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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

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 JUNE 30, 2004.

 

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)

 

76-0405386

(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 ¨

 

Indicate 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 AUGUST 2, 2004 THERE WERE

27,597,489 SHARES OF $0.01 PAR VALUE

COMMON STOCK OUTSTANDING

 



Table of Contents

LANDRY’S RESTAURANTS, INC.

 

INDEX

 

          Page
Number


PART I.

  

FINANCIAL INFORMATION

    

Item 1.

  

Financial Statements

   3
    

Condensed Consolidated Balance Sheets at June 30, 2004 (unaudited), and December 31, 2003

   4
    

Condensed Unaudited Consolidated Statements of Income for the Three and Six Months Ended June 30, 2004 and 2003

   5
    

Condensed Unaudited Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2004

   6
    

Condensed Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003

   7
    

Notes to Condensed Unaudited Consolidated Financial Statements

   8

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   12

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   17

Item 4.

  

Controls and Procedures

   17

PART II.

  

OTHER INFORMATION

   18

Item 1.

  

Legal Proceedings

   18

Item 4.

  

Submission of Matters to a Vote of Security Holders

   18

Item 6.

  

Exhibits and Reports on Form 8-K

   19

Signatures

   20

 

2


Table of Contents

LANDRY’S RESTAURANTS, INC.

 

PART I. FINANCIAL INFORMATION

 

ITEM  1. Financial Statements

 

The accompanying condensed unaudited consolidated financial statements have been prepared by us 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 our opinion, all adjustments (consisting only of normal recurring entries) necessary for a 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;

 

  goals;

 

  expansion and growth of our business and operations;

 

  future food commodity prices;

 

  availability and cost of food products, materials and employees;

 

  consumer perceptions of food safety;

 

  changes in local, regional and national economic conditions;

 

  effectiveness of our marketing efforts;

 

  same store sales;

 

  the effect of tax laws, and any changes therein;

 

  earnings guidance;

 

  the seasonality of our business;

 

  weather and acts of God;

 

  food, labor, fuel and utilities costs;

 

  changes in demographics surrounding our restaurants;

 

  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


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LANDRY’S RESTAURANTS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    

June 30,

2004


    December 31,
2003


 
     (Unaudited)        
ASSETS                 

CURRENT ASSETS:

                

Cash and cash equivalents

   $ 24,979,655     $ 35,211,319  

Accounts receivable—trade and other

     23,469,455       23,271,831  

Inventories

     53,635,295       47,772,298  

Deferred taxes

     9,200,269       6,858,350  

Other current assets

     8,432,696       7,490,383  
    


 


Total current assets

     119,717,370       120,604,181  
    


 


PROPERTY AND EQUIPMENT, net

     989,348,624       965,574,991  

GOODWILL, net

     18,527,547       7,527,547  

OTHER ASSETS

     10,717,572       9,078,787  
    


 


Total assets

   $ 1,138,311,113     $ 1,102,785,506  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY                 

CURRENT LIABILITIES:

                

Accounts payable

   $ 72,320,366     $ 82,894,048  

Accrued liabilities

     85,114,926       74,512,641  

Income taxes payable

     3,490,800       211,131  

Current portion of long-term debt

     228,496       1,963,189  
    


 


Total current liabilities

     161,154,588       159,581,009  
    


 


LONG-TERM DEBT, NET OF CURRENT PORTION

     299,217,165       299,735,906  

DEFERRED TAXES

     30,838,283       23,395,713  

OTHER LIABILITIES

     17,752,212       15,522,129  
    


 


Total liabilities

     508,962,248       498,234,757  
    


 


COMMITMENTS AND CONTINGENCIES

                

STOCKHOLDERS’ EQUITY:

                

Common stock, $0.01 par value, 60,000,000 shares authorized, 27,597,492 and 27,653,852, issued and outstanding, respectively

     275,975       276,539  

Additional paid-in capital

     438,209,142       439,616,066  

Deferred stock compensation

     (4,521,418 )     (1,868,750 )

Retained earnings

     195,385,166       166,526,894  
    


 


Total stockholders’ equity

     629,348,865       604,550,749  
    


 


Total liabilities and stockholders’ equity

   $ 1,138,311,113     $ 1,102,785,506  
    


 


 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 

4


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LANDRY’S RESTAURANTS, INC.

 

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

 

     Three Months Ended June 30,

   Six Months Ended June 30,

     2004

    2003

   2004

    2003

REVENUES

   $ 317,616,355     $ 299,890,476    $ 593,292,842     $ 549,472,520

OPERATING COSTS AND EXPENSES:

                             

Cost of revenues

     89,108,646       87,447,413      166,828,158       160,769,295

Restaurant labor

     89,818,861       86,653,823      170,751,224       161,201,385

Other restaurant operating expenses

     73,916,072       71,370,068      138,329,721       132,569,252

General and administrative expenses

     14,939,767       12,009,557      31,346,897       23,681,550

Depreciation and amortization

     13,687,217       12,166,806      26,624,244       23,361,848

Asset impairment expense

     —         1,543,219      1,708,654       1,543,219

Restaurant pre-opening expenses

     1,744,627       1,549,941      3,598,671       5,217,528
    


 

  


 

Total operating costs and expenses

     283,215,190       272,740,827      539,187,569       508,344,077
    


 

  


 

OPERATING INCOME

     34,401,165       27,149,649      54,105,273       41,128,443

OTHER EXPENSE (INCOME):

                             

Interest expense, net

     3,031,896       2,598,032      6,105,692       4,413,867

Other, net

     (222,924 )     50,681      (60,171 )     444,289
    


 

  


 

Total other expense

     2,808,972       2,648,713      6,045,521       4,858,156
    


 

  


 

INCOME BEFORE INCOME TAXES

     31,592,193       24,500,936      48,059,752       36,270,287

PROVISION FOR INCOME TAXES

     9,793,580       7,595,290      14,898,523       11,243,789
    


 

  


 

NET INCOME

   $ 21,798,613     $ 16,905,646    $ 33,161,229     $ 25,026,498
    


 

  


 

EARNINGS PER SHARE INFORMATION:

                             

BASIC—

                             

Net income

   $ 0.79     $ 0.61    $ 1.20     $ 0.91

Weighted average number of common shares outstanding

     27,600,000       27,540,000      27,600,000       27,600,000

DILUTED—

                             

Net income

   $ 0.77     $ 0.60    $ 1.16     $ 0.89

Weighted average number of common shares outstanding

     28,450,000       28,300,000      28,500,000       28,250,000

 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 

5


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LANDRY’S RESTAURANTS, INC.

 

CONDENSED UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

     Common Stock

   

Additional

Paid-in Capital


   

Deferred

Stock

Compensation


   

Retained

Earnings


    Total

 
     Shares

    Amount

         

Balance, January 1, 2004

   27,653,852     $ 276,539     $ 439,616,066     $ (1,868,750 )   $ 166,526,894     $ 604,550,749  

Net Income

   —         —         —         —         33,161,229       33,161,229  

Dividends paid

   —         —         —         —         (2,082,610 )     (2,082,610 )

Purchase of common stock held for treasury

   (278,000 )     (2,780 )     (5,675,736 )     —         (2,220,347 )     (7,898,863 )

Exercise of stock options and income tax benefit

   121,640       1,216       1,424,812       —         —         1,426,028  

Amortization of stock compensation

   —         —         —         192,332       —         192,332  

Deferred stock compensation

   100,000       1,000       2,844,000       (2,845,000 )     —         —    
    

 


 


 


 


 


Balance, June 30, 2004

   27,597,492     $ 275,975     $ 438,209,142     $ (4,521,418 )   $ 195,385,166     $ 629,348,865  
    

 


 


 


 


 


 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 

6


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LANDRY’S RESTAURANTS, INC.

 

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six Months Ended June 30,

 
     2004

    2003

 

CASH FLOWS FROM OPERATING ACTIVITIES:

                

Net income

   $ 33,161,229     $ 25,026,498  

Adjustments to reconcile net income to net cash provided by operating activities—

                

Depreciation and amortization

     26,624,244       23,361,848  

Asset impairment expense

     1,708,654       1,543,219  

Change in assets and liabilities—net and other

     5,083,187       6,967,510  
    


 


Total adjustments

     33,416,085       31,872,577  
    


 


Net cash provided by operating activities

     66,577,314       56,899,075  

CASH FLOWS FROM INVESTING ACTIVITIES:

                

Property and equipment additions

     (55,816,366 )     (89,410,427 )

Proceeds from asset disposals

     2,950,305       —    

Business acquisitions and related payments, net of cash acquired

     (12,834,875 )     (16,922,211 )
    


 


Net cash used in investing activities

     (65,700,936 )     (106,332,638 )

CASH FLOWS FROM FINANCING ACTIVITIES:

                

Proceeds from exercise of stock options

     1,126,865       607,349  

Borrowings (payment) of debt, net

     (2,253,434 )     55,043,077  

Dividends paid

     (2,082,610 )     (1,389,823 )

Repurchase of common stock for treasury

     (7,898,863 )     (4,822,498 )
    


 


Net cash provided by (used in) financing activities

     (11,108,042 )     49,438,105  
    


 


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (10,231,664 )     4,542  

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     35,211,319       13,878,199  
    


 


CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 24,979,655     $ 13,882,741  
    


 


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

                

Cash payments during the period for:

                

Income taxes

   $ 6,215,396     $ 2,751,934  

Interest

   $ 6,425,431     $ 5,012,385  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

7


Table of Contents

LANDRY’S RESTAURANTS, INC.

 

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. NATURE OF BUSINESS

 

Landry’s Restaurants, Inc. (the “Company”) primarily owns and operates restaurants 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, 2003. 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 in the United States have been condensed or omitted. This information is contained in the Company’s December 31, 2003, consolidated financial statements filed with the Securities and Exchange Commission on Form 10-K.

 

Revenues are recognized when the goods and services are delivered. Accounts receivable are primarily due from credit and charge card companies and national storage and distribution companies, and also include, as of June 30, 2004, refundable income taxes of approximately $4.3 million.

 

2. ACCRUED LIABILITIES

 

Accrued liabilities are comprised of the following:

 

    

June 30,

2004


   December 31,
2003


Payroll and related costs

   $ 18,886,608    $ 15,533,279

Rent, insurance and taxes, other than payroll and income taxes

     42,540,438      37,028,881

Deferred revenue (gift certificates)

     8,360,970      10,455,869

Other

     15,326,910      11,494,612
    

  

     $ 85,114,926    $ 74,512,641
    

  

 

3. DEBT

 

On October 1, 2003, the Company issued notes totaling $150.0 million through a private placement of debt (the “Senior Notes”). Proceeds from the Senior Notes were used to pay down amounts outstanding under the bank promissory notes and the bank syndicate credit facility. The debt offering consisted of four equal series of notes in the amount of $37.5 million, quarterly interest of 5.47%, 5.84%, 6.05%, and 6.44%, with an average rate of 5.95%, and maturities on October 1, 2009, 2010, 2011, 2013.

 

In connection with the Senior Notes, the Company entered into two interest swap agreements with the objective of managing its exposure to interest rate risk and lowering interest expense. The agreements were effective beginning October 7, 2003 with maturity dates of six years and seven years for an aggregate notional amount of $75.0 million and interest at Libor plus 1.71%. The Company’s interest rate swap agreements qualify as fair value hedges and meet the criteria for the “short cut method” under Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The estimated fair value of these swaps at June 30, 2004 was $2.0 million, which is included in other assets on the consolidated balance sheet at June 30, 2004 and offset by a like adjustment to other long-term liabilities. No hedge ineffectiveness is assumed.

 

8


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LANDRY’S RESTAURANTS, INC.

 

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

On October 14, 2003, the Company entered into the Second Amended and Restated Credit Agreement (the “Bank Credit Facility”) whereby the existing bank credit facility was amended and extended to a four-year $200.0 million revolving credit facility. The Bank Credit Facility provides the ability to add an additional $25.0 million of capacity within the facility and other permitted indebtedness. Interest on the Bank Credit Facility is payable monthly or quarterly at Libor or the bank’s base rate plus a financing spread. The Company’s financing spread is presently 1.875% for Libor, and 0.375% for base rate borrowings, and may be decreased or increased by 25 basis points as the Company’s leverage ratio decreases or increases over predetermined ratios. The Bank Credit Facility and Senior Notes are secured by stock of subsidiaries of the Company, governed by certain financial covenants, including maximum leverage ratio, maximum indebtedness, net worth, and fixed charge coverage ratio tests. The Bank Credit Facility additionally provides for limitations on annual capital expenditures to prescribed amounts, maximum annual cash dividends and limitations on repurchases of common stock. As of June 30, 2004, the Company had $11.4 million in trade letters of credit and had approximately $50.6 million available under the existing Bank Credit Facility for expansion and working capital purposes.

 

In connection with the Saltgrass Steak House acquisition in October 2002, the Company financed a portion of the acquisition with a $20.0 million, seven year, 5.5% note to the former owner of Saltgrass Steak House. In June 2004, the Company repaid all outstanding indebtedness under the note. Concurrently, the Company settled all contingent payments associated with the future financial performance of the Saltgrass restaurants resulting in recording goodwill of approximately $11.0 million.

 

The Company assumed an $11.4 million, 9.39% non-recourse, long-term mortgage note payable, due May 2010, in connection with an asset purchase in March 2003. Principal and interest payments aggregate $102,000 monthly.

 

    

June 30,

2004


   

December 31,

2003


 

$200.0 million Bank syndicated credit facility, Libor + 1.875%, interest only, due October 2007

   $ 138,000,000     $ 122,000,000  

$150.0 million Senior Notes, average 5.95%, interest only, maturities ranging from October 2009 to October 2013

     150,000,000       150,000,000  

$20.0 million Seller Note 5.5% interest, quarterly principal and interest payments of $653,386, due 2009

     —         18,055,321  

Non-recourse long-term note payable, 9.39% interest, principal and interest aggregate $101,762 monthly, due May 2010

     11,246,958       11,318,664  

Other long-term notes payable with various interest rates, principal and interest paid monthly

     198,703       325,110  
    


 


       299,445,661       301,699,095  

Less current portion

     (228,496 )     (1,963,189 )
    


 


Long-term portion

   $ 299,217,165     $ 299,735,906  
    


 


 

9


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LANDRY’S RESTAURANTS, INC.

 

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

4. CONTINGENCIES

 

Building Commitments

 

As of June 30, 2004, the Company had future development, land purchases and construction commitments anticipated to be expended within the next twelve months of approximately $11.1 million, including completion of construction on certain new restaurants. In connection with the Galveston convention center development and related management contract, the Company guaranteed certain construction cost overruns and operating losses, if any, subject to certain rights of reimbursement. Under the agreements, the Company has the right to one-half of any profits generated by the operation of the convention center.

 

In 2003, the Company purchased from the City of Galveston the Flagship Hotel and Pier, subject to an existing lease. Under this agreement, upon termination of the existing lease, the Company has committed to spend an additional $15 million to transform the hotel and pier into a turn of the century style Inn and restaurant entertainment complex.

 

During November 2003, the Company purchased two casual Italian restaurants. Under the purchase agreement, the Company is committed to building an additional five casual Italian restaurants by the end of 2008, or make certain payments in lieu of development.

 

Loan Guarantee

 

Rainforest Cafe, the Company’s wholly-owned subsidiary, has guaranteed a portion of the bank borrowings of one of its foreign affiliates in which the Company owns a 20% interest. The remaining outstanding loan balance is approximately $300,000.

 

Litigation and Claims

 

In January 2002, Rainforest Cafe 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 the Company, if any, cannot be predicted.

 

10


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LANDRY’S RESTAURANTS, INC.

 

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

On July 31, 2002, and subsequently amended, 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 were 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 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. The Company does not believe that the outcome of any of these matters will have a material adverse effect on its 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 the Company had been determined using the alternative accounting method based on the fair value prescribed by SFAS No. 123.

 

    

Three Months Ended

June 30,


   

Six Months Ended

June 30,


 
     2004

    2003

    2004

    2003

 

Net income, as reported

   $ 21,799,000     $ 16,906,000     $ 33,161,000     $ 25,026,000  

Less: stock based compensation expense using fair value method, net of tax

     (380,000 )     (530,000 )     (620,000 )     (1,060,000 )

Proforma net income

   $ 21,419,000     $ 16,376,000     $ 32,541,000     $ 23,966,000  
    


 


 


 


Earnings per share:

                                

Basic, as reported

   $ 0.79     $ 0.61     $ 1.20     $ 0.91  

Basic, proforma

   $ 0.78     $ 0.59     $ 1.18     $ 0.87  

Diluted, as reported

   $ 0.77     $ 0.60     $ 1.16     $ 0.89  

Diluted, proforma

   $ 0.75     $ 0.58     $ 1.14     $ 0.85  

 

In June 2003, the Company established an equity incentive plan pursuant to which stock options or restricted stock of the Company may be granted to eligible employees of the Company for an aggregate of 700,000 shares of common stock of the Company. The Compensation Committee of the Board of Directors determines the number of shares, prices, and vesting schedule of individual grants. In addition, the Company will issue pursuant to an employment agreement, over its five year term, 500,000 shares of restricted stock, with 10 year vest from grant date, and a minimum of 800,000 stock options. In August 2003, 100,000 restricted common shares were issued subject to vesting on the tenth anniversary. In February 2004, an additional 100,000 restricted common shares were issued with similar vesting terms. The unamortized balance of non-vested restricted common stock grants is reflected as deferred compensation included in stockholders’ equity and the related expense is amortized over the vesting periods.

 

11


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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 June 30, 2004, we operated 294 restaurants.

 

During 2003, we completed a series of relatively small acquisitions, including: separate acquisitions of several well-known individual upscale Houston restaurants; Ocean Journey (a 12 acre aquarium complex in Denver, Colorado); the Holiday Inn on the Beach in Galveston, Texas; and the Galveston Flagship Hotel (subject to an existing lease), for an aggregate cash purchase price of all such acquisitions of approximately $27.0 million, plus the assumption of an $11.4 million non-recourse long-term note payable. These acquisitions included certain future commitments.

 

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, marketing, weather conditions, and the type, number, and location of competing restaurants.

 

We have many well established competitors with greater financial resources, larger marketing and advertising budgets, 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 or promoting 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.

 

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 that strategy; competitive strengths; goals; expansion and growth of our business and operations; future commodity prices; availability of food products, materials and the effectiveness of our marketing efforts; changing demographics surrounding our restaurants; the effect of tax laws, and any changes therein; same store sales; earnings guidance; the seasonality of our business; weather and acts of God; food, labor, fuel and utilities costs; plans; references to future success as well as other statements which include words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “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, 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.

 

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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 June 30,


    Six Months
Ended June 30,


 
     2004

    2003

    2004

    2003

 

Revenues

   100.0 %   100.0 %   100.0 %   100.0 %

Cost of revenues

   28.0 %   29.2 %   28.1 %   29.3 %

Restaurant labor

   28.3 %   28.9 %   28.8 %   29.3 %

Other restaurant operating expenses (1)

   23.3 %   23.8 %   23.3 %   24.1 %
    

 

 

 

Restaurant level profit (1)

   20.4 %   18.1 %   19.8 %   17.3 %
    

 

 

 

 

(1) Excludes depreciation, amortization, asset impairment, and pre-opening expenses.

 

Three Months Ended June 30, 2004 Compared to the Three Months Ended June 30, 2003

 

Revenues increased $17,725,879, or 5.9%, from $299,890,476 to $317,616,355 for the three months ended June 30, 2004, compared to the three months ended June 30, 2003. The total increase/change in revenue is comprised of the following approximate amounts: 2004 restaurant openings – increase $24.0 million; restaurant closings – decrease $4.0 million; same store sales (locations open all of first quarter 2004 and 2003) – increase $3.0 million, and the remainder of the difference is attributable to the change in sales for stores not open a full comparable period. The total number of units open as of June 30, 2004 and 2003 were 294 and 279, respectively.

 

As a primary result of increased revenues, cost of revenues increased $1,661,233, or 1.9%, from $87,447,413 to $89,108,646 in the three months ended June 30, 2004, compared to the same period in the prior year. Cost of revenues as a percentage of revenues for the three months ended June 30, 2004, decreased to 28.0%, from 29.2% in 2003. The decrease in cost of revenues as a percentage of revenues is primarily due to a slight increase in menu prices and a shift in product mix to lower cost products.

 

Restaurant labor expenses increased $3,165,038, or 3.7%, from $86,653,823 to $89,818,861 in the three months ended June 30, 2004, 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 June 30, 2004, decreased to 28.3% from 28.9% in 2003, principally due to increased productivity and a same store sales increase which decreased labor costs as a percentage of revenues.

 

Other restaurant operating expenses increased $2,546,004, or 3.6%, from $71,370,068 to $73,916,072 in the three months ended June 30, 2004, 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 23.3% in 2004 from 23.8% in 2003 as a primary result of reduced advertising expenditures and increased leverage on higher sales.

 

General and administrative expenses increased $2,930,210, or 24.4%, from $12,009,557 to $14,939,767 in the three months ended June 30, 2004, compared to the same period in the prior year, and increased as a percentage of revenues to 4.7% in 2004 from 4.0% in 2003. The increase was a result of increased revenue and personnel required to support our operations and increased accruals related to employee bonuses.

 

Restaurant pre-opening expenses were $1,744,627 for the three months ended June 30, 2004, compared to $1,549,941 for the same period in the prior year. The increase for the 2004 period was attributable to an increase in the number of units opened in the second quarter and early third quarter 2004 as compared to the same period in 2003.

 

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Depreciation and amortization expense increased $1,520,411, or 12.5%, from $12,166,806 to $13,687,217 in the three months ended June 30, 2004, compared to the same period in the prior year. The increase for 2004 was due to the addition of new restaurants and equipment and restaurant acquisitions.

 

The increase in net interest expense in the three months ended June 30, 2004, as compared to the prior year, is primarily due to an increase in interest rates.

 

Provision for income taxes increased by $2,198,290 to $9,793,580 in the three months ended June 30, 2004 from $7,595,290 in 2003 primarily due to changes in our pre-tax income.

 

Six Months Ended June 30, 2004 Compared to the Six Months Ended June 30, 2003

 

Revenues increased $43,820,322, or 8.0%, from $549,472,520 to $593,292,842 for the six months ended June 30, 2004, compared to the six months ended June 30, 2003. The total increase/change in revenue is comprised of the following approximate amounts: 2004 restaurant openings – increase $46 million; restaurant closings – decrease $7 million; same store sales (locations open all of first quarter 2004 and 2003) – increase $10 million; extra day due to leap year – increase $3 million; and the remainder of the difference is attributable to the change in sales for stores not open a full comparable period. The total number of units open as of June 30, 2004 and 2003 were 294 and 279, respectively.

 

As a primary result of increased revenues, cost of revenues increased $6,058,863, or 3.8%, from $160,769,295 to $166,828,158 in the six months ended June 30, 2004, compared to the same period in the prior year. Cost of revenues as a percentage of revenues for the six months ended June 30, 2004, decreased to 28.1%, from 29.3% in 2003. The decrease in cost of revenues as a percentage of revenues is primarily due to a slight increase in menu prices and a shift in product mix to lower cost products.

 

Restaurant labor expenses increased $9,549,839, or 5.9%, from $161,201,385 to $170,751,224 in the six months ended June 30, 2004, 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 six months ended June 30, 2004, decreased to 28.8% from 29.3% in 2003, principally due to increased productivity and a same store sales increase which decreased labor costs as a percentage of revenues.

 

Other restaurant operating expenses increased $5,760,469, or 4.3%, from $132,569,252 to $138,329,721 in the six months ended June 30, 2004, 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 23.3% in 2004 from 24.1% in 2003 as a primary result of reduced advertising expenses and increased leverage due to higher sales.

 

General and administrative expenses increased $7,665,347, or 32.4%, from $23,681,550 to $31,346,897 in the six months ended June 30, 2004, compared to the same period in the prior year, and increased as a percentage of revenues to 5.3% in 2004 from 4.3% in 2003. The increase was a result of increased revenue and personnel required to support our operations and increased accruals related to employee bonuses.

 

Restaurant pre-opening expenses were $3,598,671 for the six months ended June 30, 2004, compared to $5,217,528 for the same period in the prior year. The decrease for the 2004 period was attributable to a decrease in the number of units opened in 2004 as compared to 2003.

 

Depreciation and amortization expense increased $3,262,396, or 14.0%, from of $23,361,848 to $26,624,244 in the six months ended June 30, 2004, compared to the same period in the prior year. The increase for 2004 was due to the addition of new restaurants and equipment and restaurant acquisitions.

 

Asset impairment expense for 2004 relates to an under-performing unit in the Joe’s Crab Shack division. The asset impairment expense in 2003 related to a closure in the Crab House division. Assets impaired are primarily leasehold improvements and to a lesser extent, equipment.

 

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The following is a summary of related charges and expenses:

 

    

Three Months

Ended June 30,


  

Six Months

Ended June 30,


     2004

   2003

   2004

   2003

Asset Impairment

   $ —      $ 1,543,219    $ 1,708,654    $ 1,543,219

Accrued Estimated Lease Termination Payments

                           

Estimated Severance Costs

     —        —        —        —  
    

  

  

  

     $ —      $ 1,543,219    $ 1,708,654    $ 1,543,219

 

The increase in net interest expense in the six months ended June 30, 2004, as compared to the prior year, is primarily due to a higher average interest rate on the Company’s long-term debt.

 

Provision for income taxes increased by $3,654,734 to $14,898,523 in the six months ended June 30, 2004 from $11,243,789 in 2003 primarily due to changes in pre-tax income.

 

Liquidity and Capital Resources

 

During last year, we increased total borrowing capacity to $350.0 million through the closing of two separate financing agreements, which allow for increased financing permitted under the existing agreements. The terms of these agreements are outlined below. With the financing, we intend to continue our planned growth. We plan to fund 2004 capital expenditures and any additional restaurant or business acquisitions out of proceeds from existing credit facilities. We expect to spend approximately $100.0 million on capital expenditures in 2004, on opening approximately 18 to 20 restaurants, refurbishments of existing restaurants and other projects. As a result of our tax loss 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, which will therefore provide additional cash flow for funding our business activities and debt service. As of June 30, 2004, we had approximately $50.6 million available under our existing credit facilities for expansion and working capital purposes.

 

In October 2003, we refinanced our bank credit facility by issuing long-term notes totaling $150.0 million through a private placement of debt (the “Senior Notes”) and amended and extended the existing bank credit facility to a four-year $200.0 million revolving credit facility (the “Bank Credit Facility”). The Senior Notes mature in October 2009 through October 2013, and the Bank Credit Facility matures in October 2007. Interest on the Senior Notes is paid quarterly at an average rate of 5.95%. Interest on the Bank Credit Facility is payable monthly or quarterly at Libor or the bank’s base rate plus a financing spread. Our financing spread is presently 1.875% for Libor borrowings and .375% for base rate borrowings. The Senior Notes and Bank Credit Facility are secured by stock of our subsidiaries, and governed by certain financial covenants, including maximum leverage ratio, maximum indebtedness, net worth, and fixed charge ratio tests. The Bank Credit Facility additionally provides for limitations on annual capital expenditures to prescribed amounts, maximum annual cash dividends and limitations on repurchases of common stock. The Bank Credit Facility also provides the ability to add an additional $25.0 million of capacity within the facility and other permitted indebtedness.

 

A wholly-owned subsidiary of ours 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 under this note aggregate $102,000 monthly.

 

During the six months ended June 30, 2004, we repurchased $7.9 million of common stock. In September 2003, we authorized an open market stock repurchase program for $60.0 million. We expect to make opportunistic repurchases of our common stock.

 

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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, 2004.

 

As a primary result of establishing long-term borrowings, the Company will incur higher interest expense in the future. However, we have mitigated a portion of the higher immediate interest expense by entering into two fair value hedges aggregating notional amounts of $75.0 million, whereby we swapped higher fixed interest rates of the Senior Notes for floating interest equal to three (3)-month Libor plus 1.71%. The estimated fair value of these swaps at June 30, 2004 was $2.0 million, which is included in other assets on the condensed consolidated balance sheet at June 30, 2004. Our interest rate swap agreements qualify for treatment under the “shortcut method” under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” The changes in fair value of the swaps are offset by a like adjustment to other long-term liabilities. No hedge ineffectiveness is assumed.

 

Since April 2000, we have paid an annual $0.10 per share dividend, declared and paid in quarterly amounts. In April 2004, the annual dividend amount was increased to $0.20 per share and will be paid in quarterly amounts.

 

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 opened 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 on a property by property basis 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.

 

Recent Accounting Pronouncements

 

The Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 46, “Consolidation of Variable Interest Entities” in January 2003. This interpretation provides guidance on the identification of, and financial reporting for, variable interest entities. Variable interest entities are entities that lack the characteristics of a controlling financial interest or lack sufficient equity to finance its activities without additional subordinated financial support. FIN 46 requires a company to consolidate a variable interest entity if that company is obligated to absorb the majority of the entity’s expected losses or entitled to receive the majority of the entity’s residual returns, or both. FIN 46 is applicable immediately to variable interest entities created after January 31, 2003. For all variable interest entities created prior to February 1, 2003, FIN 46 is applicable to periods beginning after December 15, 2003. FIN 46 was subsequently revised in December 2003 by FIN 46(R). We do not have any variable interest entities as defined by FIN 46; therefore, there is no impact on our consolidated financial statements.

 

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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 food commodity prices, restaurant labor costs, including expected future increases in federal minimum wages, land and construction costs could adversely affect our profitability and ability to expand. Food commodity prices, including beef costs and shrimp, are expected to increase in 2004.

 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to a variety of market risks including risks related to potential adverse changes in interest rates and commodity prices. We actively monitor exposure to market risk and continue to develop and utilize appropriate risk management techniques. We do not use derivative financial instruments for trading or to speculate on changes in commodity prices.

 

Interest Rate Risk

 

Total debt at June 30, 2004, included $213 million of floating-rate debt attributed to bank borrowings at an average interest rate of 4.2%. The floating-rate debt was refinanced in October 2003 by a combination of fixed and floating rate debt. As a result, our annual interest cost in 2004 will fluctuate based on short-term interest rates and will increase as a result of the refinancing of our obligations on a long-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 $0.9 million annually based on the floating-rate debt outstanding at June 30, 2004, however, there are no assurances that possible rate changes would be limited to such amounts.

 

ITEM 4. Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a – 15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2004, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer conclude that our disclosure controls and procedures were effective as of June 30, 2004.

 

During the six months ended June 30, 2004, there was no change in our internal control over financial reporting (as defined in Rule 13a – 15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

In January 2002, Rainforest Cafe 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 the Company, if any, cannot be predicted.

 

In July 31, 2002, and subsequently amended, 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, 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 the Company 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 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 4. Submission of Matters to a Vote of Security Holders

 

On June 3, 2004, the Company held its 2004 Annual Meeting of Stockholders. At such time, the election of directors was submitted to a vote of stockholders through the solicitation of proxies. The following persons were elected to serve on the Board of Directors until the 2005 Annual Meeting of Stockholders or until their successors have been duly elected and qualified. The Directors each received at least a minimum of 22,526,289 votes: Tilman J. Fertitta, Steven L. Scheinthal, Paul S. West, Michael S. Chadwick, Michael Richmond, Joe Max Taylor, and Kenneth Brimmer. Paul West subsequently resigned from the Board of Directors.

 

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ITEM 6. Exhibits and Reports on Form 8-K

 

(a) Exhibits

 

The following Exhibits are set forth herein commencing on page 21:

 

3.1    —Amendment to Bylaws of Landry’s Restaurants, Inc.
31.1    —Certification pursuant to Section 302 with respect to quarterly report of Landry’s Restaurants, Inc.
31.2    —Certification pursuant to Section 302 with respect to quarterly report of Landry’s Restaurants, Inc.
32    —Certification pursuant to Section 906 with respect to quarterly report of Landry’s Restaurants, Inc.

 

(b) Reports on Form 8-K

 

  On April 28, 2004 we furnished an 8-K Report, reporting on Item 12, on press release announcing financial results for the first quarter ended March 31, 2004. Such report was not “filed” with the Securities and Exchange Commission.
  On May 7, 2004 we filed an 8-K Report, reporting on Item 4, announcing a change in the Company’s Certifying accountant.
  On June 4, 2004 we filed an 8-K Report, reporting on Item 6, announcing the resignation of Paul S. West from his position as Chief Financial Officer and Director.
  On June 8, 2004 we furnished an 8-K Report, reporting on Item 12, on press release announcing upcoming scheduled presentations.
  On June 14, 2004 we filed an 8-K Report, reporting on Item 5, announcing the promotion of Rick Liem to Chief Financial Officer.
  On June 15, 2004 we furnished an 8-K Report, reporting on Item 12, on press release announcing an upcoming presentation.

 

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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/ Rick Liem

Rick Liem

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

Dated: August 9, 2004

 

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