10-K 1 arpk.txt 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 25, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from _______ to _______ Commission File Number 1-9606 AMERICAN RESTAURANT PARTNERS, L.P. (Exact name of registrant as specified in its charter) Delaware 48-1037438 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3020 North Cypress Road, Suite 100 Wichita, Kansas 67226 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (316) 634-1190 Securities registered pursuant to Section 12(b) of the Act: None Title of each class ------------------- Class A Income Preference Units of Limited Partner Interests Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. (X) As of March 1, 2002 the aggregate market value of the income preference units held by non-affiliates of the registrant was $2,262,377. PART I ------ Item 1. Business -------- General Development of Business ------------------------------- American Restaurant Partners, L.P., a Delaware limited partnership (the "Partnership"), was formed on April 27, 1987 for the purpose of acquiring and operating through American Pizza Partners, L.P., a Delaware limited partnership ("APP"), substantially all of the restaurant operations of RMC Partners, L.P. ("RMC") in connection with a public offering of Class A Income Preference units by the Partnership. The transfer of assets from RMC was completed on August 21, 1987 and the Partnership commenced operations on that date. Subsequently, the Partnership completed its public offering of 800,000 Class A Income Preference units and received net proceeds of $6,931,944. The Partnership is a 99% limited partner in APP which conducts substantially all of the business for the benefit of the Partnership. RMC American Management, Inc. ("RAM") is the managing general partner of both the Partnership and APP. RAM and RMC own an aggregate 1% interest in APP. On March 13, 1996, APP purchased a 45% interest in Oklahoma Magic, L.P. (Magic), a newly formed limited partnership that owns and operates Pizza Hut restaurants in Oklahoma. Effective August 11, 1998, APP's interest in Magic increased from 45% to 60% in connection with Magic's purchase of a 25% interest from a former limited partner. RAM, which owns a 1.0% interest in Magic, is the managing general partner of Magic. The remaining 39.0% interest was held by Restaurant Management Company of Wichita, Inc. (the Management Company) until July 26, 2000. On that date, APP purchased the Management Company's 39% interest in Magic. Upon completion of this purchase, APP owns 99% of Magic. APP and Magic are collectively referred to as the "Operating Partnerships". As of December 25, 2001, the Partnership owned and operated a total of 87 restaurants (collectively, the "Restaurants"). APP owned and operated 52 traditional "Pizza Hut" restaurants, 6 "Pizza Hut" delivery/carryout facilities and 3 dualbrand locations. During 2001, APP opened two "Pizza Hut" delivery/carryout restaurants and closed one traditional restaurant. Magic owned and operated 17 traditional "Pizza Hut" restaurants and 9 "Pizza Hut" delivery/carryout facilities. The following table sets forth the states in which the Partnership's Pizza Hut Restaurants are located: Units Units Units Units Open At Opened in Closed in Open At 12-26-00 2001 2001 12-25-01 -------- --------- --------- -------- Georgia 8 -- -- 8 Louisiana 1 -- -- 1 Montana 18 -- -- 18 Texas 25 2 1 26 Wyoming 8 -- -- 8 Oklahoma 26 -- -- 26 --- --- --- --- Total 86 2 1 87 === === === === Financial Information About Industry Segments --------------------------------------------- The restaurant industry is the only business segment in which the Partnership operates. Narrative Description of Business --------------------------------- The Partnership operates the Restaurants under license from Pizza Hut, Inc. ("PHI"), a subsidiary of Tricon Global Restaurants, Inc. ("Tricon") which was created with the spin-off of PepsiCo, Inc.'s restaurant division. Since it was founded in 1958, Pizza Hut has become the world's largest pizza restaurant chain in terms of both sales and number of restaurants. As of year-end 2001, there were over 6,500 units in the United States and more than 4,100 units located outside the United States (both excluding licensed units). PHI owns and operates approximately 26% of the Pizza Hut restaurants in the United States and 40% of those in foreign countries. All Pizza Hut restaurants offer substantially the same menu items, including several varieties of pizza as well as pasta, salads and sandwiches. All food items are prepared from high quality ingredients in accordance with PHI's proprietary recipes and a special blend of spices available only from PHI. Pizza is offered in several different sizes with a thin crust, hand tossed traditional crust, or a thick crust, known as "Pan Pizza," as well as with a wide variety of toppings. Pizza Hut also serves the Big New Yorker Pizza, a 16" traditional crust pizza. Food products not prescribed by PHI may only be offered with the prior express approval of PHI. PHI maintains a research and development department that develops new recipes and products, tests new procedures for food preparation and approves suppliers for Pizza Hut restaurants. Pizza Hut restaurants are constructed in accordance with prescribed design specifications and most are similar in exterior appearance and interior decor. The typical restaurant building is a freestanding, one-story building, with a wood, brick or stucco exterior. Most Pizza Hut restaurants still feature the distinctive red roof. The restaurants generally contain 1,800 to 3,000 square feet, including kitchen and storage areas, and have seating capacity for 75 to 140 persons. The typical property site will accommodate parking for 30 to 70 vehicles. Building designs may be varied only upon request and when required to comply with local regulations or for unique marketing reasons. Franchise Agreements -------------------- General. The relationships between PHI and its franchisees are governed by franchise agreements (the "Franchise Agreements"). Pursuant to the Franchise Agreements, PHI franchisees are granted the right to establish and operate restaurants under the Pizza Hut system within a designated geographic area. The initial term of each Franchise Agreement is 20 years, but prior to expiration, the franchisee may renew the agreement for an additional 15 years, if not then in default. Renewals are subject to execution of the then current form of the Franchise Agreement, including the current fee schedules. Unless the franchisee fails to develop its assigned territory, PHI agrees not to establish, and not to license others to establish, restaurants within the franchisee's territory. Standards of Operation. PHI provides management training for employees of franchisees and each restaurant manager is required to meet certain training requirements. Standards of quality, cleanliness, service, food, beverages, decor, supplies, fixtures and equipment for Pizza Hut restaurants are prescribed by PHI. Although new standards and products may be prescribed from time to time, any revision requiring substantial expenditures by franchisees must be first proven successful through market testing conducted in 5% of all Pizza Hut restaurants. Failure to comply with the established standards is cause for termination of a Franchise Agreement by PHI and PHI has the right to inspect each restaurant to monitor compliance. Management of the Partnership believes that the existing Restaurants meet or exceed the applicable standards; neither the predecessors to RMC nor the Partnership has ever had a Franchise Agreement terminated by PHI. Advertising. All franchisees are required to join a cooperative advertising association ("co-op") with other franchisees within local marketing areas defined by PHI. Contributions of 2% of each restaurant's monthly gross sales must be made to such co-ops for the purchase of advertising through local broadcast media. The term "gross sales" shall mean gross revenues (excluding price discounts and allowances) received as payment for the beverages, food, and other goods, services and supplies sold in or from each restaurant, and gross revenues from any other business operated on the premises, excluding sales and other taxes required by law to be collected from guests. All advertisements must be approved by PHI which contributes on the same basis to the appropriate co-op for each restaurant operated by PHI. Franchisees are also required to be members of I.P.H.F.H.A., Inc. ("IPHFHA") an independent association of franchisees which, together with representatives of PHI, develops and directs national advertising and promotional programs. Members of IPHFHA are required to pay national dues equal to 2% of each restaurant's monthly gross sales. Such dues are primarily used to conduct the national advertising and promotional programs. Although it is not a member of IPHFHA, PHI contributes on the same basis as members for each restaurant that PHI operates. Purchase of Equipment, Supplies and Other Products. The Franchise Agreements require that all equipment, supplies and other products and materials required for operation of Pizza Hut restaurants be obtained from suppliers that meet certain standards established and approved by PHI. Purchasing is substantially provided by the Unified Foodservice Purchasing Cooperative to all members who consist of Taco Bell, KFC, and Pizza Hut franchisees and the restaurants operated by Tricon. AmeriServe Food Distribution, Inc. (AmeriServe) provided substantially all of the distribution services to the Partnership beginning in 1997. The Partnership entered into a five-year exclusive food and supplies distribution agreement with AmeriServe effective January 1, 1999. The initial term of the agreement was to expire December 31, 2003. Thereafter, the agreement could be renewed for successive one-year terms upon the written agreement of the parties. The terms of the contract provide incentives for using more efficient distribution practices and resulted in a reduction in the distribution costs incurred by the Partnership. On January 31, 2000 AmeriServe filed for protection under the U.S. Bankruptcy Code. McLane Company, Inc., a subsidiary of Wal-Mart Stores, Inc., completed the purchase of AmeriServe's U.S. distribution business on November 30, 2000. As part of the sale, the Partnership agreed to a two-year contract extension which included a 5% increase in distribution fees. Franchise Fees. Franchisees must pay monthly service fees to PHI based on each restaurant's gross sales. The monthly service fee under each of the Partnership's Franchise Agreements is 4% of gross sales, or, if payment of a percentage of gross sales of alcoholic beverages is prohibited by state law, 4.5% of gross sales of food products and nonalcoholic beverages. Fees are payable monthly by the 30th day after the end of each month and franchisees are required to submit monthly gross sales data for each restaurant, as well as quarterly and annual profit and loss data on each restaurant, to PHI. In addition to the monthly service fees, an initial franchise fee of $15,000 is payable to PHI prior to the opening of each new restaurant. No Transfer or Assignment without Consent. No rights or interests granted to franchisees under the Franchise Agreements may be sold, transferred or assigned without the prior written consent of PHI which may not be unreasonably withheld if certain conditions are met. Additionally, PHI has a first right of refusal to purchase all or any part of a franchisee's interests if the franchisee proposes to accept a bona fide offer from a third party to purchase such interests and the sale would result in a change of control of the franchisee. PHI requires that the principal management officials of a franchisee retain a controlling interest in a franchisee that is a corporation or partnership. Default and Termination. Franchise Agreements automatically terminate in the event of the franchisee's insolvency, dissolution or bankruptcy. In addition, Franchise Agreements automatically terminate if the franchisee attempts an unauthorized transfer of a controlling interest of the franchise. PHI, at its option, may also unilaterally terminate a Franchise Agreement if the franchisee (i) is convicted of a felony, a crime of moral turpitude or another offense that adversely affects the Pizza Hut system, its trademarks or goodwill, (ii) discloses, in violation of the Franchise Agreement, confidential or proprietary information provided to it by PHI, (iii) knowingly or through gross negligence maintains false books or records or submits false reports to PHI, (iv) conducts the business so as to constitute an imminent danger to the public health, or (v) receives notices of default on three (3) or more occasions in twelve (12) months, or five (5) or more occasions in thirty-six (36) months even if each default had been cured. A termination under item (v) will affect only the individual restaurants in default, unless the defaults relate to the franchisee's entire operation, or are part of a common pattern or scheme, in which case all of the franchisee's rights will be terminated. Further, at its option, but only after thirty (30) days written notice of default and the franchisee's failure to remedy such default within the notice period, PHI may terminate a Franchise Agreement if the franchisee (i) fails to make any required payments or submit required financial or other data, (ii) fails to maintain prescribed restaurant operating standards, (iii) fails to obtain any required approval or consent, (iv) misuses any of PHI's trademarks or otherwise materially impairs its goodwill, (v) conducts any business under a name or trademark that is confusingly similar to those of PHI, (vi) defaults under any lease, sublease, mortgage or deed of trust covering a restaurant, (vii) fails to procure or maintain required insurance, or (viii) ceases operation without the prior consent of PHI. Management believes that the Partnership is in compliance in all material respects with its current Franchise Agreements; neither the predecessors to RMC nor the Partnership has ever had a Franchise Agreement terminated by PHI. In addition to items (i) through (viii) noted in the preceding paragraph, the Franchise Agreements allow PHI to also terminate a Franchise Agreement after thirty (30) days written notice if the franchisee attempts an unauthorized transfer of less than a controlling interest. A termination under these items will affect only the individual restaurants in default, unless the defaults relate to the franchisee's entire operation, in which case all of the franchisee's rights will be terminated. Tradenames, Trademarks and Service Marks. "Pizza Hut" is a registered trademark of PHI. The Franchise Agreements license franchisees to use the "Pizza Hut" trademark and certain other trademarks, service marks, symbols, slogans, emblems, logos, designs and other indicia or origin in connection with their Pizza Hut restaurants and all franchisees agree to limit their use of such marks to identify their restaurants and products and not to misuse or otherwise jeopardize such marks. The success of the business of the Restaurants is significantly dependent on the ability of the Partnership to operate using these marks and names and on the continued protection of these marks and names by PHI. Future Expansion. Under the terms of the Franchise Agreements, the Partnership has the right to open additional Pizza Hut restaurants within certain designated territories. The Partnership is not obligated to open any new restaurants in 2002 or future years. Seasonality ----------- Historically, due to the locations of many of the Restaurants near summer tourist attractions and the severity of winter weather in the areas in which many of the Restaurants are located, the Partnership has realized approximately 40% of its operating profits in periods six through nine (18 weeks). However, due to the increased sales and profits of the Partnership's restaurants in Texas and Oklahoma, the Partnership no longer experiences significant seasonality. Sales do continue to be largely driven through advertising and promotion. Competition ----------- The retail restaurant business is highly competitive with respect to trademark recognition, price, service, food quality and location, and is often affected by changes in tastes, eating habits, national and local economic conditions, population and traffic patterns. The Restaurants compete with large regional and national chains, including both fast food and full service chains, as well as with independent restaurants offering moderately priced food. Many of the Partnership's competitors have more locations, greater financial resources, and longer operating histories than the Partnership. The Restaurants compete directly with other pizza restaurants for dine-in, carry-out and delivery customers. Government Regulation --------------------- The Partnership and the Restaurants are subject to various government regulations, including zoning, sanitation, health, safety and alcoholic beverage controls. Restaurant employment practices are also governed by minimum wage, overtime and other working condition regulations which, to date, have not had a material effect on the operation of the Restaurants. The Partnership believes that it is in compliance with all laws and regulations which govern its business. In order to comply with the regulations governing alcoholic beverage sales in Montana, Texas, Wyoming and Oklahoma, the licenses permitting beer sales in certain Restaurants in those states are held in the name of resident persons or domestic entities to whom they were originally issued, and are utilized by the Partnership under lease arrangements with such resident persons or entities. Because of the varying requirements of various state agencies regulating liquor and beer licenses, the Partnership Agreement provides that all Unitholders and all other holders of limited partner interests must furnish the Managing General Partner with all information it reasonably requests in order to comply with any requirements of these state agencies, and that the Partnership has the right to purchase all Units held by any person whose ownership of Units would adversely affect the ability of the Partnership to obtain or retain licenses to sell beer or wine in any Restaurant. Employees --------- As of March 1, 2002, the Partnership did not have any employees. The Operating Partnerships had approximately 2,200 employees at the Restaurants. Each Restaurant is managed by one restaurant manager and one or more assistant restaurant managers. Many of the other employees are employed only part-time and, as is customary in the restaurant business, turnover among the part-time employees is high. The Partnership is not a party to any collective bargaining agreements and believes its employee relations to be satisfactory. The Restaurants' employees are supervised by employees of the Management Company which has its principal offices in Wichita, Kansas. The Management Company has a total of 43 employees which devote all or a significant part of their time to management of the Restaurants. In addition, the Partnership may employ certain management officials of the Management Company on a part-time basis. Employee relations are believed to be satisfactory. Financial Information About Foreign and Domestic Operations and Export ---------------------------------------------------------------------- Sales ----- The Partnership operates no restaurants in foreign countries. Item 2. Properties ---------- The following table lists the location by state of Restaurants as of December 25, 2001. Leased From Leased From Unrelated Third Affiliate of the Parties General Partners Owned Total ------- ---------------- ----- ----- Georgia 1 - 7 8 Louisiana - - 1 1 Montana 9 - 9 18 Oklahoma 24 - 2 26 Texas 11 - 15 26 Wyoming 1 1 6 8 --- --- --- --- Total 46 1 40 87 === === === === Six of the properties are subject to ground leases from unrelated third parties. The property leased from an affiliate of the General Partners is subject to a mortgage or deed of trust. Most of the properties, including that owned by an affiliate of the General Partners are leased for a minimum term of at least five years and are subject to one or more five-year renewal options. Management believes leases with initial or optional renewal periods expiring within the next five years can be renewed for multiple-year periods, or the property can be purchased, without significant difficulty or unreasonable expense. The amount of rent paid is either fixed or includes a fixed rental plus a percentage of the Restaurant's sales, subject, in some cases, to maximum amounts. The leases require the Partnership to pay all real estate taxes, insurance premiums, utilities, and to keep the property in general repair. Pizza Hut restaurants are constructed in accordance with prescribed design specifications and most are similar in exterior appearance and interior decor. The typical restaurant building is a freestanding, one-story building, with a wood, brick or stucco exterior. Most Pizza Hut restaurants still feature the distinctive red roof. The restaurants generally contain 1,800 to 3,000 square feet, including kitchen and storage areas, and have seating capacity for 75 to 140 persons. The typical property site will accommodate parking for 30 to 70 vehicles. Building designs may be varied only upon request and when required to comply with local regulations or for unique marketing reasons. Typical capital costs for the Partnership's existing restaurant facilities are approximately $150,000 for land, $250,000 for the building and $135,000 for equipment and furnishings for each unit. The cost of land, building and equipment for a typical Pizza Hut restaurant vary with location, size, construction costs and other factors. The Partnership estimates the average cost to construct and equip a new restaurant in its existing franchise territories is approximately $600,000 to $900,000 including the cost of land acquisition. Delivery/carryout facilities vary in size and appearance. These facilities are generally leased from unrelated third parties. The Partnership estimates that the capital investment necessary for a new delivery/carryout unit is approximately $200,000 in equipment and leasehold improvements. Item 3. Legal Proceedings ----------------- As of December 25, 2001, the Partnership was not a party to any pending legal proceedings material to its business. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- Not applicable. PART II ------- Item 5. Market for the Registrant's Class A Income Preference Units ----------------------------------------------------------- and Related Security Holder Matters ----------------------------------- The Partnership's Class A Income Preference Units were traded on the American Stock Exchange under the symbol "RMC" through November 13, 1997. On that date, the Partnership delisted from the American Stock Exchange and limited trading of its units. The Partnership offers a Qualified Matching Service, whereby the Partnership will match persons desiring to buy units with persons desiring to sell units. No units were matched during 2001 and 2000. Market prices for units during 2001 and 2000 were: Calendar Period High Low ----------------------------------------------------- 2001 ---- All Quarters $3.25 $3.25 2000 ---- All Quarters $3.25 $3.25 As of December 25, 2001, approximately 1,045 unitholders owned American Restaurant Partners, L.P. Class A Income Preference Units of limited partner interest. Information regarding the number of unitholders is based upon holders of record excluding individual participants in security position listings. Cash distributions to unitholders were: Per Record Date Payment Date Unit --------------------------------------------------------- 2001 ---- January 12, 2001 January 26, 2001 $.10 April 12, 2001 April 27, 2001 .10 July 12, 2001 July 27, 2001 .10 October 12, 2001 October 26, 2001 .10 --- Cash distributed during 2001 $.40 === 2000 ---- January 14, 2000 January 28, 2000 $.10 April 12, 2000 April 28, 2000 .10 July 12, 2000 July 28, 2000 .10 October 12, 2000 October 27, 2000 .10 --- Cash distributed during 2000 $.40 === The Partnership will make quarterly distributions of "Cash Available for Distribution" with respect to the Income Preference, Class B Units, and Class C Units. "Cash Available for Distribution" consists, generally, of all operating revenues less operating expenses (excluding noncash items such as depreciation and amortization), capital expenditures for existing restaurants, interest and principal payments on Partnership debt, and such cash reserves as the Managing General Partner may deem appropriate. Therefore, the Partnership may experience quarters in which there is no Cash Available for Distribution. The Partnership may retain cash during certain quarters and distribute it in later quarters in order to make quarterly distributions more consistent. Item 6. Selected Financial Data ----------------------- (in thousands, except per Unit data, number of Restaurants, and average weekly sales per Restaurant) American Restaurant Partners, L.P. ---------------------------------------------------------------- Year Ended

NOTES TO SELECTED FINANCIAL DATA (a) Net income is allocated to all partners in accordance with their respective units in the Partnership with all outstanding units being treated equally. (b) Capital expenditures include the cost of land, buildings, new and replacement restaurant equipment and refurbishment of leasehold improvements. Capital expenditures for existing restaurants represent such capitalized costs for all restaurants other than newly constructed restaurants. (c) Average weekly sales were calculated by dividing net sales by the weighted average number of restaurants open during the period. The quotient was then divided by the number of days in the period multiplied times seven days. (d) The Partnership began consolidating the accounts of Magic on August 11, 1998 when APP's interest in Magic increased from 45% to 60%. The 1998 selected financial data reflects this consolidation. Item 7. Management's Discussion and Analysis of Consolidated ---------------------------------------------------- Financial Condition and Results of Operations --------------------------------------------- Results of Operations --------------------- The following discussion compares the Partnership's results for the years ended December 25, 2001, December 26, 2000 and December 28, 1999. This discussion should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements included elsewhere herein. Net Sales --------- Net sales for the year ended December 25, 2001 increased $3,312,000 from net sales of $60,505,000 in 2000 to net sales of $63,817,000 in 2001, a 5.5% increase. Comparable restaurant sales increased 6.3% over the prior year. The stronger than expected sales results in 2001 were achieved primarily from more successful marketing promotions during the year and the success of Twisted Crust Pizza introduced during the second quarter of 2001. Net sales for the year ended December 26, 2000 increased $2,685,000 from net sales of $57,820,000 in 1999 to $60,505,000 in 2000, a 4.6% increase. Comparable restaurant sales increased 6.4% over 1999. The 2000 sales increase was attributable primarily to continued improvement in restaurant operations and the success of the Insider Pizza introduced during the fourth quarter of 2000. Income From Operations ---------------------- Income from operations for the year ended December 25, 2001 decreased $246,000 from $5,178,000 to $4,932,000, a 4.8% decrease from the year ended December 26, 2000. As a percentage of net sales, income from operations decreased from 8.6% of net sales for the year ended December 26, 2000 to 7.7% of net sales for the year ended December 25, 2001. Cost of sales increased as a percentage of net sales from 24.8% in 2000 to 25.6% in 2001 primarily due to significantly higher cheese costs. Labor and benefits expense increased as a percentage of net sales from 28.7% in 2000 to 28.9% in 2001. Advertising decreased as a percentage of net sales from 6.5% in 2000 to 6.1% in 2001. This decrease was achieved by successfully negotiating lower rates and reducing local market spending levels. Other restaurant operating expenses remained at 18.8% of net sales for both years. Additionally, general and administrative expenses remained at 8.0% of net sales for both years. Depreciation and amortization expense increased to 4.9% of net sales in 2001 compared to 4.7% of net sales in 2000. Income from operations for the year ended December 26, 2000 increased $1,188,000 from $3,990,000 to $5,178,000, a 29.8% increase over the year ended December 28, 1999. As a percentage of net sales, income from operations increased from 6.9% of net sales for the year ended December 28, 1999 to 8.6% of net sales for the year ended December 26, 2000. Cost of sales decreased as a percentage of net sales from 26.6% in 1999 to 24.8% in 2000 due to significantly lower cheese costs. Labor and benefits expense decreased as a percentage of net sales from 29.2% in 1999 to 28.7% in 2000 attributable to better cost controls and increased productivity in the restaurants. Advertising remained at 6.5% of net sales for both years. Other restaurant operating expenses increased slightly from 18.7% of net sales for the year ended December 28, 1999 to 18.8% of net sales for the year ended December 26, 2000. General and administrative expenses increased from 7.6% of net sales in 1999 to 8.0% of net sales in 2000 reflecting increased bonuses paid on improved operating results. Depreciation and amortization expense increased to 4.7% of net sales in 2000 compared to 4.4% of net sales in 1999 primarily due to the addition of point- of-sale terminals under capital leases. Net Income ---------- Net income increased $457,000 to $1,829,000 for the year ended December 25, 2001 compared to net income of $1,372,000 for the year ended December 26, 2000. The 2001 period net income included a gain on fire settlement of $159,000 (see Note 9 of the accompanying financial statements). The 2000 period net income included a $409,000 charge to record the default of certain loans within the Partnership's pooled borrowings with FMAC (see Note 3 of the accompanying financial statements). Net income is net of minority interest in income of operating partnerships of $26,000 and $211,000 in 2001 and 2000, respectively. This $185,000 decrease is attributable to APP's purchase of an additional 39% of Magic in the third quarter of 2000, which reduced the minority interest in Magic from 40% to 1%. Net income increased $57,000 to $1,372,000 for the year ended December 26, 2000 compared to net income of $1,315,000 for the year ended December 28, 1999. The 1999 period net income included a loss on sale of investments held for sale of $135,000 and a $197,000 gain on sale of a restaurant. The 1999 period net income was increased by $424,000 to record the cure of a default of certain loans within the Partnership's pooled borrowings from Franchise Mortgage Acceptance Company (FMAC) while the 2000 net income includes a $409,000 charge to record the default of certain loans within the Partnership's pooled borrowings with FMAC (See Note 3 of the accompanying financial statements). The 2000 period net income also includes equity in loss of unconsolidated affiliates of $177,000. Liquidity and Capital Resources ------------------------------- The Partnership generates its principal source of funds from net cash provided by operating activities. Management believes that net cash provided by operating activities and various other sources of income will provide sufficient funds to meet planned capital expenditures for recurring replacement of equipment in existing restaurants and to service debt obligations for the next twelve months. At December 25, 2001, the Partnership had a working capital deficiency of $8,656,000 compared to a deficiency of $6,543,000 at December 26, 2000. The increase in working capital deficiency at December 25, 2001 is primarily a result of a $2,643,000 increase in current portion of long-term debt. Subsequent to December 25, 2001, the Partnership retired $2,463,000 of this current portion of long-term debt using proceeds from sale-leaseback transactions of real estate completed in January 2002. The Partnership routinely operates with a negative working capital position which is common in the restaurant industry and which results from the cash sales nature of the restaurant business and payment terms with vendors. Net Cash Provided by Operating Activities ----------------------------------------- During 2001, net cash provided by operating activities amounted to $5,131,000, a decrease of $282,000 over 2000. This decrease is primarily attributable to a $246,000 decrease in income from operations. Non-operating items of income and expense include a noncash charge in 2000 of $409,000 to record a loss on default in pooled loans. Investing Activities -------------------- Capital expenditures for 2001 were $2,056,000, of which $196,000 was for the purchase of the land and building of a previously leased restaurant. Capital expenditures for construction of new or replacement restaurants totaled $924,000. The remaining capital expenditures were for replacement of equipment in existing restaurants. Equipment costs included above totaling $295,000 for two new restaurants in Texas were subsequently sold in sale-leaseback transactions. Therefore, the proceeds from the sale-leaseback transactions of $295,000 are included in proceeds from the sale of property and equipment. The Partnership also received insurance proceeds of $252,000 due to a restaurant fire. Financing Activities -------------------- Cash distributions paid in 2001 totaled $1,376,000 and amounted to $0.40 per unit. The Partnership's distribution objective, generally, is to distribute all operating revenues less operating expenses (excluding noncash items such as depreciation and amortization), capital expenditures for existing restaurants, interest and principal payments on Partnership debt, and such cash reserves as the managing General Partner may deem appropriate. During 2001, the Partnership's proceeds from long-term borrowings amounted to $1,724,000 of which $287,000 was used to purchase previously leased restaurants and $150,000 was used to purchase equipment of a new restaurant. The remainder was used primarily to replenish operating capital. The Partnership plans to open two new restaurants during 2002. The land for one of these new restaurants has been purchased. Management anticipates spending approximately $800,000 for the building and equipment at this location. The other restaurant, a delivery/carryout unit leased from an unrelated third party, opened in the first quarter of 2002. Management anticipates the cost of developing this location at approximately $200,000. Development of the new restaurants will be financed through existing lenders. Management anticipates spending $508,000 in 2002 for recurring replacement of equipment in existing restaurants which the Partnership expects to finance from net cash provided by operating activities. The actual level of capital expenditures may be higher in the event of unforeseen breakdowns of equipment or lower in the event of inadequate net cash flow from operating activities. Other Matters ------------- On January 31, 2000 AmeriServe, the Partnership's primary supplier of food ingredients and dry goods, filed for protection under the U.S. Bankruptcy Code. McLane Company, Inc., a subsidiary of Wal-Mart Stores, Inc., completed the purchase of AmeriServe's U.S. distribution business on November 30, 2000. As part of the sale, the Partnership agreed to a two-year contract extension and will incur a 5% increase in distribution fees. The overall impact of the increased distribution fees on cost of sales is approximately 0.1%. On March 13, 1996, the Partnership purchased a 45% interest in Magic, a newly-formed limited partnership, for $3.0 million in cash. Magic owns and operates twenty-six Pizza Hut restaurants in Oklahoma. In August 1998, Magic purchased a 25% interest in Magic from a former limited partner which effectively increased the Partnership's interest in Magic from 45% to 60%. Therefore, beginning August 11, 1998, Magic's financial statements were consolidated into the Partnership's consolidated financial statements. Prior to August 11, 1998, the Partnership accounted for its investment in Magic using the equity method of accounting. In connection with the consolidation, the Partnership recorded goodwill of $728,000 which represented the excess purchase price of the original equity investment in the net assets acquired, net of subsequent amortization. On July 26, 2000, APP purchased 39% of Magic from the Management Company for $2,500,000 cash and contingent consideration of $700,000. The $2,500,000 cash payment was financed by INTRUST Bank over five years at 9.5%. The contingent consideration will become due in the event that Magic's cash flow (determined on a 12 month trailing basis) exceeds $2.6 million at any time between January 1, 2001 and December 31, 2005. Payment of the remaining balance shall be made in Class B and Class C Units of the Partnership. In the event that Magic's cash flow does not reach this cash flow goal on or prior to December 31, 2005, APP shall owe no additional consideration. Upon completion of this purchase, the Partnership owns 99% of Magic. The Management Company is considered a related party in that one individual has controlling interest in both the Management Company and the Partnership's general partner. To the extent that the Partnership and the Management Company have common ownership, the transaction was recorded at the Management Company's historical cost. As a result of the transaction, the Partnership recorded goodwill of $1,407,991 and cost in excess of carrying value of assets acquired of $534,962. The Partnership delisted from the American Stock Exchange effective November 13, 1997 and limited trading of its units. As a result, the Partnership will continue to be taxed as a partnership rather than being taxed as a corporation. The Partnership offers a Qualified Matching Service, whereby the Partnership will match persons desiring to buy units with persons desiring to sell units. Effects of Inflation and Future Outlook --------------------------------------- Inflationary factors such as increases in food and labor costs directly affect the Partnership's operations. Because most of the Partnership's employees are paid on an hourly basis, changes in rates related to federal and state minimum wage and tip credit laws will effect the Partnership's labor costs. The Partnership cannot always effect immediate price increases to offset higher costs and no assurance can be given the Partnership will be able to do so in the future. Management anticipates an increase in the minimum wage during the last part of 2002. While an increase in the minimum wage would increase the Partnership's labor costs, due to the uncertainty regarding legislation on the matter, management cannot reliably estimate the potential impact on labor costs at this time. The Partnership's earnings are affected by changes in interest rates primarily from its long-term debt arrangements. Under its current policies, the Partnership does not use interest rate derivative instruments to manage exposure to interest rate changes. Due to the small amount of debt at variable interest rates, a hypothetical 100 basis point adverse move (increase) in interest rates along the entire interest rate yield curve would not have a material effect on the Partnership's interest expense and net income over the term of the related debt. This amount was determined by considering the impact of the hypothetical interest rates on the Partnership's borrowing cost. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act, which are intended to be covered by the safe harbors created thereby. Although the Partnership believes the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and, therefore, there can be no assurance the forward-looking statements included in this report will prove to be accurate. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to, consumer demand and market acceptance risk, the effect of economic conditions, including interest rate fluctuations, the impact of competing restaurants and concepts, the cost of commodities and other food products, labor shortages and costs and other risks detailed in the Partnership's Securities and Exchange Commission filings. Item 8. Financial Statements and Supplementary Data ------------------------------------------- See the consolidated financial statements and supplementary data listed in the accompanying "Index to Consolidated Financial Statements and Supplementary Data" on Page F-1 herein. Information required for financial statement schedules under Regulation S-X is either not applicable or is included in the consolidated financial statements or notes thereto. Item 9. Changes in and Disagreements with Accountants on Accounting ----------------------------------------------------------- and Financial Disclosure ------------------------ The Partnership filed a Form 8-K to report a change in certifying accountants with the firm of Ernst & Young LLP being replaced by Grant Thornton LLP effective September 9, 1999. PART III Item 10. Directors and Executive Officers of the Registrant -------------------------------------------------- RAM, as the Managing General Partner, is responsible for the management and administration of the Partnership under a Management Services Agreement with the Operating Partnerships. Partnership management services include, but are not limited to: preparing and reviewing projections of cash flow, taxable income or loss, and working capital requirements; conducting periodic physical inspections, market surveys and continual Restaurant reviews to determine when assets should be sold and, if so, determining acceptable terms of sale; arranging any debt financing for capital improvements or the purchase of assets; supervising any litigation involving the Partnerships; preparing and reviewing Partnership reports; communicating with Unitholders; supervising and reviewing Partnership bookkeeping, accounting and audits; supervising the presentation of and reviewing Partnership state and federal tax returns; personnel functions, and supervising professionals employed by the Partnerships in connection with any of the foregoing, including attorneys, accountants and appraisers. The direct management of the Restaurants is performed by the Management Company pursuant to a substantially identical Management Services Agreement with RAM. As compensation for management services, the Management Company will receive a management fee equal to 7% of the gross sales of the Restaurants in APP and 4.5% of gross sales of the Restaurants in Magic. In addition, the Management Company will be reimbursed for the cost of certain products purchased for use directly in the operation of the Restaurants and for outside legal, accounting, tax, auditing, advertising, and marketing services. Certain other expenses incurred by the Management Company which relate directly to the operation of the Restaurants, including insurance and profit sharing and incentive bonuses and related payroll taxes for supervisory personnel, shall be paid by the Operating Partnerships through RAM. Set forth below is certain information concerning the director and executive officers of both RAM and the Management Company. Present Position with the Management Company and Business Experience for Name Age Past 5 Years ---- --- ------------------------------------------ Hal W. McCoy 56 Chairman, Chief Executive Officer and sole director. McCoy holds a Bachelor of Arts degree from the University of Oklahoma. From 1970 to 1974, he was at different times Marketing Manager at PHI, where he was responsible for consumer research, market research, and market planning, and Systems Manager, where he was responsible for the design and installation of PHI's first management data processing system. In 1974, he founded the predecessor to the Management Company and today owns or has controlling ownership in entities operating a combined total of 120 franchised "Pizza Hut" and "Long John Silver's" restaurants. Hal W. McCoy II 34 President. McCoy holds a Bachelor of Science degree in Business Administration from the University of Kansas. In 1990, he founded, owned and operated CenTex Pizza Partners, L.P., which operated four Pizza Huts in Texas. After improving the operations and selling CenTex in 1992, he joined the Management Company where he currently oversees all operations for the Pizza Huts and Long John Silver's managed by the Management Company. J. Leon Smith 59 Vice President. Smith holds a Bachelor of Science degree in Hotel and Restaurant Management from Oklahoma State University and a Juris Doctorate from the University of Oklahoma. He has been employed by McCoy since 1974, first as Director of Operations for the Long John Silver's division and then as Director of Real Estate Development and General Counsel. Terry Freund 46 Chief Financial and Accounting Officer. Freund holds a Bachelor of Arts degree in Accounting from Wichita State University. He has been employed by McCoy since 1984. He is responsible for virtually all of the financial and administrative functions in the company. Item 11. Executive Compensation ---------------------- The executive officers of the Management Company perform services for all of the restaurants managed by the Management Company, including the Restaurants. Cash compensation of executive officers of the Management Company who are also officers of affiliated companies is allocated for accounting purposes among the various entities owning such restaurants on the basis of the number of restaurants each entity owns. Only the compensation of the Chief Executive Officer, President, and Chief Financial Officer is shown below as the other officer's total cash compensation does not exceed $100,000. Neither RAM nor the Operating Partnerships compensate their officers, directors or partners for services performed, and the salaries of the executive officers of the Management Company are paid out of its management fee and not directly by the Partnership. SUMMARY COMPENSATION TABLE Annual Compensation ------------------- Name and Allocable to Principal Position Year Salary Bonus Total Partnership ------------------ ---- ------ ----- ----- ----------- Hal W. McCoy 2001 $159,181 $60,700 $219,881 $171,850 Chief Executive Officer 2000 173,858 83,878 257,736 199,283 1999 174,831 47,969 222,800 176,389 Hal W. McCoy II 2001 128,574 62,252 190,826 139,246 President 2000 106,257 74,950 181,207 145,310 1999 97,765 32,899 130,664 98,725 Terry Freund 2001 109,523 61,009 170,532 126,128 Assistant Secretary and 2000 103,900 59,732 163,632 129,673 Chief Financial and 1999 96,227 30,078 126,305 96,739 Accounting Officer Incentive Bonus Plan -------------------- The Management Company maintains a discretionary supervisory incentive bonus plan (the "Incentive Bonus Plan") pursuant to which approximately 24 employees in key management positions, including Mr. McCoy are eligible to receive quarterly cash bonus payments if certain management objectives are achieved. Performance is measured each quarter and bonus payments are awarded and paid at the discretion of Mr. McCoy. The amounts paid under this plan for fiscal year 2001, 2000 and 1999 to Mr. McCoy, Mr. McCoy II and Mr. Freund are included in the amounts shown in the cash compensation amounts set forth above. The total amount allocated to the Restaurants under the Incentive Bonus Plan for the fiscal year ended December 25, 2001 was $486,488 of which $128,849 was paid to all executive officers as a group. Bonuses paid under the Incentive Bonus Plan are paid by the Operating Partnerships. The Incentive Bonus Plan in effect for the fiscal year ending December 25, 2001 provides for payment of aggregate supervisory bonuses in an amount equal to 15% of the amount by which the Partnership's income from operations plus depreciation and amortization expenses exceed a prescribed threshold. The threshold generally represents capital expenditures, interest and principal payments on Partnership debt, and cash distributions. For the fiscal year ended December 25, 2001 the Partnership's income from operations plus depreciation and amortization expenses was $8,038,833. Class A Unit Option Plan ------------------------ The Partnership, APP, RAM and the Management Company have adopted a Class A Unit Option Plan (the "Plan") pursuant to which 75,000 Class A Units are reserved for issuance to employees, including officers, of the Partnership, APP, RAM and the Management Company. Participants will be entitled to purchase a designated number of Units at an option price which shall be equal to the fair market value of the Units on the date the option is granted. Options granted under the Plan will be for a term to be determined by the Managing General Partner at the time of issuance (not to exceed ten years) and shall not be transferable except in the event of the death of the optionee, unless the Managing General Partner otherwise determines and so specifies in the terms of the grant. The Plan is administered by the Managing General Partner which, among other things, designates the individuals to whom options are granted, the number of Units for which such options are to be granted and other terms of grant. The executive officers have no outstanding options at December 25, 2001. Item 12. Security Ownership of Certain Beneficial Owners and --------------------------------------------------- Management ---------- PRINCIPAL UNITHOLDERS --------------------- The following table sets forth, as of March 1, 2002, information with respect to persons known to the Partnership to be beneficial owners of more than five percent of the Class A Income Preference Units, Class B or Class C Units of the Partnership: Name & Address Amount & Nature Title of Beneficial of Beneficial Percent of Class Owner Ownership of Class -------- -------------- --------------- -------- Class A Income Preference Units None Class B Hal W. McCoy 641,537 (1) 59.17% 3020 N. Cypress Rd. Suite 100 Wichita, KS 67226 Class B Hal W. McCoy II 84,105 7.76% 3020 N. Cypress Rd. Suite 100 Wichita, KS 67226 Class B John Hunter 116,564 10.75% 117 Lilac Lane San Antonio, TX 78209 Class C Hal W. McCoy 1,246,876 (1) 65.85% 3020 N. Cypress Rd. Suite 100 Wichita, KS 67226 Class C Hal W. McCoy II 141,129 7.45% 3020 N. Cypress Rd. Suite 100 Wichita, KS 67226 Class C John Hunter 106,536 5.63% 117 Lilac Lane San Antonio, TX 78209 (1) Hal W. McCoy beneficially owns 95.75% of RMC Partners, L.P. which owns 671,164 Class B Units and 1,297,266 Class C Units. Mr. McCoy owns 95.65% of RMC American Management, Inc. which owns 3,680 Class C Units. Mr. McCoy has voting authority over the units. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth, as of March 1, 2002, the number of Class A Income Preference Units, Class B Units, or Class C Units beneficially owned by the director and by the director and executive officers of both RAM and the Management Company as a group. Title Name of Amount & Nature Percent of Class Beneficial Owner of Beneficial Ownership of Class -------- ---------------- ----------------------- -------- B Hal W. McCoy 641,537 (1) 59.17% C Hal W. McCoy 1,246,876 (1) 65.85% B Director & all 807,069 (1) 74.44% officers as a group (4 Persons) C Director & all 1,530,315 (1) 80.82% officers as a group (4 Persons) (1) See the table under "Principal Unitholders" Item 13. Certain Relationships and Related Transactions ---------------------------------------------- One of the Restaurants is located in a building owned by an affiliate of the General Partners. The lease provides for minimum annual rentals of $29,500 and is subject to additional rentals based on a percentage of sales in excess of a specified amount. The lease is a net lease, under which the lessee pays the taxes, insurance and maintenance costs. The lease is for an initial term of 15 years with options to renew for three additional five-year periods. Although this lease was not negotiated at arm's length, RMC believes that the terms and conditions thereof, including the rental rate, is not less favorable to the Partnership than would be available from unrelated parties. Pursuant to the Management Services Agreements (Agreements) entered into June 26, 1987, the Restaurants of APP are managed by the Management Company for a fee equal to 7% of the gross sales of the Restaurants and reimbursement of certain costs incurred for the direct benefit of the Restaurants. Neither the terms and conditions of the Agreements, nor the amount of the fee were negotiated at arm's length. Based on prior experience in managing the Restaurants, however, the Managing General Partner believes that the terms and conditions of the Management Services Agreement, including the amount of the fee, are fair and reasonable and not less favorable to the Partnership than those generally prevailing with respect to similar transactions between unrelated parties. The 7% fee approximated the actual unreimbursed costs incurred by the Managing General Partner in managing the Restaurants when the Agreements were entered into in June of 1987. The 7% fee remains in effect for the life of the Agreements which expire December 31, 2007. Pursuant to separate Management Services Agreements entered into March 13, 1996, the Restaurants of Magic are managed by the Management Company for a fee equal to 4.5% of the gross sales of the Restaurants and reimbursement of certain costs incurred for the direct benefit of the Restaurants. The terms and conditions of the Agreements were negotiated at arm's length with the former owners of the Oklahoma restaurants who were originally 25% partners in Magic. The Management Company agreed to a reduced fee due to its ownership interest in Magic. The 4.5% fee remains in effect for the remaining life of the Agreements which expire February 28, 2010. PART IV Item 14. Exhibits, Financial Statements and Reports on Form 8-K ------------------------------------------------------ (a) 1. Financial statements -------------------- See "Index to Consolidated Financial Statements and Supplementary Data" which appears on page F-1 herein. 3. Exhibits -------- The exhibits filed as part of this annual report are listed in the "Index to Exhibits" at page 29. (b) Reports on Form 8-K ------------------- During the third quarter of 1999, the Partnership filed a Form 8-K dated September 9, 1999 reporting a change in certifying accountants. INDEX TO EXHIBITS (Item 14(a)) Exhibit No. Description of Exhibits Page/Notes ------- ----------------------- ---------- 3.1 Amended and Restated Certificate of Limited Partnership of American Restaurant Partners, L.P. A 3.2 Amended and Restated Agreement of Limited Partnership of American Restaurant Partners, L.P. A 3.3 Amended and Restated Certificate of Limited Partnership of American Pizza Partners, L.P. A 3.4 Amended and Restated Agreement of Limited Partnership of American Pizza Partners, L.P. A 4.1 Form of Class A Certificate A 4.2 Form of Application for Transfer of Class A Units A 10.1 Management Services Agreement dated June 26, 1987 between American Pizza Partners, L.P. and RMC American Management, Inc. A 10.2 Management Services Agreement dated June 26, 1987 between RMC American Management, Inc. and Restaurant Management Company of Wichita, Inc. A 10.3 Form of Superseding Franchise Agreement between the Partnership and Pizza Hut, Inc. and schedule pursuant to Item 601 of Regulation S-K. A 10.4 Form of Blanket Amendment to Franchise Agreements A 10.5 Incentive Bonus Plan A 10.6 Class A Unit Option Plan B 10.7 Revolving Term Credit Agreement dated June 29, 1987 between American Pizza Partners, L.P. and the First National Bank in Wichita C 10.8 Form of 1990 Franchise Agreement between the Partnership and Pizza Hut, Inc. and schedule pursuant to Item 601 of Regulation S-K D 10.9 Contribution Agreement, dated as of February 1, 1996, relating to the closing date of March 13, 1996, by and among American Pizza Partners, L.P., Hospitality Group of Oklahoma, Inc., RMC American Management, Inc., Restaurant Management Company of Wichita, Inc. and Oklahoma Magic, L.P. E 10.10 Settlement Agreement between Oklahoma Magic, L.P. and Hospitality Group of Oklahoma, Inc. F 23.1 Consent of Grant Thornton L.L.P. F-23 A. Included as exhibits in the Partnership's Registration Statement on Form S-1 (Registration No.33-15243) dated August 20, 1987 and included herein by reference to exhibit of same number. B. Incorporated by reference to the Partnership's Registration Statement on Form S-8 dated March 21, 1988. C. Incorporated by reference to Exhibit 10.7 of the Partnership's Form 10-K for the year ended December 31, 1987. D. Incorporated by reference to Exhibit 10.8 of the Partnership's Form 10-K for the year ended December 31, 1991. E. Incorporated by reference to Exhibit 2 of the Partnership's Form 8-K dated March 13, 1996. F. Incorporated by reference to Exhibit 10.10 of the Partnership's Form 10-K dated December 29, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN RESTAURANT PARTNERS, L.P. (Registrant) By: RMC AMERICAN MANAGEMENT, INC. Managing General Partner Date: 3/22/02 By: /s/Hal W. McCoy ------- --------------- Hal W. McCoy Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Title Date ---- ----- ---- /s/Hal W. McCoy Chairman and Chief Executive Officer 3/22/02 --------------- (Principal Executive Officer) ------- Hal W. McCoy of RMC American Management, Inc. /s/Terry Freund Chief Financial and Accounting 3/22/02 --------------- Officer ------- Terry Freund Index to Consolidated Financial Statements and Supplementary Data The following financial statements are included in Item 8: Page ---- Report of Independent Certified Public Accountants . . . . . F-2 Consolidated Balance Sheets as of December 25, 2001 and December 26, 2000 . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Income for the years ended December 25, 2001, December 26, 2000, and December 28, 1999 . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Partners' Capital (Deficiency) for the years ended December 25, 2001, December 26, 2000 and December 28, 1999 . . . . . . . . F-6 Consolidated Statements of Cash Flows for the years ended December 25, 2001, December 26, 2000, and December 28, 1999 . . . . . . . . . . . . . . . . . F-7 Notes to Consolidated Financial Statements . . . . . . . . . F-8 All financial statement schedules have been omitted since the required information is not present. Report of Independent Certified Public Accountants The General Partners and Limited Partners American Restaurant Partners, L.P. We have audited the accompanying consolidated balance sheets of American Restaurant Partners, L.P. (the Partnership) as of December 25, 2001 and December 26, 2000, and the related consolidated statements of income, partners' capital (deficiency), and cash flows for each of the three years in the period ended December 25, 2001. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of American Restaurant Partners, L.P. at December 25, 2001 and December 26, 2000 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 25, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/Grant Thornton LLP Wichita, Kansas March 8, 2002 AMERICAN RESTAURANT PARTNERS, L.P. CONSOLIDATED BALANCE SHEETS December 25, December 26, ASSETS 2001 2000 ----------------------------------- ------------ ------------ Current assets: Cash and cash equivalents $ 1,594,934 $ 788,485 Accounts receivable 482,185 320,038 Due from affiliates 64,668 66,244 Notes receivable from affiliates - current portion 16,173 15,221 Inventories 397,821 407,413 Prepaid expenses 359,592 307,894 ---------- ---------- Total current assets 2,915,373 1,905,295 Property and equipment, at cost: Land 5,089,834 4,991,222 Buildings 9,020,921 8,920,125 Restaurant equipment 13,613,104 13,502,699 Leasehold rights and improvements 8,662,927 8,259,820 Property under capital leases 3,999,874 3,538,902 Construction in progress 328,428 - ---------- ---------- 40,715,088 39,212,768 Less accumulated depreciation and amortization 20,580,330 18,552,936 ---------- ---------- 20,134,758 20,659,832 Other assets: Franchise rights, net of accumulated amortization of $2,218,933 ($1,951,824 in 2000) 4,969,167 5,236,276 Notes receivable from affiliates 53,409 66,111 Deposit with affiliate 485,000 485,000 Goodwill, net of accumulated amortization of $264,865 ($179,977 in 2000) 1,967,627 2,052,515 Other 1,193,205 1,386,337 ---------- ---------- 8,668,408 9,226,239 ---------- ---------- $31,718,539 $31,791,366 ========== ========== AMERICAN RESTAURANT PARTNERS, L.P. CONSOLIDATED BALANCE SHEETS December 25, December 26, LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY) 2001 2000 ---------------------------------------------- ------------ ------------ Current liabilities: Accounts payable $ 3,129,578 $ 2,719,592 Due to affiliates 52,763 158,755 Accrued payroll and other taxes 981,542 899,140 Accrued liabilities 1,404,786 1,361,631 Current maturities of long-term debt 5,406,737 2,763,409 Current portion of capital lease obligations 596,356 545,381 ---------- ---------- Total current liabilities 11,571,762 8,447,908 Long-term liabilities less current maturities: Capital lease obligations 1,995,197 2,026,327 Long-term debt 23,667,180 27,121,884 Other noncurrent liabilities 817,104 992,674 ---------- ---------- 26,479,481 30,140,885 Minority interests in Operating Partnerships 140,406 135,780 Commitments and contingencies - - Partners' capital (deficiency): General Partners (8,358) (8,727) Limited Partners: Class A Income Preference, authorized 875,000 units; issued 696,813 units (707,138 in 2000) 5,131,262 5,099,355 Classes B and C, issued 1,093,518 and 1,912,648 class B and C units, respectively (1,095,018 and 1,915,148 units in 2000, respectively) (9,146,027) (9,415,842) Notes receivable employees - sale of partnership units (591,344) (749,350) Cost in excess of carrying value of assets acquired (1,858,643) (1,858,643) ---------- ---------- Total partners' capital (deficiency) (6,473,110) (6,933,207) ---------- ---------- $31,718,539 $31,791,366 ========== ========== See accompanying notes. AMERICAN RESTAURANT PARTNERS, L.P. CONSOLIDATED STATEMENTS OF INCOME Years ended December 25, 2001, December 26, 2000 and December 28, 1999

AMERICAN RESTAURANT PARTNERS, L.P. Consolidated Statements of Partners' Capital (Deficiency) Years ended December 25, 2001, December 26, 2000, and December 28, 1999

AMERICAN RESTAURANT PARTNERS, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 25, 2001, December 26, 2000, and December 28, 1999

AMERICAN RESTAURANT PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES ------------------------------- ORGANIZATION American Restaurant Partners, L.P. was formed in connection with a public offering of Class A Income Preference Units in 1987 and owns a 99% limited partnership interest in American Pizza Partners, L.P. (APP). The remaining 1% of American Pizza Partners, L.P. is owned by RMC Partners, L.P. and RMC American Management, Inc. (RAM) as the general partners. On March 13, 1996, APP purchased a 45% interest in a newly formed limited partnership, Oklahoma Magic, L.P. (Magic), that owns and operates twenty-six Pizza Hut restaurants in Oklahoma. Effective August 11, 1998, APP's interest in Magic increased from 45% to 60% in connection with Magic's purchase of a 25% interest from a former limited partner. On July 26, 2000, APP purchased 39% of Magic from Restaurant Management Company of Wichita, Inc. (the Management Company) bringing their interest in Magic to 99%. The remaining 1% interest in Magic is held by RAM, the managing general partner. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of American Restaurant Partners, L.P. and its majority owned subsidiaries, American Pizza Partners, L.P., APP Concepts, L.C. and Oklahoma Magic, L.P., which are hereinafter collectively referred to as the Partnership. All significant intercompany transactions and balances have been eliminated. FISCAL YEAR The Partnership operates on a 52 or 53 week fiscal year ending on the last Tuesday in December. EARNINGS PER PARTNERSHIP UNIT Basic earnings per Partnership unit are computed based on the weighted average number of Partnership units outstanding. For purposes of diluted computations, the number of Partnership units that would be issued from the exercise of dilutive Partnership unit options has been reduced by the number of Partnership units which could have been purchased from the proceeds of the exercise at the average market price of the Partnership's units or the price of the Partnership's units on the exercise date. OPERATIONS All of the restaurants owned by the Partnership are operated under a franchise agreement with Pizza Hut, Inc., the franchisor. The agreement grants the Partnership exclusive rights to develop and operate restaurants in certain franchise territories. The Partnership operates restaurants in Georgia, Louisiana, Montana, Texas, Wyoming and Oklahoma. A schedule of restaurants in operation for the periods presented in the accompanying consolidated financial statements is as follows: 2001 2000 1999 ---- ---- ---- Restaurants in operation at beginning of period 86 87 89 Opened 2 -- -- Closed (1) (1) (1) Sold -- -- (1) --- --- --- Restaurants in operation at end of period 87 86 87 === === === INVENTORIES Inventories consist of food and supplies and are stated at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the life of the lease or improvement, whichever is shorter. The estimated useful lives used in computing depreciation and amortization are as follows: Buildings 10 to 30 years Restaurant equipment 3 to 7 years Leasehold rights and improvements 5 to 20 years Expenditures for maintenance and repairs are charged to operations as incurred. Expenditures for renewals and betterments, which materially extend the useful lives for assets or increase their productivity, are capitalized. Depreciation expense was $2,621,072, $2,345,383, and $2,036,396 for the years ended December 25, 2001, December 26, 2000 and December 28, 1999, respectively. AMORTIZATION OF GOODWILL Goodwill resulting from APP's investment in Magic was amortized over 29 years using the straight-line method through December 25, 2001. Effective December 26, 2001, goodwill will no longer be amortized but will be tested for impairment annually and whenever there is an impairment indicator (see also discussion in Effect of New Accounting Standards.) INVESTMENTS IN AFFILIATES Investments in affiliated entities owned less than 50% are accounted for on the equity method. Accordingly, consolidated net income includes the Partnership's share of their net income or loss. FRANCHISE RIGHTS AND FEES Agreements with the franchisor provide franchise rights for a period of 20 years and are renewable at the option of the Partnership for an additional 15 years, subject to the approval of the franchisor. Initial franchise fees are capitalized and amortized by the straight- line method over periods not in excess of 30 years. Periodic franchise royalty and advertising fees, which are based on a percent of sales, are charged to operations as incurred. CONCENTRATION OF CREDIT RISKS The Partnership's financial instruments that are exposed to concentration of credit risks consist primarily of cash and accounts receivable. The Partnership places its funds into high credit quality financial institutions and, at times, such funds may be in excess of the Federal Depository insurance limit. The Partnership generally does not require collateral against accounts receivable. Credit risks associated with the majority of customer sales are minimal as such sales are primarily for cash. All notes receivable from affiliates are supported by the guarantee of the majority owner of the Partnership. INCOME TAXES The Partnership is not subject to federal or state income taxes and, accordingly, no provision for income taxes has been reflected in the accompanying consolidated financial statements. Such taxes are the responsibility of the partners based on their proportionate share of the Partnership's taxable earnings. Due to differences in the rules related to reporting income for financial statement purposes and for purposes of income tax returns by individual limited partners, the tax information sent to individual limited partners differs from the information contained herein. At December 26, 2001, the Partnership's reported amount of its net assets for financial statement purposes were more than the income tax bases of such net assets by approximately $741,000. The differences between net income in conformance with accounting principles generally accepted in the United States of America (US GAAP) and taxable income are as follows: 2001 2000 1999 ---- ---- ---- US GAAP net income $1,828,908 $1,372,124 $1,314,554 Depreciation and amortization 366,691 153,712 36,348 Capitalized leases (67,041) (11,750) (59,601) Equity in earnings (loss) of affiliate (131,580) 89,127 (274,257) Loss on restaurant closings 158 (1,750) (42,149) Gain on disposition of assets 95,723 7,051 437,316 Unicap adjustment (2,140) 1,830 4,731 Loss on default of pooled loans - 313,465 - Other (45,696) 23,139 147,371 --------- --------- --------- Taxable income $2,045,023 $1,946,948 $1,564,313 ========= ========= ========= The Omnibus Budget Reconciliation Act of 1987 required public limited partnerships to become taxable entities beginning in 1998. After considering various alternatives, the Partnership delisted from the American Stock Exchange effective November 13, 1997 and now limits trading of its units. As a result, the Partnership continues to be taxed as a partnership rather than being taxed as a corporation. ADVERTISING COSTS Advertising production and media costs are expensed as incurred. USE OF ESTIMATES In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS For purposes of the statements of cash flows, the Partnership considers all highly liquid debt instruments, purchased with a maturity of three months or less, to be cash equivalents. ACCOUNTING FOR UNIT BASED COMPENSATION The Partnership uses the intrinsic value-based method for measuring unit-based compensation cost which measures compensation cost as the excess, if any, of the quoted market price of Partnership units at the grant date over the amount the employee must pay for the units. Required pro forma disclosures of compensation expense determined under the fair value method have not been presented as there are no material unvested options and no options have been granted in 2001, 2000 or 1999. INVESTMENTS AVAILABLE-FOR-SALE Investments available-for-sale are carried at fair value, with the unrealized gains and losses reported as comprehensive income. Realized gains and losses and declines in value judged to be other- than-temporary on available-for-sale securities are included in other income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in other income. EFFECT OF NEW ACCOUNTING STANDARDS On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Intangible Assets. Major provisions of this Statement and their effective dates for the Partnership are as follows: - Effective December 26, 2001, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization. Therefore, annual goodwill amortization of $84,888 will no longer be recognized by the Partnership. - Effective December 26, 2001, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator. The Partnership has completed a transitional fair value based impairment test of goodwill as of December 26, 2001. This test indicated the carrying value of goodwill is not impaired at December 26, 2001. Therefore, the Partnership does not anticipate an impairment loss to be recognized as a result of this transitional testing. 2. RELATED PARTY TRANSACTIONS -------------------------- The Partnership has entered into a management services agreement with RAM whereby RAM is responsible for management of the restaurants for a fee equal to 7% for APP, and 4.5% for Magic, of the gross receipts of the restaurants, as defined. RAM has entered into a management services agreement containing substantially identical terms and conditions with Restaurant Management Company of Wichita, Inc. (the Management Company). Affiliates of the Management Company provide various other services for the Partnership including promotional advertising. In addition to participating in advertising provided by the franchisor, an affiliated company engages in promotional activities to further enhance restaurant sales. The affiliate's fees for such services are based on the actual costs incurred and principally relate to the reimbursement of print and media costs. In exchange for advertising services provided directly by the affiliate, the Partnership pays a commission based upon 15% of the advertising costs incurred. Such costs were not significant in 2001, 2000 or 1999. The Partnership maintains a deposit with the Management Company equal to approximately one and one-half month's management fee. Such deposit, $485,000 at December 26, 2001 and December 26, 2000, may be increased or decreased at the discretion of RAM. The Management Company maintains an incentive bonus plan whereby certain employees are eligible to receive bonus payments if specified management objectives are achieved. Such bonuses are not greater than 15% of the amount by which the Partnership's cash flow exceeds threshold amounts as determined by management. Bonuses paid under the plan are reimbursed to the Management Company by the Partnership. The Partnership owns a 25% interest in a limited liability company (LLC) which owns an airplane. The Management Company leases the airplane from the LLC on an hourly basis. The Partnership recorded a loss on the LLC of $154,166 and $156,398 at December 25, 2001 and December 26, 2000, respectively. The Partnership also owns a 4.34% interest in Seaside Pizza, LLC (Seaside), a company formed to acquire eleven Pizza Hut restaurants in New Jersey in December 2000. Certain Partnership principal unitholders are also owners of Seaside. The Partnership's share of Seaside's income was not significant for the years ended December 25, 2001 and December 26, 2000. Transactions with related parties included in the accompanying consolidated financial statements and notes are summarized as follows: 2001 2000 1999 ---- ---- ---- Management fees $3,970,991 $3,738,150 $3,582,943 Management Company bonuses 539,382 510,641 322,308 Advertising commissions 92,477 96,592 77,702 Accommodation fee (See Note 3) 90,911 94,982 98,710 Acquisition/divestiture fee on sale of assets 5,000 15,000 35,850 Development fees 25,000 - - The Partnership has made advances to various affiliates under notes receivable which bear interest at market rates. The advances are to be received in varying installments with maturities as follows: 2002 - $16,173; 2003 - $11,629; 2004 - $10,452; 2005 - $11,434; 2006 - $10,058; Thereafter - $9,836. All such notes are guaranteed by the majority owner of the Partnership. In addition, the Partnership has certain other amounts due from and to affiliates which are on a noninterest bearing basis. 3. LONG-TERM DEBT -------------- Long-term debt consists of the following at December 25, 2001 and December 26, 2000: 2001 2000 ---- ---- Notes payable to INTRUST Bank in Wichita, payable in monthly install- ments aggregating $132,262 including interest at fixed and variable rates from 6.0% to 10.00%, due at various dates through January 2007 $ 7,010,662 $ 8,707,682 Notes payable to INTRUST Bank in Wichita. These notes were paid in full in January 2002 from the proceeds of a sale-leaseback transaction. 2,462,999 - Notes payable to Franchise Mortgage Acceptance Company (FMAC) payable in monthly installments aggregating $255,543 including interest at fixed rates from 8.81% to 10.65%, due at various dates through May 2013 16,637,349 18,098,354 Notes payable to CNL Financial Services, Inc. payable in monthly installments aggregating $16,844, including interest at a fixed rate of 9.62%, through July 2019 1,711,436 1,747,048 Notes payable to Peachtree Franchise Finance, LLC payable in monthly installments of $11,854 including interest at a fixed rate of 10.05%, due June 2015 1,048,906 1,083,813 Notes payable to various banks,payable in monthly installments aggregating $5,690, including interest at rates from 8.95% to 10.00%, due at various dates through January 2010 202,565 248,396 ---------- ---------- 29,073,917 29,885,293 Less current portion 5,406,737 2,763,409 ---------- ---------- $23,667,180 $27,121,884 ========== ========== Certain refinancing with FMAC required the Management Company to act as Accommodation Maker and execute the promissory notes and security agreements as borrower, enabling APP to obtain a lower interest rate and favorable borrowing terms. In return, APP must pay the Management Company an annual fee equal to 1% of the outstanding loan balance, determined as of the first day of each calendar quarter, payable in advance. Certain borrowings through FMAC are part of loans "pooled" together with other franchisees in good standing and approved restaurant concepts, as defined, and sold to the secondary market. The Partnership has provided to FMAC a limited, contingent guarantee equal to 13% of the original loan balance for APP and 15% of the original loan balance for Magic ($409,814 and $507,222 at December 25, 2001 and December 26, 2000, respectively), referred to as the "Performance Guarantee Amount" (PGA). The Partnership promises to pay to FMAC up to the total of the PGA to the extent required to cover delinquent loans or defaults in the "pooled" loans. Each month, the Partnership pays to FMAC a "Periodic Guarantee Charge Amount" (PGCA) which is the monthly amortization of the PGA. If none of the other loans in the "pool" are delinquent in respect of any payment due or in default during a monthly period, the Partnership is entitled to a rebate of the PGCA. To the extent that the other loans in the "pool" are delinquent or in default, the amount of the PGCA rebate will be reduced proportionately. At December 25, 2001 and December 26, 2000, certain loans within the Partnership's "pool" were in default. This resulted in the Partnership recording loss on default of pooled loans of $409,016 during 2000. The loss recorded in 2000 included the Partnership's total liability for these defaulted loans under the PGA. During the year ended December 28, 1999 certain loans within the Partnership's "pool" that had been in default at December 29, 1998 were cured. This resulted in the Partnership writing off the remaining $423,900 of its liability for these formerly defaulted loans under the PGA. The PGA remains in effect until the loans are discharged, prepaid, accelerated, or mature, as defined in the secured promissory note. All borrowings are secured by substantially all land, buildings, and equipment of the Partnership. In addition, all borrowings, except for the FMAC loans are supported by the guarantee of the majority owner of the Partnership. Future annual long-term debt maturities, exclusive of capital lease commitments over the next five years are as follows: 2002 - $5,406,737; 2003 - $4,527,283; 2004 - $3,051,954; 2005 - $3,494,779 and 2006 - $1,914,387. 4. LEASES ------ The Partnership leases land and buildings for various restaurants under both operating and capital lease arrangements. Initial lease terms normally range from 5 to 20 years with renewal options generally available. The leases are net leases under which the Partnership pays the taxes, insurance, and maintenance costs, and they generally provide for both minimum rent payments and contingent rentals based on a percentage of sales in excess of specified amounts. Minimum and contingent rent payments for land and buildings leased from affiliates were $30,250 for each of the years ended December 25, 2001, December 26, 2000, and December 28, 1999. The Partnership also leases point-of-sale terminals for its restaurants under capital lease arrangements. The leases contain initial lease terms ranging from 3 to 4 years and are guaranteed by the majority owner of the Partnership. Total minimum and contingent rent expense under all operating lease agreements was as follows: 2001 2000 1999 ---- ---- ---- Minimum rentals $1,191,257 $1,271,774 $1,263,873 Contingent rentals 264,565 277,858 231,070 Future minimum payments under capital leases and noncancelable operating leases with an initial term of one year or more at December 25, 2001, are as follows: Operating Leases With Operating Capital Unrelated Leases With Leases Parties Affiliates ---------- ---------- ---------- 2002 $ 848,890 $1,024,944 $7,563 2003 733,921 907,718 - 2004 387,905 710,169 - 2005 322,353 547,002 - 2006 310,162 428,164 - Thereafter 1,095,534 1,089,149 - --------- --------- ----- Total minimum payments 3,698,765 $4,707,146 $7,563 Less interet 1,107,212 ========= ===== --------- 2,591,553 Less current portion 596,356 --------- $1,995,197 ========= Amortization of property under capital leases, determined on the straight-line basis over the lease terms totaled $485,188, $360,575 and $82,149 for the years ended December 25, 2001, December 26, 2000, and December 28, 1999, respectively. The amortization is included in depreciation and amortization expense in the accompanying consolidated statements of income. The cost of property under capital leases was $3,999,874 at December 25, 2001 and $3,538,902 at December 26, 2000. Accumulated amortization on such property under capital leases was $1,961,486 and $1,536,644 at December 25, 2001 and December 26, 2000, respectively. Property under capital lease obligations included $2,017,406 of buildings and $1,982,468 of restaurant equipment at December 25, 2001 and $2,077,751 of buildings and $1,461,151 of restaurant equipment at December 26, 2000. 5. LIMITED PARTNERSHIP UNITS ------------------------- The Partnership has three classes of Partnership Units outstanding, consisting of Class A Income Preference, Class B, and Class C Units. The Units are in the nature of equity securities entitled to participate in cash distributions of the Partnership on a quarterly basis at the discretion of RAM, the General Partner. In the event the Partnership is terminated, the Unitholders will receive the remaining assets of the Partnership after satisfaction of Partnership liability and capital account requirements. 6. DISTRIBUTIONS TO PARTNERS ------------------------- On January 2, 2002, the Partnership declared a distribution of $.10 per Unit to all Unitholders of record as of January 11, 2002. The distribution is not reflected in the December 25, 2001 consolidated financial statements. 7. UNIT OPTION PLAN ---------------- The Partnership, RAM, and the Management Company adopted a Class A Unit Option Plan (the Plan) pursuant to which 75,000 Class A Units are reserved for issuance to employees, including officers of the Partnership, RAM, and the Management Company. The Plan is administered by the Managing General Partner which will, among other things, designate the number of Units and individuals to whom options will be granted. Participants in the Plan are entitled to purchase a designated number of Units at an option price equal to the fair market value of the Unit on the date the option is granted. Units under option are exercisable over a three-year period with 50% exercisable on the date of grant and 25% exercisable on each of the following two anniversary dates. The term of options granted under the Plan will be determined by the Managing General Partner at the time of issuance (not to exceed ten years) and will not be transferable except in the event of the death of the optionee, unless the Managing General Partner otherwise determines and so specifies in the terms of the grant. Units covered by options which expire or are terminated will again be available for option grants. A summary of Units under options in the Plan is as follows: Units Option Price ----- ------------ Balance at December 28, 1999, December 26, 2000 and December 25, 2001 625 $8.50 At December 25, 2001, options on 625 Units were exercisable. Unit options available for future grants totaled 48,611 at December 25, 2001 and December 26, 2000. 8. SALE OF RESTAURANT ------------------ In December 1999, the Partnership sold substantially all the assets, including land and building, of one restaurant. The Partnership recognized a gain of $196,608 on the sale. 9. FIRE SETTLEMENT --------------- In the first quarter of 2001, the Partnership incurred a fire at one of its restaurants. The property was insured for the replacement cost and the Partnership realized a gain of $159,203 upon final settlement of the claim. 10. CLASS B AND C RESTRICTED UNITS SOLD TO EMPLOYEES ------------------------------------------------ During 2000 and 1999, the Partnership issued 5,000 and 437,500 Class B and C Units, respectively, at $2.79 and $2.55 per unit, respectively, to certain employees in exchange for either a 10% down payment and notes receivable for the remaining 90% of the purchase price or for notes receivable for 100% of the purchase price. Notes receivable representing 40% or 50%, respectively, of the purchase price, together with interest thereon at a rate of 9%, will be repaid by the cash distributions paid on the units. Non-interest bearing notes receivable representing the remaining 50% of the purchase price will be reduced over a 4 1/2 year period through annual charges to compensation expense, included under the caption of "General and administrative-other" in the accompanying statements of income, as long as the employee remains employed by the Company. The units are subject to a repurchase agreement whereby the Partnership has agreed to repurchase the Units in the event the employee is terminated for an amount equal to the greater of issue price or fair market value at the time of termination. 11. PARTNERS' CAPITAL ----------------- During 2001, 2000 and 1999, the Partnership purchased 10,325, 82,728, and 24,144 Class A Income Preference Units for $33,556, $268,866, and $78,202, respectively. These Units were retired by the Partnership. 12. INVESTMENT IN MAGIC ------------------- On March 13, 1996, the Partnership purchased a 45% interest in Magic, a newly formed limited partnership, for $3.0 million in cash. Magic owns and operates twenty-six Pizza Hut restaurants in Oklahoma. In August 1998, Magic purchased a 25% interest in Magic from a former limited partner which effectively increased the Partnership's interest in Magic from 45% to 60%. Therefore, beginning August 11, 1998, Magic's financial statements were consolidated into the Partnership's consolidated financial statements. Prior to August 11, 1998, the Partnership accounted for its investment in Magic using the equity method of accounting. In connection with the consolidation, the Partnership recorded goodwill of $728,000 which represented the excess purchase price of the original equity investment in the net assets acquired, net of subsequent amortization. On July 26, 2000, APP purchased 39% of Magic from the Management Company for $2,500,000 cash and contingent consideration of $700,000. The $2,500,000 cash payment was financed by INTRUST Bank over five years at 9.5%. The contingent consideration will become due in the event that Magic's cash flow (determined on a 12 month trailing basis) exceeds $2.6 million at any time between January 1, 2001 and December 31, 2005. Payment of the remaining balance shall be made in Class B and Class C Units of the Partnership. In the event that Magic's cash flow does not reach this cash flow goal on or prior to December 31, 2005, APP shall owe no additional consideration. Upon completion of this purchase, the Partnership owns 99% of Magic. The Management Company is considered a related party in that one individual has controlling interest in both the Management Company and the Partnership's general partner. To the extent that the Partnership and the Management Company have common ownership, the transaction was recorded at the Management Company's historical cost. As a result of the transaction, the Partnership recorded goodwill of $1,407,991 and cost in excess of carrying value of assets acquired of $534,962. 13. MAJOR SUPPLIER -------------- On January 31, 2000 AmeriServe, the Partnership's primary supplier of food ingredients and dry goods, filed for protection under the U.S. Bankruptcy Code. McLane Company, Inc., a subsidiary of Wal-Mart Stores, Inc., completed the purchase of AmeriServe's U.S. distribution business on November 30, 2000. As part of the sale, the Partnership agreed to a two-year contract extension and will incur a 5% increase in distribution fees. 14. SUBSEQUENT EVENT ---------------- Subsequent to December 25, 2001, the Partnership entered into operating and capital leases totaling $3,400,000 as a result of sale- leaseback transactions. The leases have twenty-year terms and are payable in monthly payments totaling $29,750 for the first year, with 1% annual increases in the monthly payment amounts. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS ----------------------------------- The carrying amount reported on the balance sheets for financial instruments including cash and cash equivalents, notes receivable, and capital lease obligations approximates their fair value. The fair value of long-term debt is estimated at $30,284,536 compared to its carrying value of $29,073,917 at December 25, 2001. Carrying value approximated fair value at December 26, 2000. Fair values are considered equal to carrying values for variable rate debt. The estimated fair value of fixed rate debt is based on discounted cash flow analysis using interest rates currently offered for debt with similar terms. 16. QUARTERLY FINANCIAL DATA (unaudited) ------------------------------------ Unaudited quarterly consolidated statement of income information for the years ended December 25, 2001 and December 26, 2000 is summarized below: First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 2001 ---- Net sales $15,598,592 $15,795,550 $16,012,524 $16,410,764 Income from operations 1,022,098 1,368,527 932,099 1,608,995 Net income 157,974 551,122 267,558 852,254 Basic and diluted net income per Partnership unit 0.04 0.15 0.07 0.23 2000 ---- Net sales $14,799,542 $14,690,511 $15,088,559 $15,926,141 Income from operations 1,366,166 1,252,186 1,150,891 1,408,962 Net income 436,491 445,259 319,505 170,869 Basic and diluted net income per Partnership unit 0.11 0.12 0.09 0.05 Fourth quarter 2000 net income includes a $409,016 loss on default in pooled loans. The loss on default was recorded in the quarter the Partnership received notification from FMAC (See Note 3). 17. SUPPLEMENTAL CASH FLOW INFORMATION ---------------------------------- 2001 2000 1999 ---- ---- ---- Cash paid during the year for interest $3,086,014 $3,050,092 $2,906,241 Noncash investing and financing activity: Issuance of units for notes receivable - 12,555 1,047,000 Distributions offset against notes receivable 106,097 117,551 77,024 Unit repurchases offset against notes receivable 11,160 47,705 - Capital leases entered into 606,924 1,461,151 - Reduction of notes receivable recorded as compensation expense 51,909 54,385 13,952 Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated March 8, 2002, accompanying the consolidated financial statements included in the Annual Report of American Restaurant Partners, L.P. on Form 10-K for the year ended December 25, 2001. We hereby consent to the incorporation by reference of said report in the Registration Statement of American Restaurant Partners, L.P. on Form S-8 (No. 33-20784). /s/Grant Thornton LLP Wichita, Kansas March 8, 2002

AMERICAN RESTAURANT PARTNERS L P 10-K