10-K 1 arp.txt ARP 2003 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 For the fiscal year ended December 30, 2003 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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.) 3020 North Cypress Road, Suite 100 Wichita, Kansas 67226 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (316) 634-1190 Securities registered pursuant to Section 12(b) of the Act: None Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Class A Income Preference Units of None 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) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No ----- ----- As of July 1, 2003 the aggregate market value of the income preference units held by non-affiliates of the registrant was $2,380,126. As of March 1, 2004, 665,285 shares of income preference units were outstanding. No documents are incorporated by reference. PART I Item 1. Business ------------------ General Development of Business ------------------------------- American Restaurant Partners, L.P. (ARP) was formed in connection with a public offering of Class A Income Preference Units in 1987. ARP owns and operates Pizza Hut restaurants through its three subsidiaries, American Pizza Partners, L. P. (APP), Oklahoma Magic, L.P. (Magic) and Mountain View Pizza LLC (MVP). ARP owns a 99% limited partnership interest in APP. APP, in turn, owns a 99% limited partnership interest in Magic and an 87% membership interest in MVP. The remaining 13% membership interest in MVP is owned by Restaurant Management Company of Wichita, Inc. (the Management Company). The Management Company is related to ARP's managing general partner through common ownership. ARP's managing general partner is RMC American Management, Inc. (RAM). RAM is also the managing general partner of APP and Magic. RAM owns a 1% general partnership interest in ARP and Magic. RAM, along with RMC Partners, L. P. (RMC), together own an aggregate 1% general partnership interest in APP. RMC is related to RAM through common ownership. The limited partners of ARP have the right to replace the general managing partner of ARP with a vote of at least 75% of the limited partners' units. By agreement the replacement of RAM as ARP's managing general partner would also cause the replacement of RAM as the managing general partner of APP and Magic. Therefore the limited partners of ARP are considered to be in control of both ARP and each of its subsidiaries. Effective May 13, 2003, the Management Company purchased the stock of Winny Enterprises, Inc. ("Winny"), a company that owned and operated thirteen Pizza Hut restaurants in Colorado, for $260,000. Winny was then merged into a newly formed limited liability company, Mountain View Pizza, LLC ("MVP"), the surviving entity resulting from the merger. ARP, through APP, contributed $1,740,000 to MVP, effectively acquiring an 87% ownership interest in MVP. As noted above, the remaining ownership interests are held by the Management Company. APP, Magic and MVP are hereinafter collectively referred to as the "Operating Partnerships". As of December 30, 2003, the Partnership owned and operated a total of 100 restaurants (collectively, the "Restaurants"). APP owned and operated 53 traditional "Pizza Hut" restaurants, 6 "Pizza Hut" delivery/carryout facilities and 2 dualbrand locations. Magic owned and operated 17 traditional "Pizza Hut" restaurants and 9 "Pizza Hut" delivery/carryout facilities. MVP owned and operated 8 traditional "Pizza Hut" restaurants and 5 "Pizza Hut" delivery/carryout facilities. During 2003, Magic closed one "Pizza Hut" traditional restaurant. The following table sets forth the states in which the Partnership's Pizza Hut Restaurants are located: Units Units Units Units Open At Purchased in Closed in Open At 12-31-02 2003 2003 12-30-03 -------- ---- ---- -------- Georgia 8 -- -- 8 Louisiana 1 -- -- 1 Montana 18 -- -- 18 Texas 26 -- -- 26 Wyoming 8 -- -- 8 Oklahoma 27 -- 1 26 Colorado - 13 -- 13 -- -- -- --- Total 88 13 1 100 == == == === 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 Yum! Brands, Inc. ("YUM"). Since it was founded in 1958, Pizza Hut has become the world's largest pizza restaurant chain in terms of both sales and number of restaurants. As of year-end 2003, there were over 6,400 units in the United States and more than 4,500 units located outside the United States (both excluding licensed units). PHI owns and operates approximately 28% of the Pizza Hut restaurants in the United States and 59% of those in foreign countries. 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. Pizza Hut also serves the Big New Yorker Pizza, a 16" traditional crust pizza. Food products not prescribed by PHI may only be offered with the prior express approval of PHI. PHI maintains a research and development department that 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 freestanding, one-story building, with a wood, brick or stucco exterior. Most Pizza Hut restaurants still feature the distinctive red roof. The restaurants generally contain 1,800 to 3,000 square feet, including kitchen and storage areas, and have seating capacity for 75 to 140 persons. The typical property site will accommodate parking for 30 to 70 vehicles. 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 30 years. The Partnership has the option at the expiration of the initial or any subsequent term of the franchise agreement to renew the franchise granted thereunder for a renewable term of 20 years, subject to the approval of the franchisor. 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 for all food, beverages, furnishings, interior and exterior decor, supplies, fixtures and equipment for each Pizza Hut restaurant is 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 in the United States. 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 1.75% 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 2.5% 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. 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. Purchasing is substantially provided by the Unified Foodservice Purchasing Cooperative to all members who consist of Taco Bell, KFC, and Pizza Hut franchisees and the restaurants operated by YUM. Franchise Fees. An initial franchise fee of $15,000 is payable to PHI prior to the opening of each new restaurant. Service Fees. Franchisees must pay monthly service fees to PHI based on each restaurant's gross sales. The monthly service fee under each of the Partnership's Franchise Agreements is 4% of gross sales, or, if payment of a percentage of gross sales of alcoholic beverages is prohibited by state law, the monthly service fee is 0.5% more than the applicable service fee rate for the gross food and nonalcoholic beverage sales. Fees are payable monthly 20 days 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. The current franchise agreement, effective January 1, 2003, requires an increase in the monthly service fees for delivery restaurants from 4.0% to 4.5% of gross sales beginning January 1, 2010, 4.75% of gross sales as of January 1, 2020, and 5.0% of gross sales as of January 1, 2030. Upgrade Requirements. Under the terms of the Franchise Agreements, the Partnership is required to upgrade seventy-nine of their restaurants. Nine of the seventy-nine restaurants require a "partial reimage" which consists of maintenance of the exterior and interior of the restaurant and new signage. Twenty-five of the seventy-nine restaurants require a "full reimage", which consists of signage, paint, dining room finishes, dining room furniture and counters and buffet (which may be new or refurbished), new smallwares, a fresh parking lot and clean and fresh restrooms. The full and partial reimages must be completed by September 30, 2008. The remaining forty-five restaurants require a "major asset action" which includes substantial renovation, a complete rebuilding of an existing restaurant at the same location, or a relocation of an existing restaurant to a new location. Six of the major asset actions must be completed by December 31, 2005; a total of twenty must be completed by December 31, 2008; a total of thirty-one must be completed by December 31, 2010; and all forty-five must be completed by December 31, 2012. If the Partnership fails to upgrade five of the six major asset actions required by December 31, 2005, such upgrade deficiency shall constitute a "reversionary event," whereby the Franchise Agreements expire March 1, 2010, with one fifteen year renewal available. If the Partnership fails to upgrade all six of the major asset actions required by December 31, 2005, the Partnership will incur a "monetary penalty" of an additional one percent monthly service fee on the restaurants for which they are not in compliance. If the Partnership fails to meet the major asset actions required at December 31, 2008, December 31, 2010 or December 31, 2012 the Partnership will incur the monetary penalty of an additional one percent monthly service fee on the restaurants for which they are not in compliance. As of December 31, 2003, the Partnership had completed three of the six major asset actions required by December 31, 2005. Management anticipates the Partnership will be able to meet all of the upgrade requirements prior to the dates required. No Transfer or Assignment without Consent. No rights or interests granted to franchisees under the Franchise Agreements may be sold, transferred or assigned without the prior written consent of PHI which may not be unreasonably withheld if certain conditions are met. Additionally, PHI has a first right of refusal to purchase all or any part of a franchisee's interests if the franchisee proposes to accept a bona fide offer from a third party to purchase such interests and the sale would result in a change of control of the franchisee. PHI requires that the principal management officials of a franchisee retain a controlling interest in a franchisee that is a corporation or partnership. Default and Termination. Franchise Agreements automatically terminate in the event of the franchisee's insolvency, dissolution or bankruptcy. In addition, Franchise Agreements automatically terminate if the franchisee attempts an unauthorized transfer of a controlling interest of the franchise. PHI, at its option, may also unilaterally terminate a Franchise Agreement if the franchisee (i) is convicted of a felony, a crime of moral turpitude or another offense that adversely affects the Pizza Hut system, its trademarks or goodwill, (ii) discloses, in violation of the Franchise Agreement, confidential or proprietary information provided to it by PHI, (iii) knowingly or through gross negligence maintains false books or records or submits false reports to PHI, (iv) conducts the business so as to constitute an imminent danger to the public health, or (v) receives notices of default on three (3) or more occasions in twelve (12) months, or five (5) or more occasions in thirty-six (36) months even if each default had been cured. A termination under item (v) will affect only the individual restaurants in default, unless the defaults relate to the franchisee's entire operation, or are part of a common pattern or scheme, in which case all of the franchisee's rights will be terminated. Further, at its option, but only after thirty (30) days written notice of default and the franchisee's failure to remedy such default within the notice period, PHI may terminate a Franchise Agreement if the franchisee (i) fails to make any required payments or submit required financial or other data, (ii) fails to maintain prescribed restaurant operating standards, (iii) fails to obtain any required approval or consent, (iv) misuses any of PHI's trademarks or otherwise materially impairs its goodwill, (v) conducts any business under a name or trademark that is confusingly similar to those of PHI, (vi) defaults under any lease, sublease, mortgage or deed of trust covering a restaurant, (vii) fails to procure or maintain required insurance, or (viii) ceases operation without the prior consent of PHI. Management believes that the Partnership is in compliance in all material respects with its current Franchise Agreements; neither the predecessors to RMC nor the Partnership has ever had a Franchise Agreement terminated by PHI. In addition to items (i) through (viii) noted in the preceding paragraph, the Franchise Agreements allow PHI to also terminate a Franchise Agreement after thirty (30) days written notice if the franchisee attempts an unauthorized transfer of less than a controlling interest. A termination under these items will affect only the individual restaurants in default, unless the defaults relate to the franchisee's entire operation, in which case all of the franchisee's rights will be terminated. Tradenames, Trademarks and Service Marks. "Pizza Hut" is a registered trademark of PHI. The Franchise Agreements license franchisees to use the "Pizza Hut" trademark and certain other trademarks, service marks, symbols, slogans, emblems, logos, designs and other indicia or origin in connection with their Pizza Hut restaurants and all franchisees agree to limit their use of such marks to identify their restaurants and products and not to misuse or otherwise jeopardize such marks. The success of the business of the Restaurants is significantly dependent on the ability of the Partnership to operate using these marks and names and on the continued protection of these marks and names by PHI. Future Expansion. Under the terms of the Franchise Agreements, the Partnership has the right to open additional Pizza Hut restaurants within certain designated territories. The Partnership is not obligated to open any new restaurants in 2004 or future years. Seasonality ----------- The Partnership does not consider its operations to be seasonal to any material degree. 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, carry-out and delivery customers. Government Regulation --------------------- The Partnership and the Restaurants are subject to various government regulations, including zoning, sanitation, health, safety and alcoholic beverage controls. Restaurant employment practices are also governed by minimum wage, overtime and other working condition regulations which, to date, have not had a material effect on the operation of the Restaurants. The Partnership believes that it is in compliance with all laws and regulations which govern its business. In order to comply with the regulations governing alcoholic beverage sales in Montana, Texas, Wyoming and Oklahoma, the licenses permitting beer sales in certain Restaurants in those states are held in the name of resident persons or domestic entities to whom they were originally issued, and are utilized by the Partnership under lease arrangements with such resident persons or entities. Because of the varying requirements of various state agencies regulating liquor and beer licenses, the Partnership Agreement provides that all Unitholders and all other holders of limited partner interests must furnish the Managing General Partner with all information it reasonably requests in order to comply with any requirements of these state agencies, and that the Partnership has the right to purchase all Units held by any person whose ownership of Units would adversely affect the ability of the Partnership to obtain or retain licenses to sell beer or wine in any Restaurant. Employees --------- As of March 1, 2004, the Partnership did not have any employees. The Operating Partnerships had approximately 2,700 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. The Partnership is not a party to any collective bargaining agreements and believes its employee relations to be satisfactory. The Restaurants' employees are supervised by employees of the Management Company which has its principal offices in Wichita, Kansas. The Management Company has a total of 49 employees which devote all or a significant part of their time to management of the Restaurants. In addition, the Partnership may employ certain management officials of the Management Company on a part-time basis. Employee relations are believed to be satisfactory. Financial Information About Foreign and Domestic Operations and Export ---------------------------------------------------------------------- Sales ----- The Partnership operates no restaurants in foreign countries. Item 2. Properties ------------------ The following table lists the location by state of Restaurants as of December 30, 2003. Leased From Leased From Unrelated Third Affiliate of the Parties General Partners Owned Total ------- ---------------- ----- ----- Colorado 12 - 1 13 Georgia 2 - 6 8 Louisiana - - 1 1 Montana 9 - 9 18 Oklahoma 24 - 2 26 Texas 16 - 10 26 Wyoming 1 1 6 8 -- -- -- --- Total 64 1 35 100 == == == === Six of the properties are subject to ground leases from unrelated third parties. The property leased from an affiliate of the General Partners is subject to a mortgage or deed of trust. Most of the properties, including that owned by an affiliate of the General Partners are leased for a minimum term of at least five years and are subject to one or more five-year renewal options. Management believes leases with initial or optional renewal periods expiring within the next five years can be renewed for multiple-year periods, or the property can be purchased, without significant difficulty or unreasonable expense. 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 freestanding, one-story building, with a wood, brick or stucco exterior. Most Pizza Hut restaurants still feature the distinctive red roof. The restaurants generally contain 1,800 to 3,000 square feet, including kitchen and storage areas, and have seating capacity for 75 to 140 persons. The typical property site will accommodate parking for 30 to 70 vehicles. 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 the Partnership's existing restaurant facilities are approximately $150,000 for land, $250,000 for the building and $135,000 for equipment and furnishings for each unit. The cost of land, building and equipment for a typical Pizza Hut restaurant vary with location, size, construction costs and other factors. The Partnership estimates the average cost to construct and equip a new restaurant in its existing franchise territories is approximately $600,000 to $900,000 including the cost of land acquisition. Delivery/carryout facilities vary in size and appearance. These facilities are generally leased from unrelated third parties. The Partnership estimates that the capital investment necessary for a new delivery/carryout unit is approximately $200,000 to $300,000 in equipment and leasehold improvements. Item 3. Legal Proceedings -------------------------- As of December 30, 2003, 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 Partnership offers a Qualified Matching Service, whereby the Partnership will match persons desiring to buy units with persons desiring to sell units. No units were matched during 2003 and 2002. Market prices for units during 2003 and 2002 were: Calendar Period High Low ----- ----- 2003 All Quarters $3.50 $3.50 2002 First Quarter $3.25 $3.25 Second Quarter $3.25 $3.25 Third Quarter $3.25 $3.25 Fourth Quarter $3.50 $3.25 As of December 30, 2003, approximately 790 unitholders owned American Restaurant Partners, L.P. Class A Income Preference Units of limited partner interest. Information regarding the number of unitholders is based upon holders of record excluding individual participants in security position listings. Cash distributions to unitholders were: Per Record Date Payment Date Unit ------------------ ---------------- ----- 2003 January 13, 2003 January 24, 2003 $.125 April 12, 2003 April 25, 2003 .125 July 12, 2003 July 25, 2003 .100 October 12, 2003 October 31, 2003 .100 ---- Cash distributed during 2003 $.450 ==== 2002 January 11, 2002 January 25, 2002 $.100 April 12, 2002 April 26, 2002 .155 July 12, 2002 July 26, 2002 .155 October 12, 2002 October 25, 2002 .150 ---- Cash distributed during 2002 $.560 ==== 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
(d) (d) (d) (d) December 31, December 25, December 26, December 28, December 30, 2002 2001 2000 1999 2003 (restated) (restated) (restated) (restated) ---------- ---------- ---------- ---------- ---------- Income statement data: Net sales $ 71,967 $ 69,392 $ 63,284 $ 59,964 $ 57,311 Income from operations 5,115 5,863 4,804 5,034 3,817 Income from continuing operations 2,299 2,571 1,701 1,230 1,164 Income from continuing operations per Partnership unit 0.58 0.67 0.46 0.33 0.32 Net income 2,699 2,545 1,679 1,233 1,198 Net income per Partnership unit (a) 0.68 0.66 0.45 0.33 0.33 Balance sheet data: Total assets $ 33,541 $ 29,604 $ 31,719 $ 31,791 $ 29,197 Long-term debt 28,329 25,099 29,074 29,885 27,649 Obligations under capital leases 3,533 4,015 2,592 2,572 1,495 Partners capital (deficiency): General Partners (7) (8) (8) (9) (9) Class A 5,267 5,213 5,131 5,099 5,395 Class B and C (6,905) (7,655) (9,146) (9,416) (9,252) Notes receivable from employees (704) (577) (591) (749) (956) Cost in excess of carrying value of assets acquired (2,076) (2,076) (1,859) (1,859) (1,324) Cumulative comprehensive loss - (1) - - - Cash dividends declared per unit 0.45 0.56 0.40 0.40 0.45 Statistical data: Capital expenditures: (b) Existing Restaurants $ 1,528 $ 947 $ 1,132 $ 2,092 $ 1,078 New or Replacement Restaurants - 1,476 924 147 300 Average weekly sales per Restaurant: (c) Red Roof 14,678 15,136 14,374 13,573 12,683 Delivery/carryout facility 13,528 14,529 13,724 12,591 11,657 Restaurants in operation at end of period 100 88 87 86 87
NOTES TO SELECTED FINANCIAL DATA (a) Net income is allocated to all partners in accordance with their respective units in the Partnership with all outstanding units being treated equally. (b) Capital expenditures include the cost of land, buildings, new and replacement restaurant equipment and refurbishment of leasehold improvements. Capital expenditures for existing restaurants represent such capitalized costs for all restaurants other than newly constructed restaurants. (c) Average weekly sales were calculated by dividing net sales by the weighted average number of restaurants open during the period. The quotient was then divided by the number of days in the period multiplied times seven days. (d) The income statement data for the years ended December 31, 2002, December 25, 2001, December 26, 2000 and December 28, 1999 are restated to show the effect of the fair value adjustment to the variable unit plan (as described in Note 3 of the accompanying Consolidated Financial Statements), as well as the effect of reclassifying the operations of a restaurant closed in 2003 to discontinued operations for each of those years (as described in Note 18 of the accompanying Consolidated Financial Statements). 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, 2003, December 31, 2002 and December 25, 2001, excluding the effects of the consolidation of MVP. The following table separates the effects of consolidating MVP's loss from operations from the consolidated totals for the year ended December 30, 2003, in order to provide a more meaningful basis for a comparative discussion of these results versus the years ended December 31, 2002 and December 25, 2001. Comparisons of 2003 to 2002 and 2001 are also affected by an additional week of results in the 2002 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. MVP had a net loss of $155,914 for the period from the acquisition date, May 13, 2003, through December 30, 2003. Comparable restaurant sales decreased 1.1% from the date of acquisition. Other factors that contributed to MVP's net losses included relocation expense of $35,000, in addition to legal and beer license fees related to transferring beer licenses from Winny to MVP totaling $42,000. Labor expenses were also high due to increasing staffing in anticipation of improving service and sales levels.
Year Ended ---------------------------------------------------------------------------- December 31, December 25, 2002 2001 December 30, 2003 (restated) (restated) -------------------------------------------- ------------ ------------ Consolidated MVP Comparable Consolidated Consolidated -------------------------------------------- ------------ ------------ Net sales $71,967,301 $ 5,437,371 $66,529,930 $69,392,193 $63,284,057 Operating costs and expenses: Cost of sales 17,427,985 1,398,390 16,029,595 16,441,678 15,659,095 Restaurant labor and benefits 20,781,939 1,687,832 19,094,107 19,860,559 18,302,400 Advertising 4,617,649 373,756 4,243,893 4,177,953 3,869,801 Other restaurant operating expenses exclusive of depreciation and amortization 15,443,928 1,398,998 14,044,930 13,749,341 12,350,070 General and administrative: Management fees - related party 4,425,917 271,881 4,154,036 4,318,294 3,946,989 Fair value adjustment to variable unit plan (272,251) - (272,251) 277,371 150,193 Other 1,238,910 121,039 1,117,871 1,435,707 1,107,414 Depreciation and amortization 3,188,193 262,401 2,925,792 3,106,056 3,093,898 Loss on restaurant closings - - - 161,787 - ---------- ---------- ---------- ---------- ---------- Income (loss) from operations $ 5,115,031 $ (76,926) $ 5,191,957 $ 5,863,447 $ 4,804,197 ========== ========== ========== ========== ==========
Net Sales --------- Net sales from continuing operations for the year ended December 30, 2003 decreased $2,862,000 from net sales from continuing operations of $69,392,000 in 2002 to net sales from continuing operations of $66,530,000 in 2003, a 4.1% decrease. The additional week in 2002 accounted for approximately 2 percentage points of the lower sales in 2003. Comparable restaurant sales in 2003 decreased 2.2% from 2002. These decreases were not unexpected, as comparable restaurant sales in 2002 were 5.1% higher than in 2001. The sales increases in 2002 were primarily attributable to the successful introduction of a new product, P'ZONE in the first quarter of 2002. Net sales from continuing operations for the year ended December 31, 2002 increased $6,108,000 from net sales from continuing operations of $63,284,000 in 2001 to net sales from continuing operations of $69,392,000 in 2002, a 9.7% increase. The additional week in 2002 accounted for approximately 2 percentage points of the increase. Comparable restaurant sales increased 5.1% over the prior year. The 2002 sales increase was primarily attributable to the successful introduction of a new product, P'ZONE in the first quarter of 2002. The sales increase was also attributable to a price increase the Partnership implemented at the end of the third quarter of 2001. Income From Operations ---------------------- Income from continuing operations for the year ended December 30, 2003 decreased $671,000 from $5,863,000 in 2002 (restated as discussed in Note 3 of the accompanying Consolidated Financial Statements) to $5,192,000, a 11.4% decrease. As a percentage of net sales, income from continuing operations decreased from 8.5% of net sales for the year ended December 31, 2002 to 7.8% of net sales for the year ended December 30, 2003. Cost of sales from continuing operations increased as a percentage of net sales from 23.7% in 2002 to 24.1% in 2003 primarily due to promoting more high-cost products in 2003, as well as offering free Cinnamon Sticks with certain orders in the first quarter of 2003. Labor and benefits from continuing operations increased slightly as a percentage of net sales from 28.6% in 2002 to 28.7% in 2003. Advertising from continuing operations increased as a percentage of net sales from 6.0% in 2002 to 6.4% in 2003. This increase was primarily due to a net increase in advertising fees of .25% effective January 1, 2003, as required by the new franchise agreement. Other restaurant expenses from continuing operations increased from 19.8% of net sales in 2002 to 21.1% of net sales in 2003, primarily due to a 10% increase in property and liability insurance premiums and a 37% increase in workers compensation insurance premiums experienced in the last two quarters of 2003. This increase is in addition to premium increases of 40% in property and liability insurance premiums and 60% in workers' compensation insurance premiums experienced by the Partnership for the policy year July 2002 through June 2003. General and administrative expenses from continuing operations decreased as a percentage of net sales from 8.7% in 2002 to 7.5% in 2003, primarily due to a $272,000 credit for the fair value adjustment to the variable unit plan in 2003, compared to a $277,000 charge in 2002 for the same adjustment. The decrease in general and administrative expenses was also due to a decrease in management bonuses paid in 2003 from lower cash flow results. Depreciation and amortization expense from continuing operations decreased slightly to 4.4% of net sales in 2003 compared to 4.5% of net sales in 2002. The 2002 income from operations included a loss on restaurant closings of $162,000 for two stores closed and replaced in 2002. Income from continuing operations (restated for both 2002 and 2001 as discussed in Note 3 of the accompanying Consolidated Financial Statements) for the year ended December 31, 2002 increased $1,059,000 from $4,804,000 to $5,863,000, a 22.0% increase from the year ended December 25, 2001. As a percentage of net sales, income from continuing operations increased from 7.6% of net sales for the year ended December 25, 2001 to 8.4% of net sales for the year ended December 31, 2002. Cost of sales decreased as a percentage of net sales from 24.7% in 2001 to 23.7% in 2002 primarily due to significantly lower cheese costs. The decrease was also due to a decrease in the cost of meat toppings as well as the effect of the price increase the Partnership implemented at the end of the third quarter of 2001. Labor and benefits decreased as a percentage of net sales from 28.9% in 2001 to 28.6% in 2002, primarily due to efficiencies gained at higher sales levels. Advertising decreased slightly as a percentage of net sales from 6.1% in 2001 to 6.0% in 2002. Other restaurant expenses increased from 19.5% of net sales in 2001 to 19.8% of net sales in 2002, primarily due to a 40% increase in property and liability insurance premiums and a 60% increase in workers compensation insurance premiums experienced in the last two quarters of 2002. General and administrative expenses increased as a percentage of net sales from 8.2% in 2001 to 8.7% in 2002, reflecting increased bonuses paid on improved operating results. Depreciation and amortization expense decreased to 4.5% of net sales in 2002 compared to 4.9% of net sales in 2001, primarily as a result of no longer amortizing goodwill in 2002 in accordance with Statement of Financial Accounting Standards (SFAS) 142 (see Note 4 of the accompanying Consolidated Financial Statements). Net Income ---------- Net income increased $154,000 to $2,699,000 for the year ended December 30, 2003 compared to net income of $2,545,000 for the year ended December 31, 2002. The 2002 net income is restated as discussed in Note 3 of the accompanying Consolidated Financial Statements. The 2003 net income included a gain on casualty settlements of $123,000 (see Note 17 of the accompanying Consolidated Financial Statements). The 2003 net income also included income from discontinued operations, net of minority interest, of $400,000. This amount included a gain on buy-out of lease of $409,000, as discussed in Note 18 of the accompanying Consolidated Financial Statements. The 2003 net income also included a net loss of $156,000 recorded on MVP. The 2002 period net income included a loss on sale of investment in unconsolidated affiliate of $234,000. Net income is net of minority interest in income of operating partnerships of $8,000 and 34,000 in 2003 and 2002, respectively. Net income, restated as discussed in Note 3 in Notes to Consolidated Financial Statements, increased $866,000 to $2,545,000 for the year ended December 31, 2002 compared to net income of $1,679,000 for the year ended December 25, 2001. The 2002 period net income included a loss on sale of investment in unconsolidated affiliate of $234,000. The 2001 period net income included a gain on casualty settlement of $159,000 (see Note 3 of the accompanying financial statements). Net income is net of minority interest in income of operating partnerships of $34,000 and $26,000 in 2002 and 2001, respectively. 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, 2003, the Partnership had a working capital deficiency of $6,168,000 compared to a deficiency of $5,818,000 at December 31, 2002. The Partnership routinely operates with a negative working capital position which is common in the restaurant industry and which results from the cash sales nature of the restaurant business and payment terms with vendors. Net Cash Provided by Operating Activities ----------------------------------------- During 2003, net cash provided by operating activities amounted to $4,586,000 compared to $5,269,000 during 2002, a decrease of $683,000. This decrease is primarily attributable to the decrease in income from operations of $671,000. Investing Activities -------------------- Capital expenditures for 2003 were $1,528,000, all of which was for replacement of equipment in existing restaurants, including $241,000 for replacement equipment at restaurants that incurred casualty losses. The Partnership received proceeds totaling $254,000 upon final settlement of the casualty claims. The Partnership also received proceeds of $465,000 related to the buyout of the lease on the restaurant the Partnership closed in 2003. Financing Activities -------------------- Cash distributions paid in 2003 totaled $1,712,000 and amounted to $0.45 per unit. The Partnership's distribution objective, generally, is to distribute all operating revenues less operating expenses (excluding noncash items such as depreciation and amortization), capital expenditures for existing restaurants, interest and principal payments on Partnership debt, and such cash reserves as the managing General Partner may deem appropriate. During 2003, the Partnership's proceeds from long-term borrowings amounted to $3,450,000 of which $400,000 was to purchase land for a replacement restaurant to be built in 2004 and $900,000 was to refinance an existing loan as well as to purchase the land of an existing restaurant. Additionally, $1,740,000 was contributed during the Partnership's acquisition of MVP, of which $1,000,000 was used to pay down long-term debt and the remainder was used to replenish operating capital and pay down operating liabilities. The remaining proceeds from long-term borrowings were used to replenish operating capital. The Partnership plans to open one new restaurant and three replacement restaurants during 2004. Development of these restaurants will be financed through existing lenders. Management anticipates spending approximately $850,000 in 2004 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. Other Matters ------------- On March 13, 1996, the Partnership purchased a 45% interest in Magic, a newly-formed limited partnership, for $3.0 million in cash. Magic owns and operates Pizza Hut restaurants in Oklahoma. In August 1998, Magic purchased a 25% interest in Magic from a former limited partner which effectively increased the Partnership's interest in Magic from 45% to 60%. Therefore, beginning August 11, 1998, Magic's financial statements were consolidated into the Partnership's consolidated financial statements. Prior to August 11, 1998, the Partnership accounted for its investment in Magic using the equity method of accounting. In connection with the consolidation, the Partnership recorded goodwill of $728,000 which represented the excess purchase price of the original equity investment in the net assets acquired, net of subsequent amortization. On July 26, 2000, APP purchased 39% of Magic from the Management Company for $2,500,000 cash and contingent consideration of 233,333 Class B and Class C Partnership Units. The $2,500,000 cash payment was financed by INTRUST Bank over five years at 9.5%. Upon completion of this purchase, the Partnership owned 99% of Magic. The Management Company is considered a related party in that one individual has controlling interest in both the Management Company and the Partnership's general partner. To the extent that the Partnership and the Management Company have common ownership, the transaction was recorded at the Management Company's historical cost. As a result of the transaction, the Partnership recorded goodwill of $1,407,991 and cost in excess of carrying value of assets acquired of $534,962. The contingent consideration involved in the purchase of the additional 39% of Magic was to become due in the event that Magic's cash flow (determined on a 12 month trailing basis) exceeded $2.6 million at any time between January 1, 2001 and December 31, 2005. Magic's cash flow exceeded $2.6 million for the twelve months ended September 24, 2002. As a result, on October 10, 2002, the Partnership issued RMC a total of 233,333 Class B and Class C Units as payment of the remaining balance. The 233,333 units were valued at $3.39 per unit, which was the unit value at September 24, 2002. The contingent consideration was recorded in a manner consistent with the original transaction. The Partnership recorded an increase in limited partners capital of $790,999, which represented the value of the units issued, goodwill of $573,237 and cost in excess of carrying value of assets acquired of $217,762. 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 offers a Qualified Matching Service, whereby the Partnership will match persons desiring to buy units with persons desiring to sell units. Effects of Inflation and Future Outlook --------------------------------------- Inflationary factors such as increases in food and labor costs directly affect the Partnership's operations. Because most of the Partnership's employees are paid on an hourly basis, changes in rates related to federal and state minimum wage and tip credit laws will affect the Partnership's labor costs. The Partnership cannot always affect immediate price increases to offset higher costs and no assurance can be given the Partnership will be able to do so in the future. Management believes there is some likelihood of an increase in the minimum wage during 2004. While an increase in the minimum wage would increase the Partnership's labor costs, due to the uncertainty regarding legislation on the matter, management cannot reliably estimate the potential impact on labor costs at this time. 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. Off-Balance Sheet Arrangements and Contractual Obligations ---------------------------------------------------------- The Partnership has borrowings with Franchise Mortgage Acceptance Company (FMAC) that are part of loans "pooled" together with other franchisees in good standing and approved restaurant concepts, and sold to the secondary market. Under the agreements with FMAC, the Partnership has provided a limited, contingent guarantee equal to a portion of the original loan balance. As of December 30, 2003, the Partnership's remaining guarantee totaled $772,701, for which the Partnership has recorded a liability of $295,914, which management believes is sufficient to cover the potential remaining liability. (See also Note 7 in the accompanying Consolidated Financial Statements.) The Partnership has not provided any other guarantees. The following table shows the Partnership's contractual obligations, including payments due by period: Payments due by period --------------------------------------------------------------- More than Total 2004 2005-2006 2007-2008 5 years ----------- ----------- ----------- ----------- ----------- Long-term debt $28,328,609 $ 3,363,685 $ 6,076,727 $11,305,224 $ 7,582,973 Capital lease obligations 6,517,880 641,672 1,139,471 878,423 3,858,314 Operating lease obligations 10,014,079 1,657,955 2,440,590 1,591,201 4,324,333 Purchase commitments - - - - - ---------- ---------- ---------- ---------- ---------- Total contractual obligations $44,860,568 $ 5,663,312 $ 9,656,788 $13,774,848 $15,765,620 ========== ========== ========== ========== ========== Item 7A. Quantitative and Qualitative Disclosures About Market Risk -------------------------------------------------------------------- The Partnership's earnings are affected by changes in interest rates primarily from its long-term debt arrangements. Under its current policies, the Partnership does not use interest rate derivative instruments to manage exposure to interest rate changes. Due to the small amount of debt at variable interest rates, a hypothetical 100 basis point adverse move (increase) in interest rates along the entire interest rate yield curve would not have a material effect on the Partnership's interest expense and net income over the term of the related debt. This amount was determined by considering the impact of the hypothetical interest rates on the Partnership's borrowing cost. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. 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 9A. Controls and Procedures --------------------------------- As of December 30, 2003, the Partnership, under the supervision and with the participation of its Management, including its Chief Executive Officer and Chief Financial and Accounting Officer, performed an evaluation of the Partnership's disclosure controls and procedures, as contemplated by Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based on that evaluation, the Partnership's Chief Executive Officer and Chief Financial and Accounting Officer concluded that, except as discussed in the following paragraph, such disclosure controls and procedures are effective to ensure that material information relating to the Partnership is made known to them, particularly during the period for which the periodic reports are being prepared. Certain changes were made to the Partnership's controls and procedures that improved our internal controls over financial reporting during the year ended December 30, 2003. During our review of the applicability of certain new accounting principles, we determined that we were incorrectly accounting for our variable unit plan. We implemented additional administrative controls and procedures to correctly account for our employee variable unit plan to ensure that units subject to repurchase are adjusted for changes in their fair value by increasing or decreasing operations with an offsetting entry to partners' capital. This correction resulted in a restatement of our income statements for 2002 and 2001 as discussed in Note 3 to the consolidated financial statements. Except for the corrective measures referred to above, there have been no other changes in the Partnership's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation performed pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended, referred to above. PART III Item 10. Directors and Executive Officers of the Registrant ------------------------------------------------------------ RAM, as the Managing General Partner, is responsible for the management and administration of the Partnership under a Management Services Agreement with the Operating Partnerships. Partnership management services include, but are not limited to: preparing and reviewing projections of cash flow, taxable income or loss, and working capital requirements; conducting periodic physical inspections, market surveys and continual Restaurant reviews to determine when assets should be sold and, if so, determining acceptable terms of sale; arranging any debt financing for capital improvements or the purchase of assets; supervising any litigation involving the Partnerships; preparing and reviewing Partnership reports; communicating with Unitholders; supervising and reviewing Partnership bookkeeping, accounting and audits; supervising the presentation of and reviewing Partnership state and federal tax returns; personnel functions, and supervising professionals employed by the Partnerships in connection with any of the foregoing, including attorneys, accountants and appraisers. The direct management of the Restaurants is performed by the Management Company pursuant to a substantially identical Management Services Agreement with RAM. As compensation for management services, the Management Company will receive a management fee equal to 7% of the gross sales of the Restaurants in APP, 4.5% of gross sales of the Restaurants in Magic and 5.0% of gross sales of the Restaurants in MVP. In addition, the Management Company will be reimbursed for the cost of certain products purchased for use directly in the operation of the Restaurants and for outside legal, accounting, tax, auditing, advertising, and marketing services. Certain other expenses incurred by the Management Company which relate directly to the operation of the Restaurants, including insurance, profit sharing, incentive bonuses and related payroll taxes for supervisory personnel, shall be paid by the Operating Partnerships through RAM. Set forth below is certain information concerning the director and executive officers of both RAM and the Management Company. Present Position with the Management Company and Business Experience for Name Age Past 5 Years ---------------- --- ------------------------------------------- Hal W. McCoy 58 Chairman, Chief Executive Officer 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 132 franchised "Pizza Hut" and "Long John Silver's" restaurants. Hal W. McCoy II 36 President. McCoy II holds a Bachelor of Science degree in Business Administration from the University of Kansas. In 1990, he founded, owned and operated CenTex Pizza Partners, L.P., which operated four Pizza Huts in Texas. After improving the operations and selling CenTex in 1992, he joined the Management Company where he currently oversees all operations for the Pizza Huts and Long John Silver's managed by the Management Company. McCoy II is the son of Hal W. McCoy. Terry Freund 48 Chief Financial and Accounting 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. The Partnership has not adopted a Code of Ethics. Management anticipates reviewing the necessity of a Code of Ethics in 2004. The Partnership does not have an audit committee financial expert serving on its audit committee due to the expense associated with attaining a financial expert relative to the size of the Partnership. 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. Neither RAM nor the Operating Partnerships compensate their officers, directors or partners for services performed, and the salaries of the executive officers of the Management Company are paid out of its management fee and not directly by the Partnership. SUMMARY COMPENSATION TABLE Annual Compensation -------------------------------------------- Name and Allocable to Principal Position Year Salary Bonus Total Partnership ------------------------- ---- -------- -------- -------- ------------ Hal W. McCoy 2003 $153,462 $ 93,817 $247,279 $176,951 Chief Executive Officer 2002 166,566 101,451 268,017 218,734 2001 159,181 60,700 219,881 171,850 Hal W. McCoy II 2003 140,192 68,876 209,068 152,756 President 2002 135,501 92,262 227,763 176,471 2001 128,574 62,252 190,826 139,246 Terry Freund 2003 121,065 62,188 183,253 134,034 Assistant Secretary 2002 115,807 85,917 201,724 148,338 and Chief Financial 2001 109,523 61,009 170,532 126,128 and Accounting Officer Incentive Bonus Plan -------------------- The Management Company maintains a discretionary supervisory incentive bonus plan (the "Incentive Bonus Plan") pursuant to which approximately 28 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 2003, 2002 and 2001 to Mr. McCoy, Mr. McCoy II 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, 2003 was $563,214 of which $146,870 was paid to all executive officers as a group. Bonuses paid under the Incentive Bonus Plan are paid by the Operating Partnerships. The Incentive Bonus Plan in effect for the fiscal year ending December 30, 2003 provides for payment of aggregate supervisory bonuses in an amount equal to 15% of the amount by which the Partnership's income from restaurant operations plus depreciation and amortization expenses exceed a prescribed threshold. The threshold generally represents capital expenditures, interest and principal payments on Partnership debt, and cash distributions. For the fiscal year ended December 30, 2003 the Partnership's income from operations plus depreciation and amortization expenses was $8,303,224. Variable Unit Plan ------------------ The Management Company maintains a variable unit plan whereby the Partnership issues Class B and C Units to certain employees in exchange for either a 10% down payment and notes receivable for the remaining 90% of the purchase price or for notes receivable for 100% of the purchase price. Notes receivable representing 40% or 50%, respectively, of the purchase price, together with interest, are repaid by the cash distributions paid on the units. Non-interest bearing notes receivable representing the remaining 50% of the purchase price are reduced over a 4 1/2 year period through annual charges to compensation expense, as long as the employee remains employed by the Company (see also Note 12 of the accompanying Consolidated Financial Statements.) The amounts recorded as compensation expense under this plan for fiscal years 2003, 2002 and 2001 related to Mr. McCoy II and Mr. Freund are included in the bonus amounts set forth in the preceding summary compensation table. There were no amounts recorded as compensation expense related to Mr. McCoy for the fiscal years 2003, 2002 and 2001. Class A Unit Option Plan ------------------------ The Partnership, APP, RAM and the Management Company have adopted a Class A Unit Option Plan (the "Plan") pursuant to which 75,000 Class A Units of the Partnership are reserved for issuance to employees, including officers, of the Partnership, APP, RAM and the Management Company. Participants will be entitled to purchase a designated number of Units at an option price which shall be equal to the fair 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, 2003. Item 12. Security Ownership of Certain Beneficial Owners and ------------------------------------------------------------ Management ---------- PRINCIPAL UNITHOLDERS The following table sets forth, as of March 1, 2004, 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 716,849 (1) 58.83% 3020 N. Cypress Rd. Suite 100 Wichita, KS 67226 Class B Hal W. McCoy II 90,855 7.46% 3020 N. Cypress Rd. Suite 100 Wichita, KS 67226 Class B John Hunter 116,564 9.57% 117 Lilac Lane San Antonio, TX 78209 Class C Hal W. McCoy 1,372,397 (1) 64.82% 3020 N. Cypress Rd. Suite 100 Wichita, KS 67226 Class C Hal W. McCoy II 152,379 7.20% 3020 N. Cypress Rd. Suite 100 Wichita, KS 67226 Class C John Hunter 106,536 5.03% 117 Lilac Lane San Antonio, TX 78209 (1) Hal W. McCoy beneficially owns 95.75% of RMC Partners, L.P. which owns 671,165 Class B Units and 1,297,265 Class C Units. Mr. McCoy owns 95.65% of RMC American Management, Inc. which owns 3,680 Class C Units. Mr. McCoy has voting authority over the units. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth, as of March 1, 2004, 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 716,849 (1) 58.83% C Hal W. McCoy 1,372,397 (1) 64.82% B Director & all 848,706 (1) 69.66% officers as a group (3 Persons) C Director & all 1,597,311 (1) 75.45% 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 $33,275 and is subject to additional rentals based on a percentage of sales in excess of a specified amount. The lease is a net lease, under which the lessee pays the taxes, insurance and maintenance costs. The lease is for an initial term of 15 years with options to renew for three additional five-year periods. Although this lease was not negotiated at arm's length, RMC believes that the terms and conditions thereof, including the rental rate, is not less favorable to the Partnership than would be available from unrelated parties. Pursuant to the Management Services Agreements (Agreements) entered into June 26, 1987, the Restaurants of APP are managed by the Management Company for a fee equal to 7% of the gross sales of the Restaurants and reimbursement of certain costs incurred for the direct benefit of the Restaurants. Neither the terms and conditions of the Agreements, nor the amount of the fee were negotiated at arm's length. Based on prior experience in managing the Restaurants, however, the Managing General Partner believes that the terms and conditions of the Management Services Agreement, including the amount of the fee, are fair and reasonable and not less favorable to the Partnership than those generally prevailing with respect to similar transactions between unrelated parties. The 7% fee approximated the actual unreimbursed costs incurred by the Managing General Partner in managing the Restaurants when the Agreements were entered into in June of 1987. The 7% fee remains in effect for the life of the Agreements which expire December 31, 2007. Pursuant to a separate Management Services Agreement entered into March 13, 1996, the Restaurants of Magic are managed by the Management Company for a fee equal to 4.5% of the gross sales of the Restaurants and reimbursement of certain costs incurred for the direct benefit of the Restaurants. The terms and conditions of the Agreements were negotiated at arm's length with the former owners of the Oklahoma restaurants who were originally 25% partners in Magic. The Management Company agreed to a reduced fee due to its ownership interest in Magic. The 4.5% fee remains in effect for the remaining life of the Agreements which continues for a period ending with the expiration or termination of the Franchise Agreements. Pursuant to a separate Management Services Agreement entered into May 13, 2003, the Restaurants of MVP are managed by the Management Company for a fee equal to 5.0% 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 Agreement, 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 5% fee remains in effect for the life of the Agreement which continues for a period ending with the expiration or termination of the Franchise Agreements. Item 14. Principal Accountant Fees and Services ------------------------------------------------ Audit Fees The aggregate fees billed to the Partnership by the independent auditors, Grant Thornton, LLP, for the audit of the Partnership's annual financial statements and review of the Partnership's financial statements included with the 10-Q filings were $51,790 and $49,050 for the years ended December 30, 2003 and December 31, 2002, respectively. All Other Fees The aggregate fees billed to the Partnership by Grant Thornton, LLP, for other services including cost classification studies, review of the annual report to shareholders, discussion of the effects of Sarbanes Oxley, and review of the acquisition of MVP, were $16,100 for the year ended December 30, 2003. There were no fees for other services billed for the year ended December 31, 2002. PART IV Item 15. 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 37. (b) Reports on Form 8-K During the second quarter of 2003, the Partnership filed a Form 8-K dated May 20, 2003, reporting an acquisition of assets. INDEX TO EXHIBITS (Item 15(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 a. Settlement Agreement between Oklahoma Magic, L.P. and Hospitality Group of Oklahoma, Inc. F 10.10 Form of 2003 Franchise Agreement between the Partnership and Pizza Hut, Inc. and schedule pursuant to Item 601 of Regulation S-K F-39 23.1 Consent of Grant Thornton LLP F-32 31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO F-33 31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO and CAO F-35 32.1 Section 1350 Certification of CEO F-37 32.2 Section 1350 Certification of CFO and CAO F-38 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. Incorporated by reference to Exhibit 10.10 of the Partnership's Form 10-K dated December 29, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN RESTAURANT PARTNERS, L.P. (Registrant) By: RMC AMERICAN MANAGEMENT, INC. Managing General Partner Date: 3/26/04 By: /s/Hal W. McCoy ------- ------------------------------------ Hal W. McCoy Chairman 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 Chairman and Chief Executive Officer 3/26/04 ------------------ (Principal Executive Officer) ------- Hal W. McCoy of RMC American Management, Inc. /s/Terry Freund Chief Financial and Accounting 3/26/04 ------------------ Officer ------- Terry Freund Index to Consolidated Financial Statements and Supplementary Data The following financial statements are included in Item 8: Page Reports of Independent Certified Public Accountants . . . . F-2 Consolidated Balance Sheets as of December 30, 2003 and December 31, 2002 . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Income for the years ended December 30, 2003, December 31, 2002, and December 25, 2001 . . . . . . . . . . . . . . . . . F-7 Consolidated Statements of Partners' Capital (Deficiency) for the years ended December 30, 2003, December 31, 2002 and December 25, 2001 . . . . . . . . F-8 Consolidated Statements of Cash Flows for the years ended December 30, 2003, December 31, 2002, and December 25, 2001 . . . . . . . . . . . . . . . . . F-9 Notes to Consolidated Financial Statements . . . . . . . . . F-10 Report of Independent Certified Public Accountants The General Partners and Limited Partners American Restaurant Partners, L.P. We have audited the accompanying consolidated balance sheets of American Restaurant Partners, L.P. (the Partnership) as of December 30, 2003 and December 31, 2002, and the related consolidated statements of income, partners' capital (deficiency), and cash flows for each of the three years in the period ended December 30, 2003. 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 did not audit the 2003 financial statements of Oklahoma Magic, L.P., a majority-owned subsidiary whose statements reflect total assets constituting 31 percent and total revenues constituting 27 percent of the related consolidated totals. Those statements were audited by Regier, Carr & Monroe, L.L.P., whose report thereon is following, and our opinion, insofar as it relates to the amounts included for Oklahoma Magic, L.P., is based solely on the report of Regier, Carr & Monroe, L.L.P. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 and the report of Regier, Carr & Monroe, L.L.P. provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of Regier, Carr & Monroe, L.L.P., 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, 2003 and December 31, 2002 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 30, 2003, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 3 to the consolidated financial statements, the Partnership has been incorrectly accounting for its employee unit ownership plan. The error resulted in reported net income being overstated $277,371 and $150,193 in the years ended December 31, 2002 and December 25, 2001, respectively. The error had no effect on partners' capital (deficiency) at year-end, however it did affect the changes in partners' capital during the years ended December 31, 2002 and December 25, 2001. Accordingly, adjustments have been made for these amounts to the statements of income and partners' capital (deficiency) for the years ended December 31, 2002 and December 25, 2001. As discussed in Note 4 to the consolidated financial statements, the Partnership adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" on December 26, 2001. /s/Grant Thornton LLP Wichita, Kansas February 27, 2004 INDEPENDENT AUDITOR'S REPORT To the Partners Oklahoma Magic, L.P. We have audited the balance sheet of Oklahoma Magic, L.P., a limited partnership, as of December 30, 2003, and the related statements of income, 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 auditing standards generally accepted in the United States of America. 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. as of December 30, 2003, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/Regier Carr & Monroe, L.L.P. March 2, 2004 Wichita, Kansas AMERICAN RESTAURANT PARTNERS, L.P. CONSOLIDATED BALANCE SHEETS December 30, December 31, ASSETS 2003 2002 -------------------------------------------------- ------------ ------------ Current assets: Cash and cash equivalents $ 559,316 $ 522,098 Investment securities available-for-sale - 190,174 Accounts receivable 381,265 328,356 Due from affiliates 5,020 74,424 Notes receivable from affiliates - current portion 10,452 11,628 Inventories 542,278 430,542 Prepaid expenses 791,775 626,448 ---------- ---------- Total current assets 2,290,106 2,183,670 Property and equipment, at cost: Land 4,306,729 3,885,266 Buildings 8,364,748 8,267,195 Restaurant equipment 16,179,993 14,702,081 Leasehold rights and improvements 9,582,277 8,941,888 Property under capital leases 5,756,676 5,673,584 ---------- ---------- 44,190,423 41,470,014 Less accumulated depreciation and amortization 25,391,010 22,765,828 ---------- ---------- 18,799,413 18,704,186 Other assets: Franchise rights, net of accumulated amortization of $2,731,596 ($2,484,708 in 2002) 8,488,877 4,748,392 Notes receivable from affiliates 81,328 91,780 Deposit with affiliate 570,000 535,000 Goodwill 2,540,864 2,540,864 Other 770,811 800,374 ---------- ---------- 12,451,880 8,716,410 ---------- ---------- $33,541,399 $29,604,266 ========== ========== AMERICAN RESTAURANT PARTNERS, L.P. CONSOLIDATED BALANCE SHEETS December 30, December 31, LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY) 2003 2002 -------------------------------------------------- ------------ ------------ Current liabilities: Accounts payable $ 2,623,744 $ 2,383,477 Due to affiliates 66,426 12,434 Accrued payroll and other taxes 791,686 738,773 Accrued liabilities 1,325,120 1,244,191 Current maturities of long-term debt 3,363,685 3,062,704 Current portion of capital lease obligations 287,559 560,405 ---------- ---------- Total current liabilities 8,458,220 8,001,984 Long-term liabilities less current maturities: Capital lease obligations 3,245,618 3,454,437 Long-term debt 24,964,924 22,036,387 Other noncurrent liabilities 905,315 1,067,792 ---------- ---------- Total long-term liabilities 29,115,857 26,558,616 Minority interests in Operating Partnerships 393,031 147,163 Commitments and contingencies - - Partners' capital (deficiency): General Partners (7,207) (7,814) Limited Partners: Class A Income Preference, authorized 875,000 units; issued 666,985 units (682,857 in 2002) 5,267,262 5,213,890 Classes B and C, issued 1,218,316 and 2,113,463 class B and C units, respectively (1,196,942 and 2,077,837 units in 2002, respectively) (6,905,460) (7,655,305) Notes receivable employees - sale of partnership units (703,899) (576,740) Cost in excess of carrying value of assets acquired (2,076,405) (2,076,405) Cumulative comprehensive loss - (1,123) ---------- ---------- Total partners' capital (deficiency) (4,425,709) (5,103,497) ---------- ---------- $33,541,399 $29,604,266 ========== ========== See accompanying notes. AMERICAN RESTAURANT PARTNERS, L.P. CONSOLIDATED STATEMENTS OF INCOME Years ended December 30, 2003, December 31, 2002 and December 25, 2001
2002 2001 2003 (restated) (restated) ---------- ---------- ---------- Net sales $71,967,301 $69,392,193 $63,284,057 Operating costs and expenses: Cost of sales 17,427,985 16,441,678 15,659,095 Restaurant labor and benefits 20,781,939 19,860,559 18,302,400 Advertising 4,617,649 4,177,953 3,869,801 Other restaurant operating expenses exclusive of depreciation and amortization 15,443,928 13,749,341 12,350,070 General and administrative: Management fees - related party 4,425,917 4,318,294 3,946,989 Fair value adjustment to variable unit plan (272,251) 277,371 150,193 Other 1,238,910 1,435,707 1,107,414 Depreciation and amortization 3,188,193 3,106,056 3,093,898 Loss on restaurant closings - 161,787 - ---------- ---------- ---------- Income from operations 5,115,031 5,863,447 4,804,197 Equity in loss of unconsolidated affiliates (186,538) (198,113) (176,456) Interest and other investment income 23,853 17,063 27,680 Interest expense (2,771,432) (2,843,212) (3,087,641) Loss on sale of investment in unconsolidated affiliate - (234,000) - Gain on casualty settlements 122,882 - 159,203 ---------- ---------- ---------- (2,811,235) (3,258,262) (3,077,214) ---------- ---------- ---------- Income from continuing operations before minority interests 2,303,796 2,605,185 1,726,983 Minority interests in income of Operating Partnerships (4,398) (34,398) (25,824) ---------- ---------- ---------- Income from continuing operations 2,299,398 2,570,787 1,701,159 Income (loss) from discontinued operations, net of minority interest 400,077 (25,690) (22,444) ---------- ---------- ---------- Net income $ 2,699,475 $ 2,545,097 $ 1,678,715 ========== ========== ========== Net income allocated to Partners: Class A Income Preference $ 460,796 $ 467,991 $ 317,213 Class B $ 817,481 $ 756,994 $ 495,870 Class C $ 1,421,198 $ 1,320,112 $ 865,632 Weighted average number of Partnership units outstanding during period: Class A Income Preference 678,276 692,113 699,849 Class B 1,203,304 1,144,756 1,094,007 Class C 2,091,955 1,994,374 1,909,790 Basic and diluted income from continuing operations per Partnership unit $ 0.58 $ 0.67 $ 0.46 Basic and diluted income from discontinued operations per Partnership unit $ 0.10 $ (0.01) $ (0.01) Basic and diluted net income per Partnership unit $ 0.68 $ 0.66 $ 0.45 Distributions per Partnership unit $ 0.45 $ 0.56 $ 0.40 See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P. Consolidated Statements of Partners' Capital (Deficiency) Years ended December 30, 2003, December 31, 2002, and December 25, 2001
General Limited Partners Partners Cost in ------------- ------------------ excess of Cumula- Classes B Class A Income Notes carrying tive and C Preference Classes B and C receivable value of Compre- ------------- ------------------ --------------------- from assets hensive Units Amounts Units Amounts Units Amounts employees acquired loss Total ----- ------- ------- ---------- --------- ----------- ---------- ----------- -------- ----------- Balance at December 27, 2000 3,780 $(8,727) 707,138 $5,099,355 3,002,446 $(9,415,842) $(749,350) $(1,858,643) $ - $(6,933,207) Net Income (restated) - 1,714 - 317,213 - 1,359,788 - - - 1,678,715 Fair value adjust- ment to variable unit plan (re- stated) - 153 - 28,381 - 121,659 - - - 150,193 Partnership distributions - (1,575) - (279,764) - (1,200,762) 106,097 - - (1,376,004) Units purchased - - (10,325) (33,556) (4,000) (11,160) - - - (44,716) Employee compen- sation-reduction of notes receivable - - - - - - 51,909 - - 51,909 ----- ------ ------- --------- --------- ---------- -------- ---------- ------ ---------- Balance at December 25, 2001 3,780 (8,435) 696,813 5,131,629 2,998,446 (9,146,317) (591,344) (1,858,643) - (6,473,110) Net Income (restated) - 2,556 - 467,991 - 2,074,550 - - - 2,545,097 Change in unreal- ized loss on investments held- for-sale - - - - - - - - (1,123) (1,123) ---------- Comprehensive income (restated) 2,543,974 Fair value adjust- ment to variable unit plan (re- stated) - 278 - 51,003 - 226,090 - - - 277,371 Partnership distributions - (2,213) - (388,811) - (1,725,682) 128,027 - - (1,988,679) Units purchased - - (13,956) (47,922) (29,500) (91,920) 8,530 - - (131,312) Units sold to employees - - - - 72,500 216,975 (195,277) - - 21,698 Employee compen- sation-reduction of notes receivable - - - - - - 73,324 - - 73,324 Units issued in connection with the purchase of Oklahoma Magic, L.P.'s minority interest - - - - 233,333 790,999 - (217,762) - 573,237 ----- ------ ------- --------- --------- ---------- -------- ---------- ------ ---------- Balance at December 31, 2002 3,780 (7,814) 682,857 5,213,890 3,274,779 (7,655,305) (576,740) (2,076,405) (1,123) (5,103,497) Net Income - 2,568 - 460,796 - 2,236,111 - - - 2,699,475 Change in unreal- ized loss on investments held- for-sale - - - - - - - - 1,123 1,123 ---------- Comprehensive income 2,700,598 Fair value adjust- ment to variable unit plan - (259) - (46,473) - (225,519) - - - (272,251) Partnership distributions - (1,702) - (305,399) - (1,482,012) 77,468 - - (1,711,645) Units purchased - - (15,872) (55,552) (36,500) (123,735) 26,376 - - (152,911) Units sold to employees - - - - 93,500 345,000 (312,900) - - 32,100 Employee compen- sation-reduction of notes receivable - - - - - - 81,897 - - 81,897 ----- ------ ------- --------- --------- ---------- -------- ---------- ------ ---------- Balance at December 30, 2003 3,780 $(7,207) 666,985 $5,267,262 3,331,779 $(6,905,460) $(703,899) $(2,076,405) $ - $(4,425,709) ===== ====== ======= ========= ========= ========== ======== ========== ====== ========== See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 30, 2003, December 31, 2002, and December 25, 2001
2002 2001 2003 (restated) (restated) ----------- ----------- ----------- Cash flows from operating activities: Net income $ 2,699,475 $ 2,545,097 $ 1,678,715 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,198,502 3,120,554 3,107,114 Equity in loss of unconsolidated affiliates 186,538 198,113 176,456 Loss on disposition of assets 6,897 121,262 39,266 (Gain) loss on sale of investment securities (6,486) 8,601 - (Gain) loss on restaurant closings (408,703) 161,787 - Loss on sale of investment in unconsolidated affiliate - 234,000 - Minority interest in income of Operating Partnerships 8,439 34,138 25,597 Unit compensation expense 81,897 73,324 51,909 Gain on casualty settlements (122,882) - (159,203) Fair value adjustment to variable unit plan (272,251) 277,371 150,193 Net change in operating assets and liabilities, net of acquisition: Accounts receivable (8,134) 153,829 (162,147) Due from affiliates 70,604 (9,756) 1,576 Inventories (51,123) (32,721) 9,592 Prepaid expenses (95,727) (266,856) (51,698) Deposit with affiliate (35,000) (50,000) - Accounts payable (258,212) (763,068) 409,986 Due to affiliates 53,992 (40,329) (105,992) Accrued payroll and other taxes (126,736) (242,769) 82,402 Accrued liabilities (59,913) (160,595) 43,155 Other, net (275,035) (93,165) (165,641) ---------- ---------- ---------- Net cash provided by operating activities 4,586,142 5,268,817 5,131,280 Investing activities: Cash acquired in acquisition of MVP 91,900 - - Investment in unconsolidated affiliates (133,915) (160,172) (127,298) Proceeds from restaurant closing 465,200 - - Proceeds from sale of investement in unconsolidated affiliate - 26,000 - Purchase of investment securities - (391,171) - Proceeds from sale of investment securities 197,783 191,273 - Additions to property and equipment (1,528,120) (2,423,246) (2,055,634) Proceeds from sale of property and equipment 6,247 23,781 349,278 Proceeds from sale and leaseback of property and equipment - 3,187,202 - Purchase of franchise rights - (45,000) - Collections of notes receivable from affiliates 11,628 16,174 11,750 Advances on notes receivable from affiliate - (50,000) - Net proceeds from casualty settlements 253,988 - 251,613 ---------- ---------- ---------- Net cash provided by (used in) investing activities (635,289) 374,841 (1,570,291) Financing activities: Payments on long-term borrowings (4,943,448) (5,492,446) (2,449,626) Proceeds from long-term borrowings 3,449,597 1,517,620 1,723,856 Principal payments on capital lease obligations (564,757) (615,994) (587,079) Distributions to Partners (1,711,645) (1,988,679) (1,376,004) Proceeds from issuance of Class B and C units 32,100 21,698 - Repurchase of units (152,911) (131,312) (44,716) General Partners' distributions from Operating Partnerships (18,071) (21,381) (14,971) Minority interests' distributions from Operating Partnerships (4,500) (6,000) (6,000) ---------- ---------- ---------- Net cash used in financing activities (3,913,635) (6,716,494) (2,754,540) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 37,218 (1,072,836) 806,449 Cash and cash equivalents at beginning of period 522,098 1,594,934 788,485 ---------- ---------- ---------- Cash and cash equivalents at end of period $ 559,316 $ 522,098 $ 1,594,934 ========== ========== ========== See accompanying notes.
AMERICAN RESTAURANT PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES ----------------------------------- ORGANIZATION American Restaurant Partners, L.P. (ARP) was formed in connection with a public offering of Class A Income Preference Units in 1987. ARP owns and operates Pizza Hut restaurants through its three subsidiaries, American Pizza Partners, L. P. (APP), Oklahoma Magic, L.P. (Magic) and Mountain View Pizza LLC (MVP). ARP owns a 99% limited partnership interest in APP. APP, in turn, owns a 99% limited partnership interest in Magic and an 87% membership interest in MVP. The remaining 13% membership interest in MVP is owned by Restaurant Management Company of Wichita, Inc. (the Management Company). The Management Company is related to ARP's managing general partner through common ownership. ARP's managing general partner is RMC American Management, Inc. (RAM). RAM is also the managing general partner of APP and Magic. RAM owns a 1% general partnership interest in ARP and Magic. RAM, along with RMC Partners, L. P. (RMC), together own an aggregate 1% general partnership interest in APP. RMC is related to RAM through common ownership. The limited partners of ARP have the right to replace the general managing partner of ARP with a vote of at least 75% of the limited partners' units. By agreement the replacement of RAM as ARP's managing general partner would also cause the replacement of RAM as the managing general partner of APP and Magic. Therefore the limited partners of ARP are considered to be in control of both ARP and each of its subsidiaries. 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., APP Concepts, L.C., Oklahoma Magic, L.P. and Mountain View Pizza, L.L.C., which are hereinafter collectively referred to as the Partnership. All significant intercompany transactions and balances have been eliminated. 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 for the period ended December 30, 2003, 53 weeks for the period ended December 31, 2002, and 52 weeks for the period ended December 25, 2001. EARNINGS PER PARTNERSHIP UNIT Basic earnings per Partnership unit are computed based on the weighted average number of Partnership units outstanding. For purposes of diluted computations, the number of Partnership units that would be issued from the exercise of dilutive Partnership unit options has been reduced by the number of Partnership units which could have been purchased from the proceeds of the exercise at the average market price of the Partnership's units or the price of the Partnership's units on the exercise date. For earnings per Partnership unit calculations, the contingent units issued on October 10, 2002, as discussed in Note 14, were considered outstanding beginning June 26, 2002, which is the beginning of the quarter in which the contingency was met. OPERATIONS All of the restaurants owned by the Partnership are operated under a franchise agreement with Pizza Hut, Inc., the franchisor. The agreement grants the Partnership exclusive rights to develop and operate restaurants in certain franchise territories. The Partnership operates restaurants in Colorado, Georgia, Louisiana, Montana, Oklahoma, Texas and Wyoming. A schedule of restaurants in operation for the periods presented in the accompanying consolidated financial statements is as follows: 2003 2002 2001 ---- ---- ---- Restaurants in operation at beginning of year 88 87 86 Opened -- 1 2 Acquired 13 -- -- Closed (1) -- (1) ---- ---- ---- Restaurants in operation at end of year 100 88 87 ==== ==== ==== The Partnership closed one restaurant in Oklahoma during 2003. The operations and gain on restaurant closing associated with this restaurant have been reflected in the statements of operations as discontinued operations (see also Note 18). The Partnership replaced two existing restaurants with two new restaurants in 2002. In conjunction with the restaurant replacements in 2002, the Partnership recorded the write-off of leasehold improvements and restaurant equipment of $161,787 as loss on restaurant closings. In 2001, the Partnership replaced one existing restaurant with one new restaurant. ACCOUNTS RECEIVABLE Accounts receivable represent amounts due from schools and various businesses and are generally not collateralized. Past due accounts determined not to be collectible by the Partnership are charged off to other restaurant operating expenses. Total charge offs were not significant in 2003, 2002 and 2001. Accounts receivable at December 30, 2003 and December 31, 2002 are considered to be fully collectible. INVENTORIES Inventories consist of food and supplies and are stated at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the life of the lease or improvement, whichever is shorter. The estimated useful lives used in computing depreciation and amortization are as follows: Buildings 10 to 30 years Restaurant equipment 3 to 7 years Leasehold rights and improvements 5 to 20 years Expenditures for maintenance and repairs are charged to operations as incurred. Expenditures for renewals and betterments, which materially extend the useful lives for assets or increase their productivity, are capitalized. Depreciation expense was $2,815,038, $2,700,746, and $2,621,072 for the years ended December 30, 2003, December 31, 2002 and December 25, 2001, respectively. GOODWILL Effective December 26, 2001, as discussed in Note 4, goodwill and other intangible assets with indefinite lives are no longer amortized, but instead tested for impairment at least annually. Prior to December 26, 2001 goodwill resulting from APP's investment in Magic was amortized over 29 years using the straight-line method. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets and certain intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Partnership reviews applicable intangible assets and long-lived assets related to each restaurant on a periodic basis. When events or changes in circumstances indicate an asset may not be recoverable, the Partnership estimates the future cash flows expected to result from the use of the asset. If the sum of the expected undiscounted cash flows is less than the carrying value of the asset, an impairment loss is recognized. The impairment loss is recognized by measuring the difference between the carrying value of the asset and the fair value of the asset. The Partnership's estimates of fair values are based on the best information available and require the use of estimates, judgments and projections as considered necessary. The actual results may vary significantly. The Partnership recorded no impairment losses for 2003, 2002 or 2001. INVESTMENTS IN AFFILIATES Investments in affiliated entities owned less than 50% are accounted for on the equity method. Accordingly, consolidated net income includes the Partnership's share of their net income or loss. FRANCHISE RIGHTS AND FEES Agreements with the franchisor provide franchise rights for an initial term of 30 years. The Partnership has the option at the expiration of the initial or any subsequent term of the franchise agreement to renew the franchise granted thereunder for a renewable term of 20 years, subject to the approval of the franchisor. Noncompliance with the franchise agreement can subject the Partnership to changes in term, renewal or monetary penalties as outlined in the franchise agreement. Initial franchise fees are capitalized at cost and amortized by the straight-line method over the life of the franchise agreement. Periodic franchise royalty and advertising fees, which are based on a percent of sales, 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 accounts receivable. The Partnership places its funds into high credit quality financial institutions and, at times, such funds may be in excess of the Federal Depository insurance limit. The Partnership generally does not require collateral against accounts receivable. Credit risks associated with the majority of customer sales are minimal as such sales are primarily for cash. All notes receivable from affiliates are supported by the guarantee of the majority owner of the Partnership. INCOME TAXES The Partnership is not subject to federal or state income taxes and, accordingly, no provision for income taxes has been reflected in the accompanying consolidated financial statements. Such taxes are the responsibility of the partners based on their proportionate share of the Partnership's taxable earnings. Due to differences in the rules related to reporting income for financial statement purposes and for purposes of income tax returns by individual limited partners, the tax information sent to individual limited partners differs from the information contained herein. At December 30, 2003, the Partnership's reported amount of its net assets for financial statement purposes were more than the income tax bases of such net assets by approximately $3,114,000. The differences between net income in conformance with accounting principles generally accepted in the United States of America (US GAAP) and taxable income are as follows: 2002 2001 2003 (restated) (restated) ---------- ---------- ---------- US GAAP net income $2,699,475 $2,545,097 $1,678,715 Depreciation and amortization 117,136 (618,465) 366,691 Capitalized leases 8,912 19,987 (67,041) Equity in loss of affiliate (370,770) (655,608) (131,580) Gain (loss) on disposition of assets (15,567) 582,624 95,723 Fair value adjustment to variable unit plan (272,251) 277,371 150,193 Other 140,004 31,090 (49,180) --------- --------- --------- Taxable income $2,306,939 $2,182,096 $2,043,521 ========= ========= ========= The Omnibus Budget Reconciliation Act of 1987 required public limited partnerships to 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 continues 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 In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS For purposes of the statements of cash flows, the Partnership considers all highly liquid investments, purchased with a maturity of three months or less, to be cash equivalents. ACCOUNTING FOR UNIT BASED COMPENSATION The Partnership uses the intrinsic value-based method for measuring unit-based compensation cost which measures compensation cost as the excess, if any, of the quoted market price of Partnership units at the grant date over the amount the employee must pay for the units. Required pro forma disclosures of compensation expense determined under the fair value method have not been presented as there are no unvested options and no options were granted in 2003, 2002 or 2001. VARIABLE UNIT PLAN Partnership units subject to repurchase by the Partnership, where the employee does not have the risks of ownership, are accounted for as a variable award plan and are adjusted for changes in their fair value by increasing or decreasing operations with an offsetting entry to partners' capital. INVESTMENT SECURITIES AVAILABLE-FOR-SALE Investment securities available-for-sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported as the sole component of cumulative comprehensive income or loss within Partners' capital. Interest and dividends as well as realized gains and losses and declines in value judged to be other-than- temporary on available-for-sale investment securities are included in interest and other investment income. The cost of investments sold is based on the specific identification method. RECLASSIFICATIONS Certain amounts shown in the 2002 and 2001 financial statements have been reclassified to conform with the 2003 presentation. 2. FUTURE EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -------------------------------------------------------------- VARIABLE INTEREST ENTITIES In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 addresses when a company should consolidate in its financial statements the assets, liabilities and activities of a variable interest entity (VIE). It defines VIEs as entities with a business purpose that either do not have any equity investors with voting rights, or have equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. The consolidation requirements of FIN 46 applied immediately to variable interest entities created or obtained after January 31, 2003. The Partnership has not obtained an interest in a VIE subsequent to that date. A modification to FIN 46 (FIN 46R) was released in December 2003. FIN 46R delayed the effective date for VIEs created before February 1, 2003, with the exception of special-purpose entities, until the first fiscal year or interim period ending after March 15, 2004. FIN 46R delayed the effective date for special-purpose entities until the first fiscal year or interim period after December 15, 2003. The Partnership is not the primary beneficiary of any SPEs at December 30, 2003. The Partnership will adopt FIN 46R for non-SPE entities as of March 30, 2004. The adoption of FIN 46 did not result in the consolidation of any VIE's, nor is the adoption of FIN 46R expected to result in the consolidation of any VIE's. The Partnership is continuing to evaluate the impact FIN 46R will have on its financial statements. FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY In May 2003, the FASB issued Statement 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This Statement establishes standards for classifying and measuring certain financial instruments that have characteristics of both liabilities and equity. The guidance in Statement 150 became effective June 1, 2003, for all financial instruments created or modified after May 31, 2003, and otherwise became effective as of July 1, 2003. In December 2003, the FASB deferred for an indefinite period the application of the guidance in Statement 150 to noncontrolling interests that are classified as equity in the financial statements of a subsidiary but would be classified as a liability in the parent's financial statements under Statement 150. The deferral is limited to mandatorily redeemable noncontrolling interests associated with finite-lived subsidiaries. Management does not believe any such applicable entities exist as of December 30, 2003, but will continue to evaluate the applicability of this deferral to entities which may be consolidated as a result of FASB Interpretation No. 46 (revised 2003), Consolidation of Variable Interest Entities. 3) FINANCIAL STATEMENT RESTATEMENTS ------------------------------------ The Partnership has issued Class B and Class C units to certain employees that are subject to a repurchase agreement whereby the Partnership has agreed to repurchase the Units, in the event the employee terminates his or her employment, for an amount equal to the greater of issue price or fair value (as defined) at the time of termination. Because the agreement ensures the employee will not incur a loss on the units, full risk of ownership does not pass to the employee. Because full risk of ownership does not pass to the employee, US GAAP requires the units be accounted for as a variable award plan. Under variable accounting, the units subject to the repurchase agreement are adjusted for changes in their fair value by a charge to operations with an offsetting entry to partners' capital. Prior to 2003, the Partnership did not use the required variable plan accounting and did not adjust for changes in the value of units subject to the repurchase agreement. The income statements for 2002 and 2001 have been restated to reflect the change in the fair value of the outstanding units subject to the repurchase agreement as a charge to other general and administrative expense. The restatements resulted in a decrease in net income of $277,371 in 2002, which was a decrease in basic and diluted net income per Partnership unit of $.07, and a decrease in net income of $150,193 in 2001, which was a decrease in basic and diluted net income per Partnership unit of $.04. The restatements had no effect on partners' capital at any year-end. 4. GOODWILL ------------ In contrast to accounting standards in effect during 2001, SFAS 142, Goodwill and Other Intangible Assets, which became effective beginning in 2002, provides that goodwill, as well as identifiable intangible assets with indefinite lives, should not be amortized. Accordingly, with the adoption of SFAS 142 in 2002, the Partnership discontinued the amortization of goodwill. The information presented below reflects adjustments to information reported in 2001 as if SFAS 142 had been applied in that year. The adjustments reflect the effects of not amortizing goodwill. 2002 2001 2003 (restated) (restated) ---------- ---------- ---------- Reported net income $2,699,475 $2,545,097 $1,678,715 Add back: Goodwill amortization - - 84,888 --------- --------- --------- Adjusted net income $2,699,475 $2,545,097 $1,763,603 ========= ========= ========= Basic and diluted net income per Partnership Unit $ 0.68 $ 0.66 $ 0.45 Goodwill amortization - - 0.02 --------- --------- --------- Adjusted basic and diluted net income per Partnership Unit $ 0.68 $ 0.66 $ 0.47 ========= ========= ========= 5. ACQUIRED INTANGIBLE ASSETS ------------------------------ The Partnership's acquired intangible assets subject to amortization consisted primarily of franchise rights at December 30, 2003 and December 31, 2002. The weighted average amortization period for intangible assets subject to amortization was approximately 20 years at December 31, 2002. As discussed in Note 19, the Partnership entered into a new franchise agreement effective January 1, 2003 for a period of 30 years. The Partnership has the option at the expiration of the initial or any subsequent term of the franchise agreement to renew the franchise granted thereunder for a renewable term of 20 years, subject to the approval of the franchisor. Beginning January 1, 2003, the remaining franchise rights have been amortized over the initial term of the new franchise agreement of 30 years. Amortization expense was $246,888, $265,775 and $267,109 in 2003, 2002 and 2001, respectively. The estimated amortization expense is $291,000 in 2004 and for each of the subsequent four years through 2008. During 2003, the Partnership acquired franchise rights totaling $3,921,095 related to the acquisition of MVP as discussed in Note 15. The acquired franchise rights are being amortized over 30 years, the initial term of the franchise agreement. 6. RELATED PARTY TRANSACTIONS ------------------------------ The Management Company, RAM and RMC are related to the Partnership through common ownership in that the majority unit holder of the Partnership also controls each of these entities. The Partnership has entered into a management services agreement with RAM whereby RAM is responsible for management of the restaurants for a fee equal to 7% for APP, 4.5% for Magic and 5.0% for MVP, of the gross receipts of the restaurants, as defined. RAM has entered into a management services agreement containing substantially identical terms and conditions with the Management Company. Affiliates of the Management Company provide various other services for the Partnership including promotional advertising. In addition to participating in advertising provided by the franchisor, an affiliated company engages in promotional activities to further enhance restaurant sales. The affiliate's fees for such services are based on the actual costs incurred and principally relate to the reimbursement of print and media costs. In exchange for advertising services provided directly by the affiliate, the Partnership pays a commission based upon 15% of the advertising costs incurred. Such costs were not significant in 2003, 2002 or 2001. The Partnership maintains a deposit with the Management Company equal to approximately one and one-half month's management fee. Such deposit, $570,000 and $535,000 at December 30, 2003 and December 31, 2002, respectively, may be increased or decreased at the discretion of RAM. The Management Company maintains an incentive bonus plan whereby certain employees are eligible to receive bonus payments if specified management objectives are achieved. Such bonuses are not greater than 15% of the amount by which the Partnership's cash flow exceeds threshold amounts as determined by management. Bonuses paid under the plan are reimbursed to the Management Company by the Partnership. The Partnership owns a 25% interest in a limited liability company (LLC) which owns an airplane. The Management Company leases the airplane from the LLC on an hourly basis. The Partnership recorded a loss on the LLC of $138,199, $172,961, and $154,166 in 2003, 2002 and 2001, respectively. The Partnership also owned a 4.34% interest in Seaside Pizza, LLC (Seaside), a company formed to acquire eleven Pizza Hut restaurants in New Jersey in December 2000. The Partnership sold this investment in 2002, recognizing a $234,000 loss on sale of investment in unconsolidated affiliate. Certain Partnership principal unitholders are also owners of Seaside. The Partnership's share of Seaside's income was not significant for the years ended December 31, 2002 and December 25, 2001. Transactions with related parties included in the accompanying consolidated financial statements and notes are summarized as follows: 2003 2002 2001 ---------- ---------- ---------- Management fees $4,444,167 $4,345,434 $3,970,991 Management Company bonuses 535,063 744,005 539,382 Advertising commissions 82,517 78,946 92,477 Accommodation fee (See Note 7) 81,262 86,467 90,911 Acquisition/divestiture fee on sale of assets - - 5,000 Development fees - 37,500 25,000 The Partnership has made advances to various affiliates under notes receivable which bear interest at market rates. The advances are to be received in varying installments with maturities as follows: 2004 - $10,452; 2005 - $61,434; 2006 - $10,058; 2007 - $2,714; 2008 - $2,867; Thereafter - $4,255. 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. 7. LONG-TERM DEBT ------------------ Long-term debt consists of the following at December 30, 2003 and December 31, 2002: 2003 2002 ----------- ----------- Note payable to INTRUST Bank in Wichita, paid in full in 2003 $ - $ 300,000 Note payable to INTRUST Bank in Wichita, due in full plus interest at a fixed rate of 5.0% in May 2004 400,000 - Notes payable to INTRUST Bank in Wichita, payable in monthly install- ments aggregating $46,182 including interest at fixed rates from 6.0% to 9.00%, due at various dates through August 2007 1,101,332 1,924,189 Notes payable to INTRUST Bank in Wichita, payable in monthly installments totaling $67,157 including interest at a fixed rate of 7.50%, due August 2007 with balloon payments totaling $2,313,799 4,283,864 4,827,524 Note payable to INTRUST Bank in Wichita, payable in monthly installments of $4,963 including interest at a fixed rate of 6.75%, due October 2007 with a balloon payment of $115,968 285,651 324,213 Note payable to INTRUST Bank in Wichita, payable in monthly installments of $15,539 including interest at a fixed rate of 6.5%, due May 2008 with a balloon payment of $1,346,977 1,705,025 - Note payable to Fleet Business Credit, LLC, payable in escalating monthly principal installments ranging from $19,661 to $20,394 in 2004 plus interest at a variable rate (3.875% at December 30, 2003), due December 2007 with a balloon payment of $2,278,659 3,586,906 - Notes payable to Franchise Mortgage Acceptance Company (FMAC) payable in monthly installments aggregating $240,974 including interest at fixed rates from 8.81% to 10.95%, due at various dates through May 2013 13,311,185 14,854,172 Notes payable to CNL Financial Services, Inc. payable in monthly installments aggregating $16,844, including interest at a fixed rate of 9.62%, through July 2019 1,629,108 1,672,242 Notes payable to Peachtree Franchise Finance, LLC payable in monthly installments of $11,854 including interest at a fixed rate of 10.05%, due June 2015 967,681 1,010,324 Note payable to Stillwater National Bank and Trust Company, payable in monthly installments of $8,079 including interest at a fixed rate of 6.875%, due July 2008 with a balloon payment of $700,581 885,749 - Notes payable to various banks, payable in monthly installments aggregating $2,690, including interest at rates from 8.95% to 10.00%, due at various dates through January 2010. One note requires a balloon payment of $115,013 upon its maturity in January 2010 172,108 186,427 ---------- ---------- 28,328,609 25,099,091 Less current portion 3,363,685 3,062,704 ---------- ---------- $24,964,924 $22,036,387 ========== ========== Certain refinancing with FMAC required the Management Company to act as Accommodation Maker and execute the promissory notes and security agreements as borrower, enabling APP to obtain a lower interest rate and favorable borrowing terms. In return, APP must pay the Management Company an annual fee equal to 1% of the outstanding loan balance, determined as of the first day of each calendar quarter, payable in advance. 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% (APP) and 15% (Magic) of the original loan balance through May of 2013 (a total of $1,089,679 based on current loans outstanding with FMAC), referred to as the "Performance Guarantee Amount" (PGA). The Partnership promises to pay FMAC up to the total of the PGA to the extent required to cover delinquent loans or defaults in the "pooled" loans. Each month, the Partnership pays to FMAC a "Periodic Guarantee Charge Amount" (PGCA) which is the monthly amortization of the PGA. If none of the other loans in the "pool" are delinquent in respect of any payment due or in default during a monthly period, the Partnership is entitled to a rebate of the PGCA. To the extent that the other loans in the "pool" are delinquent or in default, the amount of the PGCA rebate will be reduced proportionately. During 2003 and 2002, certain loans within the Partnership's "pool" were in default. As a result, the Partnership made monthly PGCA's totaling $56,255 and $52,454 in 2003 and 2002, respectively, which were recorded as additional interest expense. From the inception of the pooled loan agreement, the Partnership has paid $328,863 of the PGA. As a result, the Partnership's remaining PGA balance at December 30, 2003 is $772,701, for which the Partnership has recorded a liability of $295,914, which management believes is sufficient to cover the potential remaining liability. 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: 2004 - $3,363,685; 2005 - $2,885,433; 2006 - $3,191,294; 2007 - $7,816,550 and 2008 - $3,488,674. 8. 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. During 2002, the Partnership sold the land and buildings of 8 restaurants for $3,187,202. The sale resulted in gains of $664,618 and losses of $120,079. Gains were deferred and losses were recognized in other restaurant operating expenses. The assets were then leased back from the purchaser for a 20-year term. The land leases are recorded as operating leases with deferred gains amortized over the term of the leases. The building leases are recorded as capital leases with deferred gains recorded as a reduction in the cost of the corresponding building. Minimum and contingent rent payments for land and buildings leased from affiliates were $33,275, $32,771 and $30,250 for the years ended December 30, 2003, December 31, 2002 and December 25, 2001, respectively. The Partnership also leases point-of-sale terminals as well as credit card terminals and telephone equipment for certain restaurants under capital lease arrangements. The leases contain initial lease terms ranging from 3 to 4 years. The leases for point-of-sale terminals are guaranteed by the majority owner of the Partnership. Total minimum and contingent rent expense under all operating lease agreements was as follows: 2003 2002 2001 ---------- ---------- ---------- Minimum rentals $1,637,500 $1,360,940 $1,191,257 Contingent rentals 219,016 265,345 264,565 Future minimum payments under capital leases and noncancelable operating leases with an initial term of one year or more at December 30, 2003, are as follows: Operating Leases With Operating Capital Unrelated Leases With Leases Parties Affiliates ---------- ---------- ----------- 2004 $ 641,672 $1,624,680 $ 33,275 2005 578,303 1,274,105 33,275 2006 561,168 1,099,935 33,275 2007 438,087 878,038 8,319 2008 440,336 704,844 - Thereafter 3,858,314 4,324,333 - --------- --------- --------- Total minimum payments 6,517,880 $9,905,935 $ 108,144 Less interest 2,984,703 ========= ========= --------- 3,533,177 Less current portion 287,559 --------- $3,245,618 ========= Amortization of property under capital leases, determined on the straight-line basis over the lease terms totaled $583,501, $654,103 and $485,188 for the years ended December 30, 2003, December 31, 2002, and December 25, 2001, respectively. The amortization is included in depreciation and amortization expense in the accompanying consolidated statements of income. Property under capital lease obligations was as follows: 2003 2002 ---------- ---------- Buildings $3,676,779 $3,676,779 Restaurant equipment 2,079,897 1,996,805 --------- --------- 5,756,676 5,673,584 Accumulated depreciation 3,199,091 2,615,590 --------- --------- $2,557,585 $3,057,994 ========= ========= 9. 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. 10. DISTRIBUTIONS TO PARTNERS ------------------------------ On January 2, 2004, the Partnership declared a distribution of $.10 per Unit to all Unitholders of record as of January 12, 2004. The distribution is not reflected in the December 30, 2003 consolidated financial statements. 11. 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 25, 2001, and December 31, 2002 625 $8.50 Balance at December 30, 2003 - - At December 30, 2003, there were no exercisable options. Unit options available for future grants totaled 49,236 at December 30, 2003 and 48,611 at December 31, 2002. 12. CLASS B AND C RESTRICTED UNITS SOLD TO EMPLOYEES ----------------------------------------------------- During 2003, the Partnership issued 87,500 Class B and C Units (22,500 at $3.00 per unit and 65,000 at $3.90 per unit) to certain employees in exchange for either a 10% down payment and notes receivable for the remaining 90% of the purchase price or for notes receivable for 100% of the purchase price. During 2002, the Partnership issued 72,500 Class B and C Units (2,500 at $2.79 per unit and 70,000 at $3.00 per unit) to certain employees under this same arrangement. Notes receivable representing 40% or 50%, respectively, of the purchase price, together with interest thereon at a rate from 7.5% to 9%, will be repaid by the cash distributions paid on the units. Non-interest bearing notes receivable representing the remaining 50% of the purchase price will be reduced over a 4 1/2 year period through annual charges to compensation expense, included under the caption of "General and administrative-other" in the accompanying statements of income, as long as the employee remains employed by the Company. The Partnership has a right of first refusal should the employee desire to sell their units to an outside third party prior to termination. 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 equal to the greater of issue price or fair market value at the time of termination. At December 30, 2003, there were 556,490 Units held by employees that were subject to repurchase agreements. The repurchase price at December 30, 2003 was $3.34 per Unit. See also Note 3. 13. PARTNERS' CAPITAL ---------------------- During 2003, 2002 and 2001, the Partnership purchased 15,872, 13,956, and 10,325 Class A Income Preference Units for $55,552, $47,922, and $33,556, respectively. These Units were retired by the Partnership. 14. INVESTMENT IN MAGIC ------------------------ On March 13, 1996, the Partnership purchased a 45% interest in Magic, a newly formed limited partnership, for $3.0 million in cash. Magic owns and operates Pizza Hut restaurants in Oklahoma. In August 1998, Magic purchased a 25% interest in Magic from a former limited partner which effectively increased the Partnership's interest in Magic from 45% to 60%. Therefore, beginning August 11, 1998, Magic's financial statements were consolidated into the Partnership's consolidated financial statements. Prior to August 11, 1998, the Partnership accounted for its investment in Magic using the equity method of accounting. In connection with the consolidation, the Partnership recorded goodwill of $728,000 which represented the excess purchase price of the original equity investment in the net assets acquired, net of subsequent amortization. On July 26, 2000, APP purchased 39% of Magic from the Management Company for $2,500,000 cash and contingent consideration of 233,333 Class B and Class C Partnership Units. The $2,500,000 cash payment was financed by INTRUST Bank over five years at 9.5%. Upon completion of this purchase, the Partnership owns 99% of Magic. The Management Company is considered a related party in that one individual has controlling interest in both the Management Company and the Partnership's general partner. To the extent that the Partnership and the Management Company have common ownership, the transaction was recorded at the Management Company's historical cost. As a result of the transaction, the Partnership recorded goodwill of $1,407,991 and cost in excess of carrying value of assets acquired of $534,962. The contingent consideration involved in the purchase of the additional 39% of Magic was to become due in the event that Magic's cash flow (determined on a 12 month trailing basis) exceeded $2.6 million at any time between January 1, 2001 and December 31, 2005. Magic's cash flow exceeded $2.6 million for the twelve months ended September 24, 2002. As a result, on October 10, 2002, the Partnership issued RMC a total of 233,333 Class B and C Units as payment of the remaining balance. The 233,333 units were valued at $3.39 per unit, which was the unit value at September 24, 2002. The contingent consideration was recorded in a manner consistent with the original transaction. The Partnership recorded an increase in limited partners capital of $790,999, which represented the value of the units issued, goodwill of $573,237 and cost in excess of carrying value of assets acquired of $217,762. 15. PURCHASE OF MOUNTAIN VIEW PIZZA, LLC (MVP) ----------------------------------------------- Effective May 13, 2003, Restaurant Management Company of Wichita, Inc. (the "Management Company"), an affiliate of the Partnership, purchased the stock of Winny Enterprises, Inc. "Winny," a company that owned and operated thirteen Pizza Hut restaurants in Colorado, for $260,000. Winny was then merged into a newly formed limited liability company, Mountain View Pizza, LLC (MVP), the surviving entity resulting from the merger. The Partnership contributed $1,740,000 to MVP, effectively acquiring an 87% ownership interest in MVP. The remaining ownership interests are held by the Management Company. A summary of the assets acquired and liabilities assumed of Winny at the acquisition date is as follows: Cash $ 91,900 Current assets 174,988 Property and equipment 1,525,000 Franchise rights 3,921,095 Other assets 113,356 Current liabilities (818,045) Notes payable to bank (4,748,294) ---------- Cash paid by RMC $ 260,000 ========== 16. INVESTMENT SECURITIES -------------------------- The Partnership purchased common stock of publicly traded companies for investment purposes in the year ended December 31, 2002 for a cost of $391,171. Stock with a cost of $191,297 was sold in 2003, resulting in a gain on sale of investment securities of $6,486. Stock with a cost of $199,874 was sold during 2002, resulting in a loss on sale of investment securities of $8,601. The Partnership held no investment securities available-for-sale at December 30, 2003. 17. CASUALTY SETTLEMENTS ------------------------- The Partnership insures its properties for replacement cost. The Partnership incurred damage from a hail storm at one of its restaurants in 2002, for which a gain of $39,800 was recognized upon final settlement of the claim in 2003. The Partnership also incurred damage from a tornado at one of its restaurants during the second quarter of 2003, and a gain of $17,828 was recognized upon final settlement of the claim. A fire at one of its restaurants in the second quarter of 2003 also resulted in the Partnership recognizing a gain of $65,254 upon final settlement of the claim. In the first quarter of 2001, the Partnership recognized a gain of $159,203 upon final settlement of a claim related to a fire at one of its restaurants. 18. DISCONTINUED OPERATIONS ---------------------------- In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 develops a single accounting method under which long-lived assets that are to be disposed of by sale are measured at the lower of book value or fair value less cost to sell. Additionally, SFAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity, and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS 144 was effective for the fiscal year 2002 and its provisions are to be applied prospectively. The Partnership closed one restaurant during 2003. Pursuant to SFAS 144, each restaurant is a component of the Partnership and the operations of the closed restaurant can be distinguished from the rest of the Partnership and will be eliminated from the ongoing operations of the Partnership. Closed restaurants that are replaced with a new restaurant in the same general market area are not considered to be discontinued operations. SFAS 144 requires that discontinued operations be reflected in the statements of income after results of continuing operations as a net amount. SFAS 144 also requires that the operations of closed restaurants, including any gain or loss on restaurant closings, be reclassified to discontinued operations for all years presented. Therefore, operations and gain on restaurant closings associated with the restaurant closed in 2003, where no replacement restaurant is planned, have been reflected in the statements of income as discontinued operations. Also, in accordance with SFAS 144, the two restaurants closed in 2002 have not been reclassified to discontinued operations because two new restaurants were opened in the same general market area as replacement restaurants in 2002. A summary of discontinued operations is as follows: 2003 2002 2001 --------- --------- --------- Revenue $ 405,564 $ 603,108 $ 533,373 Operating Expenses (410,149) (629,058) (556,044) Gain on buy-out of lease 408,703 - - Minority interest (4,041) 260 227 -------- -------- -------- Income (loss) from discontinued operations $ 400,077 $ (25,690) $ (22,444) ======== ======== ======== 19. FRANCHISE RIGHTS --------------------- The Partnership entered into a new franchise agreement with Pizza Hut, Inc. effective January 1, 2003, for a period of 30 years. The Partnership has the option at the expiration of the initial or any subsequent term of the franchise agreement to renew the franchise granted thereunder for a renewable term of 20 years, subject to the approval of the franchisor. Under the new franchise agreement, the Partnership is obligated to complete six "major asset actions" which include substantial renovation, a complete rebuilding of an existing restaurant at the same location, or a relocation of an existing restaurant to a new location, by December 31, 2005. As of December 30, 2003, the Partnership had completed three of the six major asset actions required. The new franchise agreement also requires, among other things, an increase in the royalty fees (included in other restaurant operating expenses) for delivery restaurants from 4.0% to 4.5% of net sales beginning January 1, 2010, 4.75% of net sales as of January 1, 2020, and 5.0% of net sales as of January 1, 2030; an increase in national advertising fees from 2.0% to 2.5% of net sales; and a decrease in local advertising fees from 2.0% to 1.75% of net sales. In addition, the new franchise agreement requires approximately 68 of the Partnership's restaurants to be remodeled, rebuilt, relocated or reimaged and refurnished by December 31, 2012. 20. FAIR VALUE OF FINANCIAL INSTRUMENTS ---------------------------------------- The carrying amount reported on the balance sheets for financial instruments including cash and cash equivalents, investment securities available-for-sale and notes receivable approximates their fair value. The fair value of long-term debt is estimated at $30,272,826 and $29,399,573 at December 30, 2003 and December 31, 2002, respectively, compared to its carrying value of $28,328,609 and $25,099,091 at the same respective dates. Fair values are considered equal to carrying values for variable rate debt. The estimated fair value of fixed rate debt is based on discounted cash flow analysis using interest rates currently offered for debt with similar terms. 21. QUARTERLY FINANCIAL DATA (unaudited) ----------------------------------------- Unaudited quarterly consolidated statement of income information for the years ended December 30, 2003 and December 31, 2002 is summarized as follows: First Second Third Fourth 2003 Quarter Quarter Quarter Quarter ---- ----------- ----------- ----------- ----------- Net sales $17,290,015 $17,788,883 $18,647,717 $18,646,250 Income from rest- aurant operations 1,549,353 1,287,855 719,407 1,962,534 Net income 775,699 560,479 100,181 1,263,116 Basic and diluted net income per Partnership unit 0.20 0.14 0.03 0.31 2002 ---- Net sales $17,518,696 $17,033,867 $16,911,097 $18,531,641 Income from restaurant oper- ations (restated) 2,097,696 1,620,708 1,195,593 923,500 Net income (loss) (restated) 1,252,868 891,597 456,028 (55,396) Basic and diluted net income (loss) per Partnership unit (restated) 0.34 0.24 0.12 (0.01) Fourth quarter 2003 income from restaurant operations includes a gain on restaurant closings of $408,703, which is classified in discontinued operations in the consolidated statements of income for the year ended December 30, 2003 (see Note 18). Fourth quarter 2003 also includes a decrease in other general and administrative expenses of $272,251 related to the fair value adjustment of the variable unit plan (see Note 3.) Fourth quarter 2002 data includes results from 14 weeks of operations due to the fiscal year of 2002 including 53 weeks (see Note 1). Fourth quarter 2002 net income includes loss on sale of investment in unconsolidated affiliate of $234,000 (see Note 6). The same quarter's income from restaurant operations is restated to show the $277,371 charge to other general and administrative expenses due to the effect of the fair value adjustment of the variable unit plan (see Note 3). The Partnership adjusted its variable unit plan in the fourth quarters of 2003 and 2002. Going forward, the Partnership plans to make this adjustment in the second and fourth quarters of each year. 21. SUPPLEMENTAL CASH FLOW INFORMATION --------------------------------------- 2003 2002 2001 ---------- ---------- ---------- Cash paid during the year for interest $3,218,388 $2,873,969 $3,086,014 Noncash investing and financing activity: Issuance of units for notes receivable 312,900 195,277 - Distributions offset against notes receivable 77,468 128,027 106,097 Unit repurchases offset against notes receivable 26,376 8,530 - Capital leases entered into 83,092 2,039,283 606,924 Reduction of notes receivable recorded as compensation expense 81,897 73,324 51,909 Units issued in connection with the purchase of Oklahoma Magic, L.P.'s minority interest - 790,999 - Acquisition of MVP, LLC: Liabilities assumed 5,566,339 - - Minority ownership interest 260,000 - - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated February 27, 2004, accompanying the consolidated financial statements included in the Annual Report of American Restaurant Partners, L.P. on Form 10-K for the year ended December 30, 2003. We hereby consent to the incorporation by reference of said report in the Registration Statement of American Restaurant Partners, L.P. on Form S-8 (No. 33-20784). /s/ Grant Thornton L.L.P. Wichita, Kansas February 27, 2004 Exhibit 31.1 CERTIFICATIONS I, Hal W. McCoy, Chairman and Chief Executive Officer of American Restaurant Partners, L.P., certify that: (1) I have reviewed this annual report on Form 10-K of American Restaurant Partners, L.P.; (2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; (3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; (4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and (6) The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 3/26/04 By: /s/Hal W. McCoy ------- ------------------------------------ Hal W. McCoy Chairman and Chief Executive Officer Exhibit 31.2 CERTIFICATIONS I, Terry Freund, Chief Financial and Accounting Officer of American Restaurant Partners, L.P., certify that: (1) I have reviewed this annual report on Form 10-K of American Restaurant Partners, L.P.; (2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; (3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; (4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and (6) The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 3/26/04 By: /s/Terry Freund ------- ------------------------------------ Terry Freund Chief Financial and Accounting Officer Exhibit 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Hal W. McCoy, Chairman and Chief Executive Officer of American Restaurant Partners, L.P. (the "Partnership"), certify to the best of my knowledge, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 that: (1) the Annual Report on Form 10-K of the Partnership for the annual period ended December 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of the operations of the Partnership. AMERICAN RESTAURANT PARTNERS, L.P. (Registrant) By: RMC AMERICAN MANAGEMENT, INC. Managing General Partner Date: 3/26/04 By: /s/Hal W. McCoy ------- ------------------------------------ Hal W. McCoy Chairman and Chief Executive Officer Exhibit 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Terry Freund, Chief Financial and Accounting Officer of American Restaurant Partners, L.P. (the "Partnership"), certify to the best of my knowledge, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 that: (1) the Annual Report on Form 10-K of the Partnership for the annual period ended December 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of the operations of the Partnership. AMERICAN RESTAURANT PARTNERS, L.P. (Registrant) By: RMC AMERICAN MANAGEMENT, INC. Managing General Partner Date: 3/26/04 By: /s/Terry Freund ------- ------------------------------------ Terry Freund Chief Financial and Accounting Officer