year terms and
generally vest equally over a four-year period commencing one year after the
date of grant.
In September 2002, the Company adopted a Stock Option Deferred Compensation
Plan (the "Plan"), which allows certain key executives to defer compensation
arising from the exercise of stock options granted under the Company's 1992
Incentive and Nonqualified Stock Option Plan. In fiscal 2003, pursuant to the
terms of the Plan relating to the exercise of certain stock options by a
participant, the Company issued 177,145 shares to a Rabbi trust (the "Trust")
with Intrust Bank, NA serving as the trustee. The Trust holds the shares for the
benefit of the participating employees ("Participants"). Under the terms of the
Plan, Participants may elect to change the Plan's investments from time to time,
which may result in the sale of the shares. Since the shares held by the Trust
are held pursuant to a deferred compensation arrangement whereby amounts earned
by an employee are invested in the stock of the employer and placed in the
Trust, the Company accounts for the arrangement as required by Emerging Issues
Task Force ("EITF") consensus on Issue No. 97-14, ACCOUNTING FOR DEFERRED
COMPENSATION ARRANGEMENTS WHERE AMOUNTS EARNED ARE HELD IN A RABBI TRUST AND
INVESTED ("EITF No. 97-14"). Accordingly, shares issued to the Trust were
recorded at fair market value at the date issued by the Company in the amount of
$3,663, which is reflected in the accompanying condensed consolidated balance
sheets as Common Stock Held By Trust. The corresponding amount was credited to
deferred compensation obligations. Each period, the shares owned by the Trust
are valued at the closing market price, with corresponding changes in the
underlying shares being reflected as adjustments to compensation expense and
deferred compensation obligations. At September 5, 2006, the Trust held 177,145
shares of the Company's common stock. Included in general and administrative
expenses was non-cash stock compensation expense for the twelve weeks ended
September 5, 2006 and September 6, 2005 which was a charge and a (credit) of
$429 and $(758), respectively, relating to the changes in market price for such
shares. The charge (credit) for the thirty-six weeks ended September 5, 2006 and
September 6, 2005 was $717 and $(105), respectively.
Prior to December 28, 2005, the Company elected to expense the cost of
employee stock options in accordance with the fair value method contained in
Statement of Financial Accounting Standards (SFAS) No. 123, "ACCOUNTING AND
DISCLOSURE OF STOCK-BASED COMPENSATION." Under SFAS No. 123, the fair value for
options is estimated at the date of grant using a Black-Scholes-Merton
("Black-Scholes") option-pricing model, which requires the input of highly
subjective assumptions including the expected stock price volatility. The
election was retroactively applied to all awards granted to employees after
December 28, 1994.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"SHARE-BASED PAYMENT," (SFAS 123(R)) which is a revision of FASB Statement No.
123. As required, we adopted the provisions of SFAS 123(R) effective at the
beginning of our fiscal year 2006, using the modified-prospective method. Upon
adoption of SFAS 123(R), we elected to continue using the Black-Scholes
option-pricing model. If we had adopted SFAS 123(R) in prior years, the impact
on our 2005 net income of that standard would have increased net income by $601,
net of tax. This amount is reflected in the accompanying statement of income as
a cumulative effect of change in accounting as required by the new standard.
This cumulative effect resulted from the Company not estimating forfeitures as
required by the new standard but recording these forfeitures at actual amounts
as they occurred which was allowed under SFAS No. 123. SFAS 123(R) also requires
the benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as
required prior to the adoption of SFAS 123(R). For the thirty-six week period
ended September 5, 2006, the $772 excess tax benefit classified as a financing
cash inflow would have been classified as an operating cash inflow if the
Company had not adopted SFAS 123(R). Operating income and cash flow operating
results for 2005 have not been restated for the adoption of SFAS 123(R).
-8-
During the thirty-six weeks ended September 5, 2006 and September 6, 2005,
we recorded $2,269 and $1,677 respectively, in aggregate stock-based employee
compensation expense which includes amounts attributable to noncash stock
compensation arising from the common shares held by the Trust as described
above. This compensation expense is included in the general and administrative
expenses in the accompanying statements of income. At September 5, 2006, there
was $5,319 of unrecognized compensation cost related to nonvested option awards,
of which the Company expects to recognize over the remaining weighted average
vesting period of 2.5 years.
During the thirty-six weeks ended September 5, 2006 and September 6, 2005,
a total of 602 and 199 options were exercised, respectively. The total intrinsic
value of the options exercised during the thirty-six weeks ended September 5,
2006 and September 6, 2005 was $10,737 and $3,940, respectively. Cash received
upon the exercise of these stock options was $5,104 and $2,038 during the
thirty-six weeks ended September 5, 2006 and September 6, 2005, and the related
tax benefits realized were $4,026 and $1,477 during the corresponding periods.
The weighted average fair value per option at the date of grant for options
granted in the thirty-six weeks ended September 5, 2006 and September 6, 2005
was $5.76 and $6.89, respectively, as valued using the Black-Scholes
option-pricing model with the following weighted average assumptions:
For the thirty-six weeks ended
September 5, 2006 September 6, 2005
--------------------- ---------------------
Risk-free interest rate 4.50% 4.00%
Expected dividend yield 2.60% 2.50%
Expected volatility .28 .30
Expected term (in years) 4.96 4.66
The estimated volatility is based on the historical volatility of our stock
and other factors. The expected term of options represents the period of time
that options granted are expected to be outstanding. The risk free interest rate
is based upon the Treasury Constant Maturity Rate as quoted by the Federal
Reserve at the time of the grant for a term equivalent to the expected term of
the grant.
Information pertaining to option activity for the thirty-six weeks ended
September 5, 2006 is as follows (number of options and aggregate intrinsic value
in thousands):
Weighted
Number Average Aggregate
of Exercise Price Intrinsic
Options Per Option Value
---------- ---------------- -----------
Outstanding-beginning of year 4,429 $ 16.61
Granted 167 $ 23.43
Exercised (602) $ 8.48
Cancelled (273) $ 27.43
-----
Outstanding at September 5, 2006 3,721 $ 17.44 $37,537*
=====
Vested or expected to vest at
September 5, 2006 3,619 $ 20.28 $32,993*
=====
Exercisable at September 5, 2006 2,582 $ 13.27 $36,531*
=====
* The intrinsic value of a stock option is the amount by which the market value
of the underlying stock exceeds the exercise price of the option. The market
value of our stock was $27.35 per share at September 5, 2006.
-9-
A summary of the status of the Company's nonvested shares as of September 5,
2006, and changes during the thirty-six weeks ended September 5, 2006, is
presented below (number of options in thousands):
Weighted
Average
Number of Grant-date
Nonvested Options Options Fair Value
----------------- ------- ----------
Nonvested at December 27, 2005 1,511 $ 6.81
Granted 167 $ 5.76
Vested (271) $ 6.94
Forfeited (268) $ 6.65
-----
Nonvested at September 5, 2006 1,139 $ 6.66
=====
For options outstanding as of September 5, 2006, the number of options,
weighted-average exercise price, and weighted-average remaining contract life
for each group of options are as follows:
Options Outstanding
--------------------------------------------------------------------------------
Number Weighted Weighted
Outstanding at Average Average
September 5, Exercise Remaining
Range of Prices 2006 Price Contract Life
--------------------------------------------------------------------------------
(In Thousands)
$ 7.43 to $ 9.00 894 $ 8.59 1.84 years
$12.47 to $18.81 1,373 $13.01 .82 years
$22.25 to $31.24 1,454 $27.06 8.48 years
-----
3,721 $17.44 4.06 years
=====
The number of shares and weighted-average exercise price of options
exercisable at September 5, 2006, are as follows:
Options Exercisable
--------------------------------------------------------------------------------
Number Weighted
Exercisable At Average
September 5, Exercise
Range of Prices 2006 Price
--------------------------------------------------------------------------------
(In Thousands)
$ 7.43 to $ 9.00 894 $ 8.59
$12.47 to $18.81 1,373 $ 13.01
$22.25 to $31.24 315 $ 27.68
-----
2,582 $ 13.27
=====
5. TERM REVOLVER
The Company has an unsecured revolving credit agreement with a group of
banks led by SunTrust Bank. The credit facility allows the Company to borrow up
to $30,000 with an accordian feature permitting for an increase in the credit
facility in an amount up to $20,000 such that the total amount of the credit
facility does not exceed $50,000. The additional borrowing is subject to the
approval of the lenders. The credit agreement terminates in October 2007;
however, it is subject to acceleration in the event of a change of control of
the Company as that term is defined in the credit agreement. At the time of each
borrowing, the Company may elect to pay interest at the higher of SunTrust
Bank's published prime rate or the Federal Funds Rate plus one-half of one
percent (0.50%); or the LIBOR rate plus one and one-half percent (1.50%). The
Company is required to achieve certain financial ratios and to maintain certain
net worth requirements as defined in the credit agreement. The Company is
required to pay on a quarterly basis a facility fee equal to .25% per annum on
-10-
the daily unused amount of the credit facility. At September 5, 2006 and at
December 27, 2005, there were no borrowings outstanding under the credit
facility.
The Company also has entered into a $5,000 revolving term loan agreement
with a bank, under which no borrowings were outstanding at September 5, 2006 and
December 27, 2005. The term loan agreement matures in October 2007. The interest
rate is at .50% below the daily prime rate as published in the Wall Street
Journal. In addition, the Company pays a facility fee of .25% per annum on the
daily unused portion of the credit facility.
6. COMMON STOCK TRANSACTIONS
The Board of Directors has from time to time authorized the Company to
purchase shares of the Company's common stock in the open market or in privately
negotiated transactions. The Company made no purchases of its common stock
during the thirty-six weeks ended September 5, 2006 or during the thirty-six
weeks ended September 6, 2005. The Company is accounting for any 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. At September 5, 2006, the Company may
purchase up to 2,026,190 shares of its common stock pursuant to its current
authorization by the Board of Directors.
7. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
During the thirty-six weeks ended September 5, 2006, the Company closed 34
underperforming Lone Star Steakhouse & Saloon ("Lone Star") restaurants. The
group of restaurants closed consisted of 16 owned locations and 18 leased
locations. The restaurant closings were the result of management's analysis of
not only the performance of these restaurants, but also the related return on
investment targets, the geographical location of these restaurants as compared
to other Company owned restaurant locations and the impact of demographic
changes in the local markets surrounding these restaurant locations. As of
September 5, 2006, the Company has completed the sale of six of the owned
restaurants. All of the remaining closed owned locations are currently held for
sale. The Company is seeking to minimize its losses for all closed leased
locations through either negotiated lease termination arrangements with the
landlords or the sublease of the restaurant location. During fiscal 2006, in
connection with the restaurant closings, the Company incurred a pretax loss of
$2,288 including impairment losses of approximately $3,628 related to assets
abandoned or to be sold offset by a credit of $1,340 to reflect the estimated
fair value of the remaining lease liabilities less the recognition of the
remaining deferred rent obligations related to the leased locations. All of the
losses incurred are included in discontinued operations. The Company will
account for its remaining exit costs in accordance with the provisions of SFAS
No. 146 ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES, which
requires that such costs be expensed in the period such costs are incurred. The
Company believes that such additional costs will not be significant. At
September 5, 2006 and December 27, 2005, the Company classified $15,483 and
$22,614, respectively, of net property and equipment, consisting primarily of
real estate, as "Assets Held for Sale" which are recorded at the lower of cost
or fair value less estimated selling costs.
The Company accounts for its closed restaurants in accordance with the
Provisions of SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS. Therefore, when a restaurant is closed and the restaurant is
either held for sale or abandoned, the restaurant's operations are eliminated
from ongoing operations. Accordingly, the operations of such restaurants, net of
applicable income taxes, are presented as discontinued operations and prior
period consolidated financial statements are reclassified. The twelve week and
thirty-six week periods for fiscal 2006 include gains from sale of assets of
$2,198 and $3,497, respectively. The twelve weeks and thirty-six week periods
for fiscal 2006 include provisions for impairment losses of $1,160 and $3,628,
respectively. The table below reflects as discontinued operations the applicable
operations of the Company's closed restaurants which meet the criteria for such
presentation.
-11-
For the twelve weeks For the thirty-six
ended weeks ended
------------------------ ---------------------------
Sept. 5, Sept. 6, Sept. 5, Sept. 6,
2006 2005 2006 2005
------------ ----------- ------------- -------------
Income (loss) from operations $ 242 $ (1,632) $ (2,367) $ (2,646)
Income tax benefit (provision) (70) 500 952 751
-------- -------- -------- --------
Net income (loss) from discontinued
operations $ 172 $ (1,132) $ (1,415) $ (1,895)
======== ======== ======== ========
Net sales from discontinued operations $ 53 $ 8,810 $ 7,716 $ 28,668
======== ======== ======== ========
8. INCOME TAX
The effective income tax (benefit) provision rate from continuing
operations was (134.7)% and 31.7% for the twelve weeks ended September 5, 2006
and September 6, 2005, respectively, and 30.1% and 33.3% for the thirty-six
weeks ended September 5, 2006 and September 6, 2005, respectively. The factors
which cause the effective tax rates to vary from the federal statutory rate of
35% include state income taxes, the impact of FICA Tip and other credits,
certain non taxable income, non-deductible expenses, and the tax effect of
incentive stock options. There is generally no tax impact to the Company
associated with incentive stock options and the related compensation associated
with such options in the income statement. However, tax benefits may arise
related to the incentive stock options at the time the options are exercised to
the extent that the exercise is followed by a disqualifying disposition of the
shares by the optionee. The decrease in the effective tax rate for fiscal 2006
reflects the impact of FICA Tip and other credits on the lower pre-tax income
and an increase in non-taxable interest income for fiscal 2006 compared with
2005. The decrease is partially offset by the impact of certain non-deductible
merger costs incurred in the third quarter of fiscal 2006.
9. HURRICANE RELATED COSTS
In connection with disaster relief for the victims of Hurricane Katrina,
the Company donated to the American Red Cross an amount of $1,853. The amount
donated was 100% of its restaurant sales on Labor Day, September 5, 2005.
In addition, the Company provided $800 as a casualty loss provision
associated with its restaurants which were damaged by Hurricane Katrina. The
principal amount of such losses relate to estimated property damages for which
insurance recoveries will not be available due to limitations of insurance
deductible amounts.
10. DEFINITIVE AGREEMENT FOR SALE AND MERGER OF THE COMPANY
On August 18, 2006, the Company announced it had entered into a definitive
agreement to be acquired by affiliates of Lone Star Funds for $27.10 per share,
in cash. The Company's Board of Directors approved the agreement in a special
meeting on August 18, 2006. The transaction is subject to the Company's
stockholders approving the transaction and other customary conditions, and is
expected to be completed during the fourth quarter of 2006.
In addition, the Company announced in view of the pending transaction, the
Company does not anticipate paying a cash dividend for the 2006 fourth quarter,
but intends to subsequently pay such dividend to its stockholders if for any
reason the transaction is not consummated.
There can be no assurance that the transaction will be completed.
Merger expenses of $2,712 for the twelve and thirty-six week periods ended
September 5, 2006 reflect primarily the costs for professional services incurred
by the Company in connection with the pending transaction relating to the
acquisition of the Company by affiliates of Lone Star Funds.
-12-
11. SUBSEQUENT EVENTS
Subsequent to September 5, 2006, the Company closed an additional six
underperforming Lone Star restaurants all of which were leased locations. The
carrying value of the restaurants closed is not significant. The operations of
the closed restaurants are included in the Company's continuing operations for
the twelve and thirty-six week periods ended September 5, 2006 since the
restaurants were closed after the reporting period. The operations of these
closed restaurants include an impairment charge of $1,823 for the twelve and
thirty-six weeks ended September 5, 2006. The table below reflects the
operations of the six closed restaurants.
For the twelve weeks ended For the thirty-six weeks ended
-------------------------- ------------------------------
Sept. 5, 2006 Sept. 6, 2005 Sept. 5, 2006 Sept. 6, 2005
------------- ------------- ------------- -------------
Net Sales $1,830 $2,071 $5,991 $6,356
Income (loss) from operations (1,891) 65 (1,896) 385
-13-
LONE STAR STEAKHOUSE & SALOON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
GENERAL
The following discussion and analysis should be read in conjunction with
the condensed consolidated financial statements including the notes thereto
included elsewhere in this Form 10-Q.
The Company opened six Lone Star Steakhouse & Saloon ("Lone Star")
restaurants and two Texas Land and Cattle restaurants in the thirty-six weeks
ended September 5, 2006. In the thirty-six weeks ended September 6, 2005, the
Company opened one Lone Star restaurant.
There were 222 operating domestic Lone Star restaurants as of September 5,
2006. In addition, a licensee operates four Lone Star restaurants in California.
As of September 5, 2006, the Company operates five Del Frisco's Double
Eagle restaurants. In addition, a licensee operates one Del Frisco's restaurant.
The Company also operates 15 Sullivan's Steakhouse restaurants, 22 Texas Land
and Cattle Steak House(R) restaurants and one Frankie's Italian Grille
restaurant.
Internationally, licensees operate 12 Lone Star Steakhouse & Saloon
restaurants in Australia and one in Guam.
During the thirty-six weeks ended September 5, 2006, the Company closed 34
underperforming Lone Star restaurants. Subsequent to September 5, 2006, the
Company closed an additional six underperforming Lone Star restaurants all of
which were leased locations. The restaurants closed were the result of
management's analysis of not only the performance of these restaurants, but also
the related return on investment targets, the geographical location of these
restaurants as compared to other Company owned restaurant locations and the
impact of demographic changes in the local markets surrounding these restaurant
locations. All of the owned locations are currently held for sale. The Company
is seeking to minimize its losses for all leased locations through either
negotiated lease termination arrangements with the landlords or is seeking to
sublease the restaurant locations. See Note 7 to the condensed consolidated
financial statements for additional information.
-14-
LONE STAR STEAKHOUSE & SALOON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages
which certain items included in the condensed consolidated statement of
operations bear to net sales:
TWELVE WEEKS ENDED (1) THIRTY-SIX WEEKS ENDED
------------------------------- ----------------------------
SEPT. 5, 2006 SEPT. 6, 2005 SEPT. 5, 2006 SEPT. 6, 2005
------------- ------------- ------------- ------------
STATEMENT OF OPERATIONS DATA:
Net sales................................................ 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales....................................... 34.5 34.7 35.6 34.7
Restaurant operating expenses........................ 52.2 51.1 50.1 47.7
Depreciation and amortization........................ 3.4 3.0 3.0 2.8
Provision for impaired assets........................ 1.3 - 0.4 -
---- ---- ---- ----
Restaurant costs and expenses................... 91.4 88.8 89.1 85.2
General and administrative expenses...................... 7.8 7.6 7.6 7.9
Hurricane disaster relief donation....................... - 1.3 - 0.4
Provision for casualty losses............................ - 0.5 - 0.2
Merger expenses.......................................... 2.0 - 0.6 -
---- ---- ---- ----
Income (loss) from operations............................ (1.2) 1.8 2.7 6.3
Other income, net........................................ 1.1 0.4 0.6 0.2
---- ---- ---- ----
Income (loss) from continuing operations before
income taxes............................................ (0.1) 2.2 3.3 6.5
Provision (benefit) for income taxes..................... (0.1) 0.7 1.0 2.2
---- ---- ---- ----
Income from continuing operations........................ - 1.5 2.3 4.3
Income (loss) from discontinued operations, net of
applicable income taxes................................. 0.2 (0.8) (0.3) (0.4)
Cumulative effect of accounting change, net of tax....... - - 0.1 -
---- ---- ---- ----
Net income............................................... 0.2% 0.7% 2.1% 3.9%
==== ==== ==== ====
(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.
-15-
LONE STAR STEAKHOUSE & SALOON, INC.
TWELVE WEEKS ENDED SEPTEMBER 5, 2006 COMPARED TO TWELVE WEEKS ENDED
SEPTEMBER 6, 2005 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales decreased $1,585 or 1.1% to $138,407 for the twelve weeks ended
September 5, 2006, compared to $139,992 for the twelve weeks ended September 6,
2005. The decrease in sales is due primarily to a decline in sales at the
Company's Lone Star restaurants. In addition to the numerous economic factors
impacting discretionary income for many casual dining consumers, the Lone Star
restaurants' comparable store sales were adversely affected by the Company's
decision to reduce print pieces in its direct mail advertising program by 68% as
compared to the third quarter last year and to discontinue discount coupon
marketing. The Company believes that the discount coupon-marketing program
utilizing direct mail and free standing inserts has become ineffective due to
proliferation of these offers in the casual dining segment. As a result, the
Company experienced a reduction in sales at its Lone Star restaurants of
approximately $5,000. This decrease was offset in part by sales at new Lone Star
restaurants which have been opened since September 6, 2005. In addition, the
sales decrease was offset in part by sales at two new Texas Land & Cattle
restaurants opened in the third quarter of fiscal 2006 and by increased sales at
the Company's Sullivan's and Del Frisco's Double Eagle restaurants. The
Company's blended same store sales, representing net sales, by store, for all
the Company owned restaurant concepts opened for more than 18 months in the
current and comparable prior year period decreased 5.1%. The Company's average
check increased 1.4% and guest counts decreased 6.3%.
Costs of sales, primarily food and beverages, as a percentage of net sales
decreased as a percentage of net sales to 34.5% from 34.7%, due primarily to
decreased costs for beef partially offset by increased costs in potatoes and
certain beverage costs.
Restaurant operating expenses for the twelve weeks ended September 5, 2006
increased $710 to $72,193 compared to $71,483 in the prior year period and
increased as a percentage of net sales to 52.2% from 51.1%. Labor costs
increased .3% primarily as the result of increased management staffing at the
restaurants. Advertising costs decreased .4% as the result of decreased media
print costs related to direct marketing as the Company significantly curtailed
its coupon promotional activities during the twelve weeks ended September 5,
2006. The decrease was largely offset by costs related to the Company's
sponsorship of a NASCAR car beginning in 2006 which totaled $1,392 for the
twelve weeks ended September 5, 2006. Utility costs, primarily electricity,
increased .4%. Preopening costs increased by .8%.
Depreciation and amortization increased $498 for the twelve weeks ended
September 5, 2006 compared with the prior period. The increase is attributable
primarily to the depreciation related to the new stores opened by the Company.
Provision for impaired assets for the twelve weeks ended September 5, 2006
was $1,823 reflecting the write-down of six underperforming Lone Star
restaurants. The restaurants were closed subsequent to September 6, 2006.
General and administrative expenses increased $202 for the twelve weeks
ended September 5, 2006 compared to the prior period. General and administrative
expense reflects a decrease in bonus compensation expense. Additionally,
non-cash stock compensation expense for the twelve weeks ended September 5, 2006
was $923 compared to $36 for the prior year period. The change primarily relates
to a charge of $429 in the 2006 period compared to a credit of $(758) in the
prior period relating to the accounting for certain shares of the Company's
common stock held by a Rabbi Trust pursuant to a deferred compensation
arrangement (see Note 4 to condensed financial statements).
Hurricane disaster relief donation for the twelve weeks ended September 6,
2005 reflects the Company's contribution to the American Red Cross in connection
with disaster relief for the victims of Hurricane Katrina. The Company donated
100% of its restaurant sales of $1,853 on Labor Day, September 5, 2005.
-16-
Provision for casualty loss for the twelve weeks ended September 6, 2005
reflects the Company's estimate of losses associated with its restaurants which
were damaged by Hurricane Katrina. The principal amount of such losses relate to
estimated property damages for which insurance recoveries will not be available
due to limitations of insurance deductible amounts.
Merger expenses of $2,712 for the twelve weeks ended September 5, 2006
reflect primarily the costs for professional services incurred by the Company in
connection with the pending transaction relating to the acquisition of the
Company by affiliates of Lone Star Funds.
Other income, net for the twelve weeks ended September 5, 2006 was $1,471
compared to $584 for the prior year. The increase for 2006 primarily reflects an
increase in interest income and foreign exchange gains compared to 2005. In
addition, the 2006 period includes gains from the sale of assets of $566 as
compared to none for the comparable period of the prior year.
The effective income tax rate from continuing operations was (134.7)% and
31.7% for the twelve weeks ended September 5, 2006 and September 6, 2005,
respectively. The factors which cause the effective tax rates to vary from the
federal statutory rate of 35% include state income taxes, the impact of FICA Tip
and other credits, certain non-taxable income, non-deductible expenses and the
tax effect of incentive stock options. There is generally no tax impact to the
Company associated with incentive stock options and the related compensation
associated with such options in the income statement. However, tax benefits may
arise at the time incentive options are exercised to the extent that the
exercise is followed by a disqualifying disposition of the shares by the
optionee. The decrease in the effective tax rate for fiscal 2006 reflects the
impact of FICA Tip and other credits on the lower pre-tax income and an increase
in non-taxable interest income for fiscal 2006 compared with 2005. The decrease
is partially offset by the impact of certain non-deductible merger costs
incurred in the third quarter of fiscal 2006.
Discontinued operations reflect the operations of the 34 Lone Star
restaurants closed during the thirty-six weeks ended September 5, 2006 and two
Lone Star restaurants closed in fiscal 2005 which are required to be reported as
discontinued operations pursuant to SFAS No. 144 (see Note 7 to the condensed
consolidated statements). The twelve weeks ended September 5, 2006 includes
gains from sale of assets of $2,198 and charges of $1,160 for asset impairments.
LONE STAR STEAKHOUSE & SALOON, INC.
THIRTY-SIX WEEKS ENDED SEPTEMBER 5, 2006 COMPARED TO THIRTY-SIX WEEKS ENDED
SEPTEMBER 6, 2005
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales increased $6,763 or 1.5% to $445,832 for the thirty-six weeks
ended September 5, 2006, compared to $439,069 for the thirty-six weeks ended
September 6, 2005. The increase in sales is due to increased sales from new
restaurants opened since September 6, 2005 and to increased sales at the
Company's Sullivan's, Del Frisco's Double Eagle and Texas Land & Cattle
restaurants. The increase is offset in part by a decrease in sales at the
Company's Lone Star restaurants. The sales at Lone Star restaurants were
negatively impacted by numerous economic factors impacting discretionary income
for many casual dining consumers and by the Company's decision to reduce the
print pieces in its direct mail advertising program during the third quarter by
68% as compared to the third quarter last year and to discontinue discount
coupon marketing. The Company believes that the discount coupon-marketing
program utilizing direct mail and free standing inserts has become ineffective
due to proliferation of these offers in the casual dining segment. The Company's
blended same store sales, representing net sales, by store, for all the Company
owned restaurant concepts opened for more than 18 months in the current and
comparable prior year period decreased 1.0%. The Company's average check
increased .5% and guest counts decreased 1.4%.
Costs of sales, primarily food and beverages, increased as a percentage of
net sales to 35.6% from 34.7% due primarily to increased costs for beef,
potatoes and certain beverage costs.
-17-
Restaurant operating expenses for the thirty-six weeks ended September 5,
2006 increased $13,863 to $223,181 compared to $209,318 in the prior year period
and increased as a percentage of net sales to 50.1% from 47.7%. Labor costs
increased .6% primarily as the result of increased management staffing at the
restaurants. Advertising costs increased .8% as the result of costs related to
the Company's sponsorship of a NASCAR car beginning in 2006 totaling $4,308. The
increase was partly offset by a decrease in media print costs related to direct
marketing as the Company significantly curtailed its coupon promotional
activities during the third quarter of fiscal 2006. Utility costs, for gas and
electricity, increased .4% and preopening costs increased by .5%.
Depreciation and amortization increased $1,057 for the thirty-six weeks
ended September 5, 2006 compared with the prior period. The increase is
attributable primarily to the depreciation related to the new stores opened by
the Company.
Provision for impaired assets for the thirty-six weeks ended September 5,
2006 was $1,823 reflecting the write-down of six underperforming Lone Star
restaurants. The restaurants were closed subsequent to September 6, 2006.
General and administrative expenses decreased $782 for the thirty-six weeks
ended September 5, 2006 compared to the prior period. General and administrative
expense reflects a decrease in bonus compensation expense and travel expenses
offset in part by an increase in professional fees. Additionally, non-cash stock
compensation expense for the thirty-six weeks ended September 5, 2006 was $2,269
compared to $1,677 for the prior year period. The change primarily relates to a
charge of $717 in the 2006 period compared to a credit of $105 in the prior
period relating to the accounting for certain shares of the Company's common
stock held by a Rabbi Trust pursuant to a deferred compensation arrangement (see
Note 4 to Condensed Financial Statements).
Hurricane disaster relief donation for the thirty-six weeks ended September
6, 2005 reflects the Company's contribution to the American Red Cross in
connection with disaster relief for the victims of Hurricane Katrina. The
Company donated 100% of its restaurant sales of $1,853 on Labor Day, September
5, 2005.
Provision for casualty loss for the thirty-six weeks ended September 6,
2005 reflects the Company's estimate of losses associated with its restaurants
which were damaged by Hurricane Katrina. The principal amount of such losses
relate to estimated property damages for which insurance recoveries will not be
available due to limitations of insurance deductible amounts.
Merger expenses of $2,712 for the thirty-six weeks ended September 5, 2006
reflect primarily the costs for professional services incurred by the Company in
connection with the pending transaction relating to the acquisition of the
Company by affiliates of Lone Star Funds.
Other income, net for the thirty-six weeks ended September 5, 2006 was
$2,408 compared to $796 for the prior year. The increase for 2006 primarily
reflects an increase in interest income, foreign exchange gains, and gains on
sales of assets as compared to 2005.
The effective income tax rate from continuing operations was 30.1% and
33.3% for the thirty-six weeks ended September 5, 2006 and September 6, 2005,
respectively. The factors which cause the effective tax rates to vary from the
federal statutory rate of 35% include state income taxes, the impact of FICA Tip
and other credits, certain non-taxable income, non-deductible expenses and the
tax effect of incentive stock options. There is generally no tax impact to the
Company associated with incentive stock options and the related compensation
associated with such options in the income statement. However, tax benefits may
arise at the time incentive options are exercised to the extent that the
exercise is followed by a disqualifying disposition of the shares by the
optionee. The decrease in the effective tax rate for fiscal 2006 reflects the
impact of FICA Tip and other credits on the lower pre-tax income and an increase
in non-taxable interest income for fiscal 2006 compared with 2005. The decrease
is partially offset by the impact of certain non-deductible merger costs
incurred in the third quarter of fiscal 2006.
Discontinued operations reflect the operations of the 34 Lone Star
restaurants closed during the thirty-six weeks ended September 5, 2006 and two
Lone Star restaurants closed in fiscal 2005 which are required to be reported as
-18-
discontinued operations pursuant to SFAS No. 144 (see Note 7 to the condensed
consolidated statements). The thirty-six weeks ended September 5, 2006 includes
gains from sale of assets of $3,497 and charges of $2,288 for asset impairments.
The cumulative effect of the accounting change reflects the adoption of
the provisions of SFAS 123(R). The Company adopted the provisions of SFAS 123(R)
effective at the beginning of fiscal 2006. The cumulative effect of the change
in accounting resulted in a one time credit of $601, net of income tax (see Note
4 to the condensed consolidated financial statements).
IMPACT OF INFLATION
The primary inflationary factors affecting the Company's operations include
food and labor costs. A number of the Company's restaurant personnel are paid at
the federal and state established minimum wage levels and, accordingly, changes
in such wage levels affect the Company's labor costs. However, since the
majority of personnel are tipped employees, minimum wage changes should have
little effect on overall labor costs. Historically, as costs of food and labor
increased, the Company has been able to offset these increases through menu
price increases and economies of scale; however, there may be delays in the
implementation of such menu price increases or in effecting timely economies of
scale, as well as competitive pressures which may limit the Company's ability to
recover any cost increases in its entirety. Historically, inflation has not had
a material impact on operating margins. During the past thirty-six month period,
the Company experienced significant volatility in beef prices as such prices for
the periods were generally above historical levels. To the extent that beef
prices continue to be above historical levels, it will have a material negative
impact on operating margins.
LIQUIDITY AND CAPITAL RESOURCES (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The following table presents a summary of the Company's cash flows for each
of the thirty-six week periods ended September 5, 2006 and September 6, 2005:
Thirty-six Weeks Ended
----------------------
September 5, 2006 September 6, 2005
----------------- -----------------
Net cash provided by operating activities......................... $ 27,586 $ 36,099
Net cash used in investing activities............................. (24,597) (52,925)
Net cash used in financing activities............................. (6,799) (9,562)
Net cash provided by discontinued operations...................... 7,784 836
------------ -----------
Net increase (decrease) in cash and cash equivalents.............. $ 3,974 $ (25,552)
============ ===========
The decrease in net cash provided by operating activities for the
thirty-six week period ended September 5, 2006 compared to the prior period is
due primarily to a decrease in net income during fiscal 2006 as compared to
fiscal 2005 which is offset in part by a decrease in deferred tax assets.
Net cash used in investing activities decreased primarily due to the
Company selling $11,515 of its investments in short-term securities during the
thirty-six weeks ended September 5, 2006 as compared to investment purchases of
$21,325 in the comparable period of 2005. This decrease was partially offset by
increases in property and equipment additions. During the thirty-six week period
ended September 5, 2006, the Company's investment in property and equipment was
$36,353 compared to $30,704 for the same period in 2005.
The Company's short-term investments primarily consist of auction rate
securities with contractual maturities of up to 30 years. These auction rate
securities have interest re-set dates that occur every 7 to 90 days and can be
actively marketed at ongoing auctions that occur every 7 to 90 days. These
-19-
investments are in investment-grade debt instruments such as government-backed
securities. Auction rate securities are classified as available-for-sale and are
reported on the balance sheet at par value, which equals market value, as the
rate on such securities resets every 7 to 90 days. Consequently, interest rate
movements do not affect the balance sheet valuation of these fixed income
investments.
The Company has opened six Lone Star restaurants and two Texas Land &
Cattle restaurants during the thirty-six weeks ended September 5, 2006. The
Company has plans to open an additional 17 Lone Star restaurants throughout the
remainder of fiscal 2006 or early 2007. In addition, the Company has plans to
open an additional five Texas Land & Cattle restaurants, four Sullivan's
Steakhouse restaurants and two Del Frisco's Double Eagle Steak House restaurants
during the remainder of fiscal 2006 or early 2007. During the thirty-six weeks
ended September 5, 2006, the Company closed 34 underperforming Lone Star
restaurants.
The Company anticipates the remaining aggregate costs to complete the store
development currently in process or planned will range from $45,000 to $65,000
relating primarily to construction and equipment costs for new restaurants, and
the acquisition of additional restaurant sites.
During the thirty-six week period ended September 5, 2006, the Company
received net proceeds of $5,104 from the issuance of 602,226 shares of its
common stock due to the exercise of stock options compared to proceeds of $2,038
from the issuance of 198,686 shares in the comparable period of 2005.
The Company's Board of Directors has authorized the purchase of shares of
the Company's common stock from time to time in the open market or in privately
negotiated transactions. The most recent authorization was November 17, 2004
when the Board of Directors approved the repurchase of up to 2,026,190 shares of
the Company's common stock. During the thirty-six weeks ended September 5, 2006
and September 6, 2005, the Company made no purchases of its common stock. At
September 5, 2006, the Company may purchase up to 2,026,190 shares of its common
stock pursuant to its current authorization by the Board of Directors.
The Company has paid quarterly cash dividends on its common stock since the
second quarter of fiscal 2000. In January 2006, the Company increased its
quarterly cash dividend from $.195 to $.205 per share commencing with the
dividend payment to be paid April 10, 2006. During the thirty-six weeks ended
September 5, 2006, the Company paid dividends of $12,675 or $.605 per share as
compared to $11,600 or $.565 per share in the same period in 2005. In connection
with the pending sale and merger of the Company as described below in Recent
Events, the Company will not pay its regularly scheduled dividend for the fourth
quarter of 2006 but intends to subsequently pay such dividend if for any reason
the transaction is not consummated.
At September 5, 2006, the Company had $56,061 in cash and cash equivalents
and short term investments. As described in Note 5 to the condensed consolidated
financial statements in the Form 10-Q, the Company has unsecured revolving
credit facilities that may permit borrowings of up to $55,000 which expire in
October 2007. At September 5, 2006, the Company had no outstanding borrowings.
The Company from time to time may utilize derivative financial instruments
in the form of live beef cattle futures contracts to manage market risks and
reduce its exposure resulting from fluctuations in the price of meat. Realized
and unrealized changes in the fair values of the derivative instruments are
recognized in income in the period in which the change occurs. As of and for the
thirty-six weeks ended September 5, 2006, the Company had no positions in
futures contracts.
RECENT EVENTS
On August 18, 2006, the Company announced it had entered into a definitive
agreement to be acquired by affiliates of Lone Star Funds for $27.10 per share,
in cash. The Company's Board of Directors approved the agreement in a special
meeting on August 18, 2006. The transaction is subject to the Company's
stockholders approving the transaction and other customary conditions, and is
expected to be completed during the fourth quarter of 2006.
In addition, the Company announced in view of the pending transaction, the
Company does not anticipate paying a cash dividend for the 2006 fourth quarter,
but intends to subsequently pay such dividend to its stockholders if for any
reason the transaction is not consummated.
-20-
There can be no assurance that the transaction will be completed.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 2005, the FASB issued FASB Staff Position No. FAS 13-1,
ACCOUNTING FOR RENTAL COSTS INCURRED DURING A CONSTRUCTION PERIOD (FSP 13-1).
FSP 13-1 requires rental costs associated with ground or building operating
leases incurred during a construction period to be recognized as rental expense.
FSP 13-1 is effective for reporting periods beginning after December 15, 2005.
Retroactive application is permitted, but not required. The Company adopted the
provision FSP 13-1 effective December 28, 2005 on a prospective basis, and its
adoption had no significant effect upon the Company's financial statements.
In December 2004, the FASB issued STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO. 123 (revised 2004). "SHARE-BASED PAYMENT" (SFAS 123(R)). SFAS
123(R) is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation."
Among other items, SFAS 123(R) eliminates the use of the intrinsic value method
of accounting, and requires companies to recognize the cost of awards of equity
instruments granted in exchange for employee services received, based on the
grant date fair value of those awards, in the financial statements. In addition,
SFAS 123(R) also amends SFAS 95, "Statement of Cash Flows," requiring the
benefits of tax deductions in excess of recognized compensation costs to be
reported as financing cash flows, rather than as operating cash flows as
previously required. The effective date of SFAS 123(R) was the first interim
period beginning after June 15, 2005; however, on April 14, 2005, the Securities
and Exchange Commission announced that the effective date of SFAS 123(R) was
postponed until the first annual period beginning after June 15, 2005. Prior to
the adoption of SFAS 123(R), the Company recognized the cost of its awards of
equity instruments granted in exchange for employee services received, based on
the grant date fair value of those awards in accordance Statement of Financial
Accounting Standards No. 123 in its financial statements. The Company adopted
the provisions of SFAS 123(R) effective December 28, 2005 using the modified
prospective method. See Note 4 to condensed consolidated financial statements
for additional information.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Stockholders are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to open new restaurants, general market
conditions, the price of beef, competition and pricing and other risks set forth
in the Company's Annual Report on Form 10-K for the fiscal year ended December
27, 2005. 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 DISCLOSURES ABOUT MARKET RISKS
The Company's exposure to market risks was not significant during the
thirty-six weeks ended September 5, 2006.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rules 13a-15(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
Based on this evaluation, our principal executive officer and our
principal financial officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this
Form 10-Q.
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No changes in the Company's internal control over financial reporting
(as defined in Rule 13a-15(f) of the Exchange Act) occurred during the
period covered by this report that materially affected or is
reasonably likely to materially affect the Company's internal control
over financial reporting.
As of September 5, 2006, we have completed the installation of the new
point of sale (POS) system in the Company's Lone Star Steakhouse &
Saloon Restaurants. The installation of the new system required only
minimal changes to our current procedures for control over financial
reporting. However, the new system has been subjected to testing and,
based on that testing, appropriate controls are functioning to ensure
that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. We have not
experienced any significant difficulties in connection with the
installation or operation of the new POS system.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On or about September 8, 2006, the Company was served with a purported
class-action complaint brought in the District Court of Sedgwick
County, Kansas, on behalf of Superior Partners, an alleged shareholder
of the Company, and all others similarly situated. The complaint,
which also names as defendants Lone Star Funds and the Company's
directors Fred B. Chaney, Ph.D., William B. Greene, Jr., Clark R.
Mandigo, Mark Saltzgaber, Thomas C. Lasorda, Michael A. Ledeen, Ph.D.,
Anthony Bergamo, and John D. White (the "Individual Defendants"),
alleges three claims arising out of the Company's proposed merger with
affiliates of Lone Star Funds: (1) a claim against the Individual
Defendants for breach of fiduciary duty; (2) a claim against the
Individual Defendants and the Company for failure to disclose; and (3)
a claim against Lone Star Funds for aiding and abetting the Individual
Defendants in the purported breach of their fiduciary duties. The
complaint seeks a declaratory judgment that the defendants have
breached their fiduciary duties to plaintiff and the purported class
members, compensatory and rescissory damages, pre- and post-trial
interest and costs. The Company believes that these claims are without
merit and intends to defend this action vigorously.
ITEM 1A. RISK FACTORS
There are no material changes to the Risk Factors included in the
Company's Form 10-K for the fiscal year ended December 27, 2005. The
impact of the circumstances and events described in such Risk Factors
could result in significant adverse effects on our financial position,
results of operations and cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Board of Directors on November 17, 2004 authorized the Company to
repurchase up to 2,026,190 shares of the Company's common stock. The
Company has not repurchased any shares of its common stock through
September 5, 2006.
(1) Repurchases are subject to prevailing market prices, may be made
in open market or in privately negotiated transactions, may
occur or be discontinued at any time. There can be no assurance
that the Company will repurchase any shares.
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ITEM 5. OTHER INFORMATION
On August 18, 2006, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Lone Star U.S. Acquisitions LLC
("Purchaser") and COI Acquisition Corp. ("Merger Sub") pursuant to
which each of the holders of the outstanding common stock, $.01 par
value (the "Common Stock"), of the Company will receive an aggregate
of $27.10 per share in cash. Merger Sub and Purchaser are affiliates
of Lone Star Funds, a Dallas-based private equity firm.
Under the Merger Agreement, the Company will sell to an affiliate or
affiliates of Purchaser all of the shares of capital stock of the
Company's subsidiaries which own the assets related to its Lone Star
Steakhouse & Saloon restaurants and Texas Land & Cattle Steak House
restaurants, and, immediately thereafter, Merger Sub will merge with
and into the Company with the Company being the surviving corporation
in the merger. As a result of the merger, the Company will cease to be
a publicly traded company.
The Merger Agreement and related transactions are subject to the
approval of the Company's stockholders and certain other customary
closing conditions, and are expected to be completed during the fourth
quarter of 2006.
Lone Star Funds is not an affiliate of the Company, and no members of
the management or the Board of Directors of the Company will be
participating in the purchase of the Company.
The foregoing description of the Merger Agreement does not purport to
be complete and is qualified in its entirety by reference to the
Merger Agreement. The Merger Agreement was filed as Exhibit 99.1 to
the Company's Form 8-K which was filed on August 21, 2006 and is
incorporated herein by reference.
ITEM 6. EXHIBITS
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
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LONE STAR STEAKHOUSE & SALOON, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LONE STAR STEAKHOUSE & SALOON, INC.
(Registrant)
Date: October 16, 2006 /s/ John D. White
-----------------------------------
Chief Financial Officer