Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003 or

For the transition period from                                          to                                          .

* Commission file number 000-22150

LANDRY’S RESTAURANTS, INC.

(Exact Name of the Registrant as Specified in Its Charter)

(713) 850-1010

(Registrant’s Telephone Number, Including Area Code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

Common Stock, par value $.01 per Share

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 ¨

State the aggregate market value of the voting Common Stock held by non-affiliates computed by reference to the price at which the Common Stock was last sold as of the last business day of the registrant’s most recent completed second fiscal quarter, June 30, 2003. $536,300,000. For this purpose, all shares held by officers and directors of the registrant are considered to be held by affiliates, but neither the registrant nor such persons concede that they are affiliates of the registrant.

The number of shares outstanding of the registrant’s common stock is 27,721,252 as of February 25, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

The Proxy Statement for the Registrant’s 2004 Annual Meeting of Stockholders, to be filed pursuant to regulation 14A under the Securities Exchange Act of 1934, as amended, is incorporated by reference into Part III of this Form 10-K. Although such Proxy Statement is not currently available, it will be filed with the Securities and Exchange Commission within 120 days after December 31, 2003.

Table of Contents

LANDRY’S RESTAURANTS, INC.

TABLE OF CONTENTS

1

Table of Contents

FORWARD LOOKING STATEMENTS

In this report, we have made forward-looking statements. Our forward-looking statements are subject to risks and uncertainty, including without limitation, our ability to continue our expansion strategy, our ability to make projected capital expenditures, as well as general market conditions, competition, and pricing. Forward-looking statements include statements regarding:

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.

2

Table of Contents

LANDRY’S RESTAURANTS, INC.

PART I

ITEM 1.    BUSINESS

General

We are principally engaged in the ownership and operation of full-service, casual dining restaurants, primarily under the names of Joe’s Crab Shack, Landry’s Seafood House, The Crab House, Charley’s Crab, The Chart House, Saltgrass Steak House and Rainforest Cafe. As of December 31, 2003, we were the second largest full-service seafood restaurant chain in the United States, and operated 286 full-service restaurants. The ongoing unit count on December 31, 2003, consisted of 138 Joe’s Crab Shack restaurants, 41 Landry’s Seafood House division restaurants, 26 Chart House restaurants, 29 Saltgrass Steak House division restaurants, 26 Rainforest Cafe restaurants, 15 Charley’s Crab restaurants, 11 Crab House restaurants, and a small number of limited menu restaurants.

We opened the first Landry’s Seafood House restaurant in 1980. In 1993, we became a publicly held company. Our stock is listed on the New York Stock Exchange under the symbol “LNY.” In 1994, we acquired the first Joe’s Crab Shack restaurant and in 1996, acquired the Crab House chain of restaurants. We acquired Rainforest Cafe, Inc., a publicly traded restaurant company in 2000. During 2001, we changed our name to Landry’s Restaurants, Inc. to reflect our expansion and broadening of operations. During 2002, we acquired 15 Charley’s Crab seafood restaurants located primarily in Michigan and Florida, and 27 Chart House seafood restaurants, located primarily on the East and West coasts of the United States. Both of these acquisitions included plans for the redevelopment of an additional 10 acquired lower profitability restaurants into Joe’s Crab Shack restaurants, and the sale or disposal of certain non-strategic locations. In October 2002, we purchased 27 Texas-based Saltgrass Steak House restaurants.

We will continue to add to our base of restaurants, opening primarily Joe’s Crab Shack and Saltgrass Steak House restaurants. The majority of our new restaurant expansion will be in areas where we are already located so we can take advantage of advertising and other economies of scale, including our existing labor force.

Our Principal office is located at 1510 West Loop South, Houston, Texas 77027, and our telephone number is (713) 850-1010. Our website address is www.landrysrestaurants.com.

We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. Information on our website is not a part of this report.

Core Restaurant Concepts

Joe’s Crab Shack.    Joe’s Crab Shack, a full-service seafood restaurant featuring a varied seafood menu and offering many varieties of crab specialties, represents our primary growth vehicle. The atmosphere of a Joe’s Crab Shack has an energetic casual feel, with a fun, eclectic decor influenced by a weathered, old beach front fish shack. Many of our Joe’s Crab Shack facilities incorporate a small playground area for children adjacent to family dining areas. Dinner entree prices range from $8.99 to $15.99, with certain crab items available at market price. Lunch entree prices range from $5.99 to $8.99. During the year ended December 31, 2003, alcoholic beverage sales accounted for approximately 15% of the concept’s total restaurant revenues.

Landry’s Division.    Landry’s Seafood House is a full-service traditional Gulf Coast seafood restaurant and was the original growth strategy, although in recent years the growth has been focused and concentrated on the Joe’s Crab Shack restaurants and acquisitions. It offers an extensive menu featuring fresh fish, shrimp, crab, lobster, scallops, other seafood, beef and chicken specialties in a comfortable, casual atmosphere. The restaurants

3

Table of Contents

feature a prototype look that is readily identified by a large theater-style marquee over the entrance and by a distinctive brick and wood facade, creating the feeling of a traditional old seafood house restaurant. Dinner entree prices range from $13.99 to $29.99, with certain items offered at market price. Lunch entrees range from $7.99 to $11.99. During the year ended December 31, 2003, alcoholic beverage sales accounted for approximately 17% of the concept’s total restaurant revenues. In addition to Landry’s Seafood House, the Landry’s Division also includes several distinct concepts such as Grotto, Pesce, Vic & Anthony’s Steakhouse, Willie G’s Seafood and Steak House, La Griglia, and The Flying Dutchman. Each of these concepts offers an upscale dining experience in a unique and memorable setting.

Rainforest Cafe.    The Rainforest Cafe restaurants provide full-service casual dining in a visually and audibly stimulating and entertaining rainforest environment that appeals to a broad range of customers. Each Rainforest Cafe consists of a restaurant and a retail village. The restaurant provides an attractive value to customers by offering a full menu of high quality food and beverage items served in a simulated rainforest complete with thunderstorms, waterfalls and an active wildlife. In the retail village, Rainforest Cafe sells complementary apparel, toys, and gifts with the Rainforest Cafe logo in addition to other items reflecting the rainforest theme. Entrée prices range from $8.99 to $19.99. During the year ended December 31, 2003, retail sales and alcoholic beverage sales accounted for approximately 23% of the concept’s total restaurant revenues. Rainforest Cafe restaurants typically are larger units and generate higher unit volumes than the typical restaurant, although their operating margins and operating cost margin percentages are quite similar to the Company’s other restaurants. We are growing this division more slowly than the other growth concepts.

The Crab House.    The Crab House is a full-service casual dining seafood restaurant with a casual nautical theme. Many of The Crab House restaurants feature a fresh seafood salad bar. Dinner entree prices range from $13.99 to $18.99, with certain items offered at market price. Lunch entrees range from $6.99 to $9.99. During the year ended December 31, 2003, alcoholic beverage sales accounted for approximately 14% of the concept’s total restaurant revenues.

Chart House and C.A. Muer.    The Chart House and C.A. Muer (trade name Charley’s Crab) restaurants have very long and successful operating histories and provide an upscale full-service dining experience. Located on some of the most scenic properties on the East and West coasts, many Chart House restaurants, which were founded in 1961, sit on prime water-front venues. Charley’s Crab restaurants, which were founded in 1964, are generally situated throughout Michigan and Florida, include numerous waterfront locations and have unique architectural details with two restaurants located in renovated historical train stations. Both restaurant menus offer an extensive variety of seasonal fresh fish, shrimp, beef and other daily seafood specialties, and several restaurants also offer lunch seating and a Sunday brunch. Chart House dinner entree prices range from $18.99 to $30.99 with lunch entree prices ranging from $8.99 to $14.99. Charley’s Crab dinner entree prices range from $18.99 to $32.99 with lunch entree prices ranging from $8.99 to $16.99. During the year ending December 31, 2003, alcoholic beverage sales accounted for approximately 22% of the Chart House restaurant revenues and 21% of the C.A. Muer total restaurant revenues.

Saltgrass Steak House.    Saltgrass Steak House, acquired in 2002 for the purpose of additional growth complementary to Joe’s Crab Shack, offers full-service casual dining in a Texas-Western theme. Prototype buildings welcome guests into a stone and wood beam ranch house complete with a fireplace and a saloon-style bar. Customers are presented with a host of menu options ranging from filet mignon to chicken fried steak to fresh fish to grilled chicken breast. Dinner entree prices range from $9.99 to $25.99 and lunch prices range from $6.99 to $14.99. During the year ended December 31, 2003, alcoholic beverage sales accounted for approximately 12% of the concept’s total restaurant revenues.

Specialty Growth Division.    The opening of our Company owned Kemah Boardwalk in 1999, with its multiple attractions including specialty retail shops, boutique hotel, carnival-style rides and games, and other attractions combined with several of our restaurants introduced a new growth vehicle for our Company, the Specialty Growth Division. This division provides us the opportunity to expand our realm of business into areas

4

Table of Contents

that are closely related to our core restaurant business. This expansion is in addition and complementary to the growth of our core concepts and potential future acquisitions and includes the following projects:

5

Table of Contents

Strategy

Our objective is to develop and operate a nationwide system of restaurants that offers customers a fun dining experience, creates a loyal customer base that generates a high level of repeat business and provides superior returns to our investors. By focusing on the food, value, service, and ambiance of a restaurant, we strive to create an environment that fosters repeat patronage and encourages word-of-mouth recommendations. Our operating strategy focuses on the following:

6

Table of Contents

Recent and Planned Growth

We anticipate continued expansion of our core restaurant concepts by opening units in existing and other desirable markets, which provides us economic and operating efficiencies and the ability to leverage our operating expertise. During 2003, we opened 27 new units. In addition, we may pursue opportunistic purchases of other restaurant companies and investments in the hospitality, entertainment, food service, facilities management or other industries.

The following is an update on our recent acquisitions:

Rainforest Cafe (2000).    Our integration efforts produced additional margin expansion in 2003, but most importantly, we were able to stem the tide of previous prolonged revenue declines in retail sales. In fact, overall sales trends at tourist venue units were dramatically better, resulting in positive comparative sales for the year.

Chart House/Muer (2002).    The Chart House and Muer acquisitions provided us the opportunity to purchase a collection of valuable restaurant locations, many of which are situated on premium waterfront properties on the Pacific and Atlantic Oceans. We have begun the process of remodeling many of these units, freshening and updating the look of these venues. In addition, these restaurants are undergoing menu evaluation and re-engineering as we look to feature successful dishes from previous menus side-by-side with bold, fresh ideas from our culinary experts. All of the remodeling and menu changes have been met with favorable results as both of these concepts posted positive comparable sales for 2003. Certain low performing locations were redeveloped into Joe’s Crab Shack restaurants or were closed or sold. No near term expansion of these concepts is currently planned, and future growth will be dependent upon profitability, growth and unit economics.

Saltgrass Steak House (2002).    The nearly seamless integration of Saltgrass into our systems in late 2002 was highlighted by the conversion of all 27 restaurants to our financial tools within 60 days of acquisition. These tools include the point-of-sale system and also implementation of our profitability and labor/payroll programs. Saltgrass’ expansion has already begun with the opening of two new steak houses in 2003. Further expansion into our existing markets and development of new markets is planned for 2004 and beyond.

A designated team of our employees is responsible for opening new restaurant locations, including kitchen personnel and other individuals who are trained as hosts, waiters, floor managers and bartenders. Our enhanced

7

Table of Contents

management-training program allows assistant general managers to be promoted to general managers. We believe that this program and other factors minimize our turnover at the general manager level. We believe that through our training program and the hiring of outside personnel, we will be able to support our expansion strategy.

Our primary growth vehicle is the Joe’s Crab Shack concept, although additional restaurants in our other concepts will also be built. We believe that the increased consumption of seafood due to its taste, variety and other perceived health advantages supports the decision to continue the opening of seafood restaurants.

Our secondary growth vehicle is Saltgrass Steak House. The unit economics of our restaurants and clustered growth strategy support our decision to concentrate our expansion efforts on quality restaurants in strategically targeted markets.

Additional growth will be achieved through our Specialty Growth Division and possibly by future acquisitions, as we continue to offer a greater diversity of entertainment choices that complement our core restaurant business.

Restaurant Locations

Our restaurants generally range in size from 5,000 square feet to 16,000 square feet, with an average restaurant size of approximately 8,000 square feet. The seafood restaurants generally have dining room floor seating for approximately 215 customers and additional patio seating on a seasonal basis. Saltgrass restaurants seat approximately 260 guests on average. Both formats offer bar seating for approximately 10 to 20 additional customers.

The Rainforest Cafe restaurants are larger, generally ranging in size from approximately 15,000 to 30,000 square feet with an average restaurant size of approximately 20,000 square feet. The Rainforest Cafe restaurants have between 300 and 600 restaurant seats with an average of approximately 400 seats.

The following table enumerates by state the location of our restaurants as of December 31, 2003:

We are also the developer and operator of the Kemah Boardwalk located south of Houston, Texas. We own and operate substantially all of the 40-acre Kemah Boardwalk development, which includes seven restaurants (included in the table above), a hotel, retail shops, amusement attractions, and a marina.

We own and operate several additional limited menu restaurants and other properties which are excluded from the numerical counts due to lack of materiality.

8

Table of Contents

Menu

Our seafood restaurants offer a wide variety of high quality, broiled, grilled, and fried seafood items at moderate prices, including red snapper, shrimp, crawfish, crab, lump crabmeat, lobster, oysters, scallops, flounder, and many other traditional seafood items, many with a choice of unique seasonings, stuffings and toppings. Menus include a wide variety of seafood appetizers, salads, soups and side dishes. We provide high quality beef, fowl, pastas, and other American food entrees as alternatives to seafood items. Our restaurants also feature a unique selection of desserts often made fresh on a daily basis at each location. Many of our restaurants offer complimentary salad with each entree, as well as certain lunch specials and popularly priced children’s entrees. The Rainforest Cafe menu offers traditional American fare, including beef, chicken and seafood. Saltgrass Steak House offers a variety of Certified Angus Beef, prime rib, pork ribs, fresh seafood, chicken and other Texas cuisine favorites at moderate prices.

Management and Employees

We staff our restaurants with management that has experience in the restaurant industry. We believe our strong team-oriented culture helps us attract highly motivated employees who provide customers with a superior level of service. We train our kitchen employees and wait staff to take great pride in preparing and serving food in accordance with our high standards. Restaurant managers and staff are trained to be courteous and attentive to customer needs, and the managers, in particular, are instructed to visit each table. Senior corporate management hosts weekly meetings with restaurant general managers to discuss individual restaurant performance and customer comments. Moreover, we require general managers to hold weekly staff meetings at their individual restaurants. We monitor compliance with our quality requirements through periodic on-site visits and formal periodic inspections by regional field managers and supervisory personnel from our corporate offices.

Our typical seafood unit has a general manager and several kitchen and floor managers. We have internally promoted many of the general managers after training them in all areas of restaurant management with a strong emphasis on kitchen operations. The general managers generally spend a portion of their time in the dining area of the restaurant, supervising the staff and providing service to customers.

The Rainforest Cafe unit management structure is more complex due generally to higher unit level sales, larger facilities, more sophisticated rainforest theming, including animatronics, aquariums, and complementary retail business activity. A management team consisting of floor, kitchen, retail, facility and outside sales managers supports the general manager.

Each restaurant management team is eligible to receive monthly incentive bonuses. These employees typically earn between 15% and 25% of their total cash compensation under this program.

We have spent considerable effort in developing employee growth programs whereby a large number of promotions occur internally. We require each trainee to participate in a formal training program that utilizes departmental training manuals, examinations and a scheduled evaluation process. We require newly hired wait staff to spend from five to ten days in training before they serve our customers. We utilize a program of background checks for prospective management employees, such as criminal checks, credit checks, driving record and drug screening. Management training encompasses three general areas:

Due to our enhanced training program, management training customarily lasts approximately 8 to 12 weeks, depending upon the trainee’s prior experience and performance relative to our objectives. As we expand, we will need to hire additional management personnel, and our continued success will depend in large part on our ability

9

Table of Contents

to attract, train, and retain quality management employees. As a result of the enhanced training programs, we attract and retain a greater proportion of management personnel through our existing base of employees and internal promotions and advancements.

As of December 31, 2003, there were approximately 75 individuals involved in regional management functions generally performing on-site visits, formal inspections and similar responsibilities. As we grow, we plan to increase the number of regional managers, and to have each regional manager responsible for a limited number of restaurants within their geographic area. We plan to promote successful experienced restaurant level management personnel to serve as future regional managers. Regional management is continuously evaluated for performance and effectiveness.

As of December 31, 2003, we employed approximately 25,000 persons, of whom 1,701 were restaurant managers or manager-trainees, 493 were salaried corporate and administrative employees, approximately 75 were operations regional management employees, 84 were development and construction employees and the rest were hourly employees (all numbers approximate). Typical restaurant employment for us is at a seasonal low at December 31, 2003, and may increase seasonally by 30% or more in the summer months. Our restaurants generally employ an average of approximately 60 to 100 people, depending on seasonal needs. The larger Rainforest Cafe restaurants generally have 160 to 200 employees on average, with certain larger volume units having in excess of 400 people on staff. We believe that our management level employee turnover for 2003 was within industry standards. None of our employees are covered by a collective bargaining agreement. We consider our relationship with employees to be satisfactory.

Customer Satisfaction

We provide our customers prompt, friendly and efficient service by keeping table-to-wait staff ratios low and staffing each restaurant with an experienced management team to ensure attentive customer service and consistently high food quality. Through the use of comment cards, a toll-free telephone number, and a web-based customer response site, senior management receives valuable feedback from customers and demonstrates a continuing interest in customer satisfaction by responding promptly.

Purchasing

We strive to obtain consistent, quality items at competitive prices from reliable sources. We continually search for and test various product sizes, species, and origins, in order to serve the highest quality products possible and to be responsive to changing customer tastes. In order to maximize operating efficiencies and to provide the freshest ingredients for our food products, while obtaining the lowest possible prices for the required quality, each restaurant’s management team determines the daily quantities of food items needed and orders such quantities from our primary distributors and major suppliers at prices negotiated primarily by our corporate office. We emphasize availability of the items on our menu, and if an item is in short supply, restaurant level management is expected to procure the item immediately.

We use many suppliers and obtain our seafood products from global sources in order to ensure a consistent supply of high-quality food and supplies at competitive prices. While the supply of certain seafood species is volatile, we believe that we have the ability to identify alternative seafood products and to adjust our menus as required. We routinely inventory bulk purchases of seafood products and retail goods for distribution to our restaurants to take advantage of buying opportunities, leverage our buying power, and hedge against price and supply fluctuations. As we continue to grow, our ability to improve our purchasing and distribution efficiencies will be enhanced.

We believe that our essential food products and retail goods are available, or can be made available upon relatively short notice, from alternative qualified suppliers and distributors. We primarily use two national distributors in order to achieve certain cost efficiencies, although such services are available from alternative

10

Table of Contents

qualified distributors. We have not experienced any significant delays in receiving our food and beverage products, restaurant supplies or equipment. We are reviewing and analyzing alternative distribution companies and strategies.

Advertising and Marketing

We employ a marketing strategy to attract new customers, to increase the frequency of visits by existing customers, and to establish a high level of name recognition. We have historically relied primarily on word-of-mouth publicity, billboards with distinctive graphics, travel and hospitality magazines and print advertising. Since 1999, we successfully expanded our use of television and radio commercials. We use multiple billboards on highways to direct potential customers from the highways to the restaurants, as well as to build name recognition within each market. Our advertising expenditures for 2003 were approximately 3.0% of revenues. We anticipate that future advertising and marketing expenses will moderate as a percentage of revenues, and that we may utilize moderate television and radio advertising.

Service Marks

Landry’s Seafood House, Joe’s Crab Shack, Rainforest Cafe, Chart House and Charley’s Crab are each registered as a federal service mark on the Principal Register of the United States Patent and Trademark Office. The Crab House and Saltgrass Steak House are registered design marks. We pursue registration of our important service marks and trademarks and vigorously oppose any infringement upon them.

Competition

The restaurant industry is intensely competitive with respect to price, service, the type and quality of food offered, location and other factors. We compete with both locally owned restaurants, as well as national and regional restaurant chains, some of which may be better established in our existing and future markets. Many of these competitors have a longer history of operations with substantially greater financial resources. We also compete with other restaurant and retail establishments for real estate sites, restaurant personnel and for acquisition opportunities.

Changes in customer tastes, economic conditions, demographic trends and the location, number of, and type of food served by competing restaurants could affect our business as could a shortage of experienced management and hourly employees.

We believe our restaurants enjoy a high level of repeat business and customer loyalty due to high food quality, good perceived price-value relationship, comfortable atmosphere, and friendly efficient service.

Other factors relating to our competitive position in the industry are addressed under the sections entitled “Strategy,” “Purchasing,” and “Advertising and Marketing” elsewhere in this report.

Rainforest International License and Joint Venture Agreements

Rainforest Cafe has entered into exclusive license arrangements relating to the operations and development of Rainforest Cafes in the United Kingdom, Japan, France and Mexico. There are eight international units in operation, including seven franchised units and one Company owned and operated unit in Toronto, Canada. Four international franchised units were closed between 2002 and early 2003 due to declining sales and profitability. We own various equity interests in several of the international locations, which were included when we acquired Rainforest Cafe in 2000. We do not anticipate revenues from international franchises to be significant.

Information as to Classes of Similar Products or Services

We operate in only one industry segment. All significant revenues and pre-tax earnings relate to retail sales of food, beverages and complementary merchandise and services to the general public through company-owned and company-operated properties, substantially all located in the United States.

11

Table of Contents

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, in view of the location of many of our existing restaurants 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 business interruption insurance, 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.

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.

12

Table of Contents

The restaurant industry is peculiarly affected by trends and fluctuations in demand and is highly competitive. If we are unable to successfully surmount these challenges presented by the restaurant industry, our business and results of operations could be materially adversely affected.

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:

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.

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 an aggressive but 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: