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 March 31, 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
March 31, 1998 and December 30, 1997 1
Consolidated Statements of Operations
for the Three Periods Ended
March 31, 1998 and April 1, 1997 2
Consolidated Statements of Cash Flows for
the Three Periods Ended March 31, 1998
and April 1, 1997 3
Notes to Consolidated Condensed Financial Statements 4-6
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 7-10
Part II. Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 11
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
March 31, December 30,
ASSETS 1998 1997
- -------------------------------- ----------- ------------
Current assets:
Cash and cash equivalents $ 499,149 $ 509,398
Investments available for sale,
at fair market value 144,001 195,751
Accounts receivable 74,155 84,447
Due from affiliates 77,938 67,918
Notes receivable from
affiliates - current portion 73,243 72,387
Inventories 275,216 311,516
Prepaid expenses 223,833 245,177
---------- ----------
Total current assets 1,367,535 1,486,594
Net property and equipment 16,482,550 16,828,156
Other assets:
Franchise rights, net 963,873 1,010,616
Notes receivable from affiliates 65,972 75,899
Deposit with affiliate 350,000 350,000
Investment in Oklahoma Magic, L.P. 1,760,653 1,795,774
Other 693,052 679,106
---------- ----------
$21,683,635 $22,226,145
========== ==========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY)
- ----------------------------------------------
Current liabilities:
Accounts payable $ 2,333,425 $ 3,042,151
Due to affiliates 126,937 50,539
Accrued payroll and other taxes 382,480 385,016
Accrued liabilities 769,035 784,661
Current portion of long-term debt 920,877 12,899,728
Current portion of obligations
under capital leases 37,501 36,492
---------- ----------
Total current liabilities 4,570,255 17,198,587
Other noncurrent liabilities 403,007 204,337
Long-term debt 19,178,655 7,105,615
Obligations under capital leases 1,609,267 1,608,356
General Partners' interest
in Operating Partnership 119,358 120,702
Partners' capital (deficiency):
General Partners (7,996) (7,864)
Limited Partners:
Class A Income Preference 5,596,043 5,623,790
Classes B and C (8,428,198) (8,322,372)
Cost in excess of carrying value
of assets acquired (1,323,681) (1,323,681)
Unrealized gain (loss) in investment securities (33,075) 18,675
---------- ----------
Total partners' deficiency (4,196,907) (4,011,452)
---------- ----------
$21,683,635 $22,226,145
========== ==========
See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Periods Ended
March 31, April 1,
1998 1997
---------- ----------
Net sales $9,226,646 $9,619,205
Operating costs and expenses:
Cost of sales 2,430,832 2,551,292
Restaurant labor and benefits 2,628,200 2,787,839
Advertising 610,801 561,291
Other restaurant operating
expenses exclusive of
depreciation and amortization 1,714,790 1,875,165
General and administrative:
Management fees - related party 641,918 669,449
Other 112,545 182,306
Depreciation and amortization 445,270 490,137
Equity in loss of affiliate 25,323 74,313
--------- ---------
Income from operations 616,967 427,413
Interest income (2,995) (8,420)
Interest expense 553,188 562,533
--------- ---------
Income (loss) before General Partners'
interest in income (loss) of
Operating Partnership 66,774 (126,700)
General Partners' interest in
income (loss) of Operating Partnership 668 (1,267)
--------- ---------
Net income (loss) 66,106 (125,433)
========= =========
Net income (loss) allocated to Partners:
Class A Income Preference 13,489 (25,639)
Class B 19,789 (37,532)
Class C 32,828 (62,262)
Weighted average number of Partnership
units outstanding during period:
Class A Income Preference 813,840 815,309
Class B 1,193,952 1,193,512
Class C 1,980,647 1,979,913
Basic and diluted net income (loss)
per Partnership interest 0.02 (0.03)
Distributions per Partnership interest 0.05 0.11
See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Three Periods Ended
March 31, April 1,
1998 1997
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 66,105 $ (125,433)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 445,270 490,137
Provision for deferred rent 4,317 2,516
Unit compensation expense - 11,737
Equity in loss of affiliate 25,323 74,313
(Gain)/Loss on disposition of assets (6,039) 11,624
General Partners' interest in net
income (loss) of Operating Partnership 668 (1,267)
Net change in operating assets and liabilities:
Accounts receivable 10,292 (77,756)
Due from affiliates 10,303 (2,181)
Inventories 36,300 2,568
Prepaid expenses 21,344 (25,832)
Accounts payable (708,726) (89,056)
Due to affiliates 76,398 (71,290)
Accrued payroll and other taxes (2,536) (253,434)
Accrued liabilities (15,626) (180,289)
Other, net 211,471 (49,390)
--------- ---------
Net cash provided by (used in)
operating activities 174,864 (283,033)
Cash flows from investing activities:
Purchase of certificate of deposit - (6,567)
Additions to property and equipment (98,467) (602,862)
Proceeds from sale of property and equipment 9,996 200
Purchase of franchise rights - (15,000)
Collections of notes receivable from affiliates 9,071 18,850
--------- ---------
Net cash used in
investing activities (79,400) (605,379)
Cash flows from financing activities:
Payments on long-term borrowings (405,811) (3,899,672)
Proceeds from long-term borrowings 500,000 5,083,000
Payments on capital lease obligations (8,754) (936)
Distributions to Partners (199,225) (438,910)
Proceeds from issuance of Class B and C units - 19,750
Repurchase of units (585) -
General Partners' distributions
from Operating Partnerships (2,012) (4,434)
Other, net 10,674 -
--------- ---------
Net cash (used in) provided by
financing activities (105,713) 758,798
--------- ---------
Net decrease in cash
and cash equivalents (10,249) (129,614)
Cash and cash equivalents at beginning of period 509,398 178,826
--------- ---------
Cash and cash equivalents at end of period $ 499,149 $ 49,212
========= =========
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, and
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 April 1, 1998 the Partnership declared a distribution of $0.05
per unit to all unitholders of record as of April 13, 1998 payable
on May 1, 1998. The distribution is not reflected in the March 31,
1998 consolidated condensed financial statements.
3. Long-Term Debt
--------------
On April 20, 1998, the Partnership refinanced all borrowings
through Heller Financial Corporation, $4.2 million of
borrowings through Intrust Bank, and $3.0 million of borrowings
through Franchise Mortgage Acceptance Company (FMAC), with new
promissory notes to FMAC totaling $10,200,000. The new notes are
payable in monthly installments aggregating $102,306, including
interest at a fixed rate of 8.81%, and mature in April 2013.
Accordingly, the current portion of long-term debt has been
classified to reflect the terms of the new agreements.
4. Investment in Affiliate
-----------------------
On March 13, 1996, the Partnership purchased a 45% interest in a
newly formed limited partnership, Oklahoma Magic, L.P. ("Magic"),
for $3.0 million in cash. Magic currently owns and operates twenty-
seven Pizza Hut restaurants in Oklahoma. The Partnership accounts
for its investment in Magic using the equity method of accounting.
Unaudited condensed consolidated financial statements for Magic are
as follows:
March 31, December 30,
1998 1997
----------- ------------
Balance sheet:
Current assets $ 573,225 $ 543,764
Noncurrent assets 9,879,210 9,946,529
---------- ----------
$10,452,435 $10,490,293
========== ==========
Current liabilities $ 6,734,345 $ 6,608,680
Noncurrent liabilities 2,153,065 2,260,317
---------- ----------
Partners' equity 1,565,025 1,621,296
---------- ----------
$10,452,435 $10,490,293
========== ==========
Three Periods Ended
March 31, April 1,
1998 1997
----------- -----------
Statement of Operations:
Revenues $ 3,821,164 $ 3,918,425
Cost of sales 1,022,533 1,046,243
Operating expenses 2,690,878 2,873,062
---------- ----------
Income (loss) from operations 107,753 (880)
Other expense (principally interest) 164,024 164,261
---------- -----------
Net loss $ (56,271) $ (165,141)
========== ==========
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
alleges that HGO contacted and offered employment to a significant
number of the management employees of Magic. Magic has also
alleged that HGO made certain misrepresentations at the formation
of Magic. HGO has denied that such franchise violations have
occurred and that it made any misrepresentations at the formation
of Magic. HGO has 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. HGO is seeking recision of the
purchase and contribution of the restaurants or in the alternative
compensatory and punitive damages. The matter has been submitted to
arbitration; however, the parties continue to seek to resolve the
disagreement through negotiation. If Magic prevails, the interest
of HGO in Magic will be purchased by Magic and the interest of the
Partnership will likely increase from 45% to 60%. The amount of
damages sought by HGO has not been enumerated.
5. 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
As of March 31, 1998, the Partnership operated 53 traditional Pizza
Hut red roof restaurants, five delivery/carryout units and three
dualbrand locations, and one convenience store location.
Quarter Ended March 31, 1998 Compared to Quarter Ended
- ------------------------------------------------------
April 1, 1997
- -------------
NET SALES. Net sales for the quarter ended March 31, 1998
decreased $393,000 from $9,619,000 to $9,227,000, a 4.1% decrease
from the first quarter of 1997. This decrease was entirely
attributable to restaurants closed in 1997 as comparable restaurant
sales increased 0.4%.
INCOME FROM OPERATIONS. Income from operations increased $190,000
from $427,000 to $617,000, a 44.3% increase over the first quarter
of 1997. As a percentage of net sales, income from operations
increased from 4.4% for the quarter ended April 1, 1997 to 6.7% for
the quarter ended March 31, 1998. Cost of sales decreased as a
percentage of net sales from 26.5% for the quarter ended April 1,
1997 to 26.3% for the quarter ended March 31, 1998. Labor and
benefits expense decreased as a percentage of net sales from 29.0%
in 1997 to 28.5% in 1998 despite the minimum wage increase that
took effect September 1, 1997. These margin improvements are the
result of diligent, continuous follow-up and focus on effeciencies
in the restaurants. Advertising increased as a percentage of net
sales from 5.8% in 1997 to 6.6% in 1998. Operating expenses
decreased from 19.5% of net sales in 1997 to 18.6% 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 decreased from
8.9% of net sales in 1997 to 8.2% of net sales in 1998 due to a
decrease in bonuses paid. Depreciation and amortization expense
decreased from 5.1% of net sales in 1997 to 4.8% of net sales in
1998 primarily due to restaurant closings and consolidations during
the fourth quarter of 1997. Equity in loss of affiliate amounted
to 0.3% of net sales in 1998 compared to 0.8% of net sales in 1997.
NET EARNINGS. Net earnings increased $192,000 to a net
income of $66,000 for the quarter ended March 31, 1998 compared to
a net loss of $125,000 for the quarter ended April 1, 1997. This
increase is attributable to the increase in income from operations
noted above.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At March 31, 1998 the Partnership had a working capital deficiency
of $3,203,000 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 an $11,979,000 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 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%. Accordingly, the current portion of
long-term debt has been classified to reflect the terms of the new
notes bringing the Partnership into compliance with the fixed
charge ratio. 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 (USED IN) OPERATING ACTIVITIES. For the
quarter ended March 31, 1998, net cash provided by operating
activities amounted to $175,000 compared to net cash used in
operating activities of $283,000 for the quarter ended April 1,
1997. This increase is primarily the result of the increase in net
earnings along with an increase in other noncurrent liabilities.
INVESTING ACTIVITIES. Property and equipment expenditures
represent the largest investing activity by the Partnership.
Capital expenditures for the quarter ended March 31, 1998 were
$98,000 for replacement of equipment in existing restaurants.
FINANCING ACTIVITIES. Cash distributions declared during the
quarter ended March 31, 1998 were $199,000 amounting to $0.05 per
unit as compared to $439,000, or $0.11 per unit, during the first
quarter 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 three periods ended March 31, 1998, the Partnership's
proceeds from borrowings amounted to $500,000 used primarily to
replenish operating capital. The Partnership does not plan to open
any new restaurants during 1998. Management anticipates spending an
additional $397,000 for recurring replacement of equipment in
existing restaurants which will be financed 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.
Management believes that the declining trend in same store sales
experienced over the last two years has reversed itself with the
slight increase in first quarter. Management will continue to focus
on controllable items such as labor and food costs to build on the
improvements realized this quarter. The refinancing completed in
April 1998 will lower the Partnership's annual debt service by
approximately $800,000. As a result of these items, the
Partnership should experience a significant improvement in cash
flow after debt service in 1998.
OTHER MATTERS
- -------------
In November 1996 Magic notified Hospitality Group of Oklahoma, Inc.
(HGO), the former owners of the Oklahoma restaurants, that it is
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
alleges that HGO contacted and offered employment to a significant
number of the management employees of Magic. Magic has also
alleged that HGO made certain misrepresentations at the formation
of Magic. HGO has denied that such franchise violations have
occurred and that it made any misrepresentations at the formation
of Magic. HGO has 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. HGO is seeking recision of the
purchase and contribution of the restaurants or in the alternative
compensatory and punitive damages. The matter has been submitted to
arbitration; however, the parties continue to seek to resolve the
disagreement through negotiation. If Magic prevails, the interest
of HGO in Magic will be purchased by Magic and the interest of the
Partnership will likely increase from 45% to 60%. The amount of
damages sought by HGO has not been enumerated.
As previously reported, under the Omnibus Budget Reconciliation Act
of 1987, certain MLPs, including the Partnership would be taxed as
corporations beginning in 1998. The effect of this provision is
that the Partnership would pay income taxes and the partners would
then pay additional taxes on distributions received by them,
thereby substantially increasing the total taxation of the
Partnership's distributed income. After considering various
alternatives to avoid this double taxation, 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.
The Partnership does not expect year 2000 issues to have any
material effect on its costs or to cause any significant
disruptions to its operations. The Partnership uses external
agents on all critical applications and systems. The external
agents have assured the Partnership that they expect to be fully
year 2000 compliant before the year 2000 issues will impact the
Partnership.
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: 5/13/98 By: /s/Hal W. McCoy
-------- -------------------
Hal W. McCoy
President and Chief Executive Officer
Date: 5/13/98 By: /s/Terry Freund
-------- --------------------
Terry Freund
Chief Financial Officer
<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed financial statements of American Restaurant Partners,
L.P. at March 31, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
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