Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

General and Administrative Expenses

G&A expenses increased 13.0% to $35.8 million for fiscal 2003 compared to $31.7 million for fiscal 2002. This increase was principally due to the planned growth of our supervision and support organizations commensurate with the growth of our restaurant and bakery operations during fiscal 2003. As a percentage of total revenues, G&A expenses decreased to 4.6% for fiscal 2003 compared to 4.9% for the prior fiscal year, as the 13.0% increase in these expenses for fiscal 2003 was less than the 19% increase in total revenues for the year.

Depreciation and Amortization Expenses

Depreciation and amortization expenses increased 22.1% to $28.2 million for fiscal 2003 compared to $23.1 million for fiscal 2002. This increase was principally due to new restaurant openings. As a percentage of total revenues, depreciation and amortization expenses were 3.7% and 3.5% for fiscal 2003 and 2002, respectively.

Preopening Costs

Preopening costs increased 10.9% to $12.2 million for fiscal 2003 compared to $11.0 million for the prior fiscal year. We opened fourteen restaurants during fiscal 2003 compared to twelve openings during fiscal 2002. In addition, pre-opening costs were incurred in both years for restaurant openings in progress.

Interest Income, Net, Other Income and Income Tax Provision

Interest income, net decreased to $3.4 million for fiscal 2003 compared to $3.9 million for fiscal 2002. This decrease was principally due to lower yields on our interest-bearing cash and short-term investments that, in turn, were attributable to the decline in the general level of interest rates during fiscal 2003. In addition, we recorded interest expense of approximately $0.1 million in fiscal 2003 associated with landlord construction allowances deemed to be financing in accordance with EITF 97-10, “The Effect of Lessee Involvement in Asset Construction.” See Note 1 of Notes to Consolidated Financial Statements included in this Form 10-K.

Other income for fiscal 2003 was $2.9 million compared to $2.2 million for fiscal 2002. This increase was principally due to higher gains on the sales of investments and marketable securities in order to fund the Company’s working capital requirements. Our effective income tax rate was 35.1% for fiscal 2003 compared to 35.7% for fiscal 2002.

Liquidity and Capital Resources

Our corporate finance strategy is to maintain a strong, conservative balance sheet in order to support our growth plan with financial flexibility; to provide the financial resources necessary to protect and enhance the competitiveness of our restaurant and bakery operations; and to provide a prudent level of financial capacity to manage the risks and uncertainties of conducting our business operations on a much larger scale. Our ongoing capital requirements are principally related to our restaurant expansion plan. Similar to many restaurant and retail chain store operations, we utilize operating lease arrangements for substantially all of our restaurant locations. We believe that our operating lease arrangements continue to provide appropriate leverage for our capital structure in a financially efficient manner. However, we are not limited to the use of lease arrangements as our only method of opening new restaurants. While most of our operating lease obligations are not required to be reflected as indebtedness on our consolidated balance sheet, the minimum base rents and related fixed obligations under our lease agreements must be satisfied by cash flows from our ongoing operations. Accordingly, our lease arrangements reduce, to some extent, our capacity to utilize funded indebtedness in our capital structure.

We also require capital resources to maintain our existing base of restaurants, further expand and strengthen the capabilities of our corporate and information technology infrastructures, and maintain and expand our bakery production capacity. In the past, we have obtained capital from our ongoing operations, public stock offerings, employee stock option exercises and construction contributions from our landlords. Our requirement for working capital is not significant, since our restaurant guests pay for their food and beverage purchases in cash or cash equivalents at the time of sale, and we are able to sell many of our food inventory items before payment is due to the suppliers of such items.

The following table presents, for the periods indicated, a summary of the Company’s key liquidity measurements.

	Fiscal Year
(Dollar amounts in millions)	2004			2003			2002
				(restated)			(restated)
Cash and marketable securities on hand, end of year	$	151.5		$	137.0		$	114.5
Net working capital, end of year	$	4.7		$	30.9		$	15.8
Adjusted net working capital, end of year (1)	$	110.8		$	118.7		$	107.5
Current ratio, end of year		1.0:1			1.4:1			1.3:1
Adjusted current ratio, end of year (1)		2.0:1			2.5:1			2.9:1
Long-term debt, end of year (2)	$	17.0		$	6.7		$	–
Cash provided by operations	$	150.1		$	117.6		$	91.5
Capital expenditures	$	161.9		$	113.3		$	84.6

During fiscal 2004, our total amount of cash and marketable securities on hand increased by $14.5 million to $151.5 million as of December 28, 2004. This increase was principally due to cash flow from operations, proceeds from the exercise of employee stock options and deemed landlord financing, partially offset by additions to property and equipment and purchases of treasury stock. In the table above, we also present adjusted net working capital and current ratio calculations that include all marketable securities classified as either current or noncurrent assets. We believe these adjusted calculations provide investors with useful information regarding our overall liquidity position because all marketable securities are readily available to meet our liquidity requirements. We continue to target a weighted average maturity for our marketable securities investment portfolio between one and two years. Accordingly, a substantial portion of our investments is classified as noncurrent assets, but remains available for our liquidity requirements.

We maintain a $35 million revolving credit and term loan facility (the “Credit Facility”), which expires on December 31, 2006. As of April 1, 2005, there were no borrowings outstanding under the Credit Facility. $14.3 million of the Credit Facility has been reserved to support standby letters of credit for our self-insurance programs. Borrowings under the Credit Facility will bear interest at variable rates based, at our option, on either the prime rate of interest, the lending institution’s cost of funds plus 0.75%, or the applicable LIBOR rate plus 0.75%. Upon expiration of the Credit Facility, a maximum of $35 million of any borrowings outstanding under the Credit Facility automatically convert into a four-year term loan, payable in equal quarterly installments at interest rates of 0.5% higher than the applicable revolving credit rates. The Credit Facility is not collateralized and requires us to maintain certain financial ratios and to observe certain restrictive covenants with respect to the conduct of our operations, with which we are currently in compliance.

Our new restaurant development model more closely resembles that of a retail business that occupies leased space in shopping malls, office complexes, strip centers, entertainment centers and other real estate developments. We typically seek to lease our restaurant locations for primary periods of 15 to 20 years under operating lease arrangements. Our rent structures vary from lease to lease, but generally provide for the payment of both minimum and contingent (percentage) rent based on sales, as well as other expenses related to the leases (for example our share of common area maintenance, property tax and insurance expenses). We disburse cash for leasehold improvements and furnishings, fixtures and equipment to build out our leased premises. We may also disburse cash for structural additions that we make to leased premises that generally are reimbursed to us by our landlords as construction contributions pursuant to agreed-upon terms in the respective leases. If obtained, landlord construction contributions usually take the form of up-front cash, full or partial credits against minimum or percentage rents otherwise payable by us, or a combination thereof. See Note 1 of Notes to Consolidated Financial Statements in Item 8 of this report for additional discussion on the accounting treatment of amounts paid for structural components and the related landlord construction contributions. In the future, we may also develop more freestanding restaurant locations using both ground leases and built-to-suit leases, which are common arrangements used to finance freestanding locations in the restaurant industry. We do not have any current plans to encumber our existing leasehold interests with secured financing. We own substantially all of the equipment, furniture and trade fixtures in our restaurants and currently plan to do so in the future.

During fiscal 2004, our cash outlays and accrued liability for capital expenditures were approximately $162 million. Of that amount, new restaurant openings (including several restaurants under development as of December 28, 2004) accounted for approximately $119 million, approximately $14 million represented maintenance and capacity addition outlays for our existing restaurants and approximately $8 million related to bakery and corporate infrastructure investments. The remaining $21 million was utilized to purchase a newly constructed two-story building contiguous to our bakery production facility in California to accommodate our eventual need for additional support personnel and space for those personnel as we continue to grow our company. We had previously leased the first floor of this building for our culinary, training and operations support activities. The purchase price was funded with available cash and investments. We will incur additional expenditures to finish out the interior of the building, as space is needed. Although we purchased the building with available cash and investments, we may consider mortgage and other refinancing alternatives in the future.

For fiscal 2005, we currently estimate our cash outlays for capital expenditures to range between $158 and $166 million, net of agreed-upon up-front cash landlord construction contributions and excluding $17-$18 million of expected noncapitalizable preopening costs for new restaurants. This amount also excludes approximately $6 million of landlord construction contributions to be paid as reductions to minimum or percentage rent over the term of the lease. The amount reflected as additions to property and equipment in the Consolidated Statements of Cash Flows may vary from this estimate based on the accounting treatment of each operating lease. See Note 1 of Notes to Consolidated Financial Statements in Item 8 of this report. This estimate contemplates a net outlay of $125-$128 million for as many as 18 new restaurants to be opened during fiscal 2005, estimated construction-in-progress disbursements for anticipated fiscal 2006 openings and estimated collections of up-front cash landlord construction contributions. Expected capital expenditures for fiscal 2005 also include approximately $12-$13 million for maintenance and capacity addition expenditures to our existing restaurants and $7-$8 million for corporate infrastructure investments, including interior build-out of our corporate support and training center. In addition, we expect to spend approximately $1-$2 million for maintenance and enhancements to our existing bakery production facility and approximately $13-$15 million related to establishing a second bakery production facility.

Based on our current expansion objectives, we believe that our cash and short-term investments on hand, combined with expected cash flow provided by operations, available borrowings under our Credit Facility and expected landlord construction contributions should be sufficient in the aggregate to finance our planned capital expenditures and other operating activities through fiscal 2005. We may seek additional funds to finance our growth in the future. However, there can be no assurance that such funds will be available when needed or be available on terms acceptable to us.

During fiscal 2004, our Board of Directors increased the share repurchase authorization to 6,000,000 from 2,531,250. Shares may be repurchased in the open market or through privately negotiated transactions at times and prices considered appropriate by us. Under this authorization, we have repurchased a total of 1,950,967 shares for a total cost of $26.5 million through December 28, 2004. Our share repurchase agreement does not require us to repurchase any common stock and may be discontinued at any time.

As of April 1, 2005, we had no financing transactions, arrangements or other relationships with any unconsolidated entities or related parties. Additionally, we had no financing arrangements involving synthetic leases or trading activities involving commodity contracts.