**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

** **

**FORM 10-K**

 

| **ý** | **Annual report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**                                                                                                                            |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                 |
|       | **For  the fiscal year ended December 30, 2002**                                                                                                                                                                     |
|       |                                                                                                                                                                                                                 |
| **or**     |
|       |                                                                                                                                                                                                                 |
| **o**      | **Transition report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**                                                                                                                        |
|       |                                                                                                                                                                                                                 |
|       | **For  the transition period  from                             to** |
|       |                                                                                                                                                                                                                 |
|       | **Commission  file number:   33-48183**                                                                                                                                                                    |

 

| **American Restaurant Group, Inc.**                                                |
|------------------------------------------------------------------------------------|
| Exact name of  registrant as specified in its charter                              |
|                                                                               |   |   |
| **Delaware**                                                                       |   | **33-0193602** |
| (State or other  jurisdiction of  incorporation or organization)                   |   | (I.R.S. Employer  Identification No.) |
|                                                                               |   |   |
| **4410  El Camino Real - Suite 201  Los Altos, California**                        |   | **94022** |
| (Address of  principal executive offices)                                          |   | (Zip Code) |
|                                                                               |   |   |
| Registrant’s  telephone number, including area code   **(650) 949-6400** |
|                                                                               |   |   |
| Securities  registered pursuant to Section 12(b) of the Act:                       |

 

| **Title of each class** |   | **Name of each exchange  on which registered** |
|-------------------------|--------|------------------------------------------------|
| None                    |   | None                                           |

 

Securities registeredpursuant to Section 12(g) of the Act:  **None**

 

Indicate by a check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  o    No ý

 

Registrant's financialstatements for fiscal year-end 2000 are unaudited. See Note 2.

 

Indicate by a check markif disclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of theregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part II of this Form 10-K or any amendments tothis Form 10-K.  ý

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct).  Yes  o    No ý

 

The number of outstandingshares of the Registrant’s Common Stock (one cent par value) as of March 3,2003, was 128,081.

 

 

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**AMERICAN RESTAURANT GROUP, INC.**

 

AMERICANRESTAURANT GROUP, INC. (the “COMPANY”) RESTATED ITS FINANCIAL STATEMENTS FOR2001 AND PRIOR PERIODS, AS DESCRIBED IN NOTE 2 TO THE CONSOLIDATED FINANCIALSTATEMENTS INCLUDED AS PART OF THIS ANNUAL REPORT ON FORM 10-K.  OUR PRIOR INDEPENDENT ACCOUNTANTS, ARTHURANDERSEN LLP, ARE NOT ABLE TO REISSUE THEIR REPORT BECAUSE THEY CEASEDOPERATIONS IN 2002, NOR HAVE THEY AUDITED THE RESTATEMENT ADJUSTMENTS RELATEDTO THE FISCAL YEAR ENDED DECEMBER 25, 2000 AS DESCRIBED IN NOTE 2.  ALSO, CERTAIN RECORDS AND MANAGEMENTPERSONNEL RESPONSIBLE FOR RELEVANT EARLIER TIME PERIODS ARE NO LONGER AVAILABLEAS A RESULT OF THE STOCK SALE OF CERTAIN OPERATING SUBSIDIARIES IN 2000.  IN THESE CIRCUMSTANCES, OUR SUCCESSORINDEPENDENT ACCOUNTANTS, PRICEWATERHOUSECOOPERS LLP, WERE UNABLE TO PERFORM ANAUDIT IN CONFORMANCE WITH GENERALLY ACCEPTED AUDITING STANDARDS AND, THEREFORE,ARE NOT ABLE TO ISSUE AN OPINION ON THE FINANCIAL STATEMENTS FOR THE FISCALYEAR ENDED DECEMBER 25, 2000. ACCORDINGLY, OUR RESTATED FINANCIAL STATEMENTS ASOF AND FOR THE FISCAL YEAR ENDED DECEMBER 25, 2000 ARE UNAUDITED.

 

THERESTATEMENT OF THE COMPANY’S FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDEDDECEMBER 25, 2000 AND DECEMBER 31, 2001 ARE DESCRIBED IN DETAIL WITHIN ITEM 7,“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS,” IN THE SEGMENT CAPTIONED “RESTATEMENT OF FINANCIAL STATEMENTS;”WITHIN ITEM 9, “CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE;” AND WITHIN THE COMPANY’S CONSOLIDATED FINANCIALSTATEMENTS AND RELATED NOTES, INCLUDING NOTE 2.

** **

**INDEX**

 
|         |                                                                                        |   |
|--------------|---------------------------------------------------------------------------------------------|--------|
| **PART I**   |                                                                                        |   |
|         |                                                                                        |   |
| ITEM 1.      | BUSINESS                                                                                    | 3      |
|         |                                                                                        |   |
| ITEM 2.      | PROPERTIES                                                                                  | 6      |
|         |                                                                                        |   |
| ITEM  3.     | LEGAL  PROCEEDINGS                                                                          | 7      |
|         |                                                                                        |   |
| ITEM  4.     | SUBMISSION  OF MATTERS TO A VOTE OF SECURITYHOLDERS                                         | 7      |
|         |                                                                                        |   |
| **PART II**  |                                                                                        |   |
|         |                                                                                        |   |
| ITEM  5.     | MARKET  FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                 | 7      |
|         |                                                                                        |   |
| ITEM 6.      | SELECTED FINANCIAL DATA                                                                     | 8      |
|         |                                                                                        |   |
| ITEM  7.     | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 10     |
|         |                                                                                        |   |
| ITEM  8.     | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                | 17     |
|         |                                                                                        |   |
| ITEM  9.     | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE       | 17     |
|         |                                                                                        |   |
| **PART III** |                                                                                        |   |
|         |                                                                                        |   |
| ITEM  10.    | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT                                         | 18     |
|         |                                                                                        |   |
| ITEM 11.     | EXECUTIVE COMPENSATION                                                                      | 19     |
|         |                                                                                        |   |
| ITEM  12.    | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                             | 21     |
|         |                                                                                        |   |
| ITEM  13.    | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                             | 23     |
|         |                                                                                        |   |
| ITEM 14.     | CONTROLS AND  PROCEDURES                                                                    | 23     |
|         |                                                                                        |   |
| **PART IV**  |                                                                                        |   |
|         |                                                                                        |   |
| ITEM  15.    | EXHIBITS,  FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K                         | 24     |

 

2

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**ITEM1.****                                                     BUSINESS**

 

**Introduction**

 

The Company, through itssubsidiaries, competes predominately in the midscale segment of the UnitedStates restaurant industry. (References to “the Company,” “we,” “us,” and “our”refer to American Restaurant Group, Inc., a Delaware corporation.) The Companywas formed on August 13, 1986 to acquire certain operations of SagaCorporation, a wholly owned subsidiary of Marriott Corporation (the“Acquisition”). The Acquisition was completed in February 1987.  (Prior to the completion of the Acquisition,the Company had no significant operations.) The Company is a subsidiary of American Restaurant Group Holdings, Inc.,a Delaware corporation (“Holdings”).

 

As of December 30, 2002,the Company had three wholly owned direct subsidiaries: ARG Enterprises, Inc.,ARG Property Management Corporation, and ARG Terra, Inc. ARG Enterprises, Inc.is the parent to one wholly owned subsidiary, Black Angus Enterprises of Idaho,Inc.

 

The only operatingsegment is Black Angus, which operates a western-style steakhouse specializingin steak and prime rib.  We previouslyoperated various restaurant chains. In June 2000, however, we sold all of thestock (the “Stock Sale”) of four wholly owned subsidiaries (Grandy’s, Inc.,Spoons Restaurants. Inc., Spectrum Foods, Inc., and Local Favorite, Inc.,collectively, the “Non-Black Angus Subsidiaries”) to Spectrum Restaurant Group,Inc. (formerly known as NBACo, Inc.; see discussion below in Item 7,“Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” in the segment captioned “Net Income (Loss) from DiscontinuedOperations” and in Item 13, “Certain Relationships and Related Transactions”).

 

**Overview**

 

As of December 30, 2002,Black Angus operated 109 Stuart Anderson’s Black Angus and Stuart Anderson’sCattle Company steakhouses located primarily in California, the PacificNorthwest, and Arizona.  The chain wasfounded in Seattle in 1964.  Black Angusrestaurants are typically located in highly visible and heavily traveled areasin or near retail and commercial businesses, are freestanding, and range insize from 6,500 to 12,000 square feet, seating approximately 220 to 350customers.  Black Angus restaurants aredistinctly Western in their design and feature booth seating for dining. Theyare generally open for lunch from 11:30 AM to 4:00 PM and for dinner from 4:00PM to 10:00 PM.

 

BlackAngus developed a smaller restaurant prototype in 1995 that is approximately6,700 square feet and offers a comparable number of dining seats as many of thelarger restaurants. We opened 21 restaurants using the smaller prototype,including three, four, and one in the fiscal years 2000, 2001, and 2002,respectively.  Black Angus developed anintermediate restaurant prototype in 2002 that is approximately 8,000 squarefeet.  The first restaurant based on theintermediate prototype is under construction and expected to open in fall2003.  We intend to continue to expandBlack Angus in existing and adjacent markets based on the smaller andintermediate prototypes.

 

3

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**Restaurant Operations**

 

Black Angus isfunctionally organized with separate operations, marketing, accounting,finance/treasury, information systems, real estate/risk management, humanresources/payroll, and law departments.

 

The Company’s cash managementsystem is highly sophisticated with controls down to the server level.  Restaurants are required to make dailydeposits of cash, and the Company uses a centralized cash-concentration systemthat sweeps all of its major cash accounts on a daily basis. Our central systemfor accounts payable and check-writing profiles approximately 3,100 vendors forthe year ended December 30, 2002.

 

We use a combination ofin-house and outside-contracted services for our information-system needs.  In-house systems include a point-of-salesystem for each restaurant and stand-alone processing at the restaurant andcorporate levels.  We contract forpayroll services and for mainframe-based data processing.

 

Each restaurant isstaffed with a General Manager who is directly responsible for the operation ofthe restaurant, including product quality, cleanliness, service, inventory,cash control, and the appearance and conduct of employees. Each restaurant alsohas one or two restaurant Managers and a Chef. Managers and supervisorypersonnel train other restaurant employees in accordance with detailedprocedures and guidelines.

 

General Managers aresupervised by District Managers, each of whom is responsible for approximatelysix restaurants.  District Managers,General Managers, Managers, and Chefs are eligible for bonuses under anextra-compensation program that has goals and objectives based on theprofitability, sales, and other factors relating to the restaurants.  However, issuance of all bonuses orincentive pay is at management’s discretion.

 

**Purchasing and Distribution**

 

Toensure standards of quality and to maximize pricing efficiencies, a centralpurchasing department coordinates the supply of almost all restaurantitems.  We purchase products throughoutthe United States and abroad through agreements with various food-servicevendors.  None of our vendors suppliesthe Company exclusively and no material agreements exist.  We routinely use public, cold-storagefacilities and make short-term commitments in order to establish theavailability and price of key food items such as beef and seafood.  We concentrate our distribution in order toachieve more favorable terms, but believe that we could replace anydistributor, if necessary, on a timely basis.

 

**Competition and Markets**

 

All aspects of therestaurant business are highly competitive. Price point, restaurant location, food quality, service, andattractiveness of facilities are important aspects of competition. Thecompetitive environment is often affected by factors beyond a particularrestaurant management’s control, including changes in the public’s taste andeating habits, population and traffic patterns, economic conditions, andchanges in the political environment. Our restaurants compete with a wide variety of restaurants, ranging fromnational and regional restaurant chains to locally owned restaurants.Competition from other restaurant chains typically represents the moreimportant competitive influence, principally because of their significantmarketing and financial resources.  Manyof our competitors have substantially greater financial, marketing, personnel,and other resources than us. In addition, competition is not limited to aparticular segment of the restaurant industry because fast-food restaurants,steakhouses, and casual-dining restaurants are all competing for the consumer’sdining dollars.  We believe that ourprincipal competitive strengths lie in the distinctive atmosphere and foodpresentation offered; the value, variety, and quality of food products served;the quality and training of our employees; the experience and ability ofmanagement; and the economies of scale enjoyed by us because of our size andgeographic concentration. We monitor consumer tastes and adjust and update ourmenus accordingly.

 

4

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**Employees**

 

At December 30, 2002, weemployed approximately 7,400 persons, of whom approximately 6,800 were hourlyemployees in restaurants, approximately 470 were salaried employees inrestaurants (Managers and Chefs), and approximately 100 were hourly andsalaried employees in divisional and corporate management and administration.Approximately 83% of the hourly restaurant employees work 35 hours or less perweek. No facility is unionized.  Webelieve we provide competitive compensation and benefits to our employees andthat our employee relations are good.

 

**Regulations**

 

Each restaurant issubject to licensing and regulation by state and local health, sanitation,safety, fire, and other departments.  Inaddition, each restaurant is subject to licensing with respect to the sale ofalcoholic beverages.  The loss oflicenses or permits by our restaurants to sell alcohol would interrupt orterminate our ability to serve alcoholic beverages at those restaurants and, ifa significant number of restaurants were affected, could have a materialadverse effect on us.  We believe wehave good relations with the various alcoholic beverage authorities.

 

We are subject to theFair Labor Standards Act and various state laws governing such matters asminimum wages, overtime, and other working conditions. Many of our restaurantemployees are paid at rates related to the Federal and state minimum-wagerates.  Accordingly, increases in theminimum wages increase our labor costs.

 

**Service Marks**

 

We regard our servicemarks and trademarks as important to the identification of our restaurants andbelieve they have significant value in the conduct of our business. We haveregistered various service marks and trademarks with the United States Patentand Trademark Office.  In addition, wehave registered certain marks in various foreign countries.

 

**Seasonality**

 

Ourrestaurant revenues and profitability are not subject to significant seasonalfluctuations.

 

**Available Information**

 

We file annual reports onform 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,amendments to these reports, and other information with the Securities andExchange Commission (“SEC”).  The publicmay read and copy any materials we file with the SEC at the SEC’s PublicReference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.  The public may obtain information on theoperation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC maintains an Internet site (http://www.sec.gov)that contains reports, proxy and information statements, and other informationregarding issuers that file electronically with the SEC.

 

5

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**ITEM 2.****                                                     PROPERTIES**

 

Thefollowing table sets forth, as of December 30, 2002, the number of propertiesowned or leased by the Company:

 
|                     |   | **Lease Land  and Own  Building** |   | **Lease Land  and  Building** |   | **Total** |   |
|--------------------------|--------|-----------------------------------|--------|-------------------------------|--------|-----------|--------|
| Operated  by the Company |   | 33                                |   | 76                            |   | 109       |   |

 

All but one of ourrestaurants are freestanding.  Ourrestaurants generally range from 6,500 to 12,000 square feet. Most of ourrestaurant leases provide for the payment of the greater of a set base rentalor a percentage rental of up to 6% of gross revenues, plus property taxes,insurance, and other expenses.

 

We lease office space forour corporate and Black Angus headquarters in Los Altos, California.  We also lease office space in Santa Ana,California and Folsom, California.

 

The following table setsforth, as of December 30, 2002, the number of Black Angus restaurants by stateof operation:

 

| California  |   | 57     |   |
|-------------|--------|--------|--------|
| Arizona     |   | 12     |   |
| Washington  |   | 11     |   |
| Colorado    |   | 6      |   |
| Minnesota   |   | 6      |   |
| Indiana     |   | 3      |   |
| Nevada      |   | 3      |   |
| Oregon      |   | 3      |   |
| Utah        |   | 3      |   |
| Hawaii      |   | 2      |   |
| Alaska      |   | 1      |   |
| Idaho       |   | 1      |   |
| New  Mexico |   | 1      |   |
|        |   |   |   |
| Total       |   | 109    |   |

 

6

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**ITEM3.****                                                     LEGALPROCEEDINGS**

 

We are involved invarious claims and litigation matters incidental to our business, includingclaims arising out of personal injuries, employment practices, workers’compensation cases, and contract lawsuits. The claimants sometimes assert substantial damages. Based on informationpresently available, management does not believe that the outcome of suchclaims and litigation will have a material adverse effect on our financialposition, business, or results of operations.

 

**ITEM 4.****                                                     SUBMISSIONOF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

No matters were submittedto a vote of the common stockholders of the Company in the fourth quarter of2002.

 

**PARTII**

 

**ITEM 5.****                                                     MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

**Common Stock**

 

As of December 30, 2002,there were five holders of record of the 128,081 outstanding shares of theCompany’s common stock. We have never paid dividends to common stockholders andhave no plans to do so.  There iscurrently no market for the Company’s common stock, nor is such anticipated inthe near future.

 

**Cumulative Preferred Stock, Mandatorily Redeemable**

 

Asof December 30, 2002, there were six holders of record of the 68,046outstanding shares of our mandatorily redeemable 12% senior pay-in-kindexchangeable preferred stock.  Dividendsare cumulative and accrue at a rate of 12% to 15% per annum, payablesemiannually on February 15 and August 15 of each year.  We may, at our option, pay dividends in cashor in additional shares of cumulative preferred stock.

 

As part of arecapitalization plan in February 1998, we issued 35,000 preferred stock units(the “Units”) of the Company.  Each Unitconsists of $1,000 initial liquidation preference of 12% senior pay-in-kindexchangeable preferred stock and one common-stock purchase warrant with rightsto purchase 2.66143 shares of the common stock at an initial exercise price ofone cent per share.  Our preferred stockis mandatorily redeemable on August 15, 2003. If on August 15, 2003 we do not redeem our preferred stock for cash at aprice per share equal to 110% of the then-applicable liquidation preference,our preferred stock will be automatically redeemed for shares of our commonstock at that time.  Management believesthat the preferred stock will convert to common stock.

 

Stock dividends of 4,181shares and 4,495 shares were made February 15, 2002 and August 15, 2002,respectively.  There were 68,046 sharesof preferred stock outstanding at December 30, 2002.  The net book value of our preferred stock at December 30, 2002was $74.6 million.  There is currentlyno market for our preferred stock, nor is such anticipated in the nearfuture.  Management believes the sharesavailable for redemption on August 15, 2003 will be 74,448.

 

7

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**ITEM 6.****                                                     SELECTEDFINANCIAL DATA**

# ** **

Thefollowing selected historical consolidated financial data for the fiscalyear-end 2002 should be read in conjunction with Item 7, “Management’s Discussionand Analysis of Financial Condition and Results of Operations;” Item 9,“Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure;” and the consolidated financial statements and notes theretoincluded elsewhere in this Form 10-K. The selected financial data for the fiscal years ended 2002 and 2001 isderived from the audited consolidated financial statements of the Company.  The financial statements for the fiscalyears ended 2001 and prior, which were audited by Arthur Andersen LLP, thepredecessor independent accountants, are restated. The financial statements forfiscal years ended 2000 and prior are considered unaudited for reasonsdiscussed in Item 9.

 
|                                                                             |   | **Fiscal  Year ended**      |     |
|----------------------------------------------------------------------------------|--------|-----------------------------|----------|
|                                                                             |   | **Dec. 28,  1998(1)**       |     | **Dec. 27,  1999(1)** |   | **Dec. 25,  2000(1)** |   | **Dec. 31,  2001(2)** |   | **Dec. 30,  2002** |   |
| INCOME STATEMENT DATA:                                                           |   | **(dollars  in thousands)** |     |
| REVENUES:                                                                        |   | $                           | 265,536  |   | $ | 263,561 |   | $ | 299,965 |   | $ | 301,766 |   | $ | 295,347 |   |
|                                                                             |   |                        |     |   |   |   |   |   |   |   |   |
| RESTAURANT  COSTS:                                                               |   |                        |     |   |   |   |   |   |   |   |   |
| Food  and beverage                                                               |   | 89,521                      |     | 88,110 |   | 103,339 |   | 101,434 |   | 97,175 |   |
| Payroll                                                                          |   | 74,912                      |     | 75,114 |   | 82,818 |   | 87,921 |   | 89,605 |   |
| Direct  operating                                                                |   | 63,260                      |     | 63,033 |   | 71,027 |   | 73,869 |   | 72,164 |   |
| Depreciation  and amortization                                                   |   | 10,115                      |     | 9,396 |   | 9,554 |   | 8,731 |   | 7,364 |   |
| Total  restaurant costs                                                          |   | 237,808                     |     | 235,653 |   | 266,738 |   | 271,955 |   | 266,308 |   |
|                                                                             |   |                        |     |   |   |   |   |   |   |   |   |
| GENERAL  AND ADMINISTRATIVE EXPENSES                                             |   | 11,780                      |     | 11,975 |   | 11,208 |   | 10,442 |   | 10,232 |   |
| Costs  of Note exchange                                                          |   | —                      |     | — |   | — |   | 5,496 |   | — |   |
| Non-cash  charges for impairment of assets                                       |   | 149                         |     | 459 |   | — |   | — |   | — |   |
|                                                                             |   |                        |     |   |   |   |   |   |   |   |   |
| Operating  profit                                                                |   | 15,799                      |     | 15,474 |   | 22,019 |   | 13,873 |   | 18,807 |   |
|                                                                             |   |                        |     |   |   |   |   |   |   |   |   |
| Interest  expense, net                                                           |   | 20,269                      |     | 19,450 |   | 18,492 |   | 17,977 |   | 21,705 |   |
|                                                                             |   |                        |     |   |   |   |   |   |   |   |   |
| Gain/(loss)  before provision for income taxes                                   |   | (4,470                      | )        | (3,976 | ) | 3,527 |   | (4,104 | ) | (2,898 | ) |
|                                                                             |   |                        |     |   |   |   |   |   |   |   |   |
| PROVISION  FOR INCOME TAXES                                                      |   | 67                          |     | 70 |   | 185 |   | 70 |   | 48 |   |
|                                                                             |   |                        |     |   |   |   |   |   |   |   |   |
| Income/(loss)  from continuing operations(3)                                     |   | (4,537                      | )        | (4,046 | ) | 3,342 |   | (4,174 | ) | (2,946 | ) |
|                                                                             |   |                        |     |   |   |   |   |   |   |   |   |
| Income/(loss)  from discontinued operations(4)                                   |   | (4,879                      | )        | (1,622 | ) | 3,474 |   | — |   | (500 | ) |
|                                                                             |   |                        |     |   |   |   |   |   |   |   |   |
| EXTRAORDINARY  GAIN/(LOSS) on the extinguishment of debt                         |   | 9,559                       |     | — |   | (473 | ) | (435 | ) | — |   |
|                                                                             |   |                        |     |   |   |   |   |   |   |   |   |
| Net income/(loss)                                                                |   | $                           | 143      |   | $ | (5,668 | ) | $ | 6,343 |   | $ | (4,609 | ) | $ | (3,446 | ) |
|                                                                             |   |                        |     |   |   |   |   |   |   |   |   |
| BALANCE SHEET DATA:                                                              |   |                        |     |   |   |   |   |   |   |   |   |
| Property  and equipment, net from continuing operations                          |   | $                           | 51,147   |   | $ | 51,468 |   | $ | 53,370 |   | $ | 51,103 |   | $ | 48,688 |   |
| Total  assets                                                                    |   | $                           | 149,434  |   | $ | 133,288 |   | $ | 83,756 |   | $ | 84,724 |   | $ | 77,873 |   |
| Net  long-term obligations from continuing operations, including current portion |   | $                           | 164,816  |   | $ | 164,712 |   | $ | 147,799 |   | $ | 160,269 |   | $ | 160,987 |   |
| Preferred stock, net                                                             |   | $                           | 40,667   |   | $ | 46,252 |   | $ | 54,987 |   | $ | 64,108 |   | $ | 74,586 |   |
| Common  stockholders’ (deficit)                                             |   | $                           | (126,791 | ) | $ | (138,508 | ) | $ | (167,687 | ) | $ | (181,598 | ) | $ | (195,522 | ) |
|                                                                                  |        |                             |          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)             Eachof the 1998, 1999, and 2000 fiscal years is unaudited and restated.

(2)             The2001 fiscal year is restated and includes 53 weeks.

 

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(3)             Continuingoperations is defined as American Restaurant Group, Inc. and its currentsubsidiaries, excluding the Non-Black Angus Subsidiaries, and excludes theprovision for income taxes.

(4)             Discontinuedoperations refers to the Non-Black Angus Subsidiaries.

 

9

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**ITEM7****                                                        MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Management’s Discussionand Analysis of Financial Condition and Results of Operations presented belowreflects certain restatements to our previously reported consolidated financialstatements as of and for the fiscal years ended December 25, 2000 and December31, 2001. (See “Restatement of Financial Statements” below.) The informationset forth below should be read together with the Company’s consolidatedfinancial statements and related notes appearing elsewhere in this report.

 

**Results of Continuing Operations**

 

*Fiscal Years Ended December 25, 2000, December 31, 2001, andDecember 30, 2002:*

 

*Revenues*. Black Angus revenues were $300.0million in 2000, increased 0.6% to $301.8 million in 2001, and then decreased2.2% to $295.3 million in 2002. The increase in 2001 was driven by the sevennew restaurants that opened in 2000 and 2001 as well as an additional 53rdweek of operations. Same-store sales declined 4.1% in 2001 with 100% of thedecline in the third and fourth quarters. The 100 comparable restaurants declined 8.7% (excluding the effect ofthe 53rd week)in the second half of 2001 as a result of three majorfactors: (1) strong prior-year comparisons; (2) the general economic softnessduring the second half of 2001; and (3) the general decline in consumer diningfollowing the terrorist events of September 11, 2001. Of the 2.2% revenuedecline in 2002 from 2001, 2.1% was the result of one less fiscal week ofoperations in 2002 compared to 2001, which was a 53-week fiscal year.  Our restaurants opened in 2001 and 2002provided a 2.6% contribution to revenues that was offset by a 2.7% decline inour same-store sales.  This decline wasprimarily the result of a 1.8% lower average check.  Our increased promotional activity to stimulate customer trafficcaused 1.3% of this lower average check. Our increased number of lower-priced “more casual” menu items, which weadded to enhance value and variety, resulted in the other 0.5%.  The remaining 0.9% in same-store salesdecline was the result of lower customer counts.  It should be noted, however, that markets varied.  For example, in our largest core market, thegreater Los Angeles region, which contained 29 of our 103 base restaurants in2002, same-store sales increased 2.3% and customer counts increased 3.5%.  There were 105, 107, and 109 restaurantsoperating at the end of 2000, 2001, and 2002, respectively.

 

*Food and Beverage Costs*.  As a percentage of revenues, food andbeverage costs were 34.5% in 2000, decreased to 33.6% in 2001, and thendecreased again to 32.9% in 2002. The decrease in 2001 relates primarily tosavings from the cutting of steaks at each restaurant and favorable meat prices.  The decrease in 2002 relates to favorablemeat prices and operating efficiencies.

 

*Payroll Costs*.  As a percentage of revenues, labor costs were 27.6% in 2000,increased to 29.1% in 2001, and then increased to 30.3% in 2002.  The increase in 2001 is primarily a resultof revenue volatility following the terrorist events of September 11, 2001, aswell as increases in state minimum-wage rates. The increase in 2002 isprimarily the result of three factors: (1) additional increases in stateminimum-wage rates, (2) the difficulty in balancing our projections ofunit-staff levels necessary to maintain our high level of customer serviceagainst the revenue fluctuations, and (3) an increase in workers’ compensationand employee benefit costs.

 

*Direct Operating Costs.*  Direct operating costs consist of occupancy,advertising, and other expenses incurred by individual restaurants.  As a percentage of revenues, these costswere 23.7% in 2000, 24.5% in 2001, and 24.4% in 2002.  Of the 0.8% increase in 2001, 0.4% relates to increased utilityexpenses ($1.3 million) primarily in California, and 0.2% relates to additionalrepair-and-maintenance expenses ($500,000). The 0.1% decrease in 2002 is the result of a decrease in advertisingcosts.

 

*Depreciation and Amortization.*  Depreciation and amortization consists ofdepreciation of fixed assets used by individual restaurants and at theCompany’s Black Angus and corporate offices, as well as amortization ofintangible assets.  As a percentage ofrevenues,

 

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depreciation andamortization was 3.2% in 2000, decreased to 2.9% in 2001, and then decreased to2.5% in 2002.  The decrease in 2001relates primarily to an $800,000 reduction in amortization in connection withthe $16 million principal paydown of Old Notes (described below in this Item 7in the segment captioned “Liquidity and Capital Resources”) in December2000.  The decrease in 2002 is a resultof a change in accounting for goodwill.

 

*General and Administrative Expenses.*  General and administrative expenses as apercentage of revenues were 3.7% in 2000, 3.5% in 2001, and flat at 3.5% in2002. The decrease in 2001 is primarily from a $0.8 million decrease incorporate overhead resulting from the Stock Sale and a continuing reduction ofother overhead expenses as a result of the new corporate structure.

 

*Costs of Note Exchange.*  We recognized a one-time charge ofapproximately $5.5 million in 2001. The exchange of our Old Notes for our NewNotes was a transaction involving instruments that were substantially the samein the present value of their cash flows. As a result, the costs associated with the exchange were expensed asincurred.  We incurred additional costsassociated with the issuance of the New Notes, which costs have beencapitalized and are being amortized over the term of the New Notes.

 

*Operating Profit.*  As a result of the items discussed above,operating profit was $22.0 million in 2000, declined to $13.9 million in 2001,and then increased to $18.8 million in 2002.

 

*Interest Expense - Net.*  Interest expense was $18.5 million in 2000,decreased to $18.0 million in 2001, and then increased to $21.7 million in2002.  Borrowings (excluding capitalizedlease obligations) were $144.1 million in 2000, increased to $157.7 million,net of unamortized discount of $9.0 million, in 2001, and then increased to$159.2 million in 2002 net of unamortized discount of $7.2 million. Theincrease in 2001 was the result of the Refinancing (described below in thisItem 7 in the segment captioned “Liquidity and Capital Resources”) and the netissuance of $28.5 million in New Notes combined with a paydown of $15.2 millionprincipal of the Old Notes on October 31, 2001.  The increase in 2002 related to an increase in notes outstandingduring 2001.

 

*Provision for Income Taxes.*  Our provision for income taxes was $185,000in 2000, decreased to $70,000 in 2001, and then decreased to $48,000 in2002.  The tax provision against ourpre-tax income in 2000, 2001, and 2002 consisted of liabilities for certainstate income taxes and estimated Federal income tax. The Company fully reservesagainst net-operating-loss carry forwards because sufficient doubt existsregarding the Company’s ability to use the carry forwards before expiration.

 

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*Income/(Loss) from Discontinued Operations.*  The following chart summarizes thecalculation of the income/(loss) for discontinued operations for the fiscalyears ended 2000, 2001, and 2002. There was no activity in the discontinuedoperations in 2001.

 
| **($000)**                                   |   | **December  25,  2000** |   | **December  31,  2001** |   | **December  30,  2002** |   |
|----------------------------------------------|--------|-------------------------|--------|-------------------------|--------|-------------------------|--------|
| Revenues                                     |   | $                       | 65,111 |                    | $      | —                  |   | $ | — |   |
| Food  and Beverage Costs                     |   | 17,124                  |   |                    |   |                    |   |
| Payroll  Costs                               |   | 21,645                  |   |                    |   |                    |   |
| Direct  Operating Costs                      |   | 16,848                  |   |                    |   | 400                     |   |
| Depreciation  and Amortization               |   | 1,763                   |   |                    |   |                    |   |
| General  and Administrative Expense          |   | 3,376                   |   |                    |   | 100                     |   |
| Non-cash  Charge for Impairment              |   | 112                     |   |                    |   |                    |   |
| Grandy’s  Conversion                    |   | 752                     |   |                    |   |                    |   |
| Income/(Loss)  before Taxes                  |   | 3,491                   |   |                    |   | (500                    | )      |
| Provision  for Income Taxes                  |   | 17                      |   |                    |   |                    |   |
| Income/(Loss)  from  Discontinued Operations |   | $                       | 3,474  |                    | $      | —                  |   | $ | (500 | ) |

 

*Extraordinary Loss. *Weprepaid $16 million of principal in December 2000, and recorded a $473,000extraordinary loss to write off the related unamortized deferred financingcosts. We prepaid $15.2 million of principal on October 31, 2001, and recordeda $435,000 extraordinary loss to write off the related unamortized deferredfinancing costs.  We had noextraordinary activity in 2002.

 

**Liquidity and Capital Resources**

 

Our primary sources ofliquidity are cash flows from operations and borrowings under our creditfacilities.  We require capitalprincipally for the acquisition and construction of new restaurants, theremodeling of existing restaurants, and the purchase of new equipment andleasehold improvements. As of December 30, 2002, we had approximately $4.8million of cash.

 

In general, restaurantbusinesses do not have significant accounts receivable because sales are madefor cash or by credit-card vouchers, which are ordinarily paid within three tofive days.  Our receivables areprimarily from vendor rebates and credit-card transactions.  The restaurants do not maintain substantialinventory as a result of the relatively brief shelf life and frequent turnoverof food products. Additionally, restaurants generally are able to obtain tradecredit in purchasing food and restaurant supplies.  As a result, restaurants are frequently able to operate withworking capital deficits, i.e., current liabilities exceed current assets.  At December 30, 2002, our working capitaldeficit was $25.9 million.

 

We estimate that capitalexpenditures of $2.0 million to $5.0 million are required annually to maintainand refurbish our existing restaurants. Other capital expenditures, which are generally discretionary, areprimarily for the construction of new restaurants and for expanding,reformatting, and extending the capabilities of existing restaurants and forgeneral corporate purposes.  Total capitalexpenditures for continuing operations were $7.9 million in 2000, $3.8 millionin 2001, and $3.5 million in 2002.  Weestimate that capital expenditures in 2003 will be approximately $3.5million.  We intend to open newrestaurants with small capital investments and to finance most of the expendituresthrough leases.

 

OnOctober 31, 2001, we completed a debt financing (the “Debt Financing”) in whichwe issued $30 million face-value amount of 111⁄2% Senior Secured Notes due 2006for net proceeds of $28.5 million.  Weused the net proceeds to refinance existing indebtedness, to pay the accruedand unpaid interest with respect to our 111⁄2% Senior Secured Notes due 2003 (the“Old Notes”), and for general corporate purposes.  On October 1, 2001, we commenced an offer to exchange (the “DebtExchange”) all of our outstanding Old Notes for up to $131.7 million face valueamount of 111⁄2% Senior Secured Notes due 2006 (together with the notes issuedpursuant to the Debt Financing, the “New Notes).

 

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The principal elements ofthe refinancing (the “Refinancing”) were: (a) the issuance of the New Notes;(b) the exchange of the Old Notes (approximately $124 million aggregateprincipal amount of Old Notes were exchanged for approximately $132 millionaggregate principal amount of New Notes); (c) the consent of the holders of ouroutstanding preferred stock to amend the terms of the preferred stock toprovide that if we do not redeem the preferred stock for cash on August 15,2003 in accordance with its terms, then the preferred stock will automaticallybe redeemed for shares of our common stock at that time and all the rights ofthe preferred stock will terminate, including any rights of acceleration; toeliminate provisions that allow the holders to exchange preferred stock for newsubordinated debt, and to amend the covenants of the preferred stock so thatthey are substantially similar to the covenants under the New Notes; and, (d)the consent of the lender under our former revolving credit facility (“Old CreditFacility”) to permit the issuance of the New Notes and any other aspects of theRefinancing requiring the lender’s consent.

 

We had $3.4 millionoutstanding of the Old Notes at December 30, 2002.

 

Under the Old Notes, wewere obligated to make semiannual interest payments on February 15 and August15 through February 2003.  Accordingly,we made interest payments on the Old Notes of $0.2 million in February andAugust 2002. We also paid $3.2 million in accrued interest on October 31, 2001in connection with the Refinancing.  OnFebruary 18, 2003, we paid in full the $3.4 million outstanding in Old Notes.

 

Under the New Notes, weare obligated to make semiannual interest payments on May 1 and November 1through November 2006.  Accordingly, wemade interest payments on the New Notes of $9.3 million in May and November2002. We have an additional $2.3 million in long-term debt that relates tomortgages and capital leases for improvements and equipment.

 

OnDecember 17, 2001, we entered into a loan agreement for a revolving creditfacility (“New Credit Facility”) with Foothill Capital Corporation to replacethe Old Credit Facility.  Our New CreditFacility presently provides for up to $15 million in borrowings, including supportfor letters of credit. As of December 30, 2002, we had approximately $7.7million of letters of credit outstanding and no borrowings, leavingapproximately $7.3 million remaining under the New Credit Facility.  The New Credit Facility expires in December2005.  Amendments to the Company’s NewCredit facility effective as of June 28, 2002 and November 13, 2002 aredisclosed in our Form 8-K’s filed August 8, 2002 and November 14, 2002,respectively.

 

TheCompany and its subsidiaries do not guaranty the debt of any other partiesoutside the consolidated group.

 

TheCompany’s contractual obligations can be summarized as follows (in thousands):

 
| **Contractual Obligations**                  |   | **Less  Than 1  Year** |   | **2  to 3  Years** |   | **4  to 5  Years** |   | **After  5  Years** |    | **Total** |   |
|----------------------------------------------|--------|------------------------|--------|--------------------|--------|--------------------|--------|---------------------|---------|-----------|--------|
| **Long-Term  Debt – Interest on Notes** |   | $                      | 18,800 |               | $      | 37,208             |   | $                   | 18,604  |      | $      | 0 |   | $ | 74,612 |   |
| **Long-Term  Debt — Other**             |   | 3,491                  |   | 79                 |   | 161,879            |   | 893                 |    | 166,342   |   |
| **Capital  Leases**                          |   | 836                    |   | 495                |   | 464                |   | 882                 |    | 2,677     |   |
| **Operating  Leases**                        |   | 18,543                 |   | 32,289             |   | 28,296             |   | 189,741             |    | 268,869   |   |
| **Total  Contractual Cash**                  |   | $                      | 41,670 |               | $      | 70,071             |   | $                   | 209,243 |      | $      | 191,516 |   | $ | 512,500 |   |

 

Preferred stockdividends of 4,181 shares and 4,495 shares were issued February 15, 2002 andAugust 15, 2002, respectively.  Therewere 68,046 shares of preferred stock outstanding and accrued at December 30,2002. Our preferred stock is mandatorily redeemable on August 15, 2003.  If at maturity on August 15, 2003 we do notredeem our preferred stock for cash at a price per share equal to 

 

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110% of thethen-applicable liquidation preference, our preferred stock will beautomatically redeemed for shares of our common stock at that time and all ofthe rights of the preferred stock will terminate.  Consequently, the preferred stock is stated at its redemptionvalue including the redemption premium. Management believes that the preferred stock will convert to commonstock.

 

Substantiallyall our assets are pledged to our senior lenders.  In addition, our direct subsidiaries guarantee most of ourindebtedness and such guarantees are secured by substantially all of the assetsof the subsidiaries. In connection with such indebtedness, contingent andmandatory prepayments may be required under certain specified conditions andevents.  There are no compensatingbalance requirements.

 

Althoughwe are highly leveraged, based upon current levels of operations andanticipated growth, we expect that cash flows generated from operationstogether with our other available sources of liquidity will be adequate to makerequired payments of principal and interest on our indebtedness, to makeanticipated capital expenditures, and to finance working-capital requirementsfor at least the next twelve months. We do not, however, expect to generatesufficient cash flows from operations in the future to pay fully the principalof all the senior indebtedness upon maturity and, accordingly, we expect torefinance all or a portion of such debt, obtain new financing, or possibly sellassets.

 

**Recent Accounting Pronouncements**

 

In April 2002, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards(“SFAS”) No. 145 “Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13,and Technical Corrections” (“SFAS 145”). SFAS 145 rescinds FASB Statement No. 4, “Reporting Gains and Losses fromExtinguishment of Debt,” and an amendment of that Statement, FASB Statement No.64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements,” aswell as FASB Statement No. 44, “Accounting for Intangible Assets of Motor Carriers.”This Statement amends FASB Statement No. 13, “Accounting for Leases,” toeliminate an inconsistency between the required accounting for sale-leasebacktransactions and the required accounting for certain lease modifications thathave economic effects that are similar to sale-leaseback transactions.  This Statement also amends other existingauthoritative pronouncements to make various technical corrections, clarifymeanings, or describe their applicability under changed conditions.  The provisions of SFAS 145 will be adoptedduring fiscal year 2003. We do not anticipate that adoption of this statementwill have a material impact on our consolidated balance sheets or consolidatedstatements of operations.

 

In June 2002, the FASBissued SFAS No. 146, “Accounting for Exit or Disposal Activities” (“SFAS 146”).SFAS 146 addresses significant issues regarding the recognition, measurement,and reporting of costs that are associated with exit and disposal activities,including restructuring activities that are currently accounted for under EITFNo. 94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring).”  The scope of SFAS 146also includes costs related to terminating a contract that is not a capitallease and termination benefits that employees who are involuntarily terminatedreceive under the terms of a one-time benefit arrangement that is not anongoing benefit arrangement or an individual deferred-compensation contract.SFAS 146 will be effective for exit or disposal activities that are initiatedafter December 31, 2002 and early application is encouraged. The provisions ofEITF No. 94-3 shall continue to apply for an exit activity initiated under an exitplan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS 146.We do not anticipate that adoption of this statement will have a materialimpact on our consolidated balance sheets or consolidated statements ofoperations.

 

In November 2002, theFASB issued Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers.” We are currently evaluating this standard, however, we do not believeits adoption will have a significant effect on our financial statements.

 

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**Critical Accounting Policies**

 

*Revenue Recognition. * We record revenue from the sale of food, beverage, and alcohol as products are sold.  We record proceeds from the sale of a gift card or gift certificate in current liabilities and recognize income when a holder redeems a gift card or gift certificate.  We recognize unredeemed gift cards and certificates as revenue only after such a period of time indicates, based on the Company’s historical experience, the likelihood of redemption is remote.

 

*Use ofEstimates. *Thepreparation of financial statements in conformity with generally acceptedaccounting principles in the United States requires our management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities, and thereported amounts of revenues and expenses. Actual results could differ from those estimates.

 

We believe that our financial statements are a reasonablerepresentation of the realizable values of our assets, the level of ourliabilities, and the amounts of revenues and expenses incurred in any givenperiod.  There are estimates inherent inthese amounts.  We may not be able torecover that value of all of our assets, such as property and equipment orintangible assets, if circumstances cause us to close restaurants or weexperience a decline in revenues.  Ouractual liabilities for matters, such as self-insurance, could possibly besignificantly higher or lower than our estimates if actual conditions areultimately different than the assumptions used in determining the estimates.

 

*Leases*.  We lease equipment and operating facilitiesunder both capital and operating leases. In future periods, leases for similar equipment or facilities may notqualify for the accounting applied historically because of changes in terms orour credit status.  This would mean thatwe may be required to recognize more leases as capital leases in the futurethan we have in the past, causing a corresponding increase in our assets andliabilities, and the associated depreciation and interest expense.  Conversely, if many leases in the futurewere classified as operating leases, rental expense would increase.

 

*ValuationAllowance for Deferred Tax Assets. *Weprovided a valuation allowance of $34.1 million and $44.4 million against theentire amount of our deferred tax assets as of fiscal year-end 2001 and 2002,respectively.  The valuation allowancewas recorded given the losses we have incurred historically and uncertaintiesregarding future operating profitability and taxable income.

 

*Long-Lived Assets.*  The Company periodically reviews forimpairment the carrying value of its long-lived assets.  The Company assesses the recoverability ofthe assets based on the estimated undiscounted cash flows of the assets.  If impairment is indicated, the Company writesdown the assets to fair market value based on discounted cash flows.

 

*AdvertisingCosts.*  Advertisingcosts are expensed either as incurred or the first time the advertising takesplace, in accordance with Statement of Position 93-7, “*Reporting of Advertising Costs.”*

 

*Self-Insurance Reserves.*  TheCompany self-insures certain risks, including medical, workers’ compensation,property, and general liability, up to varying limits. Deductible andself-insured limits have varied historically, ranging from $0 to $1,000,000 perincident depending on the type of risk. The policy deductibles are $125,000 forannual medical and dental benefits per person. Reserves for losses areestablished on a claims-made basis plus an actuarially determined provision forincurred-but-not-reported claims and the deductible or self-insured retentionin place at the time of the loss.  Theself-insured reserves are reported on the balance sheet under Self-insurancereserves.

 

*Restatementof Financial Statements. *Managementrestated the Company’s financial statements for 2001 and prior periods, asdescribed in Note 2 to the consolidated financial statements included as partof this annual report on Form 10-K.  Ourprior independent accountants, Arthur Andersen LLP, are not able to reissuetheir report because they ceased operations in 2002, nor have they audited therestatement adjustments related to the fiscal year ended December 25, 2000 asdescribed in Note 2.  Also, certainrecords and management personnel responsible for relevant earlier time periodsare no longer available as a result of the Stock Sale in 2000.  In these circumstances, our successorindependent accountants, PricewaterhouseCoopers LLP, are not able to issue anopinion on the financial statements for the fiscal year ended December 25,2000.  

 

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Accordingly,our restated financial statements as of and for the fiscal year ended December25, 2000 are unaudited.

 

**Impactof Unaudited Financial Statements**

 

Our access to the capital markets is presentlyrestricted because of our inability to include in future registrationstatements or reports audited financial statements for the fiscal year endedDecember 25, 2000, for the reasons described above.  In order to access the public capital markets, the Securities andExchange Commission (“SEC”) rules require us to include or incorporate byreference in any prospectus three years of our audited financialstatements.   Until our auditedfinancial statements for our fiscal year ending December 29, 2003 become available,the SEC’s current rules would require us to present in a registration statementaudited financial statements for our 2000 fiscal year.  Our financial statements for our 2000 fiscalyear, however, were previously audited by Arthur Andersen LLP and have sincebeen restated without reaudit, rendering them unaudited.  Accordingly, we expect we will not be ableto access the public markets until after the audited financial statements forour fiscal year ending December 29, 2003 are available.

 

**MarketRisk Exposure**

 

We generally are notexposed to market risks related to fluctuations in interest rates because ourNew Notes and preferred stock are at fixed rates. Changes in interest ratesaffect the fair market value of fixed-rate debt, but not the Company’s earningsor cash flows.  Interest-rate risk andchanges in fair market value would not have a significant impact on ourfixed-rate debt until we undertake a refinancing.

 

We are exposed to marketrisks related to fluctuations in interest rates on short-term borrowings on ourNew Credit Facility.  Although theCompany may borrow on its revolver from time to time, no loan amounts wereoutstanding at 2002 fiscal year-end.

 

We do not utilizeinterest-rate swaps, forward or option contracts on foreign currencies orcommodities, or other types of derivative financial instruments.  We do not believe future market-rate riskswill materially affect us or our future operating results.  A change in interest rates, however, couldhave an impact when we refinance.

 

**Impact of Inflation**

 

Although inflationaryincreases in food, labor, or operating costs could adversely affect operations,we generally have been able to offset increases in cost through priceincreases, revisions to our labor scheduling, and other management actions.

 

**Forward-looking Statements**

 

Certainstatements contained in this Form 10-K are forward-looking regarding cash flowsfrom operations, restaurant openings, capital requirements, and other matters.These forward-looking statements involve risks and uncertainties and,consequently, could be affected by general business conditions, the impact ofcompetition, governmental regulations, and inflation.

 

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**ITEM 8.****                                                     FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

See the Index toConsolidated Financial Statements on page F-1.

 

**ITEM 9.****                                                    ****CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE**

 

On August 5, 2002, wereceived a letter from the SEC informing us that the SEC had received a noticefrom Arthur Andersen LLP, our independent accountants, that Arthur Andersen LLPwas unable to perform future audit services for us and, as a result, ArthurAndersen LLP’s relationship with us was effectively terminated.  We appointed PricewaterhouseCoopers LLP asour new independent accountants in September 2002.

 

The reports of ArthurAndersen LLP on our financial statements for the 2000 and 2001 fiscal yearscontained no adverse opinion or disclaimer of opinion and were not qualified ormodified as to uncertainty, audit scope, or accounting principle.

 

Managementrestated the Company’s financial statements for 2001 and prior periods, asdescribed in Note 2 to the consolidated financial statements included as partof this annual report on Form 10-K.  Ourprior independent accountants, Arthur Andersen LLP, are not able to reissuetheir report because they ceased operations in 2002, nor have they audited therestatement adjustments related to the fiscal year ended December 25, 2000 asdescribed in Note 2.  Also, certainrecords and management personnel responsible for relevant earlier time periodsare no longer available as a result of the Stock Sale in 2000. In thesecircumstances, our successor independent accountants, PricewaterhouseCoopersLLP, have not opined on the financial statements for the fiscal year endedDecember 25, 2000.  Accordingly, ourrestated financial statements as of and for the fiscal year ended December 25,2000 are unaudited.

 

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**PART III**

 

**ITEM10.****                                              DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

**Directors and Executive Officers**

 

The following table sets forth certaininformation about our current directors and each of our executive officers andkey management personnel: 

 
| **Name**            |   | **Age** |   | **Position**                                           |   |
|---------------------|--------|---------|--------|--------------------------------------------------------|--------|
| George G.  Golleher |   | 55      |   | Chairman, Director                                     |   |
| Ralph S. Roberts    |   | 60      |   | Chief Executive Officer, President, Director           |   |
| Patrick J.  Kelvie  |   | 51      |   | Vice President, Treasurer, Secretary, General  Counsel |   |
| William G. Taves    |   | 37      |   | Chief Financial Officer, Assistant Secretary           |   |
| Robert D. Beyer     |   | 43      |   | Director                                               |   |
| Anwar S. Soliman    |   | 65      |   | Director                                               |   |
| M. Brent Stevens    |   | 42      |   | Director                                               |   |

 

Officers are elected by the Board of Directors andserve at the discretion of the Board.

 

*GeorgeG. Golleher*. Mr. Golleher was elected as a Director in1998 and as Chairman of the Board in 2000. Mr. Golleher also serves as Chairman of the Company’s auditcommittee.  Mr. Golleher is aconsultant and private investor. He previously served as President and ChiefOperating Officer and as a Director of Fred Meyer, Inc. from May 1998to June 1999. Prior to that, Mr. Golleher was the Chief ExecutiveOfficer and a Director of Ralphs Grocery Company from June 1995 until itsmerger with Fred Meyer, Inc. in May 1998. Mr. Golleher was aDirector of Food 4 Less Supermarkets, Inc. since its inception in 1989 andwas the President and Chief Operating Officer of Food 4 LessSupermarkets, Inc. from January 1990 until its merger withRalphs.  Mr. Golleher serves as aDirector of Simon Worldwide, Inc., and of Rite Aid Corporation.

 

*Ralph S. Roberts*.Mr. Roberts became the Chief Executive Officer in 2000. He has served as aDirector since 1991 and has served as the President and Chief Operating Officersince 1986. Mr. Roberts has over 30 years of experience in therestaurant industry. Before joining us, he was Deputy Group Executive ofOperations of the Grace Restaurant Group and Vice President of W.R.Grace & Co. (“Grace”). Prior to joining Grace in 1980, he was VicePresident of the Stouffer Restaurant Division and President and co-founder ofthe Rusty Scupper restaurants. Mr. Roberts received a B.A. from PrincetonUniversity.

 

*PatrickJ. Kelvie*. Mr. Kelvie has served as our General Counselsince 1987 and our Secretary since 1989. Mr. Kelvie became a VicePresident in 1998 and Treasurer in 2000. From 1987 to 1989, Mr. Kelvie wasan Assistant Secretary. Between 1978 and 1987, Mr. Kelvie held variouslegal counsel positions for Saga Corporation, predecessor owner of Black Angus.Mr. Kelvie received an A.B. from the University of California at Berkeleyand a J.D. from Harvard Law School.

* *

*WilliamG. Taves.** ***Mr. Taves joined the Company in the spring of2002 to serve as the Chief Financial Officer. Before joining the Company, Mr. Taves was the Chief Financial Officer ofEncore Software, Inc., a corporation that filed for protection to reorganizeunder Chapter 11 of the Federal bankruptcy laws in 2002. Mr. Taves served atEncore Software, Inc. from 1998 to 2002. Prior to that, Mr. Taves was Controller at Color Me Mine, Inc. and JoseEber, Inc., following a position as Assistant Controller at California PizzaKitchen, Inc. Preceding that, Mr. Taves was a Senior Auditor at Phillips, Rosen& Co. CPA’s, where he served from 1989 to 1993. Mr. Taves has a B.S. inAccounting from Arizona State University and is a Certified Public Accountant.

* *

*Robert D. Beyer*. Mr. Beyer was elected as aDirector in 1998.  Mr. Beyer also serveson the Company’s audit committee. Mr. Beyer is President of Trust Company of the West (“TCW”) wherehe has been employed since 1995. Mr. Beyer was Co-Chief Executive Officerof Cresent Capital Corporation, a registered investment advisor, from 1991until its acquisition by TCW in 1995. From 1983 to 1991, Mr. Beyer was amember of the investment banking departments of Bear, Stearns &Co., Inc. and of Drexel 

 

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Burnham Lambert, Incorporated.Mr. Beyer is also a Director of TCW and The Kroger Co.

* *

*Anwar S. Soliman*.Mr. Soliman has served as a Director since we were organized in 1986. Mr. Solimanserved as Chairman and Chief Executive Officer from 1987 until June 2000.Mr. Soliman is now the Chief Executive Officer of Spectrum RestaurantGroup, Inc., which acquired the Non-Black Angus Subsidiaries from us inJune 2000. Prior to 1986, Mr. Soliman was Executive Vice President ofGrace and Group Executive of the Grace Restaurant Group, which he started in1977. Mr. Soliman spent 22 years with Grace in various executivepositions. Mr. Soliman received both a B.Commerce and an M.B.A. from AlexandriaUniversity and a Ph.D. from New York University.

 

*M. Brent Stevens*.Mr. Stevens has served as a Director since 1999. Mr. Stevens is anExecutive Vice President of the Corporate Finance Department ofJefferies & Company, Inc., where he has served since 1990. From1989 to 1990, Mr. Stevens was a member of the Investment BankingDepartment of Drexel Burnham Lambert, Incorporated.

 

**ITEM 11.****                                              EXECUTIVECOMPENSATION**

 

The following table setsforth the cash compensation for services rendered in all capacities that theCompany paid to, or accrued for, the Chief Executive Officer and each of theexecutive officers.

 

**SUMMARY COMPENSATION TABLE**

 
| **Annual  Compensation**         |   | **Long-Term  Compensation** |       |                               |       |
|----------------------------------|--------|-----------------------------|------------|------------------------------------|------------|
| **Awards**                       |   | **Payouts**                 |       | **All  Other  Compen-  sation(b)** |       |
| **Name and  Principal Position** |   | **Year**                    |       | **Salary**                         |       | **Bonus** | ** ** | **Other  Annual  Compen-  sation(a)** |   | **Restricted  Stock  Award(s)** | ** ** | **Number  of  Options/  SARS** | ** ** | **LTIP  Payouts** |   |
|                             |   |                        |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Ralph S. Roberts                 |   | 2002                        |       | $                                  | 499,740    |   | $ | — |   | $ | 111,472 |   | — |   | — |   | — |   | $ | 12,000 |   |
| (CEO and  President)             |   | 2001                        | (c)        | 518,872                            |       | 245,000 |   | 77,765 |   | — |   | — |   | — |   | 12,250 |   |
|                             |   | 2000                        |       | 473,364                            | ** ** | **—** |   | 15,608 | ** ** | **—** | ** ** | **—** |   | — |   | 8,250 |   |
|                             |   |                        |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Patrick J. Kelvie**            |   | **2002**                    | ** ** | **253,000**                        | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **8,750** | ** ** |
| **(Vice President,**             |   | **2001**                    | **(c)**    | **237,077**                        | ** ** | **92,000** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **8,625** | ** ** |
| Secretary,  Treasurer, and       |   | 2000                        |       | 222,692                            |       | — |   | — |   | — |   | — |   | — |   | 7,572 |   |
| **General Counsel)**             |   |                        | ** ** |                               | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                             |   |                        | ** ** |                               | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **William G. Taves(d)**          |   | **2002**                    | **(d)**    | **107,692**                        | ** ** | **—** | ** ** | **31,000** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **7,000** | ** ** |
| **CFO and Assistant**            |   | **2001**                    | ** ** | **—**                         | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| **Secretary)**                   |   | **2000**                    | ** ** | **—**                         | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
|                             |   |                        | ** ** |                               | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Anwar S. Soliman**             |   | **2002**                    | ** ** | **—**                         | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| **(Former Chairman and CEO)**    |   | **2001**                    | ** ** | **—**                         | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
|                             |   | 2000                        | (e)        | 210,000                            |       | — |   | — |   | — |   | — |   | — |   | 285,322 |   |
|                             |   |                        |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **William J. McCaffrey, Jr.**    |   | **2002**                    | ** ** | **—**                         | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| **(Former Vice President)**      |   | **2001**                    | ** ** | **—**                         | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
|                             |   | **2000**                    | **(e)**    | **161,250**                        | ** ** | **—** | ** ** | **7,731** | ** ** | **—** | ** ** | **—** | ** ** | **412,700** | ** ** |   | ** ** |
|                             |   |                        |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Ken A. Di Lillo**              |   | **2002**                    | ** ** | **—**                         | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| (Former  V.P. Finance,           |   | 2001                        |       | —                             |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Treasurer,  and                  |   | 2000                        | (e)        | 138,365                            |       | — |   | — |   | — |   | — |   | — |   | 980 |   |
| **Asst. Secretary)**             |   |                        | ** ** |                               | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                                  |        |                             |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)             Amountsshown in this column for the last fiscal year include group term life insurancepremiums for Mr. Roberts and housing expense for Mr. Taves.

(b)            Amountsshown in this column for the last fiscal year include auto allowance for Mssrs.Roberts and Kelvie.  Amounts alsoinclude Company matching contributions to a 401(k) plan forMr. Kelvie.  The 2000 fiscal yearamounts shown include severance and vacation payments of $281,322 for Mr.Soliman and $407,500 for Mr. McCaffrey.

(c)             We had twoexecutive officers in 2001.

(d)            Amountsshown for 2002 are for a partial year.

(e)             Amountsshown in 2000 are for partial years for Mssrs. Soliman, McCaffrey, and DiLillo. There were no payments made to these individuals in 2001 or 2002.

 

19

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**Employment Agreements**

 

The following table setsforth, with respect to any executive officer who has entered into an employmentagreement with the Company, the base salary together with the termination dateof such agreement:

 
| **Name of Individual** |   | **Capacity  in Which Served**          |   | **Base  Salary** |    | **Termination  Date** |     |
|------------------------|--------|----------------------------------------|--------|------------------|---------|-----------------------|----------|
|                   |   |                                   |   |             |    |                  |     |
| Ralph  S. Roberts      |   | Chief Executive  Officer and President |   | $                | 500,000 |                  | 12/31/03 |   |
|                        |        |                                        |        |                  |         |                       |          |  |

 

We have entered into an employment agreement with Ralph S. Roberts, ourChief Executive Officer and President. The agreement provides, among otherthings, for adjustments to his base salary and automatic extension of theagreement. The agreement also provides for certain other benefits, including amaximum of one year’s pay in the event of death and salary for the remainder ofthe calendar year in the event of disability. The employment agreement providesfor payment until the earlier of six months or the end of the employment termif Mr. Roberts terminates his employment for cause, but does not providefor any salary in the event we terminate him for cause.

 

In addition, we entered into a consulting agreement with George G.Golleher, Chairman and Director. The agreement provided for monthly paymentsfor consulting services and expenses for a total amount of $348,000 for theperiod from January 1, 2002 through December 30, 2002.  The consulting agreement automaticallyextends, but is terminable without cause by either party upon 90 days’notice.

 

**Savings Plan**

 

The American RestaurantGroup Savings and Investment Plan (the “Savings Plan”) is our 401(k) planestablished for the benefit of employees who satisfy certain requirements.  These requirements include completion of oneyear of service with a minimum of 1,000 hours worked.  Subject to applicable limits imposed on tax-qualified plans,eligible employees may elect pre-tax contributions up to 20.0% of aparticipant’s total earnings for a calendar year (but not in excess of $11,000for 2002).  Until January 2003, theCompany made matching contributions to the Savings Plan equal to 25% of theparticipant’s contributions up to 6% of the participant’s earnings.  A participant is entitled to a distributionfrom the Savings Plan upon termination of employment and any such distributionwill be in a lump-sum form. Distributable benefits are based on the value ofthe participant’s individual account balance that is invested at the directionof the participant in one or a combination of six investment funds, none ofwhich include investments in the Company. Under certain circumstances, a participant may borrow amounts held inhis account under the Savings Plan. Based upon the Savings Plan vesting schedule, as of 2002, 100% of theCompany matching contributions were vested for Mr. Kelvie.

 

20

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**ITEM12.****                                             ****SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT**

 

The following table sets forth certaininformation regarding the beneficial ownership of our common stock (as if alloutstanding warrants were exercised), as of December 30, 2002, by (i) eachof our directors, (ii) our Chief Executive Officer and certain otherhighly compensated executive officers, (iii) all executive officers anddirectors as a group, and (iv) each person believed to own beneficiallymore than 5% of our outstanding common stock. Pursuant to a voting trustagreement, Anwar S. Soliman controls Holdings and, accordingly, together withhis direct ownership of common stock and a second voting trust agreement(described in footnote (8) below), effectively controls the voting of all (withoutgiving effect to the exercise of any outstanding warrants) our outstandingcommon stock, subject to the terms of a securityholders’ agreement.

 
| **Name of  Beneficial Owner**                        |   | **Number of  Shares** |   | **Percent of  Outstanding Class** |   | **Percent  Ownership(1)** |   |
|------------------------------------------------------|--------|-----------------------|--------|-----------------------------------|--------|---------------------------|--------|
| Anwar S. Soliman(2)                                  |   | 22,416                |   | 17.5                              | %      | 9.6                       | %      |
| Roberts Family  Limited Partnership                  |   | 9,702                 |   | 7.6                               |   | 4.2                       |   |
| Patrick J.  Kelvie                                   |   | 387                   |   | 0.3                               |   | 0.2                       |   |
| William G. Taves                                     |   | —                |   | —                            |   | —                    |   |
| Robert D.  Beyer(3)                                  |   | —                |   | —                            |   | —                    |   |
| George G.  Golleher(4)                               |   | —                |   | —                            |   | —                    |   |
| M. Brent  Stevens(5)                                 |   | —                |   | —                            |   | —                    |   |
| American  Restaurant Group Holdings, Inc.(6)         |   | 93,150                |   | 72.7                              |   | 40.0                      |   |
| All directors  and officers as a group (six persons) |   | 32,505                |   | 25.4                              |   | 14.0                      |   |
| TCW Investors  and related entities(7)               |   | 57,226                | (8)    | —                            |   | 24.6                      |   |

 

----

(1)                                  Gives effectto the exercise of all outstanding warrants. Excludes the effect of thepotential conversion of the preferred stock to common stock, as allowed byamendments to the preferred stock done in connection with the Refinancing.  Upon such a conversion, management expectsthe holders of the preferred stock would own a significant majority of thecommon stock on a fully diluted basis.

 

(2)                                  Does notinclude 12,515 shares of our common stock for which Mr. Soliman controlsvoting rights pursuant to a voting trust agreement.  Also see footnote (6).

 

(3)                                  Does notinclude shares deemed to be beneficially owned by the TCW Investors (as definedherein). Robert D. Beyer is President of TCW, of which TCW Group (see footnote(8) below) and the TCW Investors are affiliates.  Mr. Beyer shares investment power for the following TCWInvestors: TCW Shared Opportunity Fund II L.P., TCW Leveraged Income Trust,L.P., and TCW Shared Opportunity Fund IIB, LLC. See footnote (7) below.

 

(4)                                  GeorgeG. Golleher was elected Director of the Company as nominee of the TCWInvestors.

 

(5)                                  Doesnot include shares deemed to be beneficially owned by Jefferies &Company, Inc.

 

(6)                                  Anwar S.Soliman owns 228,577 shares of common stock of Holdings, representing 49.2% ofthe outstanding common stock of Holdings. In addition, Mr. Soliman isdeemed to be the owner, pursuant to a voting trust agreement, of an additional147,396 shares of Holdings common stock, representing an additional 31.7% ofthe outstanding common stock of Holdings. Accordingly, Mr. Solimanexercises the beneficial ownership of 80.9% of Holdings common stock.

 

(7)                                  TCWShared Opportunity Fund II, L.P., TCW Shared Opportunity Fund III, L.P., TCWLeveraged Income Trust II, L.P., TCW Shared Opportunity Fund IIB, LLC, TCWLeveraged Income Trust, L.P., and Brown University.

 

(8)                                  Represents warrants that are immediately exercisable at anominal price per share. Includes warrants beneficially owned by the TCWInvestors and of which TCW Asset Management Company and certain affiliates,which control voting and investment power in their capacity as general partner,investment manager, or manager of the TCW Investors (the “TCW Group”), disclaimbeneficial ownership. Excludes the effect of the changes to the terms of thepreferred stock in connection with the Refinancing.

 

21

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Two of our present management stockholders and certainother stockholders (collectively, the “Management Shareholders”) entered into avoting trust agreement dated February 25, 1998 in accordance with which AnwarS. Soliman, Director, exercises, as voting trustee, all voting andsubstantially all other rights to which such shareholders would otherwise beentitled until the earlier of August 15, 2005 or the earlier terminationof the voting trust agreement. As a result, Mr. Soliman is considered thebeneficial owner of approximately 100% of the outstanding shares of our commonstock (approximately 55.0% on a fully diluted basis, excluding the effect ofchanges to the terms of the preferred stock after the Refinancing).  In addition, the Management Shareholdersentered into other agreements pursuant to which such holders were grantedregistration rights substantially identical to the rights granted to theholders of the warrants pursuant to a securityholders’ agreement. Each of theManagement Shareholders is also party to a subscription agreement withHoldings, which provides such stockholder certain rights with respect to sharesof Holdings common stock held by such stockholder.

 

Management believes that,as of December 30, 2002, the holders of the Company’s preferred stock heldwarrants for 40% of the common stock on a diluted basis, excluding the effectof changes to the terms of the preferred stock after the Refinancing.  If the preferred stock does convert to commonstock, then management expects the holders of the preferred stock will own asignificant majority of the common stock on a fully diluted basis.

 

# **Securityholders’Agreement**

 

In connection with theFebruary 1998 recapitalization plan, each of Holdings, the ManagementShareholders, Jefferies & Company, Inc. (“Jefferies”), and TCW SharedOpportunity Fund II, L.P., TCW Leveraged Income Trust, L.P., Brown University,and TCW Shared Opportunity Fund IIB, LLC (collectively, the “TCW Investors”),and TCW Asset Management Company entered into a securityholders’ agreementconcerning the Company (the “Securityholders Agreement”). The SecurityholdersAgreement provides that each of the parties will agree to vote all of itsshares of the Company’s equity securities so that the composition of theCompany’s Board of Directors consists of five members, two of whom will bemanagement nominees, two of whom will be nominees of the TCW Investors, and oneof whom, the remaining director, will be an independent director designated byJefferies; provided that after the date that is 45 days after the date uponwhich underwritten primary public offerings of common stock of the Companypursuant to effective registration statements under the Securities Act haveresulted in 35% of the Company’s common stock (measured on a fully dilutedbasis after giving effect to such offerings) being sold to the public and inthe Company’s common stock being listed for trading on any of the New YorkStock Exchange, the Nasdaq National Market, or the American Stock Exchange, theTCW Investors and management will mutually choose the remaining director andJefferies will no longer have any right to designate a director.  The Securityholders Agreement does not limitthe rights of the holders of the preferred stock under the Certificate ofDesignation to elect additional directors to serve on the Company’s Board ofDirectors in certain circumstances.

 

The SecurityholdersAgreement also provides that (i) in the event that Holdings sells or transfersany of its shares of the Company’s equity securities, directly or indirectly,TCW Investors will have the option to include its Company equity securities insuch sale or transfer on the same terms as Holdings’ sale or transfer, (ii) TCWinvestors will have a right of first refusal with respect to any sale of equitysecurities by the Company or a party to the Securityholders Agreement (otherthan Management Shareholders) to purchase the equity securities being sold; and(iii) TCW Investors have the nontransferable right to approve certain majorcorporate transactions concerning the Company, including mergers andconsolidations, sales of any capital stock of the Company’s subsidiaries, asale of a material amount of the assets and properties of the Company, transactionswith affiliates, and amendments to the Company’s Certificate of Incorporationand Bylaws. In addition, the Securityholders Agreement provides that certain ofthe TCW Investors’ purchasers will receive payments from the Company withrespect to withholding obligations as a result of their ownership of thepreferred stock, which amount shall not exceed $125,000 per year. The Companymade no such payments in 2002. None of the rights under the SecurityholdersAgreement are transferable by TCW Investors.

 

22

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**ITEM 13.****                                              CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

On June 28, 2000, we sold all of theoutstanding stock of the Non-Black Angus Subsidiaries to Spectrum RestaurantGroup, Inc. (formerly known as NBACo, Inc.), a company that iscontrolled by Anwar S. Soliman, a Company shareholder and Director. Therewas no gain or loss recorded because of the related-party nature of the stock sale. Wereceived $17.0 million in cash on June 28, 2000, and transferred certainassets and liabilities to Spectrum Restaurant Group, Inc. Concurrent withthe sale, advances between us and the Non-Black Angus Subsidiaries wereeliminated. Paid-in capital of $27.0 million has been charged as a resultof the sale. We retained the assets and liabilities associated with certainclosed restaurants as well as certain liabilities, estimated on June 26,2000 at $12.6 million, associated with the**Non-Black AngusSubsidiaries.

 

We satisfied our obligations to pay suchliabilities in 2002.  We are indiscussion with Spectrum Restaurant Group, Inc. to resolve and document thereimbursement, assumption, and indemnification obligations by SpectrumRestaurant Group, Inc. of remaining liabilities related to the Non-Black AngusSubsidiaries.  Any resulting adjustmentwill be recognized when the amount becomes known.  For the year ended December 30, 2002, we recognized $500,000 as aloss from discontinued operations for the expenses associated with the StockSale and have $100,000 in receivables outstanding from Spectrum RestaurantGroup, Inc.

 

Jefferies,the initial purchaser of the New Notes, owns approximately 2.4% of our commonstock on a fully diluted basis, excluding the effect of changes to the terms ofthe preferred stock after the Refinancing. In connection with its ownership ofthe common stock, Jefferies is a party to the Securityholders Agreementconcerning us, pursuant to which Jefferies is entitled to designate a member ofour board of directors. M. Brent Stevens is the current board member designatedby Jefferies. Mr. Stevens is an Executive Vice President of the CorporateFinance Department of Jefferies. In addition, from time to time, Jefferies andits affiliates have provided in the past and may provide in the futureinvestment banking and financial advisory services to the Company and itsaffiliates in the ordinary course of business. Jefferies or its affiliates, asapplicable, has received or will receive customary compensation in connectionwith such services.

 

**ITEM 14.****                                             ****CONTROLS AND PROCEDURES**

 

TheCompany’s management has designed and periodically reviews and internallyaudits the effectiveness of the design and operation of the Company’sdisclosure controls and procedures. Based on those periodic reviews, the Company’s management, including theCEO and CFO, concluded that the Company’s disclosure controls and procedureswere effective as of December 30, 2002. There have been no significant changes in the Company’s internalcontrols or in other factors that could significantly affect internal controlssubsequent to December 30, 2002.

 

23

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**PARTIV**

 

**ITEM15.****                                              EXHIBITS,FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K**

 

(a)                                  ConsolidatedFinancial Statements.  See the Index toConsolidated Financial Statements on page F-1.

 

(b)                                 Reportson Form 8-K.  We filed one Form 8-K onNovember 14, 2002 concerning amendment of our revolving credit facility.  We filed another Form 8-K on November 15,2002, announcing the filing of Form 10-Q/A’s that day for the first, second andthird fiscal quarters of 2002 to supersede the respective quarterly filingssubmitted on November 14, 2002.

 

(c)                                  Listof Exhibits

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.1             |   | Stock Purchase  Agreement, dated as of May 9, 2000, between the Company and NBACo, Inc.*****                                                                                                                                                                                                                                                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.2             |   | Amendment No. 1, dated  as of June 26, 2000, to Stock Purchase Agreement, dated May 9, 2000, between  the Company and NBACo, Inc.*****                                                                                                                                                                                                                                                                                                             |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.1             |   | Amended and Restated  Certificate of Incorporation of the Company filed with the Secretary of State  of Delaware on July 23, 1991.*                                                                                                                                                                                                                                                                                                                |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.2             |   | Certificate of  Amendment to Amended and Restated Certificate of Incorporation of the Company  filed with the Secretary of State of Delaware on March 21, 1992.*                                                                                                                                                                                                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.3             |   | Amended and Restated  Certificate of Incorporation of the Company filed with the Secretary of State  of Delaware on February 23, 1998.***                                                                                                                                                                                                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.4             |   | Amendment to Certificate of the Designation of the  Powers, Preferences and Relative, Participating, Optional and Other Special  Rights of the 12% Series A Senior Pay-In-Kind Exchangeable Preferred  Stock and the 12% Series B Senior Pay-In-Kind Exchangeable Preferred  Stock and Qualifications, Limitations or Restrictions Thereof of the Company  filed with the Secretary of State of Delaware on October 31, 2001.****** |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.5             |   | By-Laws of the  Company.*                                                                                                                                                                                                                                                                                                                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.1             |   | Indenture dated as of  February 25, 1998 between the Company and U.S. Trust Company of California,  N.A., as Trustee (including specimen certificate of 11.5% Senior Secured Note  due 2003).***                                                                                                                                                                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.2             |   | Warrant Agreement dated  as of February 25, 1998 between the Company and U.S. Trust Company of  California, N.A., as warrant agent (including specimen certificate of  warrant).***                                                                                                                                                                                                                                                                |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.3             |   | Registration Rights  Agreement dated as of February 25, 1998 between the Company and Jefferies  & Company, Inc.***                                                                                                                                                                                                                                                                                                                             |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.4             |   | Securityholders’ and  Registration Right Agreement dated as of February 25, 1998 between the  Company and Jefferies & Company, Inc., as purchaser.***                                                                                                                                                                                                                                                                                     |

 

24

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| **Exhibit No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                   |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                              |
| 4.5             |   | Management Registration  Right Agreement dated as of February 28, 1998 between the Company and the  Management Stockholders.***                                                                                                                                                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                                                                                                              |
| 4.6             |   | Certificate of  Designation filed with the Secretary of State of Delaware on February 24,  1998.***                                                                                                                                                                                                                                                               |
|            |   |                                                                                                                                                                                                                                                                                                                                                              |
| 4.7             |   | Certificate of  Correction to the Certificate of Designation filed with the Secretary of  State of Delaware on February 25, 1998.***                                                                                                                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                                                                              |
| 4.8             |   | Form of Indenture  relating to the 12% Senior Subordinated Debentures to be entered into between  the Company and a trustee (including specimen certificate of 12% Senior  Subordinated Debenture due 2003).****                                                                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                                                                                              |
| 4.9             |   | First Supplemental  Indenture, dated as of June 28, 2000, to Indenture dated as of February 25,  1998, between the Company and U.S. Trust Company, National Association  (formerly known as U.S. Trust Company of California, N.A.)*****                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                                                                                              |
| 4.10            |   | Second Supplemental Indenture, dated as of  October 31, 2001, to Indenture, dated as of February 25, 1998,  between the Company and BNY Western Trust Company (successor in interest to  U.S. Trust Company, National Association, formerly known as U.S. Trust  Company of California, N.A.).******                                                    |
|            |   |                                                                                                                                                                                                                                                                                                                                                              |
| 4.11            |   | Registration Rights Agreement dated as of  October 31, 2001 between the Company and Jefferies &  Company, Inc.******                                                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                              |
| 9.1             |   | Common Stock Voting  Trust and Transfer Agreement, dated as of February 24, 1998, among the  Company and the stockholders parties thereto and Anwar S. Soliman, as voting  trustee.***                                                                                                                                                                            |
|            |   |                                                                                                                                                                                                                                                                                                                                                              |
| 9.2             |   | Securityholders Agreement,  dated as of February 25, 1998, among the Company, American Restaurant Group  Holdings, Inc., Jefferies & Company, Inc., TCW Asset Management Company,  and the Management Stockholders.***                                                                                                                                        |
|            |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.1            |   | Amended and Restated  Employment Agreement, dated as of December 14, 1993, between the Company  and Ralph S. Roberts.**                                                                                                                                                                                                                                 |
|            |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.2            |   | Loan Agreement, dated  as of December 17, 2001, between Foothill Capital Corporation, as  lender, and the Company, ARG Enterprises, Inc., ARG Property Management  Corporation and ARG Terra, Inc., as borrowers.*****                                                                                                                             |
|            |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.3            |   | Amendment No. 1 to Loan  Agreement, effective as of June 28, 2002 between Foothill Capital  Corporation, as lender, and the Company, ARG Enterprises, Inc., ARG Property  Management Corporation, and ARG Terra, Inc., as borrowers.*******                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.4            |   | Amendment No. 2 to Loan  Agreement, effective as of November 13, 2002, between Foothill Capital  Corporation, as lender, and the Company, ARG Enterprises, Inc., ARG Property  Management Corporation, and ARG Terra, Inc., as borrowers.********                                                                                                                 |
|            |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.5            |   | Second Amended and  Restated Intercreditor and Collateral Agency Agreement, dated as of  December 17, 2001, among BNY Western Trust Company, as collateral agent  and as trustee, the Company, ARG Enterprises, Inc., ARG Property Management  Corporation, and ARG Terra, Inc., as borrowers, and Foothill Capital  Corporation, as lender.****** |

 

25

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| **Exhibit No.** |   | **Description**                                                                                                                                    |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                               |
| 10.6            |   | Amended and Restated  Master Lease, dated May 11, 1998, between ARG Properties I, LLC, as landlord,  and ARG Enterprises, Inc., as tenant.*******  |
|            |   |                                                                                                                                               |
| 10.7            |   | Amended and Restated  Master Lease, dated May 11, 1998, between ARG Properties II, LLC, as  landlord, and ARG Enterprises, Inc., as tenant.******* |
|            |   |                                                                                                                                               |
| 10.8            |   | Guaranty of Lease,  dated May 11, 1998, by the Company in favor of ARG Properties I, LLC, as  landlord.*******                                     |
|            |   |                                                                                                                                               |
| 10.9            |   | Guaranty of Lease,  dated May 11, 1998, by the Company in favor of ARG Properties II, LLC, as  landlord.*******                                    |
|            |   |                                                                                                                                               |
| 99.1            |   | Letter dated March 29,  2002 by the Company confirming certain assurances received from Arthur  Andersen LLP.*******                               |
|            |   |                                                                                                                                               |
| 99.2            |   | Certificate of Chief  Executive Officer and Chief Financial Officer.*********                                                                      |

 

----

| *         |   | Incorporated by  reference to the Registrant’s Registration Statement No. 33-48183 on Form S-4  filed with the Securities and Exchange Commission on May 28, 1992 as amended  with Amendment No. 1 filed on September 11, 1992. |
|-----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                                                                                                           |
| **        |   | Incorporated by  reference to the Registrant’s Registration Statement No. 33-74010 on Form S-4  filed with the Securities and Exchange Commission on January 12, 1994.                                                                    |
|      |   |                                                                                                                                                                                                                                           |
| ***       |   | Incorporated by  reference to the Registrant’s Annual Report on Form 10-K dated December 29,  1997 filed with the Securities and Exchange Commission on March 30, 1998.                                                                   |
|      |   |                                                                                                                                                                                                                                           |
| ****      |   | Incorporated by  reference to the Registrant’s Registration Statement No. 333-55861 on  Amendment No. 1 to Form S-4 filed with the Securities and Exchange Commission  on July 29, 1998.                                                  |
|      |   |                                                                                                                                                                                                                                           |
| *****     |   | Incorporated by  reference to the Registrant’s Current Report on Form 8-K dated June 28, 2000  and filed with the Securities and Exchange Commission on July 12, 2000.                                                                    |
|      |   |                                                                                                                                                                                                                                           |
| ******    |   | Incorporated by  reference to the Registrant’s Registration Statement No. 333-76442 to  Form S-1 filed with the Securities and Exchange Commission on  January 8, 2002.                                                    |
|      |   |                                                                                                                                                                                                                                           |
| *******   |   | Incorporated by  reference to the Registrant’s Form 8-K filed with the Securities and Exchange  Commission on August 9, 2002.                                                                                                             |
|      |   |                                                                                                                                                                                                                                           |
| ********  |   | Incorporated by  reference to the Registrant’s Form 8-K filed with the Securities and Exchange  Commission on November 15, 2002.                                                                                                          |
|      |   |                                                                                                                                                                                                                                           |
| ********* |   | Filed herewith.                                                                                                                                                                                                                                |

 

26

----

 

##### **SIGNATURE**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|   | AMERICAN RESTAURANT  GROUP, INC. |
|--------|----------------------------------|
|   |                             |
|   | By:                              | /s/  Ralph S. Roberts |   |
|   |                             | Ralph S. Roberts |   |
|   |                             | Chief Executive |   |
|   |                             | Officer and  President |   |

 

Pursuant to therequirements of the Securities Act of 1934, this report has been signed belowby the following persons on behalf of the Registrant and in the capacities andon the dates indicated.

 

 
|                    |                           |                         |           |
|-------------------------|--------------------------------|------------------------------|----------------|
| /s/  George G. Golleher |                           | Director and Chairman        | March 28, 2003 |
| George  G. Golleher     |                           |                         |
|                    |                           |                         |
|                    |                           |                         |
| /s/  Ralph S. Roberts   |                           | President, Chief  Executive  | March 28, 2003 |
| Ralph  S. Roberts       | Officer,  and Director         |                         |
|                    |                           |                         |
|                    | (Principal Executive  Officer) |                         |
|                    |                           |                         |
|                    |                           |                         |
| /s/  William G. Taves   |                           | Chief Financial Officer  and | March 28, 2003 |
| William  G. Taves       | Assistant Secretary            |                         |
|                    |                           |                         |
|                    |                           |                         |
| /s/  Robert D. Beyer    |                           | Director                     | March 28, 2003 |
| Robert  D. Beyer        |                           |                         |
|                    |                           |                         |
|                    |                           |                         |
| /s/  Anwar S. Soliman   |                           | Director                     | March 28, 2003 |
| Anwar  S. Soliman       |                           |                         |
|                    |                           |                         |
|                    |                           |                         |
| /s/  M. Brent Stevens   |                           | Director                     | March 28, 2003 |
| M.  Brent Stevens       |                           |                         |

 

27

----

 

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**American Restaurant Group, Inc.(the “Company”) restated its financial statements for 2001 and prior periods,as described in Note 2 to the consolidated financial statements included aspart of this annual report on Form 10-K. The Company’s prior independent accountants, Arthur Andersen LLP, arenot able to reissue their report because they ceased operations in 2002**, nor have they audited therestatement adjustments related to the fiscal year ended December 25, 2000 asdescribed in Note 2.  Also, certainrecords and management personnel responsible for relevant earlier time periodsare no longer available as a result of the Stock Sale (see Note 1.d) in 2000.In these circumstances, the Company’s successor independent accountants,PricewaterhouseCoopers LLP, were unable to perform an audit in conformance withgenerally accepted auditing standards and, therefore, are not able to issue anopinion on the financial statements for the fiscal year ended December 25,2000. Accordingly, the Company’s restated financial statements as of and forthe fiscal year ended December 25, 2000 are unaudited.

 
| Report of  Independent Public Accountants                                                                                                                            | F-2    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                 |   |
| Consolidated Balance Sheets  as of December 31, 2001, and December 30, 2002                                                                                          | F-3    |
|                                                                                                                                                                 |   |
| Consolidated  Statements of Operations for the Fiscal Years Ended  December 25, 2000 (unaudited), December 31, 2001,  and December 30, 2002                          | F-5    |
|                                                                                                                                                                 |   |
| Consolidated  Statements of Common Stockholders’  (Deficit) for the Fiscal Years Ended December 25, 2000 (unaudited),  December 31, 2001, and December 30, 2002 | F-6    |
|                                                                                                                                                                 |   |
| Consolidated  Statements of Cash Flows for the Fiscal Years  Ended December 25, 2000 (unaudited), December 31, 2001,  and December 30, 2002                          | F-7    |
|                                                                                                                                                                 |   |
| Notes to  Consolidated Financial Statements                                                                                                                          | F-8    |

 

F-1

----

 

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

 

To the Board of Directors of American Restaurant Group, Inc.:

 

In our opinion, the accompanying consolidated balance sheets and therelated consolidated statements of operations, common stockholders’ (deficit)and cash flows present fairly, in all material respects, the financial positionof American Restaurant Group, Inc. and its subsidiaries at December 31, 2001and December 30, 2002, and the results of their operations and their cash flowsfor each of the two fiscal years in the period ended December 30, 2002 inconformity with accounting principles generally accepted in the United Statesof America.  These financial statementsare the responsibility of the Company’s management; our responsibility is toexpress an opinion on these financial statements based on our audits.  We conducted our audits of these statementsin accordance with auditing standards generally accepted in the United Statesof America, which require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.  The consolidated statements of operations,common stockholders’ (deficit) and cash flows of American Restaurant Group,Inc. and its subsidiaries for the fiscal year ended December 25, 2000 wereaudited by other auditors who have ceased operations. Those auditors expressedan unqualified opinion on those consolidated financial statements, before therestatement described in Note 2, in their report dated March 14, 2002.

 

As discussed in Note 2 to the accompanying consolidated financialstatements, the Company has restated its consolidated statements of operations,common stockholders’ (deficit) and cash flows for the fiscal year endedDecember 25, 2000 (presented herein as unaudited) and its consolidated balancesheet and related consolidated statements of operations, common stockholders’(deficit) and cash flows as of and for the fiscal year ended December 31, 2001,all of which were previously audited by other independent accountants who haveceased operations.  We performed noauditing procedures with respect to the consolidated financial statements forthe fiscal year ended December 25, 2000, and we express no opinion on suchfinancial statements.

 

Asdiscussed in Note 1.p to the consolidated financial statements, the Companychanged its method of accounting for goodwill and other intangible assets withthe adoption of Statement of Financial Accounting Standards No. 142, “Goodwilland Other Intangible Assets,” on January 1, 2002.

 
| /s/  PricewaterhouseCoopers LLP |   |
|---------------------------------|--------|

 

 

San Francisco, California

March 19, 2003

 

F-2

----

 

AMERICAN RESTAURANTGROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2001 ANDDECEMBER 30, 2002

 

ASSETS

 
|                                                                                     |   | **(Restated)  December 31,  2001** |       | **December  30,  2002** |   |
|------------------------------------------------------------------------------------------|--------|------------------------------------|------------|-------------------------|--------|
|                                                                                     |   |                               |       |                    |   |
| CURRENT  ASSETS:                                                                         |   |                               |       |                    |   |
| Cash                                                                                     |   | $                                  | 7,384,000  |                    | $      | 4,773,000 |   |
| Rebates  and other receivables, net of reserves of $252,000 in 2001 and $50,000 in  2002 |   | 2,985,000                          |       | 3,018,000               |   |
| Inventories                                                                              |   | 2,800,000                          |       | 3,031,000               |   |
| Prepaid  expenses                                                                        |   | 3,002,000                          |       | 1,454,000               |   |
|                                                                                     |   |                               |       |                    |   |
| Total  current assets                                                                    |   | 16,171,000                         |       | 12,276,000              |   |
|                                                                                     |   |                               |       |                    |   |
| PROPERTY  AND EQUIPMENT, net                                                             |   |                               |       |                    |   |
| Land  and land improvements                                                              |   | 834,000                            |       | 711,000                 |   |
| Buildings  and leasehold improvements                                                    |   | 36,559,000                         |       | 36,029,000              |   |
| Fixtures  and equipment                                                                  |   | 11,351,000                         |       | 10,552,000              |   |
| Property  held under capital leases                                                      |   | 1,060,000                          |       | 709,000                 |   |
| Construction  in progress                                                                |   | 1,299,000                          |       | 687,000                 |   |
| Net  Property and Equipment                                                              |   | 51,103,000                         |       | 48,688,000              |   |
|                                                                                     |   |                               |       |                    |   |
| OTHER  ASSETS:                                                                           |   |                               |       |                    |   |
| Goodwill,  net                                                                           |   | 8,287,000                          |       | 8,287,000               |   |
| Intangible  assets, net                                                                  |   | 8,910,000                          |       | 7,718,000               |   |
| Other                                                                                    |   | 253,000                            |       | 904,000                 |   |
| Net  other assets                                                                        |   | 17,450,000                         |       | 16,909,000              |   |
|                                                                                     |   |                               |       |                    |   |
| Total  assets                                                                            |   | $                                  | 84,724,000 |                    | $      | 77,873,000 |   |

 

(consolidatedbalance sheets continued on following page)

 

The accompanyingnotes are an integral part of these consolidated statements.

 

F-3

----

 

LIABILITIES AND COMMON STOCKHOLDERS’ (DEFICIT)

 
|                                                                                                                                                                                                                      |   | **(Restated)  December 31,  2001** |       | **December  30,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|------------|-------------------------|--------|
|                                                                                                                                                                                                                      |   |                               |       |                    |   |
| CURRENT  LIABILITIES:                                                                                                                                                                                                     |   |                               |       |                    |   |
| Accounts  payable                                                                                                                                                                                                         |   | $                                  | 11,126,000 |                    | $      | 7,825,000 |   |
| Accrued  liabilities                                                                                                                                                                                                      |   | 4,585,000                          |       | 4,235,000               |   |
| Gift-certificate  liability                                                                                                                                                                                               |   | 6,755,000                          |       | 6,226,000               |   |
| Self-insurance  reserves                                                                                                                                                                                                  |   | 3,312,000                          |       | 3,526,000               |   |
| Accrued  interest                                                                                                                                                                                                         |   | 3,447,000                          |       | 3,385,000               |   |
| Accrued  employee costs                                                                                                                                                                                                   |   | 4,207,000                          |       | 4,141,000               |   |
| Accrued  occupancy                                                                                                                                                                                                        |   | 3,998,000                          |       | 4,696,000               |   |
| Current  portion of obligations under capital leases                                                                                                                                                                      |   | 796,000                            |       | 646,000                 |   |
| Current  portion of long-term debt                                                                                                                                                                                        |   | 402,000                            |       | 3,491,000               |   |
| Liabilities  of discontinued operations                                                                                                                                                                                   |   | 525,000                            |       | —                  |   |
|                                                                                                                                                                                                                      |   |                               |       |                    |   |
| Total  current liabilities                                                                                                                                                                                                |   | 39,153,000                         |       | 38,171,000              |   |
|                                                                                                                                                                                                                      |   |                               |       |                    |   |
| LONG-TERM  LIABILITIES, net of current portion:                                                                                                                                                                           |   |                               |       |                    |   |
| Obligations  under capital leases                                                                                                                                                                                         |   | 1,799,000                          |       | 1,153,000               |   |
| Long-term  debt, net of unamortized discount                                                                                                                                                                              |   | 157,272,000                        |       | 155,697,000             |   |
|                                                                                                                                                                                                                      |   |                               |       |                    |   |
| Total  long-term liabilities                                                                                                                                                                                              |   | 159,071,000                        |       | 156,850,000             |   |
|                                                                                                                                                                                                                      |   |                               |       |                    |   |
| DEFERRED  GAIN ON SALE-LEASEBACK                                                                                                                                                                                          |   | 3,990,000                          |       | 3,788,000               |   |
|                                                                                                                                                                                                                      |   |                               |       |                    |   |
| COMMITMENTS  AND CONTINGENCIES                                                                                                                                                                                            |   |                               |       |                    |   |
|                                                                                                                                                                                                                      |   |                               |       |                    |   |
| CUMULATIVE  PREFERRED STOCK, MANDATORILY REDEEMABLE                                                                                                                                                                       |   |                               |       |                    |   |
| Senior  pay-in-kind exchangeable preferred stock, $0.01 par value; 160,000 shares  authorized; 58,883 shares accrued and outstanding at December 31, 2001 and  68,046 shares accrued and outstanding at December 30, 2002 |   | 64,108,000                         |       | 74,586,000              |   |
|                                                                                                                                                                                                                      |   |                               |       |                    |   |
| COMMON  STOCKHOLDERS’ (DEFICIT):                                                                                                                                                                                     |   |                               |       |                    |   |
| Common  stock $0.01 par value; 1,000,000 shares authorized; 128,081 shares issued and  outstanding at December 31, 2001 and December 30, 2002                                                                             |   | 1,000                              |       | 1,000                   |   |
| Paid-in  capital                                                                                                                                                                                                          |   | 1,390,000                          |       | —                  |   |
| Accumulated  (deficit)                                                                                                                                                                                                    |   | (182,989,000                       | )          | (195,523,000            | )      |
|                                                                                                                                                                                                                      |   |                               |       |                    |   |
| Total  common stockholders’ (deficit)                                                                                                                                                                                |   | (181,598,000                       | )          | (195,522,000            | )      |
|                                                                                                                                                                                                                      |   |                               |       |                    |   |
| Total  liabilities and common stockholders’ (deficit)                                                                                                                                                                |   | $                                  | 84,724,000 |                    | $      | 77,873,000 |   |

 

The accompanyingnotes are an integral part of these consolidated statements.

 

F-4

----

 

AMERICAN RESTAURANTGROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATEDSTATEMENTS OF OPERATIONS

 

FOR THE FISCALYEARS ENDED DECEMBER 25, 2000, DECEMBER 31, 2001,

 

AND DECEMBER 30, 2002

 
|                                              |   | **Fiscal  Year ended**                          |        |
|---------------------------------------------------|--------|-------------------------------------------------|-------------|
|                                              |   | **(Unaudited  and Restated)  December 25,2000** |        | **(Restated)  December 31, 2001** |   | **December  30,2002** |   |
|                                              |   |                                            |        |   |   |   |   |
| REVENUES                                          |   | $                                               | 299,965,000 |   | $ | 301,766,000 |   | $ | 295,347,000 |   |
|                                              |   |                                            |        |   |   |   |   |
| RESTAURANT  COSTS:                                |   |                                            |        |   |   |   |   |
| Food  and beverage                                |   | 103,339,000                                     |        | 101,434,000 |   | 97,175,000 |   |
| Payroll                                           |   | 82,818,000                                      |        | 87,921,000 |   | 89,605,000 |   |
| Direct  operating                                 |   | 71,027,000                                      |        | 73,869,000 |   | 72,164,000 |   |
| Depreciation  and amortization                    |   | 9,554,000                                       |        | 8,731,000 |   | 7,364,000 |   |
|                                              |   |                                            |        |   |   |   |   |
| GENERAL  AND ADMINISTRATIVE EXPENSES              |   | 11,208,000                                      |        | 10,442,000 |   | 10,232,000 |   |
|                                              |   |                                            |        |   |   |   |   |
| COSTS  OF NOTE EXCHANGE                           |   | —                                          |        | 5,496,000 |   | — |   |
|                                              |   |                                            |        |   |   |   |   |
| Operating profit from continuing operations       |   | 22,019,000                                      |        | 13,873,000 |   | 18,807,000 |   |
|                                              |   |                                            |        |   |   |   |   |
| INTEREST  EXPENSE, net                            |   | 18,492,000                                      |        | 17,977,000 |   | 21,705,000 |   |
|                                              |   |                                            |        |   |   |   |   |
| Income  /(Loss) before provision for income taxes |   | 3,527,000                                       |        | (4,104,000 | ) | (2,898,000 | ) |
|                                              |   |                                            |        |   |   |   |   |
| PROVISION  FOR INCOME TAXES                       |   | 185,000                                         |        | 70,000 |   | 48,000 |   |
|                                              |   |                                            |        |   |   |   |   |
| Income/(Loss)  from continuing operations         |   | 3,342,000                                       |        | (4,174,000 | ) | (2,946,000 | ) |
|                                              |   |                                            |        |   |   |   |   |
| Income/(Loss)  from discontinued operations       |   | 3,474,000                                       |        | — |   | (500,000 | ) |
|                                              |   |                                            |        |   |   |   |   |
| EXTRAORDINARY  (LOSS) ON EXTINGUISHMENT OF DEBT   |   | (473,000                                        | )           | (435,000 | ) | — |   |
|                                              |   |                                            |        |   |   |   |   |
| Net  Income/(Loss)                                |   |                                            | 6,343,000   |   |   | (4,609,000 | ) |   | (3,446,000 | ) |
|                                              |   |                                            |        |   |   |   |   |   |   |   |
| PREFERRED  STOCK DIVIDENDS, ISSUED AND ACCRUED    |   |                                            | 8,734,000   |   |   | 9,121,000 |   |   | 10,478,000 |   |
|                                              |   |                                            |        |   |   |   |   |   |   |   |
| Loss  to common stockholders                      |   | $                                               | (2,391,000  | ) | $ | (13,730,000 | ) | $ | (13,924,000 | ) |

 

The accompanyingnotes are an integral part of these consolidated statements.

 

F-5

----

 

AMERICAN RESTAURANTGROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATEDSTATEMENTS OF COMMON STOCKHOLDERS’ (DEFICIT)

 

FOR THE FISCALYEARS ENDED DECEMBER 25, 2000, DECEMBER 31, 2001,

 

AND DECEMBER 30,2002

 
|                                                                                                    |   | **Common  Stock** |    | **Paid-in  Capital** |     | **Accumulated  Deficit** |   | **Total**  |       |
|---------------------------------------------------------------------------------------------------------|--------|-------------------|---------|----------------------|----------|--------------------------|--------|------------|------------|
| **Shares**                                                                                              |   | **Amount**        |
|                                                                                                    |   |              |    |                 |     |                     |   |       |       |   |   |
| BALANCE,  as previously reported December 27, 1999(1)                                                   |   |              | 128,081 |                 | $        | 1,000                    |   | $          | 50,552,000 |   | $ | (180,510,000 | ) | $ | (129,957,000 | ) |
| Cumulative  effect of restatement at December 27, 1999(2)                                               |   | —            |    | —               |     | (4,338,000               | )      | (4,213,000 | )          | (8,551,000 | ) |
|                                                                                                    |   |              |    |                 |     |                     |   |       |       |   |   |
| BALANCE,  December 27, 1999(2)                                                                          |   | 128,081           |    | $                    | 1,000    |                     | $      | 46,214,000 |       | $ | (184,723,000 | ) | $ |  (138,508,000 | ) |
|                                                                                                    |   |              |    |                 |     |                     |   |       |       |   |   |
| Net  Income(2)                                                                                          |   | —            |    | —               |     | —                   |   | 6,343,000  |       | 6,343,000 |   |
| Net  book value of assets and liabilities transferred in Stock Sale in excess of  proceeds from sale(1) |   | —            |    | —               |     | (26,788,000              | )      | —     |       | (26,788,000 | ) |
| Amortization  of preferred stock issuance costs (1)                                                     |   | —            |    | —               |     | (399,000                 | )      | —     |       | (399,000 | ) |
| Preferred  stock dividends, issued and accrued(2)                                                       |   | —            |    | —               |     | (8,335,000               | )      | —     |       | (8,335,000 | ) |
|                                                                                                    |   |              |    |                 |     |                     |   |       |       |   |   |
| BALANCE,  December 25, 2000(2)                                                                          |   | 128,081           |    | $                    | 1,000    |                     | $      | 10,692,000 |       | $ | (178,380,000 | ) | $ | (167,687,000 | ) |
|                                                                                                    |   |              |    |                 |     |                     |   |       |       |   |   |
| Net  (Loss)(3)                                                                                          |   | —            |    | —               |     | —                   |   | (4,609,000 | )          | (4,609,000 | ) |
| Adjustments  to net book value of assets and liabilities transferred in Stock Sale                      |   | —            |    | —               |     | (181,000                 | )      | —     |       | (181,000 | ) |
| Amortization  of preferred stock issuance costs                                                         |   | —            |    | —               |     | (399,000                 | )      | —     |       | (399,000 | ) |
| Preferred  stock dividends, issued and accrued(3)                                                       |   | —            |    | —               |     | (8,722,000               | )      | —     |       | (8,722,000 | ) |
|                                                                                                    |   |              |    |                 |     |                     |   |       |       |   |   |
| BALANCE,  December 31, 2001(3)                                                                          |   | 128,081           |    | $                    | 1,000    |                     | $      | 1,390,000  |       | (182,989,000 | ) | $ | (181,598,000 | ) |
|                                                                                                    |   |              |    |                 |     |                     |   |       |       |   |   |
| Net  (Loss)                                                                                             |   | —            |    | —               | * * | *—*                 |   | (3,446,000 | )          | (3,446,000 | ) |
| Amortization  of preferred stock issuance costs                                                         |   | —            |    | —               |     | (399,000                 | )      | —     |       | (399,000 | ) |
| Preferred  stock dividends, issued and accrued                                                          |   | —            |    | —               |     | (991,000                 | )      | (9,088,000 | )          | (10,079,000 | ) |
|                                                                                                    |   |              |    |                 |     |                     |   |       |       |   |   |
| BALANCE,  December 30, 2002                                                                             |   |              | 128,081 |                 | $        | 1,000                    |   | $          | —     |   | $ | (195,523,000 | ) | $ | (195,522,000 | ) |

 

----

(1)          Unaudited

(2)          Unaudited and restated

(3)          Restated

 

The accompanyingnotes are an integral part of these consolidated statements.

 

F-6

----

 

AMERICANRESTAURANT GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTSOF CASH FLOWS

 

FOR THE FISCALYEARS ENDED DECEMBER 25, 2000, DECEMBER 31, 2001,

 

AND DECEMBER 30,2002

###  

|                                                                                                            |   | **Fiscal  Year ended**                            |        |
|-----------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------|-------------|
|                                                                                                            |   | **(Unaudited  And Restated)  December 25,  2000** |        | **(Restated)  December 31,  2001** |   | **December  30,  2002** |   |
|                                                                                                            |   |                                              |        |   |   |   |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                                                          |   |                                              |        |   |   |   |   |
|                                                                                                            |   |                                              |        |   |   |   |   |
| Income (loss) from continuing operations after  extraordinary items                                             |   | $                                                 | 2,869,000   |   | $ | (4,609,000 | ) | $ | (2,946,000 | ) |
|                                                                                                            |   |                                              |        |   |   |   |   |
| Adjustments  to reconcile net income (loss) to net cash provided by (used in) continuing  operating activities: |   |                                              |        |   |   |   |   |
|                                                                                                            |   |                                              |        |   |   |   |   |
| Extraordinary  loss on extinguishment of debt                                                                   |   | 473,000                                           |        | 435,000 |   | — |   |
| Depreciation  and amortization                                                                                  |   | 9,554,000                                         |        | 8,731,000 |   | 7,364,000 |   |
| Loss  on disposition of assets                                                                                  |   | 581,000                                           |        | — |   | — |   |
| Amortization  of deferred gain on sale-leaseback                                                                |   | (203,000                                          | )           | (202,000 | ) | (202,000 | ) |
| Amortization  of discount on New Notes                                                                          |   | —                                            |        | 311,000 |   | 1,866,000 |   |
|                                                                                                            |   |                                              |        |   |   |   |   |
| (Increase)  decrease in assets:                                                                                 |   |                                              |        |   |   |   |   |
| Accounts  receivable, net                                                                                       |   | (283,000                                          | )           | (47,000 | ) | (33,000 | ) |
| Inventories                                                                                                     |   | (98,000                                           | )           | (187,000 | ) | (231,000 | ) |
| Prepaid  expenses                                                                                               |   | 70,000                                            |        | (199,000 | ) | 1,548,000 |   |
| Deposits  and other L/T assets                                                                                  |   | (29,000                                           | )           | (17,000 | ) | (648,000 | ) |
| Increase  (decrease) in other liabilities:                                                                      |   |                                              |        |   |   |   |   |
| Accounts  payable                                                                                               |   | 4,308,000                                         |        | (1,071,000 | ) | (3,301,000 | ) |
| Accrued  liabilities                                                                                            |   | 5,659,000                                         |        | (3,020,000 | ) | (95,000 | ) |
|                                                                                                            |   |                                              |        |   |   |   |   |
| Net  cash provided by continuing operating activities                                                           |   | $                                                 | 22,901,000  |   | $ | 125,000 |   | $ | 3,322,000 |   |
|                                                                                                            |   |                                              |        |   |   |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                                                          |   |                                              |        |   |   |   |   |
| Capital  expenditures                                                                                           |   | (7,872,000                                        | )           | (3,786,000 | ) | (3,467,000 | ) |
| Proceeds  from disposition of assets                                                                            |   | 12,000                                            |        | 26,000 |   | — |   |
|                                                                                                            |   |                                              |        |   |   |   |   |
| Net  cash (used in) investing activities                                                                        |   | (7,860,000                                        | )           | (3,760,000 | ) | (3,467,000 | ) |
|                                                                                                            |   |                                              |        |   |   |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                                          |   |                                              |        |   |   |   |   |
| Proceeds  received from Stock Sale                                                                              |   | 17,000,000                                        |        | — |   | — |   |
| Payments  on indebtedness                                                                                       |   | (16,275,000                                       | )           | (15,635,000 | ) | (352,000 | ) |
| Net  proceeds received from New Notes                                                                           |   | —                                            |        | 28,500,000 |   | — |   |
| Increase  in deferred debt costs                                                                                |   | (1,092,000                                        | )           | (2,477,000 | ) | (293,000 | ) |
| Payments  on capital lease obligations                                                                          |   | (637,000                                          | )           | (706,000 | ) | (796,000 | ) |
| Net  cash provided by /(used in) financing activities                                                           |   | (1,004,000                                        | )           | 9,682,000 |   | (1,441,000 | ) |
|                                                                                                            |   |                                              |        |   |   |   |   |
| NET  INCREASE (DECREASE) IN CASH FROM CONTINUING OPERATIONS                                                     |   | 14,037,000                                        |        | 6,047,000 |   | (1,586,000 | ) |
|                                                                                                            |   |                                              |        |   |   |   |   |
| NET  (DECREASE) IN CASH FROM DISCONTINUED OPERATIONS                                                            |   | (10,099,000                                       | )           | (2,601,000 | ) | (1,025,000 | ) |
|                                                                                                            |   |                                              |        |   |   |   |   |
| NET  INCREASE (DECREASE) IN CASH                                                                                |   | 3,938,000                                         |        | 3,446,000 |   | (2,611,000 | ) |
|                                                                                                            |   |                                              |        |   |   |   |   |
| CASH,  at beginning of period                                                                                   |   | —                                            |        | 3,938,000 |   | 7,384,000 |   |
|                                                                                                            |   |                                              |        |   |   |   |   |
| CASH,  at end of period                                                                                         |   | $                                                 | 3,938,000   |   | $ | 7,384,000 |   | $ | 4,773,000 |   |
|                                                                                                            |   |                                              |        |   |   |   |   |
| CASH  (payments)/refunds during the year:                                                                       |   |                                              |        |   |   |   |   |
| Interest                                                                                                        |   | $                                                 | (19,279,000 | ) | $ | (20,650,000 | ) | $ | (19,773,000 | ) |
| Income  taxes                                                                                                   |   | (329,000                                          | )           | (77,000 | ) | 128,000 |   |

 

The accompanyingnotes are an integral part of these consolidated statements.

 

F-7

----

 

AMERICANRESTAURANT GROUP, INC. AND SUBSIDIARIES

 

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS 

 

DECEMBER 25, 2000(unaudited), DECEMBER 31, 2001, AND DECEMBER 30, 2002 

 

1.                                       Backgroundand Summary of Significant Accounting Policies 

 

a.               Company

 

The Company, a Delawarecorporation, through its subsidiary ARG Enterprises, Inc., operates StuartAnderson’s Black Angus and Stuart Anderson’s Cattle Company steakhouses, whichare middle-price full-service restaurants located primarily in California, thePacific Northwest, and Arizona.  TheCompany is a subsidiary of American Restaurant Group Holdings, Inc.(“Holdings”), also a Delaware corporation. At fiscal year-end 2000, 2001, and 2002, the Company operated 105, 107,and 109 restaurants, respectively, in its only continuing operating segment.

 

b.              Operations

 

The Company’s operationsare affected by local and regional economic conditions, including competitionin the restaurant industry.

 

c.               Liquidity

 

TheCompany is highly leveraged. Based upon current levels of operations andanticipated growth, management expects that cash flows generated fromoperations, together with other available sources of liquidity, will beadequate to make required payments of principal and interest on indebtedness,to make anticipated capital expenditures, and to finance working-capitalrequirements for at least the next twelve months.  Management does not, however, expect to generate sufficient cashflows from operations in the future to pay fully the principal of all thesenior indebtedness upon maturity in 2006 and, accordingly, will need torefinance all or a portion of such debt, obtain new financing, or possibly sellassets.  There can be no assurance thatsuch financing will be available or, if available, at a cost that is acceptableto the Company.

 

d.              Sale of Stock toSpectrum Restaurant Group, Inc., a Related Party

 

In June 2000, the Company sold all of theoutstanding stock of four wholly owned subsidiaries (“Non-Black AngusSubsidiaries”) to Spectrum Restaurant Group, Inc. (formerly known as NBACo,Inc.).  The operations of the soldsubsidiaries are accounted for as discontinued operations and the results forall periods are classified in accordance with Accounting Principles BoardOpinion No. 30.  Also see Note 9.

 

F-8

----

 

e.               Principles ofConsolidation

 

The consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries.  All significantintercompany accounts and transactions have been eliminated.

 

f.                 Use ofEstimates in the Preparation of Financial Statements

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities, and the reported amounts ofrevenues and expenses.  Actual resultscould differ from those estimates.

 

g.     Fiscal Year

 

The Company’s fiscal yearends on the last Monday in December. The Company uses a 5-week/4-week/4-week quarterly accounting cycle.  As a result, the Company has a 53-week fiscalyear once every 5 years.  2001 was a53-week fiscal year.

 

h.              RevenueRecognition

 

The Company records revenue from the sale of food, beverage, and alcohol as products are sold.  Proceeds from the sale of gift cards and gift certificates are recorded in current liabilities and recognized as revenue when redeemed by the holder.  Unredeemed gift cards and certificates are recognized as revenue only after such a period of time indicates, based on the Company’s historical experience, the likelihood of redemption is remote.  Revenue from unredeemed gift certificates was $975,000, $1,138,000, and $1,133,000 in 2000, 2001, and 2002, respectively.

 

i.                  Rebates andReceivables

 

Rebates and receivables consists primarily of vendor rebates for food purchases and credit-card receivables.

 

j.                  Inventories 

 

Inventories consistprimarily of food and beverages of $2,626,000 and $2,836,000 as of December 31,2001 and December 30, 2002, respectively. The Company also includes supplies in inventories.  Inventories are valued at the lower of cost(first-in, first-out method) or market value.

 

k.     Pre-opening Costs 

 

The Company expensespre-opening costs associated with new store openings as incurred.

 

l.                  AdvertisingCosts

 

Advertising costs areexpensed either as incurred or the first time the advertising takes place, inaccordance with Statement of Position 93-7, “*Reporting of Advertising Costs.” *Advertising expense for thefiscal years ended December 25, 2000, December 31, 2001, and December 30, 2002was $16,134,000, $13,501,000, and $13,217,000, respectively.  Prepaid Advertising as of December 31, 2001and December 30, 2002 was $686,000 and $910,000 respectively.

 

F-9

----

 

m.            Property andEquipment

 

Property and equipment isrecorded at cost.  The Company providesfor depreciation and amortization based upon the estimated useful lives ofdepreciable assets using the straight-line method.  Estimated useful lives are as follows:

 
| Land  improvements                  |   | 20 years                                |   |
|-------------------------------------|--------|-----------------------------------------|--------|
| Buildings                           |   | 30 to 35 years                          |   |
| Fixtures  and equipment             |   | 3 to 10 years                           |   |
| Property  held under capital leases |   | Life of lease                           |   |
| Leasehold  Improvements             |   | Lesser of useful  life or life of lease |   |

 

When a restaurant isopened, the initial purchase of expendable equipment, such as china, glassware,and silverware, is recorded as an asset and is not depreciated.  Subsequent purchases of these items areexpensed upon purchase.

 

Substantially all of theCompany’s and its direct subsidiaries’ assets, including property andequipment, are pledged as collateral to support the senior debt of the Company.

 

Replacements andmaintenance and repairs that do not extend the lives of the assets areexpensed.

 
|                                  |   | **December  31,  2001** |             | **December  30,  2002** |   |
|---------------------------------------|--------|-------------------------|------------------|-------------------------|--------|
| PROPERTY  AND EQUIPMENT:              |   |                    |             |                    |   |
| Land  and land improvements           |   | $                       | 2,598,000        |                    | $      | 2,598,000 |   |
| Buildings  and leasehold improvements |   | 71,076,000              |             | 71,879,000              |   |
| Fixtures  and equipment               |   | 48,914,000              |             | 45,213,000              |   |
| Property  held under capital leases   |   | 7,293,000               |             | 7,293,000               |   |
| Construction  in progress             |   | 1,299,000               |             | 687,000                 |   |
|                                  |   |                    |             |                    |   |
|                                  |   | 131,180,000             |             | 127,670,000             |   |
|                                  |   |                    |             |                    |   |
| Less  – Accumulated depreciation |   | 80,077,000              |             | 78,982,000              |   |
|                                  |   |                    |             |                    |   |
| Net  Property and equipment           |   | $                       | 51,103,000  |                    | $      | 48,688,000 |   |

 

Beginning in 2002, potential impairments of long-lived assets, including amortizable intangibles, have been assessed in accordance with the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 144,  “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” SFAS 144 requires the Company to review the carrying value of long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

 

The Company periodicallyreviews for impairment the carrying value of its intangible assets.  The Company assesses the recoverability ofthe assets based on the estimated, future, undiscounted cash flows of the asset.If impairment is indicated, the Company writes down the assets to fair marketvalue based on discounted cash flows. No impairment has been recorded.

 

The Company reviews eachrestaurant property periodically and determines which properties may beconsidered for closure.  Thisdetermination is made based on poor operating results, deteriorating propertyvalues, and other factors.  In addition,the Company reviews all restaurants with negative cash flows for impairment ona periodic basis.  The Company assesses therecoverability of the assets based on the restaurant’s estimated, future,undiscounted cash flows.  If impairmentis indicated, the Company writes down the assets to fair market value based ondiscounted cash flows.  No restaurantswere impaired in 2001 and 2002.

 

F-10

----

 

n.              Interest Costs

 

Interest costs incurredduring the construction period of restaurants are capitalized.  No interest costs were capitalized during2000, 2001, or 2002.

 

o.              Other Assets

 

Other assets includegoodwill, intangible assets, and other assets, such as deposits.  Intangible assets are amortized using thestraight-line method over the periods estimated to be benefited, but notgreater than 40 years.

 

Estimated useful livesfor intangible assets are as follows:

 
| Trademarks/service  marks |   | 3 to 40 years |   |
|---------------------------|--------|---------------|--------|
| Deferred  debt costs      |   | Term of debt  |   |
| Leasehold  interests      |   | Life of lease |   |
| Liquor  licenses          |   | 14-40 years   |   |

 

The following tabledetails the components of intangible assets, net of accumulated amortization,included in the accompanying consolidated balance sheets (in thousands):

 
|                                  |   | **December  31,  2001** |   | **December  30,  2002** |   |
|---------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                  |   |                    |   |                    |   |
| Trademarks/service marks and other    |   | $                       | 1,836  |                    | $      | 1,836 |   |
| less:  Accumulated amortization       |   | (713                    | )      | (759                    | )      |
| Liquor  licenses and deferred charges |   | 2,928                   |   | 2,928                   |   |
| less:  Accumulated amortization  |   | (687                    | )      | (779                    | )      |
| Deferred debt costs                   |   | 11,206                  |   | 11,499                  |   |
| less:  Accumulated amortization  |   | (6,870                  | )      | (7,896                  | )      |
| Leasehold interests                   |   | 6,577                   |   | 6,577                   |   |
| less:   Accumulated amortization |   | (5,367                  | )      | (5,688                  | )      |
|                                  |   |                    |   |                    |   |
| Net  other assets                     |   | $                       | 8,910  |                    | $      | 7,718 |   |

 

Amortization expense for the next 3 years will be $1.5million, $1.3 million in 2006, and $459,000 in 2007.  As of December 31, 2001 and December 30, 2002, no indicators ofimpairment exist.

 

p.              Goodwill

 

In July 2001, the FASBissued SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), whichrequires that goodwill and certain other intangible assets having indefinitelives no longer be amortized to earnings, but instead be subject to periodictesting for impairment. Intangible assets determined to have definitive liveswill continue to be amortized over their useful lives and will be tested forimpairment under SFAS 144. SFAS 142 is effective for the Company’s fiscal yearbeginning January 1, 2002. Goodwill and intangible assets acquired after June30, 2001, however, are subject immediately to the non-amortization andamortization provisions of this Statement. During the fiscal year endedDecember 30, 2002, we completed the annual goodwill impairment testrequired under the provisions of SFAS 142. Management determined that noimpairment exists and, as a result, no impairment losses were recorded infiscal 2002. In accordance with SFAS 142, the Company reclassified $501,000 netfrom intangible assets to goodwill relating to acquisition costs connected withthe 1987 acquisition of Stuart Anderson's from Saga Corporation. The followingtable presents the effect of SFAS 142 on net income (loss) had the accountingstandard been in effect for the years ended December 25, 2000 and December 31,2001 (in thousands):

 
|                            |   | **Fiscal  Years Ended**             |   |
|---------------------------------|--------|-------------------------------------|--------|
|                            |   | **(Unaudited  and restated)  2000** |   | **(Restated)  2001** |   | **2002** |   |
|                            |   |                                |   |   |   |   |   |
| Net income (loss), as  reported |   | $                                   | 6,343  |   | $ | (4,609 | ) | $ | (3,446 | ) |
| Amortization of goodwill        |   | 331                                 |   | 331 |   | — |   |
| Pro forma net income  (loss)    |   | $                                   | 6,674  |   | $ | (4,278 | ) | $ | (3,446 | ) |

 

F-11

----

 

q.              Self-InsuranceReserves

 

The Company self-insures certain risks, including medical, workers’ compensation, property, and general liability, up to varying limits. Deductible and self-insured limits have varied historically, ranging from $0 to $1,000,000 per incident depending on the type of risk. The policy deductibles are $125,000 for annual medical and dental benefits per person. Reserves for losses are established on a claims-made basis plus an actuarially determined provision for incurred-but-not-reported claims and the deductible or self-insured retention in place at the time of the loss.  The self-insured reserves are reported on the balance sheet under Self-insurance reserves.

 

r.                 Fair Value ofFinancial Instruments

 

The Company’s financialinstruments consist primarily of cash, accounts receivable and payable, anddebt instruments.  The carrying valuesof all financial instruments, other than debt instruments, are representativeof their fair value due to their short-term maturity.  The fair value of the Company’s long-term debt instruments isestimated based on the current rates offered to the Company.  The Company believes that the carrying valueof the Company’s long-term debt approximates the current fair value because ofthe comparable market rate of interest. Fair-value estimates are made at a specific point in time, based onrelevant market information.

 

s.               Earnings perShare

 

Earnings-per-shareinformation is omitted because the Company’s common stock does not trade in thepublic markets.  Therefore, anearnings-per-share disclosure is not meaningful.

 

t.                 Income Taxes

 

The Company accounts for incometaxes under an asset-and-liability approach. Deferred income taxes reflect thenet tax effects of (i) temporary differences between the carrying amounts ofassets and liabilities for financial reporting purposes, (ii) net operatingloss, (iii) tax-credit carryforwards, and (iv) the amounts used for income-taxpurposes measured by applying currently enacted tax laws.  A valuation allowance is provided to reducenet deferred tax assets to the amount expected to be realized.

 

u.              Reclassifications

 

Certain prior yearaccounts have been reclassified to conform with the current year’spresentation.

 

v.              New AccountingPronouncements

 

In April 2002, the FASB issued SFAS No.145, “Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and TechnicalCorrections” (“SFAS 145”).  SFAS 145rescinds SFAS 4, “Reporting Gains and Losses from Extinguishment of Debt,” andan amendment of that Statement, SFAS No. 64, “Extinguishments of Debt Made toSatisfy Sinking-Fund Requirements,” as well as SFAS No. 44, “Accounting forIntangible Assets of Motor Carriers.” SFAS 145 amends SFAS No. 13, “Accountingfor Leases,” to eliminate an inconsistency between the required accounting forsale-leaseback transactions and the required accounting for certain leasemodifications that have economic effects that are similar to sale-leasebacktransactions.  SFAS 145 amends otherexisting authoritative pronouncements to make various technical corrections,clarify meanings, or describe their applicability under changed conditions. Theprovisions of SFAS 145 will be adopted during fiscal year 2003. The Companydoes not anticipate that its adoption of SFAS 145 will have a material impacton its consolidated balance sheets or consolidated statements of operations.

 

F-12

----

 

In June 2002, the FASBissued SFAS No. 146, “Accounting for Exit or Disposal Activities” (“SFAS 146”).SFAS 146 addresses significant issues regarding the recognition, measurement,and reporting of costs that are associated with exit and disposal activities,including restructuring activities that are currently accounted for under EITFNo. 94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring).”  The scope of SFAS 146also includes costs related to terminating a contract that is not a capitallease and termination benefits that employees who are involuntarily terminatedreceive under the terms of a one-time benefit arrangement that is not anongoing benefit arrangement or an individual deferred-compensation contract.SFAS 146 will be effective for exit or disposal activities that are initiatedafter December 31, 2002 and early application is encouraged. The provisions ofEITF No. 94-3 shall continue to apply for an exit activity initiated under anexit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS146.

 

The Company does notanticipate that adoption of this statement will have a material impact on its consolidatedbalance sheets or consolidated statements of operations.

 

In November 2002, theFASB issued Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers.” The Company is currently evaluating this standard, however, it doesnot anticipate its adoption will have a significant effect on the Company’sfinancial statements.

 

2.                                       Restatementof Financial Statements

 

The Company's previouslyissued consolidated financial statements as of and for the fiscal years endedDecember 25, 2000 and December 31, 2001 are restated to correct theaccounting for certain items, as described below:

 

The Company's previousliability for gift certificates was understated. The Company has corrected itsaccounting for its gift-certificate liability and adjusted the gift-certificateliability on the balance sheet as appropriate. This adjustment increased theaccumulated deficit at December 27, 1999 by $3,088,000, decreased netincome for the fiscal year ended December 25, 2000 by $724,000, anddecreased net loss for the fiscal year ended December 31, 2001 by$1,404,000.

 

Certain utility andinsurance deposits, previously reported as other assets at December 31,2001 and earlier periods, were no longer recoverable at that date. Theadjustments to write off these deposits increased the accumulated deficit atDecember 27, 1999 by $885,000, and decreased net income for the fiscalyear ended December 25, 2000 by $100,000.

 

The Company improperly recordedcertain credit-card receivables and rebate receivables in 2001. The Company hasrecorded an adjustment to reduce the carrying amount of the receivables on thebalance sheet as of December 31, 2001. This adjustment increased net lossfor the fiscal year ended December 31, 2001 by $1,086,000.

 

The Company's previousinsurance accrual was understated at December 25, 2000. The Company hasadjusted the accrual balance at December 25, 2000 accordingly. Thisadjustment decreased net income for the year ended December 25, 2000 by$352,000.

 

The Company previouslyrecorded in the fiscal year ended December 31, 2001 certain interestincome that was earned in the fiscal year ended December 25, 2000. Aportion of this interest income incorrectly recorded in 2001 was recorded inthe revenue line in the statement of operations. The Company has recorded anadjustment to recognize the interest income in the appropriate periods. Thisadjustment increased net income for the fiscal year ended December 25,2000 and increased net loss for the fiscal year ended December 31, 2001 by$544,000.

 

In connection with theissuance of the Company's preferred stock in 1998, the Company did not properlyrecord the accretion of the redemption price due at maturity. Accordingly, theCompany has recorded an adjustment to increase the carrying amount on thebalance sheet for preferred stock and correspondingly adjusted paid-in capital,accumulated deficit, and loss to common stockholders.

 

The Company recordedcertain other adjustments and reclassifications for other entries affecting thereporting periods.

 

 

F-13

----

 

The effects of thecorrections to the Company's consolidated financial statements as ofDecember 31, 2001 and for the fiscal years ended December 25, 2000and December 31, 2001 are as follows (in thousands):

 
|                                                     |   | **As of  December 31, 2001**      |   |
|----------------------------------------------------------|--------|-----------------------------------|--------|
| **(in  thousands)**                                      |   | **As  Previously  Reported  (1)** |   | **As  Restated** |   |
| ASSETS                                                   |   |                              |   |   |   |
| CURRENT ASSETS:                                          |   |                              |   |   |   |
| Cash                                                     |   | $                                 | 7,814  |   | $ | 7,384 |   |
| Rebates and  Other receivables, net                      |   | 4,071                             |   | 2,985 |   |
| Inventories                                              |   | 3,040                             |   | 2,800 |   |
| Prepaid expenses                                         |   | 3,002                             |   | 3,002 |   |
| Total current  assets                                    |   | 17,927                            |   | 16,171 |   |
|                                                     |   |                              |   |   |   |
| Net Property  & Equipment                            |   |                              | 51,103 |   |   | 51,103 |   |
| Net Other Assets                                         |   | 18,435                            |   | 17,450 |   |
| Total assets                                             |   | $                                 | 87,465 |   | $ | 84,724 |   |
|                                                     |   |                              |   |   |   |   |   |
| LIABILITIES AND  COMMON STOCKHOLDERS’ (DEFICIT)     |   |                              |   |   |   |
| CURRENT  LIABILITIES:                                    |   |                              |   |   |   |
| Accounts payable                                         |   | $                                 | 11,126 |   | $ | 11,126 |   |
| Other Accrued  liabilities                               |   | 25,267                            |   | 28,027 |   |
| Total current  liabilities                               |   | 36,393                            |   | 39,153 |   |
|                                                     |   |                              |   |   |   |
| LONG-TERM LIABILITIES,  net of current portion:          |   | 159,071                           |   | 159,071 |   |
|                                                     |   |                              |   |   |   |
| DEFERRED GAIN                                            |   | 3,990                             |   | 3,990 |   |
|                                                     |   |                              |   |   |   |
| CUMULATIVE  PREFERRED STOCK                              |   | 58,219                            |   | 64,108 |   |
|                                                     |   |                              |   |   |   |
| COMMON  STOCKHOLDERS’ (DEFICIT):                    |   |                              |   |   |   |
|                                                     |   |                              |   |   |   |
| Common Stock                                             |   | 1                                 |   | 1 |   |
| Paid-in capital                                          |   | 7,279                             |   | 1,390 |   |
| Accumulated  (deficit)                                   |   | (177,488                          | )      | (182,989 | ) |
| Total common  stockholders’ (deficit)               |   | (170,208                          | )      | (181,598 | ) |
| Total  liabilities and common stockholders’ deficit |   | $                                 | 87,465 |   | $ | 84,724 |   |

 

----

(1)                                  Certainprior year accounts have been reclassified to conform with the current year’spresentation.

 

F-14

----

 
|                                              |   | **Year Ended  December  25, 2000** |    | **Year Ended  December  31, 2001** |   |
|---------------------------------------------------|--------|------------------------------------|---------|------------------------------------|--------|
| **(in  thousands)**                               |   | **As  Previously  Reported  (1)**  |    | **As  Restated  (Unaudited)**      |   | **As  Previously  Reported** |   | **As  Restated** |   |
|                                              |   |                               |    |                               |   |   |   |   |   |
| REVENUES                                          |   | $                                  | 299,822 |                               | $      | 299,965 |   | $ | 302,160 |   | $ | 301,766 |   |
|                                              |   |                               |    |                               |   |   |   |   |   |
| RESTAURANT  COSTS:                                |   |                               |    |                               |   |   |   |   |   |
| Food and  beverage                                |   | 103,339                            |    | 103,339                            |   | 100,982 |   | 101,434 |   |
| Payroll                                           |   | 82,818                             |    | 82,818                             |   | 87,921 |   | 87,921 |   |
| Direct operating                                  |   | 69,721                             |    | 71,027                             |   | 74,323 |   | 73,869 |   |
| Depreciation and  amortization                    |   | 9,554                              |    | 9,554                              |   | 8,731 |   | 8,731 |   |
|                                              |   |                               |    |                               |   |   |   |   |   |
| GENERAL AND  ADMIN. EXPENSES                      |   | 11,108                             |    | 11,208                             |   | 10,417 |   | 10,442 |   |
|                                              |   |                               |    |                               |   |   |   |   |   |
| COSTS OF NOTE  EXCHANGE                           |   | —                             |    | —                             |   | 5,496 |   | 5,496 |   |
|                                              |   |                               |    |                               |   |   |   |   |   |
| Operating profit  from continuing operations      |   | 23,282                             |    | 22,019                             |   | 14,290 |   | 13,873 |   |
|                                              |   |                               |    |                               |   |   |   |   |   |
| INTEREST  EXPENSE, net                            |   | 19,036                             |    | 18,492                             |   | 17,825 |   | 17,977 |   |
|                                              |   |                               |    |                               |   |   |   |   |   |
| Income /(Loss)  before provision for income taxes |   | 4,246                              |    | 3,527                              |   | (3,535 | ) | (4,104 | ) |
|                                              |   |                               |    |                               |   |   |   |   |   |
| PROVISION FOR  INCOME TAXES                       |   | 185                                |    | 185                                |   | 70 |   | 70 |   |
|                                              |   |                               |    |                               |   |   |   |   |   |
| Income/(Loss)  from continuing operations         |   | 4,061                              |    | 3,342                              |   | (3,605 | ) | (4,174 | ) |
|                                              |   |                               |    |                               |   |   |   |   |   |
| Income/(Loss)  from discontinued operations       |   | 3,474                              |    | 3,474                              |   | — |   | — |   |
|                                              |   |                               |    |                               |   |   |   |   |   |
| EXTRAORDINARY  (LOSS) ON EXTINGUISHMENT OF DEBT   |   | (473                               | )       | (473                               | )      | (435 | ) | (435 | ) |
|                                              |   |                               |    |                               |   |   |   |   |   |
| Net  Income/(Loss)                                |   | 7,062                              |    | 6,343                              |   | (4,040 | ) | (4,609 | ) |
|                                              |   |                               |    |                               |   |   |   |   |   |
| Preferred stock  dividends, issued and accrued    |   | 7,976                              |    | 8,734                              |   | 8,328 |   | 9,121 |   |
| Loss to common  stockholders                      |   | $                                  | (914    | )                                  |   | $ | (2,391 | ) |   | $ | (12,368 | ) |   | $ | (13,730 | ) |
|                                                   |        |                                    |         |                                    |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)  Certain prior year accounts have beenreclassified to conform with the current year’s presentation.

 

F-15

----

 

3.                                       LeaseObligations

 

The Company leases certain of its operating facilitiesunder terms ranging up to 40 years including renewal options.  These leases are classified as bothoperating and capital leases. Certain of the leases contain provisions callingfor rentals based on sales or other provisions obligating the Company to payrelated property taxes and certain other expenses.

 

The following is asummary of property held under capital leases and included in the accompanyingconsolidated balance sheets (in thousands):

 
|                                  |   | **December  31,  2001** |   | **December  30,  2002** |   |
|---------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                  |   |                    |   |                    |   |
| Property                              |   | $                       | 7,293  |                    | $      | 7,293 |   |
| Less  – Accumulated depreciation |   | 6,233                   |   | 6,584                   |   |
|                                  |   |                    |   |                    |   |
|                                  |   | $                       | 1,060  |                    | $      | 709 |   |

 

The following represents the minimum lease paymentsremaining under noncancelable operating leases and capitalized leases as ofDecember 30, 2002 (in thousands):

 
| **Fiscal years ending**                        |   | **Operating  Leases** |       | **Capitalized  Leases** |       |
|------------------------------------------------|--------|-----------------------|------------|-------------------------|------------|
| 2003                                           |   | $                     | 18,543     |                    | $          | 836 |   |
| 2004                                           |   | 17,327                |       | 263                     |       |
| 2005                                           |   | 14,962                |       | 232                     |       |
| 2006                                           |   | 13,978                |       | 232                     |       |
| 2007                                           |   | 14,318                |       | 232                     |       |
| Thereafter                                     |   | 189,741               |       | 882                     |       |
|                                           |   |                  |       |                    |       |
| Total  minimum lease payments                  |   | $                     | 268,869    |                    | 2,677      |   |
|                                           |   |                  | ** ** |                    | ** ** |
| Less  – Imputed interest (8.75% to 15.5%) |   |                  |       | 878                     |       |
|                                           |   |                  |       |                    |       |
| Present  value of minimum lease payments       |   |                  |       | 1,799                   |       |
|                                           |   |                  |       |                    |       |
| Less  – Current portion                   |   |                  |       | 646                     |       |
|                                           |   |                  |       |                    |       |
| Long-term  portion                             |   |                  |       | $                       | 1,153      |   |

 

Rental expense was $16,650,000, $18,609,000, and$20,317,000 during 2000, 2001, and 2002, respectively.  Prepaid occupancy costs were $1,397,000 and$0 as of the fiscal years ended December 31, 2001 and December 30, 2002,respectively.

 

Sale-Leaseback

 

The Company entered into a sale-leaseback transactionin 1996.  As of December 31, 2001 andDecember 30, 2002, the Company had $3,990,000 and $3,788,000, respectively, indeferred gain on its balance sheet. This deferred amount is being amortized asa reduction of rental expense over the leaseback period.

 

F-16

----

 

4.                                       Long-TermDebt

 

Long-term debt is summarized as follows (inthousands):

 
|                                                                                                                       |   | **December  31,  2001** |    | **December  30,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-------------------------|--------|
| Senior  secured notes, interest only due semiannually beginning August 15, 1998 at  11.5%, principal due February 15, 2003 |   | $                       | 3,410   |                    | $      | 3,410 |   |
| Senior  secured notes, interest only due semiannually beginning May 1, 2002 at 11.5%,  principal due November 1, 2006      |   | 161,774                 |    | 161,774                 |   |
| Unamortized  discount on 2006 Notes                                                                                        |   | (9,020                  | )       | (7,154                  | )      |
| Other                                                                                                                      |   | 1,510                   |    | 1,158                   |   |
|                                                                                                                       |   |                    |    |                    |   |
|                                                                                                                       |   | 157,674                 |    | 159,188                 |   |
| Less  – Current portion                                                                                               |   | 402                     |    | 3,491                   |   |
|                                                                                                                       |   |                    |    |                    |   |
| Long-term  portion                                                                                                         |   | $                       | 157,272 |                    | $      | 155,697 |   |

 

Maturities of the remaining long-term debt during eachof the five fiscal years following fiscal year-end 2002 are $3,491,000,$35,000, $44,000, $161,823,000, $56,000, and $893,000 thereafter.

 

In 2001, theCompany entered into a loan agreement with Foothill Capital Corporation for anew revolving credit facility (the “New Credit Facility”). The New CreditFacility replaced the Company’s former credit facility with Fleet NationalBank.   The New Credit Facility providesfor cash borrowings and letters of credit in an aggregate amount of $15.0million.  The New Credit Facilityprovides for an unused line fee payable monthly in arrears, fees payable onoutstanding letters of credit, as well as certain additional fees.  Borrowings under the New Credit Facilitybear interest at the prime rate announced by Wells Fargo Bank, NationalAssociation plus 1.5%.  The New CreditFacility terminates on December 17, 2005. As of December 30, 2002, the Companyhad $7.7 million of letters of credit outstanding, primarily related to itsself-insurance program, and no cash borrowings on its new revolver.    The New Credit Facility includes certainrestrictive covenants, including a requirement to maintain certain financialratios.  During the fiscal year endedDecember 30, 2002, the Company was in compliance with all covenants except forSection 7.20(a)(i) (Minimum EBITDA) that pertained to the third quarter. OnNovember 13, 2002, the Company obtained a waiver from its lender related toSection 7.20(a)(i).  The Company iscurrently in compliance with all covenants under the New Credit Facility.

 

Substantially all assetsof the Company and its subsidiaries are pledged to senior lenders. Inconnection with such indebtedness, contingent and mandatory prepayments may berequired under certain specified conditions and events.  There are no compensating balancerequirements.

 

Management believes thefair value of the debt approximates its carrying value.

 

On October 31, 2001, theCompany consummated an exchange offer (the “Exchange”) pursuant to which theCompany offered to exchange its 111⁄2% Senior Secured Notes due 2006 (the “NewNotes”) for all of its $142,600,000 outstanding 111⁄2% Senior Secured Notes due2003 (the “Old Notes”) and an offering (the “Offering”) of $30,000,000aggregate principal amount of New Notes. After the consummation of the Exchange, the Offering, and relatedtransactions (collectively, the “Refinancing”), the Company had no furtherpayment obligations with respect to over 97.6% of the outstanding Old Notes(constituting all but $3,410,000 aggregate principal amount of the Old Notes)and assumed payment obligations equivalent to $161,774,000 of the New Notes.The Refinancing substantially eliminates debt principal payments until November2006.

 

F-17

----

 

On February 18, 2003, theCompany paid in full the $3,410,000 outstanding in Old Notes. The Company doesnot, however, expect to generate sufficient cash flows from operations in thefuture to pay fully the principal on long-term debt upon maturity in the year2006 and, accordingly, it expects to refinance all or a portion of such debt,obtain new financing, or possibly sell assets.

 

The Company’s threewholly owned direct subsidiaries, ARG Enterprises, Inc., ARG PropertyManagement Corporation, and ARG Terra, Inc. (collectively, the “DirectSubsidiaries”), jointly and severally guarantee, on a full and unconditionalbasis, the outstanding indebtedness of the Company evidenced by the New Notes.The Company has no assets or operations that are independent of the DirectSubsidiaries.  The Company’s non-guarantor indirect subsidiary is minor. There are no restrictions on the ability of the Company to obtain fundsfrom the Direct Subsidiaries by dividend or loan.

 

5.                                       IncomeTaxes

 

The Company’s stateincome-tax provision, all of which was current, was $185,000, $70,000, and$48,000 in 2000, 2001, and 2002, respectively. No provision for Federal income taxes was required in any year.

 

The income-tax effects oftemporary differences that give rise to significant portions of the Company’sdeferred income-tax assets and liabilities are as follows (in thousands):

 
|                                                                           |   | **Fiscal  year ended**             |   |
|--------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                           |   | **(Restated)  December 31,  2001** |   | **December  30,  2002** |   |
| Deferred  income-tax asset:                                                    |   |                               |   |   |   |
| Reserves  and other accrued expenses not currently deductible for tax purposes |   | $                                  | 3,237  |   | $ | 3,080 |   |
| Long-lived  asset impairment not recognized on tax return                      |   | 2,813                              |   | 2,813 |   |
| Tax  gain on sale/leaseback transactions, net                                  |   | 2,895                              |   | 2,812 |   |
| Net-operating-loss  carryforward from continuing operations                    |   | 34,016                             |   | 44,641 |   |
|                                                                           |   |                               |   |   |   |
| Deferred  income-tax asset                                                     |   | 42,961                             |   | 53,346 |   |
|                                                                           |   |                               |   |   |   |
| Deferred  income-tax liability:                                                |   |                               |   |   |   |
| Tax  depreciation greater than depreciation for financial reporting purposes   |   | (5,723                             | )      | (5,225 | ) |
| Costs  capitalized for financial reporting purposes and expensed on tax return |   | (2,721                             | )      | (3,146 | ) |
| Other,  net from continuing operations                                         |   | (410                               | )      | (575 | ) |
|                                                                           |   |                               |   |   |   |
| Deferred  income-tax liability                                                 |   | (8,854                             | )      | (8,946 | ) |
|                                                                           |   |                               |   |   |   |
| Deferred  asset, net of deferred liability                                     |   | 34,107                             |   | 44,400 |   |
| Valuation  allowance                                                           |   | (34,107                            | )      | (44,400 | ) |
|                                                                           |   |                               |   |   |   |
| Net  deferred income-tax asset                                                 |   | $                                  | — |   | $ | — |   |

 

F-18

----

 

The effective tax ratediffers from the Federal statutory rate of 34 percent as a result of thefollowing items (in thousands):

 
|                                                                  |   | **Fiscal  year ended**                            |       |
|-----------------------------------------------------------------------|--------|---------------------------------------------------|------------|
|                                                                  |   | **(Unaudited  and restated)  December 25,  2000** |       | **(Restated)  December 31,  2001** |   | **December  30,  2002** |   |
| Federal  income-tax provision (benefit) at statutory rates            |   | $                                                 | 2,220      |   | $ | (1,543 | ) | $ | (1,156 | ) |
| State  income-tax provision for which no Federal benefit was recorded |   | 464                                               |       | 29 |   | 32 |   |
| Losses  for which no Federal benefit was recorded                     |   | —                                            |       | 1,727 |   | 710 |   |
| Nondeductible  items, principally intangible amortization             |   | 159                                               |       | 117 |   | 462 |   |
| Benefit  of net-operating-loss carryforward                           |   | (2,658                                            | )          | — |   | — |   |
| **Cancellation of debt income**                                       |   | **—**                                        | ** ** | **(260** | **)** | — | ** ** |
| Provision  for income taxes                                           |   | $                                                 | 185        |   | $ | 70 |   | $ | 48 |   |

 

At December 30, 2002, theCompany had available net-operating-loss carryforwards for Federal income-taxpurposes of $102,220,000 expiring in 2003 to 2022, and Federalgeneral-business-credit carryforwards of $9,887,000, expiring in 2014 to 2020.The Company fully reserves both the net-operating-loss andgeneral-business-credit carryforwards because sufficient doubt exists regardingthe Company’s ability to use the carryforward before expiration.

 

6.                                       Commitmentsand Contingencies

 

The Company is obligatedunder an employment agreement with an officer. The obligation under theagreement is $500,000 per year and expires in 2003 unless extended.

 

The Company has beennamed as defendant in various lawsuits. Management’s opinion is that the outcome of such litigation will notmaterially affect the Company’s financial position or results of operations.

 

7.                                       CumulativePreferred Stock, Mandatorily Redeemable

 

As part of arecapitalization plan in February 1998, the Company issued 35,000 preferredstock units (the “Units”) of the Company. Each Unit consists of $1,000 initial liquidation preference of 12%senior pay-in-kind exchangeable preferred stock and one common-stock purchasewarrant to purchase 2.66143 shares of the common stock at an initial exerciseprice of one cent per share.  TheCompany’s cumulative preferred stock is mandatorily redeemable on August 15,2003.  The dividend rate may rangebetween 12% and 15%.  If the Companydoes not redeem its preferred stock for cash at a price per share equal to 110%of the then-applicable liquidation preference, its preferred stock will beautomatically redeemed for shares of common stock at that time and all rightsof the preferred stock will terminate. Management believes that the preferred stock will convert to commonstock.

 

Stock dividends of 4,181shares, 4,495 shares, and 4,831 shares were made on February 15, 2002, August15, 2002, and February 15, 2003, respectively. There were 68,046 sharesoutstanding and accrued at December 30, 2002.

 

8.                                       CommonStock

 

As of December 29, 1997,all of the Company’s common stock was owned by Holdings and certain members ofthe Company’s management (the “Management Shareholders”). The ManagementShareholders also own all outstanding shares of Holdings common stock otherthan shares of Holdings common stock issued to holders of the Holdingsdebenture units and rights to acquire shares of Holdings common stock issuableupon exercise of warrants.

 

F-19

----

 

In conjunction with the1998 recapitalization plan, the Company issued shares of common stock to theManagement Shareholders in an aggregate amount equal to 15% of the common stockon a fully diluted basis.  Such ManagementShareholders entered into a voting trust agreement with Anwar S. Soliman, aCompany shareholder and Director, to exercise all voting and substantially allother rights to which such Management Shareholders would otherwise be entitleduntil August 15, 2005, or the earlier termination of the agreement.  The Management Shareholders also enteredinto a shareholders’ agreement with the remaining Company shareholders, whichprovides that the parties will agree to vote all of their shares of theCompany’s equity securities so that the Board of Directors of the Companyconsists of five directors, with two directors designated by the TCW Investors,two by the Management Shareholders, with the remaining director being anindependent director initially designated by Jefferies.

 

9.                                       Related-PartyTransactions

 

On June 28, 2000,the Company sold all of the outstanding stock of the Non-Black AngusSubsidiaries to Spectrum Restaurant Group, Inc. (formerly known asNBACo, Inc.), a company that is controlled by Anwar S. Soliman, aCompany shareholder and Director, and accounted for this business as adiscontinued operation. The difference between net book value and proceeds wasrecorded as a charge to paid-in capital because of the related-partynature of the Stock Sale.  The Companyreceived $17.0 million in cash on June 28, 2000, and transferredcertain assets and liabilities with a net book value of $43.4 million toSpectrum Restaurant Group, Inc. Concurrent with the sale, advances betweenthe Company and the Non-Black Angus Subsidiaries were eliminated.  Paid-in capital of $27.0 million hasbeen charged as a result of the sale. The Company retained the assets and liabilities associated with certainclosed restaurants as well as certain liabilities, estimated on June 26,2000 at $12.6 million, associated with the**Non-Black AngusSubsidiaries.

 

The Company satisfied itsobligations to pay such liabilities in 2002. The Company is in discussion with Spectrum Restaurant Group, Inc. toresolve and document the reimbursement, assumption, and indemnificationobligations by Spectrum Restaurant Group, Inc. of remaining liabilities relatedto the Non-Black Angus Subsidiaries. Any resulting adjustment will be recognized when the amount becomesknown.  For the year ended December 30,2002, the Company recognized $500,000 as a loss from discontinued operationsfor the expenses incurred in 2002 associated with the operations sold in theStock Sale and has $100,000 in receivables outstanding from Spectrum RestaurantGroup, Inc.

 

Jefferies, the initialpurchaser of the New Notes, owns approximately 2.4% of the Company’s commonstock on a fully diluted basis, excluding the effect of changes to the terms ofthe preferred stock after the Refinancing. In connection with its ownership of the common stock, Jefferies is aparty to the Securityholders Agreement concerning the Company, pursuant towhich Jefferies is entitled to designate a member of the Company’s board ofdirectors.  M. Brent Stevens is thecurrent board member designated by Jefferies. Mr. Stevens is an Executive Vice President of the Corporate FinanceDepartment of Jefferies.  The Companypaid Jefferies a fee of $5.6 million in fiscal 2001 associated with theRefinancing. In addition, from time to time, Jefferies and its affiliates haveprovided in the past and may provide in the future investment banking andfinancial advisory services to the Company and its affiliates in the ordinarycourse of business.  Jefferies or itsaffiliates, as applicable, has received or will receive customary compensationin connection with such services.

 

F-20

----

 

10.                                 SavingsPlan

 

The American RestaurantGroup Savings and Investment Plan (the “Savings Plan”) is a 401(k) planestablished for the benefit of employees who satisfy certain requirements.  These requirements include completion of oneyear of service with a minimum of 1,000 hours worked.  Subject to applicable limits imposed on tax-qualified plans,eligible employees may elect pre-tax contributions up to 20.0% of aparticipant’s total earnings for a calendar year (but not in excess of $11,000for 2002).  Until January 2003, theCompany made matching contributions to the Savings Plan equal to 25% of theparticipant’s contributions up to 6% of the participant’s earnings. Duringfiscal 2000, 2001, and 2002, the Company contributed approximately $203,000,$209,000 and $191,000 to the Savings Plan, respectively.  At December 30, 2002, there wereapproximately 2,588 employees eligible and 481 contributors to the plan.  The Company is not in compliance with itsfiling requirements under ERISA.  TheCompany expects to return to compliance.

 

11.                                 Income/(Loss)from Discontinued Operations

 

The following chartsummarizes the calculation of the net income/(loss) for discontinued operationsof the Non-Black Angus restaurants for the fiscal years ended 2000, 2001, and2002.  There was no activity in thediscontinued operations in 2001.

 
| **($000)**                      |   | **December 25,  2000** |   | **December 31,  2001** |   | **December 30,  2002** |   |
|---------------------------------|--------|------------------------|--------|------------------------|--------|------------------------|--------|
|                            |   |                   |   |                   |   |                   |   |
| Revenues                        |   | $                      | 65,111 |                   | $      | —                 |   | $ | — |   |
| Food and Beverage  Costs        |   | 17,124                 |   |                   |   |                   |   |
| Payroll Costs                   |   | 21,645                 |   |                   |   |                   |   |
| Direct Operating Costs          |   | 16,848                 |   |                   |   | 400                    |   |
| Depreciation and  Amortization  |   | 1,763                  |   |                   |   |                   |   |
| General and  Administrative     |   |                   |   |                   |   |                   |   |
| Expense                         |   | 3,376                  |   |                   |   | 100                    |   |
| Non-cash Charge for  Impairment |   | 112                    |   |                   |   |                   |   |
| Grandy’s Conversion        |   | 752                    |   |                   |   |                   |   |
| Income/(Loss) before  Taxes     |   | 3,491                  |   |                   |   | (500                   | )      |
| Provision for Income  Taxes     |   | 17                     |   |                   |   |                   |   |
|                            |   |                   |   |                   |   |                   |   |
| Income/(Loss) from              |   |                   |   |                   |   |                   |   |
| Discontinued  Operations        |   | $                      | 3,474  |                   | $      | —                 |   | $ | (500 | ) |

 

F-21

----

 

CERTIFICATION

 

I, Ralph S. Roberts, certify that:

 

1.                                       Ihave reviewed this annual report on Form 10-K of American Restaurant Group,Inc.;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and wehave:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)                                      presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: March 28, 2003 |                    |
|----------------------|-------------------------|
|                 |                    |
|                 | /s/ Ralph S. Roberts    |   |
|                 | Ralph S. Roberts        |
|                 | Chief Executive Officer |

 

----

 

CERTIFICATION

 

I, William G. Taves, certify that:

 

1.                                       Ihave reviewed this annual report on Form 10-K of American Restaurant Group,Inc.;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and wehave:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)                                      presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: March 28, 2003 |                    |
|----------------------|-------------------------|
|                 |                    |
|                 | /s/ William G. Taves    |   |
|                 | William G. Taves        |
|                 | Chief Financial Officer |

 

----