Landrys Restaurants (LNY) 10-Q 2005 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005.

Commission file number 000-22150

LANDRY’S RESTAURANTS, INC.

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

DELAWARE

(State or other jurisdiction of

incorporation of organization)

76-0405386

(I.R.S. Employer

Identification No.)

1510 West Loop South, Houston, TX 77027

(Address of principal executive offices)

(713) 850-1010

(Registrants telephone number)

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

AS OF NOVEMBER 4, 2005 THERE WERE

21,593,335 SHARES OF $0.01 PAR VALUE

COMMON STOCK OUTSTANDING

LANDRY’S RESTAURANTS, INC.

INDEX

		Page Number
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Condensed Consolidated Balance Sheets at September 30, 2005 (unaudited), and December 31, 2004	3
	Condensed Unaudited Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2005 and 2004	4
	Condensed Unaudited Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2005	5
	Condensed Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004	6
	Notes to Condensed Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	27
PART II.	OTHER INFORMATION	28
Item 1.	Legal Proceedings	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 6.	Exhibits	29
Signatures		30

1

LANDRY’S RESTAURANTS, INC.

PART I. FINANCIAL INFORMATION

ITEM 1.Financial Statements

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

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

• potential acquisitions of other restaurants, restaurant concepts, hotels, casinos and lines of businesses in other sectors of the hospitality and entertainment industries;

• future capital expenditures, including the amount and nature thereof;

• business strategy and measures to implement such strategy;

• competitive strengths;

• goals;

• expansion and growth of our business and operations;

• future commodity prices;

• availability of food products, materials and employees;

• consumer perceptions of food safety;

• changes in local, regional and national economic conditions;

• the effectiveness of our marketing efforts;

• changing demographics surrounding our businesses;

• the effect of tax laws and any changes therein;

• same store sales;

• earnings guidance;

• the seasonality of our business;

• weather and acts of God;

• food, labor, fuel and utilities costs;

• plans; and

• references to future success.

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate, and, therefore, we cannot assure you that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in our forward-looking statements, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

2

LANDRY’S RESTAURANTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2005			December 31, 2004
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	47,947,654		$	201,394,032
Accounts receivable - trade and other, net		20,893,040			18,595,531
Inventories		56,686,863			55,004,153
Deferred taxes		12,187,786			10,859,160
Other current assets		16,519,683			11,630,527
Total current assets		154,235,026			297,483,403
PROPERTY AND EQUIPMENT, net		1,359,169,930			1,007,296,936
GOODWILL		18,527,547			18,527,547
OTHER ASSETS, net		65,756,042			21,644,385
Total assets	$	1,597,688,545		$	1,344,952,271
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	78,590,669		$	48,341,318
Accrued liabilities		127,462,454			84,955,488
Income taxes payable		5,397,532			971,175
Current portion of long-term notes and other obligations		2,335,613			1,700,496
Total current liabilities		213,786,268			135,968,477
LONG-TERM NOTES, NET OF CURRENT PORTION		814,146,595			559,545,092
DEFERRED TAXES		21,131,609			13,343,631
OTHER LIABILITIES		34,712,437			35,198,105
Total liabilities		1,083,776,909			744,055,305
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value, 60,000,000 shares authorized, 21,593,323 and 25,607,573, issued and outstanding, respectively		215,933			256,076
Additional paid-in capital		324,754,289			401,228,736
Deferred stock compensation		(6,582,050	)		(4,281,670	)
Retained earnings		195,523,464			203,693,824
Total stockholders’ equity		513,911,636			600,896,966
Total liabilities and stockholders’ equity	$	1,597,688,545		$	1,344,952,271

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

3

LANDRY’S RESTAURANTS, INC.

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004 Restated			2005		2004 Restated
REVENUES	$	319,511,150		$	314,377,703		$	926,007,593	$	907,670,545
OPERATING COSTS AND EXPENSES:
Cost of revenues		86,604,328			86,747,269			255,103,355		253,575,427
Labor		91,841,371			88,618,978			267,952,475		259,370,202
Other operating expenses		76,779,848			75,750,232			223,737,828		214,577,854
General and administrative expenses		14,634,590			14,073,767			43,248,642		45,420,665
Depreciation and amortization		15,614,883			15,880,649			45,474,458		42,678,382
Asset impairment expense		—			—			—		1,708,654
Pre-opening expenses		1,337,670			620,594			3,507,840		4,219,264
Total operating costs and expenses		286,812,690			281,691,489			839,024,598		821,550,448
OPERATING INCOME		32,698,460			32,686,214			86,982,995		86,120,097
OTHER EXPENSE (INCOME):
Interest expense, net		9,330,650			3,172,661			26,507,477		9,278,353
Other, net		(128,587	)		(1,048,190	)		331,572		(1,108,361	)
Total other expense		9,202,063			2,124,471			26,839,049		8,169,992
INCOME BEFORE INCOME TAXES		23,496,397			30,561,743			60,143,946		77,950,105
PROVISION FOR INCOME TAXES		7,518,847			9,779,758			19,246,063		24,470,150
NET INCOME	$	15,977,550		$	20,781,985		$	40,897,883	$	53,479,955
EARNINGS PER SHARE INFORMATION:
BASIC -
Net income	$	0.75		$	0.76		$	1.81	$	1.94
Weighted average number of common shares outstanding		21,275,000			27,400,000			22,575,000		27,500,000
DILUTED -
Net income	$	0.73		$	0.74		$	1.75	$	1.88
Weighted average number of common and common share equivalents outstanding		21,900,000			28,200,000			23,300,000		28,400,000

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

4

LANDRY’S RESTAURANTS, INC.

CONDENSED UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

	Common Stock					Additional Paid-in Capital			Deferred Stock Compensation			Retained Earnings			Total
	Shares		Amount
Balance, December 31, 2004	25,607,573		$	256,076		$	401,228,736		$	(4,281,670	)	$	203,693,824		$	600,896,966
Net income	—			—			—			—			40,897,883			40,897,883
Dividends paid	—			—			—			—			(3,547,041	)		(3,547,041	)
Purchase of common stock held for treasury	(4,823,986	)		(48,240	)		(88,209,339	)		—			(45,521,202	)		(133,778,781	)
Exercise of stock options and income tax benefit	709,736			7,097			8,935,892			—			—			8,942,989
Issuance of restricted stock	100,000			1,000			2,799,000			(2,800,000	)		—			—
Amortization of deferred stock compensation	—			—			—			499,620			—			499,620
Balance, September 30, 2005	21,593,323		$	215,933		$	324,754,289		$	(6,582,050	)	$	195,523,464		$	513,911,636

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

5

LANDRY’S RESTAURANTS, INC.

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended September 30,
	2005			2004 Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	40,897,883		$	53,479,955
Adjustments to reconcile net income to net cash provided by operating activities -
Depreciation and amortization		45,474,458			42,678,382
Asset impairment expense		—			1,708,654
Change in assets and liabilities - net and other		38,333,202			3,597,095
Total adjustments		83,807,660			47,984,131
Net cash provided by operating activities		124,705,543			101,464,086
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions and other		(81,858,836	)		(91,593,016	)
Proceeds from sale of property and equipment		—			6,095,733
Business acquisitions and related payments, net of cash acquired		(135,487,498	)		(12,840,054	)
Net cash used in investing activities		(217,346,334	)		(98,337,337	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of common stock for treasury		(125,651,866	)		(36,112,823	)
Proceeds from exercise of stock options		443,875			1,245,203
Payments of debt and related expenses, net		(2,050,555	)		(18,326,838	)
Proceeds (payments) on credit facility, net		70,000,000			40,000,000
Dividends paid		(3,547,041	)		(3,459,734	)
Net cash provided by (used in) financing activities		(60,805,587	)		(16,654,192	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(153,446,378	)		(13,527,443	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		201,394,032			35,211,319
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	47,947,654		$	21,683,876
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes	$	4,642,478		$	9,139,034
Interest	$	19,706,580		$	9,554,789

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

6

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Landry’s Restaurants, Inc. (the “Company”) is a national, diversified restaurant and hospitality company principally engaged in the ownership and operation of full service, casual dining restaurants, primarily under the names Landry’s Seafood House, Joe’s Crab Shack, The Crab House, Charley’s Crab, The Chart House and Saltgrass Steak House. In addition, we own and operate domestic and license international rainforest themed restaurants under the trade name Rainforest Cafe.

On September 27, 2005, Landry’s Gaming Inc., an unrestricted subsidiary of the Company, completed the acquisition of Poster Financial Group, Inc. (PFG), owner of the Golden Nugget Hotels and Casinos in downtown Las Vegas and Laughlin, Nevada as further described in Note 2. The results of operations and cash flows for these properties included in our financial statements from the date of acquisition are not material for the third quarter.

Principles of Consolidation

The accompanying financial statements include the consolidated accounts of Landry’s Restaurants, Inc., a Delaware holding company and our wholly and majority owned subsidiaries and partnerships. All significant intercompany accounts and transactions have been eliminated in consolidation.

Basis of Presentation

The condensed consolidated financial statements included herein have been prepared by us without audit, except for the consolidated balance sheet as of December 31, 2004. The financial statements include all adjustments, consisting of normal, recurring adjustments and accruals, which we consider necessary for fair presentation of our financial position and results of operations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. This information is contained in our December 31, 2004, consolidated financial statements filed with the Securities and Exchange Commission on Form 10-K.

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

Accounts receivable include amounts from credit and charge card companies, national storage and distribution companies, and at September 30, 2005, casino and hotel receivables. Accounts are written off when management deems amounts to be uncollectible. An allowance for doubtful accounts is maintained to reduce the receivables to their approximate fair value.

2. ACQUISITION

On September 27, 2005, we completed the acquisition of the capital stock of PFG, owner of the Golden Nugget Hotels and Casinos in downtown Las Vegas and Laughlin, Nevada, including $27.5 million in cash, for approximately $163.0 million in cash, the assumption of $155.0 million of 8.75% senior secured notes due 2011 and $27.0 million in bank debt. The assets acquired and liabilities assumed are included in the accompanying balance sheet as of September 30, 2005, at estimated fair values as determined by appraised values and management estimates based on currently available information and preliminary plans for future operations. The allocation of purchase price is subject to revision based on the final determination of fair values. A summary of assets acquired and liabilities assumed in the acquisition follows:

Estimated fair value of assets acquired	$	402,535,982
Liabilities assumed		(53,011,899	)
Allocated purchase price		349,524,083
Less: Cash acquired and debt assumed		(214,036,585	)
Net cash paid	$	135,487,498

7

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

As a result of the acquisition, we have recorded direct acquisition costs for the estimated incremental costs to rationalize activities at the two locations and for associated employee contract termination and severance costs. Accounting principles generally accepted in the United States, provide that these direct acquisition expenses, which are not associated with the generation of future revenues and have no future economic benefit, be reflected as assumed liabilities in the allocation of the purchase price. The acquisition liabilities included in the purchase price allocation aggregate approximately $3.0 million.

The following unaudited pro forma financial information presents the consolidated results of operations as if the acquisition occurred on January 1, 2004, after including certain pro forma adjustments for interest expense, depreciation and amortization, and income taxes.

	Pro Forma
	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Revenue	$	375,573,150	$	375,271,703	$	1,112,790,407	$	1,102,913,189
Net income	$	13,909,654	$	16,133,261	$	40,979,871	$	54,078,454
Basic earnings per share	$	0.65	$	0.59	$	1.81	$	1.97
Diluted earnings per share	$	0.64	$	0.57	$	1.76	$	1.90

The pro forma financial information is not necessarily indicative of the combined results of operations had the transaction occurred on January 1, 2004 or the results of operations that may be obtained in the future.

3. RESTATEMENT

Following a review of our lease accounting and leasehold depreciation policies, we determined that it was appropriate to restate certain of our consolidated financial statements for periods issued prior to the fourth quarter of 2004. As a result, we have restated our quarterly financial results for 2004 to conform to these changes in lease accounting and leasehold depreciation policies. Historically, unless otherwise deemed immaterial, we recorded rent expense on a straight-line basis over the initial non-cancelable lease term, with the term commencing when actual rent payments began. We depreciated our buildings, leasehold improvements and other long-lived assets on those properties over a period that included both the initial non-cancelable lease term and options, where the failure to renew would result in economic penalty (or the useful life of the assets, if shorter). We previously believed that these long standing accounting treatments were appropriate under generally accepted accounting principles. We now have restated our financial statements to recognize rent expense on a straight-line basis over the expected lease term, including option periods where failure to exercise such options would result in an economic penalty. The lease term commences on the date when we become legally obligated under the lease regardless of when actual rent payments begin.

As a result of this restatement, net income decreased approximately $233,900 to $20,781,985 and basic and diluted earnings per share decreased $0.01 to $0.76 and $0.74, respectively, for the three months ended September 30, 2004. For the nine months ended September 30, 2004, net income decreased approximately $697,200 to $53,479,955, basic earnings per share decreased $0.03 to $1.94 and diluted earnings per share decreased $0.03 to $1.88.

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

4. ACCRUED LIABILITIES

Accrued liabilities are comprised of the following:

	September 30, 2005		December 31, 2004
Payroll and related costs	$	21,378,245	$	16,468,491
Rent and insurance		31,553,349		25,753,353
Taxes, other than payroll and income taxes		19,800,899		19,064,713
Deferred revenue (gift certificates)		10,115,491		12,751,757
Accrued interest		13,319,744		507,532
Casino deposits, outstanding chips and other gaming		11,222,135		—
Other		20,072,591		10,409,642
	$	127,462,454	$	84,955,488

5. DEBT

In connection with the acquisition of PFG, one of our unrestricted subsidiaries assumed $155.0 million in 8.75% senior secured notes due December 2011. The notes pay interest on a semi-annual basis in June and December. The notes are guaranteed, jointly and severally, by all of PFG’s current and future restricted subsidiaries on a senior secured basis. The notes are collateralized by a pledge of capital stock of PFG’s future restricted subsidiaries and a security interest in substantially all of PFG’s and the guarantors’ current and future assets that is junior to the security interest granted to the lenders under PFG’s senior credit facility. We are filing the results of operations of PFG in a separate report on Form 10-Q in order to comply with the reporting requirements set forth in the indenture governing these notes. As a result of the change in control of PFG, PFG is required to offer, and has offered to purchase all of the outstanding senior secured notes at 101% of face value plus accrued interest. The offer to purchase expires on November 28, 2005. Any notes tendered under the offer will be funded from the PFG revolving credit facility or the Company’s revolving credit facility.

Further, as a result of the acquisition of PFG, the Company assumed $27.0 in debt under a $43.0 million bank senior secured revolving credit facility. The revolving credit facility bears interest at Libor or at bank’s base rate plus a financing spread, 2.0% for Libor and 1.0% for base rate borrowing at September 30, 2005 and matures in January 2009. The financing spread and commitment fee increase or decrease based on a financial leverage ratio as defined in the credit agreement. As of September 30, 2005, $2.6 million in letters of credit were outstanding with $13.4 million of available borrowing capacity.

The PFG 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 September 30, 2005, PFG was in compliance with all such covenants.

In December 2004, we entered into a $450.0 million bank credit facility consisting of a $300.0 million revolving credit facility and a $150.0 million term loan. The revolving credit facility matures in December 2009 and bears interest at Libor or the bank’s base rate plus a financing spread, 1.50% for Libor and 0.50% for base rate borrowings at September 30, 2005. In addition, the revolving credit facility requires a commitment fee on the unfunded portion. The financing spread and commitment fee increase or decrease based on a financial leverage ratio as defined in the credit agreement. The term loan matures in December 2010 and bears interest at Libor plus 1.75% or the bank’s base rate plus 0.75%. Quarterly principal payments of $375,000 are due through December 2009 with the remaining balance payable in equal quarterly installments of $35,625,000 in 2010. The Company and certain of its guarantor subsidiaries granted liens on substantially all real and personal property as security under the bank credit facility. As of September 30, 2005, we had approximately $13.5 million in letters of credit outstanding and available borrowing capacity of $216.5 million.

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Concurrently, we issued $400.0 million in 7.5% senior notes due in December 2014. The notes are our general unsecured obligations and require semi-annual interest payments in June and December.

Net proceeds from the $450.0 million bank credit facility and $400.0 million in 7.5% senior notes totaled $536.6 million and were used to repay all outstanding liabilities under the Company’s then existing bank credit facility and $150.0 million in Senior Notes. No amounts were drawn under the $300.0 million revolving credit facility. These debt repayments resulted in a pre-tax charge of $16.6 million in the fourth quarter of 2004.

In connection with the 7.5% senior notes due 2014, we have entered into two interest rate swap agreements with the objective of managing our exposure to interest rate risk and lowering interest expense. The first agreement was effective December 28, 2004 maturing in December 2014 for a notional amount of $50.0 million and interest at Libor plus 2.38%. The second agreement was effective March 10, 2005 also maturing in December 2014 for a notional amount of $50.0 million and interest at Libor plus 2.34%. Our interest rate swap agreements qualify as fair value hedges and meet the criteria for the “short cut method” under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The aggregate estimated fair value of these swaps at September 30, 2005 was a liability of $0.1 million, which is included in other liabilities with an offsetting adjustment to the carrying value of the debt on our consolidated balance sheet.

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 September 30, 2005, we were in compliance with all such covenants.

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 approximately $102,000 monthly.

Long-term debt is comprised of the following:

	September 30,			December 31,
	2005			2004
$300.0 million Bank Syndicate Credit Facility, Libor + 1.50% interest only, due December 2009	$	70,000,000		$	—
$150.0 million Term loan facility, Libor + 1.75%, interest paid quarterly, $375,000 principal paid quarterly, through December 2009, $35,625,000 due quarterly through December 2010		148,875,000			150,000,000
$400.0 million Senior Notes, 7.5% interest only, due December 2014		400,000,000			400,000,000
$155.0 million PFG senior secured notes, 8.75% interest only, due December 2011		159,262,500			—
$43.0 million PFG senior secured revolving credit facility, Libor + 2.0%, interest only, due December 2008		26,989,821			—
Non-recourse long-term note payable, 9.39% interest, principal and interest aggregate $101,762 monthly, due May 2010		11,050,415			11,171,760
Other long-term notes payable with various interest rates, principal and interest paid monthly		399,005			163,057
Interest rate swaps		(94,533	)		(89,229	)
Total debt		816,482,208			561,245,588
Less current portion		(2,335,613	)		(1,700,496	)
Long-term portion	$	814,146,595		$	559,545,092

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

6. COMMITMENTS AND CONTINGENCIES

Building Commitments

As of September 30, 2005, we had future development, land purchases and construction commitments anticipated to be expended within the next twelve months of approximately $26.2 million, including completion of construction on certain new restaurants. In addition, we have committed $9.3 million through 2006 for the renovation of the Tower of the Americas in San Antonio, Texas, which we will operate for at least the next 15 years.

In 2003, we purchased from the City of Galveston the Flagship Hotel and Pier, subject to an existing lease. Under this agreement, upon termination of the existing lease, we have committed to spend an additional $15.0 million to transform the hotel and pier into a turn of the century style Inn and restaurant entertainment complex. The property is currently occupied by a tenant.

During November 2003, we purchased two casual Italian restaurants. Under the purchase agreement, we are committed to building an additional five casual Italian restaurants by the end of 2008, or make certain payments in lieu of development. In conjunction with the agreement to develop additional restaurants, the seller agreed to provide consulting services to ensure that the consistency and the quality of the food and service are maintained through this transition period.

Other Commitments

Our casino employees who are members of various unions are covered by union-sponsored, collective bargained, multi-employer health and welfare and defined benefit pension plans. The plans’ sponsors have not provided sufficient information to permit the Company 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 the September 30, 2005 “accrued liabilities” caption in the accompanying consolidated balance sheets.

Litigation and Claims

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 these matters will have a material adverse effect on our financial position, results of operations or cash flows.

11

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

7. EARNINGS PER SHARE AND STOCKHOLDERS’ EQUITY

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Net income	$	15,977,550	$	20,781,985	$	40,897,883	$	53,479,955
Weighted average number of common shares outstanding - basic		21,275,000		27,400,000		22,575,000		27,500,000
Dilutive common stock equivalents:
Stock options		600,000		800,000		710,000		900,000
Restricted stock		25,000		—		15,000		—
Weighted average number of common and common shares equivalents outstanding - diluted		21,900,000		28,200,000		23,300,000		28,400,000
Net income per share - basic	$	0.75	$	0.76	$	1.81	$	1.94
Net income per share - diluted	$	0.73	$	0.74	$	1.75	$	1.88

The table below illustrates the effect on net income and earnings per share if compensation costs for us had been determined using the alternative accounting method based on the fair value prescribed by SFAS No. 123.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net income, as reported	$	15,977,550		$	20,781,985		$	40,897,883		$	53,479,955
Less: stock based compensation expense using fair value method, net of tax		(390,000	)		(490,000	)		(1,230,000	)		(1,110,000	)
Proforma net income	$	15,587,550		$	20,291,985		$	39,667,883		$	52,369,955
Earnings per share:
Basic, as reported	$	0.75		$	0.76		$	1.81		$	1.94
Basic, proforma	$	0.73		$	0.74		$	1.76		$	1.90
Diluted, as reported	$	0.73		$	0.74		$	1.75		$	1.88
Diluted, proforma	$	0.71		$	0.72		$	1.70		$	1.84

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model.

In June 2003, we established an equity incentive plan pursuant to which our stock options or restricted stock may be granted to eligible employees for an aggregate of 700,000 shares of our common stock. The Compensation Committee of the Board of Directors determines the number of shares, prices, and vesting schedule of individual grants. In addition, we will issue pursuant to an employment agreement, over its five year term, 500,000 shares of restricted stock, with 10 year vest from grant date, and a minimum of 800,000 stock options. As of September 30, 2005, 300,000 restricted common shares have been issued in 100,000 increments each year since the plan was established. Each grant of restricted shares will vest on the tenth anniversary of the year they are granted.

During the nine months ended September 30, 2005, we purchased $133.8 million of our common stock.

12

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

8. SUPPLEMENTAL GUARANTOR INFORMATION

In December 2004, we issued, in a private offering, $400.0 million of 7.5% senior notes due 2014 (see “Debt”). 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 certain of our subsidiaries, “Guarantor Subsidiaries”.

The following condensed unaudited consolidating financial statements present separately the financial position, results of operations and cash flows of Landry’s Restaurants, Inc., our Guarantor Subsidiaries and our Non-guarantor Subsidiaries on a combined basis with eliminating entries.

13

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Condensed Unaudited Consolidating Financial Statements

Balance Sheet

September 30, 2005

	Parent		Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	16,519,990	$	3,608,657		$	27,819,007		$	—		$	47,947,654
Accounts receivable - trade and other, net		6,130,754		8,230,855			6,531,431			—			20,893,040
Inventories		36,532,236		16,771,233			3,383,394			—			56,686,863
Deferred taxes		12,187,786		—			—			—			12,187,786
Other current assets		1,734,770		3,314,258			11,470,655			—			16,519,683
Total current assets		73,105,536		31,925,003			49,204,487			—			154,235,026
PROPERTY AND EQUIPMENT, net		64,552,417		905,813,536			388,803,977			—			1,359,169,930
GOODWILL		—		18,527,547			—			—			18,527,547
INVESTMENTS IN AND ADVANCES TO SUBSIDIARIES		1,070,173,262		(540,926,547	)		(226,311,946	)		(302,934,769	)		—
OTHER ASSETS, net		22,941,924		2,146,301			40,667,817			—			65,756,042
Total assets	$	1,230,773,139	$	417,485,840		$	252,364,335		$	(302,934,769	)	$	1,597,688,545
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	41,357,765	$	21,887,128		$	15,345,776		$	—		$	78,590,669
Accrued liabilities		19,258,308		71,047,146			37,157,000			—			127,462,454
Income taxes payable		5,397,532		—			—			—			5,397,532
Current portion of long-term notes and other obligations		1,538,930		—			796,683			—			2,335,613
Total current liabilities		67,552,535		92,934,274			53,299,459			—			213,786,268
LONG-TERM NOTES, NET OF CURRENT PORTION		617,368,780		—			196,777,815			—			814,146,595
DEFERRED TAXES		21,131,609		—			—			—			21,131,609
OTHER LIABILITIES		10,808,579		22,539,589			1,364,269			—			34,712,437
Total liabilities		716,861,503		115,473,863			251,441,543			—			1,083,776,909
COMMITMENTS AND CONTINGENCIES
TOTAL STOCKHOLDERS’ EQUITY		513,911,636		302,011,977			922,792			(302,934,769	)		513,911,636
Total liabilities and stockholders’ equity	$	1,230,773,139	$	417,485,840		$	252,364,335		$	(302,934,769	)	$	1,597,688,545

14

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Condensed Consolidating Financial Statements

Balance Sheet

December 31, 2004

	Parent		Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	192,679,301	$	5,923,478		$	2,791,253		$	—		$	201,394,032
Accounts receivable—trade and other, net		10,256,627		8,114,520			224,384			—			18,595,531
Inventories		37,824,160		16,878,980			301,013			—			55,004,153
Deferred taxes		10,859,160		—			—			—			10,859,160
Other current assets		2,855,754		3,329,122			5,445,651			—			11,630,527
Total current assets		254,475,002		34,246,100			8,762,301			—			297,483,403
PROPERTY AND EQUIPMENT, net		73,767,370		887,811,651			45,717,915			—			1,007,296,936
GOODWILL		—		18,527,547			—			—			18,527,547
INVESTMENTS IN AND ADVANCES TO SUBSIDIARIES		864,745,965		(610,127,864	)		(40,284,199	)		(214,333,902	)		—
OTHER ASSETS, net		19,236,582		2,407,803			—			—			21,644,385
Total assets	$	1,212,224,919	$	332,865,237		$	14,196,017		$	(214,333,902	)	$	1,344,952,271
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	23,160,088	$	24,544,797		$	636,433		$	—		$	48,341,318
Accrued liabilities		12,925,743		70,441,426			1,588,319			—			84,955,488
Income taxes payable		971,175		—			—			—			971,175
Current portion of long-term notes and other obligations		1,535,814		—			164,682			—			1,700,496
Total current liabilities		38,592,820		94,986,223			2,389,434			—			135,968,477
LONG-TERM NOTES, NET OF CURRENT PORTION		548,538,015		—			11,007,077			—			559,545,092
DEFERRED TAXES		13,343,631		—			—			—			13,343,631
OTHER LIABILITIES		10,853,487		24,344,618			—			—			35,198,105
Total liabilities		611,327,953		119,330,841			13,396,511			—			744,055,305
COMMITMENTS AND CONTINGENCIES
TOTAL STOCKHOLDERS’ EQUITY		600,896,966		213,534,396			799,506			(214,333,902	)		600,896,966
Total liabilities and stockholders’ equity	$	1,212,224,919	$	332,865,237		$	14,196,017		$	(214,333,902	)	$	1,344,952,271

15

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Condensed Unaudited Consolidating Financial Statements

Statement of Income

Three Months Ended September 30, 2005

	Parent			Guarantor Subsidiaries		Non-guarantor Subsidiaries		Eliminations			Consolidated Entity
REVENUES	$	1,371,665		$	307,353,000	$	10,786,485	$	—		$	319,511,150
OPERATING COSTS AND EXPENSES:
Cost of revenues		—			84,667,033		1,937,295		—			86,604,328
Labor		—			88,556,051		3,285,320		—			91,841,371
Other operating expenses		704,198			71,918,901		4,156,749		—			76,779,848
General and administrative expenses		14,634,590			—		—		—			14,634,590
Depreciation and amortization		803,404			14,352,818		458,661		—			15,614,883
Pre-opening expenses		—			897,822		439,848		—			1,337,670
Total operating costs and expenses		16,142,192			260,392,625		10,277,873		—			286,812,690
OPERATING INCOME		(14,770,527	)		46,960,375		508,612		—			32,698,460
OTHER EXPENSE (INCOME):
Interest expense, net		8,896,216			—		434,434		—			9,330,650
Other, net		(172,817	)		32,840		11,390		—			(128,587	)
		8,723,399			32,840		445,824		—			9,202,063
INCOME (LOSS) BEFORE INCOME TAXES		(23,493,926	)		46,927,535		62,788		—			23,496,397
PROVISION (BENEFIT) FOR INCOME TAXES		(7,518,057	)		15,016,812		20,092		—			7,518,847
EQUITY IN EARNINGS OF SUBSIDIARIES		31,953,419			—		—		(31,953,419	)		—
NET INCOME	$	15,977,550		$	31,910,723	$	42,696	$	(31,953,419	)	$	15,977,550

16

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Condensed Unaudited Consolidating Financial Statements

Statement of Income

Three Months Ended September 30, 2004

	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries		Eliminations			Consolidated Entity
REVENUES	$	1,097,802		$	307,349,705		$	5,930,196	$	—		$	314,377,703
OPERATING COSTS AND EXPENSES:
Cost of revenues		—			85,452,746			1,294,523		—			86,747,269
Labor		—			86,930,177			1,688,801		—			88,618,978
Other operating expenses		667,519			73,421,975			1,660,738		—			75,750,232
General and administrative expenses		14,073,767			—			—		—			14,073,767
Depreciation and amortization		801,212			14,938,342			141,095		—			15,880,649
Pre-opening expenses		—			620,594			—		—			620,594
Total operating costs and expenses		15,542,498			261,363,834			4,785,157		—			281,691,489
OPERATING INCOME		(14,444,696	)		45,985,871			1,145,039		—			32,686,214
OTHER EXPENSE (INCOME):
Interest expense, net		2,903,269			—			269,392		—			3,172,661
Other, net		(1,047,729	)		(4,072	)		3,611		—			(1,048,190	)
		1,855,540			(4,072	)		273,003		—			2,124,471
INCOME (LOSS) BEFORE INCOME TAXES		(16,300,236	)		45,989,943			872,036		—			30,561,743
PROVISION (BENEFIT) FOR INCOME TAXES		(5,216,076	)		14,716,782			279,052		—			9,779,758
EQUITY IN EARNINGS OF SUBSIDIARIES		31,866,145			—			—		(31,866,145	)		—
NET INCOME	$	20,781,985		$	31,273,161		$	592,984	$	(31,866,145	)	$	20,781,985

17

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Condensed Unaudited Consolidating Financial Statements

Statement of Income

Nine Months Ended September 30, 2005

	Parent			Guarantor Subsidiaries		Non-guarantor Subsidiaries		Eliminations			Consolidated Entity
REVENUES	$	3,802,689		$	897,121,722	$	25,083,182	$	—		$	926,007,593
OPERATING COSTS AND EXPENSES:
Cost of revenues		—			250,044,853		5,058,502		—			255,103,355
Labor		—			261,111,284		6,841,191		—			267,952,475
Other operating expenses		2,581,822			211,465,916		9,690,090		—			223,737,828
General and administrative expenses		43,248,642			—		—		—			43,248,642
Depreciation and amortization		2,385,791			42,217,289		871,378		—			45,474,458
Pre-opening expenses		—			3,062,162		445,678		—			3,507,840
Total operating costs and expenses		48,216,255			767,901,504		22,906,839		—			839,024,598
OPERATING INCOME		(44,413,566	)		129,220,218		2,176,343		—			86,982,995
OTHER EXPENSE (INCOME):
Interest expense, net		25,515,289			—		992,188		—			26,507,477
Other, net		222,592			96,707		12,273		—			331,572
		25,737,881			96,707		1,004,461		—			26,839,049
INCOME (LOSS) BEFORE INCOME TAXES		(70,151,447	)		129,123,511		1,171,882		—			60,143,946
PROVISION (BENEFIT) FOR INCOME TAXES		(22,448,463	)		41,319,524		375,002		—			19,246,063
EQUITY IN EARNINGS OF SUBSIDIARIES		88,600,867			—		—		(88,600,867	)		—
NET INCOME	$	40,897,883		$	87,803,987	$	796,880	$	(88,600,867	)	$	40,897,883

18

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Condensed Unaudited Consolidating Financial Statements

Statement of Income

Nine Months Ended September 30, 2004

	Parent			Guarantor Subsidiaries		Non-guarantor Subsidiaries		Eliminations			Consolidated Entity
REVENUES	$	2,578,244		$	889,113,188	$	15,979,113	$	—		$	907,670,545
OPERATING COSTS AND EXPENSES:
Cost of revenues		—			249,809,401		3,766,026		—			253,575,427
Labor		—			254,489,408		4,880,794		—			259,370,202
Other operating expenses		1,548,430			207,002,231		6,027,193		—			214,577,854
General and administrative expenses		45,420,665			—		—		—			45,420,665
Depreciation and amortization		2,359,787			39,999,281		319,314		—			42,678,382
Asset impairment expense		—			1,708,654		—		—			1,708,654
Pre-opening expenses		—			4,219,264		—		—			4,219,264
Total operating costs and expenses		49,328,882			757,228,239		14,993,327		—			821,550,448
OPERATING INCOME		(46,750,638	)		131,884,949		985,786		—			86,120,097
OTHER EXPENSE (INCOME):
Interest expense, net		8,473,453			—		804,900		—			9,278,353
Other, net		(1,122,836	)		13,627		848		—			(1,108,361	)
		7,350,617			13,627		805,748		—			8,169,992
INCOME (LOSS) BEFORE INCOME TAXES		(54,101,255	)		131,871,322		180,038		—			77,950,105
PROVISION (BENEFIT) FOR INCOME TAXES		(16,934,392	)		41,340,009		64,533		—			24,470,150
EQUITY IN EARNINGS OF SUBSIDIARIES		90,646,818			—		—		(90,646,818	)		—
NET INCOME	$	53,479,955		$	90,531,313	$	115,505	$	(90,646,818	)	$	53,479,955

19

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Condensed Unaudited Consolidating Financial Statements

Statement of Cash Flows

Nine Months Ended September 30, 2005

	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	40,897,883		$	87,803,987		$	796,880		$	(88,600,867	)	$	40,897,883
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,385,791			42,217,289			871,378			—			45,474,458
Asset impairment expense		—			—			—			—			—
Change in assets and liabilities, net and other		(162,812,179	)		(70,167,487	)		182,712,001			88,600,867			38,333,202
Total adjustments		(160,426,388	)		(27,950,198	)		183,583,379			88,600,867			83,807,660
Net cash provided (used) by operating activities		(119,528,505	)		59,853,789			184,380,259			—			124,705,543
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions and/or transfers		4,053,437			(62,168,610	)		(23,743,663	)		—			(81,858,836	)
Business acquisitions and related payments, net of cash acquired		—			—			(135,487,498	)		—			(135,487,498	)
Net cash provided (used) in investing activities		4,053,437			(62,168,610	)		(159,231,161	)		—			(217,346,334	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock for treasury		(125,651,866	)		—			—			—			(125,651,866	)
Proceeds from exercise of stock options		443,875			—			—			—			443,875
Payments of debt and related expenses, net		(1,929,211	)		—			(121,344	)		—			(2,050,555	)
Proceeds from credit facility		70,000,000			—			—			—			70,000,000
Dividends paid		(3,547,041	)		—			—			—			(3,547,041	)
Net cash provided (used) in financing activities		(60,684,243	)		—			(121,344	)		—			(60,805,587	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(176,159,311	)		(2,314,821	)		25,027,754			—			(153,446,378	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		192,679,301			5,923,478			2,791,253			—			201,394,032
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	16,519,990		$	3,608,657		$	27,819,007		$	—		$	47,947,654

20

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Condensed Unaudited Consolidating Financial Statements

Statement of Cash Flows

Nine Months Ended September 30, 2004

	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	53,479,955		$	90,531,313		$	115,505		$	(90,646,818	)	$	53,479,955
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,359,787			39,999,281			319,314			—			42,678,382
Asset impairment expense		—			1,708,654			—			—			1,708,654
Change in assets and liabilities, net and other		(97,113,717	)		(11,313,089	)		21,377,083			90,646,818			3,597,095
Total adjustments		(94,753,930	)		30,394,846			21,696,397			90,646,818			47,984,131
Net cash provided (used) by operating activities		(41,273,975	)		120,926,159			21,811,902			—			101,464,086
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions and/or transfers		52,566,954			(124,916,314	)		(19,243,656	)		—			(91,593,016	)
Proceeds from sale of property and equipment		3,925,733			2,170,000			—			—			6,095,733
Business acquisitions and related payments, net of cash acquired		(12,840,054	)		—			—			—			(12,840,054	)
Net cash provided (used) in investing activities		43,652,633			(122,746,314	)		(19,243,656	)		—			(98,337,337	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock for treasury		(36,112,823	)		—			—			—			(36,112,823	)
Proceeds from exercise of stock options		1,245,203			—			—			—			1,245,203
Payments of debt and related expenses, net		(18,219,423	)		—			(107,415	)		—			(18,326,838	)
Proceeds from credit facility		40,000,000			—			—			—			40,000,000
Dividends paid		(3,459,734	)		—			—			—			(3,459,734	)
Net cash provided (used) in financing activities		(16,546,777	)		—			(107,415	)		—			(16,654,192	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(14,168,119	)		(1,820,155	)		2,460,831			—			(13,527,443	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		30,656,642			4,430,245			124,432			—			35,211,319
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	16,488,523		$	2,610,090		$	2,585,263		$	—		$	21,683,876

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LANDRY’S RESTAURANTS, INC.

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

We are a national, diversified restaurant and hospitality company principally engaged in the ownership and operation of full service, casual dining restaurants. As of September 30, 2005, we operated 309 such restaurants as well as several limited menu restaurants and other properties including the Golden Nugget Hotels and Casinos in Las Vegas and Laughlin, Nevada.

We are in the business of operating restaurants and other hospitality and entertainment activities. We do not engage in real estate operations other than those associated with the ownership and operation of our business. We own a fee interest (own the land and building) in a number of properties underlying our businesses, but do not engage in real estate sales or real estate management in any significant fashion or format. Our Chief Executive Officer, who is responsible for our operations, reviews and evaluates both core and non-core business activities and results, and determines financial and management resource allocations and investments for all business activities.

Our Specialty Growth Division is primarily engaged in operating entertainment and hospitality activities, such as miscellaneous beverage carts and various kiosks, amusement rides and games and select hotel properties, generally at locations that complement our core restaurant operations. The total assets, revenues, and operating profits of these “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 industry is intensely competitive and is affected by changes in consumer tastes and by national, regional, and local economic conditions and demographic trends. The performance of individual restaurants may be affected by factors such as: traffic patterns, demographic considerations, marketing, weather conditions, and the type, number, and location of competing restaurants.

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 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. We intend to pursue an acquisition strategy.

On September 27, 2005, Landry’s Gaming, Inc., an unrestricted subsidiary, acquired the outstanding capital stock of Poster Financial Group (PFG), and purchased the Golden Nugget Hotels and Casinos in downtown Las Vegas and Laughlin, Nevada for $163.0 million in cash, the assumption of $155.0 million of Senior Secured Notes due 2011, approximately $27.0 million in bank debt, and the assumption of certain working capital including $27.5 million in cash. Under the terms of the purchase agreement, PFG’s currently outstanding Senior Secured Notes due 2011 will remain outstanding obligations of PFG following the closing. The consummation of the sale resulted in a change of control of PFG under the terms of the senior notes and, as a result, PFG commenced an offer to purchase the senior notes for 101% of the aggregate principal amount of such senior notes, plus any accrued and unpaid interest. We assumed amounts outstanding at closing under PFG’s senior credit facility. The Golden Nugget—Las Vegas occupies over eight acres in downtown Las Vegas with approximately 40,000 square feet of gaming area. The property also features three towers containing 1,907 rooms, the largest number of guestrooms in downtown Las Vegas. The Golden Nugget—Laughlin is located on 13 acres on the Colorado River with 32,000 square feet of gaming space and 300 rooms. The results of operations for these properties included in our financial statements from the date of acquisition are not material for the third quarter.

In this report, we have made forward-looking statements. Our forward-looking statements are subject to risks and uncertainty, including without limitation, our ability to continue our expansion strategy, our ability to make projected capital expenditures, as well as potential acquisitions of other restaurants, restaurant concepts, hotels, casinos and lines of businesses in other sectors of the hospitality and entertainment industries, general market conditions, competition, and pricing. Forward-looking statements include statements regarding: future capital expenditures (including the amount and nature thereof); business strategy and measures to implement that strategy; competitive strengths; goals; expansion and growth of our business and operations; future commodity prices; availability of food products,

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materials and employees; consumer perceptions of food safety; changes in local, regional and national economic conditions; the effectiveness of our marketing efforts; changing demographics surrounding our businesses; the effect of tax laws, and any changes therein; same store sales; earnings guidance; the seasonality of our business; weather and acts of God; food, labor, fuel and utilities costs; plans; references to future success; as well as other statements which include words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend” and other similar expressions. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, we cannot assure you that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

Results of Operations

The following table sets forth the percentage relationship to total revenues of certain operating data for the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenues	27.1	%	27.6	%	27.5	%	27.9	%
Labor	28.8	%	28.2	%	28.9	%	28.6	%
Other operating expenses (1)	24.0	%	24.1	%	24.2	%	23.7	%
Unit level profit (1)	20.1	%	20.1	%	19.4	%	19.8	%

(1) Excludes depreciation, amortization, asset impairment, and pre-opening expenses.

Three Months Ended September 30, 2005 Compared to the Three Months Ended September 30, 2004

Revenues increased $5,133,447, or 1.6%, from $314,377,703 to $319,511,150 for the three months ended September 30, 2005, compared to the three months ended September 30, 2004. The total increase/change in revenue is comprised of the following approximate amounts: restaurant openings – increase $10.0 million, restaurant closings – decrease $1.7 million, same store sales (restaurants open all of the third quarter of 2005 and 2004) – decrease $2.6 million, and the remainder of the difference is attributable to the change in sales for units not open a full comparable period. The total number of restaurants open as of September 30, 2005 and 2004 were 309 and 296, respectively.

Cost of revenues was essentially flat at $86,604,328 in the three months ended September 30, 2005, compared to $86,747,269 for the same period in the prior year. Cost of revenues as a percentage of revenues for the three months ended September 30, 2005, decreased to 27.1%, from 27.6% in 2004. The decrease in cost of revenues as a percentage of revenues is primarily due to a shift in product mix.

Labor expenses increased $3,222,393, or 3.6%, from $88,618,978 to $91,841,371 in the three months ended September 30, 2005, compared to the same period in the prior year, principally as a result of increased revenues from new store openings. Labor expenses as a percentage of revenues for the three months ended September 30, 2005, increased to 28.8% from 28.2% in 2004, principally due to increased management labor expense.

Other operating expenses increased $1,029,616, or 1.4%, from $75,750,232 to $76,779,848 in the three months ended September 30, 2005, compared to the same period in the prior year, principally as a result of increased revenues. Such expenses decreased as a percentage of revenues to 24.0% in 2005 from 24.1% in 2004 as a primary result of reduced advertising expenditures.

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General and administrative expenses increased $560,823, or 4.0%, to $14,634,590 in the three months ended September 30, 2005 compared to $14,073,767 during the same period in the prior year, and increased as a percentage of revenues to 4.6% in 2005 from 4.5% in 2004.

Pre-opening expenses were $1,337,670 for the three months ended September 30, 2005, compared to $620,594 for the same period in the prior year. The increase for the 2005 period was attributable to the type of units opened in 2005 compared to the same period in 2004.

Depreciation and amortization expense remained relatively constant at $15,614,883 in the three months ended September 30, 2005, compared to $15,880,649 for the same period in the prior year.

The increase in net interest expense in the three months ended September 30, 2005, as compared to the prior year, is primarily due to higher borrowings related to the Company’s new 7.5% senior notes due 2014 finalized in December 2004.

Provision for income taxes decreased by $2,260,911 to $7,518,847 in the three months ended September 30, 2005 from $9,779,758 in 2004 primarily due to changes in our pre-tax income.

Nine Months Ended September 30, 2005 Compared to the Nine Months Ended September 30, 2004

Revenues increased $18,337,048, or 2.0%, from $907,670,545 to $926,007,593 for the nine months ended September 30, 2005, compared to the nine months ended September 30, 2004. The total increase/change in revenue is comprised of the following approximate amounts: restaurant openings – increase $35.9 million, restaurant closings – decrease $6.7 million, same store sales (restaurants open all nine months in 2005 and 2004) – decrease $4.3 million, day lost due to leap year – decrease $3.4 million, and the remainder of the difference is attributable to the change in sales for units not open a full comparable period.

Primarily as a result of increased revenues, cost of revenues increased $1,527,928, or 0.6%, from $253,575,427 to $255,103,355 in the nine months ended September 30, 2005, compared to the same period in the prior year. Cost of revenues as a percentage of revenues for the nine months ended September 30, 2005, decreased to 27.5%, from 27.9% in 2004. The decrease in cost of revenues as a percentage of revenues is primarily due to a shift in product mix.

Labor expenses increased $8,582,273, or 3.3%, from $259,370,202 to $267,952,475 in the nine months ended September 30, 2005, compared to the same period in the prior year, principally as a result of increased revenues. Labor expenses as a percentage of revenues for the nine months ended September 30, 2005, increased to 28.9% from 28.6% in 2004, principally due to increased management and kitchen labor expense.

Other operating expenses increased $9,159,974, or 4.3%, from $214,577,854 to $223,737,828 in the nine months ended September 30, 2005, compared to the same period in the prior year, principally as a result of increased revenues. Such expenses increased as a percentage of revenues to 24.2% in 2005 from 23.7% in 2004 as a primary result of increased advertising expenses.

General and administrative expenses decreased $2,172,023, or 4.8%, at $43,248,642 in the nine months ended September 30, 2005, compared to $45,420,665 for the same period in the prior year, and decreased as a percentage of revenues to 4.7% in 2005 from 5.0% in 2004. The decrease was primarily the result of decreased accruals related to employee bonuses.

Pre-opening expenses were $3,507,840 for the nine months ended September 30, 2005, compared to $4,219,264 for the same period in the prior year. The decrease for the 2005 period was attributable to a decrease in the number and type of units opened in 2005 as compared to 2004.

Depreciation and amortization expense increased $2,796,076, or 6.6%, from $42,678,382 to $45,474,458 in the nine months ended September 30, 2005, compared to the same period in the prior year. The increase for 2005 was due to the addition of new restaurants and equipment.

There was no asset impairment expense in the nine months ended September 30, 2005 as compared to $1,708,654 in the prior year period. The impairment charges in fiscal 2004 resulted from sales declines in one under performing restaurant, additional deterioration in the specific restaurant’s profitability, perceived deterioration of the market area and/or specific location, and management’s downward revised outlook for further opportunity and/or improvement of forecasted sales and profitability trends for such specific property. Assets that were impaired are primarily leasehold improvements and to a lesser extent equipment.

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The increase in net interest expense in the nine months ended September 30, 2005, as compared to the prior year, is primarily due to higher borrowings related to the Company’s new 7.5% senior notes due 2014 finalized in December 2004.

Provision for income taxes decreased by $5,224,087 to $19,246,063 in the nine months ended September 30, 2005 from $24,470,150 in 2004 primarily due to changes in pre-tax income.

Liquidity and Capital Resources

On September 27, 2005, we acquired all of the capital stock of PFG for $163.0 million in cash, assumption of $155.0 million in 8.75% senior secured notes due 2011, assumption of $27.0 million in bank debt due 2009 and assumption of working capital, including $27.5 million in cash. The purchase price was funded from cash on hand and our revolving credit facility.

In December 2004, we refinanced our existing debt by entering into a new five year $300.0 million revolving credit facility, a nine year $150.0 million term loan, and issuing $400.0 million in 7.5% senior notes due 2014. The 7.5% senior notes due 2014 are general unsecured obligations of the Company. Our financing spread under the bank credit facility was 1.50% for Libor borrowings and 0.50% for base rate borrowings at September 30, 2005. The financing spread for the term loan is 1.75% for Libor borrowings and 0.75% for base rate borrowings. Net proceeds from the refinancing were used to repay outstanding debt and for general corporate purposes. We plan to fund future operations, restaurant and hospitality development, and acquisitions from operating cash flows and available capacity under our current bank credit facility.

During the nine months ended September 30, 2005, we purchased $133.8 million of our common stock. In May 2005, we authorized a $50.0 million open market stock repurchase program. We expect to make opportunistic repurchases of our common stock.

Capital expenditures through September 30, 2005 were $81.9 million, including $22.8 million for land purchases in 2005. We expect capital expenditures to be $23.0 million for the remainder of the year primarily for new restaurants. As a result of our tax loss carryforwards and deferred tax assets, including amounts attributable to the acquisition of Rainforest Cafe, we expect our cash flow from operations to be subject to reduced federal income tax payments for the foreseeable future.

Primarily as a result of establishing long-term borrowings, we will incur higher interest expense in the future. We have entered into two interest rate swap agreements, with an aggregate notional value of $100.0 million, with the objective of managing our exposure to interest rate risk and lowering interest expense. We swapped the fixed interest rate of the senior notes due 2014 for floating interest rates equal to six month Libor plus a financing spread between 2.34% and 2.38%.

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 through December 31, 2005.

Since April 2000, we have paid an annual $0.10 per share dividend, declared and paid in quarterly amounts. In April 2004, the annual dividend amount was increased to $0.20 per share, declared and paid in quarterly amounts.

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 opened and continue to open restaurants in highly seasonal tourist markets. The Joe’s Crab Shack concept restaurants tend to experience even greater seasonality and sensitivity to weather than our other restaurant concepts. Periodically, our sales and profitability may be negatively affected by adverse weather. The timing of unit openings can and will affect quarterly results.

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Critical Accounting Policies

Restaurant and other properties are reviewed on a property by property basis for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. The recoverability of properties that are to be held and used is measured by comparison of the estimated future undiscounted cash flows associated with the asset to the carrying amount of the asset. If such assets are considered to be impaired, an impairment charge is recorded in the amount by which the carrying amount of the assets exceeds their fair value. Properties to be disposed of are reported at the lower of their carrying amount or fair value, reduced for estimated disposal costs, and are included in other current assets.

The Company maintains a large deductible insurance policy related to general liability and workers’ compensation coverage. Predetermined loss limits have been arranged with insurance companies to limit the Company’s per occurrence cash outlay. Accrued liabilities include estimated costs to settle unpaid claims and estimated incurred but not reported claims using actuarial methodologies.

We follow the intrinsic value method of accounting for stock options, and as such do not record compensation expense related to amounts outstanding.

Recent Accounting Pronouncements

In October 2005, the FASB issued FASB Staff Position (FSP) 13-1 “Accounting for Rental Costs Incurred During a Construction Period.” The FSP requires rental costs associated with both ground and building operating leases that are incurred during a construction period be expensed on a straight line basis starting from the beginning of the lease term. The statement is effective for periods beginning after December 15, 2005. Adoption of FSP 13-1 is not expected to have a material impact on the Company’s consolidated financial statements.

In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151, “Inventory Costs” which amended ARB 43. The statement clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials should be recognized as current period charges, effective for fiscal years beginning after June 15, 2005. Adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153, “Exchange of Non-Monetary Assets”. This statement amends APB 29 to require certain non-monetary exchange transactions to be recorded on a carry over cost basis if future cash flows are not expected to change significantly. The statement is effective for fiscal periods beginning after June 15, 2005. Adoption of SFAS No. 153 is not expected to have a material impact on the Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123 (R), “Share-Based Payments” later amended by the Securities and Exchange Commission in April 2005. This statement requires the expensing of stock options in the financial statements for fiscal years beginning after June 15, 2005. The Company has not made a determination of the valuation methodology and, therefore, has not determined the impact to future periods.

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 restaurant labor costs, including expected future increases in federal minimum wages, utility costs and land and construction costs, could adversely affect our profitability and ability to expand.

ITEM 3.Quantitative and Qualitative Disclosures About Market Risk

We are exposed to a variety of market risks including risks related to potential adverse changes in interest rates and commodity prices. We actively monitor exposure to market risk and continue to develop and utilize appropriate risk management techniques. We do not use derivative financial instruments for trading or to speculate on changes in commodity prices.

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Interest Rate Risk

Total debt at September 30, 2005 included $345.9 million of floating-rate debt attributed to borrowings at an average interest rate of 6.02%. As a result, our annual interest cost in 2005 will fluctuate based on short-term interest rates.

In connection with the 7.5% senior notes due 2014, the Company has entered into interest rate swap agreements with a total notional value of $100.0 million with the objective of managing our exposure to interest rate risk and lowering interest expense.

The impact on annual cash flow of a ten percent change in the floating-rate (approximately 0.6%) would be approximately $2.1 million annually based on the floating-rate debt and other obligations outstanding at September 30, 2005, however, there are no assurances that possible rate changes would be limited to such amounts.

ITEM 4.Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13e-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2005, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2005.

During the three months ended September 30, 2005, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1.Legal Proceedings

General Litigation

The Company is 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 the Company’s financial position, results of operations or cash flows.

ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds

In November 1998, we announced the authorization of an open market stock buy back program, which was renewed in April 2000, for an additional $36.0 million. In October 2002, we authorized a $50.0 million open market stock buy back program and in September 2003, we authorized another $60.0 million open market stock repurchase program. In October 2004, we authorized a $50.0 million open market stock repurchase program. In March 2005, we announced a $50.0 million authorization to repurchase common stock. In May 2005, we announced a $50.0 million authorization to repurchase common stock. These programs have resulted in our aggregate repurchasing of approximately 17.6 million shares of common stock for approximately $290.5 million through September 30, 2005.

All repurchases of our common stock during the second quarter of 2005 were made pursuant to our open market stock repurchase program. The following table summarizes repurchases of our common stock during the second quarter of 2005 pursuant to our open market stock repurchase program.

Period	(a) Total Number of Shares (or Units Purchased)	(b) Average Price paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 2005	—	$	—	—	$	55,647,697
August 2005	3,700	$	32.20	3,200	$	55,528,557
September 2005	—	$	—	—	$	55,528,557
Total	3,700	$	32.20	3,200	$	55,528,557

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PART II. OTHER INFORMATION (continued)

ITEM 6.Exhibits

The following Exhibits are set forth herein commencing on page 31:

12.1    —Ratio of Earnings to Fixed Charges

31.1    —Certification by Chief Executive Officer

31.2    —Certification by Chief Financial Officer

32       —Certification with respect to quarterly report of Landry’s Restaurants, Inc.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

LANDRY’S RESTAURANTS, INC.

(Registrant)

/s/ TILMAN J. FERTITTA

Tilman J. Fertitta

Chairman of the Board of Directors,

President and Chief Executive Officer

(Principal Executive Officer)

/s/ RICK H. LIEM

Rick H. Liem

Senior Vice President and

Chief Financial Officer

(Principal Financial and Accounting Officer)

Dated: November 9, 2005

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