Lone Star Steakhouse & Saloon Inc · 10-K · For 12/26/00

Filed On 3/26/01 4:49pm ET   ·   SEC File 0-19907   ·   Accession Number 921895-1-163

Annual Report   ·   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         52    257K 
 2: EX-10.6     Amendment to Non-Competition Agreement                 2     13K 
 3: EX-10.13    Coulter Termination Agreement                         19     68K 
 4: EX-10.14    Aaron Termination Agreement                           19     72K 
 5: EX-10.15    Pierce Change of Control Contract                     19     72K 
 6: EX-10.16    O'Connell Change of Control Contract                  19     72K 
 7: EX-10.17    Bracken Change of Control Contract                    19     72K 
 8: EX-10.18    John D. White Change of Control Contract              19     72K 
 9: EX-10.19    Lincoln Change of Control Contract                    19     72K 
10: EX-21.1     Subsidiary List                                        3±    15K 
11: EX-23.1     Consent of Independent Auditors                        1      7K 

10-K   ·   Annual Report
Document Table of Contents

10-K
1st Page of 52
TOC
Top
Previous
Next
Bottom
Just 1st
 
Sponsored Ads...


 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--
 FORM 10-K

/ X /         ANNUAL  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES
EXCHANGE ACT OF 1934        [FEE REQUIRED]          

For the fiscal year ended December 26,2000              
            ----------------

/   /         TRANSITION   REPORT  PURSUANT  TO  SECTION  13  OR  15(D)  OF  THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]   

For the transition period from ______ to ______         

Commission file number 0-19907
                       -------

 LONE STAR STEAKHOUSE & SALOON, INC.
(Exact name of Registrant as specified in its charter)

Delaware                                      48-1109495
--------                                      ----------
(State or other jurisdiction of                         (I.R.S. employer        
incorporation or organization)                          identification no.)   

 224 East Douglas, Suite 700
 Wichita, Kansas 67202
 (Address of principal executive offices) (Zip code)

(316) 264-8899
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:                     

NONE

Securities registered pursuant to Section 12(g) of the Act:                     

Common Stock, $.01 par value

      Indicate by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/  No / /                       

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes /X/ No / /                                                       

      As of March 19,  2001,  the  aggregate  market  value of the  Registrant's
Common Stock held by non-affiliates  of the Registrant was $203,356,230.  Solely
for the purpose of this  calculation,  shares held by directors  and officers of
the  Registrant  have  been                                                     

-1- 

10-K
2nd Page of 52
TOC
1st
Previous
Next
Bottom
Just 2nd

excluded. Such exclusion should not be deemed a determination by or an admission
by the  Registrant  that  such  individuals  are,  in  fact,  affiliates  of the
Registrant.                                                                     

      As of March 19, 2001,  there were  24,031,614  shares  outstanding  of the
Registrant's Common Stock.                                                      

 DOCUMENTS INCORPORATED BY REFERENCE

      The information  required by Part III will be incorporated by reference to
certain portions of a definitive proxy statement,  which is expected to be filed
by the Registrant within 120 days after the close of its fiscal year.           

 TABLE OF CONTENTS

ITEM                                                                        PAGE
----                                                                        ----

PART I

1.    Business.................................................................3
2.    Properties...............................................................9
3.    Legal Proceedings.......................................................11
4.    Submission of Matters to a Vote of Security Holders.....................11

 PART II

5.    Market for the Registrant's Common Equity                                 
        and Related Stockholder Matter........................................11
6.    Selected Financial Data.................................................12
7.    Management's Discussion and Analysis of Financial                         
        Condition and Results of Operations...................................14
7a.   Quantitative and Qualitative Disclosures about Market Risk..............22
8.    Financial Statements and Supplementary Data.............................22
9.    Changes in and Disagreements with Accountants on                          
        Accounting and Financial Disclosure...................................22

PART III

10.   Directors and Executive Officers of the Registrant......................22
11.   Executive Compensation..................................................22
12.   Security Ownership of Certain Beneficial Owners and Management..........22
13.   Certain Relationships and Related Transactions..........................22

 PART IV

14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K........23
      Signatures..............................................................26

-2- 

10-K
3rd Page of 52
TOC
1st
Previous
Next
Bottom
Just 3rd

PART I

This Annual  Report on Form 10-K  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.  Stockholders are cautioned that all forward-looking statements involve
risks and uncertainty,  including without limitation,  changes in costs of food,
the impact of  specific  events  such as the  outbreak  of "mad cow  disease" or
"foot/mouth  disease",  retail  merchandise,  labor, and employee benefits,  our
ability to continue to acquire and retain prime locations at acceptable lease or
purchase terms, as well as general market conditions,  competition, and pricing.
Although  we  believe  that  the  assumptions   underlying  the  forward-looking
statements included in this Annual Report 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 us or any other person that our  objectives and plans will be
achieved.  Our  forward-looking  statements  may be  identified by words such as
"believes,"   "expects,"   "anticipates,"   intends,"   "estimates"  or  similar
expressions.                                                                    

Item 1.  Business                                                               
--------                                                      

Background                                                                      

            As of March 19,  2001,  Lone Star  Steakhouse  & Saloon,  Inc.  (the
"Company")  owned and operated  243  mid-priced,  full  service,  casual  dining
restaurants  located in the United  States,  which  operate under the trade name
Lone Star Steakhouse & Saloon ("Lone Star" or " Lone Star Steakhouse & Saloon"),
and 20 upscale  steakhouse  restaurants,  five operating as Del Frisco's  Double
Eagle Steak House ("Del  Frisco's")  restaurants  and 15 operating as Sullivan's
Steakhouse  ("Sullivan's")  restaurants.  In addition, a licensee operates three
Lone Star  restaurants  in  California  and a licensee  operates a Del  Frisco's
restaurant in Orlando.                                                          

            Internationally,  the  Company  operates 26 Lone Star  Steakhouse  &
Saloon  restaurants  in Australia.  In addition,  licensees  operate a Lone Star
Steakhouse & Saloon  restaurant in Guam and a Lone Star theme  restaurant  under
the trade name Texas Star  Steakhouse  & Saloon in Canada.  The Company does not
own exclusive rights to the Lone Star name in Canada.                           

            Steak  continues  to be one of the most  frequently  ordered  dinner
entrees at  restaurants.  In 2000,  the United States  Department of Agriculture
estimated the average  annual per capita  consumption of beef to be 69.6 pounds,
up slightly  from 1999.  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.  Company
management  believes  its  emphasis on attentive  service and  consistent,  high
quality food products  distinguishes its upscale concepts and provides them with
a competitive advantage.                                                        

            The Company's  focus on selection,  training and in-store  execution
along with Lone Star's continued marketing initiatives,  the successful creation
of the  Sullivan's  upscale  concept  and the  development  of the Del  Frisco's
concept,  differentiate the Company from other restaurant companies that operate
steakhouse restaurants. The Company believes that through its operation of three
(3) distinct steak restaurant  concepts,  it has positioned itself as "The Steak
Company".                                                                       

Restaurant Concepts                                                             

      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                                                                        

-3- 

10-K
4th Page of 52
TOC
1st
Previous
Next
Bottom
Just 4th

related themes.  Lone Star is further  distinguished  by its high quality,  USDA
choice-graded  steaks  which are  hand-cut  fresh daily at each  restaurant  and
mesquite grilled to order.  Meals are generous  "Texas-sized"  portions and full
bar service is  available.  The exciting and vibrant  atmosphere  created by the
restaurants'  "Texas Roadhouse"  ambiance includes neon beer signs and specially
selected  upbeat  country and 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 most serve both lunch and dinner with
an average  check per  customer  for 2000 of  approximately  $12.50 at lunch and
$17.00 at dinner.                                                               

      Del Frisco's Double Eagle Steak House is designed to serve a sophisticated
clientele,  including business related dining occasions, and is the recipient of
the  prestigious Ivy Award and has been elected to the fine dining hall of fame.
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.  These elements
enhance  the  dining  experience  and  establish  a  distinct  identity  for Del
Frisco's.  Del  Frisco's  is further  distinguished  by its high  quality,  USDA
prime-graded steaks hand cut in each restaurant.  Del Frisco's restaurants serve
dinner  only,  except  for the New York City  restaurant  which is also open for
lunch,  and are  generally  open Monday  through  Saturday with an average guest
check of approximately $80.00.                                                  

      Sullivan's  Steakhouse  was  named  after  the  legendary  boxer,  John L.
Sullivan,  and embraces a Chicago style 1940's  steakhouse  theme with nostalgic
influences that feature jazz and swing music. In 1997,  Sullivan's was named the
hot concept of the year by Nation's  Restaurant News. The bar features live jazz
music several nights a week. The decor includes an open kitchen, separate dining
rooms,  dark  wood  paneling,   carpeted  floors,   warm  lighting,   and  white
tablecloths.  Sullivan's  is  distinguished  by  its  high  quality,  well-aged,
mid-west grain fed steaks, chops, and seafood. Most Sullivan's restaurants serve
dinner only,  and are generally open Monday through Sunday with an average guest
check of approximately $57.00.                                                  

Corporate Strategy                                                              

     During 2000,  the Company opened one Lone Star  restaurant,  one Sullivan's
restaurant and two Del Frisco's restaurants. In addition, the Company's licensee
in Canada opened one restaurant.                                                

     During 2000, the Company  closed (i) 14  restaurants in Australia,  (ii) 24
domestic  Lone Star  restaurants  and (iii) one  Mexican  food  restaurant.  The
Company  periodically  assesses  the  performance  and  potential of each of its
restaurants  and  selectively  closes those which future  performance  is deemed
marginal.                                                                       

      As of March 19, 2001,  the Company had eight Lone Star  restaurants  where
construction is  substantially  completed,  but will not open for business until
these  restaurants  can be  adequately  staffed  with  personnel  who  meet  the
Company's  required  standards.  The  Company  expects  to  open  all  of  these
restaurants in 2001.                                                            

     In 1998,  the  Company  suspended  the  aggressive  growth of the Lone Star
concept to focus on  implementing  certain  improvement  initiatives in existing
restaurants.  These improvements include (a) improving  operational  consistency
and  guest  satisfaction  at  existing  Lone  Star  restaurants;  (b)  improving
management and financial  systems  including  installing  Point of Sale (P.O.S.)
Systems in all units; (c) improving the quality of management at its restaurants
and on the  regional  manager and general  manager  levels;  and (d) testing and
implementing  selective  marketing and advertising  programs.  A number of these
improvements  have been  successfully  implemented  and management  continues to
focus on  improving  operation  efficiencies  at its Lone Star  restaurants.  In
fiscal  2001,  the  Company  has no plans to  expand  its  number  of Lone  Star
restaurants other than the opening of the eight completed units.                

     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                  

-4- 

10-K
5th Page of 52
TOC
1st
Previous
Next
Bottom
Just 5th

actively  monitor  expansion  opportunities  for its upscale  operations  and is
currently active in seeking additional sites for future expansion in the upscale
markets.                                                                        

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. The Company's Lone Star restaurants  averaged
approximately  $1.85 million in sales on an annualized basis during 2000. Of the
243 Lone Star restaurants open at March 19, 2001, 89 were leased  facilities and
had an average cash investment of approximately  $1.0 million and 154 were owned
and had an average  cost for land  acquisition,  construction  and  equipment of
approximately $1.9 million.                                                     

      The Company  anticipates the average total investment per restaurant for a
typical Del Frisco's  restaurant and Sullivan's  restaurant will range from $3.0
million to $5.0  million.  The Del  Frisco's,  which  opened in New York City on
March 7, 2000, cost approximately $13 million to complete.                      

Menu                                                                            

      The dinner menu at a Lone Star restaurant  features a limited selection of
high quality,  specially seasoned and mesquite grilled steaks,  prime rib, ribs,
chicken,  fish, shrimp and various  combinations.  Most 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 10% of the restaurant's net sales.                   

      The menu at Sullivan's  features high quality,  well-aged,  mid-west grain
fed steaks,  chops, seafood and quality side dishes.  Sullivan's also features a
number of high quality wines and full bar.  Alcoholic  beverage service accounts
for approximately 40% of the restaurants' 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 38% of the restaurants' sales.                                    

Site Selection                                                                  

      The Company believes site selection is critical for the potential  success
of a particular  restaurant and senior management  devotes  significant time and
resources to analyzing each prospective  site.  Among the factors  considered in
site selection are the specific steakhouse concept to be developed, local market
demographics,  and site visibility.  Consideration is given to 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.                               

      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.                                                                       

Restaurant Layout                                                               

      The Company  believes  the decor and  interior  design of its  restaurants
significantly  contribute  to its  success.  The Lone Star  Steakhouse  & Saloon
restaurants'  open layout  permits  dining  customers  to view the              

-5-       

10-K
6th Page of 52
TOC
1st
Previous
Next
Bottom
Just 6th

bar and Texas memorabilia and enhance the casual dining atmosphere.  The Company
also designs its kitchen space for  efficiency of workflow,  thereby  minimizing
the amount of space required.                                                   

      Lone Star 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 provides additional seating. The Company
anticipates future Lone Star restaurants will average approximately 5,500 square
feet with less in small town markets.                                           

      The original Del Frisco's  restaurant  in Dallas,  Texas is  approximately
10,000 square feet and seats  approximately 350 persons and includes an extended
wine cellar and a cigar lounge with private dining available in the wine cellar.
In  addition,  Del  Frisco's  features a bar area  adjacent  to the dining  room
primarily to accommodate  customers waiting for tables. 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.  The New
York  City  location  is  approximately  16,500  square  feet and the Las  Vegas
location is approximately  11,000 square feet.  Future Del Frisco's  restaurants
are  planned to be  approximately  7,000-8,000  square  feet and will  include a
dining area for approximately 175-200 customers.                                

      The first  Sullivan's  restaurant,  in Austin,  Texas has been expanded to
12,000  square  feet and can now seat 320  customers.  A separate  jazz bar area
called "Ringside" is utilized at the Baton Rouge, Louisiana, Dallas and Houston,
Texas  Sullivan's  restaurants.  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  8,000-9,000  square feet and will
include a dining area for approximately 175-200 customers.                      

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.
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.  In 2000,  the  Company  spent
approximately  $9,000,000 for radio and television  advertising campaigns in the
domestic Lone Star  markets.  The Company plans to continue its use of radio and
television advertising in those markets where it is cost effective.             

      Sullivan's  and Del  Frisco's  both  utilize  print and radio  along  with
charitable event promotions throughout the year.                                

Restaurant Operations and Management                                            

      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 typical Lone Star  management team consists of one general manager and
four 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.  Restaurant  managers  complete an eight-week  training  program during
which they are  instructed in all areas of the operation  including food quality
and preparation, customer satisfaction, alcoholic beverage                      

-6- 

10-K
7th Page of 52
TOC
1st
Previous
Next
Bottom
Just 7th

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  visits 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's commitment to customer service and satisfaction is evidenced
by several  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.  Management strives to instill enthusiasm and dedication in
its employees and 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 employee concerns.                                  

Purchasing                                                                      

      Approximately  60% of the consumable  products used in the restaurants are
distributed  through and delivered by a single  vendor.  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 risk management 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. As of March 19, 2001, the Company has no significant forward
pricing contracts.                                                              

Management Information Systems                                                  

     The Company continually monitors its management  information system to take
advantage  of  technological  improvements.  The P.O.S.  system 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
daily reports for the Company's  management on sales,  bank deposit and variance
data.                                                                           

     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  which  are  wire
transferred periodically to the Company's principal operating account.          

     The Company generates weekly, consolidated sales reports and food and labor
cost variance  reports at its corporate  headquarters,  and detailed  profit and
loss statements for each restaurant every four weeks.                           

-7- 

10-K
8th Page of 52
TOC
1st
Previous
Next
Bottom
Just 8th

Additionally,  the Company monitors the average check,  customer count,  product
mix and other sales trends on a daily basis.                                    

      The Company  expects to continue  to develop  its  management  information
systems to improve  efficiencies  and assist  management  in analyzing  business
results and opportunities.                                                      

Competition                                                                     

      The restaurant  industry is intensely  competitive  with respect to price,
service,  location  and  food  quality,  and  there  are  many  well-established
competitors with  substantially  greater  financial and other resources than the
Company.  Some  of the  Company's  competitors  have  been  in  existence  for a
substantially  longer period than the Company and may be better  established  in
the  markets  where  the  Company's  restaurants  are  or may  be  located.  The
restaurant  business is often affected by changes in consumer tastes,  national,
regional or local economic conditions,  demographic trends, traffic patterns and
the type,  number and location of competing  restaurants.  In addition,  factors
such as inflation, increased food, labor and benefits costs and the availability
of  experienced  management  and  hourly  employees  may  adversely  affect  the
restaurant industry in general and the Company's restaurants in particular.  The
Company  believes that its concepts,  attractive  price-value  relationship  and
quality  of  food  and  service  enable  it to  differentiate  itself  from  its
competitors.  The Company  believes that its ability to compete will depend upon
attracting  and retaining  high quality  employees and  continuing 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 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.                      

      Any future 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.                                             

-8- 

10-K
9th Page of 52
TOC
1st
Previous
Next
Bottom
Just 9th

Trademarks                                                                      

      The Company  regards its primary 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's  financial  condition or its results of
operation.  The Company's policy is to pursue registration of its marks whenever
possible and to oppose  vigorously any infringement of its marks the Company has
obtained registration of its marks in numerous foreign countries.               

Employees                                                                       

      As of March 19, 2001, the Company employed approximately 18,200 persons, 9
of whom are executive  officers,  87 of whom are office support personnel,  8 of
whom are  regional  managers,  28 of whom are district  managers,  approximately
1,120, of whom are restaurant management personnel and the remainder of whom are
hourly  restaurant  personnel.  None of the  Company's  employees  are currently
covered by a collective bargaining agreement. The Company considers its employee
relations to be good.                                                           

Item 2.  Properties.                                                            
-----------                                                   

            As of March 19,  2001,  the  Company  leased 89 and owned 154 of its
Lone Star restaurant locations. At such date, the Company leased three and owned
two Del Frisco's restaurants locations.  Of the 15 Sullivan's restaurants 13 are
leased,  and two are owned.  Lease terms are generally five years, with multiple
renewal  options.  All of the Company's leases provide for a minimum annual rent
and some provide for  additional  rent based on sales  volume at the  particular
location over specified  minimum  levels.  Generally,  the leases are triple 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.                                                           

-9- 

10-K
10th Page of 52
TOC
1st
Previous
Next
Bottom
Just 10th

 RESTAURANT LOCATIONS AS OF MARCH 19, 2001

The  following  table sets forth the location of the  Company's  existing,  open
domestic  Lone Star  Steakhouse  & Saloon  (243)  Restaurants,  Del Frisco's (5)
restaurants, and Sullivan's (15) restaurants                                    

                                                        [Enlarge/Download Table]


                                                                                           
LONE STAR         Carbondale        MASSACHUSETTS     Durham            SOUTH DAKOTA       
                  Champaign         Boston            Fayetteville      Sioux Falls        
ALABAMA           Chicago (10)                        Greensboro (2)                       
Anniston          Decatur           MICHIGAN          Greenville                           
Birmingham (2)    Hodgkins          Ann Arbor         Jacksonville      TENNESSEE          
Huntsville        Mt. Vernon        Battle Creek      Raleigh (3)       Jackson            
Mobile            Peoria            Bay City          Rocky Mount       Johnson City       
Montgomery        Rockford          Brighton          Salisbury         Memphis (2)        
Trussville        Springfield       Dearborn Heights  Southern Pines                       
Tuscaloosa                          Detroit (6)       Winston-Salem                        
                  INDIANA           Grand Rapids                        UTAH               
ALASKA            Anderson          Jackson           NORTH DAKOTA      Centerville        
Anchorage         Evansville        Saginaw           Fargo             Layton             
                  Ft. Wayne                                             Salt Lake City     
ARIZONA           Indianapolis (4)  MISSISSIPPI       OHIO                                 
Mesa              Lafayette         Hattiesburg       Akron             VIRGINIA           
Phoenix (4)       Merrillville      Jackson           Canton            Alexandria         
                  South Bend                          Cincinnati (2)    Centreville        
ARKANSAS          Terre Haute       MISSOURI          Cleveland (3)     Chesapeake         
Ft. Smith                           Branson           Columbus (4)      Fairfax            
Little Rock       IOWA              Independence      Dayton (2)        Fredericksburg     
Springdale        Cedar Rapids      Kansas City       Lancaster         Herndon            
                  Coralville        Springfield       Middletown        Norfolk            
COLORADO          Davenport         St. Louis (5)     Niles             Potomac Mills      
Colorado Springs  Des Moines                          Springfield       Richmond (3)       
Denver  (6)       Waterloo          NEBRASKA          Toledo (2)        Sterling           
Ft. Collins                         Lincoln           Youngstown        Virginia Beach     
Loveland          KANSAS            Omaha (2)                                              
                  Garden City                         OKLAHOMA          WEST VIRGINIA      
DELAWARE          Hutchinson        NEVADA            Lawton            Beckley            
Dover             Overland Park     Las Vegas (4)     Oklahoma City     Charleston         
Wilmington (2)                                        Tulsa (2)         Huntington         
                  KENTUCKY          NEW JERSEY                                             
FLORIDA           Bowling Green     Atlantic City     PENNSYLVANIA      WISCONSIN          
Bradenton         Florence          Bridgewater       Allentown         Racine             
Clearwater        Lexington         Cherry Hill       Easton                               
Ft. Lauderdale    Louisville        Delran            Harrisburg        SULLIVAN'S         
Ft. Myers                           Hanover Township  Johnstown         Anchorage, AK      
Gainesville       LOUISIANA         Hazlet            King of Prussia   Austin, TX         
Lakeland          Baton Rouge (2)   Marlton           Lancaster         Baton Rouge, LA    
Ocala             Houma             Ocean County      Middletown        Charlotte,  NC     
Orlando           Lafayette         Scotch Plains     Philadelphia      Chicago, IL        
Pensacola         Monroe            Turnersville      Pittsburgh (5)    Dallas, TX         
Port Richey       New Orleans (3)   Voorhees          Pottstown         Denver, CO         
Sarasota                            Wayne             Reading           Houston, TX        
St. Petersburg    MAINE                               Scranton          Indianapolis, IN   
Tampa             South Portland    NEW MEXICO        Wilkes-Barre      King of Prussia, PA
                                    Albuquerque       York              Naperville, IL     
GEORGIA           MARYLAND                                              Palm Desert, CA    
Atlanta           Bel Air           NEW YORK          RHODE ISLAND      Raleigh, NC        
Augusta           Columbia          Albany            Warwick           Tucson, AZ         
                  Frederick                                             Wilmington, DE     
IDAHO             Gaithersburg                        SOUTH CAROLINA                       
Boise             Laurel            NORTH CAROLINA    Greenville                           
                  Lexington Park    Asheville         Myrtle Beach (2)  DEL FRISCO'S       
ILLINOIS          Waldorf           Boone                               Denver, CO         
Bloomington       Westminster       Charlotte (4)                       Dallas, TX         
Bradley                                                                 Fort Worth, TX     
                                                                        Las Vegas, NV      
                                                                        New York, NY       

-10-

10-K
11th Page of 52
TOC
1st
Previous
Next
Bottom
Just 11th

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.                                                                        

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 26,
2000.                                                                           

 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 2000                     High              Low                   
-------------                     ----              ---                   

First Quarter                       9 7/16            7 27/32                   
Second Quarter                      12 3/4            8 3/4                     
Third Quarter                       11 9/16           7 29/32                   
Fourth Quarter                      8 15/16           6 11/16                   

              Bid Prices
              ----------
Calendar 1999                   High              Low                     
-------------                   ----              ---                     
First Quarter                     11 1/4            6 5/8                       
Second Quarter                    12 3/8            9 7/16                      
Third Quarter                     10 7/16           7 1/4                       
Fourth Quarter                    10 1/8            7                           

-11-

10-K
12th Page of 52
TOC
1st
Previous
Next
Bottom
Just 12th

Dividends                                                                       

      The Company  initiated  the payment of quarterly  cash  dividends in April
2000 and has paid cash  dividends  at the rate of $0.125 per share each  quarter
thereafter.  The Company plans to continue the quarterly  dividend  payments for
the foreseeable future.                                                         

Number of Stockholders                                                          

      As of March 19, 2001,  there were  approximately  450 holders of record of
the Company's  Common Stock.  The Company believes there are in excess of 15,000
beneficial owners of the Company's Common Stock.                                

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  "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations"
included elsewhere in this Form 10-K. The selected  consolidated  financial data
of the Company as of December  26, 2000,  December 28, 1999,  December 29, 1998,
December 30, 1997,  and December 31, 1996, and for each of the five years in the
period  ended  December  26,  2000,  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.  The pro forma  amounts  reflect the
adjustment  amounts  applicable  for the  fiscal  years  1996  and  1997 to give
retroactive  effect to the change in accounting for pre-opening costs adopted in
fiscal 1998 (see Note 4 to the Company's Consolidated Financial Statements).    

-12-

10-K
13th Page of 52
TOC
1st
Previous
Next
Bottom
Just 13th

The  following  table  should  be  read in  conjunction  with  the  Consolidated
Financial Statements and Notes thereto included elsewhere in this Form 10-K.    

                                                        [Enlarge/Download Table]


                                                                       Year Ended In December,(1)                      
                                                    -----------------------------------------------------------------  
                                                                   (Amounts in thousands, except share data)           

                                                     2000         1999             1998          1997           1996   
                                                     ----         ----             ----          ----           ----   

Income Statement Data:                                                                                                 

                                                                                                                       
Net sales                                     $    575,863   $    585,755       $616,692       $585,357       $491,754 

Costs and expenses:                                                                                                    

   Costs of sales                                  202,343        207,696        231,787        211,571        172,338 
   Restaurant operating expenses                   276,974        263,940        270,495        215,805        167,871 
   Restaurant depreciation and                                                                                         
     amortization                                   28,574         30,970         26,346         30,590         28,384 
   General and administrative expenses              42,472         38,057         32,070         21,649         21,285 

   Provision for impaired assets and                                                                                   
      restaurant closings                            4,310         38,931          4,646           --             --   

   Loss on divestiture of foreign operations          --             --             --             --            8,557 
                                              ------------      ---------       --------       ------          ------- 

Total costs and expenses                           554,673        579,594        565,344        479,615        398,435 
                                                  --------        -------       --------     ----------        ------- 

Income from operations                              21,190          6,161         51,348        105,742         93,319 

Other income, net                                    2,530          2,190          2,906          4,109          3,682 
                                                ----------    -----------    -----------     ----------   ------------ 

Income before provision for income                                                                                     
 taxes and minority interest                        23,720          8,351         54,254        109,851         97,001 

Provision for income taxes                          (7,590)        (2,950)       (21,843)       (40,075)       (37,518)

Minority interest                                     --             --             --             (968)           584 
                                                ----------  -------------    -----------  -------------   ------------ 

Income before cumulative effect of                                                                                     
  change in accounting principle                    16,130          5,401         32,411         68,808         60,067 

Cumulative effect of change in accounting                                                                              
  principle (net of income tax of $2,921)             --             --           (6,904)          --             --   
                                                ----------  -------------    -----------  -------------   ------------ 

Net income                                    $     16,130   $      5,401   $     25,507   $     68,808   $     60,067 
                                                 =========    ===========     ==========      =========    =========== 

Basic earnings per share:                                                                                              
  Income before cumulative effect of                                                                                   
   change in accounting principle             $        .62   $        .15   $        .81   $       1.68   $       1.53 

  Cumulative effect of change                                                                                          
     in accounting principle                          --             --             (.17)           --             --  
                                                ----------  -------------    -----------  -------------   ------------ 

Basic earnings per share                      $        .62   $        .15   $        .64   $       1.68   $       1.53 
                                              ============ ==============    ===========    ===========   ============ 

Weighted average shares                                                                                                
  outstanding                                   26,189,600     35,089,084     39,989,091     41,013,749     39,383,891 
                                                ==========     ==========     ==========     ==========     ========== 

Pro forma net income (2)                                                                   $     66,815   $     62,498 
                                                                                             ==========    =========== 

Pro forma basic earnings per share                                                         $       1.63   $       1.59 
                                                                                             ==========    =========== 

-13-

10-K
14th Page of 52
TOC
1st
Previous
Next
Bottom
Just 14th

                                                                [Download Table]


                                      At fiscal year end in December, (1)          
                                  ----------------------------------------------   
                                          (Dollars in thousands)                   

                                  2000      1999        1998      1997        1996 
                                  ----      ----        ----      ----        ---- 

Balance Sheet Data:                                                                

                                                                                   
Working capital (deficit)    $  (1,716)  $  20,215  $  67,593  $ 117,127  $ 126,244
Total assets                   488,923     533,533    608,583    620,812    542,152
Long-term debt,                                                                    
  including current portion       --          --         --         --          387
Stockholders' equity           437,783     484,379    553,441    566,148    495,239

(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 1996, 1997, 1998, 1999, and 2000 fiscal years ended on
            December 31, 30, 29, 28, and 26 respectively. 1996 included 53-weeks
            of operations, and all other fiscal years were 52-week fiscal years.
(2)         Pro forma net income  amounts  reflect  the  adjustments  for fiscal
            years  1996 and 1997 to give  retroactive  effect  to the  change in
            accounting for pre-opening  costs adopted in fiscal 1998 (see Note 4
to the Company's consolidated financial statements).    

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.                                                                           

      In May 1998,  the Company  temporarily  suspended  development of new Lone
Star  restaurants  other than  properties  which had been  committed for or were
under construction.  During 1998, the Company completed the remodel/construction
of twelve of these  restaurants.  The Company opened one restaurant in 1999, one
in 2000  and two to date  in  fiscal  2001.  The  Company  intends  to open  the
remaining eight restaurants during fiscal 2001.                                 

      In addition, the Company has seven sites available for future development,
five of which  are  owned  and two of which  are  under  lease.  There  were 243
operating  domestic  Lone Star  restaurants  as of March 19, 2001.  In addition,
licensees  operate three Lone Star  restaurants in California,  one in Guam, and
one in Canada.                                                                  

      The Company currently  operates five Del Frisco's,  including the New York
City and Las Vegas, Nevada restaurants which opened in 2000. A licensee operates
a Del Frisco's in Orlando, Florida.                                             

      The Company currently operates fifteen Sullivan's  restaurants,  including
the Sullivan's restaurant opened in Tucson, Arizona in November 2000.           

      Internationally,  as of March 19, 2001, the Company currently  operates 26
Lone Star Steakhouse & Saloon restaurants in Australia.  The Company closed nine
restaurants  in Australia  during 2000 and an  additional  five  restaurants  in
January 2001.                                                                   

-14-

10-K
15th Page of 52
TOC
1st
Previous
Next
Bottom
Just 15th

Results of Operations                                                           

      The  following  table  sets  forth  for  the  periods  indicated  (i)  the
percentages  which  certain  items  included in the  Consolidated  Statements of
Income bear to net sales, and (ii) other selected operating data.               

                                                        [Enlarge/Download Table]


                                                                                 Years Ended                    
                                                            ----------------------------------------------------
                                                            December 26,         December 28,       December 29,
                                                                2000                 1999               1998    
                                                            ------------         -------------     -------------
                                                                         (Dollars in thousands)                 
Income Statement Data:                                                                                          

                                                                                                                
Net sales                                                      100%                 100%                 100%   
   Costs and expenses:                                                                                          
     Costs of sales                                           35.1                 35.5                 37.6    
     Restaurant operating expenses                            48.1                 45.1                 43.9    
     Provision for impaired assets and restaurant closings      .7                  6.6                   .7    
     Depreciation and amortization                             5.0                  5.3                  4.3    
                                                            ------               ------               ------    
     Restaurant costs and expenses                            88.9                 92.5                 86.5    
                                                            ------               ------               ------    
     Restaurant operating income                              11.1                  7.5                 13.5    
     General and administrative expenses                       7.4                  6.5                  5.2    
                                                            ------               ------               ------    
Income from operations                                         3.7                  1.0                   8.3   

   Other income                                                 .4                   .4                   .5    
                                                            ------               ------               ------    
   Income before income taxes and cumulative effect                                                             
     of change in accounting principle                         4.1                  1.4                  8.8    
   Provision for income taxes                                  1.3                   .5                  3.5    
                                                            ------               -------              ------    
   Income before cumulative effect of change                                                                    
     in accounting principle                                   2.8                   .9                  5.3    
   Cumulative effect of change in accounting principle           -                    -                 (1.2)   
                                                            -------              -------             --------   
   Net income                                                  2.8%                  .9%                 4.1%   
                                                            =======              =======             ========   

Restaurant Operating Data:                                                                                      
   Average sales per restaurant on an                                                                           
     annualized basis (1)                                    $1,938               $1,810               $1,957   
                                                             ======               ======               ======   

Number of restaurants at end of period(2)                       287                 298                  322    
Number of full restaurant periods open                                                                          
     during the period (3)                                    3,863                4,204                4,178   

--------------------------------------                                          

(1)         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.                             
(2)         Restaurants  open  at end of  period  after  giving  effect  to five
Australian restaurants closed in January 2001.          
(3)         Full restaurant periods are four-week  accounting periods within the
            fiscal  year  (excluding  the  first  partial  accounting  period of
operations) that a restaurant is open.                  

-15-

10-K
16th Page of 52
TOC
1st
Previous
Next
Bottom
Just 16th

LONE STAR STEAKHOUSE & SALOON, INC.                                             

 Year ended December 26, 2000 compared to Year ended December 28, 1999
 (Dollar amounts in thousands)

     Net sales  decreased  $9,892 (1.7%) to $575,863 for the year ended December
26, 2000 ("fiscal  2000"),  compared to $585,755 for the year ended December 28,
1999 ("fiscal  1999").  The decrease was principally  attributable to closing 24
domestic Lone Star  restaurants in January 2000, and nine Lone Star  restaurants
in Australia in August 2000 partially offset by additional sales of $10,800 from
one  domestic  Lone  Star  restaurant,  one  Sullivan's  restaurant  and two Del
Frisco's restaurants opened in fiscal 2000. Same store sales decreased 0.1% from
fiscal 1999.                                                                    

     Costs of sales, primarily food and beverages,  decreased as a percentage of
net sales to 35.1% from 35.5% due primarily to improved procedures in controlled
food and beverage costs.                                                        

     Restaurant  operating  expenses  for fiscal  2000  increased  $13,034  from
$263,940 in fiscal 1999 to $276,974,  and increased as a percentage of net sales
from 45.1% to 48.1%. The increase in restaurant  operating expenses is primarily
attributable to an $8,072 increase in media advertising. In addition,  increased
costs were incurred for restaurant labor,  building  maintenance and pre-opening
expenses.                                                                       

     Depreciation and amortization  decreased $2,396 in fiscal 2000, compared to
fiscal 1999. The decrease is primarily attributable to restaurants closed during
fiscal 2000.                                                                    

     Provisions for impaired assets and restaurant  closings in fiscal 2000 were
$4,310 compared to $38,931 in fiscal 1999. The provision in fiscal 2000 reflects
a pre-tax  charge  of $3,000  for the  write  down of  certain  under-performing
Australian  restaurants  and $1,310  related  to costs of closing 14  Australian
restaurants.  The pre-tax  charges for fiscal 1999 include $35,797 for the write
down of both domestic and Australian impaired assets and $3,134 related to costs
of closing  25  domestic  restaurants.  The  Company  periodically  reviews  its
long-lived assets for indications of impairment.                                

     General  and  administrative  expenses  increased  $4,415  in  fiscal  2000
compared  to fiscal  1999.  This  increase  was  primarily  attributable  to (1)
salaries and wage-related  expenses reflecting the costs associated with the new
positions added to strengthen the Company's  corporate  infrastructure,  general
salary  increases and costs related to employee  retirement  benefit plans,  (2)
costs for software amortization and (3) travel and recruiting expenses.         

     Other income, net for fiscal 2000 was $2,530,  compared to $2,190 in fiscal
1999.  The  increase  is  attributable  to gains on the sale of assets of $1,305
offset in part by an  increase  in  interest  expense and a decrease in interest
income.                                                                         

     The effective  income tax rate for fiscal 2000 was 32.0%  compared to 35.3%
in  fiscal  1999.  The  difference  in  the  effective  tax  rate  is  primarily
attributable  to a mix of foreign and domestic income and the impact of FICA tip
credits on the relative pre-tax income for the two years.                       

-16-

10-K
17th Page of 52
TOC
1st
Previous
Next
Bottom
Just 17th

LONE STAR STEAKHOUSE & SALOON, INC.                                             

 Year ended December 28, 1999 compared to Year ended December 29, 1998
 (Dollar amounts in thousands)

     Net sales  decreased  $30,937 to  $585,755  for  fiscal  1999  compared  to
$616,692  for the fiscal year ended  December  29,  1998  ("fiscal  1998").  The
decrease  is  principally  attributable  to  a  decline  in  average  sales  per
restaurant  resulting  from lower  customer  counts during fiscal 1999 partially
offset by  additional  sales of $8,038 from one new domestic  Lone Star and four
Sullivan's  restaurants  opened in fiscal 1999.  Same store sales decreased 7.6%
from fiscal 1998.                                                               

     Costs of sales, primarily food and beverages,  decreased as a percentage of
net sales to 35.5% from 37.6% due  primarily to improved  margins as a result of
lower promotional  discounting of menu prices and lower beef prices. During most
of fiscal 1999, the Company purchased beef under contracted prices that provided
the Company a favorable pricing advantage compared with cash market pricing.    

     Restaurant  operating  expenses  for  fiscal  1999  decreased  $6,555  from
$270,495 in fiscal 1998 to $263,940,  and increased as a percentage of net sales
from 43.9% to 45.1%. The absolute dollar amounts reflect the impact of increased
operating costs for the new restaurants opened during fiscal 1998, and increased
costs related to manager  training  expenses and certain  insurance  costs.  The
increases  were  partially  offset by decreases in hourly labor costs related to
cost control measures taken to improve operating efficiencies at the restaurants
and by decreases  in costs for  operating  supplies  and building and  equipment
maintenance  expenses.  In  addition,  fiscal 1998  includes  costs  incurred in
connection with a national  advertising  campaign,  which was not renewed during
fiscal 1999. The increase as a percentage of sales primarily  reflects the fixed
cost  components of restaurant  operating  expenses on lower average  restaurant
sales experienced in fiscal 1999.                                               

     Depreciation and  amortization  increased $4,624 in fiscal 1999 compared to
fiscal 1998. The increase is attributable  to restaurants  open less than a full
year in fiscal  1998 and to  restaurants  opened in fiscal  1999.  In  addition,
fiscal 1999 reflects  depreciation  related to the installations of new point of
sale systems during the year.                                                   

     Provisions for impaired assets and restaurant  closings in fiscal 1999 were
$38,931  compared to $4,646 in fiscal 1998.  The decision was made in the fourth
quarter  of  fiscal  1999 to close 24  domestic  Lone Star  restaurants  and one
domestic  Mexican  restaurant.  The pretax charge includes $35,797 for the write
down of both domestic and Australian impaired assets and $3,134 related to costs
of closing the 25 domestic restaurants.                                         

     General  and  administrative  expenses  increased  $5,987  in  fiscal  1999
compared to fiscal 1998.  The increase was primarily  attributable  to increased
(i) travel  costs  incurred  in  connection  with  restaurant  operation  review
programs (ii)  recruiting  costs related to the  recruitment of new managers and
(iii) costs related to expenses  incurred in connection with the installation of
the point-of-sale systems and the new database information systems.             

     Other income,  principally interest, for fiscal 1999 was $2,190 compared to
$2,906 in fiscal 1998. The decrease is  attributable  to reduced funds available
for short-term investment purposes.                                             

     The effective  income tax rate for fiscal 1999 was 35.3%  compared to 42.6%
in fiscal 1998. The decrease in fiscal 1999 is due in part to a lower  valuation
allowance attributable to Australian operating losses in fiscal 1999, as well as
the impact of FICA tip credits on lower  pre-tax  earnings.  The decrease in the
rate was partially offset by the impact of Australian losses resulting in higher
effective state income taxes on domestic earnings.                              

-17-

10-K
18th Page of 52
TOC
1st
Previous
Next
Bottom
Just 18th

     The  cumulative  effect of change in accounting  principle  represents  the
effect of adoption of Statement of Position  98-5,  "Reporting on Costs of Start
Up Activities". This statement impacted the Company's accounting for pre-opening
costs (see Note 4 of Notes to the Consolidated Financial Statements).           

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:                                                                          

                                                        [Enlarge/Download Table]


                                             December 26,  December 28,  December 29,
                                                 2000          1999          1998    
                                             -----------   ------------  ------------

                                                                                     
Net cash provided by operating activities    $   49,345     $   70,886    $  62,598  
Net cash used in investment activities          (12,271)       (33,637)     (73,251) 
Net cash used by financing activities           (58,710)       (76,453)     (35,378) 
Net effect of exchange rate changes on cash          (8)            30         (119) 
                                             ----------     -----------   ---------- 
Net decrease in cash and cash equivalents    $  (21,644)    $  (39,174)   $ (46,150) 
                                             ==========     ==========    ========== 

      During fiscal 2000,  1999, and 1998,  the Company's  purchases of property
and equipment were $21,665, $34,085, and $63,122,  respectively. In fiscal 2000,
the Company received proceeds from the sale of assets of $10,213.               

      The Company has opened 11  restaurants  in the past three  fiscal years of
which two opened  during 1998,  five in 1999 and four in 2000.  The Company does
not have significant accounts receivable or inventory.                          

      At  December  26,  2000,   the  Company  had  $29,029  in  cash  and  cash
equivalents.  The  Company  has  entered  into a  $20,000  revolving  term  loan
agreement  with a bank.  At December  26, 2000,  the Company had no  outstanding
borrowings.                                                                     

      The Company's  Board of Directors has  authorized the repurchase of shares
of the  Company's  common  stock  from  time to time in the  open  market  or in
privately  negotiated  transactions.  During fiscal 2000, the Company  purchased
5,605,074 shares at a cost of $49,261.  During fiscal 1999 and 1998, the Company
purchased 8,758,005 shares at a cost of $76,488,  and 2,610,000 shares at a cost
of $36,375, respectively.                                                       

      In the second quarter of fiscal 2000,  the Company began paying  dividends
on its common stock. For the year, the Company paid cash dividends of $9,630, or
$0.375 per share.                                                               

      In March  2000,  the  Financial  Accounting  Standards  Board  issued FASB
Interpretation  No. 44,  Accounting  for Certain  Transactions  Involving  Stock
Compensation,  an  interpretation  of APB No. 25. The  Interpretation  requires,
among other things,  that stock options which have been modified  after December
15, 1998 to reduce the  exercise  price must be accounted  for as variable.  The
Company  has adopted  the  accounting  change for  modified  stock  options on a
prospective  basis  effective  July 1, 2000, as required by the  Interpretation.
Pursuant to the rules for the initial application of the Interpretation, imputed
non-cash  compensation expense is to be recognized on a prospective basis to the
extent that the market  price of the  Company's  common stock after July 1, 2000
exceeds  the common  stock price on July 1, 2000,  of  $10.125.  The Company has
repriced  options  during fiscal 1999 and in January 2000,  which are subject to
the  Interpretation.  At December 26, 2000, there were  approximately  4,731,000
shares  subject  to the                                                         

-18 

10-K
19th Page of 52
TOC
1st
Previous
Next
Bottom
Just 19th

Interpretation.  These  options are accounted for as variable from July 1, 2000,
until the options are  excised,  forfeited or expire  unexercised.  Prior to the
adoption of the Interpretation, the Company accounted for these repriced options
as fixed.  Because the market price of the  Company's  common stock was lower on
December 26, 2000 than on July 1, 2000, the adoption of the  Interpretation  had
no effect  upon the  Company's  net  income for year ended  December  26,  2000;
however,  the Company may incur significant  volatility in reporting earnings in
future periods as  fluctuations in market prices of its common stock may greatly
impact non-cash expenses on a periodic basis.                                   

      On  January  3,  2001,  the  Board of  Directors  declared  the  Company's
quarterly  cash  dividend  of $0.125  per share,  payable  January  26,  2001 to
stockholders of record on January 12, 2001.                                     

      From time to time, the Company utilizes derivative  financial  instruments
in the form of commodity futures contracts to manage market risks and reduce its
exposure in the price of meat resulting  from  fluctuations  in the market.  The
Company uses live beef cattle futures  contracts in an attempt to accomplish its
objective.  Realized and unrealized changes in the fair values of the derivative
instruments  are  recognized in income in the period in which the change occurs.
Realized and unrealized gains and losses related to these derivative instruments
have not been significant. As of December 26, 2000, the Company had no positions
in futures contracts.                                                           

Risk Factors                                                                    

      If we are unable to compete  effectively  with our competitors we will not
be able to increase revenues or generate profits.                               

     Our  inability to increase  revenues is directly  related to our ability to
compete effectively with our competitors. Key competitive factors include:      

o    The  quality  and  numbers  of  employees  needed to  adequately  staff our
restaurants;                                                          
o    the quality and value of the food products offered;                        
o    the quality of service;                                                    
o    the price of the food products offered;                                    
o    the restaurant locations; and                                              
o    the ambiance of facilities.                                                

      We compete with other  steakhouse  restaurants  specifically  and with all
other  restaurants  generally.  We compete with national and regional chains, as
well  as  individually  owned  restaurants.  The  restaurant  industry  has  few
non-economic  barriers  to  entry,  and as our  competitors  expand  operations,
competition  from steakhouse  restaurants  with concepts  similar to ours can be
expected to  intensify.  Many of our  competitors  are well  established  in the
upscale and mid-scale steak segments and certain  competitors have substantially
greater  financial,  marketing  and  other  resources  than us.  Such  increased
competition could adversely affect our revenues.                                

     Changing consumer preferences and discretionary spending patterns and other
factors  affecting  the  availability  of beef  could  force  us to  modify  our
restaurant's concept and menu and could result in a reduction in our revenues.  

     Even if we are able to successfully compete with other restaurant companies
with  similar  concepts,  we may be forced to make changes in one or more of our
concepts in order to respond to changes in consumer  tastes or dining  patterns.
Consumer  preferences could be affected by health concerns about the consumption
of beef,  the  primary  item on our menus,  or by  specific  events  such as the
outbreak of "mad cow  disease" or  "foot/mouth  disease"  which  occurred in the
Untied Kingdom.  In addition,  these events could reduce the                    

-19-

10-K
20th Page of 52
TOC
1st
Previous
Next
Bottom
Just 20th

available supply of beef or significantly  raise the price of beef. If we change
a restaurant concept, we may lose additional customers who do not prefer the new
concept and menu,  and we may not be able to attract a  sufficient  new customer
base to  produce  the  revenue  needed  to make the  restaurant  profitable.  In
addition,  we may have  different  or  additional  competitors  for our intended
customers  as a  result  of  such a  concept  change  and  may  not be  able  to
successfully  compete  against  such  competitors.  Our success  also depends on
numerous factors affecting  discretionary consumer spending,  including economic
conditions,  disposable consumer income and consumer confidence. Adverse changes
in these  factors  could  reduce  guest  traffic or impose  practical  limits on
pricing, either of which could reduce revenues and operating income.            

Unforeseen Cost Increases Could Adversely Affect Our Profitability.             

        Our  profitability  is highly  sensitive to increases in food, labor and
other  operating  costs.  Our  dependence  on frequent  deliveries of fresh food
supplies means that shortages or  interruptions  in supply could  materially and
adversely affect our operations. In addition, unfavorable trends or developments
concerning the following factors could adversely affect our results:            

o  Inflation,  food,  labor and employee  benefit  costs;  and                  
o  rent  increases resulting from rent escalation provisions in our leases.     

        We may be unable to  anticipate or react to changing  prices.  If we are
unable  to modify  our  purchasing  practices  or  quickly  or  readily  pass on
increased costs to customers, our business could be materially affected.        

Failure  to Comply  with  Government  Regulations  Could  Adversely  Affect  Our
Operating Performance.                                                          

        Our  restaurant  operations  are subject to certain  federal,  state and
local laws and government regulations, such as:                                 

o       The obtaining of licenses for the sale of food and alcohol beverages;   
o       national and local health sanitation laws and regulations;              
o       national and local employment and safety laws and  regulations;  and    
o       local zoning,  building code and land-use regulations.                  

        While  we  have  never  experienced  any  significant   difficulties  in
obtaining necessary governmental approvals, the failure to obtain or retain food
and liquor  licenses or any other  governmental  approvals could have a material
adverse effect on our operating results.                                        

        We may be subjected to "dram-shop" liability, which generally provides a
person injured by an intoxicated  person with the right to recover  damages from
an establishment  that wrongfully served alcoholic  beverages to the intoxicated
person. Although we carry liquor liability coverage as part of our comprehensive
general liability insurance, if we lost a lawsuit related to this liability, our
business could be materially harmed.                                            

The  Restaurant  Industry  is  Affected  by a Number  of  Trends,  As Well As by
Competition.                                                                    

      The restaurant  industry is affected by changes in consumer  tastes and by
national,  regional,  and local economic  conditions and demographic trends. The
performance of individual restaurants may be affected by factors such as traffic
patterns,  demographic  considerations  and the type,  number  and  location  of
competing                                                                       

-20-

10-K
21st Page of 52
TOC
1st
Previous
Next
Bottom
Just 21st

restaurants.  In addition, factors such as inflation,  increased food, labor and
employee benefit costs and the availability of experienced management and hourly
employees may also adversely  affect the restaurant  industry in general and our
restaurants in particular.                                                      

Our  Business  Depends on A Limited  Number of Key  Personnel,  The Loss of Whom
Could Adversely Affect us.                                                      

      Some of our senior  executives  are important to our success  because they
have been  instrumental  in setting the  strategical  direction  of our Company,
operating our business,  identifying areas for expansion and arranging necessary
financing.  These key personnel include Jamie B. Coulter, our Chairman and Chief
Executive Officer, and certain of our other executive officers. Although we feel
that  there  is a  significant  pool of  talented  personnel  in the  restaurant
industry,  if these  members  of our senior  management  team  become  unable or
unwilling to continue in their present positions,  it could adversely affect our
business and development.                                                       

Shareholders  May Not Be Able to  Resell  Their  Stock  or May Have to Sell At A
Price Substantially Lower Than the Price They Paid For It.                      

      The trading price for our common stock has been highly  volatile and could
continue to be subject to significant  fluctuations in response to variations in
our quarterly  operating results,  general conditions in the restaurant industry
or the general  economy,  and other  factors.  In addition,  the stock market is
subject to price and volume  fluctuations  affecting the market price for public
companies generally,  or within broad industry groups, which fluctuations may be
unrelated  to the  operating  results  or other  circumstances  of a  particular
company.  Such  fluctuations  may  adversely  affect the liquidity of our common
stock,  as well as price that  holders  may  achieve  for their  shares upon any
future sale.                                                                    

Staggered Board;  Blank-Check  Preferred Stock;  Poison Pill;  Change of Control
Agreements.                                                                     

      Our certificate of  incorporation  and bylaws provide for three classes of
directors,  to be elected on a staggered basis. This enables existing management
to exercise  significant control over our affairs,  and may act as an impediment
to any  future  attempts  by  third  parties  to take  control  of our  board of
directors. In addition, our board of directors has the authority without further
action by the  stockholders  to issue shares of  preferred  stock in one or more
series and to fix the rights, preferences,  privileges and restrictions thereof.
The exercise of this  authority  may act as a further  impediment  to any future
attempts by third parties to take control of our board of directors.            

      Furthermore,  our  certificate of  incorporation  authorizes,  and we have
adopted in 1997, a preferred share purchase rights plan, commonly referred to as
a "poison pill." The terms of the rights and the circumstances  under which they
may be exercised are contained in a rights agreement,  which has been filed with
the SEC.  These terms have been designed to deter hostile  takeovers of us, even
though our stockholders might favor a takeover,  especially if it were to afford
them an opportunity  to sell their stock at a price above the prevailing  market
rate.  Finally,  our  executive  officers and certain  employees are entitled to
receive  severance  payments  under  certain  circumstances  if there has been a
change of control of the company.  The terms and the  circumstances  under which
the  executive  officers  will receive the  severance  payments are contained in
change of control  agreements  which have been  filed as  exhibits  to this Form
10-K.                                                                           

-21-

10-K
22nd Page of 52
TOC
1st
Previous
Next
Bottom
Just 22nd

Item 7. A.  Quantitative and Qualitative Disclosures 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 has been omitted since the required  information
is not present.                                                                 

Item 9.     Changes in and Disagreements with Accountants                       
on Accounting and Financial Disclosure                  

Not applicable.                                                     

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.                                                                      

-22-

10-K
23rd Page of 52
TOC
1st
Previous
Next
Bottom
Just 23rd

 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.                            
        All  financial statement schedules have been omitted
      since  the  required  information  is not present.

Exhibits                                                                        
INDEX TO EXHIBITS                                                   
Exhibit              Exhibit                              
Number                                                    
     **3.1      Company's Certificate of Incorporation as amended.
       *******3.2      Rights  Agreement,  dated as of October 3, 1997,  between
                       Lone Star  Steakhouse  &  Saloon,  Inc.  and First  Union
                       National Bank,  which includes the Form of Certificate of
                       Designations  setting  forth  the  terms of the  Series A
                       Participating Preference Stock, par value $.01 per share,
                       as  Exhibit  A, and the  Summary  of Rights  to  Purchase
Preference Shares as Exhibit B.   
***3.3      Company's Amended and Re-Stated By-Laws.      
       ******10.1      Agreement,  date October 19, 1998, between LS Management,
                       Inc., a wholly-owned subsidiary of Lone Star Steakhouse &
                       Saloon, Inc., and Coulter Enterprises, Inc., date October
19, 1998.                         
           **10.2      1992 Lone Star Steakhouse & Saloon, Inc. Directors' Stock
Option Plan.                      
         ****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      Non-Competition,   Confidentiality  and  Non-Solicitation
                       Agreement between the Company and Jamie B. Coulter, dated
March 12, 1992.                   
            *10.6      Amended  Agreement  dated  January  1, 1999  between  the
Company and Jamie B. Coulter.     
     ********10.7      Employment  Agreement  between  the Company and Gerald T.
Aaron, dated March 22, 2000.      
     ********10.8      Employment  Agreement  between the Company and Randall H.
Pierce, dated March 22, 2000.     
     ********10.9      Employment   Agreement   between  the  Company  and  T.D.
O'Connell, dated March 22, 2000.  

-23-

10-K
24th Page of 52
TOC
1st
Previous
Next
Bottom
Just 24th

    ********10.10      Employment  Agreement  between  the  Company  And Jeffrey
Bracken, dated March 22, 2000.    
    ********10.11      Employment  Agreement  between  the Company and Robert A.
Martin, dated March 22, 2000.     
    ********10.12      Employment  Agreement  between  the  Company  and John D.
White, dated March 22, 2000.      
           *10.13      Change of Control Agreement between the Company and Jamie
B. Coulter dated January 3, 2001. 
           *10.14      Change of  Control  Agreement  between  the  Company  and
    Gerald T. Aaron dated January 3, 2001.
           *10.15      Change of  Control  Agreement  between  the  Company  and
      Randall H. Pierce dated January 3, 2001.
           *10.16      Change of Control Agreement between the Company and T. D.
O'Connell dated January 3, 2001.  
           *10.17      Change of  Control  Agreement  between  the  Company  and
    Jeffrey Bracken dated January 3, 2001.
           *10.18      Change of Control  Agreement between the Company and John
D. White dated January 3, 2001.   
           *10.19      Change of  Control  Agreement  between  the  Company  and
   Deidra Lincoln dated January 3, 2001.
*********10.21      Non-Qualified Deferred Compensation Plan              
*21.1      Subsidiaries of the Company.                 
            *23.1      Independent  Auditors'  consent to the  incorporation  by
                       reference in the  Company's  Registration  Statements  on
                       Form S-8 of the  independent  auditors'  report  included
herein.                           

-----------------------------                                                   

(b)             Reports on Form 8-K filed in the fourth quarter of 2000:   none 

*  Filed herewith.                                    
            **  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  Form 10-Q for the
quarter ended June 13, 2000.                    
          ****  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.
         *****  Incorporated  by  reference to the  Company's  Form 10-K for the
quarter ended March 24, 1998.                   
        ******  Incorporated  by  reference to the  Company's  Form 10-Q for the
quarter ended September 8, 1998.                

-24-

10-K
25th Page of 52
TOC
1st
Previous
Next
Bottom
Just 25th

       *******  Incorporated  by reference to the Company's  Form 8-A12G/A filed
October 9, 1997.                                
      ********  Incorporated by reference to the Company's Annual Report on Form
 10-K for the fiscal year ended December 28, 1999.
     *********  Incorporated   by  reference  to  the   Company's   Registration
                Statement on Form S-8,  filed with the  Commission  on March 31,
2000 (Commission File No. 333-33762).           

-25-

10-K
26th Page of 52
TOC
1st
Previous
Next
Bottom
Just 26th

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 26th day of March 2001.                       

                                   LONE STAR STEAKHOUSE & SALOON, INC.
                                (Registrant)

                     /s/ Randall H. Pierce
                                        ----------------------------------------
                 Randall H. Pierce
                           Chief Financial Officer and
                            Principal Accounting Officer

-26-

10-K
27th Page of 52
TOC
1st
Previous
Next
Bottom
Just 27th

 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.                                                             

     SIGNATURE                  TITLE                         DATE
     ---------                  -----                         ----

/s/  Jamie B. Coulter        Chairman of the Board               March 26, 2001 
--------------------------   and Chief Executive Officer                        
Jamie B. Coulter                                                      

/s/  John D. White           Executive Vice                      March 26, 2001 
--------------------------   President                                          
John D. White            Treasurer and Director                         

/s/ Randall H. Pierce        Chief Financial Officer            March 26, 2001  
-------------------------        and Principal                                  
Randall H. Pierce         Accounting Officer                              

/s/ Fred B. Chaney           Director                           March 26, 2001  
------------------------                                                        
Fred B. Chaney                                                            

/s/ Clark R. Mandigo         Director                           March 26, 2001  
------------------------                                                        
Clark R. Mandigo                                                          

/s/ William B. Greene        Director                          March 26, 2001   
------------------------                                                        
William B. Greene                                                         

-27-

10-K
28th Page of 52
TOC
1st
Previous
Next
Bottom
Just 28th

Steakhouse & Saloon, Inc. 

 Index to Financial Statements

                                                        [Enlarge/Download Table]


                                                                                Pages
                                                                                -----

                                                                                     
Report of Independent Auditors..................................................F-1  
Consolidated Balance Sheets as of December 26, 2000 and December 28, 1999.......F-2  
Consolidated Statements of Income for the years ended December 26, 2000,             
   December 28, 1999,and December 29, 1998......................................F-4  
Consolidated Statements of Stockholders' Equity for the years ended                  
   December 26, 2000, December 28, 1999, and December 29, 1998..................F-5  
Consolidated Statements of Cash Flows for the years ended                            
   December 26, 2000, December 28, 1999, and December 29, 1998..................F-6  
Notes to Consolidated Financial Statements......................................F-7  

10-K
29th Page of 52
TOC
1st
Previous
Next
Bottom
Just 29th

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. (the Company) and subsidiaries as of December 26, 2000
and  December  28,  1999,  and the related  consolidated  statements  of income,
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 26, 2000. 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 auditing standards generally accepted
in the United States. 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. and subsidiaries at December 26, 2000 and December 28,
1999, and the consolidated  results of their operations and their cash flows for
each of the three years in the period ended  December 26,  2000,  in  conformity
with accounting principles generally accepted in the United States.             

Kansas City, Missouri                                                           
February 2, 2001                                                                

F-1 

10-K
30th Page of 52
TOC
1st
Previous
Next
Bottom
Just 30th

 Lone Star Steakhouse & Saloon, Inc.

 Consolidated Balance Sheets
(In Thousands, Except Share Amounts)

                                        December 26,  December 28,
                                       2000           1999
                                       ----           ----

Assets                                                                          
Current assets:                                                                 
Cash and cash equivalents ....................  $ 29,029  $ 50,673        
Accounts receivable ..........................       230       836        
Inventories ..................................    12,704    11,440        
Deferred income taxes ........................     1,997     2,430        
Other ........................................     3,188     3,990        
                                        ------------------
Total current assets ............................    47,148    69,369           

Property and equipment:                                                         
Land .........................................   123,841   128,457        
Buildings ....................................   174,849   181,262        
Leasehold improvements .......................   116,145   116,378        
Equipment ....................................    99,673    90,342        
Furniture and fixtures .......................    21,364    21,693        
                                       -------------------
                                         535,872   538,132
Less accumulated depreciation and amortization   129,111   107,650        
                                       -------------------

                                         406,761   430,482

Deferred compensation plan investments ..........     2,276      --             

Other assets:                                                                   
Intangible assets, net .......................    27,322    30,757        
Deferred income taxes ........................     2,880     1,713        
Other ........................................     2,536     1,212        
                                        ------------------
                                          32,738    33,682
                                        ------------------
Total assets ....................................  $488,923  $533,533           
                                        ==================

F-2 

10-K
31st Page of 52
TOC
1st
Previous
Next
Bottom
Just 31st

                                              December 26,  December 28,
                                               2000           1999
                                              --------------------------
Liabilities and stockholders' equity                                            
Current liabilities:                                                            
Accounts payable                               $  12,918   $   9,155      
Sales tax payable                                  2,748       2,571      
Accrued payroll                                    9,801       8,473      
Real estate taxes                                  2,070       2,875      
Gift certificates                                  8,209       7,478      
Income taxes payable                               1,207       4,520      
Restaurant closure accrual                         2,209       3,134      
Other                                              9,702      10,948      
                                        ----------------------
Total current liabilities                            48,864      49,154         
Deferred compensation obligation                      2,276        --           

Stockholders' equity:                                                           
Preferred stock, $.01 par value, 2,000,000                                
shares authorized; none issued                       -           -    
Common stock, $.01 par value, 98,000,000                                  
shares authorized; 24,275,619 shares issued                           
and outstanding (29,858,553 in 1999)               243         299    
Additional paid-in capital                       188,976     238,000      
Retained earnings                                260,423     253,923      
Accumulated other comprehensive loss             (11,859)     (7,843)     
                                        ----------------------
Total stockholders' equity                          437,783     484,379         
                                        ----------------------
Total liabilities and stockholders' equity        $ 488,923   $ 533,533         
                                        ======================

See notes to consolidated financial statements.                                 

F-3 

10-K
32nd Page of 52
TOC
1st
Previous
Next
Bottom
Just 32nd

 Lone Star Steakhouse & Saloon, Inc.

 Consolidated Statements of Income
(In Thousands, Except for Per Share Amounts)

                                                        [Enlarge/Download Table]

                                                                            For the Year Ended                           
                                                          ---------------------------------------------------------------
                                                           December 26,          December 28,            December 29,    
                                                              2000                 1999                    1998          
                                                          ---------------------------------------------------------------

                                                                                                                         
Net sales                                                    $575,863                $585,755                $616,692    
Costs and expenses:                                                                                                      
   Costs of sales                                             202,343                 207,696                 231,787    
   Restaurant operating expenses                              276,974                 263,940                 270,495    
   Depreciation and amortization                               28,574                  30,970                  26,346    
   Provision for impaired assets and restaurant closings        4,310                  38,931                   4,646    
                                                          ---------------------------------------------------------------
Restaurant costs and expenses                                 512,201                 541,537                 533,274    
                                                          ---------------------------------------------------------------
Restaurant operating income                                    63,662                  44,218                  83,418    

General and administrative expenses:                                                                                     
   Related parties                                                  -                       -                   4,367    
   Other                                                       42,472                  38,057                  27,703    
                                                          ---------------------------------------------------------------
Income from operations                                         21,190                   6,161                  51,348    

Other income, net                                               2,530                   2,190                   2,906    
                                                          ---------------------------------------------------------------

Income before income taxes and cumulative                                                                                
   effect of a change in accounting principle                  23,720                   8,351                  54,254    
Provision for income taxes                                     (7,590)                 (2,950)                (21,843)   
                                                          ---------------------------------------------------------------
Income before cumulative effect of a change                                                                              
    in accounting principle, net of income                                                                               
    taxes of $2,921                                            16,130                   5,401                  32,411    
Cumulative effect of change in accounting                                                                                
        principle                                                   -                       -                  (6,904)   
                                                          ---------------------------------------------------------------
Net income                                                  $  16,130              $    5,401               $  25,507    
                                                          ===============================================================

Basic earnings per share:                                                                                                
   Income before cumulative effect of a                                                                                  
       change in accounting principle                       $    0.62              $     0.15               $    0.81    
   Cumulative effect of change in accounting                                                                             
        principle                                                   -                       -                   (0.17)   
                                                          ---------------------------------------------------------------
Basic earnings per share                                    $    0.62              $     0.15               $    0.64    
                                                          ===============================================================

Diluted earnings per share:                                                                                              
   Income before cumulative effect of a                                                                                  
      change in accounting principle                        $    0.61              $     0.15               $    0.81    
   Cumulative effect of change in accounting principle              -                       -                   (0.17)   
                                                          ---------------------------------------------------------------
Diluted earnings per share                                  $    0.61              $     0.15               $    0.64    
                                                          ===============================================================

See notes to consolidated financial statements.                                 

F-4 

10-K
33rd Page of 52
TOC
1st
Previous
Next
Bottom
Just 33rd

 Lone Star Steakhouse & Saloon, Inc.

 Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Amounts)

                                                        [Enlarge/Download Table]


                                                                             Common Stock                      Additional   
                                                Preferred     -------------------------------------------       Paid-In     
                                                  Stock              Number               Amount                Capital     
                                                ----------------------------------------------------------------------------

                                                                                                                            
Balance, December 30, 1997                            -               41,156,151             $411                  $349,608 
   Stock options exercised                            -                   61,817                1                       996 
   Tax benefit related to options exercised           -                        -                -                       111 
   Common stock repurchased and retired               -               (2,610,000)             (26)                  (36,349)
   Comprehensive income:                                                                                                    
      Net income                                      -                        -                -                         - 
      Foreign currency translation adjustments        -                        -                -                         - 

   Comprehensive income                                                                                                     
                                                ----------------------------------------------------------------------------
Balance, December 29, 1998                            -               38,607,968              386                   314,366 
   Stock options exercised                            -                    8,590                1                        34 
   Common stock purchased and retired                 -               (8,758,005)             (88)                  (76,400)
   Comprehensive income:                                                                                                    
      Net income                                      -                        -                -                         - 
      Foreign currency translation adjustments        -                        -                -                         - 

   Comprehensive income                                                                                                     
                                                ----------------------------------------------------------------------------
Balance, December 28, 1999                            -               29,858,553              299                   238,000 
   Stock options exercised                            -                   22,140                1                       180 
   Common stock purchased and retired                 -               (5,605,074)             (57)                  (49,204)
   Cash dividends ($0.375 per share)                  -                        -                -                         - 
   Comprehensive income:                                                                                                    
      Net income                                      -                        -                -                         - 
      Foreign currency translation adjustments        -                        -                -                         - 

   Comprehensive income                                                                                                     
                                                ----------------------------------------------------------------------------
Balance, December 26, 2000                            -               24,275,619             $243                  $188,976 
                                                ============================================================================

                                                        [Enlarge/Download Table]


                                                                                   Accumulated                             
                                                                                     Other                                 
                                                           Retained              Comprehensive                             
                                                           Earnings                   Loss                   Total         
                                                ---------------------------------------------------------------------------

                                                                                                                           
Balance, December 30, 1997                                    $223,015             $  (6,886)                $566,148      
   Stock options exercised                                           -                     -                      997      
   Tax benefit related to options exercised                          -                     -                      111      
   Common stock repurchased and retired                              -                     -                  (36,375)     
   Comprehensive income:                                                                                                   
      Net income                                                25,507                     -                   25,507      
      Foreign currency translation adjustments                       -                (2,947)                  (2,947)     
                                                                                                   ------------------------
   Comprehensive income                                                                                        22,560      
                                                ---------------------------------------------------------------------------
Balance, December 29, 1998                                     248,522                (9,833)                 553,441      
   Stock options exercised                                           -                     -                       35      
   Common stock purchased and retired                                -                     -                  (76,488)     
   Comprehensive income:                                                                                                   
      Net income                                                 5,401                     -                    5,401      
      Foreign currency translation adjustments                       -                 1,990                    1,990      
                                                                                                   ------------------------
   Comprehensive income                                                                                         7,391      
                                                ---------------------------------------------------------------------------
Balance, December 28, 1999                                     253,923                (7,843)                 484,379      
   Stock options exercised                                           -                     -                      181      
   Common stock purchased and retired                                                                         (49,261)     
   Cash dividends ($0.375 per share)                            (9,630)                    -                   (9,630)     
   Comprehensive income:                                                                                                   
      Net income                                                16,130                     -                   16,130      
      Foreign currency translation adjustments                       -                (4,016)                  (4,016)     
                                                                                                   ------------------------
   Comprehensive income                                                                                        12,114      
                                                ---------------------------------------------------------------------------
Balance, December 26, 2000                                    $260,423              $(11,859)                $437,783      
                                                ===========================================================================

See notes to consolidated financial statements.                                 

F-5 

10-K
34th Page of 52
TOC
1st
Previous
Next
Bottom
Just 34th

 Lone Star Steakhouse & Saloon, Inc.

 Consolidated Statements of Cash Flows
(In Thousands)

                                                        [Enlarge/Download Table]


                                                                                       For the Year Ended                         
                                                             -------------------------------------------------------------------- 
                                                                   December 26,            December 28,            December 29,   
                                                                       2000                    1999                    1998       
                                                             -------------------------------------------------------------------- 
                                                                                                                                  
Operating activities                                                                                                              
Net income                                                            $16,130               $  5,401               $  25,507      
Adjustments to reconcile net income to net cash                                                                                   
   provided by operating activities:                                                                                              
      Amortization                                                      2,902                  2,800                   1,609      
      Depreciation                                                     29,669                 30,732                  26,643      
      Provision for impaired assets and restaurant closings             4,310                 38,931                   4,646      
      Gain on sales of assets                                          (1,304)                     -                       -      
      Cumulative effect of accounting change                                -                      -                   9,825      
      Deferred income taxes                                              (734)               (13,067)                  1,588      
      Net change in operating assets and liabilities:                                                                             
         Accounts receivable                                              606                    663                     131      
         Inventories                                                   (1,335)                 4,485                  (4,997)     
         Other current assets                                             702                   (366)                    (91)     
         Accounts payable                                               3,763                  1,181                  (6,514)     
         Income taxes payable                                          (3,313)                 2,078                   1,122      
         Other current liabilities                                     (2,051)                (1,952)                  3,129      
                                                             -------------------------------------------------------------------- 
Net cash provided by operating activities                              49,345                 70,886                  62,598      

Investing activities                                                                                                              
Purchases of property and equipment                                   (21,665)               (34,085)                (63,122)     
Proceeds from sales of assets                                          10,213                      -                       -      
Payment for acquisition of business from related party                      -                      -                 (10,500)     
Other                                                                    (819)                   448                     371      
                                                             ---------------------------------------------------------------------
Net cash used in investing activities                                 (12,271)               (33,637)                (73,251)     

Financing activities                                                                                                              
Net proceeds from issuance of common stock                                181                     35                     997      
Proceeds from revolver                                                  6,955                      -                       -      
Payment on revolver                                                    (6,955)                     -                       -      
Common stock repurchased and retired                                  (49,261)               (76,488)                (36,375)     
Dividends paid                                                         (9,630)                     -                       -      
                                                             -------------------------------------------------------------------- 
Net cash used in financing activities                                 (58,710)               (76,453)                (35,378)     

Increase (decrease) in cash and cash equivalents                                                                                  
Effect of exchange rate changes on cash                                    (8)                    30                    (119)     
                                                             -------------------------------------------------------------------- 
Net decrease in cash and cash equivalents                             (21,644)               (39,174)                (46,150)     

Cash and cash equivalents at beginning of year                         50,673                 89,847                 135,997      
                                                             -------------------------------------------------------------------- 
Cash and cash equivalents at end of year                              $29,029                $50,673               $  89,847      
                                                             ==================================================================== 

Supplemental disclosure of cash flow information                                                                                  
Cash paid for income taxes                                            $11,484                $14,908               $  16,416      
                                                             ==================================================================== 

See notes to consolidated financial statements.                                 

F-6 

10-K
35th Page of 52
TOC
1st
Previous
Next
Bottom
Just 35th

 Lone Star Steakhouse & Saloon, Inc.

Notes to Consolidated Financial Statements
(All Amounts in Thousands, Except Share and Per Share Amounts)

 December 26, 2000

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.  The restaurants serve mesquite-grilled  steaks, ribs, chicken,
and fish in a "Texas  Roadhouse"  atmosphere that is positioned to attract local
clientele.  In  addition,  the  Company  operates  restaurants  in  the  upscale
steakhouse  market through Del Frisco's  Double Eagle Steak House and Sullivan's
Steakhouse. As of December 26, 2000, the Company owns and operates 241 Lone Star
Steakhouse & Saloons in the United States and 26 in Australia.  In addition, the
Company  owns and operates  five Del  Frisco's  Double Eagle Steak Houses and 15
Sullivan's Steakhouses.                                                         

Significant Accounting Policies                                                 

o     Principles of Consolidation                                               

      The consolidated  financial  statements  include the accounts of Lone Star
      Steakhouse  &  Saloon,  Inc.  and  its  wholly-owned   subsidiaries.   All
    significant intercompany accounts and transactions have been eliminated.

o     Foreign Currency Translation                                              

      Assets and  liabilities of the Company's  foreign  operations in Australia
      are translated at current  exchange rates,  while revenue and expenses are
      translated  at  average  exchange  rates   prevailing   during  the  year.
      Translation  adjustments  are  reported  as a component  of  comprehensive
income in stockholders' equity.                                     

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

F-7 

10-K
36th Page of 52
TOC
1st
Previous
Next
Bottom
Just 36th

 Lone Star Steakhouse & Saloon, Inc.

Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)

1. Background and Significant Accounting Policies (continued)                   

      of approximately $21,089 and $37,751 at December 26, 2000 and December 28,
      1999, respectively,  in investment grade securities with municipal, state,
and U.S. government agencies.                                       

o     Use of Estimates                                                          

      The  preparation of consolidated  financial  statements in conformity with
      accounting  principles  generally  accepted in the United States  requires
      management  to make  estimates  and  assumptions  that  affect the amounts
      reported in the consolidated  financial statements and accompanying notes.
Actual results could differ from those estimates.                   

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     Financial Instruments                                                     

      The Company sometimes  utilizes  derivative  financial  instruments in the
      form of commodity  futures contracts to manage market risks and reduce its
      exposure  resulting from  fluctuations  in the prices of meat. The Company
      uses live beef cattle  futures  contracts  to  accomplish  its  objective.
      Realized  and  unrealized  changes  in the fair  values of the  derivative
      instruments  are  recognized  in income in the  period in which the change
      occurs.  Realized  and  unrealized  gains  and  losses  related  to  these
      derivative instruments have not been significant. The Company held no live
      beef cattle futures  contracts at December 26, 2000. These instruments are
      with  counterparties  of  high  credit  quality;  therefore,  the  risk of
nonperformance by the counterparties is considered to be negligible.

F-8 

10-K
37th Page of 52
TOC
1st
Previous
Next
Bottom
Just 37th

 Lone Star Steakhouse & Saloon, Inc.

Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)

1. Background and Significant Accounting Policies (continued)                   

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                                                          

      Prior to 1998, labor costs and costs of hiring and training  personnel and
      certain other costs relating to opening new restaurants  were  capitalized
      until the restaurant opened and then were amortized over the subsequent 12
      months.  During 1998,  the Company  changed its method of  accounting  for
      preopening  costs (see Note 4) and now expenses  preopening costs when the
costs are incurred.                                                 

o     Intangible Assets                                                         

      Intangible assets include goodwill, intellectual properties, and licensing
      permits  which are amortized on a  straight-line  basis over the estimated
      periods of benefit, generally 10 to 20 years. Accumulated amortization for
      intangible  assets as of December 26, 2000 and December 28, 1999 is $9,975
and $7,073, respectively.                                           

F-9 

10-K
38th Page of 52
TOC
1st
Previous
Next
Bottom
Just 38th

 Lone Star Steakhouse & Saloon, Inc.

Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)

1. Background and Significant Accounting Policies (continued)                   

o     Deferred Compensation Plan                                                

      In connection with the Company's  deferred  compensation plan, the Company
      has  created a trust to which it  contributes  amounts  equal to  employee
      participant's  qualified deferrals and the Company's matching portion. The
      funds are invested by a financial institution, as trustee for the Company,
      in a selected list of mutual funds.  An account  balance is maintained for
      each participant reflecting elected deferrals, the employer match, plus or
      minus  investment gains or losses. A participant may direct the trustee to
      invest an amount equal to his assigned  account  balance in any investment
      identified  in the selected  list;  however,  the Company has reserved the
      right to veto any investment direction of the participant. All assets held
      by the trust remain the unrestricted property of the Company; however, the
      Company does not currently intend to use such assets for any purpose other
      than to fund  payments  to the  participants  pursuant to the terms of the
      deferred  compensation  plan.  The  investments  held by the  trustee  are
      carried at the fair value of the underlying assets. Because the investment
      assets of the deferred  compensation  plan are assets of the Company,  the
      accompanying  consolidated  balance  sheet  reflects such  investments  as
      assets with an offsetting liability for deferred compensation reflected in
long-term liabilities.                                              

o     Impairment of Long-Lived Assets                                           

      Long-lived  assets  and  certain  intangibles,   including  goodwill,  are
      reviewed  for  impairment  whenever  events or  changes  in  circumstances
      indicate that the carrying amount of an asset may not be recoverable.  The
      Company reviews applicable intangible assets and long-lived assets related
      to each  restaurant  on a  periodic  basis.  When  events  or  changes  in
      circumstances  indicate  an  asset  may not be  recoverable,  the  Company
      estimates  the future  cash flows  expected  to result from the use of the
      asset. If the sum of the expected  undiscounted  future cash flows is less
      than the carrying  value of the asset,  an impairment  loss is recognized.
      The impairment loss is recognized by measuring the difference  between the
      carrying value of the assets and the fair market value of the assets.  The
      Company's  estimates  of fair  values  are  based on the best  information
      available and require the use of estimates,  judgments and  projections as
considered necessary. The actual results may vary significantly.    

F-10

10-K
39th Page of 52
TOC
1st
Previous
Next
Bottom
Just 39th

 Lone Star Steakhouse & Saloon, Inc.

Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)

1. Background and Significant Accounting Policies (continued)                   

o     Advertising Costs                                                         

      Advertising  costs are expensed as incurred.  Advertising  expense for the
      years ended  December 26, 2000,  December 28, 1999,  and December 29, 1998
are $18,065, $8,591, and $9,268, respectively.                      

o     Accounting for Stock-Based Compensation                                   

      In accordance  with Accounting  Principles  Board (APB) Opinion No. 25 and
      related interpretations, 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 (see Note 4). 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 7.                              

o     Earnings Per Share                                                        

      Basic   earnings   per   share   amounts   are   computed   based  on  the
      weighted-average  number of shares  outstanding.  For  purposes of diluted
      computations,  the number of shares that would be issued from the exercise
      of dilutive  stock  options has been reduced by the number of shares which
      could have been purchased from the proceeds of the exercise at the average
      market price of the Company's stock or the price of the Company's stock on
the exercise date.                                                  

o     Recent Accounting Pronouncements                                          

      In June 1998, the Financial  Accounting Standards Board (FASB) issued SFAS
      No. 133,  Accounting for Derivative  Instruments  and Hedging  Activities,
      which the Company  adopted  effective  December  27, 2000.  The  statement
      requires  the Company to recognize  all  derivatives  on the  consolidated
      balance sheet at fair value.  Derivatives  not  considered  hedges must be
      adjusted  to fair  value  through  income.  If a  derivative  is a  hedge,
  depending on the nature of the hedge, changes in the fair value of the

F-11

10-K
40th Page of 52
TOC
1st
Previous
Next
Bottom
Just 40th

 Lone Star Steakhouse & Saloon, Inc.

Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)

1. Background and Significant Accounting Policies (continued)                   

      derivative  will either be offset  against the change in fair value of the
      hedged asset, liability, or firm commitment through earnings or recognized
      in other  comprehensive  income  until the hedged  item is  recognized  in
      earnings.  The ineffective  portion of a derivative's change in fair value
      will be immediately recognized in earnings. The Company's adoption of SFAS
      No. 133 will not have a significant effect on its results of operations or
financial position.                                                 

o     Reclassifications                                                         

      Certain reclassifications have been made to the 1999 and 1998 consolidated
financial statements to conform with the 2000 presentation.         

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
2000, 1999, and 1998 each included 52 weeks of operations.          

2. Acquisition of Business From Related Party                                   

On October 19, 1998, the Company  acquired the operations and purchased  certain
assets and assumed  certain  liabilities of Coulter  Enterprises,  Inc. (CEI), a
restaurant  management services company owned by Jamie B. Coulter, the Company's
Chairman of the Board of Directors and Chief Executive Officer. CEI had provided
accounting  and  administrative  services  to the  Company  since the  Company's
inception. The aggregate purchase price was approximately $11,432, consisting of
$10,500 of  internally  generated  cash with the  balance  comprised  of assumed
liabilities. The Company accounted for the transaction using the purchase method
of accounting.  In connection  with the purchase price  allocation,  the Company
recorded an intangible asset of approximately  $9,760 representing  intellectual
properties  which are being amortized over a period of 10 years. The acquisition
was approved by the Company's independent  directors.  In addition,  the Company
engaged an  independent  financial  advisor  who  rendered  an opinion  that the
transaction was fair to the Company and its stockholders  from a financial point
of view.  Pro forma  amounts are not  presented  since the amounts  would not be
significant.                                                                    

F-12

10-K
41st Page of 52
TOC
1st
Previous
Next
Bottom
Just 41st

 Lone Star Steakhouse & Saloon, Inc.

Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)

3. Treasury Stock Transactions                                                  

The Board of  Directors  has  authorized  the Company to purchase  shares of the
Company's common stock in open market or in privately  negotiated  transactions.
Pursuant to such authorization,  the Company has purchased 5,605,074, 8,758,005,
and 2,610,600 shares of its common stock at average prices of $8.79,  $8.73, and
$13.93  per  share  during  the  fiscal  years  ended  2000,   1999,  and  1998,
respectively. The Company is accounting for the purchases using the constructive
retirement method of accounting  wherein the aggregate par value of the stock is
charged to the  common  stock  account  and the excess of cost over par value is
charged to paid-in capital.                                                     

4. Accounting Changes                                                           

o     Stock Options                                                             

      In March  2000,  the  Financial  Accounting  Standards  Board  issued FASB
      Interpretation No. 44, Accounting for Certain Transactions Involving Stock
      Compensation,   an  Interpretation  of  APB  No.  25.  The  Interpretation
      requires,  among other things, that stock options which have been modified
      after December 15, 1998 to reduce the exercise price must be accounted for
      as variable.  The Company has adopted the  accounting  change for modified
      stock options on a prospective  basis  effective July 1, 2000, as required
      by the  Interpretation.  Pursuant to the rules for the initial application
      of the  Interpretation,  imputed  non-cash compensation  expense  is to be
      recognized on a  prospective  basis to the extent that the market price of
      the  Company's  common  stock after July 1, 2000  exceeds the common stock
      price on July 1, 2000, of $10.125. The Company has repriced options during
      fiscal 1999 and in January 2000, which are subject to the  Interpretation.
      At December  26, 2000,  there were  approximately  4,731,000  shares under
      options subject to the Interpretation.  These options are accounted for as
      variable from July 1, 2000, until the options are exercised, forfeited, or
      expire unexercised. Prior to the Interpretation, the Company accounted for
      these repriced options as fixed. Because the market price of the Company's
      common  stock was lower on  December  26,  2000 than on July 1, 2000,  the
      adoption of the  Interpretation  had no effect on the Company's net income
for the year ended December 26, 2000.                               

F-13

10-K
42nd Page of 52
TOC
1st
Previous
Next
Bottom
Just 42nd

 Lone Star Steakhouse & Saloon, Inc.

Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)

4. Accounting Changes (continued)                                               

o     Preopening Costs                                                          

      In April 1998,  the American  Institute of  Certified  Public  Accountants
      issued  Statement of Position (SOP) 98-5,  Reporting the Costs of Start-Up
      Activities, requiring the costs related to start-up activities be expensed
      as incurred.  Prior to 1998, the Company  capitalized  certain  preopening
      costs incurred in connection with the opening of new restaurant locations.
      The  Company  adopted  the  provisions  of the  SOP  in  its  consolidated
      financial  statements  for the year ended December 29, 1998. The effect of
      the  adoption  of the SOP was to  decrease  net  income  in 1998 by $2,703
      ($0.07 per share) and to record a charge for the  cumulative  effect of an
      accounting  change of  $6,904,  net of income  taxes of $2,921  ($0.17 per
share), to expense costs that had been capitalized prior to 1998.   

5. Long-Term Revolver                                                           

The Company has entered  into a $20,000  revolving  term loan  agreement  with a
bank,  under which no borrowings were outstanding at December 26, 2000. The loan
commitment  matures in April 2005 and requires  interest only  payments  through
April  2003,  at which time the loan will  convert  to a term note with  monthly
principal  and  interest  payments  sufficient  to  amortize  the loan  over its
remaining term. The interest rate is at the daily prime rate as published in The
Wall Street Journal. In addition,  the Company pays a facility fee of 1/4 of one
percent on the unused portion of the facility.                                  

6. 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.                                                                         

F-14

10-K
43rd Page of 52
TOC
1st
Previous
Next
Bottom
Just 43rd

 Lone Star Steakhouse & Saloon, Inc.

Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)

7. Stock Options                                                                

The  Company has  elected to follow APB  Opinion  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 SFAS No. 123 requires use of option  valuation  models that were
not developed for use in valuing employee stock options.                        

o     1992 Stock Option Plan                                                    

      In January 1992,  the Board of Directors  adopted a stock option plan (the
      Plan), last amended in June 1996, providing for incentive and nonqualified
      stock options  pursuant to which up to  10,000,000  shares of common stock
      are  available  for  issuance.  Options  granted  under  this Plan vest in
      periods  ranging  from  three to five years in equal  annual  installments
commencing from the date of grant.                                  

o     Directors Stock Option Plan                                               

      In January  1992,  the Board of  Directors  adopted a stock option plan as
      amended June 9, 2000, providing for nondiscretionary grants to nonemployee
      directors  pursuant  to which up to  700,000  shares of  common  stock are
      available for issuance.  All options  granted under this plan have 10-year
      terms and vest equally over a three-year  period  commencing from the date
of grant.                                                           

Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 using 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 2000,  1999,
and 1998,  respectively:  risk-free  interest rates of 6.0%,  6.0%, and 6.5%; no
dividend  yields;  volatility  factors  of  the  expected  market  price  of the
Company's  common  stock of 0.436,  0.443,  and  0.357;  and a  weighted-average
expected life of the option ranging from four to 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                                                    

F-15

10-K
44th Page of 52
TOC
1st
Previous
Next
Bottom
Just 44th

 Lone Star Steakhouse & Saloon, Inc.

Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)

7. Stock Options (continued)                                                    

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:                                                      

                                                        [Enlarge/Download Table]


                                           2000                    1999                    1998        
                                        ---------------------------------------------------------------

                                                                                                       
Pro forma net income                      $3,020                  $2,704                  $22,095      
Pro forma earnings per share:                                                                          
   Basic                                   0.12                    0.08                    0.55        
   Diluted                                 0.11                    0.08                    0.55        

Weighted-average fair value of options                                                                 
    granted during the year                3.68                    3.84                    2.81        

A summary of the Company's stock option activity and related information for the
years ended  December 26, 2000,  December 28, 1999,  and December 29, 1998 is as
follows:                                                                        

                                                        [Enlarge/Download Table]


                                           2000                              1999                             1998            
                             -------------------------------------------------------------------------------------------------
                                Weighted-                         Weighted-                         Weighted-                 
                                 Average                      Average Exercise                  Average Exercise              
                              Exercise Price   Options (000)        Price        Options (000)        Price      Options (000)
                             -------------------------------------------------------------------------------------------------
Outstanding at beginning of                                                                                                   
                                                                                                                              
  year                          $16.57           6,456           $16.91            6,982           $18.08            8,154    
      Granted                     8.55           6,394             8.15              616            10.43            1,180    
      Exercised                   8.16             (22)            4.01               (9)           16.12              (62)   
      Canceled                   17.32          (5,001)           13.04           (1,133)           18.23           (2,290)   
                                          ------------------                ------------------                ----------------
Outstanding at end of year        9.57           7,827            16.57            6,456            16.91            6,982    
                                          ==================                ==================                ================

F-16

10-K
45th Page of 52
TOC
1st
Previous
Next
Bottom
Just 45th

 Lone Star Steakhouse & Saloon, Inc.

Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)

7. Stock Options (continued)                                                    

On January 7, 2000,  the Board of Directors  approved the repricing of 4,591,757
options held by certain  current  employees,  including  officers of the Company
with an exercise  price in excess of the closing price of the  Company's  common
stock on that date of $8.47 and whose  options  were not repriced at the time of
the December 14, 1998  repricing.  Other than the change in the exercise  price,
there was no other change in the terms of the original options as granted.      

On September 10, 1999, the Company  repriced  148,400 options where the previous
exercise  price  of the  options  was in  excess  of the  closing  price  of the
Company's  stock on that date of $7.94.  The  options  were held by  nonemployee
directors.  The  terms of the  repriced  options  were the same as the  original
options, except that the expiration date was extended five years.               

The  options  repriced  on  January 7, 2000 and  September  10,  1999,  of which
4,731,000 are  outstanding at December 26, 2000, are subject to the  application
of variable accounting pursuant to FASB Interpretation No. 44.                  

On  December  14,  1998,  the  Company  canceled  1,711,253  options  previously
outstanding  and reissued  767,584 new options with an exercise  price of $8.00.
The options were held by current officers and employees, excluding the Company's
Chairman and Chief Executive Officer. The terms of the new options were the same
as the original  options,  except the new options vest equally over a three-year
period commencing one year from the date of grant.                              

For  options  outstanding  as of  December  26,  2000,  the  number of  options,
weighted-average  exercise price, and  weighted-average  remaining contract life
for each group of options are as follows:                                       

                                                        [Enlarge/Download Table]


                                          Options Outstanding                                                              
---------------------------------------------------------------------------------------------------------------------------
                                                Number                        Weighted-                  Weighted-         
                                            Outstanding at                     Average               Average Remaining     
                                             December 26                      Exercise                 Contract Life       
Range of Prices                                  2000                           Price                                      
---------------------------------------------------------------------------------------------------------------------------

                                                                                                                           
$3.38 to $7.94                                    227,136                     $  7.41                        4.52          
$8.00 to $17.94                                 6,760,211                        8.57                        5.94          
$18.25 to $18.81                                  839,448                       18.28                        4.05          

F-17

10-K
46th Page of 52
TOC
1st
Previous
Next
Bottom
Just 46th

 Lone Star Steakhouse & Saloon, Inc.

Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)

7. Stock Options (continued)                                                    

The number of shares and weighted-average  exercise price of options exercisable
at December 26, 2000 are as follows:                                            

               Options Exercisable
   -----------------------------------------------------------------------------
                                     Number              Weighted-
                                Exercisable at           Average
Range of Prices                       December 26,           Exercise     
                                    2000                 Price
   -----------------------------------------------------------------------------

$3.38 to $7.94                          145,724             $  7.33       
$8.00 to $17.94                       4,852,912                8.53       
$18.25 to $18.81                        839,051               18.29       

8. Related-Party Transactions                                                   

Prior to the  acquisition of CEI on October 19, 1998,  the Company  utilized its
affiliate to provide certain accounting,  computer and administrative  services.
The Company  incurred  fees of $4,367,  related to such  services for the fiscal
year 1998. In addition,  the Company  reimbursed CEI $856 during fiscal 1998 for
the use of an airplane and pilot services provided by an affiliated entity.     

The Company  leases on a  month-to-month  basis meeting room space,  parking lot
space and document  storage space from entities  owned by Jamie B. Coulter,  the
Company's Chairman and Chief Executive Officer.  Total rental fees paid to these
related entities in 2000,  1999, and 1998 were $30, $47, and $38,  respectively.
In addition,  in 2000, 1999, and 1998 the Company  purchased  business gifts and
awards from a retail store owned by Jamie B. Coulter  totaling $56, $8, and $24,
respectively.                                                                   

The Company  believes  the charges  reimbursed  are at least as favorable as the
charges  that would have been  incurred for similar  services or purchases  from
unaffiliated third parties.                                                     

9. Leases                                                                       

The Company leases  certain  facilities  under  noncancelable  operating  leases
having terms expiring  between 2001 and 2025. The leases have renewal clauses of
five to 20  years,  which  are  exercisable  at the  option  of the  lessee.  In
addition, certain leases contain                                                

F-18

10-K
47th Page of 52
TOC
1st
Previous
Next
Bottom
Just 47th

 Lone Star Steakhouse & Saloon, Inc.

Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)

escalation  clauses  based on a fixed  percentage  increase and  provisions  for
contingent  rentals based on a percentage of gross revenues,  as defined.  Total
rental  expense for the fiscal  years ended 2000,  1999,  and 1998 was  $12,310,
$11,575,   and   $10,227,   respectively,   including   contingent   rentals  of
approximately $228, $266, and $273, respectively.                               

Lease payments under  noncancelable  operating  leases for each of the next five
years and in the aggregate are as follows at December 26, 2000:                 

                                                    Operating Leases
                                                   ---------------------

2001                                                        $12,161       
2002                                                         10,792       
2003                                                          8,453       
2004                                                          5,989       
2005                                                          3,326       
Thereafter                                                    4,970       
                                                   ---------------------
Total minimum lease payments                                $45,691       
                                                   =====================

10. Earnings Per Share                                                          

The following table sets forth the computation of basic and diluted earnings per
share:                                                                          

                                                        [Enlarge/Download Table]


                                                                 2000                    1999                    1998      
                                                       --------------------------------------------------------------------
                                                                                                                           
Numerator:                                                                                                                 
   Numerator for basic and diluted earnings                                                                                
      per share - income available to                                                                                      
      common stockholders                                                                                                  
                                                           $      16,130         $         5,401           $      25,507   
                                                       ====================================================================

Denominator:                                                                                                               
   Denominator for basic earnings per share -                                                                              
      weighted-average shares                                 26,189,600              35,089,084              39,989,091   
   Effect of dilutive employee stock options                     296,333                 101,207                  44,789   
                                                       --------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted                                                                      
   weighted-average shares                                    26,485,933              35,190,291              40,033,880   
                                                       ====================================================================

Basic earnings per share                                   $       0.62          $         0.15            $       0.64    
                                                       ====================================================================

Diluted earnings per share                                 $       0.61          $         0.15            $       0.64    
                                                       ====================================================================

F-19

10-K
48th Page of 52
TOC
1st
Previous
Next
Bottom
Just 48th

 Lone Star Steakhouse & Saloon, Inc.

Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)

11. Income Taxes                                                                

Income taxes are included in the consolidated statements of income as follows:  

                                                                [Download Table]


                                              2000        1999        1998  
                                         ---------------------------------- 
                                                                            
Income tax expense on income before                                         
   cumulative effect of change                                              
   in accounting principle                   $7,590      $2,950     $21,843 
Cumulative effect of income tax benefit                                     
   for change in accounting principle             -           -      (2,921)
                                         -----------------------------------
Total provision for income taxes             $7,590      $2,950     $18,922 
                                         ===================================

The components of the provision for income taxes consist of the following:      

                                                                [Download Table]


                                        2000           1999      1998   
                                  --------------------------------------
                                                                        
Current tax expense:                                                    
   Federal                             $6,997        $14,526    $15,778 
   State                                1,327          1,491      1,556 
                                  --------------------------------------
Total current                           8,324         16,017     17,334 

Deferred tax expense (benefit):                                         
   Federal                                137        (17,861)     1,456 
   Foreign                               (886)         6,981          - 
   State                                   15         (2,187)       132 
                                  --------------------------------------
Total deferred                           (734)       (13,067)     1,588 
                                  --------------------------------------
Total provision for income taxes       $7,590       $  2,950    $18,922 
                                  ======================================

The  difference  between  the  reported  provision  for  income  taxes and taxes
determined by applying the applicable U.S. federal  statutory income tax rate to
income before taxes is reconciled as follows:                                   

                                                        [Enlarge/Download Table]


                                        2000                             1999                           1998              
                               -------------------------------------------------------------------------------------------
                                 Amount             Rate          Amount            Rate         Amount            Rate   
                               -------------------------------------------------------------------------------------------
                                                                                                                          
Income tax expense at federal                                                                                             
    statutory rate                 $8,302           35%              $2,923        35%              $15,550        35%    
State tax expense, net                878            4                1,105        13                 1,099         2     
Valuation allowance                     -            -                   78         3                 3,761         9     
Other items, net, principally                                                                                             
     tip credits                   (1,590)          (7)              (1,156)      (16)               (1,488)       (3)    
                               -------------------------------------------------------------------------------------------
Actual provision for income                                                                                               
     taxes                         $7,590           32%              $2,950        35%              $18,922        43%    
                               ===========================================================================================

F-20

10-K
49th Page of 52
TOC
1st
Previous
Next
Bottom
Just 49th

 Lone Star Steakhouse & Saloon, Inc.

Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)

11. 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 26, December 28,
                              2000        1999
                               -------------------------
Deferred tax assets:                                                            
Foreign NOL carryforward                  $  7,612   $  8,450             
Preopening costs                             1,077       --               
Accrued liabilities                          1,107      1,411             
Deferred compensation                          930       --               
Other                                        2,183      1,139             
                          ----------------------
                               12,909     11,000
Valuation allowance                            (3,839)    (3,839)               
                          ----------------------
Total deferred tax assets                       9,070      7,161                

Deferred tax liabilities:                                                       
Property and equipment                       1,814        723             
Basis differences in foreign investments     2,185      2,139             
Other                                          194        156             
                          ----------------------
Total deferred tax liabilities                  4,193      3,018                
                          ----------------------
Net deferred tax assets                      $  4,877   $  4,143                
                          ======================

As of December 26, 2000, the Company has net operating loss (NOL)  carryforwards
of approximately  $22,069 for foreign tax purposes  currently having  indefinite
expiration dates.                                                               

The valuation allowance for deferred tax assets at December 26, 2000 was $3,839.
The valuation  allowance is unchanged  for the year ended  December 26, 2000 and
increased  $78  for  the  year  ended   December  28,  1999.  In  assessing  the
realizability of the deferred tax assets,  the Company  considers  whether it is
more likely than not that some  portion or all of the  deferred  tax assets will
not be realized. The ultimate realization of the deferred                       

F-21

10-K
50th Page of 52
TOC
1st
Previous
Next
Bottom
Just 50th

 Lone Star Steakhouse & Saloon, Inc.

Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)

11. Income Taxes (continued)                                                    

tax assets  associated  with the Foreign NOL  carryforward  is  dependent on the
generation of future taxable income in Australia during the periods in which the
underlying  temporary  differences  can be used to offset  taxable  income.  The
Company has  considered  the projected  future  taxable  income and tax planning
strategies in making this assessment.  Based on the relevant factors considered,
the  Company  believes  it is more  likely  than  not that it will  realize  the
benefits of the deferred tax assets, net of the existing valuation allowance, at
December 26, 2000.                                                              

Pretax net loss  attributable  to foreign  operations was $9,274 and $15,157 for
the years ended December 26, 2000 and December 28, 1999, respectively.          

12. Provision for Impaired Assets and Restaurant Closings                       

The  Company  periodically  reviews its  long-lived  assets for  indications  of
impairment.  Based on  those  reviews,  the  trends  of  operations  of  certain
restaurants indicated the undiscounted cash flows from their operations would be
less than the carrying value of the long-lived  assets of the restaurants.  As a
result, the carrying values were written down to the Company's estimates of fair
value. Fair value was estimated  utilizing the best information  available using
whatever estimates, judgments, and projections were considered necessary.       

In the third and fourth  quarters of 2000,  the Company  recorded a provision of
$3,000 for the write-down of impaired assets relating to certain underperforming
Australian  restaurants.  In  addition,  a charge of  $1,310  was  recorded  for
severance,  rents, and certain other costs associated with closing 14 Australian
restaurants.                                                                    

In the third and fourth  quarters of 1999,  the Company  recorded a provision of
$38,931  which  included  approximately  $35,797 for the  write-down of impaired
assets related to certain underperforming  restaurants and $3,134 related to the
costs  of  closing  25  domestic  restaurants.  The  Company  also  incurred  an
impairment charge of $4,646 to reflect the write-down of certain underperforming
restaurants in the fourth quarter of 1998.                                      

To the extent there are "assets  held for  disposal"  recorded in the  Company's
consolidated balance sheets, such amounts are included in property and equipment
at the lower of cost or fair market  value less  estimated  selling  costs.  The
remaining carrying value of the                                                 

F-22

10-K
51st Page of 52
TOC
1st
Previous
Next
Bottom
Just 51st

 Lone Star Steakhouse & Saloon, Inc.

Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)

12. Provision for Impaired Assets and Restaurant Closings (continued)           

related assets is not significant. Net sales for all closed restaurants included
in the  Company's  operating  results  were  $6,196,  $32,050,  and  $39,741 and
operating losses at the restaurant level were $827,  $4,144,  and $4,956 for the
years ended 2000, 1999, and 1998, respectively.                                 

13. Retirement Plans                                                            

In August 1999,  the Company  approved  the adoption of two plans which  provide
retirement benefits to the participants. The salary reduction plans are provided
through a qualified 401(k) plan and a nonqualified  deferred  compensation  plan
(the Plans).  Under the Plans,  employees who meet minimum service  requirements
and elect to participate may make  contributions  of their annual salaries of up
to 15% under the 401(k) plan and up to 20% under the deferred compensation plan.
The Company may make additional  contributions at the discretion of the Board of
Directors.  The Plans were effective  beginning October 7, 1999, and during 2000
and 1999,  the  Company's  contributions  to the  Plans  were  $1,953  and $475,
respectively.                                                                   

14. Quarterly Financial Summaries (Unaudited)                                   

The following table summarizes the unaudited  consolidated  quarterly results of
operations for fiscal 2000 and 1999:                                            

                                                        [Enlarge/Download Table]


                                              1st                2nd                3rd                4th     
                                            Quarter            Quarter            Quarter            Quarter   
                                         ----------------------------------------------------------------------
2000                                                                                                           
                                                                                                               
Net sales                                  $139,254            $134,187           $130,953          $171,469   
Restaurant operating income (a) and (b)      21,938              17,687             12,415            11,622   
Net income (a) and (b)                        7,102               5,858              2,547               623   
Basic earnings per share                       0.25                0.22               0.10              0.05   
Diluted earnings per share                     0.25                0.22               0.10              0.04   

   (a)   The third  quarter of fiscal 2000 includes a charge to earnings of $541
         ($352  net of income  tax)  related  to the  provision  for  Australian
restaurant store closings recorded in the quarter.            

   (b)   The fourth  quarter of fiscal  2000  includes a charge to  earnings  of
         $3,769  ($2,480 net of income tax) related to the  provision  for asset
         impairment  and store closing costs recorded in the quarter for certain
Australian restaurants.                                       

F-23

10-K
Last Page of 52
TOC
1st
Previous
Next
Bottom
Just 52nd

 Lone Star Steakhouse & Saloon, Inc.

Notes to Consolidated Financial Statements (continued)
(All Amounts in Thousands, Except Share and Per Share Amounts)

14. Quarterly Financial Summaries (Unaudited) (continued)                       

                                                        [Enlarge/Download Table]


                                                      1st                  2nd                3rd                4th    
                                                    Quarter              Quarter            Quarter            Quarter  
                                                ------------------------------------------------------------------------
1999                                                                                                                    
                                                                                                                        
Net sales                                           $139,938             $134,753           $134,801          $176,263  
Restaurant operating income (loss) (a) and (b)        20,690               19,042             (1,779)            6,265  
Net income (loss) (a) and (b)                          7,781                7,083             (5,316)           (4,147) 
Basic earnings (loss) per share                         0.21                 0.20              (0.15)            (0.11) 
Diluted earnings (loss) per share                       0.21                 0.20              (0.15)            (0.11) 

   (a)   The third  quarter  of fiscal  1999  includes a charge to  earnings  of
         $19,365  ($12,103 net of income tax) related to the provision for asset
impairment recorded in the quarter.                           

   (b)   The fourth  quarter of fiscal  1999  includes a charge to  earnings  of
         $19,566  ($12,304 net of income tax) related to the provision for asset
impairment and store closing costs recorded in the quarter.   

15. Other Income, Net                                                           

The components of other income, net are as follows:                             

                                                        [Enlarge/Download Table]


                              2000                      1999                     1998        
                        ---------------------------------------------------------------------

                                                                                             
Interest income              $1,431                   $2,171                    $2,838       
Interest expense               (327)                       -                         -       
Gain on sale of assets        1,304                        -                         -       
Other                           122                       19                        68       
                        ---------------------------------------------------------------------
                             $2,530                   $2,190                    $2,906       
                        =====================================================================

16. Subsequent Events                                                           

On January 3, 2001, the Board of Directors declared the Company's quarterly cash
dividend of $.125 per share, payable January 26, 2001, to stockholders of record
on January 12, 2001.                                                            

F-24

Dates Referenced Herein   and   Documents Incorporated By Reference

				Referenced-On Page
This 10-K Filing		Date		First		Last			Other Filings
		1/31/92		24
		3/12/92		23
		1/12/96		24
		12/31/96		12					10-K
		10/3/97		23
		10/9/97		25					8-A12G, 8-A12B
		12/30/97		12		33			10-K/A
		3/24/98		24					10-Q
		9/8/98		24					10-Q, NT 10-Q
		10/19/98		23		46
		12/14/98		45
		12/15/98		18		41
		12/29/98		12		44			10-K, NT 10-K
		1/1/99		23
		9/10/99		45
		10/7/99		51
		12/28/99		12		50			10-K/A
		1/7/00		45
		3/7/00		5
		3/22/00		23		24
		3/31/00		25					S-8, 10-K
		6/9/00		43					DEF 14A
		6/13/00		24					10-Q
		7/1/00		18		41
For The Period Ended		12/26/00		11		50			10-K/A
		12/27/00		39
		1/3/01		19		52			SC 13G
		1/12/01		19		52
		1/26/01		19		52
		2/2/01		29					SC 13G
		3/19/01		1		14
Filed On / Filed As Of		3/26/01		27
Top									List All Filings