SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 29, 1998 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)
555 North Woodlawn, Suite 3102
Wichita, Kansas 67208
(Address of principal executive offices) (Zip-Code)
Registrant's telephone number, including area code (316) 684-5119
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 [ ]
AMERICAN RESTAURANT PARTNERS, L.P.
INDEX
Page
Number
------
Part I. Financial Information
- -------------------------------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at
September 29, 1998 and December 30, 1997 1
Consolidated Condensed Statements of
Operations for the Three and Nine Periods Ended
September 29, 1998 and September 30, 1997 2
Consolidated Condensed Statements of Cash Flows
for the Nine Periods Ended September 29, 1998
and September 30, 1997 3
Notes to Consolidated Condensed Financial Statements 4-5
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 6-13
Part II. Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 14
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
September 29, December 30,
ASSETS 1998 1997
- ------------------------------ ------------ -----------
Current assets:
Cash and cash equivalents $ 983,996 $ 509,398
Investments available for sale,
at fair market value 77,635 195,751
Accounts receivable 155,290 84,447
Due from affiliates 354,369 67,918
Notes receivable from
affiliates - current portion 70,261 72,387
Inventories 376,038 311,516
Prepaid expenses 328,101 245,177
---------- ----------
Total current assets 2,345,690 1,486,594
Net property and equipment 21,022,421 16,828,156
Other assets:
Franchise rights, net 5,847,664 1,010,616
Notes receivable from affiliates 51,486 75,899
Deposit with affiliate 423,865 350,000
Investment in Oklahoma Magic, L.P. - 1,795,774
Goodwill 1,104,683 -
Other 1,498,750 679,106
---------- ----------
$32,294,559 $22,226,145
========== ==========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY)
- ----------------------------------------------
Current liabilities:
Accounts payable $ 2,467,875 $ 3,042,151
Due to affiliates 65,306 50,539
Accrued payroll and other taxes 499,365 385,016
Accrued liabilities 1,287,667 784,661
Current portion of long-term debt 8,610,543 12,899,728
Current portion of obligations
under capital leases 46,127 36,492
---------- ----------
Total current liabilities 12,976,883 17,198,587
Other noncurrent liabilities 487,848 204,337
Long-term debt 20,081,428 7,105,615
Obligations under capital leases 1,638,895 1,608,356
Minority Interest in Oklahome Magic, L.P. 682,094 -
General Partners' interest
in Operating Partnership 125,198 120,702
Partners' capital (deficiency):
General Partners (7,423) (7,864)
Limited Partners:
Class A Income Preference 5,713,348 5,623,790
Classes B and C (7,980,590) (8,322,372)
Cost in excess of carrying value
of assets acquired (1,323,681) (1,323,681)
Unrealized gain (loss) in investment securities (99,441) 18,675
---------- ----------
Total partners' deficiency (3,697,787) (4,011,452)
---------- ----------
$32,294,559 $22,226,145
========== ==========
See accompanying notes.
<TABLE>
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
September 29, September 30, September 29, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $11,258,419 $ 9,929,607 $29,946,394 $29,552,450
Operating costs and expenses:
Cost of sales 3,000,169 2,687,142 7,756,865 7,988,293
Restaurant labor and benefits 3,128,660 2,773,287 8,407,134 8,360,493
Advertising 732,676 636,154 1,965,441 1,873,950
Other restaurant operating
expenses exclusive of
depreciation and amortization 2,193,784 1,999,478 5,607,156 5,831,891
General and administrative:
Management fees - related party 746,555 690,102 2,047,686 2,054,975
Other 194,473 109,309 453,470 414,392
Depreciation and amortization 523,609 510,518 1,483,777 1,494,784
Equity in (income)/loss of affiliate (7,126) 154,566 7,250 324,571
---------- ---------- ---------- ----------
Income from operations 745,619 369,051 2,217,615 1,209,101
Interest income (11,912) (4,776) (17,675) (17,658)
Interest expense 657,084 556,070 1,870,469 1,656,051
Gain on life insurance settlement - - (875,533) -
---------- ---------- ---------- ----------
Income (loss) before General Partners'
interest in income (loss) of
Operating Partnership 100,447 (182,243) 1,240,354 (429,292)
General Partners' interest in
income (loss) of Operating Partnership 1,004 (1,822) 12,404 (4,293)
---------- ---------- ---------- ----------
Net income (loss) $ 99,443 $ (180,421) $ 1,227,950 $ (424,999)
========== ========== ========== ==========
Net income (loss) allocated to Partners:
Class A Income Preference $ 20,301 $ (36,812) $ 250,604 $ (86,781)
Class B $ 29,765 $ (54,011) $ 367,575 $ (127,202)
Class C $ 49,377 $ (89,598) $ 609,771 $ (211,016)
Weighted average number of Partnership
units outstanding during period:
Class A Income Preference $ 813,840 $ 815,309 $ 813,840 $ 815,309
Class B $ 1,193,214 $ 1,196,202 $ 1,193,706 $ 1,195,071
Class C $ 1,979,418 $ 1,984,397 $ 1,980,237 $ 1,982,512
Basic and diluted net income (loss)
per Partnership interest $ 0.02 $ (0.05) $ 0.31 $ (0.11)
Distributions per Partnership interest $ 0.10 $ 0.05 $ 0.20 $ 0.27
<FN>
See accompanying notes.
</FN>
</TABLE>
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(Unaudited)
September 29, September 30,
1998 1997
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 1,227,950 $ (424,999)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 1,483,777 1,494,784
Deferred rent 8,184 7,550
Unit compensation expense - 11,737
Equity in loss of affiliate 7,250 324,572
(Gain) Loss on disposition of assets (11,961) 18,652
Gain on insurance settlement (875,533) -
General Partners' interest in net
income (loss) of Operating Partnership 12,404 (4,293)
Net change in operating assets and liabilities:
Accounts receivable (11,735) 27,830
Due from affiliates 4,852 (47,122)
Inventories 38,890 57,728
Prepaid expenses 163,468 (31,950)
Accounts payable (1,559,326) 58,704
Due to affiliates 12,290 (50,713)
Accrued payroll and other taxes 111,919 (124,437)
Accrued liabilities 49,802 (131,741)
Other, net (212,106) (106,382)
---------- ----------
Net cash provided by
operating activities 450,125 1,079,920
Cash flows from investing activities:
Purchase of certificate of deposit - (6,567)
Redemption of certificate of deposit - 160,202
Investment in affiliate (390,000) -
Additions to property and equipment (1,664,520) (1,372,917)
Proceeds from sale of property and equipment 17,408 701
Purchase of franchise rights - (15,000)
Collections of notes receivable from affiliates 26,539 65,361
---------- ----------
Net cash used in
investing activities (2,010,573) (1,168,220)
Cash flows from financing activities:
Payments on long-term borrowings (10,035,943) (1,070,317)
Proceeds from long-term borrowings 12,094,950 2,069,000
Proceeds from insurance settlement 1,039,747 -
Payments on capital lease obligations (21,988) (13,550)
Due from affiliate (285,600) -
Distributions to Partners (796,963) (1,077,417)
Proceeds from issuance of Class B and C units - 57,000
Repurchase of units (13,269) -
General Partners' distributions
from Operating Partnerships (8,050) (10,883)
Other, net 62,162 -
---------- ----------
Net cash provided by (used in)
financing activities 2,035,046 (46,167)
---------- ----------
Net increase (decrease) in
cash and cash equivalents 474,598 (134,467)
Cash and cash equivalents at beginning of period 509,398 178,826
---------- ----------
Cash and cash equivalents at end of period $ 983,996 $ 44,359
========== ==========
See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. General
- -----------
The accompanying consolidated financial statements include the
accounts of American Restaurant Partners, L.P. and its majority owned
subsidiaries, American Pizza Partners, L.P. and APP Concepts, LLC,
hereinafter collectively referred to as the Partnership. Effective
August 26, 1998, the Partnership's interest in Oklahoma Magic, L.P.
(Magic) increased to 60% from 45% in connection with Magic's purchase
of a 25% interest from a former limited partner (see Note 3).
Accordingly, the Partnership began consolidating the accounts of
Magic from that date. All significant intercompany balances and
transactions have been eliminated. The financial statements have
been prepared without audit. The Balance Sheet at December 30, 1997
has been derived from the Partnership's audited financial statements.
In the opinion of management, all adjustments of a normal and
recurring nature which are necessary for a fair presentation of such
financial statements have been included. These statements should be
read in conjunction with the financial statements and notes contained
in the Partnership's Annual Report filed on Form 10-K for the fiscal
year ended December 30, 1997.
The results of operations for interim periods are not necessarily
indicative of the results for the full year. The Partnership
historically has realized approximately 40% of its operating profits
in periods six through nine (18 weeks).
2. Distribution to Partners
- ----------------------------
On October 2, 1998, the Partnership declared a distribution of $0.10
per unit to all unitholders of record as of October 12, 1998, payable
on October 30, 1998. The distribution is not reflected in the
September 29, 1998 consolidated condensed financial statements.
3. Investment in Affiliate
- ---------------------------
On March 13, 1996, the Partnership purchased a 45% interest in Magic,
a newly formed limited partnership, for $3.0 million in cash. Magic
owns and operates twenty-seven Pizza Hut restaurants in Oklahoma. In
November 1996 Magic notified Hospitality Group of Oklahoma, Inc.
(HGO), the former owners of the Oklahoma restaurants, that it was
seeking to terminate HGO's interest in Magic pursuant to the terms of
the Partnership Agreement for alleged violations of the Pizza Hut
Franchise Agreement and the alleged occurrence of an Adverse
Terminating Event as defined in the Partnership Agreement. Magic
alleged HGO contacted and offered employment to a significant number
of the management employees of Magic. Magic also alleged HGO made
certain misrepresentations at the formation of Magic. HGO denied
that such franchise violations occurred and that it had made any
misrepresentations at the formation of Magic. HGO asserted that it
was fraudulently induced to enter into the Magic Partnership
Agreement by Restaurant Management Company of Wichita, Inc. and was
further damaged by alleged mismanagement of the operations.
The matter was settled in August 1998 with Magic paying HGO a Section
736(a) guaranteed payment of $255,000 for the period November 11,
1996 through the settlement date. In addition, Magic purchased HGO's
interest in Magic for $205,000 consisting of $105,000 cash and a
$100,000 note at 8% interest for five years, payable quarterly.
Magic also paid the two stockholders of HGO $240,000 for a noncompete
agreement prohibiting them from engaging in the pizza business for
the next 60 months in any market Magic operated in as of May 11,
1998. Upon completion of the settlement, the Partnership's interest
in Magic increased from 45% to 60%. Therefore, beginning August 26,
1998, Magic's financial statements were consolidated into the
Partnership's consolidated financial statements. Prior to August 26,
1998, the Partnership accounted for its investment in Magic using the
equity method of accounting.
4. Recently Issued Accounting Standards
- ----------------------------------------
As of December 31, 1997, the Partnership adopted Financial Accounting
Standards (FAS) Number 130, "Reporting Comprehensive Income". FAS
130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of
this Statement had no impact on the Partnership's net income or
partners' equity. In addition, the Partnership has no components of
other comprehensive income in any period presented.
5. Life Insurance Settlement
- -----------------------------
During the quarter ended June 30, 1998 the Partnership collected on a
life insurance policy purchased in 1993 on one of its original
investors. This investor owned approximately 438,600 Class B and C
units. The policy was purchased with the intent of providing the
Partnership a means of repurchasing his units upon his death if his
heirs so desired. The investor died in May of this year. The
Partnership is currently in negotiations with the heirs to purchase
the units.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
As discussed in the notes to the accompanying consolidated financial
statements, the consolidated results of operations include the full
quarterly results of American Restaurant Partners, L.P. and its
majority owned subsidiaries American Pizza Partners, L.P. and APP
Concepts, LLC. They also include the consolidated results of
operations of Magic for the five week period August 26, 1998 through
September 29, 1998 (see detail following). The consolidated results
of operations were not significantly impacted by the results of
Magic. Prior to August 26, 1998, the Partnership accounted for its
investment in Magic using the equity method of accounting. Therefore,
the Partnership's 45% interest in Magic's earnings was included in
the financial statements under "Equity in income/loss of affiliate".
As of September 29, 1998, the Partnership operated 54 traditional
Pizza Hut red roof restaurants, five delivery/carryout units and
three dualbrand locations. Magic operated 17 traditional Pizza Hut
red roof restaurants and 10 delivery/carryout units.
Three Periods Ended September 29, 1998 Compared to Three Periods
- ----------------------------------------------------------------
Ended September 30, 1997
- ------------------------
The following discussion relates to the comparison of the results of
operations for the three periods ended September 29, 1998 compared to
the three periods ended September 30, 1998, excluding the effects of
the consolidation of Magic. The table below separates the effects of
consolidating Magic from the consolidated totals for the three
periods ended September 29, 1998 in order to provide a more
meaningful basis for a comparative discussion of these results versus
the three periods ended September 30, 1997.
Three Periods Ended
--------------------------------------------
Sept. 29, 1998 Sept. 30,
Consolidated Magic Comparable 1997
--------------------------------------------
Net sales $11,258,419 $1,542,857 $9,715,562 $9,929,607
Operating costs and
expenses:
Cost of sales 3,000,169 432,924 2,567,245 2,687,142
Restaurant labor and
benefits 3,128,660 465,567 2,663,093 2,773,287
Advertising 732,676 115,828 616,848 636,154
Other restaurant
operating expenses
exclusive of
depreciation and
amortization 2,193,784 343,467 1,850,317 1,999,478
General and
administrative:
Management fees 746,555 69,429 677,126 690,102
Other 194,473 24,602 169,871 109,309
Depreciation and
amortization 523,609 65,980 457,629 510,518
Equity in (income)/loss
of affiliate (7,126) (21,306) 14,180 154,566
--------------------------------------------
Income from operations 745,619 46,366 699,253 369,051
Interest income (11,912) - (11,912) (4,776)
Interest expense 657,084 60,572 596,512 556,070
--------------------------------------------
Income (loss) before
General Partners'
interest in income
(loss) of Operating
Partnership 100,447 (14,206) 114,653 (182,243)
General Partners'
interest in income
(loss) of Operating
Partnership 1,004 (142) 1,146 (1,822)
--------------------------------------------
Net income (loss) $ 99,443 $ (14,064)$ 113,507 $ (180,421)
============================================
NET SALES. Net sales for the three periods ended September 29, 1998
decreased $214,000 from $9,930,000 to $9,716,000, a 2.2% decrease
from the same three periods of 1997. This decrease was entirely
attributable to restaurants closed in 1997 as comparable restaurant
sales increased 2.7%.
INCOME FROM OPERATIONS. Income from operations increased $330,000
from $369,000 to $699,000, an 89.4% increase over the three periods
ended September 30, 1997. As a percentage of net sales, income from
operations increased from 3.7% for the three periods ended September
30, 1997 to 7.2% for the three periods ended September 29, 1998.
Cost of sales decreased as a percentage of net sales from 27.1% in
1997 to 26.4% in 1998. Labor and benefits expense decreased from
27.9% of net sales in 1997 to 27.4% of net sales in 1998 despite the
minimum wage increase that took effect September 1, 1997. These
margin improvements are the result of continued diligent follow-up
and focus on efficiencies in the restaurants. Advertising decreased
slightly as a percentage of net sales from 6.4% in 1997 to 6.3% in
1998. Operating expenses decreased from 20.1% of net sales in 1997
to 19.0% of net sales in 1998 primarily attributable to the reduction
of fixed costs through restaurant closings and consolidations during
the last half of 1997. General and administrative expenses increased
from 8.1% of net sales in 1997 to 8.7% of net sales in 1998.
Depreciation and amortization expense decreased from 5.1% of net
sales in 1997 to 4.7% of net sales in 1998. Equity in earnings of
affiliate amounted to 0.1% of net sales in 1998 compared to 1.6% of
net sales in 1997.
NET EARNINGS. Net earnings increased $294,000 to net income of
$114,000 for the three periods ended September 29, 1998 compared to a
net loss of $180,000 for the three periods ended September 30, 1997.
The increase in net earnings is attributable to the increase in
income from operations noted above net of a $40,000 increase in
interest expense.
Nine Periods Ended September 29, 1998 Compared to Nine Periods
- --------------------------------------------------------------
Ended September 30, 1997
- ------------------------
The following discussion relates to the comparison of the results of
operations for the nine periods ended September 29, 1998 compared to
the nine periods ended September 30, 1998, excluding the effects of
the consolidation of Magic. The table below separates the effects of
consolidating Magic from the consolidated totals for the nine months
ended September 29, 1998 in order to provide a more meaningful basis
for a comparative discussion of these results versus the nine months
ended September 30, 1997.
Nine Periods Ended
----------------------------------------------
Sept. 29, 1998 Sept. 30,
Consolidated Magic Comparable 1997
----------------------------------------------
Net sales $29,946,394 $1,542,857 $28,403,537 $29,552,450
Operating costs and
expenses:
Cost of sales 7,756,865 432,924 7,323,941 7,988,293
Restaurant labor and
benefits 8,407,134 465,567 7,941,567 8,360,493
Advertising 1,965,441 115,828 1,849,613 1,873,950
Other restaurant
operating expenses
exclusive of
depreciation and
amortization 5,607,156 343,467 5,263,689 5,831,891
General and
administrative:
Management fees 2,047,686 69,429 1,978,257 2,054,975
Other 453,470 24,602 428,868 414,392
Depreciation and
amortization 1,483,777 65,980 1,417,797 1,494,784
Equity in (income)/loss
of affiliate 7,250 (21,306) 28,556 324,571
----------------------------------------------
Income from operations 2,217,615 46,366 2,171,249 1,209,101
Interest income (17,675) - (17,675) (17,658)
Interest expense 1,870,469 60,572 1,809,897 1,656,051
Gain on life insurance
settlement (875,533) - (875,533) -
----------------------------------------------
Income (loss) before
General Partners'
interest in income
(loss) of Operating
Partnership 1,240,354 (14,206) 1,254,560 (429,292)
General Partners'
interest in income
(loss) of Operating
Partnership 12,404 142 12,546 (4,293)
----------------------------------------------
Net income (loss) $ 1,227,950 $ (14,064)$ 1,242,014 $ (424,999)
==============================================
NET SALES. Net sales for the nine periods ended September 29, 1998
decreased $1,149,000 from $29,552,000 to $28,404,000, a 3.9% decrease
from the first nine periods of 1997. This decrease was entirely
attributable to restaurants closed in 1997 as comparable restaurant
sales increased 1.0%.
INCOME FROM OPERATIONS. Income from operations increased $962,000
from $1,209,000 to $2,171,000, a 79.6% increase over the first nine
periods of 1997. As a percentage of net sales, income from
operations increased from 4.1% for the nine periods ended September
30, 1997 to 7.6% for the nine periods ended September 29, 1998. Cost
of sales decreased as a percentage of net sales from 27.0% for the
first nine periods of 1997 to 25.8% for the first nine periods of
1998. Labor and benefits expense decreased as a percentage of net
sales from 28.3% in 1997 to 28.0% in 1998 despite the minimum wage
increase that took effect September 1, 1997. These margin
improvements are the result of continued diligent follow-up and focus
on efficiencies in the restaurants. Advertising increased as a
percentage of net sales from 6.3% in 1997 to 6.5% in 1998. Operating
expenses decreased from 19.7% of net sales in 1997 to 18.5% of net
sales in 1998 primarily attributable to the reduction of fixed costs
through restaurant closings and consolidations during the last half
of 1997. General and administrative expenses increased from 8.4% of
net sales in 1997 to 8.5% of net sales in 1998. Depreciation and
amortization expense decreased from 5.1% of net sales in 1997 to 5.0%
of net sales in 1998. Equity in earnings of affiliate amounted to
1.1% of net sales in 1997.
NET EARNINGS. Net earnings increased $1,667,000 to net income of
$1,242,000 for the nine periods ended September 29, 1998 compared to
a net loss of $425,000 for the nine periods ended September 30, 1997.
A gain on life insurance settlement of $876,000 is included in the
1998 net income. The remaining increase is attributable to the
increase in income from operations noted above net of a $154,000
increase in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At September 29, 1998 the Partnership had a working capital
deficiency of $10,631,000 compared to a working capital deficiency of
$15,712,000 at December 30, 1997. The decrease in working capital
deficiency is primarily a result of a $10,894,000 decrease in current
portion of long-term debt. At December 30, 1997, the entire amount
of outstanding notes payable to Heller Financial Corporation and FMAC
were classified as a current liability because the Partnership was in
default of the fixed charge ratio covenant. There have been no
defaults in making scheduled payments of either principal or
interest. On April 20, 1998, the Partnership refinanced with new
promissory notes due to FMAC the notes with Heller Financial
Corporation, $4.2 million of notes with Intrust Bank, and $3.0
million of notes with FMAC over 15 years at an interest rate of 8.81%
bringing the Partnership into compliance with the fixed charge ratio.
The write-off of unamortized loan cost related to this refinancing
was not material. This decrease was partially offset by the increase
in current portion of long-term debt of $5,142,000 due to the
consolidation of Magic. 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.
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.
NET CASH PROVIDED BY OPERATING ACTIVITIES. For the nine periods
ended September 29, 1998, net cash provided by operating activities
amounted to $450,000 compared to net cash provided by operating
activities of $1,080,000 for the nine periods ended September 30,
1997. This decrease is primarily the result of a decrease in
accounts payable of $1,559,000.
INVESTING ACTIVITIES. Property and equipment expenditures represent
the largest investing activity by the Partnership. Capital
expenditures for the nine periods ended September 29, 1998 were
$1,665,000 of which $1,017,000 was for the purchase of previously
leased restaurants and $156,000 was for the development of new
restaurants. The remaining $492,000 was for the replacement of
equipment in existing restaurants. In addition, the Partnership
invested $390,000 in Magic prior to the buyout of HGO.
FINANCING ACTIVITIES. Cash distributions paid during the nine
periods ended September 29, 1998 were $797,000 amounting to $0.20 per
unit as compared to $1,077,000, or $0.27 per unit, during the first
nine periods of 1997. 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 the nine periods ended September 29, 1998, the Partnership's
proceeds from borrowings amounted to $12,095,000 of which $9,633,000
was obtained to refinance existing debt, $1,005,000 was used to
purchase previously leased restaurants, $390,000 was invested in
Magic and the remaining $1,067,000 was used primarily to replenish
operating capital. The Partnership opened one new restaurant during
the third quarter. No other new restaurant openings are planned for
the remainder of the year. Management anticipates spending $58,000
for recurring replacement of equipment in existing restaurants during
the remainder of the year. These expenditures will be partially
financed from net cash provided by operating activities and
management believes that the Partnership has the ability to obtain
financing as needed. 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.
YEAR 2000 COMPLIANCE
- --------------------
The Partnership has instituted a Year 2000 project to prepare its
computer systems and communications systems for the Year 2000. The
project includes identification and assessment of all software,
hardware and equipment that could potentially be affected by the Year
2000 issue. The Partnership uses external agents on nearly all
critical applications and systems. The external agents have assured
the Partnership that they expect to be fully year 2000 compliant
before year 2000 issues will impact the Partnership. The Partnership
also receives representations and warranties from vendors of all new
hardware and software that such systems are Year 2000 compliant.
The Partnership does not believe costs related to Year 2000
Compliance will be material to its financial position or results of
operations. However, the Partnership may be vulnerable to the
failure of external agents and critical suppliers to resolve their
own Year 2000 issues. Where practicable, the Company will assess and
attempt to mitigate its risks with respect to the failure of these
entities to be Year 2000 ready. The effect, if any, on the
Partnership's results of operations from the failure of such parties
to be Year 2000 ready is not reasonably estimable.
OTHER MATTERS
- -------------
In November 1996 Magic notified Hospitality Group of Oklahoma, Inc.
(HGO), the former owners of the Oklahoma restaurants, that it was
seeking to terminate HGO's interest in Magic pursuant to the terms of
the Partnership Agreement for alleged violations of the Pizza Hut
Franchise Agreement and the alleged occurrence of an Adverse
Terminating Event as defined in the Partnership Agreement. Magic
alleged HGO contacted and offered employment to a significant number
of the management employees of Magic. Magic also alleged HGO made
certain misrepresentations at the formation of Magic. HGO denied
that such franchise violations occurred and that it had made any
misrepresentations at the formation of Magic. HGO asserted that it
was fraudulently induced to enter into the Magic Partnership
Agreement by Restaurant Management Company of Wichita, Inc. and was
further damaged by alleged mismanagement of the operations.
The matter was settled in August 1998 with Magic paying HGO a Section
736(a) guaranteed payment of $255,000 for the period November 11,
1996 through the settlement date. In addition, Magic purchased HGO's
interest in Magic for $205,000 consisting of $105,000 cash and a
$100,000 note at 8% interest for five years, payable quarterly.
Magic also paid the two stockholders of HGO $240,000 for a noncompete
agreement prohibiting them from engaging in the pizza business for
the next 60 months in any market Magic operated in as of May 11,
1998. Upon completion of the settlement, the Partnership's interest
in Magic increased from 45% to 60%.
The Partnership delisted from the American Stock Exchange effective
November 13, 1997 and limited trading of its units. As a result, the
Partnership will continue to be taxed as a partnership rather than
being taxed as a corporation. The Partnership does offer a Qualified
Matching Service, whereby the Partnership will match persons desiring
to buy units with persons desiring to sell units.
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act, and Section 21E of the
Exchange Act which are intended to be covered by the safe harbors
created thereby. Although the Partnership believes that the
assumptions underlying the forward-looking statements contained
herein are reasonable, any of the assumptions could be inaccurate,
and therefore, there can be no assurance that the forward-looking
statements included in this report will prove to be accurate.
Factors that could cause actual results to differ from the results
discussed in the forward-looking statements include, but are not
limited to, consumer demand and market acceptance risk, the effect of
economic conditions, including interest rate fluctuations, the impact
of competing restaurants and concepts, the cost of commodities and
other food products, labor shortages and costs and other risks
detailed in the Partnership's Securities and Exchange Commission
filings.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
During the fiscal period covered by this Form 10-Q, no
reports on Form 8-K were filed.
SIGNATURE
Pursuant to the requirements 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: 11/12/98 By: /s/Hal W. McCoy
-------- ---------------
Hal W. McCoy
President and Chief Executive Officer
Date: 11/12/98 By: /s/Terry Freund
-------- ---------------
Terry Freund
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed financial statements of American Restaurant Partners,
L.P. at September 29, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
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