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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

/x/	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 12, 2001.
OR
/ /	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-10576

SANTA BARBARA RESTAURANT GROUP, INC.
(Exact name of registrant as specified in its charter.)

Delaware (State or other jurisdiction of incorporation or organization)		33-0403086 (I.R.S. Employer Identification No.)
3938 State Street, Suite 200 Santa Barbara, California (Address of principal executive offices)		93105 (Zip Code)
Registrants telephone number, including area code: (805) 563-3644
360 South Hope Avenue, Suite C300 Santa Barbara, California (Former address of principal executive offices)		93105 (Zip Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /

As of August 6, 2001, the registrant had 13,123,988 shares outstanding of its Common Stock, $.08 par value.

SANTA BARBARA RESTAURANT GROUP, INC.

INDEX TO FORM 10-Q

PART I. FINANCIAL INFORMATION

		Page
Item 1.	Consolidated Financial Statements:
	Consolidated Balance Sheets as of July 12, 2001 and December 28, 2000	3
	Consolidated Statements of Income for the twelve and twenty-eight weeks ended July 12, 2001 and July 13, 2000	4
	Consolidated Statements of Cash Flows for the twenty-eight weeks ended July 12, 2001 and July 13, 2000	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Market Risk	14
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	15
Item 4.	Submission of Matters to a Vote of Security Holders	15
Item 6.	Exhibits and Reports on Form 8-K	15
Signature		16

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

SANTA BARBARA RESTAURANT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

			July 12, 2001			December 28, 2000
			(Dollars in thousands) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents			$	1,449		$	8,375
Short-term investments				1,294			1,755
Accounts receivable, net of allowance for doubtful accounts of $271,000 and $293,000 in 2001 and 2000, respectively				806			1,223
Current portion of notes receivable				207			202
Current portion of related party notes receivable				30			30
Inventories				689			762
Current deferred tax assets				626			626
Prepaid expenses				999			499
Other current assets				204			760

		Total current assets		6,304			14,232
Property and equipment, net				31,112			29,542
Property under capital leases, net				1,338			1,417
Investment in affiliated company				689			852
Notes receivable, net				2,230			2,206
Related party notes receivable, net				70			70
Costs in excess of net assets of businesses acquired, net of accumulated amortization of $740,000 in 2001 and $520,000 in 2000				14,723			15,695
Deferred tax assets				7,049			7,109
Other assets				1,850			1,683

			$	65,365		$	72,806

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
	Current installments of long-term debt		$	1,200		$	1,200
	Current portion of capital lease obligations			372			372
	Accounts payable and accrued expenses			4,400			4,280
	Accrued salaries, wages and employee benefits			1,776			2,137
	Other current liabilities			2,049			2,689

		Total current liabilities		9,797			10,678
	Long-term debt, less current installments			3,923			4,560
	Capital lease obligations, less current portion			831			1,064
	Other long-term liabilities			1,644			1,925
Shareholders' equity:
	Common stock, $.08 par value, authorized 50,000,000 shares; 16,796,327 and 20,736,330 shares issued and 13,123,988 and 16,802,892 shares outstanding in 2001 and 2000, respectively			1,344			1,659
	Additional paid in capital			66,394			73,617
	Less cost of treasury stock, 3,672,339 and 3,933,438 shares in 2001 and 2000, respectively			(5,231	)		(5,616	)
	Accumulated deficit			(13,427	)		(15,081	)
	Accumulated other comprehensive income			90			—

		Total shareholders' equity		49,170			54,579

			$	65,365		$	72,806

The accompanying notes are an integral part of the consolidated financial statements.

SANTA BARBARA RESTAURANT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(unaudited)

			Twelve Weeks Ended July 12, 2001			Twelve Weeks Ended July 13, 2000			Twenty-eight Weeks Ended July 12, 2001			Twenty-eight Weeks Ended July 13, 2000
Revenues:
	Company-operated restaurant operations		$	19,413		$	30,200		$	46,642		$	71,199
	Franchised restaurants			445			983			1,108			2,190
	Other			20			66			46			178

		Total revenues		19,878			31,249			47,796			73,567

Restaurant operating costs:
	Food and packaging			6,013			9,824			14,735			23,010
	Payroll and other employee benefits			5,910			10,263			13,960			23,740
	Occupancy and other operating costs			4,806			7,294			11,473			16,842

		Total restaurant operating costs		16,729			27,381			40,168			63,592

	Advertising			579			869			1,632			2,183
	Pre-opening expenses			8			74			82			151
	General and administrative			1,587			2,451			3,738			6,028

		Total		2,174			3,394			5,452			8,362

	Operating income			975			474			2,176			1,613
	Interest expense			(165	)		(236	)		(406	)		(536	)
	Other income (expense), net			76			482			297			(451	)

	Income before income tax expense			886			720			2,067			626
	Income tax expense			177			152			413			125

	Net income		$	709		$	568		$	1,654		$	501

Basic net income per share			$	.05		$	.03		$	.11		$	.03

Diluted net income per share			$	.05		$	.03		$	.11		$	.03

Basic weighted average shares outstanding				13,291			18,362			14,458			18,424

Diluted weighted average shares outstanding				13,746			18,462			14,968			18,524

The accompanying notes are an integral part of the consolidated financial statements.

SANTA BARBARA RESTAURANT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)
(unaudited)

			Twenty-eight Weeks Ended July 12, 2001			Twenty-eight Weeks Ended July 13, 2000
Cash flows from operating activities:
	Net income		$	1,654		$	501
	Adjustments to reconcile net income to net cash flows provided by operating activities:
		Depreciation and amortization		2,426			3,355
		Loss on equity investment in affiliate		—			1,121
		Loss on disposal of property and equipment		—			43
	Changes in operating assets and liabilities:
		Accounts receivable		417			46
		Inventories, prepaids and other current assets		129			(16	)
		Accounts payable and accrued expenses		120			(988	)
		Accrued salaries, wages and employee benefits		(361	)		461
		Other current liabilities		(640	)		(885	)

	Net cash provided by operating activities			3,745			3,638

Cash flows from investing activities:
	Proceeds from maturity of short-term investments			782			245
	Purchases of short-term investments			—			(21	)
	Issuance of related party and notes receivable			(76	)		(70	)
	Collections on related party and notes receivable			47			2,046
	Net change in other assets			(175	)		(235	)
	Proceeds from sale of property and equipment			—			13
	Purchases of property and equipment			(3,697	)		(4,647	)

		Net cash used in investing activities		(3,119	)		(2,669	)

Cash flows from financing activities:
	Repayment of capital lease obligations			(233	)		(541	)
	Repayment of long-term debt			(637	)		(300	)
	Proceeds from long-term borrowings and net borrowings under line of credit			—			500
	Purchase of treasury stock			(6,401	)		(254	)
	Net change in other long-term liabilities			(281	)		(737	)

		Net cash used in financing activities		(7,552	)		(1,332	)

Net decrease in cash and cash equivalents				(6,926	)		(363	)
Cash and cash equivalents at beginning of period				8,375			3,371

Cash and cash equivalents at end of period			$	1,449		$	3,008

Supplemental disclosures of cash flow information:
	Cash paid during the period for:
		Interest	$	405		$	553
		Income taxes	$	205		$	2

The accompanying notes are an integral part of the consolidated financial statements.

SANTA BARBARA RESTAURANT GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1. Company

Santa Barbara Restaurant Group, Inc., a Delaware corporation, and subsidiaries (the "Company") is engaged in the food service industry. As of July 12, 2001, the Company operated 25 Timber Lodge Steakhouse restaurants, 47 La Salsa restaurants, and five Green Burrito restaurants. The Company also franchises 35 Green Burrito stand-alone restaurants, 198 dual-concept restaurants, one Timber Lodge Steakhouse, and 46 La Salsa restaurants for a total of 357 restaurants.

2. Financial Statements

The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America, the instructions to Form 10-Q and Article 10 of Regulation S-X. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K as of and for the year ended December 28, 2000.

In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of results expected for a full year. Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform with the fiscal 2001 presentation.

3. Segment and Related Information

The Company currently operates two reportable segments: Steakhouse and Quick Serve Mexican. During fiscal 2000, a third reportable segment, Family Dining, was comprised of the Company's JB's and Galaxy Diner restaurants. The sale of this segment was completed on November 13, 2000. The Steakhouse segment is comprised of Timber Lodge Steakhouse which serves dinner only. The Quick Serve Mexican segment is comprised of La Salsa and Green Burrito restaurants. The Company evaluates the performance of its operating segments based on income (loss) before income taxes.

Summarized financial information concerning the Company's reportable segments is shown in the following table. The corporate assets consist of corporate cash and cash equivalents, short-term investments, investments in affiliated companies, corporate notes receivable, and deferred income taxes for all periods presented. The corporate component of segment profit (loss) before tax includes

corporate general and administrative expenses, interest income and our equity income (loss) generated from our investments in affiliated companies for all periods presented.

	Family Dining			Steakhouse			Quick Serve Mexican			Corporate			Total
	(Dollars in thousands)
Twelve Weeks Ended July 12, 2001
Revenues	$	—		$	10,055		$	9,823		$	—		$	19,878
Interest income		—			23			7			71			101
Interest expense		—			(33	)		(132	)		—			(165	)
Depreciation and amortization		—			553			499			—			1,052
Pre-opening expenses		—			—			8			—			8
Segment profit before tax	$	—		$	252		$	610		$	24		$	886
Twelve Weeks Ended July 13, 2000
Revenues	$	11,798		$	9,740		$	9,711		$	—		$	31,249
Interest income		45			23			13			171			252
Interest expense		(84	)		(11	)		(141	)		—			(236	)
Depreciation and amortization		482			494			449			—			1,425
Pre-opening expenses		—			74			—			—			74
Segment profit (loss) before tax	$	(477	)	$	172		$	650		$	375		$	720
Twenty-eight Weeks Ended July 12, 2001
Revenues	$	—		$	25,965		$	21,831		$	—		$	47,796
Interest income		—			58			12			250			320
Interest expense		—			(76	)		(330	)		—			(406	)
Depreciation and amortization		—			1,282			1,144			—			2,426
Pre-opening expenses		—			32			50			—			82
Segment profit before tax		—			1,087			828			152			2,067
Total assets as of July 12, 2001	$	—		$	33,388		$	21,860		$	10,117		$	65,365
Twenty-eight Weeks Ended July 13, 2000
Revenues	$	28,255		$	23,442		$	21,870		$	—		$	73,567
Interest income		97			39			32			260			428
Interest expense		(197	)		(25	)		(314	)		—			(536	)
Depreciation and amortization		1,133			1,129			1,093			—			3,355
Pre-opening expenses		—			151			—			—			151
Segment profit (loss) before tax		(886	)		862			1,332			(682	)		626
Total assets as of December 28, 2000	$	—		$	34,705		$	26,240		$	11,861		$	72,806

4. Related Party Notes Receivable

During the third quarter of fiscal 1999, the Company issued promissory notes to certain executives in the total amount of $153,000. As of July 12, 2001, the outstanding balance of such notes is $100,000.

5. Comprehensive Income

The Company applies the provisions of Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which establishes rules for the reporting and display of comprehensive income and its components. SFAS No. 130 requires unrealized gains and losses in debt and equity securities adjustments, which are reported separately in stockholders' equity, to be included in other comprehensive income. Total comprehensive income was $800,000 for the twelve weeks ended July 12, 2001 and $1.7 million for the twenty-eight week period ending July 12, 2001. The Company had no other comprehensive income items for the twelve and twenty-eight weeks ended July 13, 2000.

6. Calculation of Earnings per Share

		Twelve Weeks Ended July 12, 2001		Twelve Weeks Ended July 13, 2000			Twenty-eight Weeks Ended July 12, 2001			Twenty-eight Weeks Ended July 13, 2000
		(In thousands, except share and per share amounts)
Basic Earnings Per Share:
Numerator
	Net income	$	709	$	568		$	1,654		$	501

Denominator
	Weighted average shares outstanding		13,291		18,462			14,508			18,524
	Escrowed restricted shares		—		(100	)		(50	)		(100	)

	Basic weighted average shares outstanding		13,291		18,362			14,458			18,424

	Basic earnings per share:	$	.05	$	.03		$	.11		$	.03

Diluted Earnings Per Share:
Numerator
	Net income	$	709	$	568		$	1,654		$	501

Denominator
	Basic weighted average shares outstanding		13,291		18,362			14,458			18,424
Incremental common shares attributable to:
	Escrowed restricted shares		—		100			50			100
	Outstanding options		455		—			460			—

			455		100			510			100
Diluted weighted average shares outstanding			13,746		18,462			14,968			18,524

Diluted earnings per share		$	.05	$	.03		$	.11		$	.03

For the twelve and twenty-eight week periods ended July 12, 2001 and July 13, 2000, 5.9 million and 6.7 million shares, respectively, relating to the possible exercise of outstanding stock options and warrants were not included in the computation of diluted earnings per share as their effect would have been anti-dilutive.

7. Sale of JB's Family Restaurants, Inc.

On November 13, 2000 the Company completed the sale of its JB's Family Restaurants, Inc. ("JB's") subsidiary. JB's financial information is included in all prior year comparisons up to the closing date. The operations of JB's generated revenues of $11.8 million and $28.2 million for the twelve and twenty-eight week periods ended July 13, 2000, and losses from operations (before taxes) of $477,000 and $886,000 for the twelve and twenty-eight week periods ended July 13, 2000.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following Management's Discussion and Analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto. The results of operations for the twelve and twenty-eight week periods ended July 13, 2000, include twelve and twenty-eight weeks of operating results for JB's which was sold on November 13, 2000 (see note 7 to Consolidated Financial Statements). The reduction of 55 Company-operated and 30 franchised restaurants associated with the sale are the principal reasons for the significant differences when comparing results of operations for the twelve and twenty-eight week periods ended July 12, 2001 with the results of operations for the twelve and twenty-eight week periods ended July 13, 2000. The comparability of future periods will also be affected by the aforementioned transaction. The costs associated with opening and integrating new restaurants or underperforming or unprofitable restaurants, if any, acquired or otherwise operated by the Company, may have a material adverse effect on the Company's results of operations.

Results of Operations

The following table sets forth the percentage relationship to total revenues, unless otherwise indicated, of certain items included in the Company's unaudited consolidated statements of income for the twelve and twenty-eight week periods ended July 12, 2001 and July 13, 2000. The twelve week periods ended July 12, 2001 and July 13, 2000 are referred to throughout this document as the second quarter of fiscal 2001 and 2000, respectively.

			Twelve Weeks Ended July 12, 2001		Twelve Weeks Ended July 13, 2000(1)		Twenty-Eight Weeks Ended July 12, 2001		Twenty-Eight Weeks Ended July 13, 2000(1)
Revenues:
	Company-operated restaurant operations		97.7	%	96.6	%	97.7	%	96.8	%
	Franchised restaurants and other		2.3		3.4		2.3		3.2

		Total revenues	100.0		100.0		100.0		100.0

Restaurant operating costs:(2)
	Food and packaging		31.0		32.5		31.6		32.3
	Payroll and other employee benefits		30.4		34.0		29.9		33.3
	Occupancy and other operating costs		24.8		24.2		24.6		23.7

			86.2		90.7		86.1		89.3
Advertising(2)			3.0		2.9		3.5		3.1
Pre-opening expenses(2)			—		0.2		0.2		0.2
General and administrative			8.0		7.8		7.8		8.2

Operating income			4.9		1.5		4.6		2.2
Interest expense			(0.8	)	(0.8	)	(0.8	)	(0.7	)
Other income (expense), net			0.4		1.5		0.6		(0.6	)
Income before income taxes			4.5		2.3		4.3		0.9
Income tax expense			0.9		0.5		0.9		0.2

Net income			3.6	%	1.8	%	3.5	%	0.7	%

(1): Includes the operating results of JB's for the entire fiscal 2000 period presented.
(2): As a percentage of revenues from Company-operated restaurants.

Results of Operations for the Twelve Weeks Ended July 12, 2001 as Compared to the Twelve Weeks Ended July 13, 2000

Revenues from Company-operated restaurants decreased $10.8 million to $19.4 million for the second quarter of fiscal 2001 as compared with revenues of $30.2 million during the second quarter of fiscal 2000. The decrease in revenues is primarily attributable to the sale of JB's in fiscal 2000, which generated $11.5 million in revenues during the second quarter ended July 13, 2000. La Salsa same-store sales increased 4.4% during the second quarter of 2001. Timber Lodge Steakhouse and Green Burrito same-store sales decreased by 5.8% and 3.9%, respectively during the second quarter of 2001.

Revenues from franchised restaurants decreased $538,000 to $445,000 for the second quarter of fiscal 2001 as compared with revenues of $983,000 during the second quarter of fiscal 2000. The decrease in revenues from franchised restaurants is principally due to the sale of JB's which generated $347,000 in franchise royalties in the second quarter of fiscal 2000. Additionally, royalties earned from dual-concept restaurants declined by $106,000 as a result of the Company's decision to reduce the dual-concept royalty rate from four percent of revenues to three percent of revenues in exchange for a reduction in services provided by the Company.

Food and packaging costs as a percentage of revenue from Company-operated restaurants decreased to 31.0% for the second quarter of fiscal 2001 as compared with 32.5% during the second quarter of fiscal 2000. The decrease in food and packaging costs as a percentage of revenue from Company-operated restaurants for the second quarter of fiscal 2001 as compared with the prior year, is primarily due to a 260 and 180 basis point reduction in costs at La Salsa and Timber Lodge Steakhouse restaurants, respectively, due to favorable pricing negotiated on purchase contracts for key food products.

Payroll and other employee benefits decreased as a percentage of revenue from Company-operated restaurants to 30.4% for the second quarter of fiscal 2001 as compared with 34.0% for the second quarter of fiscal 2000. The decrease in payroll and other employee benefits as a percent of revenue from Company-operated restaurants for the second quarter of fiscal 2001 as compared with the prior year, is primarily attributable to sale of JB's in fiscal 2000, which operated with higher payroll and benefit costs as a percent of revenues (41.1%) during the second quarter of fiscal 2000.

Occupancy and other operating costs increased as a percentage of revenue from Company-operated restaurants to 24.8% for the second quarter of fiscal 2001 as compared with 24.2% for the second quarter of fiscal 2000. The increase in occupancy and other operating costs as a percent of revenue from Company-operated restaurants is primarily attributable to increased rental utility costs, depreciation, and insurance expenses at La Salsa and Timber Lodge Steakhouse.

Advertising costs as a percent of revenue from Company-operated restaurants for the second quarter of fiscal 2001 have remained constant as compared with the prior year period, due to management's objective to spend approximately three to four percent of restaurant sales on advertising.

Pre-opening expenses decreased $66,000 to $8,000 for the second quarter of fiscal 2001 as compared to $74,000 for the second quarter of fiscal 2000. The decrease is due to the reduction in the number of conversions and new openings in fiscal 2001 versus fiscal 2000.

General and administrative costs were $1.6 million or 8.0% of total revenues for the second quarter of fiscal 2001 as compared with $2.5 million or 7.8% of total revenues for the second quarter of fiscal 2000. The decrease in general and administrative costs is attributable to the sale of JB's in fiscal 2000, which incurred $799,000 in general and administrative costs in the second quarter of fiscal 2000.

Interest expense remained at 0.8% of total revenues or $165,000 for the second quarter of fiscal 2001, as compared to $236,000 for the second quarter of fiscal 2000. The decrease in interest expense dollars is due to the sale of JB's in fiscal 2000.

Other income (expense), net, primarily reflects interest income on invested cash, short-term investments, notes receivable and the Company's proportionate share of earnings or losses earned by our equity investments in affiliated companies. During the second quarter of fiscal 2001, other income, net, decreased $406,000 to $76,000 as compared to $482,000 during the second quarter of fiscal 2000. The current quarter income is comprised primarily of interest income as compared to the same period last year which also included the recognition of Checkers notes receivable discount amortized to income upon the note pay-off and other gains on investments in affiliates.

The Company's effective tax rates for the twelve week periods ended July 12, 2001 and July 13, 2000 were 20% and 21%, respectively.

Results of Operations for the Twenty-eight Weeks Ended July 12, 2001 as Compared to the Twenty-eight Weeks Ended July 13, 2000

Revenues from Company-operated restaurants decreased $24.6 million to $46.6 million for the twenty-eight weeks ended July 12, 2001 as compared with revenues of $71.2 million during the twenty-eight weeks ended July 13, 2000. The decrease in revenues is primarily attributable to the sale of JB's in fiscal 2000, which generated $27.5 million in revenues during the twenty-eight week period ended July 13, 2000. Same-store sales for Company-operated restaurants increased 4.5% at La Salsa, while decreasing 3.0% at Timber Lodge Steakhouse and 5.4% at Green Burrito for the twenty-eight weeks ended July 12, 2001 as compared to the comparable period last year.

Revenues from franchised restaurants decreased $1.1 million to $1.1 million for the twenty-eight weeks ended July 12, 2001 as compared with revenues of $2.2 million during the twenty-eight weeks ended July 13, 2000. The decrease in revenues from franchised restaurants is principally due to the sale of JB's which generated $791,000 in franchise royalties during the prior year period, coupled with a $214,000 year over year reduction in dual-concept restaurant royalties.

Food and packaging costs as a percentage of revenue from Company-operated restaurants for the twenty-eight weeks ended July 12, 2001 decreased to 31.6% as compared with 32.3% for the twenty-eight weeks ended July 13, 2000. The decrease in food and packaging costs as a percentage of revenue from Company-operated restaurants is primarily due a 190 and 100 basis point reduction in costs at La Salsa and Timber Lodge Steakhouse restaurants, respectively, due to favorable pricing negotiated on purchase contracts for key food products..

Payroll and other employee benefits decreased as a percentage of revenue from Company-operated restaurants for the twenty-eight weeks ended July 12, 2001 to 29.9% as compared with 33.3% for the twenty-eight weeks ended July 13, 2000. The decrease in payroll and other employee benefits as a percent of revenue from Company-operated restaurants is attributable to sale of JB's in fiscal 2000, which operated with higher payroll and benefit costs as a percent of revenues (39.9%) for the twenty-eight week period ended July 13, 2000.

Occupancy and other operating costs for the twenty-eight weeks ended July 12, 2001, as a percentage of revenue from Company-operated restaurants increased to 24.6% as compared with 23.7% for the twenty-eight weeks ended July 13, 2000. The increase in occupancy and other operating costs as a percent of revenue from Company-operated restaurants is attributable to increased rental, utility costs, depreciation, and insurance expenses at La Salsa and Timber Lodge Steakhouse.

Advertising costs as a percent of revenue from Company-operated restaurants for the twenty-eight weeks ended July 12, 2001, have remained constant as compared with the prior year, due to management's objective to spend approximately three to four percent of restaurant sales on advertising.

For the twenty-eight weeks ended July 12, 2001, pre-opening expenses decreased $69,000 to $82,000 as compared to $151,000 for the twenty-eight weeks ended July 13, 2000. The decrease is due to the reduction in the number of conversions and new openings in fiscal 2001 versus fiscal 2000.

General and administrative costs were $3.7 million or 7.8% of total revenues for the twenty-eight weeks ended July 12, 2001, as compared with $6.0 million or 8.2% of total revenues for the twenty-eight weeks ended July 13, 2000. The decrease in general and administrative costs is attributable to the sale of JB's in fiscal 2000, which incurred $2.1 million in general and administrative costs for the twenty-eight week period ended July 13, 2000.

Interest expense for the twenty-eight weeks ended July 12, 2001 was $406,000 or 0.8% of total revenues as compared to $536,000 or 0.7% of total revenues for the twenty-eight weeks ended July 13, 2000. The decrease in interest expense dollars is due to the sale of JB's in fiscal 2000.

Other income (expense), net, primarily reflects interest income on invested cash, short-term investments, notes receivable and the Company's proportionate share of earnings or losses earned by our equity investments in affiliated companies. For the twenty-eight weeks ended July 13, 2000 other income (expense), net, increased $748,000 to $297,000 as compared to an expense of $451,000 for the twenty-eight weeks ended July 13, 2000. The prior year period included losses on equity investments in the amount of $1.1 million, offset primarily by interest income earned on invested cash and notes receivable, a $129,000 gain on sale of stock in an affiliated company, and recognition of the Checkers notes receivable discount amortized to income upon the note payoff in fiscal 2000.

The Company's effective tax rate for the twenty-eight week periods ended July 12, 2001 and July 13, 2000 was 20%.

Effect of Inflation

Food and labor costs are significant costs exposed to inflationary factors in the Company's operations. Many of the Company's employees are paid hourly rates related to the statutory minimum wage; therefore, increases in the minimum wage increase the Company's costs. In addition, most of the Company's leases require it to pay base rents with escalation provisions based on the consumer price index, in addition to percentage rentals based on revenues, and to pay taxes, maintenance, insurance, repairs, and utility costs, all of which are expenses subject to inflation. The Company has generally been able to offset the effects of inflation and increases in the minimum wage through small menu price increases. There can be no assurance that the Company will be able to continue to offset the effects of inflation through menu price increases.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and hedging activities. SFAS 133, as amended by SFAS 138, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company adopted this standard on January 1, 2001, and the application of this accounting standard did not have a material impact on the Company's financial position, results of operations or liquidity.

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations be accounted for under a single method—the purchase method. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 requires the purchase method be used for business combinations initiated after June 30,

2001. SFAS No. 142 requires that goodwill no longer be amortized as an expense against earnings, but instead, should be reviewed periodically for impairment. Under SFAS No. 142, the amortization of goodwill ceases upon adoption of the Statement and is effective for fiscal years beginning after December 15, 2001.

The Company has historically amortized its goodwill over its estimated useful life. Beginning with the adoption of SFAS No. 142, the Company will cease amortizing its goodwill. The Company recorded amortization expenses in the amount of $520,000 for the year ended December 28, 2000, $94,000 for the twelve weeks ended July 12, 2001, and $220,000 for the twenty-eight weeks ended July 12, 2001. While the Company has not completely analyzed the impact of adopting SFAS 141 and 142, to the extent that no impairment charges are recorded upon adoption or application of SFAS No. 142, similar amounts of amortization will not be recorded in future periods.

Liquidity and Capital Resources

The Company had cash and cash equivalents of approximately $1.4 million at July 12, 2001 and $8.4 million at December 28, 2000. The decrease in cash and cash equivalents is primarily due to the use of approximately $3.7 million to fund purchases of equipment and other capital improvements and $7.6 million utilized in financing activities, partially offset by $3.7 million provided by operating activities and cash received from the sale of investments in the amount of $782,000.

Net cash provided by operating activities was $3.7 million during the twenty-eight week period ended July 12, 2001 which included net income of $1.7 million and depreciation and amortization of $2.4 million. Investing activities required the Company to use $3.7 million in cash to fund capital additions partially offset by proceeds from the sale of investments in the amount of $782,000. Financing activities included the use of $6.4 million of cash to acquire 3.6 million shares of the Company's stock and $637,000 of cash to pay down long-term debt.

During the first twenty-eight weeks ended July 12, 2001, the Company opened one new La Salsa restaurant at a cost of approximately $400,000 and acquired two restaurants which were converted to the La Salsa concept for a total cost of approximately $270,000 per restaurant. The Company also re-imaged four La Salsa restaurants during the first half of fiscal 2001 at an average cost of approximately $61,000 per restaurant. The Company plans to remodel three to five additional La Salsa restaurants during fiscal 2001. The Company also plans to open approximately seven new La Salsa restaurants at a cost of approximately $350,000 each during the remainder of fiscal 2001, and is currently negotiating leases to further expand La Salsa in fiscal 2002. In addition, the Company plans to open one new Timber Lodge Steakhouse restaurant at a cost of approximately $2.0 million during fiscal 2001.

The Company believes it will be able to meet its working capital requirements through its available cash and cash equivalents and cash flows from operations. The Company may require additional funds to support its working capital requirements or for other purposes, including the opening of new restaurants, remodeling of certain restaurants, acquisitions and purchases of the Company's common stock, and may seek to raise such additional funds through public or private equity and/or debt financing, the sale of assets or from other sources. In addition, much of the real properties owned by the Company and used for its restaurant operations are unencumbered and could be used by the Company as collateral for debt financing; however, there can be no assurance that real estate financing or other financing will be available or that, if available, such financing will be obtainable on terms favorable or acceptable to the Company.

Cautionary Statement

The foregoing Management's Discussion and Analysis of Financial Condition and Results of Operations contains various "forward-looking statements" within the meaning of Section 27A of the

Securities Exchange Act of 1933, as amended, and Section 21B of the Securities and Exchange Act of 1934, as amended. Forward-looking statements represent the Company's expectations or belief concerning future events, including the following: any statements regarding future restaurant openings or remodels, any statements regarding the continuation of historical trends, and any statements regarding the sufficiency of the Company's cash balances and cash generated from operating and financing activities for the Company's future liquidity and capital resource needs. Without limiting the foregoing, the words "believes", "anticipates", "plans", "expects", "should", and similar expressions are intended to identify forward-looking statements.

The Company's actual results could differ materially from those stated or implied in the forward-looking statements included in the discussion of future operating results and expansion strategy and elsewhere in this report as a result, among other things, of the following:

(i): The restaurant industry is a highly competitive industry with many well established competitors;
(ii): The Company's results can be impacted by changes in consumer tastes and the level of consumer acceptance of the Company's restaurant concepts; local, regional and national economic conditions; the seasonality of the Company's business; demographic trends; traffic patterns; consumer perception of food safety; employee availability; the cost of advertising and media; government actions and policies; inflation; and increases in various costs;
(iii): The Company's ability to expand is dependent upon various factors such as the availability of attractive sites for new restaurants, ability to obtain appropriate real estate sites at acceptable prices; ability to obtain all governmental permits including zoning approvals and liquor licenses on a timely basis, impact of government moratoriums or approval processes which could result in significant delays, ability to obtain all necessary contractors and subcontractors, the ability to generate or borrow funds, the ability to negotiate suitable lease terms, and the ability to recruit and train skilled management and restaurant employees.
(iv): Price and availability of commodities and utilities, including but not limited to such items as beef, chicken, shrimp, and cheese are subject to fluctuations and could increase or decrease more than the Company expects; and/or
(v): Weather and acts of God could result in construction delays and also adversely affect the results of one or more stores for an indeterminate amount of time.

Item 3. Market Risk

The Company holds publicly-traded common stock of an affiliated restaurant company. The fair value of this security at July 12, 2001 was $689,000. The potential loss in fair value, using a hypothetical 10% and 20% decline in the price, is estimated to be approximately $69,000 and $138,000, respectively. Such loss in fair value would not impact the Company's financial position, results of operations or cash flows, unless the Company liquidated this investment.

Additionally, the Company has a term note payable and revolving note payable which bear interest at LIBOR plus 4.0% and 3.75%, respectively. The total debt outstanding under both agreements at July 12, 2001 is $5.1 million. A hypothetical increase of 100 basis points in short-term interest rates would result in a reduction of approximately $51,000 in annual pre-tax earnings.

PART II
OTHER INFORMATION

Item 1. Legal Proceedings

The Company is from time to time the subject of complaints or lawsuits from customers alleging illness, injury or other food quality, health or operational concerns. The Company also is the subject of claims or allegations from employees and franchisees from time to time. A lawsuit or claim could result in an adverse decision against the Company and could materially adversely affect the Company or its business.

Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of Stockholders of the Company was held on August 6, 2001. At the meeting, the following actions were taken by the stockholders.

Results of voting for the Directors was as follows:

William P. Foley, II
Charles Rolles
Frank P. Willey
Burt Sugarman
Andrew F. Puzder
Norman N. Habermann
Ronald B. Maggard

For: 11,770,584
For: 11,762,456
For: 11,765,626
For: 11,743,756
For: 11,750,271
For: 11,748,756
For: 11,747,756

Withheld: 331,258
Withheld: 339,386
Withheld: 336,216
Withheld: 358,086
Withheld: 351,571
Withheld: 353,086
Withheld: 354,086

A proposal to approve an amendment to the Company's 1998 Stock Option Plan:

For:
Against:
Abstain:

7,795,401
982,518
124,947

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits:

(i): None.

(b)

Current Reports on Form 8-K:

(i): None.

SIGNATURE

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

		SANTA BARBARA RESTAURANT GROUP, INC. (Registrant)
August 21, 2001		By:		/s/ TED ABAJIAN Ted Abajian President and Chief Executive Officer (Principal Executive, Financial and Accounting Officer)

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SANTA BARBARA RESTAURANT GROUP, INC. INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
SANTA BARBARA RESTAURANT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SANTA BARBARA RESTAURANT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (unaudited)
SANTA BARBARA RESTAURANT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (unaudited)
SANTA BARBARA RESTAURANT GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
1. Company
2. Financial Statements
3. Segment and Related Information
4. Related Party Notes Receivable
5. Comprehensive Income
6. Calculation of Earnings per Share
7. Sale of JB's Family Restaurants, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Results of Operations
Results of Operations for the Twelve Weeks Ended July 12, 2001 as Compared to the Twelve Weeks Ended July 13, 2000
Results of Operations for the Twenty-eight Weeks Ended July 12, 2001 as Compared to the Twenty-eight Weeks Ended July 13, 2000
Effect of Inflation
New Accounting Pronouncements
Liquidity and Capital Resources
Cautionary Statement
Item 3. Market Risk
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE

SANTA BARBARA RESTAURANT GROUP INC 10-Q