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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

(Check One)

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For The Fiscal Year Ended June 29, 2003

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from ___ to ___

Commission File Number: 0-22639

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

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

Securities registered pursuant to Section 12 (b) of the Act:
None

Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01 per share

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 and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]

Indicate by check mark if the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): YES [X] NO [ ]

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

The aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing price of the Common Stock of the registrant as quoted on the National Association of Securities Dealers Automated Quotation System on September 19, 2003 was $63,267,969.

The aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing price of the Common Stock of the registrant as quoted on the National Association of Securities Dealers Automated Quotation System on December 29, 2002 was $81,408,215

Number of shares of Common Stock, $.01 par value, outstanding at September 19, 2003: 12,778,050

DOCUMENTS INCORPORATED BY REFERENCE

The sections of the Company’s definitive Proxy Statement, listed below, which have been or will be filed by the Company with the Securities and Exchange Commission, are incorporated in this Annual Report by reference and shall be deemed to be a part hereof:

Cross Reference Sheet between Items of
Registrant’s Proxy Statement and Form 10-K

Copies of all documents incorporated by reference other than exhibits to such documents will be provided without charge to each person who receives a copy of this Annual Report upon written request addressed to: Investor Relations, Champps Entertainment, Inc., 10375 Park Meadows Drive, Suite 560, Littleton, Colorado 80124. The annual report is also available at our web site at www.champps.com.

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FORM 10-K INDEX

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K and the documents incorporated by reference into the Annual Report on Form 10-K include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We use words such as “may,” “believe,” “estimate,” “expect,” “plan,” “intend,” “project,” “anticipate” and similar expressions to identify forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events, activities or developments. Our actual results could differ materially from those discussed in or implied by these forward-looking statements. Forward-looking statements include statements relating to, among other things:

These forward-looking statements are subject to numerous risks, uncertainties and assumptions about us, including the factors described under “Item 1. Business — Risk Factors.” The forward-looking events we discuss in this Annual Report on Form 10-K might not occur in light of these risks, uncertainties and assumptions. We undertake no obligation and disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Unless otherwise provided in this Annual Report on Form 10-K, references to “the Company,” “Champps,” “we,” “us” and “our” refer to Champps Entertainment, Inc. and our consolidated subsidiaries. Our fiscal years ended June 29, 2003, June 30, 2002 and July 1, 2001 are referred to as fiscal 2003, 2002 and 2001, respectively. Fiscal 2003, 2002 and 2001 each contained 52 weeks.

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PART I

Item 1.        Business.

Overview

Champps offers an energetic, upscale casual dining experience with uncompromising service and an extensive menu of freshly prepared items, set in a comfortable atmosphere that promotes social interaction among our guests. As of September 19, 2003, we owned and operated 44 restaurants in 16 states and had 12 restaurants operating under franchise or license agreements in five states. Our menu is comprised of approximately 86 items, primarily made from scratch on the premises. We typically include a selection of 16 appetizers, ten main plate salads, 28 high-end sandwiches and specialty burgers and 26 entrée selections, along with an additional five to eight regularly changing specials. Our menu selection includes not only traditional American favorites such as Champp’s Meatloaf and Grilled Salmon, but also a variety of ethnic cuisine such as our Mongolian Egg Rolls and Wai Kan Chicken. This diversity is designed to provide our guests with appropriate choices to meet their dining preference throughout our four distinct day-parts: lunch, after-work, dinner and late night. We believe that our enticing offerings and generous portions, combined with an average check per dining room guest of approximately $13.03 in fiscal 2003, excluding alcoholic beverages, offer our guests exceptional value.

Our restaurants are designed to create an engaging and socially interactive dining experience. Through the use of multiple levels and other design elements such as ceramic Italian style tile, slate style floors and extensive wood accents, we are able to create a variety of dining atmospheres to satisfy a wide range of diners including families with children, business professionals, couples and singles, as well as sports fans of all ages. Our restaurants range from approximately 7,500 to nearly 12,100 square feet and seat 217 to 360 guests. We position multiple video walls and large televisions strategically throughout each restaurant to create an energetic and participatory dining experience. Our bar area, which is located away from the main dining area, creates a focal gathering point for our guests to socialize. We offer music, television broadcasts and special promotional events to increase guest traffic and promote repeat visits. During fiscal 2003, the average unit sales of our restaurants opened for the entire 12 months was approximately $4.9 million, which is among the highest in the casual dining industry.

We locate our restaurants in areas that have a combination of commercial office space, residential housing and high traffic areas such as shopping malls or multi-screen movie theaters to attract guests in all of our day-parts. Our restaurants principally rely on frequent visits and loyalty from our guests who work, reside or shop nearby, rather than tourist traffic. Typically, our restaurants are located within large metropolitan areas that draw fan interest in professional and collegiate sport teams to allow us to promote the broadcasting of these sporting events in our restaurants.

We opened seven restaurants in fiscal 2003. We expect to open six to eight restaurants in fiscal 2004 by expanding our presence in existing markets and selectively entering new markets. We have increased our number of company-owned restaurants from 18 in fiscal 1999 to 41 restaurants in fiscal 2003, representing a compounded annual growth rate of 22.8%. We believe that the flexibility of our day-part model, the diversity and quality of our freshly prepared menu items, our unique entertainment and excellent service have created an attractive, high sales volume restaurant model that provides us with considerable growth opportunities to develop our brand nationwide.

Business strategy

Our objectives are to build our brand awareness and guest loyalty and provide our guests with exceptional food, uncompromising service and an exciting ambiance during each of our four day-parts. To achieve our objectives, we have developed the following strategies:

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Offer a comprehensive menu featuring enticing foods and beverages. We offer an extensive and varied menu in each of our four day-parts. Our menu is designed to suit a wide variety of dining occasions that broadens our consumer appeal and keeps the menu fresh for our frequent diners. In contrast to many competing restaurant operations, substantially all of our menu items are prepared on the premises from scratch using high quality, fresh ingredients and proprietary recipes. Champps is recognized by our guests for providing exceptional value by offering generous food portions at moderate prices. Our sophisticated, full service bar offers approximately 18 selections of wine, 20 domestic and imported bottled and draft beers, as well as premium liquor and specialty drinks. For fiscal 2003, sales of alcoholic beverages represented approximately 29.5% of our total food and beverage sales.

Provide service that “WOWs” our guests. We strive to personalize the dining experiences of our guests by instilling both high standards and a sense of urgency among our associates to exceed each guest’s dining expectations. We position associates to greet guests when they enter our restaurants and train our managers to visit each table. We also encourage our bartenders to introduce themselves to each patron at the bar, and our servers typically are responsible for no more than three to four tables at a time. Our entire staff is dedicated to executing our standard of delivering orders within 12 minutes of being placed. We encourage a strong, team-oriented atmosphere among our associates that we believe creates uncompromising guest service and a sense of pride in the Champps brand.

Create a fun, high energy, social dining and entertainment experience. Our distinct dining experience features extensive entertainment and socially interactive activities designed to encourage guest frequency and attract guests outside of normal peak dining hours. For example, we increase guest traffic in our late night day-part by encouraging guest participation in a variety of promotional events we offer, such as the “Big Bike Give-Away” and Karaoke. Our special design elements, multiple dining levels, patio areas and sizable bar area allow us to comfortably serve guests seeking different dining experiences and further promote frequent visits. Our two to three video walls and ten to 12 televisions located throughout our restaurants, as well as our state-of-the-art audio systems, enable us to provide an exciting and socially interactive environment to view major sporting events. Our open display kitchens afford our guests the opportunity to observe our kitchen staff in action.

Capitalize on our proven multiple day-part model. Champps restaurants generally are open seven days a week from 11:00 a.m. to 1:00 a.m. We serve our guests during lunch, after work, during dinner and after dinner during our late night periods. For fiscal 2003, we generated 33.7% of our sales during lunch, 60.3% after work and during dinner and 6.0% during late night, demonstrating the versatility of our concept and our ability to serve guests for a variety of occasions such as professional lunches and everyday dining, as well as social and special occasions. We adjust our ambiance throughout the day by changing the music and choice of programming for each day-part. According to a market research study of over 1,100 of our guests completed during fiscal 2002, on average our guests visit Champps 2.7 times per month while 10.0% of our guests visit our restaurants on an average of 11 times per month. By operating in multiple day-parts, we are able to maximize revenue and leverage both development and operating costs. We believe the versatility of our operating strategy has allowed us to build strong guest loyalty with a high percentage of repeat business.

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Deliver strong unit economics. We believe our company-owned restaurants provide strong unit level economics. Our company-owned restaurants open throughout fiscal 2003 generated average restaurant sales of approximately $4.9 million and restaurant level operating cash flows of approximately $0.8 million¹, or 16.3% of average annual restaurant sales. The average cash investment cost for all of our restaurants opened since the beginning of fiscal 2001 was approximately $1.7 million, excluding pre-opening expense, which averaged approximately $0.4 million per restaurant. Although the reporting of restaurant level operating cash flows is a non-GAAP measure of our performance, we believe that a prudent investor needs to understand the economic model of Champps to make an informed investment decision.

Build awareness of the Champps brand. We believe that the Champps name has achieved substantial brand equity among our guests and has become well known within our markets for our high quality, innovative menu items, generous portions, uncompromising service and a fun, engaging dining experience. We have implemented a first time guest program that is intended to strengthen our brand loyalty by educating our first time guests about the Champps concept. In addition, we believe the most effective way to build brand awareness is to consistently deliver a dining experience that exceeds our guests’ expectations.

Growth strategy

We adhere to a disciplined growth strategy and believe that there are significant opportunities to expand our concept in existing and new markets throughout the United States. The future development of Champps restaurants will be accomplished primarily through the development of company-owned restaurants in existing markets. In addition, we plan to open approximately 25% to 30% of our new restaurants in new markets. Opening multiple units in existing markets enables us to leverage costs and gain efficiencies associated with regional supervision, marketing, purchasing and hiring. We believe this approach reduces the risks involved with opening new restaurants in markets where we better understand the existing competitive conditions, consumer tastes, demographics and discretionary spending patterns. In addition, our ability to hire qualified associates is enhanced in markets in which we are well known and we are able to utilize existing associates in new restaurants and capitalize on our brand awareness.

Our current expansion plans do not include adding new franchisees. Although our existing franchisees do not have the right to open additional restaurants, under certain circumstances we may permit our existing franchisees to open additional restaurants from time-to-time. Currently, an existing franchisee is negotiating to open a Champps restaurant in Des Moines, Iowa. Although we have no obligation to do so, in the future, we may seek to acquire some or all of our 12 franchised restaurants from our franchisees. This may require additional capital.

In fiscal 2001, fiscal 2002 and fiscal 2003, we opened four, six and seven new restaurants, respectively. We plan to open six to eight restaurants in fiscal 2004. As of September 19, 2003, we have opened three restaurants, begun construction on three restaurants and have signed agreements for four additional restaurants that will open in fiscal 2004 or 2005. In addition, we have identified multiple sites that meet our growth objectives for the remainder of fiscal 2004 and partially through fiscal 2005.

(1) Average restaurant level operating cash flow for 2003 (in 000's)

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We believe that our site selection strategy is critical to our success and we devote substantial effort to evaluating each potential site at the highest levels within our organization. Our chief executive officer, chief operating officer and the respective regional directors of operations must approve each restaurant site. Our site selection criteria focuses on locating in larger metropolitan areas with average household income of at least $75,000 and population density in excess of 75,000 within a three mile radius. In addition, site visibility, traffic patterns, accessibility, adequate parking, competitive restaurants, associate availability, proximity to entertainment activities, as well as areas near a combination of commercial office space, residential housing and high traffic areas, influence our site selection criteria. Potential sites are also evaluated by our vice president of development to insure we meet our construction obligations and capital expenditure projections, our legal counsel to insure we negotiate favorable terms in our leases and our chief financial officer to insure we meet our profit and investment return objectives.

Unit level economics and day-part allocation

Our current restaurants range in size from approximately 7,500 to 12,100 square feet and have approximately 207 to 360 indoor seats and approximately 42 additional patio seats on average. We lease 40 of our restaurants and own one. During fiscal 2003, our base of restaurants opened for the entire 12-month period, generated average sales of approximately $4.9 million and restaurant level operating cash flows of approximately $0.8 million, or 16.3% of restaurant sales. Based on the Company’s average net cash investment to build a restaurant of approximately $1.7 million, our restaurants opened for the entire 12-month period generated a cash-on-cash return of over 47.1%.

Our prototype restaurant is approximately 9,000 square feet and has seating for approximately 320 guests. We have also constructed a second smaller prototype of 7,500 square feet that has seating for approximately 250 guests. The average net investment cost for our restaurants depends upon whether we lease the restaurant or complete the restaurant through a build-to-suit transaction, the terms of the lease entered into, the amount of tenant improvement allowance we receive and whether we enter into an operating lease for any equipment. The average cash investment cost for all of our restaurants opened since the beginning of fiscal 2001 was approximately $1.7 million, net of tenant improvement allowance and excluding pre-opening expense of $0.4 million.

Our success in four distinct day-parts demonstrates the strength of our concept. The following table depicts the amount and percentage of contribution to each day-part of overall company-owned restaurant sales during fiscal 2003. During this period, our food and alcoholic beverage sales as a ratio of total food and beverage sales was 70.5% and 29.5%, respectively. Our dinner day-part includes our happy hour, which we refer to as sales of alcoholic beverages that occur between 4:00 p.m. and 10:00 p.m. Our bar area produces approximately 20.5% of our total restaurant sales, 63.3% of which are generated from 4:00 p.m. to 10:00 p.m., which signifies our strong after work and happy hour business. Champps merchandise and other sales totaled $408,000 and were 0.2% of overall sales and are not included below.

Sales — Fiscal 2003 (in 000‘s)

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Restaurant design and ambiance

Our restaurants have an ambiance enhanced by a layout that encourages social interaction and promotes a high-energy environment. All of our restaurants have multiple levels that enable us to channel guests towards a specific location depending upon their dining preferences while also creating an open atmosphere and the ability for guests to have a panoramic view of the entire restaurant. The majority of our restaurants have a large “L” shaped bar area, located on the first level. The bar’s numerous angles and bends provide our guests with a place to meet and socialize. We place large video walls and additional televisions strategically throughout each restaurant, which together with a state of the art sound system, provide a source of entertainment for our guests. We monitor the selection of our broadcasts, music and volume in each dining area to create different dining environments. We also use plasma televisions to incorporate the latest technologies and keep our restaurants up to date.

Our restaurant interiors utilize a combination of dark cherry stained wood and brick throughout the dining area, Italian style ceramic tile in the kitchen and bathrooms, slate style tile in the bar area and noise reducing carpet in the dining room. Our bars are generally stainless steel and we use accented black granite or wood trim at our specially designed hostess stands to enhance our contemporary feel. The majority of our restaurants include an indoor patio area with a large fireplace and several have outdoor patios, all of which provide our guests with multiple settings to choose from. Our display kitchens are presented behind a floor-to-ceiling glass wall to provide a focal point for the dining room. We use a variety of directional lighting and chandeliers are used frequently to create a warm environment in our dining rooms and bar area.

The exterior of our restaurants typically employ brick, stone and stucco to create a highly visible restaurant that features a well-lit, large Champps sign and logo. We extensively landscape our restaurants and where appropriate, vary the exterior design to coordinate with the surrounding area. Lighted trees, directional lighting on our buildings and large entries further increase our visual appeal.

Menu

We offer our guests a comprehensive selection of approximately 86 items, primarily made on the premises from scratch, which typically includes a selection of 16 appetizers, ten main plate salads, 28 high-end sandwiches and specialty burgers and 26 entrée selections. Our menu selection includes not only traditional American favorites such as Champp’s Meatloaf and Grilled Salmon, but also a variety of ethnic cuisine such as Mongolian Egg Rolls and Wai Kan Chicken. For example, one of our most popular entrees is the Sicilian Parmesan Crusted Chicken that is created with three large chicken breasts crusted with an Italian herb mix and shredded parmesan cheese before pan frying in olive oil and accompanied by tender angel hair noodles, our freshly prepared traditional marinara sauce and fresh garlic buttered toasted crostini. We continuously experiment with food and beverage items to develop proprietary recipes with high flavor profiles to ensure that our menu is imaginative and exciting to our guests. We also feature five to eight specials that change regularly, allowing us to continually refine our menu offerings and keep our selections fresh for our frequent users. We believe that the broad range of our menu provides multiple dining options during each of our day-parts.

We emphasize freshness and quality in our food preparation and focus on maintaining our reputation for creative and high quality menu offerings. Our fresh sauces, salad dressings, batters and mixes are prepared daily in our restaurants using high-quality and fresh ingredients.

The food items on our menu range from $4.95 to $12.95 for appetizers, $5.95 to $12.95 for burgers and sandwiches, and $7.45 to $18.95 for dinner salads and entrees. For fiscal 2003, our average guest check in our dining room was approximately $13.03, excluding alcoholic beverages. Our sophisticated, full service bar offers approximately 18 selections of wine, most of which are available by the glass, 20 draft and bottled domestic and imported beers, as well as premium liquor and specialty drinks. Sales of alcoholic beverages represented approximately 29.5% of total food and beverage sales during fiscal 2003.

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Food preparation and quality control

We believe our food quality and control standards are among the highest in the industry. Our systems are designed to provide freshly prepared items based on the specifications set by our corporate executive chef and overseen by an assistant general manager and up to three management assistants. We invest substantial time in training and testing of our kitchen associates to adhere to our strict standards and preparation guidelines to maintain our quality control. The design of our facilities enables us to ensure food is maintained in accordance with the requirements of the Food and Drug Administration. We audit our sanitary conditions at each restaurant and train all of our management associates regarding safe handling practices of all perishable food products.

Guest loyalty

We believe our restaurants generate higher than average repeat visits due to our four day-part offerings of lunch, after work, dinner and late night, as well as the increased guest traffic generated from the broadcasting of major sporting events. Based upon a market research study of over 1,100 of our guests completed during fiscal 2002, we determined that on average our guests visit Champps 2.7 times per month as compared to approximately 1.9 visits per month for the casual dining industry, while 10.0% of our guests visit our restaurants on average 11 times per month. The social interaction that is created within our restaurants also provides our guests with a comfortable setting to meet family, friends and co-workers. We rely on frequent visits and loyalty from our guests to generate the high volume of sales in our restaurants.

Marketing and advertising

Historically, we have relied primarily on guest referrals rather than external marketing initiatives to promote our brand. Within our restaurants we continually promote special events and upcoming entertainment activities as well as special menu items or drinks to drive guest frequency and sales. We have implemented a first time guest program that is intended to strengthen our brand loyalty by educating our first time guests about the Champps concept. During fiscal 2003, 2002 and fiscal 2001, our expenditures for advertising and promotions were less than 1.5% of total restaurant sales.

Our associates are integral to the success of our in-store marketing strategy. Our hosts introduce our specials to our guests upon seating, and at the end of each dining experience, our wait staff is instructed to inform our guests of upcoming special or promotional events. We communicate special events to our guests with poster stanchions or special displays, as well as table displays. Finally, when exiting our restaurants, the greeters thank each guest for coming to Champps and invite them to come back soon.

On occasion, we engage in paid advertising for individual restaurant locations, including newspaper and radio advertisements, and have tested cable television advertising in select markets. We utilize a variety of printed marketing materials, including restaurant location brochures, hotel concierge cards, take-out menus and direct and electronic mailings.

Operations

Restaurant management. At September 19, 2003, we had nine regional directors who typically oversee approximately four to seven restaurants each. These regional directors supervise the general managers at each restaurant in their region. Due to the complexity of our operations and to ensure our high level of guest service, our restaurant management is divided into three areas, the general manager, front-of-house managers and back-of-house managers, each of whom are supported by additional staff members. Our managers are frequently promoted from within Champps to encourage continuity and opportunities for development, as well as enhance our corporate culture. We compensate our management team through a combination of base salary and bonuses based on achieving established performance levels for revenue, profit and guest service.

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Restaurant associates and service. We believe that our uncompromising service is one of our differentiating factors. Our service is based on a team concept to ensure that guests are made to feel that any associate can help them and that they are never left unattended. To maintain these high standards, we seek to hire and train personnel who believe in our philosophy and are passionate about guest service. We strive to personalize the dining experiences of our guests by instilling both high standards and a sense of urgency among our associates. All associates meet with their managers at two daily pre-shift motivational and informational meetings in which service standards, restaurant promotions, specials and quality control are reviewed. We frequently reward individual and restaurant achievement through several recognition programs intended to build and maintain associate morale. For example, our “Pin Program” rewards and recognizes the efforts of associates with pins that are worn proudly on uniforms to publicly acknowledge their commitment to guest service.

Training.The restaurant management team is provided with an intensive eight-week training program to ensure they have appropriate knowledge to excel in their position. All members of management are required to receive kitchen training to understand the importance of the food preparation process and how the quality of our menu is a significant driver of repeat guest visits. In addition, all field management associates with a minimum of six months experience with Champps complete a one-week training program entitled “Champps Management Leadership Conference.” This program combines hands-on training and demonstrations with classroom instruction from each of the various corporate departments in order to educate them on Company policies, train them to be more effective managers and prepare them for promotional opportunities including general manager positions. We also host an annual general managers’ conference focusing on strategic issues in addition to conducting other training classes. This conference also serves as a platform to recognize the general managers who exceeded our expectations.

We provide all new associates with complete orientation and training for their positions to ensure they are able to meet our high standards and understand our company policies. For servers, we require a minimum of six days training on how to serve our food, the composition and preparation techniques for each menu item, direction on how to treat and serve our guests and ways to promote our business. Our food preparation staff undergoes an intensive five-day hands-on training program for their respective positions, which includes a review of our safety procedures. The training encompasses classroom instruction, on-the-job training programs for each position, and testing of the new associate’s progress at pre-determined stages within the training schedule.

When we open a new restaurant, we provide an extensive and varied level of training to associates in each position to ensure the smooth and efficient operation of the restaurant from the first day it opens to the public. This training helps provide our guests with a quality dining experience from opening day on. Our training programs enable us to promote existing associates and managers as new restaurants open. We believe that we can support our expansion strategy as a result of having a large manager base in existing restaurants that can be promoted or transferred to new restaurants, combined with our thorough training programs and hiring of outside personnel.

Restaurant franchise and licensing agreements

As of September 19, 2003, we had 12 franchised restaurants that began operations between 1991 and 2000. The franchise in Duluth, MN was closed by the franchisee in July 2002. For fiscal 2002, the Duluth franchise recorded sales of approximately $1.0 million and we recorded net franchise royalty income of approximately $18,000. Seven of our current franchised restaurants are located in the Minneapolis, MN area. We also have one franchised restaurant in Charlotte, NC, Sioux City, SD, Omaha, NE, and two in Milwaukee, WI. Three franchisees own eight of the 12 franchised restaurants.

Our revenue from current franchisee agreements represented approximately 0.3% of our revenue in fiscal 2003. The franchisee is responsible for all direct costs involved in the construction and maintenance of their restaurants. We provide menu development and marketing support on a limited basis. Franchisees are required to provide periodic financial reports and annual financial statements to our corporate office for performance measurement and fee calculations. Currently, we are not actively seeking additional franchisees. Although our existing franchisees do not have the right to open additional restaurants, under certain circumstances we may permit our existing franchisees to open additional restaurants from time-to-time. Currently, an existing franchisee is negotiating to open a Champps restaurant in Des Moines, Iowa. Although we have no obligation to do so, we may seek to acquire one or more of our existing franchised restaurants if they meet our acquisition criteria.

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Accounting and management information systems

We use an automated data processing system and standardized reporting procedures to provide each of our company-owned restaurants with centralized financial and management controls. Our management information system tracks each restaurant’s weekly sales reports, vendor invoices, payroll information and other operating information which is connected to our centralized accounting and management information systems at our corporate headquarters in real time. By having a system where data can be input remotely and controlled centrally, the overhead functions are streamlined and administrative expenses are reduced.

While we continue to monitor our computer hardware and financial software for potential upgrades, we believe our existing management information systems are sufficient to support our long-term expansion plans.

Purchasing

We endeavor to obtain high quality menu ingredients and other supplies and services for our operations from reliable sources at competitive prices. We rely on SYSCO Corporation, a national food distributor, as the primary supplier of our food. In August 2003, we entered into a new five-year distribution agreement with SYSCO. By utilizing a distribution company with a national presence, we are able to ensure consistent application of menu specifications throughout the country at a pre-negotiated price. We also periodically enter into selective short-term agreements for the products we use most extensively. This helps us to consistently maintain our product costs. We believe that all essential food and beverage products are available from several qualified suppliers at competitive prices should an alternative source be required.

To maximize purchasing efficiencies and to provide for the freshest ingredients for our menu items, each restaurant’s management determines the quantities of food and supplies required. Our centralized purchasing staff, under the direction of our chief operating officer, specifies the products to be used at our restaurants, designates the vendors and provides suppliers with detailed ingredient specifications.

Competition

The restaurant industry is highly competitive. We compete with other national and international restaurant chains as well as local and regional operations. Competition within the industry is based principally on the quality, variety and price of food products served. Changes in consumer preferences, economic conditions, environmental conditions, demographic trends and the location and number of, and type of food served by, competing restaurants could adversely affect our business as could the availability of experienced management and hourly associates. We believe that the flexibility of our multiple day-part model, the diversity and quality of our freshly prepared menu items and our unique entertainment and excellent service have created an attractive, high sales volume restaurant model that provides us with considerable growth opportunities to develop our brand nationwide.

Associates

As of September 19, 2003, we had approximately 5,270 associates on the Champps team, approximately 385 of which were restaurant management and field support personnel and 40 whom worked at corporate headquarters. We do not have any collective bargaining agreements. We consider our associate relations to be good.

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History

The original Champps concept began operations in 1984 and grew to eight restaurants by December 1995. In 1996, William H. Baumhauer, chief executive officer and president of DAKA International, Inc., a large publicly traded food service management and restaurant company, led DAKA’s purchase of Champps to add to its portfolio of restaurant concepts. As part of a corporate restructuring in 1997, DAKA spun off its food service businesses and the shareholders retained ownership of the restaurant businesses, which included Champps, Fuddruckers, the Great Bagel & Coffee Company, Casual Dining Ventures and Restaurant Consulting Service. The new company was named Unique Casual Restaurants, Inc. At the end of 1998 and early 1999, Fuddruckers and Restaurant Consulting Services were sold to separate buyers. In June 1999, Unique Casual Restaurants closed Great Bagel & Coffee Company and Casual Dining Ventures and changed its name to Champps Entertainment, Inc.

Shortly thereafter, Mr. Baumhauer, who had left the DAKA organization in May 1998, was recruited back to Champps as president and chief executive officer. Upon his return, Mr. Baumhauer set in motion a series of strategic initiatives that included hiring a new management team, consolidating our headquarters, improving our operational and financial reporting procedures, standardizing the purchasing process and establishing new associate training and retention practices. As a result, our restaurant level operating profit margin increased from 7.6% in 1999 to 10.5% in fiscal 2003. In addition, our income from continuing operations increased from a negative $14.1 million in fiscal 1999 to a positive $3.9 million in fiscal 2003. We have also implemented a disciplined expansion strategy and have added 27 restaurants since Mr. Baumhauer’s return.

Operating Locations

We lease all but one of our restaurants. The leases for our restaurants expire at varying times commencing in 2009. Nearly all of our leases are for fifteen to twenty year terms with renewal options extending our leases from five to twenty additional years. Currently, our leases, with option periods, expire between 2010 and 2041.

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The following table sets forth data regarding our 41 company-owned restaurants at June 29, 2003.

Company-owned restaurants

Restaurants to open

As of September 19, 2003, we have opened three additional restaurants during fiscal 2004, one in Lansing, Michigan, one in Colorado Springs, Colorado and one in Richmond, Virginia. We have begun construction on restaurants located in Wilmington, Delaware, Rochester, New York, and Fairfax, Virginia. We also have signed agreements to open restaurants in Baltimore, Maryland, Westlake, Ohio, Philadelphia, Pennsylvania and Orland Park, Illinois.

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Franchised restaurants

As of September 19, 2003, we have 12 franchised restaurants, seven of which are located in the Minneapolis, MN area, two in Milwaukee, WI, and one in each of Charlotte, NC, Sioux City, SD and Omaha, NE. A franchise located in Duluth, MN was closed by the franchisee in July 2002.

Trademarks

Through our operating subsidiaries, we have registered a number of trademarks and service marks with the United States Patent and Trademark Office and with certain states, including, but not limited to the trade names: “Champ’s,” “Champps,” and “Champps Americana.”

Pursuant to a Master Agreement dated February 1, 1994, whereby Champps acquired the “Champ’s” and “Champps” service marks, trademarks and trade names, we agreed to pay the seller an annual fee. For fiscal 2004, the maximum fee is equal to the lesser of $322,422 or one-quarter percent (0.25%) of the gross sales of certain Champps restaurants excluding two of our oldest restaurants. The maximum fee payable is increased annually by the lesser of the increase in the consumer price index or 4.0%. In fiscal 2003, we paid $0.3 million under this agreement.

Government regulation

Our business is subject to various federal, state and local laws, including health, sanitation and safety standards, federal and state labor laws, zoning restrictions and state and local licensing. We are also subject to federal and state laws regulating franchise operations and sales, which impose registration and disclosure requirements on franchisors in the offer and sale of franchises or impose substantive standards on the relationship between franchisor and franchisee.

Our restaurants are subject to state and local licensing and regulation with respect to selling and serving alcoholic beverages. Typically, licenses must be renewed annually and may be revoked or suspended for cause. The failure to receive or retain, or a delay in obtaining, a liquor license in a particular location would adversely affect ours, or a franchisee’s, operation in that location.

In addition, our restaurants are subject to “dram shop” statutes in certain states, which generally give a person injured by an intoxicated person the right to recover damages from the establishment that has wrongfully served alcoholic beverages to the intoxicated person. We carry liquor liability coverage in the amount of $1.0 million per occurrence subject to an aggregate annual policy limit of $5.0 million, with a $0.25 million deductible per occurrence.

Risk factors related to our business

Our growth strategy depends on our ability to open new restaurants, and we may not be able to achieve our planned unit expansion

Our ability to expand our operations through the opening of new restaurants is critical to our future success. Since fiscal 1997 through fiscal 2003, we have expanded our operations from 12 company-owned restaurants in nine states to 41 company-owned restaurants in 16 states. We expect to open an additional six to eight restaurants in fiscal 2004. We have experienced delays in restaurant openings from time to time and may experience delays in the future. We cannot guarantee that we will be able to achieve our expansion goals or that new restaurants will be operated profitably. Further, we cannot assure that any restaurant we open will obtain operating results similar to those of our existing restaurants or will not adversely affect the results of other Champps restaurants in the same market. The success of our planned expansion will depend upon numerous factors, many of which are beyond our control, including the following:

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In addition, we contemplate entering new markets in which we have no operating experience. These new markets may have different demographic characteristics, competitive conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause the new restaurants to be less successful in these new markets than in our existing markets.

Our growth strategy may strain our management, financial and other resources. For instance, our existing systems and procedures, restaurant management systems, financial controls, information systems, management resources and human resources may be inadequate to support our planned expansion of new restaurants. We may not be able to respond on a timely basis to all of the changing demands that the planned expansion will impose on our infrastructure and other resources.

The inability to develop and construct our restaurants within budget and projected time periods will adversely affect our business and financial condition

Critical to our success is our ability to construct our restaurants within budget and on a timely basis. Many factors may affect the costs associated with the development and construction of our restaurants, including:

If we are unable to develop new restaurants within anticipated budget or time periods, our revenue will not meet our expectations and labor costs may exceed our projections. In addition, returns on our investments may be impaired and the amount of capital available for other new restaurants may not be available.

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The failure of our existing or new restaurants to perform as anticipated could adversely affect our business

As of June 29, 2003, we owned and operated 41 restaurants, seven of which were opened within the preceding 12-month period. The results achieved by these restaurants may not be indicative of longer-term performance or the potential market acceptance of restaurants in other locations. We cannot assure you that any new restaurant that we open will have similar operating results to those of prior restaurants. We anticipate that our new restaurants will take at least several months to reach planned operating levels due to inefficiencies typically associated with new restaurants, including lack of market awareness, inability to hire sufficient staff and other factors.

Because of our small restaurant base, our operating results could be materially and adversely affected by the negative performance of a small number of restaurants

Due to our small restaurant base, poor operating results at any one or more of our restaurants could materially and adversely affect our business, financial condition, results of operations or cash flows. In addition, we locate our restaurants close to areas that have a combination of commercial office space, residential housing and high traffic areas, such as shopping malls or multi-screen movie theaters. Changes in levels of office occupancy, new or competing real estate development projects, or delays in the development of the projects where we are located may adversely affect the performance of a restaurant. In addition, our operating results achieved to date may not be indicative of our future operating results with a larger number of restaurants.

We may require additional capital to expand our business in accordance with our growth strategy

Changes in our operating plans, acceleration of our expansion plans, lower than anticipated sales, increased expenses or other events may cause us to seek additional debt or equity financing on an accelerated basis. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could negatively impact our growth and other plans, as well as our financial condition and results of operations. Additional debt financing, if available, may involve significant cash payment obligations and covenants or financial ratios that restrict our ability to operate or grow our business. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

Our franchisees could take actions that could harm our business

Franchisees are independent operators and are not employed by us. We provided training and support to franchisees, but any number of factors beyond our control may diminish the quality of franchised restaurant operations. Consequently, franchisees may not successfully operate restaurants in a manner consistent with our standards and requirements or may not hire and train qualified managers and other restaurant personnel. If franchisees do not operate in accordance with our standards, our image and reputation may suffer materially and system-wide sales could significantly decline. Also, the presence of franchised restaurants may limit our ability to expand in a desired market.

Our operations are susceptible to changes in food availability and costs, which could adversely affect our operating results

Our profitability depends in part on our ability to anticipate and react to changes in food costs. We rely on SYSCO Corporation, a national distributor, as the primary supplier of our food. Any increase in distribution prices or failure of SYSCO to perform could cause our food costs to increase. There also could be a significant short-term disruption in our supply chain if SYSCO failed to meet our distribution requirements or our relationship was terminated. Further, various factors beyond our control, including adverse weather conditions, governmental regulation, production, availability and seasonality may affect our food costs or cause a disruption in our supply. We cannot predict whether we will be able to anticipate and react to changing food costs by adjusting our purchasing practices and menu prices, and a failure to do so could materially and adversely affect our operating results.

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Changes in consumer preferences or discretionary consumer spending could negatively impact our results of operations

Our continued success depends, in part, upon the popularity of the menu items served in the Champps environment and our dining style. Shifts in consumer preferences away from our cuisine or dining style could materially and adversely affect our future profitability. In addition, our success depends to a significant extent on numerous factors affecting discretionary consumer spending, including economic conditions, disposable consumer income and consumer confidence. Adverse changes in these factors could reduce guest traffic or impose practical limits on pricing, either of which could materially and adversely affect our operating results.

Health concerns relating to the consumption of our food products could negatively impact our results of operations

We are subject to the risk that consumer preferences could be affected by health concerns about the consumption of particular food products. Beef and chicken are the key ingredients in many of our menu items. Negative publicity concerning food quality, illness and injury, publication of government or industry findings concerning food products served by us, or other health concerns or operating issues stemming from one restaurant or a limited number of restaurants may adversely affect demand for our food and could result in a decrease in guest traffic to our restaurants.

If we lose the services of our president or other key associates, our business could suffer

Our future success significantly depends on the continued service and performance of William H. Baumhauer, our president and chief executive officer, as well as other key executives. Our future performance will depend on our ability to motivate and retain Mr. Baumhauer and other executive officers and key associates, such as regional directors of operation, restaurant general managers and kitchen managers. Competition for these associates is intense. In May 2003, Mr. Baumhauer’s employment agreement was amended and extended through June 30, 2005. The loss of the services of Mr. Baumhauer or members of our senior management and key associates or the inability to attract additional qualified personnel as needed could materially harm our business. We do not currently have key person life insurance for any of our officers or directors.

We face indemnification liability from our predecessor companies

In connection with the spin-off in late 1997 from DAKA International, Inc., we assumed certain contingent liabilities of DAKA and its subsidiary, Daka, Inc. In March 2000, a former associate of Daka was awarded approximately $0.2 million in compensatory damages, $4.8 million in punitive damages and $0.3 million in legal fees in a jury trial based on the associate’s claim of negligent supervision and retaliation due to alleged conduct that occurred in 1996 at a former Daka food service location. The amount of these awards accrues interest at a rate of 6.0% per annum. On September 20, 2000, Daka filed a Notice of Appeal with the Court of Appeals for the District of Columbia and this matter is now pending in that court. On February 9, 2001, Daka also filed its Notice of Appeal in connection with the court’s award of legal fees and this matter is pending in that court. Under our Post-Closing Covenant Agreement with DAKA, we have been responsible for handling the defense of these claims, including the appeals. At June 29, 2003, our consolidated balance sheet included our accrual of approximately $0.3 million in respect of the potential award in this matter and related legal expenses. If Daka does not prevail on its appeals in substantially all material respects, we would be required to take a charge to net income in the amount by which our final payout exceeds our reserve for this matter, and this charge could be a significant amount in relation to our income from operations at the time. In addition, the payment of a substantial amount of cash as a result of an adverse ruling by the Court of Appeals could result in delays in our expansion plans or could result in our needing to seek additional financing sources to support our expansion or our day-to-day operations. It is also possible that Daka could settle this case in advance of a final judicial determination, and the settlement amount itself could be substantial. Depending on the timing and nature of the ruling by the Court of Appeals, or the timing of any settlement of this case, we also could incur substantial additional legal expenses in pursuing Daka’s appeal and the ultimate resolution of this matter.

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We are also engaged in various tax audits arising from the operations of these predecessor companies. In December 2001, the State of Florida proposed to assess subsidiaries of DAKA $2.4 million in unpaid state sales taxes, and an additional $2.9 million in penalties and interest through December 2001. We are contractually obligated to indemnify DAKA for this matter, and are currently protesting this proposed assessment. A final determination of this matter requiring a substantial payment by us would have the same adverse consequences as a substantial final payment in the lawsuit referred to in the preceding paragraph.

We reserve in our financial statements for these and other matters, which reserves are reviewed periodically to determine their adequacy. Although we believe that our current reserves are proper under generally accepted accounting principles in light of our analysis of the outcome of the related matters, there can be no guarantees that we will not have to recognize additional expenses as these matters are ultimately resolved, which expenses could be significant.

Litigation could have a material adverse affect on our business

We are subject to complaints or allegations from current and former or prospective associates from time to time. In addition, we are the subject of complaints or litigation from guests alleging illness, injury or other food quality, health or operational concerns. We may be adversely affected by publicity resulting from such allegations, regardless of whether such allegations are valid, whether we are liable, or whether such allegations involve one of our franchisees or licensees. A lawsuit or claim could result in an adverse decision or result that could have a material adverse affect on our business.

We are also subject to state “dram shop” laws and regulations, which generally provide that a person injured by an intoxicated person may seek to recover damages from an establishment that wrongfully served alcohol to such person. While we carry liquor liability coverage as part of our existing comprehensive general liability insurance, we may still be subject to a judgment in excess of our insurance coverage and we may not be able to obtain or continue to maintain such insurance coverage at reasonable costs, or at all.

If we are unable to protect our intellectual property rights, it could reduce our ability to capitalize on our brand names

Pursuant to a Master Agreement dated February 1, 1994, we acquired the “Champps,” “Champ’s” and “Champps Americana” service mark, trademark and trade name. Our business prospects will depend, in part, on our ability to develop favorable consumer recognition of the Champps name and logo. Our trademarks could be infringed in ways that leave us without redress, such as by imitation. In addition, we rely on trade secrets and proprietary know-how, and we employ various methods to protect our concepts and recipes. However, such methods may not afford adequate protection and others could independently develop similar know-how or obtain access to our know-how, concepts and recipes. Moreover, we may face claims of infringement that could both interfere with our use of our proprietary know-how, concepts, recipes, trade secrets or trademarks or subject us to damages. Defending against such claims may be costly and, if unsuccessful, may prevent us from continuing to use such proprietary information in the future.

Although “Champps”, “Champ’s” and “Champps Americana” are federally registered trademarks, there are other restaurants and bars that operate under similar names. If these restaurants or bars are affected by negative publicity and consumers confuse these competitors with our Champps branded restaurants, our operating results could be adversely affected.

We are subject to extensive governmental regulations concerning the sale and serving of alcoholic beverages and wages paid to our associates that could adversely affect our operations and our ability to expand and develop our restaurants

The restaurant industry is subject to various federal, state and local governmental regulations. While at this time we have been able to obtain and maintain the necessary governmental licenses, permits and approvals, the failure to maintain these licenses, permits and approvals, including food and liquor licenses, could adversely affect our operating results. Difficulties or failure in obtaining the required licenses and approvals could delay or result in our decision to cancel the opening of new restaurants. Local authorities may suspend, revoke or deny renewal of our food and liquor licenses if they determine that our conduct does not meet applicable standards or if there are changes in regulations.

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For fiscal 2003, approximately 29.5% of our restaurant food and beverage sales was attributable to the sale of alcoholic beverages, and we believe our ability to serve these beverages is an important factor in attracting guests. Alcoholic beverage control regulations require each of our restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license or permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time, which could include sales to minors or intoxicated persons. Alcoholic beverage control regulations relate to numerous aspects of daily operations of our restaurants. The failure of a restaurant to obtain or retain liquor or food service licenses would adversely affect the restaurant’s operations.

Various federal and state labor laws govern our relationship with our associates and affect our operating costs. These laws include minimum wage requirements, overtime pay, unemployment tax rates, workers’ compensation rates, and citizenship requirements. Additional government imposed increases in minimum wages, overtime pay, paid leave of absence and mandated health benefits, increased tax reporting and tax payment requirements for associates who receive gratuities or a reduction in the number of states that allow tips to be credited toward minimum wage requirements could harm our operating results.

On June 17, 2002, the United States Supreme Court ruled that the Internal Revenue Service (“IRS”) can use aggregate tip estimates to ensure that the employer is paying FICA taxes on allegedly underreported tips. Under the ruling, the IRS does not need to examine individual associates’ records and it is permissible for the IRS to estimate the amount of cash tips given to associates based on tips included on credit card receipts.

The reporting of tips is the responsibility of the associates receiving the tips. We encourage our associates to abide by the law and report 100% of the tips that they receive. While we believe our associates adequately report tips, we have implemented tip reporting policies and procedures that are in full compliance with the recommended IRS policies and procedures as defined in our Tip Reporting Alternative Commitment agreement that was executed by the Company and the IRS in fiscal 2003.

Our success depends on our ability to compete effectively in the restaurant industry

The restaurant industry is highly competitive. Although we believe that our operating concept, quality of food, ambiance and overall dining experience differentiates us from competitors, we may be unable to compete effectively with new restaurant concepts or with larger, better-established competitors, which have substantially greater financial resources and operating histories than ours.

We may not be able to generate sufficient future taxable income to fully utilize our income tax operating loss and credit carryforwards

As of June 29, 2003, we had federal net operating loss (“NOL”) carryforwards of approximately $56.4 million and FICA and targeted job tax credit carryforwards of approximately $3.5 million. The federal NOL’s expire at various times through 2020 and the FICA tip and targeted job tax credits expire at various times through 2023. While we expect to fully utilize the carryforwards to reduce our income tax liabilities, future income may not be sufficient for full utilization of the carryforwards.

Strategic Alternatives

From time to time, as a matter of standard business practice, the management of the Company investigates various strategic alternatives in an attempt to maximize shareholder value. These strategic alternatives include potential acquisitions, mergers with other companies and go private transactions. As of September 19, 2003, the Company has not entered into any definitive agreements relative to any strategic alternative that has been considered or brought before management. Should a strategic alternative be presented that has the potential to maximize shareholder value, the board of directors would assign an independent committee to determine the merits of the proposed transaction and seek shareholder approval, if necessary.

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