Ruths Hospitality Group, Inc. - Quarter Report: 2005 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 25, 2005

OR

For the transition period from              to             

Commission File Number 000-51485

Ruth’s Chris Steak House, Inc.

(Exact name of registrant as specified in its charter)

(407) 333-7440

Registrants telephone number, including area code

Former name, former address and former fiscal year, if changed since last report.

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 Exchange Act Rule 12b-2).    Yes  ¨    No  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s common stock as of November 14, 2005, was 23,015,788.

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CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Quarterly Report on Form 10-Q and the materials incorporated by reference contain “forward-looking statements” that reflect, when made, the Company’s expectations or beliefs concerning future events that involve risks and uncertainties. Forward-looking statements frequently are identified by the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “will be,” “will continue,” “will likely result,” or other similar words and phrases. Similarly, statements herein that describe our objectives, plans or goals also are forward-looking statements. Actual results could differ materially from those projected, implied or anticipated by the Company’s forward-looking statements. Some of the factors that could cause actual results to differ include: the impact of adverse weather conditions, including the impact of Hurricane Katrina, on the Company’s operations; changes in economic conditions and trends generally; changes in consumer preferences or discretionary spending; the effect of competition in the restaurant industry; the Company’s ability to achieve market acceptance, particularly in new

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markets; the Company’s ability to achieve and manage its planned expansion; the Company’s ability to execute its business strategy effectively; health concerns about beef or other food products; reductions in the availability of, or increases in the cost of, USDA Prime grade beef and other food items; labor shortages or increases in labor costs; the impact of federal, state or local government regulations relating to Company employees, the sale or preparation of food, the sale of alcoholic beverages and the opening of new restaurants; harmful actions taken by the Company’s franchisees; the Company’s ability to protect its name and logo and other proprietary information; the impact of litigation; and the loss of key management personnel. For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in the Company’s registration statement on Form S-1 (File No. 333-124285) filed by the Company under the Securities Act of 1933, as such Registration Statement became effective on August 8, 2005, as well as the Company’s other filings with the Securities and Exchange Commission (the “SEC”), all of which are available on the SECs website at www.sec.gov. All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update this Quarterly Report on Form 10-Q to reflect events or circumstances after the date hereof.

Unless the context otherwise indicates, all references in this report to the “Company,” “Ruth’s Chris,” “we,” “us” or “our” or similar words are to Ruth’s Chris Steak House, Inc., and its direct wholly owned subsidiaries. Ruth’s Chris Steak House, Inc. is a Delaware corporation, and was founded in 1965.

In August 2005, we completed a 20.75281-for-1 split of our common stock. All prior share and per share amounts included in this report give retroactive effect to the stock split.

Stockholders and other security holders or buyers of our securities or our other creditors should not assume that material events subsequent to the date of this report have not occurred.

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PART 1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

RUTH’S CHRIS STEAK HOUSE, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(dollar amounts in thousands, except share data)

See accompanying notes to condensed consolidated financial statements.

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RUTH’S CHRIS STEAK HOUSE, INC. AND SUBSIDIARIES

Condensed Consolidated Income Statements - Unaudited

(dollar amounts in thousands, except share and per share data)

See accompanying notes to condensed consolidated financial statements.

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RUTH’S CHRIS STEAK HOUSE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity (Deficit)

(dollar and share amounts in thousands)

See accompanying notes to condensed consolidated financial statements.

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RUTH’S CHRIS STEAK HOUSE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows - Unaudited

(dollar amounts in thousands)

See accompanying notes to condensed consolidated financial statements.

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RUTH’S CHRIS STEAK HOUSE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share data)

(1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Ruth’s Chris Steak House, Inc. and its subsidiaries (together, the “Company”) as of September 25, 2005 and December 26, 2004 and for the quarters and nine months ended September 25, 2005 and September 26, 2004 have been prepared by the Company, pursuant to the rules and regulations of the SEC. Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reporting of revenue and expenses during the period to prepare these condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill, and obligations related to workers’ compensation, general liability and property insurance. Actual results could differ from those estimates.

The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. The interim results of operations for the fiscal quarters ended September 25, 2005 and September 26, 2004, respectively, are not necessarily indicative of the results that may be achieved for the full year. Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the registration statement on Form S-1 (File No. 333-124285) filed by the Company under the Securities Act of 1933, as such registration became effective on August 8, 2005, and all of the Company’s other filings with the SEC from August 8, 2005 through the current date pursuant to the Securities and Exchange Act of 1934.

The Company operates on a 52 or 53 week fiscal year ending on the last Sunday in December. The fiscal quarters ended September 25, 2005 and September 26, 2004 each contained 13 weeks and are referred to herein as the third quarter of fiscal 2005 and the third quarter of fiscal 2004, respectively. When combined, the first, second and third quarters of each fiscal year are referred to as the first thirty-nine weeks of fiscal 2005 and the first thirty-nine weeks of fiscal 2004, respectively.

(2) Stock-Based Employee Compensation

The Company applies the intrinsic-value-based method of accounting prescribed by the Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, (“APB No. 25”) and related interpretations including Financial Accounting Standards Board (“FASB”) Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, (“SFAS No. 123”) and SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by existing accounting standards, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123, as amended. The following table illustrates the effect on net income adjusted for pro forma provision for income taxes if the fair-value-based method had been applied to all outstanding and unvested awards in each period.

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RUTH’S CHRIS STEAK HOUSE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements – (Continued)

(in thousands, except share and per share data)

(3) Recent Accounting Pronouncements

In December of 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” which replaces the requirements under SFAS No. 123 and APB No. 25. The statement sets accounting requirements for “share-based” compensation to employees, including employee stock purchase plans, and requires all share-based payments, including employee stock options, to be recognized in the financial statements based on their fair value. It carries forward prior guidance on accounting for awards to non-employees. The accounting for employee stock ownership plan transactions will continue to be accounted for in accordance with Statement of Position (SOP) 93-6, while awards to most non-employee directors will be accounted for as employee awards. This Statement is effective for public companies that do not file as small business issuers as of the beginning of their first annual period beginning after June 15, 2005 (effective December 26, 2005 for the Company). The Company has not yet determined the effect the new Statement will have on the consolidated financial statements as it has not completed its analysis; however, the Company expects the adoption of this Statement to result in a reduction of net income that may be material.

In May, 2005, the FASB issued Statement of Financial Accounting Standards No. 154 “Accounting Changes and Error Corrections: a replacement of APB Opinion No. 20 and FASB Statement No. 3.” Statement 154 requires retrospective application for voluntary changes in accounting principle unless it is impracticable to do so. The requirements are effective for accounting changes made in fiscal years beginning after December 12, 2005. The Company has assessed the impact of Statement 154, and does not expect it to have an impact on its financial position, results of operations or cash flows.

(4) Notes Payable and Long-term Debt

Long-term debt consists of the following:

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RUTH’S CHRIS STEAK HOUSE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements – (Continued)

(in thousands, except share and per share data)

On March 11, 2005, the Company entered into a financing agreement with a syndicate of commercial banks and other institutional lenders. The financing consisted of a $105.0 million term loan facility and a $15.0 million revolving credit facility. At September 25, 2005, the interest rates on the term loan facility and revolving credit facility were 6.25%. The term loan interest and fees are payable monthly and the principal is payable in quarterly payments ranging from $829 to $2,579 commencing June 30, 2005, with the remaining unpaid balance due on March 11, 2011. The revolving credit facility interest and fees are payable monthly and all outstanding amounts are due upon maturity at March 11, 2010.

As of September 25, 2005, there were $35.5 million of borrowings outstanding under the term loan facility and $3.0 million of borrowings under the revolving credit facility. The Company had approximately $10.7 million of borrowings available under its revolving credit facility, net of outstanding letters of credit of approximately $1.3 million. The Company is required to maintain certain financial covenants and is also subject to restrictive covenants under its borrowings. The Company was in compliance with all such covenants at September 25, 2005. The Company’s obligations under these credit facilities are guaranteed by each of its existing and future subsidiaries and are secured by substantially all of its assets and the capital stock of its subsidiaries.

(5) Earnings (Loss) Per Share

Basic earnings per common share were computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the applicable period. Basic and diluted earnings per common share were determined on the assumption that all outstanding warrants were exercised as of the beginning of each period. For the quarter and thirty-nine weeks ended September 26, 2004, options to purchase 1,133,925 shares of the Company’s common stock at a weighted average price of $0.48 per share were not included in the calculation of weighted average shares for diluted earnings per share because their effects were anti-dilutive.

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

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RUTH’S CHRIS STEAK HOUSE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements – (Continued)

(in thousands, except share and per share data)

On August 1, 2005, the Company completed a 20.75281-for-1 split of the Company’s common stock. Accordingly, basic and diluted shares for all periods have also been calculated based on the weighted average shares outstanding, as adjusted for the stock split.

(6) Commitments and Contingencies

The Company has guaranteed the operating lease for the franchisee-owned restaurant in Detroit, Michigan. The operating lease requires annual minimum lease payments of $0.2 million through August 2010, the expiration of the first renewal term, and through one subsequent renewal term, which option may be exercised by the franchisee.

The Company is subject to other various claims, possible legal actions, and other matters arising in the normal course of business. Management does not expect disposition of these other matters to have a material adverse effect on the financial position, results of operations or liquidity of the Company.

(7) Discontinued Operations

On December 24, 2004, the Company closed its Manhattan-UN operation, one of its two Ruth’s Chris Steak House locations in Manhattan, New York. Prior to and including 2004, the Company experienced operating losses at its Manhattan-UN restaurant location, which leased the property on which it operated. During August 2005, the Company entered into an agreement with the landlord whereby: (1) the Company made a one-time payment of $0.3 million to the landlord for rent, commission on replacement lease, and attorneys fees; (2) the existing lease was terminated; (3) the Company allowed the landlord to contract with a third party replacement tenant; and (4) adjusted the remaining contingent lease term from eleven years to six years. Under the agreement, after the third anniversary, if the replacement tenant defaults on the new lease anytime during the remaining six years, the Company will be required to enter into a new agreement with the landlord for the remaining term. At September 25, 2005, the Company maintained a contingent lease liability of $0.2 million related to this property.

In October 2004, the Company announced its plan to close its Ruth’s Chris Steak House location in Sugar Land, Texas, where it owned the property on which it operated. The Company recorded a pre-tax charge of $80 as a result of loss due to impairment in order to reduce the assets related to this location to net realizable value. Subsequent to year-end, the Company sold this property for $2.1 million.

The Company accounts for its closed restaurants in accordance with the provisions of SFAS No. 144. Therefore, when a restaurant is closed, and the restaurant is either held for sale or abandoned, the restaurant’s operations are eliminated from the ongoing operations. Accordingly, the operations of such restaurants, net of applicable income taxes, are presented as discontinued operations and prior period operations of such restaurants, net of applicable income taxes, are reclassified.

Discontinued operations consist of the following:

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RUTH’S CHRIS STEAK HOUSE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements – (Continued)

(in thousands, except share and per share data)

(8) Subsequent Events

On September 27, 2005, the Company entered into a new credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent, Bank of America, N.A., as documentation agent, and JPMorgan Chase Bank, National Association and Wells Fargo Bank, National Association as co-lead arrangers and Wachovia Bank, N.A. The Company used the $38.5 million funded at closing under the Credit Agreement to prepay and retire borrowings under its previous credit facility and to pay related fees and expenses. In conjunction with the Credit Agreement, the Company will expense approximately $0.8 million in deferred issuance cost from the prior credit facilities.

At September 27, 2005, interest rates on the revolving credit facility, were 5.54%. The Credit Agreement requires the Company to maintain certain financial covenants and the Company is also subject to certain restrictive covenants. The Company was in compliance with all such covenants at September 27, 2005. The Company’s obligations under the Credit Agreement are guaranteed by each of its existing and future subsidiaries and are secured by substantially all of its assets and the capital stock of its subsidiaries.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The Company is an owner, operator and franchisor of upscale steakhouses. As of September 25, 2005, there were 88 (excluding the two New Orleans, Louisiana area restaurants closed due to Hurricane Katrina) Ruth’s Chris Steak House restaurants, of which 39 are company-owned and 49 are franchisee-owned, including ten international franchisee-owned restaurants in Mexico, Hong Kong, Taiwan and Canada.

The Company’s registration statement on Form S-1 (File No. 333-124285), filed by the Company under the Securities Act of 1933, as such registration statement became effective on August 8, 2005, provides additional information about the Company’s business, operations and financial condition.

Initial Public Offering

In August 2005, the Company and selling shareholders completed an initial public offering of 9,375,000 and 5,575,000 shares of common stock, respectively, at $18.00 per share. The Company received net proceeds of approximately $154.3 million from the sale of shares of its common stock in the offering after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by it. The Company used the net proceeds of the offering as follows: (1) approximately $11.7 million was used to redeem all of its outstanding mandatorily redeemable Series A senior cumulative preferred stock (the “Senior Preferred Stock”), (2) approximately $76.2 million to redeem or repurchase all of its outstanding Series B junior cumulative preferred stock (the “Junior Preferred Stock”), (3) approximately $65.5 million was used to repay a portion of the outstanding indebtedness under its senior credit facilities and (4) $0.8 million was used for general working capital needs of the Company.

Hurricane and Relocation Costs.

During the third quarter of fiscal 2005, the Company’s corporate office building in Metairie, Louisiana was damaged by Hurricane Katrina and the Company subsequently relocated its corporate offices to Orlando, Florida. The Company’s restaurants in New Orleans and Metairie, Louisiana, also received damage from the hurricane and have not yet reopened. The Company completed the construction and preopening activities for a new restaurant in Biloxi, Mississippi, which was also lost due to Hurricane Katrina. Related to these events, the Company incurred expenses of $1.2 million in the third quarter of fiscal 2005. These expenses include severance and relocation payments to employees and insurance deductibles for the two New Orleans, Louisiana area restaurants; severance payments, insurance deductibles and preopening costs associated with the Biloxi, Mississippi location; and temporary living and relocation costs for the Company’s relocation from Metairie, Louisiana to Orlando, Florida. The Company expects the total costs of the hurricane and relocation to be approximately $2.2 million excluding proceeds from business interruption insurance.

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Results of Operations

The table below sets forth certain operating data expressed as a percentage of total revenues for the periods indicated. The Company’s historical results are not necessarily indicative of the operating results that may be expected in the future.

Third Quarter of Fiscal 2005 (13 Weeks) Compared to Third Quarter of Fiscal 2004 (13 Weeks)

Restaurant Sales. Restaurant sales increased $3.8 million, or 9.5%, to $43.9 million in the third quarter of fiscal 2005 from $40.1 million in the third quarter of fiscal 2004. The increase in restaurant sales was due primarily to a $4.0 million increase in sales from restaurants open throughout both periods, representing comparable company-owned restaurant sales growth of 10.7%, together with $0.3 million from the opening of one company-owned restaurant, and partially offset by the closing of two restaurants in New Orleans, Louisiana, due to Hurricane Katrina. Approximately 40% of this increase in comparable company-owned restaurant sales was attributable to increased entrée volume, with the remainder caused by increased per entrée spending driven by a shift in meal period and mix as well as an approximate 3% pricing increase during August 2005.

Franchise Income. Franchise income increased $0.4 million, or 19.0%, to $2.5 million in the third quarter of fiscal 2005 from $2.1 million in the third quarter of fiscal 2004. The increase in franchise income was due to a $1.2 million increase in franchisee-owned restaurant sales from the franchisee-owned restaurants open throughout both periods,

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representing a comparable franchisee-owned restaurant sales growth of 3.0%, an $1.0 million sales increase from two relocated franchisee-owned restaurants, and an additional $2.5 million of sales from the opening of three new franchisee-owned restaurants.

Food and Beverage Costs. Food and beverage costs increased $0.4 million, or 2.8%, to $13.7 million in the third quarter of fiscal 2005 from $13.3 million in the third quarter of fiscal 2004. As a percentage of restaurant sales, food and beverage costs decreased to 31.2% in the third quarter of fiscal 2005 from 33.2% in the third quarter of fiscal 2004. This decrease in food and beverage costs as a percentage of restaurant sales was due to lower meat, dairy and produce costs.

Restaurant Operating Expenses. Restaurant operating expenses increased $2.3 million, or 11.9%, to $21.7 million in the third quarter of fiscal 2005 from $19.4 million in the third quarter of fiscal 2004. The increase was due to higher restaurant sales in the third quarter of fiscal 2005, increased management staffing related to new restaurant openings, employee benefit costs, and utility costs. As a result, restaurant operating expenses as a percentage of restaurant sales increased to 49.4% in the third quarter of fiscal 2005 from 48.5% in the third quarter of fiscal 2004.

Marketing and Advertising. Marketing and advertising expenses decreased $1.0 million, or 63.5%, to $0.6 million in the third quarter of fiscal 2005 from $1.6 million in the third quarter of fiscal 2004. Marketing and advertising expenses as a percentage of total revenues decreased to 1.3% in the third quarter of fiscal 2005 from 3.8% in the third quarter of fiscal 2004. This decrease was due primarily to reduced national radio advertising during the third quarter of fiscal 2005.

General and Administrative. General and administrative costs increased $0.9 million, or 32.1%, to $3.7 million in the third quarter of fiscal 2005 from $2.8 million in the third quarter of fiscal 2004. General and administrative costs as a percentage of total revenues increased to 8.0% in the third quarter of fiscal 2005 from 6.7% in the third quarter of fiscal 2004. This increase was primarily due to the recruitment and hiring of several key management personnel in the areas of construction, franchise relations and marketing in the later part of fiscal 2004 as well as the addition of certain public-company expenses.

Depreciation and Amortization. Depreciation and amortization expense remained constant during the third quarter of fiscal 2005 from the third quarter of fiscal 2004 at $1.6 million. This stability was due primarily to the fact that levels of new investment in furniture and equipment were similar to levels of previously purchased furniture and equipment becoming fully depreciated, as well as the fact that the Company did not open any restaurants during fiscal 2004.

Interest Expense, net. Interest expense, net of interest income, decreased $0.8 million, or 33.7%, to $1.4 million in the third quarter of fiscal 2005 from $2.2 million in the third quarter of fiscal 2004. This decrease was primarily due to the refinancing of the Company’s credit facility in March 2005 that resulted in a lower weighted average interest rate and lower average borrowings outstanding during the third quarter of fiscal 2005 from the third quarter of fiscal 2004. Total debt decreased by $50.5 million from September 26, 2004 to September 25, 2005.

Accrued Dividends and Accretion on Mandatorily Redeemable Senior Preferred Stock. Accrued dividends and accretion on mandatorily redeemable senior preferred stock decreased $0.9 million, or 74.5%, to $0.3 million in the third quarter of fiscal 2005 from $1.2 million in the third quarter of fiscal 2004. This decrease was primarily due to the redemption of $30.0 million of Senior Preferred Stock in March 2005 and the redemption of the remaining $11.7 million in August 2005.

Income Tax Expense. Income tax expense increased to $0.7 million in the third quarter of fiscal 2005 from a $3 thousand income tax benefit in the third quarter of fiscal 2004 due to an increase in income before income tax and an increase in the estimated annual effective tax rate resulting from changes to certain state tax laws impacting deferred tax assets.

Income from Continuing Operations. Income from continuing operations increased $0.9 million to $0.9 million in the third quarter of fiscal 2005 from $21 thousand net loss in the third quarter of fiscal 2004.

Discontinued Operations, net of Income Tax Benefit. Discontinued operations provided a $0.3 million recovery in the third quarter of fiscal 2005 from a $3.3 million expense in the third quarter of fiscal 2004. During August 2005, the Company entered into an agreement with the Manhattan-UN, New York landlord whereby: (1) the Company

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made a one-time payment of $0.3 million to the landlord for rent, commission on replacement lease, and attorneys fees; (2) the existing lease was terminated; (3) the Company allowed the landlord to contract with a third party replacement tenant; and (4) adjusted the remaining contingent lease term from eleven years to six years. Under the agreement, after the third anniversary, if the replacement tenant defaults on the new lease anytime during the remaining six years, the Company will be required to enter into a new agreement with the landlord for the remaining term. This agreement resulted in a reduction of previously recorded rental liability providing a $0.3 million recovery. At September 25, 2005, the Company maintained a contingent lease liability of $0.2 million related to this property. The $3.3 million expense during the third quarter of fiscal 2004 related to impairments recognized related to Manhattan-UN, New York.

First Thirty-nine Weeks of Fiscal 2005 Compared to First Thirty-nine Weeks of Fiscal 2004

Restaurant Sales. Restaurant sales increased $15.2 million, or 11.5%, to $147.6 million in the first thirty-nine weeks of fiscal 2005 from $132.4 million in the first thirty-nine weeks of fiscal 2004. The increase in restaurant sales was due primarily to a $13.7 million increase in sales from restaurants open throughout both periods, representing comparable company-owned restaurant sales growth of 11.0%, together with $1.3 million attributable to one restaurant acquired in April 2004, $0.3 million from the opening of one company-owned restaurant in September 2005, and partially offset by the closing of two restaurants in New Orleans, Louisiana, due to Hurricane Katrina. Approximately 40% of this increase in comparable company-owned restaurant sales was attributable to increased entrée volume with the remainder caused by increased per entrée spending, particularly caused by increased wine and beverage spending.

Franchise Income. Franchise income increased $0.9 million, or 13.0%, to $7.8 million in the first thirty-nine weeks of fiscal 2005 from $6.9 million in the first thirty-nine weeks of fiscal 2004. The increase in franchise income was due to a $6.4 million increase in franchisee-owned restaurant sales from the franchisee-owned restaurants open throughout both periods, representing a comparable franchisee-owned restaurant sales growth of 4.8%, a $2.4 million increase from two relocated franchisee-owned restaurants, and an additional $3.6 million from the opening of three new franchisee-owned restaurants. This increase was partially offset by the Company’s acquisition of one franchisee-owned restaurant and the closing of another franchisee-owned restaurant in April 2004.

Food and Beverage Costs. Food and beverage costs increased $0.1 million, or 0.3%, to $45.8 million in the first thirty-nine weeks of fiscal 2005 from $45.7 million in the first thirty-nine weeks of fiscal 2004. As a percentage of restaurant sales, food and beverage costs decreased to 31.0% in the first thirty-nine weeks of fiscal 2005 from 34.5% in the first thirty-nine weeks of fiscal 2004. This decrease in food and beverage costs as a percentage of restaurant sales was primarily due to lower meat and dairy costs.

Restaurant Operating Expenses. Restaurant operating expenses increased $7.3 million, or 12.0%, to $68.0 million in the first thirty-nine weeks of fiscal 2005 from $60.7 million in the first thirty-nine weeks of fiscal 2004. The increase was primarily due to higher restaurant sales in the first thirty-nine weeks of fiscal 2005, increased management costs, increased benefit costs due to higher participation rates and a non-recurring charge to enhance each restaurant’s small-wares inventory. Restaurant operating expenses as a percentage of restaurant sales increased to 46.1% in the first thirty-nine weeks of fiscal 2005 from 45.8% in the first thirty-nine weeks of fiscal 2004. Excluding the non-recurring charge to enhance the restaurant’s small-wares inventory, restaurant operating expenses as a percentage of restaurant sales remained constant at 45.8%.

Marketing and Advertising. Marketing and advertising expenses increased $0.1 million, or 2.0%, to $5.3 million in the first thirty-nine weeks of fiscal 2005 from $5.2 million in the first thirty-nine weeks of fiscal 2004. Marketing and advertising expenses as a percentage of total revenues decreased to 3.4% in the first thirty-nine weeks of fiscal 2005 from 3.5% in the first thirty-nine weeks of fiscal 2004.

General and Administrative. General and administrative costs increased $2.5 million, or 31.5%, to $10.4 million in the first thirty-nine weeks of fiscal 2005 from $7.9 million in the first thirty-nine weeks of fiscal 2004. General and administrative costs as a percentage of total revenues increased to 6.7% in the first thirty-nine weeks of fiscal 2005 from 5.7% in the first thirty-nine weeks of fiscal 2004. This increase was primarily due to the recruitment and hiring of a new President and Chief Executive Officer as well as several other key management personnel in the areas of human resources, construction, franchise relations and marketing in the latter part of fiscal 2004 as well as the addition of certain public-company expenses.

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Depreciation and Amortization. Depreciation and amortization expense remained constant during the first thirty-nine weeks of fiscal 2005 from the first thirty-nine weeks of fiscal 2004 at $4.8 million. This stability was due primarily to the fact that levels of new investment in furniture and equipment were similar to levels of previously purchased furniture and equipment becoming fully depreciated, as well as the fact that the Company did not open any new restaurants during fiscal 2004.

Interest Expense, net. Interest expense, net of interest income, decreased $0.8 million, or 9.7%, to $7.2 million in the first thirty-nine weeks of fiscal 2005 from $8.0 million in the first thirty-nine weeks of fiscal 2004. This decrease was primarily due to the refinancing of the Company’s credit facility in March 2005, which resulted in a lower weighted average interest rate and lower average borrowings outstanding during the first thirty-nine weeks of fiscal 2005 from the first thirty-nine weeks of fiscal 2004. Total debt decreased by $50.5 million from September 26, 2004 to September 25, 2005. The decrease in interest expense was partially offset by a $1.7 million write-off of remaining debt issuance costs in the first quarter of fiscal 2005.

Accrued Dividends and Accretion on Mandatorily Redeemable Senior Preferred Stock. Accrued dividends and accretion on mandatorily redeemable senior preferred stock decreased $1.7 million, or 47.2%, to $1.9 million in the first thirty-nine weeks of fiscal 2005 from $3.6 million in the first thirty-nine weeks of fiscal 2004. This decrease was primarily due to the redemption of $30.0 million of Senior Preferred Stock in March 2005 and the redemption of the remaining $11.7 million in August 2005.

Income Tax Expense. Income tax expense increased by $2.9 million to $3.3 million in the first thirty-nine weeks of fiscal 2005 from $0.4 million in the first thirty-nine weeks of fiscal 2004 due to an increase in income before income tax and an increase in the estimated annual effective tax rate resulting from changes to certain state tax laws impacting deferred tax assets.

Income from Continuing Operations. Income from continuing operations increased $3.7 million to $7.0 million in the first thirty-nine weeks of fiscal 2005 from $3.3 million in the first thirty-nine weeks of fiscal 2004.

Discontinued Operations, net of Income Tax Benefit. Discontinued operations decreased $3.3 million to $0.4 million in the first thirty-nine weeks of fiscal 2005 from $3.7 million in the first thirty-nine weeks of fiscal 2004. This decrease was primarily due to impairment charges recognized during the third quarter of fiscal 2004 related to Manhattan-UN, New York that closed during the fourth quarter of fiscal 2004.

Liquidity and Capital Resources

The following table presents a summary of the Company’s net cash provided by (used in) operating, investing and financing activities: