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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009.

Commission file number 000-22150

 

 

LANDRY’S RESTAURANTS, INC.

(Exact name of the registrant as specified in its charter)

 

 

DELAWARE

(State or other jurisdiction of

incorporation of organization)

76-0405386

(I.R.S. Employer

Identification No.)

1510 West Loop South, Houston, TX 77027

(Address of principal executive offices)

(713) 850-1010

(Registrants telephone number)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer   ¨    Accelerated filer     x
Non-accelerated filer   ¨    Smaller reporting company     ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes  ¨    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

AS OF NOVEMBER 5, 2009 THERE WERE

16,142,551 SHARES OF $0.01 PAR VALUE

COMMON STOCK OUTSTANDING

 

 

 


Table of Contents

INDEX

 

          Page
Number
PART I. FINANCIAL INFORMATION   

Item 1.

   Financial Statements    1
  

Condensed Consolidated Balance Sheets at September 30, 2009 (unaudited) and December 31, 2008

   3
  

Condensed Unaudited Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2009 and 2008

   4
  

Condensed Unaudited Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2009

   5
  

Condensed Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008

   6
  

Notes to Condensed Unaudited Consolidated Financial Statements

   7

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    27

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    36

Item 4.

   Controls and Procedures    36

PART II. OTHER INFORMATION

   36

Item 1.

   Legal Proceedings    36

Item 1A.

   Risk Factors    37

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    37

Item 5.

   Other Information    37

Item 6.

   Exhibits    38

Signatures

   38

 

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LANDRY’S RESTAURANTS, INC.

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

The accompanying condensed unaudited consolidated financial statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in our opinion, all adjustments (consisting only of normal recurring entries) necessary for a fair presentation of our results of operations, financial position and changes therein for the periods presented have been included.

The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and related notes to financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Operating results for the nine months ended September 30, 2009 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending December 31, 2009.

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws. Forward-looking statements may include the words “may,” “will,” “plans,” “believes,” “estimates,” “expects,” “intends” and other similar expressions. Our forward-looking statements are subject to risks and uncertainty, including, without limitation, our ability to continue our expansion strategy, our ability to make projected capital expenditures, as well as general market conditions, competition, and pricing.

This report includes certain forward-looking statements within the meaning of the federal securities laws. You can generally identify forward-looking statements by the appearance in such a statement of words like “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should” or “will” or other comparable words or the negative of these words. When you consider our forward-looking statements, you should keep in mind the risk factors we describe and other cautionary statements we make in this offering circular. Our forward-looking statements are only predictions based on expectations that we believe are reasonable. Our actual results could differ materially from those anticipated in, or implied by, these forward-looking statements as a result of known risks and uncertainties set forth below and elsewhere in this offering circular. These factors include or relate to the following:

 

   

the merger agreement entered into by us and Fertitta Group, Inc., among others, on November 3, 2009, and whether it will be consummated;

 

   

the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement with Fertitta Group, Inc.;

 

   

the inability to complete the merger due to the failure to obtain stockholder approval for the merger or the failure to satisfy other conditions to completion of the merger, including the receipt of all regulatory approvals related to the merger;

 

   

the failure to obtain the necessary financing arrangements pursuant to the merger agreement;

 

   

our ability to implement our business strategy;

 

   

our ability to expand and grow our business and operations;

 

   

the outcome of legal proceedings that have been, or may be, initiated against us related to the failed merger with an affiliate in 2008 and its termination;

 

   

the impact of future commodity prices;

 

   

the availability of food products, materials and employees;

 

   

consumer perceptions of food safety;

 

   

changes in local, regional and national economic conditions;

 

   

the effects of local and national economic, credit and capital market conditions on the economy in general and our businesses in particular;

 

   

the effectiveness of our marketing efforts;

 

   

changing demographics surrounding our restaurants, hotels and casinos;

 

   

the effect of changes in tax laws;

 

   

actions of regulatory, legislative, executive or judicial decisions at the federal, state or local level with regard to our business and the impact of any such actions;

 

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Table of Contents
   

our ability to maintain regulatory approvals for our existing businesses and our ability to receive regulatory approval for our new businesses;

 

   

our expectations of the continued availability and cost of capital resources;

 

   

our ability to obtain long-term financing and the cost of such financing, if available;

 

   

the seasonality and cyclical nature of our business;

 

   

weather and acts of God;

 

   

the ability to maintain existing management;

 

   

the impact of potential acquisitions of other restaurants, gaming operations and lines of businesses in other sectors of the hospitality and entertainment industries;

 

   

the impact of potential divestitures of restaurants, restaurant concepts and other operations or lines of business;

 

   

food, labor, fuel and utilities costs; and

 

   

the other factors discussed under “Risk Factors,” included in our Form 10-K for the year ended December 31, 2008.

We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. To the extent these risks, uncertainties and assumptions give rise to events that vary from our expectations, the forward-looking events discussed herein may not occur. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. Some of these and other risks and uncertainties that could cause actual results to differ materially from such forward-looking statements are more fully described under Item 1A. “Risk Factors” and elsewhere in this report, or in the documents incorporated by reference herein. We assume no obligation to modify or revise any forward looking statements to reflect any subsequent events or circumstances arising after the date that the statement was made.

 

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LANDRY’S RESTAURANTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     September 30, 2009     December 31, 2008  
     (Unaudited)        
ASSETS     

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 44,997,852      $ 51,066,805   

Accounts receivable - trade and other, net

     10,777,487        18,021,105   

Inventories

     26,861,674        26,161,092   

Deferred taxes

     17,771,982        28,001,267   

Assets related to discontinued operations

     2,969,491        2,973,593   

Other current assets

     11,774,930        9,102,029   
                

Total current assets

     115,153,416        135,325,891   
                

PROPERTY AND EQUIPMENT, net

     1,329,885,771        1,259,186,463   

GOODWILL

     18,527,547        18,527,547   

OTHER INTANGIBLE ASSETS, net

     38,753,842        38,872,873   

OTHER ASSETS, net

     64,813,634        63,411,316   
                

Total assets

   $ 1,567,134,210      $ 1,515,324,090   
                
LIABILITIES AND EQUITY     

CURRENT LIABILITIES:

    

Accounts payable

   $ 65,213,281      $ 70,358,471   

Accrued liabilities

     129,864,690        134,316,329   

Income taxes payable

     355,017        2,784,703   

Current portion of long-term notes and other obligations

     16,709,815        8,752,906   

Liabilities related to discontinued operations

     3,592,065        5,149,365   
                

Total current liabilities

     215,734,868        221,361,774   
                

LONG-TERM NOTES, NET OF CURRENT PORTION

     906,077,836        862,375,429   

OTHER LIABILITIES

     114,191,782        136,109,782   
                

Total liabilities

     1,236,004,486        1,219,846,985   
                

COMMITMENTS AND CONTINGENCIES

    

STOCKHOLDERS’ EQUITY:

    

Common stock, $0.01 par value, 60,000,000 shares authorized, 16,142,551 and 16,142,263, shares issued and outstanding, respectively

     161,426        161,423   

Additional paid-in capital

     225,077,029        222,410,106   

Retained earnings

     135,562,302        116,244,708   

Accumulated other comprehensive loss

     (30,671,033     (44,339,132
                

Total stockholders’ equity

     330,129,724        294,477,105   
                

Noncontrolling interest

     1,000,000        1,000,000   
                

Total equity

     331,129,724        295,477,105   
                

Total liabilities and equity

   $ 1,567,134,210      $ 1,515,324,090   
                

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

 

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LANDRY’S RESTAURANTS, INC.

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2009     2008     2009     2008  

REVENUES:

        

Restaurant and hospitality

   $ 224,217,505      $ 229,133,485      $ 650,001,318      $ 693,245,506   

Gaming:

        

Casino

     31,911,212        34,891,090        102,307,294        117,971,096   

Rooms

     11,778,137        15,105,290        36,625,590        49,835,862   

Food and beverage

     10,841,517        12,499,577        33,045,827        37,064,255   

Other

     3,863,607        3,672,058        11,585,914        10,895,382   

Promotional allowances

     (6,003,115     (5,565,271     (18,661,757     (18,852,289
                                

Net gaming revenue

     52,391,358        60,602,744        164,902,868        196,914,306   
                                

Total revenue

     276,608,863        289,736,229        814,904,186        890,159,812   
                                

OPERATING COSTS AND EXPENSES:

        

Restaurant and hospitality:

        

Cost of revenues

     53,710,457        58,425,756        157,479,860        180,211,409   

Labor

     64,161,951        65,111,320        186,347,548        200,236,279   

Other operating expenses

     54,143,465        57,292,990        150,186,942        171,732,349   

Gaming:

        

Casino

     17,180,494        18,299,089        54,312,094        60,669,092   

Rooms

     6,025,464        6,286,724        17,407,301        18,735,499   

Food and beverage

     6,508,405        7,853,832        18,942,321        22,494,103   

Other

     15,118,272        15,503,335        41,490,246        46,529,487   

General and administrative expense

     11,544,501        11,732,472        36,225,055        36,875,860   

Depreciation and amortization

     17,903,473        17,745,002        53,365,171        53,120,526   

Asset impairment expense

     607,584        18,491,787        607,584        20,084,928   

Gain on insurance claims

     (406,994     —          (4,410,642     —     

Gain on disposal of assets

     —          —          (1,363,315     —     

Pre-opening expenses

     177,867        551,720        893,429        1,392,070   
                                

Total operating costs and expenses

     246,674,939        277,294,027        711,483,594        812,081,602   
                                

OPERATING INCOME

     29,933,924        12,442,202        103,420,592        78,078,210   

OTHER EXPENSE (INCOME):

        

Interest expense, net

     29,309,564        19,491,090        82,466,181        60,175,403   

Other, net

     (13,429,264     2,633,245        (13,985,261     3,781,168   
                                

Total other expense

     15,880,300        22,124,335        68,480,920        63,956,571   
                                

Income (loss) from continuing operations before income taxes

     14,053,624        (9,682,133     34,939,672        14,121,639   

Provision (benefit) for income taxes

     5,025,846        (2,125,878     9,960,259        5,151,799   
                                

Income (loss) from continuing operations

     9,027,778        (7,556,255     24,979,413        8,969,840   

Loss from discontinued operations, net of taxes

     (56,226     (9,474,444     (154,996     (10,536,380
                                

Net income (loss)

     8,971,552        (17,030,699     24,824,417        (1,566,540

Less: Net income attributable to noncontrolling interest

     165,027        24,462        679,335        95,280   
                                

Net income (loss) attributable to Landry’s

     8,806,525        (17,055,161     24,145,082        (1,661,820

Less: Accretion of redeemable noncontrolling interests

     2,085,410        —          4,811,050        —     
                                

Net income (loss) available to Landry’s common stockholders

   $ 6,721,115      $ (17,055,161   $ 19,334,032      $ (1,661,820
                                

EARNINGS (LOSS) PER SHARE INFORMATION:

        

Amounts available to Landry’s common stockholders:

        

BASIC

        

Income (loss) from continuing operations

   $ 0.42      $ (0.47   $ 1.21      $ 0.55   

Loss from discontinued operations

     —          (0.59     (0.01     (0.65
                                

Net income (loss)

   $ 0.42      $ (1.06   $ 1.20      $ (0.10
                                

Weighted average number of common shares outstanding

     16,140,000        16,140,000        16,140,000        16,140,000   

DILUTED

        

Income (loss) from continuing operations

   $ 0.42      $ (0.47   $ 1.20      $ 0.55   

Loss from discontinued operations

     (0.01     (0.59     (0.01     (0.65
                                

Net income (loss)

   $ 0.41      $ (1.06   $ 1.19      $ (0.10
                                

Weighted average number of common and common share equivalents outstanding

     16,220,000        16,140,000        16,195,000        16,140,000   

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

 

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LANDRY’S RESTAURANTS, INC.

CONDENSED UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

    Common Stock     Additional
Paid-In

Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive

Income (loss)
    Noncontrolling
Interest
  Total  
    Shares     Amount            

Balance, December 31, 2008

  16,142,263      $ 161,423      $ 222,410,106      $ 116,244,708      $ (44,339,132   $ 1,000,000   $ 295,477,105   

Comprehensive income:

             

Net income attributable to Landry’s

  —          —          —          24,145,082        —          —       24,145,082   

Gain on interest rate swaps, net of taxes of $7,359,746

  —          —          —          —          13,668,099        —       13,668,099   
                   

Total comprehensive income

                37,813,181   

Accretion of redeemable noncontrolling interest

  —          —          —          (4,811,050     —          —       (4,811,050

Issuance of restricted stock

  3,000        30        (30     —          —          —       —     

Exercise of stock options

  3,516        35        30,593        —          —          —       30,628   

Forfeiture of restricted stock

  (2,140     (21     21        —          —          —       —     

Purchase of common stock held for treasury

  (4,088     (41     (31,452     (16,438     —          —       (47,931

Stock based compensation expense

  —          —          2,667,791        —          —          —       2,667,791   
                                                   

Balance, September 30, 2009

  16,142,551      $ 161,426      $ 225,077,029      $ 135,562,302      $ (30,671,033   $ 1,000,000   $ 331,129,724   
                                                   

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

 

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LANDRY’S RESTAURANTS, INC.

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Nine Months Ended September 30,  
     2009     2008  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income (loss)

   $ 24,824,417      $ (1,566,540

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization

     53,365,171        53,685,155   

Asset impairment expense

     607,584        30,423,771   

Gain on disposition of assets

     (1,363,315     —     

Gain on insurance claims

     (4,410,642     —     

Gain on repurchase of debt

     (19,406,543     —     

Changes in assets and liabilities, net and other

     14,223,410        4,084,317   
                

Total adjustments

     43,015,665        88,193,243   
                

Net cash provided by operating activities

     67,840,082        86,626,703   

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Property and equipment additions and other

     (128,470,353     (81,020,397

Proceeds from disposition of property and equipment

     10,738,594        15,434,800   
                

Net cash used in investing activities

     (117,731,759     (65,585,597

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Purchases of common stock for treasury

     (47,931     (15,274

Proceeds from exercise of stock options

     30,628        6,361   

Payments of debt

     (6,442,761     (187,250

Financing proceeds

     390,040,000        39,515,152   

Repayment of bonds

     (398,482,000     —     

Repurchase of debt

     (13,775,829     —     

Debt issuance costs

     (18,377,186     —     

Proceeds from credit facility

     271,693,852        219,000,000   

Payments on credit facility

     (180,816,049     (254,000,000

Dividends paid

     —          (1,614,369
                

Net cash provided by financing activities

     43,822,724        2,704,620   

NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS

     (6,068,953     23,745,726   

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     51,066,805        39,601,246   
                

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 44,997,852      $ 63,346,972   
                

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid (received) during the year for:

    

Interest

   $ 72,537,412      $ 50,295,310   

Income taxes

   $ 2,435,312      $ (2,050,139

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

 

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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, Saltgrass Steak House and Rainforest Cafe. In addition, we own and operate domestically and license internationally rainforest themed restaurants under the trade name Rainforest Cafe, and we own and operate the Golden Nugget Hotels and Casinos in downtown Las Vegas and Laughlin, Nevada and the Kemah Boardwalk in Kemah, Texas.

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 (Note 3). 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 its wholly and majority owned subsidiaries and partnerships. All significant inter-company accounts and transactions have been eliminated in consolidation.

Basis of Presentation

The condensed consolidated financial statements included herein have been prepared by us without audit, except for the consolidated balance sheet as of December 31, 2008. The financial statements include all adjustments, consisting of normal, recurring adjustments and accruals, which we consider necessary for fair presentation of our financial position and results of operations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. This information is contained in our December 31, 2008, consolidated financial statements filed with the Securities and Exchange Commission on Form 10-K.

Restaurant and hospitality revenues are recognized when the goods and services are delivered. Casino revenues are 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.

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 expense recognized 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 our 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.

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. Properties to be disposed of are reported at the lower of their carrying amount or fair value, reduced for estimated disposal costs, and are included in assets related to discontinued operations.

 

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED 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 September 30, 2009, consist primarily of interest rate swaps (Note 5), for which the lowest level of input significant to their fair value measurement is Level 2. As of September 30, 2009, the fair value of the interest rate swap liabilities totaled $68.2 million, of which $47.2 million are designated and qualify as hedges and the remaining $21.0 million do not qualify as hedges. These amounts 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 determined using Level 1 inputs, 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, 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:

 

    September 30, 2009   December 31, 2008
    Carrying Value   Fair Value   Carrying Value   Fair Value

9.5% Senior Notes due December 2014

  $ 735,000   $ 741,509   $ 395,662,000   $ 367,965,660

7.5% Senior Notes due December 2014

    783,000     637,049     4,338,000     3,261,482

14.0% Series A Senior Notes due August 2011

    7,238,649     7,274,842     —       —  

14.0% Series B Senior Notes due August 2011

    260,138,957     261,439,652     —       —  

Libor + 2.0% First Lien Term Loan due June 2014

    326,314,300     215,367,438     249,515,152     72,359,394

Libor + 3.25% Second Lien Term Loan due December 2014

    131,817,628     54,045,227     165,000,000     17,325,000

Libor + 6.0% with Libor no less than 3.5% Term Loan due March 2011

    156,526,555     158,091,821     30,015,514     30,015,514

Libor + 2.0% Revolving credit facility due June 2013

    25,000,000     16,500,000     8,000,000     2,320,000

Libor + 6.0% Revolving credit facility due March 2011

    —       —       4,182,803     4,182,803

7.0% Seller note due November 2010

    4,000,000     3,965,684     4,000,000     2,899,151

9.39% non-recourse note payable due May 2010

    10,233,562     10,455,091     10,411,034     10,403,241
                       
  $ 922,787,651   $ 728,518,313   $ 871,124,503   $ 510,732,245
                       

Reclassifications

Certain prior year amounts have been reclassified within our financial statements to conform to the current year presentation.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (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 noncontrolling 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

 

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

and have retroactively adjusted the presentation of our financial statements to reflect the effect of our non-controlling interests in a single restaurant operation.

In February 2008, the FASB issued new accounting guidance which delayed the effective date of previously issued accounting guidance on fair value measurements for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until January 1, 2009. The adoption of this new accounting guidance did not have an impact on our consolidated financial statements.

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 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 September 30, 2009 interim 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 have any unrealized losses on 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

 

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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. The new guidance requires disclosure of the date through which subsequent events have been evaluated and whether that date represents the date the financial statements were issued or were available to be issued. This new accounting guidance is effective for interim and annual periods ending after June 15, 2009. The adoption of this new guidance did not have an impact on our consolidated financial statements for the three months ended September 30, 2009, as it is our continuing policy to evaluate subsequent events through the date our financial statements are issued.

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 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.

Other Matters

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.

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. All Houston, Galveston and Kemah restaurants have reopened. During the third quarter of 2008, we recorded asset impairment charges totaling $24.4 million based on preliminary estimates of the damage sustained by our properties. This charge was reduced by $7.5 million as a result of insurance proceeds received under our various property and casualty insurance policies. During 2009, the difference between these recorded impairments and the associated insurance proceeds resulted in the recognition of a $0.4 million and a $4.4 million gain during the three and nine month period ended September 30, 2009, respectively.

We also maintain business interruption insurance coverage and have recorded approximately $0.2 million and $2.5 million in recoveries during the nine months ended September 30, 2009 and 2008, respectively, related to lost profits at our affected locations in Galveston and the Kemah Boardwalk. This amount was recorded as revenue in our consolidated financial statements.

3. DISCONTINUED OPERATIONS AND IMPAIRMENT OF LONG LIVED ASSETS

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 (“Joe’s”) 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 classified as discontinued operations in our statements of income, balance sheets and segment information for all periods presented.

On November 17, 2006, we completed the sale of 120 Joe’s restaurants to an unaffiliated entity for approximately $192.0 million, including the assumption of certain working capital liabilities to be finalized in 2009. In connection with the sale, we recorded pre-tax impairment charges and a loss on disposal totaling $49.2 million.

 

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

We expect to sell the land and improvements belonging to the remaining restaurants in the disposal plan, or abandon those locations, during the next twelve months.

The results of discontinued operations for the three and nine months ended September 30, 2009 and 2008 were as follows:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2009     2008     2009     2008  

Revenues

   $ —        $ 3,185,873      $ —        $ 10,752,673   

Loss from discontinued operations before income taxes

     (90,106     (14,676,438     (248,391     (16,310,186

Income tax benefit on discontinued operations

     (33,880     (5,201,994     (93,395     (5,773,806
                                

Net loss from discontinued operations

   $ (56,226   $ (9,474,444   $ (154,996   $ (10,536,380
                                

We continually monitor unfavorable cash flows, if any, relating to under performing restaurants. Periodically, we may conclude certain properties have become impaired based on the existing and anticipated future economic outlook or expected sales prices for such properties determined through analysis of their respective market areas or sales contracts. During the three and nine months ended September 30, 2009, we recorded impairment charges of $0.6 million related to a single restaurant location. During the nine months ended September 30, 2008, we recorded impairment charges of $3.2 million to impair the leasehold improvements and equipment of three underperforming restaurants.

4. ACCRUED LIABILITIES

Accrued liabilities are comprised of the following:

 

    September 30, 2009   December 31, 2008

Payroll and related costs

  $ 26,096,338   $ 22,345,794

Rent and insurance

    28,797,319     29,384,290

Taxes, other than payroll and income taxes

    17,518,291     20,214,428

Deferred revenue (gift cards and certificates)

    14,989,617     25,091,978

Accrued interest

    7,320,144     2,612,258

Casino deposits, outstanding chips and other gaming

    9,340,301     10,237,310

Other

    25,802,680     24,430,271
           
  $ 129,864,690   $ 134,316,329
           

5. DEBT

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.

We subsequently funded an additional $135 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 interim senior secured credit facility. The Credit Agreement provides for a term loan of $165.6 million, which includes the $31 million term loan and the revolving credit line of $50.0 million that was previously funded. The obligations under the Credit Agreement are unconditionally guaranteed by the Guarantors and are secured by a first lien position on substantially all of our assets and the Guarantors.

Interest on the Credit Agreement accrues at a base rate (which is the greater of 5.50%, 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 3.5% plus a credit spread of 6.0%, and matures on May 13, 2011.

The Credit Agreement 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 Credit Agreement contains financial covenants, including a maximum leverage ratio, a maximum senior leverage ratio, and a minimum fixed charge coverage ratio.

 

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

On February 13, 2009, we completed the 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 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 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 of 1933, as amended (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 of 1933, for the Series A Notes. An aggregate 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 a private exchange. The total principal amount of notes exchanged was $287.5 million.

The Series A and B Notes (the Notes) will mature on August 15, 2011. Interest on the Notes accrues from February 13, 2009, at a fixed interest rate of 14.0% to be paid twice a year, on each February 15th and August 15th, beginning August 15, 2009. We may redeem the Notes any time at par, plus accrued interest. We are required to offer to purchase the Notes at 101% of their aggregate principal amount, plus accrued interest, if we experience a change in control as defined in the Indenture.

The Indenture under which the Notes have been issued contains a maximum leverage ratio covenant as well as restrictions that limit our ability and the ability of the Guarantors to, among other things: incur or guarantee additional indebtedness; create liens; pay dividends on or redeem or repurchase stock; make capital expenditures or certain types of investments; sell assets or merge with other companies.

We used the proceeds from the Notes offering, together with borrowings under the Credit Agreement to refinance our existing $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 “Existing Notes”). As of September 30, 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 Existing Notes.

In connection with the refinancing of our Existing 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 Existing Notes that were not tendered, we may, at our option, either (i) pay such Existing 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 Existing Notes.

In June 2007, our wholly owned unrestricted subsidiary, Golden Nugget, Inc. (the “Golden Nugget”), 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 financing spread of 2.0% and 0.75%, respectively, at September 30, 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 December 31, 2014 and bears interest at Libor or the bank’s base rate, plus a financing spread of 3.25% and 2.0%, respectively, at September 30, 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

 

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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.

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, which is classified as other, net on the consolidated statements of income.

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 are no longer an effective cash flow hedge. Accordingly, a $4.8 million non-cash expense associated with these swaps was recorded during the third quarter of 2009. The interest rate swaps associated with the remaining outstanding term loans were redesignated as effective cash flow hedges. At September 30, 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 September 30, 2009 and December 31, 2008 are unrealized losses, net of income taxes, totaling $30.7 million and $44.3 million, respectively, related to these hedges. The impact of these interest rate swaps was an increase to interest expense of $6.5 million and $3.0 million during the three months ended September 30, 2009 and 2008, respectively, and $17.5 million and $7.3 million during the nine months ended September 30, 2009 and 2008, 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 expense of approximately $1.4 million and $1.8 million was recorded for the three months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 we recorded a non-cash gain of $3.5 million and an expense of $2.1 million for the nine months ended September 30, 2008.

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, we contributed approximately $12.7 million and $6.0 million in cash to the Golden Nugget in May 2009 and August 2009, respectively. As of September 30, 2009, we were in compliance with all such covenants and had approximately $19.3 million in letters of credit outstanding, and our available borrowing capacity was $52.7 million.

 

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Long-term debt is comprised of the following:

 

    September 30, 2009   December 31, 2008

$50.0 million revolving credit facility, Libor + 6.0%, with Libor no less than 3.5% due March 2001

  $ —     $ 4,182,803

$165.6 million Term loan, Libor + 6.0% with Libor no less than 3.5%, 9.5% interest paid quarterly, principal paid quarterly beginning June 30, 2009, due March 2011

    156,526,555     30,015,514

Series A Senior Notes, 14.0% interest only, due August 2011

    7,238,649     —  

Series B Senior Notes, 14.0% interest only, due August 2011

    260,138,957     —  

Senior Notes, 9.5% interest only, due December 2014

    735,000     395,662,000

Senior Notes, 7.5% interest only, due December 2014

    783,000     4,338,000

$47.0 million revolving credit facility, Libor + 2.0%, due June 2013

    25,000,000     8,000,000

$327.0 million First Lien Term Loan, Libor + 2.0%, 1% of principal paid quarterly beginning September 30, 2009, due June 2014

    326,314,300     249,515,152

$165.0 million Second Lien Term Loan, Libor + 3.25%, interest only, due December 2014

    131,817,628     165,000,000

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

    10,233,562     10,411,034

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

    —       3,832

$4.0 million seller note, 7.0%, interest paid monthly, due November 2010

    4,000,000     4,000,000
           

Total debt

    922,787,651     871,128,335

Less current portion

    16,709,815     8,752,906
           

Long-term portion

  $ 906,077,836   $ 862,375,429
           

6. EARNINGS PER SHARE

A reconciliation of the amounts used to compute earnings (loss) per share is as follows:

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2009     2008     2009     2008  

Amounts available to Landry’s common stockholders:

       

Income (loss) from continuing operations

  $ 6,777,341      $ (7,580,717   $ 19,489,028      $ 8,874,560   

Loss from discontinued operations

    (56,226     (9,474,444     (154,996     (10,536,380
                               

Net income (loss)

  $ 6,721,115      $ (17,055,161   $ 19,334,032      $ (1,661,820
                               

Weighted average common shares outstanding—basic

    16,140,000        16,140,000        16,140,000        16,140,000   

Dilutive common stock equivalents:

       

Stock options

    80,000        —          55,000        —     
                               

Weighted average common and common share equivalents outstanding—diluted

    16,220,000        16,140,000        16,195,000        16,140,000   

Earnings (loss) per share—basic

       

Income from continuing operations

  $ 0.42        ($0.47   $ 1.21      $ 0.55   

Loss from discontinued operations, net of taxes

    —          (0.59     (0.01     (0.65
                               

Net income

  $ 0.42        ($1.06   $ 1.20        ($0.10
                               

Earnings (loss) per share—diluted

       

Income from continuing operations

  $ 0.42        ($0.47   $ 1.20      $ 0.55   

Loss from discontinued operations, net of taxes

    (0.01     (0.59     (0.01     (0.65
                               

Net income

  $ 0.41        ($1.06   $ 1.19        ($0.10
                               

 

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 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.

7. STOCK-BASED COMPENSATION

GAAP requires the recognition of the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant. We have several stock-based employee compensation plans, which are more fully described in our 2008 Annual Report on Form 10-K.

For the three months ended September 30, 2009 and 2008, total stock-based compensation expense, which includes both stock options and restricted stock, totaled $0.8 million and $1.0 million, respectively. For the nine months ended September 30, 2009 and 2008, total stock-based compensation expense totaled $2.7 million and $3.1 million, respectively. Stock-based compensation expense is not reported at the segment level as these amounts are not included in internal measurements of segment operating performance.

8. INCOME TAXES

As of January 1, 2009, we had approximately $15.7 million of unrecognized tax benefits, including $2.3 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. There were no material changes in unrecognized benefits for the nine months ended September 30, 2009. It is reasonably possible that the amount of unrecognized tax benefits with respect to our uncertain tax positions could significantly increase or decrease within 12 months. However, based on the current status of examinations, it is not possible to estimate the future impact, if any, to recorded uncertain tax positions at September 30, 2009. Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense.

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. The Internal Revenue Service has substantially completed its audit of tax years ended December 31, 2004 and December 31, 2005 with no material issues identified to date.

9. COMMITMENTS AND CONTINGENCIES

Building Commitments

As of September 30, 2009, we had future development, land purchases and construction commitments anticipated to be expended within the next 12 months of approximately $14.3 million, including construction of certain new restaurants and the construction of a hotel tower at the Golden Nugget – Las Vegas. We estimate aggregate capital expenditures for the remainder of the year to be $20.8 million, most of which relates to the tower.

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 an additional $15.0 million to transform the hotel and pier into a 19th century style inn and entertainment complex complete with rides and carnival type games. The property 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.

Other Commitments

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 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 non-controlling interests liability and a decrease to retained earnings in our consolidated balance sheets as of September 30, 2009.

Certain of our casino employees at the Golden Nugget in Las Vegas, Nevada are members of various unions and are covered by union-sponsored, collective bargained, multi-employer health and welfare and defined benefit pension plans. Under such plans, we recorded expenses of $3.6 million and $4.4 million for the three months ended September 30, 2009 and 2008, respectively and $10.5 million and $11.8 million for the nine months ended September 30, 2009 and 2008, 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.

 

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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.

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 default 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/or cash flows. We estimate that lessee rental payment obligations during the remaining terms of the assignments and subleases approximate $63.3 million at September 30, 2009. We have recorded a liability of $3.3 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.

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.

Litigation and Claims

Following Mr. Fertitta’s proposal to acquire all of our outstanding stock in 2008, two putative class action lawsuits were filed as follows:

James F. Stuart, individually and on behalf of all others similarly situated v. Landry’s Restaurants, Inc. et al., was filed on June 26, 2008 in the Court of Chancery of the State of Delaware (“Stuart”). We are named as a defendant along with our directors, among others. Stuart is a putative class action in which plaintiff alleges that the merger agreement unduly hinders obtaining the highest value for shares of our stock. Plaintiff also alleges that the merger is unfair. Plaintiff seeks to enjoin or rescind the merger, an accounting and damages along with costs and fees.

David Barfield v. Landry’s Restaurants, Inc. et al., was filed on June 27, 2008 in the Court of Chancery of the State of Delaware (“Barfield”). We are named in this case along with our directors, among others. Barfield is a putative class action in which plaintiff alleges that our directors aided and abetted Fertitta Holdings, Inc. and Fertitta Acquisition Co. (Parent and Merge Sub, respectively), and have breached their fiduciary duties by failing to engage in a fair and reliable sales process leading up to the merger agreement. Plaintiff seeks to enjoin or rescind the transaction, an accounting and damages along with costs and fees.

Stuart and Barfield were consolidated by court order. The consolidated action is proceeding under Consolidated C.A. No. 3856-VCL; In re: Landry’s Restaurants, Inc. Shareholder Litigation. In their consolidated complaint, plaintiffs allege that our directors breached fiduciary duties to our stockholders and that the preliminary proxy statement filed on July 17, 2008 fails to disclose what plaintiffs contend are material facts. Plaintiffs also alleged that we, Parent and Merger Sub aided and abetted the alleged breach of fiduciary duty. We believe that this action is without merit and intend to contest the above matter vigorously.

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 minimal defendant Landry’s Restaurant’s, Inc. was brought against all members of our Board of Directors, Parent, and Merger Sub 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 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 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 alternately requiring payment of the reverse termination fee or damages for the devaluation of the Company’s stock. We believe that the action is without merit and intend to contest this matter vigorously.

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 Country, 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.

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.

 

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

10. SEGMENT INFORMATION

The following table presents certain financial information for continuing operations with respect to our reportable segments:

 

    Three Months Ended September 30,     Nine Months Ended September 30,
    2009     2008     2009     2008

Revenue:

       

Restaurant and Hospitality

  $ 224,217,505      $ 229,133,485      $ 650,001,318      $ 693,245,506

Gaming

    52,391,358        60,602,744        164,902,868        196,914,306
                             

Total

  $ 276,608,863      $ 289,736,229      $ 814,904,186      $ 890,159,812
                             

Unit level profit:

       

Restaurant and Hospitality

  $ 52,201,632      $ 48,303,419      $ 155,986,968      $ 141,065,469

Gaming

    7,558,723        12,659,764        32,750,906        48,486,125
                             

Total

  $ 59,760,355      $ 60,963,183      $ 188,737,874      $ 189,551,594
                             

Depreciation, amortization and impairment:

       

Restaurant and Hospitality

  $ 13,170,295      $ 30,895,870      $ 37,953,699      $ 57,336,377

Gaming

    5,340,762        5,340,919        16,019,056        15,869,077
                             

Total

  $ 18,511,057      $ 36,236,789      $ 53,972,755      $ 73,205,454
                             

Income before taxes:

       

Unit level profit

  $ 59,760,355      $ 60,963,183      $ 188,737,874      $ 189,551,594

Depreciation, amortization and impairment

    18,511,057        36,236,789        53,972,755        73,205,454

General and administrative

    11,544,501        11,732,472        36,225,055        36,875,860

Gain on insurance claims

    (406,994     —          (4,410,642     —  

Loss (gain) on disposal of assets

    —          —          (1,363,315     —  

Pre-opening

    177,867        551,720        893,429        1,392,070

Interest expense, net

    29,309,564        19,491,090        82,466,181        60,175,403

Other expenses (income)

    (13,429,264     2,633,245        (13,985,261     3,781,168
                             

Consolidated income from continuing operations before taxes

  $ 14,053,624      $ (9,682,133   $ 34,939,672      $ 14,121,639
                             
                September 30, 2009     December 31, 2008

Segment assets:

       

Restaurant and Hospitality

      $ 717,345,577      $ 720,728,486

Gaming

        671,149,337        601,475,227

Corporate and other (1)

        178,639,296        193,120,377
                 
      $ 1,567,134,210      $ 1,515,324,090
                 

 

(1) Includes intersegment eliminations and assets and liabilities related to discontinued operations

 

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

11. SUPPLEMENTAL GUARANTOR INFORMATION

In February 2009, we issued $295.5 million of 14% senior secured notes due in 2011 (see Note 5 “Debt”). 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.

Condensed Unaudited Consolidating Financial Statements

Balance Sheet

September 30, 2009

 

     Parent    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated
Entity
ASSETS            

CURRENT ASSETS:

           

Cash and cash equivalents

   $ —      $ 3,104,629      $ 42,193,141      $ (299,918   $ 44,997,852

Accounts receivable—trade and other, net

     1,320,055      5,758,163        3,699,269        —          10,777,487

Inventories

     11,515,321      13,027,326        2,319,027        —          26,861,674

Deferred taxes

     13,286,652      1,333,938        3,151,392        —          17,771,982

Assets related to discontinued operations

     2,509,148      460,343        —          —          2,969,491

Other current assets

     3,753,852      2,760,575        5,260,503        —          11,774,930
                                     

Total current assets

     32,385,028      26,444,974        56,623,332        (299,918     115,153,416
                                     

PROPERTY AND EQUIPMENT, net

     8,900,698      654,743,108        666,241,965        —          1,329,885,771

GOODWILL

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

OTHER INTANGIBLE ASSETS, net

     2,029,439      8,468,181        28,256,222        —          38,753,842

INVESTMENT IN AND ADVANCES TO SUBSIDIARIES

     772,439,853      (43,235,716     (148,464,259     (580,739,878     —  

OTHER ASSETS, net

     35,260,896      10,857        29,541,881        —          64,813,634
                                     

Total assets

   $ 851,015,914    $ 664,958,951      $ 632,199,141      $ (581,039,796   $ 1,567,134,210
                                     
LIABILITIES AND EQUITY            

CURRENT LIABILITIES:

           

Accounts payable

   $ 17,753,653    $ 17,998,129      $ 29,461,499      $ —        $ 65,213,281

Accrued liabilities

     51,165,643      42,847,148        36,151,817        (299,918     129,864,690

Income taxes payable

     355,017      —          —          —          355,017

Current portion of long-term debt and other obligations

     13,235,000      —          3,474,815        —          16,709,815

Liabilities related to discontinued operations

     —        3,592,065        —          —          3,592,065
                                     

Total current liabilities

     82,509,313      64,437,342        69,088,131        (299,918     215,734,868
                                     

LONG-TERM NOTES, NET OF CURRENT PORTION

     412,187,160      —          493,890,676        —          906,077,836

OTHER LIABILITIES

     25,189,717      19,660,909        69,341,156        —          114,191,782
                                     

Total liabilities

     519,886,190      84,098,251        632,319,963        (299,918     1,236,004,486
                                     

COMMITMENTS AND CONTINGENCIES

           

TOTAL EQUITY

     331,129,724      580,860,700        (120,822     (580,739,878     331,129,724
                                     

Total liabilities and equity

   $ 851,015,914    $ 664,958,951      $ 632,199,141      $ (581,039,796   $ 1,567,134,210
                                     

 

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Condensed Consolidating Financial Statements

Balance Sheet

December 31, 2008

 

     Parent    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated
Entity
ASSETS            

CURRENT ASSETS:

           

Cash and cash equivalents

   $ —      $ 5,705,232      $ 46,595,810      $ (1,234,237   $ 51,066,805

Accounts receivable—trade and other, net

     1,101,730      11,888,296        5,031,079        —          18,021,105

Inventories

     9,704,247      13,308,701        3,148,144        —          26,161,092

Deferred taxes

     23,786,393      1,107,582        3,107,292        —          28,001,267

Assets related to discontinued operations

     2,509,248      464,345        —          —          2,973,593

Other current assets

     2,482,520      2,348,473        4,271,036        —          9,102,029
                                     

Total current assets

     39,584,138      34,822,629        62,153,361        (1,234,237     135,325,891
                                     

PROPERTY AND EQUIPMENT, net

     12,363,905      654,061,082        592,761,476        —          1,259,186,463

GOODWILL

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

OTHER INTANGIBLE ASSETS, net

     1,880,275      8,481,376        28,511,222        —          38,872,873

INVESTMENT IN AND ADVANCES TO SUBSIDIARIES

     749,698,257      (75,427,069     (148,991,957     (525,279,231     —  

OTHER ASSETS, net

     27,929,685      1,969,120        33,512,511        —          63,411,316
                                     

Total assets

   $ 831,456,260    $ 642,434,685      $ 567,946,613      $ (526,513,468   $ 1,515,324,090
                                     
LIABILITIES AND EQUITY            

CURRENT LIABILITIES:

           

Accounts payable

   $ 25,079,676    $ 20,756,949      $ 24,521,846      $ —        $ 70,358,471

Accrued liabilities

     48,074,063      50,450,283        37,026,220        (1,234,237     134,316,329

Income taxes payable

     2,784,703      —          —          —          2,784,703

Current portion of long-term debt and other obligations

     7,503,833      —          1,249,073        —          8,752,906

Liabilities related to discontinued operations

     —        5,149,365        —          —          5,149,365
                                     

Total current liabilities

     83,442,275      76,356,597        62,797,139        (1,234,237     221,361,774
                                     

LONG-TERM NOTES, NET OF CURRENT PORTION

     426,698,317      —          435,677,112        —          862,375,429

DEFERRED TAXES

     —        2,089,261        —          (2,089,261     —  

OTHER LIABILITIES

     25,838,563      21,405,412        88,865,807        —          136,109,782
                                     

Total liabilities

     535,979,155      99,851,270        587,340,058        (3,323,498     1,219,846,985
                                     

COMMITMENTS AND CONTINGENCIES

           

TOTAL EQUITY

     295,477,105      542,583,415        (19,393,445     (523,189,970     295,477,105
                                     

Total liabilities and equity

   $ 831,456,260    $ 642,434,685      $ 567,946,613      $ (526,513,468   $ 1,515,324,090
                                     

 

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Condensed Unaudited Consolidating Financial Statements

Statement of Income

Three Months Ended September 30, 2009

 

      Parent     Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated
Entity
 

REVENUES

          

Restaurant and hospitality

   $ 616,372      $ 220,240,556      $ 4,102,585      $ (742,008   $ 224,217,505   

Gaming:

          

Casino

     —          —          31,911,212        —          31,911,212   

Rooms

     —          —          11,778,137        —          11,778,137   

Food and beverage

     —          —          10,841,517        —          10,841,517   

Other

     —          —          3,863,607        —          3,863,607   

Promotional allowances

     —          —          (6,003,115     —          (6,003,115
                                        

Net gaming revenue

     —          —          52,391,358        —          52,391,358   
                                        

Total revenue

     616,372        220,240,556        56,493,943        (742,008     276,608,863   
                                        

OPERATING COSTS AND EXPENSES:

          

Restaurant and hospitality:

          

Cost of revenues

     —          53,118,754        591,703        —          53,710,457   

Labor

     —          63,178,789        983,162        —          64,161,951   

Other operating expenses

     (214,778     53,649,930        1,450,321        (742,008     54,143,465   

Gaming:

          

Casino

     —          —          17,180,494        —          17,180,494   

Rooms

     —          —          6,025,464        —          6,025,464   

Food and beverage

     —          —          6,508,405        —          6,508,405   

Other

     —          —          15,118,272        —          15,118,272   

General and administrative expense

     11,544,501        —          —          —          11,544,501   

Depreciation and amortization

     986,609        11,080,480        5,836,384        —          17,903,473   

Asset impairment expense

     —          —          607,584        —          607,584   

Gain on insurance claims

     —          (59,076     (347,918     —          (406,994

Pre-opening expenses

     —          177,867        —          —          177,867   
                                        

Total operating costs and expenses

     12,316,332        181,146,744        53,953,871        (742,008     246,674,939   
                                        

OPERATING INCOME (LOSS)

     (11,699,960     39,093,812        2,540,072        —          29,933,924   

OTHER EXPENSES (INCOME):

          

Interest expense, net

     20,410,946        (39     8,898,657        —          29,309,564   

Other, net

     (474,409     —          (12,954,855     —          (13,429,264
                                        

Total other expense

     19,936,537        (39     (4,056,198     —          15,880,300   
                                        

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     (31,636,497     39,093,851        6,596,270        —          14,053,624   

PROVISION (BENEFIT) FOR INCOME TAXES

     (12,672,440     15,673,543        2,024,743        —          5,025,846   
                                        

INCOME (LOSS) FROM CONTINUING OPERATIONS

     (18,964,057     23,420,308        4,571,527        —          9,027,778   

INCOME (LOSS) FROM DISCONTINUED OPERATIONS NET OF TAXES

     —          (56,226     —          —          (56,226

EQUITY IN EARNINGS OF SUBSIDIARIES

     27,935,609        —          —          (27,935,609     —     
                                        

NET INCOME

     8,971,552        23,364,082        4,571,527        (27,935,609     8,971,552   

LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

     165,027        —          —          —          165,027   
                                        

NET INCOME (LOSS) ATTRIBUTABLE TO LANDRY’S

   $ 8,806,525      $ 23,364,082      $ 4,571,527      $ (27,935,609   $ 8,806,525   
                                        

 

20


Table of Contents

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Condensed Unaudited Consolidating Financial Statements

Statement of Income

Three Months Ended September 30, 2008

 

     Parent     Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated
Entity
 

REVENUES

          

Restaurant and hospitality

   $ 1,357,247      $ 224,155,641      $ 4,435,718      $ (815,121   $ 229,133,485   

Gaming:

          

Casino

     —          —          34,891,090        —          34,891,090   

Rooms

     —          —          15,105,290        —          15,105,290   

Food and beverage

     —          —          12,499,577        —          12,499,577   

Other

     —          —          3,672,058        —          3,672,058   

Promotional allowances

     —          —          (5,565,271     —          (5,565,271
                                        

Net gaming revenue

     —          —          60,602,744        —          60,602,744   
                                        

Total revenue

     1,357,247        224,155,641        65,038,462        (815,121     289,736,229   
                                        

OPERATING COSTS AND EXPENSES:

          

Restaurant and hospitality:

          

Cost of revenues

     —          57,720,927        704,829        —          58,425,756   

Labor

     —          64,082,438        1,028,882        —          65,111,320   

Other operating expenses

     (2,917,841     59,419,788        1,606,164        (815,121     57,292,990   

Gaming:

          

Casino

     —          —          18,299,089        —          18,299,089   

Rooms

     —          —          6,286,724        —          6,286,724   

Food and beverage

     —          —          7,853,832        —          7,853,832   

Other

     —          —          15,503,335        —          15,503,335   

General and administrative expense

     11,732,472        —          —          —          11,732,472   

Depreciation and amortization

     985,536        11,007,181        5,752,285        —          17,745,002   

Asset impairment expense

     —          17,445,911        1,045,876        —          18,491,787   

Pre-opening expenses

     —          551,720        —          —          551,720   
                                        

Total operating costs and expenses

     9,800,167        210,227,965        58,081,016        (815,121     277,294,027   
                                        

OPERATING INCOME (LOSS)

     (8,442,920     13,927,676        6,957,446        —          12,442,202   

OTHER EXPENSES (INCOME):

          

Interest expense, net

     10,486,985        —          9,004,105        —          19,491,090   

Other, net

     516,340        386        2,116,519        —          2,633,245   
                                        

Total other expense

     11,003,325        386        11,120,624        —          22,124,335   
                                        

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     (19,446,245     13,927,290        (4,163,178     —          (9,682,133

PROVISION (BENEFIT) FOR INCOME TAXES

     (5,821,753     4,972,305        (1,276,430     —          (2,125,878
                                        

INCOME (LOSS) FROM CONTINUING OPERATIONS

     (13,624,492     8,954,985        (2,886,748     —          (7,556,255

INCOME (LOSS) FROM DISCONTINUED OPERATIONS NET OF TAXES

     —          (9,474,444     —          —          (9,474,444

EQUITY IN EARNINGS OF SUBSIDIARIES

     (3,406,207     —          —          3,406,207        —     
                                        

NET INCOME

     (17,030,699     (519,459     (2,886,748     3,406,207        (17,030,699

LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

     24,462        —          —          —          24,462   
                                        

NET INCOME (LOSS) ATTRIBUTABLE TO LANDRY’S

   $ (17,055,161   $ (519,459   $ (2,886,748   $ 3,406,207      $ (17,055,161
                                        

 

21


Table of Contents

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Condensed Unaudited Consolidating Financial Statements

Statement of Income

Nine Months Ended September 30, 2009

 

     Parent     Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated
Entity
 

REVENUES

          

Restaurant and hospitality

   $ 1,604,650      $ 638,829,814      $ 11,979,557      $ (2,412,703   $ 650,001,318   

Gaming:

          

Casino

     —          —          102,307,294        —          102,307,294   

Rooms

     —          —          36,625,590        —          36,625,590   

Food and beverage

     —          —          33,045,827        —          33,045,827   

Other

     —          —          11,585,914        —          11,585,914   

Promotional allowances

     —          —          (18,661,757     —          (18,661,757
                                        

Net gaming revenue

     —          —          164,902,868        —          164,902,868   
                                        

Total revenue

     1,604,650        638,829,814        176,882,425        (2,412,703     814,904,186   
                                        

OPERATING COSTS AND EXPENSES:

          

Restaurant and hospitality:

          

Cost of revenues

     —          155,874,260        1,605,600        —          157,479,860   

Labor

     —          183,665,766        2,681,782        —          186,347,548   

Other operating expenses

     (684,329     149,288,052        3,995,922        (2,412,703     150,186,942   

Gaming:

          

Casino

     —          —          54,312,094        —          54,312,094   

Rooms

     —          —          17,407,301        —          17,407,301   

Food and beverage

     —          —          18,942,321        —          18,942,321   

Other

     —          —          41,490,246        —          41,490,246   

General and administrative expense

     36,225,055        —          —          —          36,225,055   

Depreciation and amortization

     2,945,235        33,039,191        17,380,745        —          53,365,171   

Asset impairment expense

     —          —          607,584        —          607,584   

Gain on insurance claims

     —          (4,062,724     (347,918     —          (4,410,642

Loss (gain) on disposal of assets

     (4,931     —          (1,358,384     —          (1,363,315

Pre-opening expenses

     —          893,429        —          —          893,429   
                                        

Total operating costs and expenses

     38,481,030        518,697,974        156,717,293        (2,412,703     711,483,594   
                                        

OPERATING INCOME (LOSS)

     (36,876,380     120,131,840        20,165,132        —          103,420,592   

OTHER EXPENSES (INCOME):

          

Interest expense, net

     56,796,305        (108     25,669,984        —          82,466,181   

Other, net

     3,389,584        (121     (17,374,724     —          (13,985,261
                                        

Total other expense

     60,185,889        (229     8,295,260        —          68,480,920   
                                        

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     (97,062,269     120,132,069        11,869,872        —          34,939,672   

PROVISION (BENEFIT) FOR INCOME TAXES

     (27,682,898     34,260,243        3,382,914        —          9,960,259   
                                        

INCOME (LOSS) FROM CONTINUING OPERATIONS

     (69,379,371     85,871,826        8,486,958        —          24,979,413   

INCOME (LOSS) FROM DISCONTINUED OPERATIONS NET OF TAXES

     —          (154,996     —          —          (154,996

EQUITY IN EARNINGS OF SUBSIDIARIES

     94,203,788        —          —          (94,203,788     —     
                                        

NET INCOME

     24,824,417        85,716,830        8,486,958        (94,203,788     24,824,417   

LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

     679,335        —          —          —          679,335   
                                        

NET INCOME (LOSS) ATTRIBUTABLE TO LANDRY’S

   $ 24,145,082      $ 85,716,830      $ 8,486,958      $ (94,203,788   $ 24,145,082   
                                        

 

22


Table of Contents

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Condensed Unaudited Consolidating Financial Statements

Statement of Income

Nine Months Ended September 30, 2008

 

     Parent     Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated
Entity
 

REVENUES

          

Restaurant and hospitality

   $ 3,292,458      $ 680,650,740      $ 12,013,717      $ (2,711,409   $ 693,245,506   

Gaming:

          

Casino

     —          —          117,971,096        —          117,971,096   

Rooms

     —          —          49,835,862        —          49,835,862   

Food and beverage

     —          —          37,064,255        —          37,064,255   

Other

     —          —          10,895,382        —          10,895,382   

Promotional allowances

     —          —          (18,852,289     —          (18,852,289
                                        

Net gaming revenue

     —          —          196,914,306        —          196,914,306   
                                        

Total revenue

     3,292,458        680,650,740        208,928,023        (2,711,409     890,159,812   
                                        

OPERATING COSTS AND EXPENSES:

          

Restaurant and hospitality:

          

Cost of revenues

     —          178,217,779        1,993,630        —          180,211,409   

Labor

     —          197,107,614        3,128,665        —          200,236,279   

Other operating expenses

     (2,207,017     172,184,257        4,466,518        (2,711,409     171,732,349   

Gaming:

          

Casino

     —          —          60,669,092        —          60,669,092   

Rooms

     —          —          18,735,499        —          18,735,499   

Food and beverage

     —          —          22,494,103        —          22,494,103   

Other

     —          —          46,529,487        —          46,529,487   

General and administrative expense

     36,875,860        —          —          —          36,875,860   

Depreciation and amortization

     2,986,177        33,101,234        17,033,115        —          53,120,526   

Asset impairment expense

     —          19,039,052        1,045,876        —          20,084,928   

Pre-opening expenses

     —          1,392,070        —          —          1,392,070   
                                        

Total operating costs and expenses

     37,655,020        601,042,006        176,095,985        (2,711,409     812,081,602   
                                        

OPERATING INCOME (LOSS).

     (34,362,562     79,608,734        32,832,038        —          78,078,210   

OTHER EXPENSES (INCOME):

          

Interest expense, net

     33,061,995        —          27,113,408        —          60,175,403   

Other, net

     883,944        1,467        2,895,757        —          3,781,168   
                                        

Total other expense

     33,945,939        1,467        30,009,165        —          63,956,571   
                                        

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     (68,308,501     79,607,267        2,822,873        —          14,121,639   

PROVISION (BENEFIT) FOR INCOME TAXES

     (20,894,385     25,180,691        865,493        —          5,151,799   
                                        

INCOME (LOSS) FROM CONTINUING OPERATIONS

     (47,414,116     54,426,576        1,957,380        —          8,969,840   

INCOME (LOSS) FROM DISCONTINUED OPERATIONS NET OF TAXES

     —          (10,536,380     —          —          (10,536,380

EQUITY IN EARNINGS OF SUBSIDIARIES

     45,847,576        —          —          (45,847,576     —     
                                        

NET INCOME

     (1,566,540     43,890,196        1,957,380        (45,847,576     (1,566,540

LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

     95,280        —          —          —          95,280   
                                        

NET INCOME (LOSS) ATTRIBUTABLE TO LANDRY’S

   $ (1,661,820   $ 43,890,196      $ 1,957,380      $ (45,847,576   $ (1,661,820
                                        

 

23


Table of Contents

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Condensed Unaudited Consolidating Financial Statements

Statement of Cash Flows

Nine months ended September 30, 2009

 

     Parent     Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated
Entity
 

CASH FLOWS FROM OPERATING ACTIVITIES:

          

Net income (loss)

   $ 24,824,417      $ 85,716,830      $ 8,486,958      $ (94,203,788   $ 24,824,417   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

          

Depreciation and amortization

     2,945,235        33,039,191        17,380,745        —          53,365,171   

Asset impairment expense

     —          —          607,584        —          607,584   

Gain on disposition of assets

     (4,931     —          (1,358,384     —          (1,363,315

Gain on insurance claims

     —          (4,062,724     (347,918     —          (4,410,642

Gain on repurchase of debt

     —          (19,406,543     —          —          (19,406,543

Change in assets and liabilities, net and other

     6,967,194        (64,535,815     (23,346,076     95,138,107        14,223,410   
                                        

Total adjustments

     9,907,498        (54,965,891     (7,064,049     95,138,107        43,015,665   
                                        

Net cash provided (used) by operating activities

     34,731,915        30,750,939        1,422,909        934,319        67,840,082   

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Property and equipment additions and/or transfers

     998,432        (33,699,462     (95,769,323     —          (128,470,353

Proceeds from disposition of property and equipment

     4,931        347,920        10,385,743        —          10,738,594   
                                        

Net cash provided by (used in) investing activities

     1,003,363        (33,351,542     (85,383,580     —          (117,731,759
                                        

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Purchases of common stock for treasury

     (47,931     —          —          —          (47,931

Proceeds from exercise of stock options

     30,628        —          —          —          30,628   

Payments of debt

     (5,003,832     —          (1,438,929     —          (6,442,761

Financing proceeds

     390,040,000        —          —          —          390,040,000   

Repayment of bonds

     (398,482,000     —          —          —          (398,482,000

Repurchase of debt

     —          —          (13,775,829       (13,775,829

Debt issuance costs

     (18,089,340     —          (287,846     —          (18,377,186

Proceeds from credit facility

     99,633,246        —          172,060,606        —          271,693,852   

Payments on credit facility

     (103,816,049     —          (77,000,000     —          (180,816,049
                                        

Net cash provided (used) in financing activities

     (35,735,278     —          79,558,002        —          43,822,724   
                                        

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     —          (2,600,603     (4,402,669     934,319        (6,068,953

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     —          5,705,232        46,595,810        (1,234,237     51,066,805   
                                        

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ —        $ 3,104,629      $ 42,193,141      $ (299,918   $ 44,997,852   
                                        

 

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Condensed Unaudited Consolidating Financial Statements

Statement of Cash Flows

Nine Months Ended September 30, 2008

 

     Parent     Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated
Entity
 

CASH FLOWS FROM OPERATING ACTIVITIES:

          

Net income (loss)

   $ (1,566,540   $ 43,890,196      $ 1,957,380      $ (45,847,576   $ (1,566,540

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

          

Depreciation and amortization

     2,986,177        33,665,863        17,033,115        —          53,685,155   

Asset impairment expense

     —          28,914,063        1,509,708        —          30,423,771   

Change in assets and liabilities, net and other

     53,681,887        (87,937,053     (7,508,093     45,847,576        4,084,317   
                                        

Total adjustments

     56,668,064        (25,357,127     11,034,730        45,847,576        88,193,243   
                                        

Net cash provided (used) by operating activities

     55,101,524        18,533,069        12,992,110        —          86,626,703   

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Property and equipment additions and/or transfers

     (1,841,291     (41,232,947     (37,946,159     —          (81,020,397

Proceeds from disposition of property and equipment

     —          15,434,800        —          —          15,434,800   
                                        

Net cash provided by (used in) investing activities

     (1,841,291     (25,798,147     (37,946,159     —          (65,585,597
                                        

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Purchases of common stock for treasury

     (15,274     —          —          —          (15,274

Proceeds from exercise of stock options

     6,361        —          —          —          6,361   

Payments of debt

     (28,608     —          (158,642     —          (187,250

Financing proceeds

     —          —          39,515,152        —          39,515,152   

Proceeds from credit facility

     142,000,000        —          77,000,000        —          219,000,000   

Payments on credit facility

     (175,000,000     —          (79,000,000     —          (254,000,000

Dividends paid

     (1,614,369     —          —          —          (1,614,369
                                        

Net cash provided by (used in) financing activities

     (34,651,890     —          37,356,510        —          2,704,620   
                                        

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     18,608,343        (7,265,078     12,402,461        —          23,745,726   

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     4,265,460        11,691,100        23,644,686        —          39,601,246   
                                        

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 22,873,803      $ 4,426,022      $ 36,047,147      $ —        $ 63,346,972   
                                        

 

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

12. SUBSEQUENT EVENTS

For the quarterly period ended September 30, 2009, we have evaluated subsequent events through November 9, 2009, which is the date our financial statements were issued and filed with the SEC.

On November 3, 2009, the Company entered into a definitive merger agreement with a company wholly-owned by the Company’s Chairman and Chief Executive Officer, Mr. Tilman J. Fertitta. Pursuant to the agreement, the Fertitta company has agreed to acquire all of Landry’s 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 Landry’s stockholders, including approval by the holders of a majority of Landry’s common stock not owned by Mr. Fertitta. The transaction is also subject to the Company refinancing a portion of its outstanding debt.

Under the merger agreement, there is a “go-shop” provision whereby the Special Committee, with the assistance of its independent advisors, will continue to actively solicit alternative acquisition proposals from third parties until the later of December 17, 2009 or until Landry’s debt refinancing is completed. To the extent that a superior proposal solicited during this period leads to the execution of a definitive agreement, the Company would be obligated to pay a $2.4 million break-up fee to Mr. Fertitta’s acquisition company, representing 1% of the equity value of the transaction. No assurances can be given that the solicitation of alternative proposals will result in an alternative transaction.

Landry’s Board of Directors, acting upon the unanimous recommendation of the Special Committee, has approved the merger agreement between Landry’s and Fertitta’s company and has recommended that Landry’s stockholders vote in favor of the merger agreement. The Special Committee received the opinion of Moelis & Company that Mr. Fertitta’s proposal was fair from a financial point of view to Landry’s stockholders, other than Mr. Fertitta.

The transaction is expected to be completed in the first half of 2010, subject to regulatory approvals and other customary closing conditions.

 

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

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.

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.

Our Board of Directors, acting upon the unanimous recommendation of a special committee comprised entirely of independent directors (Special Committee), received an opinion from Moelis & Company that the transaction is fair to Landry’s stockholders, other than Mr. Fertitta, from a financial point of view, and the Special Committee has concluded that the Merger Agreement is fair, advisable and in the best interests of Landry’s stockholders and has approved the Merger Agreement and has recommended that the Landry’s stockholders vote in favor of the Merger Agreement.

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 also subject to us refinancing a portion of our outstanding debt.

Under the Merger Agreement, there is a “go-shop” provision whereby the Special Committee, with the assistance of its independent advisors, will continue to actively solicit alternative acquisition proposals from third parties until the later of December 17, 2009 or until our debt refinancing is completed. To the extent that a superior proposal solicited during this period leads to the execution of a definitive agreement, we would be obligated to pay a $2.4 million break-up fee to Mr. Fertitta’s acquisition company. No assurances can be given that the solicitation of alternative proposals will result in an alternative transaction.

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 September 30, 2009, we operated 173 restaurants, as well as several limited menu restaurants and other properties, including the Golden Nugget Hotels and Casinos (“Golden Nugget”) in Las Vegas and Laughlin, Nevada.

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 to discontinued operations in the statements of income, balance sheets and segment information for all periods presented.

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 considering expansion, as well as competitors planning to expand in the same regions.