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, 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 November 10, 1999 there were
24,824,133 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 September 30, 1999 and December 31, 1998................. 3
Unaudited Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 1999 and 1998....................................................................... 4
Unaudited Consolidated Statement of Stockholders' Equity for the Nine Months
Ended September 30, 1999.......................................................................... 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 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................................................................................. 22
Item 6. Exhibits and Reports on Form 8-K.................................................................. 22
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Signatures.................................................................................................. 23
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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, conditions beyond the Company's
control such as weather or natural disasters, 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
September 30, December 31,
ASSETS 1999 1998
---------- ------------------ -----------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 26,399,686 $ 35,183,405
Accounts receivable--trade and other............................ 10,183,116 13,678,197
Deferred tax assets............................................. 2,330,000 2,330,000
Inventory....................................................... 12,431,162 22,839,020
Other current assets............................................ 8,661,475 10,816,686
------------ ------------
Total current assets......................................... 60,005,439 84,847,308
PROPERTY AND EQUIPMENT, net....................................... 424,011,536 398,568,419
GOODWILL, net of amortization of $1,351,000 and
$1,249,000, respectively........................................ 2,742,016 2,844,542
OTHER ASSETS, net................................................. 4,064,654 3,688,971
------------ ------------
Total assets................................................. $490,823,645 $489,949,240
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------
CURRENT LIABILITIES:
Accounts payable................................................ $ 18,004,447 $ 21,216,470
Accrued liabilities............................................. 22,543,936 19,588,812
Income taxes payable............................................ 2,614,966 ----
Current portion of long-term notes and other obligations........ 58,089,755 81,672
------------ ------------
Total current liabilities.................................... 101,253,104 40,886,954
LONG-TERM NOTES AND OTHER OBLIGATIONS,
NON-CURRENT..................................................... 84,560 35,153,100
DEFERRED INCOME TAXES AND OTHER LIABILITIES....................... 8,945,268 5,237,111
------------ ------------
Total liabilities............................................ 110,282,932 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, 25,399,133 and 30,345,290 issued and
outstanding, net of treasury shares, respectively........... 253,991 303,453
Additional paid-in capital...................................... 326,583,373 363,156,349
Retained earnings............................................... 53,703,349 45,212,273
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Total stockholders' equity.............................. 380,540,713 408,672,075
------------ ------------
Total liabilities and stockholders' equity.............. $490,823,645 $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 Nine Months Ended
-------------------------------- -------------------------------
September 30 September 30
1999 1998 1999 1999
------------- ------------- ------------ ------------
REVENUES..................................... $116,509,850 $109,352,503 $341,382,531 $310,436,071
OPERATING COSTS AND EXPENSES:
Cost of sales.............................. 35,935,628 32,916,061 106,325,569 93,664,137
Restaurant labor........................... 32,171,573 29,873,491 97,089,642 81,272,949
Other operating expenses................... 25,663,859 23,513,687 77,795,268 65,010,389
Depreciation and amortization.............. 5,641,160 4,911,434 16,350,783 13,417,147
General and administrative expenses........ 5,486,155 4,451,460 16,031,442 10,709,055
Pre-opening expenses....................... 789,224 2,614,132 2,595,970 7,591,692
Special charges, net....................... ---- ---- 2,945,000 ----
------------ ------------ ------------ ------------
Total operating costs and expenses...... 105,687,599 98,280,265 319,133,674 271,665,369
------------ ------------ ------------ ------------
OPERATING INCOME............................. 10,822,251 11,072,238 22,248,857 38,770,702
OTHER (INCOME) EXPENSE:
Interest (income) expense, net............. 661,073 (371,338) 1,101,250 (1,329,326)
Other, net................................. 96,626 250,003 (53,325) 12,277
------------ ------------ ------------ ------------
Total other (income) expense............ 757,699 (121,335) 1,047,925 (1,317,049)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES &
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE........................ 10,064,552 11,193,573 21,200,932 40,087,751
PROVISION FOR INCOME TAXES................... 3,472,270 3,861,300 7,303,569 13,825,254
NET INCOME BEFORE CUMULATIVE EFFECT OF....... ------------ ------------ ------------ ------------
CHANGE IN ACCOUNTING PRINCIPLE.............. 6,592,282 7,332,273 13,897,363 26,262,497
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE........................ ---- ---- ---- 3,381,500
------------ ------------ ------------ ------------
NET INCOME................................... $ 6,592,282 $ 7,332,273 $ 13,897,363 $ 22,880,997
============ ============ ============ ============
EARNINGS PER SHARE INFORMATION:
BASIC
Net income before cumulative effect
of accounting change...................... $ 0.26 $ 0.24 $ 0.51 $ 0.90
Cumulative effect of accounting change..... ---- ---- ---- $ 0.12
------------ ------------ ------------ ------------
Net income................................. $ 0.26 $ 0.24 $ 0.51 $ 0.78
============ ============ ============ ============
Weighted average number of common
shares outstanding........................ 25,600,000 30,350,000 27,233,000 29,117,000
DILUTED
Net income before cumulative effect
of accounting change...................... $ 0.26 $ 0.24 $ 0.50 $ 0.88
Cumulative effect of accounting change..... ---- ---- ---- $ 0.11
------------ ------------ ------------ ------------
Net income................................. $ 0.26 $ 0.24 $ 0.50 $ 0.77
============ ============ ============ ============
Weighted average number of common
share equivalents outstanding............. 25,600,000 30,350,000 27,767,000 29,700,000
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................................ 13,897,363 13,897,363
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............................. (5,846,157) (58,462) (42,867,081) (5,406,287) (48,331,830)
---------- -------- ------------ ----------- ------------
Balance, September 30, 1999............... 25,399,133 $253,991 $326,583,373 $53,703,349 $380,540,713
========== ======== ============ =========== ============
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
Nine Months Ended September 30,
----------------------------------------
1999 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 13,897,363 $ 22,880,997
Cumulative effect of change in
accounting principle............................. ---- 3,381,500
------------ -------------
Net income before accounting change............... 13,897,363 26,262,497
Adjustments to reconcile net income to
net cash provided by operating
activities-
Store closings credits.................. (730,000) ----
Depreciation and amortization........... 16,350,783 13,417,147
Change in assets and
liabilities-net and other.............. 23,757,479 19,103,031
------------ -------------
Total adjustments.................... 39,378,262 32,520,178
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Net cash provided by operating
operating activities................... 53,275,625 58,782,675
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions.................. (41,691,374) (118,101,272)
Other assets, including goodwill.................. (375,683) (553,597)
------------ -------------
Net cash used in investing
activities............................. (42,067,057) (118,654,869)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) on notes payable
and other long-term obligations.................. 22,939,543 (25,052,904)
Net amounts from sale (purchase) of
common stock..................................... (48,331,830) 102,273,090
Proceeds from exercise of stock options........... 5,400,000 6,969,317
------------ -------------
Net cash provided by (used
in) financing activities............... (19,992,287) 84,189,503
------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ (8,783,719) 24,317,309
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD............................................. 35,183,405 17,234,130
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CASH AND CASH EQUIVALENTS AT END OF PERIOD.......... $ 26,399,686 $ 41,551,439
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash payments during the period for--
Income taxes..................................... $ 464,000 $ 1,512,000
Interest......................................... $ 1,863,000 $ 1,817,000
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:
September 30, 1999 December 31, 1998
------------------ -----------------
Payroll and related costs................................ $ 5,902,126 $ 3,024,139
Taxes, other than payroll and income taxes............... 6,082,544 5,146,592
Store closings and special charges....................... 2,725,494 7,513,001
Other.................................................... 7,833,772 3,905,080
----------- -----------
$22,543,936 $19,588,812
=========== ===========
During the nine months ended September 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 in Note 4. 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 certain
lease terminations were resolved favorably in relation to amounts accrued.
-8-
LANDRY'S SEAFOOD RESTAURANTS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. Debt
The Company has a $110.0 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 a spread.
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 September 30, 1999, the Company had $58.1 million outstanding
under this credit facility at an approximate interest rate of 7.8%. 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
excluded the store closing and special charge of $37.6 million recorded in the
fourth quarter of 1998, from substantially all of the financial covenants,
permitted additional future stock repurchases of $7.0 million, and reduced 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
Eurodollar 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. This program has resulted in the Company
repurchasing approximately 6,421,157 common shares (21.2% of the outstanding
common stock) through October 10, 1999 for $53.0 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 nine months ended September 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 Nine Months Ended
September 30, September 30,
------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
Net Income............................................ $ 6,592,282 $ 7,332,273 $13,897,363 $22,880,997
=========== =========== =========== ===========
Weighted Average Common Shares Outstanding............ 25,600,000 30,350,000 27,233,000 29,117,000
Dilutive Common Stock Equivalents -- Stock Options.... ---- ---- 534,000 583,000
----------- ----------- ----------- -----------
Weighted Average Common and Common Equivalent Shares
Outstanding -- Diluted............................... 25,600,000 30,350,000 27,767,000 29,700,000
=========== =========== =========== ===========
Net Income Per Share -- Diluted....................... $ 0.26 $ 0.24 $ 0.51 $ 0.77
=========== =========== =========== ===========
Net Income Per Share, Before Special Charge and
Cumulative Effect of Change in Accounting Principle
- Diluted............................................ $ 0.26 $ 0.24 $ 0.57 $ 0.88
=========== =========== =========== ===========
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
1998. Such lawsuits allege that the defendants violated Federal securities laws
during certain periods while individually selling the Company's common stock.
The plaintiffs in 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 hotel/office project on the land. 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, which would 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. In May 1999, at the request of the Company, 610 Loop
Venture and the Company executed an amendment to the contract delaying
commencement of construction of the condominium project until April 1, 2000.
The amendment provided that the Company and 610 Loop Venture 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. 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 pays 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 September 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. 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, which reduced future annual new
unit growth and abandoned numerous potential restaurant sites. 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. 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 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.
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 release 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, conditions beyond the Company's
control such as weather or natural disasters, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1999 1998 1999 1998
----------- ------------ ----------- -----------
Revenues....................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................. 30.8% 30.1% 31.1% 30.2%
Restaurant labor............................... 27.6% 27.3% 28.5% 26.2%
Other operating expenses (1)................... 22.1% 21.5% 22.8% 20.9%
----- ----- ----- -----
Restaurant level profit (1).................... 19.5% 21.1% 17.6% 22.7%
_____________________
(1) Excludes depreciation, amortization and pre-opening expenses.
Three Months Ended September 30, 1999 Compared to the Three Months Ended
September 30, 1998
Revenues increased $7,157,347, or 6.5%, from $109,352,503 to $116,509,850
for the three months ended September 30, 1999, compared to the three months
ended September 30, 1998. The increase in revenues was primarily attributable to
increases in the Company's unit average weekly sales. 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 resulted in positive revenue results. Same store
sales for the three months ended September 30, 1999 were up approximately 4%
from the same quarter in 1998. Average weekly sales for all stores increased
approximately 4% in the third 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 and third quarters of 1999, restaurant level cash flow margins
remained below prior year margins. Management believes that the many restaurant
level operational changes that were instituted will, over a longer term, provide
sustained sales and profitability.
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LANDRY'S SEAFOOD RESTAURANTS, INC.
As a primary result of increased revenues, cost of sales increased
$3,019,567, or 9.2%, from $32,916,061 to $35,935,628 in the three months ended
September 30, 1999, compared to the same period in the prior year. Cost of
sales as a percentage of revenues for the three months ended September 30, 1999
increased to 30.8%, from 30.1% in 1998. The increase in cost of sales as a
percentage of revenues reflects new menu changes, reduced menu pricing in
certain markets, and higher product costs in 1999 as compared to 1998.
Restaurant labor expenses increased $2,298,082, or 7.7%, from $29,873,491
to $32,171,573 in the three months ended September 30, 1999, compared to the
same period in the prior year. Restaurant labor expenses as a percentage of
revenues for the three months ended September 30, 1999 increased to 27.6% from
27.3%. Labor costs have increased as a result many strategic and operational
changes implemented by the Company. These increased labor costs may be
moderated by increased sales and decreased general manager turnover.
Other operating expenses increased $2,150,172, or 9.1%, from $23,513,687
to $25,663,859 in the three months ended September 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 22.1% in 1999 from 21.5% in 1998, as a
primary result of increased insurance, marketing and customer relations
expenses. The Company anticipates advertising and marketing expenses to
increase as a percentage of revenues into 2000.
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 $2,614,132 in the three months ended September 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.
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LANDRY'S SEAFOOD RESTAURANTS, INC.
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
-------------------------- --------------------------
Restated Restated
Selected Income Statement Amounts Restated to Reflect the Previously For Previously For
Adoption of SOP 98-5 (Pre-opening Costs) Reported SOP 98-5 Reported SOP 98-5
----------- ----------- ----------- -----------
*Depreciation and amortization $ 7,134,434 $ 4,911,434 $19,908,524 $13,417,147
*Pre-opening expenses. ---- 2,614,132 ---- 7,591,692
Operating income 11,463,370 11,072,238 39,871,017 38,770,702
Net income before cumulative effect of change in accounting
principle 7,588,405 7,332,273 26,983,812 26,262,497
Cumulative effect of change in accounting principle ---- ---- ---- 3,381,500
Net income 7,588,405 7,332,273 26,983,812 22,880,997
EPS
- -Basic (before cumulative effect of accounting change) $ 0.25 $ 0.24 $ 0.93 $ 0.90
- -Basic (after cumulative effect of accounting change) $ 0.25 $ 0.24 $ 0.93 $ 0.78
- -Diluted (before cumulative effect of accounting change) $ 0.25 $ 0.24 $ 0.91 $ 0.88
- -Diluted (after cumulative effect of accounting change) $ 0.25 $ 0.24 $ 0.91 $ 0.77
--------------
*Change resulting from pre-opening cost accounting change (adoption of
SOP 98-5).
Depreciation and amortization expense increased $729,726, or 14.9%, from
$4,911,434 to $5,641,160 in the three months ended September 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 $1,034,695, or 23.2%, from
$4,451,460 to $5,486,155 in the three months ended September 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 $789,224 as compared to $2,614,132 in
1998. The Company opened four units during the three months ended September 30,
1999.
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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, working capital and treasury stock purchases. The Company
expects that the average interest rate on the credit line will be higher for the
remainder of 1999 and 2000, than in 1998 and the first six months of 1999. The
change in other (income) expense in the three months ended September 30, 1999,
as compared to the same period in the prior year, was not deemed significant.
Provision for income taxes decreased by $389,030 from $3,861,300 in 1998
to $3,472,270 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.
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended September
30, 1998
Revenues increased $30,946,460, or 10.0%, from $310,436,071 to
$341,382,531 for the nine months ended September 30, 1999, compared to the nine
months ended September 30, 1998. The increase in revenues was primarily
attributable to revenues from new restaurant openings and increases in the
Company's unit average weekly sales. 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 resulted in positive revenue results. Same store sales for the
nine months ended September 30, 1999 were up approximately 3% from the same
period in 1998. Average weekly sales for all stores for the nine months ended
September 30, 1999 increased 1.6%, with increases recorded in the second and
third quarters of 1999, offsetting a lesser decline in the first quarter of
1999, as compared to the same quarters in 1998.
As a primary result of increased revenues, cost of sales increased
$12,661,432, or 13.5%, from $93,664,137 to $106,325,569 in the nine months ended
September 30, 1999, compared to the same period in the prior year. Cost of
sales as a percentage of revenues for the nine months ended September 30, 1999
increased to 31.1%, from 30.2% in 1998. The increase in cost of sales as a
percentage of revenues reflects new menu changes, 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 $15,816,693, or 19.5%, from
$81,272,949 to $97,089,642 in the nine months ended September 30, 1999, compared
to the same period in the prior year. Restaurant labor expenses as a percentage
of revenues for the nine months ended September 30, 1999 increased to 28.5% from
26.2%. In connection with a new menu roll-out and 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
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LANDRY'S SEAFOOD RESTAURANTS, INC.
managers by approximately $10,000 per person. These increased labor costs may be
moderated by increased sales and decreased general manager turnover.
Other operating expenses increased $12,784,879, or 19.7%, from
$65,010,389 to $77,795,268 in the nine months ended September 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 22.8% in 1999 from 20.9% in
1998, as a primary result of increased advertising, marketing, customer
relations expenses, and inefficiencies, costs and effects of a new menu roll-
out. The Company anticipates advertising and marketing expenses to increase as
a percentage of revenues into 2000.
Depreciation and amortization expense increased $2,933,636, or 21.9%,
from $13,417,147 to $16,350,783 in the nine months ended September 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 $5,322,387, or 49.7%, from
$10,709,055 to $16,031,442 in the nine months ended September 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 $2,595,970 as compared to $7,591,692 in
1998. The Company opened 12 units during the nine months ended September 30,
1999.
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 nine months ended September
30, 1999, as compared to the same period in the prior year, is primarily
attributable to increased borrowings for capital expenditures, working capital
and treasury stock purchases. The change in other income was not deemed
significant.
Provision for income taxes decreased by $6,521,685 from $13,825,254 in
1998 to $7,303,569 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 nine months ended September 30, 1999, the capital expenditures of
the Company were $41.7 million and through October 10, 1999 the Company
purchased $53 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 $110 million credit facility from a bank syndicate which
expires in June 2000. The line of credit is available for expansion,
acquisitions and general corporate purposes. At September 30, 1999, the Company
had $58 million outstanding under this credit facility at an approximate
interest rate of 7.8% and had cash and cash equivalent balances aggregating
approximately $26.4 million. These borrowings were used primarily to fund
capital expenditures and working capital and treasury stock purchases. Amounts
outstanding under the line of credit are classified as a current liability in
the Company's September 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.
Exclusive of any acquisitions or large real estate purchases, the Company
currently expects to incur capital expenditures of up to $50-60 million in 1999.
The Company expects that its average per unit investment, excluding real estate
costs and capitalized interest costs, to approximate $2.2 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.
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. 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.
In furtherance of the Company's shareholder value initiatives, the Company's
Board of Directors approved a $0.10 per share annual dividend, to be declared
and paid quarterly, commencing in 2000. 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.
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LANDRY'S SEAFOOD RESTAURANTS, INC.
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 November 1999.
-20-
LANDRY'S SEAFOOD RESTAURANTS, INC.
The amount charged to expense 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.
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 September 30, 1999, included $58.0 million of floating-rate
debt attributed to bank credit facility borrowings at an average interest rate
of 7.8%. 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 increased to 225 basis
points over the Eurodollar rate, and the Company's interest expense for the
remainder of 1999 and 2000, will increase accordingly.
At September 30, 1999, the Company's floating-rate debt had a book value
and a fair market value of $58.0 million. The floating-rate debt will mature in
June 2000.
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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 during certain 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 Not Applicable
ITEM 5. OTHER INFORMATION Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
27.1 FINANCIAL DATA SCHEDULE
-22-
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: November 15, 1999
-23-