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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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 April 3, 2005

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 May 10, 2005:
12,936,988 (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. Financial Statements

CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
As of April 3, 2005 and June 27, 2004 (Restated – Note 3)
(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 April 3, 2005 and March 28, 2004(Restated – Note 3)
(In thousands except per share data)
(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Nine Months Ended April 3, 2005
(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 April 3, 2005
(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 April 3, 2005 and March 28, 2004
(Unaudited)

1. Nature of Business and Basis of Presentation

Nature of Business

As of April 3, 2005, Champps Entertainment, Inc. (the “Company,” “Champps,” “we,” “us,” or “our”) owned and operated 51 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 22 states throughout the United 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 its financial position as of April 3, 2005 and the results of operations for the interim periods ended April 3, 2005 and March 28, 2004. 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 April 3, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending July 3, 2005.

The balance sheet at June 27, 2004 reflects restated balances as a result of the adjustments described in Note 3. This restatement is further explained in our amended annual report on Form 10-K/A for the period ending June 27, 2004 filed with the Securities and Exchange Commission on May 5, 2005.

Forty operating weeks in fiscal 2005 year to date

Champps utilizes a 52/53 week fiscal year ending on the Sunday closest to June 30^th for financial reporting purposes. As a result, fiscal 2004 consisted of a 52 week year divided into four quarters of 13 weeks each. However, fiscal 2005 consists of 53 weeks. Therefore, our first quarter of fiscal 2005 contained 14 weeks while the remaining quarters in the fiscal year contain 13 weeks each. The extra week in fiscal 2005 will impact revenues compared to the prior year period, as well as expenses as a percent of revenues for fixed expenses such as occupancy, depreciation and amortization.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

Reclassifications

Certain reclassifications were made to the consolidated financial statements for prior periods to conform to the April 3, 2005 presentation.

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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 420,700 options to purchase common stock at an exercise price of $7.85 in the first quarter of fiscal 2005.

The Company maintains an Employee Stock Purchase Plan (“The Plan”) under which the employees of the Company may purchase stock at a discount. The Plan requires our employees to make a contribution commitment prior to the start of a quarter and allows the employee to purchase stock at the lower of the closing price at the beginning of the quarter or the end of the quarter less a fifteen percent discount. For the nine months ended April 3, 2005, 20,874 shares of stock had been purchased under this Plan. Historically, we have not recognized an expense for the issuance of our stock at a discount to our employees under the Plan.

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 has been recognized for stock options 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 July 2005 when the Company will be required to comply with the provisions of SFAS No. 123 (R).

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Had compensation expense for our stock option grants and employee stock purchases 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 and SFAS No. 123 (R), our net income (loss) and income (loss) per share would have been as follows:

For the three months and nine months ended April 3, 2005, 1,336,667 and 1,321,790, respectively, of weighted stock options outstanding were anti-dilutive as a result of the proforma loss for the quarter. Therefore, these dilutive options were not considered in the computation of proforma diluted income per share. Had the stock options been dilutive, 265,048 and 226,069, respectively, for the three and nine months ended April 3, 2005, would have been included.

SFAS No. 123 (R) requires the recognition of compensation expense associated with the cost of employee services received in exchange for granting of stock options for the first annual reporting period that begins after June 15, 2005. The compensation expense will be recognized over the service period and will be based upon the grant date fair value of that award.

The Company will recognize additional compensation expense associated with unvested stock option grants at the date of adoption of SFAS No. 123 (R). The Company has not yet determined the financial impact from the adoption of SFAS 123 (R).

Impairment of long lived assets

We evaluate the carrying value of long-lived assets including property, equipment and related identifiable intangible assets quarterly in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Under SFAS No. 144, an assessment is made to determine if the sum of the expected future undiscounted cash flows from the use of the assets and eventual disposition is less than the carrying value. If the sum of the expected undiscounted cash flows is less than the carrying value, an impairment loss is recognized based on fair value.

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We separately evaluate each individual restaurant for impairment. Generally, a restaurant is not evaluated for impairment until it has been open a full six quarters as the initial two quarters of operations are generally characterized by operating inefficiencies associated with start-up operations. However, if business trends are materially down or there is a permanent competitive intrusion at an underperforming new restaurant, we consider four consective quarters of negative cash flow or losses to indicate a potential for an individual restaurant to be impaired. We estimate the future cash flows for such potentially impaired restaurants utilizing such factors as restaurant sales trends, local conditions, demographics and competition, management plans and initiatives and other factors deemed appropriate in the circumstances.

During the quarter ended April 3, 2005, the Company recorded an impairment charge of $6,567,000 as the result of writing-down the asset value of four restaurants.

3. Restatement of Consolidated Financial Statements

Restatement – Accounting for leases

Following a review of its accounting policy, the Company has determined that it had incorrectly calculated its straight-line rent expense, its related deferred rent liability and its depreciation expense and has modified its financial statements to correct this issue. As a result, the Company has restated its financial statements for fiscal 2002, 2003, 2004 and for the first quarter of fiscal 2005.

The issue requiring restatement relates to how the Company has historically defined the lease term for purposes of 1) determining whether a lease is a capital or operating lease, 2) calculating amortization expense on leasehold improvements related to operating leases, 3) calculating straight-line rent expense for leases with rent escalations, and 4) calculating the amortization of lease incentives. The Company has concluded that the accounting literature should have been interpreted to require that the Company use the same lease term for depreciating leasehold improvements as it uses in determining capital versus operating lease classifications and in calculating deferred rent related to the recognition of straight-line rent expense and the amortization of lease incentive payments. The Company has also concluded that the accounting literature should have been interpreted to require the Company to include future rent increases where the future increases include escalation clauses based on the lesser of a specified percentage increase or the change in an index that includes a leverage factor.

The Company has restated its financial statements through the first quarter of fiscal 2005 and has properly accounted for our leases as described above for our second and third quarters of fiscal 2005.

Solely as a result of this restatement, previously reported net income and income per diluted share were reduced by $213,000 or $0.02 per diluted share for the three months ending March 28, 2004 and $592,000 or $0.05 per diluted share for the nine months ending March 28, 2004.

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        The following tables present the changes to the Consolidated Statement of Operations for the three and nine months ended March 28, 2004, the Consolidated Statements of Cash Flows for the nine months ended March 28, 2004 and the Consolidated Balance Sheet for June 27, 2004:

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4. Earnings Per Share

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

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5. Commitments and Contingencies

Letters of Credit

The Company had outstanding letters of credit of $2,606,000 at April 3, 2005 to guarantee its performance primarily related to certain insurance contracts. The letters of credit are irrevocable and have one-year renewable terms.

Indemnifications and Representations Related to Predecessor Companies

In fiscal 1997 in connection with the corporate restructuring of DAKA International, Inc. (“DAKA”), DAKA spun-off its food service business. The remaining corporation continued to own Champps, Fuddruckers and several other restaurant companies and renamed itself Unique Casual Restaurants, Inc. Fuddruckers was sold in 1998 and the other restaurant businesses were either sold or closed during 1998 or 1999, leaving Champps as the only restaurant group. The name of the Company was then changed to Champps Entertainment, Inc. As a result of these transactions, the Company remains responsible for liabilities of DAKA preceding its spin-off, as well as certain indemnification obligations assumed by the Company in connection with the sale of Fuddruckers. Certain matters arising in connection with these obligations are discussed in this section under the headings, “Accrued Insurance Costs,” “Litigation” And “Reserves.” Although the Company has incurred certain expenses in connection with these obligations and retained liabilities in the past, at this time, based upon the circumstances known to us at this time, the Company believes additional claims under these obligations and retained liabilities are unlikely to have a material effect on the Company’s financial position or results of operations.

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 aggregate liability for uninsured claims incurred using certain assumptions that are based upon historical experience. Actual amounts required to settle such obligations may exceed those estimates.

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 liable 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 obligations resulting from the spin-off, including those listed under “Litigation” in this Note, are adequately accrued and are unlikely to have a material effect on the Company’s financial position or results of operations.

Tax Contingencies

From time-to-time, the Company and its predecessors have been party to various assessments of taxes, penalties and interest from federal, state and local agencies. As of April 3, 2005, the Company has no outstanding assessments but has a number of audits in process or about to begin. Tax reserves are accrued based upon our estimates of the ultimate settlement of the contingencies. Actual amounts required to settle those obligations may exceed our estimates.

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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. Other than 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.

In December 2004, the Company settled an action described in the following paragraph 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 heading “Indemnifications and Representations Related to Predecessor Companies”. Based upon the circumstances known to us at this time, and the length of time that has elapsed since the spin-off of DAKA and the sale of Fuddruckers, the Company believes additional claims under these obligations and retained liabilities are unlikely to have a material effect on the Company's financial position or results of operations.

We assumed certain contingent liabilities of DAKA and its subsidiary, Daka, Inc. (“Daka”) in connection with their spin-off. In the third quarter of fiscal 2000, a Washington, D.C. superior court jury awarded a former Daka associate damages related to 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. Daka filed a Notice of Appeal with the Court of Appeals for the District of Columbia. In the third quarter of fiscal 2004, the Court issued its decision affirming the award of compensatory damages and the attorneys’ fees and costs. The Company subsequently paid the compensatory damages and attorneys’ fees, costs and related interest. However, the Court held that the punitive damages award was unconstitutional, vacated the award and remanded the case to the trial court for re-determination of punitive damages in accordance with legal principles outlined in its opinion. In the fourth quarter of fiscal 2004, the trial court re-determined the amount of punitive damages to be $937,500 and we accrued a liability for the full amount of this re-determination. In September 2004, the court awarded additional attorney fees of $301,000 to plaintiff’s attorneys related to the appeal of this matter. We accrued a liability for the full amount of the additional judgment for attorney fees in our first quarter of fiscal 2005. In December 2004, we settled this matter and made a final payment of $1,174,000.

In connection with the spin-off of DAKA in late 1997 we assumed certain contingent liabilities of DAKA and its subsidiaries (see sections entitled “Indemnifications and Representations Related to Predecessor Companies” and Accrued Insurance Costs” in this Note) including liabilities of DAKA’s insurance coverage provided by American International Group, Inc. (“AIG”) or its subsidiaries for the 1994 through 1997 policy periods. DAKA’s insurance coverage included “Large Deductible” workers compensation policies that contained a “Final Premium” section, which set forth AIG’s obligations to determine the “Final Premium” once the policy period ends. While the insurance policies were in place, surety bonds were purchased as collateral for the policies. AIG was also provided with cash collateral in connection with the insurance policies of approximately $2.0 million. Champps eventually replaced the surety bond with an irrevocable standby letter of credit for the payment of claims under the insurance policies however AIG has not released the surety bond. Champps maintains that it has satisfied its obligations under the insurance policies, and that AIG has accepted final payment from Champps as evidenced by a letter agreement between Champps and AIG. AIG asserts that since the policies were with a subsidiary of AIG, the letter agreement is not valid. AIG, through its subsidiaries, has continued to request payments from Champps.

On or about June 24, 2004, Champps filed suit in U.S. District Court for the District of Massachusetts against AIG and National Union Fire Insurance Company of Pittsburgh, PA (“National Union”) as defendants based on the defendants’ failure to release Champps from further liability under the insurance policies and for wrongfully withholding a $526,000 irrevocable standby letter of credit and a surety bond posted in the amount of $526,254.

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On August 9, 2004, National Union filed a motion to compel arbitration against Champps in U.S. District Court for the Southern District of New York based on an Indemnity Agreement containing an arbitration clause. By Order dated December 13, 2004 the New York District Court granted the Motion to Compel Arbitration as to National Union only.

On February 11, 2005, Champps filed an Amended Complaint in Federal District Court for the District of Massachusetts naming AIG as the defendant. On March 3, 2005, AIG filed a Motion to Dismiss Champps’ Amended Complaint due to lack of subject matter jurisdiction based on lack of diversity of citizenship since both Champps and AIG are Delaware corporations, or in the alternative, to stay the action pending arbitration.

On March 24, 2005, Champps filed its Notice of Voluntary Dismissal in the Massachusetts Federal District Court and on March 25, 2005, Champps filed suit in Trial Court of the Commonwealth of Massachusetts naming AIG as defendant based on AIG’s failure to release Champps from further liability under the insurance policies and for wrongfully withholding a $526,000 irrevocable standby letter of credit and a surety bond posted in the amount of $526,254. The matter against AIG is currently pending in Trial Court in the Commonwealth of Massachusetts. The matter involving National Union is currently pending arbitration in New York. Based upon the facts known to us at this time, we do not believe that the outcome of the case will have a material adverse effect on the Company’s financial condition.

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 (in thousands) for the nine months ended April 3, 2005. This liability is included in accrued expenses and other long-term liabilities. While the Company believes its reserves are adequate as of April 3, 2005 based upon its examination of these matters and its experience to date, it cannot assure that the reserves will be sufficient for all future predecessor company liabilities.

Build-to-Suit and Construction Commitments

The Company 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 April 3, 2005 and June 27, 2004, the Company had no construction projects in process that were being financed by AEI.

As of April 3, 2005, the Company had $3.2 million of other contractual construction commitments requiring payments in the next twelve months.

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6.     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 $285,000 and $273,000 which is included in general and administrative expense on the consolidated statements of operations for the nine months ended April 3, 2005 and March 28, 2004, respectively.

7.    Long Term Debt

The following discussion highlights major non-routine changes to the Company’s debt balances for the nine months ended April 3, 2005 and material amounts of borrowing availability under the Company’s credit facility.

The Company previously 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 described below. The working capital facility expired in January 2005. As of April 3, 2005, the Company had no borrowing capacity, no outstanding borrowings and no letters of credit under these facilities.

In March 2004, the Company obtained a three-year $25.0 million senior secured credit facility with LaSalle Bank. We intend to use the facility to support our growth, for general working capital needs and provide up to $5,000,000 for the issuance of letters of credit. In our fourth quarter of fiscal 2004, we had net borrowings under this facility of $2.5 million and we prepaid $15.2 million of our existing debt with these borrowings and our cash balance. The facility is secured by a blanket lien on all personal and real property of the Company. Borrowings under the facility bear interest at variable rates depending on a total funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization prior to preopening expenses, as defined) ratio and range from prime to prime plus 0.5 percent or, if elected, LIBOR plus 2.0 to 3.0 percent. The Company paid an up-front fee of $188,000 and is required to pay an annual unused commitment fee of 0.375 percent to 0.5 percent. Outstanding borrowings under the facility are required to be converted to a five-year term loan if senior debt to EBITDA exceeds specified levels, however, based upon our current senior debt to EBITDA ratio this conversion is not required. The facility also requires the Company to maintain a minimum fixed charge coverage ratio and tangible net worth level. Although the recent recognition of an impairment charge negatively impacts our tangible net worth, we are still in compliance with these debt covenants. 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 that can be made by the Company. As of April 3, 2005, the Company had $1.0 million of outstanding borrowings and had placed letters of credit of $2.6 million under this facility. The available balance under this facility at April 3, 2005 was $21.2 million. However, the use of those proceeds would be restricted to the paydown of current liabilities or for funding capital expenditures.

8. Prepaid Expenses and Other Current Assets

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

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Prepaid rents, real estate taxes and related costs were lower at June 27, 2004 as a result of the period ending date being three days before the end of the month. The rent and real estate tax payments for July 2004 were paid on June 28, 2004 after our period end, while the rent and real estate taxes for April 2005 were paid on April 1, 2005 which was before our period end.

9. Other Assets, Net

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

Available for sale securities decreased as the result of the sale of securities in July 2004. The increase in leasehold rights resulted from the purchase of a leasehold right from our landlord in Addison, Texas during September 2004. Leasehold rights are being amortized on a straight-line basis over the remaining 22 year lease term. This term coincides with the term for which we are depreciating our leasehold improvements and the term we use to calculate straight-line rent.

10. Accrued Expenses and Other Long-Term Liabilities

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

The increase in Other resulted primarily from an accrual for the severance expense of our former CEO of $520.

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

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Tenant improvement allowances represent cash received from certain landlords for initial construction costs and are amortized as a reduction of rent expense on a straight-line basis over the lease term as a reduction in rent. Tenant improvement allowances increased as the result of two tenant improvement allowances received in our second quarter of fiscal 2005.

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

Other primarily represents insurance accruals that we anticipate paying more than 12 months from April 3, 2005.

11. Severance Expense

Our former Chief Executive Officer, President and Chairman of the Board, William H. Baumhauer had an amended Employment Agreement with the Company that entitled Baumhauer to one year continuation of pay in the event of termination. On March 2, 2005, Baumhauer entered into a Separation Agreement (“The Agreement”) with the Company. The Agreement provides for an additional four months of salary after payments under the Employment Agreement would otherwise cease. These additional four months of payments are payable at the discretion of the Board and are contingent upon Baumhauer completing certain obligations to the Company.

12. Income Tax Expense (Benefit)

For the nine months ended April 3, 2005, we recorded a tax benefit of $1,393,000. This benefit primarily consists of income tax benefit at statutory rates of $392,000 based on the loss before taxes of $1,120,000, and a FICA tip tax credit of $965,000. The Company's FICA tip tax credits totaling $7.2 million may be used to offset federal income taxes. The Company determined that it is more likely than not that it would realize the tax benefits of its deferred tax assets based upon projections of future taxable income and the reversal of deferred tax liabilities.

13. Restricted Stock Award

In March 2005, our new Chief Executive Officer, President and Chairman of the Board, Michael P. O’Donnell entered into an employment agreement with Champps Entertainment, Inc. As part of the agreement, 514,680 restricted shares of common stock will be awarded to Mr. O’Donnell over a seven year period. This award is subject to the availability of shares that have been authorized and are available under our 1997 Stock Option and Incentive Plan and our 2003 Stock Option and Incentive Plan. If shares are not available, the Company will seek shareholder approval that would permit the issuance of any shares not granted due to their lack of availability. If the shareholders of the Company fail to approve such resolution by the date any portion of the restricted stock award would otherwise have vested, the Company shall make a cash payment to Mr. O’Donnell equal to the economic value of the vesting shares. Restricted stock awards are expensed ratably over the vesting period. 128,670 shares of the restricted stock award vest on an equal annual basis over a three year period on the anniversary of the grant date. 386,010 shares of the restricted stock award vest on the seventh anniversary of the grant date.

The restricted stock may vest earlier upon a qualifying disability, death, retirement or change in control. The 386,010 share restricted stock award includes a performance element that allows vesting to accelerate if certain Champps share price performance measures are met. Specifically, one-half of this restricted stock award vests over an eight quarter period if the market price of the stock appreciates 200% or more for a sixty consecutive day period prior to the 2nd anniversary of the grant (approximately $18.00 by March 2, 2007). The remainder of the grant vests over an eight quarter period if the market price of the stock appreciates 300% or more for a sixty consecutive day period prior to the 3rd anniversary of the award (approximately $27.00 by March 2, 2008).

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Currently, there are approximately 387,000 shares available under the 1997 Stock Option and Incentive Plan and our 2003 Stock Option and Incentive Plan. A compensation expense totaling $105,000 for the period of March 2, 2005 through April 3, 2005 has been recorded as a liability since there are not enough shares available to fulfill the restricted stock award, and it is not certain that the shareholders will authorize the additional shares to be awarded. The Company is obligated to make a cash payment to Mr. O’Donnell equal to the economic value of the vesting shares if the shareholders do not approve the authorization of additional incentive shares to be issued.

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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 previously filed 2004 Annual Report on Form 10-K/A for the fiscal year ended June 27, 2004, our other 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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Restatement

Following a January 2005 review of the accounting adjustments cited in several recent Form 8-K filings by other restaurant companies, and in consultation with our independent registered public accounting firm, KPMG LLP, we determined that one of the adjustments in those filings relating to the treatment of lease accounting and leasehold depreciation applied to us, and that our prior financial statements contained errors. As a result, we have restated our consolidated financial statements for the fiscal years 2002 through 2004 and for the first quarter of fiscal 2005. Selected financial data for fiscal years 2000 and 2001 have also been restated.

Historically, the Company’s accounting practice consisted of using the initial non-cancelable lease term when determining whether each of its leases was an operating lease or a capital lease and when calculating straight-line rent expense. In accordance with this policy, the Company had depreciated its leasehold improvements over a period that included both the initial non-cancelable term of the lease and its option periods but not longer than the useful life of the asset, if shorter. When accounting for leases with renewal options, we had recorded rent expense on a straight-line basis over the initial non-cancelable lease term. In addition, we previously did not include increases when calculating rent expense for leases where the increases in rent include escalation clauses based on the lesser of a specified percentage increase or the change in an index that includes a leverage factor. We previously believed that these longstanding accounting treatments were appropriate under generally accepted accounting principles. We now have restated our financial statements to use the same lease term for depreciating leasehold improvements as we use in determining capital versus operating lease classifications and in calculating straight-line rent expense. We have restated our financial statements to recognize rent expense on a straight-line basis over the expected lease term, including cancelable option periods where the failure to exercise such options would result in an economic penalty.

We have restated our consolidated financial statements through the first quarter of fiscal 2005 and have properly accounted for our leases as described above for our second and third quarters of fiscal 2005.

Solely as a result of these accounting adjustments, net earnings and earnings per diluted share were reduced by $213,000 or $0.02 per diluted share for the three months ending March 28, 2004 and $592,000 or $0.05 per diluted share for the nine months ending March 28, 2004.

The adjustments made in the restatement are all non-cash in nature and will have no material impact on the Company’s cash flows, cash position, revenues, same-store sales, or compliance with the covenants under its senior credit facility.

The prior period consolidated financial statements included in this Form 10-Q have been restated to reflect the adjustments described above. We have filed an amendment to our Annual Report on Form 10-K/A for the fiscal year ended June 27, 2004 and an amendment to our Quarterly Report on Form 10-Q/A for the quarterly period ended October 3, 2004 prior to the filing of this Form 10-Q.

Impairment

Under SFAS No. 144, an assessment is made to determine if the sum of the expected future undiscounted cash flows from the use of the assets and eventual disposition is less than the carrying value. If the sum of the expected undiscounted cash flows is less than the carrying value, an impairment loss is recognized based on fair value. During our third quarter ended April 3, 2005 the Company recorded an impairment charge of $6.6 million.

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Historically, we evaluate the recoverability of our assets periodically to determine whether the undiscounted projected cash flows associated with each restaurant over the life of their lease are greater than the asset carrying value on our balance sheet. If the undiscounted projected cash flows of an asset, including maintenance capital expenditures, are less than the book value of the assets, we consider whether or not to recognize an impairment expense to write the asset down to its fair market value. Fair market value is estimated as the greater of the sum of the estimated discounted cash flows or the salvage value of the equipment. The total impairment expense recorded in the period ended April 3, 2005 for four under performing restaurants was $6.6 million.

During the quarter ended April 3, 2005, three additional restaurants located in Irvine, California, Skokie, Illinois and Richmond, Virginia were also reviewed for impairment. However, we have not recorded an impairment charge at this time because management believes certain changes can be made to improve the future prospects of those restaurants. We determined that each of these restaurants has the opportunity to improve their cash flows to a level sufficient to cover their asset value once external factors impacting their sales are properly addressed. However, there can be no assurance that we will not experience circumstances in the future that require us to write-down additional assets of these or other restaurants.

Overview

We are a casual dining restaurant chain. As of April 3, 2005, we owned and operated 51, and franchised 12, upscale, full-service, casual dining restaurants under the names Champps Americana, Champps Restaurant and Champps Restaurant and Bar. We operate in 22 states with larger concentrations of our restaurants in the upper Midwest, mid-Atlantic and Texas. We provide 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 approximately 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, 2002, 2003, and 2004, we opened four, six, seven and seven restaurants, respectively. We anticipate opening four restaurants in fiscal 2005. As of April 3, 2005, we had opened three new locations in fiscal 2005 and had one location under construction which we expect to open during our fourth quarter of fiscal 2005. For fiscal 2006, we have begun construction on one new Champps restaurant to be opened in our first quarter, anticipate opening another new restaurant under a joint venture license and management agreement and have signed lease for a site that we intend to open in our third quarter of fiscal 2006. In addition, we are currently negotiating contracts on additional sites for restaurants to be opened in our fourth quarter of fiscal 2006.

Our newer 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 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 average approximately $360,000 per restaurant. Total invested capital includes the cost for the land, building, furniture, fixtures and equipment. Net investment includes only the cash invested and normally consists of the building, furniture, fixtures and equipment partially offset by any tenant improvement allowances received from our landlord.

We are currently investigating the possibility of developing a smaller prototype of approximately 6,500 square feet. This smaller prototype will provide us the opportunity to construct additional restaurants as site availability for this size restaurant is much more prevalent. In addition, we will be able to improve on our economic model as the cost to build these smaller restaurants will be proportionally lower than our existing prototype. Our older restaurants built from 1987 through 1998 have typically ranged in size from 9,000 square feet to 12,000 square feet.

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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 entered into a three-year $25.0 million senior secured 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 borrowings under this senior secured credit facility, although we were subject to prepayment penalties and we recorded a write-off of related debt issuance costs.

For the past several years, we have been expanding the Champps concept. As a result, of this expansion, 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, chicken wings and produce.

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 2004 and 2003, our 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 sales for those years. Factors influencing sales variability in addition to those noted above include the frequency and popularity of sporting events, holidays (including on which day of the week the holiday occurs), seasonality and weather.

Our sales are somewhat dependent upon the timing and viewing of professional and college sporting events such football, basketball and hockey, and to a lesser extent baseball. Work stoppages or lockouts of a professional league can have an adverse impact on our sales. Currently the National Hockey League (“NHL”) is in the midst of a lockout. Although our sales were slightly impacted in the third quarter ended April 3, 2005, we are anticipating an impact to our annual sales of between 0.4 to 0.5 percent as the result of the cancellation of the NHL season. This equates to an annual sales loss of between $1.0 to 1.2 million.

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 the first full month of operation after the restaurant is open 66 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 restaurants, in general.

Our comparable sales trends have been negative for the past three quarters. Although external factors such as the sluggish economy, declining consumer confidence, higher unemployment, decreases in discretionary income, increased competition in some markets and a decline in overall on-premise liquor sales throughout our industry may have had an impact on our sales, a number of our competitors have performed better than Champps relative to comparable sales.

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On March 2, 2005, our former Chief Executive Officer, President and Chairman of the Board, William H. Baumhauer, resigned. Concurrently, the Board of Directors appointed Michael P. O’Donnell our new Chief Executive Officer, President and Chairman of the Board. Mr. O’Donnell has implemented some key strategic initiatives in an effort to improve these negative trends in our comparable sales and our profitability. The initiatives consist of:

The implementation of these initiatives will not have an immediate impact on the profitability of the Company. Although some of the initiatives can implemented quickly, such as a new bonus plan, others may take longer to implement, such as the streamlining of our menu and developing a franchise network. Ultimately we intend to improve the profitability of the Company due to the implementation of these initiatives. However, we may incur additional expenses and capital spending in the near term to achieve our long term objectives.

In March 2005, Michael P. O’Donnell entered into an employment agreement with us. As part of the agreement, 514,680 restricted shares of common stock are to be awarded to Mr. O’Donnell. This award is subject to the availability of shares that have been authorized and are available under our 1997 Stock Option and Incentive Plan and our 2003 Stock Option and Incentive Plan. If shares are not available, the Company will seek shareholder approval that would permit the issuance of any shares not granted due to their lack of availability. If the shareholders of the Company fail to approve such resolution by the date any portion of the Grants would otherwise have vested, the Company shall make a cash payment to Mr. O’Donnell equal to the economic value of the vesting shares. Restricted stock awards are expensed ratably over the vesting period. 128,670 shares of the restricted stock award vest on an equal annual basis over a three year period. 386,010 shares of the restricted stock award vest on the seventh anniversary of the grant date. As a result of this grant, we will incur additional compensation expense and a liability.

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On March 31, 2005, Nathaniel Rothchild and Timothy R. Barakett resigned from the Company’s Board of Directors. In addition, on the same date, the Company elected Karl Okamoto to fill a vacancy on its Board of Directors and reduced the size of the Board of Directors to six.

Food safety issues have received increased media attention over the past few years. 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 managers the procedures to be followed 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 and the South Beach diet have resulted in many restaurant chains incorporating and promoting menu items that incorporate the philosophies of these diets. We responded to this trend by adding a “carb conscious” section to our menu as of June 2004. Sales of our “carb conscious” items have met our expectations.

We have been liable for a loss contingency related to a predecessor company (see Note 5 to our unaudited consolidated financial statements). As a result of recent significant developments, we believe this contingency is resolved. In the second quarter of fiscal 2005 we paid approximately $1.2 million related to the punitive damages judgment and attorney fees award as final settlement for this matter.

Our financial results for the quarter ended April 3, 2005 included:

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 revenues for our restaurants for the first full month of operation after the restaurant is open 66 weeks. For the third quarter of fiscal 2005, 46 of our total 51 restaurants in operation at quarter-end were included in our comparable sales calculation.

Cost of Sales and Operating Expenses — Product costs are composed primarily of food and beverage expenses. Labor costs include direct hourly and management wages, wages during training for our hourly associates, bonuses, workers’ compensation and payroll taxes and benefits for restaurant employees. Other operating expenses include 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. 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.

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Depreciation and Amortization — 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.

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, training wages for our management employees, bonuses and related associate payroll taxes and benefits, travel, temporary housing for our managers in training, information systems, communication expenses, corporate rent and related occupancy and operating costs, corporate depreciation and amortization and professional and consulting fees.