UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

 

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

4410 El Camino Real, Suite 201
Los Altos, CA  94022
(650) 949-6400

(Address and telephone number of principal executive offices)

 

 

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

 

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  o      No  ý

 

Registrant’s financial statements for the fiscal year-end 2000 included in the Form 10-K filed on March 31, 2003 were unaudited.

 

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

Yes  o      No  ý

 

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

 

 

AMERICAN RESTAURANT GROUP, INC.

 

INDEX

 

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

 

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PART I.   FINANCIAL INFORMATION

 

ITEM 1.     FINANCIAL STATEMENTS:

 

AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED BALANCE SHEETS

 

DECEMBER 30, 2002 AND JUNE 30, 2003

 

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

 

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

 

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		December 30, 2002			(Unaudited) June 30, 2003
LIABILITIES AND COMMON STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Accounts payable		$	7,825,000		$	12,838,000
Accrued liabilities		4,235,000			3,384,000
Gift-certificate liability		6,226,000			2,863,000
Self-insurance reserves		3,526,000			3,620,000
Accrued interest		3,385,000			3,238,000
Accrued employee costs		4,141,000			3,685,000
Accrued occupancy costs		4,696,000			5,275,000
Current portion of obligations under capital leases		646,000			287,000
Current portion of long-term debt		3,491,000			79,000
Total current liabilities		38,171,000			35,269,000
LONG-TERM LIABILITIES, net of current portion:
Obligations under capital leases		1,153,000			1,071,000
Long-term debt, net of unamortized discount		155,697,000			156,613,000
Total long-term liabilities		156,850,000			157,684,000
DEFERRED GAIN ON SALE-LEASEBACK		3,788,000			3,687,000
COMMITMENTS AND CONTINGENCIES
CUMULATIVE PREFERRED STOCK, MANDATORILY REDEEMABLE:
Senior pay-in-kind exchangeable preferred stock, $0.01 par value; 160,000 shares authorized; 68,046 shares outstanding and accrued at December 30, 2002 and 73,149 shares outstanding and accrued at June 30, 2003		74,586,000			80,398,000
COMMON STOCKHOLDERS’ (DEFICIT):
Common stock, $0.01 par value; 1,000,000 shares authorized; 128,081 shares issued and outstanding at December 30, 2002 and June 30, 2003		1,000			1,000
Accumulated (deficit)		(195,523,000		)	(202,918,000		)
Total common stockholders’ (deficit)		(195,522,000		)	(202,917,000		)
Total liabilities and common stockholders’ (deficit)		$	77,873,000		$	74,121,000

 

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

 

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AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

 

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

 

(UNAUDITED)

 

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

 

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

 

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AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

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

 

(UNAUDITED)

 

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

 

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

 

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AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

1.                                       BASIS OF PRESENTATION

 

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 30, 2002 and June 30, 2003, and the results of our operations for the thirteen weeks and twenty-six weeks ended July 1, 2002 and June 30, 2003 and our cash flows for the twenty-six weeks ended July 1, 2002 and June 30, 2003.  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 our annual report on Form 10-K for the fiscal year ended December 30, 2002.

 

2.                                       OPERATIONS AND REFINANCING

 

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 had 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, which we redeemed in full on February 18, 2003) and assumed payment obligations equivalent to $161,774,000 of the New Notes.  The Refinancing substantially eliminates debt principal payments until November 2006.

 

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.                                       INCOME TAXES

 

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

 

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

 

5.                                       SUBSIDIARY GUARANTORS

 

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

 

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aggregate net assets, earnings, and equity of such subsidiary guarantors are substantially equivalent to the net assets, earnings, and equity of the Company (issuer) on a consolidated basis, as the Company has no significant operations.

 

6.                                       INSURANCE

 

The Company self-insures certain risks, including medical, workers’ compensation, property, and general liability, up to varying limits.  Deductible and self-insured limits have varied historically, ranging from $0 to $1,000,000 per incident depending on the type of risk.  The policy deductibles are $125,000 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.

 

7.                                       NEW ACCOUNTING PRONOUNCEMENTS

 

In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections” (“SFAS 145”).  SFAS 145 rescinds FASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements,” as well as FASB Statement No. 44, “Accounting for Intangible Assets of Motor Carriers.”  This Statement amends FASB Statement No.  13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions.  This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions.  The provisions of SFAS 145 are being adopted during fiscal year 2003.  We do not anticipate that the adoption of this statement will have a material impact on our consolidated balance sheets or consolidated statements of operations.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities”  (“SFAS 146”).  SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”  The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 will be effective for exit or disposal activities that are initiated after December 30, 2002 and early application is encouraged.  The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS 146.  We do not anticipate that adoption of this statement will have a material impact on our consolidated balance sheets or consolidated statements of operations.

 

8.                                       COMMITMENTS AND CONTINGENCIES

 

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

 

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

 

9                                          SUBSEQUENT EVENT

 

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

 

In connection with the sale, the Company transferred rights and obligations to SRG.  Management of the Company believes the Company has no amounts due to SRG.   There can be no assurance, however, that third parties will not attempt to assert claims against the Company for obligations, including those leases rejected by SRG through bankruptcy procedures.  No reasonable estimate can be made at this time of the scope or size of any such potential claims.  Because the bankruptcy filing is so recent, we are unaware of how any remaining obligations of SRG to the Company or other parties will be resolved, including the length of payment schedules.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

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 July 1, 2002 and June 30, 2003:

 

Revenues. Total revenues decreased from $74.7 million in the second quarter of 2002 to $71.2 million in the second quarter of 2003.  Same-store sales decreased 4.5 % in the second quarter of 2003 compared to 2002.  Continuing with the strategy of reducing the number of less-profitable product promotions resulted in promotional counts decreasing 2.7% during the second quarter of 2003 compared to the second quarter of 2002.  This planned reduction in the sale of promoted items also decreased advertising expense by $1.0 million in the second quarter of 2003 compared to the second quarter of 2002.  The average dinner check increased 1.3% from the second quarter of 2003.  There were 109 Black Angus restaurants operating in both quarters.

 

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

 

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

 

Direct Operating Costs:  Direct operating costs consist of occupancy, advertising, and other expenses incurred by individual restaurants.  As a percentage of revenues, direct operating costs decreased 1.8% from 25.2% in the second quarter of 2002 to 23.4% in the second quarter of 2003. The decrease is attributable to lower advertising expenses and a reduction in janitorial service contracts.

 

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.  Depreciation and amortization remained constant at $1.8 million in the second quarter of 2002 and 2003.

 

General and Administrative Expenses.  General and administrative expenses decreased from $2.5 million in the second quarter of 2002 to $2.4 million in the second quarter of 2003.  The decrease is the result of lower corporate overhead expenses.

 

Operating Profit.  As a result of the above items, operating profit decreased from $4.9 million in the second quarter of 2002 to $4.2 million in the second quarter of 2003.  As a percentage of revenues, operating profit decreased from 6.5% in the second quarter of 2002 to 6.0% in the second quarter of 2003.

 

Interest Expense – Net. Our interest expense decreased from $5.6 million in the second quarter of 2002 to $5.3 million in the second quarter of 2003.  The decrease resulted from the redemption of $3.4 million in senior notes completed in the first quarter of 2003.

 

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

 

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

 

Food and Beverage Costs.  As a percentage of revenues, food and beverage costs improved from 33.0% in the first half of 2002 to 32.3% in the first half of 2003.  This decrease results from fewer sales of promotional products in the first half offset by higher beef costs in the second quarter 2003.

 

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Payroll Costs.  Payroll costs decreased $2.3 million from $46.7 million during the second quarter of 2002 to $44.4 million during the second quarter of 2003.  As a percentage of sales, payroll increased from 29.9% in the second quarter of 2002 to 30.6% in the second quarter of 2003.

 

Direct Operating Costs:  Direct operating costs consist of occupancy, advertising, and other expenses incurred by individual restaurants.  As a percentage of revenues, these costs decreased from 25.0% in the first half of 2002 to 24.6% in the first half of 2003.  The savings relate to decreased advertising costs and a reduction in janitorial service contracts in the first half of 2003.

 

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.  Depreciation and amortization decreased from $3.7 million in the first half of 2002 to $3.6 million in the first half of 2003.

 

General and Administrative Expense.  General and administrative expenses increased from $4.8 million in the first half of 2002 to $5.1 million in the first half of 2003.  The increase is a result of higher fees incurred in the first quarter in connection with the audits of the 2001 and 2002 financial statements.

 

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

 

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

 

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 June 30, 2003, we had approximately $2.8 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 June 30, 2003, our working-capital deficit was $25.9 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 $2.2 million through the first half of 2003.  We estimate that capital expenditures in 2003 will be approximately $3.5 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 had 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, which we redeemed in full on February 18, 2003) and assumed payment obligations equivalent to $161,774,000 of the New Notes. The Refinancing substantially eliminates debt principal payments until November 2006.

 

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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.

 

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

 

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 $9.3 million on May 1, 2003.

 

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

 

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 June 30, 2003, we had approximately $8.8 million of letters of credit outstanding and no borrowings, leaving approximately $6.2 million remaining under the New Credit Facility. The New Credit Facility expires in December 2005.

 

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

 

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

 

Contractual Obligations		Paid in Q1&2– 2003			Remainder of Fiscal 2003			Fiscal Years 2004&2005			Fiscal Years 2006&2007			Fiscal Years Beyond 2007			Total
Long-Term Debt – Interest on Notes		$	9,498		$	9,302		37,208			$	18,604		$	—		$	74,612
Long-Term Debt – Other		3,410			81			79			161,879			893			166,342
Capital Leases		441			395			495			464			882			2,677
Operating Leases		9,637			8,906			32, 289			28,296			189,741			268,869
Total Contractual Cash		$	22,986		$	18,684		$	70,071		$	209,243		$	191,516		$	512,500

 

Preferred stock dividends of 4,832 shares were issued on February 15, 2003.  There were 73,149 shares of preferred stock outstanding and accrued at June 30, 2003. 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.

 

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 at least the next twelve months. 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.

 

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Critical Accounting Policies

 

Revenue Recognition. We record revenue from the sale of food, beverage, and alcohol as products are sold.   We record proceeds from the sale of a gift card or gift certificate in current liabilities and recognize income when a holder redeems a gift card or gift certificate.  We recognize unredeemed gift cards and certificates as revenue only after such a period of time indicates, based on the Company’s historical experience, the likelihood of redemption is remote.

 

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 material decline in profitability.  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.

 

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 $44.4 million and $45.2 million against the entire amount of our deferred tax assets as of December 30, 2002 and June 30, 2003, respectively.  The Company fully reserves both the net-operating-loss and general-business-credit carryforwards because sufficient doubt exists regarding the Company’s ability to use the carryforwards before expiration.

 

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

 

Advertising Costs.  Advertising costs are expensed either as incurred or the first time the advertising takes place, in accordance with Statement of Position 93-7, “Reporting on Advertising Costs.”

 

Reclassification.  Certain accounts have been reclassified to conform with the current year’s presentation.

 

Self-Insurance Reserves.  The Company self-insures 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 $1,000,000 per incident depending on the type of risk.  The policy deductibles are $125,000 for annual medical and dental benefits per person.  Reserves for losses are established on a claims-made basis plus an actuarially determined provision for incurred-but-not-reported claims and the deductible or self-insured retention in place at the time of the loss.  The self-insured reserves are reported on the balance sheet under self-insurance reserves.

 

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ITEM 3.                                                     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The market risk of our financial instruments as of June 30, 2003 has not materially changed since December 30, 2002.  The market risk profile on December 30, 2002 is disclosed in our annual report on Form 10-K, File No. 33-48183, for the fiscal year ended December 30, 2002.

 

ITEM 4.                                                     CONTROLS AND PROCEDURES

 

The Company’s management has designed and periodically reviews and internally audits the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  Based on those periodic reviews, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of December 30, 2002.  There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to December 30, 2002.

 

PART II.                                                OTHER INFORMATION

 

ITEM 6.                                                     EXHIBITS AND REPORTS ON FORM 8-K

 

(a)                                  List of Exhibits

 

Exhibit No.		Description
31		Certificate of Chief Executive Officer and Chief Financial Officer to Section 302
32		Certificate of Chief Executive Officer and Chief Financial Officer to Section 906

 

(b)                                 Form 8-K filed on May 16, 2003 – announcement of first quarter 2003 financial results.

 

(c)                                  Form 8-K filed on May 28, 2003 – announcement expanding on first quarter 2003 financial results.

 

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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, 2003	By:	/s/ Ralph S. Roberts
			Ralph S. Roberts
			Chief Executive Officer
Date:	August 14, 2003	By:	/s/ William G. Taves
			William G. Taves
			Chief Financial Officer

 

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