##### Table of Contents



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

FORM 10-Q

(Mark One)

|                                               |  |                                                                                         
|---------------------------------------------- |  | ----------------------------------------------------------------------------------------
|(Box with an X)                                |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                              
|                                              
|                                              
|                                              
|For the quarterly period ended October 7, 2001
|                                              
|                                              
|                                              
|                                              
|OR                                            
|                                              
|                                              
|                                              
|                                              
|(Empty Ballot Box)                             |  | 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(State or other jurisdiction of incorporation or organization)             |  | 62-1254388(I.R.S. employer identification no.)
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|6075 Poplar Avenue, Suite 800, Memphis, TN(Address of principal executive offices) |  | 38119(Zip code)                               

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

Indicate by X 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  (Box with an X)
     No  (Empty Ballot Box)





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TABLE OF CONTENTS



|                                        |                                                                     |  |  |  |  |  |  | 
|--------------------------------------- | ------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION         
|                                        | ITEM 1. FINANCIAL STATEMENTS                                       
|                                        | ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|PART II  OTHER INFORMATION            
|                                        | ITEM 6. EXHIBITS AND REPORTS ON FORM 5-K                           
|Signature                              
|AMENDMENT TO REVOLVING CREDIT AGREEMENT



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##### Table of Contents



PART I  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands)







|                                          |                             |   |            |        |               |   |            |        |               |   |         |         |  |   |         |         | 
|----------------------------------------- | --------------------------- | - | ---------- | ------ | ------------- | - | ---------- | ------ | ------------- | - | ------- | ------- |  | - | ------- | ------- | 
|                                          |                             |   | 84 days    |        | 92 days       |   | 280 days   |        | 274 days     
|                                          |                             |   | ended      |        | ended         |   | ended      |        | ended        
|                                          |                             |   | October 7, |        | September 30, |   | October 7, |        | September 30,
|                                          |                             |   | 2001       |        | 2000          |   | 2001       |        | 2000         
|                                          |                             |   |            |        |               |   |            |        |              
|REVENUES:                                 |                             |   |            |        |               |   |            |        |               |   |         |         |  |   |         |        
|                                         
|                                         
|                                         
|                                         
|                                          | Food sales                  |   | $          | 70,535 |               |   | $          | 82,011 |               |   | $       | 235,213 |  |   | $       | 235,244 | 
|                                         
|                                         
|                                         
|                                         
|                                          | Franchise and other revenue |   |            | 5,543  |               |   |            | 6,130  |               |   |         | 17,816  |  |   |         | 17,276  | 
|                                          |                             |   |            |        |               |   |            |        |               |   |         |         |  |   |         |        
|Total Revenues                            |                             |   | 76,078     |        |               |   | 88,141     |        |               |   | 253,029 |         |  |   | 252,520 |        
|                                          |                             |   |            |        |               |   |            |        |               |   |         |         |  |   |         |        
|COSTS AND EXPENSES:                       |                             |   |            |        |               |   |            |        |               |   |         |         |  |   |         |        
|                                         
|                                         
|                                         
|                                         
|Cost of sales:                            |                             |   |            |        |               |   |            |        |               |   |         |         |  |   |         |        
|                                         
|                                         
|                                         
|                                         
|                                          | Food cost                   |   |            | 19,674 |               |   |            | 22,801 |               |   |         | 65,673  |  |   |         | 65,528  | 
|                                         
|                                         
|                                         
|                                         
|                                          | Labor and benefits          |   |            | 24,753 |               |   |            | 27,809 |               |   |         | 82,239  |  |   |         | 82,571  | 
|                                         
|                                         
|                                         
|                                         
|                                          | Operating expenses          |   |            | 15,332 |               |   |            | 16,013 |               |   |         | 49,778  |  |   |         | 46,189  | 
|                                         
|                                         
|                                         
|                                         
|General and administrative                |                             |   | 6,668      |        |               |   | 8,091      |        |               |   | 23,920  |         |  |   | 22,990  |        
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |                             |   | 5,357      |        |               |   | 5,794      |        |               |   | 18,077  |         |  |   | 16,932  |        
|                                         
|                                         
|                                         
|                                         
|Interest, net                             |                             |   | 4,177      |        |               |   | 4,601      |        |               |   | 13,948  |         |  |   | 13,557  |        
|                                         
|                                         
|                                         
|                                         
|Gain on disposition of assets             |                             |   |           |        |               |   |           |        |               |   | (1,097  | )       |  |   |        |        
|                                         
|                                         
|                                         
|                                         
|Asset write-down                          |                             |   | 116        |        |               |   | 937        |        |               |   | 116     |         |  |   | 1,537   |        
|                                         
|                                         
|                                         
|                                         
|Other, net                                |                             |   | (320       | )      |               |   | (383       | )      |               |   | (1,009  | )       |  |   | (1,100  | )      
|                                          |                             |   |            |        |               |   |            |        |               |   |         |         |  |   |         |        
|Total Costs and Expenses                  |                             |   | 75,757     |        |               |   | 85,663     |        |               |   | 251,645 |         |  |   | 248,204 |        
|                                          |                             |   |            |        |               |   |            |        |               |   |         |         |  |   |         |        
|Income before income taxes                |                             |   | 321        |        |               |   | 2,478      |        |               |   | 1,384   |         |  |   | 4,316   |        
|                                         
|                                         
|                                         
|                                         
|(Provision for) Benefit from
income taxes |                             |   | 374        |        |               |   | (842       | )      |               |   | 20      |         |  |   | (1,467  | )      
|                                          |                             |   |            |        |               |   |            |        |               |   |         |         |  |   |         |        
|NET INCOME                                |                             | $ | 695        |        |               | $ | 1,636      |        |               | $ | 1,404   |         |  | $ | 2,849   |        
|                                          |                             |   |            |        |               |   |            |        |               |   |         |         |  |   |         |        

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

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THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)

|                                                                                  |                      |        |         |             |  |              |         |        |  | 
|--------------------------------------------------------------------------------- | -------------------- | ------ | ------- | ----------- |  | ------------ | ------- | ------ |  | 
|                                                                                  |                      |        |         | October 7,  |  |              |         |       
|                                                                                  |                      |        |         | 2001        |  | December 31,
|                                                                                  |                      |        |         | (Unaudited) |  | 2000        
|                                                                                  |                      |        |         |             |  |             
|                                                                                  |                      | ASSETS |         |             |  |              |         |        |  | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|CURRENT ASSETS:                                                                   |                      |        |         |             |  |              |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash and cash equivalents                                                         |                      | $      | 9,143   |             |  | $            | 5,361   |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Receivables, less allowance for
doubtful accounts of $887 and $563                |                      |        | 9,653   |             |  |              | 8,376   |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Inventories, at the lower of
first-in, first-out cost or market                   |                      |        | 6,425   |             |  |              | 5,096   |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Prepaid expenses and other current assets                                         |                      |        | 1,743   |             |  |              | 1,508   |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Deferred income taxes                                                             |                      |        | 775     |             |  |              | 775     |       
|                                                                                  |                      |        |         |             |  |              |         |       
|                                                                                  | Total current assets |        |         | 27,739      |  |              |         | 21,116 | 
|                                                                                  |                      |        |         |             |  |              |         |       
|PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization |                      |        | 138,978 |             |  |              | 140,036 |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|INTANGIBLE ASSETS, net of accumulated
amortization of $36,777 and $34,830         |                      |        | 32,859  |             |  |              | 34,566  |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|NOTES RECEIVABLE, less allowance for
doubtful accounts of $139 and $255           |                      |        | 932     |             |  |              | 1,064   |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|DEFERRED INCOME TAXES                                                             |                      |        | 4,925   |             |  |              | 4,925   |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|OTHER ASSETS                                                                      |                      |        | 7,971   |             |  |              | 8,805   |       
|                                                                                  |                      |        |         |             |  |              |         |       
|                                                                                  |                      | $      | 213,404 |             |  | $            | 210,512 |       
|                                                                                  |                      |        |         |             |  |              |         |       

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 Share Amounts)

|                                                                                      |                                                 |                                          |                             |        |             |        |              |        |  |        |  
|------------------------------------------------------------------------------------- | ----------------------------------------------- | ---------------------------------------- | --------------------------- | ------ | ----------- | ------ | ------------ | ------ |  | ------ | -
|                                                                                      |                                                 |                                          |                             |        | October 7,  |        |              |        | 
|                                                                                      |                                                 |                                          |                             |        | 2001        |        | December 31,
|                                                                                      |                                                 |                                          |                             |        | (Unaudited) |        | 2000        
|                                                                                      |                                                 |                                          |                             |        |             |        |             
|                                                                                      |                                                 | LIABILITIES AND STOCKHOLDERS INVESTMENT |                             |        |             |        |              |        |  |       
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|CURRENT LIABILITIES:                                                                  |                                                 |                                          |                             |        |             |        |              |       
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Current maturities of capital lease obligations |                                          | $                           | 1,079  |             |        | $            | 971    | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Accounts payable                                |                                          |                             | 12,946 |             |        |              | 13,039 | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Accrued expenses                                |                                          |                             | 20,027 |             |        |              | 20,990 | 
|                                                                                      |                                                 |                                          |                             |        |             |        |              |       
|                                                                                      |                                                 |                                          | Total current liabilities   |        |             | 34,052 |              |        |  | 35,000 |  
|                                                                                      |                                                 |                                          |                             |        |             |        |              |       
|CAPITAL LEASE OBLIGATIONS, less
current maturities                                    |                                                 |                                          | 2,216                       |        |             |        | 3,069        |       
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|LONG-TERM DEBT                                                                        |                                                 |                                          | 171,583                     |        |             |        | 168,080      |       
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|OTHER LIABILITIES                                                                     |                                                 |                                          | 5,901                       |        |             |        | 6,115        |       
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|STOCKHOLDERS INVESTMENT:                                                             |                                                 |                                          |                             |        |             |        |              |       
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Common stock $.01 par value, 100,000 shares authorized,
10,820 issued and outstanding |                                                 |                                          | 1                           |        |             |        | 1            |       
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Accumulated deficit                                                                   |                                                 |                                          | (349                        | )      |             |        | (1,753       | )     
|                                                                                      |                                                 |                                          |                             |        |             |        |              |       
|                                                                                      |                                                 |                                          | Total stockholders deficit |        |             | (348   | )            |        |  | (1,752 | )
|                                                                                      |                                                 |                                          |                             |        |             |        |              |       
|                                                                                      |                                                 | $                                        | 213,404                     |        |             | $      | 210,512      |       
|                                                                                      |                                                 |                                          |                             |        |             |        |              |       

The accompanying notes are an integral part of these consolidated balance sheets.

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##### Table of Contents



THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)

|                                                                                  |                                             |                                                       |                   |      |            |       |               |       |            |        |               |       |        |        |         |       |        |        | 
|--------------------------------------------------------------------------------- | ------------------------------------------- | ----------------------------------------------------- | ----------------- | ---- | ---------- | ----- | ------------- | ----- | ---------- | ------ | ------------- | ----- | ------ | ------ | ------- | ----- | ------ | ------ | 
|                                                                                  |                                             |                                                       |                   |      | 84 days    |       | 92 days       |       | 280 days   |        | 274 days     
|                                                                                  |                                             |                                                       |                   |      | ended      |       | ended         |       | ended      |        | ended        
|                                                                                  |                                             |                                                       |                   |      | October 7, |       | September 30, |       | October 7, |        | September 30,
|                                                                                  |                                             |                                                       |                   |      | 2001       |       | 2000          |       | 2001       |        | 2000         
|                                                                                  |                                             |                                                       |                   |      |            |       |               |       |            |        |              
|CASH FLOWS FROM
OPERATING ACTIVITIES:                                             |                                             |                                                       |                   |      |            |       |               |       |            |        |               |       |        |        |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net income                                                                        |                                             | $                                                     | 695               |      |            | $     | 1,636         |       |            | $      | 1,404         |       |        | $      | 2,849   |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Adjustments to reconcile net income to net
cash provided by operating activities: |                                             |                                                       |                   |      |            |       |               |       |            |        |               |       |        |        |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                             | Depreciation and amortization                         |                   |      | 5,357      |       |               |       | 5,794      |        |               |       | 18,077 |        |         |       | 16,932 |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                             | Accretion of interest on
Senior Discount Notes        |                   |      | 695        |       |               |       | 679        |        |               |       | 2,253  |        |         |       | 1,965  |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                             | Asset write-down                                      |                   |      | 116        |       |               |       | 937        |        |               |       | 116    |        |         |       | 1,537  |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                             | Other non-cash income
and expense items               |                   |      | 89         |       |               |       | 111        |        |               |       | 299    |        |         |       | 333    |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                             | Gain on disposition of assets                         |                   |      |           |       |               |       |           |        |               |       | (1,097 | )      |         |       |       |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                             | Net changes in other operating
assets and liabilities |                   |      | (832       | )     |               |       | 3,080      |        |               |       | (3,906 | )      |         |       | (1,449 | )     
|                                                                                  |                                             |                                                       |                   |      |            |       |               |       |            |        |               |       |        |        |         |      
|                                                                                  |                                             |                                                       | Total adjustments |      |            | 5,425 |               |       |            | 10,601 |               |       |        | 15,742 |         |       |        | 19,318 | 
|                                                                                  |                                             |                                                       |                   |      |            |       |               |       |            |        |               |       |        |        |         |      
|Net cash provided by operating activities                                         |                                             |                                                       | 6,120             |      |            |       | 12,237        |       |            |        | 17,146        |       |        |        | 22,167  |      
|                                                                                  |                                             |                                                       |                   |      |            |       |               |       |            |        |               |       |        |        |         |      
|CASH FLOWS FROM
INVESTING ACTIVITIES:                                             |                                             |                                                       |                   |      |            |       |               |       |            |        |               |       |        |        |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash paid for property and equipment                                              |                                             |                                                       | (6,399            | )    |            |       | (5,817        | )     |            |        | (17,741       | )     |        |        | (19,071 | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash paid for acquisition of
franchised restaurants                               |                                             |                                                       |                  |      |            |       |              |       |            |        |              |       |        |        | (5,902  | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from sale of
property and equipment                                      |                                             |                                                       |                  |      |            |       |              |       |            |        | 3,687         |       |        |        | 431     |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Payments on notes receivable                                                      |                                             |                                                       | 41                |      |            |       | 43            |       |            |        | 185           |       |        |        | 121     |      
|                                                                                  |                                             |                                                       |                   |      |            |       |               |       |            |        |               |       |        |        |         |      
|Net cash used in investing activities                                             |                                             |                                                       | (6,358            | )    |            |       | (5,774        | )     |            |        | (13,869       | )     |        |        | (24,421 | )    
|                                                                                  |                                             |                                                       |                   |      |            |       |               |       |            |        |               |       |        |        |         |      
|CASH FLOWS FROM
FINANCING ACTIVITIES:                                             |                                             |                                                       |                   |      |            |       |               |       |            |        |               |       |        |        |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net proceeds from (payments on)
long-term debt                                    |                                             |                                                       | 250               |      |            |       | (4,500        | )     |            |        | 1,250         |       |        |        | 4,250   |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Principal payments under
capital lease obligations                                |                                             |                                                       | (224              | )    |            |       | (230          | )     |            |        | (745          | )     |        |        | (733    | )    
|                                                                                  |                                             |                                                       |                   |      |            |       |               |       |            |        |               |       |        |        |         |      
|Net cash provided by (used for)
financing activities                              |                                             |                                                       | 26                |      |            |       | (4,730        | )     |            |        | 505           |       |        |        | 3,517   |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                             |                                                       |                   |      |            |       |               |       |            |        |               |       |        |        |         |      
|                                                                                  | Net increase (decrease) in cash equivalents |                                                       |                   | (212 | )          |       |               | 1,733 |            |        |               | 3,782 |        |        |         | 1,263 |       
|                                                                                  |                                             |                                                       |                   |      |            |       |               |       |            |        |               |       |        |        |         |      
|CASH AND CASH EQUIVALENTS:                                                        |                                             |                                                       |                   |      |            |       |               |       |            |        |               |       |        |        |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Balance, beginning of period                                                      |                                             |                                                       | 9,355             |      |            |       | 2,438         |       |            |        | 5,361         |       |        |        | 2,908   |      
|                                                                                  |                                             |                                                       |                   |      |            |       |               |       |            |        |               |       |        |        |         |      
|Balance, end of period                                                            |                                             | $                                                     | 9,143             |      |            | $     | 4,171         |       |            | $      | 9,143         |       |        | $      | 4,171   |      
|                                                                                  |                                             |                                                       |                   |      |            |       |               |       |            |        |               |       |        |        |         |      

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

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##### Table of Contents



THE RESTAURANT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 (TRCM) and
Perkins Finance Corp. RHC is owned by Donald N. Smith (Mr. Smith), TRCs
Chairman and Chief Executive Officer, and BancBoston Ventures, Inc. Mr. Smith
is also the Chairman and Chief Executive Officer and a stockholder of Friendly
Ice Cream Corporation (FICC), which operates and franchises approximately 560
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 2000 Annual Report on
Form 10-K should be read in conjunction with these statements.

Certain prior year amounts have been reclassified to conform to current year
presentation.

Change in Accounting Reporting Period

Effective January 1, 2001, the Company converted its financial reporting from a
calendar year basis to 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 of 2001 ended on April 22, July 15 and
October 7, respectively. The fourth quarter will end on December 30.

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 modifies the rules for
accounting for goodwill and other intangible assets including the cessation of
amortization of goodwill. The new rules are required to be implemented by the
Company during fiscal 2002. The Company is still evaluating the impact of
adopting SFAS No. 142.

In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment
or Disposal of Long Lived Assets. SFAS No. 144 modifies the rules for
evaluating the recoverability of assets (including intangibles) when events and
circumstances indicate that the assets might be impaired. The new rules are
required to be implemented by the Company beginning in fiscal 2002. The
Company is still evaluating the impact of adopting SFAS No. 144.

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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
October 7, 2001, there were $1,700,000 in borrowings outstanding under these
programs, approximately $800,000 of which are guaranteed by the Company. No
additional borrowings are available under these programs.

On June 9, 2000, the Company entered into a separate agreement to guarantee
fifty percent of borrowings up to a total guarantee of $1,500,000 for use by a
franchisee to remodel and upgrade existing restaurants. As of October 7, 2001,
there were $2,339,000 in borrowings outstanding under this agreement of which
$1,169,000 were guaranteed by the Company.

Franchisee Default

At October 7, 2001, the Company leased or
subleased eight restaurant properties to a
franchisee in Denver, Colorado. The franchisee operated an additional three
restaurants leased from unrelated third parties. As of October 7, 2001, the
franchisee was in default under the franchise license agreements on its eleven
properties and in default under the leases with the Company. Two of the
restaurants leased from third parties and one of the properties owned by the
Company have been closed subsequent to the end of the third quarter. Through the third quarter of 2000 and 2001, the
Company earned royalty revenues from these restaurants totaling $480,000 and
$437,000, respectively. Additionally, the Company earned lease and sublease
income from the eight properties it controls totaling $491,000 in 2000 and
$470,000 in 2001. As of October 7, 2001, the franchisee owed the Company
approximately $560,000 for royalty fees, rents and property taxes, and
additionally, the Company had a $657,000 note receivable from the franchisee.
The original proceeds of the note were used to remodel the buildings and
upgrade equipment primarily at locations leased from the Company.

The Company is negotiating an agreement to terminate its leases on the eight
restaurants currently leased or subleased to the franchisee, assume the lease
on one restaurant leased from a third party, and to terminate its license
agreements on all eleven properties. The Company is also negotiating to
acquire the furniture, fixtures and equipment and operating goodwill of eight
of the restaurants and continue to operate them as Perkins restaurants. The
purchase price exceeds the amounts owed to the Company. Accordingly, the
Companys receivables will be deducted from the proceeds and are considered
collectable as of October 7, 2001.

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Supplemental Cash Flow Information

The increase or decrease in cash and cash equivalents due to changes in
operating assets and liabilities for the quarter and year-to-date periods ended
October 7 and September 30, consisted of the following (in thousands):

|                        |                                           |   |            |        |               |   |            |        |               |   |        |        |   |   |        |        |  
|----------------------- | ----------------------------------------- | - | ---------- | ------ | ------------- | - | ---------- | ------ | ------------- | - | ------ | ------ | - | - | ------ | ------ | -
|                        |                                           |   | 84 days    |        | 92 days       |   | 280 days   |        | 274 days     
|                        |                                           |   | ended      |        | ended         |   | ended      |        | ended        
|                        |                                           |   | October 7, |        | September 30, |   | October 7, |        | September 30,
|                        |                                           |   | 2001       |        | 2000          |   | 2001       |        | 2000         
|                        |                                           |   |            |        |               |   |            |        |              
|(Increase) Decrease in: |                                           |   |            |        |               |   |            |        |               |   |        |        |   |   |        |       
|                       
|                       
|                       
|                       
|                        | Receivables                               |   | $          | (944   | )             |   | $          | (1,263 | )             |   | $      | (1,580 | ) |   | $      | (1,848 | )
|                       
|                       
|                       
|                       
|                        | Inventories                               |   |            | (1,170 | )             |   |            | 140    |               |   |        | (1,329 | ) |   |        | (106   | )
|                       
|                       
|                       
|                       
|                        | Prepaid expenses and
other current assets |   |            | 232    |               |   |            | 469    |               |   |        | (235   | ) |   |        | (416   | )
|                       
|                       
|                       
|                       
|                        | Other assets                              |   |            | 227    |               |   |            | 82     |               |   |        | 507    |   |   |        | (1,049 | )
|                       
|                       
|                       
|                       
|Increase (Decrease) in: |                                           |   |            |        |               |   |            |        |               |   |        |        |   |   |        |       
|                       
|                       
|                       
|                       
|                        | Accounts payable                          |   |            | (34    | )             |   |            | (891   | )             |   |        | (94    | ) |   |        | (2,329 | )
|                       
|                       
|                       
|                       
|                        | Accrued expenses                          |   |            | 1,151  |               |   |            | 4,062  |               |   |        | (962   | ) |   |        | 2,472  |  
|                       
|                       
|                       
|                       
|                        | Other liabilities                         |   |            | (294   | )             |   |            | 481    |               |   |        | (213   | ) |   |        | 1,827  |  
|                        |                                           |   |            |        |               |   |            |        |               |   |        |        |   |   |        |       
|                        |                                           | $ | (832       | )      |               | $ | 3,080      |        |               | $ | (3,906 | )      |   | $ | (1,449 | )     
|                        |                                           |   |            |        |               |   |            |        |               |   |        |        |   |   |        |       

Other supplemental cash flow information was as follows (in thousands):

|                            |  |            |     |               |  |            |       |               |  |   |       |  |  |   |       | 
|--------------------------- |  | ---------- | --- | ------------- |  | ---------- | ----- | ------------- |  | - | ----- |  |  | - | ----- | 
|                            |  | 84 days    |     | 92 days       |  | 280 days   |       | 274 days     
|                            |  | ended      |     | ended         |  | ended      |       | ended        
|                            |  | October 7, |     | September 30, |  | October 7, |       | September 30,
|                            |  | 2001       |     | 2000          |  | 2001       |       | 2000         
|                            |  |            |     |               |  |            |       |              
|Cash paid for interest      |  | $          | 306 |               |  | $          | 432   |               |  | $ | 7,875 |  |  | $ | 7,725 | 
|                           
|                           
|                           
|                           
|Income taxes paid           |  |            | 793 |               |  |            | 1,654 |               |  |   | 2,545 |  |  |   | 3,358 | 
|                           
|                           
|                           
|                           
|Income tax refunds received |  |            | 5   |               |  |            |      |               |  |   | 22    |  |  |   | 2     | 

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Segment Reporting

The following presents revenues and other financial information by business
segment for the quarter and year-to-date periods ended October 7 and September
30 (in thousands):

|                                  |  |             |        |           |  |               |       |       |  |        |       |  |  |   |         |   |  |   |        | 
|--------------------------------- |  | ----------- | ------ | --------- |  | ------------- | ----- | ----- |  | ------ | ----- |  |  | - | ------- | - |  | - | ------ | 
|Quarter:                          |  | Restaurants |        | Franchise |  | Manufacturing |       | Other |  | Totals
|                                  |  |             |        |           |  |               |       |       |  |       
|84 days ended October 7, 2001:    |  |             |        |           |  |               |       |       |  |        |       |  |  |   |         |   |  |   |        | 
|                                 
|                                 
|                                 
|                                 
|Revenues from
external customers  |  | $           | 62,271 |           |  | $             | 5,410 |       |  | $      | 8,057 |  |  | $ | 340     |   |  | $ | 76,078 | 
|                                 
|                                 
|                                 
|                                 
|Intersegment revenues             |  |             |       |           |  |               |      |       |  |        | 2,111 |  |  |   |        |   |  |   | 2,111  | 
|                                 
|                                 
|                                 
|                                 
|Segment profit (loss)             |  |             | 4,852  |           |  |               | 4,510 |       |  |        | 1,993 |  |  |   | (10,660 | ) |  |   | 695    | 
|                                 
|                                 
|                                 
|                                 
|92 days ended September 30, 2000: |  |             |        |           |  |               |       |       |  |        |       |  |  |   |         |   |  |   |        | 
|                                 
|                                 
|                                 
|                                 
|Revenues from
external customers  |  | $           | 72,929 |           |  | $             | 5,970 |       |  | $      | 9,082 |  |  | $ | 160     |   |  | $ | 88,141 | 
|                                 
|                                 
|                                 
|                                 
|Intersegment revenues             |  |             |       |           |  |               |      |       |  |        | 2,319 |  |  |   |        |   |  |   | 2,319  | 
|                                 
|                                 
|                                 
|                                 
|Segment profit (loss)             |  |             | 8,973  |           |  |               | 5,007 |       |  |        | 1,926 |  |  |   | (14,270 | ) |  |   | 1,636  | 

|                                   |  |             |         |           |  |               |        |       |  |        |        |  |  |   |         |   |  |   |         | 
|---------------------------------- |  | ----------- | ------- | --------- |  | ------------- | ------ | ----- |  | ------ | ------ |  |  | - | ------- | - |  | - | ------- | 
|Year-to-date:                      |  | Restaurants |         | Franchise |  | Manufacturing |        | Other |  | Totals
|                                   |  |             |         |           |  |               |        |       |  |       
|280 days ended October 7, 2001:    |  |             |         |           |  |               |        |       |  |        |        |  |  |   |         |   |  |   |         | 
|                                  
|                                  
|                                  
|                                  
|Revenues from
external customers   |  | $           | 210,253 |           |  | $             | 17,347 |       |  | $      | 24,483 |  |  | $ | 946     |   |  | $ | 253,029 | 
|                                  
|                                  
|                                  
|                                  
|Intersegment revenues              |  |             |        |           |  |               |       |       |  |        | 6,777  |  |  |   |        |   |  |   | 6,777   | 
|                                  
|                                  
|                                  
|                                  
|Segment profit (loss)              |  |             | 18,193  |           |  |               | 14,693 |       |  |        | 5,774  |  |  |   | (37,256 | ) |  |   | 1,404   | 
|                                  
|                                  
|                                  
|                                  
|274 days ended September 30, 2000: |  |             |         |           |  |               |        |       |  |        |        |  |  |   |         |   |  |   |         | 
|                                  
|                                  
|                                  
|                                  
|Revenues from
external customers   |  | $           | 212,367 |           |  | $             | 16,786 |       |  | $      | 22,877 |  |  | $ | 490     |   |  | $ | 252,520 | 
|                                  
|                                  
|                                  
|                                  
|Intersegment revenues              |  |             |        |           |  |               |       |       |  |        | 7,304  |  |  |   |        |   |  |   | 7,304   | 
|                                  
|                                  
|                                  
|                                  
|Segment profit (loss)              |  |             | 22,769  |           |  |               | 14,419 |       |  |        | 5,079  |  |  |   | (39,418 | ) |  |   | 2,849   | 

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

|                                       |  |            |        |               |  |            |        |               |  |   |        |   |  |   |        |  
|-------------------------------------- |  | ---------- | ------ | ------------- |  | ---------- | ------ | ------------- |  | - | ------ | - |  | - | ------ | -
|                                       |  | 84 days    |        | 92 days       |  | 280 days   |        | 274 days     
|                                       |  | ended      |        | ended         |  | ended      |        | ended        
|                                       |  | October 7, |        | September 30, |  | October 7, |        | September 30,
|                                       |  | 2001       |        | 2000          |  | 2001       |        | 2000         
|                                       |  |            |        |               |  |            |        |              
|General and administrative expenses    |  | $          | 5,611  |               |  | $          | 6,848  |               |  | $ | 20,458 |   |  | $ | 19,725 |  
|                                      
|                                      
|                                      
|                                      
|Depreciation and amortization expenses |  |            | 1,442  |               |  |            | 1,544  |               |  |   | 4,746  |   |  |   | 4,543  |  
|                                      
|                                      
|                                      
|                                      
|Interest expense                       |  |            | 4,177  |               |  |            | 4,601  |               |  |   | 13,948 |   |  |   | 13,557 |  
|                                      
|                                      
|                                      
|                                      
|Gain on disposition of assets          |  |            |       |               |  |            |       |               |  |   | (1,097 | ) |  |   |       |  
|                                      
|                                      
|                                      
|                                      
|Asset write-down                       |  |            | 116    |               |  |            | 937    |               |  |   | 116    |   |  |   | 1,537  |  
|                                      
|                                      
|                                      
|                                      
|Income tax expense (benefit)           |  |            | (374   | )             |  |            | 842    |               |  |   | (20    | ) |  |   | 1,467  |  
|                                      
|                                      
|                                      
|                                      
|Other                                  |  |            | (312   | )             |  |            | (502   | )             |  |   | (895   | ) |  |   | (1,411 | )
|                                       |  |            |        |               |  |            |        |               |  |   |        |   |  |   |        |  
|                                       |  | $          | 10,660 |               |  | $          | 14,270 |               |  | $ | 37,256 |   |  | $ | 39,418 |  
|                                       |  |            |        |               |  |            |        |               |  |   |        |   |  |   |        |  

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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THIRD QUARTER ENDED OCTOBER 7, 2001

RESULTS OF OPERATIONS

Overview:

The Company is a leading operator and franchisor of mid-scale restaurants
located in 35 states and 4 Canadian provinces. As of October 7, 2001, the
Company owned and operated 142 restaurants and franchised 353 restaurants. Both
the Company-operated restaurants and franchised 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 manufactures and distributes bakery products which are sold to
Company-operated restaurants, franchisees, third-party bakers and food
distributors. 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 its
manufacturing division, Foxtail Foods (Foxtail), and franchise fees. 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. Additionally, it produces a
variety of non-proprietary products for sale in various retail markets. Sales
to Company-operated restaurants are eliminated in the accompanying statements
of income. In the 280 days ended October 7, 2001, revenues from
Company-operated restaurants, Foxtail and franchise and other accounted for
83.3%, 9.7% and 7.0% of total revenues, respectively.

TRC leases an executive aircraft through TRC Realty LLC. The aircraft is
operated for the benefit of, and all operating costs are reimbursed by, TRC and
FICC. Revenue received from FICC is included in franchise and other revenues
in the accompanying statements of income.

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A summary of the Companys results for the quarter and year-to-date
periods ended October 7, 2001 and September 30, 2000 are presented in the
following table. All revenues, costs and expenses are expressed as a percentage
of total revenues. Certain prior year amounts have been reclassified to
conform to current year presentation.

|                                          |                               |                              |                    |      |            |      |               |      |            |      |               |      |      |      |       |      |      |      | 
|----------------------------------------- | ----------------------------- | ---------------------------- | ------------------ | ---- | ---------- | ---- | ------------- | ---- | ---------- | ---- | ------------- | ---- | ---- | ---- | ----- | ---- | ---- | ---- | 
|                                          |                               |                              |                    |      | 84 days    |      | 92 days       |      | 280 days   |      | 274 days     
|                                          |                               |                              |                    |      | ended      |      | ended         |      | ended      |      | ended        
|                                          |                               |                              |                    |      | October 7, |      | September 30, |      | October 7, |      | September 30,
|                                          |                               |                              |                    |      | 2001       |      | 2000          |      | 2001       |      | 2000         
|                                          |                               |                              |                    |      |            |      |               |      |            |      |              
|Revenues:                                 |                               |                              |                    |      |            |      |               |      |            |      |               |      |      |      |       |     
|                                         
|                                         
|                                         
|                                         
|                                          |                               | Food sales                   |                    |      | 92.7       | %    |               |      | 93.0       | %    |               |      | 93.0 | %    |       |      | 93.2 | %   
|                                         
|                                         
|                                         
|                                         
|                                          |                               | Franchise and other revenues |                    |      | 7.3        |      |               |      | 7.0        |      |               |      | 7.0  |      |       |      | 6.8  |     
|                                          |                               |                              |                    |      |            |      |               |      |            |      |               |      |      |      |       |     
|Total Revenues                            |                               |                              | 100.0              |      |            |      | 100.0         |      |            |      | 100.0         |      |      |      | 100.0 |     
|                                          |                               |                              |                    |      |            |      |               |      |            |      |               |      |      |      |       |     
|Costs and Expenses:                       |                               |                              |                    |      |            |      |               |      |            |      |               |      |      |      |       |     
|                                         
|                                         
|                                         
|                                         
|                                          | Cost of sales:                |                              |                    |      |            |      |               |      |            |      |               |      |      |      |       |      |     
|                                         
|                                         
|                                         
|                                         
|                                          |                               |                              | Food cost          |      |            | 25.9 |               |      |            | 25.9 |               |      |      | 26.0 |       |      |      | 25.9 | 
|                                         
|                                         
|                                         
|                                         
|                                          |                               |                              | Labor and benefits |      |            | 32.4 |               |      |            | 31.5 |               |      |      | 32.5 |       |      |      | 32.7 | 
|                                         
|                                         
|                                         
|                                         
|                                          |                               |                              | Operating expenses |      |            | 20.2 |               |      |            | 18.1 |               |      |      | 19.5 |       |      |      | 18.3 | 
|                                         
|                                         
|                                         
|                                         
|                                          | General and administrative    |                              |                    | 8.8  |            |      |               | 9.2  |            |      |               | 9.6  |      |      |       | 9.1  |     
|                                         
|                                         
|                                         
|                                         
|                                          | Depreciation and amortization |                              |                    | 7.0  |            |      |               | 6.5  |            |      |               | 7.1  |      |      |       | 6.7  |     
|                                         
|                                         
|                                         
|                                         
|                                          | Interest, net                 |                              |                    | 5.5  |            |      |               | 5.2  |            |      |               | 5.5  |      |      |       | 5.4  |     
|                                         
|                                         
|                                         
|                                         
|                                          | Gain on disposition of assets |                              |                    |     |            |      |               |     |            |      |               | (0.3 | )    |      |       |     |     
|                                         
|                                         
|                                         
|                                         
|                                          | Asset write-down              |                              |                    | 0.2  |            |      |               | 1.1  |            |      |               |     |      |      |       | 0.6  |     
|                                         
|                                         
|                                         
|                                         
|                                          | Other, net                    |                              |                    | (0.4 | )          |      |               | (0.4 | )          |      |               | (0.4 | )    |      |       | (0.4 | )   
|                                          |                               |                              |                    |      |            |      |               |      |            |      |               |      |      |      |       |     
|Total Costs and Expenses                  |                               |                              | 99.6               |      |            |      | 97.1          |      |            |      | 99.5          |      |      |      | 98.3  |     
|                                          |                               |                              |                    |      |            |      |               |      |            |      |               |      |      |      |       |     
|Income before income taxes                |                               |                              | 0.4                |      |            |      | 2.9           |      |            |      | 0.5           |      |      |      | 1.7   |     
|                                         
|                                         
|                                         
|                                         
|(Provision for) Benefit from income taxes |                               |                              | 0.5                |      |            |      | (1.0          | )    |            |      | 0.1           |      |      |      | (0.6  | )   
|                                          |                               |                              |                    |      |            |      |               |      |            |      |               |      |      |      |       |     
|Net Income                                |                               |                              | 0.9                | %    |            |      | 1.9           | %    |            |      | 0.6           | %    |      |      | 1.1   | %   
|                                          |                               |                              |                    |      |            |      |               |      |            |      |               |      |      |      |       |     

Net income for the third quarter of 2001 was $695,000 versus $1,636,000 for the
third quarter of 2000. For the year-to-date period ended October 7, 2001, net
income was $1,404,000 compared to $2,849,000 for the year-to-date period ended
September 30, 2000.

12



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Revenues:

Total revenues for the third quarter of 2001 decreased 13.7% compared to the
third quarter of last year primarily due to the change in accounting reporting
periods, lower comparable restaurant sales and decreased Foxtail sales.
Total revenues for the first ten periods of 2001 increased 0.2% over the first
nine months of 2000 due primarily to the change in accounting reporting periods
from 280 days in 2001 versus 274 days in 2000.

Same store comparable sales decreased approximately 3.0% for the third quarter.
A portion of this decrease was due to a decline in guest check average of
0.9%. Same store comparable sales also declined 2.8% year-to-date.

Revenues from Foxtail for the third quarter of 2001, constituting 10.6% of the
Companys total revenue, decreased 11.3% compared to the third quarter of 2000.
This decrease is attributable to a 10.8% decrease in sales to customers
outside of the Perkins system. For the 280 days in 2001, Foxtail revenues
represented 9.7% of total revenues and increased approximately 7.0% over the
274 days in 2000. The year-to-date increase is primarily due to increases in
sales to customers outside of the Perkins system during the first and second
quarters and the greater number of days in 2001.

Franchise and other revenues decreased 9.6% compared to the third quarter of
2000 and increased 3.1% year-to-date. The decrease in revenues for the quarter
is due to the fewer number of days in the third quarter of 2001 and a decrease
in franchise restaurant comparable sales similar to the decrease experienced by
Company-operated restaurants. During 2001, eight new franchised restaurants
opened, five formerly Company-operated restaurants were converted to franchise
restaurants and five franchised restaurants closed. Since September 30, 2000,
eighteen new franchised restaurants have opened, six franchised restaurants
have been closed, one formerly franchised restaurant was converted to a
Company-operated restaurant and five formerly Company-operated restaurants were
converted to franchise restaurants. The net increase in the number of
franchised restaurants and the greater number of days in 2001 led to the
year-to-date increase in franchise revenue. These factors were partially
offset by a decrease in franchise restaurant comparable sales.

Costs and Expenses:

Food cost:

In terms of total revenues, food cost was flat compared to the third quarter of
2000 and increased 0.1 percentage point over the previous year-to-date period.
Restaurant division food cost as a percentage of restaurant sales increased 0.5
percentage points for the quarter and was flat year-to-date. The increase for
the quarter was primarily due to increased commodity costs for dairy products.
The year-to-date food cost was flat due to increased commodity costs for dairy
products offset by lower percentage food cost on certain current year
promotions. Foxtails food cost as a percentage of Foxtail sales decreased 2.3
percentage points for the quarter and 1.9 percentage points for the year-to
date as a result of stable commodity costs and an increase in sales of higher
gross margin products. Food cost as a percentage of total revenue was
favorably impacted by the increased percentage of franchise and other revenue
to total revenue.

Labor and benefits:

Labor and benefits expense, as a percentage of total revenues, increased 0.9
percentage points over the third quarter of 2000 and decreased 0.2 percentage
points compared to the previous year-to-date period. In Company-operated
restaurants, labor and benefits increased 1.4 percentage points for the quarter
and was flat year-to-date. The increase for the quarter was due to an increase
in the average wage rate and a decrease in productivity. Year-to-date lower
group insurance costs coupled with a higher average guest check were offset by
an increase in the average wage rate. Labor for Foxtail remained stable as
increased labor rates were offset by the production of higher margin products
and improvements in productivity.

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The wage rates of the Companys hourly employees are impacted by Federal and
state minimum wage laws. 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 raising productivity.

Operating expenses:

Operating expenses, expressed as a percentage of total revenues increased 2.1
and 1.2 percentage points, respectively, for the third quarter and year-to-date
periods. The increases for both the quarter and year-to-date are primarily due
to the impact of decreased comparable sales on certain fixed expenses, higher
utility costs and investment spending for advertising in select franchise
markets.

General and administrative:

General and administrative expenses, as a percentage of total revenues,
decreased 0.4 percentage points compared to the third quarter of 2000 and
increased 0.5 percentage points over the previous year-to-date period.
The decrease for the quarter was due to decreased incentive compensation costs
partially offset by non-recurring staff restructuring charges. The
year-to-date increase was impacted by non-recurring charges related to staff
restructuring and administrative costs related to the test of a new restaurant
development concept partially offset by decreased incentive costs.

Depreciation and amortization:

Depreciation and amortization expense, as a percentage of total revenues,
increased 0.5 percentage points over the third quarter of 2000 and increased
0.4 percentage points over the previous year-to-date period as a result of the
decline in comparable restaurant sales. The addition of new Company-operated
restaurants and continued investment in restaurant imagery also contributed to
the increase. Six Company-operated restaurants have been opened since
September 30, 2000.

Interest, net:

Interest expense, as a percentage of revenues, increased 0.3 percentage points
over the third quarter of 2000 and increased 0.1 percentage point over the
prior year-to-date period. The increases are the result of the compounding of
interest on the Senior Discount Notes and higher average borrowings on the
Companys line of credit.

Other:

The Company recorded asset write-downs under Statement of Financial Accounting
Standards No. 121 totaling $116,000 during the third quarter of 2001 versus
$937,000 in the third quarter of 2000. The loss for the third quarter of 2001
relates to the write-down to net realizable value of a non-operating property
that management intends to sell during the fourth quarter. The write-downs for
2000 were taken to reflect the permanent closing of one underperforming
restaurant and the planned conversion of another property into an alternative
concept.

Income Taxes:

The Companys income tax benefit for the third
quarter and year-to-date periods ended October 7, 2001, reflects
the net benefit derived from the utilization of income tax credits,
which primarily result from excess FICA taxes paid on server tip income
that exceeds
the minimum wage.

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CAPITAL RESOURCES AND LIQUIDITY

The principal non-operating uses of cash during the third quarter and
year-to-date periods ended October 7, 2001, were capital expenditures. Capital
expenditures consisted primarily of land, building and equipment purchases for
new Company-operated restaurants, restaurant maintenance and costs related to
remodels of existing restaurants. The Companys primary source of funding was
cash provided by operations.

The following table summarizes capital expenditures for the periods ending
October 7, 2001 and September 30, 2000 (in thousands):

|                                     |  |            |        |               |  |   |        | 
|------------------------------------ |  | ---------- | ------ | ------------- |  | - | ------ | 
|                                     |  | 280 days   |        | 274 days     
|                                     |  | ended      |        | ended        
|                                     |  | October 7, |        | September 30,
|                                     |  | 2001       |        | 2000         
|                                     |  |            |        |              
|New restaurants                      |  | $          | 8,729  |               |  | $ | 5,286  | 
|                                    
|                                    
|                                    
|                                    
|Maintenance                          |  |            | 3,497  |               |  |   | 3,312  | 
|                                    
|                                    
|                                    
|                                    
|Remodeling and reimaging             |  |            | 1,636  |               |  |   | 7,419  | 
|                                    
|                                    
|                                    
|                                    
|Acquisition of Franchise Restaurants |  |            |       |               |  |   | 5,902  | 
|                                    
|                                    
|                                    
|                                    
|Manufacturing                        |  |            | 645    |               |  |   | 508    | 
|                                    
|                                    
|                                    
|                                    
|Other                                |  |            | 3,234  |               |  |   | 2,546  | 
|                                     |  |            |        |               |  |   |        | 
|Total Capital Expenditures           |  | $          | 17,741 |               |  | $ | 24,973 | 
|                                     |  |            |        |               |  |   |        | 

The Companys estimated capital spending for 2001 is approximately $30.0
million, which includes plans to open three additional Company-operated
restaurants and acquire nine restaurants from franchisees by year-end. The
remaining capital budget will be primarily applied to remodels of existing
restaurants, restaurant maintenance and improvements to the Companys
infrastructure equipment. The primary source of funding for these projects is
expected to be cash provided by operations and borrowings under the Companys
line of credit. Capital spending could vary significantly from planned amounts
as certain of these expenditures are discretionary in nature.

The Company has a secured $40,000,000 revolving line of credit facility (the
Credit Facility) with a sublimit for up to $5,000,000 of letters of credit.
The Credit Facility was amended on November 15, 2001 to modify certain terms
and conditions and reduce available borrowings from $50,000,000 to $40,000,000.
As a result of the amendment, borrowing rates were adjusted to current market
rates. All amounts 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 October
7, 2001, $15,000,000 in borrowings and approximately $1,065,000 of letters of
credit were outstanding under the Credit Facility.

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On November 15, 2001 the Company elected to begin accruing cash interest on its
11.25% Senior Discount Notes (the Notes). Cash interest will be payable
semi-annually on May 15 and November 15. The principal balance of the Notes on
November 15 was $26,392,000. On May 15, 2003 the Company will be required to
redeem $8,383,000 in principal of the Notes at a redemption price of 105.625%. The Company
intends to reduce capital spending in 2002 in order to provide funds for the
payment of cash interest on the Notes, which is expected to be $2,969,000 in
2002.

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 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 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 immediate future. The Company may, however,
need to recapitalize or refinance all or a portion of the principal of its
senior notes on or prior to maturity. 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 such recapitalization or refinancing on commercially
reasonable terms or at all.

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.

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ITEM 2A. 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 senior notes because the interest rates are fixed. The
Company has in place a $40,000,000 line of credit facility which matures on
January 1, 2005. All borrowings under the facility bear interest at floating
rates based on the agents base rate or Eurodollar rates. The Company had
$15,000,000 outstanding under the line of credit facility at October 7, 2001.
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. Additionally, the Companys product offerings and marketing events
are relatively diverse. Therefore, the Company has the flexibility to adjust
its product mix to take advantage of or limit exposure to commodity cost
fluctuations. 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.

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PART II  OTHER INFORMATION




ITEM 6. EXHIBITS AND REPORTS ON FORM 5-K




(a)  Exhibits  Reference is made to the Index of Exhibits attached hereto
as page 19 and made a part hereof.

(b)  Reports on Form 8-K   None

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 COMPANY                                        
|                       
|DATE: November 20, 2001 |  | BY: /s/
Steven R. McClellan                                   
|                       
|                        |  | Steven R. McClellan                                           
|                       
|                        |  | Executive Vice President, Chief Financial Officer and Director
|                       
|                        |  | BY: /s/ Louis C. Jehl                                         
|                       
|                        |  | Louis C. Jehl                                                 
|                       
|                        |  | Vice President and Controller                                 

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Exhibit Index

|            |  |                                                                                                                                                                                                                                               |  | 
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|Exhibit No. |  | Description                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                              
|10.10       |  | Amendment No. 4 to Revolving Credit Agreement, by and among The Restaurant
Company, Fleet National Bank and other lending institutions, Fleet
National Bank as agent and administrative agent and Bank of America, N.A. as syndication agent.

19