**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-Q**

 
| **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**                                                                                                                                                                                                                                                                   |
|                                          |   |                                                                                                                                                                                                                                                                                                               |
| **o**                                         |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                      |
|                                          |   |                                                                                                                                                                                                                                                                                                               |
|                                          |   | **For the transition period from                          to                        ** |
|                                          |   |                                                                                                                                                                                                                                                                                                               |
| **Commission File Number   1-9684** |

 

**ANGELO AND MAXIE’S, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    |   | **33-0147725**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  Incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **2 North Riverside, Seventh Floor, Chicago,  IL 60606**        |
| (Address of principal executive offices, including zip code)    |
|                                                            |   |                                  |
| **(312) 466-3950**                                              |
| (registrant’s telephone number, including area code)       |

 

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

 

Yes   ý    No  o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined by Rule12b-2 of the Exchange Act).

 

Yes   o    No  ý

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of August 13, 2003:

 

Common Stock ($.01 par value) **1,994,877**

 

 

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**PART I - FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS.**

 

**ANGELO AND MAXIE’S,INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCESHEETS**

**(In thousands, exceptshare data)**

 
|                                                                                                                                                                      |   | **June 30,  2003** |   | **December  30, 2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|------------------------|--------|
|                                                                                                                                                                      |   | **(Unaudited)**    |   |                   |   |
| **ASSETS**                                                                                                                                                                |   |               |   |                   |   |
| Current assets:                                                                                                                                                           |   |               |   |                   |   |
| Cash and cash equivalents                                                                                                                                                 |   | $                  | 6,144  |                   | $      | 7,651 |   |
| Accounts receivable, net                                                                                                                                                  |   | 519                |   | 541                    |   |
| Inventories                                                                                                                                                               |   | 382                |   | 416                    |   |
| Prepaid expenses and other  current assets                                                                                                                                |   | 708                |   | 974                    |   |
| Total current assets                                                                                                                                                      |   | 7,753              |   | 9,582                  |   |
| Equipment and  improvements:                                                                                                                                              |   |               |   |                   |   |
| Equipment                                                                                                                                                                 |   | 3,792              |   | 3,708                  |   |
| Leasehold interests and  improvements                                                                                                                                     |   | 12,040             |   | 12,554                 |   |
|                                                                                                                                                                      |   | 15,832             |   | 16,262                 |   |
| Less: Accumulated  depreciation and amortization                                                                                                                          |   | 3,192              |   | 2,934                  |   |
| Equipment and  improvements, net                                                                                                                                          |   | 12,640             |   | 13,328                 |   |
| Other non-current assets:                                                                                                                                                 |   |               |   |                   |   |
| Restricted cash                                                                                                                                                           |   | 2,702              |   | 2,702                  |   |
| Leased property under  capital leases, net                                                                                                                                |   | 1,107              |   | 1,136                  |   |
| Intangibles, net                                                                                                                                                          |   | —             |   | 4,278                  |   |
| Other non-current assets                                                                                                                                                  |   | 534                |   | 542                    |   |
| Total other non-current  assets                                                                                                                                           |   | 4,343              |   | 8,658                  |   |
| Total assets                                                                                                                                                              |   | 24,736             |   | 31,568                 |   |
|                                                                                                                                                                      |   |               |   |                   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                            |   |               |   |                   |   |
| Current liabilities:                                                                                                                                                      |   |               |   |                   |   |
| Current portion of  non-current liabilities                                                                                                                               |   | 30                 |   | 124                    |   |
| Accounts payable                                                                                                                                                          |   | 1,160              |   | 1,679                  |   |
| Accrued liabilities                                                                                                                                                       |   | 3,694              |   | 4,322                  |   |
| Deferred gain                                                                                                                                                             |   | 967                |   | —                 |   |
| Liabilities of  discontinued operations                                                                                                                                   |   | —             |   | 170                    |   |
| Total current liabilities                                                                                                                                                 |   | 5,851              |   | 6,295                  |   |
| Non-current liabilities  (excluding current portion):                                                                                                                     |   |               |   |                   |   |
| Deferred gain                                                                                                                                                             |   | —             |   | 967                    |   |
| Long-term portion of  landlord note                                                                                                                                       |   | —             |   | 407                    |   |
| Long-term portion of  capital lease obligation                                                                                                                            |   | 1,862              |   | 1,877                  |   |
| Other long-term  obligations                                                                                                                                              |   | 805                |   | 921                    |   |
| Total non-current  liabilities (excluding current portion)                                                                                                                |   | 2,667              |   | 4,172                  |   |
|                                                                                                                                                                      |   |               |   |                   |   |
| Stockholders’ equity:                                                                                                                                                |   |               |   |                   |   |
| Preferred stock, $1.00 par  value, 10,000,000 shares authorized; 4,134,736 shares issued and outstanding  at June 30, 2003 and December 30, 2002                          |   | 4,135              |   | 4,135                  |   |
| Common stock, $0.01 par  value, 30,000,000 shares authorized; 1,994,877 and 1,978,733 shares issued  and outstanding at June 30, 2003 and December 30, 2002, respectively |   | 20                 |   | 20                     |   |
| Additional paid-in capital                                                                                                                                                |   | 65,434             |   | 65,416                 |   |
| Retained deficit                                                                                                                                                          |   | (53,371            | )      | (48,470                | )      |
| Total stockholders’ equity                                                                                                                                           |   | 16,218             |   | 21,101                 |   |
| Total liabilities and  stockholders’ equity                                                                                                                          |   | $                  | 24,736 |                   | $      | 31,568 |   |

 

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

 

1

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**ANGELO AND MAXIE’S,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(In thousands, exceptper share data)**

**(Unaudited)**

 
|                                                     |   | **Quarterly  periods ended** |   | **Six month  periods ended** |   |
|----------------------------------------------------------|--------|------------------------------|--------|------------------------------|--------|
|                                                     |   | **June 30,  2003**           |   | **July 1,  2002**            |   | **June 30,  2003** |   | **July 1,  2002** |   |
|                                                     |   |                         |   |                         |   |   |   |   |   |
| Revenues                                                 |   | $                            | 6,418  |                         | $      | 6,729 |   | $ | 13,223 |   | $ | 14,056 |   |
| Operating costs and  expenses:                           |   |                         |   |                         |   |   |   |   |   |
| Cost of sales                                            |   | 2,278                        |   | 2,353                        |   | 4,717 |   | 5,003 |   |
| Restaurant labor                                         |   | 1,478                        |   | 1,628                        |   | 3,049 |   | 3,360 |   |
| Other operating costs                                    |   | 1,202                        |   | 1,307                        |   | 2,361 |   | 2,774 |   |
| Rent                                                     |   | 600                          |   | 546                          |   | 1,201 |   | 1,056 |   |
| Total restaurant costs                                   |   | 5,558                        |   | 5,834                        |   | 11,328 |   | 12,193 |   |
| General and administrative  expenses                     |   | 691                          |   | 121                          |   | 1,359 |   | 318 |   |
| Depreciation and  amortization                           |   | 294                          |   | 417                          |   | 614 |   | 881 |   |
| Impairment of assets and  restructuring charges          |   | 4,413                        |   | 7,061                        |   | 4,413 |   | 7,061 |   |
| (Gain) loss on disposal of  assets                       |   | (2                           | )      | —                       |   | 9 |   | 2 |   |
| Total restaurant and  operating costs                    |   | 10,954                       |   | 13,433                       |   | 17,723 |   | 20,455 |   |
| Loss from operations                                     |   | (4,536                       | )      | (6,704                       | )      | (4,500 | ) | (6,399 | ) |
| Interest expense, net                                    |   | 22                           |   | 1,151                        |   | 52 |   | 2,037 |   |
| Other income                                             |   | (51                          | )      | (50                          | )      | (102 | ) | (100 | ) |
| Loss from continuing  operations before income taxes     |   | (4,507                       | )      | (7,805                       | )      | (4,450 | ) | (8,336 | ) |
| Provision for income taxes                               |   | —                       |   | —                       |   | — |   | — |   |
| Loss from continuing  operations                         |   | (4,507                       | )      | (7,805                       | )      | (4,450 | ) | (8,336 | ) |
| Discontinued operations:                                 |   |                         |   |                         |   |   |   |   |   |
| Income from operations                                   |   | —                       |   | 1,381                        |   | — |   | 951 |   |
| Income (loss) on sale                                    |   | 13                           |   | (3,681                       | )      | 13 |   | (3,681 | ) |
| Income (loss) from  discontinued operations              |   | 13                           |   | (2,300                       | )      | 13 |   | (2,730 | ) |
| Net loss                                                 |   | $                            | (4,494 | )                            | $      | (10,105 | ) | $ | (4,437 | ) | $ | (11,066 | ) |
| Preferred dividends                                      |   | 232                          |   | 225                          |   | 464 |   | 447 |   |
| Net loss applicable to  common shares                    |   | $                            | (4,726 | )                            | $      | (10,330 | ) | $ | (4,901 | ) | $ | (11,513 | ) |
|                                                     |   |                         |   |                         |   |   |   |   |   |
| Net income (loss) per  common share - basic and diluted: |   |                         |   |                         |   |   |   |   |   |
| Continuing operations                                    |   | $                            | (2.38  | )                            | $      | (4.06 | ) | $ | (2.47 | ) | $ | (4.44 | ) |
| Discontinued operations                                  |   | .01                          |   | (1.16                        | )      | .01 |   | (1.38 | ) |
|                                                     |   | $                            | (2.37  | )                            | $      | (5.22 | ) | $ | (2.46 | ) | $ | (5.82 | ) |
|                                                     |   |                         |   |                         |   |   |   |   |   |
| Weighted-average shares  outstanding                     |   | 1,993                        |   | 1,979                        |   | 1,991 |   | 1,978 |   |

 

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

 

2

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**ANGELO AND MAXIE’S,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands,unaudited)**

 
|                                                                                         |   | **Six month  periods ended** |     |
|----------------------------------------------------------------------------------------------|--------|------------------------------|----------|
|                                                                                         |   | **June 30,  2003**           |     | **July 1,  2002** |   |
| Cash flows from operating  activities:                                                       |   |                         | * * |   | * * |
| Net loss                                                                                     |   | $                            | (4,437   | ) | $ | (11,066 | ) |
| Adjustments to reconcile  net loss to cash flows (used in) provided by operating activities: |   |                         |     |   |   |
| Depreciation and  amortization                                                               |   | 614                          |     | 2,928 |   |
| Loss on disposal of assets                                                                   |   | 9                            |     | 2 |   |
| Loss provision for  impairment of assets and restructuring charges                           |   | 4,399                        |     | 7,061 |   |
| Provision for estimated  loss on disposal                                                    |   | —                       |     | 3,681 |   |
| Common stock issued in  lieu of compensation                                                 |   | 18                           |     | 70 |   |
| Amortization of debt  issuance costs, included in interest expense                           |   | —                       |     | 273 |   |
| Changes in working  capital:                                                                 |   |                         |     |   |   |
| Decrease in accounts  receivable                                                             |   | 22                           |     | 82 |   |
| Decrease in inventories                                                                      |   | 34                           |     | 169 |   |
| Decrease (increase) in  prepaid expenses and other current assets                            |   | 266                          |     | (242 | ) |
| Decrease in assets held  for disposal                                                        |   | —                       |     | 37 |   |
| Decrease in other  non-current assets                                                        |   | 8                            |     | 26 |   |
| (Decrease) increase in  accounts payable                                                     |   | (519                         | )        | 56 |   |
| (Decrease) increase in  accrued liabilities                                                  |   | (628                         | )        | 161 |   |
| Decrease in liabilities of  discontinued operations                                          |   | (170                         | )        | (2,639 | ) |
| (Decrease) increase in  other non-current obligations (excluding current portion)            |   | (116                         | )        | 598 |   |
| Cash (used in) provided by  operating activities                                             |   | (500                         | )        | 1,197 |   |
| Cash flows used in  investing activities:                                                    |   |                         |     |   |   |
| Expenditures for equipment  and improvements                                                 |   | (27                          | )        | (121 | ) |
| Cash used in investing  activities                                                           |   | (27                          | )        | (121 | ) |
| Cash flows used in  financing activities:                                                    |   |                         |     |   |   |
| Debt issuance costs                                                                          |   | —                       |     | (400 | ) |
| Net payments under  revolving credit agreement                                               |   | —                       |     | (200 | ) |
| Preferred dividends                                                                          |   | (464                         | )        | — |   |
| Payments of long-term debt                                                                   |   | (501                         | )        | (400 | ) |
| Reduction of obligations  under capital leases                                               |   | (15                          | )        | (120 | ) |
| Cash used in financing  activities                                                           |   | (980                         | )        | (1,120 | ) |
| Decrease in cash                                                                             |   | (1,507                       | )        | (44 | ) |
| Cash and cash equivalents,  beginning of period                                              |   | 7,651                        |     | 260 |   |
| Cash and cash equivalents,  end of period                                                    |   | $                            | 6,144    |   | $ | 216 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

3

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**ANGELO AND MAXIE’S,INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**June 30, 2003**

**(Unaudited)**

 

**(1)****           BASISOF PRESENTATION**

 

Theaccompanying consolidated financial statements of Angelo and Maxie’s, Inc. andits wholly-owned subsidiaries (the “Company”) for the quarterly periods endedJune 30, 2003 and July 1, 2002, and the six month periods ended June 30, 2003and July 1, 2002, have been prepared in accordance with generally acceptedaccounting principles, and with the instructions to Form 10-Q.  These financial statements have not beenaudited by independent public accountants, but include all adjustments(consisting of a normal and recurring nature) that are, in the opinion ofmanagement, necessary for a fair presentation of the financial condition, resultsof operations, and cash flows for such periods. However, these results are notnecessarily indicative of results for any other interim period or for the fullfiscal year.

 

Thepreparation of financial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities as of the date of the financial statements and thereported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

Certaininformation and footnote disclosures normally included in financial statementsin accordance with generally accepted accounting principles have been omittedpursuant to requirements of the Securities and Exchange Commission.  Management believes that the disclosuresincluded in the accompanying interim financial statements and footnotes areadequate, but should be read in conjunction with the consolidated financialstatements and notes thereto included in the Company’s Annual Report on Form10-K for the year ended December 30, 2002.

 

Certain priorperiod balances have been reclassified to conform to the current periodpresentation.

 

**(2)****           SALEOF CHART HOUSE BUSINESS**

 

In May 2002,the Board of Directors of the Company authorized the sale of the 38 Chart Houserestaurants and 1 Peohe’s restaurant (the “Chart House Business”).  The sale was completed as of July 30, 2002,for consideration of approximately $55.3 million, consisting of cash and theassumption of approximately $3.1 million of certain current liabilities thenoutstanding.  The Company used a portionof the proceeds to repay all amounts outstanding on its senior, secured debtand a subordinated note owed to a related party.  See Note 4 “Debt.”  TheCompany recorded a provision for estimated loss on sale of discontinuedoperations of $3.7 million in second quarter of 2002, which was revised to $2.4million in the third quarter of 2002, primarily as a result of the eliminationof net liabilities to landlords following the receipt of the landlords’ consentto assign certain leases to the Purchaser. In the quarterly period ended June 30, 2003, the Company furtheradjusted its liabilities associated with the sale resulting in a $13,000gain.  At June 30, 2003, the Purchaserhad not yet paid approximately $0.2 million of the purchase price provided forin the asset purchase agreement.  TheCompany has taken legal action to collect these funds.  See “Part II, Item 1. Legal Proceedings.”

 

Through July29, 2002, the Company owned the Chart House Business which consisted of 38Chart House and one Peohe’s restaurants, the operations of which have beenreported as discontinued.   Condensedfinancial information for the results of operations for the discontinuedoperations is as follows (in thousands):

 
|                                 |   | **Quarterly  period ended  July 1, 2002** |       | **Si****x month period  ended  July 1, 2002** |       |
|--------------------------------------|--------|-------------------------------------------|------------|-----------------------------------------------|------------|
|                                 |   |                                      | ** ** |                                          | ** ** |
| Revenues                             |   | $                                         | 31,318     |                                          | $          | 59,183 |   |
| Total restaurant costs               |   | 27,127                                    |       | 51,798                                        |       |
| General and administrative  expenses |   | 2,008                                     |       | 4,387                                         |       |
| Depreciation and  amortization       |   | 802                                       |       | 2,047                                         |       |
| Income from discontinued  operations |   | $                                         | 1,381      |                                          | $          | 951 |   |

 

4

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**(3)****           IMPAIRMENTOF ASSETS AND RESTRUCTURING CHARGES**

 

On January 1,2002, the Company adopted Statement of Financial Accounting Standards No. 142,“Accounting for Goodwill and Other Intangible Assets” (“SFAS 142”), whichrequires, among other things, that effective January 1, 2002, goodwill and certainother intangible assets resulting from a business combination accounted for asa purchase no longer be amortized, but be subject to ongoing impairmentreview.  In connection with thetransitional goodwill and certain other intangible assets impairment evaluation,SFAS 142 required the Company to perform an assessment of whether there was anindication that goodwill and certain other intangible assets were impaired asof the date of adoption.  To accomplishthis evaluation, the Company determined the carrying value of each reportingunit by assigning the assets and liabilities, including the existing goodwilland certain other intangible assets, to those reporting units as of the date ofadoption.  During the second quarters of2002 and 2003, the Company completed its required review by comparing itscarrying value for the Angelo and Maxie’s restaurant business to estimated fairmarket value.  In determining theestimated fair market value of its assets, management considers several factorsrequiring the exercise of its business judgment.  Such business judgment includes developing valuation multiplessuch as the ratio of total capitalized value to restaurant earnings beforeinterest, taxes, depreciation, and amortization for an industry peer group ofpublicly traded companies and applying those ratios to the Company’s historicaland projected operating performance.  Such evaluation indicated that the recorded value of goodwill and tradename of Angelo and Maxie’s was impaired by $5.4 million and $4.3 million at theend the second quarters of 2002 and 2003, respectively.  The Company also recorded a $1.7 millioncharge during the second quarter of 2002 for severance expenses incurred due tothe corporate work force reduction associated with the sale of the Chart HouseBusiness.

 

In June 2002,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 146, “Accounting for Costs from Exit or DisposalActivities” (“FAS 146”).  FAS 146requires, among other things, that a liability for costs associated with anexit or disposal activity be recognized when the liability is incurred ratherthan at the time of commitment to a formal shutdown plan.  The adoption of FAS 146 is effective for allexit or disposal activities initiated subsequent to December 31, 2002.  The Company has adopted FAS 146 as ofJanuary 1, 2003 with no material impact.

 

On June 30,2003 the Company’s lease on its Chicago corporate headquarters expired and theCompany relocated to a space commensurate with its current needs.  In connection therewith, the Companyrecorded a $0.1 million charge during the second quarter of 2003 resulting fromthe Company receiving lower than anticipated proceeds for the sale and disposalof its furniture and equipment located at the vacated facility.

 

**(4)****          DEBT**

 

During thesecond quarter of 2003, the Company prepaid, without penalty, two notesaggregating to $0.5 million that were held by one of its landlords. The notesoriginally were in the aggregate amount of $0.7 million, amortized over sevenyear terms, bore interest at 9.0%, and were payable in monthlyinstallments.  The Company madescheduled principal payments on these notes totaling $23,000 (prior torepayment) and $21,000 during the second quarterly periods of 2003 and 2002,respectively, and $46,000 (prior to repayment) and $42,000 during the six monthperiods ended June 30, 2003 and July 1, 2002, respectively.  Interest expense and cash paid for interestrelated to these notes amounted to $7,000 and $13,000 for the second quartersof 2003 and 2002, respectively, and $18,000 and $26,000 for the six monthsperiods ended June 30, 2003 and July 1, 2002, respectively.

 

During thequarterly and six month periods ended July 1, 2002, the Company had a RevolvingCredit and Term Loan Agreement (“Credit Agreement”) with a group of threebanks.  At July 1, 2002, the Company had$24.6 million outstanding under the Credit Agreement, which accrued interest atthe prime rate, plus 2.75% (7.5% at July 1, 2002).  The balance outstanding under the Credit Agreement included $1.5million funded by EGI-Fund (01) Investors, L.L.C. (“EGI-Fund (01)”), a relatedparty, which accrued interest at LIBOR plus 14.0% (15.84% at July 1, 2002) dueto the subordinate nature of the related party’s participation in the CreditAgreement.  Interest expense and cashpaid for interest related to the Credit Agreement totaled $0.9 million and $1.6million, respectively, for the second quarter of 2002.  Interest expense and cash paid for interestrelated to the Credit Agreement totaled $1.4 million and $1.6 million,respectively, for the six month period ended July 1, 2002.  On August 1, 2002, all outstanding amountsunder the Credit Agreement were paid in full with net proceeds from the sale ofthe Chart House Business.

 

During thequarterly and six month periods ended July 1, 2002, the Company had a $5.0million note owed to EGI-Fund (01), which accrued interest at the applicableEurodollar rate plus 16.0%, which was 17.84% at July 1, 2002.  Interest expense related to this notetotaled $0.3 million and $0.6 million for the quarterly and six month periodsended July 1, 2002, respectively; no cash payments were made for interestrelated to this note during the periods. On August 1, 2002, the note owed to EGI-Fund (01) was paid in full withnet proceeds from the sale of the Chart House Business.

 

5

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**(5)****           STOCK-BASEDCOMPENSATION**

 

In December2002, the Financial Accounting Standards Board issued Financial AccountingStandards No. 148, “Accounting for Stock-Based Compensation – Transition andDisclosure, an amendment of FASB Statement No. 123” (“FAS 148”).  This Statement amends Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”)to provide alternative methods of transition for a voluntary change to the fairvalue method of accounting for stock-based employee compensation.  In addition, FAS 148 amends the disclosurerequirements of FAS 123 to require prominent disclosures regarding theaccounting for stock-based employee compensation in both annual and interimfinancial statements.  The Company haspreviously adopted this Standard.

 

The Companyhas elected to account for stock-based compensation under the intrinsic valuemethod of accounting. This method measures compensation cost as the excess, ifany, of the quoted market price of the Company’s common stock at the grant dateover the amount the employee must pay for the stock. The Company’s policy is togrant stock options to purchase the Company’s stock at a price equal to fairmarket value at the date of grant.  Hadthe Company elected to recognize compensation expense determined under the fairvalue method of accounting for stock-based compensation as prescribed by FAS123 and FAS 148, the Company’s net loss applicable to common shares and pershare amounts would reflect the following pro forma amounts (in thousands,except for per share data):

 
|                                            |   | **Quarterly  periods ended** |   | **Six month  periods ended** |   |
|-------------------------------------------------|--------|------------------------------|--------|------------------------------|--------|
|                                            |   | **June 30,  2003**           |   | **July 1, 2002**             |   | **June 30,  2003** |   | **July 1,  2002** |   |
| Net loss applicable to  common shares:          |   |                         |   |                         |   |   |   |   |   |
| As reported                                     |   | $                            | (4,726 | )                            | $      | (10,330 | ) | $ | (4,901 | ) | $ | (11,513 | ) |
| Pro forma                                       |   | (4,726                       | )      | (10,338                      | )      | (4,901 | ) | (11,589 | ) |
| Net loss per common shares  - Basic and diluted |   |                         |   |                         |   |   |   |   |   |
| As reported                                     |   | $                            | (2.37  | )                            | $      | (5.22 | ) | $ | (2.46 | ) | $ | (5.82 | ) |
| Pro forma                                       |   | (2.37                        | )      | (5.22                        | )      | (2.46 | ) | (5.86 | ) |

 

**(6)****           RELATEDPARTY TRANSACTIONS**

 

Payments torelated parties for rent at one restaurant approximated $0.1 million in boththe second quarters of 2003 and 2002, and approximated $0.2 million in both thesix month periods ended June 30, 2003 and July 1, 2002.

 

During 2001and 2002, the Company was party to a marketing agreement with iDine RewardsNetwork, Inc. (“iDine”), a related party and owner of the iDine frequent dinerprogram.  In connection with the advancesale of discounted food and beverage credits, the Company received advertisingin iDine publications and through the relationships iDine had established withmajor airlines to feature the Company’s restaurants as preferred diningchoices.  iDine provided web and printpromotional services that were designed to create incentives for members todine at the Company’s restaurants, especially during the Company’s restaurants’non-peak days.  The Company receivedfrom iDine $1.0 million in the three month period ended April 1, 2002.  Pursuant to the agreement, the Company paid$1.2 million and $2.5 million during the quarterly and six month periods endedJuly 1, 2002, respectively, to iDine for its marketing services during thoseperiods and for advances, including those received in the second half of2001.  This agreement was terminated asof July 29, 2002, in conjunction with the sale of the Chart House Business.  See Note 2 “Sale of Chart HouseBusiness.”  The Company has no furtherobligations under this agreement.

 

The Companyhas entered into a loaned employee agreement with iDine, which provides for,among other things, that the Company’s President and Chief Executive Officerprovide advisory services to iDine’s Executive Management Team for up tosixteen hours per week, in exchange for a fixed amount to be paid to theCompany.  The original agreementcommenced May 19, 2003 and expired June 30, 2003.  Subsequently, the agreement has been amended by the Company andiDine to extend the termination date from June 30, 2003 to August 8, 2003.  See Note 8 “Subsequent Events.”  During the quarterly period ended June 30,2003 the Company recognized $13,000 of service revenues in connection with thisagreement.  The $13,000 of servicerevenues due to the Company was outstanding as of June 30, 2003.

 

On June 26,2003, the Company entered into an operating lease for office space with arelated party.  This agreement providesfor, among other things, that the landlord provide office space for theCompany’s six corporate employees and certain office services for $4,000 permonth.  This agreement is terminable byeither party with a thirty day notice. The Company made no payments pursuant to this agreement in the quarter endedJune 30, 2003.

 

6

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Therelationships stem from one or more Company stockholders and/or members of theCompany’s Board of Directors maintaining ownership interest in and influentialmanagement positions at or with these organizations.

 

**(7)**           **COMMITMENTS AND CONTINGENCIES**

 

The Companyperiodically is a defendant in litigation incidental to its businessactivities.  While any litigation orinvestigation has an element of uncertainty, the Company believes that theoutcome of any of these matters will not have a material adverse effect on itsfinancial condition or operations.

 

The Companymaintains letters of credit primarily to cover self-insurance reserves andlease obligations.  In connection withthe termination of the Credit Agreement, and in order to minimize costsassociated with outstanding letters of credit, the Company established a cashcollateral account equal to the full balance of its obligations underoutstanding letters of credit, which totaled $2.7 million at June 30,2003.  Such funds are presented on theconsolidated balance sheets as restricted cash, a non-current asset.

 

**(8)**           **SUBSEQUENT EVENTS**

 

On August 6,2003, the Company's Board of Directors approved the sale of three of theCompany's five Angelo and Maxie's Steakhouses. The transaction is subject to the completion of definitive agreementsand is expected to close in January 2004.

 

The Company’sBoard of Directors has approved a recommendation from its President and ChiefExecutive Officer to further reduce his time commitment to the Company.  In connection therewith, the Company’sloaned employee agreement with iDine Rewards Network, Inc. (“iDine”) has beenterminated.  See Note 6 “Related PartyTransaction.”  The President and ChiefExecutive Officer has entered into an employment agreement with iDine for asenior management position at iDine commencing August 11, 2003.    This employment agreement provides for,among other things, the President and Chief Executive Officer’s continued involvementwith the Company.

 

**(9)**           **NEW ACCOUNTING PRONOUNCEMENTS**

 

In November2002, the Financial Accounting Standards Board issued Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (“FIN 45”), which addresses thedisclosure to be made by a guarantor in its interim and annual financialstatements about its obligations under guarantees.  These disclosure requirements have been adopted by theCompany.  FIN 45 also requires therecognition of a liability by a guarantor at the inception of certainguarantees entered into subsequent to January 1, 2003.  FIN 45 requires the guarantor to recognize aliability for the non-contingent component of the guarantee, which is the obligationto stand ready to perform in the event that specified triggering events orconditions occur.  The initialmeasurement of this liability is the fair value of the guarantee at inception.  The recognition of the liability is requiredeven if it is not probable that payment will be required under the guarantee orif the guarantee was issued with a premium payment or as part of a transactionwith multiple events.  The Company hasadopted the disclosure requirements of FIN 45 and will apply the recognitionand measurement provisions for all guarantees entered into or modified afterDecember 31, 2002.  The Company has notentered into or modified any guarantees subsequent to December 31, 2002.

 

In January2003, the Financial Accounting Standards Board issued Interpretation No. 46,“Consolidation of Variable Interest Entities, an interpretation of ARB No. 51”(“FIN 46”).  FIN 46 addresses theconsolidation by business enterprises of variable interest entities as definedtherein. The Interpretation applies immediately to variable interests invariable interest entities created after January 31, 2003, and to variableinterests in variable interest entities obtained after January 31, 2003.  The Company currently has no contractualrelationships or other business relationships with a variable interest entityand therefore the adoption of FIN 46 did not have a material effect on theCompany’s consolidated financial position, results of operations, or cash flowsfor the current periods presented.

 

In May 2003,the Financial Accounting Standards Board issued Financial Accounting StandardsNo. 150, “Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity.”  ThisStatement establishes standards for how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequity.  It requires that an issuerclassify a financial instrument that is within its scope as a liability (or anasset in some circumstances).  ThisStatement is effective for financial instruments entered into or modified afterMay 31, 2003, and otherwise is effective at the beginning of the first interimperiod beginning after June 15, 2003. The Company adopted this Standard on July 1, 2003, with no materialimpact.

 

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*This Quarterly Report on Form 10-Q and thedocuments incorporated herein by reference contain forward-looking statementsthat have been made pursuant to provisions of the Private Securities LitigationReform Act of 1995.  Forward-lookingstatements represent the Company’s expectations or beliefs concerning futureevents, including any statements regarding: future sales and gross profitpercentages, the continuation of historical trends, the sufficiency of theCompany’s cash balances, and cash generated from operating, financing and/orinvesting activities for the Company’s future liquidity and capital resourceneeds.  Without limiting the foregoing,the words “believes,” “intends,” “projects,” “plans,” “expects,” “anticipates,”and similar expressions are intended to identify forward-lookingstatements.  The Company cautions thatthese statements are further qualified by important economic and competitivefactors that could cause actual results to differ materially from those in theforward-looking statements.  Thesefactors include, without limitation, risks of the restaurant industry, anindustry with many well-established competitors with greater financial andother resources than the Company, and the impact of changes in consumer trends,employee availability, and cost increases. Accordingly, such forward-looking statements do not purport to bepredictions of future events or circumstances and may not be realized.*

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS.**

 

**OVERVIEW**

 

The Companyconsummated the sale of the Chart House Business, comprised of 39 of itsthen-existing 45 restaurants, as of July 30, 2002.  The operations of these restaurants have been presented asdiscontinued operations for the second quarter and six month period ended June30, 2002, in accordance with FAS 144. The sale was completed for consideration of approximately $55.3 million,consisting of cash and the assumption of approximately $3.1 million of certaincurrent liabilities.  The Company used aportion of the net proceeds from the sale to repay all amounts outstandingunder its Credit Agreement and a subordinated note owed to a related party.

 

The Companycontinues to operate five Angelo and Maxie’s Steakhouses, which arefull-service steakhouse restaurants located in New York, Washington DC,Virginia, and Florida.  The Companyoperated the following number of restaurants at the following period ends:

 
|                |   | **Angelo and  Maxie’s  Steakhouses** |   | **Discontinued  operations** |   | **Total** |   |
|---------------------|--------|-------------------------------------------|--------|------------------------------|--------|-----------|--------|
| Second quarter 2003 |   | 5                                         |   | —                       |   | 5         |   |
| Second quarter 2002 |   | 6                                         |   | 39                           |   | 45        |   |

 

The Companyacquired the Angelo and Maxie’s Steakhouse concept and one restaurant during1999 to diversify its seafood dominated portfolio.   The Company opened a total of six additional Angelo and Maxie’srestaurants over 2000 and 2001.  One ofthese locations was closed during the fourth quarter of 2001 and anotherlocation was closed during the fourth quarter of 2002.  During 2001, the Company canceled restaurantdevelopment plans for three locations, did not open any locations during 2002,and currently has no plans to open additional restaurants during 2003.  The Company and its financial advisorcontinue the review of strategic alternatives, including a possible sale of theentire Company or the sale of the Angelo and Maxie’s Steakhouse concept and itsfive restaurants.

 

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**RESULTS OF OPERATIONS**

 

The followingtable presents the results of operations for each of the quarterly and sixmonth periods ended June 30, 2003 and July 1, 2002.  Continuing operations relate to the operations of the Company’sAngelo and Maxie’s Steakhouses.  Theoperations of the Chart House Business are presented as discontinued.

 
|                                                                |       | **Quarterly  periods ended** |   | **Six month  periods ended** |       |
|---------------------------------------------------------------------|------------|------------------------------|--------|------------------------------|------------|
| **(Unaudited,  dollars in thousands)**                              |       | **June 30,  2003**           |   | **July 1,  2002**            |       | **June 30,  2003** |   | **July 1,  2002** |   |
|                                                                | **Amount** |                         | **%**  |                         | **Amount** |   | **%** |   | **Amount** |   | **%** |   | **Amount** |   | **%** |   |
|                                                                |       |                         |   |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                            |       | $                            | 6,418  |                         | 100.0      |   | $ | 6,729 |   | 100.0 |   | $ | 13,223 |   | 100.0 |   | $ | 14,056 |   | 100.0 |   |
|                                                                |       |                         |   |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating costs and  expenses:                                      |       |                         |   |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of sales                                                       |       | 2,278                        |   | 35.5                         |       | 2,353 |   | 35.0 |   | 4,717 |   | 35.7 |   | 5,003 |   | 35.6 |   |
| Restaurant labor                                                    |       | 1,478                        |   | 23.0                         |       | 1,628 |   | 24.2 |   | 3,049 |   | 23.1 |   | 3,360 |   | 23.9 |   |
| Other operating costs                                               |       | 1,202                        |   | 18.7                         |       | 1,307 |   | 19.4 |   | 2,361 |   | 17.9 |   | 2,774 |   | 19.7 |   |
| Rent                                                                |       | 600                          |   | 9.3                          |       | 546 |   | 8.1 |   | 1,201 |   | 9.1 |   | 1,056 |   | 7.5 |   |
| Total restaurant costs                                              |       | 5,558                        |   | 86.6                         |       | 5,834 |   | 86.7 |   | 11,328 |   | 85.7 |   | 12,193 |   | 86.7 |   |
| Restaurant operating  income (before depreciation and amortization) |       | 860                          |   | 13.4                         |       | 895 |   | 13.3 |   | 1,895 |   | 14.3 |   | 1,863 |   | 13.3 |   |
| General and administrative  expenses                                |       | 691                          |   | 10.8                         |       | 121 |   | 1.8 |   | 1,359 |   | 10.3 |   | 318 |   | 2.3 |   |
| Depreciation and  amortization                                      |       | 294                          |   | 4.6                          |       | 417 |   | 6.2 |   | 614 |   | 4.6 |   | 881 |   | 6.3 |   |
| Impairment of assets and  restructuring charges                     |       | 4,413                        |   | 68.8                         |       | 7,061 |   | 104.9 |   | 4,413 |   | 33.4 |   | 7,061 |   | 50.2 |   |
| (Gain) loss on sales of  assets                                     |       | (2                           | )      | (0.0                         | )          | — |   | — |   | 9 |   | 0.1 |   | 2 |   | — |   |
| Total restaurant and  operating costs                               |       | 10,954                       |   | 170.7                        |       | 13,433 |   | 199.6 |   | 17,723 |   | 134.0 |   | 20,455 |   | 145.5 |   |
| Loss from operations                                                |       | (4,536                       | )      | (70.7                        | )          | (6,704 | ) | (99.6 | ) | (4,500 | ) | (34.0 | ) | (6,399 | ) | (45.5 | ) |
| Interest expense, net                                               |       | 22                           |   | 0.3                          |       | 1,151 |   | 17.1 |   | 52 |   | 0.4 |   | 2,037 |   | 14.5 |   |
| Other income                                                        |       | (51                          | )      | (0.8                         | )          | (50 | ) | (0.7 | ) | (102 | ) | (0.8 | ) | (100 | ) | (0.7 | ) |
| Loss from continuing  operations before income taxes                |       | (4,507                       | )      | (70.2                        | )          | (7,805 | ) | (116.0 | ) | (4,450 | ) | (33.6 | ) | (8,336 | ) | (59.3 | ) |
| Provision for income taxes                                          |       | —                       |   | —                       |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Loss from continuing  operations                                    |       | (4,507                       | )      | (70.2                        | )          | (7,805 | ) | (116.0 | ) | (4,450 | ) | (33.6 | ) | (8,336 | ) | (59.3 | ) |
|                                                                |       |                         |   |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Discontinued operations:                                            |       |                         |   |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income from operations                                              |       | —                       |   | —                       |       | 1,381 |   | 20.5 |   | — |   | — |   | 951 |   | 6.8 |   |
| Income (loss) on sale                                               |       | 13                           |   | 0.2                          |       | (3,681 | ) | (54.7 | ) | 13 |   | 0.1 |   | (3,681 | ) | (26.2 | ) |
| Income (loss) from  discontinued operations                         |       | 13                           |   | 0.2                          |       | (2,300 | ) | (34.2 | ) | 13 |   | 0.1 |   | (2,730 | ) | (19.4 | ) |
| Net loss                                                            |       | $                            | (4,494 | )                            | (70.0      | ) | $ | (10,105 | ) | (150.2 | ) | $ | (4,437 | ) | (33.5 | ) | $ | (11,066 | ) | (78.7 | ) |
| Preferred stock dividends                                           |       | 232                          |   | 3.6                          |       | 225 |   | 3.3 |   | 464 |   | 3.5 |   | 447 |   | 3.2 |   |
| Net loss applicable to  common shares                               |       | $                            | (4,726 | )                            | (73.6      | ) | $ | (10,330 | ) | (153.5 | ) | $ | (4,901 | ) | (37.0 | ) | $ | (11,513 | ) | (81.9 | ) |

 

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Angelo andMaxie’s revenues are derived primarily from food and beverage sales.  Revenues decreased $0.3 million, or 4.6%, to$6.4 million in the second quarter of 2003, compared to $6.7 million in thesecond quarter of 2002.  The decrease inrevenues is due to the Company’s exit from one restaurant during the fourthquarter of 2002.  Comparable sales forthe second quarter 2003 increased 1.8%.

 

Revenuesdecreased $0.9 million, or 5.9%, to $13.2 million for the six months ended June30, 2003, compared to $14.1 million for the six months ended July 1, 2002.  The decrease in revenues is due to theCompany’s exit from one restaurant during the fourth quarter of 2002.  Comparable sales for the six month periodincreased 0.3%.

 

Cost of salesis composed of the cost of food and beverages. Cost of sales as a percentage of revenues increased by 0.5 percentagepoints to 35.5% in the second quarter of 2003, compared with 35.0% in thesecond quarter of 2002.  This increasewas primarily the result of cost increases to certain beverage products coupledwith the discounting of food items during happy hours at several of theCompany’s locations.  For the six monthsended June 30, 2003, cost of sales as a percentage of revenues increased 0.1percentage points to 35.7%, compared with 35.6% for the six months ended July1, 2002, driven primarily by the same factors that impacted the quarterlyresults.

 

Restaurantlabor consists of restaurant management salaries, hourly staff payroll costs,and other payroll-related items. Restaurant labor as a percentage of revenues decreased by 1.2 percentagepoints to 23.0% in the second quarter of 2003, compared with 24.2% in thesecond quarter of 2002.  Thisimprovement was primarily the result of the elimination of an underperformingrestaurant in December 2002 that incurred higher labor costs than the Company’sother restaurants coupled with productivity improvements at all of theremaining restaurant locations.  For thesix months ended June 30, 2003 restaurant labor as a percentage of revenuesdecreased 0.8 percentage points to 23.1%, compared with 23.9% for the sixmonths ended July 1, 2002, primarily due to the elimination of anunderperforming restaurant in December 2002 that incurred higher labor coststhan the Company’s other restaurants coupled with productivity improvements ata majority of the remaining restaurant locations.

 

Otheroperating expenses consist primarily of various restaurant-level costs, whichare generally variable and are expected to fluctuate with revenues.  Other operating costs as a percentage ofrestaurant revenues decreased by 0.7 percentage points to 18.7% in the secondquarter of 2003, compared with 19.4% in the second quarter of 2002, primarilyas a result of lower marketing costs. For the six months ended June 30, 2003,other operating costs as a percentage of revenues decreased 1.8 percentagepoints to 17.9%, compared with 19.7% for the six months ended July 1, 2002,driven primarily by the same factors that impacted the quarterly results.

 

Rent includesboth fixed and variable portions of rent. Rent as a percentage of revenues increased by 1.2 percentage points to9.3% in the second quarter of 2003, compared with 8.1% in the second quarter of2002, primarily as a result of rent relief in the 2002 quarter related to anunderperforming restaurant that was subsequently closed.   The Company did not incur variable rentcosts for any of its locations in either period.  For the six months ended June 30, 2003, rent as a percentage ofrevenues increased 1.6 percentage points to 9.1%, compared with 7.5% for thesix months ended July 1, 2002, primarily due to the same factors that impactedthe quarterly results.

 

General andadministrative expenses are composed of expenses associated with corporate andadministrative functions that support restaurant operations, includingmanagement and staff salaries, employee benefits, travel, legal andprofessional fees, technology, and market research.  General and administrative expenses increased $0.6 million to $0.7million in the second quarter of 2003, compared to $0.1 million in the secondquarter of 2002.  The increase in thequarterly periods is the result of the fixed general overhead costs beingallocated entirely to five operating restaurants following the sale of theChart House Business rather than being allocated both to continuing anddiscontinued operations.  For the sixmonths ended June 30, 2003, general and administrative expenses increased $1.0million to $1.4 million for the six months ended June 30, 2003. The increase inthe year-to-date costs are primarily due to the same factors that impacted thequarterly results.

 

Depreciationand amortization expense includes the depreciation of fixed assets and theamortization of leasehold improvements at both the restaurants and corporatelocations.  Depreciation andamortization decreased $0.1 million to $0.3 million in the second quarter of2003, compared to $0.4 million in the second quarter of 2002 primarily due toan impairment charge that was realized in the third quarter of 2002 related tocorporate leasehold improvements, resulting in lower amortization expense inthe current period compared with the prior period.  For the six months ended June 30, 2003, depreciation andamortization expenses decreased $0.2 million to $0.6 million for the six monthsended June 30, 2003. The decrease in the year-to-date results are primarily dueto the prior period amount including the final amortization of a non-competeagreement related to a prior owner of the original Angelo and Maxie’sSteakhouse.  In addition, an impairmentcharge was recognized in the third quarter of 2002 related to corporateleasehold improvements, resulting in lower amortization expense in the currentperiod compared with the prior period.

 

During thesecond quarter 2003, the Company completed its required review by comparing itscarrying value for the Angelo and Maxie’s restaurant business to estimated fairmarket value.  In determining theestimated fair market value of its assets,

 

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management considers severalfactors requiring the exercise of its business judgment.  Such business judgment includes developingvaluation multiples such as the ratio of total capitalized value to restaurantearnings before interest, taxes, depreciation, and amortization for an industrypeer group of publicly traded companies and applying those ratios to theCompany’s historical and projected operating performance.   Such evaluation indicated that the recordedvalue of the Angelo and Maxie’s trade name was impaired by $4.3 million at theend the second quarter 2003.  Inaddition, on June 30, 2003 the Company’s lease on its Chicago corporateheadquarters expired and the Company relocated to a space commensurate with itscurrent needs.  In connection therewith,the Company recorded a $0.1 million restructuring charge during the secondquarter of 2003 resulting from the Company receiving lower than anticipatedproceeds for the sale and disposal of its furniture and equipment located atthe vacated facility.

 

Interestexpense, net, decreased $1.2 million to $22,000 in the second quarter of 2003,compared to $1.2 million in the second quarter of 2002.  Interest expense, net decreased $1.9 to $0.1million in the six months ended June 30, 2003, compared to $2.0 in the sixmonths ended July 1, 2002.  The Companypaid all outstanding bank and related party debt balances in full with theproceeds from the sale of the Chart House Business in the third quarter of2002.  The current quarter interestexpense relates to an outstanding landlord note, offset by interest incomeearned on the Company’s cash invested in overnight investment instruments.  In addition, the Company recognizes non-cashinterest expense related to a capital lease.

 

The Companyissued Series A convertible preferred stock, par value $1.00 per share (“SeriesA Preferred Stock”), during June 2001. The Series A Preferred Stock is entitled to dividends at the rate of10.0% per annum, based on the original issue price of $2.25 per share.  The Company accrued dividends on the SeriesA Preferred Stock aggregating $0.2 million during each of the second quartersof 2003 and 2002.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 
|                                                 |   | **Six month  periods ended** |   |
|------------------------------------------------------|--------|------------------------------|--------|
| **(Unaudited,  dollars in thousands)**               |   | **June 30,  2003**           |   | **July 1,  2002** |   |
| Net cash (used in)  provided by operating activities |   | $                            | (500   | ) | $ | 1,197 |   |
| Expenditures for equipment  and improvements         |   | (27                          | )      | (121 | ) |
| Cash used in financing  activities                   |   | (980                         | )      | (1,120 | ) |
| Net decrease in cash                                 |   | $                            | (1,507 | ) | $ | (44 | ) |

 

Historically,the Company required significant capital principally for the construction andopening expenses for new restaurants and for the remodeling and refurbishing ofexisting restaurants.  The Company hasfunded its capital requirements through debt financing, both with third partybanks and related parties, tenant improvement monies, equity financing, andcash flows from operations.  The Companydoes not intend to fund any new restaurants or incur any major remodeling orrefurbishing costs during fiscal 2003.

 

Net cash usedin operating activities was $0.5 million in the first six months of 2003,compared to net cash provided by operating activities of $1.2 million in thefirst six months of 2002.  In 2003, netcash used in operating activities includes an aggregate $1.2 million related topayment of 2002 bonuses, severance payments related to employees terminated inconjunction with the sale of the Chart House Business, and settlement of priorperiod insurance claims.  In 2002,operating cash flow from the Chart House Business contributed to the positivenet cash results.  In connection with anagreement with iDine Rewards Network, Inc. (“iDine”), the Company received $1.0million in the six month period of 2002 for marketing activities and the advancesale of food and beverage credits.  TheCompany in turn paid to iDine $2.5 million during the six month period of 2002related to this agreement including advances received in 2001.  This agreement was terminated as of July 29,2002, in conjunction with the sale of the Chart House Business.  The Company has no further obligations underthis agreement.

 

Net cash usedin investing activities in the six months of 2003 included capital expendituresof $27,000.  Net cash used in investingactivities in the first six months of 2002 included capital expenditures of$121,000 for the replacement of restaurant equipment and leasehold improvementsresulting from normal wear and tear.

 

Net cash usedin financing activities was $1.0 million in the first six months of 2003,including $0.5 million used to settle the payment of both scheduled paymentsand the early retirement and payoff of the landlord notes.  There were no pre-payment fees or penaltiesassociated with the early retirement of this debt obligation.

 

The Series APreferred Stock is entitled to dividends at the rate of 10.0% per annum, basedon the original price of $2.25 per share. Dividends are payable semiannually on June 1 and December 1.  Dividends paid through June 1, 2002 were inthe form of

 

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additional shares of Series APreferred Stock, in part, because the Company’s Credit Agreement prohibited thepayment of cash dividends.  Subsequentto the retirement of amounts owing under the Credit Agreement, the Companybegan paying these dividends in cash. The Company paid in June 2003 its scheduled dividend of $0.5 million incash.  The Company expects to satisfyfuture dividend obligations in cash.

 

Net cash usedin financing activities was $1.1 million in the first six months of 2002, primarilyrelated to repayments under the Company’s Credit Agreement.

 

The Company isliable under various capital and operating lease agreements, primarily relatedto restaurant locations.   The Companyis also contingently liable under letters of credit, primarily related toleasing obligations and self-insurance reserves, and guarantees on variousthird party leasing and debt agreements. No material changes have occurred regarding these commitments andcontingencies from the Company’s prior fiscal year ended December 30, 2002.

 

**CRITICAL ACCOUNTING POLICIES**

 

A criticalaccounting policy is one that would materially affect the Company’s operationsor financial condition, and requires management to make estimates or judgmentsin certain circumstances.  Set forthbelow is a description of those accounting policies which the Company believesare most critical and could have the greatest impact on its operations orfinancial condition.

 

**Valuation of ExitCosts and Restructure Reserves.**  On an as-needed basis and subject toapproval of the Company’s Board of Directors, the Company establishes reservesfor unusual and non-recurring items associated with the activities of exitingrestaurant locations and reorganizing support staff to address changes in theCompany’s operations.  This requiresthat management make estimates for cash inflows and outflows based on judgment,market conditions, advice from counsel and consultants, and historicalexperience.  These estimates include,but are not limited to, future payments of rents, severance, legal andconsulting costs, consideration for contract modifications, and proceeds fromthe sale of disposed assets.  Because offactors beyond management’s control, actual results may be different from theestimates, which may cause the Company to record adjustments in futureperiods.  In June 2002, the FinancialAccounting Standards Board issued Statement of Financial Accounting StandardsNo. 146, “Accounting for Costs from Exit or Disposal Activities” (“FAS146”).  FAS 146 requires, among otherthings, that a liability for costs associated with an exit or disposal activitybe recognized when the liability is incurred rather than at the time ofcommitment to a formal shutdown plan. The Company adopted this Standard as of January 1, 2003 with no materialimpact.

 

**Impairment of Assets.**  On January 1, 2002, the Company adopted FAS142, which requires, among other things, that effective January 1, 2002,goodwill resulting from a business combination accounted for as a purchase nolonger be amortized, but be subject to ongoing impairment review.  On an ongoing basis, the Company reviews itscarrying value of restaurant assets and compares them with fair marketvalue.  In determining the fair marketvalue of its assets, management considers several factors requiring theexercise of its business judgment.  Suchbusiness judgment includes developing valuation multiples, such as the ratio oftotal capitalized value to restaurant earnings before interest, taxes,depreciation, and amortization for an industry peer group of publicly tradedcompanies, and applying those multiples to the Company’s historical andprojected operating performance.   Ifmanagement determines that the fair market value of its assets is materiallybelow the current carrying cost of the assets, an impairment charge isrecognized in operating income in the period the impairment is identified.

 

**Cost Capitalizationand Depreciation Policies.**  Costs for maintenance, repairs, and purchases are either expensedas incurred or capitalized and amortized over the cost’s estimated usefullife.  This requires management to makebusiness judgments regarding which costs should be capitalized and, ifcapitalized, the estimated useful life. Management has established the Company’s cost capitalization anddeprecation policies based on historical experience in the restaurant industry,industry guidelines regarding useful lives, and adherence to applicableaccounting standards.  Maintenance,repairs, and minor purchases are expensed as incurred.  Major purchases of equipment and facilities,and major replacements and improvements, are capitalized.  Depreciation and amortization are recordedfor financial reporting purposes using the straight-line method over theestimated useful lives of the assets.  Equipment is depreciated over lives ranging from three to eightyears.  Leasehold interests andimprovements are amortized over the shorter of the lease term, including plannedextensions, or the asset life, ranging up to 25 years.

 

**Self-InsuranceLiability.**  TheCompany was self-insured through October 2002 for its workers’ compensation andgeneral liability insurance programs, and continues to be self-insured for itsemployee health insurance program.  TheCompany maintains stop-loss coverage with third party insurers to limit itstotal exposure.  The accrued liabilityassociated with these programs is based on management’s estimate of theultimate costs to be incurred to settle known claims and claims incurred, butnot reported, as of the balance sheet date. Our estimated liability is not discounted and is based on a number ofassumptions and factors, including historical

 

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trends, actuarial assumptions,and economic conditions.  If actualtrends differ from our estimates, our financial results could be impacted.

 

**NEW ACCOUNTING PRONOUNCEMENTS**

 

In November2002, the Financial Accounting Standards Board issued Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (“FIN 45”), which addresses thedisclosure to be made by a guarantor in its interim and annual financialstatements about its obligations under guarantees.  These disclosure requirements have been adopted by theCompany.  FIN 45 also requires therecognition of a liability by a guarantor at the inception of certainguarantees entered into subsequent to January 1, 2003.  FIN 45 requires the guarantor to recognize aliability for the non-contingent component of the guarantee, which is theobligation to stand ready to perform in the event that specified triggeringevents or conditions occur.  The initialmeasurement of this liability is the fair value of the guarantee atinception.  The recognition of the liabilityis required even if it is not probable that payment will be required under theguarantee or if the guarantee was issued with a premium payment or as part of atransaction with multiple events.  TheCompany has adopted the disclosure requirements of FIN 45 and will apply therecognition and measurement provisions for all guarantees entered into ormodified after December 31, 2002.  TheCompany has not entered into or modified any guarantees subsequent to December31, 2002.

 

In December2002, the Financial Accounting Standards Board issued Financial AccountingStandards No. 148, “Accounting for Stock-Based Compensation – Transitionand Disclosure, an amendment of FASB Statement No. 123” (“FAS 148”). ThisStatement amends Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation” (“FAS 123”) to provide alternativemethods of transition for a voluntary change to the fair value method ofaccounting for stock-based employee compensation.  In addition, FAS 148 amends the disclosure requirements ofStatement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation” (“FAS 123”) to require prominent disclosuresregarding accounting for stock-based employee compensation in both annual andinterim financial statements.  Certainof the disclosure modifications are required for fiscal years ending afterDecember 15, 2002 and are included in Note 5 to the consolidated financialstatements in Part I, Item 1.  TheCompany has previously adopted this Standard.

 

In January2003, the Financial Accounting Standards Board issued Interpretation No. 46,“Consolidation of Variable Interest Entities, an interpretation of ARB No. 51”(“FIN 46”).  FIN 46 addresses theconsolidation by business enterprises of variable interest entities as definedtherein. The Interpretation applies immediately to variable interests invariable interest entities created after January 31, 2003, and to variableinterests in variable interest entities obtained after January 31, 2003.  The Company currently has no contractualrelationships or other business relationships with a variable entity andtherefore the adoption of FIN 46 did not have a material effect on theCompany’s consolidated financial position, results of operations, or cash flowsfor the quarterly period ended June 30, 2003.

 

In May 2003,the Financial Accounting Standards Board issued Financial Accounting StandardsNo. 150, “Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity.”  This Statementestablishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity.  It requires that an issuer classify afinancial instrument that is within its scope as a liability (or an asset insome circumstances).  This Statement iseffective for financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003.  TheCompany adopted this Standard on July 1, 2003, with no material impact.

 

**SEASONALITY**

 

The Company’sbusiness is seasonal in nature, with revenues and operating income for thefirst and fourth quarters greater than in the second and third quarters as theCompany benefits from urban, holiday, and winter vacation dining which isgreater than the benefits associated with dining during leisure travel in thespring and summer quarters.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.**

 

The Company isexposed to market risk from changes in market rates earned on cash equivalentsand changes in commodity prices.   Theimpact on the Company’s results of operations of a one-point market rate changeon its cash equivalent balance as of June 30, 2003, would not be material.  The Company does not use derivativeinstruments to manage borrowing costs, reduce exposure to adverse fluctuationsin the interest rate, nor for trading purposes.

 

The Companypurchases certain commodities such as beef, seafood, chicken, and cooking oil.These commodities are generally purchased based upon purchase agreements orarrangements with vendors. These purchase agreements or arrangements maycontain features that fix the commodity price or define the price from anagreed upon formula. The Company does not use financial

 

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instruments to hedge commodityprices because these purchase arrangements help control the ultimate cost paidand any commodity price fluctuations are generally short term in nature.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

As of June 30, 2003, the Company carried outan evaluation, under the supervision and with the participation of theCompany’s President and Chief Executive Officer and the Company’s ChiefFinancial Officer, of the effectiveness of the Company’s disclosure controlsand procedures pursuant to Rule 13a-14(c) of the Securities Exchange Act of1934, as amended.  Based upon thatevaluation, the Company’s President and Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures are effective in timely alerting them to material informationrelating to the Company (including its consolidated subsidiaries) required tobe disclosed by the Company in its periodic Exchange Act reports.  There were no significant changes in theCompany’s internal controls or in other factors that could significantly affectthese controls subsequent to the date of the evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

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**PART II - OTHERINFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS.**

 

On October 1,2002, the Company filed a complaint in the Chancery Court for the State ofDelaware against the Purchaser and escrow agent Fidelity National Title.  This action alleges several breaches by thePurchaser of its contractual obligations under the asset purchase agreementrelated to the sale of the Chart House Business and under a related escrow agreement.  Aggregate damages sought, without regard tointerest or legal fees, were $1.8 million. The Company subsequently received $1.6 million through a release ofescrowed funds and a payment made by the Purchaser during the fourth quarter of2002.  The Company has amended thecomplaint to release Fidelity National Title and continues to seekapproximately $0.2 million, representing amounts that the Company believes thePurchaser wrongfully failed to pay under the asset purchase agreement, and alsoseeks related interest, costs, and attorneys’ fees.  The Purchaser has filed a counterclaim, seeking a purchase priceadjustment of $0.15 million.  TheChancery Court has ruled that the Company’s remaining claim should betransferred to the Superior Court for the State of Delaware and that thePurchaser’s counterclaim should be resolved through the dispute resolutionmechanism provided for in the asset purchase agreement.

 

The Company isunable to predict the outcome of this matter. The Company believes that the outcome of this matter will not have amaterial adverse effect on its financial condition or operations.

 

The Companyperiodically is a defendant in litigation incidental to its businessactivities. While any litigation or investigation has an element ofuncertainty, the Company believes that the outcome of any of these matters willnot have a material adverse effect on its financial condition or operations.

 

**ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES.**

 

None.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

None.

 

**ITEM 5. OTHER INFORMATION.**

 

None.

 

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.**

 

(a)           Exhibits:

 

3.1           (1) RestatedCertificate of Incorporation of the Company, as amended. (1)

(2)Certificate of Amendment of Restated Certificate of Incorporation of theCompany. (2)

(3)Certificate of Amendment of Restated Certificate of Incorporation of ChartHouse Enterprises, Inc. (4)

3.2           Amendedand Restated Bylaws of the Company. (1)

3.3           Certificateof Designations of the Series A Preferred Stock. (3)

4.1           SpecimenCommon Stock Certificate. (2)

4.2           Specimen Series APreferred Stock Certificate. (3)

31.1         Certificationof the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities ExchangeAct of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

31.2         Certificationof the Chief Financial Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

32.1         Certificationof the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2         Certificationof the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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(1)   Filedas an exhibit to the Company’s Registration Statement on Form S-1 dated August27, 1987, or amendments thereto dated October 6, 1987 and October 14, 1987(Registration No. 33-16795).

 

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(2)   Filedas an exhibit to the Company’s Registration Statement on Form S-1 dated July20, 1989, or amendment thereto dated August 25, 1989 (Registration No.33-30089).

(3)   Filedas an exhibit to the Company’s Registration Statement on Form S-2 dated March27, 2001, or amendments thereto dated May 15, 2001, May 25, 2001, and May 31,2001 (Registration No. 333-57674).

(4)   Filedas an exhibit to the Company’s Current Report on Form 10-Q for the quarterended July 1, 2002, dated August 15, 2002.

 
| (b) |   | Reports on  Form 8-K.  The Company filed a report  on Form 8-K on May 8, 2003.  The  Company reported it had issued a press release entitled “Angelo and Maxie’s  Reports First Quarter Results, Announces Series A Preferred Stock Dividend  and Provides Strategic Alternatives Review Update” and furnished this  information under Item 12. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                        | ANGELO AND  MAXIE’S, INC. |
|-----------------------------|--------------------------------|
|                        |                           |
|                        |                           |
| Date:  August 13, 2003 | By:                       | /s/ KENNETH  R. POSNER |   |   |
|                        |                           | Kenneth R.  Posner |   |
|                        |                           | President  and Chief Executive Officer |   |
|                        |                           | (principal  executive officer) |   |
|                        |                           |
|                        |                           |
| Date:  August 13, 2003 | By:                       | /s/ EMANUEL  N. HILARIO |   |   |
|                        |                           | Emanuel N.  Hilario |   |
|                        |                           | Vice  President and Chief Financial Officer |   |
|                        |                           | (principal  financial and accounting officer) |   |
|                             |                                |  |  |  |  |

 

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