**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 April 1, 2002                                                                                                                                                 |
|       |   |                                                                                                                                                                                          |
|       |   |                                 OR |
|       |   |                                                                                                                                                                                          |
| **o**      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                 |
|       |   |                                                                                                                                                                                          |

 

For the transition periodfrom                              to                

 

 

**American Restaurant Group,Inc.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                     |   | **33-48183**     |   | **33-0193602**       |
|----------------------------------|--------|------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (Commission File |   | (I.R.S. employer     |
| incorporation or  organization)  |   | Number)          |   | identification  no.) |

 

 

**4410 ElCamino Real, Suite 201**

**Los Altos, CA 94022**

**(650)949-6400**

(Address andtelephone number of principal executive offices)

 

 

 

Former name,former address and former fiscal year

if changed sincelast report.

 

----

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  ý                       No  o

 

 

The number ofoutstanding shares of the Company’s Common Stock (one cent par value) as of May6, 2002 was 128,081.

 

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**AMERICANRESTAURANT GROUP, INC.**

 

**INDEX**

 

 
| **PART I.** |   | **FINANCIAL INFORMATION**                                   |   |   |   |
|-------------|--------|-------------------------------------------------------------|--------|--------|--------|
|        |   |                                                        |   |   |   |
| ITEM 1.     |   | FINANCIAL STATEMENTS:                                       |   |   |   |
|        |   |                                                        |   |   |   |
|        |   | Consolidated  Condensed Balance Sheets                      |   |   |   |
|        |   |                                                        |   |   |   |
|        |   | Consolidated  Statements of Operations                      |   |   |   |
|        |   |                                                        |   |   |   |
|        |   | Consolidated  Statements of Cash Flows                      |   |   |   |
|        |   |                                                        |   |   |   |
|        |   | Notes  to Consolidated Condensed Financial Statements       |   |   |   |
|        |   |                                                        |   |   |   |
| ITEM 2.     |   | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF               |   |   |   |
|        |   | FINANCIAL  CONDITION AND RESULTS OF OPERATIONS              |   |   |   |
|        |   |                                                        |   |   |   |
| ITEM  3.    |   | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |   |   |   |

 

 

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**PART I.         FINANCIALINFORMATION**

 

**ITEM1.          FINANCIAL STATEMENTS:**

 

 

AMERICANRESTAURANT GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATEDCONDENSED BALANCE SHEETS

 

DECEMBER 31, 2001AND APRIL 1, 2002

 

 
| **ASSETS**                            |   | **December  31,** |       | **April 1,**    |   |
|---------------------------------------|--------|-------------------|------------|-----------------|--------|
|                                  |   | **2001**          |       | **2002**        |   |
|                                  |   |              |       | **(unaudited)** |   |
| **CURRENT  ASSETS:**                  |   |              |       |            |   |
| Cash                                  |   | $                 | 10,053,000 |            | $      | 17,235,000 |   |
| Accounts  and notes receivable, net   |   | 4,071,000         |       | 3,932,000       |   |
| Inventories                           |   | 3,040,000         |       | 3,130,000       |   |
| Prepaid  expenses                     |   | 3,002,000         |       | 5,153,000       |   |
|                                  |   |              |       |            |   |
| Total  current assets                 |   | 20,166,000        |       | 29,450,000      |   |
|                                  |   |              |       |            |   |
| PROPERTY  AND EQUIPMENT:              |   |              |       |            |   |
| Land  and land improvements           |   | 2,598,000         |       | 2,598,000       |   |
| Buildings  and leasehold improvements |   | 69,858,000        |       | 71,620,000      |   |
| Fixtures  and equipment               |   | 48,914,000        |       | 49,108,000      |   |
| Property  held under capital leases   |   | 7,293,000         |       | 7,293,000       |   |
| Construction  in progress             |   | 2,517,000         |       | 1,353,000       |   |
|                                  |   |              |       |            |   |
| Property  and Equipment               |   | 131,180,000       |       | 131,972,000     |   |
| Less  — Accumulated depreciation |   | 80,077,000        |       | 81,496,000      |   |
|                                  |   |              |       |            |   |
| Net  property and equipment           |   | 51,103,000        |       | 50,476,000      |   |
|                                  |   |              |       |            |   |
| OTHER  ASSETS, NET:                   |   | 18,435,000        |       | 17,984,000      |   |
|                                  |   |              |       |            |   |
| Total  assets                         |   | $                 | 89,704,000 |            | $      | 97,910,000 |   |

 

 

The accompanying notes are an integral part of theseconsolidated condensed statements.

(consolidated condensed balance sheets continued onthe following page)

 

1

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| **LIABILITIES  AND COMMON STOCKHOLDERS’ DEFICIT**                                                                                                                                                                |   | **December  31,** |       | **April 1,**    |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|-----------------|--------|
|                                                                                                                                                                                                                  |   | **2001**          |       | **2002**        |   |
|                                                                                                                                                                                                                  |   |              |       | **(unaudited)** |   |
| CURRENT  LIABILITIES:                                                                                                                                                                                                 |   |              |       |            |   |
| Accounts  payable                                                                                                                                                                                                     |   | $                 | 12,528,000 |            | $      | 16,081,000 |   |
| Accrued  liabilities                                                                                                                                                                                                  |   | 12,849,000        |       | 9,027,000       |   |
| Accrued  insurance                                                                                                                                                                                                    |   | 3,232,000         |       | 3,694,000       |   |
| Accrued  interest                                                                                                                                                                                                     |   | 3,447,000         |       | 7,882,000       |   |
| Accrued  payroll costs                                                                                                                                                                                                |   | 4,853,000         |       | 6,319,000       |   |
| Current  portion of obligations under capital leases                                                                                                                                                                  |   | 796,000           |       | 819,000         |   |
| Current  portion of long-term debt                                                                                                                                                                                    |   | 402,000           |       | 3,724,000       |   |
| Liabilities  from discontinued operations                                                                                                                                                                             |   | 525,000           |       | 147,000         |   |
|                                                                                                                                                                                                                  |   |              |       |            |   |
| Total  current liabilities                                                                                                                                                                                            |   | 38,632,000        |       | 47,693,000      |   |
|                                                                                                                                                                                                                  |   |              |       |            |   |
| LONG-TERM  LIABILITIES, net of current portion:                                                                                                                                                                       |   |              |       |            |   |
| Obligations  under capital leases                                                                                                                                                                                     |   | 1,799,000         |       | 1,585,000       |   |
| Long-term  debt, net of unamortized discount                                                                                                                                                                          |   | 157,272,000       |       | 154,322,000     |   |
|                                                                                                                                                                                                                  |   |              |       |            |   |
| Total  long-term liabilities                                                                                                                                                                                          |   | 159,071,000       |       | 155,907,000     |   |
|                                                                                                                                                                                                                  |   |              |       |            |   |
| DEFERRED  GAIN                                                                                                                                                                                                        |   | 3,990,000         |       | 3,940,000       |   |
|                                                                                                                                                                                                                  |   |              |       |            |   |
| COMMITMENTS  AND CONTINGENCIES                                                                                                                                                                                        |   |              |       |            |   |
|                                                                                                                                                                                                                  |   |              |       |            |   |
| CUMULATIVE  PREFERRED STOCK,                                                                                                                                                                                          |   |              |       |            |   |
| MANDATORILY  REDEEMABLE:                                                                                                                                                                                              |   |              |       |            |   |
| Senior  pay-in-kind exchangeable preferred stock, $0.01 par value; 160,000 shares  authorized; 58,883 shares outstanding and accrued at December 31, 2001 and  61,052 shares outstanding and accrued at April 1, 2002 |   | 58,219,000        |       | 60,487,000      |   |
|                                                                                                                                                                                                                  |   |              |       |            |   |
| COMMON  STOCKHOLDERS’ DEFICIT:                                                                                                                                                                                   |   |              |       |            |   |
| Common  stock, $0.01 par value; 1,000,000 shares authorized; 128,081 shares issued  and outstanding at December 31, 2001 and April 1, 2002                                                                            |   | 1,000             |       | 1,000           |   |
| Paid-in  capital                                                                                                                                                                                                      |   | 7,279,000         |       | 5,011,000       |   |
| Accumulated  deficit                                                                                                                                                                                                  |   | (177,488,000      | )          | (175,129,000    | )      |
|                                                                                                                                                                                                                  |   |              |       |            |   |
| Total  common stockholders’ deficit                                                                                                                                                                              |   | (170,208,000      | )          | (170,117,000    | )      |
|                                                                                                                                                                                                                  |   |              |       |            |   |
| Total  liabilities and common stockholders’ deficit                                                                                                                                                              |   | $                 | 89,704,000 |            | $      | 97,910,000 |   |

 

The accompanyingnotes are an integral part of these consolidated condensed statements.

 

 

2

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AMERICANRESTAURANT GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

FOR THE THIRTEEN WEEKS ENDED MARCH 26, 2001 AND APRIL1, 2002 

 

 

(UNAUDITED)

 

 

 

 

 
|                                      |   | **Thirteen  Weeks Ended** |       |
|-------------------------------------------|--------|---------------------------|------------|
|                                      |   |                      |       |   |   |
|                                      |   | **March 26,**             |       | **April 1,** |   |
|                                      |   | **2001**                  |       | **2002** |   |
|                                      |   |                      |       |   |   |
| REVENUES                                  |   | $                         | 82,181,000 |   | $ | 81,845,000 |   |
| RESTAURANT  COSTS:                        |   |                      |       |   |   |
| Food  and beverage                        |   | 27,140,000                |       | 27,509,000 |   |
| Payroll                                   |   | 22,642,000                |       | 24,607,000 |   |
| Direct  operating                         |   | 18,355,000                |       | 17,713,000 |   |
| Depreciation  and amortization            |   | 2,152,000                 |       | 1,909,000 |   |
| Total  restaurant costs                   |   | 70,289,000                |       | 71,738,000 |   |
|                                      |   |                      |       |   |   |
| GENERAL  AND ADMINISTRATIVE EXPENSES      |   | 2,466,000                 |       | 2,335,000 |   |
|                                      |   |                      |       |   |   |
| Operating  profit                         |   | 9,426,000                 |       | 7,772,000 |   |
|                                      |   |                      |       |   |   |
| INTEREST  EXPENSE, net                    |   | 4,244,000                 |       | 5,389,000 |   |
|                                      |   |                      |       |   |   |
| Income  before provision for income taxes |   | 5,182,000                 |       | 2,383,000 |   |
|                                      |   |                      |       |   |   |
| PROVISION  FOR INCOME TAXES               |   | 119,000                   |       | 24,000 |   |
|                                      |   |                      |       |   |   |
| Net  Income                               |   | $                         | 5,063,000  |   | $ | 2,359,000 |   |
|                                      |   |                      |       |   |   |

 

 

The accompanyingnotes are an integral part of these consolidated condensed statements.

 

 

3

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AMERICAN RESTAURANTGROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

FOR THE THIRTEEN WEEKSENDED MARCH 26, 2001 AND APRIL 1, 2002

 

(UNAUDITED)

### ** **

|                                                                                                                                |   | **March 26,** |       | **April 1,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|------------|--------------|--------|
|                                                                                                                                |   | **2001**      |       | **2002**     |   |
| CASH  FLOWS FROM CONTINUING OPERATING ACTIVITIES:                                                                                   |   |          |       |         |   |
| Cash  received from customers                                                                                                       |   | $             | 81,888,000 |         | $      | 81,984,000 |   |
| Cash  paid to suppliers and employees                                                                                               |   | (75,963,000   | )          | (72,796,000  | )      |
| Interest  expense, net                                                                                                              |   | (8,378,000    | )          | (487,000     | )      |
| Income  tax expense, net                                                                                                            |   | (119,000      | )          | (24,000      | )      |
| Net  cash provided by (used in) continuing operating activities                                                                     |   | (2,572,000    | )          | 8,677,000    |   |
|                                                                                                                                |   |          |       |         |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                                                              |   |          |       |         |   |
| Capital  expenditures                                                                                                               |   | (220,000      | )          | (824,000     | )      |
| Net  (increase) decrease in other assets                                                                                            |   | 18,000        |       | (7,000       | )      |
| Proceeds  from disposition of assets                                                                                                |   | (19,000       | )          | —       |   |
|                                                                                                                                |   |          |       |         |   |
| Net  cash (used in) investing activities                                                                                            |   | (221,000      | )          | (831,000     | )      |
|                                                                                                                                |   |          |       |         |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                                                              |   |          |       |         |   |
| Payments  on indebtedness                                                                                                           |   | (89,000       | )          | (95,000      | )      |
| Payments  on capital lease obligations                                                                                              |   | (179,000      | )          | (191,000     | )      |
|                                                                                                                                |   |          |       |         |   |
| Net  cash (used in) financing activities                                                                                            |   | (268,000      | )          | (286,000     | )      |
|                                                                                                                                |   |          |       |         |   |
| NET  INCREASE / (DECREASE) FROM CONTINUING OPERATIONS                                                                               |   | (3,061,000    | )          | 7,560,000    |   |
|                                                                                                                                |   |          |       |         |   |
| NET  (DECREASE) FROM DISCONTINUED OPERATIONS                                                                                        |   | (937,000      | )          | (378,000     | )      |
|                                                                                                                                |   |          |       |         |   |
| NET  CHANGE IN CASH, CURRENT PERIOD                                                                                                 |   | (3,998,000    | )          | 7,182,000    |   |
|                                                                                                                                |   |          |       |         |   |
| CASH,  at beginning of period                                                                                                       |   | 8,532,000     |       | 10,053,000   |   |
|                                                                                                                                |   |          |       |         |   |
| CASH,  at end of period                                                                                                             |   | $             | 4,534,000  |         | $      | 17,235,000 |   |
|                                                                                                                                |   |          |       |         |   |
| RECONCILIATION  OF NET INCOME FROM OPERATIONS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:                                         |   |          |       |         |   |
|                                                                                                                                |   |          |       |         |   |
| Net  income from continuing operations                                                                                              |   | $             | 5,063,000  |         | $      | 2,359,000 |   |
| Adjustments  to reconcile net income from continuing operations to net cash provided by  (used in) continuing operating activities: |   |          |       |         |   |
|                                                                                                                                |   |          |       |         |   |
| Depreciation  and amortization                                                                                                      |   | 2,152,000     |       | 1,909,000    |   |
| Amortization  of deferred gain                                                                                                      |   | (50,000       | )          | (50,000      | )      |
| Amortization  of non-cash interest expense                                                                                          |   | —        |       | 467,000      |   |
| (Increase)  decrease in current assets:                                                                                             |   |          |       |         |   |
| Accounts  and notes receivable, net                                                                                                 |   | (293,000      | )          | 139,000      |   |
| Inventories                                                                                                                         |   | (272,000      | )          | (90,000      | )      |
| Prepaid  expenses                                                                                                                   |   | 1,124,000     |       | (2,151,000   | )      |
| Increase  (decrease) in current liabilities:                                                                                        |   |          |       |         |   |
| Accounts  payable                                                                                                                   |   | 2,137,000     |       | 3,553,000    |   |
| Accrued  liabilities                                                                                                                |   | (6,857,000    | )          | (3,822,000   | )      |
| Accrued  insurance                                                                                                                  |   | (574,000      | )          | 462,000      |   |
| Accrued  interest                                                                                                                   |   | (4,134,000    | )          | 4,435,000    |   |
| Accrued  payroll                                                                                                                    |   | (868,000      | )          | 1,466,000    |   |
|                                                                                                                                |   |          |       |         |   |
| Net  cash provided by (used in) continuing operating activities                                                                     |   | (2,572,000    | )          | 8,677,000    |   |

 

 

Theaccompanying notes are an integral part of these consolidated condensedstatements.

 

 

4

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AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

 

1.                                            MANAGEMENT’S OPINION

 

TheConsolidated Condensed Financial Statements included were prepared by AmericanRestaurant Group, Inc. without audit, in accordance with Securities andExchange Commission Regulation S-X. (References to “the Company,” “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 31, 2001 and April 1, 2002, and the results of our operations for thethirteen weeks ended March 26, 2001 and April 1, 2002 and our cash flows forthe thirteen weeks ended March 26, 2001 and April 1, 2002.  Our results for an interim period are notnecessarily indicative of the results that may be expected for the year.

 

Althoughwe believe that all adjustments necessary for a fair presentation of theinterim periods presented are included and that the disclosures are adequate tomake the information presented not misleading, we suggest that theseConsolidated Condensed Financial Statements be read in conjunction with theConsolidated Financial Statements and related notes included in the our annualreport on Form 10-K, File No. 33-48183, for the year ended December 31, 2001.

 

2.                                       OPERATIONS

 

The Company’soperations are affected by local and regional economic conditions, includingcompetition in the restaurant industry.

 

On October 31,2001, we completed an exchange offer (the “Exchange”) in which we offered toexchange our 111⁄2% Senior Secured Notes due 2006 (the “New Notes”) for all ofour $142,600,000 outstanding 111⁄2% Senior Secured Notes due 2003 (the “OldNotes”).  We simultaneously completed anoffering (the “Offering”) of $30,000,000 aggregate principal amount of New Notes.  After the consummation of the Exchange, theOffering, and related transactions (collectively, the “Refinancing”), we haveno further payment obligations with respect to over 97.6% of the outstandingOld Notes (constituting all but $3,410,000 aggregate principal amount of theOld Notes) and assumed payment obligations equivalent to $161,774,000 of theNew Notes. The Refinancing substantially eliminates debt principal paymentsuntil November 2006.

 

Managementbelieves the Refinancing will also allow it to continue to effect changes inits operations and has implemented measures to reduce overhead costs. We donot, however, expect to generate sufficient cash flows from operations in thefuture to pay fully the principal of the senior indebtedness upon maturity in2006 and, accordingly, we expect to refinance all or a portion of such debt,obtain new financing, or possibly sell assets.

 

3.               SALE OF STOCK TO SPECTRUM RESTAURANTGROUP

 

In June 2000, wesold all of the outstanding stock of four wholly owned subsidiaries (“Non-BlackAngus Subsidiaries”) to Spectrum Restaurant Group, Inc. (formerly known asNBACo, Inc.) effective June 26, 2000 (the “Stock Sale”). There was no gain orloss recorded because of the related-party nature of the Stock Sale. We received$17.0 million in cash on June 28, 2000, and transferred certain assets andliabilities to Spectrum Restaurant Group, Inc. Concurrent with the Stock Sale, advances between the Company and theNon-Black Angus Subsidiaries were eliminated. Paid-in capital of $27.0 millionwas charged as a result of the Stock Sale. We retained the assets andliabilities associated with certain closed restaurants as well as certainliabilities, estimated on June 26, 2000 at approximately $12.6 million,associated with the operating restaurants that were sold.  The amount of estimated liabilities relatedto the Stock Sale remaining at April 1, 2001 was approximately $147,000.

 

 

5

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

 

4.               INCOME TAXES

 

Thetax provision against the pre-tax income in 2002 and in 2001 consisted ofcertain state income taxes and estimated Federal income tax.  We previously established a valuationallowance against net-operating-loss carryforwards.

 

5.               PREFERRED STOCK

 

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

 

Weissued preferred stock dividends of 4,181 shares on February 15, 2002.  At April 1, 2002, we had 61,052 preferredshares outstanding and accrued.

 

6.               SUBSIDIARY GUARANTORS

 

Separatefinancial statements of our subsidiaries are not included in this report onForm 10-Q because the subsidiaries are fully, unconditionally, jointly, and severallyliable for our obligations under the Company’s Old Notes and New Notes, and theaggregate net assets, earnings, and equity of such subsidiary guarantors aresubstantially equivalent to the net assets, earnings, and equity of the Companyon a consolidated basis.

 

7.                                             INSURANCE

 

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

 

8****               FORWARD-LOOKING STATEMENTS

 

Certainstatements contained in this Form 10-Q are forward-looking regarding cash flowsfrom 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 ofcompetition, governmental regulations, and inflation.

 

9                                                  NEW ACCOUNTING PRONOUNCEMENTS

 

In June2001, the Financial Accounting Standards Board issued Statements of FinancialAccounting Standards (SFAS) No. 141, “Business Combinations” and SFAS No. 142,“Goodwill and Other Intangible Assets.” These new standards are effective forfiscal years beginning after December 15, 2001. Under the new standards,goodwill is no longer amortized, but is subject to an annual impairment test.The standards also promulgate new requirements for accounting for otherintangible assets. The impact of the new standards on our financial position andresults of operations is not material.

 

 

6

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InAugust 2001, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standard No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets*.” *FASBStatement No. 144 retains FASB Statement No. 121’s “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed*,”*fundamentalprovisions for the: (1) recognition and measurement of impairment of long-livedassets to be held and used; and (2) measurement of long-lived assets to bedisposed of by sale.  FASB Statement No.144 has not had a material impact on our financial position or results ofoperations, although it may in future periods. Statement No. 144 is effective for fiscal years beginning after December15, 2001.

 

 

 

7

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## **ITEM 2.                                                  MANAGEMENT’SDISCUSSION AND ANALYSIS**

# **OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with the historical financialinformation included in the Consolidated Condensed Financial Statements.

 

**Results of Operations**

 

*Thirteen weeks ended March 26, 2001 andApril 1, 2002:*

 

*Revenues. *Totalrevenues decreased slightly to $81.8 million in the first quarter of 2002 from$82.2 million in the first quarter of 2001. The 103 same-store sales decreased by 3.1% in the first quarter of 2002compared to 2001. Significantly, of this unfavorable variance, customer countsaccounted for only 0.3%; the introduction of more casual “value” items on thedinner menu, which caused the average check to decline, accounted for thebalance of the decrease. There were 108 Black Angus restaurants operating as ofApril 1, 2002 and 105 Black Angus restaurants operating as of March 26, 2001.

 

*Food and Beverage Costs.* As a percentage of revenues, food and beverage costs increased to 33.6%in the first quarter of 2002 from 33.0% in the first quarter of 2001.  The increase relates primarily to higherproduce costs and the increase in the sales mix of “product promotionalbundles” advertised on television.

 

*PayrollCosts.*  As a percentage of revenues, labor costsincreased to 30.1% in the first quarter of 2002 from 27.6% in the first quarterof 2001.  The increase is primarily theresult of an increase in labor-related costs for vacation, medical/dental, andemployee incentives.

 

*Direct Operating Costs.* Direct operating costs consist of occupancy, advertising, and otherexpenses incurred by individual restaurants. As a percentage of revenues, these costs decreased to 21.6% in the firstquarter of 2002 from 22.3% in the first quarter of 2001.  The decrease largely results from savingsrelated to energy-conservation measures and general liability costs.

 

*Depreciationand Amortization.*  Depreciation and amortization consists ofdepreciation of fixed assets used by individual restaurants and at the BlackAngus and corporate offices, as well as amortization of intangible assets.  As a percentage of revenues, depreciationand amortization decreased to 2.3% in the first quarter of 2002 from 2.6% inthe first quarter of 2001. The decrease primarily relates to the reduction ofamortization of the deferred debt costs for Old Notes purchased as part of theRefinancing in the fourth quarter of 2001 and the discontinued amortization ofgoodwill in 2002.

 

*Generaland Administrative Expenses.*  General andadministrative expenses decreased to $2.3 million in the first quarter of 2002from $2.5 million in the first quarter of 2001. The decrease is the result ofthe continued reduction of corporate expenses.

 

*OperatingProfit.*  As a result of the above items, operatingprofit decreased to $7.8 million in the first quarter of 2002 from $9.4 millionin the first quarter of 2001.  As apercentage of revenues, operating profit decreased to 9.5% in the first quarterof 2002 compared to 11.5% in the first quarter of 2001.

 

*InterestExpense — Net.*Our interest expense increased to $5.4 million in the first quarter of 2002from $4.2 million in the first quarter of 2001. The increase resulted fromrefinancing the senior notes in the fourth quarter of 2001.  The face value of senior notes increased by$22.6 million ($165.2 million face value) compared to the first quarter of 2001($142.6 million face value) at the same interest rate (11.5%).

 

 

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## **Liquidity and CapitalResources**

 

Ourprimary sources of liquidity are cash flows from operations and borrowingsunder our revolving credit facilities. We require capital principally for the acquisition and construction ofnew restaurants, the remodeling of existing restaurants, the purchase of newequipment and leasehold improvements, and working capital. As of April 1, 2002,we had approximately $17.2 million of cash.

 

Ingeneral, restaurant businesses do not have significant accounts receivablebecause sales are made for cash or by credit-card vouchers, which areordinarily paid within three to five days. The restaurants do not maintain substantial inventory as a result of therelatively brief shelf life and 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 withworking-capital deficits, i.e., current liabilities exceed current assets.  At April 1, 2002, our working-capitaldeficit was $18.2 million.

 

Weestimate that capital expenditures of $3.0 million to $6.0 million are requiredannually to maintain and refurbish our existing restaurants.  Other capital expenditures, which aregenerally discretionary, are primarily for the construction of new restaurantsand for expanding, reformatting, and extending the capabilities of existingrestaurants and for general corporate purposes.  Total capital expenditures for continuing operations wereapproximately $0.8 million through the first quarter of 2002 and $0.2 millionthrough the first quarter of 2001.  Weestimate that capital expenditures in 2002 will be approximately $5.0million.  We intend to open newrestaurants with small capital outlays and to finance most of the expendituresthrough leases.

 

OnOctober 31, 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 $142,600,000 outstanding 111⁄2% Senior Secured Notes due 2003 (the“Old Notes”).  We simultaneouslycompleted an offering (the “Offering”) of $30,000,000 aggregate principalamount of New Notes.  After theconsummation of the Exchange, the Offering, and related transactions(collectively, the “Refinancing”), we have no further payment obligations withrespect to over 97.6% of the outstanding Old Notes (constituting all but$3,410,000 aggregate principal amount of the Old Notes) and assumed paymentobligations equivalent to $161,774,000 of the New Notes. The Refinancingsubstantially eliminates debt principal payments until November 2006.

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

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

Under the NewNotes, we are obligated to make semiannual interest payments on May 1 and November1 through November 2006. Accordingly, we made an interest payment of $9,353,683on May 1, 2002.

We have anadditional $2.7 million in long-term debt that relates to mortgages and loanson improvements and equipment.

 

 

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On December 17,2001, we entered into a loan agreement for a revolving credit facility (“NewCredit Facility”) with Foothill Capital Corporation to replace the Old CreditFacility.  Our New Credit Facilitypresently provides for up to $15 million in borrowings, including support forletters of credit. As of April 1, 2002, we had approximately $8.5 million ofletters of credit outstanding and no borrowings, leaving approximately $6.5million remaining under the New Credit Facility. The New Credit Facilityexpires in December 2005.

 

TheCompany and its direct subsidiaries do not guaranty the debt of any otherparties.

 

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

 
| **Contractual  Obligations**          |   | **Paid in Q1-2002** |   | **Remainder of Fiscal  2002** |   | **Fiscal Years  2003&2004** |   | **Fiscal Years  2005&2006** |    | **Fiscal Years Beyond  2006** |    | **Total Remaining** |   |
|---------------------------------------|--------|---------------------|--------|-------------------------------|--------|---------------------------------|--------|---------------------------------|---------|-------------------------------|---------|---------------------|--------|
| **Long-Term  Debt-Interest on Notes** |   | $                   | 196    |                          | 18,800 |                            | 37,404 |                            | 37,208  |                          | 0       |                | $      | 93,608 |   |
| **Long-Term  Debt-Other**             |   | $                   | 103    |                          | 299    |                            | 3,476  |                            | 161,867 |                          | 949     |                | $      | 166,694 |   |
| **Capital  Leases**                   |   | $                   | 268    |                          | 809    |                            | 1,092  |                            | 464     |                          | 1,115   |                | $      | 3,748 |   |
| **Operating  Leases**                 |   | $                   | 5,038  |                          | 12,047 |                            | 34,189 |                            | 28,528  |                          | 180,276 |                | $      | 260,078 |   |
| **Employment  Agreements**            |   | $                   | 0      |                          | 500    |                            | 0      |                            | 0       |                          | 0       |                | $      | 500 |   |
| **Total  Contractual Cash**           |   | $                   | 5,605  |                          | $      | 32,455                          |   | $                               | 76,161  |                          | $       | 228,067             |   | $ | 182,340 |   | $ | 524,628 |   |
|                                       |        |                     |        |                               |        |                                 |        |                                 |         |                               |         |                     |        |  |  |  |  |  |  |

 

In the second quarter of 2000, we agreedto an interpretation of the financial covenants used to determine the dividendrate of our preferred stock.  The resultwas an increase in the dividend rate from 12% to 15% and our issuing additionaldividends of 2,503 shares on August 15, 2000 (relating to holders at August1999 and February 2000). Preferred stock dividends of 5,872 (including theadjustment), 3,618 shares, 3,889 shares, and 4,181 shares were issued on August15, 2000, February 15, 2001, August 15, 2001, and February 15, 2002,respectively.  There were 61,052 sharesof preferred stock outstanding and accrued at April 1, 2002. Our preferredstock is mandatorily redeemable on August 15, 2003.  If we do not redeem our preferred stock for cash at a price pershare equal to 110% of the then-applicable liquidation preference, ourpreferred stock will be automatically redeemed for shares of our common stockat that time and all of the rights of the preferred stock will terminate.Management believes that the preferred stock will convert to common stock.

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

 

 

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Although we are highly leveraged, basedupon current levels of operations and anticipated growth, we expect that cashflows generated from operations together with our other available sources ofliquidity will be adequate to make required payments of principal and intereston our indebtedness, to make anticipated capital expenditures, and to financeworking capital requirements for the next several years. We do not, however,expect to generate sufficient cash flows from operations in the future to payfully the principal of the senior indebtedness upon maturity in 2006 and,accordingly, we expect to refinance all or a portion of such debt, obtain newfinancing, or possibly sell assets.

 

**Recent Accounting Pronouncements**

 

 

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

 

InAugust 2001, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standard No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.”  FASBStatement No. 144 retains FASB Statement No. 121’s “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of*,”*fundamental provisions for the: (1) recognition and measurement of impairment oflong-lived assets to be held and used; and (2) measurement of long-lived assetsto be disposed of by sale. FASB Statement No. 144 has not had a material impacton our financial position or results of operations, although it may in futureperiods.  Statement No. 144 is effectivefor fiscal years beginning after December 15, 2001.

 

**Critical Accounting Policies**

 

*RevenueRecognition. *We recognize revenue based upon sales tocustomers in our restaurants at the time that meals and related services areprovided.  No revenue is recognized inadvance of services being provided. Because of the nature of our business, refunds on services provided areminimal and infrequent.  The majority ofsales are paid for in cash or by major credit card and, therefore, collectionrisk for unpaid amounts is considered to be low.  We sell gift certificates for use in our restaurants, but onlyrecognize revenue at the time the services are actually rendered.  We do not believe that there are othermethods of accounting for our revenue that would cause revenue recognized inany particular period to be materially different than the amounts that we havereported.

 

*Use ofEstimates.  T*he preparation of financial statements inconformity with generally accepted accounting principles in the United Statesrequires our management to make estimates and assumptions that affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities, and the reported amounts of revenues and expenses. Actualresults 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.  We may not be able torecover the assumed value of all of our assets, such as property and equipmentor intangible assets, if circumstances cause us to close restaurants or weexperience a decline in revenues.  Our actualliabilities for matters, such as self-insurance or discontinued operations,could possibly be significantly higher or lower than our estimates if actualconditions are ultimately different than the assumptions used in determiningthe estimates.

 

 

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

 

*Valuation Allowance for Deferred TaxAssets. *We provided a valuation allowance $34.1 million and$34.2 million against the entire amount of our deferred tax assets as of fiscalyear ended 2001 and for the fiscal quarter ended April 1, 2002,respectively. The valuation  allowancewas recorded given the losses we have incurred historically and uncertaintiesregarding future operating profitability and taxable income. Had we assumedthat our deferred tax assets were fully realizable, a deferred tax benefit of$1,035,000 and $66,000 would have been recognized in the statements ofoperations for fiscal year ended 2001 and for the fiscal quarter endedApril 1, 2002, respectively.

 

 

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**ITEM 3.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Themarket risk of our financial instruments as of April 1, 2002 has not materiallychanged since December 31, 2001.  Themarket risk profile on December 31, 2001 is disclosed in our annual report onForm 10-K, File No. 33-48183, for the year ended December 31, 2001.

 

**PART II.                OTHER INFORMATION**

 

Not Applicable

 

 

 

 

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 

 

 

|   |   |         |   | AMERICAN RESTAURANT  GROUP, INC.       |
|--------|--------|--------------|--------|----------------------------------------|
|   |   |         |   | (Registrant)                           |
|   |   |         |   |                                   |   |   |
| Date:  |   | May 10, 2002 |   | By:                                    |   | /s/ Ralph S.  Roberts |
|   |   |         |   |                                   |   |   |
|   |   |         |   | Ralph S. Roberts                       |
|   |   |         |   | Chief Executive  Officer and President |
|   |   |         |   |                                   |   |   |

 

 

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