**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

 

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

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

 
| **For the Fiscal Year Ended December 27,  2004** | ** ** | **Commission File Number:  0-18668** |
|-------------------------------------------------------|------------|--------------------------------------|

 

**MAIN STREETRESTAURANT GROUP, INC.**

(Exactname of registrant as specified in its charter)

 
| **DELAWARE**                                                    | ** ** | **11-2948370**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **5050 NORTH 40TH STREET**                                      | ** ** | ** **                            |
| **SUITE 200, PHOENIX, ARIZONA**                                 | ** ** | **85018**                             |
| (Address of principal executive offices)                        |       | (Zip Code)                            |

 

**(602) 852-9000**

Registrant’stelephone number, including area code

 

Securitiesregistered pursuant to Section 12(b) of the Act:

**None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

**Common Stock, $.001 par value**

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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  ý  No  o

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K.  ý

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  o  No  ý

 

At June 28, 2004, the last business dayof the registrant’s second fiscal quarter, there were outstanding 14,642,000shares of the registrant’s common stock, $.001 par value.  The aggregate market value of common stockheld by nonaffiliates of the registrant (8,414,237 shares) based on the lastreported sale price of the common stock as reported on the Nasdaq NationalMarket on June 28, 2004, ($2.05 per share) was $17,249,186.  For purposes of this computation, allofficers, directors, and 10% beneficial owners of the registrant are deemed tobe affiliates.  Such determination shouldnot be deemed an admission that such officers, directors, or 10% beneficialowners are, in fact, affiliates of the registrant.

 

Documents incorporated by reference: Portionsof the registrant’s Proxy Statement for the 2005 Annual Meeting of Stockholdersare incorporated by reference into Part III.

 

 

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**MAIN STREET RESTAURANT GROUP, INC.**

 

ANNUALREPORT ON FORM 10-K

 

FISCALYEAR ENDED DECEMBER 27, 2004

 

TABLE OFCONTENTS

 
| PART I     |   |                                                                                                                   |   |   |
|------------|--------|------------------------------------------------------------------------------------------------------------------------|--------|--------|
| ITEM 1.    |   | BUSINESS                                                                                                               |   |   |
| ITEM 2.    |   | PROPERTIES                                                                                                             |   |   |
| ITEM 3.    |   | LEGAL PROCEEDINGS                                                                                                      |   |   |
| ITEM 4.    |   | SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                                                   |   |   |
|       |   |                                                                                                                   |   |   |
| PART II    |   |                                                                                                                   |   |   |
| ITEM 5.    |   | MARKET FOR THE REGISTRANT’S COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |   |   |
| ITEM 6.    |   | SELECTED CONSOLIDATED FINANCIAL DATA                                                                                   |   |   |
| ITEM 7.    |   | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                            |   |   |
| ITEM 7A.   |   | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                                            |   |   |
| ITEM 8.    |   | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                            |   |   |
| ITEM 9.    |   | CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                  |   |   |
| ITEM 9A.   |   | CONTROLS AND PROCEDURES                                                                                                |   |   |
| ITEM 9B.   |   | OTHER INFORMATION                                                                                                      |   |   |
|       |   |                                                                                                                   |   |   |
| PART  III  |   |                                                                                                                   |   |   |
| ITEM 10.   |   | DIRECTORS AND EXECUTIVE OFFICERS OF THE  REGISTRANT                                                                    |   |   |
| ITEM 11.   |   | EXECUTIVE COMPENSATION                                                                                                 |   |   |
| ITEM 12.   |   | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                        |   |   |
| ITEM 13.   |   | CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS                                                                        |   |   |
| ITEM 14.   |   | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                                 |   |   |
|       |   |                                                                                                                   |   |   |
| PART IV    |   |                                                                                                                   |   |   |
| ITEM 15.   |   | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                             |   |   |
|       |   |                                                                                                                   |   |   |
| SIGNATURES |   |                                                                                                                   |

 

**Statement Regarding Forward-Looking Statements**

 

The statements contained in this Report onForm 10-K that are not purely historical are forward-looking statements withinthe meaning of applicable securities laws. Forward-looking statements include statements regarding our “expectations,”“anticipation,” “intentions,” “beliefs,” or “strategies” regarding thefuture.  Forward-looking statements alsoinclude statements regarding revenue, margins, expenses, asset impairmentcharges, and earnings analysis for fiscal 2005 and thereafter; futurerestaurant operations and new restaurant acquisitions or development ordispositions; the restaurant industry outlook in general; and liquidity andanticipated cash needs and availability. All forward-looking statements included in this Report are based oninformation available to us as of the filing date of this Report, and we assumeno obligation to update any such forward-looking statements.  Our actual results could differ materiallyfrom the forward-looking statements in this Report.  A variety of factors could cause our actual resultsto differ materially from the forward-looking statements, including the factorsdiscussed in Item 1, “Business – Special Considerations.”

 

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**PART I**

 

**ITEM1.****    ****BUSINESS**

 

***General Overview***

 

We are the world’s largest franchisee of TGI Friday’srestaurants, currently owning 52 TGI Friday’s restaurants.  In addition, we own and operate 13 BambooClub “Asian Bistro” restaurants. We also own four Redfish Seafood Grill and Barrestaurants and operate an Alice Cooper’stown restaurant in Cleveland, Ohio,pursuant to a license agreement with Celebrity Restaurants, L.L.C., the ownerof the exclusive rights to operate Alice Cooper’stown restaurants. Our sales in2004 were approximately $224 million, and we operate in 14 states.

 

TGI Friday’s restaurants are full-service, casual diningestablishments featuring a wide selection of freshly prepared, popular foodsand beverages served by well-trained, friendly employees in relaxedsettings.  Bamboo Club “Asian Bistro”restaurants are full-service, casual plus restaurants that feature an extensiveand diverse menu of innovative and tantalizing Pacific Rim cuisine.  Redfish Seafood Grill and Bar restaurants arefull-service, casual dining restaurants that feature a broad selection of NewOrleans style fresh seafood, Creole and seafood cuisine, and traditionalsouthern dishes, as well as a “Voodoo” style lounge, all under one roof.  Alice Cooper’stown restaurants are rock androll and sports themed and feature a connection to the music celebrity AliceCooper.

 

We own the exclusive rights todevelop additional TGI Friday’s restaurants in Southern California, Nevada,Arizona, New Mexico, and El Paso, Texas and own TGI Friday’s restaurants in themetropolitan areas of Kansas City, Kansas, and Kansas City, Missouri. We ownthe Bamboo Club and Redfish brands.  Ourstrategy is to:

 

•                  Capitalize on thebrand-name recognition and goodwill associated with TGI Friday’s restaurants;

•                  Expand our restaurantoperations through:

•                  the development of anadditional 16 TGI Friday’s restaurants by 2009 in our existing developmentterritories,

•                  the limited developmentof additional Bamboo Club restaurants in certain key markets in  the United States when our developmentcapital allows, and

•                  the possibleacquisition or development of restaurants operating under other restaurantconcepts; and

•                  Improve ourprofitability by continuing to enhance the dining experience of our guests andimproving operating efficiency at all of our restaurant brands;

•                  Reduce our long-termdebt; and

•                  Sell non-core assets orrestaurants in non-core markets.

 

We may explore opportunities to franchise Bamboo Cluband Redfish concepts to third parties in the future.

 

We were incorporated in December 1988.  On July 15, 2004, we changed our namefrom Main Street and Main Incorporated to Main Street Restaurant Group, Inc. Wemaintain our principal executive offices at 5050 North 40th Street, Suite 200,Phoenix, Arizona 85018, and our telephone number is (602) 852-9000.  Our website is located atwww.mainandmain.com. Through our website, we make available free of charge ourannual report on Form 10-K, our quarterly reports on Form 10-Q, our currentreports on 

 

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Form 8-K, our proxy statements, and anyamendments to those reports filed or furnished pursuant to Section 13(a)or 15(d) of the Securities Exchange Act of 1934.  These reports are available as soon asreasonably practicable after we electronically file those reports with theSecurities and Exchange Commission.  Wealso post on our website the charters of our Audit Committee, CompensationCommittee, and Nominations and Governance Committee; our Corporate GovernanceGuidelines, Code of Business Conduct and Ethics, and Code of Ethics for the CEOand Senior Financial Officers, and any amendments or waivers thereto; and anyother corporate governance materials contemplated by SEC or NASDAQregulations.  These documents are alsoavailable in print to any stockholder requesting a copy from our corporatesecretary at our principal executive offices. As used in this Report, the terms “we,” “our,” “us,” the  “Company”, our company, and “Main Street”refers to Main Street Restaurant Group, Inc. and its subsidiaries and operatingdivisions.

 

***Operations***

 

**The TGI Friday’s Concept**

 

The TGI Friday’s concept isfranchised by TGI Friday’s Inc., a wholly owned subsidiary of CarlsonRestaurants Worldwide, Inc., a wholly owned subsidiary of Carlson CompaniesInc., which is a diversified company with business interests in the restaurantand hospitality industries.  The firstTGI Friday’s restaurant was opened in 1965 in New York City.  TGI Friday’s Inc. and its predecessors haveconducted a business since 1972 that is substantially similar to the businesscurrently conducted by its franchisees.  Asof December 27, 2004, TGI Friday’s Inc., had 267 franchisor-operated and492 franchised TGI Friday’s restaurants operating worldwide.  On December 27, 2004, TGI Friday’s Inc.owned 53,016 shares, or approximately 0.036%, of our outstanding common stock.  Holders of our common stock do not have anyfinancial interest in TGI Friday’s Inc., and TGI Friday’s Inc. has noresponsibility for the contents of this report.

 

TGI Friday’s restaurants arefull-service, casual dining establishments featuring a wide selection ofhigh-quality, freshly prepared popular foods and beverages, including a numberof innovative and distinctive menu items, such as menu items featuring “JackDaniel’s” sauces.    The restaurantsfeature quick, efficient, and friendly table service designed to minimizecustomer-waiting time and facilitate table turnover.

 

 Our restaurants generally are open seven daysa week between the hours of approximately 11:00 a.m. and 1:00 a.m.  We have three locations that have curbsideservice in Chandler, Arizona, our Desert Ridge location (North Phoenix,Arizona), and Ontario, California. We believe that the design and operationalconsistency of all TGI Friday’s restaurants enable us to benefit significantlyfrom the name recognition and goodwill associated with TGI Friday’srestaurants.

 

*The TGI Friday’s System*

 

TGI Friday’s restaurants aredeveloped and operated pursuant to a specified system.  TGI Friday’s Inc. maintains detailedstandards, specifications, procedures, and operating policies to facilitate thesuccess and consistency of all TGI Friday’s restaurants.  To ensure that the highest degree of qualityand service is maintained, each franchisee of TGI Friday’s Inc., including ourcompany, must operate each TGI Friday’s restaurant in strict conformity withthese methods, standards, and specifications. The TGI Friday’s system includes:

 

•                  distinctive exteriorand interior design, decor, color scheme, and furnishings;

•                  uniform specifications,procedures for operations, formal training, and standardized menus featuringspecial recipes and menu items;

 

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•                  advertising andpromotional programs;

•                  requirements forquality and uniformity of products and services offered; and

•                  requirements thatfranchisees purchase or lease from approved suppliers equipment, fixtures,furnishings, signs, inventory, recorded music, ingredients, and other productsand materials that conform with the standards and specifications of TGI Friday’sInc.

 

The TGI Friday’s system is identifiedby means of certain trade names, service marks, trademarks, logos, and emblems,including the marks TGI Friday’s® and Friday’s®.  We believe the support as well as thestandards, specifications, and operating procedures of TGI Friday’s Inc. are importantelements to our restaurant operations. Our policy is to execute these specifications, procedures, and policiesto the highest level of standards of TGI Friday’s Inc.

 

*Menu*

 

We attempt to capitalize onthe innovative and distinctive menu items that have been an important attributeof TGI Friday’s restaurants.  The menuconsists of more than 85 food items, including the following:

 

•                  appetizers, such asbuffalo wings, stuffed potato skins, quesadillas, spinach dip, cheese sticks,and pot stickers;

•                  a variety of soups,salads, sandwiches, burgers, and pasta;

•                  southwestern, oriental,and American specialty items;

•                  beef, seafood, andchicken entrees, including Jack Daniel’s®, grill items;

•                  a series of appetizersand entrees that are Atkins approved and low in carbohydrates;

•                  a children’s menu; and

•                  desserts.

 

Beverages include a full barfeaturing wines, beers, classic and specialty cocktails, after dinner drinks,soft drinks, milk, milk shakes, malts, hot chocolate, coffee, tea, frozen fruitdrinks known as Friday’s SmoothiesTM, and sparkling fruit juice combinationsknown as Friday’s Flings®.

 

Menu prices range from $9 to$20 for beef, chicken, and seafood entrees; $9 to $13 for pasta and orientaland southwestern specialty items; $4 to $9 for salads, sandwiches, and burgers;and $6 to $13 for appetizers and soups. Each restaurant offers a separate children’s menu with food entreesranging from $2 to $3.  Alcoholicbeverage sales currently account for approximately 25% of total revenue.

 

*Restaurant Layout*

 

Each of our TGI Friday’srestaurants is similar in terms of exterior and interior design.  Each restaurant features a distinctive decoraccented by red-and-white striped awnings, brass railings, stained glass, andeclectic memorabilia.  Each restauranthas interior dining areas and bar seating. In 2004, TGI Friday’s rolled out anupdated design prototype that modified the exterior and interior designs forTGI Friday’s restaurants. The updated designs provide a more modern look to theTGI Friday’s concept. We plan to use this new design in all of our newrestaurant construction and for all of our remodels. TGI Friday’s Inc. hasindicated that it will mandate future remodel requirements for all TGI Friday’srestaurants to incorporate these new design features.

 

Most of our TGI Friday’srestaurants are located in free-standing buildings.  These restaurants normally contain between5,500 and 9,000 square feet of space and average approximately 7,000 square

 

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feet. Most of our restaurants developed since 2001, however, contain 6,400 to6,800 square feet of space.  Our TGIFriday’s restaurants contain an average of 60 dining tables, seating an averageof 210 guests, and a bar area seating an average of approximately 30 additionalguests.

 

*Construction Economics*

 

We estimate that our totalcost of opening a new TGI Friday’s restaurant currently ranges from $2,475,000to $2,825,000, exclusive of annual operating expenses and assuming that weobtain the underlying real estate under a lease arrangement.  These costs include approximately (a)$1,650,000 to $2,000,000 for building, improvements, and permits, includingliquor licenses, (b) $600,000 for furniture, fixtures, and equipment, (c)$175,000 in pre-opening expenses, including hiring expenses, wages for managersand hourly employees, and supplies, and (d) $50,000 for the initial franchisefee.  Actual costs, however, may varysignificantly depending upon a variety of factors, including the site and sizeof the restaurant and conditions in the local real estate and employmentmarkets.

 

**The Bamboo Club “Asian Bistro” Concept**

 

Bamboo Club “Asian Bistro” restaurants arefull-service, casual plus restaurants that feature an extensive and diversemenu of innovative and tantalizing Pacific Rim cuisine.  Bamboo Club restaurants use fresh ingredientsand premium herbs and spices in creative combinations to serve high-qualityfood and beverages that deliver a unique combination of delicious taste,eye-appealing color, appetizing aroma, and delightful texture.  The Bamboo Club concept has been designed todeliver a consistent and enjoyable dining experience to each guest in anelegant, casual/plus atmosphere.  Therestaurants feature a modern décor that provides a dramatic yet comfortableimpression, with food and beverages prepared and served by a highly trained andskilled staff.

 

Bamboo Club restaurants are open for lunch anddinner, with hours from 11:00 a.m. to 11:00 p.m. Monday through Thursday, 11:00a.m. to midnight on Friday and Saturday, and 11:00 a.m. to 10:00 p.m. onSunday.  The kitchen remains open until11:00 p.m. Monday through Thursday, until midnight on Friday and Saturday toaccommodate guests who prefer to dine late, and until 10:00 p.m. onSunday.  Bamboo Club restaurants takereservations and can serve large parties or groups.

 

*Menu*

 

Bamboo Club restaurants feature a menu of more than60 items inspired by the diverse and exotic cuisines found in locations such asBangkok, Canton, Singapore, Seoul, Hong Kong, Indonesia, Hawaii, Saigon,Thailand, Japan and other Pacific Rim cities and provinces.  Each Bamboo Club restaurant also features afull-service bar that serves a variety of popular drinks and liquors, such asmartinis and tropical drinks, as well as traditional mixed beverages, finewines, and a wide selection of popular Asian and domestic beers.

 

Menuprices range from $8 to $10 for salads; $3 to $12 for appetizers; and $9 to $19for entrees. Alcoholic beverage sales account for approximately 23% of totalrevenue.  Take-out orders representapproximately 4%-5% of total revenue.  Inaddition, sales through a third-party delivery service in Phoenix, Arizona,represent approximately 5% of total Phoenix revenue.

 

*Restaurant Layout*

 

Bamboo Club restaurants have been designed to createa dramatic impression in an atmosphere that is both spacious and intimate.  The restaurants’ décor features artfullighting, dramatic murals, an eclectic mix of background music, and a generalcolor theme of black, copper, and bamboo to create a “hip,” exotic feeling ofwarmth and color.

 

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Therestaurants also feature an “exhibition kitchen” adjacent to the seating area,where diners can watch highly skilled wok chefs prepare the restaurants’appetizers and entrees.  Most dishes areprepared and served within five to ten minutes from the time when the order isplaced.

 

The 13 Bamboo Club restaurants are located inhigh-traffic retail shopping environments. Each restaurant contains approximately 6,600 square feet of space inleased facilities, excluding patio areas. Each of these restaurants features indoor seating and bar area seatingfor a total of approximately 240 guests, which does not include outdoor patioseating at some locations.

 

Bamboo Club “Asian Bistro” restaurants havedeveloped an extensive program to train and motivate restaurant employees.  The Bamboo Club serving staff isprofessional, friendly, highly skilled, and knowledgeable about the restaurant’scuisine and menu selections.  Servers aretrained to make suggestions or recommendations for new or different menu itemsor combinations that patrons might try, which helps each guest to enjoy amemorable dining experience.

 

We originally acquired twooperating Bamboo Club restaurants in Phoenix and Scottsdale, Arizona, and sincehave opened a total of 11 Bamboo Club restaurants, one each in Wellington,Tampa, and Aventura, Florida; one each in Tempe, Tucson, and Desert Ridge(North Phoenix), Arizona; one in Newport, Kentucky; one in King of Prussia,Pennsylvania; one in Novi (Detroit), Michigan; one in Raleigh/Durham, NorthCarolina; and one which opened in 2004, in Fairfax, Virginia.

 

*Construction Economics*

 

After opening 11 mall-based Bamboo Club restaurants, ourtotal cost of opening a new mall-based location ranges between $1,350,000 and$2,150,000, exclusive of annual operating expenses.  These costs include approximately (a)$600,000 to $1,300,000, net of a reduction for landlord’s contribution, forbuilding improvements and permits, including liquor licenses, (b) $600,000 to$650,000 for furniture, fixtures, and equipment, and (c) $150,000 to $200,000in pre-opening expenses, including hiring expenses, wages for managers andhourly employees, and supplies.   Our totalcost of opening our first free-standing Bamboo Club was approximately$3,000,000, exclusive of annual operating expenses. These costs includedapproximately (a) $2,250,000 for building improvements and permits, includingliquor licenses, (b) $610,000 for furniture, fixtures, and equipment, and (c)$140,000 in pre-opening expenses, including hiring expenses, wages for managersand hourly employees, and supplies. These costs were affected by the followingfactors: (i) this was our first free-standing unit and therefore we hadincreased design and architects fees, (ii) the site has a balcony for seating,(iii) pre-opening expenses were reduced by virtue of the location being inPhoenix where our company is headquartered, and (iv) delay related costs associatedwith the construction of this project.

 

**Our Redfish Seafood Grill and BarRestaurants**

 

Redfish Seafood Grill and Barrestaurants are full-service, casual dining restaurants that feature a broadselection of seafood, steaks, and French Quarter cuisine.  Our four restaurants offer unique, freshlyprepared food that is served quickly and efficiently in a fun-filled NewOrleans atmosphere.  Each Redfishrestaurant’s Voodoo lounge features a unique atmosphere decorated with aneclectic collection of authentic New Orleans artifacts, signs, andantiques.  Some locations have localbands and, occasionally, national touring acts present live rhythm and bluesmusic on weekends.  Redfish restaurantsare open for lunch and dinner seven days a week. Hours of operation are usuallyfrom 11:00 a.m. until midnight Monday through Thursday and 11:00 a.m. until1:00 a.m. on weekends.

 

*Menu*

 

We have developed a menu ofmore than 65 items for our Redfish restaurants. Signature dishes include blackened redfish, Bourbon Street jambalaya,crab stuffed salmon, and shrimp brochette. The

 

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menu also features a selection of appetizers,including Looziana egg rolls, Maryland-style crab cakes, Captain Morgan® ribsand chicken, and crab and artichoke dip. Our Redfish menu also features a variety of fresh seafood, steaks, ribs,pastas, fresh seasonal salads, sandwiches, and tempting desserts, such asbananas foster, chocolate bread pudding, and our signature key lime pie.  The spacious Voodoo lounge offers a wideselection of the finest beers on tap, a full wine list, and an extensivespecialty drink list.

 

Menu prices range from $7 to$20 for an entrée and $5 to $10 for salads and appetizers.  Alcohol sales currently account for approximately36% of total revenue.

 

*Restaurant Layout*

 

We developed the Redfishrestaurant layout to provide a refined southern roadhouse atmosphere.  Each of our Redfish restaurants is decoratedwith nostalgic mementos of the South, together with decorative elements thatare derived from the individual restaurant’s locale.  The décor generally creates a tribute to thelegends of American music that created the blues, as well as to the regionsthat developed the classic Creole, Cajun, and American cuisine served in ourRedfish restaurants.

 

Most of our Redfishrestaurants are located in high-traffic urban office environments.  These restaurants contain between 6,000 and7,300 square feet of space and average approximately 7,000 square feet.  Our Redfish restaurants contain an average of60 dining tables, seating an average of 250 guests, and a bar area seating anaverage of approximately 25 additional guests. We have developed a prototype for use in developing Redfish restaurantsin the future.  We constructed tworestaurants using this prototype in Scottsdale and Chandler, Arizona. Wedeveloped this prototype in order to standardize the construction process andto reduce costs. However, we do not currently plan to build any new Redfishrestaurants in the foreseeable future.

 

*Construction Economics*

 

We estimate that our totalcost of opening a new Redfish restaurant currently ranges from $2,400,000 to$2,600,000, exclusive of annual operating expenses and assuming that we obtainthe underlying real estate under a lease arrangement.  These costs include approximately (a)$1,650,000 to $1,850,000 for building, improvements, and permits, includingliquor licenses, (b) $600,000 for furniture, fixtures, and equipment, and (c)$150,000 in pre-opening expenses, including hiring expenses, wages for managersand hourly employees, and supplies. Actual costs, however, may vary significantly depending upon a varietyof factors, including the site and size of the restaurant and conditions in thelocal real estate and employment markets.

 

**Our Alice Cooper’stown Restaurant**

 

The Alice Cooper’stown conceptwas developed by Celebrity Restaurants, L.L.C. and is rock and roll and sportsthemed, featuring a connection to Alice Cooper. We own no interest in CelebrityRestaurants, L.L.C., and it owns no interest in us. Celebrity Restaurantsoperates one Alice Cooper’stown restaurant, which opened in December 1998in Phoenix, Arizona.  Our Alice Cooper’stownrestaurant opened in April 2002 in a location formerly occupied by aRedfish Seafood Grill and Bar restaurant in Cleveland, Ohio. The Clevelandlocation’s proximity to Jacobs Field, the home of the Cleveland Indians, andthe fact that Cleveland is the home of the Rock and Roll Hall of Fame, resultedin our decision to convert the location into an Alice Cooper’stown. Our AliceCooper’stown restaurant is a full-service, casual dining establishmentfeaturing a wide selection of high-quality, freshly prepared popular foods andbeverages, including a number of innovative and distinctive menu items, such asmenu items that are sports and rock and roll themed.  In addition, the restaurant sells sports androck and roll memorabilia. The restaurant features quick, efficient, andfriendly table service designed to minimize customer-waiting time and facilitatetable turnover.  Our Alice Cooper’stownrestaurant benefits significantly from the

 

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name recognition of Alice Cooper and theproximity to Jacobs Field, the home of the Cleveland Indians, and the Rock andRoll Hall of Fame.

 

*Menu*

 

Our menu in Cleveland includes salads and sandwiches,pizzas and burgers, and tempting appetizers and desserts.

 

Menu prices range from $4 to $9 for appetizers anddesserts, $5 to $18 for entrées, and $6 to $11 for pizzas and burgers.

 

*Restaurant Layout and Staffing*

 

Our Alice Cooper’stown restaurant was designed tofeature a rock and roll and sports theme, featuring the connection to rock androll legend Alice Cooper. The general décor is rock and roll and sportsmemorabilia. The logo reads “Where Rock and Roll and Sports Collide”. Therestaurant features a video wall in the bar and a large screen video in thedining room. In keeping with its sports bar theme, there are more than 35 TVscreens in the restaurant. Some of our former Cleveland Redfish staff,including management personnel, are involved in the operation of thisrestaurant.

 

*Construction Economics*

 

Our construction costs toconvert this location were approximately $400,000, and pre-opening expenseswere approximately $191,000.

 

***Future Site Selection AllConcepts***

 

When evaluating whether and where to seek expansion ofour restaurant operations, we analyze a restaurant’s profit potential.  We consider the location of a restaurant tobe one of the most critical elements of the restaurant’s long-termsuccess.  Accordingly, we expendsignificant time and effort in investigating and evaluating potentialrestaurant sites.  In conducting the siteselection process, we obtain and examine detailed demographic information, suchas population characteristics, density, and household income levels; evaluatesite characteristics, such as visibility, accessibility, and traffic volume;consider the proposed restaurant’s proximity to demand generators, such asshopping malls, lodging, and office complexes; and analyze potential competition.  Our senior corporate management evaluates andapproves each restaurant site for all of our brands prior to acquisition afterextensive consultation with all levels of our operations group.  TGI Friday’s Inc. provides site selectionguidelines and criteria as well as site selection counseling and assistance forour TGI Friday’s restaurant sites.  Wealso must obtain TGI Friday’s Inc.’s consent before we enter into definitiveagreements for a TGI Friday’s restaurant site.

 

We have entered into an exclusive, renewable one-yearbrokerage agreement with Staubach Retail Services-West, LLC, a nationally knowncommercial brokerage company, to provide us with real estate and site selectionconsulting services. The individual who managed our account left Staubach andbecame associated with a commercial brokerage company headquartered in Phoenix,Arizona.  However,  this individual will continue to manage ouraccount through Staubach.

 

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***2004 Restaurant Openings andClosures***

 

During 2004, we opened one Bamboo Club “Asian Bistro”restaurant, in Fairfax, Virginia. We did not open any new TGI Friday’srestaurants in 2004. Also during 2004, we elected not to exercise lease renewaloptions in Salinas and Oakland, California and closed our TGI Friday’srestaurants located in those areas.

 

**2004 Restaurant Openings andClosures**

 
| **Restaurants**        | ** ** | **Owned TGI  Friday’s** | ** ** | **Bamboo  Club  “Asian Bistro”** | ** ** | **Redfish  Seafood  Grill and Bar** | ** ** | **Alice  Cooper’stown** | ** ** |
|------------------------|------------|------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| December 29, 2003 |       | 54                           |       | 12                                         |       | 4                                   |       | 1                            |       |
| Closed/Sold/Terminated |       | (2                           | )          | —                                     |       | —                              |       | —                       |       |
| Opened                 |       | —                       |       | 1                                          |       | —                              |       | —                       |       |
| December 27, 2004 |       | 52                           |       | 13                                         | *          | 4                                   |       | 1                            |       |

 

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* Subsequent to the year ended December 27,2004, we completed negotiations and entered into an agreement with the landlordof the Bamboo Club in Aventura, Florida to terminate the lease and close thisrestaurant on February 24, 2005. Additionally, we completed negotiations and entered into an agreementwith the landlord of the Bamboo Club in Newport, Kentucky to terminate thelease and close this restaurant on May 31, 2005.

 

***Current Restaurants***

 

The following table sets forthinformation relating to each restaurant we owned as of March 1, 2005.

 
| **Location**                               | ** ** | **Square  Footage** | ** ** | **Seating  Capacity** | ** ** | **In  Operation  Since** | ** ** | **Operated  by  Our  Company  Since** | ** ** |
|--------------------------------------------|------------|---------------------|------------|-----------------------|------------|--------------------------|------------|---------------------------------------|------------|
| **Acquired TGI Friday’s Restaurants** |       |                |       |                  |       |                     |       |                                  |       |
| Phoenix, Arizona                           |       | 9,396               |       | 298                   |       | 1985                     |       | 1990                                  |       |
| Mesa, Arizona                              |       | 9,396               |       | 298                   |       | 1985                     |       | 1990                                  |       |
| Tucson, Arizona                            |       | 7,798               |       | 290                   |       | 1982                     |       | 1990                                  |       |
| Las Vegas, Nevada                          |       | 9,194               |       | 298                   |       | 1982                     |       | 1990                                  |       |
| Overland Park, Kansas                      |       | 6,000               |       | 220                   |       | 1992                     |       | 1993                                  |       |
| San Diego, California                      |       | 8,002               |       | 234                   |       | 1979                     |       | 1993                                  |       |
| Costa Mesa, California                     |       | 8,345               |       | 232                   |       | 1980                     |       | 1993                                  |       |
| Woodland Hills, California                 |       | 8,358               |       | 283                   |       | 1980                     |       | 1993                                  |       |
| Valencia, California                       |       | 6,500               |       | 232                   |       | 1993                     |       | 1993                                  |       |
| Torrance, California                       |       | 8,923               |       | 237                   |       | 1982                     |       | 1993                                  |       |
| La Jolla, California                       |       | 9,396               |       | 225                   |       | 1984                     |       | 1993                                  |       |
| Palm Desert, California                    |       | 9,194               |       | 235                   |       | 1983                     |       | 1993                                  |       |
| West Covina, California                    |       | 9,396               |       | 232                   |       | 1984                     |       | 1993                                  |       |
| North Orange, California                   |       | 9,194               |       | 213                   |       | 1983                     |       | 1993                                  |       |

 

8

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| **Location**                                | ** ** | **Square  Footage** | ** ** | **Seating  Capacity** | ** ** | **In  Operation  Since** | ** ** | **Operated  by  Our  Company  Since** | ** ** |
|---------------------------------------------|------------|---------------------|------------|-----------------------|------------|--------------------------|------------|---------------------------------------|------------|
| Ontario, California                         |       | 5,700               |       | 190                   |       | 1993                     |       | 1993                                  |       |
| Laguna Niguel, California                   |       | 6,730               |       | 205                   |       | 1990                     |       | 1993                                  |       |
| San Bernardino, California                  |       | 9,396               |       | 236                   |       | 1986                     |       | 1993                                  |       |
| Brea, California                            |       | 6,500               |       | 195                   |       | 1991                     |       | 1993                                  |       |
| Riverside, California                       |       | 6,500               |       | 172                   |       | 1991                     |       | 1993                                  |       |
| Pleasanton, California                      |       | 8,000               |       | 255                   |       | 1995                     |       | 1998                                  |       |
| Fresno, California                          |       | 5,950               |       | 230                   |       | 1978                     |       | 1998                                  |       |
|                                        |       |                |       |                  |       |                     |       |                                  |       |
| **Developed TGI Friday’s Restaurants** |       |                |       |                  |       |                     |       |                                  |       |
| Glendale, Arizona                           |       | 5,200               |       | 230                   |       | 1993                     |       | 1993                                  |       |
| Albuquerque, New Mexico                     |       | 5,975               |       | 270                   |       | 1993                     |       | 1993                                  |       |
| Reno, Nevada                                |       | 6,500               |       | 263                   |       | 1994                     |       | 1994                                  |       |
| Oxnard, California                          |       | 6,500               |       | 252                   |       | 1994                     |       | 1994                                  |       |
| Carmel Mountain, California                 |       | 6,500               |       | 252                   |       | 1995                     |       | 1995                                  |       |
| Rancho Santa Margarita, California          |       | 6,548               |       | 252                   |       | 1995                     |       | 1995                                  |       |
| Cerritos, California                        |       | 6,250               |       | 223                   |       | 1996                     |       | 1996                                  |       |
| Las Vegas, Nevada                           |       | 6,700               |       | 251                   |       | 1997                     |       | 1997                                  |       |
| Superstition Springs (Mesa), Arizona        |       | 6,250               |       | 240                   |       | 1998                     |       | 1998                                  |       |
| Puente Hills, California                    |       | 5,800               |       | 272                   |       | 1999                     |       | 1999                                  |       |
| San Diego, California                       |       | 6,800               |       | 277                   |       | 1999                     |       | 1999                                  |       |
| Independence, Missouri                      |       | 5,800               |       | 240                   |       | 1999                     |       | 1999                                  |       |
| Rancho San Diego, California                |       | 5,800               |       | 240                   |       | 1999                     |       | 1999                                  |       |
| Yorba Linda, California                     |       | 5,800               |       | 240                   |       | 1999                     |       | 1999                                  |       |
| Simi Valley, California                     |       | 5,800               |       | 240                   |       | 1999                     |       | 1999                                  |       |
| Tucson, Arizona                             |       | 5,800               |       | 240                   |       | 1999                     |       | 1999                                  |       |
| Henderson, Nevada                           |       | 5,800               |       | 240                   |       | 1999                     |       | 1999                                  |       |
| Carlsbad, California                        |       | 8,146               |       | 302                   |       | 1999                     |       | 1999                                  |       |
| Temecula, California                        |       | 6,400               |       | 278                   |       | 1999                     |       | 1999                                  |       |
| Chandler, Arizona                           |       | 6,000               |       | 240                   |       | 1999                     |       | 1999                                  |       |
| Goodyear, Arizona                           |       | 6,000               |       | 207                   |       | 2000                     |       | 2000                                  |       |
| Shawnee, Kansas                             |       | 6,400               |       | 245                   |       | 2000                     |       | 2000                                  |       |
| Thousand Oaks, California                   |       | 6,400               |       | 249                   |       | 2000                     |       | 2000                                  |       |
| Union City – San Francisco, California |       | 6,400               |       | 240                   |       | 2000                     |       | 2000                                  |       |
| Leawood, Kansas                             |       | 7,248               |       | 240                   |       | 2000                     |       | 2000                                  |       |
| N. Long Beach, California                   |       | 7,177               |       | 291                   |       | 2000                     |       | 2000                                  |       |
| Scottsdale, Arizona                         |       | 7,100               |       | 263                   |       | 2000                     |       | 2000                                  |       |
| Albuquerque West, New Mexico                |       | 6,426               |       | 241                   |       | 2001                     |       | 2001                                  |       |
| Porter Ranch, California                    |       | 6,426               |       | 245                   |       | 2001                     |       | 2001                                  |       |
| Chandler Arizona                            |       | 6,800               |       | 322                   |       | 2002                     |       | 2002                                  |       |
| Desert Ridge Mall (Phoenix), Arizona        |       | 6,573               |       | 292                   |       | 2003                     |       | 2003                                  |       |
|                                        |       |                |       |                  |       |                     |       |                                  |       |
| **Acquired Redfish Restaurants**            |       |                |       |                  |       |                     |       |                                  |       |
| Chicago, Illinois                           |       | 6,200               |       | 214                   |       | 1996                     |       | 1997                                  |       |
| Cincinnati, Ohio                            |       | 7,133               |       | 239                   |       | 1997                     |       | 1997                                  |       |
|                                        |       |                |       |                  |       |                     |       |                                  |       |
| **Developed Redfish Restaurants**           |       |                |       |                  |       |                     |       |                                  |       |
| Scottsdale, Arizona                         |       | 7,285               |       | 218                   |       | 2001                     |       | 2001                                  |       |

 

9

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| **Location**                          | ** ** | **Square  Footage** | ** ** | **Seating  Capacity** | ** ** | **In  Operation  Since** | ** ** | **Operated  by  Our  Company  Since** | ** ** |
|---------------------------------------|------------|---------------------|------------|-----------------------|------------|--------------------------|------------|---------------------------------------|------------|
| Chandler, Arizona                     |       | 7,216               |       | 334                   |       | 2002                     |       | 2002                                  |       |
|                                  |       |                |       |                  |       |                     |       |                                  |       |
| **Acquired Bamboo Club Restaurants**  |       |                |       |                  |       |                     |       |                                  |       |
| Phoenix, Arizona                      |       | 5,400               |       | 200                   |       | 1995                     |       | 2000                                  |       |
| Scottsdale, Arizona                   |       | 5,400               |       | 200                   |       | 1997                     |       | 2000                                  |       |
|                                  |       |                |       |                  |       |                     |       |                                  |       |
| **Developed Bamboo Club Restaurants** |       |                |       |                  |       |                     |       |                                  |       |
| Tampa, Florida                        |       | 8,100               |       | 235                   |       | 2001                     |       | 2001                                  |       |
| West Palm Beach, Florida              |       | 6,317               |       | 180                   |       | 2001                     |       | 2001                                  |       |
| Tempe, Arizona                        |       | 6,400               |       | 210                   |       | 2001                     |       | 2001                                  |       |
| Tucson, Arizona                       |       | 6,422               |       | 277                   |       | 2002                     |       | 2002                                  |       |
| (a)Newport, Kentucky                  |       | 6,735               |       | 236                   |       | 2002                     |       | 2002                                  |       |
| King of Prussia, Pennsylvania         |       | 7,391               |       | 243                   |       | 2002                     |       | 2002                                  |       |
| Novi, Michigan                        |       | 6,941               |       | 291                   |       | 2003                     |       | 2003                                  |       |
| Desert Ridge Mall (Phoenix), Arizona  |       | 7,000               |       | 293                   |       | 2003                     |       | 2003                                  |       |
| Raleigh/Durham, North Carolina        |       | 7,217               |       | 271                   |       | 2003                     |       | 2003                                  |       |
| Fairfax, Virginia                     |       | 6,294               |       | 198                   |       | 2004                     |       | 2004                                  |       |

----

| (a) Expected to close on May 31, 2005 |   |   |   |   |   |   |   |   |   |
|---------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|

 
| **Developed Cooper’stown Restaurant** |   |   |   |   |   |   |   |   |   |
|--------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Cleveland, Ohio                            |   | 11,160 |   | 356    |   | 2002   |   | 2002   |   |

 

***Restaurants by State***

 
| **State**      | ** ** | **TGI  Friday’s** | ** ** | **Bamboo  Club** | ** ** | **Redfish** | ** ** | **Cooper’stown** | ** ** |
|----------------|------------|------------------------|------------|------------------|------------|-------------|------------|-----------------------|------------|
| California     |       | 31                     |       | —           |       | —      |       | —                |       |
| Arizona        |       | 11                     |       | 5                |       | 2           |       | 1                     |       |
| Nevada         |       | 4                      |       | —           |       | —      |       | —                |       |
| Florida        |       | —                 |       | 3                |       | —      |       | —                |       |
| New Mexico     |       | 4                      |       | —           |       | —      |       | —                |       |
| Kansas         |       | 3                      |       | —           |       | —      |       | —                |       |
| Missouri       |       | 1                      |       | —           |       | —      |       | —                |       |
| Ohio           |       | 1                      |       | —           |       | —      |       | 1                     |       |
| Illinois       |       | —                 |       | —           |       | 1           |       | —                |       |
| Kentucky       |       | —                 |       | 1                |       | —      |       | —                |       |
| Pennsylvania   |       | —                 |       | 1                |       | —      |       | —                |       |
| North Carolina |       | —                 |       | 1                |       | —      |       | —                |       |
| Virginia       |       | —                 |       | 1                |       | —      |       | —                |       |
| Michigan       |       | —                 |       | 1                |       | —      |       | —                |       |
| Total          |       | 52                     |       | 13               |       | 4           |       | 1                     |       |

 

10

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***Restaurant Operations***

 

**TGI Friday’s, Bamboo Club,Redfish, and Alice Cooper’stown Operations**

 

Once a restaurant isintegrated into our operations, we provide a variety of corporate services toassure the operational success of the restaurant. Our executive managementcontinually monitors restaurant operations, inspects individual restaurants toassure the quality of products and services and the maintenance of facilities,institutes procedures to enhance efficiency and reduce costs, and providescentralized support systems.

 

We also maintain qualityassurance procedures designed to assure compliance with the high quality ofproducts and services mandated by our company and, for our TGI Friday’srestaurants, by TGI Friday’s Inc. We respond to and investigate inquiries andcomplaints, initiate on-site resolution of deficiencies, and consult with eachrestaurant’s staff to assure that proper action is taken to correct anydeficiency.  Our personnel, and thethird-party quality assurance professionals that we occasionally retain, makeunannounced visits to restaurants to evaluate the facilities, products, andservices.  We believe that our qualityreview program and executive oversight enhance restaurant operations, reduceoperating costs, improve customer satisfaction, and facilitate the highest levelof compliance with the TGI Friday’s system.

 

We maintain a zero tolerancepolicy for discrimination of any type towards both our employees and customersand, to this end, constantly enforce this policy through our training of newemployees, our policy and training manuals, and periodic re-enforcementprograms.

 

**Restaurant Management**

 

Our TGI Friday’s regional andrestaurant management personnel are responsible for complying with TGI Friday’sInc.’s and our operational standards. Our Executive Vice President of Operations is responsible for theoperation of all of our brands.  In ourTGI Friday’s and Redfish divisions, assisting our Executive Vice President, wehave a Vice President of Operations for TGI Friday’s and Redfish restaurants.Assisting this position we have two Senior Regional Managers and four RegionalManagers, who are each responsible for between eight and 11 of our restaurantswithin their region.  We have oneDirector of Operations who is responsible for the Alice Cooper’stownrestaurant. This individual has signed an agreement wherein he purchased a netprofit participation in this operation equal to 20% of a defined level ofprofits over a certain earnings before interest, taxes, depreciation, andamortization (EBITDA) as defined.

 

We have a Director ofOperations and two Regional Managers for the Bamboo Club “Asian Bistro”restaurants, one responsible for six restaurants and one responsible for sevenrestaurants in the manager’s territory, who report to the Director ofOperations for Bamboo Club restaurants, who in turn reports to the ExecutiveVice President of Operations.

 

The Executive Vice Presidentof Operations reports to our CEO and President, who has the ultimateresponsibility for our TGI Friday’s, Redfish, Bamboo Club, and Alice Cooper’stownoperations.

 

Restaurant managers areresponsible for day-to-day restaurant operations, including customer relations,food preparation and service, cost control, restaurant maintenance, andpersonnel relations.  We typically staffour restaurants with an on-site general manager, two or three assistantmanagers, and a kitchen manager. Our TGI Friday’s restaurants average between 80and 90 hourly employees.  Our Redfishrestaurants average approximately 65 hourly employees and our Bamboo Clubrestaurants average approximately 72 hourly employees. Our Alice Cooper’stownrestaurant averages 50 hourly employees. We support these operational personnelwith personnel involved in financial planning, research and development, andtraining.

 

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We have established a programof appointing multi-location senior general managers in geographic areas havinglocations close enough to each other to support this concept.  We currently have seven multi-location seniorgeneral managers. In addition to improving efficiency, this program allows usto promote and compensate key general managers and create a position thatimproves our ability to retain key employees in our company.

 

**Recruitment and Training**

 

We attempt to hire employeeswho are committed to the standards maintained by our company and, for our TGIFriday’s restaurants, by TGI Friday’s Inc. We also believe that our high unit sales volume, the image andatmosphere of the TGI Friday’s, Bamboo Club, Redfish, and Alice Cooper’stownconcepts, and our career advancement and employee benefit programs enable us toattract high quality management and restaurant personnel.

 

Our TGI Friday’s restaurant personnel participate incontinuing training programs maintained by TGI Friday’s Inc. and ourcompany.  In addition, we supplementthose programs by hiring personnel devoted solely to employee training.  Each TGI Friday’s restaurant general andassistant manager completes a formal training program conducted by ourcompany.  This program provides our TGIFriday’s restaurant managers 14 weeks of training.  The training covers all aspects of managementphilosophy and overall restaurant operations, including supervisory skills,operating and performance standards, accounting procedures, and employeeselection and training necessary for restaurant operations. We employ personnelwho are involved exclusively in training for both initial new store openingsand continued re-training.

 

Our Bamboo Club and Redfishrestaurant managers and personnel participate in extensive training programsconsistent with our operating standards. Many of our Redfish restaurant managers are experienced TGI Friday’smanagers who have accepted positions in our Redfish operations.  We have implemented all of our policies andtraining programs in order to operate the Alice Cooper’stown restaurant withthe same high standards we have established for our other brands.

 

**Maintenance and Improvement ofRestaurants**

 

We maintain our restaurantsand all associated fixtures, furnishings, and equipment in conformity with theTGI Friday’s system or standards we have developed for our Bamboo Club and Redfishrestaurants.  We also make necessaryadditions, alterations, repairs, and replacements to our TGI Friday’srestaurants as required by TGI Friday’s Inc., including periodic repainting orreplacement of obsolete signs, furnishings, equipment, and decor.  We are required, subject to certainlimitations, to modernize our restaurants to the now current standards andspecifications reflected in its new prototype design of TGI Friday’s Inc.  In the past few years, we have developed aplan that we refer to as a “pop out” in four of our existing TGI Friday’srestaurants that expands the restaurants by approximately 950 to 1,200 squarefeet. In 2004, we completed a major renovation in our San Diego (MissionValley), California, and commenced a renovation in our Palm Desert, CaliforniaTGI Friday’s restaurants and will complete additional renovations in 2005.

 

We have developed plans toconstruct improvements for some of our TGI Friday’s locations to develop atake-out program, which program could be used in the future with our otherbrands.

 

 We are developing a standard prototype that weplan to use on future Bamboo Club restaurants. Our Desert Ridge (Phoenix, AZ) location was our first fullyfree-standing Bamboo Club restaurant.

 

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**Information Systems**

 

We have devoted considerableresources to develop and implement management information systems that improvethe quality and flow of information throughout our company.  We use five to seven touch-screen computerregisters (point of sale terminals) located conveniently throughout each of ourrestaurants.  Servers enter guest ordersby touching the appropriate sections of the register’s computer screen, whichtransfers the information electronically to the kitchen and bar forpreparation.  These registers also areconnected to a computer in the restaurant office and to our corporateinformation system by frame relay. Management receives detailed comparative reports on each restaurant’ssales and expense performance daily, weekly, and monthly.

 

  During 2004, we completed the installation ofthe Aloha Technologies Point of Sales System (POS) and back office systems atall of our restaurants and implemented a new Human Resources and Payroll systemusing the Lawson ERP system.  Ourconversion to the new ERP system for our financial modules (including generalledger, accounts payable, and fixed assets) began in late 2004. We anticipatethe ERP implementation will be completed by the middle of 2005. Hosting andsupport of the new corporate ERP system has been outsourced to netASPx, Inc.

 

Weare in the process of converting the data connection of our restaurants from aframe-relay technology to an Internet-based technology allowing us, among otherthings, to have a more stream-lined technology communication process includingmore productive bandwidth and higher speed capacity.  We expect this will more than double thespeed of our up and down path of information, enabling more efficient support,quicker communication, faster email access, less down time, and an overallsavings as it relates to less time our restaurant managers spend “in the office”.  We recently completed our test phase and arecurrently in the process of rolling out this new technology to allrestaurants.  We expect this project tobe completed by the end of our second quarter 2005.

 

We believe that our managementinformation systems enable us to increase the speed and accuracy of ordertaking and pricing, better assist guest preferences, efficiently schedule laborto better serve guests, quickly and accurately monitor food and labor costs,assist in product purchasing and product movement analysis, to promptly accessfinancial and operating data, and improve the accuracy and efficiency ofstore-level information and reporting.

 

**Supply, Purchasing, andDistribution**

 

We purchase or lease, on ashort-term basis, all fixtures, furnishings, equipment, signs, recorded music,food products, supplies, inventory, and other products and materials requiredfor the development and operation of our TGI Friday’s restaurants fromsuppliers approved by TGI Friday’s Inc. In order to be approved as a supplier,a prospective supplier must demonstrate to the reasonable satisfaction of TGIFriday’s Inc. its ability to meet the then-current standards and specificationsof TGI Friday’s Inc. for such items, possess adequate quality controls, andhave the capacity to provide supplies promptly and reliably.  We are not required to purchase supplies fromany specified suppliers, but the purchase or lease of any items from anunapproved supplier requires the prior approval of TGI Friday’s Inc.

 

TGI Friday’s Inc. maintains alist of approved suppliers and a set of the TGI Friday’s system standards andspecifications.  TGI Friday’s Inc.receives no commissions on direct sales to its franchisees, but may receiverebates and promotional discounts from manufacturers and suppliers, some ofwhich are passed on proportionately to our company.  TGI Friday’s Inc. is an approved supplier ofvarious kitchen equipment and store fixtures, decorative memorabilia, andvarious paper goods, such as menus and in-store advertising materials anditems.  We are not, however, required topurchase such items from TGI Friday’s Inc. If we elect to purchase such items from TGI Friday’s Inc., TGI Friday’sInc. may derive revenue as a result of such purchases.

 

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We have an agreement with U.S.Foodservice, a national food distribution service company, to servesubstantially all of our TGI Friday’s restaurants in California, Arizona, andNevada and for all of our Bamboo Club and Redfish restaurants. We have anagreement with Performance Food Group in Missouri, Kansas, and New Mexico forall of our TGI Friday’s restaurants located in those states.  Orders are sent electronically to thesupplier.  Our suppliers havecomprehensive warehouse and delivery outlets servicing each of our markets. Webelieve that our purchases from our primary suppliers enable us to maintain ahigh level of quality, achieve dependability in the receipt of our supplies,avoid the costs of maintaining a large purchasing department, and attain costadvantages as the result of volume purchases. We believe, however, that allessential products are available from other national suppliers as well as fromlocal suppliers in the cities in which our restaurants are located in the eventwe determine to purchase our supplies from other suppliers.

 

***Advertising and Marketing***

 

**TGI Friday’s Restaurants**

 

We participate in the nationalmarketing and advertising programs conducted by TGI Friday’s Inc.  The programs use network and cable televisionand national publications and feature new menu innovations and variouspromotional programs.  In addition, fromtime to time, we supplement the marketing and advertising programs conducted byTGI Friday’s Inc. through local radio, newspaper, and magazine advertisingmedia and sponsorship of community events. In conjunction with TGI Friday’s Inc., we maintain a “frequent diner”program that includes awards of food, merchandise, and travel to frequentdiners based upon points accumulated through purchases.

 

As a franchisee of TGI Friday’sInc., we are able to utilize the trade names, service marks, trademarks,emblems, and indicia of origin of TGI Friday’s Inc., including the marks TGIFriday’s® and Friday’s®.  We advertise invarious media utilizing these marks to attract new customers to ourrestaurants.

 

Each franchise agreement alsorequires us to spend at least 4% of gross sales on local marketing and tocontribute to a national marketing pool which is administered by TGI Friday’sInc.  The national marketing pool fundsare used to develop national advertising campaigns (creative material) and buynational, spot, and local advertising. All funds contributed to the national advertising fund are creditedagainst the local advertising requirement. TGI Friday’s Inc. required us, as well as all other franchisees, tocontribute to a marketing fund. The marketing fund contributions were 2.7%,3.25%, and 3.5% in 2002, 2003, and 2004 respectively.  TGI Friday’s Inc. has increased the marketingfund contributions to 4.0% for 2005. Marketing fund contributions totaled $6,573,000 during fiscal 2004,$6,153,000 during fiscal 2003, and $5,250,000 during fiscal 2002.

 

**Bamboo Club and RedfishRestaurants**

 

Our in-house marketingdepartment develops advertising and marketing programs for our Bamboo Club andRedfish restaurants.  We develop theseprograms with an emphasis on building awareness of the “Bamboo Club” and “Redfish”brands in the communities in which we operate Bamboo Club and Redfishrestaurants and generate sales for those restaurants.  Advertising and marketing campaigns haveincluded radio and print advertising, as well as point-of-sale marketingpromotions.  We conduct a comprehensiveadvertising and public relations campaign in advance of each Bamboo Club andRedfish restaurant grand opening.

 

14

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**Alice Cooper’stown Restaurant**

 

Our in-house marketingdepartment has developed advertising and marketing programs for our AliceCooper’stown restaurant. We will emphasize the sports and rock and rollconnection and feature Alice Cooper.

 

**Expansion of Operations**

 

Weplan to expand our restaurant operations through the development of additionalTGI Friday’s restaurants in our existing development territories and thedevelopment of additional Bamboo Club restaurants in suitable locations as ourfinancial capabilities permit. See “Liquidity and Capital Resources” section ofManagement’s Discussion and Analysis of Financial Condition and Results ofOperations for additional information regarding our financial condition.

 

*Leasing Activity*

 

The following tablesummarizes the leasing activity for 2004 which represents negotiated and signedleases but where the restaurant is not yet opened.  Once a restaurant is opened, the lease isremoved from this table.

 
| ** **                            | ** ** | **Friday’s** | ** ** | **Bamboo Club** | ** ** | **Other Brands** | ** ** |
|---------------------------------------|------------|-------------------|------------|-----------------|------------|------------------|------------|
| Beginning  Balance December 2003 |       | 0                 |       | 2               |       | 0                |       |
| New leases  signed                    |       | 2                 |       | 0               |       | 0                |       |
| Leases  cancelled or terminated       |       | 0                 |       | 0               |       | 0                |       |
| New restaurants opened                |       | 0                 |       | -1              |       | 0                |       |
| Ending Balance December 2004     |       | 2                 |       | 1               | (a)        | 0                |       |

 

----

(a) Subsequent to December 27,2004, we completed negotiations for termination of the lease in Columbus, Ohio,for a one time lease termination fee of $375,000, which was accrued at year endand paid in February 2005.

 

***New Restaurant Openings in 2005***

 

Pursuant to our developmentagreement with TGI Friday’s Inc. we expect to open three to four new locationsin 2005. Our location in Surprise, Arizona (Northwest Phoenix area) will openin the first half of 2005 and the remaining two to three are expected to openin the second half of 2005.

 

Wecurrently are considering other sites for additional restaurants, but have notentered into leases or purchase agreements for such sites.  We do not know how many sites willmaterialize, as that depends on a variety of factors and economic conditions.

 

The opening of new restaurantsalso may be affected by increased construction, utility, and labor costs,delays resulting from governmental regulatory approvals, strikes, or workstoppages, adverse weather conditions, and acts of God.  Newly opened restaurants may operate at aloss for a period following their opening. The length of this period will depend upon a number of factors,including the time of year the restaurant is opened, sales volume, andoperating costs.

 

There can be no assurance thatwe will be successful in achieving our expansion goals through the developmentor acquisition of additional restaurants or that any additional restaurantsthat are

 

15

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developed or acquired will beprofitable.  In addition, the opening ofadditional restaurants in an existing market may have the effect of drawingcustomers from, and reducing the sales volume of, our existing restaurants inthose markets.

 

***Restaurant Closures and LeaseTerminations***

 

Generally when we close alocation due to underperformance or other reasons that management deemsappropriate, our first priority is to transfer useable assets to otherlocations.  Other assets that are nottransferable, including leasehold improvements and certain kitchen equipment,are written off at the time of closure, or when the formal decision to close ornot renew the lease is made.  At the timeof closure, allocated goodwill is also written off.

 

***Development Agreements***

 

We are a party to twodevelopment agreements entered into in early 2004 with TGI Friday’s Inc. onecovering Southern California and the other covering Arizona, Nevada, and NewMexico. Our new 2004 development agreements obligate us to open at least 16 newTGI Friday’s restaurants through 2009. In the past, we were unable to meet theterms of development agreements with TGI Friday’s Inc.  In each instance, TGI Friday’s Inc. waivedour non-compliance. Each development agreement grants us the right to developadditional TGI Friday’s restaurants in a specified territory and obligates usto develop additional TGI Friday’s restaurants in that territory in accordancewith a specified development schedule. We own the exclusive rights to develop additional TGI Friday’s restaurantsin territories encompassing the southern portion of California, and most of thecounties in the states of Arizona, Nevada, New Mexico and El Paso, Texas. Weplan to develop additional TGI Friday’s restaurants in our existing developmentterritories.

 

The following table sets forthinformation regarding our minimum requirements to open new TGI Friday’s restaurantsunder our current development agreements, as well as the number of existingrestaurants in each of our development territories.

 
| **Year**              | ** ** | **Southern  California  Territory(1)** | ** ** | **Southwest  Territory(2)** | ** ** | **Midwest  Territory(3)** | ** ** | **Total** | ** ** |
|-----------------------|------------|----------------------------------------|------------|-----------------------------|------------|---------------------------|------------|-----------|------------|
| 2004                  |       | —                                 |       | 1                           |       | _                         |       | 1         |       |
| 2005                  |       | 1                                      |       | 1                           |       | —                    |       | 2         |       |
| 2006                  |       | 2                                      |       | 1                           |       | —                    |       | 3         |       |
| 2007                  |       | 2                                      |       | 1                           |       | —                    |       | 3         |       |
| 2008                  |       | 2                                      |       | 1                           |       | —                    |       | 3         |       |
| 2009                  |       | 3                                      |       | 1                           |       | —                    |       | 4         |       |
| Minimum Requirements  |       | 10                                     |       | 6                           |       | —                    |       | 16        |       |
|                  |       |                                   |       |                        |       |                      |       |      |       |
| Existing  Restaurants |       | 31                                     |       | 17                          |       | 4                         |       | 52        |       |

 

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(1)   Consists of Southern California. Agreementexpires at the end of 2009.

(2)   Consists of the states of Arizona and Nevada, andmost of the state of New Mexico and El Paso, Texas.  Agreement expires at end of 2009.

(3)   Former development territory consisting ofmetropolitan Kansas City, Kansas and Kansas City, Missouri.  Agreement terminated in first quarter of2004.

 

Each development agreementgives TGI Friday’s Inc. certain remedies in the event that we fail to comply ina timely manner with our schedule for restaurant development, if weotherwise default under the development agreement or any franchise agreementrelating to a restaurant within that development territory as described above,or if our officers or directors breach the confidentiality or non-compete

 

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provisions of the development agreement.  The remedies available to TGI Friday’s Inc.include (a) the termination of our exclusive right to develop restaurants inthe related territory; and (b) the termination of the development agreement.  None of these remedies would adversely affectour ability to continue to operate our then-existing TGI Friday’s restaurants.

 

In 2004, we entered into a Development Incentiveagreement with TGI Friday’s Inc. that provides royalty and development cost relieffor our California operations, if certain conditions and development performancesare met. The amount of such cost relief in 2004 was not material to ourfinancial results.

 

***TGI Friday’s Restaurant Re imageand Improvement Program***

 

TGI Friday’s Inc. hasdeveloped specific plans and prototype examples of a restaurant remodel andimprovement program to enhance the restaurants and brand’s overall appeal andposition in the marketplace. TGI Friday’s Inc. has required franchisees toremodel each location as soon as financially practicable.  The cost of remodeling a location can varygreatly, from $150,000 to $600,000, depending on numerous factors, includingthe age and state of repair of the restaurant, local construction code requirementsand changes, the possibility of additional expansion of existing facilities,and compliance with such laws as the Americans with Disabilities Act.

 

We believe we have 50restaurants that will require remodeling to one degree or another and havescheduled to complete three in 2005.

 

***Franchise Agreements***

 

We enter into or assume aseparate franchise agreement with respect to each TGI Friday’s restaurant thatwe acquire or develop pursuant to a development agreement.  Each franchise agreement grants us anexclusive license to operate a TGI Friday’s restaurant within a designatedgeographic area, which generally is a three-mile radius from each restaurant,and obligates us to operate such restaurant in accordance with the requirementsand specifications established by TGI Friday’s Inc. relating to foodpreparation and quality of service as well as general operating procedures,advertising, records maintenance, and protection of trademarks.  The franchise agreements restrict our abilityto transfer our interest in our TGI Friday’s restaurants without the consent ofTGI Friday’s Inc.

 

Each franchise agreementrequires us to pay TGI Friday’s Inc. an initial franchise fee of $50,000. Wecurrently have entered into an agreement with TGI Friday’s Inc. where we onlypay $25,000 for new Southern California franchises, which agreement has a termequal to the Southern California Development Agreement.  In addition, we are obligated to pay TGIFriday’s Inc. a royalty of generally 4% of gross revenue as defined in thefranchise agreement for each restaurant, although we have entered into aCalifornia Development Incentive Agreement which will reduce a portion of thesefees. Royalty expense under these agreements totaled $7,172,000 during fiscal2004, $7,510,000 during fiscal 2003, and $7,477,000 during fiscal 2002.

 

As previously discussed, eachfranchise agreement also requires us to spend at least 4% of gross sales onlocal marketing and to contribute to a national marketing pool that isadministered by TGI Friday’s Inc.

 

A default under one of ourfranchise agreements will not constitute a default under any of our otherfranchise agreements.  A default underthe franchise agreement for a restaurant in a development territory may,however, constitute a default under the development agreement for thatdevelopment territory.

 

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***License Agreements***

 

Our license agreement withCelebrity Restaurants, L.L.C., allows us to operate the Alice Cooper’stownrestaurant in Cleveland, Ohio. The agreement grants us the right to useCelebrity Restaurants’ exclusive rights to Alice Cooper’s likeness and itstrademarks and trade names to operate a sports and rock and roll themedrestaurant featuring Alice Cooper.

 

 The license agreement requires us to payCelebrity Restaurants a royalty fee in the amount of 1% of gross sales for foodand beverage sales up to the amount of gross sales derived in 2001 in eachlocation through its existing operations; 2.5% from that point to $3,500,000;and 3% over $3,500,000. For the sale of merchandise products, such as logo andmemorabilia, we pay a royalty of 20% of gross sales.

 

 We paid approximately $28,000 during 2004,$32,000 during 2003, and $41,000 during 2002 in royalties under this licenseagreement.

 

***Government Regulation***

 

Each of our restaurants issubject to licensing and regulation by state and local departments and bureausof alcohol control, health, sanitation, and fire and to periodic review by thestate and municipal authorities for areas in which the restaurants are located.  In addition, we are subject to local landuse, zoning, building, planning, and traffic ordinances and regulations in theselection and acquisition of suitable sites for constructing new restaurants.  Delays in obtaining, or denials of, orrevocation or temporary suspension of, necessary licenses or approvals couldhave a material adverse impact on our development of restaurants.

 

We also are subject toregulation under the Fair Labor Standards Act, which governs such matters asworking conditions and minimum wages.  Anincrease in the minimum wage rate or the cost of workers’ compensationinsurance, both of which recently occurred in California, or changes intip-credit provisions, employee benefit costs (including costs associated withmandated health insurance coverage), or other costs associated with employeescould adversely affect our company.

 

In addition, we are subject tothe Americans with Disabilities Act of 1990, or ADA, and similar state statutesin California.  The ADA and Californiastatutes may require us to make certain installations in new restaurants orrenovations to existing restaurants to meet federally and state mandatedrequirements.  To our knowledge, we arein compliance in all material respects with all applicable federal, state, andlocal laws affecting our business, with the exception of renovations to restaurantsexisting at the time of passage of the ADA and the California statutes.

 

***Competition***

 

The restaurant business ishighly competitive with respect to price, service, food type, and quality.  In addition, restaurants compete for theavailability of restaurant personnel and managers.  Our restaurants compete with a large numberof other restaurants, including national and regional restaurant chains andfranchised restaurant systems, many of which have greater financial resources,more experience, and longer operating histories than we possess.  We also compete with locally owned,independent restaurants.

 

Our casual dining businessalso competes with various types of food businesses, as well as otherbusinesses, for restaurant locations.  Webelieve that site selection is one of the most crucial decisions required inconnection with the development of restaurants. As the result of the presence of competing restaurants in ourdevelopment territories, our management devotes great attention to obtainingwhat we believe will be premium locations for new restaurants, although we canprovide no assurance that we will be successful in these efforts.

 

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***Employees***

 

We employ approximately 6,070persons of whom approximately 60 are corporate management and staff personnel,332 are restaurant area directors, managers, or trainees, and 5,677 areemployees in non-management restaurant positions.  None of our employees are covered by acollective bargaining agreement with us. We have never experienced a major work stoppage, strike, or labordispute.  We consider our relations withour employees to be good.

 

***Executive Officers***

 

The following table sets forthcertain information regarding our executive officers:

 
| **Name**           | ** ** | **Age** | ** ** | **Position**                                                      |
|--------------------|------------|---------|------------|-------------------------------------------------------------------|
| William G. Shrader |       | 57      |       | President, Chief Executive Officer, and  Director                 |
| Michael Garnreiter |       | 52      |       | Executive Vice President, Treasurer, and Chief  Financial Officer |
| Stuart S. Gee      |       | 41      |       | Executive Vice President-Restaurant Operations                    |
| Michael J. Herron  |       | 63      |       | General Counsel, Vice President, and Secretary                    |
| Cynthia A. Ward    |       | 44      |       | Vice President-Accounting and Controller                          |
| Stephanie Barbini  |       | 35      |       | Vice President-Human Resources and Training                       |

 

***William G. (Bill) Shrader*** has served as ourChief Executive Officer since April 2004 and as our President and adirector since June 2001. Prior to that, he was our Chief OperatingOfficer. Mr. Shrader served as our Executive Vice President and Chief OperatingOfficer from March 1999 until June 2001.   Mr. Shrader was Senior Vice President ofMarketing for Tosco Marketing Company from February 1997 to March 1999.  From August 1992 to February 1997,Mr. Shrader served in several capacities at Circle K Stores, Inc., includingPresident of the Arizona Region, President of the Petroleum Products/ServicesDivision, Vice President of Gasoline Operations, and Vice President of GasolineMarketing.  Mr. Shrader began his careerin 1976 at The Southland Corporation and departed in 1992 as National Directorof Gasoline Marketing.

 

***Michael Garnreiter*** has served as ourExecutive Vice President, Treasurer, and Chief Financial Officer since April 2002.  Prior to joining our company, Mr. Garnreiterserved as a general partner of the international accounting firm of ArthurAndersen.  Mr. Garnreiter began hiscareer in public accounting with the Los Angeles office of Andersen in 1974after graduating with a Bachelor of Science degree in accounting from CaliforniaState University at Long Beach.  In 1986,he transferred to their Tucson, Arizona office to become its Office ManagingPartner.  Mr. Garnreiter’s career as anaccounting and audit partner spanned many different industries but focused onthe entrepreneurial, public company.  Mr.Garnreiter is a Certified Public Accountant in California and Arizona andretired from Andersen in March 2002.

 

***Stuart S. Gee*** has served as ourExecutive Vice President for Restaurant Operations since November 2004.Prior he was our Senior Vice President-Restaurant Operations-Bamboo Club since July 2003.Mr. Gee worked for Sam Seltzer’s Steakhouse restaurant chain as an operatingpartner from October 2002 to May 2003. Prior to that, Mr. Gee worked invarious capacities for Brinker International-Romano’s Macaroni Grill, the lastas Vice President of Operations, from March 1993 to March 2002. Mr.Gee was a general manager for Darden Restaurants-Red Lobster from March 1987to February 1993.

 

***Michael J. Herron*** has served as ourGeneral Counsel since March 2001, as our Secretary since June 2001,and as a Vice President since June 2003. Prior to joining us, Mr. Herronwas actively engaged in the private practice of law in Aspen, Colorado from February 1985until February 2001 and in Miami Beach, Florida from October 1965 to August 1984.While practicing in Florida, he served as outside General Counsel for arestaurant franchisor known as the Orange Bowl, a restaurant conceptexclusively

 

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located in regional shopping centers throughthe United States. Mr. Herron is a former President of the Miami Beach,Florida, Bar Association and was a member of the Florida Bar Association’sstanding Ethics Committee.

 

***Cynthia A. Ward*** has served as our VicePresident-Accounting since November 2004 and as our Controller since July 2001.Prior to that, she was the Controller for Auer Precision Mfg., Inc. from August 1997to April 2001. Ms. Ward was Controller for Knight Transportation from March 1995to August 1997, starting as an Accounting Manager, and was an AccountingManager for Swift Transportation from January of 1993 to March 1995.In addition, Ms. Ward worked as an auditor for the Office of Auditor Generalfrom June 1991 to January 1993. Ms. Ward holds a Bachelor of ScienceDegree in Accounting from Arizona State University and is a Certified PublicAccountant.

 

***Stephanie Barbini*** has served as our Vice President of Human Resources andTraining since September 2002.  Ms.Barbini held a variety of senior level HR positions with Conoco/ Phillips from1994 to September 2002.  During hereight-year tenure with Conoco/Phillips, she provided strategic human resourcesupport to retail operations, corporate headquarters, petroleum refining anddistribution through five separate multi-billion dollar acquisitions. Ms.Barbini holds a BA in Psychology from Oklahoma University and a Master’s inOrganizational Psychology from Columbia University.

 

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**Risk Factors**

 

You should carefully consider the following factors,in addition to the other information in this Report, in evaluating our companyand our business.

 

**We face risks associated with changes in general economic and politicalconditions that affect consumer spending.**

 

Adverse economic conditions and any related decreasein discretionary spending by our customers have an adverse affect on ourrevenues and operating results. When the economy struggles, our customers maybecome more apprehensive about the economy and reduce their level ofdiscretionary spending.  We believe thata decrease in discretionary spending could impact the frequency with which ourcustomers choose to dine out or the amount they spend on meals while diningout, thereby decreasing our revenues. Additionally, military and governmental responses to future terroristattacks and the prospect of future wars may exacerbate the then currenteconomic conditions, and may lead to weakening in the economy.

 

**We depend on TGI Friday’s Inc.**

 

Our success depends, to a significant extent, on thecontinued vitality of the TGI Friday’s restaurant concept and the overallsuccess of the TGI Friday’s system. We have no control over the management oroperation of TGI Friday’s Inc. or other TGI Friday’s franchisees.  A variety of factors affecting TGI Friday’sInc. or the TGI Friday’s concept could have a material adverse effect on ourbusiness.  These factors include thefollowing:

 

•                  anybusiness reversals that TGI Friday’s Inc. may encounter;

•                  afailure by TGI Friday’s Inc. to promote the TGI Friday’s name or restaurantconcept;

•                  theinability or failure of TGI Friday’s Inc. to support its franchisees, includingour company;

•                  thefailure to operate successfully the TGI Friday’s restaurants that TGI Friday’sInc. itself owns; and

•                  negativepublicity with respect to TGI Friday’s Inc. or the TGI Friday’s name.

 

Thefuture results of the operations of our restaurants will not necessarilyreflect the results achieved by TGI Friday’s Inc. or its other franchisees, butwill depend upon such factors as the effectiveness of our management team, thelocations and markets of our restaurants, and the operating results of thoserestaurants.

 

**Our franchise agreements with TGI Friday’s Inc. require substantialpayments.**

 

Our franchise agreement with TGI Friday’s Inc. foreach TGI Friday’s restaurant that we own generally requires us to pay aninitial franchise fee of $50,000, although currently the fee is $25,000 inSouthern California, pay royalties of generally 4% of the restaurant’s grosssales, although we have entered intoa California Development Incentive Agreement which will reduce a portion ofthese fees, and spend up to 4% of the restaurant’s gross sales on advertising,which may include contributions to a national marketing pool administered byTGI Friday’s Inc.

 

TGI Friday’s Inc. requires us and its otherfranchisees to contribute a percentage of gross sales to the national marketingpool, which has been set at 4.0% for 2005. We must pay or accrue these amountsregardless of whether or not our restaurants are profitable.

 

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If we fail to satisfythese requirements or otherwise default under the franchise agreements, wecould be subject to potential damages for breach of contract and could lose ourfranchise rights for some or all of our TGI Friday’s restaurants.  We also could lose our rights to developadditional TGI Friday’s restaurants.

 

**Our development agreements withTGI Friday’s Inc. require us to open additional TGI Friday’s restaurants.**

 

Our development agreements with TGI Friday’s Inc.require us to open additional TGI Friday’s restaurants. We may not be able tosecure sufficient restaurant sites that we believe are suitable or we may notbe able to develop restaurants on terms and conditions that we considerfavorable in order to satisfy the requirements of the developmentagreements.  The development agreementsgive TGI Friday’s Inc. certain remedies in the event that we fail to complywith the development schedule in a timely manner or if we breach theconfidentiality or non-compete provisions of the development agreements.  These remedies include, under certaincircumstances, the right to reduce the number of restaurants we may develop inthe related development territory or to terminate our exclusive right todevelop restaurants in the related development territory.****Inthe past, we have negotiated waivers from TGI Friday’s Inc. of the obligationswe have not fulfilled.  However, we canprovide no assurance that we will successfully fulfill these obligations in thefuture or, if we do not, that we will be able to obtain waivers.

 

**Our assets may become impaired due to changing and adverse economicconditions.**

 

Our assets may become impaired due to changingeconomic conditions. When we encounter a “triggering” event, decide to close arestaurant, or perform a periodic review of our marginally performing locations(particularly in the fourth quarter of each year), we record appropriate assetimpairment charges if necessary.  Theamount of impairment charges and the allocation of goodwill, if any, is basedupon assessments of current and future economic conditions and their estimatedimpact on our ability to recover our investment in long-lived assets.  Even in strong economic conditions, there canbe conditions or local situations that might require the recording of assetimpairment charges.  In 2004, we recordedimpairment write-downs and lease termination charges of $1.4 million.  We will continue to perform periodic assetimpairment tests and it is likely that we will record future asset impairmentcharges.

 

**We have significant debt, and we may be unable to continue to meet debtcovenants.**

 

Wehave incurred significant indebtedness in connection with our growth strategy.As of December 27, 2004, we had long-term debt of approximately $46.1million (including current portion of $3.9 million), and a working capitaldeficit of $19.7 million.  Our borrowingsinclude financial covenants, which have been amended and revised from time totime, generally based on EBITDA, which limits the amount we can borrow. Thesedebt agreements require us to measure our compliance with financial covenantseach fiscal quarter.  If we fail to meetany financial covenants, our lenders could call their loans immediately.  There can be no assurance we will continue tomeet these covenants in the future. Currently, the assets of all of ourrestaurants are pledged directly or indirectly to secure our debt obligations.

 

**Our borrowings involve substantial interest expense.**

 

Our borrowings will result in interest expense ofapproximately $4.0 million in 2005 and $3.5 million in 2006, based on currentlyprevailing interest rates and assuming outstanding and contemplatedindebtedness is paid in accordance with the existing payment schedules withoutany prepayments or additional borrowings. Additionally, current interest ratesare at historically low levels.  Ifinterest rates were to increase, our interest costs would also increase, sinceapproximately 19% of our debt, after 

 

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consideration of the impact of our swap agreements, is variableinterest rate debt. We must make these interest payments regardless of ouroperating results.

 

**We depend on a key food product distributor**.

 

We depend on U.S. Foodservice,a national food distribution service company, to serve substantially all of ourrestaurants in California, Arizona, and Nevada and for all of our Bamboo Cluband Redfish restaurants. U.S. Foodservice is a subsidiary of Royal Ahold, whichin early 2003 announced a major financial restatement to its 2001 and earlierfinancial statements.  The inability ofU.S. Foodservice to continue providing us with a high level of quality anddependability in the receipt of our supplies, at the cost advantages resultingfrom our volume purchases, could have a material impact on our business.

 

We believe that all essentialproducts are available from other national suppliers as well as from localsuppliers in the cities in which our restaurants are located in the event wemust purchase our products from other suppliers; however, there can be noassurance that we will be able to match quality, price, or dependability ofsupply.

 

**We face risks associated with the expansion of our operations.**

 

The success of our business depends on our abilityto expand the number of our restaurants, either by developing or acquiringadditional restaurants.  Our success alsodepends on our ability to operate and manage successfully our growing operations.  Our ability to expand successfully willdepend upon a number of factors, including the following:

 

•                  theavailability and cost of suitable restaurant locations for development;

•                  theavailability of restaurant acquisition opportunities;

•                  thehiring, training, and retention of additional management and restaurantpersonnel;

•                  theavailability of adequate financing;

•                  thecontinued development and implementation of management information systems;

•                  competitivefactors; and

•                  generaleconomic and business conditions.

 

Increased construction costs and delays resultingfrom governmental regulatory approvals, strikes, or work stoppages, adverseweather conditions, and various acts of God may also affect the opening of newrestaurants.  Newly opened restaurantsmay operate at a loss for a period following their initial opening.  The length of this period will depend upon anumber of factors, including the time of the year the restaurant is opened, thesales volume, and our ability to control costs.

 

We may not successfully achieve our expansiongoals.  Additional restaurants that wedevelop or acquire may not be profitable. In addition, the opening of additional restaurants in an existing marketmay have the effect of drawing customers from and reducing the sales volume ofour existing restaurants in those markets.

 

**We will need additional capital for expansion, which may or may not beavailable.**

 

We will need additionalfunds to develop new restaurants, including funds for construction, tenantimprovements, furniture, fixtures, equipment, training of employees, permits,initial franchise fees, and other expenditures. We have no additional borrowing capacity under our credit agreements.However, we believe our cash flows from operations in 2005 will be sufficientto fund all of our planned capital expansion, which includes opening three orfour new restaurants.  However, we willrequire funds

 

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to develop additional TGI Friday’s and Bamboo Club restaurants after2005 and to pursue any additional restaurant development or restaurantacquisition opportunities that may arise and to comply with our requiredminimum restaurant openings in accordance with our development agreements withTGI Friday’s Inc.

 

In the future, we may seek additional equity or debtfinancing to provide funds so that we can develop or acquire additionalrestaurants and to pay down debt.  Suchfinancing may not be available or may not be available on satisfactoryterms.  If financing is not available onsatisfactory terms, we may be unable to satisfy our obligations under ourdevelopment agreements with TGI Friday’s Inc. or otherwise to expand ourrestaurant operations.  While debtfinancing will enable us to add more restaurants than we otherwise would beable to add, debt financing increases expenses and is limited as toavailability due to our past financial results, and we must repay the debtregardless of our operating results. Future equity financings will likely result in dilution to ourstockholders, and that dilution could be significant.

 

**We will be subject to the risks associated with franchising operationsif we begin franchising the Redfish or Bamboo Club concepts**.

 

We do not have any immediate plans to beginfranchising. However, we will be subject to the risks associated withfranchising if we begin franchising activities in the future.  If we develop a franchising program, oursuccess as a franchisor will depend upon our ability to develop and implement asuccessful system of concepts and operating standards and to attract andidentify suitable franchisees with adequate business experience and access tosufficient capital to enable them to open and operate restaurants in a mannerconsistent with our concepts and operating standards. We cannot provideassurance that we would be able to successfully meet these challenges as afranchisor.  In addition, as a franchisorwe would be subject to a variety of federal and state laws and regulations,including Federal Trade Commission regulations, governing the offer and sale offranchises. These laws and regulations could result in significant increasedexpenses and potential liabilities for our company in the event we engage infranchising activities in the future.

 

**We face risks that affect the restaurant industry in general**.

 

A variety of factors over which we have no controlmay affect the ownership and operation of restaurants.  These factors include adverse changes innational, regional, or local economic or market conditions; increased costs oflabor or food products; fuel, utility, and energy and other price increases;competitive factors; the number, density, and location of competitors; andchanging demographics, traffic patterns, and consumer tastes, habits, andspending priorities.

 

Third parties may file lawsuits against us based ondiscrimination, personal injury, claims for injuries or damages caused byserving alcoholic beverages to an intoxicated person or to a minor, or otherclaims.  As a multi-unit restaurantoperator, our business could be adversely affected by publicity about foodquality, illness, injury, or other health and safety concerns or operatingissues at one restaurant or a limited number of restaurants operated under thesame name, whether or not we actually own or manage the restaurants inquestion.  We cannot predict any of thesefactors with any degree of certainty. Any one or more of these factors could have a material adverse effect onour business.

 

Employees may file claims or lawsuits against usbased on discrimination or wrongful termination or based upon their rightscreated by the state laws wherein we do business. These claims or lawsuitscould result in unfavorable publicity and could have a material adverse effecton our business.

 

**We face rising insurance costs.**

 

The cost of insurance (workers compensationinsurance, general liability insurance, health insurance, and directors andofficers liability insurance) has risen significantly in the past few years andis

 

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expected to continue to increase in 2005.  In California, we face significantly higherbenefits and costs for workers’ compensation claims as compared to othermarkets. We may be unable to make the improvements in our operations tomitigate the effects of increased frequency and higher costs.

 

**We face intense competition.**

 

The restaurant business is highly competitive withrespect to price, service, and food type and quality.  Restaurant operators also compete forattractive restaurant sites and qualified restaurant personnel andmanagers.  Our restaurants compete with alarge number of other restaurants, including national and regional restaurantchains and franchised restaurant systems, as well as with locally owned,independent restaurants.  Many of ourcompetitors have greater financial resources, more experience, and longeroperating histories than we possess.

 

**We depend upon our senior management.**

 

Our success depends, in large part, upon theservices of our senior management.  Theimmediate loss of the services of any members of our senior management team,without a reasonable period of transition, could have a material adverse effecton our business. We do not maintain any life insurance on these seniorexecutives.

 

**We face risks associated with government regulation.**

 

Various federal, state, and local laws affect ourbusiness.  The development and operationof restaurants depend to a significant extent on the selection and acquisitionof suitable sites.  These sites aresubject to zoning, land use, environmental, traffic, and other regulations ofstate and local governmental agencies. City ordinances or other regulations, or the application of suchordinances or regulations, could impair our ability to construct or acquirerestaurants in desired locations and could result in costly delays.

 

The delay or failure to obtain or maintain anylicenses or permits necessary for operations could have a material adverseeffect on our business.  In addition, anincrease in the minimum wage rate, employee benefit costs, or other costsassociated with employees could adversely affect our business.  We also are subject to the Americans withDisabilities Act of 1990 that, among other things, may require us to installcertain fixtures or accommodations in new restaurants or to renovate existingrestaurants to meet federally mandated requirements.

 

Sales of alcoholic beverages represent an importantsource of revenue for each of our restaurants. The temporary suspension or permanent loss or the inability to maintaina liquor license for any restaurant would have an adverse effect on theoperations of that restaurant.  We do notplan to open a restaurant in any location for which we believe we cannot obtainor maintain a liquor license.

 

**We face increased expenditures of time and money associated withcompliance with changing regulation of corporate governance and publicdisclosure.**

 

Keeping abreast of, and in compliance with, changinglaws, regulations, and standards relating to corporate governance and publicdisclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations, andNasdaq National Market rules, has required an increased amount of managementattention and external resources.  Weremain committed to maintaining high standards of corporate governance andpublic disclosure.  As a result, weintend to invest all reasonably necessary resources to comply with evolvingstandards, and this investment may result in increased general andadministrative expenses and a diversion of management time and attention fromrevenue generating activities to compliance activities.

 

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**Litigation could have a material adverse effect on our business.**

 

We are from time to time the subject of complaintsor litigation from guests alleging food-borne illness, injury, or other foodquality, health, or operational concerns. We may be adversely affected by publicity resulting from suchallegations regardless of whether such allegations are valid or whether we areliable.  We are also subject tocomplaints or allegations from former or prospective employees from time totime.  A lawsuit or claim could result inan adverse decision against us that could have a material adverse effect on ourbusiness.

 

We are subject to state “dram shop” laws andregulations, which generally provide that a person injured by an intoxicatedperson may seek to recover damages from an establishment that wrongfully servedalcoholic beverages to such person. While we carry liquor liability coverage as part of our existingcomprehensive general liability insurance, we may still be subject to ajudgment in excess of our insurance coverage and we may not be able to obtainor continue to maintain such insurance coverage at reasonable costs, or at all.

 

**The market price of our common stock has been highly volatile.**

 

Historically, the market price of our common stockhas been extremely volatile.  In thefuture, the market price of our common stock may be subject to widefluctuations as a result of a variety of factors, including the following:

 

•                  quarterlyvariations in our operating results or those of other restaurant companies;

•                  changesin analysts’ estimates of our financial performance;

•                  changesin national and regional economic conditions, the financial markets, or therestaurant industry;

•                  naturaldisasters; and

•                  otherdevelopments affecting our business or other restaurant companies.

 

The trading volume of our common stock has beenlimited, which may increase the volatility of the market price for ourstock.  In addition, the stock market hasexperienced extreme price and volume fluctuations in recent years.  This volatility has had a significant effecton the market prices of securities issued by many companies for reasons notnecessarily related to the operating performances of these companies.

 

**Our management controls a significant portion of the voting power ofour common stock.**

 

Our directors and executive officers currently ownor control, directly or indirectly, approximately 6,227,763 shares, or 44.7%,of our outstanding common stock.  Thesedirectors and officers also hold options to purchase an aggregate of 2,678,500shares of common stock at exercise prices ranging from $1.67 to $5.81 pershare.  As a result, these persons votingtogether have significant voting power, including the election of directors andthe approval of other corporate matters.

 

**The existence of stock options may adversely affect the terms of futurefinancings.**

 

Stock options to persons other than directors orofficers to acquire an aggregate of 632,001 shares of common stock currentlyare outstanding.  An additional 841,381shares of common stock have been reserved for issuance upon exercise of optionsthat may be granted under our existing stock option plans.  During the terms of those options, theholders of those securities will have the opportunity to profit from anincrease in the market price of our common stock.  The existence of options may adversely affectthe terms on which we can obtain additional financing in the future, and theholders of options

 

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can be expected to exercise those options at a time when, in alllikelihood, we would be able to obtain additional capital by offering shares ofcommon stock on terms more favorable to us than those provided by the exerciseof such options.

 

**Sales of large numbers of shares could adversely affect the price ofour common stock.**

 

Sales of substantial amounts of common stock in thepublic market, or even the potential for such sales, could adversely affectprevailing market prices for our common stock and could adversely affect ourability to raise capital.  As of March 1,2005, there were 14,641,928 shares of our common stock outstanding.  All of these shares are freely transferablewithout restriction under the securities laws, unless they are held by our “affiliates,”as that term is defined in the securities laws. Affiliates also are subject to certain of the resale limitations of Rule144.  Generally, under Rule 144, eachperson that beneficially owns restricted securities with respect to which atleast one year has elapsed since the later of the date the shares were acquiredfrom us or one of our affiliates may, every three months, sell in ordinarybrokerage transactions or to market makers an amount of shares equal to thegreater of 1% of our then-outstanding common stock or the average weeklytrading volume for the four weeks prior to the proposed sale of such shares.

 

**We do not anticipate that we will pay dividends.**

 

We have never paid any cash or stock dividends onour common stock, and we do not anticipate that we will pay dividends in theforeseeable future.  We intend to applyany earnings to the expansion and development of our business.  In addition, the terms of our creditfacilities limit our ability to pay dividends on our common stock.

 

**ITEM 2.****    ****PROPERTIES**

 

In January 2003, weentered into a 10-year lease renewal and modification agreement for ourcorporate offices. This agreement increased the size of the existing space,allowing us to combine our three office locations into one contiguous space.This resulted in a reduction in total space leased and provided a reduction inannual rent expense. We believe that the leased space is adequate for ourcurrent and reasonably anticipated future needs.

 

We also lease space for all ofour restaurants.  The initial lease termsrange from 10 to 20 years and usually contain renewal options for up to 20years.  The leases typically provide fora fixed rental payment plus a percentage of our revenue in excess of aspecified amount.

 

**ITEM3.****    ****LEGAL PROCEEDINGS**

 

From time to time, we aresubject to routine contract, negligence, employment related, and otherlitigation in the ordinary course of business.

 

We have been served with twolawsuits filed on behalf of current employees, seeking damages, underCalifornia law, for both missed breaks and missed meal breaks the employeesallege they did not receive. These lawsuits seek to establish a class actionrelating to our California operations. We intend to vigorously defend theselawsuits, both on the merits of the employees’ cases and the issues relating toclass action status.

 

The state of Californiainitiated a sales tax audit of our restaurants and determined that the optional15% gratuity added to checks for parties of eight or more should have beensubject to sales tax and, as such, has assessed taxes and related penalties ofinitially approximately $900,000, but which have since been reduced toapproximately $484,000.  We havevigorously contested this assessment. The first of various appeal conferenceswas held on November 13, 2003.  In February 2004,we were notified that

 

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our appeal was denied by the appealsofficer.  We are in the process ofpreparing a second appeal to the full state of California Franchise Tax Board.We are unable to predict the outcome of this proceeding.

 

Other than those proceedings,we are not subject to any pending litigation that we believe will have amaterial adverse effect on our business, financial condition, results ofoperations, or liquidity.

 

**ITEM 4.****    ****SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Not applicable.

 

**PART II**

 

**ITEM 5.****           ****MARKET FORTHE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

Our common stock has been quoted on the Nasdaq NationalMarket under the symbol “MAIN”. The following table sets forth the quarterlyhigh and low sales prices of our common stock for the periods indicated asreported by the Nasdaq National Market.

 
| ** **                                 | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------------------|------------|----------|------------|---------|------------|
| 2003                                       |       |     |       |    |       |
| First Quarter                              |       | $        | 2.19       |    | $          | .65 |   |
| Second Quarter                             |       | 2.23     |       | .75     |       |
| Third Quarter                              |       | 2.69     |       | 1.70    |       |
| Fourth Quarter                             |       | 3.28     |       | 1.65    |       |
| 2004                                       |       |     |       |    |       |
| First Quarter                              |       | $        | 4.45       |    | $          | 1.91 |   |
| Second Quarter                             |       | 2.79     |       | 1.81    |       |
| Third Quarter                              |       | 2.11     |       | 1.43    |       |
| Fourth Quarter                             |       | 1.82     |       | 1.20    |       |
| 2005                                       |       |     |       |    |       |
| First Quarter (through March 1, 2005) |       | $        | 2.30       |    | $          | 2.20 |   |

 

On March 1, 2005, therewere 816 holders of record of our common stock and the closing sale price ofour common stock on the Nasdaq National Market was $2.28 per share.

 

We have never declared or paidany cash dividends.  We intend to retainany earnings to fund the growth of our business and do not anticipate payingany cash dividends in the foreseeable future. In addition, our existing debt obligations limit our ability to pay cashdividends.

 

**ITEM 6.****    ****SELECTEDCONSOLIDATED FINANCIAL DATA**

 

The following table sets forthselected consolidated financial data for our company for the periodsindicated.  The selected consolidatedfinancial data for each of the five fiscal years in the period ended December 27,2004, has been derived from our consolidated financial statements, as restated,which have been audited by (1) Arthur Andersen LLP, our former independentaccountants, for each of the two fiscal years in the period ended December 25,2000 (not included herein), (2) KPMG, LLP, our former independent accountants,for the fiscal year ended December 31, 2001 (not included herein), and (3)Mayer Hoffman McCann P.C., our current independent accountants, for each of thethree fiscal years in the period ended December 27, 2004.

 

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This data should be read inconjunction with, and are qualified by reference to, our consolidated financialstatements and the notes thereto and Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” included elsewherein this Report.

 
| ** **                                         | ** ** | **Fiscal  Years Ended**                           | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                         | ** ** | **(in  thousands, except for per share amounts)** | ** ** |
| ** **                                         | ** ** | **Dec. 27,  2004**                                | ** ** | **Dec. 29,  2003** | ** ** | **Dec. 30,  2002** | ** ** | **Dec. 31,  2001** | ** ** | **Dec. 25,  2000** | ** ** |
|                                               |       |                                              |       | **(as  restated)** |   | **(as  restated)** |   | **(as  restated)** |   | **(as  restated)** |   |
| Statement of Operations Data:                      |       |                                              |       |   |   |   |   |   |   |   |   |
| Revenue                                            |       | $                                                 | 224,751    |   | $ | 224,494 |   | $ | 220,151 |   | $ | 211,823 |   | $ | 186,542 |   |
| Restaurant operating expenses: Cost of sales       |       | 59,025                                            |       | 60,299 |   | 61,270 |   | 59,139 |   | 53,671 |   |
| Operating income (loss) (3)                        |       | 4,747                                             |       | (1,454 | ) | (3,491 | ) | 2,921 |   | 7,418 |   |
| Net income (loss)(1)(2) (3)                        |       | $                                                 | 953        |   | $ | (2,144 | ) | $ | (8,750 | ) | $ | (259 | ) | $ | 3,548 |   |
| Diluted earnings per share:                        |       |                                              |       |   |   |   |   |   |   |   |   |
| Net income (loss) (1)(2) (3)                       |       | $                                                 | 0.07       |   | $ | (0.15 | ) | $ | (0.62 | ) | $ | (0.01 | ) | $ | 0.33 |   |
| Weighted average shares outstanding – diluted |       | 14,649                                            |       | 14,179 |   | 14,105 |   | 14,048 |   | 11,117 |   |
| Balance Sheet Data:                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Working capital (deficiency) (3)                   |       | $                                                 | (19,701    | ) | $ | (17,946 | ) | $ | (15,822 | ) | $ | (8,135 | ) | $ | (7,219 | ) |
| Total assets                                       |       | 103,172                                           |       | 106,207 |   | 112,395 |   | 112,462 |   | 108,261 |   |
| Long-term debt, net of current portion             |       | 42,232                                            |       | 47,869 |   | 51,998 |   | 47,232 |   | 44,395 |   |
| Stockholders’ equity (3)                      |       | 29,285                                            |       | 28,124 |   | 28,816 |   | 39,686 |   | 40,026 |   |

 

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(1)   Fiscal 2004, 2003, 2002, and 2000 include acharge of $80,000, $270,000, $46,000, and $16,000 respectively, for early extinguishmentof debt.

(2)          Fiscal 2002 includes afull valuation allowance against deferred tax assets.

(3)          Amounts have beenadjusted as a result of the restatement discussed in the footnotes to thefinancial statements.

 

**Quarterly Results of Operations (Unaudited)**

 

The following table presents unaudited consolidatedstatements of operations data for each of the eight quarters in the periodended December 27, 2004.  We believethat all necessary adjustments have been included to present fairly thequarterly information when read in conjunction with our consolidated financialstatements.  The operating results forany quarter are not necessarily indicative of the results for any subsequentquarter.

 

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| ** **                                                 | ** ** | **Fiscal Quarter Ended**                      | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                 | ** ** | **(In thousands, except per share  amounts)** | ** ** |
| ** **                                                 | ** ** | **2004 (as restated)**                        | ** ** | **2003 (as restated)** | ** ** |
| ** **                                                 | ** ** | **Dec. 27**                                   | ** ** | **Sept. 27** | ** ** | **June 28** | ** ** | **Mar. 29** | ** ** | **Dec. 29** | ** ** | **Sept. 30** | ** ** | **June 30** | ** ** | **Mar. 31** | ** ** |
| Revenue                                                    |       | $                                             | 52,218     |   | $ | 54,845 |   | $ | 56,610 |   | $ | 59,079 |   | $ | 52,625 |   | $ | 54,173 |   | $ | 60,110 |   | $ | 57,586 |   |
| Cost of  sales                                             |       | 14,280                                        |       | 14,197 |   | 14,902 |   | 15,646 |   | 14,219 |   | 14,334 |   | 15,888 |   | 15,858 |   |
| Income  (loss) before income taxes (1)(2)(3)               |       | (1,113                                        | )          | 179 |   | 870 |   | 1,129 |   | (4,864 | ) | 192 |   | 1,501 |   | 1,027 |   |
| Net income  (loss) (1)(2) (3)                              |       | $                                             | (1,113     | ) | $ | 117 |   | $ | 820 |   | $ | 1,129 |   | $ | (4,864 | ) | $ | 192 |   | $ | 1,501 |   | $ | 1,027 |   |
|                                                       |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income  (loss) per share before income taxes (1)(2)(3) |       | $                                             | (0.08      | ) | $ | 0.01 |   | $ | 0.06 |   | $ | 0.08 |   | $ | (0.34 | ) | $ | 0.02 |   | $ | 0.11 |   | $ | 0.07 |   |
| Net income  (loss) per share (1)(2)(3)                     |       | $                                             | (0.08      | ) | $ | 0.01 |   | $ | 0.06 |   | $ | 0.08 |   | $ | (0.34 | ) | $ | 0.02 |   | $ | 0.11 |   | $ | 0.07 |   |

 

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(1)   Fourth quarter fiscal 2004, 2003, and 2002include asset impairmentcharges and other and estimated lease termination fees of $1,385,000,$3,069,000, and $6,337,000, respectively, including an allocation of goodwillin fiscal 2003 and 2002 of $455,000 and $860,000, respectively.

(2)   Third quarter fiscal 2003 and 2002 includeasset impairment charges and other of $2,460,000 and $1,206,000, respectively,and a write-down in the value of land held for sale of $350,000 and $400,000,respectively.

(3)   Amounts have been adjusted as a result of therestatement as discussed in the footnotes to the financial statements.

 

**ITEM 7.****           ****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**EXECUTIVE SUMMARY**

 

**Background**

 

We commenced our restaurantoperations in May 1990 with the acquisition of four TGI Friday’s restaurants inArizona and Nevada.  During the past 14years, we have grown through acquisitions and development of newrestaurants.  We currently own 70restaurants.

 

  We openedsix new restaurants in 2002, including one TGI Friday’s and one Redfish inChandler, Arizona; three Bamboo Clubs in Tucson, Arizona, Newport, Kentucky,and King of Prussia, Pennsylvania; and one Alice Cooper’stown in Cleveland,Ohio in the location formally occupied by an under-performing Redfishrestaurant that we closed. In addition, we closed an underperforming Redfishrestaurant in San Diego, California and subleased the premises to a local SanDiego nightclub operator. We also closed underperforming TGI Friday’srestaurants in Kansas City, Missouri and in El Paso, Texas.

 

During 2002, we recorded charges for (i) thewrite-down of land held for sale of $400,000 and (ii) impairment charges andother of $1,206,000, including asset impairment for an under-performingrestaurant location that was closed, an allocation of $300,000 of goodwill, and$95,000 in lease cancellation charges related to this closure.

 

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We opened five new restaurants in 2003, includingone TGI Friday’s in the Desert Ridge Mall, in Arizona and four Bamboo Club “AsianBistro” restaurants in Novi (Detroit), Michigan; Aventura Mall (North Miami),Florida; Desert Ridge Mall, Arizona; and Raleigh/Durham, North Carolina. Wesold three TGI Friday’s restaurants in Northern California, and we entered intoan agreement canceling the management of four TGI Friday’s in California thatwe managed. We closed an under-performing Redfish Seafood Grill and Bar inDenver, Colorado and sub-leased the location to a third party.

 

During 2003, we recorded charges for (i) awrite-down in the value of land we hold for sale of $350,000, (ii) impairmentcharges and other of $2,850,000, including asset impairments forunderperforming restaurant locations, one of which was closed during 2003,(iii) an allocation of $905,000 of goodwill and franchise area goodwill for arestaurant we closed in 2003 and a restaurant that we closed in October 2004,(iv) $500,000 in lease cancellation charges related to a restaurant that weclosed in October 2004, (v) a provision of $800,000 for the termination ofa management agreement of four restaurants we managed in Northern California,(vi) a $300,000 provision for the retirement on March 31, 2004 of ourformer CEO, and (vii) a write-off of $201,000 for deferred financing feesassociated with an early debt refinancing.

 

During 2004, we opened one new Bamboo Club “AsianBistro” restaurant in Fairfax, Virginia. We closed two California TGI Friday’s locations, Oakland and Salinas,where we made the decision not to renew the lease.   In addition, we recorded charges in thefourth quarter for (i) the further write-down of the value of land held for salein El Paso, Texas by $200,000, (ii) the impairment of assets in the amount of$310,000, and the estimated one-time lease termination fees of $875,000covering three Bamboo locations, two of which have operating restaurants,Newport, Kentucky and Aventura, Florida, and one lease in Columbus, Ohio wherewe did not build a restaurant.

 

Subsequent to year end, we paid $575,000 in leasetermination fees on two of these locations, and closed the Bamboo Clubrestaurant in Aventura, Florida.  We planto terminate the lease and close the Newport, Kentucky Bamboo Club location onMay 31, 2005.

 

***Economic Overview***

 

We conduct business in the casual dining restaurantindustry and the operating performance of our restaurants is directly andheavily influenced by the overall state of the national and local economieswhere our restaurants are located.  Whenoverall economic conditions negatively impact the financial performance of anindividual restaurant, we periodically consider all of the factors influencingthat restaurant, such as operational efficiencies, local demographic changes,local construction activity, competition, and other related factors. We then assessthe prospect that we can improve both the short-term and long-term financialresults, at least to a level sufficient to recover our investment in theleasehold improvements and equipment assets. There have been and likely will continue to be situations where we willmake the decision that an asset is impaired and a write-down is required evenwhen the overall economic conditions are strong.

 

***Same Store Sales***

 

We measure and report same store sales only on afull company basis, for stores that have been open for at least 18 months. Oursame store sales increases or (decreases) by quarter are as follows:

 

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###### **Same Store Sales**

 
| **Year** | ** ** | **Annual** | ** ** | **First Qtr** | ** ** | **Second Qtr** | ** ** | **Third Qtr** | ** ** | **Fourth Qtr** | ** ** |
|----------|------------|------------|------------|---------------|------------|----------------|------------|---------------|------------|----------------|------------|
| 2004     |       | 2.4        | %          | 5.0           | %          | (1.6           | )%         | 1.3           | %          | 4.2            | %          |
| 2003     |       | 1.1        | %          | 1.2           | %          | (1.2           | )%         | 2.3           | %          | 1.4            | %          |
| 2002     |       | 0.4        | %          | 2.4           | %          | 1.5            | %          | (3.6          | )%         | (0.8           | )%         |
| 2001     |       | 1.9        | %          | 2.7           | %          | 2.5            | %          | 0.9           | %          | (0.5           | )%         |

 

***Asset Impairments and Write Offs***

 

The vast majority of our TGI Friday’s restaurantshave performed well; thus, we have experienced a limited number of assetimpairments in recent years.  As thelocal and national economies strengthen and our financial performance improvesor remains strong, the overall judgment about asset impairment write-downs, forall of our brands, becomes easier; when the economy weakens, this judgment ismade more difficult.

 

In the last 42 months in our Bamboo Club brand, wehave opened 11 new restaurants. Financial results have been below our original expectations, primarilyas a result of the timing of when we opened these restaurants and the state ofthe weak national economy.  However, twoof these new locations in Newport, Kentucky and Aventura, Florida haveperformed significantly below our expectations, due in part to what we nowbelieve to be poor real estate location decisions.  Subsequent to December 27, 2004, wecompleted the negotiations for the lease termination in Aventura, Florida andclosed the restaurant on February 24, 2005.  We also completed the negotiations for thelease termination in Newport, Kentucky and plan to close the restaurant on May31, 2005.  Since this location remainsopen and operating, we will likely have additional operating losses in 2005.

 

In the future and for many business reasons, we mayvacate an operating property of any brand where we have a long-term leaseobligation.  Any such vacating ofproperty may require us to pay fees and costs, which are likely to be material.

 

***Employee-related Insurance Costsand Wage Expense***

 

Another major cost category for us isemployee-related insurance costs, such as health care and workers compensationbenefits.  We self-insure for themajority of the risks associated with these costs and we purchase excessliability insurance for situations where the individual cases become verycostly.  Each mid year and again at yearend, with the assistance of our insurance actuaries, we evaluate the actualclaims history to (i) predict the estimated total costs to accrue for theupcoming year, and (ii) to evaluate the level of accruals for prior years’ openclaims.  As claims mature, we areprovided with better information and insight about the likely ultimate outcomesand can better estimate the ultimate liability for any given year.  However, this judgment can impact the amountof accruals actually needed as compared to previous amounts recorded, and anyshortfall or excess can be material.

 

In addition, 31 of our 70restaurants are located in California. California does not permit us to reduce the minimum wage that we arerequired to pay to our wait staff by the amount of tips and gratuity they receivefrom our customers.  This tip credit practiceis permitted in most other states in which we operate. This condition resultsin a significantly higher level of wages paid to our employees in California comparedto the other 10 states in which we operate. This condition also impacts worker compensation benefits and our costsin California.  We estimate that ourworkers compensation cost for each claim in California is more than double thecost we experience in other states.

 

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***Brand Economics***

 

*General*

 

All of our restaurants operate in the casual diningsector of the restaurant industry. However, because of each brands’ age andrelative business maturity, and because of differing levels of marketing andbrand recognition, each brand currently has somewhat different economicresults.  We do not allocate any cost ofcapital or general and administrative cost directly to the restaurants.

 

Restaurant level operating profit (ROP) includes allrestaurant-specific revenues and direct costs of operations, includingroyalties and marketing costs paid to Carlson on behalf of the TGI Friday’sbrand.  Restaurant level EBITDArepresents restaurant level cash flow, adding depreciation and amortization toROP.

 

*TGI Friday’s Brand*

 

The TGI Friday’s brand is turning 40 years old, andis very widely recognized.  In spite ofits age, it and has been very resilient against its increasingly toughcompetition (dollar amounts in thousands):

 
| ** **                           | ** ** | **2003** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Brand  Revenues                      |       | $        | 189,135    |     | $          | 187,546 |   |
| Restaurant  Operating Profit         |       | $        | 15,822     |     | $          | 17,792 |   |
| Restaurant  level Cash Flow (EBITDA) |       | $        | 22,311     |     | $          | 24,110 |   |
| EBITDA as %  of Revenue              |       | 11.8     | %          | 12.9     | %          |
| Average  Number of Restaurants       |       | 55.5     |       | 53.0     |       |
| Average  Annual Unit Volumes         |       | $        | 3,408      |     | $          | 3,539 |   |

 

*Bamboo Club Brand*

 

The Bamboo Club concept is significantly less maturethan our TGI Friday’s brand and the marketing and advertising support isdramatically lower.  Of our 13 locationsat December 27, 2004, 11 have been built and opened in the last fouryears, and two locations have significantly under performed our expectations.Our original expectation was that a restaurant achieved sales maturity within 6to 8 months, but we have found that it takes much longer.  We now believe two years is a moreappropriate estimation period to achieve maturity.  Additionally, costs are higher, especiallyfor labor, in the initial two-year period as a restaurant adjusts to its localmarket conditions and customer expectations.

 
| ** **                           | ** ** | **Brand  Totals** | ** ** | **Over 2  years** | ** ** | **Under 2  years** | ** ** | **Underperforming  (a)** | ** ** |
|--------------------------------------|------------|-------------------|------------|-------------------|------------|--------------------|------------|--------------------------|------------|
| Revenues                             |       | $                 | 26,106     |              | $          | 17,242             |       | $                        | 6,517      |   | $ | 2,347 |   |
| Restaurant  Operating Profit         |       | $                 | (1,129     | )                 | $          | 814                |       | $                        | (934       | ) | $ | (1,009 | ) |
| Restaurant  level Cash Flow (EBITDA) |       | $                 | 610        |              | $          | 1,783              |       | $                        | (309       | ) | $ | (914 | ) |
| EBITDA as a %  of Revenue            |       | 2.4               | %          | 10.3              | %          | (4.1               | )%         | (38.9                    | )%         |
| Average  Number of Restaurants       |       | 12.3              |       | 7.0               |       | 3.3                |       | 2.0                      |       |
| Average  Annual Unit Volumes         |       | $                 | 2,122      |              | $          | 2,463              |       | $                        | 1,975      |   | $ | 1,174 |   |

 

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(a) Represents the two locations of Newport, KY andAventura (Miami), FL that have struggled financially since opening.  Negotiations have been ongoing since early inthe fourth quarter 2004 to resolve

 

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these issues.  Subsequent to yearend, we completed negotiations and entered into an agreement to terminate thelease of our Aventura, FL location and we closed this restaurant on February 24,2005.  Additionally, we completednegotiations and entered into an agreement with the landlord of the Newport, KYlocation and will close this restaurant on May 31, 2005.

 

***Long-Term Debt***

 

We are a highly leveraged company. Our long-termdebt of approximately $46 million at December 27, 2004 is held by fiveprincipal lenders.  We expect to payinterest on this debt of $4.0 million in 2005 and we expect to pay downprincipal by at least $4.0 million.   Wecurrently benefit from the historically low levels of interest rates.  If interest rates rise in 2005, ourannualized interest expense will increase by approximately $286,000 for eachone percentage point increase in short-term interest rates (as measured by LIBOR).As a result of the impact of our swap agreements, approximately 19% of ourloans are tied to variable interest.

 

In addition, we have interest rate swaps whose valueor obligation changes with the change in long-term interest rates.  Since it is our intention to hold these swapsuntil maturity, the impact of the increase in value or the liability isreflected primarily on our consolidatedbalance sheet.  Should we decide for appropriate businessreasons to liquidate the debt and/or the related swaps early, this increasedvalue or obligation, depending on when liquidated, would be triggered as anitem recorded in our income statement, and this amount could be material.  During 2004, we terminated one of ourinterest rate swaps and, as a result, recorded a gain in the amount of$178,000.

 

***Sale of Assets***

 

We consider selling operating or other assets fromtime to time, and we have an active program of reviewing our options andopportunities on a regular basis.  We mayenter into a transaction to sell non-strategic assets, or as part of a programto raise cash.  We may sell these assetsat either a gain or loss and this gain or loss could be material. Subsequent toyear end, we sold land held for sale in El Paso, Texas for approximately$700,000 at its adjusted book value, resulting in no significant gain or loss.

 

***Outlook 2005***

 

A number of factors serve as the basis for cautiousoptimism for 2005: (i) 2004 saw a strong economic rebound, which rebound andthe national economy show positive signs so far in early 2005; (ii) the TGI Friday’s,partnership with Atkins to deliver low-carb menu items continues to be verypromising as well as TGI Friday’s new and stronger advertising campaign; and(iii) we plan to open three or four new TGI Friday’s restaurants in 2005 in ourstrong markets of Southern California and Arizona. We expect our EBITDA to beapproximately $15.0 million to $17.0 million in 2005 (see table below).  This level of cash flow should allow us tomeet all of our obligations as they come due and to provide sufficient cashflow to pay our debt obligations of principal and interest, to comply with ourdebt covenants, to build three or four restaurants, and to provide our storeswith routine capital equipment replacement needs.

 

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| **Forecasted EBITDA Reconciliation:** | ** ** | **Forecasted Twelve Months  Ending December 26, 2005** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                            | ** ** | **(in millions)**                                           | ** ** |
| Net Income  (*)                       | ** ** | **$**                                                       | **2.3**    | ** ** |
| Add-Income  taxes                     | ** ** | **.2**                                                      | ** ** |
| •Interest  expense               | ** ** | **4.0**                                                     | ** ** |
| •Depreciation  and Amortization  | ** ** | **9.5**                                                     | ** ** |
| EBITDA                                | ** ** | **$**                                                       | **16.0**   | ** ** |

 

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*Before the impact of non-cash charges such as stock options expense or assetimpairment write downs in 2005, if any.

 

**Critical Accounting Policies**

 

The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States requires a company to make a number ofestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements.  Such estimatesand assumptions affect the reported amounts of revenues and expenses during thereporting period.  On an ongoing basis,we evaluate estimates and assumptions based upon historical experience andvarious other factors and circumstances. We believe our estimates and assumptions are reasonable in thecircumstances; however, actual results may differ from these estimates underdifferent future conditions.

 

We believe that the estimatesand assumptions that are most important to the portrayal of our financialcondition and results of operations, in that they require our most difficult,subjective or complex judgments form the basis for the accounting policiesdeemed to be most critical to our operations. These critical accounting policies relate to the valuation andamortizable lives of long-lived assets, goodwill, and other identifiableintangible assets, valuation of deferred tax assets, and reserves related toself-insurance for workers compensation and general liability:

 

(1)  We periodically perform asset impairmentanalysis of long-lived assets related to our restaurant locations, goodwill,and other identifiable intangible assets. We perform these tests whenever weexperience a “triggering” event, such as a decision to close a location or amajor change in a location’s operating environment, or other event that mightimpact our ability to recover our asset investment.  Also,we have a policy of reviewing the financial operations of our restaurantlocations on at least a quarterly basis. Locations that are not meeting expectations are identified and continueto be watched closely throughout the year. Primarily in the fourth quarter, we review actual results and analyzebudgets for the ensuing year.  If we deemthat a location’s results will continue to be below expectations, we analyzealternatives for its continued operation. At this time, we perform an asset impairment test.  If we determined that the asset’s fair valueis less than book and we will be unable to recover the value throughoperations, we record an impairment charge. Upon an event such as a formal decision for abandonment (restaurantclosure), we may record additional impairment of assets, including anallocation of goodwill. Any carryover basis of assets is depreciated over therespective remaining useful lives.

 

(2)  Periodically, we record (or reduce) thevaluation allowance against our deferred tax assets to the amount that is morelikely than not to be realized based upon recent past financial performance,tax reporting positions, and expectations of future taxable income. We expectto continue to record a full valuation allowance on any future tax benefitsuntil we sustain profitable operations.

 

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(3)  We use an actuarial based methodologyutilizing our historical experience factors to adjust periodicallyself-insurance reserves for workers compensation and general liability claimsand settlements. These estimates are adjusted based upon annual informationreceived in July of each year in connection with policy renewals.  Estimated costs for the following year areaccrued on a monthly basis, and progress against this estimate is re-evaluatedbased upon actual claims data each quarter.

 

(4) We use the method ofaccounting for employee stock options allowed under APB Opinion 25 and haveadopted the disclosure provisions of SFAS No.123, which require pro formadisclosure of the impact of using the fair value at date of grant method ofrecording stock-based employee compensation. In 2004, the Financial AccountingStandards Board (“SFAS”) issued Statement of Financial Accounting Standards123-revised 2004 (“SFAS 123R”)  Share-Based Payment” which replaces Statementof Financial Accounting Standards No. 123 (“SFAS 123”), Accounting forStock-Based Compensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accountingfor Stock Issued to Employees.” SFAS 123R requires the measurement of allemployee share-based payments to employees, including grants of employee stockoptions, using a fair-value-based method and the recording of such expense inour consolidated statements of income. The accounting provisions of SFAS 123Rare effective for reporting periods beginning after June 15, 2005.  Although we have not yet determined whetherthe adoption of SFAS 123R will result in amounts that are similar to thecurrent pro forma disclosures under SFAS 123, we are evaluating therequirements under SFAS 123R and expect the adoption to have a significantadverse impact on our consolidated statements of operations and net income pershare.

 

We believe estimates andassumptions related to these critical accounting policies are appropriate underthe circumstances; however, should future events or occurrences result inunanticipated consequences, there could be a material impact on our futurefinancial condition or results of operations.

 

**Results of Operations**

 

The following table setsforth, for the periods indicated, the percentages that certain items of incomeand expense bear to total revenue:

 
| ** **                          | ** ** | **Fiscal  Year Ended**      | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **December 27,  2004** | ** ** | **December 29,  2003** | ** ** | **December 30,  2002** | ** ** |
| ** **                          | ** ** | ** **                  | ** ** | **(as  restated)** | ** ** | **(as  restated)** | ** ** |
| Revenue                             |       | 100.0                       | %          | 100.0 | % | 100.0 | % |
| Restaurant operating expenses:      |       |                        |       |   |   |   |   |
| Cost of sales                       |       | 26.3                        |       | 26.9 |   | 27.8 |   |
| Payroll and benefits                |       | 30.8                        |       | 31.4 |   | 31.3 |   |
| Depreciation and amortization       |       | 3.8                         |       | 3.7 |   | 3.6 |   |
| Other operating expenses            |       | 31.8                        |       | 31.3 |   | 30.0 |   |
|                                |       |                        |       |   |   |   |   |
| Total restaurant operating expenses |       | 92.7                        |       | 93.3 |   | 92.8 |   |
|                                |       |                        |       |   |   |   |   |
| Amortization of intangibles         |       | 0.3                         |       | 0.3 |   | 0.2 |   |
| General and administrative expenses |       | 4.1                         |       | 4.0 |   | 4.1 |   |
| Preopening expenses                 |       | 0.1                         |       | 0.4 |   | 0.7 |   |
| New manager training expenses       |       | —                      |       | 0.1 |   | 0.2 |   |
| Impairment charges and other        |       | 0.6                         |       | 2.6 |   | 3.6 |   |
|                                |       |                        |       |   |   |   |   |
| Operating income (loss)             |       | 2.1                         |       | (0.6 | ) | (1.6 | ) |
| Gain from sale of assets            |       | —                      |       | (1.7 | ) | — |   |
| Interest expense and other, net     |       | 1.7                         |       | 2.0 |   | 1.8 |   |
| Income (loss) before income taxes   |       | 0.4                         | %          | (1.0 | )% | (3.4 | )% |

 

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**Fiscal 2004 Compared to Fiscal2003**

 

Revenue for the fiscal yearended December 27, 2004 was essentially flat, increasing by $200,000, or0.1%, to $224.7 million compared with $224.5 million for the fiscal year ended December 29,2003. This slight increase was primarily a result of (i) sales from the one newrestaurant in 2004, (ii) the full year of revenues from the three restaurantsopened in 2003, and (iii) same store sales increase of 2.4% in 2004 (versus a1.1% increase in 2003).  These increaseswere offset by revenues lost of approximately $6.5 million as a result of sold orclosed restaurants in 2004 from the revenue levels of these locations in2003.  Same-stores sales percentagesrepresent sales for stores that have been open for at least 18 months.  Revenue from alcoholic beverages accountedfor 25.0% of revenue in 2004 and 25.1% in 2003.

 

Cost of sales as a percentage of revenue decreased to26.3% in 2004 from 26.9% in 2003.  Thisdecrease was due primarily to lower contractual prices on meat, shrimp, andother seafood, partially offset by higher costs in poultry as a result ofsupply and demand, stronger supply chain buying efforts, and slight menupricing increases.  The decrease was alsoattributable to promotional driven product mix changes throughout the year.

 

Payrolland benefits consist of restaurant management salaries, hourly payrollexpenses, and other payroll related benefits, including bonus and health care.Payroll and benefit costs decreased slightly as a percentage of revenue to30.8% in 2004 from 31.4% in 2003.  Weexperienced increases related to a substantial increase in California’s StateUnemployment rate during 2004 (which was an across the board increase and was not related to ourclaims experience) and higher labor costs related to our recent Bamboo Clubopening (labor costs are higher in the initial four to six months ofoperation).  These increases were more than offset by a reduction in our group healthcosts combined with a slight reduction in labor costs related to laborefficiencies resulting from the maturation of newer Bamboo Club restaurants.

 

Depreciation and amortizationbefore income from restaurant operations includes depreciation of restaurantproperty and equipment and amortization of franchise fees and liquorlicenses.  Depreciation and amortizationincreased as a percentage of revenue to 3.8% in 2004 from 3.7% in 2003.  This increase was primarily a result ofdepreciation related to asset acquisitions for new stores and accelerateddepreciation of the assets of two California locations that we closed in2004.  The increase was partially offsetby the reduction in depreciation as a result of asset impairments recordedduring 2004 and 2003.

 

Other operating expensesinclude rent, real estate taxes, common area maintenance (CAM) charges,royalties and advertising, workers’ compensation and property insurance,maintenance, and utilities.   Otheroperating expenses increased by $1.2 million and as a percentage of revenue to31.8% in 2004 from 31.7% in 2003. The increase was principally due to (i)higher marketing fees of $600,000 paid to TGI Friday’s for the national TGIFriday’s advertising campaign (the fee was 3.5% of sales in 2004 versus 3.2% of sales in 2003) which consisted of seven 4-week flights in 2004versus five 4-week flights, (ii) increased occupancy expenses related to higherCAM charges, property taxes, and relatively higher lease costs for our BambooClub locations, and (iii) higher local marketing costs.

 

Depreciation and amortization after income fromrestaurant operations includes depreciation of corporate property and equipment,amortization of identifiable intangibles. Depreciation and amortizationremained constant as a percentage of revenue at 0.3% for both 2004 and 2003.

 

General and administrativeexpenses are those expenses associated with corporate and administrative functionsthat support new restaurant development and restaurant operations and provideadministrative, accounting, and management infrastructure.  These costs consist primarily of managementand staff salaries, employee benefits, travel, legal and professional fees, andtechnology support.  General andadministrative expenses increased to $9.2 million, or 4.1% of revenue, in 2004 from $9.0 million, or

 

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4.0% of revenue, in 2003.  We experienced increases related primarily tohigher legal costs and increases in technology support fees.  The increases were partially offset by lowersalaries and benefits resulting from a reduction in the number of employeesfrom a corporate wide restructuring in July 2004, and due to the slow downin new store openings during 2004.

 

Pre-opening expenses are costsincurred prior to opening a new restaurant and consist primarily of managersalaries and relocation and training costs. Historically, we have experiencedvariability in the amount and percentage of revenues attributable topre-opening expenses.  We typically incurthe most significant portion of pre-opening expenses associated with a givenrestaurant in the two months immediately preceding opening and in the month therestaurant opens. Pre-opening expenses were $260,000, or 0.1% of revenue, in2004 compared with $907,000, or 0.4% of revenue, in 2003. These decreases werethe result of fewer new store openings in 2004, one compared with five in 2003,and the timing of incurring the expenses related to these openings.

 

New manager training expensesare those costs incurred in training newly hired or promoted managers, as wellas those costs incurred to relocate those managers to permanent managementpositions. New manager training expenses were $50,000, or less than 0.1% ofrevenue, in 2004 compared with $195,000, or 0.1% of revenue, in 2003.  This decrease was primarily a result of fewernew store openings in 2004 compared with 2003.

 

In 2004, the impairmentcharges and other account included the write-off or write-down of assetimpairments of certain leasehold improvements, equipment, other operatingassets, real estate held for sale, and lease termination fees to cancel threeleases. The account included (i) $200,000 primarily to reduce the carryingvalue of real property in El Paso, TX, which is currently under a salescontract, to its  estimated fair value,(ii) $310,000 in asset impairments, primarily related to an underperforming BambooClub location in Miami, FL, and (iii) $875,000 in one time lease cancellationcharges and other costs associated with the termination of three leases, one inColumbus, OH where we have not built a restaurant, and one each for Miami, FLand Newport, KY Bamboo Club locations.

 

Interest expense and other, was approximately $3.8million, or 1.7% of revenue, in 2004 compared with $4.5 million, or 2.0% ofrevenue, in 2003.  This reduction wasprimarily attributable to lower average outstanding borrowings, as we paid downdebt principal in 2004, somewhat lower interest rates, and a one-time gain onthe termination of an interest rate swap of $178,000.

 

At December 27, 2004, we had approximately $13.0million of net operating loss carryforwards and tax credits available to offsetfuture book income and federal income taxes. As a result, we did not record anyincome tax expense in 2004.

 

**Fiscal 2003 Compared to Fiscal2002**

 

Revenue for the fiscal yearended December 29, 2003 increased by $4.3 million, or 2.0%, to $224.5million compared with $220.2 million for the fiscal year ended December 30,2002.  Of this increase, $8.4 million wasprimarily a result of opening five new restaurants in 2003 and the full year ofrevenues for the six restaurants opened in 2002.  This increase was offset by revenues lost ofapproximately $6.0 million as a result of the sale of three TGI Friday’s andthe closure of one Redfish restaurant. Same-store sales increased 1.1%, or $1.9 million, for fiscal 2003compared to an increase in same-store sales of 0.4% for 2002.  Same-stores sales percentages represent salesfor stores that have been open for at least 18 months.  Revenue from alcoholic beverages accountedfor 25.1% of revenue in 2003 and 24.4% in 2002.

 

Cost of sales as a percentage of revenue decreased to26.9% in 2003 from 27.8% in 2002.  Thisdecrease was due primarily to lower contractual prices on certain items such asmeat and seafood,

 

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stronger supply chain buying efforts, andslight menu pricing increases. The decrease was also attributable topromotional driven product mix changes.

 

Payroll and benefits consistof restaurant management salaries, hourly payroll expenses, and other payrollrelated benefits, including bonus and health care. Payroll and benefit costsincreased slightly as a percentage of revenue to 31.4% in 2003 from 31.3% in2002.  As a result of new bonus programsand improved restaurant performance, we experienced increases in bonus expenseduring 2003 compared with 2002. These increases were partially offset by lowerlabor costs related to labor efficiencies resulting from the maturation ofBamboo Club restaurants (labor costs of new restaurants are higher during theinitial four to six months of operation) and productivity gains at our TGI Friday’srestaurants.

 

Depreciation and amortizationbefore income from restaurant operations includes depreciation of restaurantproperty and equipment and amortization of franchise fees and liquorlicenses.  Depreciation and amortizationincreased as a percentage of revenue to 3.7% in 2003 from 3.6% in 2002.  This increase was primarily a result ofdepreciation related to asset acquisitions for new stores and accelerateddepreciation of the assets of a California location that we sold during thethird quarter of 2003.  The increase waspartially offset by the reduction in depreciation as a result of assetimpairments recorded during 2002 and 2003.

 

Other operating expenses, asrestated, include rent, real estate taxes, common area maintenance (CAM)charges, advertising, workers’ compensation and property insurance,maintenance, and utilities.   Otheroperating expenses increased by $4.2 million and as a percentage of revenue to31.2% in 2003 from 29.9% in 2002. The increase was principally due to (i)higher marketing fees of $1.0 million paid to TGI Friday’s for the nationalFriday’s advertising campaign, which consisted of five 4-week flights in 2003versus four 4-week flights in 2002, (ii) increased  occupancy expenses of $1.4 million related tohigher CAM charges, property taxes, and relatively higher lease costs for our Bamboo Club locations, (iii)higher utility costs of $700,000, and (iv) higher worker’s compensation andgeneral liability costs, primarily in California, which increased $1.6 millionover the prior year.

 

Depreciation and amortization after income fromrestaurant operations includes depreciation of corporate property and equipmentand amortization of identifiable intangibles. Depreciation and amortizationincreased as a percentage of revenue to 0.3% in 2003 from 0.2% in 2002.  The increase was primarily a result ofadditional depreciation related to new point-of-sale software we purchased inthe third quarter of 2002 and the amortization of franchise area goodwill.

 

General and administrative expensesare those expenses associated with corporate and administrative functions thatsupport new restaurant development and restaurant operations and provideadministrative, accounting, and management infrastructure.  These costs consist primarily of managementand staff salaries, employee benefits, travel, legal and professional fees, andtechnology support.  General andadministrative expenses decreased as a percentage of revenue to $8,977,000, or4.0% of revenue, in 2003 from $8,946,000, or 4.1% of revenue, in 2002.  We experienced increases related to higherlocal marketing costs, investor relations consulting fees, and legalexpenses.  The increases were partiallyoffset by lower salaries and benefits from a reduction in the number ofemployees, reduced travel as a result of the slow-down in new store openingsduring 2003, and decreases resulting from a focused cost-reduction effortimplemented in the fourth quarter of 2002.

 

Pre-opening expenses are costsincurred prior to opening a new restaurant and consist primarily of managersalaries and relocation and training costs. Historically, we have experiencedvariability in the amount and percentage of revenues attributable topre-opening expenses.  We typically incurthe most significant portion of pre-opening expenses associated with a givenrestaurant in the two months immediately preceding opening and in the month ofopening. Pre-opening expenses were $907,000, or 0.4% of revenue, in 2003 ascompared with $1,619,000, or 0.7% of revenue, in 2002. These decreases

 

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were the result of fewer new store openingsin 2003 (five) compared to 2002 (six) and the timing of incurring the expensesrelated to these openings.

 

New manager training expensesare those costs incurred in training newly hired or promoted managers, as wellas those costs incurred to relocate those managers to permanent managementpositions. New manager training expenses were $195,000, or 0.1% of revenue in2003 compared with $426,000, or 0.2% of revenue, in 2002.  This decrease was primarily a result of fewernew store openings in 2003 compared to 2002 and expenses incurred in 2002related to new stores opened in early 2003.

 

In 2003, the impairmentcharges and other account included the write-off or write-down of assetimpairments of certain leasehold improvements, equipment, and other operatingassets. The account included (i) $2,850,000 primarily to reduce the carrying valueof these assets on underperforming locations to their estimated fair value,(ii) $905,000 of goodwill and franchise area goodwill allocated to a closedRedfish location in Denver, Colorado, and two impaired locations, one of whichclosed in October  2004, (iii) $500,000 in lease cancellation charges andother costs associated with the closing of a TGI Friday’s in Salinas,California in early 2004, (iv) a reduction of $350,000 in the value of the landand building we hold for sale in El Paso, Texas, (v) a provision of $800,000for the termination of a management agreement under which we managed fourrestaurants in Northern California, (vi) a provision of $300,000 for theretirement on March 31, 2004 for our CEO, and (vii) a write-off of$200,000 for deferred financing fees associated with early refinancing of debt.

 

Interest expense and other, net was approximately $4.5million, or 2.0% of revenue, in 2003 compared with $4.0 million, or 1.8% ofrevenue, in 2002.  This increase wasprimarily attributable to slightly higher average outstanding borrowings,higher credit spreads due to increased leverage, and a prepayment penalty of$270,000 associated with early refinancing of debt. This increase was partiallyoffset by more favorable interest rates on our variable interest rate debt.During the years ended December 29, 2003 and December 30, 2002, wehad average outstanding borrowings of $53,600,000 and $54,200,000,respectively, with effective interest rates of 7.9% and 7.3%, respectively.

 

At December 29, 2003, we had approximately $13.7million of net operating loss carryforwards and tax credits available to offsetfuture book income and federal income taxes.

 

**Liquidity and Capital Resources**

 

Our primary use of funds overthe past five years has been for the acquisition of existing TGI Friday’srestaurants, the development of new TGI Friday’s restaurants, and theacquisition and development of the Redfish and Bamboo Club restaurants andconcepts.  These acquisitions werefinanced principally through a new stock rights offering to existingstockholders, the issuance of long-term debt, and internally generated cash.

 

At December 27, 2004, wehad long-term debt with five banks and financial institutions, including thecurrent portion of $3.9 million, which required principal and interest paymentsof approximately $7.9 million in 2005.

 

All of our loan agreements contain various financialcovenants that are generally measured at the end of each quarter.  Primarily, there are two key covenants wemust meet.  Several loan agreementsincorporate a fixed charge coverage test, which requires us to produce a levelof earnings before interest, taxes, depreciation, and amortization and otherunusual gains or losses (EBITDA) in excess of principal and interest under ourdebt obligations during rolling twelve month periods.  Other loan agreements modify this covenantfor items such as pre-opening costs and rent expense.  Many of our loan documents also limit theamount of long-term debt we can borrow based on trailing levels of EBITDA.  At December 27, 2004, we met all of thefinancial covenants for all debt agreements, as amended.

 

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Currently, we have no significant borrowingcapabilities under any of our debt agreements. Some of our financial covenants depend upon profitable operations andlimit the total amount of debt we can have outstanding.

 

We had a $2.5 million,one-year revolving line of credit with a bank which expired in December 2004.  Subsequent to December 27, 2004, weentered into negotiations for a one-year renewal of this line.  We have used this line to establish a $1.9million letter of credit with our workers’ compensation insurer, to guaranteepayment of claims, under our self insured program.

 

 We believe wewill remain in compliance with our current debt agreements, as amended, in 2004or will receive the necessary amendments, if needed, to our debt covenants. Webelieve that our current cash resources, additional debt financing commitments,sale of assets, and expected cash flows from operations will be sufficient tofund our general obligations and planned limited development through 2004.

 

We started construction on one TGI Friday’s duringlate 2004, for opening in the first half of 2005.  In addition, we are required to build twomore TGI Friday’s in 2005 under the terms of our development agreements.  We believe that our cash flow from operationsin 2005 will be sufficient to meet all of our capital obligations; however, wewill likely need to obtain capital to fund additional growth beyond 2005.  Potential sources of such capital includeselling assets, bank financing, strategic alliances, and additional offeringsof our equity or debt securities.  Wecannot provide assurance that such capital will be available from these orother potential sources, and the lack of capital could have a material adverseeffect on our business.

 

Net cash flows from operatingactivities were $13,184,000 in 2004, $7,267,000 in 2003, and  $9,195,000 in 2002.  Cash flows from operating activities werereduced by $5,601,000 for funds used to make principal payments on debt during2004.

 

Net cash used in investingactivities was $6,768,000 in 2004, $5,473,000 in 2003, and $18,578,000 in 2002,which we used primarily to fund property and equipment purchases for our newrestaurants and to acquire franchise rights and goodwill related to both thepurchase and opening of new restaurants. Funds used in investing activities were offset by cash received from theearly termination of our lease in Oakland, California in October 2004($847,000) and by the sale of assets of three restaurants in the SacramentoCalifornia area in 2003 ($3,773,000).

 

At December 27, 2004, ourcurrent liabilities exceeded our current assets by approximately $19,701,000,after the effect of the restatement, due in part to cash expended on our newrestaurant development requirements and because the restaurant businessreceives substantially immediate payment for sales, while payables related toinventories and other current liabilities normally carry longer payment terms,usually 15 to 30 days.  At December 27,2004, we had a cash balance of $5,593,000 and long-term debt of $46,083,000,including current portion of long-term debt of $3,851,000.  Monthly cash receipts have been and areexpected to be sufficient to pay all obligations as they become due.

 

Approximately $39,771,000 of this debt is term loanscomprised of notes payable to three lenders. The notes bear interest at rates ranging from 5.09 to 9.46% per annumand mature at various times over the next 11 years. The remainder of ourlong-term debt consists of notes payable to various lending institutions.  These notes bear interest at rates rangingfrom 5.21% to 10.6% and mature at various times over the next 10 years.

 

From time to time, we mayenter into interest rate swap agreements with certain financial institutionsfor the purpose of adjusting our ratio of fixed rate debt over a certain periodof time at varying notional amounts. At December 27, 2004, there wereapproximately $20.0 million in net notional amounts of interest rate swapagreements outstanding that carried a weighted average interest rate of 6.0%.The effective amount of interest we pay on the notional amounts of these swapagreements is calculated using 

 

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the interest rate of the swap against the notional amount of eachswap.  These swaps effectively adjust theratio of fixed rate debt on 70% of total outstanding debt.

 

We lease all of ourrestaurants under operating leases, with initial terms ranging from 10 to 20years, with various renewal options of 10 to 20 years.  Our future debt, lease, and purchaseobligations are summarized by year as follows (in thousands):

 

**Contractual Obligations andCommitments:**

 
| ** **               | ** ** | **Total** | ** ** | **Less than  one year** | ** ** | **One to  three  years** | ** ** | **Three to  five  years** | ** ** | **Greater  than   five years** | ** ** |
|--------------------------|------------|-----------|------------|-------------------------|------------|--------------------------|------------|---------------------------|------------|--------------------------------|------------|
| Debt Maturities          |       | $         | 46,083     |                    | $          | 3,851                    |       | $                         | 8,566      |                           | $          | 9,305 |   | $ | 24,361 |   |
| Minimum Lease Commitment |       | 131,702   |       | 12,349                  |       | 25,111                   |       | 23,570                    |       | 70,672                         |       |
| Purchase Commitments     |       | 9,100     |       | 9,100                   |       | —                   |       | —                    |       | —                         |       |
| Total                    |       | $         | 186,885    |                    | $          | 25,300                   |       | $                         | 33,677     |                           | $          | 32,875 |   | $ | 95,033 |   |

 

Minimum lease commitmentsrepresent operating leases on our restaurant locations. We have no otheroff-balance sheet financings. A default under a lease agreement could result indamages or the acceleration of amounts due under the lease. Total purchasecommitments include estimated construction costs for the three to four new TGIFriday’s restaurants we have contracted to open in 2005.

 

We believe that our currentresources and expected cash flows from operations will be sufficient to fundour capital needs and debt maturities during the next 12 months.  Prolonged future adverse geopolitical andeconomic conditions could have a material adverse effect on our financial capabilities.

 

**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

As of December 27, 2004,we were participating in three derivative financial instruments for which fairvalue disclosure is required under SFAS No. 133, as amended.  The fair value liability of the interest rateswap agreements discussed in Note 2 to the consolidated financial statementsincreased to $2,053,109 using “hedge accounting” under SFAS No. 133, asamended.

 

Ourmarket risk exposure is limited to interest rate risk associated with ourcredit instruments.  We incur interest onloans made at variable interest rates of 2.65 to 3.75% over LIBOR.  At December 27, 2004, we had outstandingborrowings on these loans of approximately $28,610,184.  Our net interest expense for 2004 was$3,794,000; a one percent variation on any of the variable rates would haveincreased or decreased our total interest expense by approximately $286,000 forthe year, not including the impact of our swaps.

 

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**ITEM 8.****                      ****FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

Reference is made to theconsolidated financial statements, the reports thereon, the notes thereto, andthe supplementary data commencing at page F-1 of this report, whichconsolidated financial statements, reports, notes, and data are incorporated byreference.

 

**ITEM 9.****           ****CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

 

Our previous auditors, KPMGLLP originally audited our consolidated balance sheet as of December 30,2002, and the related consolidated statements of operations, changes instockholders’ equity and comprehensive income (loss) and cash flows for theyear ended December 30, 2002. As a result of our restatement (see note 1to consolidated financial statements), it was necessary for KPMG to auditamounts recorded during the year ended December 30, 2002 and update theirreport on those financial statements. KPMG was unable to audit the restatements and provide consent insufficient time to allow us to meet our Form 10-K filing requirements. As aresult, we engaged the accounting firm of Mayer Hoffman McCann P.C., ourcurrent independent registered public accountants, to perform a re-audit of ourconsolidated balance sheet as of December 30, 2002, and the relatedconsolidated statements of operations, changes in stockholders’ equity andcomprehensive income (loss) and cash flows for the year ended December 30,2002.

 

**ITEM 9A.   CONTROLS ANDPROCEDURES**

 

Our Chief Executive Officerand Chief Financial Officer have reviewed and evaluated the effectiveness ofour disclosure controls and procedures, which included inquires made to certainother of our employees as of December 27, 2004. Based on theirevaluations, our Chief Executive Officer and Chief Financial Officer have eachconcluded that our disclosure controls and procedures are effective andsufficient to ensure that we record, process, summarize, and report informationrequired to be disclosed by us in our periodic reports filed under theSecurities Exchange Act within the time period specified by the Securities andExchange Commission’s rules and forms.

 

**ITEM 9B.   OTHER INFORMATION**

 

Not applicable.

 

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**PART III**

 

**ITEM 10.****               ****DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The information required bythis Item relating to our directors is incorporated by reference to our ProxyStatement to be filed for our 2005 Annual Meeting of Stockholders.  The information required by this Itemrelating to our executive officers is included in Item 1, “Business – ExecutiveOfficers.”

 

**ITEM11.****               ****EXECUTIVE COMPENSATION**

 

The information required bythis Item is incorporated by reference to our Proxy Statement to be filed forour 2005 Annual Meeting of Stockholders.

 

**ITEM 12.     SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

All of our equity basedcompensation plans have been adopted with stockholder approval. Other than thepreceding, the information required by this Item is incorporated by referenceto our Proxy Statement to be filed for our 2005 Annual Meeting of Stockholders.

 

**ITEM 13.****               ****CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

The information required bythis Item is incorporated by reference to our Proxy Statement to be filed forour 2005 Annual Meeting of Stockholders.

 

**ITEM 14.****               ****PRINCIPALACCOUNTANT FEES AND SERVICES**

 

The information required bythis Item is incorporated by reference to our Proxy Statement to be filed forour 2005 Annual Meeting of Stockholders.

 

**PART IV**

 

**ITEM 15.****               ****EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

 

(a)          Financial Statementsand Financial Statement Schedules.

 

(1)          Financial statementsare listed in the index to the consolidated financial statements on page F-1 ofthis Report.

 

(2)          No financial statementschedules are included because they are not applicable or are not required orthe information required to be set forth therein is included in theconsolidated financial statements or notes thereto.

 

(b)         Exhibits

 
| **Exhibit  Number** | ** ** | **Exhibit** | ** **                                                            |
|---------------------|------------|-------------|-----------------------------------------------------------------------|
|                | 3.1        |        | Certificate of Incorporation of the Company(1)                        |   |
|                | 3.2        |        | Certificate of Amendment of Restated  Certificate of Incorporation(l) |   |
|                | 3.3        |        | Amended and Restated Bylaws of the Company(1)                         |   |
|                | 3.4        |        | Certificate of Amendment of Restated  Certificate of Incorporation(4) |   |
|                | 4.1        |        | Sergio Zyman registration rights(12)                                  |   |

 

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| **Exhibit  Number** | ** ** | **Exhibit** | ** **                                                                                                                                                                                                                                                                                                                                                                                                  |
|---------------------|------------|-------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                | 10.1       |        | Company’s 1990 Stock Option Plan(2)                                                                                                                                                                                                                                                                                                                                                                    |   |
|                | 10.5       |        | Form of Franchise Agreement between the Company  and TGI Friday’s Inc.(3)                                                                                                                                                                                                                                                                                                                              |   |
|                | 10.8       |        | General Release and Retirement Separation Agreement  dated November 19, 2003 between the Company and Bart A. Brown, Jr.                                                                                                                                                                                                                                                                                |   |
|                | 10.9       |        | Development Agreement between TGI Friday’s Inc.  and Cornerstone Productions, Inc., a wholly owned subsidiary of the Company  dated March 15, 2004                                                                                                                                                                                                                                                |   |
|                | 10.10      |        | Development Agreement between TGI Friday’s Inc.  and Main St. California, Inc., a wholly owned subsidiary of the Company dated  March 15, 2004                                                                                                                                                                                                                                                    |   |
|                | 10.11      |        | First Amendment to Development Agreement dated February 17,  2005 between TGI Friday’s Inc. and Main St. California, Inc., a wholly owned  subsidiary of the Company                                                                                                                                                                                                                              |   |
|                | 10.12      |        | CA Development Incentive Agreement between Main  Street California, Inc. and TGI Friday’s Inc. dated March 25, 2004                                                                                                                                                                                                                                                                               |   |
|                | 10.13      |        | Promissory Note between the Company and CNL  Financial I, Inc.(5)                                                                                                                                                                                                                                                                                                                                           |   |
|                | 10.14      |        | Promissory Note between the Company and CNL  Financial I, Inc.(5)                                                                                                                                                                                                                                                                                                                                           |   |
|                | 10.15      |        | Promissory Note between the Company and CNL  Financial I, Inc.(5)                                                                                                                                                                                                                                                                                                                                           |   |
|                | 10.16      |        | 1995 Stock Option Plan(6)                                                                                                                                                                                                                                                                                                                                                                                   |   |
|                | 10.22      |        | Stock Option Agreement dated August 5,  1996, between the Company and John F. Antioco for 800,000 shares of Common  Stock(7)                                                                                                                                                                                                                                                                           |   |
|                | 10.22A     |        | Stock Option Agreement dated June 15,  1998, between the Company and John F. Antioco amending the Stock Option  Agreement dated August 5, 1996(7)                                                                                                                                                                                                                                                 |   |
|                | 10.23      |        | Stock Option Agreement dated December 16,  1996, between the Company and Bart A. Brown, Jr. for 250,000 shares of Common  Stock. (The Company issued three additional Stock Option Agreements that are  substantially identical in all material respects, except as to number of  shares. The four Stock Option Agreements give rights to purchase a total of  625,000 shares of Common Stock.(7)      |   |
|                | 10.23A     |        | Schedule of Stock Option Agreements  substantially identical to Exhibit 10.23(7)                                                                                                                                                                                                                                                                                                                       |   |
|                | 10.24      |        | Stock Option Agreement dated July 14,  1997, between the Company and Bart A. Brown, Jr. for 75,000 shares of Common  Stock. (The Company issued one additional Stock Option Agreement that is  substantially identical in all material respects, except as to number of  shares. The two Stock Option Agreements give rights to purchase a total of  175,000 shares of Common Stock.(7)                |   |
|                | 10.24A     |        | Schedule of Stock Option Agreements  substantially identical to Exhibit 10.24(7)                                                                                                                                                                                                                                                                                                                       |   |
|                | 10.25      |        | Stock Option Agreement dated June 15,  1998, between the Company and James Yeager for 15,000 shares of Common Stock.  (The Company issued two additional Stock Option Agreements that are  substantially identical in all material respects, except as to option holder  and number of shares. The three Stock Option Agreements give rights to  purchase a total of 50,000 shares of Common Stock.(7) |   |
|                | 10.25A     |        | Schedule of Stock Option Agreements  substantially identical to Exhibit 10.25(7)                                                                                                                                                                                                                                                                                                                       |   |
|                | 10.26      |        | Stock Option Agreement dated December 31,  1998, between the Company and Tim Rose for 10,000 shares of Common Stock.  (The Company issued one additional Stock Option Agreement that is  substantially identical in all material respects, except as to option holder  and number of shares. The two Stock Option Agreements give rights to purchase  a total of 160,000 shares of Common Stock.(7)    |   |
|                | 10.26A     |        | Schedule of Stock Option Agreements  substantially identical to Exhibit 10.26(7)                                                                                                                                                                                                                                                                                                                       |   |
|                | 10.27      |        | Registration Rights Agreement dated August 5,  1996, between the Company and John F. Antioco(8)                                                                                                                                                                                                                                                                                                        |   |
|                | 10.28      |        | 1999 Incentive Stock Plan.(9)                                                                                                                                                                                                                                                                                                                                                                               |   |
|                | 10.29      |        | Employment Agreement between the Company and  William G. Shrader dated November 19, 2004                                                                                                                                                                                                                                                                                                               |   |

 

45

----

 
| **Exhibit  Number** | ** ** | **Exhibit** | ** **                                                                                                                                                                  |
|---------------------|------------|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                | 10.30      |        | Employment Agreement between the Company and  Michael Garnreiter dated November 19, 2004                                                                               |   |
|                | 10.40      |        | 401(k) Profit Sharing Plan(10)                                                                                                                                              |   |
|                | 10.41      |        | Loan and Security Agreement dated January 31,  2001, between Bank of America, N.A., the Company, and certain subsidiaries of  the Company listed therein(11)           |   |
|                | 21         |        | List of Subsidiaries                                                                                                                                                        |   |
|                | 23.1       |        | Consent of Mayer Hoffman McCann P.C.                                                                                                                                        |   |
|                | 31.1       |        | Certification of President and Chief Executive  Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the  Securities Exchange Act of 1934, as amended   |   |
|                | 31.2       |        | Certification of the Chief Financial Officer  pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the  Securities Exchange Act of 1934, as amended             |   |
|                | 32.1       |        | Certification of President and Chief Executive  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 |   |
|                | 32.2       |        | Certification of the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002           |   |

 

----

(1)   Incorporated by reference to the Company’s Form10-K for the year ended December 30, 1991, filed with the Securities andExchange Commission on or about March 31, 1992.

(2)   Incorporated by reference to the Company’sRegistration Statement on Form S-1 (Registration No. 33-40993), which becameeffective in September 1991.

(3)   Incorporated by reference to the Company’s Form8-K filed with the Securities and Exchange Commission on or about April 15,1994.

(4)   Incorporated by reference to the Company’s Form8-K Report filed with the Commission in July 15, 2004.

(5)   Incorporated by reference to the Company’s Form10-K for the year ended December 30, 1996, filed with the Securities andExchange Commission on or about April 14, 1997.

(6)   Incorporated by reference to Company’s ProxyStatement for its 1995 Annual Meeting of Stockholders.

(7)   Incorporated by reference to the Company’sRegistration Statement on Form S-8 (Registration No. 333-78155), filed with theSecurities and Exchange Commission on May 10, 1999.

(8)   Incorporated by reference to the Company’sRegistration Statement on Form S-3 (Registration No. 333-78161) as declaredeffective on May 14, 1999.

(9)   Incorporated by reference to Company’sRegistration Statement on Form S-8 (Registration No. 333-89931), filed with theSecurities and Exchange Commission on October 29, 1999.

(10)Incorporated by reference to the Company’sRegistration Statement on Form S-8 (Registration No. 333-55100) filed with theSecurities and Exchange Commission on February 6, 2001.

(11)Incorporated by reference to the Company’s Form10-K for the year ended December 25, 2000, filed with the Securities andExchange Commission on March 29, 2001.

(12) Incorporated by reference to the Company's Form10-K for the year ended December 29, 2003, filed with the Securities andExchange Commission on March 23, 2004.

 

46

----

 

**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                     | MAIN STREET RESTAURANT GROUP, INC.  |
|--------------------------|------------------------------------------|
|                     |                                     |
|                     |                                     |
| Date: March 8, 2005 | By:                                      | /s/ William G. Shrader |   |
|                     |                                     | William G. Shrader |
|                     |                                     | Chief Executive Officer  and President |

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and onthe dates indicated.

 

 
| **Signature**          | ** ** | **Position**                               | ** ** | **Date**           |
|------------------------|------------|--------------------------------------------|------------|--------------------|
|                   |       |                                       |       |               |
| /s/ John F. Antioco    |       | Chairman of the Board                      |       | March 8, 2005 |
| John F. Antioco        |       |                                       |       |               |
|                   |       |                                       |       |               |
| /s/ William G. Shrader |       | Chief Executive Officer, President         |       | March 8, 2005 |
| William G. Shrader     |       | and Director (Principal Executive Officer) |       |               |
|                   |       |                                       |       |               |
| /s/ Bart A Brown Jr.   |       | Director                                   |       | March 8, 2005 |
| Bart A. Brown Jr.      |       |                                       |       |               |
|                   |       |                                       |       |               |
| /s/ Michael Garnreiter |       | Chief Financial Officer, Executive Vice    |       |               |
| Michael Garnreiter     |       | President and Treasurer (Principal         |       | March 8, 2005 |
|                   |       | Financial and Accounting Officer)          |       |               |
|                   |       |                                       |       |               |
| /s/ Kenda B. Gonzales  |       | Director                                   |       | March 8, 2005 |
| Kenda B. Gonzales      |       |                                       |       |               |
|                   |       |                                       |       |               |
| /s/ John C. Metz       |       | Director                                   |       | March 8, 2005 |
| John C. Metz           |       |                                       |       |               |
|                   |       |                                       |       |               |
| /s/ Sergio S. Zyman    |       | Director                                   |       | March 8, 2005 |
| Sergio S. Zyman        |       |                                       |       |               |
|                   |       |                                       |       |               |
| /s/ Wanda Williams     |       | Director                                   |       | March 8, 2005 |
| Wanda Williams         |       |                                       |       |               |

 

47

----

 

**MAIN STREETRESTAURANT GROUP, INC.**

 

INDEX TO CONSOLIDATEDFINANCIAL STATEMENTS

 
| Report of  Independent Registered Public Accounting Firm                                                                                                                                   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                       |   |
| Consolidated Balance Sheets  as of December 27, 2004 and December 29, 2003                                                                                                                 |   |
|                                                                                                                                                                                       |   |
| Consolidated  Statements of Operations for the fiscal years ended December 27, 2004,  December 29, 2003,  and December 30, 2002                                                            |   |
|                                                                                                                                                                                       |   |
| Consolidated  Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss)  for the  fiscal years ended December 27, 2004, December 29, 2003, and December 30,  2002 |   |
|                                                                                                                                                                                       |   |
| Consolidated  Statements of Cash Flows for the fiscal years ended December 27, 2004,  December 29, 2003,  and December 30, 2002                                                            |   |
|                                                                                                                                                                                       |   |
| Notes  to Consolidated Financial Statements                                                                                                                                                |   |

 

F-1

----

 

**REPORT OFINDEPENDEDNT REGISTERED**PUBLIC ACCOUNTING FIRM

** **

To the Stockholders

 

MAIN STREET RESTAURANTGROUP, INC..

 

Wehave audited the accompanying consolidated balance sheets of Main StreetRestaurant Group, Inc. and subsidiaries as of December 27, 2004 and December29, 2003, and the related consolidated statements of operations, changes instockholders’ equity and comprehensive income (loss) and cash flows for each ofthe three years in the period ended December 27, 2004.  These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

Weconducted our audits in accordance with auditing standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the consolidate financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe consolidated financial statements. An audit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Main StreetRestaurant Group, Inc. and subsidiaries as of December 27, 2004 and December29, 2003,  andthe results of their operations and their cash flows for each of the threeyears in the period ended December 27, 2004, in conformity with U.S. generallyaccepted accounting principles.

 

Asdiscussed in Note 1 of the consolidated financial statements, the December 29,2003 and December 30, 2002 consolidated financial statements have been restated.

 

 
| /s/  Mayer Hoffman McCann P.C. |   |
|--------------------------------|--------|
|                           |
| MAYER  HOFFMAN MCCANN P.C.     |
|                           |
| Phoenix,  Arizona              |
| March  3, 2005                 |

 

F-2

----

 

**MAINSTREET RESTAURANT GROUP, INC. AND SUBSIDIARIES**CONSOLIDATED BALANCE SHEETS(In Thousands, Except Par Value and Share Data)

 
| ** **                                                                                                                              | ** ** | **December 27,  2004** | ** ** | **December 29,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                                              | ** ** | ** **             | ** ** | **(as restated)**      | ** ** |
| ASSETS                                                                                                                                  |       |                   |       |                   |       |
| Current assets:                                                                                                                         |       |                   |       |                   |       |
| Cash and cash equivalents                                                                                                               |       | $                      | 5,593      |                   | $          | 4,600 |   |
| Accounts receivable                                                                                                                     |       | 1,208                  |       | 1,494                  |       |
| Inventories                                                                                                                             |       | 2,758                  |       | 2,762                  |       |
| Prepaid expenses                                                                                                                        |       | 477                    |       | 971                    |       |
| Total current assets                                                                                                                    |       | 10,036                 |       | 9,827                  |       |
| Property and equipment, net                                                                                                             |       | 66,444                 |       | 68,129                 |       |
| Other assets, net                                                                                                                       |       | 1,804                  |       | 2,218                  |       |
| Notes receivable, net                                                                                                                   |       | 1,212                  |       | 1,657                  |       |
| Goodwill                                                                                                                                |       | 21,255                 |       | 21,685                 |       |
| Franchise fees, net                                                                                                                     |       | 1,815                  |       | 1,999                  |       |
| Purchased franchise  territories, net                                                                                                   |       | 606                    |       | 692                    |       |
|                                                                                                                                    |       |                   |       |                   |       |
| Total assets                                                                                                                            |       | $                      | 103,172    |                   | $          | 106,207 |   |
|                                                                                                                                    |       |                   |       |                   |       |
| LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                              |       |                   |       |                   |       |
| Current liabilities:                                                                                                                    |       |                   |       |                   |       |
| Current portion of long-term  debt                                                                                                      |       | $                      | 3,851      |                   | $          | 3,815 |   |
| Accounts payable                                                                                                                        |       | 6,626                  |       | 6,408                  |       |
| Other accrued liabilities                                                                                                               |       | 19,260                 |       | 17,550                 |       |
| Total current liabilities                                                                                                               |       | 29,737                 |       | 27,773                 |       |
| Long-term debt, net of current  portion                                                                                                 |       | 42,232                 |       | 47,869                 |       |
| Other liabilities and deferred  credits                                                                                                 |       | 1,918                  |       | 2,441                  |       |
|                                                                                                                                    |       |                   |       |                   |       |
| Total liabilities                                                                                                                       |       | 73,887                 |       | 78,083                 |       |
|                                                                                                                                    |       |                   |       |                   |       |
| Commitments, contingencies and  subsequent events (see notes 7 and 9)                                                                   |       |                   |       |                   |       |
|                                                                                                                                    |       |                   |       |                   |       |
| Stockholders’ equity:                                                                                                              |       |                   |       |                   |       |
| Preferred stock, $.001 par  value, 2,000,000 shares authorized, no shares issued and outstanding in 2004  and 2003                      |       | —                 |       | —                 |       |
| Common stock, $.001 par value,  25,000,000 shares authorized, 14,642,000 and 14,642,000 shares issued and  outstanding in 2004 and 2003 |       | 15                     |       | 15                     |       |
| Additional paid-in capital                                                                                                              |       | 54,927                 |       | 54,927                 |       |
| Accumulated other comprehensive  loss                                                                                                   |       | (1,845                 | )          | (2,053                 | )          |
| Accumulated deficit                                                                                                                     |       | (23,812                | )          | (24,765                | )          |
| Total stockholders’ equity                                                                                                         |       | 29,285                 |       | 28,124                 |       |
| Total liabilities and  stockholders’ equity                                                                                        |       | $                      | 103,172    |                   | $          | 106,207 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-3

----

 

**MAINSTREET RESTAURANT GROUP, INC. AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OFOPERATIONS (In Thousands, Except Per Share Amounts)

 
| ** **                                      | ** ** | **Years Ended**        | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **December 27,  2004** | ** ** | **December 29,  2003**** ** | ** ** | **December 29,  2003** | ** ** |
|                                            |       |                   |       | **(as restated)** |   | **(as restated)** |   |
| Revenue                                         |       | $                      | 224,751    |   | $ | 224,494 |   | $ | 220,151 |   |
| Restaurant operating expenses                   |       |                   |       |   |   |   |   |
| Cost of sales                                   |       | 59,025                 |       | 60,299 |   | 61,270 |   |
| Payroll and benefits                            |       | 69,287                 |       | 70,415 |   | 68,997 |   |
| Depreciation and amortization                   |       | 8,591                  |       | 8,386 |   | 7,895 |   |
| Other operating expenses                        |       | 71,438                 |       | 70,257 |   | 66,085 |   |
|                                            |       |                   |       |   |   |   |   |
| Total restaurant operating  expenses            |       | 208,341                |       | 209,357 |   | 204,247 |   |
|                                            |       |                   |       |   |   |   |   |
| Other operating expenses and  income:           |       |                   |       |   |   |   |   |
| Amortization of intangible  assets              |       | 758                    |       | 606 |   | 461 |   |
| General and administrative  expenses            |       | 9,210                  |       | 8,977 |   | 8,946 |   |
| Pre-opening expenses                            |       | 260                    |       | 907 |   | 1,619 |   |
| New manager training expenses                   |       | 50                     |       | 195 |   | 426 |   |
| Impairment charges and other                    |       | 1,385                  |       | 5,906 |   | 7,943 |   |
| Operating income (loss)                         |       | 4,747                  |       | (1,454 | ) | (3,491 | ) |
| Gain on sale of assets                          |       | —                 |       | 3,831 |   | — |   |
| Interest expense and other, net                 |       | 3,794                  |       | 4,521 |   | 3,950 |   |
| Net income (loss) before income  taxes          |       | 953                    |       | (2,144 | ) | (7,441 | ) |
| Income tax(benefit)                             |       | —                 |       | — |   | 1,309 |   |
| Net income (loss)                               |       | $                      | 953        |   | $ | (2,144 | ) | $ | (8,750 | ) |
| Basic earnings per share:                       |       |                   |       |   |   |   |   |
| Net income (loss)                               |       | $                      | 0.07       |   | $ | (0.15 | ) | $ | (0.62 | ) |
| Diluted earnings per share:                     |       |                   |       |   |   |   |   |
| Net income (loss)                               |       | $                      | 0.07       |   | $ | (0. 15 | ) | $ | (0.62 | ) |
| Weighted average number of shares  outstanding: |       |                   |       |   |   |   |   |
| Basic                                           |       | 14,642                 |       | 14,179 |   | 14,105 |   |
| Diluted                                         |       | 14,649                 |       | 14,179 |   | 14,105 |   |

** **

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-4

----

 

**MAINSTREET RESTAURANT GROUP, INC. AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OFCHANGES IN STOCKHOLDERS’ EQUITY AND

COMPREHENSIVEINCOME (LOSS)

(InThousands)

 
| ** **                                          | ** ** | **Common Stock** | ** ** | ** **     | ** ** | ** **                       | ** ** | ** **               | ** ** | ** **                                 | ** ** |
|-----------------------------------------------------|------------|------------------|------------|----------------|------------|----------------------------------|------------|--------------------------|------------|--------------------------------------------|------------|
| ** **                                          | ** ** | **Shares**       | ** ** | **Par  Value** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other Comprehensive  Loss** | ** ** | **Total** | ** ** |
|                                                |       |             |       |           |       |                             |       |                     |       |                                       |       |   |   |
| BALANCES, December 31, 2001                         |       | 14,053           |       | 14             |       | 53,645                           |       | (13,250                  | )          | (202                                       | )          | 40,207 |   |
| Cumulative effect of  restatement                   |       | —           |       | —         |       | —                           |       | (794                     | )          | —                                     |       | (794 | ) |
| Shares issued in connection  with options exercised |       | 89               |       | —         |       | 282                              |       | —                   |       | —                                     |       | 282 |   |
| Comprehensive income (loss):                        |       |             |       |           |       |                             |       |                     |       |                                       |       |   |   |
| Unrealized loss on hedging  contract                |       | —           |       | —         |       | —                           |       | —                   |       | (2,302                                     | )          | (2,302 | ) |
|                                                |       |             |       |           |       |                             |       |                     |       |                                       |       |   |   |
| Net loss                                            |       | —           |       | —         |       | —                           |       | (8,750                   | )          | —                                     |       | (8,750 | ) |
| Comprehensive loss:                                 |       |             |       |           |       |                             |       |                     |       |                                       |       | (11,052 | ) |
|                                                |       |             |       |           |       |                             |       |                     |       |                                       |       |   |   |
| BALANCES, as restated, December  30, 2002           |       | 14,142           |       | 14             |       | 53,927                           |       | (22,621                  | )          | (2,504                                     | )          | 28,816 |   |
|                                                |       |             |       |           |       |                             |       |                     |       |                                       |       |   |   |
| Shares issued, common stock                         |       | 500              |       | 1              |       | 1,000                            |       | —                   |       | —                                     |       | 1,001 |   |
| Comprehensive income (loss):                        |       |             |       |           |       |                             |       |                     |       |                                       |       |   |   |
| Unrealized gain on hedging  contract                |       | —           |       | —         |       | —                           |       | —                   |       | 451                                        |       | 451 |   |
| Net loss                                            |       | —           |       | —         |       | —                           |       | (2,144                   | )          | —                                     |       | (2,144 | ) |
| Comprehensive loss:                                 |       |             |       |           |       |                             |       |                     |       |                                       |       | (1,693 | ) |
| BALANCES, as restated, December  29, 2003           |       | 14,642           |       | 15             |       | 54,927                           |       | (24,765                  | )          | (2,053                                     | )          | 28,124 |   |
| Shares issued, common stock                         |       | —           |       | —         |       | —                           |       |                     |       |                                       |       |   |   |
| Comprehensive income (loss):                        |       |             |       |           |       |                             |       |                     |       |                                       |       |   |   |
| Unrealized gain on hedging  contract           |       | —           |       | —         |       | —                           |       | —                   |       | 208                                        |       | 208 |   |
| Net income                                          |       | —           |       | —         |       | —                           |       | 953                      |       | —                                     |       | 953 |   |
| Comprehensive Income:                               |       |             |       |           |       |                             |       |                     |       |                                       |       | 1,161 |   |
| BALANCES, December 27, 2004                         |       | 14,642           |       | $              | 15         |                             | $          | 54,927                   |       | $                                          | (23,812    | ) | $ | (1,845 | ) | $ | 29,285 |   |
|                                                     |            |                  |            |                |            |                                  |            |                          |            |                                            |            |  |  |  |  |  |  |  |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

F-5

----

 

**MAINSTREET RESTAURANT GROUP, INC. AND SUBSIDIARIES**CONSOLIDATED STATEMENTSOF CASH FLOWS(In Thousands)
| ** **                                                                                | ** ** | **Years Ended**        | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                | ** ** | **December 27,  2004** | ** ** | **December 29,  2003** | ** ** | **December 30,  2002** | ** ** |
| ** **                                                                                | ** ** | ** **             | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                                    |       |                   |       |   |   |   |   |
| Net income (loss)                                                                         |       | $                      | 953        |   | $ | (2,144 | ) | $ | (8,750 | ) |
| Adjustments to reconcile net  income (loss) to net cash provided by operating activities: |       |                   |       |   |   |   |   |
| Depreciation and amortization                                                             |       | 9,349                  |       | 8,992 |   | 8,356 |   |
| Amortization of note receivable  discount                                                 |       | (54                    | )          | (22 | ) | — |   |
| (Gain) loss on sale of assets                                                             |       | 51                     |       | (3,831 | ) | — |   |
| Impairment charges and other                                                              |       | 1,385                  |       | 5,906 |   | 5,674 |   |
| Gain on settlement of interest  rate swap                                                 |       | (178                   | )          |   |   |   |   |
| Deferred income taxes                                                                     |       | —                 |       | — |   | 1,650 |   |
| Changes in assets and  liabilities:                                                       |       |                   |       |   |   |   |   |
| Accounts receivable                                                                       |       | 286                    |       | (390 | ) | 686 |   |
| Inventories                                                                               |       | 4                      |       | (55 | ) | (416 | ) |
| Prepaid expenses                                                                          |       | 494                    |       | 1,133 |   | (849 | ) |
| Other assets, net                                                                         |       | 238                    |       | 56 |   | (300 | ) |
| Accounts payable                                                                          |       | 218                    |       | (1,665 | ) | 737 |   |
| Other accrued liabilities                                                                 |       | 438                    |       | (713 | ) | 3,028 |   |
| Net cash provided by operating  activities                                                |       | 13,184                 |       | 7,267 |   | 9,195 |   |
|                                                                                      |       |                   |       |   |   |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                                    |       |                   |       |   |   |   |   |
| Additions to property and  equipment                                                      |       | (8,115                 | )          | (10,253 | ) | (18,548 | ) |
| Cash received from notes  receivable                                                      |       | 500                    |       | 325 |   | — |   |
| Cash paid to acquire franchise  rights and goodwill                                       |       | —                 |       | (50 | ) | (30 | ) |
| Cash received from the sale of  assets                                                    |       | —                 |       | 4,505 |   | — |   |
| Cash received from termination  of lease                                                  |       | 847                    |       | — |   | — |   |
| Net cash used by investing  activities                                                    |       | (6,768                 | )          | (5,473 | ) | (18,578 | ) |
| CASH FLOWS FROM FINANCING  ACTIVITIES                                                     |       |                   |       |   |   |   |   |
| Proceeds from sale of common  stock                                                       |       | —                 |       | 1,001 |   | — |   |
| Proceeds received on settlement  of interest rate swap                                    |       | 178                    |       | — |   | — |   |
| Proceeds received from the  exercise of stock options                                     |       | —                 |       | — |   | 282 |   |
| Long-term debt borrowings                                                                 |       | —                 |       | — |   | 9,465 |   |
| Principal payments on long-term  debt                                                     |       | (5,601                 | )          | (3,816 | ) | (4,209 | ) |
| Net cash provided (used) by  financing activities                                         |       | (5,423                 | )          | (2,815 | ) | 5,538 |   |
| NET CHANGE IN CASH AND CASH  EQUIVALENTS                                                  |       | 993                    |       | (1,021 | ) | (3,845 | ) |
|                                                                                      |       |                   |       |   |   |   |   |
| CASH AND CASH EQUIVALENTS,  BEGINNING                                                     |       | 4,600                  |       | 5,621 |   | 9,466 |   |
|                                                                                      |       |                   |       |   |   |   |   |
| CASH AND CASH EQUIVALENTS,  ENDING                                                        |       | $                      | 5,593      |   | $ | 4,600 |   | $ | 5,621 |   |
|                                                                                      |       |                   |       |   |   |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH  FLOW INFORMATION                                         |       |                   |       |   |   |   |   |
| Cash paid during the year for  interest                                                   |       | $                      | 3,938      |   | $ | 4,629 |   | $ | 4,139 |   |
| Cash paid during the year for  income taxes                                               |       | $                      | 59         |   | $ | 3 |   | $ | 118 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-6

----

 

1.     ORGANIZATIONAND BASIS OF PRESENTATION

 

Main Street Restaurant Group, Inc. is a Delawarecorporation engaged in the business of acquiring, developing, and operatingrestaurants.  We currently own 52 TGIFriday’s restaurants, 13 Bamboo Club restaurants, four Redfish Grill and Barrestaurants, and one Alice Cooper’stown restaurant.

 

*(a) Principles of Consolidation*

 

The consolidated financial statements include theaccounts of Main Street Restaurant Group, Inc. and our wholly ownedsubsidiaries.  All material intercompanytransactions have been eliminated in consolidation.  All references herein refer to our companyand our subsidiaries.

 

*(b) Fiscal Year*

 

We operate on a fiscal year that ends on the Mondayon or before December 31.

 

*(c) Use of Estimates*

 

The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States requires a company to make a number ofestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements.  Such estimatesand assumptions affect the reported amounts of revenues and expenses during thereporting period.  On an ongoing basis,we evaluate estimates and assumptions based upon historical experience andvarious other factors and circumstances. We believe our estimates and assumptions are reasonable in thecircumstances; however, actual results may differ from these estimates underdifferent future conditions.

 

We believe that the estimatesand assumptions that are most important to the portrayal of our financialcondition and results of operations, in that they require our most difficult,subjective, or complex judgments, form the basis for the accounting policiesdeemed to be most critical to our operations. These critical accounting policies relate to the valuation andamortizable lives of long-lived assets, goodwill, and other identifiableintangible assets, valuation of deferred tax assets, and reserves related toself-insurance for workers compensation and general liability:

 

(1)  We periodically perform asset impairmentanalysis of long-lived assets related to our restaurant locations, goodwill,and other identifiable intangible assets. We perform these tests whenever weexperience a “triggering” event, such as a decision to close a location or amajor change in a location’s operating environment, or other event that mightimpact our ability to recover our asset investment.  Also,we have a policy of reviewing the financial operations of our restaurantlocations on at least a quarterly basis. Locations that are not meeting expectations are identified and continueto be watched closely throughout the year. Primarily in the fourth quarter, we review actual results and analyzebudgets for the ensuing year.  If we deemthat a location’s results will continue to be below expectations, we analyzealternatives for its continued operation. At this time, we perform an asset impairment test.  If we determine that the asset’s fair valueis less than carrying value and we will be unable to recover the value throughoperations, we record an impairment charge. Upon an event such as a formal decision for abandonment (restaurantclosure), we may record additional impairment of assets, including anallocation of goodwill. Any carryover basis of assets is depreciated over therespective remaining useful lives.

 

(2)  Periodically, we record (or reduce) thevaluation allowance against our deferred tax assets to the amount that is morelikely than not to be realized based upon recent past financial performance,tax reporting positions, and expectations of future taxable income.  We expect to continue to record a fullvaluation allowance on any future tax benefits until we sustain profitableoperations.

 

F-7

----

 

(3)  We use an actuarial based methodologyutilizing our historical experience factors to adjust periodicallyself-insurance reserves for workers compensation and general liability claimsand settlements. These estimates are adjusted based upon annual informationreceived in July of each year in connection with policy renewals.  Estimated costs for the following year areaccrued on a monthly basis and progress against this estimate is re-evaluatedbased upon actual claims data each quarter.

 

(4)  We use the method of accounting for employeestock options under Accounting Principles Board (APB) Opinion 25 and haveadopted the pro forma disclosure provisions of Statement of FinancialAccounting Standards (SFAS) No. 123, which require disclosure of the impact ofusing the fair value at date of grant method of recording stock-based employeecompensation.

 

Webelieve estimates and assumptions related to these critical accounting policiesare appropriate under the circumstances; however, should future events oroccurrences result in unanticipated consequences, there could be a materialimpact on our future financial condition or results of operations.

 

*(d) Restatement of previously issued FinancialStatements*

 

Following a review of our accounting policy and inconsultation with our independent registered public accounting firm, wedetermined that it was appropriate to adjust our computation of straight-linerent expense and the related deferred rent liability.  As a result, we have restated our consolidatedfinancial statements for the fiscal years ended December 30, 2002 and December29, 2003 and the first three quarters of fiscal 2004. Historically, whenaccounting for leases with renewal options, rent expense has been recorded on astraight-line basis over the initial non-cancelable lease term with the termcommencing when actual rent payments began. Buildings and leasehold improvements on those properties are depreciatedover a period equal to the shorter of the term of the lease, including optionperiods provided for in the lease, or the useful life of the assets.  We have determined that we should recognizerent expense on a straight-line basis over the term of the lease includingoptional renewal periods where failure to exercise such options would result inan economic penalty and to be consistent with our conclusions with respect tothe depreciable lives of the related improvements to which the lease relates.

 

The cumulative effect of the restatement throughfiscal 2004 is an increase in deferred rent liability of approximately $1.2million. Retained earnings and stockholders’ equity at the end of fiscal 2004also decreased by approximately $1.2 million. There is no material net impact on any of our deferred taxaccounts.  Rent expense for fiscal years2004, 2003, and 2002 increased by $190,000, $178,000, and $173,000,respectively, and for each of the first three quarters of fiscal 2004, byapproximately $47,000.   Retainedearnings for fiscal year 2002 decreased by $621,000.  The restatement did not have any impact ondiluted earnings per share for 2004 and decreased diluted earnings per share by$0.01 per share for the fiscal years 2003 and 2002.  The restatement did not have any impact onour previously reported cash flows, sales or same-store restaurant sales, or onour compliance with any covenant under any of our debt instruments.

 

*(e) New Accounting Pronouncements*

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) recentlyenacted Statement of Financial Accounting Standards 123-revised 2004 (“SFAS123R”), “Share-Based Payment” which replaces Statement of Financial AccountingStandards No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation” andsupersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.”SFAS 123R requires the measurement of all employee share-based payments toemployees, including grants of employee stock options, using a fair-value-basedmethod and the recording

 

F-8

----

 

of such expense in our consolidated statementsof income. The accounting provisions of SFAS 123R are effective for reportingperiods beginning after June 15, 2005. We are required to adopt SFAS 123R inthe fourth quarter of fiscal 2005. The pro forma disclosures previouslypermitted under SFAS 123 no longer will be an alternative to financialstatement recognition. See Note 2 in our Notes to Consolidated FinancialStatements for the pro forma net income and net income per share amounts, forfiscal 2002 through fiscal 2004, as if we had used a fair-value-based methodsimilar to the methods required under SFAS 123R to measure compensation expensefor employee stock incentive awards. Although we have not yet determinedwhether the adoption of SFAS 123R will result in amounts that are similar tothe current pro forma disclosures under SFAS 123, we are evaluating the requirementsunder SFAS 123R and expect the adoption to have a significant adverse impact onour consolidated statements of operations and net income per share.

 

InDecember 2003, the Financial Accounting Standards Board (FASB) issuedInterpretation No. 46 (revised December 2003), *Consolidationof Variable Interest Entities, an interpretation of ARB No. 51*(FIN46).  FIN 46 replaces the earlier versionof this interpretation issued in January 2003. FIN 46 addresses the consolidation by business enterprises of variableinterest entities as defined. Application of FIN 46 is required in financialstatements of public entities that have interests in variable interest entitiesor potential variable interest entities commonly referred to as special-purposeentities for periods ending after December 15, 2003.  Application of FIN 46 to all other types ofentities is required in financial statements for periods ending after March 15,2004 with earlier application permitted if the original interpretation waspreviously adopted.  We adopted theoriginal interpretation and FIN 46 as of December 31, 2003 which did not have amaterial effect on our consolidated financial statements.

 

InApril 2003, the FASB issued SFAS No. 149, *“Amendment of Statement133 on Derivative Instruments and Hedging Activities,”* which isgenerally effective for contracts entered into or modified after June 30, 2003and for hedging relationships designated after June 30, 2003.  SFAS No. 149 clarifies under whatcircumstances a contract with an initial net investment meets thecharacteristic of a derivative as discussed in SFAS No. 133, clarifies when aderivative contains a financing component, amends the definition of “underlying”to conform it to the language used in FASB Interpretation No. 45, *Guarantor Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others* and amendscertain other existing pronouncements. We adopted SFAS No. 149 as of December 31, 2003 which did not have amaterial impact on our consolidated financial statements.

 

OnMay 15, 2003, the FASB issued SFAS No. 150, *Accounting for**Certain Financial Instruments with Characteristics of Both Liabilitiesand Equity*. The Statement requires issuers to classify asliabilities (or assets in some circumstance) three classes of freestandingfinancial instruments that embody obligations for the issuer.  Generally, the Statement is effective forfinancial instruments entered into or modified after May 31, 2003 and isotherwise effective at the beginning of the first interim period beginningafter June 15, 2003. We do not have any outstanding financial instrumentswithin the scope of the Statement and therefore the adoption of this statementon July 1, 2003, did not have a material effect on our consolidated financialstatements.

 

InDecember 2004, the FASB issued FASB 151, Inventory Cost, an amendment of ARBNo. 43, Chapter 4.  This Statement shallbe effective for financial statements for fiscal years beginning after June 15,2005.  This Statement amends the guidancein ARB No. 43, Chapter 4, “Inventory Pricing” to clarify the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial (spoilage).  We are evaluatingthe requirements under FASB 151 to determine the impact, if any, on our consolidatedfinancial statements.

 

F-9

----

 

2.     SIGNIFICANTACCOUNTING POLICIES AND PROCEDURES

 

The consolidated financial statements reflect theapplication of the following accounting policies:

 

*Cash and Cash Equivalents*

 

Cash and cash equivalentsinclude funds on hand, short-term money market investments, and certificate ofdeposit accounts with original maturities of 90 days or less.

 

*Revenue Recognition*

 

Our principal source of revenue is from customerdining transactions.  Revenue isrecognized at the time the meal is paid for by the customer, in the form ofcash or credit card.

 

*Deferred Gains*

 

Deferred gains on sale-leaseback transactions areaccreted to income as a reduction of rent expense over the related lease termsin accordance with SFAS No. 98, Accounting for Leases.

 

# ***ConsiderationReceived from Vendors***

# ** **

We record vendor rebates on products purchased by usas a reduction of cost of sales when the rebates are received.

 

*Inventories*

 

Inventories consist primarily of food, beverages,and supplies and are stated at the lower of cost, determined on a first-in,first-out basis (FIFO), or net realizable value.

 

*Fair Market Value of Financial Instruments*

 

The carrying value of cash equivalents, accountsreceivable, other assets, accounts payable, accrued liabilities, and otherliabilities approximate fair value due to the short-term nature of theseinstruments.  Fixed rate long-term debtis currently at rates similar to current quotations for similar debt.

 

*Property and Equipment*

 

Property and equipment are stated at cost anddepreciated on a straight-line basis over the estimated useful lives, whileleaseholds are amortized over the shorter of 20 years or the lease termincluding option periods, which have economic penalties, and consist of thefollowing (in thousands):

 

F-10

----

 
| ** **                                       | ** ** | **Useful Lives** | ** ** | **December  27,  2004** | ** ** | **December 29,  2003** | ** ** |
|--------------------------------------------------|------------|------------------|------------|------------------------------|------------|------------------------|------------|
|                                             |       | **(years)**      |       |                         |       | **(as restated)**      |       |
| Land                                             |       | —           |       | $                            | 534        |                   | $          | 534 |   |
| Land held for sale                               |       | —           |       | 653                          |       | 853                    |       |
| Building and leasehold improvements              |       | 4-20             |       | 66,017                       |       | 64,100                 |       |
| Kitchen equipment                                |       | 5-7              |       | 24,359                       |       | 23,556                 |       |
| Restaurant equipment                             |       | 5-10             |       | 8,160                        |       | 9,210                  |       |
| Smallwares and décor                        |       | 5-10             |       | 10,467                       |       | 7,932                  |       |
| Office equipment, software, and furniture        |       | 5-7              |       | 6,816                        |       | 6,660                  |       |
|                                             |       |             |       | 117,006                      |       | 112,845                |       |
| Less: Accumulated depreciation and  amortization |       |             |       | (51,026                      | )          | (44,736                | )          |
|                                             |       |             |       | 65,980                       |       | 68,109                 |       |
| Construction in progress                         |       |             |       | 464                          |       | 20                     |       |
| Total                                            |       |             |       | $                            | 66,444     |                   | $          | 68,129 |   |

 

Depreciation expense was$9,005,000 for 2004, $8,651,000 for 2003, and $8,038,000 for 2002.

 

Construction in progress (CIP) represents costsincurred by us during the development of future restaurant sites for fixturesand building improvements.  As a resultof lease cancellations of not yet built Bamboo Club locations (San Antonio,Texas, and Fort Worth, Texas), we wrote off construction in progress costs of$415,000 during 2002.  Construction inprogress for 2004 includes the costs incurred on construction of two of the newTGI Friday’s locations that we will open in 2005 and the costs associated witha remodel project of another TGI Friday’s location.

 

*Franchise Fees*

 

Franchise fees represent thevalue assigned to the franchise agreements in the regions acquired and to thelicenses to operate the restaurants. These agreements provide for an initialterm of 20 to 30 years, with two renewal terms of 10 years each. Franchise areagoodwill represents goodwill allocated to the geographic area for developingpurchased TGI Friday’s restaurants, and it qualifies as an intangible assetwith a determinable life. These costs are being amortized on a straight-linebasis over the life of the agreement and consist of the following (inthousands):

 
| ** **                       | ** ** | **Amortization  Period** | ** ** | **December 27,  2004** | ** ** | **December 29,  2003** | ** ** |
|----------------------------------|------------|--------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                       | ** ** | **(years)**              | ** ** | ** **             | ** ** | **(as restated)**      | ** ** |
| Purchased Franchise Territories  |       | 20                       |       | $                      | 719        |                   | $          | 769 |   |
| Franchise fees and license costs |       | 20-30                    |       | 3,023                  |       | 3,099                  |       |
| Less: Accumulated amortization   |       |                     |       | (1,321                 | )          | (1,177                 | )          |
| Total                            |       |                     |       | $                      | 2,421      |                   | $          | 2,691 |   |

 

F-11

----

 

*Goodwill*

 

We have recorded significant goodwill in conjunctionwith major acquisitions. During 2002, we adopted SFAS No. 142, *Goodwill and Other Intangible Assets*.  SFAS 142 eliminates the amortization of allexisting and newly acquired goodwill on a prospective basis and requirescompanies to assess goodwill impairment, at least annually, based on the fairvalue of the reporting unit.  We nolonger amortize goodwill.

 

 As of thedate of adoption, January 2002, we had unamortized goodwill of $25,149,000 thatwas subject to the transition provisions of SFAS Nos. 141 and 142.  Accumulated amortization related to goodwillwas $5,914,000 as of the date of adoption.

 

During 2002, we wrote off $1,160,000 of allocatedgoodwill associated with one closed location (Kansas City, MO) and two impairedlocations (Palm Desert, CA and Citrus Heights, CA).  After this goodwill write-off, at December 30,2002, we performed a valuation in accordance with SFAS No.142 for the purposeof determining the amount of goodwill impairment.  Based on the results of the valuation, noadditional impairment was required. Additionally, during 2002, we reclassified $994,000 of goodwill topurchased franchise territories, which is classified as an intangible assetthat requires amortization under SFAS No.142. Purchased franchise territories represents theestimated value we paid to acquire the franchise rights to develop restaurantsin certain locations, at the date of original purchase.  As a result of these transactions, goodwillwas $22,995,000 at the end of 2002.

 

During 2003, we wrote off$1,310,000 in allocated goodwill associated with one closed Redfish Grill andBar (Denver, CO), one closed TGI Friday’s location (sale of Sacramento, CA),one impaired Bamboo Club location (Newport, KY), and one TGI Friday’s locationthat closed in October 2004 (Salinas, CA). As a result of these transactions, goodwill was $21,685,000 at the endof 2003. At December 29, 2003, we performed a valuation in accordance with SFASNo.142 for the purpose of determining the amount of goodwill impairment.  Based on the results of the valuation, noadditional impairment was required.

 

During 2004, we wrote off $430,000 in allocatedgoodwill associated with the closure of our Oakland, CA TGI Friday’s, where weelected not to renew a lease. As a result of this transaction, goodwill was$21,255,000 at the end of 2004.  We alsowrote off $50,000 of the purchased franchise territory related to the closureof this location.  At December 27, 2004,we performed a valuation in accordance with SFAS No.142 for the purpose ofdetermining the amount of goodwill impairment. Based on the results of the valuation, no additional impairment wasrequired.

 
| **Goodwill Allocated to Areas**                       | ** ** | **December 27,  2004** | ** ** | **December 29,  2003** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | ** **             | ** ** | **(as restated)**      | ** ** |
| Acquisition of California TGI Friday’s           |       | $                      | 9,460      |                   | $          | 9,890 |   |
| Acquisition of Midwest and Arizona TGI  Friday’s |       | 1,495                  |       | 1,495                  |       |
| Acquisition of Redfish                                |       | 300                    |       | 300                    |       |
| Acquisition of Bamboo Club                            |       | 10,000                 |       | 10,000                 |       |
| Total                                                 |       | $                      | 21,255     |                   | $          | 21,685 |   |

 

*Other Accrued Liabilities*

 

Other accrued liabilities consisted of the following(in thousands):

 

F-12

----

 
| ** **                     | ** ** | **December 27,  2004** | ** ** | **December 29,  2003** | ** ** |
|--------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                     | ** ** | ** **             | ** ** | **(as restated)**      | ** ** |
|                           |       |                   |       |                   |       |
| Accrued payroll                |       | $                      | 3,404      |                   | $          | 4,033 |   |
| Accrued property and sales tax |       | 2,085                  |       | 1,968                  |       |
| Accrued insurance              |       | 766                    |       | —                 |       |
| Accrued rent                   |       | 6,112                  |       | 5,171                  |       |
| Gift certificate liability     |       | 1,636                  |       | 1,504                  |       |
| Lease Termination Fees         |       | 2,175                  |       | 1,725                  |       |
| Royalty and Marketing Fees     |       | 1,265                  |       | 1,237                  |       |
| Other accrued liabilities      |       | 1,817                  |       | 1,912                  |       |
| Total                          |       | $                      | 19,260     |                   | $          | 17,550 |   |

 

*Income Taxes*

 

We utilize the asset and liability method ofaccounting for income taxes.  Under theasset and liability method, deferred taxes are provided based on temporarydifferences between the financial reporting basis and the tax basis of ourassets and liabilities, using enacted tax rates in the years in which thedifferences are expected to reverse. Deferred tax assets are reviewed periodically for recoverability andvaluation allowances are provided as necessary.

 

*Earnings (Loss) Per Share*

 

Basic earnings (loss) pershare (“EPS”) iscomputed by dividing earnings (loss) available to common stockholders by theweighted average number of shares outstanding for the period.  Diluted earnings (loss) per share reflectsthe potential dilution that could occur if securities or contracts to issuecommon stock were exercised or converted to stock or resulted in the issuanceof stock that then shared in our earnings or losses.

 

For the years ended December 29, 2003 and December30, 2002, the assumed exercise of outstanding stock options and warrants hasbeen excluded from the calculations of diluted net loss per share as theireffect is anti-dilutive.

 

We have calculated EPS in accordance with SFAS No.128, *Earnings Per Share*.The following table sets forth basic and diluted EPS computations for the yearsended December 27, 2004, December 29, 2003, and December 30, 2002 (inthousands, except per share amounts):

 

F-13

----

 

 
| ** **                               | ** ** | **2004**                    | ** ** | **2003**          | ** ** | **2002**               | ** ** |
|------------------------------------------|------------|-----------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                               | ** ** | ** **                  | ** ** | **(as restated)** | ** ** | **(as restated)**      | ** ** |
| ** **                               | ** ** | **Per  Share  Net  Income** | ** ** | **Shares**        | ** ** | **Per  Share  Amount** | ** ** | **Per  Share  Net  Loss** | ** ** | **Shares** | ** ** | **Per  Share  Amount** | ** ** | **Per  Share  Net  Loss** | ** ** | **Shares** | ** ** | **Per  Share  Amount** | ** ** |
|                                     |       |                        |       |              |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic EPS                                |       | $                           | 953        |              | 14,642     |                   | $          | 0.07 |   | $ | (2,144 | ) | 14,179 |   | $ | (0.15 | ) | $ | (8,750 | ) | 14,105 |   | $ | (0.62 | ) |
| Effect of stock options and warrants     |       | —                      |       | 7                 |       | —                 |       | — |   | 1 |   | — |   | — |   | 594 |   | — |   |
| Anti-dilutive stock options and warrants |       | —                      |       | —            |       | —                 |       | — |   | (1 | ) | — |   | — |   | (594 | ) | — |   |
| Diluted EPS                              |       | $                           | 953        |              | 14,649     |                   | $          | 0.07 |   | $ | (2,144 | ) | 14,179 |   | $ | (0.15 | ) | $ | (8,750 | ) | 14,105 |   | $ | (0.62 | ) |

* *

*Segment Reporting*

* *

We have three operating segments that are managedbased on our restaurant concepts, TGI Friday’s, Bamboo Club, Redfish, and AliceCooper’stown. SFAS No. 131 allows for aggregation of similar operating segmentsinto a single reportable operating segment if the components are consideredsimilar under certain criteria.  Therestaurants operate in the U.S. within the casual dining industry, providingsimilar products to similar customers. The restaurants also possess similar pricing structures, resulting insimilar long-term expected financial performance characteristics.  Revenues from external customers are derivedprincipally from food and beverage sales. We do not rely on any major customers as a source of revenue. As aresult of the foregoing, we believe that our restaurants meet the criteriasupporting aggregation of all restaurants into one reporting unit.

 

However,because of each brands age and relative business maturity, and because ofdiffering levels of marketing and brand recognition, each brand currently hassomewhat different economic results. Also, we do not allocate any cost of capital or general andadministrative cost directly to the restaurants.

 

Thefollowing table reflects TGI Friday’s and Bamboo Club brand financial data forthe year ended December 27, 2004 (dollar amounts in thousands):

 
| ** **                         | ** ** | **TGI Friday’s** | ** ** | **Bamboo Club** | ** ** |
|------------------------------------|------------|-----------------------|------------|-----------------|------------|
| Brand Revenues                     |       | $                     | 187,546    |            | $          | 26,106 |   |
| Restaurant Operating Profit (loss) |       | $                     | 17,792     |            | $          | (1,129 | ) |
| Average Number of Restaurants      |       | 53.0                  |       | 12.3            |       |
| Average Annual Unit Volumes        |       | $                     | 3,539      |            | $          | 2,122 |   |

 

F-14

----

 

*Stock-Based Compensation Plans*

 

SFAS No.123, *Accounting for Stock-BasedCompensation*, was issued by the FASB in 1995 and, if fully adopted,changed the methods for recognition of cost on plans similar to those of ourcompany.  Adoption of SFAS No. 123 wasoptional; however, pro forma disclosures as if we had adopted the costrecognition method are required.  Hadcompensation cost for stock options awarded under these plans been determinedconsistent with SFAS No. 123, our net income (loss) and EPS would havereflected the following pro forma amounts:

 
| ** **                                                                                                               | ** ** | **December 27,  2004**                       | ** ** | **December 29,  2003** | ** ** | **December 30,  2002** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                               | ** ** | ** **                                   | ** ** | **(as restated)**      | ** ** | **(as restated)**      | ** ** |
| ** **                                                                                                               | ** ** | **(In Thousands, Except Per Share Amounts)** | ** ** |
| Net Income (loss) as reported                                                                                            |       | $                                            | 953        |                   | $          | (2,144                 | )          | $ | (8,750 | ) |
| Employee stock compensation expense  included in net income (loss), as reported Pro Forma Employee Compensation  Expense |       | $                                            | (731       | )                      | $          | (944                   | )          | $ | (1,047 | ) |
| Pro Forma net income (loss)                                                                                              |       | $                                            | 222        |                   | $          | (3,088                 | )          | $ | (9,797 | ) |
|                                                                                                                     |       |                                         |       |                   |       |                   |       |
| Earnings (loss) per share:                                                                                               |       |                                         |       |                   |       |                   |       |
| Shares                                                                                                                   |       | 14,649                                       |       | 14,179                 |       | 14,105                 |       |
| As Reported-basic and diluted                                                                                            |       | $                                            | 0.07       |                   | $          | (0.15                  | )          | $ | (0.62 | ) |
| Pro Forma-basic and diluted                                                                                              |       | $                                            | 0.02       |                   | $          | (0.21                  | )          | $ | (0.69 | ) |

 

The weighted average fair value at the date of grantfor options granted during fiscal 2004, 2003, and 2002 were estimated using theBlack-Scholes option pricing model with the following assumptions: weightedaverage risk-free interest rate of 3.03%, 3.00%, and 2.73%, respectively;weighted average volatility of 68.94%, 65.6%, and 53.7%, respectively; averagelife of the option of three years, four years, and four years, respectively;and weighted average dividend yield of 0.0% in all years.

 

Details regarding the options outstanding as ofDecember 27, 2004 are as follows:

 

F-15

----

 
| ** **                  | ** ** | **Outstanding**       | ** ** | **Exercisable**                                     | ** ** |
|-----------------------------|------------|-----------------------|------------|-----------------------------------------------------|------------|
| **Range of Exercise Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $1.67 - $2.75               |       | 1,739,500             |       | 4.56 years                                          |       | $ | 2.17 |   | 1,390,512 |   | $ | 2.18 |   |
| $2.76 - $4.00               |       | 1,242,918             |       | 4.91 years                                          |       | $ | 3.35 |   | 1,228,751 |   | $ | 3.35 |   |
| $4.01 - $6.01               |       | 328,083               |       | 7.40 years                                          |       | $ | 4.78 |   | 220,162 |   | $ | 4.77 |   |
| Total                       |       | 3,310,501             |       |                                                |       |   |   | 2,839,425 |   |   |   |

 

*Derivative Financial Instruments*

 

We have only limited involvement with derivativefinancial instruments and do not use them for trading purposes.  We utilize an interest rate swap agreement tohedge the effects of fluctuations in interest rates related to one of ourlong-term debt instruments.  The interestrate swap agreement meets the criteria for cash flow hedge accounting.  Amounts receivable or payable due to settlementof the interest rate swap agreement are recognized as interest expense on amonthly basis.  A mark-to-marketadjustment is recorded as a component of stockholders’ equity, net of taxes, toreflect the fair value of the interest rate swap agreement.  We discontinue hedge accounting prospectivelyif it is determined that the derivative is no longer effective.

 

In conjunction with the Bankof America development facility, we have an interest rate swap agreement withBank of America, which fixes our base interest rate at 6.26% per annum on a notionalamount of $12,500,000 from July 2002 through June 2014.  The swap qualifies as a cash flow hedge inaccordance with SFAS No. 133, as amended. On a periodic basis, we adjust thefair market value of the swap on the consolidated balance sheet and offset theamount of the change to other comprehensive income (loss).  As of December 27, 2004 and December 29,2003, the fair value of the hedge resulted in a liability of $1,162,473 and$1,471,893, respectively.

 

We have a second interestrate swap agreement with Bank of America. This swap agreement effectively fixes our interest rate at 5.65% perannum (plus credit spread) on a notional amount of $10,700,000 from May 2002through May 2012.  The swap qualifies asa cash flow hedge in accordance with SFAS No. 133, as amended. On a periodicbasis, we adjust the fair market value of the swap on the consolidated balancesheet and offset the amount of the change to other comprehensive income(loss).  As of December 27, 2004 andDecember 29, 2003, the fair value of the hedge resulted in a liability of $682,569and $911,798, respectively.

 

We also had a third interestrate swap agreement with Bank of America on a note held by CNL Funding with aremaining unpaid balance of $5,516,000. The interest rate on the note, 9.457%, was the same as the interest rateto be received under the interest rate swap agreement.   On a quarterly basis, we adjusted the fairmarket value of the swap on the consolidated balance sheet and offset theamount of the change to other comprehensive income (loss).  As of December 29, 2003, the fair value ofthe hedge resulted in an asset of $330,582. During the period ended December27, 2004, we terminated this interest rate swap agreement and recorded a gainof $178,000.

 

F-16

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| **Comprehensive Income (Loss)**                                                                                                      | ** ** | **December 27,  2004** | ** ** | **December 29,  2003** | ** ** | **December 30,  2002** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
|                                                                                                                                 |       |                   |       | **(as restated)**      |       | **(as restated)**      |       |
| Net Income (loss)                                                                                                                    |       | $                      | 953        |                   | $          | (2,144                 | )          | (8,750 | ) |
| Other comprehensive income (loss), for the periods  ended December 27, 2004, December 29, 2003, and December 30, 2002,  respectively |       | 208                    |       | 451                    |       | (2,302                 | )          |
| Comprehensive income (loss)                                                                                                          |       | $                      | 1,161      |                   | $          | (1,693                 | )          | $ | (11,052 | ) |
|                                                                                                                                      |            |                        |            |                        |            |                        |            |  |  |  |

 

*Accounting for Long-Lived Assets and Impairment Charges*

 

Long-lived assets are reviewed for impairmentwhenever events or circumstances indicate that the carrying amount of the assetmay not be recoverable.  If the sum ofthe expected future cash flows (undiscounted and without interest charges) froman asset to be held and used in operations is less than the carrying value ofthe asset, an impairment loss must be recognized in the amount of thedifference between the carrying value and the fair value of the assets.

 

We have a policy of reviewing the financialoperations of our restaurant locations on at least a quarterly basis.  Locations that are not meeting expectationsare identified and continue to be monitored closely throughout the year.  Primarily in the fourth quarter, we reviewactual results and budgets for the ensuing year are analyzed.  If we deem that a location’s results willcontinue to be below expectations, we consider alternatives for its continuedoperation.  At that time, we performasset impairment testing.  If it isdetermined that the fair value of an asset is greater than its carrying value,an impairment charge is recorded.  Upon atriggering event such as a formal decision for abandonment (restaurantclosure), we may record additional impairment of assets, including anallocation of goodwill. Any carryover basis of assets is depreciated over therespective remaining useful lives.

 

Fair value of assets is determined primarily on thelikelihood of future use of the assets through operations or by the value thatcould be received for the asset if sold.

 

Other charges include write-offs of allocatedgoodwill, severance costs, lease and contract termination fees, professionalservice costs, and settlement of litigation. During fiscal years 2004, 2003,and 200, we recorded asset impairment charges and other as follows (inthousands):

 

F-17

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| ** **                                                   | ** ** | **December 27,  2004** | ** ** | **December 29,  2003** | ** ** | **December 30,  2002** | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
|                                                         |       |                   |       |                   |       |                   |       |
| Long-lived asset impairments and other                       |       | $                      | 310        |                   | $          | 3,051                  |       | $ | 4,323 |   |
| Write-off of goodwill allocated to closed  orimpaired stores |       | —                 |       | 905                    |       | 1,160                  |       |
| Provision for severance.                                     |       | —                 |       | 300                    |       | —                 |       |
| Lease cancellation charges                                   |       | 875                    |       | 500                    |       | 2,060                  |       |
| Impairment of receivables (Management  Agreement)            |       | —                 |       | 800                    |       | —                 |       |
| Write-down of land (El Paso, Texas)                          |       | 200                    |       | 350                    |       | 400                    |       |
| Total impairment charges and other                           |       | $                      | 1,385      |                   | $          | 5,906                  |       | $ | 7,943 |   |

 

The long-lived asset impairment amount in the tableabove represents the net book value of the fixed assets that will not berecovered through regular operations, computed on a discounted cash flowbasis.  The amount in 2004 isattributable primarily to the impairment of one Bamboo Club location.  The amount in 2003 is attributable primarilyto impairments of two Bamboo Club locations and the closure of one Redfishlocation.  The amount in 2002 isattributable primarily of impairments related to six TGI Friday’s locations;three not yet built Bamboo Club locations; and one Redfish location.

 

Valuation Reserves

 

Valuation reserves for the years ended December 27,2004, December 29, 2003, and December 30, 2002, consist of the following:

 
| ** **                                | ** ** | **Balance at  Beginning of  Period** | ** ** | **Expense  Recorded** | ** ** | **Payments  Made** | ** ** | **Balance at  End of  Period** | ** **  |
|-------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|--------------------|------------|--------------------------------|-------------|
| Reserve for legal settlement losses:      |       |                                 |       |                  |       |               |       |                           |        |
| Year ended December 27, 2004              |       | $                                    | —     |                  | $          | —             |       | $                              | —      |   | $ | — |   |
| Year ended December 29, 2003              |       | $                                    | —     |                  | $          | —             |       | $                              | —      |   | $ | — |   |
| Year ended December 30, 2002              |       | $                                    | 34,000     |                  | $          | (30,000            | )          | $                              | (4,000      | ) | $ | — |   |
|                                      |       |                                 |       |                  |       |               |       |                           |        |
| Insurance and claims reserves (prepaids): |       |                                 |       |                  |       |               |       |                           |        |
| Year ended December 27, 2004              |       | $                                    | (73,108    | )                     | $          | 5,992,668          |       | $                              | (5,153,298  | ) | $ | 766,262 |   |
| Year ended December 29, 2003              |       | $                                    | 1,415,300  |                  | $          | 6,694,400          |       | $                              | (8,182,808  | ) | $ | (73,108 | ) |
| Year ended December 30, 2002              |       | $                                    | 2,616,300  |                  | $          | 9,629,935          |       | $                              | (10,830,935 | ) | $ | 1,415,300 |   |

 

F-18

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3.               INCOME TAXES

 

Income tax expense (benefit) consists of thefollowing (in thousands):

 
| ** **                    | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|-------------------------------|------------|-------------|------------|--------------|------------|-----------|------------|
| Year ended December 27, 2004: |       |        |       |         |       |      |       |
| U.S. Federal                  |       | $           | —     |         | $          | —    |       | $ | — |   |
| State and local               |       | —      |       | —       |       | —    |       |
|                          |       | $           | —     |         | $          | —    |       | $ | — |   |
| Year ended December 29, 2003: |       |        |       |         |       |      |       |
| U.S. Federal                  |       | $           | —     |         | $          | —    |       | $ | —— |   |
| State and local               |       | —      |       | —       |       | —    |       |
|                          |       | $           | —     |         | $          | —    |       | $ | — |   |
| Year ended December 30, 2002: |       |        |       |         |       |      |       |
| U.S. Federal                  |       | $           | (341       | )            | $          | 1,536     |       | $ | 1,195 |   |
| State and local               |       | —      |       | 114          |       | 114       |       |
|                          |       | $           | (341       | )            | $          | 1,650     |       | $ | 1,309 |   |

 

Deferred income taxes arise due to differences inthe treatment of income and expense items for financial reporting and incometax purposes.  In the current year, wegenerated a net operating loss.  Theeffect of temporary differences and carryforwards that gave rise to deferredtax balances at December 27, 2004 and December 29, 2003, were as follows (inthousands):

 
| **Net Deferred Tax Assets/(Liabilities)**                | ** ** | **December 27, 2004** | ** ** | **December 29, 2003** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | ** **            | ** ** | **(as restated)**     | ** ** |
| ** **                                               | ** ** | **(In Thousands)**    | ** ** |
| Temporary differences:                                   |       |                  |       |                  |       |
| Basis differences in investments                         |       | $                     | 60         |                  | $          | 558 |   |
| Basis differences in depreciable and  amortizable assets |       | (5,403                | )          | (4,709                | )          |
| Provision for estimated expenses                         |       | 5,321                 |       | 2,373                 |       |
| Revenue recognition                                      |       | 47                    |       | 36                    |       |
| Interest rate swap                                       |       | 738                   |       | 821                   |       |
| Tax carryforwards:                                       |       |                  |       |                  |       |
| General business and AMT credits                         |       | 5,631                 |       | 5,791                 |       |
| Charitable contribution                                  |       | —                |       | 7                     |       |
| Net operating loss and capital loss  carryforwards       |       | 3,039                 |       | 5,084                 |       |
| Valuation reserve                                        |       | (9,433                | )          | (9,961                | )          |
| Total                                                    |       | $                     | —     |                  | $          | — |   |

 

At December 27, 2004, we had approximately$12,800,000 federal net operating and tax credit carryforwards to be used tooffset future income for federal income tax purposes.  These carryforwards expire in the years 2011to 2023. The net change in the total valuation allowance for the year endedDecember 27, 2004 and December 29, 20023, is the result of providing a fullvaluation allowance against all deferred tax assets because of the significantloss in 2002 and 2003.

 

F-19

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We believe that our abilityto utilize our net operating loss carryforwards and certain of our generalbusiness and AMT credits to offset future taxable income within thecarryforward periods under existing tax laws and regulations is subject tofuture profitability.  However, because wehave suffered significant net losses in the last three years, we have concludedthat a 100% valuation allowance against our net deferred tax assets continuesto be warranted.   Reconciliations of thefederal income tax rate to our effective tax rate were as follows:
| ** **                          | ** ** | **December 27,  2004** | ** ** | **December 29,  2003** | ** ** | **December 30,  2002** | ** ** |
|-------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| Statutory federal rate              |       | 34.0                   | %          | (34.0                  | )%         | (34.0                  | )%         |
| State taxes, net of federal benefit |       | —                 |       | —                 |       | 1.3                    |       |
| Nondeductible expenses              |       | 1.92                   | %          | 0.66                   |       | 0.23                   |       |
| Expiration of capital loss          |       | —                 |       | —                 |       | 13.3                   |       |
| Change in valuation allowance       |       | (35.92                 | )          | 33.34                  |       | 37.17                  |       |
|                                |       | 0.0%                   |       | 0.0                    | %          | 18.0                   | %          |

 

 

At December 27, 2004 and December 29, 2003, $91,000and $384,000, respectively, of estimated income tax payments are included inprepaid expenses.

 

4.     LINE OFCREDIT

 

We had a $2.5 million, one-year revolving line ofcredit with a bank that expired in December 2004.  Subsequent to year end we entered intonegotiations for a one-year renewal of this line.

 

5.     LONG-TERMDEBT

 

Long-term debt consists of the following (inthousands):

 
| ** **                                                               | ** ** | **Maturity  Dates** | ** ** | **Interest Rates  as of  December 27, 2004** | ** ** | **Annual  Principal  Payments** | ** ** | **December 27,  2004** | ** ** | **December 29,  2003** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------|------------|----------------------------------------------|------------|---------------------------------|------------|------------------------|------------|------------------------|------------|
|                                                                     |       |                |       |                                         |       |                            |       |                   |       |                   |       |
| CNL Term Loan II, secured by assets of 16 TGI  Friday’s Restaurants |       | 2012-13             |       | 9.457%                                       |       | $                               | 1,176      |                   | $          | 13,199                 |       | $ | 14,375 |   |
| Bank of America                                                          |       | 2013-15             |       | 5.09%                                        |       | 961                             |       | 15,085                 |       | 16,046                 |       |
| Merrill Lynch                                                            |       | 2007-10             |       | 5.21%                                        |       | 1,171                           |       | 3,858                  |       | 5,029                  |       |
| GE Capital                                                               |       | 2006-14             |       | 5.91-6.31%                                   |       | 1,305                           |       | 11,487                 |       | 12,792                 |       |
| GMAC                                                                     |       | 2013                |       | 8.75-10.56%                                  |       | 988                             |       | 2,454                  |       | 3,442                  |       |
| Total                                                                    |       |                |       |                                         |       | $                               | 5,601      |                   | 46,083     |                   | 51,684     |   |
| Less current portion                                                     |       |                |       |                                         |       |                            |       | (3,851                 | )          | (3,815                 | )          |
| Total                                                                    |       |                |       |                                         |       |                            |       | $                      | 42,232     |                   | $          | 47,869 |   |

 

We had a $15 millionfinancing commitment through GE Franchise Finance that expired in 2004 unused.

 

All of our loan agreements contain various financialcovenants that are generally measured at the end of each calendar quarter.  There are two key covenants we mustmeet.  One loan agreement requires a

 

F-20

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cashflow coverage test, which requires us to produce a level of earnings beforeinterest, taxes, depreciation, and amortization and other unusual gains orlosses (EBITDA) in excess of the next 12 months amount of the principal andinterest under our debt obligations. Other loan agreements modify this covenant for items such as pre-openingcosts and rent expense, making it more of a fixed charge coverage test.

 

Another covenant restricts the aggregate amount oftotal senior debt we can have to a multiple of EBITDA.

 

At December 27, 2004, we met all of the financialcovenants, as amended, for all debt agreements. All long-term debt is secured by certain assets of various restaurantlocations.

 

Maturities of long-term debt, giving effect to theborrowings discussed above, were as follows at December 27, 2004 (inthousands):

 

| 2005       |   | $      | 3,851  |   |
|------------|--------|--------|--------|--------|
| 2006       |   | 4,143  |   |
| 2007       |   | 4,424  |   |
| 2008       |   | 4,472  |   |
| 2009       |   | 4,833  |   |
| Thereafter |   | 24,360 |   |
| Total      |   | $      | 46,083 |   |

 

 

6.     STOCKHOLDERS’EQUITY

 

StockOptions

 

We have an Incentive Stock Option Plan (the “2002Plan”) that provides for the issuance of options to acquire up to 1,000,000shares of our common stock.  The optionsare intended to qualify as incentive stock options within the meaning ofSection 422A of the Internal Revenue Code or as options which are not intendedto meet the requirements of such section (“non-qualified stock options”).  Awards granted under the 2002 Plan also mayinclude stock appreciation rights and restricted stock awards.

 

The exercise price of all incentive stockoptions granted under the 2002 Plan must be at least equal to the fair marketvalue of such shares as of the date of grant or, in the case of incentive stockoptions granted to a holder of 10% or more of the our common stock, at least110% of the fair market value of such shares on the date of grant.  The plan administrator (currently the Boardof Directors) sets the term of each stock option, butno incentive stock option may be exercisable more than 10 years after the datesuch option is granted.  We also havegranted options under the 1990, 1995, and 1999 Incentive Stock Option Plans,all of which contain similar terms to the 2002 Plan.

 

On June 17, 2003, we issued approximately 291,250options to directors, management, and key employees with an exercise price of$2.17 per share, the fair market value of our common stock on the date ofgrant.

 

We are also authorized to issue or have outstandingoptions under all of our unexpired stock option plans.  During 2004, we issued 22,500 stock options.

 

A summary of the status of our stock option plans atDecember 27, 2004, December 29, 2003, and December 30, 2002, and changes duringthe years then ended is presented in the table below:

 

F-21

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| ** **                                      | ** ** | **2004**   | ** ** | **2003**               | ** ** | **2002**   | ** ** |
|-------------------------------------------------|------------|------------|------------|------------------------|------------|------------|------------|
|                                            |       | **Shares** |       | **Wtd. Avg.****Price** | ** ** | **Shares** | ** ** | **Wtd. Avg.****Price** | ** ** | **Shares** | ** ** | **Wtd. Avg.****Price** | ** ** |
|                                            |       |       |       |                   |       |       |       |   |   |   |   |   |   |
| Options outstanding at beginning of period      |       | 3,857,754  |       | $                      | 3.10       |       | 3,487,420  |   | $ | 3.30 |   | 3,234,497 |   | $ | 3.14 |   |
| Granted                                         |       | 22,500     |       | 2.10                   |       | 630,250    |       | 2.15 |   | 444,250 |   | 2.87 |   |
| Exercised                                       |       | —     |       | —                 |       | —     |       | — |   | (117,664 | ) | 3.26 |   |
| Canceled                                        |       | (569,753   | )          | 3.30                   |       | (259,916   | )          | 3.64 |   | (73,663 | ) | 3.43 |   |
| Options outstanding at end of period            |       | 3,310,501  |       | 2.87                   |       | 3,857,754  |       | 3.10 |   | 3,487,420 |   | 3.30 |   |
|                                            |       |       |       |                   |       |       |       |   |   |   |   |   |   |
| Exercisable at end of period                    |       | 2,839,425  |       | 2.89                   |       | 2,828,254  |       | 3.12 |   | 2,624,780 |   | 3.03 |   |
| Weighted average fair value of options  granted |       |       |       | $                      | 1.42       |       |       |   | $ | 1.50 |   |   |   | $ | 3.04 |   |

 

CommonStock Warrants

 

As of December 29, 2003, we had 231,277 outstandingwarrants to acquire our common stock with our lenders in connection with theissuances of previously paid-off debt. These warrants expired in March 2004.

 

7.     COMMITMENTSAND CONTINGENCIES

 

Development Agreements

 

We are obligated under separate developmentagreements with TGI Friday’s Inc. to open 16 new TGI Friday’s restaurantsthrough 2009.  The development agreementsgive TGI Friday’s Inc. certain remedies in the event we fail to timely complywith the development agreements, including the right, under certaincircumstances, to terminate our exclusive rights to develop restaurants in therelated franchised territory.  Ourdevelopment territories include most of Arizona, Nevada, New Mexico, SouthernCalifornia, and the El Paso metropolitan areas. We anticipate building three to four new TGI Fridays during 2005 and weare currently negotiating for two new TGI Friday’s restaurant sites for 2006.

 

Franchise, License, and Marketing Agreements

 

In accordance with the terms of the TGI Friday’srestaurant franchise agreements, we are required to pay franchise fees of$50,000 ($25,000 for our Southern California locations) for each restaurantopened.  We also are required to pay aroyalty of up to 4% of gross sales, although we have entered into CaliforniaDevelopment Incentive Agreement which will reduce a portion of these fees.  Royalty expense was approximately $7,510,000,$7,476,000, and $7,444,000 under these agreements during 2003, 2002, and 2001,respectively.  In addition, we could berequired to spend up to 4% of gross sales on marketing.  Marketing expense for TGI Friday’s restaurantlocations under these agreements was approximately $6,195,000, $5,250,000, and$4,772,000 during 2004, 2003, and 2002, respectively.

 

F-22

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Operating Leases

 

We lease land and restaurant facilities underoperating leases having terms (including option periods) expiring at variousdates through October 2022.  Therestaurant leases have from two to three renewal clauses of five years each atour option, and have provisions for contingent rentals based upon a percentageof gross sales.  Our minimum future leasepayments as of December 27, 2004, were as follows (in thousands):

 

| 2005       |   | $      | 12,349  |   |
|------------|--------|--------|---------|--------|
| 2006       |   | 12,614 |    |
| 2007       |   | 12,497 |    |
| 2008       |   | 12,050 |    |
| 2009       |   | 11,528 |    |
| Thereafter |   | 70,672 |    |
| Total      |   | $      | 131,733 |   |

 

Rent expense during 2004, 2003, and 2002 wasapproximately $12.3 million, $12.5 million (as restated), and $12.1 million (asrestated), respectively.  In addition, wepaid contingent rentals of $840,000, $958,000, and $1,061,000 during 2004,2003, and 2002, respectively.  Thedifference between rent expense and rent paid due to recording expenses on thestraight-line method is included in other liabilities and deferred credits inthe accompanying consolidated balance sheets.

 

Contingencies

 

In the normal course of business, we are named as adefendant in various claims and litigation matters.  From timeto time, we are subject to routine contract, negligence, employment related,and other litigation in the ordinary course of business.

 

We are involved in twolawsuits filed on behalf of current employees, seeking damages, underCalifornia law, for both missed breaks and missed meal breaks the employeesallege they did not receive. These lawsuits seek to establish a class actionrelating to our California operations. We intend to vigorously defend theselawsuits, both on the merits of the employees’ cases and the issues relating toclass action status.

 

 The state of California initiated a sales taxaudit of our restaurants and determined that the optional 15% gratuity added tochecks for parties of eight or more should have been subject to sales tax and,as such, has assessed taxes and related penalties of initially approximately$900,000, but which have since been reduced to approximately $484,000.  We have vigorously contested this assessment.The first of various appeal conferences was held on November 13, 2003.  In February 2004, we were notified that ourappeal was denied by the appeals officer. We are in the process of preparing a second appeal to the full state ofCalifornia Franchise Tax Board. We are unable to predict the outcome of thisproceeding.

 

Other than the preceding, weare not subject to any pending litigation that we believe will have a materialadverse effect on our business, financial condition, results of operations, orliquidity.

 

We are also subject, from time to time, to audit byvarious taxing authorities reviewing our income, property, sales, use, andpayroll taxes.  We believe that anyfinding from such audits will not have a material impact on our financialcondition, results of operations, or liquidity.

 

F-23

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8.     BENEFITPLANS

 

We maintain a 401(k) Savings Plan for all of ouremployees.  We currently match 50% of theparticipants’ contributions up to the first 4%. Contributions made by us were approximately $234,000, $235,000, and$257,000, during 2004, 2003, and 2002, respectively.

 

9.     SUBSEQUENTEVENTS

 

Subsequentto the year ended December 27, 2004, we completed negotiations and entered intoan agreement with the landlord of the Bamboo Club in Aventura, FL, to terminatethe lease and we closed this restaurant on February 24, 2005.  We also completed negotiations and enteredinto an agreement with the landlord of the Bamboo Club in Newport, KY toterminate the lease and to close this restaurant on May 31, 2005.

 

Additionally,we completed negotiations and entered into an agreement with the landlord in ColumbusOH, where we had not yet built a restaurant, to terminate the lease.

 

InFebruary 2005, we paid $575,000 in lease termination fees for Aventura, FL andColumbus OH.

 

F-24

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