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8-K - FORM 8-K - LANDRYS RESTAURANTS INC | d8k.htm |
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - LANDRYS RESTAURANTS INC | dex231.htm |
Exhibit 99.1
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial data as of and for the years ended December 31, 2008, 2007, 2006, 2005, and 2004 which are derived from our consolidated financial statements which have been audited by Grant Thornton LLP.
Discontinued Operations
During 2006, as part of a strategic review of our operations, we initiated a plan to divest certain restaurants, including 136 Joes Crab Shack units. Subsequently, several additional locations were added to our disposal plan. The results of operations for all units included in the disposal plan have been reclassified as discontinued operations in the statements of income for all periods presented.
The data set forth below should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations, Risk Factors and our Consolidated Financial Statements and Notes. All amounts are in thousands, except per share data.
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SELECTED CONSOLIDATED FINANCIAL INFORMATION
Year Ended December 31, | ||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
REVENUES |
$ | 1,143,889 | $ | 1,160,368 | $ | 1,101,994 | $ | 864,156 | $ | 769,280 | ||||||||||
OPERATING COSTS AND EXPENSES: |
||||||||||||||||||||
Cost of revenues |
245,381 | 256,336 | 249,575 | 223,864 | 214,966 | |||||||||||||||
Labor |
366,395 | 375,144 | 357,748 | 258,469 | 221,059 | |||||||||||||||
Other operating expenses |
288,090 | 292,298 | 278,172 | 213,697 | 189,945 | |||||||||||||||
General and administrative expense |
51,294 | 55,756 | 57,977 | 47,443 | 48,446 | |||||||||||||||
Depreciation and amortization |
70,292 | 65,287 | 55,857 | 43,262 | 37,616 | |||||||||||||||
Asset impairment expense (1) |
2,409 | | 2,966 | | 1,709 | |||||||||||||||
Loss (gain) on disposal of assets |
(59 | ) | (18,918 | ) | (2,295 | ) | (524 | ) | (100 | ) | ||||||||||
Pre-opening expenses |
2,266 | 3,477 | 5,214 | 3,030 | 2,990 | |||||||||||||||
Total operating costs and expenses |
1,026,068 | 1,029,380 | 1,005,214 | 789,241 | 716,631 | |||||||||||||||
OPERATING INCOME |
117,821 | 130,988 | 96,780 | 74,915 | 52,649 | |||||||||||||||
OTHER EXPENSE (INCOME): |
||||||||||||||||||||
Interest expense, net (2) |
79,817 | 72,322 | 49,139 | 31,208 | 10,482 | |||||||||||||||
Other, net (3) |
17,035 | 17,119 | 154 | 530 | 13,566 | |||||||||||||||
Total other expense |
96,852 | 89,441 | 49,293 | 31,738 | 24,048 | |||||||||||||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
20,969 | 41,547 | 47,487 | 43,177 | 28,601 | |||||||||||||||
PROVISION (BENEFIT) FOR INCOME TAXES (4) |
7,227 | 14,238 | 13,393 | 13,556 | (10,392 | ) | ||||||||||||||
INCOME FROM CONTINUING OPERATIONS |
13,742 | 27,309 | 34,094 | 29,621 | 38,993 | |||||||||||||||
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES (1) |
(10,569 | ) | (9,626 | ) | (56,146 | ) | 15,194 | 27,528 | ||||||||||||
NET INCOME (LOSS) |
3,173 | 17,683 | (22,052 | ) | 44,815 | 66,521 | ||||||||||||||
LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST |
265 | (429 | ) | (282 | ) | | | |||||||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO LANDRYS |
$ | 2,908 | $ | 18,112 | $ | (21,770 | ) | $ | 44,815 | $ | 66,521 | |||||||||
EARNINGS PER SHARE INFORMATION: |
||||||||||||||||||||
Amounts attributable to Landrys common stockholders: |
||||||||||||||||||||
BASIC |
||||||||||||||||||||
Income from continuing operations |
$ | 0.88 | $ | 1.47 | $ | 1.61 | $ | 1.33 | $ | 1.44 | ||||||||||
Income (loss) from discontinued operations |
(0.69 | ) | (0.51 | ) | (2.63 | ) | 0.68 | 1.02 | ||||||||||||
Net income (loss) |
$ | 0.19 | $ | 0.96 | $ | (1.02 | ) | $ | 2.01 | $ | 2.46 | |||||||||
Weighted average number of common shares outstanding |
15,260 | 18,850 | 21,300 | 22,300 | 27,000 | |||||||||||||||
DILUTED |
||||||||||||||||||||
Income from continuing operations |
$ | 0.87 | $ | 1.43 | $ | 1.56 | $ | 1.29 | $ | 1.40 | ||||||||||
Income (loss) from discontinued operations |
(0.68 | ) | (0.50 | ) | (2.55 | ) | 0.66 | 0.99 | ||||||||||||
Net income (loss) |
$ | 0.19 | $ | 0.93 | $ | (0.99 | ) | $ | 1.95 | $ | 2.39 | |||||||||
Weighted average number of common and common share equivalents outstanding |
15,480 | 19,400 | 22,000 | 23,000 | 27,800 | |||||||||||||||
EBITDA |
||||||||||||||||||||
Net Income (loss) |
$ | 3,173 | $ | 17,683 | $ | (22,052 | ) | $ | 44,815 | $ | 66,521 | |||||||||
Add back: |
||||||||||||||||||||
Provision (benefit) for income tax |
7,227 | 14,238 | 13,393 | 13,556 | (10,392 | ) | ||||||||||||||
Interest expense, net |
79,817 | 72,322 | 49,139 | 31,208 | 10,482 | |||||||||||||||
Depreciation and amortization |
70,292 | 65,287 | 55,857 | 43,262 | 37,616 | |||||||||||||||
Asset impairment expense |
2,409 | | 2,966 | | 1,709 | |||||||||||||||
EBITDA |
$ | 162,918 | $ | 169,530 | $ | 99,303 | $ | 132,841 | $ | 105,936 | ||||||||||
BALANCE SHEET DATA (AT END OF PERIOD) |
||||||||||||||||||||
Working capital (deficit) |
$ | (86,036 | ) | $ | (149,883 | ) | $ | (50,056 | ) | $ | 217,461 | $ | 161,515 | |||||||
Total assets |
$ | 1,515,324 | $ | 1,502,983 | $ | 1,464,912 | $ | 1,612,579 | $ | 1,344,952 | ||||||||||
Short-term notes payable and current portion of notes and other obligations |
$ | 8,753 | $ | 87,243 | $ | 748 | $ | 1,852 | $ | 1,700 | ||||||||||
Long term notes and other obligations, net of current portion |
$ | 862,375 | $ | 801,428 | $ | 710,456 | $ | 816,044 | $ | 559,545 | ||||||||||
Stockholders equity (1) |
$ | 294,477 | $ | 316,899 | $ | 494,707 | $ | 516,770 | $ | 600,897 |
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(1) | In 2008, 2006 and 2004, we recorded asset impairment charges related to continuing operations of $2.4 million ($1.6 million after tax), $3.0 million ($2.0 million after tax) and $1.7 million ($1.2 million after tax), respectively, related to the adjustment to estimated fair value of certain restaurant properties and assets. In 2007 and 2006, we also recorded asset impairment charges and other losses totaling $9.9 million ($6.5 million after tax) and $79.8 million ($51.8 million after-tax), respectively, related to discontinued operations. |
(2) | In 2007, we recognized an $8.0 million ($5.3 million after-tax) charge for deferred loan costs previously being amortized over the term of the 7.5% Senior Notes. |
(3) | In 2008, we recognized $14.3 million in non-cash charges associated with interest rate swaps not designated as hedges. In 2007, we recorded expenses associated with exchanging the 7.5% Senior Notes for 9.5% Senior Notes of approximately $5.0 million ($3.3 million after tax) and incurred approximately $6.3 million ($4.2 million after tax) in call premiums and expenses associated with refinancing the Golden Nugget debt. We also recorded $5.4 million ($3.5 million after tax) reflecting a non-cash expense for the change in fair value of interest rate swaps related to the new Golden Nugget financing. In 2004, we recorded prepayment penalty expense and other costs related to the refinancing of our long-term debt of approximately $16.6 million ($11.3 million after tax). |
(4) | In 2004, we recognized $18.5 million in income tax benefits for a reduction of the valuation allowance and deferred tax liabilities attributable to tax benefits deemed realizable and reduced accruals. |
EBITDA is not a generally accepted accounting principles (GAAP) measurement and is presented solely as a supplemental disclosure because we believe that it is a widely used measure of operating performance. EBITDA is not intended to be viewed as a source of liquidity or as a cash flow measure as used in the statement of cash flows. EBITDA is simply shown above as it is a commonly used non-GAAP valuation statistic. EBITDA as shown differs from that used in our credit agreements primarily due to non-guarantor subsidiaries and other specifically defined calculations.
ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Introduction
The following presents an analysis of the results and financial condition of our continuing operations. Except where indicated otherwise, the results of discontinued operations are excluded from this discussion.
We are a national, diversified, restaurant, hospitality and entertainment company principally engaged in the ownership and operation of full service, casual dining restaurants and gaming facilities. We locate our restaurants in high-profile, specialty locations in markets that provide a balanced mix of tourist, convention, business and residential clientele. We focus on providing quality food at reasonable prices while offering a memorable atmosphere for our guests. As of December 31, 2008, we operated 175 restaurants, as well as several limited menu restaurants and other properties (as described in Item 1. Business), including the Golden Nugget Hotels and Casinos (Golden Nugget) in Las Vegas and Laughlin, Nevada.
Termination of Merger Agreement
On June 16, 2008, we entered into an Agreement and Plan of Merger, as amended on October 18, 2008 (the Merger Agreement), with Fertitta Holdings, Inc (Parent)., a Delaware corporation, and Fertitta Acquisition Co., a Delaware corporation and a wholly-owned subsidiary of Parent, which are solely owned by Tilman J. Fertitta, our Chairman, President and Chief Executive Officer, to acquire all of our issued and outstanding capital stock (the Proposed Acquisition). In order to finance the Proposed Acquisition, in part, Mr. Fertitta entered into a debt commitment letter dated June 12, 2008, as amended on October 17, 2008 (the Commitment Letter) with Jefferies Funding LLC, Jefferies & Company, Inc., Jefferies Finance LLC and Wells Fargo Foothill, LLC (the Lenders). In addition to the commitment to provide financing for the Proposed Acquisition, the Commitment Letter also contained a commitment by the Lenders to provide alternative financing in the event the Proposed Acquisition was not consummated (the Alternative Commitment).
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In connection with the proxy statement required to be provided to our stockholders voting on the Proposed Acquisition, the Securities and Exchange Commission (SEC) required that we disclose certain information from the Commitment Letter issued by the Lenders to Mr. Fertitta and the Company. The Commitment Letter required that such information not be disclosed and be kept confidential and that disclosure of such information would be a basis for termination of the Commitment Letter. We informed Mr. Fertitta that we were not prepared to risk losing the Alternative Commitment and were therefore unable to comply with a condition of the Merger which required distribution of an SEC approved proxy statement to our stockholders to vote on the adoption of the merger proposal. As a result of our inability to provide a proxy statement to our stockholders, we informed Mr. Fertitta that we would be unable to consummate the Proposed Acquisition. The Merger Agreement was terminated by agreement of the parties on January 11, 2009.
No party to the Merger Agreement will be obligated to make any payments to each other as a result of the termination of the Merger Agreement. Professional fees and other related expenses associated with the Proposed Acquisition totaling $4.7 million were expensed during the fourth quarter of 2008.
Interim Senior Secured Credit Facility
On December 22, 2008, we entered into an $81.0 million interim senior secured credit facility. The interim senior secured credit facility provides 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.
Hurricane Ike
On September 13, 2008, Hurricane Ike struck the Gulf Coast of the United States, causing considerable damage to the cities of Galveston, Kemah and Houston, Texas and surrounding areas. Several of our restaurants in Galveston and Kemah sustained significant damage, as did the amusement rides, the boardwalk itself and some infrastructure at the Kemah Boardwalk. The Kemah and Galveston properties had been a significant driver of our overall performance in 2008. The damage to the Kemah and Galveston properties may adversely affect both our business and near and long-term prospects. Widespread power outages led to the closure of 31 Houston area restaurants until power was restored. All Houston, Galveston and Kemah restaurants have reopened. The difference between impairments arising from Hurricane Ike damage and the associated insurance proceeds was not material.
We also maintain business interruption insurance coverage and have recorded approximately $7.3 million in recoveries 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. We believe that the majority of our property losses and cash flow will be covered by property and business interruption insurance.
Other Matters
During 2006, as part of a strategic review of our operations, we initiated a plan to divest certain restaurants, including 136 Joes 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.
On November 17, 2006, we completed the sale of 120 Joes Crab Shack restaurants for approximately $192.0 million, including the assumption of certain working capital liabilities. In connection with the sale, we recorded pre-tax impairment charges and other losses totaling $49.2 million.
We recorded additional pre-tax impairment charges totaling $10.3 million, $9.9 million and $30.6 million for the year ended December 31, 2008, 2007 and 2006, respectively, to write down carrying values of assets
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pertaining to the remaining stores included in our disposal plan. We expect to sell the land and improvements belonging to these remaining restaurants, or abandon those locations, within the next 12 months.
In connection with our strategic review, we also identified certain restaurants that we believe are suitable for conversion into other Landrys concepts. As a result of this review, we took a charge of $3.0 million during 2006 to impair certain assets relating to these conversion units to reflect our best estimates of their fair market value. The results of operations for these restaurants are included in continuing operations. During 2008, we recorded impairment charges of $3.2 million to impair the leasehold improvements and equipment of three underperforming restaurants.
The Specialty Division is primarily engaged in operating complementary entertainment and hospitality activities, such as miscellaneous beverage carts and various kiosks, amusement rides and games and some associated limited hotel properties, generally at locations in conjunction with our core restaurant operations. The total assets, revenues, and operating profits of these complementary specialty business activities are considered not material to the overall business and below the threshold of a separate reportable business segment under SFAS No. 131.
The restaurant and gaming industries are intensely competitive and affected by changes in consumer tastes and by national, regional, and local economic conditions and demographic trends. The performance of individual restaurants or casinos may be affected by factors such as: traffic patterns, demographic considerations, marketing, weather conditions, and the type, number, and location of competing operations. We have many well established competitors with greater financial resources, larger marketing and advertising budgets, and longer histories of operation than ours, including competitors already established in regions where we are planning to expand, as well as competitors planning to expand in the same regions. We face significant competition from other casinos in the markets in which we operate and from other mid-priced, full-service, casual dining restaurants offering or promoting seafood and other types and varieties of cuisine. Our competitors include national, regional, and local chains as well as local owner-operated restaurants. We also compete with other restaurants and retail establishments for restaurant sites.
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:
| 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 proposed 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; |
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| 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; |
| 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; |
| whether the final property and business interruption losses resulting from Hurricane Ike will be in accordance with our current estimates; |
| 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. |
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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Results of Operations
Profitability
The following table sets forth the percentage relationship to total revenues of certain operating data for the periods indicated:
Year Ended December 31, | |||||||||
2008 | 2007 | 2006 | |||||||
Restaurant and hospitality: |
|||||||||
Revenues |
100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of revenues |
25.9 | % | 27.0 | % | 27.2 | % | |||
Labor |
29.0 | % | 29.8 | % | 29.4 | % | |||
Other operating expenses (1) |
24.8 | % | 23.9 | % | 24.1 | % | |||
Unit Level Profit |
20.3 | % | 19.3 | % | 19.3 | % | |||
Gaming: |
|||||||||
Revenues |
100.0 | % | 100.0 | % | 100.0 | % | |||
Casino costs |
30.9 | % | 30.7 | % | 34.6 | % | |||
Rooms costs |
9.6 | % | 8.9 | % | 8.0 | % | |||
Food and beverage costs |
11.5 | % | 11.2 | % | 10.7 | % | |||
Other operating expenses (1) |
23.2 | % | 25.2 | % | 25.6 | % | |||
Unit Level Profit (1) |
24.8 | % | 24.0 | % | 21.1 | % | |||
(1) | Excludes depreciation, amortization, general and administrative and pre-opening expenses. |
Year ended December 31, 2008 Compared to the Year ended December 31, 2007
Restaurant and Hospitality
Restaurant and hospitality revenues decreased $3,828,847, or 0.4%, from $894,434,266 to $890,605,419 for the year ended December 31, 2008 compared to the year ended December 31, 2007. The change in revenue is the result of the following approximate amounts: new restaurant openingsincrease $34.5 million; same store sales (restaurants open all of 2008 and 2007)decrease $18.5 million; hurricane closuresdecrease $13.1 million; closed or sold restaurantsdecrease $5.5 million; leap yeardecrease $2.8 million and the remainder of the difference is attributable to the change in sales for stores not open a full comparable period or other sales. The total number of units open as of December 31, 2008 and 2007 was 175 and 173, respectively.
Cost of revenues decreased $11,294,925, or 4.7%, from $241,814,108 to $230,519,183 for the year ended December 31, 2008 as compared to the prior year period. Cost of revenues as a percentage of revenues for year ended December 31, 2008 decreased to 25.9% from 27.0% in 2007. This decrease is primarily the result of a shift in mix to higher margin hotel and amusement revenues with minimal cost of revenues, the impact of business interruption proceeds and cost control measures implemented in 2008.
Labor expense decreased $8,257,738, or 3.1%, from $266,703,093 to $258,445,355 for the year ended December 31, 2008 as compared to year ended December 31, 2007. Labor expenses as a percentage of revenues for 2008 decreased to 29.0% from 29.8% in 2007. The decrease in labor resulted in part from cost control measures implemented in 2008 and the impact of business interruption proceeds partially offset by increases in the minimum wage.
Other operating expenses increased $7,157,055, or 3.4%, from $213,284,031 to $220,441,086 for the year ended December 31, 2008, as compared to the prior year period and such expenses increased as a percentage of revenues to 24.8% in 2008 from 23.9% in 2007. These increases primarily relate to increased energy costs, advertising expense and rent as compared to the comparable prior year period.
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Gaming
Casino revenues decreased $12,318,244, or 7.5%, from $165,283,475 to $152,965,231 for the year ended December 31, 2008 as compared to the year ended December 31, 2007. This decrease is primarily the result of reduced slot activity in both Las Vegas and Laughlin.
Room revenues decreased $2,711,440, or 4.1%, from $65,941,711 to $63,230,271 for the year ended December 31, 2008 as compared to the prior year period. This decrease is the result of reduced occupancy and average daily room rates as compared to the prior year period.
Casino expenses and other expenses decreased $3,368,007, or 4.1%, and $8,079,086, or 12.1%, respectively, for the year ended December 31, 2008. These decreases are primarily the result of reduced payroll costs for both Las Vegas and Laughlin. Other expenses were further reduced by reduced marketing costs as compared to the prior year period.
Consolidated
General and administrative expenses decreased $4,461,559 or 8.0%, from $55,755,985 to $51,294,426 for the year ended December 31, 2008 and decreased as a percentage of revenues to 4.5% in 2008 from 4.8% in 2007. This decrease relates primarily to reduced corporate payroll costs, as well as lower legal and other professional fees as compared to the prior year.
Depreciation and amortization expense increased by $5,004,782, or 7.7%, from $65,286,700 to $70,291,482 for the year ended December 31, 2008 as compared to the prior year period. The increase for 2008 was due to the renovation of the Golden Nugget and the addition of new restaurants and equipment.
Asset impairment expense was $2,408,625 for the year ended December 31, 2008 compared with no impairment expense for the same period in 2007. We continually monitor unfavorable cash flows, if any, related to underperforming restaurants. Periodically we may conclude that certain properties have become impaired based on the existing and anticipated future economic outlook for such properties in their respective market areas. During the year ended December 31, 2008, we impaired the leasehold improvements and equipment of three underperforming restaurants. The difference between impairments arising from Hurricane Ike damage and the associated insurance proceeds was not material.
Gains on disposals of fixed assets amounted to $18,918,088 for 2007 as a result of gains on the disposition of property in Biloxi, Mississippi, as well as a $15.1 million gain realized on the sale of a single restaurant location.
Pre-opening expenses decreased by $1,210,947, or 34.8%, from $3,476,951 to $2,266,004 for the year ended December 31, 2008. This decrease relates to the reduced number of openings undertaken in 2008 compared with the prior year.
Net interest expense for the year ended December 31, 2008 increased by $7,495,382, or 10.4%, from $72,321,952 to $79,817,334. This increase is primarily due to higher average borrowing rates and increased borrowings in 2008 primarily associated with the Golden Nugget, partially offset by a 2007 charge of $8.0 million for deferred loan costs previously being amortized over the term of the 7.5% Senior Notes. The 7.5% Senior Notes were exchanged for 9.5% Senior Notes as a result of a settlement with the note holders in the third quarter of 2007.
Other expense decreased from $17,119,676 to $17,034,705 for the year ended December 31, 2008. The 2008 amount included $14.3 million in non-cash charges related to interest rate swaps not considered hedges and prior year amount included call premiums and expenses associated with refinancing the Golden Nugget debt.
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A provision for income taxes of $7,226,574 was recorded for year ended December 31, 2008 compared with a provision of $14,237,950 for the year ended December 31, 2007. The effective tax rate for 2008 was 34.9% compared to 33.9% for the prior year period.
The after tax loss from discontinued operations increased $942,804, from $9,626,263 to $10,569,067 for the year ended December 31, 2008. The losses in both periods related primarily to impairments on assets held for sale or abandoned and lease terminations.
Year ended December 31, 2007 Compared to the Year ended December 31, 2006
Restaurant and Hospitality
Restaurant and hospitality revenues increased $23,818,824, or 2.7%, from $870,615,442 to $894,434,266 for the year ended December 31, 2007 compared to the year ended December 31, 2006. The change in revenue is comprised of the following approximate amounts: 2007 restaurant openingsincrease of $31.1 million; 2007 restaurant closingsdecrease of $3.4 million; and the remainder of the difference is attributable to the change in sales for stores not open a full comparable period. Revenues associated with locations open 2007 and 2006 including honeymoon periods was flat compared to 2006. The total number of units open as of December 31, 2007 and 2006 were 173 and 165, respectively.
Cost of revenues increased $4,672,145, or 2.0%, from $237,141,963 to $241,814,108 for the year ended December 31, 2007 as compared to the prior year period as a result of the increase in revenues. Cost of revenues as a percentage of revenues for year ended December 31, 2007 decreased to 27.0% from 27.2% in 2006. This decrease is primarily the result of a menu price increase.
Labor expense increased $10,394,613, or 4.1%, from $256,308,480 to $266,703,093 for the year ended December 31, 2007 as compared to year ended December 31, 2006. Labor expenses as a percentage of revenues for 2007 increased to 29.8% from 29.4% in 2006. The increase in labor resulted from increased revenues and increase in minimum wage rate.
Other operating expenses increased $3,875,596, or 1.9%, from $209,408,435 to $213,284,031 for the year ended December 31, 2007, as compared to the prior year period as a result of increased revenue. Other operating expenses decreased as a percentage of revenues to 23.9% in 2007 from 24.1% in 2006. Higher rent and insurance costs were more than offset by reduced advertising expenses in 2007 compared to 2006.
Gaming
Casino revenues increased $13,507,937, or 8.9%, from $151,775,538 to $165,283,475 for the year ended December 31, 2007 as compared with the prior year as a result of improved table games activity and slot hold and win.
Room revenues increased $8,205,663, or 14.2%, from $57,736,048 to $65,941,711 for the year ended December 31, 2007 as compared to the prior year period as a result of increased hotel occupancy.
Food and beverage and other revenues increased $6,226,960, or 15.8%, and 4,227,519, or 41.6%, respectively. This increase reflects the opening of new facilities that were largely under construction during 2006.
Casino expenses and other expenses increased $1,568,852, or 2.0%, and $7,733,692, or 13.1%, respectively, for the year ended December 31, 2007. Casino expenses as a percentage of revenue decreased in 2007 from 34.6% to 30.7% primarily as the result of reduced payroll costs for both Las Vegas and Laughlin.
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Consolidated
General and administrative expenses decreased $2,221,374, or 3.8%, from $57,977,359 to $55,755,985 for the year ended December 31, 2007, compared to the same period in the prior year. General and administrative expenses decreased as a percentage of revenues to 4.8% in 2007 from 5.3% in 2006 due to reductions in corporate overhead associated with the sale of 120 Joes Crab Shack restaurants in November 2006. This was partially offset by professional fees incurred in connection with our voluntary internal review of historical stock option granting practices, which was completed in the third quarter of 2007.
Depreciation and amortization expense increased $9,429,463, or 16.9%, from $55,857,237 to $65,286,700 for the year ended December 31, 2007, compared to the same period in the prior year. The increase for 2007 was primarily due to the renovation of the Golden Nugget and the addition of new restaurants and equipment.
Gain on disposal of assets of $18,918,088 during 2007 consisted primarily of gains on the disposition of property in Biloxi, Mississippi, as well as a $15.1 million gain realized on the sale of a single restaurant location. According to the terms of the sale, we will pay the buyer approximately $2.6 million over the next 27 months in return for continuing to operate the restaurant.
Restaurant pre-opening expenses were $3,476,951 for the year ended December 31, 2007, compared to $5,214,011 for the same period in the prior year. Pre-opening expenses fluctuate based on both the number and type of openings completed each period.
The increase in net interest expense for the year ended December 31, 2007 as compared to the prior year is primarily due to higher average borrowing rates and increased borrowings, as well as an $8.0 million charge for deferred loan costs previously being amortized over the term of the 7.5% Senior Notes. The 7.5% Senior Notes were exchanged for 9.5% Senior Notes as a result of a settlement with the note holders.
Other expense, net for 2007 was $17,119,676 and consisted primarily of expenses associated with exchanging the 7.5% Senior Notes for 9.5% Senior Notes, non-cash charges related to interest rate swaps not considered hedges and call premiums and expenses associated with refinancing the Golden Nugget debt.
Provision for income taxes increased by $844,555 to $14,237,950 in the year ended December 31, 2007. Our effective tax rate for 2007 was 33.9% compared to 28.0% in 2006.
Liquidity and Capital Resources
On December 22, 2008, we entered into an $81.0 million interim senior secured credit facility. The interim senior secured credit facility provides 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.
On February 13, 2009, we completed the offering of $295.5 million in aggregate principal amount of 14.0% senior secured notes due 2011 (the Notes). The gross proceeds from the offering and sale of the Notes were $260.0 million. The 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 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.
The Notes will mature on August 15, 2011. Interest on the Notes will accrue 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
10
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 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 and the Guarantors entered into a registration rights agreement, dated as of February 13, 2009 (Registration Rights Agreement) with Jefferies & Company, Inc. Under the Registration Rights Agreement, we and the Guarantors have agreed to use our best efforts to file and cause to become effective a registration statement with respect to an offer to exchange the Notes for notes registered under the Securities Act of 1933, as amended (the Securities Act), having substantially identical terms as the Notes (except that additional interest provisions and transfer restrictions pertaining to the Notes will be deleted). If we fail to cause the registration statement relating to the exchange offer to become effective within the time periods specified in the Registration Rights Agreement, we will be required to pay additional interest on the Notes until the registration statement is declared effective.
We also entered into a $215.6 million Amended and Restated Credit Agreement dated as of February 13, 2009 (the Credit Agreement) which replaced the interim senior secured credit facility. The Credit Agreement provides for a term loan of $165.6 million and a revolving credit line of $50.0 million. 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.
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). 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 planned 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 such 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.
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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.
On August 29, 2007, we agreed to commence an exchange offering on or before October 1, 2007 to exchange our $400.0 million 7.5% Senior Notes (the 7.5% Notes) for the 9.5% Notes with an interest rate of 9.5%, an option for us to redeem the 9.5% Notes at 1% above par from October 29, 2007 to February 28, 2009 and an option for the note holders to redeem the 9.5% Notes at 1% above par from February 28, 2009 to December 15, 2011, both options requiring at least 30 but not more than 60 days notice. The Exchange Offer was completed on October 31, 2007 with all but $4.3 million of the 7.5% Notes being exchanged. In connection with issuing the 9.5% Notes, we amended our existing Bank Credit Facility to provide for an accelerated maturity should the 9.5% Notes maturity date change, revised certain financial covenants to reflect the impact of the Exchange Offer and redeemed our outstanding Term Loan balance.
In June 2007, our wholly owned unrestricted subsidiary, 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 banks base rate, plus a financing spread, 2.0% and 0.75%, respectively, at December 31, 2008. 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 banks base rate, plus a financing spread, 3.25% and 2.0%, respectively, at December 31, 2008. The financing spreads and commitment fees for the revolving credit facility increase or decrease depending on the leverage ratio as defined in the credit facility. The first lien term loan requires one percent of the outstanding principal balance due annually to be paid in equal quarterly installments commencing on September 30, 2009 with the balance due on maturity. Principal of the second lien term loan is due at maturity. The Golden Nuggets 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 new $545.0 million credit facility were used to repay all of the Golden Nuggets 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, LLC. 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.
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 have designated $210.0 million of the first lien interest rate swaps and all of the second lien swaps as cash flow hedging transactions as set forth in SFAS 133. These swaps mirror the terms of the underlying debt and reset using the same index and terms. The remaining interest rate swaps associated with the $120.0 million of first lien borrowings reflecting 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 $14.3 million and $5.4 million associated with these swaps was recorded for the years ended December 31, 2008 and 2007, respectively.
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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. As of December 31, 2008, we were in compliance with all such covenants. As of December 31, 2008, our average interest rate on floating-rate debt was 8.5%, we had approximately $20.3 million in letters of credit outstanding, and our available borrowing capacity was $67.5 million.
As a primary result of the Golden Nugget refinancing and the New Notes, we have incurred higher interest expense. We expect to incur additional interest expense in the future as we continue the Golden Nugget expansion and due to higher interest costs arising from our refinancing. We are constructing a hotel tower at the Golden NuggetLas Vegas which we expect to complete by 2009 at an estimated cost of $140.0 million, funded primarily by the delayed draw term loan and operating cash flow.
Working capital, excluding discontinued operations, increased from a deficit of $166.7 million as of December 31, 2007 to a deficit of $83.9 million as of December 31, 2008 primarily due to the change in the classification of our bank credit facility to long term. Cash flow to fund future operations, new restaurant development and acquisitions will be generated from operations, available capacity under our credit facilities and additional financing, if appropriate.
From time to time, we review opportunities for restaurant acquisitions and investments in the hospitality, gaming, entertainment, amusement, food service and facilities management and other industries. Our exercise of any such investment opportunity may impact our development plans and capital expenditures. We believe that adequate sources of capital are available to fund our business activities for the next twelve months.
Since April 2000, we have paid an annual $0.10 per common share dividend, declared and paid in quarterly amounts. We increased the annual dividend to $0.20 per common share in April 2004. We paid dividends totaling $1.6 million during the year ended December 31, 2008. On June 16, 2008, we announced we were discontinuing dividend payments indefinitely.
In 2008, we incurred $123.0 million for capital expenditures including $61.2 million on the renovation and expansion of the Golden Nugget Hotel and Casino in downtown Las Vegas, Nevada, and $28.6 million on the construction of a new T-Rex restaurant at Disney. In 2009, we expect to incur approximately $115.0 million, including completion of the new tower at the Golden NuggetLas Vegas.
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Off Balance Sheet Arrangements
As of December 31, 2008, we had contractual obligations as described below. These obligations are expected to be funded primarily through cash on hand, cash flow from operations, working capital, the Credit Agreement and additional financing sources in the normal course of business operations. Our obligations include off balance sheet arrangements whereby the liabilities associated with non-cancelable operating leases, unconditional purchase obligations and standby letters of credit are not fully reflected in our balance sheets.
Contractual Obligations |
2009 | 2010-2011 | 2012-2013 | 2014+ | Total | ||||||||||
Long term debt and interest payments |
$ | 456,182,742 | $ | 114,672,271 | $ | 71,225,249 | $ | 426,719,020 | $ | 1,068,799,282 | |||||
Operating leases |
38,629,049 | 63,040,245 | 48,002,487 | 195,400,671 | 345,072,452 | ||||||||||
Unconditional purchase obligations |
160,885,741 | 4,679,190 | 599,119 | | 166,164,050 | ||||||||||
Liability for uncertain tax positions (1) |
| | | | 15,674,259 | ||||||||||
Other long term obligations |
23,831,531 | | | | 23,831,531 | ||||||||||
Total cash obligations |
$ | 679,529,063 | $ | 182,391,706 | $ | 119,826,855 | $ | 622,119,691 | $ | 1,619,541,574 | |||||
Other Commercial Commitments |
|||||||||||||||
Line of credit |
$ | | $ | 4,182,803 | $ | 8,000,000 | $ | | $ | 12,182,803 | |||||
Standby letters of credit |
20,308,999 | | | | 20,308,999 | ||||||||||
Total commercial Commitments |
20,308,999 | 4,182,803 | 8,000,000 | | 32,491,802 | ||||||||||
Total |
$ | 699,838,062 | $ | 186,574,509 | $ | 127,826,855 | $ | 622,119,691 | $ | 1,652,033,376 | |||||
(1) | These liabilities appear in total only as we are unable to reasonably predict the timing of settlement of such liabilities. |
After December 31, 2008, we completed the offering of the Notes, entered into the Credit Agreement and refinanced our Existing Notes. Considering these events, the long term debt and interest payments under the contractual obligations would be $490.2 million, $657.0 million, $91.7 million and $504.0 million for 2009, 2010-2011, 2012-2013, 2014 and thereafter, respectively.
In connection with certain of our discontinued operations, we remain the guarantor or assignor of a number of leased locations. In the event of future defaults under any of such leased locations we may be responsible for significant damages to existing landlords which may materially affect our financial condition, operating results and cash flows. We estimate that lessee rental payment obligations during the remaining terms of the assignments and subleases approximate $71.5 million as of December 31, 2008. We have recorded a liability of $5.7 million with respect to these obligations.
Seasonality and Quarterly Results
Our business is seasonal in nature. Our reduced winter volumes cause revenues and, to a greater degree, operating profits to be lower in the first and fourth quarters than in other quarters. We have and will continue to open restaurants in highly seasonal tourist markets. Periodically, our sales and profitability may be negatively affected by adverse weather. The timing of unit openings can and will affect quarterly results.
Critical Accounting Policies
Restaurant and other properties are reviewed on a property by property basis for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. The
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recoverability of properties that are to be held and used is measured by comparison of the estimated future undiscounted cash flows associated with the asset to the carrying amount of the asset. Goodwill and other non-amortizing intangible assets are reviewed for impairment at least annually. Significant estimates used in these reviews include projected operating results and cash flows, discount rates, terminal value growth rates, capital expenditures, changes in future working capital requirements, cash flow multiples, control premiums and assumed royalty rates. If such assets are considered to be impaired, an impairment charge is recorded in the amount by which the carrying amount of the assets exceeds their fair value. Properties to be disposed of are reported at the lower of their carrying amount or fair values, reduced for estimated disposal costs, and are included in other current assets.
We operate approximately 175 properties and periodically we expect to experience unanticipated individual unit deterioration in revenues and profitability, on a short-term and occasionally longer-term basis. When such events occur and we determine that the associated assets are impaired, we will record an asset impairment expense in the quarter such determination is made. Due to our average restaurant net investment cost, such amounts could be significant when and if they occur. However, such asset impairment expense does not affect our financial liquidity, and is usually excluded from many valuation model calculations.
We maintain a large deductible insurance policy related to property, general liability and workers compensation coverage. Predetermined loss limits have been arranged with insurance companies to limit our per occurrence cash outlay. Accrued expenses and other liabilities include estimated costs to settle unpaid claims and estimated incurred but not reported claims using actuarial methodologies.
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, as interpreted by FIN 48. SFAS No. 109 requires the recognition of deferred tax assets, net of applicable reserves, related to net operating loss carryforwards and certain temporary differences. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be recognized. We regularly assess the likelihood of realizing the deferred tax assets based on forecasts of future taxable income and available tax planning strategies that could be implemented and adjust the related valuation allowance if necessary.
Our income tax returns are subject to examination by the Internal Revenue Service and other tax authorities. We regularly assess the potential outcomes of these examinations in determining the adequacy of our provision for income taxes and our income tax liabilities. Inherent in our determination of any necessary reserves are assumptions based on past experiences and judgments about potential actions by taxing authorities. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We believe that we have adequately provided for any reasonable and foreseeable outcome related to uncertain tax matters.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, the recognition and measurement of current and deferred income tax assets and liabilities; the assessment of recoverability of long-lived assets and costs to settle unpaid claims. Actual results may differ materially from those estimates.
Recent Accounting Pronouncements
On January 1, 2008 we adopted FASB Statement No. 157, Fair Value Measurements (SFAS 157), which defines fair value, and FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (SFAS 159), which permits entities to choose to measure many financial instruments and certain other items at fair value. Neither of these statements had an impact on our consolidated financial statements for 2008. In February 2008, the FASB issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS No. 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in
15
the financial statements on a recurring basis, until January 1, 2009. We have not yet determined the impact that the implementation of SFAS 157, for non-financial assets and liabilities, will have on our consolidated financial statements.
In June 2007, the FASB issued Emerging Issues Task Force Issue 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF 06-11). EITF 06-11 requires that the tax benefit related to dividend equivalents paid on restricted stock, which are expected to vest, be recorded as an increase to additional paid-in capital. We originally accounted for this tax benefit as a reduction to income tax expense. EITF 06-11 is to be applied prospectively for tax benefits on dividends declared in fiscal years beginning after December 15, 2007. We adopted the provisions of EITF 06-11 on January 1, 2008. EITF 06-11 did not have a material effect on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), Implementation Issue No. E23, HedgingGeneral: Issues Involving the Application of the Shortcut Method under Paragraph 68 (Issue E23). Issue E23 amends SFAS 133 to explicitly permit use of the shortcut method for hedging relationships in which interest rate swaps have nonzero fair value at the inception of the hedging relationship, provided certain conditions are met. Issue E23 was effective for hedging relationships designated on or after January 1, 2008. The implementation of this guidance did not have an impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interest in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes the accounting and reporting standards for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests and applies prospectively to business combinations for fiscal years beginning after December 15, 2008. We adopted SFAS 160 on January 1, 2009 and retrospectively applied the guidance. Our noncontrolling interest was reclassified to equity and consolidated net income (loss) was adjusted to include net income (loss) attributable to noncontrolling interest.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R), 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 statement replaces SFAS No. 141 by requiring measurement at the acquisition date of the fair value of assets acquired, liabilities assumed and any non-controlling interest. Additionally, SFAS 141R requires that acquisition-related costs, including restructuring costs, be recognized as expense separately from the acquisition. SFAS 141R 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 after its effective date only to the extent we complete business combinations and therefore the impact cannot be determined at this time.
In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 expands quarterly disclosure requirements in SFAS 133 about an entitys derivative instruments and hedging activities. SFAS 161 is effective for fiscal years beginning after November 15, 2008. We are currently evaluating the impact that this pronouncement may have on our future footnote disclosures.
In June 2008, the FASB issued Staff Position No. EITF 03-6-1 (EITF 03-6-1). EITF 03-6-1 addresses whether instruments granted in share-based payment arrangements are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the
16
two-class method described in SFAS No. 128, Earnings per Share. The provisions of EITF 03-6-1 are effective for financial statements issued for fiscal years beginning after December 15, 2008. All prior period EPS data presented will be adjusted retrospectively to conform with the provisions of EITF 03-6-1. Early application is not permitted. We are currently evaluating the impact that EITF 03-6-1 may have on our consolidated financial statements.
Impact of Inflation
We do not believe that inflation has had a significant effect on our operations during the past several years. We believe we have historically been able to pass on increased costs through menu price increases, but there can be no assurance that we will be able to do so in the future. Future increases in commodity costs, labor costs, including expected future increases in federal and state minimum wages, energy costs, and land and construction costs could adversely affect our profitability and ability to expand.
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Landrys Restaurants, Inc.
We have audited the accompanying consolidated balance sheets of Landrys Restaurants, Inc. and subsidiaries (a Delaware holding company) as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Landrys Restaurants, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 10 to the consolidated financial statements, effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Interpretation No. 48, Accounting for Uncertainty in Income Taxes.
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 160, Non-controlling Interest in Consolidated Financial Statements, an amendment to ARB No. 51, on January 1, 2009 and retrospectively applied the guidance.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Landrys Restaurants, Inc. and subsidiaries internal control over financial reporting as of December 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 16, 2009, not separately included herein, expressed an unqualified opinion.
/s/ Grant Thornton LLP
Houston, Texas
March 16, 2009
(except for Note 1Non-controlling Interest, as to
which the date is February 11, 2010)
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LANDRYS RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
2008 | 2007 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 51,066,805 | $ | 39,601,246 | ||||
Accounts receivabletrade and other, net |
18,021,105 | 24,196,406 | ||||||
Inventories |
26,161,092 | 35,201,095 | ||||||
Deferred taxes |
28,001,267 | 21,647,642 | ||||||
Assets related to discontinued operations |
2,973,593 | 21,799,237 | ||||||
Other current assets |
9,102,029 | 12,600,758 | ||||||
Total current assets |
135,325,891 | 155,046,384 | ||||||
PROPERTY AND EQUIPMENT, net |
1,259,186,463 | 1,238,552,287 | ||||||
GOODWILL |
18,527,547 | 18,527,547 | ||||||
OTHER INTANGIBLE ASSETS, net |
38,872,873 | 39,146,222 | ||||||
OTHER ASSETS, net |
63,411,316 | 51,710,089 | ||||||
Total assets |
$ | 1,515,324,090 | $ | 1,502,982,529 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | 70,358,471 | $ | 74,557,108 | ||||
Accrued liabilities |
134,316,329 | 137,310,321 | ||||||
Income taxes payable |
2,784,703 | 843,045 | ||||||
Current portion of long-term notes and other obligations |
8,752,906 | 87,243,013 | ||||||
Liabilities related to discontinued operations |
5,149,365 | 4,976,322 | ||||||
Total current liabilities |
221,361,774 | 304,929,809 | ||||||
LONG-TERM NOTES, NET OF CURRENT PORTION |
862,375,429 | 801,427,868 | ||||||
OTHER LIABILITIES |
136,109,782 | 78,725,779 | ||||||
Total liabilities |
1,219,846,985 | 1,185,083,456 | ||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
STOCKHOLDERS EQUITY: |
||||||||
Common stock, $0.01 par value, 60,000,000 shares authorized, 16,142,263 and 16,147,745 shares issued and outstanding, respectively |
161,423 | 161,478 | ||||||
Additional paid-in capital |
222,410,106 | 218,350,471 | ||||||
Retained earnings |
116,244,708 | 114,965,728 | ||||||
Accumulated other comprehensive loss |
(44,339,132 | ) | (16,578,604 | ) | ||||
Total stockholders equity |
294,477,105 | 316,899,073 | ||||||
Noncontrolling interest |
1,000,000 | 1,000,000 | ||||||
Total equity |
295,477,105 | 317,899,073 | ||||||
Total liabilities and stockholders equity |
$ | 1,515,324,090 | $ | 1,502,982,529 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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LANDRYS RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
REVENUES |
||||||||||||
Restaurant and hospitality |
$ | 890,605,419 | $ | 894,434,266 | $ | 870,615,442 | ||||||
Gaming: |
||||||||||||
Casino |
152,965,231 | 165,283,475 | 151,775,538 | |||||||||
Rooms |
63,230,271 | 65,941,711 | 57,736,048 | |||||||||
Food and beverage |
47,734,759 | 45,761,100 | 39,534,140 | |||||||||
Other |
14,370,107 | 14,380,837 | 10,153,318 | |||||||||
Promotional allowances |
(25,016,953 | ) | (25,433,137 | ) | (27,820,979 | ) | ||||||
Net gaming revenue |
253,283,415 | 265,933,986 | 231,378,065 | |||||||||
Total revenue |
1,143,888,834 | 1,160,368,252 | 1,101,993,507 | |||||||||
OPERATING COSTS AND EXPENSES: |
||||||||||||
Restaurant and hospitality: |
||||||||||||
Cost of revenues |
230,519,183 | 241,814,108 | 237,141,963 | |||||||||
Labor |
258,445,355 | 266,703,093 | 256,308,480 | |||||||||
Other operating expenses |
220,441,086 | 213,284,031 | 209,408,435 | |||||||||
Gaming: |
||||||||||||
Casino |
78,259,949 | 81,627,956 | 80,059,104 | |||||||||
Rooms |
24,194,522 | 23,705,554 | 18,519,645 | |||||||||
Food and beverage |
29,112,315 | 29,670,847 | 24,818,009 | |||||||||
Other |
58,893,485 | 66,972,571 | 59,238,879 | |||||||||
General and administrative expense |
51,294,426 | 55,755,985 | 57,977,359 | |||||||||
Depreciation and amortization |
70,291,482 | 65,286,700 | 55,857,237 | |||||||||
Asset impairment expense |
2,408,625 | | 2,965,509 | |||||||||
Loss (gain) on disposal of assets |
(58,580 | ) | (18,918,088 | ) | (2,294,532 | ) | ||||||
Pre-opening expenses |
2,266,004 | 3,476,951 | 5,214,011 | |||||||||
Total operating costs and expenses |
1,026,067,852 | 1,029,379,708 | 1,005,214,099 | |||||||||
OPERATING INCOME |
117,820,982 | 130,988,544 | 96,779,408 | |||||||||
OTHER EXPENSE (INCOME): |
||||||||||||
Interest expense, net |
79,817,334 | 72,321,952 | 49,138,695 | |||||||||
Other, net |
17,034,705 | 17,119,676 | 153,489 | |||||||||
Total other expense |
96,852,039 | 89,441,628 | 49,292,184 | |||||||||
Income from continuing operations before income taxes |
20,968,943 | 41,546,916 | 47,487,224 | |||||||||
Provision (benefit) for income taxes |
7,226,574 | 14,237,950 | 13,393,395 | |||||||||
Income from continuing operations |
13,742,369 | 27,308,966 | 34,093,829 | |||||||||
Income (loss) from discontinued operations, net of taxes |
(10,569,067 | ) | (9,626,263 | ) | (56,145,812 | ) | ||||||
Net income (loss) |
3,173,302 | 17,682,703 | (22,051,983 | ) | ||||||||
Less: Net income (loss) attributable to noncontrolling interest |
265,115 | (429,091 | ) | (282,260 | ) | |||||||
Net income (loss) attributable to Landrys |
$ | 2,908,187 | $ | 18,111,794 | $ | (21,769,723 | ) | |||||
EARNINGS (LOSS) PER SHARE INFORMATION: |
||||||||||||
Amounts attributable to Landrys common stockholders: |
||||||||||||
BASIC: |
||||||||||||
Income from continuing operations |
$ | 0.88 | $ | 1.47 | $ | 1.61 | ||||||
Income (loss) from discontinued operations |
(0.69 | ) | (0.51 | ) | (2.63 | ) | ||||||
Net income (loss) |
$ | 0.19 | $ | 0.96 | $ | (1.02 | ) | |||||
Weighted average number of common shares outstanding |
15,260,000 | 18,850,000 | 21,300,000 | |||||||||
DILUTED: |
||||||||||||
Income from continuing operations |
$ | 0.87 | $ | 1.43 | $ | 1.56 | ||||||
Income (loss) from discontinued operations |
(0.68 | ) | (0.50 | ) | (2.55 | ) | ||||||
Net income (loss) |
$ | 0.19 | $ | 0.93 | $ | (0.99 | ) | |||||
Weighted average number of common share and common share equivalents outstanding |
15,480,000 | 19,400,000 | 22,000,000 |
The accompanying notes are an integral part of these consolidated financial statements.
20
LANDRYS RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Equity | ||||||||||||||||||||||||||||||
Stockholders Equity | ||||||||||||||||||||||||||||||
Common Stock | Additional Paid-In Capital |
Retained Earnings |
Accumulated Other Comprehensive Loss |
Noncontrolling Interest |
Total | Comprehensive Income (loss) |
||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||
BALANCE, December 31, 2005 |
21,593,823 | $ | 215,938 | $ | 327,260,457 | $ | 189,294,066 | $ | | $ | 1,000,000 | $ | 517,770,461 | $ | | |||||||||||||||
Net income (loss) |
| | | (21,769,723 | ) | | | (21,769,723 | ) | (21,769,723 | ) | |||||||||||||||||||
Dividends paid |
| | | (4,358,498 | ) | | | (4,358,498 | ) | | ||||||||||||||||||||
Purchase of common stock held for treasury |
(210,733 | ) | (2,107 | ) | (6,017,531 | ) | | | | (6,019,638 | ) | | ||||||||||||||||||
Exercise of stock options |
264,785 | 2,648 | 2,737,117 | | | | 2,739,765 | | ||||||||||||||||||||||
Tax benefit on stock options exercises |
| | 64,808 | | | | 64,808 | | ||||||||||||||||||||||
Stock based compensation expense and income tax benefit |
| | 7,280,288 | | | | 7,280,288 | | ||||||||||||||||||||||
Issuance of restricted stock |
484,920 | 4,849 | (4,849 | ) | | | | | | |||||||||||||||||||||
BALANCE, December 31, 2006 |
22,132,795 | 221,328 | 331,320,290 | 163,165,845 | | 1,000,000 | 495,707,463 | (21,769,723 | ) | |||||||||||||||||||||
Cumulative effect of adopting FIN 48 |
| | | (982,880 | ) | | | (982,880 | ) | | ||||||||||||||||||||
Net income (loss) |
| | | 18,111,794 | | | 18,111,794 | 18,111,794 | ||||||||||||||||||||||
Loss on interest rate swaps, net of tax benefit of $8,886,940 |
| | | | (16,578,604 | ) | | (16,578,604 | ) | (16,578,604 | ) | |||||||||||||||||||
Dividends paid |
| | | (3,995,295 | ) | | | (3,995,295 | ) | | ||||||||||||||||||||
Purchase of common stock held for treasury |
(6,317,400 | ) | (63,174 | ) | (120,487,247 | ) | (61,333,736 | ) | | | (181,884,157 | ) | | |||||||||||||||||
Exercise of stock options |
228,955 | 2,290 | 2,721,122 | | | | 2,723,412 | | ||||||||||||||||||||||
Stock based compensation expense |
| | 4,797,340 | | | | 4,797,340 | | ||||||||||||||||||||||
Issuance of restricted stock |
107,335 | 1,073 | (1,073 | ) | | | | | | |||||||||||||||||||||
Forfeiture of restricted stock |
(3,940 | ) | (39 | ) | 39 | | | | | | ||||||||||||||||||||
BALANCE, December 31, 2007 |
16,147,745 | 161,478 | 218,350,471 | 114,965,728 | (16,578,604 | ) | 1,000,000 | 317,899,073 | 1,533,190 | |||||||||||||||||||||
Net income (loss) |
| | | 2,908,187 | | | 2,908,187 | 2,908,187 | ||||||||||||||||||||||
Loss on interest rate swaps, net of tax benefit of $14,947,977 |
| | | | (27,760,528 | ) | | (27,760,528 | ) | (27,760,528 | ) | |||||||||||||||||||
Dividends paid |
| | | (1,614,370 | ) | | | (1,614,370 | ) | | ||||||||||||||||||||
Purchase of common stock held for treasury |
(3,306 | ) | (33 | ) | (28,179 | ) | (14,837 | ) | | | (43,049 | ) | | |||||||||||||||||
Exercise of stock options |
3,306 | 33 | 21,328 | | | | 21,361 | | ||||||||||||||||||||||
Stock based compensation expense |
| | 4,066,431 | | | | 4,066,431 | | ||||||||||||||||||||||
Forfeiture of restricted stock |
(5,482 | ) | (55 | ) | 55 | | | | | | ||||||||||||||||||||
BALANCE, December 31, 2008 |
16,142,263 | $ | 161,423 | $ | 222,410,106 | $ | 116,244,708 | $ | (44,339,132 | ) | $ | 1,000,000 | $ | 295,477,105 | $ | (24,852,341 | ) | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
21
LANDRYS RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income (loss) |
$ | 3,173,302 | $ | 17,682,703 | $ | (22,051,983 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
70,866,386 | 66,614,904 | 73,263,258 | |||||||||
Asset impairment expense |
12,753,432 | 9,887,752 | 80,077,544 | |||||||||
Deferred tax provision (benefit) |
(3,894,048 | ) | 4,052,865 | (29,322,911 | ) | |||||||
Stock-based compensation expense |
4,066,431 | 4,797,340 | 7,609,674 | |||||||||
Amortization of debt issuance costs |
5,501,857 | 11,535,268 | 2,228,093 | |||||||||
Gain on sale of marketable securities |
| (1,278,204 | ) | | ||||||||
Gain on disposition of assets |
(316,537 | ) | (18,918,416 | ) | (431,713 | ) | ||||||
Non-cash loss on interest rate swaps |
14,293,790 | 5,374,868 | | |||||||||
Deferred rent and other charges (income), net |
2,432,438 | 521,699 | (2,505,917 | ) | ||||||||
Changes in assets and liabilities, net of acquisitions: |
||||||||||||
(Increase) decrease in trade and other receivables |
6,339,551 | 2,234,777 | (5,014,349 | ) | ||||||||
(Increase) decrease in inventories |
9,343,617 | 4,941,143 | 11,078,135 | |||||||||
(Increase) decrease in other assets |
6,956,211 | (4,382,369 | ) | (333,641 | ) | |||||||
Increase (decrease) in accounts payable and accrued liabilities |
(8,861,624 | ) | 990,012 | 11,036,272 | ||||||||
Total adjustments |
119,481,504 | 86,371,639 | 147,684,445 | |||||||||
Net cash provided by operating activities |
122,654,806 | 104,054,342 | 125,632,462 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Property and equipment additions and other |
(122,997,511 | ) | (125,098,484 | ) | (205,556,304 | ) | ||||||
Proceeds from disposition of property and equipment |
36,136,768 | 47,408,833 | 189,911,436 | |||||||||
Purchase of marketable securities |
| (5,331,308 | ) | | ||||||||
Proceeds from the sale of securities |
| 6,609,512 | | |||||||||
Business acquisitions, net of cash acquired |
| | (7,860,857 | ) | ||||||||
Net cash used in investing activities |
(86,860,743 | ) | (76,411,447 | ) | (23,505,725 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Purchases of common stock for treasury |
(43,049 | ) | (181,884,157 | ) | (2,812,893 | ) | ||||||
Proceeds from exercise of stock options |
21,361 | 2,723,412 | 2,739,765 | |||||||||
Proceeds from debt issuance |
39,515,152 | 375,000,000 | | |||||||||
Payments of debt and related expenses, net |
(256,014 | ) | (193,217,934 | ) | (111,214,325 | ) | ||||||
Debt issuance costs |
(5,134,387 | ) | (15,362,308 | ) | | |||||||
Proceeds from credit facility |
343,182,803 | 258,815,778 | 432,649,258 | |||||||||
Payments on credit facility |
(400,000,000 | ) | (261,390,087 | ) | (427,076,664 | ) | ||||||
Dividends paid |
(1,614,370 | ) | (3,995,295 | ) | (4,358,498 | ) | ||||||
Net cash (used in) provided by financing activities |
(24,328,504 | ) | (19,310,591 | ) | (110,073,357 | ) | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
11,465,559 | 8,332,304 | (7,946,620 | ) | ||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
39,601,246 | 31,268,942 | 39,215,562 | |||||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR |
$ | 51,066,805 | $ | 39,601,246 | $ | 31,268,942 | ||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||||||
Cash paid (received) during the year for: |
||||||||||||
Interest |
$ | 79,168,034 | $ | 68,943,347 | $ | 61,866,319 | ||||||
Income taxes |
$ | (1,984,133 | ) | $ | 10,241,380 | $ | 11,381,720 |
The accompanying notes are an integral part of these consolidated financial statements.
22
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
We are a national, diversified, restaurant, hospitality and entertainment company principally engaged in the ownership and operation of full service, casual dining restaurants, primarily under the names Landrys Seafood House, Charleys Crab, The Chart House and Saltgrass Steak House. In addition, we own and operate domestic and license international rainforest themed restaurants under the trade name Rainforest Cafe.
On September 27, 2005, Landrys Gaming Inc., an unrestricted subsidiary of Landrys Restaurants, Inc., completed the acquisition of Golden Nugget, Inc. (GN, formerly Poster Financial Group, Inc.), owner of the Golden Nugget Hotels and Casinos in downtown Las Vegas and Laughlin, Nevada.
Discontinued Operations
During 2006 as part of a strategic review of our operations, we initiated a plan to divest certain restaurants, including 136 Joes Crab Shack units. Subsequently, several additional locations were added to our disposal plan. The results of operations, assets and liabilities for all units included in the disposal plan have been reclassified to discontinued operations in the statements of income, balance sheets and segment information for all periods presented.
Principles of Consolidation
The accompanying financial statements include the consolidated accounts of Landrys 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.
Revenue Recognition
Restaurant and hospitality revenues are recognized when the goods and services are delivered. Casino revenue is the aggregate net difference between gaming wins and losses, with liabilities recognized for funds deposited by customers before gaming play occurs (casino front money) and for chips in the customers possession (outstanding chip liability). Revenues are recognized net of certain sales incentives as well as accruals for the cost of points earned in point-loyalty programs. The retail value of accommodations, food and beverage, and other services furnished to hotel-casino guests without charge is deducted from revenue as promotional allowances. Proceeds from the sale of gift cards are deferred and recognized as revenue when redeemed by the holder.
Sales Taxes
In June 2006, the FASB ratified the consensus reached on EITF Issue No. 06-03, How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (that is, Gross Versus Net Presentation) (EITF 06-3). The scope of EITF 06-03 covers any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer. EITF 06-03 provides that a company may adopt a policy of presenting taxes either gross within revenue or on a net basis. We adopted EITF 06-03 on January 1, 2007 with no impact on our financial position or results of operations. Except for gross receipts tax on liquor sales in certain jurisdictions, our policy is to present these taxes net. The tax amounts included in revenues and expenses are not significant.
23
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Accounts Receivable
Accounts receivable is comprised primarily of amounts due from our credit card processor, receivables from national storage and distribution companies and, casino and hotel receivables. The receivables from national storage and distribution companies arise when certain of our inventory items are conveyed to these companies at cost (including freight and holding charges but without any general overhead costs). These conveyance transactions do not impact the consolidated statements of income as there is no revenue or expenses recognized in the financial statements since they are without economic substance other than drayage. We reacquire these items, although not obligated to, when subsequently delivered to the restaurants at cost plus the distribution companys contractual mark-up. Accounts receivable are reduced to reflect estimated realizable values by an allowance for doubtful accounts based on historical collection experience and specific review of individual accounts. Receivables are written off when they are deemed to be uncollectible. The allowance for doubtful accounts totaled $1.8 million and $1.5 million as of December 31, 2008 and 2007, respectively.
Inventories
Inventories consist primarily of food and beverages used in restaurant operations and complementary retail goods and are recorded at the lower of cost or market value as determined by the average cost for food and beverages and by the retail method on the first-in, first-out basis for retail goods. Inventories consist of the following:
December 31, | ||||||
2008 | 2007 | |||||
Food, beverage and supplies |
$ | 12,167,787 | $ | 18,786,015 | ||
Retail goods |
13,993,305 | 16,415,080 | ||||
$ | 26,161,092 | $ | 35,201,095 | |||
Property and Equipment
Property and equipment are recorded at cost. Expenditures for major renewals and betterments are capitalized while maintenance and repairs are expensed as incurred.
We compute depreciation using the straight-line method. The estimated lives used in computing depreciation are generally as follows: buildings and improvements5 to 40 years; furniture, fixtures and equipment5 to 15 years; and leasehold improvementsshorter of 40 years or lease term, including extensions where such are reasonably assured of renewal.
Leasehold improvements are depreciated over the shorter of the estimated life of the asset or the lease term plus option periods where failure to renew results in economic penalty. Any contributions made by landlords or tenant allowances with economic value are recorded as a long-term liability and amortized as a reduction to rent expense over the life of the lease plus option periods where failure to renew results in economic penalty.
Interest is capitalized in connection with construction and development activities, and other real estate development projects. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the assets estimated useful life. During 2008, 2007 and 2006, we capitalized interest expense of approximately $3.1 million, $3.6 million and $3.9 million, respectively.
We account for long-lived assets in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-lived Assets. Our properties are reviewed for impairment on a property by property basis whenever
24
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 is included in assets related to discontinued operations.
Software
Software, including capitalized implementation costs, is stated at cost, less accumulated amortization and is included in other assets in our Consolidated Balance Sheets. Amortization expense is provided on the straight-line basis over estimated useful lives, which do not exceed 10 years.
Pre-Opening Costs
Pre-opening costs are expensed as incurred and include the direct and incremental costs incurred in connection with the commencement of each restaurants operations, which are substantially comprised of rent expense and training-related costs.
Development Costs
Certain direct costs are capitalized in conjunction with site selection for planned future restaurants, acquiring restaurant properties and other real estate development projects. Direct and certain related indirect costs of the construction department, including interest, are capitalized in conjunction with construction and development projects. These costs are included in property and equipment in the accompanying consolidated balance sheets and are amortized over the life of the related building and leasehold interest. Costs related to abandoned site selections, projects, and general site selection costs which cannot be identified with specific restaurants are expensed.
Advertising
Advertising costs are expensed as incurred during such year. Advertising expenses were $11.9 million, $11.9 million and $15.4 million, in 2008, 2007 and 2006, respectively.
Goodwill and Other Intangible Assets
Goodwill and trademarks are not amortized, but instead tested for impairment at least annually. Other intangible assets are amortized over their expected useful life or the life of the related agreement.
The goodwill impairment test involves a two-step process. The first step is a comparison of each reporting units fair value to its carrying value. We estimate fair value using both market information and discounted cash flow projections also referred to as the income approach. The income approach uses a reporting units projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions. The projection uses managements best estimates of economic and market conditions over the projected period including growth rates in sales, costs and number of units, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements. We validate our estimates of fair value under the income approach by comparing the values
25
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
to fair value estimates using a market approach. A market approach estimates fair value by applying cash flow multiples to the reporting units operating performance. The multiples are derived from comparable publicly traded companies. If the carrying value of the reporting unit is higher than its fair value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss.
At December 31, 2008 two reporting units had goodwill; Saltgrass Steakhouse and Landrys divisions. As part of our process for performing the step one impairment test of goodwill, we estimated the fair value of all of our reporting units utilizing the income approach described above to derive an enterprise value of the Company. We reconciled the enterprise value to our overall estimated market capitalization. The estimated market capitalization considers recent trends in our market capitalization and an expected control premium. Based on the results of the step one impairment test, no impairment charges for goodwill were required.
The fair value of other indefinite-lived intangible assets, primarily trademarks, are estimated and compared to their carrying value. We estimate the fair value of these intangible assets using the relief-from-royalty method, which requires assumptions related to projected revenues from our annual long-range plan; assumed royalty rates that could be payable if we did not own the trademarks; and a discount rate. We recognize an impairment loss when the estimated fair value of the indefinite-lived intangible asset is less than its carrying value. We completed our impairment test of our indefinite-lived intangibles and concluded there was no impairment at December 31, 2008.
Even though we determined that there was no goodwill or indefinite-lived intangible asset impairment as of December 31, 2008, continued declines in the value of our stock price as well as values of others in the restaurant industry, declines in sales at our restaurants beyond our current forecasts, changes in circumstances, existing at the measurement date or at other times in the future, or in the numerous estimates associated with managements judgments, assumptions and estimates made in assessing the fair value of our goodwill and significant adverse changes in the operating environment for the restaurant industry may result in a future impairment charge.
December 31, | ||||||
2008 | 2007 | |||||
Intangible assets subject to amortization: |
||||||
Customer lists |
$ | 3,400,000 | $ | 3,400,000 | ||
Other |
675,000 | 675,000 | ||||
4,075,000 | 4,075,000 | |||||
Accumulated amortization: |
||||||
Customer lists |
1,108,778 | 768,778 | ||||
Other |
661,805 | 616,805 | ||||
1,770,583 | 1,385,583 | |||||
Net intangible assets subject to amortization |
2,304,417 | 2,689,417 | ||||
Indefinite lived intangible assets: |
||||||
Goodwill |
18,527,547 | 18,527,547 | ||||
Trademarks |
36,568,456 | 36,456,805 | ||||
55,096,003 | 54,984,352 | |||||
Total |
$ | 57,400,420 | $ | 57,673,769 | ||
Amortization expense relating to intangibles was $0.4 million for each of the years ended December 31, 2008, 2007 and 2006.
26
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Deferred Rent
Rent expense under operating leases is calculated using the straight-line method whereby an equal amount of rent expense is attributed to each period during the term of the lease, regardless of when actual payments are made. Rent expense generally begins on the date we obtained possession under the lease and includes option periods where failure to renew results in economic penalty. Generally, this results in rent expense in excess of cash payments during the early years of a lease and rent expense less than cash payments in the later years.
The difference between rent expense recognized and actual rental payments is recorded as deferred rent and included in other long term liabilities.
Insurance
We maintain large deductible insurance policies related to property, general liability and workers compensation coverage. Predetermined loss limits have been arranged with insurance companies to limit our per occurrence cash outlay. Accrued liabilities include the estimated costs to settle unpaid claims and estimated incurred but not reported claims using actuarial methodologies.
Financial Instruments
Effective January 1, 2008, we adopted the provisions of SFAS No. 157, Fair Value Measurements, which among other things, requires enhanced disclosures about financial assets and liabilities carried at fair value. SFAS No. 157 establishes a hierarchy for fair value measurements, such that Level 1 measurements include unadjusted quoted market prices for identical assets or liabilities in an active market, Level 2 measurements include quoted market prices for identical assets or liabilities in an active market which have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets, and Level 3 measurements include those that are unobservable and of a highly subjective measure.
Our financial assets and liabilities that are accounted for at fair value on a recurring basis as of December 31, 2008 consist of interest rate swaps (Note 7), for which the lowest level of input significant to their fair value measurement is Level 2. As of December 31, 2008 the fair value of the interest rate swap liabilities totaled $87.9 million.
27
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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:
December 31, | ||||||||||||
2008 | 2007 | |||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||
9.5% Senior Notes due December 2014 |
$ | 395,662,000 | $ | 367,965,660 | $ | 395,662,000 | $ | 391,499,301 | ||||
7.5% Senior Notes due December 2014 |
4,338,000 | 3,261,482 | 4,338,000 | 3,928,059 | ||||||||
Libor + 2.0% First Lien Term Loan due June 2014 |
249,515,152 | 72,359,394 | 210,000,000 | 198,450,000 | ||||||||
Libor + 3.25% Second Lien Term Loan due December 2014 |
165,000,000 | 17,325,000 | 165,000,000 | 150,150,000 | ||||||||
Libor + 6.0% Term Loan due March 2011 |
30,015,514 | 30,015,514 | | | ||||||||
Libor + 2.0% Revolving credit facility due June 2013 |
8,000,000 | 2,320,000 | 12,000,000 | 11,340,000 | ||||||||
Libor + 2.0% Revolving credit facility due March 2011 |
4,182,803 | 4,182,803 | | | ||||||||
7.0% Seller note due November 2010 |
4,000,000 | 2,899,151 | 4,000,000 | 3,725,719 | ||||||||
9.39% non-recourse note payable due May 2010 |
10,411,034 | 10,403,241 | 10,626,942 | 10,585,249 | ||||||||
$ | 871,124,503 | $ | 510,732,245 | $ | 801,626,942 | $ | 769,678,328 | |||||
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted, requires that each derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or a liability and measured at its fair value. The statement also requires that changes in the derivatives fair value be recognized currently in earnings in either income (loss) from continuing operations or accumulated other comprehensive income (loss), depending on whether the derivative qualifies for fair value or cash flow accounting treatment. We utilize interest rate swap agreements to manage our exposure to interest rate risk. Prior to 2007, all of our interest rate swap agreements qualified as fair value hedges and were recorded at fair value. As such, the gains or losses on those swaps were offset by corresponding gains or losses on the related debt. During 2007, we entered into additional interest rate swap agreements, some of which qualify as cash flow hedges. As such, any changes in the fair value of these hedges are recognized in other comprehensive income (loss). The remaining swaps have not been designated as hedges. See Note 7 for a detailed discussion of our hedging activities.
Cash Equivalents
We consider investments with a maturity of three months or less when purchased to be cash equivalents. We maintain balances at financial institutions which may exceed Federal Deposit Insurance Corporation limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant risks on our cash or other investments in bank accounts.
Income Taxes
We follow the liability method of accounting for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under this method, deferred income taxes are recorded based upon differences
28
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the underlying assets are realized or liabilities are settled. A valuation allowance reduces deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized.
Effective January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement 109 (FIN 48). This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a companys financial statements. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order to be recognized in the financial statements. Accordingly, we report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. See Note 10 for additional information.
Share-based Compensation
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment (SFAS 123-R), using the modified prospective application method. Under this transition method, we record compensation expense for all stock option awards granted after the date of adoption and for the unvested portion of previously granted stock option awards that remained outstanding at the date of adoption. See Note 9 for additional information.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Non-controlling Interest
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interest in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes the accounting and reporting standards for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests and applies prospectively to business combinations for fiscal years beginning after December 15, 2008. These consolidated financial statements reflect the retroactive adoption of SFAS 160. We adopted SFAS 160 on January 1, 2009 and retrospectively applied the guidance. Our noncontrolling interest was reclassified to equity and consolidated net income (loss) was adjusted to include net income (loss) attributable to noncontrolling interest.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements
On January 1, 2008 we adopted FASB Statement No. 157, Fair Value Measurements (SFAS 157), which defines fair value, and FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (SFAS 159), which permits entities to choose to
29
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
measure many financial instruments and certain other items at fair value. Neither of these statements had an impact on our consolidated financial statements for 2008. In February 2008, the FASB issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS No. 157 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. We have not yet determined the impact that the implementation of SFAS 157, for non-financial assets and liabilities, will have on our consolidated financial statements.
In June 2007, the FASB issued Emerging Issues Task Force Issue 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF 06-11). EITF 06-11 requires that the tax benefit related to dividend equivalents paid on restricted stock, which are expected to vest, be recorded as an increase to additional paid-in capital. We originally accounted for this tax benefit as a reduction to income tax expense. EITF 06-11 is to be applied prospectively for tax benefits on dividends declared in fiscal years beginning after December 15, 2007. We adopted the provisions of EITF 06-11 on January 1, 2008. EITF 06-11 did not have a material effect on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), Implementation Issue No. E23, HedgingGeneral: Issues Involving the Application of the Shortcut Method under Paragraph 68 (Issue E23). Issue E23 amends SFAS 133 to explicitly permit use of the shortcut method for hedging relationships in which interest rate swaps have nonzero fair value at the inception of the hedging relationship, provided certain conditions are met. Issue E23 was effective for hedging relationships designated on or after January 1, 2008. The implementation of this guidance did not have an impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R), 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 statement replaces SFAS No. 141 by requiring measurement at the acquisition date of the fair value of assets acquired, liabilities assumed and any non-controlling interest. Additionally, SFAS 141R requires that acquisition-related costs, including restructuring costs, be recognized as expense separately from the acquisition. SFAS 141R 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 after its effective date only to the extent we complete business combinations and therefore the impact cannot be determined at this time.
In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 expands quarterly disclosure requirements in SFAS 133 about an entitys derivative instruments and hedging activities. SFAS 161 is effective for fiscal years beginning after November 15, 2008. We are currently evaluating the impact that this pronouncement may have on our future footnote disclosures.
In June 2008, the FASB issued Staff Position No. EITF 03-6-1 (EITF 03-6-1). EITF 03-6-1 addresses whether instruments granted in share-based payment arrangements are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two-class method described in SFAS No. 128, Earnings per Share. The provisions of EITF 03-6-1 are effective for financial statements issued for fiscal years beginning after December 15, 2008. All prior period EPS data presented will be adjusted retrospectively to conform with the provisions of EITF 03-6-1. Early application is not permitted. We are currently evaluating the impact that EITF 03-6-1 may have on our consolidated financial statements.
30
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
2. HURRICANE IKE
On September 13, 2008, Hurricane Ike struck the Gulf Coast of the United States, causing considerable damage to the cities of Galveston, Kemah and Houston, Texas and surrounding areas. Several of our restaurants in Galveston and Kemah sustained significant damage, as did the amusement rides, the boardwalk itself and some infrastructure at the Kemah Boardwalk. The Kemah and Galveston properties had been a significant driver of our overall performance in 2008. The damage to the Kemah and Galveston properties may adversely affect both our business and near and long-term prospects. Widespread power outages led to the closure of 31 Houston area restaurants until power was restored. All Houston, Galveston and Kemah restaurants have reopened. The difference between impairments arising from Hurricane Ike damage and the associated insurance proceeds was not material.
We also maintain business interruption insurance coverage and have recorded approximately $7.3 million in recoveries 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. We believe that the majority of our property losses and cash flow will be covered by property and business interruption insurance.
3. DISCONTINUED OPERATIONS
During the third quarter of 2006, as part of a strategic review of our operations, we initiated a plan to divest certain restaurants including 136 Joes Crab Shack units. Subsequently, several additional locations were added to our disposal plan. The results of operations for all stores included in our disposal plan have been reclassified as discontinued operations in our statements of income, balance sheets and segment information for all periods presented.
On November 17, 2006, we completed the sale of 120 Joes 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.
We recorded additional pre-tax impairment charges totaling $10.3 million, $9.9 million and $30.6 million for the years ended December 31, 2008, 2007 and 2006, respectively, to write down carrying values of assets pertaining to the remaining stores included in our disposal plan. We expect to sell the land and improvements belonging to these remaining restaurants, or abandon those locations, within the next 12 months.
In connection with the disposal plan, we recorded pre-tax charges of $4.2 million and $1.7 million for the years ended December 31, 2008 and 2006, respectively, for lease termination and other store closure costs. These charges are included in discontinued operations.
The results of discontinued operations for the years ended December 31, 2008, 2007 and 2006 were as follows:
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Revenues |
$ | 10,870,296 | $ | 22,796,338 | $ | 332,337,147 | ||||||
Income (loss) from discontinued operations before income taxes |
(16,419,382 | ) | (14,809,635 | ) | (92,042,315 | ) | ||||||
Income tax (benefit) on discontinued operations |
(5,850,315 | ) | (5,183,372 | ) | (35,896,503 | ) | ||||||
Net income (loss) from discontinued operations |
$ | (10,569,067 | ) | $ | (9,626,263 | ) | $ | (56,145,812 | ) | |||
31
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Interest expense is allocated to discontinued operations based on the ratio of net assets to be discontinued to consolidated net assets. For the years ended December 31, 2007 and 2006, respectively, interest expense related to discontinued operations was $0.1 million and $12.5 million. For the year ended December 31, 2008, no interest expense was allocated to discontinued operations.
The assets and liabilities of the discontinued operations are presented separately in the Consolidated Balance Sheets and consist of the following:
Year Ended December 31, | ||||||
2008 | 2007 | |||||
Assets: | ||||||
Current assets |
$ | 4,638 | $ | 7,567,244 | ||
Property, plant and equipment, net |
2,963,303 | 14,222,641 | ||||
Other assets |
5,652 | 9,352 | ||||
Assets related to discontinued operations |
$ | 2,973,593 | $ | 21,799,237 | ||
Liabilities: | ||||||
Accounts payable and accrued expenses |
$ | 4,868,199 | $ | 4,264,544 | ||
Other liabilities |
281,166 | 711,778 | ||||
Liabilities related to discontinued operations |
$ | 5,149,365 | $ | 4,976,322 | ||
4. ACQUISITIONS
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 SCIs 20% interest for up to $35.0 million or that SCI can put its interest to us 25 months following the completion of the third restaurant. The purchase price will be calculated as the lesser of $35.0 million or a multiple of unit level profit, to be reduced by any amounts that may be owed to us by SCI in connection with the construction of the restaurants or other matters.
T-Rex, through a wholly-owned subsidiary, on February 24, 2006, signed two lease agreements with Walt Disney World Hospitality and Recreation Corporation, one for T-Rex at Downtown Disney World, which opened in October 2008, and the other for Yak and Yeti, an Asian themed eatery at Disneys Animal Kingdom Theme Park that opened in November 2007.
5. PROPERTY AND EQUIPMENT AND OTHER CURRENT ASSETS
Property and equipment is comprised of the following:
December 31, | ||||||||
2008 | 2007 | |||||||
Land |
$ | 262,616,115 | $ | 263,786,052 | ||||
Buildings and improvements |
545,809,802 | 546,978,716 | ||||||
Furniture, fixtures and equipment |
329,968,031 | 312,571,596 | ||||||
Leasehold improvements |
424,143,044 | 402,248,312 | ||||||
Construction in progress |
64,644,003 | 12,150,593 | ||||||
1,627,180,995 | 1,537,735,269 | |||||||
Lessaccumulated depreciation |
(367,994,532 | ) | (299,182,982 | ) | ||||
Property and equipment, net |
$ | 1,259,186,463 | $ | 1,238,552,287 | ||||
32
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
We continually evaluate unfavorable cash flows, if any, related to underperforming restaurants. Periodically it is concluded that certain properties have become impaired based on their existing and anticipated future economic outlook in their respective market areas. In such instances, we may impair assets to reduce their carrying values to fair values. We consider the asset impairment expense as additional depreciation and amortization, although shown as a separate line item in the Consolidated Statements of Income. Estimated fair values of impaired properties are based on comparable valuations, cash flows and management judgment.
During the year ended December 31, 2008, we recorded impairment charges of $3.2 million to impair the leasehold improvements and equipment of three underperforming restaurants. As a result of our strategic review of operations in 2006, we identified certain Joes Crab Shack restaurants that we believed were suitable for conversion into other Landrys concepts. Based on our review we recorded impairment charges of $3.0 million for the year ended December 31, 2006 to impair certain assets relating to these conversion units to reflect our best estimates of their fair market value. We took no impairment charges in the year ended December 31, 2007.
Other current assets are comprised of the following:
December 31, | ||||||
2008 | 2007 | |||||
Prepaid expenses |
$ | 5,902,659 | $ | 9,210,580 | ||
Deposits |
3,199,370 | 3,390,178 | ||||
$ | 9,102,029 | $ | 12,600,758 | |||
Other expense, net for 2008 was $17.0 million and includes $14.3 million in non-cash expenses associated with the change in fair value of swaps which were not designated as hedges. Other expense, net for 2007 was $17.1 million and includes $3.0 million in expenses associated with exchanging the 7.5% Notes for 9.5% Notes, $8.8 million in call premiums and expenses associated with refinancing the Golden Nugget debt, and $4.4 million in expenses associated with changes in the fair value of swaps which were not designated as hedges. Other (income) expense, net for 2006 was not material.
6. ACCRUED LIABILITIES
Accrued liabilities are comprised of the following:
Year Ended December 31, | ||||||
2008 | 2007 | |||||
Payroll and related costs |
$ | 22,345,794 | $ | 32,788,521 | ||
Rent and insurance |
29,384,290 | 30,009,761 | ||||
Taxes, other than payroll and income taxes |
20,214,428 | 18,888,026 | ||||
Deferred revenue (gift cards and certificates) |
25,091,978 | 17,847,319 | ||||
Accrued interest |
2,612,258 | 3,532,611 | ||||
Casino deposits, outstanding chips and other gaming |
10,237,310 | 9,578,075 | ||||
Other |
24,430,271 | 24,666,008 | ||||
$ | 134,316,329 | $ | 137,310,321 | |||
7. DEBT
On December 22, 2008, we entered into an $81.0 million interim senior secured credit facility. The interim senior secured credit facility provides for a $31.0 million senior secured term loan facility and a $50.0 million
33
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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.
On February 13, 2009, we completed the offering of $295.5 million in aggregate principal amount of 14.0% senior secured notes due 2011 (the Notes). The gross proceeds from the offering and sale of the Notes were $260.0 million. The 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 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.
The Notes will mature on August 15, 2011. Interest on the Notes will accrue 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 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 and the Guarantors entered into a registration rights agreement, dated as of February 13, 2009 (Registration Rights Agreement) with Jefferies & Company, Inc. Under the Registration Rights Agreement, we and the Guarantors have agreed to use our best efforts to file and cause to become effective a registration statement with respect to an offer to exchange the Notes for notes registered under the Securities Act of 1933, as amended (the Securities Act), having substantially identical terms as the Notes (except that additional interest provisions and transfer restrictions pertaining to the Notes will be deleted). If we fail to cause the registration statement relating to the exchange offer to become effective within the time periods specified in the Registration Rights Agreement, we will be required to pay additional interest on the Notes until the registration statement is declared effective.
We also entered into a $215.6 million Amended and Restated Credit Agreement dated as of February 13, 2009 (the Credit Agreement) which replaced the interim senior secured credit facility. The Credit Agreement provides for a term loan of $165.6 million and a revolving credit line of $50.0 million. 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.
34
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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). 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 such 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.
On August 29, 2007, we agreed to commence an exchange offering on or before October 1, 2007 to exchange our $400.0 million 7.5% Senior Notes (the 7.5% Notes) for the 9.5% Notes with an interest rate of 9.5%, an option for us to redeem the 9.5% Notes at 1% above par from October 29, 2007 to February 28, 2009 and an option for the note holders to redeem the 9.5% Notes at 1% above par from February 28, 2009 to December 15, 2011, both options requiring at least 30 but not more than 60 days notice. The Exchange Offer was completed on October 31, 2007 with all but $4.3 million of the 7.5% Notes being exchanged. In connection with issuing the 9.5% Notes, we amended our existing Bank Credit Facility to provide for an accelerated maturity should the 9.5% Notes maturity date change, revised certain financial covenants to reflect the impact of the Exchange Offer and redeemed our outstanding Term Loan balance.
In June 2007, our wholly owned unrestricted subsidiary, 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 banks base rate, plus a financing spread, 2.0% and 0.75%, respectively, at December 31, 2008. 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 banks base rate, plus a financing spread, 3.25% and 2.0%, respectively, at December 31, 2008. The financing spreads and commitment fees for the revolving credit facility increase or decrease depending on the leverage ratio as defined in the credit facility. The first lien term loan requires one percent of the outstanding principal balance due annually to be paid in equal quarterly installments commencing on September 30, 2009 with the balance due on maturity. Principal of the second lien term loan is due at maturity. The Golden Nuggets 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.
35
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The proceeds from the new $545.0 million credit facility were used to repay all of the Golden Nuggets 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, LLC. 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 the result of the failure of one of the lending banks.
Consistent with our policy to manage our exposure to interest rate risk and in conformity with the requirements of the first and second lien facilities, we entered into interest rate swaps for all of the first and second lien borrowings of the Golden Nugget that fix the interest rates at between 5.4% and 5.5%, plus the applicable margin. We have designated $210.0 million of the first lien interest rate swaps and all of the second lien swaps as cash flow hedging transactions as set forth in SFAS 133. These swaps mirror the terms of the underlying debt and reset using the same index and terms. The remaining interest rate swaps associated with the $120.0 million of first lien borrowings reflecting 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 $14.3 million and $5.4 million associated with these swaps was recorded for the years ended December 31, 2008 and 2007, respectively.
As a primary result of the Golden Nugget refinancing and the New Notes, we have incurred higher interest expense. We expect to incur additional interest expense in the future as we continue the Golden Nugget expansion and due to higher interest costs arising from our refinancing. We are constructing a hotel tower at the Golden NuggetLas Vegas which we expect to complete by the end of 2009 at an estimated cost of $140.0 million, funded primarily by the delayed draw term loan and operating cash flow.
In December 2004, we entered into a $450.0 million Bank Credit Facility and Term Loan consisting of a $300.0 million revolving credit facility and a $150.0 million term loan. In November 2006, we utilized proceeds from the Joes sale to pay down approximately $109.5 million on the term loan, leaving a balance outstanding of approximately $37.8 million as of December 31, 2006. In September 2007, we repaid the term loan.
Concurrent with the $450.0 million Bank Credit Facility, we issued $400.0 million in 7.5% Notes through a private placement which were originally due in December 2014. The 7.5% Notes were general unsecured obligations and required semi-annual interest payments in June and December. On June 16, 2005, we completed an Exchange Offering whereby substantially all of the senior notes issued under the private placement were exchanged for 7.5% Notes registered under the Securities Act of 1933.
In connection with the 7.5% Notes, we entered into two interest swap agreements aggregating $100.0 million notional value with the objective of managing our exposure to interest rate risk and lowering interest expense. The swaps effectively converted $100.0 million of the fixed rate 7.5% senior notes to a variable rate by entering into receive fixed/pay variable swaps. As a result of the Exchange Offer, these swaps were no longer considered effective hedges and the change in their fair value was recorded in other income/expense. During the fourth quarter of 2007, we settled these swaps resulting in a $2.3 million gain recorded in other income/expense on our consolidated statements of income.
We assumed an $11.4 million, 9.39% non-recourse, long-term mortgage note payable, due May 2010, in connection with an asset purchase in March 2003. Principal and interest payments aggregate $102,000 monthly.
36
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Our debt agreements contain various restrictive covenants including minimum fixed charge, net worth, and financial leverage ratios as well as limitations on dividend payments, capital expenditures and other restricted payments as defined in the agreements. At December 31, 2008, we were in compliance with all such covenants. As of December 31, 2008, our average interest rate on floating-rate debt was 8.5%, we had approximately $20.3 million in letters of credit outstanding, and our available borrowing capacity was $67.5 million.
Principal payments for all long-term debt aggregate $408.8 million in 2009, $30.7 million in 2010, $16.5 million in 2011, $2.5 million in 2012, $10.5 million in 2013 and $403.3 million thereafter.
Long-term debt is comprised of the following:
December 31, | ||||||||
2008 | 2007 | |||||||
$300.0 million Bank Syndicate Credit Facility, Libor + 1.5% interest only, due December 2009 |
$ | | $ | 87,000,000 | ||||
$50.0 million revolving credit facility, Libor + 2.0%, due March 2011 |
4,182,803 | | ||||||
$31.1 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 |
30,015,514 | | ||||||
Senior Notes, 9.5% interest only, due December 2014 |
395,662,000 | 395,662,000 | ||||||
Senior Notes, 7.5% interest only, due December 2014 |
4,338,000 | 4,338,000 | ||||||
$47.0 million revolving credit facility, Libor + 2.0%, due June 2013 |
8,000,000 | 12,000,000 | ||||||
$327.0 million First Lien Term Loan, Libor +2.0%, 1% of principal paid quarterly beginning September 30, 2009, due June 2014 |
249,515,152 | 210,000,000 | ||||||
$165.0 million Second Lien Term Loan, Libor +3.25%, interest only, due December 2014 |
165,000,000 | 165,000,000 | ||||||
Non-recourse long-term note payable, 9.39% interest, principal and interest aggregate $101,762 monthly, due May 2010 |
10,411,034 | 10,626,942 | ||||||
Other long-term notes payable with various interest rates, principal and interest paid monthly |
3,832 | 43,939 | ||||||
$4.0 million seller note, 7.0%, interest paid monthly, due November 2010 |
4,000,000 | 4,000,000 | ||||||
Total debt |
871,128,335 | 888,670,881 | ||||||
Less current portion |
(8,752,906 | ) | (87,243,013 | ) | ||||
Long-term portion |
$ | 862,375,429 | $ | 801,427,868 | ||||
8. STOCKHOLDERS EQUITY AND EARNINGS PER SHARE
In connection with our stock buy back programs, we repurchased into treasury approximately 3,300 shares, 6,317,000 shares and 211,000 shares of common stock for approximately $43,000, $181.9 million and $6.0 million in 2008, 2007 and 2006, respectively. Cumulative repurchases as of December 31, 2008 were 24.0 million shares at a cost of approximately $472.4 million.
Commencing in 2000, we began paying an annual $0.10 per share dividend, declared and paid in quarterly installments of $0.025 per share. In April 2004, the annual dividend was increased to $0.20 per share, declared and paid in quarterly installments of $0.05 per share. On June 16, 2008, we announced we were discontinuing
37
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
dividend payments indefinitely. The indentures under which our Notes were issued and our Bank Agreement prohibit the payment of dividends on our common stock to specified levels.
Basic earnings per share is computed by dividing net income (loss) attributable to Landrys by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted into common stock. For purposes of this calculation, outstanding stock options and restricted stock grants are considered common stock equivalents using the treasury stock method, and are the only such equivalents outstanding.
A reconciliation of the amounts used to compute earnings (loss) per share is as follows:
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Amounts attributable to Landrys common stockholders: |
||||||||||||
Income from continuing operations |
$ | 13,477,254 | $ | 27,738,057 | $ | 34,376,089 | ||||||
Income (loss) from discontinued operations, net of taxes |
(10,569,067 | ) | (9,626,263 | ) | (56,145,812 | ) | ||||||
Net income (loss) |
$ | 2,908,187 | $ | 18,111,794 | $ | (21,769,723 | ) | |||||
Weighted average common shares outstandingbasic |
15,260,000 | 18,850,000 | 21,300,000 | |||||||||
Dilutive common stock equivalents: |
||||||||||||
Stock options |
205,000 | 500,000 | 670,000 | |||||||||
Restricted stock |
15,000 | 50,000 | 30,000 | |||||||||
Weighted average common and common share equivalents outstandingdiluted |
15,480,000 | 19,400,000 | 22,000,000 | |||||||||
Earnings (loss) per sharebasic |
||||||||||||
Income from continuing operations |
$ | 0.88 | $ | 1.47 | $ | 1.61 | ||||||
Income (loss) from discontinued operations, net of taxes |
(0.69 | ) | (0.51 | ) | (2.63 | ) | ||||||
Net income (loss) |
$ | 0.19 | $ | 0.96 | $ | (1.02 | ) | |||||
Earnings (loss) per sharediluted |
||||||||||||
Income from continuing operations |
$ | 0.87 | $ | 1.43 | $ | 1.56 | ||||||
Income (loss) from discontinued operations, net of taxes |
(0.68 | ) | (0.50 | ) | (2.55 | ) | ||||||
Net income (loss) |
$ | 0.19 | $ | 0.93 | $ | (0.99 | ) | |||||
9. STOCK-BASED COMPENSATION
We have the following compensation plans under which awards have been issued or are authorized to be issued, which were adopted with stockholder approval:
The Landrys Restaurants, Inc. 2002 Employee/Rainforest Conversion Plan authorizes the issuance of up to 2,162,500 shares. This plan allows awards of non-qualified stock options, which may include stock appreciation rights, to our consultants, employees and non-employee directors. The plan is administered by our Compensation Committee. Terms of the award, such as vesting and exercise price, are to be determined by the Compensation Committee and set forth in the grant agreement for each award.
38
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
We maintain two stock option plans, which were originally adopted in 1993, (the Stock Option Plans), as amended, pursuant to which options were granted to our eligible employees and non-employee directors or our subsidiaries for the purchase of an aggregate of 2,750,000 shares of common stock. The Stock Option Plans were administered by the Compensation Committee of the Board of Directors (the Committee), which determined at its discretion, the number of shares subject to each option granted and the related purchase price, vesting and option periods. Options are no longer issued under either plan, however, options previously issued under the stock option plans are still outstanding.
We also maintain the 1995 Flexible Incentive Plan, which was adopted in 1995, (Flex Plan), as amended, for key employees of the Company. Under the Flex Plan eligible employees received stock options, stock appreciation rights, restricted stock, performance awards, performance stock and other awards, as defined by the Board of Directors or an appointed committee. The aggregate number of shares of common stock issued under the Flex Plan (or with respect to which awards may be granted) were not in excess of 2,000,000 shares. Options are no longer issued under the Flex Plan; however, options previously issued are still outstanding.
We have the following compensation plans under which awards have been issued or are authorized to be issued, which were adopted without stockholder approval:
The Landrys Restaurants, Inc. 2003 Equity Incentive Plan authorizes the issuance of up to 700,000 shares. This plan allows awards of both qualified and non-qualified stock options, restricted stock, cash equivalent values, and tandem awards to employees. The plan is administered by our compensation committee. Terms of the award, such as vesting and exercise price, are to be determined by the compensation committee and set forth in the grant agreement for each award.
On July 22, 2002, we issued options to purchase an aggregate of 437,500 shares under individual stock option agreements with individual members of senior management. Options under these agreements were granted at market price and expire ten years from the date of grant. These options vest in equal installments over a period of five years, provided that vesting may accelerate on certain occurrences, such as a change in control or, in the case of options granted to our CEO, if our stock hits certain price targets.
On July 22, 2002, we issued options to purchase an aggregate of 6,000 shares to our non-employee directors. Options under these agreements were granted at market price and expire ten years from the date of grant. These options vest in equal installments over a period of five years.
On March 16, 2001, we issued options to purchase an aggregate of 387,500 shares to our senior management under individual stock option agreements with individual members of senior management. Options under these agreements were granted at $8.50 and expire ten years from the date of grant. These options vest in equal installments over a period of five years, provided that vesting may accelerate on certain occurrences, such as a change in control or, in the case of options granted to our CEO, if our stock hits certain price targets. In December 2006, certain options to a member of senior management were increased to an exercise price of $9.65.
On March 16 and September 13, 2001, options to purchase an aggregate of 240,000 shares were issued to certain of our individual employees, under individual option grant agreements. Options under these agreements were granted at $8.50 and $15.80, respectively, and expire ten years from the date of grant. These options vest in equal installments over a period of five years, provided that vesting may accelerate on certain occurrences, such as a change in control.
39
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In addition, we have issued pursuant to an employment agreement, over its five year term, 775,000 shares of restricted stock, 500,000 shares which vest 10 years from the grant date, and 275,000 shares which vest 7 years from the grant date. In addition, 250,000 stock options have also been granted pursuant to the employment agreement.
In April 2006, 102,000 restricted common shares were issued to key employees vesting ratably over five years and 8,000 restricted common shares were granted to non-employee directors vesting ratably over two years.
In January 2007, 3,335 restricted common shares were issued to a key employee vesting ratably over five years and on September 27, 2007, 4,000 restricted common shares were granted to non-employee directors vesting ratably over two years.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, (SFAS 123R). SFAS 123R 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.
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123R using the modified prospective application method. Under this transition method, we record compensation expense for all stock option awards granted after the date of adoption and for the unvested portion of previously granted stock option awards that remained outstanding at the date of adoption. The amount of compensation cost recognized was based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123.
For the years ended December 31, 2008, 2007 and 2006, total stock-based compensation expense recognized was $4.1 million, $4.8 million and $7.3 million, respectively. These charges are included in general and administrative expense for the respective years. Stock-based compensation expense is not reported at the segment level as these amounts are not included in internal measurements of segment operating performance.
Stock option plan activity for the year ended December 31, 2008 is summarized below:
Shares | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (in years) |
Aggregate Intrinsic Value | ||||||||
Options outstanding January 1, 2008 |
1,305,294 | $ | 17.72 | ||||||||
Granted |
| | |||||||||
Exercised |
(3,306 | ) | $ | 7.12 | |||||||
Canceled or expired |
(46,584 | ) | $ | 13.02 | |||||||
Options outstanding December 31, 2008 |
1,255,404 | $ | 17.92 | 3.65 | $ | 1,369,590 | |||||
Options exercisable December 31, 2008 |
1,209,404 | $ | 17.67 | 3.59 | $ | 1,367,280 | |||||
No options were granted during 2008, 2007 or 2006. The total intrinsic value of options exercised during the years ended December 31, 2008, 2007 and 2006, was $21,688, $4.2 million and $3.7 million, respectively.
40
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Restricted stock activity for the year ended December 31, 2008 is summarized below:
Shares | Weighted- Average Grant Date Fair Value | |||||
Non-vested as of January 1, 2008 |
863,977 | $ | 29.01 | |||
Granted |
| | ||||
Vested |
(19,798 | ) | $ | 34.69 | ||
Canceled or expired |
(1,855 | ) | $ | 35.00 | ||
Non-vested as of December 31, 2008 |
842,324 | $ | 28.86 | |||
As of December 31, 2008, there was $15.4 million of unrecognized compensation expense related to non-vested restricted stock awards which is expected to be recognized over a weighted average period of 5.4 years.
Cash proceeds received from options exercised was approximately $21,000 for the year ended December 31, 2008 and $2.7 million for both years ended December 31, 2007 and 2006.
10. INCOME TAXES
An analysis of the provision for income taxes for continuing operations for the years ended December 31, 2008, 2007, and 2006 is as follows:
2008 | 2007 | 2006 | ||||||||
Tax provision: |
||||||||||
Current income taxes |
$ | 10,703,124 | $ | 13,139,455 | $ | 6,548,665 | ||||
Deferred income taxes |
(3,476,550 | ) | 1,098,495 | 6,844,730 | ||||||
Total provision |
$ | 7,226,574 | $ | 14,237,950 | $ | 13,393,395 | ||||
Our effective tax rate, for the years ended December 31, 2008, 2007, and 2006, differs from the federal statutory rate as follows:
2008 | 2007 | 2006 | |||||||
Statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | |||
FICA tax credit |
(22.0 | ) | (14.8 | ) | (12.6 | ) | |||
State income tax, net of federal tax benefit |
9.4 | 7.0 | 3.9 | ||||||
Recognition of tax carryforward assets and other tax attributes |
(1.0 | ) | | (6.7 | ) | ||||
Meals, entertainment and other non-deductible expense |
11.5 | 6.1 | 5.5 | ||||||
Other |
2.0 | 0.6 | 2.9 | ||||||
34.9 | % | 33.9 | % | 28.0 | % | ||||
41
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Deferred income tax assets and liabilities as of December 31, 2008 and 2007 are comprised of the following:
2008 | 2007 | |||||||
Deferred Income Taxes: |
||||||||
Current assetsaccruals and other |
$ | 28,001,000 | $ | 21,648,000 | ||||
Non-current assets: |
||||||||
AMT credit, FICA credit carryforwards, and other |
$ | 62,500,000 | $ | 46,721,000 | ||||
Federal net operating loss carryforwards |
20,379,000 | 22,880,000 | ||||||
Deferred rent and unfavorable leases |
5,240,000 | 5,338,000 | ||||||
Valuation allowance |
(5,708,000 | ) | (7,339,000 | ) | ||||
Non-current deferred tax asset |
82,411,000 | 67,600,000 | ||||||
Non-current liabilitiesproperty, swaps and other |
(64,260,000 | ) | (62,674,000 | ) | ||||
Net non-current tax asset (liability) |
$ | 18,151,000 | $ | 4,926,000 | ||||
Total net deferred tax asset (liability) |
$ | 46,152,000 | $ | 26,574,000 | ||||
At December 31, 2008 and 2007, we had operating loss carryovers for Federal Income Tax purposes of $54.7 million and $61.5 million, respectively, which expire in 2019 through 2025. These operating loss carryovers, credits, and certain other deductible temporary differences, are related to the acquisitions of Rainforest Cafe and Saltgrass Steak House, and their utilization is subject to Section 382 limits. Because of these limitations, we established a valuation allowance against a portion of these deferred tax assets to the extent it was more likely than not that these tax benefits will not be realized. In 2008, there was a reduction of the valuation allowance and deferred tax liabilities aggregating $1.6 million. The valuation allowance and certain deferred tax liabilities were reduced for current year projected NOL utilization or expiration.
At December 31, 2008, we have general business tax credit carryovers and minimum tax credit carryovers of $30.3 million. The general business carryover includes $1.5 million from Saltgrass Steak House, which is fully reserved. The general business credit carryovers expire in 2010 through 2026, while the minimum tax credit carryovers have no expiration date. We believe it is more likely than not that we will generate sufficient income in future years to utilize the non-reserved credits.
We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. We have substantially concluded all U.S. federal income tax matters for years through 2005. Substantially all material state and local income tax matters have been concluded for years through 2003. 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.
42
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). As of December 31, 2008, 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. We do not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next twelve months. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
2008 | 2007 | |||||||
Balance at beginning of the year |
$ | 14,062,885 | $ | 10,323,575 | ||||
Additions based on tax positions related to the current year |
1,495,469 | 1,299,027 | ||||||
Additions for tax positions of prior years |
2,609,533 | 3,460,957 | ||||||
Reductions for tax positions of prior years |
(1,526,296 | ) | (1,020,674 | ) | ||||
Settlements |
(967,332 | ) | | |||||
Balance at the end of the year |
$ | 15,674,259 | 14,062,885 | |||||
Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. During the year ended December 31, 2008, we released approximately $0.3 million in interest and/or penalties. We had approximately $2.3 million and $2.0 million accrued for the payment of interest and/or penalties at December 31, 2008 and 2007, respectively.
11. COMMITMENTS AND CONTINGENCIES
Lease Commitments
We have entered into lease commitments for restaurant facilities as well as certain fixtures, equipment and leasehold improvements. Under most of the facility lease agreements, we pay taxes, insurance and maintenance costs in addition to the rent payments. Certain facility leases also provide for additional contingent rentals based on a percentage of sales in excess of a minimum amount. Rental expense under operating leases was approximately $60.5 million, $54.4 million and $61.3 million, during the years ended December 31, 2008, 2007, and 2006, respectively. Percentage rent included in rent expense was $15.1 million, $15.4 million and $14.8 million, for 2008, 2007, and 2006, respectively. In connection with certain of our discontinued operations, we remain the guarantor or assignor of a number of leased locations. In the event of future defaults under any of such leased locations we may be responsible for significant damages to existing landlords which may materially affect our financial condition, operating results and cash flows. We estimate that lessee rental payment obligations during the remaining terms of the assignments and subleases approximate $71.5 million at December 31, 2008. We have recorded a liability of $5.7 million with respect to these obligations.
In 2004, we entered into an aggregate $25.5 million equipment operating lease agreement replacing two existing agreements and including additional equipment. The lease expires in 2014. We guarantee a minimum residual value related to the equipment of approximately 66% of the total amount funded under the agreement. We may purchase the leased equipment throughout the lease term for an amount equal to the unamortized lease balance. In 2006, we sold one piece of equipment reducing the aggregate amount outstanding by $4.1 million. We believe that the remaining equipments fair value is sufficient such that no amounts will be due under the residual value guarantee.
In connection with substantially all of the Rainforest Cafe leases, amounts are provided for unfavorable leases, rent abatements, and scheduled increases in rent. Such amounts are recorded as other long-term liabilities in our consolidated balance sheets, and amortized or accrued as an adjustment to rent expense, included in other
43
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
restaurant operating expenses, on a straight-line basis over the lease term, including options where failure to exercise such options would result in economic penalty.
The aggregate amounts of minimum operating lease commitments maturing in each of the five years and thereafter subsequent to December 31, 2008 are as follows:
2009 |
$ | 38,629,049 | |
2010 |
34,147,075 | ||
2011 |
28,893,169 | ||
2012 |
26,190,752 | ||
2013 |
21,811,734 | ||
Thereafter |
195,400,671 | ||
$ | 345,072,450 | ||
Building Commitments
As of December 31, 2008, we had future development, land purchases and construction commitments expected to be expended within the next twelve months of approximately $93.7 million, including completion of construction of certain new restaurants. We expect to incur approximately $89.4 million related to expansion of the Golden Nugget Hotel and Casino in Las Vegas, Nevada during the next twelve months.
In 2003, we purchased the Flagship Hotel and Pier from the City of Galveston, Texas, subject to an existing lease. Under this agreement, we have committed to spend $15.0 million to transform the hotel and pier into a 19th century style Inn and entertainment complex complete with rides and carnival type games. The property was significantly damaged by Hurricane Ike in 2008. We are currently in litigation with the former tenant due to its failure to purchase adequate insurance and are evaluating our options concerning the property.
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 SCIs 20% interest for up to $35.0 million or that SCI can put its interest to us 25 months following the completion of the third restaurant. The purchase price will be calculated as the lesser of $35.0 million or a multiple of unit level profit, to be reduced by any amounts that may be owed to us by SCI in connection with the construction of the restaurants or other matters.
Employee Benefits and Other
We sponsor qualified defined contribution retirement plans (401(k) Plan) covering eligible salaried employees. The 401(k) Plans allows eligible employees to contribute, subject to Internal Revenue Service limitations on total annual contributions, up to 100% of their base compensation as defined in the 401(k) Plans, to various investment funds. We match in cash at a discretionary rate which totaled $0.8 million in 2007 and $0.9 million in 2006. Employee contributions vest immediately while our contributions vest 20% annually beginning in the participants second year of eligibility for restaurant and hospitality employees and in the participants first year of eligibility for casino employees.
We also initiated non-qualified defined contribution retirement plans (the Plans) covering certain management employees. The Plans allow eligible employees to defer receipt of their base compensation and of their eligible bonuses, as defined in the Plans. We match in cash at a discretionary rate which totaled $0.5 million in 2007 and $0.3 million in 2006. Employee contributions vest immediately while our contributions vest 20% annually. We established a Rabbi Trust to fund the Plans obligation for the restaurant and hospitality employees. The market value of the trust assets is included in other assets, and the liability to the Plans participants is included in other liabilities.
44
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Our casino employees at the Golden Nugget in Las Vegas, Nevada that are members of various unions are covered by union-sponsored, collective bargained, multi-employer health and welfare and defined benefit pension plans. Under our obligation to these plans we recorded expenses of $14.3 million, $12.4 million and $11.9 million for the years ended 2008, 2007 and 2006, respectively. The plans sponsors have not provided sufficient information to permit us to determine its share of unfunded vested benefits, if any. However, based on available information, we do not believe that unfunded amounts attributable to our casino operations are material.
We are self-insured for most health care benefits for our non-union casino employees. The liability for claims filed and estimates of claims incurred but not reported is included in accrued liabilities in the accompanying Consolidated Balance Sheets as of December 31, 2008 and 2007.
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
On April 4, 2006, a purported class action lawsuit was filed against Joes Crab ShackSan Diego, Inc. in the Superior Court of California in San Diego by Kyle Pietrzak and others similarly situated. The lawsuit alleges that the defendant violated wage and hour laws, including the failure to pay hourly and overtime wages, failure to provide meal periods and rest periods, failing to provide minimum reporting time pay, failing to compensate employees for required expenses, including the expense to maintain uniforms, and violations of the Unfair Competition Law. In June 2006, the lawsuit was amended to include Kristina Brask as a named plaintiff and named Crab Addison, Inc. and Landrys Seafood HouseArlington, Inc. as additional defendants. We reached a settlement agreement which has been approved by the Court and paid the settlement amount in full in February 2009. As a result, this matter has been dismissed.
On February 18, 2005, and subsequently amended, a purported class action lawsuit against Rainforest Cafe, Inc. was filed in the Superior Court of California in San Bernardino by Michael D. Harrison, et. al. Subsequently, on September 20, 2005, another purported class action lawsuit against Rainforest Cafe, Inc. was filed in the Superior Court of California in Los Angeles by Dustin Steele, et. al. On January 26, 2006, both lawsuits were consolidated into one action by the state Superior Court in San Bernardino. The lawsuits allege that Rainforest Cafe violated wage and hour laws, including not providing meal and rest breaks, uniform violations and failure to pay overtime. We reached a settlement agreement which has been approved by the Court and paid the settlement amount in full in February 2009. As a result, this matter has been dismissed.
Following Mr. Fertittas initial proposal on January 27, 2008 to acquire all of our outstanding stock, five putative class action law suits were filed in state district courts in Harris County, Texas. On March 26, 2008, the five actions were consolidated for all purposes under Case No. 2008- 05211; Dennis Rice, on behalf of himself and all others similarly situated v. Landrys Restaurants, Inc. et al.; in the 157th Judicial District of Harris County, Texas (Rice). The Rice Consolidated action was voluntarily non-suited by the plaintiffs and the order of non-suit was signed by the court on February 4, 2009.
James F. Stuart, individually and on behalf of all others similarly situated v. Landrys 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, Parent and Merger Sub. 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.
45
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
David Barfield v. Landrys 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, Parent and Merger Sub. Barfield is a putative class action in which plaintiff alleges that our directors aided and abetted Parent and Merger Sub, 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: Landrys 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 Employees Retirement System on behalf of itself and all other similarly situated shareholders of Landrys Restaurants, Inc. and derivatively on behalf of minimal defendant Landrys Restaurants, Inc. was brought against all members of our Board of Directors, Fertitta Holdings, Inc., and Fertitta Acquisition Co. in the Court at Chancery of the State of Delaware. The lawsuit alleges, among other things, a breach of a fiduciary duty by the directors for renegotiating the 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 Companys stock. We intend to contest this matter vigorously.
General Litigation
We are subject to other legal proceedings and claims that arise in the ordinary course of business. Management does not believe that the outcome of any of those matters will have a material adverse effect on our financial position, results of operations or cash flows.
12. SEGMENT INFORMATION
Our operating segments are aggregated into reportable business segments based primarily on the similarity of their economic characteristics, products, services, and delivery methods. Following the acquisition of the Golden Nugget Hotels and Casinos on September 27, 2005, it was determined that we operate two reportable business segments as follows:
Restaurant and Hospitality
Our restaurants operate primarily under the names of Rainforest Cafe, Saltgrass Steak House, Landrys Seafood House, Charleys Crab and The Chart House. As of December 31, 2008, we owned and operated 175 full-service and limited-service restaurants in 27 states and Canada. We are also engaged in the ownership and operation of select hospitality and entertainment businesses that complement our restaurant operations and provide our customers with unique dining, leisure and entertainment experiences.
46
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Gaming
We operate the Golden Nugget Hotels and Casinos in Las Vegas and Laughlin, Nevada. These locations emphasize the creation of the best possible gaming and entertainment experience for their customers by providing a combination of comfortable and attractive surroundings. This is accomplished through luxury rooms and amenities coupled with competitive gaming tables and superior player rewards programs.
The accounting policies of the segments are the same as described in Note 1. We evaluate segment performance based on unit level profit, which excludes general and administrative expense, depreciation expense, net interest expense and other non-operating income or expense. Financial information by reportable business segment is as follows:
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Revenue: |
||||||||||||
Restaurant and Hospitality |
$ | 890,605,419 | $ | 894,434,266 | $ | 870,615,442 | ||||||
Gaming |
253,283,415 | 265,933,986 | 231,378,065 | |||||||||
$ | 1,143,888,834 | $ | 1,160,368,252 | $ | 1,101,993,507 | |||||||
Unit level profit: |
||||||||||||
Restaurant and Hospitality |
$ | 181,199,795 | $ | 172,633,034 | $ | 167,756,564 | ||||||
Gaming |
62,823,144 | 63,957,058 | 48,742,428 | |||||||||
$ | 244,022,939 | $ | 236,590,092 | $ | 216,498,992 | |||||||
Depreciation, amortization and impairment: |
||||||||||||
Restaurant and Hospitality |
$ | 51,545,240 | $ | 47,279,754 | $ | 46,604,986 | ||||||
Gaming |
21,154,867 | 18,006,946 | 12,217,760 | |||||||||
$ | 72,700,107 | $ | 65,286,700 | $ | 58,822,746 | |||||||
Segment assets: |
||||||||||||
Restaurant and Hospitality |
$ | 720,728,486 | $ | 749,201,750 | $ | 739,627,120 | ||||||
Gaming |
601,475,227 | 564,686,113 | 495,962,913 | |||||||||
Corporate and other (1) |
193,120,377 | 189,094,666 | 229,321,918 | |||||||||
$ | 1,515,324,090 | $ | 1,502,982,529 | $ | 1,464,911,951 | |||||||
Capital expenditures: |
||||||||||||
Restaurant and Hospitality |
$ | 59,540,249 | $ | 62,274,670 | $ | 100,793,632 | ||||||
Gaming |
61,169,141 | 59,954,345 | 94,922,458 | |||||||||
Corporate and other |
2,288,121 | 2,869,469 | 9,840,214 | |||||||||
$ | 122,997,511 | $ | 125,098,484 | $ | 205,556,304 | |||||||
Income before taxes: |
||||||||||||
Unit level profit |
$ | 244,022,939 | $ | 236,590,092 | $ | 216,498,992 | ||||||
Depreciation, amortization and impairment |
72,700,107 | 65,286,700 | 58,822,746 | |||||||||
General and administrative |
51,294,426 | 55,755,985 | 57,977,359 | |||||||||
Pre opening expenses |
2,266,004 | 3,476,951 | 5,214,011 | |||||||||
Loss (gain) on disposal of assets |
(58,580 | ) | (18,918,088 | ) | (2,294,532 | ) | ||||||
Interest expense, net |
79,817,334 | 72,321,952 | 49,138,695 | |||||||||
Other expenses (income) |
17,299,820 | 16,690,585 | (128,771 | ) | ||||||||
Consolidated income from continuing operations before taxes |
$ | 20,703,828 | $ | 41,976,007 | $ | 47,769,484 | ||||||
(1) | Includes inter-segment eliminations |
47
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
13. SUPPLEMENTAL GUARANTOR INFORMATION
In December 2004, we issued, in a private offering, $400.0 million of 7.5% Notes due in 2014 (see Note 7). In June 2005, substantially all of these notes were exchanged for substantially identical notes in an Exchange Offer registered under the Securities Act of 1933. These notes are fully and unconditionally 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 Consolidating Financial Statements
Balance Sheet
December 31, 2008
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated Entity | ||||||||||||||
ASSETS | ||||||||||||||||||
CURRENT ASSETS: |
||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 3,595,510 | $ | 48,705,532 | $ | (1,234,237 | ) | $ | 51,066,805 | |||||||
Accounts receivabletrade and other, net |
1,809,894 | 11,780,168 | 4,431,043 | | 18,021,105 | |||||||||||||
Inventories |
9,704,247 | 13,164,418 | 3,292,427 | | 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 |
2,482,521 | 2,329,993 | 4,289,515 | | 9,102,029 | |||||||||||||
Total current assets |
40,292,303 | 32,442,016 | 63,825,809 | (1,234,237 | ) | 135,325,891 | ||||||||||||
PROPERTY AND EQUIPMENT, net |
42,381,745 | 649,215,694 | 567,589,024 | | 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 |
715,713,675 | (69,247,685 | ) | (123,504,463 | ) | (522,961,527 | ) | | ||||||||||
OTHER ASSETS, net |
30,018,946 | 1,969,120 | 33,512,511 | (2,089,261 | ) | 63,411,316 | ||||||||||||
Total assets |
$ | 830,286,944 | $ | 641,388,068 | $ | 569,934,103 | $ | (526,285,025 | ) | $ | 1,515,324,090 | |||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||
CURRENT LIABILITIES: |
||||||||||||||||||
Accounts payable |
$ | 25,079,676 | $ | 20,560,543 | $ | 24,718,252 | $ | | $ | 70,358,471 | ||||||||
Accrued liabilities |
48,074,063 | 50,119,130 | 37,357,373 | (1,234,237 | ) | 134,316,329 | ||||||||||||
Income taxes payable |
2,615,388 | | 169,315 | | 2,784,703 | |||||||||||||
Current portion of long-term debt and other obligations |
7,503,832 | | 1,249,074 | | 8,752,906 | |||||||||||||
Liabilities related to discontinued operations |
| 5,149,365 | | | 5,149,365 | |||||||||||||
Total current liabilities |
83,272,959 | 75,829,038 | 63,494,014 | (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 |
24,838,563 | 21,368,682 | 89,902,537 | | 136,109,783 | |||||||||||||
Total liabilities |
534,809,839 | 99,286,981 | 589,073,663 | (3,323,498 | ) | 1,219,846,985 | ||||||||||||
COMMITMENTS AND CONTINGENCIES |
||||||||||||||||||
TOTAL EQUITY |
295,477,105 | 542,101,087 | (19,139,560 | ) | (522,961,527 | ) | 295,477,105 | |||||||||||
Total liabilities and stockholders equity |
$ | 830,286,944 | $ | 641,388,068 | $ | 569,934,103 | $ | (526,285,025 | ) | $ | 1,515,324,090 | |||||||
48
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Condensed Consolidating Financial Statements
Balance Sheet
December 31, 2007
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated Entity | ||||||||||||||
ASSETS | ||||||||||||||||||
CURRENT ASSETS: |
||||||||||||||||||
Cash and cash equivalents |
$ | 4,265,460 | $ | 9,249,286 | $ | 26,086,500 | $ | | $ | 39,601,246 | ||||||||
Accounts receivabletrade and other, net |
9,328,511 | 9,296,733 | 5,571,162 | | 24,196,406 | |||||||||||||
Inventories |
16,868,200 | 14,091,690 | 4,241,205 | | 35,201,095 | |||||||||||||
Deferred taxes |
17,812,916 | 439,191 | 3,395,535 | | 21,647,642 | |||||||||||||
Assets related to discontinued operations |
7,099,380 | 14,699,398 | 459 | | 21,799,237 | |||||||||||||
Other current assets |
3,813,548 | 3,490,855 | 5,296,355 | | 12,600,758 | |||||||||||||
Total current assets |
59,188,015 | 51,267,153 | 44,591,216 | | 155,046,384 | |||||||||||||
PROPERTY AND EQUIPMENT, net |
43,323,410 | 661,539,857 | 533,689,020 | | 1,238,552,287 | |||||||||||||
GOODWILL |
| 18,527,547 | | | 18,527,547 | |||||||||||||
OTHER INTANGIBLE ASSETS, net |
1,501,733 | 58,195 | 37,586,294 | | 39,146,222 | |||||||||||||
INVESTMENT IN AND ADVANCES TO SUBSIDIARIES |
761,917,690 | (154,241,240 | ) | (118,527,534 | ) | (489,148,916 | ) | | ||||||||||
OTHER ASSETS, net |
19,720,148 | 10,434,351 | 21,555,590 | | 51,710,089 | |||||||||||||
Total assets |
$ | 885,650,996 | $ | 587,585,863 | $ | 518,894,586 | $ | (489,148,916 | ) | $ | 1,502,982,529 | |||||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||||||||||||
CURRENT LIABILITIES: |
||||||||||||||||||
Accounts payable |
$ | 31,359,170 | $ | 26,301,025 | $ | 16,896,913 | $ | | $ | 74,557,108 | ||||||||
Accrued liabilities |
25,118,966 | 71,382,173 | 40,809,182 | | 137,310,321 | |||||||||||||
Income taxes payable |
843,045 | | | | 843,045 | |||||||||||||
Current portion of long-term debt and other obligations |
87,043,940 | | 199,073 | | 87,243,013 | |||||||||||||
Liabilities related to discontinued operations |
| 4,909,863 | 66,459 | | 4,976,322 | |||||||||||||
Total current liabilities |
144,365,121 | 102,593,061 | 57,971,627 | | 304,929,809 | |||||||||||||
LONG-TERM NOTES, NET OF CURRENT PORTION |
400,000,000 | | 401,427,868 | | 801,427,868 | |||||||||||||
DEFERRED TAXES |
| 422,207 | 12,966,073 | (13,388,280 | ) | | ||||||||||||
OTHER LIABILITIES |
23,386,802 | 22,730,740 | 32,608,237 | | 78,725,779 | |||||||||||||
Total liabilities |
567,751,923 | 125,746,008 | 504,973,805 | (13,388,280 | ) | 1,185,083,456 | ||||||||||||
COMMITMENTS AND CONTINGENCIES |
||||||||||||||||||
TOTAL EQUITY |
317,899,073 | 461,839,855 | 13,920,781 | (475,760,636 | ) | 317,899,073 | ||||||||||||
Total liabilities and stockholders equity |
$ | 885,650,996 | $ | 587,585,863 | $ | 518,894,586 | $ | (489,148,916 | ) | $ | 1,502,982,529 | |||||||
49
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Condensed Consolidating Financial Statements
Income Statement
Year Ended December 31, 2008
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated Entity |
||||||||||||||||
REVENUES |
||||||||||||||||||||
Restaurant and hospitality |
$ | 3,870,667 | $ | 865,212,490 | $ | 25,033,136 | $ | (3,510,874 | ) | $ | 890,605,419 | |||||||||
Gaming: |
||||||||||||||||||||
Casino |
| | 152,965,231 | | 152,965,231 | |||||||||||||||
Rooms |
| | 63,230,271 | | 63,230,271 | |||||||||||||||
Food and beverage |
| | 47,734,759 | | 47,734,759 | |||||||||||||||
Other |
| | 14,370,107 | | 14,370,107 | |||||||||||||||
Promotional allowances |
| | (25,016,953 | ) | | (25,016,953 | ) | |||||||||||||
Net gaming revenue |
| | 253,283,415 | | 253,283,415 | |||||||||||||||
Total revenue |
3,870,667 | 865,212,490 | 278,316,551 | (3,510,874 | ) | 1,143,888,834 | ||||||||||||||
OPERATING COSTS AND EXPENSES: |
||||||||||||||||||||
Restaurant and hospitality: |
||||||||||||||||||||
Cost of revenues |
| 225,642,884 | 4,876,299 | | 230,519,183 | |||||||||||||||
Labor |
| 251,754,135 | 6,691,220 | | 258,445,355 | |||||||||||||||
Other operating expenses |
839,442 | 214,877,901 | 8,234,617 | (3,510,874 | ) | 220,441,086 | ||||||||||||||
Gaming: |
||||||||||||||||||||
Casino |
| | 78,259,949 | | 78,259,949 | |||||||||||||||
Rooms |
| | 24,194,522 | | 24,194,522 | |||||||||||||||
Food and beverage |
| | 29,112,315 | | 29,112,315 | |||||||||||||||
Other |
| | 58,893,485 | | 58,893,485 | |||||||||||||||
General and administrative expense |
51,294,426 | | | | 51,294,426 | |||||||||||||||
Depreciation and amortization |
4,603,422 | 43,187,252 | 22,500,808 | | 70,291,482 | |||||||||||||||
Asset impairment expense |
| 815,484 | 1,593,141 | | 2,408,625 | |||||||||||||||
Loss (gain) on disposal of assets |
| | (58,580 | ) | | (58,580 | ) | |||||||||||||
Pre-opening expenses |
| 2,266,004 | | | 2,266,004 | |||||||||||||||
Total operating costs and expenses |
56,737,290 | 738,543,660 | 234,297,776 | (3,510,874 | ) | 1,026,067,852 | ||||||||||||||
OPERATING INCOME |
(52,866,623 | ) | 126,668,830 | 44,018,775 | | 117,820,982 | ||||||||||||||
OTHER EXPENSES (INCOME): |
||||||||||||||||||||
Interest expense, net |
43,796,466 | | 36,020,868 | | 79,817,334 | |||||||||||||||
Other, net |
1,820,657 | 1,857 | 15,212,191 | | 17,034,705 | |||||||||||||||
Total other expense |
45,617,123 | 1,857 | 51,233,059 | | 96,852,039 | |||||||||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
(98,483,746 | ) | 126,666,973 | (7,214,284 | ) | | 20,968,943 | |||||||||||||
PROVISION (BENEFIT) FOR INCOME TAXES |
(26,695,632 | ) | 35,731,094 | (1,808,888 | ) | | 7,226,574 | |||||||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS AFTER INCOME TAXES |
(71,788,114 | ) | 90,935,879 | (5,405,396 | ) | | 13,742,369 | |||||||||||||
INCOME (LOSS) FROM DISCONTINUED OPERATIONS NET OF INCOME TAXES |
| (10,674,648 | ) | 105,581 | | (10,569,067 | ) | |||||||||||||
EQUITY IN EARNINGS OF SUBSIDIARIES |
74,961,416 | | | (74,961,416 | ) | | ||||||||||||||
NET INCOME (LOSS) |
3,173,302 | 80,261,231 | (5,299,815 | ) | (74,961,416 | ) | 3,173,302 | |||||||||||||
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST |
265,115 | | | | 265,115 | |||||||||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO LANDRYS |
$ | 2,908,187 | $ | 80,261,231 | $ | (5,299,815 | ) | $ | (74,961,416 | ) | $ | 2,908,187 | ||||||||
50
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Condensed Consolidating Financial Statements
Income Statement
Year Ended December 31, 2007
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated Entity |
||||||||||||||||
REVENUES |
||||||||||||||||||||
Restaurant and hospitality |
$ | 4,782,987 | $ | 867,747,099 | $ | 26,030,059 | $ | (4,125,879 | ) | $ | 894,434,266 | |||||||||
Gaming: |
||||||||||||||||||||
Casino |
| | 165,283,475 | | 165,283,475 | |||||||||||||||
Rooms |
| | 65,941,711 | | 65,941,711 | |||||||||||||||
Food and beverage |
| | 45,761,100 | | 45,761,100 | |||||||||||||||
Other |
| | 14,380,837 | | 14,380,837 | |||||||||||||||
Promotional allowances |
| | (25,433,137 | ) | | (25,433,137 | ) | |||||||||||||
Net gaming revenue |
| | 265,933,986 | | 265,933,986 | |||||||||||||||
Total revenue |
4,782,987 | 867,747,099 | 291,964,045 | (4,125,879 | ) | 1,160,368,252 | ||||||||||||||
OPERATING COSTS AND EXPENSES: |
||||||||||||||||||||
Restaurant and hospitality: |
||||||||||||||||||||
Cost of revenues |
| 236,317,594 | 5,496,514 | | 241,814,108 | |||||||||||||||
Labor |
| 259,615,299 | 7,087,794 | | 266,703,093 | |||||||||||||||
Other operating expenses |
2,712,884 | 205,600,353 | 9,096,673 | (4,125,879 | ) | 213,284,031 | ||||||||||||||
Gaming: |
||||||||||||||||||||
Casino |
| | 81,627,956 | | 81,627,956 | |||||||||||||||
Rooms |
| | 23,705,554 | | 23,705,554 | |||||||||||||||
Food and beverage |
| | 29,670,847 | | 29,670,847 | |||||||||||||||
Other |
| | 66,972,571 | | 66,972,571 | |||||||||||||||
General and administrative expense |
55,755,985 | | | | 55,755,985 | |||||||||||||||
Depreciation and amortization |
4,625,295 | 41,419,360 | 19,242,045 | | 65,286,700 | |||||||||||||||
Asset impairment expense |
| | | | | |||||||||||||||
Loss (gain) on disposal of assets |
(92,613 | ) | (15,135,387 | ) | (3,690,088 | ) | (18,918,088 | ) | ||||||||||||
Pre-opening expenses |
| 3,476,951 | | | 3,476,951 | |||||||||||||||
Total operating costs and expenses |
63,001,551 | 731,294,170 | 239,209,866 | (4,125,879 | ) | 1,029,379,708 | ||||||||||||||
OPERATING INCOME |
(58,218,564 | ) | 136,452,929 | 52,754,179 | | 130,988,544 | ||||||||||||||
OTHER EXPENSES (INCOME): |
||||||||||||||||||||
Interest expense, net |
47,965,179 | (506 | ) | 24,357,279 | | 72,321,952 | ||||||||||||||
Other, net |
4,420,939 | (205,245 | ) | 12,903,982 | | 17,119,676 | ||||||||||||||
Total other expense |
52,386,118 | (205,751 | ) | 37,261,261 | | 89,441,628 | ||||||||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
(110,604,682 | ) | 136,658,680 | 15,492,918 | | 41,546,916 | ||||||||||||||
PROVISION (BENEFIT) FOR INCOME TAXES |
(33,146,001 | ) | 42,639,359 | 4,744,592 | | 14,237,950 | ||||||||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS AFTER INCOME TAXES |
(77,458,681 | ) | 94,019,321 | 10,748,326 | | 27,308,966 | ||||||||||||||
INCOME (LOSS) FROM DISCONTINUED OPERATIONS NET OF INCOME TAXES |
(119,204 | ) | (9,684,437 | ) | 177,378 | | (9,626,263 | ) | ||||||||||||
EQUITY IN EARNINGS OF SUBSIDIARIES |
95,260,588 | | | (95,260,588 | ) | | ||||||||||||||
NET INCOME (LOSS) |
17,682,703 | 84,334,884 | 10,925,704 | (95,260,588 | ) | 17,682,703 | ||||||||||||||
LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST |
(429,091 | ) | | | | (429,091 | ) | |||||||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO LANDRYS |
$ | 18,111,794 | $ | 84,334,884 | $ | 10,925,704 | $ | (95,260,588 | ) | $ | 18,111,794 | |||||||||
51
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Condensed Consolidating Financial Statements
Income Statement
Year Ended December 31, 2006
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated Entity |
||||||||||||||||
REVENUES |
||||||||||||||||||||
Restaurant and hospitality |
$ | 4,150,695 | $ | 835,516,336 | $ | 30,948,411 | $ | | $ | 870,615,442 | ||||||||||
Gaming: |
||||||||||||||||||||
Casino |
| | 151,775,538 | | 151,775,538 | |||||||||||||||
Rooms |
| | 57,736,048 | | 57,736,048 | |||||||||||||||
Food and beverage |
| | 39,534,140 | | 39,534,140 | |||||||||||||||
Other |
| | 10,153,318 | | 10,153,318 | |||||||||||||||
Promotional allowances |
| | (27,820,979 | ) | | (27,820,979 | ) | |||||||||||||
Net gaming revenue |
| | 231,378,065 | | 231,378,065 | |||||||||||||||
Total revenue |
4,150,695 | 835,516,336 | 262,326,476 | | 1,101,993,507 | |||||||||||||||
OPERATING COSTS AND EXPENSES: |
||||||||||||||||||||
Restaurant and hospitality: |
||||||||||||||||||||
Cost of revenues |
| 230,315,915 | 6,826,048 | | 237,141,963 | |||||||||||||||
Labor |
| 247,808,392 | 8,500,088 | | 256,308,480 | |||||||||||||||
Other operating expenses |
2,602,937 | 195,768,592 | 11,036,906 | | 209,408,435 | |||||||||||||||
Gaming: |
||||||||||||||||||||
Casino |
| | 80,059,104 | | 80,059,104 | |||||||||||||||
Rooms |
| | 18,519,645 | | 18,519,645 | |||||||||||||||
Food and beverage |
| | 24,818,009 | | 24,818,009 | |||||||||||||||
Other |
| | 59,238,879 | | 59,238,879 | |||||||||||||||
General and administrative expense |
56,723,235 | 1,254,124 | | | 57,977,359 | |||||||||||||||
Depreciation and amortization |
3,636,677 | 38,282,462 | 13,938,098 | | 55,857,237 | |||||||||||||||
Asset impairment expense |
145,409 | 2,820,100 | | | 2,965,509 | |||||||||||||||
Loss (gain) on disposal of assets |
(47,123 | ) | (2,252,688 | ) | 5,279 | | (2,294,532 | ) | ||||||||||||
Pre-opening expenses |
(3,334 | ) | 3,736,615 | 1,480,730 | | 5,214,011 | ||||||||||||||
Total operating costs and expenses |
63,057,801 | 717,733,512 | 224,422,786 | | 1,005,214,099 | |||||||||||||||
OPERATING INCOME |
(58,907,106 | ) | 117,782,824 | 37,903,690 | | 96,779,408 | ||||||||||||||
OTHER EXPENSES (INCOME): |
||||||||||||||||||||
Interest expense, net |
33,346,728 | 399,324 | 15,392,643 | | 49,138,695 | |||||||||||||||
Other, net |
(844,335 | ) | 44,551 | 953,273 | | 153,489 | ||||||||||||||
Total other expense |
32,502,393 | 443,875 | 16,345,916 | | 49,292,184 | |||||||||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
(91,409,499 | ) | 117,338,949 | 21,557,774 | | 47,487,224 | ||||||||||||||
PROVISION (BENEFIT) FOR INCOME TAXES |
(29,678,480 | ) | 36,116,534 | 6,955,341 | | 13,393,395 | ||||||||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS AFTER INCOME TAXES |
(61,731,019 | ) | 81,222,415 | 14,602,433 | | |
34,093,829 |
| ||||||||||||
INCOME (LOSS) FROM DISCONTINUED OPERATIONS NET OF INCOME TAXES |
(31,578,280 | ) | (24,638,014 | ) | 70,482 | | (56,145,812 | ) | ||||||||||||
EQUITY IN EARNINGS OF SUBSIDIARIES |
71,257,316 | | | (71,257,316 | ) | | ||||||||||||||
NET INCOME (LOSS) |
(22,051,983 | ) | 56,584,401 | 14,672,915 | (71,257,316 | ) | (22,051,983 | ) | ||||||||||||
LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST |
(282,260 | ) | | | | (282,260 | ) | |||||||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO LANDRYS |
$ |
(21,769,723 |
) |
$ | 56,584,401 | $ | 14,672,915 | $ | (71,257,316 | ) | $ | (21,769,723 | ) | |||||||
52
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Condensed Consolidating Financial Statements
Statement of Cash Flows
Year Ended December 31, 2008
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated Entity |
||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||||||||||
Net income (loss) |
$ | 3,173,302 | $ | 80,261,231 | $ | (5,299,815 | ) | $ | (74,961,416 | ) | $ | 3,173,302 | ||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||||||||||||||
Depreciation and amortization |
4,648,423 | 42,089,812 | 24,128,151 | | 70,866,386 | |||||||||||||||
Asset impairment expense |
| 12,753,432 | | | 12,753,432 | |||||||||||||||
Deferred tax provision (benefit) |
(11,703,200 | ) | 10,519,505 | (2,710,353 | ) | | (3,894,048 | ) | ||||||||||||
Gain on disposition of assets |
| (316,537 | ) | | | (316,537 | ) | |||||||||||||
Deferred rent and other charges (income), net |
4,013,716 | 2,414,849 | 15,799,520 | | 22,228,085 | |||||||||||||||
Stock-based compensation expense |
4,066,431 | | | | 4,066,431 | |||||||||||||||
Change in assets and liabilities, net and other |
55,194,385 | (128,234,248 | ) | 13,090,439 | 73,727,179 | 13,777,755 | ||||||||||||||
Total adjustments |
56,219,755 | (60,773,187 | ) | 50,307,757 | 73,727,179 | 119,481,504 | ||||||||||||||
Net cash provided (used) by operating activities |
59,393,057 | 19,488,044 | 45,007,942 | (1,234,237 | ) | 122,654,806 | ||||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||||||
Property and equipment additions and/or transfers |
(4,030,768 | ) | (61,278,588 | ) | (57,688,155 | ) | | (122,997,511 | ) | |||||||||||
Proceeds from disposition of property and equipment |
| 36,136,768 | | | 36,136,768 | |||||||||||||||
Net cash provided (used) in investing activities |
(4,030,768 | ) | (25,141,820 | ) | (57,688,155 | ) | | (86,860,743 | ) | |||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||||||
Purchase of common stock for treasury |
(43,049 | ) | | | | (43,049 | ) | |||||||||||||
Proceeds from exercise of stock options |
21,361 | | | | 21,361 | |||||||||||||||
Payments of debt and related expenses, net |
(40,107 | ) | | (215,907 | ) | | (256,014 | ) | ||||||||||||
Proceeds from term loans |
| | 39,515,152 | | 39,515,152 | |||||||||||||||
Debt issuance costs |
(5,134,387 | ) | | | | (5,134,387 | ) | |||||||||||||
Proceeds from credit facility |
239,182,803 | | 104,000,000 | | 343,182,803 | |||||||||||||||
Payments on credit facility |
(292,000,000 | ) | | (108,000,000 | ) | | (400,000,000 | ) | ||||||||||||
Dividends paid |
(1,614,370 | ) | | | | (1,614,370 | ) | |||||||||||||
Net cash provided (used) in financing activities |
(59,627,749 | ) | | 35,299,245 | | (24,328,504 | ) | |||||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(4,265,460 | ) | (5,653,776 | ) | 22,619,032 | (1,234,237 | ) | 11,465,559 | ||||||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
4,265,460 | 9,249,286 | 26,086,500 | | 39,601,246 | |||||||||||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR |
$ | | $ | 3,595,510 | $ | 48,705,532 | $ | (1,234,237 | ) | $ | 51,066,805 | |||||||||
53
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Condensed Consolidating Financial Statements
Statement of Cash Flows
Year Ended December 31, 2007
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated Entity |
||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||||||||||
Net income (loss) |
$ | 17,682,703 | $ | 84,334,884 | $ | 10,925,704 | $ | (95,260,588 | ) | $ | 17,682,703 | |||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||||||||||||||
Depreciation and amortization |
4,625,295 | 42,625,302 | 19,364,307 | | 66,614,904 | |||||||||||||||
Asset impairment expense |
375,000 | 9,512,752 | | | 9,887,752 | |||||||||||||||
Deferred tax provision (benefit) |
2,678,159 | (1,151,352 | ) | 2,526,058 | | 4,052,865 | ||||||||||||||
Gain on disposition of assets |
39,402 | (23,467,270 | ) | 4,509,452 | | (18,918,416 | ) | |||||||||||||
Deferred rent and other charges (income), net |
10,632,798 | 3,951,627 | 2,847,410 | | 17,431,835 | |||||||||||||||
Stock-based compensation expense |
4,797,340 | | | | 4,797,340 | |||||||||||||||
Change in assets and liabilities, net and other |
169,677,518 | (81,233,164 | ) | (183,316,947 | ) | 97,377,952 | 2,505,359 | |||||||||||||
Total adjustments |
192,825,512 | (49,762,105 | ) | (154,069,720 | ) | 97,377,952 | 86,371,639 | |||||||||||||
Net cash provided (used) by operating activities |
210,508,215 | 34,572,779 | (143,144,016 | ) | 2,117,364 | 104,054,342 | ||||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||||||
Property and equipment additions and/or transfers |
(2,149,403 | ) | (56,450,022 | ) | (66,499,059 | ) | | (125,098,484 | ) | |||||||||||
Proceeds from disposition of property and equipment |
5,227,850 | 21,143,609 | 21,037,374 | | 47,408,833 | |||||||||||||||
Purchase of marketable securities |
(5,331,308 | ) | | | | (5,331,308 | ) | |||||||||||||
Sale of marketable securities |
6,609,512 | | | | 6,609,512 | |||||||||||||||
Net cash provided (used) in investing activities |
4,356,651 | (35,306,413 | ) | (45,461,685 | ) | | (76,411,447 | ) | ||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||||||
Purchase of common stock for treasury |
(181,884,157 | ) | | | | (181,884,157 | ) | |||||||||||||
Proceeds from exercise of stock options |
2,723,412 | | | | 2,723,412 | |||||||||||||||
Payments of debt and related expenses, net |
(37,877,128 | ) | | (155,340,806 | ) | | (193,217,934 | ) | ||||||||||||
Proceeds from term loans |
| | 375,000,000 | | 375,000,000 | |||||||||||||||
Debt issuance costs |
(4,794,260 | ) | | (10,568,048 | ) | | (15,362,308 | ) | ||||||||||||
Proceeds from credit facility |
223,000,000 | | 35,815,778 | | 258,815,778 | |||||||||||||||
Payments on credit facility |
(207,771,978 | ) | | (53,618,109 | ) | | (261,390,087 | ) | ||||||||||||
Dividends paid |
(3,995,295 | ) | | | | (3,995,295 | ) | |||||||||||||
Net cash provided (used) in financing activities |
(210,599,406 | ) | | 191,288,815 | | (19,310,591 | ) | |||||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
4,265,460 | (733,634 | ) | 2,683,114 | 2,117,364 | 8,332,304 | ||||||||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
| 9,982,920 | 23,403,386 | (2,117,364 | ) | 31,268,942 | ||||||||||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR |
$ | 4,265,460 | $ | 9,249,286 | $ | 26,086,500 | $ | | $ | 39,601,246 | ||||||||||
54
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Condensed Consolidating Financial Statements
Statement of Cash Flows
Year Ended December 31, 2006
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated Entity |
||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||||||||||
Net income (loss) |
$ | (22,051,983 | ) | $ | 56,584,401 | $ | 14,672,915 | $ | (71,257,316 | ) | $ | (22,051,983 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||||||||||||||
Depreciation and amortization |
3,634,607 | 55,236,584 | 14,392,067 | | 73,263,258 | |||||||||||||||
Asset impairment expense |
145,409 | 79,932,135 | | | 80,077,544 | |||||||||||||||
Deferred tax provision (benefit) |
(27,856,094 | ) | | (1,466,817 | ) | | (29,322,911 | ) | ||||||||||||
Deferred rent and other charges (income), net |
643,647 | (1,514,252 | ) | 161,068 | | (709,537 | ) | |||||||||||||
Stock-based compensation expense |
7,369,292 | | 240,382 | | 7,609,674 | |||||||||||||||
Change in assets and liabilities, net and other |
134,163,320 | (296,689,470 | ) | 110,152,615 | 69,139,952 | 16,766,417 | ||||||||||||||
Total adjustments |
118,100,181 | (163,035,003 | ) | 123,479,315 | 69,139,952 | 147,684,445 | ||||||||||||||
Net cash provided (used) by operating activities |
96,048,198 | (106,450,602 | ) | 138,152,230 | (2,117,364 | ) | 125,632,462 | |||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||||||
Property and equipment additions and/or transfers |
16,047,795 | (79,098,267 | ) | (142,505,832 | ) | | (205,556,304 | ) | ||||||||||||
Proceeds from disposition of property and equipment |
1,811,516 | 185,158,024 | 2,941,896 | | 189,911,436 | |||||||||||||||
Business acquisition, net of cash acquired |
| | (7,860,857 | ) | | (7,860,857 | ) | |||||||||||||
Net cash provided (used) in investing activities |
17,859,311 | 106,059,757 | (147,424,793 | ) | | (23,505,725 | ) | |||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||||||
Purchase of common stock for treasury |
(2,812,893 | ) | | | | (2,812,893 | ) | |||||||||||||
Proceeds from exercise of stock options |
2,739,765 | | | | 2,739,765 | |||||||||||||||
Payments of debt and related expenses, net |
(110,903,232 | ) | | (311,093 | ) | | (111,214,325 | ) | ||||||||||||
Proceeds from credit facility |
333,000,000 | | 99,649,258 | | 432,649,258 | |||||||||||||||
Payments on credit facility |
(335,228,018 | ) | | (91,848,646 | ) | | (427,076,664 | ) | ||||||||||||
Dividends paid |
(4,358,498 | ) | | | | (4,358,498 | ) | |||||||||||||
Net cash provided (used) in financing activities |
(117,562,876 | ) | | 7,489,519 | | (110,073,357 | ) | |||||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(3,655,367 | ) | (390,845 | ) | (1,783,044 | ) | (2,117,364 | ) | (7,946,620 | ) | ||||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
3,655,367 | 10,373,765 | 25,186,430 | | 39,215,562 | |||||||||||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR |
$ | | $ | 9,982,920 | $ | 23,403,386 | $ | (2,117,364 | ) | $ | 31,268,942 | |||||||||
55
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
14. CERTAIN TRANSACTIONS
In 1996, we entered into a Consulting Service Agreement (the Agreement) with Fertitta Hospitality, LLC (Fertitta Hospitality), which is jointly owned by our Chairman and Chief Executive Officer and his wife. Pursuant to the Agreement, we provided to Fertitta Hospitality management and administrative services. Under the Agreement, we received a fee of $2,500 per month plus the reimbursement of all out-of-pocket expenses and such additional compensation as agreed upon. In 2003, a new agreement was signed (Management Agreement). Pursuant to the Management Agreement, we receive a monthly fee of $7,500, plus reimbursement of expenses. The Management Agreement provides for a renewable three-year term.
In 1999, we entered into a ground lease with 610 Loop Venture, LLC, a company wholly owned by our Chairman and Chief Executive Officer, on land owned by us adjacent to our corporate headquarters. Under the terms of the ground lease, 610 Loop Venture pays us base rent of $12,000 per month plus pro-rata real property taxes and insurance. 610 Loop Venture also has the option to purchase certain property based upon a contractual agreement. In 2004, the ground lease was extended for a 5 year term.
In 2002, we entered into an $8,000 per month, 20 year, with option renewals, ground lease agreement with Fertitta Hospitality for a new Rainforest Cafe on prime waterfront land in Galveston, Texas. The annual rent is equal to the greater of the base rent or percentage rent up to six percent, plus taxes and insurance. In 2008, 2007 and 2006, we paid base and percentage rent aggregating $561,000, $573,000 and $567,000, respectively.
As permitted by the employment contract between us and the Chief Executive Officer, charitable contributions were made by us to a charitable Foundation that the Chief Executive Officer served as Trustee in the amount of $98,000, $99,000 and $91,000 in 2008, 2007, and 2006, respectively. The contributions were made in addition to the normal salary and bonus permitted under the employment contract.
We, on a routine basis, hold or host promotional events, training seminars and conferences for our personnel. In connection therewith, we incurred in 2008, 2007 and 2006 expenses in the amount of $29,000, $47,432 and $50,000, respectively, at resort hotel properties owned by our Chief Executive Officer and managed by us.
Landrys and Fertitta Hospitality jointly sponsored events and promotional activities in 2008, 2007 and 2006 which resulted in shared costs and use of our personnel or Fertitta Hospitality employees and assets.
The foregoing agreements were entered into between related parties and were not the result of arms-length negotiations. Accordingly, the terms of the transactions may have been more or less favorable than might have been obtained from unaffiliated third parties.
56
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly consolidated results of operations.
March 31, 2008 | June 30, 2008 | September 30, 2008 | December 31, 2008 | |||||||||||
Quarter Ended: |
||||||||||||||
Revenues |
$ | 292,321,308 | $ | 308,102,274 | $ | 289,736,230 | $ | 253,729,022 | ||||||
Cost of revenues |
62,663,314 | 66,709,459 | 62,268,979 | 53,739,440 | ||||||||||
Operating income |
29,639,648 | 35,989,510 | 12,439,924 | 39,751,900 | ||||||||||
Net income (loss) attributable to Landrys |
1,521,756 | 13,871,586 | (17,055,162 | ) | 4,570,007 | |||||||||
Amounts attributable to Landrys common stockholders: |
||||||||||||||
Net income (loss) per share (basic) |
$ | 0.10 | $ | 0.91 | $ | (1.12 | ) | $ | 0.30 | |||||
Net income (loss) per share (diluted) |
$ | 0.10 | $ | 0.89 | $ | (1.12 | ) | $ | 0.30 | |||||
March 31, 2007 | June 30, 2007 | September 30, 2007 | December 31, 2007 | |||||||||||
Quarter Ended: |
||||||||||||||
Revenues |
$ | 281,944,339 | $ | 304,779,607 | $ | 295,765,187 | $ | 277,879,119 | ||||||
Cost of revenues |
61,250,505 | 68,069,968 | 66,011,991 | 61,003,881 | ||||||||||
Operating income |
49,025,321 | 33,894,553 | 27,238,138 | 20,830,532 | ||||||||||
Net income (loss) attributable to Landrys |
22,116,282 | 6,942,607 | (4,332,660 | ) | (6,614,436 | ) | ||||||||
Amounts attributable to Landrys common stockholders: |
||||||||||||||
Net income (loss) per share (basic) |
$ | 1.04 | $ | 0.34 | $ | (0.25 | ) | $ | (0.41 | ) | ||||
Net income (loss) per share (diluted) |
$ | 1.01 | $ | 0.33 | $ | (0.25 | ) | $ | (0.40 | ) |
The third quarter of 2008 included impairment charges related to damage to our Galveston and Kemah, Texas properties sustained in Hurricane Ike. The fourth quarter of 2008 included a reduction in impairment charges associated with insurance proceeds collected. The fourth quarter of 2008 also included $12.2 million in non-cash charges associated with interest rate swaps not designated as hedges. As disclosed in Note 3, we initiated a plan to divest certain restaurants including 136 Joes Crab Shack units in the third quarter of 2006 and several additional units subsequently. The results of operations for all units included in the disposal plan have been reclassified as discontinued operations for all periods presented. The 2008 results include asset impairment charges related to discontinued operations of $0.1 million and $10.2 million for the quarters ended March 31, 2008 and September 30, 2008, respectively. The 2007 results included asset impairment charges related to discontinued operations of $2.3 million, $1.0 million and $6.6 million for the quarters ended June 30, 2007, September 30, 2007 and December 31, 2007, respectively. In the quarter ended March 31, 2007, we recognized gains totaling $20.0 million on property and investment sales. We recorded expenses of $6.3 million and $13.0 million in the second and third quarters of 2007, respectively, associated with refinancing the Golden Nugget Debt and exchanging the 7.5% Notes for 9.5% Notes, respectively.
16. SUBSEQUENT EVENTS
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
57
LANDRYS RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
of each of the outstanding 9.5% Notes and 7.5% Notes to certain proposed amendments to each of the indentures governing such 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.
On February 13, 2009, we completed the offering of $295.5 million in aggregate principal amount of 14.0% senior secured notes due 2011 (the Notes). The gross proceeds from the offering and sale of the Notes were $260.0 million. The 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 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.
We also entered into a $215.6 million Amended and Restated Credit Agreement dated as of February 13, 2009 (the Credit Agreement) which replaced the interim senior secured credit facility. The Credit Agreement provides for a term loan of $165.6 million and a revolving credit line of $50.0 million. 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.
On June 16, 2008, we entered into an Agreement and Plan of Merger, as amended on October 18, 2008 (the Merger Agreement), with Fertitta Holdings, Inc., a Delaware corporation (Parent), and Fertitta Acquisition Co., a Delaware corporation and a wholly-owned subsidiary of Parent (Merger Sub), which are solely owned by Tilman J. Fertitta, our Chairman, President and Chief Executive Officer, to acquire all of our issued and outstanding capital stock (the Proposed Acquisition). In order to finance the Proposed Acquisition in part, Mr. Fertitta entered into a debt commitment letter dated June 12, 2008 (the Initial Commitment Letter), as amended on October 17, 2008 (the Commitment Letter Amendment and together with the Initial Commitment Letter, the Commitment Letter) with Jefferies Funding LLC, Jefferies & Company, Inc., Jefferies Finance LLC and Wells Fargo Foothill, LLC (the Lenders). In addition to the commitment to provide financing for the Proposed Acquisition, the Commitment Letter also contained a commitment by the Lenders to provide alternative financing in the event the Proposed Acquisition was not consummated (the Alternative Commitment).
In connection with the proxy statement required to be provided to Company stockholders voting on the Proposed Acquisition, the Securities and Exchange Commission (SEC) required the Company to disclose certain information from the Commitment Letter issued by the Lenders to Mr. Fertitta and the Company. The Commitment Letter issued by the Lenders required that such information not be disclosed and be kept confidential and that disclosure of such information would be a basis for termination of such Commitment Letter. The Company informed Mr. Fertitta that the Company was not prepared to risk losing the Alternative Commitment and was therefore unable to comply with a condition of the Merger Agreement which required distribution of an SEC approved proxy statement to Company stockholders to vote on the adoption of the merger proposal. As a result of the Companys inability to provide a proxy statement to Company stockholders, the Company informed Mr. Fertitta that it would be unable to consummate the Proposed Acquisition. The Merger Agreement was terminated by agreement of the parties on January 11, 2009.
58