10-Q 1 total.txt 2ND QUARTER 2002 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 25, 2002 Commission file number 1-9606 AMERICAN RESTAURANT PARTNERS, L.P. (Exact name of registrant as specified in its charter) Delaware 48-1037438 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification) 3020 North Cypress Road, Suite 100 Wichita, Kansas 67226 (Address of principal executive offices) (Zip-Code) Registrant's telephone number, including area code (316) 634-1190 555 North Woodlawn, Suite 3102 Wichita, Kansas 67208 (Former address of principal executive offices) (Zip-Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] AMERICAN RESTAURANT PARTNERS, L.P. INDEX Page Number ------ Part I. Financial Information ------------------------------- Item 1. Financial Statements Consolidated Condensed Balance Sheets at June 25, 2002 and December 25, 2001 1 Consolidated Condensed Statements of Income for the Three and Six Periods Ended June 25, 2002 and June 26, 2001 2 Consolidated Condensed Statements of Cash Flows for the Six Periods Ended June 25, 2002 and June 26, 2001 3 Notes to Consolidated Condensed Financial Statements 4-5 Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations 6-10 Part II. Other Information --------------------------- Item 6. Exhibits and Reports on Form 8-K 11 AMERICAN RESTAURANT PARTNERS, L.P. CONSOLIDATED CONDENSED BALANCE SHEETS June 25, December 25, ASSETS 2002 2001 --------------------------------------- ------------ ------------ Current assets: Cash and cash equivalents $ 1,981,225 $ 1,594,934 Accounts receivable 220,383 482,185 Due from affiliates 64,821 64,668 Notes receivable from affiliates - current portion 15,249 16,173 Inventories 404,725 397,821 Prepaid expenses 280,336 359,592 ---------- ---------- Total current assets 2,966,739 2,915,373 Net property and equipment 18,536,149 20,134,758 Other assets: Franchise rights, net 4,850,581 4,969,167 Notes receivable from affiliates 46,665 53,409 Deposit with affiliate 485,000 485,000 Goodwill 1,967,627 1,967,627 Other 1,153,608 1,193,205 ---------- ---------- 8,503,481 8,668,408 ---------- ---------- $30,006,369 $31,718,539 ========== ========== LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY) Current liabilities: Accounts payable $ 2,070,209 $ 3,129,578 Due to affiliates 36,547 52,763 Accrued payroll and other taxes 1,032,987 981,542 Accrued liabilities 1,173,110 1,404,786 Current maturities of long-term debt 2,840,136 5,406,737 Current portion of capital lease obligations 555,648 596,356 ---------- ---------- Total current liabilities 7,708,637 11,571,762 Long-term liabilities less current maturities: Capital lease obligations 3,741,834 1,995,197 Long-term debt 22,470,762 23,667,180 Other noncurrent liabilities 1,166,401 817,104 ---------- ---------- 27,378,997 26,479,481 Minority interests in Operating Partnerships 157,076 140,406 Commitments and contingencies - - Partners' capital (deficiency): General Partners (7,082) (8,358) Limited Partners: Class A Income Preference 5,352,470 5,131,262 Classes B and C (8,091,200) (9,146,027) Notes receivable employees - sale of partnership units (633,886) (591,344) Cost in excess of carrying value of assets acquired (1,858,643) (1,858,643) ---------- ---------- Total partners' deficiency (5,238,341) (6,473,110) ---------- ---------- $30,006,369 $31,718,539 ========== ========== See accompanying notes. AMERICAN RESTAURANT PARTNERS, L.P. CONSOLIDATED CONDENSED STATEMENTS OF INCOME

AMERICAN RESTAURANT PARTNERS, L.P. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

AMERICAN RESTAURANT PARTNERS, L.P. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Six Periods Ended June 25, 2002 and June 26, 2001 1. General ------- The accompanying consolidated condensed financial statements include the accounts of American Restaurant Partners, L.P. and its majority owned subsidiaries, American Pizza Partners, L.P. (APP), APP Concepts, LLC and Oklahoma Magic, L.P. (Magic). American Restaurant Partners, L.P., APP, APP Concepts, LLC and Magic are hereinafter collectively referred to as the Partnership. All significant intercompany balances and transactions have been eliminated. The consolidated condensed financial statements have been prepared without audit. The Balance Sheet at December 25, 2001 has been derived from the Partnership's audited financial statements. In the opinion of management, all adjustments of a normal and recurring nature which are necessary for a fair presentation of such financial statements have been included. These statements should be read in conjunction with the consolidated financial statements and notes contained in the Partnership's Annual Report filed on Form 10-K for the fiscal year ended December 25, 2001. The results of operations for interim periods are not necessarily indicative of the results for the full year. The Partnership does not experience significant seasonality but sales continue to be largely driven through advertising and promotion. 2. Subsequent Events ----------------- On July 2, 2002 the Partnership declared a quarterly distribution of $0.10 per unit, and an additional cash distribution of $0.055 per unit, for a total of $0.155 per unit to all unitholders of record as of July 12, 2002. The distribution is not reflected in the June 25, 2002 consolidated condensed financial statements. 3. Supplemental Cash Flow Information ---------------------------------- Six Periods Ended 6/25/02 6/26/01 ---------- ---------- Cash paid for interest $1,445,828 $1,567,549 Noncash investing and financing activity: Distributions offset against notes receivable 65,309 51,865 Reduction of notes receivable recorded as compensation expense 33,426 26,656 Capital leases entered into as part of sale-leaseback transactions 2,039,283 - Equipment acquired through capital lease - 153,932 Issuance of units for notes receivable 147,277 - 4. Goodwill -------- Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Intangible Assets, was issued in June 2001 and adopted by the Partnership on December 26, 2001. SFAS 142 provides that goodwill is no longer amortized effective December 26, 2001, but is instead reviewed for impairment at least annually and whenever there is an impairment indicator. The Partnership has completed its transitional fair value based impairment test of goodwill, which indicated the value of goodwill is not impaired at December 26, 2001, and as a result, no impairment loss was recognized. Goodwill amortization for the six periods ended June 26, 2001 was approximately $42,000. Net income for the six periods ended June 26, 2001, adjusted to exclude goodwill amortization, would have been approximately $751,000. 5. Contingency ----------- On July 26, 2000, APP purchased 39% of Magic from Restaurant Management Company of Wichita, Inc. (RMC) for $2,500,000 cash and contingent consideration of $700,000. The contingent consideration will become due in the event that Magic's cash flow (determined on a 12 month trailing basis) exceeds $2.6 million at any time between January 1, 2001 and December 31, 2005. Payment of the remaining balance shall be made in Class B and Class C Units of the Partnership. Based on current operating results of Magic, cash flows may exceed $2.6 million at some point during 2002. In the event that Magic's cash flow does not reach this cash flow goal on or prior to December 31, 2005, APP shall owe no additional consideration. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS --------------------- As of June 25, 2002, the Partnership operated 70 traditional Pizza Hut red roof restaurants, 16 delivery/carryout units and 2 dualbrand locations. Comparison of the Three and Six Periods Ended June 25, 2002 ----------------------------------------------------------- with the Three and Six Periods Ended June 26, 2001 -------------------------------------------------- Net sales for the three periods ended June 25, 2002 were $17,034,000, which was a $1,238,000, or 7.8%, increase over net sales of $15,796,000 reported for the same three periods of 2001. For the year-to-date, net sales increased $3,158,000, or 10.1% over the prior year. Comparable restaurant sales increased 3.6% for the quarter and 6.3% for the year-to-date. The sales increase was primarily attributable to the successful introduction of a new product, P'ZONE, in the first quarter of 2002. The sales increase is also attributable to a price increase the Partnership implemented at the end of the third quarter of 2001. Results of Operations as a Percentage of Sales: Three Periods Six Periods Ended Ended 6/25/02 6/26/01 6/25/02 6/26/01 ------- ------- ------- ------- Cost of sales 24.1% 25.8% 24.0% 25.5% Restaurant labor and benefits 28.4% 29.1% 28.1% 29.3% Advertising 5.8% 5.8% 6.1% 6.1% Other restaurant operating expenses exclusive of depreciation and amortization 18.7% 18.2% 18.1% 18.9% General and administrative: Management fees 6.2% 6.2% 6.2% 6.2% Other 2.7% 1.4% 2.5% 1.6% Depreciation and amortization 4.6% 4.8% 4.3% 4.8% Income from operations 9.5% 8.7% 10.8% 7.6% Income from operations for the three periods ended June 25, 2002 increased $252,000 from $1,369,000 to $1,621,000, a 18.4% increase from the same three periods of 2001. Year-to-date income from operations increased $1,327,000, or 55.5%, from $2,391,000 to $3,718,000. Cost of sales as a percentage of net sales decreased 170 and 150 basis points for the quarter and year-to-date, respectively. This decrease was primarily due to a 17% decrease in cheese costs during the second quarter. The year-to-date decrease is also due to a decrease in the cost of meat toppings as well as the effect of the price increase the Partnership implemented at the end of the third quarter of 2001. Labor and benefits expense for the quarter and year-to-date decreased 70 and 120 basis points, respectively, primarily due to efficiencies gained at higher sales levels. Other restaurant operating expenses increased 50 basis points for the quarter but decreased 80 basis points year-to-date. The increase for the quarter was primarily due to business interruption insurance proceeds which were offset against other restaurant operating expenses in 2001. The year-to-date decrease was primarily attributable to a decrease in utility expense. Other general and administrative expense for the quarter and year- to-date increased 130 and 90 basis points, respectively, primarily due to increased management bonuses paid in 2002 resulting from increased cash flow results. Depreciation and amortization expense decreased 20 and 50 basis points for the quarter and year-to-date, respectively, as a result of no longer amortizing goodwill in 2002 in accordance with Statement of Financial Accounting Standards (SFAS) 142 (see Note 4 in Notes to Consolidated Condensed Financial Statements). For the quarter, the Partnership had net income of $892,000, a $341,000 increase over the prior year's net income of $551,000. This increase was primarily due to the increase in income from operations noted above and a $98,000 decrease in interest expense. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- At June 25, 2002 the Partnership had a working capital deficiency of $4,742,000 compared to a working capital deficiency of $8,656,000 at December 25, 2001. This decrease in working capital deficiency is primarily attributable to a $2,567,000 decrease in the current portion of long-term debt resulting from sale-leaseback transactions on eight real estate properties in January 2002. The decrease in working capital deficiency is also attributable to net income of $2,144,000 for the six periods ended June 25, 2002. The Partnership routinely operates with a negative working capital position which is common in the restaurant industry and which results from the cash sales nature of the restaurant business and payment terms with vendors. The Partnership generates its principal source of funds from net cash provided by operating activities. Management believes net cash provided by operating activities and various other sources of income will provide sufficient funds to meet planned capital expenditures for recurring replacement of equipment in existing restaurants and to service debt obligations. NET CASH PROVIDED BY OPERATING ACTIVITIES. For the six periods ended June 25, 2002, net cash provided by operating activities amounted to $3,026,000 compared to $2,714,000 for the six periods ended June 26, 2001. This increase is primarily the result of an increase in net income of $1,435,000 which was used to pay down accounts payable and accrued liabilities, and an increase in loss on disposition of assets of $115,000. INVESTING ACTIVITIES. Capital expenditures for the six periods ended June 25, 2002 were $669,000 of which $275,000 was for construction of new restaurants. The remainder was for replacement of equipment in existing restaurants. The Partnership completed sale-leaseback transactions for the real estate of eight of its properties which generated funds of $3,188,000. FINANCING ACTIVITIES. Cash distributions paid during the six periods ended June 25, 2002 were $880,000 net of a reduction in employee notes receivable of $65,000. Distributions amounted to $.255 per unit. The Partnership's distribution objective, generally, is to distribute all operating revenues less operating expenses (excluding noncash items such as depreciation and amortization), capital expenditures for existing restaurants, interest and principal payments on Partnership debt, and such cash reserves as the managing General Partner may deem appropriate. During the six periods ended June 25, 2002, the Partnership's payments on long-term borrowings totaled $4,099,000, the majority of which were funded through proceeds from sale-leaseback transactions. Proceeds from borrowings amounted to $336,000 during the six periods ended June 25, 2002. The Partnership opened one new delivery/carryout restaurant in the Oklahoma City, Oklahoma area during the first quarter of 2002. This unit is leased from an unrelated third party. The Partnership plans to open one new restaurant and one replacement restaurant during 2002. The land for the new restaurant has been purchased. Management anticipates spending approximately $800,000 for the building and equipment at this location. The remaining restaurant planned for development will be leased from an unrelated third party. Management anticipates the cost of developing this location at approximately $400,000. Development of the restaurants will be financed through existing lenders. Management anticipates spending an additional $425,000 during the remainder of 2002 for recurring replacement of equipment in existing restaurants which will be financed from net cash provided by operating activities. The actual level of capital expenditures may be higher in the event of unforeseen breakdowns of equipment or lower in the event of inadequate net cash flow from operating activities. OTHER MATTERS ------------- The Partnership delisted from the American Stock Exchange effective November 13, 1997 and limited trading of its units. As a result, the Partnership will continue to be taxed as a partnership rather than being taxed as a corporation. The Partnership does offer a Qualified Matching Service, whereby the Partnership will match persons desiring to buy units with persons desiring to sell units. EFFECTS OF INFLATION AND FUTURE OUTLOOK --------------------------------------- Inflationary factors such as increases in food and labor costs directly affect the Partnership's operations. Because most of the Partnership's employees are paid on an hourly basis, changes in rates related to federal and state minimum wage and tip credit laws will affect the Partnership's labor costs. The Partnership cannot always effect immediate price increases to offset higher costs and no assurance can be given the Partnership will be able to do so in the future. The Partnership's property and liability insurance and workers' compensation insurance policies renew annually on July 1. Effective July 1, 2002, the Partnership's property and liability insurance premiums increased 40% and its workers' compensation premiums increased 60%. The Partnership has implemented a renewed focus on risk management in order to mitigate these premium increases. The Partnership's earnings are affected by changes in interest rates primarily from its long-term debt arrangements. Under its current policies, the Partnership does not use interest rate derivative instruments to manage exposure to interest rate changes. Due to the small amount of debt at variable interest rates, a hypothetical 100 basis point adverse move (increase) in interest rates along the entire interest rate yield curve would not have a material effect on either the Partnership's interest expense or net income over the term of the related debt. This was determined by considering the impact of the hypothetical interest rates on the Partnership's borrowing cost. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act which are intended to be covered by the safe harbors created thereby. Although the Partnership believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to, consumer demand and market acceptance risk, the effect of economic conditions, including interest rate fluctuations, the impact of competing restaurants and concepts, the cost of commodities and other food products, labor shortages and costs and other risks detailed in the Partnership's Securities and Exchange Commission filings. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits None (b) Reports on Form 8-K During the fiscal period covered by this Form 10-Q, no reports on Form 8-K were filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN RESTAURANT PARTNERS, L.P. (Registrant) By: RMC AMERICAN MANAGEMENT, INC. Managing General Partner Date: 08/08/02 By: /s/Hal W. McCoy -------- ---------------------------- Hal W. McCoy Chairman and Chief Executive Officer Date: 08/08/02 By: /s/Terry Freund -------- ---------------------------- Terry Freund Chief Financial and Accounting Officer CERTIFICATION OF PERIODIC REPORT I, Hal W. McCoy, Chairman and Chief Executive Officer and Terry Freund, Chief Financial and Accounting Officer of American Restaurant Parnters, L.P. (the "Partnership"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 that: (1) the Quarterly Report on Form 10-Q of the Partnership for the quarterly period ended June 25, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of the operations of the Partnership. AMERICAN RESTAURANT PARTNERS, L.P. (Registrant) By: RMC AMERICAN MANAGEMENT, INC. Managing General Partner Date: 08/08/02 By: /s/Hal W. McCoy -------- ---------------------------- Hal W. McCoy Chairman and Chief Executive Officer Date: 08/08/02 By: /s/Terry Freund -------- ---------------------------- Terry Freund Chief Financial and Accounting Officer

AMERICAN RESTAURANT PARTNERS L P 10-Q