** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

----

 

**FORM 10-Q**

 

**(MarkOne)**

** **

**ý****        QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterly period endedSeptember 24, 2001**

** **

**OR**

** **

**o****        TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the transition period from____________ to _____________**

** **

**American Restaurant Group,Inc.**

(Exactname of registrant as specified in its charter)

|                             |   |             |   |                 |
|----------------------------------|--------|------------------|--------|----------------------|
| **Delaware**                     |   | **33-48183**     |   | **33-0193602**       |
| (State or other  jurisdiction of |   | (Commission File |   | (I.R.S. employer     |
| incorporation or  organization)  |   | Number)          |   | identification  no.) |

 

**4410 ElCamino Real, Suite 201**

**Los Altos, CA 94022**

**(650)949-6400**

(Address andtelephone number of principal executive offices)

 

 

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

 

Indicate by checkmark whether 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  ý                       No  o

 

The number ofoutstanding shares of the Company's Common Stock (one-cent par value) as ofOctober 29, 2001 was 128,081.

 

**AMERICANRESTAURANT GROUP, INC.**

 

**INDEX**

 
| **PART I.** | **FINANCIAL INFORMATION**                                                                   |   |
|-------------|---------------------------------------------------------------------------------------------|--------|
|        |                                                                                        |   |
| ITEM 1.     | FINANCIAL STATEMENTS:                                                                       |   |
|        |                                                                                        |   |
|        | Consolidated Condensed  Balance Sheets                                                      |   |
|        |                                                                                        |   |
|        | Consolidated  Statements of Operations                                                      |   |
|        |                                                                                        |   |
|        | Consolidated  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                                 |   |

 

 

**PART I.         FINANCIAL INFORMATION**

 

**ITEM 1.          FINANCIAL STATEMENTS:**

 

AMERICANRESTAURANT GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATEDCONDENSED BALANCE SHEETS

 

DECEMBER 25, 2000AND SEPTEMBER 24, 2001

 
| ASSETS                                |   | **December 25, 2000** |       | **September 24, 2001** |   |
|---------------------------------------|--------|-----------------------|------------|------------------------|--------|
|                                  |   |                  |       | **(unaudited)**        |   |
| CURRENT  ASSETS:                      |   |                  |       |                   |   |
| Cash                                  |   | $                     | 8,532,000  |                   | $      | 3,850,000 |   |
| Accounts  and notes receivable        |   | 2,938,000             |       | 3,690,000              |   |
| Inventories                           |   | 2,853,000             |       | 2,916,000              |   |
| Prepaid  expenses                     |   | 2,803,000             |       | 4,521,000              |   |
|                                  |   |                  |       |                   |   |
| Total  current assets                 |   | 17,126,000            |       | 14,977,000             |   |
|                                  |   |                  |       |                   |   |
| PROPERTY AND  EQUIPMENT:              |   |                  |       |                   |   |
| Land  and land improvements           |   | 2,629,000             |       | 2,598,000              |   |
| Buildings  and leasehold improvements |   | 67,631,000            |       | 69,409,000             |   |
| Fixtures  and equipment               |   | 48,629,000            |       | 48,953,000             |   |
| Property  held under capital leases   |   | 7,480,000             |       | 7,293,000              |   |
| Construction  in progress             |   | 2,816,000             |       | 1,345,000              |   |
| Property  and Equipment               |   | 129,185,000           |       | 129,598,000            |   |
| Less  — Accumulated depreciation |   | 75,815,000            |       | 78,851,000             |   |
|                                  |   |                  |       |                   |   |
| Net  Property and Equipment           |   | 53,370,000            |       | 50,747,000             |   |
|                                  |   |                  |       |                   |   |
| OTHER  ASSETS — NET:             |   | 19,079,000            |       | 17,061,000             |   |
|                                  |   |                  |       |                   |   |
| Total  Assets                         |   | $                     | 89,575,000 |                   | $      | 82,785,000 |   |
|                                  |   |                  |       |                   |   |

 

 

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

(consolidated condensed balance sheets continued onthe following page)

 

 
| LIABILITIES AND COMMON STOCKHOLDERS’ DEFICIT                                                                                                                                                                           |   | **December 25, 2000** |       | **September 24, 2001** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|------------|------------------------|--------|
|                                                                                                                                                                                                                        |   |                  |       | **(unaudited)**        |   |
| CURRENT  LIABILITIES:                                                                                                                                                                                                       |   |                  |       |                   |   |
| Accounts  payable                                                                                                                                                                                                           |   | $                     | 15,193,000 |                   | $      | 13,615,000 |   |
| Accrued  liabilities                                                                                                                                                                                                        |   | 11,521,000            |       | 6,320,000              |   |
| Accrued  insurance                                                                                                                                                                                                          |   | 2,373,000             |       | 2,695,000              |   |
| Accrued  interest                                                                                                                                                                                                           |   | 6,251,000             |       | 2,116,000              |   |
| Accrued  payroll costs                                                                                                                                                                                                      |   | 7,069,000             |       | 4,115,000              |   |
| Current  portion of obligations under capital leases                                                                                                                                                                        |   | 713,000               |       | 776,000                |   |
| Current  portion of long-term debt                                                                                                                                                                                          |   | 432,000               |       | 4,416,000              |   |
| Current  liabilities from discontinued operations                                                                                                                                                                           |   | 2,945,000             |       | 1,059,000              |   |
|                                                                                                                                                                                                                        |   |                  |       |                   |   |
| Total  current liabilities                                                                                                                                                                                                  |   | 46,497,000            |       | 35,112,000             |   |
|                                                                                                                                                                                                                        |   |                  |       |                   |   |
| LONG-TERM  LIABILITIES, net of current portion:                                                                                                                                                                             |   |                  |       |                   |   |
| Obligations  under capital leases                                                                                                                                                                                           |   | 2,588,000             |       | 2,005,000              |   |
| Long-term  debt                                                                                                                                                                                                             |   | 144,066,000           |       | 143,787,000            |   |
|                                                                                                                                                                                                                        |   |                  |       |                   |   |
| Total  long-term liabilities                                                                                                                                                                                                |   | 146,654,000           |       | 145,792,000            |   |
|                                                                                                                                                                                                                        |   |                  |       |                   |   |
| DEFERRED  GAIN                                                                                                                                                                                                              |   | 4,192,000             |       | 4,037,000              |   |
|                                                                                                                                                                                                                        |   |                  |       |                   |   |
| COMMITMENTS  AND CONTINGENCIES                                                                                                                                                                                              |   |                  |       |                   |   |
|                                                                                                                                                                                                                        |   |                  |       |                   |   |
| CUMULATIVE  PREFERRED STOCK, MANDATORILY REDEEMABLE:                                                                                                                                                                        |   |                  |       |                   |   |
|                                                                                                                                                                                                                        |   |                  |       |                   |   |
| Senior  pay-in-kind exchangeable preferred stock, $0.01 par value; 160,000 shares  authorized; 50,953 shares outstanding and accrued at December 25, 2000; and  56,792 shares outstanding and accrued at September 24, 2001 |   | 49,891,000            |       | 56,029,000             |   |
|                                                                                                                                                                                                                        |   |                  |       |                   |   |
| COMMON  STOCKHOLDERS’ DEFICIT:                                                                                                                                                                                         |   |                  |       |                   |   |
| Common  stock, $0.01 par value; 1,000,000 shares authorized; 128,081 shares  outstanding at December 25, 2000 and September 24, 2001                                                                                        |   | 1,000                 |       | 1,000                  |   |
| Paid-in  capital                                                                                                                                                                                                            |   | 15,788,000            |       | 9,469,000              |   |
| Accumulated  deficit                                                                                                                                                                                                        |   | (173,448,000          | )          | (167,655,000           | )      |
|                                                                                                                                                                                                                        |   |                  |       |                   |   |
| Total  common stockholders’ deficit                                                                                                                                                                                    |   | (157,659,000          | )          | (158,185,000           | )      |
|                                                                                                                                                                                                                        |   |                  |       |                   |   |
| Total  liabilities and common stockholders’ deficit                                                                                                                                                                    |   | $                     | 89,575,000 |                   | $      | 82,785,000 |   |
|                                                                                                                                                                                                                        |   |                  |       |                   |   |

 

 

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

 

 

AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

FOR THE THIRTEEN WEEKS AND THE THIRTY-NINE WEEKS ENDEDSEPTEMBER 25, 2000 AND  

SEPTEMBER 24, 2001

 

 

(UNAUDITED)

 

 
|                                                                           |   | **Thirteen  Weeks Ended** |       | **Thirty-nine Weeks Ended** |   |
|--------------------------------------------------------------------------------|--------|---------------------------|------------|-----------------------------|--------|
|                                                                           |   | **September 25, 2000**    |       | **September 24, 2001**      |   | **September 25,  2000** |   | **September 24, 2001** |   |
|                                                                           |   |                      |       |                        |   |   |   |   |   |
| REVENUES                                                                       |   | $                         | 72,962,000 |                        | $      | 68,331,000 |   | $ | 226,567,000 |   | $ | 226,808,000 |   |
|                                                                           |   |                      |       |                        |   |   |   |   |   |
| RESTAURANT  COSTS:                                                             |   |                      |       |                        |   |   |   |   |   |
| Food  and beverage                                                             |   | 25,728,000                |       | 22,449,000                  |   | 77,675,000 |   | 75,602,000 |   |
| Payroll                                                                        |   | 19,742,000                |       | 20,661,000                  |   | 60,715,000 |   | 64,923,000 |   |
| Direct  operating                                                              |   | 17,724,000                |       | 17,747,000                  |   | 52,852,000 |   | 53,830,000 |   |
| Depreciation  and amortization                                                 |   | 2,205,000                 |       | 2,148,000                   |   | 7,352,000 |   | 6,478,000 |   |
|                                                                           |   |                      |       |                        |   |   |   |   |   |
| GENERAL  AND ADMINISTRATIVE EXPENSES                                           |   | 1,738,000                 |       | 2,428,000                   |   | 7,660,000 |   | 7,198,000 |   |
|                                                                           |   |                      |       |                        |   |   |   |   |   |
| Operating  profit                                                              |   | 5,825,000                 |       | 2,898,000                   |   | 20,313,000 |   | 18,777,000 |   |
|                                                                           |   |                      |       |                        |   |   |   |   |   |
| INTEREST  EXPENSE, net                                                         |   | 4,802,000                 |       | 4,310,000                   |   | 14,322,000 |   | 12,801,000 |   |
|                                                                           |   |                      |       |                        |   |   |   |   |   |
| Income  / (Loss) before provision for income taxes and discontinued operations |   | 1,023,000                 |       | (1,412,000                  | )      | 5,991,000 |   | 5,976,000 |   |
|                                                                           |   |                      |       |                        |   |   |   |   |   |
| PROVISION  FOR INCOME TAXES                                                    |   | 10,000                    |       | 21,000                      |   | 211,000 |   | 183,000 |   |
|                                                                           |   |                      |       |                        |   |   |   |   |   |
| Income  / (Loss) from continuing operations                                    |   | 1,013,000                 |       | (1,433,000                  | )      | 5,780,000 |   | 5,793,000 |   |
|                                                                           |   |                      |       |                        |   |   |   |   |   |
|                                                                           |   |                      |       |                        |   |   |   |   |   |
| NET INCOME FROM  DISCONTINUED OPERATIONS                                       |   | -                         |       | -                           |   | 3,474,000 |   | - |   |
|                                                                           |   |                      |       |                        |   |   |   |   |   |
|                                                                           |   |                      |       |                        |   |   |   |   |   |
| Net  Income / (Loss)                                                           |   | $                         | 1,013,000  |                        | $      | (1,433,000 | ) | $ | 9,254,000 |   | $ | 5,793,000 |   |
|                                                                           |   |                      |       |                        |   |   |   |   |   |

 

 

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

 

AMERICAN RESTAURANTGROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

FOR THE THIRTY-NINE WEEKSENDED SEPTEMBER 25, 2000 AND SEPTEMBER 24, 2001

 

 

(UNAUDITED)

 
|                                                                                                                                 |   | **September  25, 2000** |        | **September 24, 2001** |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-------------|------------------------|--------|
| CASH  FLOWS FROM CONTINUING OPERATING ACTIVITIES:                                                                                    |   |                    |        |                   |   |
| Cash  received from customers                                                                                                        |   | $                       | 226,054,000 |                   | $      | 226,056,000 |   |
| Cash  paid to suppliers and employees                                                                                                |   | (204,032,000            | )           | (212,900,000           | )      |
| Interest  paid, net                                                                                                                  |   | (19,020,000             | )           | (16,936,000            | )      |
| Income  taxes, net                                                                                                                   |   | (211,000                | )           | (183,000               | )      |
|                                                                                                                                 |   |                    |        |                   |   |
| Net  cash provided by /(used in) continuing operating activities                                                                     |   | 2,791,000               |        | (3,963,000             | )      |
|                                                                                                                                 |   |                    |        |                   |   |
|                                                                                                                                 |   |                    |        |                   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                                                               |   |                    |        |                   |   |
| Capital  expenditures                                                                                                                |   | (6,438,000              | )           | (1,876,000             | )      |
| Net  (increase) decrease in other assets                                                                                             |   | (606,000                | )           | 14,000                 |   |
| Proceeds  (loss) from disposition of assets                                                                                          |   | (12,000                 | )           | 25,000                 |   |
|                                                                                                                                 |   |                    |        |                   |   |
| Net  cash (used in) investing activities                                                                                             |   | (7,056,000              | )           | (1,837,000             | )      |
|                                                                                                                                 |   |                    |        |                   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                                                               |   |                    |        |                   |   |
| Borrowings (payments) on indebtedness                                                                                                |   | (145,000                | )           | 3,705,000              |   |
| (Payments)  on capital-lease obligations                                                                                             |   | (472,000                | )           | (520,000               | )      |
|                                                                                                                                 |   |                    |        |                   |   |
| Net  cash provided by /(used in) financing activities                                                                                |   | (617,000                | )           | 3,185,000              |   |
|                                                                                                                                 |   |                    |        |                   |   |
| NET  (DECREASE) FROM CONTINUING OPERATIONS                                                                                           |   | (4,882,000              | )           | (2,615,000             | )      |
|                                                                                                                                 |   |                    |        |                   |   |
| NET  INCREASE / (DECREASE) FROM DISCONTINUED OPERATIONS                                                                              |   | 10,833,000              |        | (2,067,000             | )      |
|                                                                                                                                 |   |                    |        |                   |   |
| CASH,  at beginning of period                                                                                                        |   | 8,316,000               |        | 8,532,000              |   |
|                                                                                                                                 |   |                    |        |                   |   |
| CASH,  at end of period                                                                                                              |   | $                       | 14,267,000  |                   | $      | 3,850,000 |   |
|                                                                                                                                 |   |                    |        |                   |   |
| RECONCILIATION OF NET  INCOME FROM OPERATIONS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:                                          |   |                    |        |                   |
|                                                                                                                                 |   |                    |        |                   |   |
| Net  income from continuing operations                                                                                               |   | $                       | 5,780,000   |                   | $      | 5,793,000 |   |
| Adjustments  to reconcile net income from continuing operations to net cash provided by  /(used in) continuing operating activities: |   |                    |        |                   |
|                                                                                                                                 |   |                    |        |                   |   |
| Depreciation  and amortization                                                                                                       |   | 7,352,000               |        | 6,478,000              |   |
| Loss  on Disposition of Assets                                                                                                       |   | 581,000                 |        | -                      |   |
|                                                                                                                                 |   |                    |        |                   |   |
| Amortization  of deferred gain                                                                                                       |   | (152,000                | )           | (155,000               | )      |
| (Increase)  decrease in current assets:                                                                                              |   |                    |        |                   |   |
| Accounts  and notes receivable, net                                                                                                  |   | (173,000                | )           | (752,000               | )      |
| Inventories                                                                                                                          |   | (310,000                | )           | (63,000                | )      |
| Prepaid  expenses                                                                                                                    |   | 1,244,000               |        | (1,718,000             | )      |
| Increase  (decrease) in current liabilities:                                                                                         |   |                    |        |                   |   |
| Accounts  payable                                                                                                                    |   | (3,697,000              | )           | (1,578,000             | )      |
| Accrued  liabilities                                                                                                                 |   | (2,783,000              | )           | (5,201,000             | )      |
| Accrued  insurance                                                                                                                   |   | 323,000                 |        | 322,000                |   |
| Accrued  interest                                                                                                                    |   | (4,698,000              | )           | (4,135,000             | )      |
| Accrued  payroll                                                                                                                     |   | (676,000                | )           | (2,954,000             | )      |
|                                                                                                                                 |   |                    |        |                   |   |
| Net  cash provided by /(used in) continuing operating activities                                                                     |   | 2,791,000               |        | (3,963,000             | )      |
|                                                                                                                                 |   |                    |        |                   |   |

 

 

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

 

AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

1.             MANAGEMENTOPINION

 

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 adjustments (allof which are of a normal recurring nature except for the discontinuedoperations) necessary to present fairly our financial position as of December25, 2000 and September 24, 2001, and the results of our operations for thethirteen weeks and thirty-nine weeks ended September 25, 2000 and September 24,2001 and our cash flows for the thirty-nine weeks ended September 25, 2000 andSeptember 24, 2001.  Our results for aninterim period are not necessarily indicative of the results that may beexpected for the year.

 

Althoughwe believe that all adjustments necessary for a fair presentation of theinterim periods presented are included and that the disclosures are adequate tomake the information presented not misleading, we suggest that theseConsolidated Condensed Financial Statements be read in conjunction with theConsolidated Financial Statements and related notes included in the our annualreport on Form 10-K, File No. 33-48183, for the year ended December 25, 2000.

 

2.             SALEOF STOCK TO SPECTRUM RESTAURANT GROUP

 

We sold all of theoutstanding stock of four wholly owned subsidiaries (“Non-Black AngusSubsidiaries”) to Spectrum Restaurant Group, Inc. (formerly known as NBACo,Inc.) effective June 26, 2000 (the “Stock Sale”). There was no gain or lossrecorded because of the related-party nature of the Stock Sale.  We received $17.0 million in cash on June28, 2000, and transferred certain assets and liabilities to Spectrum RestaurantGroup, Inc.  Concurrent with the StockSale, advances between us and the Non-Black Angus Subsidiaries were eliminated.Paid-in capital of $27.0million was charged as a result of the Stock Sale. We retained the assets andliabilities associated with certain closed restaurants as well as certainliabilities, estimated on June 26, 2000 at approximately $12.6 million,associated with the operating restaurants that were sold.  The amount of estimated liabilities remainingat September 24, 2001 was approximately $1.1 million.

 

We are currentlyworking to settle these liabilities. Any adjustment to the recorded balance, as a result of such settlement,will be recognized when the amount becomes known.

 

3.             OPERATIONS

 

Our operations areaffected by local and regional economic conditions, including competition inthe restaurant industry.  Prior to theyear ended December 25, 2000, we experienced recurring operating losses (beforeextraordinary gain (loss) on extinguishment of debt) after debt service.  A recapitalization plan was consummatedduring 1998. This plan substantially eliminated debt principal payments untilthe year 2003.  On October 31, 2001, weconsummated an exchange offer (the “Exchange”) pursuant to which we offered toexchange our 111⁄2% Series C Senior Secured Notes due 2006 (the “New Notes”) forall of our $142,600,000 outstanding 111⁄2% Series B Senior Secured Notes due 2003(the “Old Notes”) and 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 have no further payment obligations withrespect to over 97.6% of the outstanding Old Notes (constituting all but$3,408,000 aggregate principal amount of the Old Notes) and assumed principalpayment obligations equivalent to $161,744,000 of the New Notes.  The Refinancing substantially eliminatesdebt principal payments until November 2006.

 

Although we havenot yet determined the final accounting treatment to be applied to theRefinancing transactions, such effects will be reflected in our consolidatedresults of operations for the fourteen weeks ended December 31, 2001 andour consolidated balance sheet as of December 31, 2001.

 

We do not expectto generate sufficient cash flows from future operations to fully pay theprincipal on all long-term debt upon maturity and, accordingly, we expect thatwe will refinance all or a portion of such debt, obtain new financing, orpossibly sell assets.

 

4.             INCOME TAXES

 

The tax provisionagainst our pre-tax income in 2001 and in 2000 consisted of certain stateincome tax and estimated Federal income tax liabilities.  We previously established a valuationallowance against net-operating-loss carryforwards.

 

5.             PREFERRED STOCK

 

As part of therecapitalization 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 cumulativepreferred stock is mandatorily redeemable on August 15, 2003 for cash (at aprice per share equal to 110% of the then-applicable liquidation preference)or, if not redeemed for cash, the preferred stock will be automaticallyredeemed for shares of our common stock at that time.

 

We made preferredstock dividends of 3,618 shares on February 15, 2001 and 3,890 shares on August15, 2001. At September 24, 2001, we had 56,792 preferred shares outstanding andaccrued.

 

6.             SUBSIDIARY GUARANTORS

 

Separate financialstatements of our subsidiaries are not included in this report on Form 10-Qbecause the subsidiaries are fully, unconditionally, jointly, and severallyliable for our obligations under the Company's Old Notes and New Notes, and theaggregate net assets, earnings, and equity of such subsidiary guarantors aresubstantially equivalent to the net assets, earnings, and equity of the Companyon a consolidated basis.

 

7.             INSURANCE

 

We self-insure upto varying limits certain risks, including medical, workers’ compensation,property, and general liability. Deductible and self-insured limits have variedhistorically, ranging from $0 to $500,000 per incident depending on the type ofrisk. The policy deductibles are $100,000 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.

 

8             FORWARD-LOOKING STATEMENTS

 

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.

 

9              NEW ACCOUNTING PRONOUNCEMENTS

 

In June 2001, theFinancial Accounting Standards Board issued Statements of Financial AccountingStandards (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill andOther Intangible Assets. These new standards are effective for fiscal yearsbeginning after December 15, 2001. Under the new standards, goodwill will nolonger be amortized, but will be subject to an annual impairment test. Thestandards also promulgate new requirements for accounting for other intangibleassets. The impact of the new standards on our financial position and resultsof operations has not yet been determined, but we believe they will not bematerial.

 

 

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

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 September 25,2000 and September 24, 2001:*

 

*Revenues.*  Total revenues from continuing operationsdecreased to $68.3 million in the third quarter of 2001 from $73.0 million inthe third quarter of 2000.  Afterincreasing 15.4% in the third quarter of 2000 compared to 1999, same-storesales decreased 8.7% in the third quarter of 2001 compared to 2000. Themagnitude of the unusual revenue increase of the prior year, general economicsoftness in 2001, and the economic and consumer reactions to the disastrousSeptember 11th terrorist attacks in the United States contributed tothis year’s same-store sales decline. There were 105 Black Angus restaurants operating as of September 24,2001 and 103 Black Angus restaurants operating as of September 25, 2000.

 

*Food and Beverage Costs.*  As a percentage of revenues, food andbeverage costs from continuing operations decreased to 32.9% in the thirdquarter of 2001 from 35.3% in the third quarter of 2000.  The decrease relates primarily to a 35.1%food cost in the third quarter of 2001, a decrease from 38.1% food cost in thethird quarter of 2000, and was largely attributable to savings from lower meatprices.

 

*PayrollCosts.*  As apercentage of revenues, labor costs from continuing operations increased to30.2% in the third quarter of 2001 from 27.1% in the third quarter of2000.  The increase is primarily theresult of the difficulty in balancing our projections of unit staff levelsnecessary to maintain our high level of customer service against theunpredictable and volatile revenue shifts, as well as increases in Federal andstate minimum-wage rates.

 

*DirectOperating Costs.* Direct operating costs consist of occupancy, advertising, and otherexpenses incurred by individual restaurants. As a percentage of revenues, these costs from continuing operationsincreased to 26.0% in the third quarter of 2001 from 24.3% in the third quarterof 2000.  The increase relates primarilyto revisions of our estimate of unredeemed gift certificates and the increasedutility expenses.

 

*Depreciationand Amortization.* Depreciation and amortization consists of depreciation of fixed assetsas well as amortization of intangible assets. As a percentage of revenues, depreciation and amortization fromcontinuing operations increased to 3.1% in the third quarter of 2001 from 3.0%in the third quarter of 2000.

 

*Generaland Administrative Expenses.* General and administrative expenses from continuing operations increasedto $2.4 million in the third quarter of 2001 from $1.7 million in the third quarter of 2000. Theincrease is primarily related to achieving proper staffing levels at the newcorporate headquarters following the Stock Sale.

 

*OperatingProfit.*  As a resultof the above items, profit from continuing operations decreased to $2.9 millionin the third quarter of 2001 from $5.8 million in the third quarter of2000.  As a percentage of revenues,profit from continuing operations decreased to 4.2% in the third quarter of2001 compared to 8.0% in the third quarter of 2000.

 

*InterestExpense – Net.* Our interest expense decreased to $4.3 millionin the third quarter of 2001 from $4.8 million in the third quarter of 2000.The decrease resulted from paying down $16 million of principal on the OldNotes in December 2000.

 

*Thirty-nine weeks ended September25, 2000 and September 24, 2001:*

 

*Revenues.*  Total revenues from continuing operationsincreased to $226.8 million in  2001from $226.6 million in 2000.  Afterincreasing 10.7% in 2000, same-store sales decreased 2.7% in 2001. There were105 Black Angus restaurants operating as of September 24, 2001 and 103 BlackAngus restaurants operating as of September 25, 2000.

 

*Food and Beverage Costs.*  As a percentage of revenues, food andbeverage costs from continuing operations decreased to 33.3% in 2001 from 34.3%in 2000.  The decrease relates primarilyto savings from the cutting of steaks at the restaurants and favorable meatprices.

 

*PayrollCosts.*  As apercentage of revenues, labor costs from continuing operations increased to28.6% in 2001 from 26.8% in 2000.  Theincrease is primarily a result of an increase in the Federal and stateminimum-wage rates, and a reduction in the number of assigned tables per foodserver to improve customer service.

 

*DirectOperating Costs.* Direct operating costs consist of occupancy, advertising, and otherexpenses incurred by individual restaurants. As a percentage of revenues, these costs from continuing operationsincreased to 23.7% in 2001 from 23.3% in 2000. The increase relates primarilyto revisions to our estimate of unredeemed gift certificates and increasedutility expenses, which were offset by a reduction in the advertising expenseby a relocation of media in 2001.

 

*Depreciationand Amortization.* Depreciation and amortization consists of depreciation of fixed assetsas well as amortization of intangible assets. As a percentage of revenues, depreciation and amortization fromcontinuing operations decreased to 2.9% in 2001 from 3.2% in 2000.  The decrease relates primarily to corporateassets we did not retain pursuant to the Stock Sale.

 

*Generaland Administrative Expenses.* General and administrative expenses from continuing operations decreasedto $7.2 million in 2001 from $7.7 million in 2000.  The decrease relates to the reduction of corporate expenses as aresult of the Stock Sale and reduction of other overhead expenses.

 

*OperatingProfit.*  As a resultof the above items, profit from continuing operations decreased to $18.8million in 2001 from $20.3 million in 2000. As a percentage of revenues, profit from continuing operations decreasedto 8.3% in 2001 from 9.0% in 2000.

 

*InterestExpense – Net.*  Ourinterest expense decreased to $12.8 million in 2001 from $14.3 million in2000.  The decrease resulted from payingdown $16 million of principal on the Old Notes in December 2000.

 

***Net Income from Discontinued Operations****.*Effective June 26, 2000, we sold all of the outstanding stock of the Non-BlackAngus Subsidiaries.

 

The following is a summary of the net income/(loss) from discontinuedoperations for the thirty-nine weeks ended September 25, 2000.  There was no activity in the third andfourth quarter of 2000 and the entire year 2001.

 
| **($000)**                              | **September 25, 2000** |
|-----------------------------------------|------------------------|
| Revenues                                |                   | $ | 65,111 |
| Food and  Beverage Costs                |                   | 17,123 |
| Payroll Costs                           |                   | 21,605 |
| Direct  Operating Costs                 |                   | 16,888 |
| Depreciation and  Amortization          |                   | 2,003 |
| General  and Administrative             |                   | 3,137 |
| Loss  on Impairment of Assets           |                   | 112 |
| Grandy’s  Conversion:              |                   |   |
| Loss on Sale of  Assets                 |                   | 752 |
| Operating  Profit                       |                   | 3,491 |
| Income  Before Taxes                    |                   | 3,491 |
| Provision for  Income Taxes             |                   | 17 |
| Net Income from Discontinued Operations |                   | $ | 3,474 |
|                                         |                        |  |  |  |

 

 

**Liquidityand Capital Resources**

 

Our primary sources ofliquidity are cash flows from operations and borrowings under our revolvingcredit facility.  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 September 24, 2001, we had cash ofapproximately $3.9 million.

 

In general, restaurant businessesdo not have significant accounts receivable because sales are made for cash orby credit-card vouchers, which are ordinarily paid within three to fivedays.  The restaurants do not maintainsubstantial inventory as a result of the relatively brief shelf life andfrequent 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 September 24, 2001,we had a working-capital deficit of $20.1 million.

 

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 forgeneral corporate purposes.  Totalcapital expenditures for continuing operations were approximately $1.9 millionthrough the third quarter of 2001 and $6.4 million through the third quarter of2000.  We estimate that capitalexpenditures in 2001 will be approximately $4.0 million.  We intend to open new restaurants with smallcapital outlays and to finance most of the expenditures through mortgages oncapital equipment.

 

On October 31, 2001 wecompleted a Refinancing, which is described in Note 3.

 

Under the Old Notes, weare obligated to make semi-annual interest payments on February 15 and August15 through February 2003.  Accordingly,we made interest payments of $8.2 million in February and August 2001.  Under the New Notes, we are obligated tomake semi-annual interest payments on May 1 and November 1 through November2006.

 

Our revolvingcredit facility presently provides for up to $15 million in borrowings, $8.0million of which can be used to support letters of credit. On January 1, 2002,the total commitment under this revolving credit facility will reduce to $12million and will further reduce to $10 million on March 31, 2002.  As of September 24, 2001, we hadapproximately $5.7 million of letters of credit outstanding and $4.0 milliondrawn, leaving approximately $5.4 million remaining under the revolving creditfacility.  We are working to amend ourexisting revolving credit facility to extend its maturity or to replace it witha new facility with a longer maturity. We cannot assure you that we will be able successfully to amend orreplace the existing revolving credit facility.

 

Substantially all ourassets are pledged to our senior lenders. In addition, our direct subsidiaries guarantee our indebtedness and suchguarantees are secured by substantially all of the assets of the subsidiaries.In connection with such indebtedness, contingent and mandatory prepayments maybe required under certain specified conditions and events.  There are no compensating balancerequirements.

 

Although we arehighly leveraged, based upon current levels of operations and anticipatedgrowth, we expect that cash flows generated from operations together with ourother available sources of liquidity will be adequate to make required paymentsof principal 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 all the seniorindebtedness upon maturity and, accordingly, we expect to refinance all or aportion of such debt, obtain new financing, or possibly sell assets.

 

 

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

 

Themarket risk of our financial instruments as of September 24, 2001 has notmaterially changed since December 25, 2000. The market risk profile on December 25, 2000 is disclosed in our annualreport on Form 10-K, File No. 33-48183, for the year ended December 25, 2000.

 

**PART II.                OTHER INFORMATION**

 

Not Applicable

 

 

**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:  | November 7, 2001                 |                                   | By: | /s/ Ralph S.  Roberts |
|   |                             | Ralph S. Roberts                       |
|   |                             | Chief Executive  Officer and President |
|   |                             |                                   |
|        |                                  |                                        |  |  |  |