##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) ü
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended October 3, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from _________________ to _______________. Commission file number 333-57925 The Restaurant Company  (Exact name of registrant as specified in its charter)
 Delaware
    
    62-1254388(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. employer identification no.)
 6075 Poplar Avenue, Suite 800, Memphis, TN
    
    38119(Address of principal executive offices)
    
    (Zip code)
 (901) 766-6400  (Registrants telephone number, including area code)
 Indicate by
ü 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 üNo Indicate by
ü whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes            No ü Number of shares of common stock outstanding: 10,820. 1




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TABLE OF CONTENTS  CONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSPART II  OTHER INFORMATIONSignatureEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFO    Table of Contents  PART I  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE RESTAURANT COMPANY AND SUBSIDIARIES 
  
 Twelve Weeks Ended
    
    Twelve Weeks Ended
    
    Forty Weeks Ended
    
    Forty Weeks EndedOctober 3, 2004
    
    October 5, 2003
    
    October 3, 2004
    
    October 5, 2003REVENUES:Food sales
    
    $
    73,133
    
    
    $
    71,731
    
    
    $
    244,388
    
    
    $
    237,749Franchise and other revenue
    
    
    5,235
    
    
    
    5,313
    
    
    
    16,769
    
    
    
    16,908Total Revenues
    
    
    78,368
    
    
    
    77,044
    
    
    
    261,157
    
    
    
    254,657COSTS AND EXPENSES:Cost of sales (excluding depreciation
shown below):Food cost
    
    
    21,539
    
    
    
    20,269
    
    
    
    70,483
    
    
    
    67,522Labor and benefits
    
    
    24,840
    
    
    
    25,350
    
    
    
    84,412
    
    
    
    84,372Operating expenses
    
    
    15,081
    
    
    
    14,826
    
    
    
    50,168
    
    
    
    49,731General and administrative
    
    
    6,879
    
    
    
    6,681
    
    
    
    23,790
    
    
    
    22,468Depreciation and amortization
    
    
    3,827
    
    
    
    3,977
    
    
    
    12,877
    
    
    
    13,898Interest, net
    
    
    3,687
    
    
    
    3,648
    
    
    
    12,290
    
    
    
    12,692Provision for disposition of assets
    
    
    38
    
    
    
    190
    
    
    
    320
    
    
    
    245Loss on lease termination
    
    
    
    
    
    
    761
    
    
    
    
    
    
    
    761Asset write-down
    
    
    
    
    
    
    
    
    
    
    455
    
    
    
    150Other, net
    
    
    (97
    )
    
    
    (50
    )
    
    
    (365
    )
    
    
    (337
    )Total Costs and Expenses
    
    
    75,794
    
    
    
    75,652
    
    
    
    254,430
    
    
    
    251,502Income before income taxes
    
    
    2,574
    
    
    
    1,392
    
    
    
    6,727
    
    
    
    3,155Provision for income taxes
    
    
    (833
    )
    
    
    (216
    )
    
    
    (2,188
    )
    
    
    (598
    )NET INCOME
    
    $
    1,741
    
    
    $
    1,176
    
    
    $
    4,539
    
    
    $
    2,557
 The accompanying notes are an integral part of these consolidated statements. 2




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THE RESTAURANT COMPANY AND SUBSIDIARIES 
  
 October 3,
    
    December 28,2004
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    14,283
    
    
    $
    4,962Restricted cash
    
    
    5,314
    
    
    
    4,808Receivables, less allowance for
doubtful accounts of $1,131 and $1,003
    
    
    10,673
    
    
    
    10,647Inventories, net
    
    
    6,706
    
    
    
    6,199Prepaid expenses and other current assets
    
    
    1,291
    
    
    
    1,597Deferred income taxes
    
    
    2,219
    
    
    
    2,219Total current assets
    
    
    40,486
    
    
    
    30,432PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization
    
    
    113,851
    
    
    
    118,848GOODWILL
    
    
    27,035
    
    
    
    27,035INTANGIBLE ASSETS, net of accumulated
amortization of $5,759 and $5,265
    
    
    3,559
    
    
    
    4,053DEFERRED INCOME TAXES
    
    
    9,097
    
    
    
    9,097OTHER ASSETS
    
    
    7,045
    
    
    
    6,857$
    201,073
    
    
    $
    196,322
 The accompanying notes are an integral part of these consolidated balance sheets. 3




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THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par and Share Amounts)
(Unaudited) October 3,
    
    December 28,2004
    
    2003LIABILITIES AND STOCKHOLDERS INVESTMENTCURRENT LIABILITIES:Current maturities of long-term debt and capital lease obligations
    
    $
    349
    
    
    $
    466Accounts payable
    
    
    6,749
    
    
    
    11,133Franchise advertising contributions
    
    
    3,810
    
    
    
    4,093Accrued expenses
    
    
    25,607
    
    
    
    21,164Total current liabilities
    
    
    36,515
    
    
    
    36,856CAPITAL LEASE OBLIGATIONS, less
current maturities
    
    
    627
    
    
    
    869LONG-TERM DEBT
    
    
    148,009
    
    
    
    148,009OTHER LIABILITIES
    
    
    8,083
    
    
    
    7,299STOCKHOLDERS INVESTMENT:Common stock, $.01 par value, 100,000 shares authorized,
10,820 issued and outstanding
    
    
    1
    
    
    
    1Other comprehensive income
    
    
    53
    
    
    
    42Accumulated earnings
    
    
    7,785
    
    
    
    3,246Total stockholders investment
    
    
    7,839
    
    
    
    3,289$
    201,073
    
    
    $
    196,322
 The accompanying notes are an integral part of these consolidated balance sheets. 4




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THE RESTAURANT COMPANY AND SUBSIDIARIES 
  
 Twelve Weeks Ended
    
    Twelve Weeks Ended
    
    Forty Weeks Ended
    
    Forty Weeks EndedOctober 3, 2004
    
    October 5, 2003
    
    October 3, 2004
    
    October 5, 2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,741
    
    
    $
    1,176
    
    
    $
    4,539
    
    
    $
    2,557Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    3,827
    
    
    
    3,977
    
    
    
    12,877
    
    
    
    13,898Accretion of Senior Discount Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7Other non-cash income and expense items
    
    
    180
    
    
    
    157
    
    
    
    553
    
    
    
    399Provision for disposition of assets
    
    
    38
    
    
    
    190
    
    
    
    320
    
    
    
    245Asset write-down
    
    
    
    
    
    
    
    
    
    
    455
    
    
    
    150Net changes in operating assets and liabilities
    
    
    3,004
    
    
    
    (478
    )
    
    
    (1,049
    )
    
    
    (211
    )Total adjustments
    
    
    7,049
    
    
    
    3,846
    
    
    
    13,156
    
    
    
    14,488Net cash provided by operating activities
    
    
    8,790
    
    
    
    5,022
    
    
    
    17,695
    
    
    
    17,045CASH FLOWS FROM INVESTING ACTIVITIES:Cash paid for property and equipment
    
    
    (2,343
    )
    
    
    (1,768
    )
    
    
    (9,947
    )
    
    
    (6,757
    )Proceeds from sale of assets held for disposition
    
    
    7
    
    
    
    
    
    
    
    1,777
    
    
    
    10Payments on notes receivable
    
    
    41
    
    
    
    51
    
    
    
    155
    
    
    
    280Net cash used in investing activities
    
    
    (2,295
    )
    
    
    (1,717
    )
    
    
    (8,015
    )
    
    
    (6,467
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,750Payments on long-term debt
    
    
    
    
    
    
    (3,750
    )
    
    
    
    
    
    
    (14,603
    )Principal payments under capital lease obligations
    
    
    (107
    )
    
    
    (150
    )
    
    
    (359
    )
    
    
    (499
    )Net cash used in financing activities
    
    
    (107
    )
    
    
    (3,900
    )
    
    
    (359
    )
    
    
    (11,352
    )Net increase (decrease) in cash and cash equivalents
    
    
    6,388
    
    
    
    (595
    )
    
    
    9,321
    
    
    
    (774
    )CASH AND CASH EQUIVALENTS:Balance, beginning of period
    
    
    7,895
    
    
    
    5,634
    
    
    
    4,962
    
    
    
    5,813Balance, end of period
    
    $
    14,283
    
    
    $
    5,039
    
    
    $
    14,283
    
    
    $
    5,039
 The accompanying notes are an integral part of these consolidated statements. 5




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THE RESTAURANT COMPANY AND SUBSIDIARIES 
   Organization The Restaurant Company (the Company, Perkins, or TRC) is a
wholly-owned subsidiary of The Restaurant Holding Corporation (RHC).
TRC conducts business under the name Perkins Restaurant and Bakery. TRC
is also the sole stockholder of TRC Realty LLC, The Restaurant Company of
Minnesota and Perkins Finance Corp. RHCs principal stockholders are
Donald N. Smith (Mr. Smith), TRCs Chairman and Chief Executive Officer,
and BancBoston Ventures, Inc. (BBV). Mr. Smith is also the Chairman of
Friendly Ice Cream Corporation (FICC), which operates and franchises
approximately 544 restaurants, located primarily in the northeastern
United States. Basis of Presentation The accompanying unaudited consolidated financial statements of TRC have
been prepared in accordance with the instructions to Form 10-Q and
therefore do not include all information and notes necessary for complete
financial statements in conformity with generally accepted accounting
principles. The results for the periods indicated are unaudited but
reflect all adjustments (consisting only of normal recurring adjustments)
which management considers necessary for a fair presentation of the
operating results. Results of operations for the interim periods are not
necessarily indicative of a full year of operations. The notes to the
financial statements contained in the 2003 Annual Report on Form 10-K
should be read in conjunction with these statements. Accounting Reporting Period The Companys fiscal calendar year consists of thirteen four-week periods
ending on the last Sunday in December. The first quarter each year will
include four four-week periods. The first, second and third quarters
ended on April 18, July 11 and October 3, respectively. The fourth
quarter of 2004 will end on December 26. 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. On June 9, 2000, the Company entered into an agreement to guarantee fifty
percent of borrowings up to a total guarantee of $1,500,000 for use by a
franchisee to remodel and upgrade existing restaurants. As of October 3,
2004, there was $3,000,000 in borrowings outstanding under this agreement
of which the Company guaranteed $1,500,000. Under the provisions of FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, this
guarantee has been determined by the Company not to be a variable interest
in the franchisee. 6




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Provision for Disposition of Assets and Asset Write-Down During the quarter ended October 3, 2004, four separate hurricanes struck
Florida where the Company has a significant concentration of stores. The
Company recorded a provision for the disposition of assets of $38,000, which
represents the net book value of specifically identifiable assets destroyed
during the hurricanes. All other costs associated with the hurricanes,
including repairs and capital replacements, are estimated to be approximately
$300,000. Of this amount, the Company estimates that approximately $160,000
consists of capital items that will be included in 2004 capital spending. The
remaining costs were expensed to the income statement during the third quarter. Also, during the quarter, the Company entered into a contract to sell one
restaurant property. This sale closed on October 15, 2004. The Company will
record a net gain of approximately $400,000 on the sale during the fourth
quarter. During the second quarter, the Company sold one property and recorded a net
gain of $81,000. The Company also completed the sale of one property that was
under contract on April 18, 2004. A loss of $356,000 on this property was
recognized in the first quarter. During the first quarter of 2004, the Company sold one property and recorded a
net loss on the sale of approximately $7,000. Also, the Company determined
that impairment existed with respect to two Company-operated restaurants. This
determination was made based on the Companys projections that the future cash
flows of these restaurants would not exceed the present carrying value of the
assets. Accordingly, the Company recorded an impairment charge of $446,000 to
adjust the assets of these restaurants to net realizable value. Supplemental Cash Flow Information The increase or decrease in cash and cash equivalents due to changes in
operating assets and liabilities for the twelve and forty weeks ended October 3
and October 5, consists of the following (in thousands): Twelve Weeks Ended
    
    Twelve Weeks Ended
    
    Forty Weeks Ended
    
    Forty Weeks EndedOctober 3, 2004
    
    October 5, 2003
    
    October 3, 2004
    
    October 5, 2003(Increase) Decrease in:Receivables
    
    $
    (1,551
    )
    
    $
    (779
    )
    
    $
    (1,006
    )
    
    $
    162Inventories
    
    
    653
    
    
    
    (758
    )
    
    
    (507
    )
    
    
    (1,390
    )Prepaid expenses and
othercurrent assets
    
    
    481
    
    
    
    825
    
    
    
    306
    
    
    
    623Other assets
    
    
    143
    
    
    
    (234
    )
    
    
    95
    
    
    
    2Increase (Decrease) in:Accounts payable
    
    
    (599
    )
    
    
    (1,167
    )
    
    
    (4,384
    )
    
    
    (3,518
    )Accrued expenses
    
    
    3,680
    
    
    
    980
    
    
    
    3,661
    
    
    
    3,045Other liabilities
    
    
    197
    
    
    
    655
    
    
    
    786
    
    
    
    865$
    3,004
    
    
    $
    (478
    )
    
    $
    (1,049
    )
    
    $
    (211
    )
 7




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Other supplemental cash flow information is as follows (in thousands): Twelve Weeks Ended
    
    Twelve Weeks Ended
    
    Forty Weeks Ended
    
    Forty Weeks EndedOctober 3, 2004
    
    October 5, 2003
    
    October 3, 2004
    
    October 5, 2003Cash paid for interest
    
    $
    88
    
    
    $
    110
    
    
    $
    7,936
    
    
    $
    8,482Income taxes paid
    
    
    937
    
    
    
    679
    
    
    
    3,523
    
    
    
    796Income tax refunds received
    
    
    
    
    
    
    1
    
    
    
    97
    
    
    
    60
 Year-to-date, the Company has converted approximately $283,000 of accounts
receivable to long-term notes receivable. 8




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Segment Reporting The following presents revenue and other financial information by business
segment for the twelve and forty weeks ended October 3 and October 5 (in
thousands): Restaurants
    
    Franchise
    
    Manufacturing
    
    Other
    
    TotalsTwelve weeks ended October 3, 2004:Revenue from external customers
    
    $
    63,597
    
    
    $
    5,235
    
    
    $
    9,536
    
    
    
    
    
    
    $
    78,368Intersegment revenue
    
    
    
    
    
    
    
    
    
    
    2,001
    
    
    
    
    
    
    
    2,001Segment profit (loss)
    
    
    6,976
    
    
    
    4,472
    
    
    
    1,029
    
    
    
    (10,736
    )
    
    
    1,741Twelve weeks ended October 5, 2003:Revenue from external customers
    
    $
    63,713
    
    
    $
    5,246
    
    
    $
    8,018
    
    
    $
    67
    
    
    $
    77,044Intersegment revenue
    
    
    
    
    
    
    
    
    
    
    1,972
    
    
    
    
    
    
    
    1,972Segment profit (loss)
    
    
    5,437
    
    
    
    4,626
    
    
    
    1,997
    
    
    
    (10,884
    )
    
    
    1,176
 Restaurants
    
    Franchise
    
    Manufacturing
    
    Other
    
    TotalsForty weeks ended October 3, 2004:Revenue from external customers
    
    $
    217,652
    
    
    $
    16,769
    
    
    $
    26,736
    
    
    
    
    
    
    $
    261,157Intersegment revenue
    
    
    
    
    
    
    
    
    
    
    6,773
    
    
    
    
    
    
    
    6,773Segment profit (loss)
    
    
    23,190
    
    
    
    14,305
    
    
    
    4,016
    
    
    
    (36,972
    )
    
    
    4,539Forty weeks ended October 5, 2003:Revenue from external customers
    
    $
    212,941
    
    
    $
    16,604
    
    
    $
    24,808
    
    
    $
    304
    
    
    $
    254,657Intersegment revenue
    
    
    
    
    
    
    
    
    
    
    7,295
    
    
    
    
    
    
    
    7,295Segment profit (loss)
    
    
    16,910
    
    
    
    14,493
    
    
    
    5,916
    
    
    
    (34,762
    )
    
    
    2,557
 9




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A reconciliation of other segment loss is as follows (in thousands): Twelve Weeks Ended
    
    Twelve Weeks Ended
    
    Forty Weeks Ended
    
    Forty Weeks EndedOctober 3, 2004
    
    October 5, 2003
    
    October 3, 2004
    
    October 5, 2003General and administrative expenses
    
    $
    5,753
    
    
    $
    5,532
    
    
    $
    20,219
    
    
    $
    18,675Depreciation and amortization expenses
    
    
    515
    
    
    
    590
    
    
    
    1,826
    
    
    
    2,171Interest expense, net
    
    
    3,687
    
    
    
    3,648
    
    
    
    12,290
    
    
    
    12,692Provision for disposition of assets
    
    
    38
    
    
    
    190
    
    
    
    320
    
    
    
    245Loss on lease termination
    
    
    
    
    
    
    761
    
    
    
    
    
    
    
    761Asset write-down
    
    
    
    
    
    
    
    
    
    
    455
    
    
    
    150Provision for income taxes
    
    
    833
    
    
    
    216
    
    
    
    2,188
    
    
    
    598Other
    
    
    (90
    )
    
    
    (53
    )
    
    
    (326
    )
    
    
    (530
    )$
    10,736
    
    
    $
    10,884
    
    
    $
    36,972
    
    
    $
    34,762
 Revolving Credit Agreement As of October 3, 2004, the Company has a secured $25,000,000 revolving line of
credit facility (the Credit Facility) with a sub-limit for up to $7,500,000
of letters of credit. All amounts under the Credit Facility bear interest at
floating rates based on the agents base rate or Eurodollar rates as defined in
the agreement. All indebtedness under the Credit Facility is collateralized by
a first priority lien on substantially all of the assets of the Company. The
maturity date of the Credit Facility is January 1, 2005. Currently, the
Company is negotiating with the Lender to extend the term of the Credit
Facility, which the Company anticipates completing before expiration of the
Credit Facility. As of October 3, 2004, there were no borrowings and
approximately $5,968,000 of letters of credit outstanding under the Credit
Facility. At April 20, 2003, the Company failed to meet the criteria of one of the
financial covenants of the Credit Facility. On May 14, 2003, the Company
executed an amendment to the Credit Facility that waived the April 20, 2003
covenant violation, reduced the requirements of the financial covenants and
lowered the total amount available under the Credit Facility from $40,000,000
to $25,000,000. The Company executed an amendment to the Credit Facility on
March 25, 2004 that reduced the requirements of the financial covenants at the
end of the first quarter 2004 and thereafter. Effective June 16, 2004, the
Company executed an amendment to the Credit Facility that increased the
sub-limit of letters of credit from $5,000,000 to $7,500,000. As of October 3,
2004, the Company was in compliance with the requirements of the financial
covenants. 10




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE PERIOD ENDED OCTOBER 3, 2004 RESULTS OF OPERATIONS Overview: The Company is a leading operator and franchisor of mid-scale restaurants
located in 34 states and five Canadian provinces. As of October 3, 2004, the
Company owned and operated 154 and franchised 333 Perkins Restaurants. Both
the Company-operated and franchised Perkins Restaurants operate under the names
Perkins Restaurant and Bakery, Perkins Family Restaurant, Perkins Family
Restaurant and Bakery, or Perkins Restaurant and the mark Perkins. The
Company also offers cookie doughs, muffin batters, pancake mixes, pies and
other food products for sale to our Company-operated and franchised restaurants
and bakery and food service distributors through Foxtail Foods (Foxtail), our
manufacturing division. The business of Perkins was founded in 1958, and since
then Perkins has continued to adapt its menus, product offerings, building
designs and decor to meet changing consumer preferences. Perkins is a highly
recognized brand in the geographic areas it serves. The Companys revenues are derived primarily from the operation of
Company-owned restaurants, the sale of bakery products produced by Foxtail and
franchise royalties. In order to ensure consistency and availability of
Perkins proprietary products to each unit in the system, Foxtail offers cookie
doughs, muffin batters, pancake mixes, pies and other food products to
Company-operated and franchised restaurants through food service distributors.
Sales to Company-operated restaurants are eliminated in the accompanying
statements of operations. For the quarter ended October 3, 2004, revenues from
Company-operated restaurants, Foxtail, and franchise and other accounted for
81.2%, 12.1% and 6.7% of total revenue, respectively. 11




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A summary of the Companys results for the twelve and forty weeks ended
October 3, 2004 and October 5, 2003 are presented in the following
table. All revenues, costs and expenses are expressed as a percentage
of total revenues. Twelve Weeks Ended
    
    Twelve Weeks Ended
    
    Forty Weeks Ended
    
    Forty Weeks EndedOctober 3, 2004
    
    October 5, 2003
    
    October 3, 2004
    
    October 5, 2003Revenues:Food sales
    
    
    93.3
    %
    
    
    93.1
    %
    
    
    93.6
    %
    
    
    93.4
    %Franchise and other revenue
    
    
    6.7
    
    
    
    6.9
    
    
    
    6.4
    
    
    
    6.6Total Revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Costs and Expenses:Cost of sales (excluding depreciation
shown below):Food cost
    
    
    27.5
    
    
    
    26.3
    
    
    
    27.0
    
    
    
    26.5Labor and benefits
    
    
    31.7
    
    
    
    32.9
    
    
    
    32.3
    
    
    
    33.1Operating expenses
    
    
    19.2
    
    
    
    19.2
    
    
    
    19.2
    
    
    
    19.5General and administrative
    
    
    8.8
    
    
    
    8.7
    
    
    
    9.1
    
    
    
    8.8Depreciation and amortization
    
    
    4.9
    
    
    
    5.2
    
    
    
    4.9
    
    
    
    5.5Interest, net
    
    
    4.7
    
    
    
    4.7
    
    
    
    4.7
    
    
    
    5.0Provision for disposition of assets
    
    
    
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.1Loss on lease termination
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    0.3Asset write-down
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    0.1Other, net
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.1
    )Total Costs and Expenses
    
    
    96.7
    
    
    
    98.2
    
    
    
    97.4
    
    
    
    98.8Income before income taxes
    
    
    3.3
    
    
    
    1.8
    
    
    
    2.6
    
    
    
    1.2Provision for income taxes
    
    
    (1.1
    )
    
    
    (0.3
    )
    
    
    (0.9
    )
    
    
    (0.2
    )Net Income
    
    
    2.2
    %
    
    
    1.5
    %
    
    
    1.7
    %
    
    
    1.0
    %
 Net Income for the third quarter of 2004 was $1,741,000 versus net income of
$1,176,000 for the third quarter of 2003. For the year-to-date period ended
October 3, 2004, net income was $4,539,000 compared to $2,557,000 for the
year-to-date period ended October 5, 2003. 12




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Revenues: Total revenues for the third quarter of 2004 increased 1.7% from the prior year
third quarter. Year-to-date total revenues increased 2.6% over the prior
year-to-date period. This increase is primarily due to increased restaurant
sales. Same store comparable sales in Company-operated restaurants increased
approximately 0.4% for the third quarter and increased approximately 1.4%
year-to-date. The increase for the quarter is attributable to an increase in
the average guest check of 4.3% offset by a decrease of 3.9% in comparable
guest visits . The year-to-date increase is attributable to a 4.1% increase in
the average guest check offset by a decrease of 2.7% in comparable guest
visits. The calculation of same store comparable sales excludes days that
stores were closed due to the series of hurricanes in Florida. Revenues from Foxtail increased approximately 18.9% from the prior year quarter
and increased 7.8% over the prior year-to-date period and constituted
approximately 12.1% and 10.2%, respectively, of the Companys total revenues. Franchise revenue, composed primarily of franchise royalties, decreased 0.2%
over the third quarter of 2003 and increased 1.0% year-to-date. Royalty
revenues increased for the year-to-date period primarily due to an estimated
1.7% increase in franchise restaurant comparable sales partially offset by a
decrease in the average number of franchise restaurants. Since the third
quarter of 2003, the Companys franchisees have opened 8 restaurants and have
closed 13 restaurants. Costs and Expenses: Food cost: In terms of total revenues, food cost increased 1.2 percentage points from the
third quarter of 2003 and increased 0.5 percentage points over the previous
year-to-date period. Restaurant food cost, as a percentage of restaurant sales,
decreased 0.9 and 0.6 percentage points for the quarter and year-to-date
periods, respectively, primarily due to selective menu price increases and
decreased discounting. These efficiencies were partially offset by increases
in commodity costs, primarily beef, pork, dairy and eggs. As a percentage of
Foxtail sales, Foxtail food cost increased 9.9 and 5.0 percentage points for
the quarter and year-to-date periods, respectively, primarily due to production
inefficiencies related to the plant expansion completed earlier this year as
well as increases in the costs of raw materials, particularly eggs, milk and
other dairy products. Labor and benefits: Labor and benefits expense, as a percentage of total revenues, decreased 1.2
percentage points from the third quarter of 2003 and decreased 0.8 percentage
points for the year-to-date period ended October 3, 2004. The decrease is
primarily due to increased labor productivity at Company-operated restaurants
partially offset by an increase in employee insurance, average wage rates and
Foxtail labor costs, which increased 2.1% for the quarter as a percentage of
Foxtail sales. Federal and state minimum wage laws impact the wage rates of the Companys
hourly employees. Certain states do not allow tip credits for servers which
results in higher payroll costs as well as greater exposure to increases in
minimum wage rates. In the past, the Company has been able to offset increases
in labor costs through selective menu price increases and improvements in labor
productivity. However, there is no assurance that future increases can be
mitigated through raising menu prices or improvements in labor productivity. 13




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Operating expenses: Expressed as a percentage of total revenues, operating expenses were flat
compared to the third quarter of 2003 and decreased 0.3 percentage points for
the year-to-date period. The decrease for the year-to-date period is primarily
due to decreases in the usage of restaurant supplies and in administrative
expenses at Company-operated restaurants. General and administrative: General and administrative expenses, as a percentage of total revenues,
increased 0.1 percentage points compared to the third quarter of 2003 and
increased 0.3 percentage points over the year-to-date period. The increase is
primarily due to increased incentive costs, partially offset by reduced home
office expenses. Depreciation and amortization: Depreciation and amortization expense decreased from 5.2 percent of sales in
the third quarter of 2003 to 4.9 percent of sales in 2004 and decreased from
5.5 percent of sales to 4.9 percent of sales for the year-to-date period ended
October 3, 2004 as compared to the same period in 2003. This decrease is
primarily due to the Companys reduction in capital spending since 2001. Interest, net: Interest expense, as a percentage of total revenue, was flat compared to the
third quarter of 2003 and decreased 0.3 percentage points compared to the
year-to-date period primarily due to a reduction in the overall borrowings by
the Company. Provision for Disposition of Assets and Asset Write-Down: During the quarter ended October 3, 2004, four separate hurricanes struck
Florida where the Company has a significant concentration of stores. The
Company recorded a provision for the disposition of assets of $38,000, which
represents the net book value of specifically identifiable assets destroyed
during the hurricanes. All other costs associated with the hurricanes,
including repairs and capital replacements, are estimated to be approximately
$300,000. Of this amount, the Company estimates that approximately $160,000
consists of capital items that will be included in 2004 capital spending. The
remaining costs were expensed to the income statement during the third quarter. Also, during the quarter, the Company entered into a contract to sell one
restaurant property. This sale closed on October 15, 2004. The Company will
record a net gain of approximately $400,000 on the sale during the fourth
quarter. During the second quarter, the Company sold one property and recorded a net
gain of $81,000. The Company also completed the sale of one property that was
under contract on April 18, 2004. A loss of $356,000 on this property was
recognized in the first quarter. During the first quarter of 2004, the Company sold one property and recorded a
net loss on the sale of approximately $7,000. Also, the Company determined
that impairment existed with respect to two Company-operated restaurants. This
determination was made based on the Companys projections that the future cash
flows of these restaurants would not exceed the present carrying value of the
assets. Accordingly, the Company recorded an impairment charge of $446,000 to
adjust the assets of these restaurants to net realizable value. Other, net: Other income, as a percentage of total revenue, increased slightly compared to
the third quarter of 2003. Provision for Income Taxes: The effective tax rate for the third quarter and year-to-date periods was 32.4%
and 32.5%, respectively. The effective tax rate increased significantly over
the comparable prior year periods due to the fact that the impact of certain
tax credits, which primarily result from excess FICA taxes paid on server tip
income that exceeds minimum wage, was reduced as a result of the increase in
current year pretax income. 14




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CAPITAL RESOURCES AND LIQUIDITY The Companys primary sources of funding during the quarter were cash flows
from operating activities. The principal uses of cash during the quarter were
capital lease payments and capital expenditures. Capital expenditures for the
third quarter of 2004 were $2,343,000 compared to $1,768,000 for the third
quarter of 2003. Capital expenditures in 2004 consisted primarily of capital
required to remodel and upgrade existing restaurants and expand operations at
our manufacturing facility. The Companys capital budget for 2004 is $15.0
million and includes plans to open no new Company-operated restaurants. As of October 3, 2004, the Company has a secured $25,000,000 revolving line of
credit facility (the Credit Facility) with a sub-limit for up to $7,500,000
of letters of credit. All amounts under the Credit Facility bear interest at
floating rates based on the agents base rate or Eurodollar rates as defined in
the agreement. All indebtedness under the Credit Facility is collateralized by
a first priority lien on substantially all of the assets of the Company. The
maturity date of the Credit Facility is January 1, 2005. Currently, the
Company is negotiating with the Lender to extend the term of the Credit
Facility, which the Company anticipates completing before expiration of the
Credit Facility. As of October 3, 2004, there were no borrowings and
approximately $5,968,000 of letters of credit outstanding under the Credit
Facility. At April 20, 2003, we failed to meet the criteria of one of the financial
covenants of the Credit Facility. On May 14, 2003, the Company executed an
amendment to the Credit Facility that waived the April 20, 2003 covenant
violation, reduced the requirements of the financial covenants and lowered the
total amount available under the Credit Facility from $40,000,000 to
$25,000,000. The Company executed an amendment to the Credit Facility on March
25, 2004 that reduced the requirements of the financial covenants at the end of
the first quarter 2004 and thereafter. Effective June 16, 2004, the Company
executed an amendment to the Credit Facility that increased the sub-limit of
letters of credit from $5,000,000 to $7,500,000. As of October 3, 2004, the
Company was in compliance with the requirements of the financial covenants. On November 15, 2001, the Company elected to begin accruing cash interest on
its 11.25% Senior Discount Notes (the Notes). Cash interest is payable
semi-annually on May 15 and November 15. On May 15, 2003 the Company paid
$8,383,000 in principal of the Notes at a redemption price of 105.625% of the
face amount of the Notes. The principal balance of the Notes on October 3,
2004 was $18,009,000. TRC is a wholly-owned subsidiary of RHC. The common shares of RHC not owned by
Mr. Smith are subject to an option requiring RHC to redeem the shares at any
time after December 22, 2004 at fair market value (the Put). As of October 3,
2004, these shares represented 30% of the outstanding common stock of RHC. As
of December 28, 2003, the estimated fair market value of the Put was
$4,650,000. RHC has a management fee agreement dated as of December 22, 1999,
with BBV whereby BBV provides certain consulting services to RHC. In
consideration for these services, a fee of $250,000 accrues annually and is
payable by RHC on December 22, 2004. Additionally, RHC issued 50,000 shares of non-voting preferred stock on
December 22, 1999. The preferred stock is mandatorily redeemable for $1,000 per
share (the Liquidation Value) plus all accrued but unpaid dividends, if any,
on December 22, 2006. Preferred dividends of 8% per annum of the Liquidation
Value of each share are payable quarterly. As of October 3, 2004, approximately
$23,017,000 of in-kind dividends had been paid through the issuance of
additional shares of preferred stock. Assuming a continuation of in-kind
dividends, the redemption price on December 22, 2006 is estimated to be
$87,044,000. The holders of preferred stock are entitled to be paid in cash the
Liquidation Value of each share of preferred stock before any payments are made
to any holders of common stock. The preferred stock is redeemable at the option
of the Company at any time prior to the mandatory redemption date at the
Liquidation Value. 15




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RHC has no material assets other than its investment in TRC. The ability of TRC
to pay dividends to or make distributions to RHC in order to redeem common or
preferred shares or pay the management fee to BBV is restricted under its
senior notes indenture and the Credit Facility Agreement. 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,
or to fund planned capital expenditures, or to meet its or RHCs other
liquidity needs will depend on the Companys future performance, which, to a
certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond control of the
Company. Based upon the current level of operations, management believes that
cash flow from operating activities and available cash, together with available
borrowings under the Credit Facility, will be adequate to meet the Companys
liquidity needs in the normal course of its operations. There can be no
assurance that the Company will generate sufficient cash flow from operations,
have access to capital markets or that future borrowings will be available in
an amount sufficient to enable the Company to service its indebtedness or to
fund its other liquidity needs. In addition, there can be no assurance that the
Company will be able to effect any necessary recapitalization or refinancing on
commercially reasonable terms or at all. SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to adopt accounting policies and make significant judgments and
estimates to develop amounts reflected and disclosed in the financial
statements. In many cases, there are alternative policies or estimation
techniques that could be used. We maintain a thorough process to review the
application of our accounting policies and to evaluate the appropriateness of
the estimates that are required to prepare the financial statements of a
corporation. However, even under optimal circumstances, estimates routinely
require adjustment based on changing circumstances and the receipt of new or
better information. Revenue Recognition: Revenue at Company-operated restaurants is recognized as customers pay for
products at the time of sale. The earnings reporting process is covered by our
system of internal controls and generally does not require significant
management judgments and estimates. However, estimates are inherent in the
calculation of franchisee royalty revenue. We calculate an estimate of royalty
income each period and adjust royalty income when actual amounts are reported
by franchisees. Historically, these adjustments have not been material. Concentration of Credit Risk: Financial instruments, which potentially expose the Company to concentrations
of credit risk, consist principally of franchisee and Foxtail accounts
receivable. We perform ongoing credit evaluations of our customers and
generally require no collateral to secure accounts receivable. The credit
review is based on both financial and non-financial factors. Based on this
review, we provide for estimated losses for accounts receivable that are not
likely to be collected. Although we maintain good relationships with our
franchisees, if average sales or the financial health of significant
franchisees were to deteriorate, we may have to increase our reserves against
collection of franchise revenues. 16




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##### Table of Contents



Insurance Reserves: We are self-insured up to certain limits for costs associated with workers
compensation claims, property claims and benefits paid under employee health
care programs. At October 3, 2004 and December 28, 2003, we had total
self-insurance accruals reflected in our balance sheet of approximately $4.7
million. The measurement of these costs required the consideration of historical loss
experience and judgments about the present and expected levels of cost per
claim. We account for these costs primarily through actuarial methods, which
develop estimates of the undiscounted liability for claims incurred, including
those claims incurred but not reported. These methods provide estimates of
future ultimate claim costs based on claims incurred as of the balance sheet
date. Other acceptable methods of accounting for these accruals include
measurement of claims outstanding and projected payments. We believe the use of actuarial methods to account for these liabilities
provides a consistent and effective way to measure these highly judgmental
accruals. However, the use of any estimation technique in this area is
inherently sensitive given the magnitude of claims involved and the length of
time until the ultimate cost is known. We believe that our recorded
obligations for these expenses are consistently measured on a conservative
basis. Nevertheless, changes in health care costs, accident frequency and
severity and other factors can materially affect the estimate for these
liabilities. Long-Lived Assets: The restaurant industry is capital intensive. We have approximately 60% of our
total assets invested in property and equipment. We capitalize only those
costs that meet the definition of capital assets under generally accepted
accounting principles. Accordingly, repairs and maintenance costs that do not
extend the useful life of the asset are expensed as incurred. The depreciation of our capital assets over their estimated useful lives, and
the determination of any salvage values, requires management to make judgments
about future events. Because we utilize many of our capital assets over
relatively long periods (20  30 years for our restaurant buildings), we
periodically evaluate whether adjustments to our estimated lives or salvage
values are necessary. The accuracy of these estimates affects the amount of
depreciation expense recognized in a period and, ultimately, the gain or loss
on the disposal of the asset. Historically, gains and losses on the
disposition of assets have not been significant. However, such amounts may
differ materially in the future based on restaurant performance, technological
obsolescence, regulatory requirements and other factors beyond our control. Due to the fact that we have invested a significant amount in the construction
or acquisition of new restaurants, we have risks that these assets will not
provide an acceptable return on our investment and an impairment of these
assets may occur. The accounting test for whether an asset held for use is
impaired involves first comparing the carrying value of the asset with its
estimated future undiscounted cash flows. If these cash flows do not exceed
the carrying value, the asset must be adjusted to its current fair value. We
periodically perform this test on each of our restaurants to evaluate whether
impairment exists. Factors influencing our judgment include the age of the
restaurant (new restaurants have significant start up costs which impede a
reliable measure of cash flow), estimation of future restaurant performance and
estimation of restaurant fair value. Due to the fact that we can specifically
evaluate impairment on a restaurant-by-restaurant basis, we have historically
been able to identify impaired restaurants and record the appropriate
adjustment. We utilize operating leases to finance a significant number of our restaurant
properties. Over the years, we have found these leasing arrangements to be
favorable from a cash flow and risk management standpoint. Such arrangements
typically shift the risk of loss on the residual value of the assets at the end
of the lease period to the lessor. 17




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##### Table of Contents



The future commitments for operating leases are not reflected as a liability in
our balance sheet because the leases do not meet the accounting definition of
capital leases. The determination of whether a lease is accounted for as a
capital lease or an operating lease requires management to make estimates
primarily about the fair value of the asset and its estimated economic useful
life. We believe that we have a well-defined and controlled process for making
this evaluation. We have approximately $31 million of intangible assets on our balance sheet
resulting from the acquisition of businesses. New accounting standards adopted
in 2002 require that we review these intangible assets for impairment on an
annual basis and cease all goodwill amortization. The adoption of these new
rules did not result in an impairment of our recorded intangible assets. The
annual evaluation of intangible asset impairment requires the use of estimates
about the future cash flows of each of our reporting units to determine their
estimated fair values. Changes in forecasted operations and changes in
discount rates can materially affect these estimates. However, once an
impairment of intangible assets has been recorded, it cannot be reversed. Deferred Income Taxes: We record income tax liabilities utilizing known obligations and estimates of
potential obligations. A deferred tax asset or liability is recognized
whenever there are future tax effects from existing temporary differences and
operating loss and tax credit carryforwards. We record a valuation allowance
to reduce deferred tax assets to the balance that is more likely than not to be
realized. In evaluating the need for a valuation allowance, we must make
judgments and estimates on future taxable income, feasible tax planning
strategies and existing facts and circumstances. When we determine that
deferred tax assets could be realized in greater or lesser amounts than
recorded, the asset balance and income statement reflect the change in the
period such determination is made. We believe that the valuation allowance
recorded is adequate for the circumstances. However, changes in facts and
circumstances that affect our judgments or estimates in determining the proper
deferred tax assets or liabilities could materially affect the recorded
amounts. SEASONALITY Company revenues are subject to seasonal fluctuations. Customer counts (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. 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. 18




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the quantitative and qualitative market
risks of the Company since the prior reporting period. ITEM 4. CONTROLS AND PROCEDURES As of October 3, 2004, an evaluation was performed under the supervision
and with the participation of the Companys management, including the Chief
Executive Officer (CEO) and the Chief Financial Officer (CFO), of the
effectiveness of the design and operation of the Companys disclosure controls
and procedures (as defined in Rule 13a  15(e) under the Exchange Act). Based
on that evaluation, the Companys CEO and CFO concluded that the Companys
disclosure controls and procedures were effective as of October 3, 2004. There
have been no significant changes in the Companys internal controls or in other
factors that could significantly affect internal controls subsequent to the
date the Company carried out its evaluation. 19




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##### Table of Contents



PART II  OTHER INFORMATION ITEM 6. EXHIBITS AND
REPORTS ON FORM 8-K (a) Exhibits - 31.1
    
    Principal Executive Officer Certification
Pursuant to Sarbanes-Oxley Act of 2002, Section 302.31.2
    
    Principal Financial Officer Certification
Pursuant to Sarbanes-Oxley Act of 2002, Section 302.
 20




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Signature Pursuant to the requirements 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. THE RESTAURANT COMPANYDATE: November 15, 2004
    BY: /s/ Michael P. DonahoeMichael P. DonahoeExecutive Vice President,
Chief Financial Officer and Director 21