Landrys Restaurants (LNY) 10-Q 2010 Q1 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 MARCH 31, 2010.

Commission file number 000-22150

LANDRY’S RESTAURANTS, INC.

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

DELAWARE

(State or other jurisdiction of

incorporation of organization)

76-0405386

(I.R.S. Employer

Identification No.)

1510 West Loop South, Houston, TX 77027

(Address of principal executive offices)

(713) 850-1010

(Registrants telephone number)

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

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

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

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

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

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

AS OF MAY 7, 2010 THERE WERE

16,236,435 SHARES OF $0.01 PAR VALUE

COMMON STOCK OUTSTANDING

INDEX

		Page Number
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets at March 31, 2010 (unaudited) and December 31, 2009	3
	Condensed Unaudited Consolidated Statements of Income for the Three Months Ended March 31, 2010 and 2009	4
	Condensed Unaudited Consolidated Statement of Changes in Equity for the Three Months Ended March 31, 2010	6
	Condensed Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009	7
	Notes to Condensed Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	34
Item 6.	Exhibits	34
Signatures		35

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LANDRY’S RESTAURANTS, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

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

The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and related notes to financial statements included in our Annual Report on Form 10-K as amended by our Form 10-K/A for the fiscal year ended December 31, 2009. Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending December 31, 2010.

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

This report includes certain forward-looking statements within the meaning of the federal securities laws. You can generally identify forward-looking statements by the appearance in such a statement of words like “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should” or “will” or other comparable words or the negative of these words. When you consider our forward-looking statements, you should keep in mind the risk factors we describe and other cautionary statements we make in this Form 10-Q. Our forward-looking statements are only predictions based on expectations that we believe are reasonable. Our actual results could differ materially from those anticipated in, or implied by, these forward-looking statements as a result of known risks and uncertainties set forth below and elsewhere in this Form 10-Q. These factors include or relate to the following:

• the merger agreement entered into by us and Fertitta Holdings, Inc. et al on November 3, 2009 and whether it will be consummated;

• our ability to implement our business strategy;

• our ability to expand and grow our business and operations;

• the outcome of legal proceedings that have been, or may be, initiated against us related to the proposed merger with an affiliate in 2008 and its termination and the proposed merger in 2009 with an affiliate:

• risks that the termination of the 2009 merger agreement may disrupt current plans and operations and create employee retention difficulties;

• the impact of future commodity prices;

• the availability of food products, materials and employees;

• consumer perceptions of food safety;

• changes in local, regional and national economic conditions;

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

• the effectiveness of our marketing efforts;

• changing demographics surrounding our restaurants, hotels and casinos;

• the effect of changes in tax laws;

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

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

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

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

• the seasonality and cyclical nature of our business;

• weather and acts of God;

1

• the ability to maintain existing management;

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

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

• the effects of “climate change” on our operation;

• the effects of the oil spill in the Gulf of Mexico on the availability and price of certain seafood;

• food, labor, fuel and utilities costs; and

• the other factors discussed under “Risk Factors,” included in our Form 10-K for the year ended December 31, 2009.

We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. To the extent these risks, uncertainties and assumptions give rise to events that vary from our expectations, the forward-looking events discussed herein may not occur. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. Some of these and other risks and uncertainties that could cause actual results to differ materially from such forward-looking statements are more fully described under Item 1A. “Risk Factors” and elsewhere in our Form 10-K for the year ended December 31, 2009. We assume no obligation to modify or revise any forward looking statements to reflect any subsequent events or circumstances arising after the date that the statement was made.

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LANDRY’S RESTAURANTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2010			December 31, 2009
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	38,753,193		$	71,584,322
Restricted cash and cash equivalents		73,150,570			73,076,532
Accounts receivable - trade and other, net		29,749,012			28,730,944
Inventories		28,141,720			27,558,494
Deferred taxes		4,475,271			15,658,214
Assets related to discontinued operations		1,960,344			2,960,514
Other current assets		14,115,955			13,364,757
Total current assets		190,346,065			232,933,777
PROPERTY AND EQUIPMENT, net		1,324,536,246			1,334,334,637
GOODWILL		18,527,547			18,527,547
OTHER INTANGIBLE ASSETS, net		38,660,217			38,719,325
OTHER ASSETS, net		78,096,084			75,552,531
Total assets	$	1,650,166,159		$	1,700,067,817
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable	$	54,081,302		$	64,320,097
Accrued liabilities		132,101,605			122,275,958
Current portion of long-term notes and other obligations		30,114,450			30,181,424
Liabilities related to discontinued operations		1,705,910			2,850,225
Total current liabilities		218,003,267			219,627,704
LONG-TERM NOTES, NET OF CURRENT PORTION		994,080,217			1,064,758,656
OTHER LIABILITIES		107,438,723			103,808,585
Total liabilities		1,319,522,207			1,388,194,945
COMMITMENTS AND CONTINGENCIES
REDEEMABLE NONCONTROLLING INTEREST		10,540,193			10,318,386
EQUITY:
Common stock, $0.01 par value, 60,000,000 shares authorized, 16,237,851 shares issued and outstanding		162,379			162,379
Additional paid-in capital		228,203,235			227,386,478
Retained earnings		114,324,636			99,998,441
Accumulated other comprehensive loss		(23,586,491	)		(26,992,812	)
Total stockholders’ equity		319,103,759			300,554,486
Noncontrolling interest		1,000,000			1,000,000
Total equity		320,103,759			301,554,486
Total liabilities and equity	$	1,650,166,159		$	1,700,067,817

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

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LANDRY’S RESTAURANTS, INC.

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended March 31,
	2010			2009
REVENUES:
Restaurant and hospitality	$	199,244,432		$	200,275,650
Gaming:
Casino		36,817,799			35,968,289
Rooms		14,113,374			12,405,816
Food and beverage		11,100,705			10,486,228
Other		3,917,411			3,612,364
Promotional allowances		(6,462,848	)		(6,458,364	)
Net gaming revenue		59,486,441			56,014,333
Total revenue		258,730,873			256,289,983
OPERATING COSTS AND EXPENSES:
Restaurant and hospitality:
Cost of revenues		49,009,067			49,663,525
Labor		58,495,159			57,995,708
Other operating expenses		50,602,023			40,873,669
Gaming:
Casino		18,430,224			19,620,490
Rooms		5,927,294			5,609,715
Food and beverage		6,341,599			5,701,286
Other		14,564,401			12,364,687
General and administrative expense		12,698,887			12,058,150
Depreciation and amortization		19,104,021			17,760,491
Gain on insurance claims		(1,237,856	)		(3,482,897	)
Gain on disposal of assets		(938,268	)		(622,299	)
Pre-opening expenses		92,614			256,164
Total operating costs and expenses		233,089,165			217,798,689
OPERATING INCOME		25,641,708			38,491,294
OTHER EXPENSE (INCOME):
Interest expense, net		29,033,698			24,614,574
Other, net		(22,644,192	)		4,134,412
Total other expense		6,389,506			28,748,986
Income from continuing operations before income taxes		19,252,202			9,742,308
Provision for income taxes		4,666,214			2,387,581
Income from continuing operations		14,585,988			7,354,727
Loss from discontinued operations, net of taxes		(37,986	)		(50,903	)
Net income		14,548,002			7,303,824
Less: Net income attributable to noncontolling interest		221,807			230,578
Net income attributable to Landry’s		14,326,195			7,073,246
Less: Accretion of redeemable noncontrolling interest		—			1,064,763
Net income available to Landry’s common stockholders	$	14,326,195		$	6,008,483

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

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LANDRY’S RESTAURANTS, INC.

EARNINGS (LOSS) PER SHARE INFORMATION

Amounts available to Landry’s common stockholders:
BASIC
Income from continuing operations	$	0.88	$	0.37
Loss from discontinued operations		—		—
Net income	$	0.88	$	0.37
Weighted average number of common shares outstanding		16,240,000		16,140,000
DILUTED
Income from continuing operations	$	0.87	$	0.37
Loss from discontinued operations		—		—
Net income	$	0.87	$	0.37
Weighted average number of common and common share equivalents outstanding		16,500,000		16,155,000

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

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LANDRY’S RESTAURANTS, INC.

CONDENSED UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

			Equity
			Stockholder’s Equity
						Additional Paid-In Capital				Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest		Total			Comprehensive Income
	Redeemable Noncontrolling Interest		Common Stock					Retained Earnings
			Shares	Amount
Balance, December 31, 2009	$	10,318,386	16,237,851	$	162,379	$	227,386,478	$	99,998,441	$	(26,992,812	)	$	1,000,000	$	301,554,486		$	—
Net income		221,807	—		—		—		14,326,195		—			—		14,326,195			14,548,002
Ineffective portion of swaps associated with debt repurchase		—	—		—		—		—		5,548,549			—		5,548,549			5,548,549
Loss on interest rate swaps, net of tax benefit of $1,153,507		—	—		—		—		—		(2,142,228	)		—		(2,142,228	)		(2,142,228	)
Stock based compensation expense		—	—		—		816,757		—		—			—		816,757			—
Balance, March 31, 2010	$	10,540,193	16,237,851	$	162,379	$	228,203,235	$	114,324,636	$	(23,586,491	)	$	1,000,000	$	320,103,759		$	17,954,323

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

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LANDRY’S RESTAURANTS, INC.

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended March 31,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	14,548,002		$	7,303,824
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		19,104,021			17,760,491
Gain on debt repurchase		(32,998,237	)		—
Gain on disposition of assets		(938,268	)		(622,299	)
Gain on insurance claims		(1,237,856	)		(3,482,897	)
Changes in assets and liabilities, net and other		23,517,496			(7,092,148	)
Total adjustments		7,447,156			6,563,147
Net cash provided by operating activities		21,995,158			13,866,971
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions		(16,376,252	)		(42,494,299	)
Proceeds from asset dispositions		1,697,756			5,471,859
Increase in restricted cash and cash equivalents		(74,038	)		—
Net cash used in investing activities		(14,752,534	)		(37,022,440	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of common stock for treasury		—			(37,416	)
Proceeds from exercise of stock options		—			21,250
Payments of debt and related expenses		(34,718,332	)		(65,120	)
Financing proceeds		—			390,040,000
Repayment of bonds		—			(398,362,000	)
Debt issuance costs		(1,891,444	)		(17,350,710	)
Proceeds from credit facility		73,392,802			150,118,419
Payments on credit facility		(76,856,779	)		(79,227,054	)
Net cash (used in) provided by financing activities		(40,073,753	)		45,137,369
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS		(32,831,129	)		21,981,900
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		71,584,322			51,066,805
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	38,753,193		$	73,048,705
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest	$	14,812,373		$	19,274,951
Income taxes	$	(8,819	)	$	(367,446	)

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

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

We are a national, diversified restaurant, hospitality and entertainment company principally engaged in the ownership and operation of full service, casual dining restaurants, primarily under the names Landry’s Seafood House, Charley’s Crab, The Chart House, Saltgrass Steak House, Rainforest Café, and The Oceanaire Seafood Room. In addition, we own and operate domestically and license internationally rainforest themed restaurants under the trade name Rainforest Cafe, and we own and operate the Golden Nugget Hotels and Casinos in downtown Las Vegas and Laughlin, Nevada and the Kemah Boardwalk in Kemah, Texas.

Discontinued Operations

During 2006, as part of a strategic review of our operations, we initiated a plan to divest certain restaurants, including 136 Joe’s Crab Shack units (Note 3). Subsequently, several additional locations were added to our disposal plan. The results of operations, assets and liabilities for all units included in the disposal plan have been reclassified to discontinued operations in the statements of income, balance sheets and segment information for all periods presented.

Principles of Consolidation

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

Basis of Presentation

The condensed consolidated financial statements included herein have been prepared by us without audit, except for the consolidated balance sheet as of December 31, 2009. 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, 2009, consolidated financial statements filed with the Securities and Exchange Commission on Form 10-K, as amended by our filing on Form 10-K/A.

Restaurant and hospitality revenues are recognized when the goods and services are delivered. Casino revenues are the aggregate net difference between gaming wins and losses, with liabilities recognized for funds deposited by customers before gaming play occurs (“casino front money”) and for chips in the customers possession (“outstanding chip liability”). Revenues are recognized net of certain sales incentives as well as accruals for the cost of points earned in point-loyalty programs. The retail value of accommodations, food and beverage, and other services furnished to hotel-casino guests without charge is deducted from revenue as promotional allowances. Proceeds from the sale of gift cards are deferred and recognized as revenue when redeemed by the holder.

Accounts receivable is comprised primarily of amounts due from our credit card processor, receivables from national storage and distribution companies and, casino and hotel receivables. The receivables from national storage and distribution companies arise when certain of our inventory items are conveyed to these companies at cost (including freight and holding charges but without any general overhead costs). These conveyance transactions do not impact the consolidated statements of income as there is no revenue or expense recognized in the financial statements since they are without economic substance other than drayage. We reacquire these items, although not obligated to, when subsequently delivered to our restaurants at cost plus the distribution company’s contractual mark-up. Accounts receivable are reduced to reflect estimated realizable values by an allowance for doubtful accounts based on historical collection experience and specific review of individual accounts. Receivables are written off when they are deemed to be uncollectible.

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

Financial Instruments

Generally Accepted Accounting Principles (GAAP) establishes a hierarchy for fair value measurements, such that Level 1 measurements include unadjusted quoted market prices for identical assets or liabilities in an active market, Level 2 measurements include quoted market prices for identical assets or liabilities in an active market which have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets, and Level 3 measurements include those that are unobservable and of a highly subjective measure.

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Our financial assets and liabilities that are accounted for at fair value on a recurring basis as of March 31, 2010, consist primarily of interest rate swaps (Note 5), for which the lowest level of input significant to their fair value measurement is Level 2. As of March 31, 2010, the fair value of the interest rate swap liabilities totaled $64.8 million, of which $36.3 million are designated and qualify as hedges and the remaining $28.5 million do not qualify as hedges. As of December 31, 2009, the fair value of the interest rate swap liabilities totaled $60.0 million, of which $41.5 million are designated and qualify as hedges and the remaining $18.5 million do not qualify as hedges. These amounts are recorded as other long term liabilities in our consolidated balance sheets. In connection with a non-qualified deferred compensation plan, we use a Rabbi Trust to fund obligations of the plan. The market value of the trust assets as of March 31, 2010 and December 31, 2009 was $4.1 million and $4.0 million respectively, as determined using Level 1 inputs, is included in other assets, net and the liability to plan participants is included in other long term liabilities in our consolidated balance sheets.

The fair values of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate the carrying amounts due to their short maturities. The fair value of our long-term debt instruments are estimated based on quoted market prices, where available, or on the amount of future cash flows associated with each instrument, discounted using our current borrowing rate for comparable debt instruments. The estimated fair values of our significant long-term debt, including the current portions, are as follows:

	March 31, 2010				December 31, 2009
	Carrying Value		Fair Value		Carrying Value		Fair Value
Libor + 3.0% (1% PIK) Revolving credit facility due June 2013	$	36,922,622	$	28,338,112	$	44,755,040	$	30,964,893
Libor + 6.0% (2.0% floor) Revolving credit facility due November 2013		28,000,000		28,000,000		24,000,000		24,270,000
Libor + 6.0% (2.0% floor) Term Loan due November 2013		149,262,942		152,600,000		153,014,556		154,735,970
Libor + 3.0% (1% PIK) First Lien Term Loan due June 2014		325,044,606		249,471,735		325,495,365		225,202,106
Libor + 3.25% Second Lien Term Loan due November 2014		68,987,233		27,594,893		131,817,628		53,386,139
7.0% Seller note due November 2014		4,000,000		3,134,432		4,000,000		4,033,937
7.5% Senior Notes due December 2014		783,000		726,809		783,000		588,973
9.5% Senior Notes due December 2014		735,000		735,000		735,000		665,175
11 5/8% Senior Notes due December 2015		400,355,556		436,987,500		400,168,809		424,178,938
9.39% non-recourse note payable due May 2010		10,103,708		9,888,389		10,170,682		10,471,319
	$	1,024,194,667	$	937,476,870	$	1,094,940,080	$	928,497,450

Recently Adopted Accounting Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance on accounting for transfers of financial assets which removes the concept of a qualifying special-purpose entity (QSPE) and clarifies the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. We adopted the new accounting guidance beginning January 1, 2010. This new accounting guidance did not impact our financial position, cash flows or results of operations.

In June 2009, the FASB issued new accounting guidance which revises the approach to determining the primary beneficiary of a variable interest entity (VIE) to be more qualitative in nature and requires companies to more frequently reassess whether they must consolidate a VIE. We adopted the new accounting guidance beginning January 1, 2010. This new accounting guidance did not impact our financial position, cash flows or results of operations.

In January 2010, the FASB issued guidance that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements, including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. We adopted the new accounting guidance beginning January 1, 2010. This update had no impact on our financial position, cash flows or results of operations.

Other Matters

Our Chairman and Chief Executive Officer controls over 50% of our voting common stock and he is able to control the election of directors and determine the outcome of all matters submitted to a vote of our stockholders, including matters involving mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional shares of common stock or other equity securities and the payment of dividends on common stock. He will also have the power to prevent or cause a change in control unless he chooses not to as is the case in the pending Merger, and could take other actions that might be desirable to him but not to other stockholders.

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. HURRICANE IKE

On September 13, 2008, Hurricane Ike struck the Gulf Coast of the United States, causing considerable damage to the cities of Galveston, Kemah and Houston, Texas and surrounding areas. Several of our restaurants in Galveston and Kemah sustained significant damage, as did the amusement rides, the boardwalk itself and some infrastructure at the Kemah Boardwalk. The Kemah and Galveston properties had been a significant driver of our overall performance in 2008. All Houston, Galveston and Kemah restaurants have reopened. The difference between impairments of book value arising from Hurricane Ike damage and the associated insurance proceeds resulted in the recognition of a $1.2 million and a $3.5 million gain during the three months ended March 31, 2010 and 2009, respectively.

We also maintain business interruption insurance coverage and have recorded approximately $0.2 million in recoveries during the three months ended March 31, 2009 related to lost profits at our affected locations in Galveston and the Kemah Boardwalk. This amount was recorded as revenue in our consolidated financial statements.

3. DISCONTINUED OPERATIONS AND IMPAIRMENT OF LONG LIVED ASSETS

During the third quarter of 2006, as part of a strategic review of our operations, we initiated a plan to divest certain restaurants including 136 Joe’s Crab Shack (“Joe’s”) units. Subsequently, several additional locations were added to our disposal plan. The results of operations for all stores included in our disposal plan have been classified as discontinued operations in our statements of income, balance sheets and segment information for all periods presented.

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

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

The results of discontinued operations for the three months ended March 31, 2010 and 2009 were as follows:

	Three Months Ended March 31,
	2010			2009
Revenues	$	—		$	—
Loss from discontinued operations before income taxes		(60,875	)		(81,575	)
Income tax benefit on discontinued operations		(22,889	)		(30,672	)
Net loss from discontinued operations	$	(37,986	)	$	(50,903	)

We continually monitor unfavorable cash flows, if any, relating to under performing restaurants. Periodically, we may conclude certain properties have become impaired based on the existing and anticipated future economic outlook or expected sales prices for such properties determined through analysis of their respective market areas or sales contracts. No impairment charges were recorded during the three months ended March 31, 2010 and 2009.

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. ACCRUED LIABILITIES

Accrued liabilities are comprised of the following:

	March 31, 2010		December 31, 2009
Payroll and related costs	$	25,640,406	$	22,120,315
Rent and insurance		30,001,491		28,605,202
Taxes, other than payroll and income taxes		15,780,499		19,717,328
Deferred revenue (gift cards and certificates)		16,138,554		17,537,349
Accrued interest		18,917,652		7,268,622
Casino deposits, outstanding chips and other gaming		9,125,394		10,120,470
Other		16,497,609		16,906,672
	$	132,101,605	$	122,275,958

5. DEBT

On April 28, 2010, we announced the completion of an offering of an additional $47.0 million aggregate principal amount of 11 5/8% senior secured notes due 2015 (the “Additional Notes”) unconditionally guaranteed on a senior secured basis by all of our current and future domestic restricted subsidiaries (the “Guarantors”). The Additional Notes were sold in the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and to non-U.S. persons in accordance with Regulation S under the Securities Act. The Additional Notes have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration under the Securities Act. Gross proceeds from the Additional Notes of approximately $49.8 million were used to pay for the acquisition of The Oceanaire, Inc. (“Oceanaire”), to reduce outstanding revolver balances and for general corporate purposes.

The Additional Notes will have the same terms and will be part of the same series as the $406.5 million aggregate principal amount of 11 5/8% senior secured notes due 2015 (the “Initial Notes” and together with the Additional Notes, the “Notes”) which were issued in a private placement which closed on November 30, 2009. The gross proceeds from the offering and sale of the Initial Notes were $400.1 million.

The Notes will mature on December 1, 2015. Interest on the Notes will accrue from November 30, 2009, the date of original issuance of the Initial Notes, at a fixed interest rate of 11 5/8% and the Company will pay interest twice a year, on each December 1 and June 1, beginning June 1, 2010. The Notes are unconditionally guaranteed on a senior secured basis as to principal, premium, if any, and interest by the Guarantors and are secured by a second lien position on substantially all assets of the Company and the Guarantors. At any time prior to December 1, 2012, the Company may redeem up to 35% of the Notes at a redemption price of 111.625% of the principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of certain equity offerings. Additionally, on or after December 1, 2012, the Company may redeem all or a part of the Notes at a premium that will decrease over time as described in the Indenture dated November 30, 2009, as amended (the “Indenture”), among the Company, the Guarantors, Deutsche Bank Trust Company Americas, as collateral agent, and Wilmington Trust FSB, as successor trustee to Deutsche Bank Trust Company Americas. The Company is required to offer to purchase the Notes at 101% of their aggregate principal amount, plus accrued interest, if it experiences a change in control as defined in the Indenture.

On April 26, 2010, we and the Guarantors commenced an offer to exchange the Initial Notes for notes registered under the Securities Act, having substantially identical terms as the Initial Notes.

The Indenture under which the Notes have been issued contains covenants that will limit the ability of the Company and the Guarantors to, among other things: incur or guarantee additional indebtedness or issue disqualified capital stock; transfer or sell assets; pay dividends or distributions, redeem subordinated indebtedness, make certain types of investments or make other restricted payments; create or incur liens; incur dividend or other payment restrictions affecting certain subsidiaries; consummate a merger, consolidate or sell of all or substantially all of our assets; enter into transactions with affiliates; designate subsidiaries as unrestricted subsidiaries; engage in business other than a business that is the same or similar to the current business and reasonably related businesses; take or omit to take any actions that would adversely affect or impair in any material respect the collateral securing the Notes.

On November 30, 2009, we also amended and restated our Credit Agreement to allow us to borrow $235.6 million (the Amended Credit Facility). The Amended Credit Facility provides for a term loan of $160.6 million and a revolving credit line of $75.0 million. The obligations under the Amended Credit Facility are unconditionally guaranteed by the Guarantors and are secured by a first lien position on substantially all assets of Landry’s and the Guarantors. On April 27, 2010, we also amended the Amended Credit Facility to allow for the issuance of the Additional Notes and the acquisition of Oceanaire.

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Interest on the Amended Credit Facility accrues at a base rate (which is the greater of 4.0%, the Federal Funds Rate plus .50% or Wells Fargo’s prime rate) plus a credit spread of 5.0%, or at our option, at the Eurodollar base rate but no less than 2.0%, plus a credit spread of 6.0%, and matures on November 30, 2013.

The Amended Credit Facility contains covenants that limit our ability and the Guarantors to, among other things, incur or guarantee additional indebtedness; create liens; make capital expenditures; pay dividends on or repurchase stock; make certain types of investments; sell assets or merge with other companies. The Amended Credit Facility contains financial covenants, including a maximum leverage ratio, a maximum senior leverage ratio, and a minimum fixed charge coverage ratio.

Proceeds from the Initial Notes and the Amended Credit Facility were used to repay all of our outstanding 14.0% Senior Secured Notes due 2011, pay fees and expenses and provide approximately $73.0 million in restricted cash available to complete a proposed merger of an affiliate of Tilman Fertitta and us. In connection with the repayment of the 14.0% Senior Secured Notes, we expensed $35.6 million in interest expense during the fourth quarter of 2009, primarily associated with early recognition of unamortized discount and deferred loan costs.

During 2008, there was a fully funded financing commitment which included up to $250.0 million in term loans. On December 19, 2008, we entered into an $81.0 million interim senior secured credit facility to fund a portion of the commitment. The interim senior secured credit facility provided for a $31.0 million senior secured term loan facility and a $50.0 million senior secured revolving credit facility, the proceeds of which were used to refinance the remaining outstanding indebtedness under our previously issued and outstanding senior credit facility and to pay related transaction fees and expenses.

We subsequently funded an additional $135.0 million under the commitment by entering into a $215.6 million Amended and Restated Credit Agreement dated as of February 13, 2009 (the “Credit Agreement”) which included the $81.0 million interim senior secured credit facility. The Credit Agreement provided for a term loan of $165.6 million, which included the $31.0 million term loan, and the revolving credit line of $50.0 million that was previously funded. The obligations under the Credit Agreement were unconditionally guaranteed by the Guarantors and were secured by a first lien position on substantially all of our assets.

On February 13, 2009, we completed an offering of $295.5 million in aggregate principal amount of 14.0% Senior Secured Notes due 2011 (the “Series A Notes”). The gross proceeds from the offering and sale of the Series A Notes were $260.0 million. The Series A Notes were unconditionally guaranteed on a senior secured basis as to principal, premium by the Guarantors and were secured by a second lien position on substantially all of our and the Guarantors’ assets. The Series A Notes were issued pursuant to an indenture, dated as of February 13, 2009 among us, the Guarantors and Deutsche Bank Trust Company America, as Trustee and as Collateral Agent. On July 10, 2009, we and the Guarantors filed a registration statement with respect to an offer to exchange the Series A Notes for notes registered under the Securities Act, having substantially identical terms as the Series A Notes.

On August 14, 2009, we completed our offer to exchange $295.5 million in aggregate principal amount of 14.0% Senior Secured Notes due 2011 (the “Series B Notes”), that have been registered under the Securities Act, for the Series A Notes. An aggregated principal amount of $260.5 million of Series A Notes were exchanged for Series B Notes pursuant to the offer and an aggregate principal amount of $27.0 million Series A Notes were exchanged for Series B Notes pursuant to private exchange. The total principal amount of notes exchanged was $287.5 million.

We used the proceeds from the 2009 Notes offering, together with borrowings under the Credit Agreement to refinance our previous $395.7 million aggregate principal amount of 9.5% senior notes due 2014 (the “9.5% Notes”) and $4.3 million aggregate principal amount of 7.5% senior notes due 2014 (the “7.5% Notes” and, together with the 9.5% Notes, the “Previous Notes”). As of March 31, 2010, $0.8 million of our 7.5% Notes and $0.7 million of our 9.5% Notes remained outstanding. In addition, we paid a redemption premium of approximately $4.0 million in connection with the repurchase of the Previous Notes.

In connection with the refinancing of our Previous Notes, on December 23, 2008, we commenced separate cash tender offers (each a “tender offer” and together, the “tender offers”) to purchase any and all of our outstanding 9.5% Notes and 7.5% Notes for a purchase price of 101% of the principal amount thereof. In conjunction with the tender offers, we solicited consents of at least a majority of the aggregate principal amount of each of the outstanding 9.5% Notes and 7.5% Notes to certain proposed amendments to each of the indentures governing Previous Notes to eliminate most of the restrictive covenants and certain events of default and to amend certain other provisions contained in the indentures and related notes. We executed supplemental indentures with U.S. Bank National Association, as trustee, to effectuate the amendments to the indentures governing the Previous Notes, which became operative upon the consummation of the tender offers.

With respect to any Previous Notes that were not tendered, we may, at our option, either (i) pay such Previous Notes in accordance with their terms through maturity, (ii) repurchase any 9.5% Notes if the holders exercise their option to require us to do so, at 101% of the principal amount plus accrued but unpaid interest, if any, through the payment date or (iii) defease any or all of the remaining Previous Notes.

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

On February 17, 2010, the Golden Nugget, Inc., a wholly owned, unrestricted subsidiary of ours, entered into Amendment No. 2 and Waiver to the First Lien Credit Agreement (First Lien Second Amendment) by and among Golden Nugget, Inc., Wachovia Bank, National Association, as Administrative Agent, Collateral Agent, Swing Line Bank and Issuing Bank, and each of the Lender parties thereto, dated June 14, 2007.

The First Lien Second Amendment replaced the existing first lien financial covenants with minimum EBITDA, minimum liquidity, minimum cage cash and maximum capital expenditure (CAPEX) covenants. In addition, consenting first lien lenders received a consent fee of 0.5% and all first lien lenders will receive a 0.5% annual consent fee on outstanding commitments through maturity. First lien lenders will also receive additional interest in an amount equal to 1.00% per annum on unpaid advances in the form of “PIK” interest, or at the option of Golden Nugget, cash. The First Lien Second Amendment precludes dividends or other restricted payments, limits incurring additional debt, making investments and other cash distributions from the Golden Nugget, increases the excess cash flow sweep to 75% from 50% if certain liquidity levels are reached and requires additional reporting of financial performance including cash flow reports. Certain potential defaults under the existing First Lien Credit Agreement were waived.

Concurrently with the First Lien Second Amendment, the Golden Nugget entered into Amendment No. 2 and Waiver to the Second Lien Credit Agreement (Second Lien Second Amendment) by and among Golden Nugget, Inc., Wachovia Bank, National Association and the other financial institutions parties thereto, dated June 14, 2007. The Second Lien Second Amendment replaced the existing second lien financial covenants with minimum EBITDA, minimum liquidity, minimum cage cash and maximum CAPEX covenants and waived certain potential defaults under the existing Second Lien Credit Agreement. The Second Lien Second Amendment advances the maturity date on the second lien facility from December 31, 2014 to November 2, 2014. The maturity date on our existing $4.0 million seller note was extended to November 2, 2014 from November 2, 2010.

In connection with these amendments, affiliates of the Golden Nugget agreed to provide $50.0 million in additional funds to the Golden Nugget in return for non-interest bearing subordinated notes. $20.0 million of these funds was used for operating liquidity and to pay fees and expenses associated with the amendments. $30.0 million was available to purchase second lien indebtedness at 40% of face value. At closing, approximately $62.8 million of second lien indebtedness was acquired and retired at 40% of face value and accordingly, a $33.0 million gain was recognized in other income, net during the three months ended March 31, 2010. The remaining balance of the $30.0 million not used to purchase second lien debt by December 31, 2010, if any, will be used to purchase first lien debt at par value. All such purchased debt shall be immediately retired. The Golden Nugget may also incur up to an additional $8.0 million in affiliate subordinated debt during the remaining term of the First Lien Credit Agreement to meet liquidity requirements.

On September 25, 2009, an unrestricted subsidiary of Landry’s completed the acquisition of $33.2 million face amount of Golden Nugget second lien term loan debt through a dutch tender and open market purchases at a weighted average cost approximating 41% of face value. In connection with the debt purchases, the unrestricted subsidiary agreed to forgive the face amount of the debt acquired and accordingly, a $19.4 million gain was recognized in other income, net during the three months ended September 30, 2009.

Previously in June 2007, Golden Nugget, Inc., had completed a new $545.0 million credit facility consisting of a $330.0 million first lien term loan, a $50.0 million revolving credit facility, and a $165.0 million second lien term loan. The $330.0 million first lien term loan includes a $120.0 million delayed draw component to finance the expansion at the Golden Nugget Hotel and Casino in Las Vegas, Nevada. The revolving credit facility expires on June 30, 2013 and the first lien term loan matures on June 30, 2014. Both the first lien term loan and the revolving credit facility bear interest at Libor or the bank’s base rate, plus a financing spread of 2.0% and 0.75%, respectively, at March 31, 2010. In addition, the credit facility requires a commitment fee on the unfunded portion for the $50.0 million revolving credit facility. The second lien term loan matures on November 2, 2014 and bears interest at Libor or the bank’s base rate, plus a financing spread of 3.25% and 2.0%, respectively, at March 31, 2010. The financing spreads and commitment fees for the revolving credit facility increase or decrease depending on the leverage ratio as defined in the credit facility. The first lien term loan requires one percent of the outstanding principal balance due annually to be paid in equal quarterly installments commencing on September 30, 2009, with the balance due on maturity. Principal of the second lien term loan is due at maturity. The Golden Nugget’s subsidiaries have granted liens on substantially all real property and personal property as collateral under the credit facility and are guarantors of the credit facility.

        The proceeds from the $545.0 million credit facility were used to repay all of the Golden Nugget’s outstanding debt, including its 8.75% Senior Secured Notes due 2011 totaling $155.0 million, plus the outstanding balance of approximately $10.0 million on its former $43.0 million revolving credit facility with Wells Fargo Foothill, Inc. In addition, the proceeds were used to pay associated tender premiums of approximately $8.8 million due to the early redemption of the Senior Secured Notes, plus accrued interest and related transaction fees and expenses. In 2008, the revolver commitment was reduced to $47.0 million and the delayed draw term loan commitment was reduced to $117.5 million as a result of the failure of one of the lending banks.

        Consistent with our policy to manage our exposure to interest rate risk and in conformity with the requirements of the first and second lien facilities, we entered into interest rate swaps for all of the first and second lien borrowings of the Golden Nugget that fix the interest rates at between 5.4% and 5.5%, plus the applicable margin. We designated $210.0 million of the first lien interest rate

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

swaps and all of the second lien swaps as cash flow hedges. The swaps mirror the terms of the underlying debt and reset using the same index and terms. As of March 31, 2010, an aggregate $96.0 million in second lien term loan debt has been repurchased and retired, and as such a proportional share of the second lien swaps are no longer an effective cash flow hedge. Accordingly, an $8.9 million non-cash expense associated with this portion of the swaps was recorded as other expense for the three months ended March 31, 2010. At March 31, 2010, the remaining portion of these swaps were determined to be highly effective, and no ineffective portion was recognized in income. Included in accumulated other comprehensive loss at March 31, 2010 and December 31, 2009 are unrealized losses, net of income taxes, totaling $23.6 million and $27.0 million, respectively, related to these hedges. For the three months ended March 31, 2010 and 2009, the impact of these interest rate swaps was to increase interest expense by $6.4 million and $5.4 million, respectively. The remaining interest rate swaps associated with the $120.0 million of first lien borrowings representing the delayed draw construction loan have not been designated as hedges and the change in fair market value is reflected as other income/expense in the consolidated financial statements. A non-cash expense of approximately $1.1 million was recorded related to these interest rate swaps for the three months ended March 31, 2010, while a non-cash gain of approximately $0.4 million was recorded for the three months ended March 31, 2009.

Our debt agreements contain various restrictive covenants including minimum EBITDA, 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. As of March 31, 2010, we were in compliance with all such covenants. As of March 31, 2010, we had approximately $19.1 million in letters of credit outstanding, and our available borrowing capacity was approximately $36.0 million.

As a primary result of the extraordinary disruption to the credit markets in 2009, our 2009 financing carried substantially higher interest rates and original issue discount than the previous debt instruments. In addition, the Golden Nugget amendments increase its cash interest rate by 0.5% annually and its total interest rate by 1.5% annually on all first lien debt. These higher interest rates, combined with additional borrowing to provide liquidity and pay fees and expenses for the financing as well as funding the hotel tower at the Golden Nugget, will result in substantially higher interest expense over at least the next few years.

Long-term debt is comprised of the following:

	March 31, 2010			December 31, 2009
$75.0 million revolving credit facility, Libor + 6.0% (floor 2%), due November 2013	$	28,000,000		$	24,000,000
$160.6 million Term loan, Libor + 6.0% (floor 2%) $4.0 million principal paid quarterly beginning June 30, 2009, due November 2013		149,262,942			153,014,556
Senior Notes, 9.5% interest only, due December 2014		735,000			735,000
Senior Notes, 7.5% interest only, due December 2014		783,000			783,000
$406.5 million Senior Notes, 11 5/8% interest only, due December 2015		400,355,556			400,168,809
$47.0 million revolving credit facility, Libor + 3.0%, (1% PIK) due June 2013		36,922,622			44,755,040
$327.0 million First Lien Term Loan, Libor + 3.0%, (1% PIK) 1% of principal paid quarterly beginning September 30, 2009, due June 2014		325,044,606			325,495,365
$165.0 million Second Lien Term Loan, Libor + 3.25%, interest only, due November 2014		68,987,233			131,817,628
Non-recourse note payable, 9.39% interest, principal and interest aggregate $101,762 monthly, due May 2010		10,103,708			10,170,682
$4.0 million seller note, 7.0%, interest paid monthly, due November 2014		4,000,000			4,000,000
Total debt		1,024,194,667			1,094,940,080
Less current portion		(30,114,450	)		(30,181,424	)
Long-term portion	$	994,080,217		$	1,064,758,656

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. EARNINGS PER SHARE

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

	Three Months Ended March 31,
	2010			2009
Amounts available to Landry’s common stockholders:
Income from continuing operations	$	14,364,181		$	6,059,386
Loss from discontinued operations		(37,986	)		(50,903	)
Net income	$	14,326,195		$	6,008,483
Weighted average common shares outstanding—basic		16,240,000			16,140,000
Dilutive common stock equivalents:
Stock options		260,000			15,000
Weighted average common and common share equivalents outstanding—diluted		16,500,000			16,155,000
Earnings per share—basic
Income from continuing operations	$	0.88		$	0.37
Loss from discontinued operations, net of taxes		—			—
Net income	$	0.88		$	0.37
Earnings per share—diluted
Income from continuing operations	$	0.87		$	0.37
Loss from discontinued operations, net of taxes		—			—
Net income	$	0.87		$	0.37

7. STOCK-BASED COMPENSATION

GAAP requires the recognition of the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant. We have several stock-based employee compensation plans, which are more fully described in our 2009 Annual Report on Form 10-K, as amended.

For the three months ended March 31, 2010 and 2009, total stock-based compensation expense, which includes both stock options and restricted stock, totaled $0.8 million and $0.9 million, respectively. Stock-based compensation expense is not reported at the segment level as these amounts are not included in internal measurements of segment operating performance.

No restricted stock or stock options were granted during the three months ended March 31, 2010.

8. INCOME TAXES

As of January 1, 2010, we had approximately $15.1 million of unrecognized tax benefits, including $2.4 million of interest and penalties, which represents the amount of unrecognized tax benefits that, if recognized, would favorably impact our effective income tax rate in future periods. There were no material changes in unrecognized benefits for the three months ended March 31, 2010. It is reasonably possible that the amount of unrecognized tax benefits with respect to our uncertain tax positions could significantly increase or decrease within 12 months. However, based on the current status of examinations, it is not possible to estimate the future impact, if any, to recorded uncertain tax positions at March 31, 2010. Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense.

We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. We have substantially concluded all U.S. federal income tax matters for years through 2005. Substantially all material state and local income tax matters have been concluded for years through 2004.

9. COMMITMENTS AND CONTINGENCIES

Building Commitments

As of March 31, 2010, we had future development, land purchases and construction commitments anticipated to be expended within the next twelve months of approximately $2.0 million, including completion of construction of certain new restaurants. We estimate aggregate capital expenditures for the remainder of the year to be approximately $19.0 million.

        In 2003, we purchased the Flagship Hotel and Pier from the City of Galveston, Texas, subject to an existing lease. Under this agreement, we have committed to spend $15.0 million to transform the hotel and pier into a 19^th century style inn and entertainment complex complete with rides and carnival type games. The property was significantly damaged by Hurricane Ike in 2008. We are currently in litigation with the former tenant due to its failure to purchase adequate insurance and are evaluating our options concerning the property.

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other Commitments

On February 24, 2006, we acquired 80% of T-Rex Cafe, Inc. from Schussler Creative, Inc. (SCI). The agreement with SCI provides that we can acquire SCI’s 20% interest for up to $35.0 million or that SCI can put its interest to us at a calculated amount as determined in the agreement no earlier than January 2010. During the first quarter of 2009, we determined the redemption was probable and began accreting to the expected redemption value on the expected redemption date as an increase to non-controlling interest in temporary equity and a decrease to retained earnings in our consolidated balance sheets. As of December 31, 2009, the total expected redemption value had been fully accreted.

Certain of our casino employees at the Golden Nugget in Las Vegas, Nevada are members of various unions and are covered by union-sponsored, collective bargained, multi-employer health and welfare and defined benefit pension plans. Under such plans, we recorded expenses of $3.0 million and $3.5 million for the three months ended March 31, 2010 and 2009, 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.

In connection with certain of our discontinued operations, we remain the guarantor or assignor of a number of leased locations. In the event of future default under any of such leased locations, we may be responsible for significant damages to existing landlords which may materially affect our financial condition, operating results and/or cash flows. We estimate that lessee rental payment obligations during the remaining terms of the assignments and subleases approximate $58.0 million at March 31, 2010. We have recorded a liability of $1.5 million with respect to these obligations where it is probable that we will make future cash payments.

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 February 5, 2009, a purported class action and derivative lawsuit entitledLouisiana Municipal Police Employee’s Retirement System on behalf of itself and all other similarly situated shareholders of Landry’s Restaurant’s, Inc. and derivatively on behalf of nominal defendant Landry’s Restaurant’s, Inc. was brought against all members of our Board of Directors, Fertitta Holdings, Inc., and Fertitta Acquisition Co. in the Court at Chancery of the State of Delaware. The lawsuit alleges, among other things, a breach of a fiduciary duty by the directors for renegotiating the 2008 merger agreement with the Fertitta entities, allowing Mr. Fertitta to acquire shares of stock in the Company and gain majority control thereof, and terminating the 2008 merger agreement without requiring payment of the reverse termination fee. The suit seeks consummation of the merger buyout at $21.00 a share or damages representing the difference between $21.00 per share and the price at which class members sold their stock in the open market, or damages for allowing Mr. Fertitta to acquire control of the Company without paying a control premium, or alternatively requiring payment of the reverse termination fee or damages for the devaluation of the Company’s stock. We intend to contest this matter vigorously.

On January 29, 2010, plaintiff in the foregoing action filed an amended complaint also naming Fertitta Group, Inc. and Fertitta Merger Co. as defendants and has further alleged that Mr. Fertitta’s latest proposal to acquire all of our outstanding stock on November 3, 2009 was unfair and that defendants breached their fiduciary duties in entering into a 2009 merger agreement at $14.75. Also, the amended complaint alleges that the Board approved an excessive golden parachute for Mr. Fertitta (albeit over seven (7) years ago) and requests that the Court invalidate same. In addition, plaintiff asserts that there has been inadequate disclosure in our preliminary proxy statement filed with the SEC in connection with the $14.75 merger transaction. In connection with the amended complaint, plaintiff also seeks an injunction of the $14.75 transaction unless curative disclosures are made, appointment of a Trustee to conduct a sale of us to maximize shareholder value, and the imposition of a constructive trust on shares acquired by Mr. Fertitta after June 2008 to be voted in favor of a transaction that provides the highest offer to our shareholders. We believe that the new claims assented in the amended complaint are also without merit and intend to vigorously contest them as well.

On April 27, 2010, we announced that in connection with the above litigation Tilman J. Fertitta reached a tentative agreement with the plaintiff’s attorneys to settle the stockholders derivative claim and certain other claims in connection with Mr. Fertitta’s proposal to merge the Company into his wholly-owned company, and that Mr. Fertitta further agreed to increase the price to be paid to the Company’s stockholders other than Mr. Fertitta to $21.00 per share in cash in a merger of the Fertitta affiliate with the Company. Despite this announcement, a final agreement has not been agreed upon, and there is no assurance that a final agreement will in fact be reached.

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Following Mr. Fertitta’s latest proposal to acquire all of our outstanding stock on November 3, 2009, the class action lawsuit styledFrederic Goldfein, Individually and on behalf of all others similarly situated v. Landry’s restaurants, Inc., et al. was filed in the District Court of Harris County, 164^thJudicial District. We are named in the Petition as a defendant along with all of our directors. Plaintiff has alleged that in connection with the proposed merger transaction, defendants have violated their fiduciary duties, duties of loyalty and good faith and fair dealing and have placed an artificial lid on the price of our stock by announcing a transaction at an inadequate price. Plaintiff seeks to enjoin the transaction until we adopt procedures and a process to obtain the highest price for shareholders, or alternatively to rescind the transaction. We believe this action is without merit and intend to vigorously contest this matter.

Ralph Biancalana, Individually and on behalf of all others similarly situated v. Tilman J. Fertitta, et al., a putative class action, was filed on November 10, 2009 in the District Court of Harris County, Texas, 165^thJudicial District, following Mr. Fertitta’s latest proposal to acquire all of our outstanding stock. We are named in the Petition as a defendant along with all of our directors. Plaintiff has alleged, among other things, that in connection with the proposed merger transaction, our directors have knowingly and recklessly violated their fiduciary duty of care, have violated their fiduciary duties of loyalty, good faith, candor and independence, and that the transaction contains an inadequate and unfair price. Plaintiff also alleged that we aided and abetted our directors’ alleged breach of fiduciary duty. Plaintiff seeks to enjoin the transaction and the payment of a termination fee to Mr. Fertitta. Plaintiff also requests declarations from the Court that the termination fee is unfair, and that our directors have breached their fiduciary duties to our shareholders. Plaintiff seeds recovery of attorneys fees and costs. We believe this action is without merit and intend to vigorously contest this matter.

On November 17, 2009, Robert Caryer filed a class action petition in the District Court of Harris County, 125^thJudicial District. The lawsuit is styledRobert Caryer, individually and on behalf of all other similarly situated v. Landry’s Restaurants, Inc., Tilman J. Fertitta, Steve L. Scheinthal, Kenneth Brimmer, Michael S. Chadwick, Joe Max Taylor and Richard H. Liem. Plaintiff has alleged that in connection with the proposed merger transaction, defendants have violated their fiduciary duties, duties of loyalty and good faith and fair dealing and have placed an artificial lid on the price of our stock by announcing a transaction at an inadequate price. Plaintiff seeks to enjoin the transaction until we adopt procedures and a process to obtain the highest price for shareholders, or alternatively to rescind the transaction. We believe this action is without merit and intend to vigorously contest this matter.

On January 15, 2010, the Goldfein, Biancalana and Caryer actions were consolidated by Court order. Plaintiffs allege in the consolidated petition that in connection with the proposed merger transaction, defendants have violated their fiduciary duties, duties of loyalty and good faith and fair dealing and have placed an artificial lid on the price of our stock by announcing a transaction at an inadequate price. Plaintiffs seek to enjoin the transaction until we adopt procedures and a process to obtain the highest price for shareholders, or alternatively to rescind the transaction. We believe this action is without merit and intend to vigorously contest this matter.

General Litigation

We are subject to other legal proceedings and claims that arise in the ordinary course of business. Management does not believe that the outcome of any of those matters will have a material adverse effect on our financial position, results of operations or cash flows.

17

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. SEGMENT INFORMATION

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

	Three Months Ended March 31,
	2010			2009
Revenue:
Restaurant and hospitality	$	199,244,432		$	200,275,650
Gaming		59,486,441			56,014,333
Total	$	258,730,873		$	256,289,983
Unit level profit:
Restaurant and hospitality	$	41,138,183		$	51,742,748
Gaming		14,222,923			12,718,155
Total	$	55,361,106		$	64,460,903
Depreciation, amortization and impairment:
Restaurant and hospitality	$	11,967,688		$	12,424,861
Gaming		7,136,333			5,335,630
Total	$	19,104,021		$	17,760,491
Income before taxes:
Unit level profit	$	55,361,106		$	64,460,903
Depreciation, amortization and impairment		19,104,021			17,760,491
General and administrative		12,698,887			12,058,150
Gain on insurance claims		(1,237,856	)		(3,482,897	)
Loss (gain) on disposal of assets		(938,268	)		(622,299	)
Pre-opening		92,614			256,164
Interest expense, net		29,033,698			24,614,574
Other expense (income)		(22,644,192	)		4,134,412
Consolidated income from continuing operations before taxes	$	19,252,202		$	9,742,308
	March 31, 2010			December 31, 2009
Segment assets:
Restaurant and hospitality	$	766,717,098		$	805,375,785
Gaming		690,600,301			703,718,596
Corporate and other (1)		192,848,760			190,973,436
	$	1,650,166,159		$	1,700,067,817

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

18

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11. SUPPLEMENTAL GUARANTOR INFORMATION

In November 2009, we issued, in a private offering, $406.5 million of 11 ⁵/8% Senior Secured Notes due in 2015 (see Note 5). These notes are fully and unconditionally and joint and severally guaranteed by us and certain of our 100% owned subsidiaries, “Guarantor Subsidiaries”.

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

Condensed Unaudited Consolidating Financial Statements

Balance Sheet

March 31, 2010

	Parent		Guarantor Subsidiaries		Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	—	$	3,524,136	$	35,934,087		$	(705,030	)	$	38,753,193
Restricted cash and cash equivalents		73,150,570		—		—			—			73,150,570
Accounts receivable—trade and other, net		17,918,893		7,190,807		4,639,312			—			29,749,012
Inventories		12,203,864		12,963,345		2,974,511			—			28,141,720
Deferred taxes		94,201		949,113		3,431,957			—			4,475,271
Assets related to discontinued operations		1,500,000		460,344		—			—			1,960,344
Other current assets		6,097,712		2,657,195		5,361,048			—			14,115,955
Total current assets		110,965,240		27,744,940		52,340,915			(705,030	)		190,346,065
PROPERTY AND EQUIPMENT, net		8,116,871		641,428,692		674,990,683			—			1,324,536,246
GOODWILL		—		18,527,547		—			—			18,527,547
OTHER INTANGIBLE ASSETS, net		2,105,814		8,468,181		28,086,222			—			38,660,217
INVESTMENT IN AND ADVANCES TO SUBSIDIARIES		827,911,516		11,321,727		(193,289,624	)		(645,943,619	)		—
OTHER ASSETS, net		56,172,412		1,920,345		20,003,327			—			78,096,084
Total assets	$	1,005,271,853	$	709,411,432	$	582,131,523		$	(646,648,649	)	$	1,650,166,159
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable	$	19,140,384	$	20,062,242	$	15,583,706		$	(705,030	)	$	54,081,302
Accrued liabilities		53,656,166		43,184,642		35,260,797			—			132,101,605
Current portion of long-term debt and other obligations		16,735,000		—		13,379,450			—			30,114,450
Liabilities related to discontinued operations		—		1,705,910		—			—			1,705,910
Total current liabilities		89,531,550		64,952,794		64,223,953			(705,030	)		218,003,267
LONG-TERM NOTES, NET OF CURRENT PORTION		562,401,498		—		431,678,719			—			994,080,217
OTHER LIABILITIES		22,694,853		18,628,665		66,115,205			—			107,438,723
Total liabilities		674,627,901		83,581,459		562,017,877			(705,030	)		1,319,522,207
COMMITMENTS AND CONTINGENCIES
Redeemable noncontrolling interest		10,540,193		—		—			—			10,540,193
TOTAL EQUITY		320,103,759		625,829,973		20,113,646			(645,943,619	)		320,103,759
Total liabilities and equity	$	1,005,271,853	$	709,411,432	$	582,131,523		$	(646,648,649	)	$	1,650,166,159

19

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Unaudited Consolidating Financial Statements

Balance Sheet

December 31, 2009

	Parent		Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	—	$	4,074,225		$	68,574,641		$	(1,064,544	)	$	71,584,322
Restricted cash and cash equivalents		73,076,532		—			—			—			73,076,532
Accounts receivable—trade and other, net		17,268,549		8,097,176			3,365,219			—			28,730,944
Inventories		10,918,326		13,524,572			3,115,596			—			27,558,494
Deferred taxes		11,310,384		980,806			3,367,024			—			15,658,214
Assets related to discontinued operations		2,500,000		460,514			—			—			2,960,514
Other current assets		6,314,582		2,632,425			4,417,750			—			13,364,757
Total current assets		121,388,373		29,769,718			82,840,230			(1,064,544	)		232,933,777
PROPERTY AND EQUIPMENT, net		8,471,808		646,800,684			679,062,145			—			1,334,334,637
GOODWILL		—		18,527,547			—			—			18,527,547
OTHER INTANGIBLE ASSETS, net		2,079,922		8,468,181			28,171,222			—			38,719,325
INVESTMENT IN AND ADVANCES TO SUBSIDIARIES		800,537,567		(12,976,475	)		(179,551,749	)		(608,009,343	)		—
OTHER ASSETS, net		45,907,510		1,951,878			27,693,143			—			75,552,531
Total assets	$	978,385,180	$	692,541,533		$	638,214,991		$	(609,073,887	)	$	1,700,067,817
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable	$	21,055,261	$	19,845,357		$	24,484,023		$	(1,064,544	)	$	64,320,097
Accrued liabilities		43,341,610		45,191,555			33,742,793			—			122,275,958
Income taxes payable		—		740,874			—			(740,874	)		—
Current portion of long-term debt and other obligations		16,735,000		—			13,446,424			—			30,181,424
Liabilities related to discontinued operations		—		2,850,225			—			—			2,850,225
Total current liabilities		81,131,871		68,628,011			71,673,240			(1,805,418	)		219,627,704
LONG-TERM NOTES, NET OF CURRENT PORTION		561,966,365		—			502,792,291			—			1,064,758,656
DEFERRED TAXES		—		1,862,190			—			(1,862,190	)		—
OTHER LIABILITIES		23,414,072		19,140,020			61,254,493			—			103,808,585
Total liabilities		666,512,308		89,630,221			635,720,024			(3,667,608	)		1,388,194,945
COMMITMENTS AND CONTINGENCIES
Redeemable noncontrolling interest		10,318,386		—			—			—			10,318,386
TOTAL EQUITY		301,554,486		602,911,312			2,494,967			(605,406,279	)		301,554,486
Total liabilities and equity	$	978,385,180	$	692,541,533		$	638,214,991		$	(609,073,887	)	$	1,700,067,817

20

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Unaudited Consolidating Financial Statements

Statement of Income

Three Months Ended March 31, 2010

	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
REVENUES
Restaurant and hospitality	$	539,182		$	197,068,211		$	2,601,338		$	(964,299	)	$	199,244,432
Gaming:
Casino		—			—			36,817,799			—			36,817,799
Rooms		—			—			14,113,374			—			14,113,374
Food and beverage		—			—			11,100,705			—			11,100,705
Other		—			—			3,917,411			—			3,917,411
Promotional allowances		—			—			(6,462,848	)		—			(6,462,848	)
Net gaming revenue		—			—			59,486,441			—			59,486,441
Total revenue		539,182			197,068,211			62,087,779			(964,299	)		258,730,873
OPERATING COSTS AND EXPENSES:
Restaurant and hospitality:
Cost of revenues		—			48,609,232			399,835			—			49,009,067
Labor		—			57,748,691			746,468			—			58,495,159
Other operating expenses		186,254			50,198,824			1,181,244			(964,299	)		50,602,023
Gaming:
Casino		—			—			18,430,224			—			18,430,224
Rooms		—			—			5,927,294			—			5,927,294
Food and beverage		—			—			6,341,599			—			6,341,599
Other		—			—			14,564,401			—			14,564,401
General and administrative expense		12,698,887			—			—			—			12,698,887
Depreciation and amortization		876,485			10,694,335			7,533,201			—			19,104,021
Gain on insurance claims		—			(669,826	)		(568,030	)		—			(1,237,856	)
Loss (gain) on disposal of assets		(938,268	)		—			—			—			(938,268	)
Pre-opening expenses		—			92,614			—			—			92,614
Total operating costs and expenses		12,823,358			166,673,870			54,556,236			(964,299	)		233,089,165
OPERATING INCOME		(12,284,176	)		30,394,341			7,531,543			—			25,641,708
OTHER EXPENSES (INCOME):
Interest expense, net		17,611,480			(32	)		11,422,250			—			29,033,698
Other, net		(101,470	)		97,798			(22,640,520	)		—			(22,644,192	)
Total other expense		17,510,010			97,766			(11,218,270	)		—			6,389,506
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(29,794,186	)		30,296,575			18,749,813			—			19,252,202
PROVISION (BENEFIT) FOR INCOME TAXES		(7,211,169	)		7,339,928			4,537,455			—			4,666,214
INCOME (LOSS) FROM CONTINUING OPERATIONS		(22,583,017	)		22,956,647			14,212,358			—			14,585,988
INCOME (LOSS) FROM DISCONTINUED OPERATIONS NET OF TAXES		—			(37,986	)		—			—			(37,986	)
EQUITY IN EARNINGS OF SUBSIDIARIES		37,131,019			—			—			(37,131,019	)		—
NET INCOME (LOSS)		14,548,002			22,918,661			14,212,358			(37,131,019	)		14,548,002
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS		221,807			—			—			—			221,807
NET INCOME (LOSS) ATTRIBUTABLE TO LANDRY’S		14,326,195			22,918,661			14,212,358			(37,131,019	)		14,326,195
LESS: ACCRETION OF REDEEMABLE NONCONTROLLING INTERESTS		—			—			���			—			—
NET INCOME (LOSS) AVAILABLE TO LANDRY’S COMMON STOCKHOLDERS	$	14,326,195		$	22,918,661		$	14,212,358		$	(37,131,019	)	$	14,326,195

21

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Unaudited Consolidating Financial Statements

Statement of Income

Three Months Ended March 31, 2009

	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
REVENUES
Restaurant and hospitality	$	476,465		$	196,242,422		$	4,470,938		$	(914,175	)	$	200,275,650
Gaming:
Casino		—			—			35,968,289			—			35,968,289
Rooms		—			—			12,405,816			—			12,405,816
Food and beverage		—			—			10,486,228			—			10,486,228
Other		—			—			3,612,364			—			3,612,364
Promotional allowances		—			—			(6,458,364	)		—			(6,458,364	)
Net gaming revenue		—			—			56,014,333			—			56,014,333
Total revenue		476,465			196,242,422			60,485,271			(914,175	)		256,289,983
OPERATING COSTS AND EXPENSES:
Restaurant and hospitality:
Cost of revenues		—			49,144,994			518,531			—			49,663,525
Labor		—			57,178,363			817,345			—			57,995,708
Other operating expenses		(394,229	)		40,912,151			1,269,922			(914,175	)		40,873,669
Gaming:
Casino		—			—			19,620,490			—			19,620,490
Rooms		—			—			5,609,715			—			5,609,715
Food and beverage		—			—			5,701,286			—			5,701,286
Other		—			—			12,364,687			—			12,364,687
General and administrative expense		12,058,150			—			—			—			12,058,150
Depreciation and amortization		1,023,215			11,045,436			5,691,840			—			17,760,491
Gain on insurance claims		(3,482,897	)		—			—			—			(3,482,897	)
Loss (gain) on disposal of assets		(4,931	)		—			(617,368	)		—			(622,299	)
Pre-opening expenses		—			256,164			—			—			256,164
Total operating costs and expenses		9,199,308			158,537,108			50,976,448			(914,175	)		217,798,689
OPERATING INCOME		(8,722,843	)		37,705,314			9,508,823			—			38,491,294
OTHER EXPENSES (INCOME):
Interest expense, net		15,968,323			—			8,646,251			—			24,614,574
Other, net		4,275,137			(121	)		(140,604	)		—			4,134,412
Total other expense		20,243,460			(121	)		8,505,647			—			28,748,986
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(28,966,303	)		37,705,435			1,003,176			—			9,742,308
PROVISION (BENEFIT) FOR INCOME TAXES		(7,299,833	)		9,436,637			250,777			—			2,387,581
INCOME (LOSS) FROM CONTINUING OPERATIONS		(21,666,470	)		28,268,798			752,399			—			7,354,727
INCOME (LOSS) FROM DISCONTINUED OPERATIONS NET OF TAXES		—			(50,903	)		—			—			(50,903	)
EQUITY IN EARNINGS OF SUBSIDIARIES		28,970,294			—			—			(28,970,294	)		—
NET INCOME (LOSS)		7,303,824			28,217,895			752,399			(28,970,294	)		7,303,824
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS		230,578			—			—			—			230,578
NET INCOME (LOSS) ATTRIBUTABLE TO LANDRY’S		7,073,246			28,217,895			752,399			(28,970,294	)		7,073,246
LESS: ACCRETION OF REDEEMABLE NONCONTROLLING INTERESTS		1,064,763			—			—			—			1,064,763
NET INCOME (LOSS) AVAILABLE TO LANDRY’S COMMON STOCKHOLDERS	$	6,008,483		$	28,217,895		$	752,399		$	(28,970,294	)	$	6,008,483

22

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Unaudited Consolidating Financial Statements

Statement of Cash Flows

Three months ended March 31, 2010

	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	14,548,002		$	22,918,661		$	14,212,358		$	(37,131,019	)	$	14,548,002
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		876,485			10,694,335			7,533,201			—			19,104,021
Gain on debt repurchase		—			—			(32,998,237	)		—			(32,998,237	)
Gain on disposition of assets		(938,268	)		—			—			—			(938,268	)
Gain on insurance claims		—			(669,826	)		(568,030	)		—			(1,237,856	)
Change in assets and liabilities, net and other		(14,366,648	)		(28,841,366	)		29,234,977			37,490,533			23,517,496
Total adjustments		(14,428,431	)		(18,816,857	)		3,201,911			37,490,533			7,447,156
Net cash provided (used) by operating activities		119,571			4,101,804			17,414,269			359,514			21,995,158
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions		(381,721	)		(5,321,719	)		(10,672,812	)		—			(16,376,252	)
Proceeds from disposition of assets		459,900			669,826			568,030			—			1,697,756
Increase in restricted cash and cash equivalents		(74,038	)		—			—			—			(74,038	)
Net cash provided by (used in) investing activities		4,141			(4,651,893	)		(10,104,782	)		—			(14,752,534	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt and related expenses, net		(4,000,000	)		—			(30,718,332	)		—			(34,718,332	)
Financing proceeds		—			—			—			—			—
Debt issuance costs		(123,712	)		—			(1,767,732	)		—			(1,891,444	)
Proceeds from credit facility		54,000,000			—			19,392,802			—			73,392,802
Payments on credit facility		(50,000,000	)		—			(26,856,779	)		—			(76,856,779	)
Net cash provided by (used in) financing activities		(123,712	)		—			(39,950,041	)		—			(40,073,753	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		—			(550,089	)		(32,640,554	)		359,514			(32,831,129	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		—			4,074,225			68,574,641			(1,064,544	)		71,584,322
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	—		$	3,524,136		$	35,934,087		$	(705,030	)	$	38,753,193

23

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Unaudited Consolidating Financial Statements

Statement of Cash Flows

Three Months Ended March 31, 2009

	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,303,824		$	28,217,895		$	752,399		$	(28,970,294	)	$	7,303,824
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,023,215			11,045,436			5,691,840			—			17,760,491
Gain on disposition of assets		(4,931	)		—			(617,368	)		—			(622,299	)
Gain on insurance claims		(3,482,897	)		—			—			—			(3,482,897	)
Change in assets and liabilities, net and other		16,350,151			(27,366,876	)		(26,279,954	)		30,204,531			(7,092,148	)
Total adjustments		13,885,538			(16,321,440	)		(21,205,482	)		30,204,531			6,563,147
Net cash provided (used) by operating activities		21,189,362			11,896,455			(20,453,083	)		1,234,237			13,866,971
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions		(2,034,995	)		(13,679,189	)		(26,780,115	)		—			(42,494,299	)
Proceeds from disposition of assets		3,482,897			—			1,988,962			—			5,471,859
Net cash provided by (used in) investing activities		1,447,902			(13,679,189	)		(24,791,153	)		—			(37,022,440	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of common stock for treasury		(37,416	)		—			—			—			(37,416	)
Proceeds from exercise of stock options		21,250			—			—			—			21,250
Payments of debt and related expenses, net		(3,832	)		—			(61,288	)		—			(65,120	)
Financing proceeds		390,040,000			—			—			—			390,040,000
Repayment of bonds		(398,362,000	)		—			—						(398,362,000	)
Debt issuance costs		(17,350,710	)		—			—			—			(17,350,710	)
Proceeds from credit facility		56,572,965			—			93,545,454			—			150,118,419
Payments on credit facility		(46,227,054	)		—			(33,000,000	)		—			(79,227,054	)
Net cash provided (used) in financing activities		(15,346,797	)		—			60,484,166			—			45,137,369
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		7,290,467			(1,782,734	)		15,239,930			1,234,237			21,981,900
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		—			5,705,232			46,595,810			(1,234,237	)		51,066,805
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	7,290,467		$	3,922,498		$	61,835,740		$	—		$	73,048,705

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. SUBSEQUENT EVENTS

As stated in Note 5, on April 28, 2010 we issued an additional $47.0 million aggregate principal amount of 11 5/8% senior secured notes due 2015 (the “Additional Notes”) for gross proceeds of approximately $49.8 million.

On April 30, 2010 we used a portion of the proceeds of the Additional Notes to finance the acquisition of all of the stock of The Oceanaire, Inc. (“Oceanaire”) in accordance with a plan of reorganization submitted by the unsecured creditors of Oceanaire in a U.S. Bankruptcy court for $23.4 million in cash, plus the assumption of certain additional working capital liabilities. This plan provided for the sale of all of the stock of Oceanaire pursuant to an auction process after the Company submitted a stalking horse bid and entered into a stock purchase agreement with Oceanaire. The remaining net proceeds were used to reduce existing revolver balances and for general corporate purposes. The operating results of Oceanaire will be included in our financial statements beginning April 30, 2010. The allocation of the purchase price to the assets acquired and liabilities assumed is under review.

On April 27, 2010 the Company and certain of the Company’s subsidiaries also entered into an amendment to its $235.6 million Second Amended and Restated Credit Agreement (the “Credit Agreement”) dated November 30, 2009. The amendment allows for the issuance of the Additional Notes and subject to compliance with size and specific financial covenants, allows acquisitions by the Company and its restricted subsidiaries of entities located in the United States.

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

Introduction

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

We are a national, diversified, restaurant, hospitality and entertainment company principally engaged in the ownership and operation of full service, casual dining restaurants and gaming facilities. We locate our restaurants in high-profile, specialty locations in markets that provide a balanced mix of tourist, convention, business and residential clientele. We focus on providing quality food at reasonable prices while offering a memorable atmosphere for our guests. As of March 31, 2010, we operated 170 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.

Merger Agreement

On November 3, 2009, we entered into an Agreement and Plan of Merger (Merger Agreement) with Fertitta Group, Inc., a Delaware corporation (Parent) and Fertitta Merger Co., a Delaware corporation and a wholly-owned subsidiary of Parent (Merger Sub) and for certain limited purposes, Tilman J. Fertitta (Mr. Fertitta). Pursuant to the terms of the Merger Agreement, each of our outstanding shares of common stock, other than shares owned by us, Parent, Merger Sub or any other subsidiary of Parent and stockholders who perfected appraisal rights under applicable law, will be cancelled and converted into the right to receive $14.75 in cash, without interest.

On April 27, 2010, we announced that after lengthy negotiations with the Special Committee, made up of outside non-employee directors, and attorneys representing the plaintiff in a lawsuit pending in Delaware, Tilman J. Fertitta had reached a tentative agreement with the plaintiff’s attorneys to settle the stockholder derivative claim and certain other claims in connection with Mr. Fertitta’s proposal to merge Landry’s into his wholly-owned company. Pursuant to the tentative agreement, Mr. Fertitta agreed to increase the price to be paid to the Landry’s stockholders to $21.00 per share in cash in a merger of the Fertitta affiliate with Landry’s. As of this date, a final settlement has not occurred and there is no assurance that a final settlement will in fact be reached.

Mr. Fertitta’s proposal is subject to further consideration by and approval of the Special Committee and the Special Committee obtaining a fairness opinion from its independent financial advisor as to the financial terms of the proposal. If approved and recommended by the Committee, the proposal must be approved by the entire Landry’s Board. There can be no assurance that a final agreement will be reached. Any final agreement will be subject to approval by Landry’s stockholders, including approval by the holders of a majority of our common stock not owned by Mr. Fertitta. When a partial settlement of the lawsuit is reached, if at all, it will require approval by the court after notice and a fairness hearing.

Other Matters

On April 30, 2010, we completed the acquisition of all of the outstanding capital stock of The Oceanaire, Inc for approximately $23.4 million in cash, plus the assumption of certain additional working capital liabilities.

During 2006, as part of a strategic review of our operations, we initiated a plan to divest certain restaurants, including 136 Joe’s Crab Shack units. Subsequently, several additional locations were added to our disposal plan. The results of operations for all units included in the disposal plan have been reclassified to discontinued operations in the statements of income, balance sheets and segment information for all periods presented.

The restaurant and gaming industries are intensely competitive and affected by changes in consumer tastes and by national, regional, and local economic conditions and demographic trends. The performance of individual restaurants or casinos may be affected by factors such as: traffic patterns, demographic considerations, marketing, weather conditions, and the type, number, and location of competing operations. We have many well established competitors with greater financial resources, larger marketing and

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advertising budgets, and longer histories of operation than ours, including competitors already established in regions where we are considering expansion, as well as competitors planning to expand in the same regions. We face significant competition from other casinos in the markets in which we operate and from other mid-priced, full-service, casual dining restaurants offering or promoting seafood and other types and varieties of cuisine. Our competitors include national, regional, and local chains as well as local owner-operated restaurants. We also compete with other restaurants and retail establishments for restaurant sites.

The current economic conditions in the United States have continued to have a negative impact on our results of operations during 2010. A decline in discretionary spending attributable to tighter credit markets, high unemployment, increased home foreclosures, and other factors have impacted our customer’s level of spending on dining out, gaming, and tourism in general. It is difficult to predict how long the current economic conditions will persist, whether they will deteriorate further, and the extent to which our operations will be adversely affected.

Results of Operations

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

	Three Months Ended March 31,
	2010		2009
Restaurant and hospitality:
Revenues	100.0	%	100.0	%
Cost of revenues	24.6	%	24.8	%
Labor	29.4	%	29.0	%
Other operating expenses (1)	25.4	%	20.4	%
Unit Level Profit (1)	20.6	%	25.8	%
Gaming:
Revenues	100.0	%	100.0	%
Casino costs	31.0	%	35.0	%
Rooms costs	10.0	%	10.0	%
Food and beverage costs	10.7	%	10.2	%
Other operating expenses (1)	24.4	%	22.1	%
Unit Level Profit (1)	23.9	%	22.7	%

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

Three months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009

Restaurant and Hospitality

Restaurant and hospitality revenues decreased $1,031,218, or 0.5%, from $200,275,650 to $199,244,432 for the three months ended March 31, 2010 compared to the prior year comparable period. The change in revenue is the result of the following approximate amounts: new restaurant openings—increase $2.5 million; same store sales (restaurants open all of the first quarter 2010 and 2009)—decrease $2.9 million; closed or sold restaurants—decrease $2.0 million and the remainder of the difference is attributable to the change in sales for stores not open a full comparable period or other sales. The total number of units open as of March 31, 2010 and 2009 was 170 and 173, respectively.

Cost of revenues decreased $654,458, or 1.3%, from $49,663,525 to $49,009,067 for the three months ended March 31, 2010 as compared to the prior year and such expenses decreased as a percentage of revenues for the three months ended March 31, 2010 to 24.6% from 24.8% in 2009. This decrease is due to the decline in revenues and our continued cost containment strategies.

Labor expense increased $499,451, or 0.9%, from $57,995,708 to $58,495,159 for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. Labor expenses as a percentage of revenues for 2010 increased to 29.4% from 29.0% in 2009. This increase in labor expense resulted in part from inefficiencies associated with weather related sales declines.

Other operating expenses increased $9,728,354 or 23.8%, from $40,873,669 to $50,602,023 for the three months ended March 31, 2010 as compared to the prior year period and such expenses increased as a percentage of revenues to 25.4% in 2010 from 20.4% in 2009. This increase primarily relates to decreased rent expense in 2009 associated with a $7.5 million lease termination payment received from a landlord and increased marketing and promotion spend as compared to the comparable prior year period.

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Gaming

Casino revenues increased $849,510, or 2.4%, from $35,968,289 to $36,817,799 for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. This increase is primarily the result of increased traffic and the resulting table game activity in Las Vegas.

Room revenues increased $1,707,558, or 13.8%, from $12,405,816 to $14,113,374 for the three months ended March 31, 2010 as compared to the prior year period. This increase is the result of the additional 430 rooms associated with the opening of Rush Tower in the fourth quarter of 2009, partially offset by reduced occupancy and average daily room rates in Las Vegas as compared to the prior year period.

Food and beverage revenues increased $614,477, or 5.9%, from $10,486,228 to $11,100,705 for the three months ended March 31, 2010 as compared to the comparable prior year period. This increase reflects the temporary closure of certain outlets in the first quarter of 2009 as a cost saving measure.

Casino expenses decreased $1,190,266, or 6.1%, from $19,620,490 to $18,430,224 for the three months ended March 31, 2010 as compared to the comparable prior year period. This decrease is primarily the result of reduced payroll related costs and promotional and complimentary expenses for both Las Vegas and Laughlin.

Room expenses increased $317,579 or 5.7% from $5,609,715 to $5,927,294 for the three months ended March 31, 2010 as compared to the comparable prior year period. This increase is primarily the result of the opening of Rush Tower in the fourth quarter of 2009.

Food and beverage expenses increased $640,313, or 11.2%, from $5,701,286 to $6,341,599 for the three months ended March 31, 2010 as compared to the comparable prior year period. This increase reflects the temporary closure of certain outlets in the first quarter of 2009 as a cost saving measure.

Other expenses increased $2,199,714, or 17.8%, from $12,364,687 to $14,564,401 for the three months ended March 31, 2010 as compared to the comparable period in the prior year. This increase resulted primarily from increased staffing levels and utilities associated with the opening of Rush Tower in the fourth quarter of 2009.

Consolidated

General and administrative expenses increased $640,737 or 5.3%, from $12,058,150 to $12,698,887 for the three months ended March 31, 2010 as compared to the comparable prior year period and increased as a percentage of revenue to 4.9% in 2010 from 4.7% in 2009. This increase is primarily the result of an increase in travel expenses and the increase in fair value of our deferred compensation plan.

We recorded $1,237,856 for the three months ended March 31, 2010 as income representing insurance proceeds associated with Hurricane Ike that exceeded the recorded book value of the assets which were damaged.

Gains on disposals of assets amounted to $938,268 for the three months ended March 31, 2010 as a result of gains on the disposition of two restaurant properties.

Pre-opening expenses decreased by $163,550, or 63.8% from $256,164 to $92,614 for the three months ended March 31, 2010 as compared to the comparable prior year period due to reduced activity.

Net interest expense for the three months ended March 31, 2010 increased by $4,419,124, or 18.0%, from $24,614,574 to $29,033,698 as compared to the comparable prior year period. This increase is primarily due to higher effective borrowing rates and increased borrowings associated with our refinancing and construction of the Golden Nugget tower, respectively.

Other income amounted to $22,644,192, for the three months ended March 31, 2010 as compared to other expense totaling $4,134,412 for the three months ended March 31, 2009. The 2010 amount relates primarily to a $33.0 million gain related to the repurchase of $62.8 million of the Golden Nugget second lien indebtedness at 40% of face value offset by non-cash charges of $10.0 million related to interest rate swaps not considered hedges. The 2009 amount is primarily comprised of $4.0 million in call premiums associated with refinancing our 7.5% and 9.5% senior notes.

A provision for income taxes of $4,666,214 was recorded for three months ended March 31, 2010 compared with a provision of $2,387,581 for the three months ended March 31, 2009. The effective tax rate for 2010 was 24.2% compared to 24.5% for the prior year period.

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Liquidity and Capital Resources

On April 28, 2010, we announced the completion of an offering of an additional $47.0 million aggregate principal amount of 11 5/8% senior secured notes due 2015 (the “Additional Notes”). The sale of the Additional Notes provided gross proceeds of approximately $49.8 million which were used to pay for the acquisition of The Oceanaire, Inc. (“Oceanaire”), to repay outstanding revolver balances and for general corporate purposes.

On November 30, 2009, we completed the offering of $406.5 million in aggregate principal amount of 11 ⁵/8% senior secured notes due 2015 (the “Initial Notes”). The gross proceeds from the offering and sale of the Initial Notes were $400.1 million, (the Initial Notes and the Additional Notes are herein referred to as the “Notes”). The Notes are unconditionally guaranteed on a senior secured basis as to principal, premium, if any, and interest by all of our current and future domestic restricted subsidiaries (each individually a Guarantor and collectively, the Guarantors) and are secured by a second lien position on substantially all assets of Landry’s and the Guarantors.

The Indenture under which the Notes have been issued contains covenants that will limit the ability of the Company and the Guarantors to, among other things: incur or guarantee additional indebtedness or issue disqualified capital stock; transfer or sell assets; pay dividends or distributions, redeem subordinated indebtedness, make certain types of investments or make other restricted payments; create or incur liens; incur dividend or other payment restrictions affecting certain subsidiaries; consummate a merger, consolidation or sale of all or substantially all assets; enter into transactions with affiliates; designate subsidiaries as unrestricted subsidiaries; engage in business other than a business that is the same or similar to the current business and reasonably related businesses; take or omit to take any actions that would adversely affect or impair in any material respect the collateral securing the Notes.

On November 30, 2009, we also amended and restated our Credit Agreement (the Amended Credit Facility) to allow us to borrow $235.6 million. The Amended Credit Facility provides for a term loan of $160.6 million and a revolving credit line of $75.0 million. The obligations under the Amended Credit Facility are unconditionally guaranteed by the Guarantors and are secured by a first lien position on substantially all assets of Landry’s and the Guarantors.

Interest on the Amended Credit Facility accrues at a base rate (which is the greater of 4.0%, the Federal Funds Rate plus .50% or Wells Fargo’s prime rate) plus a credit spread of 5.0%, or at our option, at the Eurodollar base rate but no less than 2.0%, plus a credit spread of 6.0%, and matures on November 30, 2013.

The Amended Credit Facility contains covenants that limit our ability and the Guarantors to, among other things, incur or guarantee additional indebtedness; create liens; make capital expenditures; pay dividends on or repurchase stock; make certain types of investments; sell assets or merge with other companies. The Amended Credit Facility contains financial covenants, including a maximum leverage ratio, a maximum senior leverage ratio, and a minimum fixed charge coverage ratio.

Proceeds from the Initial Notes and the Amended Credit Facility were used to repay all of our outstanding 14.0% Senior Secured Notes due 2011, described below, pay fees and expenses and provide approximately $73.0 million in restricted cash available to complete a proposed merger of an affiliate of Tilman Fertitta and us. In connection with the repayment of the 14.0% Senior Secured Notes, we expensed $35.6 million in interest expense, primarily associated with early recognition of unamortized discount and deferred loan costs.

On February 13, 2009, we completed an offering of $295.5 million in aggregate principal amount of 14.0% Senior Secured Notes due 2011 (the “Series A Notes”). The gross proceeds from the offering and sale of the Series A Notes were $260.0 million were used in conjunction with borrowing under our then outstanding credit facility to refinance substantially all of our outstanding $400.0 million of 9.5% and 7.5% senior notes due 2014. The Series A Notes were unconditionally guaranteed by the Guarantors and were secured by a second lien position on substantially all of our and the Guarantors’ assets.

On February 17, 2010, the Golden Nugget, Inc., a wholly owned, unrestricted subsidiary of ours, entered into Amendment No. 2 and Waiver to the First Lien Credit Agreement (First Lien Second Amendment) by and among Golden Nugget, Inc., Wachovia Bank, National Association, as Administrative Agent, Collateral Agent, Swing Line Bank and Issuing Bank, and each of the Lender parties thereto, dated June 14, 2007.

The First Lien Second Amendment replaced the existing first lien financial covenants with minimum EBITDA, minimum liquidity, minimum cage cash and maximum capital expenditure (CAPEX) covenants. In addition, consenting First Lien lenders received a consent fee of 0.5% and all First Lien lenders will receive a 0.5% annual consent fee on outstanding commitments through maturity. First Lien Lenders will also receive additional interest in an amount equal to 1.00% per annum on unpaid Advances in the form of “PIK” interest, or at the option of Golden Nugget, cash. The First Lien Second Amendment precludes dividends or other restricted payments, limits incurring additional debt, making investments and other cash distributions from the Golden Nugget, increases the excess cash flow sweep to 75% from 50% if certain liquidity levels are reached and requires additional reporting of financial performance including cash flow reports. Certain potential defaults under the existing First Lien Credit Agreement were waived.

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Concurrently with the First Lien Second Amendment, the Golden Nugget entered into Amendment No. 2 and Waiver to the Second Lien Credit Agreement (Second Lien Second Amendment) by and among Golden Nugget, Inc., Wachovia Bank, National Association and the other financial institutions parties thereto, dated June 14, 2007. The Second Lien Second Amendment replaced the existing second lien financial covenants with minimum EBITDA, minimum liquidity, minimum cage cash and maximum CAPEX covenants and waived certain potential defaults under the existing Second Lien Credit Agreement. The Second Lien Second Amendment advances the maturity date on the second lien facility from December 31, 2014 to November 2, 2014. The maturity date on the existing $4.0 million Seller note was extended to November 2, 2014 from November 2, 2010.

In connection with the Golden Nugget amendments, affiliates of the Golden Nugget provided $50.0 million in additional funds to the Golden Nugget in return for non-interest bearing subordinated notes. $20.0 million of these funds was used for operating liquidity and to pay fees and expenses associated with the amendments. $30.0 million was available to purchase second lien indebtedness at 40% of face value. At closing, approximately $62.8 million of second lien indebtedness was acquired and retired at 40% of face value and accordingly, a $33.0 million gain was recognized in other income, net during the three months ended March 31, 2010. The remaining balance of the $30.0 million not used to purchase second lien debt by December 31, 2010, if any, will be used to purchase first lien debt at par value. All such purchased debt shall be immediately retired. The Golden Nugget may also incur up to an additional $8.0 million in affiliate subordinated debt during the remaining term of the First Lien Credit Agreement to meet liquidity requirements.

On September 25, 2009, an unrestricted subsidiary of Landry’s completed the acquisition of $33.2 million face amount of Golden Nugget second lien term loan debt through a dutch tender and open market purchases at a weighted average cost approximating 41% of face value. In connection with the debt purchases, the unrestricted subsidiary agreed to forgive the face amount of the debt acquired and accordingly, a $19.4 million gain was recognized in other income, net during the three months ended September 30, 2009.

Previously in June 2007, our wholly owned unrestricted subsidiary, Golden Nugget, Inc., completed a new $545.0 million credit facility consisting of a $330.0 million first lien term loan, a $50.0 million revolving credit facility, and a $165.0 million second lien term loan. The $330.0 million first lien term loan includes a $120.0 million delayed draw component to finance the expansion at the Golden Nugget Hotel and Casino in Las Vegas, Nevada. The revolving credit facility expires on June 30, 2013 and the first lien term loan matures on June 30, 2014. Both the first lien term loan and the revolving credit facility bear interest at Libor or the bank’s base rate, plus a financing spread of 2.0% and 0.75%, respectively, at March 31, 2010. In addition, the credit facility requires a commitment fee on the unfunded portion for both the $50.0 million revolving credit facility and the $120.0 million delayed draw component of the first lien term loan. The second lien term loan matures on November 2, 2014 and bears interest at Libor or the bank’s base rate, plus a financing spread of 3.25% and 2.0%, respectively, at March 31, 2010. The financing spreads and commitment fees for the revolving credit facility increase or decrease depending on the leverage ratio as defined in the credit facility. The first lien term loan requires one percent of the outstanding principal balance due annually to be paid in equal quarterly installments commencing on September 30, 2009, with the balance due on maturity. Principal of the second lien term loan is due at maturity. The Golden Nugget’s subsidiaries have granted liens on substantially all real property and personal property as collateral under the credit facility and are guarantors of the credit facility.

Consistent with our policy to manage our exposure to interest rate risk and in conformity with the requirements of the first and second lien facilities, we entered into interest rate swaps for all of the first and second lien borrowings of the Golden Nugget that fix the interest rates at between 5.4% and 5.5%, plus the applicable margin. We designated $210.0 million of the first lien interest rate swaps and all of the second lien swaps as cash flow hedges. The swaps mirror the terms of the underlying debt and reset using the same index and terms. As of March 31, 2010, an aggregate $96.0 million in second lien term loan debt has been repurchased and retired, and as such a proportional share of the second lien swaps are no longer an effective cash flow hedge. Accordingly, an $8.9 million non-cash expense associated with this portion of the swaps was recorded as other expense for the three months ended March 31, 2010. At March 31, 2010, the remaining portion of these swaps were determined to be highly effective, and no ineffective portion was recognized in income. Included in Accumulated other comprehensive loss at March 31, 2010 and December 31, 2009 are unrealized losses, net of income taxes, totaling $23.6 million and $27.0 million, respectively, related to these hedges. For the three months ended March 31, 2010 and 2009, the impact of these interest rate swaps was an increase to interest expense of $6.4 million and $5.4 million, respectively. The remaining interest rate swaps associated with the $120.0 million of first lien borrowings representing the delayed draw construction loan have not been designated as hedges and the change in fair market value is reflected as other income/expense in the consolidated financial statements. Accordingly, a non-cash expense of approximately $1.2 million was recorded for the three months ended March 31, 2010, while a non-cash gain of approximately $0.4 million was recorded for the three months ended March 31, 2009.

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Our debt agreements contain various restrictive covenants including minimum EBITDA, 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. As a result of reduced operating results combined with additional borrowings for construction of the new tower, we contributed approximately $25.0 million in cash to the Golden Nugget in 2009. As of March 31, 2010, we were in compliance with all such covenants. As of March 31, 2010, we had approximately $19.1 million in letters of credit outstanding, and our available borrowing capacity was $36.0 million.

As a primary result of the extraordinary disruption to the credit markets in 2009, our 2009 financing carried substantially higher interest rates and original issue discount than the previous debt instruments. In addition, the Golden Nugget amendments increase its cash interest rate by 0.5% annually and its total interest rate by 1.5% annually on all first lien debt. These higher interest rates, combined with additional borrowing to provide liquidity and pay fees and expenses for the financing as well as to fund the hotel tower at the Golden Nugget, will result in substantially higher interest expense over at least the next few years.

Working capital decreased from $13.3 million as of December 31, 2009 to a deficit of $27.7 million as of March 31, 2010 primarily due to a reduction in cash associated with the repurchase of a portion of the Golden Nugget’s debt. Cash flow to fund future operations, new restaurant development and acquisitions will be generated from operations, available capacity under our credit facilities and additional financing, if appropriate.

From time to time, we review opportunities for restaurant acquisitions and investments in the hospitality, gaming, entertainment, amusement, food service and facilities management and other industries. Our exercise of any such investment opportunity may impact our development plans and capital expenditures. We believe that adequate sources of capital are available to fund our business activities for the next twelve months.

Capital expenditures for the three months ended March 31, 2010 were $9.1 million. We expect capital expenditures to be approximately $19.0 million for the remainder of the year.

Seasonality and Quarterly Results

Our business is seasonal in nature. Our reduced winter volumes cause revenues and, to a greater degree, operating profits to be lower in the first and fourth quarters than in other quarters. We have and will continue to open restaurants in highly seasonal tourist markets. Periodically, our sales and profitability may be negatively affected by adverse weather. The timing of unit openings can and will affect quarterly results.

Critical Accounting Policies

Restaurant and other properties are reviewed on a property by property basis for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. The recoverability of properties that are to be held and used is measured by comparison of the estimated future undiscounted cash flows associated with the asset to the carrying amount of the asset. Goodwill and other non-amortizing intangible assets are reviewed for impairment at least annually. Significant estimates used in these reviews include projected operating results and cash flows, discount rates, terminal value growth rates, capital expenditures, changes in future working capital requirements, cash flow multiples, control premiums and assumed royalty rates. If such assets are considered to be impaired, an impairment charge is recorded in the amount by which the carrying amount of the assets exceeds their fair value. Properties to be disposed of are reported at the lower of their carrying amount or fair values, reduced for estimated disposal costs, and are included in other current assets.

We operate approximately 170 restaurants and periodically we expect to experience unanticipated individual unit deterioration in revenues and profitability, on a short-term and occasionally longer-term basis. When such events occur and we determine that the associated assets are impaired, we will record an asset impairment expense in the quarter such determination is made. Due to our average restaurant net investment cost, such amounts could be significant when and if they occur. However, such asset impairment expense does not affect our financial liquidity, and is usually excluded from many valuation model calculations.

We maintain a large deductible insurance policy related to property, general liability and workers’ compensation coverage. Predetermined loss limits have been arranged with insurance companies to limit our per occurrence cash outlay. Accrued expenses and other liabilities include estimated costs to settle unpaid claims and estimated incurred but not reported claims using actuarial methodologies.

GAAP requires the recognition of deferred tax assets, net of applicable reserves, related to net operating loss carry forwards 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.

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Our income tax returns are subject to examination by the Internal Revenue Service and other tax authorities. We regularly assess the potential outcomes of these examinations in determining the adequacy of our provision for income taxes and our income tax liabilities. Inherent in our determination of any necessary reserves are assumptions based on past experiences and judgments about potential actions by taxing authorities. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We believe that we have adequately provided for any reasonable and foreseeable outcome related to uncertain tax matters.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, the recognition and measurement of current and deferred income tax assets and liabilities; the assessment of recoverability of long-lived assets and costs to settle unpaid claims. Actual results may differ materially from those estimates.

Recent Accounting Pronouncements

In September 2009, the FASB amended authoritative guidance associated with multiple-deliverable revenue arrangements. This amended guidance addresses the determination of when individual deliverables within an arrangement may be treated as separate units of accounting and modifies the manner in which consideration is allocated across the separately identifiable deliverables. The amendments to authoritative guidance associated with multiple-deliverable revenue arrangements are effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently evaluating the potential impact this guidance may have on our consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06,Improving Disclosures about Fair Value Measurements(“ASU No. 2010-06”). The new standard addresses, among other things, guidance regarding activity in Level 3 fair value measurements. Portions of ASU No. 2010-06 that relate to the Level 3 activity disclosures are effective for the annual reporting period beginning after December 15, 2010. We are currently evaluating the potential impact this guidance may have on our consolidated financial statements.

In April 2010, the FASB issued ASU No. 2010-16,“Accruals for Casino Jackpot Liabilities”, which clarifies when a casino entity is required to accrue a jackpot liability. ASU No. 2010-16 will be effective for fiscal years beginning on or after December 15, 2010, with early adoption permitted. We are currently evaluating the potential impact this guidance may have on our consolidated financial statements.

Impact of Inflation

We do not believe that inflation has had a significant effect on our operations during the past several years. We believe we have historically been able to pass on increased costs through menu price increases, but there can be no assurance that we will be able to do so in the future. Future increases in commodity costs, labor costs, including expected future increases in federal and state minimum wages, energy costs, and land and construction costs could adversely affect our profitability and ability to expand.

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 March 31, 2010 included $214.2 million of floating-rate debt attributed to borrowings at an average interest rate of 7.16%. As a result, our annual interest cost in 2010 will fluctuate based on short-term interest rates.

Consistent with our policy to manage our exposure to interest rate risk, and in conformity with the requirements of our first and second lien facilities, we entered into interest rate swaps with notional amounts covering all of the first and second lien borrowings of the Golden Nugget. The hedges are designed to convert the lien facilities’ floating interest rates to fixed rates at between 5.4% and 5.5%, plus the applicable margin.

The impact on annual cash flow of a ten percent change in the floating-rate (approximately 0.7%) would be approximately $1.5 million annually based on the floating-rate debt and other obligations outstanding at March 31, 2010; however, there are no assurances that possible rate changes would be limited to such amounts.

ITEM 4. Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13e-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of March 31, 2010, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2010, our disclosure controls and procedures were effective to

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ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. During the three months ended March 31, 2010, 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. The Company reported a material weakness in our fiscal year 2009 Form 10-K. Now that a sufficient period of time has elapsed as of March 31, 2010 to allow for effective testing, management believes the control weakness has been remediated.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

General Litigation

On February 5, 2009, a purported class action and derivative lawsuit entitledLouisiana Municipal Police Employee’s Retirement System on behalf of itself and all other similarly situated shareholders of Landry’s Restaurant’s, Inc. and derivatively on behalf of nominal defendant Landry’s Restaurant’s, Inc. was brought against all members of our Board of Directors, Fertitta Holdings, Inc., and Fertitta Acquisition Co. in the Court at Chancery of the State of Delaware. The lawsuit alleges, among other things, a breach of a fiduciary duty by the directors for renegotiating the 2008 merger agreement with the Fertitta entities, allowing Mr. Fertitta to acquire shares of stock in the Company and gain majority control thereof, and terminating the 2008 merger agreement without requiring payment of the reverse termination fee. The suit seeks consummation of the merger buyout at $21.00 a share or damages representing the difference between $21.00 per share and the price at which class members sold their stock in the open market, or damages for allowing Mr. Fertitta to acquire control of the Company without paying a control premium, or alternatively requiring payment of the reverse termination fee or damages for the devaluation of the Company’s stock. We intend to contest this matter vigorously.

On January 29, 2010, plaintiff in the foregoing action filed an amended complaint also naming Fertitta Group, Inc. and Fertitta Merger Co. as defendants and has further alleged that Mr. Fertitta’s latest proposal to acquire all of our outstanding stock on November 3, 2009 was unfair and that defendants breached their fiduciary duties in entering into a 2009 merger agreement at $14.75. Also, the amended complaint alleges that the Board approved an excessive golden parachute for Mr. Fertitta (albeit over seven (7) years ago) and requests that the Court invalidate same. In addition, plaintiff asserts that there has been inadequate disclosure in our preliminary proxy statement filed with the SEC in connection with the $14.75 merger transaction. In connection with the amended complaint, plaintiff also seeks an injunction of the $14.75 transaction unless curative disclosures are made, appointment of a Trustee to conduct a sale of us to maximize shareholder value, and the imposition of a constructive trust on shares acquired by Mr. Fertitta after June 2008 to be voted in favor of a transaction that provides the highest offer to our shareholders. We believe that the new claims assented in the amended complaint are also without merit and intend to vigorously contest them as well.

On April 27, 2010, we announced that in connection with the above litigation Tilman J. Fertitta reached a tentative agreement with the plaintiff’s attorneys to settle the stockholders derivative claim and certain other claims in connection with Mr. Fertitta’s proposal to merge the Company into his wholly-owned company, and that Mr. Fertitta further agreed to increase the price to be paid to the Company’s stockholders other than Mr. Fertitta to $21.00 per share in cash in a merger of the Fertitta affiliate with the Company. Despite this announcement, a final agreement has not been agreed upon, and there is no assurance that a final agreement will in fact be reached.

Following Mr. Fertitta’s latest proposal to acquire all of our outstanding stock on November 3, 2009, the class action lawsuit styledFrederic Goldfein, Individually and on behalf of all others similarly situated v. Landry’s restaurants, Inc., et al. was filed in the District Court of Harris County, 164^thJudicial District. We are named in the Petition as a defendant along with all of our directors. Plaintiff has alleged that in connection with the proposed merger transaction, defendants have violated their fiduciary duties, duties of loyalty and good faith and fair dealing and have placed an artificial lid on the price of our stock by announcing a transaction at an inadequate price. Plaintiff seeks to enjoin the transaction until we adopt procedures and a process to obtain the highest price for shareholders, or alternatively to rescind the transaction. We believe this action is without merit and intend to vigorously contest this matter.

Ralph Biancalana, Individually and on behalf of all others similarly situated v. Tilman J. Fertitta, et al., a putative class action, was filed on November 10, 2009 in the District Court of Harris County, Texas, 165^thJudicial District, following Mr. Fertitta’s latest proposal to acquire all of our outstanding stock. We are named in the Petition as a defendant along with all of our directors. Plaintiff has alleged, among other things, that in connection with the proposed merger transaction, our directors have knowingly and recklessly violated their fiduciary duty of care, have violated their fiduciary duties of loyalty, good faith, candor and independence, and that the transaction contains an inadequate and unfair price. Plaintiff also alleged that we aided and abetted our directors’ alleged breach of fiduciary duty. Plaintiff seeks to enjoin the transaction and the payment of a termination fee to Mr. Fertitta. Plaintiff also requests declarations from the Court that the termination fee is unfair, and that our directors have breached their fiduciary duties to our shareholders. Plaintiff seeds recovery of attorneys fees and costs. We believe this action is without merit and intend to vigorously contest this matter.

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On November 17, 2009, Robert Caryer filed a class action petition in the District Court of Harris County, 125^thJudicial District. The lawsuit is styledRobert Caryer, individually and on behalf of all other similarly situated v. Landry’s Restaurants, Inc., Tilman J. Fertitta, Steve L. Scheinthal, Kenneth Brimmer, Michael S. Chadwick, Joe Max Taylor and Richard H. Liem. Plaintiff has alleged that in connection with the proposed merger transaction, defendants have violated their fiduciary duties, duties of loyalty and good faith and fair dealing and have placed an artificial lid on the price of our stock by announcing a transaction at an inadequate price. Plaintiff seeks to enjoin the transaction until we adopt procedures and a process to obtain the highest price for shareholders, or alternatively to rescind the transaction. We believe this action is without merit and intend to vigorously contest this matter.

On January 15, 2010, the Goldfein, Biancalana and Caryer actions were consolidated by Court order. Plaintiffs allege in the consolidated petition that in connection with the proposed merger transaction, defendants have violated their fiduciary duties, duties of loyalty and good faith and fair dealing and have placed an artificial lid on the price of our stock by announcing a transaction at an inadequate price. Plaintiffs seek to enjoin the transaction until we adopt procedures and a process to obtain the highest price for shareholders, or alternatively to rescind the transaction. We believe this action is without merit and intend to vigorously contest this matter.

General Litigation

We are subject to other legal proceedings and claims that arise in the ordinary course of business. Management does not believe that the outcome of any of those matters will have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 1A. Risk Factors

There have been no material changes to the Risk Factors disclosed in our 2009 Annual Report on Form 10-K.

ITEM 6. Exhibits

The following Exhibits are set forth herein:

10.1	— Amendment Number One To Second Amended and Restated Credit Agreement dated April 23, 2010, between, among others, the Company and Wells Fargo Capital Finance, LLC, as the Administrative Agent and Arranger.
10.2	—Registration Rights Agreement dated April 28, 2010, among the Company, the Guarantors, and the initial purchaser party thereto
10.3	—Purchase Agreement dated April 23, 2009 between the Company, the Guarantors and Jefferies & Company, Inc.
10.4	—First Supplemental Indenture dated April 22, 2010 effective as of November 30, 2009 between, including among others, Landry’s Restaurants, Inc. and Wilmington Trust, FSB, as Trustee
12.1	— Ratio of Earnings to Fixed Charges
31.1	—Certification by Chief Executive Officer
31.2	—Certification by Chief Financial Officer
32	—Certification with respect to quarterly report of Landry’s Restaurants, Inc.

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SIGNATURES

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

LANDRY’S RESTAURANTS, INC.

(Registrant)

/s/    TILMAN J. FERTITTA        

Tilman J. Fertitta

Chairman of the Board of Directors,

President and Chief Executive Officer

(Principal Executive Officer)

/s/    RICK H. LIEM        

Rick H. Liem

Executive Vice President and

Chief Financial Officer

(Principal Financial and Accounting Officer)

Date: May 10, 2010

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