##### Table of Contents





UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 28, 2003

OR

o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934


For the transition period from ______________ to _______________________

Commission File Number 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:

Name of each exchangeTitle of each class
    
    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 xNo 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. o 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.




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TABLE OF CONTENTS  PART IPART IICONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF STOCKHOLDERS INVESTMENTCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO FINANCIAL STATEMENTSQUARTERLY FINANCIAL INFORMATIONPART IVSIGNATURESREPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULEEX-10.13  AMENDMENT TO CREDIT AGREEMENTEX-14.1 CODE OF BUSINESS CONDUCTEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 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 537 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. 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 28, 2003, entrees served
in Company-operated restaurants ranged in price from $2.99 to $10.99 for
breakfast, $5.49 to $10.99 for lunch and $5.49 to $11.99 for dinner. On
December 28, 2003, there were 493 full-service restaurants in our system, of
which 156 were Company-operated restaurants and 337 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, Pennsylvania, Florida,
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 72% of franchised restaurants. We also offer cookie doughs, muffin batters, pancake mixes, pies and other food
products for sale to our Company-operated and franchised restaurants and bakery
and food service distributors through Foxtail Foods (Foxtail), our
manufacturing division. During 2003, sales of products from this division to
Perkins franchisees and outside third parties constituted approximately 10.3%
of our total revenues. 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 license fee of $40,000 for each of their first
two restaurants. Franchisees opening their third and subsequent restaurants
pay a license fee of between $25,000 and $50,000 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 2003, average annual royalties earned per
franchised restaurant were approximately $61,000. The following number of
license agreements are scheduled to expire in the years indicated:
2004  twenty-four; 2005  nine; 2006  six; 2007  fourteen; 2008  eleven.
Franchisees typically apply for and receive new license agreements. 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 2003 and four
in 2002. Eight new franchised restaurants opened during 2003 and seventeen new
franchised restaurants opened in 2002. During 2003, we entered into a lease
agreement to operate two franchisee stores for a period of five years. One
Company-operated restaurant was closed in 2003 and two were closed in 2002. In
addition to the two franchise restaurants operating under Company management,
twelve franchised restaurants were closed in 2003 and eighteen were closed in
2002. We also closed two Sage Hen Cafes located in St. Louis Park, MN and
Deerfield, IL in 2002. 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 operations and consumer testing to determine
acceptance. While this effort is an integral part of our overall operations,
it was not a material expense in 2003, 2002 or 2001. In addition, we spent
approximately $340,000 conducting consumer research in 2003. No material
amounts were spent to conduct consumer research in 2002 or 2001. Significant Franchisees.As of December 28, 2003, three franchisees, otherwise
unaffiliated with the Company, owned 92 of the 337 franchised restaurants.
These franchisees operated 41, 29 and 22 restaurants, respectively. 38 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, Maryland, Kentucky, New York, Virginia, North
Dakota, South Carolina and Michigan. During 2003, we earned net royalties and
license fees of $2,473,000, $1,571,000 and $1,592,000, respectively, from these
franchisees. Franchise Guarantees.In the past, we sponsored financing programs offered by
certain lending institutions to assist franchisees in procuring funds for the
construction of new franchised restaurants and to purchase and install in-store
bakeries. We provided a limited guaranty of funds borrowed. Our obligation
under these agreements expired during the first quarter of 2002. 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 28, 2003, $3,000,000
in borrowings was outstanding under this agreement of which we guaranteed
$1,500,000. The franchisee intends to refinance the indebtedness, at which
time, our obligation under the current agreement would terminate. 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 2003, we paid an aggregate of $2,670,000 under such
arrangements. Three such agreements are currently in effect. Of these, one
expires in the year 2075, one is subject to ongoing negotiations 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
and 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. Seasonality.Our revenues are subject to seasonal fluctuations. Customer
counts (and consequently revenues) are generally highest in the spring and
summer months and lowest during the winter months because of the high
proportion of restaurants located in states where inclement weather adversely
affects customer visits. Working Capital.We ordinarily operate with a working capital deficit since
funds generated by cash sales in excess of those needed to service short-term
obligations are used by us to reduce debt and acquire capital assets. At
December 28, 2003, this working capital deficit was $6.4 million. 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. 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 28, 2003, we employed approximately 9,750 persons.
Approximately 400 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 28, 2003. The table excludes one limited service Perkins Express
located in Utah. Number of Restaurants Company-Operated
    
    Franchised
    
    TotalArizona
    
    
    
    
    
    
    4
    
    
    
    4Arkansas
    
    
    1
    
    
    
    3
    
    
    
    4Colorado
    
    
    8
    
    
    
    5
    
    
    
    13Delaware
    
    
    
    
    
    
    1
    
    
    
    1Florida
    
    
    36
    
    
    
    26
    
    
    
    62Georgia
    
    
    
    
    
    
    1
    
    
    
    1Idaho
    
    
    
    
    
    
    9
    
    
    
    9Illinois
    
    
    7
    
    
    
    
    
    
    
    7Indiana
    
    
    
    
    
    
    8
    
    
    
    8Iowa
    
    
    16
    
    
    
    3
    
    
    
    19Kansas
    
    
    4
    
    
    
    4
    
    
    
    8Kentucky
    
    
    
    
    
    
    4
    
    
    
    4Maryland
    
    
    
    
    
    
    2
    
    
    
    2Michigan
    
    
    7
    
    
    
    2
    
    
    
    9Minnesota
    
    
    37
    
    
    
    36
    
    
    
    73Missouri
    
    
    8
    
    
    
    
    
    
    
    8Montana
    
    
    
    
    
    
    8
    
    
    
    8Nebraska
    
    
    
    
    
    
    9
    
    
    
    9New Jersey
    
    
    
    
    
    
    11
    
    
    
    11New York
    
    
    
    
    
    
    13
    
    
    
    13North Carolina
    
    
    
    
    
    
    3
    
    
    
    3North Dakota
    
    
    3
    
    
    
    5
    
    
    
    8Ohio
    
    
    
    
    
    
    49
    
    
    
    49Oklahoma
    
    
    2
    
    
    
    
    
    
    
    2Pennsylvania
    
    
    8
    
    
    
    49
    
    
    
    57South Carolina
    
    
    
    
    
    
    4
    
    
    
    4South Dakota
    
    
    
    
    
    
    10
    
    
    
    10Tennessee
    
    
    4
    
    
    
    11
    
    
    
    15Virginia
    
    
    
    
    
    
    3
    
    
    
    3Washington
    
    
    
    
    
    
    6
    
    
    
    6West Virginia
    
    
    
    
    
    
    1
    
    
    
    1Wisconsin
    
    
    15
    
    
    
    27
    
    
    
    42Wyoming
    
    
    
    
    
    
    4
    
    
    
    4Canada
    
    
    
    
    
    
    16
    
    
    
    16Total
    
    
    156
    
    
    
    337
    
    
    
    493
 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 28, 2003: Number of Properties(1)Use
    
    Owned
    
    Leased
    
    TotalOffices and Manufacturing Facilities(2)
    
    
    1
    
    
    
    11
    
    
    
    12Perkins Restaurant and Bakery(3)
    
    
    69
    
    
    
    87
    
    
    
    156
  (1)
    
    In addition, we lease ten properties, all of which are subleased to
others. We also own six properties, four of which are leased to others
and two of which are vacant land.  (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 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 seven years, excluding
renewal options. The longest lease term will mature in approximately 38
years and the shortest lease term will mature in less than 1 year,
assuming the exercise of all renewal options. 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. (a) Market information. No established public market exists for our equity securities. (b) Holders. As of December 28, 2003, there was 1 Stockholder of record. (c) Dividends. There were no dividends declared or paid during 2003 or 2002. [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) 2003
    
    2002
    
    2001
    
    2000
    
    1999Income Data:Revenues
    
    $
    332,642
    
    
    $
    339,158
    
    
    $
    330,504
    
    
    $
    336,244
    
    
    $
    315,700Net Income (Loss)
    
    $
    3,528
    
    
    $
    2,167
    
    
    $
    (696
    )
    
    $
    4,034
    
    
    $
    7,442Balance Sheet Data:Total Assets
    
    $
    196,322
    
    
    $
    198,684
    
    
    $
    210,964
    
    
    $
    210,512
    
    
    $
    200,564Long-Term Debt and
Capital Lease Obligations(a)
    
    $
    148,878
    
    
    $
    151,349
    
    
    $
    174,775
    
    
    $
    171,149
    
    
    $
    164,480Distributions
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    626
    
    
    $
    Statistical Data:Full-service Perkins Restaurants inOperation at End of Year:Company-Operated(b)
    
    
    156
    
    
    
    155
    
    
    
    153
    
    
    
    145
    
    
    
    141Franchised(b)
    
    
    337
    
    
    
    343
    
    
    
    344
    
    
    
    345
    
    
    
    333Total
    
    
    493
    
    
    
    498
    
    
    
    497
    
    
    
    490
    
    
    
    474Average Annual Sales Per
Company-Operated Restaurant(b)
    
    $
    1,795
    
    
    $
    1,851
    
    
    $
    1,910
    
    
    $
    1,937
    
    
    $
    1,899Average Annual Royalties Per
Franchised Restaurant(b)
    
    $
    61.4
    
    
    $
    61.2
    
    
    $
    62.1
    
    
    $
    63.8
    
    
    $
    61.8
  (a)
    
    Net of current maturities of $466, $9,489, $1,030, $971 and $942.  (b)
    
    Excludes two Company-operated Sage Hen Cafes (closed in 2002) and one
franchised Perkins Express. 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 28, 2003, December 29, 2002 or December 30, 2001. [Intentionally Left Blank] 9




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RESULTS OF OPERATIONS Overview: Our 2003 results reflect a solid performance in spite of the continued
challenges we face due to the overall soft economic climate, the war with Iraq
and increased competition in certain key markets. We are confident that
through our continued cost control and restaurant management efforts that we
are poised for long-term growth as the economy, particularly the tourism and
hospitality sectors, continues to recover and 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 28, 2003
    
    December 29, 2002
    
    December 30, 2001Revenues:Food sales
    
    
    93.5
    %
    
    
    93.5
    %
    
    
    93.1
    %Franchise revenues and other
    
    
    6.5
    
    
    
    6.5
    
    
    
    6.9Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Costs and expenses:Cost of sales (excluding depreciation shown below):Food cost
    
    
    26.9
    
    
    
    25.9
    
    
    
    26.3Labor and benefits
    
    
    33.1
    
    
    
    32.9
    
    
    
    32.5Operating expenses
    
    
    19.4
    
    
    
    19.6
    
    
    
    20.0General and administrative
    
    
    8.7
    
    
    
    9.1
    
    
    
    9.4Depreciation and amortization
    
    
    5.4
    
    
    
    6.2
    
    
    
    7.1Provision for (benefit from) disposition of assets, net
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    (0.3
    )Lease termination
    
    
    0.2
    
    
    
    
    
    
    
    Asset write-down
    
    
    0.1
    
    
    
    0.8
    
    
    
    0.4Interest, net
    
    
    4.9
    
    
    
    5.3
    
    
    
    5.5Other, net
    
    
    (0.1
    )
    
    
    (0.3
    )
    
    
    (0.4
    )Total costs and expenses
    
    
    98.7
    
    
    
    99.4
    
    
    
    100.5Income (loss) before income taxes
    
    
    1.3
    
    
    
    0.6
    
    
    
    (0.5
    )Benefit from (provision for) income taxes
    
    
    (0.2
    )
    
    
    
    
    
    
    0.3Net income (loss)
    
    
    1.1
    %
    
    
    0.6
    %
    
    
    (0.2
    )% Net income for 2003 was $3.5 million versus net income of $2.2 million in 2002
and a net loss of $696,000 in 2001. Pre-tax income for 2003 included a loss of
$1.6 million related to asset dispositions, write-downs and a lease
termination. Pre-tax income for 2002 included a loss of $2.2 million related
to asset dispositions and write-downs. Pre-tax loss for 2001 included a loss
of $374,000 related to asset dispositions and write-downs. 10




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Year Ended December 28, 2003 Compared to Year Ended December 29, 2002 Revenues: Total revenues decreased 1.9% 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 and other, 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. Labor and benefits: Labor and benefits expense, as a percentage of total revenues, increased 0.2
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. 11




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As a percentage of revenues, Foxtail labor and benefit charges are
significantly lower than the Companys restaurants. If Foxtail were to become
a more significant component of the Companys total operations, labor and
benefits expense, expressed as a percent of total revenue, 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 15.9% 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. 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
at a redemption price of 105.625% and reduced borrowings on the Revolving Line
of Credit. Other: Other income decreased approximately $140,000. This decrease is due primarily
to a reduction in rental income from properties subleased to others. 12




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Provision for/Benefit from income taxes: The provision for income taxes in 2003 was $753,000. Our effective tax rate
was 17.5% in 2003 and (9.0)% in 2002. The 17.5% 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. For 2004, we expect the effective tax rate to be
approximately 20.0%. The actual rate, however, will depend on a number of
factors, including the amount and source of operating income. Year Ended December 29, 2002 Compared to Year Ended December 30, 2001 Revenues: Total revenues increased 2.6% over 2001 due primarily to increased restaurant
food sales. Food sales at Company-operated restaurants increased 2.9%. The increase is
primarily the result of sales from twenty stores opened or acquired since the
beginning of 2001 partially offset by ten stores that were either closed or
sold to franchisees since the beginning of 2001. Comparable restaurant sales
decreased 2.1% primarily due to a decrease in comparable customer visits of
4.5%, partially offset by a 2.4% increase in check average. Revenues from Foxtail increased approximately 1.8% over 2001 and constituted
10.0% of our total 2002 revenues. The increase noted above can be attributed
to growth in sales outside of the Perkins system. Franchise and other revenues, which consist primarily of franchise royalties
and initial license fees, decreased 2.9% from the prior year. Royalty revenues
decreased due to a decrease in comparable sales and a decline in the number of
average franchise restaurants. Initial franchise license fees increased as a
result of seventeen franchise restaurants opening in 2002 versus twelve in
2001. Costs and Expenses: Food cost: In terms of total revenues, food cost decreased 0.4 percentage points from
2001. Restaurant division food cost expressed as a percentage of restaurant
division sales decreased 0.6 percentage points. The current year decrease was
primarily due to menu price increases and a net decrease in commodity costs. The cost of Foxtail sales, in terms of total Foxtail revenues, increased
approximately 0.3 percentage points, as a result of increased raw materials
costs. As a manufacturing operation, Foxtail typically has higher food costs
as a percent of revenues than the Companys restaurants. Labor and benefits: Labor and benefits expense, as a percentage of total revenues, increased 0.4
percentage points over 2001. Increased workers compensation costs, a moderate
increase in wage rates and a slight drop in productivity impacted restaurant
labor and benefits. Foxtail labor and benefits decreased due to improvements
in plant efficiencies. 13




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Operating expenses: Operating expenses, expressed as a percentage of total revenues, decreased 0.4
percentage points from 2001 to 2002. Restaurant division operating
expenses, expressed as a percentage of restaurant
sales, decreased 0.4 percentage points. The decrease is primarily the result of
decreased utility costs due to the drop in natural gas prices. Also, store
pre-opening expenses were lower due to the fact that the Company opened fewer
stores in 2002 as compared to 2001. Foxtail expenses, expressed as a percentage of Foxtail revenue, increased 0.3
percentage points. The increase is primarily due to increased transportation
and storage costs. Franchise division operating expenses, expressed as a percentage of franchise
revenues, decreased 1.4 percentage points compared to the prior year. Expenses
under franchise service fee agreements, investment spending for advertising in
select franchised markets, and franchise settlements drove the decrease. General and administrative: General and administrative expenses declined to 9.1% of total revenues in 2002
from 9.4% of total revenues in 2001. The decrease is primarily attributable to
the impact of selected administrative workforce reductions. Depreciation and amortization: Depreciation and amortization decreased approximately 9.6% from 2001 due to the
cessation of goodwill amortization and the increase in total revenue. Interest, net: Net interest expense decreased from 5.5% to 5.3% of revenues. The decrease is
the result of reduced average borrowings and lower variable interest rates on
the Companys revolving line of credit. Provision for/Benefit from disposition of assets: During 2002, the Company recorded a net gain of $493,000 related to the
disposition of assets. Asset write-down: The Company recorded charges totaling $2.7 million to write down the carrying
value of the two Sage Hen properties and two Company operated restaurants to
their estimated fair values. Other: Other income decreased approximately $658,000. This decrease is primarily due
to the termination of 8 leases and subleases at the end of 2001 on properties
leased to a franchisee. Provision for/Benefit from income taxes: The benefit from income taxes in 2002 was $179,000. Our effective tax rate
was (9.0)% in 2002 and 56.6% in 2001. The (9.0)% effective tax rate in 2002
was higher than in 2001 due to the fact that we had positive pretax income in
2002 versus a pretax loss in 2001. The 2002 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 2001 effective tax rate primarily due
to the utilization of these credits. 14




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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 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. 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 28, 2003 and December 29, 2002, we had total
self-insurance accruals reflected in our balance sheet of approximately $4.7
million and $2.6 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 these 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. Other acceptable methods of accounting for these accruals include
measurement of claims outstanding and projected payments. 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 a conservative
basis. Nevertheless, changes in health care costs, accident frequency and
severity and other factors can materially affect the estimate for these
liabilities. 15




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Long-Lived Assets: The restaurant industry is capital intensive. We have approximately 60% 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, 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 2003, 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 $455,000 to adjust the assets of these restaurants to net
realizable value. 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 28, 2003, we had approximately $85 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 $31 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 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. 16




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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. CAPITAL RESOURCES AND LIQUIDITY Our primary sources of funding were cash provided by operations and borrowings
under our line of credit. The principal use of cash during the year was
capital expenditures and principal and interest payments on debt. Capital
expenditures consisted primarily of equipment purchases for Foxtail,
maintenance capital and costs related to remodels of existing restaurants. The following table summarizes capital expenditures for each of the past three
years (in thousands). 2003
    
    2002
    
    2001New restaurants
    
    $
    32
    
    
    $
    2,781
    
    
    $
    12,397Capitalized maintenance
    
    
    5,053
    
    
    
    5,214
    
    
    
    4,780Remodeling and reimaging
    
    
    1,378
    
    
    
    3,510
    
    
    
    3,109Acquisitions of franchised restaurants
    
    
    
    
    
    
    
    
    
    
    3,550Manufacturing
    
    
    1,107
    
    
    
    389
    
    
    
    821Other
    
    
    2,170
    
    
    
    1,524
    
    
    
    3,022Total Capital Expenditures
    
    $
    9,740
    
    
    $
    13,418
    
    
    $
    27,679 Our capital budget for 2004 is $15.1 million and includes plans to open no new
Company-operated restaurants. 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. As is typical in the restaurant industry, we operate with a working capital
deficit since funds generated by cash sales in excess of those needed to
service short-term obligations are used to reduce debt and acquire capital
assets. At December 28, 2003, this working capital deficit was $6.4 million. The Company has a secured $25,000,000 revolving line of credit facility (the
Credit Facility) with a sub-limit for up to $5,000,000 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 28,
2003, there were no borrowings and approximately $4,018,000 of letters of
credit outstanding under the Credit Facility. The letters of credit are
primarily utilized in conjunction with our workers compensation programs. 17




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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 waives the April 20, 2003
covenant violation, reduces the requirements of the financial covenants and
lowers the total amount available under the Credit Facility from $40,000,000
to $25,000,000. At December 28, 2003, the Company was in compliance with the
requirements of the financial covenants. The Company executed an
amendment to the Credit Facility on March 25, 2004 that reduces
the requirements of the financial covenants at the end of the first
quarter 2004 and thereafter. 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 103.375% through December 15, 2004, at which time the
redemption price decreases to 101.688%. After December 15, 2005, 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 105.625% through May 15, 2004, at which time the redemption price decreases
to 103.750%. On May 15, 2005, the redemption price decreases to 101.875%, and
after May 15, 2006, the Discount Notes may be redeemed at par. 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 28, 2003 (in thousands): Payments Due by PeriodTotal
    
    2004
    
    2005 - 2006
    
    2007 - 2008
    
    ThereafterLong-term debt
    
    $
    148,009
    
    
    $
    
    
    
    $
    
    
    
    $
    148,009
    
    
    $
    Capital lease obligations
    
    
    1,563
    
    
    
    575
    
    
    
    710
    
    
    
    278
    
    
    
    Estimated interest payments
    
    
    63,623
    
    
    
    16,012
    
    
    
    31,208
    
    
    
    16,403
    
    
    
    Operating lease obligations
    
    
    84,580
    
    
    
    9,247
    
    
    
    16,875
    
    
    
    14,371
    
    
    
    44,087Purchase commitments
    
    
    26,685
    
    
    
    20,852
    
    
    
    5,833
    
    
    
    
    
    
    
    Total
    
    $
    324,460
    
    
    $
    46,686
    
    
    $
    54,626
    
    
    $
    179,061
    
    
    $
    44,087 Additionally, we have $4,018,000 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 15, 2004. It is our intent to reissue the letters of credit upon
expiration. 18




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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 the past, we have sponsored financing programs offered by certain lending
institutions to assist franchisees in procuring funds for the construction of
new franchised restaurants and to purchase and install in-store bakeries. We
provided a limited guaranty of funds borrowed. Our obligation under these
agreements expired during the first quarter of 2002. 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, 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, we 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 28, 2003, there was
$3,000,000 in borrowings outstanding under this agreement of which we
guaranteed $1,500,000. The franchisee intends to refinance the indebtedness,
at which time, our obligation under the current agreement would terminate. 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 2003, we paid an
aggregate amount of $2,670,000 under such arrangements. Three such agreements
are currently in effect. Of these, one expires in the year 2075, one is
subject to ongoing negotiations 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. The common shares of RHC not owned by
Mr. Smith are subject to an option to require RHC to redeem the shares at any
time after December 22, 2004 at fair market value (the Put). As of December
28, 2003, these shares represented 30% of the outstanding common
stock of RHC. As of December 28, 2002, the estimated fair market
value of the Put was approximately $9 million. 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
accrues annually and is payable by RHC on December 22, 2004. 19




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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 28, 2003,
approximately $18,725,000 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 our option
at any time prior to the mandatory redemption date at the Liquidation Value
plus a redemption premium as specified in our Charter. The redemption premium
was 3% through December 21, 2002 after which the preferred stock is redeemable
at par. 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 or pay the management fee to BBV is restricted under our
senior 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. 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. 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 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.
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 eight franchised restaurants
in 2003. We plan to open no new Company-operated restaurants and up to fifteen
franchised restaurants in 2004. MANAGEMENTS OUTLOOK We believe that the overall economy will continue to strengthen during 2004.
We expect this improvement to have a positive impact on our guest visits and
our overall profitability. We expect to receive a continued benefit from our
introduction of a new menu in 2003 that contained an updated, more contemporary
look and placed a greater emphasis on lunch and dinner entrees. Consistent
with 2003, we will continue focusing on managing restaurant costs and providing
quality food and service on a consistent basis. 20




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NEW ACCOUNTING PRONOUNCEMENTS In December 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 (revised December 2003) (FIN 46R), Consolidation of
Variable Interest Entities, which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through
means other than voting rights and accordingly should consolidate the entity.
FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest
Entities, which was issued in January 2003. The Company will be required to
apply FIN 46R to variable interests in VIEs created after December 31, 2003.
For variable interests in VIEs created before January 1, 2004, the
Interpretation will be applied beginning on January 1, 2005. For any VIEs that
must be consolidated under FIN 46R that were created before January 1, 2004,
the assets, liabilities and non-controlling interests of the VIE initially
would be measured at their carrying amounts with any difference between the net
amount added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining
the carrying amounts is not practicable, fair value at the date FIN 46R first
applies may be used to measure the assets, liabilities and non-controlling
interest of the VIE. At December 28, 2003, we have evaluated the impact of FIN
46R and do not believe that implementation of this Interpretation will have a
material adverse effect on our financial statements. 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. 21




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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. SEASONALITY Our revenues are subject to seasonal fluctuations. Customer counts (and
consequently revenues) are generally higher in the spring and summer months and
lower during the winter months because of the high proportion of restaurants
located in states where inclement weather adversely affects customer visits. CHANGE IN ACCOUNTING REPORTING PERIOD Effective January 1, 2001, we converted our financial reporting from a calendar
year basis to 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 2003 ended April 20, July 13, October 5, and December
28, 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 and $158.9 million at December 28, 2003 and December 29, 2002,
respectively. 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 $4.8 million as of December 28,
2003 and $6.6 million as of December 29, 2002. 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 1, 2005. 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 28, 2003. 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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##### Table of Contents



Item 8. Financial Statements and Supplementary Data. THE RESTAURANT COMPANY AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In Thousands)
 Years EndedDecember 28, 2003
    
    December 29, 2002
    
    December 30, 2001REVENUES:Food sales
    
    
    
    
    
    $
    311,002
    
    
    $
    316,958
    
    
    $
    307,649Franchise and other revenue
    
    
    
    
    
    
    21,640
    
    
    
    22,200
    
    
    
    22,855Total Revenues
    
    
    
    
    
    
    332,642
    
    
    
    339,158
    
    
    
    330,504COSTS AND EXPENSES:Cost of sales (excluding depreciation shown below):Food cost
    
    
    
    
    
    
    89,490
    
    
    
    87,866
    
    
    
    86,855Labor and benefits
    
    
    
    
    
    
    110,115
    
    
    
    111,502
    
    
    
    107,355Operating expenses
    
    
    
    
    
    
    64,405
    
    
    
    66,418
    
    
    
    66,078General and administrative
    
    
    
    
    
    
    29,058
    
    
    
    30,696
    
    
    
    31,051Depreciation and amortization
    
    
    
    
    
    
    17,832
    
    
    
    21,194
    
    
    
    23,442(Benefit from) provision for disposition of assets, net
    
    
    
    
    
    
    336
    
    
    
    (493
    )
    
    
    (1,093
    )Lease Termination
    
    
    
    
    
    
    761
    
    
    
    
    
    
    
    Asset write-down
    
    
    
    
    
    
    455
    
    
    
    2,666
    
    
    
    1,467Interest, net
    
    
    
    
    
    
    16,388
    
    
    
    17,908
    
    
    
    18,197Other, net
    
    
    
    
    
    
    (479
    )
    
    
    (587
    )
    
    
    (1,245
    )Total Costs and Expenses
    
    
    
    
    
    
    328,361
    
    
    
    337,170
    
    
    
    332,107INCOME (LOSS) BEFORE INCOME TAXES
    
    
    
    
    
    
    4,281
    
    
    
    1,988
    
    
    
    (1,603
    )BENEFIT FROM (PROVISION FOR) INCOME TAXES
    
    
    
    
    
    
    (753
    )
    
    
    179
    
    
    
    907NET INCOME (LOSS)
    
    
    
    
    
    $
    3,528
    
    
    $
    2,167
    
    
    $
    (696
    ) The accompanying notes are an integral part of these consolidated statements. 24




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THE RESTAURANT COMPANY AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 (In Thousands, Except Share Amounts)
 December 28, 2003
    
    December 29, 2002ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    4,962
    
    
    $
    5,813Restricted cash
    
    
    4,808
    
    
    
    Receivables, less allowance for doubtful accounts of $1,003 and $1,041
    
    
    10,647
    
    
    
    9,671Inventories, at the lower of first-in, first-out cost or market
    
    
    6,199
    
    
    
    5,182Prepaid expenses and other current assets
    
    
    1,597
    
    
    
    1,977Deferred income taxes
    
    
    2,219
    
    
    
    2,096Total current assets
    
    
    30,432
    
    
    
    24,739PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization
    
    
    118,848
    
    
    
    126,985GOODWILL
    
    
    27,035
    
    
    
    27,035INTANGIBLE ASSETS, net of accumulated amortization of $5,265 and $4,581
    
    
    4,053
    
    
    
    4,737DEFERRED INCOME TAXES
    
    
    9,097
    
    
    
    7,834OTHER ASSETS
    
    
    6,857
    
    
    
    7,354$
    196,322
    
    
    $
    198,684LIABILITIES AND STOCKHOLDERS INVESTMENTCURRENT LIABILITIES:Current maturities of long-term debt and capital lease obligations
    
    $
    466
    
    
    $
    9,489Accounts payable
    
    
    11,133
    
    
    
    14,132Franchise advertising contributions
    
    
    4,093
    
    
    
    Accrued expenses
    
    
    21,164
    
    
    
    17,849Total current liabilities
    
    
    36,856
    
    
    
    41,470CAPITAL LEASE OBLIGATIONS, less current maturities
    
    
    869
    
    
    
    1,334LONG-TERM DEBT
    
    
    148,009
    
    
    
    150,015OTHER LIABILITIES
    
    
    7,299
    
    
    
    6,146COMMITMENTS AND CONTINGENCIES (Notes 5 and 11)STOCKHOLDERS INVESTMENT:Common stock, $.01 par value, 100,000 shares authorized,
10,820 issued and outstanding
    
    
    1
    
    
    
    1Other Comprehensive Income
    
    
    42
    
    
    
    Retained Earnings (Deficit)
    
    
    3,246
    
    
    
    (282
    )3,289
    
    
    
    (281
    )$
    196,322
    
    
    $
    198,684 The accompanying notes are
an integral part of these consolidated balance sheets. 25




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THE RESTAURANT COMPANY AND SUBSIDIARIES 
   OtherCommon
    
    Comprehensive
    
    RetainedStock
    
    Income
    
    Earnings (Deficit)
    
    TotalBalance at December 31, 2000
    
    $
    1
    
    
    $
    
    
    
    $
    (1,753
    )
    
    $
    (1,752
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (696
    )
    
    
    (696
    )Balance at December 30, 2001
    
    
    1
    
    
    
    
    
    
    
    (2,449
    )
    
    
    (2,448
    )Net income
    
    
    
    
    
    
    
    
    
    
    2,167
    
    
    
    2,167Balance at December 29, 2002
    
    
    1
    
    
    
    
    
    
    
    (282
    )
    
    
    (281
    )Net Income
    
    
    
    
    
    
    
    
    
    
    3,528
    
    
    
    3,528Foreign Currency Translation Adjustment
    
    
    
    
    
    
    42
    
    
    
    
    
    
    
    42Balance at December 28, 2003
    
    $
    1
    
    
    $
    42
    
    
    $
    3,246
    
    
    $
    3,289
 The accompanying notes are an integral part of these consolidated statements. 26




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THE RESTAURANT COMPANY AND SUBSIDIARIES 
   Years EndedDecember 28, 2003
    
    December 29, 2002
    
    December 30, 2001CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    3,528
    
    
    $
    2,167
    
    
    $
    (696
    )Adjustments to reconcile net income (loss)
to net cash provided by operating activities:Depreciation and amortization
    
    
    17,832
    
    
    
    21,194
    
    
    
    23,442Accretion of Senior Discount Notes
    
    
    7
    
    
    
    25
    
    
    
    2,501(Benefit from) provision for disposition of assets
    
    
    336
    
    
    
    (493
    )
    
    
    (1,093
    )Asset write-down
    
    
    455
    
    
    
    2,666
    
    
    
    1,467Other non-cash income and expense items, net
    
    
    594
    
    
    
    498
    
    
    
    481Net changes in other operating assets and liabilities
    
    
    (2,693
    )
    
    
    (2,108
    )
    
    
    (5,891
    )Total adjustments
    
    
    16,531
    
    
    
    21,782
    
    
    
    20,907Net cash provided by operating activities
    
    
    20,059
    
    
    
    23,949
    
    
    
    20,211CASH FLOWS FROM INVESTING ACTIVITIES:Cash paid for property and equipment
    
    
    (9,740
    )
    
    
    (13,418
    )
    
    
    (24,129
    )Cash paid for acquisition of franchised restaurants
    
    
    
    
    
    
    
    
    
    
    (3,550
    )Proceeds from sale of property and equipment
    
    
    29
    
    
    
    5,366
    
    
    
    4,402Payments on notes receivable
    
    
    302
    
    
    
    407
    
    
    
    1,022Net cash used in investing activities
    
    
    (9,409
    )
    
    
    (7,645
    )
    
    
    (22,255
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments under capital lease obligations
    
    
    (648
    )
    
    
    (992
    )
    
    
    (1,066
    )Payments on long-term debt
    
    
    (14,603
    )
    
    
    (44,750
    )
    
    
    (53,750
    )Proceeds from long-term debt
    
    
    3,750
    
    
    
    30,750
    
    
    
    56,000Net cash (used in) provided by financing activities
    
    
    (11,501
    )
    
    
    (14,992
    )
    
    
    1,184Net increase (decrease) in cash and cash equivalents
    
    
    (851
    )
    
    
    1,312
    
    
    
    (860
    )CASH AND CASH EQUIVALENTS:Balance, beginning of year
    
    
    5,813
    
    
    
    4,501
    
    
    
    5,361Balance, end of year
    
    $
    4,962
    
    
    $
    5,813
    
    
    $
    4,501 The accompanying notes are an integral part of these consolidated statements. 27




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THE RESTAURANT COMPANY AND SUBSIDIARIES 
 NOTES TO FINANCIAL STATEMENTS
 DECEMBER 28, 2003
 (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 537 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, Pennsylvania, Florida, 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. 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 2003, 2002 and 2001. All material
intercompany transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to current year
presentation. Change in Accounting Reporting Period  Effective January 1, 2001, we converted our financial reporting from a calendar
year basis to 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 2003 ended April 20, July 13, October 5, and December
28, respectively. 28




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(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: 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. Advertising expense
was $13,053,000, $13,853,000 and $13,914,000 for the fiscal years 2003, 2002
and 2001, 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 completed adoption of 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. 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 28, 2003 and December 29, 2002. As a
result of these tests, we did not record any impairment of our goodwill. 29




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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. Before December 31, 2001, we amortized goodwill over its estimated period of
benefit on a straight-line basis; we amortized other intangible assets on
appropriate bases over their estimated lives. No amortization period exceeded
40 years. When an intangible assets carrying value exceeded associated
expected operating cash flows, we considered it to be impaired and wrote it
down to fair value, which we determined based on either discounted future cash
flows or appraised values. 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. 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 28, 2003 and December 29, 2002, we had total
self-insurance accruals reflected in our balance sheet of approximately $4.7
million and $2.6 million, respectively. 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 $4,808,000 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 $1,392,000 for accrued advertising, which is
included in accrued expenses on the accompanying balance sheet, and
approximately $4,093,000, 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. 30




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New Accounting Pronouncements
 In December 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 (revised December 2003) (FIN 46R), Consolidation of
Variable Interest Entities, which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through
means other than voting rights and accordingly should consolidate the entity.
FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest
Entities, which was issued in January 2003. The Company will be required to
apply FIN 46R to variable interests in VIEs created after December 31, 2003.
For variable interests in VIEs created before January 1, 2004, the
Interpretation will be applied beginning on January 1, 2005. For any VIEs that
must be consolidated under FIN 46R that were created before January 1, 2004,
the assets, liabilities and non-controlling interests of the VIE initially
would be measured at their carrying amounts with any difference between the net
amount added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining
the carrying amounts is not practicable, fair value at the date FIN 46R first
applies may be used to measure the assets, liabilities and non-controlling
interest of the VIE. At December 28, 2003, we have evaluated the impact of FIN
46R and do not believe that implementation of this Interpretation will have a
material adverse effect on our financial statements. (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 28, 2003
    
    December 29, 2002
    
    December 30, 2001(Increase) Decrease in:Receivables
    
    $
    (1,511
    )
    
    $
    (1,994
    )
    
    $
    (576
    )Inventories
    
    
    (1,017
    )
    
    
    148
    
    
    
    (234
    )Prepaid expenses and other current assets
    
    
    380
    
    
    
    715
    
    
    
    (1,114
    )Other assets
    
    
    (1,204
    )
    
    
    (1,214
    )
    
    
    (1,430
    )Increase (Decrease) in:Accounts payable
    
    
    (2,999
    )
    
    
    1,032
    
    
    
    61Accrued expenses
    
    
    2,505
    
    
    
    (1,182
    )
    
    
    (2,242
    )Other liabilities
    
    
    1,153
    
    
    
    387
    
    
    
    (356
    )$
    (2,693
    )
    
    $
    (2,108
    )
    
    $
    (5,891
    )  Other supplemental cash flow information for the past three years consisted of
the following (in thousands): December 28, 2003
    
    December 29, 2002
    
    December 30, 2001Cash paid for interest
    
    $
    16,138
    
    
    $
    17,124
    
    
    $
    14,771Income taxes paid
    
    
    1,281
    
    
    
    3,063
    
    
    
    2,554Income tax refunds received
    
    
    80
    
    
    
    1,666
    
    
    
    45 31




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(4) PROPERTY AND EQUIPMENT: Property and equipment consisted of the following for the past two years (in
thousands): December 28, 2003
    
    December 29, 2002Owned:Land and land improvements
    
    $
    37,000
    
    
    $
    37,327Buildings
    
    
    95,220
    
    
    
    94,649Leasehold improvements
    
    
    52,817
    
    
    
    51,742Equipment
    
    
    99,150
    
    
    
    96,273Construction in progress
    
    
    1,370
    
    
    
    285,557
    
    
    
    279,991Less  accumulated depreciation and amortization
    
    
    (169,651
    )
    
    
    (155,282
    )115,906
    
    
    
    124,709Leased:Buildings
    
    
    18,206
    
    
    
    18,790Less  accumulated amortization
    
    
    (17,421
    )
    
    
    (17,573
    )785
    
    
    
    1,217Assets Held for Sale
    
    
    2,157
    
    
    
    1,059$
    118,848
    
    
    $
    126,985 Depreciation and amortization for financial reporting purposes is computed
primarily using the straight-line method based on the shorter of either the
estimated useful lives or the lease terms of the property, as follows: YearsOwned:Land improvements
    
    
    3 - 20Buildings
    
    
    20 - 30Leasehold improvements
    
    
    7 - 20Equipment
    
    
    3 - 7Leased:Buildings
    
    
    20 - 25Equipment
    
    
    6
 As of December 28, 2003, we owned or leased four properties held for disposal
with a total carrying value of $2,157,000. Three of the properties are
currently vacant and one property is currently a company-operated restaurant.
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 these properties, our results of operations include income of
$32,000 for 2003 and losses of $9,000 and $100,000 for the years 2002 and 2001,
respectively. 32




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(5) LEASES: As of December 28, 2003, we operated 156 full-service restaurants as follows: 71 with both land and building leased
69 with both land and building owned
16 with the land leased and building owned As of December 28, 2003, we either leased or subleased seventeen properties to
others as follows: 8 with both land and building leased
6 with both land and building owned
3 with the land leased and building owned Most of our restaurant leases have a primary 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 leases that have initial or remaining lease
terms in excess of one year as of December 28, 2003 were as follows (in
thousands): Lease ObligationsCapital
    
    Operating2004
    
    $
    575
    
    
    $
    9,2472005
    
    
    398
    
    
    
    8,5672006
    
    
    312
    
    
    
    8,3082007
    
    
    166
    
    
    
    7,6102008
    
    
    112
    
    
    
    6,761Thereafter
    
    
    
    
    
    
    44,087Total minimum lease payments
    
    
    1,563
    
    
    $
    84,580Less:Amounts representing interest
    
    
    (228
    )Capital lease obligations
    
    $
    1,335
  Future minimum gross rental revenue as of December 28, 2003, were as follows
(in thousands): Amounts Receivable AsLessor
    
    Sublessor2004
    
    $
    397
    
    
    $
    8742005
    
    
    399
    
    
    
    8282006
    
    
    399
    
    
    
    5742007
    
    
    370
    
    
    
    5252008
    
    
    224
    
    
    
    533Thereafter
    
    
    1,221
    
    
    
    2,639Total minimum lease rentals
    
    $
    3,010
    
    
    $
    5,973
 33




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##### Table of Contents



The net rental expense included in the accompanying Consolidated Statements of
Operations for operating leases was as follows for the past three years (in
thousands): 2003
    
    2002
    
    2001Minimum rentals
    
    $
    9,909
    
    
    $
    9,689
    
    
    $
    8,700Contingent rentals
    
    
    624
    
    
    
    850
    
    
    
    1,352Less  sublease rentals
    
    
    (573
    )
    
    
    (615
    )
    
    
    (819
    )$
    9,960
    
    
    $
    9,924
    
    
    $
    9,233
 (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 30, 2001
    
    $
    14,037
    
    
    $
    12,998
    
    
    $
    
    
    
    $
    
    
    
    $
    27,035Changes in the carrying amount
of goodwill during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance as of December 29, 2002
    
    $
    14,037
    
    
    $
    12,998
    
    
    $
    
    
    
    $
    
    
    
    $
    27,035Changes in the carrying amount
of goodwill during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance as of December 28, 2003
    
    $
    14,037
    
    
    $
    12,998
    
    
    $
    
    
    
    $
    
    
    
    $
    27,035 The following schedule adjusts reported net income to exclude amortization
expense related to goodwill. 2003
    
    2002
    
    2001Reported net income (loss)
    
    $
    3,528
    
    
    $
    2,167
    
    
    $
    (696
    )Add back: Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    1,292Adjusted net income
    
    $
    3,528
    
    
    $
    2,167
    
    
    $
    596 34




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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. 2003
    
    2002Present value of estimated future royalty fee income
being amortized ratably over the remaining lives of
the franchise agreements
    
    $
    9,318
    
    
    $
    9,318Less  Accumulated Amortization
    
    
    (5,265
    )
    
    
    (4,581
    )Total
    
    $
    4,053
    
    
    $
    4,737
 Amortization expense for intangible assets was $684,000 for 2003 and $930,000
for 2002. Estimated amortization expense for the five succeeding fiscal years
is as follows (in thousands): EstimatedAmortization Expense2004
    
    $
    6432005
    
    
    6412006
    
    
    5392007
    
    
    5342008
    
    
    294
 (7) ACCRUED EXPENSES: Accrued expenses consisted of the following (in thousands): 2003
    
    2002Payroll and related benefits
    
    $
    8,734
    
    
    $
    8,903Property, real estate and sales taxes
    
    
    2,677
    
    
    
    2,755Insurance
    
    
    1,257
    
    
    
    568Rent
    
    
    1,218
    
    
    
    1,144Advertising
    
    
    1,392
    
    
    
    726Other
    
    
    5,886
    
    
    
    3,753$
    21,164
    
    
    $
    17,849
 35




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(8) LONG-TERM DEBT: Long-term debt consisted of the following (in thousands): 2003
    
    200210.125% Unsecured Senior Notes, due December 15, 2007
    
    $
    130,000
    
    
    $
    130,00011.25% Unsecured Senior Discount Notes, due May 15, 2008
    
    
    18,009
    
    
    
    26,855Revolving credit facility, due January 1, 2005
    
    
    
    
    
    
    2,000148,009
    
    
    
    158,855Less current maturities
    
    
    
    
    
    
    (8,840
    )$
    148,009
    
    
    $
    150,015
 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 103.375% through December 15, 2004, at which time the
redemption price decreases to 101.688%. 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 $5,000,000 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 28,
2003, there were no borrowings and approximately $4,018,000 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, the Company executed an
amendment to the Credit Facility that waives the April 20, 2003 covenant
violation, reduces the requirements of the financial covenants and lowers the
total amount available under the Credit Facility from $40,000,000 to
$25,000,000. At December 28, 2003, the Company was in compliance with the
requirements of the financial covenants. The Company executed an
amendment to the Credit Facility on March 25, 2004 that reduces
the requirements of the financial covenants at the end of the first
quarter 2004 and thereafter. 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 105.625% through May 15, 2004, at which time the redemption price decreases
to 103.750%. On May 15, 2005, the redemption price decreases to 101.875%, and
after May 15, 2006, the Discount Notes may be redeemed at par. 36




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In connection with the issuance of the Notes, the Discount Notes and obtaining
the Credit Facility, we incurred deferred financing costs of approximately
$6,752,000 that are being amortized over the terms of the debt agreements. The
unamortized balance of these costs was $2,024,000 as of December 28, 2003. 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): 2003
    
    200210.125% Unsecured Senior Notes
    
    $
    130,559
    
    
    $
    123,57711.25% Unsecured Senior Discount Notes
    
    
    18,196
    
    
    
    25,456
 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 requires us to maintain specified financial ratios, including
limits on interest expense and indebtedness compared to earnings before
interest, taxes, depreciation and amortization. At December 28, 2003, 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, these restrictions generally allow us to pay dividends or
distributions as follows: 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. We are a wholly owned
subsidiary of RHC. The common shares of RHC not owned by
Mr. Smith are subject to an option to require RHC to redeem the
shares at any time after December 22, 2004 at fair market value
(the Put). As of December 28, 2003, these shares
represented 30% of the outstanding common stock of RHC. As of
December 28, 2002, the estimated fair market value of the Put was
approximately $9,000,000. 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 accrues annually and is payable by
RHC on December 22, 2004. 37




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##### Table of Contents



Scheduled annual principal maturities of long-term debt for the five years
subsequent to December 28, 2003, are as follows: Amount2004
    
    $
    2005
    
    
    2006
    
    
    2007
    
    
    130,0002008
    
    
    18,009Thereafter
    
    
    $
    148,009
 No interest expense was capitalized in connection with our construction
activities during 2003. Interest expense capitalized equaled approximately
$28,000 and $159,000 for the years ended December 29, 2002 and December 30,
2001, respectively. (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 (benefit from)/provision
for income taxes for the past three years (in thousands): 2003
    
    2002
    
    2001Current:Federal
    
    $
    1,801
    
    
    $
    1,957
    
    
    $
    707State and local
    
    
    338
    
    
    
    194
    
    
    
    2862,139
    
    
    
    2,151
    
    
    
    993Deferred:Federal
    
    
    (1,577
    )
    
    
    (2,252
    )
    
    
    (1,688
    )State and local
    
    
    191
    
    
    
    (78
    )
    
    
    (212
    )(1,386
    )
    
    
    (2,330
    )
    
    
    (1,900
    )$
    753
    
    
    $
    (179
    )
    
    $
    (907
    )
 38




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A reconciliation of the statutory Federal income tax rate to the Companys
effective income tax rate is as follows: 2003
    
    2002
    
    2001Federal
    
    
    34.2
    %
    
    
    34.2
    %
    
    
    34.2
    %Federal income tax credits
    
    
    (25.2
    )
    
    
    (54.1
    )
    
    
    63.6State income taxes, net of Federal taxes
    
    
    4.0
    
    
    
    3.7
    
    
    
    2.8Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    (26.4
    )State
deferred tax rate changes
    
    
    2.6
    
    
    
    
    
    
    
    Nondeductible expenses and other
    
    
    1.9
    
    
    
    7.2
    
    
    
    (17.6
    )17.5
    %
    
    
    (9.0
    )%
    
    
    56.6
    %
 The following is a summary of the significant components of our deferred tax
position (in thousands): 2003
    
    2002Current
    
    Noncurrent
    
    Current
    
    NoncurrentCapital leases
    
    $
    188
    
    
    $
    34
    
    
    $
    260
    
    
    $
    47Inventory
    
    
    301
    
    
    
    
    
    
    
    251
    
    
    
    Accrued expenses and reserves
    
    
    1,675
    
    
    
    398
    
    
    
    1,356
    
    
    
    161Property and equipment
    
    
    
    
    
    
    9,936
    
    
    
    
    
    
    
    9,072State net operating loss
    
    
    
    
    
    
    1,160
    
    
    
    
    
    
    
    857Deferred compensation and other
    
    
    55
    
    
    
    1,093
    
    
    
    229
    
    
    
    1,2142,219
    
    
    
    12,621
    
    
    
    2,096
    
    
    
    11,351Valuation allowance
    
    
    
    
    
    
    (1,933
    )
    
    
    
    
    
    
    (1,770
    )Deferred tax assets
    
    
    2,219
    
    
    
    10,688
    
    
    
    2,096
    
    
    
    9,581Intangibles and other
    
    
    
    
    
    
    (1,591
    )
    
    
    
    
    
    
    (1,747
    )Deferred tax liabilities
    
    
    
    
    
    
    (1,591
    )
    
    
    
    
    
    
    (1,747
    )$
    2,219
    
    
    $
    9,097
    
    
    $
    2,096
    
    
    $
    7,834
 39




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(10) RELATED PARTY TRANSACTIONS: During 2003, 2002 and 2001, FICC purchased certain food products from Foxtail
for which we were paid approximately $322,000, $463,000 and $618,000,
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 2003 and
2002, lease and sublease income was $79,000. During 2001, lease and sublease
income was $254,000. 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 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 incured actual variable
usage costs. Total expenses reimbursed by FICC for the fiscal years 2003, 2002
and 2001 were $304,000, $448,000 and $595,000, respectively. (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. In the past, we have sponsored financing programs offered by certain lending
institutions to assist our franchisees in procuring funds for the construction
of new franchised restaurants and to purchase and install in-store bakeries.
We provided a limited guaranty of funds borrowed. Our obligations under these
agreements expired during the first quarter of 2002. 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 28, 2003 and December
29, 2002, 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 28, 2003, three
franchisees owned 92 of the 337 restaurants franchised by us. During 2003, we
earned net royalties and license fees of approximately $2,473,000, $1,571,000
and $1,592,000 from these franchisees. While the exit of one of these
franchisees from the system would have a material impact on our revenues, such
an occurrence would not in itself impair our ability to maintain our
operations. 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 2003, we paid an
aggregate amount of $2,670,000 under such arrangements. Three such agreements
are currently in effect. Of these, one expires in the year 2075, one is
subject to ongoing negotiations and the remaining agreement remains in effect
as long as we operate Perkins Restaurants and Bakeries in certain states. 40




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##### Table of Contents



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. (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 28, 2003, $3,529,000 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
$203,000, $234,000 and $242,000 for 2003, 2002 and 2001, respectively. 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. We paid $82,000
in 2003, no awards in 2002 and $137,000 in 2001. 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, $123,000
and $123,000 for 2003, 2002 and 2001, respectively. This executive retired
from the Company at the end of 2003. Subsequently, we have paid $358,000 in
final distributions under the plan. 41




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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 2003, 2002 and 2001, 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 2003, 2002 and
2001 were $474,000, $517,000 and $482,000, respectively. Participants are always 100% vested in their salary deferral accounts and
qualified rollover accounts. Vesting in the employer matching account is based
on qualifying Years of Service. A participant vests 60% in the employer
matching account after three years, 80% after four years and 100% after five
years. (14) ASSET WRITE-DOWNS: 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 net
realizable value. During 2002, we determined that impairment existed with respect to the two Sage
Hen Café restaurants and 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 $2,666,000 to
adjust the assets of these restaurants to net realizable value. During 2001, we wrote down the carrying value of three properties to their
estimated fair values. One of these properties was sold in January 2002.
Operations at one of the properties were discontinued on December 30, 2001, and
this property was subsequently sold during 2002. We currently have no plans to
discontinue operations of the third property. As required under SFAS No. 121,
the carrying amounts of the assets associated with these restaurant properties
were written down to their estimated fair market values based on our experience
in negotiating disposals of similar under-performing properties. Additionally,
we wrote off the carrying amount of certain intangibles related to the future
royalty income of franchised restaurants we acquired in December 2001. The
resulting non-cash charges related to these write-downs and write-offs reduced
2001 pre-tax income by $1,467,000. 42




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(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 by business
segment (in thousands): 2003: Restaurants
    
    Franchise
    
    Manufacturing
    
    Other
    
    TotalsRevenues from
external customers
    
    $
    276,860
    
    
    $
    21,336
    
    
    $
    34,142
    
    
    $
    304
    
    
    $
    332,642Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    9,801
    
    
    
    
    
    
    
    9,801Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,388
    
    
    
    16,388Depreciation and
amortization
    
    
    14,167
    
    
    
    
    
    
    
    921
    
    
    
    2,744
    
    
    
    17,832Segment profit (loss)
    
    
    21,459
    
    
    
    18,623
    
    
    
    8,210
    
    
    
    (44,764
    )
    
    
    3,528Segment assets
    
    
    109,931
    
    
    
    4,089
    
    
    
    14,452
    
    
    
    67,850
    
    
    
    196,322Goodwill
    
    
    14,037
    
    
    
    12,998
    
    
    
    
    
    
    
    
    
    
    
    27,035Expenditures for
segment assets
    
    
    7,599
    
    
    
    
    
    
    
    1,107
    
    
    
    1,034
    
    
    
    9,740
 43




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##### Table of Contents



2002: Restaurants
    
    Franchise
    
    Manufacturing
    
    Other
    
    TotalsRevenues from
external customers
    
    $
    281,323
    
    
    $
    21,752
    
    
    $
    33,933
    
    
    $
    2,150
    
    
    $
    339,158Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    9,689
    
    
    
    
    
    
    
    9,689Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,908
    
    
    
    17,908Depreciation and
amortization
    
    
    15,849
    
    
    
    180
    
    
    
    1,002
    
    
    
    4,163
    
    
    
    21,194Segment profit (loss)
    
    
    25,426
    
    
    
    18,329
    
    
    
    7,901
    
    
    
    (49,489
    )
    
    
    2,167Segment assets
    
    
    118,480
    
    
    
    5,459
    
    
    
    12,378
    
    
    
    62,367
    
    
    
    198,684Goodwill
    
    
    14,037
    
    
    
    12,998
    
    
    
    
    
    
    
    
    
    
    
    27,035Expenditures for
segment assets
    
    
    12,414
    
    
    
    
    
    
    
    389
    
    
    
    615
    
    
    
    13,418
 2001: Restaurants
    
    Franchise
    
    Manufacturing
    
    Other
    
    TotalsRevenues from
external customers
    
    $
    273,512
    
    
    $
    22,260
    
    
    $
    33,342
    
    
    $
    1,390
    
    
    $
    330,504Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    9,514
    
    
    
    
    
    
    
    9,514Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,197
    
    
    
    18,197Depreciation and
amortization
    
    
    16,036
    
    
    
    225
    
    
    
    959
    
    
    
    6,222
    
    
    
    23,442Segment profit (loss)
    
    
    21,956
    
    
    
    18,515
    
    
    
    7,803
    
    
    
    (48,970
    )
    
    
    (696
    )Segment assets
    
    
    130,517
    
    
    
    5,579
    
    
    
    11,838
    
    
    
    63,030
    
    
    
    210,964Goodwill
    
    
    14,037
    
    
    
    12,998
    
    
    
    
    
    
    
    
    
    
    
    27,035Expenditures for
segment assets
    
    
    26,233
    
    
    
    
    
    
    
    821
    
    
    
    625
    
    
    
    27,679
  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. 44




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##### Table of Contents



A reconciliation of other segment loss is as follows (in thousands): 2003
    
    2002
    
    2001General and administrative expenses
    
    $
    24,160
    
    
    $
    25,800
    
    
    $
    26,317Depreciation and amortization expenses
    
    
    2,744
    
    
    
    4,163
    
    
    
    6,222Asset write-down
    
    
    455
    
    
    
    2,666
    
    
    
    1,467Lease termination
    
    
    761
    
    
    
    
    
    
    
    Provision for (Benefit from) disposition of assets, net
    
    
    336
    
    
    
    (493
    )
    
    
    (1,093
    )Interest expense
    
    
    16,388
    
    
    
    17,908
    
    
    
    18,197Provision for (Benefit from) income taxes
    
    
    753
    
    
    
    (179
    )
    
    
    (907
    )Other
    
    
    (833
    )
    
    
    (376
    )
    
    
    (1,233
    )$
    44,764
    
    
    $
    49,489
    
    
    $
    48,970
 (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 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.
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. Prior to December 3, 2001, we leased or subleased eight restaurant properties
to a franchisee in Denver, Colorado. The franchisee operated an additional
three restaurants leased from unrelated third parties. In the third quarter of
2001, the franchisee was in default under the franchise license agreements on
its eleven properties and in default under its leases with us. Two of the
restaurants leased from third parties and one of the properties owned by us
were closed subsequent to the end of the third quarter. We earned royalty
revenues from this franchisee totaling $575,000 in 2001. Additionally, we
earned lease and sublease income from the eight properties it controlled
totaling $591,000 in 2001. On December 3, 2001, we terminated our leases on the eight restaurants leased
or subleased to the franchisee, assumed the lease on one restaurant leased from
a third party, and terminated our license agreements on all eleven properties.
We also acquired the furniture, fixtures, equipment and operations of eight of
the restaurants and continued to operate them as Perkins restaurants. One of
the restaurants was subsequently closed in January 2002. All amounts owed to
us as of December 3, 2001 under our license and lease agreements were deducted
from the purchase price of the restaurants. The total purchase price for this
transaction was $3,000,000, and resulted in goodwill of $670,000. On October 25, 2001, we acquired the furniture, fixtures, equipment and
operations of a restaurant from a franchisee. The total purchase price was
$550,000. 45




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##### Table of Contents



(17) ASSET DISPOSITIONS: 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 $493,000 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 and $280,000 of estimated exit costs
associated with the Sage Hen properties. During 2001, we recorded a net gain of $1,093,000 related to the disposition of
assets. This amount includes a loss of $132,000 related to discontinued
development of certain sites and a net gain of $1,225,000 related to the sale
of seven properties, five of which were Company-operated restaurants sold to a
franchisee. 46




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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, independent auditors, performs a separate
independent audit of the financial statements. This includes an assessment of
selected internal accounting controls to determine 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. 47




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Report of Independent Auditors To the Board of Directors
of The Restaurant Company: In our opinion, the
accompanying consolidated balance sheets and the related consolidated
statements of operations, of changes in 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 28, 2003 and December 29,
2002, and the results of its operations and its cash flows for the
years then ended 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 auditing standards generally accepted in the United
States of America, which require that we plan and perform the audits
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. The Companys consolidated
financial statements as of December 30, 2001, and for the year
then ended, were audited by other independent accountants who have
ceased operations. Those independent accountants expressed an
unqualified opinion on those financial statements in their report
dated March 26, 2002. As discussed in Notes 2
and 6 to the consolidated financial statements, the Company adopted
Statement of Financial Accounting Standards No. 142, goodwill
and Other Intangible Assets, in 2002. /s/ PricewaterhouseCoopers LLP March 19, 2004, except
as to the third paragraph of Note 8, for which the date is
March 25, 2004 48




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##### Table of Contents



Report of Independent
Public Accountants To The Restaurant Company: We have audited the accompanying consolidated balance sheets of The Restaurant
Company (a Delaware corporation) and subsidiaries as of December 30, 2001 and
December 31, 2000, and the related consolidated statements of operations,
stockholders investment and cash flows for the years ended December 30, 2001,
December 31, 2000 and December 31, 1999. 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 in accordance with auditing standards generally
accepted in the 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Restaurant
Company and subsidiaries as of December 30, 2001 and December 31, 2000, and the
results of its operations and its cash flows for the years ended December 30,
2001, December 31, 2000 and December 31, 1999, in conformity with accounting
principles generally accepted in the United States. Arthur Andersen LLP Memphis, Tennessee,
March 26, 2002. This is a copy of the audit report previously issued by Arthur Andersen
LLP in connection with The Restaurant Company filing onForm 10-Kfor the year
ended December 30, 2001. This audit report has not been reissued by Arthur
Andersen LLP in connection with this filing onForm 10-K. 49




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##### Table of Contents



THE RESTAURANT COMPANY AND SUBSIDIARIES
QUARTERLY FINANCIAL INFORMATION   2003 (b)
    
    Revenues
    
    Gross Profit(a)
    
    Net Income (Loss)1st Quarter
    
    $
    99,989
    
    
    $
    19,716
    
    
    $
    (57
    )2nd Quarter
    
    
    77,624
    
    
    
    16,717
    
    
    
    1,4383rd Quarter
    
    
    77,044
    
    
    
    16,599
    
    
    
    1,1764th Quarter
    
    
    77,985
    
    
    
    15,600
    
    
    
    971$
    332,642
    
    
    $
    68,632
    
    
    $
    3,528
 2002 (b)
    
    Revenues
    
    Gross Profit(a)
    
    Net Income (Loss)1st Quarter
    
    $
    105,012
    
    
    $
    22,264
    
    
    $
    6292nd Quarter
    
    
    78,088
    
    
    
    17,718
    
    
    
    8503rd Quarter
    
    
    78,205
    
    
    
    17,808
    
    
    
    1,6924th Quarter
    
    
    77,853
    
    
    
    15,582
    
    
    
    (1,004
    )$
    339,158
    
    
    $
    73,372
    
    
    $
    2,167
  (a)
    
    Represents total revenues less cost of sales.  (b)
    
    Effective January 1, 2001, we converted our financial reporting from a
calendar year basis to 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. 50




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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. None. Item 9A.
Controls and Procedures. As of December 28, 2003, an evaluation was performed under the supervision and
with the participation of the Companys management, including the Chief
Executive Officer (CEO) and the Chief Financial Officer (CFO), of the
effectiveness of the design and operation of the Companys disclosure controls
and procedures (as defined in Rule 13a  15(e) under the Exchange Act). Based
on that evaluation, the Companys CEO and CFO concluded that the Companys
disclosure controls and procedures were effective as of December 28, 2003. 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
    
    
    63
    
    
    Chairman of the Board and Chief Executive OfficerRichard A. Meringolo
    
    
    41
    
    
    DirectorHollis W. Rademacher
    
    
    68
    
    
    DirectorJoseph F. Trungale
    
    
    62
    
    
    Director, President and Chief Operating OfficerMichael P. Donahoe
    
    
    53
    
    
    Director, Executive Vice President and
Chief Financial OfficerJames F. Barrasso
    
    
    53
    
    
    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. 51




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Richard A. Meringolo Richard A. Meringolo was elected a Director of TRC and RHC in May 2003. Since
August 2002, Mr. Meringolo has been a Managing Director of BancBoston Capital.
From January 2001 until August 2002, he was a Director, Portfolio
Administration of the Middle Market Buyout Group of BancBoston Capital; from
July 1998 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. and
Aurum Technology, 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 March 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. 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 two 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 provided as an exhibit herein. 52




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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 28, 2003 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 OtherPrincipal Position
    
    Year
    
    Salary
    
    Bonus
    
    CompensationDonald N. Smith
    
    
    2003
    
    
    $
    535,326
    
    
    $
    
    
    
    $
    Chairman & Chief
    
    
    2002
    
    
    
    525,795
    
    
    
    225,615
    
    
    Executive Officer
    
    
    2001
    
    
    
    505,480
    
    
    
    237,988
    
    
    Don M. McComas (2)
    
    
    2003
    
    
    $
    321,565
    
    
    $
    
    
    
    $
   304,548
    (3)(5)President & Chief
    
    
    2002
    
    
    
    35,838
    
    
    
    
    
    
    Operating Officer
    
    
    2001
    
    
    
    
    
    
    
    
    
    
    Michael P. Donahoe
    
    
    2003
    
    
    $
    246,077
    
    
    $
    
    
    
    $
    176,813
    (1)(3)Exec. Vice President &
    
    
    2002
    
    
    
    55,906
    
    
    
    
    
    
    Chief Financial Officer
    
    
    2001
    
    
    
    
    
    
    
    
    
    
    James
F. Barrasso
    
    
    2003
    
    
    $
    212,242
    
    
    $
    25,182
    
    
    $
    6,000
    (1)Exec. Vice President,
    
    
    2002
    
    
    
    216,035
    
    
    
    20,000
    
    
    
    6,000
    (1)Foodservice Development
    
    
    2001
    
    
    
    207,410
    
    
    
    
    
    
    
    5,200
    (1)Jack W. Willingham
    
    
    2003
    
    
    $
    218,300
    
    
    $
    
    
    
    $
    87,343
    (4)Exec. Vice President
    
    
    2002
    
    
    
    212,242
    
    
    
    
    
    
    
    128,500
    (4)Restaurant Development
    
    
    2001
    
    
    
    207,410
    
    
    
    
    
    
    
    127,700
    (4)
  (1)
    
    Includes Perkins matching contributions allocated to the named executive
officers under the Perkins Retirement Savings Plan and the Deferred
Compensation Plan.  (2)
    
    The Company no longer employs Mr. McComas.  (3)
    
    Includes relocation costs paid by TRC for $151,403 on behalf of Mr.
McComas and for $170,091 on behalf of Mr. Donahoe.  (4)
    
    Mr. Willingham is eligible for benefits payable annually after retirement
through a supplemental defined contribution retirement plan agreement
between the Company and Mr. Willingham. The total amount available to be
contributed to such plan on his behalf each year is $122,500. $40,833 is
guaranteed with the remaining $81,667 being discretionary subject to Mr.
Willingham meeting specific performance goals set by Mr. Smith. The
contribution on Mr. Willinghams behalf was $81,666 for fiscal 2003 and
$122,500 for fiscal 2002 and 2001. In addition, Mr. Willingham received
matching contributions to the Perkins Retirement Savings Plan and Deferred
Compensation Plan of $5,677 in 2003, $6,000 in 2002 and $5,200 in 2001.
Mr. Willingham retired from the Company on December 31, 2003. In January
2004, the Company paid Mr. Willingham $358,391 as a final distribution
related to the assets accumulated in the retirement plan.  (5)
    
    Includes $153,145 related to the separation agreement between the Company
and Mr. McComas. 53




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Compensation of Directors. Hollis W. Rademacher is paid $2,500 for each Board Meeting of TRC he attends.
Mr. Rademacher was paid for four meetings of the board in 2003. 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 March 26, 2004 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 March 26, 2004 by all directors and the executive
officers named in the Executive Compensation Table above, including all
directors and 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
    %Common Stock
    
    Richard A. Meringolo
    
    
    2,267
    (2)
    
    
    21.0
    %Common Stock
    
    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.(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. 54




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(c) Securities Authorized for Issuance Under Equity Compensation Plans. TRC has no equity compensation plans. Item 13. Certain
Relationships and Related Transactions. (a) Transactions with Management and Others. During 2003 and 2002, FICC purchased certain food products from Foxtail for
which we were paid approximately $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 2003 and
2002, lease and sublease income was $79,000. 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 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 was $304,000 and $448,000, respectively. (b) Indebtedness of Management. In conjunction with recruiting Don M. McComas to the Company, Mr. McComas was
allowed to borrow up to $100,000 from the Company. At December 29, 2002, Mr.
McComas had an outstanding loan balance of $36,000. During the first quarter
of 2003, Mr. McComas borrowed an additional $64,000. The entire balance was
paid during the second quarter of 2003. The Company no longer employs Mr.
McComas. In June 2000, James F. Barrasso, Executive Vice President, Foodservice
Development, borrowed $65,000 from us with interest at the prime rate. In
December 2002, Mr. Barrasso paid $6,000 of principal on the outstanding loan
balance. In January 2003, Mr. Barrasso paid $20,000 of principal on the
outstanding loan balance. In February 2003, Mr. Barrasso paid an additional
$3,310 of principal on the outstanding loan balance. At December 28, 2003, the
outstanding principal balance was $35,690. Item 14. Principal
Accountant Fees And Services. The following table sets forth fees for services PricewaterhouseCoopers LLP
provided to the Company during fiscal 2003 and 2002: 2003
    
    2002Audit fees
    
    $
    162,000
    
    
    $
    196,300Tax fees(1)
    
    
    5,000
    
    
    
    8,000Total
    
    $
    167,000
    
    
    $
    204,300
  (1)
    
    Represents fees primarily related
to review of the Companys federal income tax return.
 55




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PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)
    
    
    1.
    
    
    Financial Statements (including related Notes to Financial
Statements) filed as part of this report are listed below:Report of Independent Auditors.Consolidated Statements of Operations for the Years Ended December 28,
2003, December 29, 2002 and December 30, 2001.Consolidated Balance Sheets at December 28, 2003 and December 29, 2002.Consolidated Statements of Stockholders Investment for the Years Ended
December 28, 2003, December 29, 2002 and December 30, 2001.Consolidated Statements of Cash Flows for the Years Ended December 28, 2003,
December 29, 2002 and December 30, 2001.2.
    
    
    The following Financial Statement Schedules for the years
ended December 28, 2003, December 29, 2002 and December 30, 2001 are
included:
 No.Report of Independent Auditors on Schedule.II.
    
    Valuation and Qualifying Accounts.
 Schedules I, III, IV and V are not applicable and have therefore been omitted. 3.
    Exhibit:
 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)
 56




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##### Table of Contents



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)10.4
    
    Registration Rights Agreement dated as of May
18, 1998 among the Issuer and the Initial Purchasers named
therein. (Filed as Exhibit 10.4 to The Restaurant Companys
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)10.7(a)
    
    Lease agreement between TRC Realty LLC and General
Electric Capital Corporation dated November 9, 1999 for an
aircraft and related guaranty. (Filed as Exhibit 10.1 to
The Restaurant Companys 1999 Third Quarter Report on Form
10-Q)10.8
    
    Reimbursement Agreement between TRC Realty
LLC and Friendly Ice Cream Corporation for use of a leased
plane. (Filed as Exhibit 10.8 to The Restaurant Companys
Amendment No. 1 to the Registration Statement on Form S-4,
Registration No. 333-57925)10.9
    
    Revolving Loan Note made by Donald N. Smith
payable to the order of The Restaurant Company dated July
20, 1998, providing for a loan of up to $1,500,000. (Filed
as Exhibit 10.9 to The Restaurant Companys Amendment No. 1
to the Registration Statement on Form S-4, Registration No.
333-57925)
 57




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##### Table of Contents



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)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.*14.1
    
    The Restaurant Company Code of Business Conduct*21
    
    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)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. 58




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(b) Reports on Form 8-K. No reports on Form 8-K were filed by The Restaurant Company during the
fourth quarter of 2003. [Intentionally Left Blank] 59




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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] 60




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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 26th day of
March 2004. 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 26th day of March 2004. 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/ Michael P. Donahoe
Michael P. Donahoe
    
    Director, Executive Vice President, Chief Financial
Officer (Principal Financial and Accounting Officer)
 61




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Report of Independent
Auditors onFinancial Statement Schedule To the Board of Directors
of The Restaurant Company: Our audits of the
consolidated financial statements referred to in our report dated
March 19, 2004, except as to the third paragraph of Note 8,
for which the date is March 25, 2004 included in this
Form 10-K of The Restaurant Company and subsidiaries also
included an audit of the financial statement schedules 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. /s/ PricewaterhouseCoopers LLP March 19, 2004, except
as to the third paragraph of Note 8, for which the date is
March 25, 2004 62




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SCHEDULE II

THE RESTAURANT COMPANY
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)

|                                    |                                 |          |              |          |            |          |           |          |            |           |          |   |  |   |   |      |      |   |     |       | 
|----------------------------------- | ------------------------------- | -------- | ------------ | -------- | ---------- | -------- | --------- | -------- | ---------- | --------- | -------- | - |  | - | - | ---- | ---- | - | --- | ----- | 
|Column A                            |                                 | Column B |              | Column C |            | Column D |           | Column E
|                                    |                                 |          |              |          |            |          |           |         
|                                    |                                 |          |              |          |            |          | Additions |          |            |           |          |   |  |   |  
|                                    |                                 |          |              |          |            |          |           |          |            |           |          |   |  |   |  
|                                    |                                 |          | Balance at   |          | Charged    |          | Charged   |          | Deductions |           | Balance 
|                                    |                                 |          | Beginning of |          | to Costs & |          | to Other  |          | from       |           | at Close
|Description                         |                                 | Period   |              | Expenses |            | Accounts |           | Reserves |            | of Period
|                                    |                                 |          |              |          |            |          |           |          |            |          
|FISCAL YEAR ENDED DECEMBER 28, 2003 |                                 |          |              |          |            |          |           |          |            |           |          |   |  |   |   |      |      |   |     |      
|                                    | Allowance for Doubtful Accounts |          | $            | 1,174    |            |          | $         | 552      |            |           | $        |  |  |   | $ | (723 | )(a) |   | $   | 1,003 | 
|                                    |                                 |          |              |          |            |          |           |          |            |           |          |   |  |   |   |      |      |   |     |      
|Reserve for Disposition of Assets   |                                 | $        | 156          |          |            | $        |          |          |            | $         |         |   |  | $ |  |      |      | $ | 156 |      
|                                    |                                 |          |              |          |            |          |           |          |            |           |          |   |  |   |   |      |      |   |     |      
|FISCAL YEAR ENDED DECEMBER 29, 2002 |                                 |          |              |          |            |          |           |          |            |           |          |   |  |   |   |      |      |   |     |      
|                                    | Allowance for Doubtful Accounts |          | $            | 1,115    |            |          | $         | 498      |            |           | $        |  |  |   | $ | (439 | )(a) |   | $   | 1,174 | 
|                                    |                                 |          |              |          |            |          |           |          |            |           |          |   |  |   |   |      |      |   |     |      
|Reserve for Disposition of Assets   |                                 | $        | 156          |          |            | $        |          |          |            | $         |         |   |  | $ |  |      |      | $ | 156 |      
|                                    |                                 |          |              |          |            |          |           |          |            |           |          |   |  |   |   |      |      |   |     |      
|FISCAL YEAR ENDED DECEMBER 30, 2001 |                                 |          |              |          |            |          |           |          |            |           |          |   |  |   |   |      |      |   |     |      
|                                    | Allowance for Doubtful Accounts |          | $            | 818      |            |          | $         | 484      |            |           | $        |  |  |   | $ | (187 | )(a) |   | $   | 1,115 | 
|                                    |                                 |          |              |          |            |          |           |          |            |           |          |   |  |   |   |      |      |   |     |      
|Reserve 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