**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**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 March 29, 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 asspecified 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.) |

 

**4410El Camino Real, Suite 201**

**LosAltos, CA  94022**

**(650)949-6400**

(Address and telephone number of principalexecutive offices)

 

 

Former name, former address and former fiscalyearif changed since last report.

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ý    Noo

 

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

Yes  o    Noý

 

The number of outstanding shares of the Company’s Common Stock (onecent par value) as of May 3, 2004 was 102,442.

 

 

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**AMERICANRESTAURANT 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                                                           |   |

 

2

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**PART I.****         FINANCIAL INFORMATION**

 

**ITEM 1.****          FINANCIAL STATEMENTS:**

 

AMERICAN RESTAURANT GROUP, INC. ANDSUBSIDIARIES

 

CONSOLIDATED CONDENSED BALANCE SHEETS

 

DECEMBER 29, 2003 AND MARCH 29,2004

 
|                                 |   | **December 29,  2003** |   | **(Unaudited)  March 29,  2004** |   |
|--------------------------------------|--------|-----------------------------|--------|---------------------------------------|--------|
|                                 |   | **(dollars in thousands)**  |   |
| ASSETS                               |   |                        |   |                                  |   |
|                                 |   |                        |   |                                  |   |
| CURRENT ASSETS:                      |   |                        |   |                                  |   |
| Cash                                 |   | $                           | 2,068  |                                  | $      | 2,869 |   |
| Rebates and other receivables, net   |   | 2,060                       |   | 1,523                                 |   |
| Inventories                          |   | 2,823                       |   | 2,675                                 |   |
| Prepaid expenses                     |   | 922                         |   | 1,291                                 |   |
|                                 |   |                        |   |                                  |   |
| Total current assets                 |   | 7,873                       |   | 8,358                                 |   |
|                                 |   |                        |   |                                  |   |
| PROPERTY AND EQUIPMENT, net:         |   |                        |   |                                  |   |
| Land and land improvements           |   | 571                         |   | 541                                   |   |
| Buildings and leasehold improvements |   | 34,614                      |   | 34,112                                |   |
| Fixtures and equipment               |   | 11,240                      |   | 11,320                                |   |
| Property held under capital leases   |   | 703                         |   | 654                                   |   |
| Construction in progress             |   | 201                         |   | 193                                   |   |
|                                 |   |                        |   |                                  |   |
| Net property and equipment           |   | 47,329                      |   | 46,820                                |   |
|                                 |   |                        |   |                                  |   |
| OTHER ASSETS                         |   |                        |   |                                  |   |
| Goodwill, net                        |   | 8,287                       |   | 8,287                                 |   |
| Intangible assets, net               |   | 6,919                       |   | 6,630                                 |   |
| Other                                |   | 2,414                       |   | 2,422                                 |   |
|                                 |   |                        |   |                                  |   |
| Net other assets                     |   | 17,620                      |   | 17,339                                |   |
|                                 |   |                        |   |                                  |   |
| Total assets                         |   | $                           | 72,822 |                                  | $      | 72,517 |   |

 

3

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|                                                                                                                                                  |   | **December 29,  2003** |   | **(Unaudited)  March 29,  2004** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|---------------------------------------|--------|
|                                                                                                                                                  |   | **(dollars in thousands)**  |   |
| CURRENT LIABILITIES:                                                                                                                                  |   |                        |   |                                  |   |
| Accounts payable                                                                                                                                      |   | $                           | 8,659  |                                  | $      | 7,737 |   |
| Accrued liabilities                                                                                                                                   |   | 3,439                       |   | 2,923                                 |   |
| Current portion of store-closure reserve                                                                                                              |   | 991                         |   | 774                                   |   |
| Current portion of SRG Group bankruptcies  reserve                                                                                                    |   | 4,239                       |   | 4,430                                 |   |
| Gift-certificate liability                                                                                                                            |   | 1,890                       |   | 1,493                                 |   |
| Gift-card liability                                                                                                                                   |   | 7,568                       |   | 4,970                                 |   |
| Self-insurance reserve                                                                                                                                |   | 3,267                       |   | 3,477                                 |   |
| Accrued interest                                                                                                                                      |   | 3,391                       |   | 8,097                                 |   |
| Accrued employee costs                                                                                                                                |   | 3,929                       |   | 3,686                                 |   |
| Accrued occupancy costs                                                                                                                               |   | 5,415                       |   | 6,203                                 |   |
| Current portion of obligations under  capital leases                                                                                                  |   | 218                         |   | 193                                   |   |
| Current portion of long-term debt                                                                                                                     |   | 6,158                       |   | 5,254                                 |   |
|                                                                                                                                                  |   |                        |   |                                  |   |
| Total current liabilities                                                                                                                             |   | 49,164                      |   | 49,237                                |   |
|                                                                                                                                                  |   |                        |   |                                  |   |
| LONG-TERM LIABILITIES:                                                                                                                                |   |                        |   |                                  |   |
| Obligations under capital leases                                                                                                                      |   | 1,214                       |   | 1,164                                 |   |
| Store-closure reserve                                                                                                                                 |   | 6,051                       |   | 6,051                                 |   |
| SRG Group bankruptcies reserve                                                                                                                        |   | 3,685                       |   | 3,245                                 |   |
| Long-term debt, net of unamortized discount                                                                                                           |   | 162,528                     |   | 162,983                               |   |
|                                                                                                                                                  |   |                        |   |                                  |   |
| Total long-term liabilities                                                                                                                           |   | 173,478                     |   | 173,443                               |   |
|                                                                                                                                                  |   |                        |   |                                  |   |
| DEFERRED GAIN ON SALE-LEASEBACK                                                                                                                       |   | 3,586                       |   | 3,539                                 |   |
|                                                                                                                                                  |   |                        |   |                                  |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                         |   |                        |   |                                  |   |
|                                                                                                                                                  |   |                        |   |                                  |   |
| 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 March 29, 2004 |   | 1                           |   | 1                                     |   |
| Paid-in capital                                                                                                                                       |   | 81,893                      |   | 81,893                                |   |
| Accumulated deficit                                                                                                                                   |   | (235,300                    | )      | (235,596                              | )      |
|                                                                                                                                                  |   |                        |   |                                  |   |
| Total common stockholders’ deficit                                                                                                               |   | (153,406                    | )      | (153,702                              | )      |
|                                                                                                                                                  |   |                        |   |                                  |   |
| Total liabilities and common stockholders’  deficit                                                                                              |   | $                           | 72,822 |                                  | $      | 72,517 |   |

 

The accompanying notes are an integral partof these consolidated condensed statements.

 

4

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AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATEDCONDENSED STATEMENTS OF OPERATIONS

 

FOR THE THIRTEEN WEEKS ENDED MARCH 31,2003 AND MARCH 29, 2004

 

(UNAUDITED)

 
|                                           |   | **Thirteen  Weeks Ended**   |   |
|------------------------------------------------|--------|-----------------------------|--------|
|                                           |   | **March 31,  2003**    |   | **March 29,  2004** |   |
|                                           |   | **(dollars  in thousands)** |   |
| REVENUES                                       |   | $                           | 73,739 |   | $ | 74,525 |   |
|                                           |   |                        |   |   |   |
| RESTAURANT COSTS:                              |   |                        |   |   |   |
| Food and beverage                              |   | 23,041                      |   | 25,818 |   |
| Payroll                                        |   | 22,100                      |   | 23,346 |   |
| Direct operating                               |   | 19,035                      |   | 15,477 |   |
| Depreciation and amortization                  |   | 1,815                       |   | 1,759 |   |
|                                           |   |                        |   |   |   |
| GENERAL AND ADMINISTRATIVE EXPENSES            |   | 2,767                       |   | 2,879 |   |
|                                           |   |                        |   |   |   |
| Operating profit                               |   | 4,981                       |   | 5,246 |   |
|                                           |   |                        |   |   |   |
| INTEREST EXPENSE, net                          |   | 5,345                       |   | 5,542 |   |
|                                           |   |                        |   |   |   |
| Loss before provision for income taxes         |   | (364                        | )      | (296 | ) |
|                                           |   |                        |   |   |   |
| PROVISION FOR INCOME TAXES                     |   | 2                           |   | — |   |
|                                           |   |                        |   |   |   |
| Net Loss                                       |   | (366                        | )      | (296 | ) |
|                                           |   |                        |   |   |   |
| PREFERRED STOCK DIVIDENDS, ISSUED AND  ACCRUED |   | 2,855                       |   | — |   |
|                                           |   |                        |   |   |   |
| Loss to common stockholders                    |   | $                           | (3,221 | ) | $ | (296 | ) |

 

The accompanying notes are an integral partof these consolidated condensed statements.

 

5

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AMERICAN RESTAURANT GROUP, INC. ANDSUBSIDIARIES

 

CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS

 

FOR THE THIRTEEN WEEKS ENDED MARCH 31,2003 AND MARCH 29, 2004

 

(UNAUDITED)

 
|                                                                             |   | **March 31,  2003**    |   | **March 29,  2004** |   |
|----------------------------------------------------------------------------------|--------|-----------------------------|--------|--------------------------|--------|
|                                                                             |   | **(dollars  in thousands)** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                            |   |                        |   |                     |   |
|                                                                             |   |                        |   |                     |   |
| Net loss                                                                         |   | $                           | (366   | )                        | $      | (296 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |   |                        |   |                     |   |
| Depreciation and amortization                                                    |   | 1,815                       |   | 1,759                    |   |
| Amortization of deferred gain on  sale/leaseback                                 |   | (54                         | )      | (47                      | )      |
| Amortization of discount on New Notes                                            |   | 467                         |   | 467                      |   |
| (Increase) decrease in assets                                                    |   | (211                        | )      | 268                      |   |
| Increase in current liabilities                                                  |   | 3,791                       |   | 562                      |   |
|                                                                             |   |                        |   |                     |   |
| Net cash provided by operating activities                                        |   | 5,442                       |   | 2,713                    |   |
|                                                                             |   |                        |   |                     |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                            |   |                        |   |                     |   |
| Capital expenditures                                                             |   | (1,042                      | )      | (921                     | )      |
|                                                                             |   |                        |   |                     |   |
| Net cash used in investing activities                                            |   | (1,042                      | )      | (921                     | )      |
|                                                                             |   |                        |   |                     |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                            |   |                        |   |                     |   |
| Payments on indebtedness                                                         |   | (3,420                      | )      | (916                     | )      |
| Payments on capital-lease obligations                                            |   | (221                        | )      | (75                      | )      |
|                                                                             |   |                        |   |                     |   |
| Net cash used in financing activities                                            |   | (3,641                      | )      | (991                     | )      |
|                                                                             |   |                        |   |                     |   |
| NET INCREASE IN CASH FROM OPERATIONS                                             |   | 759                         |   | 801                      |   |
|                                                                             |   |                        |   |                     |   |
| CASH, at beginning of period                                                     |   | 4,773                       |   | 2,068                    |   |
|                                                                             |   |                        |   |                     |   |
| CASH, at end of period                                                           |   | $                           | 5,532  |                     | $      | 2,869 |   |
|                                                                             |   |                        |   |                     |   |
| Cash payments during the period:                                                 |   |                        |   |                     |   |
| Interest                                                                         |   | $                           | (374   | )                        | $      | (188 | ) |
| Income taxes                                                                     |   | (2                          | )      | —                   |   |

 

The accompanying notes are an integral partof these consolidated condensed statements.

 

6

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AMERICAN RESTAURANT GROUP,INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIALSTATEMENTS

 

1.             BASIS OF PRESENTATION

 

The Consolidated Condensed Financial Statements included were preparedby American Restaurant Group, Inc. without audit, in accordance with Securitiesand Exchange Commission Regulation S-X. (References to “the Company,” ‘the registrant,”  “we,” “us,” or “our” refer to AmericanRestaurant Group, Inc.)  In the opinionof our management, these Consolidated Condensed Financial Statements containall adjustments necessary to present fairly our financial position as ofDecember 29, 2003 and March 29, 2004, the results of our operationsfor the thirteen weeks ended March 31, 2003 and March 29, 2004, andour cash flows for the thirteen weeks ended March 31, 2003 andMarch 29, 2004.  Our results for aninterim period are not necessarily indicative of the results that may beexpected for the year.

 

Although we believe that we included all adjustments necessary for afair presentation of the interim periods presented and that the disclosures areadequate to make the information presented not misleading, we suggest thatthese Consolidated Condensed Financial Statements be read in conjunction withthe Consolidated Financial Statements and related notes included in our annualreport on Form 10-K for the fiscal year ended December 29, 2003.

 

2.             GOING CONCERN

 

The accompanying financial statements have been prepared assuming thatthe Company will continue as a going concern. The Company is highly leveraged. The Company has historically used cash flow from operations togetherwith other liquidity sources to make required payments.  As of March 29, 2004, the Company had$1.2 million of availability under its New Credit Facility (defined in Note 4),no further availability under its Junior Credit Facility (defined in Note 4),and $2.9 million in cash on hand.  TheCompany has suffered recurring losses from operations, has a negativeworking-capital balance of $40.9 million, and has a net capital deficiency of$153.7 million as of March 29, 2004 that raise substantial doubt about itsability to continue as a going concern. Management is currently evaluating alternatives for restructuring theCompany’s overall outstanding debt and the associated interest rate.  The Company does not, however, expect togenerate sufficient cash flows from operations in the future to fully meet allof its senior debt obligations. Accordingly, the Company will need to refinance or restructure all orportions of such debt, obtain new financing, or possibly sell assets. There can be no assurance that any such plans will be successful or that futurefinancing or restructuring will be available or, if available, at a cost thatis acceptable to the Company.

 

On May 3, 2004, theCompany did not pay the $9.3 million semiannual interest payment then due onthe New Notes (defined in Note 4). Under the provisions of the indenture governing the New Notes, theCompany has a grace period ending June 2, 2004 within which to make theinterest payment before there is an “Event of Default” (as such term is definedin the indenture) that entitles the holders of the New Notes to certain rightsand remedies, including the right to accelerate the principal and interest dueunder the New Notes.  In turn, under theprovisions of each of the Company’s credit facilities, the development of aright, irrespective of exercise, in the holders of the New Notes to acceleratethe New Notes would cause an “Event of Default” (as such term is defined ineach of the loan agreements governing the respective credit facilities withWells Fargo Foothill, Inc. and TCW Shared Opportunity Fund III, L.P.) thatallows the respective lender to exercise certain rights and remedies, includingacceleration, under its facility.

 

As of May 13, 2004, theCompany’s cash borrowings and letters of credit, totaling $14.6 million,exceeded the then-available borrowing base as calculated in the loan agreementgoverning the New Credit Facility.  TheCompany is in discussions with the lender under the New Credit Facility tonegotiate modifications to the calculation of the borrowing base, financialcovenants, and other matters.  There canbe no assurance such negotiations will be successful, that the lender, which hasreserved its rights, will not exercise remedies available to it fornoncompliance with the loan agreement, or that the Company will not need tonegotiate future waivers for any noncompliance with the loan agreement.

 

The Company has engaged investment bankers Jefferies & Company,Inc. to act as its financial advisor to explore capital restructuring and toassist with discussions with its creditors and shareholders.  While the Company hopes that it will be ableto negotiate successfully with its creditors and resolve its capital structure,there can be no assurances that it will be able to do so.  The Company will consider options availableto it, including whether to seek in-court protections or enter intoout-of-court agreements to extend negotiations beyond the grace period or toimplement an agreed resolution of the Company’s capital structure.

 

3.             OPERATIONS

 

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

 

7

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4.             Debt

 
|                                                                                                                                           |   | **December 29,  2003** |    | **March 29,  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                      | )       | (4,821                   | )      |
| New Credit Facility, interest on borrowings  at prime rate plus 1.5%, facility expiring December 17, 2005                                 |   | 6,087                       |    | 5,183                    |   |
| 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                       |    | 1,101                    |   |
|                                                                                                                                           |   |                        |    |                     |   |
|                                                                                                                                           |   | 168,686                     |    | 168,237                  |   |
| Less – Current portion                                                                                                                    |   | (6,158                      | )       | (5,254                   | )      |
|                                                                                                                                           |   |                        |    |                     |   |
| Long-term portion                                                                                                                              |   | $                           | 162,528 |                     | $      | 162,983 |   |

 

Maturities of the debt (principal only) during the fiscal yearsfollowing fiscal year-end 2003 are the following:

 

| **(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 |   |

 

In 2001, the Company entered into a loan agreement with Wells FargoFoothill, Inc. (then known as Foothill Capital Corporation) for a new revolvingcredit facility (the “New Credit Facility”). The New Credit Facility presently provides for cash borrowings andletters of credit in an aggregate amount up to $15.0 million.  The New Credit Facility provides for anunused line fee payable monthly in arrears, fees payable on outstanding lettersof credit, as well as certain additional fees. Borrowings under the New Credit Facility bear interest at the prime rateannounced by Wells Fargo Bank, National Association plus 1.5%.  The New Credit Facility terminates onDecember 17, 2005, and shares in a first-priority lien on all assets.  As of March 29, 2004, the Company had$8.6 million of letters of credit outstanding, primarily related to itsself-insurance program, and $5.2 in cash borrowings, leaving $1.2 million ofavailability under its New Credit Facility. The New Credit Facility includes certain restrictive covenants,including a requirement to maintain certain financial ratios.  On March 26, 2004, within the amendmentNo. 5 to the loan agreement, the Company obtained a waiver from its lenderrelated to its failure to maintain certain financial covenants for the fiscalquarter ended December 29, 2003. The Company is working with its lender to negotiate modifications to itsfinancial covenants.  There can be noassurance that such negotiations will be successful or that the Company willnot need to request additional waivers going forward.  As of May 13, 2004, theCompany’s cash borrowings and letters of credit, totaling $14.6 million,exceeded the then-available borrowing base as calculated in the loan agreementgoverning the New Credit Facility.  TheCompany is in discussions with the lender under the New Credit Facility tonegotiate modifications to the calculation of the borrowing base, financialcovenants, and other matters.  There canbe no assurance such negotiations will be successful, that the lender, whichhas reserved its rights, will not exercise remedies available to it fornoncompliance with the loan agreement, or that the Company will not need tonegotiate future waivers for any noncompliance with the loan agreement.

 

On October 31, 2003, the Company entered into a loan agreement fora junior credit facility (“Junior Credit Facility”) with TCW Shared OpportunityFund III, L.P., an entity related to a group of funds that constitute themajority shareholder group.  The Companyreceived proceeds of $4.6 million net of fees and costs.  The Junior Credit Facility bears an interestrate of 13% per annum.  The JuniorCredit Facility expires February 24, 2006, and shares in a first-prioritylien on all assets.

 

Substantially all assets of the Company and its subsidiaries arepledged to senior lenders.  Inconnection with such indebtedness, contingent and mandatory prepayments may berequired under certain specified conditions and events. There are nocompensating-balance requirements.

 

8

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On October 31, 2001, the Company consummated an exchange offer(the “Exchange”) pursuant to which the Company offered to exchange its 111⁄2%Senior Secured Notes due 2006 (the “New Notes”) for all of its $142.6 millionoutstanding 111⁄2% Senior Secured Notes due 2003 (the “Old Notes”) and anoffering (the “Offering”) of $30.0 million aggregate principal amount of NewNotes.  After the consummation of theExchange, the Offering, and related transactions (collectively, the “Refinancing”),the Company had no further payment obligations with respect to over 97.6% ofthe outstanding Old Notes (constituting all but $3.4 million aggregateprincipal amount of the Old Notes) and assumed payment obligations equivalentto $161.8 million of the New Notes.  TheRefinancing substantially eliminates debt principal payments untilNovember 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 andunconditional basis, the outstanding indebtedness of the Company evidenced bythe New Notes.  The Company has nomaterial assets or operations that are independent of the Direct Subsidiaries.  The Company’s non-guarantor indirectsubsidiary is minor.  There are norestrictions on the ability of the Company to obtain funds from the DirectSubsidiaries by dividend or loan.

 

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

 

5.             INCOME TAXES

 

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

 

6.             SUBSIDIARY GUARANTORS

 

Separate financial statements of our subsidiaries are not included inthis report on Form 10-Q.  Thesubsidiaries are fully, unconditionally, jointly, and severally liable for ourobligations under the Company’s New Notes, and the aggregate net assets,earnings, and equity (deficit) of such subsidiary guarantors are substantiallyequivalent to the net assets, earnings, and equity (deficit) of the Company(issuer) on a consolidated basis, as the Company has no significant operations.

 

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 havevaried historically, ranging from $0 to $1,000,000 per incident depending onthe type of risk.  The Company’s policydeductibles are $125,000 for annual medical and dental benefits perperson.  Reserves for losses areestablished on a claims-made basis plus an actuarially determined provision forincurred-but-not-reported claims and the deductible or self-insured retentionin place at the time of the loss.  Theself-insured reserves are reported on the balance sheet under Self-insurancereserve.

 

8.             RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2003, the FASB issued FASB Interpretation Number(“FIN”) 46, *Consolidationof Variable Interest Entities* (“FIN 46”), which was subsequently revised in December 2003 (“FIN46R”).  FIN 46R requires avariable-interest entity to be consolidated by a company if that company is theprimary beneficiary of the entity.  A company is a primary beneficiary ifit is subject to a majority of the risk of loss from the variable-interestentity’s activities, entitled to receive a majority of the entity’s residualreturns, or both.  FIN 46R also requires disclosures aboutvariable-interest entities that a company is not required to consolidate but inwhich it has a significant variable interest. FIN 46R was applicable immediately to variable-interest entities createdafter January 31, 2003, and will be effective for all other existingentities in financial statements for periods ending after December 15,2004.  The Company has no material interest in any variable-interestentity, and does not expect the full adoption of FIN 46R to have a materialimpact on the Company’s consolidated financial condition or results ofoperations.

 

9.             COMMITMENTSAND 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 ofsuch litigation will not materially affect the Company’s financial position,results of operations, or cash flows.

 

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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-lookingregarding cash flows from operations, restaurant openings, capitalrequirements, and other matters. These forward-looking statements involve risksand uncertainties and, consequently, could be affected by general businessconditions, the impact of competition, governmental regulations, and inflation.

 

The following discussion and analysis of our financial condition andresults of operations should be read in conjunction with the historicalfinancial information included in the Consolidated Condensed FinancialStatements.

 

**Results of Operations**

 

*Thirteen weeks endedMarch 31, 2003 and March 29, 2004:*

 

*Revenues. *Total revenuesincreased from $73.7 million in the first quarter of 2003 to $74.5 million inthe first quarter of 2004.  Same-storesales increased by 1.7% in the first quarter of 2004 compared to 2003. Of thesales increase, 5.1% resulted from an increase in customer counts during thefirst quarter of 2004 vs. the first quarter of 2003.  For the first quarter 2004, the average check declined 3.9%compared to the first quarter 2003.  Theremaining 0.5% change was a result of an increase in beverage sales. There were108 Black Angus restaurants operating as of March 31, 2003 and 105 BlackAngus restaurants operating as of March 29, 2004.

 

*Food and BeverageCosts.*  As apercentage of revenues, food and beverage costs increased 3.4% from 31.2% inthe first quarter of 2003 to 34.6% in the first quarter of 2004.  The increase is the result of higher beefprices and a lower average check.

 

*Payroll Costs.*  As a percentage of revenues, labor costsincreased from 30.0% in the first quarter of 2003 to 31.3% in the first quarterof 2004.  The increase is a result of acombination of higher unit-staff labor because of the increased counts at lunchand dinner, and an increase in management labor primarily because of managementlabor-related benefits.

 

*Direct OperatingCosts: *Directoperating costs consist of occupancy, advertising, and other expenses incurredby individual restaurants.  Directoperating costs decreased from $19.0 million in the first quarter of 2003 to$15.5 million in the first quarter of 2004. The decrease is primarily the result of $2.7 million in lower TVadvertising expenses and $0.4 million savings incurred in a planned shift awayfrom the use of outside janitorial services.

 

*Depreciation andAmortization.* Depreciation and amortization consists of depreciation of fixed assetsused by individual restaurants and at the Black Angus and corporate offices, aswell as amortization of intangible assets. Depreciation and amortization remained stable at  $1.8 million in the first quarter of 2003and 2004.

 

*General andAdministrative Expenses.*  General and administrative expenses increased slightly, from $2.8million in the first quarter of 2003 to $2.9 million in the first quarter of2004.

 

*Operating Profit.*  As a result of the above items, operatingprofit increased from $5.0 million in the first quarter of 2003 to $5.2 millionin the first quarter of 2004.  As apercentage of revenues, first-quarter operating profit was 6.8% in the firstquarter of 2003 compared to 7.0% in the first quarter of 2004.

 

*Interest Expense –Net.*  Interestexpense increased $0.2 million, from $5.3 million in the first quarter of 2003to $ 5.5 million in the first quarter of 2004. The increase is primarily theresult of the new Junior Credit Facility.

 

## **Liquidity andCapital Resources**

## ** **

The accompanying financial statements have been prepared assuming thatthe Company will continue as a going concern. The Company is highly leveraged. The Company has historically used cash flow from operations togetherwith other liquidity sources to make required payments.  As of March 29, 2004, the Company had$1.2 million of availability under its New Credit Facility (defined in Note 4above), no further availability under its Junior Credit Facility (definedbelow), and $2.9 million in cash on hand. The Company has suffered recurringlosses from operations, has a negative working-capital balance of $40.9million, and has a net capital deficiency of $153.7 million as ofMarch 29, 2004 that raise substantial doubt about its ability to continueas a going concern.  Management iscurrently evaluating alternatives for restructuring the Company’s overalloutstanding debt and the associated interest rate.  The Company does not, however, expect to generate sufficient cashflows from operations in the future to fully meet all of its senior debtobligations.  Accordingly, the Companywill need to refinance or restructure all or portions of such debt, obtain newfinancing, or possibly sell assets.  There can be no assurance that anysuch plans will be successful or that future financing or restructuring will beavailable or, if available, at a cost that is acceptable to the Company.

 

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On May 3, 2004, the Company did not pay the $9.3million semiannual interest payment then due on the New Notes (definedbelow).  Under the provisions of theindenture governing the New Notes, the Company has a grace period endingJune 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 entitles theholders of the New Notes to certain rights and remedies, including the right toaccelerate the principal and interest due under the New Notes.  In turn, under the provisions of each of theCompany’s credit facilities, the development of a right, irrespective ofexercise, in the holders of the New Notes to accelerate the New Notes wouldcause an “Event of Default” (as such term is defined in each of the loanagreements governing the respective credit facilities with Wells FargoFoothill, Inc. and TCW Shared Opportunity Fund III, L.P.) that allows therespective lender to exercise certain rights and remedies, includingacceleration, under its facility.

 

The Company has engaged investment bankers Jefferies & Company,Inc. to act as its financial advisor to explore capital restructuring and toassist with discussions with its creditors and shareholders.  While the Company hopes that it will be ableto negotiate successfully with its creditors and resolve its capital structure,there can be no assurances that it will be able to do so.  The Company will consider options availableto it, including whether to seek in-court protections or enter intoout-of-court agreements to extend negotiations beyond the grace period or toimplement an agreed resolution of the Company’s capital structure.

 

Our primary sources of liquidity are cash flows from operations andborrowings under our revolving credit facilities.  We require capital principally for the acquisition andconstruction of new restaurants, the remodeling of existing restaurants, and the purchase of new equipment andleasehold improvements, and for our working capital.  As of March 29, 2004, we had approximately $2.9 million ofcash.

 

In general, restaurant businesses do not have significant accountsreceivable because sales are made for cash or by credit-card vouchers, whichare ordinarily paid within three to five days. Our receivables are primarily from vendor rebates and credit-cardtransactions.  The restaurants do notmaintain substantial inventory as a result of the relatively brief shelf lifeand frequent turnover of food products. Additionally, restaurants generally are able to obtain trade credit inpurchasing food and restaurant supplies. As a result, restaurants are frequently able to operate with workingcapital deficits, i.e., current liabilities exceed current assets.  As of March 29, 2004, our workingcapital deficit was $40.9 million.

 

We estimate that capital expenditures of $2.0 million to $5.0 millionare required annually to maintain and refurbish our existing restaurants.  Other capital expenditures, which aregenerally discretionary, are primarily for the construction of new restaurants,for expanding, reformatting, and extending the capabilities of existingrestaurants, and for general corporate purposes.  Total capital expenditures were $1.0 million through the firstquarter of 2003 and $0.9 million through the first quarter of 2004.  We estimate that capital expenditures in2004 will be approximately $3.0 million**. **Whenwe open new restaurants, we intend to do so with small capital investments andto finance most of the expenditures through leases.

 

In 2001, we completed an exchange offer (the “Exchange”) in which weoffered to exchange our 111⁄2% Senior Secured Notes due 2006 (the “New Notes”)for all of our $142.6 million outstanding 111⁄2% 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, theOffering, and related transactions (collectively, the “Refinancing”), we had nofurther payment obligations with respect to over 97.6% of the outstanding OldNotes (constituting all but $3.4 million aggregate principal amount of the OldNotes, which we redeemed in full on February 18, 2003) and assumed paymentobligations equivalent to $161.8 million of the New Notes.  The Refinancing substantially eliminatessenior 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 wereexchanged for approximately $132 million aggregate principal amount New Notes);(b) the Offering (the issuance of $30 million aggregate principal amount of NewNotes); (c) the consent of the holders of our outstanding preferred stock toamend the terms of the preferred stock to provide that if we do not redeem thepreferred stock for cash on August 15, 2003 in accordance with its terms,then the preferred stock will automatically be converted to shares of ourcommon stock at that time and all the rights of the preferred stock willterminate, including any rights of acceleration; to eliminate provisions thatallow the holders to exchange preferred stock for new subordinate debt; and toamend the covenants of the preferred stock so that they are substantiallysimilar to the covenants under the New Notes; and, (d) the consent of thelender under our former revolving credit facility (“Old Credit Facility”) topermit the issuance of the New Notes and any other aspects of the Refinancingrequiring the lender’s consent.

 

None of the Old Notes were outstanding at March 29, 2004.  Under the Old Notes, we were obligated tomake semiannual interest payments on February 15 and August 15through February 2003. Accordingly, we made the last interest payment of $0.2 million onFebruary 18, 2003.

 

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

 

As discussed above, onMay 3, 2004, we did not pay the $9.3 million semiannual interest payment thendue on the New Notes.  Under theprovisions of the indenture governing the New Notes, the Company has a graceperiod ending June 2, 2004 within which to make the interest paymentbefore there is an “Event of Default” (as such term is defined in theindenture).

 

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We have $2.2 million in long-term debt that relates to mortgages andcapital leases for improvements and equipment.

 

In 2001, we entered into a loan agreement with Wells Fargo Foothill,Inc. (then known as Foothill Capital Corporation) for a new revolving creditfacility (the “New Credit Facility”).  TheNew Credit Facility presently provides for cash borrowings and letters ofcredit in an aggregate amount not to exceed $15.0 million.  The New Credit Facility provides for anunused line fee payable monthly in arrears, fees payable on outstanding lettersof credit, as well as certain additional fees. Borrowings under the New Credit Facility bear interest at the prime rateannounced by Wells Fargo Bank, National Association plus 1.5%.  The New Credit Facility terminates inDecember 2005, and shares in a first-priority lien on all assets.  As of March 29, 2004, we had $8.6million of letters of credit outstanding, primarily related to ourself-insurance program, and $5.2 in cash borrowings, leaving $1.2 million ofavailability under our New Credit Facility. The New Credit Facility includes certain restrictive covenants,including a requirement to maintain certain financial ratios.  On March 26, 2004, within the amendmentNo. 5 to the loan agreement, we obtained a waiver from our lender related toour failure to maintain certain financial covenants for the fiscal quarterended December 29, 2003.  We areworking with our lender to negotiate modifications to our financialcovenants.  There can be no assurancethat such negotiations will be successful or that we will not need to requestadditional waivers going forward.  As ofMay 13, 2004, the Company’s cash borrowings and letters of credit, totaling$14.6 million, exceeded the then-available borrowing base as calculated in theloan agreement governing the New Credit Facility.  The Company is in discussions with the lender under the NewCredit Facility to negotiate modifications to the calculation of the borrowingbase, financial covenants, and other matters. There can be no assurance such negotiations will be successful, that thelender, which has reserved its rights, will not exercise remedies available toit for noncompliance with the loan agreement, or that the Company will not needto negotiate future waivers for any noncompliance with the loan agreement.

 

On October 31, 2003, we entered into a loan agreement for a juniorcredit facility (“Junior Credit Facility”) with TCW Shared Opportunity FundIII, L.P., an entity related to a group of funds that constitute the majorityshareholder group.  We received proceedsof $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 inFebruary 2006, and shares in a first-priority lien on all assets.

 

American Restaurant Group, Inc. and its subsidiaries do not guarantythe borrowings of any other parties outside the consolidated group, but havecontingent obligations under certain contracts and leases, including thoseconnected to operations sold to the SRG Group.

 

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

 

 
| **Contractual Obligations**                |   | **Paid in  Q1-2004** |   | **Remainder  2004** |   | **2 to 3  Years** |   | **4 to 5  Years** |    | **After 5  Years** |   | **Total** |   |
|--------------------------------------------|--------|----------------------|--------|---------------------|--------|-------------------|--------|-------------------|---------|--------------------|--------|-----------|--------|
| Interest & principal – New Notes  |   | $                    | — |                | $      | 18,604            |   | $                 | 198,982 |               | $      | —    |   | $ | — |   | $ | 217,586 |   |
| Interest & principal — other debt |   | 916                  |   | 5,924               |   | 6,253             |   | 343               |    | 1,114              |   | 14,550    |   |
| Capital leases                             |   | 75                   |   | 315                 |   | 677               |   | 464               |    | 652                |   | 2,183     |   |
| Operating leases                           |   | 4,820                |   | 14,130              |   | 32,779            |   | 30,905            |    | 178,498            |   | 261,132   |   |
| Total contractual cash                     |   | $                    | 5,811  |                | $      | 38,973            |   | $                 | 238,691 |               | $      | 31,712    |   | $ | 180,264 |   | $ | 495,451 |   |

 

Substantially all our assets are pledged to our senior lenders.  In addition, our direct subsidiariesguarantee most of our indebtedness and such guarantees are secured bysubstantially all of the assets of the subsidiaries.  In connection with such indebtedness, contingent and mandatoryprepayments may be required under certain specified conditions and events.  There are no compensating-balancerequirements.

 

### **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 ofEstimates. *Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires our management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities, and thereported amounts of revenues and expenses. Actual results could differ from those estimates.

 

We believe that our financial statements are a reasonablerepresentation of the realizable values of our assets, the level of ourliabilities, and the amounts of revenues and expenses incurred in any givenperiod.  There are estimates inherent inthese amounts.  If circumstances causeus to close restaurants or we experience a decline in revenues, we may not beable to recover the represented value of all of our assets, such as propertyand equipment or intangible assets.  Ouractual liabilities for matters, such as self-insurance, gift certificates, orthe SRG Group bankruptcies, could possibly be significantly higher or lowerthan our estimates if actual conditions are ultimately different than theassumptions used in determining the estimates.

 

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*Leases*.  We lease equipment and operating facilitiesunder both operating and capital leases. In future periods, leases for similar equipment or facilities may notqualify for the accounting applied historically because of changes in terms orour credit status.  This would mean thatwe might be required to recognize more leases as capital leases in the futurethan we have in the past, causing a corresponding increase in our assets andliabilities, and adjustments to the associated depreciation and interestexpense.  Conversely, if many leases inthe future were classified as operating leases, rental expense would increase.

 

*Valuation Allowancefor Deferred Tax Assets. *Weprovided a valuation allowance of $56.0 million and $53.1 million against theentire amount of our net deferred tax assets as of December 29, 2003 andMarch 29, 2004, respectively.  Thevaluation allowance was recorded given the losses we have incurred historicallyand uncertainties regarding future operating profitability and taxable income.

 

*Long-Lived Assets.*  We periodically review for impairment thecarrying 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 marketvalue based on estimated, future, discounted cash flows.  We periodically review each restaurantproperty and determine which properties may be considered for closure.  This determination is made based on pooroperating results, deteriorating property values, and other factors.  In addition, we periodically review allrestaurants with negative cash flows for impairment.  We assess the recoverability of the assets based on therestaurant’s estimated, future, undiscounted cash flows.  If impairment is indicated, we write downthe assets to fair market value based on estimated, future, discounted cashflows.  In 2003, five restaurants wereclosed and two were impaired.  In thefirst quarter of 2004, no restaurants were closed or impaired.

 

*Advertising Costs.*  Advertising costs are expensed either asincurred or the first time the advertising takes place, in accordance withStatement of Position 93-7, *Reporting of Advertising Costs.*

 

*Self-InsuranceReserves.*  Weself-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****forannual medical and dental benefits per person. Reserves for losses are established on a claims-made basis plus anactuarially determined provision for incurred-but-not-reported claims and thedeductible or self-insured retention in place at the time of the loss.  The self-insured reserves are reported onthe consolidated balance sheet under Self-insurance reserve.

 

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**ITEM 3.****          QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The market risk of our financial instruments as of March 29, 2004has 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 thefiscal 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 anevaluation, 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 andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities andExchange Act of 1934).  Based upon thatevaluation, our Chief Executive Officer along with our Chief Financial Officerconcluded that our disclosure controls and procedures are effective in timelyalerting them to material information relating to the Company (including itsconsolidated subsidiaries) required to be included in our periodic SEC filings.There have been no significant changes in our internal control over financialreporting that occurred during the Company’s most recent fiscal quarter thathas materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

**PART II.****        OTHER INFORMATION**

 

**ITEM 6.****          EXHIBITS AND REPORTS ONFORM 8-K**

 

(a)     Listof 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.) |

 

(b)     Reports on Form 8-K

 

None.

 

**SIGNATURE**

 

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

 

 
|   |         | AMERICAN RESTAURANT GROUP, INC**.** |                                  |
|--------|--------------|-------------------------------------|---------------------------------------|
|   |         | (Registrant)                        |                                  |
|   |         |                                |                                  |   |
|   |         |                                |                                  |   |
| Date:  | May 12, 2004 | By:                                 | /s/ Ralph S. Roberts                  |   |
|   |         |                                |                                  |   |
|   |         |                                | Ralph S. Roberts                      |   |
|   |         |                                | Chief Executive Officer and President |   |
|   |         |                                |                                  |   |
|   |         |                                |                                  |   |
| Date:  | May 12, 2004 | By:                                 | /s/ William G. Taves                  |   |
|   |         |                                |                                  |   |
|   |         |                                | William G. Taves                      |   |
|   |         |                                | Chief Financial Officer               |   |

 

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