Aug. 17, 2007 - GALVESTON -- A dispute between Landry's Restaurants and its bondholders remained unresolved Thursday after a federal court hearing during which CEO Tilman Fertitta testified that a ruling against the company would force it to halt all new projects.

Landry's is asking U.S. District Court Judge Samuel Kent to make permanent a temporary restraining order against bondholders who've called for the immediate repayment of $400 million in notes.

The Houston company fell into technical default, the bondholders say, after it failed to file its 2006 annual report on time. The company said the delay was necessary because it was conducting an investigation into past stock-option granting practices.

Kent ordered the two sides to try to work out an agreement on their own and to return to his courtroom on Monday if they failed.

Fertitta said all major developments -- including additional plans in Las Vegas, where the company owns the Golden Nugget Casino, and projects slated for Houston and Galveston -- would be put on hold while the company focused on generating enough income to pay off the notes, if the court sided with the bondholders.

"I'd just as well go on vacation, because we will be just sitting there," he said.

Fertitta said the company could use backup financing it arranged last week with banks to pay off the bonds, but it's costly, he said.

The company's standby financing comes with a one-time $5 million fee and a higher interest rate of 11 to 12 percent, which amounts to at least $15 million a year in additional interest, and must be paid off in two years, Fertitta testified.

He added that the loan would lead to a loss in liquidity of more than $200 million.

Proceedings paused midday and attorneys for bondholders and Landry's tried to negotiate a deal. But those talks broke down, Fertitta said after the hearing.

"All we're looking for is a deal that's better than the bank deal," he said.

Kathy Patrick, an attorney for the bondholders Post Advisory Group and Lord Abbett Bond-Debenture Fund, said she hoped the two parties would come to terms.

"It's not for lack of trying," she said after the hearing.

During his opening remarks to the court, Landry's attorney Anthony Buzbee referred to the bondholders as "sharks," seeking to extort money from the company.

He said bondholders asked Landry's to pay $4 million just to meet and negotiate. He said the bondholders were trying to force Landry's into an involuntary bankruptcy.

After the hearing, Patrick said her clients were not sharks, but managed mutual funds and pension funds.

"These are individual investors," she said. "Bondholders have been willing to negotiate and arrange a fair deal that reflects the realities of Landry's situation."

When the notes were called, and bondholders demanded $4 million just to negotiate, Fertitta said he felt help- less.

"I've never felt totally trapped into a corner," Fertitta testified. "I can usually handle a lot of situations, but I truly in my heart did not know what to do."

Some vendors are nervous and credit-rating agencies have cut the company's corporate-debt ratings and may not raise them because the interest payment on the standby financing is so huge, he said.

But upon cross-examination by Patrick, Fertitta acknowledged that if Landry's has to use the standby credit, the company would not go bankrupt, have to close any restaurants or have to lay off employees.

Patrick also noted that Landry's had made statements that it knew its bonds were immediately payable after bondholders called them.

"They gave you five months, sir," she said. "When they accelerated the notes, they asked you to pay."

Fertitta said he didn't know who the bondholders were or to whom to make out a check even if he were to pay.

When Patrick said Landry's could pay the trustee, U.S. Bank, Fertitta said, "I don't think it's nice of them to ask for it on that day after sitting on it for five months."

To which Patrick responded, "As you're apt to say, Mr. Fertitta, this isn't about niceness. This is about contracts."

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