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 31, 2002
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, 2003 the aggregate market value of the income preference units
held by non-affiliates of the registrant was $2,380,473.
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 31, 2002, the Partnership owned and operated a total
of 88 restaurants (collectively, the "Restaurants"). APP owned and
operated 52 traditional "Pizza Hut" restaurants, 6 "Pizza Hut"
delivery/carryout facilities and 3 dualbrand locations. Magic owned
and operated 18 traditional "Pizza Hut" restaurants and 9 "Pizza Hut"
delivery/carryout facilities. During 2002, Magic opened one "Pizza
Hut" traditional restaurant and replaced one "Pizza Hut" traditional
restaurant and one "Pizza Hut" delivery/carryout restaurant with two
"Pizza Hut" traditional restaurants. The following table sets forth
the states in which the Partnership's Pizza Hut Restaurants are
located:
Units Units Units
Open At Opened in Open At
12-25-01 2002 12-31-02
-------- --------- --------
Georgia 8 -- 8
Louisiana 1 -- 1
Montana 18 -- 18
Texas 26 -- 26
Wyoming 8 -- 8
Oklahoma 26 1 27
--- --- ---
Total 87 1 88
=== === ===
The Partnership also replaced two existing restaurants with two new
restaurants in 2002.
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 2002, there were over
6,500 units in the United States and more than 4,200 units located
outside the United States (both excluding licensed units). PHI owns
and operates approximately 27% 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.
On January 1, 2003, the Partnership entered into a new franchise
agreement with Pizza Hut, Inc. The new franchise agreement is
effective on January 1, 2003 for a period of 30 years. The
Partnership has the option at the expiration of the initial or any
subsequent term of the franchise agreement to renew the franchise
granted thereunder for a renewable term of 20 years, subject to the
approval of the franchisor.
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.
The new franchise agreement requires an increase in national
advertising fees from 2.0% to 2.5% of gross sales and a decrease in
local advertising fees from 2.0% to 1.75% of gross sales.
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.
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.
The new franchise agreement requires an increase in the monthly
service fees for delivery restaurants from 4.0% to 4.5% of gross sales
beginning January 1, 2010, 4.75% of gross sales as of January 1, 2020,
and 5.0% of gross sales as of January 1, 2030.
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 2003 or future years.
Seasonality
- -----------
The Partnership does not consider its operations to be seasonal to
any material degree.
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, 2003, 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 42 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 31, 2002.
Leased From Leased From
Unrelated Third Affiliate of the
Parties General Partners Owned Total
--------------- ---------------- ----- -----
Georgia 2 - 6 8
Louisiana - - 1 1
Montana 9 - 9 18
Oklahoma 25 - 2 27
Texas 16 - 10 26
Wyoming 1 1 6 8
--- --- --- ---
Total 53 1 34 88
=== === === ===
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
to $300,000 in equipment and leasehold improvements.
Item 3. Legal Proceedings
-----------------
As of December 31, 2002, 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 2002 and 2001. Market prices for units during
2002 and 2001 were:
Calendar Period High Low
- -----------------------------------------------------
2002
- ----
First Quarter $3.25 $3.25
Second Quarter $3.25 $3.25
Third Quarter $3.25 $3.25
Fourth Quarter $3.50 $3.25
2001
- ----
All Quarters $3.25 $3.25
As of December 31, 2002, approximately 850 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
- -----------------------------------------------------------------------
2002
January 11, 2002 January 25, 2002 $.100
April 12, 2002 April 26, 2002 .155
July 12, 2002 July 26, 2002 .155
October 12, 2002 October 25, 2002 .150
----
Cash distributed during 2002 $.560
====
2001
January 12, 2001 January 26, 2001 $.100
April 12, 2001 April 27, 2001 .100
July 12, 2001 July 27, 2001 .100
October 12, 2001 October 26, 2001 .100
----
Cash distributed during 2001 $.400
====
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 31, December 25, December 26, December 28, December 29,
2002 2001 2000 1999 1998 (d)
------------ ------------ ------------ ------------ ------------
Income statement data:
Net sales $ 69,995 $ 63,817 $ 60,505 $ 57,820 $ 43,544
Income from operations 6,115 4,932 5,178 3,990 2,443
Net income 2,822 1,829 1,372 1,315 809
Net income per Partnership unit (a) 0.74 0.49 0.37 0.37 0.20
Balance sheet data:
Total assets $ 29,604 $ 31,719 $ 31,791 $ 29,197 $ 30,703
Long-term debt 25,099 29,074 29,885 27,649 29,630
Obligations under capital
leases 4,015 2,592 2,572 1,495 1,543
Partners capital (deficiency):
General Partners (8) (8) (9) (9) (8)
Class A 5,213 5,131 5,099 5,395 5,543
Class B and C (7,655) (9,146) (9,416) (9,252) (10,058)
Notes receivable from employees (577) (591) (749) (956) -
Cost in excess of carrying
value of assets acquired (2,076) (1,859) (1,859) (1,324) (1,324)
Cumulative comprehensive loss (1) - - - (108)
Cash dividends declared per unit 0.56 0.40 0.40 0.45 0.30
Statistical data:
Capital expenditures: (b)
Existing Restaurants $ 947 $ 1,132 $ 2,092 $ 1,078 $ 2,465
New or Replacement Restaurants 1,476 924 147 300 162
Average weekly sales per
Restaurant: (c)
Red Roof 15,136 14,374 13,573 12,683 11,918
Delivery/carryout facility/C-store 14,529 13,724 12,591 11,657 10,508
Restaurants in operation
at end of period 88 87 86 87 89
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 31, 2002, December 25, 2001 and December 26,
2000. Comparisons of 2002 to 2001 and 2000 are affected by an
additional week of results in the 2002 reporting period. Because the
Partnership's fiscal year ends on the last Tuesday in December, a
fifty-third week is added every five or six years. 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 31, 2002 increased $6,178,000
from net sales of $63,817,000 in 2001 to net sales of $69,995,000 in
2002, a 9.7% increase. The additional week in 2002 accounted for
approximately 2 percentage points of the increase. Comparable
restaurant sales increased 5.1% over the prior year. The 2002 sales
increase was primarily attributable to the successful introduction of
a new product, P'ZONE in the first quarter of 2002. The sales
increase was also attributable to a price increase the Partnership
implemented at the end of the third quarter of 2001.
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.
Income From Operations
- ----------------------
Income from operations for the year ended December 31, 2002 increased
$1,183,000 from $4,932,000 to $6,115,000, a 24.0% increase from the
year ended December 25, 2001. As a percentage of net sales, income
from operations increased from 7.7% of net sales for the year ended
December 25, 2001 to 8.7% of net sales for the year ended December 31,
2002. Cost of sales decreased as a percentage of net sales from 25.6%
in 2001 to 24.5% in 2002 primarily due to significantly lower cheese
costs. The decrease was also due to a decrease in the cost of meat
toppings as well as the effect of the price increase the Partnership
implemented at the end of the third quarter of 2001. Labor and
benefits decreased as a percentage of net sales from 28.9% in 2001 to
28.6% in 2002, primarily due to efficiencies gained at higher sales
levels. Advertising decreased slightly as a percentage of net sales
from 6.1% in 2001 to 6.0% in 2002. Other restaurant expenses
increased from 18.8% of net sales in 2001 to 19.1% of net sales in
2002, primarily due to a 40% increase in property and liability
insurance premiums and a 60% increase in workers compensation
insurance premiums experienced in the last two quarters of 2002.
General and administrative expenses increased as a percentage of net
sales from 8.0% in 2001 to 8.3% in 2002, reflecting increased bonuses
paid on improved operating results. Depreciation and amortization
expensed decreased to 4.5% of net sales in 2002 compared to 4.9% of
net sales in 2001, primarily as a result of no longer amortizing
goodwill in 2002 in accordance with Statement of Financial Accounting
Standards (SFAS) 142 (see Note 3 in Notes to Consolidated Financial
Statements). The 2002 income from operations included a loss on
restaurant closings of $162,000 for two stores closed and replaced in
2002.
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.
Net Income
- ----------
Net income increased $993,000 to $2,822,000 for the year ended
December 31, 2002 compared to net income of $1,829,000 for the year
ended December 25, 2001. The 2002 period net income included a loss
on sale of investment in unconsolidated affiliate of $234,000. The
2001 period net income included a gain on fire settlement of $159,000
(see Note 11 of the accompanying financial statements). Net income is
net of minority interest in income of operating partnerships of
$34,000 and 26,000 in 2002 and 2001, respectively.
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 11 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. 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%.
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 31, 2002, the Partnership had a working capital deficiency
of $5,818,000 compared to a deficiency of $8,656,000 at December 25,
2001. The decrease in working capital deficiency is primarily
attributable to a $2,344,000 decrease in the current portion of long-
term debt resulting from sale-leaseback transactions on eight real
estate properties 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 2002, net cash provided by operating activities amounted to
$5,269,000, an increase of $138,000 over 2001. This increase is
primarily attributable to net income of $2,822,000 which was used to
pay down accounts payable and accrued liabilities.
Investing Activities
- --------------------
Capital expenditures for 2002 were $2,423,000, of which $1,476,000 was
for the construction of new or replacement restaurants. The remaining
capital expenditures were for replacement of equipment in existing
restaurants. The Partnership completed sale-leaseback transactions
for the real estate of eight of its properties which generated cash of
$3,187,000.
Financing Activities
- --------------------
Cash distributions paid in 2002 totaled $1,989,000 and amounted to
$0.56 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 2002, the Partnership's proceeds from long-term borrowings
amounted to $1,518,000 of which $1,282,000 was used to purchase
buildings or equipment at replacement restaurants. The remainder was
used to refinance an existing loan at a more favorable interest rate.
The Partnership plans to open one new restaurant and one replacement
restaurant during 2003. Development of these restaurants will be
financed through existing lenders. Management anticipates spending
approximately $900,000 in 2003 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 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 233,333
Class B and Class C Partnership Units. The $2,500,000 cash payment
was financed by INTRUST Bank over five years at 9.5%. Upon completion
of this purchase, the Partnership owned 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 contingent consideration involved in the purchase of the
additional 39% of Magic was to become due in the event that Magic's
cash flow (determined on a 12 month trailing basis) exceeded $2.6
million at any time between January 1, 2001 and December 31, 2005.
Magic's cash flow exceeded $2.6 million for the twelve months ended
September 24, 2002. As a result, on October 10, 2002, the Partnership
issued RMC a total of 233,333 Class B and Class C Units as payment of
the remaining balance. The 233,333 units were valued at $3.39 per
unit, which was the unit value at September 24, 2002. The contingent
consideration was recorded in a manner consistent with the original
transaction. The Partnership recorded an increase in limited partners
capital of $790,999, which represented the value of the units issued,
goodwill of $573,237 and cost in excess of carrying value of assets
acquired of $217,762.
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 does not anticipate an increase in the minimum
wage during 2003.
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.
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 57 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 entities operating a combined
total of 120 franchised "Pizza Hut" and
"Long John Silver's" restaurants.
Hal W. McCoy II 35 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 60 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 47 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 2002 $166,566 $101,451 $268,017 $218,734
Chief Executive Officer 2001 159,181 60,700 219,881 171,850
2000 173,858 83,878 257,736 199,283
Hal W. McCoy II 2002 135,501 92,262 227,763 176,471
President 2001 128,574 62,252 190,826 139,246
2000 106,257 74,950 181,207 145,310
Terry Freund 2002 115,807 85,917 201,724 148,338
Assistant Secretary and 2001 109,523 61,009 170,532 126,128
Chief Financial and 2000 103,900 59,732 163,632 129,673
Accounting Officer
Incentive Bonus Plan
- --------------------
The Management Company maintains a discretionary supervisory
incentive bonus plan (the "Incentive Bonus Plan") pursuant to which
approximately 23 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 2002,
2001 and 2000 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 31, 2002 was $748,701 of
which $211,059 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 31, 2002 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 31, 2002 the Partnership's income from operations
plus depreciation and amortization expenses was $9,235,000.
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 31, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and
---------------------------------------------------
Management
----------
PRINCIPAL UNITHOLDERS
The following table sets forth, as of March 1, 2003, 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 729,037 (1) 60.98%
3020 N. Cypress Rd.
Suite 100
Wichita, KS 67226
Class B Hal W. McCoy II 84,105 7.03%
3020 N. Cypress Rd.
Suite 100
Wichita, KS 67226
Class B John Hunter 116,564 9.75%
117 Lilac Lane
San Antonio, TX 78209
Class C Hal W. McCoy 1,392,709 (1) 66.99%
3020 N. Cypress Rd.
Suite 100
Wichita, KS 67226
Class C Hal W. McCoy II 141,129 6.79%
3020 N. Cypress Rd.
Suite 100
Wichita, KS 67226
Class C John Hunter 106,536 5.12%
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, 2003, 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 729,037 (1) 60.98%
C Hal W. McCoy 1,392,709 (1) 66.99%
B Director & all 894,569 (1) 74.83%
officers as a group
(4 Persons)
C Director & all 1,676,148 (1) 80.62%
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. Controls and Procedures
-----------------------
Within the 90 day period prior to the filing date of this Annual Report
on Form 10-K, the Partnership, under the supervision and with the
participation of its Management, including its Chief Executive Officer
and Chief Financial and Accounting Officer, performed an evaluation of
the Partnership's disclosure controls and procedures, as contemplated by
Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based
on that evaluation, the Partnership's Chief Executive Officer and Chief
Financial and Accounting Officer concluded that such disclosure controls
and procedures are effective to ensure that material information relating
to the Partnership is made known to them, particularly during the period
for which the periodic reports are being prepared.
No significant changes were made in the Partnership's internal controls or
in other factors that could significantly affect these controls subsequent
to the date of the evaluation performed pursuant to Rule 13a-15 under the
Securities Exchange Act of 1934, as amended, referred to above.
Item 15. 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 30.
(b) Reports on Form 8-K
-------------------
During the fiscal period covered by this Form 10-K, no reports on
Form 8-K were filed.
INDEX TO EXHIBITS
(Item 15(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
a. Settlement Agreement between Oklahoma Magic, L.P.
and Hospitality Group of Oklahoma, Inc. F
23.1 Consent of Grant Thornton LLP F-28
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: 3/27/03 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 3/27/03
- --------------- (Principal Executive Officer) -------
Hal W. McCoy of RMC American Management, Inc.
/s/Terry Freund Chief Financial and Accounting 3/27/03
- --------------- Officer -------
Terry Freund
CERTIFICATIONS
I, Hal W. McCoy, Chairman and Chief Executive Officer of American
Restaurant Partners, L.P., certify that:
(1) I have reviewed this annual report on Form 10-K of American
Restaurant Partners, L.P.;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report;
(4) The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: 3/27/03 By: /s/Hal W. McCoy
------- ---------------
Hal W. McCoy
Chairman and Chief Executive Officer
CERTIFICATIONS
I, Terry Freund, Chief Financial and Accounting Officer of American
Restaurant Partners, L.P., certify that:
(1) I have reviewed this annual report on Form 10-K of American
Restaurant Partners, L.P.;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report;
(4) The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: 3/27/03 By: /s/Terry Freund
------- ---------------
Terry Freund
Chief Financial and Accounting Officer
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
I, Hal W. McCoy, Chairman and Chief Executive Officer of American
Restaurant Partners, L.P. (the "Partnership"), certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
that:
(1) the Annual Report on Form 10-K of the Partnership for the
annual period ended December 31, 2002 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d));
and
(2) the information contained in the Report fairly presents, in
all material respects, the financial condition and results of
the operations of the Partnership.
AMERICAN RESTAURANT PARTNERS, L.P.
(Registrant)
By: RMC AMERICAN MANAGEMENT, INC.
Managing General Partner
Date: 3/27/03 By: /s/Hal W. McCoy
------- ---------------
Hal W. McCoy
Chairman and Chief Executive Officer
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
I, Terry Freund, Chief Financial and Accounting Officer of American
Restaurant Partners, L.P. (the "Partnership"), certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
that:
(1) the Annual Report on Form 10-K of the Partnership for the
annual period ended December 31, 2002 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d));
and
(2) the information contained in the Report fairly presents, in
all material respects, the financial condition and results of
the operations of the Partnership.
AMERICAN RESTAURANT PARTNERS, L.P.
(Registrant)
By: RMC AMERICAN MANAGEMENT, INC.
Managing General Partner
Date: 3/27/03 By: /s/Terry Freund
------- ---------------
Terry Freund
Chief Financial and Accounting Officer
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 31, 2002
and December 25, 2001 . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Income for the years ended
December 31, 2002, December 25, 2001,
and December 26, 2000 . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Partners' Capital (Deficiency)
for the years ended December 31, 2002,
December 25, 2001 and December 26, 2000 . . . . . . . . F-6
Consolidated Statements of Cash Flows for the
years ended December 31, 2002, December 25, 2001,
and December 26, 2000 . . . . . . . . . . . . . . . . . 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
31, 2002 and December 25, 2001, and the related consolidated
statements of income, partners' capital (deficiency), and cash flows
for each of the three years in the period ended December 31, 2002.
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
31, 2002 and December 25, 2001 and the consolidated results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 3 to the consolidated financial statements, the
Partnership adopted Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" on December 26, 2001.
/s/Grant Thornton LLP
Wichita, Kansas
February 28, 2003
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 31, December 25,
ASSETS 2002 2001
- ---------------------------------------------- ------------ ------------
Current assets:
Cash and cash equivalents $ 522,098 $ 1,594,934
Investment securities available-for-sale 190,174 -
Accounts receivable 328,356 482,185
Due from affiliates 74,424 64,668
Notes receivable from
affiliates - current portion 11,628 16,173
Inventories 430,542 397,821
Prepaid expenses 626,448 359,592
---------- ----------
Total current assets 2,183,670 2,915,373
Property and equipment, at cost:
Land 3,885,266 5,089,834
Buildings 8,267,195 9,020,921
Restaurant equipment 14,702,081 13,613,104
Leasehold rights and improvements 8,941,888 8,662,927
Property under capital leases 5,673,584 3,999,874
Construction in progress - 328,428
---------- ----------
41,470,014 40,715,088
Less accumulated depreciation and amortization 22,765,828 20,580,330
---------- ----------
18,704,186 20,134,758
Other assets:
Franchise rights, net of accumulated
amortization of $2,484,708 ($2,218,933 in 2001) 4,748,392 4,969,167
Notes receivable from affiliates 91,780 53,409
Deposit with affiliate 535,000 485,000
Goodwill 2,540,864 1,967,627
Other 800,374 1,193,205
---------- ----------
8,716,410 8,668,408
---------- ----------
$29,604,266 $31,718,539
========== ==========
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 31, December 25,
LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY) 2002 2001
- ---------------------------------------------- ------------ ------------
Current liabilities:
Accounts payable $ 2,383,477 $ 3,129,578
Due to affiliates 12,434 52,763
Accrued payroll and other taxes 738,773 981,542
Accrued liabilities 1,244,191 1,404,786
Current maturities of long-term debt 3,062,704 5,406,737
Current portion of capital lease obligations 560,405 596,356
---------- ----------
Total current liabilities 8,001,984 11,571,762
Long-term liabilities less current maturities:
Capital lease obligations 3,454,437 1,995,197
Long-term debt 22,036,387 23,667,180
Other noncurrent liabilities 1,067,792 817,104
---------- ----------
Total long-term liabilities 26,558,616 26,479,481
Minority interests in Operating Partnerships 147,163 140,406
Commitments and contingencies - -
Partners' capital (deficiency):
General Partners (7,620) (8,358)
Limited Partners:
Class A Income Preference, authorized 875,000
units; issued 682,857 units (696,813 in 2001) 5,212,980 5,131,262
Classes B and C, issued 1,197,042 and
2,081,517 class B and C units, respectively
(1,093,418 and 1,908,808 units in 2001,
respectively) (7,654,589) (9,146,027)
Notes receivable employees - sale
of partnership units (576,740) (591,344)
Cost in excess of carrying value
of assets acquired (2,076,405) (1,858,643)
Cumulative comprehensive loss (1,123) -
---------- ----------
Total partners' capital (deficiency) (5,103,497) (6,473,110)
---------- ----------
$29,604,266 $31,718,539
========== ==========
See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2002,
December 25, 2001 and December 26, 2000
2002 2001 2000
---------- ---------- ----------
Net sales $69,995,301 $63,817,430 $60,504,753
Operating costs and expenses:
Cost of sales 17,141,388 16,323,258 15,000,081
Restaurant labor and benefits 20,047,439 18,468,004 17,346,143
Advertising 4,217,006 3,907,872 3,927,433
Other restaurant operating
expenses exclusive of
depreciation and amortization 13,403,350 11,995,322 11,379,040
General and administrative:
Management fees - related party 4,345,434 3,970,991 3,738,150
Other 1,443,475 1,113,150 1,084,454
Depreciation and amortization 3,120,554 3,107,114 2,826,337
Loss on restaurant closings 161,787 - 24,910
---------- ---------- ----------
Income from operations 6,114,868 4,931,719 5,178,205
Equity in loss of unconsolidated affiliates (198,113) (176,456) (176,896)
Interest and other investment income 17,063 27,680 39,117
Interest expense (2,843,212) (3,087,641) (3,047,986)
Loss on default of pooled loans - - (409,016)
Loss on sale of investment in unconsolidated affiliate (234,000) - -
Gain on fire settlement - 159,203 -
---------- ---------- ----------
(3,258,262) (3,077,214) (3,594,781)
---------- ---------- ----------
Income before minority interest 2,856,606 1,854,505 1,583,424
Minority interests in income of
Operating Partnerships (34,138) (25,597) (211,300)
---------- ---------- ----------
Net income $ 2,822,468 $ 1,828,908 $ 1,372,124
========== ========== ==========
Net income allocated to Partners:
Class A Income Preference $ 518,451 $ 345,227 $ 270,654
Class B $ 838,691 $ 539,710 $ 400,710
Class C $ 1,465,326 $ 943,971 $ 700,760
Weighted average number of Partnership
units outstanding during period:
Class A Income Preference 692,113 699,849 741,052
Class B 1,144,856 1,094,107 1,097,151
Class C 1,998,214 1,913,630 1,918,702
Basic and diluted income
before minority interest per
Partnership unit $ 0.75 $ 0.50 $ 0.42
Basic and diluted minority interest
per Partnership unit $ (0.01) $ (0.01) $ (0.06)
Basic and diluted net income
per Partnership unit $ 0.74 $ 0.49 $ 0.37
Distributions per Partnership unit $ 0.56 $ 0.40 $ 0.40
See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P.
Consolidated Statements of Partners' Capital (Deficiency)
Years ended December 31, 2002, December 25, 2001, and December 26, 2000
General Cost in
Partners Limited Partners excess of
-------------- ----------------------------------------- Notes carrying
Classes B Class A Income receivable value of Cumulative
and C Preference Classes B and C from assets comprehensive
Units Amounts Units Amounts Units Amounts employees acquired loss Total
----- -------- ------- ---------- --------- ------------ ---------- ------------ ------------ ----------
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)
Net Income - 2,951 - 518,451 - 2,301,066 - - - 2,822,468
Change in unrealized
loss on investments
held-for-sale - - - - - - - - (1,123) (1,123)
----------
Comprehensive income 2,821,345
Partnership distributions - (2,213) - (388,811) - (1,725,682) 128,027 - - (1,988,679)
Units purchased - - (13,956) (47,922) (29,500) (91,920) 8,530 - - (131,312)
Units sold to employees - - - - 72,500 216,975 (195,277) - - 21,698
Employee compensation -
reduction of notes
receivable - - - - - - 73,324 - - 73,324
Units issued in connection
with the purchase of
Oklahoma Magic, L.P.'s
minority interest - - - - 233,333 790,999 - (217,762) - 573,237
----- ------ ------- --------- --------- ---------- -------- ---------- ------ ----------
Balance at
December 31, 2002 3,940 $(7,620) 682,857 $5,212,980 3,278,559 $(7,654,589) $(576,740) $(2,076,405) $(1,123) $(5,103,497)
===== ====== ======= ========= ========= ========== ======== ========== ====== ==========
See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, December 25, 2001, and December 26, 2000
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income $2,822,468 $1,828,908 $1,372,124
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 3,120,554 3,107,114 2,826,337
Equity in loss of unconsoliated affiliates 198,113 176,456 176,896
Loss on default in pooled loans - - 409,016
Loss on disposition of assets 121,262 39,266 5,786
Loss on sale of investment securities 8,601 - -
Loss on restaurant closings 161,787 - 24,910
Loss on sale of investment in unconsolidated
affiliate 234,000 - -
Minority interest in income of
Operating Partnerships 34,138 25,597 211,300
Unit compensation expense 73,324 51,909 54,385
Gain on fire settlement - (159,203) -
Net change in operating assets and liabilities:
Accounts receivable 153,829 (162,147) (61,650)
Due from affiliates (9,756) 1,576 3,704
Inventories (32,721) 9,592 3,584
Prepaid expenses (266,856) (51,698) (37,594)
Deposit with affiliate (50,000) - -
Accounts payable (763,068) 409,986 (106,418)
Due to affiliates (40,329) (105,992) 46,767
Accrued payroll and other taxes (242,769) 82,402 148,666
Accrued liabilities (160,595) 43,155 184,125
Other, net (93,165) (165,641) 151,557
---------- ---------- ----------
Net cash provided by operating activities 5,268,817 5,131,280 5,413,495
Investing activities:
Purchase of minority interest in Magic - - (2,500,000)
Investment in unconsolidated affiliates (160,172) (127,298) (341,952)
Proceeds from sale of investement in
unconsolidated affiliate 26,000 - -
Purchase of investment securities (391,171) - -
Proceeds from sale of investment securities 191,273 - -
Additions to property and equipment (2,423,246) (2,055,634) (2,239,355)
Proceeds from sale of property and equipment 23,781 349,278 6,538
Proceeds from sale and leaseback of property
and equipment 3,187,202 - -
Purchase of franchise rights (45,000) - -
Collections of notes receivable from affiliates 16,174 11,750 14,151
Advances on notes receivable from affiliate (50,000) - -
Net proceeds from fire settlement - 251,613 -
---------- ---------- ----------
Net cash provided by (used in) investing activities 374,841 (1,570,291) (5,060,618)
Financing activities:
Payments on long-term borrowings (5,492,446) (2,449,626) (3,278,852)
Proceeds from long-term borrowings 1,517,620 1,723,856 5,105,739
Principal payments on capital lease obligations (615,994) (587,079) (384,942)
Distributions to Partners (1,988,679) (1,376,004) (1,389,302)
Proceeds from issuance of Class B and C units 21,698 - 1,395
Repurchase of units (131,312) (44,716) (290,911)
General Partners' distributions
from Operating Partnerships (21,381) (14,971) (15,221)
Minority interests' distributions
from Operating Partnerships (6,000) (6,000) (54,750)
---------- ---------- ----------
Net cash used in financing activities (6,716,494) (2,754,540) (306,844)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (1,072,836) 806,449 46,033
Cash and cash equivalents at beginning of period 1,594,934 788,485 742,452
---------- ---------- ----------
Cash and cash equivalents at end of period $ 522,098 $ 1,594,934 $ 788,485
========== ========== ==========
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. The Partnership's operating results
reflected in the accompanying consolidated statements of operations
include 53 weeks for the period ended December 31, 2002, and 52 weeks
for each of the periods ended December 25, 2001 and December 26, 2000.
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.
For earnings per Partnership unit calculations, the contingent units
issued on October 10, 2002, as discussed in Note 14, were considered
outstanding beginning June 26, 2002, which is the beginning of the
quarter in which the contingency was met.
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:
2002 2001 2000
---- ---- ----
Restaurants in operation at beginning of year 87 86 87
Opened 1 2 --
Closed -- (1) (1)
--- --- ---
Restaurants in operation at end of year 88 87 86
=== === ===
The Partnership replaced two existing restaurants with two new
restaurants in 2002. In 2001, the Partnership replaced one existing
restaurant with one new restaurant. In conjunction with the
restaurant replacements in 2002, the Partnership recorded the write-
off of leasehold improvements and restaurant equipment of $161,787 as
loss on restaurant closings.
ACCOUNTS RECEIVABLE
Accounts receivable represent amounts due from schools and various
businesses and are generally not collateralized. Past due accounts
determined not to be collectible by the Partnership are charged off to
other restaurant operating expenses. Total charge offs were not
significant in 2002, 2001 and 2000. Accounts receivable at December 31,
2002 and December 25, 2001 are considered to be fully collectible.
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 $2,700,746, $2,621,072, and
$2,345,383 for the years ended December 31, 2002, December 25, 2001
and December 26, 2000, respectively.
GOODWILL
Effective December 26, 2001, as discussed in Note 3, goodwill and
other intangible assets with indefinite lives are no longer amortized,
but instead tested for impairment at least annually. Prior to
December 26, 2001 goodwill resulting from APP's investment in Magic
was amortized over 29 years using the straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Partnership reviews
applicable intangible assets and long-lived assets related to each
restaurant on a periodic basis. When events or changes in
circumstances indicate an asset may not be recoverable, the
Partnership estimates the future cash flows expected to result from
the use of the asset. If the sum of the expected undiscounted cash
flows is less than the carrying value of the asset, an impairment loss
is recognized. The impairment loss is recognized by measuring the
difference between the carrying value of the asset and the fair value
of the asset. The Partnership's estimates of fair values are based on
the best information available and require the use of estimates,
judgments and projections as considered necessary. The actual results
may vary significantly. The Partnership recorded no impairment losses
for 2002, 2001 or 2000.
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 31, 2002, 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 $1,892,000. 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:
2002 2001 2000
---- ---- ----
US GAAP net income $2,822,468 $1,828,908 $1,372,124
Depreciation and amortization (618,465) 366,691 153,712
Capitalized leases 19,987 (67,041) (11,750)
Equity in earnings (loss)
of affiliate (655,608) (131,580) 89,127
Loss on restaurant closings - 158 (1,750)
Gain on disposition of assets 582,624 95,723 7,051
Unicap adjustment - (2,140) 1,830
Loss on default of pooled loans - - 313,465
Other 33,863 (45,696) 23,139
--------- --------- ---------
Taxable income $2,184,869 $2,045,023 $1,946,948
========= ========= =========
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
unvested options and no options were granted in 2002, 2001 or 2000.
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Investment securities available-for-sale are reported at fair value,
with unrealized gains and losses excluded from earnings and reported
as the sole component of cumulative comprehensive income or loss
within Partners' capital. Interest and dividends as well as realized
gains and losses and declines in value judged to be other-than-
temporary on available-for-sale investment securities are included
in interest and other investment income. The cost of investments
sold is based on the specific identification method.
2. FUTURE EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
----------------------------------------------------------
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 146, Accounting for
Costs Associated with Exit or Disposal Activities. This statement
requires entities to recognize costs associated with exit or disposal
activities when liabilities are incurred rather than when the entity
commits to an exit or disposal plan, as currently required. Examples
of costs covered by this guidance include one-time employee
termination benefits, costs to terminate contracts other than capital
leases, costs to consolidate facilities or relocate employees, and
certain other exit or disposal activities. This statement is
effective for fiscal years beginning after December 31, 2002, and will
impact any exit or disposal activities the Partnership initiates after
that date.
ACCOUNTING FOR GUARANTEES
In November 2002, FASB Interpretation 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others (FIN 45), was issued. FIN 45 requires a
guarantor entity, at the inception of a guarantee covered by the
measurement provisions of the interpretation, to record a liability
for the fair value of the obligation undertaken in issuing the
guarantee. The Partnership previously did not record a liability when
guaranteeing obligations unless it became probable that the
Partnership would have to perform under the guarantee. FIN 45 applies
prospectively to guarantees the Partnership issues or modifies
subsequent to December 31, 2002, but has certain disclosure
requirements effective for interim and annual periods ending after
December 15, 2002. The Partnership does not anticipate FIN 45 will
have a material effect on its 2003 financial statements. Disclosures
required by FIN 45 are included in the accompanying financial
statements.
VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies the
application of Accounting Research Bulletin 51, Consolidated Financial
Statements, for certain entities that do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support from other parties or in which equity
investors do not have the characteristics of a controlling financial
interest ("variable interest entities"). Variable interest entities
within the scope of FIN 46 will be required to be consolidated by
their primary beneficiary. The primary beneficiary of a variable
interest entity is determined to be the party that absorbs a majority
of the entity's expected losses, receives a majority of its expected
returns, or both. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period beginning after
June 15, 2003, to variable interest entities in which an enterprise
holds a variable interest that it acquired before February 1, 2003.
The Partnership is in the process of determining what impact, if any,
the adoption of the provisions of FIN 46 will have upon its financial
condition or results of operations.
CONSIDERATION RECEIVED FROM A VENDOR
In November 2002 the Emerging Issues Task Force reached a consensus
opinion on EITF 02-16, "Accounting by a Customer (including a
reseller) for Certain Consideration Received from a Vendor." EITF 02-
16 requires that cash payments, credits, or equity instruments
received as consideration by a customer from a vendor should be
presumed to be a reduction of cost of sales when recognized by the
customer in the income statement. In certain situations, the
presumption could be overcome and the consideration recognized either
as revenue or a reduction of a specific cost incurred. The consensus
should be applied prospectively to new or modified arrangements
entered into after December 31, 2002. The Partnership has not yet
determined the effects of EITF 02-16 on its financial statements.
3. GOODWILL
--------
In contrast to accounting standards in effect during 2001 and 2000,
SFAS 142, Goodwill and Other Intangible Assets, which became effective
beginning in 2002, provides that goodwill, as well as identifiable
intangible assets with indefinite lives, should not be amortized.
Accordingly, with the adoption of SFAS 142 in 2002, the Partnership
discontinued the amortization of goodwill. The information presented
below reflects adjustments to information reported in 2001 and 2000 as
if SFAS 142 had been applied in those years. The adjustments reflect
the effects of not amortizing goodwill.
2002 2001 2000
---- ---- ----
Reported net income $2,822,468 $1,828,908 $1,372,124
Add back: Goodwill
amortization - 84,888 84,888
--------- --------- ---------
Adjusted net income $2,822,468 $1,913,796 $1,457,012
========= ========= =========
Basic and diluted net income
per Partnership Unit $ 0.74 $ 0.49 $ 0.37
Goodwill amortization - 0.02 0.02
---- ---- ----
Adjusted basic and diluted net
income per Partnership Unit $ 0.74 $ 0.51 $ 0.39
==== ==== ====
The carrying amount of goodwill was $2,540,864 and $1,967,627 at
December 31, 2002 and December 25, 2001, respectively. The increase
in goodwill of $573,237 since December 26, 2001 was attributable to
the recording of contingent consideration in 2002 related to the 2000
purchase of the additional 39% of Magic (see also Note 14).
4. ACQUIRED INTANGIBLE ASSETS
--------------------------
The Partnership's acquired intangible assets subject to amortization
consisted primarily of franchise rights at December 31, 2002 and
December 25, 2001. The weighted average amortization period for
intangible assets subject to amortization was approximately 20 years
at December 31, 2002. As discussed in Note 16, the Partnership
entered into a new franchise agreement effective January 1, 2003 for a
period of 30 years. The Partnership has the option at the expiration
of the initial or any subsequent term of the franchise agreement to
renew the franchise granted thereunder for a renewable term of 20
years, subject to the approval of the franchisor. Beginning January 1,
2003, the remaining franchise rights will be amortized over the initial
term of the new franchise agreement of 30 years. Amortization expense
was $419,808, $486,042 and $480,954 in 2002, 2001 and 2000, respectively.
The estimated amortization expense is $200,000 in 2003 and $170,000 for
each of the subsequent four years through 2007.
5. 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 2002, 2001 or 2000.
The Partnership maintains a deposit with the Management Company equal
to approximately one and one-half month's management fee. Such
deposit, $535,000 and $485,000 at December 31, 2002 and December 25,
2001, respectively, 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 $172,961, $154,166 and $156,398 in 2002, 2001
and 2000, respectively. The Partnership also owned a 4.34%
interest in Seaside Pizza, LLC (Seaside), a company formed to acquire
eleven Pizza Hut restaurants in New Jersey in December 2000. The
Partnership sold this investment in 2002, recognizing a $234,000 loss
on sale of investment in unconsolidated affiliate. 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 31, 2002 and December 25, 2001.
Transactions with related parties included in the accompanying
consolidated financial statements and notes are summarized as follows:
2002 2001 2000
---- ---- ----
Management fees $4,345,434 $3,970,991 $3,738,150
Management Company bonuses 744,005 539,382 510,641
Advertising commissions 78,946 92,477 96,592
Accommodation fee (See Note 6) 86,467 90,911 94,982
Acquisition/divestiture fee
on sale of assets - 5,000 15,000
Development fees 37,500 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: 2003 -
$11,628; 2004 - $60,452; 2005 - $11,434; 2006 - $10,058; 2007 -
$2,714; Thereafter - $7,122. 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.
6. LONG-TERM DEBT
--------------
Long-term debt consists of the following at December 31, 2002 and
December 25, 2001:
2002 2001
---- ----
Notes payable to INTRUST Bank in
Wichita, payable in monthly install-
ments aggregating $64,282 including
interest at fixed rates from 6.0%
to 9.00%, due at various dates
through August 2007 $ 1,924,189 $ 1,279,859
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
Note payable to INTRUST Bank in Wichita,
payable in monthly installments of
$4,963 including interest at a fixed
rate of 6.75%, due October 2007 with a
balloon payment of $115,968 324,213 -
Notes payable to INTRUST Bank in Wichita,
payable in monthly installments totaling
$85,051 including interest at a fixed
rate of 7.50%, due August 2007 with
balloon payments totaling $1,194,765 4,827,524 5,430,803
Note payable to INTRUST Bank in Wichita,
interest payable monthly at a fixed rate
of 6.50%, due in full in April 2004 300,000 300,000
Notes payable to Franchise Mortgage
Acceptance Company (FMAC) payable in
monthly installments aggregating
$242,461 including interest at fixed
rates from 8.81% to 10.95%, due at
various dates through May 2013 14,854,172 16,637,349
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 1,672,242 1,711,436
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 1,010,324 1,048,906
Notes payable to various banks,payable
in monthly installments aggregating
$2,690, including interest at rates
from 8.95% to 10.00%, due at various
dates through January 2010. One note
requires a balloon payment of $115,013
upon its maturity in January 2010 186,427 202,565
---------- ----------
25,099,091 29,073,917
Less current portion 3,062,704 5,406,737
---------- ----------
$22,036,387 $23,667,180
========== ==========
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% (APP) and 15% (Magic) of the original loan balance through May
of 2013 (a total of $1,116,004 based on current loans outstanding with
FMAC), referred to as the "Performance Guarantee Amount" (PGA). The
Partnership promises to pay 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,
certain loans within the Partnership's "pool" were in default. As a
result, the Partnership made monthly PGCA's totaling $52,454 in 2002.
At December 31, 2002, two of the Partnership's pool's included
delinquent loans. Because there were enough funds in one of the pools
to cover the delinquent loan payments, the Partnership has not been
required to make PGCA payments since September 2002 for that pool.
The Partnership is making monthly payments of $1,085 for the other
pool. From the inception of the pooled loan agreement, the
Partnership has paid $272,608 of the PGA. As a result, the
Partnership's remaining PGA balance at December 31, 2002 is $843,396,
for which the Partnership has recorded a liability of $301,250, which
management believes is sufficient to cover the potential remaining
liability.
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: 2003 -
$3,062,704; 2004 - $3,747,585; 2005 - $2,741,078; 2006 - $2,939,437
and 2007 - $3,817,214.
7. 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.
During 2002, the Partnership sold the land and buildings of 8
restaurants for $3,187,202. The sale resulted in gains of $664,618
and losses of $120,079. Gains were deferred and losses were
recognized in other restaurant operating expenses. The assets were
then leased back from the purchaser for a 20-year term. The land
leases are recorded as operating leases with deferred gains amortized
over the term of the leases. The building leases are recorded as
capital leases with deferred gains recorded as a reduction in the cost
of the corresponding building.
Minimum and contingent rent payments for land and buildings leased
from affiliates were $32,771 for the year ended December 31, 2002 and
$30,250 for each of the years ended December 25, 2001 and December 26,
2000.
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:
2002 2001 2000
---- ---- ----
Minimum rentals $1,360,940 $1,191,257 $1,271,774
Contingent rentals 265,345 264,565 277,858
Future minimum payments under capital leases and noncancelable
operating leases with an initial term of one year or more at
December 31, 2002, are as follows:
Operating
Leases With Operating
Capital Unrelated Leases With
Leases Parties Affiliates
---------- ---------- ----------
2003 $ 950,012 $1,277,472 $ 33,275
2004 606,156 1,077,034 33,275
2005 542,787 892,564 33,275
2006 532,800 802,396 33,275
2007 438,087 624,856 8,319
Thereafter 4,298,650 3,436,485 -
--------- --------- -------
Total minimum payments 7,368,492 $8,110,807 $141,419
Less interest 3,353,650 ========= =======
---------
4,014,842
Less current portion 560,405
---------
$3,454,437
=========
Amortization of property under capital leases, determined on the
straight-line basis over the lease terms totaled $654,103, $485,188
and $360,575 for the years ended December 31, 2002, December 25, 2001,
and December 26, 2000, respectively. The amortization is included in
depreciation and amortization expense in the accompanying consolidated
statements of income. Property under capital lease obligations was as
follows:
2002 2001
---- ----
Buildings $3,676,779 $2,017,406
Restaurant equipment 1,996,805 1,982,468
--------- ---------
5,673,584 3,999,874
Accumulated depreciation 2,615,590 1,961,486
--------- ---------
$3,057,994 $2,038,388
========= =========
8. 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.
9. DISTRIBUTIONS TO PARTNERS
-------------------------
On January 2, 2003, the Partnership declared a distribution of $.125
per Unit to all Unitholders of record as of January 13, 2003. The
distribution is not reflected in the December 31, 2002 consolidated
financial statements.
10. 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 Comany. 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 26, 2000,
December 25, 2001 and
December 31, 2002 625 $8.50
At December 31, 2002, options on 625 Units were exercisable. Unit
options available for future grants totaled 48,611 at December 31,
2002 and December 25, 2001.
11. 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.
12. CLASS B AND C RESTRICTED UNITS SOLD TO EMPLOYEES
------------------------------------------------
During 2002, the Partnership issued 72,500 Class B and C Units (2,500
at $2.79 per unit and 70,000 at $3.00 per unit) 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. In 2000, the Partnership issued 5,000 Class B
and C Units at $2.79 per unit to certain employees under this same
arrangement. Notes receivable representing 40% or 50%, respectively,
of the purchase price, together with interest thereon at a rate from
7.5% to 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. At December 31, 2002, there were 613,599 Units held by
employees that were subject to repurchase agreements. The repurchase
price at December 31, 2002 was $3.39 per Unit.
13. PARTNERS' CAPITAL
-----------------
During 2002, 2001 and 2000, the Partnership purchased 13,956, 10,325,
and 82,728 Class A Income Preference Units for $47,922, $33,556, and
$268,866, respectively. These Units were retired by the Partnership.
14. 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-seven 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 233,333
Class B and Class C Partnership Units. The $2,500,000 cash payment
was financed by INTRUST Bank over five years at 9.5%. 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 contingent consideration involved in the purchase of the
additional 39% of Magic was to become due in the event that Magic's
cash flow (determined on a 12 month trailing basis) exceeded $2.6
million at any time between January 1, 2001 and December 31, 2005.
Magic's cash flow exceeded $2.6 million for the twelve months ended
September 24, 2002. As a result, on October 10, 2002, the Partnership
issued RMC a total of 233,333 Class B and C Units as payment of the
remaining balance. The 233,333 units were valued at $3.39 per unit,
which was the unit value at September 24, 2002. The contingent
consideration was recorded in a manner consistent with the original
transaction. The Partnership recorded an increase in limited partners
capital of $790,999, which represented the value of the units issued,
goodwill of $573,237 and cost in excess of carrying value of assets
acquired of $217,762.
15. INVESTMENT SECURITIES
---------------------
The Partnership purchased common stock of publicly traded companies
for investment purposes in the year ended December 31, 2002 for a cost
of $391,171. Stock with a cost of $199,874 was sold during 2002
resulting in a loss on sale of investment securities of $8,601. As of
December 31, 2002, investment securities available-for-sale had a cost
of $191,297, a cumulative unrealized loss of $1,123 and a fair value
of $190,174. The adjustment to unrealized loss on available-for-sale
investment securities is included in comprehensive income.
16. SUBSEQUENT EVENT
----------------
Effective January 1, 2003 the Partnership entered into a new franchise
agreement with Pizza Hut, Inc. The new franchise agreement is
effective for a period of 30 years. The Partnership has the option at
the expiration of the initial or any subsequent term of the franchise
agreement to renew the franchise granted thereunder for a renewable
term of 20 years, subject to the approval of the franchisor. The new
franchise agreement requires, among other things, an increase in the
royalty fees for delivery restaurants from 4.0% to 4.5% of net sales
beginning January 1, 2010, 4.75% of net sales as of January 1, 2020,
and 5.0% of net sales as of January 1, 2030; an increase in national
advertising fees from 2.0% to 2.5% of net sales; and a decrease in
local advertising fees from 2.0% to 1.75% of net sales. In addition
the new franchise agreement requires approximately 68 of the
Partnership's restaurants to be remodeled, rebuilt, relocated or
reimaged and refurnished by December 31, 2012.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The carrying amount reported on the balance sheets for financial
instruments including cash and cash equivalents, investment securities
available-for-sale and notes receivable approximates their fair value.
The fair value of long-term debt is estimated at $29,399,573 and
$30,284,536 at December 31, 2002 and December 25, 2001, respectively,
compared to its carrying value of $25,099,091 and $29,073,917 at the
same respective dates. 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.
18. QUARTERLY FINANCIAL DATA (unaudited)
------------------------------------
Unaudited quarterly consolidated statement of income information for
the years ended December 31, 2002 and December 25, 2001 is summarized
as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
2002
- ----
Net sales $17,518,696 $17,033,867 $16,911,097 $18,531,641
Income from
operations 2,097,696 1,620,708 1,195,593 1,200,871
Net income 1,252,868 891,597 456,028 221,975
Basic and diluted
net income per
Partnership unit 0.34 0.24 0.12 0.06
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
Fourth quarter 2002 data includes results from 14 weeks of operations
due to the fiscal year of 2002 including 53 weeks (see Note 1).
Fourth quarter 2002 net income includes loss on sale of investment in
unconsolidated affiliate of $234,000 (see Note 5).
19. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
2002 2001 2000
---- ---- ----
Cash paid during the year for
interest $2,873,969 $3,086,014 $3,050,092
Noncash investing and financing
activity:
Issuance of units for notes
receivable 195,277 - 12,555
Distributions offset against
notes receivable 128,027 106,097 117,551
Unit repurchases offset
against notes receivable 8,530 - 47,705
Capital leases entered into 2,039,283 606,924 1,461,151
Reduction of notes receivable
recorded as compensation expense 73,324 51,909 54,385
Units issued in connection with
the purchase of Oklahoma
Magic, L.P.'s minority interest 790,999 - -
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 28, 2003, 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 31, 2002. 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
February 28, 2003