| LANDRYS RESTAURANTS INC ITEM 1A RISK FACTORS The following are factors to be considered: Some of our restaurants have limited operating histories, which makes it difficult for us to predict their future results of operations |
| A number of our restaurants have been open for less than two years |
| Consequently, the earnings achieved to date by such restaurants may not be indicative of future operating results |
| Should enough of these restaurants underperform our estimate of their performance, it could have a material adverse effect on our operating results |
| Because many of our restaurants are concentrated in single geographic areas, our results of operations could be materially adversely affected by regional events |
| Many of our existing and planned restaurants are concentrated in the southern half of the United States |
| This concentration in a particular region could affect our operating results in a number of ways |
| For example, our results of operations may be adversely affected by economic conditions in that region and other geographic areas into which we may expand |
| Also, given our present geographic concentration, adverse publicity relating to our restaurants could have a more pronounced adverse effect on our overall revenues than might be the case if our restaurants were more broadly dispersed |
| In addition, as many of our existing restaurants are in the Gulf Coast area from Texas to Florida, we are particularly susceptible to damage caused by hurricanes or other severe weather conditions |
| While we maintain property and business interruption insurance, we carry large deductibles, and there can be no assurance that if a severe hurricane or other natural disaster should affect our geographical areas of operations, we would be able to maintain our current level of operations or profitability, or that property and business interruption insurance would adequately reimburse us for our losses |
| Our gaming activities rely heavily on certain markets, and changes adversely impacting those markets could have a material adverse effect on our gaming business |
| The Golden Nugget properties are both located in Nevada and, as a result, our gaming business is subject to greater risks than a more diversified gaming company |
| These risks include, but are not limited to, risks related to local economic and competitive conditions, changes in local and state governmental laws and regulations (including changes in laws and regulations affecting gaming operations and taxes) and natural and other disasters |
| Any economic downturn in Nevada or any terrorist activities or disasters in or around Nevada could have a significant adverse effect on our business, financial condition and results of operations |
| In addition, there can be no assurance that gaming industry revenues in, or leisure travel to and throughout, Nevada or the surrounding local markets will continue to grow |
| 10 ______________________________________________________________________ [40]Table of Contents We also draw a substantial number of customers from other geographic areas, including southern California, Hawaii and Texas |
| A recession or downturn in any region constituting a significant source of our customers could result in fewer customers visiting, or customers spending less at, the Golden Nugget properties, which would adversely affect our results of operations |
| Additionally, there is one principal interstate highway between Las Vegas and southern California, where a large number of our customers reside |
| Capacity restraints of that highway or any other traffic disruptions may affect the number of customers who visit our facilities |
| If we are unable to obtain a seafood supply in sufficient quality and quantity to support our operations, our results of operations could be materially adversely affected |
| In the recent past, certain types of seafood have experienced fluctuations in availability |
| We have in the past utilized several seafood suppliers and have not experienced any difficulty in obtaining adequate supplies of fresh seafood on a timely basis |
| In addition, some types of seafood have been subject to adverse publicity due to certain levels of contamination at their source, which can adversely affect both supply and market demand |
| We maintain an in-house inspection program for our seafood purchases and, in the past, have not experienced any detriment from contaminated seafood |
| However, we can make no assurances that in the future either seafood contamination or inadequate supplies of seafood might not have a significant and materially adverse effect on our operating results and profitability |
| If we are unable to anticipate and react to changes in food and other costs, our results of operations could be materially adversely affected |
| Our profitability is dependent on our ability to anticipate and react to increases in food, labor, employee benefits, and similar costs over which we have limited or no control |
| Specifically, our dependence on frequent deliveries of fresh seafood and produce subjects us to the risk of possible shortages or interruptions in supply caused by adverse weather or other conditions that could adversely affect the availability and cost of such items |
| Our business may also be affected by inflation |
| In the past, management has been able to anticipate and avoid any adverse effect on our profitability from increasing costs through our purchasing practices and menu price adjustments, but there can be no assurance that we will be able to do so in the future |
| We use significant amounts of electricity, natural gas and other forms of energy, and energy price increases may adversely affect our results of operations |
| We use significant amounts of electricity, natural gas and other forms of energy |
| While no shortages of energy have been experienced, any substantial increases in the cost of electricity and natural gas in the United States, such as those increases recently experienced, will increase our cost of operations, which would negatively affect our operating results |
| The extent of the impact is subject to the magnitude and duration of the energy price increases, but this impact could be material |
| In addition, higher energy and gasoline prices affecting our customers may increase their cost of travel to our hotel-casinos and result in reduced visits to our properties and a reduction in our revenues |
| The restaurant, hospitality and gaming industries are peculiarly affected by trends and fluctuations in demand and are highly competitive |
| If we are unable to successfully surmount these challenges, our business and results of operations could be materially adversely affected |
| Restaurant Industry 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, 11 ______________________________________________________________________ [41]Table of Contents • demographic considerations, • the amounts spent on, and the effectiveness of, our marketing efforts; • weather conditions, and • the type, number, and location of competing restaurants |
| We have many well established competitors with greater financial resources 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 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 |
| Gaming Industry The United States gaming industry is intensely competitive and features many participants, including many world class destination resorts with greater name recognition, different attractions, amenities and entertainment options than our facilities |
| In a broader sense, gaming operations face competition from all manner of leisure and entertainment activities |
| Our competitors have more gaming industry experience, and many are larger and have significantly greater financial, selling and marketing, technical and other resources |
| Our competitors include multinational corporations that enjoy widespread name recognition, established brand loyalty, decades of casino operation experience and a diverse portfolio of gaming assets |
| We face ongoing competition as a result of the upgrading or expansion of facilities by existing market participants, the entrance of new gaming participants into a market or legislative changes |
| Certain states have recently legalized, and several other states are currently considering legalizing, casino gaming in designated areas |
| Legalized casino gaming in these states and on Indian reservations would increase competition and could adversely affect any future gaming operations |
| Our growth strategy depends on opening new restaurants |
| Our ability to expand our restaurant base is influenced by factors beyond our control, which may slow restaurant development and expansion and impair our growth strategy |
| We are pursuing a moderate and disciplined growth strategy which, to be successful, will depend in large part on our ability to open new restaurants and to operate these restaurants on a profitable basis |
| We anticipate that our new restaurants will generally take several months to reach planned operating levels due to inefficiencies typically associated with new restaurants, including lack of market awareness, the need to hire and train sufficient personnel and other factors |
| We cannot guarantee that we will be able to achieve our expansion goals or operating results similar to those of our existing restaurants |
| One of our biggest challenges in meeting our growth objectives will be to locate and secure an adequate supply of suitable new restaurant sites |
| We have experienced delays in opening some of our restaurants and may experience delays in the future |
| Delays or failures in opening new restaurants could materially and adversely affect our planned growth |
| The success of our planned expansion will depend upon numerous factors, many of which are beyond our control, including the following: • the hiring, training and retention of qualified personnel, especially managers; • reliance on the knowledge of our executives to identify available and suitable restaurant sites; • competition for restaurant sites; 12 ______________________________________________________________________ [42]Table of Contents • negotiation of favorable lease terms; • timely development of new restaurants, including the availability of construction materials and labor; • management of construction and development costs of new restaurants; • securing required governmental approvals and permits in a timely manner, or at all; • cost and availability of capital; • competition in our markets; and • general economic conditions |
| In addition, we contemplate entering new markets in which we have no operating experience |
| These new markets may have different demographic characteristics, competitive conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause the new restaurants to be less successful in these new markets than in our existing markets |
| Our growth strategy may strain our management, financial and other resources |
| For instance, our existing systems and procedures, restaurant management systems, financial controls, information systems, management resources and human resources may be inadequate to support our planned expansion of new restaurants |
| We may not be able to respond on a timely basis to all of the changing demands that the planned expansion will impose on our infrastructure and other resources |
| The expansion of our business through acquisitions poses risks that may reduce the benefits we anticipate and could harm our business and our financial condition |
| We have historically been, and we expect to continue to be, an active acquirer of restaurants, hospitality and entertainment properties and other related businesses |
| Part of our strategy involves acquisitions of restaurants and restaurant concepts and businesses involved in the hospitality, amusement and entertainment (including gaming) industries designed to expand and enhance our core operations |
| We have evaluated and expect to continue to evaluate possible acquisition and investment transactions on an ongoing basis and, at any given time, may be engaged in discussions with respect to possible acquisitions, business combinations or investments |
| Certain of these transactions, if consummated, could be material to our operations and financial condition |
| Our ability to benefit from acquisitions depends on many factors, including our ability to identify acquisition prospects, access capital markets at an acceptable cost of capital, negotiate favorable transaction terms and successfully integrate any businesses we acquire |
| Integrating businesses we acquire into our operational framework may involve unanticipated delays, costs and other operational problems |
| If we encounter unexpected problems with one of our acquisitions or alliances, our senior management may be required to divert attention away from other aspects of our businesses to address these problems |
| Acquisitions also pose the risk that we may be exposed to successor liability relating to actions by an acquired company and its management before the acquisition |
| The due diligence we conduct in connection with an acquisition, and any contractual guarantees or indemnities that we receive from the sellers of acquired companies, may not be sufficient to protect us from, or compensate us for, actual liabilities |
| A material liability associated with an acquisition could adversely affect our reputation and results of operations and reduce the benefits of the acquisition |
| The cost of compliance with the significant governmental regulation to which we are subject or our failure to comply with such regulation could materially adversely affect our results of operations |
| The restaurant industry is subject to extensive state and local government regulation relating to the sale of food and alcoholic beverages and to sanitation, public health, fire and building codes |
| Alcoholic beverage control regulations require each of our restaurants to apply for and obtain from state authorities a license or permit to sell alcohol on the premises |
| Typically, licenses must be renewed annually and may be revoked or suspended for 13 ______________________________________________________________________ [43]Table of Contents cause at any time |
| Alcoholic beverage control regulations affect various aspects of daily operations of our restaurants, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages |
| In certain states, we may be subject to “dram shop” statutes, which generally provide a person injured by an intoxicated person the right to recover damages from the establishment which wrongfully served alcoholic beverages to the intoxicated person |
| We carry liquor liability coverage as part of our comprehensive general liability insurance |
| Our operations may be impacted by changes in federal and state taxes and other federal and state governmental policies which include many possible factors such as: • the level of minimum wages, • the deductibility of business and entertainment expenses, • levels of disposable income and unemployment, and • national and regional economic growth |
| There are various federal, state and local governmental initiatives to increase the level of minimum wages which would increase our labor costs |
| Difficulties or failures in obtaining required licensing or other regulatory approvals could delay or prevent the opening of a new restaurant |
| The suspension of, or inability to renew a license could interrupt operations at an existing restaurant, and the inability to retain or renew such licenses would adversely affect the operations of such restaurant |
| Our operations are also subject to requirements of local governmental entities with respect to zoning, land use and environmental factors which could delay or prevent the development of new restaurants in particular locations |
| At the federal and state levels, there are from time to time various proposals and initiatives under consideration to further regulate various aspects of our business and employment regulations |
| These and other initiatives could adversely affect us as well as the restaurant industry in general |
| In addition, seafood is harvested on a world-wide basis and, on occasion, imported seafood is subject to federally imposed import duties |
| We conduct licensed gaming operations in Nevada, and various regulatory authorities, including the Nevada State Gaming Control Board and the Nevada Gaming Commission, require us to hold various licenses and registrations, findings of suitability, permits and approvals to engage in gaming operations and to meet requirements of suitability |
| These gaming authorities also control approval of ownership interests in gaming operations |
| These gaming authorities may deny, limit, condition, suspend or revoke our gaming licenses, registrations, findings of suitability or the approval of any of our ownership interests in any of the licensed gaming operations conducted in Nevada, any of which could have a significant adverse effect on our business, financial condition and results of operations, for any cause they may deem reasonable |
| If we violate gaming laws or regulations that are applicable to us, we may have to pay substantial fines or forfeit assets |
| If, in the future, we operate or have an ownership interest in casino gaming facilities located outside of Nevada, we may also be subject to the gaming laws and regulations of those other jurisdictions |
| If additional gaming regulations are adopted or existing ones are modified in Nevada, those regulations could impose significant restrictions or costs that could have a significant adverse effect on us |
| From time to time, various proposals are introduced in the federal and Nevada state and local legislatures that, if enacted, could adversely affect the tax, regulatory, operational or other aspects of the gaming industry and our business |
| Legislation of this type may be enacted in the future |
| If there is a material increase in federal, state or local taxes and fees, our business, financial condition and results of operations could be adversely affected |
| Our officers, directors and key employees are required to be licensed or found suitable by gaming authorities and the loss of, or inability to obtain, any licenses or findings of suitability may have a material adverse effect on us |
| 14 ______________________________________________________________________ [44]Table of Contents Our officers, directors and key employees are required to file applications with the gaming authorities in the State of Nevada, Clark County, Nevada and the City of Las Vegas and are required to be licensed or found suitable by these gaming authorities |
| If any of these gaming authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with us, we would have to sever all relationships with that person |
| Furthermore, the gaming authorities may require us to terminate the employment of any person who refuses to file the appropriate applications |
| Either result could significantly impair our gaming operations |
| Our business is subject to seasonal fluctuations, and, as a result, our results of operations for any given quarter may not be indicative of the results that may be achieved for the full fiscal year |
| Our business is subject to seasonal fluctuations |
| Historically, our highest earnings have occurred in the second and third quarters of the fiscal year, as our revenues in most of our restaurants have typically been higher during the second and third quarters of the fiscal year |
| As a result, results of operations for any single quarter are not necessarily indicative of the results that may be achieved for a full fiscal year |
| Quarterly results have been, and in the future will continue to be, significantly impacted by the timing of new restaurant openings and their respective pre-opening costs |
| Our international operations subject us to certain external business risks that do not apply to our domestic operations |
| Rainforest Cafe has license arrangements relating to the operations and development of Rainforest Cafes in the United Kingdom, Japan, France, Mexico, Canada and Egypt |
| These agreements include a per unit development fee and restaurant royalties ranging from 3prca to 7prca of revenues |
| There are nine international units; one is owned outright, and the rest are franchises |
| We own various equity interests in several of the international franchise locations |
| Our international operations will be subject to certain external business risks such as exchange rate fluctuations, political instability and the significant weakening of a local economy in which a foreign unit is located |
| In addition, it may be more difficult to register and protect our intellectual property rights in certain foreign countries |
| If we are unable to protect our intellectual property rights, it could reduce our ability to capitalize on our brand names, which could have an adverse affect on our business and results of operations |
| Landry’s Seafood House, Joe’s Crab Shack, Rainforest Cafe, Charley’s Crab, Saltgrass Steak House, Chart House and Golden Nugget are each registered as a federal service mark on the Principal Register of the United States Patent and Trademark Office |
| The Crab House is a registered design mark |
| We pursue registration of our important service marks and trademarks and vigorously oppose any infringement upon them |
| There is no assurance that any of our rights in any of our intellectual property will be enforceable, even if registered, against any prior users of similar intellectual property or against any of our competitors who seek to utilize similar intellectual property in areas where we operate or intend to conduct operations |
| The failure to enforce any of our intellectual property rights could have the effect of reducing our ability to capitalize on our efforts to establish brand equity |
| We face the risk of adverse publicity and litigation, the cost of which could have a material adverse effect on our business and results of operations |
| We may from time to time be the subject of complaints or litigation from customers alleging illness, injury or other food quality, health or operational concerns |
| Publicity resulting from these allegations may materially adversely affect us, regardless of whether the allegations are valid or whether we are liable |
| In addition, employee claims against us based on, among other things, wage and hour violations, discrimination, harassment or wrongful termination may divert our financial and management resources that would otherwise be used to benefit the future performance of our operations |
| A significant increase in the number of these claims or an increase in the number of successful claims could materially adversely affect our business, prospects, financial condition, operating results and/or cash flows |
| 15 ______________________________________________________________________ [45]Table of Contents Unfavorable publicity relating to one or more of our restaurants in a particular brand may taint public perception of the brand |
| Multi-unit restaurant businesses can be adversely affected by publicity resulting from poor food quality, illness or other health concerns or operating issues stemming from one or a limited number of restaurants |
| In particular, since we depend heavily on the “Joe’s Crab Shack” brand, unfavorable publicity relating to one or more Joe’s Crab Shack restaurants could have a material adverse effect on our business, results of operations, and financial condition |
| Labor shortages or increases in labor costs could slow our growth or harm our business |
| Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including regional operational managers and regional chefs, restaurant general managers, executive chefs and casino employees, necessary to continue our operations and keep pace with our growth |
| Qualified individuals that we need to fill these positions are in short supply and competition for these employees is intense |
| If we are unable to recruit and retain sufficient qualified individuals, our business and our growth could be adversely affected |
| Additionally, competition for qualified employees could require us to pay higher wages, which could result in higher labor costs |
| If our labor costs increase, our results of operations will be negatively affected |
| Health concerns relating to the consumption of seafood, beef and other food products could affect consumer preferences and could negatively impact our results of operations |
| Consumer food preferences could be affected by health concerns about the consumption of various types of seafood, beef or chicken |
| In addition, negative publicity concerning food quality or possible illness and injury resulting from the consumption of certain types of food, such as negative publicity concerning the levels of mercury or other carcinogens in certain types of seafood, e-coli, “mad cow” and “foot-and-mouth” disease relating to the consumption of beef and other meat products, “avian flu” related to poultry products and the publication of government, academic or industry findings about health concerns relating to food products served by any of our restaurants could also affect consumer food preferences |
| These types of health concerns and negative publicity concerning the food products we serve at any of our restaurants may adversely affect the demand for our food and negatively impact our results of operations |
| In addition, we cannot guarantee that our operational controls and employee training will be effective in preventing food-borne illnesses, such as hepatitis A, and other food safety issues that may affect our restaurants |
| Food-borne illness incidents could be caused by food suppliers and transporters and, therefore, would be outside of our control |
| Any publicity relating to health concerns or the perceived or specific outbreaks of food-borne illnesses or other food safety issues attributed to one or more of our restaurants, could result in a significant decrease in guest traffic in all of our restaurants and could have a material adverse effect on our results of operations |
| We face the risk of litigation in connection with any outbreak of food-borne illnesses or other food safety issues at any of our restaurants |
| If a claim is successful, our insurance coverage may not be adequate to cover all liabilities or losses and we may not be able to continue to maintain such insurance, or to obtain comparable insurance at a reasonable cost, if at all |
| If we suffer losses, liabilities or loss of income in excess of our insurance coverage or if our insurance does not cover such loss, liability or loss of income, there could be a material adverse effect on our results of operations |
| Expanding our restaurant base by opening new restaurants in existing markets could reduce the business of our existing restaurants |
| Our growth strategy includes opening restaurants in markets in which we already have existing restaurants |
| We may be unable to attract enough customers to the new restaurants for them to operate at a profit |
| Even if we are able to attract enough customers to the new restaurants to operate them at a profit, those customers may be former customers of one of our existing restaurants in that market and the opening of new restaurants in the existing market could reduce the revenue of our existing restaurants in that market |
| 16 ______________________________________________________________________ [46]Table of Contents Restaurant companies have been the target of class actions and other lawsuits alleging, among other things, violation of federal and state law |
| We are subject to a variety of claims arising in the ordinary course of our business brought by or on behalf of our customers or employees, including personal injury claims, contract claims, and employment-related claims |
| In recent years, a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace, employment and similar matters |
| A number of these lawsuits have resulted in the payment of substantial damages by the defendants |
| We are currently defending purported collective and class action lawsuits alleging violations, among other things, of minimum wage and overtime provisions of federal and state labor laws |
| Regardless of whether any claims against us are valid or whether we are ultimately determined to be liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our performance |
| A judgment for any claims could materially adversely affect our financial condition or results of operations (especially if there is no insurance coverage), and adverse publicity resulting from these allegations may materially adversely affect our business |
| We offer no assurance that we will not incur substantial damages and expenses resulting from lawsuits, which could have a material adverse effect on our business |
| Rising interest rates would increase our borrowing costs, which could have a material adverse effect on our business and results of operations |
| We currently have, and may incur, additional indebtedness that bears interest at variable rates |
| Accordingly, if interest rates increase, so will our interest costs, which may have an adverse effect on our business, results of operations and financial condition |
| The capital costs of our specialty growth and gaming divisions are extremely high |
| As a result, the failure of any one of these could have a material adverse effect on our operations |
| In connection with our specialty growth and gaming divisions, we incur significant capital expenditures |
| As a result, the failure of one or more of these projects could have a significant affect on our financial condition and operations |
| The loss of Tilman J Fertitta could have a material adverse effect on our business and development |
| We believe that the development of our business has been, and will continue to be, dependent on Tilman J Fertitta, our Chief Executive Officer, President, and Chairman of the Board |
| Fertitta’s services could have a material adverse effect upon our business and development, and there can be no assurance that an adequate replacement could be found for Mr |
| Fertitta in the event of his unavailability |
| Other risk factors may adversely affect our financial performance |
| Other risk factors that could cause our actual results to differ materially from those indicated in the “Forward-Looking Statements” in this report include, without limitation, changes in travel and outside dining habits as a result of terrorist activities perceived or otherwise, weather and other acts of God |
| There are inherent limitations in all control systems, and misstatements due to error that could seriously harm our business may occur and not be detected |
| Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls and disclosure controls will prevent all possible error and all fraud |
| A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met |
| In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs |
| Because of the inherent limitations 17 ______________________________________________________________________ [47]Table of Contents in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, in our Company have been detected |
| These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake |
| Further, controls can be circumvented by the individual acts of some persons or by collusion of two or more persons |
| 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 |
| Over time, a control may be inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate |
| Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected |