-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DkNzfZXk/5ZiFO5Dd4zwJfuwvVmmNg+3eaFIzfAiCig8Yf17RkP3VVQgXyHrI4O/ Zw2Mm6iu9KY9FEwQFFYxyQ== 0000817900-98-000009.txt : 19980326 0000817900-98-000009.hdr.sgml : 19980326 ACCESSION NUMBER: 0000817900-98-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971230 FILED AS OF DATE: 19980325 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN RESTAURANT PARTNERS L P CENTRAL INDEX KEY: 0000817900 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 481037438 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09606 FILM NUMBER: 98572381 BUSINESS ADDRESS: STREET 1: 555 N WOODLAWN STE 3102 CITY: WICHITA STATE: KS ZIP: 67208 BUSINESS PHONE: 3166845119 MAIL ADDRESS: STREET 1: 555 N WOODLAWN STREET 2: SUITE 3102 CITY: WICHITA STATE: KS ZIP: 67208 10-K 1 1997 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 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. EX-27 2 ARTICLE 5 FDS ANNUAL
5 This schedule contains summary financial information extracted from the consolidated condensed financial statements of American Restaurant Partners, L.P. at December 30, 1997 and is qualified in its entirety by reference to such financial statements. YEAR DEC-30-1997 DEC-30-1997 509398 195751 650651 0 311516 1486594 29309982 12481826 22226145 17198587 0 0 0 0 (4011452) 22226145 38977341 38977341 10586372 38543916 0 0 2476304 (1993394) 0 (1993394) 0 0 0 (1993394) (0.50) 0
-----END PRIVACY-ENHANCED MESSAGE-----