Landrys Restaurants 10Q 2006 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, 2006.

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

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 6, 2006 THERE WERE

22,023,381 SHARES OF $0.01 PAR VALUE

COMMON STOCK OUTSTANDING

INDEX


		Page Number
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	2

	Condensed Consolidated Balance Sheets at September 30, 2006 (unaudited) and December 31, 2005	3

	Condensed Unaudited Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2006 and 2005	4

	Condensed Unaudited Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2006	5

	Condensed Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005	6

	Notes to Condensed Unaudited Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4.	Controls and Procedures	31

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 6.	Exhibits	33

Signatures		33

LANDRY’S RESTAURANTS, INC.

PART I. FINANCIAL INFORMATION

ITEM 1.Financial Statements

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

The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and related notes to financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Operating results for the three and nine months ended September 30, 2006 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending December 31, 2006.

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our forward-looking statements are subject to risks and uncertainty, including without limitation, our ability to continue our expansion strategy, our ability to successfully complete the Golden Nugget renovation, our ability to obtain adequate capital at an acceptable cost, 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. 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, gaming operations and lines of businesses in other sectors of the hospitality and entertainment industries;

•

future capital expenditures, including the amount and nature thereof;

•

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

•

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 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;

•

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; and

•

the risks described in “Risk Factors” contained on our Annual Report on Form 10-K.

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. 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” contained in our Annual Report on Form 10-K and elsewhere in this report, or in the documents incorporated by reference herein.

LANDRY’S RESTAURANTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30, 2006		December 31, 2005
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	23,199,731	$	38,918,962
Accounts receivable - trade and other, net		25,314,395		20,858,197
Inventories		48,861,897		55,857,808
Deferred taxes		13,458,784		12,763,948
Assets related to discontinued operations		215,254,547		275,522,805
Other current assets		9,216,761		11,981,766

Total current assets		335,306,115		415,903,486

PROPERTY AND EQUIPMENT, net		1,213,250,080		1,112,223,323
GOODWILL		18,527,547		18,527,547
OTHER INTANGIBLE ASSETS, net		39,151,128		30,948,021
OTHER ASSETS, net		42,005,994		34,976,436

Total assets	$	1,648,240,864	$	1,612,578,813

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	78,284,354	$	83,267,658
Accrued liabilities		122,468,436		113,803,427
Income taxes payable		226,143		5,060,885
Current portion of long-term notes and other obligations		1,869,396		1,851,741
Liabilities related to discontinued operations		31,901,626		22,619,602

Total current liabilities		234,749,955		226,603,313

LONG-TERM NOTES, NET OF CURRENT PORTION		860,354,119		816,043,799
DEFERRED TAXES		2,323,261		21,635,903
OTHER LIABILITIES		46,981,036		31,525,337

Total liabilities		1,144,408,371		1,095,808,352

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value, 60,000,000 shares authorized 22,138,814 and 21,593,823, shares issued and outstanding, respectively		221,388		215,938
Additional paid-in capital		321,926,128		318,178,229
Retained earnings		181,684,977		198,376,294

Total stockholders’ equity		503,832,493		516,770,461

Total liabilities and stockholders’ equity	$	1,648,240,864	$	1,612,578,813

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

LANDRY’S RESTAURANTS, INC.

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
REVENUES	$	290,368,826		$	220,876,080		$	859,710,060		$	640,461,532
OPERATING COSTS AND EXPENSES:
Cost of revenues		68,077,898			59,603,211			197,853,038			176,185,009
Labor		95,223,519			64,130,431			279,033,498			185,642,436
Other operating expenses		74,762,383			53,495,937			212,737,081			155,304,643
General and administrative expense		13,557,654			12,015,340			41,396,633			35,390,892
Depreciation and amortization		14,917,445			10,987,399			42,707,073			31,747,874
Asset impairment expense		8,636,276			—			8,636,276			—
Pre-opening expenses		1,798,564			1,012,041			5,050,540			1,765,872

Total operating costs and expenses		276,973,739			201,244,359			787,414,139			586,036,726

OPERATING INCOME		13,395,087			19,631,721			72,295,921			54,424,806

OTHER EXPENSE (INCOME):
Interest expense, net		12,831,686			7,342,031			37,507,205			19,531,073
Other, net		(55,252	)		(151,039	)		(1,128,821	)		261,758

Total other expense		12,776,434			7,190,992			36,378,384			19,792,831

Income from continuing operations before income taxes		618,653			12,440,729			35,917,537			34,631,975
Provision (benefit) for income taxes		(2,768,209	)		3,317,683			8,227,969			9,551,504

Income from continuing operations		3,386,862			9,123,046			27,689,568			25,080,471
Income (loss) from discontinued operations, net of taxes		(33,336,535	)		6,854,504			(41,094,297	)		15,817,412

Net income (loss)	$	(29,949,673	)	$	15,977,550		$	(13,404,729	)	$	40,897,883

EARNINGS (LOSS) PER SHARE INFORMATION:
BASIC
Income from continuing operations	$	0.16		$	0.43	��	$	1.30		$	1.11
Income (loss) from discontinued operations		(1.56	)		0.32			(1.93	)		0.70

Net income (loss)	$	(1.40	)	$	0.75		$	(0.63	)	$	1.81

Weighted average number of common shares outstanding		21,350,000			21,275,000			21,350,000			22,575,000
DILUTED
Income from continuing operations	$	0.15		$	0.42		$	1.26		$	1.07
Income (loss) from discontinued operations		(1.51	)		0.31			(1.87	)		0.68

Net income (loss)	$	(1.36	)	$	0.73		$	(0.61	)	$	1.75

Weighted average number of common and common share equivalents outstanding		22,000,000			21,900,000			22,000,000			23,300,000

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

LANDRY’S RESTAURANTS, INC.

CONDENSED UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


	Common Stock
	Shares	Amount		Additional Paid-In Capital			Retained Earnings			Total
Balance, December 31, 2005	21,593,823	$	215,938	$	318,178,229		$	198,376,294		$	516,770,461
Net income (loss)								(13,404,729	)		(13,404,729	)
Dividends paid	—		—		—			(3,286,588	)		(3,286,588	)
Exercise of stock options and income tax benefit	42,885		429		418,568			—			418,997
Issuance of restricted stock	502,106		5,021		(5,021	)		—			—
Stock based compensation expense	—		—		3,334,352			—			3,334,352

Balance, September 30, 2006	22,138,814	$	221,388	$	321,926,128		$	181,684,977		$	503,832,493

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

LANDRY’S RESTAURANTS, INC.

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


		Nine Months Ended September 30,
		2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	(13,404,729	)	$	40,897,883
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			56,772,277			45,474,458
Asset impairment expense			72,328,297			—
Change in assets and liabilities, net and other			(5,723,347	)		38,333,202

Total adjustments			123,377,227			83,807,660

Net cash provided by operating activities			109,972,498			124,705,543
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions and other			(164,856,007	)		(81,858,836	)
Proceeds from disposition of property and equipment	��		4,391,896			—
Business acquisitions and related payments, net of cash acquired			(7,860,857	)		(135,487,498	)

Net cash used in investing activities			(168,324,968	)		(217,346,334	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock for treasury			—			(125,651,866	)
Proceeds from exercise of stock options			354,189			443,875
Payments of debt			(1,424,484	)		(2,050,555	)
Proceeds from bank credit facility			162,304,898			97,000,000
Payments on bank credit facility			(115,309,586	)		(27,000,000	)
Dividends paid			(3,286,588	)		(3,547,041	)

Net cash provided by (used in) financing activities			42,638,429			(60,805,587	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(15,714,041	)		(153,446,378	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD (1)			39,215,562			201,394,032

CASH AND CASH EQUIVALENTS AT END OF PERIOD (1)		$	23,501,521		$	47,947,654

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments during the period for:
Income taxes		$	10,810,772		$	4,642,478
Interest		$	34,476,948		$	19,706,580

(1)	Includes cash and cash equivalents related to discontinued operations (Note 2)

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

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

We are a national, diversified restaurant, hospitality and entertainment company principally engaged in the ownership and operation of full service, casual dining restaurants, primarily under the names Landry’s Seafood House, Rainforest Cafe, The Crab House, Charley’s Crab, The Chart House and Saltgrass Steak House. In addition, we own and operate the Golden Nugget Hotels and Casinos.

On September 27, 2005, Landry’s Gaming Inc., an unrestricted subsidiary, 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 as further described in Note 3.

In September 2006, we committed to a disposal plan to sell 136 Joe’s Crab Shack (Joe’s) restaurants, which included a number of locations that we closed during the second and third quarters of fiscal 2006. Accordingly, the results of operations for these restaurants have been classified as discontinued operations in our statements of income for all periods presented.

On October 9, 2006, we entered into a definitive agreement to sell 120 Joe’s restaurants to JCS Holdings, LLC , a new entity created by J.H. Whitney Capital Partners, LLC. The estimated sales price is approximately $192.0 million, including the assumption of certain working capital liabilities, and we expect to complete the sale in the fourth quarter of 2006.

Principles of Consolidation

The accompanying financial statements include the consolidated accounts of Landry’s Restaurants, Inc., a Delaware holding company and it’s wholly and majority owned subsidiaries and partnerships. All significant 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, 2005. 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, 2005, 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 points earned in cash back point-loyalty programs. The retail value of accommodations, food and beverage, and other services furnished to hotel-casino guests without charge is deducted from revenue as promotional allowances. Proceeds from the sale of gift cards are deferred and recognized as revenue when redeemed by the holder.

Accounts receivable is comprised primarily of amounts due from our credit card processor, receivables from national storage and distribution companies and casino and hotel receivables. Accounts receivable are reduced to reflect estimated fair 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.

We account for long-lived assets in accordance with SFAS 144,Accounting for the Impairment or Disposal of Long-lived Assets. SFAS 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.

Certain prior year amounts have been reclassified to conform to the presentation in the current year.

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN 48),Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, as well as guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently assessing the impact of adoption on our financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108),Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements. SAB 108 addresses the diversity in practice of quantifying and assessing materiality of financial statement errors. It is effective for fiscal years ending after November 15, 2006 and allows for a one-time transitional cumulative effect adjustment to the opening balance of retained earnings for errors that were not previously deemed material. We do not believe that adoption of SAB 108 will have a material impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS 157,Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 is effective for fiscal years ending after December 15, 2006. We are currently evaluating the impact of adoption on our financial statements.

2. DISCONTINUED OPERATIONS AND IMPAIRMENT OF LONG LIVED ASSETS

In July 2006, we announced that we had closed certain Joe’s locations during the second quarter of 2006 and were exploring strategic alternatives for the Joe’s chain in order to maximize shareholder value. During the third quarter of fiscal 2006, we closed additional Joe’s restaurants. In September 2006, we committed to a disposal plan to sell 136 Joe’s restaurants, which included a number of closed locations. The results of operations for these restaurants have been classified as discontinued operations in our statements of income for all periods presented.

As part of our strategic review of the Joe’s concept, we also identified certain locations that we believe are suitable for conversion into other Landry’s concepts. The results of operations for these restaurants are included in continuing operations.

On October 9, 2006, we entered into a definitive agreement to sell 120 Joe’s restaurants to JCS Holdings, LLC, a new entity created by J.H. Whitney Capital Partners, LLC. The estimated sale price is approximately $192.0 million, including the assumption of certain working capital liabilities, and we expect to complete the sale in the fourth quarter of 2006.

Under the terms of this agreement, we will provide JCS Holdings, LLC transitional support services after the sale for a period not expected to exceed six months. These services are expected to include, among other things, IT and purchasing support, as well as office space. Following cessation of these activities, we do not anticipate any significant continuing involvement with or cash flows from JCS Holdings, LLC.

We also expect to sell the land and improvements belonging to the remaining restaurants in the disposal plan, or abandon those locations, within the next 12 months.

The results of discontinued operations for the three months and nine months ended September 30, 2006 and the three months and nine months ended 2005 were as follows:

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2006			2005		2006			2005
Revenues	$	89,164,451		$	98,635,070	$	266,960,116		$	285,546,061
Income (loss) from discontinued operations before income taxes		(55,313,041	)		11,055,667		(66,281,124	)		25,511,970
Income tax (benefit)		(21,976,506	)		4,201,163		(25,186,827	)		9,694,558

Net income (loss) from discontinued operations	$	(33,336,535	)	$	6,854,504	$	(41,094,297	)	$	15,817,412

Interest expense of $2.8 million and $8.5 million was allocated to discontinued operations for the three month and nine month period ending September 30, 2006, respectively, based on the ratio of net assets to be discontinued to consolidated net assets.

The assets and liabilities of the discontinued operations are presented separately in the Condensed Consolidated Balance Sheet and consist of the following:


	September 30, 2006		December 31, 2005
Assets:
Cash	$	301,790	$	296,600
Other current assets		20,095,184		5,760,988
Property, plant and equipment, net		193,510,511		268,035,361
Other assets		1,347,062		1,429,856

Assets related to discontinued operations	$	215,254,547	$	275,522,805

Liabilities:
Accounts payable and accrued expenses	$	26,485,317	$	16,516,596
Other liabilities		5,416,309		6,103,006

Liabilities related to discontinued operations	$	31,901,626	$	22,619,602

In connection with the disposal plan, we recorded pre-tax charges of $55.8 million and $65.4 million, for the three months and nine months ended September 30, 2006, respectively, for asset impairment, lease termination and other store closure costs. These charges are included in discontinued operations.

In addition, an impairment charge of $8.6 million was recorded to reduce the carrying value of locations being converted to other Landry’s concepts. This charge is included in income from continuing operations.

3. ACQUISITIONS

On September 27, 2005, we completed the acquisition of 100 percent of the capital stock of GN, owner of the Golden Nugget Hotels and Casinos in downtown Las Vegas and Laughlin, Nevada, 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 under an existing Senior Revolving Credit facility and the further assumption of certain working capital, including $27.5 million in cash. The results of GN’s operations have been included in our consolidated financial statements since the acquisition date.

Acquired intangible assets include $26.2 million assigned to the trademark “Golden Nugget,” which has been in use for more than 50 years and is one of the most recognizable names in the casino industry. Also included is $3.4 million assigned to customer lists underlying the slot player clubs at each of the casinos. There was no goodwill recorded in connection with the transaction.

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 terminations 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 totaled approximately $4.9 million with $1.1 million remaining as of September 30, 2006.

The following unaudited pro forma financial information presents the consolidated results of operations as if the acquisition occurred on January 1, 2005, after including certain pro forma adjustments for interest expense, depreciation and amortization, and income taxes.


	Three months ended September 30, 2005		Nine months ended September 30, 2005
Revenue	$	375,573,150	$	1,112,790,407
Net income	$	13,909,654	$	40,979,871
Basic earnings per share	$	0.65	$	1.81
Diluted earnings per share	$	0.64	$	1.76

The pro forma financial information is not necessarily indicative of the combined results of operations had the transaction occurred on January 1, 2005, or the results of operations that may be obtained in the future.

On February 24, 2006, one of our unrestricted subsidiaries acquired 80% of T-Rex Cafe, Inc. (“T-Rex”) from Schussler Creative, Inc. (SCI). The agreement with SCI further provides that we can acquire SCI’s 20% interest for up to $35.0 million or that SCI can put its interest to us upon certain conditions for up to $35.0 million. In such event, combined profits from all stores would have to exceed $20.0 million. In addition, we have agreed to guarantee the funding for the construction, development and pre-opening of at least three T-Rex Cafes and one Asian themed eatery over the next three to four years in an amount estimated to be approximately $48.0 million.

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 (expected to open in early 2008) and the other for an Asian themed eatery at Disney’s Animal Kingdom Theme Park (expected to open in summer 2007).

4. ACCRUED LIABILITIES

Accrued liabilities are comprised of the following:


	September 30, 2006		December 31, 2005
Payroll and related costs	$	25,061,746	$	24,691,191
Rent and insurance		29,412,686		28,822,172
Taxes, other than payroll and income taxes		15,464,650		17,290,095
Deferred revenue (gift cards and certificates)		12,079,333		15,308,080
Accrued interest		14,434,973		2,805,847
Casino deposits, outstanding chips and other gaming related		12,398,495		9,851,072
Other		13,616,553		15,034,970

	$	122,468,436	$	113,803,427

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

5. DEBT

In connection with the acquisition of GN, one of our unrestricted subsidiaries assumed $155.0 million in 8.75% senior secured notes due December 2011 with a fair value of $159.3 million. The notes pay interest on a semi-annual basis in June and December. The notes are guaranteed, jointly and severally, by all of GN’s current and future restricted subsidiaries on a senior secured basis. The notes are collateralized by a pledge of capital stock of GN’s future restricted subsidiaries and a security interest in substantially all of GN’s and the guarantors’ current and future assets that are junior to the security interest granted to the lenders under GN’s senior revolving credit facility. We are filing the results of operations of GN 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 acquisition of GN, we assumed $27.0 million in debt under a $43.0 million bank senior secured revolving credit facility. The revolving credit facility bears interest at Libor or at the bank’s base rate plus a financing spread, 1.75% for Libor and 0.75% for base rate borrowings at September 30, 2006 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, 2006, the average interest rate on the facility was 7.2% and $2.5 million in letters of credit were outstanding with $24.5 million of available borrowing capacity.

The GN 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, 2006, GN was not in violation of such covenants.

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. The Bank Credit Facility matures in December 2009 and bears interest at Libor or the bank’s base rate plus a financing spread, 2.0% for Libor and 1.0% for base rate borrowings at September 30, 2006. In addition, the Bank Credit Facility requires a commitment fee on the unfunded portion. The financing spread and commitment fee increases or decreases based on a financial leverage ratio as defined in the credit facility. The Term Loan matures in December 2010 and, at September 30, 2006, 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. We and certain of our guarantor subsidiaries granted liens on substantially all real and personal property as security under the Bank Credit Facility and Term Loan. As of September 30, 2006, our average interest rate on floating-rate debt was 7.4%. We had approximately $11.0 million in letters of credit outstanding and available borrowing capacity of $162.0 million.

Concurrently, we issued $400.0 million in 7.5% senior notes through a private placement which are due in December 2014. The notes are general unsecured obligations and require 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 senior notes registered under the Securities Act of 1933.

Net proceeds from the $450.0 million Bank Credit Facility and Term Loan and $400.0 million in 7.5% senior notes totaled $536.6 million and were used to repay all outstanding liabilities under our former bank credit facility and $150.0 million in senior notes. 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, we entered into two interest swap agreements with the objective of managing our exposure to interest rate risk. The first agreement was effective December 28, 2004, maturing in December 2014, for a notional amount of $50.0 million and bears interest at Libor plus 2.38%. The second agreement was effective March 10, 2005, also maturing December 2014, for a notional amount of $50.0 million and bears 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, 2006 was a liability of $1.8 million, which is included in other liabilities with an offsetting adjustment to the carrying value of the notes on our consolidated balance sheets.

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, 2006, we were not in default of 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 $102,000 monthly.

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Long-term debt is comprised of the following:


	September 30, 2006			December 31, 2005
$300.0 million Bank Syndicate Credit Facility, Libor + 2.0% interest only, due December 2009	$	127,000,000		$	74,000,000
$150.0 million Term loan facility, Libor + 1.75%, interest paid quarterly, $375,000 principal paid quarterly, due December 2010		147,375,000			148,500,000
$400.0 million Senior Notes, 7.5% interest only, due December 2014		400,000,000			400,000,000
Non-recourse long-term note payable, 9.39% interest, principal and interest aggregate $101,762 monthly, due May 2010		10,873,583			11,007,078
Other long-term notes payable with various interest rates, principal and interest paid monthly		230,046			399,004
$155.0 million GN senior secured notes, 8.75% interest only, due December 2011		158,565,617			159,081,197
$43.0 million GN senior secured revolving credit facility, Libor + 1.75%, interest only, due January 2009		16,000,000			22,001,719
$4.0 million seller note, 7.0%, interest paid monthly, due November 2010		4,000,000			4,000,000
Interest rate swaps		(1,820,731	)		(1,093,458	)

Total debt		862,223,515			817,895,540
Less current portion		(1,869,396	)		(1,851,741	)

Long-term portion	$	860,354,119		$	816,043,799

6. COMMITMENTS AND CONTINGENCIES

Building Commitments

As of September 30, 2006, we had future development, land purchases and construction commitments anticipated to be expended within the next twelve months of approximately $16.7 million, including completion of construction on certain new restaurants. In addition, we expect to spend an estimated $64.7 million for the renovation of the Golden Nugget – Las Vegas during the next twelve months.

In connection with our purchase of an 80% interest in T-Rex in February 2006, we committed to spend an estimated aggregate of $48.0 million during 2006, 2007 and 2008 to complete one T-Rex restaurant in Kansas City, Kansas, construct two additional T-Rex restaurants, and also to construct an Asian themed restaurant in Walt Disney World Florida theme parks.

In 2003, we purchased the Flagship Hotel and Pier from the City of Galveston, Texas, subject to an existing lease. Under this agreement, we have committed to spend an additional $15.0 million to transform the hotel and pier into a 19^th century style Inn and entertainment complex complete with rides and carnival type games. The property is currently occupied by a tenant and renovations are not expected to begin until 2009.

During November 2003, we purchased two casual Italian restaurants. Under the purchase agreement, we are committed to build two additional 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 the consistency and the quality of the food and service are maintained through this expansion period.

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Other Commitments

Certain of our casino employees at the Golden Nugget in Las Vegas, Nevada are members of various unions and are covered by union-sponsored, collective bargained, multi-employer health and welfare and defined benefit pension plans. Under such plans, we recorded an expense of $2.9 million and $7.2 million for the three and nine months ended September 30, 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.

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 Joe’s Crab Shack – San 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 employee 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 Landry’s Seafood House – Arlington, Inc. as additional defendants. The Company denies Plaintiffs’ claims and intends to vigorously defend this matter, however, management does not believe the outcome will have a material adverse effect on our financial position.

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. The Plaintiffs seek to recover damages, including unpaid wages, reimbursement for uniform expenses and penalties imposed by state law. The Company denies Plaintiff’s claims and intends to vigorously defend this matter. As the litigation is in the early stages of the legal process, and given the inherent uncertainties of litigation, the ultimate outcome cannot be predicted at this time, nor can the amount of any potential loss be reasonably estimated.

We are subject to 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.

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

7. EARNINGS PER SHARE

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


	Three Months Ended September 30,					Nine Months Ended September 30,
	2006			2005		2006			2005
Income from continuing operations	$	3,386,862		$	9,123,046	$	27,689,568		$	25,080,471
Income (loss) from discontinued operations, net of taxes		(33,336,535	)		6,854,504		(41,094,297	)		15,817,412

Net income (loss)	$	(29,949,673	)	$	15,977,550	$	(13,404,729	)	$	40,897,883

Weighted average common shares outstanding - basic		21,350,000			21,275,000		21,350,000			22,575,000
Dilutive common stock equivalents:
Stock options		620,000			600,000		620,000			710,000
Restricted stock		30,000			25,000		30,000			15,000

Weighted average common and common share equivalents outstanding - diluted		22,000,000			21,900,000		22,000,000			23,300,000

Earnings (loss) per share - basic
Income from continuing operations	$	0.16		$	0.43	$	1.30		$	1.11
Income (loss) from discontinued operations, net of taxes	$	(1.56	)	$	0.32	$	(1.93	)	$	0.70

Net income	$	(1.40	)	$	0.75	$	(0.63	)	$	1.81


Earnings (loss) per share - diluted
Income from continuing operations	$	0.15		$	0.42	$	1.26		$	1.07
Income (loss) from discontinued operations, net of taxes	$	(1.51	)	$	0.31	$	(1.87	)	$	0.68

Net income (loss)	$	(1.36	)	$	0.73	$	(0.61	)	$	1.75

8. STOCK-BASED COMPENSATION

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, which will vest 10 years from the grant date.

In December 2004, the FASB issued SFAS No. 123R,Share-Based Payments. SFAS No. 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. We adopted SFAS No. 123R effective January 1, 2006 using the modified-prospective method and as such, results for prior periods have not been restated. Prior to January 1, 2006, we followed the intrinsic value method of accounting for stock options, and as such did not record compensation expense related to grants where the exercise price was at or above our share price on the date of grant.

Stock-based compensation expense totaling $1.3 million and $3.3 million is included in general and administrative expense for the three and nine months ended September 30, 2006, respectively. As a result of adopting SFAS No. 123R on January 1, 2006, incremental stock-based compensation expense recognized was $0.5 million ($0.4 million after tax) and $1.5 million ($1.3 million after tax), which impacted basic and diluted earnings per share by $.02 and $.07, for the three and nine months ended September 30, 2006, respectively. Stock-based compensation expense is not reported at the segment level as these amounts are not included in internal measurements of segment operating performance.

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Had we adopted the fair value method of SFAS No. 123R prior to January 1, 2006, our net income and earnings per share would have been as follow:


	Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005
Net income, as reported	$	15,977,550		$	40,897,883
Less: pro forma stock option compensation expense, net of tax		(390,000	)		(1,230,000	)

Pro forma net income	$	15,587,550		$	39,667,883

Earnings per share:
Basic - as reported	$	0.75		$	1.81
Basic - pro forma	$	0.73		$	1.76
Diluted - as reported	$	0.73		$	1.75
Diluted - pro forma	$	0.71		$	1.70

Stock option plan activity for the nine months ended September 30, 2006 is summarized below:


	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Options outstanding January 1, 2006	1,897,252		$	16.22	5.9	$	—
Granted	—		$	—	—	$	—
Exercised	(42,885	)	$	8.37	—	$	980,725
Canceled or expired	(12,212	)	$	—	—	$	—

Options outstanding September 30, 2006	1,842,155		$	16.39	5.1	$	29,592,917
Options exercisable September 30, 2006	1,443,755		$	13.95	4.5	$	26,705,669

No options were granted during 2006 or 2005. The total intrinsic value of options exercised during the nine months ended September 30, 2006 was $1.0 million. As of September 30, 2006, there was $19.6 million and $3.7 million of unrecognized compensation expense related to non-vested restricted stock awards and stock options, respectively, which will be recognized over the remaining requisite service period. Cash proceeds received from options exercised was $0.4 million for the nine months ended September 30, 2006 and 2005. As the result of recent announcements associated with stock option activity, we, as well as many companies, are reviewing our historical stock option practices. We do not believe the results of this review will have a material effect on our financial position.

Restricted stock activity for the nine months ended September 30, 2006 is summarized below:


	Shares	Average Grant Date Fair Value Per Award
Restricted stock awards, January 1, 2006	300,000	$	25.32
Granted	502,106	$	31.30
Vested	—	$	—
Canceled or expired	—	$	—

Restricted stock awards, September 30, 2006	802,106	$	29.06

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

9. SEGMENT INFORMATION

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Revenue:
Restaurant and Hospitality	$	238,926,912		$	218,168,570		$	689,424,800		$	637,754,022
Gaming		51,441,914			2,707,510			170,285,260			2,707,510

Total revenue	$	290,368,826		$	220,876,080		$	859,710,060		$	640,461,532

Unit level profit:
Restaurant and Hospitality	$	44,287,248		$	43,146,070		$	133,227,161		$	122,829,576
Gaming		8,017,778			500,431			36,859,282			499,868

Total unit level profit	$	52,305,026		$	43,646,501		$	170,086,443		$	123,329,444

Income before taxes:
Unit level profit	$	52,305,026		$	43,646,501		$	170,086,443		$	123,329,444
General and administrative		13,557,654			12,015,340			41,396,633			35,390,892
Depreciation, amortization and impairment expense		23,553,721			10,987,399			51,343,349			31,747,874
Pre-opening expenses		1,798,564			1,012,041			5,050,540			1,765,872
Interest expense, net		12,831,686			7,342,031			37,507,205			19,531,073
Other expense (income), net		(55,252	)		(151,039	)		(1,128,821	)		261,758

Consolidated income before taxes	$	618,653		$	12,440,729		$	35,917,537		$	34,631,975


							September 30, 2006			December 31, 2005
Segment assets:
Restaurant and Hospitality							$	752,552,350		$	713,622,749
Gaming								437,935,167			399,255,216
Corporate and other (1)								457,753,347			499,700,848

Total assets							$	1,648,240,864		$	1,612,578,813

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

10. SUPPLEMENTAL GUARANTOR INFORMATION

In December 2004, we issued, in a private offering, $400.0 million of 7.5% senior notes due in 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 us and certain of our 100% owned subsidiaries, “Guarantor Subsidiaries”.

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

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Condensed Unaudited Consolidating Financial Statements

Balance Sheet

September 30, 2006


	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	(7,535,612	)	$	8,410,830		$	22,324,513		$	—		$	23,199,731
Accounts receivable—trade and other, net		12,117,444			6,960,056			6,236,895			—			25,314,395
Inventories		32,841,740			11,276,963			4,743,194			—			48,861,897
Deferred taxes		11,542,614			—			1,916,170			—			13,458,784
Assets related to discontinued operations		15,321,924			199,932,623			—			—			215,254,547
Other current assets		1,307,332			3,291,079			4,618,350			—			9,216,761

Total current assets		65,595,442			229,871,551			39,839,122			—			335,306,115

PROPERTY AND EQUIPMENT, net		48,080,136			647,392,147			517,777,797			—			1,213,250,080
GOODWILL		—			18,527,547			—			—			18,527,547
OTHER INTANGIBLE ASSETS, net		1,354,484			114,445			37,682,199			—			39,151,128
INVESTMENT IN AND ADVANCES TO SUBSIDIARIES		1,108,048,935			(423,530,779	)		(329,892,374	)		(354,625,782	)		—
OTHER ASSETS, net		28,452,368			1,034,561			12,519,065			—			42,005,994

Total assets	$	1,251,531,365		$	473,409,472		$	277,925,809		$	(354,625,782	)	$	1,648,240,864

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	41,958,720		$	27,561,908		$	8,763,726		$	—		$	78,284,354
Accrued liabilities		22,194,631			61,342,227			38,931,578			—			122,468,436
Income taxes payable		(5,526,823	)		—			5,752,966			—			226,143
Current portion of long-term debt and other obligation		1,542,317			—			327,079			—			1,869,396
Liabilities related to discontinued operations		352,412			31,549,214			—			—			31,901,626

Total current liabilities		60,521,257			120,453,349			53,775,349			—			234,749,955

LONG-TERM NOTES, NET OF CURRENT PORTION		671,100,267			—			189,253,852			—			860,354,119
DEFERRED TAXES		(1,388,886	)		—			3,712,147			—			2,323,261
OTHER LIABILITIES		17,466,234			14,016,726			15,498,076			—			46,981,036

Total liabilities		747,698,872			134,470,075			262,239,424			—			1,144,408,371

COMMITMENTS AND CONTINGENCIES
TOTAL STOCKHOLDERS’ EQUITY		503,832,493			338,939,397			15,686,385			(354,625,782	)		503,832,493

Total liabilities and stockholders’ equity	$	1,251,531,365		$	473,409,472		$	277,925,809		$	(354,625,782	)	$	1,648,240,864

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Condensed Consolidating Financial Statements

Balance Sheet

December 31, 2005


	Parent		Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	3,655,367	$	10,076,314		$	25,187,281		$	—		$	38,918,962
Accounts receivable - trade and other, net		7,339,839		8,219,279			5,299,079			—			20,858,197
Inventories		38,668,993		13,487,808			3,701,007			—			55,857,808
Deferred taxes		12,763,948		—			—			—			12,763,948
Assets related to discontinued operations				275,522,805			—						275,522,805
Other current assets		1,384,892		2,917,324			7,679,550			—			11,981,766

Total current assets		63,813,039		310,223,530			41,866,917			—			415,903,486

PROPERTY AND EQUIPMENT, net		74,902,018		634,760,347			402,560,958			—			1,112,223,323
GOODWILL		—		18,527,547			—			—			18,527,547
OTHER INTANGIBLE ASSETS, net		1,968,604		148,195			29,531,222			—			31,648,021
INVESTMENT IN AND ADVANCES TO SUBSIDIARIES		1,077,872,314		(515,463,662	)		(236,587,317	)		(325,821,335	)		—
OTHER ASSETS, net		22,274,045		533,528			11,468,863			—			34,276,436

Total assets	$	1,240,830,020	$	448,729,485		$	248,840,643		$	(325,821,335	)	$	1,612,578,813

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	48,264,012	$	24,626,778		$	10,376,868		$	—		$	83,267,658
Accrued liabilities		15,240,460		64,847,110			33,715,857			—			113,803,427
Income taxes payable		3,294,035		—			1,766,850			—			5,060,885
Current portion of long-term debt and other obligation		1,538,930		—			312,811			—			1,851,741
Liabilities related to discontinued operations		—		22,619,602			—			—			22,619,602

Total current liabilities		68,337,437		112,093,490			46,172,386			—			226,603,313

LONG-TERM NOTES, NET OF CURRENT PORTION		619,994,855		—			196,048,944			—			816,043,799
DEFERRED TAXES		21,635,903		—			—			—			21,635,903
OTHER LIABILITIES		14,091,364		15,755,163			1,678,810			—			31,525,337

Total liabilities		724,059,559		127,848,653			243,900,140			—			1,095,808,352

COMMITMENTS AND CONTINGENCIES TOTAL STOCKHOLDERS’ EQUITY		516,770,461		320,880,832			4,940,503			(325,821,335	)		516,770,461

Total liabilities and stockholders’ equity	$	1,240,830,020	$	448,729,485		$	248,840,643		$	(325,821,335	)	$	1,612,578,813

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, 2006


	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries		Eliminations		Consolidated Entity
REVENUES	$	949,217		$	224,731,611		$	64,687,998	$	—	$	290,368,826
OPERATING COSTS AND EXPENSES:
Cost of Revenues		—			62,286,009			5,791,889		—		68,077,898
Labor		—			66,162,874			29,060,645		—		95,223,519
Other operating expenses		1,006,273			53,975,631			19,780,479		—		74,762,383
General and administrative expenses		13,557,654			—			—		—		13,557,654
Depreciation and amortization		973,934			10,117,479			3,826,032		—		14,917,445
Asset impairment expense		145,409			8,490,867			—		—		8,636,276
Pre-opening expenses		—			74,153			1,724,411		—		1,798,564

Total operating costs and expenses		15,683,270			201,107,013			60,183,456		—		276,973,739

OPERATING INCOME		(14,734,053	)		23,624,598			4,504,542		—		13,395,087
OTHER EXPENSES (INCOME):
Interest expense, net		9,000,354			—			3,831,332		—		12,831,686
Other, net		(370,362	)		22,328			292,782		—		(55,252	)

		8,629,992			22,328			4,124,114		—		12,776,434

Income from continuing operations before income taxes		(23,364,045	)		23,602,270			380,428		—		618,653
PROVISION (BENEFIT) FOR INCOME TAXES		(10,577,854	)		7,552,726			256,919		—		(2,768,209	)

Income from continuing operations		(12,786,191	)		16,049,544			123,509		—		3,386,862
Income (loss) from discontinued operations, net of taxes		(5,406,169	)		(27,930,366	)		—		—		(33,336,535	)
EQUITY IN EARNINGS OF SUBSIDIARIES		(11,757,313	)		—			—		11,757,313		—

NET INCOME (LOSS)	$	(29,949,673	)	$	(11,880,822	)	$	123,509	$	11,757,313	$	(29,949,673	)

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		$	208,717,930	$	10,786,485	$	—		$	220,876,080
OPERATING COSTS AND EXPENSES:
Cost of revenues		—			57,665,916		1,937,295		—			59,603,211
Labor		—			60,845,111		3,285,320		—			64,130,431
Other operating expenses		704,198			48,634,990		4,156,749		—			53,495,937
General and administrative expenses		12,015,340			—		—		—			12,015,340
Depreciation and amortization		803,404			9,725,334		458,661		—			10,987,399
Asset impairment expense		—			—		—		—			—
Pre-opening expenses		—			572,193		439,848		—			1,012,041

Total operating costs and expenses		13,522,942			177,443,544		10,277,873		—			201,244,359

OPERATING INCOME		(12,151,277	)		31,274,386		508,612		—			19,631,721
OTHER EXPENSES (INCOME):
Interest expense, net		6,907,597			—		434,434		—			7,342,031
Other, net		(195,269	)		32,840		11,390		—			(151,039	)

		6,712,328			32,840		445,824		—			7,190,992

Income from continuing operations before income taxes		(18,863,605	)		31,241,546		62,788		—			12,440,729
PROVISION (BENEFIT) FOR INCOME TAXES		(7,518,057	)		10,815,648		20,092		—			3,317,683

Income from continuing operations		(11,345,548	)		20,425,898		42,696		—			9,123,046
Income (loss) from discontinued operations, net of taxes		(4,630,321	)		11,484,825		—		—			6,854,504
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

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, 2006


	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
REVENUES	$	2,872,887		$	657,676,322		$	199,160,851		$	—		$	859,710,060
OPERATING COSTS AND EXPENSES:
Cost of Revenues		—			182,357,292			15,495,746			—			197,853,038
Labor		—			195,018,837			84,014,661			—			279,033,498
Other operating expenses		2,265,678			151,773,344			58,698,059			—			212,737,081
General and administrative expenses		41,396,598			181			(146	)		—			41,396,633
Depreciation and amortization		2,707,136			29,831,624			10,168,313			—			42,707,073
Asset impairment expense		145,409			8,490,867			—			—			8,636,276
Pre-opening expenses		—			2,658,206			2,392,334			—			5,050,540

Total operating costs and expenses		46,514,821			570,130,351			170,768,967			—			787,414,139
OPERATING INCOME		(43,641,934	)		87,545,971			28,391,884			—			72,295,921
OTHER EXPENSES (INCOME):
Interest expense, net		26,059,519			—			11,447,686			—			37,507,205
Other, net		(770,164	)		(1,301,257	)		942,600			—			(1,128,821	)

		25,289,355			(1,301,257	)		12,390,286			—			36,378,384
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(68,931,289	)		88,847,228			16,001,598			—			35,917,537
PROVISION (BENEFIT) FOR INCOME TAXES		(12,683,034	)		15,655,320			5,255,683			—			8,227,969
INCOME (LOSS) FROM CONTINUING OPERATIONS		(56,248,255	)		73,191,908			10,745,915			—			27,689,568
INCOME (LOSS) FROM DISCONTINUED OPERATIONS NET OF INCOME TAXES		(16,324,519	)		(24,769,778	)		—			—			(41,094,297	)
EQUITY IN EARNINGS OF SUBSIDIARIES		59,168,045			—			—			(59,168,045	)		—

NET INCOME (LOSS)	$	(13,404,729	)	$	48,422,130		$	10,745,915		$	(59,168,045	)	$	(13,404,729	)

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		$	611,575,661	$	25,083,182	$	—		$	640,461,532

OPERATING COSTS AND EXPENSES:
Cost of revenues		—			171,126,507		5,058,502		—			176,185,009
Labor		—			178,801,245		6,841,191		—			185,642,436
Other operating expenses		2,581,822			143,032,731		9,690,090		—			155,304,643
General and administrative expenses		35,390,892			—		—		—			35,390,892
Depreciation and amortization		2,385,791			28,490,705		871,378		—			31,747,874
Asset impairment expense		—			—		—		—			—
Pre-opening expenses		—			1,320,194		445,678		—			1,765,872

Total operating costs and expenses		40,358,505			522,771,382		22,906,839		—			586,036,726

OPERATING INCOME		(36,555,816	)		88,804,279		2,176,343		—			54,424,806

OTHER EXPENSES (INCOME):
Interest expense, net		18,538,885			—		992,188		—			19,531,073
Other, net		152,778			96,707		12,273		—			261,758

		18,691,663			96,707		1,004,461		—			19,792,831

Income from continuing operations before income taxes		(55,247,479	)		88,707,572		1,171,882		—			34,631,975
PROVISION (BENEFIT) FOR INCOME TAXES		(22,448,463	)		31,624,965		375,002		—			9,551,504

Income from continuing operations		(32,799,016	)		57,082,607		796,880		—			25,080,471
Income (loss) from discontinued operations, net of taxes		(14,903,968	)		30,721,380		—		—			15,817,412
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

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, 2006


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated Entity
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(13,404,729	)	$	48,422,130		$	10,745,915		$	(59,168,045	)	$	(13,404,729	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		2,705,068			43,915,913			10,151,296			—			56,772,277
Asset impairment expense		2,290,352			70,037,945			—			—			72,328,297
Change in assets and liabilities, net and other		(67,918,522	)		(100,600,018	)		105,627,148			59,168,045			(5,723,347	)

Total Adjustments		(62,923,102	)		13,353,840			113,778,444			59,168,045			123,377,227

Net cash provided by (used in) operating activities		(76,327,831	)		61,775,970			124,524,359			—			109,972,498
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions and/or transfers		16,233,180			(64,886,264	)		(116,202,923	)		—			(164,856,007	)
Proceeds from disposition of property and equipment		—			1,450,000			2,941,896			—			4,391,896
Business acquisitions and related payments, net of cash acquired		—			—			(7,860,857	)		—			(7,860,857	)

Net cash provided by (used in) investing activities		16,233,180			(63,436,264	)		(121,121,884	)		—			(168,324,968	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options		354,189			—			—			—			354,189
Payments of debt and related expenses, net		(1,163,927	)		—			(260,555	)		—			(1,424,484	)
Payments on credit facility		(68,000,000	)		—			(47,309,586	)		—			(115,309,586	)
Proceeds from credit facility		121,000,000			—			41,304,898			—			162,304,898
Dividends paid		(3,286,588	)		—			—			—			(3,286,588	)

Net cash provided by (used in) financing activities		48,903,672			—			(6,265,243	)		—			42,638,429
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(11,190,979	)		(1,660,294	)		(2,862,768	)		—			(15,714,041	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		3,655,367			10,372,914			25,187,281			—			39,215,562

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	(7,535,612	)	$	8,712,620		$	22,324,513		$	—		$	23,501,521

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
	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 by (used in) 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 by (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 bank credit facility		97,000,000			—			—			—			97,000,000
Payments on bank credit facility		(27,000,000	)		—			—			—			(27,000,000	)
Dividends paid		(3,547,041	)		—			—			—			(3,547,041	)

Net cash provided by (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

LANDRY’S RESTAURANTS, INC.

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

The following presents an analysis of the results and financial condition of our continuing operations. Except where indicated otherwise, the results of discontinued operations are excluded from this discussion.

We are a national, diversified restaurant, hospitality and entertainment company principally engaged in the ownership and operation of full service, casual dining restaurants. As of September 30, 2006, we operated 183 such restaurants as well as several limited menu restaurants and other properties, including the Golden Nugget Hotels and Casinos (“Golden Nugget”) in Las Vegas and Laughlin, Nevada.

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, hospitality and entertainment 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 locations 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 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 have historically pursued an acquisition strategy and we evaluate other restaurant, hospitality and gaming assets as acquisition opportunities arise. From time to time we also evaluate our portfolio of restaurant and hospitality concepts as well as other assets within the context of our expectations for future growth and current market value. We may pursue strategic alternatives for certain of these concepts or assets if we believe such alternatives will improve shareholder value over the long term.

In July 2006, we announced that we were evaluating strategic alternatives for our Joe’s Crab Shack concept and opportunities to enhance shareholders value through our Saltgrass Steak House concept. In September 2006, we committed to a disposal plan to sell 136 Joe’s restaurants, which included a number of closed locations. Results of operations for these restaurants have been reclassified as discontinued operations in the statement of earnings. As part of our strategic review of the Joe’s concept, we also identified certain locations that we believe are suitable for conversion into other Landry’s concepts. The results of these conversion units are included in continuing operations.

On September 27, 2005, Landry’s Gaming, Inc., an unrestricted subsidiary, acquired the outstanding capital stock of Golden Nugget, Inc. (GN, formerly Poster Financial Group), 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. The Golden Nugget – Las Vegas occupies over eight acres in downtown Las Vegas with approximately 38,000 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 are included in our financial statements from the date of acquisition.

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 successfully complete the Golden Nugget renovation, our ability to obtain adequate capital at an acceptable cost, 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, 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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenues	23.4	%	27.0	%	23.0	%	27.5	%
Labor	32.8	%	29.0	%	32.5	%	29.0	%
Other operating expenses (1)	25.7	%	24.2	%	24.8	%	24.2	%

Unit level profit (1)	18.1	%	19.8	%	19.7	%	19.3	%

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

Three Months Ended September 30, 2006 Compared to the Three Months Ended September 30, 2005

Revenues increased $69,492,746, or 31.5%, for the three months ended September 30, 2006 compared to the three months ended September 30, 2005.

Restaurant and hospitality revenues increased $20,758,342, or 9.5%, as result of the following approximate amounts: new restaurant openings—increase $15.7 million; same store sales (restaurants open all of the third quarter of 2006 and 2005) – increase $8.7 million, restaurant closings-decrease $2.9 million; units closed for an extended period as a result of the hurricanes—decrease $1.1 million; and the remainder of the difference is attributable to the change in sales for stores not open a full comparable period. The total number of units open as of September 30, 2006 and 2005 were 183 and 176, respectively.

Gaming revenues increased $48,734,404 for the three months ended September 30, 2006 as a result of the acquisition of the Golden Nugget. The results of the Golden Nugget are included from the September 27, 2005 acquisition date.

Cost of revenues increased $8,474,687, or 14.2%, to $68,077,898 from $59,603,211 in the three months ended September 30, 2006, compared to the same period in the prior year primarily as a result of increased revenues. Cost of revenues as a percentage of revenues for the three months ended September 30, 2006 decreased to 23.4% from 27.0% in 2005. The decrease in cost of revenues as a percentage of revenues resulted primarily from the acquisition of the Golden Nugget as gaming revenues are generally derived from higher labor and other operating expenses and lower cost of revenues than restaurant and hospitality revenues.

Labor expense increased $31,093,088, or 48.5%, from $64,130,431 to $95,223,519 for the three months ended September 30, 2006, 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 three months ended September 30, 2006 increased to 32.8% from 29.0% in 2005. The increase in labor as a percentage of revenues resulted primarily from the acquisition of the Golden Nugget as gaming revenues are generally derived from higher labor and other operating expenses and lower cost of revenues than restaurant and hospitality revenues.

Other operating expenses increased $21,266,446, or 39.8%, from $53,495,937 to $74,762,383 for the three months ended September 30, 2006, 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 25.7% in 2006 from 24.2% in 2005. The increase in other operating expenses as a percentage of revenues resulted primarily from the acquisition of the Golden Nugget as gaming revenues are generally derived from higher labor and other operating expenses and lower cost of revenues than restaurant and hospitality revenues.

General and administrative expenses increased $1,542,314, or 12.8%, to $13,557,654 from $12,015,340 for the three months ended September 30, 2006 as compared to the prior year, but decreased as a percentage of revenues to 4.7% in 2006 from 5.4% in 2005. This decrease is primarily attributable to the increase in revenues, offset by increased stock-based compensation expense as compared to the prior year comparable period.

Depreciation and amortization expense increased by $3,930,046, or 35.8%, from $10,987,399 to $14,917,445 for the three months ended September 30, 2006, compared to the same period in the prior year. The increase for 2006 was due to the acquisition of the Golden Nugget and the addition of new restaurants and equipment.

Asset impairment expense was $8,636,276 for the three months ended September 30, 2006 compared with no impairment expense for the same period in 2005. The impairment charges relate to Joe’s locations that we intend to convert into other Landry’s concepts.

Pre-opening expenses increased by $786,523 from $1,012,041 for the three months ended September 30, 2005 to $1,798,564 for the three months ended September 30, 2006. This increase relates to the both the number and type of openings undertaken in 2006 compared with the prior year.

The increase in net interest expense for the three months ended September 30, 2006, as compared to the prior year, is primarily due to increased borrowings related to the acquisition of the Golden Nugget and higher average borrowing rates as compared to the prior year period.

An income tax benefit was recorded for the three months ended September 30, 2006 compared with a provision of $3,317,683 for the three months ended September 30, 2005.

The after tax loss from discontinued operations was $33,336,535 for the three months ended September 30, 2006. This loss was due largely to charges taken of $55.8 million relating to asset impairment, lease termination and store closure costs. Income from discontinued operations was $6,854,504 (net of tax) for the three months ended September 30, 2005, and consisted mainly of operating income.

Nine Months Ended September 30, 2006 Compared to the Nine Months Ended September 30, 2005

Revenues increased $219,248,528, or 34.2%, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005.

Restaurant and hospitality revenues increased $51,670,778, or 8.1%, as result of the following approximate amounts: new restaurant openings—increase $35.1 million; same store sales (restaurants open all of the first nine months of 2006 and 2005) – increase $28.1 million, restaurant closings-decrease $7.3 million; units closed for an extended period as a result of the hurricanes—decrease $4.9 million; and the remainder of the difference is attributable to the change in sales for stores not open a full comparable period. The total number of units open as of September 30, 2006 and 2005 were 183 and 176, respectively.

Gaming revenues increased $167,577,750 for the nine months ended September 30, 2006 as a result of the acquisition of the Golden Nugget. The results of the Golden Nugget are included from the September 27, 2005 acquisition date.

Cost of revenues increased $21,668,029, or 12.3%, from $176,185,009 to $197,853,038 for the nine months ended September 30, 2006, compared to the same period in the prior year primarily as a result of increased revenues. Cost of revenues as a percentage of revenues for the nine months ended September 30, 2006 decreased to 23.0% from 27.5% in 2005. The decrease in cost of revenues as a percentage of revenues resulted primarily from the acquisition of the Golden Nugget as gaming revenues are generally derived from higher labor and other operating expenses and lower cost of revenues than restaurant and hospitality revenues.

Labor expense increased $93,391,062 or 50.3%, from $185,642,436 to $279,033,498 for the nine months ended September 30, 2006, 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, 2006 increased to 32.5% from 29.0% in 2005. The increase in labor as a percentage of revenues resulted primarily from the acquisition of the Golden Nugget as gaming revenues are generally derived from higher labor and other operating expenses and lower cost of revenues than restaurant and hospitality revenues.

Other operating expenses increased $57,432,438, or 37.0%, from $155,304,643 to $212,737,081 for the nine months ended September 30, 2006, 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 24.7% in 2006 from 24.2% in 2005. The increase in other operating expenses as a percentage of revenues resulted primarily from the acquisition of the Golden Nugget as gaming revenues are generally derived from higher labor and other operating expenses and lower cost of revenues than restaurant and hospitality revenues.

General and administrative expenses increased $6,005,741, or 17.0%, from $35,390,892 to $41,396,633 for the nine months ended September 30, 2006 as compared to the prior year but decreased as a percentage of revenues to 4.8% in 2006 from 5.5% in 2005. This decrease is primarily attributable to the increase in revenues, offset by increased stock-based compensation expense as compared to the prior year comparable period.

Depreciation and amortization expense increased by $10,959,199, or 34.5%, from $31,747,874 to $42,707,073 in the nine months ended September 30, 2006, compared to the same period in the prior year. The increase for 2006 was due to the acquisition of the Golden Nugget and the addition of new restaurants and equipment.

Asset impairment expense was $8,636,276 for the nine months ended September 30, 2006 compared with no impairment expense for the same period in 2005. The impairment charges relate to Joe’s locations that we intend to convert into other Landry’s concepts.

Pre-opening expenses were $5,050,540 for the nine months ended September 30, 2006, compared to $1,765,872 for the same period in the prior year. The increase relates to the both the number and type of openings undertaken in 2006 compared with the prior year.

The increase in net interest expense for the nine months ended September 30, 2006, as compared to the prior year, is primarily due to increased borrowings related to the acquisition of the Golden Nugget and higher average borrowing rates as compared to the prior year period.

Other income, net of $1,128,821 for the nine months ended September 30, 2006, consists primarily of a gain recognized on the sale of a restaurant property.

The provision for income taxes decreased due to the change in our pre-tax income and a decline in our effective tax rate to 22.9% for the nine months ended September 30, 2006 as compared to the 27.6% rate for the prior year period.

The after tax loss from discontinued operations was $41,094,297 for the nine months ended September 30, 2006, largely due to charges of $65.4 million relating to asset impairment, lease termination and store closure costs. Income from discontinued operations was $15,817,412 (net of tax) for the nine months ended September 30, 2005, and consisted mainly of operating income.

Liquidity and Capital Resources

On September 27, 2005, we acquired all of the capital stock of Golden Nugget 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 revolving credit facility and existing senior notes by entering into a new five year $300.0 million Bank Credit Facility and a six year $150.0 million Term Loan. The Bank Credit Facility matures in December 2009 and the Term Loan matures in December 2010. Interest on the Bank Credit Facility is payable monthly or quarterly at Libor or the bank’s base rate plus a financing spread. Interest on the Term Loan is payable quarterly at Libor plus a financing spread. The financing spread under the Bank Credit Facility and the Term Loan at September 30, 2006 was 2.0% and 1.75%, respectively, for Libor borrowings and 1.0% and 0.75% for base rate borrowings. As of September 30, 2006, we had approximately $162.0 million available under the existing revolving credit facility for expansion and working capital purposes.

Concurrent with the closing of the Bank Credit Facility and Term Loan in December 2004, we also issued $400.0 million in senior notes through a private placement offering. The senior notes are general unsecured obligations of the Company and mature December 2014. Interest is payable semi-annually at 7.5%. On June 16, 2005, we completed an exchange offering whereby substantially all of the senior notes issued under the private placement were exchanged for senior notes registered under the Securities Act of 1933.

Net proceeds from the Bank Credit Facility and Term Loan and senior notes totaled $536.6 million and were used to repay all outstanding liabilities under our then existing credit facility and senior notes. These debt repayments resulted in a pre-tax charge of $16.6 million in the fourth quarter of 2004.

The Bank Credit Facility and Term Loan are secured by substantially all real and personal property of the guarantor subsidiaries and governed by certain financial covenants, including minimum fixed charge, net worth, and our financial leverage ratios as well as limitations on dividend payments, capital expenditures and other restricted payments as defined in the agreements.

Capital expenditures for the nine months ended September 30, 2006 were $164.9 million, including $19.7 million for land purchases and $66.1 million for the Golden Nugget renovation. We expect capital expenditures to be approximately $40.9 million for the remainder of the year primarily for the renovation and expansion of the Golden Nugget and new restaurants.

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, 2006. The proceeds from the expected sale of Joe’s Crab Shack will primarily be used to pay down our existing Bank Credit Facility and Term Loan which will improve our financial flexibility in the future.

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 restaurant and hospitality volumes cause revenues and, to a greater degree, restaurant and hospitality 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. Periodically, our sales and profitability may be negatively affected by adverse weather. The timing of unit openings can and will affect quarterly results.

Critical Accounting Policies

Restaurant and other properties are reviewed on a property by property basis for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. The recoverability of properties that are to be held and used is measured by comparison of the estimated future undiscounted cash flows associated with the asset to the carrying amount of the asset. Goodwill and other non-amortizing intangible assets are reviewed for impairment at least annually using estimates of future operating results. 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.

We operate approximately 183 properties and periodically 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, generally excluding the owned land component, of approximately $2.0 million, 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”. 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 and services.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. We are currently assessing the impact of this Interpretation on our financial statements. Upon adoption, the cumulative effect of applying the recognition and measurement provisions of FIN 48, if any, shall be reflected as an adjustment to the opening balance of retained earnings.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108,Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements. The Bulletin addresses the diversity in practice of quantifying and assessing materiality of financial statement errors. It is effective for fiscal years ending after November 15, 2006 and allows for a one-time transitional cumulative effect adjustment to the opening balance of retained earnings for errors that were not previously deemed material. We do not believe that adoption of SAB 108 will have a material impact 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 restaurant labor costs, including expected future increases in federal or state minimum wages, energy costs, rising interest rates 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.

Interest Rate Risk

Total debt at September 30, 2006 included $390.4 million of floating-rate debt attributed to borrowings at an average interest rate of 7.4%. As a result, our annual interest cost in 2006 will fluctuate based on short-term interest rates. The impact on annual cash flow of a ten percent change in the floating-rate (approximately 0.7%) would be approximately $2.9 million annually based on the floating-rate debt and other obligations outstanding at September 30, 2006, however, there are no assurances that possible rate changes would be limited to such amounts.

In connection with the 7.5% senior notes due 2014, we have 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.

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, 2006, 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, 2006. During the nine months ended September 30, 2006, 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.

PART II. OTHER INFORMATION

ITEM 1.Legal Proceedings

General Litigation

On April 4, 2006, a purported class action lawsuit was filed against Joe’s Crab Shack – San 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 employee 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 Landry’s Seafood House – Arlington, Inc. as additional defendants. The Company denies Plaintiffs’ claims and intends to vigorously defend this matter. 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.

We are subject to legal proceedings and claims that arise in the ordinary course of business.

ITEM 1A.Risk Factors

Except as provided below, there have been no material changes to the Risk Factors disclosed in our 2005 Annual Report on Form 10-K. In response to higher insurance costs for our property and casualty coverage due to our large concentration of coastal properties, we significantly reduced our aggregate insurance policy limits and purchased individual windstorm policies for the majority of our operating units located along the Texas gulf coast. Although we have never had an insurance claim in excess of our existing coverage, there is no assurance that we will have adequate insurance coverage to recover losses that may result from a catastrophic event.

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, 2006.

We made no purchases of our common stock during the nine months ended September 30, 2006 and have approximately $55.5 million that may yet be purchased under existing programs.

ITEM 6.Exhibits

The following Exhibits are set forth herein commencing on page 34:

12.1

—Ratio of Earnings to Fixed Charges

31.1

—Certification by Chief Executive Officer

31.2

—Certification by Chief Financial Officer

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

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, 2006

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Landrys Restaurants (LNY) Inactive 10-Q2006 Q3 Quarterly report

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