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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(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 25, 2001
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 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 No.)
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
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class
-------------------
Class A Income Preference Units of
Limited Partner Interests
Securities registered pursuant to Section 12(g) of the Act: None
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
--- ---
Indicate by 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. (X)
As of March 1, 2002 the aggregate market value of the income preference units
held by non-affiliates of the registrant was $2,262,377.
PART I
------
Item 1. Business
--------
General Development of Business
- -------------------------------
American Restaurant Partners, L.P., a Delaware limited partnership
(the "Partnership"), was formed on April 27, 1987 for the purpose of
acquiring and operating through American Pizza Partners, L.P., a
Delaware limited partnership ("APP"), substantially all of the
restaurant operations of RMC Partners, L.P. ("RMC") in connection with
a public offering of Class A Income Preference units by the
Partnership. The transfer of assets from RMC was completed on August
21, 1987 and the Partnership commenced operations on that date.
Subsequently, the Partnership completed its public offering of 800,000
Class A Income Preference units and received net proceeds of
$6,931,944.
The Partnership is a 99% limited partner in APP which conducts
substantially all of the business for the benefit of the Partnership.
RMC American Management, Inc. ("RAM") is the managing general partner
of both the Partnership and APP. RAM and RMC own an aggregate 1%
interest in APP.
On March 13, 1996, APP purchased a 45% interest in Oklahoma Magic,
L.P. (Magic), a newly formed limited partnership that owns and
operates Pizza Hut restaurants in Oklahoma. Effective August 11,
1998, APP's interest in Magic increased from 45% to 60% in connection
with Magic's purchase of a 25% interest from a former limited partner.
RAM, which owns a 1.0% interest in Magic, is the managing general
partner of Magic. The remaining 39.0% interest was held by Restaurant
Management Company of Wichita, Inc. (the Management Company) until
July 26, 2000. On that date, APP purchased the Management Company's
39% interest in Magic. Upon completion of this purchase, APP owns 99%
of Magic. APP and Magic are collectively referred to as the
"Operating Partnerships".
As of December 25, 2001, the Partnership owned and operated a total
of 87 restaurants (collectively, the "Restaurants"). APP owned and
operated 52 traditional "Pizza Hut" restaurants, 6 "Pizza Hut"
delivery/carryout facilities and 3 dualbrand locations. During 2001,
APP opened two "Pizza Hut" delivery/carryout restaurants and closed
one traditional restaurant. Magic owned and operated 17 traditional
"Pizza Hut" restaurants and 9 "Pizza Hut" delivery/carryout
facilities. The following table sets forth the states in which the
Partnership's Pizza Hut Restaurants are located:
Units Units Units Units
Open At Opened in Closed in Open At
12-26-00 2001 2001 12-25-01
-------- --------- --------- --------
Georgia 8 -- -- 8
Louisiana 1 -- -- 1
Montana 18 -- -- 18
Texas 25 2 1 26
Wyoming 8 -- -- 8
Oklahoma 26 -- -- 26
--- --- --- ---
Total 86 2 1 87
=== === === ===
Financial Information About Industry Segments
- ---------------------------------------------
The restaurant industry is the only business segment in which the
Partnership operates.
Narrative Description of Business
- ---------------------------------
The Partnership operates the Restaurants under license from Pizza
Hut, Inc. ("PHI"), a subsidiary of Tricon Global Restaurants, Inc.
("Tricon") which was created with the spin-off of PepsiCo, Inc.'s
restaurant division. Since it was founded in 1958, Pizza Hut has
become the world's largest pizza restaurant chain in terms of both
sales and number of restaurants. As of year-end 2001, there were over
6,500 units in the United States and more than 4,100 units located
outside the United States (both excluding licensed units). PHI owns
and operates approximately 26% of the Pizza Hut restaurants in the
United States and 40% of those in foreign countries.
All Pizza Hut restaurants offer substantially the same menu items,
including several varieties of pizza as well as pasta, salads and
sandwiches. All food items are prepared from high quality ingredients
in accordance with PHI's proprietary recipes and a special blend of
spices available only from PHI. Pizza is offered in several different
sizes with a thin crust, hand tossed traditional crust, or a thick
crust, known as "Pan Pizza," as well as with a wide variety of
toppings. Pizza Hut also serves the Big New Yorker Pizza, a 16"
traditional crust pizza. Food products not prescribed by PHI may only
be offered with the prior express approval of PHI.
PHI maintains a research and development department that develops
new recipes and products, tests new procedures for food preparation
and approves suppliers for Pizza Hut restaurants.
Pizza Hut restaurants are constructed in accordance with prescribed
design specifications and most are similar in exterior appearance and
interior decor. The typical restaurant building is a freestanding,
one-story building, with a wood, brick or stucco exterior. Most Pizza
Hut restaurants still feature the distinctive red roof. The
restaurants generally contain 1,800 to 3,000 square feet, including
kitchen and storage areas, and have seating capacity for 75 to 140
persons. The typical property site will accommodate parking for 30 to
70 vehicles. Building designs may be varied only upon request and
when required to comply with local regulations or for unique marketing
reasons.
Franchise Agreements
- --------------------
General. The relationships between PHI and its franchisees are
governed by franchise agreements (the "Franchise Agreements").
Pursuant to the Franchise Agreements, PHI franchisees are granted the
right to establish and operate restaurants under the Pizza Hut system
within a designated geographic area. The initial term of each
Franchise Agreement is 20 years, but prior to expiration, the
franchisee may renew the agreement for an additional 15 years, if not
then in default. Renewals are subject to execution of the then
current form of the Franchise Agreement, including the current fee
schedules. Unless the franchisee fails to develop its assigned
territory, PHI agrees not to establish, and not to license others to
establish, restaurants within the franchisee's territory.
Standards of Operation. PHI provides management training for
employees of franchisees and each restaurant manager is required to
meet certain training requirements. Standards of quality,
cleanliness, service, food, beverages, decor, supplies, fixtures and
equipment for Pizza Hut restaurants are prescribed by PHI. Although
new standards and products may be prescribed from time to time, any
revision requiring substantial expenditures by franchisees must be
first proven successful through market testing conducted in 5% of all
Pizza Hut restaurants. Failure to comply with the established
standards is cause for termination of a Franchise Agreement by PHI and
PHI has the right to inspect each restaurant to monitor compliance.
Management of the Partnership believes that the existing Restaurants
meet or exceed the applicable standards; neither the predecessors to
RMC nor the Partnership has ever had a Franchise Agreement terminated
by PHI.
Advertising. All franchisees are required to join a cooperative
advertising association ("co-op") with other franchisees within local
marketing areas defined by PHI. Contributions of 2% of each
restaurant's monthly gross sales must be made to such co-ops for the
purchase of advertising through local broadcast media. The term
"gross sales" shall mean gross revenues (excluding price discounts and
allowances) received as payment for the beverages, food, and other
goods, services and supplies sold in or from each restaurant, and
gross revenues from any other business operated on the premises,
excluding sales and other taxes required by law to be collected from
guests. All advertisements must be approved by PHI which contributes
on the same basis to the appropriate co-op for each restaurant
operated by PHI. Franchisees are also required to be members of
I.P.H.F.H.A., Inc. ("IPHFHA") an independent association of
franchisees which, together with representatives of PHI, develops and
directs national advertising and promotional programs.
Members of IPHFHA are required to pay national dues equal to 2% of
each restaurant's monthly gross sales. Such dues are primarily used
to conduct the national advertising and promotional programs.
Although it is not a member of IPHFHA, PHI contributes on the same
basis as members for each restaurant that PHI operates.
Purchase of Equipment, Supplies and Other Products. The Franchise
Agreements require that all equipment, supplies and other products and
materials required for operation of Pizza Hut restaurants be obtained
from suppliers that meet certain standards established and approved by
PHI. Purchasing is substantially provided by the Unified Foodservice
Purchasing Cooperative to all members who consist of Taco Bell, KFC,
and Pizza Hut franchisees and the restaurants operated by Tricon.
AmeriServe Food Distribution, Inc. (AmeriServe) provided
substantially all of the distribution services to the Partnership
beginning in 1997. The Partnership entered into a five-year exclusive
food and supplies distribution agreement with AmeriServe effective
January 1, 1999. The initial term of the agreement was to expire
December 31, 2003. Thereafter, the agreement could be renewed for
successive one-year terms upon the written agreement of the parties.
The terms of the contract provide incentives for using more efficient
distribution practices and resulted in a reduction in the distribution
costs incurred by the Partnership.
On January 31, 2000 AmeriServe filed for protection under the U.S.
Bankruptcy Code. McLane Company, Inc., a subsidiary of Wal-Mart
Stores, Inc., completed the purchase of AmeriServe's U.S. distribution
business on November 30, 2000. As part of the sale, the Partnership
agreed to a two-year contract extension which included a 5% increase
in distribution fees.
Franchise Fees. Franchisees must pay monthly service fees to PHI
based on each restaurant's gross sales. The monthly service fee under
each of the Partnership's Franchise Agreements is 4% of gross sales,
or, if payment of a percentage of gross sales of alcoholic beverages
is prohibited by state law, 4.5% of gross sales of food products and
nonalcoholic beverages. Fees are payable monthly by the 30th day
after the end of each month and franchisees are required to submit
monthly gross sales data for each restaurant, as well as quarterly and
annual profit and loss data on each restaurant, to PHI. In addition
to the monthly service fees, an initial franchise fee of $15,000 is
payable to PHI prior to the opening of each new restaurant.
No Transfer or Assignment without Consent. No rights or interests
granted to franchisees under the Franchise Agreements may be sold,
transferred or assigned without the prior written consent of PHI which
may not be unreasonably withheld if certain conditions are met.
Additionally, PHI has a first right of refusal to purchase all or any
part of a franchisee's interests if the franchisee proposes to accept
a bona fide offer from a third party to purchase such interests and
the sale would result in a change of control of the franchisee.
PHI requires that the principal management officials of a franchisee
retain a controlling interest in a franchisee that is a corporation or
partnership.
Default and Termination. Franchise Agreements automatically
terminate in the event of the franchisee's insolvency, dissolution or
bankruptcy. In addition, Franchise Agreements automatically terminate
if the franchisee attempts an unauthorized transfer of a controlling
interest of the franchise. PHI, at its option, may also unilaterally
terminate a Franchise Agreement if the franchisee (i) is convicted of
a felony, a crime of moral turpitude or another offense that adversely
affects the Pizza Hut system, its trademarks or goodwill, (ii)
discloses, in violation of the Franchise Agreement, confidential or
proprietary information provided to it by PHI, (iii) knowingly or
through gross negligence maintains false books or records or submits
false reports to PHI, (iv) conducts the business so as to constitute
an imminent danger to the public health, or (v) receives notices of
default on three (3) or more occasions in twelve (12) months, or five
(5) or more occasions in thirty-six (36) months even if each default
had been cured. A termination under item (v) will affect only the
individual restaurants in default, unless the defaults relate to the
franchisee's entire operation, or are part of a common pattern or
scheme, in which case all of the franchisee's rights will be
terminated.
Further, at its option, but only after thirty (30) days written
notice of default and the franchisee's failure to remedy such default
within the notice period, PHI may terminate a Franchise Agreement if
the franchisee (i) fails to make any required payments or submit
required financial or other data, (ii) fails to maintain prescribed
restaurant operating standards, (iii) fails to obtain any required
approval or consent, (iv) misuses any of PHI's trademarks or otherwise
materially impairs its goodwill, (v) conducts any business under a
name or trademark that is confusingly similar to those of PHI, (vi)
defaults under any lease, sublease, mortgage or deed of trust covering
a restaurant, (vii) fails to procure or maintain required insurance,
or (viii) ceases operation without the prior consent of PHI.
Management believes that the Partnership is in compliance in all
material respects with its current Franchise Agreements; neither the
predecessors to RMC nor the Partnership has ever had a Franchise
Agreement terminated by PHI.
In addition to items (i) through (viii) noted in the preceding
paragraph, the Franchise Agreements allow PHI to also terminate a
Franchise Agreement after thirty (30) days written notice if the
franchisee attempts an unauthorized transfer of less than a
controlling interest. A termination under these items will affect
only the individual restaurants in default, unless the defaults relate
to the franchisee's entire operation, in which case all of the
franchisee's rights will be terminated.
Tradenames, Trademarks and Service Marks. "Pizza Hut" is a
registered trademark of PHI. The Franchise Agreements license
franchisees to use the "Pizza Hut" trademark and certain other
trademarks, service marks, symbols, slogans, emblems, logos, designs
and other indicia or origin in connection with their Pizza Hut
restaurants and all franchisees agree to limit their use of such marks
to identify their restaurants and products and not to misuse or
otherwise jeopardize such marks. The success of the business of the
Restaurants is significantly dependent on the ability of the
Partnership to operate using these marks and names and on the
continued protection of these marks and names by PHI.
Future Expansion. Under the terms of the Franchise Agreements, the
Partnership has the right to open additional Pizza Hut restaurants
within certain designated territories. The Partnership is not
obligated to open any new restaurants in 2002 or future years.
Seasonality
- -----------
Historically, due to the locations of many of the Restaurants near
summer tourist attractions and the severity of winter weather in the
areas in which many of the Restaurants are located, the Partnership
has realized approximately 40% of its operating profits in periods six
through nine (18 weeks). However, due to the increased sales and
profits of the Partnership's restaurants in Texas and Oklahoma, the
Partnership no longer experiences significant seasonality. Sales do
continue to be largely driven through advertising and promotion.
Competition
- -----------
The retail restaurant business is highly competitive with respect to
trademark recognition, price, service, food quality and location, and
is often affected by changes in tastes, eating habits, national and
local economic conditions, population and traffic patterns. The
Restaurants compete with large regional and national chains, including
both fast food and full service chains, as well as with independent
restaurants offering moderately priced food. Many of the
Partnership's competitors have more locations, greater financial
resources, and longer operating histories than the Partnership. The
Restaurants compete directly with other pizza restaurants for dine-in,
carry-out and delivery customers.
Government Regulation
- ---------------------
The Partnership and the Restaurants are subject to various
government regulations, including zoning, sanitation, health, safety
and alcoholic beverage controls. Restaurant employment practices are
also governed by minimum wage, overtime and other working condition
regulations which, to date, have not had a material effect on the
operation of the Restaurants. The Partnership believes that it is in
compliance with all laws and regulations which govern its business.
In order to comply with the regulations governing alcoholic beverage
sales in Montana, Texas, Wyoming and Oklahoma, the licenses permitting
beer sales in certain Restaurants in those states are held in the name
of resident persons or domestic entities to whom they were originally
issued, and are utilized by the Partnership under lease arrangements
with such resident persons or entities. Because of the varying
requirements of various state agencies regulating liquor and beer
licenses, the Partnership Agreement provides that all Unitholders and
all other holders of limited partner interests must furnish the
Managing General Partner with all information it reasonably requests
in order to comply with any requirements of these state agencies, and
that the Partnership has the right to purchase all Units held by any
person whose ownership of Units would adversely affect the ability of
the Partnership to obtain or retain licenses to sell beer or wine in
any Restaurant.
Employees
- ---------
As of March 1, 2002, the Partnership did not have any employees.
The Operating Partnerships had approximately 2,200 employees at the
Restaurants. Each Restaurant is managed by one restaurant manager and
one or more assistant restaurant managers. Many of the other
employees are employed only part-time and, as is customary in the
restaurant business, turnover among the part-time employees is high.
The Partnership is not a party to any collective bargaining agreements
and believes its employee relations to be satisfactory. The
Restaurants' employees are supervised by employees of the Management
Company which has its principal offices in Wichita, Kansas. The
Management Company has a total of 43 employees which devote all or a
significant part of their time to management of the Restaurants. In
addition, the Partnership may employ certain management officials of
the Management Company on a part-time basis. Employee relations are
believed to be satisfactory.
Financial Information About Foreign and Domestic Operations and Export
- ----------------------------------------------------------------------
Sales
- -----
The Partnership operates no restaurants in foreign countries.
Item 2. Properties
----------
The following table lists the location by state of Restaurants as of
December 25, 2001.
Leased From Leased From
Unrelated Third Affiliate of the
Parties General Partners Owned Total
------- ---------------- ----- -----
Georgia 1 - 7 8
Louisiana - - 1 1
Montana 9 - 9 18
Oklahoma 24 - 2 26
Texas 11 - 15 26
Wyoming 1 1 6 8
--- --- --- ---
Total 46 1 40 87
=== === === ===
Six of the properties are subject to ground leases from unrelated
third parties. The property leased from an affiliate of the General
Partners is subject to a mortgage or deed of trust. Most of the
properties, including that owned by an affiliate of the General
Partners are leased for a minimum term of at least five years and are
subject to one or more five-year renewal options. Management believes
leases with initial or optional renewal periods expiring within the
next five years can be renewed for multiple-year periods, or the
property can be purchased, without significant difficulty or
unreasonable expense.
The amount of rent paid is either fixed or includes a fixed rental
plus a percentage of the Restaurant's sales, subject, in some cases,
to maximum amounts. The leases require the Partnership to pay all
real estate taxes, insurance premiums, utilities, and to keep the
property in general repair.
Pizza Hut restaurants are constructed in accordance with prescribed
design specifications and most are similar in exterior appearance and
interior decor. The typical restaurant building is a freestanding,
one-story building, with a wood, brick or stucco exterior. Most Pizza
Hut restaurants still feature the distinctive red roof. The
restaurants generally contain 1,800 to 3,000 square feet, including
kitchen and storage areas, and have seating capacity for 75 to 140
persons. The typical property site will accommodate parking for 30 to
70 vehicles. Building designs may be varied only upon request and
when required to comply with local regulations or for unique marketing
reasons. Typical capital costs for the Partnership's existing
restaurant facilities are approximately $150,000 for land, $250,000
for the building and $135,000 for equipment and furnishings for each
unit.
The cost of land, building and equipment for a typical Pizza Hut
restaurant vary with location, size, construction costs and other
factors. The Partnership estimates the average cost to construct and
equip a new restaurant in its existing franchise territories is
approximately $600,000 to $900,000 including the cost of land
acquisition. Delivery/carryout facilities vary in size and
appearance. These facilities are generally leased from unrelated third
parties. The Partnership estimates that the capital investment
necessary for a new delivery/carryout unit is approximately $200,000
in equipment and leasehold improvements.
Item 3. Legal Proceedings
-----------------
As of December 25, 2001, the Partnership was not a party to any
pending legal proceedings material to its business.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
PART II
-------
Item 5. Market for the Registrant's Class A Income Preference Units
-----------------------------------------------------------
and Related Security Holder Matters
-----------------------------------
The Partnership's Class A Income Preference Units were traded on the
American Stock Exchange under the symbol "RMC" through November 13,
1997. On that date, the Partnership delisted from the American Stock
Exchange and limited trading of its units. The Partnership offers a
Qualified Matching Service, whereby the Partnership will match persons
desiring to buy units with persons desiring to sell units. No units
were matched during 2001 and 2000. Market prices for units during
2001 and 2000 were:
Calendar Period High Low
- -----------------------------------------------------
2001
- ----
All Quarters $3.25 $3.25
2000
- ----
All Quarters $3.25 $3.25
As of December 25, 2001, approximately 1,045 unitholders owned
American Restaurant Partners, L.P. Class A Income Preference Units of
limited partner interest. Information regarding the number of
unitholders is based upon holders of record excluding individual
participants in security position listings.
Cash distributions to unitholders were:
Per
Record Date Payment Date Unit
- ---------------------------------------------------------
2001
- ----
January 12, 2001 January 26, 2001 $.10
April 12, 2001 April 27, 2001 .10
July 12, 2001 July 27, 2001 .10
October 12, 2001 October 26, 2001 .10
---
Cash distributed during 2001 $.40
===
2000
- ----
January 14, 2000 January 28, 2000 $.10
April 12, 2000 April 28, 2000 .10
July 12, 2000 July 28, 2000 .10
October 12, 2000 October 27, 2000 .10
---
Cash distributed during 2000 $.40
===
The Partnership will make quarterly distributions of "Cash
Available for Distribution" with respect to the Income Preference,
Class B Units, and Class C Units. "Cash Available for Distribution"
consists, generally, of 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. Therefore, the Partnership may
experience quarters in which there is no Cash Available for
Distribution. The Partnership may retain cash during certain quarters
and distribute it in later quarters in order to make quarterly
distributions more consistent.
Item 6. Selected Financial Data
-----------------------
(in thousands, except per Unit data, number of Restaurants,
and average weekly sales per Restaurant)
American Restaurant Partners, L.P.
----------------------------------------------------------------
Year Ended
December 25, December 26, December 28, December 29, December 30,
2001 2000 1999 1998 (d) 1997
------------ ------------ ------------ ------------ ------------
Income statement data:
Net sales $ 63,817 $ 60,505 $ 57,820 $ 43,544 $ 38,977
Income from operations 4,932 5,178 3,990 2,443 433
Net income (loss) 1,829 1,372 1,315 809 (1,993)
Net income (loss) per Partnership unit (a) 0.49 0.37 0.37 0.20 (0.50)
Balance sheet data:
Total assets $ 31,719 $ 31,791 $ 29,197 $ 30,703 $ 22,226
Long-term debt 29,074 29,885 27,649 29,630 20,005
Obligations under capital
leases 2,592 2,572 1,495 1,543 1,645
Partners capital (deficiency):
General Partners (8) (9) (9) (8) (8)
Class A 5,131 5,099 5,395 5,543 5,624
Class B and C (9,146) (9,416) (9,252) (10,058) (8,322)
Notes receivable from employees (591) (749) (956) - -
Cost in excess of carrying
value of assets acquired (1,859) (1,859) (1,324) (1,324) (1,324)
Cumulative comprehensive income (loss) - - - (108) 19
Cash dividends declared per unit 0.40 0.40 0.45 0.30 0.32
Statistical data:
Capital expenditures: (b)
Existing Restaurants $ 1,132 $ 2,092 $ 1,078 $ 2,465 $ 889
New Restaurants 924 147 300 162 935
Average weekly sales per
Restaurant: (c)
Red Roof 14,374 13,573 12,683 11,918 11,813
Delivery/carryout facility/C-store 13,724 12,591 11,657 10,508 8,160
Restaurants in operation
at end of period 87 86 87 89 63
NOTES TO SELECTED FINANCIAL DATA
(a) Net income is allocated to all partners in accordance with their
respective units in the Partnership with all outstanding units being
treated equally.
(b) Capital expenditures include the cost of land, buildings, new and
replacement restaurant equipment and refurbishment of leasehold
improvements. Capital expenditures for existing restaurants represent
such capitalized costs for all restaurants other than newly
constructed restaurants.
(c) Average weekly sales were calculated by dividing net sales by the
weighted average number of restaurants open during the period. The
quotient was then divided by the number of days in the period
multiplied times seven days.
(d) The Partnership began consolidating the accounts of Magic on
August 11, 1998 when APP's interest in Magic increased from 45% to
60%. The 1998 selected financial data reflects this consolidation.
Item 7. Management's Discussion and Analysis of Consolidated
----------------------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
Results of Operations
- ---------------------
The following discussion compares the Partnership's results for the
years ended December 25, 2001, December 26, 2000 and December 28,
1999. This discussion should be read in conjunction with the Selected
Financial Data and the Consolidated Financial Statements included
elsewhere herein.
Net Sales
- ---------
Net sales for the year ended December 25, 2001 increased $3,312,000
from net sales of $60,505,000 in 2000 to net sales of $63,817,000 in
2001, a 5.5% increase. Comparable restaurant sales increased 6.3%
over the prior year. The stronger than expected sales results in 2001
were achieved primarily from more successful marketing promotions
during the year and the success of Twisted Crust Pizza introduced
during the second quarter of 2001.
Net sales for the year ended December 26, 2000 increased $2,685,000
from net sales of $57,820,000 in 1999 to $60,505,000 in 2000, a 4.6%
increase. Comparable restaurant sales increased 6.4% over 1999. The
2000 sales increase was attributable primarily to continued
improvement in restaurant operations and the success of the Insider
Pizza introduced during the fourth quarter of 2000.
Income From Operations
- ----------------------
Income from operations for the year ended December 25, 2001 decreased
$246,000 from $5,178,000 to $4,932,000, a 4.8% decrease from the year
ended December 26, 2000. As a percentage of net sales, income from
operations decreased from 8.6% of net sales for the year ended
December 26, 2000 to 7.7% of net sales for the year ended December 25,
2001. Cost of sales increased as a percentage of net sales from 24.8%
in 2000 to 25.6% in 2001 primarily due to significantly higher cheese
costs. Labor and benefits expense increased as a percentage of net
sales from 28.7% in 2000 to 28.9% in 2001. Advertising decreased as a
percentage of net sales from 6.5% in 2000 to 6.1% in 2001. This
decrease was achieved by successfully negotiating lower rates and
reducing local market spending levels. Other restaurant operating
expenses remained at 18.8% of net sales for both years. Additionally,
general and administrative expenses remained at 8.0% of net sales for
both years. Depreciation and amortization expense increased to 4.9% of
net sales in 2001 compared to 4.7% of net sales in 2000.
Income from operations for the year ended December 26, 2000 increased
$1,188,000 from $3,990,000 to $5,178,000, a 29.8% increase over the
year ended December 28, 1999. As a percentage of net sales, income
from operations increased from 6.9% of net sales for the year ended
December 28, 1999 to 8.6% of net sales for the year ended December 26,
2000. Cost of sales decreased as a percentage of net sales from 26.6%
in 1999 to 24.8% in 2000 due to significantly lower cheese costs.
Labor and benefits expense decreased as a percentage of net sales from
29.2% in 1999 to 28.7% in 2000 attributable to better cost controls
and increased productivity in the restaurants. Advertising remained
at 6.5% of net sales for both years. Other restaurant operating
expenses increased slightly from 18.7% of net sales for the year ended
December 28, 1999 to 18.8% of net sales for the year ended December
26, 2000. General and administrative expenses increased from 7.6% of
net sales in 1999 to 8.0% of net sales in 2000 reflecting increased
bonuses paid on improved operating results. Depreciation and
amortization expense increased to 4.7% of net sales in 2000 compared
to 4.4% of net sales in 1999 primarily due to the addition of point-
of-sale terminals under capital leases.
Net Income
- ----------
Net income increased $457,000 to $1,829,000 for the year ended
December 25, 2001 compared to net income of $1,372,000 for the year
ended December 26, 2000. The 2001 period net income included a gain
on fire settlement of $159,000 (see Note 9 of the accompanying
financial statements). The 2000 period net income included a $409,000
charge to record the default of certain loans within the Partnership's
pooled borrowings with FMAC (see Note 3 of the accompanying financial
statements). Net income is net of minority interest in income of
operating partnerships of $26,000 and $211,000 in 2001 and 2000,
respectively. This $185,000 decrease is attributable to APP's
purchase of an additional 39% of Magic in the third quarter of 2000,
which reduced the minority interest in Magic from 40% to 1%.
Net income increased $57,000 to $1,372,000 for the year ended December
26, 2000 compared to net income of $1,315,000 for the year ended
December 28, 1999. The 1999 period net income included a loss on sale
of investments held for sale of $135,000 and a $197,000 gain on sale
of a restaurant. The 1999 period net income was increased by $424,000
to record the cure of a default of certain loans within the
Partnership's pooled borrowings from Franchise Mortgage Acceptance
Company (FMAC) while the 2000 net income includes a $409,000 charge to
record the default of certain loans within the Partnership's pooled
borrowings with FMAC (See Note 3 of the accompanying financial
statements). The 2000 period net income also includes equity in loss
of unconsolidated affiliates of $177,000.
Liquidity and Capital Resources
- -------------------------------
The Partnership generates its principal source of funds from net cash
provided by operating activities. Management believes that 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 for the next twelve months.
At December 25, 2001, the Partnership had a working capital deficiency
of $8,656,000 compared to a deficiency of $6,543,000 at December 26,
2000. The increase in working capital deficiency at December 25, 2001
is primarily a result of a $2,643,000 increase in current portion of
long-term debt. Subsequent to December 25, 2001, the Partnership
retired $2,463,000 of this current portion of long-term debt using
proceeds from sale-leaseback transactions of real estate completed in
January 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.
Net Cash Provided by Operating Activities
- -----------------------------------------
During 2001, net cash provided by operating activities amounted to
$5,131,000, a decrease of $282,000 over 2000. This decrease is
primarily attributable to a $246,000 decrease in income from
operations. Non-operating items of income and expense include a
noncash charge in 2000 of $409,000 to record a loss on default in
pooled loans.
Investing Activities
- --------------------
Capital expenditures for 2001 were $2,056,000, of which $196,000 was
for the purchase of the land and building of a previously leased
restaurant. Capital expenditures for construction of new or
replacement restaurants totaled $924,000. The remaining capital
expenditures were for replacement of equipment in existing
restaurants. Equipment costs included above totaling $295,000 for two
new restaurants in Texas were subsequently sold in sale-leaseback
transactions. Therefore, the proceeds from the sale-leaseback
transactions of $295,000 are included in proceeds from the sale of
property and equipment. The Partnership also received insurance
proceeds of $252,000 due to a restaurant fire.
Financing Activities
- --------------------
Cash distributions paid in 2001 totaled $1,376,000 and amounted to
$0.40 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 2001, the Partnership's proceeds from long-term borrowings
amounted to $1,724,000 of which $287,000 was used to purchase
previously leased restaurants and $150,000 was used to purchase
equipment of a new restaurant. The remainder was used primarily to
replenish operating capital. The Partnership plans to open two new
restaurants during 2002. The land for one of these new restaurants
has been purchased. Management anticipates spending approximately
$800,000 for the building and equipment at this location. The other
restaurant, a delivery/carryout unit leased from an unrelated third
party, opened in the first quarter of 2002. Management anticipates
the cost of developing this location at approximately $200,000.
Development of the new restaurants will be financed through existing
lenders. Management anticipates spending $508,000 in 2002 for
recurring replacement of equipment in existing restaurants which the
Partnership expects to finance 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
- -------------
On January 31, 2000 AmeriServe, the Partnership's primary supplier of
food ingredients and dry goods, filed for protection under the U.S.
Bankruptcy Code. McLane Company, Inc., a subsidiary of Wal-Mart
Stores, Inc., completed the purchase of AmeriServe's U.S. distribution
business on November 30, 2000. As part of the sale, the Partnership
agreed to a two-year contract extension and will incur a 5% increase
in distribution fees. The overall impact of the increased
distribution fees on cost of sales is approximately 0.1%.
On March 13, 1996, the Partnership purchased a 45% interest in Magic,
a newly-formed limited partnership, for $3.0 million in cash. Magic
owns and operates twenty-six Pizza Hut restaurants in Oklahoma. In
August 1998, Magic purchased a 25% interest in Magic from a former
limited partner which effectively increased the Partnership's interest
in Magic from 45% to 60%. Therefore, beginning August 11, 1998,
Magic's financial statements were consolidated into the Partnership's
consolidated financial statements. Prior to August 11, 1998, the
Partnership accounted for its investment in Magic using the equity
method of accounting. In connection with the consolidation, the
Partnership recorded goodwill of $728,000 which represented the excess
purchase price of the original equity investment in the net assets
acquired, net of subsequent amortization.
On July 26, 2000, APP purchased 39% of Magic from the Management
Company for $2,500,000 cash and contingent consideration of $700,000.
The $2,500,000 cash payment was financed by INTRUST Bank over five
years at 9.5%. 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. 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. Upon completion of
this purchase, the Partnership owns 99% of Magic. The Management
Company is considered a related party in that one individual has
controlling interest in both the Management Company and the
Partnership's general partner. To the extent that the Partnership and
the Management Company have common ownership, the transaction was
recorded at the Management Company's historical cost. As a result of
the transaction, the Partnership recorded goodwill of $1,407,991 and
cost in excess of carrying value of assets acquired of $534,962.
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 offers 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
effect 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. Management anticipates an increase in the minimum wage during
the last part of 2002. While an increase in the minimum wage would
increase the Partnership's labor costs, due to the uncertainty
regarding legislation on the matter, management cannot reliably
estimate the potential impact on labor costs at this time.
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 the
Partnership's interest expense and net income over the term of the
related debt. This amount 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 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 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.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
See the consolidated financial statements and supplementary data
listed in the accompanying "Index to Consolidated Financial Statements
and Supplementary Data" on Page F-1 herein. Information required for
financial statement schedules under Regulation S-X is either not
applicable or is included in the consolidated financial statements or
notes thereto.
Item 9. Changes in and Disagreements with Accountants on Accounting
-----------------------------------------------------------
and Financial Disclosure
------------------------
The Partnership filed a Form 8-K to report a change in certifying
accountants with the firm of Ernst & Young LLP being replaced by Grant
Thornton LLP effective September 9, 1999.
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
RAM, as the Managing General Partner, is responsible for the
management and administration of the Partnership under a Management
Services Agreement with the Operating Partnerships. Partnership
management services include, but are not limited to: preparing and
reviewing projections of cash flow, taxable income or loss, and
working capital requirements; conducting periodic physical
inspections, market surveys and continual Restaurant reviews to
determine when assets should be sold and, if so, determining
acceptable terms of sale; arranging any debt financing for capital
improvements or the purchase of assets; supervising any litigation
involving the Partnerships; preparing and reviewing Partnership
reports; communicating with Unitholders; supervising and reviewing
Partnership bookkeeping, accounting and audits; supervising the
presentation of and reviewing Partnership state and federal tax
returns; personnel functions, and supervising professionals employed
by the Partnerships in connection with any of the foregoing, including
attorneys, accountants and appraisers.
The direct management of the Restaurants is performed by the
Management Company pursuant to a substantially identical Management
Services Agreement with RAM. As compensation for management services,
the Management Company will receive a management fee equal to 7% of
the gross sales of the Restaurants in APP and 4.5% of gross sales of
the Restaurants in Magic. In addition, the Management Company will be
reimbursed for the cost of certain products purchased for use directly
in the operation of the Restaurants and for outside legal, accounting,
tax, auditing, advertising, and marketing services. Certain other
expenses incurred by the Management Company which relate directly to
the operation of the Restaurants, including insurance and profit
sharing and incentive bonuses and related payroll taxes for
supervisory personnel, shall be paid by the Operating Partnerships
through RAM.
Set forth below is certain information concerning the director and
executive officers of both RAM and the Management Company.
Present Position with the Management
Company and Business Experience for
Name Age Past 5 Years
- ---- --- ------------------------------------------
Hal W. McCoy 56 Chairman, Chief Executive Officer
and sole director. McCoy holds a Bachelor
of Arts degree from the University of
Oklahoma. From 1970 to 1974, he was at
different times Marketing Manager at PHI,
where he was responsible for consumer
research, market research, and market
planning, and Systems Manager, where he
was responsible for the design and
installation of PHI's first management
data processing system. In 1974, he
founded the predecessor to the Management
Company and today owns or has controlling
ownership in entities operating a combined
total of 120 franchised "Pizza Hut" and
"Long John Silver's" restaurants.
Hal W. McCoy II 34 President. McCoy holds a Bachelor of
Science degree in Business Administration
from the University of Kansas. In 1990, he
founded, owned and operated CenTex Pizza
Partners, L.P., which operated four Pizza
Huts in Texas. After improving the
operations and selling CenTex in 1992, he
joined the Management Company where he
currently oversees all operations for the
Pizza Huts and Long John Silver's managed
by the Management Company.
J. Leon Smith 59 Vice President. Smith holds a Bachelor of
Science degree in Hotel and Restaurant
Management from Oklahoma State University
and a Juris Doctorate from the University of
Oklahoma. He has been employed by McCoy
since 1974, first as Director of Operations
for the Long John Silver's division and
then as Director of Real Estate Development
and General Counsel.
Terry Freund 46 Chief Financial and Accounting Officer.
Freund holds a Bachelor of Arts degree in
Accounting from Wichita State University.
He has been employed by McCoy since 1984.
He is responsible for virtually all of the
financial and administrative functions in
the company.
Item 11. Executive Compensation
----------------------
The executive officers of the Management Company perform services
for all of the restaurants managed by the Management Company,
including the Restaurants. Cash compensation of executive officers of
the Management Company who are also officers of affiliated companies
is allocated for accounting purposes among the various entities owning
such restaurants on the basis of the number of restaurants each entity
owns. Only the compensation of the Chief Executive Officer,
President, and Chief Financial Officer is shown below as the other
officer's total cash compensation does not exceed $100,000. Neither
RAM nor the Operating Partnerships compensate their officers,
directors or partners for services performed, and the salaries of the
executive officers of the Management Company are paid out of its
management fee and not directly by the Partnership.
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------
Name and Allocable to
Principal Position Year Salary Bonus Total Partnership
- ------------------ ---- ------ ----- ----- -----------
Hal W. McCoy 2001 $159,181 $60,700 $219,881 $171,850
Chief Executive Officer 2000 173,858 83,878 257,736 199,283
1999 174,831 47,969 222,800 176,389
Hal W. McCoy II 2001 128,574 62,252 190,826 139,246
President 2000 106,257 74,950 181,207 145,310
1999 97,765 32,899 130,664 98,725
Terry Freund 2001 109,523 61,009 170,532 126,128
Assistant Secretary and 2000 103,900 59,732 163,632 129,673
Chief Financial and 1999 96,227 30,078 126,305 96,739
Accounting Officer
Incentive Bonus Plan
- --------------------
The Management Company maintains a discretionary supervisory
incentive bonus plan (the "Incentive Bonus Plan") pursuant to which
approximately 24 employees in key management positions, including Mr.
McCoy are eligible to receive quarterly cash bonus payments if certain
management objectives are achieved. Performance is measured each
quarter and bonus payments are awarded and paid at the discretion of
Mr. McCoy. The amounts paid under this plan for fiscal year 2001,
2000 and 1999 to Mr. McCoy, Mr. McCoy II and Mr. Freund are included
in the amounts shown in the cash compensation amounts set forth above.
The total amount allocated to the Restaurants under the Incentive
Bonus Plan for the fiscal year ended December 25, 2001 was $486,488 of
which $128,849 was paid to all executive officers as a group. Bonuses
paid under the Incentive Bonus Plan are paid by the Operating
Partnerships.
The Incentive Bonus Plan in effect for the fiscal year ending
December 25, 2001 provides for payment of aggregate supervisory
bonuses in an amount equal to 15% of the amount by which the
Partnership's income from operations plus depreciation and
amortization expenses exceed a prescribed threshold. The threshold
generally represents capital expenditures, interest and principal
payments on Partnership debt, and cash distributions. For the fiscal
year ended December 25, 2001 the Partnership's income from operations
plus depreciation and amortization expenses was $8,038,833.
Class A Unit Option Plan
- ------------------------
The Partnership, APP, RAM and the Management Company have adopted
a Class A Unit Option Plan (the "Plan") pursuant to which 75,000 Class
A Units are reserved for issuance to employees, including officers, of
the Partnership, APP, RAM and the Management Company. Participants
will be entitled to purchase a designated number of Units at an option
price which shall be equal to the fair market value of the Units on
the date the option is granted. Options granted under the Plan will
be for a term to be determined by the Managing General Partner at the
time of issuance (not to exceed ten years) and shall not be
transferable except in the event of the death of the optionee, unless
the Managing General Partner otherwise determines and so specifies in
the terms of the grant. The Plan is administered by the Managing
General Partner which, among other things, designates the individuals
to whom options are granted, the number of Units for which such
options are to be granted and other terms of grant. The executive
officers have no outstanding options at December 25, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and
---------------------------------------------------
Management
----------
PRINCIPAL UNITHOLDERS
- ---------------------
The following table sets forth, as of March 1, 2002, information
with respect to persons known to the Partnership to be beneficial
owners of more than five percent of the Class A Income Preference
Units, Class B or Class C Units of the Partnership:
Name & Address Amount & Nature
Title of Beneficial of Beneficial Percent
of Class Owner Ownership of Class
- -------- -------------- --------------- --------
Class A Income
Preference Units None
Class B Hal W. McCoy 641,537 (1) 59.17%
3020 N. Cypress Rd.
Suite 100
Wichita, KS 67226
Class B Hal W. McCoy II 84,105 7.76%
3020 N. Cypress Rd.
Suite 100
Wichita, KS 67226
Class B John Hunter 116,564 10.75%
117 Lilac Lane
San Antonio, TX 78209
Class C Hal W. McCoy 1,246,876 (1) 65.85%
3020 N. Cypress Rd.
Suite 100
Wichita, KS 67226
Class C Hal W. McCoy II 141,129 7.45%
3020 N. Cypress Rd.
Suite 100
Wichita, KS 67226
Class C John Hunter 106,536 5.63%
117 Lilac Lane
San Antonio, TX 78209
(1) Hal W. McCoy beneficially owns 95.75% of RMC Partners, L.P. which owns
671,164 Class B Units and 1,297,266 Class C Units. Mr. McCoy owns 95.65% of
RMC American Management, Inc. which owns 3,680 Class C Units. Mr. McCoy has
voting authority over the units.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of March 1, 2002, the number of
Class A Income Preference Units, Class B Units, or Class C Units
beneficially owned by the director and by the director and executive
officers of both RAM and the Management Company as a group.
Title Name of Amount & Nature Percent
of Class Beneficial Owner of Beneficial Ownership of Class
- -------- ---------------- ----------------------- --------
B Hal W. McCoy 641,537 (1) 59.17%
C Hal W. McCoy 1,246,876 (1) 65.85%
B Director & all 807,069 (1) 74.44%
officers as a group
(4 Persons)
C Director & all 1,530,315 (1) 80.82%
officers as a group
(4 Persons)
(1) See the table under "Principal Unitholders"
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
One of the Restaurants is located in a building owned by an
affiliate of the General Partners. The lease provides for minimum
annual rentals of $29,500 and is subject to additional rentals based
on a percentage of sales in excess of a specified amount. The lease
is a net lease, under which the lessee pays the taxes, insurance and
maintenance costs. The lease is for an initial term of 15 years with
options to renew for three additional five-year periods. Although
this lease was not negotiated at arm's length, RMC believes that the
terms and conditions thereof, including the rental rate, is not less
favorable to the Partnership than would be available from unrelated
parties.
Pursuant to the Management Services Agreements (Agreements) entered
into June 26, 1987, the Restaurants of APP are managed by the
Management Company for a fee equal to 7% of the gross sales of the
Restaurants and reimbursement of certain costs incurred for the direct
benefit of the Restaurants. Neither the terms and conditions of the
Agreements, nor the amount of the fee were negotiated at arm's length.
Based on prior experience in managing the Restaurants, however, the
Managing General Partner believes that the terms and conditions of the
Management Services Agreement, including the amount of the fee, are
fair and reasonable and not less favorable to the Partnership than
those generally prevailing with respect to similar transactions
between unrelated parties. The 7% fee approximated the actual
unreimbursed costs incurred by the Managing General Partner in
managing the Restaurants when the Agreements were entered into in June
of 1987. The 7% fee remains in effect for the life of the Agreements
which expire December 31, 2007.
Pursuant to separate Management Services Agreements entered into March
13, 1996, the Restaurants of Magic are managed by the Management
Company for a fee equal to 4.5% of the gross sales of the Restaurants
and reimbursement of certain costs incurred for the direct benefit of
the Restaurants. The terms and conditions of the Agreements were
negotiated at arm's length with the former owners of the Oklahoma
restaurants who were originally 25% partners in Magic. The Management
Company agreed to a reduced fee due to its ownership interest in
Magic. The 4.5% fee remains in effect for the remaining life of the
Agreements which expire February 28, 2010.
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
------------------------------------------------------
(a) 1. Financial statements
--------------------
See "Index to Consolidated Financial Statements and
Supplementary Data" which appears on page F-1 herein.
3. Exhibits
--------
The exhibits filed as part of this annual report are listed in
the "Index to Exhibits" at page 29.
(b) Reports on Form 8-K
-------------------
During the third quarter of 1999, the Partnership filed a
Form 8-K dated September 9, 1999 reporting a change in
certifying accountants.
INDEX TO EXHIBITS
(Item 14(a))
Exhibit
No. Description of Exhibits Page/Notes
- ------- ----------------------- ----------
3.1 Amended and Restated Certificate of Limited
Partnership of American Restaurant Partners, L.P. A
3.2 Amended and Restated Agreement of Limited
Partnership of American Restaurant Partners, L.P. A
3.3 Amended and Restated Certificate of Limited
Partnership of American Pizza Partners, L.P. A
3.4 Amended and Restated Agreement of Limited
Partnership of American Pizza Partners, L.P. A
4.1 Form of Class A Certificate A
4.2 Form of Application for Transfer of Class A Units A
10.1 Management Services Agreement dated
June 26, 1987 between American Pizza
Partners, L.P. and RMC American Management, Inc. A
10.2 Management Services Agreement dated
June 26, 1987 between RMC American
Management, Inc. and Restaurant Management
Company of Wichita, Inc. A
10.3 Form of Superseding Franchise Agreement
between the Partnership and Pizza Hut, Inc.
and schedule pursuant to Item 601 of
Regulation S-K. A
10.4 Form of Blanket Amendment to Franchise Agreements A
10.5 Incentive Bonus Plan A
10.6 Class A Unit Option Plan B
10.7 Revolving Term Credit Agreement dated
June 29, 1987 between American Pizza
Partners, L.P. and the First National Bank
in Wichita C
10.8 Form of 1990 Franchise Agreement between the
Partnership and Pizza Hut, Inc. and schedule
pursuant to Item 601 of Regulation S-K D
10.9 Contribution Agreement, dated as of February 1,
1996, relating to the closing date of March 13,
1996, by and among American Pizza Partners, L.P.,
Hospitality Group of Oklahoma, Inc., RMC American
Management, Inc., Restaurant Management Company
of Wichita, Inc. and Oklahoma Magic, L.P. E
10.10 Settlement Agreement between Oklahoma Magic, L.P.
and Hospitality Group of Oklahoma, Inc. F
23.1 Consent of Grant Thornton L.L.P. F-23
A. Included as exhibits in the Partnership's Registration Statement
on Form S-1 (Registration No.33-15243) dated August 20, 1987 and
included herein by reference to exhibit of same number.
B. Incorporated by reference to the Partnership's Registration
Statement on Form S-8 dated March 21, 1988.
C. Incorporated by reference to Exhibit 10.7 of the Partnership's
Form 10-K for the year ended December 31, 1987.
D. Incorporated by reference to Exhibit 10.8 of the Partnership's
Form 10-K for the year ended December 31, 1991.
E. Incorporated by reference to Exhibit 2 of the Partnership's Form
8-K dated March 13, 1996.
F. Incorporated by reference to Exhibit 10.10 of the Partnership's
Form 10-K dated December 29, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: 3/22/02 By: /s/Hal W. McCoy
------- ---------------
Hal W. McCoy
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange 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.
Name Title Date
- ---- ----- ----
/s/Hal W. McCoy Chairman and Chief Executive Officer 3/22/02
- --------------- (Principal Executive Officer) -------
Hal W. McCoy of RMC American Management, Inc.
/s/Terry Freund Chief Financial and Accounting 3/22/02
- --------------- Officer -------
Terry Freund
Index to Consolidated Financial Statements
and Supplementary Data
The following financial statements are included in Item 8:
Page
----
Report of Independent Certified Public Accountants . . . . . F-2
Consolidated Balance Sheets as of December 25, 2001
and December 26, 2000 . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Income for the years ended
December 25, 2001, December 26, 2000,
and December 28, 1999 . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Partners' Capital (Deficiency)
for the years ended December 25, 2001,
December 26, 2000 and December 28, 1999 . . . . . . . . F-6
Consolidated Statements of Cash Flows for the
years ended December 25, 2001, December 26, 2000,
and December 28, 1999 . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . F-8
All financial statement schedules have been omitted since the required
information is not present.
Report of Independent Certified Public Accountants
The General Partners and Limited Partners
American Restaurant Partners, L.P.
We have audited the accompanying consolidated balance sheets of
American Restaurant Partners, L.P. (the Partnership) as of December
25, 2001 and December 26, 2000, and the related consolidated
statements of income, partners' capital (deficiency), and cash flows
for each of the three years in the period ended December 25, 2001.
These financial statements are the responsibility of the Partnership'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 of America. 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 consolidated financial statements referred to
above, present fairly, in all material respects, the consolidated
financial position of American Restaurant Partners, L.P. at December
25, 2001 and December 26, 2000 and the consolidated results of its
operations and its cash flows for each of the three years in the
period ended December 25, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/Grant Thornton LLP
Wichita, Kansas
March 8, 2002
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 25, December 26,
ASSETS 2001 2000
- ----------------------------------- ------------ ------------
Current assets:
Cash and cash equivalents $ 1,594,934 $ 788,485
Accounts receivable 482,185 320,038
Due from affiliates 64,668 66,244
Notes receivable from
affiliates - current portion 16,173 15,221
Inventories 397,821 407,413
Prepaid expenses 359,592 307,894
---------- ----------
Total current assets 2,915,373 1,905,295
Property and equipment, at cost:
Land 5,089,834 4,991,222
Buildings 9,020,921 8,920,125
Restaurant equipment 13,613,104 13,502,699
Leasehold rights and improvements 8,662,927 8,259,820
Property under capital leases 3,999,874 3,538,902
Construction in progress 328,428 -
---------- ----------
40,715,088 39,212,768
Less accumulated depreciation and amortization 20,580,330 18,552,936
---------- ----------
20,134,758 20,659,832
Other assets:
Franchise rights, net of accumulated
amortization of $2,218,933 ($1,951,824 in 2000) 4,969,167 5,236,276
Notes receivable from affiliates 53,409 66,111
Deposit with affiliate 485,000 485,000
Goodwill, net of accumulated
amortization of $264,865 ($179,977 in 2000) 1,967,627 2,052,515
Other 1,193,205 1,386,337
---------- ----------
8,668,408 9,226,239
---------- ----------
$31,718,539 $31,791,366
========== ==========
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 25, December 26,
LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY) 2001 2000
- ---------------------------------------------- ------------ ------------
Current liabilities:
Accounts payable $ 3,129,578 $ 2,719,592
Due to affiliates 52,763 158,755
Accrued payroll and other taxes 981,542 899,140
Accrued liabilities 1,404,786 1,361,631
Current maturities of long-term debt 5,406,737 2,763,409
Current portion of capital lease obligations 596,356 545,381
---------- ----------
Total current liabilities 11,571,762 8,447,908
Long-term liabilities less current maturities:
Capital lease obligations 1,995,197 2,026,327
Long-term debt 23,667,180 27,121,884
Other noncurrent liabilities 817,104 992,674
---------- ----------
26,479,481 30,140,885
Minority interests in Operating Partnerships 140,406 135,780
Commitments and contingencies - -
Partners' capital (deficiency):
General Partners (8,358) (8,727)
Limited Partners:
Class A Income Preference, authorized 875,000
units; issued 696,813 units (707,138 in 2000) 5,131,262 5,099,355
Classes B and C, issued 1,093,518 and
1,912,648 class B and C units, respectively
(1,095,018 and 1,915,148 units in 2000,
respectively) (9,146,027) (9,415,842)
Notes receivable employees - sale
of partnership units (591,344) (749,350)
Cost in excess of carrying value
of assets acquired (1,858,643) (1,858,643)
---------- ----------
Total partners' capital (deficiency) (6,473,110) (6,933,207)
---------- ----------
$31,718,539 $31,791,366
========== ==========
See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 25, 2001,
December 26, 2000 and December 28, 1999
2001 2000 1999
---------- ---------- ----------
Net sales $63,817,430 $60,504,753 $57,820,215
Operating costs and expenses:
Cost of sales 16,323,258 15,000,081 15,355,713
Restaurant labor and benefits 18,468,004 17,346,143 16,899,475
Advertising 3,907,872 3,927,433 3,766,662
Other restaurant operating
expenses exclusive of
depreciation and amortization 11,995,322 11,379,040 10,834,915
General and administrative:
Management fees - related party 3,970,991 3,738,150 3,582,943
Other 1,113,150 1,084,454 787,305
Depreciation and amortization 3,107,114 2,826,337 2,540,304
Loss on restaurant closings - 24,910 63,398
---------- ---------- ----------
Income from operations 4,931,719 5,178,205 3,989,500
Equity in loss of unconsolidated affiliates (176,456) (176,896) -
Interest income 27,680 39,117 25,994
Interest expense (3,087,641) (3,047,986) (3,014,620)
Cure of (loss on) default of pooled loans - (409,016) 423,900
Loss on sale of investments held for sale - - (134,766)
Gain on sale of restaurant - - 196,608
Gain on fire settlement 159,203 - -
---------- ---------- ----------
(3,077,214) (3,594,781) (2,502,884)
---------- ---------- ----------
Income before minority interest 1,854,505 1,583,424 1,486,616
Minority interests in income of
Operating Partnerships (25,597) (211,300) (172,062)
---------- ---------- ----------
Net income $ 1,828,908 $ 1,372,124 $ 1,314,554
========== ========== ==========
Net income allocated to Partners:
Class A Income Preference $ 345,227 $ 270,654 $ 298,258
Class B $ 539,710 $ 400,710 $ 368,528
Class C $ 943,971 $ 700,760 $ 647,768
Weighted average number of Partnership
units outstanding during period:
Class A Income Preference 699,849 741,052 813,642
Class B 1,094,107 1,097,151 1,005,338
Class C 1,913,630 1,918,702 1,767,105
Basic and diluted income
before minority interest per
Partnership unit $ 0.50 $ 0.42 $ 0.41
Basic and diluted minority interest
per Partnership unit $ (0.01) $ (0.06) $ (0.05)
Basic and diluted net income
per Partnership unit $ 0.49 $ 0.37 $ 0.37
Distributions per Partnership unit $ 0.40 $ 0.40 $ 0.45
See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P.
Consolidated Statements of Partners' Capital (Deficiency)
Years ended December 25, 2001, December 26, 2000, and December 28, 1999
General Partners Limited Partners Cost in
---------------- ----------------------------------------- excess of
Classes B Class A Income Notes carrying
and C Preference Classes B and C receivable value of Cumulative
---------------- ---------------- ----------------------- from assets comprehensive
Units Amounts Units Amounts Units Amounts employees acquired income (loss) Total
----- ------- ----- ------- ----- ------- --------- -------- ------------- -----
Balance at
December 29, 1998 3,940 $(8,245) 814,010 $5,543,603 2,611,859 $(10,058,014)$ - $(1,323,681) $(108,441) $(5,954,778)
Net Income - 1,446 - 298,258 - 1,014,850 - - - 1,314,554
Change in unrealized
loss on investments
available-for-sale - - - - - - - - 108,441 108,441
----------
Comprehensive income 1,422,995
Partnership distributions - (1,786) - (368,863) - (1,255,095) 77,024 - - (1,548,720)
Units purchased - - (24,144) (78,202) (23,133) (69,396) - - - (147,598)
Units sold to employees - - - - 437,500 1,115,625 (1,047,412) - - 68,213
Employee compensation
- reduction of
notes receivable - - - - - - 13,952 - - 13,952
----- ------ ------- --------- --------- ----------- -------- ---------- -------- ----------
Balance at
December 28, 1999 3,940 (8,585) 789,866 5,394,796 3,026,226 (9,252,030) (956,436) (1,323,681) - (6,145,936)
Net Income - 1,438 - 270,654 - 1,100,032 - - - 1,372,124
Partnership distributions - 1,580) - (297,229) - (1,208,044 117,551 - - 1,389,302)
Units purchased - - (82,728) (268,866) (25,000) (69,750 47,705 - - (290,911)
Units sold to employees - - - - 5,000 13,950 (12,555) - - 1,395
Employee compensation
- reduction of
notes receivable - - - - - - 54,385 - - 54,385
Purchase of Oklahoma
Magic, L.P.'s minority
interest from a
related party - - - - - - - (534,962) - (534,962)
----- ------ ------- --------- --------- ----------- -------- ---------- -------- ----------
Balance at
December 26, 2000 3,940 (8,727) 707,138 5,099,355 3,006,226 (9,415,842) (749,350) (1,858,643) - (6,933,207)
Net Income - 1,944 - 345,227 - 1,481,737 - - - 1,828,908
Partnership distributions - (1,575) - (279,764) - (1,200,762) 106,097 - - (1,376,004)
Units purchased - - (10,325) (33,556) (4,000) (11,160) - - - (44,716)
Employee compensation
- reduction of
notes receivable - - - - - - 51,909 - - 51,909
----- ------ ------- --------- --------- ----------- -------- ---------- -------- ----------
Balance at
December 25, 2001 3,940 $(8,358) 696,813 $5,131,262 3,002,226 $ (9,146,027)$ (591,344)$(1,858,643) $ - $(6,473,110)
===== ====== ======= ========= ========= =========== ======== ========== ======== ==========
See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 25, 2001, December 26, 2000, and December 28, 1999
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income $ 1,828,908 $ 1,372,124 $ 1,314,554
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 3,107,114 2,826,337 2,540,304
Equity in loss of unconsoliated affiliates 176,456 176,896 -
Loss on default in pooled loans - 409,016 -
Cure of default in pooled loans - - (423,900)
Loss on disposition of assets 39,266 5,786 20,150
Loss on sale of investments held for sale - - 134,766
Loss on restaurant closings - 24,910 63,398
Minority interest in income of
Operating Partnerships 25,597 211,300 172,062
Gain on sale of restaurants - - (196,608)
Unit compensation expense 51,909 54,385 13,952
Gain on fire settlement (159,203) - -
Net change in operating assets and liabilities:
Accounts receivable (162,147) (61,650) 6,366
Due from affiliates 1,576 3,704 20,198
Inventories 9,592 3,584 30,329
Prepaid expenses (51,698) (37,594) 16,746
Deposit with affiliate - - (35,000)
Accounts payable 409,986 (106,418) 378,601
Due to affiliates (105,992) 46,767 (114,334)
Accrued payroll and other taxes 82,402 148,666 114,669
Accrued liabilities 43,155 184,125 (100,100)
Other, net (165,641) 151,557 169,344
---------- ---------- ----------
Net cash provided by operating activities 5,131,280 5,413,495 4,125,497
Investing activities:
Purchase of minority interest in Magic - (2,500,000) -
Investment in unconsolidated affiliates (127,298) (341,952) -
Proceeds from sale of investments held for sale - - 42,310
Additions to property and equipment (2,055,634) (2,239,355) (1,378,400)
Proceeds from sale of property and equipment 349,278 6,538 209,118
Proceeds from sale of restaurants - - 717,639
Purchase of franchise rights - - (15,000)
Collections of notes receivable from affiliates 11,750 14,151 17,229
Net proceeds from fire settlement 251,613 - -
Other, net - - (35,610)
---------- ---------- ----------
Net cash used in investing activities (1,570,291) (5,060,618) (442,714)
Financing activities:
Payments on long-term borrowings (2,449,626) (3,278,852) (4,707,728)
Proceeds from long-term borrowings 1,723,856 5,105,739 3,129,500
Payments on capital lease obligations (587,079) (384,942) (47,515)
Distributions to Partners (1,376,004) (1,389,302) (1,548,720)
Proceeds from issuance of Class B and C units - 1,395 68,213
Repurchase of units (44,716) (290,911) (147,598)
General Partners' distributions
from Operating Partnerships (14,971) (15,221) (16,429)
Minority interests' distributions
from Operating Partnerships (6,000) (54,750) -
---------- ---------- ----------
Net cash used in financing activities (2,754,540) (306,844) (3,270,277)
---------- ---------- ----------
Net increase in cash and cash equivalents 806,449 46,033 412,506
Cash and cash equivalents at beginning of period 788,485 742,452 329,946
---------- ---------- ----------
Cash and cash equivalents at end of period $ 1,594,934 $ 788,485 $ 742,452
========== ========== ==========
See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
ORGANIZATION
American Restaurant Partners, L.P. was formed in connection with a
public offering of Class A Income Preference Units in 1987 and owns a
99% limited partnership interest in American Pizza Partners, L.P.
(APP). The remaining 1% of American Pizza Partners, L.P. is owned by
RMC Partners, L.P. and RMC American Management, Inc. (RAM) as the
general partners.
On March 13, 1996, APP purchased a 45% interest in a newly formed
limited partnership, Oklahoma Magic, L.P. (Magic), that owns and
operates twenty-six Pizza Hut restaurants in Oklahoma. Effective
August 11, 1998, APP's interest in Magic increased from 45% to 60% in
connection with Magic's purchase of a 25% interest from a former
limited partner. On July 26, 2000, APP purchased 39% of Magic from
Restaurant Management Company of Wichita, Inc. (the Management
Company) bringing their interest in Magic to 99%. The remaining 1%
interest in Magic is held by RAM, the managing general partner.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of American Restaurant Partners, L.P. and its majority owned
subsidiaries, American Pizza Partners, L.P., APP Concepts, L.C. and
Oklahoma Magic, L.P., which are hereinafter collectively referred to
as the Partnership. All significant intercompany transactions and
balances have been eliminated.
FISCAL YEAR
The Partnership operates on a 52 or 53 week fiscal year ending on the
last Tuesday in December.
EARNINGS PER PARTNERSHIP UNIT
Basic earnings per Partnership unit are computed based on the weighted
average number of Partnership units outstanding. For purposes of
diluted computations, the number of Partnership units that would be
issued from the exercise of dilutive Partnership unit options has been
reduced by the number of Partnership units which could have been
purchased from the proceeds of the exercise at the average market
price of the Partnership's units or the price of the Partnership's
units on the exercise date.
OPERATIONS
All of the restaurants owned by the Partnership are operated under a
franchise agreement with Pizza Hut, Inc., the franchisor. The
agreement grants the Partnership exclusive rights to develop and
operate restaurants in certain franchise territories. The Partnership
operates restaurants in Georgia, Louisiana, Montana, Texas, Wyoming
and Oklahoma.
A schedule of restaurants in operation for the periods presented in
the accompanying consolidated financial statements is as follows:
2001 2000 1999
---- ---- ----
Restaurants in operation at beginning of period 86 87 89
Opened 2 -- --
Closed (1) (1) (1)
Sold -- -- (1)
--- --- ---
Restaurants in operation at end of period 87 86 87
=== === ===
INVENTORIES
Inventories consist of food and supplies and are stated at the lower
of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the related
assets. Leasehold improvements are amortized over the life of the
lease or improvement, whichever is shorter.
The estimated useful lives used in computing depreciation and
amortization are as follows:
Buildings 10 to 30 years
Restaurant equipment 3 to 7 years
Leasehold rights and improvements 5 to 20 years
Expenditures for maintenance and repairs are charged to operations as
incurred. Expenditures for renewals and betterments, which materially
extend the useful lives for assets or increase their productivity, are
capitalized. Depreciation expense was $2,621,072, $2,345,383, and
$2,036,396 for the years ended December 25, 2001, December 26, 2000
and December 28, 1999, respectively.
AMORTIZATION OF GOODWILL
Goodwill resulting from APP's investment in Magic was amortized over
29 years using the straight-line method through December 25, 2001.
Effective December 26, 2001, goodwill will no longer be amortized but
will be tested for impairment annually and whenever there is an
impairment indicator (see also discussion in Effect of New Accounting
Standards.)
INVESTMENTS IN AFFILIATES
Investments in affiliated entities owned less than 50% are accounted
for on the equity method. Accordingly, consolidated net income
includes the Partnership's share of their net income or loss.
FRANCHISE RIGHTS AND FEES
Agreements with the franchisor provide franchise rights for a period
of 20 years and are renewable at the option of the Partnership for an
additional 15 years, subject to the approval of the franchisor.
Initial franchise fees are capitalized and amortized by the straight-
line method over periods not in excess of 30 years. Periodic
franchise royalty and advertising fees, which are based on a percent
of sales, are charged to operations as incurred.
CONCENTRATION OF CREDIT RISKS
The Partnership's financial instruments that are exposed to
concentration of credit risks consist primarily of cash and accounts
receivable. The Partnership places its funds into high credit quality
financial institutions and, at times, such funds may be in excess of
the Federal Depository insurance limit. The Partnership generally
does not require collateral against accounts receivable. Credit risks
associated with the majority of customer sales are minimal as such
sales are primarily for cash. All notes receivable from affiliates
are supported by the guarantee of the majority owner of the
Partnership.
INCOME TAXES
The Partnership is not subject to federal or state income taxes and,
accordingly, no provision for income taxes has been reflected in the
accompanying consolidated financial statements. Such taxes are the
responsibility of the partners based on their proportionate share of
the Partnership's taxable earnings.
Due to differences in the rules related to reporting income for
financial statement purposes and for purposes of income tax returns by
individual limited partners, the tax information sent to individual
limited partners differs from the information contained herein. At
December 26, 2001, the Partnership's reported amount of its net assets
for financial statement purposes were more than the income tax bases
of such net assets by approximately $741,000. The differences between
net income in conformance with accounting principles generally
accepted in the United States of America (US GAAP) and taxable income
are as follows:
2001 2000 1999
---- ---- ----
US GAAP net income $1,828,908 $1,372,124 $1,314,554
Depreciation and amortization 366,691 153,712 36,348
Capitalized leases (67,041) (11,750) (59,601)
Equity in earnings (loss)
of affiliate (131,580) 89,127 (274,257)
Loss on restaurant closings 158 (1,750) (42,149)
Gain on disposition of assets 95,723 7,051 437,316
Unicap adjustment (2,140) 1,830 4,731
Loss on default of pooled loans - 313,465 -
Other (45,696) 23,139 147,371
--------- --------- ---------
Taxable income $2,045,023 $1,946,948 $1,564,313
========= ========= =========
The Omnibus Budget Reconciliation Act of 1987 required public limited
partnerships to become taxable entities beginning in 1998. After
considering various alternatives, the Partnership delisted from the
American Stock Exchange effective November 13, 1997 and now limits
trading of its units. As a result, the Partnership continues to be
taxed as a partnership rather than being taxed as a corporation.
ADVERTISING COSTS
Advertising production and media costs are expensed as incurred.
USE OF ESTIMATES
In preparing the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Partnership
considers all highly liquid debt instruments, purchased with a
maturity of three months or less, to be cash equivalents.
ACCOUNTING FOR UNIT BASED COMPENSATION
The Partnership uses the intrinsic value-based method for measuring
unit-based compensation cost which measures compensation cost as the
excess, if any, of the quoted market price of Partnership units at the
grant date over the amount the employee must pay for the units.
Required pro forma disclosures of compensation expense determined
under the fair value method have not been presented as there are no
material unvested options and no options have been granted in 2001,
2000 or 1999.
INVESTMENTS AVAILABLE-FOR-SALE
Investments available-for-sale are carried at fair value, with the
unrealized gains and losses reported as comprehensive income.
Realized gains and losses and declines in value judged to be other-
than-temporary on available-for-sale securities are included in other
income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities
classified as available-for-sale are included in other income.
EFFECT OF NEW ACCOUNTING STANDARDS
On July 20, 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) 142,
Goodwill and Intangible Assets. Major provisions of this Statement
and their effective dates for the Partnership are as follows:
- Effective December 26, 2001, all previously recognized goodwill
and intangible assets with indefinite lives will no longer be
subject to amortization. Therefore, annual goodwill amortization of
$84,888 will no longer be recognized by the Partnership.
- Effective December 26, 2001, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator.
The Partnership has completed a transitional fair value based
impairment test of goodwill as of December 26, 2001. This test
indicated the carrying value of goodwill is not impaired at December
26, 2001. Therefore, the Partnership does not anticipate an
impairment loss to be recognized as a result of this transitional
testing.
2. RELATED PARTY TRANSACTIONS
--------------------------
The Partnership has entered into a management services agreement with
RAM whereby RAM is responsible for management of the restaurants for a
fee equal to 7% for APP, and 4.5% for Magic, of the gross receipts of
the restaurants, as defined. RAM has entered into a management
services agreement containing substantially identical terms and
conditions with Restaurant Management Company of Wichita, Inc. (the
Management Company).
Affiliates of the Management Company provide various other services
for the Partnership including promotional advertising. In addition to
participating in advertising provided by the franchisor, an affiliated
company engages in promotional activities to further enhance
restaurant sales. The affiliate's fees for such services are based on
the actual costs incurred and principally relate to the reimbursement
of print and media costs. In exchange for advertising services
provided directly by the affiliate, the Partnership pays a commission
based upon 15% of the advertising costs incurred. Such costs were not
significant in 2001, 2000 or 1999.
The Partnership maintains a deposit with the Management Company equal
to approximately one and one-half month's management fee. Such
deposit, $485,000 at December 26, 2001 and December 26, 2000, may be
increased or decreased at the discretion of RAM.
The Management Company maintains an incentive bonus plan whereby
certain employees are eligible to receive bonus payments if specified
management objectives are achieved. Such bonuses are not greater than
15% of the amount by which the Partnership's cash flow exceeds
threshold amounts as determined by management. Bonuses paid under the
plan are reimbursed to the Management Company by the Partnership.
The Partnership owns a 25% interest in a limited liability company
(LLC) which owns an airplane. The Management Company leases the
airplane from the LLC on an hourly basis. The Partnership recorded a
loss on the LLC of $154,166 and $156,398 at December 25, 2001 and
December 26, 2000, respectively. The Partnership also owns a 4.34%
interest in Seaside Pizza, LLC (Seaside), a company formed to acquire
eleven Pizza Hut restaurants in New Jersey in December 2000. Certain
Partnership principal unitholders are also owners of Seaside. The
Partnership's share of Seaside's income was not significant for the
years ended December 25, 2001 and December 26, 2000.
Transactions with related parties included in the accompanying
consolidated financial statements and notes are summarized as follows:
2001 2000 1999
---- ---- ----
Management fees $3,970,991 $3,738,150 $3,582,943
Management Company bonuses 539,382 510,641 322,308
Advertising commissions 92,477 96,592 77,702
Accommodation fee (See Note 3) 90,911 94,982 98,710
Acquisition/divestiture fee
on sale of assets 5,000 15,000 35,850
Development fees 25,000 - -
The Partnership has made advances to various affiliates under notes
receivable which bear interest at market rates. The advances are to
be received in varying installments with maturities as follows: 2002
- - $16,173; 2003 - $11,629; 2004 - $10,452; 2005 - $11,434; 2006
- - $10,058; Thereafter - $9,836. All such notes are guaranteed by the
majority owner of the Partnership. In addition, the Partnership has
certain other amounts due from and to affiliates which are on a
noninterest bearing basis.
3. LONG-TERM DEBT
--------------
Long-term debt consists of the following at December 25, 2001 and
December 26, 2000:
2001 2000
---- ----
Notes payable to INTRUST Bank in
Wichita, payable in monthly install-
ments aggregating $132,262 including
interest at fixed and variable rates
from 6.0% to 10.00%, due at various
dates through January 2007 $ 7,010,662 $ 8,707,682
Notes payable to INTRUST Bank in
Wichita. These notes were paid in
full in January 2002 from the proceeds
of a sale-leaseback transaction. 2,462,999 -
Notes payable to Franchise Mortgage
Acceptance Company (FMAC) payable in
monthly installments aggregating
$255,543 including interest at fixed
rates from 8.81% to 10.65%, due at
various dates through May 2013 16,637,349 18,098,354
Notes payable to CNL Financial Services,
Inc. payable in monthly installments
aggregating $16,844, including interest
at a fixed rate of 9.62%, through
July 2019 1,711,436 1,747,048
Notes payable to Peachtree Franchise
Finance, LLC payable in monthly
installments of $11,854 including
interest at a fixed rate of 10.05%,
due June 2015 1,048,906 1,083,813
Notes payable to various banks,payable
in monthly installments aggregating
$5,690, including interest at rates
from 8.95% to 10.00%, due at various
dates through January 2010 202,565 248,396
---------- ----------
29,073,917 29,885,293
Less current portion 5,406,737 2,763,409
---------- ----------
$23,667,180 $27,121,884
========== ==========
Certain refinancing with FMAC required the Management Company to act
as Accommodation Maker and execute the promissory notes and security
agreements as borrower, enabling APP to obtain a lower interest rate
and favorable borrowing terms. In return, APP must pay the Management
Company an annual fee equal to 1% of the outstanding loan balance,
determined as of the first day of each calendar quarter, payable in
advance.
Certain borrowings through FMAC are part of loans "pooled" together
with other franchisees in good standing and approved restaurant
concepts, as defined, and sold to the secondary market. The
Partnership has provided to FMAC a limited, contingent guarantee equal
to 13% of the original loan balance for APP and 15% of the original
loan balance for Magic ($409,814 and $507,222 at December 25, 2001 and
December 26, 2000, respectively), referred to as the "Performance
Guarantee Amount" (PGA). The Partnership promises to pay to FMAC up
to the total of the PGA to the extent required to cover delinquent
loans or defaults in the "pooled" loans. Each month, the Partnership
pays to FMAC a "Periodic Guarantee Charge Amount" (PGCA) which is the
monthly amortization of the PGA. If none of the other loans in the
"pool" are delinquent in respect of any payment due or in default
during a monthly period, the Partnership is entitled to a rebate of
the PGCA. To the extent that the other loans in the "pool" are
delinquent or in default, the amount of the PGCA rebate will be
reduced proportionately. At December 25, 2001 and December 26, 2000,
certain loans within the Partnership's "pool" were in default. This
resulted in the Partnership recording loss on default of pooled loans
of $409,016 during 2000. The loss recorded in 2000 included the
Partnership's total liability for these defaulted loans under the PGA.
During the year ended December 28, 1999 certain loans within the
Partnership's "pool" that had been in default at December 29, 1998
were cured. This resulted in the Partnership writing off the
remaining $423,900 of its liability for these formerly defaulted loans
under the PGA. The PGA remains in effect until the loans are
discharged, prepaid, accelerated, or mature, as defined in the secured
promissory note.
All borrowings are secured by substantially all land, buildings, and
equipment of the Partnership. In addition, all borrowings, except for
the FMAC loans are supported by the guarantee of the majority owner of
the Partnership.
Future annual long-term debt maturities, exclusive of capital lease
commitments over the next five years are as follows: 2002 -
$5,406,737; 2003 - $4,527,283; 2004 - $3,051,954; 2005 - $3,494,779
and 2006 - $1,914,387.
4. LEASES
------
The Partnership leases land and buildings for various restaurants
under both operating and capital lease arrangements. Initial lease
terms normally range from 5 to 20 years with renewal options generally
available. The leases are net leases under which the Partnership pays
the taxes, insurance, and maintenance costs, and they generally
provide for both minimum rent payments and contingent rentals based on
a percentage of sales in excess of specified amounts.
Minimum and contingent rent payments for land and buildings leased
from affiliates were $30,250 for each of the years ended December 25,
2001, December 26, 2000, and December 28, 1999.
The Partnership also leases point-of-sale terminals for its
restaurants under capital lease arrangements. The leases contain
initial lease terms ranging from 3 to 4 years and are guaranteed by
the majority owner of the Partnership.
Total minimum and contingent rent expense under all operating lease
agreements was as follows:
2001 2000 1999
---- ---- ----
Minimum rentals $1,191,257 $1,271,774 $1,263,873
Contingent rentals 264,565 277,858 231,070
Future minimum payments under capital leases and noncancelable
operating leases with an initial term of one year or more at December
25, 2001, are as follows:
Operating
Leases With Operating
Capital Unrelated Leases With
Leases Parties Affiliates
---------- ---------- ----------
2002 $ 848,890 $1,024,944 $7,563
2003 733,921 907,718 -
2004 387,905 710,169 -
2005 322,353 547,002 -
2006 310,162 428,164 -
Thereafter 1,095,534 1,089,149 -
--------- --------- -----
Total minimum payments 3,698,765 $4,707,146 $7,563
Less interet 1,107,212 ========= =====
---------
2,591,553
Less current portion 596,356
---------
$1,995,197
=========
Amortization of property under capital leases, determined on the
straight-line basis over the lease terms totaled $485,188, $360,575
and $82,149 for the years ended December 25, 2001, December 26, 2000,
and December 28, 1999, respectively. The amortization is included in
depreciation and amortization expense in the accompanying consolidated
statements of income. The cost of property under capital leases was
$3,999,874 at December 25, 2001 and $3,538,902 at December 26, 2000.
Accumulated amortization on such property under capital leases was
$1,961,486 and $1,536,644 at December 25, 2001 and December 26, 2000,
respectively. Property under capital lease obligations included
$2,017,406 of buildings and $1,982,468 of restaurant equipment at
December 25, 2001 and $2,077,751 of buildings and $1,461,151 of
restaurant equipment at December 26, 2000.
5. LIMITED PARTNERSHIP UNITS
-------------------------
The Partnership has three classes of Partnership Units outstanding,
consisting of Class A Income Preference, Class B, and Class C Units.
The Units are in the nature of equity securities entitled to
participate in cash distributions of the Partnership on a quarterly
basis at the discretion of RAM, the General Partner. In the event the
Partnership is terminated, the Unitholders will receive the remaining
assets of the Partnership after satisfaction of Partnership liability
and capital account requirements.
6. DISTRIBUTIONS TO PARTNERS
-------------------------
On January 2, 2002, the Partnership declared a distribution of $.10
per Unit to all Unitholders of record as of January 11, 2002. The
distribution is not reflected in the December 25, 2001 consolidated
financial statements.
7. UNIT OPTION PLAN
----------------
The Partnership, RAM, and the Management Company adopted a Class A
Unit Option Plan (the Plan) pursuant to which 75,000 Class A Units are
reserved for issuance to employees, including officers of the
Partnership, RAM, and the Management Company. The Plan is
administered by the Managing General Partner which will, among other
things, designate the number of Units and individuals to whom options
will be granted. Participants in the Plan are entitled to purchase a
designated number of Units at an option price equal to the fair market
value of the Unit on the date the option is granted. Units under
option are exercisable over a three-year period with 50% exercisable
on the date of grant and 25% exercisable on each of the following two
anniversary dates. The term of options granted under the Plan will be
determined by the Managing General Partner at the time of issuance
(not to exceed ten years) and will not be transferable except in the
event of the death of the optionee, unless the Managing General
Partner otherwise determines and so specifies in the terms of the
grant. Units covered by options which expire or are terminated will
again be available for option grants.
A summary of Units under options in the Plan is as follows:
Units Option Price
----- ------------
Balance at December 28, 1999,
December 26, 2000 and
December 25, 2001 625 $8.50
At December 25, 2001, options on 625 Units were exercisable. Unit
options available for future grants totaled 48,611 at December 25,
2001 and December 26, 2000.
8. SALE OF RESTAURANT
------------------
In December 1999, the Partnership sold substantially all the assets,
including land and building, of one restaurant. The Partnership
recognized a gain of $196,608 on the sale.
9. FIRE SETTLEMENT
---------------
In the first quarter of 2001, the Partnership incurred a fire at one
of its restaurants. The property was insured for the replacement cost
and the Partnership realized a gain of $159,203 upon final settlement
of the claim.
10. CLASS B AND C RESTRICTED UNITS SOLD TO EMPLOYEES
------------------------------------------------
During 2000 and 1999, the Partnership issued 5,000 and 437,500 Class B
and C Units, respectively, at $2.79 and $2.55 per unit, respectively,
to certain employees in exchange for either a 10% down payment and
notes receivable for the remaining 90% of the purchase price or for
notes receivable for 100% of the purchase price. Notes receivable
representing 40% or 50%, respectively, of the purchase price, together
with interest thereon at a rate of 9%, will be repaid by the cash
distributions paid on the units. Non-interest bearing notes
receivable representing the remaining 50% of the purchase price will
be reduced over a 4 1/2 year period through annual charges to
compensation expense, included under the caption of "General and
administrative-other" in the accompanying statements of income, as
long as the employee remains employed by the Company. The units are
subject to a repurchase agreement whereby the Partnership has agreed
to repurchase the Units in the event the employee is terminated for an
amount equal to the greater of issue price or fair market value at the
time of termination.
11. PARTNERS' CAPITAL
-----------------
During 2001, 2000 and 1999, the Partnership purchased 10,325, 82,728,
and 24,144 Class A Income Preference Units for $33,556, $268,866, and
$78,202, respectively. These Units were retired by the Partnership.
12. INVESTMENT IN MAGIC
-------------------
On March 13, 1996, the Partnership purchased a 45% interest in Magic,
a newly formed limited partnership, for $3.0 million in cash. Magic
owns and operates twenty-six Pizza Hut restaurants in Oklahoma. In
August 1998, Magic purchased a 25% interest in Magic from a former
limited partner which effectively increased the Partnership's interest
in Magic from 45% to 60%. Therefore, beginning August 11, 1998,
Magic's financial statements were consolidated into the Partnership's
consolidated financial statements. Prior to August 11, 1998, the
Partnership accounted for its investment in Magic using the equity
method of accounting. In connection with the consolidation, the
Partnership recorded goodwill of $728,000 which represented the excess
purchase price of the original equity investment in the net assets
acquired, net of subsequent amortization.
On July 26, 2000, APP purchased 39% of Magic from the Management
Company for $2,500,000 cash and contingent consideration of $700,000.
The $2,500,000 cash payment was financed by INTRUST Bank over five
years at 9.5%. 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. 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. Upon completion of
this purchase, the Partnership owns 99% of Magic. The Management
Company is considered a related party in that one individual has
controlling interest in both the Management Company and the
Partnership's general partner. To the extent that the Partnership and
the Management Company have common ownership, the transaction was
recorded at the Management Company's historical cost. As a result of
the transaction, the Partnership recorded goodwill of $1,407,991 and
cost in excess of carrying value of assets acquired of $534,962.
13. MAJOR SUPPLIER
--------------
On January 31, 2000 AmeriServe, the Partnership's primary supplier of
food ingredients and dry goods, filed for protection under the U.S.
Bankruptcy Code. McLane Company, Inc., a subsidiary of Wal-Mart
Stores, Inc., completed the purchase of AmeriServe's U.S. distribution
business on November 30, 2000. As part of the sale, the Partnership
agreed to a two-year contract extension and will incur a 5% increase
in distribution fees.
14. SUBSEQUENT EVENT
----------------
Subsequent to December 25, 2001, the Partnership entered into
operating and capital leases totaling $3,400,000 as a result of sale-
leaseback transactions. The leases have twenty-year terms and are
payable in monthly payments totaling $29,750 for the first year, with
1% annual increases in the monthly payment amounts.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The carrying amount reported on the balance sheets for financial
instruments including cash and cash equivalents, notes receivable, and
capital lease obligations approximates their fair value.
The fair value of long-term debt is estimated at $30,284,536 compared
to its carrying value of $29,073,917 at December 25, 2001. Carrying
value approximated fair value at December 26, 2000. Fair values are
considered equal to carrying values for variable rate debt. The
estimated fair value of fixed rate debt is based on discounted cash
flow analysis using interest rates currently offered for debt with
similar terms.
16. QUARTERLY FINANCIAL DATA (unaudited)
------------------------------------
Unaudited quarterly consolidated statement of income information for
the years ended December 25, 2001 and December 26, 2000 is summarized
below:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2001
- ----
Net sales $15,598,592 $15,795,550 $16,012,524 $16,410,764
Income from
operations 1,022,098 1,368,527 932,099 1,608,995
Net income 157,974 551,122 267,558 852,254
Basic and diluted
net income per
Partnership unit 0.04 0.15 0.07 0.23
2000
- ----
Net sales $14,799,542 $14,690,511 $15,088,559 $15,926,141
Income from
operations 1,366,166 1,252,186 1,150,891 1,408,962
Net income 436,491 445,259 319,505 170,869
Basic and diluted
net income per
Partnership unit 0.11 0.12 0.09 0.05
Fourth quarter 2000 net income includes a $409,016 loss on default in
pooled loans. The loss on default was recorded in the quarter the
Partnership received notification from FMAC (See Note 3).
17. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
2001 2000 1999
---- ---- ----
Cash paid during the year for
interest $3,086,014 $3,050,092 $2,906,241
Noncash investing and financing
activity:
Issuance of units for notes
receivable - 12,555 1,047,000
Distributions offset against
notes receivable 106,097 117,551 77,024
Unit repurchases offset
against notes receivable 11,160 47,705 -
Capital leases entered into 606,924 1,461,151 -
Reduction of notes receivable
recorded as compensation expense 51,909 54,385 13,952
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 8, 2002, accompanying
the consolidated financial statements included in the Annual
Report of American Restaurant Partners, L.P. on Form 10-K
for the year ended December 25, 2001. We hereby consent to
the incorporation by reference of said report in the
Registration Statement of American Restaurant Partners, L.P.
on Form S-8 (No. 33-20784).
/s/Grant Thornton LLP
Wichita, Kansas
March 8, 2002