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 September 30, 1998.
Commission file number 000-22150
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LANDRY'S SEAFOOD RESTAURANTS, INC.
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(Exact name of the registrant as specified in its charter)
Delaware 74-0405386
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 Post Oak Blvd., Suite 1010, Houston, Texas 77056
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(Address of principal executive offices)
(713) 850-1010
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(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of November 9, 1998 there were
30,345,290 shares of $0.01 par value
common stock outstanding.
LANDRY'S SEAFOOD RESTAURANTS, INC.
INDEX
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PAGE
PART I. FINANCIAL INFORMATION NUMBER
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Item 1. Financial Statements 2
Condensed Unaudited Consolidated Balance Sheets at September 30, 1998 and
December 31, 1997 3
Condensed Unaudited Consolidated Statements of Income for the Three
Months and Nine Months ended September 30, 1998 and September 30, 1997 4
Condensed Unaudited Consolidated Statements of Stockholders' Equity
for the Nine Months Ended September 30, 1998 5
Condensed Unaudited Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and September 30, 1997 6
Notes to Condensed Unaudited Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11-16
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
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Signatures 18
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1
LANDRY'S SEAFOOD RESTAURANTS, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying condensed unaudited consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the Company, all
adjustments (consisting only of normal recurring entries) necessary for fair
presentation of the Company's results of operations, financial position and
changes therein for the periods presented have been included.
2
LANDRY'S SEAFOOD RESTAURANTS, INC.
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 1998 1997
- ------ ------------- ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 41,551,439 $ 17,234,130
Accounts receivable--trade and other 13,425,552 8,381,965
Inventory 22,564,497 28,224,551
Other current assets 10,374,368 8,361,755
------------ ------------
Total current assets 87,915,856 62,202,401
PROPERTY AND EQUIPMENT, net 414,531,663 313,341,200
GOODWILL, net of amortization of $1,217,000 and $1,120,000, respectively 2,877,197 2,933,590
OTHER ASSETS, net 4,225,364 3,804,294
------------ ------------
Total assets $509,550,080 $382,281,485
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 16,608,753 $ 18,050,183
Accrued liabilities 14,391,395 9,022,274
Income taxes payable 9,682,727 ---
Current portion of long-term notes and other obligations 78,225 71,819
------------ ------------
Total current liabilities 40,761,100 27,144,276
LONG-TERM NOTES AND OTHER OBLIGATIONS,
NON-CURRENT 25,175,218 50,234,528
DEFERRED INCOME TAXES & OTHER LIABILITIES 7,621,698 8,164,954
------------ ------------
Total liabilities 73,558,016 85,543,758
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 2,000,000 shares authorized,
-0- and 2,702 issued and outstanding, respectively - 27
Common stock, $0.01 par value, 60,000,000 shares authorized,
30,345,290 and 26,004,449 issued and outstanding, respectively 303,453 260,044
Additional paid-in capital 363,162,948 250,935,805
Retained earnings 72,525,663 45,541,851
------------ ------------
Total stockholders' equity 435,992,064 296,737,727
------------ ------------
Total liabilities and stockholders' equity $509,550,080 $382,281,485
============ ============
The accompanying notes are an integral part of these condensed unaudited
consolidated financial statements.
3
LANDRY'S SEAFOOD RESTAURANTS, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 30, September 30,
1998 1997 1998 1997
------------- ------------ ------------ -------------
REVENUES: $109,352,503 $89,807,731 $310,436,071 $235,290,982
OPERATING COSTS AND EXPENSES:
Cost of sales 32,916,061 27,592,948 93,664,137 72,190,678
Restaurant labor 29,873,491 22,958,261 81,272,949 60,374,500
Other restaurant operating expenses 23,513,687 18,755,733 65,010,389 49,444,683
Depreciation and amortization 7,134,434 4,769,967 19,908,524 11,923,349
General and administrative expenses 4,451,460 2,693,761 10,709,055 7,538,746
------------ ----------- ------------ ------------
Total operating costs and expenses 97,889,133 76,770,670 270,565,054 201,471,956
------------ ----------- ------------ ------------
OPERATING INCOME 11,463,370 13,037,061 39,871,017 33,819,026
OTHER (INCOME) EXPENSE:
Interest (income) expense, net (371,338) (251,980) (1,329,326) (1,004,930)
Other, net 250,003 (108,294) 12,277 (129,993)
------------ ----------- ------------ ------------
Total other (income) expense (121,335) (360,274) (1,317,049) (1,134,923)
------------ ----------- ------------ ------------
INCOME BEFORE INCOME TAXES 11,584,705 13,397,335 41,188,066 34,953,949
PROVISION FOR INCOME TAXES 3,996,300 4,823,036 14,204,254 12,583,416
------------ ----------- ------------ ------------
NET INCOME $ 7,588,405 $ 8,574,299 $ 26,983,812 $ 22,370,533
============ =========== ============ ============
NET INCOME PER SHARE - BASIC $0.25 $0.33 $0.93 $0.88
============ =========== ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING -
BASIC 30,350,000 25,600,000 29,117,000 25,400,000
============ =========== ============ ============
NET INCOME PER SHARE - DILUTED $0.25 $0.32 $0.91 $0.85
============ =========== ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARE AND COMMON SHARE
EQUIVALENTS OUTSTANDING - DILUTED 30,350,000 26,920,000 29,700,000 26,350,000
============ =========== ============ ============
The accompanying notes are an integral part of these condensed unaudited
consolidated financial statements.
4
LANDRY'S SEAFOOD RESTAURANTS, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Additional
----------------- --------------------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings Total
------- ------- ---------- --------- ------------- ----------- ------------
Balance, December 31, 1997 2,702 $27 26,004,449 $260,044 $250,935,805 $45,541,851 $296,737,727
Net income -- -- -- -- -- 26,983,812 26,983,812
Exercise of stock options
and income tax benefit -- -- 527,189 5,272 9,954,053 -- 9,959,325
Conversion of preferred
stock into common stock (2,702) (27) 2,702 27 -- -- --
Issuance of common stock,
net of offering costs -- -- 3,810,950 38,110 102,273,090 -- 102,311,200
------- ------ ---------- -------- ----------- ---------- -----------
Balance, September 30, 1998 -- $ -- 30,345,290 $ 303,453 $363,162,948 $72,525,663 $435,992,064
======= ====== ========== ========= ============ =========== ============
The accompanying notes are an integral part of these condensed unaudited
consolidated financial statements.
5
LANDRY'S SEAFOOD RESTAURANTS, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
-------------------------------
September 30,
1998 1997
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 26,983,812 $ 22,370,533
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation and amortization 19,908,524 11,923,349
Change in assets and liabilities-net and other 11,890,339 16,475,394
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Total adjustments 31,798,863 28,398,743
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Net cash provided by operating activities 58,782,675 50,769,276
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions (118,101,272) (107,272,447)
Other assets, including goodwill (553,597) (817,160)
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Net cash used in investing activities (118,654,869) (108,089,607)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable and other long-term obligations (32,552,904) (141,497)
Borrowings on notes payable 7,500,000 15,000,000
Net proceeds from sale of common stock 102,273,090 ---
Proceeds from exercise of stock options 6,969,317 7,079,395
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Net cash provided by financing activities 84,189,503 21,937,898
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 24,317,309 (35,382,433)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 17,234,130 57,267,986
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 41,551,439 $ 21,885,553
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash payments during the period for--
Interest $ 1,512,000 $ 290,000
Income taxes $ 1,817,000 $ 421,000
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
6
LANDRY'S SEAFOOD RESTAURANTS INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The financial statements included herein have been prepared by the Company
without audit, except for the consolidated balance sheet as of December 31,
1997. The financial statements include all adjustments, consisting of normal,
recurring adjustments and accruals, which the Company considers necessary for
fair presentation of its financial position and results of operations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. This information is contained in the Company's December
31, 1997, consolidated financial statements filed with the Securities and
Exchange Commission on Form 10-K.
Cash and Cash Equivalents
For purposes of the condensed statements of cash flows, the Company considers
all highly liquid investments with original maturities of three months or less
to be cash equivalents.
Goodwill and Non-Compete Agreements
Goodwill and non-compete agreements are amortized over 30 years and 15 years
(or the life of the related agreement), respectively.
Earnings per Share
Net income per common share has been computed in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." Basic EPS
is computed by dividing net income by the weighted average number of shares of
common stock outstanding during the year. Diluted EPS is computed using the
average share price for the period in all cases when applying the treasury stock
method to potentially dilutive outstanding options.
7
LANDRY'S SEAFOOD RESTAURANTS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Principles
In April 1998 the American Institute of Certified Public Accountants issued a
new accounting standard under Statement of Position 98-5 "Reporting on the Costs
of Start-Up Activities". This new accounting standard, upon adoption, requires
Companies to expense pre-opening costs as incurred and to expense previously
capitalized pre-opening costs as a cumulative effect of a change in accounting
principle. The Company may adopt this new accounting standard in the fourth
quarter of 1998, or in the first quarter of 1999. At September 30, 1998,
unamortized pre-opening costs were $6,263,000, which balances at the date of
adoption will be expensed.
2. Accounts Receivable Trade and Other
Accounts receivable at September 30, 1998 includes an estimated $5,065,000
recoverable from an insurance company related to property damage and business
interruption claims during 1998. Revenues for the three and nine months ended
September 30, 1998 include an estimated $525,000 and $925,000, respectively,
related to business interruption claims during 1998. The property damage and
business interruption claims relate to a restaurant destroyed by fire in
February 1998, and partial damage to six of the Company's restaurants caused by
Tropical Storm Frances hitting the Texas Gulf Coast in September 1998. Two of
the six restaurants damaged by the storm remained temporarily closed at
September 30, 1998. The Company expects to collect the amounts recoverable from
the insurance company by the end of the first quarter of 1999.
3. Accrued Liabilities
Accrued liabilities are comprised of the following:
September 30, 1998 December 31, 1997
------------------ -----------------
Payroll and related costs $ 4,800,343 $2,166,035
Deferred and state income taxes 675,000 974,279
Taxes, other than payroll and income taxes 5,117,732 4,001,719
Other 3,798,320 1,880,241
----------- ----------
$14,391,395 $9,022,274
=========== ==========
4. Debt
The Company has a $125 million unsecured credit facility from a syndicate of
banks which expires in June 2000, and is available for expansion, acquisitions
and general corporate purposes. Interest on the credit facility is generally
payable quarterly at the Eurodollar rate plus 0.6% or the bank's base rate. The
credit facility is governed by certain financial covenants, including minimum
8
LANDRY'S SEAFOOD RESTAURANTS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
tangible net worth, a maximum leverage ratio and a minimum fixed charge coverage
ratio. At September 30, 1998 the Company had $25,000,000 outstanding under this
credit facility at an approximate interest rate of 6.3%.
5. Stockholders' Equity
In March 1998, the Company completed a public offering of 3,810,950 shares of
the Company's Common Stock. Net proceeds of the common stock offering, of
approximately $102,400,000, has been used to repay outstanding bank loans,
finance expansion and for general corporate purposes.
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,
1998 1997 1998 1997
---- ---- ---- ----
Net Income................................... $ 7,588,405 $ 8,574,299 $26,983,812 $22,370,533
=========== =========== =========== ===========
Weighted Average Common Shares Outstanding... 30,350,000 25,600,000 29,117,000 25,400,000
Dilutive Common Stock Equivalents -- Stock
Options..................................... 0 1,320,000 583,000 950,000
----------- ----------- ----------- -----------
Weighted Average Common and Common
Equivalent Shares Outstanding -- Diluted.... 30,350,000 26,920,000 29,700,000 26,350,000
=========== =========== =========== ===========
Net Income Per Share -- Diluted.............. $ 0.25 $ 0.32 $ 0.91 $ 0.85
=========== =========== =========== ===========
6. Contingencies
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. Management believes, based on discussions with
its legal counsel and in consideration of reserves recorded, that the outcome of
all legal actions will not have a material adverse effect upon the consolidated
financial position and results of operations of the Company.
7. Year 2000
The Company recognizes the need to insure that its operations will not be
adversely impacted by year 2000 software failures. The Company is currently
working to resolve the potential impact of the year 2000 issue on the processing
of date-sensitive information by the Company's computerized
9
LANDRY'S SEAFOOD RESTAURANTS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
information systems. The year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define the applicable year.
Any of the Company's programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000, which could result
in miscalculations or system failures. Based on preliminary information, costs
of addressing potential problems are not currently expected to have a material
adverse impact on the Company's financial position, results of operations or
cash flows in future periods. However, if the Company, or its vendors are unable
to resolve such processing issues in a timely manner, it could result in a
material financial risk. Accordingly, the Company plans to devote the necessary
resources to resolve all significant year 2000 issues in a timely manner.
8. Related Party
The Company entered into an agreement with 610 Loop Venture, LLC, a company
wholly owned by the Chairman and Chief Executive Officer of Landry's, whereby,
the Company would sell to 610 Loop Venture, a 4-acre undeveloped land tract at
a third-party appraised value of $5,360,000, and 610 Loop Venture would
construct a condominium project on the land. Such condominium project will
contain, among other things, a hotel unit, owned by 610 Loop Venture, and a 4-
story, 83,000 square foot office facility. The office facility will be purchased
by Landry's for a third-party appraised value of $14,840,000. At the completion
of the project, a condominium regime agreement will be entered into between
Landry's and 610 Loop Venture, who will operate and manage the project.
10
LANDRY'S SEAFOOD RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
The Company owns and operates full-service, casual dining seafood restaurants.
As of September 30, 1998 the Company operated approximately 150 restaurants. In
addition, the Company operates three limited menu take-out service units.
The Company closed two restaurants during the three months ended March 31,
1998. A Houston area restaurant closed due to an electrical fire. The restaurant
is currently being rebuilt and a majority of the construction costs are covered
by insurance. The proceeds from business interruption insurance will replace the
restaurant's lost profits during the construction period. Additionally, the
Company decided not to renew a lease for a Crab House restaurant located in a
hotel in Key West, Florida.
From time to time one or more of the Company's restaurants may be temporarily
closed for remodeling and conversion to one of the Company's other restaurant
concepts in order to improve the consumer appeal.
The Company's 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 national and regional
economic growth. The recent enactment of staged increases to federally mandated
minimum wage has increased the Company's labor costs.
The Company may record a non-recurring charge in 1998 related to a possible
fourth quarter adoption of a new accounting standard requiring the expensing of
pre-opening costs. Moreover, the Company is evaluating certain restaurant
locations, which the Company may exit. Such evaluation, which is expected to be
completed in the fourth quarter, may result in a write-down of net book value to
estimated realizable value, and certain special non-recurring charges in the
fourth quarter.
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. The
Company has many well established competitors with greater financial resources
and longer histories of operation than the Company, including competitors
already established in regions into which the Company is planning to expand, as
well as competitors planning to expand in the same regions. The Company faces
significant competition from mid-priced, full-service, casual dining restaurants
offering seafood and other types and varieties of cuisine. The Company's
competitors include national, regional, and local chains as well as local owner-
operated restaurants. The Company also competes with other restaurants and
retail establishments for restaurant sites.
11
LANDRY'S SEAFOOD RESTAURANTS, INC.
This report contains certain forward-looking statements within the meaning of
Section 27A of 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 the safe harbors created thereby. Investors are cautioned that all forward-
looking statements involve risks and uncertainty, including without limitation,
the ability of the Company to continue its expansion strategy, changes in costs
of food, labor, and employee benefits, the ability of the Company to continue to
acquire prime locations at acceptable lease or purchase terms, the ability of
the Company to resolve all of its year 2000 issues, as well as general market
conditions, competition, and pricing. Although the Company believes 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 a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Revenues increased $19,544,772, or 21.8%, from $89,807,731 to $109,352,503 in
the three months ended September 30, 1998, compared to the three months ended
September 30, 1997. The increase in revenues was attributable to revenues from
new restaurant openings. However, total sales for the quarter were below the
Company's internal sales forecast model. Same store sales for the third quarter
declined by approximately 9%, largely impacted by summer tropical storms, as the
Company directly lost approximately 100 restaurant days. Other factors include,
(i) the Company's decision to add new units (i.e. back fill) in existing
markets, and (ii) an increase in the number of the newer Joe's restaurants
entering the same store sales base with declines from initial honeymoon volumes.
The Company's overall average weekly unit sales declined approximately 12%
during the three months ended September 30, 1998 compared to 1997, due primarily
to the decline in same store sales, and reduced proportional effect of new store
"honeymoon" sales. Continued decreases in same store sales and overall average
unit sales will decrease the Company's restaurant profitability.
As a primary result of increased revenues, cost of sales increased $5,323,113,
or 19.3%, from $27,592,948 to $32,916,061 in the three months ended September
30, 1998 compared to the same period in the prior year. Cost of sales as a
percentage of revenues for the three months ended September 30, 1998 decreased
to 30.1% from 30.7% in 1997. The decrease in cost of sales as a percentage of
revenues reflects improved pricing and good management cost controls in 1998.
Restaurant labor expenses increased $6,915,230, or 30.1%, from $22,958,261, to
$29,873,491 in the three months ended September 30, 1998 compared to the same
period in the prior year. Restaurant labor expenses as a percentage of revenues
for three months ended September 30, 1998, increased 1.7% from 25.6% to 27.3%.
The Company continues to experience labor cost pressures attributable in part to
increases in federally mandated minimum wages, an increase in restaurant manager
turnover, and declines in average weekly sales comparisons. The Company is
considering
12
LANDRY'S SEAFOOD RESTAURANTS, INC.
several strategic programs to increase restaurant manager and employee
recruitment and retention. Among the variety of programs being considered are
medical benefits for hourly employees, retention or seniority type bonuses for
managers, and other increases in compensation. The Company expects labor related
costs to increase as a percentage of revenues during the remainder of 1998 and
1999.
Other restaurant operating expenses increased $4,757,954, or 25.4%, from
$18,755,733 to $23,513,687 in the three months ended September 30, 1998,
compared to the same period in the prior year, as a result of increased revenues
from the opening of new restaurants since September 30, 1997. Such expenses
increased as a percentage of revenues to 21.5% from 20.9% primarily due to
declines in average weekly sales comparisons. Additionally, the Company expects
to increase its marketing related expenditures to stimulate restaurant revenues.
Depreciation and amortization expenses increased $2,364,467, or 49.6%, from
$4,769,967 to $7,134,434 in the three months ended September 30, 1998 compared
to the same period in the prior year. The dollar increase was primarily due to
the addition of new restaurants and purchases of new equipment. Depreciation
and amortization as a percentage of revenues for the three months ended
September 30, 1998 increased to 6.5% from 5.3% during the same period in 1997,
due to an increase in pre-opening amortization expense during the three months
ended September 30, 1998, and declines in average weekly sales comparisons
whereby the fixed expense leverage is reduced. The increase in pre-opening
amortization expense is attributable to an increase in the relative number of
units subject to amortization and an increase in the per unit pre-opening
expenses.
General and administrative expenses increased $1,757,699, or 65.3%, from
$2,693,761 to $4,451,460 in the three months ended September 30, 1998 compared
to the same period of the prior year, and increased as a percentage of revenues
to 4.1% from 3.0%. The dollar increase resulted primarily from increased
personnel, salaries and travel to support the Company's expansion plans.
The increase in net interest income of $119,358, and the change in other
(income) expense of $358,297 for the three months ended September 30, 1998 as
compared to the same period in the prior year, was not deemed significant.
Provision for income taxes decreased by $826,736 in the three months ended
September 30, 1998, primarily due to the change in the Company's income. The
provision for income taxes as a percentage of income before income before taxes
decreased to 34.5% from 36% due to the effect of FICA tax tip credits on
reducing the Company's effective tax rate.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Revenues increased $75,145,089, or 31.9%, from $235,290,982 to $310,436,071 in
the nine months ended September 30, 1998 compared to the nine months ended
September 30, 1997. The increase in revenue was attributable to revenues from
new restaurant openings. The Company believes that an unseasonably mild winter
had a positive impact on first quarter sales. However, the same store sales of
restaurants open 18 months or more, while relatively flat for the first quarter,
13
LANDRY'S SEAFOOD RESTAURANTS, INC.
declined 6% in the second quarter and 9% in the third quarter. These declines
were believed to be caused by (i) the extreme heat throughout the South and
Southwest, (ii) the Company's decision to add new units (i.e. back fill) in
existing markets, (iii) newer units entering the same store sales base that are
continuing to fall from their initial or honeymoon sales amount, and, (iv) a
relatively large number of tropical storms affecting the Company's restaurant
sales in the third quarter.
As a primary result of increased revenues, cost of sales increased
$21,473,459, or 29.7%, from $72,190,678 to $93,664,137 in the nine months ended
September 30, 1998 compared to the same period in the prior year. Cost of sales
as a percentage of revenues for the nine months ended September 30, 1998
decreased to 30.2%, from 30.7% in 1997. The decrease in cost of sales as a
percentage of revenues reflects improved pricing and good management controls in
1998.
Restaurant labor expenses increased $20,898,449, or 34.6%, from $60,374,500 to
$81,272,949 in the nine months ended September 30, 1998 compared to the same
period in the prior year. Restaurant labor expenses as a percentage of revenues
for the nine months ended September 30, 1998 increased 0.5% from 25.7% to 26.2%.
The Company continues to experience labor cost pressures attributable in part to
increases in federally mandated minimum wages and a recent increase in
restaurant manager turnover.
Other restaurant operating expenses increased $15,565,706, or 31.5%, from
$49,444,683 to $65,010,389 in the nine months ended September 30, 1998 compared
to the same period in the prior year, as a result of increased revenues and the
opening of new restaurants since September 30, 1997. Such expenses remained
relatively flat, decreasing 0.1% as a percentage of revenues to 20.9% from
21.0%.
Depreciation and amortization expenses increased $7,985,175, or 67%, from
$11,923,349 to $19,908,524 in the nine months ended September 30, 1998 compared
to the same period in the prior year. The dollar increase was primarily due to
the addition of new restaurants and purchases of new equipment. Depreciation
and amortization as a percentage of revenues for the nine months ended September
30, 1998 increased to 6.4% from 5.1% during the same period in 1997 primarily
due to an increase in pre-opening amortization expense and declines in average
weekly sales comparisons during the nine months ended September 30, 1998. The
increase in pre-opening amortization expense is attributable to an increase in
the relative number of units subject to amortization and an increase in the per
unit pre-opening expenses.
General and administrative expenses increased $3,170,309, or 42.1%, from
$7,538,746 to $10,709,055 in the nine months ended September 30, 1998 compared
to the same period in the prior year, and increased as a percentage of revenues
to 3.4% from 3.2%. The dollar increase resulted primarily from increased
personnel, salaries and travel to support the Company's expansion plans.
The increase in net interest income of $324,396 and the change in other
(income) of $142,270 in the nine months ended September 30, 1998 as compared to
the same period in the prior year was not deemed significant.
14
LANDRY'S SEAFOOD RESTAURANTS, INC.
Provision for income taxes increased by $1,620,838 from $12,583,416 in 1997 to
$14,204,254 in 1998 primarily due to the change in the Company's income. The
provision for income taxes as a percentage of income before income taxes
decreased to 34.5% from 36% due to the effect of FICA tax tip credits on
reducing the Company's effective tax rate.
Liquidity and Capital Resources
For the nine months ended September 30, 1998 the capital expenditures of the
Company were approximately $118,285,000 which were funded out of existing cash
balances, proceeds from stock offerings, cash flow from operations and
borrowings.
In March 1998, the Company completed a public offering of 3,810,950 shares of
the Company's common stock. Net proceeds of the common stock offering, of
approximately $102,400,000 has been used to repay outstanding bank loans,
finance expansion and for general corporate purposes.
The Company has a $125 million line of credit from a syndicate of banks which
expires in June 2000. The line of credit is available for expansion,
acquisitions and general corporate purposes. At September 30, 1998, the Company
had $25 million outstanding under this credit facility at an approximate
interest rate of 6.3% and had cash and cash equivalent balances aggregating
approximately $41.6 million. These borrowings were used to fund capital
expenditures and working capital.
The Company's current development plans are to open approximately 40
restaurants during 1998, and 13 to 15 restaurants in 1999. The 1999 restaurant
development has been reduced from previous plans as the Company believes that an
increase in focus on the Company's existing operations of approximately 150
restaurants is prudent.
During 1997 the Company commenced construction on a development plan for a
waterfront area in South Houston (the "Kemah Development"). The Kemah
Development includes up to eight restaurant sites, a 56 room hotel, connected
public areas and plaza, four amusement/entertainment rides, and light retail
facilities. The Company currently operates six restaurants in this development
and expects to open a 56 room hotel, amusement facilities, and retail shops,
(some of which will be leased and operated by third parties) by the end of the
fiscal year.
Exclusive of any acquisitions or large real estate purchases, the Company
currently expects to incur capital expenditures of up to $135 million in 1998
(based upon approximately 40 new restaurants), depending upon the actual number
and timing of restaurant construction, the number of land purchases, the amount
of expenditures spent on conversions, remodels, and the mix of leased, owned or
conversion type locations. The Company expects that its average per unit
investment, excluding real estate costs, capitalized interest costs and pre-
opening expenses, to approximate $2.0 million. However, individual unit
investment costs can vary from management's expectations due to a variety of
factors. Moreover, average unit investment costs are dependent upon many
factors, including competition for sites, location, construction costs, unit
size and the mix of conversions, build-to-suit, leased and fee-owned locations.
The Company currently anticipates that it will continue to purchase a portion of
its new restaurant locations, which are expected to be more costly than leased
locations.
15
LANDRY'S SEAFOOD RESTAURANTS, INC.
Separately, the Company may spend up to $25 million on the Kemah Development and
up to $10-$12 million on the corporate headquarters development, both of which
will be spread over the next several fiscal years. The Company believes that
existing cash balances, cash generated from operations and potential financing
sources will be sufficient to satisfy the Company's working capital and planned
capital expenditures through 1999.
The Company is reviewing possible scenarios which would be intended to
increase shareholder value.
Seasonality and Quarterly Results
The Company's business is seasonal in nature, with revenues and, to a greater
degree, operating profits being lower in the first and fourth quarters than in
other quarters due to the Company's reduced winter volumes. The Company has and
continues to open restaurants in highly seasonal tourist markets and has further
noted that the Joe's Crab Shack concept restaurants tend to experience even
greater seasonality and sensitivity to weather. During the Company's 1998 third
quarter, the Company's restaurant operations, revenues and profitability were
negatively affected by a series of 4 tropical storms in the Gulf Coast and Mid-
Atlantic areas of the United States. The timing of unit openings can and will
affect quarterly results. The Company anticipates moderation in revenues from
the initial volumes of new units.
Impact of Inflation
Management does not believe that inflation has had a significant effect on the
Company's operations during the past several years. Management believes the
Company has historically been able to pass on increased costs through menu price
increases, but there can be no assurance that it will be able to do so in the
future. Future increases in restaurant labor costs, land and construction costs
could adversely affect the Company's profitability and ability to expand.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which registrant is a
party or of which any of the property of the registrant is the subject,
except for claims in the ordinary course of business, none of which are
considered material.
ITEM 2. CHANGES IN SECURITIES Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None
ITEM 5. OTHER INFORMATION None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10.1 Contract of Sale and Development Agreement
10.2 Executive Employment Agreements
10.3 First Amendment to Credit Agreement
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K - NONE
17
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 thereunto duly authorized.
Landry's Seafood 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 12, 1998
18