ITEM 1. BUSINESS
INTRODUCTION
American Restaurant Group, Inc., a Delaware corporation (the "Company"), through its subsidiaries, competes predominately in the midscale segment of the United States restaurant industry. The Company was formed on August 13, 1986 to acquire certain operations of Saga Corporation, a wholly owned subsidiary of Marriott Corporation (the "Acquisition"). The Acquisition was completed in February 1987. (Prior to the completion of the Acquisition, the Company had no significant operations.) The Company is a subsidiary of American Restaurant Group Holdings, Inc., a Delaware corporation ("Holdings").
As of December 25, 2000, there were three wholly owned direct subsidiaries of the Company: ARG Enterprises, Inc., ARG Property Management Corporation, and ARG Terra, Inc. ARG Enterprises, Inc. is the parent to one wholly owned subsidiary, Black Angus Enterprises of Idaho, Inc.
The only operating segment is Black Angus, which operates a western-style steakhouse specializing in steak and prime rib. In June 2000, the Company sold all of the stock (the "Stock Sale") of four wholly owned subsidiaries (Grandy's, Inc., Spoons Restaurants. Inc., Spectrum Foods, Inc., and Local Favorite, Inc., collectively, the "Non-Black Angus Subsidiaries") to Spectrum Restaurant Group, Inc. ( formerly known as NBACo, Inc.; see discussion in Item 7 Net Income (Loss) from Discontinued Operations and Item 13 Certain Relationships and Related Transactions).
OVERVIEW
As of December 25, 2000, Black Angus operated 105 Stuart Anderson's Black Angus and Stuart Anderson's Cattle Company steakhouses located primarily in California, the Pacific Northwest, and Arizona. The chain was founded in Seattle in 1964. Black Angus restaurants are typically located in highly visible and heavily traveled areas in or near retail and commercial businesses. The restaurants are generally freestanding and range in size from 6,000 to 12,000 square feet, seating approximately 220 to 350 customers. Black Angus restaurants are distinctly Western in their design and feature booth seating for dining. They are generally open for lunch from 11:30 a.m. to 4:00 p.m. and for dinner from 4:00 p.m. to 10:00 p.m.
As of December 28, 1992, Black Angus operated 66 in-restaurant lounges that offered disc jockeys, dancing, and a focus on the sale of alcoholic beverages during the after-dinner and late-night time periods. While the late-night entertainment business generated favorable profit margins in isolation, management was concerned that this business negatively affected visits by its core customers. Black Angus began limiting its late-night entertainment business in 1992 and subsequently, between 1994 and 1999, phased out its late-night entertainment business in 4 to 19 restaurants per year. By year-end 1999, Black Angus completed its plan to exit the late-night entertainment business. Most of the dance floors and lounge areas in the restaurants were remodeled to include additional seating or an open waiting area.
Once the Company decided to phase out its late-night entertainment business, it developed a new restaurant prototype eliminating the dance floor and the lounge area. This new prototype is smaller, approximately 6,700 square feet, and offers the same number of dining seats as the existing restaurants. The Company opened 20 restaurants using the new restaurant prototype since 1995, including 3 in late 2000. The Company intends to continue to expand Black Angus using the new prototype in existing and adjacent markets.
RESTAURANT OPERATIONS
Black Angus is organized functionally with separate operations, marketing, accounting, finance/treasury, real estate/risk management, human resources/payroll, and legal departments.
The Company's cash management system is highly sophisticated with controls down to the server level. Restaurants are required to make daily deposits of cash and the Company uses a centralized cash-concentration system that sweeps all of its cash accounts on a daily basis. The central accounts payable and check-writing system profiles approximately 6,400 vendors.
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 and corporate levels. The Company contracts for payroll services and for mainframe-based data processing.
Each restaurant is staffed with a General Manager who is directly responsible for the operation of the restaurant, including product quality, cleanliness, service, inventory, cash control, and the appearance and conduct of employees. Each restaurant also has one or two restaurant Managers and a Chef. Managers and supervisory personnel train other restaurant employees in accordance with detailed procedures and guidelines.
General Managers are supervised by District Managers, each of whom is responsible for approximately eight restaurants. District Managers, General Managers, Managers, and Chefs are eligible for bonuses under an extra-compensation program that has goals and objectives based on the profitability, sales, and other factors relating to the restaurants.
PURCHASING AND DISTRIBUTION
To ensure standards of quality and to maximize pricing efficiencies, a central purchasing department coordinates the supply of almost all restaurant items. The Company purchases products throughout the United States and abroad through agreements with various food-service vendors. None of the Company's vendors supplies the Company exclusively and no material agreements exist. The Company routinely uses public, cold-storage facilities and makes short-term forward commitments in order to establish the availability and price of key food items such as beef and seafood. In order to achieve more favorable terms, the Company concentrates its distribution but believes that it could replace any distributor, if necessary, on a timely basis.
COMPETITION AND MARKETS
All aspects of the restaurant business are highly competitive. Price, restaurant location, food quality, service, and attractiveness of facilities are important aspects of competition. The competitive environment is often affected by factors beyond a particular restaurant management's control, including changes in the public's taste and eating habits, population and traffic patterns, and economic conditions. The Company's restaurants compete with a wide variety of restaurants, ranging from national and regional restaurant chains to locally owned restaurants. Competition from other restaurant chains typically represents the more important competitive influence, principally because of their significant marketing and financial resources. Many of the Company's competitors have substantially greater financial, marketing, personnel, and other resources than the Company. In addition, competition is not limited to a particular segment of the restaurant industry because fast-food restaurants, steakhouses and casual-dining restaurants are all competing for the consumer's dining dollars. The Company believes that its principal competitive strengths lie in the distinctive atmosphere and food presentation offered; the value, variety, and quality of food products served; the quality and training of its employees; the experience and ability of its management; and the economies of scale enjoyed by the Company because of its size and geographic concentration. The Company monitors consumer tastes and adjusts and updates its menus accordingly.
EMPLOYEES
At December 25, 2000, the Company employed approximately 9,200 persons, of whom approximately 8,700 were hourly employees in restaurants, approximately 450 were salaried employees in restaurants (Managers and Chefs), and approximately 75 were hourly and salaried employees in divisional and corporate management and administration. Approximately 58% of the hourly restaurant employees work on a part-time basis (25 hours or less per week). No facility is unionized. The Company believes it provides competitive compensation and benefits to its employees and that its employee relations are good.
REGULATIONS
Each restaurant is subject to licensing and regulation by state and local health, sanitation, safety, fire, and other departments. In addition, each restaurant 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. Many of the Company's restaurant employees are paid at rates related to the Federal and state minimum-wage rates. Accordingly, increases in the minimum wages increase the Company's labor costs.
SERVICE MARKS
The Company regards its service marks and trademarks as important to the identification of its restaurants and believes they have significant value in the conduct of its business. The Company has registered various service marks and trademarks with the United States Patent and Trademark Office. In addition, certain marks have been registered in the state of California, in various other states, and in certain foreign countries.
SEASONALITY
The Company's restaurant revenues and profitability are not subject to significant seasonal fluctuations.
ITEM 2.
ITEM 2. PROPERTIES
The following table sets forth, as of December 25, 2000, the number of properties owned or leased by the Company:
Most of the Company's restaurants are freestanding and range from approximately 6,000 to 12,000 square feet. 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.
The Company leases office space for its corporate and Black Angus headquarters in Los Altos, and also leases office space in Santa Ana, California.
The following table sets forth, as of December 25, 2000, the number of Black Angus restaurants by state of operation:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various litigation incidental to its business, including claims arising out of personal injuries, employment practices, workers' compensation cases, and contract lawsuits. The claims sometimes assert substantial damages. Based on information presently available, management does not believe that the outcome of such litigation will have a material adverse effect on the Company's financial position, business, or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
No matters were submitted to a vote of the stockholders of the Company in the fourth quarter of 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
As of February 26, 2001, there were five holders of record of the 128,081 outstanding shares of the Company's common stock. The Company has never paid dividends to its common stockholders and has no plans to do so. There is currently no market for the Company's common stock, nor is such anticipated in the near future.
CUMULATIVE PREFERRED STOCK, MANDATORILY REDEEMABLE
As of February 26, 2001, there were five holders of record of the 50,953 outstanding shares of the Company's cumulative preferred stock. Dividends accrue at a rate of 12% to 15% per annum, payable semiannually on February 15 and August 15 of each year. The Company may, at its option, pay dividends in cash or in additional shares of cumulative preferred stock.
A stock dividend of 2,499 shares was made on February 15, 2000. In the second quarter of 2000, the Company agreed to an interpretation of the financial covenants used to determine the dividend rate. The result was an increase in the dividend rate from 12% to 15% and additional dividends issued on August 15th of 2,503 shares (relating to holders at August 1999 and February 2000). Stock dividends of 5,872 (including the adjustment) and 3,618 shares were made on August 15, 2000 and February 15, 2001, respectively.
There is currently no market for the Company's cumulative preferred stock, nor is such anticipated in the near future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data is for the year-end 2000 and each of the four prior fiscal years is derived from the audited consolidated financial statements of the Company, 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.
(1) The Company's obligations under its 11.5% senior secured notes due 2003 (the "Notes") and its revolving credit facility ("Credit Facility") are guaranteed by each of its direct subsidiaries (the "Subsidiary Guarantors"). Separate financial statements of the Subsidiary Guarantors are not included in this Form 10-K because the Subsidiary Guarantors are unconditionally jointly and severally liable for the obligations of the Company under the Notes pursuant to such guarantees. The aggregate net assets, earnings, and equity of such Subsidiary Guarantors are substantially equivalent to the net assets, earnings, and equity of the Company on a consolidated basis.
(2) The year ended December 30, 1996 included 53 weeks.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
YEARS ENDED DECEMBER 28, 1998, DECEMBER 27, 1999, AND DECEMBER 25, 2000:
REVENUES. Black Angus revenues were $265.5 million in 1998, decreased 0.7% to $263.6 million in 1999, and then increased 13.8% to $299.8 million in 2000. The decrease in 1999 was primarily due to a $3.9 million decrease from three restaurants that closed at the end of their leases and a $3.7 million decrease due to the discontinuation of late-night entertainment at four restaurants. These decreases were partially offset by a $2.1 million increase in same-store-sales (excluding late-night entertainment) and a $3.6 million increase resulting from the addition of three new restaurants in the second half of 1999. The increase in 2000 was due to a combination of strong same-store sales and strong new-store performance. Same-store-sales increased 11.4% in 2000 and the new stores contributed 2.4% to the total sales increase. There were 101, 102, and 105 stores operating at the end of 1998, 1999, and 2000, respectively.
FOOD AND BEVERAGE COSTS. As a percentage of revenues, food and beverage costs were 33.7% in 1998, decreased to 33.4% in 1999, and increased to 34.5% in 2000. The increase in 2000 relates primarily to higher meat and seafood costs.
PAYROLL COSTS. As a percentage of revenues, labor costs were 28.2% in 1998, increased to 28.5% in 1999, and then decreased to 27.6% in 2000. The decrease in 2000 is primarily from leveraging costs over a higher Black Angus sales base.
DIRECT OPERATING COSTS. Direct operating costs consist of occupancy, advertising, and other expenses incurred by individual restaurants. As a percentage of revenues, these costs were 23.8% in 1998, 23.9% in 1999, and 23.3% in 2000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization consists of depreciation of fixed assets used by individual restaurants and at the division and corporate office, as well as amortization of intangible assets. As a percentage of revenues, depreciation and amortization were 3.8% in 1998, decreased to 3.6% in 1999, and then decreased to 3.2% in 2000. The decrease in 2000 was primarily related to corporate assets not retained by the Company pursuant to the Stock Sale and leveraging costs over a higher sales base.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as a percentage of revenues were 4.4% in 1998, 4.5% in 1999, and 3.7% in 2000. The decrease in 2000 was primarily due to a $1 million decrease in corporate overhead resulting from the Stock Sale and reduction of other overhead expenses.
NON-CASH CHARGE FOR IMPAIRMENT OF LONG-LIVED ASSETS. During 1998 certain assets, including fixed assets and related intangible assets, were revalued at less than their historic costs and resulted in a non-cash charge of $.1 million. A similar non-cash charge of $0.5 million was recorded in 1999. There was no similar charge required for 2000.
OPERATING PROFIT FROM CONTINUING OPERATIONS. As a result of the items discussed above, operating profit was $15.8 million in 1998, $15.5 million in 1999, and then improved to $23.3 million in 2000.
INTEREST EXPENSE - NET. Interest expense was $20.3 million in 1998, decreased to $19.5 million in 1999, and then decreased to $19.0 million in 2000. The weighted-average interest rate on Company borrowings was 11.7%, 11.3%, and 11.5% for 1998, 1999, and 2000, respectively. Average borrowings (excluding capitalized lease obligations) was $161.6 million in 1998, decreased to $160.1 million in 1999, and decreased to $144.1 million in 2000. The reduction in 2000 was the result of a $16.0 million principal payment on the Notes in December.
INCOME TAXES. Provision for income taxes increased from $67,000 in 1998 to $70,000 in 1999, and then increased to $185,000 in 2000. The provisions represent the amounts provided for certain minimum Federal and state income taxes.
INCOME / (LOSS) FROM DISCONTINUED OPERATIONS. The following chart summarizes the calculation of the net income / (loss) for the years ended 1998, 1999, and 2000.
EXTRAORDINARY GAIN (LOSS). The Company recognized an extraordinary gain of $9.6 million on the extinguishment of debt concurrent with a related refinancing of the Company's debt in February 1998. There were no extraordinary gains or losses in 1999. The Company made a prepayment of principal of $16 million in December 2000, and recorded an extraordinary loss of $473,000 to write off the related unamortized deferred financing costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flows 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 25, 2000, the Company had cash of approximately $8.5 million.
In general, restaurant businesses do not have significant accounts receivable because sales are made for cash or by credit-card vouchers, which are ordinarily paid within three to five days. The restaurants 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 25, 2000, the Company had a working capital deficit of $29.4 million.
The Company estimates that capital expenditures of $3.0 million to $6.0 million are required annually to maintain and refurbish its existing restaurants. Other capital expenditures, which are generally discretionary, are primarily for the construction of new restaurants and for expanding, reformatting, and extending the capabilities of existing restaurants and for general corporate purposes. Total capital expenditures for continuing operations were $7.9 million in 1998, $6.2 million in 1999, and $7.9 million in 2000. The Company estimates that capital expenditures in 2001 will be approximately $12.0 million. The Company intends to open new restaurants with small capital outlays and to finance most of the expenditures through mortgages on capital equipment.
As a result of the Notes, the Company is obligated to make semiannual interest payments on February 15 and August 15 through February 2003. Accordingly, the Company made total interest payments of $18.9 million during 2000. In December 2000, the Company paid $16 million plus accrued interest of $.7 million on the Notes, reducing the outstanding balance to $142.6 million. There is an additional $1.9 million in recorded long-term debt that relates to mortgages/loans on capital equipment.
On June 28, 2000, the Company amended the terms of the Credit Facility to reduce the aggregate commitment of the lenders from $15 million to $12 million, to reduce the amount available for issuances of letters of credit from $10 million to $7 million, and to extend the maturity date from February 25, 2001 to June 30, 2002. On December 25, 2000, letters of credit were the only drawing under the Credit Facility, with $6.5 million remaining under the Credit Facility.
A stock dividend of 2,499 shares was paid on February 15, 2000. In the second quarter of 2000, the Company agreed to an interpretation of the financial covenants used to determine the dividend rate. The result was an increase in the dividend rate from 12% to 15% and additional dividends issued on August 15th of 2,503 shares (relating to holders at August 1999 and February 2000). Stock dividends of 5,872 (including the adjustment) and 3,618 shares were made on August 15, 2000 and February 15, 2001, respectively.
Substantially all assets of the Company are pledged to its senior lenders. In addition, the Subsidiary Guarantors guaranteed the indebtedness owed by the Company and such guarantees are secured by substantially all of the assets of the subsidiaries. In connection with such indebtedness, contingent and mandatory prepayments may be required under certain specified conditions and events. There are no compensating balance requirements.
Although the Company is highly leveraged, based upon current levels of operations and anticipated growth, the Company expects that cash flows generated from operations together with its other available sources of liquidity will be adequate to make required payments of principal and interest on its indebtedness, to make anticipated capital expenditures, and to finance working capital requirements for the next several years. However, the Company does not expect to generate sufficient cash flows from operations in the future to fully pay the Notes upon maturity and, accordingly, it expects to refinance all or a portion of such debt, obtain new financing, or possibly sell assets.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") Number 133, "Accounting for Derivative Instruments and Hedging Activities," issued in June 1998, establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 137, "Accounting for Derivative and Hedging Activities -Deferral of the Effective Date of FASB Statement No. 133," issued in June 1999, defers the effective date of SFAS No. 133 until the Company's first quarter financial statements in fiscal 2001. The Company is currently not engaged in hedging activities, but will apply the requirement of this statement when and if it becomes appropriate.
MARKET RISK EXPOSURE
The Company is generally not exposed to market risks related to fluctuations in interest rates because the Notes and cumulative preferred stock are at fixed rates. Changes in interest rates affect the fair market value of fixed-rate debt, but not the Company's earnings or cash flows. Interest-rate risk and changes in fair market value would not have a significant impact on its fixed-rate debt until the Company undertakes a refinancing.
The Company is exposed to market risks related to fluctuations in interest rates on short-term borrowings on its Credit Facility. Although the Company may borrow on its revolver from time to time, no amounts were outstanding at year end. Even if the entire Credit Facility were utilized for the entire year, a one-percentage point increase in interest rates would only result in an increase in interest expense of approximately $120,000.
The Company does not utilize interest rate swaps, forward or option contracts on foreign currencies or commodities, or other types of derivative financial instruments. The Company does not believe future market rate risks will have a material impact on the Company or the results of its future operations, apart from changes in interest rates upon a refinancing.
IMPACT OF INFLATION
Although inflationary increases in food, labor, or operating costs could adversely affect operations, the Company has generally been able to offset increases in cost through price increases, labor scheduling, and other management actions.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are forward-looking regarding cash flows from operations, restaurant openings, capital requirements, and other matters. These forward-looking statements involve risks and uncertainties and, consequently, could be affected by general business conditions, the impact of competition, governmental regulations, and inflation.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Consolidated Financial Statements on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about the Company's current directors and each of its executive officers and key management personnel:
Officers are elected by the Board of Directors and serve at the discretion of the Board.
GEORGE G. GOLLEHER. Mr. Golleher was elected as a Director of the Company in 1998 and as Chairman of the Board in 2000. Mr. Golleher previously served as President and Chief Operating Officer and as a Director, of Fred Meyer, Inc. from May 1998 to June 1999. Prior to that, Mr. Golleher was the Chief Executive Officer and a Director of Ralphs Grocery Company from June 1995 until its merger with Fred Meyer Inc. in May 1998. Mr. Golleher was a Director of Food 4 Less Supermarkets, Inc. since its inception in 1989 and was the President and Chief Operating Officer of Food 4 Less Supermarkets, Inc. from January 1990 until its merger with Ralphs. Mr. Golleher serves as a Director of Furr's Supermarkets, Inc. and Cyrk, Inc.
RALPH S. ROBERTS. Mr. Roberts became the Chief Executive Officer of the Company in 2000. He has served as a Director of the Company since 1991 and has served as the President and Chief Operating Officer of the Company since 1986. Mr. Roberts has over 30 years of experience in the restaurant industry. Before joining the Company, he was Deputy Group Executive of Operations of the Grace Restaurant Group and Vice President of W.R. Grace & Co. ("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.
PATRICK J. KELVIE. Mr. Kelvie has served as General Counsel of the Company since 1987 and Secretary of the Company since 1989. Mr. Kelvie became a Vice President of the Company in 1998 and Treasurer in 2000. From 1987 to 1989, Mr. Kelvie was an Assistant Secretary of the Company. Between 1978 and 1987, Mr. Kelvie held various legal counsel positions for Saga Corporation, predecessor owner of Black Angus. Mr. Kelvie received an A.B. from the University of California at Berkeley and a J.D. from Harvard Law School.
ANWAR S. SOLIMAN. Mr. Soliman has served as a Director of the Company from its organization in 1986. Mr. Soliman served as Chairman and Chief Executive Officer from 1986 until June 2000. Mr. Soliman is now the Chief Executive Officer of Spectrum Restaurant Group, Inc., which acquired certain restaurant subsidiaries from the Company in June 2000. Prior to 1986, Mr. Soliman was Executive Vice President of 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. Mr. Soliman received both a B. Commerce and an M.B.A. from Alexandria University and a Ph.D. from New York University.
ROBERT D. BEYER. Mr. Beyer has served as a Director of the Company since 1998. Mr. Beyer is President of Trust Company of the West ("TCW") where he has been employed since 1995. Mr. Beyer was Co-Chief Executive Officer of Cresent Capital Corporation, a registered investment advisor, from 1991 until its acquisition by TCW in 1995. From 1986 to 1991, Mr. Beyer was a member of the Investment Banking Department of Drexel Burnham Lambert, Incorporated. From 1983 to 1986, Mr. Beyer was a member of the Investment Banking Department of Bear, Stearns & Co., Inc. Mr. Beyer is also a Director of TCW and The Kroger Co., and a commissioner of the Los Angeles City Employees Retirement System.
M. BRENT STEVENS. Mr. Stevens has served as a Director of the Company since 1999. Mr. Stevens is an Executive Vice President of the Corporate Finance Department of Jefferies & Company, Inc., where he has served since 1990. From 1989 to 1990, Mr. Stevens was a member of the Investment Banking Department of Drexel Burnham Lambert, Incorporated.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation for services rendered in all capacities that the Company paid to, or accrued for, the Chief Executive Officer and each of the executive officers.
SUMMARY COMPENSATION TABLE
- ---------------- (a) Amounts shown in this column for the last fiscal year include the following: group term life insurance premiums of $15,608 and 7,731 for Mssrs. Roberts and McCaffrey, respectively.
(b) Amounts shown in this column for the last fiscal year includes auto allowance for Mssrs. Roberts, Kelvie, Soliman, and McCaffrey. Amounts also include Company matching contributions to a 401(k) plan for Mssrs. Kelvie and McCaffrey. Amounts shown include severance and vacation payments of $281,322 for Mr. Soliman and $407,500 for Mr. McCaffrey.
Amounts shown in 2000 are for a partial year, for Mssrs. Soliman, McCaffrey, and Di Lillo.
EMPLOYMENT AGREEMENTS
The following table sets forth, with respect to any 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:
The agreement provides, among other things, for adjustments to the base salary and automatic extension of the termination date. The agreement also provides for certain other benefits including one year's pay in the event of death and salary for the remainder of the calendar year in the event of disability. The employment agreement provides for six months' pay if he terminates his employment for cause. The employment agreement does not provide for any salary in the event of termination by the Company for cause.
There is a consulting agreement with George G. Golleher, Chairman and Director, in effect until 08/31/01. The agreement provides for monthly payments for consulting services and expenses for a total amount of $232,000 for the period from January 1, 2001 through August 31, 2001. The agreement is terminable without cause by either party upon 90 days' notice.
SAVINGS PLAN
The Company currently has the American Restaurant Group Savings and Investment Plan (the "Savings Plan"), which is a 401(k) plan established for the benefit of employees who satisfy certain requirements. These requirements include completion of one year of service with a minimum of 1,000 hours worked. Subject to applicable limits imposed on tax-qualified plans, eligible employees may elect pre-tax contributions up to 20.0% of a participant's total earnings for a calendar year (but not in excess of $10,500 for 2000). The Company makes matching contributions to the Savings Plan equal to 25% of the participant's contributions up to 6% of the participant's earnings. A participant is entitled to a distribution from the Savings Plan upon termination of employment and any such distribution will be in a lump-sum form. Distributable benefits are based on the value of the participant's individual account balance that is invested at the direction of the participant in one or a combination of six investment funds, none of which include investments in the Company. Under certain circumstances, a participant may borrow amounts held in his account under the Savings Plan. Based upon the Savings Plan vesting schedule, as of 2000, 100% of the Company matching contributions were vested for Mr. Kelvie.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership of the Company's common stock (as if all outstanding warrants were exercised), as of February 26, 2001, by (i) each of the Company's directors, (ii) the Chief Executive Officer and certain other highly compensated executive officers of the Company, (iii) all executive officers and directors as a group, and (iv) each person believed by the Company to own beneficially more than 5% of the Company's outstanding common stock. Pursuant to a voting trust agreement, Anwar S. Soliman controls Holdings and,accordingly, together with his direct ownership of common stock and the New Voting Trust Agreement (as described below), effectively controls the voting of all (without giving effect to the exercise of any outstanding warrants) the outstanding common stock, subject to the terms of the Securityholders Agreement (as described below).
(1) Gives effect to the exercise of all outstanding warrants.
(2) Does not include 12,515 shares of the common stock that Mr. Soliman is deemed to be the owner of pursuant to the New Voting Trust Agreement.
(3) Does not include shares deemed to be beneficially owned by the TCW Investors (as defined herein). Robert D. Beyer is a President of TCW, of which TCW Group (see footnote (8) below) and the TCW Investors are affiliates. Mr. Beyer shares investment power for the following TCW Investors: TCW Shared Opportunity Fund II L.P., TCW Leveraged Income Trust, L.P., and TCW Shared Opportunity Fund IIB, LLC. See footnote (7) below.
(4) George G. Golleher was elected Director of the Company, as nominee of the TCW Investors.
(5) Does not include shares deemed to be beneficially owned by Jefferies & Company, Inc.
(6) Anwar S. Soliman owns 228,577 shares of Holdings common stock, representing 49.2% of the outstanding common stock of Holdings. In addition, Mr. Soliman is deemed to be the owner, pursuant to the Voting Trust Agreement, of an additional 147,396 shares of Holdings common stock, representing 80.9% of the outstanding common stock of Holdings.
(7) TCW Shared Opportunity Fund II., L.P., TCW Leveraged Income Trust, L.P., Brown University and TCW Shared Opportunity Fund IIB , LLC.
(8) Represents warrants that are immediately exercisable at a nominal price per share. Includes warrants beneficially owned by the TCW Investors and of which TCW Asset Management Company and certain affiliates, which control voting and investment power in their capacity as general partner, investment manager, or manager of the TCW Investors (the "TCW Group"), disclaim beneficial ownership.
Both of the Company's present management stockholders and the other stockholders (collectively, the "Management Shareholders") entered into a voting trust agreement (the "New Voting Trust Agreement") dated February 25, 1998 in accordance with which Anwar S. Soliman, Director, exercises, as voting trustee, all voting and substantially all other rights to which such shareholders would otherwise be entitled until the earlier of August 15, 2005 or the earlier termination of the New Voting Trust Agreement. As a result, Mr. Soliman is considered the beneficial owner of approximately 86.2% of the outstanding shares of Company's common stock (approximately 47.4% on a diluted basis). In addition, the Management Shareholders entered into other agreements pursuant to which such holders were granted registration rights substantially identical to the rights granted to the holders of the warrants pursuant to the Securityholders' Agreement (as described below.) Each of the Management Shareholders is also party to a subscription agreement with Holdings, which provides such stockholder certain rights with respect to shares of Holdings common stock held by such stockholder.
As of February 26, 2001, holders of the Company's preferred stock held warrants for 40% of the common stock on a diluted basis.
SECURITYHOLDERS AGREEMENT
In connection with the February 1998 recapitalization plan, each of Holdings, the Management Shareholders, Jefferies & Company, Inc. (the "Initial Purchaser" of the Notes), and TCW Shared Opportunity Fund II, L.P., TCW Leveraged Income Trust, L.P., Brown University, and TCW Shared Opportunity Fund IIB, LLC (collectively, the "TCW Investors"), and TCW Asset Management Company entered into a securityholders' agreement concerning the Company (the "Securityholders Agreement"). The Securityholders Agreement provides that the parties will agree to vote all of their shares of the Company's equity securities so that the composition of the Company's Board of Directors consists of five members, two of whom will be management nominees, two of whom will be nominees of the TCW Investors, and one of whom, the remaining director, will be an independent director designated by the Initial Purchaser; provided that after the date that is 45 days after the date upon which underwritten primary public offerings of common stock of the Company pursuant to effective registration statements under the Securities Act have resulted in 35% of the Company's common stock (measured on a fully diluted basis after giving effect to such offerings) being sold to the public and in the Company's common stock being listed for trading on any of the New York Stock Exchange, the NASDAQ National Market, or the American Stock Exchange (the "Public Company Date"), the TCW Investors and management will mutually choose the Remaining Director and the Initial Purchaser will no longer have any right to designate a director. The Securityholders Agreement does not limit the rights of the holders of the preferred stock under the Certificate of Designation to elect additional directors to serve on the Company's Board of Directors in certain circumstances.
The Securityholders Agreement also provides that (i) in the event that Holdings sells or transfers any of its shares of Company equity securities, directly or indirectly, TCW Investors will have the option to include its Company equity securities in such sale or transfer on the same terms as Holdings' sale or transfer, (ii) TCW investors will have a right of first refusal with respect to any sale of equity securities by the Company or a party to the Securityholders Agreement (other than Management Shareholders) to purchase the equity securities being sold; and (iii) TCW Investors have the nontransferable right to approve certain major corporate transactions concerning the Company, including mergers and consolidations, sales of any capital stock of the Company's subsidiaries, a sale of a material amount of the assets and properties of the Company, transactions with affiliates, and amendments to the Company's Certificate of Incorporation and Bylaws. In addition, the Securityholders Agreement provides that certain of the TCW Investors' purchasers will receive payments from the Company with respect to withholding obligations as a result of their ownership of the preferred stock, which amount shall not exceed $125,000 per year. No such payments were made by the Company in 2000. None of the rights under the Securityholders Agreement are transferable by TCW Investors.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company sold all of the outstanding stock of four wholly owned subsidiaries (collectively, the "Non-Black Angus Subsidiaries") to Spectrum Restaurant Group, Inc. (formerly known as NBACo, Inc.) The consideration was determined by arm's length negotiations between the parties. There was no gain or loss recorded because of the related-party nature of the Stock Sale. The Company received $17.0 million in cash on June 28, 2000, and transferred certain assets and liabilities to Spectrum Restaurant Group, Inc. Concurrent with the sale, advances between the company and the Non-Black Angus Subsidiaries were eliminated. Paid-in capital of $26.8 million was charged as a result of the sale. The Company retained the assets and liabilities associated with certain closed restaurants as well as certain liabilities, estimated on June 26, 2000 at $12.6 million, associated with the operating restaurants that were sold. The amount of estimated liabilities remaining at December 25, 2000 was approximately $2.9 million.
The Company is currently working to settle these liabilities. Any adjustments to the recorded balance, as a result of such settlement, will be recognized as a loss on discontinued operations in the current year, if such a settlement is reached prior to June 28, 2001.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) Consolidated Financial Statements. See the Index to Consolidated Financial Statements on page.
(b) List of Exhibits
* Incorporated by reference to the Registrant's Registration Statement No. 33-48183 on Form S-4 filed with the Securities and Exchange Commission on May 28, 1992 as amended with Amendment No. 1 filed on September 11, 1992.
** Incorporated by reference to the Registrant's Registration Statement No. 33-74010 on Form S-4 filed with the Securities and Exchange Commission on January 12, 1994.
*** Incorporated by reference to the Registrant's Current Report on Form 8-K dated September 13, 1996 filed with the Securities and Exchange Commission on September 30, 1996.
**** Incorporated by reference to the Registrant's Annual Report on Form 10-K dated December 29, 1997 filed with the Securities and Exchange Commission on March 30, 1998.
***** Incorporated by reference to the Registrant's Registration Statement No. 333-55861 on Amendment No. 1 to Form S-4 filed with the Securities and Exchange Commission on July 29, 1998.
****** Incorporated by reference to the Registrant's Current Report on Form 8-K dated June 28, 2000 and filed with the Securities and Exchange Commission on July 12, 2000.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMERICAN RESTAURANT GROUP, INC.
By: /s/ RALPH S. ROBERTS -------------------------- Ralph S. Roberts Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of American Restaurant Group, Inc.:
We have audited the accompanying consolidated balance sheets of AMERICAN RESTAURANT GROUP, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 27, 1999 and December 25, 2000, and the related consolidated statements of operations, common stockholders' equity (deficit), and cash flows for the years ended December 28, 1998, December 27, 1999, and December 25, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Restaurant Group, Inc. and subsidiaries as of December 27, 1999 and December 25, 2000, and the results of their operations and their cash flows for the years ended December 28, 1998, December 27, 1999, and December 25, 2000, in conformity with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
San Francisco, California March 2, 2001
AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 27, 1999 AND DECEMBER 25, 2000
ASSETS
(consolidated balance sheets continued on following page)
The accompanying notes are an integral part of these consolidated statements.
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
The accompanying notes are an integral part of these consolidated statements.
AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 28, 1998, DECEMBER 27, 1999,
AND DECEMBER 25, 2000
The accompanying notes are an integral part of these consolidated statements.
AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 28, 1998, DECEMBER 27, 1999,
AND DECEMBER 25, 2000
The accompanying notes are an integral part of these consolidated statements.
AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 28, 1998, DECEMBER 27, 1999,
AND DECEMBER 25, 2000
The accompanying notes are an integral part of these consolidated statements.
AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1998, DECEMBER 27, 1999, AND DECEMBER 25, 2000
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. COMPANY
American Restaurant Group, Inc. (the "Company"), a Delaware corporation, through its subsidiaries, operates middle-price full-service restaurants, primarily in California, the Pacific Northwest, and Arizona. The Company is a subsidiary of American Restaurant Group Holdings, Inc. ("Holdings"), also a Delaware corporation. At year-end 1998, 1999, and 2000, the Company and its subsidiaries, collectively referred to herein as the Company, operated 101, 102, and 105 restaurants, respectively, in its continuing segment.
b. OPERATIONS
The Company's operations are affected by local and regional economic conditions, including competition in the restaurant industry. Prior to the year ended December 25, 2000, the Company experienced recurring operating losses in recent years (before extraordinary gain/(loss) on extinguishment of debt) after debt service. A recapitalization plan was consummated during 1998 (see Note 3, "Long-Term Debt"). This plan substantially eliminated debt principal payments until the year 2003.
Management believes the recapitalization will also allow it to effect changes in its operations and has already implemented measures to reduce overhead costs. However, the Company does not expect to generate sufficient cash flows from operations in the future to fully pay the principal on long-term debt upon maturity in the year 2003 and, accordingly, it expects to refinance all or a portion of such debt, obtain new financing, or possibly sell assets.
c. SALE OF STOCK TO SPECTRUM RESTAURANT GROUP, INC.
The Company sold all of the outstanding stock of four wholly owned subsidiaries (Non-Black Angus Subsidiaries) to Spectrum Restaurant Group, Inc. (formerly known as NBACo, Inc.). The consideration was determined by arm's length negotiations between the parties. There was no gain or loss recorded because of the related-party nature of the Stock Sale. The Company received $17.0 million in cash on June 28, 2000, and transferred certain assets and liabilities to Spectrum Restaurant Group, Inc. Concurrent with the sale, advances between the Company and the Non-Black Angus Subsidiaries were eliminated. Paid-in capital of $26.8 million was charged as a result of the sale. The Company retained the assets and liabilities associated with certain closed restaurants as well as certain liabilities, estimated on June 26, 2000 at $12.6 million, associated with the operating restaurants that were sold. The amount of estimated liabilities remaining at December 25, 2000 was approximately $2.9 million.
The Company is currently working to settle these liabilities. Any adjustments to the recorded balance, as a result of such settlement, will be recognized as a loss on discontinued operations in the current year, if such a settlement is reached prior to June 28, 2001.
d. 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.
e. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted accounting principles in the United States 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.
f. INVENTORIES AND PREPAID EXPENSES
Inventories consist primarily of food, beverages, and supplies and are valued at the lower of cost (first-in, first-out method) or market value.
g. ADVERTISING COSTS
Advertising costs are accrued as a percentage of sales and expensed during the year. At year end, production costs for advertisements, which have not been aired, are included in prepaid expenses. Prepaid advertising costs of $1,196,000 and $1,022,000 were included in prepaid expenses at December 27, 1999 and December 25, 2000, respectively. Advertising expenses included in net income (loss) were $13,983,000, $13,515,000, and $16,134,000 in fiscal years 1998, 1999, and 2000, respectively.
h. PROPERTY AND EQUIPMENT
Property and equipment is carried at the lower of cost or, if impaired, at the estimated fair value of the assets. The Company provides for depreciation and amortization based upon the estimated useful lives of depreciable assets using the straight-line method. Estimated useful lives are as follows:
When a restaurant is opened, the initial purchase of expendable equipment, such as china, glassware, and silverware, is recorded as an asset and is not depreciated; however, all replacements are expensed.
Substantially all of the Company's assets, including property and equipment, are pledged as collateral on the senior debt of the Company.
i. INTEREST COSTS
Interest costs incurred during the construction period of restaurants are capitalized. The Company capitalized approximately $68,000 and $44,000 for the years ended 1998 and 1999, respectively. There were no interest costs capitalized in 2000.
j. OTHER ASSETS
Other assets include intangible assets, leasehold interests, franchise rights, liquor licenses, and cost in excess of net assets acquired. These costs are amortized using the straight-line method over the periods estimated to be benefited, not greater than 40 years.
Deferred debt costs are amortized using the effective interest method over the related debt term.
Estimated useful lives are as follows:
The following table details the components of intangible assets included in the accompanying consolidated balance sheets (in thousands):
As of December 27, 1999 and December 25, 2000, no indicators of impairment exist.
k. INSURANCE
The Company self-insures certain risks up to varying limits including medical, workers' compensation, property and general liability. Deductible and self-insured limits have varied historically, ranging from $0 to $350,000 per incident depending on the type of risk. The policy deductibles are $100,000 for its annual medical benefits per person. Reserves for losses are established based upon currently estimated obligations for the claim over time and the deductible or self-insured retention in place at the time of the loss.
l. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts receivable and payable, and debt instruments. The carrying values of all financial instruments, other than debt instruments, are representative of their fair value due to their short-term maturity. The fair value of the Company's long-term debt instruments is estimated based on the current rates offered to the Company.
m. ACCOUNTING PERIOD
The Company's fiscal year ends on the last Monday in December.
n. EARNINGS PER SHARE
Earnings per share information has not been presented because of the history of operation losses resulting in the accumulated deficit.
o. RECLASSIFICATIONS
Certain prior year accounts have been reclassified to conform with the current year presentation.
2. 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 rentals based on sales or other provisions obligating the Company to pay related property taxes and certain other expenses.
The following is a summary of property held under capital leases and included in the accompanying consolidated balance sheets (in thousands):
The following represents the minimum lease payments remaining under noncancelable operating leases and capitalized leases as of December 25, 2000 (in thousands):
Rental expense was $15,216,000, $15,460,000, and $16,650,000 during 1998, 1999, and 2000, respectively.
3. LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
Maturities of the remaining long-term debt during each of the five fiscal years subsequent to year-end 2000 are $432,000, $335,000, $142,627,000, $30,000, $30,000, and $1,044,000, thereafter.
In February 1998, the Company completed a recapitalization plan (the "Recapitalization Plan") that included, among other things, the issuance by the Company of $155,000,000 of Notes due 2003.
In conjunction with the Recapitalization Plan, the Company issued an addition a $3,600,000 principal amount of Notes to holders of certain Holdings debt and recorded such issuance as a non-cash distribution. There was an extraordinary gain recorded in 1998 of $9,559,000 as a result of this transaction.
As part of the Recapitalization Plan, the Company concurrently (a) redeemed at par senior secured notes of $126,381,000 together with interest thereon and repaid certain other interest-bearing short-term liabilities, (b) repurchased its existing 10.25% subordinated notes at 65% of the par amount of $45,000,000 together with interest thereon, and canceled the related warrants to purchase common stock of Holdings, and (c) established a $15,000,000 revolving credit facility to include letters of credit. A quarterly fee of 0.5% per annum is payable on the unused portion of the letter of credit facility and a quarterly fee of 2.5% per annum is payable on outstanding letters of credit.
On June 28, 2000, the Company amended the terms of the Credit Facility to reduce the aggregate commitment of the lenders from $15,000,000 to $12,000,000, to reduce the amount available for issuance of letters of credit from $10,000,000 to $7,000,000, and to extend the maturity date from February 25, 2001 to June 30, 2002.
At year end 1999 and 2000, the Company had outstanding letters of credit primarily related to its self-insurance programs of approximately $3,597,000 and $5,500,000, respectively.
The revolving credit facility contains certain covenants, the most restrictive of which requires the Company to maintain a certain ratio of cash flows to total debt. As of December 25, 2000, the Company was in compliance with all financial covenants.
The Company made a prepayment of principal of $16 million in December 2000, and recorded an extraordinary loss of $473,000 to write-off the related unamortized deferred financing costs.
Substantially all assets of the Company are pledged to its senior lenders. In addition, the direct subsidiaries guaranteed the indebtedness owed by the Company and such guarantees are secured by substantially all of the assets of the subsidiaries. In connection with such indebtedness, contingent and mandatory prepayments may be required under certain specified conditions and events. There are no compensating balance requirements.
Management believes the fair value of the debt approximates its carrying value.
4. INCOME TAXES The Company's state income-tax provision, all of which was current, was $67,000, $70,000, and $185,000 in 1998, 1999, and 2000, respectively. No provision for Federal income taxes was required in any year.
The income tax effects of temporary differences that give rise to significant portions of the Company's deferred income tax assets and liabilities are as follows (in thousands):
The Company fully reserves its net deferred tax assets because of its history of operating losses.
The effective tax rate differs from the Federal statutory rate of 34 percent as a result of the following items (in thousands):
At December 25, 2000, the Company had available net operating loss carryforwards for Federal income-tax purposes of $96,619,000, expiring in 2003 to 2020, and Federal general business credit carryforwards of $6,192,000, expiring in 2009 to 2019.
5. COMMITMENTS AND CONTINGENCIES
The Company is obligated under an employment agreement with an officer. The obligation under the agreement is $500,000, provides for periodic increases, and expires in 2001 unless extended.
The Company has been named as defendant in various lawsuits. Management's opinion is that the outcome of such litigation will not materially affect the Company's financial position or results of operations.
6. CUMULATIVE PREFERRED STOCK, MANDATORILY REDEEMABLE
As part of the Recapitalization Plan in February, 1998, the Company issued 35,000 preferred stock units (the "Units") of the Company. Each Unit consists of $1,000 initial liquidation preference of 12% senior pay-in-kind exchangeable preferred stock and one common-stock purchase warrant initially to purchase 2.66143 shares of the common stock at an initial exercise price of one cent per share. The Company's cumulative preferred stock is mandatorily redeemable on August 15, 2003, for cash at a price per share equal to 110% of the then applicable liquidation preference.
A stock dividend of 2,499 shares was paid on February 15, 2000. In the second quarter of 2000, the Company agreed to an interpretation of the financial covenants used to determine the dividend rate. The result was an increase in the dividend rate from 12% to 15% and additional dividends issued on August 15th of 2,503 shares (relating to holders at August 1999 and February 2000). Stock dividends of 5,872 (including the adjustment) and 3,618 shares were made on August 15, 2000 and February 15, 2001, respectively. There were 50,953 shares outstanding at December 25, 2000.
7. COMMON STOCK
As of December 29, 1997, all of the Company's common stock was owned by American Restaurant Group Holdings, Inc., Anwar S. Soliman, and Management Shareholders. They also own all outstanding shares of Holdings common stock other than shares of Holdings common stock issued to holders of the debenture units and rights to acquire shares of Holdings common stock issuable upon exercise of options and warrants.
In conjunction with the Recapitalization Plan, the Company issued shares of common stock to certain members of the Company's management (the "Management Shareholders") in an aggregate amount equal to 15% of the common stock on a fully diluted basis. Such Management Shareholders entered into a voting trust agreement with Anwar Soliman to exercise all voting and substantially all other rights to which such Management Stockholders would otherwise be entitled until August 15, 2005, or the earlier termination of the agreement. The Management Shareholders also entered into a stockholders' agreement with the remaining Company stockholders, which provides that the parties will agree to vote all of their shares of the Company's equity securities so that the Board of Directors of the Company consists of five directors, with two directors designated by TCW Investors, two by the Management Shareholders, with the remaining director being an independent director initially designated by the initial purchaser of the Notes.
8. SAVINGS PLAN
The American Restaurant Group Savings and Investment Plan (the "Savings Plan") is a 401(k) plan established for the benefit of employees who satisfy certain requirements. These requirements include completion of one year of service with a minimum of 1,000 hours worked. Subject to applicable limits imposed on tax-qualified plans, eligible employees may elect pre-tax contributions up to 20.0% of a participant's total earnings for a calendar year (but not in excess of $10,500 for 2000). The Company makes matching contributions to the Savings Plan equal to 25% of the participant's contributions up to 6% of the participant's earnings. During fiscal 1998, 1999, and 2000, the Company contributed approximately $174,000, $225,000, and $206,000 to the Savings Plan, respectively. At December 25, 2000, there were approximately 3,900 employees eligible, 1,100 participants, and 600 contributors to the plan.