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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 30, 1997
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 16, 1998 the aggregate market value of the income
preference units held by non-affiliates of the registrant was
$1,626,280.
PART I
Item 1. Business
- ------- --------
General Development of Business
- -------------------------------
American Restaurant Partners, L.P., a Delaware limited
partnership (the "Partnership"), was formed on April 27, 1987 for
the purpose of acquiring and operating through American Pizza
Partners, L.P., a Delaware limited partnership (the "Operating
Partnership"), substantially all of the restaurant operations of
RMC Partners, L.P. ("RMC") in connection with a public offering
of Class A Income Preference units by the Partnership. The
transfer of assets from RMC was completed on August 21, 1987 and
the Partnership commenced operations on that date. Subsequently,
the Partnership completed its public offering of 800,000 Class A
Income Preference units and received net proceeds of $6,931,944.
The Partnership is a 99% limited partner in the Operating
Partnership which conducts substantially all of the business for
the benefit of the Partnership. RMC American Management, Inc.
("RAM") is the managing general partner of both the Partnership
and the Operating Partnership. RAM and RMC own an aggregate 1%
interest in the Operating Partnership.
As of December 30, 1997, the Partnership owned and operated 53
traditional "Pizza Hut" restaurants, 6 "Pizza Hut"
delivery/carryout facilities, 3 dualbrand locations, and 1
convenience store location (collectively, the "Restaurants"). In
1997, the Partnership opened a new dualbrand location, converted
one existing "Pizza Hut" restaurant to a dualbrand location and
relocated one "Pizza Hut" restaurant converting it to a dualbrand
location. The Partnership also closed a "Pizza Hut" restaurant,
3 delivery/carryout units, and one convenience store location.
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
12-31-96 1997 1997 12-30-97
-------- --------- --------- --------
Georgia 8 -- -- 8
Louisiana 2 -- -- 2
Montana 17 1 -- 18
Texas 31 -- 4 27
Wyoming 9 -- 1 8
--- --- --- ---
Total 67 1 5 63
=== === === ===
On March 13, 1996, the Partnership purchased a 45% interest in
a newly formed limited partnership, Oklahoma Magic, L.P. (Magic),
that currently owns and operates twenty-seven Pizza Hut
restaurants in Oklahoma. The remaining partnership interests
are held by Restaurant Management Company of Wichita, Inc.
(29.25%), an affiliate of the Partnership, Hospitality Group of
Oklahoma, Inc. (HGO)(25%), the former owners of the Oklahoma
restaurants, and RMC American Management, Inc. (RAM)(.75%), the
managing general partner of Magic.
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 February 27, 1998,
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 cars.
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 monthly gross sales and increase
their national dues by 0.5% to 2.5% of monthly 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 monthly 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, which
purchased PFS during 1997, 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
Restaurant's operations, however, are commodity items that are
available from numerous suppliers at market prices. Certain of
the items used in preparation of the Restaurant's products
currently are available only to Pizza Hut franchisees from PHI.
Franchise Fees. Franchisees must pay monthly service fees to
PHI based on each restaurant's gross sales. The monthly service
fee under each of the Franchise Agreements is 4% of gross sales,
or, if payment of a percentage of gross sales of alcoholic
beverages is prohibited by state law, 4.5% of gross sales of food
products and nonalcoholic beverages. Fees are payable monthly by
the 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 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 1998
or future years.
Seasonality
- -----------
Due to the seasonal nature of the restaurant business in
general, the locations of many of the Restaurants near summer
tourist attractions, and the severity of winter weather in the
areas in which many of the Restaurants are located, the
Partnership realizes approximately 40% of its operating profits
in periods six through nine (18 weeks). Although this seasonal
trend is likely to continue, the severity of these seasonal
cycles may be lessened to the extent that the Partnership
operates Pizza Hut restaurants in warmer climates and nontourist
population areas in the future. The Partnership does not
anticipate that the current seasonal trends will cause the
Partnership's negative working capital to deteriorate even
further during seasonal lows even if these trends continue.
Competition
- -----------
The retail restaurant business is highly competitive with
respect to trademark recognition, price, service, food quality
and location, and is often affected by changes in tastes, eating
habits, national and local economic conditions, population and
traffic patterns. The Restaurants compete with large regional
and national chains, including both fast food and full service
chains, as well as with independent restaurants offering
moderately priced food. Many of the Partnership's competitors
have more locations, greater financial resources, and longer
operating histories than the Partnership. The Restaurants
compete directly with other pizza restaurants for dine-in, take-
out and delivery customers.
Government Regulation
- ---------------------
The Partnership and the Restaurants are subject to various
government regulations, including zoning, sanitation, health,
safety and alcoholic beverage controls. Restaurant employment
practices are also governed by minimum wage, overtime and other
working condition regulations which, to date, have not had a
material effect on the operation of the Restaurants. The
Partnership believes that it is in compliance with all material
laws and regulations which govern its business. In order to
comply with the regulations governing alcoholic beverage sales in
Montana, Texas and Wyoming, the licenses permitting beer sales in
certain Restaurants in those states are held in the name of
resident persons or domestic entities to whom they were
originally issued, and are utilized by the Partnership under
lease arrangements with such resident persons or entities.
Because of the varying requirements of various state agencies
regulating liquor and beer licenses, the Partnership Agreement
provides that all Unitholders and all other holders of limited
partner interests must furnish the Managing General Partner with
all information it reasonably requests in order to comply with
any requirements of these state agencies, and that the
Partnership has the right to purchase all Units held by any
person whose ownership of Units would adversely affect the
ability of the Partnership to obtain or retain licenses to sell
beer or wine in any Restaurant.
Employees
- ---------
As of February 27, 1998, the Partnership did not have any
employees. The Operating Partnership had approximately 1,350
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
Restaurant Management Company of Wichita, Inc. (the "Management
Company"), an affiliate of the Partnership, which has its
principal offices in Wichita, Kansas. The Management Company
has a total of 33 employees which will devote all or a
significant part of their time to management of the Restaurants.
In addition, the Partnership may employ certain management
officials of the Management Company on a part time basis.
Employee relations are believed to be satisfactory.
Financial Information About Foreign and Domestic Operations and
- ---------------------------------------------------------------
Export Sales
- ------------
The Partnership operates no restaurants in foreign countries.
Item 2. Properties
- ------------------
The following table lists the location by state of Restaurants
operated by the Partnership as of December 30, 1997.
Leased From Leased From
Unrelated Third Affiliates of the
Parties General Partners Owned Total
------- ---------------- ----- -----
Georgia 1 - 7 8
Louisiana 1 - 1 2
Montana 9 - 9 18
Texas 16 - 11 27
Wyoming 4 1 3 8
--- --- --- ---
Total 31 1 31 63
=== === === ===
Five of the properties owned by the Partnership are subject to
ground leases from unrelated third parties. The property leased
from an affiliate of the General Partners is subject to a
mortgage or deed of trust. Most of the properties, including
that owned by an affiliate of the General Partners are leased for
a minimum term of at least five years and are subject to one to
four five year renewal options. Two leases with initial terms
of less than five years contain renewal options extending through
at least 2000. A low volume delivery/carryout facility is being
leased on an annual basis with the lease automatically renewing
at the end of each term. The Partnership believes leases with
shorter terms can be renewed for multiple year periods, or the
property purchased, without significant difficulty or
unreasonable expense.
In addition to the operating locations above, the Partnership
has remaining lease obligations on four closed restaurants. One
of the leases expires in 1998. Two of the locations are
subleased through their remaining lease term. The Partnership is
attempting to sublease the fourth location for the remainder of
its original lease term which expires in 2000.
The amount of rent paid is either fixed or includes a fixed
rental plus a percentage of the Restaurant's sales, subject, in
some cases, to maximum amounts. The leases require the
Partnership to pay all real estate taxes, insurance premiums,
utilities, and to keep the property in general repair.
Pizza Hut restaurants are constructed in accordance with
prescribed design specifications and most are similar in exterior
appearance and interior decor. The typical restaurant building
is a one-story brick building with 1,800 to 3,000 square feet,
including kitchen and storage areas, and features a distinctive
red roof. Seating capacity ranges from 75 to 140 persons and the
typical property site will accommodate parking for 30 to 70 cars.
Building designs may be varied only upon request and when
required to comply with local regulations or for unique marketing
reasons. Typical capital costs for a restaurant facility are
approximately $150,000 for land, $250,000 for the building and
$135,000 for equipment and furnishings. Land costs can vary
materially depending on the location of the site.
Delivery/carryout facilities vary in size and appearance. These
facilities are generally leased from unrelated third parties.
Item 3. Legal Proceedings
- --------------------------
As of December 30, 1997, 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 1997 and 1996 were:
Calendar Period High Low
- -------------------------------------------------------
1997
- ----
First Quarter 5-3/4 4-13/16
Second Quarter 5-1/8 4-13/16
Third Quarter 5 2-3/4
Fourth Quarter 4-3/8 1-1/2
1996
- ----
First Quarter 7-1/8 6
Second Quarter 7-5/16 6-7/16
Third Quarter 7 5-7/8
Fourth Quarter 6-1/8 5-3/8
As of December 30, 1997, approximately 1,350 unitholders owned
American Restaurant Partners, L.P. Class A Income Preference
Units of limited partner interest. Information regarding the
number of unitholders is based upon holders of record excluding
individual participants in security position listings.
Cash distributions to unitholders were:
Per Per
Class A Class B & C
Record Date Payment Date Unit Unit
- ----------------------------------------------------------------
1997
- ----
January 12, 1997 January 31, 1997 $0.11 $0.11
April 11, 1997 April 25, 1997 0.11 0.11
July 14, 1997 July 25, 1997 0.05 0.05
October 13, 1997 October 25, 1997 0.05 0.05
---- ----
Cash distributed during 1997 $0.32 $0.32
==== ====
Per Per
Class A Class B & C
Record Date Payment Date Unit Unit
- ---------------------------------------------------------------
1996
- ----
January 12, 1996 January 26, 1996 $0.16 $0.16
April 12, 1996 April 26, 1996 0.26 0.26
July 12, 1996 July 26, 1996 0.16 0.16
October 12, 1996 October 25, 1996 0.16 0.16
---- ----
Cash distributed during 1996 $0.74 $0.74
==== ====
The Partnership will make quarterly distributions of "Cash
Available for Distribution" with respect to the Income
Preference, Class B Units, and Class C Units. "Cash Available
for Distribution", consists, generally, of all operating revenues
less operating expenses (excluding noncash items such as
depreciation and amortization), capital expenditures for existing
restaurants, interest and principal payments on Partnership debt,
and such cash reserves as the Managing General Partner may deem
appropriate. Therefore, the Partnership may experience quarters
in which there is no Cash Available for Distribution. The
Partnership may retain cash during certain quarters and
distribute it in later quarters in order to make quarterly
distributions more consistent.
Item 6. Selected Financial Data
(in thousands, except per Unit data, number of Restaurants,
and average weekly sales per Restaurant)
American Restaurant Partners, L.P.
----------------------------------------------------------------
Year Ended
December 30, December 31, December 26, December 27, December 28,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
Income statement data:
Net sales $ 38,977 40,425 40,004 37,445 36,070
Income from operations 433 3,076 3,890 3,587 3,688
Net earnings (1,993) 1,584 2,481 2,385 3,397
Net earnings per Class A
Income Preference Unit (a) (0.50) 0.40 0.63 1.04 1.72
Balance sheet data:
Total assets $ 22,226 23,745 16,134 16,445 17,085
Long-term debt 20,005 18,859 10,525 10,787 11,204
Obligations under capital
leases 1,645 1,665 1,732 1,800 1,903
Partners capital (deficiency):
General Partners (8) (5) (3) (3) (3)
Class A 5,624 6,295 6,573 6,729 6,751
Class B and C (8,322) (5,811) (4,688) (4,479) (4,416)
Cost in excess of carrying
value of assets acquired (1,324) (1,324) (1,324) (1,324) (1,324)
Unrealized gain (loss) on investment securities 19 (44) - - -
Notes receivable from employees - - (6) (32) (76)
Cash dividends declared per unit:
Class A Income Preference 0.32 0.74 0.74 1.07 1.60
Class B 0.32 0.74 0.74 0.52 0.50
Class C 0.32 0.74 0.74 0.52 0.50
Statistical data:
Capital expenditures: (b)
Existing Restaurants $ 889 2,612 1,185 1,093 2,148
New Restaurants 935 4,136 - 1,038 599
Average weekly sales per
Restaurant: (c)
Red Roof 11,813 12,544 12,862 12,278 12,113
Delivery/carryout facility/C-store 8,160 10,547 12,463 11,536 10,636
Restaurants in operation
at end of period 63 67 60 60 58
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
Partnership have been allocated to the limited partners who are
holders of 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 was allocated equally
to all outstanding units.
(b) Capital expenditures include the cost of land, buildings, new
and replacement restaurant equipment and refurbishment of
leasehold improvements. Capital expenditures for existing
restaurants represent such capitalized costs for all restaurants
other than newly constructed restaurants.
(c) Average weekly sales were calculated by dividing net sales by
the weighted average number of restaurants open during the
period. The quotient was then divided by the number of days in
the period multiplied times seven days.
Item 7. Management's Discussion and Analysis of Consolidated
- -----------------------------------------------------------------
Financial Condition and Results of Operations
- ---------------------------------------------
Results of Operations
- ---------------------
The following discussion compares the Partnership's results for
the years ended December 30, 1997, December 31, 1996 and December
26, 1995. Comparisons of 1997 to 1996 and 1996 to 1995 are
affected by an additional week of results in the 1996 reporting
period. Because the Partnership's fiscal year ends on the last
Tuesday in December, a fifty-third week is added every five or
six years. This discussion should be read in conjunction with
the Selected Financial Data and the Consolidated Financial
Statements included elsewhere herein.
Net Sales
- ---------
Net sales for the year ended December 30, 1997 decreased
$1,448,000, or 3.6%, from $40,425,000 for the year ended
December 31, 1996 to 38,977,000 for the year ended December 30,
1997. The additional week in 1996 accounted for approximately 2
percentage points of the decrease. Comparable restaurant sales
decreased 5.2% from 1996. This decrease reflects the continuing
increase in competition in the Texas market.
Net sales for the year ended December 31, 1996 increased $421,000
to $40,425,000, a 1.1% increase over the year ended December 26,
1995. The additional week in 1996 contributed approximately 2
percentage points to the sales growth. Sales for comparable
restaurants decreased 2.1%. This decrease reflects the impact of
sales increases in 1995 due to the successful introduction of
Stuffed Crust Pizza and an increase in competition in the Texas
market during 1996.
Income From Operations
- ----------------------
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 last year to 28.3% of net sales this year 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.
Income from operations in 1996 decreased $814,000 from $3,890,000
to $3,076,000, a decrease of 20.9% from 1995. As a percentage of
net sales, income from operations decreased from 9.7% in 1995 to
7.6% in 1996. Cost of sales increased as a percentage of net
sales from 26.5% in 1995 to 26.6% in 1996. Restaurant labor and
benefits increased from 26.1% of net sales in 1995 to 26.4% of
net sales in 1996 due to the increase in minimum wage and
inefficiencies associated with several new store openings.
Advertising expense increased as a percentage of net sales from
6.4% of net sales in 1995 to 6.8% in 1996 due to increased
competition, grand opening expenses for new stores and efforts to
minimize sales decreases experienced from the maturation of the
successful introduction of Stuffed Crust Pizza in 1995. Operating
expenses were 18.4% of net sales in both 1995 and 1996. General
and administrative expense decreased from 9.1% of net sales in
1995 to 8.8% of net sales in 1996. Depreciation and amortization
as a percentage of net sales increased from 3.8% in 1995 to 4.2%
in 1996 due to the opening of new restaurants and remodels of
existing restaurants. Loss on restaurant closings amounted to
0.2% of net sales in 1996. Equity in loss of affiliate amounted
to 0.9% of net sales in 1996.
Net Earnings
- ------------
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.
Net earnings decreased $897,000 from $2,481,000 for the year
ended December 26, 1995 to $1,584,000 for the year ended December
31, 1996. This decrease is a result of the $814,000 decrease in
operating income noted above and an increase in interest expense
of $381,000 due to additional debt primarily used to fund the
acquisition of a 45% interest in Magic and to develop new
restaurants. This decrease was partially offset by a gain
on fire settlement of $158,000. A $142,000 loss on the early
extinguishment of debt was included in 1995.
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 30, 1997, the Partnership had a working capital
deficiency of $15,712,000 compared to a deficiency of $3,935,000
at December 31, 1996. The increase in working capital deficiency
at December 30, 1997 results from the classification of the
entire amount of outstanding notes payable to Heller Financial,
Inc. and Franchise Mortgage Acceptance Company (FMAC) as a
current liability because the Partnership was in default of the
fixed charge ratio at December 30, 1997. There have been no
defaults in making scheduled payments of either principal or
interest. As a result of the default, Heller Financial, Inc. has
the option to increase the interest rate two percentage points
over the rate the Partnership is currently paying. Management
plans to refinance the notes with Heller Financial, Inc. and FMAC
over 15 years at an interest rate of approximately 9% bringing
the Partnership into compliance with the fixed charge ratio.
This refinancing should be completed in April 1998. 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.
At December 30, 1997, Magic had a working capital deficiency
of $6,065,000 compared to a deficiency of $2,226,000 at
December 31, 1996. The decrease in working capital at
December 30, 1997 results from the classification of the entire
amount of outstanding notes payable to FMAC as a current
liability because Magic was in default of the fixed charge ratio
at December 30, 1997. There have been no defaults in making
scheduled payments of either principal or interest. The
Partnership has a $1,795,000 net investment in Magic that
continues to be carried at a cost basis even though Magic is in
default of the FMAC loan covenants.
Net Cash Provided by Operating Activities
- -----------------------------------------
During 1997, net cash provided by operating activities amounted
to $2,356,000, a decrease of $1,775,000 from 1996. This decrease
is attributable to the decrease in net income which was partially
offset by an increase in the loss on restaurant closings, an
increase in equity in loss of affiliate and an increase in
accounts payable.
Investing Activities
- --------------------
Property and equipment expenditures represent the largest
investing activity by the Partnership. Capital expenditures for
1997 were $1,824,000 of which $889,000 was for replacement of
equipment in existing restaurants. The remaining $935,000 was
for the development of new restaurants and the conversion of
restaurants to dualbrand locations.
Financing Activities
- --------------------
Cash distributions paid in 1997 totaled $1,277,000 and amounted
to $0.32 per unit compared to $2,942,000, or $0.74 per
unit, during 1996. 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. The reduction in cash distributions from the prior
year reflects the decline in operating revenues.
During 1997, the Partnership's proceeds from long term borrowings
amounted to $2,369,000. The proceeds were used primarily to
develop new restaurants and to replenish operating capital. The
Partnership does not plan to open any new restaurants during
1998. Management anticipates spending $495,000 in 1998 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.
With the introduction of "The Edge" pizza and some new products
in development, management anticipates a bottoming out of the
same store sales decline experienced over the last two years.
Management will focus on lowering food and labor costs in 1998 to
regain some of the margins lost during the last two years. In
addition, the Partnership plans to refinance a large amount of
its debt service over fifteen years at approximately a 9%
interest rate early in the second quarter. This will lower the
Partnership's annual debt service by approximately $750,000. As
a result of these items, the Partnership should experience a
significant improvement in cash flow after debt service in 1998.
Other Matters
- -------------
In November, 1996 Magic notified HGO that it is seeking to
terminate HGO's interest in Magic pursuant to the terms
of the Partnership Agreement for alleged violations of the Pizza
Hut Franchise Agreement and the alleged occurrence of an Adverse
Terminating Event as defined in the Partnership Agreement. Magic
alleges that HGO contacted and offered employment to a
significant number of the management employees of Magic. Magic
has also alleged that HGO made certain misrepresentations in
connection with the formation of Magic. HGO has denied that such
franchise violations have occurred and that it made any
misrepresentations at the formation of Magic. The matter has been
submitted to arbitration. A hearing for the arbitration will be
held through the American Arbitration Association during the week
of April 6, 1998. In the arbitration proceeding, HGO has
asserted that it was fraudulently induced to enter into the Magic
Partnership Agreement by Restaurant Management Company of
Wichita, Inc. and was further damaged by alleged mismanagement of
the operations. HGO is seeking recision of the purchase and
contribution of the restaurants or, in the alternative,
compensatory and punitive damages. The parties continue to seek
to resolve the disagreement through negotiation. If Magic
prevails, the interest of HGO in Magic will be purchased by Magic
and the interest of the Partnership in Magic will likely increase
from 45% to 60%. The amount of damages sought by HGO has not
been enumerated.
As previously reported, under the Omnibus Budget Reconciliation
Act of 1987, certain MLPs, including the Partnership would be
taxed as corporations beginning in 1998. The effect of this
provision is that the Partnership would pay income taxes and the
partners would then pay additional taxes on distributions
received by them, thereby substantially increasing the total
taxation of the Partnership's distributed income. After
considering various alternatives to avoid this double taxation,
the Partnership delisted from the American Stock Exchange
effective November 13, 1997 and limited trading of its units. As
a result, the Partnership will continue to be taxed as a
partnership rather than being taxed as a corporation. The
Partnership does offer a Qualified Matching Service, whereby the
Partnership will match persons desiring to buy units with persons
desiring to sell units.
The Partnership does not expect year 2000 issues to have any
material effect on its costs or to cause any significant
disruptions to its operations. The Partnership uses external
agents on all critical applications and systems. The external
agents have assured the Partnership that they expect to be fully
year 2000 compliant before the year 2000 issues will impact the
Partnership.
This report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act, and Section 21E
of the Exchange Act, which are intended to be covered by the safe
harbors created thereby. Although the Partnership believes 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 Partnerships under a
Management Services Agreement with the Operating Partnership.
Partnership management services include, but are not limited to:
preparing and reviewing projections of cash flow, taxable income
or loss, and working capital requirements; conducting periodic
physical inspections, market surveys and continual Restaurant
reviews to determine when assets should be sold and, if so,
determining acceptable terms of sale; arranging any debt
financing for capital improvements or the purchase of assets;
supervising any litigation involving the Partnerships; preparing
and reviewing Partnership reports; communicating with
Unitholders; supervising and reviewing Partnership bookkeeping,
accounting and audits; supervising the presentation of and
reviewing Partnership state and federal tax returns; personnel
functions, and supervising professionals employed by the
Partnerships in connection with any of the foregoing, including
attorneys, accountants and appraisers.
The direct management of the Restaurants is performed by the
Management company pursuant to a substantially identical
Management Services Agreement with RAM. As compensation for
management services, the Management Company will receive a
management fee equal to 7% of the gross sales of the Restaurants
and will be reimbursed for the cost of certain products purchased
for use directly in the operation of the Restaurants and for
outside legal, accounting, tax, auditing, advertising, and
marketing services. Certain other expenses incurred by the
Management Company which relate directly to the operation of the
Restaurants, including insurance and profit sharing and incentive
bonuses and related payroll taxes for supervisory personnel,
shall be paid by the Operating Partnership through RAM.
Set forth below is certain information concerning the director
and executive officers of both RAM and the Management Company.
Present Position with the Management
Company and Business Experience for
Name Age Past 5 Years
- ---- --- ----------------------------------------
Hal W. McCoy 52 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 119 franchised "Pizza Hut" and
"Long John Silver's" restaurants.
J. Leon Smith 55 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 42 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. RAM nor the
Operating Partnership compensates their officers, directors or
partners for services performed, and the salaries of the
executive officers of the Management Company are paid out of its
management fee and not directly by the Partnership.
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------
Name and Allocable to
Principal Position Year Salary Bonus Total Partnership
- ------------------ ---- ------ ----- ----- -----------
Hal W. McCoy 1997 127,322 36,451 163,773 79,716
President and Chief 1996 135,661 79,031 214,692 121,901
Executive Officer 1995 126,410 91,202 217,612 139,387
Terry Freund 1997 83,049 13,275 96,324 48,343
Assistant Secretary and 1996 82,237 39,851 122,088 67,916
Chief Financial Officer 1995 79,739 47,815 127,554 80,019
Incentive Bonus Plan
- --------------------
The Management Company maintains a discretionary supervisory
incentive bonus plan (the "Incentive Bonus Plan") pursuant to
which approximately 18 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 1997, 1996 and 1995 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 30, 1997 was $155,637 of which
$38,600 was paid to all executive officers as a group. Bonuses
paid under the Incentive Bonus Plan are paid by the Partnership.
The Incentive Bonus Plan in effect for the fiscal year ending
December 29, 1998 provides for payment of aggregate supervisory
bonuses in an amount equal to 15% of the amount by which the
Partnership's income from operations plus depreciation and
amortization expenses exceed a threshold of $1,908,400. This
threshold is subject to change with the opening or closing of
restaurants. For the fiscal year ended December 30, 1997 the
Partnership's income from operations plus depreciation and
amortization expenses was $2,511,486.
Class A Unit Option Plan
- ------------------------
The Partnership, the Operating Partnership, RAM and the
Management Company have adopted a Class A Unit Option Plan (the
"Plan") pursuant to which 75,000 Class A Units are reserved for
issuance to employees, including officers, of the Partnership,
the Operating Partnership, RAM and the Management Company.
Participants will be entitled to purchase a designated number of
Units at an option price which shall be equal to the 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 30, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and
- -----------------------------------------------------------------
Management
- ----------
PRINCIPAL UNITHOLDERS
The following table sets forth, as of February 27, 1998,
information with respect to persons known to the Partnership to
be beneficial owners of more than five percent of the Class A
Income Preference Units, Class B or Class C Units of the
Partnership:
Name & Address Amount & Nature
Title of Beneficial of Beneficial Percent
of Class Owner Ownership of Class
- -------- -------------- --------------- --------
Class A Income
Preference Units None
Class B Hal W. McCoy 698,479 (1) 58.51%
555 N. Woodlawn
Suite 3102
Wichita, KS 67208
Class B Daniel Hesse 204,401 (2) 17.12%
555 N. Woodlawn
Suite 3102
Wichita, KS 67208
Class C Hal W. McCoy 1,341,934 (1) 67.88%
555 N. Woodlawn
Suite 3102
Wichita, KS 67208
Class C Daniel Hesse 234,199 (2) 11.85%
555 N. Woodlawn
Suite 3102
Wichita, KS 67208
(1) Hal W. McCoy beneficially owns 81.31% of RMC Partners, L.P.
which owns 900,155 Class B Units and 1,604,588 Class C
Units. Mr. McCoy owns 91.67% of RMC American Management,
Inc. which owns 3,840 Class C Units. Mr. McCoy has voting
authority over the units.
(2) Daniel Hesse beneficially owns 14.48% of RMC Partners, L.P.
which owns 900,155 Class B Units and 1,604,588 Class C Units.
Mr. Hesse owns 4.17% of RMC American Management, Inc. which
owns 3,840 Class C Units. Mr. Hesse has voting authority
over the units.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of February 27, 1998, the
number of Class A Income Preference Units, Class B Units, or
Class C Units beneficially owned by the director and by the
director and executive officers of both RAM and the Management
Company as a group.
Title Name of Amount & Nature Percent
of Class Beneficial Owner of Beneficial Ownership of Class
- -------- ---------------- ----------------------- --------
B Hal W. McCoy 698,479 (1) 58.51%
C Hal W. McCoy 1,341,934 (1) 67.88%
B Director & all 753,656 (1) 63.13%
officers as a group
(3 Persons)
C Director & all 1,440,494 (1) 72.87%
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 are managed by the
Management Company for a fee equal to 7% of the gross sales of
the Restaurants and reimbursement of certain costs incurred for
the direct benefit of the Restaurants. Neither the terms and
conditions of the Agreements, nor the amount of the fee were
negotiated at arm's length. Based on prior experience in
managing the Restaurants, however, the Managing General Partner
believes that the terms and conditions of the Management Services
Agreement, including the amount of the fee, are fair and
reasonable and not less favorable to the Partnership than those
generally prevailing with respect to similar transactions between
unrelated parties. The 7% fee approximated the actual
unreimbursed costs incurred by the Managing General Partner in
managing the Restaurants when the Agreements were entered into in
June of 1987. The 7% fee remains in effect for the life of the
Agreements which expire December 31, 2007.
PART IV
Item 14. Exhibits, Financial Statements and Reports
- ----------------------------------------------------
on Form 8-K
- -----------
(a) 1. Financial statements
--------------------
See "Index to Consolidated Financial Statements and
Supplementary Data" which appears on page F-1 herein.
3. Exhibits
--------
The exhibits filed as part of this annual report are
listed in the "Index to Exhibits" at page 31.
(b) Reports on Form 8-K
-------------------
The Partnership filed a Form 8-K, dated November 25,
1997, reporting the application to withdraw from listing and
registration on the American Stock Exchange and the
permanent suspension of trading of units on the American
Stock Exchange.
The Partnership filed a Form 8-K, dated December 22, 1997
reporting the Securities and Exchange Commission had issued an
order granting Registrant's application to withdraw from listing
and registration on the American Stock Exchange.
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
23.1 Consent of Ernst & Young LLP F-25
27.1 Financial Data Schedule F
A. Included as exhibits in the Partnership's Registration
Statement on Form S-1 (Registration No.33-15243) dated August
20, 1987 and included herein by reference to exhibit of same
number.
B. Incorporated by reference to the Partnership's Registration
Statement on Form S-8 dated March 21, 1988.
C. Incorporated by reference to Exhibit 10.7 of the
Partnership's Form 10-K for the year ended December 31, 1987.
D. Incorporated by reference to Exhibit 10.8 of the
Partnership's Form 10-K for the year ended December 31, 1991.
E. Incorporated by reference to Exhibit 2 of the Partnership's
Form 8-K dated March 13, 1996.
F. Submitted electronically to the Securities and Exchange
Commission for information only and not filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AMERICAN RESTAURANT PARTNERS, L.P.
(Registrant)
By: RMC AMERICAN MANAGEMENT, INC.
Managing General Partner
Date: 3/24/98 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 3/24/98
- --------------- (Principal Executive Officer) -------
Hal W. McCoy of RMC American Management, Inc.
/s/Terry Freund Chief Financial Officer 3/24/98
- --------------- -------
Terry Freund
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 30, 1997
and December 31, 1996. . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years
ended December 30, 1997, December 31, 1996,
and December 26, 1995 . . . . . . . . . . . . . . . F-5
Consolidated Statements of Partners' Capital
(Deficiency) for the years ended December 30, 1997,
December 31, 1996 and December 26, 1995 . . . . . . F-6
Consolidated Statements of Cash Flows for the
years ended December 30, 1997, December 31, 1996,
and December 26, 1995 . . . . . . . . . . . . . . . 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-26
Balance Sheets as of December 30, 1997 and
Unaudited December 31, 1996 . . . . . . . . . . . . F-27
Statements of Operations for the year ended
December 30, 1997 and Unaudited for the
41 weeks (since inception) ended
December 31, 1996 . . . . . . . . . . . . . . . . . F-28
Statements of Partners' Capital for the
year ended December 30, 1997 and Unaudited
for the 41 weeks (since inception) ended
December 31, 1996 . . . . . . . . . . . . . . . . . F-29
Statements of Cash Flows for the year ended
December 30, 1997 and Unaudited for the
41 weeks (since inception) ended
December 31, 1996 . . . . . . . . . . . . . . . . . F-30
Notes to Financial Statements . . . . . . . . . . . . . F-31
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. (Partnership) as of December
30, 1997 and December 31, 1996, and the related consolidated
statements of operations, partners' capital (deficiency), and
cash flows for each of the three years in the period ended
December 30, 1997. 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 30, 1997 and December 31, 1996, and the consolidated
results of its operations and its cash flows for each of the
three years in the period ended December 30, 1997, in conformity
with generally accepted accounting principles.
/s/Ernst & Young LLP
Wichita, Kansas
March 19, 1998
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 30, December 31,
ASSETS 1997 1996
- ----------------------------- ----------- -----------
Current assets:
Cash and cash equivalents $ 509,398 $ 178,826
Certificate of deposit - 157,635
Investments available for sale,
at fair market value 195,751 132,751
Accounts receivable 84,447 155,724
Due from affiliates 67,918 19,415
Notes receivable from
affiliates - current portion 72,387 84,631
Inventories 311,516 344,003
Prepaid expenses 245,177 212,008
----------- -----------
Total current assets 1,486,594 1,284,993
Property and equipment, at cost:
Land 3,698,168 3,422,889
Buildings 7,702,639 7,507,937
Construction in progress - 331,080
Restaurant equipment 11,114,444 10,898,243
Leasehold rights and building improvements 4,425,532 4,643,667
Property under capital leases 2,369,199 2,369,199
----------- -----------
29,309,982 29,173,015
Less accumulated depreciation and amortization 12,481,826 11,552,747
----------- -----------
16,828,156 17,620,268
Other assets:
Franchise rights, net of accumulated
amortization of $785,578 ($707,114 in 1996) 1,010,616 1,084,080
Notes receivable from affiliates 75,899 113,410
Deposit with affiliate 350,000 350,000
Investment in Oklahoma Magic, L.P. 1,795,774 2,624,368
Other 679,106 667,964
----------- -----------
$22,226,145 $23,745,083
=========== ===========
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
December 30, December 31,
LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY) 1997 1996
- ----------------------------------------------- ----------- ------------
Current liabilities:
Accounts payable 3,042,151 2,115,502
Due to affiliates 50,539 88,654
Accrued payroll and other taxes 385,016 545,816
Accrued liabilities 784,661 1,008,937
Current maturities of long-term debt,
including $11,556,077 of notes
payable in default in 1997 12,899,728 1,428,630
Current portion of obligations
under capital leases 36,492 32,760
----------- -----------
Total current liabilities 17,198,587 5,220,299
Other noncurrent liabilities 204,337 197,308
Long-term debt 7,105,615 17,430,692
Obligations under capital leases 1,608,356 1,632,284
General Partners' interest
in Operating Partnership 120,702 153,737
Commitments - -
Partners' capital (deficiency):
General Partners (7,864) (4,634)
Limited Partners:
Class A Income Preference, authorized 875,000
units; issued 813,840 units (815,309 in 1996) 5,623,790 6,294,520
Classes B and C, issued 1,193,852 and
1,976,807 class B and C units, respectively
(1,178,384 and 1,951,025 units in 1996,
respectively) (8,322,372) (5,811,117)
Cost in excess of carrying value
of assets acquired (1,323,681) (1,323,681)
Unrealized gain (loss) in
investment securities 18,675 (44,325)
----------- ------------
Total partners' capital (deficiency) (4,011,452) (889,237)
----------- -----------
$22,226,145 $23,745,083
=========== ===========
See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 30, 1997,
December 31, 1996 and December 26, 1995
1997 1996 1995
---------- ---------- ----------
Net sales $ 38,977,341 $ 40,424,953 $ 40,004,295
Operating costs and expenses:
Cost of sales 10,586,372 10,762,986 10,599,422
Restaurant labor and benefits 11,043,688 10,672,030 10,444,896
Advertising 2,511,470 2,744,864 2,549,729
Other restaurant operating
expenses exclusive of
depreciation and amortization 7,691,831 7,433,450 7,367,758
General and administrative:
Management fees - related party 2,710,449 2,808,484 2,776,768
Other 371,443 766,551 864,553
Depreciation and amortization 2,078,061 1,687,090 1,511,158
Loss on restaurant closings 792,219 97,523 -
Equity in loss of affiliate 758,383 375,632 -
---------- ---------- ----------
Income from operations 433,425 3,076,343 3,890,011
Interest income 29,350 34,253 46,334
Interest expense (2,476,304) (1,668,551) (1,287,776)
Gain on fire settlement - 157,867 -
---------- ---------- ----------
(2,446,954) (1,476,431) (1,241,442)
---------- ---------- ----------
(Loss) income before extraordinary item (2,013,529) 1,599,912 2,648,569
Extraordinary loss on early
extinguishment of debt - - (142,491)
---------- ---------- ----------
(Loss) income before General Partners'
interest in (loss) income of
Operating Partnership (2,013,529) 1,599,912 2,506,078
General Partners' interest in
(loss) income of Operating Partnership (20,135) 15,999 25,061
---------- ---------- ----------
Net (loss) income $(1,993,394) $ 1,583,913 $ 2,481,017
========== ========== ==========
Net (loss) income allocated to Partners:
Class A Income Preference $ (406,975) $ 324,763 $ 519,316
Class B $ (596,643) $ 473,352 $ 737,783
Class C $ (989,776) $ 785,798 $ 1,223,918
Weighted average number of Partnership
units outstanding during period:
Class A Income Preference 815,305 815,309 824,978
Class B 1,195,273 1,188,332 1,172,025
Class C 1,982,849 1,972,716 1,944,299
Basic and diluted (loss) income
before extraordinary item per
Partnership interest $ (0.50) $ 0.40 $ 0.67
Basic and diluted extraordinary loss
per Partnership interest $ - $ - $ (0.04)
Basic and diluted net (loss) income
per Partnership interest $ (0.50) $ 0.40 $ 0.63
Distributions per Partnership interest $ 0.32 $ 0.74 $ 0.74
See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P.
Consolidated Statements of Partners' Capital (Deficiency)
Years ended December 30, 1997, December 31, 1996, and December 26, 1995
General Partners Limited Partners Cost
-------------- ---------------------------------------Unrealized in excess of
Classes B Class A Income Classes B gain(loss) on carrying Notes
and C Preference and C securities value of receivable
-------------- ----------------- -------------------- available assets from
Units Amounts Units Amounts Units Amounts for sale acquired employees Total
----- -------- ----- ---------- --------- --------- -------- ---------- --------- ---------
Balance at December 27, 1994 3,940 (3,347) 825,764 6,729,290 3,085,670 (4,478,892) - (1,323,681) (31,500) 891,870
Net Income - 2,975 - 519,316 - 1,958,726 - - - 2,481,017
Partnership distributions - (2,918) - (611,015) - (2,304,588) - - - (2,918,521)
Units sold to employees - - - - 18,750 37,500 - - - 37,500
Units issued to employees
as compensation - - - - 39,500 99,000 - - - 99,000
Reduction of notes receivable - - - - - - - - 25,200 25,200
Repurchase of Class A Units - - (10,455) (64,668) - - - - - (64,668)
----- ------ ------- --------- --------- ---------- ------- ---------- ------- ----------
Balance at December 26, 1995 3,940 (3,290) 815,309 6,572,923 3,143,920 (4,688,254) - (1,323,681) (6,300) 551,398
Net Income - 1,572 - 324,763 - 1,257,578 - - - 1,583,913
Partnership distributions - (2,916) - (603,166) - (2,335,633) - - - (2,941,715)
Units sold to employees - - - - 30,750 58,500 - - - 58,500
Units issued to employees
as compensation - - - - - 15,900 - - - 15,900
Units purchased from employees - - - - (45,261) (119,208) - - - (119,208)
Reduction of notes receivable - - - - - - - - 6,300 6,300
Unrealized loss on securities
available for sale - - - - - - (44,325) - - (44,325)
----- ----- ------- --------- --------- ---------- ------- ---------- ------- ----------
Balance at December 31, 1996 3,940 (4,634) 815,309 6,294,520 3,129,409 (5,811,117)(44,325) (1,323,681) - (889,237)
Net Loss - (1,970) - (406,975) - (1,584,449) - - - (1,993,394)
Partnership distributions - (1,260) - (260,718) - (1,015,039) - - - (1,277,017)
Units sold to employees - - - - 47,250 106,233 - - - 106,233
Units purchased - - (1,469) (3,037) (6,000) (18,000) - - - (21,037)
Change in unrealized gain/(loss)
on securities available for sale - - - - - - 63,000 - - 63,000
----- ------ ------- --------- --------- ---------- ------- ---------- ------- ----------
Balance at December 30, 1997 3,940 (7,864) 813,840 5,623,790 3,170,659 (8,322,372) 18,675 (1,323,681) - (4,011,452)
===== ====== ======= ========= ========= ========== ======= ========== ======= ==========
See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 30, 1997
December 31, 1996 and December 26, 1995
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net (loss) income $(1,993,394) $ 1,583,913 $ 2,481,017
Adjustments to reconcile net (loss) income
to net cash provided by operating
activities:
Depreciation and amortization 2,078,061 1,687,090 1,511,158
Provision for deferred rent 10,067 13,477 9,563
Provision for deferred compensation - 6,300 25,200
Unit compensation expense - 15,900 99,000
Equity in loss of affiliate 758,383 375,632 -
Loss on default in pooled loans 269,761 - -
Loss on disposition of assets 4,876 12,791 20,562
Loss on restaurant closings 792,219 97,523 -
Gain on fire settlement - (157,867) -
General Partners' interest in net
(loss) income of Operating Partnership (20,135) 15,999 25,061
Net change in operating assets and liabilities:
Accounts receivable 71,277 (79,119) 13,274
Due from affiliates (48,503) 5,134 (4,248)
Inventories 32,487 (43,590) (7,946)
Prepaid expenses (33,169) (67,972) (36,233)
Deposit with affiliate - (20,000) -
Accounts payable 857,340 211,525 349,005
Due to affiliates (38,115) 26,362 (16,684)
Accrued payroll and other taxes (160,800) 225,914 22,416
Accrued liabilities (224,276) 222,339 1,531
--------- --------- ---------
Net cash provided by
operating activities 2,356,079 4,131,351 4,492,676
Investing activities:
Investment in affiliate - (3,000,000) -
Purchases of certificates of deposit (6,567) (5,103) (79,687)
Redemption of certificates of deposit 164,202 - 107,356
Purchase of securities available for sale - (97,389) -
Additions to property and equipment (1,824,195) (6,747,527) (1,185,444)
Proceeds from sale of property and equipment 24,810 7,520 9,630
Purchase of franchise rights (15,000) (66,000) -
Funds advanced to affiliates - (57,131) (15,000)
Collections of notes receivable from affiliates 87,255 47,045 25,467
Net proceeds from fire settlement - 180,437 -
Other, net (69,856) (232,535) (110,193)
--------- --------- ---------
Net cash used in
investing activities (1,639,351) (9,970,683) (1,247,871)
Financing activities:
Proceeds from long-term borrowings 2,369,000 16,020,932 3,900,000
Payments on long-term borrowings (1,492,740) (7,686,372) (4,162,444)
Payments on capital lease obligations (20,196) (66,535) (68,746)
Distributions to Partners (1,277,017) (2,941,715) (2,918,521)
Proceeds from issuance of Class B and C units 68,733 58,500 37,500
Repurchase of units (21,037) (119,208) (64,668)
General Partners' distributions
from Operating Partnerships (12,899) (29,792) (29,480)
--------- --------- ---------
Net cash (used in) provided by
financing activities (386,156) 5,235,810 (3,306,359)
--------- --------- ---------
Net increase (decrease) in
cash and cash equivalents 330,572 (603,522) (61,554)
Cash and cash equivalents at beginning of period 178,826 782,348 843,902
--------- --------- ---------
Cash and cash equivalents at end of period $ 509,398 $ 178,826 782,348
========= ========= =========
See accompanying notes.
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. 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, the Partnership purchased a 45% interest in a
newly formed limited partnership, Oklahoma Magic, L.P. (Magic),
that currently owns and operates twenty-seven Pizza Hut
restaurants in Oklahoma. The remaining partnership interests
are held by Restaurant Management Company of Wichita, Inc.
(29.25%), an affiliate of the Partnership, Hospitality Group of
Oklahoma, Inc. (HGO)(25%), the former owners of the Oklahoma
restaurants, and RAM (.75%), 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., hereinafter collectively referred to as the
Partnership. All significant intercompany transactions and
balances have been eliminated.
The Partnership accounts for its investment in Oklahoma Magic,
L.P. using the equity method of accounting.
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, 53 weeks and 52 weeks for the years
ended December 30, 1997, December 31, 1996 and December 26, 1995,
respectively.
EARNINGS PER PARTNERSHIP INTEREST
In 1997 the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share. Statement 128 replaced the
calculation of primary and fully diluted earnings per Partnership
interest with basic and diluted earnings per Partnership
interest. All earnings per Partnership interest 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.
A schedule of restaurants in operation for the periods presented
in the accompanying consolidated financial statements is as
follows:
1997 1996 1995
---- ---- ----
Restaurants in operation at beginning of period 67 60 60
Opened 1 7 --
Closed (5) -- --
--- --- ---
Restaurants in operation at end of period 63 67 60
=== === ===
INVENTORIES
Inventories consist of food and supplies and are stated at the
lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Depreciation is provided by the straight-line method over the
estimated useful lives of the related assets. Leasehold
improvements are amortized over the life of the lease or
improvement, whichever is shorter.
The estimated useful lives used in computing depreciation are as
follows:
Buildings 10 to 30 years
Restaurant equipment 3 to 7 years
Leasehold rights and improvements 5 to 20 years
Expenditures for maintenance and repairs are charged to
operations as incurred. Expenditures for renewals and
betterments, which materially extend the useful lives for assets
or increase their productivity, are capitalized.
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 that are exposed to
concentration of credit risks consist primarily of cash and
certificates of deposit. The Partnership places its funds into
high credit quality financial institutions and, at times, such
funds may be in excess of the Federal Depository insurance limit.
Credit risks associated with customer sales are minimal as such
sales are primarily for cash. All notes receivable from
affiliates are supported by the guarantee of the majority owner
of the Partnership.
INCOME TAXES
The Partnership is not subject to federal or state income taxes
and, accordingly, no provision for income taxes has been
reflected in the accompanying consolidated financial
statements. Such taxes are the responsibility of the partners
based on their proportionate share of the Partnership's taxable
earnings.
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 30, 1997, the Partnership's
reported amount of its net assets for financial statement
purposes were less than the income tax bases of such net assets
by approximately $192,000.
The differences between generally accepted accounting principles
net (loss) income and taxable (loss) income are as follows:
1997 1996
---- ----
Generally accepted accounting
net (loss) income $(1,993,394) $ 1,583,913
Depreciation and amortization (205,737) (301,018)
Capitalized leases 128,791 97,837
Equity in loss of affiliate (655,814) (534,007)
Loss on restaurant closings 784,297 96,548
Loss on disposition of assets (216,534) 25,318
Other (13,022) 89,060
---------- ----------
Taxable (loss) income $(2,171,413) $ 1,057,651
========== ==========
The Omnibus Budget Reconciliation Act of 1987 provides that
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
Financial Accounting Standards (FAS) Statement No. 123
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
on 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
no options have been granted in 1997, 1996 or 1995.
INVESTMENTS AVAILABLE-FOR-SALE
Investments available-for-sale are carried at fair value, with
the unrealized gains and losses reported as a separate component
of partners' capital (deficiency). 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.
RECLASSIFICATIONS
Certain amounts shown in the 1996 and 1995 consolidated financial
statements have been reclassified to conform with the 1997
presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued FAS
Statement No. 130 "Reporting Comprehensive Income". FAS
Statement No. 130 establishes standards for reporting and display
of comprehensive income and its components in the financial
statements and is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements
for earlier periods provided for comparative purposes is
required. The Partnership has not yet determined the impact of
adoption of this standard; however, the adoption of this standard
will have no impact on the Partnership's results of operations,
financial position or cash flows.
2. RELATED PARTY TRANSACTIONS
The Partnership has entered into a management services agreement
with RAM whereby RAM will be responsible for management of the
restaurants for a fee equal to 7% of the gross receipts of the
restaurants, 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 will pay a commission
based upon 15% of the advertising costs incurred. Such costs
were not significant in 1997, 1996 or 1995.
The Partnership maintains a deposit with the Management Company
equal to approximately one and one-half month's management fee.
Such deposit, $350,000 at December 30, 1997 and 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 1995
---- ---- ----
Management fees $2,710,448 $2,808,484 $2,776,768
Management Company bonuses 155,637 342,684 356,021
Advertising commissions 73,062 66,150 99,834
The Partnership has made advances to various affiliates under
notes receivable which bear interest at market rates. The
advances are to be received in varying installments with
maturities over the next five years as follows: 1998 - $72,387;
1999 - $25,698; 2000 - $4,993; 2001 - $5,993; and 2002 - $6,043.
The remaining amounts are due in varying annual installments
through 2006. All such notes are guaranteed by the majority
owner of the Partnership. In addition, the Partnership has
certain other amounts due from and to affiliates which are on a
noninterest bearing basis.
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 $110,923, including interest
at the bank's base rate plus 1%
(9.50% at December 30, 1997)
adjusted monthly, due at various
dates through 2002 $ 7,998,688 $6,407,933
Notes payable to Franchise Mortgage
Acceptance Company (FMAC) payable
in monthly installments aggregating
$84,172, including interest at fixed
rates of 8.95% and 10.95%, due at
various dates through August 2011 9,824,118 9,878,192
Notes payable to Heller Financial
Corporation payable in monthly
installments aggregating
$48,043, including interest at
fixed rates of 9.32% and 9.55%,
due at various dates
through October 2005 2,001,719 2,367,538
Notes payable to various banks,
payable in monthly installments
aggregating $3,853, including interest
at fixed and floating rates of 10.0%
at December 30, 1997, due at various
dates through August 2006 180,818 205,659
---------- ----------
20,005,343 18,859,322
Less current portion 12,899,728 1,428,630
---------- ----------
$ 7,105,615 $17,430,692
========== ==========
All borrowings through Heller Financial Corporation are part of
borrowing agreements which require, among other conditions, that
the Partnership maintain certain financial ratios which include 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. Subsequent to year-end,
management intends to refinance this debt with Franchise Mortgage
Acceptance Company (FMAC) over fifteen years at an interest rate
of approximately 9%.
All borrowings through FMAC also require that the Partnership
maintain a fixed charge 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 requirement during and subsequent
to year ended December 30, 1997. Accordingly, the entire amount
of these borrowings is reflected in the current portion of long-
term debt. Subsequent to year-end, management intends to
refinance the amounts with FMAC over fifteen years at an interest
rate of approximately 9% bringing the Partnership into compliance
with the fixed charge coverage ratio.
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
($382,773 at December 30, 1997), referred to as the "Performance
Guarantee Amount" (PGA). The PGA is paid monthly and to the
extent 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 of $280,062, of which $10,301 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 $280,062 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.
Along with the anticipated refinancing of FMAC debt, Intrust Bank
made a commitment to the Partnership to refinance $3,000,000 of
its notes payable over ten years. Of the remaining notes payable
to Intrust Bank, $3,948,688 is anticipated to be refinanced with
FMAC under terms similar to those described previously. The
$3,000,000 in notes payable being refinanced by Intrust Bank is
classified in the accompanying balance sheet reflecting the terms
of the refinancing.
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: 1998
- - $12,899,728; 1999 - $1,965,440; 2000 - $1,347,347; 2001 -
$1,242,550; and 2002 - $506,120.
Cash paid for interest was $1,943,870, $1,383,668 and $1,293,773
for the years ended December 30, 1997, December 31, 1996, and
December 26, 1995, 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 $27,500 for each of the years ended
December 30, 1997, December 31, 1996 and December 26, 1995.
Total minimum and contingent rent expense under all operating
lease agreements were as follows:
1997 1996 1995
---- ---- ----
Minimum rentals $780,143 $826,696 $810,525
Contingent rentals 101,657 171,144 186,355
Future minimum payments under capital leases and noncancelable
operating leases with an initial term of one year or more at
December 30, 1997, are as follows:
Operating
Leases With Operating
Capital Unrelated Leases With
Leases Parties Affiliates
------- ------- ----------
1998 $ 302,745 $ 609,298 $ 30,250
1999 312,964 502,762 30,250
2000 319,156 354,844 30,250
2001 322,404 279,568 30,250
2002 322,404 222,269 7,563
Thereafter 2,301,709 1,317,926 -
--------- --------- -------
Total minimum payments 3,881,382 $3,286,667 $ 128,563
Less interest 2,236,534 ========= =======
---------
1,644,848
Less current portion 36,492
---------
$1,608,356
=========
Amortization of property under capital leases, determined on the
straight-line basis over the lease terms totaled $150,288,
$165,360, and $165,360 for the years ended December 30,1997,
December 31, 1996 and December 26, 1995, respectively, and is
included in depreciation and amortization in the accompanying
consolidated statements of operations. The cost of property
under capital leases was $2,369,199 at December 30, 1997 and
December 31, 1996, and accumulated amortization on such property
under capital leases was $1,273,066 and $1,122,778 at December
30, 1997 and December 31, 1996, 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 2, 1998, the Partnership declared a distribution of
$.05 per Unit to all Unitholders of record as of January 12,
1998. The total distribution is not reflected in the December
30, 1997, 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 26, 1995
and December 31, 1996 1,715 $8.50-9.00
Terminated (800) 9.00
Expired (290) 9.00
----- -----
Balance at December 30, 1997 625 $8.50
===== =====
At December 30, 1997, options on 625 Units were exercisable.
Unit options available for future grants totaled 48,611 at
December 30, 1997 and 47,521 at December 31, 1996.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the
Partnership in estimating its fair value disclosures for
financial instruments:
Cash and cash equivalents: The carrying amount reported in
the balance sheet for cash and cash equivalents approximates
its fair value.
Certificates of deposit: The carrying amount reported in the
balance sheet for certificates of deposit approximates their fair
value.
Notes receivable: The carrying amount reported in the balance
sheet for notes receivable approximates their 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 $ 509,398 $ 509,398 $ 178,826 $ 178,826
Certificates of
deposit -- -- 157,635 157,635
Notes receivable 148,286 148,286 198,041 198,041
Long-term debt 20,005,343 19,977,037 18,859,322 18,681,436
9. 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.
10. EXTINGUISHMENT OF DEBT
During November 1995, the Partnership refinanced notes payable to
various banks for approximately $1,198,000. As a result of this
transaction, the Partnership incurred an extraordinary loss of
$142,491, which represents penalties incurred by the Partnership
for the early extinguishment of debt and the write-off of all
unamortized financing cost associated with such notes.
11. CLASS B AND C RESTRICTED UNITS SOLD TO EMPLOYEES
During 1995, the Partnership issued 39,500 Class B and C units to
certain employees as a bonus. This resulted in the Partnership
recognizing $99,000 as compensation expense which is included
under the caption of "General and administrative - other" in the
accompanying statements of operations.
On July 1, 1994, the Partnership entered into a Unit Purchase
Agreement with certain employees whereby the employees shall
purchase Class B and C Units every six months beginning July 1,
1994, and continuing until January 1, 1998. The purchase price
per unit is $2.00 with a total of 75,000 units to be purchased
over three and one-half years. During 1997, 1996 and 1995 the
Partnership issued 47,250, 30,750 and 18,750 Class B and C units
for $94,500, $58,500, and 37,500, 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 and
1995 was $6,300 and $25,200, respectively, which is included as
restaurant labor and benefits in the accompanying statements of
income. The Units are subject to a repurchase agreement whereby
the Partnership has agreed to repurchase the Units in the event
the employee is terminated for an amount not to exceed $3.00 per
unit.
12. PARTNERS' CAPITAL
During 1997 and 1995, the Partnership purchased 1,469 and 10,155
Class A Income Preference Units for $3,037 and $64,668,
respectively. These Units were retired by the Partnership.
13. INVESTMENTS
The Partnership purchased common stock of a publicly traded
company for investment purposes. The following is a summary of
available-for-sale securities:
Gross Estimated
Unrealized Fair
Cost Gains/(Losses) Value
---- -------------- -----
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 as a separate component of
partners' capital (deficiency).
14. INVESTMENT IN AFFILIATE
On March 13, 1996, the Partnership purchased a 45% interest in a
newly formed limited partnership, Magic, that currently owns
and operates twenty-seven Pizza Hut restaurants in Oklahoma for
$3,000,000 in cash. The Partnership accounts for its investment
in the unconsolidated affiliate using the equity method
of accounting. As of December 30, 1997 a difference of
$1,066,190 exists between the carrying amount of the Partnership's
investment in Magic and its ownership in the underlying equity in
net assets. This difference represents the excess purchase price
of the equity investment in the net assets acquired and is being
amortized over 29 years. The following condensed financial
statements of Magic 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. Magic was not
in compliance with the required fixed charge coverage ratio
as defined under the borrowing agreement with FMAC during and
subsequent to the year ended December 30, 1997. As a result,
Magic has classified the borrowings under this agreement as a
current liability. Magic 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 Magic. However, Magic's continuation as a going concern
is dependent upon its ability to generate sufficient cash flow to
meet its financing obligations on a timely basis, to obtain
additional financing or refinancing as may be required, and
ultimately to obtain profitability. The financial statements do
not include any adjustments relating to the recoverability and
classification of the liabilities that might be necessary should
Magic be unable to continue as a going concern. Condensed
financial statements for Magic are as follows:
(Unaudited)
December 30, December 31,
1997 1996
------------ ------------
Balance sheet:
Current assets $ 543,764 $ 995,259
Noncurrent assets 9,946,529 10,624,688
---------- ----------
$10,490,293 $11,619,947
========== ==========
Current liabilities $ 6,608,680 $ 3,221,052
Noncurrent liabilities 2,260,317 5,115,950
Partners' equity 1,621,296 3,282,945
---------- ----------
$10,490,293 $11,619,947
========== ==========
(Unaudited)
For the For the 41
Year ended weeks ended
December 30, December31,
1997 1996
----------- ----------
Statement of Operations:
Revenues $15,712,313 $12,805,324
Cost of sales 4,308,896 3,670,348
Operating expenses 12,297,095 9,531,718
Operating loss (893,678) (396,742)
Other expense (principally interest) 791,610 437,976
---------- ----------
Net loss $(1,685,288) $ (834,718)
========== ==========
In November, 1996 Magic notified HGO that it is seeking to
terminate HGO's interest in Magic pursuant to the terms of the
Partnership Agreement for alleged violations of the Pizza Hut
Franchise Agreement and the alleged occurrence of an Adverse
Terminating Event as defined in the Partnership Agreement. Magic
alleges that HGO contacted and offered employment to a
significant number of the management employees of Magic. HGO has
denied that such franchise violations have occurred and that it
made any misrepresentations at the formation of Magic. The
matter has been submitted to arbitration. A hearing for the
arbitration will be held through the American Arbitration
Association during the week of April 6, 1998. In the arbitration
proceeding, HGO has asserted that it was fraudulently induced to
enter into the Magic Partnership Agreement by Restaurant
Management Company of Wichita, Inc. and was further damaged by
alleged mismanagement of the operations. HGO is seeking recision
of the purchase and contribution of the restaurants or in the
alternative compensatory and punitive damages. The parties
continue to seek to resolve the matter through negotiation.
If Magic prevails, the interest of HGO in Magic will be
purchased by Magic and the interest of the Partnership will
likely increase from 45% to 60%. The amount of damages sought by
HGO has not been enumerated.
15. QUARTERLY FINANCIAL SUMMARIES (Unaudited)
Summarized quarterly financial data for 1997 and 1996 are as
follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
1997 ------- ------- ------- -------
- ----
Net Sales $9,619,205 10,003,638 9,929,607 9,424,891
Gross Profit 7,067,913 7,253,779 7,242,465 6,826,812
Income (loss)
from operations 427,413 412,641 369,051 (775,680)(a)
Net loss (125,433) (119,142) (180,421) (1,568,398)(b)
Basic and diluted
net loss per unit (.03) (.03) (.05) ( .39)
1996
- ----
Net Sales $9,855,670 9,887,850 10,032,758 10,648,675
Gross Profit 7,291,643 7,337,497 7,295,948 7,736,879
Income from
operations 1,026,586 1,042,716 360,798 646,243
Net income (loss) 697,699 790,264 (70,775) 166,725
Basic and diluted
net income (loss)
per unit .18 .20 (.02) .04
Fourth quarter loss includes:
(a) $792,219 loss on restaurant closings
$353,160 equity in loss on restaurant closings from Magic
$ 66,868 equity in interest expense from FMAC loan pool
default from Magic
(b) $280,062 interest expense from FMAC loan pool default
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 19, 1998, with
respect to the consolidated financial statements of American
Restaurant Partners, L.P. included in the Annual Report
(Form 10-K) for the year ended December 30, 1997.
/s/Ernst & Young LLP
Wichita, Kansas
March 19, 1998
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.
OKLAHOMA MAGIC, L.P.
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 30, 1997 and December 31, 1996
Unrealized
gain (loss)
on securities
General Limited available
Partner Partners for sale Total
------- -------- ---------- -----
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
====== ========= ======= =========
See accompanying notes.
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 will pay 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 (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 Franchise Mortgage Acceptance Company
(FMAC) are part of loans "pooled" together with other franchisees
in good standing and approved restaurant concepts, as defined,
and sold to the secondary market. The Partnership has
provided to FMAC a limited, contingent guarantee equal to 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 its 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.