UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K/A

(Amendment No. 1)

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

FOR THE FISCAL YEAR ENDED DECEMBER 25, 2005
COMMISSION FILE NUMBER 0-19924

RARE HOSPITALITY INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

GEORGIA (State or Other Jurisdiction of Incorporation or Organization)		58-1498312 (I.R.S. Employer Identification No.)
8215 ROSWELL ROAD, BLDG 600 ATLANTA, GEORGIA (Address of principal executive offices)		30350 (Zip Code)

770-399-9595
(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act:

COMMON STOCK, NO PAR VALUE
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes þ        No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.

Yes o        No þ

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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

þ Large accelerated filer           o Accelerated filer           o Non-accelerated filer

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

 

 

The aggregate market value of the voting and non-voting common stock held by non-affiliates (assuming for these purposes, but not conceding, that all executive officers and directors are “affiliates” of the Registrant) of the Registrant was approximately $980.1 million based upon the last reported sale price in the Nasdaq National Market of $29.67 as of the last business day of the Registrant’s most recently completed second fiscal quarter.

As of February 28, 2006, the number of shares outstanding of the Registrant’s Common Stock, no par value, was 33,633,722 (excluding 1,951,500 shares held in the Company’s treasury).

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A to the Annual Report on Form 10-K for the fiscal year ended December 25, 2005, which was originally filed with the Securities and Exchange Commission on March 7, 2006, is being filed by RARE Hospitality International, Inc. (the “Company”) solely to present restated consolidated financial statements to reflect the Bugaboo Creek Steak House (“Bugaboo Creek”) operations as discontinued and the retrospective application of the Financial Accounting Standards Board’s (“FASB”) FASB Staff Position 13-1, “Accounting for Rental Costs Incurred During a Construction Period” (“FSP 13-1”).

On September 21, 2006, the Company announced that its Board of Directors had approved exiting the Bugaboo Creek Steak House business through the probable sale of the Bugaboo Creek restaurants and brand. Accordingly, financial results for Bugaboo Creek were presented as discontinued operations for each of the periods presented in the Company’s quarterly report on Form 10-Q for the quarter ended October 1, 2006. At the time of the filing of the Company’s quarterly report on Form 10-Q for the quarter ended October 1, 2006, the Company did not amend its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q to present the Bugaboo Creek operations as discontinued.

On October 6, 2005, the FASB issued FSP 13-1. FSP 13-1 was effective for the Company’s 2006 fiscal year and required rental costs incurred during the construction period associated with ground or building operating leases to be expensed. FSP 13-1 allowed for retrospective application in accordance with FASB Statement No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.” When adopting FSP 13-1, the Company elected to retrospectively apply the provisions of FSP 13-1 to its financial statements for all prior periods.

Prior to the issuance of FSP 13-1, the Company capitalized all rental costs associated with ground or building operating leases during each construction period. Pursuant to FSP 13-1, rental costs associated with ground or building operating leases incurred during construction are now recognized in pre-opening expense — restaurants.

Upon adoption of FSP 13-1 in the first fiscal quarter of 2006, the Company did not amend its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the retrospective application of FSP 13-1 (see note 1 to the consolidated financial statements).

This report on Form 10-K/A amends Items 6, 7 and 8 of the Company’s Annual Report on Form 10-K, for the fiscal year ended December 25, 2005. In the accompanying restated consolidated financial statements, rental costs associated with ground or building operating leases incurred during construction are recognized in pre-opening expense — restaurants and financial results relating to the Bugaboo Creek operations to be divested are presented as discontinued operations.

This document does not reflect events occurring after the filing of the Company’s original Annual Report on Form 10-K or modify or update those disclosures, except as required to reflect the presentation of the Bugaboo Creek operating results as discontinued operations and the effects of the adoption of FSP 13-1.

Forward-Looking Statements

     Certain of the matters discussed in this Form 10-K/A, particularly regarding estimates of the number and locations of new restaurants that RARE Hospitality International, Inc. and its subsidiaries (the “Company”) intend to open during fiscal 2006 and statements included in the section of Management’s Discussion and Analysis of Financial Condition and Results of Operations entitled “OUTLOOK FOR FUTURE OPERATING RESULTS,” constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements regarding the intent, belief or current expectations of the Company and members of its Management team, as well as assumptions on which such statements are based. All forward-looking statements in this Form 10-K/A are based upon information available to the Company on the date of this report.

Forward-looking statements involve a number of risks and uncertainties, and in addition to the factors discussed elsewhere in this Form 10-K/A, other factors that could cause actual results, performance or developments to differ materially from those expressed or implied by those forward-looking statements include the following: the ability of the Company to execute capital structure and other initiatives intended to enhance long-term shareholder value; the ability of the Company to obtain financing on terms acceptable to the Company and maintain compliance with the covenants included in such financing; the ability of the Company to repurchase its shares in the expected number and at prices that would be accretive to the Company’s financial results; the ability of the Company to effect the sale of its Bugaboo Creek Steak House restaurants on acceptable terms; failure of facts to conform to necessary Management estimates and assumptions regarding financial and operating matters; the Company’s ability to identify and secure suitable locations for new restaurants on acceptable terms, open the anticipated number of new restaurants on time and within budget, achieve anticipated rates of same store sales, hire and train additional restaurant personnel and integrate new restaurants into its operations; the continued implementation of the Company’s business discipline over a large and growing restaurant base; increases in the cost of construction of new restaurants; unexpected increases in cost of sales or employee, pre-opening or other expenses; the economic conditions in the new markets into which the Company expands and possible uncertainties in the customer base in these areas; fluctuations in quarterly operating results; seasonality; unusual weather patterns or events; changes in customer dining patterns; the impact of any negative publicity or public attitudes related to the consumption of beef or other products sold by the Company; unforeseen increases in commodity pricing; disruption of established sources of product supply or distribution; competitive pressures from other national and regional restaurant chains; legislation adversely affecting the restaurant industry, including (without limitation) minimum wage and mandatory healthcare legislation; business conditions, such as inflation or a recession, or other negative effect on dining patterns, or some other negative effect on the economy, in general, including (without limitation) war, insurrection and/or terrorist attacks on United States soil; growth in the restaurant industry and the general economy; changes in monetary and fiscal policies, laws and regulations; and the risks set forth in this Form 10-K/A and other risks identified from time to time in the Company’s SEC reports, registration statements and public announcements. Any forward-looking statement speaks only as of the date on which it was made, and the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

RARE HOSPITALITY INTERNATIONAL, INC.

INDEX

						Page
Part II
Item 6.				Selected Financial Data			4
Item 7.				Management’s Discussion and Analysis of Financial Condition and Results of Operations			6
Item 8.				Financial Statements and Supplementary Data			18
Signatures							41
EX-23.(1) CONSENT OF KPMG LLP
EX-31.(1) SECTION 302 CERTIFICATION OF PEO
EX-31.(2) SECTION 302 CERTIFICATION OF PFO
EX-32.(1) SECTION 906 CERTIFICATION OF PEO
EX-32.(2) SECTION 906 CERTIFICATION OF PFO

     ITEM 6. SELECTED FINANCIAL DATA

     The following presents selected consolidated financial data as of and for each of the fiscal years in the five-year period ended December 25, 2005. The Consolidated Financial Statements as of December 25, 2005 and December 26, 2004 and for each of the fiscal years in the three-year period ended December 25, 2005 and the independent registered public accounting firm’s report thereon are included in this Form 10-K/A. The selected consolidated financial data has been restated to reflect the Bugaboo Creek operations as discontinued and the retrospective application of the adoption of FASB Staff Position 13-1, “Accounting for Rental Costs Incurred During a Construction Period.” All share and per share amounts have been restated to give retroactive effect to the Company’s 50% stock dividend in 2003 (see Note 1 to consolidated financial statements). The data should be read in conjunction with the Consolidated Financial Statements of the Company and related notes in this Form 10-K/A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” also included in this Form 10-K/A.

		FISCAL YEARS ENDED
		DEC 25,				DEC 26,				DEC 28,				DEC 29,				DEC 30,
		2005				2004				2003				2002				2001
		(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales		$	838,830			$	717,069			$	597,133			$	512,943			$	453,857
Franchise revenues			436				403				374				345				328
Total revenues			839,266				717,472				597,507				513,288				454,185
Costs and expenses:
Cost of restaurant sales			307,741				264,307				214,814				185,064				165,455
Operating expenses— restaurants			364,566				306,591				257,610				222,546				195,902
Provision for asset impairments, restaurant closings, and other charges			557				922				—				495				2,802
Depreciation and amortization—restaurants			31,244				26,703				22,956				20,632				18,003
Pre-opening expense—restaurants			7,483				7,190				5,692				3,607				4,250
General and administrative expenses			48,064				41,582				37,024				32,625				30,020
Total costs and expenses			759,655				647,295				538,096				464,969				416,432
Operating income			79,611				70,177				59,411				48,319				37,753
Interest expense, net			1,921				1,328				1,015				1,718				2,128
Early termination of interest rate swap agreement			—				—				—				1,540				1,100
Minority interest			215				300				300				448				639
Earnings from continuing operations before income taxes			77,475				68,549				58,096				44,613				33,886
Income tax expense			25,098				22,760				18,864				14,397				11,002
Income from continuing operations			52,377				45,789				39,232				30,216				22,884
Income (loss) from discontinued operations			(798	)			1,200				2,715				2,983				3,119
Net earnings		$	51,579			$	46,989			$	41,947			$	33,199			$	26,003
Basic earnings per common share:
Continuing operations		$	1.55			$	1.35			$	1.18			$	0.93			$	0.73
Discontinued operations			(0.02	)			0.04				0.08				0.09				0.10
Net earnings		$	1.53			$	1.39			$	1.26			$	1.02			$	0.83
Diluted earnings per common share: *
Continuing operations		$	1.50			$	1.29			$	1.13			$	0.88			$	0.69
Discontinued operations			(0.02	)			0.03				0.08				0.09				0.09
Net earnings		$	1.48			$	1.33			$	1.20			$	0.97			$	0.78
Weighted average common shares outstanding (basic)			33,764				33,811				33,162				32,586				31,503
Weighted average common shares outstanding (diluted)			34,817				35,374				34,843				34,268				33,216

     The following is a summary of the unaudited quarterly results for the years ended December 25, 2005 and December 26, 2004 (in thousands, except per share data):

		First				Second				Third				Fourth				Total
		Quarter				Quarter				Quarter				Quarter				Year
2005:
Revenues		$	205,335			$	210,242			$	201,489			$	222,200			$	839,266
Operating income			22,504				20,548				15,149				21,410				79,611
Earnings from continuing operations before income taxes			22,121				20,094				14,607				20,653				77,475
Net earnings			15,350				13,734				9,588				12,907				51,579
Net earnings per share*:
Basic		$	0.45			$	0.40			$	0.29			$	0.38			$	1.53
Diluted		$	0.43			$	0.39			$	0.28			$	0.37			$	1.48
2004:
Revenues		$	176,831			$	180,449			$	171,087			$	189,105			$	717,472
Operating income			20,494				18,925				12,255				18,503				70,177
Earnings from continuing operations before income taxes			20,269				18,626				11,759				17,895				68,549
Net earnings			14,768				13,284				8,345				10,592				46,989
Net earnings per share*:
Basic		$	0.44			$	0.39			$	0.25			$	0.31			$	1.39
Diluted		$	0.42			$	0.37			$	0.24			$	0.30			$	1.33

		FISCAL YEARS ENDED
		DEC 25,				DEC 26,				DEC 28,				DEC 29,				DEC 30,
		2005				2004				2003				2002				2001
		(in thousands)
BALANCE SHEET DATA:
Cash, cash equivalents, and short-term investments		$	18,310			$	54,382			$	44,416			$	31,414			$	25,938
Assets of discontinued operations			47,179				42,938				39,575				33,225				27,833
Total assets			600,925				561,979				464,572				387,286				350,876
Debt, net of current installments			—				—				—				—				10,000
Obligations under capital leases, net of current installments			38,991				37,136				27,462				22,406				20,867
Liabilities of discontinued operations			3,075				5,446				5,650				5,412				3,390
Minority interest			1,193				1,309				1,371				1,411				1,329
Total shareholders’ equity			424,294				399,086				347,048				295,455				252,090

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

     On September 21, 2006, the Company announced that its Board of Directors had approved exiting the Bugaboo Creek Steak House business through the probable sale of the restaurants and brand. In the accompanying consolidated financial statements, financial results relating to the operations to be divested are presented as discontinued operations. Unless otherwise noted, this Management’s Discussion and Analysis of financial condition and results of operations relates exclusively to the continuing operations of the Company.

     On October 6, 2005, the FASB issued FSP 13-1. FSP 13-1 was effective for the Company’s 2006 fiscal year and required rental costs incurred during the construction period associated with ground or building operating leases to be expensed. FSP 13-1 allowed for retrospective application in accordance with FASB Statement No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.” When adopting FSP 13-1, the Company elected to retrospectively apply the provisions of FSP 13-1 to its financial statements for all prior periods. The accompanying consolidated financial statements have been restated to reflect the retrospective application of FSP 13-1.

     The Company’s revenues are derived primarily from restaurant sales from Company-owned LongHorn Steakhouse and The Capital Grille restaurants. The Company also derives a small percentage of its total revenue from two Company-owned specialty restaurants and franchise revenues from three franchised LongHorn Steakhouse restaurants. Cost of restaurant sales consists of food and beverage costs for all restaurants other than the franchised LongHorn Steakhouse restaurants in Puerto Rico. Operating expenses — restaurants consist of other costs incurred by the Company to operate its restaurants, including the cost of labor, advertising, operating supplies, rent and utilities. Depreciation and amortization — restaurants includes the depreciation attributable to restaurant-level capital expenditures. The depreciation and amortization relating to non-restaurant level capital expenditures is included in general and administrative expenses.

     Preopening costs include direct and incremental costs such as payroll, food and beverage costs, and trainer payroll and travel expenses incurred prior to opening of new restaurants. General and administrative expenses include restaurant supervision expenses, accounting, finance, management information systems and other administrative overhead related to support functions for Company-owned, joint venture, and franchise restaurant operations. Interest expense, net includes interest on capital lease obligations and amortization of loan issue costs partially offset by capitalized construction period interest and interest income. Minority interest consists of the partner’s 50% share of earnings in the three LongHorn Steakhouse restaurants that are operated as joint venture restaurants.

     The Company’s management believes in the importance of building incremental top line sales at each restaurant to support the longer-term profitability of the Company. The change in year-over-year sales for the comparable restaurant base is referred to as “same store sales.” The Company defines the comparable restaurant base to include those restaurants open for a full 18 months prior to the beginning of each fiscal quarter. Same store sales increases can be generated by an increase in guest traffic counts (“guest counts”) and/or by increases in guest average check amount (“average check”). The average check can be affected by menu price changes and the mix of menu items sold (“menu mix”). The Company gathers sales data daily and regularly analyzes the guest counts and menu mix for each concept to assist in developing menu pricing, product offering and promotion strategies. Management believes that increases in guest counts are an indication of the long-term health of a concept, while increases in average check and menu mix contribute more significantly to current period profitability. The Company works to balance the pricing and product offerings with other initiatives to achieve the long-term goal of sustainable increases in same store sales.

     Average weekly sales are defined as total restaurant sales divided by restaurant weeks. A “restaurant week” is one week during which a single restaurant is open, so that two restaurants open during the same week constitutes two restaurant weeks. Growth in average weekly sales includes the effect of newer restaurants that are not yet included in the same store sales base. Growth in average weekly sales in excess of growth in same store sales is generally an indication that newer restaurants are operating with sales levels in excess of the system average. Conversely, growth in average weekly sales less than growth in same store sales is generally an indication that newer restaurants are operating with sales levels lower than the system average. It is not uncommon in the casual dining industry for new restaurant locations to open with an initial honeymoon period of higher than normalized sales volumes and then to experience a drop off in sales after initial customer trials.

     The incremental sales generated as a result of increases in same store sales make a significant contribution to the Company’s profitability through the leveraging of certain restaurant level expenses. Many restaurant level expenses are relatively fixed in nature and do not increase at the same rate as same store sales increases. With sales increasing and certain restaurant-level expenses staying fixed or semi-variable (rising more slowly than incremental sales), the incremental sales measured by these same store sales increases should be the Company’s most profitable. When new restaurants are opened,

there are preopening costs and certain relatively fixed costs including expense items such as management labor, rent and depreciation that must be absorbed. Additionally, it generally takes some period of time after opening before restaurant margins normalize. Accordingly, the sales at newly opened restaurants do not make a significant contribution to profitability in their initial months of operation.

     The Company’s revenues and expenses can be affected significantly by the number and timing of the opening of additional restaurants. For instance, preopening expenses for any particular period may reflect expenses associated with restaurants to be opened in future periods, in addition to those restaurants opened during the current period. The timing of restaurant openings also can affect the average weekly sales and other period-to-period comparisons.

     The following table sets forth the percentage relationship to total revenues of the listed items included in the Company’s consolidated statements of operations, except as indicated (percentages may not add due to rounding):

		FISCAL YEARS ENDED
		DECEMBER 25,				DECEMBER 26,				DECEMBER 28,
		2005				2004				2003
Revenues:
Restaurant sales:
LongHorn Steakhouse			79.4	%			80.6	%			81.5	%
The Capital Grille			19.7				18.3				17.1
Other restaurants			0.9				1.1				1.3
Total restaurant sales			99.9				99.9				99.9
Franchise revenues			0.1				0.1				0.1
Total revenues			100.0				100.0				100.0
Costs and expenses:
Cost of restaurant sales(1)			36.7				36.8				36.0
Operating expenses—restaurants(1)			43.4				42.7				43.1
Provision for asset impairments, restaurant closings, and other charges			0.1				0.1				—
Depreciation and amortization—restaurants(1)			3.7				3.7				3.8
Pre-opening expense — restaurants(1)			0.9				1.0				1.0
General and administrative expenses			5.7				5.8				6.2
Total costs and expenses			90.5				90.3				90.1
Operating income			9.5				9.7				9.9
Interest expense, net			0.2				0.2				0.2
Minority interest			0.0				0.0				0.1
Earnings from continuing operations before income taxes			9.2				9.5				9.7
Income tax expense			3.0				3.2				3.1
Income from continuing operations			6.2				6.4				6.5
Income (loss) from discontinued operations			(0.1	)			0.2				0.5
Net earnings			6.1	%			6.5	%			7.0	%

RESULTS OF OPERATIONS

Year Ended December 25, 2005 Compared to Year Ended December 26, 2004

REVENUES

     Total revenues increased 17.0% to $839.3 million for 2005, compared to $717.5 million for 2004.

LongHorn Steakhouse:

     Sales in the LongHorn Steakhouse restaurants increased 15.2% to $666.1 million for 2005, compared to $578.3 million for 2004. The increase reflects a 12.4% increase in restaurant operating weeks in 2005 as compared to 2004, resulting from an increase in the restaurant base from 210 Company-owned and joint venture LongHorn Steakhouse restaurants at the end of 2004 to 237 restaurants at the end of 2005. Average weekly sales for Company-owned and joint venture LongHorn Steakhouse restaurants in 2005 were $56,876, a 2.5% increase over 2004. Same store sales for LongHorn Steakhouse restaurants increased 2.8% in 2005 as compared to 2004. The increase in same store sales for 2005 at LongHorn Steakhouse was attributable to an increase in average check, as guest counts were approximately flat compared to the prior year. Menu price increases of approximately 2.0% to 2.5% account for a majority of the check average increase with the remainder due to the impact of quarterly promotions and menu mix shifts. Management believes a number of factors have contributed to the guest counts remaining flat compared to last year, including the negative impact of severe winter weather and hurricanes, as well as the general economic impact on consumer spending of higher gasoline prices.

The Capital Grille:

     Sales in The Capital Grille restaurants increased 25.9% to $165.2 million for 2005, compared to $131.2 million for 2004. The increase reflects a 16.9% increase in restaurant operating weeks in 2005 as compared to 2004, resulting from the three new The Capital Grille restaurants opened during 2005, bringing the total The Capital Grille restaurants in operation to 23. Average weekly sales for The Capital Grille restaurants in 2005 were $149,070, a 7.7% increase from 2004. Same store sales for The Capital Grille restaurants increased 5.8% in 2005, as compared to 2004. The increase in same store sales at The Capital Grille restaurants was primarily attributable to an increase in average check of approximately 4.8% and the remainder was due to an increase in guest counts. Management believes that a number of factors have contributed to the increase in check average, including price increases on menu items of approximately 3.0% and the introduction of higher-priced culinary specials that are not included on the menu.

Franchise Revenue:

     The Company has a franchisee that operates three LongHorn Steakhouse restaurants in Puerto Rico. The Company earned $436,000 and $403,000 in franchise revenue in 2005 and 2004, respectively. Franchise revenue is computed based on a fixed percentage of the franchisee’s sales; therefore, the increase in 2005 franchise revenue over the prior year was due to the 8.2% increase in sales for the Company’s franchised restaurants.

COSTS AND EXPENSES

     Cost of restaurant sales increased 16.4% to $307.7 million for 2005, compared to $264.3 million for 2004. Cost of restaurant sales, as a percentage of restaurant sales, decreased to 36.7% in 2005 from 36.8% in 2004. In addition to the leverage that was provided by a 2% — 3% increase in menu prices, this decrease resulted from lower priced beef contracts on a portion of the Company’s beef purchases renewed in mid 2005, as well as favorable menu mix shifts.

     Restaurant operating expenses increased as a percentage of total restaurant sales in 2005 to 43.4%, from 42.7% in 2004. During 2005, the Company experienced cost pressures from labor costs resulting from increases in state minimum wage rates, including mandated increases in the minimum wage for workers in Florida, Illinois, Maine, Minnesota, Nevada, New Jersey, New York and Vermont, and increases in unemployment taxes. Additionally, utility costs and credit card fees increased during 2005 as compared to 2004 as a percentage of restaurant sales. Utility costs increased by 0.10% as a percentage of sales due to operating inefficiencies related to the extreme winter weather in the first quarter of 2005 as compared to 2004 and generally higher utility costs in the third and fourth quarter of 2005. Increased credit card usage by customers caused credit card processing fees to increase by 0.10% as a percentage of sales. These increases in restaurant operating expenses were partially offset by the positive impact from increased average weekly sales in 2005, which leveraged fixed and semi-variable expenses as a percentage of total restaurant sales.

     Depreciation and amortization — restaurants increased to $31.2 million in 2005, from $26.7 million in 2004, due to the Company’s new restaurant construction and depreciation of capital expenditures associated with the Company’s remodeling of older restaurants. The amount of depreciation expense per operating week increased slightly in 2005 as compared to 2004; however, depreciation as a percentage of total restaurant sales was flat due to the leveraging effect of increased average weekly sales in 2005.

     Pre-opening expense — restaurants increased to $7.5 million or 0.9% of total restaurant sales in 2005 from $7.2 million or 1.0% of total restaurant sales in 2004. This dollar increase was the result of the Company opening a total of 30 new restaurants in 2005 as compared to opening 27 restaurants in 2004. The amount of pre-opening expense per new restaurant in 2005 was approximately equal to preopening expense per new restaurant in 2004.

     The provision for asset impairments, restaurant closings and other charges of approximately $557,000 in 2005 consisted primarily of the write down of asset values for three LongHorn Steakhouse restaurants. The impairment for each LongHorn Steakhouse restaurant related to management’s decision to not exercise future lease options for these restaurants as the current lease term expires. The impairment for all these restaurants related to forecasts by management that indicate that the investment for each of these restaurants would not be fully recovered by anticipated future cash flows. The impairment charge represents the sum of the differences between the estimated fair value, using discounted estimated future cash flows, and the carrying value of each of these restaurants.

     General and administrative expenses increased to $48.1 million in 2005, from $41.6 million in 2004. As a percentage of total revenues, general and administrative expenses decreased slightly to 5.7% in 2005 from 5.8% in 2004. The leverage on fixed and semi-fixed general and administrative expenses resulting from higher average weekly sales volumes and greater number of restaurants in operation during 2005 as compared to 2004 was partially offset by higher accruals for management bonuses in 2005.

     Interest expense, net increased to $1.9 million in 2005, from $1.3 million in 2004. The increase in interest expense, net was due to the interest expense associated with new capital lease obligations. The Company had no amounts outstanding under its revolving credit facility during 2004. There were no amounts outstanding under the revolving credit facility at the end of 2005; however, the Company did pay approximately $100,000 in interest expense on borrowings under its revolving credit facility during the course of 2005 at an average rate of 6.2%.

     Minority interest was $215,000 in 2005 compared with $300,000 in 2004. This expense reflects the joint venture partner’s interest in the Company’s three joint venture LongHorn Steakhouse restaurants.

     Income tax expense associated with continuing operations in 2005 was 32.39% of earnings before income taxes as compared to 33.2% in 2004. This decrease in the Company’s effective income tax rate is primarily due to an increase in the FICA tip tax credit recognized in 2005. The Company’s effective income tax rate differs from applying the statutory Federal income tax rate of 35% to earnings before income taxes primarily due to employee FICA tip tax credits partially offset by state income taxes.

     Net income (loss) from discontinued operations in 2005 was a net loss of $798,000, as compared to net income from discontinued operations in 2004 of $1,200,000. The net loss in 2005 was primarily due to a $2,712,000 ($1,810,000 after tax) charge for the write down of asset values for two Bugaboo Creek Steak House restaurants. This impairment charge represents the sum of the differences between the estimated fair value, using discounted estimated future cash flows, and the carrying value of each of these restaurants.

     Net income of $51.6 million in 2005, as compared to net income of $47.0 million in 2004, reflects the net effect of the items discussed above.

RESULTS OF OPERATIONS

Year Ended December 26, 2004 Compared to Year Ended December 28, 2003

REVENUES

     Total revenues increased 20.1% to $717.5 million for 2004, compared to $597.5 million for 2003.

     LongHorn Steakhouse:

     Sales in the LongHorn Steakhouse restaurants increased 18.7% to $578.3 million for 2004, compared to $487.2 million for 2003. The increase reflects a 12.4% increase in restaurant operating weeks in 2004 as compared to 2003, resulting from an increase in the restaurant base from 187 Company-owned and joint venture LongHorn Steakhouse restaurants at the end of 2003 to 210 restaurants at the end of 2004. Average weekly sales for Company-owned and joint venture LongHorn Steakhouse restaurants in 2004 were $55,504, a 5.6% increase over 2003. Same store sales for LongHorn Steakhouse restaurants increased 5.0% in 2004 as compared to 2003. The increase in same store sales for 2004 at LongHorn Steakhouse was attributable to an increase in guest counts of approximately 1.1% and the remainder was due to an increase in average check. Management believes a number of factors have contributed to the increased guest counts including improved

restaurant-level execution; menu evolution with more appealing menu offerings; and effective use of media advertising; all of which work together to provide a better overall customer experience.

The Capital Grille:

     Sales in The Capital Grille restaurants increased 28.1% to $131.2 million for 2004, compared to $102.4 million for 2003. The increase reflects a 15.5 % increase in restaurant operating weeks in 2004 as compared to 2003, resulting from the three new The Capital Grille restaurants opened during 2004, bringing the total The Capital Grille restaurants in operation to 20. Average weekly sales for The Capital Grille restaurants in 2004 were $138,405, an 11.0% increase from 2003. Same store sales for The Capital Grille restaurants increased 11.7% in 2004, as compared to 2003. The increase in comparable restaurant sales at The Capital Grille restaurants was primarily attributable to an increase in guest counts of approximately 6.6% and the remainder was due to an increase in average check.

     During 2004, average weekly sales increased at a rate slightly less than the increase in same store sales. The Capital Grille restaurants have historically opened at lower sales volumes and not experienced the drop off in sales after an initial honeymoon period commonly characteristic in the restaurant industry.

Franchise Revenue:

     As of December 25, 2005, the Company had a franchisee that operated three LongHorn Steakhouse restaurants in Puerto Rico. The Company earned $403,000 and $374,000 in franchise revenue in 2004 and 2003, respectively. Franchise revenue is computed based on a fixed percentage of the franchisee’s sales; therefore, the increase in 2004 franchise revenue over the prior year was due to the 7.8% increase in sales for the Company’s franchised restaurants.

COSTS AND EXPENSES

     Cost of restaurant sales, as a percentage of restaurant sales, increased to 36.8% in 2004 from 36.0% in 2003. This increase resulted primarily from higher contract pricing on commodities in 2004, particularly pricing with respect to beef contracts, and was partially offset by a 2% — 3% increase in menu prices.

     Restaurant operating expenses decreased as a percentage of total restaurant sales in 2004 to 42.7%, from 43.1% in 2003. The increased average weekly sales rate in 2004 leveraged fixed and semi-variable expenses as a percentage of total restaurant sales. The leveraging of these fixed and semi-variable expenses was partially offset by slight increases in unemployment taxes, management labor, advertising spending and credit card fees as a percentage of restaurant sales. Increased credit card usage by customers caused credit card processing fees to increase slightly as a percentage of sales.

     Depreciation and amortization — restaurants increased to $26.7 million in 2004, from $23.0 million in 2003, due to the Company’s new restaurant construction and depreciation of capital expenditures associated with the Company’s remodeling of older restaurants. Depreciation as a percentage of total restaurant sales decreased slightly due to the leveraging effect of increased average weekly sales in 2004. The amount of depreciation expense per operating week was approximately the same in 2004 as it was in 2003.

     Pre-opening expense — restaurants increased to $7.2 million or 1.0% of total restaurant sales in 2004 from $5.7 million or 1.0% of total restaurant sales in 2003. This dollar increase was the result of the Company opening a total of 27 new restaurants in 2004 as compared to opening 23 restaurants in 2003. The amount of pre-opening expense per new restaurant in 2004 was approximately equal to preopening expense per new restaurant in 2003.

     The provision for asset impairments, restaurant closings and other charges of approximately $922,000 in 2004 consisted of the write down of asset values related to two LongHorn Steakhouse restaurants. The impairment charge represents the sum of the differences between the estimated fair value, using discounted estimated future cash flows, and the carrying value of each of these restaurants.

     General and administrative expenses increased to $41.6 million in 2004, from $37.0 million in 2003. As a percentage of total revenues, general and administrative expenses decreased to 5.8% in 2004 from 6.2% in 2003. This decrease was primarily associated with lower management bonuses and the greater leverage of fixed and semi-fixed general and administrative expenses resulting from higher average weekly sales volumes in 2004.

     Interest expense, net increased to $1.3 million in 2004, from $1.0 million in 2003. The increase in interest expense, net was due to the interest expense associated with new capital lease obligations partially offset by an increase in the level of capitalized interest associated with the Company’s new restaurant development. The Company had no amounts outstanding under its revolving credit facility during 2004 or 2003.

     Minority interest was $300,000 in both 2004 and 2003. This expense reflects the joint venture partner’s interest in the Company’s three joint venture LongHorn Steakhouse restaurants.

     Income tax expense associated with continuing operations in 2004 was 33.2% of earnings before income taxes. The Company’s effective income tax rate differs from applying the statutory Federal income tax rate of 35% to earnings before income taxes primarily due to employee FICA tip tax credits partially offset by state income taxes.

     Net income from discontinued operations in 2004 was $1,200,000, as compared to net income from discontinued operations in 2003 of $2,715,000. This decrease in net income from discontinued operations was primarily due to a $1,778,000 ($1,187,000 after tax) charge for the write down of asset values for a Bugaboo Creek Steak House restaurant in 2004. This impairment charge represents the difference between the estimated fair value, using discounted estimated future cash flows, and the carrying value of the Bugaboo Creek Steak House restaurant.

     Net income of $47.0 million in 2004, as compared to net income of $41.9 million in 2003, reflects the net effect of the items discussed above.

LIQUIDITY AND CAPITAL RESOURCES

     The Company requires capital primarily for the development of new restaurants, selected acquisitions and the refurbishment of existing restaurants. The Company’s principal sources of funds in 2005 were (i) cash provided by operating activities of continuing operations ($114.4 million), which included the sale of short-term investments ($28.7 million) and (ii) proceeds from the exercise of employee stock options ($7.2 million). The primary uses of funds were capital expenditures ($93.1 million) for new and improved facilities related to continuing operations, capital expenditures ($11.1 million) for new and improved facilities related to discontinued operations and the purchase of common stock for treasury ($39.3 million).

     Due to the relatively short time period (less than 30 days) between the ordering of inventories, preparation for sale, collection of payment and subsequent payment for inventories, there are no material changes in the underlying drivers of cash flows that are not clearly identifiable in the Company’s consolidated statement of cash flows.

     Since substantially all sales in the Company’s restaurants are for cash or credit card receipts, which are generally settled in three days, and accounts payable are generally due in seven to 30 days, the Company operates with little or negative working capital. The Company’s working capital balance decreased from $43.7 million on December 26, 2004, to $6.3 million on December 25, 2005, principally due to the purchase of $39.3 million of common stock for treasury during fiscal 2005.

     The increases in accounts receivable, inventory, and accrued expenses are principally due to the new restaurants which were opened during 2005 and the result of generally higher average unit volumes experienced during 2005. Further increases in current asset and liability accounts are expected as the Company continues its restaurant development program.

     The Company has a revolving credit facility, which allows the Company to borrow up to $100.0 million through its maturity in July 2010. The terms of the revolving credit facility require the Company to pay interest on outstanding borrowings at LIBOR plus a margin of 0.50% to 1.25% (depending on the Company’s leverage ratio) or the administrative agent’s prime rate of interest, at the Company’s option, and to pay a commitment fee of 0.1% to 0.2% (depending on the Company’s leverage ratio) per year on any unused portion of the facility. No amounts were outstanding, and $100.0 million was available, under the Company’s revolving credit agreement on December 25, 2005. As of December 25, 2005, terms of the revolving credit facility provide for interest to be accrued at LIBOR plus 0.5% or the prime rate and payment of the commitment fee at a rate of 0.10% per year on any unused portion of the facility.

     The revolving credit facility contains various covenants and restrictions which, among other things, require the maintenance of stipulated leverage and fixed charge coverage ratios, as defined, and limit the incurrence of additional indebtedness in excess of specified amounts. The Company is currently in compliance with such covenants.

     As of December 25, 2005, the Company’s plan for 2006 was to open 29 or 30 LongHorn Steakhouse restaurants, two Bugaboo Creek Steak House restaurants (including one restaurant closed due to a fire in the first quarter of 2005) and three The Capital Grille restaurants in 2006. The Company’s 2006 capital plan provided for capital expenditures of approximately $115 to $125 million in 2006. The capital expenditure estimate for 2006 includes the estimated cost of developing 34 to 35 new restaurants (including the two Bugaboo Creek Steak House restaurants), ongoing refurbishment in existing restaurants, costs associated with obtaining real estate for year 2007 planned openings and continued investment in improved management information systems.

TREASURY STOCK

     The Company’s Board of Directors has authorized the purchase of shares of the Company’s common stock from time to time through open market transactions, block purchases or in privately negotiated transactions. On April 20, 2005, the Board of Directors authorized the Company to use up to $29.0 million to purchase shares of its common stock and on July 22, 2005, the Board of Directors authorized the repurchase of up to an additional $30.0 million of the Company’s common stock. During the second quarter of 2005, the Company repurchased 690,000 shares of its common stock at an average price of $28.88 for an aggregate cost of approximately $19.9 million. During the third quarter of 2005, the Company repurchased 669,000 shares of its common stock at an average price of $28.95 for an aggregate cost of approximately $19.4 million. The Company did not repurchase any of its common stock during the fourth quarter of 2005. As of December 25, 2005, approximately $19.7 million remained available under the Company’s aggregate $59.0 million share repurchase authorization.

     The Company expects that available borrowings under the Company’s revolving credit facility and new borrowings under additional financing to be secured, together with cash on hand and cash provided by operating activities, will provide sufficient funds to finance its expansion and share repurchase plans through the year 2007.

OUTLOOK FOR FUTURE OPERATING RESULTS

     The Company’s fiscal year is a 52- or 53-week year ending on the last Sunday in each calendar year. All fiscal years since 2001 have been 52-week periods; however, since fiscal 2006 will end on December 31st, it will be a 53-week period. Each of the four fiscal quarters is typically made up of 13 weeks; however, the first quarter of 2006 will contain 14 weeks. During 2006, the Company expects to realize incremental profits from this extra week of sales and beneficial leverage of the sales during this extra sales week upon fixed and semi-fixed expenses.

     Revenues. The Company plans to grow revenues by opening additional restaurants and by increasing average unit volumes at both existing and new restaurants. The Company’s new restaurant development plans for 2006 are summarized in the section entitled “LIQUIDITY AND CAPITAL RESOURCES.”

     Cost of restaurant sales. The Company anticipates increased commodity prices in 2006 based primarily on higher protein pricing particularly with respect to beef. Based on the fixed prices negotiated for its protein products, partially offset by current and anticipated menu price increases, the Company expects its costs of goods sold as a percentage of total restaurant sales to be flat to up 0.10% in 2006 as compared with 2005.

     Operating expenses — restaurants. For the last several years, the Company has experienced cost pressure related to a number of operating expense line items including management and hourly labor. Additionally, several states in which the Company operates restaurants have either recently enacted or are considering enacting an increase in the minimum wage rate, which will result in an increase in hourly labor costs. The Company expects these trends to continue throughout 2006. In addition, the Company expects increases in (i) the cost of utilities, (ii) unemployment tax expense, and (iii) credit card processing fees due to the greater percentage of credit card usage.

     Pre-opening expense — restaurants. Pre-opening costs are expensed as incurred and are expected to approximate $195,000 for each LongHorn Steakhouse restaurant and $400,000 for each The Capital Grille restaurant. Restaurant pre-opening expenses may vary materially from period to period depending on when restaurants open. The Company anticipates that pre-opening expenses will be higher in 2006 by approximately $1.3 to $1.5 million (including $1.1 to $1.2 million as a result of the change in accounting for rent during the construction period) as a result of the planned opening of more new restaurants in 2006, as compared to 2005.

     Depreciation and amortization — restaurants. The Company expects depreciation and amortization to increase as it invests in the development of new restaurants and the ongoing refurbishment in existing restaurants. Due to an increase in the average cost to construct new restaurants offset by leverage of this fixed expense resulting from expected average weekly sales increases in 2006, the Company expects depreciation and amortization to remain flat as a percentage of restaurant sales.

     General and administrative expenses. The Company expects general and administrative expenses to increase by approximately 0.80% to 0.90%, as a percent of total revenues in 2006 as compared with 2005. Approximately 0.70% of that increase reflects the impact of the Company’s adoption of the stock-based expense provisions of SFAS 123R at the beginning of 2006.

     Interest expense, net. The Company does not plan to have any material amount outstanding under its revolving credit facility during 2006. However, due to the addition of capital leases during 2005 and expected additions of capital leases in 2006, as well as lower forecasted invested cash balances for 2006, the Company expects net interest expense to increase in 2006 compared with 2005.

     Income tax expense. The Company expects its effective income tax rate for 2006 to be approximately 33.25% of earnings before income taxes.

     Earnings per share. The Company expects fiscal 2006 diluted earnings per common share from continuing operations in a range of $1.41 to $1.43, which includes the impact of the Company’s adoption of SFAS 123R and FSP 13-1.

OFF-BALANCE SHEET ARRANGEMENTS

     The Company has not entered into any transactions with unconsolidated entities, that are financial guarantees, retained or contingent interests in transferred assets, derivative instruments, or obligations arising out of a variable interest entity that provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with the Company and that have a material current effect, or that are reasonably likely to have a material future effect, on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

     The table below summarizes the Company’s significant contractual obligations of continuing operations, by maturity, as of December 25, 2005 (in thousands):

						LESS THAN				1 – 3				4 – 5				AFTER 5
		TOTAL				1 YEAR				YEARS				YEARS				YEARS
Bank revolving credit facility		$	—			$	—			$	—			$	—			$	—
Capital lease obligations (1)			94,411				3,897				8,191				8,631				73,692
Operating lease obligations (2)			115,894				19,074				35,446				28,500				32,874
Purchase obligations (3)			245,270				232,949				12,321				—				—
Total contractual cash obligations		$	455,575			$	255,920			$	55,958			$	37,131			$	106,566

						LESS THAN				1 – 3				4 – 5				AFTER 5
		TOTAL				1 YEAR				YEARS				YEARS				YEARS
Operating lease obligations of discontinued operations		$	26,466			$	3,574			$	6,873			$	5,963			$	10,056

EFFECT OF INFLATION

     Management believes that inflation has not had a material effect on earnings during the past several years. Inflationary increases in the cost of labor, food and other operating costs could adversely affect the Company’s restaurant operating margins. In the past, however, the Company generally has been able to modify its operations and increase menu prices to offset inflationary increases in its operating costs.

     A majority of the Company’s employees are paid hourly rates related to federal and state minimum wage laws and various laws that allow for credits to that wage. Although the Company has generally been able to and will continue to attempt to pass along increases in the minimum wage and in other costs through food and beverage price increases, there can

be no assurance that all such increases can be reflected in its prices or that increased prices will be absorbed by customers without diminishing, at least to some degree, customer spending at its restaurants.

RECENT ACCOUNTING PRONOUNCEMENTS

     On October 6, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position 13-1, “Accounting for Rental Costs Incurred During a Construction Period” (“FSP 13-1”). FSP 13-1 is effective for the Company’s fiscal 2006 and requires the Company to expense rental costs incurred during the construction period associated with ground or building operating leases. The Company has previously capitalized these costs. Retrospective application, which permits entities to restate financial statements of previous periods is permitted but not required. In the first quarter of fiscal 2006, the Company adopted the provisions of FSP 13-1 using retrospective application. This resulted in the revision of previously issued financial statements as if the provisions of FSP 13-1 had always been used. As noted in the section entitled “EXPLANATORY NOTE,” this report on Form 10-K/A restates the Company’s consolidated financial statements to recognize rental costs associated with ground or building operating leases incurred during construction in pre-opening expense — restaurants.

     In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (SFAS 123R). SFAS 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” Among other items, SFAS 123R eliminates the use of the intrinsic value method of accounting, and requires companies to recognize the cost of awards of equity instruments granted in exchange for employee services received, based on the grant date fair value of those awards, in their financial statements. The effective date of SFAS 123R was the first interim period beginning after June 15, 2005; however, on April 14, 2005, the SEC announced that the effective date of SFAS 123R was postponed until the first annual period beginning after June 15, 2005.

     SFAS 123R permits companies to adopt its requirements using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after that date, and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date of SFAS 123R. Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but this method also permits entities to restate financial statements of previous periods based on proforma disclosures made in accordance with SFAS 123. The Company adopted the provisions of SFAS 123R using modified prospective application in the first quarter of fiscal 2006.

     The Company currently utilizes the Black-Scholes option-pricing model to measure the fair value of stock options granted to employees. While SFAS 123R permits entities to continue to use this model, the standard also permits the use of a “lattice” model. SFAS 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current standards. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated because they depend on, among other things, when employees exercise stock options.

     As described in Note 1 to the Consolidated Financial Statements, compensation cost for stock options for which the requisite future service has not yet taken place is disclosed as a pro forma expense by applying the provisions of SFAS 123. The pro forma application of SFAS 123 had a dilutive effect of approximately $0.12 per diluted share for 2005. Compensation cost for stock options vesting beginning in fiscal 2006, and all restricted stock, will be expensed in accordance with the provisions of SFAS 123R, which will be effective for the Company at the beginning of fiscal 2006. The Company estimates that stock-based compensation expense for fiscal 2006 will be approximately $6.5 to $7.5 million ($5.0 to $5.7 million after tax or $0.14 to $0.16 per diluted share). This estimate includes costs related to unvested stock options and restricted stock grants associated with new compensation programs.

     In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB No. 143” (“FIN 47”). Asset retirement obligations are legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of a long-lived asset. FIN 47 clarifies that liabilities associated with asset retirement obligations whose timing or settlement method are conditional on future events should be recorded at fair value as soon as fair value is reasonably estimable. FIN 47 also provides guidance on the information required to reasonably estimate the fair value of the liability. The provisions of FIN 47 are effective for fiscal years ending after December 15, 2005. The Company adopted the provisions of FIN 47 during the fourth quarter of 2005. The impact of adoption was not material.

     In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 replaces APB No. 20, Accounting Changes, and

SFAS No. 3, Reporting Accounting changes in Interim Financial Statements, and changes the requirements for the accounting for, and reporting of, a change in accounting principle. SFAS 154 requires retrospective application of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. SFAS 154 also redefines “restatement” as the revising of previously issued financial statements to reflect the correction of an error. SFAS 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company’s most critical accounting policies, the judgments and uncertainties affecting the application of those policies, and the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

PROPERTY AND EQUIPMENT

     Property and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of such assets. Changes in circumstances such as technological advances, changes to the Company’s business model or changes in the Company’s capital strategy can result in the actual useful lives differing from the Company’s estimates. In those cases where the Company determines that the useful life of property and equipment should be shortened, the Company would depreciate the net book value in excess of the salvage value, over its revised remaining useful life thereby increasing depreciation expense. Factors such as changes in the planned use of fixtures or software or closing of facilities could also result in shortened useful lives.

     The Company’s accounting policies regarding property and equipment include judgments by management regarding the estimated useful lives of these assets, the residual values to which the assets are depreciated, the expected lease term for assets related to leased properties and the determination as to what constitutes enhancing the value of or increasing the life of existing assets. These judgments and estimates may produce materially different amounts of depreciation and amortization expense than would be reported if different assumptions were used. As discussed further below, these judgments may also impact the Company’s need to recognize an impairment charge on the carrying amount of these assets as the cash flows associated with the assets are realized.

LEASE ACCOUNTING

     The Company is obligated under various lease agreements for certain restaurant facilities. For operating leases, the Company recognizes rent expense on a straight-line basis over the expected lease term. Capital leases are recorded as an asset and an obligation at an amount equal to the present value of the minimum lease payments during the lease term.

     Under the provisions of certain of the Company’s leases, there are rent holidays and/or escalations in payments over the base lease term, as well as renewal periods. The effects of the holidays and escalations have been reflected in rent expense on a straight-line basis over the expected lease term, which includes cancelable option periods when it is deemed to be reasonably assured that the Company will exercise such option periods due to the fact that the Company would incur an economic penalty for not doing so. The lease term commences on the date when the Company becomes legally obligated for the rent payments. The leasehold improvements and property held under capital leases for each restaurant facility are amortized on the straight-line method over the shorter of the estimated life of the asset or the same expected lease term used for lease accounting purposes. For each restaurant facility, the consolidated financial statements reflect the same lease term for amortizing leasehold improvements as the Company uses to determine capital versus operating lease classifications and in calculating straight-line rent expense. Percentage rent expense is generally based upon sales levels and is accrued at the point in time the Company determines that it is probable that such sales levels will be achieved. Leasehold improvements paid for by the lessor are recorded as leasehold improvements and deferred rent.

     Judgments made by the Company related to the probable term for each restaurant facility lease affect i) the classification and accounting for a lease as capital or operating, ii) the rent holidays and/or escalations in payments that are taken into consideration when calculating straight-line rent and iii) the term over which leasehold improvements for each restaurant facility are amortized. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used.

IMPAIRMENT OF LONG-LIVED ASSETS

     Long-lived assets, including restaurant sites, leasehold improvements, and fixed assets are reviewed by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. Expected cash flows associated with an asset is a key factor in determining the recoverability of the asset. Identifiable cash flows are generally measured at the restaurant level. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance. The Company’s estimates of undiscounted cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions, changes to its business model or changes in its operating performance. If the sum of the undiscounted cash flows is less than the carrying value of the asset, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset.

     Judgments made by the Company related to the expected useful lives of long-lived assets and the Company’s ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause the Company to realize a material impairment charge. In 2005, the Company recognized a $557,000 charge for the write down of asset values for three LongHorn Steakhouse restaurants and a $2,712,000 charge for the write down of asset values for two Bugaboo Creek Steak House restaurants. In 2004, the Company recognized a $922,000 charge for the write down of asset values related to two LongHorn Steakhouse restaurants and a $1,778,000 charge for the write down of asset values related to one Bugaboo Creek Steak House restaurant.

     SELF-INSURANCE ACCRUALS

     The Company self-insures for a significant portion of expected losses under its workers’ compensation, employee medical, employment practices and general liability programs. Accrued liabilities have been recorded based on estimates of the ultimate costs to settle incurred, but unpaid, claims.

     The accounting policies regarding self-insurance programs include certain management judgments and assumptions regarding the frequency or severity of claims and claim development patterns, and claim reserve, management, and settlement practices. Unanticipated changes in these factors may produce materially different amounts of expense than that reported under these programs.

INCOME TAXES

     Income taxes are accounted for by the Company in accordance with Statement of Financial Accounting Standards No. 109 (“SFAS 109”), “Accounting for Income Taxes” which requires that deferred tax assets and liabilities be recognized for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

     The Company reviews and assesses the recoverability of any deferred tax assets recorded on the balance sheet and provides any necessary allowances as required. An adjustment to the deferred tax asset would be charged to income in the period such determination was made.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 25, 2005, DECEMBER 26, 2004 AND DECEMBER 28, 2003

WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		PAGE
Report of Independent Registered Public Accounting Firm			20
Consolidated Balance Sheets			21
Consolidated Statements of Operations			22
Consolidated Statements of Shareholders’ Equity and Comprehensive Income			23
Consolidated Statements of Cash Flows			24
Notes to Consolidated Financial Statements			25

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
RARE Hospitality International, Inc.

     We have audited the accompanying consolidated balance sheets of RARE Hospitality International, Inc. and subsidiaries (the Company) as of December 25, 2005 and December 26, 2004, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 25, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RARE Hospitality International, Inc. and subsidiaries as of December 25, 2005 and December 26, 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 25, 2005, in conformity with U.S. generally accepted accounting principles.

     As discussed in note 1 to the consolidated financial statements, the Company has presented the results of operations of the Bugaboo Creek Steak House business as discontinued operations.

(signed) KPMG LLP

Atlanta, Georgia
November 15, 2006

RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		2005				2004
ASSETS
Current assets:
Cash and cash equivalents		$	12,107			$	19,487
Short-term investments			6,203				34,895
Accounts receivable			15,807				9,212
Inventories			14,516				11,761
Prepaid expenses			6,558				6,835
Refundable income taxes			—				3,327
Deferred income taxes			9,425				7,898
Assets of discontinued operations			47,179				42,938
Total current assets			111,795				136,353
Property and equipment, less accumulated depreciation and amortization			451,619				392,233
Goodwill			19,187				19,187
Other			18,324				14,206
Total assets		$	600,925			$	561,979
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	30,026			$	33,113
Accrued expenses			71,010				53,884
Income taxes payable			1,152				—
Current installments of obligations under capital leases			269				207
Liabilities of discontinued operations			3,075				5,446
Total current liabilities			105,532				92,650
Deferred income taxes			3,483				10,146
Obligations under capital leases, net of current installments			38,991				37,136
Other			27,432				21,652
Total liabilities			175,438				161,584
Minority interest			1,193				1,309
Shareholders’ equity:
Preferred stock, no par value. Authorized 10,000 shares, none issued			—				—
Common stock, no par value. Authorized 60,000 shares; 35,436 and 34,802 shares issued; and 33,484 and 34,209 outstanding at December 25, 2005 and December 26, 2004, respectively			229,955				217,146
Unearned compensation — restricted stock			(1,470	)			(1,588	)
Retained earnings			248,284				196,705
Treasury shares at cost; 1,952 shares and 593 shares at December 25, 2005 and December 26, 2004, respectively			(52,475	)			(13,177	)
Total shareholders’ equity			424,294				399,086
Total liabilities and shareholders’ equity		$	600,925			$	561,979

See accompanying notes to consolidated financial statements.

RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		2005				2004				2003
Revenues:
Restaurant sales:
LongHorn Steakhouse		$	666,073			$	578,297			$	487,221
The Capital Grille			165,169				131,208				102,414
Other restaurants			7,588				7,564				7,498
Total restaurant sales			838,830				717,069				597,133
Franchise revenues			436				403				374
Total revenues			839,266				717,472				597,507
Costs and expenses:
Cost of restaurant sales			307,741				264,307				214,814
Operating expenses— restaurants			364,566				306,591				257,610
Provision for asset impairments, restaurant closings, and other charges			557				922				—
Depreciation and amortization— restaurants			31,244				26,703				22,956
Pre-opening expense—restaurants			7,483				7,190				5,692
General and administrative expenses			48,064				41,582				37,024
Total costs and expenses			759,655				647,295				538,096
Operating income			79,611				70,177				59,411
Interest expense, net			1,921				1,328				1,015
Minority interest			215				300				300
Earnings from continuing operations before income taxes			77,475				68,549				58,096
Income tax expense			25,098				22,760				18,864
Income from continuing operations			52,377				45,789				39,232
Income (loss) from discontinued operations, net of income tax (expense) benefit			(798	)			1,200				2,715
Net earnings		$	51,579			$	46,989			$	41,947
Basic earnings per common share:
Continuing operations		$	1.55			$	1.35			$	1.18
Discontinued operations			(0.02	)			0.04				0.08
Net earnings		$	1.53			$	1.39			$	1.26
Diluted earnings per common share:
Continuing operations		$	1.50			$	1.29			$	1.13
Discontinued operations			(0.02	)			0.03				0.08
Net earnings		$	1.48			$	1.33			$	1.20
Weighted average common shares outstanding (basic)			33,764				33,811				33,162
Weighted average common shares outstanding (diluted)			34,817				35,374				34,843

See accompanying notes to consolidated financial statements.

RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME

										UNEARNED
										COMPENSATION-								TREASURY				TOTAL
		COMMON STOCK								RESTRICTED				RETAINED				SHARES-				SHAREHOLDERS’
		SHARES				DOLLARS				STOCK				EARNINGS				AT COST				EQUITY
BALANCE, DECEMBER 29, 2002			33,099			$	191,174			$	(1,124	)		$	107,769			$	(2,364	)		$	295,455
Net earnings and total comprehensive income			—				—				—				41,947				—				41,947
Purchase of common stock for treasury			—				—				—				—				(2,625	)			(2,625	)
Issuance of shares pursuant to restricted stock awards			47				969				(969	)			—				—				—
Amortization of restricted stock			—				—				790				—				—				790
Forfeiture of restricted stock			(11	)			(263	)			—				—				—				(263	)
Issuance of shares pursuant to exercise of stock options			907				7,120				—				—				—				7,120
Tax benefit of stock options exercised			—				4,624				—				—				—				4,624
BALANCE, DECEMBER 28, 2003			34,042				203,624				(1,303	)			149,716				(4,989	)			347,048
Net earnings and total comprehensive income			—				—				—				46,989				—				46,989
Purchase of common stock for treasury			—				—				—				—				(8,188	)			(8,188	)
Issuance of shares pursuant to restricted stock awards			61				1,565				(1,565	)			—				—				—
Forfeiture of restricted stock			(9	)			(139	)			—				—				—				(139	)
Amortization of restricted stock			—				—				1,280				—				—				1,280
Issuance of shares pursuant to exercise of stock options			708				7,706				—				—				—				7,706
Tax benefit of stock options exercised			—				4,390				—				—				—				4,390
BALANCE, DECEMBER 26, 2004			34,802				217,146				(1,588	)			196,705				(13,177	)			399,086
Net earnings and total comprehensive income			—				—				—				51,579				—				51,579
Purchase of common stock for treasury			—				—				—				—				(39,298	)			(39,298	)
Issuance of shares pursuant to restricted stock awards			55				1,656				(1,656	)			—				—				—
Forfeiture of restricted stock			(19	)			(332	)			174				—				—				(158	)
Amortization of restricted stock			—				—				1,600				—				—				1,600
Issuance of shares pursuant to exercise of stock options			598				7,188				—				—				—				7,188
Tax benefit of stock options exercised			—				4,297				—				—				—				4,297
BALANCE, DECEMBER 25, 2005			35,436			$	229,955			$	(1,470	)		$	248,284			$	(52,475	)		$	424,294

See accompanying notes to consolidated financial statements.

RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

		2005				2004				2003
Cash flows from operating activities:
Net earnings		$	51,579			$	46,989			$	41,947
Adjustments to reconcile net earnings to net cash provided by operating activities:
(Income) loss  from discontinued operations, net of income taxes			798				(1,200	)			(2.715	)
Depreciation and amortization			35,060				29,569				24,680
Provision for asset impairments, restaurant closings and other charges			549				922				—
Minority interest			215				300				300
Deferred tax expense			(8,190	)			4,797				3,709
Sale (purchase) of short-term investments, net			28,692				(10,859	)			(6,301	)
Changes in assets and liabilities:
Accounts receivable			(6,595	)			(482	)			(2,154	)
Inventories			(2,755	)			(2,664	)			(1,210	)
Prepaid expenses			277				(1,846	)			(1,547	)
Other assets			(1,506	)			(3,072	)			(1,050	)
Refundable income taxes			8,776				3,225				6,586
Accounts payable			(6,669	)			6,044				229
Accrued expenses			10,619				5,793				6,253
Other liabilities			3,516				2,429				1,424
Net cash provided by operating activities of continuing operations			114,366				79,945				70,153
Net cash provided by operating activities of discontinued operations			11,093				8,826				9,063
Cash flows from investing activities:
Purchase of property and equipment by continuing operations			(93,115	)			(88,352	)			(68,722	)
Purchase of property and equipment by discontinued operations			(11,092	)			(8,894	)			(8,988	)
Cash flows from financing activities:
Payments for debt issuance costs			(370	)			—				—
Principal payments on capital leases			(195	)			(128	)			(79	)
Distributions to minority partners			(331	)			(362	)			(340	)
Increase in bank overdraft included in accounts payable and accrued expenses			4,375				8,486				1,194
Purchase of common stock for treasury			(39,298	)			(8,188	)			(2,625	)
Proceeds from exercise of stock options			7,188				7,706				7,120
Net cash provided by (used in) financing activities of continuing operations			(28,631	)			7,514				5,270
Net increase (decrease) in cash and cash equivalents			(7,379	)			(961	)			6,776
Cash and cash equivalents at beginning of year			19,547				20,508				13,732
Cash and cash equivalents at end of year		$	12,168			$	19,547			$	20,508
Cash and cash equivalents of continuing operations at end of year		$	12,107			$	19,487			$	20,380
Cash and cash equivalents of discontinued operations at end of year		$	61			$	60			$	128
Supplemental disclosure of cash flow information:
Cash paid for income taxes		$	23,779			$	15,085			$	9,737
Cash paid for interest net of amounts capitalized		$	2,594			$	1,589			$	1,078
Supplemental disclosure of non-cash financing and investing activities:
Assets acquired under capital lease		$	2,112			$	9,885			$	5,181

See accompanying notes to consolidated financial statements.

RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

OPERATIONS

     RARE Hospitality International, Inc., including its wholly owned subsidiaries (the “Company”), is a multi-concept restaurant company, which, as of December 25, 2005, operated the following restaurants in 31 states (located primarily in the Eastern half of the United States) and the District of Columbia:

CONCEPT		NUMBER IN OPERATION
LongHorn Steakhouse			237
The Capital Grille			23
Other specialty concepts			2
Total restaurants			262

     The Company is a 50 percent partner in joint ventures that operate three LongHorn Steakhouse restaurants, which are managed by the Company and included in the restaurant counts above. Due to the rights and duties assigned by the attendant joint venture and management agreements, the Company is deemed to have control over these joint ventures.

BASIS OF PRESENTATION

     The consolidated financial statements include the financial statements of RARE Hospitality International, Inc., its wholly owned subsidiaries, and joint ventures over which the Company exercises control. All significant intercompany balances and transactions have been eliminated in consolidation.

     On September 21, 2006, the Company announced that its Board of Directors had approved exiting the Bugaboo Creek Steak House business through the probable sale of the restaurants and brand. In the accompanying consolidated financial statements, the results of operations relating to the operations to be divested are presented as discontinued operations. The assets and liabilities of discontinued operations are primarily comprised of fixed assets and accrued liabilities, respectively. Financial results for Bugaboo Creek Steak House for each of the years in the three-year period ended December 25, 2005, were as follows (in thousands):

		Full Year
		52 Weeks Ended
		Dec. 25,				Dec. 26,				Dec. 28,
		2005				2004				2003
Restaurant Sales		$	97,310			$	95,091			$	83,325
Costs and expenses:
Cost of restaurant sales			35,447				35,141				30,280
Operating expenses-restaurants			51,165				48,088				41,368
Depreciation and amortization-restaurants			4,200				3,733				3,259
Pre-opening expense-restaurants			933				903				915
Provision for asset impairments, restaurant closings, and other charges			2,712				1,778				—
General and administrative expenses			4,048				3,662				3,491
Total costs and expenses			98,505				93,305				79,313
Earnings (loss) before income taxes			(1,195	)			1,786				4,012
Income tax expense (benefit)			(397	)			586				1,297
Net earnings (loss)		$	(798	)		$	1,200			$	2,715

     Unless otherwise noted, discussions and amounts throughout these Notes to Consolidated Financial Statements relate to the Company’s continuing operations.

     On October 6, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position 13-1, “Accounting for Rental Costs Incurred During a Construction Period” (“FSP 13-1”). FSP 13-1 was effective for the Company’s 2006 fiscal year and requires the Company to expense rental costs incurred during the construction period associated with ground or building operating leases. FSP 13-1 allows for retrospective application in accordance with FASB Statement No. 154, “Accounting Changes and Error Correction.” When adopting FSP 13-1, the Company elected to retrospectively apply the provisions of FSP 13-1 to its financial statements for all prior periods.

     Prior to the issuance of FSP 13-1, the Company capitalized all rental costs associated with ground or building operating leases during each construction period. Pursuant to FSP 13-1, in the accompanying restated consolidated financial statements, rental costs associated with ground or building operating leases incurred during construction are recognized in pre-opening expense – restaurants. The retrospective application of FSP 13-1 reduced net earnings by $503,000, $540,000 and $330,000 for the years ended December 25, 2005, December 26, 2004 and December 28, 2003, respectively. The reduction in net earnings is a result of increases in pre-opening expense of $1,225,000, $1,228,000 and $824,000 partially offset by reductions of depreciation expense of $412,000, $357,000 and $293,000, and reductions of income taxes of $309,000, $330,000 and $202,000 for 2005, 2004 and 2003, respectively. The cumulative effect of the retrospective application is a reduction in retained earnings of $4,680,000 as of the beginning of fiscal year 2003.

     The Company’s fiscal year is a 52- or 53-week year ending on the last Sunday in each calendar year. Each of the four fiscal quarters is typically made up of 13 weeks.

     The Company effected a three-for-two stock split in the form of a 50% stock dividend paid on September 2, 2003 to shareholders of record on August 12, 2003. All references to the number of common shares and per share amounts prior to the stock split have been restated to give retroactive effect to the stock split for all periods presented.

CASH EQUIVALENTS

     The Company considers all highly liquid investments which have original maturities of three months or less to be cash equivalents. Cash equivalents are comprised of high-grade overnight repurchase agreements and totaled approximately $5.9 million at December 25, 2005, $14.4 million at December 26, 2004 and $16.0 million at December 28, 2003. The carrying amount of these instruments approximates their fair market values. All overdraft balances have been reclassified as current liabilities.

SHORT TERM INVESTMENTS

     Short term investments consist of federal, state and municipal bonds, and commercial paper. The Company accounts for its investments under the provisions of Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”). Pursuant to the provisions of SFAS 115, the Company has classified its investment portfolio as “trading.” Trading securities are bought and held principally for the purpose of selling them in the near term and are recorded at fair value. Unrealized gains and losses on trading securities are included in the determination of net earnings.

INVENTORIES

     Inventories, consisting principally of food and beverages, are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.

PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost. Property under capital leases is stated at the present value of minimum lease payments. Leasehold improvements and property held under capital leases are amortized on the straight-line method over the shorter of the estimated life of the asset or the lease term, including renewal periods when the exercise of such renewal periods is deemed to be reasonably assured (generally 15 years for building operating leases and 25 years for land-only operating leases and real property acquired under capital leases). Depreciation on owned property and equipment is calculated on the straight-line method over the estimated useful lives of the related assets, which approximates 25 years for buildings and land improvements, seven years for restaurant equipment, and three years for computer hardware and software.

RENT EXPENSE

     The Company recognizes rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty to the Company. The lease term commences on the date when the Company becomes legally obligated for the rent payments. Percentage rent expense is generally based upon sales levels and is accrued at the point in time the Company determines that it is probable that such sale levels will be achieved. The Company records leasehold improvements funded by landlords under operating leases as leasehold improvements and deferred rent. Prior to the adoption of FSP 13-1, rent expense incurred during the construction period was capitalized to property and equipment. As described later in this Note, under the section entitled “ACCOUNTING STANDARDS ADOPTED IN FISCAL 2005,” the Company’s accounting for rent incurred during the construction period changed effective at the beginning of fiscal 2006. This report on Form 10-K/A restates the Company’s consolidated financial statements to recognize rental costs associated with ground or building operating leases incurred during construction in pre-opening expense – restaurants.

PRE-OPENING AND ORGANIZATION COSTS

     The Company accounts for pre-opening and organization costs in accordance with the American Institute of Certified Public Accountants Statement of Position (SOP) 98-5, “Reporting on the Costs of Start-Up Activities.” SOP 98-5 requires entities to expense as incurred all organization and pre-opening costs.

COMPUTER SOFTWARE FOR INTERNAL USE

     The Company accounts for the costs of developing or acquiring computer software in accordance with the American Institute of Certified Public Accountants SOP 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” SOP 98-1 identifies the characteristics of internal-use software and specifies that once the preliminary project stage is complete, certain external direct costs, certain direct internal payroll and payroll-related costs and interest costs incurred during the development of computer software for internal use should be capitalized and amortized.

REVENUE RECOGNITION

     Revenue from restaurant sales is recognized when food and beverage products are sold and receipts from all sales are classified as operating cash flows. Accounts receivable is primarily comprised of amounts due from the Company’s credit card processor. The Company records a liability for gift certificates and gift cards at the time they are issued. Upon redemption, sales are recorded and the liability is reduced by the amount of certificates or card values redeemed. The Company began selling electronic gift cards in August of 2003. Unused gift cards will be recognized as revenue, in proportion to actual gift card redemptions, once the Company has sufficient data to make a reasonable determination of forfeiture levels. Revenues from the sales of franchises are recognized as income when substantially all of the Company’s material obligations under the franchise agreement have been performed. Continuing royalties, which are a percentage of net sales of franchised restaurants, are accrued as income when earned.

COST OF RESTAURANT SALES

     Cost of restaurant sales include food and beverage costs, warehousing, and related purchasing and distribution costs. Vendor allowances received in connection with the purchase of a vendor’s products are recognized as a reduction of the related food and beverage costs as earned. These allowances are recognized as earned in accordance with the underlying agreement with the vendor and completion of the earning process. Vendor agreements are generally for a period of one year or less, and payments received are recorded as a current liability until earned.

GOODWILL

     The Company accounts for goodwill in accordance with SFAS 142, “Goodwill and Other Intangible Assets,” which provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. The fair value of each reporting unit is compared to its carrying value to determine whether there is an indication that impairment may exist. If an impairment of goodwill is determined to exist, it is measured as the excess of its carrying value over its fair value. Upon performing the annual tests for impairment of the carrying value of the Company’s goodwill, it has been concluded that there was no indication of impairment to goodwill. Accordingly, no impairment losses have been recorded.

     As of the date of adoption of SFAS 142, the Company had unamortized goodwill in the amount of approximately $19.2 million, all of which is related to the acquisition of LongHorn Steakhouse franchise and joint venture rights. In accordance with SFAS 142, no goodwill amortization expense was recorded in the Company’s financial statements for fiscal 2005, 2004 or 2003.

OTHER ASSETS

     Other assets consist of the investments of the Company’s Supplemental Deferred Compensation Plan, debt issuance costs, trademarks, deposits, and purchased liquor licenses. The Company applies the provisions of SFAS 142 to purchased liquor licenses and trademarks. The 2005 provision for asset impairments includes a $47,000 charge to reflect the diminution in value of a purchased liquor license for a LongHorn Steakhouse restaurant location. Impairment of this liquor license was measured by the amount by which the carrying amount exceeded its fair market value. There has been no other impairment of purchased liquor licenses or trademarks since the adoption of SFAS 142 in 2002. Purchased liquor licenses related to continuing operations amounted to approximately $4,831,000 and $3,772,000 at December 25, 2005 and December 26, 2004, respectively. Purchased liquor licenses related to discontinued operations amounted to approximately $442,000 at both December 25, 2005 and December 26, 2004. Purchased trademarks aggregated approximately $0.4 million at December 25, 2005. Debt issuance costs are amortized on a straight-line basis over the expected term of the debt facility.

RECOVERABILITY OF LONG-LIVED ASSETS

     The Company accounts for long-lived assets in accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires the Company to review its long-lived assets, which include property and equipment, related to each restaurant periodically or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be held and used are reported at the lower of the carrying amount or fair value, using discounted estimated future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Considerable management judgment is required to estimate cash flows and fair value less costs to sell. Accordingly, actual results could vary significantly from such estimates.

     See Note 2 for further discussion of the Company’s provision for asset impairments, restaurant closings and other charges.

INCOME TAXES

     Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

     Income tax benefits credited to equity relate to tax benefits associated with amounts that are deductible for income tax purposes but do not affect net earnings. These benefits are principally generated from employee exercises of stock options and vesting of employee restricted stock awards.

STOCK-BASED COMPENSATION

     Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation”, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant.

     Alternatively, SFAS 123 also allows entities to continue to apply the provisions of APB 25 and provide pro forma net earnings (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The Company has elected to continue to

apply the provisions of APB 25 and provide the pro forma disclosures required by SFAS 123. The fair value of the options granted during 2005, 2004 and 2003 is estimated at approximately $3.5 million, $6.1 million and $5.8 million, respectively, on the date of grant, using the Black-Scholes option pricing model, recognizing compensation cost on a straight-line basis, using the following assumptions:

		2005				2004				2003
Dividend yield			0	%			0	%			0	%
Volatility			28.0	%			34.2	%			44.0	%
Risk-free interest rate			4.375	%			3.625	%			3.25	%
Average expected life		4yrs				4yrs				5yrs

     In accordance with the provisions of APB 25, the Company did not recognize any compensation expense from the issuance of employee stock options. The following table represents the effect on net earnings and earnings per share if the Company had applied the fair value based method and recognition provisions of SFAS 123 (in thousands except per share amounts):

		2005				2004				2003
Net earnings, as reported		$	51,579			$	46,989			$	41,947
Add: stock-based employee compensation expense included in reported net earnings, net of related tax effects			989				795				490
Deduct: stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(5,229	)			(4,784	)			(4,343	)
Pro forma net earnings		$	47,339			$	43,000			$	38,094
Basic earnings per common share:
Net earnings, as reported		$	1.53			$	1.39			$	1.26
Net earnings, pro forma		$	1.40			$	1.27			$	1.15
Diluted earnings per common share:
Diluted earnings, as reported		$	1.48			$	1.33			$	1.20
Diluted earnings, pro forma		$	1.37			$	1.23			$	1.11