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, 1999.
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
----------------------- --------------------------
(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 August 9, 1999 there were
25,666,040 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
Unaudited Consolidated Balance Sheets at June 30, 1999 and December 31, 1998 3
Unaudited Consolidated Statements of Income for the Three and Six Months Ended
June 30, 1999 and 1998 4
Unaudited Consolidated Statement of Stockholders' Equity
for the Six Months Ended June 30, 1999 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 6
Notes to Condensed Unaudited Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
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PART II OTHER INFORMATION
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Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
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Signatures 24
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1
LANDRY'S SEAFOOD RESTAURANTS, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying 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.
Cautionary Statement
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,
changes in restaurant sales and development plans, changes in costs of food,
labor, development and employee benefits, as well as general market conditions,
competition, pricing, employee turnover, and the timing of opening of new
restaurants and outcome of corporate litigation. 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. The
Company does not expect to update forward-looking statements continually as
conditions change.
2
LANDRY'S SEAFOOD RESTAURANTS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 1999 1998
------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 36,938,593 $ 35,183,405
Accounts receivable--trade and other 13,698,649 13,678,197
Deferred tax assets 2,330,000 2,330,000
Inventory 12,286,815 22,839,020
Other current assets 8,922,995 10,816,686
------------ ------------
Total current assets 74,177,052 84,847,308
------------ ------------
PROPERTY AND EQUIPMENT, net 415,199,739 398,568,419
GOODWILL, net of amortization of $1,317,000 and
$1,249,000, respectively 2,776,863 2,844,542
OTHER ASSETS, net 3,738,830 3,688,971
------------ ------------
Total assets $495,892,484 $489,949,240
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 16,673,824 $ 21,216,470
Accrued liabilities 18,825,926 19,588,812
Current portion of long-term notes and other obligations 75,087,691 81,672
------------ ------------
Total current liabilities 110,587,441 40,886,954
LONG-TERM NOTES AND OTHER OBLIGATIONS,
NON-CURRENT 107,074 35,153,100
DEFERRED INCOME TAXES AND OTHER LIABILITIES 8,945,267 5,237,111
------------ ------------
Total liabilities 119,639,782 81,277,165
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 2,000,000 shares
authorized, none outstanding ---- ----
Common stock, $0.01 par value, 60,000,000 shares
authorized, 25,666,040 and 30,345,290 issued and
outstanding, net of treasury shares, respectively 256,611 303,453
Additional paid-in capital 328,536,125 363,156,349
Retained earnings 47,459,966 45,212,273
------------ ------------
Total stockholders' equity 376,252,702 408,672,075
------------ ------------
Total liabilities and stockholders' equity $495,892,484 $489,949,240
============ ============
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
LANDRY'S SEAFOOD RESTAURANTS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
REVENUES $123,607,013 $111,038,615 $224,872,683 $201,083,568
OPERATING COSTS AND EXPENSES:
Cost of sales 38,697,215 33,259,847 70,389,942 60,748,077
Restaurant labor 34,756,632 28,481,639 64,918,070 51,399,458
Other restaurant operating expenses 27,799,256 22,210,890 52,129,676 41,496,702
Depreciation and amortization 5,467,598 4,373,475 10,709,623 8,505,713
General and administrative expenses 5,905,486 3,455,148 10,545,287 6,257,595
Pre-opening expenses 765,334 3,066,278 1,806,746 4,977,561
Special charges/(credits), net (730,000) ---- 2,945,000 ----
------------ ------------ ------------ ------------
Total operating costs and expenses 112,661,521 94,847,277 213,444,344 173,385,106
------------ ------------ ------------ ------------
OPERATING INCOME 10,945,492 16,191,338 11,428,339 27,698,462
OTHER (INCOME) EXPENSE:
Interest (income) expense, net 482,298 (750,463) 440,177 (957,988)
Other, net (310,488) 40,606 (149,951) (237,725)
------------ ------------ ------------ ------------
Total other (income) expense 171,810 (709,857) 290,226 (1,195,713)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES &
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 10,773,682 16,901,195 11,138,113 28,894,175
PROVISION FOR INCOME TAXES 3,705,570 5,825,725 3,831,299 9,964,000
------------ ------------ ------------ ------------
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 7,068,112 11,075,470 7,306,814 18,930,175
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ---- ---- ---- 3,381,500
------------ ------------ ------------ ------------
NET INCOME $ 7,068,112 $ 11,075,470 $ 7,306,814 $ 15,548,675
============ ============ ============ ============
EARNINGS PER SHARE INFORMATION:
BASIC
Net income before cumulative effect
of accounting change $ 0.26 $ 0.37 $ 0.26 $ 0.66
Cumulative effect of accounting change $ ---- $ ---- ---- 0.11
------------ ------------ ------------ ------------
Net income $ 0.26 $ 0.37 $ 0.26 $ 0.55
============ ============ ============ ============
Weighted average number of common
shares outstanding 27,600,000 30,300,000 28,650,000 28,500,000
============ ============ ============ ============
DILUTED
Net income before cumulative effect
of accounting change $ 0.26 $ 0.36 $ 0.25 $ 0.64
Cumulative effect of accounting change ---- ---- ---- $ 0.11
------------ ------------ ------------ ------------
Net income $ 0.26 $ 0.36 $ 0.25 $ 0.53
============ ============ ============ ============
Weighted average number of common
share equivalents outstanding 27,700,000 31,050,000 28,750,000 29,375,000
============ ============ ============ ============
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
4
LANDRY'S SEAFOOD RESTAURANTS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Additional
------------------ Paid-In Retained
Shares Amount Capital Earnings Total
---------- ------- ----------- ---------- -----------
Balance, December 31, 1998 30,345,290 $303,453 $363,156,349 $45,212,273 $408,672,075
Net income 7,306,814 7,306,814
Exercise of stock options and
income tax benefit 900,000 9,000 6,294,105 6,303,105
Purchase of common stock held
for treasury (5,579,250) (55,842) (40,914,329) (5,059,121) (46,029,292)
---------- ------- ----------- ---------- -----------
Balance, June 30, 1999 25,666,040 $256,611 $328,536,125 $47,459,966 $376,252,702
========== ======== ============ =========== ============
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
5
LANDRY'S SEAFOOD RESTAURANTS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
----------------------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,306,814 $ 15,548,675
Cumulative effect of change in accounting principle ---- 3,381,500
------------ ------------
Net income before accounting change 7,306,814 18,930,175
Adjustments to reconcile net income to net cash
provided by operating activities-
Store closings and special charges (credits) (730,000) ----
Depreciation and amortization 10,709,623 8,505,713
Change in assets and liabilities-net and other 12,460,845 15,999,077
------------ ------------
Total adjustments 22,440,468 24,504,790
------------ ------------
Net cash provided by operating activities 29,747,282 43,434,965
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions (27,272,936) (83,733,194)
Other assets, including goodwill (49,859) (468,269)
------------ ------------
Net cash used in investing activities (27,322,795) (84,201,463)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) on notes payable and other
long-term obligations 39,959,993 (32,534,798)
Net amounts from sale (repurchase) of common stock (46,029,292) 102,431,472
Proceeds from exercise of stock options 5,400,000 6,933,077
------------ ------------
Net cash provided by (used in) financing activities (669,299) 76,829,751
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,755,188 36,063,253
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 35,183,405 17,234,130
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 36,938,593 $ 53,297,383
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments during the period for--
Income taxes $ 431,000 $ 1,216,000
Interest $ 961,000 $ 292,000
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 consolidated financial statements included herein have been prepared by
the Company without audit, except for the consolidated balance sheet as of
December 31, 1998. 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, 1998, consolidated financial statements filed with the
Securities and Exchange Commission on Form 10-K.
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. These amounts are included
in goodwill and other assets in the accompanying consolidated balance sheets,
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
Earnings Per Share is computed by dividing net income by the weighted average
number of shares of common stock outstanding during the year. Diluted Earnings
Per Share is computed using the average share price for the period in all cases
when applying the treasury stock method to potentially dilutive outstanding
options.
Cash Flow Reporting
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with original maturities of three months
or less to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results may differ from those estimates.
7
LANDRY'S SEAFOOD RESTAURANTS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Pre-opening Costs
Pre-opening costs include the direct and incremental costs incurred in
connection with the commencement of each restaurant's operations, which are
substantially comprised of training-related costs. Pre-opening costs were
historically capitalized and amortized using the straight-line method over 12
months. During the fourth quarter of 1998, the Company elected to adopt the
American Institute of Certified Public Accountants Statement of Position 98-5
"Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires
companies to expense pre-opening costs as incurred and to expense previously
capitalized pre-opening costs as a cumulative effect of change in accounting
principle. SOP 98-5 required the Company to expense $5,162,500 of pre-opening
costs, capitalized as of December 31, 1997, during the first quarter of 1998.
The expense of $5,162,500 is recorded net of a tax benefit of $1,781,000, as a
Cumulative Effect of Change in Accounting Principle in the amount of $3,381,500.
Additionally, in connection with the adoption of SOP 98-5, the Company expensed
restaurant pre-opening costs as incurred during 1998. Quarterly financial
statements for 1998 have been restated to reflect the 1998 fourth quarter
adoption of SOP 98-5.
2. Accrued Liabilities
Accrued liabilities are comprised of the following:
June 30, 1999 December 31, 1998
------------- -----------------
Payroll and related costs $ 4,735,038 $ 3,024,139
Taxes, other than payroll and income taxes 5,866,521 5,146,592
Deferred and state income taxes 393,602 442,275
Store closings and special charges 4,262,563 7,513,001
Other 3,568,202 3,462,805
----------- -----------
$18,825,926 $19,588,812
=========== ===========
During the six months ended June 30, 1999, store closings and special
charges decreased due to payments for costs, lease rentals and other expenses
related to the fourth quarter 1998 charge as well as payments for costs
associated with the terminated acquisition discussed below. Additionally, a
special credit was recorded during the three months ended June 30, 1999 as a
reversal (i.e., additional income) of amounts originally recorded as five of
nine lease terminations have been resolved favorably to amounts accrued.
8
LANDRY'S SEAFOOD RESTAURANTS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. Debt
The Company has a $125.0 million unsecured credit facility from a bank
syndicate which matures in June 2000, and is available for expansion,
acquisitions, and other 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 tangible net worth, a maximum leverage ratio and a
minimum fixed charge coverage ratio. At June 30, 1999, the Company had $75
million outstanding under this credit facility at an approximate interest rate
of 5.8%. Amounts outstanding under the credit facility are classified as a
current liability as the existing credit agreement expires in June 2000. The
Company expects to renegotiate the credit agreement prior to its expiration.
In August 1999, the Company and bank syndicate entered into an amendment
which excludes the store closing and special charge of $37.6 million recorded in
the fourth quarter of 1998, from substantially all of the financial covenants,
permits additional future stock repurchases of $7.0 million, through June 1,
2000, and reduces the credit facility to $110.0 million. In addition, the
amendment readjusts the interest rate spread to an initial amount of 225 basis
points above the Euro dollar rate, but allows for future reductions in the
spread to 175 basis points.
4. Stockholders' Equity
On November 19, 1998, the Company announced the authorization of an open
market stock buy back program for up to $50.0 million. This program, which
continues until December 31, 1999 (unless extended or canceled) has resulted in
the Company repurchasing approximately 5,580,000 common shares through June 30,
1999 for $46.0 million.
On March 2, 1999, the Company announced the signing of a definitive merger
agreement to acquire another restaurant company. The merger agreement was
subsequently terminated on March 8, 1999. As a result of the termination, the
Company incurred costs of $3.7 million ($2.3 million net of tax) in connection
with the transaction, which was recorded as a special charge in the income
statement for the three months ended March 31, 1999 (and included in the income
statement for the six months ended June 30, 1999.)
9
LANDRY'S SEAFOOD RESTAURANTS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the amounts used to compute net income per common
share - diluted is as follows:
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net Income $ 7,068,112 $11,075,470 $ 7,306,814 $15,548,675
=========== =========== =========== ===========
Weighted Average Common Shares Outstanding 27,600,000 30,300,000 28,650,000 28,500,000
Dilutive Common Stock Equivalents -- Stock Options 100,000 750,000 100,000 875,000
----------- ----------- ----------- -----------
Weighted Average Common and Common Equivalent Shares
Outstanding -- Diluted 27,700,000 31,050,000 28,750,000 29,375,000
=========== =========== =========== ===========
Net Income Per Share -- Diluted $ 0.26 $ 0.36 $ 0.25 $ 0.53
=========== =========== =========== ===========
Net Income Per Share, Before Special Charge and $ 0.24 $ 0.36 $ 0.32 $ 0.64
Change in Accounting Principle - Diluted =========== =========== =========== ===========
5. 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 current executive
officers and directors, E.A. "Al" Jaksa, Jr. (a former executive officer and
director) and underwriters that participated in the Company's secondary offering
in March of 1998. Such lawsuits allege that the defendants violated Federal
securities laws by making misrepresentations and omissions regarding the
Company's performance and future prospects during the respective class periods
while individually selling the Company's common stock. The plaintiffs in the
above 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.
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.
10
LANDRY'S SEAFOOD RESTAURANTS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. Related Party Transactions
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 $5.4 million (approximately $700,000 more than
the original purchase price paid by the Company), and 610 Loop Venture would
construct a condominium project on the land. The carrying cost of the land held
for sale is included in other current assets. Such condominium project would
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 approximately $14.8 million.
At the completion of the project, a condominium regime agreement will be entered
into between Landry's and 610 Loop Venture, which will operate and manage the
project. At the request of the Company, 610 Loop Venture and the Company have
executed an amendment to the contract delaying commencement of construction of
the condominium project, including the 4-story, 83,000 square foot office
facility, until April 1, 2000. The amendment further provides that the Company
shall enter into a ground lease agreement with 610 Loop Venture for
approximately one-third of the undeveloped tract. The ground lease agreement
provides for 610 Loop Venture's development of a retail facility which is the
initial phase of 610 Loop Venture's condominium project. However, 610 Loop
Venture cannot utilize any other portion of the undeveloped tract and can take
no action which in any manner may hinder, delay, impede or increase the cost of
construction to the Company for the building of the office facility. The ground
lease is for a term of five years with one option renewal period and shall
terminate should 610 Loop Venture purchase the entire 4-acre undeveloped land
tract. Under the terms of the ground lease, 610 Loop Venture will pay the
Company base rent, pro-rata real property taxes and insurance in the amount
of approximately $16,000 per month.
11
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 June 30, 1999, the Company operated 144 restaurants. In
addition, the Company operates three limited-menu take-out service units.
The Company, in the fourth quarter of 1998, decided to close eleven
underperforming restaurants, eight of which were closed in 1998, and three of
which were closed in 1999. During the second quarter of 1999, the Company
concluded its negotiations on five of the nine leased restaurants included in
the fourth quarter special charge on a favorable basis compared to amounts
previously accrued. As a result, the Company recognized a $730,000 special
credit gain during the three months ended June 30, 1999. The Company is in the
process of selling its leasehold or fee interest and terminating associated
lease obligations for each of the remaining restaurants. Store closing costs
related to the write-down of associated property and equipment amounts to
estimated realizable value, and anticipated costs to be incurred related to
lease terminations and employee severance were recorded during the fourth
quarter of 1998. In addition, the Company reevaluated its strategic growth plan,
and (i) reduced future unit growth to approximately 9 to 12 new restaurants per
year, (ii) abandoned numerous potential restaurant sites, and (iii) abandoned
efforts to build a stand-alone office complex in Houston, Texas. These strategic
changes resulted in a reduction in employees, the sale of a duplicate corporate
asset and the abandonment of a strategic corporate transaction. The Company
incurred a fourth quarter 1998 charge that aggregated $37.6 million related to
all such activities.
Store closing and special charges and credits include management's estimate
of costs which will be incurred in future periods based on various factors. Such
factors could change, resulting in additional costs or credits in future
periods. The Company expects the majority of cash payments to occur through
1999. The net realizable value of the property, equipment and leasehold
interests held for sale, of approximately $1,000,000, is included in other
current assets at June 30, 1999.
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 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. Increases to the federally mandated minimum wage
have increased the Company's labor costs.
12
LANDRY'S SEAFOOD RESTAURANTS, INC.
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, including new
restaurants the Company may open or acquire, 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
where the Company is planning to expand, as well as competitors planning to
expand in the same regions or into regions where the Company currently operates.
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.
Cautionary Statement
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,
changes in restaurant sales and development plans, changes in costs of food,
labor, development and employee benefits, as well as general market conditions,
competition, pricing, employee turnover, and the timing of opening of new
restaurants and outcome of corporate litigation. 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. The
Company does not expect to update forward-looking statements continually as
conditions change.
13
LANDRY'S SEAFOOD RESTAURANTS, INC.
RESULTS OF OPERATIONS
Restaurant Profitability
The following table sets forth the percentage relationship to revenues of
certain operating data for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
1999 1998 1999 1998
----------- ------------ ----------- -----------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 31.3% 30.0% 31.3% 30.2%
Restaurant labor 28.1% 25.6% 28.9% 25.6%
Other restaurant operating expenses (1) 22.5% 20.0% 23.2% 20.6%
----- ----- ----- -----
Restaurant level profit (1) 18.1% 24.4% 16.6% 23.6%
_____________________
(1) Excludes depreciation, amortization and pre-opening expenses.
Three Months Ended June 30, 1999 Compared to the Three Months Ended
June 30, 1998
Revenues increased $12,568,398, or 11.3%, from $111,038,615 to $123,607,013
for the three months ended June 30, 1999, compared to the three months ended
June 30, 1998. The increase in revenues was primarily attributable to revenues
from new restaurant openings. During the first quarter of 1999, the Company
implemented a new menu change for the Joe's Crab Shack restaurants, a new
manager bonus plan, and a new advertising and marketing campaign. These
programs have so far resulted in positive revenue results. Same store sales for
the three months ended June 30, 1999 were up approximately 4% from the same
quarter in 1998, as compared to a 1.5% decline in the first quarter of 1999.
The decline in the first quarter was primarily caused by a decline in January
1999 same store sales. The more recent same store sales trend line, coincident
with increased advertising expenditures, is positive. Average weekly sales for
all stores increased approximately 3% in the second quarter of 1999, when
compared to the same quarter in the prior year. While the Company's internal
sales forecasts were exceeded during the second quarter of 1999, restaurant
level cash flow margins remained below internal forecasts. Management believes
that the many restaurant level operational changes that were instituted will,
over a longer term, provide sustained sales and profitability.
14
As a primary result of increased revenues, cost of sales increased
$5,437,368, or 16.3%, from $33,259,847 to $38,697,215 in the three months ended
June 30, 1999, compared to the same period in the prior year. Cost of sales as a
percentage of revenues for the three months ended June 30, 1999 increased to
31.3%, from 30.0% in 1998. The increase in cost of sales as a percentage of
revenues reflects new menu changes, temporarily increased inefficiencies and
training due to the new menu roll-out, reduced menu pricing in certain markets,
and higher product costs in 1999 as compared to 1998.
Restaurant labor expenses increased $6,274,993, or 22.0%, from $28,481,639
to $34,756,632 in the three months ended June 30, 1999, compared to the same
period in the prior year. Restaurant labor expenses as a percentage of revenues
for the three months ended June 30, 1999 increased to 28.1% from 25.7%. In
connection with the new menu roll-out and the planned advertising and
promotional campaign, the Company increased staffing levels and implemented
additional training programs. In addition, to combat what the Company believed
to be higher general manager turnover than normally experienced by the Company,
the Company raised the base salary of substantially all of its general managers
by approximately $10,000 per person.
Other restaurant operating expenses increased $5,588,366, or 25.2%, from
$22,210,890 to $27,799,256 in the three months ended June 30, 1999, compared to
the same period in the prior year, as a result of increased revenues. Such
expenses increased as a percentage of revenues to 22.5% in 1999 from 20.0% in
1998, as a primary result of increased advertising, marketing, customer
relations expenses, and temporary inefficiencies, costs and effects of the new
menu roll-out. The Company anticipates advertising and marketing expenses to
increase as a percentage of revenues throughout 1999, as compared to 1998.
During 1998 the Company elected to adopt the American Institute of Certified
Public Accountants Statement of Position 98-5 "Reporting on the Costs of Start-
Up Activities (SOP 98-5)." This new accounting standard requires companies to
expense pre-opening costs as incurred and to expense previously capitalized pre-
opening costs as a cumulative effect of change in accounting principle. As a
result of the adoption of SOP 98-5, the Company expensed $5,162,500, effective
January 1, 1998, of net pre-opening costs capitalized as of December 31, 1997.
Additionally, in connection with the adoption of SOP 98-5, the Company expensed
$10,439,229 of restaurant pre-opening costs as incurred during 1998, including
$3,066,278 in the three months ended June 30, 1998. Prior to the adoption of SOP
98-5, the Company capitalized pre-opening costs and amortized such costs over
the first twelve months the applicable restaurant was open. The following is a
summary of the results of operations as previously reported and as restated to
reflect the adoption of SOP 98-5.
15
LANDRY'S SEAFOOD RESTAURANTS, INC.
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ------------------------
JUNE 30, 1998 JUNE 30, 1998
---------------------- ------------------------
SELECTED INCOME STATEMENT AMOUNTS RESTATED TO REFLECT THE ADOPTION RESTATED RESTATED
OF SOP 98-5 (PRE-OPENING COSTS) PREVIOUSLY FOR PREVIOUSLY FOR
REPORTED SOP 98-5 REPORTED SOP 98-5
-------- -------- -------- --------
*Depreciation and amortization $ 6,570,729 $ 4,373,475 $12,774,089 $ 8,505,713
*Pre-opening expenses. ---- 3,066,278 ---- 4,977,561
Operating income 17,060,361 16,191,338 28,407,647 27,698,462
Net income before cumulative effect of change in accounting principle 11,644,493 11,075,470 19,395,406 18,930,175
Cumulative effect of change in accounting principle ---- ---- ---- 3,381,500
Net income 11,644,493 11,075,470 19,395,406 15,548,675
EPS
- -Basic (before cumulative effect of accounting change) $ 0.38 $ 0.37 $ 0.68 $ 0.66
- -Basic (after cumulative effect of accounting change) $ 0.38 $ 0.37 $ 0.68 $ 0.55
- -Diluted (before cumulative effect of accounting change) $ 0.38 $ 0.36 $ 0.66 $ 0.64
- -Diluted (after cumulative effect of accounting change) $ 0.38 $ 0.36 $ 0.66 $ 0.53
____________________
*Change resulting from pre-opening cost accounting change (adoption of SOP 98-5).
Depreciation and amortization expense increased $1,094,123, or 25.0%, from
$4,373,475 to $5,467,598 in the three months ended June 30, 1999, 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.
General and administrative expenses increased $2,450,338, or 70.9%, from
$3,455,148 to $5,905,486 in the three months ended June 30, 1999, compared to
the same period in the prior year. The dollar increase resulted primarily from
increased personnel, particularly field operations support staff, salaries and
travel to support the Company's operations.
Pre-opening expenses in 1999 were $765,334 as compared to $3,066,278 in
1998. The Company opened 3 units during the three months ended June 30, 1999, at
an average pre-opening expense of approximately $250,000 per unit.
16
LANDRY'S SEAFOOD RESTAURANTS, INC.
The increase in net interest expense, as compared to the second quarter
1998, is primarily attributable to increased borrowings for capital expenditures
and working capital. The Company expects that the average interest rate on the
credit line will be higher for the remainder of 1999 and 2000. The increase in
other income in the three months ended June 30, 1999, as compared to the same
period in the prior year, was not deemed significant.
Provision for income taxes decreased by $2,120,155 from $5,825,725 in 1998
to $3,705,570 in 1999 primarily due to the change in the Company's income. The
provision for income taxes as a percentage of income before income taxes
remained relatively constant.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
Revenues increased $23,789,115, or 11.8%, from $201,083,568 to $224,872,683
for the six months ended June 30, 1999, compared to the six months ended
June 30, 1998. The increase in revenues was primarily attributable to revenues
from new restaurant openings. During the first quarter of 1999, the Company
implemented a new menu change for the Joe's Crab Shack restaurants, a new
manager bonus plan, and a new advertising and marketing campaign. These programs
have so far resulted in positive revenue results. Same store sales for the three
months ended June 30, 1999 were up approximately 4% from the same quarter in
1998, as compared to a 1.5% decline in the first quarter of 1999. The more
recent same store sales trend line, coincident with the increased advertising
expenditures, was positive. Average weekly sales for all stores increased 3% in
the second quarter of 1999, but declined by 2.8% in the first quarter of 1999,
as compared to the same quarters in 1998. While the Company's internal sales
forecasts were exceeded during the first and second quarter of 1999, restaurant
level cash flow margins were below internal forecasts. Management believes that
the many restaurant level operational changes that were instituted will, over a
longer term, provide sustained sales and profitability.
As a primary result of increased revenues, cost of sales increased
$9,641,865, or 15.9%, from $60,748,077 to $70,389,942 in the six months ended
June 30, 1999, compared to the same period in the prior year. Cost of sales as
a percentage of revenues for the six months ended June 30, 1999 increased to
31.3%, from 30.2% in 1998. The increase in cost of sales as a percentage of
revenues reflects new menu changes, temporarily increased inefficiencies and
training due to the new menu roll-out, reduced menu pricing in certain markets,
and higher product costs in 1999 as compared to 1998.
Restaurant labor expenses increased $13,518,612 or 26.3%, from $51,399,458
to $64,918,070 in the six months ended June 30, 1999, compared to the same
period in the prior year. Restaurant labor expenses as a percentage of revenues
for the six months ended June 30, 1999 increased to 28.9% from 25.6%. In
connection with the new menu roll-out and the planned advertising and
promotional campaign, the Company increased staffing levels and implemented
additional training programs. In addition, to combat what
17
LANDRY'S SEAFOOD RESTAURANTS, INC.
the Company believed to be higher general manager turnover than normally
experienced by the Company, the Company raised the base salary of substantially
all of its general managers by approximately $10,000 per person.
Other restaurant operating expenses increased $10,632,974 or 25.6%, from
$41,496,702 to $52,129,676 in the six months ended June 30, 1999, compared to
the same period in the prior year, as a result of increased revenues. Such
expenses increased as a percentage of revenues to 23.2% in 1999 from 20.6% in
1998, as a primary result of increased advertising, marketing, customer
relations expenses, and temporary inefficiencies, costs and effects of the new
menu roll-out. The Company anticipates advertising and marketing expenses to
increase as a percentage of revenues throughout 1999, as compared to 1998.
Depreciation and amortization expense increased $2,203,910, or 25.9%, from
$8,505,713 to $10,709,623 in the six months ended June 30, 1999, 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.
General and administrative expenses increased $4,287,692, or 68.5%, from
$6,257,595 to $10,545,287 in the six months ended June 30, 1999, compared to the
same period in the prior year. The dollar increase resulted primarily from
increased personnel, particularly field operations support staff, salaries and
travel to support the Company's operations.
Pre-opening expenses in 1999 were $1,806,000 as compared to $4,977,561 in
1998. The Company opened 8 units during the six months ended June 30, 1999, at
an average pre-opening expense of approximately $225,000 per unit.
The special charge/(credit) reflects a store closing special credit (income)
of $730,000 for the second quarter of 1999, offset by a special charge of
$3,675,000 ($2,370,000 net of tax) for the first quarter of 1999 incurred in
connection with the termination of a proposed acquisition.
The increase in net interest expense in the six months ended June 30, 1999,
as compared to the same period in the prior year, is primarily attributable to
increased borrowings for capital expenditures and working capital. The change
in other income was not deemed significant.
Provision for income taxes decreased by $6,132,701 from $9,964,000 in 1998
to $3,831,299 in 1999 primarily due to the change in the Company's income. The
provision for income taxes as a percentage of income before income taxes
remained relatively constant.
18
LANDRY'S SEAFOOD RESTAURANTS, INC.
Liquidity and Capital Resources
For the six months ended June 30, 1999 the capital expenditures of the
Company were approximately $27.3 million and the Company repurchased $46.0
million of common stock for treasury. These expenditures were funded out of
existing cash balances, cash flow from operations and borrowings.
The Company has a $125.0 million credit facility from a syndicate of banks
which expires in June 2000. The credit facility was reduced to $110.0 million by
an amendment in August 1999, which among other things permits the Company to
repurchase an additional $7.0 million of common stock for treasury. The line of
credit is available for expansion, acquisitions and general corporate purposes.
At June 30, 1999, the Company had $75 million outstanding under this credit
facility at an approximate interest rate of 5.8% and had cash and cash
equivalent balances aggregating approximately $36.9 million. These borrowings
were used primarily to fund capital expenditures and working capital. Amounts
outstanding under the line of credit are classified as a current liability in
the Company's June 30, 1999 balance sheet, as the existing credit agreement
expires within one year from that date. The Company expects to renegotiate the
credit agreement prior to its expiration.
During late 1998 the Company completed the majority of construction on a
development plan for a waterfront area in South Houston (the "Kemah Boardwalk
Development"). The Kemah Boardwalk Development includes restaurants,
entertainment venues and a hotel.
Exclusive of any acquisitions or large real estate purchases, the Company
currently expects to incur capital expenditures of up to $50.0 million in 1999
(based upon approximately 9 to 12 new restaurants), depending upon the actual
number and timing of restaurant construction, the number of land purchases, the
amount 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 and capitalized interest costs, 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. The
Company may, from time to time, review opportunities for investment in the
hospitality, entertainment and food service management industries, and may
increase or expand its investment and operations in the Kemah Boardwalk
Development. 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 2000.
19
LANDRY'S SEAFOOD RESTAURANTS, INC.
On November 19, 1998, the Company announced the authorization of an open
market stock buy back program for up to $50.0 million. This program, which
continues until December 31, 1999, unless extended or canceled, has resulted in
the Company repurchasing 5,580,000 common shares through June 30, 1999 for $46.0
million.
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. The Company anticipates a
decline in revenues from the initial ("honeymoon") volumes of new units.
As a result of seasonality and seafood purchasing cycles, the Company's
inventory balances may be expected to periodically increase and decrease on a
quarter to quarter basis.
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.
Year 2000 Date Conversion
The Company recognizes the need to ensure that its operation will not be
adversely impacted by Year 2000 software failures. The Company is currently
working to resolve the potential impact of the Year 2000 on the processing of
date-sensitive data by the Company's computerized information systems. In 1998,
the Company began to evaluate, test and modify its computer information systems
to ensure proper processing of transactions relating to the Year 2000 and
beyond. Since all of the Company's critical business information systems are
vendor-supported software packages, this remediation process involves performing
normal software upgrades and some related hardware upgrades on those vendor
supported systems that are not already Year 2000 compliant. The Company expects
to complete the required upgrades and modifications by the end of October 1999.
The amount charged to expense during the twelve months ended December 31,
1998, as well as the amounts anticipated to be charged to expense related to the
Year 2000 computer compliance modifications, have not been and are not expected
to be material to the Company's financial position, results of operations or
cash flows.
20
LANDRY'S SEAFOOD RESTAURANTS, INC.
The Company is taking steps to resolve Year 2000 compliance issues that may
be created by customers, suppliers and financial institutions with whom the
Company does business. However, there can be no guarantee that the systems of
other entities will be converted on a timely basis.
The Company believes that in an emergency it could revert to the use of
manual systems that do not rely on computers and could perform the minimum
functions required to provide information reporting to maintain satisfactory
control of the business. Should the Company have to utilize manual systems, it
is uncertain that it could maintain the same level of operations, and this could
have a material adverse impact on the business. The Company intends to maintain
constant surveillance on this situation and will develop such contingency plans
as are required by the changing environment.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk primarily related to potential
adverse changes in interest rates as discussed below. Management is actively
involved in monitoring exposure to market risk and continues to develop and
utilize appropriate risk management techniques. The Company is not exposed to
any other significant risks from the use of derivative financial instruments.
Management does not use derivative financial instruments for trading or to
speculate on changes in interest rates or commodity prices.
Interest Rate Risk
Total debt at June 30, 1999, included $75.0 million of floating-rate debt
attributed to bank credit facility borrowings at an average interest rate of
5.8%. As a result, the Company's annual interest cost in 1999 will fluctuate
based on short-term interest rates. As a result of an amendment to the Credit
Line Agreement in August 1999, the interest rate spread will initially increase
to 225 basis points over the Euro dollar rate, and the Company's interest
expense for the remainder of 1999 and 2000, will increase accordingly.
At June 30, 1999, the Company's floating rate debt had a book value and a
fair market value of $75.0 million. The floating-rate debt will mature in June
2000.
21
LANDRY'S SEAFOOD RESTAURANTS, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 current executive
officers and directors, E.A. "Al" Jaksa, Jr. (a former executive officer and
director) and underwriters that participated in the Company's secondary offering
in March of 1998. Each suit, purported to be on behalf of persons who purchased
Company stock from December 19, 1997 through June 23, 1998, or from December 19,
1997 through September 18, 1998, alleges that the defendants violated Federal
securities laws by making misrepresentations and omissions regarding the
Company's performance and future prospects during the respective class periods
while individually selling the Company's common stock. The plaintiffs in the
above 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.
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
these matters will have a material adverse effect on the Company's consolidated
financial position, operating results or cash flows.
ITEM 2. CHANGES IN SECURITIES Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
1. The Annual Meeting of Shareholders was held on August 13, 1999.
22
LANDRY'S SEAFOOD RESTAURANTS, INC.
2. The following persons were elected to serve on the Board of Directors
until the 2000 Annual Meeting of Shareholders or until their successor
have been duly elected and qualified. The Directors received the votes
set forth opposite their respective names:
WITHHELD
--------
NAME FOR AGAINST AUTHORITY
---- --- ------- ---------
Tilman J. Fertitta 21,532,000 0 1,063,075
Steven L. Scheinthal 21,517,065 0 1,078,010
Paul S. West 21,517,065 0 1,078,010
James E. Masucci 21,532,000 0 1,063,075
Joe Max Taylor 21,532,000 0 1,063,050
ITEM 5. OTHER INFORMATION Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS -- 14.1 SECOND AMENDMENT TO CREDIT AGREEMENT
27.1 FINANCIAL DATA SCHEDULE
27.2 FINANCIAL DATA SCHEDULE (RESTATED)
27.3 FINANCIAL DATA SCHEDULE (RESTATED)
27.4 FINANCIAL DATA SCHEDULE (RESTATED)
27.5 FINANCIAL DATA SCHEDULE (RESTATED)
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 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: August 16, 1999
---------------
24