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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q

(Mark One)

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

For the quarterly period ended March 28, 2004

OR

[   ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

For the transition period from __________ to __________

Commission file number 0-22639

CHAMPPS ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)

(303) 804-1333
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Yes X No __

Number of shares of Common Stock, $.01 par value, outstanding at April 27, 2004: 12,812,332 (excluding
471,588 shares held in our treasury).

CHAMPPS ENTERTAINMENT INC.

INDEX

PART I – FINANCIAL INFORMATION

PART II – OTHER INFORMATION

PART I – FINANCIAL INFORMATION

ITEM 1. Condensed Financial Statements

CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
As of March 28, 2004 and June 29, 2003
(In thousands except share data)
(Unaudited)

        See accompanying notes to unaudited consolidated financial statements.

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CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended March 28, 2004 and March 30,2003
(In thousands except per share data)
(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Nine Months Ended March 28, 2004
(In thousands except share data)
(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 28, 2004 and March 30, 2003
(In thousands)
(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CHAMPPS ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended March 28, 2004 and March 30, 2003
(Unaudited)

1. Nature of Business and Basis of Presentation

Nature of Business

As of March 28, 2004, Champps Entertainment, Inc. (the “Company,” or “Champps”) owned and operated 47 full-service, casual dining restaurants under the names of “Champps Americana,” “Champps Restaurant” and “Champps Restaurant and Bar.” The Company also franchised 12 restaurants under the name “Champps Americana.” Champps operates in 21 states.

Basis of Presentation of Consolidated Financial Statements

The accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of financial position as of March 28, 2004 and results of operations for the interim periods ended March 28, 2004 and March 30, 2003. These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such SEC rules and regulations. Operating results for the three and nine month periods ended March 28, 2004 are not necessarily indicative of the results that may be expected for the year ending June 27, 2004.

The balance sheet at June 29, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and notes thereto for the fiscal year ended June 29, 2003 included in our annual report on Form 10-K.

These statements should be read in conjunction with the consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended June 29, 2003. The accounting policies used in preparing these consolidated financial statements are consistent with those described in our Annual Report on Form 10-K.

2. Summary of Significant Accounting Policies

Accounting for Stock-Based Compensation

The Company maintains stock option plans under which the Company may grant incentive stock options and non-qualified stock options to associates, consultants and non-employee directors. Stock options have been granted with exercise prices at or above the fair value on the date of grant. Options vest and expire according to the terms established at the grant date. The Company issued 388,100 options to purchase common stock at an exercise price of $6.97 in fiscal 2004.

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Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans based on the fair value of options granted. The Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, because the grant price equals or is above the market price on the date of grant for options issued by the Company, no compensation expense is generally recognized for stock options initially issued to employees.

On December 31, 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure,” which amends SFAS No. 123. SFAS No. 148 requires more prominent and frequent disclosures about the effects of stock-based compensation. The Company intends to continue to account for its stock-based compensation according to the provisions of APB Opinion No. 25 until more definitive pronouncements are issued requiring companies to record compensation costs upon issuance of options.

Had compensation cost for our stock options been recognized based upon the estimated fair value on the grant date under the fair value methodology prescribed by SFAS No. 123, as amended by SFAS No. 148, our net income and income per share would have been as follows:

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3. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

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4. Commitments and Contingencies

Restricted Cash and Letters of Credit

The Company had $100,000 of restricted cash as of March 28, 2004. These funds serve primarily as collateral for security for performance bonds. In addition, the Company had $1,767,000 of outstanding letters of credit at March 28, 2004 to guarantee performance primarily related to certain insurance contracts. The letters of credit are irrevocable and have one-year renewable terms.

Fuddruckers Representations and Indemnity

In fiscal 1998, the Company sold its Fuddrucker’s subsidiary. The agreement whereby the Company’s Fuddruckers subsidiary was sold contains various representations and warranties by the Company. Certain of these representations and warranties survived the closing and expired on December 31, 2000. The remaining representations and warranties will continue in effect as stated in the agreement.

The maximum aggregate liability of the Company on account of any breach of any representation or warranty is limited to the amount of the final purchase price. There is no limit on the liability of the Company to the purchaser on account of any breach by the Company of any of its covenants or agreements under the agreement or on account of indemnification obligations covering matters other than breaches of representations and warranties, provided that, if the purchaser is entitled to recover any losses in excess of the final purchase price, the Company may either (i) require the purchaser to reconvey to the Company full ownership and control of the shares and all assets (to the extent then owned by the purchaser or Fuddruckers) that were transferred pursuant to the agreement in such a manner as to rescind the transactions contemplated by the agreement based upon a formula price, or (ii) pay all losses associated with the indemnification. During fiscal 2003 and the first nine months of fiscal 2004, no claims for indemnification were presented by the purchaser and the Company believes the risk for significant claims for indemnification being presented in the future by the purchaser is remote.

Spin-Off Indemnifications

In fiscal 1997, the Company was spun-off from DAKA International, Inc. The Company agreed to assume certain liabilities in connection with the Company’s spin-off from DAKA International, Inc. In addition, the Company entered into a post-closing covenants agreement that provided for post-closing payments by the Company to Compass Group PLC, which acquired DAKA, under certain circumstances. The Company also agreed to indemnify Compass for certain losses on liabilities existing prior to the effective date of the spin-off but unidentified at such date. Matters involving spin-off indemnifications are discussed further in this section under the headings “Accrued Insurance Costs,” “Tax Contingencies” and “Litigation.” The Company believes the risk of any additional significant claims for indemnification being presented by Compass is remote.

Accrued Insurance Costs

The Company is self-insured for certain losses related to workers’ compensation claims, general liability and medical/dental claims. The Company has purchased stop-loss coverage in order to limit its exposure to significant levels of such claims. Self-insured reserves are accrued based upon our estimates of the ultimate liability for claims using certain assumptions that are based upon development factors utilizing historical experience. Actual amounts required to settle such obligations may exceed those estimates.

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Through June 29, 1997, the Company was self-insured for workers’ compensation, general liability, and various other risks up to specified limits. The Company’s share of prior workers’ compensation and general liability programs of DAKA through June 29, 1997 were allocated using labor costs and the aggregate costs of such programs were determined through actuarial studies which determined the estimated amount required to be provided for incurred incidents. In connection with the spin-off transaction from DAKA, the Company is obligated to indemnify Compass for all claims made subsequent to the effective date of the spin-off including claims related to associates of DAKA not continuing with the Company after the spin-off, provided the claims relate to events occurring prior to the effective date of the spin-off. The Company believes that any claims related to its obligation to further indemnify Compass after March 28, 2004 are appropriately accrued. The Company believes the risk of any additional claims related to the indemnification of Compass or claims related to associates of DAKA is remote.

Tax Contingencies

In December 2001, the State of Florida proposed to assess subsidiaries of DAKA $2.4 million in unpaid state sales taxes, and an additional $2.9 million in penalties and interest as of December 2001. The Company was contractually obligated to indemnify DAKA for this matter. In February 2004, the Company paid $0.1 million to the Florida Department of Revenue in full settlement of the matter.

Additionally, the Company and its predecessors, from time-to-time, have been party to various other assessments of taxes, penalties and interest from federal, state and local agencies. As of March 28, 2004, the Company is in the process of settling several such assessments. Tax reserves are accrued based upon our estimates of the ultimate settlement of the contingencies. Actual amounts required to settle those obligations may exceed those estimates.

Litigation

From time to time, lawsuits are filed against the Company in the ordinary course of business. Such lawsuits typically involve claims from customers, former or current associates, and others related to issues common to the restaurant industry. A number of such claims may exist at any given time. In addition to the matters described below, the Company is currently not a party to any litigation that management believes will have a material adverse effect on the Company’s consolidated financial position or results of operations.

The Company is also engaged in an action arising from our indemnification of DAKA in connection with the spin-off described above. We may also be required to assume other liabilities of DAKA in connection with the spin-off and we may be required to indemnify Fuddrucker’s in connection with future breaches of our representations and warranties that survived the closing of the sale of Fuddruckers. These indemnifications are discussed further in this section under the headings “Fuddruckers Representations and Indemnity” and “Spin-Off Indemnifications.”

In the third quarter of fiscal 2000, a Washington, D.C. superior court jury awarded a former Daka associate $188,000 in compensatory damages, $4.8 million in punitive damages and a subsequent award of $276,000 for attorneys’ fees and costs, based on the associate’s claim of negligent supervision and retaliation, due to alleged conduct that occurred in 1996 at a former Daka food service location. The events at issue in the case took place while a predecessor company of Champps owned Daka. On September 20, 2000, Daka filed a Notice of Appeal with the Court of Appeals for the District of Columbia. On December 24, 2003, the Court of Appeals for the District of Columbia issued its decision on the Appeal. In its decision, the Court affirmed the award of compensatory damages and the attorneys’ fees and costs. However, the Court held that the punitive damages award was unconstitutional and vacated the award. The Court remanded the case to the trial court for re-determination of punitive damages in accordance with legal principles outlined in its opinion.

In January 2004, the Company paid approximately $0.6 million associated with this matter based on the Appeal decision for awarded compensatory damages, attorneys’ fees and related interest. The Company has not accrued any amounts related to the punitive damages in this matter because the Appeal decision vacated the punitive damages award and it is uncertain what amount of punitive damages will ultimately be awarded. Revisions to the estimate related to the punitive damages may be made in the future and will be reported in the period in which such amounts, if any, become probable and estimable. The Company believes that the ultimate outcome of this matter will not have a material adverse effect on the Company’s consolidated financial position.

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Reserves

The Company previously recorded liabilities associated with the activities of certain predecessor companies which were either spun-off or sold to other entities. These liabilities are discussed further in this section under the headings “Accrued Insurance Costs,” “Tax Contingencies” and “Litigation.” The following table displays the activity and balances relating to these liabilities during the nine-month period ended March 28, 2004. This liability is included in accrued expenses and other long-term liabilities.

Build-to-Suit and Construction Commitments

The Company has entered into an agreement with AEI Fund Management, Inc. (“AEI”) that provides a maximum $24.5 million financing commitment for the completion of up to seven new restaurants. Under the agreement, AEI purchases the land and funds a substantial portion of the construction costs of new restaurants selected by the Company for participation under the agreement. The Company serves as the developer of the site and is responsible for completing the project on time and within budget. Once the project is completed per the terms of the development agreement, the Company finalizes its lease with AEI for the property. For accounting purposes, the Company is considered the owner of the property during the construction period due to the Company’s obligation to develop the property and AEI’s right to sell the funded assets to the Company in the event of a default under the development agreement.

As of March 28, 2004 and June 29, 2003, AEI had funded construction costs to the Company of $2.6 million and $2.7 million, respectively, for projects that were not complete as of those dates and the Company had additional obligations relative to the development agreements. These amounts were classified as prepaid expenses and other current assets and accrued expenses on the consolidated balance sheets. At March 28, 2004, the Company estimates that additional construction costs of $1.4 million will be required to finish the existing project being funded by AEI.

As of March 28, 2004, the Company had $0.1 million of contractual construction commitments outside of the AEI development projects described above.

5. Consolidated Statements of Cash Flows

Total depreciation and amortization expense per the consolidated statement of cash flows includes depreciation and amortization expense on corporate assets of $273,000 and $299,000 which is included in general and administrative expense on the consolidated statements of operations for the nine months ended March 28, 2004 and March 30, 2003, respectively.

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6. Capital Lease Obligations and Notes Payable

The following discussion highlights major non-routine changes to the Company’s debt balances for the nine months ended March 28, 2004 and material amounts of credit facility availability.

During the first quarter of fiscal 2004, the Company received $4.5 million of proceeds from a five-year collateralized equipment term loan with GE Capital.

During the third quarter of fiscal 2004, the Company elected to repay $1.0 million of a five-year equipment term loan and $0.8 million of its remaining equipment capital lease obligation before scheduled maturity.

At March 28, 2004, the Company had a bank credit facility under which it could borrow up to $8.0 million. The facility had two components: $2.0 million was available to provide short-term working capital and to support the issuance of letters of credit; the remaining $6.0 million was available to provide interim financing associated with the construction of new restaurant locations. The $6.0 million interim construction financing facility was cancelled by the Company in April 2004 as a result of the placement of a new facility with a new lender. The working capital facility expires on January 2005 at which time all outstanding borrowings are due. In July 2003, the Company borrowed $350,000 under the construction facility which was repaid in September 2003. As of March 28, 2004, the Company had no outstanding borrowings under these facilities but had placed letters of credit of $1,767,000 under the working capital facility.

In March 2004, the Company obtained a three-year $25.0 million senior secured credit facility with a new lender, LaSalle Bank. The facility will be used to refinance certain of the Company’s existing debt, support growth and general working capital needs and provide up to $5.0 million for the issuance of letters of credit. The facility is secured by a blanket lien on all personal and real property of the Company. Borrowings under the facility will bear interest that will vary depending on a Total Funded Debt to EBITDA (earnings before interest, taxes, depreciation and amortization prior to preopening expenses, as defined) ratio and will range from prime to prime plus 50 basis points or, if elected, LIBOR plus 200 to 300 basis points. The Company paid an up-front fee of $188,000 and is required to pay an annual unused commitment fee of 37.5 basis points to 50 basis points. Outstanding borrowings under the facility will be converted to a five-year term loan if Senior Debt to EBITDA exceeds specified levels. The facility requires the Company to maintain a minimum Fixed Charge Coverage Ratio and Tangible Net Worth level and not exceed thresholds for Total Funded Debt to EBITDA and Total Senior Debt to EBITDA ratios. The facility limits the opening of new restaurants to a maximum of twenty-four restaurants over a three-year period and also sets limits on the amount of dividends and/or stock repurchases made by the Company. As of March 28, 2004, the Company had no outstanding borrowings under this facility, however, as of April 29, 2004, the Company had $3.0 million of borrowings under the facility.

In the fourth quarter of fiscal 2004, the Company repaid $13.4 million of existing debt which will significantly reduce its annual interest costs. The funds to repay the debt came from excess cash and borrowings under the new $25 million senior secured bank credit facility. Prepayment penalties of approximately $500,000 and a $100,000 write-off of unamortized deferred financing fees will be recorded in the fourth quarter of fiscal 2004 as a result of the prepaying the debt before its scheduled maturity.

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7. Prepaid Expenses and Other Current Assets

The components of prepaid expenses and other current assets were as follows (in thousands):

The build-to-suit construction costs represent build-to-suit construction projects where the Company is considered the owner.

8. Other Assets, Net

The components of other assets, net were as follows (in thousands):

9. Accrued Expenses and Other Long-Term Liabilities

The components of accrued expenses were as follows (in thousands):

The increase in salaries, wages and related taxes was due to timing of the payroll cycle and increased accrued bonus. Two weeks of payroll were accrued at March 28, 2004 compared to one week of payroll at June 29, 2003. Accrued bonus increased as a result of accruals from attainment of targets under the 2004 annual corporate bonus plan. No accrued bonus was recorded as of June 29, 2003 under the annual corporate bonus plan as the targets were not attained for that year.

Accrued insurance increased as a result of timing of payments and increases in certain reserves for self-insured claims.

Predecessor obligations decreased as a result of settlements and payments for certain of these obligations (see Note 4).

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The components of other long-term liabilities were as follows (in thousands):

Tenant improvement allowances are reimbursements received from certain landlords for initial construction costs and are amortized on a straight-line basis over the lease term as a reduction in rent. Tenant improvements allowances of $3.9 million were added for new restaurants during the current fiscal year.

Deferred rents represent the cumulative difference between actual rent paid and rent expensed on a straight-line basis.

10. Related Party Transactions

In the first quarter of fiscal 2004, Mr. William Baumhauer, the Company’s chairman of the board, president and chief executive officer, repaid the remainder of a loan with the Company originally made in 2001. The loan repayment totaled $316,000, of which $116,000 represented accrued interest.

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

Forward-Looking Statements

The matters discussed in the following Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Quarterly Report on Form 10-Q, which are not historical information, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “may,” “believe,” “estimate,” “expect,” “plan,” “intend,” “project,” “anticipate” and similar expressions are used to identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements involve risks and uncertainties, many of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results of current and future operations may vary materially from those anticipated, estimated or projected. These factors, risks and uncertainties include, but are not limited to the following factors:

This list is intended to identify some of the principal factors that could cause results to differ materially from those described in the forward-looking statements included elsewhere in this report. These factors are not intended to represent a complete list of all risks and uncertainties inherent in our business, and should be read in conjunction with the more detailed cautionary statements and risk factors identified in our 2003 Annual Report on Form 10-K for the fiscal year ended June 29, 2003, our Securities and Exchange Commission filings, and press releases. All forward-looking statements attributable to our officers, directors and employees, or to persons acting on our behalf, are expressly qualified in their entirety by such factors and other events, many of which are outside of our control. Any of these factors could have a material adverse effect on the Company’s results of operations. All forward-looking statements made in this quarterly report on Form 10-Q are based on information available to us on the date hereof, and we assume no obligation to update these statements.

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Overview

Champps Entertainment, Inc. (referred to herein as the “Company,” “we,” “us,” or “our”) is a restaurant company competing in the upscale casual market. As of March 28, 2004, Champps Entertainment, Inc. owned and operated 47, and franchised 12, upscale, full-service, casual dining restaurants under the names Champps Americana, Champps Restaurant and Champps Restaurant and Bar. Champps operates in 21 states with larger concentrations of restaurants in the upper Midwest, mid-Atlantic and Texas. Champps provides an extensive menu of approximately 86 items consisting of high quality ingredients, freshly prepared and served with exceptional service in an exciting environment through the use of videos, music, sports and promotions. Champps restaurants generally are open seven days a week from 11:00 a.m. to 1:00 a.m. We serve our guests in the dining room and bar area during lunch, after work, during dinner and after dinner during our late night periods.

We opened our first restaurant in 1984. Since June 1999, we have positioned ourselves to increase profitability while embarking on a strategic expansion in major metropolitan areas throughout the United States. Prior to June 1999, we disposed of all non-Champps operating businesses and began to concentrate solely on the Champps concept. At June 1999, we owned 18 restaurants. In fiscal year 2000, we opened four restaurants and acquired two franchised restaurants. In fiscal 2001, fiscal 2002 and fiscal 2003, we opened four, six and seven restaurants, respectively. As of March 28, 2004, we had opened six additional locations, had one location under construction expected to open in the fourth quarter of fiscal 2004 and had fully executed contracts for four additional locations expected to open in fiscal 2005. We have identified multiple potential sites and are negotiating contracts on additional sites for restaurants to be opened in fiscal 2005. The Company expects to open a total of six new company-operated restaurants and one new franchise restaurant in fiscal 2005.

Our new restaurants typically range in size from 7,500 square feet to 9,000 square feet. Restaurants with a ground lease require, on average, a net cash investment of approximately $1.9 million and average total invested capital of approximately $2.9 million per restaurant. Restaurants constructed with build-to-suit financing require, on average, a net investment of $1.2 million and average total invested capital of approximately $4.9 million. Pre-opening expenses are expected to average approximately $360,000 per restaurant.

Historically, our primary sources of liquidity for funding our operations and expansion have been net cash from operations, and standard restaurant financing methods, such as build-to-suit transactions, sale-leaseback transactions, mortgage facilities, notes payable, tenant improvement allowances and equipment financing. We recently secured a three-year $25 million revolving bank credit facility giving us significantly greater financial flexibility and future interest expense savings. In that regard, certain of our higher interest rate notes payable were repaid in the fourth quarter of 2004 with excess cash and use of this bank facility, although we were subject to prepayment penalties and a write-off of related debt issuance costs.

Because we are in an expansion phase, the timing of revenues and expenses associated with opening new restaurants is expected to result in fluctuations in our quarterly and annual results. In addition, our results, and the results of the restaurant industry as a whole, may be adversely affected by changes in consumer tastes, discretionary spending priorities, national, regional and local economic conditions, demographic trends, consumer confidence in the economy, traffic patterns, weather conditions, employee availability, state and federal minimum wage requirements and the type, number and location of competing restaurants. Changes in any of these factors could adversely affect us and our financial results.

The success of our business and our operating results are also dependent upon our ability to anticipate and react to changes in food and liquor costs and the mix between food and liquor revenues. Various factors beyond our control, such as adverse weather conditions, may affect food costs and increases in federal, state and local taxes may affect liquor costs. While we have been able to manage our exposure to the risk of increasing food and liquor costs in the past through certain purchasing practices, menu changes and price adjustments, there can be no assurance that we will be able to do so in the future or that changes in our sales mix or our overall buying power will not adversely affect our results of operations. Many food product costs have increased substantially in recent months. The most notable products with higher costs that affect our operations include beef, dairy and chicken wings.

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Our sales fluctuate seasonally and therefore our quarterly results are not necessarily indicative of results that may be achieved for the full fiscal year. For fiscal years 2003 and 2002, our relative sales were highest in our second quarter (October through December), followed by our third quarter (January through March), then by our fourth quarter (April through June). Our first quarter (July through September) recorded the lowest relative sales for those years. Factors influencing sales variability in addition to those noted above include the frequency and popularity of sporting events, holidays (including which day of the week the holiday occurs) and weather.

An important indicator of sales performance within the restaurant industry is comparable sales or same store sales. This indicator compares the revenue performance of our restaurants open for more than sixty-six weeks to the same restaurants in the prior year thereby eliminating the impact of new openings in comparing the operations of existing stores. Small changes in comparable sales can have a proportionally higher impact on operating margins because of the high degree of fixed costs associated with operating restaurants.

Our comparable food sales have been positive for eight consecutive quarters and for 17 out of the last 19 quarters. However, at the same time, comparable liquor sales have been negative for eight consecutive quarters. We believe that liquor sales have been impacted by our strategy to deemphasize our late night business, the sluggish economy, declining consumer confidence, higher unemployment, decreases in discretionary income and a decline in overall on-premise liquor sales throughout our industry. .

Food safety issues have recently received increased media attention. Two prominent issues have been the identification of green onions grown in farms in Mexico as the source of hepatitis and the first reported case of “mad cow” disease in the United States. We know of no known cases related to these food safety concerns affecting our restaurants. We have received assurances from our produce provider of green onions that their sources are safe. Also, we have reinforced to our restaurant operators procedures to follow for the safe food handling of green onions. To date, the “mad cow” disease issue has not been shown to influence the beef-eating habits of customers per industry reports, although future cases could certainly influence our customers eating habits. The USDA and the beef industry have taken a number of actions to reduce the risk of “mad cow” diseased beef from entering consumer markets.

Recently, the popularity of the Atkins diet has resulted in many restaurant chains incorporating and promoting high-protein, low-carbohydrate items on their menus. We have responded to this trend by including certain menu items labeled “carb conscious” in our specials section of the menu throughout the third quarter. We also plan to add a “carb conscious” section to our menu in our next update in June 2004.

We have been liable for two potentially significant loss contingencies related to a predecessor company (see Note 4 to our unaudited consolidated financial statements). Significant developments have occurred recently in both items. In the McCrae vs. Daka matter, the Court of Appeals issued its decision in December 2003. The Court affirmed the award of compensatory damages in the amount of $187,500 and attorneys’ fees in the amount of $276,000. In January 2004, we paid approximately $0.6 million for these items including accrued interest. However, the Court vacated the $4.8 million punitive damages award as constitutionally excessive and remanded the case to the trial court for re-determination of punitive damages in accordance with legal principles outlined in its opinion. We have not accrued any liability for punitive damages in this matter because the ultimate award is not determinable. The State of Florida proposed tax assessment was settled in February 2004 for a payment of $0.1 million. Previously, the State of Florida had proposed to assess $2.4 million in unpaid state sales taxes, and an additional $2.9 million in penalties and interest as of December 2001.

Our financial results for the quarter ended March 28, 2004 included:

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Financial Definitions

Revenue — Our revenue is comprised of restaurant sales and net franchise royalties and fees. Restaurant sales are comprised almost entirely of food and beverage sales with less than 0.2% of the restaurant sales represented by sales of Champps’ merchandise and other revenue. In calculating our company-owned comparable restaurant sales, we include restaurants open at least 66 weeks. For the third quarter of fiscal 2004, 38 restaurants of our total 47 restaurants in operation at quarter-end were included in our comparable sales calculation.

Restaurant Operating Costs — Product costs are composed primarily of food and beverage expenses. Labor costs include direct hourly and management wages, our restaurant associates wages during training, bonuses, workers’ compensation and payroll taxes and benefits for restaurant employees. Other operating expense includes restaurant supplies, marketing costs specifically related to the restaurants’ activities, utilities, repairs and maintenance, banking and credit card fees and other directly related restaurant costs. Occupancy costs include equipment operating leases, fixed rent, percentage rent, common area maintenance charges, general liability and property insurance and real estate and personal property taxes. Depreciation and amortization principally includes depreciation on capital expenditures for restaurants. Depreciation and amortization excludes corporate level depreciation and amortization which are included in general and administrative expense. Restaurant level operating profit is composed of restaurant sales less restaurant operating costs, which includes product costs, labor costs, other operating expense, occupancy and depreciation and amortization.

General and Administrative Expenses — General and administrative expenses include all corporate and administrative functions that support existing operations and provide infrastructure to facilitate our future growth. Components include executive and management salaries, regional supervisory and staff salaries, bonuses and related associate payroll taxes and benefits, travel, information systems, communication expenses, corporate rent and related occupancy and operating costs, corporate depreciation and amortization and professional and consulting fees.

Preopening and Other Items — Pre-opening expenses, which are expensed as incurred, consist of direct costs related to hiring and training the initial restaurant workforce and other expenses incurred prior to the opening of a new restaurant that are directly associated with opening the new restaurants. Other (income) expense, net generally consists of losses on asset disposals from asset replacements. Interest expense and income, net consists of interest expense on notes payable and capitalized lease obligations and amortization of loan fee costs partially offset by interest income earned on excess cash balances and interest capitalized as part of the construction process. Expenses related to predecessor companies consist of expenses for indemnity obligations related to the Company’s spin-off in 1997.

Fiscal Calendar — We utilize a 52/53 week fiscal year ending on the Sunday closest to June 30 for financial reporting purposes. Fiscal 2004 will consist of 52 weeks and will end on Sunday, June 27, 2004. The quarters ending March 28, 2004 and March 30, 2003 both had thirteen operating weeks and are referred to as the third quarter of fiscal 2004 and the third quarter of fiscal 2003, respectively. Our upcoming fiscal 2005 will consist of 53 weeks. The first quarter of fiscal 2005 will contain 14 weeks while the remaining quarters in the fiscal year will contain 13 weeks each.

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RESULTS OF OPERATIONS

The following table sets forth, for the periods presented, certain unaudited consolidated financial information for the Company (dollars in thousands).

Restaurant level operating profit is a non-GAAP measure that we believe is useful in understanding our business. Restaurant level operating profit is defined as restaurant operating and franchise contribution, minus franchising and royalty revenue, net. Thus, restaurant level operating profit is most directly comparable to the GAAP measure restaurant operating and franchise contribution. Deducting “Franchising and royalty revenue, net” from “Restaurant operating and franchise contribution,” produces the non-GAAP measurement referred to as “Restaurant level operating profit”:

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We believe this non-GAAP measure provides a useful means to evaluate the performance of our core business since it deducts items regarding our franchise operations, which are of modest scale and have minor significance to the day-to-day operation of our business. We understand investors and analysts regularly rely on operating income measures, including such measures that may be non-GAAP financial measures. Investors should not put undue reliance on non-GAAP financial measures as a substitute for GAAP financial measures.

Historically, we have experienced volatility quarter to quarter in the amount of pre-opening expenses and the percentage relationship of these expenses to revenues. We typically incur the most significant portion of our pre-opening expenses associated with the opening of a new restaurant within the two months immediately preceding and during the month of the opening of a new restaurant. In addition, product costs, labor and operating costs associated with a newly opened restaurant are usually higher in the first three to four months of operation, both in aggregate dollars and as a percentage of revenues. Accordingly, the volume and timing of new restaurant openings has had, and is expected to continue to have, a meaningful impact on pre-opening expenses, product costs, labor and operating costs. We did not open any restaurants during the quarter ended March 28, 2004 and opened one new restaurant in the quarter ended March 30, 2003. We opened six restaurants in the thirty-nine weeks ended March 28, 2004 and five restaurants in the same period of fiscal 2003.

Thirteen Weeks Ended March 28, 2004 Compared to the Thirteen Weeks Ended March 30, 2003

Total revenue. Total revenue increased approximately $8.0 million, or 17.3%, to $54.2 million in the thirteen weeks ended March 28, 2004 from $46.2 million for the comparable prior year period primarily due to operating approximately 8.5 more restaurants on average compared to the prior year. Also contributing to the increase was higher comparable restaurant sales of 0.7%. In the third quarter of fiscal 2004, comparable food sales increased 2.6% while comparable alcohol sales decreased 3.8%. The average guest check in our dining room, excluding alcoholic beverages, was approximately $13.38 for the third quarter of fiscal 2004 versus $12.97 for the third quarter of fiscal 2003. During the third quarter of fiscal 2004, food sales and alcoholic beverage sales represented 72.2% and 27.8% of our total food and beverage sales, respectively. During the third quarter of fiscal 2003, food and alcoholic beverage sales represented 70.4% and 29.6% of our total food and beverage sales, respectively.

Although fiscal 2004‘s third quarter had negative weather impacts, fiscal 2003‘s third quarter weather effects were more severe. Fiscal 2003‘s third quarter sales were negatively impacted by adverse weather in the Ohio, Indiana, mid-Atlantic and Colorado markets including 12 full store closure days.

The third quarter of fiscal 2004 marked the eighth consecutive quarter of positive comparable food sales. However, this quarter also marked the eighth consecutive quarter of negative comparable alcohol sales. This trend is partially reflective of the greater emphasis that we have placed on food sales, but also reflects increased competition in some markets. We will continue to pursue measures to improve our alcohol sales.

Restaurant Operating Costs.

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Restaurant level operating profit. Restaurant level operating profit increased approximately $1.4 million, or 30.4%, to $6.0 million in the thirteen weeks ended March 28, 2004 from $4.6 million in the comparable prior year period. Restaurant level operating profit as a percentage of restaurant sales increased to 11.1% in fiscal 2004 from 10.0% in fiscal 2003. Restaurant level operating profit increased primarily as the result of our additional restaurants open and our ability to improve the restaurant contribution margin between periods.

General and administrative expenses. General and administrative expenses increased $0.5 million, or 19.2%, to $3.1 million in the thirteen weeks ended March 28, 2004 from $2.6 million in the comparable prior year period. General and administrative expenses increased as a result of increased personnel costs to support growth and higher bonus and workers’ compensation expenses partially offset by a litigation settlement accrual of $241,000 and $97,000 of audit committee legal expenses incurred in the prior year. General and administrative expenses as a percentage of total revenue decreased to 5.6% for fiscal 2004 from 5.7% in fiscal 2003.

Pre-opening expenses. Pre-opening expenses were $0.1 million for the thirteen weeks ended March 28, 2004 and $0.6 million for the comparable prior year period. We did not open any restaurants in the third quarter of fiscal 2004. We opened one restaurant in the third quarter of fiscal 2003. In addition, the third quarter of 2003 included pre-opening costs for two restaurants opened in the fourth quarter of fiscal 2003 while the third quarter of fiscal 2004 included much lower relative pre-opening costs for the one restaurant expected to open in the fourth quarter of fiscal 2004. Pre-opening expenses as a percentage of revenue decreased and were 0.1% for fiscal 2004 and 1.3% for fiscal 2003.

Interest expense and income, net. Interest expense and income, net was approximately $0.6 million in the third quarter of fiscal 2004 and $0.5 million in fiscal 2003. The increase resulted from higher interest income in fiscal 2003 as a result of higher levels of investable funds and lower capitalized interest in fiscal 2004 as a result of lower levels of new restaurant construction activity.

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Expenses related to predecessor companies. Expenses related to predecessor companies totaled $0.1 million for the thirteen weeks ended March 28, 2004 versus $0.3 million in the comparable prior year quarter. The lower level of expenses in fiscal 2004‘s third quarter was due to the resolution of several on-going predecessor issues.

Income before income taxes. Income before income taxes increased $1.6 million, or 228.6%, to $2.3 million for the thirteen weeks ended March 28, 2004 from $0.7 million in the comparable prior year quarter primarily for the reasons described above.

Income tax expense. For the thirteen weeks ended March 28, 2004, we recorded an income tax expense of $0.5 million, or an effective income tax rate of approximately 22%, versus $0.1 million, or an effective income tax rate of approximately 19%, in the comparable prior year quarter.

Thirty-nine Weeks Ended March 28, 2004 Compared to the Thirty-nine Weeks Ended March 30, 2003

Total revenue. Total revenue increased approximately $23.7 million, or 17.7%, to $157.9 million in the thirty-nine weeks ended March 28, 2004 from $134.2 million for the comparable prior year period primarily due to the opening of seven additional restaurants throughout fiscal 2003 and the opening of six restaurants in the first half of fiscal 2004. Comparable restaurant sales were flat between periods. In the first nine months of fiscal 2004, comparable food sales increased 1.4% while comparable alcohol sales decreased 3.0%. The average guest check in our dining room, excluding alcoholic beverages, was approximately $13.22 for the first nine months of fiscal 2004 versus $13.06 for the first nine months of fiscal 2003. During the first nine months of fiscal 2004, food sales and alcoholic beverage sales represented 71.7% and 28.3% of our total food and beverage sales, respectively. During the first nine months of fiscal 2003, food and alcoholic beverage sales represented 70.1% and 29.9% of our total food and beverage sales, respectively.

Restaurant operating costs.

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Restaurant level operating profit.Restaurant level operating profit increased approximately $2.7 million, or 18.1%, to $17.6 million in the thirty-nine weeks ended March 28, 2004 from $14.9 million in the comparable prior year period. Restaurant level operating profit as a percentage of restaurant sales increased to 11.2% in fiscal 2004 from 11.1% in fiscal 2003 due to the reasons described above.

General and administrative expenses.General and administrative expenses increased $0.8 million, or 10.7%, to $8.3 million in the thirty-nine weeks ended March 28, 2004 from $7.5 million in the comparable prior year period. The increase was the result of higher personnel costs to support growth, bonus expense and computer related costs. The increase was partially offset by lower hiring and recruiting expenses as well as $144,000 of expenses related to a terminated project, a litigation settlement accrual of $241,000 and audit committee legal expenses of $97,000 all incurred in the prior year. General and administrative expenses as a percentage of total revenue decreased to 5.2% for fiscal 2004 from 5.6% in fiscal 2003 as a result of economies of scale associated with higher revenues.

Pre-opening expenses. Pre-opening expenses were $1.6 million for the thirty-nine weeks ended March 28, 2004 and $2.1 million for the comparable prior year period. Pre-opening expenses as a percentage of revenue were 1.1% for fiscal 2004 and 1.6% for fiscal 2003. Pre-opening expenses have historically been approximately $0.4 million per location. We opened six restaurants in the first nine months of fiscal 2004 and five restaurants in the first nine months of fiscal 2003. The average restaurant pre-opening cost was significantly lower in 2004 versus 2003 because of timings of openings, openings in existing markets, and better management of the expense.

Other (income) expense. Other expense decreased to $0.1 million in the first nine months of fiscal 2003 from $0.2 million in the comparable prior year quarter. The decrease was due to fewer losses on asset replacements.

Interest expense and income, net. Interest expense and income, net was approximately $1.8 million in the first three quarters of fiscal 2004 and $1.3 million in fiscal 2003. The increase resulted primarily from higher interest expense associated with the issuance of $15.0 million of 5.5% convertible notes in December 2002 and $4.5 million of new borrowings in the first quarter of fiscal 2004 partially offset by the prepayment of approximately $5.2 million of notes payable before scheduled maturity in December 2002.

Expenses related to predecessor companies. Expenses related to predecessor companies totaled $0.3 million for both the thirty-nine weeks ended March 28, 2004 and the comparable prior year period. The expenses relate to adjustments to the liabilities for the McCrae vs. Daka litigation as a result of the appeal decision (see Note 4 to the financial statements) and on-going litigation costs partially offset by a reduction in the liability for the State of Florida proposed tax assessment due to the actual settlement of the proposed assessment.

Debt extinguishment costs. Debt extinguishment costs of $0.3 million were incurred for the thirty-nine weeks ended March 30, 2003 as a result of the repayment of $5.2 million of notes payable before their scheduled maturity. A minimal amount of debt extinguishment costs were incurred in fiscal 2004.

Income before income taxes. Income before income taxes increased $2.4 million, or 68.6%, to $5.9 million for the thirty-nine weeks ended March 28, 2004 from $3.5 million in the comparable prior year period for the reasons described herein.

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Income tax expense. For the thirty-nine weeks ended March 28, 2004, we recorded an income tax expense of $1.4 million, or an effective income tax rate of approximately 24%, versus $0.2 million, or an effective income tax rate of approximately 7%, in the comparable prior year period. The higher effective income tax rate for the thirty-nine weeks ended March 28, 2004, resulted from the reversal of the valuation allowance on the Company’s deferred tax assets in fourth quarter of fiscal 2003. This resulted in the recognition of tax expense at statutory rates for fiscal 2004. The effective income tax rate for fiscal 2004 primarily reflects a 41% effective state and federal income tax rate partially offset by a deferred tax benefit of approximately 15% for FICA tip credits. Although we recognized an income tax expense of 24%, we anticipate paying income taxes of only 9% because of our ability to utilize net operating loss carryforwards to offset taxable federal income.

LIQUIDITY AND CAPITAL RESOURCES

As of March 28, 2004, our unrestricted cash balance was $11.7 million and our restricted cash balance was $0.1 million. The restricted cash balance primarily serves as collateral for performance obligations. Our working capital needs are generally low, as sales are made for cash or through credit card that are quickly converted to cash, and purchases of food and supplies and other operating expenses are generally paid within 30 to 60 days after receipt of invoices and labor costs are paid bi-weekly. This is consistent with other companies engaged in the restaurant industry.

For the nine months ended March 28, 2004, we generated cash flow from operating activities of $13.9 million compared to $8.1 million for the prior year comparable period. The increased cash flow from operating activities was due largely to our improved profitability and increased cash from working capital changes.

Capital expenditures before tenant improvement allowances were $13.3 million for the nine months ended March 28, 2004 and $15.6 million for the nine months ended March 30, 2003. Tenant improvement allowances are reimbursements received from certain of our landlords for a portion of initial construction expenditures. Capital expenditures for fiscal 2004 were comprised of $9.8 million for new restaurants, $1.8 million for existing restaurant improvements and replacements, $1.4 million for the purchase of equipment previously under an operating lease and $0.3 million for corporate related capital expenditures. Funding for expansion during fiscal year 2004 and fiscal year 2003 was generally provided through available cash balances, use of build-to-suit facilities, equipment financing and tenant improvement allowances. Additionally, in fiscal 2003, funding was supplemented with the issuance of $15.0 million of convertible subordinated notes and related warrants.

Capital expenditures for the balance of fiscal year 2004 are anticipated to be approximately $3.0 million, before tenant improvement allowances, based upon current estimates. These expenditures will primarily be for the construction of one new restaurant expected to open in the fourth quarter of fiscal 2004, for upgrades to existing restaurants and for the start of construction on two restaurants expected to open in the first half of fiscal 2005. We review our capital expenditures budget on a monthly basis and amounts are subject to change.

During the first nine months of fiscal 2004, we received tenant improvement allowances of approximately $3.9 million. We are anticipating tenant improvement allowances of approximately $0.5 million for the remainder of fiscal 2004 for projects already completed.

We have a build-to-suit facility with AEI Fund Management, Inc. This agreement provides a commitment for the completion of seven new restaurants with an additional funding commitment of $24.5 million. At March 28, 2004, we had completed the construction of two restaurants under this commitment located in Houston, Texas and Cincinnati, Ohio. The third restaurant to be completed under this commitment will be in Orland Park, Illinois and is expected to open in May 2004. The commitment expires the earlier of November 30, 2005 or upon AEI’s acceptance or rejection of seven total restaurant sites. The funding of this build-to-suit facility is subject to various pre-closing conditions.

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At March 28, 2004, we had a bank credit facility under which we could borrow up to $8,000,000. The facility had two components: $2,000,000 was available to provide short-term working capital and to support the issuance of letters of credit; the remaining $6,000,000 was available to provide interim financing associated with construction of new restaurant locations. We cancelled the $6,000,000 interim construction financing facility in April 2004 as a result of the placement of a new facility with a new lender. The working capital facility expires on January 2005 at which time all outstanding borrowings are due. In July 2003, we borrowed $350,000 under the construction facility that was repaid in September 2003. As of March 28, 2004, we had no outstanding borrowings under these facilities but had placed letters of credit of $1,767,000 under the working capital facility.

In September 2002, we entered into a $5,000,000 five-year term loan facility with GE Capital. This facility is collateralized with equipment. We borrowed $500,000 of the funds in fiscal 2003 and the $4,500,000 balance during the first quarter of fiscal 2004.

During the third quarter of fiscal 2004, we elected to prepay $1.0 million of a five-year equipment term loan and $0.8 million of our remaining equipment capital lease obligations. These repayments were made with available excess cash.

In March 2004, we obtained a three-year $25,000,000 senior secured credit facility with a new lender, LaSalle Bank. We intend to use the facility to refinance certain of our existing debt, support growth and general working capital needs and provide up to $5,000,000 for the issuance of letters of credit. The facility is secured by a blanket lien on all personal assets and real property of the Company. Borrowings under the facility will bear interest depending on a Total Funded Debt to EBITDA ratio and will range from prime to prime plus 50 basis points or, if elected, LIBOR plus 200 to 300 basis points. We paid an up-front fee of $188,000 and are required to pay an annual unused commitment fee of 37.5 basis points to 50 basis points. Outstanding borrowings under the facility may be converted to a five-year term loan if the ratio of Senior Debt to EBITDA exceeds specified levels. The facility requires the Company to maintain a minimum Fixed Charge Coverage Ratio and Tangible Net Worth level and not exceed thresholds for Total Funded Debt to EBITDA and Total Senior Debt to EBITDA ratios. The facility limits the opening of new restaurants to a maximum of twenty-four over a three year period and also limits the amount of dividends and/or stock repurchases. As of March 28, 2004, the Company had no outstanding borrowings under this facility, however, as of April 29, 2004, the Company had $3.0 million of borrowings under the facility.

In the fourth quarter of fiscal 2004, we elected to prepay $13.4 million of our existing debt to significantly reduce our annual interest costs. The funds to prepay the debt came from excess cash and borrowings under the new $25 million senior secured bank credit facility. Prepayment penalties of approximately $500,000 and a $100,000 write-off of unamortized deferred financing fees will be recorded as a result of prepaying the debt before its scheduled maturity.

There may be cash payments during the next twelve months associated with liabilities previously recorded and related to the sale of predecessor companies. Such liabilities include prior year insurance claims, litigation associated with predecessor companies and potential legal settlements. While we expect the total cash payments for these liabilities to be less than $50,000, the amounts could be considerably higher depending on the outcome of the DAKA punitive damage proceeding. This issue is discussed in Note 4 to the consolidated financial statements. During the first nine months of fiscal 2004, we expended approximately $0.9 million related to these liabilities.

We believe that the available funding for our expansion, other capital expenditures, required debt service requirements and other working capital needs for the next twelve months will be sufficient. The funding is anticipated to be provided from cash flows from operations, tenant improvement allowances and our credit sources including the new $25 million senior secured bank credit facility. Although we do not believe it is likely, in the event that such funds are not available, we have the ability to curtail our expansion program, draw on funds available under our credit facility and reduce non-essential operating costs to conserve working capital.

Inflation and changing prices have had no measurable impact on net sales and revenue or income during the last three fiscal years.

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Contractual obligations

Payments, including interest, due by period as of March 28, 2004
(in thousands)