<PAGE>   1
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K
(Mark One)
   [X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1998

                                       OR

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                 For the transition period from ______to _______

                          Commission File Number 1-9214

                        PERKINS FAMILY RESTAURANTS, L.P.

             (Exact name of Registrant as specified in its charter)

         Delaware                                    62-1283091
(State or other jurisdiction of           (I.R.S. Employer Identification No.)
incorporation or organization)

6075 Poplar Avenue, Suite 800, Memphis, Tennessee                  38119
  (Address of principal executive offices)                       (Zip Code)

                                 (901) 766-6400
              (Registrant's telephone number, including area code)

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


Title of each class                                  Name of each exchange
-------------------                                  on which registered
                                                     -------------------
Depositary Units Representing Limited
Partnership Interests in the Registrant              None

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

                                      None

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  X    No
                                              ---      ---- 

         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. [ ]


<PAGE>   2
                                     PART I
ITEM 1.  BUSINESS.

GENERAL. Perkins Family Restaurants, L.P., ("Perkins," "Company" or "PFR"), is a
Delaware limited partnership. The Company is managed by Perkins Management
Company, Inc. ("PMC"). PMC, a wholly-owned subsidiary of Perkins Restaurants,
Inc. ("PRI"), is the sole general partner and owns 2.9% of PFR including a 1%
general partner interest and a 1.9% limited partner interest. PRI owns the
remaining 98.1% of the Limited Partnership Units ("Units") of PFR. PRI is a
wholly-owned subsidiary of The Restaurant Company ("TRC"). The Company
reimburses PMC for all of its direct and indirect costs (principally general and
administrative costs) allocable to the Company. Perkins Finance Corp. ("PFC") is
a wholly-owned subsidiary of PFR and was created solely to act as the co-issuer
of PFR's 10.125% Senior Notes. PFC has no substantial operations of any kind and
does not have any revenues.

The principal shareholders of TRC are Donald N. Smith, PMC's Chairman and Chief
Executive Officer, and The Equitable Life Assurance Society of the United States
("Equitable"). Mr. Smith is also the Chairman and Chief Executive Officer of
Friendly Ice Cream Corporation ("FICC"), which operates and franchises
approximately 700 full-service restaurants, located primarily in the
northeastern United States. Mr. Smith owns 9.5% of the common stock of FICC.
Unless the context otherwise requires, all references to Perkins with respect to
the ownership and operation of its business also include references to PMC.

THE GOING PRIVATE TRANSACTION. Prior to December 22, 1997, the Company was a
limited partnership 48.6% indirectly owned (including its general partner's
interest) by TRC. The remainder of the limited partnership units ("Units") were
traded on the New York Stock Exchange under the symbol "PFR". The Company's
business was conducted through Perkins Restaurants Operating Company, L.P.
("PROC"), a Delaware limited partnership. PFR was the sole limited partner and
owned 99% of PROC, and PMC was the sole general partner and owned the remaining
1% of PROC. Upon a majority vote of the holders of the publicly traded Units,
5.44 million Units held by persons other than TRC and its subsidiaries were
converted into the right to receive $14.00 in cash per Unit (the "Going Private
Transaction"). Additionally, PROC was merged into PFR, and PMC's 1% general
partnership interest in PROC was converted into a limited partnership interest
in PFR. Upon consummation of the Going Private Transaction on December 22, 1997,
PFR became an indirect wholly-owned subsidiary of TRC.

OPERATIONS. Perkins operates and franchises family-style restaurants which serve
a wide variety of high quality, moderately-priced breakfast, lunch and dinner
entrees. Perkins Family Restaurants provide table service, and many are open 24
hours a day (except Christmas day and certain late night hours in selected
markets), seven days a week. As of December 31, 1998, entrees served in
Company-operated restaurants ranged in price from $3.99 to $9.49 for breakfast,
$4.65 to $9.49 for lunch and $6.19 to $9.49 for dinner. On December 31, 1998,
there were 496 full service restaurants in the Perkins' system, of which 140
were Company-operated restaurants and 356 were franchised restaurants. Both the
Company-operated restaurants and franchised restaurants operate under the names
"Perkins Family Restaurant," "Perkins Family Restaurant and Bakery," or "Perkins
Restaurant" and the mark "Perkins." The full-service Company-operated
restaurants and franchised restaurants were located in 35 states with the
largest number in Minnesota, Ohio, Pennsylvania, Florida and New York (See
Significant Franchisees). Perkins has sixteen franchised restaurants in Canada.

Perkins offers its guests 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. All menu items
at franchised restaurants must be approved by Perkins. Menu offerings
continually evolve to meet changing consumer tastes. Perkins buys television,
radio, outdoor and print advertisements to encourage trial, to promote product
lines and to increase guest traffic. Perkins has also installed a computerized
labor scheduling and administrative system called PRISM in all Company-operated
restaurants to improve Perkins' operating efficiency. PRISM is also available to
franchisees.


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<PAGE>   3



Perkins also offers cookie doughs, muffin batters, pancake mixes, pies and other
food products for sale to its Company-operated and franchised restaurants and
bakery and food service distributors through Foxtail Foods ("Foxtail"), Perkins'
manufacturing division. During 1998, sales of products from this division to
Perkins franchisees and outside third parties constituted approximately 9.2% of
total revenues of the Company.

Franchised restaurants operate pursuant to license agreements generally having
an initial term of 20 years, and pursuant to which a royalty fee (usually 4% of
gross sales) and an advertising contribution (typically 3% of gross sales) are
paid. Effective January 1, 1998, franchisees pay a non-refundable license fee of
$40,000 for the opening of new restaurants. Franchisees opening their third and
subsequent restaurants have the option to pay a license fee of only $30,000 if
limited assistance in opening the restaurant is provided by Perkins. License
agreements are typically terminable by franchisees on 12 to 15 months prior
notice and upon payment of specified liquidated damages. Franchisees do not
typically have express renewal rights. In 1998, average annual royalties paid by
franchisees were approximately $58,700. The following number of license
agreements are scheduled to expire in the years indicated: 1999 - ten; 2000 -
eight; 2001 - ten; 2002 - ten; 2003 - eight. Franchisees typically apply for and
receive new license agreements.

DESIGN DEVELOPMENT. Perkins restaurants are primarily located in free-standing
buildings with between approximately 90 to 250 seats. The Company employs 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. An accelerated program to upgrade existing
Company-operated restaurants began in 1995 and continues today. The current
remodel package features modern, distinctive interior and exterior layouts that
enhance operating efficiencies and guest appeal. As of December 31, 1998,
approximately 91% of Company-operated restaurants were either new or remodeled
since January 1, 1994.

To promote a consistent and current image throughout the Perkins system, the
Company encourages its franchisees to remodel their restaurants. Thirty-nine
franchised restaurants were remodeled in 1997 and an additional 46 restaurants
were remodeled in 1998. Franchise restaurants that were either new or remodeled
since 1994 represent approximately 63% of the total franchise system.

SYSTEM DEVELOPMENT. Perkins opened six new Company-operated full-service
restaurants in 1998 in St. Louis Park, MN, Orange City, FL, Orlando, FL, West
Des Moines, IA, Stanley, KS and Appleton, WI. One restaurant was reopened in
Bloomington, MN during 1998 after being razed and reconstructed as a new Perkins
Cafe Bakery. Thirty-five new franchised Perkins restaurants opened during the
year and twelve new franchise owners joined the system.

RESEARCH AND DEVELOPMENT. Each year, Perkins develops and tests a wide variety
of products with potential to enhance variety and appeal of its menu. In
addition to evaluations conducted in the Company's 3,000 sq. ft. test kitchen in
Memphis, new products undergo extensive operations and consumer testing to
determine acceptance. While this effort is an integral part of Perkins overall
operations, it was not a material expense in 1998. In addition, no material
amounts were spent to conduct consumer research in 1998.

SIGNIFICANT FRANCHISEES. As of December 31, 1998, three franchisees, otherwise
unaffiliated with Perkins, owned 81 of the 356 full-service franchised
restaurants and bakeries. The respective distribution of restaurants operated by
such franchisees was: 31 restaurants primarily in upstate New York; 30
restaurants in Pennsylvania, Ohio and New York; and 20 restaurants in Ohio and
Kentucky. During 1998, Perkins received net royalties and license fees of
approximately $1,783,000, $1,739,000 and $1,103,000 respectively, from these
franchisees.


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<PAGE>   4



On February 4, 1999, Denny's (a subsidiary of Advantica Restaurant Group) was
the successful bidder in the court-supervised auction sale of 30 restaurants of
Perk Development Corporation ("Perk"), the Company's upstate New York
franchisee. These restaurants ceased operating as Perkins Family Restaurants on
February 28, 1999. For the year ended December 31, 1998, the Company recorded a
reserve for debt of the franchisee guaranteed by the Company of $250,000, a
write-off of $225,000 for unreserved accounts receivable and a non-cash charge
of $689,000 related to the write-off of an intangible asset related to future
royalty income from the franchisee. The Company received approximately
$1,783,000 in royalties from Perk during 1998. Management expects to replace
this revenue stream in future years through the recruiting of new franchisees.

FRANCHISE GUARANTEES. In the past, the Company has sponsored financing programs
offered by certain lending institutions to assist its franchisees in procuring
funds for the construction of new franchised restaurants and to purchase and
install in-store bakeries. The Company provides a limited guaranty of funds
borrowed. At December 31, 1998, there were approximately $3,370,000 in
borrowings outstanding under these programs. The Company has guaranteed
$1,118,000 of these borrowings. No additional borrowings are available under
these programs.

On February 4, 1999, Denny's (a subsidiary of Advantica Restaurant Group) was
the successful bidder in the court-supervised auction sale of 30 restaurants of
Perk Development Corporation, a franchisee of the Company. These restaurants
ceased operating as Perkins Family Restaurants on February 28, 1999. As a
result, the Company recorded a reserve for debt of the franchisee guaranteed by
the Company of $250,000 for the year ended December 31, 1998. After
consideration of this reserve, $2,998,000 and $858,000 in borrowings and
guarantees, respectively, remain under the financing programs above.

In early 1998, the Company entered into a separate two year limited guarantee of
$1,200,000 in borrowings of a franchisee which were used to construct a new
franchise restaurant.

SERVICE FEE AGREEMENTS. Perkins' predecessors entered into arrangements with
several different parties which have reserved territorial rights under which
specified payments are to be made by Perkins based on a percentage of gross
sales from certain restaurants and for new restaurants opened within certain
geographic regions. During 1998, Perkins paid an aggregate of $2,181,000 under
such arrangements. Three of such agreements are currently in effect. Of these,
one expires upon the death of the beneficiary, one expires in the year 2075 and
the remaining agreement remains in effect as long as the Company operates
Perkins Family Restaurants in certain states.

SOURCE OF MATERIALS. Essential supplies and raw materials are available from
several sources and Perkins is not dependent upon any one source for its
supplies and raw materials.

PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY. Perkins believes that its
trademarks and service marks, especially the mark "Perkins," are of substantial
economic importance to its 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. Perkins has copyrighted
architectural drawings for Perkins restaurants and claims copyright protection
for certain manuals, menus, advertising and promotional materials. Perkins does
not have any patents.

SEASONALITY. Perkins' revenues are subject to seasonal fluctuations. Customer
traffic and consequently revenues are highest in the summer months and lowest
during the winter months because of the high proportion of restaurants located
in states where inclement weather adversely affects guest visits.


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<PAGE>   5



WORKING CAPITAL. As is typical in the restaurant industry, the Company
ordinarily operates with a working capital deficit since the majority of its
sales are for cash, while credit is received from its suppliers. Funds generated
by cash sales in excess of those needed to service short term obligations are
used by the Company to reduce debt and acquire capital assets. At December 31,
1998, this working capital deficit was $18.2 million.

COMPETITION. Perkins' 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. Perkins competes directly or indirectly with all restaurants, from
national and regional chains to local establishments. Some of its competitors
are corporations that are much larger than Perkins 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 which compete with each other. PRI, TRC, other affiliates of PMC and
their management may engage in other businesses which may compete with the
business of Perkins.

EMPLOYEES. As of March 23, 1999, Perkins employed approximately 10,500 persons,
of whom approximately 360 were administrative and manufacturing personnel and
the balance were restaurant personnel. Approximately 67% of the restaurant
personnel are part-time employees. Perkins competes in the job market for
qualified restaurant management and operational employees. Perkins maintains
ongoing restaurant management training programs and has on its staff full-time
restaurant training managers and a training director. Perkins believes that its
restaurant management compensation and benefits package compares favorably with
those offered by its competitors. None of Perkins' employees are represented by
a union.

REGULATION. Perkins is subject to various Federal, state and local laws
affecting its 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.

Perkins is 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.
Perkins must also adhere to Federal Trade Commission regulations governing
disclosures in the sale of franchises.

The wage rates of Perkins' hourly employees are impacted by Federal and state
minimum wage rate laws. Future increases in these rates could materially affect
Perkins' cost of labor.









                            INTENTIONALLY LEFT BLANK


                                       5
<PAGE>   6



ITEM 2.  PROPERTIES.

The following table lists the location of each of the Company-operated and
franchised restaurants and bakeries as of December 31, 1998 (excluding
alternative formats):

<TABLE>
<CAPTION>
                       Number of Restaurants and Bakeries
                       ----------------------------------

                           Company
                           Operated          Franchised          Total
                           --------          ----------          -----
<S>                        <C>               <C>                 <C>
Alabama                       --                 1                 1
Arizona                       --                10                10
Arkansas                      --                 5                 5
Colorado                      --                16                16
Delaware                      --                 1                 1
Florida                       21                22                43
Georgia                       --                 2                 2
Idaho                         --                 9                 9
Illinois                       8                 1                 9
Indiana                       --                 6                 6
Iowa                          17                 1                18
Kansas                         5                 4                 9
Kentucky                      --                 3                 3
Maryland                      --                 2                 2
Michigan                       5                 1                 6
Minnesota                     40                33                73
Mississippi                   --                 2                 2
Missouri                      10                 1                11
Montana                       --                 8                 8
Nebraska                       5                 2                 7
New Jersey                    --                 9                 9
New York                      --                35                35
North Carolina                --                 5                 5
North Dakota                   3                 5                 8
Ohio                          --                58                58
Oklahoma                       3                --                 3
Pennsylvania                   7                44                51
South Carolina                --                 3                 3
South Dakota                  --                10                10
Tennessee                      1                12                13
Utah                          --                 1                 1
Virginia                      --                 1                 1
Washington                    --                 7                 7
Wisconsin                     15                16                31
Wyoming                       --                 4                 4
Canada                        --                16                16
                             ---               ---               ---

     Total                   140               356               496
                             ===               ===               ===
</TABLE>



Most of the restaurants feature a distinctively styled brick or stucco building.
Perkins 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.


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<PAGE>   7


The following table sets forth certain information regarding Company-operated
restaurants and other properties, as of December 31, 1998:


<TABLE>
<CAPTION>
                                                        Number of Properties(1)
                                                        --------------------  
Use                                           Owned             Leased           Total
---                                           -----             ------           -----
<S>                                           <C>               <C>              <C>
Offices and Manufacturing Facilities(2)          1                  8                9
Perkins Family Restaurants(3)                   58                 82              140
Alternative Concepts(4)                          -                  3                3
</TABLE>

-----------

         (1) In addition, Perkins leases 19 properties, 16 of which are
         subleased to others and 3 of which are vacant. Perkins also owns 14
         properties, 12 of which are leased to others, 1 of which is vacant and
         1 held for future development.

         (2) Perkins' principal office is located in Memphis, Tennessee, and
         currently comprises approximately 53,500 square feet under a lease
         expiring on May 31, 2003, subject to renewal by Perkins for a maximum
         of 60 months. In addition, Perkins owns a 25,149 square-foot
         manufacturing facility in Cincinnati, OH, and leases two other
         properties in Cincinnati, OH, consisting of 36,000 square feet and
         60,000 square feet, respectively, for use as manufacturing facilities.

         (3) The average term of the remaining leases is 8 years, excluding
         renewal options. The longest lease term will mature in 42 years and the
         shortest lease term will mature in approximately 2 years, assuming the
         exercise of all renewal options.

         (4) Perkins leases 3 properties, 2 of which are operating as Cafe and
         Bakeries and 1 is closed and held for disposal. The average term of the
         leases is 7 years, excluding renewal options. The longest lease term
         will mature in 15 years and the shortest lease term will mature in
         approximately 7 years, assuming the exercise of all renewal options.
         The Company is currently negotiating termination of these leases.

ITEM 3.  LEGAL PROCEEDINGS.

Perkins is a party to various legal proceedings in the ordinary course of
business. Management does not believe that these proceedings, either
individually or in the aggregate, are likely to have a material adverse effect
on Perkins' financial position or results of operations.

ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF UNITHOLDERS.

Since all publicly traded Units were repurchased in conjunction with the Going
Private Transaction on December 22, 1997, this item is not applicable.


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<PAGE>   8



                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED UNITHOLDER MATTERS.

         (a)  Market information.

Subsequent to the Going Private Transaction, no established public market exists
for the Company's equity securities.

         (b)  Unitholders.

As of March 23, 1999, there were 2 Unitholders of record.

         (c)  Cash Distributions.

Cash distributions totaling $3,468,000 were paid to Perkins' general partner and
limited partners in 1998. These distributions were made to satisfy estimated
income taxes of its partners arising out of the allocation of taxable income
from the Company. The terms of the Company's secured line of credit facility and
Senior Note Indenture otherwise limit its ability to pay distributions to its
partners.

Cash distributions of $0.975 per Unit were declared to Perkins' limited partners
during 1997.



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<PAGE>   9



ITEM 6.  SELECTED FINANCIAL DATA.

                        PERKINS FAMILY RESTAURANTS, L.P.
                      SELECTED FINANCIAL AND OPERATING DATA
         (In Thousands, Except Per Unit Data and Number of Restaurants)


<TABLE>
<CAPTION>
                                      1998           1997          1996          1995          1994
-----------------------------------------------------------------------------------------------------
<S>                                  <C>           <C>           <C>           <C>           <C>     
Income Data:
  Revenues                           $298,806      $269,526      $252,793      $245,751      $221,902
  Net Income (a)                     $  2,984      $  8,200      $ 13,522      $  9,796      $ 12,008
  Cash Distributions Declared
    Per Unit                         $    N/A      $  0.975      $   1.30      $   1.30      $   1.30

Balance Sheet Data:
  Total Assets                       $202,550      $214,324      $155,656      $161,829      $150,407
  Long-Term Debt (b)                 $134,000      $130,000      $ 48,244      $ 57,850      $ 39,875
  Capital Leases (b)                 $  5,767      $  6,999      $  8,573      $  8,810      $ 10,862


Statistical Data:

  Restaurants and Bakeries
  in Operation at End of Year:
      Company-Operated (c)                140           136           134           139           132
      Franchised (c)                      356           337           331           319           300

-----------------------------------------------------------------------------------------------------
           Total                          496           473           465           458           432
  Average Annual Sales Per
    Company-Operated Restaurant      $  1,816      $  1,682      $  1,576      $  1,535      $  1,535
  Average Annual Royalties Per
    Franchised Restaurant            $   58.7      $   56.9      $   55.2      $   55.0      $   53.3


(a)      Excluding unusual items, net income for 1998, 1997, 1995 and 1994 would have been $7,254,
         $16,050, $12,092 and $13,868, respectively.

(b)      Net of current maturities.

(c)      Excluding alternative concepts.
</TABLE>



                                       9
<PAGE>   10



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
        OF OPERATIONS.

RESULTS OF OPERATIONS

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. The Company does 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.

Overview:
A summary of the Company's results for the three years ended December 31 are
presented in the following table. All revenues, costs and expenses are expressed
as a percentage of total revenues.


<TABLE>
<CAPTION>
                                                    1998        1997         1996
                                                    -----       -----        -----
<S>                                                 <C>         <C>          <C>
Revenues:
  Food sales                                        92.7%        92.8%        92.6%
  Franchise revenues                                 7.3          7.2          7.4
                                                   -----        -----        -----
Total revenues                                     100.0        100.0        100.0%
                                                   -----        -----        -----

Costs and expenses:
  Cost of sales:
    Food cost                                       26.3         26.9         27.1
    Labor and benefits                              32.1         31.2         31.2
    Operating expenses                              18.4         18.8         19.1
  General and administrative                         9.7          9.8          9.4
  Depreciation and amortization                      6.7          5.9          6.2
  Interest, net                                      4.8          1.8          2.0
  Loss on/Provision for disposition of assets        0.2           --           --
  Asset write-down (SFAS No. 121)                    1.1           --           --
  Going Private Transaction                           --          2.7           --
  Loss due to bankruptcy of franchisee               0.2           --           --
  Other, net                                        (0.5)        (0.1)        (0.3)
                                                   -----        -----        -----
Total costs and expenses                            99.0         97.0         94.7
                                                   -----        -----        -----
Net income                                           1.0%         3.0%         5.3%
                                                   =====        =====        =====
</TABLE>



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<PAGE>   11



Net income for 1998 was $2,984,000 versus $8,200,000 in 1997 and $13,522,000 in
1996. Net income for 1998 included $422,000 in loss on/provision for disposition
of assets, $3,373,000 in asset impairment charges under SFAS No. 121 and
$475,000 in write-offs related to the bankruptcy of a significant franchisee.
Net income for 1997 included $7,200,000 in expenses incurred in connection with
the Going Private Transaction and $650,000 in non-recurring tax reorganization
costs. Without these charges, 1998 and 1997 income would have been $7,254,000
and $16,050,000, respectively.


Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Revenues:

Total revenues increased 10.9% over 1997 due primarily to increased restaurant
food sales, sales at Foxtail, and increased franchise royalties.

The increase in restaurant food sales can be primarily attributed to an increase
in comparable sales of 7.8% and the net addition of four new restaurants in
1998. The increase in comparable restaurant sales was due primarily to selective
price increases resulting in an increase in average guest check of 5.2% and an
increase in comparable guest visits of 2.8%.

Revenues from Foxtail increased approximately 15.6% over 1997 and constituted
approximately 9.2% of the Company's total 1998 revenues. Foxtail offers cookie
doughs, muffin batters, pancake mixes, pies and other food products to
Company-operated and franchised restaurants through food service distributors in
order to ensure consistency and availability of Perkins' proprietary products to
each unit in the system. 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 income statements. The increase
noted above can be attributed to growth in the number of stores in the Perkins
system and increased external sales. The increase in outside sales is due to the
Company pursuing sales outside the Perkins system in order to maintain plant
utilization during slower production periods.

Franchise revenues, which consist primarily of franchise royalties and initial
license fees, increased 13.1% over the prior year due primarily to the net
addition of nineteen new franchised restaurants. The increase was also impacted
by an increase in sales for franchised restaurants open for more than one year
of approximately 1.7%.

Costs and Expenses:

Food Cost:
In terms of total revenues, food cost decreased 0.6 percentage points over 1997.
Restaurant division food cost expressed as a percentage of restaurant division
sales, decreased 0.7 percentage points. These decreases during the current year
were primarily due to menu price increases effective in January, May and August
1998. Lower commodity costs on pork, coffee and red meat contributed to the
decrease in food cost percentage as well.

The cost of Foxtail sales, in terms of total Foxtail revenues, decreased
approximately 1.7 percentage points from 1997, due primarily to certain
commodity cost decreases and pricing increases. As a manufacturing operation,
Foxtail typically has higher food costs as a percent of revenues than the
Company's restaurants.


                                       11
<PAGE>   12



Labor and benefits:
Labor and benefits expense, as a percentage of total revenues, increased 0.9
percentage points from 1997. Labor costs have increased over the prior year due
to higher minimum wage rates, a highly competitive labor market and slightly
lower productivity. Employee insurance costs rose over the prior year due to a
change in the provider network effective October 1, 1997. Many health care
providers within the network began to withdraw during the year depriving the
Company of anticipated discounts. Effective October 1, 1998, the Company changed
provider networks in an effort to control these costs.

The wage rates of the Company's hourly employees are impacted by Federal and
state minimum wage laws. Legislation enacted during 1996 which raised the
Federal minimum wage rate in 1996 and 1997 has had an impact on the Company's
labor costs. These increases have resulted in the Federal minimum wage rate
increasing from $4.25 per hour in 1996 to $5.15 per hour today. 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. The Company believes
that it has been able to offset the majority of the recent increases through
selective menu price increases. However, there is no assurance that future
increases can be mitigated through raising menu prices.

As a percentage of revenues, Foxtail labor and benefit charges are significantly
lower than the Company's restaurants. As Foxtail becomes a more significant
component of the Company's total operations, labor and benefits expense,
expressed as a percent of total revenue, should decrease.

Operating expenses:
Operating expenses, expressed as a percentage of total revenues, decreased 0.4
percentage points from 1997 to 1998. The decrease is primarily due to the impact
of menu price increases and lower franchise service fees partially offset by
increased franchise opening costs and higher external distribution and storage
costs at Foxtail. Franchise service fees decreased due to the termination of two
service fee agreements during 1997. Franchise opening costs increased due to the
opening of 19 additional restaurants during the year compared to 1997. Foxtail
external distribution and storage costs increased due to the use of outside
warehousing allowing increased efficiency within the plants and more timely
availability of goods for customers.

General and administrative:
General and administrative expenses increased approximately 11.2% over 1997.
This increase is primarily due to higher incentive compensation costs,
restaurant development costs, field administration costs, human resources costs
and administrative costs at Foxtail. In addition, payroll expense for corporate
administrative staff has increased over the prior year. These were planned
increases deemed necessary as the Company continues to increase the number of
franchise and Company-operated restaurants.

Depreciation and amortization:
Depreciation and amortization increased approximately 25.8% over 1997 due to the
write-up of fixed assets and intangibles resulting from "push-down" accounting
adjustments recorded in December 1997 in connection with the Going Private
Transaction. Additionally, the Company's continuing refurbishment program to
upgrade and maintain existing restaurants and the addition of four new
Company-operated restaurants contributed to this increase.

Interest, net:
Net interest expense was approximately 194.4% higher than 1997 primarily as the
result of debt incurred in December 1997 which was used to consummate the Going
Private Transaction. Interest expense associated with capital lease obligations
has decreased.


                                       12
<PAGE>   13


Loss on/Provision for disposition of assets:
During 1998, the Company recorded a net loss of $422,000 related to the loss
on/provision for disposition of assets; this amount includes a loss of
approximately $773,000 on the disposal of two properties and the recognition of
a previously deferred gain of approximately $445,000 under SFAS No. 66,
"Accounting for Sales of Real Estate," related to the sale of property in 1994.

Asset writedown (SFAS No. 121):
Results of operations for the twelve months ended December 31, 1998, reflect a
$3,373,000 charge against earnings related to the writedown of certain assets
impaired under SFAS No. 121. This charge includes the write-off of an intangible
asset of $689,000 which related to future royalty income of a franchisee which
became disaffiliated with the Perkins system.

Loss due to bankruptcy of franchisee:
Due to the bankruptcy of a significant franchisee, the Company recorded charges
of $250,000 related to debt guaranteed by the Company and $225,000 in unreserved
accounts receivable.

Other:
Other income increased approximately $1,230,000 during 1998 due primarily to
$650,000 in reorganization costs incurred in 1997 associated with the Company
analyzing the alternatives to becoming a tax paying entity beginning January
1998, increased rental income on properties leased/subleased by the Company and
elimination of the 1% minority interest in Company operations due to the Going
Private Transaction.


Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Revenues:

Total revenues increased 6.6% over 1996 primarily due to higher comparable
restaurant sales, the net addition of five new franchised restaurants and two
new Company-operated restaurants and increased sales at Foxtail.

Comparable sales for Company-operated restaurants increased approximately 6.6%
due to a 3.7% increase in average guest check and a 2.9% increase in customer
counts. As a comparison, 1996 results include an additional day because of leap
year. The increase in average guest check was the result of selective menu price
increases and guest preferences for higher-priced entrees. The shift in customer
preference to higher-priced entrees can be attributed to the Company's
development and promotion of higher-priced menu items. Management believes
remodeling of Company-operated restaurants, increased promotional events and
implementation of new products resulted in the increased customer counts.

In 1997, Foxtail revenues increased 11.7% over 1996 and constituted
approximately 8.9% of the Company's total revenues. The increase in Foxtail's
revenue can be attributed primarily to price increases effective in August 1996
and January 1997, increased sales outside the Perkins system and an increase in
franchised restaurants' sales. The increase in outside sales is due to the
Company developing external sales in order to maintain plant utilization during
slower production periods.

Franchise revenues increased 3.8% over the prior year. Although comparable
franchised restaurant sales only increased 1.5% over the prior year, revenues of
franchised restaurants opened during 1995 and 1996 averaged 6.1% higher than the
franchise system average. This performance resulted in the overall improvement
in franchise revenues. Additionally, 13 new franchised restaurants opened during
the year, and one Company-operated restaurant was converted to a franchised
restaurant. Revenues from these openings were partially offset by the closing of
8 under-performing franchised restaurants, 2 of which reopened in late 1997, and
a decrease in franchise license fees due to fewer openings in 1997.




                                       13
<PAGE>   14
Costs and Expenses:

Food cost:
In terms of total revenues, food cost decreased 0.2 percentage points over 1996.
Restaurant division food cost expressed as a percentage of restaurant division
sales, decreased 0.3 percentage points. This decrease resulted from selective
menu price increases and a decline in the costs of certain commodities including
eggs and breads. This decrease was partially offset by higher food costs
associated with pork and poultry products.

Labor and benefits:
Labor and benefits, as a percentage of total revenues, remained consistent to
1996. Worker's compensation and group insurance claims costs decreased; however,
hourly labor costs in the Company's restaurants rose due to mandated increases
in minimum wage rates and wage rate pressures from low levels of unemployment.

Operating expenses:
Operating expenses, expressed as a percentage of total revenues, decreased 0.3
percentage points over 1996. Fees payable under service fee arrangements
decreased as a percentage of total revenues due to termination of two such
agreements, and utilities expense decreased due to milder winter weather than
experienced in the previous year. These decreases were partially offset by
increased bad debt expense.

General and administrative:
General and administrative expenses increased 10.3% over 1996, primarily due to
increased incentive compensation costs as a result of the Company's improved
performance and due to increased administrative support related to both the
growth at Foxtail and anticipated growth in the number of Company-operated and
franchised restaurants expected to open in 1998.

Depreciation and amortization:
Depreciation and amortization increased approximately 1.8% over 1996 due
primarily to the continuing refurbishment program to upgrade and maintain
existing restaurants as well as the addition of new Company-operated
restaurants.

Interest, net:
Interest expense was approximately 4% lower than 1996 due to lower average debt
balances and decreased capital lease obligations.

Going Private Transaction:
During 1997, after Unitholder approval, all Units held by persons other than TRC
and its subsidiaries were converted into the right to receive $14.00 in cash per
Unit. In connection with the Going Private Transaction, the Company expensed
$7,200,000 of related costs.

Other:
In 1997, the Company incurred approximately $650,000 in reorganization costs
associated with analyzing the alternatives to becoming a tax-paying entity
beginning January 1998.


CAPITAL RESOURCES AND LIQUIDITY

Principal uses of cash during the year were payments on long-term debt, cash
outlays related to the Going Private Transaction, including repurchase of Units
and the Going Private Transaction expenses, capital expenditures and cash
distributions to Unitholders. Capital expenditures consisted primarily of land,
building and equipment purchases for new Company-operated restaurants,
maintenance capital and costs related to remodels of existing restaurants. The
Company's primary sources of funding were the issuance of debt and cash provided
by operations.


                                       14
<PAGE>   15



The following table summarizes capital expenditures for each of the years in the
three-year period ended December 31, 1998 (in thousands).

<TABLE>
<CAPTION>
                                       YEARS ENDED DECEMBER 31
                                       -----------------------

                                  1998         1997         1996 
                                -------      -------      -------
<S>                             <C>          <C>          <C>    
Maintenance                     $ 4,141      $ 3,453      $ 2,987
New sites                        12,845        6,193        1,947
Manufacturing                     1,152          714          651
Remodeling and Reimaging          4,144        2,790        4,064
Other                             2,864        1,936        2,209
                                -------      -------      -------
Total Capital Expenditures      $25,146      $15,086      $11,858
                                =======      =======      =======
</TABLE>


The Company's capital budget for 1999 is $28.0 million and includes plans to add
eight new Company-operated restaurants. The Company may increase the capital
budget if it concludes accelerating its development plans would be in its best
interest. The primary source of funding for these projects 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, the Company ordinarily operates with a
working capital deficit since the majority of its sales are for cash, while
credit is received from its suppliers. Funds generated by cash sales in excess
of those needed to service short term obligations are used by the Company to
reduce debt and acquire capital assets. At December 31, 1998, this working
capital deficit was $18.2 million.

On December 22, 1997, the Company issued $130,000,000 of 10.125% Unsecured
Senior Notes (the "Notes") due December 15, 2007. The proceeds were used to
repay outstanding senior notes and borrowings under the Company's revolving line
of credit, purchase Units from the public and pay expenses relative to the
Company's Going Private Transaction.

On December 22, 1997, the Company obtained a secured $50,000,000 revolving line
of credit facility (the "Credit Facility") with a sublimit for up to $5,000,000
of letters of credit. The Credit Facility matures on January 1, 2003, at which
time all amounts become payable. All amounts under the facility will 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 secured
by a first priority lien on substantially all of the assets of the Company. As
of December 31, 1998, $4,000,000 in borrowings and approximately $1,573,000 of
letters of credit were outstanding under the facility.

Prior to the consummation of the Going Private Transaction the Company had paid
regular quarterly cash distributions. The Company expects to pay distributions
to its general partner and limited partners sufficient to satisfy estimated tax
liabilities arising out of the allocation of taxable income or gain from the
Company. The Senior Note Indenture and the Credit Facility otherwise limit the
Company's ability to pay distributions to its partners.


                                       15
<PAGE>   16



The Company's ability to make scheduled payments of principal of, or to pay the
interest or liquidated damages, if any, on, or to refinance, its indebtedness
(including the Notes), or to fund planned capital expenditures will depend on
its future performance, which, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond its control. Based upon the current level of operations, management
believes that cash flow from operations and available cash, together with
available borrowings under the Credit Facility, will be adequate to meet the
Company's liquidity needs for the foreseeable future. The Company may, however,
need to refinance all or a portion of the principal of the Notes on or prior to
maturity. There can be no assurance that the Company will generate sufficient
cash flow from operations, or that future borrowings will be available under the
Credit Facility in an amount sufficient to enable the Company to service its
indebtedness, including the Notes, or to fund its other liquidity needs. In
addition, there can be no assurance that the Company will be able to effect any
such refinancing on commercially reasonable terms or at all.


LOSS OF A SIGNIFICANT FRANCHISEE

On February 4, 1999, Denny's (a subsidiary of Advantica Restaurant Group) was
the successful bidder in the court-supervised auction sale of 30 restaurants of
Perk Development Corporation ("Perk"), the Company's upstate New York
franchisee. These restaurants ceased operating as Perkins Family Restaurants on
February 28, 1999. For the year ended December 31, 1998, the Company recorded a
reserve for debt of the franchisee guaranteed by the Company of $250,000, a
write-off of $225,000 for unreserved accounts receivable and a non-cash charge
of $689,000 related to the write-off of an intangible asset related to future
royalty income from the franchisee. The Company received approximately
$1,783,000 in royalties from Perk during 1998. Management expects to replace
this revenue stream in future years through the recruiting of new franchisees.


SYSTEM DEVELOPMENT

The Company plans to add eight new Company-operated restaurants in 1999. The
Company expects to open between 30 and 35 franchised restaurants in 1999. In
recent years, the Company has been issuing area development agreements in
selected markets where both new and existing franchisees are qualified to open
multiple locations within three to five years. These development agreements are
expected to complement continued growth among franchisees who prefer to open a
limited number of restaurants in existing and smaller markets.


FEDERAL INCOME TAXATION

For state and Federal income tax purposes, the Company is not a taxpaying
entity. Accordingly, no current provision for income taxes is reflected in the
accompanying financial statements. The tax returns of the Company are subject to
examination by state and Federal taxing authorities. If such examinations result
in changes to taxable income, the tax liability of the partners would be changed
accordingly.


                                       16
<PAGE>   17



NEW ACCOUNTING PRONOUNCEMENTS

In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which the Company is adopting in 1999. SOP 98-5 requires the costs
of start-up activities to be expensed as incurred. Historically, new store
preopening costs have been deferred and amortized over twelve months starting
when the restaurant opens. Upon adoption of SOP 98-5, the Company will be
required to record a cumulative effect of a change in accounting principle to
write off any unamortized preopening costs that exist on the balance sheet at
that date. As of December 31, 1998, the Company had unamortized preopening costs
of approximately $523,000 which will be expensed during the first quarter of
1999.

Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," is required to be implemented
for fiscal years beginning after June 15, 1999. The Company is currently
evaluating the effects of adopting this statement, but does not expect the
adoption to have a material effect on the Company's financial statements.


IMPACT OF INFLATION

The Company does not believe that its operations are generally affected by
inflation to a greater extent than are the operations of others within the
restaurant industry. In the past, the Company has generally been able to offset
the effects of inflation through selective periodic menu price increases.


IMPACT OF GOVERNMENTAL REGULATION

A majority of the Company's employees are paid hourly rates as determined by
Federal and state minimum wage rate laws. Future increases in these rates could
materially affect the Company's cost of labor.


SEASONALITY

The Company's revenues are subject to seasonal fluctuations. Customer counts
(and consequently revenues) are higher in the summer months and lower during the
winter months because of the high proportion of restaurants located in northern
states where inclement weather adversely affects guest visits.



                                       17
<PAGE>   18



YEAR 2000

The Year 2000 presents a critical business issue due to the possibility that
many computerized systems will not be able to process information including
dates beginning in the Year 2000. In recent years, the Company has upgraded
computer hardware and software in the normal course of business to Year 2000
compliant technology. The Company has established a plan to assess its readiness
for the Year 2000. A review of computer systems and software, including
non-information technology systems, has been substantially completed. No
material costs associated with achieving Year 2000 compliance internally are
anticipated based on this review.

The nature of the Company's business is such that the ability of outside vendors
to supply the Company's restaurants with food and related products and
preparedness of the Company's franchisees to appropriately assess and address
Year 2000 business risks represent the primary risks to the Company from third
parties. In response to these risks, questionnaires have been sent to all of the
Company's primary vendors to obtain reasonable assurances that adequate plans
are being developed to address the Year 2000 issue. The returned questionnaires
are being assessed by the Company, and are being categorized based upon
readiness for the Year 2000 issues and prioritized in order of significance to
the business of the Company. In the case of outside vendors which provide
inadequate assurance of their readiness to handle Year 2000 issues, appropriate
contingency plans will be developed. The Company's franchisees have been
provided with information regarding the potential business risks associated with
the Year 2000 issue. The Year 2000 readiness of significant franchisees will be
assessed and action plans will be created to address the identified risks.

Unless public suppliers of water, electricity and natural gas are disrupted for
a substantial period of time (in which case the Company's business may be
materially adversely affected), based on information currently available,
management believes the most reasonably likely worst case scenario related to
Year 2000 compliance would not have a material impact on its financial position
or results of operations. However, unanticipated failures by critical vendors or
franchisees, as well as unidentified internal failures, could result in a
material adverse effect on the Company's operations. As a result, management
cannot reasonably predict what impact, if any, Year 2000 issues will have on the
Company.


                                       18
<PAGE>   19



ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK. The Company currently has market risk sensitive instruments
related to interest rates. The Company is not subject to significant exposure
for changing interest rates on its $130,000,000 Unsecured Senior Notes because
the interest rate is fixed at 10.125%. The Company has in place a $50,000,000
line of credit facility which matures on January 1, 2003. All borrowings under
the facility bear interest at floating rates based on the agent's base rate or
Eurodollar rates. The Company had $4,000,000 outstanding under the line of
credit facility at December 31, 1998. While changes in market interest rates
would affect the cost of funds borrowed in the future, the Company believes that
the effect, if any, of reasonably possible near-term changes in interest rates
on the Company's consolidated financial position, results of operations or cash
flows would not be material.

COMMODITY PRICE RISK. Many of the food products purchased by the Company are
affected by commodity pricing and are, therefore, subject to price volatility
caused by weather, production problems, delivery difficulties and other factors
which are outside the control of the Company. The Company's supplies and raw
materials are available from several sources and the Company is not dependent
upon any single source for these items. If any existing suppliers fail, or are
unable to deliver in quantities required by the Company, the Company believes
that there are sufficient other quality suppliers in the marketplace that its
sources of supply can be replaced as necessary. At times the Company enters into
purchase contracts of one year or less or purchases 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, wheat products and corn products. The Company believes it will be
able to pass through increased commodity costs by adjusting menu pricing in most
cases. However, the Company believes that any changes in commodity pricing which
cannot be offset by changes in menu pricing or other product delivery
strategies, would not be material.


                                       19
<PAGE>   20



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                        PERKINS FAMILY RESTAURANTS, L.P.
                              STATEMENTS OF INCOME
                             YEARS ENDED DECEMBER 31
                                 (In Thousands)


<TABLE>
<CAPTION>

                                                           1998            1997            1996
                                                         ---------       ---------       ---------
<S>                                                      <C>             <C>             <C>      
REVENUES:
     Food sales                                          $ 276,935       $ 250,193       $ 234,164
     Franchise revenues                                     21,871          19,333          18,629
                                                         ---------       ---------       ---------
Total Revenues                                             298,806         269,526         252,793
                                                         ---------       ---------       ---------
COSTS AND EXPENSES:
  Cost of sales:
      Food cost                                             78,576          72,559          68,456
      Labor and benefits                                    96,011          84,027          78,970
      Operating expenses                                    54,779          50,645          48,284
  General and administrative                                29,120          26,187          23,741
  Depreciation and amortization                             20,167          16,029          15,748
  Interest, net                                             14,312           4,862           5,066
  Loss on/Provision for disposition of  assets, net            422              --              --
  Asset write-down (SFAS No. 121)                            3,373              --              --
  Going Private Transaction                                     --           7,200              --
  Loss due to bankruptcy of franchisee                         475              --              --
  Other, net                                                (1,413)           (183)           (994)
                                                         ---------       ---------       ---------
Total Costs and Expenses                                   295,822         261,326         239,271
                                                         ---------       ---------       ---------
NET INCOME                                               $   2,984       $   8,200       $  13,522
                                                         =========       =========       =========
</TABLE>



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


                                       20
<PAGE>   21



                        PERKINS FAMILY RESTAURANTS, L.P.
                                 BALANCE SHEETS
                                   DECEMBER 31
                       (In Thousands, Except Unit Amounts)

<TABLE>
<CAPTION>
                                                                          1998          1997
                                                                        --------      --------
                                  ASSETS
<S>                                                                     <C>           <C>     
CURRENT ASSETS:
Cash and cash equivalents                                               $  2,257      $ 14,160
Receivables, less allowance for doubtful accounts of $495 and $846         7,150         7,719
Inventories, at the lower of first-in, first-out cost or market            5,375         4,232
Prepaid expenses and other current assets                                  1,989         1,823
                                                                        --------      --------
Total current assets                                                      16,771        27,934
                                                                        --------      --------

PROPERTY AND EQUIPMENT, at cost, net of
   accumulated depreciation and amortization                             131,271       127,392
NOTES RECEIVABLE, less allowance for
   doubtful accounts of $161 and $6                                          748           983
INTANGIBLE AND OTHER ASSETS, net of
   accumulated amortization of $30,415 and $27,591                        53,760        58,015
                                                                        --------      --------
                                                                        $202,550      $214,324
                                                                        ========      ========
</TABLE>



              The accompanying notes to financial statements are an
                     integral part of these balance sheets.







                                       21

<PAGE>   22



                        PERKINS FAMILY RESTAURANTS, L.P.
                                 BALANCE SHEETS
                                   DECEMBER 31
                       (In Thousands, Except Unit Amounts)



<TABLE>
<CAPTION>
                                                                1998           1997
                                                               --------      --------
<S>                                                            <C>           <C>     
                      LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
 Current maturities of long-term debt                          $     --      $     --
 Current maturities of capital lease obligations                  1,229         1,301
 Accounts payable                                                11,469        10,563
 Accrued expenses                                                22,254        35,948
                                                               --------      --------
 Total current liabilities                                       34,952        47,812
                                                               --------      --------

CAPITAL LEASE OBLIGATIONS, less  current maturities               5,767         6,999

LONG-TERM DEBT, less current maturities                         134,000       130,000

OTHER LIABILITIES                                                 3,114         4,312

COMMITMENTS AND CONTINGENCIES
  (Notes 5 and 10)

PARTNERS' CAPITAL:
General partner                                                     247           252
Limited partners (5,463,924 Units issued and outstanding)        24,470        24,949
                                                               --------      --------
Total Partners' Capital                                          24,717        25,201
                                                               --------      --------
                                                               $202,550      $214,324
                                                               ========      ========
</TABLE>

              The accompanying notes to financial statements are an
                     integral part of these balance sheets.


                                       22

<PAGE>   23



                        PERKINS FAMILY RESTAURANTS, L.P.
                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
                        (In Thousands, Except Unit Data)

<TABLE>
<CAPTION>
                                                        Limited
                                                     Partnership      General      Limited
                                                        Units         Partner      Partners        Total
                                                     -----------      -------      --------       --------
<S>                                                 <C>               <C>          <C>            <C>     
Balance at December 31, 1995                          10,481,370       $ 611       $ 60,485       $ 61,096
                                                     -----------       -----       --------       --------
  Net income for 1996                                         --         135         13,387         13,522
  Capital contribution                                        --           7             --              7
  Cash distributions declared ($1.30 per Unit)                --        (138)       (13,633)       (13,771)
  Issuance of restricted Units                            44,250          --            544            544
  Retirement of restricted Units                         (32,690)         --           (451)          (451)
  Changes in deferred compensation
   related to restricted Units                                --          --            610            610
                                                     -----------       -----       --------       --------
Balance at December 31, 1996                          10,492,930         615         60,942         61,557
                                                     -----------       -----       --------       --------
  Net income for 1997                                         --          82          8,118          8,200
  Capital contribution                                        --          28             --             28
  Cash distributions declared ($0.975 per Unit)               --        (103)       (10,220)       (10,323)
  Issuance of restricted Units                            13,750          --            166            166
  Retirement of restricted Units                         (20,413)         --           (279)          (279)
  Changes in deferred compensation
   related to restricted Units                                --          --          2,278          2,278
  Going Private Transaction                           (5,442,067)         --        (36,677)       (36,677)
  Issuance of Units to PRI and PMC                       420,924          --            639            639
  Other                                                   (1,200)       (370)           (18)          (388)
                                                     -----------       -----       --------       --------
 Balance at December 31, 1997                          5,463,924         252         24,949         25,201
                                                     -----------       -----       --------       --------
  Net income for 1998                                         --          30          2,954          2,984
  Tax distributions                                           --         (35)        (3,433)        (3,468)
                                                     -----------       -----       --------       --------
Balance at December 31, 1998                           5,463,924       $ 247       $ 24,470       $ 24,717
                                                     ===========       =====       ========       ========
</TABLE>

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


                                       23
<PAGE>   24



                        PERKINS FAMILY RESTAURANTS, L.P.
                            STATEMENTS OF CASH FLOWS
                             YEARS ENDED DECEMBER 31
                                 (In Thousands)

<TABLE>
<CAPTION>

                                                                  1998            1997           1996
                                                                --------       ---------       --------
<S>                                                             <C>            <C>             <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                    $  2,984       $   8,200       $ 13,522
  Adjustments to reconcile net income to net
  cash provided by operating activities:
    Depreciation and amortization                                 20,167          16,029         15,748
    Going Private Transaction                                         --           7,200             --
    Loss on/Provision for disposition of assets                      197              --             --
    Asset writedown (SFAS No. 121)                                 3,373              --             --
    Other non-cash income and expense items                        1,697           1,941          1,795
    Changes in other operating assets and liabilities                302           1,524          4,180
                                                                --------       ---------       --------
      Total adjustments                                           25,736          26,694         21,723
                                                                --------       ---------       --------
      Net cash provided by operating activities                   28,720          34,894         35,245
                                                                --------       ---------       --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Cash paid for property and equipment                           (25,146)        (15,086)       (11,858)
  Proceeds from sale of property and equipment                     1,095           1,513            573
  Payments on notes receivable                                     1,249           1,154          1,755
  Investment in/Advances to joint venture                           (110)           (850)            --
                                                                --------       ---------       --------
      Net cash used in investing activities                      (22,912)        (13,269)        (9,530)
                                                                --------       ---------       --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from long-term debt                                    43,800         192,000         16,250
  Payments on long-term debt                                     (39,800)       (114,600)       (25,075)
  Principal payments under capital lease obligations              (1,304)         (1,956)        (2,074)
  Distributions to partners                                       (3,468)        (13,906)       (13,904)
  Deferred financing costs                                          (536)         (5,474)            --
  Repurchase of limited partnership units                        (16,403)        (66,266)            --
                                                                --------       ---------       --------
      Net cash used in financing activities                      (17,711)        (10,202)       (24,803)
                                                                --------       ---------       --------
      Net increase (decrease) in cash and cash equivalents       (11,903)         11,423            912

CASH AND CASH EQUIVALENTS:
  Balance, beginning of year                                      14,160           2,737          1,825
                                                                --------       ---------       --------
  Balance, end of year                                          $  2,257       $  14,160       $  2,737
                                                                ========       =========       ========
</TABLE>



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


                                       24
<PAGE>   25



                        PERKINS FAMILY RESTAURANTS, L.P.
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998


(1)  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Organization --

Perkins Family Restaurants, L.P., ("Perkins," "Company" or "PFR"), is a Delaware
limited partnership. The Company is managed by Perkins Management Company, Inc.
("PMC"). PMC, a wholly-owned subsidiary of Perkins Restaurants, Inc. ("PRI"), is
the sole general partner and owns 2.9% of PFR including a 1% general partner
interest and a 1.9% limited partner interest. PRI owns approximately 98.1% of
the Limited Partnership Units ("Units") of PFR. PRI is a wholly-owned subsidiary
of The Restaurant Company ("TRC"). The Company reimburses PMC for all of its
direct and indirect costs (principally general and administrative costs)
allocable to the Company. Perkins Finance Corp. ("PFC") is a wholly-owned
subsidiary of PFR and was created solely to act as the co-issuer of PFR's
10.125% Senior Notes. PFC has no substantial operations of any kind and does not
have any revenues.

The activities of the Company are governed by the terms of the partnership
agreement (the "Agreement"). The significant provisions of the Agreement not
described elsewhere are that the general partner has sole and complete
discretion in determining the consideration, terms and conditions with respect
to any future issuance of Units and no preemptive rights to acquire additional
Units exist.

The Company operates and franchises family-style restaurants which serve a wide
variety of high quality, moderately priced breakfast, lunch, and dinner entrees,
snacks and bakery products. Perkins restaurants provide table service, and many
are open 24 hours a day (except Christmas day and certain late night hours in
selected markets), seven days a week. The full-service restaurants are located
in 35 states with the largest number in Minnesota, Ohio, Pennsylvania, Florida
and New York (See Note 16). There are sixteen franchised restaurants located in
Canada. The Company also offers cookie doughs, muffin batters, pancake mixes,
pies and other food products for sale to Company-operated and franchised
restaurants and bakery and food service distributors through Foxtail Foods 
("Foxtail"), the Company's manufacturing division.

Basis of Presentation --
Certain prior year amounts have been reclassified to conform to current year
presentation.

Estimates --
The presentation of financial statements in conformity with generally accepted
accounting principles 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.

Cash Equivalents --
The Company considers highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.

Franchise Revenue --
Franchisees are required to pay an initial fee to the Company when each
franchise is granted. These fees are not recognized as income until the
restaurants open. The Company also receives franchise royalties ranging from one
to six percent of the gross sales of each franchised restaurant. These royalties
are recorded as income monthly.


                                       25
<PAGE>   26
Advertising --
The Company expenses the costs of advertising. Net advertising expense was
$11,644,000, $10,784,000 and $10,629,000 for the fiscal years 1998, 1997 and
1996, respectively.

Property and Equipment --
Major renewals and betterments are capitalized; replacements and maintenance and
repairs which do not extend the lives of the assets are charged to operations as
incurred.

Preopening Costs --
Historically, new store preopening costs have been deferred and amortized over
twelve months starting when the restaurant opens. In April 1998, the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-5, "Reporting on the Costs of Start-Up Activities," which the Company is
adopting in 1999. SOP 98-5 requires the costs of start-up activities to be
expensed as incurred. Upon adoption of SOP 98-5, the Company will be required to
record a cumulative effect of a change in accounting principle to write off any
unamortized preopening costs that exist on the balance sheet at that date. As of
December 31, 1998, the Company had unamortized preopening costs of approximately
$523,000 which will be expensed during the first quarter of 1999.

Impairment of Long-Lived Assets --
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company evaluates the recoverability of assets (including
intangibles) when events and circumstances indicate that assets might be
impaired. For such assets, the Company determines 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, the
Company generally estimates undiscounted future cash flows at the level of
individual restaurants or manufacturing facilities. In the case of certain
intangible assets related to the acquisition of area development rights and
acquisition of groups of restaurants, undiscounted future cash flows are
evaluated based on an appropriate grouping of the related properties' cash
flows. 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.

Income Taxes --
For state and Federal income tax purposes, the Company is not a taxpaying
entity. As a result, the taxable income, which may vary substantially from
income reported for financial reporting purposes, is includable in the state and
Federal tax returns of the partners. Accordingly, no current provision for
income taxes is reflected in the accompanying financial statements. The tax
returns of the Company are subject to examination by state and Federal taxing
authorities. If such examinations result in changes to taxable income, the tax
liability of the partners would be changed accordingly.

Cash Distributions --
Cash distributions totaling $3,468,000 were paid to Perkins' general partner and
limited partners in 1998 to satisfy estimated income taxes of the partners
arising out of the allocation of taxable income from the Company. Cash
distributions of $0.975 per Unit were declared to Perkins' limited partners
during 1997.

New Accounting Pronouncements --
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," is required to be implemented
for fiscal years beginning after June 15, 1999. The Company is currently
evaluating the effects of adopting this statement, but does not expect the
adoption to have a material effect on the Company's financial statements.


                                       26

<PAGE>   27



(2) THE GOING PRIVATE TRANSACTION:

Prior to December 22, 1997, the Company was a limited partnership 48.6%
indirectly owned (including its general partner's interest) by TRC. The
remainder of the limited partnership units ("Units") were traded on the New York
Stock Exchange under the symbol "PFR". The Company's business was conducted
through Perkins Restaurants Operating Company, L.P. ("PROC"), a Delaware limited
partnership. PFR was the sole limited partner and owned 99% of PROC, and PMC was
the sole general partner and owned the remaining 1% of PROC. Upon a majority
vote of the holders of the publicly traded Units, 5.44 million Units held by
persons other than TRC and its subsidiaries were converted into the right to
receive $14.00 in cash per Unit (the "Going Private Transaction"). Additionally,
PROC was merged into PFR, and PMC's 1% general partnership interest in PROC was
converted into a limited partnership interest in PFR. Upon consummation of the
Going Private Transaction on December 22, 1997, PFR became an indirect
wholly-owned subsidiary of TRC.

TRC's treatment of the transaction as an acquisition of a minority interest of a
subsidiary resulted in "push down" accounting adjustments in accordance with the
purchase method of accounting as a step acquisition. The effect of these
adjustments is summarized as follows (in thousands):

<TABLE>
<S>                                                                   <C>     
Total purchase price of Units (including direct costs of $1,569)      $ 77,758
Less: Minority interest in PFR                                         (36,677)
                                                                      --------
  Total                                                               $ 41,081
                                                                      ========

Allocation of step-up of assets:
Property and equipment                                                $ 13,830
Franchise agreements                                                    10,630
Goodwill                                                                16,621
                                                                      --------
  Total                                                               $ 41,081
                                                                      ========
</TABLE>

Franchise agreements are amortized using the straight-line method over the
remaining life of each specific franchise agreement (generally 1 to 20 years).
Goodwill is amortized using the straight-line method over 40 years.

The Going Private Transaction "push down" accounting adjustments resulted in
additional depreciation and amortization expense of approximately $3,000,000 in
1998. As the Going Private Transaction occurred on December 22, 1997, there was
no material impact on the results of operations for the year ended December 31,
1997. Expenses of $7,200,000 incurred in connection with the Going Private
Transaction are reflected in the accompanying Statements of Income for the year
ended December 31, 1997.


                                       27


<PAGE>   28



The following unaudited proforma results of operations for 1997 and 1996 give
effect to the Going Private Transaction, excluding the $7,200,000 in Going
Private Transaction expenses, as if it had occurred at the beginning of those
periods. This proforma information does not necessarily represent what the
results would have been had the Going Private Transaction occurred at the
beginning of each period presented.


<TABLE>
<CAPTION>
                                      (Unaudited)
                                     (in thousands)
                              -----------------------------
                                1997                1996
                              --------            ---------
<S>                           <C>                 <C>     
Revenues                      $269,526            $252,793
Net income                    $  3,806            $  2,102
</TABLE>




(3)  SUPPLEMENTAL CASH FLOW INFORMATION:

The increase or decrease in cash and cash equivalents due to changes in
operating assets and liabilities for the years ended December 31 consisted of
the following (in thousands):

<TABLE>
<CAPTION>
                                                  1998          1997          1996
                                                 -------       -------       -------
<S>                                              <C>           <C>           <C>  
(Increase) Decrease in:
                                                 $  (699)      $(2,675)      $ 1,726
  Receivables
  Inventories                                     (1,143)            2            84
  Prepaid expenses and other current assets         (916)         (534)         (739)
  Other assets                                     1,051          (787)          190

Increase (Decrease) in:
  Accounts payable                                   907         1,685         1,353
  Accrued expenses                                 2,300         3,540         1,294
  Other liabilities                               (1,198)          293           272
                                                 -------       -------       -------
                                                 $   302       $ 1,524       $ 4,180
                                                 =======       =======       =======
</TABLE>



The Company paid interest of $13,398,000 in 1998, $5,036,000 in 1997 and
$5,443,000 in 1996.

During 1996, the Company acquired property, primarily restaurant equipment,
through a master capital lease agreement totaling $1,565,000.











                                       28
<PAGE>   29



(4)  PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following as of December 31 (in
thousands):

<TABLE>
<CAPTION>
                                                        1998             1997
                                                      ---------       ---------
<S>                                                   <C>             <C>      
Owned:
  Land and land improvements                          $  34,770       $  34,469
  Buildings                                              76,099          73,109
  Leasehold improvements                                 40,195          33,942
  Equipment                                              68,880          62,704
  Construction in progress                                1,465           1,472
                                                      ---------       ---------
                                                        221,409         205,696
Less - accumulated depreciation and amortization        (93,911)        (83,052)
                                                      ---------       ---------
                                                        127,498         122,644
                                                      ---------       ---------
Leased:
  Buildings                                              23,654          23,972
  Equipment                                               1,532           1,532
                                                      ---------       ---------
                                                         25,186          25,504
Less - accumulated amortization                         (21,413)        (20,756)
                                                      ---------       ---------
                                                          3,773           4,748
                                                      ---------       ---------
                                                      $ 131,271       $ 127,392
                                                      =========       =========
</TABLE>

Depreciation and amortization for financial reporting purposes is computed using
the straight-line method based on the shorter of either the estimated useful
lives or the lease terms of the property, as follows:



<TABLE>
<CAPTION>
                                                 Years
                                                 -----
<S>                                              <C> 
Owned:
   Land improvements                              3-20
   Buildings                                     20-30
   Leasehold improvements                         7-20
   Equipment                                       3-7
Leased:
    Buildings                                    20-25
    Equipment                                        6
</TABLE>





                                       29
<PAGE>   30



(5)  LEASES:

As of December 31, 1998, there were 140 full-service restaurants operated by the
Company, as follows:

                           68  with both land and building leased
                           58  with both land and building owned
                           14  with the land leased and building owned

As of December 31, 1998, there were 28 restaurants either leased or subleased to
others by the Company as follows:

                           13 with both land and building leased
                           12 with both land and building owned
                            3 with the land leased and building owned

Most of the 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 31, 1998 were as follows (in
thousands):


<TABLE>
<CAPTION>
                                                            Lease Obligations
                                                         -----------------------
                                                         Capital       Operating
                                                         -------       ---------
<S>                                                      <C>            <C>    
1999                                                     $ 1,904        $ 6,332
2000                                                       1,549          5,767
2001                                                       1,469          5,378
2002                                                       1,206          4,542
2003                                                         970          2,901
Thereafter                                                 2,628         14,115
                                                         -------        -------

  Total minimum lease payments                             9,726        $39,035
                                                                        ========

Less:
  Amounts representing interest                           (2,730)
                                                         -------

  Capital lease obligations                               $6,996
                                                          ======
</TABLE>

Capital lease obligations have effective interest rates ranging from 7.1% to
16.1% and are payable in monthly installments through 2011.



                                       30
<PAGE>   31



Future minimum gross rental receipts as of December 31, 1998, were as follows
(in thousands):

<TABLE>
<CAPTION>
                                        Amounts Receivable As
                                      -------------------------
                                       Lessor         Sublessor
                                      ---------       ---------
<S>                                   <C>             <C>      
1999                                  $   1,069       $   1,242
2000                                      1,080             998
2001                                      1,041           1,000
2002                                        925             884
2003                                        925             654
Thereafter                                6,678           2,537
                                      ---------       ---------
Total minimum lease rentals           $  11,718       $   7,315
                                      =========       =========
</TABLE>


The net rental expense included in the accompanying financial statements for
operating leases was as follows (in thousands):

<TABLE>
<CAPTION>

                               1998          1997            1996
                             -------       -------       -------
<S>                          <C>           <C>           <C>    
Minimum rentals              $ 6,350       $ 5,710       $ 5,341
Contingent rentals             1,570         1,280         1,114
Less - sublease rentals       (1,022)         (992)       (1,041)
                             -------       -------       -------
                             $ 6,898       $ 5,998       $ 5,414
                             =======       =======       =======
</TABLE>


(6)  INTANGIBLE AND OTHER ASSETS: 

Intangible and other assets, net of accumulated amortization, were as follows as
of December 31 (in thousands):

<TABLE>
<CAPTION>
                                                                      1998          1997
                                                                     -------      -------
<S>                                                                  <C>          <C>    
Excess of cost over fair value of net assets acquired,
  being amortized evenly over 30 to 40 years                         $37,849      $39,256
Present value of estimated future royalty fee income
  being amortized evenly over the remaining lives of
  the franchise agreements                                             8,937       10,909
Deferred financing costs being amortized over
  the remaining life of the debt agreements                            5,036        5,793
Other                                                                  1,938        2,057
                                                                     -------      -------
                                                                     $53,760      $58,015
                                                                     =======      =======
</TABLE>


The Company periodically reevaluates the realizability of its excess cost over
fair value of net assets acquired by comparing the unamortized balance with
projected undiscounted cash flows from operations. The realizability of
intangible assets related to future royalty fee income is also assessed
periodically based on the performance of the applicable franchised restaurants.
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.



                                       31
<PAGE>   32



(7)  ACCRUED EXPENSES:

Accrued expenses consisted of the following as of December 31 (in thousands):

<TABLE>
<CAPTION>

                                                                 1998                1997
                                                                -------             -------
<S>                                                             <C>                 <C>    
Payroll and related benefits                                    $12,660             $ 9,006
Property, real estate and sales taxes                             2,401               2,427
Insurance                                                           686               1,139
Rent                                                              1,595               1,407
Unredeemed Units and Going Private Transaction costs                252              17,801
Franchise equipment deposits                                         --               1,428
Other                                                             4,660               2,740
                                                                -------             -------
                                                                $22,254             $35,948
                                                                =======             =======
</TABLE>

(8)  LONG-TERM DEBT:

Long-term debt consisted of the following at December 31 (in thousands):

<TABLE>
<CAPTION>
                                                                  1998                1997
                                                                --------            --------
<S>                                                             <C>                 <C>  
Unsecured Senior Notes:
  10.125%, interest payable semi-annually,
  due December 15, 2007                                         $130,000            $130,000

Revolving credit agreement, due January 1, 2003                    4,000                  --
                                                                --------            --------
                                                                 134,000             130,000
Less current maturities                                               --                  --
                                                                --------            --------
                                                                $134,000            $130,000
                                                                ========            ========
</TABLE>


On December 22, 1997, the Company issued $130,000,000 of 10.125% Unsecured
Senior Notes ("the Notes") due December 15, 2007. The proceeds were used to
repay outstanding senior notes and borrowings under the Company's revolving line
of credit, purchase Units from the public and pay expenses related to the Going
Private Transaction.

On December 22, 1997, the Company obtained a $50,000,000 secured revolving line
of credit facility (the "Credit Facility") with a sublimit for up to $5,000,000
of letters of credit. The Credit Facility matures on January 1, 2003, at which
time all amounts become payable. Any amounts borrowed under the Credit Facility
will 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 secured by a first priority lien on substantially all of the assets
of the Company. As of December 31, 1998, $4,000,000 in borrowings and
approximately $1,573,000 of letters of credit were outstanding under the Credit
Facility.

In connection with the issuance of the Notes and obtaining the Credit Facility,
the Company incurred deferred financing costs of approximately $6,028,000 which
are being amortized over the terms of the debt agreements.

In order to manage interest costs, the Company entered into an interest rate
swap agreement in 1994. The agreement expired June 30, 1998. 


                                       32
<PAGE>   33

Based on the borrowing rates currently available for debt with similar terms and
maturities, the approximate fair market value of the Company's long-term debt as
of December 31 was as follows (in thousands):


<TABLE>
<CAPTION>
                                               1998            1997
                                             ----------     ----------
<S>                                          <C>            <C>      
10.125% Unsecured Senior Notes               $  138,000     $ 130,000
Interest Rate Swap Agreement                         --            11
                                                                             
</TABLE>


The value associated with the interest rate swap represents the estimated
contract value as reported to the Company by the commercial bank that was the
counterparty to these agreements. Because the Company's revolving line of credit
borrowings outstanding at December 31, 1998 bear interest at current market
rates, management believes that the related liabilities reflected in the
accompanying balance sheets approximated fair market value.

Pursuant to both the Notes and the Credit Facility, the Company must maintain
specified financial ratios and is subject to certain restrictions which limit
additional indebtedness. At December 31, 1998, the Company was in compliance
with all such requirements.

The Notes and the Credit Facility restrict the ability of the Company to pay
dividends or distributions to its equity holders. If no default or event of
default exists, these restrictions generally allow the Company to make
distributions as follows:

     1.  sufficient to pay its equity holders' estimated federal, state and
         local income taxes on the holders' share of the taxable income of the
         Company (Tax Distributions).

     2.  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.

     3.  up to an aggregate of $5 million after December 22, 1997.

As of December 31, 1998, the Company had made tax distributions to its equity
holders of $3,468,000.

Interest expense capitalized in connection with the Company's construction
activities amounted to approximately $198,000, $78,000 and $136,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.

(9)  INCOME TAXES:

The Company is a nontaxable partnership for state and Federal income tax
purposes. Under the Company's form of taxation, the distributions paid by the
Company are not taxable to its partners. Instead, the Company's taxable income,
which may vary substantially from income reported for financial purposes, is
included in the state and Federal income tax returns of its partners.
Accordingly, no provision for income taxes has been reflected in the
accompanying financial statements.

Since the Going Private Transaction, the Company pays distributions to its
partners from available cash flow in amounts sufficient to satisfy estimated tax
liabilities of the partners arising out of the allocation of taxable income or
gain from the Company.




                                       33
<PAGE>   34


(10)  CONTINGENCIES:

The Company is a party to various legal proceedings in the ordinary course of
business. Management does not believe it is likely that these proceedings,
either individually or in the aggregate, will have a material adverse effect on
the Company's financial position or results of operations.

In the past, the Company has sponsored financing programs offered by certain
lending institutions to assist its franchisees in procuring funds for the
construction of new franchised restaurants and to purchase and install in-store
bakeries. The Company provides a limited guaranty of funds borrowed. At December
31, 1998, there were approximately $3,370,000 in borrowings outstanding under
these programs. The Company has guaranteed $1,118,000 of these borrowings. No
additional borrowings are available under these programs.

On February 4, 1999, Denny's (a subsidiary of Advantica Restaurant Group) was
the successful bidder in the court-supervised auction sale of 30 restaurants of
Perk Development Corporation, a franchisee of the Company. These restaurants
ceased operating as Perkins Family Restaurants on February 28, 1999. As a
result, the Company recorded a reserve for debt of the franchisee guaranteed by
the Company of $250,000 for the year ended December 31, 1998. After
consideration of this reserve, $2,998,000 and $858,000 in borrowings and
guarantees, respectively, remain under the financing programs above.

In early 1998, the Company entered into a separate two year limited guarantee of
$1,200,000 in borrowings of a franchisee which were used to construct a new
franchise restaurant.

The majority of the Company's franchise revenues are generated from franchisees
owning less than 5% of total franchised restaurants and, therefore, the loss of
any one of these franchisees would not have a material impact on the results of
the Company's operations. As of December 31, 1998, three franchisees owned 81 of
the 356 restaurants franchised by the Company. During 1998, the Company received
net royalties and license fees of approximately $1,783,000, $1,739,000 and
$1,103,000 from these franchisees (See Note 16).

The Company's ability to make scheduled payments of principal of, or to pay the
interest or liquidated damages, if any, on, or to refinance, its indebtedness
(including the Notes), or to fund planned capital expenditures will depend on
its future performance, which, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond its control. Based upon the current level of operations, management
believes that cash flow from operations and available cash, together with
available borrowings under the Credit Facility, will be adequate to meet the
Company's liquidity needs for the foreseeable future. The Company may, however,
need to refinance all or a portion of the principal of the Notes on or prior to
maturity. There can be no assurance that the Company will generate sufficient
cash flow from operations, or that future borrowings will be available under the
Credit Facility in an amount sufficient to enable the Company to service its
indebtedness, including the Notes, or to fund its other liquidity needs. In
addition, there can be no assurance that the Company will be able to effect any
such refinancing on commercially reasonable terms or at all.

(11)  LONG TERM INCENTIVE PLANS:

The Perkins Family Restaurants, L.P. Restricted Limited Partnership Unit Plan
("Unit Plan") was initially adopted in October 1987. Awards of restricted Units
under the Unit Plan were made to officers and key employees of PMC, PRI and
their affiliates as well as certain members of PMC's Board of Directors. A
committee composed of those non-employee directors of PMC (the "Committee") was
appointed to administer the Unit Plan. At the time of each award, the Committee
determined the applicable award restrictions, including, without limitation, (i)
a restricted period (not to exceed ten years) during which the Units could not
be sold, transferred or pledged and (ii) the date(s) on which restrictions on
all or a portion of the Units awarded would lapse. To the extent declared, cash
distributions were paid on all Units awarded under the Unit Plan even during the
restricted period.



                                       34
<PAGE>   35

In conjunction with the Going Private Transaction, all Units under the Unit
Plan, including those Units for which the restrictions had not lapsed, were
repurchased by the Company and the Unit Plan was eliminated.

The Perkins Family Restaurants, L.P. Executive Long Term Incentive Plan (the
"LTI Plan") was established for the benefit of officers and selected key
employees of the Company as of January 1, 1998. Annual awards are based on an
executive's position within the Company and are earned by participants based on
Minimum, Target, and Maximum performance in earnings before interest, taxes,
depreciation and amortization ("EBITDA") criteria determined by the Board of
Directors each fiscal year. Long Term Incentive Awards vest separately over 3
year periods at 33.3% per year, except for the initial Long Term Incentive Award
which vests 50% in year one, 33% in year two and 17% in year three and are
payable in cash. Future vesting of Long Term Incentive Awards is dependent upon
the Company meeting specific EBITDA goals from year to year. The LTI Plan is
designed to retain and reward officers and selected key employees of the Company
and to compete with publicly held companies in the retention of top management.

Effective January 1, 1999, the Company established a Deferred Compensation Plan
under which officers and key employees of the Company may defer specified
percentages of their salaries, annual incentives and long-term compensation
payments. The Company also makes matching contributions of the lesser of 3% of
eligible compensation or $4,800. Amounts deferred are excluded from the
participant's taxable income and are held in trust with a bank, where the funds
are invested at the direction of the participant.

Effective January 1, 1998, the Company established a Performance Unit Grant plan
under which a select group of key employees of the Company 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 of the Company by tying
Performance Unit valuation to Company growth valuation criteria. Each award is
payable in cash and vests separately over 3 year periods at, 33.3% per year. 
Upon exercise, award values may be transferred to the participant's Deferred
Compensation Plan account. Unexercised awards expire on the tenth anniversary
of grant.

(12) 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, of PFR and of any Participating Company, as
defined. At December 31, 1998, Participating Companies were PMC, TRC and TRC
Realty.

All participating employees at December 31, 1991 remained eligible to
participate in the Plan as amended and restated January 1, 1992. All other
employees of the Company and Participating Companies 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 legal maximums. Participating Companies 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 their Boards
of Directors. During 1998, 1997 and 1996, the Company and PMC elected to match
contributions at a rate of 50% up to the first 6% deferred by each participant.
Company matching contributions to the Plan for each of the years 1998, 1997 and
1996 were $720,000, $615,000 and $554,000, 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.


                                       35
<PAGE>   36

The trust established under the Plan is intended to qualify under the
appropriate section of the Internal Revenue Code (the "IRC") as exempt from
Federal income taxes. The Plan has received a favorable determination by the
Internal Revenue Service with regard to the qualification of the Plan. The
favorable determination applies to the original Plan as well as all amendments
adopted prior to 1995. The fourth, fifth and sixth amendments to the Plan,
adopted during 1995 through 1997, will be submitted for determination at a later
date. The Company's management and legal counsel believe that the adoption of
the aforementioned amendments to the Plan do not hinder the Plan's ability to
operate in compliance with all applicable provisions of the IRC and that a
favorable determination will be received.

(13) ASSET WRITE-DOWN (SFAS NO. 121):

During 1998, the Company identified twelve restaurant properties which were not
expected to generate undiscounted future cash flows sufficient to cover the
carrying value of the underlying assets related to these properties. As required
under SFAS No. 121, the carrying amounts of the assets associated with these
restaurant properties were written down to their fair market values as estimated
based on the Company's experience in disposing of similar under-performing
properties and negotiations relating to the disposal of the subject properties.
Nine of these properties are held for disposal, of which, seven continue to
operate as restaurants. In addition, the Company wrote off intangibles related
to future royalty income of a significant franchisee which went bankrupt. These
intangibles had been recorded in conjunction with "push down" accounting
adjustments related to the Going Private Transaction. The resulting non-cash
charge for the above items, reduced 1998 net income by $3,373,000. The
components of the charge were as follows (in thousands):


<TABLE>
<S>                                                                          <C>
Reduction of the carrying values of operating assets
  to estimated fair market values                                            $2,030
Estimated disposal costs, including commissions                                 654
Write-off of intangible asset relating to future royalty income                 689
                                                                             ------
                                                                             $3,373
                                                                             ======
</TABLE>



The Company's results of operations included losses related to the nine
properties held for disposal of $838,000, $559,000 and $442,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. As of December 31, 1998, 
these properties had a remaining net book value of $985,000.

(14) SEGMENT REPORTING:

The Company has 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 only
includes Foxtail Foods.

Revenues for the restaurant segment result from the sale of menu products at
restaurants operated by the Company. 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 operated by the Company
and franchisees, as well as customers outside the Perkins system. Foxtail's
sales to Company-operated restaurants are eliminated for external reporting
purposes.



                                       36
<PAGE>   37



The following presents revenues and other financial information by business
segment (in thousands):

1998:
<TABLE>
<CAPTION>

                          Restaurants    Franchise   Manufacturing        Other        Totals
                          -----------   -----------  -------------      ---------     ---------
<S>                       <C>           <C>          <C>                <C>           <C>     
Revenues from
  external customers       $248,302      $21,799      $27,626           $  1,079       $298,806
Intersegment revenues            --           --        8,394                 --          8,394
Interest expense, net            --           --           --             14,312         14,312
Depreciation and
  amortization               12,506          190          795              6,676         20,167
Segment profit (loss)        27,085       18,955        5,409            (48,465)         2,984
Segment assets              114,780        9,317       13,459             64,994        202,550
Expenditures for
  segment assets             23,994           --        1,152                 --         25,146


<CAPTION>

1997:
                          Restaurants    Franchise   Manufacturing        Other        Totals
                          -----------   -----------  -------------      ---------     ---------
<S>                       <C>           <C>          <C>                <C>           <C>     
Revenues from
  external customers       $225,486      $19,257      $23,888           $    895       $269,526
Intersegment revenues            --           --        8,042                 --          8,042
Interest expense, net            --           --           --              4,862          4,862
Depreciation and
  amortization               11,616          108          691              3,614         16,029
Segment profit (loss)        24,569       16,536        4,611            (37,516)         8,200
Segment assets              110,373       11,041       11,740             81,170        214,324
Expenditures for
  segment assets             14,372           --          714                 --         15,086

</TABLE>



                                       37
<PAGE>   38


1996:

<TABLE>
<CAPTION>
                          Restaurants    Franchise   Manufacturing        Other        Totals
                          -----------   -----------  -------------      ---------     ---------
<S>                       <C>           <C>          <C>                <C>           <C>     
Revenues from
  external customers       $212,788      $18,591      $21,376           $     38       $252,793
Intersegment revenues            --           --        7,406                 --          7,406
Interest expense, net            --           --           --              5,066          5,066
Depreciation and
  amortization               11,385           77          617              3,669         15,748
Segment profit (loss)        20,603       15,744        4,005            (26,830)        13,522
Segment assets               98,463          696        9,707             46,790        155,656
Expenditures for
  segment assets             11,207           --          651                 --         11,858
</TABLE>

The Company evaluates the performance of its segments based primarily on
operating profit before corporate general and administrative expenses, interest
expense, depreciation and amortization incurred as a result of the Going Private
Transaction and amortization of goodwill.

Although depreciation and amortization related to the Going Private Transaction
are not allocated to segment profit, the "push down" accounting adjustments
related to assets have been included in the totals for each respective operating
segment. Assets not allocated to specific operating segments primarily include
cash, corporate accounts receivable and goodwill.

A reconciliation of other segment loss is as follows (in thousands):

<TABLE>
<CAPTION>
                                                    1998                 1997                 1996
                                                  --------             --------             --------
<S>                                               <C>                  <C>                  <C>     
General and administrative expenses               $ 25,182             $ 22,947             $ 20,989
Depreciation and amortization expenses               6,676                3,614                3,669
Interest expense                                    14,312                4,862                5,066
Going Private Transaction                               --                7,200                   --
Asset write-down (SFAS No. 121)                      3,373                   --                   --
Other                                               (1,078)              (1,107)              (2,894)
                                                  --------             --------             --------
                                                  $ 48,465             $ 37,516             $ 26,830
                                                  ========             ========             ========
</TABLE>




                                       38
<PAGE>   39

(15) RELATED PARTY TRANSACTIONS:

Donald N. Smith is PMC's Chairman and Chief Executive Officer. Mr. Smith is also
the Chairman and Chief Executive Officer of Friendly Ice Cream Corporation
("FICC"), which operates and franchises approximately 700 full-service
restaurants, located primarily in the northeastern United States.

FICC purchased certain food products used in the normal course of business from
Foxtail. For the years ended December 31, 1998, 1997 and 1996, purchases were
$945,000, $975,000 and $1,425,000, respectively.

Perkins has subleased certain land, building and equipment to FICC. During 1998,
1997 and 1996, Perkins received approximately $328,000, $322,000 and $328,000,
respectively, related to those subleases.

In 1998, 1997 and 1996, PMC made payments to TRC Realty Co., a subsidiary of
TRC, totaling $573,000, $501,000 and $467,000, respectively related to the use
of an aircraft leased by TRC Realty Co. PMC's use of this aircraft is solely for
Company related purposes, and the Company reimburses PMC for all airplane
expenses paid. Pursuant to an agreement expiring April 14, 2004, the Company is
obligated to reimburse monthly an amount equal to 50% of the fixed costs of the
aircraft (consisting principally of lease payments, pilot salaries, insurance
and hangar rental) and its proportionate share of variable expenses (such as
fuel and maintenance) based on PMC's actual usage of the aircraft.

(16) SUBSEQUENT EVENT:

On February 4, 1999, Denny's (a subsidiary of Advantica Restaurant Group) was
the successful bidder in the court-supervised auction sale of 30 restaurants of
Perk Development Corporation ("Perk"), the Company's upstate New York
franchisee. These restaurants ceased operating as Perkins Family Restaurants on
February 28, 1999. For the year ended December 31, 1998, the Company recorded a
reserve for debt of the franchisee guaranteed by the Company of $250,000, a
write-off of $225,000 for unreserved accounts receivable and a non-cash charge
of $689,000 to write-off an intangible asset related to future royalty income
from the franchisee. The Company received approximately $1,783,000 in royalties
from Perk during 1998. Management expects to replace this revenue stream in
future years through the recruiting of new franchisees.



                                       39
<PAGE>   40

RESPONSIBILITY FOR FINANCIAL STATEMENTS

The Company's management is responsible for the preparation, accuracy and
integrity of the financial statements.

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

The Company maintains a system of internal accounting control which is adequate
to provide reasonable assurance that transactions are executed and recorded in
accordance with management's authorization and that assets are safeguarded. The
Audit Committee of the Board of Directors reviews the adequacy of the Company's
internal accounting controls.

Arthur Andersen LLP, independent public accountants, 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.





                                       40
<PAGE>   41





Report of Independent Public Accountants



To the Partners of Perkins Family Restaurants, L.P.:

We have audited the accompanying balance sheets of PERKINS FAMILY RESTAURANTS,
L.P. (a Delaware limited partnership) as of December 31, 1998 and 1997, and the
related statements of income, changes in partners' capital and cash flows for
each of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Perkins Family Restaurants,
L.P. as of December 31, 1998 and 1997 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.


Arthur Andersen LLP

Memphis, Tennessee,
March 25, 1999.



                                       41
<PAGE>   42


                        PERKINS FAMILY RESTAURANTS, L.P.
                   QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
                      (In Thousands, Except Per Unit Data)


<TABLE>
<CAPTION>
                                                                                  Cash
                                                                Net             Distributions
                                           Gross   (a)         Income            Declared
       1998            Revenues            Profit              (Loss)             per Unit
---------------------------------------------------------------------------------------------
<S>                    <C>                 <C>                <C>                 <C>     
1st Quarter            $ 67,784            $15,112            $  (487)            $        --
2nd Quarter              73,718             17,529              1,947                      --
3rd Quarter              78,630             18,544              2,552                      --
4th Quarter              78,674             18,255             (1,028)                     --
---------------------------------------------------------------------------------------------
                       $298,806            $69,440            $ 2,984             $        --
=============================================================================================



<CAPTION>
                                                                                  Cash
                                                                Net             Distributions
                                           Gross   (a)         Income            Declared
       1997            Revenues            Profit              (Loss)             per Unit
---------------------------------------------------------------------------------------------
<C>                    <C>                 <C>                <C>                 <C>     
1st Quarter            $ 61,481            $13,875            $ 2,725             $    0.325
2nd Quarter              66,588             15,767              3,464                  0.325
3rd Quarter              71,603             17,205              5,581                  0.325
4th Quarter              69,854             15,448             (3,570)                    --
--------------------------------------------------------------------------------------------
                       $269,526            $62,295            $ 8,200             $    0.975
============================================================================================


</TABLE>


(a) Represents total revenues less cost of sales.




                                       42
<PAGE>   43
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE.

There were no changes in, or disagreements with, accountants during 1998.



                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The following individuals are currently serving as directors and executive
officers of Perkins:

<TABLE>
<CAPTION>
Name                                  Age                 Position with PMC
----                                  ---                 -----------------
<S>                                   <C>                 <C>                                      
Donald N. Smith                       58                  Chairman of the Board, Chief Executive
                                                            Officer and President

Lee N. Abrams                         64                  Director

Steven L. Ezzes                       52                  Director

Basil P. Livanos                      45                  Director

D. Michael Meeks                      56                  Director

James F. Barrasso                     48                  Executive Vice President, Foodservice Development

Michael D. Kelly                      52                  Executive Vice President, Marketing

Steven R. McClellan                   43                  Executive Vice President, Chief Financial Officer

Jack W. Willingham                    53                  Executive Vice President, Restaurant Development

William S. Forgione                   45                  Vice President, Human Resources

Clyde J. Harrington                   40                  Vice President, Operations Administration

Patrick W. Ortt                       52                  Vice President, Operations - Eastern Division

Steven J. Pahl                        43                  Vice President, Operations - Western Division

Anthony C. Seta                       51                  Vice President, Research and Development

Robert J. Winters                     47                  Vice President, Franchise Development

Donald F. Wiseman                     52                  Vice President, General Counsel and Secretary
</TABLE>



                                       43
<PAGE>   44

DONALD N. SMITH
Donald N. Smith has been the Chairman of the Board and Chief Executive Officer
of PMC, PRI and TRC since 1986. Mr. Smith also has been the Chairman of the
Board and Chief Executive Officer of FICC since 1988. Prior to joining TRC, Mr.
Smith was President and Chief Executive Officer of Diversifoods, Inc. from 1983
to October 1985. From 1980 to 1983, Mr. Smith was a Senior Vice President of
PepsiCo, Inc. and was President of its Food Service Division. Mr. Smith was
responsible for the operations of Pizza Hut Inc. and Taco Bell Corp., as well as
North American Van Lines, Lee Way Motor Freight, Inc., PepsiCo Foods
International and La Petite Boulangerie. Prior to 1980, Mr. Smith was President
and Chief Executive Officer of Burger King Corporation and Senior Executive Vice
President and Chief Operations Officer for McDonald's Corporation.

LEE N. ABRAMS
Lee N. Abrams was elected a Director of PMC in September 1986 and appointed
Chairman of the Audit Committee for PMC in October 1986. He is a senior partner
in the Chicago, Illinois law firm of Mayer, Brown & Platt. He has been
associated with that firm since his graduation from the University of Michigan
Law School in 1957. He specializes in franchise and antitrust law. He is also a
Certified Public Accountant.

STEVEN L. EZZES
Steven L. Ezzes was elected a Director of PMC, PRI, TRC and FICC in February
1996. Mr. Ezzes resigned as a director of TRC in October 1998. Since June 1998
Mr. Ezzes has been a Managing Director of S.G. Cowen Securities Corporation, a
subsidiary of Societe General Securities Corp. From October 1996 to June 1998,
Mr. Ezzes was a Managing Director of Scotia Capital Markets (U.S.A.), Inc. and
from January 1995 to October 1996, Mr. Ezzes was a private investor. For more
than a year prior, Mr. Ezzes was a Managing Director of Lehman Brothers, Inc.
Mr. Ezzes is a director of OZEMail, a company that provides internet telephony
in Australia and New Zealand.

BASIL P. LIVANOS
Basil P. Livanos was elected Director of PMC and TRC in October 1998. Mr.
Livanos has served as Senior Vice President of Albion Alliance, L.L.C. since
August 1996 and as Vice President of Alliance Capital since July 1993. Mr.
Livanos has also served as an Investment Officer of The Equitable Life Assurance
Society of the United States since August 1980.

D. MICHAEL MEEKS
D. Michael Meeks was elected a Director of PMC and became a member of the Audit
Committee for PMC in August 1996. Mr. Meeks has been a private investor for more
than the past five years.

JAMES F. BARRASSO
James F. Barrasso was elected Executive Vice President, Foodservice Development
of PMC in February 1999. From January 1994 to February 1999, he was Vice
President Foodservice Development of PMC. 

MICHAEL D. KELLY
Michael D. Kelly has served as Executive Vice President, Marketing of PMC since
March 1993.

STEVEN R. MCCLELLAN
Steven R. McClellan has served as Executive Vice President and Chief Financial
Officer of PMC since September 1996. Mr. McClellan has also served as Vice
President and Chief Financial Officer of TRC and PRI since May 1998. From June
1994 to September 1996, Mr. McClellan was Executive Vice President and General
Banking Group Head of First Union National Bank of South Carolina, a subsidiary
of First Union Corporation. For more than a year prior, he was a Senior Vice
President of NationsBank.





                                       44
<PAGE>   45


JACK W. WILLINGHAM         
Jack W. Willingham was elected Executive Vice President, Restaurant Development
of PMC in April 1994. For more than a year prior, Mr. Willingham served as Vice
President, Corporate Development of PMC.

WILLIAM S. FORGIONE
William S. Forgione was elected Vice President, Human Resources of PMC effective
August 1997. From July 1994 to August 1997, Mr. Forgione was Vice President,
Human Resources of College Affiliated Medical Practice Group and for more than a
year prior, he was Worldwide Program Manager for Digital Equipment Corporation.

CLYDE J. HARRINGTON
Clyde J. Harrington was elected Vice President, Operations Administration of PMC
in September 1996. From August 1995 to September 1996, he was Director, Systems
Operations of the Company and from March 1995 to August 1995, he served as
Director in Training for the Company. For more than two years prior, Mr.
Harrington served as Director, Operations, for the Restaurant Division of
PepsiCo., Inc.

PATRICK W. ORTT
Patrick W. Ortt was elected Vice President, Operations - Eastern Division of PMC
in September 1996. From March 1993 to September 1996, Mr. Ortt served as
Director, Systems Operations of the Company.

STEVEN J. PAHL
Steven J. Pahl was elected Vice President, Operations - Western Division of PMC
in September 1996. From November 1988 to September 1996, Mr. Pahl served as
Director, System Operations of the Company.

ANTHONY C. SETA
Anthony C. Seta was elected Vice President, Research and Development of PMC in
April 1994. From August 1992 to April 1994, he served as Vice President, Food
and Beverage for Blackeyed Pea Restaurants, Inc. 

ROBERT J. WINTERS
Robert J. Winters was elected Vice President, Franchise Development of PMC in
October 1996. From March 1993 to October 1996, he served as Senior Director,
Franchise Development of the Company.

DONALD F. WISEMAN
Donald F. Wiseman has been Vice President, General Counsel and Secretary of PMC
since December 1991 and the Secretary of TRC and PRI since September 1997.

Members of PMC's Board of Directors serve until such time as their successors
are elected and qualified. Officers serve at the pleasure of the Board of
Directors.



                                       45
<PAGE>   46

ITEM 11.  EXECUTIVE COMPENSATION.

The following table summarizes all compensation paid or accrued for services
rendered to Perkins in all capacities during each of the three years in the
period ended December 31, 1998 with respect to the Chief Executive Officer of
PMC and the four most highly compensated executive officers of PMC whose total
annual salary and bonus exceeded $100,000.


<TABLE>
<CAPTION>
                                             ANNUAL COMPENSATION                     LONG-TERM
                              -------------------------------------------------    -------------
                                                                                   COMPENSATION 
                                                                                   ------------
                                                                                     RESTRICTED     ALL OTHER
                                                                                       UNITS          COMPEN-
PRINCIPAL POSITION            YEAR       SALARY     BONUS         OTHER               AWARDS(4)       SATION 
--------------------------------------------------------------------------------------------------------------
<S>                           <C>        <C>        <C>         <C>                <C>              <C>
                               
DONALD N. SMITH               1998       $274,661   $200,000    $ 3,150 (2)                  --         --
 Chairman & Chief             1997        267,126    160,000      3,150 (2)                  --         --
 Executive                    1996        212,912    110,000      8,832 (1)(2)               --     $  550 (5)
 Officer

STEVEN R. MCCLELLAN           1998       $186,892   $103,425    $ 9,000 (2)                  --     $5,000 (6)
 Exec. Vice President &       1997        207,001     83,875     10,055 (2)(3)               --      4,750 (6)
 Chief Financial Officer      1996         42,500     39,650     30,715 (1)(2)(3)      $120,000        298 (5)

MICHAEL D. KELLY              1998       $191,246   $ 94,000    $ 9,000 (2)                  --     $5,000 (6)
 Exec. Vice President,        1997        181,836     78,000      9,000 (2)                  --      4,750 (6)
 Marketing                    1996        176,287     60,000     12,726 (1)(2)               --      4,808 (5)(6)

JACK W. WILLINGHAM            1998       $179,141   $ 79,500    $ 9,000 (2)                  --     $3,708 (6)
 Exec. Vice President,        1997        172,481     59,250      9,000 (2)                  --      4,750 (6)
 Restaurant Development       1996        161,582     56,500     15,135 (1)(2)               --      7,630 (5)(6)

DONALD F. WISEMAN             1998       $166,535   $ 71,600    $ 9,000 (2)                  --     $4,983 (6)
 Vice President, General      1997        156,199     74,200      9,000 (2)                  --      4,750 (6)
 Counsel and Secretary        1996        143,654     43,500     14,366 (1)(2)               --      7,630 (5)(6)
</TABLE>

-----------------------------

(1) Includes premiums paid for medical and disability insurance during 1996 for
the named executive officers in the following amounts: Mr. Smith - $6,312; Mr.
McClellan - $767; Mr. Kelly - $5,076; Mr. Willingham - $7,485; and Mr. Wiseman -
$6,716.

(2) Includes auto allowance paid to the named executive officers during 1998 and
1997 in the following amounts: Mr. Smith - $3,150; Mr. McClellan - $9,000; Mr.
Kelly - $9,000; Mr. Willingham - $9,000; and Mr. Wiseman - $9,000. During 1996,
Mr. Smith received an auto allowance of $2,520; Mr. McClellan - $2,550; Mr.
Kelly - $7,650; Mr. Willingham - $7,650; and Mr. Wiseman - $7,650.

(3) Includes relocation expenses in the amount of $1,055 and $27,398 for 1997
and 1996, respectively for Mr. McClellan.

(4) The restricted period applicable to each award of Units under Perkins Family
Restaurants, L.P. Restricted Limited Partnership Unit Plan (the "Plan") was
established by the Plan Committee (the "Committee") and could not exceed ten
(10) years. The Plan was eliminated during 1997 and all restricted Units were
repurchased by the Company in conjunction with the Company's Going Private
Transaction. Therefore, as of December 31, 1998 no restricted Units were
outstanding. Cash payments related to repurchased restricted Units during
December 1997 were: Mr. McClellan - $131,810; Mr. Kelly - $126,448; Mr.
Willingham - $101,248; and Mr. Wiseman - $87,136.

(5) Includes premiums paid for group term life insurance. Premiums paid during
1996 for the named executive officers were: Mr. Smith - $550; Mr. McClellan -
$298; Mr. Kelly - $58; Mr. Willingham - $2,880; and Mr. Wiseman - $2,880.



                                       46
<PAGE>   47



(6) Includes Perkins' discretionary matching contributions allocated to the
named executive officers for the period January 1, 1998 through December 31,
1998 under Perkins Retirement Savings Plan as follows: Mr. McClellan - $5,000;
Mr. Kelly - $5,000; Mr. Willingham - $3,708; and Mr. Wiseman - $4,983. For the
period January 1, 1997 through December 31, 1997 the contributions were as
follows: Mr. McClellan - $4,600; Mr. Kelly - $4,750; Mr. Willingham - $4,750;
and Mr. Wiseman - $4,750. For the period January 1, 1996 through December 31,
1996 the contributions were as follows: Mr. Kelly - $4,750; Mr. Willingham -
$4,750; and Mr. Wiseman - $4,750.


COMPENSATION OF DIRECTORS.

Lee N. Abrams, D. Michael Meeks and Steven L. Ezzes are paid $5,000 for each
Board Meeting they attend. Messrs. Abrams and Meeks were paid for four meetings
of the board in 1998. Mr. Ezzes was paid for two meetings of the board in 1998.










                                       47
<PAGE>   48



ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

(A)  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.


<TABLE>
<CAPTION>
                                                                       Amount and
                                                                       Nature of
                                    Name and Address                   Beneficial            Percent
Title of Class                      of Beneficial Owner                Ownership             of Class
--------------                      -------------------                ---------             --------
<S>                                 <C>                                <C>                    <C>   
Depositary Units Rep-               Perkins Restaurants,               5,358,000              98.06%
resenting Limited                   Inc., 1 Pierce Place,
Partnership Interests               Suite 100 E, Itasca, IL
in the Registrant                   60143

Depositary Units Rep-               Perkins Management                   105,924               1.94% 
resenting Limited                   Company, Inc. 
Partnership Interests               6075 Poplar Avenue
in the Registrant                   Memphis, TN 38119 
</TABLE>


Following consummation of the Going Private Transaction, PRI
and PMC own all of the outstanding Units and the Company is a wholly-owned
indirect subsidiary of TRC. TRC's outstanding common stock is owned 50.0% and
42.3% by Mr. Smith and Equitable, respectively and 7.7% by others. Pursuant to
the terms of a Stockholders Agreement (the "Stockholders Agreement") among TRC's
stockholders and the Bylaws of TRC, the voting and disposition of the shares of
TRC are subject to numerous restrictions. Significant stockholder and director
actions (including certain transactions in TRC's assets and the disposition of
TRC's indirect investment in the Company), as defined in the Stockholders
Agreement and in the By-Laws of TRC, PRI and PMC, must be approved by a
unanimous vote of the Board of Directors of the company proposing to take any
such action and by at least 75% of shareholders.

(B) SECURITY OWNERSHIP OF MANAGEMENT.

The following table sets forth the number of Units beneficially owned either
directly or indirectly on March 23, 1999 by all directors and the executive
officers named in the Executive Compensation Table above, including all
directors and officers as a group:

<TABLE>
<CAPTION>
                                                                       Amount and
                                                                       Nature of
                                                                       Beneficial            Percent
Title of Class                      Name of Beneficial Owner           Ownership             of Class
--------------                      ------------------------           ---------             --------
<S>                                 <C>                                <C>                   <C>  
Depositary Units Representing        Donald N. Smith                   2,731,962 (1)         50.0%
Limited Partnership Interests
in the Registrant

"                                   All Directors and Officers
                                    of Registrant as a group           2,731,962             50.0%
</TABLE>

---------------

(1) Owned indirectly through Mr. Smith's 50.0% ownership of TRC, the sole
shareholder of PRI.




                                       48
<PAGE>   49


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

(A)  TRANSACTIONS WITH MANAGEMENT AND OTHERS.

During 1998 and 1997, FICC purchased layer cakes and muffin and pancake mixes
from Perkins for which Perkins was paid approximately $945,000 and $975,000,
respectively. PMC believes that the prices paid to Foxtail 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.

Perkins has subleased certain land, building and equipment to FICC. During 1998
and 1997, Perkins received approximately $328,000 and $322,000, respectively,
related to those subleases.

In 1998, PMC made payments to TRC Realty Co., a subsidiary of TRC, totaling
$573,000 related to the use of an aircraft leased by TRC Realty Co. PMC's use of
this aircraft is solely for Company related purposes, and the Company reimburses
PMC for all airplane expenses paid. Pursuant to an agreement expiring April 14,
2004, the Company is obligated to reimburse monthly an amount equal to 50% of
the fixed costs of the aircraft (consisting principally of lease payments, pilot
salaries, insurance and hangar rental) and its proportionate share of variable
expenses (such as fuel and maintenance) based on PMC's actual usage of the
aircraft.

The Company reimburses TRC for its out-of-pocket expenses related to management
services provided to the Company, including employee compensation and office
related expenses and related expenses. In addition, TRC reimburses the Company
for certain tax and accounting services. Excluding Mr. Smith's compensation and
expenses, during 1998, the payments due to TRC exceeded the payments TRC owed
the Company by $67,500.

(B)  CERTAIN BUSINESS RELATIONSHIPS.

Lee N. Abrams, a director of PMC and chairman of the Audit Committee of PMC, is
a senior partner in the Mayer, Brown & Platt law firm. Mayer, Brown & Platt
represented the Company and its affiliates in several matters during 1997 and
1998, including the Going Private Transaction.

(C)  INDEBTEDNESS OF MANAGEMENT.

There was no outstanding indebtedness of management during 1998 requiring
disclosure.




                                       49
<PAGE>   50

                                     PART IV

ITEM 14.  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 Public Accountants.
         Statements of Income for Each of the Three Years Ended December 31,
            1998.
         Balance Sheets at December 31, 1998 and 1997.
         Statements of Changes in Partners' Capital for Each of the Three Years
            Ended December 31, 1998.
         Statements of Cash Flows for Each of the Three Years Ended December 
            31, 1998.


         2.  THE FOLLOWING FINANCIAL STATEMENT SCHEDULES FOR THE YEARS ENDED 
                DECEMBER 31, 1998, 1997 AND 1996 ARE INCLUDED:

         No.
                    Report of Independent Public Accountants on Schedule.
         II.        Valuation and Qualifying Accounts.

Schedules I, III, IV and V are not applicable and have therefore been omitted.

         3.  EXHIBITS (FOOTNOTES APPEAR ON PAGE 52):

<TABLE>
<CAPTION>
               Exhibit No.       
               ----------
               <S>                  <C>
                   1                Purchase Agreement dated as of December 17, 1997 among the Issuers and the
                                    Initial Purchasers named therein*

                   3.1(a)           Certificate of Incorporation of Perkins Management Company, Inc.(8)

                   3.1(b)           Certificate of Amendment of Certificate of Incorporation of Perkins Management Company, Inc.(8)

                   3.2              Certificate of Incorporation of Perkins Finance Corp.*

                   3.3              By-Laws, as amended, of Perkins Management Company, Inc.(7)

                   3.4              By-Laws of Perkins Finance Corp.*

                   3.5              Certificate of Limited Partnership of Perkins Family Restaurants, L.P.(9)

                   4.1(a)           Agreement of Limited Partnership of Perkins Family Restaurants, L.P.(5)

                  4.1(b)            Amended and Restated Agreement of Limited Partnership of Perkins Family Restaurants, L.P.(5)

                  4.2               Indenture dated as of December 22, 1997 among the Issuers and the Trustee named therein.*


                  4.3               Form of 10.125% Series B Senior Notes due 2007 (included in Exhibit 4.2)
</TABLE>



                                       50
<PAGE>   51
<TABLE>
                  <S>               <C>  
                  10.1              Lease Agreement dated January 18, 1988 between The Crescent Center, Ltd. and Perkins
                                    Restaurants Operating Company, L.P.(6)

                  10.2              Modification and Ratification of Lease dated December 21, 1992 between The Travelers Insurance
                                    Company, successor of interest to the Crescent Center, Ltd., and Perkins Restaurants Operating
                                    Company, L.P.(2)

                  10.3              Finance Program Agreement dated September 14, 1993 among Bell Atlantic TrCon Leasing
                                    Corporation, d/b/a Bell Atlantic Capital Corporation, Perkins Restaurants Operating Company,
                                    L.P. and Perkins Family Restaurants L.P.(1)

                  10.4              Guaranty by Perkins Family Restaurants, L.P. and Perkins Family Restaurants Operating Company,
                                    L.P. in favor of BancBoston Leasing, Inc. dated as of May 1, 1994.(10)

                  10.5              Guaranty dated July 5, 1995 among Perkins Restaurants Operating Company, L.P. and BancBoston
                                    Leasing, Inc.(5)

                  10.7              Revolving Credit Agreement, by and among Perkins Family Restaurants, 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.*

                  10.8              Registration Rights Agreement dated as of December 22, 1997 among the Issuers and the Initial
                                    Purchasers named therein.*

                  10.9(a)           Deferred Compensation Plan

                  10.9(b)           Trust under the Perkins Family Restaurants, L.P. Deferred Compensation Plan

                  21                Subsidiaries of the Registrant*

                  24                Power of Attorney (Included on Page II-12)

                  25                Statement of Eligibility of Trustee*

                  27                Financial Data Schedule (for SEC use only)

                  99.1              Certificate of Incorporation of The Restaurant Company.(8)

                  99.2              Certificate of Amendment of Certificate of Incorporation of The Restaurant Company.(8)

                  99.3              By-Laws of The Restaurant Company.(4)

                  99.4              Articles of Incorporation, as amended, of Perkins Restaurants, Inc.(7)

                  99.5              By-Laws of Perkins Restaurants, Inc.(9)

                  99.6              Stockholders Agreement, dated as of November 21, 1985, among The  Restaurant Company,
                                    Holiday Inns, Inc., Bass Investment Limited Partnership, Donald N. Smith, et al.(9)
</TABLE>

                                       51
<PAGE>   52
<TABLE>
                  <S>               <C>

                  99.7              Pledge Agreement dated September 2, 1988 between Perkins Restaurants, Inc. and The First
                                    National Bank of Boston.(6)
</TABLE>


-------------------

         (1) Incorporated herein by reference to Registrant's Current Report on
         Form 8-K/A dated November 1, 1993.

         (2) Incorporated herein by reference to Registrant's Annual Report on
         Form 10-K for the fiscal year ended December 31, 1992.

         (3) Incorporated herein by reference to Registrant's Current Report on
         Form 8-K dated May 29, 1992.

         (4) Incorporated herein by reference to Registrant's Annual Report on
         Form 10-K for the fiscal year ended December 31, 1994.

         (5) Incorporated herein by reference to Registrant's Quarterly Report
         on Form 10-Q for the quarterly period ending September 30, 1995.

         (6) Incorporated herein by reference to Registrant's Annual Report on
         Form 10-K for the fiscal year ended December 31, 1988.

         (7) Incorporated herein by reference to Registrant's Annual Report on
         Form 10-K for the fiscal year ended December 31, 1987.

         (8) Incorporated herein by reference to Registrant's Annual Report on
         Form 10-K for the fiscal year ended December 31, 1986.

         (9) Incorporated herein by reference to Registrant's Form S-1,
         Registration No. 33-7333 dated July 17, 1986.

         (10) Incorporated herein by reference to Registrant's Quarterly Report
         on Form 10-Q for the quarterly period ended June 30, 1994.

-------------------

         * Previously filed.



(B)   Report on Form 8-K dated October 2, 1998 disclosing the resignation of
      Richard K. Arras, President and Chief Operating Officer of Perkins
      Management Company, Inc.



                                       52
<PAGE>   53



TRADEMARK NOTICE

The following trademarks are used in this report to identify products and
services of Perkins Family Restaurants, L.P.: Perkins, Perkins Family
Restaurant, Perkins Family Restaurant and Bakery, Perkins Express and Bakery and
Perkins Bakery.

























                           [INTENTIONALLY LEFT BLANK]




                                       53
<PAGE>   54




                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, on this 31st day of March,
1999.

                                      PERKINS FAMILY RESTAURANTS, L.P.
                                      BY: PERKINS MANAGEMENT COMPANY, INC.,
                                          GENERAL PARTNER


                                      By:/s/ Donald N. Smith             
                                      --------------------------------------
                                      Its: Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities indicated on this 31st day of March, 1999.

<TABLE>
Signature                                            Title
<S>                                         <C>
/s/ Donald N. Smith                         Chairman of the Board, Chief
------------------------------------        Executive Officer and Director
Donald N. Smith                     


/s/ Lee N. Abrams                           Director
------------------------------------
Lee N. Abrams


/s/ Steven L. Ezzes                         Director
------------------------------------
Steven L. Ezzes


/s/ Basil P. Livanos                        Director
------------------------------------
Basil P. Livanos


/s/ D. Michael Meeks                        Director
------------------------------------
David Michael Meeks


/s/ Steven R. McClellan                     Executive Vice President and Chief Financial Officer,
------------------------------------        (Principal Financial and Accounting Officer) 
Steven R. McClellan                         
</TABLE>



                                       54
<PAGE>   55





              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE



To the Partners of Perkins Family Restaurants, L.P.:


We have audited in accordance with generally accepted auditing standards, the
financial statements of Perkins Family Restaurants, L.P. included in this Form
10-K, and have issued our report thereon dated March 25, 1999. Our audit was
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule listed in Item 14.(a)2. is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.





                                                       Arthur Andersen LLP




Memphis, Tennessee,
March 25, 1999
<PAGE>   56
                                                                     SCHEDULE II

                        PERKINS FAMILY RESTAURANTS, L.P.
                        VALUATION AND QUALIFYING ACCOUNTS
                                 (In Thousands)

<TABLE>
<CAPTION>  
------------------------------------- ---------------------------- ------------ --------------- ------------
        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
------------------------------------- ------------   ------------- ------------ --------------- ------------
<S>                                   <C>              <C>            <C>        <C>             <C>
FISCAL YEAR ENDED DECEMBER 31, 1998

Allowance for Doubtful Accounts          $  852          $672            $--      $  (868)(a)      $656
                                         ======          ====            ===      =======          ====
Reserve for Disposition of Assets        $   --          $654            $--      $    --          $654   
                                         ======          ====            ===      =======          ====

FISCAL YEAR ENDED DECEMBER 31, 1997

Allowance for Doubtful Accounts          $  440          $727            $--      $  (315)(a)      $852
                                         ======          ====            ===      =======          ====

Allowance for Income Taxes               $  400          $ --            $--      $  (400)         $ --(c)
                                         ======          ====            ===      =======          ====

FISCAL YEAR ENDED DECEMBER 31, 1996

Allowance for Doubtful Accounts          $  495          $299            $--      $  (354)(a)      $440
                                         ======          ====            ===      =======          ====

Reserve for Disposition of Assets        $1,061          $ --            $--      $(1,061)(b)      $ --
                                         ======          ====            ===      =======          ====

Allowance for Income Taxes               $  575          $ --            $--      $  (175)         $400(c)
                                         ======          ====            ===      =======          ====
</TABLE>

----------

(a) Represents uncollectible accounts written off, net of recoveries, and net
    costs associated with direct financing sublease receivables for which a
    reserve was established.

(b) Represents disposal of assets included in the reserve.

(c) Represents the valuation allowance necessary to reduce to zero the net
    deferred tax assets realized in connection with the adoption of Statement of
    Financial Accounting Standards No. 109 "Accounting for Income Taxes" due to
    the uncertainty of their realizability.


                                      S-1