ITEM 1. BUSINESS
General
We are a national, diversified restaurant, hospitality and entertainment company principally engaged in the ownership and operation of full-service, specialty location restaurants, with 174 locations in 27 states as of December 31, 2009. We are one of the largest full-service restaurant operators in the United States, operating primarily under the names of Rainforest Cafe, Saltgrass Steak House, Landry’s Seafood House, Charley’s Crab and The Chart House. Our concepts range from upscale steak and seafood restaurants to theme-based restaurants, and consist of a broad array of formats, menus and price-points that appeal to a wide range of markets and consumer tastes. We are also engaged in the ownership and operation of select hospitality and entertainment businesses, which include hotels, aquarium complexes and the Kemah Boardwalk, a 40-acre amusement, entertainment and retail complex in Kemah, Texas, among others. We believe these businesses complement our restaurant operations and provide our customers with unique dining, leisure and entertainment experiences.
We opened the first Landry’s Seafood House restaurant in 1980. In 1993, we became a public company. Our stock is listed on the New York Stock Exchange under the symbol “LNY.” 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. In October 2002, we purchased 27 Texas-based Saltgrass Steak House restaurants.
In September 2005, we acquired the Golden Nugget Hotels and Casinos located in Las Vegas and Laughlin, Nevada. The entities that own and operate the Golden Nugget Hotels and Casinos are separately financed, unrestricted subsidiaries of ours. We believe that the Golden Nugget brand name is one of the most recognized in the gaming industry and is highly complementary to our portfolio of leading restaurant, hospitality and entertainment operations. Both Golden Nugget locations offer extensive arrays of amenities and high degrees of hospitality, service and attention to detail. We expect to continue to capitalize on the strong name recognition and high level of quality and value associated with the brand.
In February 2006, we acquired 80% of T-Rex Cafe, Inc. (“T-Rex”) and committed to the construction of at least four restaurants, two of which are located at high profile Disney properties. Three of the four restaurants have been completed and are operating.
During the third quarter of fiscal 2006, as part of a strategic review of our operations, we initiated a plan to divest certain restaurants, including 136 Joe’s units. In November 2006, we completed the sale of 120 Joe’s. Subsequently, several additional locations were added to our disposal plan.
Recent Developments
On November 3, 2009, we entered into a definitive merger agreement with a company wholly-owned by our Chairman and Chief Executive Officer, Mr. Tilman J. Fertitta. Pursuant to the agreement, the Fertitta owned company has agreed to acquire all of our outstanding common stock not already owned by Mr. Fertitta for $14.75 per share in cash. The offer price represents a premium of approximately 37% over the closing share price of our common stock on November 2, 2009, the last trading day before the announcement of the transaction. The total value of the transaction is approximately $1.2 billion. On November 2, 2009, Mr. Fertitta beneficially owned approximately 55.1% of our outstanding shares of common stock.
The proposed merger transaction is subject to approval by our stockholders, including approval by the holders of a majority of our common stock not owned by Mr. Fertitta. The transaction is subject to regulatory approvals and other customary closing conditions.
Under the merger agreement, there is a “go-shop” provision whereby the Special Committee, with the assistance of its independent advisors, actively solicited alternative acquisition proposals from third parties until December 17, 2009. Although we received indications of interest during the go-shop period, no superior proposals were received.
On February 17, 2010, the Golden Nugget, Inc., our wholly owned, unrestricted subsidiary, entered into Amendment No. 2 and Waiver to the First Lien Credit Agreement (First Lien Second Amendment) by and among the Golden Nugget, Inc., Wachovia Bank, National Association, as Administrative Agent, Collateral Agent, Swing Line Bank and Issuing Bank, and each of the Lender parties thereto, dated June 14, 2007.
The First Lien Second Amendment replaced the existing first lien financial covenants with minimum EBITDA, minimum liquidity, minimum cage cash and maximum capital expenditure (CAPEX) covenants. In addition, consenting First Lien lenders received a consent fee of 0.5% and all First Lien lenders will receive a 0.5% annual consent fee on outstanding commitments through maturity. First Lien Lenders will also receive additional interest in an amount equal to 1.00% per annum on unpaid Advances in the form of “PIK” interest, or at the option of the Golden Nugget, cash. The First Lien Second Amendment precludes dividends or other restricted payments, limits incurring additional debt, making investments and other cash distributions from Golden Nugget, increases the excess cash flow sweep to 75% from 50% if certain liquidity levels are reached and requires additional reporting of financial performance including cash flow reports. Certain potential defaults under the existing First Lien Credit Agreement were waived.
Concurrently with the First Lien Second Amendment, the Golden Nugget entered into Amendment No. 2 and Waiver to the Second Lien Credit Agreement (Second Lien Second Amendment) by and among Golden Nugget, Inc., Wachovia Bank, National Association and the other financial institutions parties thereto, dated June 14, 2007. The Second Lien Second Amendment replaced the existing second lien financial covenants with minimum EBITDA, minimum liquidity, minimum cage cash and maximum CAPEX covenants and waived certain potential defaults under the existing Second Lien Credit Agreement. The Second Lien Second Amendment advances the maturity date on the second lien facility from December 31, 2014 to November 2, 2014. The maturity date on the existing $4.0 million Seller note was extended to November 2, 2014 from November 2, 2010.
In connection with the amendments, affiliates of the Golden Nugget will provide $50.0 million in additional funds to the Golden Nugget in return for non-interest bearing subordinated notes. $20.0 million of these funds were used for operating liquidity and to pay fees and expenses associated with the amendments. $30.0 million was available to purchase second lien indebtedness at 40% of face value. At closing, approximately $62.8 million of second lien indebtedness was acquired and retired. The remaining balance of the $30.0 million not used to purchase second lien debt by December 31, 2010, if any, will be used to purchase first lien debt at par value. All such purchased debt shall be immediately retired. The Golden Nugget may also incur up to an additional $8.0 million in affiliate subordinated debt during the remaining term of the First Lien Credit Agreement to meet liquidity requirements.
Due to a number of factors affecting consumers, including rising unemployment, home foreclosures, a slowdown in global economies, contracting credit markets, and reduced consumer spending, the near term outlook for the restaurant, hospitality, and entertainment industries is uncertain. The economic slow down accelerated in the fourth quarter of 2008 and has continued throughout 2009. In response to the current economic conditions, we have taken measures to increase our efficiencies and reduce our cost structure across our businesses. In addition, we have lowered our growth plans for new restaurants to conserve capital resources.
Significant events that affected our 2009 results, as compared to 2008, or that may affect our future results, are described below:
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Two refinancings of our debt in 2009, the first in February during the peak of the credit crisis resulting in significantly higher interest rates, substantial original issue discount, more restrictive covenants and a relatively short term followed by a refinancing in November with improved interest rates, less restrictive covenants and a longer term compared to the February financing.
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The entering into a 2009 merger agreement and associated transaction costs.
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The amending of our Golden Nugget credit facility and associated purchase and retirement of second lien debt at a discount to face value.
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The impact of Hurricane Ike which resulted in significant disruption to our Houston, Kemah and Galveston restaurants. We have reopened all restaurants and received insurance proceeds, including business interruption, sufficient to replace substantially all of our lost profits and damaged property. However, the long term impact of the storm, if any, is uncertain.
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Construction of the new hotel tower at the Golden Nugget Las Vegas which was completed in late 2009 at a cost of approximately $140.0 million, significantly increased our debt for the Golden Nugget Las Vegas at a time when the near term outlook for the gaming industry is uncertain.
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The termination of our 2008 merger agreement and associated transaction costs.
Core Restaurant Concepts
Our portfolio of restaurant concepts consists of a variety of formats, each providing our guests with a distinct dining experience.
We currently operate our restaurants through the following divisions:
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Landry’s Division-our high-profile seafood and signature restaurants;
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Rainforest Cafe Division-our rainforest-, Asian and prehistoric-themed restaurants;
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Saltgrass Steak House Division-our Texas-Western-themed restaurants; and
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Chart House Division-our upscale seafood restaurants primarily at waterfront locations.
Landry’s Division. The Landry’s Division is comprised of 65 Landry’s Seafood House and C.A. Muer restaurants (which include restaurants that operate under several trade names, primarily Charley’s Crab), as well as our Signature Group restaurants, which together generated 24.8% of our restaurant and hospitality revenues for the year ended December 31, 2009. Alcoholic beverage sales accounted for approximately 18.8% of these revenues.
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Landry’s Seafood House and Charley’s Crab. Landry’s Seafood House and Charley’s Crab are full-service seafood restaurants. Each offers an extensive menu featuring fresh fish, shrimp, crab, lobster, scallops, other seafood, beef and chicken specialties in a comfortable, relaxed atmosphere. The Landry’s Seafood House restaurants 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. Charley’s Crab restaurants, the first of which was 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. Landry’s Seafood House dinner entrée prices range from $8.99 to $28.99, with certain items offered at market price. Lunch entrées range from $5.99 to $18.99. Charley’s Crab dinner entrée prices range from $17.99 to $39.99, with lunch entrée prices ranging from $7.99 to $23.99.
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Signature Group. Landry’s Signature Group, initiated in 2003, includes fine dining and upscale concepts such as Vic & Anthony’s, a world-class steakhouse with locations in downtown Houston, Texas and in the Golden Nugget-Las Vegas, and the award-winning Pesce seafood restaurant. Both Vic & Anthony’s and Pesce are included in many “Top 10” lists in their respective categories. Grotto, one of Houston’s most popular upscale Italian eateries, has locations in Houston, Texas, The Woodlands, Texas and the Golden Nugget-Las Vegas. Brenner’s Steakhouse, a Houston tradition since 1936, has expanded to two locations. Willie G’s, one of Landry’s original concepts that features Louisiana style fresh seafood, has locations in Houston, Texas, Galveston, Texas and Denver, Colorado. The Signature Group accommodates the needs of the high-end consumer who we believe is less impacted by overall economic conditions.
Rainforest Cafe Division. The Rainforest Cafe Division comprised of 31 Rainforest Cafe, T-Rex Cafe and Yak & Yeti theme-based restaurants, generated 32.8% of our restaurant and hospitality revenues for the year ended December 31, 2009. Alcoholic beverage sales and retail sales accounted for approximately 20.3% of these revenues. These restaurants typically are larger units generating higher unit volumes than restaurants in our other concept, with operating profit margins that are comparable to our other restaurants. Five of these restaurants are located on high-profile Disney properties.
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Rainforest Cafe. Each Rainforest Cafe consists of a restaurant and a retail village. The Rainforest Cafe restaurants provide full-service dining in a visually and audibly stimulating and entertaining rainforest-themed environment that appeals to a broad range of customers. 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 active wildlife. Entrée prices range from $8.99 to $23.99. In the retail village, we sell complementary apparel, toys and gifts with the Rainforest Cafe logo in addition to other items reflecting the rainforest theme.
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T-Rex Cafe. In February 2006, we acquired 80% of T-Rex Cafe, Inc. T-Rex Cafe is a unique concept that features an interactive prehistoric environment with life-size animatronic dinosaurs. Each T-Rex Cafe offers a full menu of high-quality food and beverage items and unique merchandise. Under the agreement, we guaranteed the funding for the construction, development and pre-opening of at least three T-Rex Cafes. The first T-Rex Cafe opened in July 2006 in Kansas City, Kansas and the second unit opened in October 2008 at Downtown Disney in Orlando, Florida.
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Yak & Yeti. In February 2006, we also acquired the majority interest in Yak & Yeti, a new Asian themed restaurant that opened in November 2007 at Walt Disney World’s Animal Kingdom in Orlando, Florida. In a setting reminiscent of a rural Himalayan village, the Asian-Fusion concept offers both full-service table dining and quick service food, as well as a retail component offering traditional Asian dinnerware ranging from sushi plates to chopsticks to fine teapots.
Saltgrass Steak House Division. Our 44 Saltgrass Steak House restaurants generated 19.5% of our restaurant and hospitality revenues for the year ended December 31, 2009. Alcoholic beverage sales accounted for approximately 12.2% of these revenues. The Saltgrass Steak House restaurants offer full-service dining in a Texas-Western theme which welcomes guests into a stone and wood beam ranch house complete with a fireplace and a saloon-style bar. Menu options extend from filet mignon to chicken fried steak to fresh fish to grilled chicken breast. Dinner entrée prices range from $8.99 to $29.99 and lunch entrée prices range from $7.99 to $15.99.
Chart House Division. The Chart House Division is comprised of 28 Chart House restaurants, which generated 12.7% of our restaurant and hospitality revenues for the year ended December 31, 2009. Alcoholic beverage sales accounted for approximately 21.2% of these revenues. The Chart House has a very long and successful history of providing an upscale full service dining experience. Founded in 1961, Chart House restaurants are located on some of the most scenic properties on the East and West coasts, including many prime waterfront venues. The Chart House 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 entrée prices range from $18.99 to $44.99.
Specialty Division
Our Specialty Division, which generated 10.2% of our restaurant and hospitality revenues, consists of hospitality and amusement properties that provide ancillary revenue streams and opportunities complementary to our core restaurant business. The Specialty Division includes the following properties:
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Kemah Boardwalk. Our Specialty Division commenced operations with the 1999 opening of the Kemah Boardwalk, our owned amusement, entertainment and retail complex located on approximately 40 acres in Galveston, Texas. The Kemah Boardwalk has multiple attractions; including specialty retail shops, a boutique hotel, a marina, and carnival-style rides and games. In August 2007, the Boardwalk Bullet roller coaster opened, which is the largest wooden roller coaster on the Gulf Coast of Texas, towering over 96 feet tall overlooking Galveston Bay. The Kemah Boardwalk’s activities are based upon and complementary to the business and traffic generated at our nine wholly-owned and operated high-volume restaurants situated at that location, which include units from most of our core restaurant concepts described above as well as the original Aquarium Restaurant.
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Aquariums. We currently operate two aquarium complexes featuring Aquarium Underwater Dining Adventure restaurants in Denver, Colorado and Houston, Texas. In addition, we operate two Aquarium Underwater Dining Adventure restaurants in Nashville, Tennessee and Kemah, Texas. In 1998, we opened the original Aquarium Restaurant in Kemah, Texas at the Kemah Boardwalk. We opened a second aquarium, the Downtown Aquarium in Houston, Texas, in 2003. In addition to a restaurant, the Downtown Aquarium features a public aquarium complex with over 200 species of fish, a giant acrylic shark tank, dancing water fountains, a mini-amusement park and a bar/lounge. Also in 2003, we acquired Ocean Journey, a 12-acre aquarium complex located adjacent to downtown Denver, Colorado. This world-class facility, which is wholly-owned and operated, is home to over 400 species of fish. In 2004, we opened an Aquarium Restaurant in Nashville, Tennessee featuring a 200,000 gallon aquarium. In 2005, we opened an up-scale Aquarium Restaurant in Denver, Colorado, which transformed the aquarium into a recreational destination and renamed the facility the Downtown Aquarium.
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Hotels. We currently own, operate and/or manage five hotel properties in Texas. Opened in 2004, the Inn at the Ballpark, located in downtown Houston, is a luxury hotel featuring over 200 rooms located directly across the street from Minute Maid Park, home of the Houston Astros baseball team. The hotel also offers easy access to all of downtown Houston’s amenities, including the newly expanded George R. Brown Convention Center, the new Toyota Center, home of the Houston Rockets basketball team, the theater district and our Downtown Aquarium. The Boardwalk Inn is a full service hotel located in the center of the Kemah Boardwalk. We manage the Galveston San Luis Resort Spa & Conference Center and the Galveston Island Hilton, which are owned by Fertitta Hospitality, L.L.C., and we own and operate the Galveston Holiday Inn on the Beach, which is owned by a separately financed, unrestricted subsidiary. See “Certain Relationships and Related Transactions-Management Agreement.”
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Tower of the Americas. In 2004, we entered into a 15-year lease agreement with the City of San Antonio to renovate and operate the 750-foot landmark Tower of the Americas, a major tourist attraction in San Antonio which also includes a revolving Chart House restaurant, an open air observation deck at the top of the tower, and a Texas-themed 4-D “multi-sensory” theater on the ground level.
Gaming Division
In 2005, Landry’s Gaming, Inc., a separately financed, unrestricted subsidiary, acquired the Golden Nugget, Inc., owner of the Golden Nugget. The Golden Nugget-Las Vegas occupies approximately eight acres in downtown Las Vegas, Nevada, with approximately 55,000 square feet of gaming area. In November 2009, we completed the construction of a new hotel tower. As of December 31, 2009, the property featured four towers containing 2,345 rooms, the largest number of guestrooms in downtown Las Vegas, approximately 1,358 slot machines and 74 table games. The Golden Nugget-Laughlin has approximately 33,000 square feet of gaming
space and as of December 31, 2009 had 1,027 slot machines, 16 table games and 300 hotel rooms in Laughlin, Nevada. For the year ended December 31, 2009, the Golden Nugget properties generated total revenues of $216.8 million. The subsidiaries that own and operate the Golden Nugget are separately financed, unrestricted subsidiaries with $506.1 million of debt as of December 31, 2009, which includes $116.5 million of funds used in the additional new hotel tower opened in November 2009.
We believe that the Golden Nugget brand name is one of the most recognized in the gaming industry and we expect to continue to capitalize on the strong name recognition and high level of quality and value associated with it. Demonstrating a long-standing commitment to quality and service, the Golden Nugget-Las Vegas has received the prestigious AAA Four Diamond Award for thirty-two consecutive years, which is a record for any lodging establishment in Nevada. Presented by the American Automobile Association, a North American motoring and leisure travel organization, the 2009 award was given to only 19 Nevada hotels of the approximately 50,000 eligible lodging establishments in the United States evaluated by the AAA. According to the AAA, establishments that receive the AAA Four Diamond Award are upscale in all areas and offer extensive arrays of amenities and high degrees of hospitality, service and attention to detail.
Our business strategy is to create the best possible gaming and entertainment experience for our customers by providing a combination of comfortable and attractive surroundings with attentive service from friendly, experienced employees. We target out-of-town customers at both of our properties while also catering to the local customer base. The Golden Nugget-Las Vegas offers the same complement of services as our Las Vegas Strip competitors, but we believe that our customers prefer the boutique experience we offer and the downtown environment. We emphasize the property’s wide selection of amenities to complement guests’ gaming experience and provide a luxury room product, exceptional dining alternatives and personalized services at an attractive value. At the Golden Nugget-Laughlin, we focus on providing a high level of customer service, a quality dining experience at an appealing value, a slot product with highly competitive pay tables and player rewards programs.
Our Competitive Strengths
Stable and Diversified Cash Flows. Our nationwide system of 174 full-service restaurants consists of multiple formats and varied price points, from upscale fine dining to mid-scale casual dining, and offers a variety of menus that have both regional and national appeal. Many of our restaurant and hospitality locations are situated in high-profile, specialty locations in markets that provide a balanced mix of tourist, convention, business and residential clientele. We believe that this strategy results in a high volume of new and repeat customers and provides us with increased name recognition in new markets. Our menu diversification reduces our dependence on any particular seafood or commodity, and allows us to select from a variety of seafood species to best provide our guests with an attractive price-value relationship. Our experience operating multiple concepts in diverse geographic areas and types of locations enables us to select the most appropriate format for each property. In addition, we believe that our geographic diversification limits operational issues related to regional weather or economic conditions, and provides stability to our operations and cash flows.
Significant Base of Owned Assets in Prime Locations. We believe one of our core strengths is the identification, valuation, negotiation and purchase or lease of attractive locations for our restaurant and hospitality operations. Our portfolio of owned properties includes 53 restaurant properties and many properties in our Specialty Division. Out of our 174 restaurants, we operate 75 waterfront restaurants and restaurants at a number of high-profile locations (including five units at Disney theme parks), as well as restaurants at the MGM Grand Hotel and Casino in Las Vegas, Nevada, the Mall of America in Bloomington, Minnesota and Fisherman’s Wharf in San Francisco, California.
Experienced Management Team. Our management team has extensive experience in the restaurant industry and a history of operating, developing and acquiring hospitality businesses. Our senior management team, led by Tilman J. Fertitta, our founder and Chairman, President and Chief Executive Officer, has an average of 19 years
of experience with us and 27 years of industry experience. In addition to an experienced and committed senior management team, we also have an experienced operations organization at the regional and individual restaurant level, which we believe contributes significantly to our success. Our management team has grown our revenues from approximately $400.0 million in 1998 to $1.1 billion for the year ended December 31, 2009, through both developing new properties and integrating acquisitions.
Our Business Strategy
Our objective is to develop and operate a diversified restaurant, hospitality and entertainment company offering customers unique dining, leisure and entertainment experiences. We believe that this strategy creates a loyal customer base, generates a high level of repeat business and provides consistent levels of profitability and cash flows. By focusing on high-quality food, superior value and service, and the ambiance of our locations, we strive to create an environment that fosters repeat patronage and encourages word-of-mouth recommendations.
Our operating strategy focuses on the following:
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Provide an Attractive Price-Value Entertainment and Dining Experience. Our restaurants provide customers an attractive price-value relationship by serving high quality meals featuring generous portions and fresh ingredients in comfortable and attractive surroundings with attentive service at reasonable prices. With a significant seafood component, our restaurants have flexibility in procuring alternative products based on price and availability, allowing us to promptly change menu items and prices to assure quality and value for our guests. In addition, our culinary experts conduct menu evaluations and reengineering to ensure our restaurants feature sought after core menu items along with bold, fresh offerings to attract new and repeat guests. We believe that the distinctive, visually stimulating design and décor of our restaurants makes us a destination for special occasion diners and travelers. We provide our customers prompt, friendly and efficient service, keeping table-to-wait staff ratios low. We strive to create a memorable dining experience for customers to ensure repeat and frequent patronage.
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Attract and Retain Quality Employees. We believe there is a high correlation between the quality of unit management and our long-term success. We provide extensive training and attractive compensation and focus on internal promotion to foster a strong corporate culture and create a sense of personal commitment from our employees. Through our cash bonus program, our restaurant managers typically earn bonuses equal to 15% to 25% of their total cash compensation. We believe this encourages attentive customer service and consistent food quality for our guests.
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Focus on Store-Level Operating Performance. We remain committed to improving store-level operating performance. We spent $11.7 million during 2006 and 2007 on corporate and store-based systems which enable management to leverage point-of-sale data obtained on a daily basis for improved responsiveness to market and operating conditions. Additionally, we have aggressively maintained the condition of our restaurants. We will continue to maintain the condition of our restaurants in order to promote repeat and frequent patronage by our guests.
The following is a summary of our major acquisitions:
Rainforest Cafe (2000). Since our acquisition of Rainforest Cafe, we have focused on stabilizing this concept’s operations. We have closed unprofitable locations, renegotiated leases, reduced general and administrative expenses and refreshed the concept’s menu with proven menu items from our other concepts. We have also opened new units in high traffic tourist locations.
Chart House and C.A. Muer (2002). The Chart House and C.A. Muer restaurant acquisitions enabled us 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 remodeled many of these units, freshening and updating the look of these venues. In addition, these restaurants have undergone menu evaluations and re-engineering in
order for us to feature successful dishes from previous menus side-by-side with bold, fresh ideas from our culinary experts. The remodeling and menu changes have been met with favorable results. No significant near-term expansion of these concepts is currently planned, and future growth will be dependent upon profitability and unit economics.
Saltgrass Steak House (2002). The nearly seamless integration of Saltgrass Steak House restaurants 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 our point-of-sale system and also implementation of our profitability and labor/payroll programs. Since the acquisition, we have expanded the concept to 42 units. We also opened our first unit outside of Texas in 2006. We will continue to evaluate potential sites for this concept in both existing and new markets in 2010.
Golden Nugget (2005). The Golden Nugget acquisition allowed us to enter the gaming business with one of the most recognized brands in the industry and in the preeminent gaming city, Las Vegas, Nevada. We also acquired the Golden Nugget property in Laughlin, Nevada.
T-Rex (2006). In February 2006, we acquired 80% of T-Rex Cafe, Inc. and committed to the construction of at least four restaurants (including Yak & Yeti). Three of the locations have already opened with two of them being at high profile Disney properties.
Restaurant Locations
Our restaurants generally range in size from 5,000 square feet to 16,000 square feet. The Rainforest Cafe and T-Rex 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 and T-Rex 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, 2009:
Hotels and Other Properties
We own and operate the Golden Nugget-Las Vegas and Golden Nugget-Laughlin through wholly owned, separately financed, unrestricted subsidiaries. The Golden Nugget-Las Vegas occupies approximately eight acres in downtown Las Vegas. The Golden Nugget-Laughlin occupies approximately 13.5 acres, all of which is owned by us.
We currently own and/or operate a hotel property in each of Houston, Texas and Kemah, Texas. The Inn at the Ballpark is located in downtown Houston directly across the street from Minute Maid Park, home of the Houston Astros baseball team, and is wholly-owned and operated by us. The Boardwalk Inn is a full-service hotel located in the center of the Kemah Boardwalk. We also manage the Galveston San Luis Resort Spa & Conference Center and the Galveston Island Hilton, which are owned by Fertitta Hospitality, L.L.C., and own and operate the Holiday Inn Resort Galveston on the Beach, which is a wholly-owned, separately financed, unrestricted subsidiary. See “Certain Relationships and Related Transactions-Management Agreement.”
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 nine restaurants (included in the table above), a hotel, retail shops, amusement attractions, and a marina.
Our corporate office in Houston, Texas is a multi-story building owned by us and includes meeting and training facilities, and a research and development test kitchen. We also own and operate approximately 75,000 square feet of warehouse facilities used primarily for construction activities and related storage and retail goods storage and distribution related activities. We own and operate several additional limited menu restaurants, hospitality venues and other properties which are excluded from the numerical counts due to materiality.
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 operating units with management that has experience in our 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, wait staff, hotel staff and casino employees to take great pride serving our customers in accordance with our high standards. Managers and staff are trained to be courteous and attentive to customer needs, and the managers, in particular, are instructed to regularly visit with customers. Senior corporate management hosts weekly meetings with our general managers to discuss individual unit performance and customer comments. Moreover, we require general managers to hold weekly meetings at their individual operating units. 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 typically spend a portion of their time in the dining area of the restaurant, supervising the staff and providing service to customers.
The Rainforest Cafe and T-Rex 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:
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all service positions;
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management, accounting, personnel management, and dining room and bar operations; and
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kitchen management, which entails food preparation and quality controls, cost controls, training, ordering and receiving and sanitation operations.
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 to attract, train, and retain quality management employees. As a result of the enhanced training programs, we believe 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, 2009, there were approximately 50 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, 2009, in the restaurant division, we employed approximately 17,000 persons, of whom 1,097 were restaurant managers or manager-trainees, 237 were salaried corporate and administrative employees, approximately 50 were operations regional management employees, 36 were development and construction employees and the rest were hourly employees. Typical restaurant employment for us is at a seasonal low at December 31, and may increase 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. We believe that our management level employee turnover for 2009 was within industry standards.
We employed approximately 2,800 persons in the gaming division as of December 31, 2009, of whom 116 were management, 122 were salaried employees and the rest were hourly employees. Approximately 1,228 employees are covered by collective bargaining agreements at the Golden Nugget-Las Vegas. 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 operating unit with an experienced management team to ensure attentive customer service and consistently high food quality as well as providing an excellent room and gaming experience. 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 make 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, we believe that 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 one national distributor in order to achieve certain cost efficiencies, although such services are available from alternative qualified distributors. We have not experienced any significant delays in receiving our food and beverage products, restaurant supplies or equipment.
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 through television and radio commercials, billboards, travel and hospitality magazines, print advertising and newspaper drops. Our advertising expenditures for 2009 were approximately 1.2% of revenues from continuing operations. We expect to cross market our restaurant, hospitality and gaming locations to leverage our advertising spend. We anticipate future advertising and marketing expenses to remain moderate.
Service Marks
Landry’s, Rainforest Cafe, Chart House, Charley’s Crab, Saltgrass, T-Rex 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.
Competition
The restaurant, hospitality and entertainment industries are intensely competitive with respect to price, service, the type and quality of product offered, location and other factors. We compete with both locally owned facilities, as well as national and regional 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, hospitality and gaming, and retail establishments for real estate sites, personnel and acquisition opportunities.
Changes in customer tastes, economic conditions, demographic trends and the location, number of, and type of food and amenities served by competing businesses could affect our business as could a shortage of experienced management and hourly employees.
We believe our business units 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.
Rainforest International License Agreements
Rainforest Cafe has entered into exclusive license arrangements relating to the operations and development of Rainforest Cafes in several foreign jurisdictions. Currently, there are ten international units. We own a small equity interest in an international location, which was included when we acquired Rainforest Cafe in 2000. We do not anticipate revenues from international franchises to be significant.
Environmental Matters
Our business is subject to federal, state and local environmental laws and regulations concerning the discharge, storage, handling, release and disposal of hazardous or toxic substances. These environmental laws provide for significant fines, penalties and liabilities, sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of the hazardous or toxic substances. Third parties may also make claims against owners or operators of properties for personal injuries and property damage associated with releases of, or actual or alleged exposure to, such substances. To date, neither our restaurants nor our facilities have been the subject of any material environmental matters.
Information as to Classes of Similar Products or Services
We operate in only two reportable industry segments: restaurant and hospitality and gaming operations.
ITEM 1A.
ITEM 1A. RISK FACTORS
The following information describes certain significant risks and uncertainties inherent in our business. You should take these risks into account in evaluating us. This section does not describe all risks applicable to us, our industry or our business, and it is intended only as a summary of certain material risks. You should carefully consider such risks and uncertainties together with the other information contained in this Form 10-K. If any of such risks or uncertainties actually occurs, our business, financial condition and operating results could be harmed substantially and could differ materially from the plans and other forward-looking statements included in the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and elsewhere in this report.
Risks Related to Our Business
The restaurant, hospitality and gaming industries are particularly 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:
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traffic patterns,
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demographic considerations,
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the amounts spent on, and the effectiveness of, our marketing efforts,
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weather conditions, and
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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 may 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 and 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, sales 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 and the entrance of new gaming participants. Certain states have recently legalized, and several other states are currently considering legalizing, casino gaming. Legalized casino gaming in these states and on Indian reservations would increase competition and could adversely affect our gaming operations.
General economic factors may adversely affect our results of operations.
National, regional and local economic conditions, such as recessionary economic cycles, a worsening economy and any increases in energy and fuel prices, could adversely affect disposable consumer income and consumer confidence. When gasoline, natural gas, electricity and other energy costs increase, and credit card, home mortgage and other borrowing costs increase, our guests may have lower disposable income and reduce the frequency with which they dine out or may choose more inexpensive restaurants when dining outside the home. The gaming activities we offer represent discretionary expenditures and participation in such activities may decline during economic downturns, during which consumers generally have less disposable income. Even an uncertain economic outlook may adversely affect consumer spending in our restaurant, hospitality and gaming operations, as consumers spend less in anticipation of a potential prolonged economic downturn. Unfavorable changes in these factors or in other business and economic conditions affecting our customers could reduce customer traffic in some or all of our restaurants, impose practical limits on our pricing and increase our costs. Any of these factors could lower our profit margins and have a material adverse affect on our results of operations.
The impact of inflation on food, beverages, labor, utilities and other aspects of our business can negatively affect our results of operations. We may not be able to offset inflation through menu price increases, cost controls and incremental improvement in operating margins, which could negatively affect our results of operations.
Current difficult conditions in the global financial markets and the economy generally may materially adversely affect our business and results of operations.
Our results of operations are materially affected by conditions in the global financial markets and the economy generally, both in the U.S. and elsewhere around the world. The stress experienced by global financial markets that began in the second half of 2007 substantially increased during the third and fourth quarter of 2008 and continued into 2009. The volatility and disruption in the global financial markets reached unprecedented levels. The availability and cost of credit has been materially affected. These factors, combined with volatile oil and gas prices, sustained periods of high unemployment levels, depressed home prices and increasing foreclosures, declining business and consumer confidence, declines in consumer spending, and the risks of increased inflation have precipitated an economic slowdown and a severe recession, which could continue to adversely affect the demand for our products and, as a result, lead to declining revenues and profit margins. It is difficult to predict how long the current economic conditions will persist, whether they will deteriorate further, and the extent to which our operations will be adversely affected.
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 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 the impact, frequency of which may be triggered by climate change. For example, on September 13, 2008, Hurricane Ike struck the Gulf Coast of the United States, causing considerable damage to the cities of Galveston, Kemah and Houston, Texas and surrounding areas. Several of our restaurants in Galveston and Kemah sustained significant damage, as did the amusement rides, the boardwalk itself and some infrastructure at the Kemah Boardwalk. The Kemah and Galveston properties had been a significant driver of our overall performance in 2008. The damage to the Kemah and Galveston properties may adversely affect both our business and near- and long-term prospects. Widespread power outages led to the closure of 31 Houston area restaurants until power was restored. All Houston, Galveston and Kemah restaurants have reopened.
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.
Moreover, in response to continued high insurance costs for our property and casualty coverage due to our large concentration of coastal properties, we significantly reduced our aggregate insurance policy limits and purchased individual windstorm policies for the majority of our operating units located along the Texas gulf coast. There is no assurance that we will have adequate insurance coverage to recover losses that may result from a catastrophic event.
Our gaming activities rely heavily on the Nevada gaming market, and changes adversely impacting that market 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, Nevada gaming industry revenues have declined significantly in 2008 and 2009, and there can be no assurance that gaming industry revenues will not continue to significantly decline.
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 anticipate and react to changes in food and other costs, or obtain a seafood supply in sufficient quality and quantity, 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. There can be no assurance that we will be able to anticipate and avoid any adverse effect on our profitability from increasing costs.
In the past, certain types of seafood have experienced fluctuations in availability. In addition, some types of seafood have been subject to adverse publicity due to certain levels of contamination at their source or a perceived scarcity in supply, which can adversely affect both supply and market demand. 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.
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.
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. Any shortage or substantial increases in the cost of electricity and natural gas in the United States 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 significant. 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 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 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 (i) the level of minimum wages, (ii) the deductibility of business and entertainment expenses, (iii) levels of disposable income and unemployment and (iv) national and regional economic growth.
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, employment regulations and climate change. These and other initiatives could adversely affect us as well as the restaurant industry in general. In particular, the increased focus on climate change may lead to new initiatives directed at regulating a yet unspecified array of environmental matters, such as greenhouse gas emissions. These regulatory efforts could result in increase in the cost of raw materials, taxes, transportation, and utilities, which could decrease our operating profits and could necessitate future investments in facilities and equipment. 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. In its discretion, the gaming authorities may require the holder of any of our securities to file applications, be investigated and be deemed suitable to own our securities. 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 also will 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.
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 several foreign jurisdictions. These agreements include a per unit development fee and/or restaurant royalties. There are ten international units; one is owned outright, and nine are franchises. Our international operations are subject to certain external business risks such as exchange rate fluctuations, import and export restrictions and tariffs, litigation in foreign jurisdictions, cultural differences, increased competition as a result of subsidies to local companies, increased expenses from inflation, 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, Rainforest Cafe, Chart House, Charley’s Crab, Saltgrass, T-Rex Cafe 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. 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 or the unenforceability of 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 or adverse results of which could have a material adverse effect on our business and results of operations.
We are a multi-unit business and 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. Negative publicity may also result from actual or alleged violations of “dram shop” laws which generally provide an injured party with recourse against an establishment that serves alcoholic beverages to an intoxicated party who then causes injury to himself or to a third party. 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 cash flows. Unfavorable publicity resulting from these claims relating to a limited number of our restaurants or only relating to a single restaurant could adversely affect the public perception of all our restaurants within that particular brand. Adverse publicly and its effect on overall consumer perceptions of food safety, or our failure to respond effectively to adverse publicity, could have a material affect on our financial condition.
In connection with certain of our discontinued operations, we remain the guarantor or assignor under a number of leased locations. In the event of future defaults under any of such leased locations we may be responsible for significant damages to landlords which may materially affect our financial condition, operating results and cash flows.
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, salmonella, “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, could 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.
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 collective and 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 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.
We may not be able to access capital markets when necessary.
We may find it necessary in the future to issue additional debt or equity to support ongoing operations, to undertake capital expenditures, or to undertake acquisitions or other business combination transactions. Disruptions, uncertainty or volatility in the financial markets may limit our access to capital required to operate our business. These market conditions may limit our ability to replace, in a timely manner, maturing debt obligations, including the notes when they become due, and access the capital necessary to grow our business. As a result, we may be forced to delay raising capital, issue shorter tenor securities than would be optimal, bear an unattractive cost of capital or be unable to raise capital at any price, which could decrease our profitability and significantly reduce our financial flexibility. Actions we might take to access financing may in turn cause rating agencies to further reevaluate our ratings. In the event current resources do not satisfy our needs, we may have to seek additional financing. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry, and our credit ratings and credit capacity. In addition, the indenture governing the notes and the credit agreement governing our amended and restated senior secured credit facility will contain certain covenants that restrict our ability to incur additional indebtedness. Our inability to raise financing to support ongoing operations or to fund capital expenditures or acquisitions could limit our growth and may have a material adverse effect on us.
The capital costs of our specialty and gaming divisions are extremely high. As a result, if any of these projects do not perform as expected, it could have a material adverse effect on our operations.
In connection with our specialty and gaming divisions, we may incur significant capital expenditures. We recently completed construction of a hotel tower at the Golden Nugget-Las Vegas, at a cost of approximately $140 million. 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, our Chairman, President and Chief Executive Officer, 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 Chairman, President and Chief Executive Officer. The loss of Mr. 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.
Following Mr. Fertitta’s proposal to acquire all of our common stock in 2008, the termination of the 2008 merger agreement and in connection with his current proposal to acquire us, we have been named as a party in number of lawsuits, and we may be named in other lawsuits, which could harm our business and financial conditions.
Following the announcement of Mr. Fertitta’s offer to acquire us in 2008, the termination of the 2008 merger agreement and in connection with his current proposal to acquire us, we and each of our directors were named in a number of class action and derivative lawsuits alleging, among other things, breaches of fiduciary duties. In one of these lawsuits, brought in Delaware, the court denied a motion to dismiss and it is scheduled for trial in 2010. Our Amended and Restated Bylaws and our Certificate of Incorporation require us to indemnify our directors for braches of fiduciary duties, subject to certain limited exceptions. As a result of these lawsuits, we are obligated to pay for certain costs and expenses of each of our directors and may be liable for substantial damages, costs and expenses if the lawsuits are successful. Such litigation could also divert the attention of our management and our resources in general from day-to-day operations. Further, it is possible that additional claims will be brought against us in connection with the current transaction.
There are inherent limitations in all control systems that may result in undetected errors.
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 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, errors may not be detected.
We identified a material weakness in the design and operation of our internal controls over financial reporting as of December 31, 2009.
Our Chief Executive Officer and Chief Financial Officer reevaluated the effectiveness of the design and operation of our disclosure controls and procedures as of each of March 31 and June 30, and concluded that our disclosure controls and procedures were not effective due to a material weakness in our internal control over financial reporting solely related to our restatement of net income available to our stockholders for the purpose of calculating earnings per share. There can be no assurance that our controls will effectively prevent material misstatements in our consolidated financial statements in future periods.
Tilman J. Fertitta is a Control Shareholder.
Tilman J. Fertitta, the Company’s Chairman of the Board, President and Chief Executive Officer controls a majority of the Company’s common stock and the Company’s voting power. As a result, Mr. Fertitta is able to control the election of the Company’s Board of Directors and controls the vote on virtually all matters which might be submitted to a vote of our stockholders. As a controlled company, we are not required to and do not have an independent compensation or monitoring and corporate governess committee.
Tilman J. Fertitta’s ownership of over 50% of our common stock could adversely affect our share price and make future equity offerings more difficult.
Tilman J. Fertitta’s ownership of over 50% of our common stock has reduced the number of shares held by unaffiliated stockholders and, as a result, our common stock may be more susceptible to market volatility. This ownership could adversely affect prevailing market prices for our common stock and limit our ability to raise capital through equity securities offerings due to the lower number of institutional investors a reduced public float generally attracts. Additionally, if Mr. Fertitta’s proposed acquisition of us is completed, our stock will no longer be publically traded and Mr. Fertitta will own all of our common stock.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Restaurant Locations
For information concerning the location of our restaurants see “Business-Restaurant Locations.”
Our corporate office in Houston, Texas is a multi-story building owned by us and includes meeting and training facilities, and a research and development test kitchen. We also own and operate approximately 75,000 square feet of warehouse facilities used primarily for construction activities and related storage and retail goods storage and distribution related activities.
The Golden Nugget-Las Vegas (“GNLV”) occupies approximately eight acres and GNLV owns the buildings and approximately 90% of the land. GNLV leases the remaining land under three ground leases that expire (given effect to their options to renew) on dates ranging from 2025 to 2102. The Golden Nugget-Laughlin (“GNL”) occupies approximately 13.5 acres, all of which is owned by GNL.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On February 5, 2009, a purported class action and derivative lawsuit entitled Louisiana Municipal Police Employee’s Retirement System on behalf of itself and all other similarly situated shareholders of Landry’s Restaurant’s, Inc. and derivatively on behalf of nominal defendant Landry’s Restaurant’s, Inc. was brought against all members of our Board of Directors, Fertitta Holdings, Inc., and Fertitta Acquisition Co. in the Court at Chancery of the State of Delaware. The lawsuit alleges, among other things, a breach of a fiduciary duty by the directors for renegotiating the 2008 merger agreement with the Fertitta entities, allowing Mr. Fertitta to acquire shares of stock in the Company and gain majority control thereof, and terminating the 2008 merger agreement without requiring payment of the reverse termination fee. The suit seeks consummation of the merger buyout at $21.00 a share or damages representing the difference between $21.00 per share and the price at which class members sold their stock in the open market, or damages for allowing Mr. Fertitta to acquire control of the Company without paying a control premium, or alternatively requiring payment of the reverse termination fee or damages for the devaluation of the Company’s stock. We intend to contest this matter vigorously.
On January 29, 2010, plaintiff in the foregoing action filed an amended complaint also naming Fertitta Group, Inc. and Fertitta Merger Co. as defendants and has further alleged that Mr. Fertitta’s latest proposal to acquire all of our outstanding stock on November 3, 2009 was unfair and that defendants breached their fiduciary duties in entering into a 2009 merger agreement at $14.75. Also, the amended complaint alleges that the Board approved an excessive golden parachute for Mr. Fertitta (albeit over seven (7) years ago) and requests that the Court invalidate same. In addition, plaintiff asserts that there has been inadequate disclosure in our preliminary proxy statement filed with the SEC in connection with the $14.75 merger transaction. In connection with the amended complaint, plaintiff also seeks an injunction of the $14.75 transaction unless curative disclosures are made, appointment of a Trustee to conduct a sale of us to maximize shareholder value, and the imposition of a constructive trust on shares acquired by Mr. Fertitta after June 2008 to be voted in favor of a transaction that provides the highest offer to our shareholders. We believe that the new claims asserted in the amended complaint are also without merit and intend to vigorously contest them as well.
Following Mr. Fertitta’s latest proposal to acquire all of our outstanding stock on November 3, 2009, the class action lawsuit styled Frederic Goldfein, Individually and on behalf of all others similarly situated v. Landry’s Restaurants, Inc., et al. was filed in the District Court of Harris County, 164th Judicial District. We are named in the Petition as a defendant along with all of our directors. Plaintiff has alleged that in connection with the proposed merger transaction, defendants have violated their fiduciary duties, duties of loyalty and good faith and fair dealing and have placed an artificial lid on the price of our stock by announcing a transaction at an inadequate price. Plaintiff seeks to enjoin the transaction until we adopt procedures and a process to obtain the highest price for shareholders, or alternatively to rescind the transaction. We believe this action is without merit and intend to vigorously contest this matter.
Ralph Biancalana, Individually and on behalf of all others similarly situated v. Tilman J. Fertitta, et al., a putative class action, was filed on November 10, 2009 in the District Court of Harris County, Texas, 165th Judicial District, following Mr. Fertitta’s latest proposal to acquire all of our outstanding stock. We are named in the Petition as a defendant along with all of our directors. Plaintiff has alleged, among other things, that in connection with the proposed merger transaction, our directors have knowingly and recklessly violated their fiduciary duty of care, have violated their fiduciary duties of loyalty, good faith, candor and independence, and that the transaction contains an inadequate and unfair price. Plaintiff also alleged that we aided and abetted our directors’ alleged breach of fiduciary duty. Plaintiff seeks to enjoin the transaction and the payment of a termination fee to Mr. Fertitta. Plaintiff also requests declarations from the Court that the termination fee is unfair, and that our directors have breached their fiduciary duties to our shareholders. Plaintiff seeds recovery of attorneys fees and costs. We believe this action is without merit and intend to vigorously contest this matter.
On November 17, 2009, Robert Caryer filed a class action petition in the District Court of Harris County, 125th Judicial District. The lawsuit is styled Robert Caryer, individually and on behalf of all other similarly situated v. Landry’s Restaurants, Inc., Tilman J. Fertitta, Steve L. Scheinthal, Kenneth Brimmer, Michael S. Chadwick, Joe Max Taylor and Richard H. Liem. Plaintiff has alleged that in connection with the proposed merger transaction, defendants have violated their fiduciary duties, duties of loyalty and good faith and fair dealing and have placed an artificial lid on the price of our stock by announcing a transaction at an inadequate price. Plaintiff seeks to enjoin the transaction until we adopt procedures and a process to obtain the highest price for shareholders, or alternatively to rescind the transaction. We believe this action is without merit and intend to vigorously contest this matter.
On January 15, 2010, Goldfein, Biancalana and Caryer were consolidated by Court order. Plaintiffs allege in the consolidated petition that in connection with the proposed merger transaction, defendants have violated their fiduciary duties, duties of loyalty and good faith and fair dealing and have placed an artificial lid on the price of our stock by announcing a transaction at an inadequate price. Plaintiffs seek to enjoin the transaction until we adopt procedures and a process to obtain the highest price for shareholders, or alternatively to rescind the transaction. We believe this action is without merit and intend to vigorously contest this matter.
General Litigation
We are 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 our financial position, results of operations or cash flows.
ITEM 4.
ITEM 4. RESERVED
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
Our common stock trades on the New York Stock Exchange under the symbol “LNY.” As of March 12, 2010, there were approximately 924 stockholders of record of the common stock.
The following table presents the quarterly high and low sales prices for our common stock, as reported on the New York Stock Exchange Composite Tape under the symbol “LNY” and dividends paid per common share for 2008 and 2009.
Dividend Policy
Commencing in 2000, we began paying an annual $0.10 per share dividend, declared and paid in quarterly installments of $0.025 per share. In April 2004, the annual dividend was increased to $0.20 per share, declared and paid in quarterly installments of $0.05 per share. On June 16, 2008, we announced we were discontinuing dividend payments indefinitely. The indentures under which our Senior Secured Notes were issued and our Credit Agreement limit the payment of dividends on our common stock to specified levels.
Stock Repurchase
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. In March, July and November 2007, we authorized an additional $50.0 million, $75.0 million and $1.5 million, respectively, of open market stock repurchases. These programs have resulted in our aggregate repurchasing of approximately 24.0 million shares of common stock for approximately $472.4 million through December 31, 2009. In addition to our repurchases, during the fourth quarter of 2008, Mr. Tilman J. Fertitta, our Chairman, Chief Executive Officer and President, who owns approximately 56% of our stock, purchased approximately 2.6 million shares on the open market without having a publicly announced plan.
All repurchases of our common stock during the year ended December 31, 2009 were made pursuant to our open market stock repurchase program. We purchased 4,088 shares of our common stock during 2009, and have exhausted substantially all funds authorized for purchases under previously existing programs. No repurchases of our common stock were made during the quarter ended December 31, 2009.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial data as of and for the years ended December 31, 2009, 2008, 2007, 2006, and 2005 which are derived from our consolidated financial statements which have been audited by Grant Thornton LLP.
Discontinued Operations
During 2006, as part of a strategic review of our operations, we initiated a plan to divest certain restaurants, including 136 Joe’s Crab Shack units. Subsequently, several additional locations were added to our disposal plan. The results of operations for all units included in the disposal plan have been reclassified as discontinued operations in the statements of income for all periods presented.
Recent Accounting Pronouncements
In June 2008, the FASB issued new accounting guidance on determining whether instruments granted in share-based payment transactions are participating securities. In accordance with the new accounting guidance, unvested equity-based awards that contain non-forfeitable rights to dividends are considered to participate with common shareholders in undistributed earnings. As a result, our unvested awards of restricted stock are required to be included in the calculation of basic earnings per common share. These participating securities, prior to
application of the new accounting guidance, were excluded from weighted-average common shares outstanding in the calculation of basic earnings per common share. We applied the provisions of the new accounting guidance beginning on January 1, 2009, and have calculated and presented basic earnings per common share on this basis for all periods presented.
The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and our Consolidated Financial Statements and Notes. All amounts are in thousands, except per share data.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(1) In 2009, 2008 and 2006, we recorded asset impairment charges related to continuing operations of $2.9 million ($1.9 million after tax), $2.4 million ($1.6 million after tax) and $3.0 million ($2.0 million after tax), respectively, related to the adjustment to estimated fair value of certain restaurant properties and assets. In 2007 and 2006, we also recorded asset impairment charges and other losses totaling $9.9 million ($6.5 million after tax) and $79.8 million ($51.8 million after-tax), respectively, related to discontinued operations.
(2) In 2009, we accelerated recognition of $26.0 million ($16.9 million after tax) in original issue discount and $9.6 million ($6.2 million after tax) in deferred loan costs, respectively, associated with the extinguishment of our 14.0% Senior Secured Notes. These costs were previously being amortized over the term of the Notes. We also issued $406.5 million of 11 5/8 % Senior Secured Notes (New Notes) and amended and extended our credit facility. In 2007, we recognized an $8.0 million ($5.3 million after-tax) charge for deferred loan costs previously being amortized over the term of our 7.5% Senior Notes.
(3) In 2009, we recognized a $19.4 million ($12.6 million after tax) gain related to the purchase and retirement of $33.2 million of Golden Nugget second lien debt, offset by $4.0 million in call premiums associated with refinancing our 7.5% and 9.5% Senior Notes. In 2008, we recognized $14.3 million in non-cash charges associated with interest rate swaps not designated as hedges. In 2007, we recorded expenses associated with exchanging the 7.5% Senior Notes for 9.5% Senior Notes of approximately $5.0 million ($3.3 million after tax) and incurred approximately $6.3 million ($4.2 million after tax) in call premiums and expenses associated with refinancing the Golden Nugget debt. We also recorded $5.4 million ($3.5 million after tax) reflecting a non-cash expense for the change in fair value of interest rate swaps related to the new Golden Nugget financing.
Adjusted EBITDA includes asset impairment expense as we consider asset impairment expense to be additional depreciation expense. Adjusted EBITDA has certain limitations and is not a generally accepted accounting principles (“GAAP”) measurement and is presented solely as a supplemental disclosure because we believe that it is a widely used measure of operating performance. Adjusted EBITDA is also not intended to be viewed as a source of liquidity or as a cash flow measure as used in the statement of cash flows. We compensate for these limitations by relying primarily on our GAAP results and using adjusted EBITDA only supplementally as a valuation statistic. Adjusted EBITDA as shown differs from that used in our credit agreements primarily due to non-guarantor subsidiaries and other specifically defined calculations.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following presents an analysis of the results and financial condition of our continuing operations. Except where indicated otherwise, the results of discontinued operations are excluded from this discussion.
We are a national, diversified, restaurant, hospitality and entertainment company principally engaged in the ownership and operation of full service, casual dining restaurants and gaming facilities. We locate our restaurants in high-profile, specialty locations in markets that provide a balanced mix of tourist, convention, business and residential clientele. We focus on providing quality food at reasonable prices while offering a memorable atmosphere for our guests. As of December 31, 2009, we operated 174 restaurants, as well as several limited menu restaurants and other properties (as described in Item 1. Business), including the Golden Nugget Hotels and Casinos (Golden Nugget) in Las Vegas and Laughlin, Nevada.
Merger Agreement
On November 3, 2009, we entered into an Agreement and Plan of Merger (Merger Agreement) with Fertitta Group, Inc., a Delaware corporation (Parent) and Fertitta Merger Co., a Delaware corporation and a wholly-owned subsidiary of Parent (Merger Sub) and for certain limited purposes, Tilman J. Fertitta (Mr. Fertitta). Pursuant to the terms of the Merger Agreement, each of our outstanding shares of common stock, other than shares owned by us, Parent, Merger Sub or any other subsidiary of Parent and stockholders who perfected appraisal rights under applicable law, will be cancelled and converted into the right to receive $14.75 in cash, without interest.
The proposed merger transaction is subject to approval by our stockholders, including approval by the holders of a majority of our common stock not owned by Mr. Fertitta.
Under the Merger Agreement, there is a “go-shop” provision whereby the Special Committee, with the assistance of its independent advisors, actively solicited alternative acquisition proposals from third parties through December 17, 2009. Although expressions of interest were made by two independent groups, a superior acquisition proposal was never submitted by either group.
Other Matters
On September 25, 2009, an unrestricted subsidiary of Landry’s completed the acquisition of $33.2 million face amount of Golden Nugget second lien term loan debt through a dutch tender and open market purchases at a weighted average cost approximating 41% of face value. In connection with the debt purchases, the unrestricted subsidiary agreed to forgive the face amount of the debt acquired and accordingly, a $19.4 million gain was recognized.
On February 17, 2010, the Golden Nugget entered into Amendment No. 2 and Waiver to the First Lien Credit Agreement (First Lien Second Amendment) by and among Golden Nugget, Inc., Wachovia Bank, National Association, as Administrative Agent, Collateral Agent, Swing Line Bank and Issuing Bank, and each of the Lender parties thereto, dated June 14, 2007.
The First Lien Second Amendment replaced the existing first lien financial covenants with minimum EBITDA, minimum liquidity, minimum cage cash and maximum capital expenditure (CAPEX) covenants. In addition, consenting First Lien lenders received a consent fee of 0.5% and all First Lien lenders will receive a 0.5% annual consent fee on outstanding commitments through maturity. First Lien Lenders will also receive additional interest in an amount equal to 1.00% per annum on unpaid Advances in the form of “PIK” interest, or at the option of the Golden Nugget, cash. The First Lien Second Amendment precludes dividends or other restricted payments, limits incurring additional debt, making investments and other cash distributions from Golden Nugget, increases the excess cash flow sweep to 75% from 50% if certain liquidity levels are reached and requires additional reporting of financial performance including cash flow reports. Certain potential defaults under the existing First Lien Credit Agreement were waived.
Concurrently with the First Lien Second Amendment, the Golden Nugget entered into Amendment No. 2 and Waiver to the Second Lien Credit Agreement (Second Lien Second Amendment) by and among Golden Nugget, Inc., Wachovia Bank, National Association and the other financial institutions parties thereto, dated June 14, 2007. The Second Lien Second Amendment replaced the existing second lien financial covenants with minimum EBITDA, minimum liquidity, minimum cage cash and maximum CAPEX covenants and waived certain potential defaults under the existing Second Lien Credit Agreement. The Second Lien Second Amendment advances the maturity date on the second lien facility from December 31, 2014 to November 2, 2014. The maturity date on the existing $4.0 million Seller note was extended to November 2, 2014 from November 2, 2010.
In connection with the amendments, affiliates of the Golden Nugget will provide $50.0 million in additional funds to the Golden Nugget in return for non-interest bearing subordinated notes. $20.0 million of these funds was used for operating liquidity and to pay fees and expenses associated with the amendments. $30.0 million was available to purchase second lien indebtedness at 40% of face value. At closing, approximately $62.8 million of second lien indebtedness was acquired and retired. The remaining balance of the $30.0 million not used to purchase second lien debt by December 31, 2010, if any, will be used to purchase first lien debt at par value. All such purchased debt shall be immediately retired. The Golden Nugget may also incur up to an additional $8.0 million in affiliate subordinated debt during the remaining term of the First Lien Credit Agreement to meet liquidity requirements.
During 2006, as part of a strategic review of our operations, we initiated a plan to divest certain restaurants, including 136 Joe’s Crab Shack units. On November 17, 2006, we completed the sale of 120 Joe’s Crab Shack restaurants. The results of operations for all units included in the disposal plan have been reclassified to discontinued operations in the statements of income, balance sheets and segment information for all periods presented.
We recorded additional pre-tax impairment charges totaling $10.3 million and $9.9 million for the year ended December 31, 2008, 2007, respectively, to write down carrying values of property and equipment pertaining to the remaining stores included in our disposal plan.
During 2009 and 2008, we recorded impairment charges of $2.9 million and $3.2 million, respectively, to impair the leasehold improvements and equipment of several underperforming restaurants.
The Specialty Division is primarily engaged in operating complementary entertainment and hospitality activities, such as miscellaneous beverage carts and various kiosks, amusement rides and games and some associated limited hotel properties, generally at locations in conjunction with 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.
The restaurant and gaming industries are intensely competitive and affected by changes in consumer tastes and by national, regional, and local economic conditions and demographic trends. The performance of individual restaurants or casinos may be affected by factors such as: traffic patterns, demographic considerations, marketing, weather conditions, and the type, number, and location of competing operations. 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 other casinos in the markets in which we operate and from other 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.
Results of Operations
Profitability
The following table sets forth the percentage relationship to total revenues of certain operating data for the periods indicated:
(1) Excludes depreciation, amortization, general and administrative and pre-opening expenses.
Year ended December 31, 2009 Compared to the Year ended December 31, 2008
Restaurant and Hospitality
Restaurant and hospitality revenues decreased $47,143,393, or 5.3%, from $890,605,419 to $843,462,026 for the year ended December 31, 2009 compared to the year ended December 31, 2008. The revenue decline reflects the economic contraction and reduced consumer spending in 2009. The change in revenue is the result of the following approximate amounts: new restaurant openings-increase $28.3 million; same store sales (restaurants open all of 2009 and 2008)-decrease $60.9 million; closed or sold restaurants-decrease $9.7 million; and the remainder of the difference is attributable to the change in sales for stores not open a full comparable period or other sales. The total number of units open as of December 31, 2009 and 2008 was 174 and 175, respectively.
Cost of revenues decreased $24,945,963, or 10.8%, from $230,519,183 to $205,573,220 for the year ended December 31, 2009 as compared to the prior year period percentage. Cost of revenues as a percentage of revenues for year ended December 31, 2009 decreased to 24.4% from 25.9% in 2008. This decrease is primarily the result of favorable commodity prices and cost control measures implemented during the latter part of 2008.
Labor expense decreased $14,150,419, or 5.5%, from $258,445,355 to $244,294,936 for the year ended December 31, 2009 as compared to the year ended December 31, 2008. Labor expenses as a percentage of revenues remained constant at 29.0% for both 2009 and 2008. Increases in labor expense associated with a revised bonus plan and an increase in the minimum wage were offset by declines in hourly labor primarily due to reduced overtime and other cost control measures.
Other operating expenses decreased $19,518,911, or 8.9%, from $220,441,086 to $200,922,175 for the year ended December 31, 2009, as compared to the prior year period and such expenses decreased as a percentage of revenues to 23.8% in 2009 from 24.8% in 2008. The percentage decreases primarily relate to decreased rent expense associated with a $7.5 million lease termination payment from a landlord during the first quarter of 2009, as well as decreased energy costs in 2009 as compared to 2008.
Gaming
Casino revenues decreased $19,316,983, or 12.6%, from $152,965,231 to $133,648,248 for the year ended December 31, 2009 as compared to the year ended December 31, 2008 reflecting the impact of the economic contraction and reduction in consumer spending in 2009.
Room revenues decreased $14,035,142, or 22.2%, from $63,230,271 to $49,195,129 for 2009 as compared to 2008. This decrease is primarily the result of reduced occupancy and average daily room rates in Las Vegas.
Food and beverage revenues decreased $3,920,797, or 8.2%, from $47,734,759 to $43,813,962 for the year ended December 31, 2009 as compared to the comparable prior year period. This decrease resulted from reduced visitor traffic and the temporary closure of certain outlets as a cost saving measure during the first quarter of 2009.
Other revenues increased $1,075,398, or 7.5%, from $14,370,107 to $15,445,505 for the year ended December 31, 2009 as a result of increased ticket revenue from headliner entertainment when compared with the prior year period.
Casino expenses decreased $7,420,946, or 9.5%, from $78,259,949 to $70,839,003 for the year ended December 31, 2009. This decrease is primarily the result of reduced payroll costs and promotional expenses due to lower revenues.
Room expenses decreased $798,917, or 3.3%, from $24,194,522 to $23,395,605 for the year ended December 31, 2009. This decrease is primarily the result of reduced payroll costs, and other expenses associated with lower occupancies.
Food and beverage expenses decreased $4,125,281, or 14.2%, from $29,112,315 to $24,987,034 for the year ended December 31, 2009. This decrease resulted from lower revenues associated with reduced visitor traffic and the temporary closure of certain outlets as a cost saving measure during the first quarter.
Other expenses decreased $4,834,417, or 8.2%, from $58,893,485 to $54,059,068 for the year ended December 31, 2009 as compared to the prior year. This decrease resulted primarily from reduced payroll costs, operating supplies and utilities.
Consolidated
General and administrative expenses decreased $2,014,991 or 3.9%, from $51,294,426 to $49,279,435 for the year ended December 31, 2009 and increased slightly as a percentage of revenues to 4.6% in 2009 from 4.5% in 2008 due to the reduction in revenues. This decrease in expenses relates primarily to reduced supplies and utilities as compared to the prior year.
Depreciation and amortization expense increased by $1,746,342, or 2.5%, to $72,037,824 from $70,291,482 for the year ended December 31, 2009 as compared to the prior year period. The increase for 2009 was due to the renovation of the Golden Nugget and the addition of new restaurants and equipment.
Asset impairment expense was $2,887,842 for the year ended December 31, 2009 compared with an impairment expense of $2,408,625 for the same period in 2008. We continually monitor unfavorable cash flows, if any, related to underperforming restaurants. Periodically we may conclude that certain properties have become impaired based on the existing and anticipated future economic outlook for such properties in their respective market areas. During the year ended December 31, 2009, we impaired the leasehold improvements and equipment of several underperforming restaurants. During the year ended December 31, 2008, we impaired the leasehold improvements and equipment of three underperforming restaurants. The difference between impairments arising from Hurricane Ike damage and the associated insurance proceeds in 2008 was not material.
We recorded a $4,850,576 gain for the year ended December 31, 2009, representing insurance proceeds associated with Hurricane Ike that exceeded the recorded book value of the assets which were damaged.
Gains on disposals of fixed assets amounted to $2,098,132 for 2009 as a result of a gain on the disposition of property as well as a gain realized on the sale of a single restaurant location.
Pre-opening expenses decreased by $1,170,996, or 51.7%, from $2,266,004 to $1,095,008 for the year ended December 31, 2009. This decrease relates primarily to the opening of the T-Rex Café in 2008.
Net interest expense for the year ended December 31, 2009 increased by $70,452,079, or 88.3%, from $79,817,334 to $150,269,413. This increase is due to higher effective borrowing rates and increased borrowings in 2009 associated with our refinancing in February 2009, as well as accelerated amortization of $26.0 million and $9.6 million in original issue discount and deferred loan costs, respectively, previously being amortized over the term of the 14.0% Senior Secured Notes. The 14.0% Senior Secured Notes were retired and we issued 11 5/8 % Senior Notes in the fourth quarter of 2009.
Other income of $15,371,615 was recorded during the year ended December 31, 2009 as compared to other expenses totaling $17,034,705 for the year ended December 31, 2008. The 2009 amount is primarily comprised of a gain of $19.4 million recognized in connection with the repurchase of an aggregate $33.2 million face amount of the Golden Nugget’s second lien debt by an unrestricted subsidiary of Landry’s. This gain was
partially offset by $4.0 million in call premiums associated with refinancing our 7.5% and 9.5% senior notes. The 2008 expense primarily relates to $14.3 million in non-cash charges related to interest rate swaps not considered hedges.
A tax benefit of $9,788,822 was recorded for the year ended December 31, 2009 compared with a provision of $7,226,574 for the year ended December 31, 2008. The effective tax rate for 2009 was 57.3% compared to 34.5% for the prior year period, as a result of pre-tax loss and the general business credits increasing the effective tax rate above the statutory benefit rate of 35%
The after tax loss from discontinued operations decreased $10,363,101, from $10,569,067 to $205,966 for the year ended December 31, 2009. The losses in both periods related primarily to impairments on assets held for sale or abandoned and lease terminations.
Year ended December 31, 2008 Compared to the Year ended December 31, 2007
Restaurant and Hospitality
Restaurant and hospitality revenues decreased $3,828,847, or 0.4%, from $894,434,266 to $890,605,419 for the year ended December 31, 2008 compared to the year ended December 31, 2007. The change in revenue is the result of the following approximate amounts: new restaurant openings-increase $34.5 million; same store sales (restaurants open all of 2008 and 2007)-decrease $18.5 million; hurricane closures-decrease $13.1 million; closed or sold restaurants-decrease $5.5 million and the remainder of the difference is attributable to the change in sales for stores not open a full comparable period or other sales. The total number of units open as of December 31, 2008 and 2007 was 175 and 173, respectively.
Cost of revenues decreased $11,294,925, or 4.7%, from $241,814,108 to $230,519,183 for the year ended December 31, 2008 as compared to the prior year period. Cost of revenues as a percentage of revenues for year ended December 31, 2008 decreased to 25.9% from 27.0% in 2007. This decrease is primarily the result of a shift in mix to higher margin hotel and amusement revenues with minimal cost of revenues, the impact of business interruption proceeds and cost control measures implemented in 2008.
Labor expense decreased $8,257,738, or 3.1%, from $266,703,093 to $258,445,355 for the year ended December 31, 2008 as compared to year ended December 31, 2007. Labor expenses as a percentage of revenues for 2008 decreased to 29.0% from 29.8% in 2007. The decrease in labor resulted in part from cost control measures implemented in 2008 and the impact of business interruption proceeds, partially offset by increases in the minimum wage.
Other operating expenses increased $7,157,055, or 3.4%, from $213,284,031 to $220,441,086 for the year ended December 31, 2008, as compared to the prior year period and such expenses increased as a percentage of revenues to 24.8% in 2008 from 23.9% in 2007. These increases primarily relate to increased energy costs, advertising expense and rent as compared to the comparable prior year period.
Gaming
Casino revenues decreased $12,318,244, or 7.5%, from $165,283,475 to $152,965,231 for the year ended December 31, 2008 as compared to the year ended December 31, 2007. This decrease is primarily the result of reduced slot activity in both Las Vegas and Laughlin.
Room revenues decreased $2,711,440, or 4.1%, from $65,941,711 to $63,230,271 for the year ended December 31, 2008 as compared to the prior year period. This decrease is the result of reduced occupancy and average daily room rates as compared to the prior year period.
Casino expenses and other expenses decreased $3,368,007, or 4.1%, and $8,079,086, or 12.1%, respectively, for the year ended December 31, 2008. These decreases are primarily the result of reduced payroll costs for both Las Vegas and Laughlin. Other expenses were further reduced by reduced marketing costs as compared to the prior year period.
Consolidated
General and administrative expenses decreased $4,461,559 or 8.0%, from $55,755,985 to $51,294,426 for the year ended December 31, 2008 and decreased as a percentage of revenues to 4.5% in 2008 from 4.8% in 2007. This decrease relates primarily to reduced corporate payroll costs, as well as lower legal and other professional fees as compared to the prior year.
Depreciation and amortization expense increased by $5,004,782, or 7.7%, from $65,286,700 to $70,291,482 for the year ended December 31, 2008 as compared to the prior year period. The increase for 2008 was due to the renovation of the Golden Nugget and the addition of new restaurants and equipment.
Asset impairment expense was $2,408,625 for the year ended December 31, 2008 compared with no impairment expense for the same period in 2007. We continually monitor unfavorable cash flows, if any, related to underperforming restaurants. Periodically we may conclude that certain properties have become impaired based on the existing and anticipated future economic outlook for such properties in their respective market areas. During the year ended December 31, 2008, we impaired the leasehold improvements and equipment of three underperforming restaurants. The difference between impairments arising from Hurricane Ike damage and the associated insurance proceeds was not material.
Gains on disposals of fixed assets amounted to $18,918,088 for 2007 as a result of gains on the disposition of property in Biloxi, Mississippi, as well as a $15.1 million gain realized on the sale of a single restaurant location.
Pre-opening expenses decreased by $1,210,947, or 34.8%, from $3,476,951 to $2,266,004 for the year ended December 31, 2008. This decrease relates to the reduced number of openings undertaken in 2008 compared with the prior year.
Net interest expense for the year ended December 31, 2008 increased by $7,495,382, or 10.4%, from $72,321,952 to $79,817,334. This increase is primarily due to higher average borrowing rates and increased borrowings in 2008 primarily associated with the Golden Nugget, partially offset by a 2007 charge of $8.0 million for deferred loan costs previously being amortized over the term of the 7.5% Senior Notes. The 7.5% Senior Notes were exchanged for 9.5% Senior Notes as a result of a settlement with the note holders in the third quarter of 2007.
Other expense decreased $84,971, or 0.5%, from $17,119,676 to $17,034,705 for the year ended December 31, 2008. The 2008 amount included $14.3 million in non-cash charges related to interest rate swaps not considered hedges and prior year amount included call premiums and expenses associated with refinancing the Golden Nugget debt.
A provision for income taxes of $7,226,574 was recorded for year ended December 31, 2008 compared with a provision of $14,237,950 for the year ended December 31, 2007. The effective tax rate for 2008 was 34.5% compared to 34.3% for the prior year period.
The after tax loss from discontinued operations increased $942,804, from $9,626,263 to $10,569,067 for the year ended December 31, 2008. The losses in both periods related primarily to impairments on assets held for sale or abandoned and lease terminations.
Liquidity and Capital Resources
On November 30, 2009, we completed the offering of $406.5 million in aggregate principal amount of 11 5/8% senior secured notes due 2015 (New Notes). The gross proceeds from the offering and sale of the New Notes were $400.1 million. The New Notes are unconditionally guaranteed on a senior secured basis as to principal, premium, if any, and interest by all of our current and future domestic restricted subsidiaries (each individually a Guarantor and collectively, the Guarantors) and are secured by a second lien position on substantially all assets of Landry’s and the Guarantors. The New Notes were issued pursuant to an indenture, dated as of November 30, 2009 (Indenture), among Landry’s, the Guarantors and Deutsche Bank Trust Company Americas, as Trustee and as Collateral Agent. Subsequent to the closing, Wilmington Trust became Trustee.
In addition to the Indenture, Landry’s and the Guarantors entered into a registration rights agreement, dated as of November 30, 2009 (Registration Rights Agreement). Under the Registration Rights Agreement, Landry’s and the Guarantors have agreed to use their best efforts to file and cause to become effective a registration statement with respect to an offer to exchange the New Notes for notes registered under the Securities Act of 1933, as amended (the Securities Act), having substantially identical terms as the New Notes (except that additional interest provisions and transfer restrictions pertaining to the New Notes will be deleted). If we fail to cause the registration statement relating to the exchange offer to become effective within the time periods specified in the Registration Rights Agreement, we will be required to pay liquidated damages on the New Notes until the registration statement is declared effective.
On November 30, 2009, we also amended and restated our Credit Agreement to allow us to borrow $235.6 million (the Amended Credit Facility). The Amended Credit Facility provides for a term loan of $160.6 million and a revolving credit line of $75.0 million. The obligations under the Amended Credit Facility are unconditionally guaranteed by the Guarantors and are secured by a first lien position on substantially all assets of Landry’s and the Guarantors.
Interest on the Amended Credit Facility accrues at a base rate (which is the greater of 4.0%, the Federal Funds Rate plus .50% or Wells Fargo’s prime rate) plus a credit spread of 5.0%, or at our option, at the Eurodollar base rate of at least 2.0% plus a credit spread of 6.0%, and matures on November 30, 2013.
The Amended Credit Facility contains covenants that limit our ability and the Guarantors to, among other things, incur or guarantee additional indebtedness; create liens; make capital expenditures; pay dividends on or repurchase stock; make certain types of investments; sell assets or merge with other companies. The Amended Credit Facility contains financial covenants, including a maximum leverage ratio, a maximum senior leverage ratio, and a minimum fixed charge coverage ratio.
Proceeds from the New Notes and the Amended Credit Facility were used to repay all of the 14.0% Senior Secured 2009 Notes due 2011, pay fees and expenses and provide approximately $73.0 million in restricted cash available to complete the proposed merger. In connection with the repayment of the 14.0% Senior Secured Notes, we expensed $35.6 million, primarily associated with early recognition of unamortized discount and deferred loan costs.
On February 17, 2010, the Golden Nugget, Inc., a wholly owned, unrestricted subsidiary of ours, entered into Amendment No. 2 and Waiver to the First Lien Credit Agreement (First Lien Second Amendment) by and among Golden Nugget, Inc., Wachovia Bank, National Association, as Administrative Agent, Collateral Agent, Swing Line Bank and Issuing Bank, and each of the Lender parties thereto, dated June 14, 2007.
The First Lien Second Amendment replaced the existing first lien financial covenants with minimum EBITDA, minimum liquidity, minimum cage cash and maximum capital expenditure (CAPEX) covenants. In addition, consenting First Lien lenders received a consent fee of 0.5% and all First Lien lenders will receive a 0.5% annual consent fee on outstanding commitments through maturity. First Lien Lenders will also receive
additional interest in an amount equal to 1.00% per annum on unpaid Advances in the form of “PIK” interest, or at the option of Golden Nugget, cash. The First Lien Second Amendment precludes dividends or other restricted payments, limits incurring additional debt, making investments and other cash distributions from the Golden Nugget, increases the excess cash flow sweep to 75% from 50% if certain liquidity levels are reached and requires additional reporting of financial performance including cash flow reports. Certain potential defaults under the existing First Lien Credit Agreement were waived.
Concurrently with the First Lien Second Amendment, the Golden Nugget entered into Amendment No. 2 and Waiver to the Second Lien Credit Agreement (Second Lien Second Amendment) by and among Golden Nugget, Inc., Wachovia Bank, National Association and the other financial institutions parties thereto, dated June 14, 2007. The Second Lien Second Amendment replaced the existing second lien financial covenants with minimum EBITDA, minimum liquidity, minimum cage cash and maximum CAPEX covenants and waived certain potential defaults under the existing Second Lien Credit Agreement. The Second Lien Second Amendment advances the maturity date on the second lien facility from December 31, 2014 to November 2, 2014. The maturity date on the existing $4.0 million Seller note was extended to November 2, 2014 from November 2, 2010.
In connection with the Amendments, affiliates of the Golden Nugget will provide $50.0 million in additional funds to the Golden Nugget in return for non-interest bearing subordinated notes. $20.0 million of these funds was used for operating liquidity and to pay fees and expenses associated with the amendments. $30.0 million was available to purchase second lien indebtedness at 40% of face value. At closing, approximately $62.8 million of second lien indebtedness was acquired and retired. The remaining balance of the $30.0 million not used to purchase second lien debt by December 31, 2010, if any, will be used to purchase first lien debt at par value. All such purchased debt shall be immediately retired. The Golden Nugget may also incur up to an additional $8.0 million in affiliate subordinated debt during the remaining term of the First Lien Credit Agreement to meet liquidity requirements.
On September 25, 2009, an unrestricted subsidiary of Landry’s completed the acquisition of $33.2 million face amount of Golden Nugget second lien term loan debt through a dutch tender and open market purchases at a weighted average cost approximating 41% of face value. In connection with the debt purchases, the unrestricted subsidiary agreed to forgive the face amount of the debt acquired and accordingly, a $19.4 million gain was recognized.
In June 2007, our wholly owned unrestricted subsidiary, Golden Nugget, Inc., completed a new $545.0 million credit facility consisting of a $330.0 million first lien term loan, a $50.0 million revolving credit facility, and a $165.0 million second lien term loan. The revolving credit facility expires on June 30, 2013 and the first lien term loan matures on June 30, 2014. Both the first lien term loan and the revolving credit facility bear interest at Libor or the bank’s base rate, plus a financing spread of 2.0% and 0.75%, respectively, at December 31, 2009. In addition, the credit facility requires a commitment fee on the unfunded portion for both the $50.0 million revolving credit facility. The second lien term loan matures on November 2, 2014 and bears interest at Libor or the bank’s base rate, plus a financing spread of 3.25% and 2.0%, respectively, at December 31, 2009. The financing spreads and commitment fees for the revolving credit facility increase or decrease depending on the leverage ratio as defined in the credit facility. The first lien term loan requires one percent of the outstanding principal balance due annually to be paid in equal quarterly installments commencing on September 30, 2009, with the balance due on maturity. Principal of the second lien term loan is due at maturity. The Golden Nugget’s subsidiaries have granted liens on substantially all real property and personal property as collateral under the credit facility and are guarantors of the credit facility.
Consistent with our policy to manage our exposure to interest rate risk and in conformity with the requirements of the first and second lien facilities, we entered into interest rate swaps for all of the first and second lien borrowings of the Golden Nugget that fix the interest rates at between 5.4% and 5.5%, plus the applicable margin. We designated $210.0 million of the first lien interest rate swaps and all of the second lien
swaps as cash flow hedges. These swaps mirror the terms of the underlying debt and reset using the same index and terms. On September 25, 2009, an unrestricted subsidiary of Landry’s repurchased an aggregate $33.2 million face amount of second lien term loan debt, and as such, a proportional share of the second lien swaps were no longer an effective cash flow hedge. Accordingly, a $4.2 million non-cash expense associated with these swaps was recorded for the year ended December 31, 2009. At December 31, 2009, the remaining swaps were determined to be highly effective, and no ineffective portion was recognized in income. Included in Accumulated other comprehensive loss at December 31, 2009 and December 31, 2008 are unrealized losses, net of income taxes, totaling $27.0 million and $44.3 million, respectively, related to these hedges. The impact of these interest rate swaps was an increase to interest expense by $24.1 million, $10.3 million and $0.6 million for the years ended December 31, 2009, 2008 and 2007, respectively. The interest rate swaps associated with the $120.0 million of first lien borrowings representing the delayed draw construction loan have not been designated as hedges and the change in fair market value is reflected as other income/expense in the consolidated financial statements. Accordingly, a non-cash gain of approximately $5.4 million was recorded for the year ended December 31, 2009 and a non-cash expense of approximately $14.3 million and $5.4 million for the years ended December 31, 2008 and 2007, respectively.
Our debt agreements contain various restrictive covenants including minimum EBITDA, fixed charge and financial leverage ratios, limitations on capital expenditures, and other restricted payments as defined in the agreements. In addition, the Golden Nugget debt agreement requires a parent contribution if the leverage ratio, as defined, falls below a predetermined level through December 31, 2009. As a result of reduced operating results combined with additional borrowings for construction of the new tower, Landry’s contributed approximately $25.0 million in cash to the Golden Nugget in 2009. As of December 31, 2009, we were in compliance with all such covenants and the restaurant group had approximately $17.0 million in letters of credit outstanding and available borrowing capacity of $34.0 while the Golden Nugget had approximately $2.0 million in letters of credit outstanding, and available borrowing capacity of less than $1.0 million.
As a primary result of the extraordinary disruption to the credit markets in 2009, our 2009 financing carried substantially higher interest rates and original issue discount than the previous debt instruments. In addition, the Golden Nugget Amendments increase its cash interest rate by 0.5% annually and its total interest rate by 1.5% annually on all first lien debt. These higher interest rates, combined with additional borrowing to provide liquidity and pay fees and expenses for the financing as well as to complete the hotel tower at the Golden Nugget, resulted in substantially higher interest expense in 2009. We expect to continue to incur high interest expense over the next few years.
Working capital increased from a deficit of $86.0 million as of December 31, 2008 to $13.3 million as of December 31, 2009 primarily due to the increase in cash in anticipation of the Golden Nugget amendment and merger. Cash flow to fund future operations, new restaurant development and acquisitions will be generated from operations, available capacity under our credit facilities and additional financing, if appropriate.
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 for the next twelve months.
In 2009, we incurred $153.2 million for capital expenditures including $17.2 million in accounts payable at December 31, 2009 and excluding $24.7 million in accounts payable at December 31, 2008. We incurred $113.5 million on the renovation and expansion of the Golden Nugget Hotel and Casino in downtown Las Vegas, Nevada. In 2010, we expect to incur approximately $27.0 million in capital expenditures.
Off Balance Sheet Arrangements
As of December 31, 2009, we had contractual obligations as described below. These obligations are expected to be funded primarily through cash on hand, cash flow from operations, working capital, the Credit
Agreement and additional financing sources in the normal course of business operations. Our obligations include off balance sheet arrangements whereby the liabilities associated with non-cancelable operating leases, unconditional purchase obligations and standby letters of credit are not fully reflected in our balance sheets.
(1) Interest payments for our variable rate debt was computed using rates in effect at December 31, 2009.
(2) These liabilities appear in total only as we are unable to reasonably predict the timing of settlement of such liabilities.
In connection with certain of our discontinued operations, we remain the guarantor or assignor of a number of leased locations. In the event of future defaults under any of such leased locations we may be responsible for significant damages to existing landlords which may materially affect our financial condition, operating results and cash flows. We estimate that lessee rental payment obligations during the remaining terms of the assignments and subleases approximate $60.7 million as of December 31, 2009. We have recorded a liability of $2.6 million with respect to these obligations, where we believe it is probable that we will make future cash payments. We believe the remaining obligations will be met by the third party.
Seasonality and Quarterly Results
Our business is seasonal in nature. Our reduced winter volumes cause revenues and, to a greater degree, operating profits to be lower in the first and fourth quarters than in other quarters. We have and will continue to open restaurants in highly seasonal tourist markets. 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. Goodwill and other non-amortizing intangible assets are reviewed for impairment at least annually. Significant estimates used in these reviews include projected operating results and cash flows, discount rates, terminal value growth rates, capital expenditures, changes in future working capital requirements, cash flow multiples, control premiums and
assumed royalty rates. 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 values, reduced for estimated disposal costs, and are included in other current assets.
We operate approximately 174 properties and periodically we expect to experience unanticipated individual unit deterioration in revenues and profitability, on a short-term and occasionally longer-term basis. When such events occur and we determine that the associated assets are impaired, we will record an asset impairment expense in the quarter such determination is made. Due to our average restaurant net investment cost, such amounts could be significant when and if they occur. However, such asset impairment expense does not affect our financial liquidity, and is usually excluded from many valuation model calculations.
We maintain a large deductible insurance policy related to property, general liability and workers’ compensation coverage. Predetermined loss limits have been arranged with insurance companies to limit our 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 account for income taxes in accordance with FASB accounting guidance which requires the recognition of deferred tax assets, net of applicable reserves, related to net operating loss carryforwards and certain temporary differences. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be recognized. We regularly assess the likelihood of realizing the deferred tax assets based on forecasts of future taxable income and available tax planning strategies that could be implemented and adjust the related valuation allowance if necessary.
Our income tax returns are subject to examination by the Internal Revenue Service and other tax authorities. We regularly assess the potential outcomes of these examinations in determining the adequacy of our provision for income taxes and our income tax liabilities. Inherent in our determination of any necessary reserves are assumptions based on past experiences and judgments about potential actions by taxing authorities. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We believe that we have adequately provided for any reasonable and foreseeable outcome related to uncertain tax matters.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, the recognition and measurement of current and deferred income tax assets and liabilities; the assessment of recoverability of long-lived assets and costs to settle unpaid claims. Actual results may differ materially from those estimates.
Recent Accounting Pronouncements
In June 2009, the FASB issued new accounting guidance on accounting for transfers of financial assets which removes the concept of a qualifying special-purpose entity (QSPE) and clarifies the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. This new guidance is effective for fiscal years beginning after November 15, 2009. We are currently evaluating the potential impact this guidance may have on our consolidated financial statements.
In June 2009, the FASB issued new accounting guidance which revises the approach to determining the primary beneficiary of a variable interest entity (VIE) to be more qualitative in nature and requires companies to more frequently reassess whether they must consolidate a VIE. This new guidance is effective for fiscal years beginning after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. We are currently evaluating the potential impact this new guidance may have on our consolidated financial statements.
In January 2010, the FASB issued guidance that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements, including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. The guidance is effective for reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures that are effective for periods beginning after December 15, 2010. We are currently evaluating the potential impact this new guidance may have on our consolidated financial statements.
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 commodity costs, labor costs, including expected future increases in federal and state minimum wages, energy costs, and land and construction costs could adversely affect our profitability and ability to expand.
ITEM 7A.
ITEM 7A. 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 December 31, 2009 included $221.8 million of floating-rate debt attributed to borrowings at an average interest rate of 7.11%. As a result, our annual interest cost in 2009 will fluctuate based on short-term interest rates.
Consistent with our policy to manage our exposure to interest rate risk, and in conformity with the requirements of the first and second lien facilities, we entered into interest rate swaps with notional amounts covering all of the first and second lien term loan borrowings of the Golden Nugget. The hedges are designed to convert the lien facilities’ floating interest rates to fixed interest rates at between 5.4% and 5.5%, plus the applicable margin.
The impact on annual cash flow of a ten percent change in the floating-rate (approximately 0.7%) would be approximately $1.6 million annually based on the floating-rate debt and other obligations outstanding at December 31, 2009; however, there are no assurances that possible rate changes would be limited to such amounts.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statement schedule is set forth commencing on page 45.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
We have had no disagreements with our accountants on any accounting or financial disclosures.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Management’s Report on Internal Control Over Financial Reporting
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 December 31, 2009, the end of the period covered by this report. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2009 due to a material weakness in our internal control over financial reporting solely related to our restatement of net income available to Company stockholders for the purpose of calculating earnings per share resulting from our failure to consider all applicable accounting guidance in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009. Management, with oversight from the Audit Committee of the Board of Directors, has concluded that given the nature of the material weakness no remedial actions were necessary. However, the control weakness will not be considered effective until a sufficient period of time has elapsed to allow for effective testing, and management and its independent registered certified public accounting firm conclude that these controls are operating effectively. During the year ended December 31, 2009, 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.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f). Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2009 for the reasons discussed above. Grant Thornton LLP has issued an adverse report on the effectiveness of internal control over financial reporting as of December 31, 2009, which is included on page 50 of this report.
Changes in Internal Control over Financial Reporting
Our management carried out an evaluation, with the participation of our principal executive officer and principal financial officer, of changes in our internal control over financial reporting, as defined in Rule 13a-15(f). Based on this evaluation, our management determined that no change in our internal control over financial reporting occurred during the fourth quarter of fiscal 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
We have disclosed all information required to be disclosed in a current report on Form 8-K during the fourth quarter of the year ended December 31, 2009.
PART III
Pursuant to Instruction G to Form 10-K, we incorporate by reference into Items 10-14 below the information to be disclosed in our definitive Proxy Statement prepared in connection with the 2010 Annual Meeting of Shareholders, which will be filed within 120 days of December 31, 2009. We have adopted a code of ethics applicable to its chief executive officer, chief financial officer, controller and other financial officers, which is a “Code of Ethics” as defined by applicable rules of the Securities and Exchange Commission. A copy of our Code of Ethics has been previously filed and is incorporated by reference as an exhibit hereto. If the we make any amendments to this Code other than technical, administrative, or other non-substantive amendments, or grants any waivers, including implicit waivers, from a provision of this Code to our chief executive officer, chief financial officer or controller, we will disclose the nature of the amendment or waiver, its effective date and to whom it applies on its website or in a report on Form 8-K filed with the Securities and Exchange Commission.
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
On May 21, 2009 we filed with the New York Stock Exchange the Annual CEO Certification regarding our compliance with the New York Stock Exchange’s Corporate Governance listing standards as required by Section 303A-12(a) of the New York Stock Exchange Listed Company Manual. The Annual CEO Certification was issued without qualification. In addition, we have filed as exhibits to this Annual Report on Form 10-K for the year ended December 31, 2009 and to the Annual Reports on Form 10-K for the years ended December 31, 2008 and 2007, the applicable certifications of our Chief Executive Officer and our Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Certain information relating to our directors and executive officers is incorporated by reference herein from our definitive Proxy Statement in connection with our Annual Meeting of Stockholders, which Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2009.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Certain information relating to our directors and executive officers is incorporated by reference herein from our definitive Proxy Statement in connection with our Annual Meeting of Stockholders, which Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2009.
Equity Compensation Plan Information
The following table provides information as of December 31, 2009 regarding the number of shares of Common Stock that may be issued under our equity compensation plans.
(1) We have the following compensation plans under which awards have been issued or are authorized to be issued, which were adopted with stockholder approval:
(a) The Landry’s Restaurants, Inc. 2002 Employee/Rainforest Conversion Plan authorizes the issuance of up to 2,162,500 shares. This plan allows awards of non-qualified stock options, which may include stock appreciation rights, to our consultants, employees and non-employee directors. The plan is administered by our Compensation Committee. Terms of the award, such as vesting and exercise price, are to be determined by the Compensation Committee and set forth in the grant agreement for each award.
(b) We maintain two stock option plans, which were originally adopted in 1993, (the Stock Option Plans), as amended, pursuant to which options were granted to our eligible employees and non-employee directors or our subsidiaries for the purchase of an aggregate of 2,750,000 shares of common stock. The Stock Option Plans were administered by the Compensation Committee of the Board of Directors (the Committee), which determined at its’ discretion, the number of shares subject to each option granted and the related purchase price, vesting and option periods. Options are no longer issued under either plan, however, options previously issued under the stock option plans are still outstanding.
(c) We also maintain the 1995 Flexible Incentive Plan, which was adopted in 1995, (Flex Plan), as amended, for key employees of the Company. Under the Flex Plan eligible employees received stock options, stock appreciation rights, restricted stock, performance awards, performance stock and other awards, as defined by the Board of Directors or an appointed committee. The aggregate number of shares of common stock issued under the Flex Plan (or with respect to which awards may be granted) were not in excess of 2,000,000 shares. Options are no longer issued under the Flex Plan; however, options previously issued are still outstanding.
(2) We have the following compensation plans under which awards have been issued or are authorized to be issued, which were adopted without stockholder approval:
(a) The Landry’s Restaurants, Inc. 2003 Equity Incentive Plan authorizes the issuance of up to 700,000 shares. This plan allows awards of both qualified and non-qualified stock options, restricted stock, cash equivalent values, and tandem awards to employees. The plan is administered by our compensation committee. Terms of the award, such as vesting and exercise price, are to be determined by the compensation committee and set forth in the grant agreement for each award.
(b) On July 22, 2002, we issued options to purchase an aggregate of 437,500 shares under individual stock option agreements with individual members of senior management. Options under these agreements were granted at market price and expire ten years from the date of grant. These options vest in equal installments over a period of five years, provided that vesting may accelerate on certain occurrences, such as a change in control or, in the case of options granted to our CEO, if our stock hits certain price targets.
(c) On July 22, 2002, we issued options to purchase an aggregate of 6,000 shares to our non-employee directors. Options under these agreements were granted at market price and expire ten years from the date of grant. These options vest in equal installments over a period of five years.
(d) On March 16, 2001, we issued options to purchase an aggregate of 387,500 shares to our senior management under individual stock option agreements with individual members of senior management. Options under these agreements were granted at $8.50 and expire ten years from the date of grant. These options vest in equal installments over a period of five years, provided that vesting may accelerate on certain occurrences, such as a change in control or, in the case of options granted to our CEO, if our stock hits certain price targets. In December 2006, certain options to a member of senior management were increased to an exercise price of $9.65.
(e) On March 16 and September 13, 2001, options to purchase an aggregate of 240,000 shares were issued to certain of our individual employees, under individual option grant agreements. Options under these agreements were granted at $8.50 and $15.80, respectively, and expire ten years from the date of grant. These options vest in equal installments over a period of five years, provided that vesting may accelerate on certain occurrences, such as a change in control.
(f) In addition, we have issued pursuant to an employment agreement, over its five year term, 775,000 shares of restricted stock, 500,000 shares which vest 10 years from the grant date, and 275,000 shares which vest 7 years from the grant date. In addition, 250,000 stock options have also been granted pursuant to the employment agreement.
(g) In April 2006, 102,000 restricted common shares were issued to key employees vesting ratably over five years and 8,000 restricted common shares were granted to non-employee directors vesting ratably over two years.
(h) In January 2007, 3,335 restricted common shares were issued to a key employee vesting ratably over five years and on September 27, 2007, 4,000 restricted common shares were granted to non-employee directors vesting ratably over two years.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Certain information relating to our directors and executive officers is incorporated by reference herein from our definitive Proxy Statement in connection with our Annual Meeting of Stockholders, which Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2009.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Certain information regarding the fees we paid to our principal accountants, including Audit Fees, Audit-Related Fees, Tax Fees and all other fees is incorporated by reference herein from our definitive Proxy Statement in connection with our Annual Meeting of Stockholders, which Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2009.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
The following financial statements are set forth herein commencing on page 50:
-Reports of Independent Registered Public Accounting Firm Grant Thornton LLP
-Consolidated Balance Sheets as of December 31, 2009 and 2008
-Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007
-Consolidated Statements of Changes in Equity for the years ended December 31, 2009, 2008 and 2007
-Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007.
-Notes to Consolidated Financial Statements
2. Financial Statement Schedules-Not applicable.
(b) Exhibits
* Filed herewith
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Landry’s Restaurants, Inc.
We have audited Landry’s Restaurants, Inc. and subsidiaries’ (a Delaware holding company) internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Landry’s Restaurants, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on Landry’s Restaurants, Inc. and subsidiaries’ internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. A material weakness was identified as management did not appropriately interpret all applicable accounting guidance when calculating and presenting earnings per share for net income available to Landry’s Restaurants, Inc. and subsidiaries.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Landry’s Restaurants, Inc. and subsidiaries has not maintained effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Landry’s Restaurants and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in equity, and cash flows for each of the three years ended December 31, 2009. The material weakness identified above was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2009 financial statements, and this report does not affect our report dated March 16, 2010, which expressed unqualified opinion on those financial statements.
/s/ Grant Thornton LLP
Houston, Texas
March 16, 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Landry’s Restaurants, Inc.
We have audited the accompanying consolidated balance sheets of Landry’s Restaurants, Inc. and subsidiaries’ (a Delaware holding company) as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Landry’s Restaurants, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Notes 1 and 8 to the consolidated financial statements, the Company adopted new accounting guidance on January 1, 2009 related to the inclusion of certain instruments granted in share-based payment transactions in the calculation of basic earnings per common share and retrospectively applied the guidance.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Landry’s Restaurants, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 16, 2010 expressed an adverse opinion on the effectiveness of internal control over financial reporting.
/s/ Grant Thornton LLP
Houston, Texas
March 16, 2010
LANDRY’S RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
LANDRY’S RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of these consolidated financial statements.
LANDRY’S RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
LANDRY’S RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
We are a national, diversified, restaurant, hospitality and entertainment company principally engaged in the ownership and operation of full service, casual dining restaurants, primarily under the names Landry’s Seafood 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.
On September 27, 2005, Landry’s Gaming Inc., an unrestricted subsidiary of Landry’s Restaurants, Inc., completed the acquisition of Golden Nugget, Inc. (formerly Poster Financial Group, Inc.), owner of the Golden Nugget Hotels and Casinos in downtown Las Vegas and Laughlin, Nevada.
Discontinued Operations
During 2006 as part of a strategic review of our operations, we initiated a plan to divest certain restaurants, including 136 Joe’s Crab Shack units. Subsequently, several additional locations were added to our disposal plan. The results of operations, assets and liabilities for all units included in the disposal plan have been reclassified to discontinued operations in the statements of income, balance sheets and segment information for all periods presented.
Principles of Consolidation
The accompanying financial statements include the consolidated accounts of Landry’s Restaurants, Inc., a Delaware holding company, and it’s wholly and majority owned subsidiaries and partnerships. All significant inter-company accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Restaurant and hospitality revenues are recognized when the goods and services are delivered. Casino revenue is the aggregate net difference between gaming wins and losses, with liabilities recognized for funds deposited by customers before gaming play occurs (“casino front money”) and for chips in the customers possession (“outstanding chip liability”). Revenues are recognized net of certain sales incentives as well as accruals for the cost of points earned in point-loyalty programs. The retail value of accommodations, food and beverage, and other services furnished to hotel-casino guests without charge is deducted from revenue as promotional allowances. Proceeds from the sale of gift cards are deferred and recognized as revenue when redeemed by the holder.
Sales Taxes
Except for gross receipts tax on liquor sales in certain jurisdictions, our policy is to present sales taxes net. The tax amounts included in revenues and expenses are not significant.
Accounts Receivable
Accounts receivable is comprised primarily of amounts due from our credit card processor, receivables from national storage and distribution companies and, casino and hotel receivables. The receivables from national storage and distribution companies arise when certain of our inventory items are conveyed to these companies at cost (including freight and holding charges but without any general overhead costs). These conveyance transactions do not impact the consolidated statements of income as there is no revenue or expenses recognized
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
in the financial statements since they are without economic substance other than drayage. We reacquire these items, although not obligated to, when subsequently delivered to the restaurants at cost plus the distribution company’s contractual mark-up. Accounts receivable are reduced to reflect estimated realizable values by an allowance for doubtful accounts based on historical collection experience and specific review of individual accounts. Receivables are written off when they are deemed to be uncollectible. The allowance for doubtful accounts totaled $2.0 million and $1.8 million as of December 31, 2009 and 2008, respectively.
Inventories
Inventories consist primarily of food and beverages used in restaurant operations and complementary retail goods and are recorded at the lower of cost or market value as determined by the average cost for food and beverages and by the retail method on the first-in, first-out basis for retail goods. Inventories consist of the following:
Property and Equipment
Property and equipment are recorded at cost. Expenditures for major renewals and betterments are capitalized while maintenance and repairs are expensed as incurred.
We compute depreciation using the straight-line method. The estimated lives used in computing depreciation are generally as follows: buildings and improvements-5 to 40 years; furniture, fixtures and equipment-5 to 15 years; and leasehold improvements-shorter of 40 years or lease term, including extensions where such are reasonably assured of renewal.
Leasehold improvements are depreciated over the shorter of the estimated life of the asset or the lease term plus option periods where failure to renew results in economic penalty. Any contributions made by landlords or tenant allowances with economic value are recorded as a long-term liability and amortized as a reduction to rent expense over the life of the lease plus option periods where failure to renew results in economic penalty.
Interest is capitalized in connection with construction and development activities, and other real estate development projects. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. During 2009, 2008 and 2007, we capitalized interest expense of approximately $8.2 million, $3.1 million and $3.6 million, respectively.
Our properties are reviewed for impairment on a property by property basis 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 using Level 3 measurements. Properties to be disposed of are reported at the lower of their carrying amount or fair value determined by management’s estimates of expected proceeds supplemented by third party offers or sales contracts, reduced for estimated disposal costs, and amounted to $2.5 million as of December 31, 2009 included in assets related to discontinued operations.
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Non-recurring fair value measurements related to impaired property and equipment consisted of the following:
Software
Software, including capitalized implementation costs, is stated at cost, less accumulated amortization and is included in other assets in our consolidated balance sheets. Amortization expense is provided on the straight-line basis over estimated useful lives, which do not exceed 10 years.
Pre-Opening Costs
Pre-opening costs are expensed as incurred and include the direct and incremental costs incurred in connection with the commencement of each restaurant’s operations, which are substantially comprised of rent expense and training-related costs.
Development Costs
Certain direct costs are capitalized in conjunction with site selection for planned future restaurants, acquiring restaurant properties and other real estate development projects. Direct and certain related indirect costs of the construction department, including interest, are capitalized in conjunction with construction and development projects. These costs are included in property and equipment in the accompanying consolidated balance sheets and are amortized over the life of the related building and leasehold interest. Costs related to abandoned site selections, projects, and general site selection costs which cannot be identified with specific restaurants are expensed.
Comprehensive Income (Loss)
Comprehensive income (loss) includes only comprehensive income (loss) attributable Landry’s stockholder’s. Income (loss) attributable to noncontrolling interests are shown separately in the Statement of Changes in Equity.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Advertising
Advertising costs are expensed as incurred during such year. Advertising expenses were $12.4 million, $11.9 million and $11.9 million, in 2009, 2008 and 2007, respectively.
Goodwill and Other Intangible Assets
Goodwill and trademarks are not amortized, but instead tested for impairment at least annually. Other intangible assets are amortized over their expected useful life or the life of the related agreement.
The goodwill impairment test involves a two-step process. The first step is a comparison of each reporting unit’s fair value to its carrying value. We estimate fair value using both market information and discounted cash flow projections also referred to as the income approach. The income approach uses a reporting unit’s projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions. The projection uses management’s best estimates of economic and market conditions over the projected period including growth rates in sales, costs and number of units, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements. We validate our estimates of fair value under the income approach by comparing the values to fair value estimates using a market approach. A market approach estimates fair value by applying cash flow multiples to the reporting unit’s operating performance. The multiples are derived from comparable publicly traded companies. If the carrying value of the reporting unit is higher than its fair value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss.
At December 31, 2009, two reporting units had goodwill; Saltgrass Steakhouse and Landry’s divisions. As part of our process for performing the step one impairment test of goodwill, we estimated the fair value of all of our reporting units utilizing the income approach described above to derive an enterprise value of the Company. We reconciled the enterprise value to our overall estimated market capitalization. The estimated market capitalization considers recent trends in our market capitalization and an expected control premium. Based on the results of the step one impairment test, step two was not required as an impairment was not identified.
The fair value of other indefinite-lived intangible assets, primarily trademarks, are estimated and compared to their carrying value. We estimate the fair value of these intangible assets using the relief-from-royalty method, which requires assumptions related to projected revenues from our annual long-range plan; assumed royalty rates that could be payable if we did not own the trademarks; and a discount rate. We recognize an impairment loss when the estimated fair value of the indefinite-lived intangible asset is less than its carrying value. We completed our impairment test of our indefinite-lived intangibles and concluded there was no impairment at December 31, 2009.
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Even though we determined that there was no goodwill or indefinite-lived intangible asset impairment as of December 31, 2009, declines in the value of our stock price as well as values of others in the restaurant industry, declines in sales at our restaurants beyond our current forecasts, changes in circumstances, existing at the measurement date or at other times in the future, or in the numerous estimates associated with management’s judgments, assumptions and estimates made in assessing the fair value of our goodwill and significant adverse changes in the operating environment for the restaurant industry may result in a future impairment charge.
Amortization expense relating to intangibles was $0.4 million for each of the years ended December 31, 2009, 2008 and 2007.
Deferred Rent
Rent expense under operating leases is calculated using the straight-line method whereby an equal amount of rent expense is attributed to each period during the term of the lease, regardless of when actual payments are made. Rent expense generally begins on the date we obtained possession under the lease and includes option periods where failure to renew results in economic penalty. Generally, this results in rent expense in excess of cash payments during the early years of a lease and rent expense less than cash payments in the later years.
The difference between rent expense recognized and actual rental payments is recorded as deferred rent and included in other long term liabilities.
Insurance
We maintain large deductible insurance policies related to property, general liability and workers’ compensation coverage. Predetermined loss limits have been arranged with insurance companies to limit our per occurrence cash outlay. Accrued liabilities include the estimated costs to settle unpaid claims and estimated incurred but not reported claims using actuarial methodologies.
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Financial Instruments
Generally Accepted Accounting Principles (GAAP) establishes a hierarchy for fair value measurements, such that Level 1 measurements include unadjusted quoted market prices for identical assets or liabilities in an active market, Level 2 measurements include quoted market prices for identical assets or liabilities in an active market which have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets, and Level 3 measurements include those that are unobservable and of a highly subjective measure.
Our financial assets and liabilities that are accounted for at fair value on a recurring basis as of December 31, 2009, consist of interest rate swaps (Note 7), for which the lowest level of input significant to their fair value measurement is Level 2. As of December 31, 2009, the fair value of the interest rate swap liabilities totaled $60.0 million, of which $41.5 million are designated and qualify as hedges and the remaining $18.5 million do not qualify as hedges. These amounts, net of taxes, are recorded as other long term liabilities in our consolidated balance sheets. In connection with a non-qualified deferred compensation plan, we use a Rabbi Trust to fund obligations of the plan. The market value of the trust assets as of December 31, 2009 and 2008 was $4.0 million and $3.5 million respectively, as determined using Level 1 inputs, and is included in other assets, net and the liability to plan participants is included in other liabilities in our consolidated balance sheets.
The fair values of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate the carrying amounts due to their short maturities. The fair value of our long-term debt instruments are estimated based on quoted market prices, where available, or on the amount of future cash flows associated with each instrument, discounted using our current borrowing rate for comparable debt instruments. The estimated fair values of our significant long-term debt, including the current portions, are as follows:
GAAP requires that each derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or a liability and measured at its fair value. These
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
guidelines also require that changes in the derivative’s fair value be recognized currently in earnings in either income (loss) from continuing operations or accumulated other comprehensive income (loss), depending on whether the derivative qualifies for fair value or cash flow accounting treatment. We utilize interest rate swap agreements to manage our exposure to interest rate risk. During 2007, we entered into additional interest rate swap agreements, some of which qualify as cash flow hedges. As such, any changes in the fair value of these hedges that are considered highly effective, are recognized in other comprehensive income (loss). The remaining swaps have not been designated as hedges. See Note 7 for a detailed discussion of our hedging activities.
Cash Equivalents and Restricted Cash
We consider investments with a maturity of three months or less when purchased to be cash equivalents. We maintain balances at financial institutions which may exceed Federal Deposit Insurance Corporation limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant risks on our cash or other investments in bank accounts. As described in Note 7, certain cash balances at December 31, 2009 are restricted.
Income Taxes
We follow the liability method of accounting for income taxes in accordance with GAAP. Under this method, deferred income taxes are recorded based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the underlying assets are realized or liabilities are settled. A valuation allowance reduces deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized.
Effective January 1, 2007, we adopted FASB accounting guidance which clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. The guidance prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order to be recognized in the financial statements. Accordingly, we report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. See Note 10 for additional information.
Earnings Per Share
We include our unvested participating securities in determining weighted-average common shares outstanding in the calculation of basic earnings per common share.
Share-based Compensation
We record compensation expense for all stock option awards granted based on the grant date fair value.
Redeemable Noncontrolling Interest
We have accreted the adjustments to the fair value of our redeemable noncontrolling interest through the earliest date of redemption. As described in Note 11, we have a noncontrolling interest that includes a redemption provision that is not solely within our control, commonly referred to as redeemable noncontrolling interest. Accounting guidance requires that noncontrolling interests that are redeemable at the option of the holder be recorded outside of permanent equity at fair value, and the redeemable noncontrolling interests should be adjusted to their fair value at each balance sheet date through retained earnings.
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements
In December 2007, the FASB issued new accounting guidance on business combinations which expands the use of the acquisition method of accounting used in business combinations to all transactions and other events in which one entity obtains control over one or more other businesses or assets. This new accounting guidance requires measurement at the acquisition date of the fair value of assets acquired, liabilities assumed and any non-controlling interest. Additionally, the guidance requires that acquisition-related costs, including restructuring costs, be recognized as expense separately from the acquisition. This new accounting guidance applies prospectively to business combinations for which the acquisition date is on or after the first fiscal period beginning on or after December 15, 2008. The implementation of this guidance will affect our consolidated financial statements only to the extent we complete business combinations in the future.
In December 2007, the FASB issued new accounting guidance on non-controlling interests in consolidated financial statements. This new guidance applies to the accounting for non-controlling interests (previously referred to as minority interest) in a subsidiary and for the deconsolidation of a subsidiary. We adopted the new accounting guidance on January 1, 2009.
In March 2008, the FASB issued new accounting guidance requiring expanded quarterly disclosure requirements about an entity’s derivative instruments and hedging activities. The new accounting guidance is effective for fiscal years beginning after November 15, 2008. We adopted the guidance on January 1, 2009 and have included the required expanded disclosures within this report.
In April 2008, the FASB issued new accounting guidance on determining the useful life of intangible assets which removed the requirement for an entity to consider, when determining the useful life of an acquired intangible asset, whether the intangible asset can be renewed without substantial cost or material modification to the existing terms and conditions associated with the intangible asset. The new guidance replaces the previous useful life assessment criteria with a requirement that an entity considers its own experience in renewing similar arrangements. If the entity has no relevant experience, it would consider market participant assumptions regarding renewal. This new accounting guidance is being applied prospectively beginning January 1, 2009, and the adoption has not had a material impact on our consolidated financial statements.
In June 2008, the FASB issued new accounting guidance on determining whether instruments granted in share-based payment transactions are participating securities. In accordance with the new guidance, unvested equity-based awards that contain non-forfeitable rights to dividends are considered to participate with common shareholders in undistributed earnings. As a result, our unvested awards of restricted stock are required to be included in the calculation of basic earnings per common share. These participating securities, prior to application of the new accounting guidance, were excluded from weighted-average common shares outstanding
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
in the calculation of basic earnings per common share. We applied the provisions of the new accounting guidance beginning on January 1, 2009, and have calculated and presented basic earnings per common share on this basis for all periods presented. The impact of the inclusion of participating securities in the calculation of basic earnings per common share for prior periods was not material.
In April 2009, the FASB issued new accounting guidance on interim disclosures about fair value of financial instruments. This new accounting guidance was effective for our reporting periods beginning with our June 30, 2009 interim financial statements. The new accounting guidance expanded the previous disclosure requirements about how an entity reports on fair value to be included in the summarized, interim financial statements. This new accounting guidance did not impact our consolidated financial position, cash flows or results of operations, and we have included the required disclosures within these December 31, 2009 financial statements.
In April 2009, the FASB issued new accounting guidance on the recognition and presentation of other-than temporary impairments, which provides guidance for measuring and expands the presentation and disclosure requirements of other-than-temporary impairments on debt and equity securities in interim and annual financial statements. As we currently do not own any debt or equity securities, this new accounting guidance did not impact our financial position, cash flows or results of operations.
In April 2009, the FASB issued new accounting guidance on the estimation of fair value when the volume and level of activity for assets or liabilities have significantly decreased, the identification of transactions that are not orderly, and the use of judgment in evaluating the relevance of inputs such as transaction prices. This new accounting guidance became effective with our second quarter of 2009 interim financial statements. The implementation of this new accounting guidance did not significantly change our valuation or disclosure of financial and nonfinancial assets and liabilities.
In April 2009, the FASB issued new accounting guidance on accounting for assets acquired and liabilities assumed in a business combination. This new accounting guidance, which became effective for business combinations having an acquisition date on or after January 1, 2009, requires an asset or liability arising from a contingency in a business combination to be recognized at fair value if fair value can be reasonably determined. If it cannot, the asset or liability must be recognized in accordance with accounting guidance related to accounting for contingencies and reasonably estimating the amount of a loss. The implementation of this guidance will affect our consolidated financial statements only to the extent we complete business combinations in the future.
In May 2009, the FASB issued new accounting guidance on subsequent events. This new guidance establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This new accounting guidance is effective for interim and annual periods ending after June 15, 2009.
In June 2009, the FASB issued new accounting guidance on the FASB Accounting Standards Codification (Codification) and the hierarchy of generally accepted accounting principles, which establishes the Codification as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with generally accepted accounting principles. This new guidance explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC registrants. This new accounting guidance is effective for financial statements issued for interim and annual reporting periods ending after September 15, 2009. The adoption of this new guidance did not have an impact on our consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. HURRICANE IKE
On September 13, 2008, Hurricane Ike struck the Gulf Coast of the United States, causing considerable damage to the cities of Galveston, Kemah and Houston, Texas and surrounding areas. Several of our restaurants in Galveston and Kemah sustained significant damage, as did the amusement rides, the boardwalk itself and some infrastructure at the Kemah Boardwalk. The Kemah and Galveston properties had been a significant driver of our overall performance in 2008. The damage to the Kemah and Galveston properties may adversely affect both our business and near and long-term prospects. Widespread power outages led to the closure of 31 Houston area restaurants until power was restored. All Houston, Galveston and Kemah restaurants have reopened. The difference between impairments arising from Hurricane Ike damage and the associated insurance proceeds was not material. During the year ended December 31, 2009, the difference between these recorded impairments and the associated insurance proceeds resulted in the recognition of a $4.9 million gain.
We also maintain business interruption insurance coverage and recorded approximately $0.2 and $7.3 million in recoveries related to lost profits at our affected locations in Galveston and the Kemah Boardwalk during the years ended December 31, 2009 and 2008, respectively. This amount was recorded as revenue in our consolidated financial statements.
3. DISCONTINUED OPERATIONS
During the third quarter of 2006, as part of a strategic review of our operations, we initiated a plan to divest certain restaurants including 136 Joe’s Crab Shack units. Subsequently, several additional locations were added to our disposal plan. The results of operations for all stores included in our disposal plan have been reclassified as discontinued operations in our statements of income, balance sheets and segment information for all periods presented.
We recorded pre-tax impairment charges of $10.3 million and $9.9 million for the years ended December 31, 2008 and 2007, respectively, to write down carrying values of property and equipment pertaining to the remaining stores included in our disposal plan based on the expected net sales proceeds determined through analysis of the respective markets or sales contracts. No impairment charge was recorded for the year ended December 31, 2009. We expect to sell the land and improvements belonging to these remaining restaurants, or abandon those locations, within the next 12 months.
In connection with the disposal plan, we recorded pre-tax charges of $4.2 million for the year ended December 31, 2008, for lease termination and other store closure costs. These charges are included in discontinued operations.
The results of discontinued operations for the years ended December 31, 2009, 2008 and 2007 were as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Interest expense is allocated to discontinued operations based on the ratio of net assets to be discontinued to consolidated net assets. For the year ended December 31, 2007 interest expense related to discontinued operations was $0.1 million. For the years ended December 31, 2008 and 2009, no interest expense was allocated to discontinued operations.
The assets and liabilities of the discontinued operations are presented separately in the consolidated balance sheets and consist of the following:
4. NONCONTROLLING INTEREST AND REDEEMABLE NONCONTROLLING INTEREST
On February 24, 2006, we acquired 80% of T-Rex Cafe, Inc. from Schussler Creative, Inc. (SCI). The agreement with SCI provides that we can acquire SCI’s 20% interest for up to $35.0 million or that SCI can put its interest to us at a calculated amount as determined in the agreement no earlier than January 2010. During the first quarter of 2009, we determined that the redemption was probable and began accreting to the expected redemption value on the expected redemption date. We are recording the estimated amount as an increase to noncontrolling interest in temporary equity and a decrease to retained earnings in our consolidated balance sheets as of December 31, 2009.
T-Rex, through a wholly-owned subsidiary, on February 24, 2006, signed two lease agreements with Walt Disney World Hospitality and Recreation Corporation, one for T-Rex at Downtown Disney World, which opened in October 2008, and the other for Yak and Yeti, an Asian themed eatery at Disney’s Animal Kingdom Theme Park that opened in November 2007.
We present the noncontrolling interest in an additional restaurant as a separate component of equity.
5. PROPERTY AND EQUIPMENT AND OTHER CURRENT ASSETS
Property and equipment is comprised of the following:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
We continually evaluate unfavorable cash flows, if any, related to underperforming restaurants. Periodically it is concluded that certain properties have become impaired based on their existing and anticipated future economic outlook in their respective market areas. In such instances, we may impair assets to reduce their carrying values to fair values. We consider the asset impairment expense as additional depreciation and amortization, although shown as a separate line item in the consolidated statements of income. Estimated fair values of impaired properties are based on comparable valuations, cash flows and management judgment.
During the year ended December 31, 2009, we recorded impairment charges of $2.9 million to impair the leasehold improvements and equipment of several underperforming restaurants. During the year ended December 31, 2008, we recorded impairment charges of $3.2 million to impair the leasehold improvements and equipment of three underperforming restaurants. We took no impairment charges in the year ended December 31, 2007.
Other current assets are comprised of the following:
Other income, net for 2009 was $15.4 million and includes a $19.4 million gain related to the acquisition of a portion of our outstanding debt and a $1.2 million gain associated with the change in fair value of swaps not designated as hedges, offset by approximately $5.0 million in expenses related to call premiums and refinancing costs. Other expense, net for 2008 was $17.0 million and includes $14.3 million in non-cash expenses associated with the change in fair value of swaps which were not designated as hedges. Other expense, net for 2007 was $17.1 million and includes $3.0 million in expenses associated with exchanging the 7.5% Notes for 9.5% Notes, $8.8 million in call premiums and expenses associated with refinancing the Golden Nugget debt, and $4.4 million in expenses associated with changes in the fair value of swaps which were not designated as hedges.
6. ACCRUED LIABILITIES
Accrued liabilities are comprised of the following:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. DEBT
On November 30, 2009, we completed the offering of $406.5 million in aggregate principal amount of 11 5/8% senior secured notes due 2015 (the New Notes). The gross proceeds from the offering and sale of the New Notes were $400.1 million. The New Notes are unconditionally guaranteed on a senior secured basis as to principal, premium, if any, and interest by all of our current and future domestic restricted subsidiaries (each individually a Guarantor and collectively, the Guarantors) and are secured by a second lien position on substantially all assets of Landry’s and the Guarantors. The New Notes were issued pursuant to an indenture, dated as of November 30, 2009 (Indenture), among Landry’s, the Guarantors and Deutsche Bank Trust Company Americas, as Trustee and as Collateral Agent. Subsequent to the closing, Wilmington Trust became Trustee.
In addition to the Indenture, Landry’s and the Guarantors entered into a registration rights agreement, dated as of November 30, 2009 (Registration Rights Agreement). Under the Registration Rights Agreement, Landry’s and the Guarantors have agreed to use their best efforts to file and cause to become effective a registration statement with respect to an offer to exchange the New Notes for notes registered under the Securities Act of 1933, as amended (the Securities Act), having substantially identical terms as the New Notes (except that additional interest provisions and transfer restrictions pertaining to the New Notes will be deleted). If we fail to cause the registration statement relating to the exchange offer to become effective within the time periods specified in the Registration Rights Agreement, we will be required to pay liquidated damages on the New Notes until the registration statement is declared effective.
On November 30, 2009, we also amended and restated our Credit Agreement to allow us to borrow $235.6 million (the Amended Credit Facility). The Amended Credit Facility provides for a term loan of $160.6 million and a revolving credit line of $75.0 million. The obligations under the Amended Credit Facility are unconditionally guaranteed by the Guarantors and are secured by a first lien position on substantially all assets of Landry’s and the Guarantors.
Interest on the Amended Credit Facility accrues at a base rate (which is the greater of 4.0%, the Federal Funds Rate plus .50% or Wells Fargo’s prime rate) plus a credit spread of 5.0%, or at our option, at the Eurodollar base rate but no less than 2.0%, plus a credit spread of 6.0%, and matures on November 30, 2013.
The Amended Credit Facility contains covenants that limit our ability and the Guarantors to, among other things, incur or guarantee additional indebtedness; create liens; make capital expenditures; pay dividends on or repurchase stock; make certain types of investments; sell assets or merge with other companies. The Amended Credit Facility contains financial covenants, including a maximum leverage ratio, a maximum senior leverage ratio, and a minimum fixed charge coverage ratio.
Proceeds from the New Notes and the Amended Credit Facility were used to repay all of our outstanding 14.0% Senior Secured Notes due 2011, pay fees and expenses and provide approximately $73.0 million in restricted cash available to complete a proposed merger of an affiliate of Tilman Fertitta and us. In connection with the repayment of the 14.0% Senior Secured Notes, we expensed $35.6 million in interest expense, primarily associated with early recognition of unamortized discount and deferred loan costs.
During 2008, we obtained a fully funded financing commitment which included up to $250.0 million in term loans. On December 19, 2008, we entered into an $81.0 million interim senior secured credit facility to fund a portion of the commitment. The interim senior secured credit facility provided for a $31.0 million senior secured term loan facility and a $50.0 million senior secured revolving credit facility, the proceeds of which were used to refinance the remaining outstanding indebtedness under our previously issued and outstanding senior credit facility and to pay related transaction fees and expenses.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
We subsequently funded an additional $135.0 million under the commitment by entering into a $215.6 million Amended and Restated Credit Agreement dated as of February 13, 2009 (the Credit Agreement) which included the $81.0 million interim senior secured credit facility. The Credit Agreement provided for a term loan of $165.6 million, which included the $31.0 million term loan, and the revolving credit line of $50.0 million that was previously funded. The obligations under the Credit Agreement were unconditionally guaranteed by the Guarantors and were secured by a first lien position on substantially all of our assets.
On February 13, 2009, we completed an offering of $295.5 million in aggregate principal amount of 14.0% Senior Secured Notes due 2011 (Series A Notes). The gross proceeds from the offering and sale of the Series A Notes were $260.0 million. The Series A Notes were unconditionally guaranteed on a senior secured basis as to principal, premium, if any, and interest by all of our current and future domestic restricted subsidiaries (each individually a Guarantor and collectively, the Guarantors) and were secured by a second lien position on substantially all of our and the Guarantors’ assets. The Series A Notes were issued pursuant to an indenture, dated as of February 13, 2009 (Indenture), among us, the Guarantors and Deutsche Bank Trust Company America, as Trustee and as Collateral Agent. On July 10, 2009, we and the Guarantors filed a registration statement with respect to an offer to exchange the Series A Notes for notes registered under the Securities Act, having substantially identical terms as the Series A Notes.
On August 14, 2009, we completed our offer to exchange $295.5 million in aggregate principal amount of 14.0% Senior Secured Notes due 2011 (Series B Notes), that have been registered under the Securities Act, for the Series A Notes. An aggregated principal amount of $260.5 million of Series A Notes were exchanged for Series B Notes pursuant to the offer and an aggregate principal amount of $27.0 million Series A Notes were exchanged for Series B Notes pursuant to private exchange. The total principal amount of notes exchanged was $287.5 million.
We used the proceeds from the Notes offering, together with borrowings under the Credit Agreement to refinance our previous $395.7 million aggregate principal amount of 9.5% senior notes due 2014 (the “9.5% Notes”) and $4.3 million aggregate principal amount of 7.5% senior notes due 2014 (the “7.5% Notes” and, together with the 9.5% Notes, the “Previous Notes”). As of December 31, 2009, $0.8 million of our 7.5% Notes and $0.7 million of our 9.5% Notes remained outstanding. In addition, we paid a redemption premium of approximately $4.0 million in connection with the repurchase of the Previous Notes.
In connection with the refinancing of our Previous Notes, on December 23, 2008, we commenced separate cash tender offers (each a “tender offer” and together, the “tender offers”) to purchase any and all of our outstanding 9.5% Notes and 7.5% Notes for a purchase price of 101% of the principal amount thereof. In conjunction with the tender offers, we solicited consents of at least a majority of the aggregate principal amount of each of the outstanding 9.5% Notes and 7.5% Notes to certain proposed amendments to each of the indentures governing the 9.5% Notes and 7.5% Notes to eliminate most of the restrictive covenants and certain events of default and to amend certain other provisions contained in the indentures and notes related thereto. We executed supplemental indentures with U.S. Bank National Association, as trustee, to effectuate the proposed amendments to the indentures governing the Existing Notes, which became operative upon the consummation of the Notes offering.
With respect to any Previous Notes that were not tendered, we may, at our option, either (i) pay such Previous Notes in accordance with their terms through maturity, (ii) repurchase any 9.5% Notes if the holders exercise their option to require us to do so, at 101% of the principal amount plus accrued but unpaid interest, if any, through the payment date or (iii) defease any or all of the remaining Previous Notes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
On February 17, 2010, the Golden Nugget, Inc., a wholly owned, unrestricted subsidiary of ours, entered into Amendment No. 2 and Waiver to the First Lien Credit Agreement (First Lien Second Amendment) by and among Golden Nugget, Inc., Wachovia Bank, National Association, as Administrative Agent, Collateral Agent, Swing Line Bank and Issuing Bank, and each of the Lender parties thereto, dated June 14, 2007.
The First Lien Second Amendment replaced the existing first lien financial covenants with minimum EBITDA, minimum liquidity, minimum cage cash and maximum capital expenditure (CAPEX) covenants. In addition, consenting First Lien lenders received a consent fee of 0.5% and all First Lien lenders will receive a 0.5% annual consent fee on outstanding commitments through maturity. First Lien Lenders will also receive additional interest in an amount equal to 1.00% per annum on unpaid Advances in the form of “PIK” interest, or at the option of Golden Nugget, cash. The First Lien Second Amendment precludes dividends or other restricted payments, limits incurring additional debt, making investments and other cash distributions from the Golden Nugget, increases the excess cash flow sweep to 75% from 50% if certain liquidity levels are reached and requires additional reporting of financial performance including cash flow reports. Certain potential defaults under the existing First Lien Credit Agreement were waived.
Concurrently with the First Lien Second Amendment, the Golden Nugget entered into Amendment No. 2 and Waiver to the Second Lien Credit Agreement (Second Lien Second Amendment) by and among Golden Nugget, Inc., Wachovia Bank, National Association and the other financial institutions parties thereto, dated June 14, 2007. The Second Lien Second Amendment replaced the existing second lien financial covenants with minimum EBITDA, minimum liquidity, minimum cage cash and maximum CAPEX covenants and waived certain potential defaults under the existing Second Lien Credit Agreement. The Second Lien Second Amendment advances the maturity date on the second lien facility from December 31, 2014 to November 2, 2014. The maturity date on the existing $4.0 million Seller note was extended to November 2, 2014 from November 2, 2010.
In connection with the Amendments, affiliates of the Golden Nugget will provide $50.0 million in additional funds to the Golden Nugget in return for non-interest bearing subordinated notes. $20.0 million of these funds was used for operating liquidity and to pay fees and expenses associated with the amendments. $30.0 million was available to purchase second lien indebtedness at 40% of face value. At closing, approximately $62.8 million of second lien indebtedness was acquired and retired. The remaining balance of the $30.0 million not used to purchase second lien debt by December 31, 2010, if any, will be used to purchase first lien debt at par value. All such purchased debt shall be immediately retired. The Golden Nugget may also incur up to an additional $8.0 million in affiliate subordinated debt during the remaining term of the First Lien Credit Agreement to meet liquidity requirements.
On September 25, 2009, an unrestricted subsidiary of Landry’s completed the acquisition of $33.2 million face amount of Golden Nugget second lien term loan debt through a dutch tender and open market purchases at a weighted average cost approximating 41% of face value. In connection with the debt purchases, the unrestricted subsidiary agreed to forgive the face amount of the debt acquired and accordingly, a $19.4 million gain was recognized in other income, net.
In June 2007, our wholly owned unrestricted subsidiary, Golden Nugget, Inc., completed a new $545.0 million credit facility consisting of a $330.0 million first lien term loan, a $50.0 million revolving credit facility, and a $165.0 million second lien term loan. The $330.0 million first lien term loan includes a $120.0 million delayed draw component to finance the expansion at the Golden Nugget Hotel and Casino in Las Vegas, Nevada. The revolving credit facility expires on June 30, 2013 and the first lien term loan matures on June 30, 2014. Both the first lien term loan and the revolving credit facility bear interest at Libor or the bank’s base rate, plus a
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
financing spread of 2.0% and 0.75%, respectively, at December 31, 2009. In addition, the credit facility requires a commitment fee on the unfunded portion for both the $50.0 million revolving credit facility and the $120.0 million delayed draw component of the first lien term loan. The second lien term loan matures on November 2, 2014 and bears interest at Libor or the bank’s base rate, plus a financing spread of 3.25% and 2.0%, respectively, at December 31, 2009. The financing spreads and commitment fees for the revolving credit facility increase or decrease depending on the leverage ratio as defined in the credit facility. The first lien term loan requires one percent of the outstanding principal balance due annually to be paid in equal quarterly installments commencing on September 30, 2009, with the balance due on maturity. Principal of the second lien term loan is due at maturity. The Golden Nugget’s subsidiaries have granted liens on substantially all real property and personal property as collateral under the credit facility and are guarantors of the credit facility.
The proceeds from the $545.0 million credit facility were used to repay all of the Golden Nugget’s outstanding debt, including its 8.75% Senior Secured Notes due 2011 totaling $155.0 million, plus the outstanding balance of approximately $10.0 million on its former $43.0 million revolving credit facility with Wells Fargo Foothill, Inc. In addition, the proceeds were used to pay associated tender premiums of approximately $8.8 million due to the early redemption of the Senior Secured Notes, plus accrued interest and related transaction fees and expenses. We expect to incur higher interest expense as a result of the increased borrowings associated with the Golden Nugget financing. In 2008, the revolver commitment was reduced to $47.0 million and the delayed draw term loan commitment was reduced to $117.5 million as a result of the failure of one of the lending banks.
Consistent with our policy to manage our exposure to interest rate risk and in conformity with the requirements of the first and second lien facilities, we entered into interest rate swaps for all of the first and second lien borrowings of the Golden Nugget that fix the interest rates at between 5.4% and 5.5%, plus the applicable margin. We designated $210.0 million of the first lien interest rate swaps and all of the second lien swaps as cash flow hedges. These swaps mirror the terms of the underlying debt and reset using the same index and terms. On September 25, 2009, an unrestricted subsidiary of Landry’s repurchased an aggregate $33.2 million face amount of second lien term loan debt, and as such, a proportional share of the second lien swaps were no longer an effective cash flow hedge. Accordingly, a $4.2 million non-cash expense associated with these swaps was recorded as other expense for the year ended December 31, 2009. At December 31, 2009, the remaining swaps were determined to be highly effective, and no ineffective portion was recognized in income. Included in Accumulated other comprehensive loss at December 31, 2009 and December 31, 2008 are unrealized losses, net of income taxes, totaling $27.0 million and $44.3 million, respectively, related to these hedges. The impact of these interest rate swaps was an increase to interest expense of $24.1 million, $10.3 million and $0.6 million for the years ended December 31, 2009, 2008 and 2007, respectively. The interest rate swaps associated with the $120.0 million of first lien borrowings representing the delayed draw construction loan have not been designated as hedges and the change in fair market value is reflected as other income/expense in the consolidated financial statements. Accordingly, a non-cash gain of approximately $5.4 million was recorded for the year ended December 31, 2009 and a non-cash expense of approximately $14.3 million and $5.4 million for the years ended December 31, 2008 and 2007, respectively.
Our debt agreements contain various restrictive covenants including minimum EBITDA, fixed charge and financial leverage ratios, limitations on capital expenditures, and other restricted payments as defined in the agreements. In addition, the Golden Nugget debt agreement requires a parent contribution if the leverage ratio, as defined, falls below a predetermined level through December 31, 2009. The contribution is required to be made within 10 days of reporting the Golden Nugget quarterly results to the lenders. As a result of reduced operating results combined with additional borrowings for construction of the new tower, Landry’s contributed approximately $25.0 million in cash to the Golden Nugget in 2009. As of December 31, 2009, we were in
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
compliance with all such covenants and the restaurant group had approximately $17.0 million in letters of credit outstanding and available borrowing capacity of $34.0 while the Golden Nugget had approximately $2.0 million in letters of credit outstanding, and available borrowing capacity of less than $1.0 million.
As a primary result of the extraordinary disruption to the credit markets in 2009, our 2009 financing carried substantially higher interest rates and original issue discount than the previous debt instruments. In addition, the Golden Nugget Amendments increase its cash interest rate by 0.5% annually and its total interest rate by 1.5% annually on all first lien debt. These higher interest rates, combined with additional borrowing to provide liquidity and pay fees and expenses for the financing as well as to complete the hotel tower at the Golden Nugget, resulted in substantially higher interest expense in 2009. We expect to continue to incur high interest expense over at least the next few years.
In December 2004, we entered into a $450.0 million “Bank Credit Facility” and “Term Loan” consisting of a $300.0 million revolving credit facility and a $150.0 million term loan. In November 2006, we utilized proceeds from the Joe’s sale to pay down approximately $109.5 million on the term loan, leaving a balance outstanding of approximately $37.8 million as of December 31, 2006. In September 2007, we repaid the term loan.
Concurrent with the $450.0 million Bank Credit Facility, we issued $400.0 million in 7.5% Notes through a private placement which were originally due in December 2014. The 7.5% Notes were general unsecured obligations and required semi-annual interest payments in June and December. On June 16, 2005, we completed an Exchange Offering whereby substantially all of the senior notes issued under the private placement were exchanged for 7.5% Notes registered under the Securities Act of 1933.
In connection with the 7.5% Notes, we entered into two interest swap agreements aggregating $100.0 million notional value with the objective of managing our exposure to interest rate risk and lowering interest expense. The swaps effectively converted $100.0 million of the fixed rate 7.5% senior notes to a variable rate by entering into “receive fixed/pay variable swaps.” As a result of the Exchange Offer, these swaps were no longer considered effective hedges and the change in their fair value was recorded in other income/expense. During the fourth quarter of 2007, we settled these swaps resulting in a $2.3 million gain recorded in other income/expense on our consolidated statements of income.
We 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.
Our 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 December 31, 2009, we were in compliance with all such covenants. As of December 31, 2009, our average interest rate on floating-rate debt was 7.1%, we had approximately $19.0 million in letters of credit outstanding, and our available borrowing capacity was $34.2 million.
Principal payments for all long-term debt aggregate $30.2 million in 2010, $19.3 million in 2011, $19.3 million in 2012, $180.6 million in 2013, $449.0 million in 2014 and $406.5 million thereafter.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Long-term debt is comprised of the following:
8. STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE
In connection with our stock buy back programs, we repurchased into treasury approximately 4,000 shares, 3,300 shares and 6,317,000 shares of common stock for approximately $48,000, $43,000 and $181.9 million in 2009, 2008 and 2007, respectively. Cumulative repurchases as of December 31, 2009 were 24.0 million shares at a cost of approximately $472.4 million.
Commencing in 2000, we began paying an annual $0.10 per share dividend, declared and paid in quarterly installments of $0.025 per share. In April 2004, the annual dividend was increased to $0.20 per share, declared and paid in quarterly installments of $0.05 per share. On June 16, 2008, we announced we were discontinuing dividend payments indefinitely. The indentures under which our Notes were issued and our Bank Agreement prohibit the payment of dividends on our common stock to specified levels.
Basic earnings per share is computed by dividing net income (loss) attributable to Landry’s by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted into common stock. For purposes of this calculation, outstanding stock options are considered common stock equivalents using the treasury stock method, and are the only such equivalents outstanding.
In June 2008, the FASB issued new accounting guidance on determining whether instruments granted in share-based payment transactions are participating securities. In accordance with this new accounting guidance, unvested equity-based awards that contain non-forfeitable rights to dividends are considered to participate with
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
common shareholders in undistributed earnings. As a result, our unvested awards of restricted stock are required to be included in the calculation of basic earnings per common share. These participating securities, prior to application of the new accounting guidance, were excluded from weighted-average common shares outstanding in the calculation of basic earnings per common share. The basic and diluted earnings per share amounts have been retroactively adjusted for all periods presented.
A reconciliation of the amounts used to compute earnings (loss) per share is as follows:
Our Chairman and Chief Executive Officer controls over 50% of the Company’s voting common stock and he is able to control the election of directors and determine the outcome of all matters submitted to a vote of our stockholders, including matters involving mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional shares of common stock or other equity securities and the payment of dividends on common stock. He will also have the power to prevent or cause a change in control unless he chooses not to as is the case in the pending Merger, and could take other actions that might be desirable to him but not to other stockholders.
9. STOCK-BASED COMPENSATION
We have the following compensation plans under which awards have been issued or are authorized to be issued, which were adopted with stockholder approval:
The Landry’s Restaurants, Inc. 2002 Employee/Rainforest Conversion Plan authorizes the issuance of up to 2,162,500 shares. This plan allows awards of non-qualified stock options, which may include stock appreciation rights, to our consultants, employees and non-employee directors. The plan is administered by our Compensation Committee. Terms of the award, such as vesting and exercise price, are to be determined by the Compensation Committee and set forth in the grant agreement for each award.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
We maintain two stock option plans, which were originally adopted in 1993, (the Stock Option Plans), as amended, pursuant to which options were granted to our eligible employees and non-employee directors or our subsidiaries for the purchase of an aggregate of 2,750,000 shares of common stock. The Stock Option Plans were administered by the Compensation Committee of the Board of Directors (the Committee), which determined at its’ discretion, the number of shares subject to each option granted and the related purchase price, vesting and option periods. Options are no longer issued under either plan, however, options previously issued under the stock option plans are still outstanding.
We also maintain the 1995 Flexible Incentive Plan, which was adopted in 1995, (Flex Plan), as amended, for key employees of the Company. Under the Flex Plan eligible employees received stock options, stock appreciation rights, restricted stock, performance awards, performance stock and other awards, as defined by the Board of Directors or an appointed committee. The aggregate number of shares of common stock issued under the Flex Plan (or with respect to which awards may be granted) were not in excess of 2,000,000 shares. Options are no longer issued under the Flex Plan; however, options previously issued are still outstanding.
We have the following compensation plans under which awards have been issued or are authorized to be issued, which were adopted without stockholder approval:
The Landry’s Restaurants, Inc. 2003 Equity Incentive Plan authorizes the issuance of up to 700,000 shares. This plan allows awards of both qualified and non-qualified stock options, restricted stock, cash equivalent values, and tandem awards to employees. The plan is administered by our compensation committee. Terms of the award, such as vesting and exercise price, are to be determined by the compensation committee and set forth in the grant agreement for each award.
For the years ended December 31, 2009, 2008 and 2007, total stock-based compensation expense recognized was $3.5 million, $4.1 million and $4.8 million, respectively. These charges are included in general and administrative expense for the respective years. Stock-based compensation expense is not reported at the segment level as these amounts are not included in internal measurements of segment operating performance.
Stock option plan activity for the year ended December 31, 2009 is summarized below:
No options were granted during 2009, 2008 or 2007. The total intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007, was $472,120, $21,688 and $4.2 million, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Restricted stock activity for the year ended December 31, 2009 is summarized below:
As of December 31, 2009, there was $12.1 million of unrecognized compensation expense related to non-vested restricted stock awards which is expected to be recognized over a weighted average period of 4.3 years.
Cash proceeds received from options exercised was approximately $1.5 million for the year ended December 31, 2009, $21,000 for the year ended December 31, 2008 and $2.7 million for the year ended December 31, 2007.
10. INCOME TAXES
An analysis of the provision for income taxes for continuing operations for the years ended December 31, 2009, 2008, and 2007 is as follows:
Our effective tax rate, for the years ended December 31, 2009, 2008, and 2007, differs from the federal statutory rate as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Deferred income tax assets and liabilities as of December 31, 2009 and 2008 are comprised of the following:
At December 31, 2009 and 2008, we had net operating loss carryovers for Federal Income Tax purposes of $54.7 million, which expire in 2019 through 2029. The net operating loss carryovers, credits, and certain other deductible temporary differences, are related to the acquisitions of Rainforest Cafe and Saltgrass Steak House. Their utilization is subject to Section 382 limits. Because of these limitations, we established a valuation allowance against a portion of these deferred tax assets to the extent it was more likely than not that these tax benefits will not be realized. In 2009, there was an increase of the state deferred tax asset of $6.7 million, and an increase in the state valuation allowance and deferred tax liabilities aggregating $6.3 million for the projected state NOL utilization.
At December 31, 2009, we have general business tax credit carryovers and minimum tax credit carryovers of $49.9 million. The general business carryover includes $1.5 million from Saltgrass Steak House, which is fully reserved. The general business credit carryovers expire in 2025 through 2029, while the minimum tax credit carryovers have no expiration date. We believe it is more likely than not that we will generate sufficient income in future years to utilize these credits.
We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. We have substantially concluded all U.S. federal income tax matters for years through 2005. Substantially all material state and local income tax matters have been concluded for years through 2004.
As of December 31, 2009, we had approximately $15.1 million of unrecognized tax benefits, including $2.4 million of interest and penalties, which represents the amount of unrecognized tax benefits that, if recognized, would favorably impact our effective income tax rate in future periods. We do not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next twelve months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. During the year ended December 31, 2009, we increased interest and/or penalties by $0.1 million. We had approximately $2.4 million and $2.3 million accrued for the payment of interest and/or penalties at December 31, 2009 and 2008, respectively. We also settled certain open tax years with various taxing jurisdictions during 2009 and 2008.
11. COMMITMENTS AND CONTINGENCIES
Lease Commitments
We have entered into lease commitments for restaurant facilities as well as certain fixtures, equipment and leasehold improvements. Under most of the facility lease agreements, we pay taxes, insurance and maintenance costs in addition to the rent payments. Certain facility leases also provide for additional contingent rentals based on a percentage of sales in excess of a minimum amount. Rental expense under operating leases was approximately $47.6 million, $60.5 million and $54.4 million, during the years ended December 31, 2009, 2008, and 2007, respectively. Percentage rent included in rent expense was $14.9 million, $15.1 million and $15.4 million, for 2009, 2008 and 2007, respectively. In connection with certain of our discontinued operations, we remain the guarantor or assignor of a number of leased locations. In the event of future defaults under any of such leased locations we may be responsible for significant damages to existing landlords which may materially affect our financial condition, operating results and cash flows. We estimate that lessee rental payment obligations during the remaining terms of the assignments and subleases approximate $60.7 million at December 31, 2009. We have recorded a liability of $2.6 million with respect to these obligations, where it is probable that we will make future cash payments. We believe the remaining obligations will be met by the third party.
In 2004, we entered into an aggregate $25.5 million equipment operating lease agreement replacing two existing agreements and including additional equipment. The lease expires in 2014. We guarantee a minimum residual value related to the equipment of approximately 66% of the total amount funded under the agreement. We may purchase the leased equipment throughout the lease term for an amount equal to the unamortized lease balance. In 2006 and 2009, we sold equipment reducing the aggregate amount outstanding by $7.2 million. We believe that the remaining equipments’ fair value is sufficient such that no amounts will be due under the residual value guarantee.
In connection with substantially all of the Rainforest Cafe leases, amounts are provided for unfavorable leases, rent abatements, and scheduled increases in rent. Such amounts are recorded as other long-term liabilities in our consolidated balance sheets, and amortized or accrued as an adjustment to rent expense, included in other restaurant operating expenses, on a straight-line basis over the lease term, including options where failure to exercise such options would result in economic penalty.
The aggregate amounts of minimum operating lease commitments maturing in each of the five years and thereafter subsequent to December 31, 2009 are as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Building Commitments
As of December 31, 2009, we had future development, land purchases and construction commitments expected to be expended within the next twelve months of approximately $3.4 million, including completion of construction of certain new restaurants.
In 2003, we purchased the Flagship Hotel and Pier from the City of Galveston, Texas, subject to an existing lease. Under this agreement, we have committed to spend $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 was significantly damaged by Hurricane Ike in 2008. We are currently in litigation with the former tenant due to its failure to purchase adequate insurance and are evaluating our options concerning the property.
Employee Benefits and Other
We sponsor qualified defined contribution retirement plans (401(k) Plan) covering eligible salaried employees. The 401(k) Plans allows eligible employees to contribute, subject to Internal Revenue Service limitations on total annual contributions, up to 100% of their base compensation as defined in the 401(k) Plans, to various investment funds. We match in cash at a discretionary rate which totaled $0.2 million in 2009 and $0.8 million in 2007. Employee contributions vest immediately while our contributions vest 20% annually beginning in the participant’s second year of eligibility for restaurant and hospitality employees and in the participant’s first year of eligibility for casino employees.
We also initiated non-qualified defined contribution retirement plans (the Plans) covering certain management employees. The Plans allow eligible employees to defer receipt of their base compensation and of their eligible bonuses, as defined in the Plans. We match in cash at a discretionary rate which totaled $0.3 million in 2009 and $0.5 million in 2007. Employee contributions vest immediately while our contributions vest 20% annually. We established a Rabbi Trust to fund the Plan’s obligation for the restaurant and hospitality employees. The market value of the trust assets is included in other assets, and the liability to the Plans’ participants is included in other liabilities.
Our casino employees at the Golden Nugget in Las Vegas, Nevada that are members of various unions are covered by union-sponsored, collective bargained, multi-employer health and welfare and defined benefit pension plans. Under our obligation to these plans we recorded expenses of $12.0 million, $14.3 million and $12.4 million for the years ended 2009, 2008 and 2007, respectively. The plans’ sponsors have not provided sufficient information to permit us to determine its share of unfunded vested benefits, if any. However, based on available information, we do not believe that unfunded amounts attributable to our casino operations are material.
We are self-insured for most health care benefits for our non-union casino employees. The liability for claims filed and estimates of claims incurred but not reported is included in accrued liabilities in the accompanying consolidated balance sheets as of December 31, 2009 and 2008.
We manage and operate the Galveston Island Convention Center in Galveston, Texas. In connection with the Galveston Island Convention Center Management Contract (Contract), we agreed to fund operating losses, if any, subject to certain rights of reimbursement. Under the Contract, we have the right to one-half of any profits generated by the operation of the Convention Center.
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Litigation and Claims
On February 5, 2009, a purported class action and derivative lawsuit entitled Louisiana Municipal Police Employee’s Retirement System on behalf of itself and all other similarly situated shareholders of Landry’s Restaurant’s, Inc. and derivatively on behalf of nominal defendant Landry’s Restaurant’s, Inc. was brought against all members of our Board of Directors, Fertitta Holdings, Inc., and Fertitta Acquisition Co. in the Court at Chancery of the State of Delaware. The lawsuit alleges, among other things, a breach of a fiduciary duty by the directors for renegotiating the 2008 merger agreement with the Fertitta entities, allowing Mr. Fertitta to acquire shares of stock in the Company and gain majority control thereof, and terminating the 2008 merger agreement without requiring payment of the reverse termination fee. The suit seeks consummation of the merger buyout at $21.00 a share or damages representing the difference between $21.00 per share and the price at which class members sold their stock in the open market, or damages for allowing Mr. Fertitta to acquire control of the Company without paying a control premium, or alternatively requiring payment of the reverse termination fee or damages for the devaluation of the Company’s stock. We intend to contest this matter vigorously.
On January 29, 2010, plaintiff in the foregoing action filed an amended complaint also naming Fertitta Group, Inc. and Fertitta Merger Co. as defendants and has further alleged that Mr. Fertitta’s latest proposal to acquire all of our outstanding stock on November 3, 2009 was unfair and that defendants breached their fiduciary duties in entering into a 2009 merger agreement at $14.75. Also, the amended complaint alleges that the Board approved an excessive golden parachute for Mr. Fertitta (albeit over seven (7) years ago) and requests that the Court invalidate same. In addition, plaintiff asserts that there has been inadequate disclosure in our preliminary proxy statement filed with the SEC in connection with the $14.75 merger transaction. In connection with the amended complaint, plaintiff also seeks an injunction of the $14.75 transaction unless curative disclosures are made, appointment of a Trustee to conduct a sale of us to maximize shareholder value, and the imposition of a constructive trust on shares acquired by Mr. Fertitta after June 2008 to be voted in favor of a transaction that provides the highest offer to our shareholders. We believe that the new claims assented in the amended complaint are also without merit and intend to vigorously contest them as well.
Following Mr. Fertitta’s latest proposal to acquire all of our outstanding stock on November 3, 2009, the class action lawsuit styled Frederic Goldfein, Individually and on behalf of all others similarly situated v. Landry’s restaurants, Inc., et al. was filed in the District Court of Harris County, 164th Judicial District. We are named in the Petition as a defendant along with all of our directors. Plaintiff has alleged that in connection with the proposed merger transaction, defendants have violated their fiduciary duties, duties of loyalty and good faith and fair dealing and have placed an artificial lid on the price of our stock by announcing a transaction at an inadequate price. Plaintiff seeks to enjoin the transaction until we adopt procedures and a process to obtain the highest price for shareholders, or alternatively to rescind the transaction. We believe this action is without merit and intend to vigorously contest this matter.
Ralph Biancalana, Individually and on behalf of all others similarly situated v. Tilman J. Fertitta, et al., a putative class action, was filed on November 10, 2009 in the District Court of Harris County, Texas, 165th Judicial District, following Mr. Fertitta’s latest proposal to acquire all of our outstanding stock. We are named in the Petition as a defendant along with all of our directors. Plaintiff has alleged, among other things, that in connection with the proposed merger transaction, our directors have knowingly and recklessly violated their fiduciary duty of care, have violated their fiduciary duties of loyalty, good faith, candor and independence, and that the transaction contains an inadequate and unfair price. Plaintiff also alleged that we aided and abetted our directors’ alleged breach of fiduciary duty. Plaintiff seeks to enjoin the transaction and the payment of a termination fee to Mr. Fertitta. Plaintiff also requests declarations from the Court that the termination fee is unfair, and that our directors have breached their fiduciary duties to our shareholders. Plaintiff seeds recovery of attorneys fees and costs. We believe this action is without merit and intend to vigorously contest this matter.
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
On November 17, 2009, Robert Caryer filed a class action petition in the District Court of Harris County, 125th Judicial District. The lawsuit is styled Robert Caryer, individually and on behalf of all other similarly situated v. Landry’s Restaurants, Inc., Tilman J. Fertitta, Steve L. Scheinthal, Kenneth Brimmer, Michael S. Chadwick, Joe Max Taylor and Richard H. Liem. Plaintiff has alleged that in connection with the proposed merger transaction, defendants have violated their fiduciary duties, duties of loyalty and good faith and fair dealing and have placed an artificial lid on the price of our stock by announcing a transaction at an inadequate price. Plaintiff seeks to enjoin the transaction until we adopt procedures and a process to obtain the highest price for shareholders, or alternatively to rescind the transaction. We believe this action is without merit and intend to vigorously contest this matter.
On January 15, 2010, the Goldfein, Biancalana and Caryer actions were consolidated by Court order. Plaintiffs allege in the consolidated petition that in connection with the proposed merger transaction, defendants have violated their fiduciary duties, duties of loyalty and good faith and fair dealing and have placed an artificial lid on the price of our stock by announcing a transaction at an inadequate price. Plaintiffs seek to enjoin the transaction until we adopt procedures and a process to obtain the highest price for shareholders, or alternatively to rescind the transaction. We believe this action is without merit and intend to vigorously contest this matter.
General Litigation
We are 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 our financial position, results of operations or cash flows.
12. SEGMENT INFORMATION
Our operating segments are aggregated into reportable business segments based primarily on the similarity of their economic characteristics, products, services, and delivery methods. Following the acquisition of the Golden Nugget Hotels and Casinos on September 27, 2005, it was determined that we operate two reportable business segments as follows:
Restaurant and Hospitality
Our restaurants operate primarily under the names of Rainforest Cafe, Saltgrass Steak House, Landry’s Seafood House, Charley’s Crab and The Chart House. As of December 31, 2009, we owned and operated 174 full-service and limited-service restaurants in 27 states and Canada. We are also engaged in the ownership and operation of select hospitality and entertainment businesses that complement our restaurant operations and provide our customers with unique dining, leisure and entertainment experiences.
Gaming
We operate the Golden Nugget Hotels and Casinos in Las Vegas and Laughlin, Nevada. These locations emphasize the creation of the best possible gaming and entertainment experience for their customers by providing a combination of comfortable and attractive surroundings. This is accomplished through luxury rooms and amenities coupled with competitive gaming tables and superior player rewards programs.
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The accounting policies of the segments are the same as described in Note 1. We evaluate segment performance based on unit level profit, which excludes general and administrative expense, depreciation expense, net interest expense and other non-operating income or expense. Financial information by reportable business segment is as follows:
(1) Includes inter-segment eliminations
13. SUPPLEMENTAL GUARANTOR INFORMATION
In November 2009, we issued, in a private offering, $406.5 million of 11 5/8% Senior Secured Notes due in 2015 (see Note 7). These notes are fully and unconditionally and joint and severally guaranteed by us and certain of our 100% owned subsidiaries, “Guarantor Subsidiaries”.
The following condensed consolidating financial statements present separately the financial position, results of operations and cash flows of our Guarantor Subsidiaries and Non-guarantor Subsidiaries on a combined basis with eliminating entries.
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Condensed Consolidating Financial Statements
Balance Sheet
December 31, 2009
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Condensed Consolidating Financial Statements
Balance Sheet
December 31, 2008
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Condensed Consolidating Financial Statements
Income Statement
Year Ended December 31, 2009
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Condensed Consolidating Financial Statements
Income Statement
Year Ended December 31, 2008
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Condensed Consolidating Financial Statements
Income Statement
Year Ended December 31, 2007
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Condensed Consolidating Financial Statements
Statement of Cash Flows
Year Ended December 31, 2009
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Condensed Consolidating Financial Statements
Statement of Cash Flows
Year Ended December 31, 2008
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Condensed Consolidating Financial Statements
Statement of Cash Flows
Year Ended December 31, 2007
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
14. CERTAIN TRANSACTIONS
In 1996, we entered into a Consulting Service Agreement (the “Agreement”) with Fertitta Hospitality, LLC (“Fertitta Hospitality”), which is jointly owned by our Chairman and Chief Executive Officer and his wife. Pursuant to the Agreement, we provided to Fertitta Hospitality management and administrative services. Under the Agreement, we received a fee of $2,500 per month plus the reimbursement of all out-of-pocket expenses and such additional compensation as agreed upon. In 2003, a new agreement was signed (“Management Agreement”). Pursuant to the Management Agreement, we receive a monthly fee of $7,500, plus reimbursement of expenses. The Management Agreement provides for a renewable three-year term.
In 1999, we entered into a ground lease and purchase option with 610 Loop Venture, LLC, a company wholly owned by our Chairman and Chief Executive Officer, on land owned by us adjacent to our corporate headquarters. Under the terms of the ground lease, 610 Loop Venture paid us base rent of $12,000 per month plus pro-rata real property taxes and insurance. In 2009, 610 Loop Venture exercised its purchase option and acquired the land from us for approximately $1.8 million.
In 2002, we entered into an $8,000 per month, 20 year, with option renewals, ground lease agreement with Fertitta Hospitality for a new Rainforest Cafe on prime waterfront land in Galveston, Texas. The annual rent is equal to the greater of the base rent or percentage rent up to six percent, plus taxes and insurance. In 2009, 2008 and 2007, we paid base and percentage rent aggregating $434,000, $561,000 and $573,000, respectively.
As permitted by the employment contract between us and the Chief Executive Officer, charitable contributions were made by us to a charitable Foundation that the Chief Executive Officer served as Trustee in the amount of $130,000, $98,000 and $99,000 in 2009, 2008, and 2007, respectively. The contributions were made in addition to the normal salary and bonus permitted under the employment contract.
We, on a routine basis, hold or host promotional events, training seminars and conferences for our personnel. In connection therewith, we incurred in 2009, 2008 and 2007 expenses in the amount of $20,850, $29,000 and $47,432, respectively, at resort hotel properties owned by our Chief Executive Officer and managed by us.
Landry’s and Fertitta Hospitality jointly sponsored events and promotional activities in 2009, 2008 and 2007 which resulted in shared costs and use of our personnel or Fertitta Hospitality employees and assets.
The foregoing agreements were entered into between related parties and were not the result of arm’s-length negotiations. Accordingly, the terms of the transactions may have been more or less favorable than might have been obtained from unaffiliated third parties.
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly consolidated results of operations.
The first quarter of 2009 included a $7.5 million reduction in rent expense associated with a lease termination payment received from a landlord partially offset by $4.0 million in call premiums associated with refinancing the 7.5% and 9.5% senior notes. The second quarter of 2009 included $4.5 million in non-cash gains associated with interest rate swaps not designated as hedges. The third quarter of 2009 included a gain of $19.4 million related to the repurchase of an aggregate $33.2 million face amount of the Golden Nugget’s Second lien debt, offset by non-cash charges of $6.2 million on interest rate swaps. The fourth quarter of 2009 included the acceleration of $26.0 million in original issue discount and $9.6 million in deferred loan costs associated with the extinguishment of our 14.0% Senior Notes.
The third quarter of 2008 included $16.9 million of impairment charges related to damage to our Galveston and Kemah, Texas properties sustained in Hurricane Ike. The fourth quarter of 2008 included a $16.7 million reduction in impairment charges associated with insurance proceeds collected. The fourth quarter of 2008 also included $4.7 million in professional fees and other related expenses associated with the termination of the Merger Agreement as well as $12.2 million in non-cash charges associated with interest rate swaps not designated as hedges. As disclosed in Note 3, we initiated a plan to divest certain restaurants including 136 Joe’s Crab Shack units in the third quarter of 2006 and several additional units subsequently. The results of operations for all units included in the disposal plan have been reclassified as discontinued operations for all periods presented. The 2008 results include asset impairment charges related to discontinued operations of $0.1 million and $10.2 million for the quarters ended March 31, 2008 and September 30, 2008, respectively.
LANDRY’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
16. SUBSEQUENT EVENTS
As more fully discussed in Note 7 to the Consolidated Financial Statements, on February 17, 2010 the Golden Nugget entered into Amendment No 2 and Waiver to its First and Second Liem Credit Agreements whereby affiliates of the Golden Nugget will provide $50.0 million in additional funds to the Golden Nugget, $20.0 million of which was used for operating liquidity and $30.0 million of which was available to purchase and retire second lien debt at 40% of face value. At closing approximately $62.8 million of second lien indebtedness was acquired and retired. In addition, the financial covenants were amended to become less restrictive, cash distributions from the Golden Nugget became more restrictive, a consent fee of 0.5% will be paid on all outstanding first lien amounts annually and an additional 1% of “PIK” interest will accrue on all outstanding first lien indebtedness, payable in cash at the discretion of Golden Nugget.
LANDRY’S RESTAURANTS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized in the City of Houston, State of Texas, on the 16th day of March, 2010
LANDRY’S RESTAURANTS, INC.
/S/ TILMAN J. FERTITTA
Tilman J. Fertitta
Chairman of the Board, President and
Chief Executive Officer
Each person whose signature appears below constitutes and appoints Tilman J. Fertitta, Rick Liem and Steven L. Scheinthal, and each of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign on his behalf individually and in each capacity stated below this Annual Report on Form 10-K and any amendment thereto and to file the same, with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrants and in the capacities and on the dates indicated.
EXHIBIT INDEX
* filed herewith