10-Q 1 d10q.txt FORM 10-Q FOR PERIOD ENDING SEPTEMBER 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 SEPTEMBER 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 NOVEMBER 5, 2002 THERE WERE 27,740,078 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 Consolidated Balance Sheets at September 30, 2002 and December 31, 2001......... 3 Condensed Unaudited Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2002 and September 30, 2001......................................... 4 Condensed Unaudited Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 2002................................................................ 5 Condensed Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and September 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.. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 14 Item 4. Controls and Procedures................................................................ 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings...................................................................... 15 Item 2. Changes in Securities.................................................................. 15 Item 3. Defaults Upon Senior Securities........................................................ 15 Item 4. Submission of Matters to a Vote of Security Holders.................................... 15 Item 5. Other Information...................................................................... 15 Item 6. Exhibits and Reports on Form 8-K....................................................... 16 Signatures...................................................................................... 17 Exhibit 10.17--Asset Purchase Agreement by and among Chart House, Inc., Chart House Enterprises, Inc., LCH Acquisitions, Inc. and Landry's Restaurants, Inc. Exhibit 10.18--Amendment No. 3 dated July 30, 2002 to Credit Agreement among Landry's Restaurants, Inc. and Bank of America, N.A. as administrative agent for the Banks. Exhibit 10.19--Stock Purchase Agreement dated September 10, 2002 among Landry's Restaurants, Inc., LSRI Holdings, Inc. and Well Seasoned, Inc., MetroNational Corporation and Kimberly Restaurants, Ltd. Exhibit 10.20--Asset Purchase and Sale Agreement dated September 10, 2002 among Kimberly Restaurants, Ltd., MNC Restaurant Properties, L.P., Well Seasoned, Inc. and MetroNational Corporation and LSRI Holdings, Inc. Exhibit 99.1--Certification Exhibit 99.2--Certification
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 accounting principles generally accepted in the U.S. 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 CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2002 2001 ------------- ------------ ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents............................................... $ 20,166,029 $ 31,081,008 Accounts receivable--trade and other.................................... 16,577,431 13,518,828 Inventories............................................................. 30,174,294 33,562,608 Deferred taxes.......................................................... 1,860,121 5,621,459 Other current assets.................................................... 16,434,454 10,336,996 ------------ ------------ Total current assets................................................ 85,212,329 94,120,899 ------------ ------------ PROPERTY AND EQUIPMENT, net................................................ 720,481,489 587,828,723 GOODWILL, net.............................................................. 2,434,547 2,438,996 OTHER ASSETS, net.......................................................... 7,362,828 5,782,578 ------------ ------------ Total assets........................................................ $815,491,193 $690,171,196 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................................................ $ 54,678,215 $ 45,027,820 Accrued liabilities..................................................... 67,812,482 55,109,685 Income taxes payable.................................................... 3,796,522 -- Current portion of long-term debt....................................... 50,000 -- ------------ ------------ Total current liabilities........................................... 126,337,219 100,137,505 ------------ ------------ LONG-TERM DEBT, NET OF CURRENT PORTION..................................... 103,204,200 175,000,000 DEFERRED TAXES............................................................. 6,904,979 4,126,948 OTHER LIABILITIES.......................................................... 16,844,876 17,236,120 ------------ ------------ Total liabilities................................................... 253,291,274 296,500,573 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $0.01 par value, 60,000,000 shares authorized, 27,688,706 and 21,996,369, issued and outstanding, respectively.................. 276,887 219,964 Additional paid-in capital.............................................. 440,342,742 305,598,659 Retained earnings....................................................... 121,580,290 87,852,000 ------------ ------------ Total stockholders' equity.......................................... 562,199,919 393,670,623 ------------ ------------ Total liabilities and stockholders' equity.......................... $815,491,193 $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 Nine Months Ended September 30, September 30, ------------------------- -------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ REVENUES...................................... $241,071,848 $202,786,013 $665,179,946 $586,156,439 OPERATING COSTS AND EXPENSES: Cost of revenues........................... 68,994,725 59,836,314 190,838,983 173,772,529 Restaurant labor........................... 69,301,201 57,637,840 189,325,758 168,327,066 Other restaurant operating expenses........ 57,081,466 48,666,417 163,778,079 144,005,590 General and administrative expenses........ 11,430,759 10,204,974 31,889,281 28,901,774 Depreciation and amortization.............. 9,727,656 8,662,534 30,950,438 25,806,443 Restaurant pre-opening expenses............ 1,182,369 453,115 3,040,694 2,037,023 ------------ ------------ ------------ ------------ Total operating costs and expenses..... 217,718,176 185,461,194 609,823,233 542,850,425 ------------ ------------ ------------ ------------ OPERATING INCOME.............................. 23,353,672 17,324,819 55,356,713 43,306,014 OTHER EXPENSE (INCOME): Interest expense, net...................... 539,706 2,049,108 3,540,335 7,432,210 Other, net................................. 35,455 (5,275) (1,727,258) (139,243) ------------ ------------ ------------ ------------ Total other expense.................... 575,161 2,043,833 1,813,077 7,292,967 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES.................... 22,778,511 15,280,986 53,543,636 36,013,047 PROVISION FOR INCOME TAXES.................... 7,061,338 4,737,381 16,598,527 11,164,320 ------------ ------------ ------------ ------------ NET INCOME.................................... $ 15,717,173 $ 10,543,605 $ 36,945,109 $ 24,848,727 ============ ============ ============ ============ EARNINGS PER SHARE INFORMATION: BASIC-- Net income................................. $ 0.57 $ 0.48 $ 1.46 $ 1.15 Weighted average number of common shares outstanding....................... 27,750,000 21,920,000 25,300,000 21,700,000 DILUTED-- Net income................................. $ 0.55 $ 0.46 $ 1.40 $ 1.10 Weighted average number of common share equivalents outstanding............ 28,700,000 22,850,000 26,300,000 22,500,000
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.......................... -- -- -- 36,945,109 36,945,109 Dividends paid...................... -- -- -- (1,803,269) (1,803,269) 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.......................... (306,300) (3,063) (5,317,637) (1,413,550) (6,734,250) Exercise of stock options and income tax benefit....................... 701,137 7,011 7,537,379 -- 7,544,390 ---------- -------- ------------ ------------ ------------ Balance, September 30, 2002......... 27,688,706 $276,887 $440,342,742 $121,580,290 $562,199,919 ========== ======== ============ ============ ============
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements. 5 LANDRY'S RESTAURANTS, INC. CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, ------------------------------ 2002 2001 ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................................ $ 36,945,109 $ 24,848,727 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization......................................... 30,950,438 25,806,443 Change in assets and liabilities-net and other........................ 23,591,783 (15,565,615) ------------- ------------ Total adjustments.................................................. 54,542,221 10,240,828 ------------- ------------ Net cash provided by operating activities...................... 91,487,330 35,089,555 CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment additions.......................................... (74,244,009) (55,043,552) Payment of acquisition integration liabilities............................ (7,797,943) -- Purchase of Chart House Restaurants, net of cash acquired................. (51,276,955) -- Purchase of Muer Seafood Restaurants, net of cash acquired................ (27,652,773) -- ------------- ------------ Net cash used in investing activities.......................... (160,971,680) (55,043,552) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of common stock.................................... 132,577,316 -- Proceeds from exercise of stock options................................... 6,529,574 3,546,385 Borrowings (payments) under credit line, net.............................. (72,000,000) (4,059,963) Dividends paid............................................................ (1,803,269) (1,620,113) Repurchase of common stock for treasury................................... (6,734,250) (50,567) ------------- ------------ Net cash provided by (used in) financing activities............ 58,569,371 (2,184,258) ------------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... (10,914,979) (22,138,255) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................. 31,081,008 26,159,525 ------------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD................................... $ 20,166,029 $ 4,021,270 ============= ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments during the period for-- Income taxes.......................................................... $ 5,247,820 $ 2,663,000 Interest.............................................................. $ 4,120,597 $ 8,794,000
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 all the outstanding common stock of 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. In October 2002, the Company acquired all the outstanding common stock from the owner and certain assets related to the operations of the Saltgrass Steak Houses ("Saltgrass"), the Texas-based owner and operator of 27 casual dining steak and seafood restaurants for approximately $73.0 million. The Company's fourth quarter financial statements will reflect the Saltgrass 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 accounting principles generally accepted in the U.S. 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 SFAS No. 141, "Business Combinations", SFAS No. 142, "Goodwill and Other Intangible Assets" and adopted SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Management believes these pronouncements will not have a material effect on the Company's financial statements. 7 LANDRY'S RESTAURANTS, INC. NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. ACCRUED LIABILITIES Accrued liabilities are comprised of the following:
September 30, December 31, 2002 2001 ------------- ------------ Payroll and related costs..................................... $16,714,738 $14,137,640 Rent, insurance and taxes, other than payroll and income taxes 31,180,460 24,845,811 Acquisition accruals (Rainforest Cafe and Muer)............... -- 3,569,111 Other......................................................... 19,917,284 12,557,123 ----------- ----------- $67,812,482 $55,109,685 =========== ===========
During the nine months ended September 30, 2002, accrued Rainforest Cafe acquisition costs were reduced by cash payments aggregating $3,436,743. In connection with the preliminary purchase price allocation for the Muer Acquisition, the Company recorded $2,100,000 in acquisition integration liabilities, of which $2,064,294 was paid during the nine months ended September 30, 2002. The company recorded acquisition integration liabilities of $2,300,000 for the Chart House acquisition, which were paid as of September 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 4.2% at September 30, 2002). The credit line is governed by certain financial covenants. In July 2002, the credit line was amended to permit the Chart House and Saltgrass acquisitions. In connection with the Saltgrass acquisition, the Company increased borrowings by approximately $73 million, including an additional $53 million under the credit facility and a $20 million 7 year 5.5% note from the former owner of Saltgrass. 4. CONTINGENCIES Approximately eighty 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 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, the dissenting shareholders 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. In January 2002, Rainforest Cafe, Inc., a wholly-owned subsidiary of Landry's, was sued by EklecCo, L.L.C. in the Supreme Court of the State of New York in Onondaga County. EklecCo is seeking damages, plus interest, attorneys fees and costs as a result of Rainforest Cafe's alleged breach of a restaurant lease entered into in 1996 for a Rainforest Cafe unit formerly located in the Palisades Mall. Rainforest Cafe believes that it has no liability for damages beyond the personal property located in the premises at the time it vacated the premises. Rainforest Cafe is defending this case vigorously. Because the case is in its early stages, the financial impact to the Company, if any, cannot be predicted. 8 LANDRY'S RESTAURANTS, INC. NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On July 31, 2002, and subsequently amended on August 6, 2002, a purported collective action lawsuit against the Company entitled Meaghan Bollenberg, et. al. v. Landry's Restaurants, Inc. was filed in the United States District Court for the Northern District of Illinois. The lawsuit was filed by six plaintiffs who are current and former servers on behalf of themselves and others similarly situated. The lawsuit alleges that the Company violated certain minimum wage laws under the federal Fair Labor Standards Act and seeks damages, statutory damages, attorneys fees and costs. The Company is vigorously defending this litigation. Because the case is in its early stages, the financial impact to the Company, if any, cannot be predicted. 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 to the Company were approximately $132.6 million and were used to repay outstanding borrowings. In October 2002, the Company's board of directors authorized a $50.0 million open market stock buy back program. 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, ----------------------- ----------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net income................................... $15,717,173 $10,543,605 $36,945,109 $24,848,727 ----------- ----------- ----------- ----------- Weighted average common shares outstanding... 27,750,000 21,920,000 25,300,000 21,700,000 Dilutive common stock equivalents--stock options.................................... 950,000 930,000 1,000,000 800,000 ----------- ----------- ----------- ----------- Weighted average common and common equivalent shares outstanding--diluted ............... 28,700,000 22,850,000 26,300,000 22,500,000 =========== =========== =========== =========== Net income per share--diluted................ $ 0.55 $ 0.46 $ 1.40 $ 1.10 =========== =========== =========== ===========
9 LANDRY'S RESTAURANTS, INC. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction We own and operate full-service, casual dining restaurants. As of September 30, 2002, we operated 241 restaurants. In February 2002, we acquired 16 seafood restaurants located primarily in Michigan and Florida resulting from the acquisition of 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 October 2002, we purchased 27 Texas-based Saltgrass Steak and seafood restaurants. 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 Nine Months Ended Ended September 30, September 30, ------------ ------------ 2002 2001 2002 2001 ----- ----- ----- ----- Revenues............................... 100.0% 100.0% 100.0% 100.0% Cost of revenues....................... 28.6% 29.5% 28.7% 29.6% Restaurant labor....................... 28.7% 28.4% 28.5% 28.7% Other restaurant operating expenses (1) 23.7% 24.0% 24.6% 24.6% ----- ----- ----- ----- Restaurant level profit (1)............ 19.0% 18.1% 18.2% 17.1% ===== ===== ===== =====
-------- (1) Excludes depreciation, amortization and pre-opening expenses. 10 Three Months Ended September 30, 2002 Compared to the Three Months Ended September 30, 2001 Revenues increased $38,285,835 or 18.9%, from $202,786,013 to $241,071,848 for the three months ended September 30, 2002, compared to the three months ended September 30, 2001. The increase in revenues was primarily attributable to revenues from new restaurant openings, same store sales increase of 1.6% for the Company's seafood restaurants, offset by a slight decline in Rainforest Cafe restaurant revenues, and the inclusion of 2002 revenues from the Muer (full quarter) and Chart House (August and September only) acquisitions. While the Company's same store sales were positive in the month of September 2002 and for the first three weeks of October 2002, management believes that positive comparisons for the remaining balance of the fourth quarter may be difficult in light of excellent prior year comparative same store sales results, unfavorable weather in October and early November, and a more difficult and competitive economic environment. Revenues from the Saltgrass acquisition completed in October will be included in our financial statements for the fourth quarter from the date the transaction closed. As a primary result of increased revenues, cost of revenues increased $9,158,411, or 15.3%, from $59,836,314 to $68,994,725 in the three months ended September 30, 2002, compared to the same period in the prior year. Cost of revenues as a percentage of revenues for the three months ended September 30, 2002, decreased to 28.6%, from 29.5% 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 $11,663,361 or 20.2%, from $57,637,840 to $69,301,201 in the three months ended September 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 September 30, 2002, increased to 28.7% from 28.4% in 2001, as a result of higher labor costs at the restaurants purchased in recent acquisitions. Other restaurant operating expenses increased $8,415,049, or 17.3%, from $48,666,417 to $57,081,466 in the three months ended September 30, 2002, compared to the same period in the prior year, principally as a result of increased revenues. Such expenses decreased as a percentage of revenues to 23.7% in 2002 from 24.0% in 2001, as a primary result of lower utility costs as a percentage of revenues in 2002. General and administrative expenses increased $1,225,785 or 12.0%, from $10,204,974 to $11,430,759 in the three months ended September 30, 2002, compared to the same period in the prior year. Such expenses decreased as a percentage of revenues to 4.7% in 2002 from 5.0% in 2001. The dollar amount increase was a result of increased revenues, acquisitions and additional personnel required to support our expanded operations. Depreciation and amortization expense increased $1,065,122 or 12.3%, from $8,662,534 to $9,727,656 in the three months ended September 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 decrease in net interest expense in the three months ended September 30, 2002, as compared to the prior year, was primarily due to our lower borrowings under the credit line and a lower borrowing rate. A substantial portion of outstanding debt was repaid with proceeds from a secondary offering of common stock in April 2002. The change in other expense (income) was not material. Provision for income taxes increased by $2,323,957 to $7,061,338 in the three months ended September 30, 2002 from $4,737,381 compared to the same period in the prior year primarily due to changes in our pre-tax income. The Company's effective tax rate remained a constant 31% for all periods presented. Nine Months Ended September 30, 2002 Compared to the Nine Months Ended September 30, 2001 Revenues increased $79,023,507, or 13.5%, from $586,156,439 to $665,179,946 for the nine months ended September 30, 2002, compared to the nine months ended September 30, 2001. The increase in revenues was 11 primarily attributable to revenues from new restaurant openings, a same store sales increase of 2.5% for our seafood restaurants, offset by a slight decline in Rainforest Cafe restaurant revenues, and the inclusion of 2002 revenues from the Muer and Chart House acquisitions. As a primary result of increased revenues, cost of revenues increased $17,066,454, or 9.8%, from $173,772,529 to $190,838,983 in the nine months ended September 30, 2002, compared to the same period in the prior year. Cost of revenues as a percentage of revenues for the nine months ended September 30, 2002, decreased to 28.7%, from 29.6% 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 $20,998,692 or 12.5%, from $168,327,066 to $189,325,758 in the nine months ended September 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 nine months ended September 30, 2002, decreased to 28.5% from 28.7% in 2001, as a result of increases in hourly labor productivity, offset in part by higher labor costs at restaurants purchased in recent acquisitions. Other restaurant operating expenses increased $19,772,489, or 13.7%, from $144,005,590 to $163,778,079 in the nine months ended September 30, 2002, compared to the same period in the prior year, principally as a result of increased revenues. Such expenses were flat as a percentage of revenues at 24.6% as lower utility costs were offset by other expenses that increased. General and administrative expenses increased $2,987,507 or 10.3%, from $28,901,774 to $31,889,281 in the nine months ended September 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 our expanded operations. Depreciation and amortization expense increased $5,143,995, or 19.9%, from $25,806,443 to $30,950,438 in the nine months ended September 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 and Chart House acquisitions, and asset impairment charges of $2,200,000 included in the 2002 amounts. The decrease in net interest expense for the nine months ended September 30, 2002, as compared to the prior year, was primarily due to our lower borrowings under the credit line and the lower borrowing rate. 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 nine months ended September 30, 2002. Provision for income taxes increased by $5,434,207 to $16,598,527 in the nine months ended September 30, 2002, from $11,164,320 in 2001, due to changes in our 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 and Saltgrass acquisitions. At September 30, 2002, we had $103 million outstanding under this credit facility. In October 2002, we purchased the 27-unit Saltgrass chain for approximately $73 million. The acquisition was financed by borrowing $53 million from the credit facility and a $20 million 7 year 5.5% note from the seller. In October 2002, we authorized a $50.0 million open market stock buy program. 12 For the nine months ended September 30, 2002, we funded our capital expenditures of $74.2 million and $79.0 million in acquired restaurant properties (Muer and Chart House restaurants), out of existing cash balances, cash flows from operations and borrowings. We expect to spend approximately $120 million on capital expenditures in 2002, in addition to the various acquisitions. The majority of planned capital expenditures will be for restaurants that are expected to open in 2002 and 2003, which include approximately 14 in 2002 and 30 in 2003. In addition, we are renovating a building adjacent to the new Houston professional baseball park and close to the Houston Convention Center, into a 200-room hotel as a part of our diversified growth opportunities. Expected construction costs of approximately $25 million, expended over several years are included in our capital budget. Further, we were awarded a contract from the City of Galveston, Texas to construct and operate the Galveston Convention Center. The estimated construction costs will be funded by proceeds from governmental agency bonds issued by the City of Galveston and serviced by certain taxes. Under the agreements, we have the right to one-half of the profits of the Convention Center. 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. Since April 2000 we have paid 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, 2003. 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 13 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. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk primarily related to potential adverse changes in interest rates as discussed below. We actively monitor exposure to market risk and continue to develop and utilize appropriate risk management techniques. We are not exposed to any other significant risks from the use of derivative financial instruments. We do not use derivative financial instruments for trading or to speculate on changes in interest rates or commodity prices. Interest Rate Risk Total debt at September 30, 2002, primarily included $103.0 million of floating-rate debt attributed to a bank line of credit facility at an average interest rate of 4.2%. As a result, our annual interest cost in 2002 will fluctuate based on borrowings outstanding and short-term interest rates. ITEM 4. Controls and Procedures Within 90 days prior to the date of this Report, we carried out an evaluation under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation. 14 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings Approximately eighty 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 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. In January 2002, Rainforest Cafe, Inc., a wholly-owned subsidiary of Landry's, was sued by EklecCo, L.L.C., in the Supreme Court of the State of New York in Onondaga County. EklecCo is seeking damages, plus interest, attorneys fees and costs as a result of Rainforest Cafe's alleged breach of a restaurant lease entered into in 1996 for a Rainforest Cafe unit formerly located in the Palisades Mall. Rainforest Cafe believes that it has no liability for damages beyond the personal property located in the premises at the time it vacated the premises. Rainforest Cafe is defending this case vigorously. Because the case is in its early stages, the financial impact to the Company, if any, cannot be predicted. On July 31, 2002, and subsequently amended on August 6, 2002, a purported collective action lawsuit against the Company entitled Meaghan Bollenberg, et. al. v. Landry's Restaurants, Inc. was filed in the United States District Court for the Northern District of Illinois. The lawsuit was filed by six plaintiffs who are current and former servers on behalf of themselves and others similarly situated. The lawsuit alleges that the Company violated certain minimum wage laws under the federal Fair Labor Standards Act and seeks damages, statutory damages, attorneys fees and costs. The Company is vigorously defending this litigation. Because the case is in its early stages, the financial impact to the Company, if any, cannot be predicted. 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 Not applicable. ITEM 5. Other Information Not applicable. 15 ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits. 10.17 --Asset Purchase Agreement by and among Chart House, Inc., Chart House Enterprises, Inc., LCH Acquisitions, Inc. and Landry's Restaurants, Inc. 10.18 --Amendment No. 3 dated July 30, 2002 to Credit Agreement among Landry's Restaurants, Inc. and Bank of America, N.A. as administrative agent for the Banks. 10.19 --Stock Purchase Agreement dated September 10, 2002 among Landry's Restaurants, Inc., LSRI Holdings, Inc. and Well Seasoned, Inc., MetroNational Corporation and Kimberly Restaurants, Ltd. 10.20 --Asset Purchase and Sale Agreement dated September 10, 2002 among Kimberly Restaurants, Ltd., MNC Restaurant Properties, L.P., Well Seasoned, Inc. and MetroNational Corporation and LSRI Holdings, Inc. 99.1 --Certification by CEO and CFO with respect to Quarterly Report. 99.2(a) --Certification by CEO and CFO with respect to certain information contained in the Quarterly Report and Disclosure Controls and Procedures. 99.2(b) --Certification by CEO and CFO with respect to certain information contained in the Quarterly Report and Disclosure Controls and Procedures.
(b) Reports on Form 8-K. 1. The Company filed a report on Form 8-K on October 4, 2002 and September 12, 2002 in which it reported on Item 5 on the acquisition of the 27 unit Saltgrass chain. 16 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: November 13, 2002 17