10-K 1 tenk.txt 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, 2000 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 Title of each class ------------------- Class A Income Preference Units of Limited Partner Interests Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. (X) As of March 1, 2001 the aggregate market value of the income preference units held by non-affiliates of the registrant was $2,284,760. PART I Item 1. Business ------- -------- General Development of Business ------------------------------- American Restaurant Partners, L.P., a Delaware limited partnership (the "Partnership"), was formed on April 27, 1987 for the purpose of acquiring and operating through American Pizza Partners, L.P., a Delaware limited partnership ("APP"), substantially all of the restaurant operations of RMC Partners, L.P. ("RMC") in connection with a public offering of Class A Income Preference units by the Partnership. The transfer of assets from RMC was completed on August 21, 1987 and the Partnership commenced operations on that date. Subsequently, the Partnership completed its public offering of 800,000 Class A Income Preference units and received net proceeds of $6,931,944. The Partnership is a 99% limited partner in APP which conducts substantially all of the business for the benefit of the Partnership. RMC American Management, Inc. ("RAM") is the managing general partner of both the Partnership and APP. RAM and RMC own an aggregate 1% interest in APP. On March 13, 1996, APP purchased a 45% interest in Oklahoma Magic, L.P. (Magic), a newly formed limited partnership that owns and operates Pizza Hut restaurants in Oklahoma. Effective August 11, 1998, APP's interest in Magic increased from 45% to 60% in connection with Magic's purchase of a 25% interest from a former limited partner. RAM, which owns a 1.0% interest in Magic, is the managing general partner of Magic. The remaining 39.0% interest was held by Restaurant Management Company of Wichita, Inc. (the Management Company) until July 26, 2000. On that date, APP purchased the Management Company's 39% interest in Magic. Upon completion of this purchase, APP owns 99% of Magic. APP and Magic are collectively referred to as the "Operating Partnerships". As of December 26, 2000, the Partnership owned and operated a total of 86 restaurants (collectively, the "Restaurants"). APP owned and operated 53 traditional "Pizza Hut" restaurants, 4 "Pizza Hut" delivery/carryout facilities and 3 dualbrand locations. During 2000, APP closed one "Pizza Hut" delivery/carryout restaurant. Magic owned and operated 17 traditional "Pizza Hut" restaurants and 9 "Pizza Hut" delivery/carryout facilities. The following table sets forth the states in which the Partnership's Pizza Hut Restaurants are located: Units Units Units Open At Closed in Open At 12-28-99 2000 12-26-00 -------- --------- -------- Georgia 8 -- 8 Louisiana 1 -- 1 Montana 19 1 18 Texas 25 -- 25 Wyoming 8 -- 8 Oklahoma 26 -- 26 --- --- --- Total 87 1 86 === === === Financial Information About Industry Segments --------------------------------------------- The restaurant industry is the only business segment in which the Partnership operates. Narrative Description of Business --------------------------------- The Partnership operates the Restaurants under license from Pizza Hut, Inc. ("PHI"), a subsidiary of Tricon Global Restaurants, Inc. ("Tricon") which was created with the spin-off of PepsiCo, Inc.'s restaurant division. Since it was founded in 1958, Pizza Hut has become the world's largest pizza restaurant chain in terms of both sales and number of restaurants. As of year-end 2000, there were over 6,600 units in the United States and more than 4,000 units located outside the United States (both excluding licensed units). PHI owns and operates approximately 27% of the Pizza Hut restaurants in the United States and 41% of those in foreign countries. All Pizza Hut restaurants offer substantially the same menu items, including several varieties of pizza as well as pasta, salads and sandwiches. All food items are prepared from high quality ingredients in accordance with PHI's proprietary recipes and a special blend of spices available only from PHI. Pizza is offered in several different sizes with a thin crust, hand tossed traditional crust, or a thick crust, known as "Pan Pizza", as well as with a wide variety of toppings. Pizza Hut also serves the Big New Yorker Pizza, a 16" traditional crust pizza. Food products not prescribed by PHI may only be offered with the prior express approval of PHI. PHI maintains a research and development department that develops new recipes and products, tests new procedures for food preparation and approves suppliers for Pizza Hut restaurants. Pizza Hut restaurants are constructed in accordance with prescribed design specifications and most are similar in exterior appearance and interior decor. The typical restaurant building is a freestanding, one-story building, with a wood, brick or stucco exterior. Most Pizza Hut restaurants still feature the distinctive red roof. The restaurants generally contain 1,800 to 3,000 square feet, including kitchen and storage areas, and have seating capacity for 75 to 140 persons. The typical property site will accommodate parking for 30 to 70 vehicles. Building designs may be varied only upon request and when required to comply with local regulations or for unique marketing reasons. Franchise Agreements -------------------- General. The relationships between PHI and its franchisees are governed by franchise agreements (the "Franchise Agreements"). Pursuant to the Franchise Agreements, PHI franchisees are granted the right to establish and operate restaurants under the Pizza Hut system within a designated geographic area. The initial term of each Franchise Agreement is 20 years, but prior to expiration, the franchisee may renew the agreement for an additional 15 years, if not then in default. Renewals are subject to execution of the then current form of the Franchise Agreement, including the current fee schedules. Unless the franchisee fails to develop its assigned territory, PHI agrees not to establish, and not to license others to establish, restaurants within the franchisee's territory. Standards of Operation. PHI provides management training for employees of franchisees and each restaurant manager is required to meet certain training requirements. Standards of quality, cleanliness, service, food, beverages, decor, supplies, fixtures and equipment for Pizza Hut restaurants are prescribed by PHI. Although new standards and products may be prescribed from time to time, any revision requiring substantial expenditures by franchisees must be first proven successful through market testing conducted in 5% of all Pizza Hut restaurants. Failure to comply with the established standards is cause for termination of a Franchise Agreement by PHI and PHI has the right to inspect each restaurant to monitor compliance. Management of the Partnership believes that the existing Restaurants meet or exceed the applicable standards; neither the predecessors to RMC nor the Partnership has ever had a Franchise Agreement terminated by PHI. Advertising. All franchisees are required to join a cooperative advertising association ("co-op") with other franchisees within local marketing areas defined by PHI. Contributions of 2% of each restaurant's monthly gross sales must be made to such co-ops for the purchase of advertising through local broadcast media. The term "gross sales" shall mean gross revenues (excluding price discounts and allowances) received as payment for the beverages, food, and other goods, services and supplies sold in or from each restaurant, and gross revenues from any other business operated on the premises, excluding sales and other taxes required by law to be collected from guests. All advertisements must be approved by PHI which contributes on the same basis to the appropriate co-op for each restaurant operated by PHI. Franchisees are also required to be members of I.P.H.F.H.A., Inc. ("IPHFHA") an independent association of franchisees which, together with representatives of PHI, develops and directs national advertising and promotional programs. Members of IPHFHA are required to pay national dues equal to 2% of each restaurant's monthly gross sales. Such dues are primarily used to conduct the national advertising and promotional programs. Although it is not a member of IPHFHA, PHI contributes on the same basis as members for each restaurant that PHI operates. Purchase of Equipment, Supplies and Other Products. The Franchise Agreements require that all equipment, supplies and other products and materials required for operation of Pizza Hut restaurants be obtained from suppliers that meet certain standards established and approved by PHI. Purchasing is substantially provided by the Unified Foodservice Purchasing Cooperative to all members who consist of Taco Bell, KFC, and Pizza Hut franchisees and the restaurants operated by Tricon. Prior to the PepsiCo, Inc. spin-off of its restaurant division, substantially all distribution services were provided by PepsiCo Food Systems, Inc., ("PFS") which was a wholly-owned subsidiary of PepsiCo, Inc. AmeriServe Food Distribution, Inc. (AmeriServe) acquired PFS in July 1997 and provided substantially all of the distribution services to the Partnership through its PFS relationship since the acquisition. The Partnership entered into a five-year exclusive food and supplies distribution agreement with AmeriServe effective January 1, 1999. The initial term of the agreement was to expire December 31, 2003. Thereafter, the agreement could be renewed for successive one-year terms upon the written agreement of the parties. The terms of the contract provide incentives for using more efficient distribution practices and resulted in a reduction in the distribution costs incurred by the Partnership. On January 31, 2000 AmeriServe filed for protection under the U.S. Bankruptcy Code. McLane Company, Inc., a subsidiary of Wal-Mart Stores, Inc., completed the purchase of AmeriServe's U.S. distribution business on November 30, 2000. As part of the sale, the Partnership agreed to a two-year contract extension and will incur a 5% increase in distribution fees. Franchise Fees. Franchisees must pay monthly service fees to PHI based on each restaurant's gross sales. The monthly service fee under each of the Partnership's Franchise Agreements is 4% of gross sales, or, if payment of a percentage of gross sales of alcoholic beverages is prohibited by state law, 4.5% of gross sales of food products and nonalcoholic beverages. Fees are payable monthly by the 30th day after the end of each month and franchisees are required to submit monthly gross sales data for each restaurant, as well as quarterly and annual profit and loss data on each restaurant, to PHI. In addition to the monthly service fees, an initial franchise fee of $15,000 is payable to PHI prior to the opening of each new restaurant. No Transfer or Assignment without Consent. No rights or interests granted to franchisees under the Franchise Agreements may be sold, transferred or assigned without the prior written consent of PHI which may not be unreasonably withheld if certain conditions are met. Additionally, PHI has a first right of refusal to purchase all or any part of a franchisee's interests if the franchisee proposes to accept a bona fide offer from a third party to purchase such interests and the sale would result in a change of control of the franchisee. PHI requires that the principal management officials of a franchisee retain a controlling interest in a franchisee that is a corporation or partnership. Default and Termination. Franchise Agreements automatically terminate in the event of the franchisee's insolvency, dissolution or bankruptcy. In addition, Franchise Agreements automatically terminate if the franchisee attempts an unauthorized transfer of a controlling interest of the franchise. PHI, at its option, may also unilaterally terminate a Franchise Agreement if the franchisee (i) is convicted of a felony, a crime of moral turpitude or another offense that adversely affects the Pizza Hut system, its trademarks or goodwill, (ii) discloses, in violation of the Franchise Agreement, confidential or proprietary information provided to it by PHI, (iii) knowingly or through gross negligence maintains false books or records or submits false reports to PHI, (iv) conducts the business so as to constitute an imminent danger to the public health, or (v) receives notices of default on three (3) or more occasions in twelve (12) months, or five (5) or more occasions in thirty-six (36) months even if each default had been cured. A termination under item (v) will affect only the individual restaurants in default, unless the defaults relate to the franchisee's entire operation, or are part of a common pattern or scheme, in which case all of the franchisee's rights will be terminated. Further, at its option, but only after thirty (30) days written notice of default and the franchisee's failure to remedy such default within the notice period, PHI may terminate a Franchise Agreement if the franchisee (i) fails to make any required payments or submit required financial or other data, (ii) fails to maintain prescribed restaurant operating standards, (iii) fails to obtain any required approval or consent, (iv) misuses any of PHI's trademarks or otherwise materially impairs its goodwill, (v) conducts any business under a name or trademark that is confusingly similar to those of PHI, (vi) defaults under any lease, sublease, mortgage or deed of trust covering a restaurant, (vii) fails to procure or maintain required insurance, or (viii) ceases operation without the prior consent of PHI. Management believes that the Partnership is in compliance in all material respects with its current Franchise Agreements; neither the predecessors to RMC nor the Partnership has ever had a Franchise Agreement terminated by PHI. In addition to items (i) through (viii) noted in the preceding paragraph, the Franchise Agreements allow PHI to also terminate a Franchise Agreement after thirty (30) days written notice if the franchisee attempts an unauthorized transfer of less than a controlling interest. A termination under these items will affect only the individual restaurants in default, unless the defaults relate to the franchisee's entire operation, in which case all of the franchisee's rights will be terminated. Tradenames, Trademarks and Service Marks. "Pizza Hut" is a registered trademark of PHI. The Franchise Agreements license franchisees to use the "Pizza Hut" trademark and certain other trademarks, service marks, symbols, slogans, emblems, logos, designs and other indicia or origin in connection with their Pizza Hut restaurants and all franchisees agree to limit their use of such marks to identify their restaurants and products and not to misuse or otherwise jeopardize such marks. The success of the business of the Restaurants is significantly dependent on the ability of the Partnership to operate using these marks and names and on the continued protection of these marks and names by PHI. Future Expansion. Under the terms of the Franchise Agreements, the Partnership has the right to open additional Pizza Hut restaurants within certain designated territories. The Partnership is not obligated to open any new restaurants in 2001 or future years. Seasonality ----------- Historically, due to the locations of many of the Restaurants near summer tourist attractions and the severity of winter weather in the areas in which many of the Restaurants are located, the Partnership has realized approximately 40% of its operating profits in periods six through nine (18 weeks). However, due to the increased sales and profits of the Partnership's restaurants in Texas and Oklahoma, the Partnership no longer experiences significant seasonality. Sales do continue to be largely driven through advertising and promotion. Competition ----------- The retail restaurant business is highly competitive with respect to trademark recognition, price, service, food quality and location, and is often affected by changes in tastes, eating habits, national and local economic conditions, population and traffic patterns. The Restaurants compete with large regional and national chains, including both fast food and full service chains, as well as with independent restaurants offering moderately priced food. Many of the Partnership's competitors have more locations, greater financial resources, and longer operating histories than the Partnership. The Restaurants compete directly with other pizza restaurants for dine- in, carry-out and delivery customers. Government Regulation --------------------- The Partnership and the Restaurants are subject to various government regulations, including zoning, sanitation, health, safety and alcoholic beverage controls. Restaurant employment practices are also governed by minimum wage, overtime and other working condition regulations which, to date, have not had a material effect on the operation of the Restaurants. The Partnership believes that it is in compliance with all laws and regulations which govern its business. In order to comply with the regulations governing alcoholic beverage sales in Montana, Texas, Wyoming and Oklahoma, the licenses permitting beer sales in certain Restaurants in those states are held in the name of resident persons or domestic entities to whom they were originally issued, and are utilized by the Partnership under lease arrangements with such resident persons or entities. Because of the varying requirements of various state agencies regulating liquor and beer licenses, the Partnership Agreement provides that all Unitholders and all other holders of limited partner interests must furnish the Managing General Partner with all information it reasonably requests in order to comply with any requirements of these state agencies, and that the Partnership has the right to purchase all Units held by any person whose ownership of Units would adversely affect the ability of the Partnership to obtain or retain licenses to sell beer or wine in any Restaurant. Employees --------- As of March 1, 2001, the Partnership did not have any employees. The Operating Partnerships had approximately 2,100 employees at the Restaurants. Each Restaurant is managed by one restaurant manager and one or more assistant restaurant managers. Many of the other employees are employed only part-time and, as is customary in the restaurant business, turnover among the part-time employees is high. The Partnership is not a party to any collective bargaining agreements and believes its employee relations to be satisfactory. The Restaurants' employees are supervised by employees of the Management Company which has its principal offices in Wichita, Kansas. The Management Company has a total of 41 employees which devote all or a significant part of their time to management of the Restaurants. In addition, the Partnership may employ certain management officials of the Management Company on a part-time basis. Employee relations are believed to be satisfactory. Financial Information About Foreign and Domestic Operations and --------------------------------------------------------------- Export Sales ------------ The Partnership operates no restaurants in foreign countries. Item 2. Properties ------------------ The following table lists the location by state of Restaurants operated by APP as of December 26, 2000. Leased From Leased From Unrelated Third Affiliate of the Parties General Partners Owned Total ------- ---------------- ----- ----- Georgia 1 - 7 8 Louisiana - - 1 1 Montana 9 - 9 18 Texas 14 - 11 25 Wyoming 1 1 6 8 --- --- --- --- Total APP 25 1 34 60 === === === === Six of the properties owned by APP are subject to ground leases from unrelated third parties. The property leased from an affiliate of the General Partners is subject to a mortgage or deed of trust. Most of the properties, including that owned by an affiliate of the General Partners are leased for a minimum term of at least five years and are subject to one or more five-year renewal options. Management believes leases with initial or optional renewal periods expiring within the next five years can be renewed for multiple-year periods, or the property can be purchased, without significant difficulty or unreasonable expense. In addition to the operating restaurants above, APP has a remaining lease obligation on one closed restaurant. This location is subleased through its remaining lease term. The following table lists the Restaurants operated by Magic as of December 26, 2000. Leased From Unrelated Third Leased From Parties Affiliate Owned Total ------- --------- ----- ---- Oklahoma 24 1 1 26 === === === === Most of the properties including the one owned by an affiliate are leased for a minimum term of at least five years and are subject to one or more five-year renewal options. Management believes leases with initial or optional renewal periods expiring within the next five years can be renewed for multiple-year periods, or the property can be purchased, without significant difficulty or unreasonable expense. The amount of rent paid is either fixed or includes a fixed rental plus a percentage of the Restaurant's sales, subject, in some cases, to maximum amounts. The leases require the Partnership to pay all real estate taxes, insurance premiums, utilities, and to keep the property in general repair. Pizza Hut restaurants are constructed in accordance with prescribed design specifications and most are similar in exterior appearance and interior decor. The typical restaurant building is a freestanding, one-story building, with a wood, brick or stucco exterior. Most Pizza Hut restaurants still feature the distinctive red roof. The restaurants generally contain 1,800 to 3,000 square feet, including kitchen and storage areas, and have seating capacity for 75 to 140 persons. The typical property site will accommodate parking for 30 to 70 vehicles. Building designs may be varied only upon request and when required to comply with local regulations or for unique marketing reasons. Typical capital costs for the Partnership's existing restaurant facilities are approximately $150,000 for land, $250,000 for the building and $135,000 for equipment and furnishings for each unit. The cost of land, building and equipment for a typical Pizza Hut restaurant vary with location, size, construction costs and other factors. The Partnership estimates the average cost to construct and equip a new restaurant in its existing franchise territories is approximately $600,000 to $900,000 including the cost of land acquisition. Delivery/carryout facilities vary in size and appearance. These facilities are generally leased from unrelated third parties. The Partnership estimates that the capital investment necessary for a new delivery/carryout unit is approximately $200,000 in equipment and leasehold improvements. Item 3. Legal Proceedings -------------------------- As of December 26, 2000, the Partnership was not a party to any pending legal proceedings material to its business. Item 4. Submission of Matters to a Vote of Security Holders ------------------------------------------------------------ Not applicable. PART II Item 5. Market for the Registrant's Class A Income Preference Units -------------------------------------------------------------------- and Related Security Holder Matters ----------------------------------- The Partnership's Class A Income Preference Units were traded on the American Stock Exchange under the symbol "RMC" through November 13, 1997. On that date, the Partnership delisted from the American Stock Exchange and limited trading of its units. The Class A Income Preference Units were traded on the Pink Sheets from December 1, 1997 through January 2, 1998. Effective January 1, 1998, the Partnership offered a Qualified Matching Service, whereby the Partnership will match persons desiring to buy units with persons desiring to sell units. No units were matched during 2000. Market prices for units during 2000 and 1999 were: Calendar Period High Low ----------------------------------------------------- 2000 ---- All Quarters $3.25 $3.25 1999 ---- First Quarter $2.80 $2.55 Second Quarter 2.80 2.60 Third Quarter 2.80 2.75 Fourth Quarter 2.95 2.75 As of December 26, 2000, approximately 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 Record Date Payment Date Unit ----------------------------------------------------------- 2000 ---- January 14, 2000 January 28, 2000 $0.10 April 12, 2000 April 28, 2000 0.10 July 12, 2000 July 28, 2000 0.10 October 12, 2000 October 27, 2000 0.10 ---- Cash distributed during 2000 $0.40 ==== Per Record Date Payment Date Unit ----------------------------------------------------------- 1999 ---- January 15, 1999 January 29, 1999 $0.10 April 12, 1999 April 30, 1999 0.10 July 12, 1999 July 30, 1999 0.10 October 12, 1999 October 29, 1999 0.15 ---- Cash distributed during 1999 $0.45 ==== The Partnership will make quarterly distributions of "Cash Available for Distribution" with respect to the Income Preference, Class B Units, and Class C Units. "Cash Available for Distribution" consists, generally, of all operating revenues less operating expenses (excluding noncash items such as depreciation and amortization), capital expenditures for existing restaurants, interest and principal payments on Partnership debt, and such cash reserves as the Managing General Partner may deem appropriate. Therefore, the Partnership may experience quarters in which there is no Cash Available for Distribution. The Partnership may retain cash during certain quarters and distribute it in later quarters in order to make quarterly distributions more consistent. Item 6. Selected Financial Data ---------------------------------- (in thousands, except per Unit data, number of Restaurants, and average weekly sales per Restaurant) American Restaurant Partners, L.P. ------------------------------------------------------------------- Year Ended
December 26, December 28, December 29, December 30, December 31, 2000 1999 1998 (d) 1997 1996 ------------ ------------ ------------ ------------ ------------ Income statement data: Net sales $ 60,505 $ 57,820 $ 43,544 $ 38,977 $ 40,425 Income from operations 5,178 3,990 2,443 433 3,076 Net income (loss) 1,372 1,315 809 (1,993) 1,584 Net income (loss) per Partnership unit (a) 0.37 0.37 0.20 (0.50) 0.40 Balance sheet data: Total assets $ 31,791 $ 29,197 $ 30,703 $ 22,226 $ 23,745 Long-term debt 29,885 27,649 29,630 20,005 18,859 Obligations under capital leases 2,572 1,495 1,543 1,645 1,665 Partners capital (deficiency): General Partners (9) (9) (8) (8) (5) Class A 5,099 5,395 5,543 5,624 6,295 Class B and C (9,416) (9,252) (10,058) (8,322) (5,811) Notes receivable from employees (749) (956) - - - Cost in excess of carrying value of assets acquired (1,859) (1,324) (1,324) (1,324) (1,324) Cumulative comprehensive income (loss) - - (108) 19 (44) Cash dividends declared per unit 0.40 0.45 0.30 0.32 0.74 Statistical data: Capital expenditures: (b) Existing Restaurants $ 2,092 $ 1,078 $ 2,465 $ 889 $ 2,612 New Restaurants 147 300 162 935 4,136 Average weekly sales per Restaurant: (c) Red Roof 13,573 12,683 11,918 11,813 12,544 Delivery/carryout facility/C-store 12,591 11,657 10,508 8,160 10,547 Restaurants in operation at end of period 86 87 89 63 67
NOTES TO SELECTED FINANCIAL DATA (a) Net income is allocated to all partners in accordance with their respective units in the Partnership with all outstanding units being treated equally. (b) Capital expenditures include the cost of land, buildings, new and replacement restaurant equipment and refurbishment of leasehold improvements. Capital expenditures for existing restaurants represent such capitalized costs for all restaurants other than newly constructed restaurants. (c) Average weekly sales were calculated by dividing net sales by the weighted average number of restaurants open during the period. The quotient was then divided by the number of days in the period multiplied times seven days. (d) The Partnership began consolidating the accounts of Magic on August 11, 1998 when APP's interest in Magic increased from 45% to 60%. The 1998 selected financial data reflects this consolidation. Item 7. Management's Discussion and Analysis of Consolidated ------------------------------------------------------------- Financial Condition and Results of Operations --------------------------------------------- Results of Operations --------------------- The following discussion compares the Partnership's results for the years ended December 26, 2000, December 28, 1999 and December 29, 1998. This discussion should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements included elsewhere herein. The accompanying consolidated financial statements include the accounts of the Partnership and its majority owned subsidiaries, American Pizza Partners, L.P. and APP Concepts, LLC. Effective August 11, 1998, the interest of American Pizza Partners, L.P. in Magic increased from 45% to 60% in connection with Magic's purchase of a 25% interest from a former limited partner (see Note 13 to the accompanying financial statements). Accordingly, the Partnership began consolidating the accounts of Magic from that date. All significant intercompany balances and transactions have been eliminated. The table below shows the historical Statements of Income as well as proforma results of operations assuming the Partnership's interest in Magic increased to 60% as of December 31, 1997. The proforma results are shown in order to provide a more meaningful basis for a comparative discussion of the years ended December 26, 2000, December 28, 1999 and December 29, 1998. Historical Proforma (1) -------------------------------------------------- 2000 1999 1998 1998 -------------------------------------------------- Net sales $60,504,753 $57,820,215 $43,543,633 $53,631,453 Operating costs and expenses: Cost of sales 15,000,081 15,355,713 11,710,209 14,289,075 Restaurant labor and benefits 17,346,143 16,899,475 12,500,842 15,522,283 Advertising 3,927,433 3,766,662 2,844,451 3,595,040 Other restaurant operating expenses exclusive of depreciation and amortization 11,379,040 10,834,915 8,337,961 10,656,012 General and administrative: Management fees 3,738,150 3,582,943 2,894,911 3,348,863 Other 1,084,454 787,305 631,999 761,827 Depreciation and amortization 2,826,337 2,540,304 2,149,606 2,664,692 Loss (gain) on restaurant closings 24,910 63,398 23,747 (93,220) Equity in loss of Magic - - 7,250 - ---------- ---------- ---------- ---------- Income from operations 5,178,205 3,989,500 2,442,657 2,886,881 Equity in loss of unconsolidated affiliates (176,896) - - - Interest income 39,117 25,994 29,783 29,783 Interest expense (3,047,986) (3,014,620) (2,662,061) (3,115,146) Cure of (loss on) default of pooled loans (409,016) 423,900 - - Gain on life insurance settlement - - 875,533 875,533 Loss on sale of investments held for sale - (134,766) - - Gain on sale of restaurant - 196,608 - - ---------- ---------- ---------- ---------- (3,594,781) (2,502,884) (1,756,745) (2,209,830) ---------- ---------- ---------- ---------- Income before minority interest 1,583,424 1,486,616 685,912 677,051 Minority interest in (income) loss of Operating Partnerships (211,300) (172,062) 122,805 129,273 ---------- ---------- ---------- ---------- Net income $ 1,372,124 $ 1,314,554 $ 808,717 $ 806,324 ========== ========== ========== ========== (1) The proforma statements of operations for 1998 include consolidation of Magic as if APP's interest in Magic increased to 60% as of December 31, 1997. Net Sales --------- Net sales for the year ended December 26, 2000 increased $2,685,000 from net sales of $57,820,000 in 1999 to net sales of $60,505,000 in 2000, a 4.6% increase. Comparable restaurant sales increased 6.4% over the prior year. The stronger than expected sales results in 2000 were achieved primarily through continued improvement in restaurant operations and the success of The Insider Pizza introduced during the fourth quarter of 2000. Net sales for the year ended December 28, 1999 increased $4,189,000 from proforma net sales of $53,631,000 in 1998 to $57,820,000 in 1999, a 7.8% increase. This increase was attributable primarily to the success of The Big New Yorker pizza, a 16-inch traditional style pizza introduced in early 1999. Income From Operations ---------------------- Income from operations for the year ended December 26, 2000 increased $1,188,000 from $3,990,000 to $5,178,000, a 29.8% increase over the year ended December 28, 1999. As a percentage of net sales, income from operations increased from 6.9% of net sales for the year ended December 28, 1999 to 8.6% of net sales for the year ended December 26, 2000. Cost of sales decreased as a percentage of net sales from 26.6% in 1999 to 24.8% in 2000 due to significantly lower cheese costs. Labor and benefits expense decreased as a percentage of net sales from 29.2% in 1999 to 28.7% in 2000 attributable to better cost controls and increased productivity in the restaurants. Advertising remained at 6.5% of net sales for both years. Other restaurant operating expenses increased slightly from 18.7% of net sales for the year ended December 28, 1999 to 18.8% of net sales for the year ended December 26, 2000. General and administrative expenses increased from 7.6% of net sales in 1999 to 8.0% of net sales in 2000 reflecting increased bonuses paid on improved operating results. Depreciation and amortization expense increased to 4.7% of net sales in 2000 compared to 4.4% of net sales in 1999 primarily due to the addition of point-of-sale terminals under capital leases. Income from operations for the year ended December 28, 1999 increased $1,103,000 from $2,887,000 to $3,990,000, a 38.2% increase over the year ended December 29, 1998. Income from operations represented 6.9% of net sales for the year ended December 28, 1999 compared to proforma income from operations of 5.4% of proforma net sales for the year ended December 29, 1998. Cost of sales as a percentage of net sales was 26.6% of net sales in both 1999 and 1998. Labor and benefits expense increased slightly from 28.9% of net sales for the year ended December 29, 1998 to 29.2% of net sales for the year ended December 28, 1999 due to improved staffing of the restaurants. Advertising decreased from 6.7% of proforma net sales in 1998 to 6.5% of net sales in 1999. Other restaurant operating expenses amounted to 18.7% of net sales in 1999 compared to 19.9% of proforma net sales in 1998. This decrease is primarily attributable to lower occupancy costs in 1999 through the purchase of previously leased properties and the buyout or expiration of leases on closed restaurants during the last half of 1998. General and administrative expenses decreased from 7.7% of proforma net sales in 1998 to 7.6% of net sales in 1999. Depreciation and amortization expense decreased from 5.0% of proforma net sales in 1998 to 4.4% of net sales in 1999. Net Income ---------- Net income increased $57,000 to $1,372,000 for the year ended December 26, 2000 compared to net income of $1,315,000 for the year ended December 28, 1999. The 1999 period net income included a loss on sale of investments held for sale of $135,000 and a $197,000 gain on sale of a restaurant. The 1999 period net income was increased by $424,000 to record the cure of a default of certain loans within the Partnership's pooled borrowings from Franchise Mortgage Acceptance Company (FMAC) while the 2000 net income includes a $409,000 charge to record the default of certain loans within the Partnership's pooled borrowings with FMAC (See Note 3 of the accompanying financial statements). The 2000 period net income also includes equity in loss of unconsolidated affiliates of $177,000. Net income increased $509,000 to net income of $1,315,000 for the year ended December 28, 1999 compared to proforma net income of $806,000 for the year ended December 29, 1998. The 1998 period net income included a gain on life insurance settlement of $876,000. The 1999 period net income included a $135,000 loss on sale of investments held for sale and a $197,000 gain on sale of a restaurant. The increase in net earnings is primarily attributable to the increase in income from operations noted above and a decrease in interest expense of $100,000. In addition, the cure of a default of certain loans within the Partnership's pooled borrowings from FMAC increased net income by $424,000 (See Note 3 of the accompanying financial statements). These were offset by a $301,000 increase in minority interest in earnings of affiliate. Liquidity and Capital Resources ------------------------------- The Partnership generates its principal source of funds from net cash provided by operating activities. Management believes that net cash provided by operating activities and various other sources of income will provide sufficient funds to meet planned capital expenditures for recurring replacement of equipment in existing restaurants and to service debt obligations for the next twelve months. At December 26, 2000, the Partnership had a working capital deficiency of $6,543,000 compared to a deficiency of $5,543,000 at December 28, 1999. The increase in working capital deficiency at December 26, 2000 is primarily a result of a $486,000 increase in current portion of obligations under capital leases related to point- of-sale terminals and a $367,000 increase in current portion of long- term debt. The Partnership routinely operates with a negative working capital position which is common in the restaurant industry and which results from the cash sales nature of the restaurant business and payment terms with vendors. Net Cash Provided by Operating Activities ----------------------------------------- During 2000, net cash provided by operating activities amounted to $5,413,000, an increase of $1,288,000 over 1999. This increase is primarily attributable to a $1,189,000 increase in income from operations. Non-operating items of income and expense include a noncash charge in 2000 of $409,000 to record a loss on default in pooled loans versus recording a $424,000 cure of default in pooled loans in 1999. Investing Activities -------------------- Capital expenditures for 2000 were $2,239,000 of which $1,022,000 was for replacement of equipment in existing restaurants, $147,000 was for the purchase of land for future development, and $1,070,000 was for the purchase of previously leased restaurants. The Partnership also entered into capital leases of $1,461,000 for point-of-sale terminals. In addition, the Partnership purchased a minority interest in Oklahoma Magic, L.P. for $2,500,000. Financing Activities -------------------- Cash distributions paid in 2000 totaled $1,389,000 and amounted to $0.40 per unit. The Partnership's distribution objective, generally, is to distribute all operating revenues less operating expenses (excluding noncash items such as depreciation and amortization), capital expenditures for existing restaurants, interest and principal payments on Partnership debt, and such cash reserves as the managing General Partner may deem appropriate. During 2000, the Partnership's proceeds from long-term borrowings amounted to $5,106,000 of which $2,500,000 was used to purchase a 39% interest in Magic from an affiliate and $1,025,000 was used to purchase previously leased restaurants. The remainder was used to refinance existing debt. The financing costs related to this refinancing are being amortized over the terms of the loan agreements. The Partnership plans to open four to six new restaurants during 2001. The land for two of these new restaurants has been purchased. Management anticipates spending approximately $900,000 for the buildings and equipment at these two locations. The remaining restaurants planned for development will be delivery/carryout units leased from unrelated third parties. Management anticipates the cost of developing these locations at approximately $200,000 per restaurant. Development of the new restaurants will be financed through existing lenders. Management anticipates spending $828,000 in 2001 for recurring replacement of equipment in existing restaurants which the Partnership expects to finance from net cash provided by operating activities. The actual level of capital expenditures may be higher in the event of unforeseen breakdowns of equipment or lower in the event of inadequate net cash flow from operating activities. During 1998, the Partnership collected on a life insurance policy purchased in 1993 on one of its original investors. This investor owned approximately 438,600 Class B and C units. The policy was purchased with the intent of providing the Partnership a means of repurchasing his units upon his death if his heirs so desired. The investor died in May of 1998. The Partnership recognized a gain of $876,000 upon receipt of the insurance proceeds. The units were repurchased on December 29, 1998 at $2.55 per unit for a total purchase price of $1,118,430. Other Matters ------------- On January 31, 2000 AmeriServe, the Partnership's primary supplier of food ingredients and dry goods, filed for protection under the U.S. Bankruptcy Code. McLane Company, Inc., a subsidiary of Wal-Mart Stores, Inc., completed the purchase of AmeriServe's U.S. distribution business on November 30, 2000. As part of the sale, the Partnership agreed to a two-year contract extension and will incur a 5% increase in distribution fees. The overall impact of the increased distribution fees on cost of sales is expected to be approximately 0.1%. On March 13, 1996, the Partnership purchased a 45% interest in Magic, a newly-formed limited partnership, for $3.0 million in cash. Magic owns and operates twenty-six Pizza Hut restaurants in Oklahoma. In August 1998, Magic purchased a 25% interest in Magic from a former limited partner which effectively increased the Partnership's interest in Magic from 45% to 60%. Therefore, beginning August 11, 1998, Magic's financial statements were consolidated into the Partnership's consolidated financial statements. Prior to August 11, 1998, the Partnership accounted for its investment in Magic using the equity method of accounting. In connection with the consolidation, the Partnership recorded goodwill of $728,000 which represented the excess purchase price of the original equity investment in the net assets acquired, net of subsequent amortization. On July 26, 2000, APP purchased 39% of Magic from the Management Company for $2,500,000 cash and contingent consideration of $700,000. The $2,500,000 cash payment was financed by INTRUST Bank over five years at 9.5%. The contingent consideration will become due in the event that Magic's cash flow (determined on a 12 month trailing basis) exceeds $2.6 million at any time between January 1, 2001 and December 31, 2005. Payment of the remaining balance shall be made in Class B and Class C Units of the Partnership. In the event that Magic's cash flow does not reach this cash flow goal on or prior to December 31, 2005, APP shall owe no additional consideration. Upon completion of this purchase, the Partnership owns 99% of Magic. The Management Company is considered a related party in that one individual has controlling interest in both the Management Company and the Partnership's general partner. To the extent that the Partnership and the Management Company have common ownership, the transaction was recorded at the Management Company's historical cost. As a result of the transaction, the Partnership recorded goodwill of $1,407,991 and cost in excess of carrying value of assets acquired of $534,962. The Partnership delisted from the American Stock Exchange effective November 13, 1997 and limited trading of its units. As a result, the Partnership will continue to be taxed as a partnership rather than being taxed as a corporation. The Partnership does offer a Qualified Matching Service, whereby the Partnership will match persons desiring to buy units with persons desiring to sell units. Effects of Inflation and Future Outlook --------------------------------------- Inflationary factors such as increases in food and labor costs directly affect the Partnership's operations. Because most of the Partnership's employees are paid on an hourly basis, changes in rates related to federal and state minimum wage and tip credit laws will effect the Partnership's labor costs. The Partnership cannot always effect immediate price increases to offset higher costs and no assurance can be given the Partnership will be able to do so in the future. Congress is considering legislation which could increase the minimum wage by up to as much as $1 per hour over a two-year period. While an increase in the minimum wage would increase the Partnership's labor costs, due to the uncertainty regarding legislation on the matter, management cannot reliably estimate the potential impact on labor costs at this time. The Partnership's earnings are affected by changes in interest rates primarily from its long-term debt arrangements. Under its current policies, the Partnership does not use interest rate derivative instruments to manage exposure to interest rate changes. Due to the small amount of debt at variable interest rates, a hypothetical 100 basis point adverse move (increase) in interest rates along the entire interest rate yield curve would not have a material effect on the Partnership's interest expense and net income over the term of the related debt. This amount was determined by considering the impact of the hypothetical interest rates on the Partnership's borrowing cost. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act, which are intended to be covered by the safe harbors created thereby. Although the Partnership believes the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and, therefore, there can be no assurance the forward-looking statements included in this report will prove to be accurate. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to, consumer demand and market acceptance risk, the effect of economic conditions, including interest rate fluctuations, the impact of competing restaurants and concepts, the cost of commodities and other food products, labor shortages and costs and other risks detailed in the Partnership's Securities and Exchange Commission filings. Item 8. Financial Statements and Supplementary Data ---------------------------------------------------- See the consolidated financial statements and supplementary data listed in the accompanying "Index to Consolidated Financial Statements and Supplementary Data" on Page F-1 herein. Information required for financial statement schedules under Regulation S-X is either not applicable or is included in the consolidated financial statements or notes thereto. Item 9. Changes in and Disagreements with Accountants on Accounting -------------------------------------------------------------------- and Financial Disclosure ------------------------ The Partnership filed a Form 8-K to report a change in certifying accountants with the firm of Ernst & Young LLP being replaced by Grant Thornton LLP effective September 9, 1999. PART III Item 10. Directors and Executive Officers of the Registrant ------------------------------------------------------------ RAM, as the Managing General Partner, is responsible for the management and administration of the Partnership under a Management Services Agreement with the Operating Partnerships. Partnership management services include, but are not limited to: preparing and reviewing projections of cash flow, taxable income or loss, and working capital requirements; conducting periodic physical inspections, market surveys and continual Restaurant reviews to determine when assets should be sold and, if so, determining acceptable terms of sale; arranging any debt financing for capital improvements or the purchase of assets; supervising any litigation involving the Partnerships; preparing and reviewing Partnership reports; communicating with Unitholders; supervising and reviewing Partnership bookkeeping, accounting and audits; supervising the presentation of and reviewing Partnership state and federal tax returns; personnel functions, and supervising professionals employed by the Partnerships in connection with any of the foregoing, including attorneys, accountants and appraisers. The direct management of the Restaurants is performed by the Management Company pursuant to a substantially identical Management Services Agreement with RAM. As compensation for management services, the Management Company will receive a management fee equal to 7% of the gross sales of the Restaurants in APP and 4.5% of gross sales of the Restaurants in Magic. In addition, the Management Company will be reimbursed for the cost of certain products purchased for use directly in the operation of the Restaurants and for outside legal, accounting, tax, auditing, advertising, and marketing services. Certain other expenses incurred by the Management Company which relate directly to the operation of the Restaurants, including insurance and profit sharing and incentive bonuses and related payroll taxes for supervisory personnel, shall be paid by the Operating Partnerships through RAM. Set forth below is certain information concerning the director and executive officers of both RAM and the Management Company. Present Position with the Management Company and Business Experience for Name Age Past 5 Years ---- --- ------------------------------------- Hal W. McCoy 55 Chairman, Chief Executive Officer and sole director. McCoy holds a Bachelor of Arts degree from the University of Oklahoma. From 1970 to 1974, he was at different times Marketing Manager at PHI, where he was responsible for consumer research, market research, and market planning, and Systems Manager, where he was responsible for the design and installation of PHI's first management data processing system. In 1974, he founded the predecessor to the Management Company and today owns or has controlling ownership in entities operating a combined total of 117 franchised "Pizza Hut" and "Long John Silver's" restaurants. Hal W. McCoy II 33 President. McCoy holds a Bachelor of Science degree in Business Administration from the University of Kansas. In 1990, he founded, owned and operated CenTex Pizza Partners, L.P., which operated four Pizza Huts in Texas. After improving the operations and selling CenTex in 1992, he joined the Management Company where he currently oversees all operations for the Pizza Huts and Long John Silver's managed by the Management Company. J. Leon Smith 58 Vice President. Smith holds a Bachelor of Science degree in Hotel and Restaurant Management from Oklahoma State University and a Juris Doctorate from the University of Oklahoma. He has been employed by McCoy since 1974, first as Director of Operations for the Long John Silver's division and then as Director of Real Estate Development and General Counsel. Terry Freund 45 Chief Financial Officer. Freund holds a Bachelor of Arts degree in Accounting from Wichita State University. He has been employed by McCoy since 1984. He is responsible for virtually all of the financial and administrative functions in the company. Item 11. Executive Compensation ------------------------------- The executive officers of the Management Company perform services for all of the restaurants managed by the Management Company, including the Restaurants. Cash compensation of executive officers of the Management Company who are also officers of affiliated companies is allocated for accounting purposes among the various entities owning such restaurants on the basis of the number of restaurants each entity owns. Only the compensation of the Chief Executive Officer, President, and Chief Financial Officer is shown below as the other officer's total cash compensation does not exceed $100,000. Neither RAM nor the Operating Partnerships compensate their officers, directors or partners for services performed, and the salaries of the executive officers of the Management Company are paid out of its management fee and not directly by the Partnership. SUMMARY COMPENSATION TABLE Annual Compensation ------------------- Name and Allocable to Principal Position Year Salary Bonus Total Partnership ------------------ ---- ------ ----- ----- ----------- Hal W. McCoy 2000 $173,858 $83,878 $257,736 $199,283 Chief Executive Officer 1999 174,831 47,969 222,800 176,389 1998 171,627 40,370 211,997 142,821 Hal W. McCoy II 2000 106,257 74,950 181,207 145,310 President 1999 97,765 32,899 130,664 98,725 Terry Freund 2000 103,900 59,732 163,632 129,673 Assistant Secretary and 1999 96,227 30,078 126,305 96,739 Chief Financial Officer 1998 84,297 20,063 104,360 67,441 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 2000, 1999 and 1998 to Mr. McCoy, Mr. McCoy II and Mr. Freund are included in the amounts shown in the cash compensation amounts set forth above. The total amount allocated to the Restaurants under the Incentive Bonus Plan for the fiscal year ended December 26, 2000 was $448,892 of which $135,692 was paid to all executive officers as a group. Bonuses paid under the Incentive Bonus Plan are paid by the Operating Partnerships. The Incentive Bonus Plan in effect for the fiscal year ending December 25, 2001 provides for payment of aggregate supervisory bonuses in an amount equal to 15% of the amount by which the Partnership's income from operations plus depreciation and amortization expenses exceed a prescribed threshold. The threshold generally represents capital expenditures, interest and principal payments on Partnership debt, and cash distributions. For the fiscal year ended December 26, 2000 the Partnership's income from operations plus depreciation and amortization expenses was $8,004,542. Class A Unit Option Plan ------------------------ The Partnership, APP, RAM and the Management Company have adopted a Class A Unit Option Plan (the "Plan") pursuant to which 75,000 Class A Units are reserved for issuance to employees, including officers, of the Partnership, APP, RAM and the Management Company. Participants will be entitled to purchase a designated number of Units at an option price which shall be equal to the fair market value of the Units on the date the option is granted. Options granted under the Plan will be for a term to be determined by the Managing General Partner at the time of issuance (not to exceed ten years) and shall not be transferable except in the event of the death of the optionee, unless the Managing General Partner otherwise determines and so specifies in the terms of the grant. The Plan is administered by the Managing General Partner which, among other things, designates the individuals to whom options are granted, the number of Units for which such options are to be granted and other terms of grant. The executive officers have no outstanding options at December 26, 2000. Item 12. Security Ownership of Certain Beneficial Owners and ------------------------------------------------------------ Management ---------- PRINCIPAL UNITHOLDERS The following table sets forth, as of March 1, 2001, information with respect to persons known to the Partnership to be beneficial owners of more than five percent of the Class A Income Preference Units, Class B or Class C Units of the Partnership: Name & Address Amount & Nature Title of Beneficial of Beneficial Percent of Class Owner Ownership of Class -------- -------------- --------------- -------- Class A Income Preference Units None Class B Hal W. McCoy 641,537 (1) 58.59% 555 N. Woodlawn Suite 3102 Wichita, KS 67208 Class B Hal W. McCoy II 84,105 7.68% 555 N. Woodlawn Suite 3102 Wichita, KS 67208 Class B John Hunter 116,564 10.57% 117 Lilac Lane San Antonio, TX 78209 Class C Hal W. McCoy 1,246,876 (1) 65.24% 555 N. Woodlawn Suite 3102 Wichita, KS 67208 Class C Hal W. McCoy II 141,129 7.38% 555 N. Woodlawn Suite 3102 Wichita, KS 67208 Class C John Hunter 106,536 5.54% 117 Lilac Lane San Antonio, TX 78209 (1) Hal W. McCoy beneficially owns 95.75% of RMC Partners, L.P. which owns 671,164 Class B Units and 1,297,266 Class C Units. Mr. McCoy owns 95.65% of RMC American Management, Inc. which owns 3,680 Class C Units. Mr. McCoy has voting authority over the units. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth, as of March 1, 2001, the number of Class A Income Preference Units, Class B Units, or Class C Units beneficially owned by the director and by the director and executive officers of both RAM and the Management Company as a group. Title Name of Amount & Nature Percent of Class Beneficial Owner of Beneficial Ownership of Class -------- ---------------- ----------------------- -------- B Hal W. McCoy 641,537 (1) 58.59% C Hal W. McCoy 1,246,876 (1) 65.24% B Director & all 807,069 (1) 73.71% officers as a group (4 Persons) C Director & all 1,530,315 (1) 80.07% officers as a group (4 Persons) (1) See the table under "Principal Unitholders" Item 13. Certain Relationships and Related Transactions ------------------------------------------------------- One of the Restaurants is located in a building owned by an affiliate of the General Partners. The lease provides for minimum annual rentals of $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 of APP are managed by the Management Company for a fee equal to 7% of the gross sales of the Restaurants and reimbursement of certain costs incurred for the direct benefit of the Restaurants. Neither the terms and conditions of the Agreements, nor the amount of the fee were negotiated at arm's length. Based on prior experience in managing the Restaurants, however, the Managing General Partner believes that the terms and conditions of the Management Services Agreement, including the amount of the fee, are fair and reasonable and not less favorable to the Partnership than those generally prevailing with respect to similar transactions between unrelated parties. The 7% fee approximated the actual unreimbursed costs incurred by the Managing General Partner in managing the Restaurants when the Agreements were entered into in June of 1987. The 7% fee remains in effect for the life of the Agreements which expire December 31, 2007. Pursuant to separate Management Services Agreements entered into March 13, 1996, the Restaurants of Magic are managed by the Management Company for a fee equal to 4.5% of the gross sales of the Restaurants and reimbursement of certain costs incurred for the direct benefit of the Restaurants. The terms and conditions of the Agreements were negotiated at arm's length with the former owners of the Oklahoma restaurants who were originally 25% partners in Magic. The Management Company agreed to a reduced fee due to its ownership interest in Magic. The 4.5% fee remains in effect for the remaining life of the Agreements which expire February 28, 2010. PART IV Item 14. Exhibits, Financial Statements and Reports ---------------------------------------------------- on Form 8-K ----------- (a) 1. Financial statements -------------------- See "Index to Consolidated Financial Statements and Supplementary Data" which appears on page F-1 herein. 3. Exhibits -------- The exhibits filed as part of this annual report are listed in the "Index to Exhibits" at page 32. (b) Reports on Form 8-K ------------------- During the third quarter of 1999, the Partnership filed a Form 8-K dated September 9, 1999 reporting a change in certifying accountants. INDEX TO EXHIBITS (Item 14(a)) Exhibit No. Description of Exhibits Page/Notes 3.1 Amended and Restated Certificate of Limited Partnership of American Restaurant Partners, L.P. A 3.2 Amended and Restated Agreement of Limited Partnership of American Restaurant Partners, L.P. A 3.3 Amended and Restated Certificate of Limited Partnership of American Pizza Partners, L.P. A 3.4 Amended and Restated Agreement of Limited Partnership of American Pizza Partners, L.P. A 4.1 Form of Class A Certificate A 4.2 Form of Application for Transfer of Class A Units A 10.1 Management Services Agreement dated June 26, 1987 between American Pizza Partners, L.P. and RMC American Management, Inc. A 10.2 Management Services Agreement dated June 26, 1987 between RMC American Management, Inc. and Restaurant Management Company of Wichita, Inc. A 10.3 Form of Superseding Franchise Agreement between the Partnership and Pizza Hut, Inc. and schedule pursuant to Item 601 of Regulation S-K. A 10.4 Form of Blanket Amendment to Franchise Agreements A 10.5 Incentive Bonus Plan A 10.6 Class A Unit Option Plan B 10.7 Revolving Term Credit Agreement dated June 29, 1987 between American Pizza Partners, L.P. and the First National Bank in Wichita C 10.8 Form of 1990 Franchise Agreement between the Partnership and Pizza Hut, Inc. and schedule pursuant to Item 601 of Regulation S-K D 10.9 Contribution Agreement, dated as of February 1, 1996, relating to the closing date of March 13, 1996, by and among American Pizza Partners, L.P., Hospitality Group of Oklahoma, Inc., RMC American Management, Inc., Restaurant Management Company of Wichita, Inc. and Oklahoma Magic, L.P. E 10.10 Settlement Agreement between Oklahoma Magic, L.P. and Hospitality Group of Oklahoma, Inc. F 23.1 Consent of Grant Thornton LLP F-26 A. Included as exhibits in the Partnership's Registration Statement on Form S-1 (Registration No.33-15243) dated August 20, 1987 and included herein by reference to exhibit of same number. B. Incorporated by reference to the Partnership's Registration Statement on Form S-8 dated March 21, 1988. C. Incorporated by reference to Exhibit 10.7 of the Partnership's Form 10-K for the year ended December 31, 1987. D. Incorporated by reference to Exhibit 10.8 of the Partnership's Form 10-K for the year ended December 31, 1991. E. Incorporated by reference to Exhibit 2 of the Partnership's Form 8-K dated March 13, 1996. F. Incorporated by reference to Exhibit 10.10 of the Partnership's Form 10-K for the year ended December 29, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN RESTAURANT PARTNERS, L.P. (Registrant) By: RMC AMERICAN MANAGEMENT, INC. Managing General Partner Date: 3/23/01 By: /s/Hal W. McCoy -------- --------------- Hal W. McCoy Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Title Date ---- ----- ---- /s/Hal W. McCoy Chairman and Chief Executive Officer 3/23/01 --------------- (Principal Executive Officer) ------- Hal W. McCoy of RMC American Management, Inc. /s/Terry Freund Chief Financial Officer 3/23/01 --------------- ------- Terry Freund Index to Consolidated Financial Statements and Supplementary Data The following financial statements are included in Item 8: Page ---- Report of Independent Certified Public Accountants . . . . . F-2 Report of Independent Auditors . . . . . . . . . . . . . . . F-3 Consolidated Balance Sheets as of December 26, 2000 and December 28, 1999 . . . . . . . . . . . . . . . . . F-4 Consolidated Statements of Income for the years ended December 26, 2000, December 28, 1999, and December 29, 1998 . . . . . . . . . . . . . . . . . F-6 Consolidated Statements of Partners' Capital (Deficiency) for the years ended December 26, 2000, December 28, 1999 and December 28, 1998 . . . . . . . . F-7 Consolidated Statements of Cash Flows for the years ended December 26, 2000, December 28, 1999, and December 29, 1998 . . . . . . . . . . . . . . . . . F-8 Notes to Consolidated Financial Statements . . . . . . . . . F-9 All financial statement schedules have been omitted since the required information is not present. Report of Independent Certified Public Accountants The General Partners and Limited Partners American Restaurant Partners, L.P. We have audited the accompanying consolidated balance sheets of American Restaurant Partners, L.P. (the Partnership) as of December 26, 2000 and December 28, 1999, and the related consolidated statements of income, partners' capital (deficiency) and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of American Restaurant Partners, L.P. as of December 26, 2000 and December 28, 1999 and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/Grant Thornton LLP Wichita, Kansas March 2, 2001 REPORT OF INDEPENDENT AUDITORS The General Partners and Limited Partners American Restaurant Partners, L.P. We have audited the accompanying consolidated statements of operations, partner's capital (deficiency), and cash flows of American Restaurant Partners, L.P. (the Partnership) for the year ended December 29, 1998. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated results of operations and cash flows of American Restaurant Partners, L.P. for the year ended December 29, 1998, in conformity with auditing standards generally accepted in the United States. /s/Ernst & Young LLP Kansas City, Missouri March 12, 1999 AMERICAN RESTAURANT PARTNERS, L.P. CONSOLIDATED BALANCE SHEETS December 26, December 28, ASSETS 2000 1999 ----------------------------- ----------- ------------ Current assets: Cash and cash equivalents $ 788,485 $ 742,452 Accounts receivable 320,038 258,388 Due from affiliates 66,244 69,948 Notes receivable from affiliates - current portion 15,221 19,531 Inventories 407,413 410,997 Prepaid expenses 307,894 270,300 ---------- ---------- Total current assets 1,905,295 1,771,616 Property and equipment, at cost: Land 4,991,222 4,312,468 Buildings 8,920,125 8,374,351 Restaurant equipment 13,502,699 12,808,308 Leasehold rights and improvements 8,259,820 8,164,307 Property under capital leases 3,538,902 2,077,751 ---------- ---------- 39,212,768 35,737,185 Less accumulated depreciation and amortization 18,552,936 16,406,881 ---------- ---------- 20,659,832 19,330,304 Other assets: Franchise rights, net of accumulated amortization of $1,951,824 ($1,686,489 in 1999) 5,236,276 5,510,611 Notes receivable from affiliates 66,111 75,952 Deposit with affiliate 485,000 485,000 Goodwill, net of accumulated amortization of $179,977 ($130,110 in 1999) 2,052,515 694,391 Other 1,386,337 1,328,781 ---------- ---------- $31,791,366 $29,196,655 ========== ========== AMERICAN RESTAURANT PARTNERS, L.P. CONSOLIDATED BALANCE SHEETS December 26, December 28, LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY) 2000 1999 ------------ ------------ Current liabilities: Accounts payable $ 2,719,592 $ 2,818,985 Due to affiliates 158,755 111,988 Accrued payroll and other taxes 899,140 750,474 Accrued liabilities 1,361,631 1,177,506 Current maturities of long-term debt 2,763,409 2,396,678 Current portion of obligations under capital leases 545,381 59,124 ---------- ---------- Total current liabilities 8,447,908 7,314,755 Long-term liabilities less current maturities: Obligations under capital leases 2,026,327 1,436,375 Long-term debt 27,121,884 25,252,712 Other noncurrent liabilities 992,674 787,208 ---------- ---------- 30,140,885 27,476,295 Minority interests in Operating Partnerships 135,780 551,541 Commitments and contingencies - - Partners' capital (deficiency): General Partners (8,727) (8,585) Limited Partners: Class A Income Preference, authorized 875,000 units; issued 707,138 units (789,866 in 1999) 5,099,355 5,394,796 Classes B and C, issued 1,095,018 and 1,915,148 class B and C units, respectively (1,102,418 and 1,923,808 units in 1999, respectively) (9,415,842) (9,252,030) Notes receivable employees - sale of partnership units (749,350) (956,436) Cost in excess of carrying value of assets acquired (1,858,643) (1,323,681) ---------- ---------- Total partners' capital (deficiency) (6,933,207) (6,145,936) ---------- ---------- $31,791,366 $29,196,655 ========== ========== See accompanying notes. AMERICAN RESTAURANT PARTNERS, L.P. CONSOLIDATED STATEMENTS OF INCOME Years ended December 26, 2000, December 28, 1999 and December 29, 1998
2000 1999 1998 ---------- ---------- ---------- Net sales $60,504,753 $57,820,215 $43,543,633 Operating costs and expenses: Cost of sales 15,000,081 15,355,713 11,710,209 Restaurant labor and benefits 17,346,143 16,899,475 12,500,842 Advertising 3,927,433 3,766,662 2,844,451 Other restaurant operating expenses exclusive of depreciation and amortization 11,379,040 10,834,915 8,337,961 General and administrative: Management fees - related party 3,738,150 3,582,943 2,894,911 Other 1,084,454 787,305 631,999 Depreciation and amortization 2,826,337 2,540,304 2,149,606 Loss on restaurant closings 24,910 63,398 23,747 Equity in loss of Magic - - 7,250 ---------- ---------- ---------- Income from operations 5,178,205 3,989,500 2,442,657 Equity in loss of unconsolidated affiliates (176,896) - - Interest income 39,117 25,994 29,783 Interest expense (3,047,986) (3,014,620) (2,662,061) Cure of (loss on) default of pooled loans (409,016) 423,900 - Gain on life insurance settlement - - 875,533 Loss on sale of investments held for sale - (134,766) - Gain on sale of restaurant - 196,608 - ---------- ---------- ---------- (3,594,781) (2,502,884) (1,756,745) ---------- ---------- ---------- Income before minority interest 1,583,424 1,486,616 685,912 Minority interests in (income) loss of Operating Partnerships (211,300) (172,062) 122,805 ---------- ---------- ---------- Net income $ 1,372,124 $ 1,314,554 $ 808,717 ========== ========== ========== Net income allocated to Partners: Class A Income Preference $ 270,654 $ 298,258 $ 165,210 Class B $ 400,710 $ 368,528 $ 242,003 Class C $ 700,760 $ 647,768 $ 401,504 Weighted average number of Partnership units outstanding during period: Class A Income Preference 741,052 813,642 814,145 Class B 1,097,151 1,005,338 1,192,579 Class C 1,918,702 1,767,105 1,978,589 Basic and diluted income before minority interest per Partnership unit $ 0.42 $ 0.41 $ 0.17 Basic and diluted minority interest per Partnership unit $ (0.06) $ (0.05) $ 0.03 Basic and diluted net income per Partnership unit $ 0.37 $ 0.37 $ 0.20 Distributions per Partnership unit $ 0.40 $ 0.45 $ 0.30 See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P. Consolidated Statements of Partners' Capital (Deficiency) Years ended December 26, 2000, December 28, 1999, and December 29, 1998
General Partners Limited Partners Cost in ---------------- --------------------------------------- excess of Classes B Class A Income Notes carrying and C Preference Classes B and C receivable value of Cumulative ---------------- --------------------------------------- from assets comprehensive Units Amounts Units Amounts Units Amounts employees acquired income (loss) Total ------ -------- ----- ------- ----- ------- --------- -------- ------------- ----- Balance at December 31, 1997 3,940 $(7,864) 814,314 $5,623,790 3,170,659 $(8,322,372) $ - $(1,323,681) $ 18,675 $(4,011,452) Net Income - 801 - 165,210 - 642,706 - - - 808,717 Unrealized loss on investments available-for-sale - - - - - - - - (127,116) (127,116) --------- Comprehensive income 681,601 Partnership distributions - (1,182) - (244,128) - (949,721) - - - (1,195,031) Units purchased - - (304) (1,269) (558,800) (1,428,627) - - - (1,429,896) ----- ------ ------- --------- --------- ---------- --------- --------- ------- --------- Balance at December 29, 1998 3,940 (8,245) 814,010 5,543,603 2,611,859 (10,058,014) - (1,323,681) (108,441) (5,954,778) Net Income - 1,446 - 298,258 - 1,014,850 - - - 1,314,554 Change in unrealized loss on investments available-for-sale - - - - - - - - 108,441 108,441 --------- Comprehensive income 1,422,995 Partnership distributions - (1,786) - (368,863) - (1,255,095) 77,024 - - (1,548,720) Units purchased - - (24,144) (78,202) (23,133) (69,396) - - - (147,598) Units sold to employees - - - - 437,500 1,115,625 (1,047,412) - - 68,213 Employee compensation - reduction of notes receivable - - - - - - 13,952 - - 13,952 ----- ------ ------- --------- --------- ---------- ---------- ---------- ------- ---------- Balance at December 28, 1999 3,940 (8,585) 789,866 5,394,796 3,026,226 (9,252,030) (956,436) (1,323,681) - (6,145,936) Net Income - 1,438 - 270,654 - 1,100,032 - - - 1,372,124 Partnership distributions - (1,580) - (297,229) - (1,208,044) 117,551 - - (1,389,302) Units purchased - - (82,728) (268,866) (25,000) (69,750) 47,705 - - (290,911) Units sold to employees - - - - 5,000 13,950 (12,555) - - 1,395 Employee compensation - reduction of notes receivable - - - - - - 54,385 - - 54,385 Purchase of Oklahoma Magic, L.P.'s minority interest from a related party - - - - - - - (534,962) - (534,962) ----- ------ ------- --------- --------- ---------- ---------- ---------- ------- --------- Balance at December 26, 2000 3,940 $(8,727) 707,138 $5,099,355 3,006,226 $(9,415,842)$ (749,350)$(1,858,643) $ - $(6,933,207) ===== ====== ======= ========= ========= ========== ========= ========== ======= ========= See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 26, 2000, December 28, 1999 and December 29, 1998
2000 1999 1998 ---- ---- ---- Cash flows from operating activities: Net income $ 1,372,124 $ 1,314,554 $ 808,717 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,826,337 2,540,304 2,149,606 Provision for deferred rent - - 9,554 Equity in loss of Magic - - 7,250 Equity in loss of unconsoliated affiliates 176,896 - - Loss on default in pooled loans 409,016 - 67,963 Cure of default in pooled loans - (423,900) - (Gain) loss on disposition of assets 5,786 20,150 (41,498) Loss on sale of investments held for sale - 134,766 - Gain on life insurance settlement - - (875,533) Loss on restaurant closings 24,910 63,398 23,747 Minority interest in Operating Partnerships 211,300 172,062 (122,805) Gain on sale of restaurants - (196,608) - Unit compensation expense 54,385 13,952 - Net change in operating assets and liabilities: Accounts receivable (61,650) 6,366 (121,199) Due from affiliates 3,704 20,198 (16,525) Inventories 3,584 30,329 (26,398) Prepaid expenses (37,594) 16,746 204,523 Deposit with affiliate - (35,000) - Accounts payable (106,418) 378,601 (1,692,680) Due to affiliates 46,767 (114,334) 173,306 Accrued payroll and other taxes 148,666 114,669 248,360 Accrued liabilities 184,125 (100,100) 35,092 Other, net 151,557 169,344 6,151 ---------- ---------- ---------- Net cash provided by operating activities 5,413,495 4,125,497 837,631 Investing activities: Investment in Magic prior to consolidation - - (390,000) Purchase of minority interest in Magic (2,500,000) - - Investment in unconsolidated affiliates (341,952) - - Net cash from consolidation of affiliate - - 56,061 Proceeds from sale of investments held for sale - 42,310 - Additions to property and equipment (2,239,355) (1,378,400) (2,626,566) Proceeds from sale of property and equipment 6,538 209,118 518,641 Proceeds from sale of restaurants - 717,639 - Purchase of franchise rights - (15,000) - Collections of notes receivable from affiliates 14,151 17,229 35,574 Other, net - (35,610) - ---------- ---------- ---------- Net cash used in investing activities (5,060,618) (442,714) (2,406,290) Financing activities: Proceeds from long-term borrowings 5,105,739 3,129,500 13,394,950 Payments on long-term borrowings (3,278,852) (4,707,728) (10,466,003) Payments on capital lease obligations (384,942) (47,515) (36,689) Proceeds from life insurance settlement - - 1,039,747 Distributions to Partners (1,389,302) (1,548,720) (1,195,031) Contribution of capital in Magic from minority partners - - 94,200 Proceeds from issuance of Class B and C units 1,395 68,213 - Repurchase of units (290,911) (147,598) (1,429,896) General Partners' distributions from Operating Partnerships (15,221) (16,429) (12,071) Minority interests' distributions from Operating Partnerships (54,750) - - ---------- ---------- ---------- Net cash provided by (used in) financing activities (306,844) (3,270,277) 1,389,207 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 46,033 412,506 (179,452) Cash and cash equivalents at beginning of period 742,452 329,946 509,398 ---------- ---------- ---------- Cash and cash equivalents at end of period $ 788,485 $ 742,452 $ 329,946 ========== ========== ========== See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES ------------------------------- ORGANIZATION American Restaurant Partners, L.P. was formed in connection with a public offering of Class A Income Preference Units in 1987 and owns a 99% limited partnership interest in American Pizza Partners, L.P. (APP). The remaining 1% of American Pizza Partners, L.P. is owned by RMC Partners, L.P. and RMC American Management, Inc. (RAM) as the general partners. On March 13, 1996, APP purchased a 45% interest in a newly formed limited partnership, Oklahoma Magic, L.P. (Magic), that owns and operates twenty-six Pizza Hut restaurants in Oklahoma. Effective August 11, 1998, APP's interest in Magic increased from 45% to 60% in connection with Magic's purchase of a 25% interest from a former limited partner. On July 26, 2000, APP purchased 39% of Magic from Restaurant Management Company of Wichita, Inc. (the Management Company) bringing their interest in Magic to 99%. The remaining 1% interest in Magic is held by RAM, the managing general partner. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of American Restaurant Partners, L.P. and its majority owned subsidiaries, American Pizza Partners, L.P. and APP Concepts, L.C. The Partnership also began consolidating the accounts of Magic effective August 11, 1998. American Restaurant Partners, L.P., APP, APP Concepts, L.C. and Magic are hereinafter collectively referred to as the Partnership. All significant intercompany transactions and balances have been eliminated. The Partnership accounted for its investment in Oklahoma Magic, L.P. using the equity method of accounting prior to the increase in their ownership from 45% to 60%. FISCAL YEAR The Partnership operates on a 52 or 53 week fiscal year ending on the last Tuesday in December. EARNINGS PER PARTNERSHIP UNIT Basic earnings per Partnership unit are computed based on the weighted average number of Partnership units outstanding. For purposes of diluted computations, the number of Partnership units that would be issued from the exercise of dilutive Partnership unit options has been reduced by the number of Partnership units which could have been purchased from the proceeds of the exercise at the average market price of the Partnership's units or the price of the Partnership's units on the exercise date. OPERATIONS All of the restaurants owned by the Partnership are operated under a franchise agreement with Pizza Hut, Inc., the franchisor. The agreement grants the Partnership exclusive rights to develop and operate restaurants in certain franchise territories. The Partnership operates restaurants in Georgia, Louisiana, Montana, Texas, Wyoming and Oklahoma. A schedule of restaurants in operation for the periods presented in the accompanying consolidated financial statements is as follows: 2000 1999 1998 ---- ---- ---- American Pizza Partners, L.P. ----------------------------- Restaurants in operation at beginning of period 61 62 63 Opened -- -- 1 Closed (1) -- (2) Sold -- (1) -- --- --- --- Restaurants in operation at end of period 60 61 62 === === === Oklahoma Magic, L.P. -------------------- Restaurants in operation at beginning of period 26 27 27 Closed -- (1) -- --- --- --- Restaurants in operation at end of period 26 26 27 === === === INVENTORIES Inventories consist of food and supplies and are stated at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the life of the lease or improvement, whichever is shorter. The estimated useful lives used in computing depreciation and amortization are as follows: Buildings 10 to 30 years Restaurant equipment 3 to 7 years Leasehold rights and improvements 5 to 20 years Expenditures for maintenance and repairs are charged to operations as incurred. Expenditures for renewals and betterments, which materially extend the useful lives for assets or increase their productivity, are capitalized. Depreciation expense was $2,345,383, $2,036,396, and $1,795,783 for the years ended December 26, 2000, December 28, 1999 and December 29, 1998, respectively. AMORTIZATION OF GOODWILL Goodwill resulting from APP's investment in Magic is being amortized over 29 years using the straight-line method. The Partnership reviews goodwill to assess recoverability from future operations using undiscounted cash flows. Impairments are recognized in operating results when the carrying value exceeds undiscounted future cash flows. INVESTMENTS IN AFFILIATES Investments in affilated entities owned less than 50% are accounted for on the equity method. Accordingly, consolidated net income includes the Partnership's share of their net income or loss. FRANCHISE RIGHTS AND FEES Agreements with the franchisor provide franchise rights for a period of 20 years and are renewable at the option of the Partnership for an additional 15 years, subject to the approval of the franchisor. Initial franchise fees are capitalized and amortized by the straight- line method over periods not in excess of 30 years. Periodic franchise royalty and advertising fees, which are based on a percent of sales, are charged to operations as incurred. CONCENTRATION OF CREDIT RISKS The Partnership's financial instruments that are exposed to concentration of credit risks consist primarily of cash and accounts receivable. The Partnership places its funds into high credit quality financial institutions and, at times, such funds may be in excess of the Federal Depository insurance limit. The Partnership generally does not require collateral against accounts receivable. Credit risks associated with the majority of customer sales are minimal as such sales are primarily for cash. All notes receivable from affiliates are supported by the guarantee of the majority owner of the Partnership. INCOME TAXES The Partnership is not subject to federal or state income taxes and, accordingly, no provision for income taxes has been reflected in the accompanying consolidated financial statements. Such taxes are the responsibility of the partners based on their proportionate share of the Partnership's taxable earnings. Due to differences in the rules related to reporting income for financial statement purposes and for purposes of income tax returns by individual limited partners, the tax information sent to individual limited partners differs from the information contained herein. At December 26, 2000, the Partnership's reported amount of its net assets for financial statement purposes were more than the income tax bases of such net assets by approximately $767,000. The differences between net income in conformance with accounting principles generally accepted in the United States of America (US GAAP) and taxable income (loss) are as follows: 2000 1999 1998 ---- ---- ---- US GAAP net income $1,372,124 $1,314,554 $ 808,717 Depreciation and amortization 153,712 36,348 (133,606) Capitalized leases (11,750) (59,601) 163,641 Equity in earnings (loss) of affiliate 89,127 (274,257) (751,845) Loss on restaurant closings (1,750) (42,149) (190,972) Gain (loss) on disposition of assets 7,051 437,316 (36,642) Unicap adjustment 1,830 4,731 (70,985) Non-taxable life insurance proceeds - - (866,778) Loss on default of pooled loans 313,465 - - Other 23,139 147,371 32,295 --------- --------- --------- Taxable income (loss) $1,946,948 $1,564,313 $(1,046,175) ========= ========= ========= The Omnibus Budget Reconciliation Act of 1987 required public limited partnerships to become taxable entities beginning in 1998. After considering various alternatives, the Partnership delisted from the American Stock Exchange effective November 13, 1997 and now limits trading of its units. As a result, the Partnership continues to be taxed as a partnership rather than being taxed as a corporation. ADVERTISING COSTS Advertising production and media costs are expensed as incurred. USE OF ESTIMATES In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS For purposes of the statements of cash flows, the Partnership considers all highly liquid debt instruments, purchased with a maturity of three months or less, to be cash equivalents. ACCOUNTING FOR UNIT BASED COMPENSATION The Partnership uses the intrinsic value-based method for measuring unit-based compensation cost which measures compensation cost as the excess, if any, of the quoted market price of Partnership units at the grant date over the amount the employee must pay for the units. Required pro forma disclosures of compensation expense determined under the fair value method have not been presented as there are no material unvested options and no options have been granted in 2000, 1999 or 1998. INVESTMENTS AVAILABLE-FOR-SALE Investments available-for-sale are carried at fair value, with the unrealized gains and losses reported as comprehensive income. Realized gains and losses and declines in value judged to be other- than-temporary on available-for-sale securities are included in other income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in other income. EFFECT OF NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement No. 133). Statement No. 133 defines derivative instruments and requires these items be recognized as assets or liabilities in the statements of financial position. This Statement is effective for fiscal years beginning after June 15, 2000. As of December 26, 2000, the Partnership does not have any derivative instruments. RECLASSIFICATIONS Certain amounts shown in the 1999 consolidated financial statements have been reclassified to conform with the 2000 presentation. 2. RELATED PARTY TRANSACTIONS -------------------------- The Partnership has entered into a management services agreement with RAM whereby RAM is responsible for management of the restaurants for a fee equal to 7% for APP, and 4.5% for Magic, of the gross receipts of the restaurants, as defined. RAM has entered into a management services agreement containing substantially identical terms and conditions with Restaurant Management Company of Wichita, Inc. (the Management Company). Affiliates of the Management Company provide various other services for the Partnership including promotional advertising. In addition to participating in advertising provided by the franchisor, an affiliated company engages in promotional activities to further enhance restaurant sales. The affiliate's fees for such services are based on the actual costs incurred and principally relate to the reimbursement of print and media costs. In exchange for advertising services provided directly by the affiliate, the Partnership pays a commission based upon 15% of the advertising costs incurred. Such costs were not significant in 2000, 1999 or 1998. The Partnership maintains a deposit with the Management Company equal to approximately one and one-half month's management fee. Such deposit, $485,000 at December 26, 2000 and December 28, 1999 may be increased or decreased at the discretion of RAM. The Management Company maintains an incentive bonus plan whereby certain employees are eligible to receive bonus payments if specified management objectives are achieved. Such bonuses are not greater than 15% of the amount by which the Partnership's cash flow exceeds threshold amounts as determined by management. Bonuses paid under the plan are reimbursed to the Management Company by the Partnership. The Partnership owns a 25% interest in a limited liability company (LLC) which owns an airplane. The Management Company leases the airplane from the LLC on an hourly basis. The Partnership recorded a loss of $156,398 on the LLC. The Partnership also owns a 4.34% interest in Seaside Pizza, LLC (Seaside), a company formed to acquire eleven Pizza Hut restaurants in December 2000. Certain Partnership principal unitholders are also owners of Seaside. The Partnership's share of Seaside's income is not significant for the year ended December 26, 2000. Transactions with related parties included in the accompanying consolidated financial statements and notes are summarized as follows: 2000 1999 1998 ---- ---- ---- Management fees $3,738,150 $3,582,943 $2,894,911 Management Company bonuses 510,641 322,308 226,522 Advertising commissions 96,592 77,702 75,745 Accommodation fee (See Note 3) 94,982 98,710 70,775 Acquisition/divestiture fee on sale of assets 15,000 35,850 - The Partnership has made advances to various affiliates under notes receivable which bear interest at market rates. The advances are to be received in varying installments with maturities as follows: 2001 - $15,221; 2002 - $22,019; 2003 - $17,384; 2004 - $10,219; 2005 - $9,001; Thereafter - $7,488. All such notes are guaranteed by the majority owner of the Partnership. In addition, the Partnership has certain other amounts due from and to affiliates which are on a noninterest bearing basis. 3. LONG-TERM DEBT -------------- Long-term debt consists of the following at December 26, 2000 and December 28, 1999: 2000 1999 ---- ---- Notes payable to INTRUST Bank in Wichita, payable in monthly installments aggregating $138,865, including interest at variable rates from 8.5% to 10.00%, due at various dates through July 2005 $ 8,707,682 $ 5,933,513 Notes payable to Franchise Mortgage Acceptance Company (FMAC) payable in monthly installments aggregating $259,491, including interest at fixed rates from 8.81% to 10.95%, due at various dates through May 2013 18,098,354 19,167,158 Notes payable to CNL Financial Services, Inc. payable in monthly installments aggregating $16,844, including interest at a fixed rate of 9.62%, through July 2019 1,747,048 1,779,406 Notes payable to Peachtree Franchise Finance, LLC payable in monthly installments aggregating $11,854 including interest at a fixed rate of 10.05%, due June 2015 1,083,813 - Notes payable to Hospitality Group of Oklahoma, Inc., payable in quarterly installments of $41,397 including interest at a fixed rate of 8.00%, due at various dates through August 2003 (notes were repaid during 2000) - 478,963 Notes payable to various banks, payable in monthly installments aggregating $5,374, including interest at rates from 9.00% to 10.00%, due at various dates through January 2010 248,396 290,350 ---------- ---------- 29,885,293 27,649,390 Less current portion 2,763,409 2,396,678 ---------- ---------- $27,121,884 $25,252,712 ========== ========== Certain refinancing with FMAC required the Management Company to act as Accommodation Maker and execute the promissory notes and security agreements as borrower, enabling APP to obtain a lower interest rate and favorable borrowing terms. In return, APP must pay the Management Company an annual fee equal to 1% of the outstanding loan balance, determined as of the first day of each calendar quarter, payable in advance. Certain borrowings through FMAC are part of loans "pooled" together with other franchisees in good standing and approved restaurant concepts, as defined, and sold to the secondary market. The Partnership has provided to FMAC a limited, contingent guarantee equal to 13% of the original loan balance for APP and 15% of the original loan balance for Magic ($507,222 at December 26, 2000), referred to as the "Performance Guarantee Amount" (PGA). The Partnership promises to pay to FMAC up to the total of the PGA to the extent required to cover delinquent loans or defaults in the "pooled" loans. Each month, the Partnership pays to FMAC a "Periodic Guarantee Charge Amount" (PGCA) which is the monthly amortization of the PGA. If none of the other loans in the "pool" are delinquent in respect of any payment due or in default during a monthly period, the Partnership is entitled to a rebate of the PGCA. To the extent that the other loans in the "pool" are delinquent or in default, the amount of the PGCA rebate will be reduced proportionately. At December 26, 2000 and December 29, 1998, certain loans within the Partnership's "pool" were in default. This resulted in the Partnership recording expense of $409,016 and $67,963, during 2000 and 1998, respectively, representing the Partnership's total liability for these defaulted loans under the PGA. During the year ended December 28, 1999 certain loans within the Partnership's "pool" that had been in default at December 29, 1998 were cured. This resulted in the Partnership writing off the remaining $423,900 of its liability for these formerly defaulted loans under the PGA. The PGA remains in effect until the loans are discharged, prepaid, accelerated, or mature, as defined in the secured promissory note. All borrowings are secured by substantially all land, buildings, and equipment of the Partnership. In addition, all borrowings, except for the FMAC loans are supported by the guarantee of the majority owner of the Partnership. Future annual long-term debt maturities, exclusive of capital lease commitments over the next five years are as follows: 2001 - $2,736,409; 2002 - $3,639,290; 2003 - $4,488,285; 2004 - $3,012,320 and 2005 - $3,443,646. 4. LEASES ------ The Partnership leases land and buildings for various restaurants under both operating and capital lease arrangements. Initial lease terms normally range from 5 to 20 years with renewal options generally available. The leases are net leases under which the Partnership pays the taxes, insurance, and maintenance costs, and they generally provide for both minimum rent payments and contingent rentals based on a percentage of sales in excess of specified amounts. Minimum and contingent rent payments for land and buildings leased from affiliates were $30,250 for each of the years ended December 26, 2000, December 28, 1999, and December 29, 1998. The Partnership also leases point-of-sale terminals for the restaurants under capital lease arrangements. The leases contain initial lease terms ranging from 3 to 4 years and are guaranteed by the majority owner of the Partnership. Total minimum and contingent rent expense under all operating lease agreements was as follows: 2000 1999 1998 ---- ---- ---- Minimum rentals $1,271,774 $1,263,873 $904,665 Contingent rentals 277,858 231,070 147,673 Future minimum payments under capital leases and noncancelable operating leases with an initial term of one year or more at December 26, 2000, are as follows: Operating Leases With Operating Capital Unrelated Leases With Leases Parties Affiliates ------ ------- ---------- 2001 $ 788,149 $1,053,966 $ 30,250 2002 647,578 900,767 7,563 2003 532,609 768,183 - 2004 239,825 609,307 - 2005 245,889 466,740 - Thereafter 1,348,888 1,457,209 - --------- --------- ------ Total minimum payments 3,802,938 $5,256,172 $ 37,813 Less interest 1,231,230 ========= ====== --------- 2,571,708 Less current portion 545,381 --------- $2,026,327 ========= Amortization of property under capital leases, determined on the straight-line basis over the lease terms totaled $360,575, $82,149 and $106,677 for the years ended December 26, 2000, December 28, 1999, and December 29, 1998, respectively. The amortization is included in depreciation and amortization expense in the accompanying consolidated statements of income. The cost of property under capital leases was $3,538,902 at December 26, 2000 and $2,077,751 at December 28, 1999. Accumulated amortization on such property under capital leases was $1,536,644 and $1,176,069 at December 26, 2000 and December 28, 1999, 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. 6. DISTRIBUTIONS TO PARTNERS ------------------------- On January 2, 2001, the Partnership declared a distribution of $.10 per Unit to all Unitholders of record as of January 12, 2001. The distribution is not reflected in the December 26, 2000 consolidated financial statements. 7. UNIT OPTION PLAN ---------------- The Partnership, RAM, and the Management Company adopted a Class A Unit Option Plan (the Plan) pursuant to which 75,000 Class A Units are reserved for issuance to employees, including officers of the Partnership, RAM, and the Management Company. The Plan is administered by the Managing General Partner which will, among other things, designate the number of Units and individuals to whom options will be granted. Participants in the Plan are entitled to purchase a designated number of Units at an option price equal to the fair market value of the Unit on the date the option is granted. Units under option are exercisable over a three-year period with 50% exercisable on the date of grant and 25% exercisable on each of the following two anniversary dates. The term of options granted under the Plan will be determined by the Managing General Partner at the time of issuance (not to exceed ten years) and will not be transferable except in the event of the death of the optionee, unless the Managing General Partner otherwise determines and so specifies in the terms of the grant. Units covered by options which expire or are terminated will again be available for option grants. A summary of Units under options in the Plan is as follows: Units Option Price ----- ------------ Balance at December 29, 1998, December 28, 1999 and December 26, 2000 625 $8.50 At December 26, 2000, options on 625 Units were exercisable. Unit options available for future grants totaled 48,611 at December 26, 2000 and December 28, 1999. 8. SALE OF RESTAURANT ------------------ In December 1999, the Partnership sold substantially all the assets, including land and building, of one restaurant. The Partnership recognized a gain of $196,608 on the sale. 9. LIFE INSURANCE SETTLEMENT ------------------------- During 1998, the Partnership collected on a life insurance policy purchased in 1993 on one of its original investors. This investor owned approximately 438,600 Class B and C units. The policy was purchased with the intent of providing the Partnership a means of repurchasing his units upon his death if his heirs so desired. The investor died in May of 1998. The Partnership recognized a gain of $875,533 upon receipt of the insurance proceeds. The units were repurchased on December 29, 1998 at $2.55 per unit for a total purchase price of $1,118,430. 10. CLASS B AND C RESTRICTED UNITS SOLD TO EMPLOYEES ------------------------------------------------ During 2000 and 1999, the Partnership issued 5,000 and 437,500 Class B and C Units, respectively, at $2.79 and $2.55 per unit, respectively, to certain employees in exchange for either a 10% down payment and notes receivable for the remaining 90% of the purchase price or for notes receivable for 100% of the purchase price. Notes receivable representing 40% or 50%, respectively, of the purchase price, together with interest thereon at a rate of 9%, will be repaid by the cash distributions paid on the units. Non-interest bearing notes receivable representing the remaining 50% of the purchase price will be reduced over a 4 1/2 year period through annual charges to compensation expense, included under the caption of "General and administrative - other" in the accompanying statements of income, as long as the employee remains employed by the Company. The units are subject to a repurchase agreement whereby the Partnership has agreed to repurchase the Units in the event the employee is terminated for an amount equal to the greater of issue price or fair market value at the time of termination. 11. PARTNERS' CAPITAL ----------------- During 2000, 1999 and 1998, the Partnership purchased 82,728, 24,144, and 304 Class A Income Preference Units for $268,866, $78,202 and $1,269, respectively. These Units were retired by the Partnership. 12. INVESTMENT IN MAGIC ------------------- On March 13, 1996, the Partnership purchased a 45% interest in Magic, a newly formed limited partnership, for $3.0 million in cash. Magic owns and operates twenty-six Pizza Hut restaurants in Oklahoma. In August 1998, Magic purchased a 25% interest in Magic from a former limited partner which effectively increased the Partnership's interest in Magic from 45% to 60%. Therefore, beginning August 11, 1998, Magic's financial statements were consolidated into the Partnership's consolidated financial statements. Prior to August 11, 1998, the Partnership accounted for its investment in Magic using the equity method of accounting. In connection with the consolidation, the Partnership recorded goodwill of $728,000 which represented the excess purchase price of the original equity investment in the net assets acquired, net of subsequent amortization. On July 26, 2000, APP purchased 39% of Magic from the Management Company for $2,500,000 cash and contingent consideration of $700,000. The $2,500,000 cash payment was financed by INTRUST Bank over five years at 9.5%. The contingent consideration will become due in the event that Magic's cash flow (determined on a 12 month trailing basis) exceeds $2.6 million at any time between January 1, 2001 and December 31, 2005. Payment of the remaining balance shall be made in Class B and Class C Units of the Partnership. In the event that Magic's cash flow does not reach this cash flow goal on or prior to December 31, 2005, APP shall owe no additional consideration. Upon completion of this purchase, the Partnership owns 99% of Magic. The Management Company is considered a related party in that one individual has controlling interest in both the Management Company and the Partnership's general partner. To the extent that the Partnership and the Management Company have common ownership, the transaction was recorded at the Management Company's historical cost. As a result of the transaction, the Partnership recorded goodwill of $$1,407,991 and cost in excess of carrying value of assets acquired of $534,962. Condensed financial information for Magic accounted for under the equity method of accounting through August 10, 1998 is as follows: (Unaudited) For the 32 weeks ended August 10, 1998 ----------- Statement of Operations: Revenues $10,087,820 Cost of sales 2,578,865 Operating expenses 7,071,979 ---------- Operating income 436,976 Other expense (principally interest) 453,087 ---------- Net loss $ (16,111) ========== The proforma unaudited results of operations for the year ended December 29, 1998, assuming the increase in the Partnership's interest in Magic from 45% to 60% occurred as of December 31, 1997, are as follows: (Unaudited) December 29, 1998 ------------ Net sales $53,631,453 Net income 806,324 Net income per Partnership unit $ 0.20 13. MAJOR SUPPLIER -------------- On January 31, 2000 AmeriServe, the Partnership's primary supplier of food ingredients and dry goods, filed for protection under the U.S. Bankruptcy Code. McLane Company, Inc., a subsidiary of Wal-Mart Stores, Inc., completed the purchase of AmeriServe's U.S. distribution business on November 30, 2000. As part of the sale, the Partnership agreed to a two-year contract extension and will incur a 5% increase in distribution fees. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS ----------------------------------- The carrying amount reported on the balance sheets for all financial instruments including cash and cash equivalents, notes receivable, and debt instruments approximates their fair value. 15. QUARTERLY FINANCIAL DATA (unaudited) ------------------------------------ Unaudited quarterly consolidated statement of income information for the years ended December 26, 2000 and December 28, 1999 is summarized below: First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 2000 ---- Net sales $14,799,542 $14,690,511 $15,088,559 $15,926,141 Income from operations 1,366,166 1,252,186 1,150,891 1,408,962 Net income 436,491 445,259 319,505 170,869 Basic and diluted net income per Partnership unit 0.11 0.12 0.09 0.05 1999 ---- Net sales $14,441,585 $14,334,285 $14,602,367 $14,441,978 Income from operations 950,810 1,120,209 938,556 979,925 Net income 188,644 317,549 53,070 755,291 Basic and diluted net income per Partnership unit 0.06 0.09 0.01 0.21 Fourth quarter 2000 net income includes a $409,016 loss on default in pooled loans. Fourth quarter 1999 net income includes a $423,900 cure of default in pooled loans. The loss on default and cure of default in pooled loans were recorded in the quarter the Partnership received notification from FMAC. (See Note 3) 16. SUPPLEMENTAL CASH FLOW INFORMATION ---------------------------------- 2000 1999 1998 ---- ---- ---- Cash paid during the year for interest $3,050,092 $2,906,241 $2,485,044 Noncash investing and financing activity: Issuance of units for notes receivable 12,555 1,047,000 - Distributions offset against notes receivable 117,551 77,024 - Unit repurchases offset against notes receivable 47,705 - - Capital leases entered into 1,461,151 - - Reduction of notes receivable recorded as compensation expense 54,385 13,952 - Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated March 2, 2001, accompanying the consolidated financial statements included in the Annual Report of American Restaurant Partners, L.P. on Form 10-K for the year ended December 26, 2000. We hereby consent to the incorporation by reference of said report in the Registration Statement of American Restaurant Partners, L.P. on Form S-8 (No. 33-20784). /s/Grant Thornton LLP Wichita, Kansas March 2, 2001