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LANDRYS RESTAURANTS INC 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-12.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32
  6. Ex-32
Quarterly Report on Form 10-Q
Table of Contents

 

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 MARCH 31, 2005.

 

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

incorporation of organization)

 

76-0405386

(I.R.S. Employer

Identification No.)

 

1510 West Loop South, Houston, TX 77027

(Address of principal executive offices)

 

(713) 850-1010

(Registrants 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 ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). 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 May 5, 2005 THERE WERE

22,382,933 SHARES OF $0.01 PAR VALUE

COMMON STOCK OUTSTANDING

 



Table of Contents

LANDRY’S RESTAURANTS, INC.

 

INDEX

 

          Page
Number


PART I. FINANCIAL INFORMATION     

Item 1.

   Financial Statements    2
     Condensed Consolidated Balance Sheets at March 31, 2005 (unaudited), and December 31, 2004    3
     Condensed Unaudited Consolidated Statements of Income for the Three Months Ended March 31, 2005 and 2004    4
     Condensed Unaudited Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2005    5
     Condensed Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004    6
     Notes to Condensed Unaudited Consolidated Financial Statements    7

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    18

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    21

Item 4.

   Controls and Procedures    22

PART II. OTHER INFORMATION

   23

Item 1.

   Legal Proceedings    23

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    23

Item 6.

   Exhibits    24

Signatures

   25

 

1


Table of Contents

 

LANDRY’S RESTAURANTS, INC.

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

The accompanying condensed unaudited consolidated financial statements have been prepared by us 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 a fair presentation of our results of operations, financial position and changes therein for the periods presented have been included.

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws. Forward-looking statements may include the words “may,” “will,” “plans,” “believes,” “estimates,” “expects,” “intends” and other similar expressions. 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:

 

    potential acquisitions of other restaurants, restaurant concepts and lines of businesses in other sectors of the hospitality and entertainment industries;

 

    future capital expenditures, including the amount and nature thereof;

 

    business strategy and measures to implement such strategy;

 

    competitive strengths;

 

    goals;

 

    expansion and growth of our business and operations;

 

    future commodity prices;

 

    availability of food products, materials and employees;

 

    consumer perceptions of food safety;

 

    changes in local, regional and national economic conditions;

 

    the effectiveness of our marketing efforts;

 

    changing demographics surrounding our restaurants;

 

    the effect of tax laws and any changes therein;

 

    same store sales;

 

    earnings guidance;

 

    the seasonality of our business;

 

    weather and acts of God;

 

    food, labor, fuel and utilities costs;

 

    plans; and

 

    references to future success.

 

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 our forward-looking statements, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

 

2


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LANDRY’S RESTAURANTS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     March 31,
2005


    December 31,
2004


 
     (Unaudited)        
ASSETS                 

CURRENT ASSETS:

                

Cash and cash equivalents

   $ 132,437,088     $ 201,394,032  

Accounts receivable - trade and other

     17,242,198       18,595,531  

Inventories

     52,855,624       55,004,153  

Deferred taxes

     11,307,212       10,859,160  

Other current assets

     10,101,775       11,630,527  
    


 


Total current assets

     223,943,897       297,483,403  
    


 


PROPERTY AND EQUIPMENT, net

     1,012,924,563       1,007,296,936  

GOODWILL

     18,527,547       18,527,547  

OTHER ASSETS, net

     47,206,741       21,644,385  
    


 


Total assets

   $ 1,302,602,748     $ 1,344,952,271  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY                 

CURRENT LIABILITIES:

                

Accounts payable

   $ 48,044,096     $ 48,341,318  

Accrued liabilities

     93,091,294       84,955,488  

Income taxes payable

     830,095       971,175  

Current portion of long-term notes and other obligations

     1,703,612       1,700,496  
    


 


Total current liabilities

     143,669,097       135,968,477  
    


 


LONG-TERM NOTES, NET OF CURRENT PORTION

     557,902,431       559,545,092  

DEFERRED TAXES

     14,369,582       13,343,631  

OTHER LIABILITIES

     36,029,057       35,198,105  
    


 


Total liabilities

     751,970,167       744,055,305  
    


 


COMMITMENTS AND CONTINGENCIES

                

STOCKHOLDERS’ EQUITY:

                

Common stock, $0.01 par value, 60,000,000 shares authorized, 23,706,933 and 25,607,573, shares issued and outstanding, respectively

     237,070       256,076  

Additional paid-in capital

     366,361,861       401,228,736  

Deferred stock compensation

     (6,961,796 )     (4,281,670 )

Retained earnings

     190,995,446       203,693,824  
    


 


Total stockholders’ equity

     550,632,581       600,896,966  
    


 


Total liabilities and stockholders’ equity

   $ 1,302,602,748     $ 1,344,952,271  
    


 


 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 

3


Table of Contents

LANDRY’S RESTAURANTS, INC.

 

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

 

     Three Months Ended March 31,

     2005

   2004
Restated


REVENUES

   $ 281,344,585    $ 275,676,487

OPERATING COSTS AND EXPENSES:

             

Cost of revenues

     78,583,533      77,719,512

Restaurant labor

     83,532,423      80,932,363

Other restaurant operating expenses

     69,996,905      64,697,802

General and administrative expenses

     13,686,407      16,407,130

Depreciation and amortization

     14,755,204      13,031,197

Asset impairment expense

     —        1,708,654

Restaurant pre-opening expenses

     919,521      1,854,044
    

  

Total operating costs and expenses

     261,473,993      256,350,702
    

  

OPERATING INCOME

     19,870,592      19,325,785

OTHER EXPENSE (INCOME):

             

Interest expense, net

     8,565,599      3,073,796

Other, net

     455,691      162,753
    

  

Total other expense

     9,021,290      3,236,549
    

  

INCOME BEFORE INCOME TAXES

     10,849,302      16,089,236

PROVISION FOR INCOME TAXES

     3,471,777      4,987,663
    

  

NET INCOME

   $ 7,377,525    $ 11,101,573
    

  

EARNINGS PER SHARE INFORMATION:

             

BASIC

             

Net income

   $ 0.30    $ 0.40

Weighted average number of common shares outstanding

     24,600,000      27,600,000

DILUTED

             

Net income

   $ 0.29    $ 0.39

Weighted average number of common and common share equivalents outstanding

     25,500,000      28,500,000

 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 

4


Table of Contents

LANDRY’S RESTAURANTS, INC.

 

CONDENSED UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

     Common Stock

                         
     Shares

    Amount

   

Additional
Paid-In

Capital


    Deferred Stock
Compensation


    Retained
Earnings


    Total

 

Balance, December 31, 2004

   25,607,573     $ 256,076     $ 401,228,736     $ (4,281,670 )   $ 203,693,824     $ 600,896,966  

Net income

   —         —         —         —         7,377,525       7,377,525  

Dividends paid

   —         —         —         —         (1,280,269 )     (1,280,269 )

Purchase of common stock held for treasury

   (2,006,200 )     (20,062 )     (37,748,269 )     —         (18,795,634 )     (56,563,965 )

Exercise of stock options and income tax benefit

   5,560       56       82,394       —         —         82,450  

Issuance of restricted stock

   100,000       1,000       2,799,000       (2,800,000 )     —         —    

Amortization of deferred stock compensation

   —         —         —         119,874       —         119,874  
    

 


 


 


 


 


Balance, March 31, 2005

   23,706,933     $ 237,070     $ 366,361,861     $ (6,961,796 )   $ 190,995,446     $ 550,632,581  
    

 


 


 


 


 


 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 

5


Table of Contents

LANDRY’S RESTAURANTS, INC.

 

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Three Months Ended March 31,

 
     2005

    2004
Restated


 

CASH FLOWS FROM OPERATING ACTIVITIES:

                

Net income

   $ 7,377,525     $ 11,101,573  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Depreciation and amortization

     14,755,204       13,031,197  

Asset impairment expense

     —         1,708,654  

Change in assets and liabilities, net and other

     13,152,440       (15,696,162 )
    


 


Total adjustments

     27,907,644       (956,311 )
    


 


Net cash provided by operating activities

     35,285,169       10,145,262  

CASH FLOWS FROM INVESTING ACTIVITIES:

                

Property and equipment additions

     (20,317,587 )     (29,758,550 )

Proceeds from sale of property and equipment

     —         1,470,000  

Business acquisitions and related payments, net of cash acquired

     (25,484,613 )     (179,857 )
    


 


Net cash used in investing activities

     (45,802,200 )     (28,468,407 )

CASH FLOWS FROM FINANCING ACTIVITIES:

                

Purchase of common stock for treasury

     (56,563,965 )     (1,538,113 )

Proceeds from exercise of stock options

     53,000       628,402  

Payments of debt and related expenses, net

     (648,679 )     (522,834 )

Proceeds (payments) on credit facility, net

     —         (4,000,000 )

Dividends paid

     (1,280,269 )     (691,497 )
    


 


Net cash provided by (used in) financing activities

     (58,439,913 )     (6,124,042 )
    


 


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (68,956,944 )     (24,447,187 )

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     201,394,032       35,211,319  
    


 


CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 132,437,088     $ 10,764,132  
    


 


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

                

Cash payments during the period for:

                

Income taxes

   $ 430,109     $ 598,327  

Interest

   $ 2,069,876     $ 3,071,924  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

6


Table of Contents

LANDRY’S RESTAURANTS, INC.

 

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Landry’s Restaurants, Inc. (the “Company”) is a national, diversified restaurant and hospitality company principally engaged in the ownership and operation of full service, casual dining restaurants, primarily under the names Landry’s Seafood House, Joe’s Crab Shack, The Crab House, Charley’s Crab, The Chart House and Saltgrass Steak House. In addition, we own and operate domestic and license international rainforest themed restaurants under the trade name Rainforest Cafe.

 

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 partnerships. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Basis of Presentation

 

The condensed consolidated financial statements included herein have been prepared by the Company without audit, except for the consolidated balance sheet as of December 31, 2004. 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, 2004, consolidated financial statements filed with the Securities and Exchange Commission on Form 10-K.

 

Revenues are recognized when the goods and services are delivered. Accounts receivable are primarily due from credit and charge card companies and national storage and distribution companies, and also include, as of March 31, 2005, refundable income taxes of approximately $1.1 million.

 

2. RESTATEMENT

 

Following a review of our lease accounting and leasehold depreciation policies, we determined that it was appropriate to restate certain of our consolidated financial statements for periods issued prior to the fourth quarter of 2004. As a result, we are restating our quarterly financial results for 2004 to conform to these changes in lease accounting and leasehold depreciation policies. Historically, unless otherwise deemed immaterial, we recorded rent expense on a straight-line basis over the initial non-cancelable lease term, with the term commencing when actual rent payments began. We depreciated our buildings, leasehold improvements and other long-lived assets on those properties over a period that included both the initial non-cancelable lease term and options, where the failure to renew would result in economic penalty (or the useful life of the assets, if shorter). We previously believed that these long standing accounting treatments were appropriate under generally accepted accounting principals. We now have restated our financial statements to recognize rent expense on a straight-line basis over the expected lease term, including option periods where failure to exercise such options would result in an economic penalty. The lease term commences on the date when we become legally obligated under the lease regardless of when actual rent payments begin.

 

As a result of this restatement, net income decreased $261,000 to $11,101,573 and basic and diluted earnings per share decreased $0.01 to $0.40 and $0.39, respectively, for the three months ended March 31, 2004.

 

3. OTHER ASSETS

 

On February 4, 2005, we entered into an agreement to acquire the capital stock of Poster Financial Group, Inc., owner of the Golden Nugget Hotel and Casino in downtown Las Vegas, Nevada for $140.0 million in cash, the assumption of $155.0 million of Senior Secured notes due 2011 and certain working capital liabilities to be calculated at closing. Pursuant to the agreement, we deposited $25.0 million in escrow, which is included in other assets on our consolidated balance sheet. This deposit may be forfeited if the Company fails to consummate the transaction. The agreement is subject to various contingencies, including the approval of Nevada Gaming authorities, which could take up to a year to obtain.

 

7


Table of Contents

LANDRY’S RESTAURANTS, INC.

 

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

 

4. ACCRUED LIABILITIES

 

Accrued liabilities are comprised of the following:

 

     March 31,
2005


   December 31,
2004


Payroll and related costs

   $ 18,765,919    $ 16,468,491

Rent and insurance

     27,532,721      25,753,353

Taxes, other than payroll and income taxes

     15,094,750      19,064,713

Deferred revenue (gift certificates)

     10,467,391      12,751,757

Accrued interest

     7,695,027      507,532

Other

     13,535,486      10,409,642
    

  

     $ 93,091,294    $ 84,955,488
    

  

 

5. DEBT

 

In December 2004, the Company entered into a $450.0 million bank credit facility consisting of a $300.0 million revolving credit facility and a $150.0 million term loan. The revolving credit facility matures in December 2009 and bears interest at Libor or the bank’s base rate plus a financing spread, 1.75% for Libor and 0.75% for base rate borrowings at March 31, 2005. In addition, the revolving credit facility requires a commitment fee on the unfunded portion. The financing spread and commitment fee increase or decrease based on a financial leverage ratio as defined in the credit agreement. The term loan matures in December 2010 and, at March 31, 2005, bears interest at Libor plus 1.75% or the bank’s base rate plus 0.75%. Quarterly principal payments of $375,000 are due through December 2009 with the remaining balance payable in equal quarterly installments of $35,625,000 in 2010. The Company and certain of its guarantor subsidiaries granted liens on substantially all real and personal property as security under the bank credit facility. As of March 31, 2005 the Company had approximately $13.9 million in letters of credit outstanding and available borrowing capacity of $286.1 million.

 

Concurrently, the Company issued $400.0 million in 7.5% senior notes due in December 2014. The notes are general unsecured obligations of the Company and require semi-annual interest payments in June and December.

 

Net proceeds from the $450.0 million bank credit facility and $400.0 million in 7.5% senior notes totaled $536.6 million and were used to repay all outstanding liabilities under the Company’s then existing bank credit facility and $150.0 million in Senior Notes. These debt repayments resulted in a pre-tax charge of $16.6 million in the fourth quarter of 2004.

 

In connection with the 7.5% senior notes due 2014, we have entered into two interest rate swap agreements with the objectives of managing our exposure to interest rate risk and lowering interest expense. The first agreement was effective December 28, 2004 maturing in December 2014 for a notional amount of $50.0 million and interest at Libor plus 2.38%. The second agreement was effective March 10, 2005 also maturing in December 2014 for a notional amount of $50.0 million and interest at Libor plus 2.34%. The Company’s interest rate swap agreements qualify as fair value hedges and meet the criteria for the “short cut method” under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The aggregate estimated fair value of these swaps at March 31, 2005 was a liability of $1.3 million, which is included in other liabilities with an offsetting adjustment to the carrying value of the debt on our consolidated balance sheet.

 

The Company’s debt agreements contain various restrictive covenants including minimum fixed charge, net worth, and financial leverage ratios as well as limitations on dividend payments, capital expenditures and other restricted payments as defined in the agreements. At March 31, 2005, the Company was in compliance with all such covenants.

 

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Table of Contents

LANDRY’S RESTAURANTS, INC.

 

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

 

The Company assumed an $11.4 million, 9.39% non-recourse, long-term mortgage note payable, due May 2010, in connection with an asset purchase in March 2003. Principal and interest payments aggregate $102,000 monthly.

 

Long-term debt is comprised of the following:

 

    

March 31,

2005


    December 31,
2004


 

$300.0 million Bank Syndicate Credit Facility, Libor + 1.75% interest only, due December 2009

   $ —       $ —    

$150.0 million Term loan facility, Libor + 1.75%, interest paid quarterly, $375,000 principal paid quarterly, due December 2009, $35,625,000 due quarterly through December 2010

     149,625,000       150,000,000  

$400.0 million Senior Notes, 7.5% interest only, due December 2014

     400,000,000       400,000,000  

Non-recourse long-term note payable, 9.39% interest, principal and interest aggregate $101,762 monthly, due May 2010

     11,128,470       11,171,760  

Other long-term notes payable with various interest rates, principal and interest paid monthly

     127,243       163,057  

Interest rate swaps

     (1,274,670 )     (89,229 )
    


 


Total debt

     559,606,043       561,245,588  

Less current portion

     (1,703,612 )     (1,700,496 )
    


 


Long-term portion

   $ 557,902,431     $ 559,545,092  
    


 


 

6. CONTINGENCIES

 

Building Commitments

 

As of March 31, 2005, the Company had future development, land purchases and construction commitments expected to be expended within the next twelve months of approximately $9.2 million, including completion of construction on certain new restaurants. In addition, the Company has committed $9.2 million through 2006 for the renovation of the Tower of the Americas in San Antonio, Texas which the Company will operate for at least the next 15 years.

 

In 2003, the Company purchased from the City of Galveston the Flagship Hotel and Pier, subject to an existing lease. Under this agreement, upon termination of the existing lease, the Company has committed to spend an additional $15.0 million to transform the hotel and pier into a 19th century style Inn and entertainment complex complete with rides and carnival type games. The property is currently occupied by a tenant.

 

During November 2003, the Company purchased two casual Italian restaurants. Under the purchase agreement, the Company is committed to building an additional five casual Italian restaurants over the next five years, or make certain payments in lieu of development. In conjunction with the agreement to develop additional restaurants, the seller agreed to provide consulting services to ensure that the consistency and the quality of the food and service are maintained through this transition period.

 

Litigation and Claims

 

On July 31, 2002, and subsequently amended, 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 and subsequently moved to a court in the Southern District of Texas. The lawsuit was filed by six plaintiffs who were 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 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 our financial position, results of operations or cash flows.

 

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Table of Contents

LANDRY’S RESTAURANTS, INC.

 

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

 

7. EARNINGS PER SHARE AND STOCKHOLDERS’ EQUITY

 

A reconciliation of the amounts used to compute net income per common share – diluted is as follows:

 

     Three Months Ended March 31,

     2005

   2004

Net income

   $ 7,377,525    $ 11,101,573
    

  

Weighted average common shares outstanding - basic

     24,600,000      27,600,000

Dilutive common stock equivalents:

             

Stock options

     890,000      900,000

Restricted stock

     10,000      —  
    

  

Weighted average common and common share equivalents outstanding - diluted

     25,500,000      28,500,000
    

  

Net income per share - basic

   $ 0.30    $ 0.40

Net income per share - diluted

   $ 0.29    $ 0.39

 

The table below illustrates the effect on net income and earnings per share if compensation costs for the Company had been determined using the alternative accounting method based on the fair value prescribed by SFAS No. 123.

 

     Three Months Ended March 31,

 
     2005

    2004

 

Net income, as reported

   $ 7,377,525     $ 11,101,573  

Less: stock based compensation expense using fair value method, net of tax

     (440,000 )     (240,000 )
    


 


Proforma net income

   $ 6,937,525     $ 10,861,573  
    


 


Earnings per share

                

Basic, as reported

   $ 0.30     $ 0.40  

Basic, proforma

   $ 0.28     $ 0.39  

Diluted, as reported

   $ 0.29     $ 0.39  

Diluted, proforma

   $ 0.27     $ 0.38  

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model.

 

In June 2003, the Company established an equity incentive plan pursuant to which stock options or restricted stock of the Company may be granted to eligible employees of the Company for an aggregate of 700,000 shares of common stock of the Company. The Compensation Committee of the Board of Directors determines the number of shares, prices, and vesting schedule of individual grants. In addition, the Company will issue pursuant to an employment agreement, over its five year term, 500,000 shares of restricted stock, with 10 year vest from grant date, and a minimum of 800,000 stock options. As of March 31, 2005, 300,000 restricted common shares have been issued in 100,000 increments each year since the plan was established. Each grant of restricted shares will vest on the tenth anniversary of the year they are granted.

 

During the three months ended March 31, 2005, the Company purchased $56.6 million of its common stock.

 

10


Table of Contents

LANDRY’S RESTAURANTS, INC.

 

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

 

8. SUPPLEMENTAL GUARANTOR INFORMATION

 

In December 2004, the Company issued, in a private offering, $400.0 million of 7.5% senior notes due 2014 (see “Debt”). These notes will be exchanged for substantially identical notes in an exchange offer registered under the Securities Act of 1933. These notes are fully and unconditionally guaranteed by the Company and certain of its subsidiaries, “Guarantor Subsidiaries”.

 

The following condensed unaudited consolidating financial statements present separately the financial position, results of operations and cash flows of the Company’s Guarantor Subsidiaries and Non-guarantor Subsidiaries on a combined basis with eliminating entries.

 

11


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LANDRY’S RESTAURANTS, INC.

 

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

 

Condensed Unaudited Consolidating Financial Statements

Balance Sheet

March 31, 2005

 

     Parent

  

Guarantor

Subsidiaries


   

Non-guarantor

Subsidiaries


    Eliminations

   

Consolidated

Entity


ASSETS                                      

CURRENT ASSETS:

                                     

Cash and cash equivalents

   $ 124,752,234    $ 5,326,402     $ 2,358,452     $ —       $ 132,437,088

Accounts receivable - trade and other

     11,281,296      5,809,040       151,862       —         17,242,198

Inventories

     35,576,621      16,902,755       376,248       —         52,855,624

Deferred taxes

     11,307,212      —         —         —         11,307,212

Other current assets

     1,035,377      3,626,639       5,439,759       —         10,101,775
    

  


 


 


 

Total current assets

     183,952,740      31,664,836       8,326,321       —         223,943,897
    

  


 


 


 

PROPERTY AND EQUIPMENT, net

     69,190,129      897,536,846       46,197,588       —         1,012,924,563

GOODWILL

     —        18,527,547       —         —         18,527,547

INVESTMENTS IN AND ADVANCES TO SUBSIDIARIES

     872,121,382      (594,131,768 )     (40,450,452 )     (237,539,162 )     —  

OTHER ASSETS, net

     44,824,402      2,382,339       —         —         47,206,741
    

  


 


 


 

Total assets

   $ 1,170,088,653    $ 355,979,800     $ 14,073,457     $ (237,539,162 )   $ 1,302,602,748
    

  


 


 


 

LIABILITIES AND

STOCKHOLDERS’ EQUITY

                                     

CURRENT LIABILITIES:

                                     

Accounts payable

   $ 24,420,422    $ 23,085,798     $ 537,876     $ —       $ 48,044,096

Accrued liabilities

     19,162,217      72,404,025       1,525,052       —         93,091,294

Income taxes payable

     830,095      —         —         —         830,095

Current portion of long-term notes and other obligations

     1,538,930      —         164,682       —         1,703,612
    

  


 


 


 

Total current liabilities

     45,951,664      95,489,823       2,227,610       —         143,669,097
    

  


 


 


 

LONG-TERM NOTES, NET OF CURRENT PORTION

     546,938,643      —         10,963,788       —         557,902,431

DEFERRED TAXES

     14,369,582      —         —         —         14,369,582

OTHER LIABILITIES

     12,196,183      23,832,874       —         —         36,029,057
    

  


 


 


 

Total liabilities

     619,456,072      119,322,697       13,191,398       —         751,970,167
    

  


 


 


 

COMMITMENTS AND CONTINGENCIES TOTAL STOCKHOLDERS’ EQUITY      550,632,581      236,657,103       882,059       (237,539,162 )     550,632,581
    

  


 


 


 

Total liabilities and stockholders’ equity

   $ 1,170,088,653    $ 355,979,800     $ 14,073,457     $ (237,539,162 )   $ 1,302,602,748
    

  


 


 


 

 

12


Table of Contents

LANDRY’S RESTAURANTS, INC.

 

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

 

Condensed Consolidating Financial Statements

Balance Sheet

December 31, 2004

 

     Parent

  

Guarantor

Subsidiaries


   

Non-guarantor

Subsidiaries


    Eliminations

   

Consolidated

Entity


ASSETS                                      

CURRENT ASSETS:

                                     

Cash and cash equivalents

   $ 192,679,301    $ 5,923,478     $ 2,791,253     $ —       $ 201,394,032

Accounts receivable—trade and other

     10,256,627      8,114,520       224,384       —         18,595,531

Inventories

     37,824,160      16,878,980       301,013       —         55,004,153

Deferred taxes

     10,859,160      —         —         —         10,859,160

Other current assets

     2,855,754      3,329,122       5,445,651       —         11,630,527
    

  


 


 


 

Total current assets

     254,475,002      34,246,100       8,762,301       —         297,483,403
    

  


 


 


 

PROPERTY AND EQUIPMENT, net

     73,767,370      887,811,651       45,717,915       —         1,007,296,936

GOODWILL

     —        18,527,547       —         —         18,527,547

INVESTMENTS IN AND ADVANCES TO SUBSIDIARIES

     864,745,965      (610,127,864 )     (40,284,199 )     (214,333,902 )     —  

OTHER ASSETS, net

     19,236,582      2,407,803       —         —         21,644,385
    

  


 


 


 

Total assets

   $ 1,212,224,919    $ 332,865,237     $ 14,196,017     $ (214,333,902 )   $ 1,344,952,271
    

  


 


 


 

LIABILITIES AND

STOCKHOLDERS’ EQUITY

                                     

CURRENT LIABILITIES:

                                     

Accounts payable

   $ 23,160,088    $ 24,544,797     $ 636,433     $ —       $ 48,341,318

Accrued liabilities

     12,925,743      70,441,426       1,588,319       —         84,955,488

Income taxes payable

     971,175      —         —         —         971,175

Current portion of long-term notes and other obligations

     1,535,814      —         164,682       —         1,700,496
    

  


 


 


 

Total current liabilities

     38,592,820      94,986,223       2,389,434       —         135,968,477
    

  


 


 


 

LONG-TERM NOTES, NET OF CURRENT PORTION

     548,538,015      —         11,007,077       —         559,545,092

DEFERRED TAXES

     13,343,631      —         —         —         13,343,631

OTHER LIABILITIES

     10,853,487      24,344,618       —         —         35,198,105
    

  


 


 


 

Total liabilities

     611,327,953      119,330,841       13,396,511       —         744,055,305
    

  


 


 


 

COMMITMENTS AND CONTINGENCIES

                                     

TOTAL STOCKHOLDERS’ EQUITY

     600,896,966      213,534,396       799,506       (214,333,902 )     600,896,966
    

  


 


 


 

Total liabilities and stockholders’ equity

   $ 1,212,224,919    $ 332,865,237     $ 14,196,017     $ (214,333,902 )   $ 1,344,952,271
    

  


 


 


 

 

13


Table of Contents

LANDRY’S RESTAURANTS, INC.

 

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

 

Condensed Unaudited Consolidating Financial Statements

Income Statement

March 31, 2005

 

     Parent

    Guarantor
Subsidiaries


   Non-guarantor
Subsidiaries


   Eliminations

    Consolidated
Entity


REVENUES

   $ 1,201,505     $ 273,849,874    $ 6,293,206    $ —       $ 281,344,585

OPERATING COSTS AND EXPENSES:

                                    

Cost of revenues

     —         77,136,160      1,447,373      —         78,583,533

Restaurant labor

     —         81,688,388      1,844,035      —         83,532,423

Other restaurant operating expenses

     1,285,163       66,329,861      2,381,881      —         69,996,905

General and administrative expenses

     13,686,407       —        —        —         13,686,407

Depreciation and amortization

     791,237       13,764,034      199,933      —         14,755,204

Restaurant pre-opening expenses

     —         915,785      3,736      —         919,521
    


 

  

  


 

Total operating costs and expenses

     15,762,807       239,834,228      5,876,958      —         261,473,993

OPERATING INCOME

     (14,561,302 )     34,015,646      416,248      —         19,870,592

OTHER EXPENSE (INCOME):

                                    

Interest expense, net

     8,270,661       820      294,118      —         8,565,599

Other, net

     444,119       10,844      728      —         455,691
    


 

  

  


 

       8,714,780       11,664      294,846      —         9,021,290

INCOME (LOSS) BEFORE INCOME TAXES

     (23,276,082 )     34,003,982      121,402      —         10,849,302

PROVISION (BENEFIT) FOR INCOME TAXES

     (7,448,347 )     10,881,275      38,849      —         3,471,777

EQUITY IN EARNINGS OF SUBSIDIARIES

     23,205,260       —        —        (23,205,260 )     —  
    


 

  

  


 

NET INCOME

   $ 7,377,525     $ 23,122,707    $ 82,553    $ (23,205,260 )   $ 7,377,525
    


 

  

  


 

 

14


Table of Contents

LANDRY’S RESTAURANTS, INC.

 

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

 

Condensed Unaudited Consolidating Financial Statements

Income Statement

March 31, 2004

 

     Parent

    Guarantor
Subsidiaries


   Non-guarantor
Subsidiaries


    Eliminations

    Consolidated
Entity


REVENUES

   $ 504,589     $ 270,489,082    $ 4,682,816     $ —       $ 275,676,487

OPERATING COSTS AND EXPENSES:

                                     

Cost of revenues

     —         76,543,636      1,175,876       —         77,719,512

Restaurant labor

     —         79,394,771      1,537,592       —         80,932,363

Other restaurant operating expenses

     388,118       61,734,045      2,575,639       —         64,697,802

General and administrative expenses

     16,407,130       —        —         —         16,407,130

Depreciation and amortization

     800,281       12,145,750      85,166       —         13,031,197

Asset impairment expense

     —         1,708,654      —         —         1,708,654

Restaurant pre-opening expenses

     —         1,854,044      —         —         1,854,044
    


 

  


 


 

Total operating costs and expenses

     17,595,529       233,380,900      5,374,273       —         256,350,702

OPERATING INCOME

     (17,090,940 )     37,108,182      (691,457 )     —         19,325,785

OTHER EXPENSE (INCOME):

                                     

Interest expense, net

     2,805,546       —        268,250       —         3,073,796

Other, net

     155,654       7,945      (846 )     —         162,753
    


 

  


 


 

       2,961,200       7,945      267,404       —         3,236,549

INCOME (LOSS) BEFORE INCOME TAXES

     (20,052,140 )     37,100,237      (958,861 )     —         16,089,236

PROVISION (BENEFIT) FOR INCOME TAXES

     (6,216,164 )     11,501,074      (297,247 )             4,987,663

EQUITY IN EARNINGS OF SUBSIDIARIES

     24,937,549       —        —         (24,937,549 )     —  
    


 

  


 


 

NET INCOME

   $ 11,101,573     $ 25,599,163    $ (661,614 )   $ (24,937,549 )   $ 11,101,573
    


 

  


 


 

 

15


Table of Contents

LANDRY’S RESTAURANTS, INC.

 

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

 

Condensed Unaudited Consolidating Financial Statements

Statement of Cash Flows

March 31, 2005

 

     Parent

    Guarantor
Subsidiaries


    Non-guarantor
Subsidiaries


    Eliminations

    Consolidated
Entity


 

CASH FLOWS FROM OPERATING ACTIVITIES:

                                        

Net income

   $ 7,377,525     $ 23,122,707     $ 82,553     $ (23,205,260 )   $ 7,377,525  

Adjustments to reconcile net income to net cash provided by operating activities:

                                        

Depreciation and amortization

     791,237       13,764,034       199,933       —         14,755,204  

Change in assets and liabilities, net and other

     3,877,119       (13,830,678 )     (99,261 )     23,205,260       13,152,440  
    


 


 


 


 


Total adjustments

     4,668,356       (66,644 )     100,672       23,205,260       27,907,644  
    


 


 


 


 


Net cash provided (used) by operating activities

     12,045,881       23,056,063       183,225       —         35,285,169  

CASH FLOWS FROM INVESTING ACTIVITIES:

                                        

Property and equipment additions and/or transfers

     3,908,289       (23,653,139 )     (572,737 )     —         (20,317,587 )

Business acquisitions and related payments, net of cash acquired

     (25,484,613 )     —         —         —         (25,484,613 )
    


 


 


 


 


Net cash provided (used) in investing activities

     (21,576,324 )     (23,653,139 )     (572,737 )     —         (45,802,200 )

CASH FLOWS FROM FINANCING ACTIVITIES:

                                        

Purchase of common stock for treasury

     (56,563,965 )     —         —         —         (56,563,965 )

Proceeds from exercise of stock options

     53,000       —         —         —         53,000  

Payments of debt and related expenses, net

     (605,390 )     —         (43,289 )     —         (648,679 )

Dividends paid

     (1,280,269 )     —         —         —         (1,280,269 )
    


 


 


 


 


Net cash provided (used) in financing activities

     (58,396,624 )     —         (43,289 )     —         (58,439,913 )

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (67,927,067 )     (597,076 )     (432,801 )     —         (68,956,944 )

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     192,679,301       5,923,478       2,791,253       —         201,394,032  
    


 


 


 


 


CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 124,752,234     $ 5,326,402     $ 2,358,452     $ —       $ 132,437,088  
    


 


 


 


 


 

16


Table of Contents

LANDRY’S RESTAURANTS, INC.

 

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

 

Condensed Unaudited Consolidating Financial Statements

Statement of Cash Flows

March 31, 2004

 

     Parent

    Guarantor
Subsidiaries


    Non-guarantor
Subsidiaries


    Eliminations

    Consolidated
Entity


 

CASH FLOWS FROM OPERATING ACTIVITIES:

                                        

Net income

   $ 11,101,573     $ 25,599,163     $ (661,614 )   $ (24,937,549 )   $ 11,101,573  

Adjustments to reconcile net income to net cash provided by operating activities:

                                        

Depreciation and amortization

     800,281       12,145,750       85,166       —         13,031,197  

Asset impairment expense

     —         1,708,654       —         —         1,708,654  

Change in assets and liabilities, net and other

     (57,820,939 )     15,857,952       1,329,276       24,937,549       (15,696,162 )
    


 


 


 


 


Total adjustments

     (57,020,658 )     29,712,356       1,414,442       24,937,549       (956,311 )
    


 


 


 


 


Net cash provided (used) by operating activities

     (45,919,085 )     55,311,519       752,828       —         10,145,262  

CASH FLOWS FROM INVESTING ACTIVITIES:

                                        

Property and equipment additions and/or transfers

     30,448,387       (60,027,816 )     (179,121 )     —         (29,758,550 )

Proceeds from sale of property and equipment

     —         1,470,000       —         —         1,470,000  

Business acquisitions and related payments, net of cash acquired

     (179,857 )     —         —         —         (179,857 )
    


 


 


 


 


Net cash provided (used) in investing activities

     30,268,530       (58,557,816 )     (179,121 )     —         (28,468,407 )

CASH FLOWS FROM FINANCING ACTIVITIES:

                                        

Purchase of common stock for treasury

     (1,538,113 )     —         —         —         (1,538,113 )

Proceeds from exercise of stock options

     628,402       —         —         —         628,402  

Payments of debt and related expenses, net

     (485,967 )     —         (36,867 )     —         (522,834 )

Proceeds (payments) on credit facility, net

     (4,000,000 )     —         —         —         (4,000,000 )

Dividends paid

     (691,497 )     —         —         —         (691,497 )
    


 


 


 


 


Net cash provided (used) in financing activities

     (6,087,175 )     —         (36,867 )     —         (6,124,042 )

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (21,737,730 )     (3,246,297 )     536,840       —         (24,447,187 )

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     30,656,642       4,430,245       124,432       —         35,211,319  
    


 


 


 


 


CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 8,918,912     $ 1,183,948     $ 661,272     $ —       $ 10,764,132  
    


 


 


 


 


 

17


Table of Contents

LANDRY’S RESTAURANTS, INC.

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

We are a national, diversified restaurant and hospitality company principally engaged in the ownership and operation of full service, casual dining restaurants. As of March 31, 2005, we operated 301 such restaurants as well as several limited menu restaurants and other properties.

 

We are in the business of operating restaurants and other complementary activities. We do not engage in real estate operations other than those associated with the ownership and operation of our business. We own a fee interest (own the land and building) in a number of properties underlying our businesses, but do not engage in real estate sales or real estate management in any significant fashion or format. Our Chief Executive Officer, who is responsible for the our operations, reviews and evaluates both core and non-core business activities and results, and determines financial and management resource allocations and investments for all business activities.

 

Our Specialty Growth Division is primarily engaged in operating complementary entertainment and hospitality activities, such as miscellaneous beverage carts and various kiosks, amusement rides and games and select hotel properties, generally at locations that complement our core restaurant operations. The total assets, revenues, and operating profits of these complementary “specialty” business activities are considered not material to the overall business and below the threshold of a separate reportable business segment under SFAS No. 131.

 

The restaurant industry is intensely competitive and is affected by changes in consumer tastes and by national, regional, and local economic conditions and demographic trends. The performance of individual restaurants may be affected by factors such as: traffic patterns, demographic considerations, marketing, weather conditions, and the type, number, and location of competing restaurants.

 

We have many well established competitors with greater financial resources, larger marketing and advertising budgets, and longer histories of operation than ours, including competitors already established in regions where we are planning to expand, as well as competitors planning to expand in the same regions. We face significant competition from mid-priced, full-service, casual dining restaurants offering or promoting seafood and other types and varieties of cuisine. Our competitors include national, regional, and local chains as well as local owner-operated restaurants. We also compete with other restaurants and retail establishments for restaurant sites. We intend to pursue an acquisition strategy.

 

On February 4, 2005, through the purchase of the outstanding capital stock of Poster Financial Group, Inc., we entered into an agreement to purchase the Golden Nugget Casino in downtown Las Vegas for $140.0 million in cash, the assumption of $155.0 million of Senior Secured Notes due 2011, and the assumption of certain working capital liabilities to be calculated at closing. Pursuant to the terms of the purchase agreement, we deposited $25.0 million into an escrow account. This deposit may be forfeited if the Company fails to consummate the transaction. Under the terms of the purchase agreement, Poster Financial Group’s currently outstanding Senior Secured Notes due 2011 will remain outstanding obligations of Poster Financial Group following the closing. The consummation of the sale will result in a change of control of Poster Financial Group under the terms of the senior notes and, as a result, Poster Financial Group will be required within 30 days of such change of control to commence an offer to purchase the senior notes for 101% of the aggregate principal amount of such senior notes, plus any accrued and unpaid interest. Under the terms of the purchase agreement, amounts outstanding at closing under Poster Financial Group’s senior credit facility will be repaid by us or we will seek consent from the lender under such facility for such amounts to remain outstanding. The Golden Nugget occupies over eight acres in downtown Las Vegas with approximately 40,000 square feet of gaming area. The property also features three towers containing 1,907 rooms, the largest number of guestrooms in downtown Las Vegas. It is anticipated that the transaction will close within the next twelve months, subject to customary closing conditions contained in the purchase agreement, including receipt of all necessary governmental, gaming and other regulatory approvals.

 

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 potential acquisitions of other restaurants, restaurant concepts and lines of businesses in other sectors of the hospitality and entertainment industries, 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 that strategy; competitive strengths; goals; expansion and growth of our business and operations; future commodity prices; availability of food products, materials and employees; consumer perceptions of food safety; changes in local, regional and national economic conditions; the effectiveness of our marketing efforts; changing demographics surrounding our restaurants; the effect of tax laws, and any changes therein; same store sales; earnings

 

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guidance; the seasonality of our business; weather and acts of God; food, labor, fuel and utilities costs; plans; references to future success; as well as other statements which include words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “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, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

 

Results of Operations

 

Restaurant Profitability

 

The following table sets forth the percentage relationship to total restaurant revenues of certain restaurant operating data for the periods indicated:

 

     Three Months Ended March 31,

 
     2005

    2004

 

Revenues

   100.0 %   100.0 %

Cost of revenues

   27.9 %   28.2 %

Restaurant labor

   29.7 %   29.3 %

Other restaurant operating expenses (1)

   24.9 %   23.4 %
    

 

Restaurant level profit (1)

   17.5 %   19.1 %
    

 

 

(1) Excludes depreciation, amortization and pre-opening expenses.

 

Three Months Ended March 31, 2005 Compared to the Three Months Ended March 31, 2004

 

Revenues increased $5,668,098, or 2.1%, from $275,676,487 to $281,344,585 for the three months ended March 31, 2005, compared to the three months ended March 31, 2004. The total increase/change in revenue is comprised of the following approximate amounts: 2005 restaurant openings – increase $12.5 million; restaurant closings – decrease $2.7 million; day lost due to leap year – decrease $3.4 million; and the remainder of the difference is attributable to the change in sales for stores not open a full comparable period. The total number of units open as of March 31, 2005 and 2004 were 301 and 290, respectively.

 

Cost of revenues increased $864,021, or 1.1%, from $77,719,512 to $78,583,533 in the three months ended March 31, 2005, compared to the same period in the prior year primarily as a result of increased revenues. Cost of revenues as a percentage of revenues for the three months ended March 31, 2005, decreased to 27.9%, from 28.2% in 2004. The slight decrease in cost of revenues as a percentage of revenues is primarily due to a shift in revenue to lower cost products.

 

Restaurant labor expenses increased $2,600,060, or 3.2%, from $80,932,363 to $83,532,423 in the three months ended March 31, 2005, 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 March 31, 2005, increased to 29.7% from 29.3% in 2004, principally due to increased hourly labor expense. The increase occurred primarily in kitchen and wait staff labor and was a product of reduced productivity and higher overtime wages.

 

Other restaurant operating expenses increased $5,299,103, or 8.2%, from $64,697,802 to $69,996,905 in the three months ended March 31, 2005, 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 24.9% in 2005 from 23.4% in 2004 as a primary result of increased advertising expenses.

 

General and administrative expenses decreased $2,720,723, or 16.6%, from $16,407,130 to $13,686,407 in the three months ended March 31, 2005, compared to the same period in the prior year, and decreased as a percentage of revenues to 4.9% in 2005 from 6.0% in 2004. The decrease was primarily a result of decreased accruals related to employee bonuses.

 

Restaurant pre-opening expenses were $919,521 for the three months ended March 31, 2005, compared to $1,854,044 for the same period in the prior year. The decrease for the 2005 period was attributable to a decrease in the number of units opened in 2005 as compared to 2004.

 

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Combined depreciation and amortization expense and asset impairment expense increased an aggregate of $15,353 or 0.1%, from an aggregate of $14,739,851 to $14,755,204 in the three months ended March 31, 2005, compared to the same period in the prior year. The increase for 2005 was due to the addition of new restaurants and equipment offset by an asset impairment expense in 2004 of $1,708,654.

 

The impairment charges in fiscal 2004 resulted from sales declines in one under performing restaurant, additional deterioration in the specific restaurant’s profitability, perceived deterioration of the market area and/or specific location, and management’s downward revised outlook for further opportunity and/or improvement of forecasted sales and profitability trends for such specific property. Assets that were impaired are primarily leasehold improvements and to a lesser extent equipment.

 

The increase in net interest expense in the three months ended March 31, 2005, as compared to the prior year, is primarily due to higher borrowings related to the Company’s new credit facility and 7.5% senior notes due 2014 both finalized in December 2004.

 

Provision for income taxes decreased by $1,515,886 to $3,471,777 in the three months ended March 31, 2005 from $4,987,663 in 2004 primarily due to changes in our pre-tax income.

 

Liquidity and Capital Resources

 

In December 2004, we refinanced our existing debt by entering into a new five year $300.0 million bank credit facility, a six year $150.0 million term loan, and issuing $400.0 million in 7.5% senior notes due 2014. The 7.5% senior notes due 2014 are general unsecured obligations of the Company. Our financing spread under both the bank credit facility and the term loan was 1.75% for Libor borrowings and 0.75% for base rate borrowings at March 31, 2005. Net proceeds from the refinancing were used to repay outstanding debt and for general corporate purposes. We plan to fund future operations, new restaurant development, and acquisitions from operations and available capacity under our current bank credit facility.

 

During the three months ended March 31, 2005, we purchased $56.6 million of our common stock. In early 2005 we authorized a $50.0 million open market stock repurchase program. We expect to make opportunistic repurchases of our common stock.

 

Working capital decreased to $80.3 million as of March 31, 2005 from $161.5 million as of December 31, 2004 primarily due to repurchases of stock and the deposit of $25.0 million into an escrow account pursuant to the terms of the purchase agreement of the Golden Nugget Casino in downtown Las Vegas, Nevada. Upon consummation of the sale, we will pay $140.0 million in cash and assume $155.0 million of senior secured notes due 2011 plus certain working capital liabilities to be calculated at closing. The transaction is anticipated to close within the next twelve months. Pursuant to the purchase agreement we will acquire the outstanding capital stock of Poster Financial Group, Inc., owner of the Golden Nugget Casino.

 

Primarily as a result of establishing long-term borrowings, we will incur higher interest expense in the future. We have entered into two interest rate swap agreements, with an aggregate notional value of $100.0 million, with the objective of managing our exposure to interest rate risk and lowering interest expense. We swapped higher 7.5% fixed interest rates of the senior notes due 2014 for floating interest rates equal to six month Libor plus a financing spread of 2.38% for the first $50.0 million and Libor plus 2.34% for the next $50.0 million.

 

From time to time, we review opportunities for restaurant acquisitions, and investments in the hospitality, gaming, 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, 2005.

 

Since April 2000, we have paid an annual $0.10 per share dividend, declared and paid in quarterly amounts. In April 2004, the annual dividend amount was increased to $0.20 per share, declared and paid in quarterly amounts.

 

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 opened and continue to open restaurants in highly seasonal tourist markets. The Joe’s Crab Shack concept restaurants tend to experience even greater seasonality and

 

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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 on a property by property basis 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, and are included in other current assets.

 

The Company maintains a large deductible insurance policy related to general liability and workers’ compensation coverage. Predetermined loss limits have been arranged with insurance companies to limit the Company’s per occurrence cash outlay. Accrued expenses and other liabilities include estimated costs to settle unpaid claims and estimated incurred but not reported claims using actuarial methodologies.

 

We follow the intrinsic value method of accounting for stock options, and as such do not record compensation expense related to amounts outstanding.

 

Recent Accounting Pronouncements

 

In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151, “Inventory Costs” which amended ARB 43. The statement clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials should be recognized as current period charges, effective for fiscal years beginning after June 15, 2005. Adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

In December 2004, the FASB issued SFAS No. 153, “Exchange of Non-Monetary Assets”. This statement amends APB 29 to require certain non-monetary exchange transactions to be recorded on a carry over cost basis if future cash flows are not expected to change significantly. The statement is effective for fiscal periods beginning after June 15, 2005. Adoption of SFAS No. 153 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In December 2004, the FASB issued SFAS No. 123 (R), “Share-Based Payments” later amended by the Securities and Exchange Commission in April 2005. This statement requires the expensing of stock options in the financial statements at the beginning of the next fiscal year for periods beginning after June 15, 2005. The Company has not made a determination of the valuation methodology and, therefore, has not determined the impact to future periods.

 

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 a variety of market risks including risks related to potential adverse changes in interest rates and commodity prices. We actively monitor exposure to market risk and continue to develop and utilize appropriate risk management techniques. We do not use derivative financial instruments for trading or to speculate on changes in commodity prices.

 

Interest Rate Risk

 

Total debt at March 31, 2005 included $249.6 million of floating-rate debt attributed to borrowings at an average interest rate of 5.1%. As a result, our annual interest cost in 2005 will fluctuate based on short-term interest rates.

 

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In connection with the 7.5% senior notes due 2014, the Company has entered into interest swap agreements with a total notional value of $100.0 million with the objective of managing our exposure to interest rate risk and lowering interest expense.

 

The impact on annual cash flow of a ten percent change in the floating-rate (approximately 0.5%) would be approximately $1.3 million annually based on the floating-rate debt and other obligations outstanding at March 31, 2005, however, there are no assurances that possible rate changes would be limited to such amounts.

 

ITEM 4. Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13e-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of March 31, 2005, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2005.

 

During the three months ended March 31, 2005, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

In July 31, 2002, and subsequently amended, 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, and subsequently moved to the Southern District of Texas Court. The lawsuit was filed by six plaintiffs who were 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 and costs. We are 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. Unregistered Sales of Equity Securities and Use of Proceeds

 

In November 1998, we announced the authorization of an open market stock buy back program, which was renewed in April 2000, for an additional $36.0 million. In October 2002, we authorized a $50.0 million open market stock buy back program and in September 2003, we authorized another $60.0 million open market stock repurchase program. In October 2004, we authorized a $50.0 million open market stock repurchase program. In March 2005, we announced a $50.0 million authorization to repurchase common stock. In May 2005, we announced a $50.0 million authorization to repurchase common stock. These programs have resulted in our aggregate repurchasing of approximately 14.8 million shares of common stock for approximately $213.3 million through March 31, 2005.

 

All repurchases of our common stock during the first quarter of 2005 were made pursuant to our open market stock repurchase program. The following table summarizes repurchases of our common stock during the first quarter of 2005 pursuant to our open market stock repurchase program.

 

Period


   (a) Total Number
of Shares (or Units
Purchased)


   (b) Average Price paid
per Share (or Unit)


   (c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs


   (d) Maximum Number
(or Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs


January 2005 (January 12 through January 31)

   567,300    $ 27.47    567,300    $ 73,722,400

February 2005 (February 10 through February 28)

   340,200    $ 28.76    340,200    $ 63,939,530

March 2005 (March 1 through March 31)

   1,098,700    $ 28.39    1,098,700    $ 82,743,373
    
  

  
  

Total

   2,006,200    $ 28.19    2,006,200    $ 82,743,373

 

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PART II. OTHER INFORMATION (continued)

 

ITEM 6. Exhibits

 

The following Exhibits are set forth herein commencing on page 26:

 

12.1    —Ratio of Earnings to Fixed Charges
31.1    —Certification by Chief Executive Officer
31.2    —Certification by Chief Financial Officer
32    —Certification with respect to quarterly report of Landry’s Restaurants, Inc.

 

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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/    RICK H. LIEM        
Rick H. Liem
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)

 

Dated: May 10, 2005

 

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