UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K


(Mark
      One)R
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE
                ACT
      OF 1934For
      the fiscal year ended December 28, 2008OR£
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For the transition period
      from     
      to




Commission
File Number 333-131004




PERKINS
& MARIE CALLENDER’S INC.





(Exact
name of Registrant as specified in its charter)





Delaware
            62-1254388(State
      or other jurisdiction of
            (I.R.S.
      Employer Identification No.)incorporation
      or organization)6075
      Poplar Ave. Suite 800 Memphis, TN
            38119(Address
      of principal executive offices)
            (Zip
      Code)(901)
      766-6400(Registrant’s
      telephone number, including area
code)




Securities
registered pursuant to Section 12(b) of the Act:


Title
      of each class
            Name
      of each exchange on which
      registered


None


Securities registered
pursuant to Section 12(g) of the Act: None




Indicate by
checkmark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes £ No R




Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.


Yes
£NoR




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 R 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 or any amendment to this
Form 10-K. R




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large
      accelerated filer £
            Accelerated
      filer£
            Non-accelerated
      filer R
            Smaller
      reporting company £(Do not check if a
      smaller reporting
  company)




Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes £ NoR




As of December 28, 2008, the
last day of our fiscal year, the aggregate market value of the registrant’s
common stock held by non-affiliates of the registrant was $___based on the
closing sale price as reported on the (applicable exchange). Not
Applicable




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the last practical date.




Class: Common Stock,
      $.01 par value per
      share
            Outstanding as of
      March 30, 2009: 10,820
      sharesDocuments incorporated
      by reference:None











TABLE OF CONTENTS





PART IItem 1. Business
            3Item 1a. Risk Factors
            8Item 1b. Unresolved Staff Comments
            17Item 2. Properties
            18Item 3. Legal Proceedings
            20Item 4. Submission of Matters to Vote of Security
      Holders
            20PART IIItem 5. Market for Registrant’s Common Equity and Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities
            21Item 6. Selected Financial Data
            22Item 7. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
            23Item 7A. Quantitative and Qualitative Disclosures About
      Market Risk
            42Item 8. Financial Statements and Supplementary
      Data
            43Item 9. Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
            80Item 9A(T). Controls and Procedures
            80Item 9B. Other Information
            81PART IIIItem 10. Directors, Executive Officers and Corporate
      Governance
            82Item 11. Executive Compensation
            83Item 12. Security Ownership of Certain Beneficial Owners
      and Management and Related Stockholder Matters.
            94Item 13. Certain Relationships and Related Transactions and
      Director Independence
            96Item 14. Principal Accounting Fees And
      Services
            97PART IVItem 15. Exhibits and Financial Statement
      Schedules
            98SIGNATURES
            100Item 15(a)(2). SCHEDULE II
            101Ex-10.14 Pascuzzi Employment
    AgreementEx-31.1 Section 302 CertificationEx-31.2 Section 302 CertificationEx-32.1 Section 906 CertificationEx-32.2 Section 906 Certification





2
 Table of Contents





PART I





Item 1. Business.





General.Perkins
& Marie Callender’s Inc., together with its consolidated subsidiaries
(collectively, the “Company”, “we” or “us”), is a wholly-owned subsidiary of
Perkins & Marie Callender’s Holding Inc. Perkins & Marie Callender’s
Holding Inc. is a wholly-owned subsidiary of P&MC’s Holding Corp., which is
a wholly-owned subsidiary of P&MC’s Holding LLC, which is principally owned
by affiliates of Castle Harlan, Inc.  The Company is the sole equity
holder of Wilshire Restaurant Group, LLC.





Wilshire
Restaurant Group, LLC (“WRG”) owns 100% of the outstanding common stock of Marie
Callender Pie Shops, Inc. (“MCPSI”), a California corporation. MCPSI owns and
operates restaurants and has granted franchises under the name Marie Callender’s
and Marie Callender’s Grill. MCPSI also owns 100% of the outstanding common
stock of M.C. Wholesalers, Inc., a California corporation. M.C. Wholesalers,
Inc. operates a commissary that produces bakery goods. MCPSI also owns 100% of
the outstanding common stock of FIV Corp., a Delaware corporation that owns and
operates one restaurant under the name East Side Mario’s.





Formation and History of Perkins
& Marie Callender’s Inc.On November 12, 1999, Castle Harlan Partners
III, L.P. (“CHP III”), a New York-based private equity fund managed by Castle
Harlan, Inc. (“Castle Harlan”), acquired WRG, a privately held company, through
the purchase of a majority interest in the equity interests of WRG.





On
September 21, 2005, P&MC’s Holding Corp, an affiliate of Castle Harlan
Partners IV, L.P. (“CHP IV”), a New York-based private equity fund also managed
by Castle Harlan, purchased all of the outstanding capital stock of Perkins
& Marie Callender’s Holding Inc. (the “Acquisition”). Since the closing of
the Acquisition, the capital stock has been 100% owned by P&MC’s Holding
Corp., whose capital stock is 100% owned by P&MC’s Holding LLC. CHP III and
CHP IV are under the common control of Castle Harlan.





On May 3,
2006, pursuant to a stock purchase agreement (the “Stock Purchase Agreement”),
the Company purchased all of the outstanding stock of WRG, and the shareholders
of WRG received equity interests in P&MC’s Holding LLC in exchange for their
WRG stock. As a result of the purchase, WRG became a direct wholly-owned
subsidiary of the Company.  From September 21, 2005 through May 3,
2006, both the Company and WRG were portfolio companies under the common control
of Castle Harlan; therefore, the financial statements of both entities are
presented retroactively on a consolidated basis, in a manner similar to a
pooling of interest, from September 21, 2005, the first date at which both
companies were under common control. This transaction (the “Combination”) is
described more fully in Note 4 to the consolidated financial statements,
“Combination of Companies Under Common Control.”





Financial Statement Presentation.The accompanying consolidated financial statements include the financial
results of the Company for fiscal years 2008 and 2007 and for the Company and
WRG on a consolidated basis for fiscal 2006.  Intercompany
transactions have been eliminated in consolidation.





Additional
information may be found on our websites, www.perkinsrestaurants.com
and www.mcpies.com. We
make available on our websites our Annual Report on Form 10-K, our quarterly
reports on Form 10-Q, current reports on Form 8-K and all exhibits to those
reports free of charge as soon as reasonably practicable after they are
electronically filed or furnished to the Securities and Exchange Commission. Our
internet websites and the information contained therein or connected thereto are
not intended to be incorporated into this Annual Report on Form
10-K.








3
 Table of Contents





Operations.The Company
operates two primary restaurant concepts: (1) full-service family dining
restaurants located primarily in the Midwest, Florida and Pennsylvania under the
name Perkins Restaurant and Bakery (“Perkins”) and (2) mid-priced, casual-dining
restaurants, specializing in the sale of pie and other bakery items, located
primarily in the western United States under the name Marie Callender’s
Restaurant and Bakery (“Marie Callender’s”).





The
Company also operates a bakery goods manufacturing segment (“Foxtail”), which
manufactures pies, muffin batters, cookie doughs, pancake mixes, and other food
products for sale to our Perkins and Marie Callender’s Company-operated and
franchised restaurants and to food service distributors.





Perkins
Restaurant and Bakery





Perkins,
founded in 1958, serves a variety of demographically and geographically diverse
customers for a wide range of dining occasions that are appropriate for the
entire family. Perkins has continued to adapt its menu, product offerings and
building décor to meet changing consumer preferences. As of December 28, 2008,
Perkins offered a full menu of over 90 assorted breakfast, lunch, dinner, snack
and dessert items ranging in price from $3.79 to $13.89, with an average guest
check of $8.70 at our Company-operated Perkins restaurants.  Perkins’
signature menu items include our omelettes, secret-recipe real buttermilk
pancakes, Mammoth Muffins, the Tremendous Twelve platters, salads, melt
sandwiches and Butterball turkey entrees. Breakfast items, which are available
throughout the day, accounted for approximately half of the entrees sold in our
Perkins restaurants during fiscal year 2008.





Perkins
is a leading operator and franchisor of full-service family dining restaurants.
As of December 28, 2008, we franchised 317 restaurants to 106 franchisees in 31
states and in 5 Canadian provinces and we operated 164 restaurants. The
footprint of our Company-operated Perkins restaurants extends over 13 states,
with a significant number of restaurants in Minnesota and Florida. Our
Company-operated Perkins restaurants generated average annual revenues of
$1,840,000 for the year ended December 28, 2008.





Perkins’
franchised restaurants operate pursuant to license agreements generally having
an initial term of 20 years and requiring both a royalty fee (4% of gross sales)
and an advertising contribution (3% of gross sales). Franchisees pay a
non-refundable license fee of $40,000 for each of their first two restaurants.
Franchisees opening their third and subsequent restaurants pay a license fee of
between $25,000 and $50,000 per restaurant depending on the level of assistance
provided by us in opening each restaurant. Typically, franchisees may terminate
license agreements upon a minimum of 12 months prior notice and upon payment of
specified liquidated damages. Franchisees do not typically have express renewal
rights.





For the
years ended December 28, 2008, December 30, 2007 and December 31, 2006, average
annual royalties earned per franchised restaurant were approximately $62,000,
$64,000 and $66,000, respectively. The following number of Perkins license
agreements are scheduled to expire in the years indicated: 2009 — thirteen; 2010
— seventeen; 2011 — thirteen; 2012 — seven and 2013 — nine. Upon the expiration
of license agreements, franchisees typically apply for and receive new license
agreements and pay a license agreement renewal fee of $5,000 to $7,500 depending
on the length of the renewal term.





Marie
Callender’s Restaurant and Bakery





Marie
Callender’s is a mid-priced casual dining concept. Founded in 1948, it has one
of the longest operating histories within the full-service dining sector. Marie
Callender’s is known for serving quality food in a warm, pleasant atmosphere,
and for its premium pies that are baked fresh daily. As of December 28, 2008,
the Company offered a full menu of over 50 items ranging in price from $5.69 to
$17.99. Marie Callender’s signature menu items include pot pies, quiches, a
plentiful salad bar and Sunday brunch. Sales by day part were split
approximately evenly between lunch and dinner during fiscal year
2008.








4
 Table of Contents





Marie
Callender’s operates primarily in the western United States. As of December 28,
2008 we operated 91 Marie Callender’s restaurants and franchised 42 restaurants
to 25 franchisees located in four states and Mexico.  The footprint of
our Company-operated Marie Callender’s restaurants extends over nine states with
61 restaurants located in California. Our existing Company-operated restaurants
generated average annual revenues of $2,217,000 for the year ended December 28,
2008.  As of December 28, 2008, 129 restaurants were operated under
the “Marie Callender’s” name, one under the “Marie Callender’s Grill” name, two
under the “Callender’s Grill” name and one under the “East Side Mario’s” name.
The Company owns and operates 76 Marie Callender’s restaurants, two Callender’s
Grill restaurants, and the East Side Mario’s restaurant (a mid-priced Italian
restaurant operating in Lakewood, California).  The Company also has
an ownership interest in 12 Marie Callender’s restaurants under partnership
agreements, with a minority interest in two of the partnership restaurants and a
57% to 95% ownership interest in the remaining ten
locations.  Franchisees owned and operated 41 Marie Callender’s
restaurants and the Marie Callender’s Grill.





Marie
Callender’s franchised restaurants operate pursuant to franchise agreements
generally having an initial term of 15 years, and requiring both a royalty fee
(normally 5% of gross sales) and, in most agreements, an advertising
contribution (normally 1% of gross sales).  Franchisees pay a
non-refundable initial franchise fee of $25,000 and a training fee of $35,000
prior to opening a restaurant. Franchisees typically have the right to renew the
franchise agreement for two terms of five years each.  For the years
ended December 28, 2008, December 30, 2007 and December 31, 2006, average annual
royalties earned per franchised restaurant were approximately $98,000, $102,000
and $105,000, respectively.  The following number of Marie Callender’s
franchise agreements have expiration dates occurring during the next five years:
2009 — none; 2010 — two; 2011 — one; 2012 — three and 2013 — one. Upon the
expiration of their franchise agreements, franchisees typically apply for and
receive new franchise agreements and pay a franchise agreement renewal fee of
$2,500.





Manufacturing





Foxtail
manufactures pies, pancake mixes, cookie doughs, muffin batters and other bakery
products for both our in-store bakeries and third-party customers. One
manufacturing facility in Corona, California produces pies and other bakery
products principally for the Marie Callender’s restaurants, and two facilities
in Cincinnati, Ohio produce pies, pancake mixes, cookie doughs, muffin batters
and other bakery products to supply the Perkins restaurants and various third
party customers.   Sales of bakery products to our
Company-operated and franchised restaurants accounted for 29.0% and 30.4% of
Foxtail’s revenues, respectively, during fiscal year 2008. Sales of bakery
products to outside parties accounted for the remainder, or 40.6% of Foxtail’s
sales during fiscal year 2008.





Design Development.Our
Perkins restaurants are primarily located in freestanding buildings seating
between 90 and 250 customers. Our Marie Callender’s restaurants are also
primarily located in freestanding buildings seating between 70 and 385
customers. We employ an on-going system of prototype development, testing and
remodeling to maintain operationally efficient, cost-effective and unique
interior and exterior facility design and decor. The current prototype packages
feature modern, distinctive interior and exterior layouts that enhance operating
efficiencies and customer appeal.





System
Development.





Perkins





During
2008, we opened two new Company-operated Perkins restaurants.  In the
Perkins franchise segment, our franchisees opened two new restaurants during
2008 and closed eight restaurants. During 2007, we opened seven new
Company-operated Perkins restaurants, acquired three Perkins restaurants from
franchisees and closed three Perkins Company-operated restaurants. In the
Perkins franchise segment, our franchisees opened eight new restaurants during
2007 and closed four restaurants.  During 2006, we opened one new
Company-operated Perkins restaurant, acquired three Perkins restaurants from
franchisees, opened five Perkins franchised restaurants and closed eleven
Perkins franchised restaurants.








5
 Table of Contents





Marie
Callender’s





During
2008, we closed one Company-operated Marie Callender’s
restaurant.   In the Marie Callender’s franchise segment, our
franchisees opened one new restaurant during 2008 and closed three restaurants.
We purchased one Marie Callender’s restaurant from a franchisee in 2007. During
2007, one Company-operated Marie Callender’s restaurant and one Marie
Callender’s franchised restaurant were closed.  During 2006, we opened
one new Company-operated Callender’s Grill restaurant, purchased one Marie
Callender’s restaurant from a franchisee and closed three Company-operated Marie
Callender’s restaurants.





Research and Development.Each
year, we develop and test a wide variety of products for the Perkins brand in
our 5,600 square foot test kitchen in Memphis, Tennessee and we employ an
executive chef for the development of Marie Callender's products. New products
undergo extensive development and consumer testing to determine acceptance in
the marketplace. While this effort is an integral part of our overall
operations, it was not a material expense in 2008 or 2007. We spent
approximately $114,000 and $155,000 conducting consumer research in 2008 and
2007, respectively.





Significant
Franchisees.As of December 28, 2008, three Perkins
franchisees otherwise unaffiliated with the Company owned 89, or 28%, of the 317
franchised Perkins restaurants, consisting of 41, 27 and 21 restaurants,
respectively.  38 of these restaurants are located in Pennsylvania, 25
are located in Ohio and the remaining 26 are located across Wisconsin, Nebraska,
Florida, Tennessee, New Jersey, Minnesota, South Dakota, Kentucky, Maryland, New
York, Virginia, North Dakota, South Carolina and Michigan.  During
2008, these same three franchisees provided royalties and license fees of
$1,926,000, $1,452,000 and $1,500,000, respectively.  During 2007,
these same three Perkins franchisees provided royalties and license fees of
$2,050,000, $1,499,000 and $1,555,000, respectively.





As of
December 28, 2008, three Marie Callender’s franchisees otherwise unaffiliated
with the Company owned 13, or 31%, of the 42 franchised Marie Callender’s
restaurants, consisting of five, four and four restaurants,
respectively.  12 of these restaurants are located in California and
one is located in Oregon. During 2008, these same three Marie Callender’s
franchisees provided royalties and license fees of $542,000, $465,000 and
$312,000, respectively.  During 2007, these same three Marie
Callender’s franchisees provided royalties and icense fees of $653,000, $512,000
and $342,000, respectively.





Significant Licensees.The
Company has license agreements with certain parties to distribute and market
Marie Callender’s branded products. The most significant of these agreements are
with ConAgra, Inc., which distributes frozen entrees and dinners to supermarkets
and club stores throughout the United States, and American Pie, LLC, which
distributes primarily frozen pies throughout most of the country. Both
agreements are in effect in perpetuity, with the licensor having the right to
terminate if specified sales levels are not achieved (both licensees have
achieved the required annual sales levels), and each licensee has the right to
terminate upon a 180 day notice. License income under these two agreements
totaled approximately $4,865,000, $4,336,000 and $3,867,000 in 2008, 2007 and
2006, respectively.





Territorial Rights.The
Company has arrangements with several different parties to whom territorial
rights were granted in exchange for specified payments. The Company makes
specified payments to those parties based on a percentage of gross sales from
certain Perkins restaurants and for new Perkins restaurants opened within those
geographic regions. During 2008 and 2007, we paid an aggregate of $2,718,000 and
$2,762,000, respectively, under such arrangements. Three such agreements are
currently in effect. Of these, one expires in the year 2075, one expires upon
the death of the beneficiary, and the remaining agreement remains in effect as
long as we operate Perkins restaurants in certain states.





Purchasing and Sourcing of
Materials. Essential supplies and raw materials are available from
several sources, and we are not dependent upon any one source for our supplies
or raw materials. We negotiate directly with suppliers for food and beverage
products and raw materials to ensure consistent quality and freshness of
products and to obtain competitive prices. We have a contract with U.S.
Foodservice, Inc. (“U.S. Foodservice”) for the distribution of most of the food
and other supplies used by our restaurants and certain of our franchisees.
During fiscal year 2008, U.S. Foodservice accounted for approximately 95% of our
total purchases of food and other supplies. Two of the suppliers from which U.S.
Foodservice obtains such food and other supplies for us accounted for
approximately 16% and 11%, respectively, of our total purchases of food and
other supplies during fiscal year 2008.





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 Table of Contents





All
franchisees have the opportunity to benefit from our purchasing economies of
scale, and we aggregate the purchasing requirements of all of our
Company-operated restaurants and the majority of franchised restaurants to
obtain better prices for food items, cleaning supplies, equipment and
maintenance services. However, we do not require franchisees to purchase their
requirements through us.





In
addition, together with our franchisees, we make significant purchases of
commodity products, such as chicken, steak and eggs, which provide the basis for
several product-driven marketing programs throughout the year. Additionally, we
offer diverse menus, which we believe mitigates our exposure to commodity risk.
In fiscal year 2008, no single commodity accounted for over 8% of our
purchases.





All of
our Company-operated and franchised restaurants source most of their bakery
goods, including pies, cookie doughs, muffin batters and pancake mixes, in their
menu items and source their pies from Foxtail.





Trademarks and Other Intellectual
Property.We believe that our trademarks and service marks, especially
the marks “Perkins” and “Marie Callender’s,” are of substantial economic
importance to our business. These include signs, logos and marks relating to
specific menu offerings in addition to marks relating to the Perkins and Marie
Callender’s name. Certain of these marks are registered in the U.S. Patent and
Trademark Office and in Canada. Common law rights are claimed with respect to
other menu offerings and certain promotions and slogans. We have copyrighted
architectural drawings for Perkins restaurants and claim copyright protection
for certain manuals, menus, advertising and promotional materials. We do not
have any patents.





Competition.The restaurant
industry in general and our sector of the industry are highly competitive and
fragmented, and the number, size and strength of our competitors vary widely by
city and region and are often affected by changes in consumer tastes and eating
habits, by local and national economic conditions and by population and traffic
patterns. We compete directly or indirectly with all restaurants, from national
and regional chains to local establishments, based on a variety of factors,
which include menu price points, quality of food products, customer service,
reputation, menu selection, convenience, name recognition and restaurant
location. We consider our principal competitors to be full-service, family
dining operators, including national and regional chains such as Bakers Square,
Bob Evans, Cracker Barrel, Denny’s, IHOP, Mimi’s Cafe and Village Inn, and, to a
lesser extent, Country Kitchen, Embers and Waffle House. We also face
competition from independents and local establishments. Some of our competitors
are much larger than us and have substantially greater capital resources at
their disposal.





Employees.As of December 28, 2008,
we employed approximately 14,100 persons. Approximately 9,100 were employed at
Perkins restaurants, approximately 4,500 were employed at Marie Callender’s
restaurants and approximately 500 of these employees were administrative and
manufacturing personnel. Approximately 61% of the restaurant personnel are
part-time employees. We compete in the job market for qualified restaurant
management and operational employees. We maintain ongoing restaurant management
training programs and have on our staff full-time restaurant training managers
and a director of training. We believe that our restaurant management
compensation and benefits package is competitive within the industry. None of
our employees are represented by a union.





Regulation. Our
Company-operated and franchised restaurants are subject to extensive federal,
state and local governmental regulations, including those relating to the
preparation and sale of food, building and zoning requirements and access for
the disabled, including the Americans with Disabilities Act, and failure to
comply with these regulations could adversely affect us. For example, on July
25, 2008, the California state legislature passed legislation prohibiting the
use of trans fats in food establishments, including casual dining restaurants,
effective January 1, 2010. The trans fat ban includes oil, shortening and
margarine used in spreads or for frying. Public interest groups have also
focused attention on the marketing of high-fat and high-sodium foods to children
in a stated effort to combat childhood obesity and legislators in the United
States have proposed replacing the self-regulatory Children’s Advertising Review
Board with formal governmental regulation under the Federal Trade Commission. In
addition, certain jurisdictions have adopted regulations requiring that chain
restaurants include calorie information on their menu boards and make other
nutritional information available on printed menus which must be plainly visible
to consumers at the point of ordering. There may also be increased regulation of
and opposition to genetically engineered food products, which could force us to
use alternative food supplies. The cost of complying with these regulations
could increase our expenses and may cause our food items to be less popular, and
the negative publicity arising from any such legislative initiatives could
reduce our sales.





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We and
our franchisees also are subject to licensing and regulation by state and local
departments relating to health, sanitation and safety standards and liquor
licenses (with respect to our 104 restaurants that serve alcoholic beverages)
and to laws governing our relationships with employees, including minimum wage
requirements, overtime, working conditions and citizenship requirements. The
inability to obtain or maintain such licenses or publicity resulting from actual
or alleged violations of such regulations could have an adverse effect on us.
Furthermore, changes in, and the cost of compliance with, government regulations
could have an adverse effect on us.





We also
are subject to Federal Trade Commission regulations and various state and
foreign laws which govern the offer and sale of franchises. Some states require
that certain materials be registered before franchises can be offered or sold in
that state. We also must comply with a number of state and foreign laws that
regulate some substantive aspects of the franchisor-franchisee relationship.
These laws may limit a franchisor’s ability to: terminate or not renew a
franchise without good cause; interfere with the right of free association among
franchisees; enforce noncompetition provisions in its franchise agreements;
disapprove the transfer of a franchise; discriminate among franchisees with
regard to charges, royalties and other fees; or place new restaurants near
existing restaurants. The failure to obtain or retain licenses or approvals to
sell franchises could adversely affect our financial condition.





In
addition, as is the case with any owner or operator of real property, we are
subject to a variety of federal, state and local governmental regulations
relating to the use, storage, discharge, emission and disposal of hazardous
materials. Failure to comply with environmental laws could result in the
imposition of severe penalties or restrictions on operations by governmental
agencies or courts of law, which could adversely affect us. We do not have
environmental liability insurance and no material amounts have been or are
expected to be expensed to comply with environmental protection
regulations.





Segment Information.We have
three reportable segments: restaurant operations, franchise operations and
Foxtail. See Note 17 of Notes to Consolidated Financial Statements for financial
information regarding each of our segments.





Item 1a. Risk
Factors.





Our
substantial indebtedness could adversely affect our financial health and prevent
us from fulfilling our obligations under our indebtedness.




As of
December 28, 2008, we had approximately $331.0 million of total debt
outstanding, of which approximately $142.1 million is secured. Subject to
restrictions in our indentures and our credit agreement, we may incur additional
indebtedness.




Our
substantial indebtedness could have important consequences and significant
effects on our business. For example, it could:




·
            make
      it more difficult for us to satisfy our obligations with respect to our
      indebtedness and our other financial
  obligations;


·
            increase
      our vulnerability to general adverse economic and industry
      conditions;


·
            require
      us to dedicate a substantial portion of our cash flow from operations to
      payments on our indebtedness, thereby reducing the availability of our
      cash flow to fund working capital, capital expenditures and other general
      corporate purposes;


·
            limit
      our flexibility in planning for, or reacting to, changes in our business
      and the industry in which we
operate;


·
            restrict
      us from making strategic acquisitions or exploiting business
      opportunities;


·
            place
      us at a competitive disadvantage compared to our competitors that have
      less debt; and


·
            limit
      our ability to borrow additional
funds.










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In
addition, our indentures and our credit agreement contain financial and other
restrictive covenants that limit our ability to engage in activities that may be
in our long-term best interests. Our failure to comply with those covenants
could result in an event of default which, if not cured or waived, could result
in the acceleration of all of our indebtedness.




Furthermore,
based on our level of indebtedness or other factors affecting our business, one
or more suppliers could require more restrictive payment terms before shipping
products to us, which could adversely affect our liquidity.




Borrowings
under our credit agreement bear interest at variable rates. If these rates were
to increase significantly, our ability to borrow additional funds may be reduced
and the risks related to our substantial indebtedness would intensify. While we
may enter into agreements limiting our exposure to higher interest rates, any
such agreements may not offer complete protection for this risk.





Ongoing
macroeconomic conditions and changes in consumer preferences are adversely
impacting our business, financial position and results of operations and are
expected to continue to do so.





Purchases
at our restaurants are discretionary for our customers, and, therefore, we are
susceptible to economic slowdowns. Changes in consumer discretionary spending as
a result of ongoing national and regional economic conditions have adversely
affected our comparable restaurant sales, and we have experienced declining same
store sales and increasing net losses in recent periods. An ongoing or further
decline in general economic conditions or negative economic sentiment could
further affect our operating performance. In addition, if we choose to offer
menu price discounts and/or promotions in response to these macroeconomic
conditions, our margins could be reduced.  As a result, we may suffer
further losses and be unable to generate sufficient cash flow to fund our
operations and service our debt. Economic conditions that have adversely
affected and could continue to adversely affect consumer discretionary spending
include, without limitation, unemployment levels, investment returns,
residential mortgage interest rates and residential real estate prices, energy
costs (especially gasoline prices) and price inflation affecting other goods and
services and the general consumer perception of economic conditions of the
country or any of the markets in which we operate.




We
have experienced a decline in same store sales and an increase in net losses in
recent quarterly periods.  The recent turmoil in the economy has
adversely affected our guest counts and, in turn, our net loss and cash
generated by operations.  The Company expects to incur a net loss in
2009.  In order to improve the cash flows in our business, we have
introduced a new breakfast program at our Marie Callender’s restaurants,
implemented price increases, improved systems to more effectively manage our
food and labor costs, upgraded our management staff and certain equipment in our
Foxtail division to drive higher operating efficiencies, reduced overall planned
capital expenditures for 2009, and eliminated several salaried
positions.  Management expects these initiatives together with the
Company’s cash provided by operations and borrowing capacity to provide
sufficient liquidity for at least the next twelve months.  However,
there can be no assurance as to whether these or other actions will enable us to
generate sufficient cash flow to fund our operations and service our
debt.









We
depend upon frequent deliveries of food and other supplies from our suppliers
and their failure to deliver the necessary products in a timely fashion could
harm our business; additionally, supplier payment terms may affect our
liquidity.




Our
ability to maintain consistent quality throughout our Company-owned restaurants
and franchised restaurants depends in part upon our ability to acquire fresh
food products and related items from reliable sources in accordance with our
specifications. We have a contract with U.S. Foodservice for the distribution of
most of the food and other supplies used by our restaurants and certain of our
franchisees. During fiscal year 2008, U.S. Foodservice accounted for
approximately 95% of our total purchases of food and other supplies. Two of the
suppliers from which U.S. Foodservice obtains such food and other supplies for
us accounted for approximately 16% and 11%, respectively, of our total purchases
of food and other supplies during fiscal year 2008.







9
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Under the
terms of our contract, U.S. Foodservice may unilaterally establish and revise
credit terms based on our perceived credit worthiness, including reducing the
amount of time permitted between invoice and payment for new orders. During the
third fiscal quarter of 2008, U.S. Foodservice significantly reduced the number
of days permitted between invoice and payment for new orders, which increased
pressure on our liquidity.




If any of
our suppliers do not perform adequately or otherwise fail to distribute products
or supplies to our restaurants, we may be unable to replace the supplier in a
short period of time on acceptable terms. Factors that could result in the
failure of a supplier to deliver supplies on a timely basis include
unanticipated demand, supply shortfalls, inclement weather, strikes and
financial issues affecting the supplier, including bankruptcy.




Although
we have alternative sources of supply available to our restaurants, our
inability to replace a supplier in a short period of time on acceptable terms
could increase our costs and/or could cause shortages at our restaurants of food
and other items that may cause us to remove certain items from a restaurant’s
menu. If we temporarily remove popular items from a restaurant’s menu, that
restaurant may experience a significant reduction in revenue during the time
affected by the shortage or thereafter, as our customers may change their dining
habits as a result.





We may not be able to compete
successfully with other restaurants.





The
restaurant industry is intensely competitive with respect to quality of food
products, customer service, reputation, restaurant location, attractiveness and
maintenance of properties, name recognition and price of meals and beverages. We
consider our principal competitors to be mid-priced family dining venues and
casual dining operations, including other national and regional chains, as well
as locally-owned restaurants. Some of our competitors may be better established
in certain of the markets where our restaurants and franchised restaurants are
or may be located.  In addition, as a result of current economic
conditions, some of our competitors are offering aggressive menu price discounts
and promotions. Some of our competitors also have substantially greater
financial, marketing and other resources than we do. We also compete with other
restaurants for experienced management personnel and hourly employees and with
other restaurants and retail establishments for quality restaurant sites. If our
restaurants and franchised restaurants are unable to compete successfully with
other restaurants in new and existing markets, or if we choose to offer menu
price discounts and/or promotions in response to actions of our competitors, our
margins could be adversely affected, and, as a result, we may not be able to
generate sufficient cash flow to service our debt
obligations.  Furthermore, new competitors may emerge at any time. To
the extent that one of our existing or future competitors offers items that are
better priced, more appealing to consumer tastes or operate in more desirable
locations than our restaurants, it could materially adversely affect
us.





Inflation
in the prices of food has adversely affected and could continue to adversely
affect us.




Prices of
many food products have increased substantially over the last year. We have
experienced, and may continue to experience, inflation in the prices of certain
of our key food ingredients, which depend on a variety of factors, many of which
are beyond our control. Fluctuations in weather, supply and demand, energy and
transportation costs and general inflationary trends and other economic
conditions could adversely affect the cost, availability and quantity of one or
more of our products and raw ingredients. Significant items that could be
subject to price fluctuations include beef, pork, coffee, eggs, dairy products,
wheat products and corn products.




We
currently do not engage in futures contracts or other financial risk management
strategies with respect to potential price fluctuations in the cost of food and
other supplies, which we purchase at prevailing market or contracted
prices.Our
inability to obtain requisite quantities of high-quality ingredients on
favorable terms would adversely affect our ability to provide the menu items
that are central to our business, and the highly competitive nature of our
industry may limit our ability to pass increased costs on to our guests, which
could reduce our gross margins. If we were to raise our prices due to inflation,
we could lose customers.





10
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Increased energy costs could
negatively impact the cost structure of our business.





We
purchase electricity, oil and natural gas to operate our restaurants, and
suppliers purchase gasoline in connection with the transportation of food and
other supplies to us. Any significant increase in energy costs could adversely
affect our business through higher rates charged by providers of electricity,
oil and natural gas and the imposition of fuel surcharges by our
suppliers.  We may not be able to pass to our customers all or part of
any future increases.





Because
a significant portion of our Perkins bakery products are produced at facilities
in the same city, we are vulnerable to natural disasters and other
disruptions.




We depend
on Foxtail’s ability to reliably produce our bakery products, which include
pies, cookies, muffins and mixes and syrups, and deliver them to restaurants and
foodservice distributors on a regular schedule. We currently produce a
significant portion of our bakery products in two manufacturing facilities in
Cincinnati, Ohio. As a result, Foxtail is vulnerable to damage or interruption
from fire, severe drought, flood, power loss and energy shortages,
telecommunications failure, break-ins, snow and ice storms and similar events.
Any such damage or failure could disrupt some or all of our Foxtail operations
and result in the loss of sales and current and potential customers if we are
unable to quickly recover from such events. Our business interruption insurance
may not be adequate to compensate us for our losses if any of these events
occur. In addition, business interruption insurance may not be available to us
in the future on acceptable terms or at all. Even if we carry adequate
insurance, such events could have a material adverse impact on us.




Certain
of the Marie Callender’s restaurants house pie production equipment, while the
remaining Marie Callender’s restaurants rely on a pie production facility in
Corona, California. Although Marie Callender’s is less vulnerable than Perkins
with respect to the impact of a disruption at its production plant, significant
incremental costs would be incurred to supply bakery products to those
restaurants without production equipment in the event they were unable to obtain
pies from the Corona, California facility on a timely basis.





Our
operations are concentrated in six states.




For the
year ended December 28, 2008, approximately 60% of the total number of our
Company-operated and franchised restaurants were located in the states of
California, Florida, Minnesota, Ohio, Pennsylvania and Wisconsin. Given our
geographic concentrations, particularly in California and Florida, regional
occurrences such as earthquakes, hurricanes, snow and ice storms or other
natural disasters, unfavorable economic conditions, government regulations,
reduced tourism, negative publicity, terrorist attacks or other events,
conditions and occurrences specific to these states may materially adversely
affect us.





Labor shortages could slow our growth
and adversely impact existing restaurants.





Our
success depends in part upon our ability to attract, motivate and retain a
sufficient number of qualified employees, including restaurant managers, kitchen
staff and servers necessary to accommodate further expansion and meet the needs
of our restaurants and franchised restaurants. A sufficient number of qualified
individuals of the requisite caliber to fill these positions may be in short
supply in some areas. Any future inability to recruit and retain qualified
individuals may delay the planned openings of new restaurants and could
adversely impact our existing Company-operated restaurants and franchised
restaurants. Any such delays, any material increases in employee turnover rates
in existing restaurants or any widespread employee dissatisfaction could have a
material adverse effect on us. Additionally, competition for qualified employees
could require us to pay higher wages, which could result in higher labor costs,
which may have an adverse effect on our operating performance and accordingly,
we may generate insufficient cash flow to service our debt
obligations.








11
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Increased labor costs could adversely
affect our future operating performance.





On July
24, 2007, the U.S. Congress passed minimum wage increases in 70 cent increments
that took effect in July 2007 and July 2008, and will increase further in July
2009. We have a substantial number of employees who are paid wage rates at or
slightly above the minimum wage. As federal and state minimum wage rates
increase, we may be required to increase not only the wages of our minimum wage
employees but also the wages paid to employees whose wage rates are above
minimum wage. If competitive pressures or other factors prevent us from
offsetting the increased costs by increases in prices, our profitability may
decline. In addition, various proposals that would require employers to provide
health insurance for all of their employees are being considered from
time-to-time in the U.S. Congress and various states. The imposition of any
requirement that we provide health insurance to all employees on terms
materially different from our existing programs could have an adverse effect on
our operating performance.





One
or more current restaurant locations may cease to be economically viable and we
may decide to close one or more restaurants.




We have
in the past closed, and may in the future close, certain of our restaurants. If
a current location ceases to be economically viable, we may close the restaurant
in that location. The decision to close a restaurant generally involves an
analysis of revenue and earnings trends, competitive ability, strategic factors
and other considerations. Closing a restaurant would reduce the sales that such
restaurant would have contributed to our revenues, and could subject us to
various costs, including severance, legal costs and the write-down of leasehold
improvements, equipment, furniture and fixtures.





All of
our restaurant locations are leased. We may be locked into long-term and
non-cancelable leases that we want to cancel and may be unable to renew leases
that we want to extend at the end of their terms.




Many of
our current leases are non-cancelable and typically have an initial term ranging
from 15 to 20 years and renewal options for terms ranging from five to 20 years.
The average remaining life of our current leases is approximately 9 years.
Leases that we enter into in the future likely will also be long-term and
non-cancelable and have similar renewal options. If we close a restaurant, we
may remain committed to perform our obligations under the applicable lease,
which would include, among other things, payment of the base rent for the
balance of the lease term. Additionally, the potential losses associated with
our inability to cancel leases may result in our keeping open restaurant
locations that are performing significantly below targeted levels. As a result,
ongoing lease operations at closed or underperforming restaurant locations could
impair our results of operations.




In
addition, at the end of the lease term and any renewal period for a restaurant,
we may be unable to renew the lease without substantial additional cost, if at
all. As a result, we may be required to close or relocate a restaurant, which
could subject us to construction and other costs and risks, and may have an
adverse effect on our operating performance.




A
majority of our restaurants are owned and operated by independent franchisees
over whom we do not have as much control as our Company-operated restaurants,
and as a result the financial performance of franchisees can adversely affect
our future operating performance.





As of
December 28, 2008, 359 of our 614 restaurants were owned and operated by
franchisees. As a result, we rely in part on our franchisees and the manner in
which they operate their locations to develop and promote our business.
Franchise royalties and fees represented approximately 4% of our revenues and
contributed 13.9% of the segment income of our three reportable segments during
fiscal 2008. While we try to ensure that the quality of our brand is maintained
by all of our franchisees, there is a risk that franchisees will take actions
that adversely affect the value of our intellectual property or
reputation.








12
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Our
franchisees may not operate their locations in accordance with, or may object
to, our policies, and we may experience disputes or other conflicts. In
addition, although we have developed criteria to evaluate and screen prospective
franchisees, there can be no assurance that franchisees will have the business
acumen or financial resources necessary to operate successful franchises in
their franchise areas. Franchisees may not be able to find suitable sites on
which to develop restaurants. In addition, franchisees may not be able to
negotiate acceptable lease or purchase terms for the sites, obtain the necessary
permits and government approvals or meet construction schedules. Any of these
problems could slow our growth and reduce our franchise revenues. Additionally,
many of our franchisees depend on financing from banks and other financial
institutions in order to construct and open new restaurants. State franchise
laws may limit our ability to terminate or modify these franchise
arrangements.





As of
December 28, 2008, three Perkins’ franchisees, otherwise unaffiliated with the
Company, owned 89 of the 359 franchised restaurants operating 41, 27 and 21
restaurants, respectively. If any of these franchisees were to experience
financial difficulties our business could be adversely affected. In addition, a
majority of our franchises can terminate their agreements with us on twelve
months notice without cause. The failure of franchisees to operate franchised
restaurants successfully or to the extent a significant number of franchisees
elect to terminate their agreements with us could have a material adverse effect
on us, our reputation, our brand and our ability to attract prospective
franchisees.





Some of
our franchisees are highly leveraged, and if they are unable to service their
indebtedness, such failure could adversely affect their ability to maintain
their operations, and/or meet their contractual obligations to us, which may
have a material adverse effect on our operating performance.





The failure to enforce and maintain
our intellectual property rights could adversely affect our ability to
maintain brand awareness.





The
success of our business strategy depends on our continued ability to use our
existing trade names, trademarks and service marks. We have registered the names
Perkins, Perkins Restaurant & Bakery, Marie Callender’s and certain other
names used by our restaurants as trade names, trademarks or service marks with
the United States Patent and Trademark Office and in Canada. However, our
trademarks could be imitated in ways that we cannot prevent. In addition, we
rely on trade secrets, proprietary know-how, concepts and recipes. Our methods
of protecting this information may not be adequate, however, and others could
independently develop similar know-how or obtain access to our trade secrets,
know-how, concepts and recipes.





Moreover,
we may face claims of misappropriation or infringement of third parties’ rights
that could interfere with our use of our proprietary know-how, concepts, recipes
or trade secrets. Defending these claims may be costly and, if unsuccessful, may
prevent us from continuing to use this proprietary information in the future and
may result in a judgment or monetary damages.





Our
business is partially dependent upon our advertising and promotional programs,
and our competitors’ advertising and promotional activities may reduce the
effectiveness of our initiatives.




Our sales
are heavily influenced by marketing and advertising. If we do not advertise or
run promotions for our products, or if our marketing and advertising programs
are not successful, we may experience a loss or reduction in sales, fail to
attract new guests or be unable to retain existing guests. In addition, our
competitors’ advertising and promotions, including any increase in the amount
and/or frequency thereof, may reduce the effectiveness of our initiatives. As a
result of current economic events, some of our competitors have significantly
increased their use of promotions.  Furthermore, we may be adversely
affected by an increase in the cost of television, radio or print
advertising.




13
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We depend on the services of key
executives, the loss of who may adversely affect our future operating
performance.





Some of
our senior executives are important to our success because they have been
instrumental in setting our strategic direction, operating our business,
identifying, recruiting and training key personnel, identifying expansion
opportunities and arranging necessary financing. Losing the services of any of
these individuals may have an adverse effect on our business and operating
performance and accordingly, we may generate insufficient cash flow to service
our debt obligations until a suitable replacement could be found.





Additional expansion plans present
risks.





We review
additional sites for potential future restaurants on an ongoing basis. There is
a “ramp-up” period of time before we expect a new restaurant to achieve our
targeted level of profitability. This is due to higher operating costs caused by
start-up and other temporary inefficiencies associated with opening new
restaurants, such as lack of market familiarity and acceptance when we enter a
new market and training of staff. Furthermore, our ability, and our franchisees’
ability, to open new restaurants is dependent upon a number of factors, many of
which are beyond our and our franchisees’ control, including, but not limited
to, the ability to:





•
            find
      quality locations;


•
            reach
      acceptable agreements regarding the lease or purchase of
      locations;


•
            comply
      with applicable zoning, land use and environmental
      regulations;


•
            raise
      or have available an adequate amount of money for construction and opening
      costs;


•
            timely
      hire, train and retain the skilled management and other employees
      necessary to meet staffing needs;


•
            obtain,
      for an acceptable cost, required permits and
  approvals;


•
              efficiently
      manage the amount of time and money used to build and open each new
      restaurant; and•
              general
      economic conditions.


We may
enter new markets in which we have limited or no operating experience. These new
markets may have different demographic and competitive conditions, consumer
tastes and discretionary spending patterns than our existing markets and may not
be able to attract enough customers to new restaurants because potential
customers may be unfamiliar with our restaurants or the atmosphere or menu of
our restaurants might not appeal to them. As a result, the revenue and profit
generated at new restaurants may not equal the revenue and profit generated at
our existing restaurants. New restaurants may even operate at a loss, which
would have an adverse effect on our overall profits. In addition, opening a new
restaurant in an existing market could reduce the revenue of our existing
restaurants in that market.





Food-borne illness incidents, claims
of food-borne illness and adverse publicity could adversely affect our
future operating performance.





Claims of
illness or injury relating to food quality or food handling are common in the
food service industry, and a number of these claims may exist at any given time.
We cannot guarantee that our internal controls and training will be effective in
preventing all food-borne illnesses. Some food-borne illness incidents could be
caused by third-party food suppliers and transporters outside of our control.
New illnesses resistant to our current precautions may develop in the future, or
diseases with long incubation periods could arise, such as e-coli, that could
give rise to claims or allegations on a retroactive basis. We could be adversely
affected by negative publicity resulting from food quality or handling claims at
one or more of our restaurants. Food-borne illnesses spread at restaurants have
generated significant negative publicity at other restaurant chains in the past,
which has had a negative impact on their results of operations. One or more
instances of food-borne illness in one of our restaurants could negatively
affect our restaurants’ image and sales. These risks exist even if it were later
determined that an illness was wrongly attributed to one of our
restaurants.








14
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In
addition, the impact of adverse publicity relating to one of our restaurants or
franchised restaurants may extend beyond that restaurant to affect some or all
of our other restaurants. We believe that the risk of negative publicity is
particularly great with respect to our franchised restaurants because we have
limited ability to control their operations, especially on a real-time basis. A
similar risk may exist with respect to unrelated food service businesses if
customers mistakenly associate them with our operations.





We
face risks of litigation and negative publicity from restaurant customers,
suppliers and other parties.




We are
subject to a variety of claims arising in the ordinary course of our business
brought by or on behalf of our customers or employees, including personal injury
claims, contract claims, discriminatory claims and employment-related claims. In
recent years, a number of restaurant chains have been subject to lawsuits, and a
number of these lawsuits have resulted in the payment of substantial damages by
chains. These lawsuits include class action lawsuits alleging violations of U.S.
federal or state law regarding workplace or employment conditions and similar
matters. Class action lawsuits could also be filed alleging, among other things,
that restaurants have failed to disclose the health risks associated with
high-fat foods and that our marketing practices have targeted children and
encouraged obesity.





In
addition, 12 of our Company-operated Perkins restaurants located in Florida, one
Company-operated Perkins restaurant located in Minnesota and 91 Company-operated
Marie Callender’s restaurants serve alcoholic beverages. These restaurants may
be subject to state “dram shop” laws, which allow a person to sue us if that
person was injured by a legally intoxicated person who was wrongfully served
alcoholic beverages at one of our restaurants. A judgment against us under a
dram shop law could exceed our liability insurance coverage policy limits and
could result in substantial liability for us and may have an adverse effect on
our operating performance and, accordingly, we may generate insufficient cash
flow to service our debt obligations.





Regardless
of whether any claims against us are valid or whether we are ultimately
determined to be liable, claims may be expensive to defend and may divert time
and money away from our operations. In addition, any adverse publicity about
these allegations could adversely affect us, regardless of whether the
allegations are true, by discouraging customers from buying our products. A
judgment also could be significantly in excess of our insurance coverage for any
claims and we may not be able to continue to maintain such insurance, or to
obtain comparable insurance at a reasonable cost, if at all. If we suffer
losses, liabilities or loss of income in excess of our insurance coverage or if
our insurance does not cover such loss, liability or loss of income, there could
be a material adverse effect on our results of operations or financial
condition.




We
are subject to extensive government regulations.




Our
Company-operated and franchised restaurants are subject to extensive federal,
state and local governmental regulations, including those relating to the
preparation and sale of food, those relating to building and zoning requirements
and those relating to access for the disabled, including the Americans with
Disabilities Act, and failure to comply with these regulations could adversely
affect us. For example, on July 25, 2008, the California state legislature
passed legislation prohibiting the use of trans fats in food establishments,
including casual dining restaurants, effective January 1, 2010.  The
trans fat ban covers oil, shortening and margarine used in spreads or for
frying. Public interest groups have also focused attention on the marketing of
high-fat and high-sodium foods to children in a stated effort to combat
childhood obesity and legislators in the United States have proposed replacing
the self-regulatory Children’s Advertising Review Board with formal governmental
regulation under the Federal Trade Commission. In addition, certain
jurisdictions have adopted regulations requiring that chain restaurants include
calorie information on their menu boards and make other nutritional information
available on printed menus which must be plainly visible to consumers at the
point of ordering. There may also be increased regulation of and opposition to
genetically engineered food products, which could force us to use alternative
food supplies. The cost of complying with these regulations could increase our
expenses and may cause our food items to be less popular, and the negative
publicity arising from such legislative initiatives could reduce our
sales.







15
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We and
our franchisees also are subject to licensing and regulation by state and local
departments relating to health, sanitation and safety standards and liquor
licenses (with respect to our 104 restaurants that serve alcoholic beverages)
and to laws governing our relationships with employees, including minimum wage
requirements, overtime, working conditions and citizenship requirements. The
inability to obtain or maintain such licenses or publicity resulting from actual
or alleged violations of such regulations could have an adverse effect on us.
Furthermore, changes in, and the cost of compliance with, government regulations
could have an adverse effect on us.




We also
are subject to Federal Trade Commission regulations and various state and
foreign laws which govern the offer and sale of franchises. Some states require
that certain materials be registered before franchises can be offered or sold in
that state. We also must comply with a number of state and foreign laws that
regulate some substantive aspects of the franchisor-franchisee relationship.
These laws may limit a franchisor’s ability to: terminate or not renew a
franchise without good cause; interfere with the right of free association among
franchisees; enforce noncompetition provisions in its franchise agreements;
disapprove the transfer of a franchise; discriminate among franchisees with
regard to charges, royalties and other fees; or place new restaurants near
existing restaurants. The failure to obtain or retain licenses or approvals to
sell franchises could adversely affect our financial condition.




In
addition, as is the case with any owner or operator of real property, we are
subject to a variety of federal, state and local governmental regulations
relating to the use, storage, discharge, emission and disposal of hazardous
materials. Failure to comply with environmental laws could result in the
imposition of severe penalties or restrictions on operations by governmental
agencies or courts of law, which could adversely affect us. We do not have
environmental liability insurance and no material amounts have been or are
expected to be expensed to comply with environmental protection
regulations.





Rises in interest rates could
adversely affect our financial condition.





Amounts
we borrow under our credit agreement with Wells Fargo Foothill, LLC bear
interest at a variable base rate plus an applicable margin. Therefore, an
increase in prevailing interest rates would have an effect on the interest rates
charged on any borrowings outstanding under our credit agreement. If prevailing
interest rates result in higher interest rates on any debt we incur under the
credit agreement, the increased interest expense could adversely affect our cash
flow and our ability to service our debt.




Our controlling stockholder may take
actions that conflict with the interests of others.





Affiliates
of Castle Harlan control the power to elect our directors, to appoint members of
management and to approve all actions requiring the approval of the holders of
our common stock, including adopting amendments to our certificate of
incorporation and approving mergers, acquisitions, sales of all or substantially
all of our assets, debt incurrences and other significant corporate
transactions.  The interests of our controlling stockholder could
conflict with the interests of others.  In addition, Castle Harlan is
in the business of making investments in companies and may, from time to time,
acquire interests in businesses that compete directly or indirectly with
us.  Castle Harlan also may pursue, for its own account, acquisition
opportunities that may be complementary to our business and, as a result, those
acquisition opportunities may not be available to us.





16
 Table of Contents




Our
compliance with Sarbanes-Oxley requires significant resources and results in
additional costs.





We are
subject to the Sarbanes-Oxley Act of 2002, including Section 404 thereunder,
and, beginning with our fiscal 2009 annual report on Form 10-K, an attestation
report of our auditors on our internal control over financial reporting is
required. Compliance with Sarbanes-Oxley places additional obligations on our
systems and resources and requires us to incur additional costs. In order to
maintain the effectiveness of our disclosure controls and procedures and
internal control over financial reporting, significant resources and management
oversight is required, as we need to devote additional time and personnel to
legal, financial and accounting activities to ensure our ongoing compliance with
the public company reporting requirements. In future years, if we fail to timely
complete our assessment of the effectiveness of our internal control over
financial reporting, or if our auditors cannot timely issue their attestation
report, we may cease to be in compliance with our reporting requirements under
the Securities Exchange Act of 1934, as amended, and could suffer a loss of
public confidence in our internal controls, either of which could adversely
affect our ability to access the capital markets.





Item 1b. Unresolved
Staff Comments.





Not
applicable.








17
 Table of Contents





Item 2.
Properties.





The
following table lists the number of full-service Company-operated and franchised
restaurants, by state or country, as of December 28, 2008. The Company-operated
restaurants of Marie Callender’s include wholly-owned restaurants, East Side
Mario’s and those restaurants operated under various partnership agreements. The
table excludes one limited service Perkins Express located in Utah.








Perkins
      Restaurants
                
                
                Marie
      Callender's RestaurantsCompany-Operated
                
                
                Franchise
                
                
                Total
                
                
                Company-Operated
                
                
                Franchise
                
                
                TotalArizona
                
                
                -
                
                
                
                1
                
                
                
                1
                
                
                
                7
                
                
                
                -
                
                
                
                7Arkansas
                
                
                -
                
                
                
                2
                
                
                
                2
                
                
                
                -
                
                
                
                -
                
                
                
                -California
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                61
                
                
                
                35
                
                
                
                96Colorado
                
                
                8
                
                
                
                4
                
                
                
                12
                
                
                
                -
                
                
                
                1
                
                
                
                1Delaware
                
                
                -
                
                
                
                1
                
                
                
                1
                
                
                
                -
                
                
                
                -
                
                
                
                -Florida
                
                
                45
                
                
                
                15
                
                
                
                60
                
                
                
                -
                
                
                
                -
                
                
                
                -Georgia
                
                
                -
                
                
                
                1
                
                
                
                1
                
                
                
                -
                
                
                
                -
                
                
                
                -Idaho
                
                
                -
                
                
                
                8
                
                
                
                8
                
                
                
                1
                
                
                
                -
                
                
                
                1Illinois
                
                
                7
                
                
                
                -
                
                
                
                7
                
                
                
                -
                
                
                
                -
                
                
                
                -Indiana
                
                
                -
                
                
                
                5
                
                
                
                5
                
                
                
                -
                
                
                
                -
                
                
                
                -Iowa
                
                
                16
                
                
                
                4
                
                
                
                20
                
                
                
                -
                
                
                
                -
                
                
                
                -Kansas
                
                
                3
                
                
                
                4
                
                
                
                7
                
                
                
                -
                
                
                
                -
                
                
                
                -Kentucky
                
                
                -
                
                
                
                3
                
                
                
                3
                
                
                
                -
                
                
                
                -
                
                
                
                -Maryland
                
                
                -
                
                
                
                2
                
                
                
                2
                
                
                
                -
                
                
                
                -
                
                
                
                -Michigan
                
                
                7
                
                
                
                3
                
                
                
                10
                
                
                
                -
                
                
                
                -
                
                
                
                -Minnesota
                
                
                39
                
                
                
                37
                
                
                
                76
                
                
                
                -
                
                
                
                -
                
                
                
                -Missouri
                
                
                7
                
                
                
                1
                
                
                
                8
                
                
                
                -
                
                
                
                -
                
                
                
                -Montana
                
                
                -
                
                
                
                9
                
                
                
                9
                
                
                
                -
                
                
                
                -
                
                
                
                -Nebraska
                
                
                -
                
                
                
                9
                
                
                
                9
                
                
                
                -
                
                
                
                -
                
                
                
                -Nevada
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4
                
                
                
                3
                
                
                
                7New
      Jersey
                
                
                -
                
                
                
                16
                
                
                
                16
                
                
                
                -
                
                
                
                -
                
                
                
                -New
      York
                
                
                -
                
                
                
                15
                
                
                
                15
                
                
                
                -
                
                
                
                -
                
                
                
                -North
      Carolina
                
                
                -
                
                
                
                2
                
                
                
                2
                
                
                
                -
                
                
                
                -
                
                
                
                -North
      Dakota
                
                
                4
                
                
                
                4
                
                
                
                8
                
                
                
                -
                
                
                
                -
                
                
                
                -Ohio
                
                
                -
                
                
                
                39
                
                
                
                39
                
                
                
                -
                
                
                
                -
                
                
                
                -Oklahoma
                
                
                2
                
                
                
                -
                
                
                
                2
                
                
                
                2
                
                
                
                -
                
                
                
                2Oregon
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4
                
                
                
                1
                
                
                
                5Pennsylvania
                
                
                6
                
                
                
                47
                
                
                
                53
                
                
                
                -
                
                
                
                -
                
                
                
                -South
      Carolina
                
                
                -
                
                
                
                4
                
                
                
                4
                
                
                
                -
                
                
                
                -
                
                
                
                -South
      Dakota
                
                
                -
                
                
                
                11
                
                
                
                11
                
                
                
                -
                
                
                
                -
                
                
                
                -Tennessee
                
                
                4
                
                
                
                9
                
                
                
                13
                
                
                
                -
                
                
                
                -
                
                
                
                -Texas
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4
                
                
                
                -
                
                
                
                4Utah
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5
                
                
                
                -
                
                
                
                5Virginia
                
                
                -
                
                
                
                4
                
                
                
                4
                
                
                
                -
                
                
                
                -
                
                
                
                -Washington
                
                
                -
                
                
                
                6
                
                
                
                6
                
                
                
                3
                
                
                
                -
                
                
                
                3West
      Virginia
                
                
                -
                
                
                
                2
                
                
                
                2
                
                
                
                -
                
                
                
                -
                
                
                
                -Wisconsin
                
                
                16
                
                
                
                27
                
                
                
                43
                
                
                
                -
                
                
                
                -
                
                
                
                -Wyoming
                
                
                -
                
                
                
                5
                
                
                
                5
                
                
                
                -
                
                
                
                -
                
                
                
                -Canada
                
                
                -
                
                
                
                17
                
                
                
                17
                
                
                
                -
                
                
                
                -
                
                
                
                -Mexico
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2
                
                
                
                2Total
                
                
                164
                
                
                
                317
                
                
                
                481
                
                
                
                91
                
                
                
                42
                
                
                
                133








18
 Table of Contents





Our
typical Perkins restaurant averages approximately 5,000 square feet in size and
is located in a free-standing building, with seating capacity ranging between 90
and 250. Marie Callender’s restaurants average 8,000 square feet in size and are
primarily located in free-standing buildings, with a seating capacity ranging
between 70 and 385. We have an ongoing program of prototype development, testing
and remodeling to maintain operationally efficient, cost-effective and inviting
interior and exterior facility design and décor. Over the last five years, we
have invested over $16 million remodeling our Company-operated stores. In
addition, across our restaurant base, we have spent an average of $7.7 million
per year over the last five years on maintenance capital expenditures to
maintain an attractive dining experience. Among our Company-operated stores,
approximately 67% of Perkins’ and 40% of Marie Callender’s are either new or
have been remodeled within the past five years.





During
2008, we opened two new Company-operated Perkins restaurants.  In the
Perkins franchise segment, our franchisees opened two new restaurants during
2008 and closed eight restaurants. During 2007, we opened seven new
Company-operated Perkins restaurants, acquired three Perkins restaurants from
franchisees and closed three Perkins Company-operated restaurants. In the
Perkins franchise segment, our franchisees opened eight new restaurants during
2007 and closed four restaurants.  During 2006, we opened one new
Company-operated Perkins restaurant, acquired three Perkins restaurants from
franchisees, opened five Perkins franchised restaurants and closed eleven
Perkins franchised restaurants.





During
2008, we closed one Company-operated Marie Callender’s
restaurant.   In the Marie Callender’s franchise segment, our
franchisees opened one new restaurant during 2008 and closed three restaurants.
We purchased one Marie Callender’s restaurant from a franchisee in 2007. During
2007, one Company-operated Marie Callender’s restaurant and one Marie
Callender’s franchised restaurant were closed.  During 2006, we opened
one new Company-operated Callender’s Grill restaurant, purchased one Marie
Callender’s restaurant from a franchisee and closed three Company-operated Marie
Callender’s restaurants.





The
following table sets forth certain information regarding Company-operated
restaurants and other properties, as of December 28, 2008:





Number
      of Properties (1)Use
                        
                        Owned
                        
                        
                        Leased
                        
                        
                        TotalOffices
      and Manufacturing Facilities(2)
                        
                        
                        —
                        
                        
                        
                        10
                        
                        
                        
                        10Perkins
      Restaurant and Bakery(3)
                        
                        
                        —
                        
                        
                        
                        164
                        
                        
                        
                        164Marie
      Callender’s Restaurant and Bakery(4,5)
                        
                        
                        —
                        
                        
                        
                        91
                        
                        
                        
                        91


____________





(1)
            In
      addition to the properties noted in the schedule above, we lease seventeen
      properties which are subleased to others and we own two properties which
      are leased to others.





(2)
            Our
      principal office is located in Memphis, Tennessee, and currently comprises
      approximately 43,000 square feet under a lease expiring on May 31, 2013,
      subject to a renewal by us for a maximum of 60 months. We also lease an
      office which comprises approximately 6,300 square feet in Mission Viejo,
      California, with a lease term through April 30, 2013 and no renewal
      options.  In addition to the two office locations, we lease two
      properties in Cincinnati, Ohio, consisting of 36,000 square feet and
      120,000 square feet, and lease one property in Corona, California,
      consisting of 29,600 square feet, for use as manufacturing
      facilities.





(3)
            The
      average term of the remaining leases is approximately 11 years, excluding
      renewal options. The longest lease term will mature in approximately 20
      years and the shortest lease term will mature in less than 1 year,
      excluding renewal options.





(4)
            Includes
      two Callender’s Grill restaurants and the East Side Mario’s
      restaurant.





(5)
            The
      average term of the remaining leases is approximately five years,
      excluding renewal options. The longest lease term will mature in
      approximately 32 years and the shortest lease term will mature in less
      than 1 year, excluding renewal
options.








19
 Table of Contents





Item 3. Legal Proceedings.





We are a
party to various legal proceedings in the ordinary course of business. We do not
believe that any of these known proceedings, either individually or in the
aggregate, are likely to have a material adverse effect on our financial
position, results of operations or cash flows.





Item 4. Submission of Matters to Vote of Security
Holders.





Not
applicable.





20
 Table of Contents





PART II





Item 5. Market for
Registrant’s Common Equity and Related StockholderMatters and Issuer
Purchases of Equity Securities.





Market
information.





No
established public market exists for our equity securities.





Holders.





As of
December 28, 2008, there was 1 stockholder of record.





Dividends.





No
dividends or distributions were declared or paid during 2008, 2007 or 2006. The
Company’s credit agreements and the indentures governing our debt securities
restrict our ability to pay dividends or distributions to our equity
holders.





Purchases
of Equity Securities.





Not
applicable.




21
 Table of Contents





Item 6. Selected Financial Data.





PERKINS
& MARIE CALLENDER’S INC.


SELECTED
FINANCIAL AND OPERATING DATA


(In
Thousands, Except Number of Restaurants)





The
following financial and operating data should be read in conjunction with
Management’s Discussion and Analysis of Financial Conditions and Results of
Operations and the consolidated financial statements and data included elsewhere
in this Annual Report on Form 10-K.





As a
result of the Combination, the financial statements of the Company and WRG are
presented on a consolidated basis as of September 21, 2005, the first date on
which both companies were under common control, and include the combined results
of operations of each company for all periods presented after such date. Prior
to September 21, 2005, the consolidated financial statements and data presented
include WRG only.





2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Income
      Data:Revenues
                
                $
                581,970
                
                
                
                587,886
                
                
                
                594,190
                
                
                
                321,473
                
                
                
                228,760Net
      loss
                
                
                (52,953
                )
                
                
                (16,335
                )
                
                
                (9,372
                )
                
                
                (15,231
                )
                
                
                (16,318
                )Balance
      Sheet Data (at year end):Total
      assets
                
                
                323,508
                
                
                
                362,942
                
                
                
                346,845
                
                
                
                346,276
                
                
                
                56,459Long-term
      debt and capital lease
                  obligations
      (a)
                
                
                330,249
                
                
                
                309,996
                
                
                
                292,628
                
                
                
                300,077
                
                
                
                105,114Distributions
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Statistical
      Data:Full-service
      restaurants in operation at end of year:Company-operated
      Perkins
                
                
                164
                
                
                
                162
                
                
                
                155
                
                
                
                151
                
                
                
                —Franchised
      Perkins (b)
                
                
                317
                
                
                
                323
                
                
                
                322
                
                
                
                331
                
                
                
                —Total
      Perkins
                
                
                481
                
                
                
                485
                
                
                
                477
                
                
                
                482
                
                
                
                —Company-operated
      Marie Callender’s
                
                
                90
                
                
                
                91
                
                
                
                91
                
                
                
                92
                
                
                
                93Company-operated
      East Side Mario’s
                
                
                1
                
                
                
                1
                
                
                
                1
                
                
                
                1
                
                
                
                1Franchised
      Marie Callender’s
                
                
                42
                
                
                
                44
                
                
                
                46
                
                
                
                47
                
                
                
                51Total
      Marie Callender’s
                
                
                133
                
                
                
                136
                
                
                
                138
                
                
                
                140
                
                
                
                145Average
      annual sales per company-operated Perkins restaurant
                
                $
                1,840
                
                
                
                1,890
                
                
                
                1,944
                
                
                
                1,866
                
                
                
                —Average
      annual royalties per franchised Perkins restaurant
                
                
                62
                
                
                
                64
                
                
                
                66
                
                
                
                64
                
                
                
                —Average
      annual sales per company-operated Marie Callender’s
    restaurant
                
                
                2,217
                
                
                
                2,339
                
                
                
                2,369
                
                
                
                2,298
                
                
                
                2,202Average
      annual royalties per franchised Marie Callender’s
    restaurant
                
                
                98
                
                
                
                102
                
                
                
                105
                
                
                
                107
                
                
                
                102


____________





(a)
            Excluding
      current maturities of $382, $9,464, $1,706, $3,311 and $3,127,
      respectively.





(b)
            Excludes
      one franchised Perkins Express.





22
 Table of Contents





Item 7. Management’s
Discussion and Analysis of Financial Condition and Resultsof
Operations.





General.The
following discussion and analysis should be read in conjunction with and is
qualified in its entirety by reference to the consolidated financial statements
and accompanying notes of the Company included elsewhere in this Form 10-K.
Except for historical information, the discussions in this section contain
forward-looking statements that involve risks and uncertainties, as indicated in
“Information Concerning Forward-Looking Statements” below.  Except as
otherwise indicated references to “years” mean our fiscal year ended December
28, 2008, December 30, 2007 or December 31, 2006.





Information Concerning
Forward-Looking Statements.This annual report on Form 10-K
contains “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). These statements, written, oral or
otherwise made, may be identified by the use of forward-looking terminology such
as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,”
“may,” “might,” “plan,” “potential,” “predict,” “should” or “will,” or the
negative thereof or other variations thereon or comparable
terminology.





We have
based these forward-looking statements on our current expectations, assumptions,
estimates and projections. While we believe these expectations, assumptions,
estimates and projections are reasonable, such forward-looking statements are
only predictions and involve known and unknown risks and uncertainties, many of
which are beyond our control. These and other important factors may cause our
actual results, performance or achievements to differ materially from any future
results, performance or achievements expressed or implied by these
forward-looking statements. Factors affecting these forward-looking statements
include, among others, the following:





•
            general
      economic conditions, consumer preferences and demographic patterns, either
      nationally or in particular regions in which we
  operate;





•
            our
      substantial indebtedness;





•
            our
      liquidity and capital resources;





•
            competitive
      pressures and trends in the restaurant
industry;





•
            prevailing
      prices and availability of energy, raw materials, food, supplies and
      labor;





•
            a
      failure to obtain timely deliveries from our suppliers or other supplier
      issues;





•
            our
      ability to successfully implement our business
  strategy;





•
            relationships
      with franchisees and financial health of
  franchisees;





•
            legal
      proceedings and regulatory matters;
and





•
            our
      development and expansion plans.





Given
these risks and uncertainties, you are cautioned not to place undue reliance on
such forward-looking statements. The forward-looking statements included in this
Form 10-K are made only as of the date hereof. We do not undertake and
specifically decline any obligation to update any such statements or to publicly
announce the results of any revisions to any of such statements to reflect
future events or developments.





Our
Company.References to the “Company,” “us” or “we” refer to
Perkins & Marie Callender’s Inc. and its consolidated
subsidiaries.








23
 Table of Contents





The
Company operates two restaurant concepts: (1) full-service family dining
restaurants located primarily in the Midwest, Florida and Pennsylvania under the
name Perkins Restaurant and Bakery (“Perkins”), and (2) mid-priced,
casual-dining restaurants, specializing in the sale of pies and other bakery
items, located primarily in the western United States under the name Marie
Callender’s Restaurant and Bakery (“Marie Callender’s”).





The
Company also operates a bakery goods manufacturing segment (“Foxtail”), which
manufactures pies, muffin batters, cookie doughs, pancake mixes, and other food
products for sale to our Perkins and Marie Callender’s Company-operated and
franchised restaurants and to food service distributors.





Combination of Companies Under Common
Control.On November 12, 1999, CHP III, a New York-based
private equity fund managed by Castle Harlan, acquired WRG, a privately held
company, through the purchase of a majority interest in the equity interests of
WRG.





On
September 21, 2005, P&MC’s Holding Corp., an affiliate of CHP IV, a New
York-based private equity fund also managed by Castle Harlan, purchased all of
the outstanding capital stock of the parent of the Company. CHP III and CHP IV
are under the common control of Castle Harlan.





On May 3,
2006, in connection with the Combination, the Company purchased all the
outstanding stock of WRG and the shareholders of WRG received equity interests
in P&MC’s Holding LLC, the Company’s indirect parent, in exchange for their
WRG stock.  As a result of the purchase, WRG became a direct
wholly-owned subsidiary of the Company.  From September 21, 2005
through May 3, 2006, both the Company and WRG were portfolio companies under the
common control of Castle Harlan; therefore, the financial statements of both
entities are presented retroactively on a consolidated basis, in a manner
similar to a pooling of interests, from September 21, 2005, the first date at
which both companies were under common control. This transaction is described
more fully in Note 4 to the consolidated financial statements, “Combination of
Companies Under Common Control.”





Key Factors Affecting our
Business.The key factors that affect our operating results
are general economic conditions, competition, our comparable restaurant sales,
which are driven by our comparable customer counts and our guest check average,
restaurant openings and closings, commodity prices, energy prices, our ability
to manage operating expenses, such as food cost, labor and benefits, weather,
and governmental legislation. Comparable restaurant sales and comparable
customer counts are measures of the percentage increase or decrease of the sales
and customer counts, respectively, of restaurants open at least one full fiscal
year prior to the start of the comparative year. We do not use new restaurants
in our calculation of comparable restaurant sales until they are open for at
least one full fiscal year in order to allow a new restaurant’s operations time
to stabilize and provide more meaningful results.




The
results of the franchise operations are mainly impacted by the same factors as
those impacting our restaurant segments, excluding the operating cost factors
since franchise segment income is earned primarily through royalty
income.




Like much
of the restaurant industry, we view comparable restaurant sales as a key
performance metric at the individual restaurant level, within regions and
throughout our Company. With our information systems, we monitor comparable
restaurant sales on a daily, weekly and monthly basis on a
restaurant-by-restaurant basis. The primary drivers of comparable restaurant
sales performance are changes in the average guest check and changes in the
number of customers, or customer count. Average guest check is primarily
affected by menu price changes and changes in the mix of items purchased by our
customers. We also monitor entree count, which we believe is indicative of
overall customer traffic patterns. To increase restaurant sales, we focus
marketing and promotional efforts on increasing customer visits and sales of
particular products. Restaurant sales performance is also affected by other
factors, such as food quality, the level and consistency of service within our
restaurants and franchised restaurants, the attractiveness and physical
condition of our restaurants and franchised restaurants, as well as local,
regional and national competitive and economic factors.




Marie
Callender’s food cost percentage is traditionally higher than Perkins food cost
percentage primarily as a result of a greater portion of sales that are derived
from lunch and dinner items, which typically carry higher food costs than
breakfast items.


The
operating results of Foxtail are impacted mainly by the following
factors:  orders from our external customer base, general economic
conditions, labor and employee benefit expenses, production efficiency,
commodity prices, energy prices, Perkins and Marie Callender’s restaurant
openings and closings, governmental legislation and food safety
requirements.
  Fiscal
2008 has been challenging for the family and casual dining segments of the
restaurant industry. Largely as a result of the current general economic
downturn, we experienced a decrease in comparable annual sales for both Perkins
and Marie Callender’s in 2008. We believe that decreases in residential real
estate prices, especially in some of our larger markets, the rise in
unemployment, the decrease in investment values, the consequent pressures on
consumer sentiment and spending, and the increase in gas prices have reduced
household discretionary spending, which has adversely affected our revenues. At
the same time, our costs have increased, and consequently, we have experienced
an increase in net losses. If the current economic conditions persist or worsen,
our revenues are likely to continue to suffer and our losses could
increase.





24
 Table of Contents





In
comparison to the year ended December 30, 2007, Perkins’ Company-operated
restaurants’ comparable sales decreased by 2.8% and Marie Callender’s
Company-operated restaurants’ comparable sales decreased by
6.5%.  These declines in comparable sales resulted primarily from
decreases in comparable guest counts at both concepts.  Management
believes the decline in comparable guest counts for both concepts is
attributable primarily to adverse economic conditions that are impacting the
restaurant industry, particularly in Florida for Perkins restaurants and in
California for Marie Callender’s restaurants.


Operations,
Financial Position and Liquidity.At December 28, 2008, we had a
negative working capital balance of $19,598,000 and a total stockholder’s
deficit of $111,073,000.  At December 28, 2008, we had $4,613,000 in
unrestricted cash and cash equivalents and $11,596,000 of borrowing capacity
under our revolving credit facility.
  Our
principal sources of liquidity include unrestricted cash, available borrowings
under our revolving credit facility and cash generated by
operations.  We also have from time to time received capital
contributions from our parent company, including a $12,500,000 capital
contribution received in 2008, and engaged in capital markets
transactions.  Our principal uses of liquidity are costs and expenses
associated with our restaurant and manufacturing operations, servicing
outstanding indebtedness (including interest), and making capital
expenditures.
  We
have experienced a decline in same store sales and an increase in net losses in
recent quarterly periods.  The recent turmoil in the economy has
adversely affected our guest counts and, in turn, our net loss and cash
generated by operations.  The Company expects to incur a net loss in
2009.  In order to improve the cash flows in our business, we have
introduced a new breakfast program at our Marie Callender’s restaurants,
implemented price increases, improved systems to more effectively manage our
food and labor costs, upgraded our management staff and certain equipment in our
Foxtail division to drive higher operating efficiencies, reduced overall planned
capital expenditures for 2009, and eliminated several salaried
positions.  Management expects these initiatives together with the
Company’s cash provided by operations and borrowing capacity to provide
sufficient liquidity for at least the next twelve months.  However,
there can be no assurance as to whether these or other actions will enable us to
generate sufficient cash flow to fund our operations and service our
debt.


Summary of Significant and Critical
Accounting Policies.The preparation of financial statements
in accordance with accounting principles generally accepted in the United States
of America requires management to adopt accounting policies and make significant
judgments and estimates to develop amounts reflected and disclosed in the
financial statements. In many cases, there are alternative policies or
estimation techniques that could be used. We maintain a process for reviewing
the application of our accounting policies and for evaluating the
appropriateness of the estimates that are required to prepare the financial
statements of our Company. However, even under optimal circumstances, estimates
routinely require adjustment based on changing circumstances and the receipt of
new or better information.





Revenue
Recognition





Revenue
at our restaurants is recognized when customers pay for products at the time of
sale. This revenue reporting process is covered by our system of internal
controls and generally does not require significant management judgments and
estimates. However, estimates are inherent in the calculation of franchisee
royalty revenue. We calculate an estimate of royalty income each period and
adjust royalty income when actual amounts are reported by
franchisees.  A $1,000,000 change in estimated franchise sales would
impact royalty revenue by $40,000 to $50,000.  Historically, these
adjustments have not been material.





Sales
Taxes





Sales
taxes collected from customers are excluded from revenues. The obligation is
included in accrued expenses until the taxes are remitted to the appropriate
taxing authorities.





Advertising





We
recognize advertising expense in the operating expenses of the restaurant
segment. Those advertising costs are expensed as incurred.  Advertising
expense was approximately $24,016,000, $21,130,000 and $20,267,000 for fiscal
years 2008, 2007 and 2006, respectively.






25
 Table of Contents





Leases





Future
commitments for operating leases are not reflected as a liability on our
consolidated balance sheets. The determination of whether a lease is accounted
for as a capital lease or as an operating lease requires management to make
estimates primarily about the fair value of the asset, its estimated economic
useful life and the incremental borrowing rate.











Preopening
Costs





In
accordance with the American Institute of Certified Public Accountants issued
Statement of Position (“SOP”) 98-5, “Reporting on the Costs of Start-Up
Activities,” we expense the costs of start-up activities as
incurred.





Transaction
Costs





The
Company has classified certain expenses incurred in fiscal 2007 and 2006 as
transaction costs on the consolidated statements of
operations.  Transaction costs include expenses directly attributable
to the Acquisition in September 2005 and the Combination and certain
non-recurring expenses incurred as a result of the Acquisition and the
Combination.  There were no transaction costs for 2008. Transaction
costs were $1,013,000 and $5,674,000 for 2007 and 2006, respectively. The direct
expenses consisted of administrative, consultative and legal
expenses.





Cash
Equivalents





We
consider all highly liquid investments with an original maturity of three months
or less to be cash equivalents.





Perkins
Marketing Fund and Gift Card Fund





The
Company maintains a marketing fund (the “Marketing Fund”) to pool the resources
of the Company and its franchisees for advertising purposes and to promote the
Perkins brand in accordance with the system’s advertising policy.  The
Company has classified approximately $6,912,000 and $7,376,000 as of
December 28, 2008 and December 30, 2007, respectively, as restricted cash on its
consolidated balance sheets.  This amount represents funds contributed
specifically for the purpose of advertising. The Company has also recorded
liabilities of approximately $978,000 and $937,000 as of December 28, 2008 and
December 30, 2007, respectively, for accrued advertising, which is included in
accrued expenses on the accompanying consolidated balance sheets, and
approximately $5,316,000 and $5,940,000 as of December 28, 2008 and December 30,
2007, respectively, which is included in Franchise advertising contributions on
the accompanying consolidated balance sheets and represents franchisee
contributions for advertising services not yet provided.





The
Company markets gift cards at both its Company-operated and franchised Perkins
restaurants.  The Company maintains a separate bank account
specifically for cash inflows from gift card sales and cash outflows from gift
card redemptions and expenses (the “Gift Card Fund”). The Gift Card Fund is
consolidated with PMCI and, accordingly, the Company has recorded approximately
$3,228,000 and $2,722,000 of net gift card proceeds received from Perkins’
franchisees as restricted cash as of December 28, 2008 and December 30, 2007,
respectively, on its consolidated balance sheets. The operating expenses of the
Gift Card Fund, which primarily consist of production costs of the cards and
bank fees, are not significant.  Through the fiscal year ended
December 28, 2008, the Company has not recorded breakage on the gift cards, as
it does not have sufficient historical redemption data.





Concentration
of Credit Risk





Financial
instruments, which potentially expose us to concentrations of credit risk,
consist principally of franchisee and Foxtail accounts receivable. We perform
ongoing credit evaluations of our franchisees and Foxtail customers and
generally require no collateral to secure accounts receivable. The credit review
is based on both financial and non-financial factors. Based on this review, we
provide for estimated losses for accounts receivable that are not likely to be
collected. Although we maintain good relationships with our franchisees, if
average sales or the financial health of significant franchises were to
deteriorate, we might have to increase our reserves against collection of
franchise receivables.





26
 Table of Contents





Additional
financial instruments that potentially subject us to a concentration of credit
risk are cash and cash equivalents. At times, cash balances may be in excess of
Federal Deposit Insurance Corporation insurance limits. The Company has not
experienced any losses with respect to bank balances in excess of government
provided insurance.





Long
Lived Assets





Major
renewals and betterments are capitalized; replacements and maintenance and
repairs that do not extend the lives of the assets are charged to operations as
incurred. Upon disposition, both the asset and the accumulated depreciation
amounts are relieved, and the related gain or loss is credited or charged to the
statement of operations. Depreciation and amortization is computed primarily
using the straight-line method over the estimated useful lives unless the assets
relate to leased property, in which case, the amortization period is
the lesser of the useful lives or the lease terms. A summary of the useful
lives is as follows:





YearsLand
      improvements
              3 —
      20Buildings
              20
      — 30Leasehold
      improvements
              3 —
      20Equipment
              1 —
      7





The
depreciation of our capital assets over their estimated useful lives (or in the
case of leasehold improvements, the lesser of their estimated useful lives or
lease term) and the determination of any salvage values require management to
make judgments about future events. Because we utilize many of our capital
assets over relatively long periods, we periodically evaluate whether
adjustments to our estimated lives or salvage values are necessary. The accuracy
of these estimates affects the amount of depreciation expense recognized in a
period and, ultimately, the gain or loss on the disposal of the asset.
Historically, gains and losses on the disposition of assets have not been
significant. However, such amounts may differ materially in the future based on
restaurant performance, technological obsolescence, regulatory requirements and
other factors beyond our control.





Due to
the significant amounts required for the construction or acquisition of new
restaurants, we have risks that these assets will not provide an acceptable
return on our investment and an impairment of these assets may occur. The
accounting test for whether an asset held for use is impaired involves first
comparing the carrying value of the asset with its estimated future undiscounted
cash flows. If these cash flows do not exceed the carrying value, the asset must
be adjusted to its current fair value. We perform this test on each of our long
lived assets periodically and as indicators arise to evaluate whether impairment
exists. Factors influencing our judgment include the age of the asset,
estimation of future cash flows from long lived assets and estimation of fair
value.  Asset fair value is determined using discounted cash flow
models, residual proceeds and other factors that may impact the ultimate return
of our investment in the long lived asset.





Goodwill
and Intangible Assets





As of
December 28, 2008 and December 30, 2007, we had approximately $160,683,000 and
$183,354,000, respectively, of goodwill and intangible assets on our
consolidated balance sheet primarily resulting from the Acquisition. We account
for our goodwill and other intangible assets in accordance with SFAS No. 142,
“Goodwill and Other Intangible Assets”, which provides guidance regarding the
recognition and measurement of intangible assets, eliminates the amortization of
certain intangibles and requires assessments for impairment of intangible assets
that are not subject to amortization at least annually, or more frequently if
events or changes in circumstances indicate that the asset might be impaired.
Our annual evaluation, performed as of year-end or on an interim basis if
circumstances warrant, requires the use of estimates about the future cash flows
of each of our reporting units and non-amortizing intangibles to determine their
estimated fair values. Changes in forecasted operations and changes in discount
rates can materially affect these estimates. However, once an impairment of
goodwill or intangible assets has been recorded, it cannot be
reversed.








27
 Table of Contents





Due to
the decrease in the Company’s operating results during 2008 compared to 2007 and
the decline in general economic conditions impacting the restaurant industry,
management conducted an interim goodwill impairment evaluation during the
quarter ended October 5, 2008. Fair values of the reporting units were
calculated using discounted future cash flows and market-based comparative
values.  Because the carrying values of the reporting units in both
the franchise and Foxtail segments exceeded their respective estimated fair
values, the Company completed step two of the goodwill test and concluded that
the goodwill of both reporting units was fully impaired as of October 5, 2008.
Accordingly, the Company recorded a non-cash goodwill impairment charge of
$20,202,000 in the quarter ended October 5, 2008.   See Note 8 to
the consolidated financial statements included in this Form 10-K.





Deferred
Income Taxes and Income Tax Uncertainties





We record
income tax liabilities utilizing known obligations and estimates of potential
obligations.  A deferred tax asset or liability is recognized whenever
there are future tax effects from existing temporary differences and operating
loss and tax credit carry forwards.  We record a valuation allowance
to reduce deferred tax assets to the balance that is more likely than not to be
realized.  In evaluating the need for a valuation allowance, we must
make judgments and estimates on future taxable income, feasible tax planning
strategies and existing facts and circumstances.  When we determine
that deferred tax assets could be realized in greater or lesser amounts than
recorded, the assets’ recorded amount is adjusted and the income statement is
either credited or charged, respectively, in the period during which the
determination is made.  We believe that the valuation allowance
recorded at December 28, 2008 is adequate for the
circumstances.  However, subsequent changes in facts and circumstances
that affect our judgments or estimates in determining the proper deferred tax
assets or liabilities could materially affect the recorded
balances.





The
Company’s accounting for uncertainty in income taxes prescribes a recognition
threshold and a measurement attribute for the financial statement recognition
and measurement of tax positions taken or expected to be taken in a tax
return.  For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing
authorities.  The amount recognized is measured as the largest amount
of benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement.





Insurance
Reserves





We are
self-insured up to certain limits for costs associated with workers’
compensation claims, general liability claims, property claims and benefits paid
under employee health care programs. At December 28, 2008 and December 30, 2007,
we had total self-insurance accruals reflected in our consolidated balance
sheets of approximately $8,803,000 and $7,952,000, respectively. The measurement
of these costs required the consideration of historical loss experience and
judgments about the present and expected levels of cost per claim. We account
for the workers’ compensation costs primarily through actuarial methods, which
develop estimates of the discounted liability for claims incurred, including
those claims incurred but not reported. These methods provide estimates of
future ultimate claim costs based on claims incurred as of the balance sheet
dates. We account for benefits paid under employee health care programs using
historical claims information as the basis for estimating expenses incurred as
of the balance sheet dates. We believe the use of these methods to account for
these liabilities provides a consistent and effective way to measure these
highly judgmental accruals. However, the use of any estimation technique in this
area is inherently sensitive given the magnitude of claims involved and the
length of time until the ultimate cost is known. We believe that our recorded
obligations for these expenses are consistently measured on an appropriate
basis. Nevertheless, changes in health care costs, accident frequency and
severity and other factors, including discount rates, can materially affect
estimates for these liabilities.








28
 Table of Contents





Results of
Operations.Prior to the Combination on May 3, 2006, the
Company and WRG were separate entities under the common control of Castle
Harlan, as defined in Emerging Issues Task Force Issue No. 02-5, Definition of “Common Control” in
Relation to FASB Statement No. 141. As a
result of the Combination, the financial statements of these entities are
presented retroactively on a consolidated basis, in a manner similar to a
pooling of interest, as of September 21, 2005, the first date on which both
companies were under common control, and the financial statements include the
results of operations of each company for all periods presented after such
date.





Financial
Statement Presentation





The
accompanying consolidated financial statements include the financial results of
the Company for fiscal years 2008 and 2007 and for the Company and WRG on a
consolidated basis for 2006.  Intercompany transactions have been
eliminated in consolidation.





Our
financial reporting is based on thirteen four-week periods ending on the last
Sunday in December. In 2006, as is the case every six years, the fourth quarter
included an extra week of operations and therefore the year included fifty-three
weeks of operations compared to fifty-two weeks of operations in 2008 and
2007.





Seasonality





Sales
fluctuate seasonally and the Company’s fiscal quarters do not all have the same
time duration.  Specifically, the first quarter has an extra four weeks
compared to the other quarters of the fiscal year.  Historically, our
average weekly sales are highest in the fourth quarter (approximately October
through December), resulting primarily from holiday pie sales at both
Perkins and Marie Callender’s restaurants and Thanksgiving feast sales at Marie
Callender’s restaurants.  Therefore, the quarterly results are not
necessarily indicative of results that may be achieved for the full fiscal
year.  Factors influencing relative sales variability, in addition to
the holiday impact noted above, include, but are not limited to, the
frequency and popularity of advertising and promotions, the relative sales
levels of new and closed locations, other holidays and
weather.





Overview





Our
revenues are derived primarily from restaurant operations, franchise royalties
and the sale of bakery products produced by Foxtail. Sales from Foxtail to
Company-operated restaurants are eliminated in the accompanying statements of
operations. Segment revenues as a percentage of total revenues were as
follows:


Percentage
      of Total RevenuesYear
      Ended
                      
                      
                      Year
      Ended
                      
                      
                      Year
      EndedDecember
      28, 2008
                      
                      
                      December
      30, 2007
                      
                      
                      December
      31, 2006Restaurant
      operations
                      
                      
                      86.5
                      %
                      
                      
                      86.9
                      %
                      
                      
                      86.2
                      %Franchise
      operations
                      
                      
                      4.1
                      %
                      
                      
                      4.4
                      %
                      
                      
                      4.5
                      %Foxtail
                      
                      
                      8.5
                      %
                      
                      
                      7.8
                      %
                      
                      
                      8.5
                      %Other
                      
                      
                      0.9
                      %
                      
                      
                      0.9
                      %
                      
                      
                      0.8
                      %Total
      revenues
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %





29
 Table of Contents




The
following table reflects certain data for the year ended December 28, 2008
compared to the preceding two fiscal years. The consolidated information is
derived from the accompanying consolidated statements of
operations.  Data from the Company’s segments – restaurant operations,
franchise operations, Foxtail and other is included for
comparison.  The ratios presented reflect the underlying dollar values
expressed as a percentage of the applicable revenue amount (food cost as a
percentage of food sales; labor and benefits and operating expenses as a
percentage of total revenues in the restaurant operations and franchise
operations segments and as a percentage of food sales in the Foxtail
segment).  The food cost ratio in the consolidated results reflects
the elimination of intersegment food cost of $20,088,000, $19,826,000 and
$18,682,000 in 2008, 2007 and 2006, respectively.





Consolidated
      Results
                
                
                Restaurant
      Operations
                
                
                Franchise
      Operations2008
                
                
                2007
                
                
                2006
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2008
                
                
                2007
                
                
                2006Food
      sales
                
                $
                572,550
                
                
                
                576,816
                
                
                
                581,424
                
                
                
                503,242
                
                
                
                510,863
                
                
                
                512,104
                
                
                
                -
                
                
                
                -
                
                
                
                -Franchise
      and other revenue
                
                
                29,508
                
                
                
                30,896
                
                
                
                31,448
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                24,141
                
                
                
                25,982
                
                
                
                26,894Intersegment
      revenue
                
                
                (20,088
                )
                
                
                (19,826
                )
                
                
                (18,682
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      revenues
                
                
                581,970
                
                
                
                587,886
                
                
                
                594,190
                
                
                
                503,242
                
                
                
                510,863
                
                
                
                512,104
                
                
                
                24,141
                
                
                
                25,982
                
                
                
                26,894Food
      cost
                
                
                29.2
                %
                
                
                28.5
                %
                
                
                28.4
                %
                
                
                26.9
                %
                
                
                27.1
                %
                
                
                27.1
                %
                
                
                n/a
                
                
                
                n/a
                
                
                
                n/aLabor
      and benefits
                
                
                32.4
                %
                
                
                32.2
                %
                
                
                31.2
                %
                
                
                35.5
                %
                
                
                35.3
                %
                
                
                34.5
                %
                
                
                n/a
                
                
                
                n/a
                
                
                
                n/aOperating
      expenses
                
                
                26.2
                %
                
                
                25.4
                %
                
                
                25.3
                %
                
                
                28.3
                %
                
                
                27.6
                %
                
                
                27.6
                %
                
                
                8.3
                %
                
                
                8.5
                %
                
                
                7.9
                %Segment
      (loss) profit
                
                $
                (52,953
                )
                
                
                (16,335
                )
                
                
                (9,372
                )
                
                
                26,806
                
                
                
                32,459
                
                
                
                34,369
                
                
                
                3,603
                
                
                
                23,774
                
                
                
                24,770Foxtail
      (a)
                
                
                Other
      (b)2008
                
                
                2007
                
                
                2006
                
                
                2008
                
                
                2007
                
                
                2006Food
      sales
                
                $
                69,308
                
                
                
                65,953
                
                
                
                69,320
                
                
                
                -
                
                
                
                -
                
                
                
                -Franchise
      and other revenue
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,367
                
                
                
                4,914
                
                
                
                4,554Intersegment
      revenue
                
                
                (20,088
                )
                
                
                (19,826
                )
                
                
                (18,682
                )
                
                
                -
                
                
                
                -
                
                
                
                -Total
      revenues
                
                
                49,220
                
                
                
                46,127
                
                
                
                50,638
                
                
                
                5,367
                
                
                
                4,914
                
                
                
                4,554Food
      cost
                
                
                65.9
                %
                
                
                60.9
                %
                
                
                56.9
                %
                
                
                n/a
                
                
                
                n/a
                
                
                
                n/aLabor
      and benefits
                
                
                13.5
                %
                
                
                13.1
                %
                
                
                12.3
                %
                
                
                n/a
                
                
                
                n/a
                
                
                
                n/aOperating
      expenses
                
                
                11.0
                %
                
                
                9.7
                %
                
                
                9.4
                %
                
                
                n/a
                
                
                
                n/a
                
                
                
                n/aSegment
      (loss) profit
                
                $
                (4,500
                )
                
                
                3,687
                
                
                
                8,255
                
                
                
                (78,862
                )
                
                
                (76,255
                )
                
                
                (76,766
                )


(a)
            The
      percentages for food cost, labor and benefits, and operating expenses, as
      presented above, represent manufacturing costs at
      Foxtail.  Foxtail’s selling, general and administrative expenses
      are included in general and administrative expenses in the Consolidated
      Statements of Operations and in the Foxtail segment profit or loss
      presented above.


(b)
              Licensing
      revenue of $5,125,000, $4,564,000 and $4,107,000 for fiscal 2008, 2007 and
      2006, respectively, is included in the other segment revenues. The other
      segment loss includes corporate general and administrative expenses,
      interest expense and other non-operational expenses. For details of the
      other segment loss, see Note 17, “Segment Reporting” in the Notes to
      Consolidated Financial Statements.





30
 Table of Contents




Year
Ended December 28, 2008 Compared to the Year Ended December 30,
2007





Segment
Overview





Restaurant
Operations Segment





The
operating results of the restaurant segment are impacted mainly by the following
factors: general economic conditions, competition, our comparable store sales,
which are driven by our comparable customer counts and our guest check average,
restaurant openings and closings, commodity prices, energy prices, our ability
to manage operating expenses, such as food cost, labor and benefits, weather and
governmental legislation.





Perkins
comparable restaurant sales decreased by 2.8% and Marie Callender’s comparable
restaurant sales decreased by 6.5% in 2008 as compared to 2007. The decrease in
comparable sales resulted primarily from a decrease in comparable guest counts
due to macro-economic conditions. Total restaurant segment revenues decreased
approximately $7,621,000 in 2008, also due primarily to the decrease in
comparable guest counts resulting from macro economic
conditions.  During 2008, the Company opened two Perkins restaurants
and closed one Marie Callender’s restaurant.





Restaurant
segment income decreased approximately $5,653,000 in 2008 compared to a year
ago. The decrease was primarily due to the decrease in comparable restaurant
sales, which was partially offset by a decline in restaurant segment food
cost.





Franchise
Operations Segment





The
operating results of the franchise segment are mainly impacted by the same
factors as those impacting the Company’s restaurant segment, excluding the
operating cost factors since franchise segment income is earned primarily
through royalty income.





Franchise
revenues decreased approximately $1,841,000 in 2008 compared to a year
ago.  During 2008, royalty revenue decreased by $1,468,000 due
principally to a decline in comparable customer counts resulting from
macro-economic conditions and by $373,000 due to lower franchise fees and
renewal fees resulting from a smaller number of new franchises and the
non-renewal of some of our existing franchises.





Franchise
segment profit decreased by $20,171,000 in 2008 compared to 2007 due primarily
to a non-cash goodwill impairment charge of $18,538,000.  Excluding
the impairment charge, franchise segment profit decreased by $1,633,000 due
primarily to the decrease in royalty revenue.  See Note 8 to our
consolidated financial statements contained herein.





During
2008, franchisees opened two Perkins restaurants, closed eight Perkins
restaurants, opened one Marie Callender’s restaurant and closed three Marie
Callender’s restaurants.





Foxtail
Segment





The
operating results of Foxtail are impacted mainly by the following
factors:  orders from our external customer base, general economic
conditions, labor and employee benefit expenses, production efficiency,
commodity prices, energy prices, Perkins and Marie Callender’s restaurant
openings and closings, governmental legislation and food safety
requirements.


Foxtail’s
revenues, net of intercompany sales, increased approximately $3,093,000 compared
to the prior year. The increase was primarily due to increases in selling prices
over all major product lines partially offset by decreases in sales volume
resulting primarily from macro-economic conditions.  The segment loss
of approximately $4,500,000 in 2008 represented a decline of approximately
$8,187,000 as compared to the segment income of $3,687,000 in the prior
year.  The decline was primarily due to increased raw materials costs,
primarily the result of increases in commodity prices, a non-cash goodwill
impairment charge of $1,664,000 in the third quarter of 2008, a decrease in
contribution margin attributable to an approximate 5.5% decrease in sales
volume, in addition to increases of approximately $1,250,000 in outside services
and $800,000 in marketing programs and allowances.





31
 Table of Contents





Revenues





Consolidated
total revenues decreased approximately $5,916,000 in 2008 compared to
2007.  The decrease was due primarily to a $7,621,000 decrease in
sales in the restaurant segment and a decrease in revenues of $1,841,000 in the
franchise segment, partially offset by increases in sales of $3,093,000 in the
Foxtail segment and licensing and other revenues of $453,000 in the other
segment.  Total revenues of approximately $581,970,000 in 2008 were
1.0% lower than total revenues of approximately $587,886,000 in
2007.





Restaurant
segment sales of $503,242,000 and $510,863,000 in 2008 and 2007, respectively,
accounted for 86.5% and 86.9% of total revenues, respectively. Total restaurant
segment sales decreased as a percentage of total revenues due an overall 4.4%
decrease in comparable sales at Company-operated Perkins and Marie Callender’s
restaurants and the increase in Foxtail segment sales.





Franchise
segment revenues of $24,141,000 and $25,982,000 in 2008 and 2007, respectively,
accounted for 4.1% and 4.4% of total revenues, respectively. During 2008,
royalty revenue decreased $1,468,000 due principally to a decline in comparable
customer counts and by $373,000 due to lower franchise fees and renewal
fees.





Foxtail
revenues of $49,220,000 and $46,127,000 in 2008 and 2007, respectively,
accounted for 8.5% and 7.8% of total revenues respectively. The increase of
$3,093,000 was primarily due to increases in selling prices over all major
product lines, partially offset by decreases in sales volume.





Costs and
Expenses





Food
Cost





Consolidated
food cost was 29.2% and 28.5% of food sales in 2008 and 2007, respectively.
Restaurant segment food cost was 26.9% and 27.1% of food sales in 2008 and 2007,
respectively, while food cost in the Foxtail segment was 65.9% and 60.9% of food
sales in 2008 and 2007, respectively. This increase of 5.0% in the Foxtail
segment is primarily due to higher commodity costs, particularly dairy and flour
prices.





Labor
and Benefits Expenses





Consolidated
labor and benefits expenses were 32.4% and 32.2% of total revenues in 2008 and
2007, respectively. The labor and benefits ratio increased by 0.2% in the
restaurant segment, while the Foxtail segment labor and benefits expense
increased from 13.1% in 2007 to 13.5% in 2008. The increase in labor and
benefits as a percentage of revenues in the restaurant segment is primarily due
to higher restaurant manager compensation.  The increase of 0.4% in
the Foxtail segment is due primarily to an increase in contract production labor
as well as higher administrative and maintenance compensation.





Operating
Expenses





Total
operating expenses of $152,260,000 in 2008 increased by $2,823,000 as compared
to 2007. The most significant components of operating expenses were rent,
utilities, advertising, restaurant supplies, repair and maintenance and property
taxes. Total operating expenses, as a percentage of total sales, were 26.2% and
25.4% in 2008 and 2007, respectively. Approximately 93.7% and 94.2% of total
operating expenses in 2008 and 2007, respectively, were incurred in the
restaurant segment, and restaurant segment operating expenses, as a percentage
of restaurant sales, were 28.3% and 27.6% in 2008 and 2007,
respectively.  The 0.7% increase in operating expenses as a percentage
of revenues in the restaurant segment resulted primarily from the decline in
revenues and increases in utilities costs and marketing expenses, which were
partially offset by a decrease in pre-opening expenses for new stores. Operating
expenses in the Foxtail segment, as a percentage of segment food sales,
increased 1.3% or $1,232,000 due primarily to higher custodial
services.





General
and Administrative Expenses





The most
significant components of general and administrative (“G&A”) expenses were
corporate labor and benefits, occupancy costs and outside services. Consolidated
G&A expenses represented 8.2% and 7.6% of sales in 2008 and 2007,
respectively. The increase is primarily due to consulting costs of approximately
$1,700,000 (or 0.3%) to design and implement improved operating and accounting
systems at Foxtail and higher marketing costs at Foxtail.




32
 Table of Contents
  Transaction Costs





The
Company has classified certain expenses incurred in fiscal 2007 and 2006 as
transaction costs on the consolidated statements of
operations.  Transaction costs include expenses directly attributable
to the Acquisition in September 2005 and the Combination and certain
non-recurring expenses incurred as a result of the Acquisition and the
Combination.  There were no transaction costs for 2008. Transaction
costs were $1,013,000 for 2007. The direct expenses consisted of administrative,
consultative and legal expenses.





Depreciation
and Amortization





Depreciation
and amortization expense was $24,699,000 and $24,822,000 in 2008 and 2007,
respectively.





Interest,
net





Interest,
net was $36,689,000 or 6.3% of revenues in 2008 compared to $31,180,000 or 5.3%
of revenues in 2007. This increase was primarily due to an increase in the
average effective interest rate to 11.6% from 9.2% and an approximate
$13,700,000 increase in the average debt outstanding during 2008 as compared to
2007.





Asset
Impairments and Closed Store Expenses





Asset
impairments and closed store expenses consist primarily of the write-down to
fair value for impaired stores and adjustments to the reserve for closed stores.
During 2008 and 2007, we recorded expenses of $1,797,000 and $2,463,000,
respectively for asset impairment and store closures.





Goodwill
Impairment





At
December 30, 2007, the Company had $30,038,000 of goodwill, of which $9,836,000
was attributable to restaurant operations, $18,538,000 was attributable to
franchise operations and $1,664,000 was attributable to the Foxtail
segment. The goodwill originated from the Acquisition of the Company in
September 2005. Due to the decrease in the Company’s operating results
during 2008 compared to 2007 and the decline in general economic conditions
impacting the restaurant industry, management conducted an interim goodwill
impairment evaluation during the quarter ended October 5, 2008. Fair values
of the reporting units were calculated using discounted future cash flows and
market-based comparative values.  Because the carrying values of the
reporting units for both the franchise and Foxtail reporting units exceeded
their respective estimated fair values, the Company completed step two of the
goodwill test and concluded that the goodwill of those reporting units was
impaired as of October 5, 2008. Accordingly, in the quarter ended October
5, 2008, the Company recorded a non-cash goodwill impairment charge of
$20,202,000, of which $18,538,000 was charged to the franchise segment and
$1,664,000 was charged to the Foxtail segment.   No impairment
charge was required for the goodwill associated with the restaurant reporting
unit or the Company’s non-amortizing intangibles.  As of December 28,
2008, we conducted our annual impairment test of goodwill and nonamortizing
intangible assets and determined that no impairment charge was
required.









In
connection with the September 2008 refinancing transaction (see “Capital
Resources and Liquidity” below), we terminated our pre-existing credit agreement
and consequently incurred a $2,952,000 loss due to the write-off of deferred
financing costs related to that agreement.





Taxes





The
effective federal and state income tax rates were 3.2% and -10.5% in 2008 and
2007, respectively. Our rates differ from the statutory rate primarily due to a
valuation allowance against deferred tax deductions, losses and
credits.  The effective income tax rate for 2008 reflects current and
deferred tax benefit of losses and credits and the net benefit and interest on
settled and expired uncertain tax positions.  The write-down of
goodwill is not a tax-deductible item and reduced the Company’s effective
income tax rate by -12.6%.





The
Company is open to federal and state tax audits until the applicable statute of
limitations expire. The Company is no longer subject to U.S. federal tax
examinations by tax authorities for tax years before 2005. For the majority of
states where the Company has a significant presence, it is no longer subject to
tax examination by tax authorities for tax years before 2005.








33
 Table of Contents


Year
Ended December 30, 2007 Compared to the Year Ended December 31,
2006
 
 Segment
Overview
 
 Restaurant
Operations Segment
 
 Perkins
comparable restaurant sales decreased by 1.2% and Marie Callender’s comparable
restaurant sales decreased by 0.5% in 2007 as compared to 2006. The decrease in
comparable sales resulted primarily from a decrease in comparable guest counts.
Total restaurant segment revenues decreased approximately $1,241,000 in 2007.
The additional week of operations in 2006 (and approximately $7,400,000 of
revenue attributable to the extra week) was the primary reason for the decrease
in 2007. During 2007, the Company opened seven Perkins restaurants, obtained
three Perkins restaurants from franchisees, obtained one Marie Callender’s
restaurant from a franchisee, closed one Marie Callender’s restaurant, and
closed three Perkins restaurants. Revenues from the new Perkins restaurants
offset the majority of the decline in 2007 sales as compared to 2006 that was
caused by the additional week of operations in 2006 and the decline in
comparable restaurant sales.
 Restaurant
segment income decreased approximately $1,910,000 in 2007 compared to a year
ago. The decrease was primarily due to an increase in rent expense, approximate
$600,000 decrease in segment income attributable to the additional week of
operations in 2006, the decrease in comparable restaurant sales and an increase
in labor and benefits due primarily to an increase in the average wage rate.
These factors were offset in part by the segment income generated by new
restaurants.
  Franchise
Operations Segment





Franchise
revenues decreased approximately $912,000 in 2007 compared to a year ago.
Approximately $300,000 of franchise revenue attributable to the additional week
of 2006 operations was a primary reason for the decrease in 2007. The decrease
was also due, in part, to the impact of the decrease in comparable franchise
restaurant sales in 2007 as compared to 2006, as Perkins franchise comparable
sales decreased an estimated 0.8% and Marie Callender’s franchise comparable
sales decreased an estimated 2.7%.





During
2007, franchisees opened eight Perkins restaurants, closed four Perkins
restaurants and closed one Marie Callender’s restaurant. Three franchised
Perkins restaurants and one franchised Marie Callender’s restaurant were
obtained by the Company.





Foxtail
Segment





Foxtail’s
net sales decreased approximately $4,511,000 from the prior year. The decrease
was primarily due to a decrease in sales of approximately $1,433,000 to one
contractual customer and the loss of a line of business and related sales of
approximately $3,350,000 to one major non-contractual customer. Segment income
of approximately $3,687,000 in 2007 decreased by approximately $4,568,000 as
compared to the prior year due primarily to this decline in sales and due to
increases in commodity costs in excess of selling price increases, an increase
in average wage rates, and a decrease in labor productivity due in part to the
sales decline.





Revenues





Consolidated
total revenues decreased approximately $6,304,000 in 2007 compared to 2006. The
additional week of operations in 2006 (and approximately $8,700,000 of revenue
attributable to the extra week) was the primary reason for the decrease in 2007.
The decrease was also due in part to an approximately $4,511,000 decrease in
sales in the Foxtail segment. Revenues from the new Perkins restaurants offset
the majority of the impact of the additional week of operations in 2006 and the
decrease in Foxtail segment revenues. Total revenues of approximately
$587,886,000 in 2007 were 1.1% lower than total revenues of approximately
$594,190,000 in 2006.





Restaurant
segment sales of $510,863,000 and $512,104,000 in 2007 and 2006, respectively,
accounted for 86.9% and 86.2% of total revenues, respectively. Total restaurant
segment sales increased as a percentage of total revenues due to the greater
decline in Foxtail segment sales than restaurant segment sales.





Franchise
segment revenues of $25,982,000 and $26,894,000 in 2007 and 2006, respectively,
accounted for 4.4% and 4.5% of total revenues, respectively. The decrease was
due to the estimated $300,000 in revenues from 2006’s additional week, plus the
impact of the decrease in comparable franchise restaurant sales in 2007 as
compared to 2006 of 0.8% in the Perkins brand and 2.7% in the Marie Callender’s
brand.





34
 Table of Contents


Foxtail
revenues of $46,127,000 and $50,638,000 in 2007 and 2006, respectively,
accounted for 7.8% and 8.5% of total revenues respectively. The decrease of
$4,511,000 was primarily due to a decrease in sales of approximately $1,433,000
to one contractual customer and the loss of a line of business and related sales
of approximately $3,350,000 to one major non-contractual customer.
 Costs
and Expenses
  Food
Cost
 
 Consolidated
food cost was 28.5% and 28.4% of food sales in 2007 and 2006, respectively.
Restaurant segment food cost was flat at 27.1% of food sales in 2007 and 2006.
In the Foxtail segment, food cost was 60.9% and 56.9% of food sales in 2007 and
2006, respectively. This increase of 4.0 percentage points is primarily due to
higher commodity costs and production inefficiencies resulting in part from
lower sales.


Labor
and Benefits Expenses





Consolidated
labor and benefits expenses were 32.2% and 31.2% of total revenues in 2007 and
2006, respectively. The labor and benefits ratio increased by 0.8 % in the
restaurant segment, while the Foxtail segment labor and benefits expense
increased from 12.3% in 2006 to 13.1% in 2007. The increase in the restaurant
segment is primarily due to a 1.4% and 1.9% increase in the average wage rate at
Perkins restaurants and Marie Callender’s restaurants, respectively. Federal and
state minimum wage rate laws impact the wage rates of our hourly employees. The
increase in the Foxtail segment is due primarily to an increase in the average
wage rate in the Cincinnati plants due to competitive pressures in the
marketplace, as well as lower labor productivity resulting from reduced
sales.





Operating
Expenses





Total
operating expenses of $149,437,000 in 2007 decreased by $665,000 as compared to
2006. The most significant components of operating expenses were rent,
utilities, advertising, restaurant supplies, repair and maintenance and property
taxes. Total operating expenses, as a percentage of total sales, were 25.4% and
25.3% in 2007 and 2006, respectively. Approximately 94.2% of total operating
expenses in both 2007 and 2006 were incurred in the restaurant segment and
restaurant segment operating expenses, as a percentage of restaurant sales, were
27.6% in both 2007 and 2006. Operating expenses in the Foxtail segment, as a
percentage of segment food sales, increased 0.3 % due primarily to customer
rebate programs and increased utilities expense.





General
and Administrative Expenses





The most
significant components of general and administrative (“G&A”) expenses were
corporate labor and benefits, occupancy costs and outside services. Consolidated
G&A expenses represented 7.6% and 8.1% of sales in 2007 and 2006,
respectively. The decrease is primarily due to an approximate $2,813,000 (or 0.5
percentage point) reduction in corporate incentive compensation and continuing
synergies achieved as a result of the Combination. These savings are partially
offset by three legal settlements that totaled approximately
$750,000.





Transaction
Costs





The
Company has classified certain expenses directly attributable to the Combination
in May 2006 and certain non-recurring expenses incurred as a result of the
Combination as transaction costs on the consolidated statements of operations.
Transaction costs were $1,013,000 and $5,674,000 in 2007 and 2006,
respectively.





Depreciation
and Amortization





Depreciation
and amortization expense was $24,822,000 and $25,641,000 in 2007 and 2006,
respectively. In 2006, depreciation expense was higher than 2007 due to the
Acquisition related step-up in the basis of Perkins’ depreciable assets and the
related adjustment to depreciation made in 2006.





Interest,
net





Interest,
net was $31,180,000 or 5.3% of revenues in 2007 compared to $36,197,000 or 6.1%
of revenues in 2006. The decrease is mainly due to the repayment of WRG’s
indebtedness with proceeds of the term loan obtained in connection with the May
2006 Combination of Perkins and WRG. Interest rates on WRG’s indebtedness were
significantly higher than the interest rates on the term loan.




35
 Table of Contents


Asset
Impairments and Closed Store Expenses
 
 Asset
impairments and closed store expenses consist primarily of the write-down to
fair value for impaired stores and adjustments to the reserve for closed stores.
During 2007 and 2006, we recorded expenses of $2,463,000 and $3,089,000,
respectively for asset impairment and store closures.
 Gain
on Extinguishment of Debt
 
 During
2006 and in conjunction with the financing for the Combination, the Company
obtained repayment concessions from WRG’s subordinated debt lender resulting in
a gain on extinguishment of $12,642,000.


Taxes





The
effective federal and state income tax rates were -10.5% and -1.7% in 2007 and
2006, respectively. Our effective rate differs from the statutory rate primarily
due to a valuation allowance for deductible temporary differences and net
operating losses and credits generated during 2007. For the year ended 2007, the
Company included, as a component of income taxes, $210,000 and $166,000 of
current federal and state tax, respectively, and $248,000 of deferred federal
taxes not offset by current losses, future deductible temporary differences or
net operating loss and $570,000 and $288,000 of tax and interest expense,
respectively, related to uncertain income tax positions. For the year 2006, the
Company included, as a component of income taxes, $98,000 and $57,000 of federal
and state tax on current income not offset by current losses, future deductible
temporary differences, net operating loss or credits.





CAPITAL
RESOURCES AND LIQUIDITY





Pre-existing
Credit Agreement
 
 In May
2006, the Company entered into an amended and restated credit agreement with
Wachovia Bank, National Association, as administrative agent, swingline lender
and issuing lender. Pursuant to the credit agreement, the lenders made available
the following: (1) a five-year revolving credit facility of up to $40,000,000,
including a sub-facility for letters of credit in an amount not to exceed
$25,000,000 and a sub-facility for swingline loans in an amount not to exceed
$5,000,000 (the “Revolver”); and (2) a seven-year term loan credit facility not
to exceed $100,000,000 (the “Term Loan”). The interest rate on credit agreement
borrowings was 9.00% on December 30, 2007.
 
 In
connection with the entering into of the credit agreement, the Company
capitalized certain financing costs. As of December 30, 2007, the deferred
financing costs of $3,762,000 for the Credit Agreement were being amortized over
the term of the agreement using the effective interest method.





The
Company’s ability to service its indebtedness requires a significant amount of
cash. Its ability to generate this cash will depend largely on future operations
(including future sales, expansion plans, cost reduction plans, competitive
factors and economic conditions, among others). Subject to these plans and
conditions, we expect to be able to meet our liquidity requirements for the next
twelve months through cash provided by operations and through borrowings
available under our New Revolver.  Our principal liquidity requirements are
to service our debt and meet our working capital and capital expenditure
needs.





Secured
Notes





The
Secured Notes will mature on May 31, 2013, and interest is payable semi-annually
on May 31 and November 30 of each year, commencing on May 31,
2009.  The Secured Notes were issued at a discount of $7,537,200,
which will be accreted using the interest method over their term.





The
Secured Notes are fully and unconditionally guaranteed (the "Secured Notes
Guarantees") on a senior secured basis by the Company's parent, Perkins &
Marie Callender's Holding Inc., and each of the Company's existing and future
domestic fully-owned subsidiaries (the “Secured Notes
Guarantors”).  The Secured Notes and the Secured Notes Guarantees are
the Company’s and the Secured Notes Guarantors’ senior secured obligations and
rank equal in right of payment to all of the Company’s and the Secured Notes
Guarantor’s existing and future senior indebtedness.  The Secured
Notes and the Secured Notes Guarantees are secured by a lien on substantially
all of the Company's and the Secured Notes Guarantors’ existing and future
assets, subject to certain exceptions.  Pursuant to the terms of an
intercreditor agreement, the foregoing liens are contractually subordinated to
the liens that secure the New Revolver.




36
 Table of Contents




Prior to
May 31, 2011, the Company may redeem up to 35% of the aggregate principal amount
of the Secured Notes with the net cash proceeds of certain equity offerings at a
premium specified in the indenture pertaining to the Secured Notes (the “Secured
Notes Indenture”).  Prior to May 31, 2011, the Company also may redeem
all or part of the Secured Notes at a “make whole” premium specified in the
Secured Notes Indenture.  On or after May 31, 2011, the Company may
redeem the Secured Notes at a 7% premium that decreases to a 0% premium on May
31, 2012.  If the Company experiences a change of control, the holders
have the right to require the Company to repurchase its Secured Notes at 101% of
the principal amount.  If the Company sells assets and does not use
the net proceeds for specified purposes, it may be required to use the net
proceeds to offer to repurchase the Secured Notes at 100% of the Notes’
principal amount.  Any redemption or repurchase also requires the
payment of any accrued and unpaid interest through the redemption or repurchase
date.


10%
Senior Notes





In
September 2005, the Company issued $190,000,000 of unsecured 10% Senior Notes
(the “10% Senior Notes”). The 10% Senior Notes were issued at a discount of
$2,570,700, which is accreted using the interest method over the term of the 10%
Senior Notes. The 10% Senior Notes will mature on October 1, 2013, and interest
is payable semi-annually on April 1 and October 1 of each year. All consolidated
subsidiaries of the Company that are 100% owned provide joint and several, full
and unconditional guarantee of the 10% Senior Notes. There are no significant
restrictions on the Company’s ability to obtain funds from any of the guarantor
subsidiaries in the form of a dividend or a loan. Additionally, there are no
significant restrictions on a guarantor subsidiary’s ability to obtain funds
from the Company or its direct or indirect subsidiaries.





Prior to
October 1, 2009, the Company may redeem all or part of the 10% Senior Notes at a
“make whole” premium specified in the indenture pertaining to the 10% Senior
Notes (the "10% Senior Note Indenture").  On or after October 1, 2009,
the Company may redeem the 10% Senior Notes at a 5% premium that steps down to a
2.5% premium on October 1, 2010 and a 0% premium on October 1, 2011 and
thereafter.  If the Company experiences a change of control, the
holders have the right to require the Company to repurchase its 10% Senior Notes
at 101% of the principal amount.  If the Company sells assets and does
not use the net proceeds for specified purposes, it may be required to use the
net proceeds to offer to repurchase the 10% Senior Notes and certain other
existing pari-passu indebtedness of the Company at 100% of the principal amount
thereof.  Any redemption or repurchase also requires the payment of
any accrued and unpaid interest through the redemption or repurchase
date.





The
Secured Notes Indenture and the 10% Senior Indenture contain various customary
events of default, including, without limitation:  (i) nonpayment of
principal or interest; (ii) cross-defaults with certain other indebtedness;
(iii) certain bankruptcy related events; (iv) invalidity of guarantees; (v)
monetary judgment defaults; and (vi) certain change of control
events.  In addition, any impairment of the security interest in the
Secured Notes collateral shall constitute an event of default under the Secured
Notes Indenture.





New
Revolver





The New
Revolver, which matures on February 28, 2013, is guaranteed by Perkins &
Marie Callender's Holding Inc. and certain of the Company's existing and future
subsidiaries.  The New Revolver is secured by a first priority
perfected security interest in all of the Company's property and assets, and the
property and assets of each guarantor.  Subject to the satisfaction of
the conditions contained therein, up to $26,000,000 may be borrowed under the
New Revolver from time to time.  The New Revolver includes a
sub-facility for letters of credit in an amount not to exceed
$15,000,000.





Amounts
outstanding under the New Revolver will bear interest, at the Company’s option,
at a rate per annum equal to either:  (i) the base rate, as defined in
the New Revolver, plus an applicable margin, or (ii) a LIBOR-based equivalent,
plus an applicable margin.  For the foreseeable future, margins are
expected to be 325 basis points for base rate loans and 425 basis points for
LIBOR loans.  The average interest rates on aggregate borrowings under
the New Revolver were 8.25% on December 28, 2008 and 9.0% under the pre-existing
credit agreement on December 30, 2007.  As of December 28, 2008, the
New Revolver permitted additional borrowings of approximately $11,596,000 (after
giving effect to $3,184,000 in borrowings and $11,220,000 in letters of credit
outstanding).  The letters of credit are primarily utilized in
conjunction with our workers’ compensation programs.





The
Company is required to make mandatory prepayments under the New Revolver with,
subject to certain exceptions (as defined in the New Revolver): (i) the net cash
proceeds from certain asset sales or dispositions; (ii) the net cash proceeds of
any debt issued by the Company or its subsidiaries; (iii) 50% of the net cash
proceeds of any equity issuance by the Company, its parent or its subsidiaries;
and (iv) the extraordinary receipts received by the Company or its subsidiaries,
consisting of proceeds of judgments or settlements, certain indemnity payments
and purchase price adjustments received in connection with any purchase
agreement.  Any of the foregoing mandatory prepayments will result in
a corresponding permanent reduction in the maximum New Revolver
amount.





37
 Table of Contents




The New
Revolver contains various affirmative and negative covenants, including, but not
limited to a financial covenant to maintain at least $30,000,000 of trailing
13-period EBITDA, as defined in the New Revolver, and a covenant that limits the
Company’s capital expenditures.


Our debt
agreements place restrictions on the Company’s ability and the ability of its
subsidiaries to (i) incur additional indebtedness or issue certain preferred
stock; (ii) repay certain indebtedness prior to stated maturities; (iii) pay
dividends or make other distributions on, redeem or repurchase capital stock or
subordinated indebtedness; (iv) make certain investments or other restricted
payments; (v) enter into transactions with affiliates; (vi) issue stock of
subsidiaries; (vii) transfer, sell or consummate a merger or consolidation of
all, or substantially all, of the Company's assets; (viii) change its line of
business; (ix) incur dividend or other payment restrictions with regard to
restricted subsidiaries; (x) create or incur liens on assets to secure debt;
(xi) dispose of assets; (xii) restrict distributions from subsidiaries; (xiii)
make certain acquisitions; (xiv) make capital expenditures; or (xv) amend the
terms of the Company's outstanding notes.  As of December 28, 2008, we
were in compliance with the financial covenants contained in our debt
agreements.





Working
Capital and Cash Flows





At
December 28, 2008, we had a negative working capital balance of $19,600,000
million. Like many other restaurant companies, the Company is able to, and does
more often than not, operate with negative working capital. We are able to
operate with a substantial working capital deficit because (1) restaurant
revenues are received primarily on a cash or near-cash basis with a low level of
accounts receivable, (2) rapid turnover results in a limited investment in
inventories and (3) accounts payable for food and beverages usually become due
after the receipt of cash from the related sales.


We
have experienced a decline in same store sales and an increase in net losses in
recent quarterly periods.  The recent turmoil in the economy has
adversely affected our guest counts and, in turn, our net loss and cash
generated by operations.  The Company expects to incur a net loss in
2009.  In order to improve the cash flows in our business, we have
introduced a new breakfast program at our Marie Callender’s restaurants,
implemented price increases, improved systems to more effectively manage our
food and labor costs, upgraded our management staff and certain equipment in our
Foxtail division to drive higher operating efficiencies, reduced overall planned
capital expenditures for 2009, and eliminated several salaried
positions.  Management expects these initiatives together with the
Company’s cash provided by operations and borrowing capacity to provide
sufficient liquidity for at least the next twelve months.  However,
there can be no assurance as to whether these or other actions will enable us to
generate sufficient cash flow to fund our operations and service our
debt.


The
following table sets forth summary cash flow data for the years ended December
28, 2008, December 30, 2007 and December 31, 2006 (in thousands):





Year
      Ended
                    
                    
                    Year
      Ended
                    
                    
                    Year
      EndedDecember
      28, 2008
                    
                    
                    December
      30, 2007
                    
                    
                    December
      31, 2006Cash
      flows (used in) provided by operating activities
                    
                    $
                    (9,489
                    )
                    
                    
                    15,479
                    
                    
                    
                    15,233Cash
      flows used in investing activities
                    
                    
                    (17,649
                    )
                    
                    
                    (31,526
                    )
                    
                    
                    (18,013
                    )Cash
      flows provided by financing activities
                    
                    
                    12,719
                    
                    
                    
                    26,010
                    
                    
                    
                    7,861





Operating
activities





Cash
flows used in operating activities decreased by $24,968,000 for 2008 compared to
2007. Cash provided by operating activities increased by $246,000 for 2007
compared to 2006. The decrease in 2008 from 2007 was primarily due to lower cash
earnings and a $10,193,000 increase in operating assets and
liabilities.  The increase in 2007 from 2006 was primarily due to
synergies realized from the Combination partially offset by changes in operating
assets and liabilities.





Investing
activities





Cash
flows used in investing activities were $17,649,000, $31,526,000 and $18,013,000
for 2008, 2007 and 2006, respectively. Substantially all cash flows used in
investing activities were used for capital expenditures.





38
 Table of Contents




Capital
expenditures consisted primarily of restaurant improvements, manufacturing plant
improvements, restaurant remodels, and equipment packages for new restaurants.
The following table summarizes capital expenditures for each of the past three
years (in thousands):
 Year
      Ended
                        
                        
                        Year
      Ended
                        
                        
                        Year
      EndedDecember
      28, 2008
                        
                        
                        December
      30, 2007
                        
                        
                        December
      31, 2006New
      restaurants (including restaurants acquired from
    franchisees)
                        
                        $
                        2,302
                        
                        
                        
                        15,255
                        
                        
                        
                        2,980Restaurant
      improvements
                        
                        
                        6,650
                        
                        
                        
                        8,675
                        
                        
                        
                        7,815Restaurant
      remodeling and reimaging
                        
                        
                        3,165
                        
                        
                        
                        4,920
                        
                        
                        
                        6,963Manufacturing
      plant improvements
                        
                        
                        4,710
                        
                        
                        
                        1,476
                        
                        
                        
                        563Other
                        
                        
                        1,509
                        
                        
                        
                        1,221
                        
                        
                        
                        1,241Total
      capital expenditures
                        
                        $
                        18,336
                        
                        
                        
                        31,547
                        
                        
                        
                        19,562





Financing
activities





Cash
flows provided by financing activities were $12,719,000, $26,010,000 and
$7,861,000 for 2008, 2007 and 2006, respectively.  In
September 2008, the Company refinanced its pre-existing bank debt utilizing
proceeds of $124,463,000 from the Secured Notes, $4,804,000 from the New
Revolver and a $12,500,000 capital contribution from its sole shareholder to
repay $127,500,000 of Term Loan and revolver debt under the terminated credit
agreement.  The remaining proceeds were used to pay fees and interest
related to the pre-existing debt and debt financing costs.  During
2007, the primary cash flows included $20,000,000 of net receipts from our
pre-existing credit agreement and $6,107,000 received from various landlords as
reimbursements for building expenditures and leasehold improvements at new store
locations.  The decrease in net borrowings in 2008 results from the
high cash balances in place at the beginning of 2008 and the decrease in 2008
capital expenditures.  During 2006, the primary cash flows included
$99,500,000 of debt proceeds, $2,720,000 of debt issuance costs, $112,467,000 of
payments on our long-term debt and a $12,545,000 capital contribution from our
parent company.


Impact of
Inflation.We do not believe that our operations are affected
by inflation to a greater extent than others within the restaurant industry.
Certain significant items that are historically subject to price fluctuations
are beef, pork, poultry, dairy products, wheat products, corn products and
coffee.  In most cases, we historically have been able to pass through
a substantial portion of the increased commodity costs by adjusting menu
pricing.





Cash
Contractual Obligations and Off-Balance Sheet Arrangements.





Cash
Contractual Obligations





The
following table represents our contractual commitments associated with our debt
and other obligations as of December 28, 2008 (in thousands):





Fiscal
                    2009
                  
                  
                  Fiscal
                    2010
                  
                  
                  Fiscal
                    2011
                  
                  
                  Fiscal
                    2012
                  
                  
                  Fiscal
                    2013
                  
                  
                  Thereafter
                  
                  
                  TotalContractual Obligations(1)10%
      Senior Notes
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  190,000
                  
                  
                  
                  —
                  
                  
                  
                  190,000Secured
      Notes
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  132,000
                  
                  
                  
                  —
                  
                  
                  
                  132,000New
      Revolver
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,184
                  
                  
                  
                  —
                  
                  
                  
                  3,184Capital
      lease obligations
                  
                  
                  1,980
                  
                  
                  
                  1,984
                  
                  
                  
                  1,822
                  
                  
                  
                  1,805
                  
                  
                  
                  1,820
                  
                  
                  
                  39,270
                  
                  
                  
                  48,681Operating
      leases
                  
                  
                  36,709
                  
                  
                  
                  34,799
                  
                  
                  
                  31,365
                  
                  
                  
                  28,564
                  
                  
                  
                  25,841
                  
                  
                  
                  239,322
                  
                  
                  
                  396,600Interest
      on indebtedness (2)
                  
                  
                  41,459
                  
                  
                  
                  38,016
                  
                  
                  
                  38,016
                  
                  
                  
                  38,016
                  
                  
                  
                  23,579
                  
                  
                  
                  —
                  
                  
                  
                  179,086Purchase
      commitments (3)
                  
                  
                  68,092
                  
                  
                  
                  5,409
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  73,501Management
      fee (4)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  22,421
                  
                  
                  
                  —
                  
                  
                  
                  22,421Total
      contractual obligations
                  
                  $
                  148,240
                  
                  
                  
                  80,208
                  
                  
                  
                  71,203
                  
                  
                  
                  68,385
                  
                  
                  
                  398,845
                  
                  
                  
                  278,592
                  
                  
                  
                  1,045,473


____________








39
 Table of Contents





(1)
            In
      addition to the contractual obligations disclosed in this table, we have
      unrecognized tax benefits with respect to which, based on uncertainties
      associated with the items, we are unable to make reasonably reliable
      estimates of the period of potential cash settlements, if any, with taxing
      authorities. (See Note 11 to our Consolidated Financial
      Statements.)





(2)
            Represents
      interest expense using the interest rate of 10.0% on the $190,000,000 of
      10% Senior Notes, 14.0% on the $132,000,000 of Secured Notes and 8.25% on
      the outstanding balance of $3,184,000 under the New Revolver at December
      28, 2008. Interest obligations exclude interest on capital lease
      obligations and fees on any letters of credit that may be issued under our
      new credit agreement.





(3)
            Primarily
      represents commitments to purchase food products for the restaurant and
      manufacturing segments.





(4)
            The
      Company is obligated for management fees due to CHI; however, as long as
      the Company’s current debt agreements are in place, the Company is
      limited as to the amount that can be paid each year.  As of December
      28, 2008, $6,614,000 of past due management fees were accrued in other
      liabilities and fees will continue to accrue quarterly at an annual rate
      of 3% of equity contributed by CHI and
  affiliates.





As of
December 28, 2008, there were borrowings of $3,184,000 and approximately
$11,220,000 of letters of credit outstanding under the New Revolver. These
letters of credit are primarily utilized in conjunction with our workers’
compensation program. Total future lease payments under capital leases at
December 28, 2008 are $48,681,000, of which approximately $34,599,000 represents
interest.





Additionally,
the Company has arrangements with several different parties to whom territorial
rights were granted in exchange for specified payments. The Company makes
specified payments to those parties based on a percentage of gross sales from
certain Perkins restaurants and for new Perkins restaurants opened within those
geographic regions. During the year ended December 28, 2008, we paid an
aggregate of approximately $2,718,000 under such arrangements. Three such
agreements are currently in effect. Of these, one expires in the year 2075, one
expires upon the death of the beneficiary, and the remaining agreement remains
in effect as long as we operate Perkins restaurants in certain
states.





Off-Balance
Sheet Arrangements





As of
December 28, 2008, the Company had no off-balance sheet
arrangements.





RECENT
ACCOUNTING PRONOUNCEMENTS





The
following are recent accounting standards adopted or issued that could have an
impact on our Company:





Intangible
Assets





In April
2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible
Assets,” (“FSP No. 142-3”) which amends the factors that should be considered in
developing renewal or extension assumptions used in determining the useful life
of a recognized intangible asset. The requirement for determining useful lives
must be applied prospectively to intangible assets acquired after the effective
date and the disclosure requirements require prospective application to all
intangible assets recognized as of, and subsequent to, the effective
date.  FSP No. 142-3 is effective for financial statements issued for
fiscal years and interim periods beginning after December 15, 2008. The
Company will adopt these provisions in the first quarter of fiscal
2009.





Business
Combinations





In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,”
(“SFAS No. 141(R)”).  SFAS No. 141(R) establishes principles and
requirements for how an acquiring entity in a business combination recognizes
and measures the assets acquired and liabilities assumed in the transaction;
establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; and sets the disclosure requirements
regarding the information needed to evaluate and understand the nature and
financial effect of the business combination. This statement will be effective
prospectively for business combinations closing on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008.  The Company will adopt SFAS No. 141(R) beginning in the
first quarter of fiscal 2009 and will change its accounting treatment for
business combinations on a prospective basis.








40
 Table of Contents





Noncontrolling
Interests in Consolidated Financial Statements





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No. 51,” (“SFAS No. 160”).  This statement clarifies that a
noncontrolling (minority) interest in a subsidiary is an ownership interest in
the entity that should be reported as equity in the consolidated financial
statements. It also requires consolidated net income to include the amounts
attributable to both the parent and noncontrolling interest, with disclosure on
the face of the consolidated income statement of the amounts attributed to the
parent and to the noncontrolling interest. This statement will be effective
prospectively for fiscal years beginning after December 15, 2008, with
presentation and disclosure requirements applied retrospectively to comparative
financial statements. The Company will present noncontrolling interests
(currently shown as minority interest) as a component of equity on the
consolidated balance sheets and minority interest expense will no longer be
separately reported as a reduction to net income on the consolidated income
statements. The Company does not anticipate the adoption of SFAS No. 160
will have a material impact on its consolidated financial
statements.





Fair
Value Measurement




In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
(“SFAS No. 157”) which provides a single definition of fair value, together with
a framework for measuring it and requires additional disclosures about the use
of fair value to measure assets and liabilities. It also emphasizes that fair
value is a market-based measurement, not an entity-specific measurement, and
establishes a fair value hierarchy for valuation inputs. The hierarchy
prioritizes the inputs into three levels based on the extent to which inputs
used in measuring fair value are observable in the market.  Each fair value
measurement is reported in one of the three levels which is determined by the
lowest level input that is significant to the fair value measurement in its
entirety. These levels are:





Level 1 –
inputs are based upon unadjusted quoted prices for identical instruments traded
in active markets.





Level 2 –
inputs are based upon quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all significant
assumptions are observable in the market or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities.





Level 3 –
inputs are generally unobservable and typically reflect management’s estimates
of assumptions that market participants would use in pricing the asset or
liability. The fair values are therefore determined using model-based techniques
that include option pricing models, discounted cash flow models, and similar
techniques.


In
February 2008, the FASB released FSP No. 157-2, “Effective Date of FASB
Statement No. 157,” (“FSP No. 157-2”) which delays the effective date of
SFAS No. 157 for all non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually) to fiscal years beginning
after November 15, 2008. In accordance with FSP No. 157-2, we adopted SFAS No.
157 at the beginning of fiscal 2008 only with respect to financial assets and
liabilities. The adoption of SFAS No. 157 did not have a material impact on our
financial position, results of operations or cash flows.  Our
financial instruments, which are reported at fair value, consist of long-term
investments in marketable securities that are held in trust for payment of
non-qualified deferred compensation.  Fair value for these investments
is based on readily available market prices.
 In
October 2008, the FASB released FSP No. FAS 157-3 (“FSP No.
157-3”),“Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active,” which clarifies the application of FASB No. 157 in an inactive
market and illustrates how an entity would determine fair value when the market
for a financial asset is not active. The Staff Position is effective immediately
and applies to prior periods for which financial statements have not been
issued, including interim or annual periods ending on or before
December 30, 2008. The implementation of FSP No. 157-3 did not have a
material impact on the Company’s consolidated financial statements.





41
 Table of Contents





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115” (“SFAS No. 159”).  SFAS No. 159 provides companies
with an option to report selected financial assets and financial liabilities at
fair value.  Unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings at each subsequent
reporting date.  The fair value option may be elected on an
instrument-by-instrument basis, with few exceptions, as long as it is applied to
the instrument in its entirety. The statement establishes presentation and
disclosure requirements to help financial statement users understand the effect
of an entity’s election on its earnings, but does not eliminate the disclosure
requirements of other accounting standards.  SFAS No. 159 was
effective for fiscal years beginning after November 15, 2007.  The
Company elected not to apply the fair value option to any of its financial
assets or financial liabilities.


Item 7A. Quantitative
and Qualitative Disclosures About Market Risk.





We are
subject to changes in interest rates, foreign currency exchange rates and
certain commodity prices.





Interest
Rate Risk





Our
primary market risk is interest rate exposure with respect to our floating rate
debt. As of December 28, 2008, our New Revolver permitted borrowings of up to
approximately $11,596,000 (after giving effect to $3,184,000 in borrowings and
$11,220,000 in letters of credit outstanding). Borrowings under the New Revolver
are subject to variable interest rates. For the twelve months ended December 28,
2008, a 100 basis point change in interest rates (assuming $26,000,000 was
outstanding under the New Revolver) would have impacted us by approximately
$260,000.  In the future, we may decide to employ a hedging strategy
through derivative financial instruments to reduce the impact of adverse changes
in interest rates. We do not plan to hold or issue derivative instruments for
trading purposes.





Foreign
Currency Exchange Rate Risk





We
conduct foreign operations in Canada. As a result, we are subject to risk from
changes in foreign exchange rates. These changes result in cumulative
translation adjustments, which are included in accumulated and other
comprehensive income (loss). As of December 28, 2008, we do not consider the
potential loss resulting from a hypothetical 10% adverse change in quoted
foreign currency exchange rates to be material.





Commodity
Price Risk





Many of
the food products and other operating essentials purchased by us are affected by
commodity pricing and are, therefore, subject to price volatility caused by
weather, changes in global demand, production problems, delivery difficulties
and other factors that are beyond our control. Our supplies and raw materials
are available from several sources, and we are not dependent upon any single
source for these items. If any existing suppliers fail or are unable to deliver
in quantities required by us, we believe that there are sufficient other quality
suppliers in the marketplace such that our sources of supply can be replaced as
necessary. At times, we enter into purchase contracts of one year or less or
purchase bulk quantities for future use of certain items in order to control
commodity-pricing risks. Certain significant items that are historically subject
to price fluctuations are beef, pork, poultry, dairy products, wheat products,
corn products and coffee.  In most cases, we historically have been
able to pass through a substantial portion of the increased commodity costs
through periodic menu price adjustments.








42
 Table of Contents





Item
8. Financial Statementsand Supplementary Data.





RESPONSIBILITY
FOR CONSOLIDATED FINANCIAL STATEMENTS





Our
management is responsible for the preparation, accuracy and integrity of the
consolidated financial statements.





These
consolidated statements have been prepared in accordance with accounting
principles generally accepted in the United States of America consistently
applied, in all material respects, and reflect estimates and judgments by
management where necessary.





We
maintain a system of internal accounting control that is adequate to provide
reasonable assurance that transactions are executed and recorded in accordance
with management’s authorization and that assets are safeguarded.





43
 Table of Contents





Report
of Independent Registered Public Accounting Firm





To the
Board of Directors of Perkins & Marie Callender’s Inc.:





We have
audited the accompanying consolidated balance sheets of Perkins & Marie
Callender’s Inc. and subsidiaries (the “Company”) as of December 28, 2008 and
December 30, 2007, and the related consolidated statements of operations,
stockholder’s investment, and cash flows for each of the three years in the
period ended December 28, 2008. Our audits also included the financial statement
schedule listed in the Index at Item 15(a)(2). These financial statements and
financial statement schedule are the responsibility of the Company’s management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Perkins & Marie Callender’s Inc. and
subsidiaries as of December 28, 2008 and December 30, 2007, and the results of
their operations and their cash flows for each of the three years in the period
ended December 28, 2008, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.





As
discussed in Note 11 to the consolidated financial statements, the Company
changed its method of accounting for uncertainty in income taxes to conform to
Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes — an Interpretation of FASB Statement No. 109, on January
1, 2007.








/s/Deloitte
& Touche LLP





Memphis,
Tennessee


March 30,
2009




















44
 Table of Contents








PERKINS
& MARIE CALLENDER’S INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
thousands)





Year
      Ended
                    
                    
                    Year
      Ended
                    
                    
                    Year
      EndedDecember
      28,
                    
                    
                    December
      30,
                    
                    
                    December
      31,2008
                    
                    
                    2007
                    
                    
                    2006REVENUES:Food
      sales
                    
                    $
                    552,462
                    
                    
                    
                    556,990
                    
                    
                    
                    562,742Franchise
      and other revenue
                    
                    
                    29,508
                    
                    
                    
                    30,896
                    
                    
                    
                    31,448Total
      revenues
                    
                    
                    581,970
                    
                    
                    
                    587,886
                    
                    
                    
                    594,190COSTS
      AND EXPENSES:Cost
      of sales (excluding depreciation shown below):Food
      cost
                    
                    
                    161,103
                    
                    
                    
                    158,708
                    
                    
                    
                    159,751Labor
      and benefits
                    
                    
                    188,431
                    
                    
                    
                    189,307
                    
                    
                    
                    185,405Operating
      expenses
                    
                    
                    152,260
                    
                    
                    
                    149,437
                    
                    
                    
                    150,102General
      and administrative
                    
                    
                    47,829
                    
                    
                    
                    44,874
                    
                    
                    
                    48,188Transaction
      costs
                    
                    
                    -
                    
                    
                    
                    1,013
                    
                    
                    
                    5,674Depreciation
      and amortization
                    
                    
                    24,699
                    
                    
                    
                    24,822
                    
                    
                    
                    25,641Interest,
      net
                    
                    
                    36,689
                    
                    
                    
                    31,180
                    
                    
                    
                    36,197Asset
      impairments and closed store expenses
                    
                    
                    1,797
                    
                    
                    
                    2,463
                    
                    
                    
                    3,089Goodwill
      impairment
                    
                    
                    20,202
                    
                    
                    
                    -
                    
                    
                    
                    -Loss
      (gain) on extinguishments of debt
                    
                    
                    2,952
                    
                    
                    
                    -
                    
                    
                    
                    (12,642
                    )Other,
      net
                    
                    
                    446
                    
                    
                    
                    228
                    
                    
                    
                    1,509Total
      costs and expenses
                    
                    
                    636,408
                    
                    
                    
                    602,032
                    
                    
                    
                    602,914Loss
      before income taxes andminority
      interests
                    
                    
                    (54,438
                    )
                    
                    
                    (14,146
                    )
                    
                    
                    (8,724
                    )Benefit
      from (provision for) income taxes
                    
                    
                    1,769
                    
                    
                    
                    (1,482
                    )
                    
                    
                    (155
                    )Minority
      interest expense
                    
                    
                    (284
                    )
                    
                    
                    (707
                    )
                    
                    
                    (493
                    )NET
      LOSS
                    
                    $
                    (52,953
                    )
                    
                    
                    (16,335
                    )
                    
                    
                    (9,372
                    )















































The
accompanying notes are an integral part of these consolidated financial
statements.


45
 Table of Contents


PERKINS
& MARIE CALLENDER’S INC.


CONSOLIDATED
BALANCE SHEETS


(In
thousands)





December
      28,
                
                
                December
      30,2008
                
                
                2007ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                
                $
                4,613
                
                
                
                19,032Restricted
      cash
                
                
                10,140
                
                
                
                10,098Receivables,
      less allowances for doubtful accounts of $954
                  and
      $1,542 in 2008 and 2007, respectively
                
                
                21,386
                
                
                
                17,221Inventories
                
                
                12,300
                
                
                
                13,239Prepaid
      expenses and other current assets
                
                
                2,996
                
                
                
                5,732Total
      current assets
                
                
                51,435
                
                
                
                65,322PROPERTY
      AND EQUIPMENT, net of accumulated
                  depreciation
      and amortization of $125,951 and $109,441 in
                  2008
      and 2007, respectively
                
                
                93,500
                
                
                
                99,311INVESTMENT
      IN UNCONSOLIDATED PARTNERSHIP
                
                
                48
                
                
                
                53GOODWILL
                
                
                9,836
                
                
                
                30,038INTANGIBLE
      ASSETS, net of accumulated amortization of
                  $19,963
      and $17,494 in 2008 and 2007, respectively
                
                
                150,847
                
                
                
                153,316DEFERRED
      INCOME TAXES
                
                
                -
                
                
                
                242OTHER
      ASSETS
                
                
                17,842
                
                
                
                14,660TOTAL
      ASSETS
                
                $
                323,508
                
                
                
                362,942LIABILITIES
      AND STOCKHOLDER'S INVESTMENTCURRENT
      LIABILITIES:Accounts
      payable
                
                $
                18,295
                
                
                
                25,559Accrued
      expenses
                
                
                47,040
                
                
                
                52,621Franchise
      advertising contributions
                
                
                5,316
                
                
                
                5,940Current
      maturities of long-term debt and capital lease obligations
                
                
                382
                
                
                
                9,464Total
      current liabilities
                
                
                71,033
                
                
                
                93,584LONG-TERM
      DEBT, less current maturities
                
                
                316,534
                
                
                
                298,009CAPITAL
      LEASE OBLIGATIONS, less current maturities
                
                
                13,715
                
                
                
                11,987DEFERRED
      RENT
                
                
                15,343
                
                
                
                13,467OTHER
      LIABILITIES
                
                
                17,741
                
                
                
                15,520MINORITY
      INTERESTS IN CONSOLIDATED PARTNERSHIPS
                
                
                215
                
                
                
                333STOCKHOLDER'S
      INVESTMENT:Common
      stock, $.01 par value; 100,000 shares authorized;10,820
      issued and outstanding
                
                
                1
                
                
                
                1Additional
      paid-in capital
                
                
                149,851
                
                
                
                137,923Accumulated
      other comprehensive income
                
                
                (4
                )
                
                
                86Accumulated
      deficit
                
                
                (260,921
                )
                
                
                (207,968
                )Total
      stockholder's investment
                
                
                (111,073
                )
                
                
                (69,958
                )TOTAL
      LIABILITIES AND STOCKHOLDER'S INVESTMENT
                
                $
                323,508
                
                
                
                362,942










The
accompanying notes are an integral part of these consolidated financial
statements.


46
 Table of Contents


PERKINS
& MARIE CALLENDER’S INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)





Year
      Ended
                
                
                Year
      Ended
                
                
                Year
      EndedDecember
      28,
                
                
                December
      30,
                
                
                December
      31,2008
                
                
                2007
                
                
                2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                
                $
                (52,953
                )
                
                
                (16,335
                )
                
                
                (9,372
                )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Depreciation
      and amortization
                
                
                24,699
                
                
                
                24,822
                
                
                
                25,641Asset
      impairments
                
                
                1,797
                
                
                
                2,463
                
                
                
                2,723Goodwill
      impairment
                
                
                20,202
                
                
                
                -
                
                
                
                -Amortization
      of debt discount
                
                
                647
                
                
                
                324
                
                
                
                321Loss
      (gain) on extinguishment of debt
                
                
                2,952
                
                
                
                -
                
                
                
                (12,642
                )Minority
      interests expense
                
                
                284
                
                
                
                707
                
                
                
                493Equity
      in net loss of unconsolidated partnership
                
                
                5
                
                
                
                82
                
                
                
                73Other
      non-cash income and expense items
                
                
                (12
                )
                
                
                333
                
                
                
                6,690Net
      changes in operating assets and liabilities
                
                
                (7,110
                )
                
                
                3,083
                
                
                
                1,306Total
      adjustments
                
                
                43,464
                
                
                
                31,814
                
                
                
                24,605Net
      cash (used in) provided by operating activities
                
                
                (9,489
                )
                
                
                15,479
                
                
                
                15,233CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                
                
                (18,336
                )
                
                
                (31,547
                )
                
                
                (19,562
                )Proceeds
      from sale of assets
                
                
                687
                
                
                
                21
                
                
                
                1,549Net
      cash used in investing activities
                
                
                (17,649
                )
                
                
                (31,526
                )
                
                
                (18,013
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from terminated revolver
                
                
                53,000
                
                
                
                75,100
                
                
                
                12,900Repayment
      of terminated revolver
                
                
                (73,000
                )
                
                
                (55,100
                )
                
                
                (12,900)Proceeds
      from New Revolver
                
                
                31,848
                
                
                
                -
                
                
                
                -Repayment
      of New Revolver
                
                
                (28,664
                )
                
                
                -
                
                
                
                -Proceeds
      from Secured Notes, net of $7,537 discount
                
                
                124,463
                
                
                
                -
                
                
                
                -Proceeds
      from (repayment of) Term Loan
                
                
                (98,750
                )
                
                
                (750
                )
                
                
                99,500Repayment
      of capital lease obligations
                
                
                (413
                )
                
                
                (702
                )
                
                
                (895
                )Proceeds
      from (repayment of) other debt
                
                
                (18
                )
                
                
                82
                
                
                
                (100,026
                )Debt
      financing costs
                
                
                (9,559
                )
                
                
                -
                
                
                
                (2,720
                )Lessor
      financing of new restaurants
                
                
                2,286
                
                
                
                6,107
                
                
                
                -Distributions
      to minority partners
                
                
                (402
                )
                
                
                (519
                )
                
                
                (543
                )Capital
      contributions
                
                
                12,500
                
                
                
                1,792
                
                
                
                12,545Repurchase
      of equity ownership units in P&MC's Holding LLC
                
                
                (572
                )
                
                
                -
                
                
                
                -Net
      cash provided by financing activities
                
                
                12,719
                
                
                
                26,010
                
                
                
                7,861NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                (14,419
                )
                
                
                9,963
                
                
                
                5,081CASH
      AND CASH EQUIVALENTS:Balance,
      beginning of period
                
                
                19,032
                
                
                
                9,069
                
                
                
                3,988Balance,
      end of period
                
                $
                4,613
                
                
                
                19,032
                
                
                
                9,069










The
accompanying notes are an integral part of these consolidated financial
statements.


47
 Table of Contents





PERKINS
& MARIE CALLENDER’S INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDER’S INVESTMENT


(In
thousands)








AccumulatedAdditional
                  
                  
                  Notes
                  
                  
                  OtherCommon
                  
                  
                  Paid-in
                  
                  
                  Secured
                  
                  
                  Comprehensive
                  
                  
                  AccumulatedStock
                  
                  
                  Capital
                  
                  
                  by
      Stock
                  
                  
                  Income
                  
                  
                  Deficit
                  
                  
                  TotalBalances
      at December 25, 2005
                  
                  $
                  1
                  
                  
                  
                  123,907
                  
                  
                  
                  (1,308
                  )
                  
                  
                  14
                  
                  
                  
                  (182,444
                  )
                  
                  
                  (59,830
                  )Capital
      contribution
                  
                  
                  -
                  
                  
                  
                  12,545
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  12,545Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  (9,372
                  )
                  
                  
                  (9,372
                  )Currency
      translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  (1
                  )
                  
                  
                  -
                  
                  
                  
                  (1
                  )Total
      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (9,373
                  )Note
      forgiveness
                  
                  
                  -
                  
                  
                  
                  (321
                  )
                  
                  
                  1,308
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  987Balances
      at December 31, 2006
                  
                  
                  1
                  
                  
                  
                  136,131
                  
                  
                  
                  -
                  
                  
                  
                  13
                  
                  
                  
                  (191,816
                  )
                  
                  
                  (55,671
                  )Cumulative
      adjustment uponadoption
      of FIN48
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  183
                  
                  
                  
                  183Capital
      contribution
                  
                  
                  -
                  
                  
                  
                  1,792
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,792Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (16,335
                  )
                  
                  
                  (16,335
                  )Currency
      translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  73
                  
                  
                  
                  -
                  
                  
                  
                  73Total
      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (16,262
                  )Balances
      at December 30, 2007
                  
                  
                  1
                  
                  
                  
                  137,923
                  
                  
                  
                  -
                  
                  
                  
                  86
                  
                  
                  
                  (207,968
                  )
                  
                  
                  (69,958
                  )Capital
      contributions
                  
                  
                  -
                  
                  
                  
                  12,500
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  12,500Distribution
      of equity ownershipunits
      in P&MC's Holding LLC
                  
                  
                  -
                  
                  
                  
                  (572
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (572
                  )Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (52,953
                  )
                  
                  
                  (52,953
                  )Currency
      translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (90
                  )
                  
                  
                  -
                  
                  
                  
                  (90
                  )Total
      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (53,043
                  )Balances
      at December 28, 2008
                  
                  $
                  1
                  
                  
                  
                  149,851
                  
                  
                  
                  -
                  
                  
                  
                  (4
                  )
                  
                  
                  (260,921
                  )
                  
                  
                  (111,073
                  )









































The
accompanying notes are an integral part of these consolidated financial
statements.





48
 Table of Contents





PERKINS
& MARIE CALLENDER’S INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS







(1) ORGANIZATION:


Organization
—





Perkins
& Marie Callender’s Inc., together with its consolidated subsidiaries
(collectively, the “Company”, “we” or “us”), is a wholly-owned subsidiary of
Perkins & Marie Callender’s Holding Inc. Perkins & Marie Callender’s
Holding Inc. is a wholly-owned subsidiary of P&MC’s Holding Corp., which is
a wholly-owned subsidiary of P&MC’s Holding LLC, which is principally owned
by affiliates of Castle Harlan, Inc.  The Company is the sole equity
holder of Wilshire Restaurant Group, LLC.





The
Company operates two primary restaurant concepts: (1) full-service family dining
restaurants located primarily in the Midwest, Florida and Pennsylvania under the
name Perkins Restaurant and Bakery (“Perkins”) and (2) mid-priced, casual-dining
restaurants, specializing in the sale of pie and other bakery items, located
primarily in the western United States under the name Marie Callender’s
Restaurant and Bakery (“Marie Callender’s”).





Through
our bakery goods manufacturing segment (“Foxtail”), we offer pies, muffin
batters, cookie doughs, pancake mixes, and other food products for sale to our
Perkins and Marie Callender’s Company-operated and franchised restaurants and to
food service distributors.





Wilshire
Restaurant Group, LLC (“WRG”) owns 100% of the outstanding common stock of Marie
Callender Pie Shops, Inc. (“MCPSI”), a California corporation. MCPSI owns and
operates restaurants and has granted franchises under the name Marie Callender’s
and Marie Callender’s Grill. MCPSI also owns 100% of the outstanding common
stock of M.C. Wholesalers, Inc., a California corporation. M.C. Wholesalers,
Inc. operates a commissary that produces bakery goods. MCPSI also owns 100% of
the outstanding common stock of FIV Corp., a Delaware corporation that owns and
operates one restaurant under the name East Side Mario’s.





Basis of
Presentation —





On May 3,
2006, the Company and WRG, under the common control of Castle Harlan, Inc., were
combined (the “Combination”).  Pursuant to a stock purchase agreement
(the “Stock Purchase Agreement”), the Company purchased all of the outstanding
stock of WRG, and the shareholders of WRG received equity interests in
P&MC’s Holding LLC in exchange for their WRG stock. From September 21, 2005
(date of common control) through May 3, 2006, both Perkins and WRG were
portfolio companies under the common control of Castle Harlan; therefore, the
financial statements of both entities are presented retroactively on a
consolidated basis, in a manner similar to a pooling of interest, from September
21, 2005, the first date at which both companies were under common control. This
transaction is described more fully in Note 4, “Combination of Companies Under
Common Control.”


Accounting
Reporting Period —
 
 Our
financial reporting is based on thirteen four-week periods ending on the last
Sunday in December. The first quarter each year includes four four-week periods
and, typically, the second, third and fourth quarters include three four-week
periods. The first, second, third and fourth quarters of 2008 ended April 20,
July 13, October 5, and December 28, respectively.  The first, second,
third and fourth quarters of 2007 ended April 22, July 15, October 7, and
December 30, respectively. The first, second, third and fourth quarters of 2006
ended April 16, July 9, October 1, and December 31, respectively. In 2006, as is
the case every six years, the fourth quarter included two four-week periods and
one five-week period.  All material intercompany transactions have
been eliminated in consolidation.


49
 Table of Contents





(2)
OPERATIONS, FINANCIAL POSITION AND LIQUIDITY:
 
 At
December 28, 2008, we had a negative working capital balance of $19,598,000 and
a total stockholder’s deficit of $111,073,000.  At December 28, 2008,
we had $4,613,000 in unrestricted cash and cash equivalents and $11,596,000 of
borrowing capacity under our revolving credit facility.
  Our
principal sources of liquidity include unrestricted cash, available borrowings
under our revolving credit facility and cash generated by
operations.  We also have from time to time received capital
contributions from our parent company, including a $12,500,000 capital
contribution received in 2008, and engaged in capital markets
transactions.  Our principal uses of liquidity are costs and expenses
associated with our restaurant and manufacturing operations, servicing
outstanding indebtedness (including interest), and making capital
expenditures.
  We
have experienced a decline in same store sales and an increase in net losses in
recent quarterly periods.  The recent turmoil in the economy has
adversely affected our guest counts and, in turn, our net loss and cash
generated by operations.  The Company expects to incur a net loss in
2009.  In order to improve the cash flows in our business, we have
introduced a new breakfast program at our Marie Callender’s restaurants,
implemented price increases, improved systems to more effectively manage our
food and labor costs, upgraded our management staff and certain equipment in our
Foxtail division to drive higher operating efficiencies, reduced overall planned
capital expenditures for 2009, and eliminated several salaried
positions.  Management expects these initiatives together with the
Company’s cash provided by operations and borrowing capacity to provide
sufficient liquidity for at least the next twelve months.  However,
there can be no assurance as to whether these or other actions will enable us to
generate sufficient cash flow to fund our operations and service our
debt.
 (3) SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:





The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to adopt
accounting policies and make significant judgments and estimates to develop
amounts reflected and disclosed in the financial statements. In many cases,
there are alternative policies or estimation techniques that could be used. We
maintain a process for reviewing the application of our accounting policies and
for evaluating the appropriateness of the estimates that are required to prepare
the financial statements of our Company. However, even under optimal
circumstances, estimates routinely require adjustment based on changing
circumstances and the receipt of new or better information.





Revenue
Recognition —





Revenue
at our restaurants is recognized when customers pay for products at the time of
sale. This revenue reporting process is covered by our system of internal
controls and generally does not require significant management judgments and
estimates. However, estimates are inherent in the calculation of franchisee
royalty revenue. We calculate an estimate of royalty income each period and
adjust royalty income when actual amounts are reported by
franchisees.  A $1,000,000 change in estimated franchise sales would
impact royalty revenue by $40,000 to $50,000.  Historically, these
adjustments have not been material.





Sales
Taxes —





Sales
taxes collected from customers are excluded from revenues. The obligation is
included in accrued expenses until the taxes are remitted to the appropriate
taxing authorities.





Advertising
—





We
recognize advertising expense in the operating expenses of the restaurant
segment. Those advertising costs are expenses as incurred.  Advertising
expense was approximately $24,016,000, $21,130,000 and $20,267,000 for fiscal
years 2008, 2007 and 2006, respectively.





Leases
—





Future
commitments for operating leases are not reflected as a liability on our
consolidated balance sheets. The determination of whether a lease is accounted
for as a capital lease or as an operating lease requires management to make
estimates primarily about the fair value of the asset, its estimated economic
useful life and the incremental borrowing rate.





50
 Table of Contents





Rent
expense for the Company’s operating leases, some of which have escalating
rentals over the term of the lease, is recorded on a straight-line basis over
the lease term, as defined in SFAS No. 13, “Accounting for Leases, as amended.”
The lease term begins when the Company has the right to control the use of the
leased property, which may occur before rent payments are due under the terms of
the lease. The difference between rent expense and rent paid is recorded as
deferred rent and included in Deferred Rent on the consolidated balance
sheets.





In
accordance with the American Institute of Certified Public Accountants issued
Statement of Position (“SOP”) 98-5, “Reporting on the Costs of Start-Up
Activities,” we expense the costs of start-up activities as
incurred.





Transaction
Costs —





The
Company has classified certain expenses incurred in fiscal 2007 and 2006 as
transaction costs on the consolidated statements of
operations.  Transaction costs include expenses directly attributable
to the Company’s acquisition in September 2005 and the Combination and certain
non-recurring expenses incurred as a result of the acquisition and the
Combination.  There were no transaction costs for 2008. Transaction
costs were $1,013,000 and $5,674,000 for 2007 and 2006, respectively. The direct
expenses consisted of administrative, consultative and legal
expenses.





Cash
Equivalents —





We
consider all highly liquid investments with an original maturity of three months
or less to be cash equivalents.





Perkins
Marketing Fund and Gift Card Fund —





The
Company maintains a marketing fund (the “Marketing Fund”) to pool the resources
of the Company and its franchisees for advertising purposes and to promote the
Perkins brand in accordance with the system’s advertising policy.  The
Company has classified approximately $6,912,000 and $7,376,000 as of
December 28, 2008 and December 30, 2007, respectively, as restricted cash on its
consolidated balance sheets.  This amount represents funds contributed
specifically for the purpose of advertising. The Company has also recorded
liabilities of approximately $978,000 and $937,000 as of December 28, 2008 and
December 30, 2007, respectively, for accrued advertising, which is included in
accrued expenses on the accompanying consolidated balance sheets, and
approximately $5,316,000 and $5,940,000 as of December 28, 2008 and December 30,
2007, respectively, which is included in Franchise advertising contributions on
the accompanying consolidated balance sheets and represents franchisee
contributions for advertising services not yet provided.


The
Company markets gift cards at both its Company-operated and franchised Perkins
restaurants.  The Company maintains a separate bank account
specifically for cash inflows from gift card sales and cash outflows from gift
card redemptions and expenses (the “Gift Card Fund”). The Gift Card Fund is
consolidated with PMCI and accordingly, the Company has recorded approximately
$3,228,000 and $2,722,000 of net gift card proceeds received from Perkins’
franchisees as restricted cash as of December 28, 2008 and December 30, 2007,
respectively, on its consolidated balance sheets. The operating expenses of the
Gift Card Fund, which primarily consist of production costs of the cards and
bank fees, are not significant.  Through the fiscal year ended
December 28, 2008, the Company has not recorded breakage on the gift cards, as
it does not yet have sufficient historical redemption data.





Concentration
of Credit Risk —





Financial
instruments, which potentially expose us to concentrations of credit risk,
consist principally of franchisee and Foxtail accounts receivable. We perform
ongoing credit evaluations of our franchisees and Foxtail customers and
generally require no collateral to secure accounts receivable. The credit review
is based on both financial and non-financial factors. Based on this review, we
provide for estimated losses for accounts receivable that are not likely to be
collected. Although we maintain good relationships with our franchisees, if
average sales or the financial health of significant franchises were to
deteriorate, we might have to increase our reserves against collection of
franchise receivables.





Additional
financial instruments that potentially subject us to a concentration of credit
risk are cash and cash equivalents. At times, cash balances may be in excess of
Federal Deposit Insurance Corporation insurance limits. The Company has not
experienced any losses with respect to bank balances in excess of government
provided insurance.


51
 Table of Contents


Long
Lived Assets —





Major
renewals and betterments are capitalized; replacements and maintenance and
repairs that do not extend the lives of the assets are charged to operations as
incurred. Upon disposition, both the asset and the accumulated depreciation
amounts are relieved, and the related gain or loss is credited or charged to the
statement of operations. Depreciation and amortization is computed primarily
using the straight-line method over the estimated useful lives unless the assets
relate to leased property, in which case, the amortization period is
the lesser of the useful lives or the lease terms. A summary of the useful
lives is as follows:





YearsLand
      improvements
              3 —
      20Buildings
              20
      — 30Leasehold
      improvements
              3 —
      20Equipment
              1 —
      7





The
depreciation of our capital assets over their estimated useful lives (or in the
case of leasehold improvements, the lesser of their estimated useful lives or
lease term) and the determination of any salvage values require management to
make judgments about future events. Because we utilize many of our capital
assets over relatively long periods, we periodically evaluate whether
adjustments to our estimated lives or salvage values are necessary. The accuracy
of these estimates affects the amount of depreciation expense recognized in a
period and, ultimately, the gain or loss on the disposal of the asset.
Historically, gains and losses on the disposition of assets have not been
significant. However, such amounts may differ materially in the future based on
restaurant performance, technological obsolescence, regulatory requirements and
other factors beyond our control.





Due to
the significant amounts required for the construction or acquisition of new
restaurants, we have risks that these assets will not provide an acceptable
return on our investment and an impairment of these assets may occur. The
accounting test for whether an asset held for use is impaired involves first
comparing the carrying value of the asset with its estimated future undiscounted
cash flows. If these cash flows do not exceed the carrying value, the asset must
be adjusted to its current fair value. We perform this test on each of our long
lived assets periodically and as indicators arise to evaluate whether impairment
exists. Factors influencing our judgment include the age of the asset,
estimation of future cash flows from long lived assets and estimation of fair
value.  Asset fair value is determined using discounted cash flow
models, residual proceeds and other factors that may impact the ultimate return
of our investment in the long lived asset.





Goodwill
and Intangible Assets —





As of
December 28, 2008 and December 30, 2007, we had approximately $160,683,000 and
$183,354,000, respectively, of goodwill and intangible assets on our
consolidated balance sheet primarily resulting from an acquisition in September
2005. We account for our goodwill and other intangible assets in accordance with
SFAS No. 142, “Goodwill and Other Intangible Assets”, which provides guidance
regarding the recognition and measurement of intangible assets, eliminates the
amortization of certain intangibles and requires assessments for impairment of
intangible assets that are not subject to amortization at least annually, or
more frequently if events or changes in circumstances indicate that the asset
might be impaired. Our annual evaluation, performed as of year-end, or on an
interim basis if circumstances warrant, requires the use of estimates about the
future cash flows of each of our reporting units and non-amortizing intangibles
to determine their estimated fair values. Changes in forecasted operations and
changes in discount rates can materially affect these estimates. However, once
an impairment of goodwill or intangible assets has been recorded, it cannot be
reversed.




Due to
the decrease in the Company’s operating results during 2008 compared to 2007 and
the decline in general economic conditions impacting the restaurant industry,
management conducted an interim goodwill impairment evaluation during the
quarter ended October 5, 2008. Fair values of the reporting units were
calculated using discounted future cash flows and market-based comparative
values.  Because the carrying values of the reporting units in both
the franchise and Foxtail segments exceeded their respective estimated fair
values, the Company completed step two of the goodwill test and concluded that
the goodwill of both reporting units was fully impaired as of October 5, 2008.
Accordingly, the Company recorded a non-cash goodwill impairment charge of
$20,202,000 in the quarter ended October 5, 2008.   See Note 8 to
the consolidated financial statements included in this Form
10-K.


52
 Table of Contents


Deferred
Income Taxes and Income Tax Uncertainties —
  We record
income tax liabilities utilizing known obligations and estimates of potential
obligations.  A deferred tax asset or liability is recognized whenever
there are future tax effects from existing temporary differences and operating
loss and tax credit carry forwards.  We record a valuation allowance
to reduce deferred tax assets to the balance that is more likely than not to be
realized.  In evaluating the need for a valuation allowance, we must
make judgments and estimates on future taxable income, feasible tax planning
strategies and existing facts and circumstances.  When we determine
that deferred tax assets could be realized in greater or lesser amounts than
recorded, the assets’ recorded amount is adjusted and the income statement is
either credited or charged, respectively, in the period during which the
determination is made.  We believe that the valuation allowance
recorded at December 28, 2008 is adequate for the
circumstances.  However, subsequent changes in facts and circumstances
that affect our judgments or estimates in determining the proper deferred tax
assets or liabilities could materially affect the recorded
balances.


The
Company’s accounting for uncertainty in income taxes prescribes a recognition
threshold and a measurement attribute for the financial statement recognition
and measurement of tax positions taken or expected to be taken in a tax
return.  For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing
authorities.  The amount recognized is measured as the largest amount
of benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement.





Insurance
Reserves —





We are
self-insured up to certain limits for costs associated with workers’
compensation claims, general liability claims, property claims and benefits paid
under employee health care programs.  At December 28, 2008 and December 30,
2007, we had total self-insurance accruals reflected in our consolidated balance
sheets of approximately $8,803,000 and $7,952,000, respectively. The measurement
of these costs required the consideration of historical loss experience and
judgments about the present and expected levels of cost per claim. We account
for the workers’ compensation costs primarily through actuarial methods, which
develop estimates of the discounted liability for claims incurred, including
those claims incurred but not reported. These methods provide estimates of
future ultimate claim costs based on claims incurred as of the balance sheet
dates. We account for benefits paid under employee health care programs using
historical claims information as the basis for estimating expenses incurred as
of the balance sheet dates. We believe the use of these methods to account for
these liabilities provides a consistent and effective way to measure these
highly judgmental accruals. However, the use of any estimation technique in this
area is inherently sensitive given the magnitude of claims involved and the
length of time until the ultimate cost is known. We believe that our recorded
obligations for these expenses are consistently measured on an appropriate
basis. Nevertheless, changes in health care costs, accident frequency and
severity and other factors, including discount rates, can materially affect
estimates for these liabilities.





Recent
Accounting Pronouncements —





The
following are recent accounting standards adopted or issued that could have an
impact on our Company:





Intangible
Assets





In April
2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of
Intangible Assets,” (“FSP No. 142-3”) which amends the factors that should be
considered in developing renewal or extension assumptions used in determining
the useful life of a recognized intangible asset. The requirement for
determining useful lives must be applied prospectively to intangible assets
acquired after the effective date and the disclosure requirements require
prospective application to all intangible assets recognized as of, and
subsequent to, the effective date.  FSP No. 142-3 is effective for
financial statements issued for fiscal years and interim periods beginning after
December 15, 2008. The Company will adopt these provisions in the first
quarter of fiscal 2009.


Business
Combinations


53
 Table of Contents





Noncontrolling
Interests in Consolidated Financial Statements


In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No. 51,” (“SFAS No. 160”).  This statement clarifies that a
noncontrolling (minority) interest in a subsidiary is an ownership interest in
the entity that should be reported as equity in the consolidated financial
statements. It also requires consolidated net income to include the amounts
attributable to both the parent and noncontrolling interest, with disclosure on
the face of the consolidated income statement of the amounts attributed to the
parent and to the noncontrolling interest. This statement will be effective
prospectively for fiscal years beginning after December 15, 2008, with
presentation and disclosure requirements applied retrospectively to comparative
financial statements. The Company will present noncontrolling interests
(currently shown as minority interest) as a component of equity on the
consolidated balance sheets and minority interest expense will no longer be
separately reported as a reduction to net income on the consolidated income
statements. The Company does not anticipate the adoption of SFAS No. 160 will
have a material impact on its consolidated financial statements.
 
 Fair
Value Measurement
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
(“SFAS No. 157”) which provides a single definition of fair value, together with
a framework for measuring it and requires additional disclosures about the use
of fair value to measure assets and liabilities. It also emphasizes that fair
value is a market-based measurement, not an entity-specific measurement, and
establishes a fair value hierarchy for valuation inputs. The hierarchy
prioritizes the inputs into three levels based on the extent to which inputs
used in measuring fair value are observable in the market.  Each fair value
measurement is reported in one of the three levels which is determined by the
lowest level input that is significant to the fair value measurement in its
entirety. These levels are:
 
 Level 1 –
inputs are based upon unadjusted quoted prices for identical instruments traded
in active markets.
  Level 2 –
inputs are based upon quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all significant
assumptions are observable in the market or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities.
 
 Level 3 –
inputs are generally unobservable and typically reflect management’s estimates
of assumptions that market participants would use in pricing the asset or
liability. The fair values are therefore determined using model-based techniques
that include option pricing models, discounted cash flow models, and similar
techniques.
 In
February 2008, the FASB released FSP No. 157-2, “Effective Date of FASB
Statement No. 157,” (“FSP No. 157-2”) which delays the effective date of
SFAS No. 157 for all non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually) to fiscal years beginning
after November 15, 2008. In accordance with FSP No. 157-2, we adopted SFAS No.
157 at the beginning of fiscal 2008 only with respect to financial assets and
liabilities. The adoption of SFAS No. 157 did not have a material impact on our
financial position, results of operations or cash flows.  Our
financial instruments, which are reported at fair value, consist of long-term
investments in marketable securities that are held in trust for payment of
non-qualified deferred compensation.  Fair value for these investments
is based on readily available market prices.
  In
October 2008, the FASB released FSP No. FAS 157-3 (“FSP No.
157-3”),“Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active,” which
clarifies the application of FASB No. 157 in an inactive market and
illustrates how an entity would determine fair value when the market for a
financial asset is not active. The Staff Position is effective immediately and
applies to prior periods for which financial statements have not been issued,
including interim or annual periods ending on or before December 30, 2008.
The implementation of FSP No. 157-3 did not have a material impact on the
Company’s consolidated financial statements.
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115” (“SFAS No. 159”).  SFAS No. 159 provides companies
with an option to report selected financial assets and financial liabilities at
fair value.  Unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings at each subsequent
reporting date.  The fair value option may be elected on an
instrument-by-instrument basis, with few exceptions, as long as it is applied to
the instrument in its entirety. The statement establishes presentation and
disclosure requirements to help financial statement users understand the effect
of an entity’s election on its earnings, but does not eliminate the disclosure
requirements of other accounting standards.  SFAS No. 159 was
effective for fiscal years beginning after November 15, 2007.  The
Company elected not to apply the fair value option to any of its financial
assets or financial liabilities.
 54
 Table of Contents
  (4) COMBINATION OF COMPANIES UNDER
COMMON CONTROL:
  On May 3,
2006, the Combination with WRG was completed pursuant to the Stock Purchase
Agreement and WRG became a direct wholly-owned subsidiary of the Company. The
consideration under the Stock Purchase Agreement was paid to WRG stockholders in
the form of equity interests in P&MC’s Holding LLC, the Company’s indirect
parent.
 
 In
connection with the Combination, the Company repaid the outstanding indebtedness
of WRG in the amount of approximately $101,000,000 and assumed capital lease
obligations of WRG in the amount of approximately $7,000,000. The Company
obtained funds for the repayment of WRG’s outstanding indebtedness from a
$140,000,000 amended and restated credit agreement, described in Note 10,
“Long-Term Debt.” The Company recognized a gain of $12,642,000 on its
extinguishment of certain WRG debt and related accrued interest.
 
 Also, at
the time of the Combination, certain notes issued by particular WRG stockholders
in favor of WRG, which were secured by outstanding stock of WRG, were forgiven
in exchange for a reduction in the total number of P&MC’s Holding LLC equity
units to be transferred to such WRG stockholders. In conjunction with the
forgiveness, previously accrued interest income on the notes of approximately
$489,000 was forgiven and expensed, and the difference between the fair value of
the original WRG shares and the reduction in P&MC’s Holding LLC equity units
to be exchanged, $321,000, was also expensed.
 
 From
September 21, 2005 (date of common control) through May 3, 2006, both Perkins
and WRG were portfolio companies under the common control of Castle Harlan;
therefore, the financial statements of both entities are presented retroactively
on a consolidated basis, in a manner similar to a pooling of interest, from
September 21, 2005, the first date at which both companies were under common
control.
 (5) SUPPLEMENTAL CASH FLOW
INFORMATION:
  The
change in cash and cash equivalents due to changes in operating assets and
liabilities for the past three years consisted of the following (in
thousands):
 Year
      Ended
                        
                        
                        Year
      Ended
                        
                        
                        Year
      EndedDecember
      28,
                        
                        
                        December
      30,
                        
                        
                        December
      31,2008
                        
                        
                        2007
                        
                        
                        2006(Increase)
      Decrease in:Receivables
                        
                        $
                        (3,726
                        )
                        
                        $
                        1,470
                        
                        
                        
                        (1,941
                        )Inventories
                        
                        
                        939
                        
                        
                        
                        (2,218
                        )
                        
                        
                        332Prepaid
      expenses and other current assets
                        
                        
                        2,736
                        
                        
                        
                        (904
                        )
                        
                        
                        1,509Other
      assets
                        
                        
                        3,594
                        
                        
                        
                        (467
                        )
                        
                        
                        (447
                        )Increase
      (Decrease) in:Accounts
      payable
                        
                        
                        (7,327
                        )
                        
                        
                        2,642
                        
                        
                        
                        985Accrued
      expenses
                        
                        
                        (7,422
                        )
                        
                        
                        (2,516
                        )
                        
                        
                        3,313Other
      liabilities
                        
                        
                        4,096
                        
                        
                        
                        5,076
                        
                        
                        
                        (2,445
                        )$
                        (7,110
                        )
                        
                        
                        3,083
                        
                        
                        
                        1,306
  55
 Table of Contents
  Other
supplemental cash flow information for the past three years consisted of the
following (in thousands):
 Year
      Ended
                    
                    
                    Year
      Ended
                    
                    
                    Year
      EndedDecember
      28,
                    
                    
                    December
      30,
                    
                    
                    December
      31,2008
                    
                    
                    2007
                    
                    
                    2006Cash
      paid for interest
                    
                    $
                    30,279
                    
                    
                    
                    29,186
                    
                    
                    
                    26,308Income
      taxes paid
                    
                    
                    681
                    
                    
                    
                    1,044
                    
                    
                    
                    1,389Income
      tax refunds received
                    
                    
                    577
                    
                    
                    
                    954
                    
                    
                    
                    605
  (6) PROPERTY AND
EQUIPMENT:
 Property
and equipment consisted of the following (in thousands):
 December
      28,
                      
                      
                      December
      30,2008
                      
                      
                      2007Owned:Land
      and land improvements
                      
                      $
                      2,035
                      
                      
                      
                      1,951Buildings
                      
                      
                      5,221
                      
                      
                      
                      5,738Leasehold
      improvements
                      
                      
                      86,711
                      
                      
                      
                      80,056Equipment
                      
                      
                      114,926
                      
                      
                      
                      110,210Construction
      in progress
                      
                      
                      1,690
                      
                      
                      
                      1,856210,583
                      
                      
                      
                      199,811Less
      — accumulated depreciation and amortization
                      
                      
                      (122,579
                      )
                      
                      
                      (106,316
                      )88,004
                      
                      
                      
                      93,495Property
      under capital lease:Leasehold
      improvements
                      
                      
                      7,822
                      
                      
                      
                      7,822Less
      — accumulated amortization
                      
                      
                      (3,372
                      )
                      
                      
                      (3,056
                      )4,450
                      
                      
                      
                      4,766Assets
      held for sale
                      
                      
                      1,046
                      
                      
                      
                      1,050Property
      and Equipment, net
                      
                      $
                      93,500
                      
                      
                      
                      99,311
 
 (7) LEASES:
  The
majority of our Perkins restaurant leases have an initial term of 20 years and
the majority of our Marie Callender’s restaurant leases have an initial term of
15 years. Both Perkins and Marie Callender’s leases generally provide for two to
four renewal periods of five years each. Contingent rents are generally amounts
due as a result of sales in excess of amounts stipulated in certain restaurant
leases and are included in rent expense as they are
incurred.  Landlord contributions are recorded when received as a
deferred rent liability and amortized as a reduction of rent expense on a
straight-line basis over the remaining term of the lease.
  56
 Table of Contents
  Future
minimum payments related to non-cancelable leases that have initial or remaining
lease terms in excess of one year as of December 28, 2008 were as follows (in
thousands):
 
 Lease ObligationsCapital
                      
                      
                      Operating2009
                      
                      $
                      1,980
                      
                      
                      
                      36,7092010
                      
                      
                      1,984
                      
                      
                      
                      34,7992011
                      
                      
                      1,822
                      
                      
                      
                      31,3652012
                      
                      
                      1,805
                      
                      
                      
                      28,5642013
                      
                      
                      1,820
                      
                      
                      
                      25,841Thereafter
                      
                      
                      39,270
                      
                      
                      
                      239,322Total
      minimum lease payments
                      
                      
                      48,681
                      
                      
                      $
                      396,600Less:Amounts
      representing interest (3.3%-24.6%)
                      
                      
                      (34,599
                      )Capital
      lease obligations
                      
                      $
                      14,082
 
 Future
minimum gross rental receipts as of December 28, 2008, were as follows (in
thousands):
 
 Lessor
                  
                  
                  Sublessor2009
                  
                  $
                  151
                  
                  
                  
                  1,4922010
                  
                  
                  152
                  
                  
                  
                  1,1322011
                  
                  
                  115
                  
                  
                  
                  9682012
                  
                  
                  77
                  
                  
                  
                  6122013
                  
                  
                  77
                  
                  
                  
                  472Thereafter
                  
                  
                  19
                  
                  
                  
                  1,130Total
      minimum lease
      rentals
                  
                  $
                  591
                  
                  
                  
                  5,806
 
 The net
rental expense included in the accompanying Consolidated Statements of
Operations for operating leases was as follows for the past three years (in
thousands):
 
 Year
      Ended
                        
                        
                        Year
      Ended
                        
                        
                        Year
      EndedDecember
      28,
                        
                        
                        December
      30,
                        
                        
                        December
    31,2008
                        
                        
                        2007
                        
                        
                        2006Minimum
      rentals
                        
                        $
                        38,365
                        
                        
                        
                        41,269
                        
                        
                        
                        39,017Contingent
      rentals
                        
                        
                        930
                        
                        
                        
                        1,566
                        
                        
                        
                        1,764Less
      — sublease
      rentals
                        
                        
                        (616
                        )
                        
                        
                        (715
                        )
                        
                        
                        (966
                        )$
                        38,679
                        
                        
                        
                        42,120
                        
                        
                        
                        39,815
 
 Sublease
rentals are recorded in other expenses in the accompanying Consolidated
Statements of Operations.
 
 (8) GOODWILL AND INTANGIBLE
ASSETS:
  Goodwill
 
 At
December 30, 2007, the Company had $30,038,000 of goodwill, of which $9,836,000
was attributable to restaurant operations, $18,538,000 was attributable to
franchise operations and $1,664,000 was attributable to the Foxtail
segment. The goodwill originated from the acquisition of the Company by
affiliates of Castle Harlan, Inc. in September 2005. Due to the decrease in
the Company’s operating results during 2008 compared to 2007 and the decline in
general economic conditions impacting the restaurant industry, management
conducted an interim goodwill impairment evaluation during the quarter ended
October 5, 2008. Fair values of the reporting units were calculated using
discounted future cash flows and market-based comparative
values.  Because the carrying values of the reporting units for both
the franchise and Foxtail reporting units exceeded their respective estimated
fair values, the Company completed step two of the goodwill test and concluded
that the goodwill of those reporting units was impaired as of October 5,
2008. Accordingly, in the quarter ended October 5, 2008, the Company
recorded a non-cash goodwill impairment charge of $20,202,000, of which
$18,538,000 was charged to the franchise segment and $1,664,000 was charged to
the Foxtail segment.   No impairment charge was required for the
goodwill associated with the restaurant reporting unit or the Company’s
non-amortizing intangibles.  As of December 28, 2008, we conducted our
annual impairment test of goodwill and nonamortizing intangible assets and
determined that no additional impairment charge was required.
  57
 Table of Contents
  The
following schedule presents the carrying amount of goodwill attributable to each
reportable operating segment and changes therein (in thousands):
 
 Restaurant
                      Operations
                    
                    
                    Franchise
                      Operations
                    
                    
                    Foxtail
                    
                    
                    Total
                      CompanyBalance
      as of December 31, 2006
                    
                    $
                    9,836
                    
                    
                    
                    18,538
                    
                    
                    
                    1,664
                    
                    
                    
                    30,038Adjustments
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Balance
      as of December 30, 2007
                    
                    
                    9,836
                    
                    
                    
                    18,538
                    
                    
                    
                    1,664
                    
                    
                    
                    30,038Goodwill
      impairment charge
                    
                    
                    —
                    
                    
                    
                    (18,538
                    )
                    
                    
                    (1,664
                    )
                    
                    
                    (20,202
                    )Balance
      as of December 28, 2008
                    
                    $
                    9,836
                    
                    
                    ─
                    
                    
                    ─
                    
                    
                    
                    9,836
 
 Intangible
Assets
 
 The
components of our identifiable intangible assets are as follows (in
thousands):
 
 December
      28,
                                
                                
                                December
      30,2008
                                
                                
                                2007Amortizing
      intangible assets:Franchise
      agreements
                                
                                $
                                35,000
                                
                                
                                
                                35,000Customer
      relationships
                                
                                
                                13,300
                                
                                
                                
                                13,300Acquired
      franchise rights
                                
                                
                                11,076
                                
                                
                                
                                11,076Design
      prototype
                                
                                
                                834
                                
                                
                                
                                834Subtotal
                                
                                
                                60,210
                                
                                
                                
                                60,210Less
      — accumulated amortization
                                
                                
                                (19,963
                                )
                                
                                
                                (17,494
                                )Total
      amortizing intangible assets
                                
                                
                                40,247
                                
                                
                                
                                42,716Nonamortizing
      intangible asset:Tradename
                                
                                
                                110,600
                                
                                
                                
                                110,600Total
      intangible assets, net
                                
                                $
                                150,847
                                
                                
                                
                                153,316
 
 Amortization
expense for intangible assets was approximately $2,469,000, $3,476,000 and
$1,975,000 for fiscal years 2008, 2007 and 2006, respectively. Estimated
amortization expense of such intangible assets for the five succeeding fiscal
years is as follows (in thousands):
 
 Estimated
                    Amortization Expense2009
                  
                  $
                  2,4122010
                  
                  
                  2,3102011
                  
                  
                  2,2242012
                  
                  
                  2,1322013
                  
                  
                  1,988
  58
 Table of Contents
  (9) ACCRUED
EXPENSES:
  Accrued
expenses consisted of the following (in thousands):
 
 December
      28,
                                
                                
                                December
      30,2008
                                
                                
                                2007Payroll
      and related benefits
                                
                                $
                                15,017
                                
                                
                                
                                16,016Property,
      real estate and sales taxes
                                
                                
                                4,118
                                
                                
                                
                                4,325Insurance
                                
                                
                                1,874
                                
                                
                                
                                1,539Gift
      cards and gift certificates
                                
                                
                                7,446
                                
                                
                                
                                7,099Advertising
                                
                                
                                978
                                
                                
                                
                                937Interest
                                
                                
                                9,634
                                
                                
                                
                                6,310Management
      fees (Note 12)
                                
                                ­─
                                
                                
                                
                                4,065Other
                                
                                
                                7,973
                                
                                
                                
                                12,330$
                                47,040
                                
                                
                                
                                52,621
 
 (10) LONG-TERM
DEBT:
 
 Long-term
debt consisted of the following (in thousands):
 
 December
      28,
                          
                          
                          December
      30,2008
                          
                          
                          200710%
      Senior Notes, due October 1, 2013, net of discount of $1,548 and $1,878,
      respectively
                          
                          $
                          188,452
                          
                          
                          
                          188,123Secured
      Notes, due May 31, 2013, net of discount of $7,220
                          
                          
                          124,780
                          
                          
                          ­─Revolver
      (retired September 2008)
                          
                          ­─
                          
                          
                          
                          20,000New
      Revolver, due February 28, 2013
                          
                          
                          3,184
                          
                          
                          ­─Term
      Loan (retired September 2008)
                          
                          ­─
                          
                          
                          
                          98,750Promissory
      Note, due January 2011
                          
                          
                          100
                          
                          
                          
                          100Other
                          
                          
                          33
                          
                          
                          
                          54316,549
                          
                          
                          
                          307,027Less
      current maturities
                          
                          
                          (15
                          )
                          
                          
                          (9,018
                          )$
                          316,534
                          
                          
                          
                          298,009
  Pre-existing
Credit Agreement
 
 In May
2006, the Company entered into an amended and restated credit agreement with
Wachovia Bank, National Association, as administrative agent, swingline lender
and issuing lender. Pursuant to the credit agreement, the lenders made available
the following: (1) a five-year revolving credit facility of up to $40,000,000,
including a sub-facility for letters of credit in an amount not to exceed
$25,000,000 and a sub-facility for swingline loans in an amount not to exceed
$5,000,000 (the “Revolver”); and (2) a seven-year term loan credit facility not
to exceed $100,000,000 (the “Term Loan”). The interest rate on credit agreement
borrowings was 9.00% on December 30, 2007.
 
 In
connection with the entering into of the credit agreement, the Company
capitalized certain financing costs. As of December 30, 2007, the deferred
financing costs of $3,762,000 for the Credit Agreement, were being
amortized over the term of the agreement using the effective interest
method.


On
September 24, 2008, the Company issued $132,000,000 of 14% senior secured notes
(the "Secured Notes") and entered into a new $26,000,000 revolving credit
facility (the “New Revolver”) in connection with the refinancing of its then
existing $100,000,000 term loan and $40,000,000 revolver.  The
pre-existing credit agreement terminated upon the consummation of the
refinancing.  In connection with this transaction, we recognized a
loss of $2,952,000, representing the write-off of previously deferred financing
costs related to the terminated credit agreement.
 
 Secured
Notes
 
 The
Secured Notes were issued at a discount of $7,537,200, which will be accreted
using the interest method over the term of the Secured Notes.  The
Secured Notes will mature on May 31, 2013, and interest is payable semi-annually
on May 31 and November 30 of each year, commencing on May 31,
2009.
  59
 Table of Contents
  The
Secured Notes are fully and unconditionally guaranteed (the "Secured Notes
Guarantees") on a senior secured basis by the Company's parent, Perkins &
Marie Callender's Holding Inc., and each of the Company's existing and future
domestic wholly-owned subsidiaries (the “Secured Notes
Guarantors”).  The Secured Notes and the Secured Notes Guarantees are
the Company’s and the Secured Notes Guarantors’ senior secured obligations and
rank equal in right of payment to all of the Company’s and the Senior Notes
Guarantor’s existing and future senior indebtedness.  The Secured
Notes and the Secured Notes Guarantees are secured by a lien on substantially
all of the Company’s and the Secured Notes Guarantor’s existing and future
assets, subject to certain exceptions.  Pursuant to the terms of an
intercreditor agreement, the foregoing liens are contractually subordinated to
the liens that secure the New Revolver.


10%
Senior Notes
 
 In
September 2005, the Company issued $190,000,000 of unsecured 10% Senior Notes
(the “10% Senior Notes”). The 10% Senior Notes were issued at a discount of
$2,570,700, which is accreted using the interest method over the term of the 10%
Senior Notes. The 10% Senior Notes will mature on October 1, 2013, and interest
is payable semi-annually on April 1 and October 1 of each year. All consolidated
subsidiaries of the Company that are 100% owned provide joint and several, full
and unconditional guarantee of the 10% Senior Notes. There are no significant
restrictions on the Company’s ability to obtain funds from any of the guarantor
subsidiaries in the form of a dividend or a loan. Additionally, there are no
significant restrictions on a guarantor subsidiary’s ability to obtain funds
from the Company or its direct or indirect subsidiaries.
 
 Prior to
October 1, 2009, the Company may redeem all or part of the 10% Senior Notes at a
“make whole” premium specified in the indenture pertaining to the 10% Senior
Notes (the "10% Senior Note Indenture").  On or after October 1, 2009,
the Company may redeem the 10% Senior Notes at a 5% premium that steps down to a
2.5% premium on October 1, 2010 and a 0% premium on October 1, 2011 (and
thereafter).  If the Company experiences a change of control, the
holders have the right to require the Company to repurchase its 10% Senior Notes
at 101% of the principal amount.  If the Company sells assets and does
not use the net proceeds for specified purposes, it may be required to use the
net proceeds to offer to repurchase the 10% Senior Notes and certain other
existing pari-passu indebtedness of the Company at 100% of the principal amount
thereof.  Any redemption or repurchase also requires the payment of
any accrued and unpaid interest through the redemption or repurchase
date.
 
 With
respect to the 10% Senior Notes, the Company has certain covenants that restrict
our ability to pay dividends or distributions to our equity holders (“Restricted
Payments”). If no default or event of default exists or occurs as a result of
such Restricted Payments, we are generally allowed to make Restricted Payments
subject to the following restrictions:
 
 1.
              The
      Company would, at the time of such Restricted Payments and after giving
      pro forma effect thereto as if such Restricted Payment had been made at
      the beginning of the applicable four-quarter period, have been permitted
      to incur at least $1.00 of additional indebtedness pursuant to the fixed
      charge coverage ratio tests as defined in the
  indenture.
 
 2.
              Such
      Restricted Payment, together with the aggregate amount of all other
      Restricted Payments made by the Company after September 21, 2005, is less
      than the sum, without duplication, of (i) 50% of the consolidated net
      income of the Company for the period from the beginning of the first full
      fiscal quarter commencing after the date of the indenture to the end of
      the Company’s most recent ended fiscal quarter for which internal
      financial statements are available at the time of the Restricted Payment;
      (ii) 100% of the aggregate net proceeds received by the Company since the
      date of the indenture as a contribution to its equity capital or from the
      sale of equity interests of the Company or from the conversion of
      interests or debt securities that have been converted to equity interests;
      and (iii) to the extent that any Restricted Investment, as defined, that
      was made after the date of the indenture is sold for cash, the lesser of
      (a) the cash return of capital or (b) the aggregate amount of such
      restricted investment that was treated as a Restricted Payment when
      made.
  60
 Table of Contents
  The
Secured Notes Indenture and the 10% Senior Notes Indenture contain various
customary events of default, including, without limitation:  (i)
nonpayment of principal or interest; (ii) cross-defaults with certain other
indebtedness; (iii) certain bankruptcy related events; (iv) invalidity of
guarantees; (v) monetary judgment defaults; and (vi) certain change of control
events.  In addition, any impairment of the security interest in the
Secured Notes collateral shall constitute an event of default under the Secured
Notes Indenture.
 
 New
Revolver
 
 The New
Revolver, which matures on February 28, 2013, is guaranteed by Perkins &
Marie Callender's Holding Inc. and certain of the Company's existing and future
subsidiaries.  The New Revolver is secured by a first priority
perfected security interest in all of the Company's property and assets, and the
property and assets of each guarantor.  Subject to the satisfaction of
the conditions contained therein, up to $26,000,000 may be borrowed under the
New Revolver from time to time.  The New Revolver includes a
sub-facility for letters of credit in an amount not to exceed
$15,000,000.
 
 Amounts
outstanding under the New Revolver bear interest, at the Company’s option, at a
rate per annum equal to either: (i) the base rate, as defined in the New
Revolver, plus an applicable margin or (ii) a LIBOR-based equivalent, plus an
applicable margin.  For the foreseeable future, margins are expected
to be 325 basis points for base rate loans and 425 basis points for LIBOR
loans.  As of December 28, 2008, the average interest rate on
aggregate borrowings under the New Revolver was 8.25%, and the New Revolver
permitted additional borrowings of approximately $11,596,000 (after giving
effect to $3,184,000 in borrowings and $11,220,000 in letters of credit
outstanding).  The letters of credit are primarily utilized in
conjunction with our workers’ compensation programs.
 
 The
Company is required to make mandatory prepayments under the New Revolver with,
subject to certain exceptions (as defined in the New Revolver): (i) the net cash
proceeds from certain asset sales or dispositions; (ii) the net cash proceeds of
any debt issued by the Company or its subsidiaries; (iii) 50% of the net cash
proceeds of any equity issuance by the Company, its parent or its subsidiaries;
and (iv) the extraordinary receipts received by the Company or its subsidiaries,
consisting of proceeds of judgments or settlements, certain indemnity payments
and purchase price adjustments received in connection with any purchase
agreement.  Any of the foregoing mandatory prepayments will result in
a corresponding permanent reduction in the maximum New Revolver
amount.
 
 The New
Revolver contains various affirmative and negative covenants, including, but not
limited to a financial covenant to maintain at least $30,000,000 of trailing
13-period EBITDA, as defined in the New Revolver, and a covenant that limits the
Company’s capital expenditures.
 
 The
average interest rate on aggregate borrowings on December 28, 2008 was 11.6%
compared to the average interest rate on aggregate borrowings on December 30,
2007 of 9.2%.
  Our debt
agreements place restrictions on the Company’s ability and the ability of its
subsidiaries to (i) incur additional indebtedness or issue certain preferred
stock; (ii) repay certain indebtedness prior to stated maturities; (iii) pay
dividends or make other distributions on, redeem or repurchase capital stock or
subordinated indebtedness; (iv) make certain investments or other restricted
payments; (v) enter into transactions with affiliates; (vi) issue stock of
subsidiaries; (vii) transfer, sell or consummate a merger or consolidation of
all, or substantially all, of the Company's assets; (viii) change its line of
business; (ix) incur dividend or other payment restrictions with regard to
restricted subsidiaries; (x) create or incur liens on assets to secure debt;
(xi) dispose of assets; (xii) restrict distributions from subsidiaries; (xiii)
make certain acquisitions; (xiv) make capital expenditures; or (xv) amend the
terms of the Company's outstanding notes.  As of December 28, 2008, we
were in compliance with the financial covenants contained in our debt
agreements.
  61
 Table of Contents
  Deferred
Financing Costs, Fair Market Values and Maturities
 
 In
connection with the issuance of the 10% Senior Notes and the Secured Notes and
the execution of the New Revolver, the Company has capitalized certain financing
costs in Other Assets in the Consolidated Balance Sheets. As of December 28,
2008, the deferred financing costs of $5,059,000, $7,226,000 and $974,000 for
the 10% Senior Notes, the Secured Notes and the New Revolver, respectively, are
being amortized over their respective terms using the effective interest
method.
 
 Based on
estimated bond ratings and estimated trading prices, the approximate fair market
value of our 10.0% Senior Notes was $93,000,000 and $133,000,000 on December 28,
2008 and December 30, 2007, respectively, and the approximate fair market value
of our Secured Notes was $124,000,000 on December 28, 2008.
 
 Because
our New Revolver bears interest at current market rates, we believe that its
carrying value approximated fair market value at December 28,
2008.  The Term Loan and pre-existing Revolver retired in September
2008 also bore interest at then-current market rates, and their carrying values
also approximated fair market value at December 30, 2007.
 
 Scheduled
annual principal maturities of long-term debt for the five years subsequent to
December 28, 2008, are as follows (in thousands):
 
 Amount2009
                    
                    $
                    152010
                    
                    
                    182011
                    
                    
                    1002012
                    
                    ─2013
                    
                    
                    325,184Thereafter
                    
                    ─$
                    325,317
 
 No
interest expense was capitalized in connection with our construction activities
for the year ended December 28, 2008, and approximately $13,800 was capitalized
in connection with our construction activities for the year ended December 30,
2007.  Interest income was $292,000, $589,000 and $581,000 in fiscal
2008, 2007 and 2006, respectively.
 
 (11) INCOME
TAXES:
 
 Effective
May 4, 2006, the consolidated Federal income tax return for P&MC’s Holding
Corp. includes MCPSI and Perkins. Prior to May 4, 2006, MCPSI was a member of
the WRG consolidated Federal income tax return. For state purposes, each
subsidiary generally files a separate return, except for the following states
that require a combined or unitary filing: Arizona, California, Idaho, Illinois,
Kentucky, Kansas, Minnesota, Montana, New Mexico, New York, North Dakota,
Nebraska, Oklahoma and Utah. Prior to May 4, 2006, MCPSI was a member of the WRG
unitary or combined state filing in Arizona, California, Idaho, New Mexico,
Oklahoma, Oregon, and Utah.
 
 The
following is a summary of the components of the benefit from (provision for)
income taxes for the past three years (in thousands):
 
 December
      28,
                    
                    
                    December
      30,
                    
                    
                    December
      31,2008
                    
                    
                    2007
                    
                    
                    2006Current:Federal
                    
                    $
                    1,929
                    
                    
                    
                    (1,274
                    )
                    
                    
                    (588
                    )State
      and local
                    
                    
                    82
                    
                    
                    
                    258
                    
                    
                    
                    (275
                    )2,011
                    
                    
                    
                    (1,016
                    )
                    
                    
                    (863
                    )Deferred:Federal
                    
                    
                    (242
                    )
                    
                    
                    (248
                    )
                    
                    
                    490State
      and local
                    
                    
                    -
                    
                    
                    
                    (218
                    )
                    
                    
                    218(242
                    )
                    
                    
                    (466
                    )
                    
                    
                    708$
                    1,769
                    
                    
                    
                    (1,482
                    )
                    
                    
                    (155
                    )
 
  62
 Table of Contents
  A
reconciliation of the statutory Federal income tax rate to the Company’s
effective income tax rate is as follows:
 
 December
      28,
                              
                              
                              December
      30,
                              
                              
                              December
      31,2008
                              
                              
                              2007
                              
                              
                              2006Federal
                              
                              
                              34.0
                              %
                              
                              
                              34.0
                              %
                              
                              
                              34.0
                              %Federal
      income tax credits
                              
                              
                              3.8
                              %
                              
                              
                              1.2
                              %
                              
                              
                              21.3
                              %State
      income taxes, net of Federal taxes
                              
                              
                              3.5
                              %
                              
                              
                              (1.2
                              )%
                              
                              
                              (0.6
                              )%Changes
      in FIN 48 / FAS 5 items
                              
                              
                              0.9
                              %
                              
                              
                              (6.1
                              )%
                              
                              
                              2.1
                              %Non-deductible
      goodwill impairment
                              
                              
                              (12.6
                              )%
                              
                              
                              -
                              
                              
                              
                              -Nondeductible
      interest, expenses, other, net
                              
                              
                              0.1
                              %
                              
                              
                              0.9
                              %
                              
                              
                              (2.2
                              )%Federal
      and state valuation allowances
                              
                              
                              (26.5
                              )%
                              
                              
                              (39.3
                              )%
                              
                              
                              (56.3
                              )%3.2
                              %
                              
                              
                              (10.5
                              )%
                              
                              
                              (1.7
                              )%
 
 The
following is a summary of the significant components of our deferred tax
position (in thousands):
  December
      28,
                        
                        
                        December
      30,2008
                        
                        
                        2007Deferred
      tax assets:Net
      operating loss carryforwards
                        
                        $
                        18,176
                        
                        
                        
                        13,290Accrued
      expenses not currently deductible
                        
                        
                        15,371
                        
                        
                        
                        12,526Tax
      credit carryforwards
                        
                        
                        10,278
                        
                        
                        
                        4,561Property,
      equipment, and improvements — tax basis in excess of book
      basis
                        
                        
                        14,429
                        
                        
                        
                        12,002Capital
      leases
                        
                        
                        2,046
                        
                        
                        
                        1,115Total
      deferred tax assets
                        
                        
                        60,300
                        
                        
                        
                        43,494Less
      valuation allowance
                        
                        
                        (43,498
                        )
                        
                        
                        (25,581
                        )16,802
                        
                        
                        
                        17,913Deferred
      tax liabilities:Investment
      in unconsolidated partnership
                        
                        
                        (18
                        )
                        
                        
                        (20
                        )Intangible
      assets — book basis in excess of tax basis
                        
                        
                        (16,784
                        )
                        
                        
                        (17,651
                        )(16,802
                        )
                        
                        
                        (17,671
                        )Net
      deferred tax assets
                        
                        $
                        -
                        
                        
                        
                        242
 
 The
valuation allowance for deferred tax assets as of December 28, 2008, and
December 30, 2007 was $43,498,000, and $25,581,000, respectively.  The
change in the valuation allowance of $17,917,000 relates primarily to the
increase in deferred deductible differences related to fixed assets,
intangibles, capital leases, accrued expenses, net operating losses and tax
credit carry forwards net of uncertain tax positions.  In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.  The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible.  Based upon the
level of historical taxable income and projections for taxable income in future
periods management believes a valuation allowance is necessary for the
consolidated net deferred tax assets.  In that regard, management also
believes its deferred tax liabilities will turn within the same period as of its
deferred tax assets; thereby only requiring a valuation allowance on the
Company’s net deferred tax asset position.
 
 The
Company had federal net operating loss carryforwards totaling approximately
$40,572,000, and $35,177,000 at December 28, 2008, and December 30, 2007,
respectively, which begin to expire in 2012.
 
 The
Company had state net operating loss carryforwards totaling approximately
$69,703,000 and $46,833,000 at December 28, 2008, and December 30, 2007,
respectively, which begin to expire in 2009.
 
 63
 Table of Contents
  Additionally,
the Company had tax credit carryforwards totaling approximately $10,278,000 and
$4,561,000 at December 28, 2008, and December 30, 2007 respectively, which begin
to expire in 2018.
  On
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB
Statement No. 109,” (“FIN 48”).  As a result of the implementation of
FIN 48, the Company recognized approximately a $183,000 increase to the January
1, 2007 balance of retained earnings.  As of December 28, 2008 and
December 30, 2007, the Company had approximately $1,097,000 and $4,092,000,
respectively, of unrecognized tax benefits that, if recognized, would impact the
Company’s effective tax rate. In addition, as of December 28, 2008 and December
30, 2007 the Company had $652,000 and $3,010,000, respectively, of unrecognized
tax benefits reducing federal and state net operating loss carry forwards and
federal credit carry forwards that, if recognized, would be subject to a
valuation allowance.
 
 A
reconciliation of the change in the gross unrecognized tax benefits from January
1, 2007 to December 28, 2008 is as follows (in thousands):
  2008
                                    
                                    
                                    2007Unrecognized
      tax benefit - beginning of fiscal year
                                    
                                    $
                                    5,724
                                    
                                    
                                    
                                    5,126Additions
      for tax positions of prior years
                                    
                                    
                                    97
                                    
                                    
                                    
                                    1,480Reductions
      for tax positions of prior years
                                    
                                    
                                    (2,341
                                    )
                                    
                                    
                                    (699
                                    )Additions
      for tax positions of current period
                                    
                                    
                                    0
                                    
                                    
                                    
                                    0Reductions
      due to settlements
                                    
                                    
                                    (1,080
                                    )
                                    
                                    
                                    0Reductions
      for lapse of statute of limitations
                                    
                                    
                                    (1,041
                                    )
                                    
                                    
                                    (183
                                    )Unrecognized
      tax benefit - end of fiscal year
                                    
                                    $
                                    1,359
                                    
                                    
                                    
                                    5,724
 During
the first and fourth quarters of 2008, the Company filed a request with the
Internal Revenue Service to resolve $2,341,000 of uncertain tax positions with
respect to Marie Callender’s historical taxable revenue and expense recognition;
this request effectively settled these uncertain tax positions. Additionally,
in May 2008, the Company paid approximately $395,000 to the Internal Revenue
Service to settle certain other income tax positions taken on prior
filings.
  The
Company expects that the total amount of its gross unrecognized tax benefits
will decrease between $76,000 and $667,000 within the next 12 months due to
federal and state settlements and expiration of statutes.  As of
December 30, 2007, the Company believed that it was reasonably possible that a
decrease between $3,800,000 and $4,400,000 in gross unrecognized tax benefits
would have occurred due to federal and state settlements and expiration of
statutes during the year ended December 28, 2008.  During the year
ended December 30, 2008, gross unrecognized tax benefits related to federal and
state settlements and expiration of statutes actually decreased by $4,462,000 as
illustrated in the above table.
 
 The
Company recognizes interest accrued related to unrecognized tax benefits and
penalties as income tax expense. The Company paid $42,000 and removed $370,000
of accrued interest during 2008 and in total, as of December 28, 2008, has
recognized a liability for interest of $121,000. The Company accrued $289,000 of
interest during 2007 and in total, as of December 30, 2007, had recognized a
liability for interest of $533,000. The Company has no accured
penalties.
 
 The
Company is open to federal and state tax audits until the applicable statute of
limitations expire.  The Company is no longer subject to U.S. federal
tax examinations by tax authorities for tax years before 2005.  For
the majority of states where the Company has a significant presence, it is no
longer subject to tax examination by tax authorities for tax years before
2005.
  
 64
 Table of Contents
  (12) RELATED PARTY
TRANSACTIONS:
 Management
Agreement:
 
 The
management agreement is for an initial term expiring December 31, 2012 and is
subject to renewal for consecutive one-year terms unless terminated by Castle
Harlan or us upon 90 days notice prior to the expiration of the initial term or
any annual renewal. We also indemnify Castle Harlan, its officers, directors and
affiliates from any losses or claims suffered by them as a result of services
they provide us. Payment of management fees is subject to restrictions contained
in the Secured Notes Indenture, the 10% Senior Note Indenture and the New
Revolver.  As of December 28, 2008 and December 30, 2007, other
liabilities in our consolidated balance sheet includes past due management fees
of $6,614,000 and $7,832,000, respectively.
  We paid
Castle Harlan $4,894,000, $3,576,000 and $3,635,000 in annual management fees
during the years ended December 28, 2008, December 30, 2007 and December 31,
2006, respectively.
 
 During
the quarter ended October 5, 2008, certain affiliates of Castle Harlan, Inc.
made a $4,000,000 payment to the lenders under our pre-existing revolving credit
facility in satisfaction of their guarantee under the March 2008 amendment to
the term loan.  This amount became a subordinated obligation of the
Company and, immediately prior to the consummation of the refinancing, the
affiliates of Castle Harlan relinquished and canceled the indebtedness in
exchange for 39,996 Class A-1 units and 39,996 Class B units of P&MC’s
Holding LLC.  Also, during the quarter, the Company received an
additional equity contribution of $8,500,000 from our indirect parent,
P&MC’s Holding Corp.
 
 (13) OTHER COMMITMENTS AND
CONTINGENCIES:
  We are a
party to various legal proceedings in the ordinary course of business. We do not
believe it is likely that these proceedings, either individually or in the
aggregate, will have a material adverse effect on our consolidated financial
statements.
 
 The
majority of our franchise revenues are generated from franchisees owning
individually less than five percent of total franchised restaurants, and,
therefore, the loss of any one of these franchisees would not have a material
impact on our results of operations. As of December 28, 2008, three Perkins
franchisees otherwise unaffiliated with the Company owned 89 of the 317
franchised restaurants. These franchisees operated 41, 27 and 21 restaurants,
respectively. During 2008, these three Perkins franchisees provided royalties
and license fees of $1,926,000, $1,452,000 and $1,500,000, respectively. As of
December 28, 2008, three Marie Callender’s franchisees otherwise unaffiliated
with the Company, owned 13 of the 42 franchised restaurants. These franchisees
operated five, four and four restaurants, respectively. During 2008, these three
Marie Callender’s franchisees provided royalties and license fees of $542,000,
$465,000 and $312,000, respectively.
 
 The
Company has license agreements with certain parties to distribute and market
Marie Callender’s branded products. The most prominent of these agreements are
with ConAgra, Inc., which distributes frozen entrees and dinners to supermarkets
and club stores throughout the United States, and American Pie, LLC, which
distributes primarily frozen pies throughout most of the country. Both
agreements are in effect in perpetuity, with the licensor having the right to
terminate if specified sales levels are not achieved (both licensees have
achieved the required sales levels), and each licensee having the right to
terminate upon a 180 day notice. License income under these two agreements
totaled $4,865,000, $4,336,000 and $3,867,000 in 2008, 2007 and 2006,
respectively.
  65
 Table of Contents
  The
Company has arrangements with several different parties to whom territorial
rights were granted in exchange for specified payments. The Company makes
specified payments to those parties based on a percentage of gross sales from
certain Perkins restaurants and for new Perkins restaurants opened within those
geographic regions. During 2008, 2007 and 2006, we paid an aggregate of
$2,718,000, $2,762,000 and $2,799,000, respectively, under such arrangements.
Three such agreements are currently in effect. Of these, one expires in the year
2075, one expires upon the death of the beneficiary and the remaining agreement
remains in effect as long as we operate Perkins restaurants in certain
states.
 
 (14) LONG-TERM INCENTIVE
PLANS:
  In
October 2006, we established a nonqualified defined contribution plan for
executive officers and other key employees (the “Deferred Compensation
Plan”).  The Deferred Compensation Plan is voluntary and our executive
officers and key employees may defer specified percentages of their eligible
pay, defined as base pay plus the eligible portion of any incentive
award.  The first 3% of eligible pay contributed to the plan by the
executive is eligible for a 100% company matching contribution uo to $6,000,
which vests over a three year period.  The Company may elect to make
additional contributions to an employee’s account.  Amounts deferred
are held in trust with a bank.  The Company made matching
contributions of $210,000, $275,000 and $28,000 to the Deferred Compensation
Plan during 2008, 2007 and 2006, respectively.
 
 Effective
April 2004, The Perkins & Marie Callender’s Supplemental Executive
Retirement Plan (“SERP I”) was established. The purpose of SERP I is to provide
additional compensation for a select group of management and highly compensated
employees who contribute materially to the growth of the Company. Contributions
to SERP I are made at the discretion of the Company and participants vest at a
rate of 25% for one to three years of service, 50% for four to five years of
service and 100% for five or more years of service. The Company did not make
contributions to SERP I in 2008 or 2007, but contributed $280,000 in
2006.
 
 Effective
January 2005, The Perkins & Marie Callender’s Supplemental Executive
Retirement Plan II (“SERP II”) was established. The purpose of SERP II is to
provide additional compensation for a select group of key employees who
contribute materially to the growth of the Company. Contributions to SERP II are
made at the discretion of the Company and participants generally vest in the
contributions over a five-year period. The Company did not make contributions to
SERP II in 2008 or 2007, but contributed $210,000 in 2006. The deferred
compensation expenses related to SERP I and SERP II are recorded in general and
administrative expenses in the accompanying Consolidated Statements of
Operations.
 
 (15) EMPLOYEE
BENEFITS:
  The
Company maintains the Perkins & Marie Callender’s Retirement Savings Plan
(the “Plan”) generally for employees who have satisfied the participation
requirements are eligible for participation in the Plan provided they (i) have
attained the age of 21 and (ii) have completed one year of service, as defined,
during which they have been credited with a minimum of 1,000 hours of
service.
 
 Participants
may elect to defer from 1% to 15% of their annual eligible compensation subject
to Internal Revenue Code (“IRC”) regulated maximums. We may make a matching
contribution equal to a percentage of the amount deferred by the participant or
a specified dollar amount as determined each year by the Board of Directors.
During 2008, 2007 and 2006, we elected to match contributions at a rate of 25%
up to the first 6% deferred by each participant. Our matching contributions for
the years ended December 28, 2008, December 30, 2007 and December 31, 2006 were
$432,000, $434,000 and $325,000, respectively.
 
 Participants
are always 100% vested in their salary deferral accounts and qualified rollover
accounts. Vesting in the employer matching account is based on qualifying years
of service. A participant vests 60% in the employer matching account after three
years, 80% after four years and 100% after five years.
 
 66
 Table of Contents
  (16) P&MC’s HOLDING LLC EQUITY
PLAN AND OTHER EQUITY TRANSACTIONS:
  Equity
Plan
 
 Strip
Subscription Units:  During 2007, pursuant to the Equity Plan, Strip
Subscription Units, consisting of Class A Units and Class C Units, aggregating
$1,768,000 were purchased by certain Company executives at fair values of
$100.00 and $0.01, respectively.  During 2008, certain units were
repurchased from Company executives at the fair value of $572,000.
 
 Incentive
Units:  During 2007, pursuant to the Equity Plan, Incentive Units were
granted at fair value to key employees. Incentive Units represent a subordinated
unit interest in P&MC’s Holding LLC,  generally vest over four
years of continuous service and have no contractual term.  The Company
has determined the estimated fair value of the Incentive Units to be
approximately $0.01 at their grant date.
 
 Stock-based
employee compensation expense is charged by the Company based on the recognition
and measurement provisions of SFAS No. 123 (revised 2004), “Share-Based
Payment” and related interpretations.  Stock-based compensation
expense for the year ended December 28, 2008, December 30, 2007 and December 31,
2006 was not material.
 
 If the
employee is employed as of the date of the occurrence of certain change in
control events, as defined in the Equity Plan, the employee’s outstanding but
unvested Incentive Units shall vest simultaneously with the consummation of the
change in control event.  Upon termination of employment, unvested
Incentive Units are forfeited and vested Incentive Units and Strip Subscription
Units are subject to repurchase, at a price not to exceed fair value, pursuant
to the terms of P&MC’s Holding LLC’s unitholders agreement.
 
 Other
Equity Transactions
 
 During
the quarter ended October 5, 2008, certain affiliates of Castle Harlan, Inc.
made a $4,000,000 payment to the lenders under our pre-existing revolving credit
facility in satisfaction of their guarantee under the March 2008 amendment to
the term loan.  This amount became a subordinated obligation of the
Company and immediately prior to the consummation of the refinancing, the
affiliates of Castle Harlan relinquished and canceled the indebtedness in
exchange for 39,996 units of Class A-1 and Class B units of P&MC’s Holding
LLC.  The Class A-1 units are senior to the existing Class A Units and
carry a preferred return of 14%.  Following the exchange, certain key
Company employees exercised their pre-emptive right and purchased 123 units of
the Class A-1 and Class B units.  Also, during the third quarter of
2008, the Company received an additional equity contribution of $8,500,000 from
our indirect parent, P&MC’s Holding Corp.
 
 A summary
of the status of the equity units of P&MC’s Holding LLC as of December 28,
2008, and changes during the years ended December 28, 2008 and December 30,
2007, is presented below.  The units outstanding prior to April 1,
2007 are owned by parties other than the Company executives.
  67
 Table of Contents
  
 TimePurchased
                      
                      
                      VestingClass
                      
                      
                      Class
                      
                      
                      Class
                      
                      
                      Class
                      
                      
                      ClassA-1
                      
                      
                      A
                      
                      
                      
                      B
                      
                      
                      
                      C
                      
                      
                      
                      CUnits
                      
                      
                      Units
                      
                      
                      Units
                      
                      
                      Units
                      
                      
                      UnitsUnits
      outstanding as of December 31, 2006
                      
                      
                      -
                      
                      
                      
                      1,104,589
                      
                      
                      
                      1,104,589
                      
                      
                      
                      -
                      
                      
                      
                      -Granted
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      116,715Purchased
                      
                      
                      -
                      
                      
                      
                      17,673
                      
                      
                      
                      -
                      
                      
                      
                      17,673
                      
                      
                      
                      -Forfeited
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (3,990
                      )Units
      outstanding as of December 30, 2007
                      
                      
                      -
                      
                      
                      
                      1,122,262
                      
                      
                      
                      1,104,589
                      
                      
                      
                      17,673
                      
                      
                      
                      112,725Granted
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      19,951Purchased
                      
                      
                      40,119
                      
                      
                      
                      -
                      
                      
                      
                      40,119
                      
                      
                      
                      -
                      
                      
                      
                      -Forfeited
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (36,286
                      )Repurchase
      of equity ownership units
                      
                      
                      -
                      
                      
                      
                      (5,664
                      )
                      
                      
                      (142
                      )
                      
                      
                      (5,522
                      )
                      
                      
                      -Units
      outstanding as of December 28, 2008
                      
                      
                      40,119
                      
                      
                      
                      1,116,598
                      
                      
                      
                      1,144,566
                      
                      
                      
                      12,151
                      
                      
                      
                      96,390Units
      exercisable as of December 28, 2008
                      
                      
                      40,119
                      
                      
                      
                      1,116,598
                      
                      
                      
                      1,144,566
                      
                      
                      
                      12,151
  A summary
of the vested status of the Company’s time-vesting Class C Units as of December
28, 2008, and changes during the years ended December 28, 2008 and December 30,
2007, is presented below:
  Time
      Vesting Class C UnitsNonvested
                      
                      
                      VestedOutstanding
      at December 31, 2006
                      
                      
                      -
                      
                      
                      
                      -Granted
                      
                      
                      116,715
                      
                      
                      
                      -Forfeited
                      
                      
                      (3,990
                      )
                      
                      
                      -Outstanding
      at December 30, 2007
                      
                      
                      112,725
                      
                      
                      
                      -Granted
                      
                      
                      19,951
                      
                      
                      
                      -Vested
                      
                      
                      (25,604
                      )
                      
                      
                      25,604Forfeited
                      
                      
                      (33,169
                      )
                      
                      
                      (3,117
                      )Outstanding
      at December 28, 2008
                      
                      
                      73,903
                      
                      
                      
                      22,487
 
 (17) SEGMENT
REPORTING:
  We have
three reportable segments: restaurant operations, franchise operations, and
Foxtail. The restaurant operations include the operating results of
Company-operated Perkins and Marie Callender’s restaurants. The franchise
operations include revenues and expenses directly attributable to franchised
Perkins and Marie Callender’s restaurants. Foxtail’s operations consist of three
manufacturing plants: one in Corona, California and two in Cincinnati,
Ohio.
 
 Restaurant
operations operate principally in the U.S. within the family dining and casual
dining industries, providing similar products to similar customers. Revenues
from restaurant operations are derived principally from food and beverage sales
to external customers. Perkins and Marie Callender’s operations exhibit similar
operating characteristics, including food and labor costs which result in
similar long-term average gross margins. Revenues from franchise operations
consist primarily of royalty income earned on the revenues generated at
franchisees’ restaurants and initial franchise fees. The revenue and cost
structure of our Perkins and Marie Callender’s franchise operations exhibit
similar long-term operating characteristics. Revenues from Foxtail are generated
by the sale of food products to both Company-operated and franchised Perkins and
Marie Callender’s restaurants as well as to unaffiliated customers. Foxtail’s
sales to Company-operated restaurants are eliminated for reporting purposes. The
revenues in the “Other” segment are primarily licensing
revenues.
  68
 Table of Contents
  The
following presents revenues and other financial information by business segment
(in thousands):
 
 
 Year
      Ended
                  
                  
                  Year
      Ended
                  
                  
                  Year
      EndedDecember
      28, 2008
                  
                  
                  December
      30, 2007
                  
                  
                  December
      31, 2006RevenuesRestaurant
      operations
                  
                  $
                  503,242
                  
                  
                  
                  510,863
                  
                  
                  
                  512,104Franchise
      operations
                  
                  
                  24,141
                  
                  
                  
                  25,982
                  
                  
                  
                  26,894Foxtail
                  
                  
                  69,308
                  
                  
                  
                  65,953
                  
                  
                  
                  69,320Intersegment
      revenue
                  
                  
                  (20,088
                  )
                  
                  
                  (19,826
                  )
                  
                  
                  (18,682
                  )Other
                  
                  
                  5,367
                  
                  
                  
                  4,914
                  
                  
                  
                  4,554Total
                  
                  $
                  581,970
                  
                  
                  
                  587,886
                  
                  
                  
                  594,190Depreciation and
    amortizationRestaurant
      operations
                  
                  
                  19,563
                  
                  
                  
                  18,913
                  
                  
                  
                  20,402Franchise
      operations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Foxtail
                  
                  
                  1,792
                  
                  
                  
                  1,576
                  
                  
                  
                  1,659Other
                  
                  
                  3,344
                  
                  
                  
                  4,333
                  
                  
                  
                  3,580Total
                  
                  $
                  24,699
                  
                  
                  
                  24,822
                  
                  
                  
                  25,641Segment net income (loss)Restaurant
      operations
                  
                  
                  26,806
                  
                  
                  
                  32,459
                  
                  
                  
                  34,369Franchise
      operations
                  
                  
                  3,603
                  
                  
                  
                  23,774
                  
                  
                  
                  24,770Foxtail
                  
                  
                  (4,500
                  )
                  
                  
                  3,687
                  
                  
                  
                  8,255Other
                  
                  
                  (78,862
                  )
                  
                  
                  (76,255
                  )
                  
                  
                  (76,766
                  )Total
                  
                  $
                  (52,953
                  )
                  
                  
                  (16,335
                  )
                  
                  
                  (9,372
                  )
  December
      28, 2008
                          
                          
                          December
      30, 2007Segment assetsRestaurant
      operations
                          
                          $
                          131,135
                          
                          
                          
                          140,848Franchise
      operations
                          
                          
                          102,719
                          
                          
                          
                          121,199Foxtail
                          
                          
                          37,575
                          
                          
                          
                          42,329Other
                          
                          
                          52,079
                          
                          
                          
                          58,566Total
                          
                          $
                          323,508
                          
                          
                          
                          362,942GoodwillRestaurant
      operations
                          
                          
                          9,836
                          
                          
                          
                          9,836Franchise
      operation
                          
                          
                          -
                          
                          
                          
                          18,538Foxtail
                          
                          
                          -
                          
                          
                          
                          1,664Other
                          
                          
                          -
                          
                          
                          
                          -Total
                          
                          $
                          9,836
                          
                          
                          
                          30,038
 
 
 Year
      Ended
                  
                  
                  Year
      Ended
                  
                  
                  Year
      EndedDecember
      28, 2008
                  
                  
                  December
      30, 2007
                  
                  
                  December
      31, 2006Capital expendituresRestaurant
      operations
                  
                  $
                  12,489
                  
                  
                  
                  29,095
                  
                  
                  
                  18,073Franchise
      operations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Foxtail
                  
                  
                  4,710
                  
                  
                  
                  1,476
                  
                  
                  
                  563Other
                  
                  
                  1,137
                  
                  
                  
                  976
                  
                  
                  
                  926Total
                  
                  $
                  18,336
                  
                  
                  
                  31,547
                  
                  
                  
                  19,562
 
  69
 Table of Contents
  We
evaluate the performance of our segments based primarily on operating profit
before general and administrative expenses, interest expense and income
taxes.
 
 Assets
included in the other operating segment primarily consist of cash, corporate
accounts receivable and deferred taxes.
 
 The
components of the other segment loss are as follows (in thousands):
 Year
      Ended
                  
                  
                  Year
      Ended
                  
                  
                  Year
      EndedDecember
      28, 2008
                  
                  
                  December
      30, 2007
                  
                  
                  December
      31, 2006General
      and administrative expenses
                  
                  $
                  40,162
                  
                  
                  
                  39,393
                  
                  
                  
                  43,176Depreciation
      and amortization expenses
                  
                  
                  3,343
                  
                  
                  
                  4,333
                  
                  
                  
                  3,580Interest
      expense, net
                  
                  
                  36,689
                  
                  
                  
                  31,180
                  
                  
                  
                  36,197Loss
      on disposition of assets, net
                  
                  
                  505
                  
                  
                  
                  226
                  
                  
                  
                  670Asset
      write-down
                  
                  
                  1,292
                  
                  
                  
                  2,237
                  
                  
                  
                  2,058Loss
      (gain) on extinguishment of debt
                  
                  
                  2,952
                  
                  
                  
                  -
                  
                  
                  
                  (12,642
                  )Lease
      termination
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  366Transaction
      costs
                  
                  
                  -
                  
                  
                  
                  1,013
                  
                  
                  
                  5,674Provision
      for (benefit from) income taxes
                  
                  
                  (1,769
                  )
                  
                  
                  1,482
                  
                  
                  
                  155Minority
      interest expense
                  
                  
                  284
                  
                  
                  
                  707
                  
                  
                  
                  493Licensing
      revenue
                  
                  
                  (5,125
                  )
                  
                  
                  (4,564
                  )
                  
                  
                  (4,107
                  )Other
                  
                  
                  529
                  
                  
                  
                  248
                  
                  
                  
                  1,146Total
      other segment loss
                  
                  $
                  78,862
                  
                  
                  
                  76,255
                  
                  
                  
                  76,766
 
  70
 Table of Contents
  (18)
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
 
 The
Company’s 10% Senior Notes and its Secured Notes were issued subject to a joint
and several, full and unconditional guarantee by all of the Company’s 100% owned
domestic subsidiaries. There are no significant restrictions on the Company’s
ability to obtain funds from any of the guarantor subsidiaries in the form of a
dividend or loan. Additionally, there are no significant restrictions on the
guarantor subsidiaries’ ability to obtain funds from the Company or its direct
or indirect subsidiaries.
 
 The
following consolidating statements of operations, balance sheets and statements
of cash flows are provided for the parent company and all subsidiaries. The
information has been presented as if the parent company accounted for its
ownership of the guarantor and non-guarantor subsidiaries using the equity
method of accounting.
 
 Consolidating statement of operations
for the year ended December 28, 2008 (in thousands):
 
 Guarantor
                  
                  
                  Non-
                  
                  
                  
                  
                  
                  ConsolidatedParent
      Issuer
                  
                  
                  WRG
                  
                  
                  Guarantors
                  
                  
                  Eliminations
                  
                  
                  PMCIREVENUES:Food
      sales
                  
                  $
                  344,869
                  
                  
                  
                  179,792
                  
                  
                  
                  27,801
                  
                  
                  
                  -
                  
                  
                  
                  552,462Franchise
      and other revenue
                  
                  
                  19,993
                  
                  
                  
                  9,515
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  29,508Total
      revenues
                  
                  
                  364,862
                  
                  
                  
                  189,307
                  
                  
                  
                  27,801
                  
                  
                  
                  -
                  
                  
                  
                  581,970COSTS
      AND EXPENSES:Cost
      of sales (excluding depreciation shown
                    below):Food
      cost
                  
                  
                  100,841
                  
                  
                  
                  51,175
                  
                  
                  
                  9,087
                  
                  
                  
                  -
                  
                  
                  
                  161,103Labor
      and benefits
                  
                  
                  115,931
                  
                  
                  
                  63,163
                  
                  
                  
                  9,337
                  
                  
                  
                  -
                  
                  
                  
                  188,431Operating
      expenses
                  
                  
                  90,388
                  
                  
                  
                  53,683
                  
                  
                  
                  8,189
                  
                  
                  
                  -
                  
                  
                  
                  152,260General
      and administrative
                  
                  
                  42,590
                  
                  
                  
                  5,239
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  47,829Depreciation
      and amortization
                  
                  
                  17,794
                  
                  
                  
                  6,183
                  
                  
                  
                  722
                  
                  
                  
                  -
                  
                  
                  
                  24,699Interest,
      net
                  
                  
                  35,604
                  
                  
                  
                  1,085
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  36,689Asset
      impairments and closed store expenses
                  
                  
                  221
                  
                  
                  
                  1,523
                  
                  
                  
                  53
                  
                  
                  
                  -
                  
                  
                  
                  1,797Goodwill
      impairment
                  
                  
                  20,202
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  20,202Loss
      on extinguishments of debt
                  
                  
                  2,952
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,952Other,
      net
                  
                  
                  446
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  446Total
      costs and expenses
                  
                  
                  426,969
                  
                  
                  
                  182,051
                  
                  
                  
                  27,388
                  
                  
                  
                  -
                  
                  
                  
                  636,408Income
      (loss) before income taxes and
                    minority
      interests
                  
                  
                  (62,107
                  )
                  
                  
                  7,256
                  
                  
                  
                  413
                  
                  
                  
                  -
                  
                  
                  
                  (54,438
                  )Provision
      for income taxes
                  
                  
                  1,769
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,769Minority
      interest expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (284
                  )
                  
                  
                  -
                  
                  
                  
                  (284
                  )Equity
      in earnings (loss) of subsidiaries
                  
                  
                  7,385
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (7,385
                  )
                  
                  
                  -NET
      (LOSS) INCOME
                  
                  $
                  (52,953
                  )
                  
                  
                  7,256
                  
                  
                  
                  129
                  
                  
                  
                  (7,385
                  )
                  
                  
                  (52,953
                  )
  71
 Table of Contents
  Consolidating statement of operations
for the year ended December 30, 2007 (in thousands):
  Guarantor
                  
                  
                  Non-
                  
                  
                  
                  
                  
                  ConsolidatedParent
      Issuer
                  
                  
                  WRG
                  
                  
                  Guarantors
                  
                  
                  Eliminations
                  
                  
                  PMCIREVENUES:Food
      sales
                  
                  $
                  336,820
                  
                  
                  
                  189,614
                  
                  
                  
                  30,556
                  
                  
                  
                  -
                  
                  
                  
                  556,990Franchise
      and other revenue
                  
                  
                  21,323
                  
                  
                  
                  9,573
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  30,896Total
      revenues
                  
                  
                  358,143
                  
                  
                  
                  199,187
                  
                  
                  
                  30,556
                  
                  
                  
                  -
                  
                  
                  
                  587,886COSTS
      AND EXPENSES:Cost
      of sales (excluding depreciation shown below):Food
      cost
                  
                  
                  94,986
                  
                  
                  
                  55,260
                  
                  
                  
                  8,462
                  
                  
                  
                  -
                  
                  
                  
                  158,708Labor
      and benefits
                  
                  
                  114,846
                  
                  
                  
                  64,562
                  
                  
                  
                  9,899
                  
                  
                  
                  -
                  
                  
                  
                  189,307Operating
      expenses
                  
                  
                  86,731
                  
                  
                  
                  52,659
                  
                  
                  
                  10,047
                  
                  
                  
                  -
                  
                  
                  
                  149,437General
      and administrative
                  
                  
                  39,152
                  
                  
                  
                  5,722
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  44,874Transaction
      costs
                  
                  
                  772
                  
                  
                  
                  241
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,013Depreciation
      and amortization
                  
                  
                  17,610
                  
                  
                  
                  5,939
                  
                  
                  
                  1,273
                  
                  
                  
                  -
                  
                  
                  
                  24,822Interest,
      net
                  
                  
                  30,127
                  
                  
                  
                  1,053
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  31,180Asset
      impairments and closed store expenses
                  
                  
                  (178
                  )
                  
                  
                  2,612
                  
                  
                  
                  29
                  
                  
                  
                  -
                  
                  
                  
                  2,463Other,
      net
                  
                  
                  (122
                  )
                  
                  
                  350
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  228Total
      costs and expenses
                  
                  
                  383,924
                  
                  
                  
                  188,398
                  
                  
                  
                  29,710
                  
                  
                  
                  -
                  
                  
                  
                  602,032Income
      (loss) before income taxes and
                    minority
      interests
                  
                  
                  (25,781
                  )
                  
                  
                  10,789
                  
                  
                  
                  846
                  
                  
                  
                  -
                  
                  
                  
                  (14,146
                  )Provision
      for income taxes
                  
                  
                  (1,482
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,482
                  )Minority
      interest expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (707
                  )
                  
                  
                  -
                  
                  
                  
                  (707
                  )Equity
      in earnings (loss) of subsidiaries
                  
                  
                  10,928
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (10,928
                  )
                  
                  
                  -NET
      (LOSS) INCOME
                  
                  $
                  (16,335
                  )
                  
                  
                  10,789
                  
                  
                  
                  139
                  
                  
                  
                  (10,928
                  )
                  
                  
                  (16,335
                  )
 
  72
 Table of Contents
  Consolidating statement of operations
for the year ended December 31, 2006 (in thousands):
 
 GuarantorsParent
      Issuer
                  
                  
                  PMCM
                  
                  
                  WRG
                  
                  
                  Other
                  
                  
                  Non-Guarantors
                  
                  
                  Eliminations
                  
                  
                  ConsolidatedPMCIREVENUES:Food
      sales
                  
                  $
                  258,945
                  
                  
                  
                  82,667
                  
                  
                  
                  190,346
                  
                  
                  
                  -
                  
                  
                  
                  30,784
                  
                  
                  
                  -
                  
                  
                  
                  562,742Franchise
      and other revenue
                  
                  
                  13,731
                  
                  
                  
                  15,189
                  
                  
                  
                  9,396
                  
                  
                  
                  15
                  
                  
                  
                  -
                  
                  
                  
                  (6,883
                  )
                  
                  
                  31,448Total
      revenues
                  
                  
                  272,676
                  
                  
                  
                  97,856
                  
                  
                  
                  199,742
                  
                  
                  
                  15
                  
                  
                  
                  30,784
                  
                  
                  
                  (6,883
                  )
                  
                  
                  594,190COSTS
      AND EXPENSES:Cost
      of sales (excluding depreciation shown below):Food
      cost
                  
                  
                  76,676
                  
                  
                  
                  18,904
                  
                  
                  
                  55,629
                  
                  
                  
                  -
                  
                  
                  
                  8,542
                  
                  
                  
                  -
                  
                  
                  
                  159,751Labor
      and benefits
                  
                  
                  84,608
                  
                  
                  
                  29,908
                  
                  
                  
                  61,765
                  
                  
                  
                  -
                  
                  
                  
                  9,124
                  
                  
                  
                  -
                  
                  
                  
                  185,405Operating
      expenses
                  
                  
                  59,569
                  
                  
                  
                  27,064
                  
                  
                  
                  55,842
                  
                  
                  
                  15
                  
                  
                  
                  10,920
                  
                  
                  
                  (3,308
                  )
                  
                  
                  150,102General
      and administrative
                  
                  
                  36,427
                  
                  
                  
                  3,585
                  
                  
                  
                  11,751
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,575
                  )
                  
                  
                  48,188Transaction
      costs
                  
                  
                  3,545
                  
                  
                  
                  -
                  
                  
                  
                  2,129
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,674Depreciation
      and amortization
                  
                  
                  14,418
                  
                  
                  
                  3,290
                  
                  
                  
                  6,583
                  
                  
                  
                  -
                  
                  
                  
                  1,350
                  
                  
                  
                  -
                  
                  
                  
                  25,641Interest,
      net
                  
                  
                  26,882
                  
                  
                  
                  (697
                  )
                  
                  
                  10,005
                  
                  
                  
                  -
                  
                  
                  
                  7
                  
                  
                  
                  -
                  
                  
                  
                  36,197Asset
      impairments and closed store expenses
                  
                  
                  1,569
                  
                  
                  
                  -
                  
                  
                  
                  1,495
                  
                  
                  
                  -
                  
                  
                  
                  25
                  
                  
                  
                  -
                  
                  
                  
                  3,089Gain
      on extinguishments of debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (12,642
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (12,642
                  )Other,
      net
                  
                  
                  (143
                  )
                  
                  
                  (35
                  )
                  
                  
                  1,687
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,509Total
      costs and expenses
                  
                  
                  303,551
                  
                  
                  
                  82,019
                  
                  
                  
                  194,244
                  
                  
                  
                  15
                  
                  
                  
                  29,968
                  
                  
                  
                  (6,883
                  )
                  
                  
                  602,914Income
      (loss) before income taxes and
                    minority
      interests
                  
                  
                  (30,875
                  )
                  
                  
                  15,837
                  
                  
                  
                  5,498
                  
                  
                  
                  
                  
                  
                  
                  816
                  
                  
                  
                  -
                  
                  
                  
                  (8,724
                  )Benefit
      from (provision for) income taxes
                  
                  
                  5,427
                  
                  
                  
                  (5,582
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (155
                  )Minority
      interest expense
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  (493
                  )
                  
                  
                  -
                  
                  
                  
                  (493
                  )Equity
      in earnings (loss) of subsidiaries
                  
                  
                  16,076
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  (16,076
                  )
                  
                  
                  -NET
      (LOSS) INCOME
                  
                  $
                  (9,372
                  )
                  
                  
                  10,255
                  
                  
                  
                  5,498
                  
                  
                  
                  -
                  
                  
                  
                  323
                  
                  
                  
                  (16,076
                  )
                  
                  
                  (9,372
                  )
 
  73
 Table of Contents
  Consolidating balance sheet as of
December 28, 2008 (in thousands):
 Guarantor
                  
                  
                  Non-
                  
                  
                  
                  
                  
                  ConsolidatedParent
      Issuer
                  
                  
                  WRG
                  
                  
                  Guarantors
                  
                  
                  Eliminations
                  
                  
                  PMCIASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                  
                  $
                  2,155
                  
                  
                  
                  1,662
                  
                  
                  
                  796
                  
                  
                  
                  -
                  
                  
                  
                  4,613Restricted
      cash
                  
                  
                  10,140
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,140Receivables,
      less allowances for
                    doubtful
      accounts
                  
                  
                  14,392
                  
                  
                  
                  6,955
                  
                  
                  
                  39
                  
                  
                  
                  -
                  
                  
                  
                  21,386Inventories
                  
                  
                  8,145
                  
                  
                  
                  3,893
                  
                  
                  
                  262
                  
                  
                  
                  -
                  
                  
                  
                  12,300Prepaid
      expenses and other current assets
                  
                  
                  2,721
                  
                  
                  
                  269
                  
                  
                  
                  6
                  
                  
                  
                  -
                  
                  
                  
                  2,996Total
      current assets
                  
                  
                  37,553
                  
                  
                  
                  12,779
                  
                  
                  
                  1,103
                  
                  
                  
                  -
                  
                  
                  
                  51,435PROPERTY
      AND EQUIPMENT, net
                  
                  
                  65,020
                  
                  
                  
                  26,357
                  
                  
                  
                  2,123
                  
                  
                  
                  -
                  
                  
                  
                  93,500INVESTMENT
      IN
                    UNCONSOLIDATED
      PARTNERSHIP
                  
                  
                  -
                  
                  
                  
                  39
                  
                  
                  
                  9
                  
                  
                  
                  -
                  
                  
                  
                  48GOODWILL
                  
                  
                  9,836
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  9,836INTANGIBLE
      ASSETS, net
                  
                  
                  150,676
                  
                  
                  
                  171
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  150,847INVESTMENTS
      IN SUBSIDIARIES
                  
                  
                  (85,354
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  85,354
                  
                  
                  
                  -DUE
      FROM SUBSIDIARIES
                  
                  
                  88,948
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (88,948
                  )
                  
                  
                  -OTHER
      ASSETS
                  
                  
                  16,195
                  
                  
                  
                  1,437
                  
                  
                  
                  210
                  
                  
                  
                  -
                  
                  
                  
                  17,842TOTAL
      ASSETS
                  
                  $
                  282,874
                  
                  
                  
                  40,783
                  
                  
                  
                  3,445
                  
                  
                  
                  (3,594
                  )
                  
                  
                  323,508LIABILITIES
      AND STOCKHOLDER'S INVESTMENTCURRENT
      LIABILITIES:Accounts
      payable
                  
                  
                  11,090
                  
                  
                  
                  6,731
                  
                  
                  
                  474
                  
                  
                  
                  -
                  
                  
                  
                  18,295Accrued
      expenses
                  
                  
                  33,575
                  
                  
                  
                  12,123
                  
                  
                  
                  1,342
                  
                  
                  
                  -
                  
                  
                  
                  47,040Franchise
      advertising contributions
                  
                  
                  5,316
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,316Current
      maturities of long-term debt and
                    capital
      lease obligations
                  
                  
                  169
                  
                  
                  
                  213
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  382Total
      current liabilities
                  
                  
                  50,150
                  
                  
                  
                  19,067
                  
                  
                  
                  1,816
                  
                  
                  
                  -
                  
                  
                  
                  71,033LONG-TERM
      DEBT, less current
                    maturities
                  
                  
                  316,516
                  
                  
                  
                  18
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  316,534CAPITAL
      LEASE OBLIGATIONS, less
                    current
      maturities
                  
                  
                  8,270
                  
                  
                  
                  5,445
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  13,715DEFERRED
      RENT
                  
                  
                  10,180
                  
                  
                  
                  5,089
                  
                  
                  
                  74
                  
                  
                  
                  -
                  
                  
                  
                  15,343OTHER
      LIABILITIES
                  
                  
                  8,831
                  
                  
                  
                  8,910
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  17,741DUE
      TO PARENT
                  
                  
                  -
                  
                  
                  
                  88,324
                  
                  
                  
                  624
                  
                  
                  
                  (88,948
                  )
                  
                  
                  -MINORITY
      INTERESTS IN
                    CONSOLIDATED
      PARTNERSHIPS
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  215
                  
                  
                  
                  -
                  
                  
                  
                  215-STOCKHOLDER'S
      INVESTMENT:Common
      stock
                  
                  
                  1
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1Preferred
      stock
                  
                  
                  -
                  
                  
                  
                  63,277
                  
                  
                  
                  -
                  
                  
                  
                  (63,277
                  )
                  
                  
                  -Capital
      in excess of par
                  
                  
                  -
                  
                  
                  
                  9,338
                  
                  
                  
                  -
                  
                  
                  
                  (9,338
                  )
                  
                  
                  -Additional
      paid-in capital
                  
                  
                  149,851
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  149,851Treasury
      stock
                  
                  
                  -
                  
                  
                  
                  (137
                  )
                  
                  
                  -
                  
                  
                  
                  137
                  
                  
                  
                  -Accumulated
      other comprehensive income
                  
                  
                  (4
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (4
                  )Accumulated
      (deficit) earnings
                  
                  
                  (260,921
                  )
                  
                  
                  (158,548
                  )
                  
                  
                  716
                  
                  
                  
                  157,832
                  
                  
                  
                  (260,921
                  )Total
      stockholder's investment
                  
                  
                  (111,073
                  )
                  
                  
                  (86,070
                  )
                  
                  
                  716
                  
                  
                  
                  85,354
                  
                  
                  
                  (111,073
                  )TOTAL
      LIABILITIES AND
                    STOCKHOLDER'S
      INVESTMENT
                  
                  $
                  282,874
                  
                  
                  
                  40,783
                  
                  
                  
                  3,445
                  
                  
                  
                  (3,594
                  )
                  
                  
                  323,508
 
  74
 Table of Contents
  Consolidating balance sheet as of
December 30, 2007 (in thousands):
  Guarantor
                  
                  
                  Non-
                  
                  
                  
                  
                  
                  ConsolidatedParent
      Issuer
                  
                  
                  WRG
                  
                  
                  Guarantors
                  
                  
                  Eliminations
                  
                  
                  PMCIASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                  
                  $
                  19,391
                  
                  
                  
                  428
                  
                  
                  
                  (787
                  )
                  
                  
                  -
                  
                  
                  
                  19,032Restricted
      cash
                  
                  
                  10,098
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,098Receivables,
      less allowances for
                    doubtful
      accounts
                  
                  
                  12,000
                  
                  
                  
                  5,180
                  
                  
                  
                  41
                  
                  
                  
                  -
                  
                  
                  
                  17,221Inventories
                  
                  
                  8,108
                  
                  
                  
                  4,839
                  
                  
                  
                  292
                  
                  
                  
                  -
                  
                  
                  
                  13,239Prepaid
      expenses and other current assets
                  
                  
                  5,053
                  
                  
                  
                  679
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,732Total
      current assets
                  
                  
                  54,650
                  
                  
                  
                  11,126
                  
                  
                  
                  (454
                  )
                  
                  
                  -
                  
                  
                  
                  65,322PROPERTY
      AND EQUIPMENT, net
                  
                  
                  66,956
                  
                  
                  
                  29,530
                  
                  
                  
                  2,825
                  
                  
                  
                  -
                  
                  
                  
                  99,311INVESTMENT
      IN
                    UNCONSOLIDATED
      PARTNERSHIP
                  
                  
                  -
                  
                  
                  
                  43
                  
                  
                  
                  10
                  
                  
                  
                  -
                  
                  
                  
                  53GOODWILL
                  
                  
                  30,038
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  30,038INTANGIBLE
      ASSETS, net
                  
                  
                  153,077
                  
                  
                  
                  239
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  153,316INVESTMENTS
      IN SUBSIDIARIES
                  
                  
                  (92,739
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  92,739
                  
                  
                  
                  -DUE
      FROM SUBSIDIARIES
                  
                  
                  89,283
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (89,283
                  )
                  
                  
                  -DEFERRED
      INCOME TAXES
                  
                  
                  242
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  242OTHER
      ASSETS
                  
                  
                  12,777
                  
                  
                  
                  (497
                  )
                  
                  
                  2,380
                  
                  
                  
                  -
                  
                  
                  
                  14,660TOTAL
      ASSETS
                  
                  $
                  314,284
                  
                  
                  
                  40,441
                  
                  
                  
                  4,761
                  
                  
                  
                  3,456
                  
                  
                  
                  362,942LIABILITIES
      AND STOCKHOLDER'S INVESTMENTCURRENT
      LIABILITIES:Accounts
      payable
                  
                  
                  16,369
                  
                  
                  
                  8,420
                  
                  
                  
                  770
                  
                  
                  
                  -
                  
                  
                  
                  25,559Accrued
      expenses
                  
                  
                  33,569
                  
                  
                  
                  17,221
                  
                  
                  
                  1,831
                  
                  
                  
                  -
                  
                  
                  
                  52,621Franchise
      advertising contributions
                  
                  
                  5,940
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,940Current
      maturities of long-term debt and
                    capital
      lease obligations
                  
                  
                  9,134
                  
                  
                  
                  330
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  9,464Total
      current liabilities
                  
                  
                  65,012
                  
                  
                  
                  25,971
                  
                  
                  
                  2,601
                  
                  
                  
                  -
                  
                  
                  
                  93,584LONG-TERM
      DEBT, less current
                    maturities
                  
                  
                  297,972
                  
                  
                  
                  37
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  298,009CAPITAL
      LEASE OBLIGATIONS, less
                    current
      maturities
                  
                  
                  6,147
                  
                  
                  
                  5,840
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  11,987DEFERRED
      RENT
                  
                  
                  7,827
                  
                  
                  
                  5,556
                  
                  
                  
                  84
                  
                  
                  
                  -
                  
                  
                  
                  13,467OTHER
      LIABILITIES
                  
                  
                  7,284
                  
                  
                  
                  8,235
                  
                  
                  
                  1
                  
                  
                  
                  -
                  
                  
                  
                  15,520DUE
      TO PARENT
                  
                  
                  -
                  
                  
                  
                  92,192
                  
                  
                  
                  (2,909
                  )
                  
                  
                  (89,283
                  )
                  
                  
                  -MINORITY
      INTERESTS IN
                    CONSOLIDATED
      PARTNERSHIPS
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  333
                  
                  
                  
                  -
                  
                  
                  
                  333-STOCKHOLDER'S
      INVESTMENT:Common
      stock
                  
                  
                  1
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1Preferred
      stock
                  
                  
                  -
                  
                  
                  
                  63,277
                  
                  
                  
                  -
                  
                  
                  
                  (63,277
                  )
                  
                  
                  -Capital
      in excess of par
                  
                  
                  -
                  
                  
                  
                  (177
                  )
                  
                  
                  9,515
                  
                  
                  
                  (9,338
                  )
                  
                  
                  -Additional
      paid-in capital
                  
                  
                  137,923
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  137,923Treasury
      stock
                  
                  
                  -
                  
                  
                  
                  (137
                  )
                  
                  
                  -
                  
                  
                  
                  137
                  
                  
                  
                  -Accumulated
      other comprehensive income
                  
                  
                  86
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  86Accumulated
      (deficit) earnings
                  
                  
                  (207,968
                  )
                  
                  
                  (160,353
                  )
                  
                  
                  (4,864
                  )
                  
                  
                  165,217
                  
                  
                  
                  (207,968
                  )Total
      stockholder's investment
                  
                  
                  (69,958
                  )
                  
                  
                  (97,390
                  )
                  
                  
                  4,651
                  
                  
                  
                  92,739
                  
                  
                  
                  (69,958
                  )TOTAL
      LIABILITIES AND
                    STOCKHOLDER'S
      INVESTMENT
                  
                  $
                  314,284
                  
                  
                  
                  40,441
                  
                  
                  
                  4,761
                  
                  
                  
                  3,456
                  
                  
                  
                  362,942
 
  75
 Table of Contents
  Consolidating statement of cash flows
for the year ended December 28, 2008 (in thousands):
 
 Guarantor
                  
                  
                  Non-
                  
                  
                  
                  
                  
                  ConsolidatedParent
      Issuer
                  
                  
                  WRG
                  
                  
                  Guarantors
                  
                  
                  Eliminations
                  
                  
                  PMCICASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
                  
                  $
                  (52,953
                  )
                  
                  
                  7,256
                  
                  
                  
                  129
                  
                  
                  
                  (7,385
                  )
                  
                  
                  (52,953
                  )Adjustments
      to reconcile net (loss) income to net cashprovided
      by (used in) operating activities:Equity
      in the earnings of subsidiaries
                  
                  
                  (7,385
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,385
                  
                  
                  
                  -Depreciation
      and amortization
                  
                  
                  17,795
                  
                  
                  
                  6,182
                  
                  
                  
                  722
                  
                  
                  
                  -
                  
                  
                  
                  24,699Asset
      impairments
                  
                  
                  221
                  
                  
                  
                  1,523
                  
                  
                  
                  53
                  
                  
                  
                  -
                  
                  
                  
                  1,797Goodwill
      impairment
                  
                  
                  20,202
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  20,202Amortization
      of debt discount
                  
                  
                  647
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  647Loss
      on extinguishment of debt
                  
                  
                  2,952
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,952Minority
      interests expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  284
                  
                  
                  
                  -
                  
                  
                  
                  284Equity
      in net loss of unconsolidated partnership
                  
                  
                  -
                  
                  
                  
                  5
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5Other
      non-cash income and expense items
                  
                  
                  (116
                  )
                  
                  
                  104
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (12
                  )Net
      changes in operating assets and liabilities
                  
                  
                  1,767
                  
                  
                  
                  (8,435
                  )
                  
                  
                  (442
                  )
                  
                  
                  -
                  
                  
                  
                  (7,110
                  )Total
      adjustments
                  
                  
                  36,083
                  
                  
                  
                  (621
                  )
                  
                  
                  617
                  
                  
                  
                  7,385
                  
                  
                  
                  43,464Net
      cash (used in) provided by operating activities
                  
                  
                  (16,870
                  )
                  
                  
                  6,635
                  
                  
                  
                  746
                  
                  
                  
                  -
                  
                  
                  
                  (9,489
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                  
                  
                  (14,697
                  )
                  
                  
                  (3,341
                  )
                  
                  
                  (298
                  )
                  
                  
                  -
                  
                  
                  
                  (18,336
                  )Proceeds
      from sale of assets
                  
                  
                  592
                  
                  
                  
                  95
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  687Net
      cash used in investing activities
                  
                  
                  (14,105
                  )
                  
                  
                  (3,246
                  )
                  
                  
                  (298
                  )
                  
                  
                  -
                  
                  
                  
                  (17,649
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      of terminated revolver
                  
                  
                  53,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  53,000Repayment
      of terminated revolver
                  
                  
                  (73,000
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (73,000
                  )Proceeds
      from new Revolver
                  
                  
                  31,848
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  31,848Repayment
      from new Revolver
                  
                  
                  (28,664
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (28,664
                  )Proceeds
      from Secured Notes, net of $7,537 discount
                  
                  
                  124,463
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  124,463Repayment
      of Term Loan
                  
                  
                  (98,750
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (98,750
                  )Repayment
      of capital lease obligations
                  
                  
                  (148
                  )
                  
                  
                  (265
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (413
                  )Repayment
      of other debt
                  
                  
                  -
                  
                  
                  
                  (18
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (18
                  )Debt
      financing costs
                  
                  
                  (9,559
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (9,559
                  )Lessor
      financing of new restaurants
                  
                  
                  2,286
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,286Distributions
      to minority partners
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (402
                  )
                  
                  
                  -
                  
                  
                  
                  (402
                  )Intercompany
      financing
                  
                  
                  335
                  
                  
                  
                  (1,872
                  )
                  
                  
                  1,537
                  
                  
                  
                  -
                  
                  
                  
                  -Capital
      contributions
                  
                  
                  12,500
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  12,500Repurchase
      of equity ownership units in P&MC's Holding LLC
                  
                  
                  (572
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (572
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  13,739
                  
                  
                  
                  (2,155
                  )
                  
                  
                  1,135
                  
                  
                  
                  -
                  
                  
                  
                  12,719NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
                  
                  
                  (17,236
                  )
                  
                  
                  1,234
                  
                  
                  
                  1,583
                  
                  
                  
                  -
                  
                  
                  
                  (14,419
                  )CASH
      AND CASH EQUIVALENTS:Balance,
      beginning of period
                  
                  
                  19,391
                  
                  
                  
                  428
                  
                  
                  
                  (787
                  )
                  
                  
                  -
                  
                  
                  
                  19,032Balance,
      end of period
                  
                  $
                  2,155
                  
                  
                  
                  1,662
                  
                  
                  
                  796
                  
                  
                  
                  -
                  
                  
                  
                  4,613
 
  76
 Table of Contents
  Consolidating statement of cash flows
for the year ended December 30, 2007 (in thousands):
 
 Guarantor
                  
                  
                  Non-
                  
                  
                  
                  
                  
                  ConsolidatedParent
      Issuer
                  
                  
                  WRG
                  
                  
                  Guarantors
                  
                  
                  Eliminations
                  
                  
                  PMCICASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
                  
                  $
                  (16,335
                  )
                  
                  
                  10,789
                  
                  
                  
                  139
                  
                  
                  
                  (10,928
                  )
                  
                  
                  (16,335
                  )Adjustments
      to reconcile net (loss) income to net cashprovided
      by (used in) operating activities:Equity
      in the earnings of subsidiaries
                  
                  
                  (10,928
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,928
                  
                  
                  
                  -Depreciation
      and amortization
                  
                  
                  17,610
                  
                  
                  
                  5,939
                  
                  
                  
                  1,273
                  
                  
                  
                  -
                  
                  
                  
                  24,822Asset
      impairments
                  
                  
                  (178
                  )
                  
                  
                  2,612
                  
                  
                  
                  29
                  
                  
                  
                  -
                  
                  
                  
                  2,463Amortization
      of debt discount
                  
                  
                  324
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  324Minority
      interests expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  707
                  
                  
                  
                  -
                  
                  
                  
                  707Equity
      in net loss of unconsolidated partnership
                  
                  
                  -
                  
                  
                  
                  82
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  82Other
      non-cash income and expense items
                  
                  
                  265
                  
                  
                  
                  68
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  333Net
      changes in operating assets and liabilities
                  
                  
                  6,373
                  
                  
                  
                  (2,815
                  )
                  
                  
                  (475
                  )
                  
                  
                  -
                  
                  
                  
                  3,083Total
      adjustments
                  
                  
                  13,466
                  
                  
                  
                  5,886
                  
                  
                  
                  1,534
                  
                  
                  
                  10,928
                  
                  
                  
                  31,814Net
      cash (used in) provided by operating activities
                  
                  
                  (2,869
                  )
                  
                  
                  16,675
                  
                  
                  
                  1,673
                  
                  
                  
                  -
                  
                  
                  
                  15,479CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                  
                  
                  (25,794
                  )
                  
                  
                  (5,095
                  )
                  
                  
                  (658
                  )
                  
                  
                  -
                  
                  
                  
                  (31,547
                  )Proceeds
      from sale of assets
                  
                  
                  -
                  
                  
                  
                  21
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  21Net
      cash used in investing activities
                  
                  
                  (25,794
                  )
                  
                  
                  (5,074
                  )
                  
                  
                  (658
                  )
                  
                  
                  -
                  
                  
                  
                  (31,526
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from terminated revolver
                  
                  
                  75,100
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  75,100Repayment
      from terminated revolver
                  
                  
                  (55,100
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (55,100
                  )Repayment
      of Term Loan
                  
                  
                  (750
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (750
                  )Repayment
      of capital lease obligations
                  
                  
                  (177
                  )
                  
                  
                  (525
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (702
                  )Proceeds
      from (repayment of) other debt
                  
                  
                  100
                  
                  
                  
                  (18
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  82Lessor
      financing of new restaurants
                  
                  
                  6,107
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,107Distributions
      to minority partners
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (519
                  )
                  
                  
                  -
                  
                  
                  
                  (519
                  )Intercompany
      financing
                  
                  
                  17,649
                  
                  
                  
                  (17,788
                  )
                  
                  
                  139
                  
                  
                  
                  -
                  
                  
                  
                  -Capital
      contributions
                  
                  
                  1,792
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,792Net
      cash provided by (used in) financing activities
                  
                  
                  44,721
                  
                  
                  
                  (18,331
                  )
                  
                  
                  (380
                  )
                  
                  
                  -
                  
                  
                  
                  26,010NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
                  
                  
                  16,058
                  
                  
                  
                  (6,730
                  )
                  
                  
                  635
                  
                  
                  
                  -
                  
                  
                  
                  9,963CASH
      AND CASH EQUIVALENTS:Balance,
      beginning of period
                  
                  
                  3,333
                  
                  
                  
                  7,158
                  
                  
                  
                  (1,422
                  )
                  
                  
                  -
                  
                  
                  
                  9,069Balance,
      end of period
                  
                  $
                  19,391
                  
                  
                  
                  428
                  
                  
                  
                  (787
                  )
                  
                  
                  -
                  
                  
                  
                  19,032
 
  77
 Table of Contents
  Consolidating statement of cash flows
for the year ended December 31, 2006 (in thousands):
 
 GuarantorParent
      Issuer
                        
                        
                        PMCM
                        
                        
                        WRG
                        
                        
                        Other
                        
                        
                        Non-Guarantors
                        
                        
                        Eliminations
                        
                        
                        Consolidated
      PMCICASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
                        
                        $
                        (9,372
                        )
                        
                        
                        10,255
                        
                        
                        
                        5,498
                        
                        
                        
                        -
                        
                        
                        
                        323
                        
                        
                        
                        (16,076
                        )
                        
                        
                        (9,372
                        )Adjustments
      to reconcile net (loss) income to net cashprovided
      by (used in) operating activities:Equity
      in the earnings of subsidiaries
                        
                        
                        (16,076
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        16,076
                        
                        
                        
                        -Depreciation
      and amortization
                        
                        
                        14,418
                        
                        
                        
                        3,290
                        
                        
                        
                        6,925
                        
                        
                        
                        -
                        
                        
                        
                        1,008
                        
                        
                        
                        -
                        
                        
                        
                        25,641Asset
      impairments
                        
                        
                        1,203
                        
                        
                        
                        -
                        
                        
                        
                        1,484
                        
                        
                        
                        -
                        
                        
                        
                        36
                        
                        
                        
                        -
                        
                        
                        
                        2,723Amortization
      of debt discount
                        
                        
                        321
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        321Gain
      on extinguishment of debt
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (12,642
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (12,642
                        )Minority
      interests expense
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        493
                        
                        
                        
                        -
                        
                        
                        
                        493Equity
      in net loss of unconsolidated partnership
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        73
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        73Other
      non-cash income and expense items
                        
                        
                        (91
                        )
                        
                        
                        -
                        
                        
                        
                        6,781
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        6,690Net
      changes in operating assets and liabilities
                        
                        
                        3,355
                        
                        
                        
                        (1
                        )
                        
                        
                        (3,479
                        )
                        
                        
                        23
                        
                        
                        
                        1,408
                        
                        
                        
                        -
                        
                        
                        
                        1,306Total
      adjustments
                        
                        
                        3,130
                        
                        
                        
                        3,289
                        
                        
                        
                        (858
                        )
                        
                        
                        23
                        
                        
                        
                        2,945
                        
                        
                        
                        16,076
                        
                        
                        
                        24,605Net
      cash (used in) provided by operating activities
                        
                        
                        (6,242
                        )
                        
                        
                        13,544
                        
                        
                        
                        4,640
                        
                        
                        
                        23
                        
                        
                        
                        3,268
                        
                        
                        
                        -
                        
                        
                        
                        15,233CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                        
                        
                        (3,211
                        )
                        
                        
                        (7,568
                        )
                        
                        
                        (7,542
                        )
                        
                        
                        -
                        
                        
                        
                        (1,241
                        )
                        
                        
                        -
                        
                        
                        
                        (19,562
                        )Proceeds
      from sale of assets
                        
                        
                        1,536
                        
                        
                        
                        -
                        
                        
                        
                        13
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,549Intercompany
      activities
                        
                        
                        78,510
                        
                        
                        
                        (78,510
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Net
      cash used in investing activities
                        
                        
                        76,835
                        
                        
                        
                        (86,078
                        )
                        
                        
                        (7,529
                        )
                        
                        
                        -
                        
                        
                        
                        (1,241
                        )
                        
                        
                        -
                        
                        
                        
                        (18,013
                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from terminated revolver
                        
                        
                        12,900
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        12,900Repayment
      of terminated revolver
                        
                        
                        (12,900
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (12,900
                        )Proceeds
      from Term Loan
                        
                        
                        99,500
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        99,500Repayment
      of capital lease obligations
                        
                        
                        (277
                        )
                        
                        
                        -
                        
                        
                        
                        (618
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (895
                        )Repayment
      of other debt
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (100,026
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (100,026
                        )Debt
      financing costs
                        
                        
                        (2,720
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (2,720
                        )Distributions
      to minority partners
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (543
                        )
                        
                        
                        -
                        
                        
                        
                        (543
                        )Intercompany
      financing
                        
                        
                        (106,932
                        )
                        
                        
                        -
                        
                        
                        
                        108,082
                        
                        
                        
                        -
                        
                        
                        
                        (1,150
                        )
                        
                        
                        -
                        
                        
                        
                        -Capital
      contributions
                        
                        
                        (58,623
                        )
                        
                        
                        71,168
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        12,545Net
      cash (used in) provided by financing activities
                        
                        
                        (69,052
                        )
                        
                        
                        71,168
                        
                        
                        
                        7,438
                        
                        
                        
                        -
                        
                        
                        
                        (1,693
                        )
                        
                        
                        -
                        
                        
                        
                        7,861NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
                        
                        
                        1,541
                        
                        
                        
                        (1,366
                        )
                        
                        
                        4,549
                        
                        
                        
                        23
                        
                        
                        
                        334
                        
                        
                        
                        -
                        
                        
                        
                        5,081CASH
      AND CASH EQUIVALENTS:Balance,
      beginning of period
                        
                        
                        1,591
                        
                        
                        
                        1,567
                        
                        
                        
                        2,609
                        
                        
                        
                        (23
                        )
                        
                        
                        (1,756
                        )
                        
                        
                        -
                        
                        
                        
                        3,988Balance,
      end of period
                        
                        $
                        3,132
                        
                        
                        
                        201
                        
                        
                        
                        7,158
                        
                        
                        
                        -
                        
                        
                        
                        (1,422
                        )
                        
                        
                        -
                        
                        
                        
                        9,069
 
  78
 Table of Contents
  (19) QUARTERLY RESULTS OF
OPERATIONS (UNAUDITED):
  Our
financial reporting is based on thirteen four-week periods ending on the last
Sunday in December. The first quarter each year includes four four-week periods
and the second, third and fourth quarters include three four-week
periods.
 
 2008
                
                Revenues
                
                
                (a)
                  Gross Profit
                
                
                Net Loss1st
      Quarter
                
                $
                182,400
                
                
                
                25,556
                
                
                
                (7,588
                )2nd
      Quarter
                
                
                130,966
                
                
                
                16,440
                
                
                
                (8,065
                )3rd
      Quarter
                
                
                127,901
                
                
                
                16,377
                
                
                
                (30,477
                )4th
      Quarter
                
                
                140,703
                
                
                
                21,803
                
                
                
                (6,823
                )$
                581,970
                
                
                
                80,176
                
                
                
                (52,953
                )
 
 2007
                
                Revenues
                
                
                (a)
                  Gross Profit
                
                
                Net Loss1st
      Quarter
                
                $
                178,286
                
                
                
                28,548
                
                
                
                (2,749
                )2nd
      Quarter
                
                
                130,110
                
                
                
                21,787
                
                
                
                (2,723
                )3rd
      Quarter
                
                
                131,312
                
                
                
                18,540
                
                
                
                (4,345
                )4th
      Quarter
                
                
                148,178
                
                
                
                21,559
                
                
                
                (6,518
                )$
                587,886
                
                
                
                90,434
                
                
                
                (16,335
                )
 ____________
 
 (a)
              Gross
      profit represents total revenues less food cost, labor and benefits and
      operating expenses.
 
  79
 Table of Contents
  Item 9. Changes in
and Disagreements with Accountants on Accounting andFinancial
Disclosure.
 
 None.
 
 Item 9A(T).Controls and
Procedures.
 
 Disclosure Controls and
Procedures.  As of December 28, 2008, an evaluation of the
effectiveness of our disclosure controls and procedures was carried out under
the supervision and with the participation of the Company’s management,
including our Chief Executive Officer and Chief Financial Officer. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in the reports that
the Company files under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms and is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure.
 
 Based on
the results of our review, the determination was made that there were no control
deficiencies that represented material weaknesses in our disclosure controls and
procedures. The Company’s management, including the Company’s Chief Executive
Officer and Chief Financial Officer, concluded that our disclosure controls and
procedures were effective as of December 28, 2008.
 
 Management’s Annual Report
on Internal Control over Financial Reporting.  Management is
responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange
Act.
 
 Internal
control over financial reporting is defined under the Exchange Act as a process
designed by, or under the  supervision of, our Chief Executive Officer
and Chief Financial Officer and effected by our board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and
includes those policies and procedures that: (i) pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of our assets; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted
accounting  principles, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and
directors; and (iii) provide reasonable assurance regarding prevention or timely
detection of  unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluations of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate. Accordingly, even an effective
system of internal control over financial reporting will provide only reasonable
assurance with respect to financial statement preparation.
 
 Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the Company's internal control
over financial reporting as of December 28, 2008.  In making this
assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission, Internal Control -
Integrated Framework.  Based on this evaluation and those criteria,
our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, concluded that, as of December 28, 2008, our internal control
over financial reporting was effective.
 
 The
Annual Report on Form 10-K for the fiscal year ended December 28, 2008 does not
include an attestation report of our independent registered public accounting
firm regarding our internal control over financial
reporting.  Management's report was not subject to attestation by our
independent registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this Annual Report.
  80
 Table of Contents
  Changes in Internal Control
over Financial  Reporting.  There have not been any
changes in our internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f)) that occurred during the fourth fiscal quarter of 2008 that
have materially affected,  or are reasonably likely to materially
affect, our internal control over financial reporting.
 
 Item 9B.Other
Information.
 
 None.
 
  81
 Table of Contents
  PART III
 
 Item 10. Directors, Executive Officers and Corporate
Governance.
 
 Directors
and Executive Officers of the Registrant.
 
 The
following individuals are currently serving as directors and executive officers
of the Company:
 
 Name
                    
                    Age
                    
                    Position with
      PMCIJoseph
      F.
      Trungale
                    
                    
                    67
                    
                    Director,
      President and Chief Executive OfficerFred
      T. Grant,
      Jr.
                    
                    
                    53
                    
                    Executive
      Vice President and Chief Financial OfficerPete
      M.
      Pascuzzi
                    
                    
                    57
                    
                    Executive
      Vice President and Chief Operating OfficerRobert
      J.
      Winters
                    
                    
                    57
                    
                    Senior
      Vice President, Franchise Sales, Franchise Operations and Restaurant
      DevelopmentCheryl
      S.
      Ahlbrandt
                    
                    
                    52
                    
                    Senior
      Vice President, Marketing and Research &
  Development
 
 Joseph F.
Trungale
 
 Joseph F.
Trungale became our Chief Executive Officer on September 21, 2005. Mr. Trungale
has been our President and Chief Operating Officer and a member of our board
since March 8, 2004. Previously, Mr. Trungale was Chief Executive Officer and
Director of VICORP Restaurants, Inc. from November 1999 through September 2003,
after serving as the President of the Bakers Square concept since August 1998.
From July 1997 through August 1998, Mr. Trungale served in various positions
with operational responsibility over VICORP’s Bakers Square restaurants. From
September 1995 through July 1997, Mr. Trungale operated a family-owned real
estate business. For eight years preceding that, he was Vice President of
Operations for Whataburger, Inc.
 
 Fred
T. Grant, Jr.
 
 Fred T.
Grant, Jr. became our Executive Vice President and Chief Financial Officer on
April 4, 2008.  Mr. Grant, a licensed Certified Public Accountant,
most recently served as a financial consultant at Pacific Gateway Capital in
Greenville, South Carolina. From 1990 until 2007 he was employed by Ryan's
Family Steak Houses, a division of Buffets Inc. Mr. Grant served as Chief
Financial Officer at Ryan's and later as division president. Mr. Grant's
background also includes nine years of public accounting experience with KPMG
and Deloitte & Touche as well as three years with Barnett Banks of
Florida.
  Pete M. Pascuzzi
 
 Pete M.
Pascuzzi was promoted to Executive Vice President and Chief Operating Officer
effective March 20, 2009. Prior to that, Mr. Pascuzzi served as Executive Vice
President, Operations and President, Perkins Restaurants since January
2009, Executive Vice President, Corporate Restaurant Operations for the
Perkins Restaurant & Bakery chain as well as Marie Callender’s since June
2008,  Senior Vice President, Corporate Operations since May 2007 and
Vice President, Operations since January 2006.  Prior to joining our
company in January 2006, Mr. Pascuzzi, spent thirty years in the industry where
he held senior management positions at Sonic Restaurants, Inc., VICORP, Inc.
Bakers Square Restaurants, Whataburger Inc., and Long John Silvers, Inc. He was
awarded a B.A. degree from the University of Missouri.
 Robert
J. Winters
 
 Robert
J. Winters was promoted to Senior Vice President Franchise Sales, Franchise
Operations and Restaurant Development in June 2008. He had served as Vice
President, Franchise Operations and Development since 1999 and before that held
a variety of executive positions in training, development and
operations.  Prior to joining the Company in 1989, he worked for Carty
& Co. Inc. in the financial services industry, and preceding that he was the
director of company operations for Shoney’s South Inc.  Mr. Winters
earned a Bachelor of Science Degree in Business Administration from Christian
Brothers College in Memphis, TN.
 
  82
 Table of Contents
  Cheryl
S. Ahlbrandt
 
 Cheryl S.
Ahlbrandt was promoted to Senior Vice President Marketing and Research &
Development in June 2008.  She has responsibility for the Perkins &
Marie Callender’s marketing teams and the research and development
function.   Ms. Ahlbrandt, who joined the company in April 2006 as
Vice President of Marketing, has over twenty years of advertising and marketing
experience, the majority of which have been spent in the restaurant industry
including working on both the Village Inn and Bakers Square brands as Vice
President of Marketing for seven years and working as Regional Marketing Manager
for Wendy's International and for various agencies on the McDonald's, Pizza Hut,
Taco Bell and Buffets, Inc. brands.
 
 Code
of Ethics.
 
 We have
adopted the Perkins & Marie Callender’s Inc. Code of Business Conduct (the
“Code”) which provides written standards that are reasonably designed to deter
wrongdoing and to promote honest and ethical conduct; full, fair, accurate,
timely and understandable public communications or filings; compliance with
applicable governmental laws, rules and regulations; the prompt internal
reporting of violations of the Code to an appropriate person identified within
the Code; and accountability for adherence to the Code. All manager-level
employees and above are required annually to sign an acknowledgement that they
are in compliance with the standards outlined in the Code. A copy of the Code is
available on our website, www.perkinsrestaurants.com.
We intend to disclose any amendments to or waivers of our Code by posting the
required information on our website or filing a Form 8-K within the required
time periods.
 
 Audit
Committee.
 
 P&MC’s
Holding LLC has a standing audit committee which is comprised of the following
members of its Board of Directors: William Pruellage, Chairman; Lee Cohn and
Zane Tankel. Mr. Pruellage is the non-independent financial expert of the audit
committee.
 
 Item 11. Executive Compensation.
 
 Compensation Discussion and
Analysis.This section discusses the principles underlying our
executive compensation policies and decisions and the most important factors
relevant to an analysis of these policies and decisions. It provides qualitative
information regarding the manner and context in which compensation is awarded to
and earned by our executive officers. It also places in perspective the data
presented in the tables and narrative that follow.
 
 Our
compensation program for executive officers is designed to attract, as needed,
individuals with the requisite skills for us to achieve our business plan, to
motivate and reward those individuals fairly over time and to retain those
individuals who continue to perform at or above the levels expected. It is also
designed to reinforce a sense of ownership, urgency and overall entrepreneurial
spirit and to link rewards to measurable corporate and individual
performance.
 
 Our
executive officers’ compensation currently has two primary components — base
compensation or salary and annual cash bonuses under a performance-based,
non-equity incentive plan. In addition, we provide our executive officers a
variety of benefits commensurate with their level of responsibility. We fix
executive officer base compensation at a level we believe enables us to hire and
retain individuals in a competitive environment and to reward individual
performance and contribution to our overall business goals. We also take into
account the base compensation payable by companies we believe to be our
competitors and by other private and public companies with which we believe we
generally compete for executives. To this end, we access applicable executive
compensation surveys and other databases and review them when making executive
officer hiring decisions, as well as annually when reviewing executive
compensation. We designed our executive bonus plan to focus our management on
achieving key corporate financial objectives, to motivate desired individual
behaviors and to reward substantial achievement of these company financial
objectives and individual goals. We utilize cash bonuses to reward performance
achievements with a time horizon of one year or less, and we utilize salary as
the base amount necessary to match our competitors for executive
talent.
 
  83
 Table of Contents
  We view
these components of compensation as related but distinct. Each is determined
separately. Our compensation committee annually reviews each component of each
executive officer’s compensation. We determine the appropriate level for each
compensation component based in part, but not exclusively, on competitive
benchmarking consistent with our recruiting and retention goals, our view of
internal equity and consistency, and other considerations we deem relevant, such
as rewarding extraordinary performance or changes in the executive’s area of
responsibility. Except as described below, our compensation committee has not
adopted any formal or informal policies or guidelines for allocating
compensation between long-term and currently paid out compensation, between cash
and non-cash compensation, or among different forms of non-cash compensation.
However, our compensation committee’s philosophy is to make a greater percentage
of an employee’s compensation performance-based as he or she moves to a more
senior role. This philosophy also involves maintaining the salary component at
the minimum competitive level while providing the opportunity to be
well-rewarded through the cash bonus component if the Company performs well over
time.
 
 Our
compensation committee’s current intent is to perform an annual strategic review
of our executive officers’ compensation to determine whether they provide
adequate incentives and motivation and whether they adequately compensate our
executive officers relative to comparable officers in other companies with which
we compete for executives. These companies may consist of public and private
sector companies and may not all be restaurant companies. During 2008, our
compensation committee met in May and December. Compensation committee meetings
typically have included, for all or a portion of each meeting, not only the
committee members, but also our chief executive officer. For compensation
decisions relating to executive officers other than our chief executive officer,
our compensation committee typically considers recommendations from the chief
executive officer.
  Benchmarking of Base Compensation.  In order to attract and retain
seasoned executive officers, our compensation committee sets their base
compensation after considering a variety of factors, including benchmarking. Our
compensation committee realizes that using a benchmark may not always be
appropriate but believes that it is an important element in determining base
compensation. In instances where an executive officer is uniquely key to our
success, our compensation committee may provide compensation in excess of
benchmarked percentiles. Our compensation committee’s judgments with regard to
market levels of base compensation are based on readily available market data,
restaurant compensation surveys and general compensation surveys. The
compensation committee’s use of benchmarking, along with other means of
determining base pay, reflects consideration of our owners’ interests in paying
what is necessary, but not significantly more than necessary, to achieve our
corporate goals, while conserving cash as much as practicable. We believe that,
given the industry in which we operate and the corporate culture we have
created, our base compensation is generally sufficient to retain our existing
executive officers and to hire new executive officers when and as required. The
annual salary levels as of December 28, 2008 for each of our executive officers
are reflected in the footnotes to the “Summary Compensation Table”
below.
 During
March 2009, Mr. Pascuzzi was promoted to Executive Vice President and Chief
Operating Officer.  In connection with his promotion, his base salary
was increased to $400,000 from $317,000.  His new salary was
determined by the Compensation Committee and our Chief Executive Officer based
on 1) a recent review of salary levels for similarly situated employees at a
representative selection of casual and family dining restaurants and 2) the
relative salaries within the Company.
 Cash Bonuses under Our Non-Equity
Incentive Plan.The 2008 executive bonus plan in effect for
our executive officers as of December 28, 2008 provides cash bonus awards to
reward members of our management team, including vice presidents and more senior
executive officers. It contemplates the payment of a target bonus equal to a
percentage of the executive officer’s current annual salary. Awards to executive
officers are approved by our compensation committee. The current annual target
bonus percentages are 70% for Mr. Trungale, 50% for Mr. Pascuzzi, 45% for Mr.
Grant and 40% for Mr. Winters and Ms. Ahlbrandt; the maximum bonus payable as a
percentage of base salary is currently 100% for Mr. Trungale, 75% for Mr.
Pascuzzi, 67.5% for Mr. Grant and 60.0% for Mr. Winters and Ms. Ahlbrandt. We
pay bonuses annually following the closing of our year-end accounting
cycle.
  In
connection with his promotion to Executive Vice President and Chief Operating
Officer, Mr. Pascuzzi’s annual and maximum incentive bonus targets were changed
to 50% and 75% from 40% and 60%, respectively.  The targets were
changed based on factors similar to his change in salary, as noted
above.
  84
 Table of Contents
  As a
result of the Combination in May 2006, the compensation committee elected to
calculate fiscal year 2006 executive bonus awards using the individual executive
bonus plan structures in place at WRG and Perkins as of the effective date of
the Combination. For fiscal year 2007, the compensation committee of the Company
adopted a single executive bonus plan.
 
 The basis
for the bonus calculation for our executive officers in fiscal years 2007 and
2008 was our consolidated EBITDA budget (earnings before interest, taxes,
depreciation and amortization). No bonuses were paid to the executive officers
of the Company for fiscal 2007 or 2008 because the EBITDA thresholds required to
earn bonuses were not met.
 
 Further
details about our executive bonus plan are provided below in the footnotes to
the “Summary Compensation Table”. Under the current guidelines established by
our compensation committee, the Company would not attempt to recover previous
bonuses paid based on our financial performance as a result of our revenues or
operational EBITDA being later restated in a downward direction sufficient to
reduce the amount of bonus that should have been paid under our plan
formulas.
 
 Nonqualified Deferred Compensation
Plan and Supplemental Executive Retirement Plan.In October
2006, the deferred compensation plan, named the Successor Plan, was adopted. The
terms of the Successor Plan provide enrollment for eligible employees of both
Perkins and Marie Callender’s. The Successor Plan is a nonqualified defined
contribution plan; the first 3% of eligible pay contributed to the plan by the
executive is eligible for a 100% company matching contribution up to $6,000,
which vests over a three-year period. The Company may elect to make additional
contributions to an employee’s account. For purposes of the Successor Plan,
eligible pay is defined as base pay and the eligible portion of any incentive
award. The Successor Plan is available for enrollment on a voluntary,
non-discriminatory basis to executive officers and other key
employees.
 
 Effective
April 1, 2004 SERP I was established. The purpose of SERP I is to provide
additional compensation for a select group of management and highly compensated
employees who contribute materially to the continued growth of the Company.
Contributions to SERP I are made at the discretion of the Company and
participants vest at a rate of 25% for one to two years of service, 50% for at
least three but less than five years of service and 100% for five or more years
of service. The Company did not make contributions to SERP I in 2008 or 2007,
but contributed $280,000 in 2006.
 
 Severance and Change in Control
Payments.The Company
provides severance and change in control arrangements for key executives in
order to mitigate some of the risk that exists working in an environment where
there is a meaningful likelihood that a change in control event may occur. These
arrangements are intended to attract and retain qualified executives whose
alternative job opportunities may appear more attractive absent these
arrangements.  Change in control arrangements also serve to mitigate a
potential disincentive to consideration and execution of a change in control,
particularly where the services of executive officers may not be required at
some point following the change in control.
 
 Following
the Combination, the employment of WRG’s chief executive officer Phillip Ratner
was terminated in September 2006. In accordance with the terms of his written
employment agreement, Mr. Ratner was entitled to receive the following:
continued payment of his base salary in effect as of the date of his termination
of employment ($1,000,000 for the two year period following the termination of
his employment); a prorated portion of the executive bonus award he would have
received had he remained employed with WRG for all of fiscal year 2006,
determined based on WRG’s performance through the termination date; continuation
of his health and life insurance and related coverages while he is receiving
severance compensation; continuation of a monthly mortgage supplement based on
the after-tax difference in housing cost between Heath, Texas, (Mr. Ratner’s
former residence), and the cost of his housing in the area near WRG’s former
office in Aliso Viejo, California. Mr. Ratner’s severance compensation ended in
September 2008.
 
  85
 Table of Contents
  James W.
Stryker resigned his position with the Company on April 4, 2008. In accordance
with the terms of his written employment agreement, Mr. Stryker was entitled to
receive the following: continued payment of his base salary in effect as of the
date of his termination of employment ($328,000 for the one year period
following the termination of his employment); the executive bonus award he would
have received had he remained employed with the Company for all of fiscal year
2008 determined based on the Company’s performance through the termination date;
continuation of his health and life insurance and related coverages while he is
receiving severance compensation. Mr. Stryker’s severance compensation is
payable in bi-weekly installments and shall be reduced by the amount of any
employment income he receives during the period he is receiving severance
compensation.
 
 James F.
Barrasso resigned his position with the Company on December 31, 2007. In
accordance with the terms of his written employment agreement, Mr. Barrasso was
entitled to receive the following: continued payment of his base salary in
effect as of the date of his termination of employment ($260,000 for the one
year period following the termination of his employment); the executive bonus
award he would have received, determined based on the Company’s performance
through the termination date; continuation of his health and life insurance and
related coverages while he is receiving severance compensation. Mr. Barrasso’s
severance compensation ended in December 2008.
 
 For
quantification of severance and change in control benefits, please see the
discussion under “Severance and Change in Control Agreements”
below.
 
 Other
Benefits.Executive officers are eligible to participate in
our employee benefit plans such as medical, dental, vision, group life,
disability, accidental death and dismemberment insurance, and our 401(k) plan.
For executive officers and certain other key employees, we provide supplemental
life insurance, disability and long-term care coverage.  Our objective
is to offer our executive officers and other key employees a benefits package
that is competitive within our industry and labor markets.
 
 Compensation Committee
Report.The compensation committee of the Board of Directors
of P&MC’s Holding LLC has reviewed and discussed with management the
information contained in the Compensation Discussion and Analysis section of
this filing and recommended to the Board of Directors that the Compensation
Discussion and Analysis be included in this Form 10-K.
 
 Compensation
Committee:
 
 John K.
Castle, Chairman
 David B.
Pittaway
 Dr. John
J. Connolly
  86
 Table of Contents
  Executive
Compensation Tables.
 
 The
following table provides information regarding all plan and non-plan
compensation awarded to or earned by each of our executive officers serving as
such at the end of 2008 for all services rendered in all capacities to us during
2008, 2007 and 2006, respectively, based on the information available to us as
of December 28, 2008. We refer to these executive officers as our named
executive officers.
 
 Summary
Compensation Table
 
 Name and Principal
      Position
                  Year
                  
                  Salary
                    (1)
                  
                  
                  Stock
                    Awards
                    (2)
                  
                  
                  Non-Equity
                    Incentive
      Plan
                    Compensation
                    (3)
                  
                  
                  Change
      in
                    Pension
      Value
                    and
                    Nonqualified
                    Deferred
                    Compensation
                    Earnings
                    (4)
                  
                  
                  All
      Other
                    Compensation
                    (5)
                  
                  
                  Total
                    (6)Joseph
      F. Trungale
                  2008
                  
                  $
                  629,658
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  43,040
                  
                  
                  $
                  672,698Director,
      President and Chief Executive Officer
                  2007
                  
                  
                  615,020
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  50,756
                  
                  
                  
                  665,7762006
                  
                  
                  566,539
                  
                  
                  
                  —
                  
                  
                  
                  446,250
                  
                  
                  
                  —
                  
                  
                  
                  51,536
                  
                  
                  
                  1,064,325Fred T. Grant,
      Jr.
                  2008
                  
                  
                  211,268
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (906
                  )
                  
                  
                  134,694
                  
                  
                  
                  345,056Executive
      Vice President and Chief Financial Officer
                  2007
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —2006
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Pete
      M. Pascuzzi
                  2008
                  
                  
                  252,042
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (7,845
                  )
                  
                  
                  39,287
                  
                  
                  
                  283,484Executive
      Vice President, Operations and President, Perkins
    Restaurants
                  2007
                  
                  
                  230,360
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  416
                  
                  
                  
                  35,511
                  
                  
                  
                  266,2872006
                  
                  
                  202,115
                  
                  
                  
                  —
                  
                  
                  
                  80,325
                  
                  
                  
                  —
                  
                  
                  
                  27,523
                  
                  
                  
                  309,963Robert
      J. Winters
                  2008
                  
                  
                  227,268
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (8,401
                  )
                  
                  
                  37,597
                  
                  
                  
                  256,464Senior
      Vice President, Franchise Sales, Franchise Operations and Restaurant
      Development
                  2007
                  
                  
                  215,193
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  674
                  
                  
                  
                  36,601
                  
                  
                  
                  252,4682006
                  
                  
                  208,615
                  
                  
                  
                  —
                  
                  
                  
                  67,970
                  
                  
                  
                  —
                  
                  
                  
                  29,050
                  
                  
                  
                  305,635Cheryl
      S. Ahlbrandt
                  2008
                  
                  
                  220,000
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (3,031
                  )
                  
                  
                  26,877
                  
                  
                  
                  243,846Senior
      Vice President, Marketing and Research & Development
                  2007
                  
                  
                  201,139
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  53
                  
                  
                  
                  29,031
                  
                  
                  
                  230,2232006
                  
                  
                  138,462
                  
                  
                  
                  —
                  
                  
                  
                  49,431
                  
                  
                  
                  —
                  
                  
                  
                  15,409
                  
                  
                  
                  203,302James
      W. Stryker
                  2008
                  
                  
                  159,378
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (32,656
                  )
                  
                  
                  268,108
                  
                  
                  
                  394,830Former
      Executive Vice President and Chief Financial Officer
                  2007
                  
                  
                  317,042
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  4,283
                  
                  
                  
                  44,496
                  
                  
                  
                  365,8212006
                  
                  
                  304,111
                  
                  
                  
                  —
                  
                  
                  
                  144,585
                  
                  
                  
                  14,364
                  
                  
                  
                  36,959
                  
                  
                  
                  500,019Charles
      A. Conine
                  2008
                  
                  
                  152,563
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (12,090
                  )
                  
                  
                  20,898
                  
                  
                  
                  161,371Former
      Executive Vice President, Human Resources and
    Administration
                  2007
                  
                  
                  236,089
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  15,195
                  
                  
                  
                  52,205
                  
                  
                  
                  303,4892006
                  
                  
                  224,722
                  
                  
                  
                  —
                  
                  
                  
                  107,865
                  
                  
                  
                  2,305
                  
                  
                  
                  237,520
                  
                  
                  
                  572,412
 ____________
 
  87
 Table of Contents
  (1)
              The
      amounts in this column include any salary contributed by the named
      executive officer to our nonqualified deferred compensation and 401(k)
      plans. In their May and December 2008 meetings, our compensation committee
      approved annual base compensation for these executive officers as follows:
      Mr. Trungale — $625,000; Mr. Grant — $280,000; Mr. Winters — $235,000; Ms.
      Ahlbrandt — $228,800.  In March 2009, the compensation committee
      approved annual base compensation for Mr. Pascuzzi of $400,000 in
      connection with his promotion to Chief Operating
  Officer.
 
 (2)
              On
      April 1, 2007, pursuant to strip subscription agreements, 17,673 Class A
      Units and 17,673 Class C Units were sold to certain of the company’s
      executives at $100.00 per unit and $0.01 per unit, respectively. This
      transaction is described more fully in Note 16 to the consolidated
      financial statements, “P&MC’s Holding LLC Equity Plan and Other Equity
      Transactions” and Item 12, “Security Ownership of Certain Beneficial
      Owners and Management and Related Stockholder
  Matters.”
 
 (3)
              The
      amounts in this column represent total performance-based bonuses earned
      for services rendered during 2008, 2007 and 2006, respectively. No bonuses
      were paid to the executive officers based on the actual financial results
      of the Company for fiscal 2008 or 2007. Bonuses were earned during 2006
      and were based entirely on our financial performance and the executive
      officer’s performance against his or her specified individual objectives;
      these bonus amounts were paid in 2007 for 2006 bonus
    amounts.
 
 (4)
              Amounts
      represent Nonqualified Deferred Compensation Plan
  earnings.
 
 (5)
              See
      table below for detail of amounts in this
  column.
 
 (6)
              The
      dollar value in this column for each named executive officer represents
      the sum of all compensation reflected in the preceding
      columns.
 
 All
Other Compensation
 Year
                  
                  Vehicle
                    Allowance
                  
                  
                  Club Dues
                  
                  
                  Relocation
                    (1)
                  
                  
                  Loan
                    Forgiveness
                    (2)
                  
                  
                  Life
      Insurance
                    Premiums
                  
                  
                  Medical
                    Insurance
                    Premiums
                  
                  
                  401(k)
                    Matching
                    Contributions
                  
                  
                  NQDC
                    Matching
                    Contributions
                    (3)
                  
                  
                  Legal
                    Fees
                    (4)
                  
                  
                  Severance
                    Payments
                    (5)
                  
                  
                  TotalJoseph
      F. Trungale
                  2008
                  
                  $
                  9,600
                  
                  
                  
                  4,785
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  8,625
                  
                  
                  
                  20,030
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  43,0402007
                  
                  
                  9,600
                  
                  
                  
                  6,897
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  8,625
                  
                  
                  
                  25,634
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  50,7562006
                  
                  
                  9,600
                  
                  
                  
                  6,336
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  8,625
                  
                  
                  
                  26,420
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  555
                  
                  
                  
                  —
                  
                  
                  
                  51,536Fred
      T. Grant, Jr.
                  2008
                  
                  
                  7,600
                  
                  
                  
                  1,040
                  
                  
                  
                  107,380
                  
                  
                  
                  —
                  
                  
                  
                  4,128
                  
                  
                  
                  8,084
                  
                  
                  
                  —
                  
                  
                  
                  6,462
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  134,6942007
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —2006
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Pete
      M. Pascuzzi
                  2008
                  
                  
                  9,600
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  5,449
                  
                  
                  
                  17,191
                  
                  
                  
                  —
                  
                  
                  
                  7,047
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  39,2872007
                  
                  
                  9,600
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  5,422
                  
                  
                  
                  16,149
                  
                  
                  
                  —
                  
                  
                  
                  4,340
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  35,5112006
                  
                  
                  8,000
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  5,000
                  
                  
                  
                  14,523
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  27,523Robert
      J. Winters
                  2008
                  
                  
                  9,600
                  
                  
                  
                  1,386
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  5,412
                  
                  
                  
                  14,078
                  
                  
                  
                  100
                  
                  
                  
                  7,021
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  37,5972007
                  
                  
                  9,600
                  
                  
                  
                  1,223
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  5,396
                  
                  
                  
                  13,322
                  
                  
                  
                  100
                  
                  
                  
                  6,960
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  36,6012006
                  
                  
                  9,600
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  5,378
                  
                  
                  
                  13,972
                  
                  
                  
                  100
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  29,050Cheryl
      S. Ahlbrandt
                  2008
                  
                  
                  9,600
                  
                  
                  
                  1,386
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  5,399
                  
                  
                  
                  10,492
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  26,8772007
                  
                  
                  9,600
                  
                  
                  
                  1,223
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  5,370
                  
                  
                  
                  9,872
                  
                  
                  
                  —
                  
                  
                  
                  2,966
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  29,0312006
                  
                  
                  6,400
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,960
                  
                  
                  
                  5,049
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  15,409James
      W. Stryker
                  2008
                  
                  
                  3,177
                  
                  
                  
                  474
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,113
                  
                  
                  
                  5,602
                  
                  
                  
                  100
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  256,642
                  
                  
                  
                  268,1082007
                  
                  
                  11,800
                  
                  
                  
                  1,223
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  7,849
                  
                  
                  
                  16,729
                  
                  
                  
                  145
                  
                  
                  
                  6,750
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  44,4962006
                  
                  
                  11,104
                  
                  
                  
                  696
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  7,826
                  
                  
                  
                  7,185
                  
                  
                  
                  1,234
                  
                  
                  
                  8,359
                  
                  
                  
                  555
                  
                  
                  
                  —
                  
                  
                  
                  36,959Charles
      A. Conine
                  2008
                  
                  
                  5,900
                  
                  
                  
                  749
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  5,220
                  
                  
                  
                  5,269
                  
                  
                  
                  100
                  
                  
                  
                  3,660
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  20,8982007
                  
                  
                  11,800
                  
                  
                  
                  1,223
                  
                  
                  
                  16,736
                  
                  
                  
                  —
                  
                  
                  
                  5,440
                  
                  
                  
                  10,133
                  
                  
                  
                  123
                  
                  
                  
                  6,750
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  52,2052006
                  
                  
                  11,104
                  
                  
                  
                  618
                  
                  
                  
                  109,953
                  
                  
                  
                  90,455
                  
                  
                  
                  5,423
                  
                  
                  
                  2,522
                  
                  
                  
                  554
                  
                  
                  
                  16,336
                  
                  
                  
                  555
                  
                  
                  
                  —
                  
                  
                  
                  237,520
 ____________
 88
 Table of Contents
 (1)
              In
      connection with their relocation to Memphis, TN, the Company incurred
      various relocation payments on behalf of Mr. Grant and Mr. Conine,
      including non-recurring closing costs on the sale of their primary
      residence, temporary housing in Memphis, and the cost of transferring
      household goods and vehicles.
 
 (2)
              In
      connection with the Combination, a loan outstanding to Mr. Conine was
      forgiven in exchange for the surrender of WRG securities pledged as
      security for the loan.
 
 (3)
              Amounts
      represent contributions made by the Company and are discussed under
      “Nonqualified Deferred Compensation” below. 2006 amounts include a
      discretionary contribution equal to $6,542 for Mr. Stryker and $14,438 for
      Mr. Conine. These amounts were awarded in early 2007 based on account
      balances as of December 31, 2006.
 
 (4)
              For
      2006, legal fees totaling $2,220 in the aggregate were paid on behalf of
      our executive officers for advice rendered in connection with their
      employment agreements.
  (5)
              2008
      severance amounts include $8,623 for vehicle allowances paid to Mr.
      Stryker in addition to salary continuation amounts.  Mr. Stryker
      also received medical and life insurance premium reimbursements totaling
      $15,206 and $5,736, respectively, which were paid in addition to salary
      continuation amounts and are included in the 2008 severance
      amounts.
 
 Pension
Benefits.The PMCI Supplemental Executive Retirement Plan I
(“SERP I”) was established by the Company on April 1, 2004 and amended and
restated on November 1, 2006. Mr. Trungale,  Mr. Pascuzzi and Mr.
Winters participated in SERP I in 2008. Contributions vest at a rate of 25% for
one to two years of service, 50% for at least three but less than five years of
service and 100% for five or more years of service.
 
 The
following table provides information regarding all plans providing for payments
or other benefits at, following, or in connection with retirement for each of
our executive officers serving as such at the end of 2008, based on the
information available to us as of December 28, 2008.
 
 Pension
Benefits—2008
 
 Name
                
                Plan Name
                
                
                Number
      of Years
                  Credited Service
                
                
                Present
      Value of
                  Accumulated Benefit
                
                
                Payments
      During
                  Last Fiscal YearJoseph
      F.
      Trungale
                
                SERP
      I
                
                
                
                4
                
                
                $
                147,147
                
                
                
                —Fred
      T. Grant,
      Jr.
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Pete
      M.
      Pascuzzi
                
                SERP
      I
                
                
                
                4
                
                
                
                29,013
                
                
                
                —Robert
      J.
      Winters
                
                SERP
      I
                
                
                
                4
                
                
                
                29,013
                
                
                
                —Cheryl
      S.
      Ahlbrandt
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —James
      W.
      Stryker
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Charles
      A.
      Conine
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
 
 
 89
 Table of Contents
  Nonqualified Deferred
Compensation
 
 Nonqualified
Deferred Compensation—2008
 
 Name
                
                Executive
                  Contributions
      in
                  Last
      Fiscal Year
                  (1)
                
                
                Registrant
                  Contributions
      in
                  Last
      Fiscal Year
                  (2)
                
                
                Aggregate
                  Earnings(Losses)
      in Last Fiscal Year
                  (3)
                
                
                Aggregate
                  Withdrawals/Distributions
                
                
                Aggregate
      Balance
                  at
      Last Fiscal Year
                  EndJoseph
      F. Trungale
                
                $
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                —Fred T. Grant,
      Jr.
                
                
                12,923
                
                
                
                6,462
                
                
                
                (906
                )
                
                
                —
                
                
                
                18,478Pete
      M. Pascuzzi
                
                
                12,870
                
                
                
                7,047
                
                
                
                (7,845
                )
                
                
                —
                
                
                
                27,926Robert
      J. Winters
                
                
                7,131
                
                
                
                7,021
                
                
                
                (8,401
                )
                
                
                —
                
                
                
                21,970Cheryl
      S. Ahlbrandt
                
                
                —
                
                
                
                —
                
                
                
                (3,031
                )
                
                
                —
                
                
                
                4,931James
      W. Stryker
                
                
                —
                
                
                
                —
                
                
                
                (32,656
                )
                
                
                82,828
                
                
                
                49Charles
      A. Conine
                
                
                3,660
                
                
                
                3,660
                
                
                
                (12,090
                )
                
                
                252,940
                
                
                
                —
 ____________
 
 (1)
              Amounts
      represent deferred salary and are reflected as such in the Salary column
      of the Summary Compensation Table.
 
 (2)
              Amounts
      represent contributions made by the Company and are reflected as such in
      the All Other Compensation column of the Summary Compensation Table, as
      well as in the NQDC Matching Contributions column of the All Other
      Compensation Table.
 
 (3)
              Amounts
      are also reflected in the Change in Pension Value and Nonqualified
      Deferred Compensation Earnings column of the Summary Compensation
      Table.
 
 In
connection with the Combination, the Company terminated its nonqualified
deferred compensation plan. In October 2006, a new plan (the “Successor Plan”)
was adopted. The terms of the new plan are similar to the terminated plan and
provide enrollment for eligible employees of both Perkins and Marie Callender’s.
The Successor Plan is available for enrollment on a voluntary,
non-discriminatory basis to executive officers and other key
employees.
 
  90
 Table of Contents
  The
Successor Plan is a nonqualified defined contribution plan; the first 3% of
eligible pay contributed to the plan by the executive is eligible for a 100%
company matching contribution up to $6,000, which vests over a three year
period. The Company may elect to make additional contributions to an employee’s
account. For purposes of the Successor Plan, eligible pay is defined as base pay
and the eligible portion of any incentive award.
 
 Deferrals
are made at the direction of the executive and are for a specific term and on a
pre-tax basis. No distributions will occur until the executive’s retirement,
disability, death, separation from employment or financial hardship. Upon the
occurrence of one of these events, periodic payments are distributed as elected
by the executive in accordance with the Successor Plan’s waiting period for such
payments or upon a change in control event or other action by the Board of
Directors which results in termination of the Successor Plan. Participating
employees choose from a variety of investment units selected by the Company,
none of which contain any securities of the Company. The fund(s) chosen,
dividend calculations and market fluctuations will determine any gain or loss to
the employee balances; employee fund elections, including allocations of
investments among the various investment units offered, may be changed by the
employee as frequently as desired. Messrs. Stryker and Conine participated in a
predecessor plan at WRG, the terms of which provided no company matching
contributions; participant changes to fund selection or percentage allocations
were limited to once monthly. Subsequent to the Combination the WRG predecessor
plan was terminated and employee balances were transferred to the Successor
Plan. Messrs. Grant, Stryker, Conine, Pascuzzi and Winters, as well as Ms.
Ahlbrandt, participated in the Successor Plan in 2008.
 
 Severance and Change in Control
Agreements.As of December 28, 2008, the Company maintained
formal severance arrangements, as part of formal employment agreements for each
of Messrs. Trungale, Grant and Pascuzzi. In addition, the Company is party to a
severance arrangement with Mr. Stryker, pursuant to which it is currently paying
him severance.  The terms of these arrangements are discussed under
“Employment Agreements” below. The employment agreements include a provision for
severance compensation which would be payable to each executive officer in the
event his employment is terminated for “Good Reason” or “Without Cause”. The
following definitions apply to these arrangements:
 
 The term
“Cause” shall mean: as determined by the Board of Directors (or its designee),
(i) the executive’s material breach of any of the executive’s obligations under
his employment agreement; (ii) the executive’s continued and deliberate neglect
of, willful misconduct in connection with the performance of, or refusal to
perform the executive’s duties, which, in the case of neglect or failure to
perform, has not been cured within thirty days after the executive has been
provided notice of the same; (iii) the executive’s engagement in any conduct
which injures the integrity, character, business or reputation of the Company or
any of its subsidiaries or affiliates or which impugns the executive’s own
integrity, character or reputation so as to cause the executive to be unfit to
act on behalf of the Company; or (iv) the Board of Director’s good faith
determination that the executive has committed an act or acts constituting a
felony, or other act involving dishonesty, disloyalty or fraud against the
Company or any of its subsidiaries or affiliates.
 
 The term
“Good Reason” shall mean: (i) the assignment to the executive of duties and
responsibilities not commensurate with his current job title; (ii) the failure
of the Company to provide Base Salary, bonus opportunity and benefits to the
executive as required in his employment agreement; or (iii) the failure of the
Company to adhere in any substantial manner to any of its other covenants in the
employment agreement, provided that any of the foregoing continues for a period
of twenty days after written notice specifying the nature thereof and requesting
that it be cured, is given to the Company by the executive. If a Change in
Control has occurred, the term “Good Reason” shall also mean (iv) any other
action by the Company which results in a diminishment in the executive’s
position, authority, duties or responsibilities to any substantial degree; (v)
any material adverse change in the executive’s benefits or perquisites; or (vi)
the Company’s requiring the executive to be based at any office or location more
than fifty miles from that which the executive is based immediately prior to the
Change in Control. The executive’s election to terminate his employment for Good
Reason shall in no way limit or restrict his remedies at law or equity for a
breach of his employment agreement.
 
  91
 Table of Contents
  The term
“Change in Control” shall mean: (i) the sale of all or substantially all of the
business and/or assets of the Company to a person or entity that is not a
subsidiary or other affiliate of the Company or CHP IV; (ii) the merger or
consolidation or other reorganization of the Company with or into one or more
entities that are not subsidiaries or other affiliates of the Company or CHP,
which results in less than 50% of the outstanding equity interests of the
surviving or resulting entity immediately after the reorganization being owned,
directly or indirectly, by the holders (or affiliates of the holders) of equity
interests of the Company, immediately before such reorganization; and (iii)
approval by the stockholders of the Company of the dissolution or liquidation of
the Company.
 
 The
following table provides the current potential payments for each named executive
officer upon termination for Good Reason or Without Cause:
 
 Salary
                  
                  
                  BenefitsName
                  
                  
                  (1)
                  
                  
                  
                  (2)Individuals
      with 24 months continuation:Joseph
      F.
      Trungale
                  
                  $
                  1,250,000
                  
                  
                  
                  57,310Individuals
      with 12 months continuation:Fred
      T. Grant,
      Jr.
                  
                  
                  280,000
                  
                  
                  
                  15,190Pete
      M.
      Pascuzzi
                  
                  
                  400,000
                  
                  
                  
                  22,640
 ____________
 
 (1)
              Reflects
      24 months of continued salary in the case of Mr. Trungale and 12 months of
      continued salary in the cases of Mr. Grant and Mr.
    Pascuzzi.
 
 (2)
              Reflects
      24 months of continued health (medical, dental and vision) and life
      insurance in the case of Mr. Trungale and 12 months of continued health
      (medical, dental and vision) and life insurance in the cases of Mr. Grant
      and Mr. Pascuzzi.
 
 Employment
Agreements.Written employment agreements have been entered
into with certain executive officers, as described below:
 
 Joseph F.
Trungale
 
 Effective
June 1, 2007 the Company and Mr. Trungale executed an employment agreement which
provides employment arrangements as follows: (1)  the initial term is
three years and the agreement renews automatically for successive one-year terms
unless either party provides notice of termination; (2)  annual base
compensation is $625,000, and a minimum of twenty-four months of base salary and
benefits are provided in the event employment is terminated Without Cause or for
Good Reason; (3)  a prorated incentive bonus in the fiscal year in
which employment terminates, to be awarded if Mr. Trungale’s termination occurs
for reasons other than Cause; and  (4) an annual incentive bonus
target award of 70% of base compensation, with a maximum award of 100% of base
compensation.
 
 Fred
T. Grant, Jr.
 
 Effective
March 17, 2008 the Company and Mr. Grant executed an employment agreement which
provides employment arrangements as follows: (1)  the initial term is
eighteen months and the agreement renews automatically for successive one-year
terms unless either party provides notice of termination; (2)  annual
base compensation is $280,000, and a minimum of twelve months of base salary and
benefits are provided in the event employment is terminated Without Cause or for
Good Reason; (3)  a prorated incentive bonus in the fiscal year in
which employment terminates, to be awarded if Mr. Grant’s termination occurs for
reasons other than Cause; and (4) an annual incentive bonus target award of 45%
of base compensation, with a maximum award of 67.5% of base
compensation.
 
 92
 Table of Contents
  Pete M. Pascuzzi
  Effective
August 1, 2008 the Company and Mr. Pascuzzi executed an employment agreement
which provides employment arrangements as follows: (1)  the initial
term is eighteen months and the agreement renews automatically for successive
one-year terms unless either party provides notice of termination;
(2)  annual base compensation is $257,400, and a minimum of twelve
months of base salary and benefits are provided in the event employment is
terminated Without Cause or for Good Reason; (3)  a prorated incentive
bonus in the fiscal year in which employment terminates, to be awarded if Mr.
Pascuzzi’s termination occurs for reasons other than Cause; and (4) an annual
incentive bonus target award of 45% of base compensation, with a maximum award
of 67.5% of base compensation.  In connection with his promotion to Chief
Operating Officer in March 2009, Mr. Pascuzzi's base compensation and annual and
maximum incentive bonus targets were changed to $4000,000, 50% and 75%,
respectively.
 
 Director
Compensation.
 
 Four
non-employee directors receive remuneration for their services as members of the
Board of Directors of P&MC’s Holding LLC. Allen J. Bernstein provides
consulting services to the Company and also serves as non-executive chairman of
the Board of Directors; the annual fee payable for his combined services is
$200,000. Our remaining non-employee directors are compensated as follows:
$8,750 per meeting attended for Dr. Connolly, and $5,000 per meeting for Mr.
Tankel and Mr. Cohn. Our employed director, Mr. Trungale, receives no additional
compensation for his service on the Board.
 
 The
following table sets forth a summary of the compensation earned by our
non-employee directors in 2008:
 
 Name and Principal Position
                  
                  Fees
      Earned or
                    Paid in Cash
                  
                  
                  Stock Awards
                  
                  
                  Option
                    Awards
                  
                  
                  Non-Equity
                    Incentive
      Plan
                    Compensation
                  
                  
                  Change
      in
                    Pension
      Value
                    and
                    Nonqualified
                    Deferred
                    Compensation
                    Earnings
                  
                  
                  All
      Other
                    Compensation
                  
                  
                  TotalAllen
      J. Bernstein, Non-Executive Chairman
                  
                  $
                  200,000
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  200,000Zane
      Tankel, Director
                  
                  
                  20,000
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  20,000Lee
      Cohn, Director
                  
                  
                  20,000
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  20,000Dr.
      John J. Connolly, Director
                  
                  
                  35,000
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  35,000
 
  93
 Table of Contents
  Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
  Security Ownership of Certain
Beneficial Owners and Management.Perkins & Marie
Callender’s Holding Inc., our parent, holds all of our issued and outstanding
capital stock. Perkins & Marie Callender’s Holding Inc. is a direct wholly
owned subsidiary of P&MC’s Holding Corp., who is a direct wholly owned
subsidiary of P&MC’s Holding LLC. The following table sets forth information
with respect to the beneficial ownership of buyer parent’s equity interests
by:
 
 •
              Each
      person who is known by us to beneficially own 5% or more of P&MC’s
      Holding LLC’s outstanding equity;
 
 •
              Each
      member of P&MC’s Holding LLC’s board of
  directors;
 
 •
              Each
      of our executive officers named in the executive compensation table;
      and
 
 •
              All
      members of P&MC’s Holding LLC’s board of directors and our executive
      officers as a group.
 
 Beneficial
ownership is determined in accordance with the rules of the SEC. To our
knowledge, each of the holders of units of ownership interests listed below has
sole voting and investment power as to the units owned unless otherwise noted.
The holders of Class A units will not ordinarily have the right to vote on
matters to be voted on by unit holders. Holders of Class A-1, Class A, Class B
and Class C units will also have different rights with respect to
distributions.
 
 Name
      and Address ofBeneficial
      Owner
                
                Number
                  of
      Class A-1
                  Units
                
                
                %
                  of
      Total
                  Class
      A-1
                  Units
                
                
                Number
                  of
      Class A
                  Units
                
                
                %
                  of
      Total
                  Class
      A
                  Units
                
                
                Number
                  of
      Class B
                  Units
                
                
                %
                  of
      Total
                  Class
      B
                  Units
                
                
                Number
                  of
      Class C
                  Units
                
                
                %
                  of
      Total
                  Class
      C
                  UnitsCastle
      Harlan Partners IV, L.P. (1)(2)
                
                
                22,992.2
                
                
                
                57.3
                %
                
                
                591,138.1
                
                
                
                52.9
                %
                
                
                607,086.2
                
                
                
                53.0
                %
                
                
                —
                
                
                
                —Castle
      Harlan Partners III, L.P. (1)(2)
                
                
                16,242.9
                
                
                
                40.5
                %
                
                
                418,387.3
                
                
                
                37.5
                %
                
                
                434,630.2
                
                
                
                38.0
                %
                
                
                —
                
                
                
                —John
      K. Castle (1)(3)
                
                
                39,996.0
                
                
                
                99.7
                %
                
                
                1,029,577.6
                
                
                
                92.2
                %
                
                
                1,062,529.6
                
                
                
                92.8
                %
                
                
                —
                
                
                
                —Donald
      N. Smith (1)
                
                
                —
                
                
                
                —
                
                
                
                64,993.5
                
                
                
                5.8
                %
                
                
                64,993.5
                
                
                
                5.7
                %
                
                
                —
                
                
                
                —Joseph
      F. Trungale (1)
                
                
                —
                
                
                
                —
                
                
                
                7,363.9
                
                
                
                0.7
                %
                
                
                —
                
                
                
                —
                
                
                
                40,616.2
                
                
                
                37.4
                %Pete
      M. Pascuzzi (1)
                
                
                —
                
                
                
                —
                
                
                
                1,288.7
                
                
                
                0.1
                %
                
                
                —
                
                
                
                —
                
                
                
                9,103.0
                
                
                
                8.4
                %Cheryl
      S. Ahlbrandt (1)
                
                
                —
                
                
                
                —
                
                
                
                920.5
                
                
                
                0.1
                %
                
                
                —
                
                
                
                —
                
                
                
                6,074.6
                
                
                
                5.6
                %Robert
      J. Winters (1)
                
                
                —
                
                
                
                —
                
                
                
                1,288.7
                
                
                
                0.1
                %
                
                
                —
                
                
                
                —
                
                
                
                8,105.4
                
                
                
                7.5
                %Allen
      J. Bernstein (1)
                
                
                —
                
                
                
                —
                
                
                
                1,657.7
                
                
                
                0.1
                %
                
                
                8,061.4
                
                
                
                0.7
                %
                
                
                —
                
                
                
                —David
      B. Pittaway (1)
                
                
                —
                
                
                
                —
                
                
                
                224.2
                
                
                
                0.0
                %
                
                
                224.2
                
                
                
                0.0
                %
                
                
                —
                
                
                
                —William
      M. Pruellage (1)
                
                
                —
                
                
                
                —
                
                
                
                22.4
                
                
                
                0.0
                %
                
                
                22.4
                
                
                
                0.0
                %
                
                
                —
                
                
                
                —Total
      Units (including those listed above)
                
                
                40,118.7
                
                
                
                100.0
                %
                
                
                1,116,598.1
                
                
                
                100.00
                %
                
                
                1,144,566.4
                
                
                
                100.00
                %
                
                
                108,540.4
                
                
                
                100.00
                %
 ____________
 
 (1)
              The
      address for CHP IV, CHP III and Messrs. Castle, Pittaway and Pruellage is
      c/o Castle Harlan, Inc., 150 East 58th Street, New York, New York 10155.
      The address for Mr. Bernstein is c/o Endeavor Restaurant Group, P.O. Box
      3758, New Hyde Park, New York 11040. The address for Mr. Smith is 90
      Hawthorne Lane, Barrington, Illinois 60010, and the address for the
      executive officers named in the table is 6075 Poplar Avenue, Suite 800,
      Memphis, Tennessee 38119.
 
 (2)
              Includes
      units of ownership interests held by related entities and persons, all of
      which may be deemed to be beneficially owned by CHP IV and CHP III,
      respectively. Each of CHP III and CHP IV disclaim beneficial ownership of
      these units.
 
  94
 Table of Contents
  (3)
              John
      K. Castle, a member of P&MC’s Holding LLC’s board of directors, is the
      controlling stockholder of Castle Harlan Partners IV, G.P., Inc., the
      general partner of the general partner of CHP IV, and as such may be
      deemed a beneficial owner of the units of P&MC’s Holding LLC owned by
      CHP IV and its affiliates. Mr. Castle is also the controlling stockholder
      of Castle Harlan Partners III, G.P., Inc., which is the general partner of
      the general partner of CHP III, and as such may be deemed a beneficial
      owner of the units of P&MC’s Holding LLC owned by CHP III and its
      affiliates. Mr. Castle disclaims beneficial ownership of all units in
      excess of his proportionate partnership share of CHP IV, CHP III and their
      respective affiliates.
 
 Securities Authorized for Issuance
Under Equity Compensation Plans.Effective April 1, 2007,
P&MC’s Holding LLC established a management equity incentive plan for the
benefit of key Company employees. The Equity Plan provides the following two
types of equity ownership in P&MC’s Holding LLC: (i) Incentive Units, which
generally vest over four years of continuous service and have no contractual
term, and (ii) Strip Subscription Units, which consist of Class A Units and
Class C Units, ownership of which is effective April 1, 2007. The Equity Plan
provides for accelerated vesting of Incentive Units in the event of a change in
control. The executive officers and certain other officers of the Company
purchased Strip Subscription Units through direct investment in P&MC’s
Holding LLC.
  95
 Table of Contents
  Item 13. Certain
Relationships and Related Transactions and DirectorIndependence.
 
 Transactions with Management and
Others.
  Management
Agreement:
 
 We are
party to a management agreement with Castle Harlan under which Castle Harlan
provides business and organizational strategy, financial and investment
management, advisory, merchant and investment banking services to our parent and
us. As compensation for those services, we pay Castle Harlan an annual
management fee equal to 3% of the aggregate equity contributions made by CHP IV
and CHP III and their affiliates (including their limited partners), payable
quarterly in advance. If, at any time, CHP IV or CHP III or their affiliates
(including their limited partners) make any additional equity contributions to
any of our parent or us, we will pay Castle Harlan an annual management fee
equal to 3% of each such equity contribution. We will also pay or reimburse
Castle Harlan for all out-of-pocket fees and expenses incurred by Castle Harlan
and any advisors, consultants, legal counsel and other professionals engaged by
Castle Harlan to assist in the provision of services under the management
agreement.
 
 The
management agreement is for an initial term expiring December 31, 2012 and is
subject to renewal for consecutive one-year terms unless terminated by Castle
Harlan or us upon 90 days notice prior to the expiration of the initial term or
any annual renewal. We also indemnify Castle Harlan, its officers, directors and
affiliates from any losses or claims suffered by them as a result of services
they provide us. Payment of management fees is subject to restrictions contained
in the Secured Notes Indenture, the 10% Senior Note Indenture and the New
Revolver.  As of December 28, 2008 and December 30, 2007, other
liabilities in our consolidated balance sheet includes past due management fees
of $6,614,000 and $7,832,000, respectively.
 
 We paid
Castle Harlan $4,894,000, $3,576,000 and $3,635,000 in annual management fees
during the years ended December 28, 2008, December 30, 2007 and December 31,
2006, respectively.
 
 During
the quarter ended October 5, 2008, certain affiliates of Castle Harlan made a
$4,000,000 payment to the lenders under our pre-existing revolving credit
facility in satisfaction of their guarantee under the March 2008 amendment to
the term loan.  This amount became a subordinated obligation of the
Company and immediately prior to the consummation of the refinancing, the
affiliates of Castle Harlan relinquished and canceled the indebtedness in
exchange for 39,996 Class A-1 units and 39,996 Class B units of P&MC’s
Holding LLC.  Also, during the quarter, the Company received an
additional equity contribution of $8,500,000 from our indirect parent,
P&MC’s Holding Corp.
 
 Other
Board Affiliations:
 
 Certain
members of the Board of Directors of our parent have in the past served,
currently serve and in the future may serve on the boards of directors of other
restaurant companies. Among the boards of directors of Castle Harlan portfolio
companies on which one or more of our parent’s directors serve are McCormick and
Schmick Management Group, Morton’s Restaurant Group, Inc., Bravo Development
Inc., and Caribbean Restaurants, LLC.
 
 Independent
Directors.
  The
following directors of P&MC’s Holding LLC are independent directors within
the meaning of Rule 4200 of the NASDAQ Stock Market:   Dr. John
J. Connolly; Lee Cohn; and Zane Tankel.
 
  96
 Table of Contents
  Item 14. Principal Accounting Fees and Services.
 
 Independent
Auditor Fees.
 
 It is the
Audit Committee's policy to review and approve in advance the Company's
independent auditor's annual engagement letter, including the proposed fees
contained therein, as well as all audit and permitted non-audit engagements and
relationships between the Company and its independent auditors.
 
 The
following table sets forth fees for services of Deloitte & Touche LLP
provided to the Company for fiscal 2008 and 2007:
 
 2008
                                
                                
                                2007Deloitte
      & Touche LLPAudit
      fees
                                
                                $
                                707,000
                                
                                
                                
                                675,000Audit-related
      fees (1)
                                
                                
                                112,000
                                
                                
                                
                                —Tax
      fees
                                
                                
                                —
                                
                                
                                
                                —Total
                                
                                
                                819,000
                                
                                
                                
                                675,000
 
 (1)  Represents
fees related to the issuance of a comfort letter in connection with the
Company’s September 24, 2008 offering of Secured Notes.
 
 Services
Provided by the Independent Auditors.
 
 Pursuant
to rules adopted by the Securities and Exchange Commission, the fees paid to
Deloitte & Touche for services provided are presented in the table
above under the following categories:
 
 Audit Fees.These are fees
for professional services performed by Deloitte & Touche for the audit
and review of our annual financial statements that are normally provided in
connection with statutory and regulatory filings or engagements related to
Securities and Exchange Commission matters.
 
 Audit-Related Fees.These are fees
for assurance and related services performed by Deloitte & Touche that
are reasonably related to the performance of the audit or review of our
financial statements. This includes comfort letters, consents and other services
that are not required by statute or regulation.
 
 Tax Fees.These are fees
for professional services performed by Deloitte & Touche with respect
to tax compliance, tax advice and tax planning.
  97
 Table of Contents
  PART IV
 
 Item 15. Exhibits and Financial Statement
Schedules.
 
 (a)
              1. Financial Statements filed
      as part of this report are listed
below:
 
 Report of
Independent Registered Public Accounting Firm.
 
 Consolidated
Statements of Operations for the years ended December 28, 2008, December 30,
2007 and December 31, 2006.
 
 Consolidated
Balance Sheets at December 28, 2008 and December 30, 2007.
 
 Consolidated
Statements of Stockholder’s Investment for the years ended December 28, 2008,
December 30, 2007 and December 31, 2006.
 
 Consolidated
Statements of Cash Flows for the years ended December 28, 2008, December 30,
2007 and December 31, 2006.
 
 Notes to
Consolidated Financial Statements.
 
 2. The following Financial Statement
Schedule for the years ended December 28, 2008, December 30, 2007 and December
31, 2006 is included:
 
 No. II.
Valuation and Qualifying Accounts.
 
 Schedules
I, III, IV and V are not applicable and have therefore been
omitted.
 
 3. Exhibits:
  Exhibit
      No.1.1*
                Stock
      Purchase Agreement, dated as of September 2, 2005, by and among The
      Restaurant Holding Corporation, The Individuals and Entities listed on
      Exhibit A attached thereto and TRC Holding Corp.1.2*
                First
      Amendment to Stock Purchase Agreement, dated as of September 21, 2005, by
      and among The Restaurant Corporation, TRC Holding Corp., BancBoston
      Ventures Inc. and Donald N. Smith2.1*
                Stock
      Purchase Agreement, dated as of May 3, 2006, by and among The Restaurant
      Company, TRC Holding LLC, Wilshire Restaurant Group, Inc. and the
      individuals and entities listed on Exhibit A attached
    thereto.3.1*
                Certificate
      of Amendment of Certificate of Incorporation of The Restaurant Company
      dated August 7, 2006.3.2*
                Certificate
      of Amendment of Certificate of Formation of TRC Realty LLC dated December
      5, 2006.4.1*
                First
      Supplemental Indenture, dated as of April 28, 2006, by and among The
      Restaurant Company, the Guarantors and The Bank of New York, as
      trustee.4.2*
                Form
      of 10% Senior Notes due 2013 (included in Exhibit 4.1)4.3*
                Form
      of Guarantee (included in Exhibit 4.1)10.1**
                Purchase
      Agreement, dated September 24, 2008, by and among Perkins & Marie
      Callender’s Inc., the Guarantors named therein, and  Jefferies
      & Company, Inc.10.2**
                Indenture,
      dated as of September 24, 2008, among Perkins & Marie Callender’s
      Inc., the Guarantors named therein, and The Bank of New York Mellon, as
      Trustee.
 98
 Table of Contents
  Exhibit
      No.10.3**
                                  Form
      of 14% Senior Secured Notes due 2013 (included in Exhibit
      10.2).10.4**
                                  Form
      of Guarantee (included in Exhibit 10.2).10.5**
                                  Security
      Agreement, dated as of September 24, 2008, among the Grantors listed
      therein and those additional entities that become parties thereby, and The
      Bank of New York Mellon, as Trustee.10.6**
                                  Trademark
      Security Agreement, dated as of September 24, 2008, among the Grantors
      listed therein and those additional entities that become parties thereby,
      and The Bank of New York Mellon, as Trustee.10.7**
                                  Intercreditor
      Agreement, dated as of September 24, 2008, between Wells Fargo Foothill,
      LLC, as First Priority Agent, and The Bank of New York Mellon, as Second
      Priority Agent.10.8**
                                  Credit
      Agreement, dated September 24, 2008, among Perkins & Marie Callender’s
      Holding Inc., as Parent, Perkins & Marie Callender’s Inc., as
      Borrower, the lenders that are signatories thereto, and Wells Fargo
      Foothill, LLC, as the Arranger and Administrative
Agent.10.9**
                                  Security
      Agreement, dated as of September 24, 2008, among Perkins & Marie
      Callender’s Holding Inc. and each of its subsidiaries signatory thereto,
      as grantors, and Wells Fargo Foothill, LLC.10.10**
                                  Trademark
      Security Agreement, dated as of September 24, 2008, among the grantors
      thereto and Wells Fargo Foothill, LLC.10.11***+
                                  Employment
      Agreement between Perkins & Marie Callender’s Inc. and Joseph F.
      Trungale, President and Chief Executive Officer10.12***+
                                  Employment
      Agreement between Perkins & Marie Callender’s Inc. and Charles A.
      Conine, Executive Vice President, Human Resources &
      Administration10.13****+
                                  Employment
      Agreement between Perkins & Marie Callender’s Inc. and Fred T. Grant,
      Jr., Executive Vice President and Chief Financial
  Officer10.14+
                                  Employment
      Agreement between Perkins & Marie Callender’s Inc. and Pete M.
      Pascuzzi, Executive Vice President, Operations and President, Perkins
      Restaurants21.1*
                                  List
      of subsidiaries of Perkins & Marie Callender’s Inc.31.1
                                  Chief
      Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002,
      Section 30231.2
                                  Chief
      Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002,
      Section 302.32.1
                                  Chief
      Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002,
      Section 906.32.2
                                  Chief
      Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002,
      Section 906.
 *
              Previously
      filed as an exhibit to the Registrant’s Registration Statement on Form S-4
      (File No. 333-131004), originally filed on January 12,
    2006.
 
 **
              Previously
      filed as an exhibit to the Registrant’s Current Report on Form 8-K/A,
      originally filed on October 3,
2008.
 
 ***
              Previously
      filed as an exhibit to the Annual Report on Form 10-K (File No.
      333-57925), originally filed on June 27,
2007.
 
 ****
              Previously
      filed as an exhibit to the Registrant’s Current Report on Form 8-K,
      originally filed on March 18, 2008.
 
 +        
Management contract or compensatory plan or arrangement.
 
 
  99
 Table of Contents
  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 our behalf by
the undersigned thereunto duly authorized, on this the 30th day of March
2009.
 
 PERKINS & MARIE CALLENDER’S
INC.
 
 By: /s/ Joseph F.
Trungale
 Chief Executive Officer
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities indicated on this the 30th day of March 2009.
 
 Signature
                        Title/s/ Joseph F.
      Trungale
                        President
      and Chief Executive OfficerJoseph
      F. Trungale
                        (Principal
      Executive Officer)/s/ Fred T. Grant, Jr.
                        Executive
      Vice President and Chief Financial OfficerFred
      T. Grant, Jr.
                        (Principal
      Financial and Accounting
Officer)
 
 
 We have
not sent, and do not intend to send, an annual report to security holders
covering our last fiscal year, nor have we sent a proxy statement, form of proxy
or other soliciting material to our security holders with respect to any annual
meeting of security holders.
 
  100
 Table of Contents
  SCHEDULE II
 
 PERKINS
& MARIE CALLENDER’S INC.
 VALUATION
AND QUALIFYING ACCOUNTS
 (In
thousands)
 
 Column A
                    
                    Column B
                    
                    
                    Column C
                    
                    Column D
                    
                    
                    
                    Column EAdditionsDescription
                    
                    Balance
      at
                      Beginning
      of
                      Period
                    
                    
                    Business
                      Combination
                    
                    
                    Charged
                      to
      Costs &
                      Expenses
                    
                    
                    Charged
                      to
      Other
                      Accounts
                    
                    Deductions
                      from
                      Reserves
                    
                    
                    
                    Balance
                      at
      Close
                      of PeriodFISCAL
      YEAR ENDED DECEMBER 28, 2008Allowance
      for Doubtful Accounts
                    
                    $
                    1,542
                    
                    
                    
                    0
                    
                    
                    
                    79
                    
                    
                    
                    0
                    
                    (667
                    )
                    (a)
                    
                    
                    954FISCAL
      YEAR ENDED DECEMBER 30, 2007Allowance
      for Doubtful Accounts
                    
                    
                    1,624
                    
                    
                    
                    0
                    
                    
                    
                    77
                    
                    
                    
                    0
                    
                    (159
                    )
                    (a)
                    
                    
                    1,542FISCAL
      YEAR ENDED DECEMBER 31, 2006Allowance
      for Doubtful Accounts
                    
                    
                    1,683
                    
                    
                    
                    0
                    
                    
                    
                    433
                    
                    
                    
                    0
                    
                    (492
                    )
                    (a)
                    
                    
                    1,624Reserve
      for Disposition ofAssets
                    
                    $
                    156
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    (156
                    )
                    
                    
                    
                    0
 ____________
 
 (a)
              Represents
      uncollectible accounts written off, net of recoveries, and net costs
      associated with sublease receivables for which a reserve was
      established.
 
 
 
  101