10-Q 1 d10q.txt FORM 10-Q FOR PERIOD ENDING JUNE 30, 2002 ================================================================================ 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, 2002. Commission file number 000-22150 LANDRY'S RESTAURANTS, INC. (Exact name of the registrant as specified in its charter) DELAWARE (State or other jurisdiction of 74-00405386 incorporation or ( I.R.S. Employer organization) Identification No.) 1510 West Loop South, Houston, TX 77027 (Address of principal executive offices) (713) 850-1010 (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [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 12, 2002 THERE WERE 27,868,750 SHARES OF $0.01 PAR VALUE COMMON STOCK OUTSTANDING. ================================================================================ LANDRY'S RESTAURANTS, INC. INDEX
Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements................................................................... 2 Condensed Unaudited Consolidated Balance Sheets at June 30, 2002 and December 31, 2001...... 3 Condensed Unaudited Consolidated Statements of Income for the Three and Six Months Ended June 30, 2002 and June 30, 2001........................................................... 4 Condensed Unaudited Consolidated Statement of Stockholders' Equity for the Six Months Ended June 30, 2002............................................................................. 5 Condensed Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and June 30, 2001.................................................................... 6 Notes to Condensed Unaudited Consolidated Financial Statements................................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 9 Item 3. Quantitative and Qualitative Disclosures About Market Risks............................ 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings...................................................................... 13 Item 2. Changes in Securities.................................................................. 13 Item 3. Defaults Upon Senior Securities........................................................ 13 Item 4. Submission of Matters to a Vote of Security Holders.................................... 13 Item 5. Other Information...................................................................... 14 Item 6. Exhibits and Reports on Form 8-K....................................................... 14 Signatures..................................................................................... 15 Exhibit 99.1 Certification..................................................................... 16
1 LANDRY'S RESTAURANTS, INC. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements We have prepared the accompanying condensed unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting only of normal recurring entries) necessary for fair presentation of our results of operations, financial position and changes therein for the periods presented have been included. In this report, we have made forward-looking statements. Our forward-looking statements are subject to risks and uncertainty, including without limitation, our ability to continue our expansion strategy, our ability to make projected capital expenditures, as well as general market conditions, competition, and pricing. Forward-looking statements include statements regarding: . future capital expenditures (including the amount and nature thereof); . business strategy and measures to implement such strategy; . competitive strengths; . expansion and growth of our business and operations; . plans; . references to future success as well as other statements which include words such as "anticipate," "believe," "plan," "estimate," "expect," and "intend" and . other similar expressions. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, we cannot assure you that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the objectives and plans will be achieved. 2 LANDRY'S RESTAURANTS, INC. CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2002 2001 ------------ ------------ ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents............................................... $ 25,944,546 $ 31,081,008 Accounts receivable--trade and other.................................... 18,186,050 13,518,828 Inventories............................................................. 31,618,044 33,562,608 Deferred taxes.......................................................... 5,621,459 5,621,459 Other current assets.................................................... 9,614,320 10,336,996 ------------ ------------ Total current assets................................................ 90,984,419 94,120,899 ------------ ------------ PROPERTY AND EQUIPMENT, net................................................ 643,685,906 587,828,723 GOODWILL, net.............................................................. 2,434,547 2,438,996 OTHER ASSETS, net.......................................................... 7,553,829 5,782,578 ------------ ------------ Total assets........................................................ $744,658,701 $690,171,196 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................................................ $ 61,052,292 $ 45,027,820 Accrued liabilities..................................................... 72,504,839 55,109,685 Current portion of long-term debt....................................... 50,000 -- ------------ ------------ Total current liabilities........................................... 133,607,131 100,137,505 ------------ ------------ LONG-TERM DEBT, NET OF CURRENT PORTION..................................... 36,204,200 175,000,000 DEFERRED TAXES............................................................. 6,904,979 4,126,948 OTHER LIABILITIES.......................................................... 17,254,169 17,236,120 ------------ ------------ Total liabilities................................................... $193,970,479 $296,500,573 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $0.01 par value, 60,000,000 shares authorized, 27,864,200 and 21,996,369, issued and outstanding, respectively.................. 278,642 219,964 Additional paid-in capital.............................................. 443,080,349 305,598,659 Retained earnings....................................................... 107,329,231 87,852,000 ------------ ------------ Total stockholders' equity.......................................... 550,688,222 393,670,623 ------------ ------------ Total liabilities and stockholders' equity.......................... $744,658,701 $690,171,196 ============ ============
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements. 3 LANDRY'S RESTAURANTS, INC. CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, Six Months Ended June 30, -------------------------- -------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ REVENUES...................................... $231,938,099 $207,415,463 $424,108,097 $383,370,426 OPERATING COSTS AND EXPENSES: Cost of revenues........................... 66,443,465 61,881,566 121,844,259 113,936,215 Restaurant labor........................... 64,742,711 58,997,056 120,024,556 110,689,226 Other restaurant operating expenses........ 56,786,174 50,036,869 106,696,613 95,339,173 General and administrative expenses........ 10,936,837 9,661,817 20,458,522 18,696,800 Depreciation and amortization.............. 11,337,625 8,541,835 21,222,782 17,143,909 Restaurant pre-opening expenses............ 576,088 502,132 1,858,325 1,583,908 ------------ ------------ ------------ ------------ Total operating costs and expenses..... 210,822,900 189,621,275 392,105,057 357,389,231 ------------ ------------ ------------ ------------ OPERATING INCOME.............................. 21,115,199 17,794,188 32,003,040 25,981,195 OTHER EXPENSE (INCOME): Interest expense, net...................... 912,031 2,598,082 3,000,629 5,383,102 Other, net................................. (1,600,567) (173,577) (1,762,714) (133,968) ------------ ------------ ------------ ------------ Total other expense.................... (688,536) 2,424,505 1,237,915 5,249,134 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES.................... 21,803,735 15,369,683 30,765,125 20,732,061 PROVISION FOR INCOME TAXES.................... 6,759,158 4,764,602 9,537,189 6,426,939 ------------ ------------ ------------ ------------ NET INCOME.................................... $ 15,044,577 $ 10,605,081 $ 21,227,936 $ 14,305,122 ============ ============ ============ ============ EARNINGS PER SHARE INFORMATION: BASIC-- Net income................................. $ 0.58 $ 0.49 $ 0.88 $ 0.66 Weighted average number of common shares outstanding....................... 26,000,000 21,700,000 24,075,000 21,600,000 DILUTED-- Net income................................. $ 0.56 $ 0.47 $ 0.85 $ 0.64 Weighted average number of common share equivalents outstanding............ 27,000,000 22,400,000 25,100,000 22,200,000
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements. 4 LANDRY'S RESTAURANTS, INC. CONDENSED UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock -------------------- Additional Retained Shares Amount Paid-In Capital Earnings Total ---------- -------- --------------- ------------ ------------ Balance, December 31, 2001.......... 21,996,369 $219,964 $305,598,659 $ 87,852,000 $393,670,623 Net income.......................... -- -- -- 21,227,936 21,227,936 Dividends paid...................... -- -- -- (1,106,711) (1,106,711) Issuance of common stock, net of offering costs.................... 5,297,500 52,975 132,524,341 -- 132,577,316 Purchase of common stock held for treasury.......................... (108,400) (1,084) (2,422,642) (643,994) (3,067,720) Exercise of stock options and income tax benefit....................... 678,731 6,787 7,379,991 -- 7,386,778 ---------- -------- ------------ ------------ ------------ Balance, June 30, 2002.............. 27,864,200 $278,642 $443,080,349 $107,329,231 $550,688,222 ========== ======== ============ ============ ============
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements. 5 LANDRY'S RESTAURANTS, INC. CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, --------------------------- 2002 2001 ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................ $ 21,227,936 $ 14,305,122 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization..................................... 21,222,782 17,143,909 Change in assets and liabilities-net and other.................... 28,658,931 1,480,018 ------------- ------------ Total adjustments................................................. 49,881,713 18,623,927 ------------- ------------ Net cash provided by operating activities...................... 71,109,649 32,929,049 CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment additions...................................... (40,661,485) (38,888,573) Payment of acquisition integration liabilities........................ (3,706,700) -- Purchase of Muer Seafood Restaurants, net of cash acquired............ (27,652,773) -- ------------- ------------ Net cash used in investing activities............................. (72,020,958) (38,888,573) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of common stock................................ 132,577,316 -- Proceeds from exercise of stock options............................... 6,371,962 1,745,208 Borrowings (payments) under credit line, net.......................... (139,000,000) (9,051,006) Dividends paid........................................................ (1,106,711) (1,076,069) Repurchase of common stock for treasury............................... (3,067,720) -- ------------- ------------ Net cash provided by (used in) financing activities............... (4,225,153) (8,381,867) ------------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... (5,136,462) (14,341,391) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 31,081,008 26,159,525 ------------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 25,944,546 $ 11,818,134 ============= ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments during the period for-- Income taxes...................................................... $ 2,001,036 $ 563,000 Interest.......................................................... $ 3,789,320 $ 6,514,000
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 LANDRY'S RESTAURANTS, INC. NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS Landry's Restaurants, Inc. (the "Company") owns and operates seafood restaurants primarily under the trade names Landry's Seafood House, Joe's Crab Shack, The Crab House, Charley's Crab and Chart House. In addition, the Company owns and operates domestic and licenses international rainforest themed restaurants under the trade name Rainforest Cafe. The Company is also the developer and operator of the Kemah Boardwalk, located near Houston, Texas. The Kemah Boardwalk is a thirty acre waterfront restaurant development including seven restaurants, a boutique hotel, retail shops, amusement attractions, and a marina. In February 2002, the Company acquired C.A. Muer, Inc. ("Muer Acquisition"), the owner and operator of 16 seafood restaurants for approximately $28.0 million. In August 2002, the Company acquired, in an asset purchase transaction, 39 Chart House seafood restaurants located primarily on the East and West coasts of the United States from Angelo and Maxie's, Inc. for approximately $45.5 million in cash, as well as assumption of certain trade payable related liabilities. The impact on the Company's financial statements related to the acquisitions is not material. The acquisitions are accounted for under SFAS 141 and results of operations are included in the accompanying financial statements from the date of acquisition. Principles of Consolidation The accompanying financial statements include the consolidated accounts of Landry's Restaurants, Inc., a Delaware holding company and its wholly and majority owned subsidiaries and partnership. Basis of Presentation The consolidated financial statements included herein have been prepared by the Company without audit, except for the consolidated balance sheet as of December 31, 2001. 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, 2001, consolidated financial statements filed with the Securities and Exchange Commission on Form 10-K. The Company adopted two financial accounting standards addressing accounting for business combinations, goodwill and other intangible assets and adopted SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which superseded a previous pronouncement. Management believes these pronouncements will not have a material effect on the Company's financial statements. 2. ACCRUED LIABILITIES Accrued liabilities are comprised of the following:
June 30, December 31, 2002 2001 ----------- ------------ Payroll and related costs..................................... $17,601,862 $14,137,640 Rent, insurance and taxes, other than payroll and income taxes 29,791,879 24,845,811 Acquisition accruals (Rainforest Cafe and Muer)............... 1,816,633 3,569,111 Other......................................................... 23,294,465 12,557,123 ----------- ----------- $72,504,839 $55,109,685 =========== ===========
7 LANDRY'S RESTAURANTS, INC. NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During the six months ended June 30, 2002, accrued Rainforest Cafe acquisition costs were reduced by cash payments aggregating $1,941,661. In connection with the preliminary purchase price allocation for the Muer Acquisition, the Company recorded $1,900,000 in acquisition integration liabilities, of which $1,765,000 was paid during the six months ended June 30, 2002. 3. DEBT The Company has a $205.0 million credit line from a syndicate of banks. The credit line may be increased to $220.0 million at the request of the Company, subject to the addition of participating banks. The credit line matures in July 2004, and is available for expansion, acquisitions, share repurchases, and other general corporate purposes. Interest on the credit line is payable monthly or quarterly at Libor or the banks' base rate plus a financing spread (aggregating 4.65% at June 30, 2002). The credit line is governed by certain financial covenants. In July 2002, the credit line was amended to allow the Chart House restaurants and other additional acquisitions. 4. CONTINGENCIES Dissenters Rights Litigation Eighty-one former shareholders (holding 4,406,655 shares) of Rainforest Cafe, Inc. dissented to the merger between the Company and Rainforest Cafe. On February 13, 2001, Rainforest Cafe sent each of the 81 dissenting shareholders, Rainforest Cafe's estimate of fair value per share, along with a check in the amount of $3.25 per share, which was the original acquisition price per share. Subsequently, 78 of the dissenting shareholders have made a demand for supplemental payment based on their belief that the fair value per share of common stock of the former Rainforest Cafe was greater than $3.25 per share. The Company believes that its estimate of fair value is correct, and that the dissenting shareholders' estimate of fair value is inflated. The Company is vigorously pursuing its determination of fair value in an appraisal proceeding in a Minnesota District Court. 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 these matters will have a material adverse effect on the Company's financial position, results of operations or cash flows. 5. STOCKHOLDERS' EQUITY In April 2002, the Company completed a public offering of 5,297,500 shares of the Company's common stock. Net proceeds of the offering were approximately $132.6 million and were used to repay outstanding borrowings, finance expansion, acquisitions, and for other corporate purposes. 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, --------------------------- ------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net income................................... $15,044,577 $10,605,081 $21,227,936 $14,305,122 ----------- ----------- ----------- ----------- Weighted average common shares outstanding... 26,000,000 21,700,000 24,075,000 21,600,000 Dilutive common stock equivalents--stock options.................................... 1,000,000 700,000 1,025,000 600,000 Weighted average common and common equivalent shares outstanding--diluted................ 27,000,000 22,400,000 25,100,000 22,200,000 =========== =========== =========== =========== Net income per share--diluted................ $ 0.56 $ 0.47 $ 0.85 $ 0.64 =========== =========== =========== ===========
8 LANDRY'S RESTAURANTS, INC. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction We own and operate full-service, casual dining restaurants. As of June 30, 2002, we operated 214 restaurants. In February 2002, we acquired 16 seafood restaurants located primarily in Michigan and Florida resulting from the C.A. Muer, Inc., (the "Muer Acquisition"). In August 2002, we purchased 39 Chart House seafood restaurants, located primarily on the East and West Coasts of the United States. In this report, we have made forward-looking statements. Our forward-looking statements are subject to risks and uncertainty, including without limitation, our ability to continue our expansion strategy, our ability to make projected capital expenditures, as well as general market conditions, competition, and pricing. Forward-looking statements include statements regarding: . future capital expenditures (including the amount and nature thereof); . business strategy and measures to implement such strategy; . competitive strengths; . expansion and growth of our business and operations; . plans; . references to future success as well as other statements which include words such as "anticipate," "believe," "plan," "estimate," "expect," and "intend" and . other similar expressions. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, we cannot assure you that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the objectives and plans will be achieved. Results of Operations Restaurant Profitability The following table sets forth the percentage relationship to total revenues of certain operating data for the periods indicated:
Three Months Six Months Ended June 30, Ended June 30, ------------ ------------ 2002 2001 2002 2001 ----- ----- ----- ----- Revenues............................... 100.0% 100.0% 100.0% 100.0% Cost of revenues....................... 28.6% 29.8% 28.7% 29.7% Restaurant labor....................... 27.9% 28.5% 28.3% 28.9% Other restaurant operating expenses (1) 24.5% 24.1% 25.2% 24.9% ----- ----- ----- ----- Restaurant level profit (1)............ 19.0% 17.6% 17.8% 16.5% ===== ===== ===== =====
-------- (1) Excludes depreciation, amortization and pre-opening expenses. 9 Three Months Ended June 30, 2002 Compared to the Three Months Ended June 30, 2001 Revenues increased $24,522,636, or 11.8%, from $207,415,463 to $231,938,099 for the three months ended June 30, 2002, compared to the three months ended June 30, 2001. The increase in revenues was primarily attributable to revenues from new restaurant openings, a same store sales increase of 3.3% for the Company's seafood restaurants, and the inclusion of 2002 revenues from the Muer Acquisition. As a primary result of increased revenues, cost of revenues increased $4,561,899, or 7.4%, from $61,881,566 to $66,443,465 in the three months ended June 30, 2002, compared to the same period in the prior year. Cost of revenues as a percentage of revenues for the three months ended June 30, 2002, decreased to 28.6%, from 29.8% in 2001. The decrease in cost of revenues as a percentage of revenues primarily reflects menu changes and lower product costs in 2002 as compared to 2001. Restaurant labor expenses increased $5,745,655 or 9.7%, from $58,997,056 to $64,742,711 in the three months ended June 30, 2002, compared to the same period in the prior year, principally as a result of increased revenues. Restaurant labor expenses as a percentage of revenues for the three months ended June 30, 2002, decreased to 27.9% from 28.5% in 2001, as a result of increases in hourly labor productivity. Other restaurant operating expenses increased $6,749,305, or 13.5%, from $50,036,869 to $56,786,174 in the three months ended June 30, 2002, compared to the same period in the prior year, principally as a result of increased revenues. Such expenses increased as a percentage of revenues to 24.5% in 2002 from 24.1% in 2001, as a primary result of higher advertising and insurance costs. The Company anticipates that 2002 advertising and marketing expenses will increase as a percentage of revenues over the prior year. General and administrative expenses increased $1,275,020 or 13.2%, from $9,661,817 to $10,936,837 in the three months ended June 30, 2002, compared to the same period in the prior year, and was flat as a percentage of revenues at 4.7%. The dollar amount increase was a result of increased revenues and personnel required to support the Company's operations. Depreciation and amortization expense increased $2,795,790, or 32.7%, from $8,541,835 to $11,337,625 in the three months ended June 30, 2002, compared to the same period in the prior year. The increase for 2002 was primarily due to the addition of new restaurants and equipment, and an asset impairment charge of approximately $1,700,000, included in the 2002 amounts. The decrease in net interest expense in the three months ended June 30, 2002, as compared to the prior year, was primarily due to the Company's lower borrowings under the credit line and a lower borrowing rate. The Company's average borrowing rate declined by approximately 1.75% from June 30, 2001, to June 30, 2002. The change in other expense (income), was primarily due to additional income of $1,100,000 for a settlement from a vendor and a $500,000 gain on an asset during the three months ended June 30, 2002. Provision for income taxes increased by $1,994,556 to $6,759,158 in the three months ended June 30, 2002 from $4,764,602 compared to the same period in the prior year primarily due to changes in the Company's pre-tax income. Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2001 Revenues increased $40,737,671, or 10.6%, from $383,370,426 to $424,108,097 for the six months ended June 30, 2002, compared to the six months ended June 30, 2001. The increase in revenues was primarily attributable to revenues from new restaurant openings, a same store sales increase of 2.9% for the Company's seafood restaurants, and the inclusion of 2002 revenues from the Muer Acquisition. 10 As a primary result of increased revenues, cost of revenues increased $7,908,044, or 6.9%, from $113,936,215 to $121,844,259 in the six months ended June 30, 2002, compared to the same period in the prior year. Cost of revenues as a percentage of revenues for the six months ended June 30, 2002, decreased to 28.7%, from 29.7% in 2001. The decrease in cost of revenues as a percentage of revenues primarily reflects menu changes and lower product costs in 2002 as compared to 2001. Restaurant labor expenses increased $9,335,330 or 8.4%, from $110,689,226 to $120,024,556 in the six months ended June 30, 2002, compared to the same period in the prior year, principally as a result of increased revenues. Restaurant labor expenses as a percentage of revenues for the six months ended June 30, 2002, decreased to 28.3% from 28.9% in 2001, as a result of increases in hourly labor productivity. Other restaurant operating expenses increased $11,357,440, or 11.9%, from $95,339,173 to $106,696,613 in the six months ended June 30, 2002, compared to the same period in the prior year, principally as a result of increased revenues. Such expenses increased as a percentage of revenues to 25.2% in 2002 from 24.9% in 2001, as a primary result of higher advertising and insurance costs. The Company anticipates that 2002 advertising and marketing expenses will increase as a percentage of revenues over the prior year. General and administrative expenses increased $1,761,722 or 9.4%, from $18,696,800 to $20,458,522 in the six months ended June 30, 2002, compared to the same period in the prior year, and decreased slightly as a percentage of revenues to 4.8% in 2002 from 4.9% in 2001. The dollar amount increase was a result of increased revenues and personnel required to support the Company's operations. Depreciation and amortization expense increased $4,078,873, or 23.8%, from $17,143,909 to $21,222,782 in the six months ended June 30, 2002, compared to the same period in the prior year. The increase for 2002 was primarily due to the addition of new restaurants and equipment, the Muer Acquisition, and asset impairment charges of $2,200,000, included in the 2002 amounts. The decrease in net interest expense in the six months ended June 30, 2002, as compared to the prior year, was primarily due to the Company's lower borrowings under the credit line and the lower borrowing rate. The Company's average borrowing rate declined by approximately 1.75% from June 30, 2001, to June 30, 2002. The change in other expense (income), was primarily due to additional income of $1,100,000 for a settlement from a vendor and a $1,500,000 gain on an asset, offset by a loss of $1,000,000 on an asset during the six months ended June 30, 2002. Provision for income taxes increased by $3,110,250 to $9,537,189 in the six months ended June 30, 2002, from $6,426,939 in 2001, due to changes in the Company's pre-tax income. Liquidity and Capital Resources In April 2002, we completed a public offering of 5,297,500 shares of common stock and raised approximately $132.6 million. These proceeds were initially used to pay down the majority of amounts outstanding on our credit line. Our $205.0 million line of credit from a syndicate of banks matures in July 2004, and is available for expansion, acquisitions, share repurchases and other general corporate purposes. In July 2002, the credit line was amended to permit the Chart House restaurants and other additional acquisitions. At June 30, 2002, we had $36.0 million outstanding under this credit facility. For the six months ended June 30, 2002, we funded our capital expenditures of $40.7 million, out of existing cash balances, cash flow from operations and borrowings. In February 2002, we completed the Muer Acquisition for approximately $28.0 million. In August 2002, we acquired Chart House seafood restaurants for approximately $45.5 million in cash, as well as assumption of certain trade payable related liabilities. 11 We expect to spend approximately $100 million on capital expenditures in 2002, in addition to the Muer and Chart House Acquisitions. The capital expenditures include partial construction costs on an estimated 14 to 16 new seafood restaurants, one new Rainforest Cafe restaurant, and a new Aquarium restaurant, which are expected to open in 2002 or early 2003, plus further land acquisition costs and other capital expenditures. We have entered into an agreement to construct and operate a convention center in the City of Galveston, Texas. The Galveston Convention Center's estimated construction costs of approximately $28 million and subsequent operating expenses will not be funded by us, but by proceeds from governmental agency bonds issued by the City of Galveston and serviced by certain hotel occupancy taxes. In connection with the convention center development and related management contract, we are obligated to purchase and donate, with a reversionary interest, land required for use by the Galveston Convention Center. Under the agreement, we will have the right to one-half of any profits generated by the operation of the convention center. We have previously purchased property, including a multi-story building, adjacent to the new Houston professional baseball park and close to the Houston Convention Center. The property is also near the new professional basketball arena currently under construction and other major venues under development and construction in the downtown area of Houston, Texas. We plan to renovate the existing building into a 200-room hotel. We expect renovation and construction costs to be approximately $25 million, which would be expended over the next three years. We plan to fund 2002 capital expenditures and any additional restaurant acquisitions out of proceeds from existing cash balances, cash flow from operations and availability under our existing credit facility. As a result of our tax carryforwards and deferred tax assets, including amounts attributable to the acquisition of Rainforest Cafe, we expect our cash flow from operations to be subject to reduced Federal income tax payments for the foreseeable future, and therefore provide additional cash flow for funding our business activities and debt service. We pay an annual $0.10 per share dividend, declared and paid in quarterly amounts. From time to time we review opportunities for restaurant acquisitions, and investments in the hospitality, entertainment, amusement, food service and facilities management and other industries. Our exercise of any such investment opportunity may impact our development plans and capital expenditures. We believe that adequate sources of capital are available to fund our business activities through December 31, 2002. Seasonality and Quarterly Results Our business is seasonal in nature. Our reduced winter volumes cause revenues and, to a greater degree, operating profits to be lower in the first and fourth quarters than in other quarters. We have and continue to open restaurants in highly seasonal tourist markets. We further note that the Joe's Crab Shack concept restaurants tend to experience even greater seasonality and sensitivity to weather than our other restaurant concepts. Periodically, our sales and profitability may be negatively affected by adverse weather. The timing of unit openings can and will affect quarterly results. Critical Accounting Policies Restaurant and other properties are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. The recoverability of properties that are to be held and used is measured by comparison of the estimated future undiscounted cash flows associated with the asset to the carrying amount of the asset. If such assets are considered to be impaired, an impairment charge is recorded in the amount by which the carrying amount of the assets exceeds their fair value. Properties to be disposed of are reported at the lower of their carrying amount or fair value, reduced for estimated disposal costs. Impact of Inflation We do not believe that inflation has had a significant effect on our operations during the past several years. We believe we have historically been able to pass on increased costs through menu price increases, but there can be no assurance that we will be able to do so in the future. Future increases in restaurant labor costs, including expected future increases in federal minimum wages, land and construction costs could adversely affect our profitability and ability to expand. 12 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk primarily related to potential adverse changes in interest rates as discussed below. We actively monitor exposure to market risk and continue to develop and utilize appropriate risk management techniques. We are not exposed to any other significant risks from the use of derivative financial instruments. We do not use derivative financial instruments for trading or to speculate on changes in interest rates or commodity prices. Interest Rate Risk Total debt at June 30, 2002 primarily included $36.0 million of floating-rate debt attributed to a bank line of credit facility at an average interest rate of 4.65%. As a result, our annual interest cost in 2002 will fluctuate based on borrowings outstanding and short-term interest rates. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings Dissenters Rights Litigation Eighty-one former shareholders (holding 4,406,655 shares) of Rainforest Cafe, Inc. dissented to the merger between the Company and Rainforest Cafe. On February 13, 2001, Rainforest Cafe sent each of the 81 dissenting shareholders, Rainforest Cafe's estimate of fair value per share, along with a check in the amount of $3.25 per share, which was the original acquisition price. Subsequently, 78 of the dissenting shareholders have made a demand for supplemental payment based on their belief that the fair value per share of common stock in the former Rainforest Cafe was greater than $3.25 per share. The Company believes that its estimate of fair value is correct, and that the dissenting shareholders' estimate of fair value is significantly inflated. The Company is vigorously pursuing its determination of fair value in an appraisal proceeding in a Minnesota District Court. General Litigation The Company is subject to other legal proceedings and claims that arise in the ordinary course of business. Management does not believe that the outcome of any of those matters will have a material adverse effect on the Company's financial position, results of operations or cash flows. ITEM 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 On June 6, 2002, the Company held its 2002 Annual Meeting of Stockholders. At such time, the election of directors was submitted to a vote of stockholders through the solicitation of proxies. The following persons were elected to serve on the Board of Directors until the 2003 Annual Meeting of Stockholders or until their successors have been duly elected and qualified. The Directors each received at least a minimum of 20,600,000 votes: Tilman J. Fertitta, Steven L. Scheinthal, Paul S. West, Michael S. Chadwick; James A. Masucci, and Joe Max Taylor. 13 ITEM 5. Other Information Not applicable. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits. 99.1--Certification by CEO and CFO with respect to Quarterly Report. (b) Reports on Form 8-K. 1. The Company filed a report on Form 8-K on April 15, 2002 in which it reported on Item 5 of the issuance of a press release announcing its financial results for three months ended March 31, 2002. 2. The Company filed a report on Form 8-K on April 22, 2002 in which it reported on Item 5 on the acquisition of C.A. Muer, Incorporated. 3. The Company filed a report on Form 8-K on May 29, 2002 in which it reported that it had issued a press release announcing that it had entered into an agreement to acquire Chart House restaurants. 4. The Company filed a report on Form 8-K on August 2, 2002 announcing the retention of Ernst & Young LLP as its new independent auditors. The Company further announced the completion of the Chart House acquisition. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. LANDRY'S RESTAURANTS, INC. (Registrant) /s/ TILMAN J. FERTITTA -------------------------------------- Tilman J. Fertitta Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) /s/ PAUL S. WEST -------------------------------------- Paul S. West Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Dated: August 14, 2002 15