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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 MARCH 31, 2003.
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
incorporation of organization)
74-00405386
(I.R.S. Employer
Identification No.)
1510 West Loop South, Houston, TX 77027
(Address of principal executive offices)
(713) 850-1010
(Registrants 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 [_]
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Act). 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 MAY 1, 2003 THERE WERE
27,530,546 SHARES OF $0.01 PAR VALUE
COMMON STOCK OUTSTANDING
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LANDRY'S RESTAURANTS, INC.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................................... 3
Condensed Unaudited Consolidated Balance Sheets at March 31, 2003, and December 31,
2002............................................................................. 4
Condensed Unaudited Consolidated Statements of Income for the Three Months Ended
March 31, 2003 and March 31, 2002................................................ 5
Condensed Unaudited Consolidated Statement of Stockholders' Equity for the Three
Months Ended March 31, 2003...................................................... 6
Condensed Unaudited Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2003 and March 31, 2002.......................................... 7
Notes to Condensed Unaudited Consolidated Financial Statements..................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 13
Item 4. Controls and Procedures............................................................ 13
Item 5. Exhibits and Reports on Form 8-K................................................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 14
Signatures.................................................................................. 15
Exhibits
LANDRY'S RESTAURANTS, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
The accompanying condensed unaudited consolidated financial statements have
been prepared by Landry's Restaurants, Inc. (the "Company") 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 generally
accepted accounting principles for complete financial statements. In the
opinion of the Company, all adjustments (consisting only of normal recurring
entries) necessary for fair presentation of the Company's 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.
3
LANDRY'S RESTAURANTS, INC.
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 4,646,099 $ 13,878,199
Accounts receivable--trade and other, net............................... 23,473,818 19,910,006
Inventories............................................................. 39,889,117 40,879,375
Deferred taxes.......................................................... 6,227,519 6,227,519
Other current assets.................................................... 8,409,199 11,774,016
------------ ------------
Total current assets................................................ 82,645,752 92,669,115
------------ ------------
PROPERTY AND EQUIPMENT, net................................................ 898,843,744 830,930,131
GOODWILL................................................................... 2,434,548 2,434,547
OTHER ASSETS, net.......................................................... 6,614,864 6,981,286
------------ ------------
Total assets........................................................ $990,538,908 $933,015,079
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................ $ 70,200,698 $ 71,748,874
Accrued liabilities..................................................... 71,900,986 74,237,570
Income taxes payable.................................................... 2,332,206 584,531
Current portion of long-term debt....................................... 1,932,375 1,783,427
------------ ------------
Total current liabilities........................................... 146,366,265 148,354,402
------------ ------------
LONG-TERM DEBT, NET OF CURRENT PORTION..................................... 245,178,213 189,403,599
DEFERRED TAXES............................................................. 12,864,094 11,540,594
OTHER LIABILITIES.......................................................... 16,053,937 16,641,047
------------ ------------
Total liabilities................................................... 420,462,509 365,939,642
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, 60,000,000 shares authorized, 27,529,334
and 27,771,479 issued and outstanding, respectively................... 275,294 277,715
Additional paid-in capital.............................................. 437,974,822 441,338,043
Retained earnings....................................................... 131,826,283 125,459,679
------------ ------------
Total stockholders' equity.......................................... 570,076,399 567,075,437
------------ ------------
Total liabilities and stockholders' equity.......................... $990,538,908 $933,015,079
============ ============
The accompanying notes are an integral part of these condensed unaudited
consolidated financial statements.
4
LANDRY'S RESTAURANTS, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31,
---------------------------
2003 2002
------------ ------------
REVENUES............................................................... $249,582,044 $192,169,998
OPERATING COSTS AND EXPENSES:
Cost of revenues.................................................... 73,321,881 55,400,794
Restaurant labor.................................................... 74,547,562 55,281,845
Other restaurant operating expenses................................. 61,199,185 49,910,439
General and administrative expenses................................. 11,671,993 9,521,685
Depreciation and amortization....................................... 11,195,042 9,885,157
Restaurant pre-opening expenses..................................... 3,667,587 1,282,237
------------ ------------
Total operating costs and expenses.............................. 235,603,250 181,282,157
------------ ------------
OPERATING INCOME....................................................... 13,978,794 10,887,841
OTHER EXPENSE (INCOME):
Interest expense, net............................................... 1,815,836 2,088,598
Other, net.......................................................... 393,607 (162,146)
------------ ------------
Total other expense............................................. 2,209,443 1,926,452
------------ ------------
INCOME BEFORE INCOME TAXES............................................. 11,769,351 8,961,389
PROVISION FOR INCOME TAXES............................................. 3,648,499 2,778,030
------------ ------------
NET INCOME............................................................. $ 8,120,852 $ 6,183,359
============ ============
EARNINGS PER SHARE INFORMATION:
BASIC
Net income.......................................................... $ 0.29 $ 0.28
Weighted average number of common shares outstanding................ 27,600,000 22,150,000
DILUTED
Net income.......................................................... $ 0.29 $ 0.27
Weighted average number of common share and equivalents outstanding. 28,200,000 23,200,000
The accompanying notes are an integral part of these condensed unaudited
consolidated financial statements.
5
LANDRY'S RESTAURANTS, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock
-------------------- Additional Retained -
Shares Amount Paid-In Capital Earnings Total
---------- -------- --------------- ------------ ------------ -
Balance, January 1, 2003....... 27,771,479 $277,715 $441,338,043 $125,459,679 $567,075,437
Net income..................... 8,120,852 8,120,852
Dividends paid................. (694,240) (694,240)
Shares repurchased for treasury (294,623) (2,946) (3,759,544) (1,060,008) (4,822,498)
Exercise of stock options and
income tax benefit........... 52,478 525 396,323 396,848
---------- -------- ------------ ------------ ------------ -
Balance, March 31, 2003........ 27,529,334 $275,294 $437,974,822 $131,826,283 $570,076,399
========== ======== ============ ============ ============ =
The accompanying notes are an integral part of these condensed unaudited
consolidated financial statements.
6
LANDRY'S RESTAURANTS, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
--------------------------
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 8,120,852 $ 6,183,359
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization......................................... 11,195,042 9,885,157
Change in assets and liabilities--net and other....................... (299,349) 5,018,608
------------ ------------
Total adjustments.................................................. 10,895,693 14,903,765
------------ ------------
Net cash provided by operating activities...................... 19,016,545 21,087,124
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions.......................................... (50,516,225) (15,789,796)
Payment of acquisition integration liabilities............................ (372,370) (1,391,242)
Business acquisitions, net of cash acquired............................... (16,740,791) (27,652,773)
------------ ------------
Net cash used in investing activities.......................... (67,629,386) (44,833,811)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options................................... 392,489 2,297,015
Borrowings (payments) of debt, net........................................ 44,504,990 11,000,000
Repurchase of common stock for treasury................................... (4,822,498) --
Dividends paid............................................................ (694,240) (549,887)
------------ ------------
Net cash provided by (used in) financing activities............ 39,380,741 12,747,128
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... (9,232,100) (10,999,559)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................. 13,878,199 31,081,008
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................... $ 4,646,099 $ 20,081,449
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments during the period for
Income taxes.......................................................... $ 231,928 $ 165,801
Interest.............................................................. $ 1,830,644 $ 2,514,110
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
7
LANDRY'S RESTAURANTS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Landry's Restaurants, Inc. (the "Company") owns and operates restaurants
primarily under the trade names Landry's Seafood House, Joe's Crab Shack, The
Crab House, Charley's Crab, The Chart House and Saltgrass Steak House. In
addition, the Company owns and operates domestic and licenses international
rainforest themed restaurants under the trade name Rainforest Cafe.
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 condensed consolidated financial statements included herein have been
prepared by the Company without audit, except for the consolidated balance
sheet as of December 31, 2002. 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 generally
accepted accounting principles have been condensed or omitted. This information
is contained in the Company's December 31, 2002, consolidated financial
statements filed with the Securities and Exchange Commission on Form 10-K.
2. ACCRUED LIABILITIES
Accrued liabilities are comprised of the following:
March 31, December 31,
2003 2002
----------- ------------
Payroll and related costs..................................... $18,154,532 $14,708,991
Rent, insurance and taxes, other than payroll and income taxes 34,049,709 36,628,732
Deferred revenue (gift certificates).......................... 7,429,632 9,085,304
Acquisition accruals.......................................... 968,829 591,624
Other......................................................... 11,298,284 13,222,919
----------- -----------
$71,900,986 $74,237,570
=========== ===========
3. DEBT
In March and April 2003, the Company borrowed $15.0 million under promissory
notes from two banks which also participate in the Company's existing credit
line facility. The notes mature in July 2004, require quarterly interest
payments of Libor plus 2.5%, and cross defaults with the credit line agreement.
Proceeds from these notes were used to reduce the outstanding balance under the
credit line and fund capital expenditures. As a result, the Company had $7
million available under our credit line as of May 1, 2003.
In connection with the Company's $220.0 million credit line, the Company's
financing spread increased by 0.5% effective April 1, 2003 as a result of a
predetermined increase in the Company's leverage ratio.
The Company assumed an $11.4 million 9.39% non-recourse, long-term note
payable (due May 2010) in connection with an asset purchase in March 2003.
Principal and interest payments aggregate $102,000 monthly.
8
LANDRY'S RESTAURANTS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. CONTINGENCIES
In January 2002, Rainforest Cafe, Inc., our wholly-owned subsidiary, was
sued by EklecCo, L.L.C., in the Supreme Court of the State of New York in
Onondaga County. EklecCo is seeking damages, 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 us, if any, cannot be predicted.
On July 31, 2002, and subsequently amended, a purported collective action
lawsuit against us 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 were
servers on behalf of themselves and others similarly situated. The lawsuit
alleges that we violated certain minimum wage laws under the federal Fair Labor
Standards Act and seeks damages and costs. We are vigorously defending this
litigation. Because the case is in its early stages, the financial impact to
us, 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
The table below illustrates the effect on net income and earnings per share
if compensation costs for outstanding stock options had been determined using
the alternative accounting method based on the fair value prescribed by SFAS
No. 123.
Three Months Ended
March 31,
----------------------
2003 2002
---------- ----------
Net income, as reported............................................... $8,120,852 $6,183,359
Less: stock based compensation expense using fair value method, net of
tax................................................................. (450,000) (365,000)
Pro forma net income.................................................. $7,670,852 $5,818,359
Earnings per share
Basic, as reported................................................. $ 0.29 $ 0.28
Basic, pro forma................................................... $ 0.28 $ 0.26
Diluted, as reported............................................... $ 0.29 $ 0.27
Diluted, pro forma................................................. $ 0.27 $ 0.25
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model; amortization over the respective
vesting periods; expected lives of 6 years; expected stock price volatility of
approximately 40% and an interest rate of approximately 2.9%.
9
LANDRY'S RESTAURANTS, INC.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
We own and operate full-service, casual dining restaurants. As of March 31,
2003, we operated 277 restaurants. In addition to these units, there were four
Chart House restaurants operating but scheduled for closure and redevelopment
into Joe's Crab Shack restaurants.
In February 2002, we acquired 15 seafood restaurants located primarily in
Michigan and Florida in connection with the acquisition of C.A. Muer, Inc.,
(the "Muer Acquisition"). In August 2002, we purchased 27 Chart House seafood
restaurants, located primarily on the East and West Coasts of the United
States. Both of these acquisitions included plans for the redevelopment of 10
additional lower profitability restaurants, also then acquired, into Joe's Crab
Shack restaurants, and the sale or disposal of approximately six additional
acquired, but non-strategic, locations. In October 2002, we purchased 27
Texas-based Saltgrass Steak House restaurants.
The restaurant industry is intensely competitive and 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, weather
conditions, and the type, number, and location of competing restaurants.
We have many well established competitors with greater financial resources
and longer histories of operation than ours, including competitors already
established in regions where we are planning to expand, as well as competitors
planning to expand in the same regions. We face significant competition from
mid-priced, full-service, casual dining restaurants offering seafood and other
types and varieties of cuisine. Our competitors include national, regional, and
local chains as well as local owner-operated restaurants. We also compete with
other restaurants and retail establishments for restaurant sites. We intend to
pursue an acquisition strategy.
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
restaurant revenues of certain restaurant operating data for the periods
indicated:
Three Months
Ended
March 31,
------------
2003 2002
----- -----
Revenues........................... 100.0% 100.0%
Cost of revenues................... 29.4 28.8
Restaurant labor................... 29.9 28.8
Other restaurant operating expenses 24.5 26.0
----- -----
Restaurant level profit............ 16.2% 16.4%
===== =====
Three Months Ended March 31, 2003 Compared to the Three Months Ended March
31, 2002
Revenues increased $57,412,046, or 29.9%, from $192,169,998 to $249,582,044
for the three months ended March 31, 2003, compared to the three months ended
March 31, 2002. The increase in revenues was primarily
10
attributable to revenues from new restaurant openings and revenues from
acquisitions completed in 2002, offset by a same store sales decrease for our
restaurants and sales lost due to inclement weather.
As a primary result of increased revenues, cost of revenues increased
$17,921,087 or 32.3%, from $55,400,794 to $73,321,881 in the three months ended
March 31, 2003, compared to the same period in the prior year. Cost of revenues
as a percentage of revenues for the three months ended March 31, 2003,
increased to 29.4%, from 28.8% in 2002. The increase in cost of revenues as a
percentage of revenues primarily reflects the higher cost of sales from the
Saltgrass and other 2002 acquisitions offset by menu changes and lower product
costs in 2003 as compared to 2002.
Restaurant labor expenses increased $19,265,717, or 34.8%, from $55,281,845
to $74,547,562 in the three months ended March 31, 2003, 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 March 31, 2003, increased to 29.9% from 28.8% in 2002, principally due to
a comparatively large number of new unit openings during the 2003 period and
weather affected sales deleveraging labor costs.
Other restaurant operating expenses increased $11,288,746 or 22.6%, from
$49,910,439 to $61,199,185 in the three months ended March 31, 2003, 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 24.5% in 2003
from 26.0% in 2002, as a primary result of lower supplies, marketing and
utility expenses.
General and administrative expenses increased $2,150,308, or 22.6%, from
$9,521,685 to $11,671,993 in the three months ended March 31, 2003, compared to
the same period in the prior year, and decreased as a percentage of revenues to
4.7% in 2003 from 5.0% in 2002. The dollar amount increase was a result of
increased revenues and personnel required to support our operations.
Depreciation and amortization expense increased $1,309,885, or 13.3%, from
$9,885,157 to $11,195,042 in the three months ended March 31, 2003, compared to
the same period in the prior year. The increase for 2003 was primarily due to
the addition of new restaurants and equipment and restaurant acquisitions in
2002.
The decrease in net interest expense in the three months ended March 31,
2003, as compared to the prior year, is primarily due to our lower borrowing
rate, partially offset by higher borrowings. The change in other expense
(income), net includes a $300,000 loss on the sale of marketable securities in
2003.
Provision for income taxes increased by $870,469 to $3,648,499 in the three
months ended March 31, 2003 from $2,778,030 in 2002 primarily due to changes in
our pre-tax income.
Liquidity and Capital Resources
We expect to spend approximately $150 million on capital expenditures in
2003. The majority of planned capital expenditures will be for restaurants that
are expected to open in 2003 and 2004, which include approximately 24
restaurants in 2003, although a portion will be for land purchases, other
entertainment and hospitality opportunities, and the completion of our Downtown
Aquarium project in Houston, Texas. 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 specialty growth
division. Expected construction costs of approximately $25 million will be
expended over several years. Further, we were awarded a contract from the City
of Galveston, Texas to develop, construct and operate the Galveston Island
Convention Center. The estimated construction costs are being 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. Our estimated costs of these projects
are included in our projected capital expenditures, however, the timing and
finalization of such projects may increase capital expenditures for 2003.
11
In March and April 2003, we borrowed $15.0 million under promissory notes
from two banks which also participate in our existing credit line facility. The
notes mature in July 2004, require quarterly interest payments of Libor plus
2.5%, and cross defaults with the credit line facility. Proceeds from these
notes were used to reduce the outstanding balance under the credit line and
fund capital expenditures. In connection with the Company's $220.0 million
credit line, the Company's financing spread increased by 0.5% effective April
1, 2003 as a result of a predetermined increase in the Company's leverage
ratio. The Company assumed a $11.4 million 9.39% non-recourse, long-term note
payable (due May 2010) in connection with an asset purchase in March 2003.
Principal and interest payments under this note aggregate $102,000 monthly.
We are being aggressively pursued by a number of the largest banks in the
country regarding long-term financing opportunities. We have begun a review of
these opportunities, and have determined that 5, 7, 10, and 20-year financing
is available at extremely attractive rates. Furthermore, the amount of capital
available appears much greater than our current facilities. As of May 1, 2003,
we had $7 million available for borrowing under the credit line, although the
Company is able to borrow additional amounts or access additional capital from
other sources. Establishing longer-term access to capital could result in
slightly higher immediate interest rates, but result in overall a much stronger
financial structure, and at historically low rates. The financing market is
extremely competitive today.
We plan to fund 2003 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, or from new
capital sources. 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. 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 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, and are included in other current
assets.
We follow the intrinsic value method of accounting for stock options, and as
such do not record compensation expense related to amounts outstanding.
12
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 March 31, 2003, included $216.0 million of floating-rate debt
attributed to a bank syndicated line of credit at an average interest rate of
3.5%, but was increased by 0.5% effective April 1, 2003, due to the change in
the Company's leverage ratio. The floating-rate debt will mature in July 2004.
As a result, our annual interest cost in 2003 will fluctuate based on
short-term interest rates and may be subject to an increase if we elect to
refinance our obligations on a longer term fixed rate basis.
The impact on annual cash flow of a ten percent change in the floating-rate
(approximately 0.4%) would be approximately $0.8 million annually based on the
floating-rate debt outstanding at March 31, 2003, however, there are no
assurances that possible rate changes would be limited to such amounts.
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
In January 2002, Rainforest Cafe, Inc., our wholly-owned subsidiary, was
sued by EklecCo, L.L.C., in the Supreme Court of the State of New York in
Onondaga County. EklecCo is seeking damages, 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 us, if any, cannot be predicted.
In July 31, 2002, and subsequently amended, a purported collective action
lawsuit against us entitled Meaghan Bollenberg, et. al. v. Landry's
Restaurants, Inc. was filed in the United States District Court for the
Northern District of Illinois, and subsequently moved to the Southern District
of Texas Court. The lawsuit was filed by six plaintiffs who were servers on
behalf of themselves and others similarly situated. The lawsuit alleges that we
violated certain minimum wage laws under the federal Fair Labor Standards Act
and seeks damages and costs. We are vigorously defending this litigation.
Because the case is in its early stages, the financial impact to us, 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are set forth herein commencing of page 16:
99.1 --Certification with respect to quarterly report of Landry's Restaurants, Inc.
99.2(a) --Certification with respect to quarterly report of Landry's Restaurants, Inc.
99.2(b) --Certification with respect to quarterly report of Landry's Restaurants, Inc.
(b) Reports on Form 8-K
--The Company did not file any report on Form 8-K during the quarter
ending March 31, 2003.
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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: May 2, 2003
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