**UNITED STATES SECURITIES ANDEXCHANGE****COMMISSION**

 

**WASHINGTON,D.C. 20549**

 

----

 

**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 June 30, 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 CaminoReal, Suite 201Los Altos, CA  94022(650) 949-6400**

(Address and telephone numberof principal executive offices)

 

 

Former name, former address andformer fiscal year if changed since last report.

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

Yes  o      No  ý

 

Registrant’s financialstatements for the fiscal year-end 2000 included in the Form 10-K filed onMarch 31, 2003 were unaudited.

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)

Yes  o      No  ý

 

The number of outstandingshares of the Company’s Common Stock (one cent par value) as of August 4, 2003was 128,081.

 

 

----

 

**AMERICANRESTAURANT GROUP, INC.**

 

**INDEX**

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

 

2

----

 

**PART I.  FINANCIAL INFORMATION**

 

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

 

AMERICAN RESTAURANT GROUP, INC. ANDSUBSIDIARIES

 

CONSOLIDATED CONDENSED BALANCE SHEETS

 

DECEMBER 30, 2002 AND JUNE 30, 2003

 
|                                 |   | **December  30,  2002** |       | **(Unaudited)  June 30,  2003** |   |
|--------------------------------------|--------|-------------------------|------------|---------------------------------|--------|
|                                 |   |                    |       |                            |   |
| ASSETS                               |   |                    |       |                            |   |
|                                 |   |                    |       |                            |   |
| CURRENT ASSETS:                      |   |                    |       |                            |   |
| Cash                                 |   | $                       | 4,773,000  |                            | $      | 2,751,000 |   |
| Rebates and other receivables, net   |   | 3,018,000               |       | 2,361,000                       |   |
| Inventories                          |   | 3,031,000               |       | 3,071,000                       |   |
| Prepaid expenses                     |   | 1,454,000               |       | 1,167,000                       |   |
|                                 |   |                    |       |                            |   |
| Total current assets                 |   | 12,276,000              |       | 9,350,000                       |   |
|                                 |   |                    |       |                            |   |
| PROPERTY AND EQUIPMENT, net:         |   |                    |       |                            |   |
| Land and land improvements           |   | 711,000                 |       | 650,000                         |   |
| Buildings and leasehold improvements |   | 36,029,000              |       | 35,123,000                      |   |
| Fixtures and equipment               |   | 10,552,000              |       | 10,363,000                      |   |
| Property held under capital leases   |   | 709,000                 |       | 534,000                         |   |
| Construction in progress             |   | 687,000                 |       | 1,172,000                       |   |
|                                 |   |                    |       |                            |   |
| Net property and equipment           |   | 48,688,000              |       | 47,842,000                      |   |
|                                 |   |                    |       |                            |   |
| Other assets, net:                   |   | 16,909,000              |       | 16,929,000                      |   |
|                                 |   |                    |       |                            |   |
| Total assets                         |   | $                       | 77,873,000 |                            | $      | 74,121,000 |   |

 

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

 

3

----

 
|                                                                                                                                                                                                                  |   | **December  30,  2002** |       | **(Unaudited)  June 30,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|---------------------------------|--------|
|                                                                                                                                                                                                                  |   |                    |       |                            |   |
| LIABILITIES AND COMMON STOCKHOLDERS’  DEFICIT                                                                                                                                                                    |   |                    |       |                            |   |
|                                                                                                                                                                                                                  |   |                    |       |                            |   |
| CURRENT LIABILITIES:                                                                                                                                                                                                  |   |                    |       |                            |   |
| Accounts payable                                                                                                                                                                                                      |   | $                       | 7,825,000  |                            | $      | 12,838,000 |   |
| Accrued liabilities                                                                                                                                                                                                   |   | 4,235,000               |       | 3,384,000                       |   |
| Gift-certificate liability                                                                                                                                                                                            |   | 6,226,000               |       | 2,863,000                       |   |
| Self-insurance reserves                                                                                                                                                                                               |   | 3,526,000               |       | 3,620,000                       |   |
| Accrued interest                                                                                                                                                                                                      |   | 3,385,000               |       | 3,238,000                       |   |
| Accrued employee costs                                                                                                                                                                                                |   | 4,141,000               |       | 3,685,000                       |   |
| Accrued occupancy costs                                                                                                                                                                                               |   | 4,696,000               |       | 5,275,000                       |   |
| Current portion of obligations under  capital leases                                                                                                                                                                  |   | 646,000                 |       | 287,000                         |   |
| Current portion of long-term debt                                                                                                                                                                                     |   | 3,491,000               |       | 79,000                          |   |
|                                                                                                                                                                                                                  |   |                    |       |                            |   |
| Total current liabilities                                                                                                                                                                                             |   | 38,171,000              |       | 35,269,000                      |   |
|                                                                                                                                                                                                                  |   |                    |       |                            |   |
| LONG-TERM LIABILITIES, net of current  portion:                                                                                                                                                                       |   |                    |       |                            |   |
| Obligations under capital leases                                                                                                                                                                                      |   | 1,153,000               |       | 1,071,000                       |   |
| Long-term debt, net of unamortized discount                                                                                                                                                                           |   | 155,697,000             |       | 156,613,000                     |   |
|                                                                                                                                                                                                                  |   |                    |       |                            |   |
| Total long-term liabilities                                                                                                                                                                                           |   | 156,850,000             |       | 157,684,000                     |   |
|                                                                                                                                                                                                                  |   |                    |       |                            |   |
| DEFERRED GAIN ON SALE-LEASEBACK                                                                                                                                                                                       |   | 3,788,000               |       | 3,687,000                       |   |
|                                                                                                                                                                                                                  |   |                    |       |                            |   |
| 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 73,149 shares outstanding and accrued at  June 30, 2003 |   | 74,586,000              |       | 80,398,000                      |   |
|                                                                                                                                                                                                                  |   |                    |       |                            |   |
| 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 June 30, 2003                                                                            |   | 1,000                   |       | 1,000                           |   |
| Accumulated (deficit)                                                                                                                                                                                                 |   | (195,523,000            | )          | (202,918,000                    | )      |
|                                                                                                                                                                                                                  |   |                    |       |                            |   |
| Total common stockholders’ (deficit)                                                                                                                                                                             |   | (195,522,000            | )          | (202,917,000                    | )      |
|                                                                                                                                                                                                                  |   |                    |       |                            |   |
| Total liabilities and common stockholders’  (deficit)                                                                                                                                                            |   | $                       | 77,873,000 |                            | $      | 74,121,000 |   |

 

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

 

4

----

 

AMERICAN RESTAURANT GROUP, INC. ANDSUBSIDIARIES

 

CONSOLIDATED CONDENSED STATEMENTS OFOPERATIONS

 

FOR THE THIRTEEN WEEKS AND THE TWENTY-SIXWEEKS  ENDED JULY 1, 2002 AND JUNE 30,2003 

 

(UNAUDITED)

 
|                                           |   | **Thirteen  Weeks Ended** |       | **Twenty-Six  Weeks Ended** |   |
|------------------------------------------------|--------|---------------------------|------------|-----------------------------|--------|
|                                           |   | **July 1,  2002**         |       | **June 30,  2003**          |   | **July 1,  2002** |   | **June 30,  2003** |   |
|                                           |   |                      |       |                        |   |   |   |   |   |
| REVENUES                                       |   | $                         | 74,660,000 |                        | $      | 71,176,000 |   | $ | 156,476,000 |   | $ | 144,915,000 |   |
|                                           |   |                      |       |                        |   |   |   |   |   |
| RESTAURANT COSTS:                              |   |                      |       |                        |   |   |   |   |   |
| Food and beverage                              |   | 24,612,000                |       | 23,791,000                  |   | 51,669,000 |   | 46,832,000 |   |
| Payroll                                        |   | 22,104,000                |       | 22,283,000                  |   | 46,711,000 |   | 44,383,000 |   |
| Direct operating                               |   | 18,829,000                |       | 16,664,000                  |   | 39,077,000 |   | 35,699,000 |   |
| Depreciation and amortization                  |   | 1,754,000                 |       | 1,817,000                   |   | 3,663,000 |   | 3,632,000 |   |
|                                           |   |                      |       |                        |   |   |   |   |   |
| GENERAL AND ADMINISTRATIVE EXPENSES            |   | 2,492,000                 |       | 2,377,000                   |   | 4,834,000 |   | 5,144,000 |   |
|                                           |   |                      |       |                        |   |   |   |   |   |
| Operating profit                               |   | 4,869,000                 |       | 4,244,000                   |   | 10,522,000 |   | 9,225,000 |   |
|                                           |   |                      |       |                        |   |   |   |   |   |
| INTEREST EXPENSE, net                          |   | 5,550,000                 |       | 5,346,000                   |   | 10,832,000 |   | 10,691,000 |   |
|                                           |   |                      |       |                        |   |   |   |   |   |
| Loss before provision for income               |   | (681,000                  | )          | (1,102,000                  | )      | (310,000 | ) | (1,466,000 | ) |
|                                           |   |                      |       |                        |   |   |   |   |   |
| PROVISION FOR INCOME TAXES                     |   | 33,000                    |       | 46,000                      |   | 57,000 |   | 48,000 |   |
|                                           |   |                      |       |                        |   |   |   |   |   |
| Loss from continuing operations                |   | (714,000                  | )          | (1,148,000                  | )      | (367,000 | ) | (1,514,000 | ) |
|                                           |   |                      |       |                        |   |   |   |   |   |
| Loss from discontinued operations              |   | -0-                       |       | (69,000                     | )      | -0- |   | (69,000 | ) |
|                                           |   |                      |       |                        |   |   |   |   |   |
| NET LOSS                                       |   | (714,000                  | )          | (1,217,000                  | )      | (367,000 | ) | (1,583,000 | ) |
|                                           |   |                      |       |                        |   |   |   |   |   |
| Preferred stock dividends, issued and  accrued |   | 2,571,000                 |       | 2,957,000                   |   | 5,056,000 |   | 5,812,000 |   |
|                                           |   |                      |       |                        |   |   |   |   |   |
| Loss to common stockholders                    |   | $                         | (3,285,000 | )                           | $      | (4,174,000 | ) | $ | (5,423,000 | ) | $ | (7,395,000 | ) |

 

Theaccompanying notes are an integral part of these consolidated condensedstatements.

 

5

----

 

AMERICAN RESTAURANT GROUP, INC. ANDSUBSIDIARIES

 

CONSOLIDATED CONDENSED STATEMENTS OF CASHFLOWS

 

FOR THE TWENTY-SIX WEEKS ENDED JULY 1, 2002AND JUNE 30, 2003

 

(UNAUDITED)

 
|                                                                                                  |   | **July 1,  2002** |        | **June 30,  2003** |   |
|-------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|--------------------|--------|
| CASH FLOWS FROM CONTINUING OPERATING  ACTIVITIES:                                                     |   |              |        |               |   |
|                                                                                                  |   |              |        |               |   |
| Loss from continuing operations                                                                       |   | $                 | (367,000    | )                  | $      | (1,514,000 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) continuing operating activities: |   |              |        |               |   |
|                                                                                                  |   |              |        |               |   |
| Depreciation and amortization                                                                         |   | 3,663,000         |        | 3,632,000          |   |
| Amortization of deferred gain                                                                         |   | (101,000          | )           | (101,000           | )      |
| Amortization of non-cash interest expense                                                             |   | 933,000           |        | 933,000            |   |
| Decrease in current assets                                                                            |   | 1,215,000         |        | 251,000            |   |
| Increase (decrease) in current liabilities                                                            |   | (6,665,000        | )           | 869,000            |   |
|                                                                                                  |   |              |        |               |   |
| Net cash provided by (used in) continuing  operating activities                                       |   | (1,322,000        | )           | 4,070,000          |   |
|                                                                                                  |   |              |        |               |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                 |   |              |        |               |   |
| Capital expenditures                                                                                  |   | (1,902,000        | )           | (2,150,000         | )      |
| Net (increase) in other assets                                                                        |   | (2,000            | )           | (3,000             | )      |
| Net cash (used in) investing activities                                                               |   | (1,904,000        | )           | (2,153,000         | )      |
|                                                                                                  |   |              |        |               |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                 |   |              |        |               |   |
| Payments on indebtedness                                                                              |   | (195,000          | )           | (3,429,000         | )      |
| Payments on capital-lease obligations                                                                 |   | (387,000          | )           | (441,000           | )      |
| Net cash (used in) financing activities                                                               |   | (582,000          | )           | (3,870,000         | )      |
|                                                                                                  |   |              |        |               |   |
| NET (DECREASE) FROM CONTINUING OPERATIONS                                                             |   | (3,808,000        | )           | (1,953,000         | )      |
|                                                                                                  |   |              |        |               |   |
| NET (DECREASE) FROM DISCONTINUED OPERATIONS                                                           |   | (489,000          | )           | (69,000            | )      |
|                                                                                                  |   |              |        |               |   |
| NET CHANGE IN CASH, CURRENT PERIOD                                                                    |   | (4,297,000        | )           | (2,022,000         | )      |
|                                                                                                  |   |              |        |               |   |
| CASH, at beginning of period                                                                          |   | 7,384,000         |        | 4,773,000          |   |
|                                                                                                  |   |              |        |               |   |
| CASH, at end of period                                                                                |   | $                 | 3,087,000   |               | $      | 2,751,000 |   |
|                                                                                                  |   |              |        |               |   |
| Cash payments during the period:                                                                      |   |              |        |               |   |
| Interest                                                                                              |   | $                 | (10,036,000 | )                  | $      | (9,905,000 | ) |
| Income taxes                                                                                          |   | (33,000           | )           | (28,000            | )      |

 

The accompanying notes are an integral partof these consolidated condensed statements

 

6

----

 

AMERICAN RESTAURANT GROUP, INC. ANDSUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIALSTATEMENTS

 

1.                                       BASIS OFPRESENTATION

 

The Consolidated Condensed Financial Statements included were preparedby American Restaurant Group, Inc. without audit, in accordance with Securitiesand Exchange Commission Regulation S-X. (References to “the Company,” “we,” “us,” or “our” refer to AmericanRestaurant Group, Inc.)  In the opinionof our management, these Consolidated Condensed Financial Statements containall adjustments necessary to present fairly our financial position as ofDecember 30, 2002 and June 30, 2003, and the results of our operations for thethirteen weeks and twenty-six weeks ended July 1, 2002 and June 30, 2003 and ourcash flows for the twenty-six weeks ended July 1, 2002 and June 30, 2003.  Our results for an interim period are notnecessarily indicative of the results that may be expected for the year.

 

Although we believe that we included all adjustments necessary for afair presentation of the interim periods presented and that the disclosures areadequate to make the information presented not misleading, we suggest thatthese Consolidated Condensed Financial Statements be read in conjunction withthe Consolidated Financial Statements and related notes included in our annualreport on Form 10-K for the fiscal year ended December 30, 2002.

 

2.                                       OPERATIONS ANDREFINANCING

 

The Company’s operations are affected by local and regional economicconditions, including competition in the restaurant industry.

 

On October 31, 2001, we completed an exchange offer (the “Exchange”) inwhich we offered to exchange our 111⁄2% Senior Secured Notes due 2006 (the “NewNotes”) for all of our $142,600,000 outstanding 111⁄2% Senior Secured Notes due2003 (the “Old Notes”).  Wesimultaneously completed an offering (the “Offering”) of $30,000,000 aggregateprincipal amount of New Notes.  Afterthe consummation of the Exchange, the Offering, and related transactions(collectively, the “Refinancing”), we had no further payment obligations withrespect 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 infull on February 18, 2003) and assumed payment obligations equivalent to$161,774,000 of the New Notes.  TheRefinancing substantially eliminates debt principal payments until November2006.

 

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.

 

3.                                       INCOME TAXES

 

The tax provision against the pre-tax income in 2002 and in 2003consisted of certain state income taxes and estimated Federal income tax.  We previously established a valuationallowance against net-operating-loss carryforwards.

 

4.                                       PREFERRED STOCK

 

As part of the recapitalization plan in February 1998, we issued 35,000preferred stock units (the “Units”) of the Company.  Each Unit consists of $1,000 initial liquidation preference of12% senior pay-in-kind exchangeable preferred stock and one common-stockpurchase warrant initially to purchase 2.66143 shares of the common stock at aninitial exercise price of one cent per share. Our preferred stock is mandatorily redeemable on August 15, 2003.  If on August 15, 2003 we do not redeem ourpreferred 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 allrights of the preferred stock will terminate. Management believes that the preferred stock will convert to commonstock.

 

We issued preferred stock dividends of 4,832 shares on February 15,2003.  At June 30, 2003, we had 73,149preferred shares outstanding and accrued.

 

5.                                       SUBSIDIARYGUARANTORS

 

Separate financial statements of our subsidiaries are not included inthis report on Form 10-Q.  Thesubsidiaries are fully, unconditionally, jointly, and severally liable for ourobligations under the Company’s New Notes, and the

 

7

----

 

aggregate net assets, earnings, and equity of such subsidiary guarantorsare substantially equivalent to the net assets, earnings, and equity of theCompany (issuer) on a consolidated basis, as the Company has no significantoperations.

 

6.                                       INSURANCE

 

The Company self-insures certain risks, including medical, workers’ compensation,property, and general liability, up to varying limits.  Deductible and self-insured limits havevaried historically, ranging from $0 to $1,000,000 per incident depending onthe type of risk.  The policydeductibles are $125,000 for annual medical and dental benefits perperson.  Reserves for losses areestablished based upon presently estimated obligations for the claim over timeand the deductible or self-insured retention in place at the time of the loss.

 

7.                                       NEW ACCOUNTINGPRONOUNCEMENTS

 

In April 2002, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 145, “*Rescission of FAS Nos. 4, 44, and 64*, *Amendment of FAS 13, and TechnicalCorrections*” (“SFAS 145”). SFAS 145 rescinds FASB Statement No. 4, “*Reporting Gains**and Lossesfrom Extinguishment of Debt,”* and an amendment of that 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, “*Accounting for Leases*,” to eliminate aninconsistency between the required accounting for sale-leaseback transactionsand the required accounting for certain lease modifications that have economiceffects 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 notanticipate that the adoption of this statement will have a material impact onour consolidated balance sheets or consolidated statements of operations.

 

In June 2002, the FASB issued SFAS No. 146, “*Accounting for Exit or DisposalActivities*”  (“SFAS146”).  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 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.  Wedo not anticipate that adoption of this statement will have a material impacton our consolidated balance sheets or consolidated statements of operations.

 

8.                                       COMMITMENTSAND CONTINGENCIES

 

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

 

The Company has been named as defendant in various lawsuits.  Management’s opinion is that the outcome ofsuch litigation will not materially affect the Company’s financial position,results of operations, or cash flows.

 

9                                          SUBSEQUENTEVENT

 

On June 28, 2000, we sold all of the outstanding stock of theNon-Black Angus Subsidiaries to Spectrum Restaurant Group, Inc., a companythat is controlled by Anwar S. Soliman, a Company shareholder andDirector. On August 6, 2003, the Company was notified that Spectrum RestaurantGroup, Inc. and its subsidiaries (collectively, “SRG”) each filed in UnitedStated Bankruptcy Court a voluntary petition for bankruptcy and reorganizationunder Chapter 11.  The Company is currently owed $138,000 as of June 30,2003 from SRG.  As a result, the Company has recorded a reserve of $69,000or 50% of the outstanding receivable.

 

Inconnection with the sale, the Company transferred rights and obligations toSRG.  Management of the Company believes the Company has no amounts due toSRG.   There can be no assurance, however, that third parties willnot attempt to assert claims against the Company for obligations, includingthose leases rejected by SRG through bankruptcy procedures.  No reasonableestimate can be made at this time of the scope or size of any such potentialclaims.  Because the bankruptcy filing is so recent, we are unaware of howany remaining obligations of SRG to the Company or other parties will beresolved, including the length of payment schedules.

 

8

----

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

 

Certain statements contained in this Form 10-Q are forward-lookingregarding cash flows from operations, restaurant openings, capitalrequirements, 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 discussion and analysis of our financial condition andresults of operations should be read in conjunction with the historicalfinancial information included in the Consolidated Condensed FinancialStatements.

 

**Resultsof Operations**

 

*Thirteen weeks ended July 1, 2002 and June 30, 2003:*

 

*Revenues.*Total revenues decreased from $74.7million in the second quarter of 2002 to $71.2 million in the second quarter of2003.  Same-store sales decreased 4.5 %in the second quarter of 2003 compared to 2002.  Continuing with the strategy of reducing the number ofless-profitable product promotions resulted in promotional counts decreasing2.7% during the second quarter of 2003 compared to the second quarter of2002.  This planned reduction in thesale of promoted items also decreased advertising expense by $1.0 million inthe second quarter of 2003 compared to the second quarter of 2002.  The average dinner check increased 1.3% fromthe second quarter of 2003.  There were109 Black Angus restaurants operating in both quarters.

 

*Food and Beverage Costs.*  As a percentage of revenues, food andbeverage costs increased from 33.0% in the second quarter of 2002 to 33.4% inthe second quarter of 2003.  Theincrease is the result of higher beef costs experienced during the quarter.

 

*Payroll Costs.*  Payroll costs decreased $179,000 from $22.3 million during thesecond quarter of 2002 to $22.1 million during the second quarter of 2003.  As a percentage of sales, payroll increasedfrom 29.6% in the second quarter of 2002 to 31.3% in the second quarter of2003.

 

*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 1.8% from 25.2% in the second quarter of 2002 to23.4% in the second quarter of 2003. The decrease is attributable to loweradvertising expenses and a reduction in janitorial service contracts.

 

*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 remainedconstant at $1.8 million in the second quarter of 2002 and 2003.

 

*General and Administrative Expenses.*  General and administrative expensesdecreased from $2.5 million in the second quarter of 2002 to $2.4 million inthe second quarter of 2003.  Thedecrease is the result of lower corporate overhead expenses.

 

*Operating Profit.*  As a result of the above items, operating profit decreased from$4.9 million in the second quarter of 2002 to $4.2 million in the secondquarter of 2003.  As a percentage ofrevenues, operating profit decreased from 6.5% in the second quarter of 2002 to6.0% in the second quarter of 2003.

 

*Interest Expense – Net.* Our interest expensedecreased from $5.6 million in the second quarter of 2002 to $5.3 million inthe second quarter of 2003.  Thedecrease resulted from the redemption of $3.4 million in senior notes completedin the first quarter of 2003.

 

*Twenty-six weeks ended July 1, 2002 and June 30, 2003:*

 

*Revenues. *Totalrevenue decreased from $156.5 million in the first half of 2002 to $144.9million in the first half of 2003. Same-store sales decreased by 7.4% in thefirst half of 2003 compared to the first half of 2002. Roughly half of thisdecrease was related to a planned reduction in advertised product promotions, astrategy which also reduced advertising expense by $2.3 million in the firsthalf of 2003, compared to the first half of 2002.  The average check increased 2.1% in the first half of 2003compare to the first half of 2002. There were 109 Black Angus restaurants operating during both periods.

 

*Food and Beverage Costs.*  As a percentage of revenues, food andbeverage costs improved from 33.0% in the first half of 2002 to 32.3% in thefirst half of 2003.  This decreaseresults from fewer sales of promotional products in the first half offset byhigher beef costs in the second quarter 2003.

 

9

----

 

*Payroll Costs*.  Payroll costs decreased $2.3 million from $46.7 million duringthe second quarter of 2002 to $44.4 million during the second quarter of2003.  As a percentage of sales, payrollincreased from 29.9% in the second quarter of 2002 to 30.6% in the secondquarter of 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 25.0% in the first half of 2002 to 24.6% in the first half of2003.  The savings relate to decreasedadvertising costs and a reduction in janitorial service contracts in the firsthalf of 2003.

 

*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$3.7 million in the first half of 2002 to $3.6 million in the first half of2003.

 

*General and Administrative Expense.*  General and administrative expensesincreased from $4.8 million in the first half of 2002 to $5.1 million in thefirst half of 2003.  The increase is aresult of higher fees incurred in the first quarter in connection with theaudits of the 2001 and 2002 financial statements.

 

*Operating Profit.*  As a result of the above items, operating profit decreased from$10.5 million in the first half of 2002 to $9.2 million in the first half of2003.  As a percentage of revenues,operating profit decreased from 6.7% in the first half of 2002 to 6.4% in thefirst half of 2003.

 

*Interest Expense — Net.*  Our interest expense decreased from $10.8million in the first half of 2002 to $10.7 million in the first half of2003.  The decrease was resulted fromthe redemption of $3.4 million in senior notes completed in the first quarterof 2003.

 

**Liquidityand Capital Resources**

 

Our primary sources of liquidity are cash flows from operations andborrowings under our revolving credit facilities.  We require capital principally for the acquisition and constructionof new restaurants, the remodeling of existing restaurants, the purchase of newequipment and leasehold improvements, and working capital. As of June 30, 2003,we had approximately $2.8 million of cash.

 

In general, restaurant businesses do not have significant accountsreceivable because sales are made for cash or by credit-card vouchers, whichare ordinarily paid within three to five days. The restaurants do not maintain substantial inventory as a result of therelatively brief shelf life and frequent turnover of food products.Additionally, restaurants generally are able to obtain trade credit inpurchasing food and restaurant supplies. As a result, restaurants are frequently able to operate with working-capitaldeficits, i.e., current liabilities exceed current assets.  At June 30, 2003, our working-capitaldeficit was $25.9 million.

 

We estimate that capital expenditures of $3.0 million to $6.0 millionare required annually to maintain and refurbish our existing restaurants.  Other capital expenditures, which aregenerally discretionary, are primarily for the construction of new restaurantsand for expanding, reformatting, and extending the capabilities of existingrestaurants and for general corporate purposes.  Total capital expenditures for continuing operations wereapproximately $1.9 million through the first half of 2002 and $2.2 millionthrough the first half of 2003.  Weestimate that capital expenditures in 2003 will be approximately $3.5 million.  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 exchange offer (the “Exchange”) inwhich we offered to exchange our 111⁄2% Senior Secured Notes due 2006 (the “NewNotes”) for all of our $142,600,000 outstanding 111⁄2% Senior Secured Notes due2003 (the “Old Notes”).  Wesimultaneously completed an offering (the “Offering”) of $30,000,000 aggregateprincipal amount of New Notes.  Afterthe consummation of the Exchange, the Offering, and related transactions(collectively, the “Refinancing”), we had no further payment obligations withrespect 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 infull on February 18, 2003) and assumed payment obligations equivalent to$161,774,000 of the New Notes. The Refinancing substantially eliminates debtprincipal payments until November 2006.

 

10

----

 

The principal elements of the Refinancing were: (a) the Exchange(approximately $124 million aggregate principal amount of Old Notes wereexchanged for approximately $132 million aggregate principal amount New Notes);(b) the Offering (the issuance of $30 million aggregate principal amount of NewNotes); (c) the consent of the holders of our outstanding preferred stock toamend the terms of the preferred stock to provide that if we do not redeem thepreferred stock for cash on August 15, 2003 in accordance with its terms, thenthe preferred stock will automatically be redeemed for shares of our commonstock at that time and all the rights of the preferred stock will terminate,including any rights of acceleration; to eliminate provisions that allow theholders to exchange preferred stock for new subordinate debt; and to amend thecovenants of the preferred stock so that they are substantially similar to thecovenants under the New Notes; and, (d) the consent of the lender under ourformer revolving credit facility (“Old Credit Facility”) to permit the issuanceof the New Notes and any other aspects of the Refinancing requiring thelender’s consent.

 

None of the Old Notes were outstanding at June 30, 2003.  Under the Old Notes, we were obligated tomake semiannual interest payments on February 15 and August 15 through February2003.  Accordingly, we made the lastinterest payment of $0.2 million on February 15, 2003.

 

Under the New Notes, we are obligated to make semiannual interestpayments on May 1 and November 1 through November 2006. Accordingly, we made aninterest payment of $9.3 million on May 1, 2003.

 

We have an additional $2.1 million in long-term debt that relates tomortgages and capital leases for improvements and equipment.

 

On December 17, 2001, we entered into a loan agreement for a revolvingcredit facility (“New Credit Facility”) with Foothill Capital Corporation toreplace the Old Credit Facility.  OurNew Credit Facility presently provides for up to $15 million in borrowings, includingsupport for letters of credit. As of June 30, 2003, we had approximately $8.8million of letters of credit outstanding and no borrowings, leavingapproximately $6.2 million remaining under the New Credit Facility. The NewCredit Facility expires in December 2005.

 

The Company and its subsidiaries do not guaranty the debt of any otherparties outside the consolidated group.

 

The Company’s contractual obligations can be summarized as follows (inthousands):

 
| **Contractual Obligations**             |   | **Paid in  Q1&2–  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             |   | 3,410                             |   | 81                               |   | 79                               |   | 161,879                          |   | 893                             |   | 166,342   |   |
| Capital Leases                          |   | 441                               |   | 395                              |   | 495                              |   | 464                              |   | 882                             |   | 2,677     |   |
| Operating Leases                        |   | 9,637                             |   | 8,906                            |   | 32, 289                          |   | 28,296                           |   | 189,741                         |   | 268,869   |   |
| Total Contractual Cash                  |   | $                                 | 22,986 |                             | $      | 18,684                           |   | $                                | 70,071 |                            | $      | 209,243   |   | $ | 191,516 |   | $ | 512,500 |   |
|                                         |        |                                   |        |                                  |        |                                  |        |                                  |        |                                 |        |           |        |  |  |  |  |  |  |

 

Preferred stock dividends of 4,832 shares were issued on February 15,2003.  There were 73,149 shares ofpreferred stock outstanding and accrued at June 30, 2003. Our preferred stockis mandatorily redeemable on August 15, 2003. If we do not redeem our preferred stock for cash at a price per shareequal to 110% of the then-applicable liquidation preference, our preferredstock will be automatically redeemed for shares of our common stock at thattime and all of the rights of the preferred stock will terminate. Managementbelieves that the preferred stock will convert to common stock.

 

Substantially all our assets are pledged to our senior lenders.  In addition, our direct subsidiariesguarantee most of our indebtedness and such guarantees are secured bysubstantially all of the assets of the subsidiaries. In connection with suchindebtedness, contingent and mandatory prepayments may be required undercertain specified conditions and events. There are no compensating balance requirements.

 

Although we are highly leveraged, based upon current levels ofoperations and anticipated growth, we expect that cash flows generated fromoperations together with our other available sources of liquidity will beadequate to make required payments of principal and interest on ourindebtedness, to make anticipated capital expenditures, and to financeworking-capital requirements for at least the next twelve months. We do not,however, expect to generate sufficient cash flows from operations in the futureto pay fully the principal of the senior indebtedness upon maturity in 2006and, accordingly, we expect to refinance all or a portion of such debt, obtainnew financing, or possibly sell assets.

 

11

----

 

**Critical AccountingPolicies**

 

*Revenue Recognition.*We record revenue from the sale of food, beverage, andalcohol as products are sold.   Werecord proceeds from the sale of a gift card or gift certificate in currentliabilities and recognize income when a holder redeems a gift card or 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 ofEstimates. *Thepreparation of financial statements in conformity with generally acceptedaccounting principles in the United States requires our management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities, and thereported amounts of revenues and expenses. Actual results could differ from those estimates.

 

We believe that our financial statements are a reasonablerepresentation of the realizable values of our assets, the level of ourliabilities, and the amounts of revenues and expenses incurred in any givenperiod.  There are estimates inherent inthese amounts.  We may not be able torecover the assumed value of all of our assets, such as property and equipmentor intangible assets, if circumstances cause us to close restaurants or weexperience 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 the assumptionsused 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 associated depreciationand interest expense.  Conversely, ifmany leases in the future were classified as operating leases, rental expensewould increase.

 

*Valuation Allowancefor Deferred Tax Assets. *Weprovided a valuation allowance of $44.4 million and $45.2 million against theentire amount of our deferred tax assets as of December 30, 2002 and June 30,2003, respectively.  The Company fullyreserves both the net-operating-loss and general-business-credit carryforwardsbecause sufficient doubt exists regarding the Company’s ability to use thecarryforwards before expiration.

 

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

 

*Reclassification. *Certain accountshave been reclassified to conform with the current year’s presentation.

 

*Self-InsuranceReserves*.  TheCompany self-insures certain risks, including medical, workers’ compensation,property, and general liability, up to varying limits.  Deductible and self-insured limits havevaried historically, ranging from $0 to $1,000,000 per incident depending onthe type of risk.  The policydeductibles 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.  Theself-insured reserves are reported on the balance sheet under self-insurancereserves.

 

12

----

 

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

 

The market risk of our financial instruments as of June 30, 2003 hasnot materially changed since December 30, 2002.  The market risk profile on December 30, 2002 is disclosed in ourannual report on Form 10-K, File No. 33-48183, for the fiscal year endedDecember 30, 2002.

 

**ITEM4.****                                                     CONTROLSAND PROCEDURES**

 

The Company’s management has designed and periodically reviews andinternally audits the effectiveness of the design and operation of theCompany’s disclosure 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**                                                                    |
|-----------------|--------|------------------------------------------------------------------------------------|
|            |   |                                                                               |
| 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 May 16, 2003 – announcement of first quarter 2003 financialresults.

 

(c)                                  Form8-K filed on May 28, 2003 – announcement expanding on first quarter 2003financial results.

 

13

----

 

**SIGNATURE**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 

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

 

14

----