**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

 

**WASHINGTON, D.C. 20549**

 

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**FORM 10-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 March 31, 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                 ** |

 

**AmericanRestaurant Group, Inc.**

(Exact name ofregistrant 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**

(Address andtelephone number of principal executive offices)

 

Former name,former address and former fiscal yearif changed since last report.

 

Indicate by 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 included in the Form 10-K filed on March31, 2003 were unaudited.

 

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 Company’s Common Stock (one cent par value) as of May 5, 2003 was128,081.

 

 

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**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 | 9      |
|        |                                                                                        |   |
| ITEM 3.     | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK                                 | 12     |
|        |                                                                                        |   |
| ITEM  4.    | CONTROLS  AND PROCEDURES                                                                    | 12     |
|        |                                                                                        |   |
| **PART II** | **OTHER INFORMATION**                                                                       | 12     |
|        |                                                                                        |   |
| ITEM  6.    | EXHIBITS  AND REPORTS ON FORM 8-K                                                           | 12     |

 

2

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**PART I.****                                   FINANCIALINFORMATION**

 

**ITEM 1****.****                                    FINANCIALSTATEMENTS:**

 

AMERICANRESTAURANT GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATEDCONDENSED BALANCE SHEETS

 

DECEMBER 31, 2002AND MARCH 31, 2003

 
|                                  |   | **December  30,  2002** |       | **March 31,  2003** |   |
|---------------------------------------|--------|-------------------------|------------|---------------------|--------|
|                                  |   |                    |       | **(Unaudited)**     |   |
| ASSETS                                |   |                    |       |                |   |
|                                  |   |                    |       |                |   |
| CURRENT  ASSETS:                      |   |                    |       |                |   |
| Cash                                  |   | $                       | 4,773,000  |                | $      | 5,532,000 |   |
| Rebates  and other receivables, net   |   | 3,018,000               |       | 2,947,000           |   |
| Inventories                           |   | 3,031,000               |       | 2,679,000           |   |
| Prepaid  expenses                     |   | 1,454,000               |       | 1,713,000           |   |
|                                  |   |                    |       |                |   |
| Total  current assets                 |   | 12,276,000              |       | 12,871,000          |   |
|                                  |   |                    |       |                |   |
| PROPERTY  AND EQUIPMENT, net:         |   |                    |       |                |   |
| Land  and land improvements           |   | 711,000                 |       | 680,000             |   |
| Buildings  and leasehold improvements |   | 36,029,000              |       | 35,617,000          |   |
| Fixtures  and equipment               |   | 10,552,000              |       | 10,458,000          |   |
| Property  held under capital leases   |   | 709,000                 |       | 622,000             |   |
| Construction  in progress             |   | 687,000                 |       | 887,000             |   |
|                                  |   |                    |       |                |   |
| Net  property and equipment           |   | 48,688,000              |       | 48,264,000          |   |
|                                  |   |                    |       |                |   |
| Other  assets, net:                   |   | 16,909,000              |       | 16,935,000          |   |
|                                  |   |                    |       |                |   |
| Total  assets                         |   | $                       | 77,873,000 |                | $      | 78,070,000 |   |

 

3

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|                                                                                                                                                                                                                   |   | **December  30,  2002** |       | **March 31,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|---------------------|--------|
|                                                                                                                                                                                                                   |   |                    |       | **(Unaudited)**     |   |
| LIABILITIES  AND COMMON STOCKHOLDERS’ DEFICIT                                                                                                                                                                     |   |                    |       |                |   |
|                                                                                                                                                                                                                   |   |                    |       |                |   |
| CURRENT  LIABILITIES:                                                                                                                                                                                                  |   |                    |       |                |   |
| Accounts  payable                                                                                                                                                                                                      |   | $                       | 7,825,000  |                | $      | 11,010,000 |   |
| Accrued  liabilities                                                                                                                                                                                                   |   | 4,235,000               |       | 3,534,000           |   |
| Gift-certificate  liability                                                                                                                                                                                            |   | 6,226,000               |       | 3,209,000           |   |
| Self-insurance  reserves                                                                                                                                                                                               |   | 3,526,000               |       | 3,645,000           |   |
| Accrued  interest                                                                                                                                                                                                      |   | 3,385,000               |       | 7,889,000           |   |
| Accrued  employee costs                                                                                                                                                                                                |   | 4,141,000               |       | 3,572,000           |   |
| Accrued  occupancy costs                                                                                                                                                                                               |   | 4,696,000               |       | 4,966,000           |   |
| Current  portion of obligations under capital leases                                                                                                                                                                   |   | 646,000                 |       | 484,000             |   |
| Current  portion of long-term debt                                                                                                                                                                                     |   | 3,491,000               |       | 79,000              |   |
|                                                                                                                                                                                                                   |   |                    |       |                |   |
| Total  current liabilities                                                                                                                                                                                             |   | 38,171,000              |       | 38,388,000          |   |
|                                                                                                                                                                                                                   |   |                    |       |                |   |
| LONG-TERM  LIABILITIES, net of current portion:                                                                                                                                                                        |   |                    |       |                |   |
| Obligations  under capital leases                                                                                                                                                                                      |   | 1,153,000               |       | 1,094,000           |   |
| Long-term  debt, net of unamortized discount                                                                                                                                                                           |   | 155,697,000             |       | 156,156,000         |   |
|                                                                                                                                                                                                                   |   |                    |       |                |   |
| Total  long-term liabilities                                                                                                                                                                                           |   | 156,850,000             |       | 157,250,000         |   |
|                                                                                                                                                                                                                   |   |                    |       |                |   |
| DEFERRED  GAIN ON SALE-LEASEBACK                                                                                                                                                                                       |   | 3,788,000               |       | 3,734,000           |   |
|                                                                                                                                                                                                                   |   |                    |       |                |   |
| 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 and  70,552 shares outstanding and accrued at March 31, 2003 |   | 74,586,000              |       | 77,441,000          |   |
|                                                                                                                                                                                                                   |   |                    |       |                |   |
| 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 March 31, 2003                                                                            |   | 1,000                   |       | 1,000               |   |
| Accumulated  (deficit)                                                                                                                                                                                                 |   | (195,523,000            | )          | (198,744,000        | )      |
|                                                                                                                                                                                                                   |   |                    |       |                |   |
| Total  common stockholders’ (deficit)                                                                                                                                                                             |   | (195,522,000            | )          | (198,743,000        | )      |
|                                                                                                                                                                                                                   |   |                    |       |                |   |
| Total  liabilities and common stockholders’ deficit                                                                                                                                                               |   | $                       | 77,873,000 |                | $      | 78,070,000 |   |

 

The accompanyingnotes are an integral part of these consolidated condensed statements.

 

4

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AMERICANRESTAURANT GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATEDCONDENSED STATEMENTS OF OPERATIONS

 

FOR THE THIRTEENWEEKS ENDED APRIL 1, 2002 AND MARCH 31, 2003

 

(UNAUDITED)

 
|                                             |   | **Thirteen  Weeks Ended** |       |
|--------------------------------------------------|--------|---------------------------|------------|
|                                             |   | **April 1,  2002**        |       | **March 31,  2003** |   |
|                                             |   |                      |       |   |   |
| REVENUES                                         |   | $                         | 81,816,000 |   | $ | 73,739,000 |   |
|                                             |   |                      |       |   |   |
| RESTAURANT  COSTS:                               |   |                      |       |   |   |
| Food  and beverage                               |   | 27,057,000                |       | 23,041,000 |   |
| Payroll                                          |   | 24,607,000                |       | 22,100,000 |   |
| Direct  operating                                |   | 20,248,000                |       | 19,035,000 |   |
| Depreciation  and amortization                   |   | 1,909,000                 |       | 1,815,000 |   |
|                                             |   |                      |       |   |   |
| GENERAL  AND ADMINISTRATIVE EXPENSES             |   | 2,342,000                 |       | 2,767,000 |   |
|                                             |   |                      |       |   |   |
| Operating  profit                                |   | 5,653,000                 |       | 4,981,000 |   |
|                                             |   |                      |       |   |   |
| INTEREST  EXPENSE, net                           |   | 5,282,000                 |       | 5,345,000 |   |
|                                             |   |                      |       |   |   |
| Income  (Loss) before provision for income taxes |   | 371,000                   |       | (364,000 | ) |
|                                             |   |                      |       |   |   |
| PROVISION  FOR INCOME TAXES                      |   | 24,000                    |       | 2,000 |   |
|                                             |   |                      |       |   |   |
| Net  Income (Loss)                               |   | 347,000                   |       | (366,000 | ) |
|                                             |   |                      |       |   |   |
| Preferred  stock dividends, issued and accrued   |   | 2,485,000                 |       | 2,855,000 |   |
|                                             |   |                      |       |   |   |
| Loss  to common stockholders                     |   | $                         | (2,138,000 | ) | $ | (3,221,000 | ) |

 

The accompanying notes are an integral part of theseconsolidated condensed statements.

 

5

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AMERICANRESTAURANT GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS

 

FOR THE THIRTEENWEEKS ENDED APRIL 1, 2002 AND MARCH 31, 2003

 

(UNAUDITED)

 
|                                                                                                                                         |   | **April 1,  2002** |       | **March 31,  2003** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|---------------------|--------|
| CASH  FLOWS FROM CONTINUING OPERATING ACTIVITIES:                                                                                            |   |               |       |                |   |
|                                                                                                                                         |   |               |       |                |   |
| Net  income (loss) from continuing operations                                                                                                |   | $                  | 347,000    |                | $      | (366,000 | ) |
| Adjustments  to reconcile net income (loss) from continuing operations to net cash  provided by / (used in) continuing operating activities: |   |               |       |                |   |
| Depreciation  and amortization                                                                                                               |   | 1,909,000          |       | 1,815,000           |   |
| Amortization  of deferred gain                                                                                                               |   | (50,000            | )          | (54,000             | )      |
| Amortization  of non-cash interest expense                                                                                                   |   | 467,000            |       | 467,000             |   |
| (Increase)  decrease in current and other assets                                                                                             |   | 457,000            |       | (211,000            | )      |
| Increase  (decrease) in current liabilities                                                                                                  |   | 3,996,000          |       | 3,791,000           |   |
|                                                                                                                                         |   |               |       |                |   |
| Net  cash provided by (used in) continuing operating activities                                                                              |   | 7,126,000          |       | 5,442,000           |   |
|                                                                                                                                         |   |               |       |                |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                                                                                       |   |               |       |                |   |
| Capital  expenditures                                                                                                                        |   | (824,000           | )          | (1,042,000          | )      |
| Net  increase in other assets                                                                                                                |   | (7,000             | )          | —              |   |
| Net  cash (used in) investing activities                                                                                                     |   | (831,000           | )          | (1,042,000          | )      |
|                                                                                                                                         |   |               |       |                |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                                                                       |   |               |       |                |   |
| Payments  on indebtedness                                                                                                                    |   | (95,000            | )          | (3,420,000          | )      |
| Payments  on capital lease obligations                                                                                                       |   | (191,000           | )          | (221,000            | )      |
|                                                                                                                                         |   |               |       |                |   |
| Net  cash (used in) financing activities                                                                                                     |   | (286,000           | )          | (3,641,000          | )      |
|                                                                                                                                         |   |               |       |                |   |
| NET  INCREASE FROM CONTINUING OPERATIONS                                                                                                     |   | 6,009,000          |       | 759,000             |   |
|                                                                                                                                         |   |               |       |                |   |
| NET  (DECREASE) FROM DISCONTINUED OPERATIONS                                                                                                 |   | (378,000           | )          | —              |   |
|                                                                                                                                         |   |               |       |                |   |
| NET  CHANGE IN CASH, CURRENT PERIOD                                                                                                          |   | 5,631,000          |       | 759,000             |   |
|                                                                                                                                         |   |               |       |                |   |
| CASH,  at beginning of period                                                                                                                |   | 7,384,000          |       | 4,773,000           |   |
|                                                                                                                                         |   |               |       |                |   |
| CASH,  at end of period                                                                                                                      |   | $                  | 13,015,000 |                | $      | 5,532,000 |   |
|                                                                                                                                         |   |               |       |                |   |
| Cash  payments during the period:                                                                                                            |   |               |       |                |   |
| Interest                                                                                                                                     |   | $                  | (348,000   | )                   | $      | (374,000 | ) |
| Income  taxes                                                                                                                                |   | (25,000            | )          | (2,000              | )      |

 

The accompanyingnotes are an integral part of these consolidated condensed statements.

 

6

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AMERICAN RESTAURANTGROUP, INC. AND SUBSIDIARIES

NOTES TOCONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

1.                                       BASISOF PRESENTATION

 

The ConsolidatedCondensed Financial Statements included were prepared by American RestaurantGroup, Inc. without audit, in accordance with Securities and ExchangeCommission Regulation S-X.  (Referencesto “the Company,” “we,” “us,” or “our” refer to American Restaurant Group,Inc.)  In the opinion of our management,these Consolidated Condensed Financial Statements contain all adjustmentsnecessary to present fairly our financial position as of December 30, 2002 andMarch 31, 2003, and the results of our operations for the thirteen weeks endedApril 1, 2002 and March 31, 2003 and our cash flows for the thirteen weeksended April 1, 2002 and March 31, 2003. Our results for an interim period are not necessarily indicative of theresults that may be expected for the year.

 

Although we believe thatwe included all adjustments necessary for a fair presentation of the interimperiods presented and that the disclosures are adequate to make the informationpresented not misleading, we suggest that these Consolidated CondensedFinancial Statements be read in conjunction with the Consolidated FinancialStatements and related notes included in our annual report on Form 10-K for thefiscal year ended December 30, 2002.

 

2.                                       OPERATIONSAND REFINANCING

 

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

 

On October 31, 2001, wecompleted an exchange offer (the “Exchange”) in which we offered to exchangeour 111⁄2% Senior Secured Notes due 2006 (the “New Notes”) for all of our$142,600,000 outstanding 111⁄2% Senior Secured Notes due 2003 (the “OldNotes”).  We simultaneously completed anoffering (the “Offering”) of $30,000,000 aggregate principal amount of NewNotes.  After the consummation of theExchange, the Offering, and related transactions (collectively, the“Refinancing”), we had no further payment obligations with respect to over97.6% of the outstanding Old Notes (constituting all but $3,410,000 aggregateprincipal amount of the Old Notes, which we redeemed in full on February 18,2003) and assumed payment obligations equivalent to $161,774,000 of the NewNotes. The Refinancing substantially eliminates debt principal payments untilNovember 2006.

 

We do not, however,expect 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.                                       INCOMETAXES

 

The tax provision againstthe pre-tax income in 2003 and in 2002 consisted of certain state income taxesand estimated Federal income tax.  Wepreviously established a valuation allowance against net-operating-losscarryforwards.

 

4.                                       PREFERREDSTOCK

 

As part of ourrecapitalization 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 initially topurchase 2.66143 shares of the common stock at an initial exercise price of onecent per share.  Our preferred stock ismandatorily 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 and all rights of the preferred stock will terminate.  Management believes that the preferred stockwill convert to common stock and, upon such event, the holders of the preferredstock will own a significant majority of the common stock on a fully dilutedbasis.

 

We issued preferred stockdividends of 4,832 shares on February 15, 2003.  At March 31, 2003, we had 70,552 preferred shares outstanding andaccrued.

 

5.                                       SUBSIDIARYGUARANTORS

 

Separate financialstatements of our subsidiaries are not included in this report on Form10-Q.  The subsidiaries are fully,unconditionally, jointly, and severally liable for our obligations under theCompany’s Old Notes and New Notes, and the aggregate net assets, earnings, andequity of such subsidiary guarantors are substantially equivalent to the netassets, earnings, and equity of the Company (issuer) on a consolidated basis,as the Company has no significant operations.

 

7

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6.                                       INSURANCE

 

The Company self-insurescertain risks, including medical, workers’ compensation, property, and generalliability, up to varying limits. Deductible and self-insured limits have variedhistorically, ranging from $0 to $1,000,000 per incident depending on the typeof risk. The policy deductibles are $125,000 for annual medical and dentalbenefits per person. Reserves for losses are established based upon presentlyestimated obligations for the claim over time and the deductible orself-insured retention in place at the time of the loss.

 

7.                                       NEWACCOUNTING PRONOUNCEMENTS

 

In April 2002, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 145, “*Rescissionof FAS Nos. 4, 44, and 64*, *Amendment of FAS 13, and Technical Corrections*”(“SFAS 145”).  SFAS 145 rescinds FASBStatement No. 4, “*Reporting Gains**and Losses from Extinguishment of Debt,*”and an amendment of that Statement, FASB Statement No. 64, “*Extinguishmentsof**Debt**Made to Satisfy Sinking-Fund Requirements*,”as well as FASB Statement No. 44, “*Accounting for Intangible Assets of Motor**Carriers*.”  This Statement amends FASB StatementNo.  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 are being adoptedduring fiscal year 2003. We do not anticipate that the adoption of thisstatement will have a material impact on our consolidated balance sheets orconsolidated statements of operations.

 

In June 2002, the FASBissued SFAS No. 146, “*Accounting for Exit or Disposal Activities*”  (“SFAS 146”). SFAS 146 addresses significantissues regarding the recognition, measurement, and reporting of costs that areassociated with exit and disposal activities, including restructuringactivities 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 will beeffective for exit or disposal activities that are initiated after December 30,2002 and early application is encouraged. The provisions of EITF No. 94-3 shallcontinue to apply for an exit activity initiated under an exit plan that metthe criteria of EITF No. 94-3 prior to the adoption of SFAS 146. We do notanticipate that adoption of this statement will have a material impact on ourconsolidated balance sheets or consolidated statements of operations.

 

8.                                       COMMITMENTSAND CONTINGENCIES

 

The Company is obligatedunder an employment agreement with an officer. The obligation under theagreement is $500,000 per year.

 

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, results of operations, orcash flows.

 

8

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

 

Certain statementscontained in this Form 10-Q are forward-looking regarding cash flows fromoperations, restaurant openings, capital requirements, and other matters. Theseforward-looking statements involve risks and uncertainties and, consequently,could be affected by general business conditions, the impact of competition,governmental regulations, and inflation.

 

The following discussionand analysis of our financial condition and results of operations should beread in conjunction with the historical financial information included in theConsolidated Condensed Financial Statements.

 

**Results of Operations**

 

*Thirteen weeks ended April 1, 2002 and March 31, 2003:*

 

*Revenues. *Totalrevenues decreased from $81.8 million in the first quarter of 2002 to $73.7million in the first quarter of 2003. Same-store sales decreased by 10.2% in the first quarter of 2003compared to 2002.  Of the sales decrease,7.2% resulted from a planned reduction in spending on TV product promotionsduring the first quarter of 2003 vs. the first quarter of 2002.  The sale of promoted items accounted for21.1% of revenues in the first quarter of 2003, down from 28.1% in the firstquarter of 2002.  The remaining 3.0% ofthe quarter-over-quarter decrease stems from sales softness leading up to andduring the Iraqi war.  There were 109Black Angus restaurants operating as of March 31, 2003 and 108 Black Angusrestaurants operating as of April 1, 2002.

 

*Food and Beverage Costs.*  As a percentage of revenues, food andbeverage costs improved 1.9% to 31.2% in the first quarter of 2003 from 33.1%in the first quarter of 2002.  Thedecrease is the result of fewer sales of promoted products, which have a lowergross profit margin.

 

*Payroll Costs.*  As a percentage of revenues, labor costs improved to 30.0% in thefirst quarter of 2003 from 30.1% in the first quarter of 2002.

 

*Direct Operating Costs: *Direct operating costs consist of occupancy,advertising, and other expenses incurred by individual restaurants.  Direct operating costs decreased from $20.2million in the first quarter of 2002 to $19.0 million in the first quarter of2003.  The decrease is the result $1.3million in lower TV advertising expenses, offset by a small increase in energyand insurance costs.

 

*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 first quarter of 2002 to $1.8 million in the first quarterof 2003.

 

*General and Administrative Expenses.*  General and administrative expensesincreased from $2.3 million in the first quarter of 2002 to $2.8 million in thefirst quarter of 2003.  100% of theincrease is the result of higher fees incurred in connection with the recentaudits of the 2002 and 2001 financial statements.

 

*Operating Profit.*  As a result of the above items, operatingprofit decreased from $5.7 million in the first quarter of 2002 to $5.0 millionin the first quarter of 2003.  As apercentage of revenues, first-quarter operating profit was 6.9% in the firstquarter of 2002 compared to 6.8% in the first quarter of 2003.

 

*Interest Expense – Net.*  Interest expense remained flat at $5.3million in the first quarter of 2003.

 

## **Liquidityand Capital Resources**

 

Our primary sources ofliquidity are cash flows from operations and borrowings under our revolvingcredit facilities.  We require capitalprincipally for the acquisition and construction of new restaurants, theremodeling of existing restaurants, the purchase of new equipment and leaseholdimprovements, and working capital. As of March 31, 2003, we had approximately$5.5 million 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.  The restaurants do notmaintain substantial inventory as a result of the relatively brief shelf lifeand frequent turnover of food products. Additionally, restaurants generally areable to obtain trade credit in purchasing food and restaurant supplies.  As a result, restaurants are frequently ableto operate with working-capital deficits, i.e., current liabilities exceedcurrent assets.  At March 31, 2003, ourworking-capital deficit was $25.5 million.

 

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We estimate that capitalexpenditures of $3.0 million to $6.0 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 for generalcorporate purposes.  Total capitalexpenditures for continuing operations were approximately $1.0 million throughthe first quarter of 2003 and $0.8 million through the first quarter of2002.  We estimate that capital expendituresin 2003 will be approximately $3.5 million. We intend to open new restaurants with small capital outlays and tofinance most of the expenditures through leases.

 

On October 31, 2001, wecompleted an exchange offer (the “Exchange”) in which we offered to exchangeour 111⁄2% Senior Secured Notes due 2006 (the “New Notes”) for all of our$142,600,000 outstanding 111⁄2% Senior Secured Notes due 2003 (the “OldNotes”).  We simultaneously completed anoffering (the “Offering”) of $30,000,000 aggregate principal amount of NewNotes.  After the consummation of theExchange, the Offering, and related transactions (collectively, the“Refinancing”), we had no further payment obligations with respect to over97.6% of the outstanding Old Notes (constituting all but $3,410,000 aggregateprincipal amount of the Old Notes, which we redeemed in full on February 18,2003) and assumed payment obligations equivalent to $161,774,000 of the NewNotes. The Refinancing substantially eliminates debt principal payments until November2006.

 

The principal elements ofthe Refinancing were: (a) the Exchange (approximately $124 million aggregateprincipal amount of Old Notes were exchanged for approximately $132 millionaggregate principal amount New Notes); (b) the Offering (the issuance of $30million aggregate principal amount of New Notes); (c) the consent of theholders of our outstanding preferred stock to amend the terms of the preferredstock to provide that if we do not redeem the preferred stock for cash onAugust 15, 2003 in accordance with its terms, then the preferred stock willautomatically be redeemed for shares of our common stock at that time and allthe rights of the preferred stock will terminate, including any rights ofacceleration; to eliminate provisions that allow the holders to exchangepreferred stock for new subordinate debt; and to amend the covenants of thepreferred stock so that they are substantially similar to the covenants underthe New Notes; and, (d) the consent of the lender under our former revolvingcredit facility (“Old Credit Facility”) to permit the issuance of the New Notesand any other aspects of the Refinancing requiring the lender’s consent.

 

None of the Old Noteswere outstanding at March 31, 2003. Under the Old Notes, we were obligated to make semiannual interestpayments on February 15 and August 15 through February 2003.  Accordingly, we made the last interestpayment of $0.2 million on February 15, 2003.

 

Under the New Notes, weare obligated to make semiannual interest payments on May 1 and November 1through November 2006.

 

We have an additional$2.2 million in long-term debt that relates to mortgages and capital leases forimprovements and equipment.

 

On December 17, 2001, weentered into a loan agreement for a revolving credit facility (“New CreditFacility”) with Foothill Capital Corporation to replace the Old CreditFacility.  Our New Credit Facilitypresently provides for up to $15 million in borrowings, including support forletters of credit. As of March 31, 2003, we had approximately $6.8 million ofletters of credit outstanding and no borrowings, leaving approximately $8.2million remaining under the New Credit Facility. The New Credit Facilityexpires in December 2005.

 

The Company and itssubsidiaries do not guaranty the debt of any other parties outside theconsolidated group.

 

The Company’s contractualobligations can be summarized as follows (in thousands):

 
| **Contractual Obligations**                  |   | **Paid  in Q1 - 2003** |   | **Remainder  of  Fiscal  2003** |   | **Fiscal  Years  2004&2005** |   | **Fiscal  Years  2006&2007** |   | **Fiscal  Years  Beyond  2007** |   | **Total** |   |
|----------------------------------------------|--------|------------------------|--------|---------------------------------|--------|----------------------------------|--------|----------------------------------|--------|---------------------------------|--------|-----------|--------|
| **Long-Term  Debt – Interest on Notes** |   | $                      | 196    |                            | $      | 18,604                           |   | $                                | 37,208 |                            | $      | 18,604    |   | $ | — |   | $ | 74,612 |   |
| **Long-Term  Debt – Other**             |   | 3,410                  |   | 81                              |   | 79                               |   | 161,879                          |   | 893                             |   | 166,342   |   |
| **Capital  Leases**                          |   | 221                    |   | 615                             |   | 495                              |   | 464                              |   | 882                             |   | 2,677     |   |
| **Operating  Leases**                        |   | 4,835                  |   | 13,708                          |   | 32,289                           |   | 28,296                           |   | 189,741                         |   | 268,869   |   |
| **Total  Contractual Cash**                  |   | $                      | 8,662  |                            | $      | 33,008                           |   | $                                | 70,071 |                            | $      | 209,243   |   | $ | 191,516 |   | $ | 512,500 |   |

 

Preferred stock dividendsof 4,832 shares were issued on February 15, 2003.  There were 70,552 shares of preferred stock outstanding andaccrued at March 31, 2003. Our preferred stock is mandatorily redeemable onAugust 15, 2003.  If we do not redeemour preferred stock for cash at a price per share equal to 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. Management believes that thepreferred stock will convert to common stock.

 

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Substantially all ourassets are pledged to our senior lenders. In addition, our direct subsidiaries guarantee most of our indebtednessand such guarantees are secured by substantially all of the assets of thesubsidiaries. In connection with such indebtedness, contingent and mandatoryprepayments may be required under certain specified conditions and events.  There are no compensating balancerequirements.

 

Although we are highlyleveraged, based upon current levels of operations and anticipated growth, weexpect that cash flows generated from operations together with our otheravailable sources of liquidity will be adequate to make required payments ofprincipal and interest on our indebtedness, to make anticipated capitalexpenditures, and to finance working-capital requirements for the next severalyears. We do not, however, 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 all or a portionof such debt, obtain new financing, or possibly sell assets.

 

### **CriticalAccounting Policies**

 

*Revenue Recognition. *We record revenue from the sale of food and beverageas products are sold.   We recordproceeds from the sale of a gift card or gift certificate in currentliabilities and recognize income when a holder redeems a gift card of giftcertificate.  We recognize unredeemedgift cards and certificates as revenue only after such a period of timeindicates, based on the Company’s historical experience, the likelihood ofredemption is remote.

 

*Use of Estimates. *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 thoseestimates.

 

We believe that ourfinancial statements are a reasonable representation of the realizable valuesof our assets, the level of our liabilities, and the amounts of revenues andexpenses incurred in any given period.  Thereare estimates inherent in these amounts. We may not be able to recover the assumed value of all of our assets,such as property and equipment or intangible assets, if circumstances cause usto close restaurants or we experience a decline in revenues.  Our actual liabilities for matters, such asself-insurance or discontinued operations, could possibly be significantlyhigher or lower than our estimates if actual conditions are ultimatelydifferent than the assumptions used in determining the estimates.

 

*Leases*. We lease equipment and operating facilities under both capital andoperating leases.  In future periods,leases for similar equipment or facilities may not qualify for the accountingapplied historically because of changes in terms or our credit status. Thiswould mean that we may be required to recognize more leases as capital leasesin the future than we have in the past, causing a corresponding increase in ourassets and liabilities, and the associated depreciation and interest expense.  Conversely, if many leases in the futurewere classified as operating leases, rental expense would increase.

 

*Valuation Allowance for Deferred Tax Assets. *We provided a valuationallowance of $44.4 million and $44.7 million against the entire amount of ourdeferred tax assets as of the December 30, 2002 and March 31, 2003,respectively. The Company fully reserves both the net-operating-loss andgeneral-business-credit carry forwards because sufficient doubt existsregarding the Company’s ability to use the carryforwards before expiration.

 

*Long-Lived Assets.*The Companyperiodically reviews for impairment the carrying value of its long-livedassets.  The Company assesses therecoverability of the assets based on the estimated undiscounted cash flows ofthe assets.  If impairment is indicated,the Company writes down the assets to fair market value based on discountedcash flows.

 

*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.*”

 

*Self-Insurance Reserves.*The Companyself-insures certain risks, including medical, workers’ compensation, property,and general liability, up to varying limits. Deductible and self-insured limitshave varied historically, ranging from $0 to $1,000,000 per incident dependingon the type of risk. The policy deductibles are $125,000 for annual medical anddental benefits per person. Reserves for losses are established on aclaims-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.

 

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

 

The market risk of ourfinancial instruments as of March 31, 2003 has not materially changed sinceDecember 30, 2002.  The market riskprofile on December 30, 2002 is disclosed in our annual report on Form10-K, File No. 33-48183, for the fiscal year ended December 30, 2002.

 

**ITEM 4****.****                                    CONTROLSAND 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.

 

**PART II****.****                               OTHERINFORMATION**

 

**ITEM 6****.****                                    EXHIBITSAND REPORTS ON FORM 8-K**

 

(a)                                  Listof Exhibits

 
| **Exhibit No.** |   | **Description**                                                     |
|-----------------|--------|---------------------------------------------------------------------|
|            |   |                                                                |
| 99.1            |   | Certificate of Chief  Executive Officer and Chief Financial Officer |

 

(b)         Form 8-K filed onFebruary 25, 2003 – announcement of redemption of Old Notes

 

(c)          Form 8-K filed on March31, 2003 – announcement of financial results, restatement of earlier financialresults, and annual establishment of financial covenants under revolving creditfacility

 

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   | AMERICAN  RESTAURANT GROUP, INC**.** |                                                    |
|--------|--------------------------------------|---------------------------------------------------------|
|   | (Registrant)                         |                                                    |
|   |                                 |                                                    |   |
|   |                                 |                                                    |   |
| Date:  | May 14, 2003                         |                                                    | /s/ Ralph S.  Roberts |   |
|   |                                 |                                                    |   |
|   |                                 | Ralph S. Roberts  Chief Executive Officer and President |   |
|   |                                 |                                                    |   |
|   |                                 |                                                    |   |
| Date:  | May 14, 2003                         | By:                                                     | /s/ William G.  Taves |   |
|   |                                 |                                                    |   |
|   |                                 | William G. Taves  Chief Financial Officer               |   |

 

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CERTIFICATION

 

I, Ralph S. Roberts,certify that:

 

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

 

2.                                     Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                     Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the“Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

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 quarterlyreport 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:  | May 14, 2003                              |   |
|--------|-------------------------------------------|--------|
|   |                                      |
|   |                                      |
|   | /s/ Ralph S. Roberts                      |   |
|   | Ralph S. Roberts  Chief Executive Officer |

 

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CERTIFICATION

 

I, William G. Taves,certify that:

 

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

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the“Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

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 quarterlyreport 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:  | May 14, 2003                              |   |
|--------|-------------------------------------------|--------|
|   |                                      |
|   |                                      |
|   | /s/ William G. Taves                      |   |
|   | William G. Taves  Chief Financial Officer |

 

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