UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

OR

 

 

American Restaurant Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

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   ý   No   o

 

The number of outstanding shares of the Company’s Common Stock (one cent par value) as of August 5, 2002 was 128,081.

 

 

AMERICAN RESTAURANT GROUP, INC.

 

INDEX

 

PART I.	FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS:
	Consolidated Condensed Balance Sheets
	Consolidated Statements of Operations
	Consolidated Statements of Cash Flows
	Notes to Consolidated Condensed Financial Statements
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5.	OTHER INFORMATION
ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K

 

 

PART I.    FINANCIAL INFORMATION

 

ITEM 1.     FINANCIAL STATEMENTS:

 

PLEASE NOTE:  THESE INTERIM FINANCIAL STATEMENTS WERE NOT REVIEWED BY AN INDEPENDENT ACCOUNTANT USING PROFESSIONAL REVIEW STANDARDS AND PROCEDURES, ALTHOUGH SUCH A REVIEW IS REQUIRED.  PLEASE SEE CHANGE IN AUDITORS UNDER “CRITICAL ACCOUNTING POLICIES” IN ITEM 2 OF THIS PART I.

 

AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED BALANCE SHEETS

 

DECEMBER 31, 2001 AND JULY 1, 2002

 

		December 31, 2001			July 1, 2002
					(unaudited)
ASSETS
CURRENT ASSETS:
Cash		$	10,053,000		$	7,225,000
Accounts and notes receivable, net		4,071,000			3,424,000
Inventories		3,040,000			2,966,000
Prepaid expenses		3,002,000			4,275,000
Total current assets		20,166,000			17,890,000
PROPERTY AND EQUIPMENT:
Land and land improvements		2,598,000			2,598,000
Buildings and leasehold improvements		69,858,000			72,426,000
Fixtures and equipment		48,914,000			49,890,000
Property held under capital leases		7,293,000			7,293,000
Construction in progress		2,517,000			810,000
Property and Equipment		131,180,000			133,017,000
Less – Accumulated depreciation		80,077,000			82,924,000
Net property and equipment		51,103,000			50,093,000
OTHER ASSETS, NET:		18,435,000			17,686,000
Total assets		$	89,704,000		$	85,669,000

 

The accompanying notes are an integral part of these consolidated condensed statements.

(consolidated condensed balance sheets continued on the following page)

 

1

 

		December 31, 2001			July 1, 2002
					(unaudited)
LIABILITIES AND COMMON STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Accounts payable		$	12,528,000		$	10,254,000
Accrued liabilities		12,849,000			8,200,000
Accrued insurance		3,232,000			3,880,000
Accrued interest		3,447,000			3,385,000
Accrued payroll costs		4,853,000			5,171,000
Current portion of obligations under capital leases		796,000			842,000
Current portion of long-term debt		402,000			3,632,000
Liabilities from discontinued operations		525,000			36,000
Total current liabilities		38,632,000			35,400,000
LONG-TERM LIABILITIES, net of current portion:
Obligations under capital leases		1,799,000			1,366,000
Long-term debt, net of unamortized discount		157,272,000			154,780,000
Total long-term liabilities		159,071,000			156,146,000
DEFERRED GAIN		3,990,000			3,889,000
COMMITMENTS AND CONTINGENCIES
CUMULATIVE PREFERRED STOCK, MANDATORILY REDEEMABLE:
Senior pay-in-kind exchangeable preferred stock, $0.01 par value; 160,000 shares authorized; 58,883 shares outstanding and accrued at December 31, 2001 and 63,299 shares outstanding and accrued at July 1, 2002		58,219,000			62,834,000
COMMON STOCKHOLDERS’ DEFICIT:
Common stock, $0.01 par value; 1,000,000 shares authorized; 128,081 shares issued and outstanding at December 31, 2001 and July 1, 2002		1,000			1,000
Paid-in capital		7,279,000			2,664,000
Accumulated deficit		(177,488,000		)	(175,265,000		)
Total common stockholders’ deficit		(170,208,000		)	(170,600,000		)
Total liabilities and common stockholders’ deficit		$	89,704,000		$	85,669,000

 

The accompanying notes are an integral part of these consolidated condensed statements.

 

2

 

AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

FOR THE THIRTEEN WEEKS AND THE TWENTY-SIX WEEKS ENDED JUNE 25, 2001 AND JULY 1, 2002

 

(UNAUDITED)

 

		Thirteen Weeks Ended						Twenty-Six Weeks Ended_
		June 25, 2001			July 1, 2002			June 25, 2001			July 1, 2002
REVENUES		$	76,296,000		$	74,626,000		$	158,477,000		$	156,471,000
RESTAURANT COSTS:
Food and beverage		26,013,000			24,612,000			53,153,000			52,121,000
Payroll		21,620,000			22,104,000			44,262,000			46,711,000
Direct operating		17,728,000			18,256,000			36,083,000			35,969,000
Depreciation and amortization		2,178,000			1,754,000			4,330,000			3,663,000
GENERAL AND ADMINISTRATIVE EXPENSES		2,304,000			2,485,000			4,770,000			4,820,000
Operating profit		6,453,000			5,415,000			15,879,000			13,187,000
INTEREST EXPENSE, net		4,247,000			5,518,000			8,491,000			10,907,000
Income (Loss) before provision For income taxes		2,206,000			(103,000		)	7,388,000			2,280,000
PROVISION FOR INCOME TAXES		44,000			33,000			163,000			57,000
Net Income (Loss)		$	2,162,000		$	(136,000	)	$	7,225,000		$	2,223,000

 

The accompanying notes are an integral part of these consolidated condensed statements.

 

3

 

AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

FOR THE TWENTY-SIX WEEKS ENDED JUNE 25, 2001 AND JULY 1, 2002

 

(UNAUDITED)

 

		June 25, 2001			July 1, 2002
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES:
Cash received from customers		$	157,531,000		$	157,118,000
Cash paid to suppliers and employees		(149,014,000		)	(146,878,000		)
Interest expense, net		(8,486,000		)	(10,036,000		)
Income tax expense, net		(163,000		)	(57,000		)
Net cash provided by (used in) continuing operating activities		(132,000		)	147,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(1,171,000		)	(1,902,000		)
Net (increase) decrease in other assets		51,000			(2,000		)
Net cash provided by (used in) investing activities		(1,120,000		)	(1,904,000		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on indebtedness		(200,000		)	(195,000		)
Payments on capital-lease obligations		(340,000		)	(387,000		)
Net cash provided by (used in) financing activities		(540,000		)	(582,000		)
NET (DECREASE) FROM CONTINUING OPERATIONS		(1,792,000		)	(2,339,000		)
NET (DECREASE) FROM DISCONTINUED OPERATIONS		(1,715,000		)	(489,000		)
NET CHANGE IN CASH, CURRENT PERIOD		(3,507,000		)	(2,828,000		)
CASH, at beginning of period		8,532,000			10,053,000
CASH, at end of period		$	5,025,000		$	7,225,000
RECONCILIATION OF NET INCOME FROM OPERATIONS TO NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES:
Net income		$	7,225,000		$	2,223,000
Adjustments to reconcile net income to net cash provided by (used) continuing operating activities:
Depreciation and amortization		4,330,000			3,663,000
Amortization of deferred gain		(101,000		)	(101,000		)
Amortization of non-cash interest expense		—			933,000
(Increase) decrease in current assets:
Accounts and notes receivable, net		(946,000		)	647,000
Inventories		(326,000		)	74,000
Prepaid expenses		(2,946,000		)	(1,273,000		)
Increase (decrease) in current liabilities:
Accounts payable		452,000			(2,274,000		)
Accrued liabilities		(5,649,000		)	(4,649,000		)
Accrued insurance		(137,000		)	648,000
Accrued interest		5,000			(62,000		)
Accrued payroll		(2,039,000		)	318,000
Net cash provided by (used in) continuing operating activities		(132,000		)	147,000

 

The accompanying notes are an integral part of these consolidated condensed statements.

 

4

 

AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

PLEASE NOTE:  THESE INTERIM FINANCIAL STATEMENTS WERE NOT REVIEWED BY AN INDEPENDENT ACCOUNTANT USING PROFESSIONAL REVIEW STANDARDS AND PROCEDURES, ALTHOUGH SUCH A REVIEW IS REQUIRED.  PLEASE SEE CHANGE IN AUDITORS UNDER “CRITICAL ACCOUNTING POLICIES” IN ITEM 2 OF THIS PART I.

 

 

1.             MANAGEMENT’S OPINION

 

The Consolidated Condensed Financial Statements included were prepared by American Restaurant Group, Inc. without audit, in accordance with Securities and Exchange Commission Regulation S-X.  (References to “the Company,” “we,” “us,” or “our” refer to American Restaurant Group, Inc.)  In the opinion of our management, these Consolidated Condensed Financial Statements contain all adjustments necessary to present fairly our financial position as of December 31, 2001 and July 1, 2002, and the results of our operations for the thirteen weeks and twenty-six weeks ended June 25, 2001 and July 1, 2002 and our cash flows for the twenty-six weeks ended June 25, 2001 and July 1, 2002.  Our results for an interim period are not necessarily indicative of the results that may be expected for the year.

 

Although we believe that we included all adjustments necessary for a fair presentation of the interim periods presented and that the disclosures are adequate to make the information presented not misleading, we suggest that these Consolidated Condensed Financial Statements be read in conjunction with the Consolidated Financial Statements and related notes included in the our annual report on Form 10-K, File No. 33-48183, for the fiscal year ended December 31, 2001.

 

2.             OPERATIONS

 

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

 

On October 31, 2001, we completed an exchange offer (the “Exchange”) in which we offered to exchange our 11½% Senior Secured Notes due 2006 (the “New Notes”) for all of our $142,600,000 outstanding 11½% Senior Secured Notes due 2003 (the “Old Notes”).  We simultaneously completed an offering (the “Offering”) of $30,000,000 aggregate principal amount of New Notes.  After the consummation of the Exchange, the Offering, and related transactions (collectively, the “Refinancing”), we have no further payment obligations with respect to over 97.6% of the outstanding Old Notes (constituting all but $3,410,000 aggregate principal amount of the Old Notes) and assumed payment obligations equivalent to $161,774,000 of the New Notes. The Refinancing substantially eliminates debt principal payments until November 2006.

 

Management believes the Refinancing will also allow it to continue to effect changes in its operations and has implemented measures to reduce overhead costs. We do not, however, expect to generate sufficient cash flows from operations in the future to pay fully the principal of the senior indebtedness upon maturity in 2006 and, accordingly, we expect to refinance all or a portion of such debt, obtain new financing, or possibly sell assets.

 

3.             SALE OF STOCK TO SPECTRUM RESTAURANT GROUP

 

In June 2000, we sold all of the outstanding stock of four wholly owned subsidiaries (“Non-Black Angus Subsidiaries”) to Spectrum Restaurant Group, Inc. (formerly known as NBACo, Inc.) effective June 26, 2000 (the “Stock Sale”). There was no gain or loss recorded because of the related-party nature of the Stock Sale. We received $17.0 million in cash on June 28, 2000, and transferred certain assets and liabilities to Spectrum Restaurant Group, Inc.  Concurrent with the Stock Sale,

 

5

 

advances between the Company and the Non-Black Angus Subsidiaries were eliminated. Paid-in capital of $27.0 million was charged as a result of the Stock Sale. We retained the assets and liabilities associated with certain closed restaurants as well as certain liabilities, estimated on June 26, 2000 at approximately $12.6 million, associated with the operating restaurants that were sold.  The amount of estimated liabilities related to the Stock Sale remaining at July 1, 2002 was approximately $36,000.

 

We are currently working to settle these liabilities.  Any adjustment to the recorded balance, as a result of such settlement, will be recognized when the amount becomes known.  Until a settlement is reached, additional payments will be charged to direct operating expenses as incurred.  Management believes such amount, if any, will not be material to our financial position or results of operations.

 

4.             INCOME TAXES

 

The tax provision against the pre-tax income in 2002 and in 2001 consisted of certain state income taxes and estimated Federal income tax.  We established a valuation allowance against net-operating-loss carryforwards.

 

5.             PREFERRED STOCK

 

As part of the recapitalization plan in February 1998, we issued 35,000 preferred stock units (the “Units”) of the Company.  Each Unit consists of $1,000 initial liquidation preference of 12% senior pay-in-kind exchangeable preferred stock and one common-stock purchase warrant initially to purchase 2.66143 shares of the common stock at an initial exercise price of one cent per share.  Our preferred stock is mandatorily redeemable on August 15, 2003.  If on August 15, 2003 we do not redeem our preferred stock for cash at a price per share equal to 110% of the then-applicable liquidation preference, our preferred stock will be automatically redeemed for shares of our common stock at that time and all rights of the preferred stock will terminate.  Management believes that the preferred stock will convert to common stock.

 

We issued preferred stock dividends of 4,181 shares on February 15, 2002.  At July 1, 2002, we had 63,299 preferred shares outstanding and accrued.

 

6.             SUBSIDIARY GUARANTORS

 

Separate financial statements of our subsidiaries are not included in this report on Form 10-Q because the subsidiaries are fully, unconditionally, jointly, and severally liable for our obligations under the Company’s Old Notes and New Notes, and the aggregate net assets, earnings, and equity of such subsidiary guarantors are substantially equivalent to the net assets, earnings, and equity of the Company on a consolidated basis.

 

7.             INSURANCE

 

We self-insure certain risks, including medical, workers’ compensation, property, and general liability, up to varying limits. Deductible and self-insured limits have varied historically, ranging from $0 to $500,000 per incident depending on the type of risk. The policy deductibles are $100,000 for annual medical and dental benefits per person. Reserves for losses are established based upon presently estimated obligations for the claim over time and the deductible or self-insured retention in place at the time of the loss.

 

8.            FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this Form 10-Q are forward-looking regarding cash

 

6

 

flows from operations, restaurant openings, capital requirements, and other matters. These forward-looking statements involve risks and uncertainties and, consequently, could be affected by general business conditions, the impact of competition, governmental regulations, and inflation.

 

9.             NEW ACCOUNTING PRONOUNCEMENTS

 

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” These new standards are effective for fiscal years beginning after December 15, 2001. Under the new standards, goodwill is no longer amortized, but is subject to an annual impairment test. The standards also promulgate new requirements for accounting for other intangible assets. The impact of the new standards on our financial position and results of operations is not material.

 

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  FASB Statement No. 144 retains FASB Statement No. 121’s “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed,” fundamental provisions for the: (1) recognition and measurement of impairment of long-lived assets to be held and used; and (2) measurement of long-lived assets to be disposed of by sale.  FASB Statement No. 144 has not had a material impact on our financial position or results of operations, although it may in future periods.  Statement No. 144 is effective for fiscal years beginning after December 15, 2001.

 

7

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the historical financial information included in the Consolidated Condensed Financial Statements.

 

Results of Operations

 

Thirteen weeks ended June 25, 2001 and July 1, 2002:

 

Revenues.  Total revenues decreased to $74.6 million in the second quarter of 2002 from $76.3 million in the second quarter of 2001.  In the 103 base stores, sales decreased by 5.1% in the second quarter of 2002 compared to the second quarter of 2001.  There were 109 Black Angus restaurants operating as of July 1, 2002 and 105 Black Angus restaurants operating as of June 25, 2001.

 

Food and Beverage Costs.  As a percentage of revenues, food and beverage costs decreased to 33.0% in the second quarter of 2002 from 34.1% in the second quarter of 2001.  The decrease in 2002 relates primarily to favorable raw material costs.

 

Payroll Costs.  As a percentage of revenues, labor costs increased to 29.6% in the second quarter of 2002 from 28.3% in the second quarter of 2001.  The increase is primarily the result of the minimum wage rate increase in 2002 and increased management expense for four new units.

 

Direct Operating Costs.  Direct operating costs consist of occupancy, advertising, and other expenses incurred by individual restaurants.  As a percentage of revenues, these costs increased to 24.5% in the second quarter of 2002 from 23.2% in the second quarter of 2001.  The increase largely results from the increase in rental expense for the additional four new restaurants opened in the third and fourth quarters of 2001, and the preopening expenses associated with our 109^th restaurant opened in the second quarter of 2002.

 

Depreciation and Amortization.  Depreciation and amortization consists of depreciation of fixed assets used by individual restaurants and at the Black Angus and corporate offices, as well as amortization of intangible assets.  As a percentage of revenues, depreciation and amortization decreased to 2.4% in the second quarter of 2002 from 2.9% in the second quarter of 2001. The decrease primarily relates to the reduction of amortization of the deferred debt costs for Old Notes purchased as part of the Refinancing in the fourth quarter of 2001 and the discontinued amortization of goodwill in 2002.

 

General and Administrative Expenses.  General and administrative expenses increased to $2.5 million in the second quarter of 2002 from $2.3 million in the second quarter of 2001 primarily because of an increase in management training expense.

 

Operating Profit.  As a result of the above items, operating profit decreased to $5.4 million in the second quarter of 2002 from $6.5 million in the second quarter of 2001. As a percentage of revenues, operating profit decreased to 7.3% in the second quarter of 2002 compared to 8.5% in the second quarter of 2001.

 

Interest Expense - Net. Our interest expense increased to $5.5 million in the second quarter of 2002 from $4.2 million in the second quarter of 2001. The increase resulted from refinancing the senior notes in the fourth quarter of 2001.  The face value of senior notes increased by $22.6 million ($165.2 million face value) compared to the second quarter of 2001 ($142.6 million face value) at the same interest rate (11.5%).

 

8

 

Twenty-six weeks ended June 25, 2001 and July 1, 2002:

 

Revenues.  Total revenues decreased to $156.5 million in the first half of 2002 from $158.5 million in the first half of 2001.  In the 103 base stores, sales decreased by 4.1% in the first half of 2002 compared to the first half of 2001.  Significantly, of this unfavorable variance, customer counts accounted for only 0.1%; the introduction of more casual “value” items on the dinner menu, which caused the average check to decline, accounted for the balance of the decrease. There were 109 Black Angus restaurants operating as of July 1, 2002 and 105 Black Angus restaurants operating as of June 25, 2001.

 

Food and Beverage Costs.  As a percentage of revenues, food and beverage costs decreased slightly to 33.3% in the first half of 2002 from 33.5% in the first half of 2001. This decrease reflects lower raw-material costs.

 

Payroll Costs.  As a percentage of revenues, labor costs increased to 29.9% in the first half of 2002 from 27.9% in the first half of 2001.  The increase is primarily the result of an increase in labor-related costs for vacation, medical/dental, employee incentives, and minimum wage rate increases in 2002.

 

Direct Operating Costs.  Direct operating costs consist of occupancy, advertising, and other expenses incurred by individual restaurants.  As a percentage of revenues, these costs increased slightly to 23.0% in the first half of 2002 from 22.8% in the first half of 2001. The savings related to energy-conservation measures and general liability costs from the first quarter of 2002 were offset by an increase in rental expense for the additional four new restaurants opened in the third and fourth quarters of 2001, and the preopening expenses associated with our 109^th restaurant opened in the second quarter of 2002.

 

Depreciation and Amortization.  Depreciation and amortization consists of depreciation of fixed assets used by individual restaurants and at the Black Angus and corporate offices, as well as amortization of intangible assets.  As a percentage of revenues, depreciation and amortization decreased to 2.3% in the first half of 2002 from 2.7% in the first half of 2001. The decrease primarily relates to the reduction of amortization of the deferred debt costs for Old Notes purchased as part of the Refinancing in the fourth quarter of 2001 and the discontinued amortization of goodwill in 2002.

 

General and Administrative Expenses.  General and administrative expenses were flat at $4.8 million in the first half of each of 2002 and 2001.

 

Operating Profit.  As a result of the above items, operating profit decreased to $13.2 million in the first half of 2002 from $15.9 million in the first half of 2001.  As a percentage of revenues, operating profit decreased to 8.4% in the first half of 2002 compared to 10.0% in the first half of 2001.

 

Interest Expense - Net. Our interest expense increased to $10.9 million in the first half of 2002 from $8.5 million in the first half of 2001. The increase resulted from refinancing the senior notes in the fourth quarter of 2001.  The face value of senior notes increased by $22.6 million ($165.2 million face value) compared to the first half of 2001 ($142.6 million face value) at the same interest rate (11.5%).

 

9

 

Liquidity and Capital Resources

 

Our primary sources of liquidity are cash flows from operations and borrowings under our revolving credit facilities.  We require capital principally for the acquisition and construction of new restaurants, the remodeling of existing restaurants, the purchase of new equipment and leasehold improvements, and working capital. As of July 1, 2002, we had approximately $7.2 million of cash.

 

In general, restaurant businesses do not have significant accounts receivable because sales are made for cash or by credit-card vouchers, which are ordinarily paid within three to five days.  The restaurants do not maintain substantial inventory as a result of the relatively brief shelf life and frequent turnover of food products. Additionally, restaurants generally are able to obtain trade credit in purchasing food and restaurant supplies.  As a result, restaurants are frequently able to operate with working-capital deficits, i.e., current liabilities exceed current assets.  At July 1, 2002, our working-capital deficit was $17.5 million.

 

We estimate that capital expenditures of $3.0 million to $6.0 million are required annually to maintain and refurbish our existing restaurants.  Other capital expenditures, which are generally discretionary, are primarily for the construction of new restaurants and for expanding, reformatting, and extending the capabilities of existing restaurants and for general corporate purposes.  Total capital expenditures for continuing operations were approximately $1.9 million through the first half of 2002 and $1.2 million through the half of 2001.  We estimate that capital expenditures in 2002 will be approximately $5.0 million.  We intend to open new restaurants with small capital outlays and to finance most of the expenditures through leases.

 

On October 31, 2001, we completed an exchange offer (the “Exchange”) in which we offered to exchange our 11½% Senior Secured Notes due 2006 (the “New Notes”) for all of our $142,600,000 outstanding 11½% Senior Secured Notes due 2003 (the “Old Notes”).  We simultaneously completed an offering (the “Offering”) of $30,000,000 aggregate principal amount of New Notes.  After the consummation of the Exchange, the Offering, and related transactions (collectively, the “Refinancing”), we have no further payment obligations with respect to over 97.6% of the outstanding Old Notes (constituting all but $3,410,000 aggregate principal amount of the Old Notes) and assumed payment obligations equivalent to $161,774,000 of the New Notes. The Refinancing substantially eliminates debt principal payments until November 2006.

 

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

 

$3,410,000 of the Old Notes were outstanding at July 1, 2002.  Under the Old Notes, we are obligated to make semiannual interest payments on February 15 and August 15 through February 2003.  Accordingly, we made an interest payment of $196,075 on February 15, 2002.

 

Under the New Notes, we are obligated to make semiannual interest payments on May 1 and November 1 through November 2006. Accordingly, we made an interest payment of $9,353,683 on May 1, 2002.

 

We have an additional $2.5 million in long-term debt that relates to mortgages and loans on improvements and equipment.

 

10

 

On December 17, 2001, we entered into a loan agreement for a revolving credit facility (“New Credit Facility”) with Foothill Capital Corporation to replace the Old Credit Facility.  Our New Credit Facility presently provides for up to $15 million in borrowings, including support for letters of credit. As of July 1, 2002, we had approximately $7.7 million of letters of credit outstanding and no borrowings, leaving approximately $7.3 million remaining under the New Credit Facility. The New Credit Facility expires in December 2005.

 

The Company and its direct subsidiaries do not guaranty the debt of any other parties.

 

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

 

Contractual Obligations		Paid in Q1&2-  2002			Remainder of Fiscal 2002			Fiscal Years 2003&2004			Fiscal Years 2005&2006			Fiscal Years Beyond 2006			Total Remaining
Long-Term Debt - Interest on Notes		$	9,550		9,498			37,404			37,208			0			$	93,660
Long-Term Debt - Other		$	195		207			3,476			161,867			949			$	166,694
Capital Leases		$	387		690			1,092			464			1,115			$	3,748
Operating Leases		$	9,595		9,595			34,189			28,528			180,276			$	262,183
Employment Agreements		$	0		500			0			0			0			$	500
Total Contractual Cash		$	19,727		$	20,490		$	76,161		$	228,067		$	182,340		$	526,785

 

In the second quarter of 2000, we agreed to an interpretation of the financial covenants used to determine the dividend rate of our preferred stock.  The result was an increase in the dividend rate from 12% to 15% and our issuing additional dividends of 2,503 shares on August 15, 2000 (relating to holders at August 1999 and February 2000). Preferred stock dividends of 5,872 (including the adjustment), 3,618 shares, 3,889 shares, and 4,181 shares were issued on August 15, 2000, February 15, 2001, August 15, 2001, and February 15, 2002, respectively.  There were 63,299 shares of preferred stock outstanding and accrued at July 1, 2002. Our preferred stock is mandatorily redeemable on August 15, 2003. If we do not redeem our preferred stock for cash at a price per share equal to 110% of the then-applicable liquidation preference, our preferred stock will be automatically redeemed for shares of our common stock at that time and all of the rights of the preferred stock will terminate. Management believes that the preferred stock will convert to common stock.

 

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

 

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Although we are highly leveraged, based upon current levels of operations and anticipated growth, we expect that cash flows generated from operations together with our other available sources of liquidity will be adequate to make required payments of principal and interest on our indebtedness, to make anticipated capital expenditures, and to finance working capital requirements for the next several years. We do not, however, expect to generate sufficient cash flows from operations in the future to pay fully the principal of the senior indebtedness upon maturity in 2006 and, accordingly, we expect to refinance all or a portion of such debt, obtain new financing, or possibly sell assets.

 

Recent Accounting Pronouncements

 

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” These new standards are effective for fiscal years beginning after December 15, 2001. Under the new standards, goodwill is no longer amortized, but is subject to an annual impairment test. The standards also promulgate new requirements for accounting for other intangible assets. The impact of the new standards on our financial position and results of operations is not material.

 

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  FASB Statement No. 144 retains FASB Statement No. 121’s “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” fundamental provisions for the: (1) recognition and measurement of impairment of long-lived assets to be held and used; and (2) measurement of long-lived assets to be disposed of by sale. FASB Statement No. 144 has not had a material impact on our financial position or results of operations, although it may in future periods.  Statement No. 144 is effective for fiscal years beginning after December 15, 2001.

 

Critical Accounting Policies

 

Revenue Recognition.  We recognize revenue based upon sales to customers in our restaurants at the time that meals and related services are provided.  No revenue is recognized in advance of services being provided.  Because of the nature of our business, refunds on services provided are minimal and infrequent.  The majority of sales are paid for in cash or by major credit card and, therefore, collection risk for unpaid amounts is considered to be low.  We sell gift certificates for use in our restaurants, but only recognize revenue at the time the services are actually rendered.  We do not believe that there are other methods of accounting for our revenue that would cause revenue recognized in any particular period to be materially different than the amounts that we have reported.

 

Use of Estimates.  The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates.

 

We believe that our financial statements are a reasonable representation of the realizable values of our assets, the level of our liabilities, and the amounts of revenues and expenses incurred in any given period.  There are estimates inherent in these amounts.  We may not be able to recover the assumed value of all of our assets, such as property and equipment or intangible assets, if circumstances cause us to close restaurants or we experience a decline in revenues.  Our actual liabilities for matters, such as self-insurance or discontinued operations, could possibly be significantly higher or lower than our estimates if actual conditions are ultimately different than the assumptions used in determining the estimates.

 

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

 

Valuation Allowance for Deferred Tax Assets.  We provided a valuation allowance of $34.1 million and $33.7 million against the entire amount of our deferred tax assets as of the fiscal year ended 2001 and as of the fiscal quarter ended July 1, 2002, respectively. The valuation allowance was recorded given the losses we have incurred historically and uncertainties regarding future operating profitability and taxable income.  Had we assumed that our deferred tax assets were fully realizable, a deferred tax benefit of $1,036,000 would have been recognized in the statement of operations for the fiscal year ended 2001.

 

Change in Auditors.  On August 5, 2002 we received a letter from the Securities and Exchange Commission (“SEC”) informing the Company that the SEC has received a notice from Arthur Andersen LLP (“Andersen”), the Company’s independent accountants, that Andersen is unable to perform future audit services for us and, as a result, Andersen’s relationship with us is effectively terminated.  We did not receive a copy of this notification directly.

 

The reports of Andersen on our financial statements for the past two fiscal years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principle.

 

In connection with audits for our two most recent fiscal years and through July 1, 2002, there were no disagreements with Andersen on any matter of accounting principles or practices, financial-statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Andersen, would have caused it to make reference to the subject matter of the disagreements in its report on ARG’s financial statements for such years.

 

During our two most recent fiscal years and through July 1, 2002, there have been no reportable events, as defined in Item 304(a)(1)(v) of Regulation S-K.

 

Upon retaining new independent accountants, the Company and its new auditors will review this Form 10-Q and our historical financial reports. This review may result in a recommendation or requirement by our auditors to change certain historical accounting treatments.  The implications, if any, will depend upon the views of the new auditors after conducting their examination and what specific changes, if any, are ultimately made.

 

On August 13, 2002, our Board of Directors authorized us to engage new independent accountants.  After the new auditors are engaged, we will file a Form 8-K to announce the new relationship.

 

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ITEM 3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The market risk of our financial instruments as of July 1, 2002 has not materially changed since December 31, 2001.  The market risk profile on December 31, 2001 is disclosed in our annual report on Form 10-K, File No. 33-48183, for the fiscal year ended December 31, 2001.

 

PART II.                OTHER INFORMATION

 

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

 

N/A

 

ITEM 5.                  OTHER INFORMATION

 

N/A

 

ITEM 6.                  EXHIBITS AND REPORTS ON FORM 8-K

 

(a)           List of Exhibits

 

Exhibit No.		Description
99.2		Certificate of Chief Executive Officer and Chief Financial Officer

 

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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.

 

	AMERICAN RESTAURANT GROUP, INC.
	(Registrant)
Date:  August 14, 2002	By:		/s/ Ralph S. Roberts
			Ralph S. Roberts
			Chief Executive Officer and President
Date:  August 14, 2002	By:	/s/ William G. Taves
		William G. Taves
		Chief Financial Officer

 

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