**SECURITIES AND EXCHANGE COMMISSION**

** **

**WASHINGTON, D.C. 20549**

** **

**FORM 10-K**

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

 

| **For the Fiscal Year Ended December 29, 2003**              |                                                             | **Commission File Number: 0-18668** |
|--------------------------------------------------------------|------------------------------------------------------------------|-------------------------------------|
|                                                         |                                                             |                                |
| **MAIN STREET AND MAIN INCORPORATED**                        |
| (Exact  name 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’s  telephone number, including area code     |
|                                                         |
| Securities  registered pursuant to Section 12(b) of the Act: |
| **None**                                                     |
|                                                         |
| Securities  registered pursuant to Section 12(g) of the Act: |
| **Common Stock, $.001 par value**                            |
|                                                              |                                                                  |                                     |  |  |  |  |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  ý  No  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule12b-2). Yes  o No  ý

 

At June 30, 2003, there wereoutstanding 14,129,928 shares of the registrant’s common stock, $.001 parvalue.  The aggregate market value ofcommon stock held by nonaffiliates of the registrant (8,304,305 shares) basedon the closing sale price of the common stock as reported on the NasdaqNational Market on June 30, 2003; ($2.12 per share) was $17,605,513.  For purposes of this computation, allofficers, directors, and 10% beneficial owners of the registrant are deemed tobe affiliates.  Such determinationshould not be deemed an admission that such officers, directors, or 10%beneficial owners are, in fact, affiliates of the registrant.

 

Documents incorporated byreference: Portions of the registrant’s Proxy Statement for the 2004 AnnualMeeting of Stockholders are incorporated by reference into Part III.

 

 

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**MAIN STREET AND MAIN INCORPORATED**

 

ANNUALREPORT ON FORM 10-K

 

FISCALYEAR ENDED DECEMBER 29, 2003

 

TABLEOF CONTENTS

 
| 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 PURCHASE OF EQUITY SECURITIE |   |
| 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 9 A.  | CONTROLS AND PROCEDURES                                                                                                     |   |
|       |                                                                                                                        |   |
| 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 ACCOUNTANTS FEES AND SERVICES                                                                                     |   |
|       |                                                                                                                        |   |
| PART IV    |                                                                                                                        |   |
| ITEM 15.   | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND  REPORTS ON FORM 8-K                                                           |   |
|       |                                                                                                                        |   |
| SIGNATURES |                                                                                                                        |   |

 

**Statement Regarding Forward-Looking Statements**

 

The statements contained inthis Report on Form 10-K that are not purely historical are forward-lookingstatements within the meaning of applicable securities laws.  Forward-looking statements includestatements regarding our “expectations,” “anticipation,” “intentions,”“beliefs,” or “strategies” regarding the future.  Forward-looking statements also include statements regardingrevenue, margins, expenses, asset impairment charges, and earnings analysis forfiscal 2004 and thereafter; future restaurant operations and new restaurantacquisitions or development or dispositions; the restaurant industry outlook ingeneral; and liquidity and anticipated cash needs and availability.  All forward-looking statements included inthis Report are based on information available to us as of the filing date ofthis Report, and we assume no obligation to update any such forward-lookingstatements.  Our actual results coulddiffer materially from the forward-looking statements in this Report.  A variety of factors could cause our actualresults to differ materially from the forward-looking statements, including thefactors discussed in Item 1, “Business – Special Considerations.”

 

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**PART I**

 

**ITEM 1.****         ****BUSINESS**

 

***General Overview***

 

We are the world’s largestfranchisee of TGI Friday’s restaurants, currently owning 54 TGI Friday’srestaurants.  In addition, we own andoperate 12 Bamboo Club “Asian Bistro” restaurants. We also own four RedfishSeafood Grill and Bar restaurants.  Weoperate an Alice Cooper’stown restaurant in Cleveland, Ohio, under a licenseagreement with Celebrity Restaurants, L.L.C., the owner of the exclusive rightsto operate Alice Cooper’stown restaurants.

 

TGI Friday’s restaurants arefull-service, casual dining establishments featuring a wide selection offreshly prepared, popular foods and beverages served by well-trained, friendlyemployees in relaxed settings.  BambooClub “Asian Bistro” restaurants are full-service, casual plus restaurants that featurean extensive and diverse menu of innovative and tantalizing Pacific Rimcuisine.  Redfish Seafood Grill and Barrestaurants are full-service, casual dining restaurants that feature a broadselection of New Orleans style fresh seafood, Creole and seafood cuisine, andtraditional southern dishes, as well as a “Voodoo” style lounge, all under oneroof.  Alice Cooper’stown restaurantsare rock and roll and sports themed and feature a connection to the musiccelebrity Alice Cooper.

 

We own the exclusive rightsto develop 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 the brand-name recognition and goodwill associated withTGI Friday’s restaurants;

 

•      expand our restaurant operations through

 

•      the development of additional TGI Friday’s restaurants in our existingdevelopment territories,

 

•      the development of additional Bamboo Club restaurants throughout theUnited States, and

 

•      the possible acquisition or development of restaurants operating underother restaurant concepts; and

 

•      improve our profitability by continuing to enhance the dining experienceof our guests and improving operating efficiency at all of our restaurantbrands.

 

We may explore opportunitiesto franchise Bamboo Club and Redfish concepts to third parties in the future.

 

We were incorporated inDecember 1988.  We maintain our principalexecutive offices at 5050 North 40th Street, Suite 200, Phoenix, Arizona 85018,and our telephone number is (602) 852-9000. Our website is located at www.mainandmain.com. Through our website, wemake

 

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available free of charge ourannual report on Form 10-K, our quarterly reports on Form 10-Q, our currentreports on Form 8-K, our proxy statements, and any amendments to those reportsfiled or furnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934.  These reports areavailable as soon as reasonably practicable after we electronically file thosereports with the Securities and Exchange Commission.  We also post on our website the charters of our Audit Committee,Compensation Committee, and Nominations and Governance Committee; our CorporateGovernance Guidelines, Code of Business Conduct and Ethics, and Code of Ethicsfor the CEO and Senior Financial Officers, and any amendments or waiversthereto; and any other corporate governance materials contemplated by SEC orNASDAQ regulations.  These documents arealso available 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 and Main Incorporated and its subsidiaries and operatingdivisions.

 

***Operations***

 

**The TGIFriday’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. As of December 29, 2003, TGI Friday’s Inc. had 253 franchisor-operatedand 482 franchised TGI Friday’s restaurants operating worldwide.  On December 29, 2003, 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.  TGI Friday’s has justembarked on the promotion of “Atkins” approved menu items, which will involveextensive advertising in 2004. The restaurants feature quick, efficient, andfriendly table service designed to minimize customer-waiting time andfacilitate table turnover.

 

Our restaurants generallyare open seven days a week between the hours of approximately 11:00 a.m. and1:00 a.m.  We have three locations thathave curbside service in Chandler, Arizona, our Desert Ridge location (NorthPhoenix, Arizona), and in Ontario, California. We believe that the design andoperational consistency of all TGI Friday’s restaurants enable us to benefit significantlyfrom the name recognition and goodwill associated with TGI Friday’srestaurants.

 

*The TGIFriday’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 our

 

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company, must operate eachTGI Friday’s restaurant in strict conformity with these methods, standards, andspecifications.  The TGI Friday’s systemincludes:

 

•      distinctive exterior and interior design, decor, color scheme, andfurnishings;

 

•      uniform specifications, procedures for operations, formal training, andstandardized menus featuring special recipes and menu items;

 

•      advertising and promotional programs;

 

•      requirements for quality and uniformity of products and servicesoffered; and

 

•      requirements that franchisees purchase or lease from approved suppliersequipment, fixtures, furnishings, signs, inventory, recorded music,ingredients, and other products and materials that conform with the standardsand specifications of TGI Friday’s Inc.

 

The TGI Friday’s system isidentified by 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. areimportant elements to our restaurant operations.  Our policy is to execute these specifications, procedures, andpolicies to 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 as buffalo 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, and chicken entrees, including Jack DanielsTM grillitems;

 

•      a series of appetizers and entrees that are Atkins approved and low incarbohydrates;

 

•      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.

 

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*RestaurantLayout*

 

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.

 

Most of our TGI Friday’srestaurants are located in freestanding buildings.  These restaurants normally contain between 5,500 and 9,000 squarefeet of space and average approximately 7,000 square feet.  Most of our restaurants developed since2001, however, contain 5,800 to 6,500 square feet of space.  Our TGI Friday’s restaurants contain anaverage of 60 dining tables, seating an average of 210 guests, and a bar areaseating an average of approximately 30 additional guests.

 

*UnitEconomics*

 

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) $1,650,000to $2,000,000 for building, improvements, and permits, including liquorlicenses, (b) $600,000 for furniture, fixtures, and equipment, (c) $175,000 inpre-opening expenses, including hiring expenses, wages for managers and hourlyemployees, and supplies, and (d) $50,000 for the initial franchise fee.  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.  Our TGI Friday’s restaurantsopen during all of fiscal 2003 generated an average of approximately $3,400,000in annual revenue per restaurant.

 

**The BambooClub “Asian Bistro” Concept**

 

Bamboo Club “Asian Bistro”restaurants are full-service, casual plus restaurants that feature an extensiveand diverse menu of innovative and tantalizing Pacific Rim cuisine.  Bamboo Club restaurants use freshingredients and premium herbs and spices in creative combinations to servehigh-quality food and beverages that deliver a unique combination of delicioustaste, 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 an elegant,casual/plus atmosphere.  The restaurantsfeature a modern décor that provides a dramatic yet comfortable impression,with food and beverages prepared and served by a highly trained and skilledstaff.

 

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

 

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*Menu*

 

Bamboo Club restaurantsfeature a menu of more than 69 items inspired by the diverse and exoticcuisines found in locations such as Bangkok, Canton, Singapore, Seoul, HongKong, Indonesia, Hawaii, 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, a wide selection of popular Asian and domestic beers, and fine cigars.

 

Menu prices range from $8 to$9 for salads; $3 to $12 for appetizers; and $9 to $19 for entrees. Alcoholicbeverage sales account for approximately 23% of total revenue.  Take-out orders represent approximately 3%to 4% of total revenue.  In addition,sales through a third-party delivery service in Phoenix, Arizona, representapproximately 3% of total Phoenix revenue.

 

*RestaurantLayout*

 

Bamboo Club restaurants havebeen designed to create a dramatic impression in an atmosphere that is bothspacious and intimate.  The restaurants’décor features artful lighting, dramatic murals, an eclectic mix of backgroundmusic, and a general color theme of black, copper, and bamboo to create a“hip,” exotic feeling of warmth and color.

 

The restaurants also featurean “exhibition kitchen” adjacent to the seating area, where diners can watchhighly skilled wok chefs prepare the restaurants’ appetizers and entrees.  Most dishes are prepared and served withinfive to ten minutes from the time when the order is placed.

 

The 12 Bamboo Clubrestaurants are located in high-traffic retail shopping environments.  Each restaurant contains approximately 6,600square feet of space in leased facilities, excluding patio areas.  Each of these restaurants features indoorseating and bar area seating for a total of approximately 240 guests, whichdoes not include outdoor patio seating at some locations.

 

Bamboo Club “Asian Bistro”restaurants have developed an extensive program to train and motivaterestaurant employees.  The Bamboo Clubserving staff is professional, friendly, highly skilled, and knowledgeableabout the restaurant’s cuisine and menu selections.  Servers are trained to make suggestions or recommendations fornew or different menu items or combinations that patrons might try, which helpseach guest to enjoy a memorable dining experience.

 

We originally acquired twooperating Bamboo Club restaurants in Phoenix and Scottsdale, Arizona, and sincehave opened a total of ten 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; and one in Raleigh/Durham, NorthCarolina.

 

*UnitEconomics*

 

After opening nine in-lineBamboo Club restaurants, our total cost of opening a new in-line locationranges between $1,500,000 and $2,150,000, exclusive of annual operating

 

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expenses.  These costs included 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.  Ourtotal cost 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 costsassociated with the construction of this project.

 

Our eight Bamboo Clubrestaurants open during all of fiscal 2003, which consist of the two originalacquired restaurants; Tempe and Tucson, Arizona; Newport, Kentucky; King ofPrussia, Pennsylvania; and West Palm and Tampa, Florida generated an average ofapproximately $2.4 million in annual revenue per restaurant.

 

**Our RedfishSeafood Grill and Bar Restaurants**

 

Redfish Seafood Grill andBar restaurants are full-service, casual dining restaurants that feature abroad selection of seafood, steaks, and French Quarter cuisine.  The 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 Streetjambalaya, crab stuffed salmon, and shrimp brochette.  The menu also features a selection of appetizers, includingLooziana egg rolls, Maryland-style crab cakes, Captain Morgan ribs and chicken,and crab and artichoke dip.  Our Redfishmenu also features a variety of fresh seafood, steaks, ribs, pastas, freshseasonal salads, sandwiches, and tempting desserts, such as bananas 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 forapproximately 36% of total revenue.

 

*RestaurantLayout*

 

We developed the Redfishrestaurant layout to provide a refined southern roadhouse atmosphere.  Each of our Redfish restaurants is decoratedwith nostalgic mementos of the South,

 

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together with decorativeelements that are 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 averageof 60 dining tables, seating an average of 250 guests, and a bar area seatingan average of approximately 25 additional guests.  We have developed a prototype for use in developing Redfishrestaurants in the future.  Weconstructed two restaurants using this prototype in Scottsdale and Chandler,Arizona. We would use this prototype whenever possible in order to standardizethe construction process and to reduce costs. However, we do not currently planto build any new Redfish restaurants in the foreseeable future.

 

*UnitEconomics*

 

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 $1,850,000for building, improvements, and permits, including liquor licenses, (b)$600,000 for furniture, fixtures, and equipment, and (c) $150,000 inpre-opening expenses, including hiring expenses, wages for managers and hourlyemployees, and supplies.  Actual costs,however, may vary significantly depending upon a variety of factors, includingthe site and size of the restaurant and conditions in the local real estate andemployment markets.  Our four Redfishrestaurants open during all of fiscal 2003 generated an average of approximately$2.2 million in annual revenue per restaurant. During 2003, we closed anunderperforming location in Denver, Colorado and sub-leased the location to athird party.

 

**Our AliceCooper’stown Restaurant**

 

The Alice Cooper’stownconcept was developed by Celebrity Restaurants, L.L.C. and is rock and roll andsports themed, featuring a connection to Alice Cooper. We own no interest inCelebrity Restaurants, L.L.C., and it owns no interest in us. CelebrityRestaurants operates one Alice Cooper’stown restaurant, which opened inDecember 1998 in Phoenix, Arizona.  OurAlice Cooper’stown restaurant opened in April 2002 in a location formerlyoccupied by a Redfish Seafood Grill and Bar restaurant in Cleveland, Ohio. TheCleveland location’s proximity to Jacob Field, the home of the ClevelandIndians, and the fact that Cleveland is the home of the Rock and Roll Hall ofFame, resulted in our decision to convert the location into an AliceCooper’stown. Our Alice Cooper’stown restaurant is a full-service, casualdining establishment featuring a wide selection of high quality, freshlyprepared popular foods and beverages, including a number of innovative anddistinctive menu items, such as menu items that are sports and rock and rollthemed.  In addition, the restaurantsells sports and rock and roll memorabilia. The restaurant features quick,efficient, and friendly table service designed to minimize customer-waitingtime and facilitate table turnover.  OurAlice Cooper’stown restaurant benefits significantly from the name recognitionof Alice Cooper and the proximity to Jacob Field, the home of the ClevelandIndians, and the Rock and Roll Hall of Fame.

 

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*Menu*

 

Our menu in Clevelandincludes salads and sandwiches, pizzas and burgers, and tempting appetizers anddesserts.

 

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

 

*RestaurantLayout and Staffing*

 

Our Alice Cooper’stownrestaurant was designed to feature a rock and roll and sports theme, featuringthe connection to rock and roll legend Alice Cooper. The general décor is rockand roll and sports memorabilia. The logo reads “Where Rock and Roll and SportsCollide”. The restaurant features a video wall in the bar and a large screenvideo in the dining room. In keeping with its sports bar theme, there are morethan 35 TV screens in the restaurant. Some of our former Cleveland Redfishstaff, including management personnel, are involved in the operation of thisrestaurant.

 

*UnitEconomics*

 

Our construction costs toconvert this location were approximately $400,000, and pre-opening expenseswere approximately $191,000.  Thisrestaurant generated $1.9 million of revenue in 2003.

 

***Future Site Selection-all Concepts***

 

When evaluating whether andwhere to seek expansion of our restaurant operations, we analyze a restaurant’sprofit potential.  We consider thelocation of a restaurant to be one of the most critical elements of therestaurant’s long-term success. Accordingly, we expend significant time and effort in investigating andevaluating potential restaurant sites. In conducting the site selection process, we obtain and examine detaileddemographic information, such as population characteristics, density, andhousehold income levels; evaluate site characteristics, such as visibility,accessibility, and traffic volume; consider the proposed restaurant’s proximityto demand generators, such as shopping malls, lodging, and office complexes;and analyze potential competition.  Oursenior corporate management evaluates and approves each restaurant site for allof our brands prior to acquisition after extensive consultation with all levelsof our operations group.  TGI Friday’sInc. provides site selection guidelines and criteria as well as site selectioncounseling and assistance for our TGI Friday’s restaurant sites.  We also must obtain TGI Friday’s Inc.’sconsent before we enter into definitive agreements for a TGI Friday’srestaurant site.

 

We have recently enteredinto an exclusive one-year brokerage agreement with Staubach RetailServices-West, LLC, a nationally known commercial brokerage company, whichprovides us with real estate and site selection consulting services.

 

***2003 Restaurant Openings and Closures***

 

During 2003, we opened oneTGI Friday’s restaurant in Phoenix (Desert Ridge Center), Arizona and fourBamboo Club “Asian Bistro” restaurants, one in Novi (Detroit), Michigan, one

 

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in Phoenix (Desert RidgeCenter), Arizona, one in Aventura, Florida, and one in Raleigh, NorthCarolina.  Also during 2003, we closedour Denver, Colorado Redfish Seafood Grill and Bar, sold three TGI Friday’srestaurants in Northern California, and terminated a management agreement forthe four TGI Friday’s restaurants in Northern California owned by a thirdparty.

 

**2003Restaurant Openings and Closures**

 
| **Restaurants**        |   | **Owned  TGI  Friday’s** |   | **Managed  TGI  Friday’s** |   | **Bamboo  Club  “Asian  Bistro”** |   | **Redfish  Seafood  Grill  and Bar** |   | **Alice  Cooper’stown** |   |
|------------------------|--------|-------------------------------|--------|---------------------------------|--------|---------------------------------------------|--------|--------------------------------------|--------|------------------------------|--------|
| December 30, 2002      |   | 56                            |   | 4                               |   | 8                                           |   | 5                                    |   | 1                            |   |
| Closed/Sold/Terminated |   | (3                            | )      | (4                              | )      | —                                      |   | (1                                   | )      | —                       |   |
| Opened                 |   | 1                             |   | —                          |   | 4                                           |   | —                               |   | —                       |   |
| December 29, 2003      |   | 54                            |   | —                          |   | 12                                          |   | 4                                    |   | 1                            |   |

 

***Current Restaurants***

 

The following table setsforth information relating to each restaurant we own as of March 12, 2004.

 
| **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                                  |   |

 

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| **Location**                                |   | **Square  Footage** |   | **Seating  Capacity** |   | **In  Operation  Since** |   | **Operated  by  Our  Company  Since** |   |
|---------------------------------------------|--------|---------------------|--------|-----------------------|--------|--------------------------|--------|---------------------------------------|--------|
| North Orange, California                    |   | 9,194               |   | 213                   |   | 1983                     |   | 1993                                  |   |
| 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                                  |   |
| Salinas, California                         |   | 6,500               |   | 240                   |   | 1994                     |   | 1998                                  |   |
| Oakland, California                         |   | 5,966               |   | 230                   |   | 1994                     |   | 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                                  |   |

 

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| **Location**                                     |   | **Square  Footage** |   | **Seating  Capacity** |   | **In  Operation  Since** |   | **Operated  by  Our  Company  Since** |   |
|--------------------------------------------------|--------|---------------------|--------|-----------------------|--------|--------------------------|--------|---------------------------------------|--------|
| 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                                  |   |
| 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                                  |   |
| Newport, Kentucky                                |   | 6,735               |   | 236                   |   | 2002                     |   | 2002                                  |   |
| King of Prussia, Pennsylvania                    |   | 7,391               |   | 243                   |   | 2002                     |   | 2002                                  |   |
| Miami (Aventura), Florida                        |   | 6,544               |   | 236                   |   | 2003                     |   | 2003                                  |   |
| 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                                |   | Under               |   | Construction          |   |                     |   |                                  |   |
|                                             |   |                |   |                  |   |                     |   |                                  |   |
| **Developed Alice Cooper’stown Restaurant** |   |                |   |                  |   |                     |   |                                  |   |
| Cleveland, Ohio                                  |   | 11,160              |   | 356                   |   | 2002                     |   | 2002                                  |   |

 

In the first quarter of2004, we entered into agreements with landlords terminating two leases whichwill result in the closure of two TGI Friday’s restaurants in 2004.

 

***Restaurant Operations***

 

**TGIFriday’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.

 

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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 andthird-party quality assurance professionals we have retained make unannouncedvisits to restaurants to evaluate the facilities, products, and services.  We believe that our quality review programand executive oversight enhance restaurant operations, reduce operating costs,improve customer satisfaction, and facilitate the highest level of compliancewith 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.

 

**RestaurantManagement**

 

Our TGI Friday’s regionaland restaurant management personnel are responsible for complying with TGIFriday’s Inc.’s and our operational standards. In our TGI Friday’s division, assisting our Senior Director of Operations,we have three Senior Regional Managers and two Regional Managers responsiblefor between eight and 11 of our restaurants within their region.  We have one Director of Operations who isresponsible for the Alice Cooper’stown restaurant. This individual has signedan agreement wherein he purchased a net profit participation in this operationequal to 20% of a defined level of profits over a certain earnings beforeinterest, taxes, depreciation, and amortization (EBITDA) as defined. We haveone Regional Manager who is responsible for the Redfish Seafood Grill and Barrestaurants. These Regional Managers and Directors of Operations report to ourSenior Vice President of Restaurant Operations for TGI Friday’s, RedfishSeafood Grill and Bar, and Alice Cooper’stown restaurants.

 

We have two RegionalManagers for the Bamboo Club “Asian Bistro” restaurants, each responsible forsix restaurants in the manager’s territory, who report to the Senior VicePresident of Restaurant Operations for Bamboo Club restaurants.

 

The Senior Vice Presidentsof Restaurant Operations report to our President and Chief Operating Officer,who has responsibility for our TGI Friday’s, Redfish, Bamboo Club, and AliceCooper’stown operations.

 

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 assistant managers,and a kitchen manager. Our TGI Friday’s restaurants average between 80 and 90hourly 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.

 

We have established aprogram of appointing multi-location general managers in geographic areashaving locations close enough to each other to support this concept.  We currently have seven multi-locationsenior general managers. In addition to improving efficiency,

 

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this program allows us topromote and compensate key general managers and create a position that improvesour ability to retain key employees in our company.

 

**Recruitmentand 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 restaurantpersonnel participate in continuing training programs maintained by TGIFriday’s Inc. and our company.  Inaddition, we supplement those programs by hiring personnel devoted solely toemployee training.  Each TGI Friday’srestaurant general and assistant manager completes a formal training programconducted by our company.  This programprovides our TGI Friday’s restaurant managers 14 weeks of training.  The training covers all aspects ofmanagement philosophy and overall restaurant operations, including supervisoryskills, operating and performance standards, accounting procedures, andemployee selection and training necessary for restaurant operations. We employpersonnel who are involved exclusively in training for both initial new storeopenings and 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.

 

**Maintenanceand Improvement of Restaurants**

 

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 andRedfish restaurants.  We also makenecessary additions, 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 may be required, subject to certainlimitations, to modernize our restaurants to the then-current standards andspecifications of TGI Friday’s Inc.  Inthe past few years, we have developed a plan that we refer to as a “popout” infour of our existing TGI Friday’s restaurants that expands the restaurants byapproximately 1,200 square feet. In 2003, we completed a major renovation inour Torrance, California and one of our Las Vegas, Nevada TGI Friday’srestaurants and may complete additional renovations in 2004.

 

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.

 

During 2003, we did a majorrenovation at one of the original Bamboo Club locations and a minor renovationat the other original location that we acquired when we purchased the BambooClub concept.  We are developing astandard prototype that we plan to use on future

 

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Bamboo Clubrestaurants.  Our Desert Ridge (Phoenix,AZ) location was our first fully free-standing Bamboo Club restaurant.

 

**Point ofSales 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.

 

We are currently using threedifferent in-store systems: at most of our TGI Friday’s locations, we use aproprietary system supported by TGI Friday’s Inc.; our Redfish locations useMicros software; and our Bamboo Club locations are on our new restaurantsystems provided by Aloha Technology. We are migrating all of our concepts to a consistent new point of saleor POS, and back office solution from Aloha Technology.  We are also moving to a new corporateenterprise resource planning system, or ERP, from Lawson Software.  Management and support of the new corporateERP system will be outsourced to netASPx, Inc.

 

We are in the process ofinstalling the POS and back office systems at all of our stores and anticipatethat this will be completed by the end of 2004.  We are currently defining the requirements for our revised HumanResources and Payroll system using the Lawson ERP system. Our conversion to thenew ERP system will commence when the new POS system has been implemented at amajority of our stores.  We anticipatethe ERP implementation will be completed by the middle of 2005.

 

We believe that ourmanagement information systems enable us to increase the speed and accuracy oforder taking and pricing, to better assist guest preferences, to efficientlyschedule labor to better serve guests, to quickly and accurately monitor foodand labor costs, assist in product purchasing and product movement analysis, topromptly access financial and operating data, and to improve the accuracy andefficiency of store-level information and reporting.

 

**Supply,Purchasing, and Distribution**

 

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 from suppliersapproved by TGI Friday’s Inc. In order to be approved as a supplier, aprospective 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 suppliesfrom any specified suppliers, but the purchase or lease of any items from anunapproved supplier requires the prior approval of TGI Friday’s Inc.

 

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TGI Friday’s Inc. maintainsa list 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 of various kitchen equipmentand store fixtures, decorative memorabilia, and various paper goods, such asmenus and in-store advertising materials and items.  We are not, however, required to purchase such items from TGIFriday’s Inc.  If we elect to purchasesuch items from TGI Friday’s Inc., TGI Friday’s Inc. may derive revenue as aresult of such purchases.

 

Celebrity Restaurantsassisted us in converting the Cleveland location into an Alice Cooper’stownrestaurant. Celebrity Restaurants provided guidance in restaurant design,acquisition of themed memorabilia for décor, and locating sources for thepurchase of memorabilia for sale to guests.

 

We have an agreement withU.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.

 

We created a new departmentto manage supply chain management services for our company.  This division may contract with otherrestaurant operators to provide supply chain management services for afee.  We are currently negotiating withthe owners of the three TGI Friday’s that we sold in 2003 and have signed acontract with the owners of the TGI Friday’s that were formerly managed by usin northern California to provide fee-based services to them.

 

***Advertising and Marketing***

 

**TGIFriday’s Restaurants**

 

We participate in thenational marketing 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 TGIFriday’s Inc., we are able to utilize the trade names, service marks,trademarks, emblems, and indicia of origin of TGI Friday’s Inc., including themarks TGI

 

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Friday’s® andFriday’s®.  We advertise invarious media utilizing these marks to attract new customers to ourrestaurants.

 

Each franchise agreementalso requires 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 2.1% of gross sales in the first three quarters of 2001 to thenational marketing fund. This requirement was reduced to 1.7% during the lastfiscal quarter of 2001.  The marketingfund contributions were 2.7% and 3.25% in 2002 and 2003, respectively.  TGI Friday’s has increased the marketingfund contributions to 3.5% for 2004. Marketing fund contributions totaled $6,153,000 during fiscal 2003,$5,250,000 during fiscal 2002, and $4,774,000 during fiscal 2001.

 

**Bamboo Cluband Redfish Restaurants**

 

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 have included radio and printadvertising, as well as point-of-sale marketing promotions.  We conduct a comprehensive advertising andpublic relations campaign in advance of each Bamboo Club and Redfish restaurantgrand opening.

 

**AliceCooper’stown Restaurant**

 

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

 

**Expansionof Operations**

 

We plan to expand ourrestaurant operations through the development of additional TGI Friday’srestaurants in our existing development territories and the development ofadditional Bamboo Club restaurants in suitable locations as our financialcapabilities 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.

 

 We are currently constructing a Bamboo Club in Fairfax, Virginiathat we anticipate will open late in the third quarter of 2004 and have amendedour lease covering a Bamboo Club location in Columbus, Ohio to beginconstruction in 2004.

 

We are negotiating for asite and intend to commence construction of a TGI Friday’s restaurant in thefourth quarter of 2004.

 

We currently are consideringother sites for additional restaurants, but have not entered into leases orpurchase agreements for such sites.  Wedo not know how many sites will materialize, as that depends on a variety offactors and economic conditions.

 

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The opening of newrestaurants also may be affected by increased construction, utility, and laborcosts, delays resulting from governmental regulatory approvals, strikes, orwork stoppages, 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 assurancethat we will be successful in achieving our expansion goals through thedevelopment or acquisition of additional restaurants or that any additionalrestaurants that are developed or acquired will be profitable.  In addition, the opening of additionalrestaurants in an existing market may have the effect of drawing customersfrom, and reducing the sales volume of, our existing restaurants in thosemarkets.

 

***Restaurant Closures and Lease Terminations***

 

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 thetime of 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’srestaurants in territories encompassing the southern portion of California, andmost of the counties in the states of Arizona, Nevada, New Mexico and El Paso,Texas. We plan to develop additional TGI Friday’s restaurants in our existingdevelopment territories.

 

The following table setsforth information regarding our minimum requirements to open new TGI Friday’srestaurants under our current development agreements, as well as the number ofexisting restaurants in each of our development territories.

 

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| **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 |   | 33                                     |   | 17                          |   | 4                          |   | 54        |   |
| Total                |   |                                   |   |                        |   |                       |   | 70        |   |

 

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

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

(3)   Former Development Territory consisting of metropolitan Kansas City,Kansas and Kansas City, Missouri. Agreement terminated in first quarter of 2004.

 

Each development agreementgives TGI Friday’s Inc., certain remedies in the event that we fail to complyin a 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-competeprovisions of the development agreement. The remedies available to TGI Friday’s Inc., include (a) the terminationof our exclusive right to develop restaurants in the related territory; and (b)the termination of the development agreement. None of these remedies would adversely affect our ability to continue tooperate our then-existing TGI Friday’s restaurants.  Currently, other than the one TGI Friday’s location currentlyunder negotiation, we do not anticipate building additional TGI Friday’srestaurants during 2004.

 

In the first quarter of2004, we entered into an agreement with TGI Friday’s Inc. that provides royaltyand development cost relief if certain conditions are met. We cannot determineat this time the amount of any such cost relief, but such sum may be materialto our operational results.

 

***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 limit from each restaurant,and obligates us to operate such restaurant in accordance with the requirementsand specifications established by TGI Friday’s Inc. relating to food preparationand quality of service as well as general operating procedures, advertising,records maintenance, and protection of trademarks.  The franchise agreements restrict our ability to transfer ourinterest in our TGI Friday’s restaurants without the consent of TGI Friday’sInc.

 

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Each franchise agreementrequires us to pay TGI Friday’s Inc. an initial franchise fee of $50,000.  In addition, we are obligated to pay TGIFriday’s Inc. a royalty of generally 4% of the gross revenue as defined in thefranchise agreement for each restaurant. Royalty expense under these agreementstotaled $7,510,000 during fiscal 2003, $7,477,000 during fiscal 2002, and$7,444,000 during fiscal 2001.

 

As previously discussed,each franchise agreement also requires us to spend at least 4% of gross saleson local 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 that developmentterritory.

 

***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 pay Celebrity Restaurants aroyalty fee in the amount of 1% of gross sales for food and beverage sales upto the amount of gross sales derived in 2001 in each location through itsexisting 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 and memorabilia,we pay a royalty of 20% of gross sales.

 

We paid approximately$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 arelocated.  In addition, we are subject tolocal land use, zoning, building, planning, and traffic ordinances andregulations in the selection and acquisition of suitable sites for constructingnew restaurants.  Delays in obtaining,or denials of, or revocation or temporary suspension of, necessary licenses orapprovals could have 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. An increase in the minimum wage rate or the cost of workers’compensation insurance, both of which recently occurred in California, orchanges in tip-credit provisions, employee benefit costs (including costsassociated with mandated health insurance coverage), or other costs associatedwith employees could adversely affect our company.

 

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In addition, we are subjectto the Americans with Disabilities Act of 1990 or ADA.  The ADA may require us to make certaininstallations in new restaurants or renovations to existing restaurants to meetfederally mandated requirements.  To ourknowledge, we are in compliance in all material respects with all applicablefederal, state, and local laws affecting our business, with the exception ofrenovations to restaurants existing at the time of passage of the ADA.

 

***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 number of other restaurants,including national and regional restaurant chains and franchised restaurantsystems, many of which have greater financial resources, more experience, andlonger 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. We believe that site selection is one of the most crucial decisionsrequired in connection with the development of restaurants.  As the result of the presence of competingrestaurants in our development territories, our management devotes greatattention to obtaining what we believe will be premium locations for new restaurants,although we can provide no assurance that we will be successful in theseefforts.

 

***Employees***

 

We employ approximately2,300 people on a full-time basis, of whom 72 are corporate management andstaff personnel.  We also employapproximately 3,100 part-time employees, which results in our employment ofapproximately 5,400 total personnel, of which approximately 5,328 arerestaurant personnel.  Except forcorporate and management personnel, we generally pay our employees on an hourlybasis.  We employ an average ofapproximately 76 full-time and part-time hourly employees at each of ourrestaurants.  None of our employees arecovered by a collective 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 setsforth certain information regarding our executive officers:

 
| **Name**               |   | **Age** |   | **Position**                                                                                        |
|------------------------|--------|---------|--------|-----------------------------------------------------------------------------------------------------|
| Bart A. Brown, Jr. (1) |   | 72      |   | Chief Executive Officer and Director                                                                |
| William G. Shrader (2) |   | 56      |   | President, Chief Operating Officer, and Director                                                    |
| Michael Garnreiter     |   | 52      |   | Executive Vice President, Treasurer, and Chief Financial Officer                                    |
| Jeff Smit              |   | 45      |   | Senior Vice President-Restaurant Operations-TGI Friday’s, Redfish and  Alice Cooper’stown |
| Stuart S. Gee          |   | 40      |   | Senior Vice President-Restaurant Operations-Bamboo Club                                             |
| Michael J. Herron      |   | 62      |   | General Counsel, Vice President, and Secretary                                                      |
| Matthew J. Wickesberg  |   | 29      |   | Vice President-Financial Planning and Analysis                                                      |
| Stephanie Barbini      |   | 33      |   | Vice President-Human Resources and Training                                                         |

 

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(1). Bart A. Brown Jr. hasannounced his retirement effective March 31, 2004; thereafter, he will remainon the board of directors and serve our company as a consultant pursuant to aconsulting contract.

(2). William G. Shrader wasappointed CEO and President of our company by the board of directors, effectiveApril 1, 2004.

 

***Bart A. Brown, Jr***. has served as our Chief Executive Officer and as a director sinceDecember 1996.  Mr. Brown served as ourPresident from December 1996 until June 2001. Mr. Brown was affiliated withInvestcorp International, N.A., an international investment banking firm, fromApril 1996 until December 1996.  Mr.Brown served as the Chairman and Chief Executive Officer of Color Tile, Inc. atthe request of Investcorp International, Inc., which owned all of thatcompany’s common stock, from September 1995 until March 1996.  In January 1996, Color Tile filed forreorganization under Chapter 11 of the United States Bankruptcy Code.  Mr. Brown served as Chairman of the Board ofThe Circle K Corporation from June 1990, shortly after that company filed forreorganization under Chapter 11 of the United States Bankruptcy Code, untilSeptember 1995.  From September 1994until September 1996, Mr. Brown served as the Chairman and Chief ExecutiveOfficer of Spreckels Industries, Inc. Mr. Brown engaged in the private practice of law from 1963 through 1990after seven years of employment with the Internal Revenue Service.

 

***William G. (Bill) Shrader*** has served as our President and Chief Operating Officer and as adirector since June 2001.  Mr. Shraderserved as our Executive Vice President and Chief Operating Officer from March1999 until June 2001.  Mr. Shrader wasSenior Vice President of Marketing for Tosco Marketing Company from February1997 to March 1999.  From August 1992 toFebruary 1997, Mr. Shrader served in several capacities at Circle K Stores,Inc., including President of the Arizona Region, President of the PetroleumProducts/Services Division, Vice President of Gasoline Operations, and VicePresident of Gasoline Marketing.  Mr.Shrader began his career in 1976 at The Southland Corporation and departed in1992 as National Director of Gasoline Marketing.

 

***Michael Garnreiter*** has served as our Executive Vice President, Treasurer, and ChiefFinancial Officer since April 2002. Prior to joining our company, Mr. Garnreiter served as a general partnerof the international accounting firm of Arthur Andersen.  Mr. Garnreiter began his career in publicaccounting with the Los Angeles office of Andersen in 1974 after graduatingwith a Bachelor of Science degree in accounting from California StateUniversity at Long Beach.  In 1986, hetransferred 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 andArizona and retired from Andersen in March 2002.

 

***Jeff Smit***has served as our Senior Vice President-Restaurant Operations-TGIFridays/Redfish since June 2001. Mr. Smit served as our Vice President ofOperations from September 1998 to June 2001. Mr. Smit joined us in 1994 and hasbeen a general and regional manager. Prior to joining us, Mr. Smit worked forTGI Friday’s Inc. as a general manager in its TGI Friday’s operation. Prior tothat, Mr. Smit worked in a variety of capacities in various restaurants.

 

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***Stuart S. Gee*** has served as our Senior Vice President-Restaurant Operations-BambooClub since July 2003. Mr. Gee worked for Sam Seltzer’s Steakhouse restaurantchain as an operating partner from October 2002 to May 2003. Prior to that, Mr.Gee worked in various capacities for Brinker International-Romano’s MacaroniGrill, the last as 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 our General Counsel since March 2001, as our Secretarysince June 2001, and as a Vice President since June 2003. Prior to joining us,Mr. Herron was actively engaged in the private practice of law in Aspen,Colorado from February 1985 until February 2001 and in Miami Beach, Floridafrom October 1965 to August 1984. While practicing in Florida, he served asoutside General Counsel for a restaurant franchisor known as the Orange Bowl, arestaurant concept exclusively located in regional shopping centers through theUnited States. Mr. Herron is a former President of the Miami Beach, Florida,Bar Association and was a member of the Florida Bar Association’s standingEthics Committee.

 

***Matthew J. Wickesberg*** has served as our Vice President of Financial Planning and Analysissince June 2002.  Mr. Wickesberg servedas our Director of Strategic Planning from May 2000 to June 2002. Prior tojoining our company, Mr. Wickesberg was a Senior Consultant with PricewaterhouseCoopersin Dallas, Texas. As a member of the Financial Advisory Services group, heworked in the areas of corporate restructuring, bankruptcy, corporate financeand litigation support. Mr. Wickesberg is a Chartered Financial Analyst andattended programs at the London School of Economics, and received his Bachelorsin Finance from Oklahoma State University.

 

***Stephanie Barbini*** has served as our Vice President of Human Resources and Training sinceSeptember 2002. Ms. Barbini held a variety of senior level HR positions withConoco/ Phillips, from 1994 to September 2002. During her eight-year tenure with Conoco/Phillips she provided strategichuman resource support to retail operations, corporate headquarters, petroleumrefining and distribution through five separate multi-billion dollaracquisitions. Ms. Barbini holds a BA in Psychology from Oklahoma University anda Master’s in Organizational Psychology from Columbia University.

 

**Risk Factors**

 

You should carefullyconsider the following factors, in addition to the other information in thisReport, in evaluating our company and our business.

 

**We facerisks associated with changes in general economic and political conditions thataffect consumer spending.**

 

Adverseeconomic conditions and any related decrease in discretionary spending by ourcustomers have an adverse affect on our revenues and operating results. Whenthe economy struggles, our customers may become more apprehensive about theeconomy and reduce their level of discretionary spending.  We believe that a decrease in discretionaryspending could impact the frequency with which our customers choose to dine outor the amount they spend on meals while dining out, thereby decreasing ourrevenues.  Additionally, military and

 

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governmental responses tofuture terrorist attacks and the prospect of future wars may exacerbate thethen current economic conditions, and may lead to weakening in the economy.

 

**We dependon TGI Friday’s Inc.**

 

Our success depends, to asignificant extent, on the continued vitality of the TGI Friday’s restaurantconcept and the overall success of the TGI Friday’s system.

 

We have no control over themanagement or operation of TGI Friday’s Inc. or other TGI Friday’sfranchisees.  A variety of factorsaffecting TGI Friday’s Inc. or the TGI Friday’s concept could have a materialadverse effect on our business.  Thesefactors include the following:

 

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

 

•      a failure by TGI Friday’s Inc. to promote the TGI Friday’s name orrestaurant concept;

 

•      the inability or failure of TGI Friday’s Inc. to support itsfranchisees, including our company;

 

•      the failure to operate successfully the TGI Friday’s restaurants thatTGI Friday’s Inc. itself owns; and

 

•      negative publicity with respect to TGI Friday’s Inc. or the TGIFriday’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.

 

**OurFranchise agreements with TGI Friday’s, Inc. require substantial payments.**

 

Our franchise agreement withTGI Friday’s Inc. for each TGI Friday’s restaurant that we own generallyrequires us to pay an initial franchise fee of $50,000, pay royalties ofgenerally 4% of the restaurant’s gross sales, and spend up to 4% of therestaurant’s gross sales on advertising, which may include contributions to anational marketing pool administered by TGI Friday’s Inc.

 

TGI Friday’s Inc. requiresus and its other franchisees to contribute a percentage of gross sales to thenational marketing pool, which has been set at 3.5% for 2004. We must pay oraccrue these amounts regardless of whether or not our restaurants areprofitable.

 

If we fail to satisfy theserequirements or otherwise default under the franchise agreements, we could besubject 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.

 

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**Our DevelopmentAgreements with TGI Friday’s Inc. require us to open additional TGI Friday’srestaurants.**

 

Our development agreementswith TGI Friday’s Inc. require us to open additional TGI Friday’s restaurants.We may not be able to secure sufficient restaurant sites that we believe aresuitable or we may not be able to develop restaurants on terms and conditionsthat we consider favorable in order to satisfy the requirements of thedevelopment agreements.  The developmentagreements give TGI Friday’s Inc. certain remedies in the event that we fail tocomply with the development schedule in a timely manner or if we breach theconfidentiality or noncompete 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.****In the past, we have negotiated waiversfrom TGI Friday’s Inc. of the obligations we have not fulfilled.  However, we can provide no assurance that wewill successfully fulfill these obligations in the future or, if we do not,that we will be obtain waivers.

 

**Our assetsmay become impaired due to changing economic conditions.**

 

Our assets may becomeimpaired due to changing economic conditions. When we encounter a “triggering”event, decide to close a restaurant, or perform a periodic review of ourmarginally performing locations (particularly in the fourth quarter of eachyear), we record appropriate asset impairment charges if necessary.  The amount of impairment charges and theallocation of goodwill, if any, is based upon assessments of current and futureeconomic conditions and their estimated impact on our ability to recover ourinvestment in long-lived assets.  Evenin strong economic conditions, there can be conditions or local situations thatmight require the recording of asset impairment charges.  We will continue to perform periodic assetimpairment tests, and it is likely that we will record future asset impairmentcharges.

 

**We havesignificant debt, and we may be unable to continue to meet debt covenants.**

 

We have incurred significantindebtedness in connection with our growth strategy. As of December 29, 2003,we had long-term debt of approximately $51.7 million (including current portionof $3.8 million), and a working capital deficit of $16.4 million.  Our borrowings include financial covenants(which have been amended and revised from time to time) generally based on EBITDA,which limits the amount we can borrow. These debt agreements require us tomeasure our compliance with financial covenants each fiscal quarter. If we failto meet any financial covenants, our lenders could call their loansimmediately.  There can be no assurancewe will continue to meet these covenants in the future.

 

**Ourborrowings involve substantial interest expense.**

 

Our borrowings will resultin interest expense of approximately $3.9 million in 2004 and $3.7 million in2005, based on currently prevailing interest rates and assuming outstanding andcontemplated indebtedness is paid in accordance with the existing paymentschedules without any prepayments or additional borrowings. Additionally,current interest rates are at historically low levels.  If interest rates were to increase, ourinterest costs would also increase, since approximately 30%, afterconsideration of the impact of our swap agreements, of our debt is

 

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variable interest rate debt.We must make these interest payments regardless of our operating results.  Currently, 50 of our restaurants are pledgedto secure our debt obligations.

 

**We dependon a key food product distributor**.

 

We depend on U.S.Foodservice, a national food distribution service company, to servesubstantially all of our restaurants in California, Arizona, and Nevada and forall of our Bamboo Club and Redfish restaurants. U.S. Foodservice is asubsidiary of Royal Ahold, which in early 2003 announced a major financialrestatement to its 2001 and earlier financial statements.  The inability of U.S. Foodservice tocontinue providing us with a high level of quality and dependability in thereceipt of our supplies, at the cost advantages resulting from our volumepurchases, could have a material impact on our business.

 

We believe 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 must purchase our products from other suppliers; however, there can be noassurance that we will be able to match quality, price, or dependability ofsupply.

 

**We facerisks associated with the expansion of our operations.**

 

The success of our businessdepends on our ability to expand the number of our restaurants, either bydeveloping or acquiring additional restaurants.  Our success also depends on our ability to operate and managesuccessfully our growing operations. Our ability to expand successfully will depend upon a number of factors,including the following:

 

•      the availability and cost of suitable restaurant locations fordevelopment;

 

•      the availability of restaurant acquisition opportunities;

 

•      the hiring, training, and retention of additional management andrestaurant personnel;

 

•      the availability of adequate financing;

 

•      the continued development and implementation of management informationsystems;

 

•      competitive factors; and

 

•      general economic and business conditions.

 

Increased construction costsand delays resulting from governmental regulatory approvals, strikes, or workstoppages, adverse weather conditions, and various acts of God may also affectthe opening of new restaurants.  Newlyopened restaurants may operate at a loss for a period following their initialopening.  The length of this period willdepend upon a number of factors, including the time of the year the restaurantis opened, the sales volume, and our ability to control costs.

 

We may not successfullyachieve our expansion goals.  Additionalrestaurants that we develop or acquire may not be profitable.  In addition, the opening of additionalrestaurants in an existing market may have the effect of drawing customers fromand reducing the sales volume of our existing restaurants in those markets.

 

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**We willneed additional capital for expansion which may not be available.**

 

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 creditagreements. Our cash flows from operations will be sufficient to build one newBamboo Club and one new TGI Friday’s during 2004.  However, we will require funds to develop additional TGI Friday’sand Bamboo Club restaurants after 2004 and to pursue any additional restaurantdevelopment or restaurant acquisition opportunities that may develop and tocomply with our required minimum restaurant openings in accordance with ourdevelopment agreements with TGI Friday’s Inc.

 

In the future, we may seekadditional equity or debt financing to provide funds so that we can develop oracquire additional restaurants.  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 financial results, and we must repay the debt regardlessof our operating results.  Future equityfinancings could result in dilution to our stockholders.

 

**We will besubject to the risks associated with franchising operations if we beginfranchising the Redfish or Bamboo Club concepts**.

 

We will be subject to therisks associated with franchising if we begin franchising activities in thefuture.  If we develop a franchisingprogram, our success as a franchisor will depend upon our ability to developand implement a successful system of concepts and operating standards and toattract and identify suitable franchisees with adequate business experience andaccess to sufficient capital to enable them to open and operate restaurants ina manner consistent with our concepts and operating standards. We cannot provideassurance that we would be able to successfully meet these challenges as afranchisor.  In addition, as afranchisor we would be subject to a variety of federal and state laws andregulations, including Federal Trade Commission regulations, governing theoffer and sale of franchises. These laws and regulations could result insignificant increased expenses and potential liabilities for our company in theevent we engage in franchising activities in the future.

 

**We facerisks that affect the restaurant industry in general**.

 

A variety of factors overwhich we have no control may affect the ownership and operation ofrestaurants.  These factors includeadverse changes in national, regional, or local economic or market conditions;increased costs of labor or food products; fuel, utility, and energy and otherprice increases; competitive factors; the number, density and location ofcompetitors; and changing demographics, traffic patterns, and consumer tastes,habits, and spending priorities.

 

Third parties may filelawsuits against us based on discrimination, personal injury, claims forinjuries or damages caused by serving alcoholic beverages to an intoxicatedperson or to a minor, or other claims. As a multi-unit restaurant operator, our business could be adversely

 

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affected by publicity aboutfood quality, 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 ofthese factors with any degree of certainty. Any one or more of these factors could have a material adverse effect onour business.

 

Employees may file claims orlawsuits against us based on discrimination or wrongful termination or basedupon their rights created by the state laws wherein we do business. Theseclaims or lawsuits could result in unfavorable publicity and could have amaterial adverse effect on our business.

 

**We facerising insurance costs.**

 

The cost of insurance(workers compensation insurance, general liability insurance, health insurance,and directors and officers liability insurance) has risen significantly in thepast year and is expected to continue to increase in 2004.  In California, new legislation effectiveJanuary 1, 2003, provides significantly increased benefits and higher costs tocompanies for workers’ compensation claims. Also in California, new legislation that takes effect in 2006 requiresus to provide 80% of the cost of health insurance to our employees and theirfamilies. Approximately 50% of our owned restaurants and employees are locatedin California.  The cost of this healthprogram has not yet been determined, but will likely have a significantnegative impact on our profitability. We maybe unable to make the improvementsin our operations to mitigate the effects of these increased costs.

 

**We faceintense competition.**

 

The restaurant business ishighly competitive with respect to price, service, and food type andquality.  Restaurant operators alsocompete for attractive restaurant sites and qualified restaurant personnel andmanagers.  Our restaurants compete witha large 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 longer operatinghistories than we possess.

 

**We dependupon our senior management.**

 

Our success depends, inlarge part, upon the services of our senior management.  The immediate loss of the services of anymembers of our senior management team, without a reasonable period oftransition, could have a material adverse effect on our business.

 

**We facerisks associated with government regulation.**

 

Various federal, state, andlocal laws affect our business.  Thedevelopment and operation of restaurants depend to a significant extent on theselection and acquisition of suitable sites. These sites are subject to zoning, land use, environmental, traffic, andother regulations of state and local governmental agencies.  City ordinances or other regulations, or theapplication of such ordinances or regulations, could impair our ability toconstruct or acquire restaurants in desired locations and could result incostly delays.

 

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The delay or failure toobtain or maintain any licenses or permits necessary for operations could havea material adverse effect on our business. In addition, an increase in the minimum wage rate, employee benefitcosts, or other costs associated with employees could adversely affect ourbusiness.  We also are subject to theAmericans with Disabilities Act of 1990 that, among other things, may requireus to install certain fixtures or accommodations in new restaurants or torenovate existing restaurants to meet federally mandated requirements.

 

Sales of alcoholic beveragesrepresent an important source of revenue for each of our restaurants.  The temporary suspension or permanent lossor the inability to maintain a liquor license for any restaurant would have anadverse effect on the operations of that restaurant.  We do not plan to open a restaurant in any location for which webelieve we cannot obtain or maintain a liquor license.

 

**We faceincreased expenditures of time and money associated with compliance withchanging regulation of corporate governance and public disclosure.**

 

Keeping abreast of, and incompliance with, changing laws, regulations, and standards relating tocorporate governance and public disclosure, including the Sarbanes-Oxley Act of2002, new SEC regulations, and Nasdaq National Market rules, has required anincreased amount of management attention and external resources.  We remain committed to maintaining highstandards of corporate governance and public disclosure.  As a result, we intend to invest allreasonably necessary resources to comply with evolving standards, and thisinvestment may result in increased general and administrative expenses and adiversion of management time and attention from revenue generating activitiesto compliance activities.

 

**Litigationcould have a material adverse effect on our business.**

 

We are from time to time thesubject of complaints or litigation from guests alleging food-borne illness,injury, or other food quality, health, or operational concerns.  We may be adversely affected by publicityresulting from such allegations regardless of whether such allegations arevalid or whether we are liable.  We arealso subject to complaints or allegations from former or prospective employeesfrom time to time.  A lawsuit or claimcould result in an adverse decision against us that could have a materialadverse effect on our business.

 

We are subject to state“dram shop” laws and regulations, which generally provide that a person injuredby an intoxicated person may seek to recover damages from an establishment thatwrongfully served alcoholic 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 marketprice of our common stock has been volatile.**

 

Historically, the marketprice of our common stock has been extremely volatile.  In the future, the market price of ourcommon stock will be subject to wide fluctuations as a result of a variety offactors, including the following:

 

•      quarterly variations in our operating results or those of otherrestaurant companies;

 

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•      changes in analysts’ estimates of our financial performance;

 

•      changes in national and regional economic conditions, the financialmarkets, or the restaurant industry;

 

•      natural disasters; and

 

•      other developments affecting our business or other restaurantcompanies.

 

The trading volume of ourcommon stock has been limited, which may increase the volatility of the marketprice for our stock.  In addition, thestock market has experienced extreme price and volume fluctuations in recentyears.  This volatility has had a significanteffect on the market prices of securities issued by many companies for reasonsnot necessarily related to the operating performances of these companies.

 

**Ourmanagement controls a significant portion of the voting power of our commonstock.**

 

Our directors and executiveofficers currently own or control, directly or indirectly, approximately6,494,306 shares, or 43.7%, of our outstanding common stock.  These directors and officers also holdoptions to purchase an aggregate of 2,889,500 shares of common stock atexercise prices ranging from $1.67 to $6.01 per share.  As a result, these persons voting togetherhave significant voting power, including the election of directors and theapproval of other corporate matters.

 

**Theexistence of stock options and warrants may adversely affect the terms offuture financings.**

 

Stock options to personsother than directors or officers to acquire an aggregate of 968,255 shares ofcommon stock currently are outstanding. An additional 312,000 shares of common stock have been reserved forissuance upon exercise of options that may be granted under our existing stockoption plans.  In addition, warrants toacquire 231,000 shares of common stock currently are outstanding.  During the terms of those options andwarrants, the holders of those securities will have the opportunity to profitfrom an increase in the market price of our common stock.  The existence of options and warrants mayadversely affect the terms on which we can obtain additional financing in thefuture, and the holders of options and warrants can be expected to exercisethose options and warrants at a time when, in all likelihood, we would be ableto obtain additional capital by offering shares of common stock on terms morefavorable to us than those provided by the exercise of such options andwarrants.

 

**Sales oflarge numbers of shares could adversely affect the price of our common stock.**

 

Sales of substantial amountsof common stock in the public market, or even the potential for such sales,could adversely affect prevailing market prices for our common stock and couldadversely affect our ability to raise capital. As of March 5, 2004, there were 14,641,928 shares of our common stockoutstanding.  All of these shares arefreely transferable without restriction under the securities laws, unless theyare held by our “affiliates,” as that term is defined in the securitieslaws.  Affiliates also are subject tocertain of the resale limitations of Rule 144. Generally, under Rule 144, each person that beneficially owns restrictedsecurities with respect to which at least one year has elapsed since the laterof the date the shares were acquired from us or one of our affiliates may,every three months, sell in ordinary brokerage transactions or to

 

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market makers an amount ofshares equal to the greater of 1% of our then-outstanding common stock or theaverage weekly trading volume for the four weeks prior to the proposed sale ofsuch shares.

 

**We do notanticipate that we will pay dividends.**

 

We have never paid any cashor stock dividends on our common stock, and we do not anticipate that we willpay dividends in the foreseeable future. We intend to apply any earnings to the expansion and development of ourbusiness.  In addition, the terms of ourcredit facilities limit our ability to pay dividends on our common stock.

 

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

 

In January 2003, we enteredinto a 10-year lease renewal and modification agreement for our corporateoffices. This agreement increased the size of the existing space, allowing usto combine our three office locations into one contiguous space. This willresult in a reduction in total space leased and will provide 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 mostof our restaurants.  The initial leaseterms range from 10 to 20 years and usually contain renewal options for up to20 years.  The leases typically providefor a fixed rental payment plus a percentage of our revenue in excess of aspecified amount.

 

**ITEM 3.****         ****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 two lawsuits filed on behalf of currentemployees, seeking damages, under California law, for both missed breaks andmissed meal breaks the employees allege they did not receive. These lawsuitsseeks to establish a class action relating to our California operations. Weintend to vigorously defend these lawsuits, both on the merits of theemployees’ case and the issues relating to class action status.

 

During 2003 we were involvedin two lawsuits with landlords of leases to build two Bamboo Club restaurants.We entered into settlement agreements with both and such lawsuits were amicablyresolved.

 

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 ofapproximately $900,000.  We havevigorously contested this assessment. The first of various appeal conferenceswas held on November 13, 2003.  InFebruary 2004, we were notified that 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 thoseproceedings, we are not subject to any pending litigation that we believe willhave a material adverse effect on our business or financial condition, resultsof operations, or liquidity.

 

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

 

Not applicable.

 

**PART II**

 

**ITEM 5.****    MARKETFOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASE OF EQUITY SECURITIES**

 

Our common stock has beenquoted on the Nasdaq National Market under the symbol “MAIN” since 1992.  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** |   |
|---------------------------------------|--------|----------|--------|---------|--------|
| 2002                                  |   |     |   |    |   |
| First Quarter                         |   | $        | 6.10   |    | $      | 3.85 |   |
| Second Quarter                        |   | 6.51     |   | 5.30    |   |
| Third Quarter                         |   | 6.30     |   | 2.81    |   |
| Fourth Quarter                        |   | 3.25     |   | 1.47    |   |
| 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 (through March 5, 2004) |   | $        | 4.45   |    | $      | 2.39 |   |

 

On March 5, 2004, there were860 holders of record of our common stock and the closing sale price of ourcommon stock on the Nasdaq National Market was $2.75 per share.

 

We have never declared orpaid any cash dividends.  We intend toretain any earnings to fund the growth of our business and do not anticipatepaying any cash dividends in the foreseeable future.  In addition, our existing debt obligations limit our ability topay cash dividends.

 

**ITEM 6.****         ****SELECTED CONSOLIDATED FINANCIAL DATA**

 

The following table setsforth selected consolidated financial data for our company for the periodsindicated.  The selected consolidatedfinancial data for each of the five fiscal years in the period ended December29, 2003, has been derived from our consolidated financial statements, whichhave 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 each of the two fiscal years in the period ended December 30, 2002(included herein), and (3) Mayer Hoffman McCann P.C., our current independentaccountants, for the fiscal year ended December 29, 2003 (included herein).

 

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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. 29,  2003**                                |    | **Dec. 30,  2002** | ** ** | **Dec. 31,  2001** | ** ** | **Dec. 25,  2000** | ** ** | **Dec. 27,  1999** | ** ** |
|                                                |   |                                              |    |   |   |   |   |   |   |   |   |
| Statement of Operations Data:                       |   |                                              |    |   |   |   |   |   |   |   |   |
| Revenue                                             |   | $                                                 | 224,494 |   | $ | 220,151 |   | $ | 211,823 |   | $ | 186,542 |   | $ | 140,294 |   |
| Restaurant operating expenses:                      |   |                                              |    |   |   |   |   |   |   |   |   |
| Cost of sales                                       |   | 60,299                                            |    | 61,270 |   | 59,139 |   | 53,671 |   | 39,960 |   |
| Operating income (loss)                             |   | (1,276                                            | )       | (3,318 | ) | 3,069 |   | 7,548 |   | 3,792 |   |
| Net income (loss)(1)(2)                             |   | $                                                 | (1,966  | ) | $ | (8,577 | ) | $ | (111 | ) | $ | 3,678 |   | $ | 970 |   |
| Diluted earnings per share:                         |   |                                              |    |   |   |   |   |   |   |   |   |
| Net income (loss) (2)                               |   | $                                                 | (0.14   | ) | $ | (0.61 | ) | $ | (0.01 | ) | $ | 0.33 |   | $ | 0.09 |   |
| Weighted average shares outstanding –  diluted |   | 14,179                                            |    | 14,105 |   | 14,048 |   | 11,117 |   | 10,407 |   |
| Balance Sheet Data:                                 |   |                                              |    |   |   |   |   |   |   |   |   |
| Working capital (deficiency)                        |   | $                                                 | (16,973 | ) | $ | (15,028 | ) | $ | (7,987 | ) | $ | (7,692 | ) | $ | (16,652 | ) |
| Total assets                                        |   | 106,207                                           |    | 112,395 |   | 112,462 |   | 108,261 |   | 86,525 |   |
| Long-term debt, net of current portion              |   | 47,869                                            |    | 51,998 |   | 47,232 |   | 44,395 |   | 31,513 |   |
| Stockholders’ equity                           |   | 29,097                                            |    | 29,610 |   | 40,207 |   | 40,499 |   | 27,383 |   |

 

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(1)   Fiscal 2003, 2002, and 2000 includes a charge of $270,000, $46,000, and$16,000 respectively, for early extinguishment of debt.

(2)   Fiscal 1999 includes a charge of $168,000, or $0.02 per diluted share,due to the cumulative effect of change in accounting principle related to theadoption of SOP 98-5.

(3)   Fiscal 2002 includes a full valuation allowance against deferred taxassets.

 

**QuarterlyResults of Operations (Unaudited)**

 

The following table presentsunaudited consolidated statements of operations data for each of the eightquarters in the period ended December 29, 2003.  We believe that all necessary adjustments have been included topresent fairly the quarterly information when read in conjunction with ourconsolidated financial statements.  Theoperating results for any quarter are not necessarily indicative of the resultsfor any subsequent quarter.

 

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|                                             |   | **Fiscal  Quarter Ended**                     |   |
|--------------------------------------------------|--------|-----------------------------------------------|--------|
|                                             |   | **(In  thousands, except per share amounts)** |   |
|                                             |   | **2003**                                      |   | **2002** |   |
|                                             |   | **Dec. 29**                                   |   | **Sept. 30** |   | **June 30** |   | **Mar. 31** |   | **Dec. 30** |   | **Sept. 30** |   | **July 1** |   | **April 1** |   |
| Revenue                                          |   | $                                             | 52,625 |   | $ | 54,173 |   | $ | 60,110 |   | $ | 57,586 |   | $ | 52,898 |   | $ | 54,026 |   | $ | 57,898 |   | $ | 55,329 |   |
| Cost of sales                                    |   | 14,219                                        |   | 14,334 |   | 15,888 |   | 15,858 |   | 15,167 |   | 15,145 |   | 15,775 |   | 15,183 |   |
| Income (loss) before income taxes                |   | (4,820                                        | )      | 236 |   | 1,546 |   | 1,071 |   | (7,920 | ) | (2,446 | ) | 1,541 |   | 1,557 |   |
| Net income (loss) (1) (2) (3)                    |   | $                                             | (4,820 | ) | $ | 236 |   | $ | 1,546 |   | $ | 1,071 |   | $ | (9,103 | ) | $ | (2,006 | ) | $ | 1,264 |   | $ | 1,268 |   |
|                                             |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) per share before income  taxes |   | $                                             | (0.34  | ) | $ | (0.02 | ) | $ | 0.11 |   | $ | 0.08 |   | $ | (0.56 | ) | $ | (0.17 | ) | $ | 0.11 |   | $ | 0.11 |   |
| Net income (loss) per share                      |   | $                                             | (0.34  | ) | $ | (0.02 | ) | $ | 0.11 |   | $ | 0.08 |   | $ | (0.64 | ) | $ | (0.14 | ) | $ | 0.09 |   | $ | 0.09 |   |

 

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(1) Fourth quarter fiscal2003 and 2002 include asset impairment charges and other and estimated leasetermination fees of $3,069,000 and $6,337,000, respectively, including anallocation of $455,000 and $860,000 of goodwill, respectively.

(2) Third quarter fiscal2003 and 2002 include asset 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.

 

**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 13years, we have grown through acquisitions and development of new restaurants.  We currently own 71 restaurants.

 

In 2001, operations were impactedby soft economic conditions, especially in the fourth quarter and subsequent tothe September 11th attacks on the United States.  These conditions halted our positivesame-store sales increase record at 18 consecutive quarters and predicated thefourth quarter impairment write-down of five owned restaurants and themanagement agreement receivable impairment write-down for six stores we managedin Northern California and El Paso, Texas.

 

We opened seven newrestaurants in 2001, including three TGI Friday’s, one Redfish, and threeBamboo Club locations.  The TGI Friday’srestaurants are located in West Albuquerque, New Mexico; Roseville, California(Sacramento area); and Porter Ranch, California (Los Angeles area).  The Redfish restaurant is located in NorthScottsdale, Arizona;

 

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and the Bamboo Clubrestaurants are located in Tampa, Florida; Wellington, Florida (West Palm Beacharea); and Tempe, Arizona (Phoenix area).

 

We opened six newrestaurants in 2002, including one TGI Friday’s and one Redfish in Chandler,Arizona; three Bamboo Clubs in Tucson, Arizona, Newport, Kentucky, and King ofPrussia, Pennsylvania; and one Alice Cooper’stown in Cleveland, Ohio in thelocation formally occupied by an underperforming Redfish restaurant that weclosed. In addition, we closed an underperforming Redfish restaurant in SanDiego, California and subleased the premises to a local San Diego nightcluboperator. We also closed underperforming TGI Friday’s restaurants in KansasCity, Missouri and in El Paso, Texas.

 

During 2002, we recordedcharges for (i) the write-down of land held for sale of $400,000 and (ii)impairment charges and other of $1,206,000, including asset impairment for anunder-performing restaurant location that was closed, an allocation of $300,000of goodwill, and $95,000 in lease cancellation charges related to this closure.

 

We opened five newrestaurants in 2003, including one TGI Friday’s in the Desert Ridge Mall, inArizona and four Bamboo Club “Asian Bistro” restaurants in Novi (Detroit),Michigan; Aventura Mall (North Miami), Florida; Desert Ridge Mall, Arizona; andRaleigh/ Durham, North Carolina. We sold three TGI Friday’s restaurants inNorthern California, and we entered into an agreement canceling the managementof four TGI Friday’s in California that we managed. We closed anunderperforming Redfish Seafood Grill and Bar in Denver, Colorado andsub-leased the location to a third party.

 

During 2003, we recordedcharges for (i) a write-down in the value of land we hold for sale of $350,000,(ii) impairment charges and other of $2,850,000, including asset impairmentsfor underperforming 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 will close in early 2004,(iv) $500,000 in lease cancellation charges related to a restaurant that willclose in early 2004, (v) a provision of $800,000 for the termination of amanagement agreement of four restaurants we managed in Northern California,(vi) a $300,000 provision for the retirement on March 31, 2004 of our CEO, and(vii) a write-off of $201,000 for deferred financing fees associated with anearly debt refinancing.

 

***Economic Overview***

 

We conduct business in thecasual dining restaurant industry and the operating performance of ourrestaurants is directly and heavily influenced by the overall state of thenational and local economies where our restaurants are located.  When overall economic conditions negativelyimpact the financial performance of an individual restaurant, we periodicallyconsider all of the factors influencing that restaurant, such as operationalefficiencies, local demographic changes, local construction activity,competition, and other related factors. We then assess the prospect that we canimprove both the short-term and long-term financial results, at least to alevel sufficient to recover our investment in the leasehold improvements andequipment assets.  There have been andlikely will continue to be situations where we will make the decision that anasset is impaired and a write-down is required.

 

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***Asset Impairments and Write Offs***

 

The vast majority of ourT.G.I. Friday’s restaurants have performed well; thus, we have experienced alimited number of asset impairments in recent years.  As the local and national economies strengthen and our financialperformance improves or remains strong, the overall judgment call about assetimpairment write-downs, for all of our brands, becomes easier; when the economyweakens, this judgment is made more difficult.

 

In the last 30 months in ourBamboo Club brand, we have opened ten new restaurants.  Financial results have been slightly belowour original expectations, primarily as a result of the timing of when weopened these restaurants and the state of the weak national economy.  However, two of these new locations (Newportand Aventura) have performed significantly below our expectations, due in partto what we now believe to be poor real estate location decisions.  In one case, the demographics of the mallare not consistent with our target demographics.  In the other case, our physical location within the mall providespoor visibility and customer access. Although both of these locations remainopen and operating, we recorded asset impairments in 2003 on both of theselocations.  We cannot rule out futurelosses at these or any other locations.

 

In the future and for manybusiness reasons, we may vacate an operating property where we have a long-termlease obligation.  Any such vacation ofproperty may require us to pay fees and costs, which are likely to be material.

 

***Employee-related Insurance Costs and Wage Expense***

 

Another major cost categoryfor us is employee-related insurance costs, such as health care and workerscompensation benefits.  We self-insurefor the majority of the risks associated with these costs and we purchaseexcess liability insurance for situations where the individual cases becomevery costly.  Each mid year and again atyear end, with the assistance of our insurance actuaries, we evaluate theactual claims history to (i) predict the estimated total costs to accrue forthe upcoming year, and (ii) to evaluate the level of accruals for prior years’open claims.  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, 37 of our 71restaurants, 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 theyreceive from our customers.  Thispractice is permitted in most other states in which we operate. This conditionresults in a significantly higher level of wages paid to our employees inCalifornia,  compared to the other tenstates in which we operate.  Thiscondition also impacts worker compensation benefits and our costs inCalifornia.  We estimate that ourworkers compensation cost for each claim in California is more than double thecost we experience in other states. Finally, the California legislature has recently enacted legislationthat, if it remains in effect, will require us to pay 80% of the health carecosts, starting in 2006, for all of our California based employees and theirfamilies. We estimate this annual cost may be as much as $5.0 million based oncurrent employment levels.  We can notpredict whether, or to what extent, we will be able to absorb these additionalcosts through price increases, operational efficiencies, staff reductions, or cost controls.

 

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***Long-Term Debt***

 

We are a highly leveragedcompany. Our long-term debt of approximately $51 million at December 29, 2003is held by five principal lenders.  Weexpect to pay interest on this debt of $3.9 million in 2004. However, afterconsideration of the impact of our swap agreements, approximately 30% of ourloans are tied to variable interest.  Wecurrently benefit from the historically low levels of interest rates.  If interest rates rise in 2004, ourannualized interest expense will increase by approximately $300,000 for eachone percentage point increase in short-term interest rates (as measured byLIBOR).

 

In addition, we haveinterest rate swaps whose value or obligation changes with the change inlong-term interest rates.  Since it isour intention to hold these swaps until maturity, the impact of the increase invalue or the liability is reflected primarily on our balance 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.

 

***Sale of Assets***

 

Finally, we consider sellingoperating or other assets from time to time, and we have an active program ofreviewing our options and opportunities on a regular basis.  We may enter into a transaction to sellnon-strategic assets, or as part of a program to raise cash.  We may sell these assets at either a gain orloss and this gain or loss could be material.

 

***Outlook 2004***

 

A number of factors serve asthe basis of cautious optimism for 2004: (i) we have seen positive signs aboutthe national economy in early 2004, (ii) the TGI Friday’s partnership withAtkins to deliver low-carb menu items looks very promising, and (iii) we planto open only one restaurant for all of 2004. We expect our EBITDA to beapproximately $14.0 million to $16.0 million in 2004 (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 two restaurants, and to provide our stores withroutine capital equipment needs.

 

| **EBITDA Reconciliation:**            |   | **Twelve  Months Ended  December 27, 2004** |       |
|---------------------------------------|--------|---------------------------------------------|------------|
|                                  |   | **(in  millions)**                          |       |
| Net Income                            |   | **$**                                       | **1.5**    | ** ** |
| Add-Income taxes                      |   | **—**                                  | ** ** |
| •Interest  expense               |   | **4.0**                                     | ** ** |
| •Depreciation  and Amor tization |   | **9.5**                                     | ** ** |
| EBITDA                                |   | **$**                                       | **15.0**   | ** ** |

 

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**CriticalAccounting Policies**

 

The preparation of consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires us to make a number of estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements.  Such estimates and assumptions affect thereported amounts of revenues and expenses during the reporting period.  On an ongoing basis, we evaluate ourestimates and assumptions based upon historical experience and various otherfactors and circumstances.  We believeour estimates and assumptions are reasonable in the circumstances; however,actual results may differ from these estimates under different futureconditions.

 

We believe that the estimates and assumptionsthat are most important to the portrayal of our financial condition and resultsof operations, in that they require management’s most difficult, subjective orcomplex judgments, form the basis for the accounting policies deemed to be mostcritical to our operations.  Thesecritical accounting policies relate to the valuation, impairment andamortizable lives of long-lived assets, goodwill, and to other identifiableintangible assets, valuation of deferred tax assets, reserves related toself-insurance for workers compensation and general liability, and recognitionof stock-based employee compensation. These policies are as follows:

 

(1) We periodically perform asset impairment analysis of long-lived assetsrelated to our restaurant locations, goodwill, and other identifiableintangible assets. We perform these tests whenever we experience a “triggering”event, such as a decision to close a location or major change in the locationsoperating environment, or other event that might impact our ability to recoverour asset investment. Also, we have a policy of reviewing the financial operations of ourrestaurant locations on at least a quarterly basis.  Locations that are not meeting expectations are identified andcontinue to be watched closely throughout the year.  Primarily in the fourth quarter, actual results are reviewed andbudgets for the ensuing year are analyzed. If we deem that a location’s results will continue to be below expectations,alternatives for its continued operation are considered.  At this time, we perform an asset impairmenttest.  If it is determined that theasset’s fair value is less than book value and we will be unable to recover ourinvestment through operations, an impairment charge is recorded.  Upon an event, such as a formal decision forabandonment (restaurant closure), we may record additional impairment of assetsand an allocation of goodwill if the location was one that was acquired.  Any carryover basis of assets is depreciatedover the respective remaining useful lives.

 

(2) Periodically we adjust the valuation allowance against our deferred taxassets to carry the net amount that is more likely than not to be realized,based upon recent past financial performance, tax reporting positions, andexpectations of future taxable income. We expect to continue to record a full valuation allowance on any futuretax benefits until we achieve profitable operations.

 

(3) We use an actuarial based methodology utilizing our historicalexperience factors to periodically adjust self-insurance reserves for workerscompensation and general liability claims and settlements. These estimates areadjusted based upon annual information received in July of

 

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each year in connection with policyrenewals.  Estimated costs for thefollowing year are accrued on a monthly basis and progress against thisestimate is re-evaluated based upon actual claim data received each quarter.

 

(4) We use the method of accounting for employee stock options allowed underAPB Opinion 25 and have adopted the disclosure provisions of SFAS No. 123,which require pro forma disclosure of the impact of using the fair value atdate of grant method of recording stock-based employee compensation.

 

We believe estimates and assumptions relatedto these critical accounting policies are appropriate under the circumstances;however, should future events or occurrences result in unanticipated consequences,there could be a material impact on our future financial condition or resultsof operations.

 

**Resultsof Operations**

 

The following table sets forth, for theperiods indicated, the percentages that certain items of income and expensebear to total revenue:

 
|                                 |   | **Fiscal Year Ended**  |   |
|--------------------------------------|--------|------------------------|--------|
|                                 |   | **December 29,  2003** |   | **December 30,  2002** |   | **December 31,  2001** |   |
| Revenue                              |   | 100.0                  | %      | 100.0 | % | 100.0 | % |
| Restaurant operating expenses:       |   |                   |   |   |   |   |   |
| Cost of sales                        |   | 26.9                   |   | 27.8 |   | 27.9 |   |
| Payroll and benefits                 |   | 31.4                   |   | 31.3 |   | 31.1 |   |
| Depreciation and amortization        |   | 3.7                    |   | 3.6 |   | 3.7 |   |
| Other operating expenses             |   | 31.2                   |   | 29.9 |   | 28.9 |   |
| Total restaurant operating  expenses |   | 93.2                   |   | 92.7 |   | 91.6 |   |
|                                 |   |                   |   |   |   |   |   |
| Income from restaurant  operations   |   | 6.8                    |   | 7.3 |   | 8.4 |   |
|                                 |   |                   |   |   |   |   |   |
| Amortization of intangibles          |   | 0.3                    |   | 0.2 |   | 0.9 |   |
| General and administrative  expenses |   | 4.0                    |   | 4.1 |   | 3.8 |   |
| Preopening expenses                  |   | 0.4                    |   | 0.7 |   | 0.7 |   |
| New manager training expenses        |   | 0.1                    |   | 0.2 |   | 0.2 |   |
| Impairment charges and other         |   | 2.6                    |   | 3.6 |   | 1.6 |   |
| Management fee income                |   | —                 |   | — |   | (0.2 | ) |
|                                 |   |                   |   |   |   |   |   |
| Operating income (loss)              |   | (0.6                   | )      | (1.5 | ) | 1.4 |   |
| Gain from sale of assets             |   | (1.7                   | )      | — |   | — |   |
| Interest expense and other, net      |   | 2.0                    |   | 1.8 |   | 1.8 |   |
| Income (loss) before income  taxes   |   | (0.9                   | )%     | (3.3 | )% | (0.4 | )% |

 

**Fiscal2003 Compared to Fiscal 2002**

 

Revenue for the fiscal year ended December29, 2003 increased by $4.3 million, or 2.0%, to $224.5 million compared to$220.2 million for the fiscal year ended December 30, 2002.  Of this increase, $8.4 million was primarilya result of opening five new restaurants in 2003 and the full year of revenuesfor the six restaurants opened in 2002. This increase was offset by revenues

 

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lost of approximately $6.0 million as aresult of the sale of three TGI Friday’s and the closure of one Redfishrestaurant.  Same-store sales increased1.1%, or $1.9 million, for fiscal 2003 compared to an increase in same-store sales of 0.4% for 2002.  Same-stores sales percentages representsales for 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 ofrevenue decreased to 26.9% in 2003 from 27.8% in 2002.  This decrease was due primarily to lowercontractual prices on certain items such as meat and seafood, stronger supplychain buying efforts, and slight menu pricing increases.  The decrease was also attributable topromotional driven product mix changes.

 

Payroll and benefits consist ofrestaurant 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 to 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 TGIFriday’s 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 3.7% 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 2003.  The increase waspartially offset by the reduction in depreciation as a result of assetimpairments recorded during 2002 and 2003.

 

Other operating expenses includerent, real estate taxes, common area maintenance charges, advertising, workers’compensation and property insurance, maintenance, and utilities.  Other operating expenses increased by $4.2million and as a percentage of revenue to 31.2% in 2003 from 29.9% in 2002. Theincrease was principally due to (i) higher marketing fees of $1.0 million paidto TGI Friday’s for the national Friday’s advertising campaign, which consistedof five 4-week flights in 2003 versus four 4-week flights in 2002, (ii)increased occupancy expenses of $1.4 million related to higher 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 compensationand general liability costs, primarily in California, which increased $1.6million over the prior year.

 

Depreciation and amortizationafter income from restaurant operations includes depreciation of corporateproperty and equipment, amortization of identifiable intangibles, andamortization of goodwill as applicable. Depreciation and amortization increasedas 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 administrativeexpenses are those expenses associated with corporate and administrativefunctions that support new restaurant development and restaurant operations and

 

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provide administrative, accounting andmanagement infrastructure.  These costsconsist primarily of management and staff salaries, employee benefits, travel,legal and professional fees, and technology support.  General and administrative expenses decreased as a percentage ofrevenue to $8,977,000, or 4.0% of revenue, in 2003 from $8,946,000, or 4.1% ofrevenue, in 2002.  We experiencedincreases related to higher local marketing costs, investor relationsconsulting fees, and legal expenses. The increases were offset by lower salaries and benefits from areduction in the number of employees, reduced travel as a result of the slowdown in new store openings during 2003, and decreases resulting from a focusedcost-reduction effort implemented 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 typicallyincur the most significant portion of pre-opening expenses associated with agiven restaurant in the two months immediately preceding opening and in themonth of opening. Pre-opening expenses were $907,000, or 0.4% of revenue, in2003 as compared to $1,619,000, or 0.7% of revenue, in 2002. These decreaseswere the result fewer new store openings in 2003 (five) compared to 2002 (six)and the timing of incurring the expenses related to these openings.

 

New manager training expenses arethose costs incurred in training newly hired or promoted managers, as well asthose costs incurred to relocate those managers to permanent managementpositions. New manager training expenses were $195,000, or 0.1% of revenue, forthe year ended December 29, 2003 compared to $426,000, or 0.2% of revenue, in2002.  This decrease was primarily aresult of fewer new store openings in 2003 compared to 2002 and expensesincurred in 2002 related to new stores opened in early 2003.

 

In 2003, the impairment chargesand other account included the write-off or write-down of asset impairments ofcertain leasehold improvements, equipment and other operating assets. Theaccount included (i) $2,850,000 primarily to reduce the carrying value of theseassets on underperforming locations to their estimated fair value, (ii)$905,000 of goodwill and franchise area goodwill allocated to a closed Redfishlocation in Denver, Colorado, and two impaired locations, one of which willclose in early 2004, (iii) $500,000 in lease cancellation charges and othercosts associated with the closing of a TGI Friday’s in Salinas, California inearly 2004, (iv) a reduction of $350,000, in the value of the land and buildingwe hold for sale in El Paso, Texas, (v) a provision of $800,000 for thetermination of a management agreement under which we managed four restaurantsin Northern California, (vi) a provision of $300,000 for the retirement onMarch 31, 2004 for our CEO, and (vii) a write-off of $200,000 for deferredfinancing fees associated with early refinancing of debt.

 

Interest expense and other, netwas approximately $4.5 million, or 2.0% of revenue, in 2003 compared with $4.0million, or 1.8% of revenue, in 2002. This increase was primarily attributable to slightly higher averageoutstanding borrowings, higher credit spreads due to increased leverage, and aprepayment penalty of $270,000 associated with early refinancing of debt. Thisincrease was offset some by more favorable interest rates on our variableinterest rate debt. During the years ended December 29, 2003 and December 30,2002, we had average outstanding borrowings of $53,600,000 and $54,200,000,respectively, with effective interest rates of 7.9% and 7.3%, respectively.

 

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At December 29, 2003, we hadapproximately $13.7 million of net operating loss carryforwards and tax creditsavailable to offset future book income and federal income taxes.

 

 

**Fiscal2002 Compared to Fiscal 2001**

 

Revenue for the fiscal year endedDecember 30, 2002 increased 3.9% to $220.2 million compared to $211.8 millionfor the year ended December 31, 2001. This increase was primarily the result ofopening six new restaurants in 2002 and the full year of revenues for the sevenrestaurants opened in 2001.  Same-storesales increased 0.4% for fiscal 2002 compared to an increase in same-storesales of 1.9% for 2001.  Same-storessales percentages represent sales for stores that have been open for at least18 months.  Revenue from alcoholicbeverages accounted for 24.4% of revenue in 2002 and 24.2% in 2001.

 

Cost of sales as a percentage ofrevenue decreased slightly to 27.8% in 2002 from 27.9% in 2001.  This decrease was due primarily to lowerprices on certain food supplies, partially offset by higher costs for produce,seafood, and grocery products.

 

Payroll and benefit costsincreased as a percentage of revenue to 31.3% in 2002 from 31.06% in 2001.  This increase was primarily due to a $0.50per hour minimum wage increase in our California market, effective January 1,2002, and increases in management labor and benefits resulting from lowerturnover.  As discussed below, new managerlabor expense is charged to the new manager training expense account.  Therefore, when turnover is lower, lesslabor is charged to the new manager training expense account and more laborremains in the payroll and benefits account. Payroll and benefits increases were also the result of higher healthinsurance costs.

 

Depreciation and amortizationbefore income from restaurant operations includes depreciation of restaurantproperty and equipment and amortization of franchise fees and liquorlicenses.  Depreciation and amortizationdecreased as a percentage of revenue to 3.6% in 2002 from 3.7% in 2001,primarily due to a reduction in depreciation expense due to the impairment ofassets for several underperforming locations recorded in December 2001, andadditional asset impairments recorded in the third quarter of 2002.

 

Other operating expenses includerent, real estate taxes, common area maintenance charges, advertising,insurance, maintenance, and utilities. Other operating expenses increased as a percentage of revenue to 29.9% in2002 from 28.9% in 2001.  The increasewas due primarily to additional unit level advertising costs, store rentincreases related to new store openings, and marketing fee increases. Thefranchise agreements between TGI Friday’s Inc. and our company require a 4% ofnet sales royalty and up to a 4% of net sales marketing contribution.  Each year we contribute to a TGI Friday’snational marketing pool.  In 2001, thepool contribution was 2.1% of net sales for the first three fiscal quarters and1.7% of net sales for the fourth quarter. The pool contribution percentage decreased because TGI Friday’s Inc.cancelled its TGI Friday’s national advertising campaign for the entire fourthquarter of 2001. In 2002, the contribution to the fund was 2.7% of sales,resulting in an increase over the prior year. This contribution offsets a portion of our general 4% marketingrequirement.

 

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Depreciation and amortizationafter income from restaurant operations includes depreciation of corporateproperty and equipment, amortization of identifiable intangibles, andamortization of goodwill as applicable. Depreciation and amortization decreased as a percentage of revenue to0.2% in 2002 from 0.9% in 2001, as a result of the elimination of goodwillamortization under SFAS No. 142, effective as of January 1, 2002.

 

General and administrativeexpenses increased as a percentage of revenue to $8,946,000, or 4.1% ofrevenue, in 2002 from $8,105,000, or 3.8% of revenue in 2001.  The increase was due primarily to increasesin salaries, benefits, and travel related to building of the Bamboo Clubinfrastructure and increases in technology support costs, higher legal costs,and higher rent due to additional office space.

 

Pre-opening expenses were $1,619,000,or 0.7% of revenue, in 2002 as compared to $1,417,000, or 0.7% of revenue in2001.  Although we opened six stores in2002 compared to seven stores in 2001, our expenses were higher in 2002 dueprimarily to incurring costs in 2002 for new store openings in 2003, combinedwith increases in employee recruiting and training, new store opening teamtravel, and promotional events. The majority of pre-opening expenses occurduring the two months prior to opening a store.

 

New manager training expenses arethose costs incurred in training newly hired or promoted managers, as well asthose costs incurred to relocate those managers to permanent managementpositions. New manager training expenses were $1,820,000, or 0.2% of revenue,in 2002 compared to $1,676,000, or 0.2% of revenue, in 2001.  Although new manager training expenses wereconsistent as a percentage of revenue, the increases in 2002 were primarily theresult of new store openings in 2002 compared to 2001 and expenses incurred in2002 related to new stores opened in early 2003.

 

In 2002, the impairment chargesand other account included the impairment of certain leasehold improvements andother operating assets. The account included (i) $3,908,000 to primarily reducethe carrying value of these assets on underperforming locations to theirestimated fair value, (ii) $1,160,000 of goodwill allocated to a closedlocation in Kansas City, Missouri, and two impaired California locations wherewe decided not to renew the lease when the initial terms expire in 2003,  (iii) $760,000 in lease cancellation chargesand $415,000 in asset write-downs for three Bamboo Club locations that weelected not to open, and (iv) lease cancellation costs of $1,300,000 for ourLeawood, Kansas location where we decided to cancel a lease early (Leawood,KS).  During the third quarter of 2002,we also reduced the value of the land and building we are holding for sale inEl Paso, Texas by $400,000.  During thefourth quarter of 2001, we recorded an impairment expense of $1,615,000 againsta management agreement with CNL.

 

Under management agreements, wemanaged four TGI Friday’s stores in Northern California and managed one TGIFriday’s store in El Paso, Texas. During the fourth quarter 2002, the El Paso,Texas location was closed.  Under theseagreements, we were entitled to a management fee if certain cash flow levelswere achieved.  Based on the cash flowprovisions of the management agreements, we were unable to record managementfee income during 2002 compared to $432,000, or 0.2% of revenue, in 2001.

 

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Interest expense and other, netwas approximately $3,950,000, or 1.8% of revenue, in 2002 compared to$3,825,000, or 1.8% of revenue, in 2001. Although we incurred additional debt and a corresponding increase ininterest expense in 2002, the increased expenses compared with 2001 were offsetby more favorable interest rate conditions on our variable interest ratedebt.  As of December 30, 2002,approximately 59% of our total debt was tied to variable interest rates.  During the years ended December 30, 2002 andDecember 31, 2001 we had average outstanding borrowings of $54,200,000 and$48,300,000, respectively, with effective interest rates of 7.3% and 7.9%,respectively.

 

As a result of a substantial netloss during 2002, we provided an additional valuation allowance to fullyreserve all of our net deferred tax asset. An income tax benefit of $645,000 was recorded in 2001 because we offsetnet operating loss carryforwards against taxable income.  We were in a taxable income situation in2001 due to the recognition of various timing differences from 2000. AtDecember 30, 2002, we had approximately $7,463,000 of net operating losscarryforwards and tax credit carryforwards available to offset future incomefor federal income tax purposes.

 

**Liquidityand Capital Resources**

 

Our primary use of funds over thepast 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 29, 2003, we hadlong-term debt with five banks and financial institutions, including currentportion of $3.8 million, requiring principal and interest payments ofapproximately $7.7 million in 2004.

 

All of our loan agreements contain variousfinancial covenants that are generally measured at the end of eachquarter.  Primarily, there are two keycovenants we must meet.  Several loanagreements incorporate a fixed charge coverage test, which requires us toproduce a level of earnings before interest, taxes, depreciation, andamortization and other unusual gains or losses (EBITDA) in excess of principaland interest under our debt obligations during rolling twelve monthperiods.  Other loan agreements modifythis covenant for items such as pre-opening costs and rent expense. Many of ourloan documents also limit the amount of long-term debt the company can borrowbased on trailing levels of EBITDA.  AtDecember 29, 2003, we met all of the financial covenants for all debtagreements, as amended.

 

Our operations in 2003 have been positivelyimpacted by a slow economic recovery, resulting in a same-store sales increase.If the positive economic trend does not continue and our cash flow does notimprove from recent levels, we may violate one or more of these covenants withany one of our lenders in 2004. Currently, we have no significant borrowing capabilities under any ofour debt agreements.  Some of our financialcovenants depend upon profitable operations and limit the total amount of debtwe can have outstanding

 

During 2003, we entered into a $2.5 million,one-year revolving line of credit with a bank. At December 29, 2003, $7,000 was outstanding on this line.

 

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We believe we will remain in compliance withour current debt agreements, as amended, in 2004 or will receive the necessaryamendments, if needed, to our debt covenants. We believe that our current cashresources, additional debt financing commitments, sale of assets, and expectedcash flows from operations will be sufficient to fund our general obligationsand planned limited development through 2004.

 

As previously discussed, we currently haveone Bamboo Club under construction and the commitment to commence building oneother in 2004.  We plan on startingconstruction of one TGI Friday’s during late 2004, for opening in 2005. Webelieve we may need to obtain capital to fund additional growth beyond2004.  Potential sources of any suchcapital include selling assets, bank financing, strategic alliances, andadditional offerings of our equity or debt securities.  We cannot provide assurance that suchcapital will be available from these or other potential sources, and the lackof capital could have a material adverse effect on our business.

 

Net cash flows from operatingactivities were $7,267,000 in 2003, $9,195,000 in 2002, and $12,529,000 in2001.  Cash flows from operatingactivities were offset by $3,816,000 for funds used to make regular debt paymentsduring 2003, and supplemented by cash flows from financing of $5,538,000 in2002 and $3,864,000 in 2001, which we used to fund our acquisitions anddevelopment of new restaurants.

 

Net cash used in investingactivities was $5,473,000 in 2003, $18,578,000 in 2002, and $11,492,000 in2001, which we used primarily to fund property and equipment purchases for ournew restaurants and to acquire franchise rights and goodwill related to boththe purchase and opening of new restaurants. Funds used in investing activities were offset by cash received from thesale of assets of three restaurants in the Sacramento California area in 2003and cash received from the sale of assets related to our sale-leasebacktransactions during 2001.

 

At December 29, 2003, our currentliabilities exceeded our current assets by approximately $16,973,000 due inpart to cash expended on our development requirements and because therestaurant business receives substantially immediate payment for sales, whilepayables related to inventories and other current liabilities normally carrylonger payment terms, usually 15 to 30 days. At December 29, 2003, we had a cash balance of $4,600,000 and long-termdebt of $51,684,000, including current portion of long-term debt of $3,815,000.  Monthly cash receipts have been and areexpected to be sufficient to pay all obligations as they become due.

 

Approximately $40,740,000 of thisdebt is term loans comprised of notes payable to three lenders.  The notes bear interest at rates rangingfrom 3.45-9.46% per annum and mature at various times over the next 11 years.The remainder of our long-term debt consists of notes payable to variouslending institutions.  These notes bearinterest at rates ranging from 4.0% to 10.6% and mature at various times overthe next 10 years.

 

From time to time, we may enter into interestrate swap agreements with certain financial institutions for the purpose ofadjusting our ratio of fixed rate debt over a certain period of time at varyingnotional amounts. At December 29, 2003, there were $16.5 million in netnotional amounts of interest rate swap agreements outstanding that carried aweighted average interest rate of 3.2%. The effective amount of interest we payon the notional amounts of these swap

 

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agreements is calculated using the interest rate of the swap againstthe notional amount of each swap.  Theseswaps effectively adjust the ratio of fixed rate debt to 70% of totaloutstanding debt.

 

We lease all of our restaurantswith terms ranging from 10 to 20 years, with various renewal options of 10-20years.  Our future debt, lease, andpurchase obligations are summarized by year as follows (in thousands):

 

**ContractualObligations and Commitments:**

** **
|                      |   | **Total** |    | **Less than  one year** |   | **One to three  years** |   | **Three to  five years** |   | **Greater  than five  years** |   |
|---------------------------|--------|-----------|---------|-------------------------|--------|-------------------------|--------|--------------------------|--------|-------------------------------|--------|
| Debt Maturities           |   | $         | 51,684  |                    | $      | 3,815                   |   | $                        | 8,606  |                          | $      | 9,753 |   | $ | 29,510 |   |
| Minimum Lease Commitments |   | 131,574   |    | 12,019                  |   | 23,384                  |   | 21,840                   |   | 74,331                        |   |
|                      |   |      |    |                    |   |                    |   |                     |   |                          |   |
| Purchase Commitments      |   | 2,400     |    | 2,400                   |   | —                  |   | —                   |   | —                        |   |
| Total                     |   | $         | 185,658 |                    | $      | 18,234                  |   | $                        | 31,990 |                          | $      | 31,593 |   | $ | 103,841 |   |

 

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 construction costs for a restaurant we have contracted toopen in 2004.

 

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 financialcapabilities.

 

**ITEM 7A.****              QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

As of December 29, 2003, we wereparticipating in three derivative financial instruments for which fair valuedisclosure is required under SFAS No. 133. The fair value liability of the interest rate swap agreements discussedin note 2 to the consolidated financial statements increased to $2,053,109using “hedge accounting” under SFAS No. 133.

 

Our market risk exposure islimited to interest rate risk associated with our credit instruments.  We incur interest on loans made at variableinterest rates of 2.75 to 3.35% over LIBOR. At December 29, 2003, we had outstanding borrowings on these loans ofapproximately $31,395,383.  Our netinterest expense for 2003 was $4,521,000; a one percent variation on any

 

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of the variable rates would have increased ordecreased our total interest expense by approximately $314,000 for the year,not including the impact of our swaps.

 

**ITEM 8****.****                       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

Reference is made to the consolidatedfinancial statements, the reports thereon, the notes thereto, and thesupplementary data commencing at page F-1 of this report, which consolidatedfinancial statements, reports, notes, and data are incorporated by reference.

 

**ITEM9****.****                      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE.**

 

On October 7, 2003, we engaged the accountingfirm of Mayer Hoffman McCann P.C. as our new independent public accountants anddismissed KPMG LLP.  The decision tochange our accounting firm was recommended and approved by our Audit Committeeof the Board of Directors and approved by our Board of Directors.  In connection with the two most recentfiscal years ended December 31, 2002 and December 30, 2001, and the subsequentinterim periods through and including the termination date of October 7, 2003,there were no disagreements between our company and KPMG LLP on any matter ofaccounting principles or practices, financial statement disclosure, accountingscope or procedures, which disagreements if not resolved to their satisfactionwould have caused them to make reference in connection with their opinion tothe subject matter of the disagreement, or any reportable events. Prior totheir engagement, we had not consulted with Mayer Hoffman McCann P.C. on eitherthe application of accounting principles or type of opinion Mayer HoffmanMcCann P.C. might issue on our consolidated financial statements.

 

On August 27, 2001, we engaged the accountingfirm of KPMG LLP as our new independent public accountants and dismissed ArthurAndersen LLP.  The decision to changeour accounting firm was recommended and approved by the Audit Committee of ourBoard of Directors and approved by our Board of Directors.  During the two most recent fiscal years andsubsequent interim reporting periods preceding the date of their termination,there were no disagreements between us and Arthur Andersen LLP on any matter ofaccounting principles or practices, financial statement disclosure, accountingscope or procedures, or any reportable events. The report of Arthur Andersen LLP on our consolidated financialstatements for the last two fiscal years in which they did report contained noadverse opinion or disclaimer of opinion and was not qualified or modified asto uncertainty, audit scope, or accounting principles.  Prior to their engagement, we had notconsulted with KPMG LLP on either the application of accounting principles ortype of opinion KPMG LLP might issue on our consolidated financialstatements.  Arthur Andersen LLP agreedwith the above statements and a letter from it was attached to our Form 8-Kfiled on August 27, 2001.

 

**ITEM 9A****.****              CONTROLS AND PROCEDURES**

 

Our Chief Executive Officer andChief Financial Officer have reviewed and evaluated the effectiveness of ourdisclosure controls and procedures, which included inquires made to certainother of our employees as of December 31, 2003. Based on their evaluations, ourChief Executive Officer and Chief Financial Officer have each concluded thatour disclosure controls and procedures are effective and sufficient to ensurethat we record, process, summarize, and report information required to bedisclosed by us in our periodic reports filed under the Securities

 

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Exchange Act within the time period specifiedby the Securities and Exchange Commission’s rules and forms.

 

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**PART III**

 

**ITEM 10****.****                DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The information required by thisItem relating to our directors is incorporated by reference to our ProxyStatement to be filed for our 2004 Annual Meeting of Stockholders.  The information required by this Itemrelating to our executive officers is included in Item 1, “Business – ExecutiveOfficers.”

 

**ITEM 11****.****                EXECUTIVE COMPENSATION**

 

The information required by thisItem is incorporated by reference to our Proxy Statement to be filed for our2004 Annual Meeting of Stockholders.

 

**ITEM12****.****               SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

The information required by thisItem is incorporated by reference to our Proxy Statement to be filed for our2004 Annual Meeting of Stockholders.

 

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 2004 Annual Meeting of Stockholders.

 

The following table sets forth information withrespect to our common stock that may be issued upon the exercise of stockoptions under our various stock option plans as of December 29, 2003:

 

 
| **Plan  Category**                                      |   | **(a)Number  of  securities to be Issued   Upon Exercise of  Outstanding Options,  Warrants and Rights** |   | **(b)Weighted  Average  Exercise Price of  Outstanding Options,  Warrants and Rights** |   | **Number of  Securities  Remaining Available  for Future Issuance  Under Equity  Compensation Plans  (Excluding Securities  Reflected in Column  (a))** |    |
|---------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
| Equity Compensation Plans Approved by  Stockholders     |   | 3,857,754                                                                                                |   | $                                                                                      | 3.10   |                                                                                                                                                    | 312,000 |   |
| Equity Compensation Plans Not Approved by  Stockholders |   | —                                                                                                   |   | —                                                                                 |   | —                                                                                                                                                  |    |
| Total                                                   |   | 3,857,754                                                                                                |   | $                                                                                      | 3.10   |                                                                                                                                                    | 312,000 |   |

 

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**ITEM 13****.****                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

The information required by thisItem is incorporated by reference to our Proxy Statement to be filed for our2004 Annual Meeting of Stockholders.

 

**ITEM 14****.****                PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

The information required by thisItem is incorporated by reference to our Proxy Statement to be filed for our2004 Annual Meeting of Stockholders.

 

**PART IV**

 

**ITEM 15****.****                EXHIBITS, FINANCIAL STATEMENT SCHEDULES, ANDREPORTS ON FORM 8-K**

 

(a)          Financial Statements and Financial Statement Schedules.

 

(1)          Financial statements are listed in the index tothe consolidated financial statements on page F-1 of this Report.

 

(2)          No financial statement schedules are includedbecause they are not applicable or are not required or the information requiredto be set forth therein is included in the consolidated financial statements ornotes thereto.

 

(b)         Reports on Form 8-K.

 

(1) Report onForm 8-K dated October 7, 2003 furnishing Item 4 Changes in Registrant’sCertifying Accountant disclosure.

 

(2) Report onForm 8-k dated November 6, 2003 furnishing Item 12 Results of Operations andFinancial Condition disclosure.

 

(c)          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)                                                                                                 |
| 4.1                 |   | Sergio Zyman registration rights                                                                                                               |
| 10.1                |   | Company’s 1990 Stock Option Plan(2)                                                                                                       |
| 10.5                |   | Form of Franchise Agreement between the  Company and TGI Friday’s Inc.(3)                                                                 |
| 10.9                |   | Form of Management Agreement between Main  St. California II, Inc. and Main St. California, Inc., a wholly owned  subsidiary of the Company(4) |
| 10.10               |   | Master Incentive Agreements between Main  St. California II, Inc. and Main St. California, Inc., a wholly owned  subsidiary of the Company(4)  |
| 10.11               |   | Employment Agreement with Bart A. Brown,  Jr.(5)                                                                                               |
| 10.11A              |   | Employment Agreement dated January 1, 1999  between the Company and Bart A. Brown, Jr.(6)                                                      |
| 10.13               |   | Promissory Note between the Company and CNL  Financial I, Inc.(5)                                                                              |

 

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| **Exhibit  Number** |   | **Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                     |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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(7)                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.17               |   | Amended and Restated Development Agreement  between TGI Friday’s Inc. and Cornerstone Productions, Inc., a wholly owned  subsidiary of the Company(8)                                                                                                                                                                                                                                                      |
| 10.18               |   | Amended and Restated Development Agreement  between TGI Friday’s Inc. and Main St. California, Inc., a wholly owned  subsidiary of the Company(8)                                                                                                                                                                                                                                                          |
| 10.18A              |   | First Amendment to Development Agreement  dated February 10, 1999, between TGI Friday’s Inc. and Main St. California,  Inc., a wholly owned subsidiary of the Company(6)                                                                                                                                                                                                                                   |
| 10.18B              |   | Second Amendment to Development Agreement  dated November 6, 2001, between TGI Friday’s. Inc. and Main St. California,  Inc., a wholly owned subsidiary of the Company.(9)                                                                                                                                                                                                                                 |
| 10.19               |   | Amended and Restated Development Agreement  between TGI Friday’s Inc. and Main St. Midwest, Inc., a wholly owned subsidiary  of the Company(8)                                                                                                                                                                                                                                                             |
| 10.20               |   | Amended and Restated Purchase Agreement  between RJR Holdings, Inc. and Main St. California, Inc., a wholly owned  Subsidiary of the Company(8)                                                                                                                                                                                                                                                                 |
| 10.21               |   | Development Agreement dated April 22, 1998  between Main St. California, Inc. and TGI Fridays, Inc., and First Amendment  to Development Agreement dated February 10, 1999 between TGI Friday’s Inc.  and Main St. California, Inc., a wholly owned subsidiary of the Company (6)                                                                                                                          |
| 10.21A              |   | Second Amendment to Development Agreement  dated October 20, 1999 between TGI Friday’s Inc. and Main St. California,  Inc., a wholly owned subsidiary of the Company.(9)                                                                                                                                                                                                                                   |
| 10.21B              |   | Third Amendment to Development Agreement  dated November 6, 2001 between TGI Friday’s Inc. and Main St. California,  Inc., a wholly owned subsidiary of the Company.(9)                                                                                                                                                                                                                                    |
| 10.22               |   | Stock Option Agreement dated August 5,  1996, between the Company and John F. Antioco for 800,000 shares of Common  Stock(9)                                                                                                                                                                                                                                                                                    |
| 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(10)                                                                                                                                                                                                                                                              |
| 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.)(10) |
| 10.23A              |   | Schedule of Stock Option Agreements substantially  identical to Exhibit 10.23(10)                                                                                                                                                                                                                                                                                                                               |
| 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.)(10)           |

 

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| **Exhibit  Number** |   | **Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                         |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.24A              |   | Schedule of Stock Option Agreements  substantially identical to Exhibit 10.24(10)                                                                                                                                                                                                                                                                                                                                   |
| 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.)(10) |
| 10.25A              |   | Schedule of Stock Option Agreements  substantially identical to Exhibit 10.25(10)                                                                                                                                                                                                                                                                                                                                   |
| 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.)(10)   |
| 10.26A              |   | Schedule of Stock Option Agreements  substantially identical to Exhibit 10.26(10)                                                                                                                                                                                                                                                                                                                                   |
| 10.27               |   | Registration Rights Agreement dated August  5, 1996, between the Company and John F. Antioco(11)                                                                                                                                                                                                                                                                                                                    |
| 10.28               |   | 1999 Incentive Stock Plan.(12)                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.29               |   | Working Capital Management Agreement  Reducing Revolver Loan Agreement dated November 2, 1999, between the Company  and Merrill Lynch Business Financial Services, Inc. (13)                                                                                                                                                                                                                                        |
| 10.30               |   | Working Capital Management Agreement  Reducing Revolver Loan Agreement dated November 22, 1999, between the Company  and Merrill Lynch Business Financial Services, Inc. (13)                                                                                                                                                                                                                                       |
| 10.31               |   | Form of Unconditional Guaranty executed in  connection with Working Capital Management Agreement Reducing Revolver Loan  Agreement dated November 22, 1999.   (Such guarantees were executed by Main St. California, Inc.,  Cornerstone Productions, Inc., and Redfish America, LLC.) (13)                                                                                                                     |
| 10.32               |   | Form of Security Agreement executed in  connection with Working Capital Management Agreement Reducing Revolver Loan  Agreement dated November 22, 1999.   (Such security agreements were executed by Main St. California, Inc.  and Cornerstone Productions, Inc.) (13)                                                                                                                                        |
| 10.35               |   | Credit Agreement dated April 2, 1999,  between the Company and Imperial Bank (14)                                                                                                                                                                                                                                                                                                                                   |
| 10.35A              |   | First Amendment to Credit Agreement dated  August 2, 1999, between the Company and Imperial Bank (14)                                                                                                                                                                                                                                                                                                               |
| 10.35B              |   | Second Amendment to Credit Agreement dated  July 13, 2000, between the Company and Imperial Bank (14)                                                                                                                                                                                                                                                                                                               |
| 10.35C              |   | Third Amendment to Credit Agreement and  First Amendment to Promissory Note dated July 5, 2001, between the Company  and Imperial Bank(9)                                                                                                                                                                                                                                                                           |
| 10.36               |   | Revolving Promissory Note dated July 13,  2000, in the principal amount of                                                                                                                                                                                                                                                                                                                                          |

 

51

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| **Exhibit  Number** |   | **Exhibit**                                                                                                                                                               |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   | $5,000,000 from the Company, as Borrower, to Imperial Bank, as Lender  (14)                                                                                               |
| 10.37               |   | Term Promissory Note dated July 13, 2000,  in the principal amount of $5,000,000 from the Company, as Borrower, to  Imperial Bank, as Lender (14)                         |
| 10.38               |   | Unconditional Guarantee of Payment of Term  Promissory Note executed by John F. Antioco, as Guarantor, in favor of  Imperial Bank, as Lender (14)                         |
| 10.39               |   | Unconditional Guarantee of Payment of Term  Promissory Note executed by Bart A. Brown, Jr., as Guarantor, in favor of  Imperial Bank, as Lender (14)                      |
| 10.40               |   | 401(k) Profit Sharing Plan (15)                                                                                                                                           |
| 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 (16)             |
| 16                  |   | Letter from Arthur Andersen LLP regarding  the change in certifying accountant (17)                                                                                       |
| 21                  |   | List of Subsidiaries                                                                                                                                                      |
| 23.1                |   | Consent of Mayer Hoffman McCann P.C.                                                                                                                                      |
| 23.2                |   | Consent of KPMG LLP                                                                                                                                                       |
| 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 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 January 1997.

(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 the Company’s Form10-K for the year ended December 28, 1998, filed with the Securities andExchange Commission on March 29, 1999.

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

(8)              Incorporated by reference to the Company’s Form10-K for the year ended December 29, 1997, filed with the Securities andExchange Commission on March 27, 1998.

(9)              Incorporated by reference to the Company’s Form10-K for the year ended December 30, 2002, filed with the Securities andExchange Commission on March 31, 2003.

 

52

----

 

(10)        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.

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

(12)        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.

(13)        Incorporated by reference to the Company’s Form10-K for the year ended December 27, 1999, filed with the Securities andExchange Commission on March 28, 2000

(14)        Incorporated by reference to the Company’s Form8-K dated July 21, 2000, as filed with the Securities and Exchange Commissionon July 24, 2000.

(15)        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.

(16)        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.

(17)        Incorporated by reference to the Company’s Form8-K dated September 4, 2001, as filed with the Securities and ExchangeCommission on September 4, 2001.

 

53

----

 

SIGNATURES

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 
|                 |  MAIN STREET AND MAIN INCORPORATED |
|----------------------|-----------------------------------------|
|                 |                                    |
|                 |                                    |
| Date: March 23, 2004 | By:                                     |   /s/ Bart A. Brown, Jr. |
|                 |                                    |   Bart A. Brown, Jr. |
|                 |                                    |   Chief Executive Officer |

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 

 
| **Signature**          |   | **Position**                               |           | **Date** |   |
|------------------------|--------|--------------------------------------------|----------------|----------|--------|
|                   |   |                                       |
| /s/ John F. Antioco    |   | Chairman of the Board                      | March 23, 2004 |
| John F. Antioco        |   |                                       |           |
|                   |   |                                       |           |
| /s/ Bart A. Brown, Jr. |   | Chief Executive Officer                    | March 23, 2004 |
| Bart A. Brown, Jr.     |   | and Director (Principal Executive Officer) |           |
|                   |   |                                       |           |
| /s/ William G. Shrader |   | President,                                 | March 23, 2004 |
| William G. Shrader     |   | Chief Operating Officer, and Director      |           |
|                   |   |                                       |           |
| /s/ Michael Garnreiter |   | Chief Executive Officer, Executive Vice    | March 23, 2004 |
| Michael Garnreiter     |   | President and Treasurer                    |           |
|                   |   |                                       |           |
| /s/ Michael J. Herron  |   | Vice President, Secretary and              | March 23, 2004 |
| Michael J. Herron      |   | General Counsel                            |           |
|                   |   |                                       |           |
| /s/ Kenda B. Gonzales  |   | Director                                   | March 23, 2004 |
| Kenda B. Gonzales      |   |                                       |           |
|                   |   |                                       |           |
| /s/ John C. Metz       |   | Director                                   | March 23, 2004 |
| John C. Metz           |   |                                       |           |
|                   |   |                                       |           |
| /s/ Sergio S. Zyman    |   | Director                                   | March 23, 2004 |
| Sergio S. Zyman        |   |                                       |           |
|                   |   |                                       |           |
| /s/ Wanda Williams     |   | Director                                   | March 23, 2004 |
| Wanda Williams         |   |                                       |           |
|                        |        |                                            |                |          |        |  |

 

54

----

 

**MAIN STREET AND MAIN INCORPORATED**

 

INDEX TO CONSOLIDATED FINANCIALSTATEMENTS

 
| Independent Auditors’ Report - Mayer Hoffman McCann P.C.                                                                                                                            |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                     |   |
| Independent Auditors’ Report - KPMG LLP                                                                                                                                             |   |
|                                                                                                                                                                                     |   |
| Consolidated  Balance Sheets as of December 29, 2003 and December 30, 2002                                                                                                               |   |
|                                                                                                                                                                                     |   |
| Consolidated Statements of Operations for  the fiscal years ended December 29, 2003, December 30, 2002, and December 31,  2001                                                           |   |
|                                                                                                                                                                                     |   |
| Consolidated Statements of Changes in  Stockholders’ Equity and Comprehensive Income (Loss) for the fiscal years  ended December 29, 2003, December 30, 2002, and December 31, 2001 |   |
|                                                                                                                                                                                     |   |
| Consolidated Statements of Cash Flows for the fiscal years ended  December 29, 2003, December 30, 2002, and December 31, 2001                                                            |   |
|                                                                                                                                                                                     |   |
| Notes to Consolidated Financial Statements                                                                                                                                               |   |

 

F-1

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

To the Board of Directors ofMain Street and Main Incorporated

 

We have audited theaccompanying consolidated balance sheet of Main Street and Main Incorporatedand subsidiaries as of December 29, 2003, and the related consolidatedstatements of operations, changes in stockholders’ equity and comprehensiveincome (loss) and cash flows for the year then ended.  These consolidated financial statements are the responsibility ofthe Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audit.  The consolidated financial statements of theCompany as of December 30, 2002, and for each of the two years in the periodended December 30, 2002, were audited by other auditors whose report dated March 4, 2003, expressedan unqualified opinion on those statements.

 

We conducted our audit inaccordance with U.S. generally accepted auditing standards.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred toabove present fairly, in all material respects, the financial position of Main Street and Main Incorporated andsubsidiaries******atDecember 29, 2003, and the results of their operations and their cash flows forthe year then ended in conformity with U.S. generally accepted accountingprinciples.

 

 
| /s/ Mayer Hoffman McCann P.C. |   |
|-------------------------------|--------|
|                          |
| MAYER HOFFMAN MCCANN P.C.     |
| Phoenix, Arizona              |
| March 9, 2004                 |

 

F-2

----

 

**INDEPENDENT AUDITORS’ REPO****RT**

 

The Board of DirectorsMain Street and Main Incorporated:

 

We have audited theaccompanying consolidated balance sheet of Main Street and Main Incorporatedand subsidiaries as of December 30, 2002, and the related consolidatedstatements of operations, changes in stockholders’ equity and comprehensiveincome (loss) and cash flows for the years ended December 30, 2002 and December31, 2001.  These consolidated financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in United States ofAmerica.  Those standards require thatwe plan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Main Street and Main Incorporatedand subsidiaries as of December 30, 2002 and the results of their operationsand their cash flows for the years ended December 30, 2002 and December 31,2001, in conformity with accounting principles generally accepted in UnitedStates of America.

 

As discussed in Note 2 to theconsolidated financial statements, the Company adopted the provisions of SFASNo. 142, *Goodwill and Other IntangibleAssets* which changed the Company’s method of accounting for goodwilland other intangible assets effective January 1, 2002.

 

Phoenix, Arizona

March 4, 2003

 

F-3

----

 

**MAIN STREET AND MAININCORPORATED AND SUBSIDIARIES**CONSOLIDATED BALANCE SHEETS(In Thousands, Except Par Value and Share Data)

 
|                                                                                                                                                  |   | **December 29,****2003** |    | **December 30,****2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|--------------------------|--------|
| ASSETS                                                                                                                                                |   |                     |    |                     |   |
| Current assets:                                                                                                                                       |   |                     |    |                     |   |
| Cash and cash equivalents                                                                                                                             |   | $                        | 4,600   |                     | $      | 5,621 |   |
| Accounts receivable                                                                                                                                   |   | 1,494                    |    | 1,997                    |   |
| Inventories                                                                                                                                           |   | 2,762                    |    | 2,832                    |   |
| Prepaid expenses                                                                                                                                      |   | 971                      |    | 2,104                    |   |
| Total current assets                                                                                                                                  |   | 9,827                    |    | 12,554                   |   |
| Property and equipment, net                                                                                                                           |   | 68,129                   |    | 71,265                   |   |
| Other assets, net                                                                                                                                     |   | 2,218                    |    | 2,449                    |   |
| Notes receivable, net                                                                                                                                 |   | 1,657                    |    | —                   |   |
| Goodwill                                                                                                                                              |   | 21,685                   |    | 22,995                   |   |
| Franchise area fees, net                                                                                                                              |   | 2,691                    |    | 3,132                    |   |
|                                                                                                                                                  |   |                     |    |                     |   |
| Total assets                                                                                                                                          |   | $                        | 106,207 |                     | $      | 112,395 |   |
|                                                                                                                                                  |   |                     |    |                     |   |
| LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                                            |   |                     |    |                     |   |
| Current liabilities:                                                                                                                                  |   |                     |    |                     |   |
| Current portion of long-term  debt                                                                                                                    |   | $                        | 3,815   |                     | $      | 3,502 |   |
| Accounts payable                                                                                                                                      |   | 6,408                    |    | 8,073                    |   |
| Other accrued liabilities                                                                                                                             |   | 16,577                   |    | 16,007                   |   |
| Total current liabilities                                                                                                                             |   | 26,801                   |    | 27,582                   |   |
| Long-term debt, net of current  portion                                                                                                               |   | 47,869                   |    | 51,998                   |   |
| Other liabilities and deferred  credits                                                                                                               |   | 2,441                    |    | 3,205                    |   |
|                                                                                                                                                  |   |                     |    |                     |   |
| Total liabilities                                                                                                                                     |   | 77,110                   |    | 82,785                   |   |
|                                                                                                                                                  |   |                     |    |                     |   |
| Commitments, contingencies and  subsequent events (see notes 4, 7, 8, 9 and 10)                                                                       |   |                     |    |                     |   |
|                                                                                                                                                  |   |                     |    |                     |   |
| Stockholders’ equity:                                                                                                                            |   |                     |    |                     |   |
| Preferred stock, $.001 par  value, 2,000,000 shares authorized, no shares issued and outstanding in 2003  and 2002                                    |   | —                   |    | —                   |   |
| Common stock, $.001 par value,  25,000,000 shares authorized, 14,642,000 and 14,142,000 shares issued and  outstanding in 2003 and 2002, respectively |   | 15                       |    | 14                       |   |
| Additional paid-in capital                                                                                                                            |   | 54,927                   |    | 53,927                   |   |
| Accumulated other comprehensive  loss                                                                                                                 |   | (2,053                   | )       | (2,504                   | )      |
| Accumulated deficit                                                                                                                                   |   | (23,792                  | )       | (21,827                  | )      |
| Total stockholders’ equity                                                                                                                       |   | 29,097                   |    | 29,610                   |   |
| Total liabilities and  stockholders’ equity                                                                                                      |   | $                        | 106,207 |                     | $      | 112,395 |   |

 

F-4

----

 

**MAIN STREET AND MAININCORPORATED AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Amounts)

 
|                                            |   | **Years  Ended**         |    |
|-------------------------------------------------|--------|--------------------------|---------|
|                                            |   | **December 29,****2003** |    | **December 30,****2002** |   | **December 31,****2001** |   |
| Revenue                                         |   | $                        | 224,494 |   | $ | 220,151 |   | $ | 211,823 |   |
| Restaurant operating expenses                   |   |                     |    |   |   |   |   |
| Cost of sales                                   |   | 60,299                   |    | 61,270 |   | 59,139 |   |
| Payroll and benefits                            |   | 70,415                   |    | 68,997 |   | 65,784 |   |
| Depreciation and amortization                   |   | 8,386                    |    | 7,895 |   | 7,845 |   |
| Other operating expenses                        |   | 70,079                   |    | 65,912 |   | 61,285 |   |
|                                            |   |                     |    |   |   |   |   |
| Total restaurant operating  expenses            |   | 209,179                  |    | 204,074 |   | 194,053 |   |
|                                            |   |                     |    |   |   |   |   |
| Income from restaurant  operations              |   | 15,315                   |    | 16,077 |   | 17,770 |   |
|                                            |   |                     |    |   |   |   |   |
| Other operating expense and  income:            |   |                     |    |   |   |   |   |
| Amortization of intangible  assets              |   | 606                      |    | 461 |   | 1,831 |   |
| General and administrative  expenses            |   | 8,977                    |    | 8,946 |   | 8,105 |   |
| Pre-opening expenses                            |   | 907                      |    | 1,619 |   | 1,417 |   |
| New manager training expenses                   |   | 195                      |    | 426 |   | 327 |   |
| Impairment charges and other                    |   | 5,906                    |    | 7,943 |   | 3,453 |   |
| Management fee income                           |   | —                   |    | — |   | (432 | ) |
|                                            |   |                     |    |   |   |   |   |
| Operating income (loss)                         |   | (1,276                   | )       | (3,318 | ) | 3,069 |   |
|                                            |   |                     |    |   |   |   |   |
| Gain on sale of assets                          |   | 3,831                    |    | — |   | — |   |
| Interest expense and other, net                 |   | 4,521                    |    | 3,950 |   | 3,825 |   |
|                                            |   |                     |    |   |   |   |   |
| Net income (loss) before income  taxes          |   | (1,966                   | )       | (7,268 | ) | (756 | ) |
| Income tax expense (benefit)                    |   | —                   |    | 1,309 |   | (645 | ) |
|                                            |   |                     |    |   |   |   |   |
| Net income (loss)                               |   | $                        | (1,966  | ) | $ | (8,577 | ) | $ | (111 | ) |
|                                            |   |                     |    |   |   |   |   |
| Basic earnings per share:                       |   |                     |    |   |   |   |   |
| Net income (loss)                               |   | $                        | (0.14   | ) | $ | (0.61 | ) | $ | (0.01 | ) |
|                                            |   |                     |    |   |   |   |   |
| Diluted earnings per share:                     |   |                     |    |   |   |   |   |
| Net income (loss)                               |   | $                        | (0.14   | ) | $ | (0.61 | ) | $ | (0.01 | ) |
|                                            |   |                     |    |   |   |   |   |
| Weighted average number of  shares outstanding: |   |                     |    |   |   |   |   |
| Basic                                           |   | 14,179                   |    | 14,105 |   | 14,048 |   |
| Diluted                                         |   | 14,179                   |    | 14,105 |   | 14,048 |   |

 

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

 

F-5

----

 

**MAIN STREET AND MAININCORPORATED AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’EQUITY ANDCOMPREHENSIVE INCOME (LOSS)(In Thousands)

 
|                                                      |   |             |   |           |   |        |   |            |   | **Accumulated**   |    |      |   |
|-----------------------------------------------------------|--------|------------------|--------|----------------|--------|-------------|--------|-----------------|--------|-------------------|---------|-----------|--------|
|                                                      |   | **Common Stock** |   | **Additional** |   |        |   | **Other**       |   |              |    |
|                                                      |   |             |   | **Par**        |   | **Paid-in** |   | **Accumulated** |   | **Comprehensive** |    |      |   |
|                                                      |   | **Shares**       |   | **Value**      |   | **Capital** |   | **Deficit**     |   | **Loss**          |    | **Total** |   |
|                                                      |   |             |   |           |   |        |   |            |   |              |    |      |   |
| BALANCES, December 25, 2000                               |   | 14,045           |   | $              | 14     |        | $      | 53,624          |   | $                 | (13,139 | )         | $      | — |   | $ | 40,499 |   |
| Shares issued in connection  with options exercised (net) |   | 7                |   | —         |   | 21          |   | —          |   | —            |    | 21        |   |
| Shares issued to employees                                |   | 1                |   | —         |   | —      |   | —          |   | —            |    | —    |   |
| Comprehensive income (loss):                              |   |             |   |           |   |        |   |            |   |              |    |      |   |
| Unrealized loss on hedging  contract,                     |   | —           |   | —         |   | —      |   | —          |   | (202              | )       | (202      | )      |
| Net loss                                                  |   | —           |   | —         |   | —      |   | (111            | )      | —            |    | (111      | )      |
| Comprehensive loss:                                       |   |             |   |           |   |        |   |            |   |              |    | (313      | )      |
| BALANCES, December 31, 2001                               |   | 14,053           |   | 14             |   | 53,645      |   | (13,250         | )      | (202              | )       | 40,207    |   |
| Shares issued in connection  with options exercised (net) |   | 89               |   | —         |   | 282         |   | —          |   | —            |    | 282       |   |
| Comprehensive income (loss):                              |   |             |   |           |   |        |   |            |   |              |    |      |   |
| Unrealized loss on hedging  contract                      |   | —           |   | —         |   | —      |   | —          |   | (2,302            | )       | (2,302    | )      |
| Net loss                                                  |   | —           |   | —         |   | —      |   | (8,577          | )      | —            |    | (8,577    | )      |
| Comprehensive loss:                                       |   |             |   |           |   |        |   |            |   |              |    | (10,879   | )      |
| BALANCES, December 30, 2002                               |   | 14,142           |   | 14             |   | 53,927      |   | (21,827         | )      | (2,504            | )       | 29,610    |   |
| Shares issued, common stock                               |   | 500              |   | 1              |   | 1,000       |   |            |   |              |    | 1,001     |   |
| Comprehensive income (loss):                              |   |             |   |           |   |        |   |            |   |              |    |      |   |
| Unrealized loss on hedging  contract                      |   | —           |   | —         |   | —      |   | —          |   | 451               |    | 451       |   |
| Net loss                                                  |   | —           |   | —         |   | —      |   | (1,966          | )      | —            |    | (1,966    | )      |
| Comprehensive loss:                                       |   |             |   |           |   |        |   |            |   |              |    | (1,515    | )      |
| BALANCES, December 29, 2003                               |   | 14,642           |   | $              | 15     |        | $      | 54,927          |   | $                 | (23,793 | )         | $      | (2,053 | ) | $ | 29,096 |   |

 

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

 

F-6

----

 

**MAIN STREET AND MAININCORPORATED AND SUBSIDIARIES**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (In Thousands)

 
|                                                                                      |   | **Years  Ended**         |   |
|-------------------------------------------------------------------------------------------|--------|--------------------------|--------|
|                                                                                      |   | **December 29,****2003** |   | **December 30,****2002** |   | **December 31,****2001** |   |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                                    |   |                     |   |   |   |   |   |
| Net income (loss)                                                                         |   | $                        | (1,966 | ) | $ | (8,577 | ) | $ | (111 | ) |
| Adjustments to reconcile net  income (loss) to net cash provided by operating activities: |   |                     |   |   |   |   |   |
| Depreciation and amortization                                                             |   | 8,992                    |   | 8,356 |   | 9,676 |   |
| Amortization of note receivable  discount                                                 |   | (22                      | )      | — |   | — |   |
| Gain on sale of assets                                                                    |   | (3,831                   | )      | — |   | — |   |
| Impairment charges and other                                                              |   | 5,906                    |   | 5,674 |   | 3,453 |   |
| Deferred income taxes                                                                     |   | —                   |   | 1,650 |   | (1,048 | ) |
| Changes in assets and  liabilities:                                                       |   |                     |   |   |   |   |   |
| Accounts receivable                                                                       |   | (390                     | )      | 686 |   | 1,994 |   |
| Inventories                                                                               |   | (55                      | )      | (416 | ) | (792 | ) |
| Prepaid expenses                                                                          |   | 1,133                    |   | (849 | ) | (511 | ) |
| Other assets, net                                                                         |   | 56                       |   | (300 | ) | (580 | ) |
| Accounts payable                                                                          |   | (1,665                   | )      | 737 |   | (1,892 | ) |
| Other accrued liabilities                                                                 |   | (891                     | )      | 2,234 |   | 2,340 |   |
| Cash provided by operating  activities                                                    |   | 7,267                    |   | 9,195 |   | 12,529 |   |
|                                                                                      |   |                     |   |   |   |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                                    |   |                     |   |   |   |   |   |
|                                                                                      |   |                     |   |   |   |   |   |
| Additions to property and  equipment                                                      |   | (10,253                  | )      | (18,548 | ) | (14,013 | ) |
| Cash received from notes  receivable                                                      |   | 325                      |   | — |   | — |   |
| Cash paid to acquire franchise  rights and goodwill                                       |   | (50                      | )      | (30 | ) | (330 | ) |
| Cash received from the sale of  assets                                                    |   | 4,505                    |   | — |   | 2,851 |   |
| Cash used by investing  activities                                                        |   | (5,473                   | )      | (18,578 | ) | (11,492 | ) |
|                                                                                      |   |                     |   |   |   |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                                    |   |                     |   |   |   |   |   |
| Proceeds from sale of common  stock                                                       |   | 1,001                    |   | — |   | — |   |
| Financing and offering costs  paid                                                        |   | —                   |   | — |   | — |   |
| Proceeds received from the  exercise of stock options                                     |   | —                   |   | 282 |   | 21 |   |
| Long-term debt borrowings                                                                 |   | —                   |   | 9,465 |   | 6,583 |   |
| Principal payments on long-term  debt                                                     |   | (3,816                   | )      | (4,209 | ) | (2,740 | ) |
| Cash provided (used) by  financing activities                                             |   | (2,815                   | )      | 5,538 |   | 3,864 |   |
|                                                                                      |   |                     |   |   |   |   |   |
| NET CHANGE IN CASH AND CASH  EQUIVALENTS                                                  |   | (1,021                   | )      | (3,845 | ) | 4,901 |   |
|                                                                                      |   |                     |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS,  BEGINNING                                                     |   | 5,621                    |   | 9,466 |   | 4,565 |   |
|                                                                                      |   |                     |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS,  ENDING                                                        |   | $                        | 4,600  |   | $ | 5,621 |   | $ | 9,466 |   |
|                                                                                      |   |                     |   |   |   |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH  FLOW INFORMATION                                         |   |                     |   |   |   |   |   |
| Cash paid during the year for  interest                                                   |   | $                        | 4,629  |   | $ | 4,139 |   | $ | 4,259 |   |
| Cash paid during the year for  income taxes                                               |   | $                        | 3      |   | $ | 118 |   | $ | 1,408 |   |

 

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

 

F-7

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**MAIN STREET AND MAININCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

1.               ORGANIZATIONAND BASIS OF PRESENTATION

 

Main Street and Main Incorporated is a Delaware corporation engaged inthe business of acquiring, developing, and operating restaurants.  We currently own 54 TGI Friday’srestaurants, 12 Bamboo Club restaurants, four Redfish Grill and Bar restaurants,and one Alice Cooper’stown restaurant.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of ourcompany and our wholly owned subsidiaries. All material intercompany transactions have been eliminated inconsolidation.  All references hereinrefer to our company and our subsidiaries.

 

Fiscal Year

 

We operate on a fiscal year that ends on the Monday on or beforeDecember 31.

 

Use of Estimates

 

The preparation of consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires a company to make a number of estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements.  Such estimates and assumptions affect thereported amounts of revenues and expenses during the reporting period.  On an ongoing basis, we evaluate estimatesand assumptions based upon historical experience and various other factors andcircumstances.  We believe our estimatesand assumptions are reasonable in the circumstances; however, actual resultsmay differ from these estimates under different future conditions.

 

We believe that the estimates and assumptionsthat are most important to the portrayal of our financial condition and resultsof operations, in that they require our most difficult, subjective or complexjudgments, form the basis for the accounting policies deemed to be mostcritical to our operations.  Thesecritical accounting policies relate to the valuation and amortizable lives oflong-lived assets, goodwill, and other identifiable intangible assets,valuation of deferred tax assets, and reserves related to self-insurance forworkers 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 ormajor 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 thefinancial operations of our restaurant locations on at least a quarterlybasis.  Locations that are not meetingexpectations are identified and continue to be watched closely throughout theyear.  Primarily in the fourth quarter,we review actual results and analyze budgets for the ensuing year.  If we deem that a location’s results willcontinue to be below expectations, we analyze alternatives for its continuedoperation.  At this time, we perform anasset impairment test.  If we determinedthat the asset’s fair value is less than book and we will be unable to recoverthe value through

 

F-8

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operations, we record animpairment charge.  Upon an event suchas a formal decision for abandonment (restaurant closure), we may recordadditional impairment of assets, including an allocation of goodwill. Any carryoverbasis of assets is depreciated over the respective remaining useful lives.

 

(2) Periodically, we record (or reduce) the valuation allowance against ourdeferred tax assets to the amount that is more likely than not to be realizedbased upon recent past financial performance, tax reporting positions, andexpectations of future taxable income.

 

(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 claim data each quarter.

 

(4) We use the method of accounting foremployee stock options under Accounting Principles Board (APB Opinion 25) andhave adopted 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.

 

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.

 

New Accounting Pronouncements

 

During 2002, we adopted the provisions of SFAS No. 142, whicheliminates the amortization of all existing and newly acquired goodwill on aprospective basis and requires companies to assess goodwill impairment, atleast annually, based on the fair value of the reporting unit.

 

In December2003, the Financial Accounting Standards Board (FASB) issued Interpretation No.46 (revised December 2003), *Consolidation of Variable Interest Entities, aninterpretation of ARB No. 51 (FIN 46*).  FIN 46 replaces the earlier version of this interpretation issuedin January 2003.  FIN 46 addresses theconsolidation by business enterprises of variable interest entities as defined.Application of FIN 46 is required in financial statements of public entitiesthat have interests in variable interest entities or potential variableinterest entities commonly referred to as special-purpose entities for periodsending after December 15, 2003. Application of FIN 46 to all other types of entities is required infinancial statements for periods ending after March 15, 2004 with earlierapplication permitted if the original interpretation was previouslyadopted.  We adopted the originalinterpretation and FIN 46 as of December 31, 2003 which did not have a materialeffect on the Company’s financial statements.

 

F-9

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In April 2003,the FASB issued SFAS No. 149, *“Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities,”* which is generally effective for contractsentered into or modified after June 30, 2003 and for hedging relationships designatedafter June 30, 2003.  SFAS No. 149clarifies under what circumstances a contract with an initial net investmentmeets the characteristic of a derivative as discussed in SFAS No. 133,clarifies when a derivative contains a financing component, amends thedefinition of an “underlying” to conform it to the language used in FASBInterpretation No. 45, *Guarantor Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others*and amends certain other existing pronouncements.  We do not anticipate that the adoption of SFAS No. 149 will havea material impact on our consolidated financial statements.

 

On May 15,2003, the FASB issued SFAS No. 150, *Accounting for**Certain Financial Instruments withCharacteristics of Both*Liabilities*and Equity*.The Statement requires issuers to classify as liabilities (or assets in somecircumstance) three classes of freestanding financial instruments that embodyobligations for the issuer.  Generally,the Statement is effective for financial instruments entered into or modifiedafter May 31, 2003 and is otherwise effective at the beginning of the firstinterim period beginning after June 15, 2003. We do not have any outstandingfinancial instruments within the scope of the Statement and therefore theadoption of this statement on July 1, 2003, did not have a material effect onour consolidated financial statements.

 

2.               SIGNIFICANTACCOUNTING POLICIES AND PROCEDURES

 

The consolidated financial statements reflect the application of thefollowing accounting policies:

 

Cash and Cash Equivalents

 

Cash and cash equivalents include funds on hand, short-term moneymarket investments, and certificate of deposit accounts with originalmaturities of 90 days or less.

 

Revenue Recognition

 

Our principal source of revenue is from customer diningtransactions.  Revenue is recognized atthe time the meal is paid for by the customer, in the form of cash or creditcard.

 

Deferred Gains

 

Deferred gains on sale-leaseback transactions are accreted to income asa reduction of rent expense over the related lease terms in accordance withSFAS No. 98, Accounting for Leases.

 

# **ConsiderationReceived from Vendors**

# ** **

In November 2003, the Emerging Issues Task Force (EITF) issued EITFIssue 03-10, Application of Issue No. 02-16 *by Resellers to Sales Incentives Offered to Consumersby Manufacturers*(EITF 03-10). Sales incentives covered by EITF 03-10 include coupons and other similarinstruments for which the reseller receives a direct reimbursement from thevendor.  Application of EITF 03-10 tonew arrangements, including modifications to existing

 

F-10

----

 

arrangements, entered into in fiscal periods beginning after November25, 2003 is required.  Application ofEITF 03-10 is not expected to have a material effect on the Company’s financialstatements. * *In accordance with Issue No.02-16, we record vendor rebates as a reduction of cost of sales when therebates are received.

 

Inventories

 

Inventories consist primarily of food, beverages, and supplies and arestated 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, accounts receivable, otherassets, accounts payable, accrued liabilities, and other liabilitiesapproximate fair value due to the short-term nature of these instruments.  The revolving line of credit approximate fairvalue, as they bear interest at indexed rates. Fixed rate long-term debt is currently at rates similar to currentquotations for similar debt.

 

Property and Equipment

 

Property and equipment are stated at cost and depreciated on astraight-line basis over the estimated useful lives, while leaseholds areamortized over the shorter of 20 years or the lease term including optionperiods, which have economic penalties, and consist of the following (inthousands):

 
|                                                   |   | **Useful  Lives  (years)** |   | **December  29,  2003** |   | **December  30,  2002** |   |
|--------------------------------------------------------|--------|----------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                                   |   |                       |   |                    |   |                    |   |
| Land                                                   |   | —                     |   | $                       | 534    |                    | $      | 534 |   |
| Land held for sale                                     |   | —                     |   | 853                     |   | 1,203                   |   |
| Building and leasehold improvements                    |   | 5-20                       |   | 64,100                  |   | 58,599                  |   |
| Kitchen equipment                                      |   | 5-7                        |   | 23,556                  |   | 22,913                  |   |
| Restaurant equipment                                   |   | 5-10                       |   | 9,210                   |   | 10,183                  |   |
| Smallwares and décor                              |   | 5-10                       |   | 7,932                   |   | 7,677                   |   |
| Office equipment, software, and furniture              |   | 5-7                        |   | 6,660                   |   | 6,445                   |   |
|                                                   |   |                       |   | 112,845                 |   | 107,554                 |   |
| Less:   Accumulated depreciation and amortization |   |                       |   | (44,736                 | )      | (39,854                 | )      |
|                                                   |   |                       |   | 68,109                  |   | 67,700                  |   |
| Construction in progress                               |   |                       |   | 20                      |   | 3,565                   |   |
| Total                                                  |   |                       |   | $                       | 68,129 |                    | $      | 71,265 |   |

 

F-11

----

 

Depreciation expense was $8,651,000 for 2003, $8,038,000 for 2002, and$7,912,000 for 2001.

 

Construction in progress (CIP) represents costs incurred by us duringthe development of future restaurant sites for fixtures and buildingimprovements.  As a result of leasecancellations of not yet built Bamboo Club locations (Fairfax, Virginia, SanAntonio, Texas, and Fort Worth, Texas), we wrote off construction in progresscosts of $415,000 during 2002.

 

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 developingTGI Friday’s restaurants purchased, 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  (years)** |   | **December  29,  2003** |   | **December  30,  2002** |   |
|---------------------------------------|--------|-----------------------------------|--------|-------------------------|--------|-------------------------|--------|
| Franchise area goodwill               |   | 20                                |   | $                       | 769    |                    | $      | 994 |   |
| Franchise fees and license costs      |   | 20-30                             |   | 3,099                   |   | 3,173                   |   |
| Less:   Accumulated amortization |   |                              |   | (1,177                  | )      | (1,035                  | )      |
| Total                                 |   |                              |   | $                       | 2,691  |                    | $      | 3,132 |   |

 

Goodwill

 

We have recorded significant goodwill in conjunction with majoracquisitions. During 2002, we adopted SFAS No. 142, Goodwill and OtherIntangible Assets.  SFAS 142 eliminatesthe amortization of all existing and newly acquired goodwill on a prospectivebasis and requires companies to assess goodwill impairment, at least annually,based on the fair value of the reporting unit. We no longer amortize goodwill.

 

As of the date of adoption, January 2002, we had unamortized goodwillof $25,149,000 that was subject to the transition provisions of SFAS Nos.141and 142.  Accumulated amortizationrelated to goodwill was $5,914,000 as of the date of adoption.

 

During 2002, we wrote off $1,160,000 of allocated goodwill associatedwith one closed location (Kansas City, Missouri) and two impaired locations(Palm Desert, California and Citrus Heights, California).  After this goodwill write-off, at December30, 2002, we performed a valuation in accordance with SFAS No.142 for thepurpose of determining the amount of goodwill impairment.  Based on the results of the valuation, noadditional impairment was

 

F-12

----

 

required.  Additionally, during 2002, we reclassified$994,000 of goodwill to franchise area goodwill, which is classified as anintangible asset that requires amortization under SFAS No.142.  Franchise area goodwill represents the estimatedvalue we paid to acquire the franchise rights to develop restaurants in certainlocations, at the date of original purchase. As a result of these transactions, goodwill was $22,995,000 at the endof 2002.

 

During 2003, we wrote off $1,310,000 inallocated goodwill associated with one closed Redfish Grill and Bar (Denver,CO), one closed TGI Friday’s location (sale of Sacramento, CA), one impairedBamboo Club location (Newport, KY), and one TGI Friday’s location that willclose in early 2004 (Salinas, CA).  As aresult of these transactions, goodwill was $21,685,000 at the end of 2003. AtDecember 29, 2003, we performed a valuation in accordance with SFAS No.142 forthe purpose of determining the amount of goodwill impairment.  Based on the results of the valuation, noadditional impairment was required.

 
| **Goodwill  Allocated to Areas**                      |   | **December  29,  2003** |   | **December  30,  2002** |   |
|-------------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                                  |   |                    |   |                    |   |
| Acquisition of California TGI Friday’s           |   | $                       | 9,890  |                    | $      | 10,750 |   |
| Acquisition of Midwest and Arizona TGI  Friday’s |   | 1,495                   |   | 1,495                   |   |
| Acquisition of Redfish                                |   | 300                     |   | 450                     |   |
| Acquisition of Bamboo Club                            |   | 10,000                  |   | 10,300                  |   |
| Total                                                 |   | $                       | 21,685 |                    | $      | 22,995 |   |

 

The following table presents reported net loss and loss per shareexclusive of goodwill amortization expense for the years ended December 29,2003, December 30, 2002, and December 31, 2001 (in thousands except per shareamounts):

 
|                                        |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Reported net income (loss)                  |   | $        | (1,966 | )        | $      | (8,577   | )      | $ | (111 | ) |
| Add back goodwill amortization              |   | —   |   | —   |   | 1,455    |   |
| Adjusted net income (loss)                  |   | $        | (1,966 | )        | $      | (8,577   | )      | $ | 1,344 |   |
|                                        |   |     |   |     |   |     |   |
| Basic Income (loss) Per Share:              |   |     |   |     |   |     |   |
| Reported net income (loss) per common share |   | $        | (0.14  | )        | $      | (0.61    | )      | $ | (0.01 | ) |
| Add back goodwill amortization              |   | —   |   | —   |   | 0.11     |   |
| Adjusted net income (loss) per share        |   | $        | (0.14  | )        | $      | (0.61    | )      | $ | 0.10 |   |
|                                        |   |     |   |     |   |     |   |
| Diluted Income (loss) Per Share:            |   |     |   |     |   |     |   |
| Reported net income (loss) per common share |   | $        | (0.14  | )        | $      | (0.61    | )      | $ | (0.01 | ) |
| Add back goodwill amortization              |   | —   |   | —   |   | 0.11     |   |
| Adjusted net income (loss) per share        |   | $        | (0.14  | )        | $      | (0.61    | )      | $ | 0.10 |   |

 

F-13

----

 

Other Accrued Liabilities

 

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

 
|                           |   | **December  29,  2003** |   | **December  30,  2002** |   |
|--------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                           |   |                    |   |                    |   |
| Accrued payroll                |   | $                       | 4,033  |                    | $      | 3,736 |   |
| Accrued property and sales tax |   | 1,968                   |   | 1,912                   |   |
| Accrued insurance              |   | —                  |   | 1,415                   |   |
| Accrued rent                   |   | 4,199                   |   | 3,142                   |   |
| Gift certificate liability     |   | 1,504                   |   | 1,249                   |   |
| Other accrued liabilities      |   | 4,873                   |   | 4,553                   |   |
| Total                          |   | $                       | 16,577 |                    | $      | 16,007 |   |

 

 

Income Taxes

 

We utilize the asset and liability method of accounting for incometaxes.  Under the asset and liabilitymethod, deferred taxes are provided based on temporary differences between thefinancial reporting basis and the tax basis of our assets and liabilities,using enacted tax rates in the years in which the differences are expected toreverse.  Deferred tax assets arereviewed periodically for recoverability and valuation allowances are providedas necessary.

 

Earnings (Loss) Per Share

 

Basic earnings (loss) per share (“EPS”) is computed by dividingearnings (loss) available to common stockholders by the weighted-average numberof shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution thatcould occur if securities or contracts to issue common stock were exercised orconverted to stock or resulted in the issuance of stock that then shared in ourearnings or losses.

 

The assumed exercise of outstanding stock options and warrants has beenexcluded from the calculations of diluted net loss per share as their effect isanti-dilutive.

 

We have calculated EPS in accordance with SFAS No. 128, *Earnings PerShare*. The following table sets forth basic and diluted EPScomputations for the years ended December 29, 2003, December 30, 2002, andDecember 31, 2001 (in thousands, except per share amounts):

 

F-14

----

 
|                                     |   | **2003**      |   | **2002**   |   | **2001**               |   |
|------------------------------------------|--------|---------------|--------|------------|--------|------------------------|--------|
|                                     |   | **Net  Loss** |   | **Shares** |   | **Per  Share  Amount** |   | **Net  Income** |   | **Shares** |   | **Per  Share  Amount** |   | **Net  Income** |   | **Shares** |   | **Per  Share  Amount** |   |
|                                     |   |          |   |       |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic EPS                                |   | $             | (1,966 | )          | 14,179 |                   | $      | (0.14 | ) | $ | (8,577 | ) | 14,105 |   | $ | (0.61 | ) | $ | (111 | ) | 14,048 |   | $ | (0.01 | ) |
| Effect of stock options and warrants     |   | —        |   | 1          |   | —                 |   | — |   | 594 |   | — |   | — |   | 533 |   | — |   |
| Anti-dilutive stock options and warrants |   | —        |   | (1         | )      | —                 |   | — |   | (594 | ) | — |   | — |   | (533 | ) | — |   |
| Diluted EPS                              |   | $             | (1,966 | )          | 14,179 |                   | $      | (0.14 | ) | $ | (8,577 | ) | 14,105 |   | $ | (0.61 | ) | $ | (111 | ) | 14,048 |   | $ | (0.01 | ) |

 

 

SegmentReporting

 

We have three operating segments that are managed based on ourrestaurant 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.  As aresult of the foregoing, we believe that our restaurants meet the criteriasupporting aggregation of all restaurants into one reporting unit.  Accordingly, we have not presented separatefinancial information for each of our operating segments, as our consolidatedfinancial statements present our one reporting unit.

 

Stock-Based Compensation Plans

 

SFAS No.123, *Accounting for Stock-Based Compensation*,was issued by the FASB in 1995 and, if fully adopted, changed the methods forrecognition of cost on plans similar to those of our company.  Adoption of SFAS No. 123 was optional;however, pro forma disclosures as if we had adopted the cost recognition methodare required.  Had compensation cost forstock options awarded under these plans been determined consistent with SFASNo. 123, our net income (loss) and EPS would have reflected the following proforma amounts:

 

F-15

----

 
|                          |   | **December  29,  2003**                       |   | **December  30,  2002** |   | **December  31,  2001** |   |
|-------------------------------|--------|-----------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                          |   | **(In  Thousands, Except Per Share Amounts)** |   |
| Net Income (loss):            |   |                                          |   |                    |   |                    |   |
| As Reported                   |   | $                                             | (1,966 | )                       | $      | (8,577                  | )      | $ | (111 | ) |
| Compensation Expense          |   | $                                             | (944   | )                       | $      | (1,047                  | )      | $ | (850 | ) |
| Pro Forma                     |   | $                                             | (2,910 | )                       | $      | (9,624                  | )      | $ | (961 | ) |
|                          |   |                                          |   |                    |   |                    |   |
| Earnings (loss) per share:    |   |                                          |   |                    |   |                    |   |
| Shares                        |   | 14,179                                        |   | 14,105                  |   | 14,048                  |   |
| As Reported-basic and diluted |   | $                                             | (0.14  | )                       | $      | (0.61                   | )      | $ | (0.01 | ) |
| Pro Forma-basic and diluted   |   | $                                             | (0.21  | )                       | $      | (0.68                   | )      | $ | (0.07 | ) |

 

The weighted average fair value at the date of grant for optionsgranted during fiscal 2003, 2002, and 2001 were estimated using the Black-Scholesoption pricing model with the following assumptions: weighted average risk-freeinterest rate of 3.00%, 2.73%, and 5.22%, respectively; weighted averagevolatility of 65.6%, 53.7%, and 50.0%, respectively; average life of the optionof three years, four and four years, respectively; and weighted averagedividend yield of 0.0% in all years.

 

Details regarding the options outstanding as of December 29, 2003 areas follows:

 
|                         |   | **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                |   | 1,652,000             |   | 5.53 years                                          |   | $ | 2.24 |   | 1,039,000 |   | $ | 2.29 |   |
| $3.00 - $3.65                |   | 1,550,004             |   | 5.72 years                                          |   | $ | 3.34 |   | 1,447,337 |   | $ | 3.32 |   |
| $4.00 - $6.01                |   | 655,750               |   | 6.82 years                                          |   | $ | 4.74 |   | 341,917 |   | $ | 4.77 |   |
| Total                        |   | 3,857,754             |   |                                                |   |   |   | 2,828,254 |   |   |   |

 

Derivative Financial Instruments

 

We have only limited involvement with derivative financial instrumentsand do not use them for trading purposes. We utilize an interest rate swap agreement to hedge the effects offluctuations in interest rates related to one of our long-term debtinstruments.  The interest rate

 

F-16

----

 

swap agreement meets the criteriafor cash flow hedge accounting.  Amountsreceivable or payable due to settlement of the interest rate swap agreement arerecognized as interest expense on a monthly basis.  A mark-to-market adjustment is recorded as a component ofstockholders’ equity, net of taxes, to reflect the fair value of the interestrate swap agreement.  We discontinuehedge accounting prospectively if it is determined that the derivative is nolonger effective.

 

In conjunctionwith the Bank of America development facility, we have an interest rate swapagreement with Bank of America, which fixes our base interest rate at 6.26% perannum on a notional amount of $12,500,000 from July 2002 through June2014.  The swap qualifies as a cash flowhedge in accordance with SFAS No. 133. On a periodic basis, we adjust the fairmarket value of the swap on the balance sheet and offset the amount of thechange to other comprehensive income (loss). As of December 29, 2003 and December 30, 2002, the fair value of thehedge resulted in a liability of $1,471,893, and $1,884,919 respectively

 

We also havean interest rate swap agreement with Bank of America on a note held by CNLFunding with a remaining unpaid balance of $5,516,000.  The interest rate on the note, 9.457%, isthe same as the interest rate to be received under the interest rate swapagreement.  The swap effectively floatsthe 9.457% note to a 30-day LIBOR base plus a spread of 4.34% on a notionalamount of $5,516,000. On a quarterly basis, we adjust the fair market value ofthe swap on the balance sheet and offset the amount of the change to othercomprehensive income (loss).  As ofDecember 29, 2003 and December 30, 2002, the fair value of the hedge resultedin an asset of $330,582 and $450,114, respectively.

 

We also havean additional interest rate swap agreement with Bank of America.  This swap agreement effectively fixes ourinterest rate at 5.65% per annum (plus credit spread) on a notional amount of$10,700,000 from May 2002 through May 2012. The swap qualifies as a cash flow hedge in accordance with SFAS No. 133.On a periodic basis, we adjust the fair market value of the swap on the balancesheet and offset the amount of the change to other comprehensive income(loss).  As of December 29, 2003 andDecember 30, 2002, the fair value of the hedge resulted in a liability of$911,798 and $1,203,299, respectively.

 
| **Comprehensive  Income (Loss)**                                                                                |   | **December  29,  2003** |   | **December  30,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                                                                                            |   |                    |   |                    |   |
| Net Income (loss)                                                                                               |   | $                       | (1,966 | )                       | $      | (8,577 | ) |
| Other comprehensive income (loss), for the  periods ended December 29, 2003 and December 30, 2002, respectively |   | 451                     |   | (2,302                  | )      |
|                                                                                                            |   |                    |   |                    |   |
| Comprehensive income (loss)                                                                                     |   | $                       | (1,515 | )                       | $      | (10,879 | ) |

 

F-17

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Reclassifications

 

Certain prior year amounts have been reclassified to conform to thecurrent year presentation.  EffectiveJanuary 1, 2003, we began charging the costs of training new managers relatedto the replacement of existing managers to the payroll and benefits account.  In previous years, this expense was includedin the new manager training account. The reclassifications made during 2002 and2001 were approximately $1,394,000 and $1,349,000, respectively.

 

Accounting for Long-Lived Assets and Impairment Charges

 

Long-lived assets are reviewed for impairment whenever events orcircumstances indicate that the carrying amount of the asset may not berecoverable.  If the sum of the expectedfuture cash flows (undiscounted and without interest charges) from an asset tobe held and used in operations is less than the carrying value of the asset, animpairment loss must be recognized in the amount of the difference between thecarrying value and the fair value of the assets.

 

We have a policy of reviewing the financial operations of ourrestaurant locations on at least a quarterly basis.  Locations that are not meeting expectations are identified andcontinue to be monitored closely throughout the year.  Primarily in the fourth quarter, we review actual results andbudgets for the ensuing year are analyzed. If we deem that a location’s results will continue to be belowexpectations, we consider alternatives for its continued operation.  At that time, we perform asset impairmenttesting.  If it is determined that thefair value of an asset is greater than its carrying value, an impairment chargeis recorded.  Upon a triggering eventsuch as a formal decision for abandonment (restaurant closure), we may recordadditional impairment of assets, including an allocation of goodwill. Anycarryover basis of assets is depreciated over the respective remaining usefullives.

 

Fair value of assets is determined primarily on the likelihood offuture use of the assets through operations or by the value that could bereceived for the asset if sold.

 

Other charges include write-offs of allocated goodwill, severancecosts, lease and contract termination fees, professional service costs, andsettlement of litigation. During fiscal years ended 2003, 2002, and 2001, werecorded asset impairment charges and other as follows (in thousands):

 
|                                                          |   | **December  29,  2003** |   | **December  30,  2002** |   | **December  31,  2001** |   |
|---------------------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                                          |   |                    |   |                    |   |                    |   |
| Long-lived asset impairments and other                        |   | $                       | 3,051  |                    | $      | 4,323                   |   | $ | 1,838 |   |
| Write-off of goodwill allocated to closed  or impaired stores |   | 905                     |   | 1,160                   |   | —                  |   |
| Provision for Severance                                       |   | 300                     |   |                    |   |                    |   |
| Lease cancellation charges                                    |   | 500                     |   | 2,060                   |   | —                  |   |
| Impairment of receivables (Mngmt.  Agreement)                 |   | 800                     |   | —                  |   | 1,615                   |   |
| Write-down of land (El Paso, Texas)                           |   | 350                     |   | 400                     |   | —                  |   |
| Total impairment charges and other                            |   | $                       | 5,906  |                    | $      | 7,943                   |   | $ | 3,453 |   |

 

F-18

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The long-lived asset impairment amount in the table above representsthe net book value of the fixed assets which will not be recovered throughregular operations, computed on a discounted cash flow basis.  The amount in 2003 is attributable primarilyof impairment 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.  The amount in 2001 is primarily attributableto the impairment of assets at four TGI Friday’s locations, and two Redfishlocations.

 

Valuation Reserves

 

Valuation reserves for the years ended December 29, 2003, December 30,2002, and December 31, 2001, 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 29, 2003             |   | $                                    | —    |                  | $      | —             |   | $                              | —      |   | $ | — |   |
| Year ended December 30, 2002             |   | $                                    | 34,000    |                  | $      | (30,000            | )      | $                              | (4,000      | ) | $ | — |   |
| Year ended December 31, 2001             |   | $                                    | 149,000   |                  | — |               | $      | (115,000                       | )           | $ | 34,000 |   |
|                                     |   |                                 |      |                  |   |               |   |                           |        |
| Insurance and claims reserves(prepaids): |   |                                 |      |                  |   |               |   |                           |        |
| 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 |   |
| Year ended December 31, 2001             |   | $                                    | 1,668,700 |                  | $      | 5,258,539          |   | $                              | (4,310,939  | ) | $ | 2,616,300 |   |

 

3.               INCOMETAXES

 

Income tax expense (benefit)consists of the following (in thousands):

 

F-19

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|                          |   | **Current** |   | **Deferred** |   | **Total** |   |
|-------------------------------|--------|-------------|--------|--------------|--------|-----------|--------|
| 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 |   |
| Year ended December 31, 2001: |   |        |   |         |   |      |   |
| U.S. Federal                  |   | $           | 228    |         | $      | (913      | )      | $ | (685 | ) |
| State and local               |   | 175         |   | (135         | )      | 40        |   |
|                          |   | $           | 403    |         | $      | (1,048    | )      | $ | (645 | ) |

 

 

Deferred income taxes arise due to differences in the treatment ofincome and expense items for financial reporting and income tax purposes.  In the current year, we generated a netoperating loss.  The effect of temporarydifferences and carryforwards that gave rise to deferred tax balances atDecember 29, 2003 and December 30, 2002, were as follows (in thousands):

 
| **Net  Deferred Tax Assets/(Liabilities)**               |   | **December  29, 2003** |   | **December  30, 2002** |   |
|----------------------------------------------------------|--------|------------------------|--------|------------------------|--------|
|                                                     |   | **(In Thousands)**     |   |
| Temporary differences:                                   |   |                   |   |                   |   |
| Basis differences in investments                         |   | $                      | 558    |                   | $      | 366 |   |
| Basis differences in depreciable and  amortizable assets |   | (4,709                 | )      | (4,942                 | )      |
| Provision for estimated expenses                         |   | 1,986                  |   | 3,403                  |   |
| Revenue recognition                                      |   | 36                     |   | 50                     |   |
|  Interest rate swap                                 |   | 821                    |   | 921                    |   |
| Tax carryforwards:                                       |   |                   |   |                   |   |
| General business and AMT credits                         |   | 5,791                  |   | 5,791                  |   |
| Charitable Contribution                                  |   | 7                      |   | —                 |   |
| Net operating loss and capital loss  carryforwards       |   | 5,471                  |   | 3,621                  |   |
| Valuation reserve                                        |   | (9,961                 | )      | (9,210                 | )      |
| Total                                                    |   | $                      | — |                   | $      | — |   |

 

At December 29, 2003, we had approximately $13,988,000 federal netoperating and tax credit carryforwards to be used to offset future income forfederal income tax purposes.  Thesecarryforwards expire in the years 2004 to 2021. The net change in the totalvaluation allowance for the year ended December 29, 2003 and December 30,2002,  is the result of providing a fullvaluation allowance against all deferred tax assets because of the significantloss in 2002 and 2003

 

F-20

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We believe that our ability to utilize our net operating losscarryforwards and certain of our general business and AMT credits to offsetfuture taxable income within the carryforward periods under existing tax lawsand regulations is subject to future profitability.  However, because we have suffered significant net losses in thelast three years, we have concluded that a 100% valuation allowance against ournet deferred tax assets continues to be warranted.  Reconciliations of the federal income tax rate to our effectivetax rate were as follows:

 
|                                |   | **December  29,  2003** |   | **December  30,  2002** |   | **December  31,  2001** |   |
|-------------------------------------|--------|-------------------------|--------|-------------------------|--------|-------------------------|--------|
| Statutory federal rate              |   | (34.0                   | )%     | (34.0                   | )%     | (34.0                   | )%     |
| State taxes, net of federal benefit |   | —                  |   | 1.3                     |   | 51.4                    |   |
| Nondeductible expenses              |   | 0.66                    |   | 0.23                    |   | 4.4                     |   |
| Expiration of capital loss          |   | —                  |   | 13.3                    |   | —                  |   |
| Change in valuation allowance       |   | 33.34                   |   | 37.17                   |   | (107.1                  | )      |
|                                |   | 0.0                     | %      | 18.0                    | %      | (85.3                   | )%     |

 

At December 29, 2003 and December 30, 2002, $384,000 and $1,216,000,respectively, of estimated income tax payments are included in prepaidexpenses.

 

4.               LINEOF CREDIT

 

During 2003, we entered into a $2.5 million, one-year revolving line ofcredit with a bank.  At December 29,2003, $7,000 was outstanding on this line.

 

5.               LONG-TERMDEBT

 

Long-term debt consists of the following (in thousands):

 
|                                                                     |   | **Maturity  Dates** |   | **Interest  Rates  as of  December 29,  2003** |   | **Annual  Principal  Payments** |   | **December  29,  2003** |   | **December  30,  2002** |   |
|--------------------------------------------------------------------------|--------|---------------------|--------|------------------------------------------------|--------|---------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                                                     |   |                |   |                                           |   |                            |   |                    |   |                    |   |
| CNL Term Loan II, secured by assets of 16  TGI Friday’s Restaurants |   | 2012-2013           |   | 9.457                                          | %      | $                               | 1,200  |                    | $      | 14,375                  |   | $ | 16,535 |   |
| Bank of America                                                          |   | 2013                |   | 3.75                                           | %      | 900                             |   | 16,046                  |   | 15,738                  |   |
| Merrill Lynch                                                            |   | 2007-15             |   | 3.96                                           | %      | 470                             |   | 5,029                   |   | 5,485                   |   |
| FFCA                                                                     |   | 2002-16             |   | 10.5                                           | %      | 32                              |   | —                  |   | 32                      |   |
| GE Capital                                                               |   | 2002-14             |   | 4.81                                           | %      | 1,000                           |   | 12,792                  |   | 2,774                   |   |
| GMAC                                                                     |   | 2010-15             |   | 10.56                                          | %      | 253                             |   | 3,442                   |   | 14,936                  |   |
| Total                                                                    |   |                |   |                                           |   | $                               | 3,823  |                    | 51,684 |                    | 55,500 |   |
| Less current portion                                                     |   |                |   |                                           |   |                            |   | (3,815                  | )      | (3,502                  | )      |
| Total                                                                    |   |                |   |                                           |   |                            |   | $                       | 47,869 |                    | $      | 51,998 |   |

 

F-21

----

 

We have a $15million financing commitment through GE Franchise Finance.  The terms include $6 million for financingof equipment and leasehold improvements for the seven Bamboo Clubs already openand approximately $9 million for new Bamboo Club development.  At December 29, 2003, there were noborrowings outstanding under this commitment.

 

In July 2002,we amended our Bank of America development facility to provide for anadditional $1,000,000 in financing. During 2002, we borrowed an additional $9,465,000 to fund constructionon two locations (TGI Friday’s San Tan, Chandler, Arizona and Porter Ranch,California) and to refinance two existing locations (TGI Friday’s Cerritos,California and Oxnard, California) for which we paid off higher rate debt.  By September 30, 2002, we had fully utilizedour development facility with Bank of America.

 

All of our loan agreements contain various financial covenants that aregenerally measured at the end of each calendar quarter.  There are two key covenants we mustmeet.  One loan agreement requires acash flow coverage test, which requires us to produce a level of earningsbefore interest, taxes, depreciation, and amortization and other unusual gainsor losses (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 of total senior debt wecan have to a multiple of EBITDA.

 

At December 29, 2003, we met all of the financial covenants, asamended, for all debt agreements.  Alllong-term debt is secured by certain assets of various restaurant locations.

 

Maturities of long-term debt, giving effect to the borrowings discussedabove, were as follows at December 29, 2003 (in thousands):

 

| 2003       |   | $      | 3,815  |   |
|------------|--------|--------|--------|--------|
| 2004       |   | 4,190  |   |
| 2005       |   | 4,416  |   |
| 2006       |   | 4,762  |   |
| 2007       |   | 4,991  |   |
| Thereafter |   | 29,510 |   |
| Total      |   | $      | 51,684 |   |

 

 

6.               STOCKHOLDERS’EQUITY

 

Stock Options

 

We have anIncentive Stock Option Plan (the “2002 Plan”) that provides for the issuance ofoptions to acquire up to 1,000,000 shares of our common stock.  The options are intended to qualify asincentive stock options within the meaning of Section 422A of the InternalRevenue Code or as options which are not intended to meet the requirements ofsuch section (“non-qualified

 

F-22

----

 

stock options”).  Awards granted under the 2002 Plan also mayinclude stock appreciation rights and restricted stock awards.

 

The exerciseprice of all incentive stock options granted under the 2002 Plan must be atleast equal to the fair market value of such shares as of the date of grant or,in the case of incentive stock options granted to the holder of 10% or more ofthe our common stock, at least 110% of the fair market value of such shares onthe date of grant.  The planadministrator (currently the Board of Directors) sets the term of each stockoption, but no incentive stock option may be exercisable more than 10 yearsafter the date such option is granted. We also have granted options under the 1990, 1995, and 1999 IncentiveStock option Plans, all of which contain similar terms to the 2002 IncentiveStock Option Plan.

 

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

 

We are also authorized to issue or have outstanding options under allof our unexpired stock option plans.  Inaddition, our Board of Directors approved the issuance of 50,000 non-statutorystock options to one of our officers during 2000 and 150,000 non-statutorystock options to one of our officers in 2001.

 

A summary of the status of our stock option plans at December 29, 2003,December 30, 2002, and December 31, 2001 and changes during the years thenended is presented in the table and narrative below:

 
|                                            |   | **2003**   |   | **2002**              |   | **2001**   |      |
|-------------------------------------------------|--------|------------|--------|-----------------------|--------|------------|-----------|
|                                            |   | **Shares** |   | **Wtd.  Avg.  Price** |   | **Shares** |      | **Wtd.  Avg.  Price** |   | **Shares** |   | **Wtd.  Avg.  Price** |   |
|                                            |   |       |   |                  |   |       |      |   |   |   |   |   |   |
| Options outstanding at beginning of period      |   | 3,487,420  |   | $                     | 3.30   |       | 3,234,497 |   | $ | 3.14 |   | 2,733,000 |   | $ | 3.05 |   |
| Granted                                         |   | 630,250    |   | 2.15                  |   | 444,250    |      | 2.87 |   | 644,000 |   | 3.79 |   |
| Exercised                                       |   | —     |   | —                |   | (117,664   | )         | 3.26 |   | (6,999 | ) | 3.02 |   |
| Cancelled                                       |   | (259,916   | )      | 3.64                  |   | (73,663    | )         | 3.43 |   | (135,504 | ) | 3.47 |   |
| Options outstanding at end of period            |   | 3,857,754  |   | 3.10                  |   | 3,487,420  |      | 3.30 |   | 3,234,497 |   | 3.14 |   |
|                                            |   |       |   |                  |   |       |      |   |   |   |   |   |   |
| Exercisable at end of period                    |   | 2,828,254  |   | 3.12                  |   | 2,624,780  |      | 3.03 |   | 2,112,332 |   | 2.96 |   |
| Weighted average fair value of options  granted |   |       |   | $                     | 1.50   |       |      |   | $ | 3.04 |   |   |   | $ | 2.56 |   |

 

F-23

----

 

Common Stock Warrants

 

As of December 29, 2003 and December 30, 2002, we had 231,277 outstandingwarrants to acquire our common stock with our lenders in connection with theissuances of previously paid- off debt. The warrants are exercisable at $9.08 per share and expire in March2004.

 

7.               COMMITMENTSAND CONTINGENCIES

 

Development Agreements

 

We are obligated under separate development agreements with TGIFriday’s Inc. to open 16 new TGI Friday’s restaurants through 2009.  The development agreements give TGI Friday’sInc. certain remedies in the event we fail to timely comply with the developmentagreements, including the right, under certain circumstances, to terminate ourexclusive rights to develop restaurants in the related franchisedterritory.  Our development territoriesinclude most of Arizona, Nevada, New Mexico, Southern California, and the ElPaso metropolitan areas.  We currentlyare negotiating for one new TGI Friday’s restaurant site and do not anticipatebuilding any additional TGI Friday’s during 2004.

 

Franchise, License, and Marketing Agreements

 

In accordance with the terms of the TGI Friday’s restaurant franchiseagreements, we are required to pay franchise fees of $50,000 for eachrestaurant opened.  We also are requiredto pay a royalty of up to 4% of gross sales. Royalty expense was approximately $7,510,000, $7,476,000, and $7,444,000under these agreements during 2003, 2002, and 2001, respectively.  In addition, we could be required to spendup to 4% of gross sales on marketing. Marketing expense for TGI Friday’s restaurant locations under theseagreements was approximately $6,195,000, $5,250,000, and $4,772,000 during2003, 2002, and 2001, respectively.

 

Operating Leases

 

We lease land and restaurant facilities under operating leases havingterms expiring at various dates through January 2020.  The restaurant leases have from two to three renewal clauses offive years each at our option, and have provisions for contingent rentals basedupon a percentage of gross sales.  Ourminimum future lease payments as of December 29, 2003, were as follows (inthousands):

 

| 2004       |   | $      | 12,019  |   |
|------------|--------|--------|---------|--------|
| 2005       |   | 11,891 |    |
| 2006       |   | 11,493 |    |
| 2007       |   | 11,043 |    |
| 2008       |   | 10,797 |    |
| Thereafter |   | 74,331 |    |
| Total      |   | $      | 131,574 |   |

 

F-24

----

 

Rent expense during 2003, 2002, and 2001 was approximately $12.4million, $11.9 million, and $10.8 million, respectively.  In addition, we paid contingent rentals of$958,000, $1,061,000, and $1,060,000 during 2003, 2002, and 2001,respectively.  The difference betweenrent expense and rent paid due to recording expenses on the straight-linemethod is included in other liabilities and deferred credits in theaccompanying consolidated balance sheets.

 

Contingencies

 

In the normal course of business, we are named as a defendant invarious claims and litigation matters.  From time to time, we are subject to routinecontract, negligence, employment related, and other litigation in the ordinarycourse of business.  In January 2002, wewere served with a lawsuit filed on behalf of a current employee, seekingdamages, under California law, for both missed breaks and missed meal breaksthe employee alleges she did not receive. This lawsuit seeks to establish aclass action relating to our California operations. We intend to vigorouslydefend this lawsuit, both on the merits of the employee’s case and the issuesrelating to class action status.  Otherthan the preceding, we are not subject to any pending litigation that webelieve will have a material adverse effect on our business or financialcondition, results of operations, or liquidity.

 

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 andas such has assessed taxes and related penalties of approximately$900,000.  We have vigorously contestedthis assessment. The first of various appeal conferences was held on November13, 2003.  In February 2004, we werenotified that our appeal was denied by the appeals officer.  We are in the process of preparing a secondappeal to the full state of California Franchise Tax Board. We are unable topredict the outcome of this proceeding and have provided no amounts for thiscontingency.

 

We are also subject, from time to time, to audit by various taxingauthorities reviewing our income, property, sales, use, and payroll taxes.  We believe that any finding from such auditswill not have a material impact on our financial position, results ofoperations, or liquidity.

 

8.               BENEFITPLANS

 

We maintain a401(k) Savings Plan for all of our employees. We currently match 50% of the participants’ contributions for the first4% of the participants’ compensation. Contributions made by us were approximately $235,000, $257,000, and$248,000 during 2003, 2002, and 2001, respectively.

 

F-25

----