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12
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 26, 1995
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.)
555 N. Woodlawn, Suite 3102
Wichita, Kansas 67208
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (316) 684-5119
Securities registered pursuant to Section 12(b) of the Act: None
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Class A Income Preference Units of American Stock
Limited Partner Interests Exchange
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 rifled 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 February 29, 1996 the aggregate market value of the income
preference units held by non-affiliates of the registrant was $5,665,440.
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 (the "Operating Partnership"), 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 the Operating Partnership
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 the Operating Partnership. RAM
and RMC own an aggregate 1% interest in the Operating Partnership.
As of December 26, 1995, the Partnership owned and operated 54 "Pizza
Hut" restaurants and six "Pizza Hut" delivery/carryout facilities
(collectively, the "Restaurants"). The Partnership did not open any new
"Pizza Hut" restaurants during 1995. The following table sets forth the
states in which the Partnership's Pizza Hut Restaurants are located:
Units Open at
12-26-95 and 12-27-94
---------------------
Georgia 8
Louisiana 2
Montana 17
Texas 25
Wyoming 8
--
Total 60
==
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 PepsiCo, Inc. Since it was founded in 1958,
PHI has become the world's largest pizza restaurant chain in terms of both
sales and number of restaurants. As of February 29, 1996, there were
approximately 7,700 Pizza Hut restaurants and delivery/carryout facilities
with locations in all 50 states and in over 85 foreign countries. PHI
owns and operates approximately 63% of these restaurants and independent
franchisees own and operate approximately 37% of these restaurants.
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. Food products
not prescribed by PHI may only be offered with the prior express approval
of PHI.
PHI maintains a research and development department which develops new
recipes and products, tests new procedures for food preparation and
approves suppliers for Pizza Hut restaurants. During 1995, PHI
successfully introduced "Stuffed Crust Pizza", a pizza with a ring of
mozzarella cheese hand-stuffed in the crust.
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 one-story brick
building with 1,800 to 3,000 square feet, including kitchen and storage
areas, and features a distinctive red roof. Seating capacity ranges from
75 to 140 persons and the typical property site will accommodate parking
for 30 to 70 cars. Building designs may be varied only upon request and
when required to comply with local regulations or for unique marketing
reasons.
PHI has developed a system for delivery of pizza and other food
products to customers' homes or offices. Delivery has resulted in
excellent growth for the Pizza Hut system from the mid 1980's through the
early 1990's. As growth in the delivery segment is slowing, alternative
sites of distribution is an area of the business in which PHI will
concentrate development for future growth.
Franchise Agreements
- --------------------
General. The relationships between PHI and its franchisees are
governed by franchise agreements (the "Franchise Agreements") . Pursuant
to the Franchise Agreements, PHI franchisees are granted the right to
establish and operate restaurants under the Pizza Hut system within a
designated geographic area. The initial term of each Franchise Agreement
is 20 years, but prior to expiration, the franchisee may renew the
agreement for an additional 15 years, if not then in default. Renewals
are subject to execution of the then current form of the Franchise
Agreement, including the current fee schedules. Unless the franchisee
fails to develop its assigned territory, PHI agrees not to establish, and
not to license others to establish, restaurants within the franchisee's
territory.
Standards of Operation . PHI provides management training for
employees of franchisees and each restaurant manager is required to meet
certain training requirements. Standards of quality, cleanliness,
service, food, beverages, decor, supplies, fixtures and equipment for
Pizza Hut restaurants are prescribed by PHI. Although new standards and
products may be prescribed from time to time, any revision requiring
substantial expenditures by franchisees must be first proven successful
through market testing conducted in 5% of all Pizza Hut restaurants.
Failure to comply with the established standards is cause for termination
of a Franchise Agreement by PHI and PHI has the right to inspect each
restaurant to monitor compliance. Management of the Partnership believes
that the existing Restaurants meet or exceed the applicable standards;
neither the predecessors to RMC nor the Partnership has ever had a
Franchise Agreement terminated by PHI.
Advertising. All franchisees are required to join a cooperative
advertising association ("co-op") with other franchisees within local
marketing areas defined by PHI. Contributions of 2% of each restaurant's
monthly gross sales (however, the contribution rate on delivery sales was
or shall be as follows: 1993-1.75%; 1994 through termination of the
initial term - 2%) 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 (however, dues on delivery sales were or
shall be as follows: 1993-1.75%; 1994 through termination of the initial
term - 2%). 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.
Effective January 1, 1996, PHI and the members of IPHFHA agreed to
decrease their contribution to the co-ops by 0.5% to 1.5% of monthly gross
sales and increase their national dues by 0.5% to 2.5% of monthly gross
sales. The increase in national dues allows for additional buying of
network television which reaches a greater audience.
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.
PFS, a wholly-owned subsidiary of PepsiCo, Inc., offers certain equipment,
food products and supplies for sale to franchisees for use in their
restaurants, but franchisees are not required to purchase such items from
PFS. Further, PHI limits its rate of profit on PFS's sales of food, paper
products and similar restaurant supplies to franchisees to a 14% gross
profit and a 2.5% net pre-tax profit. Profits in excess of such amounts
are returned annually on a proportionate basis to franchisees purchasing
products from PFS. Because of these financial incentives, the Partnership
purchases substantially all of its equipment, supplies, and other products
and materials from PFS, except for produce items, which are purchased
locally for each Restaurant. Most of the equipment, supplies, and other
products and materials used in the Restaurant's operations, however, are
commodity items that are available from numerous suppliers at market
prices. Certain of the items used in preparation of the Restaurant's
products currently are available only to Pizza Hut franchisees from PHI.
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 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 20th day after the end of each month and
franchisees are required to submit monthly gross sales data for each
restaurant, as well as quarterly and annual profit and loss data on each
restaurant, to PHI. In addition to the monthly service fees, an initial
franchise fee of $15,000 is payable to PHI prior to the opening of each
new restaurant.
No Transfer or Assignment with 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 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 1996 or future years.
Seasonality
-----------
Due to the seasonal nature of the restaurant business in general, the
locations of many of the Restaurants near summer tourist attractions, and
the severity of winter weather in the areas in which many of the
Restaurants are located, the Partnership realizes approximately 40% of its
operating profits in periods six through nine (18 weeks). Although this
seasonal trend is likely to continue, the severity of these seasonal
cycles may be lessened to the extent that the Partnership operates Pizza
Hut restaurants in warmer climates and nontourist population areas in the
future. The Partnership does not anticipate that the current seasonal
trends will cause the Partnership's negative working capital to
deteriorate even further during seasonal lows even if these trends
continue.
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 in-restaurant, take-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 material laws
and regulations which govern its business. In order to comply with the
regulations governing alcoholic beverage sales in Montana, Texas and
Wyoming, 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 February 29, 1996, the Partnership did not have any employees.
The Operating Partnership had approximately 1,450 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. Employees at one of the
Restaurants are covered by a collective bargaining agreement. The
Restaurants are managed by employees of Restaurant Management Company of
Wichita, Inc. (the "Management Company"), an affiliate of the Partnership,
which has its principal offices in Wichita, Kansas. The Management
Company has a total of 38 employees which will 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 operated
by the Partnership as of December 26, 1995.
Leased From Leased From
Unrelated Third Affiliates of the
Parties General Partners Owned Total
--------------- ----------------- ----- -----
Georgia 1 0 7 8
Louisiana 1 0 1 2
Montana 11 0 6 17
Texas 15 0 10 25
Wyoming 5 1 2 8
-- -- -- --
Total 33 1 26 60
== == == ==
Five of the properties owned by the Partnership 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 ten years and are
subject to options to renew. Seven leases with initial terms of less than
ten years contain renewal options extending to 1998. A low volume
delivery/carryout facility whose final lease renewal option expired in
1994 is being leased on a month-to month basis while a new lease is
negotiated. The Partnership believes that the few leases with shorter
terms can be renewed for multiple year periods, or the property 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 one-story brick
building with 1,800 to 3,000 square feet, including kitchen and storage
areas, and features a distinctive red roof. Seating capacity ranges from
75 to 140 persons and the typical property site will accommodate parking
for 30 to 70 cars. 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 a restaurant facility are
approximately $150,000 for land, $250,000 for the building and $135,000
for equipment and furnishings. Land costs can vary materially depending
on the location of the site.
The typical delivery/carryout facility is a 500 square foot
prefabricated unit, including kitchen and storage areas, and features a
distinctive red roof. The units provide delivery and carryout only and do
not have dining facilities. Typical capital costs for a delivery kitchen
are approximately $100,000 for land, $71,000 for the building, $45,000 for
improvements, and $55,000 for equipment. Land costs can vary materially
depending on the location of the site.
Item 3. Legal Proceedings
- --------------------------
As of December 26, 1995, 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 are traded on the
American Stock Exchange under the symbol "RMC". Market prices for units
during 1995 and 1994 were:
Calendar Period High Low
- -----------------------------------------------------
1995
- ----
First Quarter 6-7/8 5-7/8
Second Quarter 6-3/4 5-1/2
Third Quarter 7 5-3/4
Fourth Quarter 6-15/16 5-3/4
1994
- ----
First Quarter 11-7/8 10-1/4
Second Quarter 10-3/4 9
Third Quarter 9-1/2 7-3/8
Fourth Quarter 8-1/4 5-7/8
As of December 26, 1995, approximately 1,900 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 Per
Class A Class B & C
Record Date Payment Date Unit Unit
- -------------------------------------------------------------------
1995
- ----
January 12, 1995 January 27, 1995 $0.160 $0.160
April 12, 1995 April 28, 1995 0.160 0.160
July 12, 1995 July 28, 1995 0.160 0.160
October 12,1995 October 27, 1995 0.260 0.260
----- -----
Cash distributed during 1995 $0.740 $0.740
===== =====
1994
- ----
January 12, 1994 January 28, 1994 $0.375 $0.100
April 12, 1994 May 6, 1994 0.375 0.100
July 12, 1994 July 29, 1994 0.160 0.160
October 12,1994 October 29, 1994 0.160 0.160
----- -----
Cash distributed during 1994 $1.070 $0.520
===== =====
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 even.
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 26, December 27, December 28, December 29, December 31,
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
Income statement data:
Net sales $ 40,004 $ 37,445 $ 36,070 $ 34,606 $ 33,376
Income from operations 3,890 3,587 3,688 2,966 1,626
Net income 2,481 2,385 3,397 3,418 1,356
Net income per Class A
Income Preference Unit (a) 0.63 1.04 1.72 1.72 1.21
Balance sheet data:
Total assets $ 16,134 $ 16,445 $ 17,085 $ 15,906 $ 16,035
Long-term debt 10,525 10,787 11,204 8,539 10,460
Obligations under capital
leases 1,732 1,800 1,903 2,115 1,232
Partners capital (deficiency):
General Partners (3) (3) (3) (3) (4)
Class A 6,573 6,729 6,751 6,626 6,441
Class B and C (4,688) (4,479) (4,416) (4,178) (4,704)
Cost in excess of carrying
value of assets acquired (1,324) (1,324) (1,324) (820) (820)
Notes receivable from
employees (6) (32) (76) -- --
Cash dividends declared per unit:
Class A Income Preference 0.74 1.07 1.60 1.50 1.67
Class B 0.74 0.52 0.50 0.40 0.57
Class C 0.74 0.52 0.50 0.40 0.57
Statistical data:
Capital expenditures: (b)
Existing Restaurants $ 1,185 $ 1,093 $ 2,148 $ 326 $ 394
New Restaurants -- 1,038 599 44 2,386
Average weekly sales per
Restaurant: (c)
Red Roof 12,862 12,278 12,113 10,712 10,871
Delivery/carryout facility 12,463 11,536 10,636 8,708 8,115
Restaurants in operation
at end of period 60 60 58 58 65
NOTES TO SELECTED FINANCIAL DATA
(a) Net income per Class A Income Preference Unit was determined by allocating
the earnings in the same manner required by the Partnership Agreements for the
allocation of taxable income and loss. Therefore, net income of the Operating
Partnership has been allocated to the limited partners who are holders of Units
first until the amount allocated equals the preference amount. The remaining
net income is allocated to all partners in accordance with their respective
Units in the Partnership with all outstanding Units being treated equally. The
preference requirement was satisfied in May of 1994. Upon expiration of the
preference, net income was allocated equally to all outstanding units.
(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.
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 26, 1995, December 27, 1994 and December 28, 1993. 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 26, 1995 increased $2.6 million to $40
million, a 6.8% increase over the year ended December 27, 1994. Sales for
comparable restaurants increased 5.6% over the prior year. This increase is
primarily the result of the success of a new product, Stuffed Crust Pizza,
which was introduced in April. Stuffed Crust is a pizza with a ring of
mozzarella cheese hand-stuffed in the crust.
Net sales for 1994 increased $1.4 million to $37.4 million, a 3.8% increase
over 1993. Sales for comparable restaurants increased 2.5% over the prior
year. Same store sales growth slowed during the last half of 1994 as the
Partnership rolled over large sales increases in 1993 due to the introduction
of BigFoot Pizza and the success of the luncheon buffet. BigFoot is a
rectangular pizza measuring 2 feet by 1 foot which appeals to the value-
oriented delivery customer.
Income From Operations
- ----------------------
Income from operations for the year ended December 26, 1995 increased $303,000
to $3,890,000, an 8.4% increase over the prior year. As a percentage of net
sales, income from operations increased from 9.6% in 1994 to 9.7% in 1995.
Cost of sales increased as a percentage of net sales from 25.8% in 1994 to
26.5% in 1995. This increase is a result of promoting items, including Stuffed
Crust Pizza, that have higher food costs and an increase in cheese prices.
Restaurant labor and benefits decreased from 27.0% of net sales in 1994 to
26.1% of net sales in 1995 primarily due to lower benefit costs and the
efficiencies achieved at higher sales levels. Advertising increased slightly
from 6.3% of net sales in 1994 to 6.4% of net sales in 1995. Operating
expenses as a percentage of net sales decreased from 18.5% in 1994 to 18.4% in
1995. General and administrative expense increased to 9.1% of net sales in
1995 from 9.0% of net sales in 1994. Depreciation and amortization expense
remained at 3.8% of net sales for both 1994 and 1995.
Income from operations for the year ended December 27, 1994 decreased $100,000,
or 2.7% from the prior year. As a percentage of net sales, income from
operations decreased from 10.2% in 1993 to 9.6% in 1994. Cost of sales and
labor expenses increased as a percentage of net sales during 1994 while all
other operating expenses remained stable. Cost of sales as a percentage of net
sales increased from 25.6% in 1993 to 25.8% in 1994. Cost of labor and
benefits increased from 26.3% of net sales in 1993 to 27.0% of net sales in
1994. These increases are the result of inefficiencies experienced in the
fourth quarter during the implementation of new procedures which focus on
providing a consistent, quality pizza to each customer. Advertising expense
decreased as a percentage of net sales from 6.4% in 1993 to 6.3% in 1994.
Operating expenses were 18.5% of net sales in both 1993 and 1994. General and
administrative expenses remained at 9.0% of net sales for both 1993 and 1994.
Depreciation and amortization as a percentage of net sales decreased slightly
from 4.0% in 1993 to 3.8% in 1994.
Net Income
- ----------
Net income increased $96,000 to $2,481,000 for the year ended December 26, 1995
compared to $2,385,000 for the year ended December 27, 1994. This increase is
a result of the increase in income from operations noted above which was
partially offset by an increase in interest expense of approximately $61,000
and a $142,000 loss on the early extinguishment of debt which was refinanced to
obtain a favorable interest rate.
Net income decreased $1,013,000 from $3,397,000 for the year ended December 28,
1993 to $2,385,000 for the year ended December 27, 1994. A gain on sale of
restaurants of $636,000 and a gain on fire settlement of $49,000 were included
in 1993. The remaining decrease is attributable to the decrease in operating
income noted above and an increase in interest expense of $233,000 due to
higher interest rates.
Liquidity and Capital Resources
- -------------------------------
The Partnership generates its principal source of funds from net cash provided
by operating activities. Net cash provided by operating activities is expected
to provide sufficient funds to meet planned capital expenditures for recurring
replacement of equipment in existing restaurants, to service debt obligations
and to make quarterly cash distributions.
At December 26, 1995, the Partnership had a working capital deficiency of
$2,218,000 compared to a deficiency of $2,379,000 at December 27, 1994. The
decrease in working capital deficiency is primarily a result of a $559,000
decrease in current portion of long-term debt due to certain refinancing in
1995 which was partially offset by an increase in accounts payable of $349,000.
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.
Master Limited Partnerships (MLPs) are not currently subject to federal or
state income taxes. However, under the Omnibus Budget Reconciliation Act of
1987, certain MLPs, including the Partnership, will be taxed as corporations
beginning in 1998.
Net Cash Provided by Operating Activities
- -----------------------------------------
During 1995, net cash provided by operating activities amounted to $4,382,000,
an increase of $376,000 over 1994. This increase is attributable to an
increase in accounts payable and the increase in income from operations noted
above.
Investing Activities
- --------------------
Property and equipment expenditures represent the largest investing activity
by the Partnership. Capital expenditures for 1995 were $1,185,000 of
which $641,000 was for replacement of equipment in existing restaurants and
$343,000 was for quality upgrades and Stuffed Crust Pizza requirements. The
remaining $201,000 was used to purchase the land and building of a previously
leased Pizza Hut restaurant from an unrelated party.
Financing Activities
- --------------------
Cash distributions paid in 1995 totaled $2,919,000 and amounted to $0.74 per
Class A Income Preference 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 reserves as the managing General Partner may deem
appropriate. From the inception of the Partnership in August, 1987, the
Partnership paid a preference payment of $0.275 each quarter until such time as
the Class A Income Preference units had received $10.00 in aggregate cash
distributions. While the preference distribution was in effect, net income was
allocated to the Class A Income Preference units until the amount allocated
equaled the preference amount. The remaining net income was allocated to all
units in accordance with their ratio to all outstanding units. The quarterly
preference requirement was satisfied with the May 6, 1994 distribution. Upon
expiration of the preference, net income and distributions were allocated
equally to all outstanding units.
During 1995, the Partnership's proceeds from long term borrowings amounted to
$3,900,000. These proceeds were used as follows: $2,800,000 to refinance debt
to obtain a favorable interest rate, $200,000 to fund the acquisition of the
land and building of a previously leased restaurant, and $900,000 to increase
working capital. The Partnership plans to open four new restaurants in 1996.
Management estimates that approximately $2,500,000 will be needed to finance
the construction of the new restaurants. In addition, management plans to
finance $942,000 for remodels of existing restaurants. Management anticipates
spending $832,000 in 1996 for recurring replacement of equipment in existing
restaurants which the Partnership expects to finance from net cash provided by
operating activities.
The Partnership announced on July 5, 1995 that its managing general partner has
authorized the purchase by the Partnership of up to 300,000 Class A Income
Preference Units of limited partner interests. Such purchases which may be
made either by open market purchases effected on the American Stock Exchange or
otherwise or in privately negotiated transactions, may be made from time to
time through December 31, 1996, depending on market factors and other
conditions.
On March 13, 1996, the Partnership purchased a 45% interest in a newly formed
limited partnership that will own and operate thirty-three Pizza Hut
restaurants in Oklahoma. The name of the new partnership is Oklahoma Magic,
L.P. ("Magic") The remaining ownership interests are held by Restaurant
Management Company of Wichita, Inc. (29.25%), an affiliate of the Partnership,
Hospitality Group of Oklahoma, Inc. (25%), the former owners of the thirty-
three Oklahoma restaurants, and RAM (.75%), the managing general partner of the
Partnership. RAM is also the managing general partner of Magic.
The Partnership paid $3.0 million in cash for their 45% interest in the new
partnership. Intrust Bank in Wichita has interim financed the $3.0 million
until such time as permanent financing can be obtained.
Recently Issued Accounting Standard
- -----------------------------------
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
which requires impairment losses to be recognized for long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows are not sufficient to recover the assets' carrying amount. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount. The Partnership will first apply Statement 121 in the first
quarter of 1996 and, based on presently available estimates and current
circumstances, believes that no impairment loss will be recognized at time
of adoption.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
See the consolidated financial statements and supplementary data listed in
the accompanying "Index to Consolidated Financial Statements and
Supplementary Data" on Page F-1 herein. Information required for financial
statement schedules under Regulation S-X is either not applicable or is
included in the consolidated financial statements or notes thereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
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 Partnerships under a Management Services Agreement with
the Operating Partnership. 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 and
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
Partnership 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 50 Chairman, Chief Executive Officer, President
and sole director. McCoy holds a Bachelor
of Arts degree from the University of
Oklahoma. From 1970 to 1974, he was at
different times Marketing Manager at PHI,
where he was responsible for consumer
research, market research, and market
planning, and Systems Manager, where he
was responsible for the design and
installation of PHI's first management
data processing system. In 1974, he
founded the predecessor to the Management
Company and today owns or has controlling
ownership in entities operating a combined
total of 90 franchised "Pizza Hut", "Long
John Silver's" and "Grandy's" restaurants.
J. Leon Smith 53 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.
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 is shown below as the other officers' cash compensation
allocable to the Restaurants does not exceed $100,000. RAM nor the Operating
Partnership compensates 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
Name and Annual Compensation
Principal
Position Year Salary Bonus
--------- ---- ------ -----
Hal W. McCoy 1995 76,498 62,889
President and 1994 93,386 52,679
Chief Executive Officer 1993 47,771 35,693
Incentive Bonus Plan
- --------------------
The Management Company maintains a discretionary supervisory incentive
bonus plan (the "Incentive Bonus Plan") pursuant to which approximately 21
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 1995, 1994, and 1993 to Mr. McCoy and allocated to the Restaurants
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 26, 1995 was $394,299 of which $62,889
was paid to all executive officers as a group. Bonuses paid under the
Incentive Bonus Plan are paid by the Partnership.
The Incentive Bonus Plan in effect for the fiscal year ending December 31,
1996 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 $1,731,500. For the fiscal year
ended December 26, 1995 the Partnership's income from operations plus
depreciation and amortization expenses was $5,401,169.
Class A Unit Option Plan
- ------------------------
The Partnership, the Operating Partnership, 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, the Operating Partnership, 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 closing sales price of Units on the
American Stock Exchange on the date of the grant of the option. 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 26,
1995.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
PRINCIPAL UNITHOLDERS
The following table sets forth, as of February 29, 1996, 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 698,479 (1) 58.67%
555 N. Woodlawn
Suite 3102
Wichita, KS 67208
Class B Daniel Hesse 204,401 (2) 17.17%
555 N. Woodlawn
Suite 3102
Wichita, KS 67208
Class C Hal W. McCoy 1,341,934 (1) 64.47%
555 N. Woodlawn
Suite 3102
Wichita, KS 67208
Class C Daniel Hesse 234,199 (2) 7.40%
555 N. Woodlawn
Suite 3102
Wichita, KS 67208
(1) Hal W. McCoy beneficially owns 81.31% of RMC Partners, L.P. which owns
900,155 Class B Units and 1,604,588 Class C Units. Mr. McCoy owns
91.67% of RMC American Management, Inc. which owns 3,840 Class C Units.
(2) Daniel Hesse beneficially owns 14.48% of RMC Partners, L.P. which owns
900,155 Class B Units and 1,604,588 Class C Units. Mr. Hesse owns 4.17%
of RMC American Management, Inc. which owns 3,840 Class C Units.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of February 29, 1996, 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 698,479 (1) 58.67%
C Hal W. McCoy 1,341,934 (1) 64.47%
B Director & all 743,592 (1) 62.46%
officers as a group
(2 Persons)
C Director & all 1,419,521 (1) 71.90%
officers as a group
(2 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 $25,000
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 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.
PART IV
Item 14. Exhibits, Financial Statements and Reports
- ----------------------------------------------------
on Form 8-K
- -----------
(a) 1.
Financial statements
--------------------
See "Index to Consolidated Financial Statements and Supplementary
Data" which appears on page F-1 herein.
3. Exhibits
The exhibits filed as part of this annual report are listed in the
"Index to Exhibits" at page 28.
(b) Reports on Form 8-K
During the third quarter of 1995, the Partnership filed a
Form 8-K, dated July 5, 1995, reporting that the managing
general partner had authorized the purchase by the
Partnership of up to 300,000 Class A Income Preference
Units of limited partner interests.
INDEX TO EXHIBITS
(Item 14(a))
Exhibit
No. Description of Exhibits Page/Notes
3.1 Amended and Restated Certificate of Limited
Partnership of American Restaurant Partners, L.P. A
3.2 Amended and Restated Agreement of Limited
Partnership of American Restaurant Partners, L.P. A
3.3 Amended and Restated Certificate of Limited
Partnership of American Pizza Partners, L.P. A
3.4 Amended and Restated Agreement of Limited
Partnership of American Pizza Partners, L.P. A
4.1 Form of Class A Certificate A
4.2 Form of Application for Transfer of Class A Units A
10.1 Management Services Agreement dated
June 26, 1987 between American Pizza
Partners, L.P. and RMC American Management, Inc. A
10.2 Management Services Agreement dated
June 26, 1987 between RMC American
Management, Inc. and Restaurant Management
Company of Wichita, Inc. A
10.3 Form of Superseding Franchise Agreement
between the Partnership and Pizza Hut, Inc.
and schedule pursuant to Item 601 of
Regulation S-K. A
10.4 Form of Blanket Amendment to Franchise Agreements A
10.5 Incentive Bonus Plan A
10.6 Class A Unit Option Plan B
10.7 Revolving Term Credit Agreement dated
June 29, 1987 between American Pizza
Partners, L.P. and the First National Bank
in Wichita C
10.8 Form of 1990 Franchise Agreement between the
Partnership and Pizza Hut, Inc. and schedule
pursuant to Item 601 of Regulation S-K D
11. Computation of Earnings per Partnership Interest X-1
24. Consent of Ernst & Young LLP F-24
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 Form 10-K for the year
ended December 31, 1991.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AMERICAN RESTAURANT PARTNERS, L.P.
(Registrant)
By: RMC AMERICAN MANAGEMENT, INC.
Managing General Partner
Date: 3/22/96 By: /s/ Hal W. McCoy
--------- ----------------------
Hal W. McCoy
President 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 3/22/96
- ------------------ President and Chief Executive Officer --------
Hal W. McCoy (Principal Executive Officer)
of RMC American Management, Inc.
/s/ Terrry Freund 3/22/96
- ------------------ Chief Financial Officer --------
Terry Freund
Index to Consolidated Financial Statements
and Supplementary Data
The following consolidated financial statements of American Restaurant
Partners, L.P. are included in Item 8:
Page
----
Consolidated Balance Sheets as of December 26, 1995
and December 27, 1994. . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Income for the years ended
December 26, 1995, December 27, 1994,
and December 28, 1993. . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Partners' Capital
(Deficiency)for the years ended December 26, 1995,
December 27, 1994, and December 28, 1993 . . . . . . . . F-6
Consolidated Statements of Cash Flows for the
years ended December 26, 1995, December 27, 1994,
and December 28, 1993. . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . F-8
Supplementary Data (Unaudited) . . . . . . . . . . . . . . F-23
All financial statement schedules have been omitted since the required
information is not present.
REPORT OF INDEPENDENT AUDITORS
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. as of December 26, 1995 and December 27, 1994, and
the related consolidated statements of income, partners' capital (deficiency),
and cash flows for each of the three years in the period ended December 26,
1995. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the consolidated financial position
of American Restaurant Partners, L.P. at December 26, 1995 and December 27,
1994, and the consolidated results of its operations and its cash flows for
each for the three years in the period ended December 26, 1995, in conformity
with generally accepted accounting principles.
/s/ Ernst and Young
Wichita, Kansas
March 21, 1996
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 26, December 27,
ASSETS 1995 1994
- ------------------------------- ------------ ------------
Current assets:
Cash and cash equivalents (Note 9) $ 782,348 $ 843,902
Certificate of deposit (Notes 9 and 13) 232,219 259,888
Accounts receivable 76,605 89,879
Due from affiliates (Note 2) 24,549 20,301
Deposit with affiliate (Note 2) 330,000 330,000
Notes receivable from
affiliates - current portion (Note 2) 30,872 27,172
Inventories 300,413 292,467
Prepaid expenses 144,036 107,803
--------- ---------
Total current assets 1,921,042 1,971,412
Property and equipment, at cost
(Notes 2,3,4,8,and 10):
Land 2,592,607 2,516,897
Buildings 6,239,359 6,114,052
Restaurant equipment 8,706,682 8,056,608
Leasehold rights and building improvements 2,838,835 2,683,002
Property under capital leases 2,369,199 2,369,199
---------- ----------
22,746,682 21,739,758
Less accumulated depreciation and amortization 10,270,929 9,027,449
---------- ----------
12,475,753 12,712,309
Other assets:
Franchise rights, net of accumulated
amortization of $625,724 ($545,452 in 1994)
(Note 8) 1,099,470 1,179,742
Notes receivable from affiliates (Note 2) 157,083 171,250
Other 480,998 409,884
---------- ----------
$ 16,134,346 $ 16,444,597
========== ==========
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 26, December 27,
LIABILITIES AND PARTNERS' CAPITAL 1995 1994
- --------------------------------- ------------ ------------
Current liabilities:
Accounts payable $ 1,903,977 $ 1,554,972
Due to affiliates (Note 2) 62,292 78,976
Accrued payroll and other taxes 319,902 297,486
Accrued liabilities 786,598 785,067
Current portion of long-term debt (Notes 3 and 9) 997,814 1,557,312
Current portion of obligations
under capital leases (Note 4) 68,833 76,248
---------- ----------
Total current liabilities 4,139,416 4,350,061
Other noncurrent liabilities 86,308 76,745
Long-term debt (Note 3 and 9) 9,526,948 9,229,895
Obligations under capital leases (Note 4) 1,662,746 1,724,077
General Partners' interest
in Operating Partnership 167,530 171,949
Partners' capital (Notes 5,6,7,8,14 and 15):
General Partners (3,290) (3,347)
Limited Partners:
Class A Income Preference, authorized 875,000
units; issued 815,309 units (825,764
units in 1994) 6,572,923 6,729,290
Classes B and C, issued 1,184,046 and
1,959,874 Class B and C units, respectively
(1,162,201 and 1,923,469 units in 1994,
respectively (4,688,254) (4,478,892)
Cost in excess of carrying value
of assets acquired (1,323,681) (1,323,681)
Notes receivable from employees (6,300) (31,500)
---------- ----------
Total partners' capital 551,398 891,870
---------- ----------
$ 16,134,346 $ 16,444,597
========== ==========
See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 26, 1995,
December 27, 1994 and December 28, 1993
1995 1994 1993
---- ---- ----
Net sales $ 40,004,295 $ 37,445,069 $ 36,069,693
Operating costs and expenses:
Cost of sales 10,599,422 9,645,875 9,237,827
Restaurant labor and benefits (Note 14) 10,444,896 10,122,132 9,479,162
Advertising (Note 2) 2,549,729 2,348,785 2,308,870
Other restaurant operating
expenses exclusive of
depreciation and amortization 7,367,758 6,915,364 6,679,757
General and administrative:
Management fees - related party (Note 2) 2,776,768 2,598,168 2,504,277
Other 864,553 791,496 742,796
Depreciation and amortization 1,511,158 1,435,775 1,429,227
---------- ---------- ----------
Income from operations 3,890,011 3,587,474 3,687,777
Interest income 46,334 43,103 42,004
Interest expense (1,287,776) (1,226,319) (992,897)
Gain on sale of restaurants to related party
(Note 10) -- -- 636,097
Gain on fire settlement (Note 11) -- -- 49,480
---------- ---------- ----------
(1,241,442) (1,183,216) (265,316)
---------- ---------- ----------
Income before General Partners' interest
in income of operating partnership and
extraordinary item 2,648,569 2,404,258 3,422,461
General Partners' interest in
income of Operating Partnership 25,061 19,501 25,153
---------- ---------- ----------
Income before extraordinary item 2,623,508 2,384,757 3,397,308
Extraordinary loss on early extinguishment
of debt (Note 12) 142,491 -- --
---------- ---------- ----------
Net income $ 2,481,017 $ 2,384,757 $ 3,397,308
========== ========== ==========
Net income allocated to Partners:
Class A Income Preference $ 519,316 $ 861,833 $ 1,421,715
Class B $ 737,783 $ 572,923 $ 744,043
Class C $ 1,223,918 $ 950,001 $ 1,231,550
Weighted average number of Partnership
units outstanding during period:
Class A Income Preference 824,978 825,764 824,677
Class B 1,172,025 1,160,514 1,192,443
Class C 1,944,299 1,924,330 1,973,751
Income before extraordinary item per Partnership
interest:
Class A Income Preference $ 0.67 $ 1.04 $ 1.72
Class B $ 0.67 $ 0.49 $ 0.62
Class C $ 0.67 $ 0.49 $ 0.62
Extraordinary loss per Partnership interest:
Class A Income Preference $ 0.04 $ -- $ --
Class B $ 0.04 $ -- $ --
Class C $ 0.04 $ -- $ --
Net income per Partnership interest:
Class A Income Preference $ 0.63 $ 1.04 $ 1.72
Class B $ 0.63 $ 0.49 $ 0.62
Class C $ 0.63 $ 0.49 $ 0.62
Distributions per Partnership interest:
Class A Income Preference $ 0.74 $ 1.07 $ 1.60
Class B $ 0.74 $ 0.52 $ 0.50
Class C $ 0.74 $ 0.52 $ 0.50
Pro Forma Amounts per Partnership interest
upon expiration of Class A Income
Preference distributions (Note 2):
Net income $ 0.61 $ 0.85
Distributions $ 0.64 $ 0.73
See accompanying notes.
AMERICAN RESTARUANT PARTNERS, L.P.
Consolidated Statements of Partners' Capital (Deficiency)
Years ended December 26, 1995, December 27, 1994, and December 28, 1993
General Partners Limited Partners
---------------- --------------------------------------------Cost in excess
Class B Class A Income Classes B of carrying Notes
and C Preference and C value receivable
--------------- -------------------- ---------------------- of assets from
Units Amounts Units Amounts Units Amounts acquired employees Total
------- ------- ------- ----------- -------- ---------- ---------- ------------------
Balance at December 29, 1992 4,100 ($3,005) 822,689 $6,625,824 3,204,804 ($4,178,023) ($819,699) -- $1,625,097
Net Income -- 2,515 -- 1,421,715 -- 1,973,078 -- -- 3,397,308
Partnership distributions -- (2,034) -- (1,323,124) -- (1,595,041) -- -- (2,920,199)
Unit options exercised (Note 7) -- -- 3,075 26,737 -- -- -- -- 26,737
Units sold to employees (Note 14) -- -- -- -- 25,200 75,600 -- (75,600) --
Units exchanged with related party
for restaurants (Note 10) (160) (720) -- -- (175,931) (791,689) -- -- (792,409)
Units granted for purchase of
restaurants (Note 8) -- -- -- -- 22,222 100,000 -- -- 100,000
Purchases of land and buildings
from affiliate (Note 2) -- -- -- -- -- -- (503,982) -- (503,982)
----- ------ ------- --------- --------- ---------- ---------- ------ ---------
Balance at December 28, 1993 3,940 (3,244) 825,764 6,751,152 3,076,295 (4,416,075) (1,323,681) (75,600) 932,552
Net Income -- 1,946 -- 861,833 -- 1,520,978 -- -- 2,384,757
Partnership distributions -- (2,049) -- (883,695) -- (1,602,545) -- -- (2,488,289)
Units sold to employees (Note 14) -- -- -- -- 9,375 18,750 -- -- 18,750
Reduction of notes receivable -- -- -- -- -- -- -- 44,100 44,100
----- ------ ------- --------- --------- ---------- ---------- ------- -------
Balance at December 27, 1994 3,940 (3,347) 825,764 6,729,290 3,085,670 (4,478,892) (1,323,681) (31,500) 891,870
Net Income -- 2,975 -- 519,316 -- 1,958,726 -- -- 2,481,017
Partnership distributions -- (2,918) -- (611,015) -- (2,304,588) -- -- 2,918,521)
Units sold to employees (Note 14) -- -- -- -- 18,750 37,500 -- -- 37,500
Units issued to employees
as compensation -- -- -- -- 39,500 99,000 -- -- 99,000
Reduction of notes receivable -- -- -- -- -- -- -- 25,200 25,200
Repurchase of Class A Units(Note 15) -- -- (10,455) (64,668) -- -- -- -- (64,668)
----- ------ ------- ---------- --------- ----------- ----------- ------ --------
Balance at December 26, 1995 3,940 ($3,290) 815,309 $6,572,923 3,143,920 ($4,688,254)($1,323,681) ($6,300) $551,398
===== ======= ======= ========== ========= =========== =========== ======= ========
See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 26, 1995
December 27, 1994 and December 28, 1993
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net income $ 2,481,017 $ 2,384,757 $ 3,397,308
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,511,158 1,435,775 1,429,227
Provision for deferred rent 9,563 11,335 (51,092)
Provision for deferred compensation 25,200 44,100 --
Unit compensation expense (Note 14) 99,000 -- --
Gain on sale of restaurants -- -- (636,097)
Loss on disposition of assets 20,562 6,968 8,623
Gain on fire settlement -- -- (49,480)
General Partners' interest in net
income of Operating Partnership 25,061 19,501 25,153
Net change in operating assets and liabilities:
Accounts receivable 13,274 93,954 218,394
Due from affiliates (4,248) 6,876 (4,172)
Inventories (7,946) (7,021) 12,522
Prepaid expenses (36,233) 151,851 (173,252)
Accounts payable 349,005 (184,387) 122,766
Due to affiliates (16,684) (3,353) (25,505)
Accrued payroll and other taxes 22,416 23,760 21,199
Accrued liabilities 1,531 73,324 (59,183)
Other, net (110,193) (51,012) (171,090)
--------- --------- ---------
Net cash provided by
operating activities 4,382,483 4,006,428 4,065,321
Investing activities:
Purchases of certificates of deposit (79,687) (122,833) (67,000)
Redemption of certificates of deposit 107,356 129,945 --
Additions to property and equipment (1,185,444) (2,130,601) (1,389,043)
Purchases of land and buildings from affiliate -- -- (1,272,957)
Proceeds from sale of property and equipment 9,630 5,329 35,463
Purchase of restaurants -- -- (700,000)
Proceeds from sale of restaurants -- -- 1,054,000
Decrease (Increase) in restricted cash -- 750,000 (750,000)
Purchase of franchise rights -- (30,000) (30,000)
Funds advanced to affiliates (15,000) -- --
Collections of notes receivable from affiliates 25,467 11,344 286,228
Net proceeds from fire settlement -- -- 91,743
---------- ---------- ----------
Net cash used by
investing activities (1,137,678) (1,386,816) (2,741,566)
Financing activities:
Proceeds from short-term borrowings -- 360,000 505,000
Proceeds from long-term borrowings 3,900,000 995,963 5,530,000
Payments on short-term borrowings -- (360,000) (730,000)
Payments on long-term borrowings (4,162,444) (1,412,313) (2,865,488)
Payments on capital lease obligations (68,746) (102,575) (212,048)
Distributions to Partners (2,918,521) (2,488,289) (3,289,085)
Proceeds from exercise of Class A unit options -- -- 26,737
Proceeds from issuance of Class B and C units 37,500 18,750 --
Repurchase of Class A units (64,668) -- --
General Partners' distributions
from Operating Partnerships (29,480) (20,547) (20,334)
---------- ---------- ----------
Net cash used in
financing activities (3,306,359) (3,009,011) (1,055,218)
---------- ---------- ----------
Net (decrease) increase in
cash and cash equivalents (61,554) (389,399) 268,537
Cash and cash equivalents at beginning of period 843,902 1,233,301 964,764
---------- ---------- ----------
Cash and cash equivalents at end of period $ 782,348 $ 843,902 $ 1,233,301
========== ========== ==========
Supplemental disclosure of noncash investing and financing activities:
During 1993, the Partnership entered into certain noncash investing and financing activities
disclosed in Notes 8,10, and 14.
See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
The following is a summary of the consolidated entities' 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. 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.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
American Restaurant Partners, L.P. and its majority owned subsidiary, American
Pizza Partners, L.P., 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.
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.
A schedule of restaurants in operation for the periods presented in the
accompanying consolidated financial statements is as follows:
1995 1994 1993
---- ---- ----
Restaurants in operation at beginning of period 60 58 58
Opened -- 2 2
Purchased -- -- 2
Sold -- -- (4)
--- --- ---
Restaurants in operation at end of period 60 60 58
=== === ===
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
-------------------------------
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
Depreciation is provided by 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 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.
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 at cost 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.
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
-------------------------------
PREOPENING COSTS
Costs incurred before a restaurant is opened, which represent the cost of
staffing, advertising, and similar preopening costs, are charged to operations
as incurred.
SELF INSURANCE
The Partnership is self-insured with respect to certain workers compensation
risks in the state of Texas. The Partnership does maintain certain excess loss
coverage with respect to such risks. The Partnership estimates its liability
for the self-insured portions of the risks covered by the program and accrues
appropriate reserves.
CONCENTRATION OF CREDIT RISKS
The Partnership's financial instruments that are exposed to concentration of
credit risks consist primarily of cash and certificates of deposit. 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. Credit risks associated with 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.
The Partnership became subject to the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," during 1993. 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 after the end of the
year differed from the information contained herein. At December 26, 1995, the
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
-------------------------------
Partnership's reported amount of its net assets for financial statement
purposes were less than the income tax bases of such net assets by
approximately $700,000.
The Omnibus Budget Reconciliation Act of 1987 provides that public limited
partnerships will become taxable entities beginning in 1998. The effect of
these changes on the Partnership is uncertain at this time as the effective
date is two years in the future.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. 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.
UNIT BASED COMPENSATION
The Partnership accounts for its unit based compensation under the provisions
of APB 25, "Accounting for Stock Issued to Employees," and intends to
continue to do so.
RECENTLY ISSUED ACCOUNTING STANDARD
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
which requires impairment losses to be recognized for long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows are not sufficient to recover the assets' carrying amount. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount. The Partnership will first apply Statement 121 in the first
quarter of 1996 and, based on presently available estimates and current
circumstances, believes that no impairment loss will be recognized at time of
adoption.
2. RELATED PARTY TRANSACTIONS
--------------------------
The Partnership has entered into a management services agreement with RAM
whereby RAM will be responsible for management of the restaurants for a fee
equal to 7% of the gross receipts of the restaurants. 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
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. RELATED PARTY TRANSACTIONS (continued)
--------------------------
provided directly by the affiliate, the Partnership will pay a commission based
upon 15% of the advertising costs incurred. Such costs were not significant in
1995, 1994 or 1993.
The Partnership maintains a deposit with the Management Company equal to
approximately one and one-half month's management fee. Such deposit, $330,000
at December 26, 1995 and December 27, 1994, 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.
Transactions with related parties (other than those described in Notes 8 and
10) included in the accompanying consolidated financial statements and notes
are summarized as follows:
1995 1994 1993
---- ---- ----
Management fees $2,776,768 $2,598,168 2,504,277
Management Company bonuses 356,021 378,825 342,082
Advertising commissions 99,834 74,401 73,362
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 over the next five years as follows:
1996 - $30,872: 1997 - $31,925; 1998 - $49,945; 1999 - $25,011; and
2000 - $4,993. The remaining amounts are due in varying annual installments
through 2006. 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.
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. RELATED PARTY TRANSACTIONS (continued)
--------------------------
In December 1993, the Partnership acquired previously leased land and buildings
related to three existing restaurant sites. The assets were acquired from an
affiliate under the General Partner's common control. The acquisition cost of
$1,272,957 was based upon fair market value considerations; however, because
such transaction was with a controlled party, the assets are reflected in the
accounts of the Partnership at the historic cost of the affiliate. In
connection with the transaction, the Partnership reduced partners' capital by
$503,982 which reflects the amount paid in excess of the affiliate's historic
carrying value of the assets acquired.
3. LONG-TERM DEBT
--------------
Long-term debt consists of the following at December 26, 1995 and December 27,
1994:
1995 1994
---- ----
Notes payable to Intrust Bank in Wichita,
payable in monthly installments
aggregating $24,876, including interest
at the bank's base rate plus 1%
(10.5% at December 26, 1995)
adjusted monthly, due at various
dates through 1998 $ 952,818 $ 2,155,694
Notes payable to NationsBank of
Georgia, N.A., payable in monthly
installments aggregating $36,457,
including interest at NationsBank
index rate plus 1 3/4% (10.5% at
December 26, 1995), due at various
dates through December 2006 1,714,965 1,954,381
Notes payable to Franchise Mortgage
Acceptance Company payable in monthly
installments aggregating $56,577,
including interest at fixed rates
of 8.95% and 10.95%, due at various
dates through December 2009 4,927,328 5,137,142
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. LONG-TERM DEBT (continued)
--------------
1995 1994
---- ----
Notes payable to various banks,
monthly installments aggregating
$81,897, including interest at
various fixed and floating rates
ranging from 9.3% to 10.0% at
December 26, 1995, due at various
dates through October 2006 2,929,651 1,539,990
---------- ----------
10,524,762 10,787,207
Less current portion 997,814 1,557,312
---------- ----------
$ 9,526,948 $ 9,229,895
========== ==========
All borrowings through NationsBank of Georgia, N.A. (NationsBank) are part of
borrowing agreements which require, among other conditions, that the
Partnership maintain certain financial ratios which include a debt to net worth
ratio and a ratio of cash flow to current maturities, as defined. The
Partnership has the option of converting the floating interest rate to a fixed
interest rate for a period of three, five, or seven years. The fixed interest
rate would be based upon the Bank's index rate plus 3 1/4%. At the end of each
fixed rate period, the Partnership has the option of continuing the fixed
interest rate, adjusted for changes in the index rate, or reverting back to the
floating interest rate of the Bank's index rate plus 1 3/4%.
As discussed in Note 12, the Partnership refinanced certain notes to various
banks during 1995.
Subsequent to December 26, 1995, the Partnership refinanced all of the
NationsBank debt with a promissory note to Intrust Bank for $2,500,000 dated
March 19, 1996, of which approximately $1,700,000 has been drawn. Such note
matures April 1, 1997. Accordingly, the current portion of long-term debt
has been classified to reflect the terms of the new agreement. The write-off
of unamortized loan cost related to this refinancing was not material.
All borrowings through Franchise Mortgage Acceptance Company (FMAC) are part of
loans "pooled" together with other franchisees in good standing and approved
restaurant concepts, as defined, and sold to the secondary market. The
Partnership has provided to FMAC a limited, contingent guarantee equal to 13%
of the original loan balance ($791,352 in the aggregate at December 26, 1995),
referred to as the "Performance Guarantee Amount" (PGA). The PGA is paid
monthly and to the extent that the other loans in the "pool" are delinquent or
in default, the amount of the PGA refund will be reduced proportionately;
however, at December 26, 1995, no such loans within the Partnership's "pool"
were delinquent or in default. The PGA remains in effect until
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. LONG-TERM DEBT (continued)
--------------
the loans are discharged, prepaid, accelerated, or mature, as defined in the
secured promissory note. The interest rates for the loans are fixed at 8.95%
and 10.95% for the full term of the loans. The loans require, among other
conditions, that the Partnership maintain a certain fixed charge coverage
ratio, as defined.
Subsequent to December 26, 1995, the Partnership entered into an additional
$700,000 promissory note with Intrust Bank to fund operations and property and
equipment additions. Such note matures February 1, 2001.
Also subsequent to December 26, 1995, the Partnership entered into an
additional $528,000 promissory note with Intrust Bank of which $328,000 has
been drawn by the Partnership to purchase property. Such note matures
September 1, 1996.
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: 1996 - $998,000; 1997 - $2,592,000;
1998 - $815,000; 1999 - $896,000; and 2000 - $878,000.
Cash paid for interest was $1,293,773, $1,192,753, and $995,360 for the years
ended December 26, 1995, December 27, 1994, and December 28, 1993,
respectively.
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. LEASES
------
The Partnership leases land and buildings for various restaurants under both
operating and capital lease arrangements. Initial lease terms normally range
from 10 to 20 years with renewal options generally available. The leases are
net leases under which the Partnership pays the taxes, insurance, and
maintenance costs, and they generally provide for both minimum rent payments
and contingent rentals based on a percentage of sales in excess of specified
amounts.
Minimum and contingent rent payments for land and buildings leased from
affiliates were $27,500, $27,500, and $183,715 for the years ended December 26,
1995, December 27, 1994, and December 28, 1993, respectively.
Total minimum and contingent rent expense under all operating lease agreements
were as follows:
1995 1994 1993
---- ---- ----
Minimum rentals $792,957 $783,895 $937,562
Contingent rentals 186,355 184,236 176,453
Future minimum payments under capital leases and noncancelable operating leases
with an initial term of one year or more at December 26, 1995, are as follows:
Operating
Leases With Operating
Capital Unrelated Leases With
Leases Parties Affiliates
--------- ----------- ------------
1996 $ 277,948 $ 720,662 $ 27,500
1997 235,370 627,304 29,562
1998 232,845 508,366 30,250
1999 243,064 384,929 30,250
2000 263,516 255,646 30,250
Thereafter 3,060,168 1,760,105 37,813
--------- --------- -------
Total minimum payments 4,312,911 $4,257,012 $ 185,625
Less interest 2,581,332
---------
1,731,579
Less current portion 68,833
---------
$1,662,746
=========
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. LEASES (continued)
------
Amortization of property under capital leases, determined on the straight-line
basis over the lease terms totaled $165,360, $165,360, and $192,477 for the
years ended December 26, 1995, December 27, 1994, and December 28, 1993,
respectively, and is included in depreciation and amortization in the
accompanying consolidated statements of income. The cost of property under
capital leases was $2,369,199 at December 26, 1995 and December 27, 1994, and
accumulated amortization on such property under capital leases was $957,420 and
$792,060 at December 26, 1995 and December 27, 1994, respectively.
5. LIMITED PARTNERSHIP UNITS
-------------------------
The Partnership has three classes of Partnership Units outstanding, consisting
of Class A Income Preference, Class B, and Class C Units. The Units are in the
nature of equity securities entitled to participate in cash distributions of
the Partnership on a quarterly basis at the discretion of RAM, the General
Partner. In the event the partnership is terminated, the Unitholders will
receive the remaining assets of the Partnership after satisfaction of
Partnership liability and capital account requirements.
Since inception of the Partnership in August, 1987, the Partnership paid a
preference payment of $0.275 each quarter until such time as the Class A Income
Preference Units had received $10.00 in aggregate cash distributions. The
$10.00 aggregate cash distribution requirement was satisfied with the May 6,
1994 distribution. While the preference distribution was in effect, net income
was allocated to the Class A Income Preference Units until the amount allocated
equaled the preference amount. The remaining net income was allocated to all
partners in accordance with their respective Units in the Partnership with all
outstanding Units being treated equally. As the cash distribution requirement
was satisfied in the prior year, net income was allocated to all partners in
accordance with their respective Units in the Partnership with all outstanding
Units being treated equally.
Without the $.55 preference amount, the 1994 distribution and net income of
$1.07 and $1.04, respectively, per Class A Income Preference Unit would have
been $.64 and $.61, respectively.
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. DISTRIBUTIONS TO PARTNERS
-------------------------
On January 2, 1996, the Partnership declared a distribution of $.16 per Unit to
all Unitholders of record as of January 12, 1996. The total distribution is
not reflected in the December 26, 1995, consolidated financial statements.
7. UNIT OPTION PLAN
----------------
The Partnership, RAM, and the Management Company adopted a Class A Unit Option
Plan (the Plan) pursuant to which 75,000 Class A Units were reserved for
issuance to employees, including officers of the Partnership, RAM, and the
Management Company. The Plan is administered by the Managing General Partner
which will, among other things, designate the number of Units and individuals
to whom options will be granted. Participants in the Plan are entitled to
purchase a designated number of Units at an option price equal to the fair
market value of the Unit on the date the option is granted. Units under option
are exercisable over a three-year period with 50% exercisable on the date of
grant and 25% exercisable on each of the following two anniversary dates. The
term of options granted under the Plan will be determined by the Managing
General Partner at the time of issuance (not to exceed ten years) and will not
be transferable except in the event of the death of the optionee, unless the
Managing General Partner otherwise determines and so specifies in the terms of
the grant. Units covered by options which expire or are terminated will again
be available for option grants.
A summary of Units under options in the Plan is as follows:
Units Option Price
----- ------------
Balance at December 29, 1992 5,290 $8.50-9.625
Exercised (3,075) 8.50-9.000
----- ----------
Balance at December 28, 1993 and
December 27, 1994 2,215 8.50-9.000
Terminated (500) 8.500
----- ----------
Balance at December 26, 1995 1,715 $8.50-9.000
===== ==========
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. UNIT OPTION PLAN (continued)
----------------
At December 26, 1995, options on 625 Units were exercisable. Unit options
available for future grants totaled 47,521 and 47,021 at December 26, 1995 and
December 27, 1994, respectively.
8. ACQUISITIONS
------------
On June 2, 1993, the Partnership acquired two restaurants plus the territorial
and developmental rights associated with three counties in Texas from a
partnership in which the general partner was the son of the Partnership's
Chairman and Principal Owner. The Partnership paid $700,000 in cash and issued
22,222 Class B and C Units. The Partnership received an opinion of a
nationally recognized investment banking firm that the considerations involved
in this transaction were fair from a financial point of view to the Class A
Unitholders of American Restaurant Partners, L.P. A summary of the transaction
is as follows:
Fair value of the net assets acquired $ 800,000
Value of partnership units issued (100,000)
-------
Cash paid $ 700,000
=======
The acquisition was accounted for as a purchase with the results of operations
included from the date of acquisition. The operations of the purchased
restaurants are not material in relation to the Partnership's financial
statements and pro forma financial information has not been presented.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The following methods and assumptions were used by the Partnership in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Certificates of deposit: The carrying amount reported in the balance
sheet for certificates of deposit approximates its fair value.
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
-----------------------------------
Long-term debt: The carrying amounts of the Partnership's borrowings
under its variable rate debt approximate their fair value. The fair value
of the Partnership's fixed rate debt is estimated using discounted cash
flow analyses, based on the Partnership's current incremental borrowing
rates for similar types of borrowing arrangements.
The carrying amounts and fair values of the Partnership's financial instruments
at December 26, 1995 are as follows:
December 26, 1995
--------------------
Carrying Fair
Value Value
-------- -----
Cash and cash
equivalents $ 782,348 $ 782,348
Certificates of
deposit 232,219 232,219
Long-term debt 10,524,762 10,395,546
10. NON-MONETARY TRANSACTION
------------------------
On July 27, 1993, the Partnership entered into a non-monetary transaction and
exchanged the operating assets and related lease obligations of four low volume
restaurants in Wyoming for 176,091 Class B and C Partnership Units owned by the
President of the Partnership who resigned on the same date. The Partnership
received an opinion of a nationally recognized investment banking firm that the
consideration received by the Partnership was fair from a financial point of
view to the Class A Unitholders of American Restaurant Partnership , L.P. As a
result of this transaction, the Partnership recognized a gain of $636,097.
11. FIRE SETTLEMENT
---------------
During the quarter ended September 28, 1993, the Partnership incurred a fire at
one of its restaurants. The property was insured for replacement cost and the
Partnership realized a gain of $49,480.
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. EXTINGUISHMENT OF DEBT
----------------------
During November 1995, the Partnership refinanced notes payable to various banks
for approximately $1,198,000. As a result of this transaction, the
Partnership incurred an extraordinary loss of $142,491, which represents
penalties incurred by the Partnership for the early extinguishment of debt and
the write-off of all unamortized financing cost associated with such notes.
The loan was refinanced from funds received from Heller Financial.
13. LETTER OF CREDIT
----------------
At December 26, 1995, the Partnership has obtained a $50,000 letter of credit
from a bank, secured by certificates of deposit for the same amount, to support
obligations under its workers compensation insurance coverage.
14. CLASS B AND C RESTRICTED UNITS SOLD TO EMPLOYEES
------------------------------------------------
During 1995, the Partnership issued 39,500 Class B and C units to certain
employees as a bonus. This resulted in the Partnership recognizing $99,000 as
compensation expense which is included under the caption of" General and
administrative - other" in the accompanying statement of income.
On July 1, 1994, the Partnership entered into a Unit Purchase Agreement with
certain employees whereby the employees shall purchase Class B and C Units
every six months beginning July 1, 1994, and continuing until January 1, 1998.
The purchase price per unit is $2.00 with a total of 75,000 units to be
purchased over three and one-half years. During 1995 and 1994 the Partnership
issued 18,750 and 9,375 Class B and C units for $37,500 and $18,750,
respectively.
During 1993, the Partnership issued 25,200 Class B and C Units to certain
employees in exchange for notes receivable which will be forgiven by the
Partnership over a three year period. The forgiveness of the note receivable
balance together with interest thereon will be recognized as compensation
expense over the three year period. Total compensation expense recognized in
1995 and 1994 was $25,200 and $44,100, respectively, which is included as
restaurant labor and benefits in the accompanying statements of income. 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
not to exceed $3.00 per unit.
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. STOCKHOLDERS' EQUITY
--------------------
During 1995, the Partnership purchased 10,155 Class A Income Preference Units
for $64,668. These Units were retired by the Partnership.
16. SUBSEQUENT EVENT
----------------
On March 13, 1996, the Partnership purchased a 45% interest in a newly formed
limited partnership, Oklahoma Magic, L.P. ("Magic"), that owns and operates
thirty-three Pizza Hut restaurants in Oklahoma for $3.0 million in cash. The
purchase was financed by the Partnership from a note payable entered into with
Intrust Bank. The remaining partnership interests in Magic are held by
Restaurant Management Company of Wichita, Inc. (29.25%), an affiliate of the
Partnership, Hospitality Group of Oklahoma, Inc. (25%), and RAM (.75%). The
Partnership will account for the investment using the equity method of
accounting.
AMERICAN RESTAURANT PARTNERS, L.P.
QUARTERLY RESULTS
(Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter
1995 1994 1995 1994 1995 1994 1995 1994
--------------------- -------------------- --------------------- --------------------
Net Sales $9,067,057 9,003,190 10,996,286 9,535,286 10,274,920 9,843,609 9,666,032 9,062,984
Gross Profit 6,693,950 6,706,763 8,055,924 7,075,004 7,586,151 7,333,890 7,068,847 6,683,537
Income from
Operations $770,615 990,301 1,385,373 955,494 988,415 1,058,956 745,608 582,723
Net Income $451,597 692,391 1,037,434 659,568 672,171 764,396 319,815 268,402
Net income per unit:
Class A $0.12 0.39 0.26 0.39 0.17 0.20 (a) 0.08 0.07
Class B $0.12 0.12 0.26 0.11 0.17 0.20 0.11 0.07
Class C $0.12 0.12 0.26 0.11 0.17 0.20 0.11 0.07
(a) Upon expiration of the preference with the May 6, 1994 distribution, net income was allocated
equally to all outstanding units.
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8) No. 33-20784) pertaining to the Class A Unit Option Plan of American
Restaurant Partners, L.P. of our report dated March 21, 1996, with respect to
the consolidated financial statements of American Restaurant Partners, L.P.
included in the Annual Report (Form 10-K) for the year ended December 26, 1995.
/s/ Ernst and Young
Wichita, Kansas
March 21, 1996
AMERICAN RESTAURANT PARTNERS, L.P.
COMPUTATION OF EARNINGS PER PARTNERSHIP INTEREST
Years ended December 26, 1995,
December 27, 1994, and December 28, 1993
1995 1994 1993
----------- ----------- -----------
Income before General Partners'
interest in income of Operating
Partnership $ 2,506,078 $ 2,404,258 $ 3,422,461
Priority amount attributable to
Class A Income Preference units -- (454,170) (907,145)
--------- --------- ---------
Balance attributable to all
Partnership interests 2,506,078 1,950,088 2,515,316
========= ========= =========
Income before General Partners'
interest in income of Operating
Partnership $ 2,506,078 $ 2,404,258 $ 3,422,461
Net income attributable to
General Partners (1%) (25,061) (19,501) (25,153)
--------- --------- ---------
Net income attributable to
American Restaruant Partners,
L.P. unitholders $ 2,481,017 $ 2,384,757 $ 3,397,308
========= ========= =========
Net income allocated to Partners:
Class A Income Preference $ 519,316 $ 861,833 $ 1,421,715
Class B 737,783 572,923 744,043
Class C 1,223,918 950,001 1,231,550
Weighted average number of
Partnership units outstanding
during period:
Class A Income Preference 824,978 825,764 824,677
Class B 1,172,025 1,160,514 1,192,443
Class C 1,944,299 1,924,330 1,973,751
Income before extraordinary item
per Partnership interest:
Class A Income Preference $ 0.67 $ 1.04 $ 1.72
Class B 0.67 0.49 0.62
Class C 0.67 0.49 0.62
Income per Partnership
interest:
Class A Income Preference $ 0.63 $ 1.04 $ 1.72
Class B 0.63 0.49 0.62
Class C 0.63 0.49 0.62