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LONE STAR STEAKHOUSE & SALOON INC - 10-K/A - 19980402 - PART_I
PART I
Item 1. Business
Background
As of March 10, 1998, Lone Star Steakhouse & Saloon, Inc. ("the
Company") owned and operated a chain of 267 mid-priced, full service, casual
dining restaurants located in the United States which operate under the trade
name Lone Star Steakhouse and Saloon ("Lone Star" or "Lone Star Steakhouse &
Saloon"). In addition, as of March 10, 1998 the Company owned and operated eight
upscale steakhouse restaurants, three operating as Del Frisco's Double Eagle
Steak House restaurants and five operating as Sullivan's Steakhouse restaurants.
The Lone Star restaurants embrace a Texas-style concept featuring Texas
artifacts and music and serve mesquite grilled steaks, ribs, chicken and fish.
Internationally, the Company owns a 65% interest in a joint venture which
operates 34 restaurants in Australia (the "Australian Joint Venture"), thirteen
of which were opened in 1997.
Americans consumed an estimated 68 pounds of beef on a per capita
basis in 1996 (Source: United States Department of Agriculture), up from an
estimated 63 pounds of beef in 1993, and steak continues to be one of the most
frequently ordered dinner entrees at restaurants. Company management believes
the limited menu of its restaurants, which concentrates primarily on high
quality USDA choice-graded steaks, and the appeal of its "Texas Roadhouse"
ambiance, distinguishes the Lone Star restaurants and provides the Company with
a competitive advantage.
The Company opened 60 new domestic Lone Star restaurants and the
Australian Joint Venture opened 13 restaurants during 1997.
In 1995 the Company decided to develop additional steak restaurant
concepts in the upscale segment. In September 1995 the Company acquired the
intellectual property rights, marks and trade name of Del Frisco's Double Eagle
Steak House restaurant ("Del Frisco's"), the existing Del Frisco's restaurant
located in Dallas, Texas, and a Del Frisco's restaurant under construction in
Fort Worth, Texas (the "Del Frisco's Acquisition"). The Fort Worth location
opened in April of 1996 and the third Del Frisco's unit opened in Denver,
Colorado in January of 1997. The average check per customer for the Del Frisco's
concept is approximately $60.
See "Expansion into Upscale Markets" for a description of the Del Frisco's
Acquisition.
The Company developed another upscale steak restaurant concept which
utilizes the trade name Sullivan's Steakhouse ("Sullivan's"). The Company opened
two Sullivan's in 1996 in Austin, Texas and Indianapolis, Indiana, respectively,
and opened two in 1997 in Wilmington, Delaware and Baton Rouge, Louisiana,
respectively. The Company opened its fifth Sullivan's Steakhouse restaurant in
January, 1998 in Charlotte, North Carolina. The average check per customer in
this segment is approximately $50. See "Expansion into Upscale Market" for a
description of the Sullivan's concept.
Restaurant Concept
Lone Star restaurants are positioned as "destination restaurants" that
attract loyal clientele. The Lone Star restaurants embrace a Texas-style concept
that features Texas artifacts and country and western music. The authentic
"Texas Roadhouse" concept was developed to capitalize on the enduring popularity
of Texas related themes. Lone Star is further
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distinguished by its high quality, USDA choice-graded steaks which are hand-cut
fresh daily at each restaurant and mesquite grilled to order. A meat counter
visible from the dining area enables customers to have the opportunity to view
and personally select their own steaks. Meals are generous "Texas-sized"
portions and full liquor bar service is available. The exciting and vibrant
atmosphere created by the restaurants' "Texas Roadhouse" ambiance is enhanced by
free buckets of roasted peanuts, neon beer signs and specially selected upbeat
country western music. The decor includes planked wooden floors, dim lighting,
flags and other Texas memorabilia, all of which enhance the casual dining
experience and establish a distinct identity. Lone Star restaurants are open
seven days a week and serve both lunch and dinner with an average check per
customer for 1997 of approximately $9.50 at lunch and $19.50 at dinner.
Del Frisco's is designed to serve a sophisticated clientele, including
business related dining occasions. The Del Frisco's concept embraces an elegant
and timeless early twentieth century motif. The concept features old ways of
cooking, such as master broiling and roasting. Del Frisco's decor and ambiance
include dark woods, fabric walls, fireplaces, separate dining rooms and soft
background music featuring old favorites. All of these elements enhance the
dining experience and establish a distinct identity for the Del Frisco's
restaurant. Del Frisco's is further distinguished by its high quality USDA
prime-graded steaks which are hand-cut in each restaurant. Del Frisco's
restaurants serve dinner only, and are open Monday through Saturday with an
average guest check of approximately $60.
Sullivan's embraces a 1940's steakhouse theme with nostalgic art deco
influences that feature music from the big band era. In the bar, live jazz music
is featured nightly. The decor includes an open kitchen, separate dining rooms,
dark wood paneling, carpeted floors, warm lighting and white table cloths.
Sullivan's is distinguished by its high quality Certified Angus BeefTM steaks,
chops and seafood. Sullivan's restaurants serve dinner only, and are open Monday
through Saturday with an average guest check of approximately $50.
Corporate Strategy
The Company has positioned itself as "The Steak Company," operating three
distinct steakhouse restaurant concepts. The primary growth vehicle continues to
be the Lone Star Steakhouse & Saloon restaurants concept which operate in the
mid-scale steak segment. Lone Star Steakhouse & Saloon restaurants emphasize the
following strategic elements:
o Positioning in the mid-priced, full-service casual dining
segment of the restaurant industry.
o The popular brand of Texas provides a unique and enduring
attraction to a broad and diverse demographic and
socio-economic mix of customers in the 25 to 54 age group.
o Generous "Texas-sized" portions offered at moderate prices.
o High quality and attentive service with each wait person
generally being assigned to no more than three tables at
dinner to ensure customer satisfaction.
o Consistent high quality products through careful ingredient
selection, food preparation and aging of steaks.
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The Company believes it can continue to distinguish itself in the upscale market
by employing many of the strategies that have been successful in the mid-priced
steakhouse market. The Company will continue to emphasize attentive service and
consistent, high quality food products. The Company expects that it can
successfully apply its restaurant operations and management systems to the
upscale markets. See "Restaurant Concepts" for a description of the elements of
these concepts.
Internationally, the Company will continue to develop Lone Star Steakhouse
& Saloon restaurants in various countries aligning itself with proven local
operators. The Company also believes that its two upscale steak concepts have
international development opportunities.
Unit Economics
The Company's management team focuses on selecting locations with the
potential of producing significant revenues while controlling capital
expenditures and occupancy costs as a percentage of net sales. The Company's
Lone Star restaurants averaged approximately $2.3 million in sales on an
annualized basis during 1997. Of the 267 Lone Star restaurants open at March 10,
1998, 102 were leased facilities and had an average cash investment of
$1,120,000 and 165 were owned and had an average cost for land acquisition,
construction, equipment and pre-opening expenses of $2,065,000. The Company
anticipates that a greater proportion of its new Lone Star restaurant locations
will continue to be purchased rather than leased and anticipates an average
total cost per unit of between $1.6 million and $2.2 million.
The Company anticipates the average total investment per restaurant for a
typical Del Frisco's restaurant and Sullivan's restaurant will range from $2.2
million to $2.8 million, but expects the sales to investment ratio will be
similar to that of the Lone Star Steakhouse & Saloon restaurants.
Menu
The dinner menu at a Lone Star Steakhouse & Saloon restaurant features a
limited selection of high quality, specially seasoned and mesquite grilled
steaks, ribs, chicken, fish, shrimp and feature various combinations. All
dinners offer a complete meal including salad, bread and butter and a choice of
baked potato, baked sweet potato, steak fries or Texas rice. The lunch menu
offers a selection of hamburgers, chicken sandwiches, luncheon steaks, ribs,
soups and salads. Depending on local availability and quality, a fresh fish
selection is also offered at lunch and dinner. The lunch and dinner menus also
include appetizers and desserts, together with a full bar service. Alcoholic
beverage service accounts for approximately 13% of the Company's net sales.
The menu at Del Frisco's features high quality USDA prime-graded steaks,
chops, seafood, and quality side dishes. Del Frisco's wine list offers over 300
high quality wines and a full bar. Alcoholic beverage service accounts for
approximately 35% of the restaurants sales.
The menu at Sullivan's features high quality Certified Angus Beef(TM)
steaks, chops, seafood and quality side dishes. Sullivan's also features a
number of high quality wines and full bar service. Alcoholic beverage service
accounts for approximately 40% of the restaurants' sales.
Site Selection
The Company believes the site selection process is critical in determining
the potential success of a particular restaurant and senior management devotes
significant time and resources to analyzing each prospective site. A variety of
factors are considered in the site
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selection process, including the specific steakhouse concept to be developed,
local market demographics, site visibility and accessibility and proximity to
significant generators of potential customers such as major retailers, retail
centers and office complexes, office and hotel concentrations and entertainment
centers (stadiums, arenas, theaters, etc.). The Company also reviews potential
competition and attempts to analyze the profitability of other national chain
restaurants operating in the area.
Of the 267 existing Lone Star Steakhouse & Saloon restaurants at March 10,
1998, 102 are leased and 165 are owned locations. As of March 10, 1998, the
Company has entered into agreements to open 17 additional locations, 4 under
lease and 13 by purchase. The Company will continue to purchase additional sites
in the future, when it is cost effective. The Company utilizes a prototype
building for its Lone Star Steakhouse & Saloon restaurants when it acquires or
leases vacant land. Currently, there are 97 prototype units open and 9 prototype
units under development. Leases are negotiated generally with initial terms of
three to five years, with multiple renewal options. The Company has generally
required between 150 and 280 days after the signing of a lease or the closing of
a purchase to complete construction and open a new restaurant. Additional time
is sometimes required to obtain certain government approvals and licenses, such
as liquor licenses.
Of the three Del Frisco's open as of March 10, 1998 two are owned and one
is leased and the Company has entered into an agreement to lease an additional
Del Frisco's restaurant in New York, New York. The five existing Sullivan's are
all leased and the Company has entered into lease agreements for six additional
Sullivan's locations, and two agreements to purchase additional sites.
Restaurant Layout
The Company believes the decor and interior design of its restaurants are
significant factors in its success. The Lone Star Steakhouse & Saloon
restaurants' open layout permits dining customers to view the bar and Texas
memorabilia and enhance the casual dining atmosphere. The Company also designs
its kitchen space for efficiency of work flow, thereby minimizing the amount of
space required.
Lone Star Steakhouse & Saloon restaurants currently average approximately
5,800 square feet and include a dining area with seating for approximately 220
customers. In addition, a bar area is located adjacent to the dining room
primarily to accommodate customers waiting for dining tables or to accommodate
overflow. In some restaurants, an outside patio area can provide additional
seating. The Company anticipates future Lone Star restaurants will average
approximately 5,500 square feet and in small town markets will average of 4,700
square feet.
The original Del Frisco's restaurant in Dallas, Texas is approximately
10,000 square feet and seats approximately 350 persons. In the first quarter of
1998 an extended wine cellar and cigar bar were added with private dining
available in the wine cellar. The Ft. Worth, Texas and Denver, Colorado Del
Frisco's restaurants are approximately 8,000 and 12,000 square feet and seat
approximately 300 and 360 persons, respectively. In addition, Del Frisco's
features a bar area adjacent to the dining room primarily to accommodate
customers waiting for tables. Future Del Frisco's, ecxcept for the New York City
location, restaurants are planned to be approximately 7,000-8,000 square feet
and will include a dining area for approximately 175-200 customers.
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The first Sullivan's restaurant, in Austin, Texas was 7,500 square feet
and included a dining area for approximately 180-200 customers. This restaurant
was expanded by 4,500 square feet in 1997 to accommodate a specialty area called
"Ringside". The addition provides space for private parties and overflow from
the Sullivan's restaurant. This location now seats 320 customers. This concept
is also utilized at the Baton Rouge, Louisiana Sullivan's restaurant. The
Sullivan's bar area is separate from the dining room and is designed to be a
destination unto itself, featuring live jazz music six nights a week and an
upbeat, convivial atmosphere. Future Sullivan's restaurants are planned to be
approximately 7,000-8,000 square feet and will include a dining area for
approximately 175-200 customers.
Expansion Strategy - Lone Star Steakhouse and Saloon Restaurants
The Company is continuing its Lone Star Steakhouse & Saloon expansion
program pursuant to which it opened, domestically, 36 restaurants in 1993, 48
restaurants in 1994, 45 restaurants in 1995, 45 restaurants in 1996, 60
restaurants in 1997, and intends to open approximately 60 Lone Star Steakhouse &
Saloon restaurants in 1998, all of which are expected to be Company-owned and
operated. The Company plans to develop such new restaurants in its existing
markets and expand into new markets which meet the Company's criteria. A
licensed Lone Star restaurant opened in February 1998 in California and two
additional restaurants will open in California in 1998 by the same licensee.
As of March 10, 1998, the Company had entered into agreements to open 17
additional Lone Star Steakhouse & Saloon locations, 4 under lease and 13 by
purchase. The Company is also actively negotiating for additional leases or
purchases at a number of sites for future Lone Star restaurant locations which
will also be developed in traditional and smaller markets.
Small Markets and Expansion of Foreign Markets
In 1997 the Company opened seven Lone Star restaurants in small town
markets generally having a population of approximately 35,000 to 40,000 but
having a regional trade area draw of between 70,000 and 100,000 people. The Lone
Star restaurants in these areas are approximately 4,700 to 5,000 square feet. In
1998 the Company anticipates opening up to 20 units in small town markets. The
Company expects between 120 and 180 days after the signing of a lease or the
closing of a purchase to complete construction and open a new restaurant in
small town markets.
The Company intends to continue to expand its Lone Star Steakhouse &
Saloon business outside the United States. Pursuant to a joint venture
arrangement covering Australia and New Zealand (the "Australian Joint Venture"),
the Australian Joint Venture owns and operates 34 restaurants. The Company plans
to open between 8 and 10 units in Australia in 1998. A licensed Lone Star
Steakhouse & Saloon restaurant opened in Guam in mid-1995. The Company is also
contemplating entering into restaurant development joint ventures, licensing or
other corporate partnership arrangements in other countries.
In June 1996 the Company terminated its joint venture in Europe whereby it
divested its interest in three existing restaurants and one under construction.
Such restaurants do not operate as Lone Star Steakhouse & Saloon restaurants.
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Expansion into Upscale Markets
While the Company intends to continue to have a substantial and increasing
presence in the mid-priced, full service, casual dining steakhouse restaurant
market, the Company believes considerable opportunities exist in the upscale
steakhouse dining segment.
The Company intends to develop both of its upscale steakhouse concepts. In
September 1995, the Company entered the upscale steakhouse segment by acquiring
the intellectual property rights, marks and trade name of Del Frisco's Double
Eagle Steak House, the existing Del Frisco's located in Dallas, Texas, and a Del
Frisco's under construction in Fort Worth, Texas which opened in April 1996. The
Company opened an additional Del Frisco's restaurant in Denver, Colorado in
January 1997. The Company also became the licensor of two Del Frisco restaurants
in Houston, Texas and Orlando, Florida. The Company has no plans for future
franchising of the Del Frisco's concept.
The Company has leased approximately 16,000 square feet of space in
Rockefeller Plaza in New York City and will open a Del Frisco's Steakhouse
restaurant in late summer of 1998. The Company expects to open one or two other
Del Frisco's restaurants in 1998 in the United States.
The Company developed and operates a second upscale steak restaurant
concept, Sullivan's Steakhouse, where the average check per customer is
approximately $50. The Company opened its first Sullivan's restaurant in May
1996 in Austin, Texas and an additional restaurant in November 1996 in
Indianapolis, Indiana. The Company expects to open five to seven Sullivan's
units in 1998 in the United States. The Company opened two Sullivan's
restaurants in 1997 in Wilmington, Delaware and Baton Rouge, Louisiana and
opened an additional restaurant in Charlotte, North Carolina in January 1998.
Marketing
Lone Star Steakhouse & Saloon restaurants are "destination location
restaurants" that focus on the mid-priced full service casual dining market
segments. The Company has relied principally on its commitment to customer
service, an excellent price-value relationship and the unique "Texas Roadhouse"
ambiance of its restaurants to attract and retain customers. Accordingly, the
Company has focused its resources on providing its customers with superior
service, value and an exciting and vibrant atmosphere, and has relied primarily
on word of mouth to attract new customers. The Company also utilizes radio and
billboard advertising to promote its restaurants and build customer awareness.
In 1998, the Company will select one or more ad agencies to help promote the
company on radio and television in select markets by the third quarter. The
Company utilizes a similar strategy for its Del Frisco's and Sullivan's
restaurants, in addition to various local store marketing efforts. The Company
also employs some print and direct mail advertising, and conducts some local
restaurant promotions. To create additional Lone Star name recognition and
customer identification, the Company sells T-shirts and other items bearing the
Lone Star name and logo.
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Restaurant Operations and Management
The Lone Star Steakhouse & Saloon concept has evolved from various
steakhouse restaurants that certain of the Company's principal stockholders have
operated since 1985. In addition, the restaurant operations and management
systems are an outgrowth of systems and controls developed by the Company's
senior management and successfully used to manage a large number of restaurants
located in numerous states. Management utilizes substantially the same
operational, financial and management systems for all three steakhouse concepts.
The Company strives to maintain quality and consistency in its restaurants
through careful hiring, training and supervision of personnel and the
establishment of standards relating to food and beverage preparation,
maintenance of facilities and conduct of personnel.
The Company maintains financial and accounting controls for each of its
restaurants through the use of centralized accounting and management information
systems. Sales information is collected daily from each restaurant, and
restaurant managers are provided with daily, weekly and twenty-eight day period
operating statements for their locations. Cash is controlled through daily
deposits of sales proceeds in local operating accounts, the balances of which
are wire transferred weekly to the Company's principal operating account.
The management team for a typical Company restaurant consists of one
general manager and three managers. Each restaurant also employs a staff
consisting of approximately 50 to 90 hourly employees, many of whom work
part-time. Typically, each general manager reports directly to a district
manager who reports to a regional manager. The regional managers report to the
Company's Chief Operating Officer. Restaurant managers complete an eight-week
training program during which they are instructed in areas including food
quality and preparation, customer satisfaction, alcoholic beverage service,
governmental regulations compliance, liquor liability avoidance and employee
relations. Restaurant management is also provided with a proprietary operations
manual relating to food and beverage preparation, all areas of restaurant
management and compliance with governmental regulations. Working in concert with
restaurant managers, the Company's senior management defines operations and
performance objectives for each restaurant and monitors implementation. An
incentive cash bonus program has been established in which each restaurant's
management team participates. Awards under the incentive plan are tied to
achievement of specified operating targets. Senior management regularly visit
Company restaurants and meets with the respective management teams to ensure the
Company's strategies and standards of quality are met in all respects of
restaurant operations and personnel development.
The Company utilizes a comprehensive peer review reporting system for its
general managers and district managers. Within seven days after the close of
each twenty-eight day accounting period, complete financial statements are
produced and, subsequently, the district managers and the Company's senior
management review operating results for each district. The next week a meeting
is arranged during which the general manager of each restaurant reviews the
profit and loss statement of the restaurant with a district manager and other
general managers who report to the district manager. The participants offer each
other feedback on their respective performances and suggest ways of improving
profitability. The Company believes the peer review system enables each general
manager to benefit from the collective experience of all of the Company's
management.
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The Company believes customer service and satisfaction are keys to the
success of restaurant operations. The Company's commitment to customer service
and satisfaction is evidenced by several Company practices and policies,
including periodic visits by restaurant management to customers' tables, active
involvement of restaurant management in responding to customer comments and
assigning wait persons to a limited number of tables, generally three for dinner
and four for lunch. Teamwork is emphasized through a runner system for
delivering food to the tables that is designed to serve customers in an
efficient and timely manner.
Each new restaurant employee of the Company participates in a training
program during which the employee works under the close supervision of a
restaurant manager, or experienced key employee. Management strives to instill
enthusiasm and dedication in its employees and to create a stimulating and
rewarding working environment where employees know what is expected of them in
measurable terms. Management continuously solicits employee feedback concerning
restaurant operations and strives to be responsive to the employees' concerns.
During the first few months of 1998, management began a re-certification
training program to re-train the regional and district managers. The general
managers of the Company are currently being certified which essentially is a
program to retrain the trainers. The Company believes this re-training will help
maintain and enhance management congruence and re-emphasize the Company's
dedication to superior service, food quality, and operating performance.
Purchasing
The Company negotiates directly with suppliers for food and beverage
products to ensure consistent quality and freshness of products and to obtain
competitive prices. The Company purchases substantially all food and beverage
products from local or national suppliers. Food and supplies are shipped
directly to the restaurants, although invoices for purchases are sent to the
Company for payment. The Company does not maintain a central product warehouse
or commissary. The Company has not experienced any significant delays in
receiving restaurant supplies and equipment.
From time to time, the Company engages in forward pricing and may consider
other hedging strategies with regard to its meat and other food costs in order
to minimize the impact of potential fluctuations in prices. This practice could
help stabilize the Company's food costs during times of fluctuating prices. The
Company has no forward pricing contracts at December 30, 1997.
Management Information Systems
The Company utilizes an in-store computer-based management support system
which is designed to improve labor scheduling and food cost management, provide
corporate management quicker access to financial data and reduce the restaurant
manager's administrative time. Each general manager uses the system for
production planning, labor scheduling and food cost variance analysis. The
system generates reports on sales, bank deposit data and variance data to the
Company's management on a daily basis.
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The Company generates weekly consolidated sales reports and food and labor
cost variance reports at its corporate headquarters, as well as detailed profit
and loss statements for each restaurant every four weeks. Additionally, the
Company monitors the average check, customer count, product mix and other sales
trends on a daily basis.
In 1997 the Company started testing and evaluating point-of-sale (P.O.S.)
systems for its restaurants at several locations. A P.O.S. system would enhance
the current in-store computer based support system and streamline the
order-taking/delivery process. Management estimates the cost of company-wide
P.O.S. implementation would be approximately $9-$11 million.
Year 2000 Compliance
The Company utilizes and is dependent upon computer systems and software
to conduct its business. The systems and software include those developed and
maintained by the Company's in-house computer department as well as purchased
software which is run on in-house computer systems, including networks. In 1997,
the Company initiated a review and assessment of all hardware and software to
confirm that it will function properly in the year 2000. In addition, selected
major vendors have been contacted to ensure that they are addressing this issue.
All in-house systems and software are expected to be year 2000 compliant no
later than the third quarter of 1998. Vendor response indicates that their
hardware and/or software will be compliant, collectively, no later than the end
of 1998. This timetable will allow time for testing such compliance. While there
may be some expenses incurred in the next two years, it is not expected to have
a material effect on the Company's consolidated financial statements.
Accounting and Administrative Services
The Company utilizes certain accounting and administrative services
provided by Coulter Enterprises, Inc. pursuant to the terms of a services
agreement. These services were provided to the Company during 1997 at an annual
fee of $2,010,000 plus an additional fee of $440 per restaurant per 28-day
period plus reimbursement of all out-of-pocket costs and expenses. For 1998, the
fixed annual charge is $3,737,000 and the per restaurant per 28-day period fee
is $466. The increase in the fixed charge is due to an increase in the number of
restaurants operated by the Company. In the future, the Company may satisfy its
accounting and administrative needs by hiring employees directly. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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Competition
Competition in the restaurant industry is increasingly intense. The
Company operates its mid-scale and upscale full service restaurants primarily on
the basis of quality of food and service, ambiance, location and price-value
relationship. The Company also competes with a number of other restaurants
within its markets, including both locally owned restaurants and regional or
national chains. The Company believes that its "Texas Roadhouse" concept,
attractive price-value relationship and quality of food and service enable it to
differentiate itself from its competitors. While the Company believes its
restaurants are distinctive in design and operating concept, it is aware of
restaurants that operate with similar concepts. The Company also competes with
other restaurants and retail establishments for sites. Many of the Company's
competitors are well-established in the mid-priced mid-scale and upscale dining
segment and certain competitors have substantially greater financial, marketing
and other resources than the Company. The Company believes that its ability to
compete effectively will continue to depend upon its ability to offer high
quality, competitively priced food in a full service, distinctive dining
environment.
Government Regulation
The Company's restaurants are subject to numerous federal, state and local
laws affecting health, sanitation, safety and ADA accessibility standards, as
well as to state and local licensing regulation of the sale of alcoholic
beverages. Each restaurant has appropriate licenses from regulatory authorities
allowing it to sell liquor, beer and wine, and each restaurant has food service
licenses from local health authorities. The Company's licenses to sell alcoholic
beverages must be renewed annually and may be suspended or revoked at any time
for cause, including violation by the Company or its employees of any law or
regulation pertaining to alcoholic beverage control, such as those regulating
the minimum age of patrons or employees, advertising, wholesale purchasing, and
inventory control. The failure of a restaurant to obtain or retain liquor or
food service licenses could have a material adverse effect on its operations. In
order to reduce this risk, each restaurant is operated in accordance with
standardized procedures designed to ensure compliance with all applicable codes
and regulations.
The Company may be subject in certain states to "dram-shop" statutes,
which generally provide a person injured by an intoxicated person the right to
recover damages from an establishment that wrongfully served alcoholic beverages
to the intoxicated person. The Company carries liquor liability coverage as part
of its existing comprehensive general liability insurance.
The development and construction of additional restaurants will be subject
to compliance with applicable zoning, land use and environmental regulations.
The Company's restaurant operations are also subject to federal and state
minimum wage laws governing such matters as working conditions, overtime and tip
credits and other employee matters. Significant numbers of the Company's food
service and preparation personnel are paid at rates related to the federal
minimum wage and, accordingly, further increases in the minimum wage could
increase the Company's labor costs.
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Trademarks
The Company regards its marks, Lone Star Steakhouse & Saloon(R),
Lone Star Cafe(R), Del Frisco's(R), Double Eagle Steak House(R), and Sullivan's
Steakhouse(R) as having significant value and as being an important factor in
the marketing of its restaurants. The Company is aware of names and marks
similar to the service marks of the Company used by other persons in certain
geographic areas. However, the Company believes such uses will not have a
material adverse effect on the Company. The Company's policy is to pursue
registration of its marks whenever possible and to oppose vigorously any
infringement of its marks.
In December 1993, the Company filed a trademark infringement suit
against a restaurant operator who operated two steakhouse restaurants in
metropolitan Atlanta utilizing the mark and trade name Lone Star Steaks. By
Order dated April 24, 1995, the United States District Court for the Northern
District of Georgia, entered a permanent injunction barring the Company from
using or displaying the "Lone Star Steakhouse & Saloon name , trademark or
service mark" or any similar imitation of that mark or the "Lone Star Steaks"
mark in connection with the operation of any restaurant in Georgia. On February
24, 1997, the Court of Appeals of the Eleventh Circuit issued its decision
whereby it affirmed all of the district court's rulings, except for the portion
which granted attorney fees under the Georgia Fair Business Practices Act. The
Company filed an appeal en banc. On September 25, 1997 the United States Court
of Appeals, Eleventh Circuit, vacated its previous affirmation of the district
court's order granting a permanent injunction and remanded the case to the
district court to revisit certain issues of its earlier findings. In November
1997 the parties to the lawsuit entered into a confidential settlement agreement
to resolve all issues. As a result the Company may use its Lone Star Steakhouse
& Saloon mark in the state of Georgia and all orders issued by the district
court have been vacated.
On June 2, 1996, the License Agreement for the Del Frisco's
restaurant in Houston, Texas expired. The licensee refused to cease using the
Company's marks. Accordingly, a lawsuit was filed in Federal District Court in
the State of Texas on September 9, 1996 seeking to enjoin licensee from further
use of the Company's marks and seeking damages for infringement.
Employees
As of March 10, 1998, the Company employed approximately 21,500 persons, 7
of whom are executive officers, three of whom are regional managers, 22 of whom
are district managers, approximately 1,276 of whom are restaurant management
personnel and the remainder of whom are hourly restaurant personnel. None of the
Company's employees are covered by a collective bargaining agreement. The
Company considers its employee relations to be good.
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RESTAURANT LOCATIONS AS OF MARCH 10, 1998
The following table sets forth the location of the Company's existing domestic
Lone Star Steakhouse & Saloon (267) restaurants, Del Frisco's (3) restaurants,
and Sullivan's (5) restaurants:
ALABAMA GEORGIA LOUISIANA NEW JERSEY PENNSYLVANIA
Anniston Atlanta Alexandria Atlantic City Allentown
Birmingham (2) Augusta Baton Rouge (2) Bridgewater Easton
Huntsville Lafayette Cherry Hill Erie
Mobile IDAHO Monroe Delran Harrisburg
Montgomery Boise New Orleans (4) Eatontown Johnstown
Trussville Shreveport Edison King of Prussia
Tuscaloosa ILLINOIS Hanover Township Lancaster
Bloomington MASSACHUSETTS Hazlet Philadelphia (3)
ALASKA Bradley Boston (2) Marlton Pittsburgh (5)
Anchorage Carbondale Ocean County Pottstown
Champaign MARYLAND Scotch Plains Middletown
ARIZONA Chicago (12) Bel Air Turnersville Reading
Mesa Decatur Columbia Voorhees Scranton
Phoenix (4) Mt. Vernon Frederick Wayne Wilkes-Barre
Peoria Gaithersburg York
ARKANSAS Rockford Laurel NEW MEXICO
Ft. Smith Springfield Lexington Park Albuquerque SOUTH CAROLINA
Little Rock (2) Waldorf Greenville
Springdale INDIANA Westminster NEW YORK Myrtle Beach (2)
Anderson Albany Spartanburg
COLORADO Evansville MICHIGAN Buffalo
Colorado Springs Fort Wayne Ann Arbor Poughkeepsie SOUTH DAKOTA
Denver (6) Indianapolis (4) Battle Creek Rochester (2) Sioux Falls
Fort Collins Lafayette Bay City
Loveland Merrillville Brighton NORTH CAROLINA TENNESSEE
South Bend Dearborn Asheville Jackson
DELAWARE Terre Haute Detroit (7) Boone Johnson City
Dover Grand Rapids Charlotte (4) Knoxville
Wilmington (2) IOWA Jackson Durham Memphis (3)
Cedar Rapids Saginaw Fayetteville
FLORIDA Coralville Waterford Greensboro (2) UTAH
Bradenton Davenport Greenville Centerville
Clearwater Des Moines MISSISSIPPI Jacksonville Layton
Coral Springs Waterloo Hattiesburg Raleigh (3) Salt Lake City
Fort Lauderdale Jackson Rocky Mount
Fort Myers KANSAS Salisbury VIRGINIA
Gainesville Garden City MISSOURI Southern Pines Alexandria
Lakeland Hutchinson Branson Winston-Salem Centreville
Ocala Overland Park Independence Chesapeake
Orlando Kansas City NORTH DAKOTA Fairfax
Pensacola KENTUCKY Springfield Fargo Falls Church
Port Richey Bowling Green St. Louis (5) Fredericksburg
Sarasota Florence OHIO Herndon
St. Petersburg Lexington NEBRASKA Akron Norfolk
Tampa Louisville Lincoln Canton Potomac Mills
Omaha (2) Cincinnati (3) Richmond (3)
Cleveland (5) Sterling
NEVADA Columbus (5) Virginia Beach
-------------- ----------------
SULLIVAN'S DEL FRISCO'S Las Vegas (4) Dayton (2)
LOCATIONS: LOCATIONS: Lancaster WEST VIRGINIA
-------------- ----------------
OKLAHOMA Middletown Beckley
Wilmington, DE Denver, CO Lawton Niles Charleston
Indianapolis, IN Dallas, TX Oklahoma City Springfield Huntington
Baton Rouge, LA Fort Worth, TX Tulsa Toledo (2) Vienna
Charlotte, NC Youngstown
Austin, TX WISCONSIN
Appleton
Racine
|
-14-
Item 2. Properties
As of March 10, 1998, the Company leased 102 and owned 165 of its Lone
Star restaurant locations. At such date the Company owned two and leased one Del
Frisco's Steak Houses and leased all five of its locations utilized for its
Sullivan's concept. Lease terms are generally five years, with multiple renewal
options. All of the Company's leases provide for a minimum annual rent and some
leases provide for additional rent based on sales volume at the particular
location over specified minimum levels. Generally, the leases are net leases
which require the Company to pay the costs of insurance, taxes and maintenance.
The Company intends to continue to purchase restaurant locations where
cost-effective.
The Company's executive offices are located at 224 East Douglas, Suite
700, Wichita, Kansas, 67202 which space is provided pursuant to the terms of the
existing management agreement with Coulter Enterprises. The Company believes
there is sufficient office space available at favorable leasing terms in the
Wichita, Kansas area to satisfy the additional needs of the Company that may
result from future expansion.
Item 3. Legal Proceedings
The Company is involved from time to time in litigation arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the financial condition or results of operations of the
Company. See "Business-Trademarks" for a description of litigation involving the
use of trademarks.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the holders of the Company's Common
Stock during the fourth quarter of the Company's fiscal year ended December 30,
1997.
-15-
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Market Information
The Company's Common Stock (ticker symbol: STAR) is traded
over-the-counter on the Nasdaq National Market (Nasdaq). The following table
sets forth, for the periods indicated, the high and low sale prices for the
Common Stock, as reported by Nasdaq.
Bid Prices
----------
Calendar 1997 High Low
---------------------- ---- ---
First Quarter 28 1/2 22 3/4
Second Quarter 26 18 1/4
Third Quarter 25 1/16 17 1/8
Fourth Quarter 23 3/16 16 1/8
Bid Prices
----------
Calendar 1996 High Low
------------------------ ---- ---
First Quarter 40 7/8 31 1/8
Second Quarter 45 37 3/8
Third Quarter 39 7/8 30
Fourth Quarter 32 25 3/8
|
Dividends
The Company has not paid any cash dividends on its Common Stock and does
not intend to pay cash dividends on its Common Stock for the foreseeable future.
The Company intends to retain future earnings to finance future development.
Number of Stockholders
As of March 10, 1998, there were 673 holders of record of the Company's
Common Stock. The Company believes there are in excess of 8,000 beneficial
owners of the Company's Common Stock.
-16-
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data and is
qualified by reference to and should be read in conjunction with the
consolidated financial statements and the notes thereto and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K. The selected consolidated data of the
Company as of December 30, 1997, December 31, 1996, December 26, 1995, December
27, 1994, and December 28, 1993, and for each of the five years in the period
ended December 30, 1997, were derived from the Company's audited consolidated
financial statements. The pro forma data set forth below for the periods
presented are unaudited and have been prepared by management solely to
facilitate period-to-period comparison and do not represent the actual results
of operations for the periods presented. Said pro forma adjustments reflect the
income tax provisions at the estimated effective federal and state income tax
rates applicable to the operations of a group of related entities which were
operated under common control (collectively, the "CCC Group"), (see Note 2 to
the Company's consolidated financial statements) which were taxed as
S-Corporations for income tax purposes prior to their acquisition by the Company
in August 1995.
-17-
The following table should be read in conjunction with the Financial Statements
and Notes thereto included elsewhere in this Form 10-K.
Year Ended In December,(1)
-----------------------------------------------------------------------------
(Dollars in thousands except share data)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Income Statement Data:
Net sales $ 585,358 $ 491,754 $ 340,857 $ 215,800 $ 112,263
Costs and expenses:
Costs of sales 211,571 172,338 120,871 76,888 40,981
Restaurant operating expenses 215,805 167,871 116,703 71,996 36,979
General and administrative expenses 21,649 21,285 12,693 8,117 3,916
Loss on divestiture of foreign operations -- 8,557 -- -- --
Depreciation and
amortization 30,590 28,384 19,817 12,989 6,744
------------ ------------ ------------ ------------ ------------
Total costs and expenses 479,615 398,435 270,084 169,990 88,620
------------ ------------ ------------ ------------ ------------
Income from operations 105,743 93,319 70,773 45,810 23,643
Other income, net 4,108 3,682 2,910 1,263 1,840
------------ ------------ ------------ ------------ ------------
Income before provision for
income taxes and minority
interest 109,851 97,001 73,683 47,073 25,483
Provision for income taxes 40,075 37,518 26,820 16,900 9,112
Minority interest (expense) (968) 584 705 -- --
------------ ------------ ------------ ------------ ------------
Net income $ 68,808 $ 60,067 $ 47,568 $ 30,173 $ 16,371
============ ============ ============ ============ ============
Basic earnings per share $ 1.68 $ 1.53 $ 1.31 $ 0.88 $ 0.50
============ ============ ============ ============ ============
Weighted average shares
outstanding 41,013,749 39,383,891 36,432,464 34,295,830 32,402,469
============ ============ ============ ============ ============
Unaudited pro forma information based
on providing for income taxes
on pooled S-Corporations of
CCC Group prior to acquisi-
tion at the estimated tax rate:
Income before income
taxes, net of minority
interest $ 74,388 $ 47,073 $ 25,483
Pro forma provision for
income taxes 27,653 17,884 9,696
------------ ------------ ------------
Pro forma net income $ 46,735 $ 29,189 $ 15,787
============ ============ ============
Pro forma basic earnings per
share $ 1.28 $ 0.85 $ 0.49
============ ============ ============
|
-18-
At fiscal year end in December, (1)
--------------------------------------------------------------------------------
(Dollars in thousands)
1997 1996 1995 1994 1993
-------- ---------- ------------ ------------- ---------
Balance Sheet Data:
Working capital $116,773 $126,244 $ 59,880 $ 37,618 $ 83,606
Total assets 620,812 542,152 358,218 204,028 164,763
Long-term debt,
including current
portion -- -- 387 4,318 2,953
Stockholders' equity 566,148 495,239 322,811 180,072 151,768
------------------
|
(1) The Company operates on a 52 or 53 week fiscal year ending the last
Tuesday in December. The fiscal quarters for the Company consist of
accounting periods of 12, 12, 12, and 16 or 17 weeks, respectively.
The Company's 1993 fiscal year ended on December 28 and its 1994,
1995, 1996, and 1997 fiscal years ended on December 29, 26, 31, and
30, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The following discussion and analysis should be read in conjunction with
the information set forth under "Selected Financial Data" and the consolidated
financial statements including the notes thereto included elsewhere in this Form
10-K.
The Company began 1995 with 115 Lone Star domestic restaurants, opened 45
restaurants during 1995, 45 restaurants during 1996, and opened 60 restaurants
during the year ended December 30, 1997.
Pre-opening costs include labor costs, costs of hiring and training
personnel and certain other costs relating to opening new restaurants, and are
capitalized and amortized over a 12 month period, beginning in the period that
the restaurants opens.
After acquiring the rights to operate the Del Frisco's Double Eagle Steak
House restaurant located in Dallas, Texas, the Company opened two additional Del
Frisco's restaurants, one in Fort Worth, Texas in April 1996 and one in Denver,
Colorado in January 1997. The Company also licenses a Del Frisco's restaurant in
Orlando, Florida.
The Company has also developed another upscale steak restaurant concept
under the trade name Sullivan's Steakhouse, where the average check per customer
is approximately $50. The Company opened the first restaurant in May 1996 in
Austin, Texas and opened an additional restaurant in 1996 in Indianapolis,
Indiana, two in 1997, one in Wilmington, Delaware and one in Baton Rouge,
Louisiana, and one additional restaurant in Charlotte, North Carolina in
January, 1998.
-19-
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.
Years Ended (1)
December 30, December 31, December 26,
1997 1996 1995
--------------- --------------- -----------
(Dollars in thousands)
Income Statement Data:
Net sales 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales 36.1 35.1 35.5
Restaurant operating expense 36.9 34.1 34.2
Depreciation and amortization 5.2 5.8 5.8
-------- -------- --------
Restaurant costs and expenses 78.2 75.0 75.5
-------- -------- --------
Restaurant operating income 21.8 25.0 24.5
General and administrative expenses 3.7 4.3 3.7
Loss on divestiture of foreign operations -- 1.7 --
-------- -------- --------
Income from operations 18.1 19.0 20.8
Other income, and minority interest .5 .7 1.0
-------- -------- --------
Income before provision for income
taxes 18.6 19.7 21.8
Provision for income
taxes (2) 6.8 7.5 8.1
-------- -------- --------
Net income (2) 11.8% 12.2% 13.7%
======== ======== ========
Restaurant Operating Data:
Average sales per restaurant on an
annualized basis (3) $ 2,255 $ 2,509 $ 2,536
Number of restaurants at end of period 308 232 175
Number of full restaurant periods open
during the period (4) 3,335 2,546 1,783
|
(1) The Company operates on a 52 or 53 week fiscal year ending the
last Tuesday in December. The fiscal quarters for the Company
consist of accounting periods of 12, 12, 12 and 16 or 17
weeks, respectively.
(2) Gives pro forma effect to providing for income taxes on pooled
S corporations of CCC Group prior to the 1995 Lone Star
Acquisition at the estimated effective tax rate.
(3) Average sales per restaurant on an annualized basis are
computed by dividing a restaurant's total sales for full
accounting periods by the number of full accounting periods
open in the reporting period, and annualizing the result.
(4) Full restaurant periods are four-week accounting periods
within the fiscal year (excluding the first partial accounting
period of operations) that a restaurant was open.
|
-20-
Year Ended December 30, 1997 Compared to Year Ended December 31, 1996
Net sales increased $93,604,000 (19%) for the year ended December 30, 1997
compared to the year ended December 31, 1996 principally attributable to
$60,703,000 in additional sales from units opened the full year in 1997 versus a
partial year in 1996, $43,350,000 in sales from the 60 new domestic Lone Star
restaurants opened in 1997, and $7,038,000 in additional sales from the
Sullivan's and Del Frisco's restaurants opened in 1997. Consolidated sales for
international joint venture restaurants (Australian) increased $20,565,000. Same
store sales were down 6.3% for the year.
Costs of sales, primarily food and beverages increased as a percentage of
sales to 36.1% for the year ended December 30, 1997 from 35.1% due to slightly
higher beef prices as well as some discounted menu items and free appetizers
offered in a national marketing campaign. During these periods, the Company
purchased beef under contracted prices which allowed the Company to maintain
more stable beef costs. Such contracts expired in September, 1997 although there
may be a possibility of contracting prices in the future. If the Company is
unable to contract prices in the future, beef costs could be less stable.
Restaurant operating expenses for the year ended December 30, 1997
increased $47,934,000 (28.6%) from $167,871,000 in the year ended December 31,
1996 to $215,805,000 and such expenses increased as a percentage of net sales
from 34.1% to 36.9%. This increase is attributable to the national marketing
efforts the Company has employed in addition to higher fixed costs in the way of
building and equipment maintenance costs on the domestic Lone Star restaurants
as well as higher labor and occupancy costs in the Australian units, and the
effect of other fixed cost components on lower average restaurant sales.
Depreciation and amortization increased $2,206,000 (7.8%) in the year ended
December 30, 1997 over the year ended December 31, 1996 principally reflecting
the depreciation of equipment relating to the opening of 60 new restaurants in
1997, and increases in depreciation relating to additional owned properties.
General and administrative expenses for the year ended December 30, 1997
increased $364,000 (1.7%) from 1996.
Certain accounting and administrative services are contracted from Coulter
Enterprises, a restaurant management services and consulting company owned by
the Company's Chairman of the Board and Chief Executive Officer. The service
agreement provides for specified accounting and administration services to be
provided on a cost pass-through basis under which the Company paid a fixed
annual charge of $2,010,000, plus an additional fee of $440 per restaurant per
28-day accounting period plus reimbursement of out-of-pocket costs and expenses
during the fiscal year ended December 30, 1997. The service agreement was
renewed for fiscal 1998 with the fixed annual charge increasing to $3,737,000
and the per restaurant, per accounting period fee increasing to $466. Should the
service agreement not be renewed in the future, the Company would incur direct
costs for accounting and administration, personnel, rent and other costs
associated with a separate office; however, the Company believes such direct
costs would not be materially different than the costs under the contractual
arrangement.
-21-
In June 1996 the Company terminated its joint venture in Europe (the
"European Joint Venture") whereby it divested its interest in three existing
restaurants and one under construction. This resulted in a charge to earnings of
$5,964,664 net of the tax benefit of $2,592,512. Such restaurants do not operate
as Lone Star Steakhouse & Saloon restaurants.
Other income, principally interest, for the year ended December 30, 1997
was $4,108,000 a $426,000 increase from 1996. This increase is attributable to
the investment for a full year of the remaining net proceeds of the Company's
public offering in May 1996. The effective income tax rate for the year ended
December 30, 1997 was 36.8% compared to 38.4% for the year ended December 31,
1996. The decrease in the rate is primarily due to certain losses in 1996
resulting from the write-off of the European Joint Venture that were not
available for deduction. Without the impact of the European Joint Venture
write-off, the effective rate was 36.9% in 1996.
Year Ended December 31, 1996 Compared to Year Ended December 26, 1995
Net sales increased $150,897,000 (44.3%) for the year ended December 31,
1996, principally attributable to $77,609,000 in sales from units opened the
full year in 1996 versus a partial year in 1995, $42,038,000 in sales from the
45 domestic Lone Star restaurants opened in 1996, and $13,425,000 in additional
sales from the Sullivan's and Del Frisco's restaurants in 1996. In addition,
consolidated sales for international joint venture (primarily Australian)
increased $46,866,000. Same stores sales were down 1.9% for the year.
Costs of sales, primarily food and beverages, decreased slightly as a
percentage of sales to 35.1% for the year ended December 31, 1996, from 35.5%
due to slightly lower beef prices and improved controls. The Company continues
to purchase beef and some seafood at contracted prices.
Restaurant operating expenses for the year ended December 31, 1996
increased $51,168,000 (43.8%) from $116,703,000 in the year ended December 26,
1995 to $167,871,000. Such expenses decreased as a percentage of net sales to
34.1% from 34.2%.
Depreciation and amortization increased $8,567,000 (43.2%) in the year
ended December 31, 1996, principally reflecting the amortization of capitalized
pre-opening expenses relating to the opening of 59 new restaurants in 1996 and
increases in depreciation related to additional owned properties. General and
administrative expenses for the year ended December 31, 1996 increased
$8,592,000 (67.7%) from the comparable period in 1995. The increase reflects the
first full year of consolidated foreign joint venture administration expenses in
1996, as well as the costs associated with additional multiunit supervisors.
Certain accounting and administrative services are contracted from Coulter
Enterprises. The service agreement provides for specified accounting and
administration services to be provided on a cost pass-through basis under which
Lone Star paid a fixed annual charge in fiscal 1996 of $1,272,000, plus an
additional fee of $416 per restaurant per 28 day accounting period and
reimbursement of out-of-pocket costs and expenses during the fiscal year ended
December 31, 1996.
-22-
In June 1996 the Company terminated its joint venture in Europe where by
it divested its interest in three existing restaurants and one under
construction. This resulted in a charge to earnings of $5,964,664 net of the tax
benefit of $2,592,512. Such restaurants will no longer operate as Lone Star
Steakhouse & Saloon restaurants.
Other income, principally interest, for the year ended December 31, 1996,
was $3,682,000 a $772,000 increase from the comparable period in 1995. This
increase is attributable to the investment of the net proceeds of the Company's
public offering in May 1996.
The effective income tax rate for the year ended December 31, 1996 and the
effective pro forma income tax rate for the year ended December 26, 1995 was
38.4% and 37.2%, respectively. The increase in the rate is primarily due to
certain losses resulting from the write-off of the European Joint Venture that
are not currently available for deduction. Without the impact of the European
Joint Venture write-off, the effective rate was 36.9%.
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 Federal and state established minimum wage levels and,
accordingly, changes in such wage levels affect the Company's labor costs. As
costs of food and labor have increased, the Company has historically been able
to offset these increases through economies of scale and improved operating
procedures, although there is no assurance that such offsets will continue. To
date, inflation has not had a material impact on operating margins.
Liquidity and Capital Resources
The following table presents a summary of the Company's cash flows for the
years ended:
Years ended
-----------------------------------------------------------
December 30, December 31, December 26,
1997 1996 1995
------------ ------------ ------------
Net cash provided by operating activities $ 87,787,650 $ 105,323,791 $ 63,824,777
Net cash used in investment activities (103,488,255) (131,178,835) (124,028,705)
Net cash provided by financing activities 7,328,065 109,401,300 82,052,141
Net effect of exchange rate changes on cash (6,351,750) (249,854) (284,363)
Net increase (decrease) in cash (14,724,290) 83,296,402 21,563,850
|
During the year ended December 30, 1997, the Company's purchases of property and
equipment were $98,959,049.
The Company has opened 185 restaurants in the past three fiscal years of
which 50 opened in 1995, 59 opened during the year ended December 31, 1996, and
76 in the year ended December 30, 1997. The Company does not have significant
accounts receivable 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 capital
expenditures.
-23-
At December 30, 1997, the Company had $135,996,996 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
has entered into 9 leases for new locations. In addition, at such date the
Company had acquired 4 sites and signed contracts or options to purchase 16
sites. The Company was also actively negotiating purchase or lease of
approximately 38 additional sites. In the future, the Company anticipates that a
greater proportion of its new restaurant locations will be purchased rather than
leased. The Company expects to expend approximately $145,000,000 to open new
restaurants in fiscal 1998.
Forward Looking Statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act, and Section 21E of the Exchange Act which
are intended to be covered by the safe harbors created thereby. Although the
Company believes the assumptions underlying the forward-looking statements
contained herein are reasonable, and any of the assumptions could be inaccurate,
and therefore, there can be no assurance the forward-looking statements included
in this report will prove to be accurate. Factors that could cause actual
results to differ from the results discussed in the forward-looking statements
include, but are not limited to 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. 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 the forward-looking statements contained in
this Form 10-K will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
Item 7.A. Quantitative and Qualitative Disclosure about Market Risks
Not applicable.
Item 8. Financial Statements and Supplementary Data
See the Consolidated Financial Statements listed in the accompanying Index
to Financial Statements on Page F-1 herein. Information required for financial
schedules under Regulation S-X is either not applicable or is included in the
financial statements or notes thereto.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
Not applicable.
-24-
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
Item 11. Executive Compensation
The information required by this Item 11 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item 12 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item 13 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements.
See Index to Financial Statements which appears on
page F-1 herein.
(2) Exhibits
-25-
INDEX TO EXHIBITS
Exhibit Exhibit
Number -------
------
***3.1 Company's Certificate of Incorporation as amended
***3.2 Company's By-Laws
*10.1 Services Agreement as amended between the Company
and Coulter Enterprises, Inc., dated February 8,
1997
*****10.2 Employment Agreement between the Company and John D.
White, dated February 1, 1995
****10.3 1992 Lone Star Steakhouse & Saloon, Inc. Incentive
and Non-qualified Stock Option Plan (the "Plan") as
amended
***10.4 Form of Indemnification Agreement for officers and
directors of the Company
***10.5 Purchase Agreement between the Company and Max
Shayne, Inc., dated January 22, 1992
***10.6 Non-Competition, Confidentiality and
Non-Solicitation Agreement between the Company and
Jamie B. Coulter, dated March 12, 1992
**10.7 Non-Competition, Confidentiality and
Non-Solicitation Agreement between the Company and
Dennis L. Thompson, dated March 12, 1992
******10.8 Employment Agreement between the Company and Mike
Archer, dated
April 20, 1995
*11.1 Statement regarding Computation of Per Share
Earnings
*******21.0 Subsidiaries of the Company
*23.1 Accountants' consent to the incorporation by
reference to the Company's Registration Statement on
Form S-8 of the independent auditors' report
included herein
*27.0 Financial data schedule
-----------------------------
|
(b) Reports on Form 8-K filed in the fourth quarter of 1997: none
* Filed herewith.
** Incorporated by reference to the Company's Registration
Statement on Form S-1, filed with the Commission on October 1,
1992 (Commission File No. 33-52678) as amended.
*** Incorporated by reference to the Company's Registration
Statement on Form S-1, filed with the Commission on January
31, 1992 (Commission File No. 33-45399), as amended.
**** Incorporated by reference to the Company's Registration
Statement on Form S-8, filed with the Commission on January
12, 1996 (Commission File No. 33-00280), as amended.
-26-
***** Incorporated by reference to the Company's Form 10-K for the
year ended December 27, 1994.
****** Incorporated by reference to the Company's Form 10-K for the
year ended December 26, 1995.
******* Previously filed.
-27-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Wichita, State of Kansas, on this 30th day of March 1998.
LONE STAR STEAKHOUSE & SALOON, INC.
(Registrant)
/s/ John D. White
-------------------------------------
John D. White
Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer,
Treasurer and Director
|
SIGNATORIES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons in the capacities and on
the date indicated.
-28-
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jamie B. Coulter Chairman of the Board March 27, 1998
---------------------------------- and Chief Executive Officer
Jamie B. Coulter
Executive Vice President,
/s/ John D. White Chief Financial Officer and March 27, 1998
---------------------------------- Principal Accounting Officer
John D. White Treasurer and Director
/s/ Michael J. Archer Chief Operating Officer March 27, 1998
---------------------------------- Del Frisco's/Sullivan's
Michael J. Archer and Director
/s/ Dennis L. Thompson Director March 27, 1998
----------------------------------
Dennis L. Thompson
/s/ Clark R. Mandigo Director March 27, 1998
----------------------------------
Clark R. Mandigo
/s/ Fred B. Chaney Director March 27, 1998
----------------------------------
Fred B. Chaney
/s/ H. Gilliland Nickel Director March 27, 1998
----------------------------------
H. Gilliland Nickel
/s/ William H. Tilley Director March 27, 1998
----------------------------------
William H. Tilley
-29-
|
Lone Star Steakhouse & Saloon, Inc.
Index to Financial Statements
Pages
Report of Independent Auditors----------------------------------------------F-2
Consolidated Balance Sheets as of December 30, 1997 and December 31, 1996---F-3
Consolidated Statements of Income for the years ended December 30, 1997,
December 31, 1996, and December 26, 1995------------------------------F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 30, 1997, December 31, 1996, and December 26, 1995-----------F-6
Consolidated Statements of Cash Flows for the years ended December 30, 1997,
December 31, 1996, and December 26, 1995------------------------------F-7
Notes to Consolidated Financial Statements----------------------------------F-9
F-1
Report of Independent Auditors
The Board of Directors and Stockholders
Lone Star Steakhouse & Saloon, Inc.
We have audited the accompanying consolidated balance sheets of Lone Star
Steakhouse & Saloon, Inc. as of December 30, 1997 and December 31, 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lone Star
Steakhouse & Saloon, Inc. at December 30, 1997 and December 31, 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 30, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Wichita, Kansas
March 25, 1998
|
F-2
Lone Star Steakhouse & Saloon, Inc.
Consolidated Balance Sheets
December 30, 1997 December 31, 1996
---------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $135,996,996 $150,721,286
Accounts receivable 1,614,839 2,233,119
Inventories 10,955,361 4,728,071
Preopening costs, net 9,162,642 6,250,241
Deferred income taxes 1,282,954 584,780
Other 3,625,992 783,557
-------------------------------------------
Total current assets 162,638,784 165,301,054
Property and equipment:
Land 132,201,161 102,501,716
Buildings 170,852,451 143,620,384
Leasehold improvements 93,681,898 68,049,332
Equipment 68,274,914 56,311,330
Furniture and fixtures 19,244,098 14,975,975
-------------------------------------------
484,254,522 385,458,737
Less accumulated depreciation and amortization 54,521,936 34,870,491
-------------------------------------------
429,732,586 350,588,246
Other assets:
Intangible and other assets 28,440,560 26,262,455
-------------------------------------------
Total assets $620,811,930 $542,151,755
=========================================
|
F-3
December 30, December 31,
1997 1996
-----------------------------------
Liabilities and stockholders' equity:
Current liabilities
Accounts payable $ 14,221,099 $ 8,202,116
Sales tax payable 2,525,505 2,310,128
Accrued payroll 10,475,393 4,875,218
Gift certificates 8,409,558 6,595,403
Income taxes payable 1,431,779 5,098,460
Other 8,802,204 11,975,725
-----------------------------------
Total current liabilities 45,865,538 39,057,050
Other long-term liabilities 158,736 247,510
Deferred income taxes 8,619,262 7,306,978
Minority interest 19,927 301,384
Stockholders' equity
Preferred stock, $.01 par value, 2,000,000 shares authorized; none issued
-- --
Common stock, $.01 par value, 98,000,000 shares authorized; 41,156,151 shares
issued and outstanding (40,702,725 in 1996)
411,562 407,027
Additional paid-in capital 349,607,732 341,158,492
Retained earnings 223,015,141 154,207,532
Translation adjustment (6,885,968) (534,218)
-----------------------------------
Total stockholders' equity 566,148,467 495,238,833
-----------------------------------
Total liabilities and stockholders' equity $ 620,811,930 $ 542,151,755
==================================
|
See notes to consolidated financial statements.
F-4
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Income
For the year ended
December 30, December 31, December 26,
1997 1996 1995
-----------------------------------------------
Net sales $ 585,357,637 $ 491,754,270 $ 340,857,223
Costs and expenses:
Costs of sales 211,571,507 172,338,134 120,870,646
Restaurant operating expenses 215,805,009 167,871,293 116,703,192
Depreciation and amortization 30,589,748 28,384,168 19,816,823
---------------------------------------------
Restaurant costs and expenses 457,966,264 368,593,595 257,390,661
---------------------------------------------
Restaurant operating income 127,391,373 123,160,675 83,466,562
General and administrative expenses:
Related parties 3,366,080 2,215,467 1,443,312
Other 18,282,740 19,068,740 11,249,957
Loss on divestiture of European joint venture -- 8,557,176 --
---------------------------------------------
Income from operations 105,742,553 93,319,292 70,773,293
Other income (expense):
Other income, net (principally interest) 4,108,545 3,681,493 3,137,760
Interest expense -- -- (228,532)
---------------------------------------------
4,108,545 3,681,493 2,909,228
---------------------------------------------
-------------
Income before income taxes and minority interest 109,851,098 97,000,785 73,682,521
Provision for income taxes (40,075,457) (37,517,693) (26,819,591)
Minority interest (968,032) 584,202 705,160
---------------------------------------------
Net income $ 68,807,609 $ 60,067,294 $ 47,568,090
=============================================
Basic earnings per share $ 1.68 $ 1.53 $ 1.31
=============================================
Diluted earnings per share $ 1.65 $ 1.49 $ 1.27
=============================================
Unaudited pro forma information based on providing for income taxes on pooled
S-Corporations prior to acquisition at the estimated effective tax rate:
Income before income taxes, net of minority interest
$ 74,387,681
Pro forma provision for income taxes 27,652,784
-------------
Pro forma net income $ 46,734,897
=============
Pro forma basic earnings per share $ 1.28
=============
Pro forma diluted earnings per share $ 1.24
=============
|
See notes to consolidated financial statements.
F-5
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Stockholders' Equity
Preferred Common Stock Additional
--------------------- Paid-in Retained Translation
Stock Number Amount Capital Earnings Adjustment Total
----------------------------------------------------------------------------------------------
Balance, December 27, 1994 $ - 34,302,568 $343,025 $131,482,689 $ 48,246,108 $ - $180,071,822
Shares issued in public offering - 2,906,710 29,067 85,638,616 - - 85,667,683
Translation adjustment - - - - - (284,364) (284,364)
Stock options exercised - 172,446 1,724 1,970,382 - - 1,972,106
Tax benefit related to options
exercised
- - - 1,239,166 - - 1,239,166
S-Corporation deferred taxes - - - - (16,503) - (16,503)
Shares issued for Del Frisco Group - 206,250 2,063 8,247,937 - - 8,250,000
Dividends paid by pooled companies
- - - - (1,657,457) - (1,657,457)
Net income - - - - 47,568,090 - 47,568,090
----------------------------------------------------------------------------------------------
Balance, December 26, 1995 - 37,587,974 375,879 228,578,790 94,140,238 (284,364) 322,810,543
Shares issued in public offering - 2,650,000 26,500 101,399,750 - - 101,426,250
Translation adjustment - - - - - (249,854) (249,854)
Stock options exercised - 464,751 4,648 8,034,952 - - 8,039,600
Tax benefit related to options
exercised
- - - 3,145,000 - - 3,145,000
Net income - - - - 60,067,294 - 60,067,294
----------------------------------------------------------------------------------------------
Balance, December 31, 1996 - 40,702,725 407,027 341,158,492 154,207,532 (534,218) 495,238,833
Translation adjustment - - - - - (6,351,750) (6,351,750)
Stock options exercised - 453,426 4,535 7,398,801 - - 7,403,336
Tax benefit related to options
exercised
- - - 1,050,439 - - 1,050,439
Net income - - - - 68,807,609 - 68,807,609
==============================================================================================
Balance, December 30, 1997 $ - 41,156,151 $411,562 $349,607,732 $223,015,141 $(6,885,968) $566,148,467
==============================================================================================
|
See notes to consolidated financial statements.
F-6
DRAFT 03/28/98 4:49 PM
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Cash Flows
For the year ended
-------------------------------------------------------
December 30, December 31, December 26,
1997 1996 1995
-------------------------------------------------------
Operating activities
Net income $ 68,807,609 $ 60,067,294 $ 47,568,090
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization 10,775,039 13,693,946 9,324,951
Depreciation 19,814,709 14,690,222 10,491,872
Equity in net loss from investment in joint venture
-- -- 311,282
Loss on divestiture of European joint venture -- 6,759,848 --
Deferred income taxes 614,110 938,071 3,113,315
Minority interest 968,032 (584,202) (705,160)
Net change in operating assets and liabilities:
Accounts receivable 618,280 (924,254) (467,868)
Inventories (6,227,290) (571,716) (1,510,680)
Preopening costs (12,585,828) (8,632,004) (13,060,622)
Refundable income taxes -- 5,006,856 (2,368,198)
Other current assets (2,842,435) (693,465) 1,491,275
Accounts payable 6,018,983 (1,043,215) (560,084)
Income taxes payable (2,616,242) 8,243,460 --
Other current liabilities 4,442,683 8,372,950 10,196,604
-------------------------------------------------------
Net cash provided by operating activities 87,787,650 105,323,791 63,824,777
Investing activities
Purchases of property and equipment (98,959,049) (126,703,360) (104,787,485)
Purchase of assets of Del Frisco -- -- (14,600,000)
Contribution to capital by minority interest -- -- 1,748,189
Cash acquired in consolidation of joint venture -- -- 495,873
Cash paid in divestiture of European joint venture -- (1,797,328) --
Investment in joint venture -- -- (2,436,689)
Other (4,529,206) (2,678,147) (4,448,593)
-------------------------------------------------------
Net cash used in investing activities (103,488,255) (131,178,835) (124,028,705)
Financing activities
Net proceeds from issuance of common stock 7,403,336 109,465,850 87,639,789
Payment of notes payable and capital lease obligation on company
acquired (75,271) (64,550) (3,930,191)
Dividends on prior S-Corporation income -- -- (1,657,457)
-------------------------------------------------------
Net cash provided by financing activities 7,328,065 109,401,300 82,052,141
|
F-7
Lone Star Steakhouse & Saloon, Inc.
Consolidated Statements of Cash Flows (continued)
For the year ended
---------------------------------------------------------------
December 30, December 31, December 26,
1997 1996 1995
---------------------------------------------------------------
Effect of exchange rate changes on cash $ (6,351,750) $ (249,854) $ (284,363)
---------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (14,724,290) 83,296,402 21,563,850
Cash and cash equivalents at beginning of year 150,721,286 67,424,884 45,861,034
---------------------------------------------------------------
Cash and cash equivalents at end of year $ 135,996,996 $ 150,721,286 $ 67,424,884
===============================================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ -- $ 7,105 $ 75,170
Cash paid for income taxes 40,829,142 23,329,306 23,282,127
|
Supplemental schedule of noncash investing and financing activities:
As described in Note 12, in September 1995 the Company issued 206,250 shares
of common stock having a market value of $8,250,000 in connection with the
acquisition of Del Frisco Group.
See notes to consolidated financial statements.
F-8
Lone Star Steakhouse & Saloon, Inc.
Notes to Consolidated Financial Statements
1. Background and Significant Accounting Policies
Background
Lone Star Steakhouse & Saloon, Inc. (the "Company") owns and operates a chain of
mid-priced full service, casual dining restaurants in the United States, as well
as in Australia, through participation in an international joint venture. The
restaurants serve mesquite-grilled steaks, ribs, chicken and fish in a "Texas
Roadhouse" atmosphere that are positioned to attract local clientele. During
1995, the Company expanded into the upscale steakhouse market with the
acquisition of Del Frisco's Double Eagle Steakhouse and the development of
Sullivan's Steakhouse. As of December 30, 1997, the Company owns and operates
265 Lone Star Steakhouse & Saloons in the United States as well as 33 in
connection with the joint venture in Australia. In addition, the Company owns
and operates three Del Frisco's Double Eagle Steakhouses and four Sullivan's
Steakhouses.
Significant Accounting Policies
o Principles of Consolidation
The consolidated financial statements include the accounts of Lone Star
Steakhouse & Saloon, Inc., its wholly owned subsidiaries and its majority
owned foreign joint venture. All significant intercompany accounts and
transactions have been eliminated.
o Concentration of Credit Risk
The Company's financial instruments exposed to concentration of credit
risk consist primarily of cash and short-term investments (cash
equivalents). The Company places its cash with high credit quality
financial institutions and, at times, such cash may be in excess of the
Federal Depository insurance limit. The Company has cash equivalents in
investment grade securities with municipal, State and U.S. government
agencies of approximately $97,361,000 and $110,835,000, at December 30,
1997 and December 31, 1996, respectively.
o Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from estimates.
F-9
1. Background and Significant Accounting Policies (continued)
o Cash and Cash Equivalents
The Company considers cash and cash equivalents to include currency on
hand, demand deposits with banks or other financial institutions, and
short-term investments with maturities of three months or less when
purchased. Cash and cash equivalents are carried at cost which
approximates fair value.
o Inventories
Inventories consist of food and beverages, and are stated at the lower of
cost (first-in, first-out) or market.
o Property and Equipment
Property and equipment are stated at cost. Maintenance, repairs and
renewals which do not enhance the value of or increase the life of the
assets are expensed as incurred.
Buildings are depreciated using the straight-line method over 20 years,
which is the estimated useful life of the assets. Leasehold improvements
are amortized on the straight-line method over the lesser of the maximum
life of the lease or 20 years, or the estimated useful lives of the
assets. Equipment and furniture and fixtures are depreciated using the
straight-line method over seven years, which is the estimated useful life
of the assets.
o Preopening Costs
Labor costs and costs of hiring and training personnel and certain other
costs relating to opening new restaurants are capitalized until the
restaurant is open and then amortized over the subsequent 12 months.
Accumulated amortization related to stores opened during 1997 and 1996 is
approximately $2,942,000 and $2,930,000 at December 30, 1997 and December
31, 1996, respectively.
o Intangibles and Other Assets
Intangibles and other assets principally represent goodwill. Such goodwill
represents the excess of the cost of companies acquired over the fair
value of their net assets at dates of acquisition and is being amortized
on a straight-line method over 20 years. The remaining intangibles and
other assets are being amortized by the straight-line method over the
estimated useful life of the related assets. Accumulated amortization for
intangibles and other assets as of December 30, 1997 and December 31,
1996, is $2,360,497 and $1,261,470, respectively.
F-10
1. Background and Significant Accounting Policies (continued)
o Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 30, 1997, December 31, 1996 and December 26, 1995,
are $7,283,514, $5,006,152 and $4,041,337, respectively.
o Accounting for Stock-Based Compensation
In accordance with Accounting Principles Board Opinion (APBO) No. 25, the
Company uses the intrinsic value-based method for measuring stock-based
compensation cost which measures compensation cost as the excess, if any,
of the quoted market price of Company common stock at the grant date over
the amount the employee must pay for the stock. Required pro forma
disclosures of compensation expense determined under the fair value method
of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation, are presented in Note 6.
o Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, Reporting Comprehensive Income. Statement No. 130
establishes new rules for the reporting and display of comprehensive
income and its components in the financial statements. Statement No. 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
In June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information. Statement No. 131
establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and
requires those enterprises to report selected information about operating
segments in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas, and
major customers. Statement No. 131 is effective for financial statements
for fiscal years beginning after December 15, 1997. Financial statement
disclosures for prior periods are required to be restated.
The Company has not yet determined the impact of adoption of these two
standards; however, the adoption of these standards will have no impact on
the Company's consolidated results of operations, financial position or
cash flows.
In February 1998, the FASB cleared AcSEC's Statement of Position (SOP),
Accounting for the Costs of Start-Up Activities, for final issuance
subject to certain editorial changes. AcSEC plans to issue the final SOP
by June 1998. The SOP will require the Company to
F-11
1. Background and Significant Accounting Policies (continued)
expense start-up costs, including organizational costs, as incurred and to
report the initial adoption as a cumulative effect of a change in
accounting principle as described in APBO No. 20, Accounting Changes,
during the first quarter of its fiscal year 1999. The cumulative effect
upon adoption would result in a one-time charge to income in an amount
equal to the net book value of the Company's start-up costs. A resulting
benefit of this change is the discontinuance of amortization expense in
subsequent periods.
o Earnings per Share
In 1997, the FASB issued Statement No. 128, Earnings per Share. Statement
No. 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share
is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented,
and where appropriate, restated to conform to the Statement No. 128
requirements.
o Fiscal Year
The Company operates on a 52 or 53 week fiscal year ending the last
Tuesday in December. The fiscal quarters for the Company consist of
accounting periods of 12, 12, 12 and 16 or 17 weeks, respectively. Fiscal
1997 and 1995 each included 52 weeks of operations and fiscal 1996
included 53 weeks of operations.
2. Acquisition of CCC Group
On August 6, 1995, the Company completed the acquisition of 11 licensed Lone
Star Steakhouse & Saloon restaurants as well as three additional restaurants
from a group of related entities which were operated under common control,
collectively, hereinafter referred to as the "CCC Group." The transaction was
accounted for as a pooling of interests and, accordingly, the accompanying
financial statements have been restated to include the accounts and operations
of the CCC Group for all periods presented prior to the acquisition. The Company
exchanged 580,433 shares of its common stock for all of the common stock and
related net assets of the various entities acquired.
3. Public Offerings
On April 12, 1995, the Company completed an offering of 2,906,710 additional
shares of its Common Stock at $31.00 per share. Total net proceeds to the
Company of approximately $86 million were used for continued development and
funding of the Company's upscale steakhouse concept.
F-12
3. Public Offerings (continued)
On May 21, 1996, the Company completed an offering of 2,650,000 additional
shares of its Common Stock at $40.125 per share. Total net proceeds to the
Company of approximately $101 million were used for continued development and
funding of the Company's core Lone Star Steakhouse & Saloon restaurants and its
upscale steakhouse concepts.
4. Investment in and Advances to Joint Venture
The Company has a joint venture agreement with an unrelated third party to
develop and operate a chain of restaurants in Australia under the Company's
trademark "Lone Star". Prior to June 1995, the Company owned a 50% interest in
the joint venture and accounted for its investment using the equity method of
accounting. The Company's equity portion of the results of operations, which are
not significant, are included in the accompanying financial statements for the
year ended December 26, 1995.
In June 1995, the Company increased its ownership interest in the Australian
joint venture from 50% to 65%. The Company consolidated the accounts of the
joint venture effective with the change in control.
During 1995, the Company entered into a second joint venture agreement with an
unrelated third party to build and operate a chain of restaurants in Europe
under the Company's trademark "Lone Star". The Company owned a 65% interest in
the joint venture and, accordingly, its net assets and operations were
consolidated with the Company in the accompanying consolidated financial
statements for the year ended December 31, 1995 and through June 1996, when the
Company terminated its joint venture in Europe whereby it divested its interest
in three existing restaurants and one under construction. This resulted in a
charge to earnings of $5,964,664, net of the tax benefit of $2,592,512. Such
restaurants no longer operate as Lone Star Steakhouse & Saloon restaurants.
5. Preferred Stock
The Company's Board of Directors has the authority to issue up to 2,000,000
shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preference
and the numbers of shares constituting any series or the designation of such
series.
6. Stock Options
The Company has elected to follow APBO No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its employee stock
options because, as described below, the alternative fair value accounting
provided under FASB Statement No. 123, Accounting for Stock-Based Compensation,
requires use of
F-13
6. Stock Options (continued)
option valuation models that were not developed for use in valuing employee
stock options. Since the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
o 1992 Stock Option Plan
In January 1992, the Board of Directors adopted a stock option plan (the
"Plan") which was last amended in June 1996, which provides for incentive
and nonqualified stock options pursuant to which up to 10,000,000 shares
of Common Stock are available for issuance. All options granted under this
Plan have ten-year terms and vest according to the following schedule:
Year 1 20%
Year 2 40%
Year 3 60%
Year 4 80%
Year 5 100%
o Directors Stock Option Plan
|
In January 1992, the Board of Directors adopted a stock option plan
providing for nondiscretionary grants to nonemployee directors pursuant to
which up to 400,000 shares of Common Stock are available for issuance. All
options granted under this Plan have ten-year terms and vest according to
the following schedule:
Year 1 33%
Year 2 66%
Year 3 100%
o Other Options
|
In connection with the Australian joint venture agreement, options to
acquire 513,800 shares of the Company's Common Stock, $.01 par value, were
granted to certain individuals of the unrelated third party. The exercise
price of such options granted was $14.50 per share which was the fair
market value of the Common Stock on the date of grant.
Pro forma information regarding net income and earnings per share is required by
Statement No. 123, which also requires the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994, under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997,
1996 and 1995, respectively: risk-free interest rates of 6.50%, 6.53% and 7.05%;
no dividend yields; volatility factors of the expected
F-14
6. Stock Options (continued)
market price of the Company's Common Stock of 0.380, 0.940, and 1.037; and a
weighted-average expected life of the option of five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information follows:
1997 1996 1995
-----------------------------------------
Pro forma net income $49,523,000 $42,340,000 $41,445,000
Pro forma earnings per share:
Basic 1.21 1.08 1.10
Diluted 1.19 1.05 1.09
|
Because Statement No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect is not fully reflected in 1997 or
indicative of future years.
A summary of the Company's stock option activity and related information for the
years ended December 30, 1997, December 31, 1996, and December 26, 1995, is as
follows:
1997 1996 1995
-----------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Options Average Options Average Options
Exercise Price (000) Exercise Price (000) Exercise Price (000)
-----------------------------------------------------------------------------------
Outstanding beginning of year $28.69 4,739 $24.34 4,575 $20.54 2,657
Granted 21.26 12,652 32.21 1,745 23.20 2,141
Exercised 22.59 (453) 38.08 (465) 28.15 (172)
Canceled 25.91 (8,784) 28.91 (1,116) 23.04 (51)
------- ------- ------
Outstanding end of year $18.08 8,154 $28.69 4,739 $24.34 4,575
======= ======= ======
Weighted average fair value of options
granted during the year $ 7.99 $26.59 $19.99
|
F-15
6. Stock Options (continued)
On April 24, 1997, the Company repriced 8,123,745 options with an exercise price
in excess of the closing price of the Company's stock on that date of $18.25.
The options are held by current employees, including officers of the Company.
The original options were canceled and replaced by new grants with the same
vesting schedule as contained in each separate grant. All other terms and
conditions shall remain the same as the original grant with the exception of
repricing the exercise price.
For options outstanding as of December 30, 1997, 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 Average
Outstanding at Weighted Average Remaining
Range of Prices December 30, 1997 Exercise Price Contract Life
--------------------------------------------------------------------------------
$3.38 to 7.25 26,357 $ 3.63 4.22 years
$14.50 to 18.99 7,940,338 18.16 8.44 years
$19.50 to 25.13 187,649 22.12 9.56 years
|
The number of shares and weighted average exercise price of options exercisable
at December 30, 1997, are as follows:
Options Exercisable
--------------------------------------------------------------------------------
Number Exercisable Weighted Average
Range of Prices at December 30, 1997 Exercise Price
--------------------------------------------------------------------------------
$3.38 to 7.25 26,357 $ 3.63
$14.50 to 18.99 2,632,208 18.04
$19.50 to 25.13 1,141 21.69
|
7. Related Party Transactions
The Company utilizes an affiliate to provide certain accounting, computer and
administrative services. The Company incurred fees of $3,366,080 and $2,215,467,
and $1,443,312, related to such services for fiscal years 1997, 1996, and 1995,
respectively.
8. Leases
The Company leases certain facilities under noncancelable operating leases
having terms expiring between 1998 and 2025. The leases have renewal clauses of
5 to 20 years, and are exercisable at the option of the lessee. In addition,
certain leases contain escalation clauses based upon a fixed percentage increase
and provisions for contingent rentals
F-16
8. Leases (continued)
based on a percentage of gross revenues, as defined. Total rental expense for
the years ended December 30, 1997, December 31, 1996, and December 26, 1995, was
$7,115,812, $5,982,830, and $4,962,163, respectively, including contingent
rentals of approximately $347,349, $422,820, and $419,357, respectively.
Lease payments under noncancelable operating leases for each of the next five
years and in the aggregate are as follows at December 30, 1997:
Operating Leases
-----------------------
1998 $ 7,132,560
1999 5,806,323
2000 4,218,213
2001 2,887,646
2002 2,006,046
Thereafter 7,981,761
-----------------------
Total minimum lease payments $ 30,032,549
=======================
|
9. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
1997 1996 1995
--------------------------------------------------------
Numerator:
Numerator for basic and diluted earnings per share -
income available to common stockholders $ 68,807,609 $ 60,067,294 $ 47,568,090
========================================================
Denominator:
Denominator for basic earnings per share -
weighted-average shares
41,013,749 39,383,891 36,432,464
Effect of dilutive employee stock options 748,753 1,013,974 1,105,427
--------------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted-average shares 41,762,502 40,397,865 37,537,891
========================================================
Basic earnings per share $ 1.68 $ 1.53 $ 1.31
========================================================
Diluted earnings per share $ 1.65 $ 1.49 $ 1.27
========================================================
|
F-17
9. Earnings Per Share (continued)
For purposes of the diluted computations, the 1997, 1996 and 1995 computation of
shares that would be issued from the exercise of stock options has been reduced
by the number of shares that 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 the options were exercised during the periods presented.
10. Income Taxes
The provision for income taxes consists of the following:
Years ended
December 30, December 31, December 26,
1997 1996 1995
-------------------------------------------------------------------
Current tax expense:
Federal $ 35,742,496 $ 32,080,619 $ 20,145,697
State 3,718,851 4,499,003 3,560,579
-------------------------------------------------------------------
Total current 39,461,347 36,579,622 23,706,276
Deferred tax expense:
Federal 469,371 819,155 2,976,342
State 144,739 118,916 136,973
-------------------------------------------------------------------
Total deferred 614,110 938,071 3,113,315
-------------------------------------------------------------------
Total provision for income taxes $ 40,075,457 $ 37,517,693 $ 26,819,591
===================================================================
|
The difference between the reported provision for income taxes and a tax
determined by applying the applicable U.S. Federal statutory income tax rate to
income before taxes, is reconciled as follows.
For the year ended For the year ended For the year ended
December 30, 1997 December 31, 1996 December 26, 1995
---------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
---------------------------------------------------------------------
Income tax expense at Federal
statutory rate $ 38,109,073 35% $ 34,154,745 35% $ 25,788,882 35%
State tax expense, net 2,511,333 2 3,001,647 2 2,403,409 3
Effect of income tax related to
CCC Group which were not
taxed because of S-Corporation
status -- -- -- -- (833,193) (1)
Other items, net (544,949) -- 361,301 -- (539,507) (1)
---------------------------------------------------------------------
Actual provision for income taxes $ 40,075,457 37% $ 37,517,693 38% $ 26,819,591 36%
=====================================================================
|
F-18
10. Income Taxes (continued)
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and amounts used for income tax purposes. Significant components of deferred tax
liabilities and assets are presented below:
December 30, December 31,
1997 1996
-------------------------------------------
Deferred tax assets:
Foreign NOL carryforward $ 1,908,346 $ 954,383
Accrued liabilities 1,562,269 856,925
-------------------------------------------
Total deferred tax assets 3,470,615 1,811,308
Deferred tax liabilities:
Preopening costs 279,316 272,145
Property and equipment 10,527,607 8,261,361
-------------------------------------------
Total deferred tax liabilities 10,806,923 8,533,506
-------------------------------------------
Net deferred tax liabilities $ 7,336,308 $ 6,722,198
===========================================
|
As of December 30, 1997, the Company has net operating loss (NOL) carryforwards
of approximately $5,500,000 for foreign tax purposes which begin expiring in
2002.
11. Commitments
As of December 30, 1997, the Company has entered into purchase or option
contracts to purchase 13 additional sites for future restaurant locations. Such
contracts aggregate approximately $26,845,000. The Company has also entered into
operating lease agreements, subject to certain contingencies, on three
additional sites. Such leases generally have initial lease terms of five years
and the aggregate future minimum lease payments total approximately $1,052,000.
Subsequent to December 30, 1997, the Company entered into purchase contracts,
subject to certain contingencies, for three additional sites totaling
approximately $6,195,000. The Company also entered into an operating lease
agreement, subject to certain contingencies, on one additional site. Such leases
generally have initial lease terms of five years and the aggregate future
minimum lease payments total approximately $325,000.
F-19
12. Acquisition of The Del Frisco Group
On September 16, 1995, the Company acquired substantially all the operating
assets, real estate and related operations that comprised Del Frisco's Double
Eagle Steakhouse Group in Dallas, Texas, including a restaurant under
construction in Fort Worth, Texas, for an aggregate purchase price of $22.8
million, consisting of $14.6 million of internally generated cash and 206,250
shares of the Company's Common Stock. The Company accounted for the transaction
using the purchase method of accounting. In connection with the purchase price
allocation, the Company recorded goodwill of approximately $16.5 million which
is being amortized over a period of twenty years. The following supplemental pro
forma information presents the combined results of operations of the Company as
though the acquisition had occurred at the beginning of periods presented.
The pro forma information is unaudited and not necessarily indicative of the
results of the Company had the acquisition occurred at the beginning of such
periods.
December 26, 1995
------------------------------------------
(Dollars in thousands except per share
amounts)
Revenues $347,630
Net income $ 48,494
Basic earnings per share $ 1.33
|
13. Acquisition of Ground Round Restaurant Real Estate
Pursuant to the Company's contract of purchase dated June 28, 1996, with Ground
Round, the Company acquired three restaurant locations in 1997 and nine in 1996.
The acquisition price for all 12 locations was $11,975,000. All locations were
converted to Lone Star Steakhouse & Saloon operating units during 1997.
F-20
14. Quarterly Financial Summaries (Unaudited)
The following table summarizes the unaudited consolidated quarterly results of
operations for fiscal 1997 and 1996 (in thousands, except per share amounts):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-------------------------------------------------------
1997
----
Net Sales $130,256 $133,360 $135,302 $186,440
Restaurant operating income 32,478 32,856 27,807 34,249
Net income 18,204 18,546 15,055 17,003
Basic earnings per share $ 0.45 $ 0.45 $ 0.37 $ 0.41
Diluted earnings per share $ 0.44 $ 0.44 $ 0.36 $ 0.41
1996
----
Net Sales $106,375 $107,768 $113,746 $163,864
Restaurant operating income 24,759 26,786 28,877 42,739
Net income 12,936 8,103 15,838 23,190
Basic earnings per share 0.34 0.21 0.39 0.57
Diluted earnings per share 0.33 0.21 0.38 0.56
|
(a) The second quarter of 1996 includes a charge to earnings of $5,964,664,
net of tax benefits resulting from the Company's terminated joint venture
in Europe.
F-21
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-47516) pertaining to the 1992 Incentive and Non-qualified Stock
Option Plan and options granted to the principals of a joint venture partner of
Lone Star Steakhouse & Saloon, Inc., in the Registration Statement (Form S-8 No.
33-75078) pertaining to the 1992 Incentive and Non-qualified Stock Option Plan
and 1992 Director's Stock Option Plan of Lone Star Steakhouse & Saloon, Inc.,
and in the Registration Statement (Form S-8 No. 33-00280) pertaining to the 1992
Incentive and Non-qualified Stock Option Plan of Lone Star Steakhouse & Saloon,
Inc., of our report dated March 25, 1998, with respect to the consolidated
financial statements of Lone Star Steakhouse & Saloon, Inc. included in the
Annual Report (Form 10-K) for the year ended December 30, 1997.
/s/ ERNST & YOUNG LLP
Wichita, Kansas
March 25, 1998
|
|
ARTICLE 5
|
|
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S FORM 10-K FOR THE QUARTER ENDED DECEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
|
|
MULTIPLIER: 1,000
|
|
|
|
PERIOD TYPE
|
YEAR
|
|
FISCAL YEAR END
|
DEC 30 1997
|
|
PERIOD START
|
JAN 01 1997
|
|
PERIOD END
|
DEC 30 1997
|
|
CASH
|
135,997
|
|
SECURITIES
|
0
|
|
RECEIVABLES
|
1,615
|
|
ALLOWANCES
|
0
|
|
INVENTORY
|
10,955
|
|
CURRENT ASSETS
|
162,639
|
|
PP&E
|
429,733
|
|
DEPRECIATION
|
0
|
|
TOTAL ASSETS
|
620,812
|
|
CURRENT LIABILITIES
|
45,866
|
|
BONDS
|
0
|
|
PREFERRED MANDATORY
|
0
|
|
PREFERRED
|
0
|
|
COMMON
|
412
|
|
OTHER SE
|
0
|
|
TOTAL LIABILITY AND EQUITY
|
620,812
|
|
SALES
|
585,358
|
|
TOTAL REVENUES
|
585,358
|
|
CGS
|
211,572
|
|
TOTAL COSTS
|
457,966
|
|
OTHER EXPENSES
|
21,649
|
|
LOSS PROVISION
|
0
|
|
INTEREST EXPENSE
|
4,109
|
|
INCOME PRETAX
|
108,883
|
|
INCOME TAX
|
40,075
|
|
INCOME CONTINUING
|
0
|
|
DISCONTINUED
|
0
|
|
EXTRAORDINARY
|
0
|
|
CHANGES
|
0
|
|
NET INCOME
|
68,808
|
|
EPS PRIMARY
|
1.68
|
|
EPS DILUTED
|
1.65
|
|
|
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