**UNITED STATES 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 July  1, 2002**                                             |

 

**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 registrantas specified in its charter)

 

| **Delaware**                                                                       |   | **33-48183**              |   | **33-0193602**                        |
|------------------------------------------------------------------------------------|--------|---------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)                   |   | (Commission File  Number) |   | (I.R.S. employer  identification no.) |
|                                                                               |
| **4410  El Camino Real, Suite 201  Los Altos, CA  94022  (650) 949-6400**     |
| (Address and telephone  number of principal executive offices)                     |
|                                                                               |
| Former name, former  address and former fiscal year  if changed since last report. |
|                                                                               |

 

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

 

Yes   ý   No  o

 

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

 

 

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**AMERICAN RESTAURANT GROUP, INC.**

 

**INDEX**

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

 

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**PARTI.    FINANCIAL INFORMATION**

 

**ITEM1.     FINANCIAL STATEMENTS:**

 

PLEASE NOTE:  THESE INTERIMFINANCIAL STATEMENTS WERE NOT REVIEWED BY AN INDEPENDENT ACCOUNTANT USINGPROFESSIONAL REVIEW STANDARDS AND PROCEDURES, ALTHOUGH SUCH A REVIEW IS REQUIRED.  PLEASE SEE *CHANGEIN AUDITORS* UNDER “CRITICAL ACCOUNTING POLICIES” IN ITEM 2 OF THISPART I.

 

AMERICAN RESTAURANTGROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED CONDENSEDBALANCE SHEETS

 

DECEMBER 31, 2001 ANDJULY 1, 2002

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

 

The accompanying notesare an integral part of these consolidated condensed statements. 

(consolidated condensedbalance sheets continued on the following page)

 

1

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

 

The accompanying notesare an integral part of these consolidated condensed statements.

 

2

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AMERICAN RESTAURANT GROUP,INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTSOF OPERATIONS

 

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

 

(UNAUDITED)

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

 

The accompanying notesare an integral part of these consolidated condensed statements.

 

3

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AMERICAN RESTAURANTGROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTSOF CASH FLOWS

 

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

 

(UNAUDITED)

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

 

The accompanying notesare an integral part of these consolidated condensed statements.

 

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AMERICAN RESTAURANTGROUP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATEDCONDENSED FINANCIAL STATEMENTS

 

PLEASE NOTE:  THESE INTERIM FINANCIALSTATEMENTS WERE NOT REVIEWED BY AN INDEPENDENT ACCOUNTANT USING PROFESSIONALREVIEW STANDARDS AND PROCEDURES, ALTHOUGH SUCH A REVIEW IS REQUIRED.  PLEASE SEE *CHANGEIN AUDITORS* UNDER “CRITICAL ACCOUNTING POLICIES” IN ITEM 2 OF THISPART I.

 

 

1.             MANAGEMENT’SOPINION

 

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

 

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

 

2.             OPERATIONS

 

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

 

On October 31, 2001, we completed an exchange offer(the “Exchange”) in which we offered to exchange our 111⁄2% Senior Secured Notesdue 2006 (the “New Notes”) for all of our $142,600,000 outstanding 111⁄2% SeniorSecured Notes due 2003 (the “Old Notes”). We simultaneously completed an offering (the “Offering”) of $30,000,000aggregate principal amount of New Notes. After the consummation of the Exchange, the Offering, and relatedtransactions (collectively, the “Refinancing”), we have no further paymentobligations with respect to over 97.6% of the outstanding Old Notes(constituting all but $3,410,000 aggregate principal amount of the Old Notes)and assumed payment obligations equivalent to $161,774,000 of the New Notes.The Refinancing substantially eliminates debt principal payments until November2006.

 

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

 

3.             SALE OF STOCK TOSPECTRUM RESTAURANT GROUP

 

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

 

5

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

 

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

 

4.             INCOME TAXES

 

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

 

5.             PREFERRED STOCK

 

As part of the recapitalization plan in February 1998,we issued 35,000 preferred stock units (the “Units”) of the Company.  Each Unit consists of $1,000 initialliquidation preference of 12% senior pay-in-kind exchangeable preferred stockand one common-stock purchase warrant initially to purchase 2.66143 shares ofthe common stock at an initial exercise price of one cent per share.  Our preferred stock is mandatorilyredeemable on August 15, 2003.  If onAugust 15, 2003 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 rights of the preferred stock will terminate.  Management believes that the preferred stockwill convert to common stock.

 

We issued preferred stock dividends of 4,181 shares onFebruary 15, 2002.  At July 1, 2002, wehad 63,299 preferred shares outstanding and accrued.

 

6.             SUBSIDIARYGUARANTORS

 

Separate financial statements of our subsidiaries arenot included in this report on Form 10-Q because the subsidiaries are fully,unconditionally, jointly, and severally liable for our obligations under theCompany’s Old Notes and New Notes, and the aggregate net assets, earnings, andequity of such subsidiary guarantors are substantially equivalent to the netassets, earnings, and equity of the Company on a consolidated basis.

 

7.             INSURANCE

 

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

 

8.            FORWARD-LOOKINGSTATEMENTS

 

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

 

6

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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.

 

9.             NEW ACCOUNTING PRONOUNCEMENTS

 

In June 2001, the Financial Accounting Standards Boardissued Statements of Financial Accounting Standards (SFAS) No. 141, “BusinessCombinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” Thesenew standards are effective for fiscal years beginning after December 15, 2001.Under the new standards, goodwill is no longer amortized, but is subject to anannual impairment test. The standards also promulgate new requirements foraccounting for other intangible assets. The impact of the new standards on ourfinancial position and results of operations is not material.

 

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

 

7

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**ITEM2.****                                                                                                                                                     MANAGEMENT’SDISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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.

 

**Resultsof Operations**

 

*Thirteenweeks ended June 25, 2001 and July 1, 2002:*

 

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

 

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

 

*PayrollCosts.*  As apercentage of revenues, labor costs increased to 29.6% in the second quarter of2002 from 28.3% in the second quarter of 2001. The increase is primarily the result of the minimum wage rate increasein 2002 and increased management expense for four new units.

 

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

 

*Depreciationand Amortization.* 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. As a percentage of revenues, depreciation and amortization decreased to2.4% in the second quarter of 2002 from 2.9% in the second quarter of 2001. Thedecrease primarily relates to the reduction of amortization of the deferreddebt costs for Old Notes purchased as part of the Refinancing in the fourthquarter of 2001 and the discontinued amortization of goodwill in 2002.

 

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

 

*OperatingProfit.*  As a resultof the above items, operating profit decreased to $5.4 million in the secondquarter of 2002 from $6.5 million in the second quarter of 2001. As apercentage of revenues, operating profit decreased to 7.3% in the secondquarter of 2002 compared to 8.5% in the second quarter of 2001.

 

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

 

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*Twenty-sixweeks ended June 25, 2001 and July 1, 2002:*

 

*Revenues. *Total revenues decreasedto $156.5 million in the first half of 2002 from $158.5 million in the firsthalf of 2001.  In the 103 base stores,sales decreased by 4.1% in the first half of 2002 compared to the first half of2001.  Significantly, of thisunfavorable variance, customer counts accounted for only 0.1%; the introductionof more casual “value” items on the dinner menu, which caused the average checkto decline, accounted for the balance of the decrease. There were 109 BlackAngus restaurants operating as of July 1, 2002 and 105 Black Angus restaurantsoperating as of June 25, 2001.

 

*Foodand Beverage Costs.* As a percentage of revenues, food and beverage costs decreased slightlyto 33.3% in the first half of 2002 from 33.5% in the first half of 2001. Thisdecrease reflects lower raw-material costs.

 

*PayrollCosts.*  As apercentage of revenues, labor costs increased to 29.9% in the first half of2002 from 27.9% in the first half of 2001. The increase is primarily the result of an increase in labor-relatedcosts for vacation, medical/dental, employee incentives, and minimum wage rateincreases in 2002.

 

*DirectOperating Costs.* Direct operating costs consist of occupancy, advertising, and otherexpenses incurred by individual restaurants. As a percentage of revenues, these costs increased slightly to 23.0% inthe first half of 2002 from 22.8% in the first half of 2001. The savingsrelated to energy-conservation measures and general liability costs from thefirst quarter of 2002 were offset by an increase in rental expense for theadditional four new restaurants opened in the third and fourth quarters of2001, and the preopening expenses associated with our 109th restaurantopened in the second quarter of 2002.

 

*Depreciationand Amortization.* 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. As a percentage of revenues, depreciation and amortization decreased to2.3% in the first half of 2002 from 2.7% in the first half of 2001. Thedecrease primarily relates to the reduction of amortization of the deferreddebt costs for Old Notes purchased as part of the Refinancing in the fourthquarter of 2001 and the discontinued amortization of goodwill in 2002.

 

*Generaland Administrative Expenses.* General and administrative expenses were flat at $4.8 million in thefirst half of each of 2002 and 2001.

 

*OperatingProfit.*  As a resultof the above items, operating profit decreased to $13.2 million in the firsthalf of 2002 from $15.9 million in the first half of 2001.  As a percentage of revenues, operatingprofit decreased to 8.4% in the first half of 2002 compared to 10.0% in thefirst half of 2001.

 

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

 

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**Liquidity and Capital Resources**

 

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, thepurchase of new equipment and leasehold improvements, and working capital. Asof July 1, 2002, we had approximately $7.2 million of cash.

 

In general, 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 July 1, 2002, our working-capital deficitwas $17.5 million.

 

We estimate that capital expenditures of $3.0 million to $6.0 millionare required annually 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 were approximately$1.9 million through the first half of 2002 and $1.2 million through the halfof 2001.  We estimate that capitalexpenditures in 2002 will be approximately $5.0 million.  We intend to open new restaurants with smallcapital outlays and to finance most of the expenditures through leases.

 

On October 31, 2001, we completed an exchange offer (the “Exchange”) inwhich we offered to exchange our 111⁄2% Senior Secured Notes due 2006 (the “NewNotes”) for all of our $142,600,000 outstanding 111⁄2% Senior Secured Notes due2003 (the “Old Notes”).  Wesimultaneously completed an offering (the “Offering”) of $30,000,000 aggregateprincipal amount of New Notes.  Afterthe consummation 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 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, thenthe preferred stock will automatically be redeemed for shares of our commonstock at that time and all the rights of the preferred stock will terminate,including any rights of acceleration; to eliminate provisions that allow theholders to exchange preferred stock for new subordinate debt; and to amend thecovenants of the preferred stock so that they are substantially similar to thecovenants under the New Notes; and, (d) the consent of the lender under ourformer revolving credit facility (“Old Credit Facility”) to permit the issuanceof the New Notes and any other aspects of the Refinancing requiring thelender’s consent.

 

$3,410,000 of the Old Notes were outstanding at July 1, 2002.  Under the Old Notes, we are obligated tomake semiannual interest payments on February 15 and August 15 through February2003.  Accordingly, we made an interestpayment of $196,075 on February 15, 2002.

 

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

 

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

 

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

 

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

 

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

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

 

In the second quarter of 2000, we agreed to an interpretation of thefinancial covenants used to determine the dividend rate of our preferredstock.  The result was an increase inthe dividend rate from 12% to 15% and our issuing additional dividends of 2,503shares on August 15, 2000 (relating to holders at August 1999 and February2000). Preferred stock dividends of 5,872 (including the adjustment), 3,618shares, 3,889 shares, and 4,181 shares were issued on August 15, 2000, February15, 2001, August 15, 2001, and February 15, 2002, respectively.  There were 63,299 shares of preferred stockoutstanding and accrued at July 1, 2002. Our preferred stock is mandatorilyredeemable on August 15, 2003. If we do not redeem our preferred stock for cashat a price per share equal to 110% of the then-applicable liquidationpreference, our preferred stock will be automatically redeemed for shares ofour common stock at that time and all of the rights of the preferred stock willterminate. Management believes that the preferred stock will convert to commonstock.

 

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 suchindebtedness, contingent and mandatory prepayments may be required undercertain specified conditions and events. There are no compensating balance requirements.

 

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

 

**RecentAccounting Pronouncements**

 

In June 2001, the Financial Accounting Standards Board issuedStatements of Financial Accounting Standards (SFAS) No. 141, “BusinessCombinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” Thesenew standards are effective for fiscal years beginning after December 15, 2001.Under the new standards, goodwill is no longer amortized, but is subject to anannual impairment test. The standards also promulgate new requirements foraccounting for other intangible assets. The impact of the new standards on ourfinancial position and results of operations is not material.

 

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

 

**CriticalAccounting Policies**

 

*RevenueRecognition. *Werecognize revenue based upon sales to customers in our restaurants at the timethat meals and related services are provided. No revenue is recognized in advance of services being provided.  Because of the nature of our business,refunds on services provided are minimal and infrequent.  The majority of sales are paid for in cashor by major credit card and, therefore, collection risk for unpaid amounts isconsidered to be low.  We sell giftcertificates for use in our restaurants, but only recognize revenue at the timethe services are actually rendered.  Wedo not believe that there are other methods of accounting for our revenue thatwould cause revenue recognized in any particular period to be materiallydifferent than the amounts that we have reported.

 

*Use ofEstimates. *The preparation of financialstatements in conformity with generally accepted accounting principles in theUnited States requires our management to make estimates and assumptions thataffect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities, and the reported amounts of revenues andexpenses. 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 our liabilities,and the amounts of revenues and expenses incurred in any given period.  There are estimates inherent in theseamounts.  We may not be able to recoverthe assumed value of all of our assets, such as property and equipment orintangible assets, if circumstances cause us to close restaurants or weexperience a decline in revenues.  Ouractual liabilities for matters, such as self-insurance or discontinuedoperations, could possibly be significantly higher or lower than our estimatesif actual conditions are ultimately different than the assumptions used indetermining the estimates.

 

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*Leases*.  We lease equipment and operating facilitiesunder both capital and operating 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 that we may be required to recognize moreleases as capital leases in the future than we have in the past, causing acorresponding increase in our assets and liabilities, and the associateddepreciation and interest expense. Conversely, if many leases in the future were classified as operatingleases, rental expense would increase.

 

*ValuationAllowance for Deferred Tax Assets. *Weprovided a valuation allowance of $34.1 million and $33.7 million against theentire amount of our deferred tax assets as of the fiscal year ended 2001 andas of the fiscal quarter ended July 1, 2002, respectively. The valuationallowance was recorded given the losses we have incurred historically anduncertainties regarding future operating profitability and taxable income.  Had we assumed that our deferred tax assetswere fully realizable, a deferred tax benefit of $1,036,000 would have beenrecognized in the statement of operations for the fiscal year ended 2001.

 

*Changein Auditors.*  On August 5, 2002 we received a letter fromthe Securities and Exchange Commission (“SEC”) informing the Company that theSEC has received a notice from Arthur Andersen LLP (“Andersen”), the Company’sindependent accountants, that Andersen is unable to perform future auditservices for us and, as a result, Andersen’s relationship with us iseffectively terminated.  We did notreceive a copy of this notification directly.

 

Thereports of Andersen on our financial statements for the past two fiscal yearscontained no adverse opinion or disclaimer of opinion and were not qualified ormodified as to uncertainty, audit scope, or accounting principle.

 

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

 

Duringour two most recent fiscal years and through July 1, 2002, there have been noreportable events, as defined in Item 304(a)(1)(v) of Regulation S-K.

 

Uponretaining new independent accountants, the Company and its new auditors willreview this Form 10-Q and our historical financial reports. This review mayresult in a recommendation or requirement by our auditors to change certainhistorical accounting treatments.  Theimplications, if any, will depend upon the views of the new auditors afterconducting their examination and what specific changes, if any, are ultimatelymade.

 

OnAugust 13, 2002, our Board of Directors authorized us to engage new independentaccountants.  After the new auditors areengaged, we will file a Form 8-K to announce the new relationship.

 

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**ITEM3.       QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The market risk of our financial instruments as of July 1, 2002 has notmaterially changed since December 31, 2001. The market risk profile on December 31, 2001 is disclosed in our annualreport on Form 10-K, File No. 33-48183, for the fiscal year ended December 31,2001.

 

**PART II.                OTHER INFORMATION**

 

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

 

N/A

 

**ITEM 5.                  OTHER INFORMATION**

 

N/A

 

**ITEM6.                  EXHIBITS AND REPORTSON FORM 8-K**

 

(a)           List of Exhibits

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

 

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**SIGNATURE**

 

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

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

 

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