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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, 2001.
Commission file number 000-22150
LANDRY'S RESTAURANTS, INC.
(Exact name of the registrant as specified in its charter)
DELAWARE 74-00405386
(State or other jurisdiction of (I.R.S. Employer
incorporation of 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 [_] 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 8, 2001 THERE WERE
21,498,352 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............................................. 2
Condensed Unaudited Consolidated Balance Sheets at September 30, 2001
and December 31, 2000............................................... 3
Unaudited Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2001 and September 30, 2000.............. 4
Condensed Unaudited Consolidated Statement of Stockholders' Equity
for the Nine Months Ended September 30, 2001........................ 5
Condensed Unaudited Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2001 and September 30, 2000......... 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....... 15
PART II. OTHER INFORMATION
Item 1 Legal Proceedings................................................ 16
Signatures.............................................................. 17
LANDRY'S RESTAURANTS, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
We have prepared the accompanying 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 generally accepted accounting principles in the United
States for complete financial statements. In our opinion, all adjustments
necessary for fair presentation of our results of operations, financial
positions and changes for the periods presented have been included.
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1993, as amended (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which are intended to be covered by safe harbors created
thereby. Stockholders are cautioned that all forward-looking statements involve
risks and uncertainty, including without limitation, our ability to continue
expansion strategy, our ability to make projected capital expenditures, as well
as general market conditions, competition, and pricing. In addition, there is
no assurance that we will be able to smoothly integrate Rainforest Cafe
operations and business, or whether same store sales declines of Rainforest
Cafe units can be mitigated or can achieve projected financial results. All
statements, other than statements of historical facts, included or incorporated
by reference in this report that address activities, events or developments
that we expect or anticipate will or may occur in the future, including such
things as 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, 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 constitute forward-looking
statements. Although we believe that the assumptions underlying the forward-
looking statements contained herein are reasonable, any of the assumptions
could be inaccurate and, therefore, there can be no assurance 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
our representation or that of any other person that our objectives and plans
will be achieved.
2
LANDRY'S RESTAURANTS, INC.
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
September December 31,
30, 2001 2000
ASSETS ------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 4,021,270 $ 26,159,525
Accounts receivable--trade and other............... 8,699,027 10,653,387
Inventories........................................ 24,098,175 34,752,119
Deferred taxes..................................... 3,121,766 2,671,766
Other current assets............................... 19,064,014 12,302,393
------------ ------------
Total current assets............................. 59,004,252 86,539,190
------------ ------------
PROPERTY AND EQUIPMENT, net.......................... 584,879,212 559,737,798
GOODWILL, net........................................ 2,473,240 2,575,625
DEFERRED TAXES -- 8,501,521
OTHER ASSETS, net.................................... 5,875,745 6,520,641
------------ ------------
Total assets..................................... $652,232,449 $663,874,775
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................... $ 34,367,700 $ 40,192,661
Accrued liabilities................................ 55,836,239 85,943,990
Current portion of long-term notes................. -- 59,963
------------ ------------
Total current liabilities........................ 90,203,939 126,196,614
------------ ------------
LONG-TERM DEBT....................................... 151,000,000 155,000,000
DEFERRED TAXES....................................... 2,162,799 --
OTHER LONG-TERM LIABILITIES.......................... 17,163,014 18,125,503
------------ ------------
Total liabilities................................ 260,529,752 299,322,117
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, 60,000,000 shares
authorized, 21,969,355 and 21,498,352 shares,
respectively, issued and outstanding, net of
treasury shares................................... 219,694 214,984
Additional paid-in capital......................... 304,725,570 301,225,712
Retained earnings.................................. 86,757,433 63,111,962
------------ ------------
Total stockholders' equity....................... 391,702,697 364,552,658
------------ ------------
Total liabilities and stockholders' equity....... $652,232,449 $663,874,775
============ ============
The accompanying notes are an integral part of these condensed unaudited
consolidated financial statements.
3
LANDRY'S RESTAURANTS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUES................ $202,786,013 $133,108,129 $586,156,439 $378,101,396
OPERATING COSTS AND
EXPENSES:
Cost of revenues...... 59,836,314 39,691,093 173,772,529 114,967,754
Restaurant labor...... 57,637,840 36,517,291 168,327,066 104,753,662
Other restaurant
operating expenses... 48,666,417 29,810,287 144,005,590 86,406,771
General and
administrative
expenses............. 10,204,974 7,309,821 28,901,774 18,954,114
Pre-opening expenses.. 453,115 288,186 2,037,023 2,058,684
Depreciation and
amortization......... 8,662,534 6,341,232 25,806,443 18,933,621
Special charge........ -- -- -- 2,000,000
------------ ------------ ------------ ------------
Total operating
costs and
expenses........... 185,461,194 119,957,910 542,850,425 348,074,606
------------ ------------ ------------ ------------
OPERATING INCOME........ 17,324,819 13,150,219 43,306,014 30,026,790
OTHER (INCOME) EXPENSE:
Interest (income)
expense, net......... 2,049,108 1,803,752 7,432,210 4,180,581
Other, net............ (5,275) (23,372) (139,243) 277,747
Total other (income)
expense............ 2,043,833 1,780,380 7,292,967 4,458,328
------------ ------------ ------------ ------------
INCOME BEFORE INCOME
TAXES.................. 15,280,986 11,369,839 36,013,047 25,568,462
PROVISION FOR INCOME
TAXES.................. 4,737,381 3,524,650 11,164,320 8,423,175
------------ ------------ ------------ ------------
NET INCOME.............. $ 10,543,605 $ 7,845,189 $ 24,848,727 17,145,287
============ ============ ============ ============
EARNINGS PER SHARE
INFORMATION:
BASIC--
Net income per common
share................ $ 0.48 $ 0.34 $ 1.15 $ 0.71
Weighted average
number of common
shares outstanding... 21,920,000 23,000,000 21,700,000 24,000,000
DILUTED--
Net income per common
share................ $ 0.46 $ 0.34 $ 1.10 $ 0.71
Weighted average
number of common
shares and
equivalents
outstanding.......... 22,850,000 23,200,000 22,500,000 24,200,000
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
-------------------- Paid-In Retained
Shares Amount Capital Earnings Total
---------- -------- ------------ ----------- ------------
Balance, December 31,
2000................... 21,498,352 $214,984 $301,225,712 $63,111,962 $364,552,658
Net income.............. -- -- -- 24,848,727 24,848,727
Dividends paid.......... -- -- -- (1,620,113) (1,620,113)
Purchase of common stock
for treasury........... (2,616) (26) (41,791) (8,750) (50,567)
Exercise of stock
options and income tax
benefit................ 473,619 4,736 3,541,649 425,607 3,971,992
---------- -------- ------------ ----------- ------------
Balance, September 30,
2001................... 21,969,355 $219,694 $304,725,570 $86,757,433 $391,702,697
========== ======== ============ =========== ============
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,
--------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 24,848,727 $ 17,145,287
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization.................... 25,806,443 18,933,621
Change in assets and liabilities-net and other... (15,565,615) 16,587,305
------------ ------------
Total adjustments................................ 10,240,828 35,520,926
------------ ------------
Net cash provided by operating activities...... 35,089,555 52,666,213
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions................. (55,043,552) (58,542,963)
------------ ------------
Net cash used in investing activities.......... (55,043,552) (58,542,963)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options.......... 3,546,385 --
Borrowings (payments) under credit line, net..... (4,059,963) 12,931,380
Repurchase of common stock for treasury (50,567) (20,055,909)
Dividends paid (1,620,113) (1,208,880)
------------ ------------
Net cash provided by (used in) financing
activities (2,184,258) (8,333,409)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... (22,138,255) (14,210,159)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD... 26,159,525 22,977,666
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......... $ 4,021,270 $ 8,767,507
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments during the period for--
Income taxes.................................... $ 2,663,000 $ 1,700,000
Interest........................................ $ 8,794,000 $ 5,169,000
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 and The Crab House. In addition, the Company owns and operates domestic
and licenses international rainforest themed restaurants under the trade name
Rainforest Cafe. Rainforest Cafe, Inc. ("Rainforest Cafe"), a casual dining
restaurant chain, was acquired in 2000.
The Company is also the developer and operator of the Kemah Boardwalk,
located near Houston, Texas. The Kemah Boardwalk is a forty-acre waterfront
restaurant development including seven restaurants, a boutique hotel, retail
shops, amusement attractions, and a marina.
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, 2000. The financial statements include all adjustments 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, 2000, consolidated financial statements
filed with the Securities and Exchange Commission on Form 10-K.
The Company early adopted, as of March 31, 2001, newly released guidance for
accounting for certain sales incentives and revised the recognition and income
statement classification for certain discounts, certificates, and offers. There
were no reclassifications to prior financial statements as amounts were not
deemed material, and the change had no impact on reported earnings.
In June 2000 two new financial accounting standards were issued addressing
accounting for business combinations, goodwill and other intangible assets.
Management does not believe either pronouncement will have a material effect on
the Company's financial statements.
2. ACCRUED LIABILITIES
Accrued liabilities are comprised of the following:
September December
30, 2001 31, 2000
----------- -----------
Payroll and related costs............................. $10,971,258 $10,898,420
Rent, insurance and taxes, other than payroll and
income taxes......................................... 24,095,311 17,841,483
Store closings and special charges.................... 737,103 947,131
Accruals for Rainforest Cafe acquisition.............. 8,937,901 44,361,565
Other................................................. 11,094,666 11,895,391
----------- -----------
$55,836,239 $85,943,990
=========== ===========
The change since December 31, 2000, in accruals for the Rainforest Cafe
acquisition is due primarily to payments to former Rainforest Cafe
shareholders, termination payments to exit certain closed facilities and a
7
LANDRY'S RESTAURANTS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
non-cash reduction to estimated exit costs, and corresponding property and
equipment purchase allocations, of $4.3 million.
3. DEBT
The Company has a $200.0 million credit line from a syndicate of banks. The
credit line matures in June 2003, 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 5.5% at September 30, 2001). The Company's
financing spread is presently 2.50% for Libor, and 0.75% for base rate
borrowings, and may be decreased or increased as the Company's leverage ratio
decreases or increases over predetermined amounts. The credit line is governed
by certain financial covenants, including maximum leverage ratio, maximum
indebtedness, tangible net worth and fixed charge coverage ratio tests,
limitations of capital expenditures to prescribed amounts, maximum annual cash
dividends of $5.0 million per year, and restrictions on repurchases of common
stock. In connection with the bank syndicate's approval of the Rainforest Cafe
acquisition, certain financial covenants were amended or added, including a
permitted increase in the maximum leverage ratio through September 30, 2001,
and an additional limitation of common stock repurchases to $6.0 million until
the Company's leverage ratio is below a prescribed amount.
4. CONTINGENCIES
Class Action Litigation
Class action lawsuits were filed in June and July of 1999 against the
Company in the United States District Court for the Southern District of Texas,
Houston Division. These actions name the Company, all of its then current
executive officers and directors, and underwriters that participated in the
Company's offering of Common Stock in March 1998. Such lawsuits allege that the
defendants violated Federal securities laws during certain periods while
individually selling the Company's common stock. The plaintiffs in these
actions seek unspecified monetary damages. Although the ultimate outcome of
this matter cannot be determined at this time, the Company believes these
claims are without merit and intends to defend these claims vigorously.
Dissenters Rights Litigation
Eighty-one former shareholders (holding 4,406,655 shares) of Rainforest Cafe
common stock dissented to the merger between the Company and Rainforest Cafe.
On February 13, 2001, Rainforest Cafe sent each of the 81 dissenting
shareholders, Rainforest Cafe's estimate of its 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 made a
demand for supplemental payment based on their belief that the fair value of
each 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 will vigorously pursue the determination of fair value in
an appraisal proceeding.
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.
8
LANDRY'S RESTAURANTS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. STOCKHOLDERS' EQUITY
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,
----------------------- -----------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net Income.................... $10,543,605 $ 7,845,189 $24,848,727 $17,145,287
----------- ----------- ----------- -----------
Weighted Average Common Shares
Outstanding.................. 21,920,000 23,000,000 21,700,000 24,000,000
Dilutive Common Stock
Equivalents--Stock Options... 930,000 200,000 800,000 200,000
----------- ----------- ----------- -----------
Weighted Average Common and
Common Equivalent Shares
Outstanding--Diluted......... 22,850,000 23,200,000 22,500,000 24,200,000
=========== =========== =========== ===========
Net Income Per Share--
Diluted...................... $ 0.46 $ 0.34 $ 1.10 $ 0.71
=========== =========== =========== ===========
Net Income Per Share, Before
Special Charge............... $ 0.46 $ 0.34 $ 1.10 $ 0.76
=========== =========== =========== ===========
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, 2001, we operated 192 restaurants. In addition, we operate three limited
menu take-out service units.
On October 28, 2000, pursuant to a tender offer, we acquired approximately
60% of the outstanding common stock of Rainforest Cafe, a publicly traded
restaurant company. On December 1, 2000, we completed the 100% merger with
Rainforest Cafe. The aggregate purchase price for all outstanding shares was
approximately $70.2 million. As of September 30, 2001, we owned and operated 25
domestic and one international Rainforest Cafes and franchised 11 international
units. We own a minority equity interest in certain international franchised
units. Subsequent to the acquisition, we closed four domestic Rainforest Cafe
restaurants. We will probably close additional Rainforest Cafe restaurants
failing to meet certain minimum standards.
Revenues for substantially all Rainforest Cafe restaurants have experienced
same store sales declines for an extended period of time. Correspondingly,
comparative restaurant profitability has also declined. We are implementing
numerous changes to address the sales declines through:
. improved menu development,
. a focused general manager incentive plan,
. additional investments in improved ambiance,
. additional marketing initiatives and
. selective unit closures of restaurants that do not meet our minimum
standards.
We cannot assure you that we will successfully curtail the same store sales
declines of Rainforest Cafe restaurants or that our operational and financial
plans will improve operating margins, particularly in situations where sales
declines continue.
As a result of the terrorist attacks on the United States on September 11,
2001, a number of our restaurants were negatively affected. Our Rainforest
Cafes and other restaurants in major tourist areas saw an immediate decline in
same-store sales as customers initially curtailed their travel and dining out
activities. We believe that due to the seasonality and lower average sales of
our restaurants in the 4th quarter, the Company's results will be negatively
affected by a few cents per share.
These revenue declines have begun to lessen in the fourth quarter, as people
appear to be adjusting to the change in airplane travel schedules, security and
safety. However, we cannot predict at this time what lingering effects the
terrorists' attack will have on our business. Such affects could be seen in our
revenue, liquidity, ability to access the capital markets, and compliance with
our bank credit facilities.
Our operations may be impacted by changes in federal and state taxes and
other federal and state governmental policies which include many possible
factors such as:
. the level of minimum wages,
. the deductibility of business and entertainment expenses,
. levels of disposable income and unemployment and
. national and regional economic growth.
10
There are various federal, state and local governmental initiatives to
increase the level of minimum wages which would increase our labor costs.
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.
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, ability to make projected
capital expenditures, as well as general market conditions, competition, and
pricing. We cannot assure you that we will be able to smoothly integrate
Rainforest Cafe operations and business, or whether same store sales declines
of Rainforest Cafe units can be mitigated or can achieve projected financial
results. 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,
. 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 our 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.
11
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 Nine Months
Ended Ended
September September
30, 30,
------------ ------------
2001 2000 2001 2000
----- ----- ----- -----
Revenues............................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................................... 29.5% 29.8% 29.6% 30.4%
Restaurant labor.................................... 28.4% 27.4% 28.7% 27.7%
Other restaurant operating expenses (1)............. 24.0% 22.4% 24.6% 22.9%
----- ----- ----- -----
Restaurant level profit (1)......................... 18.1% 20.4% 17.1% 19.0%
===== ===== ===== =====
- --------
(1) Excludes depreciation, amortization and pre-opening expenses.
Three Months Ended September 30, 2001 Compared to the Three Months Ended
September 30, 2000
Revenues increased $69,677,884, or 52.3%, from $133,108,129 to $202,786,013
for the three months ended September 30, 2001, compared to the three months
ended September 30, 2000. Revenues from new restaurant openings, a same store
sales increase of 0.5% for our seafood restaurants, and the inclusion of
revenues from Rainforest Cafe restaurants in the 2001 period primarily
attributed to the increase in revenues. However, as noted above, revenues
declined since the terrorist attacks on September 11, 2001, and we cannot
determine the short and long-term effects of the attacks on our on-going
business.
As a primary result of increased revenues, cost of revenues increased
$20,145,221, or 50.8%, from $39,691,093 to $59,836,314 in the three months
ended September 30, 2001, compared to the same period in the prior year. Cost
of revenues as a percentage of revenues for the three months ended September
30, 2001, decreased to 29.5%, from 29.8% in 2000. The decrease in cost of
revenues as a percentage of revenues primarily reflects the inclusion of
Rainforest Cafe restaurants with lower cost of revenues percentages, menu
changes and lower product costs in 2001 as compared to 2000. We may continue to
experience declines in comparative cost of sales percentages due to favorable
cost and pricing comparisons in 2002.
Restaurant labor expenses increased $21,120,549 or 57.8%, from $36,517,291
to $57,637,840 in the three months ended September 30, 2001, 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, 2001, increased to 28.4% from 27.4% in 2000. The inclusion
of the Rainforest Cafe units, which generally incur higher labor costs
primarily caused the increase in labor expense as a percentage of revenues.
Other restaurant operating expenses increased $18,856,130, or 63.3%, from
$29,810,287 to $48,666,417 in the three months ended September 30, 2001,
compared to the same period in the prior year, principally as a result of
increased revenues. Such expenses increased as a percentage of revenues to
24.0% in 2001 from 22.4% in 2000, as a primary result of the inclusion of
Rainforest Cafe restaurants with higher occupancy expenses, and slight
percentage increases in utility and advertising costs.
General and administrative expenses increased $2,895,153, or 39.6%, from
$7,309,821 to $10,204,974 in the three months ended September 30, 2001,
compared to the same period in the prior year, and decreased as a percentage of
revenues to 5.0% in 2001 from 5.5% in 2000. The dollar increase resulted
primarily from increased personnel to support the Rainforest Cafe concept. The
decline of general and administrative expenses as a percentage of revenues is
the result of higher restaurant sales.
12
Depreciation and amortization expense increased $2,321,302, or 36.6%, from
$6,341,232 to $8,662,534 in the three months ended September 30, 2001, compared
to the same period in the prior year. The increase primarily occurred due to
the addition of new restaurants and equipment and the inclusion of the
Rainforest Cafe restaurants in the 2001 period.
The increase in net interest expense for the three months ended September
30, 2001, as compared to the prior year, is substantially due to increased
borrowings for the Rainforest Cafe acquisition and prior year treasury stock
purchases. Our average borrowing rate has declined by approximately 3.0% since
December 31, 2000. The change in other (income) expense, net was not deemed
material.
Provision for income taxes increased by $1,213,731 to $4,737,381 in the
three months ended September 30, 2001 from $3,524,650 in 2000 primarily due to
changes in our pre-tax income.
Nine Months Ended September 30, 2001 Compared to the Nine Months Ended
September 30, 2000
Revenues increased $208,055,043, or 55.0%, from $378,101,396 to $586,156,439
for the nine months ended September 30, 2001, compared to the nine months ended
September 30, 2000. Revenues from new restaurant openings, same store sales
increases for our seafood restaurants, and the inclusion of revenues from
Rainforest Cafe restaurants primarily attributed to the increase in revenues in
the 2001 period. However, as noted above, revenues declined since the terrorist
attacks on September 11, 2001, and we cannot determine the short and long-term
effects of the attacks on our on-going business.
As a primary result of increased revenues, cost of revenues increased
$58,804,775, or 51.1%, from $114,967,754 to $173,772,529 in the nine months
ended September 30, 2001, compared to the same period in the prior year. Cost
of revenues as a percentage of revenues for the nine months ended September 30,
2001, decreased to 29.6%, from 30.4% in 2000. The decrease in cost of revenues
as a percentage of revenues primarily reflects the inclusion of Rainforest Cafe
restaurants with lower cost of revenues percentages, menu changes and lower
product costs in 2001 as compared to 2000.
Restaurant labor expenses increased $63,573,404 or 60.7%, from $104,753,662
to $168,327,066 in the nine months ended September 30, 2001, 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, 2001, increased to 28.7% from 27.7% in 2000. The inclusion of
Rainforest Cafe units, which generally incur higher labor costs, and large
initial labor staffing and training costs incurred following the opening of the
Rainforest Cafe restaurant in Anaheim, California primarily caused the increase
in labor expense as a percentage of revenues during the nine months ended
September 30, 2001.
Other restaurant operating expenses increased $57,598,819, or 66.7%, from
$86,406,771 to $144,005,590 in the nine months ended September 30, 2001,
compared to the same period in the prior year, principally as a result of
increased revenues. Such expenses increased as a percentage of revenues to
24.6% in 2001 from 22.9% in 2000, as a primary result of the inclusion of
Rainforest Cafe restaurants with higher occupancy expenses, and slight
percentage increases in utility and advertising costs.
General and administrative expenses increased $9,947,660, or 52.5%, from
$18,954,114 to $28,901,774 in the nine months ended September 30, 2001,
compared to the same period in the prior year, and decreased as a percentage of
revenues to 4.9% in 2001 from 5.0% in 2000. The dollar increase resulted
primarily from increased personnel to support the Rainforest Cafe concept.
Depreciation and amortization expense increased $6,872,822, or 36.3%, from
$18,933,621 to $25,806,443 in the nine months ended September 30, 2001,
compared to the same period in the prior year. The increase was primarily due
to the addition of new restaurants and equipment and the inclusion of the
Rainforest Cafe restaurants in the 2001 period.
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The increase in net interest expense in the nine months ended September 30,
2001, as compared to the prior year, substantially resulted from increased
borrowings for the Rainforest Cafe acquisition and prior year treasury stock
purchases. Our average borrowing rate declined by approximately 3.0% from
December 31, 2000, to September 30, 2001. The change in other expense (income),
net was not deemed material.
Provision for income taxes increased by $2,741,145 to $11,164,320 in the
nine months ended September 30, 2001 from $8,423,175 in 2000 primarily due to
changes in our pre-tax income, offset by a reduction in the accrual rate from
34.5% to 31.0%. Effective in the third quarter of 2000, our provision for
income taxes as a percentage of income before income taxes was reduced from
34.5% to 31.0% to reflect continuing favorable Federal tax credits for tipped
employees.
Liquidity and Capital Resources
Our $200.0 million line of credit from a syndicate of banks expires in June
2003. The line of credit is available for expansion, acquisitions, share
repurchases and other general corporate purposes. At September 30, 2001, we had
$151.0 million outstanding (with availability of $49.0 million) under this
credit facility at an average interest rate of 5.5% and had cash and cash
equivalent balances aggregating approximately $4.0 million. Our average
borrowing rate declined by approximately 3.0% since December 31, 2000.
For the nine months ended September 30, 2001, we funded our capital
expenditures of $55.0 million, out of existing cash balances, cash flow from
operations and borrowings. On October 28, 2000 we completed the purchase of
approximately 60% of the outstanding common stock of Rainforest Cafe for
approximately $40.5 million through a cash tender offer. Our existing credit
facility provided the funds. We acquired the shares not tendered as of October
28, 2000 by a merger on December 1, 2000. Acquisition costs of approximately
$12.0 million was paid in 2000 and $18.0 million in 2001, was funded by
available cash balances and borrowings on our bank line of credit. These
amounts exclude the dissenting shareholders demand for supplemental payment in
excess of $3.25 per share. We believe that the Rainforest Cafe merger
consideration of $3.25 per share was not below fair value of Rainforest Cafe
and will pursue the determination of fair value in an appraisal proceeding.
We expect to spend approximately $75.0 million on capital expenditures in
2001. The capital expenditures include the remaining costs of opening seven
Joe's Crab Shack restaurants and one Rainforest Cafe restaurant in 2001,
partial construction costs on an estimated sixteen to eighteen new seafood
restaurants and a new Aquarium restaurant, which are expected to open in 2002,
remaining construction costs of the new corporate headquarters and an
additional warehouse, plus further land acquisition costs and other capital
expenditures. We have entered into an agreement to construct and operate a
convention center in the City of Galveston, Texas. The Galveston Convention
Center's estimated construction costs of approximately $25.0 million and
subsequent operating expenses will be funded not by us, but by governmental
agency bonds issued by the City of Galveston and serviced by certain hotel
occupancy taxes. In connection with the Convention Center development and
related management contract, we are obligated to purchase and donate, with a
reversionary interest, land required for use by the Galveston Convention
Center. Under the agreement, we will have the right to one-half of any profits
generated by the operation of the Convention Center.
We have purchased property, including a multi-story building, adjacent to
the new Enron Field (professional baseball park) and close to the Houston
Convention Center. The property is also near the proposed new professional
basketball arena and other major venues under development and construction in
the downtown area of Houston, Texas. We plan to renovate the existing building
into a 200-room hotel, and build a stand-alone restaurant. We expect renovation
and construction costs to be approximately $28.0 million, which would be
expended over three years.
We plan to fund 2001 capital expenditures and remaining Rainforest Cafe
acquisition costs out of existing cash balances, cash flow from operations and
availability under our existing credit facility. As a result of our
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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.
We pay an annual $0.10 per share dividend, declared and paid in quarterly
amounts.
We, from time to time, review opportunities for restaurant acquisitions,
investment in the hospitality, entertainment, 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, 2002.
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 we 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. The timing of unit
openings can and will affect quarterly results. We anticipate a decline in
revenues from the initial volumes of new units, and a decline in 2001and 2002
revenues of the majority of Rainforest Cafe restaurants, including the closure
of certain restaurant locations. We expect our seasonal results to also be
affected by the effect of the terrorist attacks on September 11, 2001 and the
resulting declines in tourist related travel and casual dining.
Impact of Inflation
We do not believe that inflation has had a significant effect on our
operations during the past several years. 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 an expected future increase in federal
minimum wages and land acquisition and construction costs could adversely
affect our profitability and our 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, 2001, included $151.0 million of floating-rate
debt attributed to a bank line of credit facility at an average interest rate
of 5.5%. As a result, our annual interest cost in 2001 and 2002 will fluctuate
based on short-term interest rates. The impact on annual cash flow of a ten
percent change in the floating rate (approximately 55 basis points) would be
approximately $831,000 annually based on the floating-rate debt outstanding at
September 30, 2001. Our financing spread, and thus aggregate borrowing costs,
can increase or decrease in relationship to our leverage ratio in accordance
with our credit agreement.
At September 30, 2001, our floating-rate debt had a book value and a fair
market value of $151.0 million. The floating-rate debt will mature in June
2003.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Class Action Litigation
Class action lawsuits were filed in June and July of 1999 against us in the
United States District Court for the Southern District of Texas, Houston
Division. These actions name us as defendants, along with all of our then
current executive officers, directors and underwriters that participated in our
offering of Common Stock in March 1998. These lawsuits allege that the
defendants violated Federal securities laws during certain periods while
individually selling our common stock. The plaintiffs in these actions seek
unspecified monetary damages. Although the ultimate outcome of this matter
cannot be determined at this time, we believe these claims are without merit
and intend to defend these claims vigorously.
Dissenters Rights Litigation
Eighty-one former shareholders (holding 4,406,655 shares) of Rainforest Cafe
common stock dissented to the merger between us and Rainforest Cafe. On
February 13, 2001, Rainforest Cafe sent each of the 81 dissenting shareholders,
Rainforest Cafe's estimate of its 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 of each share of
common stock in the former Rainforest Cafe was greater than $3.25 per share. We
believe that our estimate of fair value is correct, and that the dissenting
shareholders' estimate of fair value is significantly inflated. We will
vigorously pursue the determination of fair value in an appraisal proceeding.
General Litigation
We are subject to other legal proceedings and claims that arise in the
ordinary course of business. We do not believe that the outcome of any of those
matters will have a material adverse effect on our financial position, results
of operations or cash flows.
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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
Vice President--Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Dated: November 14, 2001
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