1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
American Restaurant Group, Inc.
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-48183 33-0193602
- ------------------------------- ---------------- ------------------
(State or other jurisdiction of (Commission File (I.R.S. employer
incorporation or organization) Number) identification no.)
450 Newport Center Drive
Newport Beach, CA 92660
(949) 721-8000
-------------------------------------------------------------
(Address and telephone number of principal executive offices)
--------------------------------------------------
Former name, former address and former fiscal year
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of outstanding shares of the Company's Common Stock (one cent par
value) as of November 01, 1999 was 128,081.
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AMERICAN RESTAURANT GROUP, INC.
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Condensed Balance Sheets......................... 1
Consolidated Statements of Operations......................... 3
Consolidated Statements of Cash Flows......................... 4
Notes to Consolidated Condensed Financial Statements.......... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................. 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................. 11
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
DECEMBER 28, 1998 AND SEPTEMBER 27, 1999
ASSETS December 28, September 27,
1998 1999
------------ ------------
(unaudited)
CURRENT ASSETS:
Cash $ 8,832,000 $ 3,029,000
Accounts and notes receivable, net of reserve of
$602,000 and $72,000 at December 28, 1998
and September 27, 1999, respectively 4,804,000 4,730,000
Inventories 5,716,000 5,031,000
Prepaid expenses 3,108,000 2,789,000
------------ ------------
Total current assets 22,460,000 15,579,000
------------ ------------
PROPERTY AND EQUIPMENT:
Land and land improvements 5,485,000 5,485,000
Buildings and leasehold improvements 112,280,000 111,635,000
Fixtures and equipment 84,774,000 80,676,000
Property held under capital leases 11,634,000 11,634,000
Construction in progress 2,250,000 3,708,000
------------ ------------
216,423,000 213,138,000
Less -- Accumulated depreciation 125,858,000 124,717,000
------------ ------------
90,565,000 88,421,000
------------ ------------
OTHER ASSETS -- NET 37,434,000 34,099,000
------------ ------------
Total Assets $150,459,000 $138,099,000
============ ============
The accompanying notes are an integral part of these
consolidated condensed statements.
(consolidated condensed balance sheets continued on the following page)
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LIABILITIES AND COMMON STOCKHOLDERS' December 28, September 27,
EQUITY 1998 1999
------------- -------------
(unaudited)
CURRENT LIABILITIES:
Accounts payable $ 22,937,000 $ 25,084,000
Accrued liabilities 18,299,000 12,159,000
Accrued insurance 4,243,000 4,054,000
Accrued interest 7,033,000 2,449,000
Accrued payroll costs 8,194,000 7,167,000
Current portion of obligations
under capital leases 950,000 942,000
Current portion of long-term debt 421,000 484,000
------------- -------------
Total current liabilities 62,077,000 52,339,000
------------- -------------
LONG-TERM LIABILITIES, net of current portion:
Obligations under capital leases 6,566,000 5,851,000
Long-term debt 159,506,000 159,299,000
------------- -------------
Total long-term liabilities 166,072,000 165,150,000
------------- -------------
DEFERRED GAIN 4,684,000 4,445,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
CUMULATIVE PREFERRED STOCK,
MANDATORILY REDEEMABLE 36,801,000 40,567,000
------------- -------------
REDEEMABLE CUMULATIVE PREFERRED STOCK:
Redeemable cumulative senior
preferred stock, $0.01 par value;
1,400,000 shares authorized,
no shares issued or outstanding -- --
Redeemable cumulative junior
preferred stock, $0.01 par value;
100,000 shares authorized,
no shares issued or outstanding -- --
COMMON STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value; 1,000,000
shares authorized; 128,081 shares
issued and outstanding at December 28,
1998 and September 27, 1999 1,000 1,000
Paid-in capital 55,666,000 51,899,000
Accumulated deficit (174,842,000) (176,302,000)
------------- -------------
Total common stockholders' deficit (119,175,000) (124,402,000)
------------- -------------
Total liabilities and common stockholders' equity $ 150,459,000 $ 138,099,000
============= =============
The accompanying notes are an integral part of these
consolidated condensed statements.
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AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 28, 1998 and SEPTEMBER 27, 1999
AND THE THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1998 and SEPTEMBER 27, 1999
(UNAUDITED)
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------------- --------------------------------
September 28, September 27, September 28, September 27,
1998 1999 1998 1999
------------- ------------- ------------- -------------
REVENUES $ 101,801,000 $ 96,389,000 $ 324,795,000 $ 310,536,000
RESTAURANT COSTS:
Food and beverage 32,487,000 30,593,000 103,355,000 97,742,000
Payroll 31,909,000 30,072,000 98,621,000 94,588,000
Direct operating 26,419,000 24,744,000 81,272,000 77,355,000
Depreciation and
amortization 3,582,000 3,362,000 10,848,000 10,180,000
GENERAL AND ADMINISTRATIVE
EXPENSES 5,239,000 7,054,000 15,680,000 17,571,000
NON-CASH CHARGE FOR IMPAIRMENT
OF LONG-LIVED ASSETS -- 540,000 -- 540,000
GRANDY'S FRANCHISE CONVERSION
PROGRAM:
Gain on sale of assets -- 77,000 -- 913,000
Non-cash charge for assets
to be disposed -- (94,000) -- (240,000)
------------- ------------- ------------- -------------
Operating profit 2,165,000 7,000 15,019,000 13,233,000
INTEREST EXPENSE, net 4,869,000 4,796,000 15,330,000 14,573,000
------------- ------------- ------------- -------------
Loss before provision
for income taxes and
extraordinary gain (2,704,000) (4,789,000) (311,000) (1,340,000)
PROVISION FOR INCOME
TAXES 52,000 16,000 128,000 120,000
------------- ------------- ------------- -------------
Loss before extraordinary
gain (2,756,000) (4,805,000) (439,000) (1,460,000)
EXTRAORDINARY GAIN ON
EXTINGUISHMENT OF DEBT -- -- 9,559,000 --
------------- ------------- ------------- -------------
Net income (loss) $ (2,756,000) $ (4,805,000) $ 9,120,000 $ (1,460,000)
============= ============= ============= =============
The accompanying notes are an integral part of these
consolidated condensed statements.
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AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1998 AND SEPTEMBER 27, 1999
(UNAUDITED)
September 28, September 27,
1998 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 325,389,000 $ 310,610,000
Cash paid to suppliers and employees (310,544,000) (291,877,000)
Interest paid, net (20,415,000) (19,157,000)
Income taxes paid (128,000) (83,000)
------------- -------------
Net cash used in
operating activities (5,698,000) (507,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,941,000) (8,118,000)
Net decrease in other assets 174,000 99,000
Proceeds from disposition of assets 3,000 453,000
Proceeds from sale of Grandy's assets -- 3,365,000
------------- -------------
Net cash used in investing activities (8,764,000) (4,201,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on indebtedness (161,000,000) (10,276,000)
Borrowings on indebtedness 160,215,000 10,132,000
Net increase in deferred debt costs (10,631,000) (228,000)
Costs included in extraordinary gain on extinguishment
of debt (1,686,000) --
Issuance of cumulative preferred stock 35,000,000 --
Cost related to issuance of cumulative preferred
stock (2,178,000) --
Payments on insurance-related financing (7,450,000) --
Payments on capital lease obligations (697,000) (723,000)
------------- -------------
Net cash provided by (used in) financing activities 11,573,000 (1,095,000)
------------- -------------
NET DECREASE IN CASH (2,889,000) (5,803,000)
CASH, at beginning of period 5,737,000 8,832,000
------------- -------------
CASH, at end of period $ 2,848,000 $ 3,029,000
============= =============
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
USED IN OPERATING ACTIVITIES:
Net income (loss) $ 9,120,000 $ (1,460,000)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Extraordinary gain on
extinguishment of debt (9,559,000) --
Depreciation and amortization 10,848,000 10,180,000
Loss on impairment of long-lived assets -- 540,000
Non-cash charge for assets to be disposed -- 240,000
Loss on disposition of assets 376,000 1,186,000
Amortization of deferred gain (296,000) (239,000)
Accretion on indebtedness 21,000 --
(Increase) decrease in current assets:
Accounts and notes receivable, net 594,000 74,000
Inventories (53,000) 685,000
Prepaid expenses (82,000) 319,000
Increase (decrease) in current liabilities:
Accounts payable (5,516,000) 2,147,000
Accrued liabilities (5,687,000) (8,379,000)
Accrued insurance 1,292,000 (189,000)
Accrued interest (5,106,000) (4,584,000)
Accrued payroll (1,650,000) (1,027,000)
------------- -------------
Net cash used in
operating activities $ (5,698,000) $ (507,000)
============= =============
The accompanying notes are an integral part of these
consolidated condensed statements.
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AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. MANAGEMENT OPINION
The Consolidated Condensed Financial Statements included were prepared
by the Company, without audit, in accordance with Securities and
Exchange Commission Regulation S-X. In the opinion of the Company's
management, these Consolidated Condensed Financial Statements contain
all adjustments (all of which are of a normal recurring nature)
necessary to present fairly the Company's financial position as of
December 28, 1998 and September 27, 1999 and the results of its
operations for the thirteen weeks and the thirty-nine weeks ended
September 28, 1998 and September 27, 1999 and its cash flows for the
thirty-nine weeks ended September 28, 1998 and September 27, 1999. The
Company's results for an interim period are not necessarily indicative
of the results that may be expected for the year.
Although the Company believes that all adjustments necessary for a
fair presentation of the interim periods presented are included and
that the disclosures are adequate to make the information presented
not misleading, we suggest that these Consolidated Condensed Financial
Statements be read in conjunction with the Consolidated Financial
Statements and related notes included in the Company's annual report
on Form 10-K, File No. 33-48183, for the year ended December 28, 1998.
2. OPERATIONS
The Company's operations are affected by local and regional economic
conditions, including competition in the restaurant industry. The
Company has had recurring operating losses in recent years and was
unable to meet a required debt principal payment during 1997. A
recapitalization plan was consummated during 1998. This plan
substantially eliminated debt principal payments until the year 2003.
Management believes the recapitalization will also allow it to effect
changes in its operations and has already implemented measures to
reduce overhead costs. However, the Company does not expect to
generate sufficient cash flow from operations in the future to make
principal payments on long-term debt upon maturity in the year 2003
and, accordingly, it expects to refinance all or a portion of such
debt, obtain new financing or possibly sell assets.
3. INCOME TAX
The tax provision against the Company's pre-tax income in 1999 and
1998 consisted of certain state income tax and estimated Federal
income tax payments. The Company previously established a valuation
allowance against net operating loss carryforwards.
4. SEGMENT REPORTING
Effective December 28, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of
an Enterprise and Related Information. The Company's reportable
operating segments include Black Angus, Grandy's and the Other
Concepts (Spoons, Spectrum and National Sports Grill, none of which
meet the separate disclosure requirements).
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The applicable line items for the Company's reportable segments
reconciled to the consolidated financial statements are as follows (in
thousands, except for number of restaurants):
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------ ------------------------
Sept. 28, Sept. 27, Sept. 28, Sept. 27,
1998 1999 1998 1999
--------- --------- --------- ---------
Number of Restaurants
Black Angus 101 100 101 100
Grandy's 86 66 86 66
Other Concepts 39 35 39 35
--------- --------- --------- ---------
Total Consolidated 226 201 226 201
========= ========= ========= =========
Revenues (a)
Black Angus $ 61,994 $ 61,514 $ 201,810 $ 200,308
Grandy's 17,232 13,705 54,312 45,607
Other Concepts 22,575 21,170 68,673 64,621
--------- --------- --------- ---------
Total Consolidated $ 101,801 $ 96,389 $ 324,795 $ 310,536
========= ========= ========= =========
Gross Profit (b)
Black Angus $ 7,520 $ 7,474 $ 28,524 $ 29,080
Grandy's 1,821 1,441 6,824 5,151
Other Concepts 1,645 2,065 6,199 6,620
--------- --------- --------- ---------
Total Consolidated $ 10,986 $ 10,980 $ 41,547 $ 40,851
========= ========= ========= =========
Net Income (loss) (c)
Black Angus $ 1,156 $ 1,192 $ 9,480 $ 9,963
Grandy's (539) (2,501) (425) (2,631)
Other Concepts (771) (794) (1,259) (1,163)
Corporate (2,550) (2,686) (8,107) (7,509)
--------- --------- --------- ---------
Total Consolidated $ (2,704) $ (4,789) $ (311) $ (1,340)
========= ========= ========= =========
(a) Reflects sales and revenues from external customers.
Intersegment sales and revenues do not apply.
(b) Gross profit is defined as revenues less food and beverage,
payroll and direct operating costs.
(c) Before provision for income taxes and extraordinary items.
There has not been a material change from the total asset amounts
disclosed in the December 28, 1998 Form 10-K; therefore, total assets
are not disclosed in this Form 10-Q.
5. SUBSIDIARY GUARANTORS
Separate financial statements of the Company's subsidiaries are not
included in this report on Form 10-Q because the subsidiaries are
fully, unconditionally, jointly and severally liable for the
obligations of the Company under the Company's 11.5% senior secured
notes, due 2003, and the aggregate net assets, earnings and equity of
such subsidiary guarantors are substantially equivalent to the net
assets, earnings and equity of the Company on a consolidated basis.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of American Restaurant Group, Inc.'s
financial condition and results of operations should be read in conjunction with
the historical financial information included in the Consolidated Condensed
Financial Statements.
RESULTS OF OPERATIONS
Thirteen weeks ended September 28, 1998 and September 27, 1999:
Revenues. Total revenues decreased to $96.4 million in the third quarter of 1999
from $101.8 million in the third quarter of 1998. Same-store-sales decreased
0.6%. During the third quarter ended September 27, 1999, the Company closed 15
restaurants and converted one Grandy's restaurant from company-owned to
franchised. The Company also opened one new Black Angus restaurant and one new
restaurant in the Other Concepts. There were 201 restaurants operating as of
September 27, 1999 and 226 operating as of September 28, 1998.
Black Angus revenues decreased 0.8% to $61.5 million in the third quarter of
1999 as compared to the same period in 1998. The decrease consisted of $0.9
million from discontinuing late-night entertainment and lunch at three
restaurants and $0.8 million related to two restaurants closed at the end of
their leases during 1999. These amounts were partially offset by a $0.9 million,
or 1.6%, increase in same-store-sales (excluding late-night entertainment and
discontinued lunch) and by a $0.3 million increase related to two new stores.
Grandy's revenues decreased 20.5% to $13.7 million in the third quarter of 1999
as compared to the same period in 1998. The decrease consisted of $3.0 million
from 16 restaurants closed during 1998 and 1999 and seven restaurants converted
from company-owned to franchised operations during 1999 as well as $0.5 million,
or 3.7%, decline in same-store-sales. Franchise revenues remained constant.
Revenues from Other Concepts (Spoons, Spectrum and National Sports Grill)
decreased 6.2% to $21.2 million in the third quarter 1999 compared to the same
quarter in 1998. The decrease consisted of $1.6 million from the closure of five
restaurants during 1998 and 1999 and $0.1 million, or 0.6%, decline in
same-store-sales. These amounts were partially offset by a $0.3 million increase
related to one new restaurant.
Food and Beverage Costs. As a percentage of revenues, food and beverage costs
decreased to 31.7% in the third quarter of 1999 from 31.9% in the third quarter
of 1998. The decrease was primarily from lower produce and meat costs.
Payroll Costs. As a percentage of revenues, labor costs decreased slightly to
31.2% in the third quarter of 1999 from 31.3% in the third quarter of 1998. The
decrease was primarily from lower unit staff payroll costs.
Direct Operating Costs. Direct operating costs consist of occupancy, advertising
and other expenses incurred by individual restaurants. As a percentage of
revenues, these costs decreased to 25.7% in the third quarter of 1999 from 26.0%
in the third quarter of 1998. The decrease was primarily from lower repair and
maintenance expenses and operating supplies.
Depreciation and Amortization. Depreciation and amortization consist of
depreciation of fixed assets used by individual restaurants, divisions and
corporate offices, as well as amortization of intangible assets. As a percentage
of revenues, depreciation and amortization remained constant at 3.5%.
General and Administrative Expenses. General and administrative expenses
increased to $7.1 million in the third quarter of 1999 from $5.2 million in the
third quarter of 1998. The increase was primarily due to a $2.0 million non-cash
charge in 1999 related to future lease-related costs associated with recently
closed restaurants. General and administrative expenses as a percentage of
revenues increased to 7.3% (5.2% before the non-cash charge) in the third
quarter of 1999 from 5.1% in the third quarter of 1998.
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Non-Cash Charge for Impairment of Long-Lived Assets. In September 1999, fixed
assets related to recently closed restaurants were valued at less than their
historical costs and resulted in a non-cash charge of $0.5 million.
Grandy's Franchise Conversion Program. In 1998, the Company announced a plan to
convert a majority of its company-owned restaurants to franchised restaurants.
The Company recorded a $0.1 million gain on the sale of the property and
equipment, including applicable lease rights and certain intangible assets,
related to the conversion of one restaurant in the third quarter of 1999. It
also recorded a $0.1 million non-cash charge related to the conversion program.
Operating Profit. Due to the above items, operating profit decreased to $7,000
in the third quarter of 1999 from $2.2 million in the third quarter of 1998.
Interest Expense - Net. Interest expense decreased to $4.8 million in the third
quarter of 1999 from $4.9 million in the third quarter of 1998. The Company's
average stated interest rate decreased to 11.3% in the third quarter of 1999
from 11.5% in the third quarter of 1998. The weighted-average debt balance
(excluding capitalized lease obligations) decreased to $162.0 million in the
third quarter of 1999 from $171.8 million in the third quarter of 1998.
Thirty-nine weeks ended September 28, 1998 and September 27, 1999:
Revenues. Total revenues decreased to $310.5 million in 1999 from $324.8 million
in 1998. Same-store-sales decreased 1.2%. During the thirty-nine weeks ended
September 27, 1999, the Company closed 18 restaurants and converted seven
Grandy's restaurants from company-owned to franchised restaurants. The Company
also opened one new Black Angus restaurant and one new restaurant in the Other
Concepts. There were 201 restaurants operating as of September 27, 1999 and 226
operating as of September 28, 1998.
Black Angus revenues decreased 0.7% to $200.3 million in 1999 as compared to the
same period in 1998. The decrease consisted of $2.9 million from discontinuing
late-night entertainment and $2.8 million from four restaurants closed at the
end of their leases during 1998 and 1999. These amounts were partially offset by
a $2.7 million, or 1.4%, increase in same-store-sales (excluding late-night
entertainment and discontinued lunch) and a $1.5 million increase related to two
new stores opened in 1998 and 1999.
Grandy's revenues decreased 16.0% to $45.6 million in 1999 as compared to the
same period in 1998. The decrease consisted of $6.5 million from 16 restaurants
closed during 1998 and 1999 and seven restaurants converted from company-owned
restaurants to franchised operations during 1999 as well as $2.3 million, or
5.6%, decline in same store sales. Franchise revenues improved $0.1 million
primarily because of franchise fees related to seven company-owned restaurants
converted to franchised restaurants during 1999.
Revenues from Other Concepts (Spoons, Spectrum and National Sports Grill)
decreased 5.9% to $64.6 million in 1999 compared to 1998. The decrease consisted
of $3.3 million from the closure of seven restaurants during 1998 and 1999 and
$1.0 million, or 1.6%, decline in same-store-sales, offset in part by $0.3
million related to the opening of one new restaurant in 1999.
Food and Beverage Costs. As a percentage of revenues, food and beverage costs
decreased to 31.5% in 1999 from 31.8% in 1998. The decrease was primarily from
lower seafood and produce costs.
Payroll Costs. As a percentage of revenues, labor costs increased to 30.5% in
1999 from 30.4% in 1998, primarily as a result of higher management payroll
costs at Black Angus.
Direct Operating Costs. As a percentage of revenues, these costs decreased
slightly to 24.9% in 1999 from 25.0% in 1998.
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Depreciation and Amortization. As a percentage of revenues, depreciation and
amortization remained constant at 3.3%.
General and Administrative Expenses. General and administrative expenses
increased to $17.6 million in 1999 from $15.7 in 1998. The increase was
primarily due to a $2.0 million non-cash charge in the third quarter of 1999
related to future lease-related costs associated with recently closed
restaurants. General and administrative expenses, as a percentage of revenues,
increased to 5.7% (5.0% before the non-cash charge) in 1999 from 4.8% in 1998.
Non-Cash Charge for Impairment of Long-Lived Assets. In 1999, the Company
recorded a $0.5 million non-cash charge related to the impairment of long-lived
assets at recently closed restaurants.
Grandy's Franchise Conversion Program. The Company recorded a $0.9 million gain
on the sale of the property and equipment, including applicable lease rights and
certain intangible assets, related to the conversion of restaurants during 1999.
It also recorded a $0.2 million non-cash charge related to the conversion
program.
Operating Profit. Due to the above items, operating profit decreased to $13.2
million in 1999 from $15.0 million in 1998. As a percentage of revenues,
operating profit decreased to 4.3% in 1999 from 4.6% in 1998.
Interest Expense - Net. Interest expense decreased to $14.6 million in 1999 from
$15.3 million in 1998. The decrease was primarily attributable to the
refinancing of the Company's debt in February 1998. The Company's average stated
interest rate decreased to 11.3% in 1999 from 11.8% in 1998. The
weighted-average debt balance (excluding capitalized lease obligations)
decreased to $161.3 million in 1999 from $162.1 million in 1998.
Extraordinary Gain. The company recognized an extraordinary gain of $9.6 million
on the extinguishment of debt in 1998. This gain resulted from the refinancing
of the Company's debt in February 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flow from operations and
borrowings under its credit facilities. The Company requires capital principally
for the acquisition and construction of new restaurants, the remodeling of
existing restaurants and the purchase of new equipment and leasehold
improvements. As of September 27, 1999, the Company had cash of $3.0 million.
In general, restaurant businesses do not have significant accounts receivable
because sales are made for cash or by credit card vouchers which are ordinarily
paid within three to five days, and restaurant businesses do not maintain
substantial inventory because of the relatively brief shelf life and frequent
turnover of food products. Additionally, restaurants generally are able to
obtain trade credit in purchasing food and restaurant supplies. As a result,
restaurants are frequently able to operate with working capital deficits, i.e.,
current liabilities exceed current assets. At September 27, 1999 the Company had
a working capital deficit of $36.8 million.
In conjunction with the Company's plan to convert a majority of its
company-owned Grandy's restaurants to franchised restaurants, the Company
received proceeds of $3.4 million related to the conversion of restaurants in
1999. The Company continues to market its Grandy's restaurants for franchising;
however, the timing and amount of proceeds from the conversion of other
restaurants cannot be determined. The Company is required to reinvest the net
proceeds as capital expenditures or to pay down outstanding debt.
The Company estimates that capital expenditures of $6.0 million to $8.0 million
are required annually to maintain and refurbish its existing restaurants. In
addition, the Company spends approximately $10.0 million to $12.0 million
annually for repairs and maintenance which are expensed as incurred. Other
capital expenditures, which are generally discretionary, are primarily for the
construction of new restaurants and for expanding, reformatting and extending
the capabilities of existing
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restaurants and for general corporate purposes. Total capital expenditures
year-to-date were $8.1 million and $8.9 million in 1999 and 1998, respectively.
The Company estimates that capital expenditures in 1999 will be approximately
$10.0 million. The Company intends to open new restaurants with small capital
outlays and to finance most of the expenditures through operating leases.
As a result of the 11.5% senior secured notes issued by the Company in February
1998, the Company is obligated to make semiannual interest payments on February
15 and August 15 through February 2003. Accordingly, an interest payment of $9.1
million was made in August 1999.
Substantially all assets of the Company are pledged to its senior lenders. In
addition, the subsidiaries have guaranteed the indebtedness owed by the Company
and such guarantee is secured by substantially all of the assets of the
subsidiaries. In connection with such indebtedness, contingent and mandatory
prepayments may be required under certain specified conditions and events. There
are no compensating balance requirements.
Although the Company is highly leveraged, based upon current levels of
operations and anticipated growth, the Company expects that cash flows generated
from operations together with its other available sources of liquidity will be
adequate to make required payments of principal and interest on its
indebtedness, to make anticipated capital expenditures and to finance working
capital requirements. However, the Company does not expect to generate
sufficient cash flow from operations in the future to pay the Notes upon
maturity and, accordingly, it expects to refinance all or a portion of such
debt, obtain new financing or possibly sell assets.
YEAR 2000 COMPLIANCE
Since 1997, the Company has been assessing the Year 2000 issues that may affect
its operations. The Company believes the Year 2000 issues it must address
include ensuring (i) its information technology systems (hardware and software)
enable it to manage and operate its business and (ii) its non-information
technology systems (including heating, air conditioning and security systems)
will continue to operate. The Company is currently on schedule for Year 2000
compliance and does not believe it has material potential liability to third
parties if its systems are not Year 2000 compliant.
The Company has received written responses from third parties with which it has
material relationships. All of the responses received to date indicate the
suppliers have or will timely resolve their Year 2000 issues.
The Company's costs of compliance with the Year 2000 requirements are immaterial
because it was in the process of upgrading or establishing systems in the normal
course of business.
The Company believes it and its material suppliers will resolve their Year 2000
issues in a timely fashion. However, if the Company or its material suppliers do
not become Year 2000 compliant, the Company could suffer a material adverse
effect on its business, results of operations and financial condition. The
Company believes it is unlikely any of these events will result, but there can
be no such assurance. The Company currently has no contingency plan to handle
the occurrence of these events and does not currently intend to create one.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Position No. 98-5, Reporting on the Costs of Start-up Activities
(SOP No. 98-5) was issued in April 1998. SOP No. 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. The Company has
historically accumulated costs incurred in connection with opening a new
restaurant and amortized these costs over the initial year of operations. Any
previously deferred preopening costs were expensed as of the end of fiscal year
1998. New restaurant openings are typically staggered throughout the year and,
therefore, the Company does not anticipate the requirements of SOP No. 98-5 to
materially affect the Company's financial position or results of operations.
Preopening expenses year to date were $0.4 and $0.2 in 1999 and 1998,
respectively.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk of the Company's financial instruments as of September 27, 1999
has not materially changed since December 28, 1998. The market risk profile on
December 28, 1998 is disclosed in the Company's annual report on Form 10-K, File
No. 33-48183, for the year ended December 28, 1998.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN RESTAURANT GROUP, INC.
-------------------------------
(Registrant)
Date: November 8, 1999 By: /s/ KEN DI LILLO
---------------------------------
Ken Di Lillo
Treasurer and Assistant Secretary
(Principal Financial and
Accounting Officer)
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INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only.