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 29, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from _______ to _______
Commission File Number 1-9606
AMERICAN RESTAURANT PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 48-1037438
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 N. Woodlawn, Suite 3102
Wichita, Kansas 67208
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (316) 684-5119
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class
-------------------
Class A Income Preference Units of
Limited Partner Interests
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K. (X)
As of March 1, 1999 the aggregate market value of the income
preference units held by non-affiliates of the registrant was
$2,073,941.
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 is held by Restaurant Management Company of Wichita,
Inc. (the Management Company). APP and Magic are collectively
referred to as the "Operating Partnerships".
As of December 29, 1998, the Partnership owned and operated a
total of 89 restaurants (collectively, the "Restaurants"). APP
owned and operated 54 traditional "Pizza Hut" restaurants, 5
"Pizza Hut" delivery/carryout facilities and 3 dualbrand
locations. During 1998, APP opened one "Pizza Hut" restaurant,
and closed a delivery/carryout unit and a convenience store
location. Magic owned and operated 17 traditional "Pizza Hut"
restaurants and 10 "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
12-30-97 1998 1998 12-29-98
-------- --------- --------- --------
Georgia 8 -- -- 8
Louisiana 2 -- 1 1
Montana 18 1 -- 19
Texas 27 -- 1 26
Wyoming 8 -- -- 8
Oklahoma 27 -- -- 27
--- --- --- ---
Total 90 1 2 89
=== === === ===
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. which was created with the spin-off of PepsiCo,
Inc.'s restaurant division. Since it was founded in 1958, PHI
has become the world's largest pizza restaurant chain in terms of
both sales and number of restaurants. As of March 1, 1999, there
were approximately 7,300 Pizza Hut restaurants and
delivery/carryout facilities with locations in all 50 states and
in over 85 countries. PHI owns and operates approximately 51% of
these restaurants and independent franchisees own and operate
approximately 49% of these restaurants.
All Pizza Hut restaurants offer substantially the same menu
items, including several varieties of pizza as well as pasta,
salads and sandwiches. All food items are prepared from high
quality ingredients in accordance with PHI's proprietary recipes
and a special blend of spices available only from PHI. Pizza is
offered in several different sizes with a thin crust, hand tossed
traditional crust, or a thick crust, known as "Pan Pizza", as
well as with a wide variety of toppings. Food products not
prescribed by PHI may only be offered with the prior express
approval of PHI.
PHI maintains a research and development department which
develops new recipes and products, tests new procedures for food
preparation and approves suppliers for Pizza Hut restaurants.
Pizza Hut restaurants are constructed in accordance with
prescribed design specifications and most are similar in exterior
appearance and interior decor. The typical restaurant building
is a one-story brick building with 1,800 to 3,000 square feet,
including kitchen and storage areas, and features a distinctive
red roof. Seating capacity ranges from 75 to 140 persons and the
typical property site will accommodate parking for 30 to 70
automobiles. 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.
Effective January 1, 1996 through December 31, 1997, PHI and
the members of IPHFHA agreed to decrease their contribution to
the co-ops by 0.5% to 1.5% of gross sales and increase their
national dues by 0.5% to 2.5% of gross sales. Effective January
1, 1998, PHI and the members of IPHFHA agreed to change both the
contributions to the co-ops and national dues back to 2% of gross
sales.
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. AmeriServe is the
primary supplier of equipment, food products and supplies to
franchisees. AmeriServe offers certain equipment, food products
and supplies for sale to franchisees for use in their
restaurants, but franchisees are not required to purchase such
items from AmeriServe. Further, PHI limits the rate of profit on
AmeriServe's sales of food, paper products and similar restaurant
supplies to franchisees to a 14% gross profit and a 2.5% net pre-
tax profit. Profits in excess of such amounts are returned
annually on a proportionate basis to franchisees purchasing
products from AmeriServe. Because of these financial incentives,
the Partnership purchases substantially all of its equipment,
supplies, and other products and materials from AmeriServe,
except for produce items, which are purchased locally for each
Restaurant. Most of the equipment, supplies, and other products
and materials used in the Restaurants' operations, however, are
commodity items that are available from numerous suppliers at
market prices. Certain of the items used in preparation of the
Restaurants' products currently are available only to Pizza Hut
franchisees from PHI.
Franchise Fees. Franchisees must pay monthly service fees to
PHI based on each restaurant's gross sales. The monthly service
fee under each of the 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 1999
or future years.
Seasonality
- -----------
Due to the seasonal nature of the restaurant business in
general, the locations of many of the Restaurants near summer
tourist attractions, and the severity of winter weather in the
areas in which many of the Restaurants are located, the
Partnership realizes approximately 40% of its operating profits
in periods six through nine (18 weeks). Although this seasonal
trend is likely to continue, the severity of these seasonal
cycles may be lessened to the extent that the Partnership
operates Pizza Hut restaurants in warmer climates and nontourist
population areas in the future. The Partnership does not
anticipate that the current seasonal trends will cause the
Partnership's negative working capital to deteriorate even
further during seasonal lows even if these trends continue.
Competition
- -----------
The retail restaurant business is highly competitive with
respect to trademark recognition, price, service, food quality
and location, and is often affected by changes in tastes, eating
habits, national and local economic conditions, population and
traffic patterns. The Restaurants compete with large regional
and national chains, including both fast food and full service
chains, as well as with independent restaurants offering
moderately priced food. Many of the Partnership's competitors
have more locations, greater financial resources, and longer
operating histories than the Partnership. The Restaurants
compete directly with other pizza restaurants for dine-in, take-
out and delivery customers.
Government Regulation
- ---------------------
The Partnership and the Restaurants are subject to various
government regulations, including zoning, sanitation, health,
safety and alcoholic beverage controls. Restaurant employment
practices are also governed by minimum wage, overtime and other
working condition regulations which, to date, have not had a
material effect on the operation of the Restaurants. The
Partnership believes that it is in compliance with all
laws and regulations which govern its business. In order to
comply with the regulations governing alcoholic beverage sales in
Montana, Texas and Wyoming, the licenses permitting beer sales in
certain Restaurants in those states are held in the name of
resident persons or domestic entities to whom they were
originally issued, and are utilized by the Partnership under
lease arrangements with such resident persons or entities.
Because of the varying requirements of various state agencies
regulating liquor and beer licenses, the Partnership Agreement
provides that all Unitholders and all other holders of limited
partner interests must furnish the Managing General Partner with
all information it reasonably requests in order to comply with
any requirements of these state agencies, and that the
Partnership has the right to purchase all Units held by any
person whose ownership of Units would adversely affect the
ability of the Partnership to obtain or retain licenses to sell
beer or wine in any Restaurant.
Employees
- ---------
As of March 1, 1999, the Partnership did not have any
employees. The Operating Partnerships had approximately 2,100
employees at the Restaurants. Each Restaurant is managed by one
restaurant manager and one or more assistant restaurant managers.
Many of the other employees are employed only part-time and, as
is customary in the restaurant business, turnover among the part-
time employees is high. Employees at one of the Restaurants were
covered by a collective bargaining agreement through July 7,
1997. The employees at this restaurant voted to decertify as of
that date. The Restaurants are managed by employees of the
Management Company which has its principal offices in Wichita,
Kansas. The Management Company has a total of 37 employees which
devote all or a significant part of their time to management of
the Restaurants. In addition, the Partnership may employ certain
management officials of the Management Company on a part time
basis. Employee relations are believed to be satisfactory.
Financial Information About Foreign and Domestic Operations and
- ---------------------------------------------------------------
Export Sales
- ------------
The Partnership operates no restaurants in foreign countries.
Item 2. Properties
- ------------------
The following table lists the location by state of Restaurants
operated by APP as of December 29, 1998.
Leased From Leased From
Unrelated Third Affiliate of the
Parties General Partners Owned Total
------- ---------------- ----- -----
Georgia 1 - 7 8
Louisiana - - 1 1
Montana 9 - 10 19
Texas 15 - 11 26
Wyoming 1 1 6 8
--- --- --- ---
Total APP 26 1 35 62
=== === === ===
Five of the properties owned by APP are subject to ground
leases from unrelated third parties. The property leased from an
affiliate of the General Partners is subject to a mortgage or
deed of trust. Most of the properties, including that owned by
an affiliate of the General Partners are leased for a minimum
term of at least five years and are subject to one or more five
year renewal options. Two leases with initial terms of less
than five years contain renewal options extending through at
least 2001. Management believes leases with shorter terms can be
renewed for multiple year periods, or the property can be
purchased, without significant difficulty or unreasonable
expense.
In addition to the operating restaurants above, APP has
remaining lease obligations on two closed restaurants. Both of
the locations are subleased through their remaining lease term.
The following table lists the Restaurants operated by Magic as
of December 29, 1998.
Leased From
Unrelated Third Leased From
Parties Affiliate Total
------- --------- -----
Oklahoma 25 2 27
--- --- ---
Total Magic 25 2 27
=== === ===
Most of the properties including the two owned by an affiliate
are leased for a minimum term of at least five years and are
subject to one or more five year renewal options. One lease with
an initial term of less than five years contains renewal options
through 2002.
In addition to the operating restaurants above, Magic has
remaining lease obligations on two closed restaurants. Magic is
attempting to sublease these locations through the remainder of
their lease terms which expire in 2001.
The amount of rent paid is either fixed or includes a fixed
rental plus a percentage of the Restaurant's sales, subject, in
some cases, to maximum amounts. The leases require the
Partnership to pay all real estate taxes, insurance premiums,
utilities, and to keep the property in general repair.
Pizza Hut restaurants are constructed in accordance with
prescribed design specifications and most are similar in exterior
appearance and interior decor. The typical restaurant building
is a one-story brick building with 1,800 to 3,000 square feet,
including kitchen and storage areas, and features a distinctive
red roof. Seating capacity ranges from 75 to 140 persons and the
typical property site will accommodate parking for 30 to 70
automobiles. Building designs may be varied only upon request
and when required to comply with local regulations or for unique
marketing reasons. Typical capital costs for a restaurant
facility are approximately $150,000 for land, $250,000 for the
building and $135,000 for equipment and furnishings. Land costs
can vary materially depending on the location of the site.
Delivery/carryout facilities vary in size and appearance. These
facilities are generally leased from unrelated third parties.
Item 3. Legal Proceedings
- --------------------------
As of December 29, 1998, the Partnership was not a party to
any pending legal proceedings material to its business.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
PART II
Item 5. Market for the Registrant's Class A Income Preference
- --------------------------------------------------------------
Units and Related Security Holder Matters
- -----------------------------------------
The Partnership's Class A Income Preference Units were traded
on the American Stock Exchange under the symbol "RMC" through
November 13, 1997. On that date, the Partnership delisted from
the American Stock Exchange and limited trading of its units.
The Class A Income Preference Units were traded on the Pink
Sheets from December 1, 1997 through January 2, 1998. Effective
January 1, 1998, the Partnership offered a Qualified Matching
Service, whereby the Partnership will match persons desiring to
buy units with persons desiring to sell units. Market prices for
units during 1998 and 1997 were:
Calendar Period High Low
- -----------------------------------------------------
1998
- ----
First Quarter $2.75 $1.90
Second Quarter 2.60 2.25
Third Quarter 2.80 2.60
Fourth Quarter 2.80 2.70
1997
- ----
First Quarter $5.75 $4.81
Second Quarter 5.13 4.81
Third Quarter 5.00 2.75
Fourth Quarter 4.38 1.50
As of December 29, 1998, approximately 1,200 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
- ---------------------------------------------------------------
1998
January 12, 1998 January 30, 1998 $0.05
April 13, 1998 May 1, 1998 0.05
July 13, 1998 July 31, 1998 0.10
October 12, 1998 October 30, 1998 0.10
----
Cash distributed during 1998 $0.30
====
1997
- ----
January 12, 1997 January 31, 1997 $0.11
April 11, 1997 April 25, 1997 0.11
July 14, 1997 July 25, 1997 0.05
October 13, 1997 October 25, 1997 0.05
----
Cash distributed during 1997 $0.32
====
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.
<TABLE>
Item 6. Selected Financial Data
- ----------------------------------
(in thousands, except per Unit data, number of Restaurants,
and average weekly sales per Restaurant)
<CAPTION>
American Restaurant Partners, L.P.
-----------------------------------------------------------------
Year Ended
December 29, December 30, December 31, December 26, December 27,
1998 (d) 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income statement data:
Net sales $ 43,544 $ 38,977 $ 40,425 $ 40,004 $ 37,445
Income from operations 2,443 433 3,076 3,890 3,587
Net income (loss) 809 (1,993) 1,584 2,481 2,385
Net income (loss) per Class A
Income Preference Unit (a) 0.20 (0.50) 0.40 0.63 1.04
Balance sheet data:
Total assets $ 30,703 $ 22,226 $ 23,745 $ 16,134 $ 16,445
Long-term debt 29,630 20,005 18,859 10,525 10,787
Obligations under capital
leases 1,543 1,645 1,665 1,732 1,800
Partners capital (deficiency):
General Partners (8) (8) (5) (3) (3)
Class A 5,543 5,624 6,295 6,573 6,729
Class B and C (10,058) (8,322) (5,811) (4,688) (4,479)
Cost in excess of carrying
value of assets acquired (1,324) (1,324) (1,324) (1,324) (1,324)
Cumulative comprehensive income (108) 19 (44) - -
Notes receivable from employees - - - (6) (32)
Cash dividends declared per unit:
Class A Income Preference 0.30 0.32 0.74 0.74 1.07
Class B 0.30 0.32 0.74 0.74 0.52
Class C 0.30 0.32 0.74 0.74 0.52
Statistical data:
Capital expenditures: (b)
Existing Restaurants $ 2,465 889 2,612 1,185 1,093
New Restaurants 162 935 4,136 - 1,038
Average weekly sales per
Restaurant: (c)
Red Roof 11,918 11,813 12,544 12,862 12,278
Delivery/carryout facility/C-store 10,508 8,160 10,547 12,463 11,536
Restaurants in operation
at end of period 89 63 67 60 60
</TABLE>
NOTES TO SELECTED FINANCIAL DATA
(a) Net earnings per Class A Income Preference Unit were
determined by allocating the earnings in the same manner required
by the Partnership Agreements for the allocation of taxable
income and loss. Therefore, net earnings of the Operating
Partnerships have been allocated to the limited partners who are
holders of Class A Income Preference Units (Units) first until
the amount allocated equals the preference amount. The remaining
net earnings are allocated to all partners in accordance with
their respective Units in the Partnership with all outstanding
Units being treated equally. The preference requirement was
satisfied in May of 1994. Upon expiration of the preference, net
earnings were allocated equally to all outstanding units.
(b) Capital expenditures include the cost of land, buildings, new
and replacement restaurant equipment and refurbishment of
leasehold improvements. Capital expenditures for existing
restaurants represent such capitalized costs for all restaurants
other than newly constructed restaurants.
(c) Average weekly sales were calculated by dividing net sales by
the weighted average number of restaurants open during the
period. The quotient was then divided by the number of days in
the period multiplied times seven days.
(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 29, 1998, December 30, 1997 and December
31, 1996. Comparisons of 1997 to 1996 are affected by an
additional week of results in the 1996 reporting period. Because
the Partnership's fiscal year ends on the last Tuesday in
December, a fifty-third week is added every five or six years.
This discussion should be read in conjunction with the Selected
Financial Data and the Consolidated Financial Statements included
elsewhere herein.
The accompanying consolidated financial statements include the
accounts of the Partnership and its majority owned subsidiaries,
American Pizza Partners, L.P. and APP Concepts, LLC. Effective
August 11, 1998, the interest of American Pizza Partners, L.P. in
Magic increased from 45% to 60% in connection with Magic's
purchase of a 25% interest from a former limited partner (see
Note 13 to the accompanying financial statements). Accordingly,
the Partnership began consolidating the accounts of Magic from
that date. All significant intercompany balances and
transactions have been eliminated. The table below shows the
historical Statements of Operations as well as proforma results
of operations assuming the Partnership's interest in Magic
increased to 60% as of January 1, 1997. The proforma results are
shown in order to provide a more meaningful basis for a
comparative discussion of the years ended December 29, 1998 and
December 30, 1997.
<TABLE>
<CAPTION>
Historical Proforma (1)
---------------------------------------------------------------
1998 1997 1996 1998 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $43,543,633 $38,977,341 $40,424,953 $53,631,453 $54,689,655
Operating costs
and expenses:
Cost of sales 11,710,209 10,586,372 10,762,075 14,289,075 14,895,268
Restaurant labor
and beneifits 12,500,842 11,043,688 10,672,283 15,522,283 15,939,414
Advertising 2,844,451 2,511,470 2,744,864 3,595,040 3,827,444
Other restaurant
operating expenses
exclusive of
depreciation and
amortization 8,337,961 7,691,831 7,433,450 10,656,012 11,382,741
General and
administrative:
Management fees 2,894,911 2,710,449 2,808,484 3,348,863 3,261,044
Other 631,999 371,443 766,551 761,827 601,017
Depreciation
and amortization 2,149,606 2,078,061 1,687,090 2,664,692 2,907,574
Loss (gain) on
restaurant closings 23,747 792,219 97,523 (93,220) 1,577,018
Equity in loss
of affiliate 7,250 758,383 375,632 - -
---------- ---------- ---------- ---------- ----------
Income from
operations 2,442,657 433,425 3,076,343 2,886,881 298,135
Interest income 29,783 29,350 34,253 29,783 29,350
Interest expense (2,662,061) (2,476,304) (1,668,551) (3,115,146) (3,267,918)
Gain on life
insurance settlement 875,533 - - 875,533 -
Gain on fire
settlement - - 157,867 - -
---------- ---------- ---------- ---------- ----------
Income (loss) before
minority interest 685,912 (2,013,529) 1,599,912 677,051 (2,940,433)
Minority interest
in income (loss) of
Operating Partnerships 122,805 20,135 (15,999) 129,273 696,778
---------- ---------- ---------- ---------- ----------
Net income $ 808,717 $(1,993,394) $ 1,583,913 $ 806,324 $(2,243,655) $
========== ========== ========== ========== ==========
<FN>
(1) The proforma statements of operations for 1998 and 1997 include
consolidation of Magic as if the Partnership's interest in Magic
increased to 60% as of January 1, 1997.
</FN>
</TABLE>
Net Sales
- ---------
Proforma net sales for the year ended December 29, 1998 decreased
$1,059,000 or 1.9%, from $54,690,000 for the year ended December
30, 1997 to $53,631,000 for the year ended December 29, 1998.
This decrease was entirely attributable to restaurants closed in
1997 as comparable restaurants sales increased 4.4%.
Net sales for the year ended December 30, 1997 decreased
$1,448,000, or 3.6%, from $40,425,000 to 38,977,000. The
additional week in 1996 accounted for approximately 2 percentage
points of the decrease. Comparable restaurant sales decreased
5.2% from 1996. This decrease reflected the continuing increase
in competition in the Texas market.
Income From Operations
- ----------------------
Proforma income from operations for the year ended December 29,
1998 increased $2,589,000 from $298,000 to $2,887,000, an 868.8%
increase over the year ended December 30, 1997. As a percentage
of proforma net sales, proforma income from operations increased
from 0.5% in 1997 to 5.4% in 1998. Proforma cost of sales
decreased as a percentage of proforma net sales from 27.2% in
1997 to 26.6% of proforma net sales in 1998. Proforma labor and
benefits expense decreased from 29.1% of proforma net sales in
1997 to 28.9% of proforma 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
as a percentage of proforma net sales from 7.0% in 1997 to 6.7%
in 1998. Other restaurant operating expenses decreased from
20.8% of proforma net sales in 1997 to 19.9% of proforma 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 7.1% of proforma net sales in 1997 to 7.7% of proforma net
sales in 1998. This increase is due to an increase in Magic's
management fee from 3.5% of proforma net sales during 1997 to
4.5% of proforma net sales during 1998 and an increase in bonuses
paid on improved operating results. Depreciation and amortization
expense decreased from 5.3% of proforma net sales in 1997 to 5.0%
of proforma net sales in 1998 due to restaurant closings and
consolidations during the last half of 1997. Loss on restaurant
closings amounted to 2.9% of proforma net sales or $1,577,000 in
1997 compared to a gain on restaurant closings in 1998 of
$93,000. This gain is the result of favorable buyouts of two
long-term leases on restaurants closed in 1997.
Income from operations for the year ended December 30, 1997
decreased $2,643,000 from $3,076,000 to $433,000, an 85.9%
decrease from the prior year. As a percentage of net sales,
income from operations decreased from 7.6% in 1996 to 1.1% in
1997. Cost of sales increased as a percentage of net sales from
26.6% in 1996 to 27.2% in 1997 due to increased commodity costs.
Restaurant labor and benefits expense increased from 26.4% of net
sales in 1996 to 28.3% of net sales in 1997 as a result of
minimum wage increases implemented October 1, 1996 and September
30, 1997 along with lower same store sales. Advertising
decreased from 6.8% of net sales in 1996 to 6.4% of net sales in
1997. Other restaurant operating expenses increased from 18.4%
of net sales in 1996 to 19.7% of net sales in 1997 attributable
to the effects of lower same store sales on fixed operating
expenses. General and administrative expense decreased from 8.8%
of net sales in 1996 to 7.9% of net sales in 1997 primarily due
to lower bonuses paid on operating results. Depreciation and
amortization expense increased from 4.2% of net sales in 1996 to
5.3% of net sales in 1997 due to the construction of new
restaurants and remodels of existing restaurants during 1996 and
the first six periods of 1997. Loss on restaurant closings
amounted to 2.0% of net sales in 1997 and 0.2% of net sales in
1996. Five restaurants were closed in 1997 compared to one in
the prior year. Equity in loss of affiliate amounted to 1.9% of
net sales in 1997 compared to 0.9% of net sales in 1996
reflecting the Partnership's share of operations in Oklahoma
Magic, L.P. acquired in March 1996.
Net Earnings
- ------------
Proforma net earnings increased $3,050,000 to proforma net income
of $806,000 for the year ended December 29, 1998 compared to a
proforma net loss of $2,244,000 for the year ended December 30,
1997. A gain on life insurance settlement of $876,000 is
included in the 1998 proforma net income. This gain, the
increase in proforma income from operations noted above, and a
decrease in interest expense of $153,000 were offset by a
decrease in the minority interest in loss of affiliate of
$537,000.
Net earnings decreased $3,577,000 to a net loss of $1,993,000 for
the year ended December 30, 1997 compared to net income of
$1,584,000 for the year ended December 31, 1996. This decrease
is attributable to the decrease in income from operations of
$2,643,000 noted above combined with an increase in interest
expense of $808,000. The default of certain loans within the
Partnership's pooled borrowings from Franchise Mortgage
Acceptance Company resulted in additional interest expense of
$280,000 (see Note 3 of the accompanying financial statements).
The remaining increase in interest expense of $528,000 is due to
additional debt primarily used to fund the acquisition of a 45%
interest in Magic and to develop new restaurants. The 1996 net
earnings include a $158,000 gain on fire settlement.
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 29, 1998, the Partnership had a working capital
deficiency of $9,211,000 compared to a deficiency of $15,712,000
at December 30, 1997. The decease in working capital deficiency
at December 29, 1998 is primarily a result of a $6,718,000
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 coverage ratio covenant. There have been no defaults in
making scheduled payments of either principal or interest. On
April 20, 1998, APP 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 APP into
compliance with the fixed charge coverage ratio covenant. The
write-off of unamortized loan cost related to this refinancing
was not material. At December 29, 1998, Magic is not in
compliance with the fixed charge coverage ratio covenant required
by the notes held by FMAC. Accordingly, the entire amount of
Magic's borrowings with FMAC is reflected in the current portion
of long-term debt. The Partnership routinely operates with a
negative working capital position which is common in the
restaurant industry and which results from the cash sales nature
of the restaurant business and payment terms with vendors.
Net Cash Provided by Operating Activities
- -----------------------------------------
During 1998, net cash provided by operating activities amounted
to $838,000, a decrease of $1,518,000 from 1997. This decrease is
primarily attributable to a decrease in accounts payable.
Investing Activities
- --------------------
Property and equipment expenditures represent the largest
investing activity by the Partnership. Capital expenditures for
1998 were $2,627,000 of which $1,696,000 was for the purchase of
previously leased restaurants and $162,000 was for the
development of new restaurants. The remaining $769,000 was for
the replacement of equipment in existing restaurants. In
addition, the Partnership invested $390,000 in Magic prior to
Magic's purchase of a 25% interest from a former limited partner.
Financing Activities
- --------------------
Cash distributions paid in 1998 totaled $1,195,000 and amounted
to $0.30 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 1998, the Partnership collected on a life insurance policy
purchased in 1993 on one of its original investors. This
investor owned approximately 438,600 Class B and C units. The
policy was purchased with the intent of providing the Partnership
a means of repurchasing his units upon his death if his heirs so
desired. The investor died in May of 1998. The Partnership
recognized a gain of $876,000 upon receipt of the insurance
proceeds. The units were repurchased on December 29, 1998 at
$2.55 per unit for a total purchase price of $1,118,430. In
addition, if the nine Pizza Hut restaurants located within the
Billings, Montana ADI, including the associated franchises, real
estate and operating assets, (the BM Restaurants) are sold to an
unrelated party in one or more transactions and the sale
transaction(s) are closed prior to January 1, 2001, then the
heirs will receive as additional consideration for the purchase
of the units a contingent payment of $0.50 per unit, or
$219,300. If the BM Restaurants are not sold within that time,
the obligation to make the contingent payment will expire. The
Partnership is not required to market or sell the BM Restaurants
or to accept any offer by any party to purchase such BM
Restaurants.
During 1998, the Partnership's proceeds from long term borrowings
amounted to $13,395,000 of which $9,633,000 was obtained to
refinance existing debt. The remaining proceeds were used
primarily to purchase previously leased restaurants and to
replenish operating capital. The Partnership does not plan to
open any new restaurants during 1999. Management anticipates
spending $721,000 in 1999 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.
Year 2000 Compliance
- --------------------
The Partnership has instituted a Year 2000 project to prepare its
computer systems and communication 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.
Testing is expected to be completed during the second quarter of
1999. 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 Partnership
will assess and attempt to mitigate its risks with respect to the
failure of these entities to be Year 2000 ready. In the event
external agents do not complete their Year 2000 readiness, the
Partnership would be unable to process accounts payable and
payroll. The Partnership has contingency plans for critical
applications that include, among other actions, manual
workarounds, adjusting staffing strategies and outsourcing
applications. 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), a 25% limited partner in Magic, that it was
seeking to terminate HGO's interest in Magic pursuant to the
terms of the related 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 that HGO contacted and offered
employment to a significant number of the management employees of
Magic. Magic also alleged that HGO made certain
misrepresentations at the formation of Magic. HGO denied that
such franchise violations occurred and that it 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 Magic's
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, payable
quarterly for five years. 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.
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. A hypothetical 100 basis point adverse move (increase)
in interest rates along the entire interest rate yield curve
would increase the Partnership's interest expense and decrease
net income by $63,000 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
- -----------------------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
RAM, as the Managing General Partner, is responsible for the
management and administration of the 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 53 Chairman, Chief Executive Officer,
President and sole director. McCoy
holds a Bachelor of Arts degree from
the University of Oklahoma. From 1970
to 1974, he was at different times
Marketing Manager at PHI, where he was
responsible for consumer research,
market research, and market
planning, and Systems Manager, where
he was responsible for the design and
installation of PHI's first management
data processing system. In 1974, he
founded the predecessor to the Management
Company and today owns or has controlling
ownership in entities operating a combined
total of 112 franchised "Pizza Hut" and
"Long John Silver's" restaurants.
J. Leon Smith 56 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 43 Chief Financial Officer. Freund holds
a Bachelor of Arts degree in Accounting
from Wichita State University. He has
been employed by McCoy since 1984.
He is responsible for virtually all of
the financial and administrative
functions in the company.
Item 11. Executive Compensation
- -------------------------------
The executive officers of the Management Company perform
services for all of the restaurants managed by the Management
Company, including the Restaurants. Cash compensation of
executive officers of the Management Company who are also
officers of affiliated companies is allocated for accounting
purposes among the various entities owning such restaurants on
the basis of the number of restaurants each entity owns. Only
the compensation of the Chief Executive Officer 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 1998 $171,627 $40,370 $211,997 $142,821
President and Chief 1997 127,322 36,451 163,773 79,716
Executive Officer 1996 135,661 79,031 214,692 121,901
Terry Freund 1998 84,297 20,063 104,360 67,441
Assistant Secretary and 1997 83,049 13,275 93,324 48,343
Chief Financial Officer 1996 82,237 39,851 122,088 67,916
Incentive Bonus Plan
- --------------------
The Management Company maintains a discretionary supervisory
incentive bonus plan (the "Incentive Bonus Plan") pursuant to
which approximately 22 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 1998, 1997 and 1996 to Mr.
McCoy 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 29, 1998 was $262,959 of which
$43,510 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 28, 1999 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 29, 1998 the Partnership's
income from operations plus depreciation and amortization
expenses was $4,592,263.
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 29, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and
- -----------------------------------------------------------------
Management
- ----------
PRINCIPAL UNITHOLDERS
The following table sets forth, as of March 1, 1999,
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 656,537 (1) 69.55%
555 N. Woodlawn
Suite 3102
Wichita, KS 67208
Class B John Hunter 116,564 12.35%
117 Lilac Lane
San Antonio, TX 78209
Class C Hal W. McCoy 1,271,876 (1) 76.33%
555 N. Woodlawn
Suite 3102
Wichita, KS 67208
Class C John Hunter 106,536 6.39%
117 Lilac Lane
San Antonio, TX 78209
(1) Hal W. McCoy beneficially owns 94.81% of RMC Partners, L.P.
which owns 691,815 Class B Units and 1,338,248 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, 1999, 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 656,537 (1) 69.55%
C Hal W. McCoy 1,271,876 (1) 76.33%
B Director & all 711,714 (1) 75.39%
officers as a group
(3 Persons)
C Director & all 1,370,436 (1) 82.24%
officers as a group
(3 Persons)
(1) See the table under "Principal Unitholders"
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
One of the Restaurants is located in a building owned by an
affiliate of the General Partners. The lease provides for
minimum annual rentals of $25,000 and is subject to additional
rentals based on a percentage of sales in excess of a specified
amount. The lease is a net lease, under which the lessee pays
the taxes, insurance and maintenance costs. The lease is for an
initial term of 15 years with options to renew for three
additional five-year periods. Although this lease was not
negotiated at arm's length, RMC believes that the terms and
conditions thereof, including the rental rate, is not less
favorable to the Partnership than would be available from
unrelated parties.
Pursuant to the Management Services Agreements (Agreements)
entered into June 26, 1987, the Restaurants of APP are managed by
the Management Company for a fee equal to 7% of the gross sales
of the Restaurants and reimbursement of certain costs incurred
for the direct benefit of the Restaurants. Neither the terms and
conditions of the Agreements, nor the amount of the fee were
negotiated at arm's length. Based on prior experience in
managing the Restaurants, however, the Managing General Partner
believes that the terms and conditions of the Management Services
Agreement, including the amount of the fee, are fair and
reasonable and not less favorable to the Partnership than those
generally prevailing with respect to similar transactions between
unrelated parties. The 7% fee approximated the actual
unreimbursed costs incurred by the Managing General Partner in
managing the Restaurants when the Agreements were entered into in
June of 1987. The 7% fee remains in effect for the life of the
Agreements which expire December 31, 2007.
Pursuant to separate Management Services Agreements entered into
March 13, 1996, the Restaurants of Magic are managed by the
Management Company for a fee equal to 4.5% of the gross sales of
the Restaurants and reimbursement of certain costs incurred for
the direct benefit of the Restaurants. The terms and conditions
of the Agreements were negotiated at arm's length with the former
owners of the Oklahoma restaurants who were originally 25%
partners in Magic. The Management Company agreed to a reduced
fee due its ownership interest in Magic. The 4.5% fee remains in
effect for the remaining life of the Agreements which expire
February 28, 2010.
PART IV
Item 14. Exhibits, Financial Statements and Reports
- ----------------------------------------------------
on Form 8-K
- -----------
(a) 1. Financial statements
--------------------
See "Index to Consolidated Financial Statements and
Supplementary Data" which appears on page F-1 herein.
3. Exhibits
--------
The exhibits filed as part of this annual report are
listed in the "Index to Exhibits" at page 32.
(b) Reports on Form 8-K
-------------------
None.
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-25
23.1 Consent of Ernst & Young LLP F-28
27.1 Financial Data Schedule F
A. Included as exhibits in the Partnership's Registration
Statement on Form S-1 (Registration No.33-15243) dated August
20, 1987 and included herein by reference to exhibit of same
number.
B. Incorporated by reference to the Partnership's Registration
Statement on Form S-8 dated March 21, 1988.
C. Incorporated by reference to Exhibit 10.7 of the
Partnership's Form 10-K for the year ended December 31, 1987.
D. Incorporated by reference to Exhibit 10.8 of the
Partnership's Form 10-K for the year ended December 31, 1991.
E. Incorporated by reference to Exhibit 2 of the Partnership's
Form 8-K dated March 13, 1996.
F. Submitted electronically to the Securities and Exchange
Commission for information only and not filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AMERICAN RESTAURANT PARTNERS, L.P.
(Registrant)
By: RMC AMERICAN MANAGEMENT, INC.
Managing General Partner
Date: 3/26/99 By: /s/ Hal W. McCoy
-------- -----------------
Hal W. McCoy
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Name Title
Date
/s/ Hal W. McCoy President and Chief Executive Officer 3/26/99
- ---------------- (Principal Executive Officer) -------
Hal W. McCoy of RMC American Management, Inc.
/s/ Terry Freund Chief Financial Officer 3/26/99
- ---------------- -------
Index to Consolidated Financial Statements
and Supplementary Data
The following financial statements are included in Item 8:
Page
----
American Restaurant Partners, L.P.
- ----------------------------------
Report of Independent Auditors . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 29, 1998
and December 30, 1997. . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years
ended December 29, 1998, December 30, 1997,
and December 31, 1996 . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Partners' Capital
(Deficiency) for the years ended December 29, 1998,
December 30, 1997 and December 31, 1996 . . . . . . . F-6
Consolidated Statements of Cash Flows for the
years ended December 29, 1998, December 30, 1997,
and December 31, 1996 . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . F-8
All financial statement schedules have been omitted since the
required information is not present.
Oklahoma Magic, L.P.
- --------------------
Report of Independent Auditors . . . . . . . . . . . . . . F-29
Balance Sheets as of December 30, 1997 and
Unaudited as of December 31, 1996 . . . . . . . . . . F-30
Statements of Operations for the year ended
December 30, 1997 and Unaudited for the
41 weeks (since inception) ended
December 31, 1996 . . . . . . . . . . . . . . . . . . F-31
Statements of Partners' Capital for the
year ended December 30, 1997 and Unaudited
for the 41 weeks (since inception) ended
December 31, 1996 . . . . . . . . . . . . . . . . . . F-32
Statements of Cash Flows for the year ended
December 30, 1997 and Unaudited for the
41 weeks (since inception) ended
December 31, 1996 . . . . . . . . . . . . . . . . . . F-33
Notes to Financial Statements . . . . . . . . . . . . . . F-34
REPORT OF INDEPENDENT AUDITORS
The General Partners and Limited Partners
American Restaurant Partners, L.P.
We have audited the accompanying consolidated balance sheets of
American Restaurant Partners, L.P. (the Partnership) as of
December 29, 1998 and December 30, 1997, and the related
consolidated statements of operations, partners' capital
(deficiency), and cash flows for each of the three years in the
period ended December 29, 1998. These financial statements are
the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above, present fairly, in all material respects, the consolidated
financial position of American Restaurant Partners, L.P. at
December 29, 1998 and December 30, 1997, and the consolidated
results of its operations and its cash flows for each of the
three years in the period ended December 29, 1998, in conformity
with generally accepted accounting principles.
/s/Ernst & Young LLP
Wichita, Kansas
March 12, 1999
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 29, December 30,
ASSETS 1998 1997
- ---------------------------- ------------ ------------
Current assets:
Cash and cash equivalents $ 329,946 $ 509,398
Investments available-for-sale,
at fair market value 68,635 195,751
Accounts receivable 264,754 84,447
Due from affiliates 90,146 67,918
Notes receivable from
affiliates - current portion 62,511 72,387
Inventories 441,326 311,516
Prepaid expenses 287,046 245,177
---------- ----------
Total current assets 1,544,364 1,486,594
Property and equipment, at cost:
Land 4,082,418 3,698,168
Buildings 8,586,103 7,702,639
Restaurant equipment 12,823,544 11,114,444
Leasehold rights and improvements 8,006,852 4,425,532
Property under capital leases 2,077,751 2,369,199
---------- ----------
35,576,668 29,309,982
Less accumulated depreciation and amortization 14,733,218 12,481,826
---------- ----------
20,843,450 16,828,156
Other assets:
Franchise rights, net of accumulated
amortization of $1,416,937 ($785,578 in 1997) 5,780,163 1,010,616
Notes receivable from affiliates 50,201 75,899
Deposit with affiliate 450,000 350,000
Investment in Oklahoma Magic, L.P. - 1,795,774
Goodwill, net of accumulated
amortization of $109,402 714,469 -
Other 1,320,132 679,106
---------- ----------
$30,702,779 $22,226,145
========== ==========
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 29, December 30,
LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY) 1998 1997
- ----------------------------------------------- ------------ ------------
Current liabilities:
Accounts payable $ 2,390,582 $ 3,042,151
Due to affiliates 226,322 50,539
Accrued payroll and other taxes 635,805 385,016
Accrued liabilities 1,272,957 784,661
Current maturities of long-term debt,
including $4,186,311 and $11,556,077
of notes payable in default in
1998 and 1997, respectively 6,182,101 12,899,728
Current portion of obligations
under capital leases 47,528 36,492
---------- ----------
Total current liabilities 10,755,295 17,198,587
Other noncurrent liabilities 563,095 204,337
Long-term debt 23,447,773 7,105,615
Obligations under capital leases 1,495,486 1,608,356
Minority interests in
Operating Partnerships 395,908 120,702
Commitments and contingencies - -
Partners' capital (deficiency):
General Partners (8,245) (7,864)
Limited Partners:
Class A Income Preference, authorized 875,000
units; issued 814,010 units (814,304 in 1997) 5,543,603 5,623,790
Classes B and C, issued 948,039 and
1,663,820 class B and C units, respectively
(1,193,852 and 1,976,807 units in 1997,
respectively) (10,058,014) (8,322,372)
Cost in excess of carrying value
of assets acquired (1,323,681) (1,323,681)
Cumulative comprehensive (loss) income (108,441) 18,675
---------- ----------
Total partners' capital (deficiency) (5,954,778) (4,011,452)
---------- ----------
$30,702,779 $22,226,145
========== ==========
See accompanying notes.
<TABLE>
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 29, 1998,
December 30, 1997 and December 31, 1996
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Net sales $43,543,633 $38,977,341 $40,424,953
Operating costs and expenses:
Cost of sales 11,710,209 10,586,372 10,762,986
Restaurant labor and benefits 12,500,842 11,043,688 10,672,030
Advertising 2,844,451 2,511,470 2,744,864
Other restaurant operating
expenses exclusive of
depreciation and amortization 8,337,961 7,691,831 7,433,450
General and administrative:
Management fees - related party 2,894,911 2,710,449 2,808,484
Other 631,999 371,443 766,551
Depreciation and amortization 2,149,606 2,078,061 1,687,090
Loss on restaurant closings 23,747 792,219 97,523
Equity in loss of affiliate 7,250 758,383 375,632
---------- ---------- ----------
Income from operations 2,442,657 433,425 3,076,343
Interest income 29,783 29,350 34,253
Interest expense (2,662,061) (2,476,304) (1,668,551)
Gain on life insurance settlement 875,533 - -
Gain on fire settlement - - 157,867
---------- ---------- ----------
(1,756,745) (2,446,954) (1,476,431)
---------- ---------- ----------
Income (loss) before minority interest 685,912 (2,013,529) 1,599,912
Minority interests in (income) loss
of Operating Partnerships 122,805 20,135 (15,999)
---------- ---------- ----------
Net income (loss) $ 808,717 $(1,993,394) $ 1,583,913
========== ========== ==========
Net income (loss) allocated to Partners:
Class A Income Preference $ 165,210 $ (406,975) $ 324,763
Class B $ 242,003 $ (596,643) $ 473,352
Class C $ 401,504 $ (989,776) $ 785,798
Weighted average number of Partnership
units outstanding during period:
Class A Income Preference 814,145 815,305 815,309
Class B 1,192,579 1,195,273 1,188,332
Class C 1,978,589 1,982,849 1,972,716
Basic and diluted income (loss)
before minority interest per
Partnership unit $ 0.17 $ (0.50) $ 0.40
Basic and diluted minority interest
per Partnership unit $ 0.03 $ - $ -
Basic and diluted net income (loss)
per Partnership unit $ 0.20 $ (0.50) $ 0.40
Distributions per Partnership unit $ 0.30 $ 0.32 $ 0.74
<FN>
See accompanying notes.
</FN>
</TABLE>
<TABLE>
AMERICAN RESTAURANT PARTNERS, L.P.
Consolidated Statements of Partners' Capital (Deficiency)
Years ended December 29, 1998, December 30, 1997, and December 31, 1996
<CAPTION>
General Partners Limited Partners
-------------- ---------------------------------------- Cost in
Classes B Class A Income Notes excess of Cumulative
and C Preference Classes B and C receivable carrying comprehensive
-------------- ----------------- --------------------- from value of income
Units Amounts Units Amounts Units Amounts employees assets acquired (loss) Total
----- ------- ------- --------- --------- ---------- ------ ------------ ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 26, 1995 3,940 $(3,290) 815,309 $ 6,572,923 3,143,920 $(4,688,254) $(6,300) $(1,323,681)$ - $ 551,398
Net Income - 1,572 - 324,763 - 1,257,578 - - - 1,583,913
Unrealized loss on investments
available-for-sale - - - - - - - - (44,325) (44,325)
---------
Comprehensive income 1,539,588
Partnership distributions - (2,916) - (603,166) - (2,335,633) - - - (2,941,715)
Units sold to employees - - - - 30,750 58,500 - - - 58,500
Units issued to employees
as compensation - - - - - 15,900 - - - 15,900
Units purchased from employees - - - - (45,261) (119,208) - - - (119,208)
Reduction of notes receivable - - - - - - 6,300 - - 6,300
----- ------ ------- --------- --------- ---------- ----- ---------- ------- ----------
Balance at December 31, 1996 3,940 (4,634) 815,309 6,294,520 3,129,409 (5,811,117) - (1,323,681) (44,325) (889,237)
Net Loss - (1,970) - (406,975) - (1,584,449) - - - (1,993,394)
Unrealized gain on investments
available-for-sale - - - - - - - - 63,000 63,000
----------
Comprehensive loss (1,930,394)
Partnership distributions - (1,260) - (260,718) - (1,015,039) - - - (1,277,017)
Units sold to employees - - - - 47,250 106,233 - - - 106,233
Units purchased - - (995) (3,037) (6,000) (18,000) - - - (21,037)
----- ------ ------- --------- --------- --------- ----- ---------- ------- ----------
Balance at December 30, 1997 3,940 (7,864) 814,314 5,623,790 3,170,659 (8,322,372) - (1,323,681) 18,675 (4,011,452)
Net Income - 801 - 165,210 - 642,706 - - - 808,717
Unrealized loss on investments
available-for-sale - - - - - - - - (127,116) (127,116)
----------
Comprehensive income 681,601
Partnership distributions - (1,182) - (244,128) - (949,721) - - - (1,195,031)
Units purchased - - (304) (1,269) (558,800) (1,428,627) - - - (1,429,896)
----- ------ ------- --------- --------- ----------- ----- ---------- ------- ----------
Balance at December 29, 1998 3,940 $(8,245) 814,010 $5,543,603 2,611,859$(10,058,014) - $(1,323,681)$(108,441) $(5,954,778)
===== ====== ======= ========= ========= =========== ===== ========== ======= ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
<TABLE>
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 29, 1998
December 30, 1997 and December 31, 1996
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 808,717 $(1,993,394) $ 1,583,913
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 2,149,606 2,078,061 1,687,090
Provision for deferred rent 9,554 10,067 13,477
Provision for deferred compensation - - 6,300
Unit compensation expense - - 15,900
Equity in loss of affiliate 7,250 758,383 375,632
Loss on default in pooled loans 67,963 269,761 -
(Gain) loss on disposition of assets (41,498) 4,876 12,791
Gain on life insurance settlement (875,533) - -
Loss on restaurant closings 23,747 792,219 97,523
Minority interest in Operating Partnerships (122,805) (20,135) 15,999
Gain on fire settlement - - (157,867)
Net change in operating assets and liabilities:
Accounts receivable (121,199) 71,277 (79,119)
Due from affiliates (16,525) (48,503) 5,134
Inventories (26,398) 32,487 (43,590)
Prepaid expenses 204,523 (33,169) (67,972)
Deposit with affiliate - - (20,000)
Accounts payable (1,692,680) 857,340 211,525
Due to affiliates 173,306 (38,115) 26,362
Accrued payroll and other taxes 248,360 (160,800) 225,914
Accrued liabilities 35,092 (224,276) 222,339
Other, net 6,151 - -
---------- ---------- ----------
Net cash provided by
operating activities 837,631 2,356,079 4,131,351
Investing activities:
Investment in affiliate prior to consolidation (390,000) - (3,000,000)
Net cash from consolidation of affiliate 56,061 - -
Purchases of certificates of deposit - (6,567) (5,103)
Redemption of certificates of deposit - 164,202 -
Purchase of securities available for sale - - (97,389)
Additions to property and equipment (2,626,566) (1,824,195) (6,747,527)
Proceeds from sale of property and equipment 518,641 24,810 7,520
Purchase of franchise rights - (15,000) (66,000)
Funds advanced to affiliates - - (57,131)
Collections of notes receivable from affiliates 35,574 87,255 47,045
Net proceeds from fire settlement - - 180,437
Other, net - (69,856) (232,535)
---------- ---------- ----------
Net cash used in
investing activities (2,406,290) (1,639,351) (9,970,683)
Financing activities:
Proceeds from long-term borrowings 13,394,950 2,369,000 16,020,932
Payments on long-term borrowings (10,466,003) (1,492,740) (7,686,372)
Payments on capital lease obligations (36,689) (20,196) (66,535)
Proceeds from life insurance settlement 1,039,747 - -
Distributions to Partners (1,195,031) (1,277,017) (2,941,715)
Contribution of capital in Magic
from minority partners 94,200 - -
Proceeds from issuance of Class B and C units - 68,733 58,500
Repurchase of units (1,429,896) (21,037) (119,208)
General Partners' distributions
from Operating Partnerships (12,071) (12,899) (29,792)
---------- ---------- ----------
Net cash provided by (used in)
financing activities 1,389,207 (386,156) 5,235,810
---------- ---------- ----------
Net (decrease) increase in
cash and cash equivalents (179,452) 330,572 (603,522)
Cash and cash equivalents at beginning of period 509,398 178,826 782,348
---------- ---------- ----------
Cash and cash equivalents at end of period 329,946 509,398 178,826
========== ========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
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-seven 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. The remaining partnership
interests are held by Restaurant Management Company of Wichita,
Inc. (39%) (the Management Company) and RAM (1%), the managing
general partner.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of American Restaurant Partners, L.P. and its majority
owned subsidiaries, American Pizza Partners, L.P. and APP
Concepts, L.C.. The Partnership also began consolidating the
accounts of Magic effective August 11, 1998. American Restaurant
Partners, L.P., APP, APP Concepts, L.C. and Magic are hereinafter
collectively referred to as the Partnership. All significant
intercompany transactions and balances have been eliminated. The
Partnership accounted for its investment in Oklahoma Magic, L.P.
using the equity method of accounting prior to the increase in
their ownership from 45% to 60%.
FISCAL YEAR
The Partnership operates on a 52 or 53 week fiscal year ending on
the last Tuesday in December. The Partnership's operating
results reflected in the accompanying consolidated statements of
operations include 52 weeks, 52 weeks and 53 weeks for the years
ended December 29, 1998, December 30, 1997 and December 31, 1996,
respectively.
EARNINGS PER PARTNERSHIP UNIT
In 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share
(Statement 128). Statement 128 replaced the calculation of
primary and fully diluted earnings per Partnership unit with
basic and diluted earnings per Partnership unit. All
earnings per Partnership unit amounts for all periods have been
presented, and where appropriate, restated to conform to
Statement 128 requirements.
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:
1998 1997 1996
---- ---- ----
American Pizza Partners, L.P.
- -----------------------------
Restaurants in operation at
beginning of period 63 67 60
Opened 1 1 7
Closed (2) (5) --
--- --- ---
Restaurants in operation at
end of period 62 63 67
=== === ===
Oklahoma Magic, L.P.
- --------------------
Restaurants in operation at
beginning of period 27
Opened -
Closed -
---
Restaurants in operation at
end of period 27
===
INVENTORIES
Inventories consist of food and supplies and are stated at the
lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated using
the straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the
life of the lease or improvement, whichever is shorter.
The estimated useful lives used in computing depreciation 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 $1,795,783, $1,856,547 and $1,541,819 for the years
ended December 29, 1998, December 30, 1997 and December 31, 1996,
respectively.
AMORTIZATION OF GOODWILL
Goodwill resulting from APP's original investment in Magic is
being amortized over 29 years using the straight-line method.
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 20 years. Periodic franchise royalty and
advertising fees, which are based on a percent of sales, are
charged to operations as incurred.
PREOPENING COSTS
Costs incurred before a restaurant is opened, which represent the
cost of staffing, advertising, and similar preopening costs, are
charged to operations as incurred.
CONCENTRATION OF CREDIT RISKS
The Partnership's financial instruments that are exposed to
concentration of credit risks consist primarily of cash,
certificates of deposit 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 29, 1998, 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 $698,000. The differences between generally
accepted accounting principles net income (loss) and taxable loss
are as follows:
1998 1997
---- ----
Generally accepted accounting
net income (loss) $ 808,717 $(1,993,394)
Depreciation and amortization (133,606) (205,737)
Capitalized leases 163,641 128,791
Equity in loss of affiliate (751,845) (655,814)
Loss on restaurant closings (190,972) 784,297
Loss on disposition of assets (36,642) (216,534)
Unicap adjustment (70,985) (76)
Non-taxable life insurance proceeds (866,778) -
Other 32,295 (12,946)
---------- ----------
Taxable loss $(1,046,175) $(2,171,413)
========== ==========
The Omnibus Budget Reconciliation Act of 1987 provides public
limited partnerships 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
will continue 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
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Partnership
considers all highly liquid debt instruments, purchased with a
maturity of three months or less, to be cash equivalents.
ACCOUNTING FOR UNIT BASED COMPENSATION
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, recommends, but does not
require, companies to change their existing accounting for
employee stock options under Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, to
recognize expense for equity-based awards utilizing their
estimated fair value on the date of grant. Companies electing to
continue to follow accounting rules under APB Opinion No. 25 are
required to provide pro forma disclosures of what operating and
per share results would have been had the new fair value method
been used. The Partnership has elected to continue to apply the
existing accounting contained in APB Opinion No. 25, and the
required pro forma disclosures have not been presented as
there are no material unvested options and no options have been
granted in 1998, 1997 or 1996.
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.
RECLASSIFICATIONS
Certain amounts shown in the 1997 and 1996 consolidated financial
statements have been reclassified to conform with the 1998
presentation.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, Reporting Comprehensive Income (Statement
No. 130). Statement No. 130 establishes standards for reporting
and display of comprehensive income and its components in
the financial statements. Comprehensive income, as defined,
includes all changes reflected directly in Partnership equity
during a period from non-owner transactions. The Partnership
adopted Statement No. 130 in 1998.
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 1998, 1997 or 1996.
The Partnership maintains a deposit with the Management Company
equal to approximately one and one-half month's management fee.
Such deposit, $450,000 and $350,000 at December 29, 1998 and
December 30, 1997, respectively, may be increased or decreased at
the discretion of RAM.
The Management Company maintains an incentive bonus plan whereby
certain employees are eligible to receive bonus payments if
specified management objectives are achieved. Such bonuses are
not greater than 15% of the amount by which the Partnership's
cash flow exceeds threshold amounts as determined by management.
Bonuses paid under the plan are reimbursed to the Management
Company by the Partnership.
Transactions with related parties included in the accompanying
consolidated financial statements and notes are summarized as
follows:
1998 1997 1996
---- ---- ----
Management fees $2,894,911 $2,710,448 $2,808,484
Management Company bonuses 226,522 155,637 342,684
Advertising commissions 75,745 73,062 66,150
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: 1999 - $62,511; 2000 - $5,471; 2001 -
$6,043; 2002 - $6,676; 2003 - $7,375; Thereafter - $24,636. 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 29, 1998 and
December 30, 1997:
1998 1997
---- ----
Notes payable to Intrust Bank in Wichita,
payable in monthly installments
aggregating $122,520, including interest
at variable rates from 8.5% to 9.50%,
due at various dates through 2004 $ 8,045,758 $7,998,688
Notes payable to Franchise Mortgage
Acceptance Company (FMAC) payable
in monthly installments aggregating
$262,643, including interest at fixed
rates from 8.81% to 10.95%, due
at various dates through May 2013 20,815,919 9,824,118
Notes payable to Heller Financial
Corporation payable in monthly
installments aggregating
$48,043, including interest at
fixed rates of 9.32% and 9.55%,
refinanced during 1998 - 2,001,719
Notes payable to HGO, payable
in quarterly installments of
$41,397 including interest at
a fixed rate of 8%, due at
various dates through August 2003 600,115 -
Notes payable to various banks,
payable in monthly installments
aggregating $4,169, including interest
at fixed and variable rates from 8.96%
to 10.0% at December 29, 1998, due at
various dates through August 2006 168,082 180,818
---------- ----------
29,629,874 20,005,343
Less current portion 6,182,101 12,899,728
---------- ----------
$23,447,773 $27,105,615
========== ==========
All borrowings through Heller Financial Corporation were part of
borrowing agreements which required, among other conditions, the
Partnership maintain certain financial ratios which include a
fixed charge coverage ratio, as defined. All borrowings through
FMAC require the Partnership maintain a fixed charge coverage
ratio as defined by the loan covenants under the borrowing
agreements. The Partnership has met all scheduled debt
payments; however, it was not in compliance with the fixed charge
coverage ratio required by the loan covenants under the borrowing
agreements during and subsequent to the year ended December 30,
1997. Accordingly, the entire amount of these borrowings was
reflected in the current portion of long-term debt at
December 30, 1997. On April 20, 1998, APP 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% bringing APP into compliance with the fixed charge coverage
ratio. The write-off of unamortized loan cost related to this
refinancing was not material. Magic is not in compliance with
the fixed charge coverage ratio required by the FMAC loan
covenants during and subsequent to the year ended December 29,
1998. Accordingly, the entire amount of Magic's borrowings with
FMAC is reflected in the current portion of long-term debt at
December 29, 1998.
The 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 more 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. The accommodation fee
amounted to $70,775 for the year ended December 29, 1998.
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 ($555,560
at December 29, 1998), referred to as the "Performance Guarantee
Amount" (PGA). At December 29, 1998 and December 30, 1997,
certain loans within the Partnership's "pool" were in default.
This resulted in the Partnership recording interest expense of
$67,963 and $280,062, during 1998 and 1997 respectively,
representing the Partnership's total liability for these
defaulted loans under the PGA. This liability is payable in
monthly installments over the remaining term of the loan. The
PGA remains in effect until the loans are discharged, prepaid,
accelerated, or mature, as defined in the secured promissory
note.
Subsequent to December 29, 1998, Intrust Bank made a commitment
to APP to renew $2,055,000 of its notes payable through April 1,
2000. In addition, Intrust Bank refinanced $500,000 of Magic's
notes payable with a new promissory note dated January 1, 1999
which matures January 1, 2004. Accordingly, the current and
non-current portion of long-term debt reflects the terms of the
agreements.
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: 1999
- - $6,182,101; 2000 - $3,918,463; 2001 - $2,040,176; 2002 -
$2,010,269; and 2003 - $3,550,511.
Cash paid for interest was $2,194,670, $1,943,870 and $1,383,668
for the years ended December 29, 1998, December 30, 1997, and
December 31, 1996, respectively.
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, $27,500 and $27,500 for the
years ended December 29, 1998, December 30, 1997 and December 31,
1996.
Total minimum and contingent rent expense under all operating
lease agreements were as follows:
1998 1997 1996
---- ---- ----
Minimum rentals $904,665 $780,143 $827,558
Contingent rentals 147,673 101,657 171,144
Future minimum payments under capital leases and noncancelable
operating leases with an initial term of one year or more at
December 29, 1998, are as follows:
Operating
Leases With Operating
Capital Unrelated Leases With
Leases Parties Affiliates
1999 $ 221,317 $1,243,548 $ 30,250
2000 226,829 1,085,242 30,250
2001 230,077 951,394 30,250
2002 230,077 779,837 7,563
2003 230,077 593,685 -
Thereafter 1,834,601 2,294,214 -
--------- --------- ---------
Total minimum payments 2,972,978 $6,947,920 $ 98,313
Less interest 1,429,964 ========= =========
---------
1,543,014
Less current portion 47,528
---------
$1,495,486
=========
Amortization of property under capital leases, determined on the
straight-line basis over the lease terms totaled $106,677,
$150,288, and $165,360 for the years ended December 29, 1998,
December 30, 1997 and December 31, 1996, respectively. Capital
lease interest was $290,374, $212,890 and $210,551, respectively,
over the same years ended. The amortization is included in
depreciation and amortization expense and the interest is
included in interest expense in the accompanying consolidated
statements of operations. The cost of property under capital
leases was $2,077,751 and $2,369,199 at December 29, 1998 and
December 30, 1997, respectively, and accumulated amortization on
such property under capital leases was $1,188,156 and $1,273,066
at December 29, 1998 and December 30, 1997, respectively.
5. LIMITED PARTNERSHIP UNITS
-------------------------
The Partnership has three classes of Partnership Units
outstanding, consisting of Class A Income Preference, Class B,
and Class C Units. The Units are in the nature of equity
securities entitled to participate in cash distributions of the
Partnership on a quarterly basis at the discretion of RAM, the
General Partner. In the event the Partnership is terminated, the
Unitholders will receive the remaining assets of the Partnership
after satisfaction of Partnership liability and capital account
requirements.
6. DISTRIBUTIONS TO PARTNERS
-------------------------
On January 5, 1999, the Partnership declared a distribution of
$.10 per Unit to all Unitholders of record as of January 15,
1999. The total distribution is not reflected in the December
29, 1998 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 31, 1996 1,715 $8.50-9.00
Terminated (800) 9.00
Expired (290) 9.00
----- -----
Balance at December 30, 1997
and December 29, 1998 625 $8.50
===== =====
At December 29, 1998, options on 625 Units were exercisable.
Unit options available for future grants totaled 48,611 at
December 29, 1998 and December 30, 1997.
8. FIRE SETTLEMENT
---------------
During 1996, the Partnership incurred a fire at one of its
restaurants. The property was insured for replacement cost and
the Partnership realized a gain of $157,867.
9. LIFE INSURANCE SETTLEMENT
-------------------------
During 1998, the Partnership collected on a life insurance policy
purchased in 1993 on one of its original investors. This
investor owned approximately 438,600 Class B and C units. The
policy was purchased with the intent of providing the Partnership
a means of repurchasing his units upon his death if his heirs so
desired. The investor died in May of 1998. The Partnership
recognized a gain of $876,000 upon receipt of the insurance
proceeds. The units were repurchased on December 29, 1998 at
$2.55 per unit for a total purchase price of $1,118,430. In
addition, if the nine Pizza Hut restaurants located within the
Billings, Montana ADI, including the associated franchises, real
estate and operating assets, (the BM Restaurants) are sold to an
unrelated party in one or more transactions and the sale
transaction(s) are closed prior to January 1, 2001, then the
heirs will receive as additional consideration for the purchase
of the units a contingent payment of $0.50 per unit, or
$219,300. If the BM Restaurants are not sold within that time,
the obligation to make the contingent payment will expire. The
Partnership is not required to market or sell the BM Restaurants
or to accept any offer by any party to purchase such BM
Restaurants.
10. CLASS B AND C RESTRICTED UNITS SOLD TO EMPLOYEES
------------------------------------------------
On July 1, 1994, the Partnership entered into a Unit Purchase
Agreement with certain employees whereby the employees may
purchase Class B and C Units every six months beginning July 1,
1994, and continuing until January 1, 1998. The purchase price
per unit was $2.00 with a total of 75,000 units to be purchased
over three and one-half years. During 1997 and 1996, the
Partnership issued 47,250 and 30,750 Class B and C units for
$94,500 and $58,500, respectively.
During 1993, the Partnership issued 25,200 Class B and C Units to
certain employees in exchange for notes receivable which were
forgiven by the Partnership over a three-year period. The
forgiveness of the note receivable balance together with
interest thereon was recognized as compensation expense over
the three-year period. Total compensation expense recognized
in 1996 was $6,300 which is included as restaurant labor and
benefits in the accompanying statements of income. The Units
are subject to a repurchase agreement whereby the Partnership has
agreed to repurchase the Units in the event the employee is
terminated for an amount not to exceed $3.00 per unit.
11. PARTNERS' CAPITAL
-----------------
During 1998 and 1997, the Partnership purchased 304 and 995 Class
A Income Preference Units for $1,269 and $3,037, respectively.
These Units were retired by the Partnership.
12. INVESTMENTS
-----------
The Partnership purchased common stock of a publicly traded
company for investment purposes. The following is a summary of
available-for-sale securities:
Cumulative Estimated
Unrealized Fair
Cost Gains/(Losses) Value
---- -------------- ---------
December 29, 1998 $177,076 $(108,441) $ 68,635
======= ======== =======
December 30, 1997 $177,076 $ 18,675 $195,751
======= ======== =======
December 31, 1996 $177,076 $ (44,325) $132,751
======= ======== =======
The net adjustment to unrealized gain/(loss) on securities
available-for-sale is included in comprehensive income.
13. 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 such franchise violations occurred and that it had
made any misrepresentations at the formation of Magic. HGO
asserted 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
Magic's 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 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. As of December 29, 1998, the
Partnership has goodwill, net of accumulated amortization, of
$714,469 representing the excess purchase price of the original
equity investment in the net assets acquired. The goodwill is
being amortized over 29 years. Condensed financial statements
for Magic accounted for under the equity method of accounting
through August 10, 1998 are as follows:
(Unaudited)
August 10, December 30,
1998 1997
---------- -----------
Balance sheet:
Current assets $ 433,472 $ 543,764
Noncurrent assets 9,498,425 9,946,529
---------- ----------
$ 9,931,897 $10,490,293
========== ==========
Current liabilities $ 6,422,027 $ 6,608,680
Noncurrent liabilities 1,769,124 2,260,317
Partners' equity 1,740,746 1,621,296
---------- ----------
$ 9,931,897 $10,490,293
========== ==========
(Unaudited) (Unaudited)
For the 32 For the For the 41
weeks ended Year ended weeks ended
August 10, December 30, December 31,
1998 1997 1996
----------- ----------- -----------
Statement of Operations:
Revenues $10,087,820 $15,712,313 $12,805,324
Cost of sales 2,578,865 4,308,896 3,670,348
Operating expenses 7,071,979 12,297,095 9,531,718
Operating income (loss) 436,976 (893,678) (396,742)
Other expense
(principally interest) 453,087 791,610 437,976
---------- ---------- ----------
Net loss $ (16,111) $(1,685,288) $ (834,718)
========== ========== ==========
The proforma unaudited results of operations for the years ended
December 29, 1998 and December 30, 1997, assuming the increase in
the Partnership's interest in Magic from 45% to 60% occured as of
January 1, 1997, are as follows:
(Unaudited)
December 29, December 30,
1998 1997
------------ -----------
Net sales $53,631,453 $54,689,655
Net income (loss) 806,324 (2,243,655)
Net income (loss) per
per Partnership unit $ 0.20 $ (0.56)
Exhibit 10.10
SETTLEMENT AGREEMENT
This is an agreement between the parties to settle a dispute
now pending in American Arbitration Association Case No.
5718012997. It is intended that this settlement be a binding and
enforceable agreement upon execution by the parties. The parties
acknowledge that additional documentation may be necessary in
order to complete the transaction referenced in this Settlement
Agreement. The parties will work in good faith toward the
preparation and execution of those documents. The parties
understand that the terms of the Settlement Agreement may be
enforced without regard to the subsequent execution of those
documents.
The terms of the settlement are as follows:
1. The settling parties are Oklahoma Magic, L.P., Hal W.
McCoy, Hospitality Group of Oklahoma, Inc. ("HGO"), Homayoun
Aminmadani, and Farzin Ferdowsi. Oklahoma Magic, L.P. and its
affiliates Hal W. McCoy, Restaurant Management Company of
Wichita, Inc., and RMC American Management, Inc. are collectively
referred to as "Oklahoma Magic". For the purpose of the
releasees referred to herein, Oklahoma Magic shall join in the
release given to HGO, Homayoun Aminmadani, and Farzin Ferdowsi
and shall receive the same release from them. The settling
parties agree to exchange mutual Releases fully releasing and
discharging any claims they may have against the other, their
agents and employees, which are the subject of the arbitration
proceeding referenced herein or which may otherwise exist between
the parties as of the date of this settlement.
2. Oklahoma Magic will pay to HGO the sum of $205,000 for
the purchase of HGO's interest in Oklahoma Magic, L.P., payable
as $105,000 in cash on or before August 11, 1998, and the
remaining $100,000 to be paid by a $100,000 note, dated August
11, 1998, at 8% for five years, payable quarterly, with the first
payment due on November 11, 1998. The payment of that amount
recognizes the termination of HGO's partnership interest pursuant
to the adverse terminating event as declared by Mr. McCoy's
letter dated November 11, 1996, with the date of termination as
set forth therein. Upon receipt of the cash payment, HGO will
execute all documents necessary to transfer its ownership
interest, and all parties to the agreement will exchange mutual
releases.
3. Oklahoma Magic will pay to HGO the sum of $255,000 as a
Section 736(a) guaranteed payment for the time period between
November of 1996 and October of 1998. This payment to be made on
or before August 11, 1998.
4. In return for a noncompete agreement, Oklahoma Magic
will pay to Homayoun Aminmadani and Farzin Ferdowsi the sum of
$240,000. This sum is to be paid on or before August 11, 1998.
This sum is calculated at $2,000 per month each (for a total of
$4,000) for 60 months for Homayoun Aminmadani and Farzin
Ferdowsi. The money is all to be paid up front with no discount
for the advance payment. Homayoun Aminmadani and Farzin Ferdowsi
will execute a noncompete agreement whereby they agree not to
engage in the pizza business (as defined by the 1990 PHI
Franchise Agreement) in any market where Oklahoma Magic, L.P.
operates on May 11, 1998. [This is the old HGO market.]
5. The cash payments by Oklahoma Magic, as referenced in
paragraphs 2, 3 and 4 above, are due and owing on or before
August 11, 1998. If Oklahoma Magic defaults in all, or a portion
of, the cash payments then due and owing, Oklahoma Magic will, in
addition to the payments required under this agreement, be liable
for interest on the unpaid amount at the rate of 10% per annum
calculated from May 11, 1998, until paid, together with costs of
collection, including attorney's fees.
6. Acceptance of this agreement will result in the
termination of the current arbitration proceeding, subject only
to the right of the parties to enforce this agreement.
7. It is contemplated that HGO and Homayoun Aminmadani and
Farzin Ferdowsi will be released by PHI from whatever their
obligations are under the Oklahoma Magic Franchise Agreement
(Franchise Agreement No. 858) and that PHI must approve this
transfer of interest from HGO to Oklahoma Magic, L.P. Oklahoma
Magic, L.P. will request the release and transfer approval.
Oklahoma Magic will take all steps necessary to obtain the
release and transfer and will bear all expenses related thereto.
If PHI will not release HGO, Homayoun Aminmadani and Farzin
Ferdowsi then, at their option, this agreement may be terminated
or, in the alternative, Oklahoma Magic shall indemnify them from
all losses, costs or expense, including attorney's fees, related
to the Franchise Agreement.
8. The parties agree they mutually regret their past
disagreements and misunderstandings. The parties to this
agreement will not initiate contact to seek to employ employees
from the other party without express written permission, which
permission shall not be unreasonably withheld.
This agreement has been signed by Mr. McCoy on behalf of
himself, Oklahoma Magic, L.P., Restaurant Management Company of
Wichita, Inc., and RMC American Management, Inc. Messrs.
Aminmadani and Ferdowsi need to sign on behalf of Hospitality
Group of Oklahoma, Inc., and on behalf of themselves. The
parties agreed that this agreement may be executed in
counterparts, each of which shall be deemed an original. The
parties agree that facsimile signatures are effective as original
signatures.
Hal W. McCoy Hospitality Group of Oklahoma, Inc.
Oklahoma Magic, L.P.
RMC American Management, Inc.
Restaurant Management Company
of Wichita, Inc, By: /s/ Homayoun Aminmadani
-------------------------
Homayoun Aminmadani, individually,
and in his representative
capacity as an officer of
Hospitality Group
By: /s/ Hal W. McCoy of Oklahoma, Inc.
------------------
Hal W. McCoy, individually
and in his respective
capacity as an officer of
the named entities By: /s/ Farzin Ferdowsi
---------------------
Farzin Ferdowsi, individually,
and in his representative
capacity as an officer of
Hospitality Group of Oklahoma, Inc.
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the
Registration Statement (Form S-8 No. 33-20784) pertaining to
the Class A Unit Option Plan of American Restaurant
Partners, L.P. of our report dated March 12, 1999, with
respect to the consolidated financial statements of American
Restaurant Partners, L.P. and our report dated March 19,
1998, with respect to the consolidated financial statements
of Oklahoma Magic, L.P. included in American Restaurant
Partners, L.P.'s Annual Report (Form 10-K) for the year
ended December 29, 1998.
/s/Ernst & Young LLP
Wichita, Kansas
March 22, 1999
REPORT OF INDEPENDENT AUDITORS
The Partners
Oklahoma Magic, L.P.
We have audited the accompanying consolidated balance sheet of
Oklahoma Magic, L.P. (Partnership) as of December 30, 1997 and
the related statement of operations, partners' capital, and cash
flows for the year then ended. These financial statements are
the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above,
present fairly, in all material respects, the financial position
of Oklahoma Magic, L.P. at December 30, 1997, and the results of
its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming
Oklahoma Magic, L.P. will continue as a going concern. As more
fully described in Note 7, the Partnership has incurred recurring
operating losses and has a working capital deficiency. In
addition, the Partnership has not complied with certain covenants
of loan agreements with banks. These conditions raise
substantial doubt about the Partnership's ability to continue as
a going concern. Management's plans in regard to these matters
are also described in Note 7. The financial statements do not
include any adjustments to reflect the possible future effects on
the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the
outcome of this uncertainty.
/s/Ernst & Young LLP
Wichita, Kansas
March 19, 1998
OKLAHOMA MAGIC, L.P.
BALANCE SHEETS
(Unaudited)
December 30, December 31,
ASSETS 1997 1996
- ---------------------------- ------------ -----------
Current assets:
Cash and cash equivalents $ 242,741 $ 594,026
Investments available for sale,
at fair market value - 73,750
Accounts receivable 70,300 71,964
Due from affiliates 28,780 33,134
Inventories 112,920 131,678
Prepaid expenses 89,023 90,707
---------- ----------
Total current assets 543,764 995,259
Property and equipment, at cost:
Land 433,468 403,389
Restaurant equipment 1,461,776 1,396,565
Leasehold rights and building improvements 3,240,488 3,313,182
---------- ----------
5,135,732 5,113,136
Less accumulated depreciation and amortization 769,318 326,059
---------- ----------
4,366,414 4,787,077
Other assets:
Franchise rights, net of accumulated
amortization of $367,141 ($148,419 in 1996) 5,069,765 5,288,487
Development rights, net of accumulated
amortization of $15,204 ($6,146 in 1996) 209,796 218,854
Deposit with affiliate 110,000 100,000
Other 190,554 230,270
---------- ----------
$10,490,293 $11,619,947
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
- ----------------------------------
Current liabilities:
Accounts payable $ 1,152,058 $ 1,137,616
Due to affiliates - 8,048
Accrued payroll and other taxes 219,650 197,963
Accrued liabilities 347,387 401,730
Current maturities of long-term debt,
including $4,597,311 of notes
payable in default in 1997 4,889,585 1,475,695
---------- ----------
Total current liabilities 6,608,680 3,221,052
Other noncurrent liabilities 355,468 -
Long-term debt 1,904,849 5,115,950
Partners' capital:
General Partner 43,700 47,913
Limited Partners 1,577,596 3,258,671
Unrealized loss in
investment securities - (23,639)
---------- ----------
Total partners' capital 1,621,296 3,282,945
---------- ----------
$10,490,293 $11,619,947
========== ==========
See accompanying notes.
OKLAHOMA MAGIC, L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
Year ended 41 weeks ended
December 30, December 31,
1997 1996
----------- -----------
Net sales $15,712,313 $12,805,324
Operating costs and expenses:
Cost of sales 4,308,896 3,670,348
Restaurant labor and benefits 4,895,725 4,028,218
Advertising 1,283,130 1,065,245
Other restaurant operating
expenses exclusive of
depreciation and amortization 3,924,738 3,376,983
General and administrative:
Management fees - related party 550,596 448,184
Other 28,594 78,638
Depreciation and amortization 829,513 534,450
Loss on restaurant closings 784,799 -
---------- ----------
Loss from operations (893,678) (396,742)
Interest expense (791,610) (437,976)
---------- ----------
Net loss $(1,685,288) $ (834,718)
========== ==========
See accompanying notes.
<TABLE>
OKLAHOMA MAGIC, L.P.
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 30, 1997 and December 31, 1996
<CAPTION>
Unrealized
gain/(loss)
on securities
General Limited available
Partner Partners for sale Total
------------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Balance at March 13, 1996, inception (Unaudited) $ 50,000 4,091,302 - 4,141,302
Net loss (Unaudited) (2,087) (832,631) - (834,718)
Change in unrealized loss
on securities available for sale (Undaudited) - - (23,639) (23,639)
------- ---------- ------- ----------
Balance at December 31, 1996 (Unaudited) 47,913 3,258,671 (23,639) 3,282,945
Net loss (4,213) (1,681,075) - (1,685,288)
Change in unrealized loss
on securities available for sale - - 23,639 23,639
------- ---------- ------- ----------
Balance at December 30, 1997 $ 43,700 1,577,596 - 1,621,296
======= ========== ======= ==========
<FN>
See accompanying notes.
</FN>
OKLAHOMA MAGIC, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
Year Ended 41 Weeks Ended
December 30, December 31,
1997 1996
----------- ------------
Cash flows from operating activities:
Net loss $(1,685,288) $ (834,718)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization 829,513 534,450
(Gain)/loss on disposition of assets 17,895 (5,250)
Gain on fire settlement (32,150) -
Loss on restaurant closings 784,799 -
Loss on default in pooled loans 140,991 -
Net change in operating assets and liabilities:
Accounts receivable 1,664 (71,964)
Due from affiliates 4,354 (33,134)
Inventories 18,758 8,322
Prepaid expenses 1,684 (88,107)
Deposit with affiliate (10,000) (100,000)
Accounts payable 14,442 1,137,616
Due to affiliates (8,048) 8,048
Accrued payroll and other taxes 21,687 197,963
Accrued liabilities (54,343) 279,230
---------- ----------
Net cash provided by
operating activities 45,958 1,032,456
Investing activities:
Purchase of securities available for sale - (97,389)
Proceeds from sale of securities available for sale 83,243 -
Additions to property and equipment (679,440) (1,546,660)
Purchase of development rights - (225,000)
Proceeds from sale of property and equipment 40,598 5,250
Net proceeds from fire settlement 121,588 -
Other, net (25,030) 95,418
---------- ----------
Net cash used in
investing activities (459,041) (1,768,381)
Financing activities:
Proceeds from long-term borrowings 1,350,000 1,113,674
Payments on long-term borrowings (1,288,202) (249,017)
---------- ----------
Net cash provided by
financing activities 61,798 864,657
---------- ----------
Net (decrease) increase in
cash and cash equivalents (351,285) 128,732
Cash and cash equivalents at beginning of period 594,026 465,294
---------- ----------
Cash and cash equivalents at end of period $ 242,741 $ 594,026
========== ==========
See accompanying notes.
OKLAHOMA MAGIC, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 30, 1997
(Information with respect to data prior to
January 1, 1997 is unaudited.)
1. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
ORGANIZATION
Oklahoma Magic, L.P. (the Partnership) was formed in connection
with the purchase of thirty-three Pizza Hut restaurants in
Oklahoma on March 13, 1996. The partnership interests are held
by American Restaurant Partners, L.P. (ARP)(45%), Restaurant
Management Company of Wichita, Inc. (29.25%), an affiliate of
ARP, Hospitality Group of Oklahoma, Inc. (HGO)(25%),the former
owners of the Oklahoma restaurants, and RMC American Management,
Inc. (RAM) (.75%), the managing general partner of the
Partnership.
BASIS OF PRESENTATION
The Partnership operates on a 52 or 53 week fiscal year ending on
the last Tuesday in December. The Partnership's operating
results reflected in the accompanying statements of operations
include 52 weeks for the year ended December 30, 1997 and 41
weeks (from the date of inception) for the year ended December
31, 1996.
The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business. See Note 7 to the Financial Statements.
OPERATIONS
All of the restaurants owned by the Partnership are operated
under a franchise agreement with Pizza Hut, Inc., the franchisor.
The agreement grants the Partnership exclusive rights to develop
and operate restaurants in certain franchise territories.
A schedule of restaurants in operation for the periods presented
in the accompanying consolidated financial statements is as
follows:
1997 1996
---- ----
Restaurants in operation at beginning of period 32 33
Opened 1 --
Closed (6) (1)
--- ---
Restaurants in operation at end of period 27 32
=== ===
INVENTORIES
Inventories consist of food and supplies and are stated at the
lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Depreciation is provided by the straight-line method over the
estimated useful lives of the related assets. Leasehold
improvements are amortized over the life of the lease or
improvement, whichever is shorter.
The estimated useful lives used in computing depreciation are as
follows:
Buildings 10 to 30 years
Restaurant equipment 3 to 7 years
Leasehold rights and improvements 5 to 20 years
Expenditures for maintenance and repairs are charged to
operations as incurred. Expenditures for renewals and
betterments, which materially extend the useful lives for assets
or increase their productivity, are capitalized.
FRANCHISE RIGHTS AND FEES
Agreements with the franchisor provide franchise rights for a
period of 20 years and are renewable at the option of the
Partnership for an additional 15 years, subject to the approval
of the franchisor. Initial franchise fees are capitalized at
cost and amortized by the straight-line method over periods not
in excess of 30 years. Periodic franchise royalty and
advertising fees, which are based on a percent of sales, are
charged to operations as incurred.
PREOPENING COSTS
Costs incurred before a restaurant is opened, which represent the
cost of staffing, advertising, and similar preopening costs, are
charged to operations as incurred.
CONCENTRATION OF CREDIT RISKS
The Partnership's financial instruments exposed to concentration
of credit risks consist primarily of cash. The Partnership places
its funds into high credit quality financial institutions and, at
times, such funds may be in excess of the Federal Depository
insurance limit. Credit risks associated with customer sales are
minimal as such sales are primarily for cash.
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.
The differences between generally accepted accounting principles
net loss and taxable loss are as follows:
1997 1996
---- ----
Generally accepted accounting
principles net loss $(1,685,288) $ (834,718)
Depreciation and amortization (1,253,290) (669,241)
Loss on restaurant closings 784,799 -
Other 41,365 (26,348)
---------- ----------
Taxable loss $(2,112,414) $(1,530,307)
========== ==========
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Partnership
considers all highly liquid debt instruments, purchased with a
maturity of three months or less, to be cash equivalents.
INVESTMENTS AVAILABLE-FOR-SALE
Investments available-for-sale are carried at fair value, with
unrealized gains and losses reported in a separate component of
partners' capital. Realized gains and losses and declines in
value judged to be other-than-temporary on available-for-sale
securities are included in investment income. The cost of
securities sold is based on the specific identification method.
Interest and dividends on securities classified as available-for-
sale are included in investment income.
2. RELATED PARTY TRANSACTIONS
--------------------------
The Partnership has entered into a management services agreement
with RAM whereby RAM will be responsible for management of the
restaurants for a fee equal to 3.5% 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.
The Partnership maintains a deposit with the Management Company
equal to approximately two month's management fee. Such deposit,
$110,000 at December 30, 1997 and $100,000 at December 31, 1996,
may be increased or decreased at the discretion of RAM.
The Management Company maintains an incentive bonus plan whereby
certain employees are eligible to receive bonus payments if
specified management objectives are achieved. Such bonuses are
not greater than 15% of the amount by which the Partnership's
cash flow exceeds threshold amounts as determined by management.
Bonuses paid under the plan are reimbursed to the Management
Company by the Partnership.
Transactions with related parties included in the accompanying
consolidated financial statements and notes are summarized as
follows:
1997 1996
---- ----
Management fees $550,596 $448,184
Management Company bonuses 25,234 21,007
Advertising commissions 12,589 2,128
The Partnership has $23,865 and $19,412 at December 30, 1997 and
December 31, 1996, respectively, due from HGO for contingent
rentals paid by the Partnership for periods prior to the
inception of Magic. In addition, the Partnership has certain
other amounts due from affiliates which are on a noninterest
bearing basis.
3. LONG-TERM DEBT
--------------
Long-term debt consists of the following at December 30, 1997 and
December 30, 1996:
1997 1996
---- ----
Notes payable to Intrust Bank in Wichita,
payable in monthly installments
aggregating $29,724, including interest
at the bank's base rate plus 1%
(9.50% at December 30, 1997)
adjusted monthly, due at various
dates through 2002 $ 1,537,497 $1,100,000
Notes payable to Franchise Mortgage
Acceptance Company payable in monthly
installments aggregating $72,055,
including interest at fixed rates
of 9.20% and 10.16%, due at various
dates through August 2011 4,738,300 4,970,983
Note payable to partner,
payable in quarterly installments
aggregating $30,415, including
interest at a fixed rate of 8.0%,
beginning June 15, 1998,
due March 2003 500,000 500,000
Other 18,637 20,662
---------- ----------
6,794,434 6,591,645
Less current portion 4,889,585 1,475,695
---------- ----------
$ 1,904,849 $ 5,115,950
========== ==========
All borrowings through Franchise Mortgage Acceptance Company
(FMAC) are part of borrowing agreements which require that the
Partnership maintain a fixed charge coverage ratio, as defined.
The Partnership has met all scheduled debt payments; however, it
was not in compliance with the fixed charge coverage ratio
required by the loan covenants under the borrowing agreement
during and subsequent to the year ended December 30, 1997.
Accordingly, the entire amount of these borrowings is reflected
in the current portion of long-term debt.
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 15% of the original loan balance
($274,020 at December 30, 1997), referred to as the "Performance
Guarantee Amount" (PGA). The PGA is paid monthly and to the
extent that the other loans in the "pool" are delinquent or in
default, the amount of the PGA refund will be reduced
proportionately. At December 30, 1997, certain loans within the
Partnership's "pool" were in default. This resulted in the
Partnership recording an expense $148,595, of which $7,604 was
paid during 1997, representing the Partnership's total liability
for these defaulted loans under the PGA. This liability is
payable in monthly installments over the remaining term of the
loan. The initial charge of $148,595 was included in interest
expense in the accompanying statement of operations. 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
principal beneficial owner of the Partnership.
Future annual long-term debt maturities, exclusive of capital
lease commitments over the next five years are as follows: 1998
- - $4,889,585; 1999 - $742,161; 2000 - $374,732; 2001 - $410,801;
and 2002 - $259,392.
Cash paid for interest was $650,619 and $437,975 for the years
ended December 30, 1997 and December 31, 1996, respectively.
4. LEASES
------
The Partnership leases land and buildings for various restaurants
under operating 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.
Total minimum and contingent rent expense under all operating
lease agreements for the year ended December 30, 1997 and the 41
weeks ended December 31, 1996 were as follows:
1997 1996
---- ----
Minimum rentals $758,842 $620,266
Contingent rentals 88,439 59,348
Future minimum payments under noncancelable operating leases with
an initial term of one year or more at December 30, 1997, are as
follows:
1998 $ 643,361
1999 570,537
2000 442,584
2001 419,641
2002 355,593
Thereafter 1,803,694
---------
Total minimum payments $4,235,411
=========
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The following methods and assumptions were used by the
Partnership in estimating its fair value disclosures for
financial instruments:
Cash and cash equivalents: The carrying amount reported in
the balance sheet for cash and cash equivalents approximates
its fair value.
Long-term debt: The carrying amounts of the Partnership's
borrowings under its variable rate debt approximate their
fair value. The fair value of the Partnership's fixed rate
debt is estimated using discounted cash flow analyses,
based on the Partnership's current incremental borrowing
rates for similar types of borrowing arrangements.
The carrying amounts and fair values of the Partnership's
financial instruments at December 30, 1997 and December 31, 1996
are as follows:
December 30, 1997 December 31, 1996
--------------------- --------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Cash and cash
equivalents $ 242,741 $ 242,741 $ 594,026 $ 594,026
Long-term debt 6,794,434 6,881,071 6,591,645 6,569,761
6. INVESTMENTS
-----------
During 1997, the Partnership sold available-for-sale securities
for $83,243 realizing a loss on the sale of these securities of
$14,146. At December 31, 1996, these securities had a fair
market value of $73,750 and unrealized losses of $23,639. Such
unrealized losses were included as a separate component of
partners' capital on the accompanying statement of partners'
capital.
7. GOING CONCERN MATTERS
---------------------
The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets
and satisfaction of liabilities in the normal course of business.
As shown in the financial statements, during the year ended
December 30, 1997 and 41 weeks ended December 31, 1996, the
Partnership incurred losses of $1,685,288 and $834,718,
respectively, and due to the default provision has classified the
majority of its debt with FMAC as current for the year ended
December 30, 1997. These factors among others may indicate the
Partnership will be unable to continue as a going concern for a
reasonable period of time.
The financial statements do not include any adjustments relating
to the recoverability and classification of liabilities that
might be necessary should the Partnership be unable to continue
as a going concern. As described in Note 3, the Partnership was
not in compliance with the required fixed charge coverage ratio
as defined by the loan covenants under the borrowing agreement
during and subsequent to the year ended December 30, 1997. As a
result of the covenant violation, the Partnership has classified
the borrowings under this borrowing agreement ($,4,597,311) as a
current liability. The Partnership is current on all of its
financing obligations. Management believes it has the resources
for a successful restructuring of its debt on a long-term basis.
Management believes that until the restructuring of the debt is
completed, existing cash balances and anticipated cash receipts
will be adequate to cover operating requirements including debt
service of the Partnership. However, the Partnership's
continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meets its financing obligations
on a timely basis, to obtain additional financing or refinancing
as may be required, and ultimately to obtain profitability.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed financial statements of American Restaurant Partners,
L.P. at December 29, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-29-1998
<PERIOD-END> DEC-29-1998
<CASH> 329946
<SECURITIES> 68635
<RECEIVABLES> 917612
<ALLOWANCES> 0
<INVENTORY> 441326
<CURRENT-ASSETS> 1544364
<PP&E> 35576668
<DEPRECIATION> 14733218
<TOTAL-ASSETS> 30702779
<CURRENT-LIABILITIES> 10755295
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (5954778)
<TOTAL-LIABILITY-AND-EQUITY> 30702779
<SALES> 43543633
<TOTAL-REVENUES> 43543633
<CGS> 11710209
<TOTAL-COSTS> 41100976
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2662061
<INCOME-PRETAX> 808717
<INCOME-TAX> 0
<INCOME-CONTINUING> 808717
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 808717
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
