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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002.
Commission file number 000-22150
LANDRY'S RESTAURANTS, INC.
(Exact name of the registrant as specified in its charter)
Delaware
(State or other
jurisdiction of 74-00405386
incorporation or ( I.R.S. Employer
organization) Identification No.)
1510 West Loop South, Houston, TX 77027
(Address of principal executive offices)
(713) 850-1010
(Registrant's telephone number)
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 [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
AS OF NOVEMBER 5, 2002 THERE WERE
27,740,078 SHARES OF $0.01 PAR VALUE
COMMON STOCK OUTSTANDING.
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LANDRY'S RESTAURANTS, INC.
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements................................................................... 2
Condensed Consolidated Balance Sheets at September 30, 2002 and December 31, 2001......... 3
Condensed Unaudited Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 2002 and September 30, 2001......................................... 4
Condensed Unaudited Consolidated Statement of Stockholders' Equity for the Nine Months
Ended September 30, 2002................................................................ 5
Condensed Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and September 30, 2001............................................... 6
Notes to Condensed Unaudited Consolidated Financial Statements............................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 14
Item 4. Controls and Procedures................................................................ 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 15
Item 2. Changes in Securities.................................................................. 15
Item 3. Defaults Upon Senior Securities........................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders.................................... 15
Item 5. Other Information...................................................................... 15
Item 6. Exhibits and Reports on Form 8-K....................................................... 16
Signatures...................................................................................... 17
Exhibit 10.17--Asset Purchase Agreement by and among Chart House, Inc., Chart House Enterprises,
Inc., LCH Acquisitions, Inc. and Landry's Restaurants, Inc.
Exhibit 10.18--Amendment No. 3 dated July 30, 2002 to Credit Agreement among Landry's
Restaurants, Inc. and Bank of America, N.A. as administrative agent for the Banks.
Exhibit 10.19--Stock Purchase Agreement dated September 10, 2002 among Landry's Restaurants,
Inc., LSRI Holdings, Inc. and Well Seasoned, Inc., MetroNational Corporation and Kimberly
Restaurants, Ltd.
Exhibit 10.20--Asset Purchase and Sale Agreement dated September 10, 2002 among Kimberly
Restaurants, Ltd., MNC Restaurant Properties, L.P., Well Seasoned, Inc. and MetroNational
Corporation and LSRI Holdings, Inc.
Exhibit 99.1--Certification
Exhibit 99.2--Certification
LANDRY'S RESTAURANTS, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
We have prepared the accompanying condensed unaudited consolidated financial
statements pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the U.S. for
complete financial statements. In our opinion, all adjustments (consisting only
of normal recurring entries) necessary for fair presentation of our results of
operations, financial position and changes therein for the periods presented
have been included.
In this report, we have made forward-looking statements. Our forward-looking
statements are subject to risks and uncertainty, including without limitation,
our ability to continue our expansion strategy, our ability to make projected
capital expenditures, as well as general market conditions, competition, and
pricing. Forward-looking statements include statements regarding:
. future capital expenditures (including the amount and nature thereof);
. business strategy and measures to implement such strategy;
. competitive strengths;
. expansion and growth of our business and operations;
. plans;
. references to future success as well as other statements which include
words such as "anticipate," "believe," "plan," "estimate," "expect," and
"intend" and
. other similar expressions.
Although we believe that the assumptions underlying our forward-looking
statements are reasonable, any of the assumptions could be inaccurate and,
therefore, we cannot assure you that the forward-looking statements included in
this 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 the objectives and plans will be achieved.
2
LANDRY'S RESTAURANTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
------------- ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 20,166,029 $ 31,081,008
Accounts receivable--trade and other.................................... 16,577,431 13,518,828
Inventories............................................................. 30,174,294 33,562,608
Deferred taxes.......................................................... 1,860,121 5,621,459
Other current assets.................................................... 16,434,454 10,336,996
------------ ------------
Total current assets................................................ 85,212,329 94,120,899
------------ ------------
PROPERTY AND EQUIPMENT, net................................................ 720,481,489 587,828,723
GOODWILL, net.............................................................. 2,434,547 2,438,996
OTHER ASSETS, net.......................................................... 7,362,828 5,782,578
------------ ------------
Total assets........................................................ $815,491,193 $690,171,196
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................ $ 54,678,215 $ 45,027,820
Accrued liabilities..................................................... 67,812,482 55,109,685
Income taxes payable.................................................... 3,796,522 --
Current portion of long-term debt....................................... 50,000 --
------------ ------------
Total current liabilities........................................... 126,337,219 100,137,505
------------ ------------
LONG-TERM DEBT, NET OF CURRENT PORTION..................................... 103,204,200 175,000,000
DEFERRED TAXES............................................................. 6,904,979 4,126,948
OTHER LIABILITIES.......................................................... 16,844,876 17,236,120
------------ ------------
Total liabilities................................................... 253,291,274 296,500,573
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, 60,000,000 shares authorized, 27,688,706
and 21,996,369, issued and outstanding, respectively.................. 276,887 219,964
Additional paid-in capital.............................................. 440,342,742 305,598,659
Retained earnings....................................................... 121,580,290 87,852,000
------------ ------------
Total stockholders' equity.......................................... 562,199,919 393,670,623
------------ ------------
Total liabilities and stockholders' equity.......................... $815,491,193 $690,171,196
============ ============
The accompanying notes are an integral part of these condensed unaudited
consolidated financial statements.
3
LANDRY'S RESTAURANTS, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES...................................... $241,071,848 $202,786,013 $665,179,946 $586,156,439
OPERATING COSTS AND EXPENSES:
Cost of revenues........................... 68,994,725 59,836,314 190,838,983 173,772,529
Restaurant labor........................... 69,301,201 57,637,840 189,325,758 168,327,066
Other restaurant operating expenses........ 57,081,466 48,666,417 163,778,079 144,005,590
General and administrative expenses........ 11,430,759 10,204,974 31,889,281 28,901,774
Depreciation and amortization.............. 9,727,656 8,662,534 30,950,438 25,806,443
Restaurant pre-opening expenses............ 1,182,369 453,115 3,040,694 2,037,023
------------ ------------ ------------ ------------
Total operating costs and expenses..... 217,718,176 185,461,194 609,823,233 542,850,425
------------ ------------ ------------ ------------
OPERATING INCOME.............................. 23,353,672 17,324,819 55,356,713 43,306,014
OTHER EXPENSE (INCOME):
Interest expense, net...................... 539,706 2,049,108 3,540,335 7,432,210
Other, net................................. 35,455 (5,275) (1,727,258) (139,243)
------------ ------------ ------------ ------------
Total other expense.................... 575,161 2,043,833 1,813,077 7,292,967
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES.................... 22,778,511 15,280,986 53,543,636 36,013,047
PROVISION FOR INCOME TAXES.................... 7,061,338 4,737,381 16,598,527 11,164,320
------------ ------------ ------------ ------------
NET INCOME.................................... $ 15,717,173 $ 10,543,605 $ 36,945,109 $ 24,848,727
============ ============ ============ ============
EARNINGS PER SHARE INFORMATION:
BASIC--
Net income................................. $ 0.57 $ 0.48 $ 1.46 $ 1.15
Weighted average number of common
shares outstanding....................... 27,750,000 21,920,000 25,300,000 21,700,000
DILUTED--
Net income................................. $ 0.55 $ 0.46 $ 1.40 $ 1.10
Weighted average number of common
share equivalents outstanding............ 28,700,000 22,850,000 26,300,000 22,500,000
The accompanying notes are an integral part of these condensed unaudited
consolidated financial statements.
4
LANDRY'S RESTAURANTS, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock
-------------------- Additional Retained
Shares Amount Paid-In Capital Earnings Total
---------- -------- --------------- ------------ ------------
Balance, December 31, 2001.......... 21,996,369 $219,964 $305,598,659 $ 87,852,000 $393,670,623
Net income.......................... -- -- -- 36,945,109 36,945,109
Dividends paid...................... -- -- -- (1,803,269) (1,803,269)
Issuance of common stock, net of
offering costs.................... 5,297,500 52,975 132,524,341 -- 132,577,316
Purchase of common stock held for
treasury.......................... (306,300) (3,063) (5,317,637) (1,413,550) (6,734,250)
Exercise of stock options and income
tax benefit....................... 701,137 7,011 7,537,379 -- 7,544,390
---------- -------- ------------ ------------ ------------
Balance, September 30, 2002......... 27,688,706 $276,887 $440,342,742 $121,580,290 $562,199,919
========== ======== ============ ============ ============
The accompanying notes are an integral part of these condensed unaudited
consolidated financial statements.
5
LANDRY'S RESTAURANTS, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
------------------------------
2002 2001
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 36,945,109 $ 24,848,727
Adjustments to reconcile net income to net cash provided by operating
activities--
Depreciation and amortization......................................... 30,950,438 25,806,443
Change in assets and liabilities-net and other........................ 23,591,783 (15,565,615)
------------- ------------
Total adjustments.................................................. 54,542,221 10,240,828
------------- ------------
Net cash provided by operating activities...................... 91,487,330 35,089,555
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions.......................................... (74,244,009) (55,043,552)
Payment of acquisition integration liabilities............................ (7,797,943) --
Purchase of Chart House Restaurants, net of cash acquired................. (51,276,955) --
Purchase of Muer Seafood Restaurants, net of cash acquired................ (27,652,773) --
------------- ------------
Net cash used in investing activities.......................... (160,971,680) (55,043,552)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock.................................... 132,577,316 --
Proceeds from exercise of stock options................................... 6,529,574 3,546,385
Borrowings (payments) under credit line, net.............................. (72,000,000) (4,059,963)
Dividends paid............................................................ (1,803,269) (1,620,113)
Repurchase of common stock for treasury................................... (6,734,250) (50,567)
------------- ------------
Net cash provided by (used in) financing activities............ 58,569,371 (2,184,258)
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... (10,914,979) (22,138,255)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................. 31,081,008 26,159,525
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................... $ 20,166,029 $ 4,021,270
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments during the period for--
Income taxes.......................................................... $ 5,247,820 $ 2,663,000
Interest.............................................................. $ 4,120,597 $ 8,794,000
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
6
LANDRY'S RESTAURANTS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Landry's Restaurants, Inc. (the "Company") owns and operates seafood
restaurants primarily under the trade names Landry's Seafood House, Joe's Crab
Shack, The Crab House, Charley's Crab and Chart House. In addition, the Company
owns and operates domestic and licenses international rainforest themed
restaurants under the trade name Rainforest Cafe.
The Company is also the developer and operator of the Kemah Boardwalk,
located near Houston, Texas. The Kemah Boardwalk is a thirty acre waterfront
restaurant development including seven restaurants, a boutique hotel, retail
shops, amusement attractions, and a marina.
In February 2002, the Company acquired all the outstanding common stock of
C.A. Muer, Inc. ("Muer Acquisition"), the owner and operator of 16 seafood
restaurants for approximately $28.0 million. In August 2002, the Company
acquired, in an asset purchase transaction, 39 Chart House seafood restaurants
located primarily on the East and West coasts of the United States from Angelo
and Maxie's, Inc. for approximately $45.5 million in cash, as well as
assumption of certain trade payable related liabilities. The impact on the
Company's financial statements related to the acquisitions is not material. The
acquisitions are accounted for under SFAS 141 and results of operations are
included in the accompanying financial statements from the date of acquisition.
In October 2002, the Company acquired all the outstanding common stock from
the owner and certain assets related to the operations of the Saltgrass Steak
Houses ("Saltgrass"), the Texas-based owner and operator of 27 casual dining
steak and seafood restaurants for approximately $73.0 million. The Company's
fourth quarter financial statements will reflect the Saltgrass acquisition.
Principles of Consolidation
The accompanying financial statements include the consolidated accounts of
Landry's Restaurants, Inc., a Delaware holding company and its wholly and
majority owned subsidiaries and partnership.
Basis of Presentation
The consolidated financial statements included herein have been prepared by
the Company without audit, except for the consolidated balance sheet as of
December 31, 2001. The financial statements include all adjustments, consisting
of normal, recurring adjustments and accruals, which the Company considers
necessary for fair presentation of its financial position and results of
operations. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the U.S. have been condensed or omitted. This information
is contained in the Company's December 31, 2001, consolidated financial
statements filed with the Securities and Exchange Commission on Form 10-K.
The Company adopted SFAS No. 141, "Business Combinations", SFAS No. 142,
"Goodwill and Other Intangible Assets" and adopted SFAS 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets". Management believes these
pronouncements will not have a material effect on the Company's financial
statements.
7
LANDRY'S RESTAURANTS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. ACCRUED LIABILITIES
Accrued liabilities are comprised of the following:
September 30, December 31,
2002 2001
------------- ------------
Payroll and related costs..................................... $16,714,738 $14,137,640
Rent, insurance and taxes, other than payroll and income taxes 31,180,460 24,845,811
Acquisition accruals (Rainforest Cafe and Muer)............... -- 3,569,111
Other......................................................... 19,917,284 12,557,123
----------- -----------
$67,812,482 $55,109,685
=========== ===========
During the nine months ended September 30, 2002, accrued Rainforest Cafe
acquisition costs were reduced by cash payments aggregating $3,436,743. In
connection with the preliminary purchase price allocation for the Muer
Acquisition, the Company recorded $2,100,000 in acquisition integration
liabilities, of which $2,064,294 was paid during the nine months ended
September 30, 2002. The company recorded acquisition integration liabilities of
$2,300,000 for the Chart House acquisition, which were paid as of September 30,
2002.
3. DEBT
The Company has a $205.0 million credit line from a syndicate of banks. The
credit line may be increased to $220.0 million at the request of the Company,
subject to the addition of participating banks. The credit line matures in July
2004, and is available for expansion, acquisitions, share repurchases, and
other general corporate purposes. Interest on the credit line is payable
monthly or quarterly at Libor or the banks' base rate plus a financing spread
(aggregating 4.2% at September 30, 2002). The credit line is governed by
certain financial covenants. In July 2002, the credit line was amended to
permit the Chart House and Saltgrass acquisitions.
In connection with the Saltgrass acquisition, the Company increased
borrowings by approximately $73 million, including an additional $53 million
under the credit facility and a $20 million 7 year 5.5% note from the former
owner of Saltgrass.
4. CONTINGENCIES
Approximately eighty former shareholders (holding 4,406,655 shares) of
Rainforest Cafe, Inc. dissented to the merger between the Company and
Rainforest Cafe. On February 13, 2001, Rainforest Cafe sent dissenting
shareholders, Rainforest Cafe's estimate of fair value per share, along with a
check in the amount of $3.25 per share, which was the original acquisition
price per share. Subsequently, the dissenting shareholders made a demand for
supplemental payment based on their belief that the fair value per share of
common stock of the former Rainforest Cafe was greater than $3.25 per share.
The Company believes that its estimate of fair value is correct, and that the
dissenting shareholders' estimate of fair value is inflated. The Company is
vigorously pursuing its determination of fair value in an appraisal proceeding
in a Minnesota District Court.
In January 2002, Rainforest Cafe, Inc., a wholly-owned subsidiary of
Landry's, was sued by EklecCo, L.L.C. in the Supreme Court of the State of New
York in Onondaga County. EklecCo is seeking damages, plus interest, attorneys
fees and costs as a result of Rainforest Cafe's alleged breach of a restaurant
lease entered into in 1996 for a Rainforest Cafe unit formerly located in the
Palisades Mall. Rainforest Cafe believes that it has no liability for damages
beyond the personal property located in the premises at the time it vacated the
premises. Rainforest Cafe is defending this case vigorously. Because the case
is in its early stages, the financial impact to the Company, if any, cannot be
predicted.
8
LANDRY'S RESTAURANTS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On July 31, 2002, and subsequently amended on August 6, 2002, a purported
collective action lawsuit against the Company entitled Meaghan Bollenberg, et.
al. v. Landry's Restaurants, Inc. was filed in the United States District Court
for the Northern District of Illinois. The lawsuit was filed by six plaintiffs
who are current and former servers on behalf of themselves and others similarly
situated. The lawsuit alleges that the Company violated certain minimum wage
laws under the federal Fair Labor Standards Act and seeks damages, statutory
damages, attorneys fees and costs. The Company is vigorously defending this
litigation. Because the case is in its early stages, the financial impact to
the Company, if any, cannot be predicted.
General Litigation
The Company is subject to other legal proceedings and claims that arise in
the ordinary course of business. Management does not believe that the outcome
of any of these matters will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
5. STOCKHOLDERS' EQUITY
In April 2002, the Company completed a public offering of 5,297,500 shares
of the Company's common stock. Net proceeds of the offering to the Company were
approximately $132.6 million and were used to repay outstanding borrowings.
In October 2002, the Company's board of directors authorized a $50.0 million
open market stock buy back program.
A reconciliation of the amounts used to compute net income per common
share--diluted is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income................................... $15,717,173 $10,543,605 $36,945,109 $24,848,727
----------- ----------- ----------- -----------
Weighted average common shares outstanding... 27,750,000 21,920,000 25,300,000 21,700,000
Dilutive common stock equivalents--stock
options.................................... 950,000 930,000 1,000,000 800,000
----------- ----------- ----------- -----------
Weighted average common and common equivalent
shares outstanding--diluted ............... 28,700,000 22,850,000 26,300,000 22,500,000
=========== =========== =========== ===========
Net income per share--diluted................ $ 0.55 $ 0.46 $ 1.40 $ 1.10
=========== =========== =========== ===========
9
LANDRY'S RESTAURANTS, INC.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
We own and operate full-service, casual dining restaurants. As of September
30, 2002, we operated 241 restaurants.
In February 2002, we acquired 16 seafood restaurants located primarily in
Michigan and Florida resulting from the acquisition of C.A. Muer, Inc., (the
"Muer Acquisition"). In August 2002, we purchased 39 Chart House seafood
restaurants, located primarily on the East and West Coasts of the United
States. In October 2002, we purchased 27 Texas-based Saltgrass Steak and
seafood restaurants.
In this report, we have made forward-looking statements. Our forward-looking
statements are subject to risks and uncertainty, including without limitation,
our ability to continue our expansion strategy, our ability to make projected
capital expenditures, as well as general market conditions, competition, and
pricing. Forward-looking statements include statements regarding:
. future capital expenditures (including the amount and nature thereof);
. business strategy and measures to implement such strategy;
. competitive strengths;
. expansion and growth of our business and operations;
. plans;
. references to future success as well as other statements which include
words such as "anticipate," "believe," "plan," "estimate," "expect," and
"intend" and
. other similar expressions.
Although we believe that the assumptions underlying our forward-looking
statements are reasonable, any of the assumptions could be inaccurate and,
therefore, we cannot assure you that the forward-looking statements included in
this 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 the objectives and plans will be achieved.
Results of Operations
Restaurant Profitability
The following table sets forth the percentage relationship to total revenues
of certain operating data for the periods indicated:
Three Months Nine Months
Ended Ended
September 30, September 30,
------------ ------------
2002 2001 2002 2001
----- ----- ----- -----
Revenues............................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................... 28.6% 29.5% 28.7% 29.6%
Restaurant labor....................... 28.7% 28.4% 28.5% 28.7%
Other restaurant operating expenses (1) 23.7% 24.0% 24.6% 24.6%
----- ----- ----- -----
Restaurant level profit (1)............ 19.0% 18.1% 18.2% 17.1%
===== ===== ===== =====
- --------
(1) Excludes depreciation, amortization and pre-opening expenses.
10
Three Months Ended September 30, 2002 Compared to the Three Months Ended
September 30, 2001
Revenues increased $38,285,835 or 18.9%, from $202,786,013 to $241,071,848
for the three months ended September 30, 2002, compared to the three months
ended September 30, 2001. The increase in revenues was primarily attributable
to revenues from new restaurant openings, same store sales increase of 1.6% for
the Company's seafood restaurants, offset by a slight decline in Rainforest
Cafe restaurant revenues, and the inclusion of 2002 revenues from the Muer
(full quarter) and Chart House (August and September only) acquisitions. While
the Company's same store sales were positive in the month of September 2002 and
for the first three weeks of October 2002, management believes that positive
comparisons for the remaining balance of the fourth quarter may be difficult in
light of excellent prior year comparative same store sales results, unfavorable
weather in October and early November, and a more difficult and competitive
economic environment. Revenues from the Saltgrass acquisition completed in
October will be included in our financial statements for the fourth quarter
from the date the transaction closed.
As a primary result of increased revenues, cost of revenues increased
$9,158,411, or 15.3%, from $59,836,314 to $68,994,725 in the three months ended
September 30, 2002, compared to the same period in the prior year. Cost of
revenues as a percentage of revenues for the three months ended September 30,
2002, decreased to 28.6%, from 29.5% in 2001. The decrease in cost of revenues
as a percentage of revenues primarily reflects menu changes and lower product
costs in 2002 as compared to 2001.
Restaurant labor expenses increased $11,663,361 or 20.2%, from $57,637,840
to $69,301,201 in the three months ended September 30, 2002, compared to the
same period in the prior year, principally as a result of increased revenues.
Restaurant labor expenses as a percentage of revenues for the three months
ended September 30, 2002, increased to 28.7% from 28.4% in 2001, as a result of
higher labor costs at the restaurants purchased in recent acquisitions.
Other restaurant operating expenses increased $8,415,049, or 17.3%, from
$48,666,417 to $57,081,466 in the three months ended September 30, 2002,
compared to the same period in the prior year, principally as a result of
increased revenues. Such expenses decreased as a percentage of revenues to
23.7% in 2002 from 24.0% in 2001, as a primary result of lower utility costs as
a percentage of revenues in 2002.
General and administrative expenses increased $1,225,785 or 12.0%, from
$10,204,974 to $11,430,759 in the three months ended September 30, 2002,
compared to the same period in the prior year. Such expenses decreased as a
percentage of revenues to 4.7% in 2002 from 5.0% in 2001. The dollar amount
increase was a result of increased revenues, acquisitions and additional
personnel required to support our expanded operations.
Depreciation and amortization expense increased $1,065,122 or 12.3%, from
$8,662,534 to $9,727,656 in the three months ended September 30, 2002, compared
to the same period in the prior year. The increase for 2002 was primarily due
to the addition of new restaurants and equipment.
The decrease in net interest expense in the three months ended September 30,
2002, as compared to the prior year, was primarily due to our lower borrowings
under the credit line and a lower borrowing rate. A substantial portion of
outstanding debt was repaid with proceeds from a secondary offering of common
stock in April 2002. The change in other expense (income) was not material.
Provision for income taxes increased by $2,323,957 to $7,061,338 in the
three months ended September 30, 2002 from $4,737,381 compared to the same
period in the prior year primarily due to changes in our pre-tax income. The
Company's effective tax rate remained a constant 31% for all periods presented.
Nine Months Ended September 30, 2002 Compared to the Nine Months Ended
September 30, 2001
Revenues increased $79,023,507, or 13.5%, from $586,156,439 to $665,179,946
for the nine months ended September 30, 2002, compared to the nine months ended
September 30, 2001. The increase in revenues was
11
primarily attributable to revenues from new restaurant openings, a same store
sales increase of 2.5% for our seafood restaurants, offset by a slight decline
in Rainforest Cafe restaurant revenues, and the inclusion of 2002 revenues from
the Muer and Chart House acquisitions.
As a primary result of increased revenues, cost of revenues increased
$17,066,454, or 9.8%, from $173,772,529 to $190,838,983 in the nine months
ended September 30, 2002, compared to the same period in the prior year. Cost
of revenues as a percentage of revenues for the nine months ended September 30,
2002, decreased to 28.7%, from 29.6% in 2001. The decrease in cost of revenues
as a percentage of revenues primarily reflects menu changes and lower product
costs in 2002 as compared to 2001.
Restaurant labor expenses increased $20,998,692 or 12.5%, from $168,327,066
to $189,325,758 in the nine months ended September 30, 2002, compared to the
same period in the prior year, principally as a result of increased revenues.
Restaurant labor expenses as a percentage of revenues for the nine months ended
September 30, 2002, decreased to 28.5% from 28.7% in 2001, as a result of
increases in hourly labor productivity, offset in part by higher labor costs at
restaurants purchased in recent acquisitions.
Other restaurant operating expenses increased $19,772,489, or 13.7%, from
$144,005,590 to $163,778,079 in the nine months ended September 30, 2002,
compared to the same period in the prior year, principally as a result of
increased revenues. Such expenses were flat as a percentage of revenues at
24.6% as lower utility costs were offset by other expenses that increased.
General and administrative expenses increased $2,987,507 or 10.3%, from
$28,901,774 to $31,889,281 in the nine months ended September 30, 2002,
compared to the same period in the prior year, and decreased slightly as a
percentage of revenues to 4.8% in 2002 from 4.9% in 2001. The dollar amount
increase was a result of increased revenues and personnel required to support
our expanded operations.
Depreciation and amortization expense increased $5,143,995, or 19.9%, from
$25,806,443 to $30,950,438 in the nine months ended September 30, 2002,
compared to the same period in the prior year. The increase for 2002 was
primarily due to the addition of new restaurants and equipment, the Muer and
Chart House acquisitions, and asset impairment charges of $2,200,000 included
in the 2002 amounts.
The decrease in net interest expense for the nine months ended September 30,
2002, as compared to the prior year, was primarily due to our lower borrowings
under the credit line and the lower borrowing rate. The change in other expense
(income), was primarily due to additional income of $1,100,000 for a settlement
from a vendor and a $1,500,000 gain on an asset, offset by a loss of $1,000,000
on an asset during the nine months ended September 30, 2002.
Provision for income taxes increased by $5,434,207 to $16,598,527 in the
nine months ended September 30, 2002, from $11,164,320 in 2001, due to changes
in our pre-tax income.
Liquidity and Capital Resources
In April 2002, we completed a public offering of 5,297,500 shares of common
stock and raised approximately $132.6 million. These proceeds were initially
used to pay down the majority of amounts outstanding on our credit line. Our
$205.0 million line of credit from a syndicate of banks matures in July 2004
and is available for expansion, acquisitions, share repurchases and other
general corporate purposes. In July 2002, the credit line was amended to permit
the Chart House and Saltgrass acquisitions. At September 30, 2002, we had $103
million outstanding under this credit facility. In October 2002, we purchased
the 27-unit Saltgrass chain for approximately $73 million. The acquisition was
financed by borrowing $53 million from the credit facility and a $20 million 7
year 5.5% note from the seller. In October 2002, we authorized a $50.0 million
open market stock buy program.
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For the nine months ended September 30, 2002, we funded our capital
expenditures of $74.2 million and $79.0 million in acquired restaurant
properties (Muer and Chart House restaurants), out of existing cash balances,
cash flows from operations and borrowings.
We expect to spend approximately $120 million on capital expenditures in
2002, in addition to the various acquisitions. The majority of planned capital
expenditures will be for restaurants that are expected to open in 2002 and
2003, which include approximately 14 in 2002 and 30 in 2003. In addition, we
are renovating a building adjacent to the new Houston professional baseball
park and close to the Houston Convention Center, into a 200-room hotel as a
part of our diversified growth opportunities. Expected construction costs of
approximately $25 million, expended over several years are included in our
capital budget. Further, we were awarded a contract from the City of Galveston,
Texas to construct and operate the Galveston Convention Center. The estimated
construction costs will be funded by proceeds from governmental agency bonds
issued by the City of Galveston and serviced by certain taxes. Under the
agreements, we have the right to one-half of the profits of the Convention
Center.
We plan to fund 2002 capital expenditures and any additional restaurant
acquisitions out of proceeds from existing cash balances, cash flow from
operations and availability under our existing credit facility. As a result of
our tax carryforwards and deferred tax assets, including amounts attributable
to the acquisition of Rainforest Cafe, we expect our cash flow from operations
to be subject to reduced Federal income tax payments for the foreseeable
future, and therefore provide additional cash flow for funding our business
activities and debt service.
Since April 2000 we have paid an annual $0.10 per share dividend, declared
and paid in quarterly amounts.
From time to time we review opportunities for restaurant acquisitions, and
investments in the hospitality, entertainment, amusement, food service and
facilities management and other industries. Our exercise of any such investment
opportunity may impact our development plans and capital expenditures. We
believe that adequate sources of capital are available to fund our business
activities through December 31, 2003.
Seasonality and Quarterly Results
Our business is seasonal in nature. Our reduced winter volumes cause
revenues and, to a greater degree, operating profits to be lower in the first
and fourth quarters than in other quarters. We have and continue to open
restaurants in highly seasonal tourist markets. We further note that the Joe's
Crab Shack concept restaurants tend to experience even greater seasonality and
sensitivity to weather than our other restaurant concepts. Periodically, our
sales and profitability may be negatively affected by adverse weather. The
timing of unit openings can and will affect quarterly results.
Critical Accounting Policies
Restaurant and other properties are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recovered. The recoverability of properties that are to be held and used
is measured by comparison of the estimated future undiscounted cash flows
associated with the asset to the carrying amount of the asset. If such assets
are considered to be impaired, an impairment charge is
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recorded in the amount by which the carrying amount of the assets exceeds their
fair value. Properties to be disposed of are reported at the lower of their
carrying amount or fair value, reduced for estimated disposal costs.
Impact of Inflation
We do not believe that inflation has had a significant effect on our
operations during the past several years. We believe we have historically been
able to pass on increased costs through menu price increases, but there can be
no assurance that we will be able to do so in the future. Future increases in
restaurant labor costs, including expected future increases in federal minimum
wages, land and construction costs could adversely affect our profitability and
ability to expand.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk primarily related to potential adverse changes
in interest rates as discussed below. We actively monitor exposure to market
risk and continue to develop and utilize appropriate risk management
techniques. We are not exposed to any other significant risks from the use of
derivative financial instruments. We do not use derivative financial
instruments for trading or to speculate on changes in interest rates or
commodity prices.
Interest Rate Risk
Total debt at September 30, 2002, primarily included $103.0 million of
floating-rate debt attributed to a bank line of credit facility at an average
interest rate of 4.2%. As a result, our annual interest cost in 2002 will
fluctuate based on borrowings outstanding and short-term interest rates.
ITEM 4. Controls and Procedures
Within 90 days prior to the date of this Report, we carried out an
evaluation under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC reports. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Approximately eighty former shareholders (holding 4,406,655 shares) of
Rainforest Cafe, Inc. dissented to the merger between the Company and
Rainforest Cafe. On February 13, 2001, Rainforest Cafe sent each dissenting
shareholders, Rainforest Cafe's estimate of fair value per share, along with a
check in the amount of $3.25 per share, which was the original acquisition
price. Subsequently, 78 of the dissenting shareholders have made a demand for
supplemental payment based on their belief that the fair value per share of
common stock in the former Rainforest Cafe was greater than $3.25 per share.
The Company believes that its estimate of fair value is correct, and that the
dissenting shareholders' estimate of fair value is significantly inflated. The
Company is vigorously pursuing its determination of fair value in an appraisal
proceeding in a Minnesota District Court.
In January 2002, Rainforest Cafe, Inc., a wholly-owned subsidiary of
Landry's, was sued by EklecCo, L.L.C., in the Supreme Court of the State of New
York in Onondaga County. EklecCo is seeking damages, plus interest, attorneys
fees and costs as a result of Rainforest Cafe's alleged breach of a restaurant
lease entered into in 1996 for a Rainforest Cafe unit formerly located in the
Palisades Mall. Rainforest Cafe believes that it has no liability for damages
beyond the personal property located in the premises at the time it vacated the
premises. Rainforest Cafe is defending this case vigorously. Because the case
is in its early stages, the financial impact to the Company, if any, cannot be
predicted.
On July 31, 2002, and subsequently amended on August 6, 2002, a purported
collective action lawsuit against the Company entitled Meaghan Bollenberg, et.
al. v. Landry's Restaurants, Inc. was filed in the United States District Court
for the Northern District of Illinois. The lawsuit was filed by six plaintiffs
who are current and former servers on behalf of themselves and others similarly
situated. The lawsuit alleges that the Company violated certain minimum wage
laws under the federal Fair Labor Standards Act and seeks damages, statutory
damages, attorneys fees and costs. The Company is vigorously defending this
litigation. Because the case is in its early stages, the financial impact to
the Company, if any, cannot be predicted.
General Litigation
The Company is subject to other legal proceedings and claims that arise in
the ordinary course of business. Management does not believe that the outcome
of any of those matters will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
ITEM 2. Changes in Securities
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5. Other Information
Not applicable.
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ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.17 --Asset Purchase Agreement by and among Chart House, Inc., Chart House Enterprises,
Inc., LCH Acquisitions, Inc. and Landry's Restaurants, Inc.
10.18 --Amendment No. 3 dated July 30, 2002 to Credit Agreement among Landry's Restaurants,
Inc. and Bank of America, N.A. as administrative agent for the Banks.
10.19 --Stock Purchase Agreement dated September 10, 2002 among Landry's Restaurants, Inc.,
LSRI Holdings, Inc. and Well Seasoned, Inc., MetroNational Corporation and Kimberly
Restaurants, Ltd.
10.20 --Asset Purchase and Sale Agreement dated September 10, 2002 among Kimberly
Restaurants, Ltd., MNC Restaurant Properties, L.P., Well Seasoned, Inc. and
MetroNational Corporation and LSRI Holdings, Inc.
99.1 --Certification by CEO and CFO with respect to Quarterly Report.
99.2(a) --Certification by CEO and CFO with respect to certain information contained in the
Quarterly Report and Disclosure Controls and Procedures.
99.2(b) --Certification by CEO and CFO with respect to certain information contained in the
Quarterly Report and Disclosure Controls and Procedures.
(b) Reports on Form 8-K.
1. The Company filed a report on Form 8-K on October 4, 2002 and
September 12, 2002 in which it reported on Item 5 on the acquisition of the
27 unit Saltgrass chain.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LANDRY'S RESTAURANTS, INC.
(Registrant)
/s/ TILMAN J. FERTITTA
-----------------------------
Tilman J. Fertitta
Chairman of the Board of
Directors,
President and Chief Executive
Officer
(Principal Executive Officer)
/s/ PAUL S. WEST
-----------------------------
Paul S. West
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Dated: November 13, 2002
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