ITEM 1. BUSINESS
INTRODUCTION
American Restaurant Group, Inc., a Delaware corporation (the "Company"), through its subsidiaries, competes predominately in the midscale segment of the United States restaurant industry. The Company was formed on August 13, 1986, by Anwar S. Soliman, Chairman of the Board and Chief Executive Officer of the Company, and other members of current senior management, to acquire certain operations of Saga Corporation, a wholly owned subsidiary of Marriott Corporation (the "Acquisition"). The Acquisition was completed in February 1987. (Prior to the completion of the Acquisition, the Company had no significant operations.) The Company is a subsidiary of American Restaurant Group Holdings, Inc., a Delaware corporation ("Holdings").
As of December 27, 1999, the Company operated 193 restaurants located in 15 states, principally California and Texas. The Company operates five restaurant divisions: Black Angus (western-style steakhouses specializing in steak and prime rib), Grandy's (family-oriented, quick-service restaurants specializing in fried and grilled chicken, country-fried steak and country breakfasts), Spoons (casual-style restaurants featuring fajitas, salads and hamburgers), Spectrum (upscale Northern Italian, American and Mexican specialty restaurants) and National Sports Grill (sports-theme restaurants featuring generous portions and microbrewery beers). In addition, as of December 27, 1999, Grandy's franchised 63 restaurants in the southern United States.
DIVISION OVERVIEW
BLACK ANGUS
As of December 27, 1999, Black Angus operated 102 Stuart Anderson's Black Angus and Stuart Anderson's Cattle Company steakhouses located primarily in California, the Pacific Northwest and Arizona. The chain was founded in Seattle in 1964 and is the Company's largest restaurant concept. Black Angus restaurants are typically located in highly visible and heavily traveled areas in or near retail and commercial businesses. The restaurants are generally freestanding and range in size from 6,600 to 12,000 square feet, seating approximately 220 to 350 customers. Black Angus restaurants are distinctly Western in their design and feature booth seating for dining. They are generally open for lunch from 11:30 a.m. to 4:00 p.m. and for dinner from 4:00 p.m. to 10:00 p.m.
As of December 28, 1992, Black Angus operated 66 in-restaurant lounges which offered disc jockeys, dancing and a focus on the sale of alcoholic beverages during the after-dinner and late-night time periods. While the late-night entertainment business generated favorable profit margins in isolation, management was concerned that this business negatively affected visits by its core customers. Black Angus began limiting its late-night entertainment business in 1992 and subsequently, between 1994 and 1999, phased out its late-night entertainment business in 4 to 19 restaurants per year. By year-end 1999, Black Angus had completed its plan to exit the late-night entertainment business. Most of the dance floors and lounge areas in existing Black Angus restaurants have been remodeled to include additional seating or an open waiting area.
Once the Company decided to phase out its late-night entertainment business, it developed a new restaurant prototype eliminating the dance floor and the lounge area. This new prototype is smaller, approximately 6,700 square feet, and offers the same number of dining seats as the existing restaurants. The Company has opened thirteen of the new prototype design since 1995, three in late 1999. The Company intends to continue to expand the Black Angus division using the new prototype in existing and adjacent markets.
GRANDY'S
As of December 27, 1999, Grandy's operated 56 family-oriented, quick-service restaurants located primarily in Texas and Oklahoma and franchised an additional 63 restaurants primarily in the southern United States. The chain was founded in Lewisville, Texas in 1973. Grandy's restaurants are generally freestanding and are located near shopping malls or other highly visible, heavily traveled areas. The restaurants range in size from 3,800 to 5,200 square feet and have dining areas, which generally seat 130 to 220 customers. All restaurants offer self-service beverages with free refills, and all but one restaurant have drive-thru service. Grandy's restaurants are generally open from 6:00 a.m. to 10:00 p.m. and serve breakfast, lunch and dinner. Grandy's differentiates itself from its competitors by offering complete home-style meals with limited service. Approximately 51% of Grandy's 1999 revenues were for consumption in the dining room as opposed to take- out.
Grandy's franchise agreements generally require initial fees of $15,000 to $30,000 per restaurant, ongoing royalties of 3% to 5% of sales and advertising expenditures of approximately 4% of sales. Grandy's provides certain support functions for franchisees, including initial training and ongoing monitoring and consultations. The Company generally does not provide financing for franchisees.
In July 1998, the Company announced a plan to convert a majority of its company-owned Grandy's restaurants to franchised restaurants. The Company intends to sell the property and equipment, including applicable lease rights, and enter into franchise agreements with the purchasers. During 1999, the Company converted twelve company-owned Grandy's restaurants to franchised restaurants.
SPOONS
Spoons, founded in 1978, operated 17 casual-style restaurants as of December 27, 1999, all of which are located in California. Spoons restaurants are generally freestanding, located in heavily traveled areas, ranging in size from 5,500 to 7,800 square feet and seating approximately 200 customers. These full-service restaurants average a 40-minute table turnover and offer booth and table seating in a casual, highly energetic atmosphere. In addition, each restaurant has a lounge area which also serves food. Spoons restaurants are generally open from 11:00 a.m. to 12:00 midnight and feature the same menu all day. During 1999, the Company converted one Spoons restaurant to a casual seafood concept, Crabby Bob's, under a licensing arrangement.
SPECTRUM
Spectrum, founded in 1970, operated 12 unique, upscale, specialty restaurants as of December 27, 1999, all of which are located in California. All restaurants focus on "authentic" Northern Italian, contemporary American or Mexican cuisine. The division includes four Prego restaurants, two Tutto Mare restaurants, two MacArthur Park restaurants and four other restaurants which, although operated under different names, generally concentrate on Northern Italian food. Spectrum restaurants vary in size and physical type but are primarily located proximate to concentrations of young professionals and other upper-income customers. The restaurants are generally open from 11:00 a.m. to 12:00 midnight.
NATIONAL SPORTS GRILL
National Sports Grill, founded in 1993, operated six sports-theme restaurants as of December 27, 1999, all of which are located in California. This concept offers a menu featuring generous portions and microbrewery beers and provides multiple video telecasts of national and regional sporting events as well as interactive video games and other sporting-related games. National Sports Grill restaurants are freestanding and generally range in size from 10,000 to 17,000 square feet, seating approximately 200 to 300 customers. The restaurants feature a bar, a dining area, a billiards area and multiple video screens throughout. National Sports Grill restaurants are typically open from 11:00 a.m. to 2:00 a.m.
RESTAURANT OPERATIONS
The Company has five distinct divisions. The Black Angus division is generally managed separately from the other divisions and is organized functionally with separate operations, marketing, finance, real estate and human resources departments. Grandy's and the three smaller divisions are each run independently but share among them certain support functions such as finance, administration and human resources. In addition, the Company generally provides purchasing, cash management, insurance and other treasury functions, and accounting and legal services, on a centralized basis. The Company's corporate headquarters provides strategic direction and approves major capital expenditures, annual budgets and all salaries above a specified level.
The Company's cash management system is highly sophisticated with controls down to the server level. Restaurants are required to make daily deposits of cash and the Company uses a centralized cash concentration system which sweeps all of its cash accounts on a daily basis. There is a central accounts payable and check writing system with approximately 6,400 vendors profiled on the system.
The Company uses a combination of in-house and outside-contracted services for its management information system needs. In-house systems include a point-of-sale system for each restaurant and stand-alone computing at the restaurant, division and corporate levels. The Company contracts for payroll services and for mainframe-based data processing.
Each restaurant is staffed with a General Manager who is directly responsible for the operation of the restaurant, including product quality, cleanliness, service, inventory, cash control and the appearance and conduct of store employees. Except for Grandy's, most restaurants also have one or two Managers and a Chef. Managers and supervisory personnel train other restaurant employees in accordance with detailed procedures and guidelines prescribed by each division.
General Managers are supervised by District Managers, each of whom is responsible for approximately ten restaurants. District Managers, General Managers, Managers and Chefs are eligible for bonuses under each division's extra compensation program, for which goals and objectives are established based on the profitability, sales and other factors relating to the restaurants.
PURCHASING AND DISTRIBUTION
To ensure standards of quality and to maximize pricing efficiencies, a central purchasing department coordinates the supply of almost all restaurant items. The Company purchases products throughout the United States and abroad through agreements with various food-service vendors. None of the Company's vendors supply the Company exclusively and no material agreements exist. The Company routinely uses public, cold-storage facilities and makes forward commitments in order to establish the availability and price of key food items such as beef and seafood. In order to achieve more favorable terms, the Company concentrates its distribution among certain of its vendors but believes that it could replace any of these distributors, if necessary, on a timely basis.
COMPETITION AND MARKETS
All aspects of the restaurant business are highly competitive. Price, restaurant location, food quality, service and attractiveness of facilities are important aspects of competition. The competitive environment is often affected by factors beyond a particular restaurant management's control, including changes in the public's taste and eating habits, population and traffic patterns and economic conditions. The Company's restaurants compete with a wide variety of restaurants, ranging from national and regional restaurant chains to locally owned restaurants. Competition from other restaurant chains typically represents the more important competitive influence, principally because of their significant marketing and financial resources. Many of the Company's competitors have substantially greater
financial, marketing, personnel and other resources than the Company. In addition, competition is not limited to a particular segment of the restaurant industry because fast-food restaurants, steakhouses and casual-dining restaurants are all competing for the same consumer's dining dollars. The Company believes that its principal competitive strengths lie in the distinctive atmosphere and food presentation offered; the value, variety and quality of food products served; the quality and training of its employees; the experience and ability of its management; and the economies of scale enjoyed by the Company because of its size and geographic concentration. The Company continually monitors consumer tastes and adjusts and updates its menus accordingly.
EMPLOYEES
At December 27, 1999, the Company employed approximately 9,700 persons, of whom approximately 8,900 were hourly employees in restaurants, approximately 650 were salaried employees in restaurants (Managers and Chefs) and approximately 150 were hourly and salaried employees in divisional and corporate management and administration. Approximately 63% of the hourly restaurant employees work on a part-time basis (25 hours or less per week). None of the Company's facilities are unionized. The Company believes it provides competitive compensation and benefits to its employees and that its employee relations are good.
REGULATIONS
Each restaurant is subject to licensing and regulation by state and local health, sanitation, safety, fire and other departments. In addition, each restaurant (except for Grandy's) is subject to licensing with respect to the sale of alcoholic beverages. The loss of licenses or permits by the Company's restaurants to sell alcohol would interrupt or terminate the Company's ability to serve alcoholic beverages at those restaurants and, if a significant number of restaurants were affected, could have a material adverse effect on the Company. The Company believes it has good relations with the various alcoholic beverage authorities.
The Company is subject to the Fair Labor Standards Act and various state laws governing such matters as minimum wages, overtime and other working conditions. Substantially all of the Company's restaurant employees are paid at rates related to the Federal and state minimum wage, and, accordingly, increases in the minimum wage increase the Company's labor costs.
SERVICE MARKS
The Company regards its service marks and trademarks as important to the identification of its restaurants and believes they have significant value in the conduct of its business. The Company has registered various service marks and trademarks with the United States Patent and Trademark Office. In addition, certain marks have been registered in the state of California, in various other states and in certain foreign countries.
SEASONALITY
The Company's restaurant revenues and profitability are not subject to significant seasonal fluctuations.
ITEM 2.
ITEM 2. PROPERTIES
The following table sets forth, as of December 27, 1999, the number of properties owned or leased by the Company:
Most of the Company's restaurants are freestanding and range from approximately 4,000 square feet for a Grandy's restaurant to as much as 17,000 square feet for the Company's other restaurants. Most of the Company's leases provide for the payment of the greater of a set base rental or a percentage rental of up to 6% of gross revenues, plus real estate taxes, insurance and other expenses.
In addition, the Company owns the land and building for the Grandy's headquarters in Lewisville, Texas, and leases office space for its other divisions and corporate headquarters in Los Altos and Newport Beach, California.
The following table sets forth, as of December 27, 1999, the number of Company-operated restaurants by division and state of operation:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various litigation incidental to its business, including claims arising out of personal injuries, employment practices, worker's compensation cases and contract lawsuits, the claims for which sometimes involve substantial damages. Based on information presently available, management does not believe that the outcome of such litigation will have a material adverse effect on the Company's financial position, business or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
No matters were submitted to a vote of the stockholders of the Company in the fourth quarter of 1999.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
As of February 28, 2000, there were six record holders of the 128,081 outstanding shares of the Company's common stock. The Company has never paid dividends to its common stockholders and currently has no plans to do so. There is currently no market for the Company's common stock, nor is such anticipated in the near future.
CUMULATIVE PREFERRED STOCK, MANDATORILY REDEEMABLE
As of February 28, 2000, there were six record holders of the 44,083 outstanding shares of the Company's cumulative preferred stock. Dividends accrue at a rate of 12% per annum, payable semiannually on February 15 and August 15 of each year. The Company may, at its option, pay dividends in cash or in additional shares of cumulative preferred stock. Stock dividends of 2,360 and 2,499 shares were paid on August 15, 1999 and February 15, 2000, respectively. There is currently no market for the Company's cumulative preferred stock, nor is such anticipated in the near future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data for each of the five periods ended December 27, 1999, has been derived from the consolidated financial statements of the Company which have been audited by Arthur Andersen LLP, independent public accountants, and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the consolidated financial statements and notes thereto included elsewhere in this Form 10-K.
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(1) The Company's obligations under its 11.5% senior secured notes (the "Notes") due 2003 are guaranteed by each of its direct subsidiaries (the "Subsidiary Guarantors"). Separate financial statements of the Subsidiary Guarantors are not included in this Form 10-K because the Subsidiary Guarantors are unconditionally jointly and severally liable for the obligations of the Company under the Notes pursuant to such guarantees. 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.
(2) The year ended December 30, 1996, included 53 weeks.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Years Ended December 29, 1997, December 28, 1998 and December 27, 1999:
Revenues. Total revenues decreased 3.0% from $440.0 million in 1997 to $426.9 million in 1998 followed by a 4.4% decrease to $408.0 million in 1999. Same-store-sales for 1999 decreased 1.2% from 1998. Four new restaurant openings during 1999 were offset by the closure of 23 restaurants and by the conversion of 12 Grandy's restaurants to franchised restaurants. There were 231, 224 and 193 restaurants operating at the end of 1997, 1998 and 1999, respectively.
Black Angus revenues increased 0.5% from $264.2 million in 1997 to $265.5 million in 1998 and then decreased 0.7% to $263.6 million in 1999. The decrease in 1999 was primarily due to a $3.9 million decrease from three restaurants which closed at the end of the leases and a $3.7 million decrease due to the closure of late-night entertainment at four restaurants. This decrease was partially offset by a $2.1 million increase in same-store-sales (excluding late-night entertainment) and a $3.6 million increase resulting from the addition of three new restaurants in the second half of 1999. Same-store-sales increased 0.9% (decreased 0.5% including late-night entertainment) in 1999.
Grandy's revenues decreased 10.2% from $78.8 million in 1997 to $70.8 million in 1998 followed by a 18.0% decrease to $58.1 million in 1999. The decrease in 1999 resulted from a $6.1 decrease due to the conversion of 12 company-owned restaurants to franchised restaurants during 1999, a $4.4 million decrease due to the closure of 21 restaurants during 1998 and 1999 and a $2.6 million, or a 5.6%, decline in same-store-sales. Franchise income increased $0.4 million due to franchise fees related to the conversions. Franchise revenues were $2.6 million, $1.8 million and $2.2 million in 1997, 1998 and 1999, respectively.
Revenues from other concepts (Spoons, Spectrum and National Sports Grill) decreased 6.6% from $97.0 million in 1997 to $90.6 million in 1998 and then decreased 4.7% to $86.4 million in 1999. Revenues declined $4.5 million due to the closure of seven restaurants in 1998 and 1999 and a $0.5 million decrease in same-store-sales. The decrease was partially offset by $0.8 million related to the opening of one new restaurant in 1999.
Food and Beverage Costs. As a percentage of revenues, food and beverage costs remained constant at 31.8% in 1997 and 1998 and decreased to 31.4% in 1999. The decrease is due primarily to lower produce costs.
Payroll Costs. As a percentage of revenues, labor costs increased from 30.4% in 1997 to 30.5% in 1998 and then increased to 30.6% in 1999. The increase relates primarily to higher restaurant management costs at Black Angus due to an increase in the average number of managers per restaurant.
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 from 25.1% in 1997 to 24.9% in 1998 and remained constant at 24.9% in 1999. The decrease in 1998 was primarily a result of lower occupancy costs related to the ending of certain equipment leases and disposition of closed units as well as lower general liability expenses.
Depreciation and Amortization. Depreciation and amortization consists of depreciation of fixed assets used by individual restaurants, division and corporate offices, as well as amortization of intangible assets. As a percentage of revenues, depreciation and amortization decreased from 4.5% in 1997 to 3.4% in 1998 and then decreased slightly to 3.3% in 1999. The decrease in 1998 was primarily due to the reduction in amortization of deferred debt costs related to the refinancing of the Company's debt in February 1998.
General and Administrative Expenses. General and administrative expenses as a percentage of revenues were 6.7% in 1997, 5.2% in 1998 and 5.8% in 1999. The increase in 1999 was primarily due to a $1.8 million increase in non-cash charges related to future lease-related costs associated with restaurants closed during 1999 and higher legal expenses partially offset by lower corporate overhead expenses. The decrease in 1998 was primarily due to a $3.5 million decrease in corporate overhead resulting from the implementation of the Company's strategy to reduce overhead expenses and a $3.4 million decrease in non-cash charges for costs associated with closed units.
Non-Cash Charge for Impairment of Long-Lived Assets. During 1999 certain assets, including fixed assets and certain related intangible assets, were valued at less than their historic costs and resulted in a non-cash charge of $1.5 million. This non-cash charge was 0.4% of revenues. Similar non-cash charges of $3.0 million and $1.4 million were recorded in 1997 and 1998, respectively.
Grandy's Franchise Conversion Program. In conjunction with the plan announced in July 1998 to convert a majority of company-owned Grandy's restaurants to franchised restaurants, the Company recognized a $0.6 million gain on the sale of the property and equipment, including applicable lease rights and certain intangible assets, during 1999. The Company also recorded a $1.2 million non-cash charge related to fixed assets and certain intangible assets valued at less than their historical costs. A similar non-cash charge of $5.0 million was recorded in 1998.
Operating Profit. As a result of the items discussed above, operating profit of $3.8 million in 1997 improved to $10.9 million in 1998 and then improved to $13.9 million in 1999. The Company's divisions are not uniform in revenues, size or profitability. For example, for the fiscal year ended 1999, operating profit, excluding non-cash charges and certain corporate general and administrative expenses, at Black Angus was $22.1 million, Grandy's, $4.2 million and the Other Concepts, $2.2 million.
Interest Expense - Net. Interest expense decreased from $24.0 million in 1997 to $20.3 million in 1998 and then decreased to $19.4 million in 1999. The average interest rate on Company borrowings was 12.3%, 11.7% and 11.3% for 1997, 1998 and 1999, respectively. Average borrowings (excluding capitalized lease obligations) decreased from $171.7 million in 1997 to $161.6 million in 1998 and then increased to $162.0 million in 1999.
Income Taxes. Income taxes increased from a provision of $63,000 in 1997 to $67,000 in 1998 and then increased to $70,000 in 1999. The provisions represent amounts provided for certain minimum state income taxes.
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. There were no extraordinary gains in 1997 or 1999.
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 December 27, 1999, the Company had cash of approximately $9.2 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 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 December 27, 1999, the Company had a working capital deficit of $37.8 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 $4.7 million related to the conversion of restaurants in 1999. Since December 27, 1999, the Company has received proceeds of $0.9 million for conversions during the first two months of 2000. 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 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 restaurants and for general corporate purposes. Total capital expenditures were $4.6 million in 1997, $12.3 million in 1998, and $12.2 million in 1999. New store capital expenditures included in these amounts were $0.4 million, $1.9 million and $1.5 million for 1997, 1998 and 1999, respectively. The Company estimates that capital expenditures in 2000 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, the Company made total interest payments of $18.2 million during 1999.
Substantially all assets of the Company are pledged to its senior lenders. In addition, the Subsidiary Guarantors guaranteed the indebtedness owed by the Company and such guarantees are 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 for the next several years. 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
In 1997, the Company began assessing the Year 2000 issues that might affect it. The Year 2000 issues the Company addressed included ensuring (i) its information technology systems (hardware and software) enabled 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 completed its schedule for Year 2000 compliance in late 1999 and did not believe it had material potential liability to third parties if its systems were not Year 2000 compliant.
The Company received written responses from third parties with which it had material relationships. All of the responses received indicated the suppliers had timely resolved their Year 2000 issues.
The Company's costs of compliance with the Year 2000 requirements were immaterial because it was in the process of upgrading or establishing systems in the normal course of business.
The Company has not, to date, experienced any significant problems with its systems or third party relationships as a result of the January 1, 2000 date change. There has been no material adverse effect on its business, results of operations or financial position as a result of Year 2000 issues.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Position ("SOP") Number 98-5, "Reporting on the Costs of Start-up Activities" issued in April 1998 was adopted by the Company effective December 28, 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 were $2.1 million, $0.6 million, and $0.8 million in 1997, 1998 and 1999, respectively.
Statement of Financial Accounting Standards ("SFAS") Number 133, "Accounting for Derivative Instruments and Hedging Activities," issued in June 1998, establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 137, "Accounting for Derivative and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133," issued in June 1999, defers the effective date of SFAS No. 133, until the Company's first quarter financial statements in fiscal 2001. The Company is currently not involved in derivative instruments or hedging activities and will measure the impact of this statement as it becomes appropriate.
MARKET RISK EXPOSURE
The Company is generally not exposed to market risks related to fluctuations in interest rates on its debt because all of the Company's debt is at fixed rates. Changes in interest rates affect the fair market value of fixed rate debt, but not the Company's earnings or cash flows. The Company generally cannot prepay fixed rate debt prior to maturity; therefore, interest rate risk and changes in fair market value would not have a significant impact on its fixed rate debt until the Company refinances such debt.
The Company is exposed to market risks related to fluctuations in interest rates on short-term borrowings on its revolving credit facility. Although the Company may borrow on its revolver from time to time, no amounts were outstanding at year end. Even if the entire revolving credit facility were outstanding for the entire year, a one percentage point increase in interest rates would only result in an increase in interest expense of approximately $114,000.
The Company does not utilize interest rate swaps, forward or option contracts on foreign currencies or commodities, or other types of derivative financial instruments. For all these reasons, the Company does not believe future market rate risks will have a material impact on the Company or the results of its future operations.
IMPACT OF INFLATION
Although inflationary increases in food, labor or operating costs could adversely affect operations, the Company has generally been able to offset increases in cost through price increases, labor scheduling and other management actions.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are forward-looking regarding cash flow from operations, restaurant openings, capital requirements and other matters. These forward-looking statements involve risks and uncertainties and, consequently, could be affected by general business conditions, the impact of competition, governmental regulations and inflation.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Consolidated Financial Statements on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about the Company's current directors and each of its executive officers and key management personnel:
Officers are elected by the Board of Directors and serve at the discretion of the Board.
Anwar S. Soliman. Mr. Soliman has served as Chairman, Chief Executive Officer and a Director of the Company since its organization in 1986. Prior to joining the Company, Mr. Soliman was Executive Vice President of W. R. Grace & Co. ("Grace") and Group Executive of the Grace Restaurant Group, which he started in 1977. Mr. Soliman spent 22 years with Grace in various executive positions. He is also a trustee of the Orange County Museum of Art and a member of the Board Council of Boys Hope of California. Mr. Soliman received both a B. Commerce and an M.B.A. from Alexandria University and a Ph.D. from New York University.
Ralph S. Roberts. Mr. Roberts has served as a Director of the Company since 1991 and has served as the President and Chief Operating Officer of the Company since 1986. Mr. Roberts has over 30 years of experience in the restaurant industry and before joining the Company was Deputy Group Executive of Operations of the Grace Restaurant Group and Vice President of Grace. Prior to joining Grace in 1980, he was Vice President of the Stouffer Restaurant Division and President and co-founder of the Rusty Scupper restaurants. Mr. Roberts received a B.A. from Princeton University.
William J. McCaffrey, Jr. Mr. McCaffrey has served as Vice President since 1986 and as Chief Financial Officer of Black Angus since June 1998. Mr. McCaffrey served as a Director of the Company from 1991 to 1998 and as the Chief Financial Officer, Treasurer and Assistant Secretary of the Company from 1986 to 1998. Prior thereto he was Chief Financial Officer of the Grace Restaurant Group, having spent 12 years with Grace. For eight years, Mr. McCaffrey was assistant to the Chief Executive Officer of Grace. He received a B.S., M.E. from the University of Notre Dame and an M.B.A. from Harvard University.
Patrick J. Kelvie. Mr. Kelvie has served as General Counsel of the Company since 1987 and Secretary of the Company since 1989. Mr. Kelvie was elected as Vice President of the Company in 1998. From 1987 to 1989, Mr. Kelvie was an Assistant Secretary of the Company. Between 1978 and 1987, Mr. Kelvie held various legal counsel positions for Saga Corporation. Mr. Kelvie received a B.A. from the University of California at Berkeley and a J.D. from Harvard Law School.
Ken A. Di Lillo. Mr. Di Lillo was elected as the Treasurer and Assistant Secretary of the Company in 1998. Mr. Di Lillo has served as the Vice President - - Finance of the Company since June 1998 and as Corporate Controller since 1989. Prior thereto, he was Corporate Manager - Financial Reporting at Nissan Motor Acceptance Corporation ("NMAC"), having spent six years with NMAC. Mr. Di Lillo received a B.B.A. from Cleveland State University and is a Certified Public Accountant registered by the Accountancy Board of Ohio.
Robert D. Beyer. Mr. Beyer was elected as a Director of the Company in 1998. Mr. Beyer has served as Group Managing Director of Trust Company of the West ("TCW") since 1995. Mr. Beyer was Co-Chief Executive Officer of Cresent Capital Corporation, a registered investment advisor, from 1991 until its acquisition by TCW in 1995. From 1986 to 1991, Mr. Beyer was a member of the Investment Banking Department of Drexel Burnham Lambert, Incorporated. From 1983 to 1986, Mr. Beyer was a member of the Investment Banking Department of Bear, Stearns & Co., Inc. Mr. Beyer is also a Director of The Kroger Co. and a commissioner of the Los Angeles City Employees Retirement System.
George G. Golleher. Mr. Golleher was elected as a Director of the Company in 1998. Mr. Golleher was President and Chief Operating Officer of Fred Meyer, Inc., from March 1998 until his retirement in July 1999. Mr. Golleher was Chief Executive Officer of Ralphs Grocery Company ("Ralphs") from January 1996 to March 1998 and was Vice Chairman from June 1995 to January 1996. Mr. Golleher was a Director ofL Supermarkets since its inception in 1989 and was the President and Chief Operating Officer ofL Supermarkets from January 1990 until its merger with Ralphs. From 1986 through 1989, Mr. Golleher served as Senior Vice President - Finance and Administration of the Boys Markets, Inc. Mr. Golleher served as a Director of Dominick's Finer Foods, Inc. from March 1995 until October 1996 and currently serves as a Director of Prandium, Inc., Cyrk, Inc., and Checkout.com.
M. Brent Stevens. Mr. Stevens was elected as a Director of the Company in 1999. Mr. Stevens has served as Managing Director of Jefferies & Company, Inc. since 1997. From 1993 to 1996, Mr. Stevens was Senior Vice President at Jefferies & Company, Inc.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation for services rendered in all capacities which the Company paid to or accrued for the Chief Executive Officer and each of the other four most highly compensated executive officers.
SUMMARY COMPENSATION TABLE
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(a) Amounts shown are for reimbursement during the fiscal year for the payment of premiums and income taxes thereon relating to executive life and disability plans. In addition, the Company maintains key man life insurance policies for the benefit of the Company on Mr. Soliman.
(b) Amounts shown in this column for the last fiscal year include the following: group term life insurance premiums of $29,646, $10,620, and $8,307 for Messrs. Soliman, Roberts, and McCaffrey, respectively; Company matching contributions to a 401(k) plan of $1,313, $1,318 and $1,278 for Messrs. McCaffrey, Kelvie and Di Lillo, respectively.
EMPLOYMENT AGREEMENTS
The following table sets forth, with respect to each executive officer who has entered into an employment agreement with the Company, the base salary for such officer provided for therein together with the termination date of such agreement:
Each of the agreements provides, among other things, for adjustments to the base salaries and automatic extensions of the termination date. The agreements also provide for certain other benefits, including, in the case of Mr. Soliman, one year's pay equal to his then salary in the event of disability or death; in the case of Mr. Roberts, one year's pay in the event of death and salary for the remainder of the calendar year in the event of disability. The employment agreements of Mr. Soliman and Mr. Roberts each provide six months' pay if either executive terminates his employment for cause. None of the Company's employment agreements provides for any salary obligations in the event of termination by the Company for cause.
SAVINGS PLAN
The Company currently has the American Restaurant Group Savings and Investment Plan (the "Savings Plan"), which is a 401(k) plan established for the benefit of employees who have satisfied certain requirements. These requirements include completion of one year of service with a minimum of 1,000 hours worked. Subject to applicable limits imposed on tax-qualified plans, eligible employees may elect pre-tax contributions up to 18.5% of a participant's total earnings for a calendar year (but not in excess of $10,000 for 1999). The Company makes matching contributions to the Savings Plan equal to 25% of the participant's contributions up to 6% of the participant's earnings. A participant is entitled to a distribution from the Savings Plan upon termination of employment and any such distribution will be in a lump sum form. Distributable benefits are based on the value of the participant's individual account balance which is invested at the direction of the participant in one or a combination of six investment funds, none of which include investments in the Company. Under certain circumstances, a participant may borrow amounts held in his account under the Savings Plan. Based upon the Savings Plan vesting schedule, as of 1999, 100% of the Company matching contributions were vested for Messrs. McCaffrey, Kelvie and Di Lillo.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership of the Company's common stock (as if the Warrants and any other outstanding warrants were exercised), as of February 28, 2000, by (i) each of the Company's directors, (ii) the Chief Executive Officer and certain other highly compensated executive officers of the Company, (iii) all executive officers and directors as a group and (iv) each person believed by the Company to own beneficially more than 5% of the Company's outstanding common stock. Pursuant to the Voting Trust Agreement, Anwar S. Soliman controls Holdings and, accordingly, together with his direct ownership of common stock and the New Voting Trust Agreement (as described below), effectively controls the voting of all (without giving effect to the exercise of Warrants and any other outstanding warrants) the outstanding common stock, subject to the terms of the Securityholders Agreement as described below.
(1) Gives effect to the exercise of all outstanding warrants.
(2) Does not include 14,941 shares of the common stock which Mr. Soliman is deemed to be the owner of pursuant to the New Voting Trust Agreement.
(3) Does not include shares deemed to be beneficially owned by the TCW Investors (as defined herein). Robert D. Beyer is a Group Managing Director of TCW, of which TCW Group (see footnote (8) below) and the TCW Investors are affiliates. Mr. Beyer shares investment power for the following TCW Investors: TCW Shared Opportunity Fund II L.P., TCW Leveraged Income Trust, L.P. and TCW Shared Opportunity Fund IIB, LLC. See footnote (7) below.
(4) George G. Golleher was elected Director of the Company, as nominee of the TCW Investors.
(5) Does not include shares deemed to be beneficially owned by Jefferies & Company, Inc.
(6) Anwar S. Soliman owns 228,577 shares of Holdings common stock, representing 46.4% of the outstanding common stock of Holdings. In addition, Mr. Soliman is deemed to be the owner, pursuant to the Voting Trust Agreement, of an additional 175,963 shares of Holdings common stock.
(7) TCW Shared Opportunity Fund II., L.P., TCW Leveraged Income Trust, L.P., Brown University and TCW Shared Opportunity Fund IIB, LLC.
(8) Represents warrants which are immediately exercisable at a nominal price per share. Includes warrants beneficially owned by the TCW Investors and of which TCW Asset Management Company and certain affiliates which control voting and investment power in their capacity as general partner, investment manager or manager of the TCW Investors (the "TCW Group"), disclaims beneficial ownership.
All of the Company's Management Stockholders have entered into a voting trust agreement (the "New Voting Trust Agreement") dated February 25, 1998 in accordance with which Anwar S. Soliman, Chairman and Chief Executive Officer of the Company, exercises, as voting trustee, all voting and substantially all other rights to which such shareholders would otherwise be entitled until the earlier of August 15, 2005 or the earlier termination of the New Voting Trust Agreement. As a result, Mr. Soliman is considered the beneficial owner of approximately 86.9% of the outstanding shares of Company's common stock (approximately 47.8% on a diluted basis). In addition, the Management Stockholders have entered into other agreements pursuant to which such holders were granted registration rights substantially identical to the rights granted to the holders of the Warrants pursuant to the Securityholders' Agreement. Each of the Management Stockholders is also party to a subscription agreement with Holdings which provides such stockholder certain rights with respect to shares of Holdings common stock held by such stockholder.
As of February 28, 2000, holders of the Company's preferred stock held warrants for 41% of the common stock on a diluted basis.
STOCK OPTION PLANS
In August 1999, the Company approved increasing the stock ownership by certain management shareholders to 30% of the fully diluted number of shares of common stock or 49,902 shares. The shares are to be awarded to the management shareholders upon the Company meeting specified goals. The shares will be allocated based on the ownership of each shareholder in relation to the total common stock ownership at the time of distribution.
SECURITYHOLDERS AGREEMENT
In connection with the February 1998 recapitalization plan, each of Holdings, the Management Stockholders, Jefferies & Company, Inc. (the "Initial Purchaser" of the Notes), and TCW Shared Opportunity Fund II, L.P., TCW Leveraged Income Trust, L.P., Brown University and TCW Shared Opportunity Fund IIB, LLC (collectively, the "TCW Investors") and TCW Asset Management Company entered into a securityholders' agreement concerning the Company (the "Securityholders Agreement"). The Securityholders Agreement provides that the parties will agree to vote all of their shares of the Company's equity securities so that the composition of the Company's Board of Directors consists of five members, two of whom will be management nominees, two of whom will be nominees of the TCW Investors and one of whom, the Remaining Director, will be an independent director designated by the Initial Purchaser; provided that after the date that is 45 days after the date upon which underwritten primary public offerings of common stock of the Company pursuant to effective registration statements under the Securities Act have resulted in 35% of the Company's common stock (measured on a fully diluted basis after giving effect to such offerings) being sold to the public and in the Company's common stock being listed for trading on any of the New York Stock Exchange, the NASDAQ National Market or the American Stock Exchange (the "Public Company Date") the TCW Investors and management will mutually choose the Remaining Director and the Initial Purchaser will no longer have any right to designate a director. The Securityholders Agreement does not limit the rights of the holders of the preferred stock under the Certificate of Designation to elect additional directors to serve on the Company's Board of Directors in certain circumstances.
The Securityholders Agreement also provides that (i) in the event that Holdings sells or transfers any of its shares of Company equity securities, directly or indirectly, TCW Investors will have the option to include its Company equity securities in such sale or transfer on the same terms as Holdings' sale or transfer, (ii) TCW investors will have a right of first refusal with respect to any sale of equity securities by the Company or a party to the Securityholders Agreement (other than Management Stockholders) to purchase the equity securities being sold; and (iii) TCW Investors have the nontransferable right to approve certain major corporate transactions concerning the Company, including mergers and consolidations, sales of any capital stock of the Company's Subsidiaries, a sale of a material amount of the assets and properties of the Company, transactions with affiliates and amendments to the Company's Certificate of Incorporation and Bylaws. In addition, the Securityholders Agreement provides that certain of the TCW Investors' purchasers will receive payments from the Company with respect to withholding obligations as a result of their ownership of the preferred stock, which amount shall not exceed $125,000 per year. None of the rights under the Securityholders Agreement are transferable by TCW Investors.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) Consolidated Financial Statements. See the Index to Consolidated Financial Statements on page.
(c) List of Exhibits
Exhibit No. Description
2.1 Purchase Agreement dated as of September 11, 1996 by and between ARG Property Management Corporation and ARG Enterprises, Inc. and ARG Properties I, LLC.***
2.2 Master lease dated September 11, 1996 between ARG Properties I, LLC, as Landlord and ARG Enterprises, Inc. as Tenant.***
2.3 Lease #06152 dated September 11, 1996 between Captec Net Lease Realty, Inc. and ARG Enterprises, Inc. as Tenant for Bloomington, Minnesota.***
2.4 Lease #06153 dated September 11, 1996 between Captec Net Lease Realty, Inc. and ARG Enterprises, Inc. as Tenant for Fridley, Minnesota.***
2.5 Lease #06154 dated September 11, 1996 between Captec Net Lease Realty, Inc. and ARG Enterprises, Inc. as Tenant for Minnetonka, Minnesota.***
2.6 Lease #06155 dated September 11, 1996 between Captec Net Lease Realty, Inc. and ARG Enterprises, Inc. as Tenant for Roseville, Minnesota.***
2.7 Lease dated September 11, 1996 between Safeway Inc. as Landlord and ARG Enterprises, Inc. as Tenant.***
2.8 Guaranty of Lease dated September 11, 1996 by ARG Enterprises, Inc. as Tenant to ARG Properties I, LLC as Landlord.***
2.9 A Guaranty of Lease dated September 11, 1996 by ARG Enterprises, Inc. as Tenant to Captec Net Lease Realty, Inc. as Landlord for each of four Minnesota restaurants.***
2.10 Guaranty of Lease dated September 11, 1996 by ARG Enterprises, Inc. as Tenant and Safeway Inc. as Landlord.***
3.1 Amended and Restated Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on July 23, 1991.*
3.2 Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on March 21, 1992. *
Exhibit No. Description
3.3 Amended and Restated Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on February 23, 1998. ****
3.4 By-Laws of the Company. *
4.1 Indenture dated as of February 25, 1998 between the Company and U.S. Trust Company of California, N.A., as Trustee (including specimen certificate of 11.5% Senior Secured Note due 2003). ****
4.2 Warrant Agreement dated as of February 25, 1998 between the Company and U.S. Trust Company of California, N.A., as warrant agent (including specimen certificate of Warrant). ****
4.3 Registration Rights Agreement dated as of February 25, 1998 between the Company and Jefferies & Company, Inc. ****
4.4 Securityholders' and Registration Right Agreement dated as of February 25, 1998 between the Company and Jefferies & Company, Inc., as purchaser. ****
4.5 Management Registration Right Agreement dated as of February 28, 1998 between the Company and the Management Stockholders. ****
4.6 Certificate of Designation filed with the Secretary of State of Delaware on February 24, 1998. ****
4.7 Certificate of Correction to the Certificate of Designation filed with the Secretary of State of Delaware on February 25, 1998. ****
4.8 Form of Indenture relating to the 12% Senior Subordinated Debentures to be entered into between the Company and a trustee (including specimen certificate of 12% Senior Subordinated Debenture due 2003). *****
9.1 Common Stock Voting Trust and Transfer Agreement dated as of February 24, 1998 among the Company and the stockholders parties thereto and Anwar S. Soliman, as voting trustee. ****
9.2 Securityholders Agreement dated as of February 25, 1998 among the Company, American Restaurant Group Holdings, Inc., Jefferies & Company, Inc., TCW Asset Management Company and the Management Stockholders. ****
10.1 Amended and Restated Employment Agreement dated as of December 14, 1993 between the Company and Anwar S. Soliman. **
10.2 Amended and Restated Employment Agreement dated as of December 14, 1993 between the Company and Ralph S. Roberts. **
21.1 Subsidiaries of the Company. **
27 Financial Data Schedule
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* Incorporated by reference to the Registrant's Registration Statement No. 33-48183 on Form S-4 filed with the Securities and Exchange Commission on May 28, 1992 as amended with Amendment No. 1 filed on September 11, 1992.
** Incorporated by reference to the Registrant's Registration Statement No. 33-74010 on Form S-4 filed with the Securities and Exchange Commission on January 12, 1994.
*** Incorporated by reference to the Registrant's Current Report on Form 8-K dated September 13, 1996 filed with the Securities and Exchange Commission on September 30, 1996.
**** Incorporated by reference to the Registrant's Annual Report on Form 10-K dated December 29, 1997 filed with the Securities and Exchange Commission on March 30, 1998.
***** Incorporated by reference to the Registrant's Registration Statement No. 333-55861 on Amendment No. 1 to Form S-4 filed with the Securities and Exchange Commission on July 29, 1998.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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.
By: /s/ ANWAR S. SOLIMAN --------------------------------- Anwar S. Soliman Chairman, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of American Restaurant Group, Inc.:
We have audited the accompanying consolidated balance sheets of AMERICAN RESTAURANT GROUP, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 28, 1998 and December 27, 1999, and the related consolidated statements of operations, common stockholders' equity (deficit) and cash flows for the years ended December 29, 1997, December 28, 1998 and December 27, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Restaurant Group, Inc. and subsidiaries as of December 28, 1998 and December 27, 1999, and the results of their operations and their cash flows for the years ended December 29, 1997, December 28, 1998 and December 27, 1999, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Orange County, California February 28, 2000
AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 28, 1998 AND DECEMBER 27, 1999
ASSETS
(consolidated balance sheets continued on following page)
The accompanying notes are an integral part of these consolidated statements.
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated statements.
AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 29, 1997, DECEMBER 28, 1998
AND DECEMBER 27, 1999
The accompanying notes are an integral part of these consolidated statements.
AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 29, 1997, DECEMBER 28, 1998
AND DECEMBER 27, 1999
The accompanying notes are an integral part of these consolidated statements.
AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 29, 1997, DECEMBER 28, 1998
AND DECEMBER 27, 1999
The accompanying notes are an integral part of these consolidated statements.
AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1997, DECEMBER 28, 1998 AND DECEMBER 27, 1999
1. Background and Summary of Significant Accounting Policies
a. Company
American Restaurant Group, Inc. (the "Company"), a Delaware corporation, through its subsidiaries, operates middle and upper price full-service restaurants, casual-style restaurants and quick-service restaurants primarily in California and Texas. The Company is a subsidiary of American Restaurant Group Holdings, Inc. ("Holdings"), also a Delaware corporation. At year end 1997, 1998 and 1999, the Company and its subsidiaries, collectively referred to herein as the Company, operated 231, 224 and 193 restaurants, respectively.
b. 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. A recapitalization plan was consummated during 1998 (see Note 5, "Long-Term Debt"). 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.
c. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
d. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates.
e. Inventories and Prepaid Expenses
Inventories consist primarily of food, beverages and supplies and are valued at the lower of cost (first-in, first-out method) or market value. When a restaurant is opened, the initial purchase of expendable equipment, such as china, glassware and silverware, is recorded as prepaid supplies and is not depreciated; however, all replacements are expensed.
f. Advertising Costs
Advertising costs are accrued as a percentage of sales and expensed during the year. Production costs are allocated to the related advertisements. At year end, production costs for advertisements which have not been aired are included in prepaid expenses. Prepaid advertising costs of $1,199,000 and $1,698,000 were included in prepaid expenses at December 28, 1998 and December 27, 1999, respectively. Advertising expenses included in net income (loss) were $16,995,000, $17,254,000 and $16,174,000 in fiscal years 1997, 1998 and 1999, respectively.
g. Preopening Costs
Effective December 28, 1998, the Company adopted Statement of Position ("SOP") Number 98-5, "Reporting on the Costs of Start-up Activities" which was issued in April 1998. SOP 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. Although not material to the Company's financial position or results of operations, any previously deferred preopening costs were expensed as of the end of fiscal year 1998. Preopening expense was $2,077,000, $582,000 and $815,000 in 1997, 1998 and 1999, respectively.
h. Property and Equipment
Property and equipment is carried at the lower of cost or, if impaired, at the estimated fair value of the asset (see Note 2, "Impairment of Long-Lived Assets"). The Company provides for depreciation and amortization based upon the estimated useful lives of depreciable assets using the straight-line method. Estimated useful lives are as follows:
Substantially all of the Company's assets, including property and equipment, are pledged as collateral on the senior debt of the Company.
i. Interest Costs
Interest costs incurred during the construction period of restaurants are capitalized. The Company capitalized approximately $90,000, $68,000 and $44,000 for the years ended 1997, 1998 and 1999, respectively.
j. Other Assets
Other assets include intangible assets, leasehold interests, franchise rights, liquor licenses and cost in excess of net assets acquired. These costs are amortized using the straight-line method over the periods estimated to be benefited, not greater than 40 years.
Deferred debt costs are amortized using the effective interest method over the related debt term.
Estimated useful lives are as follows:
The following table details the components of intangible assets included in the accompanying consolidated balance sheets (in thousands):
k. Insurance
The Company self-insures the first $100,000 of its annual medical and dental benefits per family. The Company also self-insures up to the first $350,000 per incident for property and casualty risks inherent in its operations. Reserves for losses are established based upon currently estimated obligations.
l. Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, accounts receivable and payable and debt instruments. The carrying values of all financial instruments, other than debt instruments, are representative of their fair value due to their short-term maturity. The fair value of the Company's long-term debt instruments is estimated based on the current rates offered to the Company.
m. Franchise Income
The Company franchises Grandy's quick-service restaurants. Franchise fees are recognized as income as services are rendered in accordance with Statement of Financial Accounting Standards ("SFAS") Number 45, "Accounting for Franchise Fee Revenue". Franchise royalties based upon a percentage of the franchisees' gross sales are accrued currently. Revenues include franchise royalties and franchise fees of $2,586,000, $1,800,000, and $2,169,000, respectively, for the years ended 1997, 1998 and 1999. There were 61, 57 and 63 franchised restaurants at year end 1997, 1998 and 1999, respectively.
n. Accounting Period
The Company's fiscal year ends on the last Monday in December.
o. Reclassifications
Certain prior year accounts have been reclassified to conform with the current year presentation.
2. Impairment of Long-Lived Assets
The Company follows the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This statement changed the method of evaluating the impairment of the Company's long-lived assets, including intangible assets. Various assumptions and estimates are used to determine fair value. The calculation of the impairment loss is based on estimated future cash flows. The estimates used to determine the impairment adjustment can change in the near term as the economy and operations of specific restaurants change. The adoption of SFAS 121, together with the effects of continuing adverse operations of certain restaurants, resulted in pre-tax non-cash charges, excluding non-cash charges related to the Grandy's franchise conversion program, of $3,047,000, $1,415,000 and $1,499,000 for the years ended 1997, 1998 and 1999, respectively.
3. Grandy's Franchise Conversion Program
In 1998, the Company announced a plan to convert a majority of its company-owned Grandy's restaurants to franchised restaurants. During 1999, the Company recorded a gain of $619,000 on the sale of property and equipment, including applicable leasehold rights and certain intangible assets, related to the conversion program.
The Company has reviewed the value of the recorded assets, including an allocation of intangible assets, for each restaurant to be converted. A write-down has been recorded for each restaurant where the carrying amount of the tangible and intangible assets exceeds the anticipated net proceeds. Write-downs of $4,789,000 and $955,000 were recorded in 1998 and 1999, respectively. The Company also recorded a provision of $245,000 in 1998 and $248,000 in 1999 for other costs, including severance, associated with the conversion program. The restaurants will remain in operation pending their conversion to franchised restaurants; therefore, the Company will continue to depreciate the remaining assets.
4. Lease Obligations
The Company leases certain of its operating facilities under terms ranging up to 40 years. These leases are classified as both operating and capital leases. Certain of the leases contain provisions calling for additional rentals based on sales or other provisions obligating the Company to pay related property taxes and certain other expenses.
The following is a summary of property held under leases that have been capitalized and included in the accompanying consolidated balance sheets (in thousands):
The following represents the minimum lease payments remaining under noncancelable operating leases and capitalized leases as of December 27, 1999 (in thousands):
Rental expense (including $802,000, $733,000 and $684,000, respectively, for contingent rents under operating leases) was $30,676,000, $28,656,000 and $27,594,000 during 1997, 1998 and 1999, respectively.
5. Long-Term Debt
Long-term debt is summarized as follows (in thousands):
Maturities of the remaining long-term debt during each of the five fiscal years subsequent to year end 1999 are $477,000, $336,000, $335,000, $158,627,000 and $30,000.
In February, 1998, the Company completed a recapitalization plan (the "Recapitalization Plan") which included, among other things, the issuance by the Company of $155,000,000 of 11.5% senior secured notes (the "Notes") due 2003.
Also, as part of the Recapitalization Plan, the Company concurrently (a) redeemed at par senior secured notes of $126,381,000 together with interest thereon and repaid certain other interest-bearing short-term liabilities, (b) repurchased its existing 10.25% subordinated notes at 65% of the par amount of $45,000,000 together with interest thereon, and canceled the related warrants to purchase common stock of Holdings, and (c) established a $15,000,000 revolving credit facility to include letters of credit. A quarterly fee of 0.5% per annum is payable on the unused portion of the letter of credit facility and a quarterly fee of 2.5% per annum is payable on outstanding letters of credit. At year end 1998 and 1999, the Company had outstanding letters of credit primarily related to its self-insurance programs of approximately $4,316,000 and $3,597,000, respectively.
The revolving credit facility contains certain covenants, the most restrictive of which requires the Company to maintain a certain ratio of cash flows to total debt. As of December 27, 1999, the Company was in compliance with all covenants.
As an additional component of the Recapitalization Plan, Holdings extended the accretion period on its senior discount debentures due 2005 (the "Holdings Debentures") from June 15, 1999 to maturity on December 15, 2005, and amended certain provisions of the Holdings Debentures. The Holdings Debentures will accrete at a rate of 14.25%, compounded semi-annually. In addition, holders of the Holdings Debentures with an accreted value of approximately $10,757,000 surrendered such debentures for cancellation and received $3,600,000 principal amount of the Notes which was in addition to the $155,000,000 of Notes sold in connection with the Recapitalization Plan. The Notes issued in lieu of Holdings Debentures were recorded as a non-cash distribution to Holdings by the Company.
Substantially all assets of the Company are pledged to its senior lenders. In addition, the direct subsidiaries guaranteed the indebtedness owed by the Company and such guarantees are 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.
6. Income Taxes
The Company's state income tax provision, all of which was current, was $63,000, $67,000 and $70,000 in 1997, 1998 and 1999, respectively. No provision for Federal income taxes was required in any year.
The income tax effects of temporary differences that give rise to significant portions of the Company's deferred income tax assets and liabilities are as follows (in thousands):
The effective tax rate differs from the Federal statutory rate of 34 percent as a result of the following items (in thousands):
As a result of the Recapitalization Plan (see Note 5, "Long-Term Debt") the Company no longer files consolidated income tax returns with Holdings.
At December 27, 1999, the Company had available net operating loss carryforwards for Federal income tax purposes of $133,000,000 expiring in 2004 to 2014, and Federal general business credit carryforwards of $13,200,000, expiring in 2004 to 2014.
7. Commitments and Contingencies
The Company is obligated under employment agreements with certain officers and employees. Obligations under the agreements are $1,163,000, provide for periodic increases and expire in 2000 unless extended.
The Company has been named as defendant in various lawsuits. It is the opinion of management that the outcome of such litigation will not materially affect the Company's financial position or results of operations.
8. Cumulative Preferred Stock, Mandatorily Redeemable
As part of the Recapitalization Plan in February, 1998, the Company issued 35,000 preferred stock units (the "Units") of the Company. Each Unit consists of $1,000 initial liquidation preference of 12% senior pay-in-kind exchangeable preferred stock and one common stock purchase warrant initially to purchase 2.66143 shares of the common stock at an initial exercise price of one cent per share. The Company's cumulative preferred stock is mandatorily redeemable on August 15, 2003, for cash at a price per share equal to 110% of the then applicable liquidation preference.
9. Redeemable Cumulative Senior and Junior Preferred Stock
At year end 1998 and 1999, there were 1,400,000 authorized shares of senior preferred stock (one cent par value). There were no issued or outstanding shares.
At year end 1998 and 1999, there were 100,000 authorized shares of junior preferred stock (one cent par value). There were no issued or outstanding shares.
10.Common Stock
Common stock (one cent par value) authorized, issued and outstanding is as follows:
As of December 29, 1997, all of the Company's common stock was owned by American Restaurant Group Holdings, Inc. The Chairman and certain other members of the Company's management owned all outstanding shares of Holdings common stock other than shares of Holdings common stock issued to holders of the debenture units and rights to acquire shares of Holdings common stock issuable upon exercise of options and warrants.
In conjunction with the Recapitalization Plan, the Company issued shares of common stock to certain members of the Company's management (the "Management Stockholders") in an aggregate amount equal to 15% of the common stock on a fully diluted basis. Such Management Stockholders have entered into a voting trust agreement in accordance with which the Chairman and Chief Executive Officer of the Company will exercise all voting and substantially all other rights to which such Management Stockholders would otherwise be entitled until August 15, 2005, or the earlier termination of the agreement. The Management Stockholders also entered into a stockholders' agreement with the remaining Company stockholders, which provides that the parties will agree to vote all of their shares of the Company's equity securities so that the Board of Directors of the Company consists of five directors, with two directors designated by TCW Asset Management Company, two by the Management Stockholders, with the remaining director being an independent director initially designated by the initial purchaser of the Notes.
11. Savings Plan
The American Restaurant Group Savings and Investment Plan (the "Savings Plan") is a 401(k) plan established for the benefit of employees who have satisfied certain requirements. These requirements include completion of one year of service with a minimum of 1,000 hours worked. Subject to applicable limits imposed on tax qualified plans, eligible employees may elect pre-tax contributions up to 18.5% of a participant's total earnings for a calendar year (but not in excess of $10,000 for 1999). The Company makes matching contributions to the Savings Plan equal to 25% of the participant's contributions up to 6% of the participant's earnings. During fiscal 1997, 1998 and 1999, the Company contributed approximately $200,000, $174,000 and $225,000 to the Savings Plan, respectively. At December 27, 1999, there were approximately 850 participants in the plan.
12. Segment Reporting
The Company follows the provisions of SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services, and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.
The Company's reportable operating segments include Black Angus, Grandy's, and the Other Concepts (Spoons, Spectrum, National Sports Grill, and the former Velvet Turtle, none of which individually meet the separate disclosure requirements of SFAS 131).
The applicable line items for the Company's reportable segments reconciled to the consolidated financial statements for the years 1997, 1998 and 1999 are as follows (in thousands, except for number of restaurants):
(a) Reflects sales and revenues from external customers. Intersegment sales and revenues are not applicable.
(b) Gross profit is defined as revenues less food and beverage, payroll and direct operating costs.
(c) Fiscal year 1999 includes $1,203,000 non-cash charge for assets to be disposed offset by $619,000 gain on sale of assets. Fiscal year 1998 includes $5,034,000 non-cash charge for assets to be disposed.
(d) In 1998, the Company began charging certain corporate overhead general and administrative expenses to the divisions. Because it is not practicable to restate prior years, the Company has presented 1998 and 1999 net income (loss) without the corporate changes for comparisons to 1997. Net income (loss) with the inclusion of corporate overhead expenses is presented for 1998 and 1999 but is not comparable to 1997.
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