UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from _______ to _______
Commission File Number 1-9606
AMERICAN RESTAURANT PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 48-1037438
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 N. Woodlawn, Suite 3102
Wichita, Kansas 67208
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (316) 684-5119
Securities registered pursuant to Section 12(b) of the Act: None
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Class A Income Preference Units of American Stock
Limited Partner Interests Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed
all reports required to be 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 February 28, 1997 the aggregate market value of the
income preference units held by non-affiliates of the registrant
was $4,174,871.
PART I
Item 1. Business
- ------- --------
General Development of Business
- -------------------------------
American Restaurant Partners, L.P., a Delaware limited
partnership (the "Partnership"), was formed on April 27, 1987 for
the purpose of acquiring and operating through American Pizza
Partners, L.P., a Delaware limited partnership (the "Operating
Partnership"), substantially all of the restaurant operations of
RMC Partners, L.P. ("RMC") in connection with a public offering
of Class A Income Preference units by the Partnership. The
transfer of assets from RMC was completed on August 21, 1987 and
the Partnership commenced operations on that date. Subsequently,
the Partnership completed its public offering of 800,000 Class A
Income Preference units and received net proceeds of $6,931,944.
The Partnership is a 99% limited partner in the Operating
Partnership which conducts substantially all of the business for
the benefit of the Partnership. RMC American Management, Inc.
("RAM") is the managing general partner of both the Partnership
and the Operating Partnership. RAM and RMC own an aggregate 1%
interest in the Operating Partnership.
As of December 31, 1996, the Partnership owned and operated 56
"Pizza Hut" restaurants, 9 "Pizza Hut" delivery/carryout
facilities, and 2 convenience store locations (collectively, the
"Restaurants"). In 1996, the Partnership opened one new "Pizza
Hut" restaurant, four "Pizza Hut" delivery/carryout units and two
convenience store locations. The Partnership also relocated two
units, converting one from a "Pizza Hut" delivery/carryout unit
to a "Pizza Hut" restaurant. The following table sets forth the
states in which the Partnership's Pizza Hut Restaurants are
located:
Units Units Units
Open At Opened in Open At
12-26-95 1996 12-31-96
-------- --------- ---------
Georgia 8 -- 8
Louisiana 2 -- 2
Montana 17 -- 17
Texas 25 6 31
Wyoming 8 1 9
-- -- --
Total 60 7 67
== == ==
Financial Information About Industry Segments
- ---------------------------------------------
The restaurant industry is the only business segment in which
the Partnership operates.
Narrative Description of Business
- ---------------------------------
The Partnership operates the Restaurants under license from
Pizza Hut, Inc. ("PHI"), a subsidiary of PepsiCo, Inc. Since it
was founded in 1958, PHI has become the world's largest pizza
restaurant chain in terms of both sales and number of
restaurants. As of February 28, 1997, there were approximately
7,500 Pizza Hut restaurants and delivery/carryout facilities with
locations in all 50 states and in over 85 foreign countries. PHI
owns and operates approximately 60% of these restaurants and
independent franchisees own and operate approximately 40% of
these restaurants.
All Pizza Hut restaurants offer substantially the same menu
items, including several varieties of pizza as well as pasta,
salads and sandwiches. All food items are prepared from high
quality ingredients in accordance with PHI's proprietary recipes
and a special blend of spices available only from PHI. Pizza is
offered in several different sizes with a thin crust, hand tossed
traditional crust, or a thick crust, known as "Pan Pizza", as
well as with a wide variety of toppings. Food products not
prescribed by PHI may only be offered with the prior express
approval of PHI.
PHI maintains a research and development department which
develops new recipes and products, tests new procedures for food
preparation and approves suppliers for Pizza Hut restaurants.
During 1995, PHI successfully introduced "Stuffed Crust Pizza", a
pizza with a ring of mozzarella cheese hand-stuffed in the crust.
Pizza Hut restaurants are constructed in accordance with
prescribed design specifications and most are similar in exterior
appearance and interior decor. The typical restaurant building
is a one-story brick building with 1,800 to 3,000 square feet,
including kitchen and storage areas, and features a distinctive
red roof. Seating capacity ranges from 75 to 140 persons and the
typical property site will accommodate parking for 30 to 70 cars.
Building designs may be varied only upon request and when
required to comply with local regulations or for unique marketing
reasons.
PHI has developed a system for delivery of pizza and other
food products to customers' homes or offices. Delivery has
resulted in excellent growth for the Pizza Hut system from the
mid 1980's through the early 1990's. As growth in the delivery
segment is slowing, alternative sites of distribution is an area
of the business in which PHI will concentrate development for
future growth.
Franchise Agreements
- --------------------
General. The relationships between PHI and its franchisees
are governed by franchise agreements (the "Franchise Agreements").
Pursuant to the Franchise Agreements, PHI franchisees are
granted the right to establish and operate restaurants under the
Pizza Hut system within a designated geographic area. The
initial term of each Franchise Agreement is 20 years, but prior
to expiration, the franchisee may renew the agreement for an
additional 15 years, if not then in default. Renewals are
subject to execution of the then current form of the Franchise
Agreement, including the current fee schedules. Unless the
franchisee fails to develop its assigned territory, PHI agrees
not to establish, and not to license others to establish,
restaurants within the franchisee's territory.
Standards of Operation. PHI provides management training
for employees of franchisees and each restaurant manager is
required to meet certain training requirements. Standards of
quality, cleanliness, service, food, beverages, decor, supplies,
fixtures and equipment for Pizza Hut restaurants are prescribed
by PHI. Although new standards and products may be prescribed
from time to time, any revision requiring substantial
expenditures by franchisees must be first proven successful
through market testing conducted in 5% of all Pizza Hut
restaurants. Failure to comply with the established standards is
cause for termination of a Franchise Agreement by PHI and PHI has
the right to inspect each restaurant to monitor compliance.
Management of the Partnership believes that the existing
Restaurants meet or exceed the applicable standards; neither the
predecessors to RMC nor the Partnership has ever had a Franchise
Agreement terminated by PHI.
Advertising. All franchisees are required to join a
cooperative advertising association ("co-op") with other
franchisees within local marketing areas defined by PHI.
Contributions of 2% of each restaurant's monthly gross sales 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.
Effective January 1, 1996, PHI and the members of IPHFHA agreed
to decrease their contribution to the co-ops by 0.5% to 1.5% of
monthly gross sales and increase their national dues by 0.5% to
2.5% of monthly gross sales. The increase in national dues
allows for additional buying of network television.
Purchase of Equipment, Supplies and Other Products. The
Franchise Agreements require that all equipment, supplies and
other products and materials required for operation of Pizza Hut
restaurants be obtained from suppliers that meet certain
standards established and approved by PHI. PFS, a wholly-owned
subsidiary of PepsiCo, Inc., offers certain equipment, food
products and supplies for sale to franchisees for use in their
restaurants, but franchisees are not required to purchase such
items from PFS. Further, PHI limits its rate of profit on PFS's
sales of food, paper products and similar restaurant supplies to
franchisees to a 14% gross profit and a 2.5% net pre-tax profit.
Profits in excess of such amounts are returned annually on a
proportionate basis to franchisees purchasing products from PFS.
Because of these financial incentives, the Partnership purchases
substantially all of its equipment, supplies, and other products
and materials from PFS, except for produce items, which are
purchased locally for each Restaurant. Most of the equipment,
supplies, and other products and materials used in the
Restaurant's operations, however, are commodity items that are
available from numerous suppliers at market prices. Certain of
the items used in preparation of the Restaurant's products
currently are available only to Pizza Hut franchisees from PHI.
Franchise Fees. Franchisees must pay monthly service fees to
PHI based on each restaurant's gross sales. The monthly service
fee under each of the Franchise Agreements is 4% of gross sales,
or, if payment of a percentage of gross sales of alcoholic
beverages is prohibited by state law, 4.5% of gross sales of food
products and nonalcoholic beverages. Fees are payable monthly by
the 20th day after the end of each month and franchisees are
required to submit monthly gross sales data for each restaurant,
as well as quarterly and annual profit and loss data on each
restaurant, to PHI. In addition to the monthly service fees, an
initial franchise fee of $15,000 is payable to PHI prior to the
opening of each new restaurant.
No Transfer or Assignment 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 Agreement, confidential or proprietary
information provided to it by PHI, (iii) knowingly or through
gross negligence maintains false books or records or submits
false reports to PHI, (iv) conducts the business so as to
constitute an imminent danger to the public health, or (v)
receives notices of default on three (3) or more occasions in
twelve (12) months, or five (5) or more occasions in thirty-six
(36) months even if each default had been cured. A termination
under item (v) will affect only the individual restaurants in
default, unless the defaults relate to the franchisee's entire
operation, or are part of a common pattern or scheme, in which
case all of the franchisee's rights will be terminated.
Further, at its option, but only after thirty (30) days
written notice of default and the franchisee's failure to remedy
such default within the notice period, PHI may terminate a
Franchise Agreement if the franchisee (i) fails to make any
required payments or submit required financial or other data,
(ii) fails to maintain prescribed restaurant operating standards,
(iii) fails to obtain any required approval or consent, (iv)
misuses any of PHI's trademarks or otherwise materially impairs
its goodwill, (v) conducts any business under a name or trademark
that is confusingly similar to those of PHI, (vi) defaults under
any lease, sublease, mortgage or deed of trust covering a
restaurant, (vii) fails to procure or maintain required
insurance, or (viii) ceases operation without the prior consent
of PHI. Management believes that the Partnership is in
compliance in all material respects with its current Franchise
Agreements; neither the predecessors to RMC nor the Partnership
has ever had a Franchise Agreement terminated by PHI.
In addition to items (i) through (viii) noted in the preceding
paragraph, the Franchise Agreements allow PHI to also terminate a
Franchise Agreement after thirty (30) days written notice if the
franchisee attempts an unauthorized transfer of less than a
controlling interest. A termination under these items will
affect only the individual restaurants in default, unless the
defaults relate to the franchisee's entire operation, in which
case all of the franchisee's rights will be terminated.
Tradenames, Trademarks and Service Marks. "Pizza Hut" is a
registered trademark of PHI. The Franchise Agreements license
franchisees to use the "Pizza Hut" trademark and certain other
trademarks, service marks, symbols, slogans, emblems, logos,
designs and other indicia or origin in connection with their
Pizza Hut restaurants and all franchisees agree to limit their
use of such marks to identify their restaurants and products and
not to misuse or otherwise jeopardize such marks. The success of
the business of the Restaurants is significantly dependent on the
ability of the Partnership to operate using these marks and names
and on the continued protection of these marks and names by PHI.
Future Expansion. Under the terms of the Franchise
Agreements, the Partnership has the right to open additional
Pizza Hut restaurants within certain designated territories. The
Partnership is not obligated to open any new restaurants in 1996
or future years.
Seasonality
- -----------
Due to the seasonal nature of the restaurant business in
general, the locations of many of the Restaurants near summer
tourist attractions, and the severity of winter weather in the
areas in which many of the Restaurants are located, the
Partnership realizes approximately 40% of its operating profits
in periods six through nine (18 weeks). Although this seasonal
trend is likely to continue, the severity of these seasonal
cycles may be lessened to the extent that the Partnership
operates Pizza Hut restaurants in warmer climates and nontourist
population areas in the future. The Partnership does not
anticipate that the current seasonal trends will cause the
Partnership's negative working capital to deteriorate even
further during seasonal lows even if these trends continue.
Competition
- -----------
The retail restaurant business is highly competitive with
respect to trademark recognition, price, service, food quality
and location, and is often affected by changes in tastes, eating
habits, national and local economic conditions, population and
traffic patterns. The Restaurants compete with large regional
and national chains, including both fast food and full service
chains, as well as with independent restaurants offering
moderately priced food. Many of the Partnership's competitors
have more locations, greater financial resources, and longer
operating histories than the Partnership. The Restaurants
compete directly with other pizza restaurants for dine-in, take-
out and delivery customers.
Government Regulation
- ---------------------
The Partnership and the Restaurants are subject to various
government regulations, including zoning, sanitation, health,
safety and alcoholic beverage controls. Restaurant employment
practices are also governed by minimum wage, overtime and other
working condition regulations which, to date, have not had a
material effect on the operation of the Restaurants. The
Partnership believes that it is in compliance with all material
laws and regulations which govern its business. In order to
comply with the regulations governing alcoholic beverage sales in
Montana, Texas and Wyoming, the licenses permitting beer sales in
certain Restaurants in those states are held in the name of
resident persons or domestic entities to whom they were
originally issued, and are utilized by the Partnership under
lease arrangements with such resident persons or entities.
Because of the varying requirements of various state agencies
regulating liquor and beer licenses, the Partnership Agreement
provides that all Unitholders and all other holders of limited
partner interests must furnish the Managing General Partner with
all information it reasonably requests in order to comply with
any requirements of these state agencies, and that the
Partnership has the right to purchase all Units held by any
person whose ownership of Units would adversely affect the
ability of the Partnership to obtain or retain licenses to sell
beer or wine in any Restaurant.
Employees
- ---------
As of February 28, 1997, the Partnership did not have any
employees. The Operating Partnership had approximately 1,500
employees at the Restaurants. Each Restaurant is managed by one
restaurant manager and one or more assistant restaurant managers.
Many of the other employees are employed only part-time and, as
is customary in the restaurant business, turnover among the part-
time employees is high. Employees at one of the Restaurants are
covered by a collective bargaining agreement. The Restaurants
are managed by employees of Restaurant Management Company of
Wichita, Inc. (the "Management Company"), an affiliate of the
Partnership, which has its principal offices in Wichita, Kansas.
The Management Company has a total of 36 employees which will
devote all or a significant part of their time to management of
the Restaurants. In addition, the Partnership may employ certain
management officials of the Management Company on a part time
basis. Employee relations are believed to be satisfactory.
Financial Information About Foreign and Domestic Operations and
- ---------------------------------------------------------------
Export Sales
- ------------
The Partnership operates no restaurants in foreign countries.
Item 2. Properties
- ------------------
The following table lists the location by state of Restaurants
operated by the Partnership as of December 31, 1996.
Leased From Leased From
Unrelated Third Affiliates of the
Parties General Partners Owned Total
------- ---------------- ----- -----
Georgia 1 0 7 8
Louisiana 1 0 1 2
Montana 10 0 7 17
Texas 19 0 12 31
Wyoming 6 1 2 9
-- -- -- --
Total 37 1 29 67
== == == ==
Four of the properties owned by the Partnership are subject to
ground leases from unrelated third parties. The property leased
from an affiliate of the General Partners is subject to a
mortgage or deed of trust. Most of the properties, including
that owned by an affiliate of the General Partners are leased for
a minimum term of at least five years and are subject to one to
four five year renewal options. Four leases with initial terms
of less than five years contain renewal options extending to at
least 1998. A low volume delivery/carryout facility is being
leased on an annual basis with the lease automatically renewing
at the end of each term. The Partnership believes that the leases
with shorter terms can be renewed for multiple year periods, or
the property purchased, without significant difficulty or
unreasonable expense.
The amount of rent paid is either fixed or includes a fixed
rental plus a percentage of the Restaurant's sales, subject, in
some cases, to maximum amounts. The leases require the
Partnership to pay all real estate taxes, insurance premiums,
utilities, and to keep the property in general repair.
Pizza Hut restaurants are constructed in accordance with
prescribed design specifications and most are similar in exterior
appearance and interior decor. The typical restaurant building
is a one-story brick building with 1,800 to 3,000 square feet,
including kitchen and storage areas, and features a distinctive
red roof. Seating capacity ranges from 75 to 140 persons and the
typical property site will accommodate parking for 30 to 70 cars.
Building designs may be varied only upon request and when
required to comply with local regulations or for unique marketing
reasons. Typical capital costs for a restaurant facility are
approximately $150,000 for land, $250,000 for the building and
$135,000 for equipment and furnishings. Land costs can vary
materially depending on the location of the site.
Delivery/carryout facilities vary in size and appearance. These
facilities are generally leased from unrelated third parties.
Item 3. Legal Proceedings
- --------------------------
As of December 31, 1996, the Partnership was not a party to
any pending legal proceedings material to its business.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
PART II
Item 5. Market for the Registrant's Class A Income Preference
- --------------------------------------------------------------
Units and Related Security Holder Matters
- -----------------------------------------
The Partnership's Class A Income Preference Units are traded
on the American Stock Exchange under the symbol "RMC". Market
prices for units during 1996 and 1995 were:
Calendar Period High Low
- -------------------------------------------------------
1996
- ----
First Quarter 7-1/8 6
Second Quarter 7-5/16 6-7/16
Third Quarter 7 5-7/8
Fourth Quarter 6-1/8 5-3/8
1995
- ----
First Quarter 6-7/8 5-7/8
Second Quarter 6-3/4 5-1/2
Third Quarter 7 5-3/4
Fourth Quarter 6-15/16 5-3/4
As of December 31, 1996, approximately 1,650 unitholders owned
American Restaurant Partners, L.P. Class A Income Preference
Units of limited partner interest. Information regarding the
number of unitholders is based upon holders of record excluding
individual participants in security position listings.
Cash distributions to unitholders were:
Per Per
Class A Class B & C
Record Date Payment Date Unit Unit
- ------------------------------------------------------------------
1996
- ----
January 12, 1996 January 26, 1996 $0.160 $0.160
April 12, 1996 April 26, 1996 0.260 0.260
July 12, 1996 July 26, 1996 0.160 0.160
October 12, 1996 October 25, 1996 0.160 0.160
----- -----
Cash distributed during 1996 $0.740 $0.740
===== =====
1995
- ----
January 12, 1995 January 27, 1995 $0.160 $0.160
April 12, 1995 April 28, 1995 0.160 0.160
July 12, 1995 July 28, 1995 0.160 0.160
October 12, 1995 October 27, 1995 0.260 0.260
----- -----
Cash distributed during 1995 $0.740 $0.740
===== =====
The Partnership will make quarterly distributions of "Cash
Available for Distribution" with respect to the Income
Preference, Class B Units, and Class C Units. "Cash Available
for Distribution", consists, generally, of all operating revenues
less operating expenses (excluding noncash items such as
depreciation and amortization), capital expenditures for existing
restaurants, interest and principal payments on Partnership debt,
and such cash reserves as the Managing General Partner may deem
appropriate. Therefore, the Partnership may experience quarters
in which there is no Cash Available for Distribution. The
Partnership may retain cash during certain quarters and
distribute it in later quarters in order to make quarterly
distributions more even.
<TABLE>
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
<CAPTION>
December 31, December 26, December 27, December 28, December 29,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Income statement data:
Net sales $ 40,425 $ 40,004 $ 37,445 $ 36,070 $ 34,606
Income from operations 3,174 3,890 3,587 3,688 2,966
Net income 1,584 2,481 2,385 3,397 3,418
Net income per Class A
Income Preference Unit (a) 0.40 0.63 1.04 1.72 1.72
Balance sheet data:
Total assets $ 23,745 $ 16,134 $ 16,445 $ 17,085 $ 15,906
Long-term debt 18,859 10,525 10,787 11,204 8,539
Obligations under capital
leases 1,665 1,732 1,800 1,903 2,115
Partners capital (deficiency):
General Partners (5) (3) (3) (3) (3)
Class A 6,295 6,573 6,729 6,751 6,626
Class B and C (5,811) (4,688) (4,479) (4,416) (4,178)
Cost in excess of carrying
value of assets acquired (1,324) (1,324) (1,324) (1,324) (820)
Unrealized loss on investment securities (44) -- -- -- --
Notes receivable from employees -- (6) (32) (76) --
Cash dividends declared per unit:
Class A Income Preference 0.74 0.74 1.07 1.60 1.50
Class B 0.74 0.74 0.52 0.50 0.40
Class C 0.74 0.74 0.52 0.50 0.40
Statistical data:
Capital expenditures: (b)
Existing Restaurants $ 2,612 $ 1,185 $ 1,093 $ 2,148 $ 326
New Restaurants 4,136 -- 1,038 599 44
Average weekly sales per
Restaurant: (c)
Red Roof 12,544 12,862 12,278 12,113 10,712
Delivery/carryout facility/C-store 10,547 12,463 11,536 10,636 8,708
Restaurants in operation
at end of period 67 60 60 58 58
</TABLE>
NOTES TO SELECTED FINANCIAL DATA
(a) Net income per Class A Income Preference Unit was determined
by allocating the earnings in the same manner required by the
Partnership Agreements for the allocation of taxable income and
loss. Therefore, net income of the Operating Partnership has
been allocated to the limited partners who are holders of Units
first until the amount allocated equals the preference amount.
The remaining net income is allocated to all partners in
accordance with their respective Units in the Partnership with
all outstanding Units being treated equally. The preference
requirement was satisfied in May of 1994. Upon expiration of the
preference, net income was allocated equally to all outstanding
units.
(b) Capital expenditures include the cost of land, buildings, new
and replacement restaurant equipment and refurbishment of
leasehold improvements. Capital expenditures for existing
restaurants represent such capitalized costs for all restaurants
other than newly constructed restaurants.
(c) Average weekly sales were calculated by dividing net sales by
the weighted average number of restaurants open during the
period. The quotient was then divided by the number of days in
the period multiplied times seven days.
Item 7. Management's Discussion and Analysis of Consolidated
- -----------------------------------------------------------------
Financial Condition and Results of Operations
- ---------------------------------------------
Results of Operations
- ---------------------
The following discussion compares the Partnership's results for
the years ended December 31, 1996, December 26, 1995 and December
27, 1994. Comparisons of 1996 to 1995 are affected by an
additional week of results in the 1996 reporting period. Because
the Partnership's fiscal year ends on the last Tuesday in
December, a fifty-third week is added every five or six years.
This discussion should be read in conjunction with the Selected
Financial Data and the Consolidated Financial Statements included
elsewhere herein.
Net Sales
- ---------
Net sales for the year ended December 31, 1996 increased $421,000
to $40.4 million, a 1.1% increase over the year ended December
26, 1995. The additional week contributed approximately 2 points
to the sales growth. Sales for comparable restaurants decreased
2.1%. This decrease reflects the impact of sales increases
in 1995 due to the successful introduction of Stuffed Crust
Pizza and an increase in competition in the Texas market during
1996.
Net sales in 1995 increased $2.6 million to $40 million, a 6.8%
increase over 1994. Sales for comparable restaurants increased
5.6% over the prior year. This increase is primarily the result
of the success of a new product, Stuffed Crust Pizza, which was
introduced in April. Stuffed Crust is a pizza with a ring of
mozzarella cheese hand-stuffed in the crust.
Income From Operations
- ----------------------
Income from operations in 1996 decreased $716,000 from $3,890,000
to $3,174,000, a decrease of 18.4% from 1995. As a percentage of
net sales, income from operations decreased from 9.7% in 1995 to
7.9% in 1996. Cost of sales increased as a percentage of net
sales from 26.5% in 1995 to 26.6% in 1996. Restaurant labor and
benefits increased from 26.1% of net sales in 1995 to 26.4% of
net sales in 1996 due to the increase in minimum wage and
inefficiencies associated with several new store openings.
Advertising expense increased as a percentage of net sales from
6.4% of net sales in 1995 to 6.8% in 1996 due to increased
competition, grand opening expenses for new stores and efforts to
minimize sales decreases experienced from the maturation of last
year's successful introduction of Stuffed Crust Pizza. Operating
expenses were 18.4% of net sales in both 1995 and 1996. General
and administrative expense decreased from 2.2% of net sales in
1995 to 1.9% of net sales in 1996 primarily due to lower
bonuses paid on operating results. Depreciation and amortization
as a percentage of net sales increased from 3.8% in 1995 to
4.2% in 1996 due to the opening of new restaurants and remodels
of existing restaurants. Equity in loss of affiliate amounted
to 1.0% of net sales in 1996 reflecting the Partnership's
share of operations in Oklahoma Magic, L.P. ("Magic") acquired in
March 1996.
Income from operations for the year ended December 26, 1995
increased $303,000 to $3,890,000, an 8.4% increase over the prior
year. As a percentage of net sales, income from operations
increased from 9.6% in 1994 to 9.7% in 1995. Cost of sales
increased as a percentage of net sales from 25.8% in 1994 to
26.5% in 1995. This increase is a result of promoting items,
including Stuffed Crust Pizza, that have higher food costs and an
increase in cheese prices. Restaurant labor and benefits
decreased from 27.0% of net sales in 1994 to 26.1% of net sales
in 1995 primarily due to lower benefit costs and the efficiencies
achieved at higher sales levels. Advertising increased slightly
from 6.3% of net sales in 1994 to 6.4% of net sales in 1995.
Other restaurant operating expenses as a percentage of net sales
decreased from 18.5% in 1994 to 18.4% in 1995. General and
administrative expense increased to 9.1% of net sales in 1995
from 9.0% of net sales in 1994. Depreciation and amortization
expense remained at 3.8% of net sales for both 1994 and 1995.
Net Income
- ----------
Net income decreased $897,000 from $2,481,000 for the year ended
December 26, 1995 to $1,584,000 for the year ended December 31,
1996. This decrease is a result of the $716,000 decrease in
operating income noted above, which includes the $376,000 loss
arising from the Partnership's equity investment in Magic and an
increase in interest expense of $381,000 due to additional debt
primarily used to fund the acquisition of a 45% interest in Magic
which operates thirty-two Oklahoma restaurants and to develop
new restaurants for the Partnership. This decrease was partially
offset by a gain on fire settlement of $158,000. A $142,000 loss
on the early extinguishment of debt was included in 1995.
Net income increased $96,000 to $2,481,000 for the year ended
December 26, 1995 compared to $2,385,000 for the year ended
December 27, 1994. This increase is a result of the increase in
income from operations noted above which was partially offset by
an increase in interest expense of approximately $61,000 and a
$142,000 loss on the early extinguishment of debt which was
refinanced to obtain a favorable interest rate.
Liquidity and Capital Resources
- -------------------------------
The Partnership generates its principal source of funds from net
cash provided by operating activities. Net cash provided by
operating activities is expected to provide sufficient funds to
meet planned capital expenditures for recurring replacement of
equipment in existing restaurants, to service debt obligations
and to make quarterly cash distributions.
At December 31, 1996, the Partnership had a working capital
deficiency of $3,935,000 compared to a deficiency of $2,548,000
at December 26, 1995. The increase in working capital deficiency
is primarily a result of a $603,000 decrease in cash combined
with a $434,000 increase in accounts payable and accrued
liabilities along with a $431,000 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.
Master Limited Partnerships (MLPs) are not currently subject to
federal or state income taxes. However, under the Omnibus Budget
Reconciliation Act of 1987, certain MLPs, including the
Partnership, will be taxed as corporations beginning in 1998.
Net Cash Provided by Operating Activities
- -----------------------------------------
During 1996, net cash provided by operating activities amounted
to $4,131,000, a decrease of $362,000 from 1995. This decrease is
attributable to the decrease in net income which was partially
offset by an increase in accounts payable and accrued
liabilities.
Investing Activities
- --------------------
Property and equipment expenditures represent the largest
investing activity by the Partnership. Capital expenditures for
1996 were $6,748,000 of which $4,136,000 was for the development
of new restaurants, $1,377,000 was for replacement of equipment
in existing restaurants and $977,000 was for remodels of existing
restaurants. The remaining $258,000 was used to purchase the
land and building of a previously leased Pizza Hut restaurant
from an unrelated party. In addition, the Partnership invested
$3,000,000 in connection with its acquisition of a 45% interest
in Oklahoma Magic, L.P.
Financing Activities
- --------------------
Cash distributions paid in 1996 totaled $2,942,000 and amounted
to $0.74 per Class A Income Preference Unit. The Partnership's
distribution objective, generally, is to distribute all operating
revenues less operating expenses (excluding noncash items such as
depreciation and amortization), capital expenditures for existing
restaurants, interest and principal payments on Partnership debt,
and such reserves as the managing General Partner may deem
appropriate. From the inception of the Partnership in August,
1987, the Partnership paid a preference payment of $0.275 each
quarter until such time as the Class A Income Preference units
had received $10.00 in aggregate cash distributions. While the
preference distribution was in effect, net income was allocated
to the Class A Income Preference units until the amount allocated
equaled the preference amount. The remaining net income was
allocated to all units in accordance with their ratio to all
outstanding units. The quarterly preference requirement was
satisfied with the May 6, 1994 distribution. Upon expiration of
the preference, net income and distributions were allocated
equally to all outstanding units.
During 1996, the Partnership's proceeds from long term borrowings
amounted to $16,021,000. These proceeds were used as follows:
$3,000,000 to fund the acquisition of a 45% interest in a newly
formed limited partnership that owns and operates thirty-two
Pizza Hut restaurants in Oklahoma, $3,457,000 to develop new
restaurants, $641,000 for remodels of existing restaurants,
$260,000 to fund the acquisition of the land and building of a
previously leased restaurant, $2,129,000 to replenish operating
capital and $6,534,000 to refinance debt to obtain more favorable
terms. The Partnership plans to open four new restaurants in
1997. Management estimates that approximately $1,925,000 will be
needed to finance the construction of new restaurants.
Management anticipates spending $552,000 in 1997 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.
On July 5, 1995, the managing general partner authorized the
purchase by the Partnership of up to 300,000 Class A Income
Preference Units of limited partner interests between July 5,
1995 and December 31, 1996. Under such authorization, the
Partnership purchased and retired 10,455 Class Income Preference
Units.
On March 13, 1996, the Partnership purchased a 45% interest in a
newly formed limited partnership, Oklahoma Magic, L.P. ("Magic"),
that owns and operates thirty-two Pizza Hut restaurants in
Oklahoma for $3,000,000 in cash. The purchase was financed by
the Partnership from a short-term note payable entered into with
Intrust Bank which was refinanced on a long-term basis on July
30, 1996. The remaining partnership interests in Magic are held
by Restaurant Management Company of Wichita, Inc. (29.25%), an
affiliate of the Partnership, Hospitality Group of Oklahoma, Inc.
(HGO) (25%), the former owners of the thirty-two Oklahoma
restaurants, and RMC American Management, Inc. (RAM)(.75%), the
managing general partner of Magic. In November 1996, Magic
notified HGO that it is seeking to terminate HGO's interest in
Magic and to purchase such interest pursuant to the Magic
partnership agreement as a result of HGO's alleged violations of
certain matters pursuant to such agreement. HGO has denied such
violations and the parties are continuing to seek to resolve such
matters. In the event Magic ultimately prevails, it is likely
that the Partnership's interest in Magic would be increased from
45% to 60%; however, the Partnership would not likely be required
to make any additional contributions to Magic.
This report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act, and Section 21E
of the Exchange Act which are intended to be covered by the safe
harbors created thereby. Although the Partnership believes that
the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be
inaccurate, and therefore, there can be no assurance that the
forward-looking statements included in this report will prove to
be accurate. Factors that could cause actual results to differ
from the results discussed in the forward-looking statements
include, but are not limited to, consumer demand and market
acceptance risk, the effect of economic conditions, including
interest rate fluctuations, the impact of competing restaurants
and concepts, the cost of commodities and other food products,
labor shortages and costs and other risks detailed in the
Partnership's Securities and Exchange Commission filings.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
See the consolidated financial statements and supplementary
data listed in the accompanying "Index to Consolidated Financial
Statements and Supplementary Data" on Page F-1 herein.
Information required for financial statement schedules under
Regulation S-X is either not applicable or is included in the
consolidated financial statements or notes thereto.
Item 9. Changes in and Disagreements with Accountants on
- -----------------------------------------------------------------
Accounting and Financial Disclosure
- -----------------------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
RAM, as the Managing General Partner, is responsible for the
management and administration of the Partnerships under a
Management Services Agreement with the Operating Partnership.
Partnership management services include, but are not limited to:
preparing and reviewing projections of cash flow, taxable income
or loss, and working capital requirements; conducting periodic
physical inspections, market surveys and continual Restaurant
reviews to determine when assets should be sold and, if so,
determining acceptable terms of sale; arranging any debt
financing for capital improvements or the purchase of assets;
supervising any litigation involving the Partnerships; preparing
and reviewing Partnership reports; communicating with
Unitholders; supervising and reviewing Partnership bookkeeping,
accounting and audits; supervising the presentation of and
reviewing Partnership state and federal tax returns; personnel
functions, and supervising professionals employed by the
Partnerships in connection with any of the foregoing, including
attorneys, accountants and appraisers.
The direct management of the Restaurants is performed by the
Management company pursuant to a substantially identical
Management Services Agreement with RAM. As compensation for
management services, the Management Company will receive a
management fee equal to 7% of the gross sales of the Restaurants
and will be reimbursed for the cost of certain products purchased
for use directly in the operation of the Restaurants and for
outside legal, accounting, tax, auditing, advertising, and
marketing services. Certain other expenses incurred by the
Management Company which relate directly to the operation of the
Restaurants, including insurance and profit sharing and incentive
bonuses and related payroll taxes for supervisory personnel,
shall be paid by the Operating Partnership through RAM.
Set forth below is certain information concerning the director
and executive officers of both RAM and the Management Company.
Present Position with the Management
Company and Business Experience for
Name Age Past 5 Years
- ---- --- ----------------------------------------
Hal W. McCoy 51 Chairman, Chief Executive Officer, President
and sole director. McCoy holds a Bachelor
of Arts degree from the University of
Oklahoma. From 1970 to 1974, he was at
different times Marketing Manager at PHI,
where he was responsible for consumer
research, market research, and market
planning, and Systems Manager, where he
was responsible for the design and
installation of PHI's first management
data processing system. In 1974, he
founded the predecessor to the Management
Company and today owns or has controlling
ownership in entities operating a combined
total of 128 franchised "Pizza Hut" and
"Long John Silver's" restaurants.
J. Leon Smith 54 Vice President. Smith holds a Bachelor of
Science degree in Hotel and Restaurant
Management from Oklahoma State University
and a Juris Doctorate from the University of
Oklahoma. He has been employed by McCoy
since 1974, first as Director of Operations
for the Long John Silver's division and then
as Director of Real Estate Development and
General Counsel.
Item 11. Executive Compensation
- -------------------------------
The executive officers of the Management Company perform
services for all of the restaurants managed by the Management
Company, including the Restaurants. Cash compensation of
executive officers of the Management Company who are also
officers of affiliated companies is allocated for accounting
purposes among the various entities owning such restaurants on
the basis of the number of restaurants each entity owns. Only
the compensation of the Chief Executive Officer is shown below as
the other officers' cash compensation allocable to the
Restaurants does not exceed $100,000. RAM nor the Operating
Partnership compensates their officers, directors or partners for
services performed, and the salaries of the executive officers of
the Management Company are paid out of its management fee and not
directly by the Partnership.
SUMMARY COMPENSATION TABLE
Name and Annual Compensation
Principal ------------------------
Position Year Salary Bonus
--------- ---- ------ ------
Hal W. McCoy 1996 63,092 58,809
President and 1995 76,498 62,889
Chief Executive Officer 1994 93,386 52,679
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 1996, 1995 and 1994 to Mr.
McCoy and allocated to the Restaurants are included in the
amounts shown in the cash compensation amounts set forth above.
The total amount allocated to the Restaurants under the Incentive
Bonus Plan for the fiscal year ended December 31, 1996 was
$342,650 of which $58,809 was paid to all executive officers as a
group. Bonuses paid under the Incentive Bonus Plan are paid by
the Partnership.
The Incentive Bonus Plan in effect for the fiscal year ending
December 30, 1997 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 threshold of $1,896,800. This
threshold is subject to change with the opening of new
restaurants. For the fiscal year ended December 31, 1996 the
Partnership's income from operations plus depreciation and
amortization expenses was $4,476,433.
Class A Unit Option Plan
- ------------------------
The Partnership, the Operating Partnership, RAM and the
Management Company have adopted a Class A Unit Option Plan (the
"Plan") pursuant to which 75,000 Class A Units are reserved for
issuance to employees, including officers, of the Partnership,
the Operating Partnership, RAM and the Management Company.
Participants will be entitled to purchase a designated number of
Units at an option price which shall be equal to the closing
sales price of Units on the American Stock Exchange on the date
of the grant of the option. Options granted under the Plan will
be for a term to be determined by the Managing General Partner at
the time of issuance (not to exceed ten years) and shall not be
transferable except in the event of the death of the optionee,
unless the Managing General Partner otherwise determines and so
specifies in the terms of the grant. The Plan is administered by
the Managing General Partner which, among other things,
designates the individuals to whom options are granted, the
number of Units for which such options are to be granted and
other terms of grant. The executive officers have no outstanding
options at December 31, 1996.
Item 12. Security Ownership of Certain Beneficial Owners and
- -----------------------------------------------------------------
Management
- ----------
PRINCIPAL UNITHOLDERS
The following table sets forth, as of February 28, 1997,
information with respect to persons known to the Partnership to
be beneficial owners of more than five percent of the Class A
Income Preference Units, Class B or Class C Units of the
Partnership:
Name & Address Amount & Nature
Title of Beneficial of Beneficial Percent
of Class Owner Ownership of Class
- -------- -------------- --------------- --------
Class A Income
Preference Units None
Class B Hal W. McCoy 698,479 (1) 58.43%
555 N. Woodlawn
Suite 3102
Wichita, KS 67208
Class B Daniel Hesse 204,401 (2) 17.10%
555 N. Woodlawn
Suite 3102
Wichita, KS 67208
Class C Hal W. McCoy 1,341,934 (1) 67.80%
555 N. Woodlawn
Suite 3102
Wichita, KS 67208
Class C Daniel Hesse 234,199 (2) 11.83%
555 N. Woodlawn
Suite 3102
Wichita, KS 67208
(1) Hal W. McCoy beneficially owns 81.31% of RMC Partners, L.P.
which owns 900,155 Class B Units and 1,604,588 Class C Units.
Mr. McCoy owns 91.67% of RMC American Management, Inc. which owns
3,840 Class C Units.
(2) Daniel Hesse beneficially owns 14.48% of RMC Partners, L.P.
which owns 900,155 Class B Units and 1,604,588 Class C Units.
Mr. Hesse owns 4.17% of RMC American Management, Inc. which owns
3,840 Class C Units.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of February 28, 1997, the
number of Class A Income Preference Units, Class B Units, or
Class C Units beneficially owned by the director and by the
director and executive officers of both RAM and the Management
Company as a group.
Title Name of Amount & Nature Percent
of Class Beneficial Owner of Beneficial Ownership of Class
- --------- ---------------- ----------------------- --------
B Hal W. McCoy 698,479 (1) 58.43%
C Hal W. McCoy 1,341,934 (1) 67.80%
B Director & all 743,592 (1) 62.20%
officers as a group
(2 Persons)
C Director & all 1,419,521 (1) 71.72%
officers as a group
(2 Persons)
(1) See the table under "Principal Unitholders"
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
One of the Restaurants is located in a building owned by an
affiliate of the General Partners. The lease provides for
minimum annual rentals of $25,000 and is subject to additional
rentals based on a percentage of sales in excess of a specified
amount. The lease is a net lease, under which the lessee pays
the taxes, insurance and maintenance costs. The lease is for an
initial term of 15 years with options to renew for three
additional five-year periods. Although this lease was not
negotiated at arm's length, RMC believes that the terms and
conditions thereof, including the rental rate, is not less
favorable to the Partnership than would be available from
unrelated parties.
Pursuant to the Management Services Agreements (Agreements)
entered into June 26, 1987, the Restaurants are managed by the
Management Company for a fee equal to 7% of the gross sales of
the Restaurants and reimbursement of certain costs incurred for
the direct benefit of the Restaurants. Neither the terms and
conditions of the Agreements, nor the amount of the fee were
negotiated at arm's length. Based on prior experience in
managing the Restaurants, however, the Managing General Partner
believes that the terms and conditions of the Management Services
Agreement, including the amount of the fee, are fair and
reasonable and not less favorable to the Partnership than those
generally prevailing with respect to similar transactions between
unrelated parties. The 7% fee approximated the actual
unreimbursed costs incurred by the Managing General Partner in
managing the Restaurants when the Agreements were entered into in
June of 1987. The 7% fee remains in effect for the life of the
Agreements which expire December 31, 2007.
PART IV
Item 14. Exhibits, Financial Statements and Reports
- ----------------------------------------------------
on Form 8-K
- -----------
(a) 1.
Financial statements
--------------------
See "Index to Consolidated Financial Statements and
Supplementary Data" which appears on page F-1 herein.
3. Exhibits
--------
The exhibits filed as part of this annual report are
listed in the "Index to Exhibits" at page 28.
(b) Reports on Form 8-K
-------------------
The Partnership filed a Form 8-K, dated March 13, 1996,
reporting the acquisition of a 45% interest in Oklahoma
Magic, L.P. a newly formed limited partnership that owns
and operates thirty-two Pizza Hut restaurants in Oklahoma.
During the third quarter of 1995, the Partnership filed a
Form 8-K, dated July 5, 1995, reporting that the managing
general partner had authorized the purchase by the
Partnership of up to 300,000 Class A Income Preference
Units of limited partner interests.
INDEX TO EXHIBITS
(Item 14(a))
Exhibit
No. Description of Exhibits Page/Notes
- ---- ----------------------- ----------
3.1 Amended and Restated Certificate of Limited
Partnership of American Restaurant Partners, L.P. A
3.2 Amended and Restated Agreement of Limited
Partnership of American Restaurant Partners, L.P. A
3.3 Amended and Restated Certificate of Limited
Partnership of American Pizza Partners, L.P. A
3.4 Amended and Restated Agreement of Limited
Partnership of American Pizza Partners, L.P. A
4.1 Form of Class A Certificate A
4.2 Form of Application for Transfer of Class A Units A
10.1 Management Services Agreement dated
June 26, 1987 between American Pizza
Partners, L.P. and RMC American Management, Inc. A
10.2 Management Services Agreement dated
June 26, 1987 between RMC American
Management, Inc. and Restaurant Management
Company of Wichita, Inc. A
10.3 Form of Superseding Franchise Agreement
between the Partnership and Pizza Hut, Inc.
and schedule pursuant to Item 601 of
Regulation S-K. A
10.4 Form of Blanket Amendment to Franchise Agreements A
10.5 Incentive Bonus Plan A
10.6 Class A Unit Option Plan B
10.7 Revolving Term Credit Agreement dated
June 29, 1987 between American Pizza
Partners, L.P. and the First National Bank
in Wichita C
10.8 Form of 1990 Franchise Agreement between the
Partnership and Pizza Hut, Inc. and schedule
pursuant to Item 601 of Regulation S-K D
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
11. Computation of Earnings per Partnership Interest X-1
23.1 Consent of Ernst & Young LLP F-25
27.1 Financial Data Schedule F
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. Submitted electronically to the Securities and Exchange
Commission for information only and not filed.
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: 3/28/97 By: /s/ Hal W. McCoy
------- -----------------------
Hal W. McCoy
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Name Title Date
- ---- ----- ----
/s/ Hal W. McCoy 3/28/97
________________ President and Chief Executive Officer _______
Hal W. McCoy (Principal Executive Officer)
of RMC American Management, Inc.
/s/Terry Freund 3/28/97
_______________ Chief Financial Officer _______
Terry Freund
Index to Consolidated Financial Statements
and Supplementary Data
The following consolidated financial statements of American
Restaurant Partners, L.P. are included in Item 8:
Page
----
Report of Independent Auditors . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1996
and December 26, 1995. . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Income for the years ended
December 31, 1996, December 26, 1995,
and December 27, 1994 . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Partners' Capital
(Deficiency) for the years ended December 31, 1996,
December 26, 1995, and December 27, 1994. . . . . . . . F-6
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, December 26, 1995,
and December 27, 1994 . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements. . . . . . . . . F-8
Supplementary Data (Unaudited). . . . . . . . . . . . . . . F-24
All financial statement schedules have been omitted since the
required information is not present.
REPORT OF INDEPENDENT AUDITORS
The General Partners and Limited Partners
American Restaurant Partners, L.P.
We have audited the accompanying consolidated balance sheets of
American Restaurant Partners, L.P. as of December 31, 1996 and
December 26, 1995, and the related consolidated statements of
income, partners' capital (deficiency), and cash flows for each
of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above, present fairly, in all material respects, the consolidated
financial position of American Restaurant Partners, L.P. at
December 31, 1996 and December 26, 1995, and the consolidated
results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/Ernst & Young LLP
Wichita, Kansas
March 26, 1997
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 31, December 26,
ASSETS 1996 1995
- ---------------------------------- ------------ -----------
Current assets:
Cash and cash equivalents (Note 8) $ 178,826 $ 782,348
Certificate of deposit (Notes 8 and 11) 157,635 152,532
Investments available for sale,
net of fair market value adjustment
of $44,325 in 1996 (Note 14) 132,751 79,687
Accounts receivable 155,724 76,605
Due from affiliates (Note 2) 19,415 24,549
Notes receivable from
affiliates - current portion (Note 2) 84,631 30,872
Inventories 344,003 300,413
Prepaid expenses 212,008 144,036
---------- ----------
Total current assets 1,284,993 1,591,042
Property and equipment, at cost
(Notes 3 and 4):
Land 3,422,889 2,592,607
Buildings 7,507,937 6,239,359
Construction in progress 331,080 --
Restaurant equipment 10,898,243 8,706,682
Leasehold rights and building improvements 4,643,667 2,838,835
Property under capital leases 2,369,199 2,369,199
---------- ----------
29,173,015 22,746,682
Less accumulated depreciation and amortization 11,552,747 10,270,929
---------- ----------
17,620,268 12,475,753
Other assets:
Franchise rights, net of accumulated
amortization of $707,114 ($625,724 in 1995) 1,084,080 1,099,470
Notes receivable from affiliates (Note 2) 113,410 157,083
Deposit with affiliate (Note 2) 350,000 330,000
Investment in Oklahoma Magic, L.P. (Note 15) 2,624,368 --
Other 667,964 480,998
---------- ----------
$ 23,745,083 $ 16,134,346
========== ==========
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 31, December 26,
LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY) 1996 1995
- ---------------------------------------------- ----------- -----------
Current liabilities:
Accounts payable $ 2,115,502 $ 1,903,977
Due to affiliates (Note 2) 88,654 62,292
Accrued payroll and other taxes 545,816 319,902
Accrued liabilities 1,008,937 786,598
Current portion of long-term debt (Notes 3 and 8) 1,428,630 997,814
Current portion of obligations
under capital leases (Note 4) 32,760 68,833
---------- ----------
Total current liabilities 5,220,299 4,139,416
Other noncurrent liabilities 197,308 86,308
Long-term debt (Note 3 and 8) 17,430,692 9,526,948
Obligations under capital leases (Note 4) 1,632,284 1,662,746
General Partners' interest
in Operating Partnership 153,737 167,530
Commitments (Note 11) -- --
Partners' capital (deficiency)
(Notes 5,6,7,10,12 and 13):
General Partners (4,634) (3,290)
Limited Partners:
Class A Income Preference, authorized 875,000
units; issued 815,309 units 6,294,520 6,572,923
Classes B and C, issued 1,178,384 and
1,951,025 class B and C units, respectively
(1,184,046 and 1,959,874 units in 1995,
respectively) (5,811,117) (4,688,254)
Cost in excess of carrying value
of assets acquired (1,323,681) (1,323,681)
Unrealized loss in investment
securities (Note 14) (44,325) --
Notes receivable from employees -- (6,300)
---------- ----------
Total partners' capital (deficiency) (889,237) 551,398
---------- ----------
$ 23,745,083 $ 16,134,346
========== ==========
See accompanying notes.
<TABLE>
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996,
December 26, 1995 and December 27, 1994
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 40,424,953 $ 40,004,295 $ 37,445,069
Operating costs and expenses:
Cost of sales 10,762,986 10,599,422 9,645,875
Restaurant labor and benefits (Note 12) 10,672,030 10,444,896 10,122,132
Advertising (Note 2) 2,744,864 2,549,729 2,348,785
Other restaurant operating
expenses exclusive of
depreciation and amortization 7,433,450 7,367,758 6,915,364
General and administrative:
Management fees - related party (Note 2) 2,808,484 2,776,768 2,598,168
Other (Note 12) 766,551 864,553 791,496
Depreciation and amortization 1,687,090 1,511,158 1,435,775
Equity in loss of affiliate (Note 15) 375,632 -- --
---------- ---------- ----------
Income from operations 3,173,866 3,890,011 3,587,474
Interest income 34,253 46,334 43,103
Interest expense (1,668,551) (1,287,776) (1,226,319)
Closed restaurant expense (97,523) -- --
Gain on fire settlement (Note 9) 157,867 -- --
---------- ---------- ----------
(1,476,431) (1,241,442) (1,183,216)
---------- ---------- ----------
Income before extraordinary item 1,599,912 2,648,569 2,404,258
Extraordinary loss on early extinguishment of
debt (Note 10) -- 142,491 --
---------- ---------- ----------
Income before General Partners'
interest in income of
Operating Partnership 1,599,912 2,506,078 2,404,258
General Partners' interest in
income of Operating Partnership 15,999 25,061 19,501
---------- ---------- ----------
Net income $ 1,583,913 $ 2,481,017 $ 2,384,757
========== ========== ==========
Net income allocated to Partners:
Class A Income Preference $ 324,763 $ 519,316 $ 861,833
Class B $ 473,352 $ 737,783 $ 572,923
Class C $ 785,798 $ 1,223,918 $ 950,001
Weighted average number of Partnership
units outstanding during period:
Class A Income Preference 815,309 824,978 825,764
Class B 1,188,332 1,172,025 1,160,514
Class C 1,972,716 1,944,299 1,924,330
Income before extraordinary item per Partnership
interest:
Class A Income Preference $ 0.40 $ 0.67 $ 1.04
Class B $ 0.40 $ 0.67 $ 0.49
Class C $ 0.40 $ 0.67 $ 0.49
Extraordinary loss per Partnership interest:
Class A Income Preference $ -- $ 0.04 $ --
Class B $ -- $ 0.04 $ --
Class C $ -- $ 0.04 $ --
Net income per Partnership interest:
Class A Income Preference $ 0.40 $ 0.63 $ 1.04
Class B $ 0.40 $ 0.63 $ 0.49
Class C $ 0.40 $ 0.63 $ 0.49
Distributions per Partnership interest:
Class A Income Preference $ 0.74 $ 0.74 $ 1.07
Class B $ 0.74 $ 0.74 $ 0.52
Class C $ 0.74 $ 0.74 $ 0.52
Pro Forma Amounts per Partnership interest
upon expiration of Class A Income
Preference distributions (Note 2):
Net income N/A N/A $ 0.61
Distributions N/A N/A $ 0.64
<FN>
See accompanying notes.
</FN>
</TABLE>
<TABLE>
AMERICAN RESTAURANT PARTNERS, L.P.
Consolidated Statements of Partners' Capital (Deficiency)
Years ended December 31, 1996, December 26, 1995, and December 27, 1994
<CAPTION>
General Partners Limited Partners Cost in
--------------- --------------------------------------- Unrealized excess of
Classes B Class A Income Classes B loss on carrying Notes
and C Preference and C securities value receivable
--------------- ------------------ --------------------- available of assets from
Units Amounts Units Amounts Units Amounts for sale acquired employees Total
------ ------- ------- --------- --------- --------- ------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 28, 1993 3,940 $(3,244) 825,764 $6,751,152 3,076,295 $(4,416,075) $ -- $(1,323,681) $(75,600) $ 932,552
Net Income -- 1,946 -- 861,833 -- 1,520,978 -- -- -- 2,384,757
Partnership distributions -- (2,049) -- (883,695) -- (1,602,545) -- -- -- (2,488,289)
Units sold to employees (Note 12) -- -- -- -- 9,375 18,750 -- -- -- 18,750
Reduction of notes receivable -- -- -- -- -- -- -- -- 44,100 44,100
----- ------ ------- --------- --------- --------- ------ ---------- ------- ---------
Balance at December 27, 1994 3,940 (3,347) 825,764 6,729,290 3,085,670 (4,478,892) -- (1,323,681) (31,500) 891,870
Net Income -- 2,975 -- 519,316 -- 1,958,726 -- -- -- 2,481,017
Partnership distributions -- (2,918) -- (611,015) -- (2,304,588) -- -- -- (2,918,521)
Units sold to employees (Note 12) -- -- -- -- 18,750 37,500 -- -- -- 37,500
Units issued to employees
as compensation -- -- -- -- 39,500 99,000 -- -- -- 99,000
Reduction of notes receivable -- -- -- -- -- -- -- -- 25,200 25,200
Repurchase of Class A
Units (Note 13) -- -- (10,455) (64,668) -- -- -- -- -- (64,668)
----- ------ ------- --------- --------- --------- ------ ---------- ------- ---------
Balance at December 26, 1995 3,940 (3,290) 815,309 6,572,923 3,143,920 (4,688,254) -- (1,323,681) (6,300) 551,398
Net Income -- 1,572 -- 324,763 -- 1,257,578 -- -- -- 1,583,913
Partnership distributions -- (2,916) -- (603,166) -- (2,335,633) -- -- -- (2,941,715)
Units sold to employees (Note 12) -- -- -- -- 30,750 58,500 -- -- -- 58,500
Units issued to employees
as compensation -- -- -- -- -- 15,900 -- -- -- 15,900
Units purchased from employees -- -- -- -- (45,261) (119,208) -- -- -- 119,208)
Reduction of notes receivable -- -- -- -- -- -- -- -- 6,300 6,300
Unrealized loss on securities
available for sale (Note 14) -- -- -- -- -- -- (44,325) -- -- (44,325)
----- ------ ------- --------- --------- --------- ------ ---------- ------- ---------
Balance at December 31, 1996 3,940 $(4,634) 815,309 $6,294,520 3,129,409 $(5,811,117)$(44,325)$(1,323,681) $ -- $(889,237)
===== ====== ======= ========= ========= ========= ======= ========== ======= ========
<FN>
See accompanying notes.
</FN>
</TABLE>
<TABLE>
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996
December 26, 1995 and December 27, 1994
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,583,913 $ 2,481,017 $ 2,384,757
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,687,090 1,511,158 1,435,775
Provision for deferred rent 13,477 9,563 11,335
Provision for deferred compensation 6,300 25,200 44,100
Unit compensation expense (Note 12) 15,900 99,000 --
Equity in loss of affiliate 375,632 -- --
Loss on disposition of assets 12,791 20,562 6,968
Closed restaurant expense 97,523 -- --
Gain on fire settlement (157,867) -- --
General Partners' interest in net
income of Operating Partnership 15,999 25,061 19,501
Net change in operating assets and liabilities:
Accounts receivable (79,119) 13,274 93,954
Due from affiliates 5,134 (4,248) 6,876
Inventories (43,590) (7,946) (7,021)
Prepaid expenses (67,972) (36,233) 151,851
Deposit with affiliate (20,000) -- --
Accounts payable 211,525 349,005 (184,387)
Due to affiliates 26,362 (16,684) (3,353)
Accrued payroll and other taxes 225,914 22,416 23,760
Accrued liabilities 222,339 1,531 73,324
--------- --------- ---------
Net cash provided by
operating activities 4,131,351 4,492,676 4,057,440
Investing activities:
Investment in affiliate (3,000,000) -- --
Purchases of certificates of deposit (5,103) (79,687) (122,833)
Redemption of certificates of deposit -- 107,356 129,945
Purchase of securities available for sale (97,389) -- --
Additions to property and equipment (6,747,527) (1,185,444) (2,130,601)
Proceeds from sale of property and equipment 7,520 9,630 5,329
Decrease in restricted cash -- -- 750,000
Purchase of franchise rights (66,000) -- (30,000)
Funds advanced to affiliates (57,131) (15,000) --
Collections of notes receivable from affiliates 47,045 25,467 11,344
Net proceeds from fire settlement 180,437 -- --
Other, net (232,535) (110,193) (51,012)
--------- --------- ---------
Net cash used in
investing activities (9,970,683) (1,247,871) (1,437,828)
Financing activities:
Proceeds from short-term borrowings -- -- 360,000
Proceeds from long-term borrowings 16,020,932 3,900,000 995,963
Payments on short-term borrowings -- -- (360,000)
Payments on long-term borrowings (7,686,372) (4,162,444) (1,412,313)
Payments on capital lease obligations (66,535) (68,746) (102,575)
Distributions to Partners (2,941,715) (2,918,521) (2,488,289)
Proceeds from issuance of Class B and C units 58,500 37,500 18,750
Repurchase of Class A units -- (64,668) --
Repurchase of Class B and C units (119,208) -- --
General Partners' distributions
from Operating Partnerships (29,792) (29,480) (20,547)
--------- --------- ---------
Net cash provided by (used in)
financing activities 5,235,810 (3,306,359) (3,009,011)
--------- --------- ---------
Net decrease in
cash and cash equivalents (603,522) (61,554) (389,399)
Cash and cash equivalents at beginning of period 782,348 843,902 1,233,301
--------- --------- ---------
Cash and cash equivalents at end of period $ 178,826 $ 782,348 $ 843,902
========= ========= =========
<FN>
See accompanying notes.
</FN>
</TABLE>
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
The following is a summary of the consolidated entities'
significant accounting policies.
ORGANIZATION
American Restaurant Partners, L.P. was formed in connection with
a public offering of Class A Income Preference Units in 1987 and
owns a 99% limited partnership interest in American Pizza
Partners, L.P. The remaining 1% of American Pizza Partners, L.P.
is owned by RMC Partners, L.P. and RMC American Management, Inc.
(RAM) as the general partners.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of American Restaurant Partners, L.P. and its majority
owned subsidiaries, American Pizza Partners, L.P. and APP
Concepts, L.C., hereinafter collectively referred to as the
Partnership. All significant intercompany transactions and
balances have been eliminated.
FISCAL YEAR
The Partnership operates on a 52 or 53 week fiscal year ending on
the last Tuesday in December. The Partnership's operating
results reflected in the accompanying consolidated statements of
income include 53 weeks, 52 weeks and 52 weeks for the years
ended December 31, 1996, December 26, 1995 and December 27, 1994,
respectively.
OPERATIONS
All of the restaurants owned by the Partnership are operated
under a franchise agreement with Pizza Hut, Inc., the franchisor.
The agreement grants the Partnership exclusive rights to develop
and operate restaurants in certain franchise territories.
A schedule of restaurants in operation for the periods presented
in the accompanying consolidated financial statements is as
follows:
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
-------------------------------
1996 1995 1994
---- ---- ----
Restaurants in operation at beginning of period 60 60 58
Opened 7 -- 2
-- -- --
Restaurants in operation at end of period 67 60 60
== == ==
INVENTORIES
Inventories consist of food and supplies and are stated at the
lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Depreciation is provided by the straight-line method over the
estimated useful lives of the related assets. Leasehold
improvements are amortized over the life of the lease or
improvement, whichever is shorter.
The estimated useful lives used in computing depreciation are as
follows:
Buildings 10 to 30 years
Restaurant equipment 3 to 7 years
Leasehold rights and improvements 5 to 20 years
Expenditures for maintenance and repairs are charged to
operations as incurred. Expenditures for renewals and
betterments, which materially extend the useful lives for assets
or increase their productivity, are capitalized.
In March 1995, the FASB issued Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, which requires impairment losses to be recorded
on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the asset's
carrying amount. Statement 121 also addresses the accounting
for long-lived assets that are expected to be disposed of. The
Partnership adopted Statement 121 in 1996. The effect of the
adoption was not material to the accompanying financial
statements.
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
-------------------------------
FRANCHISE RIGHTS AND FEES
Agreements with the franchisor provide franchise rights for a
period of 20 years and are renewable at the option of the
Partnership for an additional 15 years, subject to the approval
of the franchisor. Initial franchise fees are capitalized at
cost and amortized by the straight-line method over periods not
in excess of 30 years. Periodic franchise royalty and
advertising fees, which are based on a percent of sales, are
charged to operations as incurred.
PREOPENING COSTS
Costs incurred before a restaurant is opened, which represent the
cost of staffing, advertising, and similar preopening costs, are
charged to operations as incurred.
SELF INSURANCE
The Partnership is self-insured with respect to certain workers
compensation risks in the state of Texas. The Partnership
maintains certain excess loss coverage with respect to such risks.
The Partnership estimates its liability for the self-insured
portions of the risks covered by the program and accrues
appropriate reserves.
CONCENTRATION OF CREDIT RISKS
The Partnership's financial instruments that are exposed to
concentration of credit risks consist primarily of cash and
certificates of deposit. The Partnership places its funds into
high credit quality financial institutions and, at times, such
funds may be in excess of the Federal Depository insurance limit.
Credit risks associated with customer sales are minimal as such
sales are primarily for cash. All notes receivable from
affiliates are supported by the guarantee of the majority owner
of the Partnership.
INCOME TAXES
The Partnership is not subject to federal or state income taxes
and, accordingly, no provision for income taxes has been
reflected in the accompanying consolidated financial statements.
Such taxes are the responsibility of the partners based on their
proportionate share of the Partnership's taxable earnings.
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
-------------------------------
The Partnership became subject to the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes," during 1993. Due to differences in the rules related to
reporting income for financial statement purposes and for
purposes of income tax returns by individual limited partners,
the tax information sent to individual limited partners after the
end of the year differed from the information contained herein.
At December 31, 1996, the Partnership's reported amount of its
net assets for financial statement purposes were less than
the income tax bases of such net assets by approximately
$313,000.
The Omnibus Budget Reconciliation Act of 1987 provides that
public limited partnerships will become taxable entities
beginning in 1998. The effect of these changes on the
Partnership is uncertain at this time.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Partnership
considers all highly liquid debt instruments, purchased with a
maturity of three months or less, to be cash equivalents.
ACCOUNTING FOR UNIT BASED COMPENSATION
In October 1995, the FASB issued Statement No. 123, Accounting
for Stock-Based Compensation, which prescribed accounting and
reporting standards for all equity-based compensation plans,
including employee stock options, restricted stock, and stock
appreciation rights. Statement No. 123 did not require companies
to change their existing accounting for employee stock options
under APB Opinion No. 25, Accounting for Stock Issued to
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
-------------------------------
Employees, but instead encouraged companies to recognize expense
for equity-based awards on their estimated fair value on the
date of grant. Companies electing to continue to follow present
accounting rules under APB Opinion No. 25 are required to provide
pro forma disclosures of what net income and earnings per share
would have been had the new fair value method been used. The
Partnership has elected to continue to apply the existing
accounting contained in APB 25 and the required pro forma
disclosures under the new method have not been presented as no
options have been granted in either 1996 or 1995.
INVESTMENTS AVAILABLE-FOR-SALE
Investments available-for-sale are carried at fair value, with
the unrealized gains and losses reported in a separate component
of partners' equity. Realized gains and losses and declines
in value judged to be other-than-temporary on available-for-sale
securities are included in investment 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 investment income.
2. RELATED PARTY TRANSACTIONS
--------------------------
The Partnership has entered into a management services agreement
with RAM whereby RAM will be responsible for management of the
restaurants for a fee equal to 7% of the gross receipts of the
restaurants. RAM has entered into a management services
agreement containing substantially identical terms and conditions
with Restaurant Management Company of Wichita, Inc. (the
Management Company).
Affiliates of the Management Company provide various other
services for the Partnership including promotional advertising.
In addition to participating in advertising provided by the
franchisor, an affiliated company engages in promotional
activities to further enhance restaurant sales. The affiliate's
fees for such services are based on the actual costs incurred and
principally relate to the reimbursement of print and media costs.
In exchange for advertising services provided directly by the
affiliate, the Partnership will pay a commission based upon 15%
of the advertising costs incurred. Such costs were not
significant in 1996, 1995 or 1994.
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. RELATED PARTY TRANSACTIONS (continued)
--------------------------
The Partnership maintains a deposit with the Management Company
equal to approximately one and one-half month's management fee.
Such deposit, $350,000 at December 31, 1996 and $330,000 at
December 26, 1995, may be increased or decreased at the
discretion of RAM.
The Management Company maintains an incentive bonus plan whereby
certain employees are eligible to receive bonus payments if
specified management objectives are achieved. Such bonuses are
not greater than 15% of the amount by which the Partnership's cash
flow exceeds threshold amounts as determined by management. Bonuses
paid under the plan are reimbursed to the Management Company by
the Partnership.
Transactions with related parties included in the accompanying
consolidated financial statements and notes are summarized as
follows:
1996 1995 1994
------ ------ ------
Management fees $2,808,484 $2,776,768 $2,598,168
Management Company bonuses 342,684 356,021 378,825
Advertising commissions 66,150 99,834 74,401
The Partnership has made advances to various affiliates under
notes receivable which bear interest at market rates. The
advances are to be received in varying installments with
maturities over the next five years as follows: 1997 - $84,631;
1998 - $34,945; 1999 - $25,011; 2000 - $4,993; and 2001 -
$5,993. The remaining amounts are due in varying annual
installments through 2006. All such notes are guaranteed by the
majority owner of the Partnership. In addition, the Partnership
has certain other amounts due from and to affiliates which are on
a noninterest bearing basis.
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. LONG-TERM DEBT
--------------
Long-term debt consists of the following at December 31, 1996 and
December 26, 1995:
1996 1995
------ ------
Notes payable to Intrust Bank in Wichita,
payable in monthly installments
aggregating $79,285, including interest
at the bank's base rate plus 1%
(9.75% at December 31, 1996)
adjusted monthly, due at various
dates through 1998 $ 6,407,933 $ 952,818
Notes payable to NationsBank of
Georgia, N.A., payable in monthly
installments aggregating $36,457,
including interest at NationsBank
index rate plus 1 3/4% (10.5% at
December 26, 1995), due at various
dates through December 2006 -- 1,714,965
Notes payable to Franchise Mortgage
Acceptance Company payable in monthly
installments aggregating $80,754,
including interest at fixed rates
of 8.95% and 10.95%, due at various
dates through August 2011 9,878,192 4,927,328
Notes payable to various banks,
monthly installments aggregating
$51,896, including interest at
various fixed and floating rates
ranging from 9.3% to 10.0% at
December 31, 1996, due at various
dates through October 2006 2,573,197 2,929,651
---------- ----------
18,859,322 10,524,762
Less current portion 1,428,630 997,814
---------- ----------
$17,430,692 $ 9,526,948
========== ==========
Subsequent to December 31, 1996, the Partnership refinanced
certain of the Intrust Bank debt with a new promissory note to
Intrust Bank for $3,639,000 dated March 3, 1997 of which the
entire amount has been drawn. Such note matures March 15, 2002.
Accordingly, the current portion of long-term debt has been
classified to reflect the terms of the new agreement. The write-
off of unamortized loan cost related to this refinancing was not
material.
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. LONG-TERM DEBT (continued)
--------------
Certain borrowings through Franchise Mortgage Acceptance Company
(FMAC) are part of loans "pooled" together with other franchisees
in good standing and approved restaurant concepts, as defined,
and sold to the secondary market. The Partnership has provided to
FMAC a limited, contingent guarantee equal to 13% of the original
loan balance ($801,352 in the aggregate at December 31, 1996),
referred to as the "Performance Guarantee Amount" (PGA). The PGA
is paid monthly and to the extent that the other loans in the
"pool" are delinquent or in default, the amount of the PGA refund
will be reduced proportionately; however, at December 31, 1996,
no such loans within the Partnership"s "pool" were delinquent or
in default. The PGA remains in effect until the loans are
discharged, prepaid, accelerated, or mature, as defined in the
secured promissory note. The interest rates for the loans are
fixed at 8.95% and 10.95% for the full term of the loans. The
loans require, among other conditions, that the Partnership
maintain a certain fixed charge coverage ratio, as defined.
Subsequent to December 31, 1996, the Partnership entered into an
additional $1,000,000 promissory note with Intrust Bank to fund
property and equipment additions. Such note matures September 3,
1997.
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: 1997
- - $1,429,000; 1998 - $6,858,000; 1999 - $1,701,000; 2000 -
$1,765,000; and 2001 - $1,372,000.
Cash paid for interest was $1,383,668, $1,293,773 and $1,192,753
for the years ended December 31, 1996, December 26, 1995, and
December 27, 1994, respectively.
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. LEASES
------
The Partnership leases land and buildings for various restaurants
under both operating and capital lease arrangements. Initial
lease terms normally range from 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 $27,500 for each of the years ended
December 31, 1996, December 26, 1995 and December 27, 1994.
Total minimum and contingent rent expense under all operating
lease agreements were as follows:
1996 1995 1994
------ ------ ------
Minimum rentals $827,558 $792,957 $783,895
Contingent rentals 171,144 186,355 184,236
Future minimum payments under capital leases and noncancelable
operating leases with an initial term of one year or more at
December 31, 1996, are as follows:
Operating
Leases With Operating
Capital Unrelated Leases With
Leases Parties Affiliates
------- ---------- -----------
1997 $ 307,923 $ 746,505 $ 29,562
1998 308,723 576,496 30,250
1999 318,942 479,362 30,250
2000 325,134 347,743 30,250
2001 328,382 271,668 30,250
Thereafter 2,630,091 1,505,194 7,563
--------- --------- -------
Total minimum payments 4,219,194 $ 3,926,968 $ 158,125
========= =======
Less interest 2,554,150
---------
1,731,579
Less current portion 32,760
---------
$1,632,284
=========
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. LEASES (continued)
------
Amortization of property under capital leases, determined on the
straight-line basis over the lease terms totaled $165,360 for
each of the years ended December 31, 1996, December 26, 1995 and
December 27, 1994 and is included in depreciation and
amortization in the accompanying consolidated statements of
income. The cost of property under capital leases was $2,369,199
at December 31, 1996 and December 26, 1995, and accumulated
amortization on such property under capital leases was $1,122,778
and $957,420 at December 31, 1996 and December 26, 1995,
respectively.
5. LIMITED PARTNERSHIP UNITS
-------------------------
The Partnership has three classes of Partnership Units
outstanding, consisting of Class A Income Preference, Class B,
and Class C Units, The Units are in the nature of equity
securities entitled to participate in cash distributions of the
Partnership on a quarterly basis at the discretion of RAM, the
General Partner. In the event the partnership is terminated, the
Unitholders will receive the remaining assets of the Partnership
after satisfaction of Partnership liability and capital account
requirements.
Since inception of the Partnership in August, 1987, the
Partnership paid a preference payment of $0.275 each quarter
until such time as the Class A Income Preference Units had
received $10.00 in aggregate cash distributions. The $10.00
aggregate cash distribution requirement was satisfied with the
May 6, 1994 distribution. While the preference distribution was
in effect, net income was allocated to the Class A Income
Preference Units until the amount allocated equaled the
preference amount. The remaining net income was allocated to all
partners in accordance with their respective Units in the
Partnership with all outstanding Units being treated equally. As
the cash distribution requirement was satisfied in 1994, net
income for 1996 was allocated to all partners in accordance with
their respective Units in the Partnership with all outstanding
Units being treated equally.
Without the $.55 preference amount, the 1994 distribution and net
income of $1.07 and $1.04, respectively, per Class A Income
Preference Unit would have been $.64 and $.61, respectively.
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. DISTRIBUTIONS TO PARTNERS
-------------------------
On January 2, 1997, the Partnership declared a distribution of
$.11 per Unit to all Unitholders of record as of January 12,
1997. The total distribution is not reflected in the December
31, 1996, consolidated financial statements.
7. UNIT OPTION PLAN
----------------
The Partnership, RAM, and the Management Company adopted a Class
A Unit Option Plan (the Plan) pursuant to which 75,000 Class A
Units were reserved for issuance to employees, including officers
of the Partnership, RAM, and the Management Company. The Plan is
administered by the Managing General Partner which will, among
other things, designate the number of Units and individuals to
whom options will be granted. Participants in the Plan are
entitled to purchase a designated number of Units at an option
price equal to the fair market value of the Unit on the date the
option is granted. Units under option are exercisable over a
three-year period with 50% exercisable on the date of grant and
25% exercisable on each of the following two anniversary dates.
The term of options granted under the Plan will be determined by
the Managing General Partner at the time of issuance (not to
exceed ten years) and will not be transferable except in the
event of the death of the optionee, unless the Managing General
Partner otherwise determines and so specifies in the terms of the
grant. Units covered by options which expire or are terminated
will again be available for option grants.
A summary of Units under options in the Plan is as follows:
Units Option Price
----- ------------
Balance at December 27, 1994 2,215 $8.50-9.00
Terminated (500) 8.50
----- ----
Balance at December 26, 1995
and December 31, 1996 1,715 $8.50-9.00
===== =========
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. UNIT OPTION PLAN (continued)
----------------
At December 31, 1996, options on 1715 Units were exercisable.
Unit options available for future grants totaled 47,521 at
December 31, 1996 and December 26, 1995, respectively.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The following methods and assumptions were used by the
Partnership in estimating its fair value disclosures for
financial instruments:
Cash and cash equivalents: The carrying amount reported in
the balance sheet for cash and cash equivalents approximates
its fair value.
Certificates of deposit: The carrying amount reported in the
balance sheet for certificates of deposit approximates its fair
value.
Long-term debt: The carrying amounts of the Partnership's
borrowings under its variable rate debt approximate their fair
value. The fair value of the Partnership's fixed rate debt is
estimated using discounted cash flow analyses, based on the
Partnership's current incremental borrowing rates for similar
types of borrowing arrangements.
The carrying amounts and fair values of the Partnership's
financial instruments at December 31, 1996 and December 26, 1995
are as follows:
December 31, 1996 December 26, 1995
----------------- -----------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Cash and cash
equivalents $ 178,826 $ 178,826 $ 782,348 $ 782,348
Certificates of
deposit 157,635 157,635 152,532 152,532
Long-term debt 18,859,322 18,681,436 10,524,762 10,395,546
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. FIRE SETTLEMENT
---------------
During the quarter ended June 25, 1996, the Partnership incurred
a fire at one of its restaurants. The property was insured for
replacement cost and the Partnership realized a gain of $157,867.
10. EXTINGUISHMENT OF DEBT
----------------------
During November 1995, the Partnership refinanced notes payable to
various banks for approximately $1,198,000. As a result of this
transaction, the Partnership incurred an extraordinary loss of
$142,491, which represents penalties incurred by the Partnership
for the early extinguishment of debt and the write-off of all
unamortized financing cost associated with such notes. The loan
was refinanced from funds received from Heller Financial.
11. LETTER OF CREDIT
----------------
At December 31, 1996, the Partnership has obtained a $50,000
letter of credit from a bank, secured by certificates of deposit
for the same amount, to support obligations under its workers
compensation insurance coverage.
12. CLASS B AND C RESTRICTED UNITS SOLD TO EMPLOYEES
------------------------------------------------
During 1995, the Partnership issued 39,500 Class B and C units to
certain employees as a bonus. This resulted in the Partnership
recognizing $99,000 as compensation expense which is included
under the caption of "General and administrative - other" in the
accompanying statement of income.
On July 1, 1994, the Partnership entered into a Unit Purchase
Agreement with certain employees whereby the employees shall
purchase Class B and C Units every six months beginning July 1,
1994, and continuing until January 1, 1998. The purchase price
per unit is $2.00 with a total of 75,000 units to be purchased
over three and one-half years. During 1996, 1995 and 1994 the
Partnership issued 30,750, 18,750 and 9,375 Class B and C units
for $58,500, $37,500 and $18,750, respectively.
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. CLASS B AND C RESTRICTED UNITS SOLD TO EMPLOYEES (continued)
------------------------------------------------
During 1993, the Partnership issued 25,200 Class B and C Units to
certain employees in exchange for notes receivable which will be
forgiven by the Partnership over a three year period. The
forgiveness of the note receivable balance together with interest
thereon will be recognized as compensation expense over the three
year period. Total compensation expense recognized in 1996, 1995
and 1994 was $6,300, $25,200 and $44,100, respectively, which is
included as restaurant labor and benefits in the accompanying
statements of income. The Units are subject to a repurchase
agreement whereby the Partnership has agreed to repurchase the
Units in the event the employee is terminated for an amount not
to exceed $3.00 per unit.
13. STOCKHOLDERS' EQUITY
--------------------
During 1995, the Partnership purchased 10,155 Class A Income
Preference Units for $64,668. These Units were retired by the
Partnership.
14. INVESTMENTS
-----------
The following is a summary of available-for-sale securities:
Gross Estimated
Unrealized Fair
Cost Losses Value
---- ------ -----
Equity securities:
December 31, 1996 $177,076 $ 44,325 $132,751
======= ====== =======
December 26, 1995 $ 79,687 $ -- $ 79,687
======= ====== =======
The net adjustment to unrealized holding losses on available-for-
sale securities included as a separate component of partners'
equity totaled $44,325 in 1996.
15. INVESTMENT IN AFFILIATE
-----------------------
On March 13, 1996, the Partnership purchased a 45% interest in a
newly formed limited partnership, Oklahoma Magic, L.P. ("Magic"),
that owns and operates thirty-two Pizza Hut restaurants in
Oklahoma for $3,000,000 in cash. The purchase was financed by
the Partnership from a short-term note payable entered into with
Intrust Bank which was refinanced on a long-term basis on July
30, 1996. The remaining
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. INVESTMENT IN AFFILIATE (continued)
-----------------------
partnership interests in Magic are held by Restaurant Management
Company of Wichita, Inc. (29.25%), an affiliate of the
Partnership, Hospitality Group of Oklahoma, Inc. (25%), and RMC
American Management, Inc. (RAM)(.75%), the managing general
partner of the Partnership. RAM is also the managing general
partner of Magic. The Partnership accounts for its investment in
the unconsolidated affiliate using the equity method of
accounting. The proforma unaudited results of operations for
the years ended December 31, 1996 and December 26, 1995, assuming
consummation of the purchase and financing of the $3,000,000
note payable as of December 28, 1994 are as follows:
Year Ended
December 31, December 26,
1996 1995
----------- -----------
Net sales $40,424,953 $40,004,295
Equity in earnings (loss) (334,912) 142,255
Net income 1,192,848 2,339,700
Net income per partnership interest
Class A Income Preference $ 0.30 $ 0.59
Class B $ 0.30 $ 0.59
Class C $ 0.30 $ 0.59
Condensed financial statements for the unconsolidated affiliate
accounted for under the equity method of accounting described
above are as follows:
December 31,
1996
-----------
Balance sheet:
Current assets $ 1,101,130
Noncurrent assets 10,624,687
----------
$11,725,817
==========
Current liabilities $ 1,851,228
Noncurrent liabilities 6,591,644
Partners' equity 3,282,945
----------
$11,725,817
==========
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. INVESTMENT IN AFFILIATE (continued)
-----------------------
For the 41
weeks ended
December 31,
1996
-----------
Statement of Operations:
Revenues $12,805,324
Cost of sales 3,670,348
Operating expenses 9,458,330
----------
Operating loss (323,354)
Other expense (principally interest) 511,364
----------
Net loss $ (834,718)
==========
In November 1996, Magic notified HGO that it is seeking to
terminate HGO's interest in Magic and to purchase such interest
pursuant to the Magic partnership agreement as a result of HGO's
alleged violations of certain matters pursuant to such
agreement. HGO has denied such violations and the parties are
continuing to seek to resolve such matters. In the event Magic
ultimately prevails, it is likely that the Partnership's interest
in Magic would be increased from 45% to 60%; however, the
Partnership would not likely be required to make any additional
contributions to Magic.
<TABLE>
AMERICAN RESTAURANT PARTNERS, L.P.
QUARTERLY RESULTS
(Unaudited)
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
1996 1995 1996 1995 1996 1995 1996 1995
-------------------- -------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 9,855,670 9,067,057 9,887,850 10,996,286 10,032,758 10,274,920 10,648,675 9,666,032
Gross Profit $ 7,291,643 6,693,950 7,337,497 8,055,924 7,295,948 7,586,151 7,736,879 7,068,848
Income from
Operations $ 1,026,586 770,615 1,042,716 1,385,373 360,798 988,415 743,766 745,608
Net Income $ 697,699 451,597 790,264 1,037,434 (70,775) 672,171 166,725 319,815
Net income per unit:
Class A $ 0.18 0.12 0.20 0.26 (0.02) 0.17 0.04 0.08
Class B $ 0.18 0.12 0.20 0.26 (0.02) 0.17 0.04 0.08
Class C $ 0.18 0.12 0.20 0.26 (0.02) 0.17 0.04 0.08
</TABLE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the
Registration Statement (Form S-8) No. 33-20784) pertaining
to the Class A Unit Option Plan of American Restaurant
Partners, L.P. of our report dated March 26, 1997, with
respect to the consolidated financial statements of American
Restaurant Partners, L.P. included in the Annual Report
(Form 10-K) for the year ended December 31, 1996.
/s/Ernst & Young LLP
Wichita, Kansas
March 26, 1997
<TABLE>
Exhibit 11
AMERICAN RESTAURANT PARTNERS, L.P.
COMPUTATION OF EARNINGS PER PARTNERSHIP INTEREST
Years ended December 31, 1996
December 26, 1995, and December 27, 1994
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Income before General Partners'
interest in income of Operating
Partnership $ 1,599,912 $ 2,506,078 $ 2,404,258
Priority amount attributable to
Class A Income Preference units -- -- (454,170)
--------- --------- ---------
Balance attributable to all
Partnership interests 1,599,912 2,506,078 1,950,088
========= ========= =========
Income before General Partners'
interest in income of Operating
Partnership $ 1,599,912 $ 2,506,078 $ 2,404,258
Net income attributable to
General Partners (1%) (15,999) (25,061) (19,501)
--------- --------- ---------
Net income attributable to
American Restaruant Partners,
L.P. unitholders $ 1,583,913 $ 2,481,017 $ 2,384,757
========= ========= =========
Net income allocated to Partners:
Class A Income Preference $ 324,763 $ 519,316 $ 861,833
Class B $ 473,352 $ 737,783 $ 572,923
Class C $ 785,798 $ 1,223,918 $ 950,001
Weighted average number of
Partnership units outstanding
during period:
Class A Income Preference 815,309 824,978 825,764
Class B 1,188,332 1,172,025 1,160,514
Class C 1,972,716 1,944,299 1,924,330
Income before extraordinary item
per Partnership interest:
Class A Income Preference $ 0.40 $ 0.67 $ 1.04
Class B $ 0.40 $ 0.67 $ 0.49
Class C $ 0.40 $ 0.67 $ 0.49
Income per Partnership
interest:
Class A Income Preference $ 0.40 $ 0.63 $ 1.04
Class B $ 0.40 $ 0.63 $ 0.49
Class C $ 0.40 $ 0.63 $ 0.49
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed financial statements of American Restaurant Partners,
L.P. at December 31, 1996 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 178826
<SECURITIES> 0
<RECEIVABLES> 723180
<ALLOWANCES> 0
<INVENTORY> 344003
<CURRENT-ASSETS> 1284993
<PP&E> 29173015
<DEPRECIATION> 11552747
<TOTAL-ASSETS> 23745083
<CURRENT-LIABILITIES> 5220299
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 889237
<TOTAL-LIABILITY-AND-EQUITY> 23745083
<SALES> 40424953
<TOTAL-REVENUES> 40424953
<CGS> 10762986
<TOTAL-COSTS> 37251087
<OTHER-EXPENSES> 97523
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1668551
<INCOME-PRETAX> 1583913
<INCOME-TAX> 0
<INCOME-CONTINUING> 1583913
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1583913
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0
</TABLE>
