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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 March 25, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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American Restaurant Group, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 33-48183 33-0193602
- - ------------------------------- ------------ -------------------
(State or other jurisdiction of (Commission (I.R.S. employer
incorporation or organization) File Number) identification no.)
450 Newport Center Drive
Newport Beach, CA 92660
(714) 721-8000
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(Address and telephone number of principal executive offices)
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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 April 29, 1996 was 93,150.
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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 Income . . . . . . . . . . . . . . 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 . . . . . . . . 6
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 9
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
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CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
DECEMBER 25, 1995 AND MARCH 25, 1996
------------------------------------
ASSETS December 25, March 25,
1995 1996
------------ ------------
(unaudited)
CURRENT ASSETS:
Cash $ 10,385,000 $ 3,956,000
Accounts receivable, net of reserve of
$777,000 and $781,000 at December 25, 1995
and March 25, 1996, respectively 7,734,000 7,901,000
Inventories 6,597,000 6,419,000
Prepaid expenses 4,607,000 2,836,000
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Total current assets 29,323,000 21,112,000
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PROPERTY AND EQUIPMENT:
Land and land improvements 52,991,000 52,991,000
Buildings and leasehold improvements 141,382,000 141,623,000
Fixtures and equipment 90,520,000 90,557,000
Property held under capital leases 13,067,000 13,067,000
Construction in progress 3,749,000 5,448,000
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301,709,000 303,686,000
Less -- Accumulated depreciation 130,679,000 134,111,000
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171,030,000 169,575,000
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OTHER ASSETS -- NET 48,700,000 47,529,000
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Total Assets $249,053,000 $238,216,000
============ ============
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 STOCKHOLDER'S December 25, March 25,
EQUITY 1995 1996
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(unaudited)
CURRENT LIABILITIES:
Accounts payable $ 29,239,000 $ 23,182,000
Accrued liabilities 14,112,000 10,918,000
Accrued insurance 16,694,000 18,306,000
Accrued interest 5,925,000 903,000
Accrued payroll costs 10,171,000 10,681,000
Current portion of obligations
under capital leases 858,000 870,000
Current portion of long-term debt 8,131,000 22,455,000
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Total current liabilities 85,130,000 87,315,000
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LONG-TERM LIABILITIES, net of current portion:
Obligations under capital leases 9,344,000 9,127,000
Long-term debt 214,678,000 197,726,000
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Total long-term liabilities 224,022,000 206,853,000
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COMMITMENTS AND CONTINGENCIES
REDEEMABLE CUMULATIVE PREFERRED STOCK:
Redeemable cumulative senior
preferred stock, $0.01 par value;
1,400,000 shares authorized,
no shares issued or outstanding
at December 25, 1995 or
March 25, 1996 - -
Redeemable cumulative junior
preferred stock, $0.01 par value;
100,000 shares authorized,
no shares issued or outstanding
at December 25, 1995 or
March 25, 1996 - -
COMMON STOCKHOLDER'S EQUITY:
Common stock, $0.01 par value; 1,000,000
shares authorized; 93,150 shares issued
and outstanding at December 25, 1995 and
March 25, 1996 1,000 1,000
Paid-in capital 56,132,000 63,247,000
Accumulated deficit (116,232,000) (119,200,000)
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Total common stockholder's deficit (60,099,000) (55,952,000)
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Total liabilities and common
stockholder's equity $249,053,000 $238,216,000
============ ============
The accompanying notes are an integral part of these consolidated condensed
statements.
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AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE THIRTEEN WEEKS ENDED MARCH 27, 1995 AND MARCH 25, 1996
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(UNAUDITED)
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Thirteen Weeks Ended
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March 27, March 25,
1995 1996
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REVENUES $ 114,715,000 $ 114,598,000
RESTAURANT COSTS:
Food and beverage 35,642,000 36,850,000
Payroll 34,602,000 34,365,000
Direct operating 26,784,000 27,451,000
Depreciation and amortization 6,063,000 5,124,000
GENERAL AND ADMINISTRATIVE EXPENSES 7,735,000 6,667,000
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Operating profit 3,889,000 4,141,000
INTEREST EXPENSE, net 6,883,000 7,097,000
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Loss before provision for income taxes (2,994,000) (2,956,000)
PROVISION FOR INCOME TAXES 4,000 12,000
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Net loss $ (2,998,000) $ (2,968,000)
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The accompanying notes are an integral part of these consolidated condensed
statements.
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AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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FOR THE THIRTEEN WEEKS ENDED MARCH 27, 1995 AND MARCH 25, 1996
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(UNAUDITED)
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March 27, March 25,
1995 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 114,886,000 $ 114,431,000
Cash paid to suppliers and employees (105,099,000) (110,761,000)
Interest paid, net (11,864,000) (12,095,000)
Income taxes paid (4,000) (12,000)
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Net cash used in operating activities (2,081,000) (8,437,000)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,271,000) (2,078,000)
Net (increase) decrease in other assets 418,000 (151,000)
Proceeds from disposition of assets 25,000 -
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Net cash used in investing activities (3,828,000) (2,229,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on indebtedness (93,000) (2,652,000)
Net increase in deferred debt costs (5,000) (21,000)
Payments on capital lease obligations (195,000) (205,000)
Contribution from parent - 7,115,000
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Net cash provided by (used in)
financing activities (293,000) 4,237,000
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NET DECREASE IN CASH (6,202,000) (6,429,000)
CASH, at beginning of period 15,032,000 10,385,000
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CASH, at end of period $ 8,830,000 $ 3,956,000
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RECONCILIATION OF NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
Net loss $ (2,998,000) $ (2,968,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 6,063,000 5,124,000
Loss on disposition of assets 158,000 33,000
Accretion on indebtness 21,000 24,000
Loss on value of interest rate swap 59,000 -
(Increase) decrease in current assets:
Accounts receivable, net 171,000 (167,000)
Inventories 201,000 178,000
Prepaid expenses 486,000 1,523,000
Increase (decrease) in current liabilities:
Accounts payable 2,277,000 (6,057,000)
Accrued liabilities (4,800,000) (3,227,000)
Accrued insurance 1,853,000 1,612,000
Accrued interest (5,061,000) (5,022,000)
Accrued payroll (511,000) 510,000
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Net cash used in operating activities $ (2,081,000) $ (8,437,000)
============= ==============
The accompanying notes are an integral part of these consolidated condensed
statements.
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AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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1. MANAGEMENT OPINION
The Consolidated Condensed Financial Statements included herein have
been prepared by the Company, without audit, in accordance with
Securities and Exchange Commission Regulation S-X. In the opinion of
management of the Company, 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 25, 1995 and March 25, 1996, and the results
of its operations and its cash flows for the thirteen weeks ended
March 27, 1995 and March 25, 1996. 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, it is suggested that these Consolidated Condensed
Financial Statements be read in conjunction with the Consolidated
Financial Statements and notes thereto included in the Company's
annual report on Form 10-K, File No. 33-48183, for the year ended
December 25, 1995.
2. SUBSIDIARY GUARANTORS
Separate financial statements of the Company's subsidiaries are not
included in this report on Form 10-Q because the subsidiaries are
unconditionally jointly and severally liable for the obligations of
the Company under the Company's 12% Senior Secured Notes, due
September 15, 1998, 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 March 27, 1995 and March 25, 1996:
Revenues. Total revenues decreased from $114.7 million in the first quarter of
1995 to $114.6 million in the first quarter of 1996 reflecting a decrease in
comparable restaurant revenues of 2.0%. During the twelve months ended March
25, 1996, the Company opened three new restaurants and closed one poor
performing restaurant. There were 246 restaurants operating as of March 27,
1995 and 248 operating as of March 25, 1996.
Black Angus revenues increased 4.3% to $67.8 million in the first quarter of
1996 as compared to the same period in 1995. The increase was due to the
addition of three new restaurants in California (one of which opened late in
the first quarter of 1995) and increased television advertising. Comparable
restaurant revenues increased 1.6% as compared to the prior year.
Grandy's revenues decreased 11.3% to $22.7 million in the first quarter of 1996
as compared to the same period in 1995. Comparable restaurant revenues in the
first quarter of 1996 were 11.6% lower than the same period in 1995, in part
due to less use of discounting to stimulate sales and less effective
advertising and promotion. Franchise revenues were $0.5 million in the first
quarter of 1995 and 1996.
Other revenues decreased from $24.2 million in the first quarter of 1995 to
$24.1 million in the same period of 1996. The Company opened one new
restaurant and closed one poor performing restaurant during the twelve months
ended March 25, 1996. Comparable restaurant revenues decreased 1.8%.
Food and Beverage Costs. As a percentage of revenues, food and beverage costs
increased from 31.1% in the first quarter of 1995 to 32.2% in the first quarter
of 1996. The increase was primarily due to higher seafood costs at Black
Angus.
Payroll Costs. As a percentage of revenues, labor costs decreased from 30.2%
in the first quarter of 1995 to 30.0% in the first quarter of 1996. The
decrease was partially due to reduced health insurance 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 increased in the first quarter from 23.3%
in 1995 to 24.0% in 1996. The increase was due primarily to higher advertising
expenses.
Depreciation and Amortization. Depreciation and amortization consists 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 decreased from 5.3% in
the first quarter of 1995 to 4.4% in the same period of 1996. The decrease was
due primarily to the furniture, fixtures and equipment purchased in the 1987
acquisition which became fully depreciated in February 1995 and the
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non-cash reduction of the historical cost of certain long-lived assets in
December 1995.
General and Administrative Expenses. General and administrative expenses
decreased 13.8% from $7.7 million in the first quarter of 1995 to $6.7 million
in the first quarter of 1996. The decrease was due primarily to the December
1995 restructuring of administrative personnel which resulted in a reduction of
payroll costs. General and administrative expenses as a percentage of revenues
decreased from 6.7% to 5.8%.
Operating Profit. Due to the above items, operating profit increased from $3.9
million in the first quarter of 1995 to $4.1 million in the first quarter of
1996. As a percentage of revenues, operating profit increased 0.2% from 3.4%
to 3.6%.
Interest Expense - Net. Interest expense increased from $6.9 million in the
first quarter of 1995 to $7.1 million in the first quarter of 1996. The
increase was primarily due to higher interest income in the first quarter of
1995 and a higher average debt balance in the first quarter of 1996. The
Company's average stated interest rate decreased from 11.6% in the first
quarter of 1995 to 11.5% in the first quarter of 1996. The weighted average
debt balance (excluding capitalized lease obligations) increased from $215.0
million in the first quarter of 1995 to $220.1 million in the first quarter of
1996.
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.
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 a few days, and do not maintain substantial inventory as a result
of the relatively brief shelf life and frequent turnover of food products.
Additionally, restaurants generally are able to obtain trade credit in
purchasing food and restaurant supplies. As a result, restaurants are
frequently able to operate with working capital deficits, i.e., current
liabilities exceed current assets. At March 25, 1996, the Company had a
working capital deficit of $66.2 million.
The Company estimates that capital expenditures of $10.0 million to $13.0
million are required annually to maintain and refurbish its existing
restaurants. In addition, the Company spends approximately $10.0 million to
$13.0 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 restaurants and for
general corporate purposes. The Company expects to spend approximately $3.0
million to $6.0 million on new restaurants in 1996, primarily during the second
half of 1996, and depending on market conditions, to increase its capital
expenditures for new restaurants thereafter. Total capital expenditures year
to date were $4.3 million in 1995 and $2.1 million in 1996. The Company's
credit agreement contains limitations on the amount of capital expenditures
that the Company may incur.
The Company has amended its credit facilities to provide for a working capital
facility of $5.0 million until June 30, 1996 and a letter of credit facility of
$13.5 million until September 30, 1996. Each of such facilities was fully
utilized as of March 25, 1996. In conjunction with these extensions, the
Company agreed to make certain asset sales. Prior to its scheduled expiration,
the Company will seek to replace or further extend its letter of credit
facility.
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In March 1996, American Restaurant Group Holdings, Inc. ("Holdings"), the
parent of the Company, completed a private placement of its 14% senior discount
debentures due 2005 at an aggregate offering price of approximately $7.1
million. Substantially all of the net proceeds of the offering were
contributed by Holdings to the Company. The net proceeds were used by the
Company for general corporate purposes.
The Company is currently in negotiation for a sale/leaseback of 24 Black Angus
restaurants and, separately, for a sale and agreement to manage 38 Grandy's
restaurants, for total gross proceeds of $88.0 million. If these transactions
are consummated, all but $10.0 million of the net proceeds of these
transactions will be used to repay senior debt. These transactions are
expected to close in June 1996. The Company also intends to negotiate an
extension of the maturities of its debt. Thus, although the Company is highly
leveraged, based upon current and projected levels of operations and
anticipated growth, the Company expects that cash flow generated from
operations together with its other available sources of liquidity, including
the transactions discussed above, 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.
A covenant in the Company's senior secured notes specifies that, if at the end
of any two consecutive fiscal quarters the Company's net worth falls below a
minimum amount, the Company is obligated to make an offer to purchase ten
percent of the principal amount of its senior secured notes ($17.0 million)
plus accrued interest. The Company's net worth was less than this minimum at
December 25, 1995 and at March 25, 1996 and, accordingly, the Company has
classified this $17.0 million in the current portion of long-term debt. The
Company is required to notify the senior secured note holders ("Note Holders")
by May 25, 1996 of these circumstances and the Note Holders have until June 24,
1996 to accept such offer. Once the notification is made, each Note Holder has
the right to either accept or decline the offer. With respect to the senior
secured notes of any Note Holder who does not accept such offer, the Company
has no further purchase requirement and the portion of the $17.0 million offer
not so accepted remains payable in the ordinary course along with the balance
of the senior secured notes. If the Note Holders do not waive their rights to
such purchase and the Company is unable to meet the payment demand, the Note
Holders would have the right to accelerate the entire face amount of the senior
secured notes ($170.0 million). If such right is exercised, the holders of the
Company's other debt would have the right to accelerate such debt.
In addition, the Company is currently in default under a net worth maintenance
covenant in its senior credit agreement.
Management believes that such purchase of $17.0 million of senior secured notes
will not be required because the Company intends to seek a waiver of this
purchase obligation prior to May 25, 1996, in conjunction with the negotiations
discussed above involving the repayment of a portion of its debt, together with
an extension of maturities for its remaining debt. The Company also intends to
seek a waiver of the net worth maintenance covenant in its senior credit
agreement.
There can be no assurance, however, that the Company will be able to complete
any of the above noted transactions or obtain any of the above noted waivers or
extensions on acceptable terms.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
Sequentially
Numbered
Exhibit No. Description Page
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27.1 Financial Data Schedule, which is submitted
electonically to the Securities and Exchange
Commission for information only and not filed.
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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: May 8, 1996 By: /s/ WILLIAM J. MCCAFFREY, JR.
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William J. McCaffrey, Jr.
Vice President, Chief
Financial Officer
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