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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K (Mark One) x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
  OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
 Commission File Number 333-57925 THE RESTAURANT COMPANY  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 check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes x     No o 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. x Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes o     No x State the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was last sold,
or the average bid and asked price of such common equity, as of the last business day of the
registrants most recently completed second fiscal quarter. Not Applicable. Number of shares of common stock outstanding: 10,820. Documents incorporated by reference: None. 1




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TABLE OF CONTENTS  PART IPART IICONSOLIDATED STATEMENTS OF INCOMENOTES TO FINANCIAL STATEMENTSQUARTERLY FINANCIAL INFORMATIONPART IVSIGNATURESEX-10.17 SUPPLEMENTAL EXECUTIVE RETIREMENT PLANEX-10.18 EMPLOYMENT AGREEMENTEX-10.19 2004 CORPORATE ANNUAL INCENTIVE PLANEX-10.20 DEFERRED COMPENSATION PLANEX-31.1 CERTIFICATION OF THE CEOEX-31.2 CERTIFICATION OF THE CFO    Table of Contents  
 PART I Item 1.Business. General.The Restaurant Company (the Company, Perkins, or TRC) is a wholly-owned
subsidiary of The Restaurant Holding Corporation (RHC). TRC conducts business under the name
Perkins Restaurant and Bakery. TRC is also the sole stockholder of TRC Realty LLC, The
Restaurant Company of Minnesota (TRCM) and Perkins Finance Corp. RHC is owned principally by
Donald N. Smith (Mr. Smith), TRCs Chairman and Chief Executive Officer, and BancBoston Ventures,
Inc. (BBV). Mr. Smith is also the Chairman of Friendly Ice Cream Corporation (FICC), which
operates and franchises approximately 535 restaurants, located primarily in the northeastern United
States. Additional information may be found on our website, www.perkinsrestaurants.com. We make
available on our website 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 website and the information contained therein or connected thereto are
not intended to be incorporated into this Annual Report on Form 10-K. TRC was incorporated in 1985
under the laws of the State of Delaware. Operations.We operate and franchise mid-scale full service restaurants, which serve a
wide variety of high quality, moderately priced breakfast, lunch and dinner entrees. Our
restaurants are open seven days a week except Christmas Day and some are open 24 hours a day. As
of December 26, 2004, entrees served in Company-operated restaurants ranged in price from $2.99 to
$11.99 for breakfast, $5.99 to $11.99 for lunch and $5.49 to $11.99 for dinner. On December 26,
2004, there were 486 full-service restaurants in our system, of which 153 were Company-operated
restaurants and 333 were franchised restaurants. The restaurants operate under the names Perkins
Restaurant and Bakery, Perkins Family Restaurant, Perkins Family Restaurant and Bakery, or
Perkins Restaurant and the mark Perkins. The restaurants are located in thirty-four states
with the largest number in Minnesota, Florida, Pennsylvania, Ohio and Wisconsin (see Significant
Franchisees). We have sixteen franchised restaurants in Canada. We offer our customers a core menu consisting of certain required menu offerings that each
Company-operated and franchised restaurant must offer. Additional items are offered to meet
regional and local tastes. We must approve all menu items at franchised restaurants. Menu
offerings continually evolve to meet changing consumer tastes. We purchase television, radio,
outdoor and print advertisements to encourage trial, to promote product lines and to increase
customer traffic. We maintain a computerized labor scheduling and administrative system called
PRISM in all Company-operated restaurants to improve our operating efficiency. PRISM is also
available to franchisees and is currently utilized in approximately 75% of franchised restaurants. We also offer cookie doughs, muffin batters, pancake mixes, pies and other food products for sale
to our Company-operated restaurants and franchised restaurants and bakery and food service
distributors through Foxtail Foods (Foxtail), our manufacturing division. Sales of products from
this division to Perkins franchisees and other third parties constituted approximately 11.3% of our
total revenues in 2004, 10.3% in 2003 and 10.1% in 2002. Franchised restaurants operate pursuant to license agreements generally having an initial term of
20 years, and pursuant to which a royalty fee (4% of gross sales) and an advertising contribution
(3% of gross sales) are paid. Franchisees pay a non-refundable one-time license fee of $40,000 for
each of their first two restaurants. Franchisees opening their third and subsequent restaurants
pay a one-time license fee of between $25,000 and $50,000 depending on the level of assistance
provided by us in opening the 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. In 2004, average annual royalties earned
per franchised restaurant were approximately $63,000. The following number of license agreements
are scheduled to expire in the years indicated: 2005  twelve; 2006  six; 2007  thirteen; 2008 
eleven; 2009  fourteen. Upon the expiration of license agreements, franchisees typically apply
for and receive new license agreements. Franchisees pay a license agreement renewal fee of $5,000
to $7,500. 2




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Design Development.Our restaurants are primarily located in freestanding buildings
seating between 90 and 250 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.We opened no Company-operated restaurants in 2004 or 2003. Nine new
franchised restaurants opened during 2004 and eight new franchised restaurants opened in 2003.
During 2003, we entered into a lease agreement to operate two franchisee restaurants for a period
of five years. Three Company-operated restaurants were closed in 2004 and one was closed in 2003.
In addition to the two franchise restaurants operating under Company management, thirteen
franchised restaurants were closed in 2004 and twelve were closed in 2003. Research and Development.Each year, we develop and test a wide variety of products in our
3,000 square foot test kitchen in Memphis, Tennessee. New products undergo extensive development
and consumer testing to determine acceptance. While this effort is an integral part of our overall
operations, it was not a material expense in 2004 or 2003. In addition, we spent
approximately $389,000 and $340,000 conducting consumer research in 2004 and 2003, respectively. Significant Franchisees.As of December 26, 2004, three franchisees, otherwise
unaffiliated with the Company, owned 92 of the 333 franchised restaurants. These franchisees
operated 41, 29 and 22 restaurants, respectively. Thirty-eight of these restaurants are located in
Pennsylvania, 26 are located in Ohio and the remaining 28 are located across Wisconsin, Nebraska,
Florida, Tennessee, New Jersey, Minnesota, South Dakota, Kentucky, Maryland, New York, Virginia,
North Dakota, South Carolina and Michigan. During 2004, these three franchisees provided royalties
and license fees of $2,431,000, $1,561,000 and $1,476,000, respectively. Franchise Guarantees.During 2000, the Company entered into an agreement to guarantee
fifty percent of borrowings up to a total guarantee of $1,500,000 for use by a franchisee to
remodel and upgrade existing restaurants. As of December 26, 2004, $3,000,000 in borrowings was
outstanding under this agreement of which the Company guaranteed $1,500,000. Under the provisions
of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, this guarantee has been
determined by the Company not to be a variable interest in the franchisee. Service Fee Agreements.Our predecessors entered into arrangements with several different
parties which have reserved territorial rights under which specified payments are to be made by us
based on a percentage of gross sales from certain restaurants and for new restaurants opened within
certain geographic regions. During 2004, we paid an aggregate of $2,656,000 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 and Bakeries in certain states. Source 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. 3




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Patents, Trademarks and Other Intellectual Property.We believe that our trademarks and
service marks, especially the mark Perkins, 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 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.Our business and the restaurant industry in general are highly competitive
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 price, quality, service, menu selection, convenience and location. Some of
our competitors are corporations that are much larger than us and have substantially greater
capital resources at their disposal. In addition, in some markets, primarily in the northeastern
United States, Perkins and FICC operate restaurants that compete with each other. Employees.As of December 26, 2004, we employed approximately 8,400 persons. Approximately
425 of these were administrative and manufacturing personnel and the balance were restaurant
personnel. Approximately 60% 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 training director. We believe that our restaurant management compensation and
benefits package compares favorably with those offered by our competitors. None of our employees
are represented by a union. Regulation.We are subject to various federal, state and local laws affecting our
business. Restaurants generally are required to comply with a variety of regulatory provisions
relating to zoning of restaurant sites, sanitation, health and safety. No material amounts have
been or are expected to be expensed to comply with environmental protection regulations. We are subject to a number of state laws regulating franchise operations and sales. Those laws
impose registration and disclosure requirements on franchisors in the offer and sale of franchises
and, in certain cases, also apply substantive standards to the relationship between franchisor and
franchisee. We must also adhere to Federal Trade Commission regulations governing disclosures in
the sale of franchises. Federal and state minimum wage rate laws impact the wage rates of our hourly employees. Future
increases in these rates could materially affect our cost of labor. Segment Information.We have three primary operating segments: restaurants, franchise and
manufacturing. See Note 15 of Notes to Financial Statements for financial information regarding
each of our segments. 4




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Item 2.Properties. The following table lists the location of each of the full-service Company-operated and franchised
restaurants in the Perkins system as of December 26, 2004. The table excludes one limited service
Perkins Express located in Utah. Number of Restaurants Company-Operated
    
    
    Franchised
    
    
    TotalArizona
    
    
    
    
    
    
    1
    
    
    
    1Arkansas
    
    
    
    
    
    
    4
    
    
    
    4Colorado
    
    
    8
    
    
    
    4
    
    
    
    12Delaware
    
    
    
    
    
    
    1
    
    
    
    1Florida
    
    
    36
    
    
    
    25
    
    
    
    61Georgia
    
    
    
    
    
    
    1
    
    
    
    1Idaho
    
    
    
    
    
    
    8
    
    
    
    8Illinois
    
    
    7
    
    
    
    
    
    
    
    7Indiana
    
    
    
    
    
    
    7
    
    
    
    7Iowa
    
    
    16
    
    
    
    3
    
    
    
    19Kansas
    
    
    3
    
    
    
    4
    
    
    
    7Kentucky
    
    
    
    
    
    
    4
    
    
    
    4Maryland
    
    
    
    
    
    
    2
    
    
    
    2Michigan
    
    
    7
    
    
    
    2
    
    
    
    9Minnesota
    
    
    37
    
    
    
    35
    
    
    
    72Missouri
    
    
    7
    
    
    
    1
    
    
    
    8Montana
    
    
    
    
    
    
    8
    
    
    
    8Nebraska
    
    
    
    
    
    
    10
    
    
    
    10New Jersey
    
    
    
    
    
    
    13
    
    
    
    13New York
    
    
    
    
    
    
    13
    
    
    
    13North Carolina
    
    
    
    
    
    
    3
    
    
    
    3North Dakota
    
    
    3
    
    
    
    5
    
    
    
    8Ohio
    
    
    
    
    
    
    47
    
    
    
    47Oklahoma
    
    
    2
    
    
    
    
    
    
    
    2Pennsylvania
    
    
    8
    
    
    
    50
    
    
    
    58South Carolina
    
    
    
    
    
    
    4
    
    
    
    4South Dakota
    
    
    
    
    
    
    10
    
    
    
    10Tennessee
    
    
    4
    
    
    
    11
    
    
    
    15Virginia
    
    
    
    
    
    
    3
    
    
    
    3Washington
    
    
    
    
    
    
    6
    
    
    
    6West Virginia
    
    
    
    
    
    
    1
    
    
    
    1Wisconsin
    
    
    15
    
    
    
    27
    
    
    
    42Wyoming
    
    
    
    
    
    
    4
    
    
    
    4Canada
    
    
    
    
    
    
    16
    
    
    
    16Total
    
    
    153
    
    
    
    333
    
    
    
    486
 Most of the restaurants feature a distinctively styled brick or stucco building. Our restaurants
are predominantly single-purpose, one-story, free-standing buildings averaging approximately 5,000
square feet, with a seating capacity of between 90 and 250 customers. 5




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The following table sets forth certain information regarding Company-operated restaurants and other
properties, as of December 26, 2004: Number of Properties(1)Use
    
    Owned
    
    
    Leased
    
    
    TotalOffices and Manufacturing Facilities(2)
    
    
    1
    
    
    
    10
    
    
    
    11Perkins Restaurant and Bakery(3)
    
    
    67
    
    
    
    86
    
    
    
    153
 (1) In addition, we lease nine properties, all of which are subleased to others.
We also own four properties, three of which are leased to others and one that is vacant. (2) Our principal office is located in Memphis, Tennessee, and currently
comprises approximately 50,000 square feet under a lease expiring on May 31, 2013, subject
to a renewal by us for a maximum of 60 months. We also own a 25,149 square-foot
manufacturing facility in Cincinnati, Ohio, and lease two other properties in Cincinnati,
Ohio, consisting of 36,000 square feet and 120,000 square feet, for use as manufacturing
facilities. (3) The average term of the remaining leases is approximately eight years,
excluding renewal options. The longest lease term will mature in approximately 40 years and
the shortest lease term will mature in less than 1 year, assuming the exercise of all
renewal options. The Revolving Credit Facility is collateralized by a first priority lien on substantially all of
the assets of the Company. Item 3.Legal Proceedings. We are a party to various legal proceedings in the ordinary course of business. We do not believe
that these proceedings, either individually or in the aggregate, are likely to have a material
adverse effect on our financial position or results of operations. Item 4.Submission of Matters to Vote of Shareholders. Not applicable. [Intentionally Left Blank] 6




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PART II  Item 5.
    Market for Registrants Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities. Market information. No established public market exists for our equity securities. Holders. As of December 26, 2004, there was 1 Stockholder of record. Dividends. A distribution of $1,250,000 was declared and paid during 2004. No dividends or distributions were
declared or paid during 2003. TRCs credit agreements and indentures governing its debt securities
restrict our ability to pay dividends or distributions to our equity holders. Purchases of Equity Securities. Not applicable. [Intentionally Left Blank] 7




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Item 6.Selected Financial Data. THE RESTAURANT COMPANY AND SUBSIDIARIES
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 audited financial
statements included elsewhere in this Annual Report on Form 10-K. We have restated our previously reported consolidated financial statements for 2003 and 2002 and
our Selected Financial Data for 2001 and 2000 for the adjustments discussed in Note 2 of Notes to
the Consolidated Financial Statements of Item 8: Financial Statements and Supplementary Data, which
is included in this Annual Report on Form 10-K. 2004
    
    
    2003
    
    
    2002
    
    
    2001(c)
    
    
    2000(c)(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Income Data:Revenues
    
    $
    341,341
    
    
    $
    332,642
    
    
    $
    337,456
    
    
    $
    329,709
    
    
    $
    336,244Income (Loss) from continuing
operations
    
    $
    6,805
    
    
    $
    3,463
    
    
    $
    3,195
    
    
    $
    (404
    )
    
    $
    3,944Loss from discontinued operations
    
    $
    
    
    
    $
    (96
    )
    
    $
    (1,195
    )
    
    $
    (378
    )
    
    $
    Balance Sheet Data:Total Assets
    
    $
    202,498
    
    
    $
    195,702
    
    
    $
    198,234
    
    
    $
    210,677
    
    
    $
    210,307Long-Term Debt and
Capital Lease Obligations (a)
    
    $
    148,546
    
    
    $
    148,878
    
    
    $
    151,349
    
    
    $
    174,775
    
    
    $
    171,149Distributions
    
    $
    1,250
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    626Statistical Data:Full-service Perkins Restaurants in
Operation at End of Year:Company-Operated (b)
    
    
    153
    
    
    
    156
    
    
    
    155
    
    
    
    153
    
    
    
    145Franchised (b)
    
    
    333
    
    
    
    337
    
    
    
    343
    
    
    
    344
    
    
    
    345Total
    
    
    486
    
    
    
    493
    
    
    
    498
    
    
    
    497
    
    
    
    490Average Annual Sales Per
Company-Operated Restaurant (b)
    
    $
    1,824
    
    
    $
    1,795
    
    
    $
    1,851
    
    
    $
    1,910
    
    
    $
    1,937Average Annual Royalties Per
FranchisedRestaurant (b)
    
    $
    63.3
    
    
    $
    61.4
    
    
    $
    61.2
    
    
    $
    62.1
    
    
    $
    63.8
  (a)
    Net of current maturities of $331, $466, $9,489, $1,030 and $971.  (b)
    Excludes two Company-operated Sage Hen Cafes (closed in 2002) and one franchised Perkins
Express.  (c)
    The restatement described in Note 2 to the consolidated financial statements included in
Item 8 herein decreased revenues, increased loss from continuing operations and decreased the
benefit from income taxes in 2001 by $795, $292 and $177, respectively. In 2000, the
restatement adjustments increased depreciation and rent expense, in the aggregate, by $144
and decreased the provision for income taxes by $54. The cumulative effect of the
restatement resulted in a decrease to total assets of $2 and an increase in accumulated
deficit of $223 at December 31, 1999. 8




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Item 7.Managements Discussion and Analysis of Financial Condition and Results of
Operations. GENERAL The following managements discussion and analysis describes the principal factors affecting the
results of operations, liquidity and capital resources, as well as the critical accounting
policies, of TRC. This discussion should be read in conjunction with the accompanying audited
financial statements, which include additional information about our significant accounting
policies and practices and the transactions that underlie our financial results. The key factors that affect our operating results are comparable restaurant sales, which are driven
by comparable customer counts and check average, and our ability to manage operating expenses such
as food cost, labor and benefits and other costs. Except as otherwise indicated, references to years mean our fiscal year ended December 26, 2004,
December 28, 2003 or December 29, 2002. RESTATEMENT OF FINANCIAL STATEMENTS Restatement of Previously Issued Consolidated Financial Statements  Lease Accounting We began a review of our lease accounting policies following announcements beginning in December
2004 that several restaurant companies were revising their accounting practices for leases. As a
result of our review, we determined that the amortization of leasehold improvements was not in
accordance with accounting principles generally accepted in the United States. In addition, we
determined that there were errors in the computation of rental expense and deferred rents, which
were primarily caused by the improper determination of the commencement date of certain lease terms
and improper straight-line rentals of certain restaurants. We identified certain situations where leasehold improvements were being amortized over their
useful life rather than the shorter of the lease term, as defined in FAS 13, as amended, or their
useful life. The lease term includes the non-cancelable term of the lease plus any renewal options
where renewals are reasonably assured of exercise as determined at inception of the lease.
Renewals are reasonably assured of exercise if failure to renew the lease would impose an economic
penalty to the lessee. As the Company has determined that in most cases renewals are not reasonably
assured of exercise, the initial non-cancelable lease term, generally 20 years, represent the lease
term, as defined. Historically, the Company maintained a policy for recognizing straight-line
rentals over the initial lease term commencing when rental payments were due. The Company
corrected its accounting to report rental expense over the lease term commencing on the date that
the Company obtains control over the asset to be leased. The restatement adjustments correct (i)
the depreciation expense for the applicable period and accumulated depreciation on the balance
sheet to reflect the amortization of the lease related assets over the shorter of their useful life
or the lease term and (ii) the determination of rental expense over the lease term commencing when
the Company has control over the property to be leased. As a result of our review of lease accounting, we revalued the assumed liabilities at the date of
the purchase accounting date (December 22, 1997) related to lease obligations. The Company had
incorrectly recorded the deferred rent liability, as recorded on the acquirees financial
statements, rather than eliminating this liability. The impact of these restatement adjustments
reduced goodwill and increased accumulated deficit by $503,000. 9




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The restatement adjustments correct our historical accounting for leases and had no impact on
revenues, comparable store sales or net operating cash flows. The impact of the restatement
adjustments, net of tax effects, reduced net income by $161,000, $167,000, and $90,000 for 2003,
2002, and 2000, respectively and increased net loss by $86,000 in 2001. We have restated our
consolidated balance sheet at December 28, 2003 and the consolidated statements of income,
stockholders equity and cash flows for the years ended December 28, 2003 and December 29, 2002.
The effects of the restatement adjustments are included in Managements Discussion and Analysis of
Financial Condition and Results of Operations. Discontinued Operations Additionally, we restated our 2002 and 2003 financial statements to correctly classify the closure
of two Sage Hen restaurants as discontinued operations. Previously, the Company had presented the
disposition of these components within income from continuing operations. The effect of this
restatement is to reclassify as discontinued operations the operations of the two Sage Hen
restaurants as well as the charges associated with closing the restaurants in 2002. In 2003, the
Company recorded an additional charge to discontinued operations, which represents a change in
estimate related to the continuing lease obligation for one of the restaurants. This change in
estimate had previously been reflected within continuing operations and has been restated to be
classified within discontinued operations. These restatement adjustments reclassify revenues and
expenses between continuing operations and discontinued operations and have no impact on reported
net income for 2002 and 2003. Note 18 of Notes to Consolidated Financial Statements in Item 8 of
this report provides additional information regarding discontinued operations. We did not amend our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q
for the restatement adjustments. 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 thorough process to review the application of our accounting policies and to
evaluate the appropriateness of the estimates that are required to prepare the financial statements
of a corporation. 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 Company-operated restaurants is recognized as customers pay for products at the time of
sale. The earnings 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. Historically,
these adjustments have not been material. Concentration of Credit Risk: Financial instruments, which potentially expose the Company to concentrations of credit risk,
consist principally of franchisee and Foxtail accounts receivable. We perform ongoing credit
evaluations of our franchisee 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 franchisees were to deteriorate, we may have to increase our
reserves against collection of franchise revenues. 10




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Insurance Reserves: We are self-insured up to certain limits for costs associated with workers compensation claims,
property claims and benefits paid under employee health care programs. At December 26, 2004 and
December 28, 2003, we had total self-insurance accruals reflected in our balance sheet of
approximately $5.7 million and $4.7 million, 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 workers
compensation costs primarily through actuarial methods, which develop estimates of the undiscounted
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
date. We account for benefits paid under employee health care programs using historical lag
information as the basis for estimating expenses incurred as of the balance sheet date. We believe the use of actuarial 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 can materially affect the estimate
for these liabilities. Long-Lived Assets: The restaurant industry is capital intensive. We have approximately 55% of our total assets
invested in property and equipment. We capitalize only those costs that meet the definition of
capital assets under generally accepted accounting principles. Accordingly, repairs and
maintenance costs that do not extend the useful life of the asset are expensed as incurred. 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, requires management to make judgments about future events.
Because we utilize many of our capital assets over relatively long periods (20  30 years for our
restaurant buildings), 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 fact that we have invested a significant amount in 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 periodically perform this test on each of
our restaurants to evaluate whether impairment exists. Factors influencing our judgment include
the age of the restaurant (new restaurants have significant start up costs which impede a reliable
measure of cash flow), estimation of future restaurant performance and estimation of restaurant
fair value. Due to the fact that we can specifically evaluate impairment on a
restaurant-by-restaurant basis, we have historically been able to identify impaired restaurants and
record the appropriate adjustment. During 2004, we determined that impairment existed with respect to three company owned restaurants.
This determination was made based on our projections that the future cash flows of these
restaurants would not exceed the present carrying value of the assets. Accordingly, we recorded an
impairment charge of approximately $604,000 to adjust the assets of these restaurants to fair
value. Additionally, we recorded an impairment charge of $136,000 related to intangible assets on
specifically identifiable franchise locations that are no longer in operation. 11




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We utilize operating leases to finance a significant number of our restaurant properties. Over the
years, we have found these leasing arrangements to be favorable from a cash flow and risk
management standpoint. Such arrangements typically shift the risk of loss on the residual value of
the assets at the end of the lease period to the Lessor. As discussed in Capital Resources and
Liquidity and in Note 5 to the accompanying audited financial statements, at December 26, 2004, we
had approximately $70 million (on an undiscounted basis) of future commitments for operating
leases. The future commitments for operating leases are not reflected as a liability in our balance sheet
because the leases do not meet the accounting definition of capital leases. The determination of
whether a lease is accounted for as a capital lease or an operating lease requires management to
make estimates primarily about the fair value of the asset and its estimated economic useful life.
We believe that we have a well-defined and controlled process for making this evaluation. We have approximately $30 million of intangible assets on our balance sheet resulting from the
acquisition of businesses. New accounting standards adopted in 2002 require that we review these
intangible assets for impairment on an annual basis and cease all goodwill amortization. The
adoption of these new rules did not result in an impairment of our recorded intangible assets. The
annual evaluation of intangible asset impairment, performed in the period following our year end,
requires the use of estimates about the future cash flows of each of our reporting units 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 intangible assets has
been recorded, it cannot be reversed. Deferred Income Taxes: 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 carryforwards. 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 asset balance and income statement reflect the change in the period such
determination is made. We believe that the valuation allowance recorded is adequate for the
circumstances. However, 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
amounts. ACQUIRED RESTAURANT OPERATIONS Effective December 1, 2003, we leased two restaurants from a franchisee in Florida for a period of
five years. These restaurants operations for 2004 and the last four-week period of 2003 are
included in the accompanying financial statements. Also effective December 1, 2003, we entered
into a management contract to operate one franchisee restaurant located in Florida for a period of
one year. This contract was renewed during 2004 for an additional one-year period. In accordance
with the contract, we will operate the store and are responsible for the profit or loss generated
by the store. This contract did not meet the accounting requirements for consolidation into our
financial statements. Therefore, only our management fee income or expense related to this
restaurants profit or loss is recorded in the Franchise segment of our financial statements. SYSTEM DEVELOPMENT We opened no new Company-operated restaurants and nine franchised restaurants in 2004. We plan to
open one new Company-operated restaurant and up to thirteen franchised restaurants in 2005. 12




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##### Table of Contents



MANAGEMENTS OUTLOOK We believe that the overall economy will continue a period of sustained growth in 2005. We expect
the economic environment to have a positive impact on our guest visits and our overall
profitability. Consistent with 2004, we will continue focusing on managing restaurant costs and
providing quality food and service on a consistent basis. It is our belief that the above factors
will allow us to begin to expand our number of restaurants over the next several years. On March 21, 2005, RHC announced that it had retained an investment bank to help RHC explore and
evaluate a variety of financial and strategic alternatives for the Perkins Restaurant and Bakery
chain. We believe that consummating a strategic transaction will best allow us to take advantage
of our full potential. RESULTS OF OPERATIONS Overview:
Our 2004 results reflect improved overall performance that was consistent with the recovery in the
economy. However, we still face continued challenges due to the slower economic recovery in
certain Midwest states and increased competition in certain key markets. Over the past year, our
available cash has increased through our continued focus on cost control and restaurant management
efforts. We believe that this strategy will allow us to begin to expand our number of restaurants
once the economy, particularly the tourism and hospitality sectors, experiences sustained growth.
The following table sets forth all revenues, costs and expenses as a percentage of total revenues
for the periods indicated for revenue and expense items included in the consolidated statements of
operations. December
    
    
    December
    
    
    December26, 2004
    
    
    28, 2003
    
    
    29, 2002(Restated)(1)
    
    
    (Restated)(1)Revenues:Food sales
    
    
    93.7
    %
    
    
    93.5
    %
    
    
    93.4
    %Franchise revenues and other
    
    
    6.3
    
    
    
    6.5
    
    
    
    6.6Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Costs and expenses:Cost of sales (excluding depreciation shown below):Food cost
    
    
    27.4
    
    
    
    26.9
    
    
    
    25.9Labor and benefits
    
    
    32.3
    
    
    
    33.1
    
    
    
    32.7Operating expenses
    
    
    18.9
    
    
    
    19.3
    
    
    
    19.5General and administrative
    
    
    9.1
    
    
    
    8.7
    
    
    
    9.1Depreciation and amortization
    
    
    4.9
    
    
    
    5.4
    
    
    
    6.3Provision for (benefit from) disposition of assets, net
    
    
    
    
    
    
    0.1
    
    
    
    (0.2
    )Lease termination
    
    
    
    
    
    
    0.2
    
    
    
    Asset write-down
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.5Interest, net
    
    
    4.7
    
    
    
    4.9
    
    
    
    5.3Other, net
    
    
    (0.3
    )
    
    
    
    
    
    
    (0.2
    )Total costs and expenses
    
    
    97.2
    
    
    
    98.7
    
    
    
    98.9Income from continuing operations before income taxes
    
    
    2.8
    
    
    
    1.3
    
    
    
    1.1Provision for income taxes
    
    
    (0.8
    )
    
    
    (0.3
    )
    
    
    (0.2
    )Income from continuing operations
    
    
    2.0
    %
    
    
    1.0
    %
    
    
    0.9
    %
  1)
    We have restated our previously reported financial statements as discussed in Note 2 to the
Consolidated Financial Statements of Item 8: Financial Statements and Supplementary Data,which is
included in this Annual Report on Form 10-K. 13




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Income from continuing operations for 2004 was $6.8 million versus $3.5 million in 2003 and $3.2
million in 2002. Pre-tax income from continuing operations for 2004 included a net loss of $0.6
million related to asset dispositions and write-downs. Pre-tax income from continuing operations
for 2003 included a net loss of $1.6 million related to asset dispositions, write-downs and a lease
termination. Pre-tax income from continuing operations for 2002 included a net loss of $0.9
million related to asset dispositions and write-downs. Year Ended December 26, 2004 Compared to Year Ended December 28, 2003 Revenues: Total revenues increased 2.6% over 2003 due primarily to increased restaurant food sales and
increased Foxtail sales outside the Perkins system. Food sales at Company-operated restaurants increased 1.6%. The increase can be attributed to an
increase in comparable restaurant sales of 1.0%. Comparable restaurant sales increased primarily
due to a 3.9% increase in check average, partially offset by a decrease in comparable customer
visits of 2.9%. Slower than expected economic recovery in key Midwestern states and increased
competition in certain key markets contributed to the decrease in comparable customer visits. The
decrease in comparable customer visits was partially offset by an increase in the guest check
average due to menu mix shifts and cumulative price increases. Revenues from Foxtail increased approximately 12.6% over 2003 and constituted 11.3% of our total
2004 revenues. In order to ensure consistency and availability of our proprietary products to each
restaurant in the system, Foxtail offers cookie doughs, muffin batters, pancake mixes, pies and
other food products to Company-operated and franchised restaurants through food service
distributors. Additionally, it produces a variety of non-proprietary products for sale in various
retail markets. Sales to Company-operated restaurants are eliminated in the accompanying statements
of operations. The increase noted above can be attributed to growth in sales outside of the
Perkins system. Franchise revenues, which consist primarily of franchise royalties and initial license fees,
increased 1.3% from the prior year. Royalty revenues increased due to an increase in comparable
sales, partially offset by a decline in the average number of franchise restaurants by 6.7
restaurants. Initial franchise license fees increased as a result of nine franchise restaurants
opening in 2004 versus eight in 2003. Costs and Expenses: Food cost:In terms of total revenues, food cost increased 0.5 percentage points from 2003. Restaurant
division food cost expressed as a percentage of restaurant division sales decreased 0.7 percentage
points. The current year decrease was primarily due to the impact of selective menu price
increases and decreased discounting, which was partially offset by increased commodity costs.
Commodity costs during 2004 increased 1.3 percentage points over 2003, primarily due to increases
in beef, pork, dairy and eggs. Overall menu price increases realized during 2004 were
approximately 3.2%, which positively impacted food cost by 0.8 percentage points. The cost of Foxtail sales, in terms of total Foxtail revenues, increased approximately 4.5
percentage points, as a result of production inefficiencies associated with the start up of the
expanded pie plant and continued increases in raw materials costs. As a manufacturing operation,
Foxtail typically has higher food costs as a percent of revenues than the Companys restaurants. 14




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##### Table of Contents



Labor and benefits:Labor and benefits expense, as a percentage of total revenues, decreased 0.8 percentage points over
2003. Increased productivity partially offset by an increase in wage rates and employee insurance
costs favorably impacted restaurant labor and benefits. Foxtail labor and benefits increased 1.7%
from 2003 primarily due to production inefficiencies associated with the start up of the expanded
pie plant. Federal and state minimum wage laws impact the wage rates of the Companys hourly employees.
Certain states do not allow tip credits for servers which results in higher payroll costs as well
as greater exposure to increases in minimum wage rates. In the past, the Company has been able to
offset increases in labor costs through selective menu price increases and improvements in labor
productivity. However, there is no assurance that future increases can be mitigated through
raising menu prices or productivity improvements. As a percentage of revenues, Foxtail labor and benefit charges are significantly lower than the
Companys restaurants. If Foxtails third party business were to become a more significant
component of the Companys total operations, labor and benefits expense, expressed as a percent of
total revenue, likely would decrease. Operating expenses:Operating expenses, expressed as a percentage of total revenues, decreased 0.4 percentage points
from 2003. Restaurant division operating expenses expressed as a percentage of restaurant sales decreased 0.5
percentage points, primarily the result of a decrease in restaurant supplies, repairs and
maintenance and local store marketing expenses. Foxtail expenses, expressed as a percentage of Foxtail revenue, increased 1.2 percentage points,
primarily due to increased utility costs. Franchise division operating expenses, expressed as a percentage of franchise revenues, decreased
1.5 percentage points compared to the prior year. Reduced expenses under franchise service fee
agreements, investment spending for advertising in select franchised markets and other franchise
related spending contributed to the decrease. General and administrative:General and administrative expenses increased to 9.1% of total revenues in 2004 from 8.7% of total
revenues in 2003. The increase is primarily attributable to increased incentive costs. Depreciation and amortization:Depreciation and amortization decreased approximately 7.4% from 2003 due to the Companys continued
reduction in capital spending since 2001. Provision for/Benefit from disposition of assets:During 2004, the Company recorded a net gain of $109,000 related to the disposition of assets. Asset write-down:During 2004, we determined that impairment existed with respect to three company owned restaurants.
This determination was made based on our projections that the future cash flows of these
restaurants would not exceed the present carrying value of the assets. Accordingly, we recorded an
impairment charge of approximately $604,000 to adjust the assets of these restaurants to net
realizable value. Additionally, we recorded an impairment charge of $136,000 related to intangible
assets on specifically identifiable franchise locations that ceased operations. Interest, net:Net interest expense decreased from 4.9% to 4.7% of revenues. The decrease is the result of
reduced average borrowings by the Company during 2004. 15




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##### Table of Contents



Provision for income taxes:
The provision for income taxes in 2004 was $2.6 million. Our effective tax rate attributable to
continuing operations was 27.8% in 2004 and 17.1% in 2003. The effective tax rate in 2004 was
higher than in 2003 because federal income tax credits were relatively flat as compared to 2003 yet
2004 operating income was higher than in 2003. The 2004 effective tax rate was favorably impacted
primarily by credits resulting from excess FICA taxes paid on server tip income that exceeds
minimum wage. The effective tax rate is lower than the statutory U.S. federal tax rate primarily
due to the utilization of these credits. For 2005, we expect the effective tax rate to be
approximately 28.0%. The actual rate, however, will depend on a number of factors, including the
amount and source of operating income. Year Ended December 28, 2003 Compared to Year Ended December 29, 2002 Revenues: Total revenues decreased 1.4% over 2002 due primarily to decreased restaurant food sales. Food sales at Company-operated restaurants decreased 1.6%. The decrease can be attributed to a
decline in comparable restaurant sales of 2.9%. Comparable restaurant sales decreased primarily
due to a decrease in comparable customer visits of 6.4%, partially offset by a 3.5% increase in
check average. Economic weakness prevalent throughout 2003 and increased competition in certain
key markets contributed to the decrease in comparable customer visits. The decrease in comparable
customer visits was partially offset by an increase in the guest check average due to a menu mix
shift and cumulative price increases. The menu mix shift resulted from the introduction of a new
menu with a focus on lunch and dinner items, which have a higher menu price than breakfast items. Revenues from Foxtail increased approximately 0.6% over 2002 and constituted 10.3% of our total
2003 revenues. In order to ensure consistency and availability of our proprietary products to each
restaurant in the system, Foxtail offers cookie doughs, muffin batters, pancake mixes, pies and
other food products to Company-operated and franchised restaurants through food service
distributors. Additionally, it produces a variety of non-proprietary products for sale in various
retail markets. Sales to Company-operated restaurants are eliminated in the accompanying statements
of operations. The increase noted above can be attributed to growth in sales outside of the
Perkins system. Franchise revenues, which consist primarily of franchise royalties and initial license fees,
decreased 1.9% from the prior year. Royalty revenues decreased due to a decrease in comparable
sales and a decline in the average number of franchise restaurants by 5.3 restaurants. Initial
franchise license fees decreased as a result of eight franchise restaurants opening in 2003 versus
seventeen in 2002. Costs and Expenses: Food cost:
In terms of total revenues, food cost increased 1.0 percentage points from 2002. Restaurant
division food cost expressed as a percentage of restaurant division sales increased 1.1 percentage
points. The current year increase was primarily due to increased commodity costs and the
introduction of a new menu which resulted in a menu mix shift to higher food cost lunch and dinner
items. These increases were partially offset by the impact of selective menu price increases.
Commodity costs during 2003 increased 0.9 percentage points over 2002, primarily due to increases
in eggs, red meat, oils and pork. The introduction of a new menu during 2003 negatively impacted
food costs by 0.4 percentage points as compared to 2002. Overall price increases realized during
2003 were approximately 1.8%, which positively impacted food cost by 0.4 percentage points. The cost of Foxtail sales, in terms of total Foxtail revenues, increased approximately 0.4
percentage points, as a result of continued increases in raw materials costs. As a manufacturing
operation, Foxtail typically has higher food costs as a percent of revenues than the Companys
restaurants. 16




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##### Table of Contents



Labor and benefits:
Labor and benefits expense, as a percentage of total revenues, increased 0.4 percentage points over
2002. Increased employee insurance and workers compensation costs, a moderate increase in wage
rates and a drop in productivity impacted restaurant labor and benefits. Foxtail labor and
benefits were flat compared to 2002. Federal and state minimum wage laws impact the wage rates of the Companys hourly employees.
Certain states do not allow tip credits for servers which results in higher payroll costs as well
as greater exposure to increases in minimum wage rates. In the past, the Company has been able to
offset increases in labor costs through selective menu price increases and improvements in labor
productivity. However, there is no assurance that future increases can be mitigated through
raising menu prices or productivity improvements. As a percentage of revenues, Foxtail labor and benefit charges are significantly lower than the
Companys restaurants. If Foxtails third party business were to become a more significant
component of the Companys total operations, labor and benefits expense, expressed as a percent of
total revenue, likely would decrease. Operating expenses:
Operating expenses, expressed as a percentage of total revenues, decreased 0.2 percentage points
from 2003 to 2002. Restaurant division operating expenses expressed as a percentage of restaurant sales increased 0.1
percentage points. The increase is primarily the result of increased utility cost due to the rise
in natural gas prices. This increase is partially offset by a slight decrease in administrative
costs and store marketing expenses. Foxtail expenses, expressed as a percentage of Foxtail revenue, decreased 1.5 percentage points.
The decrease is primarily due to decreased freight, plant maintenance and utility costs. Franchise division operating expenses, expressed as a percentage of franchise revenues, decreased
2.8 percentage points compared to the prior year. Franchise opening costs decreased due to the
opening of nine fewer restaurants than in the prior year. Reduced expenses under franchise service
fee agreements, investment spending for advertising in select franchised markets and other
franchise related spending also contributed to the decrease. General and administrative:
General and administrative expenses declined to 8.7% of total revenues in 2003 from 9.1% of total
revenues in 2002. The decrease is primarily attributable to reductions in corporate home office
expenses and decreased incentive costs. Depreciation and amortization:
Depreciation and amortization decreased approximately 14.9% from 2002 due to the Companys
continued reduction in capital spending since 2001. Provision for/Benefit from disposition of assets:
During 2003, the Company recorded a net loss of $336,000 related to the disposition of assets,
including $190,000 related to the termination of the lease on the corporate aircraft. Lease termination:
The Company recorded a net loss of $761,000 on the termination of the lease related to the
corporate aircraft. Asset write-down:
The Company recorded charges totaling $455,000 to write down the carrying value of two
Company-operated restaurants to their estimated fair values. 17




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##### Table of Contents



Interest, net:
Net interest expense decreased from 5.3% to 4.9% of revenues. The decrease is the result of
reduced average borrowings by the Company during 2003, primarily due to the payment of $8.4 million
of accreted interest on the Discount Notes (defined below) at a redemption price of 105.625% and
reduced borrowings on the Credit Facility. Other:
Other income decreased approximately $100,000. This decrease is due primarily to a reduction in
rental income from properties subleased to others. Provision for/Benefit from income taxes:
The provision for income taxes attributable to continuing operations in 2003 was $715,000. Our
effective tax rate attributable to continuing operations was 17.1% in 2003 and 12.7% in 2002. The
17.1% effective tax rate in 2003 was higher than in 2002 due to the fact that 2003 operating income
was higher and federal income tax credits were relatively flat as compared to 2002. Also, we
experienced a $140,000 reduction in state deferred tax assets due to jurisdiction tax changes. The
2003 effective tax rate was favorably impacted primarily by credits resulting from excess FICA
taxes paid on server tip income that exceeds minimum wage. The effective tax rate is lower than
the statutory U.S. federal tax rate and the 2002 effective tax rate primarily due to the
utilization of these credits. CAPITAL RESOURCES AND LIQUIDITY Our primary sources of funding during 2004 were cash provided by operations and proceeds from the
sale of property and equipment. The principal uses of cash during the year were capital
expenditures and a distribution to RHC. Capital expenditures consisted primarily of equipment
purchases for Foxtail, capital improvements and costs related to remodels of existing restaurants. The following table summarizes capital expenditures for each of the past three years (in
thousands). 2004
    
    
    2003
    
    
    2002New restaurants
    
    $
    
    
    
    $
    32
    
    
    $
    2,781Capital Improvements
    
    
    3,944
    
    
    
    5,053
    
    
    
    5,214Remodeling and reimaging
    
    
    920
    
    
    
    1,378
    
    
    
    3,510Manufacturing
    
    
    3,549
    
    
    
    1,107
    
    
    
    389Other
    
    
    3,461
    
    
    
    2,170
    
    
    
    1,524Total Capital Expenditures
    
    $
    11,874
    
    
    $
    9,740
    
    
    $
    13,418
 Our capital budget for 2005 is $12.6 million and includes plans to open one new Company-operated
restaurant. The primary source of funding for these expenditures is expected to be cash provided
by operations. Capital spending could vary significantly from planned amounts as certain of these
expenditures are discretionary in nature. RHCs principal source of liquidity is dividends and other distributions from TRC. RHC is subject
to a Put option, which may require a significant distribution in 2005, to the extent permitted.
For additional details, please see the Cash Contractual Obligations and Off-Balance Sheet
Arrangements section below. The Company has a secured $25,000,000 revolving line of credit facility (the Credit Facility)
with a sub-limit for up to $7,500,000 of letters of credit. All amounts under the Credit Facility
bear interest at floating rates based on the agents base rate or Eurodollar rates as defined in
the agreement. All indebtedness under the Credit Facility is collateralized by a first priority
lien on substantially all of the assets of the Company. As of December 26, 2004, there were no
borrowings and approximately $5,968,000 of letters of credit outstanding under the Credit Facility.
The letters of credit are primarily utilized in conjunction with our workers compensation
programs. 18




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##### Table of Contents



At April 20, 2003, we failed to meet the criteria of one of the financial covenants of the Credit
Facility. On May 14, 2003, the Company executed an amendment to the Credit Facility that waived
the April 20, 2003 covenant violation, reduced the requirements of the financial covenants and
lowered the total amount available under the Credit Facility from $40,000,000 to $25,000,000. The
Company executed an amendment to the Credit Facility on March 25, 2004 that reduced the
requirements of the financial covenants at the end of the first quarter 2004 and thereafter.
Effective December 20, 2004, the Company executed an amendment to extend the maturity of the Credit
Facility to January 12, 2006 and to simplify the financial covenants. At December 26, 2004, the
Company was in compliance with the requirements of the financial covenants. We have outstanding $130 million of 10.125% Unsecured Senior Notes (the Notes) due December 15,
2007. Interest on the Notes is payable semi-annually on June 15 and December 15. The Notes may be
redeemed at any time at a redemption price of 101.688% through December 15, 2005, at which time the
Notes may be redeemed at par. We have outstanding $18 million of 11.25% Senior Discount Notes (the Discount Notes) maturing on
May 15, 2008. On November 15, 2001, we elected to begin accruing cash interest on the Discount
Notes. Cash interest is payable semi-annually on May 15 and November 15. On May 15, 2003, we
redeemed $8.4 million in accreted interest of the Discount Notes at a redemption price of 105.625%.
The Discount Notes may be redeemed at any time at a redemption price of 103.750% through May 15,
2005. On May 15, 2005, the redemption price decreases to 101.875%, and after May 15, 2006, the
Discount Notes may be redeemed at par. Our ability to make scheduled payments of principal, or to pay the interest or liquidated damages,
if any, on, or to refinance, our indebtedness, or to fund planned capital expenditures will depend
on our future performance, which, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our control. Based upon the
current level of operations, we believe that cash flow from operations and available cash, together
with available borrowings under the Credit Facility, will be adequate to meet our liquidity needs
for the foreseeable future. We may, however, need to refinance all or a portion of the principal
of the Discount Notes and the Notes on or prior to maturity. There can be no assurance that we
will generate sufficient cash flow from operations, or that future borrowings will be available
under the Credit Facility in an amount sufficient to enable us to service our indebtedness or to
fund our other liquidity needs. In addition, there can be no assurance that we will be able to
effect any such refinancing on commercially reasonable terms or at all. CASH CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS Cash Contractual Obligations: The following represents the contractual obligations and commercial commitments of the Company as
of December 26, 2004 (in thousands): Payments Due by PeriodTotal
    
    
    2005
    
    
    2006 - 2007
    
    
    2008 - 2009
    
    
    ThereafterLong-term debt
    
    $
    148,009
    
    
    $
    
    
    
    $
    130,000
    
    
    $
    18,009
    
    
    $
    Capital lease obligations
    
    
    989
    
    
    
    398
    
    
    
    478
    
    
    
    113
    
    
    
    Estimated interest payments
    
    
    47,784
    
    
    
    15,777
    
    
    
    31,208
    
    
    
    799
    
    
    
    Operating lease obligations
    
    
    70,317
    
    
    
    9,055
    
    
    
    17,222
    
    
    
    14,027
    
    
    
    30,013Purchase commitments
    
    
    66,160
    
    
    
    65,060
    
    
    
    1,100
    
    
    
    
    
    
    
    Total
    
    $
    333,259
    
    
    $
    90,290
    
    
    $
    180,008
    
    
    $
    32,948
    
    
    $
    30,013
 Additionally, we have $5,968,000 of letters of credit outstanding under the Credit Facility. The
letters of credit are primarily utilized in conjunction with our workers compensation programs.
The letters of credit expire on December 28, 2005. It is our intent to reissue the letters of
credit upon expiration. 19




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##### Table of Contents



Off-Balance Sheet Arrangements: In accordance with the definition under Securities and Exchange Commission rules, the following
qualify as off-balance sheet arrangements:  
    Any obligation under certain guarantees or contracts;
    A retained or contingent interest in assets transferred to an unconsolidated entity
or similar entity or similar arrangement that serves as credit, liquidity or market
risk support to that entity for such assets;
    Any obligation under certain derivative instruments;
    Any obligation under a material variable interest held by the registrant in an
unconsolidated entity that provides financing, liquidity, market risk or credit risk
support to the registrant, or engages in leasing, hedging or research and development
services with the registrant. Based on the above, the following represents the off-balance sheet arrangements for our Company. In 1999, TRC Realty LLC leased an aircraft for use by both FICC and TRC. The operating lease
expires in November 2009. During the third quarter of 2003, TRC Realty terminated its lease for
the corporate aircraft. In accordance with the terms of the lease, TRC Realty was required to pay
a Termination Value to the lessor upon termination of the lease. As a result, we incurred a loss
of approximately $950,000 on the termination of the lease and disposal of assets related to the
aircraft. Concurrently, TRC Realty entered into a new lease for a smaller and less expensive
aircraft, which will be used solely by us. During 2000, the Company entered into an agreement to guarantee fifty percent of borrowings up to a
total guarantee of $1,500,000 for use by a franchisee to remodel and upgrade existing restaurants.
As of December 26, 2004, there was $3,000,000 in borrowings outstanding under this agreement of
which the Company guaranteed $1,500,000. Under the provisions of FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, this guarantee has been determined by the Company not
to be a variable interest in the franchisee. Our predecessors entered into arrangements with several different parties which have reserved
territorial rights under which specified payments are to be made by us based on a percentage of
gross sales from certain restaurants and for new restaurants opened within certain geographic
regions. During 2004, we paid an aggregate of $2,656,000 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 and Bakeries in certain states. We are a wholly owned subsidiary of RHC. On March 21, 2005, RHC announced that it had retained an
investment bank to help RHC explore and evaluate a variety of financial and strategic alternatives
for the Perkins Restaurant and Bakery chain. The outstanding common shares of RHC not owned by Mr.
Smith (the Minority Shares) are subject to an option to require RHC to redeem such shares at any
time after December 22, 2004 at fair market value (the Put). As of December 31, 2004, the
Minority Shares represented 30% of the outstanding common stock of RHC. By letter agreement, dated
as of March 18, 2005, the holders of the Minority Shares agreed that they will not exercise the Put
while RHC was exploring its strategic alternatives; however, if an agreement relating to a
strategic transaction is not entered into by September 11, 2005 or a strategic transaction is not
consummated by January 9, 2006, the holders right to exercise the Put will be reinstated. Under
such letter agreement, RHC has agreed that if no strategic transaction is consummated within such
time period and the holders of the Minority Shares exercise their Put rights thereafter, then RHC
will, pursuant to the terms of the Put, complete the purchase of the Minority Shares put by the
holders. RHC has waived its right under the terms of the Put to commence a sale of the company to
complete such purchase, but this waiver would apply only to the first time the holders of Minority
Shares exercise their Put rights. 20




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RHC has a management fee agreement dated as of December 22, 1999, with BancBoston Ventures, Inc.
(BBV) whereby BBV provides certain consulting services to RHC. In consideration for these
services, a fee of $250,000 accrued annually through 2004 and $1,250,000 was paid by RHC on
December 22, 2004. During 2004, we declared and paid a dividend to RHC in the amount of $1,250,000
for the purpose of paying the management fee to BBV. Our payment of this dividend was in
compliance with the dividend restrictions under the Notes, the Discount Notes and the Credit
Facility. Additionally, RHC issued 50,000 shares of non-voting preferred stock on December 22, 1999. The
preferred stock is mandatorily redeemable for $1,000 per share (the Liquidation Value) plus all
accrued but unpaid dividends, if any, on December 22, 2006. Preferred dividends of 8% per annum of
the Liquidation Value of each share are payable quarterly. As of December 26, 2004, approximately
$24,357,000 of in-kind dividends had been paid through the issuance of additional shares of
preferred stock. Assuming a continuation of in-kind dividends, the redemption price on December 22,
2006 is estimated to be $87,044,000. The holders of preferred stock are entitled to be paid in cash
the Liquidation Value of each share of preferred stock before any payments are made to any holders
of common stock. The preferred stock is redeemable at RHCs option at any time prior to the
mandatory redemption date at the Liquidation Value plus a redemption premium as specified in RHCs
Charter. The redemption premium was 3% through December 21, 2002 after which the preferred stock is
redeemable at par plus accrued and unpaid dividends. RHC has no material assets other than its investment in us. Our ability to pay dividends to or make
distributions to RHC in order to redeem common or preferred shares is restricted under the Notes,
Discount Notes and the Credit Facility. Therefore, we may need to recapitalize or refinance all or
a portion of our obligations on or prior to maturity or mandatory redemption date. NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4.
This statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted
material. This statement requires that those items be recognized as current period charges
regardless of whether they meet the criterion of so abnormal. In addition, the statement
requires that allocation of fixed production overheads to the costs of conversion be based on the
normal capacity of the production facilities. The statement is effective for fiscal years
beginning after June 15, 2005. The Company does not believe that the implementation of this
statement will have a material effect on the financial position or results of operations of the
Company. In December 2004, FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB
Opinion No. 29.This statement addresses the measurement of exchanges of nonmonetary assets. It
eliminates the exception from fair value measurement for nonmonetary exchanges of similar
productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary
Transactions,and replaces it with an exception for exchanges that do not have commercial
substance. This statement specifies that a nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result of the exchange.
The provisions of this statement shall be effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005 and shall be applied on a prospective basis. The
Company has evaluated the impact of implementing SFAS No. 153 and has concluded that implementation
of the statement will not have a material effect on the financial position or results of operations
of the Company. 21




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In December 2004, the FASB issued SFAS No. 123, Share Based Payments (revised 2004). This
statement requires that the cost resulting from all share-based payment transactions be recognized
in the financial statements. It requires entities to apply a fair-value-based measurement method
in accounting for share-based payment transactions with employees, except for equity instruments
held by employee share ownership plans. However, this statement provides certain exceptions to
that measurement method if it is not possible to reasonably estimate the fair value of an award at
the grant date. A nonpublic entity also may choose to measure its liabilities under share-based
payment arrangements at intrinsic value. The statement also establishes fair value as the
measurement objective for transactions in which an entity acquires goods or services from
nonemployees in share-based payment transactions. This statement is effective for the Company with
the beginning of the 2006 fiscal year. Currently, the Company does not anticipate that the
implementation of the statement will have a material effect on the financial position or results of
operations of the Company. IMPACT OF INFLATION We do not believe that our operations are affected by inflation to a greater extent than are the
operations of others within the restaurant industry. In the past, we have generally been able to
offset the effects of inflation through selective menu price increases. IMPACT OF GOVERNMENTAL REGULATION A majority of our employees are paid hourly rates as determined by federal and state minimum wage
rate laws. Future increases in these rates could materially affect our cost of labor. We are
subject to various other regulatory requirements from federal, state and local organizations. The
Occupational Safety and Health Administration, the Food and Drug Administration, the Environmental
Protection Agency and other governmental agencies all maintain regulations with which we are
required to comply. ACCOUNTING REPORTING PERIOD Our financial reporting is based on thirteen four-week periods ending on the last Sunday in
December. The first quarter includes four four-week periods. The first, second, third and fourth
quarters of 2004 ended April 18, July 11, October 3, and December 26, respectively. FORWARD-LOOKING STATEMENTS This discussion contains forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations
that are subject to known and unknown risks, uncertainties and other factors that could cause
actual results to differ materially from those contemplated by the forward-looking statements.
Such factors include, but are not limited to, the following: general economic conditions,
competitive factors, consumer taste and preferences and adverse weather conditions. We do not
undertake to publicly update or revise the forward-looking statements even if experience or future
changes make it clear that the projected results expressed or implied therein will not be realized. 22




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Item 7A.Quantitative and Qualitative Disclosures About Market Risk. Interest Rate Risk.We currently have market risk-sensitive-instruments related to
interest rates. We have no significant exposure for changing interest rates on the Notes and
Discount Notes because the interest rates are fixed. We have outstanding long-term debt (exclusive
of capital leases) of $148 million at December 26, 2004 and December 28, 2003. Market risk for
fixed-rate, long-term debt is estimated as the potential decrease in fair value resulting from a
hypothetical 10% increase in interest rates and amounts to approximately $3.9 million as of
December 26, 2004 and $4.8 million as of December 28, 2003. The underlying fair values of our
long-term debt were estimated based on quoted market prices or on the current rates offered for
debt with similar terms and maturities. Currently, derivative instruments are not used to manage
interest rate risk. We have in place a $25 million line of credit facility that matures on January 12, 2006. All
borrowings under the facility bear interest at floating rates based on the agents base rate or
Eurodollar rates. We had no amounts outstanding under the line of credit facility at December 26,
2004. While changes in market interest rates would affect the cost of funds borrowed in the
future, we believe that the effect, if any, of reasonably possible near-term changes in interest
rates on our consolidated financial position, results of operations or cash flows would not 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, 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 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 could be subject to
price fluctuations are beef, pork, coffee, eggs, dairy products, wheat products and corn products.
We believe that we will be able to pass through increased commodity costs by adjusting menu pricing
in most cases. However, we believe that any changes in commodity pricing that cannot be offset by
changes in menu pricing or other product delivery strategies would not be material. 23




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Item 8.Financial Statements and Supplementary Data. RESPONSIBILITY FOR FINANCIAL STATEMENTS Our management is responsible for the preparation, accuracy and integrity of the financial
statements. These 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. The Board of Directors reviews the adequacy of our internal
accounting controls. PricewaterhouseCoopers LLP, our independent registered public accounting firm, performs an audit of
the financial statements. This includes consideration of certain components of our internal control
over financial reporting in determining the nature, timing and extent of audit tests and other
procedures they deem necessary to express an opinion on the fairness of the financial statements. 24




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Report of Independent Registered Public Accounting Firm To the Board of Directors of The Restaurant Company: In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, of stockholders investment and of cash flows present fairly, in all material
respects, the financial position of The Restaurant Company and subsidiaries (the Company) at
December 26, 2004 and December 28, 2003, and the results of its operations and its cash flows for
each of the three years in the period ended December 26, 2004 in conformity with accounting
principles generally accepted in the United States of America. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these statements 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. An audit 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, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. As described in Note 2 to the consolidated financial statements, the Company has restated its 2003
and 2002 financial statements. PricewaterhouseCoopers LLP /s/
Memphis, Tennessee May 25, 2005 25




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THE RESTAURANT COMPANY AND SUBSIDIARIES 
   Years EndedDecember
    
    
    December
    
    
    December26, 2004
    
    
    28, 2003
    
    
    29, 2002(Restated)
    
    
    (Restated)REVENUES:Food sales
    
    $
    319,737
    
    
    $
    311,002
    
    
    $
    315,256Franchise and other revenue
    
    
    21,604
    
    
    
    21,640
    
    
    
    22,200Total Revenues
    
    
    341,341
    
    
    
    332,642
    
    
    
    337,456COSTS AND EXPENSES:Cost of sales (excluding depreciation shown below):Food cost
    
    
    93,439
    
    
    
    89,490
    
    
    
    87,307Labor and benefits
    
    
    110,312
    
    
    
    110,115
    
    
    
    110,511Operating expenses
    
    
    64,397
    
    
    
    64,283
    
    
    
    65,892General and administrative
    
    
    30,959
    
    
    
    29,058
    
    
    
    30,696Depreciation and amortization
    
    
    16,720
    
    
    
    18,062
    
    
    
    21,214(Benefit from) provision for disposition of assets, net
    
    
    (109
    )
    
    
    336
    
    
    
    (775
    )Lease Termination
    
    
    
    
    
    
    761
    
    
    
    Asset write-down
    
    
    740
    
    
    
    455
    
    
    
    1,640Interest, net
    
    
    15,932
    
    
    
    16,398
    
    
    
    17,930Other, net
    
    
    (469
    )
    
    
    (494
    )
    
    
    (595
    )Total Costs and Expenses
    
    
    331,921
    
    
    
    328,464
    
    
    
    333,820INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    9,420
    
    
    
    4,178
    
    
    
    3,636PROVISION FOR INCOME TAXES
    
    
    (2,615
    )
    
    
    (715
    )
    
    
    (441
    )INCOME FROM CONTINUING OPERATIONS
    
    
    6,805
    
    
    
    3,463
    
    
    
    3,195DISCONTINUED OPERATIONS:Loss from discontinued operations of Sage Hen
    
    
    
    
    
    
    (154
    )
    
    
    (1,915
    )Income tax benefit
    
    
    
    
    
    
    58
    
    
    
    720LOSS FROM DISCONTINUED OPERATIONS
    
    
    
    
    
    
    (96
    )
    
    
    (1,195
    )NET INCOME
    
    $
    6,805
    
    
    $
    3,367
    
    
    $
    2,000
 The accompanying notes are an integral part of these consolidated balance sheets. 26




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THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts) December
    
    
    December26, 2004
    
    
    28, 2003(Restated)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    17,988
    
    
    $
    4,962Restricted cash
    
    
    5,853
    
    
    
    4,808Trade receivables, less allowance for doubtful accounts of $1,279 and $1,003
    
    
    10,268
    
    
    
    10,647Inventories, at the lower of first-in, first-out cost or market
    
    
    7,166
    
    
    
    6,199Prepaid expenses and other current assets
    
    
    1,228
    
    
    
    1,597Deferred income taxes
    
    
    2,420
    
    
    
    2,219Total current assets
    
    
    44,923
    
    
    
    30,432PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization
    
    
    109,959
    
    
    
    118,168GOODWILL
    
    
    26,582
    
    
    
    26,582INTANGIBLE ASSETS, net of accumulated amortization of $5,914 and $5,265
    
    
    3,268
    
    
    
    4,053DEFERRED INCOME TAXES
    
    
    10,524
    
    
    
    9,534OTHER ASSETS
    
    
    7,242
    
    
    
    6,933$
    202,498
    
    
    $
    195,702LIABILITIES AND STOCKHOLDERS INVESTMENTCURRENT LIABILITIES:Current maturities of capital lease obligations
    
    $
    331
    
    
    $
    466Accounts payable
    
    
    9,980
    
    
    
    11,133Franchisee advertising contributions
    
    
    3,851
    
    
    
    4,093Accrued expenses
    
    
    23,018
    
    
    
    21,273Total current liabilities
    
    
    37,180
    
    
    
    36,965CAPITAL LEASE OBLIGATIONS, less current maturities
    
    
    537
    
    
    
    869LONG-TERM DEBT
    
    
    148,009
    
    
    
    148,009OTHER LIABILITIES
    
    
    8,624
    
    
    
    7,299COMMITMENTS AND CONTINGENCIES (Notes 5 and 11)STOCKHOLDERS INVESTMENT:Common stock, $.01 par value, 100,000 shares authorized,
10,820 issued and outstanding
    
    
    1
    
    
    
    1Accumulated Other Comprehensive Income
    
    
    75
    
    
    
    42Retained Earnings
    
    
    8,072
    
    
    
    2,5178,148
    
    
    
    2,560$
    202,498
    
    
    $
    195,702
 The accompanying notes are an integral part of these consolidated balance sheets. 27




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THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS INVESTMENT
(In Thousands) AccumulatedOther
    
    
    RetainedCommon
    
    
    Comprehensive
    
    
    EarningsStock
    
    
    Income
    
    
    (Deficit)
    
    
    TotalBalance at December 30, 2001, as reported
    
    $
    1
    
    
    $
    
    
    
    $
    (2,449
    )
    
    $
    (2,448
    )Cumulative effect on prior years of restatement
    
    
    
    
    
    
    
    
    
    
    (401
    )
    
    
    (401
    )Balance at December 30, 2001, as restated
    
    
    1
    
    
    
    
    
    
    
    (2,850
    )
    
    
    (2,849
    )Net Income, as restated
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    2,000Balance at December 29, 2002, as restated
    
    
    1
    
    
    
    
    
    
    
    (850
    )
    
    
    (849
    )Net income, as restated
    
    
    
    
    
    
    
    
    
    
    3,367
    
    
    
    3,367Foreign Currency Translation Adjustment
    
    
    
    
    
    
    42
    
    
    
    
    
    
    
    42Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,409Balance at December 28, 2003, as restated
    
    
    1
    
    
    
    42
    
    
    
    2,517
    
    
    
    2,560Distribution
    
    
    
    
    
    
    
    
    
    
    (1,250
    )
    
    
    (1,250
    )Net income
    
    
    
    
    
    
    
    
    
    
    6,805
    
    
    
    6,805Foreign Currency Translation Adjustment
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    33Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,838Balance at December 26, 2004
    
    $
    1
    
    
    $
    75
    
    
    $
    8,072
    
    
    $
    8,148
 The accompanying notes are an integral part of these consolidated statements. 28




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THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands) Years EndedDecember
    
    
    December
    
    
    December26, 2004
    
    
    28, 2003
    
    
    29, 2002(Restated)
    
    
    (Restated)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    6,805
    
    
    $
    3,367
    
    
    $
    2,000Adjustments to reconcile net income
to net cash provided by operating activities:Depreciation and amortization
    
    
    16,720
    
    
    
    18,062
    
    
    
    21,385Accretion of Senior Discount Notes
    
    
    
    
    
    
    7
    
    
    
    25Payments on notes receivable of franchise fees
    
    
    268
    
    
    
    302
    
    
    
    407(Benefit from) provision for disposition of assets
    
    
    (109
    )
    
    
    336
    
    
    
    (493
    )Asset write-down
    
    
    740
    
    
    
    455
    
    
    
    2,666Other non-cash income and expense items, net
    
    
    752
    
    
    
    594
    
    
    
    498Net changes in other operating assets and liabilities
    
    
    (2,049
    )
    
    
    (2,762
    )
    
    
    (2,132
    )Total adjustments
    
    
    16,322
    
    
    
    16,994
    
    
    
    22,356Net cash provided by operating activities
    
    
    23,127
    
    
    
    20,361
    
    
    
    24,356CASH FLOWS FROM INVESTING ACTIVITIES:Cash paid for property and equipment
    
    
    (11,874
    )
    
    
    (9,740
    )
    
    
    (13,418
    )Proceeds from sale of property and equipment
    
    
    3,490
    
    
    
    29
    
    
    
    5,366Net cash used in investing activities
    
    
    (8,384
    )
    
    
    (9,711
    )
    
    
    (8,052
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments under capital lease obligations
    
    
    (467
    )
    
    
    (648
    )
    
    
    (992
    )Payments on long-term debt
    
    
    
    
    
    
    (14,603
    )
    
    
    (44,750
    )Proceeds from long-term debt
    
    
    
    
    
    
    3,750
    
    
    
    30,750Distribution to RHC
    
    
    (1,250
    )
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    (1,717
    )
    
    
    (11,501
    )
    
    
    (14,992
    )Net increase (decrease) in cash and cash equivalents
    
    
    13,026
    
    
    
    (851
    )
    
    
    1,312CASH AND CASH EQUIVALENTS:Balance, beginning of year
    
    
    4,962
    
    
    
    5,813
    
    
    
    4,501Balance, end of year
    
    $
    17,988
    
    
    $
    4,962
    
    
    $
    5,813
 The accompanying notes are an integral part of these consolidated statements. 29




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THE RESTAURANT COMPANY AND SUBSIDIARIES 
 NOTES TO FINANCIAL STATEMENTS
 DECEMBER 26, 2004
 (1) ORGANIZATION: Organization 
The Restaurant Company (TRC, Perkins or the Company) is a Delaware corporation and is a
wholly- owned subsidiary of The Restaurant Holding Corporation (RHC). RHC is owned by Donald N.
Smith (Mr. Smith), BancBoston Ventures, Inc. (BBV), a subsidiary of Fleet Boston Financial
Corp., and others who own 70.0%, 21.0% and 9.0%, respectively. Mr. Smith is also the Chairman of Friendly Ice Cream Corporation (FICC), which operates and
franchises approximately 535 restaurants, located primarily in the northeastern United States. We operate and franchise mid-scale restaurants that serve a wide variety of high quality,
moderately priced breakfast, lunch, and dinner entrees and bakery products. TRC and its franchisees
operate under the names Perkins Restaurant and Bakery, Perkins Family Restaurant, Perkins
Family Restaurant and Bakery and Perkins Restaurant. Our restaurants provide table service and
are open seven days a week. The restaurants are located in 34 states with the largest number in
Minnesota, Florida, Pennsylvania, Ohio, and Wisconsin. There are sixteen franchised restaurants
located in Canada. We also offer cookie doughs, muffin batters, pancake mixes, pies and other food
products for sale to restaurants operated by us and our franchisees and bakery and food service
distributors through Foxtail Foods (Foxtail), our manufacturing division. TRC Realty LLC 
TRC Realty LLC is a 100% owned subsidiary of TRC. TRC Realty LLCs sole purpose is the operation
of an airplane that is used for business purposes of TRC. Perkins Finance Corp. 
Perkins Finance Corp. (PFC) is a wholly-owned subsidiary of TRC, and was created solely to act as
the co-issuer of our 10.125% Senior Notes. PFC has no operations and does not have any revenues or
assets. The Restaurant Company of Minnesota 
On September 30, 2000, we contributed all of the restaurant, office and related assets owned by us
and used in our operations in Minnesota and North Dakota and all of our trademarks and service
marks to The Restaurant Company of Minnesota (TRCM), a newly created, wholly-owned subsidiary.
TRCM was formed to conduct our operations in Minnesota and North Dakota as well as manage the
rights and responsibilities related to the contributed trademarks and service marks. TRCM granted
us a license to use, and the right to license others to use, the trademarks and service marks used
in the Perkins system. Basis of Presentation 
The accompanying financial statements include the consolidated results of TRC and subsidiaries for
the fiscal years 2004, 2003 and 2002. All material intercompany transactions have been eliminated
in consolidation. Certain prior year amounts have been reclassified to conform to current year presentation. Accounting Reporting Period 
Our financial reporting is based on thirteen four-week periods ending on the last Sunday in
December. The first quarter includes four four-week periods. The first, second, third and fourth
quarters of 2004 ended April 18, July 11, October 3, and December 26, respectively. 30




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(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Restatement of Previously Issued Consolidated Financial Statements  Lease Accounting We began a review of our lease accounting policies following announcements beginning in December
2004 that several restaurant companies were revising their accounting practices for leases. As a
result of our review, we determined that the amortization of leasehold improvements was not in
accordance with accounting principles generally accepted in the United States. In addition, we
determined that there were errors in the computation of rental expense and deferred rents, which
were primarily caused by the improper determination of the commencement date of certain lease terms
and improper straight-line rentals of certain restaurants. We identified certain situations where leasehold improvements were being amortized over their
useful life rather than the shorter of the lease term, as defined in FAS 13, as amended, or their
useful life. The lease term includes the non-cancelable term of the lease plus any renewal options
where renewals are reasonably assured of exercise as determined at inception of the lease.
Renewals are reasonably assured of exercise if failure to renew the lease would impose an economic
penalty to the lessee. As the Company has determined that in most cases renewals are not reasonably
assured of exercise, the initial non-cancelable lease term, generally 20 years, represent the lease
term, as defined. Historically, the Company maintained a policy for recognizing straight-line
rentals over the initial lease term commencing when rental payments were due. The Company
corrected its accounting to report rental expense over the lease term commencing on the date that
the Company obtains control over the asset to be leased. The restatement adjustments correct (i)
the depreciation expense for the applicable period and accumulated depreciation on the balance
sheet to reflect the amortization of the lease related assets over the shorter of their useful life
or the lease term and (ii) the determination of rental expense over the lease term commencing when
the Company has control over the property to be leased. As a result of our review of lease accounting, we revalued the assumed liabilities at the date of
the purchase accounting date (December 22, 1997) related to lease obligations. The Company had
incorrectly recorded the deferred rent liability as recorded on the acquirees financial statements
rather than eliminating this liability. The impact of these restatement adjustments reduced
goodwill and increased accumulated deficit by $503,000. The restatement adjustments correct our historical accounting for leases and had no impact on
revenues, comparable store sales or net operating cash flows. The impact of the restatement
adjustments, net of tax effects, reduced net income by $161,000 and $167,000 for 2003 and 2002. We
have restated our consolidated balance sheet at December 28, 2003 and the consolidated statements
of income, stockholders equity and cash flows for the years ended December 28, 2003 and December
29, 2002. The impact of the restatement adjustments on periods prior to 2002 has been reflected as
a cumulative effect adjustment as a reduction to accumulated deficit of $401,000 as of December 30,
2001 in the accompanying statements of stockholders investment. Discontinued Operations Additionally, we restated our 2002 and 2003 financial statements to correctly classify the closure
of two Sage Hen restaurants as discontinued operations. Previously, the Company had presented the
disposition of these components within income from continuing operations. The effect of this
restatement is to reclassify as discontinued operations the operations of the two Sage Hen
restaurants as well as the charges associated with closing the restaurants in 2002. In 2003, the
Company recorded an additional charge to discontinued operations which represents a change in
estimate related to the continuing lease obligation for one of the restaurants. This change in
estimate had previously been reflected within continuing operations and has been restated to be
classified within discontinued operations. These restatement adjustments reclassify revenues and
expenses between continuing operations and discontinued operations and have no impact on reported
net income for 2002 and 2003. Note 18 provides additional information regarding discontinued operations. 31




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We did not amend our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q
for the restatement adjustments. The effects of our restatement on previously reported
Consolidated Financial Statements as of December 28, 2003 and for the years ended December 28, 2003
and December 29, 2002 are shown in the following tables. The footnotes included elsewhere herein
have also been restated for these items as applicable. The following table reflects the effect of the restatement adjustments on the Consolidated
Statements of Income (in thousands): 2003
    
    
    2002As Reported
    
    
    As Restated
    
    
    As Reported
    
    
    As RestatedSelected Statements of Income Data:Food sales (a)
    
    
    
    
    
    
    
    
    
    $
    316,958
    
    
    $
    315,256Total Revenues (a)
    
    
    
    
    
    
    
    
    
    
    339,158
    
    
    
    337,456Food cost (a)
    
    
    
    
    
    
    
    
    
    
    87,866
    
    
    
    87,307Labor and benefits (a)
    
    
    
    
    
    
    
    
    
    
    111,502
    
    
    
    110,511Operating expenses (a)(b)
    
    $
    64,405
    
    
    $
    64,283
    
    
    
    66,418
    
    
    
    65,892Depreciation and amortization (a)(b)
    
    
    17,832
    
    
    
    18,062
    
    
    
    21,194
    
    
    
    21,214Benefit from disposition of assets (a)
    
    
    
    
    
    
    
    
    
    
    (493
    )
    
    
    (775
    )Asset write-down (a)
    
    
    
    
    
    
    
    
    
    
    2,666
    
    
    
    1,640Total costs and expenses (a)(b)
    
    
    328,361
    
    
    
    328,464
    
    
    
    337,170
    
    
    
    333,820Income from continuing operations
before income taxes (a)(b)
    
    
    4,281
    
    
    
    4,178
    
    
    
    1,998
    
    
    
    3,636(Provision for) Benefit from
income taxes (a)(b)
    
    
    (753
    )
    
    
    (715
    )
    
    
    179
    
    
    
    (441
    )Income from continuing operations (a)(b)
    
    
    
    
    
    
    3,463
    
    
    
    
    
    
    
    3,195Loss from discontinued operations (a)
    
    
    
    
    
    
    (154
    )
    
    
    
    
    
    
    (1,915
    )Income tax benefit (a)
    
    
    
    
    
    
    58
    
    
    
    
    
    
    
    720Loss on discontinued operations (a)
    
    
    
    
    
    
    (96
    )
    
    
    
    
    
    
    (1,195
    )Net income (a)(b)
    
    
    3,528
    
    
    
    3,367
    
    
    
    2,167
    
    
    
    2,000
 (a) Change related to the Sage Hen discontinued operations restatement adjustments (b) Change related to the Lease Accounting restatement adjustments The following table reflects the effect of the restatement adjustments on the Consolidated Balance
Sheets (in thousands): 2003As Reported
    
    
    As RestatedSelected Balance Sheet Data:Property and Equipment, net
    
    $
    118,848
    
    
    $
    118,168Goodwill
    
    
    27,035
    
    
    
    26,582Deferred Income Taxes
    
    
    9,097
    
    
    
    9,534Total Assets
    
    
    196,322
    
    
    
    195,702Accrued Expenses
    
    
    21,164
    
    
    
    21,273Total Current Liabilities
    
    
    36,856
    
    
    
    36,965Retained Earnings
    
    
    3,246
    
    
    
    2,517Total Stockholders Investment
    
    
    3,289
    
    
    
    2,560
 32




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The following table reflects the effect of the restatement adjustments on the Consolidated
Statements of Cash Flows (in thousands): 2003
    
    
    2002As Reported
    
    
    As Restated
    
    
    As Reported
    
    
    As RestatedSelected Cash Flow Data:Net Income
    
    $
    3,528
    
    
    $
    3,367
    
    
    $
    2,167
    
    
    $
    2,000Depreciation and Amortization
    
    
    17,832
    
    
    
    18,062
    
    
    
    21,194
    
    
    
    21,385Net changes in other operating assets
and liabilities
    
    
    (2,693
    )
    
    
    (2,762
    )
    
    
    (2,108
    )
    
    
    (2,132
    )
 Estimates 
The presentation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. Concentration of Credit Risk 
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 FDIC insurance limits. The Company
has not experienced any losses with respect to bank balances in excess of government provided
insurance. Cash Equivalents 
We consider all investments with an original maturity of three months or less to be cash
equivalents. Revenue Recognition 
Revenue at Company-operated restaurants is recognized as customers pay for products at the time of
sale. Revenue recognition at Foxtail occurs upon the shipment of product to the distributor. Our franchisees are required to pay an initial fee to us when each franchise is granted. These fees
are not recognized as income until the restaurants open. We also receive franchise royalties
ranging from one to six percent of the gross sales of each franchised restaurant. These royalties
are recorded as income in the period earned. Advertising 
We include the costs of advertising in operating expenses as incurred. Advertising expense was
$12,006,000, $13,053,000 and $13,853,000 for the fiscal years 2004, 2003 and 2002, respectively. Property and Equipment 
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 income statement. Goodwill and Intangible Assets 
As of December 31, 2001, we adopted Statement of Financial Accounting Standards (SFAS) 142,
Goodwill and Other Intangible Assets. Under SFAS 142, goodwill is no longer amortized but is tested
for impairment using a fair value approach, at the reporting unit level. A reporting unit is the
operating segment, or a business one level below that operating segment (the component level) if
discrete financial information is prepared and regularly reviewed by management at the component
level. We have determined that our operating segments are our reporting units under the provisions
of SFAS 142. 33




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SFAS 142 requires a two-step process for testing impairment. First, the fair value of each
reporting unit is compared to its carrying value to determine whether an indication of impairment
exists. The fair value of each reporting unit is determined using a discounted cash flow analysis
and comparative market multiples. If an impairment is indicated, then the fair value of the
reporting units goodwill is determined by allocating the units fair value to its assets and liabilities (including any unrecognized
intangible assets) as if the reporting unit had been acquired in a business combination. The
amount of impairment for goodwill and other intangible assets is measured as the excess of its
carrying value over its fair value. As required by SFAS No. 142, we completed a transitional
impairment test for goodwill as of December 30, 2001 and also an impairment test as of December 26,
2004, December 28, 2003 and December 29, 2002. As a result of these tests, we did not record any
impairment of our goodwill. We amortize the cost of other intangibles over their estimated useful lives unless such lives are
deemed indefinite. Amortizable intangible assets are tested for impairment based on undiscounted
cash flows and, if impaired, written down to fair value based on either discounted cash flows or
appraised values. Intangible assets with indefinite lives are tested for impairment and written
down to fair value as required. Income Taxes 
Deferred income taxes are provided for the tax effect of temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial statements. We use the
asset and liability method to account for income taxes, which requires deferred taxes to be
recorded at the statutory rate expected to be in effect when the taxes are paid. We record a
valuation allowance to reduce deferred tax assets to the balance that is more likely than not to be
realized. 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. Impairment of Long-Lived Assets 
Pursuant to SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, we
evaluate the recoverability of assets (including intangibles) when events and circumstances
indicate that assets might be impaired. For such assets, we determine impairment by comparing the
undiscounted future cash flows estimated to be generated by these assets to their respective
carrying amounts. Where an indication of impairment exists, we generally estimate undiscounted
future cash flows at the level of individual restaurants or manufacturing facilities. In the event
an impairment exists, a loss is recognized based on the amount by which the carrying value exceeds
the fair value of the asset. Assets held for disposition are valued at the lower of historical
cost, net of accumulated depreciation, or fair market value less disposition cost. Insurance Accruals 
We are self-insured up to certain limits for costs associated with workers compensation claims,
property claims and benefits paid under employee health care programs. At December 26, 2004 and
December 28, 2003, we had total self-insurance accruals reflected in our balance sheet of
approximately $5.7 million and $4.7 million, respectively. We account for the workers compensation costs primarily through actuarial methods, which develop
estimates of the undiscounted 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 date. We account for benefits paid under employee health care
programs using historical lag information as the basis for estimating expenses incurred as of the
balance sheet date. Operating Leases 
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 is included in accrued expenses in the consolidated balance sheets. 34




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Perkins Marketing Fund 
The Company has maintained a 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. Effective with the third quarter of 2003, the Company consolidated
the Marketing Fund with TRC. Accordingly, the Company has recorded $5,853,000 and $4,808,000 as of
December 26, 2004 and December 28, 2003, respectively, of restricted cash on its balance sheet that
represents the funds contributed by TRC and the franchisees specifically for the purpose of
advertising. The Company has also recorded liabilities of approximately $1,442,000 and $1,392,000
as of December 26, 2004 and December 28, 2003, respectively, for accrued advertising, which is
included in accrued expenses on the accompanying balance sheet, and approximately $3,851,000 and
$4,093,000 as of December 26, 2004 and December 28, 2003, respectively, which represents franchisee
contributions for advertising services not yet provided. The results of operations of the
Marketing Fund primarily consist of general and administrative expenses and interest income, both
of which are immaterial to the Company as a whole. New Accounting Pronouncements 
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4.
This statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted
material. This statement requires that those items be recognized as current period charges
regardless of whether they meet the criterion of so abnormal. In addition, the statement
requires that allocation of fixed production overheads to the costs of conversion be based on the
normal capacity of the production facilities. The statement is effective for fiscal years
beginning after June 15, 2005. The Company does not believe that the implementation of this
statement will have a material affect on the financial position or results of operations of the
Company. In December 2004, FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB
Opinion No. 29.This statement addresses the measurement of exchanges of nonmonetary assets. It
eliminates the exception from fair value measurement for nonmonetary exchanges of similar
productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary
Transactions,and replaces it with an exception for exchanges that do not have commercial
substance. This statement specifies that a nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result of the exchange.
The provisions of this statement shall be effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005 and shall be applied on a prospective basis. The
Company has evaluated the impact of implementing SFAS No. 153 and has concluded that implementation
of the statement will not have a material affect on the financial position or results of operations
of the Company. In December 2004, the FASB issued SFAS No. 123, Share Based Payments (revised 2004). This
statement requires that the cost resulting from all share-based payment transactions be recognized
in the financial statements. It requires entities to apply a fair-value-based measurement method
in accounting for share-based payment transactions with employees, except for equity instruments
held by employee share ownership plans. However, this statement provides certain exceptions to
that measurement method if it is not possible to reasonably estimate the fair value of an award at
the grant date. A nonpublic entity also may choose to measure its liabilities under share-based
payment arrangements at intrinsic value. The statement also establishes fair value as the
measurement objective for transactions in which an entity acquires goods or services from
nonemployees in share-based payment transactions. This statement is effective for the Company with
the beginning of the 2006 fiscal year. Currently, the Company does not anticipate that the
implementation of the statement will have a material effect on the financial position or results of
operations of the Company. 35




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(3) SUPPLEMENTAL CASH FLOW INFORMATION: The decrease in cash and cash equivalents due to changes in operating assets and liabilities for
the past three years consisted of the following (in thousands): December
    
    
    December
    
    
    December26, 2004
    
    
    28, 2003
    
    
    29, 2002(Restated)
    
    
    (Restated)(Increase) Decrease in:Receivables
    
    $
    (705
    )
    
    $
    (1,511
    )
    
    $
    (1,994
    )Inventories
    
    
    (967
    )
    
    
    (1,017
    )
    
    
    148Prepaid expenses and other current assets
    
    
    369
    
    
    
    380
    
    
    
    715Other assets
    
    
    (1,400
    )
    
    
    (1,277
    )
    
    
    (1,242
    )Increase (Decrease) in:Accounts payable
    
    
    (1,153
    )
    
    
    (2,999
    )
    
    
    1,032Accrued expenses
    
    
    481
    
    
    
    2,509
    
    
    
    (1,178
    )Other liabilities
    
    
    1,326
    
    
    
    1,153
    
    
    
    387$
    (2,049
    )
    
    $
    (2,762
    )
    
    $
    (2,132
    )
 Other supplemental cash flow information for the past three years consisted of the following (in
thousands): December
    
    
    December
    
    
    December26, 2004
    
    
    28, 2003
    
    
    29, 2002Cash paid for interest
    
    $
    15,555
    
    
    $
    16,138
    
    
    $
    17,124Income taxes paid
    
    
    4,487
    
    
    
    1,281
    
    
    
    3,063Income tax refunds received
    
    
    98
    
    
    
    80
    
    
    
    1,666
 During 2004, the Company has converted approximately $97,000 of accounts receivable to long-term
notes receivable. 36




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(4) PROPERTY AND EQUIPMENT: Property and equipment consisted of the following for the past two years (in thousands): December
    
    
    December26, 2004
    
    
    28, 2003(Restated)Owned:Land and land improvements
    
    $
    36,422
    
    
    $
    37,000Buildings
    
    
    95,380
    
    
    
    95,220Leasehold improvements
    
    
    54,380
    
    
    
    52,817Equipment
    
    
    104,270
    
    
    
    99,150Construction in progress
    
    
    284
    
    
    
    1,370290,736
    
    
    
    285,557Less  accumulated depreciation and amortization
    
    
    (181,590
    )
    
    
    (170,331
    )109,146
    
    
    
    115,226Property under Capital Lease:Buildings
    
    
    17,116
    
    
    
    18,206Less  accumulated amortization
    
    
    (16,764
    )
    
    
    (17,421
    )352
    
    
    
    785Assets Held for Sale
    
    
    461
    
    
    
    2,157$
    109,959
    
    
    $
    118,168
 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 shorter of the useful lives or the lease terms. A summary of the useful lives is as
follows: YearsOwned:Land improvements
    
    
    3 - 20Buildings
    
    
    20 - 30Leasehold improvements
    
    
    3 - 20Equipment
    
    
    1 - 7Property under Capital Lease:Buildings
    
    
    20
 37




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As of December 26, 2004, we owned one property held for disposal with a total carrying value of
$461,000. This property is currently vacant. The assets are reflected in the accompanying balance
sheet at the lower of historical cost, net of accumulated depreciation, or fair market value less
disposition costs. Depreciation is not recorded on assets held for sale. Related to this
property, our results of operations include a loss of $58,000 for 2004, income of $32,000 for 2003
and a loss of $9,000 for 2002. (5) LEASES: As of December 26, 2004, we operated 153 full-service restaurants as follows: 70 with both land and building leased
67 with both land and building owned
16 with only the land leased As of December 26, 2004, we either leased or subleased thirteen properties to others as follows: 6 with both land and building leased
4 with both land and building owned
3 with only the land leased Most of our restaurant leases have an initial term of 20 years and generally provide for two to
four renewals of five years each. Certain leases provide for minimum payments plus a percentage of
sales in excess of stipulated amounts. Future minimum payments related to non-cancelable leases that have initial or remaining lease terms
in excess of one year as of December 26, 2004 were as follows (in thousands): Lease ObligationsCapital
    
    
    Operating2005
    
    $
    398
    
    
    $
    9,0552006
    
    
    312
    
    
    
    8,9322007
    
    
    166
    
    
    
    8,2902008
    
    
    113
    
    
    
    7,5282009
    
    
    
    
    
    
    6,499Thereafter
    
    
    
    
    
    
    30,013Total minimum lease payments
    
    
    989
    
    
    $
    70,317Less:Amounts representing interest
    
    
    (121
    )Capital lease obligations
    
    $
    868
 38




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##### Table of Contents



Future minimum gross rental revenue as of December 26, 2004, were as follows (in thousands): Amounts Receivable AsLessor
    
    
    Sublessor2005
    
    $
    320
    
    
    $
    8242006
    
    
    320
    
    
    
    6602007
    
    
    291
    
    
    
    6602008
    
    
    145
    
    
    
    6522009
    
    
    151
    
    
    
    612Thereafter
    
    
    442
    
    
    
    2,489Total minimum lease rentals
    
    $
    1,669
    
    
    $
    5,897
 The net rental expense included in the accompanying Consolidated Statements of Income for operating
leases was as follows for the past three years (in thousands): 2003
    
    
    20022004
    
    
    (Restated)
    
    
    (Restated)Minimum rentals
    
    $
    10,173
    
    
    $
    9,941
    
    
    $
    9,751Contingent rentals
    
    
    823
    
    
    
    624
    
    
    
    850Less  sublease rentals
    
    
    (677
    )
    
    
    (573
    )
    
    
    (615
    )$
    10,319
    
    
    $
    9,992
    
    
    $
    9,986
 Sublease rentals are recorded in other expenses in the accompanying Consolidated Statements of
Income. (6) GOODWILL AND INTANGIBLE ASSETS: The following schedule presents the carrying amount of goodwill attributable to each reportable
operating segment and changes therein: TotalRestaurants
    
    
    Franchise
    
    
    Manufacturing
    
    
    Other
    
    
    CompanyBalance as of December 29, 2002
    
    $
    13,893
    
    
    $
    12,689
    
    
    $
    
    
    
    $
    
    
    
    $
    26,582Changes in the carrying amount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance as of December 28, 2003
    
    $
    13,893
    
    
    $
    12,689
    
    
    $
    
    
    
    $
    
    
    
    $
    26,582Changes in the carrying amount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance as of December 26, 2004
    
    $
    13,893
    
    
    $
    12,689
    
    
    $
    
    
    
    $
    
    
    
    $
    26,582
 39




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##### Table of Contents



In connection with adopting SFAS No. 142, we also reassessed the useful lives and the
classification of our identifiable intangible assets other than goodwill and determined that they
continue to be appropriate. The components of our intangible assets are as follows (in thousands): 2004
    
    
    2003Present value of estimated future royalty fee income
being amortized ratably over the remaining lives of
the franchise agreements
    
    $
    9,182
    
    
    $
    9,318Less  Accumulated Amortization
    
    
    (5,914
    )
    
    
    (5,265
    )Total
    
    $
    3,268
    
    
    $
    4,053
 Additionally, during 2004 we recorded an impairment charge of $136,000 related to intangible assets
on specifically identifiable franchise locations that ceased operations. Amortization expense for intangible assets was $649,000, $684,000 and $930,000 for 2004, 2003 and
2002, respectively. Estimated amortization expense for the five succeeding fiscal years is as
follows (in thousands): EstimatedAmortization Expense2005
    
    $
    6252006
    
    
    5242007
    
    
    5192008
    
    
    2792009
    
    
    279
 (7) ACCRUED EXPENSES: Accrued expenses consisted of the following (in thousands): 20032004
    
    
    (Restated)Payroll and related benefits
    
    $
    10,566
    
    
    $
    8,734Property, real estate and sales taxes
    
    
    2,683
    
    
    
    2,677Insurance
    
    
    1,480
    
    
    
    1,257Rent
    
    
    1,669
    
    
    
    1,351Advertising
    
    
    1,280
    
    
    
    1,392Other
    
    
    5,340
    
    
    
    5,862$
    23,018
    
    
    $
    21,273
 40




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(8) LONG-TERM DEBT: Long-term debt consisted of the following (in thousands): 2004
    
    
    200310.125% Unsecured Senior Notes, due December 15, 2007
    
    $
    130,000
    
    
    $
    130,00011.25% Unsecured Senior Discount Notes, due May 15, 2008
    
    
    18,009
    
    
    
    18,009Revolving credit facility, due January 12, 2006
    
    
    
    
    
    
    148,009
    
    
    
    148,009Less current maturities
    
    
    
    
    
    
    $
    148,009
    
    
    $
    148,009
 We have outstanding $130,000,000 of 10.125% Unsecured Senior Notes (the Notes) due December 15,
2007. Interest on the Notes is payable semi-annually on June 15 and December 15. The Notes may be
redeemed at any time at a redemption price of 101.688% through December 15, 2005. After December
15, 2005, the Notes may be redeemed at par. We have a secured $25,000,000 revolving line of credit facility (the Credit Facility) with a
sub-limit for up to $7,500,000 of letters of credit. All amounts under the Credit Facility bear
interest at floating rates based on the agents base rate or Eurodollar rates as defined in the
agreement. All indebtedness under the Credit Facility is collateralized by a first priority lien
on substantially all of the assets of the Company. As of December 26, 2004, there were no
borrowings and approximately $5,968,000 of letters of credit outstanding under the Credit Facility. At April 20, 2003, we failed to meet the criteria of one of the financial covenants of the Credit
Facility. On May 14, 2003, we executed an amendment to the Credit Facility that waived the April
20, 2003 covenant violation, reduced the requirements of the financial covenants and lowered the
total amount available under the Credit Facility from $40,000,000 to $25,000,000. We executed an
amendment to the Credit Facility on March 25, 2004 that reduced the requirements of the financial
covenants at the end of the first quarter 2004 and thereafter. Effective December 20, 2004, we
executed an amendment to extend the maturity of the Credit Facility to January 12, 2006 and to
simplify the financial covenants. At December 26, 2004, we were in compliance with the
requirements of the financial covenants. We have outstanding $18,009,000 of 11.25% Senior Discount Notes (the Discount Notes) maturing on
May 15, 2008. On November 15, 2001, we elected to begin accruing cash interest on the Discount
Notes. Cash interest is payable semi-annually on May 15 and November 15. On May 15, 2003, we
redeemed $8,383,000 in principal on the Discount Notes at a redemption price of 105.625%. The
Discount Notes may be redeemed at any time at a redemption price of 103.750% through May 15, 2005.
On May 15, 2005, the redemption price decreases to 101.875%, and after May 15, 2006, the Discount
Notes may be redeemed at par. In connection with the issuance of the Notes, the Discount Notes and obtaining the Credit Facility,
we incurred deferred financing costs of approximately $6,836,000 that are being amortized over the
terms of the debt agreements. The unamortized balance of these costs was $1,487,000 as of December
26, 2004. Amortization of deferred financing costs of $662,000, $633,000 and $940,000 for 2004,
2003 and 2002, respectively, are included in interest, net in the accompany Consolidated Statements
of Income. 41




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##### Table of Contents



Based on the borrowing rates currently available for debt with similar terms and maturities, the
approximate fair market value of our long-term debt was as follows (in thousands): 2004
    
    
    200310.125% Unsecured Senior Notes
    
    $
    130,654
    
    
    $
    130,55911.25% Unsecured Senior Discount Notes
    
    
    18,087
    
    
    
    18,196
 Because our revolving line of credit borrowings bear interest at current market rates, we believe
that any related liabilities reflected in the accompanying balance sheets approximated fair market
value. Pursuant to the Notes, the Discount Notes and the Credit Facility, we are subject to certain
restrictions which limit additional indebtedness. Additionally, among other restrictions, the
Credit Facility limits our capital expenditures and additional indebtedness and requires us to
maintain specified financial ratios and a minimum level of annual earnings before interest, taxes,
depreciation and amortization. At December 26, 2004, we were in compliance with all such
requirements. A continuing default under the Credit Facility could result in a default under the
Notes and the Discount Notes. In the event of such a default and under certain circumstances, the
trustee or the holders of the Notes or the Discount Notes could then declare the respective notes
due and payable immediately. The Notes, the Discount Notes and the Credit Facility restrict our ability to pay dividends or
distributions to our equity holders. If no default or event of default exists, we are generally
allowed to pay dividends or distributions subject to all of the following restrictions: 1. if at the time of such dividend or distribution we would have been allowed to incur at
least $1.00 of additional indebtedness under fixed charge coverage ratio tests as defined
in the 11.25% Senior Discount Note Indenture and the 10.125% Senior Note Indenture (the
Indentures). 2. under the Discount Notes, if such dividend or distribution is less than the sum of 50%
of consolidated net income from July 1, 1998 through the end of the most recent fiscal
quarter plus 100% of any contribution to or net proceeds from issuance of our common equity
plus additional dividends not to exceed $5 million after the date of the Indenture. 3. under the Notes, in an aggregate amount after December 22, 1997 equal to 50% of positive
net income, after tax distributions, from January 1, 1998 through the end of the most
recently ended fiscal quarter plus additional dividends not to exceed $5 million after the
date of the Indenture. These available amounts are reduced by dividends paid as well as certain other restricted payments
as defined in the Indentures. 42




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We are a wholly owned subsidiary of RHC. On March 21, 2005, RHC announced that it had retained an
investment bank to help RHC explore and evaluate a variety of financial and strategic alternatives
for the Perkins Restaurant and Bakery chain. The outstanding common shares of RHC not owned by Mr.
Smith (the Minority Shares) are subject to an option to require RHC to redeem such shares at any
time after December 22, 2004 at fair market value (the Put). As of December 31, 2004, the
Minority Shares represented 30% of the outstanding common stock of RHC. By letter agreement, dated
as of March 18, 2005, the holders of the Minority Shares agreed that they will not exercise the Put
while RHC was exploring its strategic alternatives; however, if an agreement relating to a
strategic transaction is not entered into by September 11, 2005 or a strategic transaction is not
consummated by January 9, 2006, the holders right to exercise the Put will be reinstated. Under
such letter agreement, RHC has agreed that if no strategic transaction is consummated within such
time period and the holders of the Minority Shares exercise their Put rights thereafter, then RHC
will, pursuant to the terms of the Put, complete the purchase of the Minority Shares put by the
holders. RHC has waived its right under the terms of the Put to commence a sale of the company to
complete such purchase, but this waiver would apply only to the first time the holders of Minority
Shares exercise their Put rights. RHC has a management fee agreement dated as of December 22, 1999, with BancBoston Ventures, Inc.
(BBV) whereby BBV provides certain consulting services to RHC. In consideration for these
services, a fee of $250,000 accrued annually through 2004 and $1,250,000 was paid by RHC on
December 22, 2004. During 2004, we declared and paid a dividend to RHC in the amount of $1,250,000
for the purpose of paying the management fee to BBV. Our payment of this dividend was in
compliance with the dividend restrictions under the Notes, the Discount Notes and the Credit
Facility. Scheduled annual principal maturities of long-term debt for the five years subsequent to December
26, 2004, are as follows: Amount2005
    
    $
    2006
    
    
    2007
    
    
    130,0002008
    
    
    18,0092009
    
    
    Thereafter
    
    
    $
    148,009
 No interest expense was capitalized in connection with our construction activities during 2004 and
2003. Interest expense capitalized equaled approximately $28,000 for the year ended December 29,
2002. 43




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##### Table of Contents



(9) INCOME TAXES: We file a consolidated Federal income tax return with RHC. For state purposes, each subsidiary
generally files a separate return. The following is a summary of the components of the provision for income taxes attributable to
continuing operations for the past three years (in thousands): 2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Current:Federal
    
    $
    3,124
    
    
    $
    1,853
    
    
    $
    2,608State and local
    
    
    683
    
    
    
    344
    
    
    
    2633,807
    
    
    
    2,197
    
    
    
    2,871Deferred:Federal
    
    
    (1,125
    )
    
    
    (1,665
    )
    
    
    (2,345
    )State and local
    
    
    (67
    )
    
    
    183
    
    
    
    (85
    )(1,192
    )
    
    
    (1,482
    )
    
    
    (2,430
    )$
    2,615
    
    
    $
    715
    
    
    $
    441
 A reconciliation of the statutory Federal income tax rate to the Companys effective income tax
rate attributable to continuing operations is as follows: 2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Federal
    
    
    34.2
    %
    
    
    34.2
    %
    
    
    34.2
    %Federal income tax credits
    
    
    (11.7
    )
    
    
    (26.1
    )
    
    
    (34.4
    )State income taxes, net of Federal taxes
    
    
    3.9
    
    
    
    4.0
    
    
    
    3.7State deferred tax rate changes
    
    
    
    
    
    
    2.8
    
    
    
    Nondeductible expenses and other
    
    
    1.4
    
    
    
    2.2
    
    
    
    8.627.8
    %
    
    
    17.1
    %
    
    
    12.1
    %
 44




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##### Table of Contents



The following is a summary of the significant components of our deferred tax position (in thousands): 2004
    
    
    2003 (Restated)Current
    
    
    Noncurrent
    
    
    Current
    
    
    NoncurrentCapital leases
    
    $
    133
    
    
    $
    75
    
    
    $
    188
    
    
    $
    34Inventory
    
    
    349
    
    
    
    
    
    
    
    301
    
    
    
    Accrued expenses and reserves
    
    
    1,824
    
    
    
    603
    
    
    
    1,675
    
    
    
    580Property and equipment
    
    
    
    
    
    
    10,250
    
    
    
    
    
    
    
    10,191State net operating loss
    
    
    
    
    
    
    1,369
    
    
    
    
    
    
    
    1,160Deferred compensation and other
    
    
    114
    
    
    
    1,835
    
    
    
    55
    
    
    
    1,0932,420
    
    
    
    14,132
    
    
    
    2,219
    
    
    
    13,058Valuation allowance
    
    
    
    
    
    
    (2,235
    )
    
    
    
    
    
    
    (1,933
    )Deferred tax assets
    
    
    2,420
    
    
    
    11,897
    
    
    
    2,219
    
    
    
    11,125Intangibles and other
    
    
    
    
    
    
    (1,373
    )
    
    
    
    
    
    
    (1,591
    )Deferred tax liabilities
    
    
    
    
    
    
    (1,373
    )
    
    
    
    
    
    
    (1,591
    )$
    2,420
    
    
    $
    10,524
    
    
    $
    2,219
    
    
    $
    9,534
 During 2004, the American Jobs Creation Act of 2004 (Jobs Creation Act) was signed into law.
Beginning in 2005, the Jobs Creation Act includes relief for domestic manufacturers by providing a
tax deduction for qualified production activities. Generally, food processing is a qualified
production activity. In addition, the Jobs Creation Act provides a shorter recovery period for
both leasehold improvements and qualified restaurant property put into service during 2005. We do
not believe that the provisions of the Jobs Creation Act will have a material impact on our
effective rate in future periods. (10) RELATED PARTY TRANSACTIONS: During 2004, 2003 and 2002, FICC purchased certain food products from Foxtail for which we were
paid approximately $340,000, $322,000 and $463,000, respectively. We believe that the prices paid
to us for these products were no less favorable than the prices that would have been paid for the
same products by a non-affiliated party in an arms length transaction. FICC leases certain land, buildings and equipment from us. During 2004 and 2003, lease and
sublease revenue was $69,000. During 2002, lease and sublease revenue was $68,000. We believe
that the terms of the lease are no less favorable to us than could be obtained if the transaction
was entered into with an unaffiliated third party. In 1999, TRC Realty LLC leased an aircraft for use by both FICC and TRC. The operating lease on
this aircraft was terminated and all associated costs of the termination were paid during the third
quarter of 2003. During the lease, we shared with FICC the cost of TRC Realty LLCs generally
fixed expenses. In addition, FICC and TRC incurred actual variable usage costs. Total expenses
reimbursed by FICC for the fiscal years 2003 and 2002 were $304,000 and $448,000, respectively. 45




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##### Table of Contents



(11) 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. During 2000, we entered into a separate agreement to guarantee fifty percent of borrowings up to a
total guarantee of $1,500,000 for use by a franchisee to remodel and upgrade existing restaurants.
As of December 26, 2004 and December 28, 2003, there were $3,000,000 in borrowings outstanding
under this agreement of which $1,500,000 was guaranteed by us. 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 26,
2004, three franchisees, otherwise unaffiliated with the Company, owned 92 of the 333 franchised
restaurants. These franchisees operated 41, 29 and 22 restaurants, respectively. Thirty-eight of
these restaurants are located in Pennsylvania, 26 are located in Ohio and the remaining 28 are
located across Wisconsin, Nebraska, Florida, Tennessee, New Jersey, Minnesota, South Dakota,
Kentucky, Maryland, New York, Virginia, North Dakota, South Carolina and Michigan. During 2004,
these three franchisees provided royalties and license fees of $2,431,000, $1,561,000 and
$1,476,000, respectively. Our predecessors entered into arrangements with several different parties which have reserved
territorial rights under which specified payments are to be made by us based on a percentage of
gross sales from certain restaurants and for new restaurants opened within certain geographic
regions. During 2004, we paid an aggregate of $2,656,000 under such arrangements. Three such
agreements are currently in effect. Of these, one expires in the year 2075 and covers an area
within a twenty-five mile radius from a point within Wall Township, New Jersey, one covers Iowa and
Wisconsin and expires upon the death of the beneficiary and the remaining agreement covering North
Dakota, South Dakota and Nebraska remains in effect as long as we operate Perkins Restaurants and
Bakeries in certain states. Our ability to make scheduled payments of principal of, or to pay the interest or liquidated
damages, if any, on, or to refinance, our indebtedness (including the Notes and the Discount
Notes), or to fund planned capital expenditures will depend on our future performance, which, to a
certain extent, is subject to general economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control. Based upon the current level of operations, we believe
that cash flow from operations and available cash, together with available borrowings under the
Credit Facility, will be adequate to meet our liquidity needs for the foreseeable future. We may,
however, need to refinance all or a portion of the principal of the Notes and the Discount Notes on
or prior to maturity. There can be no assurance that we will generate sufficient cash flow from
operations, or that future borrowings will be available under the Credit Facility in an amount
sufficient to enable us to service our indebtedness or to fund our other liquidity needs. In
addition, there can be no assurance that we will be able to effect any such refinancing on
commercially reasonable terms or at all. 46




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(12) LONG-TERM INCENTIVE PLANS: Effective January 1, 1999, we established a Deferred Compensation Plan under which our officers and
key employees may defer specified percentages of their salaries, annual incentives and long-term
compensation payments. We also make matching contributions of the lesser of 3% of eligible
compensation or $6,000. Amounts deferred are excluded from the participants taxable income and
are held in trust with a bank, where the funds are invested at the direction of each participant.
As of December 26, 2004, $4,261,000 is held in trust under the plan and is included in other
long-term assets and liabilities in the accompanying consolidated balance sheets. We made matching
contributions of $215,000, $203,000 and $234,000 for 2004, 2003 and 2002, respectively, which are
recorded in general and administrative expenses in the accompanying Consolidated Statements of
Income. Investment income on the invested funds is taxable to us, and we are eligible for a tax deduction
for compensation expense when the funds are distributed to the participants at retirement,
cessation of employment or other specified events. We established a Performance Unit Grant Plan under which a select group of key employees may
receive awards of Performance Units based on financial performance criteria established by the
Board of Directors at the time of grant. The Performance Unit Grant Plan is designed to retain and
reward selected key employees by tying Performance Unit valuation to our growth valuation criteria.
Each award is payable in cash and vests over a 3 year period at 33.3% per year. Upon exercise, up
to 50% of vested award values may be transferred to the participants Deferred Compensation Plan
account. Unexercised awards expire on the tenth anniversary of grant. Compensation expense of
$171,000, $23,000 and $134,000 for 2004, 2003 and 2002, respectively, was recorded and included in
general and administrative expense in the accompanying Consolidated Statements of Income. Awards
of $82,000 were paid in 2003 and no awards were paid in 2004 or 2002. Our Supplemental Executive Retirement Income Plan (the SERP) was established on July 1, 1999.
Under the SERP, a contribution is made each year on behalf of one of our executives. The executive
immediately vests in 33.3% of the contribution while vesting in the remaining 66.7% is
discretionary based on the attainment of certain performance criteria. We contributed $82,000 and
$123,000 for 2003 and 2002, respectively, which is recorded in general and administrative expenses
in the accompanying Consolidated Statements of Income. This executive retired from the Company at
the end of 2003. During 2004, we paid $358,000 in final distributions under the plan. Effective April 1, 2004, The Restaurant Company Supplemental Executive Retirement Plan (the New
SERP) was established. The purpose of the New SERP 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 the New SERP are made at the discretion of the
Company and participants generally vest in the contributions over a five-year period. During 2004,
the Company made $355,000 in contributions under the New SERP, which is included in general and
administrative expenses in the accompanying Consolidated Statements of Income. 47




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##### Table of Contents



(13) EMPLOYEE BENEFITS: The Perkins Retirement Savings Plan (the Plan) as amended and restated effective January 1, 1992,
was established for the benefit of all eligible employees, both hourly and salaried. All
participating employees at December 31, 1991 remained eligible to participate in the Plan. All
other employees of TRC and TRC Realty LLC 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 2004, 2003 and 2002, we elected to match
contributions at a rate of 25% up to the first 6% deferred by each participant. Our matching
contributions to the Plan for each of the years 2004, 2003, and 2002 were $282,000, $474,000, and
$517,000, respectively. During 2004, we elected to pay an additional matching contribution of
$270,000, which was accrued as of December 26, 2004 and subsequently paid in February 2005. 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. (14) ASSET WRITE-DOWNS: During 2004, we determined that impairment existed with respect to three company owned restaurants.
This determination was made based on our projections that the future cash flows of these
restaurants would not exceed the present carrying value of the assets. Accordingly, we recorded an
impairment charge of approximately $604,000 to adjust the assets of these restaurants to fair
value. Additionally, we recorded an impairment charge of $136,000 related to intangible assets on
specifically identifiable franchise locations that ceased operations. During 2003, we determined that impairment existed with respect to two company owned restaurants.
This determination was made based on our projections that the future cash flows of these
restaurants would not exceed the present carrying value of the assets. Accordingly, we recorded an
impairment charge of approximately $455,000 to adjust the assets of these restaurants to fair
value. During 2002, we determined that impairment existed with respect to two Company-operated
restaurants. This determination was made based on our projections that the future cash flows of
these restaurants would not exceed the present carrying value of the assets. Accordingly, we
recorded an impairment charge of approximately $1,640,000 to adjust the assets of these restaurants
to fair value. 48




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##### Table of Contents



(15) SEGMENT REPORTING: We have three primary operating segments: restaurants, franchise and manufacturing. The
restaurant operating segment includes Company-operated restaurants. The franchise operating
segment includes revenues and expenses directly allocable to franchised restaurants. The
manufacturing segment consists of Foxtail. Revenues for the restaurant segment result from the sale of menu products at Perkins restaurants we
operate. Revenues for the franchise segment consist primarily of initial franchise fees and
royalty income earned as a result of operation of franchise restaurants. Revenues for the
manufacturing segment are generated by the sale of food products to restaurants we operate and
franchisees through third-party distributors, as well as customers outside the Perkins system.
Foxtails sales to Company-operated restaurants are eliminated for external reporting purposes. The following presents revenues and other financial information, attributable to continuing
operations, by business segment (in thousands): 2004: Restaurants
    
    
    Franchise
    
    
    Manufacturing
    
    
    Other
    
    
    TotalsRevenues from
external customers
    
    $
    281,292
    
    
    
    21,604
    
    
    
    38,445
    
    
    
    
    
    
    
    341,341Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    9,420
    
    
    
    
    
    
    
    9,420Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,932
    
    
    
    15,932Depreciation and
amortization
    
    
    13,454
    
    
    
    
    
    
    
    936
    
    
    
    2,330
    
    
    
    16,720Segment profit (loss)
    
    
    29,240
    
    
    
    18,871
    
    
    
    5,949
    
    
    
    (47,255
    )
    
    
    6,805Segment assets
    
    
    118,514
    
    
    
    20,340
    
    
    
    17,392
    
    
    
    46,252
    
    
    
    202,498Goodwill
    
    
    13,893
    
    
    
    12,689
    
    
    
    
    
    
    
    
    
    
    
    26,582Expenditures for
segment assets
    
    
    7,531
    
    
    
    
    
    
    
    3,549
    
    
    
    794
    
    
    
    11,874
 49




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##### Table of Contents



2003 (Restated): Restaurants
    
    
    Franchise
    
    
    Manufacturing
    
    
    Other
    
    
    TotalsRevenues from
external customers
    
    $
    276,860
    
    
    $
    21,336
    
    
    $
    34,142
    
    
    $
    304
    
    
    $
    332,642Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    9,801
    
    
    
    
    
    
    
    9,801Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,398
    
    
    
    16,398Depreciation and
amortization
    
    
    14,397
    
    
    
    
    
    
    
    921
    
    
    
    2,744
    
    
    
    18,062Segment profit (loss)
    
    
    21,197
    
    
    
    18,623
    
    
    
    8,210
    
    
    
    (44,567
    )
    
    
    3,463Segment assets
    
    
    126,207
    
    
    
    20,699
    
    
    
    13,381
    
    
    
    35,415
    
    
    
    195,702Goodwill
    
    
    13,893
    
    
    
    12,689
    
    
    
    
    
    
    
    
    
    
    
    26,582Expenditures for
segment assets
    
    
    7,599
    
    
    
    
    
    
    
    1,107
    
    
    
    1,034
    
    
    
    9,740
 2002 (Restated): Restaurants
    
    
    Franchise
    
    
    Manufacturing
    
    
    Other
    
    
    TotalsRevenues from
external customers
    
    $
    281,323
    
    
    $
    21,752
    
    
    $
    33,933
    
    
    $
    448
    
    
    $
    337,456Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    9,689
    
    
    
    
    
    
    
    9,689Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,930
    
    
    
    17,930Depreciation and
amortization
    
    
    16,040
    
    
    
    180
    
    
    
    1,002
    
    
    
    3,992
    
    
    
    21,214Segment profit (loss)
    
    
    25,174
    
    
    
    18,329
    
    
    
    7,901
    
    
    
    (48,209
    )
    
    
    3,195Segment assets
    
    
    134,702
    
    
    
    20,979
    
    
    
    11,791
    
    
    
    30,762
    
    
    
    198,234Goodwill
    
    
    13,893
    
    
    
    12,689
    
    
    
    
    
    
    
    
    
    
    
    26,582Expenditures for
segment assets
    
    
    12,414
    
    
    
    
    
    
    
    389
    
    
    
    615
    
    
    
    13,418
 We evaluate the performance of our segments based primarily on operating profit before corporate
general and administrative expenses, interest expense, amortization of goodwill and income taxes. Assets included in the Other operating segment primarily include cash, corporate accounts
receivable and deferred taxes. 50




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##### Table of Contents



The components of the other segment loss is as follows (in thousands): 2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)General and administrative expenses
    
    $
    26,176
    
    
    $
    24,160
    
    
    $
    25,800Depreciation and amortization expenses
    
    
    2,330
    
    
    
    2,744
    
    
    
    3,992Asset write-down
    
    
    740
    
    
    
    455
    
    
    
    1,640Lease termination
    
    
    
    
    
    
    761
    
    
    
    (Benefit from) provision for disposition of assets, net
    
    
    (109
    )
    
    
    336
    
    
    
    (775
    )Interest expense
    
    
    15,932
    
    
    
    16,398
    
    
    
    17,930Provision for income taxes
    
    
    2,615
    
    
    
    715
    
    
    
    441Other
    
    
    (429
    )
    
    
    (1,002
    )
    
    
    (819
    )$
    47,255
    
    
    $
    44,567
    
    
    $
    48,209
 (16) ACQUIRED RESTAURANT OPERATIONS: Effective December 1, 2003, we leased two restaurants from a franchisee in Florida for a period of
five years. These restaurants operations for 2004 and the last four-week period of 2003 are
included in the accompanying financial statements. Also effective December 1, 2003, we entered
into a management contract to operate one franchisee restaurant located in Florida for a period of
one year. This contract was renewed during 2004 for an additional one-year period. In accordance
with the contract, we will operate the store and are responsible for the profit or loss generated
by the store. This contract did not meet the requirements under accounting principles generally
accepted in the United States of America for consolidation into our financial statements.
Therefore, only our management fee income or expense related to this restaurants profit or loss is
recorded in the Franchise segment of our financial statements. (17) ASSET DISPOSITIONS: During 2004, we recorded a net gain of $109,000 related to the disposition of assets. This amount
primarily related to the disposition of five properties owned by us that were sold during 2004. During 2003, we recorded a net loss of $336,000 related to the disposition of assets. This amount
includes a loss of $190,000 on the disposal of assets related to the lease termination of the
corporate aircraft and a loss of approximately $95,000 related to the disposition of automobiles in
conjunction with amending our corporate fleet automobile program. During 2002, we recorded a net gain of $775,000 related to the disposition of assets. This amount
includes a $920,000 net gain related to the sale of six restaurant properties during the year. 51




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(18) DISCONTINUED OPERATIONS: In 2001, the Company opened two restaurants, known as Sage Hen, as a test of a new concept for an
upscale breakfast restaurant. Due to poor performance, by the end of 2002, all of the restaurants
operations had ceased with the exception of an operating lease on one of the stores, for which the
Company is obligated until July 31, 2011. In the third quarter of 2002, the Company determined
that impairment existed with respect to the two Sage Hen restaurants. This determination was made
based on projections that indicated that the future cash flows of these restaurants would not
exceed the carrying value of the assets. Accordingly, an impairment charge of approximately
$1,026,000 was recorded to adjust the book value of the assets to an estimate of their fair value
of $100,000. These remaining assets were subsequently moved to other Company locations and
depreciated. At the time of closure, we recorded a liability of $282,000, which represented the
estimated present value of the remaining lease obligation, net of expected sub-rentals. During
2003, we charged lease payments of approximately $182,000 against this liability. In the fourth
quarter of 2003, we entered into a sublease for this property and recorded a change in estimate and
increased the fair value of the liability by an additional $154,000. During 2004, we reduced the
liability by lease payments of $185,000, net of rental receipts of $100,000. Components of the loss on discontinued operations consisted of the following: 2003
    
    
    2002Food sales
    
    $
    
    
    
    $
    1,702Cost of sales
    
    
    
    
    
    
    2,138Depreciation and amortization
    
    
    
    
    
    
    171Lease termination charge
    
    
    154
    
    
    
    282Asset write-down
    
    
    
    
    
    
    1,026( 154
    )
    
    
    (1,915
    )Income tax benefit
    
    
    58
    
    
    
    720Loss on discontinued operations
    
    $
    (   96
    )
    
    $
    (1,195
    )
 (19) COMPREHENSIVE INCOME: Comprehensive income includes net income and foreign currency translation adjustments. Total
comprehensive income for the years ended December 26, 2004 and December 28, 2003 was $6,838,000 and
$3,409,000 respectively, which included the effect of gains from translation adjustments of
approximately $33,000 and $42,000, respectively. (20) SUBSEQUENT EVENT: On April 13, 2005, we entered into a commitment letter (Commitment) with a subsidiary of
Trustreet Properties, Inc. (Trustreet) pursuant to which we will sell to Trustreet and
simultaneously lease back from Trustreet up to 68 of our owned properties which are currently
operated by us as Perkins Restaurant and Bakery restaurants (each, a Property and collectively,
the Properties). The sale and lease back of each Property is conditioned on, among other things,
the negotiation and execution by us and Trustreet of mutually agreeable definitive purchase and
lease agreements, each on the terms specified in the Commitment. The aggregate purchase price for
the Properties will be $137,500,000, and the lease agreements will each have terms of between 17
and 20 years with two successive ten-year renewal options. We currently expect to close the
transactions contemplated in the Commitment no more than 60 days after the execution of the
Commitment. We currently expect to use the net proceeds from the sale of the Properties along with other monies
provided by us to effect the covenant defeasance and subsequent redemption of (i) all of our
outstanding 10.125% Unsecured Senior Notes under the indenture dated as of December 22, 1997, among
Perkins Family Restaurants, L.P., Perkins Finance Corp. (to which we are successor in interest) and
State Street Bank and Trust Company, as Trustee, and (ii) all of our outstanding 11.25% Senior
Discount Notes under the indenture dated as of May 18, 1998, between us and State Street Bank and
Trust Company, as Trustee. 52




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THE RESTAURANT COMPANY AND SUBSIDIARIES 
  
 2004 (b)
    
    Revenues
    
    
    Gross Profit (a)
    
    
    Net Income (c)1st Quarter (restated)
    
    $
    105,117
    
    
    $
    22,380
    
    
    $
    9052nd Quarter (restated)
    
    
    77,672
    
    
    
    16,806
    
    
    
    1,7953rd Quarter (restated)
    
    
    78,368
    
    
    
    16,908
    
    
    
    1,6924th Quarter
    
    
    80,184
    
    
    
    17,099
    
    
    
    2,413$
    341,341
    
    
    $
    73,193
    
    
    $
    6,805
 2003(Restated) (b)
    
    Revenues
    
    
    Gross Profit (a)
    
    

Net
Income (Loss) (c)1st Quarter
    
    $
    99,989
    
    
    $
    19,716
    
    
    $
    (97
    )2nd Quarter
    
    
    77,624
    
    
    
    16,717
    
    
    
    1,3983rd Quarter
    
    
    77,044
    
    
    
    16,599
    
    
    
    1,1364th Quarter (d)
    
    
    77,985
    
    
    
    15,600
    
    
    
    930$
    332,642
    
    
    $
    68,632
    
    
    $
    3,367
 (a) Represents total revenues less cost of sales. (b) Our financial reporting calendar has thirteen four-week periods ending on the last Sunday in
December. The first quarter includes four four-week periods. The second, third and fourth
quarters include three four-week periods. (c) As discussed in Note 2, the financial statements have been restated to correct the accounting
for leases and depreciation. The impact of the restatement adjustments on net income (loss) was
$49 for each of the first three quarters of 2004 and $40 for each quarter in 2003. (d) As discussed in Note 2 and Note 18, we classified the results of operations of the two Sage
Hen restaurants from continuing operations to discontinued operations. The net income in the
fourth quarter of 2003 includes $154 of additional lease termination charges related to these
discontinued operations. 53




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Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. The Company has evaluated the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934 as of the end of the period covered by the report. The evaluation was performed under the
supervision and with the participation of the Companys management, including the Chief Executive
Officer (the CEO) and the Chief Financial Officer (the CFO). In performing this evaluation, our management considered all disclosure controls and procedures and
turned specific attention to our lease accounting and our accounting for restaurant closures. A
detailed discussion of the correction of the errors and the impact of the restatement is included
in Notes 2 and 18 of the notes to our consolidated financial statements. The determination was made that we had control deficiencies that represented material weaknesses in
our disclosure controls and procedures. As a result of this determination, the Companys
management, including the Companys CEO and CFO, concluded that our disclosure controls and
procedures were not effective as of December 26, 2004. There were no changes in our internal control over financial reporting during the quarter ended
December 26, 2004 that materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. However, as of June 9, 2005, we have reviewed our
policies and have begun to implement procedures that will remediate these deficiencies in our
controls and procedures by adding review procedures over the application of appropriate assumptions
and factors affecting our lease accounting and identifying and recognizing discontinued operations
related to restaurant closures. Item 9B. Other Information. None. 54




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PART III Item 10.Directors and Executive Officers of the Registrant. (a) Directors and Executive Officers of the Registrant The following individuals are currently serving as directors and executive officers of TRC: Name
    
    
    Age
    
    
    Position with TRCDonald N. Smith
    
    
    64
    
    
    Chairman of the Board and Chief Executive OfficerRichard A. Meringolo
    
    
    42
    
    
    DirectorHollis W. Rademacher
    
    
    69
    
    
    DirectorJoseph F. Trungale
    
    
    63
    
    
    Director, President and Chief Operating OfficerMichael P. Donahoe
    
    
    54
    
    
    Director, Executive Vice President and Chief Financial OfficerJames F. Barrasso
    
    
    54
    
    
    Executive Vice President, Foodservice Development
 Donald N. Smith
Donald N. Smith has been the Chairman of the Board and Chief Executive Officer of TRC since our
organization in November 1985 and has been Chairman of the Board and Chief Executive Officer of RHC
since its organization in December 1999. Mr. Smith served as Chief Operating Officer of TRC from
September 1998 through November 2002 and was previously the Chief Operating Officer from November
1985 through November 1988. Mr. Smith has also served as Director of TRC Realty LLC since December
1999. In August 2000, Mr. Smith was elected a Director and President of TRCM. Mr. Smith also has
been the Chairman of the Board of FICC since October 1988 and was Chief Executive Officer of FICC
from November 1989 to February 2003. Richard A. Meringolo
Richard A. Meringolo was elected a Director of TRC and RHC in May 2003. Since January 2001, Mr.
Meringolo has been a Managing Director of BancBoston Capital. From July 1984 through December
2000, he held various positions in several debt capital market divisions of FleetBoston Finance
Group. Hollis W. Rademacher
Hollis W. Rademacher was elected a Director of TRC and RHC in June 2000. For more than the past
five years Mr. Rademacher has been a Principal of Hollis W. Rademacher & Company, a private
consulting and investment company. Mr. Rademacher also serves on the Boards of Directors of
Wintrust Financial Corporation, Schawk, Inc., Harkers Distribution, Inc., Continental Glass &
Plastics Company, Willis Stein & Partners, LLC, Jupiter Industries, Inc., Glencoe Capital Partners,
LLP, First Mercury Financial Corp. and CompuPay, Inc. among several other privately held companies. Joseph F. Trungale
Joseph F. Trungale was appointed President and Chief Operating Officer and was elected as a
Director of the Company on March 4, 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. 55




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##### Table of Contents



Michael P. Donahoe
Michael P. Donahoe has been Director, Executive Vice President and Chief Financial Officer of TRC
since September 2002 and of RHC since February 2003. Since February 2003, he has also been Vice
President and Treasurer of TRC Realty, LLC; Director, Vice President and Treasurer of TRCM; and
Director, Vice President and Treasurer of Perkins Finance Corporation. Prior to joining TRC, Mr.
Donahoe was Senior Vice President and Chief Financial Officer of Shoneys Restaurant Division, from
2000 to 2002 and Senior Vice President, Finance of Cracker Barrel Old Country Store, from 1999 to
2000. Mr. Donahoe also served in various senior financial positions within TRC, Perkins
Restaurants, Inc., Perkins Management Company, Inc. and Friendly Holding Company from 1986 through
1999. James F. Barrasso
James F. Barrasso has been Executive Vice President, Foodservice Development of TRC since February
1999. For more than five years prior, he was Vice President, Foodservice Development for TRC. Mr.
Barrasso has served in various executive positions with TRC since September 1983. (b) Code of Ethics We have adopted The Restaurant Company Code of Business Conduct (the Code) that 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. 56




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##### Table of Contents



Item 11.Executive Compensation. The following table summarizes all compensation paid or accrued for services rendered to the
Company in all capacities during each of the three years in the period ended December 26, 2004 with
respect to the Chief Executive Officer and the four most highly compensated executive officers
whose total annual salary and bonus exceeded $100,000. Annual CompensationAll OtherCompen-Principal Position
    
    Year
    
    
    Salary
    
    
    Bonus
    
    
    sationDonald N. Smith
    
    
    2004
    
    
    $
    567,802
    
    
    $
    272,915
    
    
    $
    Chairman & Chief
    
    
    2003
    
    
    
    535,326
    
    
    
    
    
    
    
    Executive Officer
    
    
    2002
    
    
    
    525,795
    
    
    
    225,615
    
    
    
    Joseph F. Trungale (4)
    
    
    2004
    
    
    $
    363,755
    
    
    $
    127,104
    
    
    $
    106,086
    (2)(3)President & Chief
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    Operating Officer
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    Michael P. Donahoe
    
    
    2004
    
    
    $
    280,565
    
    
    $
    59,359
    
    
    $
    16,874
    (1)(3)Exec. Vice President &
    
    
    2003
    
    
    
    246,077
    
    
    
    
    
    
    
    176,813
    (1)(2)Chief Financial Officer
    
    
    2002
    
    
    
    55,906
    
    
    
    
    
    
    
    James F. Barrasso
    
    
    2004
    
    
    $
    256,149
    
    
    $
    27,494
    
    
    $
    16,874
    (1)(3)Exec. Vice President,
    
    
    2003
    
    
    
    212,242
    
    
    
    25,182
    
    
    
    6,000
    (1)Foodservice Development
    
    
    2002
    
    
    
    216,035
    
    
    
    20,000
    
    
    
    6,000
    (1)
   (1)
    
    Includes $6,150 for 2004 and $6,000 for 2003 and 2002 of Perkins matching contributions
allocated to the named executive officers under the Perkins Retirement Savings Plan and the
Deferred Compensation Plan.(2)
    
    Includes relocation costs paid by TRC for $90,000 on behalf of Mr. Trungale and $170,091 on
behalf of Mr. Donahoe.(3)
    
    Includes payments made under The Restaurant Company Supplemental Executive Retirement Plan in
the amount of $16,086 for Mr. Trungale, $10,724 for Mr. Donahoe and Mr. Barrasso.(4)
    
    Mr. Trungale also has a compensation arrangement with TRC, which provides one-year salary if
termination is not for cause as defined in the arrangement. 57




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##### Table of Contents



Compensation of Directors. Hollis W. Rademacher is paid $2,500 for each Board Meeting of TRC he attends. Mr. Rademacher was
paid for one meeting of the board in 2004. No other Directors are compensated for their services
as such. Item 12.Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters. (a) Security ownership of certain beneficial owners. The following table sets forth the number of shares beneficially owned indirectly on June 9, 2005
by BancBoston Ventures, Inc. Amount andNature ofBeneficial
    
    
    PercentTitle of Class
    
    Name of Beneficial Owner
    
    Ownership
    
    
    of ClassCommon Stock
    
    BancBoston Ventures, Inc.
    
    
    2,267
    (1)
    
    
    21.0
    %100 Federal StreetBoston, MA   02110
 (1) Owned indirectly through BancBoston Ventures, Inc.s ownership of RHC, the sole shareholder of TRC. (b) Security ownership of management. The following table sets forth the number of shares beneficially owned either directly or
indirectly on June 9, 2005 by all directors and the executive officers named in the Executive
Compensation Table above, including all directors and executive officers as a group: Amount and
    
    
    PercentNature of
    
    
    of ClassBeneficial
    
    
    (* lessTitle of Class
    
    Name of Beneficial Owner
    
    
    Ownership
    
    
    than 1%)Common Stock
    
    Donald N. Smith
    
    
    7,574
    (1)
    
    
    70.0
    %
    
    Richard A. Meringolo
    
    
    2,267
    (2)
    
    
    21.0
    %
    
    Hollis W. Rademacher
    
    
    5
    (3)
    
    
    *
   (1)
    
    Beneficially owned by Mr. Smith through two family trusts owning seventy percent of the
common stock of RHC, the sole shareholder of TRC. Mr. Smiths address is c/o The Restaurant
Company, 6075 Poplar Avenue, Suite 800, Memphis, TN 38119.(2)
    
    Owned by BancBoston Ventures, Inc. indirectly through its ownership of RHC. Mr. Meringolo
is a Managing Director of BancBoston Capital.(3)
    
    Owned indirectly through RHC. 58




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##### Table of Contents



(c) Securities Authorized for Issuance Under Equity Compensation Plans. TRC has no equity compensation plans. (d) Arrangements Related to a Possible Change in Control of the Company. On March 21, 2005, RHC announced that it had retained an investment bank to help RHC explore and
evaluate a variety of financial and strategic alternatives for the Perkins Restaurant and Bakery
chain. The outstanding common shares of RHC not owned by Mr. Smith (the Minority Shares) are subject to
an option to require RHC to redeem such shares at any time after December 22, 2004 at fair market
value (the Put). As of December 26, 2004, the Minority Shares represented 30% of the outstanding
common stock of RHC. By letter agreement, dated as of March 18, 2005, the holders of the Minority Shares agreed that
they will not exercise the Put while RHC was exploring its strategic alternatives; however, if an
agreement relating to a strategic transaction is not entered into by September 11, 2005 or a
strategic transaction is not consummated by January 9, 2006, the holders right to exercise the Put
will be reinstated. Under such letter agreement, RHC has agreed that if no strategic transaction is consummated within
such time period and the holders of the Minority Shares exercise their Put rights thereafter, then
RHC will, pursuant to the terms of the Put, complete the purchase of the Minority Shares put by the
holders. RHC has waived its right under the terms of the Put to commence a sale of the company to
complete such purchase, but this waiver would apply only to the first time the holders of Minority
Shares exercise their Put rights. Item 13.Certain Relationships and Related Transactions. (a) Transactions with Management and Others. During 2004, FICC purchased certain food products from Foxtail for which we were paid approximately
$340,000. We believe that the prices paid to us for these products were no less favorable than the
prices that would have been paid for the same products by a non-affiliated party in an arms length
transaction. Mr. Smith is the Chairman of FICC and owns approximately 9.5% of its outstanding
equity securities. FICC leases certain land, buildings and equipment from us. During 2004, lease and sublease revenue
was $69,000. We believe that the terms of the lease are no less favorable to us than could be
obtained if the transaction was entered into with an unaffiliated third party. Item 14.Principal Accountant Fees And Services. The following table sets forth fees for services PricewaterhouseCoopers LLP provided to the Company
during fiscal 2004 and 2003: 2004
    
    
    2003Audit fees (2)
    
    $
    193,000
    
    
    $
    162,000Tax fees (1)
    
    
    5,000
    
    
    
    5,000Total
    
    $
    198,000
    
    
    $
    167,000
  (1)
    Represents fees primarily related to review of the Companys federal income tax
return.(2)
    Approximately $13,000 of the 2004 amount relates to the 2003 financial
statement audit. 59




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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 Income for the Years Ended December 26, 2004, December 28,
2003 and December 29, 2002. Consolidated Balance Sheets at December 26, 2004 and December 28, 2003. Consolidated Statements of Stockholders Investment for the Years Ended
December 26, 2004, December 28, 2003 and December 29, 2002. Consolidated Statements of Cash Flows for the Years Ended December 26, 2004,
December 28, 2003 and December 29, 2002. 2. The following Financial Statement Schedule for the years ended December 26,
2004, December 28, 2003 and December 29, 2002 is included: No.Report of Independent Registered Public Accounting Firm on FinancialStatement Schedule.II.
    
    Valuation and Qualifying Accounts.
 Schedules I, III, IV and V are not applicable and have therefore been omitted. 3. Exhibits: Exhibit No.3.1
    
    
    Certificate of Incorporation of The Restaurant Company.
(Filed as Exhibit 3.1 to The Restaurant Companys Registration Statement on
Form S-4, Registration No. 333-57925)3.2
    
    
    By-Laws of The Restaurant Company. (Filed as Exhibit 3.2
to The Restaurant Companys Registration Statement on Form S-4, Registration
No. 333-57925)3.3
    
    
    Amendment to Certificate of Incorporation of RHC. (Filed
as Exhibit 3 to The Restaurant Companys report on Form 8-K on January 3,
2000)4.1
    
    
    Indenture dated as of May 18, 1998 among the Issuer and
the Trustee named therein. (Filed as Exhibit 4.1 to The Restaurant Companys
Registration Statement on Form S-4, Registration No. 333-57925)4.2
    
    
    Form of 11 1/4% Series B Senior Discount Notes due 2008
(included in Exhibit 4.1). (Filed as Exhibit 4.2 to The Restaurant
Companys Registration Statement on Form S-4, Registration No. 333-57925)4.3
    
    
    Joinder and Amendment No. 2 dated as of December 22, 1999
to Credit Agreement dated as of December 22, 1997. (Filed as Exhibit 4 to
The Restaurant Companys report on Form 8-K on January 3, 2000)
 60




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##### Table of Contents



Exhibit No.10.1
    
    
    Guaranty by Perkins Restaurant and Bakery, L.P. and Perkins
Restaurant and Bakery Operating Company, L.P. in favor of BancBoston
Leasing, Inc. dated as of May 1, 1994. (Filed as Exhibit 10.1 to The
Restaurant Companys Amendment No. 1 to the Registration Statement on Form
S-4, Registration No. 333-57925)10.2
    
    
    Guaranty dated July 5, 1995 among Perkins Restaurants
Operating Company, L.P. and BancBoston Leasing, Inc. (Filed as Exhibit 10.2
to The Restaurant Companys Amendment No. 1 to the Registration Statement on
Form S-4, Registration No. 333-57925)10.3
    
    
    Revolving Credit Agreement, by and among Perkins Restaurant
and Bakery, L.P., The Restaurant Company, Perkins Restaurants, Inc., Perkins
Finance Corp., BankBoston, N.A. and other financial institutions and
BankBoston N.A., as Agent and Administrative Agent with NationsBank, N.A. as
Syndication Agent and BancBoston Securities, Inc. as Arranger dated as of
December 22, 1997. (Filed as Exhibit 10.3 to The Restaurant Companys
Amendment No. 1 to the Registration Statement on Form S-4, Registration No.
333-57925)10.5
    
    
    10 1/8% Senior Notes Indenture dated as of December 22,
1997 among Perkins Restaurant and Bakery, L.P., Perkins Finance Corp. and the
Trustee named therein. (Filed as Exhibit 10.5 to The Restaurant Companys
Amendment No. 1 to the Registration Statement on Form S-4, Registration No.
333-57925)10.6
    
    
    Form of 10 1/8% Senior Notes due 2007 (included in Exhibit
10.5). (Filed as Exhibit 10.6 to The Restaurant Companys Amendment No. 1 to
the Registration Statement on Form S-4, Registration No. 333-57925)10.10
    
    
    Amendment No. 4 to Revolving Credit Agreement, by and
among The Restaurant Company, Fleet National Bank and other lending
institutions, Fleet National Bank as agent and administrative agent and Bank
of America, N.A. as syndication agent. (Filed as Exhibit 10.10 to The
Restaurant Companys 2001 Third Quarter Report on Form 10-Q)10.11
    
    
    First Amendment to Lease Agreement between Crescent Forum
Partnership, an Arkansas general partnership and The Restaurant Company
(Filed as Exhibit 10.11 to The Restaurant Companys 2002 Annual Report on
Form 10-K)10.12
    
    
    Amendment No. 5 to Revolving Credit Agreement, by and
among The Restaurant Company, Fleet National Bank and other lending
institutions, Fleet National Bank as agent and administrative agent and Bank
of America, N.A. as syndication agent (Filed as Exhibit 10.12 to The
Restaurant Companys 2003 First Quarter Report on Form 10-Q)
 61




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Exhibit No.10.13
    
    
    Amendment No. 6 to Revolving Credit Agreement, by and
among The Restaurant Company, Fleet National Bank and other lending
institutions, Fleet National Bank as agent and administrative agent and Bank
of America, N.A. as syndication agent (Filed as Exhibit 10.13 to The
Restaurant Companys 2003 Annual Report on Form 10-K)10.14
    
    
    Amendment No. 7 to Revolving Credit Agreement, by and
among The Restaurant Company, Fleet National Bank and other lending
institutions, Fleet National Bank as agent and administrative agent and Bank
of America, N.A. as syndication agent (Filed as Exhibit 10.14 to The
Restaurant Companys 2004 Third Quarter Report on Form 10-Q)10.15
    
    
    Amendment No. 8 to Revolving Credit Agreement, by and
among The Restaurant Company, Fleet National Bank and other lending
institutions, Fleet National Bank as agent and administrative agent and Bank
of America, N.A. as syndication agent (Filed as Exhibit 10.15 to The
Restaurant Companys Report on Form 8-K on December 27, 2004)10.16
    
    
    Amendment No. 9 to Revolving Credit Agreement, by and
among The Restaurant Company, Fleet National Bank and other lending
institutions, Fleet National Bank as agent and administrative agent and Bank
of America, N.A. as syndication agent (Filed as Exhibit 10.16 to The
Restaurant Companys Report on Form 8-K on December 27, 2004)10.17
    
    
    The Restaurant Company Supplemental Executive Retirement
Plan effective April 1, 2004**10.18
    
    
    Employment Agreement between The Restaurant Company and
Joseph. F. Trungale, President and Chief Operating Officer**10.19
    
    
    The Restaurant Company 2004 Corporate Annual Incentive Plan**10.20
    
    
    The Restaurant Company 1999 Deferred Compensation Plan**14
    
    
    The Restaurant Company Code of Business Conduct21
    
    
    Subsidiaries of the Registrant. (Filed as Exhibit 21 to
The Restaurant Companys Amendment No. 1 to the Registration Statement on
Form S-4, Registration No. 333-57925)24
    
    
    Power of Attorney (Included on Page 11-12). (Filed as
Exhibit 24 to The Restaurant Companys Amendment No. 1 to the Registration
Statement on Form S-4, Registration No. 333-57925)
 62




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Exhibit No.31.1
    
    
    Principal Executive Officer Certification Pursuant
to Sarbanes-Oxley Act of 2002, Section 302*31.2
    
    
    Principal Financial Officer Certification Pursuant
to Sarbanes-Oxley Act of 2002, Section 302*99.1
    
    
    Stockholders Agreement dated as of December 22, 1999,
among RHC, BBV and DNS. (Filed as Exhibit 99 to The Restaurant Companys
report on Form 8-K filed on January 3, 2000)99.2
    
    
    Letter of Registrant pursuant to Temporary Note 3T to
Article 3 of Regulation S-X. (Filed as Exhibit 99.2 to The Restaurant
Companys 2001 Annual Report on Form 10-K)
   *
    
    Filed Herewith.**
    
    Compensation Plan or Arrangement 63




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Trademark Notice. The following trademarks are used in this report to identify products and services of The
Restaurant Company: Perkins, Perkins Family Restaurant, Perkins Restaurant and Bakery, Perkins
Family Restaurant and Bakery and Perkins Bakery. [Intentionally Left Blank] 64




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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 9th day of June 2005. THE RESTAURANT COMPANYBy:
    /s/ Donald N. SmithChief 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 9th
day of June 2005. Signature
    
    Title/s/ Donald N. Smith

Donald N. Smith
    
    Chairman of the Board, Chief Executive Officer
(Principal Executive Officer)/s/ Richard A. Meringolo

Richard A. Meringolo
    
    Director/s/ Hollis W. Rademacher

Hollis W. Rademacher
    
    Director/s/ Joseph F. Trungale

Joseph F. Trungale
    
    Director, President and Chief Operating Officer/s/ Michael P. Donahoe

Michael P. Donahoe
    
    Director, Executive Vice President, Chief Financial
Officer (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. 65




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REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of The Restaurant Company: Our audits of the
consolidated financial statements referred to in our report dated
May 25, 2005,
appearing in this Annual Report on Form 10-K of The Restaurant Company and subsidiaries also included an audit of the
financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this
financial statement schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP
Memphis, TN May 25, 2005 66




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SCHEDULE II THE RESTAURANT COMPANY
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands) Column A
    
    Column B
    
    
    Column C
    
    
    Column D
    
    
    Column EAdditionsBalance at
    
    
    Charged
    
    
    Charged
    
    
    Deductions
    
    
    BalanceBeginning of
    
    
    to Costs &
    
    
    to Other
    
    
    from
    
    
    at CloseDescription
    
    Period
    
    
    Expenses
    
    
    Accounts
    
    
    Reserves
    
    
    of PeriodFISCAL YEAR ENDED DECEMBER 26, 2004Allowance for Doubtful Accounts
    
    $
    1,003
    
    
    $
    719
    
    
    $
    
    
    
    $
    (493
    ) (a)
    
    $
    1,229Reserve for Disposition of Assets
    
    $
    156
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    156FISCAL YEAR ENDED DECEMBER 28, 2003Allowance for Doubtful Accounts
    
    $
    1,174
    
    
    $
    552
    
    
    $
    
    
    
    $
    (723
    ) (a)
    
    $
    1,003Reserve for Disposition of Assets
    
    $
    156
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $

    156FISCAL YEAR ENDED DECEMBER 29, 2002Allowance for Doubtful Accounts
    
    $
    1,115
    
    
    $
    498
    
    
    $
    
    
    
    $
    (439
    ) (a)
    
    $
    1,174Reserve for Disposition of Assets
    
    $
    156
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    156
   (a)
    
    Represents uncollectible accounts written off, net of recoveries, and net costs associated
with direct financing sublease receivables for which a reserve was established. S-1