10-Q 1 a04-9474_110q.htm 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

 

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the quarterly period ended June 28, 2004

 

OR

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the transition period from                   to                  

 

American Restaurant Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

33-48183

 

33-0193602

(State or other jurisdiction of
incorporation or organization)

 

(Commission File
Number)

 

(I.R.S. employer
identification no.)

 

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 ý    No o

 

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 2, 2004 was 102,442.

 

 



 

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 3.

DEFAULTS UPON SENIOR SECURITIES

 

 

 

 

ITEM 6.

EXHIBITS AND REPORTS ON FORM 8-K

 

 

2



 

PART I.                 FINANCIAL INFORMATION

 

ITEM 1.                  FINANCIAL STATEMENTS:

 

AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED BALANCE SHEETS

 

DECEMBER 29, 2003 AND JUNE 28, 2004

 

 

 

December 29,
2003

 

(Unaudited)
June 28,
2004

 

 

 

(dollars in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash

 

$

2,068

 

$

1,444

 

Rebates and other receivables, net

 

2,060

 

1,420

 

Inventories

 

2,823

 

2,752

 

Prepaid expenses

 

922

 

1,429

 

 

 

 

 

 

 

Total current assets

 

7,873

 

7,045

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, net:

 

 

 

 

 

Land and land improvements

 

571

 

512

 

Buildings and leasehold improvements

 

34,614

 

32,796

 

Fixtures and equipment

 

11,240

 

10,335

 

Property held under capital leases

 

703

 

613

 

Construction in progress

 

201

 

154

 

 

 

 

 

 

 

Net property and equipment

 

47,329

 

44,410

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

Goodwill, net

 

8,287

 

8,287

 

Intangible assets, net

 

6,919

 

5,834

 

Other

 

2,414

 

2,404

 

 

 

 

 

 

 

Net other assets

 

17,620

 

16,525

 

 

 

 

 

 

 

Total assets

 

$

72,822

 

$

67,980

 

 

1



 

 

 

December 29,
2003

 

(Unaudited)
June 28,
2004

 

 

 

(dollars in thousands)

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

8,659

 

$

6,493

 

Accrued liabilities

 

3,439

 

2,069

 

Current portion of store-closure reserve

 

991

 

419

 

Current portion of SRG Group bankruptcies reserve

 

4,239

 

4,691

 

Gift-certificate liability

 

1,890

 

1,262

 

Gift-card liability

 

7,568

 

4,891

 

Self-insurance reserve

 

3,267

 

3,532

 

Accrued interest

 

3,391

 

12,926

 

Accrued employee costs

 

3,929

 

4,114

 

Accrued occupancy costs

 

5,415

 

5,944

 

Current portion of obligations under capital leases

 

218

 

198

 

Current portion of long-term debt

 

6,158

 

166,831

 

 

 

 

 

 

 

Total current liabilities

 

49,164

 

213,370

 

 

 

 

 

 

 

LONG-TERM LIABILITIES:

 

 

 

 

 

Obligations under capital leases

 

1,214

 

1,112

 

Store-closure reserve

 

6,051

 

6,018

 

SRG Group bankruptcies reserve

 

3,685

 

2,825

 

Long-term debt, net of unamortized discount

 

162,528

 

1,019

 

 

 

 

 

 

 

Total long-term liabilities

 

173,478

 

10,974

 

 

 

 

 

 

 

DEFERRED GAIN ON SALE-LEASEBACK

 

3,586

 

3,485

 

 

 

 

 

 

 

COMMON STOCKHOLDERS’ DEFICIT:

 

 

 

 

 

Common stock, $0.01 par value; 1,000,000 shares authorized; 102,442 shares issued and outstanding at December 29, 2003 and June 28, 2004

 

1

 

1

 

Paid-in capital

 

81,893

 

81,893

 

Accumulated deficit

 

(235,300

)

(241,743

)

 

 

 

 

 

 

Total common stockholders’ deficit

 

(153,406

)

(159,849

)

 

 

 

 

 

 

Total liabilities and common stockholders’ deficit

 

$

72,822

 

$

67,980

 

 

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

 

2



 

AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

 

FOR THE THIRTEEN WEEKS AND THE TWENTY-SIX WEEKS ENDED JUNE 30, 2003 AND JUNE 28, 2004

(UNAUDITED)

 

 

 

 

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

 

 

 

June 30,
2003

 

June 28,
2004

 

June 30,
2003

 

June 28,
2004

 

 

 

(dollars in thousands)

 

(dollars in thousands)

 

REVENUES

 

$

71,176

 

$

70,224

 

$

144,915

 

$

144,749

 

 

 

 

 

 

 

 

 

 

 

RESTAURANT COSTS:

 

 

 

 

 

 

 

 

 

Food and beverage

 

23,791

 

26,383

 

46,832

 

52,201

 

Payroll

 

22,283

 

22,324

 

44,383

 

45,670

 

Direct operating

 

16,664

 

14,903

 

35,699

 

30,380

 

Depreciation and amortization

 

1,817

 

1,801

 

3,632

 

3,560

 

 

 

 

 

 

 

 

 

 

 

GENERAL AND ADMINISTRATIVE EXPENSES

 

2,377

 

2,581

 

5,144

 

5,460

 

Loss on asset impairment

 

 

2,366

 

 

2,366

 

Restructuring expense

 

 

291

 

 

291

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss)

 

4,244

 

(425

)

9,225

 

4,821

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE, net

 

5,346

 

5,714

 

10,691

 

11,256

 

 

 

 

 

 

 

 

 

 

 

Loss before provision for income

 

(1,102

)

(6,139

)

(1,466

)

(6,435

)

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

46

 

8

 

48

 

8

 

 

 

 

 

 

 

 

 

 

 

Loss from Continuing Operations

 

(1,148

)

(6,147

)

(1,514

)

(6,443

)

 

 

 

 

 

 

 

 

 

 

Loss from Discontinued Operations

 

(69

)

 

(69

)

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

(1,217

)

(6,147

)

(1,583

)

(6,443

)

 

 

 

 

 

 

 

 

 

 

PREFERRED STOCK DIVIDENDS, ISSUED AND ACCRUED

 

2,957

 

 

5,812

 

 

 

 

 

 

 

 

 

 

 

 

Loss to common stockholders

 

(4,174

)

(6,147

)

$

(7,395

)

$

(6,443

)

 

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

 

3



 

AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

FOR THE TWENTY-SIX WEEKS ENDED MARCH 31, 2003 AND JUNE 28, 2004

 

(UNAUDITED)

 

 

 

June 30, 2003

 

June 28, 2004

 

 

 

(dollars in thousands)

 

CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operating activities

 

$

(1,514

)

$

(6,443

)

Adjustments to reconcile net loss to net cash provided by continuing operating activities:

 

 

 

 

 

Depreciation and amortization

 

3,632

 

3,560

 

Amortization of deferred gain on sale/leaseback

 

(101

)

(101

)

Amortization of discount on New Notes

 

933

 

933

 

Loss on impairment

 

 

2,366

 

Decrease in assets

 

248

 

204

 

Increase in current liabilities

 

869

 

2,554

 

 

 

 

 

 

 

Net cash provided by continuing operating activities

 

4,067

 

3,073

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(2,150

)

(1,806

)

 

 

 

 

 

 

Net cash used in investing activities

 

(2,150

)

(1,806

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Payments on indebtedness

 

(3,429

)

(1,769

)

Payments on capital-lease obligations

 

(441

)

(122

)

 

 

 

 

 

 

Net cash used in financing activities

 

(3,870

)

(1,891

)

 

 

 

 

 

 

NET DECREASE IN CASH FROM CONTINUING OPERATIONS

 

(1,953

)

(624

)

 

 

 

 

 

 

NET DECREASE IN CASH FROM DISCONTINUED OPERATIONS

 

(69

)

 

 

 

 

 

 

 

NET CHANGE IN CASH, CURRENT PERIOD

 

(2,022

)

(624

)

 

 

 

 

 

 

CASH, at beginning of period

 

4,773

 

2,068

 

 

 

 

 

 

 

CASH, at end of period

 

$

2,751

 

$

1,444

 

 

 

 

 

 

 

Cash payments during the period:

 

 

 

 

 

Interest

 

$

(9,905

)

$

(680

)

Income taxes

 

(28

)

(8

)

 

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

 

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,” ‘the registrant,”  “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 29, 2003 and June 28, 2004, the results of our operations for the thirteen and twenty-six weeks ended June 30, 2003 and June 28, 2004, and our cash flows for the twenty-six weeks ended June 30, 2003 and June 28, 2004.  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 29, 2003.

 

2.             GOING CONCERN

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  The Company is highly leveraged.  The Company has historically used cash flow from operations together with other liquidity sources to make required payments.  As of June 28, 2004, the Company had no further availability under its New Credit Facility (defined in Note 4), no further availability under its Junior Credit Facility (defined in Note 4), and $1.4 million in cash on hand.  The Company has suffered recurring losses from operations, has a negative working-capital balance of $206.3 million, and has a net capital deficiency of $159.8 million as of June 28, 2004 that raise substantial doubt about its ability to continue as a going concern.  Management is currently evaluating alternatives for restructuring the Company’s overall outstanding debt and the associated interest rate.  The Company does not, however, expect to generate sufficient cash flows from operations in the future to pay fully at maturity all of its senior debt obligations.  Accordingly, the Company will need to refinance or restructure all or portions of such debt, obtain new financing, or possibly sell assets.  There can be no assurance that any such plans will be successful or that future financing or restructuring will be available or, if available, at a cost that is acceptable to the Company.

 

On May 3, 2004, the Company did not pay the $9.3 million semiannual interest payment (the “Note Interest Default”), then due on the New Notes (defined in Note 4).  Under the provisions of the indenture governing the New Notes, the Company had a grace period ending June 2, 2004 within which to make the interest payment before there is an “Event of Default” (as such term is defined in the indenture) that entitled the holders of the New Notes to certain rights and remedies, including the right to accelerate the principal and interest due under the New Notes.  In turn, under the provisions of each of the Company’s credit facilities, the development of a right, irrespective of exercise, in the holders of the New Notes to accelerate the New Notes would cause an “Event of Default” (as such term is defined in each of the New Credit Facility and the Junior Credit Facility) that allows the respective lender to exercise certain rights and remedies, including acceleration, under its facility.

 

On June 1, 2004, the Company entered into a forbearance agreement (the “Note Forbearance Agreement”) with holders in excess of  60% of the New Notes (the “Signing Holders”) pursuant to which the Signing Holders agreed to forbear from exercising rights and remedies with respect to the Note Interest Default.  The Note Forbearance Agreement has been extended until September 3, 2004, subject to certain terms and conditions. 

 

As of June 28, 2004, the Company’s cash borrowings and letters of credit, totaling $15.0 million, exceeded the then-available borrowing base as calculated in the loan agreement governing the New Credit Facility.  In addition, the Company was in default of the New Credit Facility because of a cross-default caused by the Note Interest Default and the Company’s failure to deliver financial statements carrying an opinion without qualifications from its auditors as required by the New Credit Facility. 

 

On August 5, 2004, the Company entered into a forbearance agreement (the “NCF Forbearance Agreement”) with the lender under the New Credit Facility pursuant to which such lender agreed to forbear from exercising rights and remedies with respect to the certain defaults and events of default under the New Credit Facility until September 3, 2004, subject to certain

 

5



 

terms and conditions.  Also on August 5, 2004, the Company increased the amount available under the New Credit Facility to $17.5 million.

 

As of June 28, 2004, the Company was also in default of the Junior Credit Facility because of a cross-default caused by the Note Interest Default and the Company’s failure to deliver financial statements carrying an opinion without qualifications from its auditors as required by the Junior Credit Facility.

 

On August 12, 2004, the Company entered into a forbearance agreement (the “Junior Forbearance Agreement”) with the lender under the Junior Credit Facility pursuant to which such lender agreed to forbear from exercising its rights and remedies with respect to certain defaults and events of default under the Junior Credit Facility until September 3, 2004, subject to certain terms and conditions. 

 

There can be no assurances that any or all of the Note Forbearance Agreement, the NCF Forbearance Agreement, or the Junior Forbearance Agreement will be extended beyond September 3, 2004 or that the Company will not need to negotiate future forbearance agreements for any noncompliance with its debt documents. 

 

The Company has retained the consulting firm of Alvarez and Marsal, Inc. to provide restructuring advisory services to its Board of Directors and to assist the Company in the restructuring process of its organization.  The Company also has engaged investment bankers Houlihan Lokey Howard & Zukin to explore financial restructuring alternatives and assist with discussions with the Company’s creditors and shareholders.  Certain holders of the New Notes have formed an informal committee and have engaged a financial advisor and outside legal counsel at the Company’s expense.  The Company has commenced restructuring negotiations with the committee’s advisors, the lender under the New Credit Facility, the lender under the Junior Credit Facility, and the Company’s majority shareholder group.  The Company is also in negotiations with the lessors of certain of the Company’s unfavorable leases.  There is the possibility that a restructuring may be implemented through an out-of-court arrangement if the Company were to reach satisfactory agreements with many of the parties.  However, no restructuring agreements have been reached with any party, and there can be no assurance that the Company will reach any such agreement with any particular party.   If no such agreements can be reached or if any agreement(s) that may be reached cannot be implemented through an out-of-court transaction, the Company will likely seek protection under the United States Bankruptcy Code to further pursue its restructuring alternatives and/or to implement any agreement(s) that may be reached.

 

3.             OPERATIONS

 

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

 

4.             DEBT

 

On October 31, 2001, the Company consummated an exchange offer (the “Exchange”) pursuant to which the Company offered to exchange its 11½% Senior Secured Notes due 2006 (the “New Notes”) for all of its $142.6 million outstanding 11½% Senior Secured Notes due 2003 (the “Old Notes”) and an offering (the “Offering”) of $30.0 million aggregate principal amount of New Notes.  After the consummation of the Exchange, the Offering, and related transactions (collectively, the “Refinancing”), the Company had no further payment obligations with respect to over 97.6% of the outstanding Old Notes (constituting all but $3.4 million aggregate principal amount of the Old Notes) and assumed payment obligations equivalent to $161.8 million of the New Notes.  The Refinancing substantially eliminates debt principal payments until November 2006.

 

The Company’s three wholly owned direct subsidiaries, ARG Enterprises, Inc., ARG Property Management Corporation, and ARG Terra, Inc. (collectively, the “Direct Subsidiaries”), jointly and severally guarantee, on a full and unconditional basis, the outstanding indebtedness of the Company evidenced by the New Notes.  The Company has no material assets or operations that are independent of the Direct Subsidiaries.  The Company’s non-guarantor indirect subsidiary is minor.  There are no restrictions on the ability of the Company to obtain funds from the Direct Subsidiaries by dividend or loan.

 

On May 3, 2004, the Company did not pay the $9.3 million semiannual interest payment then due on the New Notes.  Under the provisions of the indenture governing the New Notes, the Company had a grace period ending June 2, 2004 within which to make the interest payment before there is an “Event of Default” (as such term is defined in the indenture).  See Note 2.

 

6



 

On June 1, 2004, the Company entered into the New Note Forbearance Agreement pursuant to which the Signing Holders agreed to forbear from exercising rights and remedies with respect to such “Event of Default.”  The New Note Forbearance Agreement has been extended until September 3, 2004, subject to certain terms and conditions.

 

Due to the default, the long term debt related to the New Notes and Junior Credit Facility has been reclassified to current on the accompanying balance sheet.

 

In 2001, the Company entered into a loan agreement with Wells Fargo Foothill, Inc. (then known as Foothill Capital Corporation) for a new revolving credit facility (the “New Credit Facility”).  The New Credit Facility presently provides for cash borrowings and letters of credit in an aggregate amount up to $17.5 million.  The New Credit Facility provides for an unused-line fee payable monthly in arrears, fees payable on outstanding letters of credit, as well as certain additional fees.  Borrowings under the New Credit Facility bear interest at the prime rate announced by Wells Fargo Bank, National Association plus 1.5%.  The New Credit Facility terminates on December 17, 2005, and shares in a first-priority lien on substantially all personal property and certain real property leases.  The New Credit Facility includes certain restrictive covenants, including a requirement to maintain certain financial ratios.  As of June 28, 2004, the Company had $10.7 million of letters of credit outstanding, primarily related to its self-insurance program, and $4.3 in cash borrowings, with no availability at that time under its New Credit Facility.  Such cash borrowings and letters of credit, totaling $15.0 million, exceeded the then-available borrowing base as calculated in the loan agreement governing the New Credit Facility.

 

On August 5, 2004, the Company amended the New Credit Facility to increase the maximum amount available under the New Credit Facility to $17.5 million and to modify both the borrowing base and the financial covenants thereunder.  On August 5, 2004, the Company entered into the NCF Forbearance Agreement with the lender under the New Credit Facility pursuant to which such lender agreed to forbear from exercising rights and remedies with respect to certain defaults and events of default under the New Credit Facility until September 3, 2004.  See Note 2.

 

On October 31, 2003, the Company entered into a loan agreement for a junior credit facility (“Junior Credit Facility”) with TCW Shared Opportunity Fund III, L.P., an entity related to a group of funds that constitute the majority shareholder group.  The Company received proceeds of $4.6 million net of fees and costs.  The Junior Credit Facility bears an interest rate of 13% per annum.  The Junior Credit Facility expires February 24, 2006, and shares in a first-priority lien on substantially all personal property and certain real property leases.

 

On August 5, 2004, the Company amended the Junior Credit Facility to permit additional borrowing in amount up to $17.5 under the New Credit Facility.  On August 12, 2004, the Company entered into the Junior Forbearance Agreement with the lender under the Junior Credit Facility pursuant to which such lender agreed to forbear from exercising its rights and remedies with respect to certain defaults and events of default under the Junior Credit Facility until September 3, 2004.  See Note 2.

 

Substantially all personal property and certain real property leases of the Company and its subsidiaries are pledged to senior lenders.  In connection with such indebtedness, contingent and mandatory prepayments may be required under certain specified conditions and events.  There are no compensating-balance requirements.

 

7



 

 

 

December 29,
2003

 

June 28,
2004

 

 

 

(dollars in thousands)

 

New Notes, interest only due semiannually beginning May 1, 2002 at 11.5%, principal due November 1, 2006*

 

$

161,774

 

$

161,774

 

Unamortized discount on New Notes

 

(5,288

)

(4,354

)

New Credit Facility, interest on borrowings at prime rate plus 1.5%, facility expiring December 17, 2005*

 

6,087

 

4,341

 

Junior Credit Facility, interest only due quarterly beginning December 31, 2003 at 13.0% interest, principal due February 24, 2006*

 

5,000

 

5,000

 

Other

 

1,113

 

1,089

 

 

 

 

 

 

 

 

 

168,686

 

167,850

 

Less – Current portion

 

(6,158

)

(166,831

)

 

 

 

 

 

 

Long-term portion

 

$

162,528

 

$

1,019

 

 


*Because of the Event of Default, the obligation is deemed accelerated and payable at the end of the respective forbearance agreement because it may become due at such time rather than at the respective maturity date absent such acceleration.

 

Maturities of the debt (principal only) during the fiscal years following fiscal year-end 2003 are the following (without giving effect to the defaults described in Note 2):

 

(dollars in thousands)

 

Principal
Payment

 

 

 

 

 

2004

 

$

6,158

 

2005

 

44

 

2006

 

166,823

 

2007

 

56

 

2008

 

63

 

Thereafter

 

830

 

 

 

 

 

Total Loan Principal Payments

 

$

173,974

 

 

5.             INCOME TAXES

 

The tax provision against the pre-tax income in 2003 and in 2004 consisted of certain state income taxes and estimated federal income tax.  We previously established a valuation allowance against net-operating-loss carryforwards.

 

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

 

7.             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 Company’s 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 reserve.

 

8



 

8.             RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2003, the FASB issued FASB Interpretation Number (“FIN”) 46, Consolidation of Variable Interest Entities (“FIN 46”), which was subsequently revised in December 2003 (“FIN 46R”).  FIN 46R requires a variable-interest entity to be consolidated by a company if that company is the primary beneficiary of the entity.  A company is a primary beneficiary if it is subject to a majority of the risk of loss from the variable-interest entity’s activities, entitled to receive a majority of the entity’s residual returns, or both.  FIN 46R also requires disclosures about variable-interest entities that a company is not required to consolidate but in which it has a significant variable interest.  FIN 46R was applicable immediately to variable-interest entities created after January 31, 2003, and will be effective for all other existing entities in financial statements for periods ending after December 15, 2004.  The Company has no material interest in any variable-interest entity, and does not expect the full adoption of FIN 46R to have a material impact on the Company’s consolidated financial condition or results of operations.

 

9.             ASSET IMPAIRMENT

 

In the second quarter of 2004, we recorded a total of $2.4 million in charges related to asset impairments for four under-performing restaurants.  As required under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” $1.9 million in fixed assets and $0.5 million of intangibles were written down for these locations.  The assets consisted of buildings/leasehold improvements, and fixtures /equipment. Fair market value of the leasehold improvements was determined based on discounted cash flows and the lower of the net book value or an estimate of current liquidation value for fixtures and equipment. 

 

As discussed in Note 2, in connection with the restructuring of the Company’s debt obligations, the Company may seek protection under the United States Bankruptcy Code to further pursue its restructuring alternatives and/or to implement agreements that may be reached.  In such an event, the Company may elect to reject certain leases deemed unfavorable and may, in connection thereto, have additional asset write-downs.

 

10.           STORE CLOSURE

 

On June 20, 2004, we closed one of our locations.

 

11.           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



 

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 June 30, 2003 and June 28, 2004:

 

Revenues.  Total revenues decreased from $71.2 million in the second quarter of 2003 to $70.2 million in the second quarter of 2004.  Same-store sales decreased by 0.6% in the second quarter of 2004 compared to 2003.  Of the sales decrease, 1.6% resulted from a decrease in customer counts during the second quarter of 2004 vs. the second quarter of 2003.  For the second quarter 2004, the average check improved 0.6% compared to the second quarter 2003.  Beverage sales improved 1.6% during the second quarter of 2004 vs. the second quarter of 2003.  The remaining change was a result of having five fewer stores operating during the quarter.  There were 109 Black Angus restaurants operating as of June 30, 2003 and 104 Black Angus restaurants operating as of June 28, 2004.

 

Food and Beverage Costs.  As a percentage of revenues, food and beverage costs increased 4.2% from 33.4% in the second quarter of 2003 to 37.6% in the second quarter of 2004.  Of the 4.2% increase, 3.3% was due to higher beef prices with the remainder of the difference the result of an increase in promotional sales being a greater part of the overall sales mix.

 

Payroll Costs.  As a percentage of revenues, labor costs increased from 31.3% in the second quarter of 2003 to 31.8% in the second quarter of 2004.  The increase results from transferring janitorial services from third-party contractors to our employees.

 

Direct Operating Costs.  Direct operating costs consist of occupancy, advertising, and other expenses incurred by individual restaurants.  Direct operating costs decreased from $16.7 million in the second quarter of 2003 to $14.9 million in the second quarter of 2004.  The decrease is the result of lower TV advertising expenses, the transferring of janitorial services to our employees, and less occupancy expenses as a result of operating fewer locations.

 

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 stable at $1.8 million in the second quarter of 2003 and 2004.

 

General and Administrative Expenses.  General and administrative expenses increased slightly, from $2.4 million in the second quarter of 2003 to $2.6 million in the second quarter of 2004.  The increase is a result of higher legal and consulting services.

 

Loss on Asset Impairment.  In the second quarter of 2004, we recorded a total of $2.4 million in charges related to asset impairments for four under-performing restaurants.  As required under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” $1.9 million in fixed assets and $0.5 million of intangibles were written down for these locations.  The assets consisted of buildings/leasehold improvements, and fixtures/equipment.  Fair market value was determined based on discounted cash flows of the leasehold improvements and the lower of the net book value or an estimate of current liquidation value for fixtures and equipment.

 

Restructuring Expense. We paid $0.3 million in the second quarter of 2004 to advisors in connection with the possible restructuring of our New Notes (defined below under the segment captioned “Liquidity and Capital Resources”).

 

Operating Profit(Loss).  As a result of the above items, operating profit decreased from $4.2 million in the second quarter of 2003 to a loss of $0.4 million in the second quarter of 2004. 

 

Interest Expense — Net.  Our interest expense increased from $5.3 million in the second quarter of 2003 to $5.7 million in the second

 

10



 

quarter of 2004.  The increase is primarily the result of the new Junior Credit Facility and default interest due as a result of not making the May 3rd interest payment on our New Notes.

 

Twenty-Six Weeks ended June 30, 2003 and June 28, 2004

 

Revenues.  Total revenues decreased slightly from $144.9 million in the first half of 2003 to $144.7 million in the first half of 2004.  Same-store sales increased by 0.6% in the first half of 2004 compared to 2003.  Of the sales increase, 1.8% resulted from an increase in customer counts during the first half of 2004 vs. the first half of 2003.  For the first half of 2004, the average check decreased 1.7% compared to the first half of 2003.  Beverage sales improved 3.8% during the first half of 2004 vs. the first half of 2003.  The remaining change was a result of having five fewer stores.  There were 109 Black Angus restaurants operating as of June 30, 2003 and 104 Black Angus restaurants operating as of June 28, 2004.

 

Food and Beverage Costs.  As a percentage of revenues, food and beverage costs increased from 32.3% in the first half of 2003 to 36.1% in the first half of 2004.  Of the 3.8% increase, 2.3% was due to higher beef prices with the remainder of the difference the result of an increase in promotional sales being a greater part of the overall sales mix.

 

Payroll Costs.   As a percentage of revenues, labor costs increased from 30.6% in the first half of 2003 to 31.6% in the first half of 2004.  The increase results from transferring janitorial services from third-party contractors to our employees.

 

Direct Operating Costs.  Direct operating costs consist of occupancy, advertising, and other expenses incurred by individual restaurants.  Direct operating costs decreased from $35.7 million in the first half of 2003 to $30.4 million in the first half of 2004.  The decrease is the result of lower TV advertising expenses, the transferring of janitorial services to our employees, and less occupancy expenses as a result of operating fewer locations.

 

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 consistent at $3.6 million in the first half of 2003 and 2004.

 

General and Administrative Expense.  General and administrative expenses increased from $5.1 million in the first half of 2003 to $5.5 million in the first half of 2004.  The increase is a result of higher legal and consulting services.

 

Loss on Asset Impairment.  We recorded a total of $2.4 million in charges related to asset impairments for four under-performing restaurants.  As required under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” $1.9 million in fixed assets and $0.5 million of intangibles were written down for these locations.  The assets consisted of buildings/leasehold improvements, and fixtures/equipment.  Fair market value was determined based on discounted cash flows of the leasehold improvements and the lower of the net book value or an estimate of current liquidation value for fixtures and equipment.

 

Restructuring Expense. We paid $0.3 million in the first half of 2004 to advisors in connection with the possible restructuring of our on our New Notes.

 

Operating Profit.  As a result of the above items, operating profit decreased from $9.2 million in the first half of 2003 to $4.8 million in the first half of 2004. 

 

Interest Expense — Net.  Our interest expense increased from $10.7 million in the first half of 2003 to $11.3 million in the first half of 2004.  The increase is primarily the result of the new Junior Credit Facility and default interest due as a result of not making the May 3rd interest payment on our New Notes.

 

Liquidity and Capital Resources

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  The Company is highly leveraged.  We have historically used cash flow from operations together with other liquidity sources to make required payments.  As of June 28, 2004, we had no further availability under its loan agreement with Wells Fargo Foothill, Inc. (“New Credit Facility”), no further availability under our loan agreement with TCW Shared Opportunity Fund III, L.P. (“Junior Credit Facility), and $1.4 million in cash on hand.  We have suffered recurring losses from operations, have a negative working-capital balance of $206.3 million, and have a net capital deficiency of $159.8 million as of June 28, 2004 that raise substantial doubt about our

 

11



 

ability to continue as a going concern.  Management is currently evaluating alternatives for restructuring the Company’s overall outstanding debt and the associated interest rate.  We do not, however, expect to generate sufficient cash flows from operations in the future to pay fully at maturity all of its senior debt obligations.  Accordingly, we will need to refinance or restructure all or portions of such debt, obtain new financing, or possibly sell assets.  There can be no assurance that any such plans will be successful or that future financing or restructuring will be available or, if available, at a cost that is acceptable to us.

 

On May 3, 2004, we did not pay the $9.3 million semiannual interest payment (the “Note Interest Default”), then due on our 11½% Senior Secured Notes due 2006 (“New Notes”).  Under the provisions of the indenture governing the New Notes, we had a grace period ending June 2, 2004 within which to make the interest payment before there was an “Event of Default” (as such term is defined in the indenture) that entitled the holders of the New Notes to certain rights and remedies, including the right to accelerate the principal and interest due under the New Notes.  In turn, under the provisions of each of our credit facilities, the development of a right, irrespective of exercise, in the holders of the New Notes to accelerate the New Notes would cause an “Event of Default” (as such term is defined in each of the New Credit Facility and the Junior Credit Facility) that allows the respective lender to exercise certain rights and remedies, including acceleration, under its facility.

 

On June 1, 2004, we entered into a forbearance agreement (the “Note Forbearance Agreement”) with holders in excess of 60% of the New Notes (the “Signing Holders”) pursuant to which the Signing Holders agreed to forbear from exercising rights and remedies with respect to the Note Interest Default.  The Note Forbearance Agreement has been extended until September 3, 2004, subject to certain terms and conditions. 

 

As of June 28, 2004, our cash borrowings and letters of credit, totaling $15.0 million, exceeded the then-available borrowing base as calculated in the loan agreement governing the New Credit Facility.  In addition, we were in default of the New Credit Facility because of a cross-default caused by the Note Interest Default and our failure to deliver financial statements carrying an opinion without qualifications from our auditors as required by the New Credit Facility. 

 

On August 5, 2004, we entered into a forbearance agreement (the “NCF Forbearance Agreement”) with the lender under the New Credit Facility pursuant to which such lender agreed to forbear from exercising rights and remedies with respect to the certain defaults and events of default under the New Credit Facility until September 3, 2004, subject to certain terms and conditions.  Also on August 5, 2004, we increased the amount available under the New Credit Facility to $17.5 million.

 

As of June 28, 2004, we were also in default of the Junior Credit Facility because of a cross-default caused by the Note Interest Default and our failure to deliver financial statements carrying an opinion without qualifications from our auditors as required by the Junior Credit Facility.

 

On August 12, 2004, we entered into a forbearance agreement (the “Junior Forbearance Agreement”) with the lender under the Junior Credit Facility pursuant to which such lender agreed to forbear from exercising its rights and remedies with respect to certain defaults and events of default under the Junior Credit Facility until September 3, 2004, subject to certain terms and conditions. 

 

There can be no assurances that any or all of the Note Forbearance Agreement, the NCF Forbearance Agreement, or the Junior Forbearance Agreement will be extended beyond September 3, 2004 or that we will not need to negotiate future forbearance agreements for any noncompliance with our debt documents. 

 

We have retained the consulting firm of Alvarez and Marsal, Inc. to provide restructuring advisory services to our Board of Directors and to assist us in the restructuring process of our organization.  We also have engaged investment bankers Houlihan Lokey Howard & Zukin to explore financial restructuring alternatives and assist with discussions with our creditors and shareholders.  Certain holders of the New Notes have formed an informal committee and have engaged a financial advisor and outside legal counsel at the Company’s expense.  We have commenced restructuring negotiations with the committee’s advisors, the lender under the New Credit Facility, the lender under the Junior Credit Facility, and our majority shareholder group.  We are also in negotiations with the lessors of certain of our unfavorable leases.  There is the possibility that a restructuring may be implemented through an out-of-court arrangement if we were to reach satisfactory agreements with many of the parties.  However, no restructuring agreements have been reached with any party, and there can be no assurance that we will reach any such agreement with any particular party.   If no such agreements can be reached or if any agreement(s) that may be reached cannot be implemented through an out-of-court transaction, we will likely seek protection under the United States Bankruptcy Code to further pursue our restructuring alternatives and/or to implement any agreement(s) that may be reached.

 

12



 

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, and the purchase of new equipment and leasehold improvements, and for our working capital.  As of June 28, 2004, we had approximately $1.4 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.  Our receivables are primarily from vendor rebates and credit-card transactions.  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.  As of June 28, 2004, our working-capital deficit was $206.3 million.

 

We estimate that capital expenditures of $4.0 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, for expanding, reformatting, and extending the capabilities of existing restaurants, and for general corporate purposes.  Total capital expenditures were $2.2 million through the first half of 2003 and $1.8 million through the first half of 2004.  When we open new restaurants, we intend to do so with small capital investments and to finance most of the expenditures through leases.

 

In 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 $142.6 million outstanding 11½% Senior Secured Notes due 2003 (the “Old Notes”).  We simultaneously completed an offering (the “Offering”) of $30.0 million 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 $3.4 million aggregate principal amount of the Old Notes, which we redeemed in full on February 18, 2003) and assumed payment obligations equivalent to $161.8 million of the New Notes.  The Refinancing substantially eliminates senior 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 converted to 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 28, 2004.  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 18, 2003 when the outstanding balance on the Old Notes of $3.4 million was fully retired at the maturity date.

 

Under the New Notes, we are obligated to make semiannual interest payments, on May 1 and November 1, through November 2006.

 

As discussed above, on May 3, 2004, we did not pay the $9.3 million semiannual interest payment then due on the New Notes.  Under the provisions of the indenture governing the New Notes, the Company had a grace period ending June 2, 2004 within which to make the interest payment before there is an “Event of Default” (as such term is defined in the indenture).

 

On June 1, 2004, we entered in the Note Forbearance Agreement with the Signing Holders pursuant to which the Signing Holders agreed to forbear from exercising rights and remedies in respect to the Note Interest Default.  The Note Forbearance Agreement has been extended until September 3, 2004, subject to certain terms and conditions.

 

In 2001, we entered into a loan agreement with Wells Fargo Foothill, Inc. (then known as Foothill Capital Corporation) for the New Credit Facility.  The New Credit Facility presently provides for cash borrowings and letters of credit in an aggregate amount up to $17.5 million.  The New Credit Facility provides for an unused-line fee payable monthly in arrears, fees payable on outstanding letters of credit, as well as certain additional fees.  Borrowings under the New Credit Facility bear interest at the prime rate announced by Wells Fargo Bank, National Association plus 1.5%.  The New Credit Facility terminates on December 17, 2005, and shares in a first-priority lien on substantially all our personal property and certain real property leases.  The New Credit Facility includes certain restrictive covenants, including a requirement to maintain certain financial ratios.  As of June 28, 2004, we had $10.7 million of letters of credit outstanding, primarily related to our self-insurance program, and $4.3 in cash borrowings, with no availability under our New Credit Facility.  Such cash borrowings and letters of credit, totaling $15.0 million, exceeded the then-available borrowing base as calculated in the loan agreement governing the

 

13



 

New Credit Facility.

 

On August 5, 2004, we amended the New Credit Facility to increase the maximum amount available under the New Credit Facility to $17.5 million and to modify both the borrowing base and the financial covenants thereunder.  On August 5, 2004, we entered into the NCF Forbearance Agreement with the lender under the New Credit Facility pursuant to which such lender agreed to forbear from exercising rights and remedies with respect to certain defaults and events of default under the New Credit Facility until September 3, 2004, subject to certain terms and conditions.

 

On October 31, 2003, we entered into the Junior Credit Facility with TCW Shared Opportunity Fund III, L.P., an entity related to a group of funds that constitute the majority shareholder group.  We received proceeds of $4.6 million net of fees and costs.  The Junior Credit Facility bears an interest rate of 13% per annum.  The Junior Credit Facility expires February 24, 2006, and shares in a first-priority lien on substantially all our personal property and certain real property leases.

 

On August 5, 2004, we amended the Junior Credit Facility to permit additional borrowing in amount up to $17.5 under the New Credit Facility.  On August 11, 2004, we entered into the Junior Forbearance Agreement with the lender under the Junior Credit Facility pursuant to which such lender agreed to forbear from exercising its rights and remedies with respect to certain defaults and events of default under the Junior Credit Facility until September 3, 2004, subject to certain terms and conditions.

 

American Restaurant Group, Inc. and its subsidiaries do not guaranty the borrowings of any other parties outside the consolidated group, but have contingent obligations under certain contracts and leases, including some of those connected to operations sold to Spectrum Restaurant Group, Inc. (the “SRG Group”).

 

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

 

Our contractual obligations (principal and interest) can be summarized as follows (dollars in thousands):

 

Contractual Obligations

 

Paid in
Q1&2-2004

 

Remainder
2004

 

2 to 3
Years

 

4 to 5
Years

 

After 5
Years

 

Total

 

Interest & principal – New Notes

 

$

 

$

217,586

 

$

 

$

 

$

 

$

217,586

 

Interest & principal — other debt

 

2,468

 

9,744

 

1,253

 

343

 

1,114

 

14,922

 

Capital leases

 

210

 

180

 

677

 

464

 

652

 

2,183

 

Operating leases

 

9,672

 

9,278

 

32,779

 

30,905

 

178,498

 

261,132

 

Total contractual cash

 

$

12,350

 

$

236,788

 

$

34,709

 

$

31,712

 

$

180,264

 

$

495,823

 

 

Substantially all our personal property and certain real property leases 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.

 

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 gift certificates as revenue only after such a period of time indicates, based on our Company’s historical experience, the likelihood of redemption is remote.

 

Use of Estimates.  The preparation of financial statements in conformity with accounting principles generally accepted 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.  If circumstances cause us to close restaurants or we experience a decline in revenues, we may not be able to recover the represented

 

14



 

value of all of our assets, such as property and equipment or intangible assets.  Our actual liabilities for matters, such as self-insurance, store closing reserves, gift certificates, or the SRG Group bankruptcies, could possibly be significantly higher or lower than our estimates if conditions are ultimately different than the assumptions used in determining the estimates.

 

Leases.  We lease equipment and operating facilities under both operating and capital 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 might 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 adjustments to 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 $56.0 million and $54.6 million against the entire amount of our net deferred tax assets as of December 29, 2003 and June 28, 2004, respectively.  The valuation allowance was recorded given the losses we have incurred historically and uncertainties regarding future operating profitability and taxable income.

 

Long-Lived Assets.  We periodically review for impairment the carrying value of our long-lived assets.  We assess the recoverability of the assets based on the estimated, future, undiscounted cash flows of the assets.  If impairment is indicated, we write down the assets to fair market value based on estimated, future, discounted cash flows.  We periodically review each restaurant property and determine which properties may be considered for closure.  This determination is made based on poor operating results, deteriorating property values, and other factors.  In addition, we periodically review all restaurants with negative cash flows for impairment.  We assess the recoverability of the assets based on the restaurant’s estimated, future, undiscounted cash flows.  If impairment is indicated, we write down the assets to fair market value based on estimated, future, discounted cash flows.  In 2003, five restaurants were closed and two were impaired.  In the second quarter of 2004, one restaurant was closed because of an expiring term and four restaurants were impaired.

 

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 of Advertising Costs.

 

Self-Insurance Reserves.  We self-insure certain risks, including medical, workers’ compensation, property, and general liability, up to varying limits.  Deductible and self-insured retention limits have varied historically, ranging from $0 to $1,000,000 per incident depending on the type of risk.  Our policy deductible is $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 consolidated balance sheet under Self-insurance reserve.

 

ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The market risk of our financial instruments as of June 28, 2004 has not materially changed since December 29, 2003.  The market risk profile on December 29, 2003 is disclosed in our annual report on Form 10-K File No. 33-48183 for the fiscal year ended December 29, 2003.

 

ITEM 4.          CONTROLS AND PROCEDURES

 

As of the end of the period covered by this Form 10-Q we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer along with our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934).  Based upon that evaluation, our Chief Executive Officer along with our Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in our periodic SEC filings. There have been no significant changes in our internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

15



 

PART II.        OTHER INFORMATION

 

ITEM 3.          DEFAULTS UPON SENIOR SECURITIES

 

On May 3, 2004, we did not pay the $9.3 million interest payment then due on our New Notes.  On the date of this report, the amount of interest (including defaulted interest of $178,290) accrued on the New Notes is $14,831,122.

 

ITEM 6.          EXHIBITS AND REPORTS ON FORM 8-K

 

(a)   List of Exhibits

 

 

Exhibit No.

 

Description

 

 

 

 

 

31.1

 

Certificate (Section 302) of Chief Executive Officer.  (Filed herewith.)

 

 

 

 

 

31.2

 

Certificate (Section 302) of Chief Financial Officer.  (Filed herewith.)

 

 

 

 

 

32.1

 

Certificate (Section 906) of Chief Executive Officer and Chief Financial Officer.  (Furnished herewith.)

 

 

 

 

 

99.1

 

Amendment No. 6 to the ARG/Wells Fargo Foothill Agreement.  (Filed herewith.)

 

 

 

 

 

99.2

 

First Amendment to the Eligible Credit Facility (ARG/TCW Agreement.)  (Filed herewith.)

 

 

 

 

 

99.3

 

Forbearance Agreement between Wells Fargo Foothill and ARG.  (Filed herewith.)

 

 

 

 

 

99.4

 

Forbearance Agreement between TCW Shared Opportunity Fund III and ARG.  (Filed herewith.)

 

 

 

 

 

99.5

 

Forbearance Agreement between bondholders and ARG.  (Filed herewith.)

 

 

 

 

 

99.6

 

Bondholder forbearance extension letter dated July 30, 2004.  (Filed herewith.)

 

 

 

 

 

99.7

 

Bondholder forbearance extension letter dated August 6, 2004.  (Filed herewith.)

 

(b)   Form 8-K filed on May 3, 2004 – nonpayment of semiannual interest on notes.

 

(c)   Form 8-K filed on May 13, 2004 – announcement of first quarter 2004 financial results.

 

16



 

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 12, 2004

By:

/s/ Ralph S. Roberts

 

 

 

 

 

 

 

 

 

Ralph S. Roberts

 

 

 

 

Chief Executive Officer and President

 

 

 

 

 

 

 

 

 

 

 

Date:

August 12, 2004

By:

/s/ William G. Taves

 

 

 

 

 

 

 

 

 

William G. Taves

 

 

 

 

Chief Financial Officer

 

 

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