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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee required)
For the fiscal year ended December 30, 1996
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from________________ to___________
Commission file number: 33-74012
American Restaurant Group Holdings, Inc.
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Exact Name of Registrant as Specified in Its Charter
Delaware 33-0592148
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
450 Newport Center Drive
Newport Beach, California 92660
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(Address of Principal Executive Offices) (Zip Code)
(714) 721-8000
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by a 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
----- ----
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part II of this Form 10-K or any amendments to this
Form 10-K. [ X ]
The number of outstanding shares of the Registrant's Common Stock (one cent par
value) as of March 3, 1997 was 504,505.
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AMERICAN RESTAURANT GROUP HOLDINGS, INC.
INDEX
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PAGE
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PART I
ITEM 1. BUSINESS............................................................ 1
ITEM 2. PROPERTIES.......................................................... 5
ITEM 3 LEGAL PROCEEDINGS................................................... 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................. 6
ITEM 6. SELECTED FINANCIAL DATA............................................. 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................. 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................... 12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................. 12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................. 13
ITEM 11. EXECUTIVE COMPENSATION.............................................. 14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...................................................... 16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES,
AND REPORTS ON FORM 8-K............................................. 17
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PART I
ITEM 1. BUSINESS
INTRODUCTION
American Restaurant Group Holdings, Inc. ("Holdings"), a Delaware corporation,
was formed in September 1993 to own 100% of the outstanding common stock of
American Restaurant Group, Inc. ("ARG"), a Delaware corporation.
Holdings, through ARG and its subsidiaries (collectively, the "Company"),
competes predominately in the midscale segment of the United States restaurant
industry. As of December 30, 1996, the Company operated 247 restaurants located
in 17 states, principally California and Texas. The Company operates five
restaurant divisions: Black Angus (western-style steak houses 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 30, 1996,
Grandy's franchised 56 restaurants in the southern United States.
DIVISION OVERVIEW
BLACK ANGUS
As of December 30, 1996, Black Angus operated 101 Stuart Anderson's Black Angus
and Stuart Anderson's Cattle Company steak houses located primarily in
California, the Pacific Northwest and Arizona. During the year, the Company
expanded the Black Angus restaurants into two new markets, Las Vegas, Nevada and
Salt Lake City, Utah. 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 generally
range in size from 6,600 to 12,000 square feet, seating 300 to 435 customers.
Black Angus restaurants are distinctly Western in their design and feature booth
seating for dining, attractive lounge areas with audio and video entertainment,
parking facilities and, in some cases, dance floors. 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.
GRANDY'S
As of December 30, 1996, Grandy's operated 103 family-oriented quick-service
restaurants located primarily in Texas, Oklahoma and Florida and franchised an
additional 56 restaurants 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 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 and free-refill drinks, and all but two restaurants have
drive-through 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 48% of Grandy's 1996 revenues were for consumption in the dining
room as opposed to take out.
Grandy's domestic franchise agreements presently require initial fees of $15,000
to $25,000 per restaurant, ongoing royalties of 4% of sales (3% for some older
franchises)
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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 does not provide financing for
franchisees.
SPOONS
Spoons, founded in 1978, operated 20 casual-style restaurants as of December 30,
1996, all of which are located in California. Spoons restaurants are generally
freestanding restaurants 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.
SPECTRUM
As of December 30, 1996, Spectrum, founded in 1970, operated 16 upscale,
specialty restaurants located in California which serve either Northern Italian,
contemporary American or Mexican cuisine. The division includes four "Prego"
restaurants, three "Tutto Mare" restaurants, two "MacArthur Park" restaurants
and seven 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 in proximity 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 30, 1996. 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 12:00 midnight.
VELVET TURTLE
The Company operated one Velvet Turtle restaurant as of December 30, 1996.
Velvet Turtle was a full-service, white-tablecloth restaurant chain catering to
the special occasion diner and a more affluent, older customer. The Company
closed the last Velvet Turtle restaurant in February 1997.
RESTAURANT OPERATIONS
The Company is operated as five separate divisions. The Black Angus and Grandy's
divisions are each organized functionally with separate operations, marketing,
finance, real estate and human resources departments. The three smaller
divisions share among them certain support functions such as marketing, finance,
administration and human resources. The Company provides strategic direction and
approves major capital expenditures, annual budgets, and all salaries above a
specific level. In addition, the Company provides purchasing, cash management,
insurance and other treasury functions, and accounting and legal expertise, all
on a centralized basis.
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The Company's cash management system is highly sophisticated with controls down
to the server level. 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 9,000 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 currently 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 Assistant
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 seven restaurants.
District Managers, General Managers, Assistant Managers and Chefs are eligible
for bonuses under each division's extra compensation program, for which goals
and objectives are established based on 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. 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, during recent months the Company has chosen to
concentrate its distribution among certain of its vendors but believes that it
could replace any of these distributors on a timely basis.
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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 and 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. 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. The Company operates a research facility near its
headquarters which develops new menu items for each of the Company's concepts.
EMPLOYEES
At December 30, 1996, the Company employed approximately 14,800 persons, of whom
approximately 13,800 were hourly employees in restaurants, approximately 800
were salaried employees in restaurants (managers and chefs) and approximately
200 were hourly and salaried employees in divisional and corporate management
and administration. Approximately 70% 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 regulation by federal agencies and 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.
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SEASONALITY
Except with respect to Grandy's, the Company's restaurant revenues and
profitability are not subject to significant seasonal fluctuations. Grandy's
revenues and profits are traditionally higher during the spring and summer
months because of factors such as increased travel and improved weather
conditions affecting the public's dining habits.
ITEM 2. PROPERTIES
Of the 247 restaurants operated by the Company on December 30, 1996, the Company
owns the land and building for 8, owns the building and leases the land for 97,
and leases both land and building for the remaining 142 restaurants. 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 a National
Sports Grill restaurant. 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, San Francisco, and Newport
Beach, California. The Company also leases a facility in Newport Beach,
California, which it uses for centralized research and development.
The following table sets forth, as of December 30, 1996, the number of
Company-operated restaurants by division and state of operation:
<TABLE>
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DIVISION
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NATIONAL
BLACK SPORTS VELVET NUMBER OF
STATE ANGUS GRANDY'S SPOONS SPECTRUM GRILL TURTLE RESTAURANTS
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California 56 2 20 16 6 1 101
Texas - 70 - - - - 70
Oklahoma - 16 - - - - 16
Washington 11 - - - - - 11
Arizona 9 - - - - - 9
Florida - 9 - - - - 9
Colorado 5 - - - - - 5
Kansas - 5 - - - - 5
Oregon 5 - - - - - 5
Minnesota 4 - - - - - 4
Indiana 3 - - - - - 3
Hawaii 2 - - - - - 2
Nevada 2 - - - - - 2
New Mexico 1 1 - - - - 2
Alaska 1 - - - - - 1
Idaho 1 - - - - - 1
Utah 1 - - - - - 1
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Total 101 103 20 16 6 1 247
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ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various litigation incidental to its business,
including claims arising out of personal injuries, contract lawsuits, employment
practices and worker's compensation cases, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of the Company in the
fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
There are approximately eight record holders of the outstanding shares of
Holdings' common stock. There is currently no market for Holdings' common stock,
nor is such anticipated in the near future. Holdings has never paid dividends to
its common stockholders and currently has no plans to do so.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data for each of the
five periods ended December 30, 1996 has been derived from the consolidated
financial statements of the Company which have been audited by Arthur Andersen
LLP, independent 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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Year ended
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Dec. 28, Dec. 27, Dec. 26, Dec. 25, Dec. 30,
1992 1993 1994 1995 1996 (1)
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(dollars in thousands)
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INCOME STATEMENT DATA:
REVENUES:
Black Angus ................ $ 225,796 $ 235,345 $ 253,634 $ 243,624 $ 254,946
Grandy's ................... 106,701 111,166 109,301 101,839 90,962
Other concepts ............. 92,520 91,398 97,471 100,503 99,516
--------- --------- --------- --------- ---------
Total revenues ....... 425,017 437,909 460,406 445,966 445,424
RESTAURANT COSTS:
Food and beverage .......... 132,767 136,255 142,828 138,270 141,032
Payroll .................... 131,016 132,292 136,151 134,532 137,104
Direct operating ........... 95,419 109,462 108,382 110,399 114,589
Depreciation and
amortization ............. 26,330 25,682 26,723 23,171 20,791
--------- --------- --------- --------- ---------
Total restaurant costs . 385,532 403,691 414,084 406,372 413,516
General and administrative
expenses ................... 28,429 29,895 31,063 31,387 28,110
Non-cash charge for impairment
of long-lived assets ....... - - - 20,178 13,205
Operating profit (loss) ...... 11,056 4,323 15,259 (11,971) (9,407)
Interest expense, net ........ 23,185 23,982 34,190 35,450 37,954
Net loss before
extraordinary loss ......... (12,228) (19,457) (18,995) (47,496) (49,455)
Extraordinary loss on
extinguishment of debt ..... (17,775) (10,790) - - (1,688)
Net loss ..................... $ (30,003) $ (30,247) $ (18,995) $ (47,496) $ (49,143)
Ratio of earnings to fixed
charges-- (deficiency) (2) . (12,129) (19,659) (18,931) (47,421) (47,361)
BALANCE SHEET DATA:
Plant and equipment, net ..... $ 190,017 $ 181,889 $ 181,496 $ 171,030 $ 101,169
Total assets ................. 298,494 299,068 288,228 254,491 177,205
Long-term obligations,
including current portion .. 215,627 273,355 277,820 291,987 258,566
Redeemable cumulative
preferred stock ............ 73,291 - - - -
Common stockholder's
equity (deficit) ........... (60,735) (47,140) (66,135) (113,681) (162,824)
</TABLE>
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(1) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of earnings before extraordinary loss, income taxes
and fixed charges. Fixed charges consist of interest on indebtedness,
the amortization of debt issue costs and that portion of operating
rental expense representative of the interest factor.
(2) The year ended December 30, 1996 included 53 weeks.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Years Ended December 26, 1994, December 25, 1995 and December 30, 1996:
Revenues. Total revenues decreased 3.1% from $460.4 million in 1994 to $446.0
million in 1995 followed by a slight decrease to $445.4 million in 1996. The
year ended December 30, 1996 includes a 53rd week which added $6.9 million to
total revenues. Comparable restaurant revenues excluding the 53rd week decreased
2.9% from 1995. Six new restaurants were opened during 1996 offset by the
closure of seven restaurants. There were 246, 248 and 247 restaurants operating
at the end of 1994, 1995 and 1996, respectively.
Black Angus revenues decreased 3.9% from $253.6 million in 1994 to $243.6
million in 1995 then increased 4.6% to $254.9 million in 1996. The increase in
1996 revenues was the result of the 53rd week which added $4.2 million in
revenues and the addition of six new restaurants. Total comparable restaurant
revenues increased 0.2% in 1996. Comparable restaurant food sales increased 1.5%
compared to 1995 while beverage sales decreased 3.9% as a result of
de-emphasizing the late-night lounge business. There were six new restaurants
opened in 1996, two in Arizona, two in Nevada, one in Washington and one in
Utah.
Grandy's revenues decreased 6.8% from $109.3 million in 1994 to $101.8 million
in 1995 followed by a 10.7% decrease to $91.0 million in 1996. The decrease in
1996 was the net result of the 53rd week which added $1.3 million in revenues,
an 11.3% decrease in comparable restaurant revenues and the closure of seven
poor performing restaurants. Franchise revenues were $2.5 million, $2.2 million
and $2.0 million in 1994, 1995 and 1996, respectively.
Other revenues increased 3.1% from $97.5 million in 1994 to $100.5 million in
1995 then decreased 1.0% to $99.5 million in 1996. The decrease in 1996 was the
net result of the 53rd week which added $1.4 million in revenues and a 1.9%
decrease in comparable restaurant revenues in 1996.
Food and Beverage Costs. As a percentage of revenues, food and beverage costs
increased from 31.0% in 1994 and 1995 to 31.7% in 1996. The increase in 1996 was
primarily a result of higher grocery expenses.
Payroll Costs. As a percentage of revenues, labor costs increased from 29.6% in
1994 to 30.2% in 1995 and then increased to 30.8% in 1996. The increase in 1996
was primarily a result of higher restaurant management 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 from 23.5% in 1994 to 24.8% in 1995 and then
increased to 25.7% in 1996. The increase was a result of increased advertising
expenses and higher occupancy costs.
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 5.8% in 1994 to 5.2%
in 1995 and then decreased to 4.7% in 1996. The decrease was primarily due to
the non-cash reduction of the historical costs
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of certain long-lived assets in December 1995.
General and Administrative Expenses. General and administrative expenses as a
percentage of revenues were 6.7% in 1994, 7.0% in 1995 and 6.3% in 1996. The
decrease in 1996 was due primarily to decreased division overhead payroll
expenses.
Non-Cash Charge for Impairment of Long-Lived Assets. In December 1996 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
$13.2 million. This non-cash charge was 3.0% of revenues. A similar non-cash
charge of $20.2 million was recorded in 1995. There were no charges for
impairment of long-lived assets in 1994.
Operating Profit. As a result of the items discussed above, operating profit
decreased from $15.3 million in 1994 to an operating loss of 12.0 million in
1995 and then improved to an operating loss of $9.4 million in 1996 (an
operating profit of $8.2 million in 1995 and $3.8 million in 1996 before the
non-cash charge for impairment of long-lived assets). As noted in the discussion
of revenues, the Company's divisions are not uniform in size or profitability.
For example, for the fiscal year ended 1996, Black Angus had an operating profit
of $19.1 million while Grandy's had an operating loss of $1.0 million.
Interest Expense - Net. Interest expense increased from $34.2 million in 1994 to
$35.5 million in 1995 and then to $38.0 million in 1996. The average interest
rate on Company borrowings was 11.8%, 11.9% and 12.2% for 1994, 1995 and 1996,
respectively. Average borrowings (excluding capitalized lease obligations)
increased from $263.7 million in 1994 to $273.5 million in 1995 and then to
$281.6 million in 1996.
Income Taxes. Income taxes increased from a provision of $64,000 in 1994 to
$75,000 in 1995 and then to $94,000 in 1996. The provisions represent amounts
provided for certain minimum state income taxes.
Extraordinary Loss. An extraordinary loss of $1.7 million occurred in 1996 with
the extinguishment of debt. This extraordinary loss resulted from a non-cash
charge to expense for capitalized debt costs associated with the debt repaid.
There were no extraordinary losses in 1994 or 1995.
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 30, 1996, the Company had cash of approximately
$7.5 million and has essentially no debt amortization until September 1997. The
Company also had $12.4 million outstanding under its letters of credit facility.
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 December 30, 1996, the Company had a working capital deficit
of $91.6 million which included $41.3 million in current portion of long-term
debt.
The Company estimates that capital expenditures of $6.0 million to $10.0 million
are
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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 spent approximately $5.8 million on new restaurants in 1996. The Company
expects to spend approximately $5.0 million for new restaurants in 1997. Total
capital expenditures were $22.2 million in 1994, $16.3 million in 1995, and
$13.3 million in 1996. Higher capital expenditures in 1994 resulted from the
addition of five National Sports Grill restaurants, three Black Angus
restaurants, two Grandy's restaurants, one Spoons restaurant and one Spectrum
restaurant. The Company's credit agreement contains limitations on the amount of
capital expenditures that the Company may incur.
On March 13, 1996, Holdings completed a private placement of its 14% senior
discount debentures due 2005 with a face value of $17.0 million producing
aggregate proceeds of approximately $7.1 million. Substantially all of the net
proceeds of the offering were contributed by Holdings to ARG. The net proceeds
were used by ARG for general corporate purposes.
On August 28, 1996, ARG's Senior Secured Note holders consented to an amendment
which increased the interest rate on substantially all of the Senior Secured
Notes from 12% to 13% and changed interest payment dates from semi-annual to
quarterly beginning December 15, 1996. The amendment also replaced a net worth
covenant with an EBITDA (earnings before interest, taxes, depreciation and
amortization) covenant and required ARG to consummate asset sales or
sale/leaseback transactions prior to December 31, 1996.
On September 13, 1996, ARG completed a sale/leaseback transaction under which it
sold the real property relating to 24 Stuart Anderson's Black Angus and Stuart
Anderson's Cattle Company restaurants for an aggregate sales price of $48.1
million and simultaneously executed long-term leases under which it will
continue to operate the restaurants. The proceeds of the transaction have been
applied in accordance with the requirements of ARG's debt instruments, as
follows: to redeem at par principal and interest thereon of its Senior Secured
Notes in the amount of $34.3 million; to repay bank debt and to partially cash
collateralize outstanding letters of credit in a combined amount of $4.8
million; for fees and expenses of this transaction as well as ARG's above noted
consent solicitation relating to the Senior Secured Notes in a total amount of
$4.6 million; and $4.4 million retained by ARG to be invested in productive
assets within six months. ARG recorded an extraordinary loss on extinguishment
of debt relating to the write-off of capitalized debt costs in the amount of
$1.1 million. In addition, a $5.9 million gain related to this sale/leaseback
was deferred and will be amortized over the life of the underlying leases.
On December 13, 1996, ARG completed a sale/leaseback transaction under which it
sold the real property relating to 30 Grandy's restaurants for an aggregate
sales price of $12.5 million and simultaneously executed a long-term lease under
which it will continue to operate the restaurants. The proceeds of this
transaction were applied in accordance with the requirements of the ARG's debt
instruments as follows: to redeem at par principal and interest thereon of its
Senior Secured Notes in the amount of $9.9 million; to partially cash
collateralize outstanding letters of credit in the amount of $1.1 million; for
fees and expenses of this transaction in the amount of $0.9 million; and $0.6
million retained by ARG to be invested in productive assets within six months.
10
<PAGE> 13
ARG recorded a loss of $1.5 million on the sale of this property and an
extraordinary loss of $0.6 million on extinguishment of debt relating to the
write-off of capitalized debt costs.
During 1996, ARG also completed the sale of three additional Grandy's
restaurants and the sale/leaseback of two Spoons restaurants, the proceeds of
which were applied in accordance with the requirements of ARG's debt
instruments. The combined aggregate sales price of these transactions was $3.9
million.
ARG was two weeks late in paying the quarterly interest of $1.2 million on its
Subordinated Debt which was due December 15, 1996 and expects to be four weeks
late in the quarterly payment which was due March 15, 1997. The Subordinated
Debt provides for a 30-day grace period for interest payments.
In 1997, ARG was in default under a covenant that required certain sales or
sale/leaseback transactions by December 31, 1996. On March 13,1997, ARG's Senior
Secured Note holders consented to an amendment which replaced the EBITDA
covenants for the year ended December 30, 1996 and for the four quarters ended
March 31, 1997 with an EBITDA covenant for the twelve months ended May 31, 1997
(tested at the same level as would have been required for the four quarters
ended March 31, 1997), reduced the amount of net cash proceeds from asset sales
or sale/leaseback transactions required by December 31, 1996 to $15.0 million
(which was accomplished) and waived any related existing defaults or events of
default. The amendment provided for an increase of $10 in the stated principal
amount for each $1,000 in stated principal amount of consenting noteholders.
This resulted in an increase of approximately $1.6 million in the stated
principal amount of the Senior Secured Notes and $1.2 million in the actual
outstanding principal amount of the Senior Secured Notes.
Substantially all assets of ARG are pledged to its senior lenders. In addition,
the subsidiaries have guaranteed the indebtedness owed by ARG and such guarantee
is secured by substantially all of the assets of the subsidiaries. In connection
with such indebtedness, contingent and mandatory prepayments may be required
under certain specified conditions and events. There are no compensating balance
requirements. A quarterly commitment fee of 0.5% per annum is payable on the
letter of credit facility and a quarterly fee of 3.75% per annum is payable on
outstanding letters of credit.
At year end 1995 and 1996, ARG had outstanding letters of credit primarily
related to its self-insurance programs of approximately $14.4 million and $12.4
million, respectively.
ARG's senior credit facilities provide for a letter of credit facility of $11.0
million until July 31, 1997. This letter of credit facility was fully utilized
as of March 3, 1997. Having repaid the outstanding bank loan in September 1996,
ARG does not have a working capital facility.
The Company is highly leveraged and is pursuing additional asset sales which
must be consummated in order to enable ARG to repay the required sinking fund
payment of $41.5 million due September 15, 1997 on the Senior Secured Notes. Any
additional asset sale proceeds in excess of the amount required to repay the
Senior Secured Notes in full, together with any proceeds from additional
refinancing, will be used to repay ARG's Subordinated Debt. In the absense of
such a sale, the Company believes it could otherwise restructure its debt. In
addition, the Company expects to obtain a replacement letter of credit facility.
However, there can be no assurance that any such asset sales or refinancing will
be completed on acceptable terms.
The Company's net operating loss carryforwards may be subject to significant
limitations on use or elimination under applicable provisions of the Internal
Revenue Code of 1986,
11
<PAGE> 14
as amended, as a result of changes in ownership of the Company.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Consolidated Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
12
<PAGE> 15
PART III
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:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
<S> <C> <C>
Anwar S. Soliman 59 Chairman, Chief Executive Officer,
Director
Ralph S. Roberts 54 President, Chief Operating Officer,
Director
William J. McCaffrey, Jr. 50 Chief Financial Officer, Vice President,
Treasurer, Assistant Secretary, Director
Wilfred H. Partridge 67 Vice President - Purchasing
Patrick J. Kelvie 45 Secretary and General Counsel
</TABLE>
Officers are elected by the Board of Directors and serve at the discretion of
the board.
Anwar S. Soliman. Mr. Soliman is Chairman, Chief Executive Officer and a
Director of Holdings. He has served as Chairman, Chief Executive Officer and a
Director of ARG 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 is President, Chief Operating Officer and a
Director of Holdings. He has served as a Director of ARG since 1991 and has
served as the President and Chief Operating Officer of ARG since 1986. Mr.
Roberts has over 25 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 is Chief Financial Officer, Vice
President, Treasurer, Assistant Secretary and a Director of Holdings. He has
served as a Director of ARG since 1991 and has served as the Chief Financial
Officer, Vice President, Treasurer and Assistant Secretary of ARG since 1986.
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.
Wilfred H. Partridge. Mr. Partridge has served as Vice President responsible for
purchasing and distribution for ARG since 1986. Mr. Partridge has over 30 years
experience in the restaurant industry encompassing purchasing, production and
distribution, as well as restaurant operations, and was President of Grace
Restaurant Services before joining the Company. Mr. Partridge served as Vice
President of Purchasing, Production and Distribution with Marriott Corporation
(Bob's Big Boy Division) for 19 years. He served as Director of Manufacturing
and Distribution for
13
<PAGE> 16
Foodmaker Company (Jack-in-the-Box) and also operated his own restaurants in the
San Diego area. He received a B.A. in Commercial Science from Benjamin Franklin
University.
Patrick J. Kelvie. Mr. Kelvie is Secretary and General Counsel of Holdings. He
has served as General Counsel of ARG since 1987 and Secretary of ARG since 1989.
From 1987 to 1989, Mr. Kelvie was an Assistant Secretary of ARG. 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.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation for services rendered in
all capacities which ARG paid to or accrued for the Chief Executive Officer and
each of the other four most highly compensated executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
- ------------------------------------------------------------------------ ------------------------- --------------
OTHER NUMBER ALL
ANNUAL RESTRICTED OF OTHER
NAME AND COMPEN- STOCK OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS SATION(b) AWARD(S) SARS PAYOUTS SATION(c)
- ------------------------------------------------------------------------ ---------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Anwar S. Soliman 1996 $1,233,640 $ 0 $ 96,125 - - - $ 24,303
(Chairman and CEO) 1995 1,233,640 0 62,660 - - - 18,002
1994 1,189,580 0 92,635 - - - 17,552
Ralph S. Roberts 1996 704,935 0 48,295 - - - 8,351
(President and COO) 1995 704,935 0 28,230 - - - 8,351
1994 659,907 0 43,400 - - - 5,759
William J. McCaffrey, Jr. 1996 325,000 0 (a) 5,680 - - - 14,846
(Chief Financial Officer) 1995 311,539 30,000 0 - - - 9,571
1994 287,115 35,000 5,425 - - - 9,093
Wilfred H. Partridge 1996 290,000 0 (a) 7,610 - - - 5,754
(Vice President - 1995 279,231 30,000 0 - - - 5,884
Purchasing) 1994 259,692 35,000 7,325 - - - 26,982
Patrick J. Kelvie 1996 175,000 0 (a) 0 - - - 1,312
(Secretary and 1995 175,000 0 0 - - - 1,262
General Counsel) 1994 167,731 0 0 - - - 1,849
</TABLE>
- ----------
(a) Discretionary bonus amounts for Messrs. McCaffrey, Partridge and Kelvie
were not determined as of March 3, 1997.
(b) 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.
(c) Amounts shown in this column for the last fiscal year include the
following: group term life insurance premiums of $24,303, $8,351,
$12,471 and $3,510 for Messrs. Soliman, Roberts, McCaffrey and
Partridge, respectively; and company matching contributions to a 401(k)
plan of $2,375, $2,244 and $1,312 for Messrs. McCaffrey, Partridge and
Kelvie, respectively.
14
<PAGE> 17
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:
<TABLE>
<CAPTION>
BASE TERMINATION
NAME OF INDIVIDUAL CAPACITY IN WHICH SERVED SALARY DATE
- ------------------ ------------------------------------ ------ ----------
<S> <C> <C> <C>
Anwar S. Soliman Chairman and Chief Executive Officer $1,233,640 12/31/97
Ralph S. Roberts President and Chief Operating Officer 704,935 12/31/97
Wilfred H. Partridge Vice President - Purchasing 290,000 12/31/97
</TABLE>
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 severance pay equal to his then salary in the event of disability or
death; in the case of Mr. Roberts, one year's severance pay in the event of
death and salary for the remainder of the calendar year in the event of
disability; in the case of Mr. Partridge, six months severance 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 severance pay if either executive terminates his employment
for cause. None of ARG's employment agreements provides for any salary
obligations in the event of termination by the Company for cause.
STOCK OPTION PLAN
Holdings has adopted a Stock Option Plan for Key Employees (the "Plan")
providing for the grant of non-qualified stock options ("Options") to selected
employees. Holdings has reserved 45,600 shares of common stock for issuance
under the Plan. The Plan is designed, through the award of incentive
compensation, to attract and retain key employees who are in a position to make
a significant contribution to the successful operation of the business of
Holdings and its subsidiaries. The Board of Directors will designate persons to
be granted awards under the Plan, the number of Options to purchase shares to be
granted, and any other conditions relating to the awards as it may deem
appropriate, consistent with the provisions of the Plan.
The Plan provides that the exercise price for Options granted pursuant to the
Plan shall be at least equal to the fair market value of the stock on the date
of grant. Options granted under the Plan shall expire on the earlier of the
tenth anniversary of the date the Option was granted or the 60th day following
termination of the optionee's employment with Holdings or its subsidiaries. The
Options will be exercisable after five years (or such earlier date as may be
specified by the Board of Directors or the Compensation Committee thereof).
Options will not be transferrable (other than by will or the laws of descent and
distribution) and, during the optionee's lifetime, will only be exercisable by
the optionee.
Holders of shares of common stock received pursuant to the Plan will be required
to become a party to the Voting Trust Agreement and a stockholder's agreement
having terms and conditions comparable to those contained in the Common Stock
Subscription Agreements (as herein defined). See "Business" and "Security
Ownership of Certain Beneficial Owners and Management."
SAVINGS PLAN
ARG 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
15
<PAGE> 18
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
$9,500 for 1996). ARG 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 ARG.
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 1996, 100% of ARG matching contributions were vested for Messrs. McCaffrey,
Partridge and Kelvie.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Holdings owns 100% of ARG's outstanding common stock. All of the Holdings'
management stockholders have entered into a voting trust agreement 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 December 31, 2001 or the earlier termination of the Voting Trust Agreement.
As a result, Mr. Soliman is considered the beneficial owner of approximately
82.4% of the outstanding shares of Holdings' common stock (approximately 61% on
a fully diluted basis).
As of March 3, 1997, certain holders of the senior discount debentures held
approximately 18% of the shares of Holdings' common stock (approximately 13% on
a fully diluted basis). Also certain holders of the Subordinated Debt held
warrants of common stock of approximately 26% on a fully diluted basis.
The following table sets forth certain information regarding the beneficial
ownership of Holdings common stock, as of March 3, 1997, 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 Holdings' outstanding common stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
NAME AND ADDRESS(1) OF BENEFICIAL OWNERSHIP OF CLASS
- ------------------- ----------------------- --------
<S> <C> <C>
Anwar S. Soliman 228,577 (1) 33.5%
Roberts Family Limited Partnership 114,266 16.8
William J. McCaffrey, Jr. 28,567 4.2
Wilfred H. Partridge 28,567 4.2
Patrick J. Kelvie 4,563 0.7
Nomura Holding America Inc. 39,358 (2) 5.8
Swiss Bank Corporation 39,355 (2) 5.8
Cerberus Partners, L.P. 35,430 (2) 5.2
Dean Witter, Discover & Co. and
Dean Witter InterCapital Inc. 78,557 (3) 11.5
All directors and officers of the
Company as a group (5 persons) 404,540 59.4
</TABLE>
- ----------
(1) Does not include 187,371 shares of Holdings common stock which Mr.
Soliman is deemed to be the owner of pursuant to the Voting Trust
Agreement.
(2) Represents warrants which are immediately exercisable at a nominal
price per share.
16
<PAGE> 19
None of such warrants are exercisable after July 31, 2001.
(3) Pursuant to a Schedule 13G dated February 13, 1996, Dean Witter,
Discover & Co. and Dean Witter InterCapital Inc. reported holding
78,557 shares the beneficial ownership of which they disclaimed.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
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 F-1.
(c) List of Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Certificate of Incorporation of Holdings, filed with the
Secretary of State of Delaware on September 24, 1993.*
3.2 Certificate of Amendment to Certificate of Incorporation of
Holdings, filed with the Secretary of State of Delaware on
December 10, 1993.*
3.3 By-Laws of Holdings.*
4.1 Indenture, dated as of December 1, 1993, between Holdings and
United States Trust Company of New York.*
4.2 Specimen Certificate of 14% Senior Discount Debentures due
2005, Series A.*
4.3 Specimen Certificate of 14% Senior Discount Debentures due
2005, Series B ("Exchange Debenture").*
4.4 Indenture, dated as of December 1, 1993, between American
Restaurant Group, Inc. ("ARG") and U.S. Trust Company of
California, N.A. (including the form of notes).***
4.5 Shareholders and Registration Rights Agreement, dated as of
December 14, 1993, between Holdings, certain management
stockholders and BT Securities Corporation.*
4.6 Amended and Restated Credit Agreement, dated as of December
13, 1993, among ARG, the subsidiaries of ARG parties thereto,
Bankers Trust Company, as Agent, and the several banks named
thereto.***
4.7 Second Amended and Restated Subordinated Loan Agreement, dated
as of December 14, 1993, between ARG and Merrill Lynch
Interfunding Inc.***
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
4.8 Registration Rights Agreement, dated as of December 14, 1993,
between ARG and Merrill Lynch Interfunding Inc.***
4.9 Stockholders and Registration Rights Agreement, dated as of
December 14, 1993, among Holdings, ARG, the stockholders
parties thereto and Merrill Lynch Interfunding Inc.***
4.10 Warrant Certificate, dated as of December 14, 1993, between
Holdings and Merrill Lynch Interfunding Inc.*
4.11 Indenture, dated as of September 15, 1992, between ARG and
U.S. Trust Company of California, N.A., as Trustee (including
the form of note).**
4.12 Intercreditor Agreement, dated March 20, 1992, among Bankers
Trust Company, as Collateral Agent and as Agent, U.S. Trust
Company of California, N.A., as Trustee, Merrill Lynch
Interfunding Inc., ARG and the Subsidiary Guarantors.**
4.13 Acknowledgment to Intercreditor Agreement, dated as of
December 13, 1993, between the Lenders named therein and U.S.
Trust Company of California, N.A., as Trustee.***
4.14 First Supplemental Indenture, dated as of December 9, 1993,
between ARG and U.S. Trust Company of California, N.A., as
Trustee.***
4.15 Limited Waiver and Fourth Amendment to Amended and Restated
Credit Agreement, dated November 1, 1995, among ARG, the
subsidiaries of ARG parties hereto, Bankers Trust Company, as
Agent, and the several banks named thereto.****
4.16 Limited Waiver and Fifth Amendment to Amended and Restated
Credit Agreement, dated February 27, 1996, among ARG, the
subsidiaries of ARG parties hereto, Bankers Trust Company, as
Agent, and the several banks named thereto.****
4.17 Limited Waiver and Sixth Amendment to Amended and Restated
Credit Agreement, dated August 26, 1996, among ARG, the
subsidiaries of ARG parties hereto, Bankers Trust Company, as
Agent, and the several banks named thereto.*****
4.18 Limited Waiver and Seventh Amendment to Amended and Restated
Credit Agreement, dated September 10, 1996, among ARG, the
subsidiaries of ARG parties hereto, Bankers Trust Company, as
Agent, and the several banks named thereto.*****
4.19 Limited Waiver and Eighth Amendment to Amended and Restated
Credit Agreement, dated February 25, 1997, among ARG, the
subsidiaries of ARG parties hereto, Bankers Trust Company, as
Agent, and the several banks named thereto.*****
4.20 Limited Waiver and Ninth Amendment to Amended and Restated
Credit Agreement, dated February 27, 1997, among ARG, the
subsidiaries of ARG parties hereto, Bankers Trust Company, as
Agent, and the several banks named thereto.*****
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
4.21 Second Supplemental Indenture, dated as of August 28, 1996,
between ARG and U.S. Trust Company of California, N.A., as
Trustee under the Indenture dated as of September 15,
1992.*****
4.22 Third Supplemental Indenture, dated as of January 15, 1997,
between ARG and U.S. Trust Company of California, N.A., as
Trustee under the Indenture dated as of September 15,
1992.*****
4.23 Fourth Supplemental Indenture, dated as of March 13, 1997,
between ARG and U.S. Trust Company of California, N.A., as
Trustee under the Indenture dated as of September 15,
1992.*****
4.24 First Supplemental Indenture, dated as of August 28, 1996,
between ARG and U.S. Trust Company of California, N.A., as
Trustee under the Indenture dated as of December 1, 1993.*****
4.25 Second Supplemental Indenture, dated as of March 13, 1997,
between ARG and U.S. Trust Company of California, N.A., as
Trustee under the Indenture dated as of December 1, 1993.*****
9.1 Common Stock Voting Trust Agreement, dated as of December 14,
1993, among the stockholders named therein and Anwar S.
Soliman, as Voting Trustee.*
10.1 Common Stock Subscription Agreement, dated as of December 14,
1993, between Holdings and Anwar S. Soliman.*
10.2 Common Stock Subscription Agreement, dated as of December 14,
1993, between Holdings and Ralph S. Roberts.*
10.3 Common Stock Subscription Agreements, each dated as of
December 14, 1993, between Holdings and the subscriber party
thereto.*
10.4 Amended and Restated Employment Agreement, dated as of
December 14, 1993, between ARG and Anwar S. Soliman.*
10.5 Amended and Restated Employment Agreement, dated as of
December 14, 1993, between ARG and Ralph S. Roberts.*
10.6 Amended and Restated Employment Agreement, dated as of
December 14, 1993, between ARG and Wilfred H. Partridge.*
10.7 Stock Option Plan for Key Employees of American Restaurant
Group Holdings, Inc.*
21.1 Subsidiaries of Holdings.*
27.1 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only.
</TABLE>
--------------
* Incorporated by reference to the Registrant's Registration
Statement No. 33-74012 on Form S-4 filed with the Securities
and Exchange Commission on January 12, 1994.
19
<PAGE> 22
** Incorporated by reference to ARG'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 ARG's Current Report on Form 8-K
dated December 14, 1993 filed with the Securities and Exchange
Commission on December 30, 1993.
**** Incorporated by reference to ARG's Annual Report on Form 10-K
dated December 25, 1995 filed with the Securities and Exchange
Commission on March 25, 1996.
***** Incorporated by reference to ARG's Annual Report on Form 10-K
dated December 30, 1996 filed with the Securities and Exchange
Commission on April 14, 1997.
20
<PAGE> 23
SIGNATURES
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 HOLDINGS, INC.
By: /s/ANWAR S. SOLIMAN
-----------------------------------
Anwar S. Soliman
Chairman, Chief Executive
Officer and Director
April 11, 1997
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.
<TABLE>
<CAPTION>
SIGNATURE
---------
<S> <C> <C>
/s/ANWAR S. SOLIMAN Chairman, Chief Executive April 11, 1997
- ---------------------------- Officer and Director
Anwar S. Soliman (Principal Executive Officer)
/s/WILLIAM J. MCCAFFREY, JR. Chief Financial Officer, April 11, 1997
- ---------------------------- Vice President, Treasurer,
William J. McCaffrey, Jr. Assistant Secretary and
Director (Principal
Financial and Accounting Officer)
/s/RALPH S. ROBERTS President, Chief Operating April 11, 1997
- --------------------------- Officer and Director
Ralph S. Roberts
</TABLE>
21
<PAGE> 24
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants........................... F-2
Consolidated Balance Sheets as of December 25, 1995
and December 30, 1996..................................... F-3
Consolidated Statements of Operations for the Years Ended
December 26, 1994, December 25, 1995
and December 30, 1996..................................... F-5
Consolidated Statements of Common Stockholders'
Equity for Years Ended December 26, 1994,
December 25, 1995 and December 30, 1996................... F-6
Consolidated Statements of Cash Flows for Years
Ended December 26, 1994, December 25, 1995
and December 30, 1996..................................... F-7
Notes to Consolidated Financial Statements......................... F-8
</TABLE>
F-1
<PAGE> 25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
American Restaurant Group Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of AMERICAN
RESTAURANT GROUP HOLDINGS, INC. (a Delaware corporation) AND SUBSIDIARIES as of
December 25, 1995 and December 30, 1996, and the related consolidated statements
of operations, common stockholders' equity (deficit) and cash flows for the
years ended December 26, 1994, December 25, 1995 and December 30, 1996. 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 generally accepted auditing
standards. 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
Holdings, Inc. and subsidiaries as of December 25, 1995 and December 30, 1996,
and the results of their operations and their cash flows for the years ended
December 26, 1994, December 25, 1995 and December 30, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1.b. and other
notes to the financial statements, the Company has suffered recurring losses
from operations, has a net capital deficit, has a sinking fund payment of $41.5
million due September 15, 1997, and may be required to renegotiate its senior
debt if it cannot meet amended covenants, that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1.b. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
As explained in Note 2. of the financial statements, as required by FAS 121,
effective December 25, 1995, the Company changed its method of accounting for
the impairment of long-lived assets.
ARTHUR ANDERSEN LLP
Orange County, California
February 28, 1997, except certain matters
in Note 4. which date is March 13, 1997
F-2
<PAGE> 26
AMERICAN RESTAURANT GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 25, 1995 AND DECEMBER 30, 1996
ASSETS
<TABLE>
<CAPTION>
December 25, December 30,
1995 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 10,385,000 $ 7,493,000
Accounts receivable, net of
reserve of $777,000 and
$1,041,000 at December 25, 1995
and December 30, 1996,
respectively 7,734,000 7,465,000
Inventories 6,597,000 6,818,000
Prepaid expenses 4,607,000 4,485,000
------------ ------------
Total current assets 29,323,000 26,261,000
------------ ------------
PROPERTY AND EQUIPMENT:
Land and land improvements 52,991,000 6,158,000
Buildings and leasehold
improvements 141,382,000 110,071,000
Fixtures and equipment 90,520,000 84,162,000
Property held under capital
leases 13,067,000 12,375,000
Construction in progress 3,749,000 6,487,000
301,709,000 219,253,000
Less-- Accumulated depreciation 130,679,000 118,084,000
------------ ------------
171,030,000 101,169,000
OTHER ASSETS:
Intangible assets 14,137,000 13,039,000
Deferred debt costs 26,552,000 26,325,000
Leasehold interests 10,176,000 9,946,000
Franchise rights 8,798,000 6,876,000
Liquor licenses and other 3,899,000 6,259,000
Cost in excess of net assets
acquired 14,671,000 13,305,000
------------ ------------
78,233,000 75,750,000
Less-- Accumulated amortization 24,095,000 25,975,000
------------ ------------
54,138,000 49,775,000
Total assets $254,491,000 $177,205,000
============ ============
</TABLE>
(consolidated balance sheets continued on following page)
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 27
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 25, December 30,
1995 1996
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 29,239,000 $ 33,394,000
Accrued liabilities 14,226,000 14,435,000
Accrued insurance 16,694,000 15,848,000
Accrued interest 5,855,000 921,000
Accrued payroll costs 10,171,000 11,059,000
Current portion of obligations
under capital leases 858,000 902,000
Current portion of long-term debt 7,850,000 41,324,000
------------- -------------
Total current liabilities 84,893,000 117,883,000
------------- -------------
LONG-TERM LIABILITIES, net of current portion:
Obligations under capital leases 9,344,000 8,443,000
Long-term debt 273,935,000 207,897,000
------------- -------------
Total long-term
liabilities 283,279,000 216,340,000
------------- -------------
DEFERRED GAIN - 5,806,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
PREFERRED STOCK, $0.01 par value;
10,000 shares authorized, no shares
issued or outstanding
at December 25, 1995 or
December 30, 1996 - -
COMMON STOCKHOLDERS' EQUITY:
Common stock 2,000 2,000
Treasury stock (50,000) (50,000)
Paid-in capital 17,539,000 17,539,000
Accumulated deficit (131,172,000) (180,315,000)
------------- -------------
Total common stockholders'
deficit (113,681,000) (162,824,000)
------------- -------------
Total liabilities and
common stockholders'
equity $ 254,491,000 $ 177,205,000
============= =============
</TABLE>
The accoompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 28
AMERICAN RESTAURANT GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 26, 1994, DECEMBER 25, 1995
AND DECEMBER 30, 1996
<TABLE>
<CAPTION>
Year ended
-------------------------------------------------------
December 26, December 25, December 30,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES $ 460,406,000 $ 445,966,000 $ 445,424,000
------------- ------------- -------------
RESTAURANT COSTS:
Food and beverage 142,828,000 138,270,000 141,032,000
Payroll 136,151,000 134,532,000 137,104,000
Direct operating 108,382,000 110,399,000 114,589,000
Depreciation and amortization 26,723,000 23,171,000 20,791,000
GENERAL AND ADMINISTRATIVE EXPENSES 31,063,000 31,387,000 28,110,000
NON-CASH CHARGE FOR IMPAIRMENT
OF LONG-LIVED ASSETS - 20,178,000 13,205,000
------------- ------------- -------------
Operating profit (loss) 15,259,000 (11,971,000) (9,407,000)
INTEREST EXPENSE, net 34,190,000 35,450,000 37,954,000
------------- ------------- -------------
Loss before provision
for income taxes and
extraordinary loss (18,931,000) (47,421,000) (47,361,000)
PROVISION FOR INCOME TAXES 64,000 75,000 94,000
------------- ------------- -------------
Loss before extraordinary loss (18,995,000) (47,496,000) (47,455,000)
EXTRAORDINARY LOSS ON EXTINGUISHMENT
OF DEBT - - (1,688,000)
------------- ------------- -------------
Net loss $ (18,995,000) $ (47,496,000) $ (49,143,000)
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 29
AMERICAN RESTAURANT GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 26, 1994, DECEMBER 25, 1995
AND DECEMBER 30, 1996
<TABLE>
<CAPTION>
Common Treasury Paid-in Accumulated
Stock Stock Capital Deficit Total
------ -------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 27, 1993 $2,000 $ - $17,539,000 $ (64,681,000) $ (47,140,000)
Net loss - - - (18,995,000) (18,995,000)
------ -------- ----------- ------------- -------------
BALANCE, December 26, 1994 2,000 - 17,539,000 (83,676,000) (66,135,000)
Net loss - - - (47,496,000) (47,496,000)
Purchase of treasury stock - (50,000) - - (50,000)
------ -------- ----------- ------------- -------------
BALANCE, December 25, 1995 2,000 (50,000) 17,539,000 (131,172,000) (113,681,000)
Net loss - - - (49,143,000) (49,143,000)
------ -------- ----------- ------------- -------------
BALANCE, December 30, 1996 $2,000 $(50,000) $17,539,000 $(180,315,000) $(162,824,000)
====== ======== =========== ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 30
AMERICAN RESTAURANT GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 26, 1994, DECEMBER 25, 1995
AND DECEMBER 30, 1996
<TABLE>
<CAPTION>
Year ended
-------------------------------------------------------
December 26, December 25, December 30,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 460,024,000 $ 446,355,000 $ 445,678,000
Cash paid to suppliers and
employees (414,550,000) (413,219,000) (415,679,000)
Interest paid, net (27,800,000) (27,912,000) (32,524,000)
Income taxes paid (62,000) (95,000) (87,000)
------------- ------------- -------------
Net cash provided by (used in)
operating activities 17,612,000 5,129,000 (2,612,000)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (22,178,000) (16,277,000) (13,279,000)
Net (increase) decrease in other
assets 209,000 181,000 (2,455,000)
Proceeds from disposition of assets 508,000 29,000 64,560,000
Sale/leaseback costs included in
deferred gain - - (1,112,000)
------------- ------------- -------------
Net cash provided by (used in)
investing activities (21,461,000) (16,067,000) 47,714,000
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on indebtedness (631,000) (3,877,000) (51,834,000)
Borrowings on indebtedness - 11,000,000 8,906,000
Net increase in deferred debt costs (510,000) (5,000) (4,209,000)
Payments on capital lease
obligations (970,000) (777,000) (857,000)
Purchase of treasury stock - (50,000) -
------------- ------------- -------------
Net cash provided by (used in)
financing activities (2,111,000) 6,291,000 (47,994,000)
------------- ------------- -------------
NET DECREASE IN CASH (5,960,000) (4,647,000) (2,892,000)
CASH, at beginning of period 20,992,000 15,032,000 10,385,000
------------- ------------- -------------
CASH, at end of period $ 15,032,000 $ 10,385,000 $ 7,493,000
============= ============= =============
RECONCILIATION OF NET LOSS TO NET
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net loss $ (18,995,000) $ (47,496,000) $ (49,143,000)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Extraordinary loss on
extinguishment of debt - - 1,688,000
Loss on impairment of long-lived
assets - 20,178,000 13,205,000
Depreciation and amortization 26,723,000 23,171,000 20,791,000
Loss on disposition of assets 2,183,000 684,000 1,610,000
Amortization of deferred gain - - (123,000)
Accretion on indebtedness 6,616,000 7,565,000 10,364,000
(Gain) loss in value of
interest rate swap (661,000) 98,000 -
Gain on extinguishment of debt (550,000) - -
(Increase) decrease in current assets:
Accounts receivable, net (382,000) 389,000 254,000
Inventories (769,000) 1,483,000 (221,000)
Prepaid expenses (1,817,000) (1,288,000) (467,000)
Increase (decrease) in current liabilities:
Accounts payable 5,453,000 (1,706,000) 4,155,000
Accrued liabilities (1,671,000) 870,000 167,000
Accrued insurance (794,000) 2,167,000 (846,000)
Accrued interest (45,000) (125,000) (4,934,000)
Accrued payroll costs 2,321,000 (861,000) 888,000
------------- ------------- -------------
Net cash provided by
(used in) operating
activities $ 17,612,000 $ 5,129,000 $ (2,612,000)
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 31
AMERICAN RESTAURANT GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1994, DECEMBER 25, 1995 AND DECEMBER 30, 1996
1. Summary of Significant Accounting Policies
a. Company
American Restaurant Group Holdings, Inc. ("Holdings"), a Delaware
corporation, was formed in September 1993 to own 100% of the
outstanding common stock of American Restaurant Group, Inc. ("ARG"), a
Delaware corporation. Holdings, through ARG and its subsidiaries
(collectively, the "Company"), operates middle and upper price dinner
houses, casual dining restaurants and fast food restaurants primarily
in California and Texas. At year end 1994, 1995 and 1996, the Company
operated 246, 248 and 247 restaurants, respectively.
b. Significant Risks and Operations
The Company's operations are affected by local and regional economic
conditions, including competition in the restaurant industry, and the
effect that such conditions have on the markets it serves. Due to a
decline in restaurant revenues in 1996, the Company was two weeks late,
but within the grace period, in paying the quarterly interest on its
subordinated debt which was due on December 15, 1996 and expects to be
four weeks late, but within the grace period, in the quarterly payment
due on March 15, 1997. The Company also renegotiated its senior debt
covenants in March 1997 (see Note 4.) and may be required to
renegotiate if it is not in compliance with the amended covenants.
The Company has initiated plans and transactions in 1997 to assist it
in meeting its obligations subsequent to December 30, 1996. The Company
expects to pursue additional asset sales, including the sale of its
Black Angus division, in order to repay its senior secured notes prior
to the required sinking fund payment of $41,456,000 due September 15,
1997. Any additional asset sale proceeds in excess of the amount
required to repay the senior secured notes in full, together with any
proceeds from additional refinancing, will be used to repay the
subordinated debt. In the absence of such a sale, the Company believes
it could otherwise restructure its debt. In addition, the Company
expects to obtain a replacement letter of credit facility. However,
there can be no assurance that any such asset sales or refinancing will
be completed on acceptable terms.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary
should the Company be unable to accomplish its plans.
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.
F-8
<PAGE> 32
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. Related-Party Transactions
In fiscal years 1995 and 1996, the Company had $27,000 and $83,000,
respectively, in net receivables due from certain officers for advanced
expenses.
f. Inventories and Prepaid Expenses
Inventories consist 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 set up as prepaid supplies
and is not depreciated; however, all replacements are expensed.
g. 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 $1,946,000 and $1,215,000 were included in prepaid
expenses at December 25, 1995 and December 30, 1996, respectively.
Advertising expenses included in net loss were $17,644,000, $16,768,000
and $20,870,000 in fiscal years 1994, 1995 and 1996, respectively.
h. Preopening Costs
Costs incurred in connection with opening a new restaurant, principally
occupancy and staff training, are accumulated as prepaid expenses and
amortized over the initial year of operations.
i. 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.). 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:
<TABLE>
<S> <C>
Land improvements 20 years
Buildings 30 to 35 years
Leasehold improvements Life of lease
Fixtures and equipment 3 to 10 years
Property held under capital leases Life of lease
</TABLE>
Substantially all of the Company's assets, including property and
equipment, are pledged as collateral on the senior debt of the Company.
F-9
<PAGE> 33
j. Interest Costs
Interest costs incurred during the construction period of restaurants
are capitalized. The Company capitalized approximately $184,000,
$130,000 and $168,000 for the years ended 1994, 1995 and 1996,
respectively.
k. 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:
<TABLE>
<S> <C>
Intangible assets 3 to 40 years
Deferred debt costs Term of debt
Leasehold interests Life of lease
Franchise rights 35 years
Liquor licenses 40 years
Cost in excess of net assets acquired 40 years
</TABLE>
l. Intangible Assets
The following table details the components of intangible assets
included in the accompanying consolidated balance sheets (in
thousands):
<TABLE>
<CAPTION>
December 25, December 30,
1995 1996
----------- -----------
<S> <C> <C>
Assembled workforce $ 5,556 $ 5,109
Goodwill 3,854 3,502
Trademark/service marks 2,963 2,769
Acquisition costs 1,322 1,209
Other 442 450
------- ------
Total $14,137 $13,039
======= =======
</TABLE>
m. Insurance
The Company self-insures the first $100,000 of its annual medical and
dental benefits per family. The Company also self-insures the first
$100,000 of property damage and the first $250,000 to $350,000 per
incident for general liability, automotive liability and workers'
compensation risks inherent in its operations. Reserves for losses are
established currently based upon estimated obligations.
F-10
<PAGE> 34
n. 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.
o. Franchise Income
The Company franchises fast food restaurants. Franchise fees are
recognized as income as services are rendered. Franchise royalties
based upon a percentage of the franchisees' gross sales are accrued
currently. Revenues include franchise royalties and franchise fees of
$2,483,000, $2,176,000 and $1,995,000, respectively, for the years
ended 1994, 1995 and 1996. There were 59, 55 and 56 franchised
restaurants at year end 1994, 1995 and 1996, respectively.
p. Accounting Period
The Company's fiscal year ends on the last Monday in December. The
years ended 1994 and 1995 included 52 weeks while 1996 included 53
weeks.
q. Reclassifications
Certain prior year accounts have been reclassified to conform to the
current year presentation.
2. Impairment of Long-Lived Assets
Effective December 25, 1995, the Company adopted the provisions of
Financial Accounting Standards Number 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (FAS
121). The new statement changes the method of valuing long-lived assets,
including the Company's intangible assets, whereby long-lived assets are to
be carried at the lower of cost or, if impaired, fair value of the asset,
rather than at original cost less accumulated depreciation. 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 FAS 121, together with the effects of continuing adverse
operations of certain restaurants, resulted in a pre-tax non-cash charge of
$20,178,000 and $13,205,000 for the years ended 1995 and 1996,
respectively.
3. 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.
F-11
<PAGE> 35
The following is a summary of property held under leases that have been
capitalized and included in the accompanying consolidated balance sheets
(in thousands):
<TABLE>
<CAPTION>
December 25, December 30,
1995 1996
----------- -----------
<S> <C> <C>
Property $13,067 $12,375
Less-- Accumulated depreciation 6,650 7,066
------- -------
$ 6,417 $ 5,309
======= =======
</TABLE>
The following represents the minimum lease payments remaining under
noncancelable operating leases and capitalized leases as of December 30,
1996 (in thousands):
<TABLE>
<CAPTION>
Operating Capitalized
Fiscal years ending Leases Leases
--------- -----------
<S> <C> <C>
1997 $ 28,984 $ 1,966
1998 26,823 1,881
1999 25,542 1,791
2000 24,266 1,694
2001 22,999 1,694
Thereafter 252,707 6,639
--------- --------
Total minimum lease payments $ 381,321 15,665
=========
Less -- Imputed interest
(7.75% to 15.5%) 6,320
--------
Present value of minimum lease payments 9,345
Less -- Current portion 902
Long-term portion $ 8,443
========
</TABLE>
Rental expense (including $1,300,000, $1,019,000 and $895,000,
respectively, for contingent rents under operating leases) was $21,823,000,
$22,863,000 and $24,814,000 during 1994, 1995 and 1996, respectively.
4. Long-Term Debt
In 1991, ARG secured financing of $45,000,000 which was subordinated to
existing debt.
In 1992, ARG issued and sold $120,000,000 of senior secured notes. These
notes are due September 15, 1998. Simultaneously with its issuance of the
notes, ARG entered into a senior credit agreement providing for a term loan
of $40,000,000, a revolving credit facility of $11,000,000 and a letter of
credit facility of $15,000,000. ARG used the proceeds to repay existing
debt and to purchase previously issued warrants from the previous lender.
In December 1993, the Company consummated a refinancing which included,
among other things, (a) the private placement by ARG of $50,000,000 of
senior secured notes due September 15, 1998 (the "Note Offering") and (b)
the private placement by Holdings of 88,557 units consisting of $88,557,000
aggregate principal amount of 14% senior discount debentures due 2005 and
88,557 shares of Holdings common stock (the "Debenture Offering") at a
total price of $45,000,000. Substantially all of the net
F-12
<PAGE> 36
proceeds of the Debenture Offering were contributed by Holdings to ARG. The
combined net proceeds from the Note Offering and the Debenture Offering
were used by ARG to repay a portion of ARG's indebtedness and to retire all
of its outstanding preferred stock at a cost which was $42,545,000 less
than its book value. ARG repaid the senior term loan and the outstanding
indebtedness on the revolving credit facility. The existing credit
agreement was also amended and restated for the revolving credit and letter
of credit facilities. In March 1994, the Company consummated a registered
exchange offer whereby ARG exchanged $50,000,000 of its senior secured
notes due September 15, 1998, Series B, for one hundred percent of the
senior secured notes that had been privately placed in the Note Offering
and Holdings exchanged $88,577,000 of its 14% senior discount debentures
due 2005 for one hundred percent of the senior discount debentures that had
been privately placed in the Debenture Offering.
In March 1996, Holdings completed a private placement of its 14% senior
discount debentures due 2005 with a face value of $17,000,000 producing
aggregate proceeds of approximately $7,114,000. Substantially all of the
net proceeds of the offering were contributed by Holdings to ARG. The net
proceeds were used by ARG for general corporate purposes.
In August 1996, ARG's senior secured noteholders consented to an amendment
which increased the interest rate from 12% to 13% and changed interest
payment dates from semi-annual to quarterly beginning December 15, 1996.
The amendment also replaced a net worth covenant with an EBITDA (earnings
before interest, taxes, depreciation and amortization) covenant and
required ARG to consummate asset sales or sale/leaseback transactions prior
to December 31, 1996.
In September 1996, ARG completed a sale/leaseback transaction under which
it sold the real property relating to 24 Stuart Anderson's Black Angus and
Stuart Anderson's Cattle Company restaurants for an aggregate sales price
of $48,080,000 and simultaneously executed long-term leases under which it
will continue to operate the restaurants. The proceeds of the transaction
were used to redeem at par principal senior secured notes of $32,383,000
together with interest thereon; to repay bank debt; to partially cash
collateralize outstanding letters of credit; to pay fees and expenses of
this transaction as well as the above noted consent solicitation and a
portion was retained by ARG to be invested in productive assets within six
months. ARG recorded an extraordinary loss on extinguishment of debt
relating to the write-off of capitalized debt costs in the amount of
$1,095,000. In addition, a $5,929,000 gain related to this sale/leaseback
was deferred and will be amortized over the life of the underlying leases.
In December 1996, ARG completed a sale/leaseback transaction under which it
sold the real property relating to 30 Grandy's restaurants for an aggregate
sales price of $12,500,000 and simultaneously executed a long-term lease
under which it will continue to operate the restaurants. The proceeds of
this transaction were used to redeem at par principal senior secured notes
of $9,543,000 together with interest thereon and to partially cash
collateralize outstanding letters of credit and a portion was retained by
ARG to be invested in productive assets within six months. ARG recorded a
loss of $1,484,000 on the sale of this property and an extraordinary loss
of $593,000 on extinguishment of debt relating to the write-off of
capitalized debt costs.
During 1996, ARG also completed the sale of three additional Grandy's
restaurants and the sale/leaseback of two Spoons restaurants, the proceeds
of which were applied in accordance with the requirements of ARG's debt
instruments. The combined aggregate sales price of these transactions was
$3,918,000.
F-13
<PAGE> 37
In 1997, ARG was in default under a covenant that required certain sales or
sale/leaseback transactions by December 31, 1996. In March 1997, ARG's
senior secured noteholders consented to an amendment which replaced the
EBITDA covenants for the year ended December 30, 1996 and for the four
quarters ended March 31, 1997 with an EBITDA covenant for the twelve months
ended May 31, 1997, reduced the amount of net cash proceeds from asset
sales or sale/leaseback transactions required by December 31, 1996 to
$15,000,000 (which was accomplished) and waived any related existing
defaults or events of default. The amendment provided for an increase of
$10 in the stated principal amount for each $1,000 in stated principal
amount of consenting noteholders. This resulted in an increase of
approximately $1,617,000 in the stated principal amount of the senior
secured notes and $1,200,000 in the actual outstanding principal amount of
the senior secured notes.
Substantially all assets of ARG are pledged to its senior lenders. In
addition, the subsidiaries have guaranteed the indebtedness owed by ARG and
such guarantee is secured by substantially all of the assets of the
subsidiaries. In connection with such indebtedness, contingent and
mandatory prepayments may be required under certain specified conditions
and events. There are no compensating balance requirements. A quarterly
commitment fee of 0.5% per annum is payable on the letter of credit
facility and a quarterly fee of 3.75% per annum is payable on outstanding
letters of credit.
At year end 1995 and 1996, ARG had outstanding letters of credit primarily
related to its self-insurance programs of approximately $14,435,000 and
$12,356,000, respectively.
F-14
<PAGE> 38
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 25, December 30,
1995 1996
------------ -----------
<S> <C> <C>
Senior discount debentures, interest only due
semi-annually beginning June 15, 1999 at 14%,
matures December 15, 2005 $ 59,257 $ 76,637
Senior secured notes, interest only due
semi-annually beginning September 15, 1992 at
12%, amended to 13% beginning August 28, 1996, principal
due September 15, 1998, sinking fund
payment due September 15, 1997 120,000 84,270
Senior secured notes, interest only due semi-annually
beginning March 15, 1994 at 12%, amended to 13%
beginning August 28, 1996, principal due September
15, 1998, sinking fund payment due September 15, 1997 49,671 41,584
Revolving line of credit, interest at the prime rate
plus 1.875% or LIBOR plus 3.25% due quarterly,
paid September 13, 1996 7,500 -
Subordinated note payable, quarterly
principal payments of $5,625,000
due beginning December 31, 1998,
interest only due quarterly at 10.25% 45,000 45,000
Other 357 1,730
-------- --------
281,785 249,221
Less-- Current portion 7,850 41,324
-------- --------
Long-term portion $273,935 $207,897
======== ========
</TABLE>
Maturities of long-term debt during each of the five fiscal years
subsequent to year end 1996 are $41,324,000, $85,104,000, $22,750,000,
$22,781,000 and $315,000.
F-15
<PAGE> 39
5. Income Taxes
On January 1, 1993, the Company adopted, prospectively, FAS 109. The
adoption of this statement had no material effect on the Company's
financial statements.
The Company's provision for income taxes includes the following components
(in thousands):
<TABLE>
<CAPTION>
Year ended
-----------------------------------------
December 26, December 25, December 30,
1994 1995 1996
------------ ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State 64 75 94
--- --- ---
64 75 94
--- --- ---
Deferred:
Federal - - -
State - - -
--- --- ---
--- --- ---
--- --- ---
Provision for income taxes $64 $75 $94
=== === ===
</TABLE>
F-16
<PAGE> 40
The deferred income tax provision resulted from the following temporary
differences in the recognition of revenues and expenses for tax and
financial reporting purposes (in thousands):
<TABLE>
<CAPTION>
Year ended
------------------------------------------
December 26, December 25, December 30,
1994 1995 1996
<S> <C> <C> <C>
Deferred tax liability:
Decrease in liability
reserves $ 841 $ - $ -
Costs capitalized for financial
reporting purposes and
expensed on tax return 283 - 395
Other, net 370 57 113
------- -------- --------
Deferred tax liability 1,494 57 508
------- -------- --------
Deferred tax asset:
Tax depreciation less than
depreciation for financial
reporting purposes (2,850) (1,313) (639)
Long-lived asset impairment
not recognized on tax
return - - (5,426)
Tax gain on sale/leaseback
transaction, net - - (3,759)
Increase in liability
reserves - (1,460) (2,413)
Costs expensed for financial
reporting purposes and
capitalized on tax return - (482) -
Carryover of tax net operating
loss (5,539) (16,519) (17,767)
------- -------- --------
Deferred tax asset (8,389) (19,774) (30,004)
------- -------- --------
Deferred asset, net of
deferred liability (6,895) (19,717) (29,496)
Valuation allowance 6,895 19,717 29,496
------- -------- --------
Net deferred tax liability $ - $ - $ -
======= ======== ========
</TABLE>
F-17
<PAGE> 41
The components of the Company's deferred income tax liability are as
follows (in thousands):
<TABLE>
<CAPTION>
Year ended
----------------------------
December 25, December 30,
1995 1996
----------- ------------
<S> <C> <C>
Deferred tax liability:
Tax depreciation greater than
depreciation for financial
reporting purposes $ 7,639 $ 7,000
Costs capitalized for financial
reporting purposes and
expensed on tax return 4,578 4,973
Other, net 872 985
-------- ---------
Deferred tax liability 13,089 12,958
-------- ---------
Deferred tax asset:
Increase in liability reserves (3,368) (5,781)
Long-lived asset impairment not
recognized on tax return - (5,426)
Tax gain on sale/leaseback
transactions, net - (3,759)
Carryover of tax net operating loss (95,945) (113,712)
-------- ---------
Deferred tax asset (99,313) (128,678)
-------- ---------
Deferred asset, net of deferred
liability (86,224) (115,720)
Valuation allowance 86,224 115,720
-------- ---------
Net deferred tax liability $ - $ -
======== =========
</TABLE>
The effective tax rate differs from the Federal statutory rate of 34
percent as a result of the following items (in thousands):
<TABLE>
<CAPTION>
Year ended
---------------------------------------------
December 26, December 25, December 30,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Federal income tax credit
at statutory rates $(6,437) $(16,123) $(16,677)
State income tax provision
for which no federal
benefit was recorded 42 50 62
Losses for which no federal
benefit was recorded 5,757 14,175 15,661
Permanent items, principally
intangible amortization 702 1,973 1,048
------- -------- --------
Provision for income taxes $ 64 $ 75 $ 94
======= ======== ========
</TABLE>
F-18
<PAGE> 42
At December 30, 1996, the Company had available net operating loss
carryforwards for Federal income tax purposes of $113,712,000, expiring in
2003 to 2011.
6. Commitments and Contingencies
ARG is obligated under employment agreements with certain officers and
employees. Obligations under the agreements are $2,229,000 in 1997, provide
for periodic increases and expire in 1997 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.
7. Preferred Stock
At year end 1995 and 1996, there were 10,000 authorized shares of preferred
stock (one cent par value). There were no issued or outstanding shares.
8. Common Stock
Common stock (one cent par value) authorized, issued and outstanding is as
follows:
<TABLE>
<CAPTION>
December 25, December 30,
1995 1996
------------ ------------
<S> <C> <C>
Shares authorized 1,000,000 1,000,000
Shares issued 513,631 513,631
Shares outstanding 504,505 504,505
Treasury shares 9,126 9,126
</TABLE>
The Chairman and certain other members of the Company's management own all
outstanding shares of Holdings common stock other than shares of Holdings
common stock issued to holders of the debenture units in connection with
the refinancing and rights to acquire shares of Holdings common stock
issuable upon exercise of options and warrants. All such shares owned by
management are subject to a common stock voting trust agreement, in
accordance with which the Chairman and Chief Executive Officer of the
Company exercises all voting and substantially all other rights to which
stockholders would otherwise be entitled until the earlier of December 31,
2001 or the termination of the common stock voting trust agreement.
During 1994, the Company acquired 9,126 shares of treasury stock. No shares
of treasury stock were acquired by the Company in 1995 and 1996.
9. Stock-Based Compensation Plans
The Company adopted a Stock Option Plan for Key Employees (the "Plan"). The
Company accounts for this plan under APB Opinion No. 25, under which no
compensation cost has been recognized. FAS 123 "Accounting for Stock-Based
Compensation" was issued by the FASB in 1995 and, if fully adopted, changes
the methods for recognition of cost on plans similar to those of the
Company. Adoption of FAS 123 is optional; however, pro forma disclosures as
if the Company had adopted the cost recognition method are required for the
periods in which awards are granted. The Company did not award stock
options during the fiscal years ended December 25, 1995 or December 30,
1996.
Under the Plan, the Company may grant options for up to 45,600 shares and
the option exercise price is equal to at least the stock market price on
the date of grant. Vesting provisions for the stock options are determined
by the Board of Directors on
F-19
<PAGE> 43
a per-grant basis.
A summary of the status of the Company's stock option plan at December 25,
1995 and December 30, 1996 and changes during the years then ended is
presented in the table and narrative below:
<TABLE>
<CAPTION>
December 26, 1994 December 25, 1995 December 30, 1996
--------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year 26,700 $ 17.98 21,572 $ 17.98 21,572 $ 17.98
Granted 4,000 17.98 - - - -
Exercised - - - - - -
Forfeited (9,128) 17.98 - - (9,128) 17.98
Expired - - - - - -
------ -------- ------ -------- ------ -------
Outstanding at
end of year 21,572 $ 17.98 21,572 $ 17.98 21,444 $ 17.98
====== ======= ====== ======= ====== =======
</TABLE>
Options outstanding at December 30, 1996, none of which are exercisable,
have an exercise price of $17.98 with a weighted average remaining
contractual life of approximately 6 years.
F-20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 30, 1996 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS ON FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-30-1996
<PERIOD-START> DEC-26-1995
<PERIOD-END> DEC-30-1996
<CASH> 7,493,000
<SECURITIES> 0
<RECEIVABLES> 8,506,000
<ALLOWANCES> 1,041,000
<INVENTORY> 6,818,000
<CURRENT-ASSETS> 26,261,000
<PP&E> 219,253,000
<DEPRECIATION> 118,084,000
<TOTAL-ASSETS> 177,205,000
<CURRENT-LIABILITIES> 117,883,000
<BONDS> 0
0
0
<COMMON> 2,000
<OTHER-SE> (162,826,000)
<TOTAL-LIABILITY-AND-EQUITY> 177,205,000
<SALES> 445,424,000
<TOTAL-REVENUES> 445,424,000
<CGS> 141,032,000
<TOTAL-COSTS> 413,516,000
<OTHER-EXPENSES> 41,315,000
<LOSS-PROVISION> 332,000
<INTEREST-EXPENSE> 37,954,000
<INCOME-PRETAX> (47,361,000)
<INCOME-TAX> 94,000
<INCOME-CONTINUING> (47,455,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,688,000)
<CHANGES> 0
<NET-INCOME> (49,143,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
