**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **x**  | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                        |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                           |
|   | **For  the quarterly period ended March 25, 2008**                                                                                                                                                        |
|   |                                                                                                                                                                                                           |
|   | **OR**                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                           |
| **o**  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                       |
|   |                                                                                                                                                                                                           |
|   | **For  the transition period  from                            to** |

 

**CommissionFile Number 000-50972**

 

**TexasRoadhouse, Inc.**

(Exact name ofregistrant specified in its charter)

 

| **Delaware**                     | ** ** | **20-1083890**          |
|----------------------------------|------------|-------------------------|
| (State or other  jurisdiction of |       | (IRS Employer           |
| incorporation or  organization)  |       | Identification  Number) |

 

**6040Dutchmans Lane, Suite 200**

**Louisville,Kentucky 40205**

(Address ofprincipal executive offices) (Zip Code)

 

**(502)426-9984**

(Registrant’stelephone number, including area code)

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act.  (Check one):

 
| Large accelerated filer  x | Accelerated filer  o | Non-accelerated  filer  o | Smaller reporting  company  o |
|--------------------------------------|--------------------------------|-------------------------------------|-----------------------------------------|

 

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

 

The number of shares of Class Aand Class B common stock outstanding were 69,110,325 and 5,265,376,respectively, on April 25, 2008.

 

 

----

 

 

**TABLEOF CONTENTS**

 
| PART I.  FINANCIAL INFORMATION                                                                                         |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                        |   |
| Item  1 — Financial Statements — Texas Roadhouse, Inc. and Subsidiaries                                      | 3      |
| Condensed  Consolidated Balance Sheets — March 25, 2008 and December 25, 2007                                | 3      |
| Condensed  Consolidated Statements of Income — For the 13 Weeks Ended March 25,  2008 and March 27, 2007     | 4      |
| Condensed  Consolidated Statements of Cash Flows — For the 13 Weeks Ended March 25,  2008 and March 27, 2007 | 5      |
| Notes  to Condensed Consolidated Financial Statements                                                                       | 6      |
| Item 2 — Management’s Discussion and Analysis of  Financial Condition and Results of Operations                   | 13     |
| Item 3 — Quantitative and Qualitative Disclosures  About Market Risk                                                   | 20     |
| Item 4 — Controls and Procedures                                                                                       | 20     |
|                                                                                                                        |   |
| PART II.  OTHER INFORMATION                                                                                            |   |
|                                                                                                                        |   |
| Item  1 — Legal Proceedings                                                                                            | 21     |
| Item  1A — Risk Factors                                                                                                | 21     |
| Item 2 — Unregistered Sales of Equity Securities and  Use of Proceeds                                                  | 21     |
| Item 3 — Defaults Upon Senior Securities                                                                               | 21     |
| Item 4 — Submission of Matters to a Vote of Security  Holders                                                          | 21     |
| Item  5 — Other Information                                                                                            | 22     |
| Item 6  — Exhibits                                                                                                     | 22     |
|                                                                                                                        |   |
| Signatures                                                                                                                  | 23     |

 

2

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**PART I — FINANCIAL INFORMATION**

 

**ITEM 1 —FINANCIAL STATEMENTS**

 

**Texas Roadhouse, Inc. andSubsidiaries**

**Condensed Consolidated Balance Sheets**

**(inthousands, except share and per share data)**

**(unaudited)**

 
| ** **                                                                                                                                                                                                | ** ** | **March 25, 2008** | ** ** | **December 25, 2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **Assets**                                                                                                                                                                                                |       |                         |       |                            |       |
| Current assets:                                                                                                                                                                                           |       |                         |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                                                |       | $                            | 18,173     |                            | $          | 11,564 |   |
| Receivables, net  of allowance for doubtful accounts of $8 at March 25, 2008 and  December 25, 2007                                                                                             |       | 10,289                       |       | 18,303                          |       |
| Inventories, net                                                                                                                                                                                          |       | 7,059                        |       | 7,277                           |       |
| Prepaid expenses                                                                                                                                                                                          |       | 4,261                        |       | 3,646                           |       |
| Deferred tax  assets                                                                                                                                                                                      |       | 884                          |       | 841                             |       |
| Total current  assets                                                                                                                                                                                     |       | 40,666                       |       | 41,631                          |       |
| Property and  equipment, net                                                                                                                                                                              |       | 406,143                      |       | 390,378                         |       |
| Goodwill                                                                                                                                                                                                  |       | 101,674                      |       | 101,856                         |       |
| Intangible  asset, net                                                                                                                                                                                    |       | 8,239                        |       | 8,414                           |       |
| Other assets                                                                                                                                                                                              |       | 3,894                        |       | 3,750                           |       |
| Total assets                                                                                                                                                                                              |       | $                            | 560,616    |                            | $          | 546,029 |   |
|                                                                                                                                                                                                      |       |                         |       |                            |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                            |       |                         |       |                            |       |
| Current  liabilities:                                                                                                                                                                                     |       |                         |       |                            |       |
| Current  maturities of long-term debt and obligations under capital leases                                                                                                                                |       | $                            | 309        |                            | $          | 302 |   |
| Accounts payable                                                                                                                                                                                          |       | 22,587                       |       | 23,716                          |       |
| Deferred revenue  — gift certificates                                                                                                                                                                |       | 18,490                       |       | 32,088                          |       |
| Accrued wages                                                                                                                                                                                             |       | 15,561                       |       | 14,561                          |       |
| Income tax  payable                                                                                                                                                                                       |       | 8,766                        |       | 721                             |       |
| Accrued taxes  and licenses                                                                                                                                                                               |       | 7,793                        |       | 6,439                           |       |
| Other accrued  liabilities                                                                                                                                                                                |       | 9,679                        |       | 10,432                          |       |
| Total current  liabilities                                                                                                                                                                                |       | 83,185                       |       | 88,259                          |       |
| Long-term debt  and obligations under capital leases, excluding current maturities                                                                                                                        |       | 75,402                       |       | 66,482                          |       |
| Stock option and  other deposits                                                                                                                                                                          |       | 5,201                        |       | 4,916                           |       |
| Deferred rent                                                                                                                                                                                             |       | 7,991                        |       | 7,472                           |       |
| Deferred tax  liabilities                                                                                                                                                                                 |       | 3,196                        |       | 4,900                           |       |
| Other  liabilities                                                                                                                                                                                        |       | 5,457                        |       | 4,235                           |       |
| Total  liabilities                                                                                                                                                                                        |       | 180,432                      |       | 176,264                         |       |
| Minority  interest in consolidated subsidiaries                                                                                                                                                           |       | 2,808                        |       | 2,384                           |       |
| Stockholders’  equity:                                                                                                                                                                               |       |                         |       |                            |       |
| Preferred stock  ($0.001 par value, 1,000,000 shares authorized; no shares issued or  outstanding)                                                                                                        |       | —                       |       | —                          |       |
| Common stock,  Class A, ($0.001 par value, 100,000,000 shares authorized, 69,123,355  and 69,582,602 shares issued and outstanding at March 25, 2008 and December 25,  2007, respectively) |       | 69                           |       | 70                              |       |
| Common stock,  Class B, ($0.001 par value, 8,000,000 shares authorized, 5,265,376 shares  issued and outstanding)                                                                                    |       | 5                            |       | 5                               |       |
| Additional paid  in capital                                                                                                                                                                               |       | 261,317                      |       | 264,234                         |       |
| Retained  earnings                                                                                                                                                                                        |       | 115,985                      |       | 103,072                         |       |
| Total  stockholders’ equity                                                                                                                                                                          |       | 377,376                      |       | 367,381                         |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                          |       | $                            | 560,616    |                            | $          | 546,029 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

3

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**TexasRoadhouse, Inc. and Subsidiaries**

**Condensed Consolidated Statements ofIncome**

**(inthousands, except per share data)**

**(unaudited)**

** **
| ** **                                                   | ** ** | **13 Weeks Ended** | ** ** |
|--------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                   | ** ** | **March 25, 2008** | ** ** | **March 27, 2007** | ** ** |
| Revenue:                                                     |       |                         |       |   |   |
| Restaurant sales                                             |       | $                            | 208,601    |   | $ | 175,444 |   |
| Franchise  royalties and fees                                |       | 2,612                        |       | 2,893 |   |
|                                                         |       |                         |       |   |   |
| Total revenue                                                |       | 211,213                      |       | 178,337 |   |
|                                                         |       |                         |       |   |   |
| Costs and  expenses:                                         |       |                         |       |   |   |
| Restaurant  operating costs:                                 |       |                         |       |   |   |
| Cost of sales                                                |       | 73,586                       |       | 61,096 |   |
| Labor                                                        |       | 58,442                       |       | 48,297 |   |
| Rent                                                         |       | 3,289                        |       | 2,785 |   |
| Other operating                                              |       | 33,250                       |       | 27,893 |   |
| Pre-opening                                                  |       | 2,826                        |       | 3,584 |   |
| Depreciation and  amortization                               |       | 8,546                        |       | 6,645 |   |
| Impairment and  closure                                      |       | 703                          |       | — |   |
| General and  administrative                                  |       | 9,871                        |       | 8,337 |   |
|                                                         |       |                         |       |   |   |
| Total costs and  expenses                                    |       | 190,513                      |       | 158,637 |   |
|                                                         |       |                         |       |   |   |
| Income from  operations                                      |       | 20,700                       |       | 19,700 |   |
|                                                         |       |                         |       |   |   |
| Interest  expense, net                                       |       | 642                          |       | 236 |   |
| Minority  interest                                           |       | 261                          |       | 289 |   |
| Equity income  from investments in unconsolidated affiliates |       | 69                           |       | 97 |   |
|                                                         |       |                         |       |   |   |
| Income before  taxes                                         |       | 19,866                       |       | 19,272 |   |
| Provision for  income taxes                                  |       | 6,953                        |       | 6,976 |   |
| Net income                                                   |       | $                            | 12,913     |   | $ | 12,296 |   |
|                                                         |       |                         |       |   |   |
| Net income per  common share:                                |       |                         |       |   |   |
| Basic                                                        |       | $                            | 0.17       |   | $ | 0.17 |   |
|                                                         |       |                         |       |   |   |
| Diluted                                                      |       | $                            | 0.17       |   | $ | 0.16 |   |
|                                                         |       |                         |       |   |   |
| Weighted-average  shares outstanding:                        |       |                         |       |   |   |
| Basic                                                        |       | 74,744                       |       | 74,327 |   |
|                                                         |       |                         |       |   |   |
| Diluted                                                      |       | 76,443                       |       | 76,726 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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**TexasRoadhouse, Inc. and Subsidiaries**

**Condensed Consolidated Statements ofCash Flows**

**(inthousands)**

**(unaudited)**

 
| ** **                                                                         | ** ** | **13 Weeks Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                         | ** ** | **March 25, 2008** | ** ** | **March 27, 2007** | ** ** |
| **Cash  flows from operating activities:**                                         |       |                         |       |   |   |
| Net income                                                                         |       | $                            | 12,913     |   | $ | 12,296 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                         |       |   |   |
| Depreciation and  amortization                                                     |       | 8,546                        |       | 6,645 |   |
| Deferred income  taxes                                                             |       | (1,747                       | )          | (1,021 | ) |
| Loss on  disposition of assets                                                     |       | 253                          |       | 20 |   |
| Impairment and  closure                                                            |       | 611                          |       | — |   |
| Minority  interest                                                                 |       | 261                          |       | 289 |   |
| Equity income  from investments in unconsolidated affiliates                       |       | (69                          | )          | (97 | ) |
| Distributions  received from investments in unconsolidated affiliates              |       | 65                           |       | 79 |   |
| Provision for  doubtful accounts                                                   |       | —                       |       | (14 | ) |
| Share-based  compensation expense                                                  |       | 1,700                        |       | 1,123 |   |
| Changes in  operating working capital:                                             |       |                         |       |   |   |
| Receivables                                                                        |       | 8,014                        |       | 79 |   |
| Inventories                                                                        |       | 218                          |       | 135 |   |
| Prepaid expenses                                                                   |       | (576                         | )          | (1,065 | ) |
| Other assets                                                                       |       | (140                         | )          | 109 |   |
| Accounts payable                                                                   |       | (1,129                       | )          | (1,482 | ) |
| Deferred revenue  — gift certificates                                         |       | (13,598                      | )          | (11,136 | ) |
| Accrued wages                                                                      |       | 1,000                        |       | (2,012 | ) |
| Excess tax  benefits from share-based compensation                                 |       | (73                          | )          | (1,051 | ) |
| Prepaid income  taxes and income taxes payable                                     |       | 8,118                        |       | 3,670 |   |
| Accrued taxes  and licenses                                                        |       | 1,354                        |       | 324 |   |
| Other accrued  liabilities                                                         |       | (767                         | )          | (1,767 | ) |
| Deferred rent                                                                      |       | 519                          |       | 418 |   |
| Other  liabilities                                                                 |       | 611                          |       | 2,545 |   |
|                                                                               |       |                         |       |   |   |
| Net cash  provided by operating activities                                         |       | $                            | 26,084     |   | $ | 8,087 |   |
|                                                                               |       |                         |       |   |   |
| **Cash  flows from investing activities:**                                         |       |                         |       |   |   |
| Capital  expenditures — property and equipment                                |       | (24,384                      | )          | (24,061 | ) |
| Acquisitions of  franchise restaurants, net of cash acquired                       |       | 157                          |       | — |   |
| Proceeds from  sale of property and equipment, including insurance proceeds        |       | (5                           | )          | 144 |   |
|                                                                               |       |                         |       |   |   |
| Net cash used in  investing activities                                             |       | $                            | (24,232    | ) | $ | (23,917 | ) |
|                                                                               |       |                         |       |   |   |
| **Cash  flows from financing activities:**                                         |       |                         |       |   |   |
| Net proceeds (repayments)  from revolving credit facility                          |       | 9,000                        |       | (5,000 | ) |
| Proceeds from  minority interest contributions and other                           |       | 445                          |       | — |   |
| Distributions to  minority interest holders                                        |       | (258                         | )          | (273 | ) |
| Excess tax  benefits from share-based compensation                                 |       | 73                           |       | 1,051 |   |
| Repurchase  shares of common stock                                                 |       | (4,905                       | )          | — |   |
| Proceeds from  stock option and other deposits                                     |       | 339                          |       | 358 |   |
| Principal  payments on long-term debt and capital lease obligations                |       | (73                          | )          | (567 | ) |
| Proceeds from  exercise of stock options                                           |       | 136                          |       | 1,027 |   |
|                                                                               |       |                         |       |   |   |
| Net cash  provided by (used in) financing activities                               |       | $                            | 4,757      |   | $ | (3,404 | ) |
|                                                                               |       |                         |       |   |   |
| Net  increase/(decrease) in cash                                                   |       | 6,609                        |       | (19,234 | ) |
| Cash and cash  equivalents — beginning of period                              |       | 11,564                       |       | 33,784 |   |
| Cash and cash  equivalents — end of period                                    |       | $                            | 18,173     |   | $ | 14,550 |   |
|                                                                               |       |                         |       |   |   |
| Supplemental  disclosures of cash flow information:                                |       |                         |       |   |   |
| Interest, net of  amounts capitalized                                              |       | $                            | 873        |   | $ | 273 |   |
| Income taxes                                                                       |       | $                            | 582        |   | $ | 4,327 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

5

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**TexasRoadhouse, Inc. and Subsidiaries**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Tabulardollar amounts in thousands, except per share data)**

**(unaudited)**

 

**(1)   Basisof Presentation**

 

The accompanyingunaudited condensed consolidated financial statements include the accounts ofTexas Roadhouse, Inc. (the “Company”) and its wholly-owned subsidiaries,Texas Roadhouse Holdings LLC (“Holdings”), Texas Roadhouse DevelopmentCorporation (“TRDC”) and Texas Roadhouse Management Corp. (“ManagementCorp.”), as of and for the 13 weeks ended March 25, 2008 and March 27,2007.  The Company and its wholly-owned subsidiaries operate TexasRoadhouse restaurants. Holdings also provides supervisory and administrativeservices for certain other franchise and license restaurants. TRDC sellsfranchise rights and collects the franchise royalties and fees. Management Corp. provides management services to the Company, Holdings andcertain other license and franchise restaurants.

 

Management of the Companyhas made a number of estimates and assumptions relating to the reporting ofassets and liabilities, the disclosure of contingent assets and liabilities atthe date of the condensed consolidated financial statements and the reportingof revenue and expenses during the period to prepare these condensedconsolidated financial statements in conformity with U.S. generally acceptedaccounting principles (“GAAP”). Significant items subject to such estimates andassumptions include the carrying amount of property and equipment, goodwill, obligationsrelated to insurance reserves, income taxes and share-based compensationexpense. Actual results could differ from those estimates.

 

In the opinion ofmanagement, the accompanying unaudited financial statements reflect alladjustments, consisting only of normal recurring adjustments, necessary topresent fairly the financial position, results of operations and cash flows ofthe Company for the periods presented.  The financial statements have beenprepared in accordance with GAAP, except that certain information and footnoteshave been condensed or omitted pursuant to rules and regulations of theSecurities and Exchange Commission (“SEC”).  Operating results for the 13weeks ended March 25, 2008 are not necessarily indicative of the resultsthat may be expected for the year ending December 30, 2008.  Thefinancial statements should be read in conjunction with the consolidatedfinancial statements and notes thereto included in the Company’s Annual Reporton Form 10-K for the year ended December 25, 2007.

 

Our significant interimaccounting policies include the recognition of income taxes using an estimatedannual effective tax rate.

 

**(2)   Share-basedCompensation**

 

The Company may grantincentive and non-qualified stock options to purchase shares of Class Acommon stock, stock bonus awards (restricted stock unit awards (“RSUs”)) andrestricted stock awards under the Texas Roadhouse, Inc. 2004 EquityIncentive Plan (the “Plan”).  Beginningin 2008, the Company changed the method by which it provides share-based compensationto its employees by eliminating stock option grants and, instead, granting RSUsas a form of share-based compensation.  AnRSU is the conditional right to receive one share of Class A common stockupon satisfaction of the vesting requirement.

 

The following tablesummarizes the share-based compensation recorded in the accompanying condensedconsolidated statements of income:

 
| ** **                              | ** ** | **13 Weeks Ended** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **March 25, 2008** | ** ** | **March 27, 2007** | ** ** |
|                                    |       |                         |       |   |   |
| Labor expense                           |       | $                            | 550        |   | $ | 493 |   |
| General and  administrative expense     |       | 1,150                        |       | 630 |   |
| Total  share-based compensation expense |       | $                            | 1,700      |   | $ | 1,123 |   |

 

6

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A summary ofshare-based compensation activity by type of grant as of March 25, 2008and changes during the period then ended is presented below.

 

*Summary Details for Plan ShareOptions*

 
| ** **                             | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-Average  Remaining Contractual  Term (years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|------------|------------|---------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------|------------|
|                                   |       |       |       |                                        |       |                                                                |       |                            |       |
| Outstanding at  December 25, 2007 |       | 7,356,978  |       | $                                           | 9.11       |                                                                |       |                            |       |   |
| Granted                                |       | —     |       | —                                      |       |                                                                |       |                            |       |
| Forfeited                              |       | (50,419    | )          | 11.47                                       |       |                                                                |       |                            |       |
| Exercised                              |       | (70,653    | )          | 3.05                                        |       |                                                                |       |                            |       |
| Outstanding at  March 25, 2008    |       | 7,235,906  |       | $                                           | 9.15       |                                                                | 6.22       |                            | $          | 12,649 |   |
|                                   |       |       |       |                                        |       |                                                                |       |                            |       |
| Exercisable at  March 25, 2008    |       | 5,610,198  |       | $                                           | 8.04       |                                                                | 5.59       |                            | $          | 16,039 |   |

 

No stock options weregranted during the 13 weeks ended March 25, 2008.  The weighted-average grant date fair value ofoptions granted during the 13 weeks ended March 27, 2007 was $5.47 usingthe Black-Scholes option-pricing model with the following weighted-averageassumptions:

 
| ** **               | ** ** | **13 Weeks Ended** | ** ** |
|--------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **March 27, 2007** | ** ** |
|                     |       |                         |       |
| Risk-free  interest rate |       | 4.62                         | %          |
| Expected term  (years)   |       | 3.0 – 5.0               |       |
| Expected  volatility     |       | 35.8                         | %          |
| Expected  dividend yield |       | 0.0                          | %          |

 

The total intrinsic valueof options exercised during the 13 weeks ended March 25, 2008 and March 27,2007 was $0.6 million and $3.2 million, respectively.  As of March 25, 2008, with respect tounvested stock options, there was $3.8 million of unrecognized compensationcost that is expected to be recognized over a weighted-average period of 1.1 years.  The total grant date fair value of stock optionsvested for both 13 week periods ended March 25, 2008 and March 27,2007 was $2.3 million and $1.2 million, respectively.

 

  *Summary Details for RSUs*

 
| ** **                             | ** ** | **Shares** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** |
|----------------------------------------|------------|------------|------------|----------------------------------------------------------|------------|
|                                   |       |       |       |                                                     |       |
| Outstanding at  December 25, 2007 |       | —     |       | $                                                        | —     |   |
| Granted                                |       | 821,029    |       | $                                                        | 9.95       |   |
| Forfeited                              |       | (609       | )          | 9.74                                                     |       |
| Exercised                              |       | —     |       |                                                     |       |
| Outstanding at  March 25, 2008    |       | 820,420    |       | $                                                        | 9.95       |   |

 

During the first quarterof 2008, the Company recorded pre-tax compensation expense in connection withthese RSUs of $0.1 million in labor expense and $0.4 million in general andadministrative expense.  As of March 25,2008, with respect to unvested RSUs, there was $7.7 million of unrecognizedcompensation cost that is expected to be recognized over a weighted-averageperiod of 2.2 years.  The vesting termsof the RSUs range from approximately 1.0 to 5.0 years.

 

In the fourth quarter of2006, the Company awarded 36,000 restricted shares, at a weighted-average priceof $14.55 per share, to two corporate office employees under the terms of thePlan.  The restricted shares vest afterthree years.  At March 25, 2008, theunrecognized compensation expense related to the restricted stock grantstotaled approximately $0.3 million and will be recognized over the remainingvesting period.

 

7

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**(3)   Long-termDebt and Obligations Under Capital Leases**

 

Long-term debt andobligations under capital leases consisted of the following:

 
| ** **                               | ** ** | **March 25, 2008** | ** ** | **December 25, 2007** | ** ** |
|------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Installment  loans, due 2008 – 2020 |       | $                            | 3,151      |                            | $          | 3,210 |   |
| Obligations  under capital leases        |       | 560                          |       | 574                             |       |
| Revolver                                 |       | 72,000                       |       | 63,000                          |       |
|                                     |       | 75,711                       |       | 66,784                          |       |
| Less current  maturities                 |       | 309                          |       | 302                             |       |
|                                     |       | $                            | 75,402     |                            | $          | 66,482 |   |

 

The weighted-averageinterest rate for installment loans outstanding at March 25, 2008 and December 25,2007 was 9.97% and 9.95%, respectively. The debt is secured by certain land, buildings and equipment.

 

On May 31, 2007, theCompany amended and restated its existing five-year revolving credit facilitydated October 8, 2004 with a syndicate of commercial lenders led by Bankof America, N.A., Banc of America Securities LLC and National City Bank.  The facility was increased from $150.0million to $250.0 million and the term was extended to May 31, 2012.  The terms of the facility require the Companyto pay interest on outstanding borrowings at LIBOR plus a margin of 0.50% to0.875% and to pay a commitment fee of 0.10% to 0.175% per year on any unusedportion of the facility, in both cases depending on the Company’s leverageratio.  The weighted-average interestrate for the revolver at March 25, 2008 and December 25, 2007 was 3.84%and 5.73%, respectively.  At March 25,2008, the Company had $72.0 million outstanding under the credit facility and $174.4million of availability, net of $3.6 million of outstanding letters of credit.

 

The lenders’ obligationto extend credit under the facility depends on the Company maintaining certainfinancial covenants, including a minimum consolidated fixed charge coverageratio of 2.00 to 1.00 and a maximum consolidated leverage ratio of 3.00 to1.00.  The new credit facility permitsthe Company to incur additional secured or unsecured indebtedness outside thefacility, except for the incurrence of secured indebtedness that in theaggregate exceeds 20% of the Company’s consolidated tangible net worth orcircumstances where the incurrence of secured or unsecured indebtedness wouldprevent the Company from complying with its financial covenants.  The Company is currently in compliance withsuch covenants.

 

**(4)   RecentAccounting Pronouncements**

 

In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 157, *Fair Value Measurements*(“SFAS157”), which defines fair value, establishes a framework for measuring fairvalue and expands disclosures about fair value measurements.  The provisions of SFAS 157 for financialassets and liabilities, as well as any other assets and liabilities that arecarried at fair value on a recurring basis in financial statements areeffective for financial statements issued for fiscal years beginning after November 15,2007 (fiscal year 2008 for the Company). FASB Staff Position FAS 157-2, *Effective Date of FASBStatement No. *157, delayed the effective date of SFAS 157 formost nonfinancial assets and nonfinancial liabilities until fiscal yearsbeginning after November 15, 2008 (fiscal year 2009 for the Company).  The implementation of SFAS 157 for financialassets and financial liabilities, effective December 26, 2007, did nothave a material impact on the Company’s consolidated financial position,results of operations or cash flows.  TheCompany is currently assessing the impact of SFAS 157 for nonfinancial assetsand liabilities on its consolidated financial position, results of operationsor cash flows.  See note 10 foradditional fair value discussions.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities* (“SFAS 159”). SFAS 159permits entities to choose to measure selected financial assets and financialliabilities at fair value. Unrealized gains and losses on items for which thefair value option has been elected are reported in earnings at each subsequentreporting date. The provisions of SFAS 159 are effective as of the beginning ofthe Company’s 2008 fiscal year. The adoption of SFAS 159 has not had a materialimpact on the Company’s consolidated financial position, results of operationsor cash flows.

 

In December 2007, theFASB issued SFAS No. 141 (revised 2007), *BusinessCombinations* (“SFAS 141R”). SFAS 141R establishes the principles and requirements for how anacquirer: 1) recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any noncontrollinginterest in the acquiree; 2) recognizes and measures the goodwill acquired inthe business combination or gain from a bargain purchase;  and 3) determines what information todisclose to enable users of the financial statements to evaluate the nature andfinancial effects of the business combination. SFAS 141R is to be applied prospectively to business combinations consummatedon or after the beginning of the first annual reporting period on or after December 15,2008 (fiscal year 2009 for the Company). The Company is currently evaluating the impact SFAS 141R will have onany potential future business combinations.

 

8

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In December 2007,the FASB issued SFAS No. 160, *Noncontrolling Interestsin Consolidated Financial Statements – an amendment of ARB No. 51*(“SFAS 160”).  SFAS 160 establishesaccounting and reporting standards that require noncontrolling interests to bereported as a component of equity, changes in a parent’s ownership interestwhile the parent retains its controlling interest be accounted for as equitytransactions, and any retained noncontrolling equity investment upon thedeconsolidation of a subsidiary be initially measured at fair value.  SFAS 160 is to be applied prospectively tobusiness combinations consummated on or after the beginning of the first annualreporting period on or after December 15, 2008 (fiscal year 2009 for theCompany).  The Company is currentlyevaluating the impact of adopting SFAS 160 on its consolidated financialposition, results or operations or cash flows.

 

**(5)   Commitmentsand Contingencies**

 

The estimated cost ofcompleting capital project commitments at March 25, 2008 and December 25,2007 was approximately $87.2 million and $90.0 million, respectively.

 

The Company entered intoreal estate lease agreements for franchise restaurants located in Everett, MA,Longmont, CO, Montgomeryville, PA and Fargo, ND before granting franchiserights for those restaurants. The Company has subsequently assigned the leasesto the franchisees, but remains contingently liable if a franchisee defaultsunder the terms of a lease.  The Longmont lease was assigned in October 2003and expires in May 2014, the Everett lease was assigned in September 2002and expires in February 2018, the Montgomeryville lease was assigned in October 2004and expires in June 2021 and the Fargo lease was assigned in February 2006and expires in July 2016.  As thefair value of the guarantees is not considered significant, no liability hasbeen recorded.  As discussed in note 6,the Everett, MA, Longmont, CO, and Fargo, ND restaurants are owned, in whole orpart, by certain officers, directors or 5% shareholders of the Company.

 

The Company is involvedin various claims and legal actions arising in the normal course of business.In the opinion of management, the ultimate disposition of these matters willnot have a material effect on the Company’s consolidated financial position,results of operations, or cash flows.

 

On March 26, 2007, acivil case styled as a class action complaint titled *Nicole M.Ehrheart v. Texas Roadhouse, Inc. and Does 1 through 10 (“Ehrheart”)*,Case Number CA 07-54, was filed against the Company in the United StatesDistrict Court for the Western District of Pennsylvania Erie Division.  The case alleges liability under the Fair andAccurate Credit Transactions Act (“FACTA”) based on the alleged practice ofunlawfully including more information than is permitted on the electronicallyprinted credit or debit card receipts provided to customers.  The plaintiff seeks monetary damages,including statutory damages, punitive damages, costs and attorneys’ fees, and apermanent injunction against the alleged unlawful practice.  Statutory damages range from $100 to $1,000for each willful violation.  While theCompany has filed an answer to the complaint denying the material allegationsof the complaint, discovery has not yet begun.

 

On July 20, 2007, acivil case styled as a class action complaint titled *Mario Alianov. Texas Roadhouse Holdings LLC and Does 1-10 (“Aliano”)*, Case Number07cv4108, was filed against the Company in the United States District Court forthe Northern District of Illinois Eastern Division.  The case alleges liability under FACTA.  The plaintiff seeks statutory damages of $100to $1,000 per violation, attorney’s fees, litigation expenses and costs.  While the Company has filed an answer to thecomplaint denying the material allegations of the complaint, discovery has notyet begun.

 

The Company believes thatit has meritorious defenses to the *Ehrheart* and *Aliano* claims, and it intends to vigorously defend againstthe claims, including the plaintiffs’ efforts to certify a nationwide classaction.  The Company believes thatneither case will have a material adverse effect on its business and itsconsolidated financial position, results of operations or cash flows.  However, if either court both granted classaction status and imposed statutory penalties, the resolution of the case wouldbe likely to have a material adverse effect on the Company’s business and itsconsolidated financial position, results of operation and cash flows.

 

The Company currentlybuys most of its beef from three suppliers. Although there are a limited numberof beef suppliers, management believes that other suppliers could provide asimilar product on comparable terms. A change in suppliers, however, couldcause supply shortages and a possible loss of sales, which would affectoperating results adversely. The Company has no material minimum purchasecommitments with its vendors that extend beyond a year.

 

9

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**(6)   RelatedParty Transactions**

 

The Longview, Texas restaurant,which was acquired by the Company in connection with the completion of theinitial public offering, leases the land and restaurant building from an entitycontrolled by Steven L. Ortiz, the Company’s Chief Operating Officer. The leaseterm is 15 years and will terminate in November 2014. The lease canbe renewed for two additional terms of five years each. Rent is approximately$16,000 per month and will increase by 5% on the 11th anniversary date ofthe lease. The lease can be terminated if the tenant fails to pay the rent on atimely basis, fails to maintain the insurance specified in the lease, fails tomaintain the building or property or becomes insolvent. Total rent paymentswere approximately $50,000 for each of the 13 week periods ended March 25,2008 and March 27, 2007.

 

The Bossier City,Louisiana restaurant, of which Steven L. Ortiz, the Company’s Chief OperatingOfficer, beneficially owns 66.0% and the Company owns 5.0%, leases the land andbuilding from an entity owned by Mr. Ortiz.  The lease term is 15 years and will terminateon March 31, 2020.  The lease can berenewed for three additional terms of five years each.  Rent is approximately $15,100 per month forthe first five years of the lease and escalates 10% each five year periodduring the term.  The lease can beterminated if the tenant fails to pay rent on a timely basis, fails to maintaininsurance, abandons the property or becomes insolvent.  Total rent payments were approximately $45,000for each of the 13 week periods ended March 25, 2008 and March 27,2007.

 

The Company had 14 franchiseand license restaurants owned, in whole or part, by certain officers, directorsor 5% shareholders of the Company at March 25, 2008 and March 27, 2007.These entities paid the Company fees of approximately $0.5 million and $0.6million during each of the 13 week periods ended March 25, 2008 and March 27,2007, respectively.  As disclosed in note5, the Company is contingently liable on leases which are related to three of theserestaurants.

 

From 2000 to December 2007,the Company employed Juli Miller Hart, who, during 2007, was the wife of G.J.Hart, the Company’s President and Chief Executive Officer. Ms. Hart didnot report to Mr. Hart.  In December 2007,Ms. Hart’s status changed from employee to consultant.

 

**(7)   EarningsPer Share**

 

The share and net incomeper share data for all periods presented are based on the historical weighted-averageshares outstanding.  The diluted earnings per share calculations show theeffect of the weighted-average stock options, RSUs and restricted stock awardsoutstanding from the Plan.  For the 13weeks ended March 25, 2008 and March 27, 2007, options to purchase3,177,066 and 1,852,819 shares of common stock, respectively, were outstanding,but not included in the computation of diluted earnings per share becausetheir inclusion would have had an anti-dilutive effect.

 

The following table setsforth the calculation of weighted-average shares outstanding as presented inthe accompanying condensed consolidated statements of income:

 
| ** **                                  | ** ** | **13 Weeks Ended** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | **March 25, 2008** | ** ** | **March 27, 2007** | ** ** |
| Net income                                  |       | $                            | 12,913     |   | $ | 12,296 |   |
|                                        |       |                         |       |   |   |
| Basic EPS:                                  |       |                         |       |   |   |
| Weighted-average  common shares outstanding |       | 74,744                       |       | 74,327 |   |
|                                        |       |                         |       |   |   |
| Basic EPS                                   |       | $                            | 0.17       |   | $ | 0.17 |   |
|                                        |       |                         |       |   |   |
| Diluted EPS:                                |       |                         |       |   |   |
| Weighted-average  common shares outstanding |       | 74,744                       |       | 74,327 |   |
| Dilutive effect  of stock options           |       | 1,699                        |       | 2,399 |   |
| Shares – diluted                       |       | 76,443                       |       | 76,726 |   |
|                                        |       |                         |       |   |   |
| Diluted EPS                                 |       | $                            | 0.17       |   | $ | 0.16 |   |

 

10

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**(8)****        ****Acquisitions**

 

On June 27, 2007,the first day of the Company’s third fiscal quarter, the Company completed theacquisitions of nine restaurants located in Indiana, Kentucky andMissouri.  Pursuant to the terms of theacquisition agreements, the Company paid an aggregate purchase price ofapproximately $22.7 million.  Inconjunction with these acquisitions, the Company acquired land and buildingsleased by seven of the nine franchisees from parties related to thosefranchisees for an aggregate purchase price of approximately $12.1 million.  These acquisitions are consistent with theCompany’s long-term strategy to increase net income and earnings per share.

 

These transactions wereaccounted for using the purchase method as defined in SFAS No. 141, *Business Combinations*. Based on a purchase price of $33.1 million, including $0.2 million ofdirect acquisition costs and net of the $1.6 million of cash acquired and the$0.5 million charge related to Emerging Issues Task Force (“EITF”) Issue No. 04-1,*Accounting for Preexisting Relationships betweenthe Parties to a Business Combination* (“EITF 04-1”), and the Company’sestimates of the fair value of net assets acquired, $15.0 million of goodwillwas generated by the acquisitions, which is not amortizable for book purposes,but is deductible for tax purposes.

 

The purchase price hasbeen allocated as follows:

 

| Current assets               |   | $      | 427    |   |
|------------------------------|--------|--------|--------|--------|
| Property and  equipment, net |   | 15,629 |   |
| Goodwill                     |   | 15,026 |   |
| Intangible asset             |   | 4,064  |   |
| Other assets                 |   | 12     |   |
| Current  liabilities         |   | (2,078 | )      |
| Other  liabilities           |   | (18    | )      |
|                         |   |   |   |
|                         |   | $      | 33,062 |   |

 

If the acquisitions hadbeen completed as of the beginning of the quarter ended March 27, 2007,pro forma revenue, net income and earnings per share would have been asfollows:

 

| ** **  | ** ** | **13 Weeks Ended  March 27, 2007** | ** ** |
|-------------|------------|--------------------------------------------------------|------------|
| ** **  | ** ** | ** **                                             | ** ** |
| Revenue     |       | $                                                      | 187,029    |   |
| Net income  |       | 12,658                                                 |       |
| Basic EPS   |       | $                                                      | 0.17       |   |
| Diluted EPS |       | $                                                      | 0.17       |   |

 

As a result of theseacquisitions, the Company incurred a charge of $0.5 million and recorded anintangible asset relating to certain reacquired franchise rights of $4.1million in accordance with EITF 04-1. EITF 04-1 requires that a business combination between two parties thathave a preexisting relationship be evaluated to determine if a settlement of apreexisting relationship exists. EITF 04-1 also requires that certainreacquired rights (including the rights to the acquirer’s trade name under afranchise agreement) be recognized as intangible assets apart from goodwill.However, if a contract giving rise to the reacquired rights includes terms thatare favorable or unfavorable when compared to pricing for current markettransactions for the same or similar items, EITF 04-1 requires that asettlement gain or loss should be measured as the lesser of (i) the amountby which the contract is favorable or unfavorable under market terms from theperspective of the acquirer or (ii) the stated settlement provisions ofthe contract available to the counterparty to which the contract isunfavorable.

 

The intangible asset of$4.1 million has a weighted-average life of approximately 13 years.  When calculating this intangible asset, theCompany considered the remaining term of the existing franchise agreementsincluding renewals.  The remaining termsranged from nine to 18 years.  TheCompany recorded amortization expense relating to the intangible asset ofapproximately $0.1 million for the 13 weeks ended March 25, 2008.  The Company expects the annual expense foreach of the next five years to be $0.3 million.

 

**(9)  Income Taxes**

 

In June 2006, FASBInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes – an Interpretation of FAS 109* (“FIN 48”), wasissued.  FIN 48 clarifies the accountingfor uncertainty in income taxes recognized in an entity’s financial statementsin accordance with FASB Statement No. 109, *Accountingfor Income Taxes.*  FIN 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.  The 

 

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Company adopted theprovisions of FIN 48 on December 27, 2006, the first day of the Company’s2007 fiscal year.

 

The adoption of FIN 48 onDecember 27, 2006 did not result in any change to the Company’sunrecognized tax benefits.  The Company’sgross unrecognized tax benefits were $0.7 million at March 25, 2008 and December 25,2007.  In addition, activity related tothe Company’s unrecognized tax benefits was not material during the 13 weeksended March 25, 2008.  The Company,consistent with its existing policy, recognizes both interest and penalties onrecognized tax benefits as part of income tax expense.  As of March 25, 2008 and December 25,2007, the total amount of accrued penalties and interest was $0.2 million.  Included in the balance of total unrecognizedtax benefits at March 25, 2008 are potential benefits of $0.1 million,which, if recognized, would affect the effective tax rate on income beforetaxes.

 

All entities for whichunrecognized tax benefits exist as of March 25, 2008 possess a December taxyear-end.  As a result, as of March 25,2008, the tax years ended December 28, 2004, December 27, 2005, December 26,2006 and December 25, 2007 remain subject to examination by taxjurisdictions.  As of March 25, 2008,no audits were in process by a tax jurisdiction that, if completed during thenext 12 months, would be expected to result in a material change to the Company’sunrecognized tax benefits.  Additionally,as of March 25, 2008, no event occurred that is likely to result in asignificant increase or decrease in the unrecognized tax benefits through December 30,2008.

 

**(10)  FairValue Measurement**

 

On December 26,2007, the Company adopted SFAS 157, which defines fair value, establishes aframework for using fair value to measure assets and liabilities, and expandsdisclosures about fair value measurements.  The Statement applies wheneverother statements require or permit assets or liabilities to be measured at fairvalue.

 

As of March 25,2008, the Company’s financial assets and financial liabilities that aremeasured at fair value on a recurring basis are comprised of the Second Amendedand Restated Deferred Compensation Plan of Texas Roadhouse Management Corp., asamended, (the “Deferred Compensation Plan”). The Deferred Compensation Plan is a nonqualified deferred compensationplan which allows highly compensated employees to defer receipt of a portion oftheir compensation and contribute such amounts to one or more investment fundsheld in a rabbi trust. The Company reports the accounts of the rabbi trust inits condensed consolidated financial statements. At March 25, 2008,investments totaling $1.7 million are included within other assets andoffsetting obligations of $1.7 million are included within otherliabilities on the condensed consolidated balance sheet. These investments areconsidered trading securities and are reported at fair value based on thirdparty broker statements which represents level 2 in the SFAS 157 fair valuehierarchy. The realized and unrealized holding gains and losses related tothese investments, as well as the offsetting compensation expense, is recordedin general and administrative expense on the condensed consolidated statementsof income.

 

**(11)  Stock RepurchaseProgram**

 

On February 14,2008, the Company’s Board of Directors approved a stock repurchase programunder which it authorized the Company to repurchase up to $25.0 million of its Class Acommon stock.  Under this program, theCompany may repurchase outstanding shares of its Class A common stock fromtime to time in open market transactions during the two-year period ending February 14,2010.  The timing and the amount of anyrepurchases will be determined by management of the Company under parametersestablished by its Board of Directors, based on its evaluation of the Company’sstock price, market conditions and other corporate considerations.

 

For the 13 weeks ended March 25,2008, the Company paid approximately $4.9 million to repurchase and retire 529,900shares at an average price of $9.24 per share.

 

**(12)  Subsequent Event**

 

On March 26, 2008,the first day of the Company’s second fiscal quarter, the Company completed theacquisitions of three franchise restaurants located in Kentucky andMissouri.  Pursuant to the terms of theacquisition agreements, the Company paid an aggregate purchase price ofapproximately $8.7 million.

 

The Company expects tocomplete its purchase price allocation relating to this transaction in thethird quarter of 2008.

 

12

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

**OVERVIEW**

 

Texas Roadhouse is agrowing, moderately priced, full-service restaurant chain. Our founder andchairman, W. Kent Taylor, started the business in 1993. Our mission statementis “Legendary Food, Legendary Service®.” Our operating strategy is designed to position eachof our restaurants as the local hometown destination for a broad segment ofconsumers seeking high quality, affordable meals served with friendly,attentive service. As of March 25, 2008, there were 290 Texas Roadhouse restaurantsoperating in 44 states, including:

 

· 209 “company restaurants,” of which202 were wholly-owned and seven were majority-owned.  The results ofoperations of company restaurants are included in our condensed consolidatedstatements of income. The portion of income attributable to minority interestsin company restaurants that are not wholly-owned is reflected in the line itementitled “Minority interest” in our condensed consolidated statements ofincome.

 

· 81 “franchise restaurants,” of which78 were franchise restaurants and three were license restaurants. We have a 5.0%to 10.0% ownership interest in 18 franchise restaurants.  The income derived from our minorityinterests in these franchise restaurants is reported in the line item entitled “Equity incomefrom investments in unconsolidated affiliates” in our condensed consolidatedstatements of income. Additionally, we provide various management services to thesefranchise restaurants, as well as four additional franchise restaurants inwhich we have no ownership interest.

 

We have contractualarrangements which grant us the right to acquire at pre-determined valuationformulas (i) the remaining equity interests in five of the seven majority-ownedcompany restaurants, and (ii) 64 of the franchise restaurants.

 

**Presentationof Financial and Operating Data**

 

Throughout this report,the 13 weeks ended March 25, 2008 and March 27, 2007 are referred toas Q1 2008 and Q1 2007, respectively.

 

**Long-termStrategies to Grow Earnings Per Share**

 

Our long-term strategieswith respect to increasing net income and earnings per share include thefollowing:

 

*ExpandingOur Restaurant Base.*   Wewill continue to evaluate opportunities to develop Texas Roadhouse restaurantsin existing and new domestic and international markets. We will remain focusedprimarily on mid-sized markets where we believe there exists a significantdemand for our restaurants because of population size, income levels and thepresence of shopping and entertainment centers and a significant employmentbase.

 

We may, at ourdiscretion, add franchise restaurants, domestically and/or internationally,primarily with franchisees who have demonstrated prior success with the TexasRoadhouse or other restaurant concepts and in markets in which the franchiseedemonstrates superior knowledge of the demographics and restaurant operatingconditions.  We may also look to acquirefranchise restaurants under terms favorable to us and our stockholders.  Additionally, from time to time, we mayevaluate potential mergers, acquisitions, joint ventures or other strategicinitiatives to acquire or develop additional concepts.

 

*Maintainingand/or Improving Restaurant Level Profitability.*   We plan to maintain, or possiblyincrease, restaurant level profitability through a combination of increasedcomparable restaurant sales and operating cost management.

 

*LeveragingOur Scalable Infrastructure.*   Over the past several years, we havemade significant investments in our infrastructure, including informationsystems, real estate, human resources, legal, marketing and operations. As aresult, we believe that our general and administrative costs will increase at aslower growth rate than our revenue.

 

**KeyMeasures We Use to Evaluate Our Company**

 

Key measures we use toevaluate and assess our business include the following:

 

*Numberof Restaurant Openings.*   Number of restaurant openings reflects the number ofrestaurants opened during a particular fiscal period. For company restaurantopenings we incur pre-opening costs, which are defined below, before therestaurant opens. Typically new restaurants open with an initial start-upperiod of higher than normalized sales volumes, which decrease to a steady 

 

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level approximately threeto six months after opening. However, although sales volumes are generallyhigher, so are initial costs, resulting in restaurant operating margins thatare generally lower during the start-up period of operation and increase to asteady level approximately three to six months after opening.

 

*ComparableRestaurant Sales Growth. *  Comparable restaurant sales growthreflects the change in year-over-year sales for all company restaurants for thecomparable restaurant base. We define the comparable restaurant base to includethose restaurants open for a full 18 months before the beginning of the laterfiscal period excluding restaurants closed during the period. Comparablerestaurant sales growth can be generated by an increase in guest traffic countsor by increases in the per person average check amount. Menu price changes andthe mix of menu items sold can affect the per person average check amount.

 

*AverageUnit Volume.*   Averageunit volume represents the average annual restaurant sales for all companyrestaurants open for a full six months before the beginning of the periodmeasured. Average unit volume excludes sales on restaurants closed during theperiod.  Growth in average unit volumesin excess of comparable restaurant sales growth is generally an indication thatnewer restaurants are operating with sales levels in excess of the companyaverage. Conversely, growth in average unit volumes less than growth incomparable restaurant sales growth is generally an indication that newerrestaurants are operating with sales levels lower than the system average.

 

*StoreWeeks.*   Storeweeks represent the number of weeks that our company restaurants were openduring the reporting period.

 

**OtherKey Definitions**

 

*RestaurantSales.*   Restaurantsales include gross food and beverage sales, net of promotions and discounts.

 

*FranchiseRoyalties and Fees.*   Franchiseestypically pay a $40,000 initial franchise fee for each new restaurant and afranchise renewal fee equal to the greater of 30% of the then-current initialfranchise fee or $10,000 to $15,000. Franchise royalties consist of royaltiesin the amount of 2.0% to 4.0% of gross sales paid to us by our franchisees.

 

*RestaurantCost of Sales.*   Restaurantcost of sales consists of food and beverage costs.

 

*RestaurantLabor Expenses.*   Restaurantlabor expenses include all direct and indirect labor costs incurred inoperations except for profit sharing incentive compensation expenses earned byour managing partners and market partners. These profit sharing expenses arereflected in restaurant other operating expenses.  Restaurant labor expenses also includeshare-based compensation expense related to restaurant-level employees.

 

*RestaurantRent Expense.*   Restaurantrent expense includes all rent associated with the leasing of real estate andincludes base, percentage and straight-line rent expense.

 

*RestaurantOther Operating Expenses.*   Restaurant other operating expenses consist of allother restaurant-level operating costs, the major components of which areutilities, supplies, advertising, repair and maintenance, property taxes,credit card fees and general liability insurance. Profit sharing allocations tomanaging partners and market partners are also included in restaurant otheroperating expenses.

 

*Pre-openingExpenses.*   Pre-openingexpenses, which are charged to operations as incurred, consist of expensesincurred before the opening of a new restaurant and are comprised principallyof opening team and training salaries, travel expenses, rent, and food,beverage and other initial supplies and expenses.

 

*Depreciationand Amortization Expenses.*   Depreciation and amortizationexpenses (“D&A”) includes the depreciation of fixed assets and amortizationof intangibles with definite lives.

 

*Impairmentand closure costs. *Impairment andclosure costs include any impairment of long-lived assets associated withrestaurants where the carrying amount of the asset is not recoverable andexceeds the fair value of the asset and expenses associated with the closure ofa restaurant.

 

*Generaland Administrative Expenses.*   General and administrative expenses(“G&A”) are comprised of expenses associated with corporate andadministrative functions that support development and restaurant operations andprovide an infrastructure to support future growth.   Supervision and accounting fees receivedfrom certain franchise restaurants and license restaurants are offset againstG&A.  G&A also includesshare-based compensation expense related to executive officers, support centeremployees and market partners.

 

*InterestExpense, Net.*   Interestexpense includes the cost of our debt obligations including the amortization ofloan fees, reduced by interest income and capitalized interest.  Interest income includes earnings on cash andcash equivalents.

 

*MinorityInterest.*   Minorityinterest represents the portion of income attributable to the other owners ofthe majority-owned or 

 

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controlledrestaurants.  Our consolidatedsubsidiaries at March 25, 2008 included nine majority-owned restaurants,seven of which were open and one of which was under construction.  Ourconsolidated subsidiaries at March 27, 2007 included seven majority-ownedrestaurants, five of which were open.

 

*EquityIncome from Unconsolidated Affiliates.*   We own a 5.0% to 10.0% equityinterest in 18 franchise restaurants. Equity income from unconsolidatedaffiliates represents our percentage share of net income earned by theseunconsolidated affiliates.

 

**Resultsof Operations**

 

| ** **                                                   | ** ** | **13 Weeks Ended** | ** ** |
|--------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                   | ** ** | **March 25, 2008** | ** ** | **March 27, 2007** | ** ** |
| **($ in thousands)**                               | ** ** | **$**                        | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
|                                                         |       |                         |       |   |   |   |   |   |   |
| Revenue:                                                     |       |                         |       |   |   |   |   |   |   |
| Restaurant sales                                             |       | 208,601                      |       | 98.8 |   | 175,444 |   | 98.4 |   |
| Franchise  royalties and fees                                |       | 2,612                        |       | 1.2 |   | 2,893 |   | 1.6 |   |
|                                                         |       |                         |       |   |   |   |   |   |   |
| Total revenue                                                |       | 211,213                      |       | 100.0 |   | 178,337 |   | 100.0 |   |
|                                                         |       |                         |       |   |   |   |   |   |   |
| Costs and  expenses:                                         |       |                         |       |   |   |   |   |   |   |
| *(As a  percentage of restaurant sales)*                     |       |                         |       |   |   |   |   |   |   |
| Restaurant  operating costs:                                 |       |                         |       |   |   |   |   |   |   |
| Cost of sales                                                |       | 73,586                       |       | 35.3 |   | 61,096 |   | 34.8 |   |
| Labor                                                        |       | 58,442                       |       | 28.0 |   | 48,297 |   | 27.5 |   |
| Rent                                                         |       | 3,289                        |       | 1.6 |   | 2,785 |   | 1.6 |   |
| Other operating                                              |       | 33,250                       |       | 15.9 |   | 27,893 |   | 15.9 |   |
| *(As a  percentage of total revenue)*                        |       |                         |       |   |   |   |   |   |   |
| Pre-opening                                                  |       | 2,826                        |       | 1.3 |   | 3,584 |   | 2.0 |   |
| Depreciation and  amortization                               |       | 8,546                        |       | 4.0 |   | 6,645 |   | 3.7 |   |
| Impairment and  closure                                      |       | 703                          |       | 0.3 |   | — |   | — |   |
| General and  administrative                                  |       | 9,871                        |       | 4.7 |   | 8,337 |   | 4.7 |   |
|                                                         |       |                         |       |   |   |   |   |   |   |
| Total costs and  expenses                                    |       | 190,513                      |       | 90.2 |   | 158,637 |   | 89.0 |   |
| Income from  operations                                      |       | 20,700                       |       | 9.8 |   | 19,700 |   | 11.0 |   |
| Interest  expense, net                                       |       | 642                          |       | 0.3 |   | 236 |   | 0.1 |   |
| Minority  interest                                           |       | 261                          |       | 0.1 |   | 289 |   | 0.2 |   |
| Equity income  from investments in unconsolidated affiliates |       | (69                          | )          | NM |   | (97 | ) | 0.1 |   |
|                                                         |       |                         |       |   |   |   |   |   |   |
| Income before  taxes                                         |       | 19,866                       |       | 9.4 |   | 19,272 |   | 10.8 |   |
| Provision for  income taxes                                  |       | 6,953                        |       | 3.3 |   | 6,976 |   | 3.9 |   |
| Net income                                                   |       | 12,913                       |       | 6.1 |   | 12,296 |   | 6.9 |   |

 

----

 NM – Not meaningful

 

**RestaurantUnit Activity**

** **
| ** **                         | ** ** | **Company** | ** ** | **Franchise** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-------------|------------|---------------|------------|-----------|------------|
| Balance at  December 25, 2007 |       | 204         |       | 81            |       | 285       |       |
| Openings                           |       | 6           |       | —        |       | 6         |       |
| Closures                           |       | (1          | )          | —        |       | (1        | )          |
|                               |       |        |       |          |       |      |       |
| Balance at  March 25, 2008    |       | 209         |       | 81            |       | 290       |       |

 

15

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**Q12008 (13 weeks) Compared to Q1 2007 (13 weeks)**

 

*RestaurantSales.*   Restaurantsales increased by 18.9% in Q1 2008 as compared to Q1 2007. This increase wasprimarily attributable to the opening of new restaurants and the acquisitionsof nine franchise restaurants on June 27, 2007, partially offset by adecrease in comparable restaurant sales and average unit volumes.

 

The following tablesummarizes certain key drivers and/or attributes of restaurant sales at companyrestaurants for the periods.

 

| ** **                          | ** ** | **Q1 2008** | ** ** | **Q1 2007** | ** ** |
|-------------------------------------|------------|------------------|------------|------------------|------------|
|                                |       |             |       |             |       |
| Store weeks                         |       | 2,667            |       | 2,161            |       |
| Comparable  restaurant sales growth |       | (1.2             | )%         | 0.9              | %          |
| Average unit  volume (in thousands) |       | $                | 1,019      |             | $          | 1,048 |   |
|                                     |            |                  |            |                  |            |  |  |

 

Theamounts in the table above include the impact of increased menu pricing of approximately1.1% implemented during January and February 2008 in response tocontinued inflationary pressures.  Wecurrently plan to implement an additional 1.0% to 1.5% menu price increaseduring May 2008.  We will continueto evaluate the need for and test further menu price increases as we assess thecurrent inflationary environment.

 

OnJune 27, 2007, we acquired nine franchise restaurants.  On an on-going annual basis, we estimatethese acquisitions will be accretive to diluted earnings per share byapproximately $0.015.  In Q1 2008,restaurant sales included $9.0 million from the nine acquired franchiserestaurants.  For comparative purposes,average unit volume for Q1 2007 was adjusted to reflect restaurant sales of thenine acquired franchise restaurants as part of company-owned restaurantsaverage unit volume.

 

*FranchiseRoyalties and Fees.*   Franchiseroyalties and fees decreased by $0.3 million, or by 9.7%, in Q1 2008 from Q12007.  This decrease was primarilyattributable to the loss of royalties associated with the nine franchiserestaurants acquired at the beginning of the third quarter of fiscal 2007 and adecrease in comparable restaurant sales, partially offset by increasing royaltyrates in conjunction with the renewal of certain franchise agreements.  The nine acquired franchise restaurantsgenerated approximately $0.3 million in franchise royalties in Q1 2007.  Franchise comparable restaurant sales decreased2.8% in Q1 2008.  Franchise restaurantcount activity is shown in the restaurant unit activity table above.

 

*RestaurantCost of Sales.*   Restaurantcost of sales, as a percentage of restaurant sales, increased to 35.3% in Q12008 from 34.8% in Q1 2007.  Thisincrease was primarily attributable to higher commodity costs, principallydairy costs, partially offset by menu price increases discussed above.  Additionally, higher food costs relating to itemssuch as wheat and other ingredients were offset by the benefit of floatingcontracts on various beef products.  For2008, we have entered into fixed price contracts for approximately 75% of ourbeef product volume with the remainder currently subject to fluctuating marketprices.  We expect to face continuedinflationary pressures in commodity costs in fiscal 2008, which may or may notbe offset by additional menu price adjustments.

 

*RestaurantLabor Expenses.*   Restaurantlabor expenses, as a percentage of restaurant sales, increased to 28.0% in Q12008 from 27.5% in Q1 2007.  Thisincrease was primarily attributable to higher average hourly wage ratesresulting from several state-mandated increases in minimum and tip wage rates throughout2007 and restaurants opened in Q1 2008 and the latter part of fiscal 2007 as wegenerally incur higher labor costs, as a percentage of restaurant sales, duringthe first few months after the opening of a new restaurant. In addition, thisincrease was partially offset by the impact of menu price increases asdiscussed above.  We anticipate our laborcosts will continue to be pressured by inflation, which is primarily caused byfederal- and state-mandated increases in minimum and tip wages rates.  These increases may or may not be offset byadditional menu price adjustments.

 

*RestaurantRent Expense.*   Restaurantrent expense, as a percentage of restaurant sales, was flat with the prior yearat 1.6%.

 

*RestaurantOther Operating Expenses**. ****** ***Restaurant other operating expenses, as a percentageof restaurant sales, was flat with the prior year at 15.9% as lower managingpartner and market partner bonuses, as a percentage of restaurant sales, wereoffset by higher utility costs and supply expenses.

 

*RestaurantPre-opening Expenses.*   Pre-opening expenses decreased to $2.8 millionin Q1 2008 from $3.6 million in Q1 2007.  This decrease is primarily due to fewer restaurants being opened in Q12008 compared to Q1 2007.  Pre-openingcosts will fluctuate from period to period based on the number and timing ofrestaurant openings and the number and timing of restaurant managers hired.

 

*Depreciationand Amortization Expense.*   D&A, as a percentage of total revenue, increasedto 4.0% in Q1 2008 from 3.7% in Q1 2007. This increase was primarily related tocapital spending on new restaurants.

 

16

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*Impairmentand Closure Expenses.*  Impairment and closure expensesincreased to 0.3% in Q1 2008 due to lease reserve charges incurred inconjunction with the closure of a restaurant in Q1 2008.  In the fourth quarter of fiscal 2007, animpairment charge was incurred relating to this restaurant.  No impairment or closure costs were incurredin Q1 2007.

 

*Generaland Administrative Expenses.*  G&A, as apercentage of total revenue, was flat with the prior year at 4.7%.  While we did achieve leverage on severalexpense items, higher share-based compensation costs combined with negativeaverage unit volume growth prevented overall leverage on G&A.  The higher share-based compensation costswere a result of the renewals of certain executive employment contracts at thebeginning of 2008.

 

*InterestExpense, Net.*   Interestexpense increased to $0.6 million in Q1 2008 from $0.2 million in Q1 2007.  This increase was primarily due to increasedborrowings under our credit facility, partially offset by lower interest rates.  The increased borrowings were primarilyrelated to franchise restaurant acquisitions.

 

*IncomeTax Expense. * Weaccount for income taxes in accordance with Statement of Financial AccountingStandards  (“SFAS”) No. 109, *Accounting for Income Taxes. *Oureffective tax rate decreased to 35.0% in Q1 2008 from 36.2% in Q1 2007primarily due to higher federal tax credits earned.

 

**Liquidityand Capital Resources**

 

The following tablepresents a summary of our net cash provided by (used in) operating, investingand financing activities:

 
| ** **                                           | ** ** | **13 Weeks Ended** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|
| ** **                                           | ** ** | **March 25, 2008** | ** ** | **March 27, 2007** | ** ** |
| ** **                                           | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Net cash  provided by operating activities           |       | $                            | 26,084     |   | $ | 8,087 |   |
| Net cash used in  investing activities               |       | (24,232                      | )          | (23,917 | ) |
| Net cash  provided by (used in) financing activities |       | 4,757                        |       | (3,404 | ) |
|                                                 |       |                         |       |   |   |
| Net increase  (decrease) in cash                     |       | $                            | 6,609      |   | $ | (19,234 | ) |

 

Net cash provided byoperating activities was $26.1 million in Q1 2008 compared to $8.1 million inQ1 2007.  This increase was primarily dueto a $8.8 million decrease in accounts receivable due to the timing of creditcard settlements as fiscal year 2007 ended on a bank holiday, increases inother working capital and higher net income and depreciation.  Our operations have not required significantworking capital and, like many restaurant companies, we have been able tooperate with negative working capital. Sales are primarily for cash, and restaurant operations do not requiresignificant inventories or receivables. In addition, we received trade credit for the purchase of food,beverages and supplies, thereby reducing the need for incremental workingcapital to support growth.

 

Net cash used ininvesting activities was $24.2 million in Q1 2008 which was comparable to the $23.9million in Q1 2007 primarily due to expected similar restaurant development forthe full year of 2008 compared to the full year of 2007.

 

We require capitalprincipally for the development of new company restaurants and therefurbishment of existing restaurants.  We either lease our restaurantsite locations under operating leases for periods of five to 30 years(including renewal periods) or purchase the land where it is cost effective. Asof March 25, 2008, there were 110 restaurants developed on land which weowned.

 

Our future capitalrequirements will primarily depend on the number of new restaurants we open andthe timing of those openings within a given fiscal year. These requirementswill include costs directly related to opening new restaurants and may alsoinclude costs necessary to ensure that our infrastructure is able to support alarger restaurant base. In fiscal 2008, we expect our capital expenditures tobe approximately $100.0 million to $110.0 million, excluding any cashused for franchise acquisitions, substantially all of which will relate toplanned restaurant openings. We continue to evaluate opportunities to acquirefranchise restaurants under terms which would create value for us and ourstockholders.  In accordance with thisstrategy, we completed the acquisitions of three franchise restaurants for anaggregate purchase price of approximately $8.7 million in the second quarter of2008.  See note 12 to the condensedconsolidated financial statements.  Weintend to satisfy our capital requirements over the next 12 months withcash on hand, net cash provided by operating activities and funds availableunder our credit facility.

 

Net cash provided byfinancing activities was $4.8 million in Q1 2008 as compared to net cash usedin financing activities of $3.4 million in Q1 2007.  This increase was primarily due to borrowingsof $9.0 million under our credit facility in conjunction with the acquisitionsof three franchise restaurants in the second quarter of 2008 as discussed above.  This increase was partially offset by sharerepurchases of $4.9 million.  On February 14,2008, our Board of Directors approved a stock repurchase program under which weare authorized to repurchase up to $25.0 million of Class A commonstock.  Under this program, we mayrepurchase outstanding shares from time to time in open market transactionsduring the two-year period ending February 14, 2010.  The timing and the amount of any repurchaseswill be determined by management under parameters established by our Board ofDirectors, based on its evaluation of our stock price, market conditions andother corporate considerations.

 

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In Q1 2008, we paiddistributions of $0.3 million to equity holders of five of our majority-ownedcompany restaurants.  Currently, ourintent is to retain our future earnings, if any, primarily to finance thefuture development and operation of our business.

 

On May 31, 2007, weamended and restated our existing five-year revolving credit facility dated October 8,2004 with a syndicate of commercial lenders led by Bank of America, N.A., Bancof America Securities LLC and National City Bank. The facility was increasedfrom $150.0 million to $250.0 million and the term was extended to May 31,2012.  The terms of the facility requireus to pay interest on outstanding borrowings at LIBOR plus a margin of 0.50% to0.875% and to pay a commitment fee of 0.10% to 0.175% per year on any unusedportion of the facility, in both cases depending on our leverage ratio.   The weighted-average interest rate for therevolver at March 25, 2008 and December 25, 2007 was 3.84% and 5.73%,respectively.  The lenders’ obligation toextend credit under the facility depends on us maintaining certain financialcovenants, including a minimum consolidated fixed charge coverage ratio of 2.00to 1.00 and a maximum consolidated leverage ratio of 3.00 to 1.00.  The new credit facility permits us to incuradditional secured or unsecured indebtedness outside the facility, except forthe incurrence of secured indebtedness that in the aggregate exceeds 20% of ourconsolidated tangible net worth or circumstances where the incurrence ofsecured or unsecured indebtedness would prevent us from complying with ourfinancial covenants.   We are currentlyin compliance with such covenants.

 

At March 25, 2008,we had $72.0 million of outstanding borrowings under our credit facility and$174.4 million of availability net of $3.6 million of outstanding letters ofcredit.  In addition, we had various other notes payable totaling $3.2million with interest rates ranging from 4.35% to 10.80%.  Each of thesenotes related to the financing of specific restaurants. Our total weighted-averageeffective interest rate at March 25, 2008 was 4.10%.

 

**ContractualObligations**

 

The following tablesummarizes the amount of payments due under specified contractual obligationsas of March 25, 2008:

 

| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More than  5 years** | ** ** |
| ** **                         | ** ** | **(in thousands)**                   | ** ** |
| Long-term debt  obligations        |       | $                                         | 75,151     |   | $ | 250 |   | $ | 498 |   | $ | 72,602 |   | $ | 1,801 |   |
| Capital lease  obligations         |       | 559                                       |       | 59 |   | 140 |   | 174 |   | 186 |   |
| Interest (1)                       |       | 2,033                                     |       | 362 |   | 631 |   | 490 |   | 550 |   |
| Operating lease  obligations       |       | 135,639                                   |       | 13,313 |   | 26,419 |   | 26,341 |   | 69,566 |   |
| Capital  obligations               |       | 87,185                                    |       | 87,185 |   | — |   | — |   | — |   |
| Total  contractual obligations (2) |       | $                                         | 300,567    |   | $ | 101,169 |   | $ | 27,688 |   | $ | 99,607 |   | $ | 72,103 |   |

 

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(1)        Assumes constant rate until maturity forour fixed and variable rate debt and capital lease obligations.

Uses interest rates as ofMarch 25, 2008 for our variable rate debt. Interest payments on our variable-rate revolving credit facility havebeen excluded from the amounts shown above, primarily because the balanceoutstanding under our revolving credit facility, described further in note 3 ofthe condensed consolidated financial statements, can fluctuate daily.

(2)        This amount excludes $0.7 million ofunrecognized tax benefits under Financial Accounting Standards Board (“FASB”)Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes – an Interpretation of FASB Statement No. 109* (“FIN48”).

 

The Company has nomaterial minimum purchase commitments with its vendors that extend beyond ayear.  See note 5 to the condensedconsolidated financial statements for details of contractual obligations.

 

**Off-BalanceSheet Arrangements**

 

Except for operatingleases (primarily restaurant leases), we do not have any off-balance sheetarrangements.

 

**Guarantees**

 

We entered into realestate lease agreements for franchise restaurants located in Everett, MA,Longmont, CO, Montgomeryville, PA and Fargo, ND prior to our granting franchiserights for those restaurants. We have subsequently assigned the leases to thefranchisees, but we remain contingently liable if a franchisee defaults underthe terms of a lease. The Longmont lease expires in May 2014, the Everettlease expires in February 2018, the Montgomeryville lease expires in June 2021and the Fargo lease expires in July 2016.

 

**Recently Issued AccountingStandards**

 

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS157”), which defines fair value, establishes a framework for measuring fairvalue and expands disclosures about fair value measurements.  The provisions of SFAS 157 for financialassets and liabilities, as well as any other assets and liabilities that arecarried at fair value on a recurring basis in financial statements areeffective for financial statements issued for fiscal years beginning after November 15,2007 (our fiscal year 

 

18

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2008).  FASB Staff Position FAS 157-2, *Effective Date of FASB Statement No. 157,* delayed theeffective date of SFAS 157 for most nonfinancial assets and nonfinancialliabilities until fiscal years beginning after November 15, 2008 (ourfiscal year 2009).  The implementation ofSFAS 157 for financial assets and financial liabilities, effective December 26,2007, did not have a material impact on our consolidated financial position,results of operations or cash flows.  Weare currently assessing the impact of SFAS 157 for nonfinancial assets andliabilities on our consolidated financial position, results of operations orcash flows.   See note 10 of the condensedconsolidated financial statements for additional fair value discussions.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities* (“SFAS 159”). SFAS 159permits entities to choose to measure selected financial assets and financialliabilities at fair value. Unrealized gains and losses on items for which thefair value option has been elected are reported in earnings at each subsequentreporting date. The provisions of SFAS 159 are effective as of the beginning ofour 2008 fiscal year.  The adoption ofSFAS 159 has not had a material impact on our consolidated financial position,results of operations or cash flows.

 

In December 2007, theFASB issued SFAS No. 141 (revised 2007), *BusinessCombinations* (“SFAS 141R”). SFAS 141R establishes the principles and requirements for how anacquirer: 1) recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any noncontrolling interestin the acquiree; 2) recognizes and measures the goodwill acquired in thebusiness combination or gain from a bargain purchase;  and 3) determines what information todisclose to enable users of the financial statements to evaluate the nature andfinancial effects of the business combination. SFAS 141R is to be applied prospectively to business combinationsconsummated on or after the beginning of the first annual reporting period onor after December 15, 2008 (our fiscal year 2009).  We are currently evaluating the impact SFAS141R will have on any potential future business combinations.

 

In December 2007,the FASB issued SFAS No. 160, *Noncontrolling Interestsin Consolidated Financial Statements – an amendment of ARB No. 51*(“SFAS 160”).  SFAS 160 establishesaccounting and reporting standards that require noncontrolling interests to bereported as a component of equity, changes in a parent’s ownership interestwhile the parent retains its controlling interest be accounted for as equitytransactions, and any retained noncontrolling equity investment upon thedeconsolidation of a subsidiary be initially measured at fair value.  SFAS 160 is to be applied prospectively tobusiness combinations consummated on or after the beginning of the first annualreporting period on or after December 15, 2008 (our fiscal year2009).  We are currently evaluating theimpact of adopting SFAS 160 on our consolidated financial position, results ofoperations or cash flows.

 

19

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**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to marketrisk from changes in interest rates on debt and changes in commodity prices.Our exposure to interest rate fluctuations is limited to our outstanding bankdebt. At March 25, 2008, there was $72.0 million outstanding under ourrevolving line of credit which bears interest at approximately 50 to 87.5 basispoints (depending on our leverage ratios) over the London Interbank OfferedRate.   Our various other notes payable totaled $3.2 million at March 25,2008 and had fixed rates ranging from 4.35% to 10.80%.  Should interestrates based on these borrowings increase by one percentage point, our estimatedannual interest expense would increase by $0.7 million.

 

Many of the ingredients usedin the products sold in our restaurants are commodities that are subject tounpredictable price volatility. There are no established fixed price marketsfor certain commodities such as produce and cheese, and we are subject toprevailing market conditions when purchasing those types of commodities. Forother commodities, we employ various purchasing and pricing contract techniquesin an effort to minimize volatility, including fixed price contracts for termsof one year or less and negotiating prices with vendors with reference tofluctuating market prices.  We currentlydo not use financial instruments to hedge commodity prices, but we willcontinue to evaluate their effectiveness. Extreme and/or long term increases incommodity prices could adversely affect our future results, especially if weare unable, primarily due to competitive reasons, to increase menu prices.Additionally, if there is a time lag between the increasing commodity pricesand our ability to increase menu prices or if we believe the commodity priceincrease to be short in duration and we choose not to pass on the costincreases, our short-term financial results could be negatively affected.

 

We are subject tobusiness risk as our beef supply is highly dependent upon three vendors.  If these vendors were unable to fulfill theirobligations under their contracts, we may encounter supply shortages and incurhigher costs to secure adequate supplies, any of which would harm our business.

 

**ITEM4. CONTROLS AND PROCEDURES**

 

**Evaluation of disclosure controlsand procedures**

 

We have evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures pursuant to, and as defined in Exchange Act Rules 13a-15(e) and15d-15(e), as of the end of the period covered by this report. Based on theevaluation, performed under the supervision and with the participation of ourmanagement, including the Chief Executive Officer (the “CEO”) and the ChiefFinancial Officer (the “CFO”), our management, including the CEO and CFO,concluded that our disclosure controls and procedures were effective as of theend of the period covered by this report.

 

**Changes in internal control**

 

During the period coveredby this report, there were no significant changes with respect to our internalcontrol over financial reporting that materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

20

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**PART II — OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

Occasionally, we are adefendant in litigation arising in the ordinary course of our business,including “slip and fall’ accidents, employment related claims and claims fromguests or employees alleging illness, injury or food quality, health oroperational concerns.  None of these types of litigation, most of whichare covered by insurance, has had a material effect on us and, as of the dateof this report, we are not party to any litigation that we believe would have amaterial adverse effect on our business.

 

On March 26, 2007, acivil case styled as a class action complaint titled *Nicole M.Ehrheart v. Texas Roadhouse, Inc. and Does 1 through 10 (“Ehrheart”)*,Case Number CA 07-54, was filed against us in the United States District Courtfor the Western District of Pennsylvania Erie Division.  The case alleges liability under the Fair andAccurate Credit Transactions Act (“FACTA”) based on the alleged practice ofunlawfully including more information than is permitted on the electronicallyprinted credit or debit card receipts provided to customers.  The plaintiff seeks monetary damages,including statutory damages, punitive damages, costs and attorneys’ fees, and apermanent injunction against the alleged unlawful practice.  Statutory damages range from $100 to $1,000for each willful violation.  While wehave filed an answer to the complaint denying the material allegations of thecomplaint, discovery has not yet begun.

 

On July 20, 2007, acivil case styled as a class action complaint titled *Mario Alianov. Texas Roadhouse Holdings LLC and Does 1-10 (“Aliano”)*, CaseNumber 07cv4108, was filed against us in the United States District Court forthe Northern District of Illinois Eastern Division.  The case alleges liability under FACTA.  The plaintiff seeks statutory damages of $100to $1,000 per violation, attorney’s fees, litigation expenses and costs.  While we have filed an answer to thecomplaint denying the material allegations of the complaint, discovery has notyet begun.

 

We believe that we havemeritorious defenses to the *Ehrheart* and *Aliano* claims, and we intend to vigorously defend againstthe claims, including the plaintiffs’ efforts to certify a nationwide classaction.  We believe that neither casewill have a material adverse effect on our business and our consolidatedfinancial position, results of operations or cash flows.  However, if either court both granted classaction status and imposed statutory penalties, the resolution of the case wouldbe likely to have a material adverse effect on our business and ourconsolidated financial position, results of operation and cash flows.

 

**ITEM1A.   RISK FACTORS**

 

Informationregarding risk factors appears in our Annual Report on Form 10-K for theyear ended December 25, 2007, under the heading “Special Note RegardingForward-looking Statements” and in the Form 10-K Part I, Item 1A,Risk Factors.  There have been nomaterial changes from the risk factors previously disclosed in our Form 10-K.

 

**ITEM2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

On February 14,2008, the Company’s Board of Directors approved a stock repurchase programunder which it authorized the Company to repurchase up to $25.0 million of its Class Acommon stock during the two-year period ending February 14, 2010.

 

The followingtable includes information regarding purchases of our common stock made by usduring the first quarter ended March 25, 2008:

 
| **Period**                           | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of Shares  Purchased as Part of Publicly  Announced Plans or Programs** | ** **  | **Maximum Number (or Approximate  Dollar Value) of Shares that May Yet Be  Purchased Under the Plans or Programs** | ** **     |
|--------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|
| December 26  to January 22 | ** ** | **—**                                       | ** ** | **—**                                   | ** ** | **—**                                                                                                                               | ** **  | **—**                                                                                                                                                                                    | ** **     |
| January 23  to February 19 | ** ** | **—**                                       | ** ** | **—**                                   | ** ** | **—**                                                                                                                               | ** **  | **$**                                                                                                                                                                                         | **25,000,000** | ** ** |
| February 20  to March 25   | ** ** | **529,900**                                      | ** ** | **$**                                        | **9.24**   | ** **                                                                                                                               | **529,900** | ** **                                                                                                                                                                                    | **$**          | **20,106,029** | ** ** |
| ** **                           | ** ** | ** **                                       | ** ** | ** **                                   | ** ** | ** **                                                                                                                               | ** **  | ** **                                                                                                                                                                                    | ** **     |
| Total                                | ** ** | **529,900**                                      | ** ** | ** **                                   | ** ** | **529,900**                                                                                                                              | ** **  | ** **                                                                                                                                                                                    | ** **     |
|                                      |            |                                                  |            |                                              |            |                                                                                                                                          |             |                                                                                                                                                                                               |                |  |  |

 

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

None.

 

21

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**ITEM5.  OTHER INFORMATION.**

 

None.

 

**ITEM6.  EXHIBITS.**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                 |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                     |
| 31.2                 |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                     |
| 32.1                 |       | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2                 |       | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                   | TEXAS ROADHOUSE, INC. |
|------------------------|-----------------------|
|                   |                  |   |
| Date: May 1, 2008 | By:                   | /s/ G.J. Hart |
|                   |                  | G.J. Hart |
|                   |                  | President, Chief  Executive Officer |
|                   |                  | (principal executive officer) |
|                   |                  |   |
| Date: May 1, 2008 | By:                   | /s/ Scott M. Colosi |
|                   |                  | Scott M. Colosi |
|                   |                  | Chief Financial Officer |
|                   |                  | (principal financial officer) |
|                   |                  | (chief accounting officer) |

 

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