** **

**UNITEDSTATES SECURITIES AND EXCHANGE********COMMISSION**

 

**WASHINGTON, D.C. 20549**

 

----

 

**FORM10-Q**

 

| **(Mark One)**                                                                                                                                                    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                        |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                              |
| **For the quarterly period ended September  29, 2003**                                                                                                            |
|                                                                                                                                                              |
| **OR**                                                                                                                                                            |
|                                                                                                                                                              |
| **o**                                                                                                                                                             |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                              |
| **For the transition period from             to            ** |

 

| **American Restaurant Group, Inc.**                             |
|-----------------------------------------------------------------|
| (Exact name of registrant as specified in  its charter)         |
|                                                            |   |   |   |   |
| **Delaware**                                                    |   | **33-48183** |   | **33-0193602** |
| (State or other jurisdiction of  incorporation or organization) |   | (Commission File  Number) |   | (I.R.S. employer  identification no.) |

 

**4410 El Camino Real, Suite 201Los Altos, CA 94022(650) 949-6400**

(Addressand telephone number of principal executive offices)

 

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  o      No  ý

 

Registrant’sfinancial statements for the fiscal year-end 2000 included in the Form 10-Kfiled on March 31, 2003 were unaudited.

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act)

Yes  o      No  ý

 

Thenumber of outstanding shares of the Company’s Common Stock (one cent par value)as of November 3, 2003 was 0.999871. 

 

 

----

 

**AMERICAN RESTAURANT GROUP, INC.**

 

**INDEX**

 
| **PART I.** | **FINANCIAL INFORMATION**                                                                   |   |
|-------------|---------------------------------------------------------------------------------------------|--------|
|        |                                                                                        |   |
| ITEM 1.     | FINANCIAL STATEMENTS:                                                                       |   |
|        |                                                                                        |   |
|        | Consolidated Condensed Balance Sheets                                                       | 3      |
|        |                                                                                        |   |
|        | Consolidated Condensed Statements of  Operations                                            | 5      |
|        |                                                                                        |   |
|        | Consolidated Condensed Statements of Cash  Flows                                            | 6      |
|        |                                                                                        |   |
|        | Notes to Consolidated Condensed Financial  Statements                                       | 7      |
|        |                                                                                        |   |
| ITEM 2.     | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATIONS | 10     |
|        |                                                                                        |   |
| ITEM 3.     | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                 | 15     |
|        |                                                                                        |   |
| ITEM 4.     | CONTROLS AND PROCEDURES                                                                     | 15     |
|        |                                                                                        |   |
| **PART II** | **OTHER INFORMATION**                                                                       |   |
|        |                                                                                        |   |
| ITEM 6.     | EXHIBITS AND REPORTS ON FORM 8-K                                                            | 15     |

 

----

 

**PART I.   FINANCIAL INFORMATION**

 

**ITEM 1.****    ****FINANCIAL STATEMENTS:**

 

AMERICAN RESTAURANT GROUP, INC. ANDSUBSIDIARIES

 

CONSOLIDATED CONDENSED BALANCE SHEETS

 

(in thousands)

 
|                                  |   | **December 30,  2002** |   | **(Unaudited)  September 29,  2003** |   |
|---------------------------------------|--------|------------------------|--------|--------------------------------------|--------|
|                                  |   |                   |   |                                 |   |
| ASSETS                                |   |                   |   |                                 |   |
|                                  |   |                   |   |                                 |   |
| CURRENT  ASSETS:                      |   |                   |   |                                 |   |
| Cash                                  |   | $                      | 4,773  |                                 | $      | 5,495 |   |
| Rebates  and other receivables, net   |   | 3,018                  |   | 3,615                                |   |
| Inventories                           |   | 3,031                  |   | 2,894                                |   |
| Prepaid  expenses                     |   | 1,454                  |   | 1,207                                |   |
|                                  |   |                   |   |                                 |   |
| Total  current assets                 |   | 12,276                 |   | 13,211                               |   |
|                                  |   |                   |   |                                 |   |
| PROPERTY  AND EQUIPMENT, net:         |   |                   |   |                                 |   |
| Land  and land improvements           |   | 711                    |   | 601                                  |   |
| Buildings  and leasehold improvements |   | 36,029                 |   | 33,670                               |   |
| Fixtures  and equipment               |   | 10,552                 |   | 9,779                                |   |
| Property  held under capital leases   |   | 709                    |   | 770                                  |   |
| Construction  in progress             |   | 687                    |   | 2,403                                |   |
|                                  |   |                   |   |                                 |   |
| Net  property and equipment           |   | 48,688                 |   | 47,223                               |   |
|                                  |   |                   |   |                                 |   |
| Other  assets, net:                   |   | 16,909                 |   | 16,516                               |   |
|                                  |   |                   |   |                                 |   |
| Total  assets                         |   | $                      | 77,873 |                                 | $      | 76,950 |   |

 

The accompanying notes are an integral partof these consolidated condensed statements.(consolidated condensed balance sheets continued on the following page)

 

3

----

 

AMERICAN RESTAURANT GROUP, INC. ANDSUBSIDIARIES

 

CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)

 

(in thousands)

 
|                                                                                                                                                              |   | **December 30,  2002** |   | **(Unaudited)  September 29,  2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|--------------------------------------|--------|
|                                                                                                                                                              |   |                   |   |                                 |   |
| LIABILITIES  AND COMMON STOCKHOLDERS’ DEFICIT                                                                                                                |   |                   |   |                                 |   |
|                                                                                                                                                              |   |                   |   |                                 |   |
| CURRENT  LIABILITIES:                                                                                                                                             |   |                   |   |                                 |   |
| Accounts  payable                                                                                                                                                 |   | $                      | 7,825  |                                 | $      | 12,432 |   |
| Accrued  liabilities                                                                                                                                              |   | 4,235                  |   | 3,190                                |   |
| Current  portion of store-closures reserve                                                                                                                        |   | -0-                    |   | 270                                  |   |
| Current  portion of SRG bankruptcy reserve                                                                                                                        |   | -0-                    |   | 3,079                                |   |
| Gift-certificate  liability                                                                                                                                       |   | 6,226                  |   | 2,901                                |   |
| Self-insurance  reserves                                                                                                                                          |   | 3,526                  |   | 3,325                                |   |
| Accrued  interest                                                                                                                                                 |   | 3,385                  |   | 7,890                                |   |
| Accrued  employee costs                                                                                                                                           |   | 4,141                  |   | 3,272                                |   |
| Accrued  occupancy costs                                                                                                                                          |   | 4,696                  |   | 5,743                                |   |
| Current  portion of obligations under capital leases                                                                                                              |   | 646                    |   | 272                                  |   |
| Current  portion of long-term debt                                                                                                                                |   | 3,491                  |   | 5,071                                |   |
|                                                                                                                                                              |   |                   |   |                                 |   |
| Total  current liabilities                                                                                                                                        |   | 38,171                 |   | 47,445                               |   |
|                                                                                                                                                              |   |                   |   |                                 |   |
| LONG-TERM  LIABILITIES, net of current portion:                                                                                                                   |   |                   |   |                                 |   |
| Obligations  under capital leases                                                                                                                                 |   | 1,153                  |   | 1,261                                |   |
| Store-closures  reserve                                                                                                                                           |   | -0-                    |   | 1,982                                |   |
| SRG  bankruptcy reserve                                                                                                                                           |   | -0-                    |   | 6,639                                |   |
| Long-term  debt, net of unamortized discount                                                                                                                      |   | 155,697                |   | 157,071                              |   |
|                                                                                                                                                              |   |                   |   |                                 |   |
| Total  long-term liabilities                                                                                                                                      |   | 156,850                |   | 166,953                              |   |
|                                                                                                                                                              |   |                   |   |                                 |   |
| DEFERRED  GAIN ON SALE-LEASEBACK                                                                                                                                  |   | 3,788                  |   | 3,636                                |   |
|                                                                                                                                                              |   |                   |   |                                 |   |
| COMMITMENTS  AND CONTINGENCIES                                                                                                                                    |   |                   |   |                                 |   |
|                                                                                                                                                              |   |                   |   |                                 |   |
| CUMULATIVE  PREFERRED STOCK, MANDATORILY REDEEMABLE:                                                                                                              |   |                   |   |                                 |   |
| Senior  pay-in-kind exchangeable preferred stock, $0.01 par value; 160,000 shares  authorized; 68,046 shares outstanding and accrued at December 30, 2002         |   | 74,586                 |   | -0-                                  |   |
|                                                                                                                                                              |   |                   |   |                                 |   |
| COMMON  STOCKHOLDERS’ (DEFICIT):                                                                                                                             |   |                   |   |                                 |   |
| Common  stock, $0.01 par value; 1,000,000 shares authorized; 128,081 shares issued  and outstanding at December 30, 2002 and 999,871 shares at September 29, 2003 |   | 1                      |   | 10                                   |   |
| Paid-in  capital                                                                                                                                                  |   | -0-                    |   | 81,883                               |   |
| Accumulated  (deficit)                                                                                                                                            |   | (195,523               | )      | (222,977                             | )      |
|                                                                                                                                                              |   |                   |   |                                 |   |
| Total  common stockholders’ (deficit)                                                                                                                        |   | (195,522               | )      | (141,084                             | )      |
|                                                                                                                                                              |   |                   |   |                                 |   |
| Total  liabilities and common stockholders’ (deficit)                                                                                                        |   | $                      | 77,873 |                                 | $      | 76,950 |   |

 

The accompanying notes are an integral partof these consolidated condensed statements.

 

4

----

 

AMERICAN RESTAURANT GROUP, INC. ANDSUBSIDIARIES

 

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

 

FOR THE THIRTEEN WEEKS AND THE THIRTY-NINEWEEKS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 29, 2003 

 

(in thousands)

 
|                                             |   | **Thirteen Weeks Ended** |   | **Thirty-Nine Weeks Ended** |   |
|--------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                             |   | **September 30,  2002**  |   | **September 29,  2003**     |   | **September 30,  2002** |   | **September 29,  2003** |   |
|                                             |   |                     |   |                        |   |   |   |   |   |
| REVENUES                                         |   | $                        | 70,119 |                        | $      | 66,422 |   | $ | 226,595 |   | $ | 211,337 |   |
|                                             |   |                     |   |                        |   |   |   |   |   |
| RESTAURANT  COSTS:                               |   |                     |   |                        |   |   |   |   |   |
| Food  and beverage                               |   | 23,267                   |   | 23,326                      |   | 74,936 |   | 70,158 |   |
| Payroll                                          |   | 21,651                   |   | 21,419                      |   | 68,362 |   | 65,802 |   |
| Direct  operating                                |   | 17,814                   |   | 16,679                      |   | 56,891 |   | 52,378 |   |
| Depreciation  and amortization                   |   | 1,864                    |   | 1,762                       |   | 5,527 |   | 5,394 |   |
|                                             |   |                     |   |                        |   |   |   |   |   |
| OTHER  COSTS                                     |   |                     |   |                        |   |   |   |   |   |
| Loss on asset  impairment and store closures     |   | -0-                      |   | 3,889                       |   | -0- |   | 3,889 |   |
| SRG  bankruptcy reserve                          |   | -0-                      |   | 10,010                      |   | -0- |   | 10,079 |   |
|                                             |   |                     |   |                        |   |   |   |   |   |
| GENERAL  AND ADMINISTRATIVE EXPENSES             |   | 2,723                    |   | 2,531                       |   | 7,557 |   | 7,675 |   |
|                                             |   |                     |   |                        |   |   |   |   |   |
| Operating  profit (Loss)                         |   | 2,800                    |   | (13,194                     | )      | 13,322 |   | (4,038 | ) |
|                                             |   |                     |   |                        |   |   |   |   |   |
| INTEREST  EXPENSE, net                           |   | 5,484                    |   | 5,363                       |   | 16,316 |   | 16,054 |   |
|                                             |   |                     |   |                        |   |   |   |   |   |
| Income  (Loss) before provision for income taxes |   | (2,684                   | )      | (18,557                     | )      | (2,994 | ) | (20,092 | ) |
|                                             |   |                     |   |                        |   |   |   |   |   |
| PROVISION  FOR INCOME TAXES                      |   | 9                        |   | 8                           |   | 66 |   | 56 |   |
|                                             |   |                     |   |                        |   |   |   |   |   |
| Income  (Loss) from continuing operations        |   | (2,693                   | )      | (18,565                     | )      | (3,060 | ) | (20,148 | ) |
|                                             |   |                     |   |                        |   |   |   |   |   |
| Income  (Loss) from discontinued operations      |   | (225                     | )      | -0-                         |   | (225 | ) | -0- |   |
|                                             |   |                     |   |                        |   |   |   |   |   |
| NET  INCOME (LOSS)                               |   | (2,918                   | )      | (18,565                     | )      | (3,285 | ) | (20,148 | ) |
|                                             |   |                     |   |                        |   |   |   |   |   |
| Preferred  stock dividends, issued and accrued   |   | 2,664                    |   | 1,495                       |   | 7,720 |   | 7,308 |   |
|                                             |   |                     |   |                        |   |   |   |   |   |
| Loss  to common stockholders                     |   | $                        | (5,582 | )                           | $      | (20,060 | ) | $ | (11,005 | ) | $ | (27,456 | ) |
|                                                  |        |                          |        |                             |        |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these consolidatedcondensed statements.

 

5

----

 

AMERICAN RESTAURANT GROUP, INC. ANDSUBSIDIARIES

 

CONSOLIDATED CONDENSED STATEMENTS OF CASHFLOWS

 

FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 30,2002 AND SEPTEMBER 29, 2003 (UNAUDITED)

 

(in thousands)

 
|                                                                                                   |   | **September 30, 2002** |    | **September 29, 2003** |    |
|--------------------------------------------------------------------------------------------------------|--------|------------------------|---------|------------------------|---------|
| CASH  FLOWS FROM CONTINUING OPERATING ACTIVITIES:                                                      |   |                   |    |                   |    |
|                                                                                                   |   |                   |    |                   |    |
| Loss  from continuing operations                                                                       |   | $                      | (3,060  | )                      | $       | (20,148 | ) |
| Adjustments  to reconcile net loss to net cash provided by (used in) continuing operating  activities: |   |                   |    |                   |    |
|                                                                                                   |   |                   |    |                   |    |
| Depreciation  and amortization                                                                         |   | 5,527                  |    | 5,394                  |    |
| Loss  on asset impairment and store closures                                                           |   | -0-                    |    | 3,803                  |    |
| Loss  on SRG bankruptcy                                                                                |   | -0-                    |    | 9,718                  |    |
| Amortization  of deferred gain                                                                         |   | (151                   | )       | (152                   | )       |
| Amortization  of non-cash interest expense                                                             |   | 1,400                  |    | 1,400                  |    |
| Decrease  (increase) in current assets                                                                 |   | 142                    |    | (750                   | )  |
| Increase  (decrease) in current liabilities                                                            |   | (2,032                 | )       | 4,720                  |    |
| Net  cash provided by continuing operating activities                                                  |   | 1,826                  |    | 3,985                  |    |
|                                                                                                   |   |                   |    |                   |    |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                                                 |   |                   |    |                   |    |
| Capital  expenditures                                                                                  |   | (2,491                 | )       | (4,548                 | )       |
| Net  (increase) in other assets                                                                        |   | (544                   | )       | (3                     | )       |
| Net  cash (used in) investing activities                                                               |   | (3,035                 | )       | (4,551                 | )       |
|                                                                                                   |   |                   |    |                   |    |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                                 |   |                   |    |                   |    |
| Net  borrowings (payments) on indebtedness                                                             |   | (294                   | )       | 1,554                  |    |
| Payments  on capital-lease obligations                                                                 |   | (589                   | )       | (266                   | )       |
| Net  cash provided by (used in) financing activities                                                   |   | (883                   | )       | 1,288                  |    |
|                                                                                                   |   |                   |    |                   |    |
| NET  INCREASE (DECREASE) FROM CONTINUING OPERATIONS                                                    |   | (2,092                 | )       | 722                    |    |
|                                                                                                   |   |                   |    |                   |    |
| NET  (DECREASE) FROM DISCONTINUED OPERATIONS                                                           |   | (750                   | )       | -0-                    |    |
|                                                                                                   |   |                   |    |                   |    |
| NET  CHANGE IN CASH, CURRENT PERIOD                                                                    |   | (2,842                 | )       | 722                    |    |
|                                                                                                   |   |                   |    |                   |    |
| CASH,  at beginning of period                                                                          |   | 7,384                  |    | 4,773                  |    |
|                                                                                                   |   |                   |    |                   |    |
| CASH,  at end of period                                                                                |   | $                      | 4,542   |                   | $       | 5,495 |   |
|                                                                                                   |   |                   |    |                   |    |
| Cash  payments during the period:                                                                      |   |                   |    |                   |    |
| Interest                                                                                               |   | $                      | (10,468 | )                      | $       | (10,149 | ) |
| Income  taxes                                                                                          |   | (9                     | )       | (36                    | )       |

 

The accompanying notes are an integral partof these consolidated condensed statements

 

6

----

 

AMERICAN RESTAURANT GROUP, INC. ANDSUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIALSTATEMENTS (UNAUDITED)

 

1.             BASIS OF PRESENTATION

 

The Consolidated Condensed FinancialStatements included were prepared by American Restaurant Group, Inc. (referredto herein as the “Company”) without audit, in accordance with Securities andExchange Commission Regulation S-X.  Inthe opinion of our management, these Consolidated Condensed FinancialStatements contain all adjustments necessary to present fairly the Company’sfinancial position as of December 30, 2002 and September 29, 2003, and theresults of operations for the thirteen weeks and thirty-nine weeks endedSeptember 30, 2002 and September 29, 2003 and cash flows for the thirty-nineweeks ended September 30, 2002 and September 29, 2003.  The Company’s results for an interim periodare not necessarily indicative of the results that may be expected for theyear.

 

The Company believes the disclosures included inthe accompanying interim consolidated financial statements and footnotes areadequate to make the information not misleading, but should be read inconjunction with the consolidated financial statements and notes thereto includedin our filings with the Securities and Exchange Commission.

 

2.             OPERATIONS AND LIQUIDITY

 

The Company’s operations are affected bylocal and regional economic conditions, including competition in the restaurantindustry.

 

On October 31, 2001, the Company completed anexchange offer (the “Exchange”) in which it offered to exchange its 111⁄2% SeniorSecured Notes due 2006 (the “New Notes”) for all of its $142,600,000outstanding 111⁄2% Senior Secured Notes due 2003 (the “Old Notes”).  We simultaneously completed an offering (the“Offering”) of $30,000,000 aggregate principal amount of New Notes.  After the consummation of the Exchange, theOffering, and related transactions (collectively, the “Refinancing”), there wereno further payment obligations with respect to over 97.6% of the outstandingOld Notes (constituting all but $3,410,000 aggregate principal amount of theOld Notes, which were redeemed in full on February 18, 2003) and assumedpayment obligations equivalent to $161,774,000 of the New Notes.  The Refinancing substantially eliminatesdebt principal payments until November 2006.

 

The Company has historically used cash flowfrom operations together with other liquidity sources to make requiredpayments. As of September 29, 2003, the Company has $1.1 million ofavailability under its Credit Facility and $5.5 million in cash on hand.Although the Company has historically generated sufficient cash flow to providefor payments of principal and interest on our indebtedness as well asanticipated capital expenditures and working-capital needs, management cannotprovide complete assurance that the Company's liquidity sources will besufficient to provide for all future cash requirements. Additionally, we do notexpect to generate sufficient cash flows from operations in the future to payfully the principal of the senior indebtedness upon maturity in 2006 and,accordingly, we expect to refinance all or a portion of such debt, obtain newfinancing, or possibly sell assets.

 

3.             INCOME TAXES

 

The tax provision against the pre-tax income in2002 and in 2003 consisted of certain state income taxes and estimated federalincome tax.  The Company has establisheda valuation allowance against net-operating-loss carry forwards. The Companypays certain minimum state and federal taxes.

 

4.             PREFERRED STOCK

 

As part of the recapitalization plan inFebruary 1998, the Company issued 35,000 preferred stock units (the “Units”) ofthe Company.  Each Unit consisted of$1,000 initial liquidation preference of 12% senior pay-in-kind exchangeablepreferred stock and one common-stock purchase warrant initially to purchase2.66143 shares of the common stock at an initial exercise price of one cent pershare.  There were 74,448 shares ofpreferred stock outstanding at August 15, 2003.  The Company redeemed all of its preferred stock August 15, 2003 atthe 110% liquidation preference for shares of common stock and warrants toacquire additional shares of common stock, based upon a valuation as of theconversion date.  Upon the August 15,2003 conversion to common stock, all rights of the preferred stock terminated.

 

The Company issued preferred stock dividendsof 4,832 shares on February 15, 2003 and 5,194 shares on August 15, 2003.  At September 29, 2003, it no longer hadpreferred shares outstanding and accrued.

 

7

----

5.             SUBSIDIARYGUARANTORS

 

Separate financial statements of theCompany’s subsidiaries are not included in this report on Form 10-Q.  The Company's direct subsidiaries are fully,unconditionally, jointly, and severally liable for the Company’s obligationsunder the its New Notes, and the aggregate net assets, earnings, and equity ofsuch subsidiary guarantors are substantially equivalent to the net assets,earnings, and equity of the Company (issuer) on a consolidated basis, becausethe parent Company has no significant operations.

 

6.             INSURANCE

 

The Company self-insures certain risks,including medical, workers’ compensation, property, and general liability, upto 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 for annual medical and dentalbenefits per person.  Reserves forlosses are established based upon presently estimated obligations for the claimover time and the deductible or self-insured retention in place at the time ofthe loss.

 

7.             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 ofFAS 13, and Technical Corrections*” (“SFAS 145”).  SFAS 145 rescinds FASB Statement No. 4, “*ReportingGains**and Losses from Extinguishment of Debt,”* and an amendment ofthat Statement, FASB Statement No. 64, “*Extinguishments of**Debt**Made to Satisfy Sinking-FundRequirements*,” as well as FASB Statement No. 44, “*Accountingfor Intangible Assets of Motor**Carriers*.”  This Statement amends FASB Statement No. 13, “*Accountingfor Leases*,” to eliminate an inconsistency between the requiredaccounting for sale-leaseback transactions and the required accounting forcertain lease modifications that have economic effects that are similar tosale-leaseback transactions.  ThisStatement also amends other existing authoritative pronouncements to makevarious technical corrections, clarify meanings, or describe theirapplicability under changed conditions. The provisions of SFAS 145 were adopted during fiscal year 2003.  The adoption of this statement did notmaterially affect the Company’s consolidated balance sheets or consolidatedstatements of operations.

 

In June 2002, the FASB issued SFAS No. 146, “*Accountingfor Exit or Disposal Activities*” (“SFAS 146”).  SFAS 146 addressessignificant issues regarding the recognition, measurement, and reporting ofcosts that are associated with exit and disposal activities, includingrestructuring activities that are currently accounted for under EITF No. 94-3,“*LiabilityRecognition for Certain Employee**Termination Benefits and Other Costs to Exit anActivity (including Certain Costs Incurred in a Restructuring).”*  The scope of SFAS 146 also includes costsrelated to terminating a contract that is not a capital lease and terminationbenefits that employees who are involuntarily terminated receive under theterms of a one-time benefit arrangement that is not an ongoing benefitarrangement or an individual deferred-compensation contract. SFAS 146 iseffective for exit or disposal activities that are initiated after December 30,2002 and early application is encouraged. The provisions of EITF No. 94-3 shall continue to apply for an exitactivity initiated under an exit plan that met the criteria of EITF No. 94-3prior to the adoption of SFAS 146.

 

8.             SPECTRUMRESTAURANT GROUP, INC. BANKRUPTCY RESERVES

 

On June 28, 2000, the Company sold allof the outstanding stock of the Non-Black Angus Subsidiaries, and transferredcertain rights and obligations, to Spectrum Restaurant Group, Inc., acompany that is controlled by Anwar S. Soliman, a Company shareholder andDirector. 

 

On August 6, 2003, Spectrum Restaurant Group,Inc. and its subsidiaries (collectively, “SRG”) each filed in United StatesBankruptcy Court a voluntary petition for bankruptcy and reorganization underChapter 11.  The Company was owed $0.4 million as of September 29, 2003from SRG. The Company has fully reserved for this receivable, and has recordedan additional reserve of $9.7 million during the third quarter of 2003 inconnection with possible claims arising from the SRG bankruptcies.  Third parties have asserted claims against the Company and itssubsidiaries for SRG obligations, including claims for obligations undercertain leases rejected by SRG through bankruptcy procedures. In conformitywith SFAS 5, *“Accounting for Contingencies”*and FASB Interpretation No. 14 *“ReasonableEstimation of the Amount of a Loss,”* the Company accrued a $9.7million reserve as of September 29, 2003, representing management’s bestestimate of the amount the Company will incur to settle those claims.  Of the $9.7 million, $3.1 million of thisreserve is comprised of lease obligations due by SRG within the next twelvemonths; however, management is uncertain as to when payments will be made tosatisfy claims that have been or may be asserted against the Company.

 

The changes in the SRG bankruptcy reserveduring the 39 weeks ended September 29, 2003 were as follows (in thousands):

 
| Beginning reserve balance             |   | $      | 0      |   |   |
|---------------------------------------|--------|--------|--------|--------|--------|
| New accruals                          |   | 10,079 |   |
| less: Cash paid                       |   | (361   | )      |
| Reserve balance at September 29, 2003 |   | $      | 9,718  |   |   |
|                                       |        |        |        |        |        |  |

 

 

8

----

 

9.             ASSETIMPAIRMENT AND STORE CLOSURES

 

In the third quarter of 2003, we recorded atotal of $3.9 million in charges related to asset impairments and storeclosures of under-performing restaurants. As required under SFAS No. 144, *“Accountingfor the Impairment or Disposal of Long-Lived Assets,”* $1.5 millionin assets were written down for these under-performing locations.  The assets consisted of leaseholdimprovements and fixtures and equipment. Fair market value of the leaseholdimprovements was determined based on discounted cash flows and the lower of thenet book value or an estimate of current liquidation value for fixtures andequipment.  $2.4 million instore-closure reserves were made in connection with the lease costs of twostores that were closed during the third quarter, one of which extends to 2023,and the other of which has been terminated.

 

The Company expects to record an additional $4.8million in store-closure reserves, primarily related to lease costs, during thefourth quarter of 2003 in connection with the anticipated closing of threeadditional locations.

 

The changes in the store closure reserve duringthe 39 weeks ended September 29, 2003 were as follows (in thousands):

 
| Beginning reserve balance             |   | $     | 0      |   |
|---------------------------------------|--------|-------|--------|--------|
| New accruals                          |   | 2,452 |   |
| less: Cash paid                       |   | (200  | )      |
| Reserve balance at September 29, 2003 |   | $     | 2,252  |   |

 

10.           COMMITMENTSAND CONTINGENCIES

 

The Company is obligated under an employmentagreement with an officer.  Theobligation under the agreement is $500,000 per year.

 

The Company has been named as defendant invarious lawsuits.  Management’s opinionis that the outcome of such litigation will not materially affect the Company’sfinancial position, results of operations, or cash flows.

 

Please refer to Note 8 for a discussion ofcontingencies related to the SRG bankruptcy.

 

11.           SUBSEQUENTEVENTS

 

In conjunction with the conversion of 74,448shares of preferred stock to common stock on August 15, 2003, each preferredshareholder received for each share of its preferred stock (i) 11.71 shares ofcommon stock and (ii) one warrant (“2003 warrant”) exercisable for 1,376,000shares of common stock.  The 2003 warrantsare exercisable until December 15, 2003, when the 2003 warrants willexpire.  As of September 29, 2003, thetotal outstanding common stock (preceding exercise of any 2003 warrants) was999,871 shares.  Effective October 15,2003, the Company implemented a reverse stock split of the shares of commonstock on a proportionate one-for-one million basis.  As of November 3, 2003, the total outstanding common stock(preceding exercise of any 2003 warrants) was less than one share.  Assuming all of the 2003 warrants wereexercised as of November 3, 2003, the common stock as of that date would havebeen approximately 102,442 shares.

 

On October 31, 2003, the Company entered intoa loan agreement with TCW Shared Opportunity Fund III, L.P., an entity relatedto a group of funds that constitute the majority shareholder group, for netproceeds of $4.8 million. The credit facility bears an interest rate of 13% perannum. The credit facility expires February 2006, and shares in afirst-priority lien on all assets.

 

9

----

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

 

 

Certain statements contained in this Form10-Q are forward-looking regarding cash flows from operations, restaurantopenings, capital requirements, and other matters.  These forward-looking statements involve risks and uncertaintiesand, consequently, could be affected by general business conditions, the impactof competition, governmental regulations, and inflation.

 

The following discussion and analysis of ourfinancial condition and results of operations should be read in conjunctionwith the historical financial information included in the ConsolidatedCondensed Financial Statements contained in our Form 10-K for the fiscal yearended December 30, 2002.

 

# **Overview**

 

As of September 29, 2003, the operatingsubsidiaries of American Restaurant Group, Inc. (referred to herein as “we” and“our”) operated 108 Stuart Anderson’s Black Angus and Stuart Anderson’s CattleCompany steakhouses located primarily in California, the Pacific Northwest, andArizona.  The chain was founded 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 are distinctly Western in their designand feature booth seating for dining. They are generally open for lunch from11:30 AM to 4:00 PM and for dinner from 4:00 PM to 10:00 PM.

 

**Critical Accounting Policies**

 

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

 

*Use of Estimates. *The preparation of financial statementsin conformity with generally accepted accounting principles in the UnitedStates requires our management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, the disclosure of contingentassets and liabilities, and the reported amounts of revenues and expenses.  Actual results could differ from those estimates.

 

We believe that our financial statements area reasonable representation of the realizable values of our assets, the levelof our liabilities, and the amounts of revenues and expenses incurred in anygiven period.  There are estimatesinherent in these amounts.  We may notbe able to recover the assumed value of all of our assets, such as property andequipment or intangible assets, if circumstances cause us to close restaurantsor we experience a material decline in profitability.  Our actual liabilities for matters, such as self-insurance ordiscontinued operations, could possibly be significantly higher or lower thanour estimates if actual conditions are ultimately different than theassumptions 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 that we may be required to recognize moreleases as capital leases in the future than we have in the past, causing acorresponding increase in our assets and liabilities, and the associateddepreciation and interest expense. Conversely, if many leases in the future were classified as operatingleases, rental expense would increase.

 

*Valuation Allowance for Deferred TaxAssets. *We provideda valuation allowance of $44.4 million and $47.2 million against the entireamount of our deferred tax assets as of December 30, 2002 and September 29,2003, respectively.  We fully reserveboth the net-operating-loss and general-business-credit carry forwards becausesufficient doubt exists regarding the Company’s ability to use the carryforwards before expiration.

 

*Long-Lived Assets.*  We periodically review for impairment thecarrying value of its long-lived assets, and assess the recoverability of theassets based on the estimated undiscounted cash flows of the assets.  If impairment is indicated, assets are writtendown to fair market value based on discounted cash flows.

 

10

----

 

*Advertising Costs.*  Advertising costs are expensed either asincurred or the first time the advertising takes place, in accordance withStatement of Position 93-7, *“Reporting on Advertising Costs.”*

 

*Reclassification. *Certain accounts have been reclassifiedto conform to the current year’s presentation.

 

*Self-Insurance Reserves*.  We self-insure certain risks, includingmedical, workers’ compensation, property, and general liability, up to varyinglimits.  Deductible and self-insuredlimits have varied historically, ranging from $0 to $1,000,000 per incidentdepending on the type of risk.  Thepolicy deductibles are $125,000 for annual medical and dental benefits perperson.  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.  The self-insuredreserves are reported on the balance sheet under self-insurance reserves.****

 

**Results of Operations**

 

*Thirteen weeks ended September 30, 2002 andSeptember 29, 2003:*

 

*Revenues.*Totalrevenues decreased from $70.1 million in the third quarter of 2002 to $66.4million in the third quarter of 2003. Same-store sales decreased 4.9% in the third quarter of 2003 compared to2002.  Of the decrease, 1.4% is relatedto lower average dinner checks because of a change to lower promotional prices,and 3.3% is related to lower customer counts. There were 108 Black Angus restaurants operating at the end of the thirdquarter, compared to 109 at the end of the same period in 2002.

 

*Food and Beverage Costs.*  As a percentage of revenues, food andbeverage costs increased from 33.2% in the third quarter of 2002 to35.1% in the third quarter of 2003. The increase is the result of higher beef costs experienced during thequarter.

 

*Payroll Costs.*  Payroll costs decreased from$21.7 million during the third quarter of 2002 to $21.4 millionduring the third quarter of 2003.  As apercentage of sales, payroll increased from 30.9% in the third quarter of 2002to 32.2% in the third quarter of 2003.

 

*Direct Operating Costs.*  Direct operating costs consist of occupancy,advertising, and other expenses incurred by individual restaurants.  As a percentage of revenues, directoperating costs decreased from 25.4% in the third quarter of 2002 to 25.1% inthe third quarter of 2003. The decrease is from lower advertising expenses anda reduction in janitorial service contracts. 

 

*Asset Impairment,Store Closures.* In the third quarter of 2003, we recorded a total of $3.9 millionin charges related to the asset impairment and store closures ofunder-performing restaurants.  As requiredunder SFAS No. 144, $1.5 million in assets were written down forthese under-performing locations.  Theassets consisted of leasehold improvements and fixtures and equipment.  Fair value of the leasehold improvements wasdetermined based on discounted cash flows and the lower of the net book valueor an estimate of current liquidation value for fixtures and equipment.  $2.4 million in store-closure reserveswere made in connection with the lease costs of two stores that were closedduring the third quarter.  

 

*Depreciation and Amortization.*  Depreciation and amortization consists ofdepreciation of fixed assets used by individual restaurants and at the BlackAngus and corporate offices, as well as amortization of intangible assets.  Depreciation and amortization decreased from$1.9 million in the third quarter of 2002 to $1.8 million in the third quarterof 2003.

 

*General and Administrative Expenses.*  General and administrative expensesdecreased from $2.7 million in the third quarter of 2002 to $2.5 million in thethird quarter of 2003.  The decrease isthe result of lower corporate overhead expenses, reflecting ongoing budgetarycontrols.

 

*Spectrum Restaurant Group, Inc. Bankruptcies.*  In the third quarter of 2003, we recorded acharge of $10.1 million related to the SRG bankruptcies for anticipated claimsagainst us for SRG obligations, including claims for obligations under certainleases rejected by SRG through bankruptcy procedures.  The related reserve of $9.7 million as of September 29, 2003represents management's best estimate of the amount the Company will incur tosettle those claims. Of this reserve, management is uncertain as to whenpayments will be made to satisfy claims that have been or may be assertedagainst the Company (see Note 8).

 

*Operating Profit.*  As a result of the above items, operatingprofit decreased from $2.8 million profit in the third quarter of 2002 to($13.2) million loss in the third quarter of 2003.  As a percentage of revenues, operating profit decreased from 4.0%profit in the third quarter of 2002 to (19.9%) loss in the third quarter of2003.

 

11

----

 

 

*Interest Expense, Net.* Ourinterest expense decreased from $5.5 million in the third quarter of 2002 to$5.4 million in the third quarter of 2003. The decrease resulted from the redemption of $3.4 million in seniornotes completed in the first quarter of 2003.

 

*Thirty-nine weeks ended September 30, 2002and September 29, 2003:*

 

*Revenues. *Total revenue decreased from $226.6million in 2002 to $211.3 million in 2003. Same-store sales decreased by 6.8%in 2003 compared to 2002. The average dinner check increased 0.9% in 2003compared to 2002.  Of the 7.7% declinein customer counts, a significant portion of the decline was related to aplanned reduction in advertised product promotions, a strategy that alsoreduced advertising expense by $3.3 million in 2003 during the first 39 weeksof 2003, compared to the same period in 2002. There were 108 Black Angus restaurants operating at the end of the thirdquarter, compared to 109 at the end of the same period in 2002.

 

*Food and Beverage Costs.*  As a percentage of revenues, food andbeverage costs slightly increased from 33.1% in 2002 to 33.2% in 2003.  This increase primarilyas a result of higher beef costs in 2003 offset by fewersales of promotional products in the third quarter 2003.

 

*Payroll Costs*.  Payroll costs decreased from $68.4 millionduring 2002 to $65.8 million during 2003. As a percentage of sales, payroll increased from 30.2% in 2002 to 31.1%in 2003.

 

*Direct Operating Costs.*  Direct operating costs consist of occupancy,advertising, and other expenses incurred by individual restaurants.  As a percentage of revenues, these costsdecreased from 25.1% in 2002 to 24.8% in 2003.  The savings relate to decreased advertisingcosts and a reduction in janitorial service contracts in 2003.

 

*Asset Impairment,Store Closures.* In the third quarter of 2003, we recorded a total of $3.9 millionin charges related to the asset impairment and store closures ofunder-performing restaurants.  Asrequired under SFAS No. 144, $1.5 million in assets were written downfor these under-performing locations. The assets consisted of leasehold improvements and fixtures andequipment.  Fair value of the leaseholdimprovements was determined based on discounted cash flows and the lower of thenet book value or an estimate of current liquidation value for fixtures andequipment.  $2.4 million instore-closure reserves were made in connection with the lease costs of twostores that were closed during the third quarter.  

 

*Depreciation and Amortization.*  Depreciation and amortization consists ofdepreciation of fixed assets used by individual restaurants and at the BlackAngus and corporate offices, as well as amortization of intangible assets.  Depreciation and amortization decreased from$5.5 million in 2002 to $5.4 million in 2003.

 

*General and Administrative Expense.*  General and administrative expensesincreased from $7.6 million in 2002 to $7.7 million in 2003.  The increase is a result of higher feesincurred in the first quarter in connection with the audits of the 2001 and2002 financial statements, net of reductions in subsequent quarters reflectingongoing budgetary controls.

 

*Spectrum Restaurant Group, Inc. Bankruptcies.*  In the third quarter of 2003, we recorded acharge of $10.1 million related to the SRG bankruptcies for anticipated claimsagainst us for SRG obligations, including claims for obligations under certainleases rejected by SRG through bankruptcy procedures.  The related reserve of $9.7 million as of September 29, 2003represents management's best estimate of the amount the Company will incur tosettle those claims. Of this reserve, management is uncertain as to whenpayments will be made to satisfy claims that have been or may be assertedagainst the Company (see Note 8).  

 

*Operating Profit.*  As a result of the above items, operatingprofit decreased from $13.3 million profit in 2002 to ($4.0) million loss in2003.  As a percentage of revenues,operating profit decreased from 5.9% profit in 2002 to (1.9%) loss in 2003.

 

*Interest Expense, Net*. Ourinterest expense decreased from $16.3 million in 2002 to $16.1 million in2003.  The decrease resulted from theredemption of $3.4 million in senior notes completed in the first quarter of2003.

 

 

**Liquidity and Capital Resources**

 

Our primary sources of liquidity are cashflows from operations and borrowings under our revolving creditfacilities.  We 

 

12

----

 

require capital principally for theacquisition and construction of new restaurants, the remodeling of existingrestaurants, the purchase of new equipment and leasehold improvements, andworking capital. As of September 29, 2003, we had approximately $5.5 million ofcash.

 

In general, restaurant businesses do not havesignificant accounts receivable because sales are made for cash or bycredit-card vouchers, which are ordinarily paid within three to five days.  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 trade credit in purchasing food andrestaurant supplies.  As a result,restaurants are frequently able to operate with working-capital deficits, i.e.,current liabilities exceed current assets. At September 29, 2003, our working-capital deficit was $34.2 million,compared with $25.9 million for the same period in 2002.  The change in the working-capital deficit isimpacted by the recording of current liabilities related to the SRGbankruptcies. 

 

We estimate that capital expenditures of $2.5million to $5.0 million are required annually to maintain and refurbish ourexisting restaurants.  Other capitalexpenditures, which are generally discretionary, are primarily for theconstruction of new restaurants and for expanding, reformatting, and extendingthe capabilities of existing restaurants and for general corporatepurposes.  Total capital expendituresfor continuing operations were approximately $2.5 million through the thirdquarter of 2002 and $4.5 million through the third quarter of 2003.  We intend to open new restaurants with smallcapital outlays and to finance most of the expenditures through leases.

 

On October 31, 2001, we completed an exchangeoffer (the “Exchange”) in which we offered to exchange our 111⁄2% Senior SecuredNotes due 2006 (the “New Notes”) for all of our $142,600,000 outstanding 111⁄2%Senior Secured Notes due 2003 (the “Old Notes”).  We simultaneously completed an offering (the “Offering”) of$30,000,000 aggregate principal amount of New Notes.  After the consummation of the Exchange, the Offering, and relatedtransactions (collectively, the “Refinancing”), we had no further paymentobligations with respect to over 97.6% of the outstanding Old Notes(constituting all but $3,410,000 aggregate principal amount of the Old Notes,which we redeemed in full on February 18, 2003) and assumed payment obligationsequivalent to $161,774,000 of the New Notes. The Refinancing substantiallyeliminates debt principal payments until November 2006.

 

The principal elements of the Refinancingwere: (a) the Exchange (approximately $124 million aggregate principal amountof Old Notes were exchanged for approximately $132 million aggregate principalamount New Notes); (b) the Offering (the issuance of $30 million aggregateprincipal 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 newsubordinate 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 (“OldCredit Facility”) to permit the issuance of the New Notes and any other aspectsof the Refinancing requiring the lender’s consent.

 

None of the Old Notes were outstanding atSeptember 29, 2003.  Under the OldNotes, we were obligated to make semiannual interest payments on February 15and August 15 through February 2003. Accordingly, we made the last interest payment of $0.2 million onFebruary 15, 2003.

 

Under the New Notes, we are obligated to makesemiannual interest payments on May 1 and November 1 through November2006.  Accordingly, we made interestpayments of $9.3 million on May 5, 2003 and November 3, 2003.

 

We have an additional $2.3 million inlong-term debt that relates to mortgages and capital leases for improvementsand equipment.

 

On December 17, 2001, we entered into a loanagreement for a revolving credit facility (“New Credit Facility”) with WellsFargo Foothill (then known as Foothill Capital Corporation) to replace the OldCredit Facility.  Our New CreditFacility presently provides for up to $15 million in borrowings, includingsupport for letters of credit. As of September 29, 2003, we had approximately$8.9 million of letters of credit outstanding and borrowings $5.0 million,leaving approximately $1.1 million remaining under the New Credit Facility. TheNew Credit Facility expires in December 2005.

 

American Restaurant Group, Inc. and itssubsidiaries do not guaranty the debt of any other parties outside the consolidatedgroup, but have contingent obligations under certain lease guarantees connectedto operations sold to SRG (see Note 8).

 

13

----

 

Ourcontractual obligations can be summarized as follows (in thousands):
| **Contractual Obligations**              |   | **Paid in  Q1, 2 & 3  2003** |   | **Remainder   of  Fiscal  2003** |   | **Fiscal  Years  2004&2005** |   | **Fiscal  Years  2006&2007** |   | **Fiscal  Years  Beyond  2007** |   | **Total** |   |
|------------------------------------------|--------|----------------------------------|--------|----------------------------------|--------|----------------------------------|--------|----------------------------------|--------|---------------------------------|--------|-----------|--------|
| Long-Term  Debt – Interest on Notes |   | $                                | 9,498  |                             | $      | 9,302                            |   | 37,208                           |   | $                               | 18,604 |      | $      | — |   | $ | 74,612 |   |
| Long-Term  Debt – Other             |   | 3,420                            |   | 71                               |   | 79                               |   | 161,879                          |   | 893                             |   | 166,342   |   |
| Capital  Leases                          |   | 266                              |   | 602                              |   | 751                              |   | 549                              |   | 882                             |   | 3,050     |   |
| Operating  Leases                        |   | 14,160                           |   | 4,383                            |   | 32, 289                          |   | 28,296                           |   | 189,741                         |   | 268,869   |   |
| Total  Contractual Cash                  |   | $                                | 27,344 |                             | $      | 14,358                           |   | $                                | 70,327 |                            | $      | 209,328   |   | $ | 191,516 |   | $ | 512,873 |   |
|                                          |        |                                  |        |                                  |        |                                  |        |                                  |        |                                 |        |           |        |  |  |  |  |  |  |

 

The above noted amounts exclude anyobligations arising as a result of the SRG bankruptcies (see Note 8).

 

Preferred stock dividends of 4,832 shareswere issued on February 15, 2003 and 5,194 shares as of August 15, 2003.  There were 74,448 shares of preferred stockoutstanding on August 15, 2003. We redeemed all of our preferred stock onAugust 15, 2003 at the 110% liquidation preference for shares of our commonstock and warrants to acquire additional shares of our common stock.  Upon the August 15, 2003 conversion tocommon stock, all rights of the preferred stock terminated. 

 

Substantially all our assets are pledged toour senior lenders.  In addition, ourdirect subsidiaries guarantee most of our indebtedness and such guarantees aresecured by substantially all of the assets of the subsidiaries. In connectionwith such indebtedness, contingent and mandatory prepayments may be requiredunder certain specified conditions and events. There are no compensating-balance requirements.

 

The Company has historically used cash flowfrom operations together with other liquidity sources to make requiredpayments.  As of September 29, 2003, theCompany has $1.1 million of availability under its Credit Facility and $5.5million in cash on hand.  Although theCompany has historically generated sufficient cash flow to provide for paymentsof principal and interest on our indebtedness as well as anticipated capitalexpenditures and working-capital needs, management cannot provide completeassurance that the Company’s liquidity sources will be sufficient to providefor all future cash requirements. Additionally, we do not expect to generate sufficient cash flows fromoperations in the future to pay fully the principal of the senior indebtednessupon maturity in 2006 and, accordingly, we expect to refinance such debt,obtain new financing, or possibly sell assets.

 

14

----

**ITEM 3.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The market risk of our financial instrumentsas of September 29, 2003 has not materially changed since December 30,2002.  The market risk profile onDecember 30, 2002 is disclosed in our annual report on Form 10-K, File No.33-48183, for the fiscal year ended December 30, 2002.

 

**ITEM 4.                  CONTROLS AND PROCEDURES**

 

Management has designed and periodicallyreviews and internally audits the effectiveness of the design and operation ofour disclosure controls and procedures. Based on those periodic reviews, our management, including the CEO andCFO, concluded that our disclosure controls and procedures were effective as ofSeptember 29, 2003.  There have been nosignificant changes in our internal controls or in other factors that couldsignificantly affect internal controls subsequent to September 29, 2003.

 

**PART II.                OTHER INFORMATION**

 

**ITEM 6.                  EXHIBITS AND REPORTS ON FORM8-K**

 

(a)             List of Exhibits

 
| **Exhibit  No.** |   | **Description**                                                                    |
|------------------|--------|------------------------------------------------------------------------------------|
|             |   |                                                                               |
| 31               |   | Certificate of Chief Executive Officer and  Chief Financial Officer to Section 302 |
| 32               |   | Certificate of Chief Executive Officer and  Chief Financial Officer to Section 906 |

 

(b)           Form8-K filed on August 1, 2003 – announcement of change of directors. 

 

(c)           Form8-K filed on August 15, 2003 – announcement of second quarter 2003 financialresults

 

**SIGNATURE**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   |              | AMERICAN RESTAURANT GROUP, INC. |                    |
|--------|-------------------|---------------------------------|-------------------------|
|   |              | (Registrant)                    |                    |
|   |              |                            |
|   |              |                            |
| Date:  | November 13, 2003 | By:                             | /s/ Ralph S. Roberts    |   |
|   |              |                            | Ralph S. Roberts        |
|   |              |                            | Chief Executive Officer |
|   |              |                            |
|   |              |                            |
| Date:  | November 13, 2003 | By:                             | /s/ William G. Taves    |   |
|   |              |                            | William G. Taves        |
|   |              |                            | Chief Financial Officer |

 

15

----