##### Table of Contents



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

FORM 10-Q

(MARK ONE)

|                        |  |                                                                                        
|----------------------- |  | ---------------------------------------------------------------------------------------
|(BOX WITH A CHECK MARK) |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended     July 15, 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                                                       |  | 62-1254388                          
|                                                               |  |                                     
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|                                                              
|6075 Poplar Avenue, Suite 800, Memphis, TN                     |  | 38119                               
|                                                               |  |                                     
|(Address of principal executive offices)                       |  | (Zip code)                          

(901) 766-6400

---

(Registrants telephone number, including area code)


Indicate by
(BOX WITH A CHECK MARK) whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
(BOX WITH A CHECK MARK) No
(EMPTY BALLOT BOX)



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TABLE OF CONTENTS



|                               |                                            |  |  |  |  |  |  | 
|------------------------------ | ------------------------------------------ |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | CONSOLIDATED STATEMENTS OF INCOME         
|                               | CONSOLIDATED BALANCE SHEETS               
|                               | CONSOLIDATED BALANCE SHEETS               
|                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|PART II  OTHER INFORMATION   
|Signature                     



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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  |        | 91 days  |   | 196 days |        | 182 days
|                              |                             |   | ended    |        | ended    |   | ended    |        | ended   
|                              |                             |   | July 15, |        | June 30, |   | July 15, |        | June 30,
|                              |                             |   | 2001     |        | 2000     |   | 2001     |        | 2000    
|                              |                             |   |          |        |          |   |          |        |         
|REVENUES:                     |                             |   |          |        |          |   |          |        |          |   |         |         |  |   |         |        
|                             
|                             
|                             
|                             
|                              | Food sales                  |   | $        | 70,989 |          |   | $        | 77,742 |          |   | $       | 164,678 |  |   | $       | 153,233 | 
|                             
|                             
|                             
|                             
|                              | Franchise and other revenue |   |          | 5,395  |          |   |          | 5,732  |          |   |         | 12,273  |  |   |         | 11,146  | 
|                              |                             |   |          |        |          |   |          |        |          |   |         |         |  |   |         |        
|Total Revenues                |                             |   | 76,384   |        |          |   | 83,474   |        |          |   | 176,951 |         |  |   | 164,379 |        
|                              |                             |   |          |        |          |   |          |        |          |   |         |         |  |   |         |        
|COSTS AND EXPENSES:           |                             |   |          |        |          |   |          |        |          |   |         |         |  |   |         |        
|                             
|                             
|                             
|                             
|Cost of sales:                |                             |   |          |        |          |   |          |        |          |   |         |         |  |   |         |        
|                             
|                             
|                             
|                             
|                              | Food cost                   |   |          | 19,916 |          |   |          | 21,521 |          |   |         | 45,999  |  |   |         | 42,727  | 
|                             
|                             
|                             
|                             
|                              | Labor and benefits          |   |          | 25,015 |          |   |          | 27,969 |          |   |         | 57,486  |  |   |         | 54,762  | 
|                             
|                             
|                             
|                             
|                              | Operating expenses          |   |          | 14,732 |          |   |          | 15,332 |          |   |         | 34,446  |  |   |         | 30,176  | 
|                             
|                             
|                             
|                             
|General and administrative    |                             |   | 7,704    |        |          |   | 6,704    |        |          |   | 17,252  |         |  |   | 14,899  |        
|                             
|                             
|                             
|                             
|Depreciation and amortization |                             |   | 5,476    |        |          |   | 5,648    |        |          |   | 12,720  |         |  |   | 11,138  |        
|                             
|                             
|                             
|                             
|Interest, net                 |                             |   | 4,169    |        |          |   | 4,531    |        |          |   | 9,771   |         |  |   | 8,956   |        
|                             
|                             
|                             
|                             
|Gain on disposition of assets |                             |   | (1,169   | )      |          |   |         |        |          |   | (1,097  | )       |  |   |        |        
|                             
|                             
|                             
|                             
|Asset write-down              |                             |   |         |        |          |   | 600      |        |          |   |        |         |  |   | 600     |        
|                             
|                             
|                             
|                             
|Other, net                    |                             |   | (296     | )      |          |   | (367     | )      |          |   | (689    | )       |  |   | (717    | )      
|                              |                             |   |          |        |          |   |          |        |          |   |         |         |  |   |         |        
|Total Costs and Expenses      |                             |   | 75,547   |        |          |   | 81,938   |        |          |   | 175,888 |         |  |   | 162,541 |        
|                              |                             |   |          |        |          |   |          |        |          |   |         |         |  |   |         |        
|Income before income taxes    |                             |   | 837      |        |          |   | 1,536    |        |          |   | 1,063   |         |  |   | 1,838   |        
|                             
|                             
|                             
|                             
|Provision for income taxes    |                             |   | (279     | )      |          |   | (532     | )      |          |   | (354    | )       |  |   | (625    | )      
|                              |                             |   |          |        |          |   |          |        |          |   |         |         |  |   |         |        
|NET INCOME                    |                             | $ | 558      |        |          | $ | 1,004    |        |          | $ | 709     |         |  | $ | 1,213   |        
|                              |                             |   |          |        |          |   |          |        |          |   |         |         |  |   |         |        

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

2



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##### Table of Contents



THE RESTAURANT COMPANY AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS


(In Thousands)


|                                                                                  |        |                      |         |             |        |              |         |  |        | 
|--------------------------------------------------------------------------------- | ------ | -------------------- | ------- | ----------- | ------ | ------------ | ------- |  | ------ | 
|                                                                                  |        |                      |         | July 15,    |        |              |         | 
|                                                                                  |        |                      |         | 2001        |        | December 31,
|                                                                                  |        |                      |         | (Unaudited) |        | 2000        
|                                                                                  |        |                      |         |             |        |             
|                                                                                  | ASSETS |                      |         |             |        |              |         |  |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|CURRENT ASSETS:                                                                   |        |                      |         |             |        |              |         | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash and cash equivalents                                                         |        | $                    | 9,355   |             |        | $            | 5,361   | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Receivables, less allowance for
doubtful accounts of $709 and $563                |        |                      | 8,802   |             |        |              | 8,376   | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Inventories, at the lower of first-
in, first-out cost or market                  |        |                      | 5,255   |             |        |              | 5,096   | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Prepaid expenses and other current assets                                         |        |                      | 1,975   |             |        |              | 1,508   | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Deferred income taxes                                                             |        |                      | 775     |             |        |              | 775     | 
|                                                                                  |        |                      |         |             |        |              |         | 
|                                                                                  |        | Total current assets |         |             | 26,162 |              |         |  | 21,116 | 
|                                                                                  |        |                      |         |             |        |              |         | 
|PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization |        |                      | 137,436 |             |        |              | 140,036 | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|INTANGIBLE ASSETS, net of accumulated
amortization of $36,164 and $34,830         |        |                      | 33,415  |             |        |              | 34,566  | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|NOTES RECEIVABLE                                                                  |        |                      | 833     |             |        |              | 1,064   | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|DEFERRED INCOME TAXES                                                             |        |                      | 4,925   |             |        |              | 4,925   | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|OTHER ASSETS                                                                      |        |                      | 8,395   |             |        |              | 8,805   | 
|                                                                                  |        |                      |         |             |        |              |         | 
|                                                                                  |        | $                    | 211,166 |             |        | $            | 210,512 | 
|                                                                                  |        |                      |         |             |        |              |         | 

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

3



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##### Table of Contents



THE RESTAURANT COMPANY AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS


(In Thousands, Except Share Amounts)


|                                                                                      |                                                 |                                          |         |                             |  |             |         |              |  |  |        |  
|------------------------------------------------------------------------------------- | ----------------------------------------------- | ---------------------------------------- | ------- | --------------------------- |  | ----------- | ------- | ------------ |  |  | ------ | -
|                                                                                      |                                                 |                                          |         |                             |  | July 15,    |         |              |  | 
|                                                                                      |                                                 |                                          |         |                             |  | 2001        |         | December 31,
|                                                                                      |                                                 |                                          |         |                             |  | (Unaudited) |         | 2000        
|                                                                                      |                                                 |                                          |         |                             |  |             |         |             
|                                                                                      |                                                 | LIABILITIES AND STOCKHOLDERS INVESTMENT |         |                             |  |             |         |              |  | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|CURRENT LIABILITIES:                                                                  |                                                 |                                          |         |                             |  |             |         |             
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Current maturities of capital lease obligations |                                          | $       | 1,110                       |  |             | $       | 971          | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Accounts payable                                |                                          |         | 12,981                      |  |             |         | 13,039       | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Accrued expenses                                |                                          |         | 18,876                      |  |             |         | 20,990       | 
|                                                                                      |                                                 |                                          |         |                             |  |             |         |             
|                                                                                      |                                                 |                                          |         | Total current liabilities   |  |             | 32,967  |              |  |  | 35,000 |  
|                                                                                      |                                                 |                                          |         |                             |  |             |         |             
|CAPITAL LEASE OBLIGATIONS, less
current maturities                                    |                                                 |                                          | 2,408   |                             |  |             | 3,069   |             
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|LONG-TERM DEBT                                                                        |                                                 |                                          | 170,638 |                             |  |             | 168,080 |             
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|OTHER LIABILITIES                                                                     |                                                 |                                          | 6,196   |                             |  |             | 6,115   |             
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|STOCKHOLDERS INVESTMENT:                                                             |                                                 |                                          |         |                             |  |             |         |             
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Common stock $.01 par value, 100,000 shares authorized,
10,820 issued and outstanding |                                                 |                                          | 1       |                             |  |             | 1       |             
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Accumulated deficit                                                                   |                                                 |                                          | (1,044  | )                           |  |             | (1,753  | )           
|                                                                                      |                                                 |                                          |         |                             |  |             |         |             
|                                                                                      |                                                 |                                          |         | Total
stockholder's deficit |  |             | (1,043  | )            |  |  | (1,752 | )
|                                                                                      |                                                 |                                          |         |                             |  |             |         |             
|                                                                                      |                                                 | $                                        | 211,166 |                             |  | $           | 210,512 |             
|                                                                                      |                                                 |                                          |         |                             |  |             |         |             

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

4



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##### Table of Contents



THE RESTAURANT COMPANY AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)
(In Thousands)


|                                                                                  |                                                       |                   |        |          |       |          |        |          |       |          |         |        |        |   |         |        |       | 
|--------------------------------------------------------------------------------- | ----------------------------------------------------- | ----------------- | ------ | -------- | ----- | -------- | ------ | -------- | ----- | -------- | ------- | ------ | ------ | - | ------- | ------ | ----- | 
|                                                                                  |                                                       |                   |        | 84 days  |       | 91 days  |        | 196 days |       | 182 days
|                                                                                  |                                                       |                   |        | ended    |       | ended    |        | ended    |       | ended   
|                                                                                  |                                                       |                   |        | July 15, |       | June 30, |        | July 15, |       | June 30,
|                                                                                  |                                                       |                   |        | 2001     |       | 2000     |        | 2001     |       | 2000    
|                                                                                  |                                                       |                   |        |          |       |          |        |          |       |         
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |                                                       |                   |        |          |       |          |        |          |       |          |         |        |        |   |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net income                                                                        |                                                       | $                 | 558    |          |       | $        | 1,004  |          |       | $        | 709     |        |        | $ | 1,213   |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                       |                   |        |          |       |          |        |          |       |          |         |        |        |   |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Depreciation and amortization                         |                   |        | 5,476    |       |          |        | 5,648    |       |          |         | 12,720 |        |   |         | 11,138 |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Accretion of interest on Senior Discount Notes        |                   |        | 683      |       |          |        | 653      |       |          |         | 1,558  |        |   |         | 1,287  |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Asset write-down                                      |                   |        |         |       |          |        | 600      |       |          |         |       |        |   |         | 600    |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Other non-cash income and expense items               |                   |        | 85       |       |          |        | 110      |       |          |         | 208    |        |   |         | 221    |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Gain on disposition of assets                         |                   |        | (1,169   | )     |          |        |         |       |          |         | (1,097 | )      |   |         |       |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Net changes in other operating assets and liabilities |                   |        | (1,596   | )     |          |        | (4,211   | )     |          |         | (3,071 | )      |   |         | (4,530 | )    
|                                                                                  |                                                       |                   |        |          |       |          |        |          |       |          |         |        |        |   |         |       
|                                                                                  |                                                       | Total adjustments |        |          | 3,479 |          |        |          | 2,800 |          |         |        | 10,318 |   |         |        | 8,716 | 
|                                                                                  |                                                       |                   |        |          |       |          |        |          |       |          |         |        |        |   |         |       
|Net cash provided by operating activities                                         |                                                       |                   | 4,037  |          |       |          | 3,804  |          |       |          | 11,027  |        |        |   | 9,929   |       
|                                                                                  |                                                       |                   |        |          |       |          |        |          |       |          |         |        |        |   |         |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |                                                       |                   |        |          |       |          |        |          |       |          |         |        |        |   |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash paid for property and equipment                                              |                                                       |                   | (4,957 | )        |       |          | (9,192 | )        |       |          | (11,342 | )      |        |   | (13,254 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash paid for acquisition of franchised restaurants                               |                                                       |                   |       |          |       |          |       |          |       |          |        |        |        |   | (5,902  | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from sale of property and equipment                                      |                                                       |                   | 3,687  |          |       |          | 8      |          |       |          | 3,687   |        |        |   | 431     |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Payments on notes receivable                                                      |                                                       |                   | 66     |          |       |          | 43     |          |       |          | 144     |        |        |   | 79      |       
|                                                                                  |                                                       |                   |        |          |       |          |        |          |       |          |         |        |        |   |         |       
|Net cash used in investing activities                                             |                                                       |                   | (1,204 | )        |       |          | (9,141 | )        |       |          | (7,511  | )      |        |   | (18,646 | )     
|                                                                                  |                                                       |                   |        |          |       |          |        |          |       |          |         |        |        |   |         |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |                                                       |                   |        |          |       |          |        |          |       |          |         |        |        |   |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net proceeds from long-term debt                                                  |                                                       |                   | 750    |          |       |          | 5,000  |          |       |          | 1,000   |        |        |   | 8,750   |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Principal payments under capital lease obligations                                |                                                       |                   | (223   | )        |       |          | (245   | )        |       |          | (522    | )      |        |   | (503    | )     
|                                                                                  |                                                       |                   |        |          |       |          |        |          |       |          |         |        |        |   |         |       
|Net cash provided by financing activities                                         |                                                       |                   | 527    |          |       |          | 4,755  |          |       |          | 478     |        |        |   | 8,247   |       
|                                                                                  |                                                       |                   |        |          |       |          |        |          |       |          |         |        |        |   |         |       
|Net increase (decrease) in cash and cash equivalents                              |                                                       |                   | 3,360  |          |       |          | (582   | )        |       |          | 3,994   |        |        |   | (470    | )     
|                                                                                  |                                                       |                   |        |          |       |          |        |          |       |          |         |        |        |   |         |       
|CASH AND CASH EQUIVALENTS:                                                        |                                                       |                   |        |          |       |          |        |          |       |          |         |        |        |   |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Balance, beginning of period                                                      |                                                       |                   | 5,995  |          |       |          | 3,020  |          |       |          | 5,361   |        |        |   | 2,908   |       
|                                                                                  |                                                       |                   |        |          |       |          |        |          |       |          |         |        |        |   |         |       
|Balance, end of period                                                            |                                                       | $                 | 9,355  |          |       | $        | 2,438  |          |       | $        | 9,355   |        |        | $ | 2,438   |       
|                                                                                  |                                                       |                   |        |          |       |          |        |          |       |          |         |        |        |   |         |       

|                                                                            
|----------------------------------------------------------------------------
|The accompanying notes are an integral part of these consolidated statements

5



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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 575
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 and second quarters of 2001 ended on April 22 and July 15, respectively.
The third and fourth quarters will end on October 7 and December 30,
respectively.

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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.

6



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##### Table of Contents



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 July 15,
2001, there were $1,727,000 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 July 15, 2001,
there were $2,339,000 in borrowings outstanding under this agreement of which
$1,169,000 were guaranteed by the Company.

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
July 15 and June 30, consisted of the following (in thousands):

|                        |                                           |   |          |        |          |   |          |        |          |   |        |        |   |   |        |        |  
|----------------------- | ----------------------------------------- | - | -------- | ------ | -------- | - | -------- | ------ | -------- | - | ------ | ------ | - | - | ------ | ------ | -
|                        |                                           |   | 84 days  |        | 91 days  |   | 196 days |        | 182 days
|                        |                                           |   | ended    |        | ended    |   | ended    |        | ended   
|                        |                                           |   | July 15, |        | June 30, |   | July 15, |        | June 30,
|                        |                                           |   | 2001     |        | 2000     |   | 2001     |        | 2000    
|                        |                                           |   |          |        |          |   |          |        |         
|(Increase) Decrease in: |                                           |   |          |        |          |   |          |        |          |   |        |        |   |   |        |       
|                       
|                       
|                       
|                       
|                        | Receivables                               |   | $        | (650   | )        |   | $        | (84    | )        |   | $      | (636   | ) |   | $      | (586   | )
|                       
|                       
|                       
|                       
|                        | Inventories                               |   |          | (324   | )        |   |          | (641   | )        |   |        | (159   | ) |   |        | (246   | )
|                       
|                       
|                       
|                       
|                        | Prepaid expenses and
other current assets |   |          | (81    | )        |   |          | (167   | )        |   |        | (467   | ) |   |        | (885   | )
|                       
|                       
|                       
|                       
|                        | Other assets                              |   |          | 90     |          |   |          | 200    |          |   |        | 281    |   |   |        | (1,133 | )
|                       
|                       
|                       
|                       
|Increase (Decrease) in: |                                           |   |          |        |          |   |          |        |          |   |        |        |   |   |        |       
|                       
|                       
|                       
|                       
|                        | Accounts payable                          |   |          | 2,210  |          |   |          | 341    |          |   |        | (58    | ) |   |        | (1,438 | )
|                       
|                       
|                       
|                       
|                        | Accrued expenses                          |   |          | (3,331 | )        |   |          | (3,566 | )        |   |        | (2,114 | ) |   |        | (1,405 | )
|                       
|                       
|                       
|                       
|                        | Other liabilities                         |   |          | 490    |          |   |          | (294   | )        |   |        | 82     |   |   |        | 1,163  |  
|                        |                                           |   |          |        |          |   |          |        |          |   |        |        |   |   |        |       
|                        |                                           | $ | (1,596   | )      |          | $ | (4,211   | )      |          | $ | (3,071 | )      |   | $ | (4,530 | )     
|                        |                                           |   |          |        |          |   |          |        |          |   |        |        |   |   |        |       

7



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##### Table of Contents



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

|                            |  |          |       |          |  |          |       |          |  |   |       |  |  |   |       | 
|--------------------------- |  | -------- | ----- | -------- |  | -------- | ----- | -------- |  | - | ----- |  |  | - | ----- | 
|                            |  | 84 days  |       | 91 days  |  | 196 days |       | 182 days
|                            |  | ended    |       | ended    |  | ended    |       | ended   
|                            |  | July 15, |       | June 30, |  | July 15, |       | June 30,
|                            |  | 2001     |       | 2000     |  | 2001     |       | 2000    
|                            |  |          |       |          |  |          |       |         
|Cash paid for interest      |  | $        | 7,262 |          |  | $        | 7,036 |          |  | $ | 7,569 |  |  | $ | 7,292 | 
|                           
|                           
|                           
|                           
|Income taxes paid           |  |          | 1,165 |          |  |          | 1,456 |          |  |   | 1,752 |  |  |   | 1,704 | 
|                           
|                           
|                           
|                           
|Income tax refunds received |  |          |      |          |  |          | 1     |          |  |   | 16    |  |  |   | 2     | 

Segment Reporting

The following presents revenues and other financial information by business
segment for the quarter and year-to-date periods ended July 15 and June 30 (in
thousands):

|                                 |  |             |        |           |  |               |       |        |  |   |       |  |  |   |         |   |  |   |        | 
|-------------------------------- |  | ----------- | ------ | --------- |  | ------------- | ----- | ------ |  | - | ----- |  |  | - | ------- | - |  | - | ------ | 
|Quarter:                         |  | Restaurants |        | Franchise |  | Manufacturing | Other | Totals
|                                 |  |             |        |           |  |               |       |        |  |  
|84 days ended July 15, 2001:     |  |             |        |           |  |               |       |        |  |   |       |  |  |   |         |   |  |   |        | 
|                                
|                                
|                                
|                                
|Revenues from
external customers |  | $           | 63,109 |           |  | $             | 5,255 |        |  | $ | 7,672 |  |  | $ | 348     |   |  | $ | 76,384 | 
|                                
|                                
|                                
|                                
|Intersegment revenues            |  |             |       |           |  |               |      |        |  |   | 2,049 |  |  |   |        |   |  |   | 2,049  | 
|                                
|                                
|                                
|                                
|Segment profit (loss)            |  |             | 5,295  |           |  |               | 4,513 |        |  |   | 1,881 |  |  |   | (11,131 | ) |  |   | 558    | 
|                                
|                                
|                                
|                                
|91 days ended June 30, 2000:     |  |             |        |           |  |               |       |        |  |   |       |  |  |   |         |   |  |   |        | 
|                                
|                                
|                                
|                                
|Revenues from
external customers |  | $           | 70,749 |           |  | $             | 5,569 |        |  | $ | 6,994 |  |  | $ | 162     |   |  | $ | 83,474 | 
|                                
|                                
|                                
|                                
|Intersegment revenues            |  |             |       |           |  |               |      |        |  |   | 2,635 |  |  |   |        |   |  |   | 2,635  | 
|                                
|                                
|                                
|                                
|Segment profit (loss)            |  |             | 6,921  |           |  |               | 4,814 |        |  |   | 1,760 |  |  |   | (12,491 | ) |  |   | 1,004  | 

8



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|                                 |  |             |         |           |  |               |        |        |  |   |        |  |  |   |         |   |  |   |         | 
|-------------------------------- |  | ----------- | ------- | --------- |  | ------------- | ------ | ------ |  | - | ------ |  |  | - | ------- | - |  | - | ------- | 
|Year-to-date:                    |  | Restaurants |         | Franchise |  | Manufacturing | Other  | Totals
|                                 |  |             |         |           |  |               |        |        |  |  
|196 days ended July 15, 2001:    |  |             |         |           |  |               |        |        |  |   |        |  |  |   |         |   |  |   |         | 
|                                
|                                
|                                
|                                
|Revenues from
external customers |  | $           | 147,982 |           |  | $             | 11,937 |        |  | $ | 16,426 |  |  | $ | 606     |   |  | $ | 176,951 | 
|                                
|                                
|                                
|                                
|Intersegment revenues            |  |             |        |           |  |               |       |        |  |   | 4,666  |  |  |   |        |   |  |   | 4,666   | 
|                                
|                                
|                                
|                                
|Segment profit (loss)            |  |             | 13,341  |           |  |               | 10,183 |        |  |   | 3,781  |  |  |   | (26,596 | ) |  |   | 709     | 
|                                
|                                
|                                
|                                
|182 days ended June 30, 2000:    |  |             |         |           |  |               |        |        |  |   |        |  |  |   |         |   |  |   |         | 
|                                
|                                
|                                
|                                
|Revenues from
external customers |  | $           | 139,438 |           |  | $             | 10,816 |        |  | $ | 13,796 |  |  | $ | 329     |   |  | $ | 164,379 | 
|                                
|                                
|                                
|                                
|Intersegment revenues            |  |             |        |           |  |               |       |        |  |   | 4,985  |  |  |   |        |   |  |   | 4,985   | 
|                                
|                                
|                                
|                                
|Segment profit (loss)            |  |             | 13,796  |           |  |               | 9,412  |        |  |   | 3,153  |  |  |   | (25,148 | ) |  |   | 1,213   | 

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

|                                       |  |          |        |          |  |          |        |          |  |   |        |   |  |   |        |  
|-------------------------------------- |  | -------- | ------ | -------- |  | -------- | ------ | -------- |  | - | ------ | - |  | - | ------ | -
|                                       |  | 84 days  |        | 91 days  |  | 196 days |        | 182 days
|                                       |  | ended    |        | ended    |  | ended    |        | ended   
|                                       |  | July 15, |        | June 30, |  | July 15, |        | June 30,
|                                       |  | 2001     |        | 2000     |  | 2001     |        | 2000    
|                                       |  |          |        |          |  |          |        |         
|General and administrative expenses    |  | $        | 6,680  |          |  | $        | 5,780  |          |  | $ | 14,847 |   |  | $ | 12,877 |  
|                                      
|                                      
|                                      
|                                      
|Depreciation and amortization expenses |  |          | 1,442  |          |  |          | 1,512  |          |  |   | 3,304  |   |  |   | 2,999  |  
|                                      
|                                      
|                                      
|                                      
|Interest expense                       |  |          | 4,169  |          |  |          | 4,531  |          |  |   | 9,771  |   |  |   | 8,956  |  
|                                      
|                                      
|                                      
|                                      
|Gain on disposition of assets          |  |          | (1,169 | )        |  |          |       |          |  |   | (1,097 | ) |  |   |       |  
|                                      
|                                      
|                                      
|                                      
|Asset write-down                       |  |          |       |          |  |          | 600    |          |  |   |       |   |  |   | 600    |  
|                                      
|                                      
|                                      
|                                      
|Income tax expense                     |  |          | 279    |          |  |          | 532    |          |  |   | 354    |   |  |   | 625    |  
|                                      
|                                      
|                                      
|                                      
|Other                                  |  |          | (270   | )        |  |          | (464   | )        |  |   | (583   | ) |  |   | (909   | )
|                                       |  |          |        |          |  |          |        |          |  |   |        |   |  |   |        |  
|                                       |  | $        | 11,131 |          |  | $        | 12,491 |          |  | $ | 26,596 |   |  | $ | 25,148 |  
|                                       |  |          |        |          |  |          |        |          |  |   |        |   |  |   |        |  

9



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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE SECOND QUARTER ENDED JULY 15, 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 July 15, 2001, the Company
owned and operated 140 restaurants and franchised 354 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 196 days ended July
15, 2001, revenues from Company-operated restaurants, Foxtail and franchise and
other accounted for 83.8%, 9.3% and 6.9% 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.

10



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##### Table of Contents



A summary of the Companys results for the quarter and year-to-date periods
ended July 15, 2001 and June 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  |      | 91 days  |      | 196 days |      | 182 days
|                           |                               |                              |                    |      | ended    |      | ended    |      | ended    |      | ended   
|                           |                               |                              |                    |      | July 15, |      | June 30, |      | July 15, |      | June 30,
|                           |                               |                              |                    |      | 2001     |      | 2000     |      | 2001     |      | 2000    
|                           |                               |                              |                    |      |          |      |          |      |          |      |         
|Revenues:                  |                               |                              |                    |      |          |      |          |      |          |      |          |      |      |      |       |     
|                          
|                          
|                          
|                          
|                           |                               | Food sales                   |                    |      | 92.9     | %    |          |      | 93.1     | %    |          |      | 93.1 | %    |       |      | 93.2 | %   
|                          
|                          
|                          
|                          
|                           |                               | Franchise and other revenues |                    |      | 7.1      |      |          |      | 6.9      |      |          |      | 6.9  |      |       |      | 6.8  |     
|                           |                               |                              |                    |      |          |      |          |      |          |      |          |      |      |      |       |     
|Total Revenues             |                               |                              | 100.0              |      |          |      | 100.0    |      |          |      | 100.0    |      |      |      | 100.0 |     
|                           |                               |                              |                    |      |          |      |          |      |          |      |          |      |      |      |       |     
|Costs and Expenses:        |                               |                              |                    |      |          |      |          |      |          |      |          |      |      |      |       |     
|                          
|                          
|                          
|                          
|                           | Cost of sales:                |                              |                    |      |          |      |          |      |          |      |          |      |      |      |       |      |     
|                          
|                          
|                          
|                          
|                           |                               |                              | Food cost          |      |          | 26.1 |          |      |          | 25.8 |          |      |      | 26.0 |       |      |      | 26.0 | 
|                          
|                          
|                          
|                          
|                           |                               |                              | Labor and benefits |      |          | 32.7 |          |      |          | 33.5 |          |      |      | 32.5 |       |      |      | 33.3 | 
|                          
|                          
|                          
|                          
|                           |                               |                              | Operating expenses |      |          | 19.3 |          |      |          | 18.4 |          |      |      | 19.5 |       |      |      | 18.3 | 
|                          
|                          
|                          
|                          
|                           | General and administrative    |                              |                    | 10.0 |          |      |          | 8.0  |          |      |          | 9.7  |      |      |       | 9.1  |     
|                          
|                          
|                          
|                          
|                           | Depreciation and amortization |                              |                    | 7.2  |          |      |          | 6.8  |          |      |          | 7.2  |      |      |       | 6.8  |     
|                          
|                          
|                          
|                          
|                           | Interest, net                 |                              |                    | 5.5  |          |      |          | 5.4  |          |      |          | 5.5  |      |      |       | 5.4  |     
|                          
|                          
|                          
|                          
|                           | Gain on disposition of assets |                              |                    | (1.5 | )        |      |          |     |          |      |          | (0.6 | )    |      |       |     |     
|                          
|                          
|                          
|                          
|                           | Asset write-down              |                              |                    |     |          |      |          | 0.7  |          |      |          |     |      |      |       | 0.4  |     
|                          
|                          
|                          
|                          
|                           | Other, net                    |                              |                    | (0.4 | )        |      |          | (0.4 | )        |      |          | (0.4 | )    |      |       | (0.4 | )   
|                           |                               |                              |                    |      |          |      |          |      |          |      |          |      |      |      |       |     
|Total Costs and Expenses   |                               |                              | 98.9               |      |          |      | 98.2     |      |          |      | 99.4     |      |      |      | 98.9  |     
|                           |                               |                              |                    |      |          |      |          |      |          |      |          |      |      |      |       |     
|Income before income taxes |                               |                              | 1.1                |      |          |      | 1.8      |      |          |      | 0.6      |      |      |      | 1.1   |     
|                          
|                          
|                          
|                          
|Provision for income taxes |                               |                              | (0.4               | )    |          |      | (0.6     | )    |          |      | (0.2     | )    |      |      | (0.4  | )   
|                           |                               |                              |                    |      |          |      |          |      |          |      |          |      |      |      |       |     
|Net Income                 |                               |                              | 0.7                | %    |          |      | 1.2      | %    |          |      | 0.4      | %    |      |      | 0.7   | %   
|                           |                               |                              |                    |      |          |      |          |      |          |      |          |      |      |      |       |     

Net income for the second quarter of 2001 was $558,000 versus $1,004,000 for the
second quarter of 2000. For the year-to-date period ended July 15, 2001, net
income was $709,000 compared to $1,213,000 for the year-to-date period ended
June 30, 2000.

11



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##### Table of Contents



Revenues:

Total revenues for the second quarter of 2001 decreased 8.5% over the second
quarter of last year primarily due to the change in accounting
reporting periods.
The second quarter of 2001 included 84 days versus 91 days in the second
quarter of 2000. A decrease in comparable sales in Company-operated
restaurants also contributed to the decline. Total revenues for the first seven periods of 2001 increased 7.6%
over the first six months of 2000 due primarily to 196 days in
2001 versus 182 days in 2000. Comparable restaurant sales also
declined year-to-date.

Same store comparable sales decreased approximately 3.4% for the second quarter
and 2.7% year-to-date due to a decline in comparable guest visits of 3.4% and
5.0%, respectively. The decrease in comparable guest visits for the year-to-date
period was partially offset by an increase in the guest check average due to
cumulative price increases.

Revenues from Foxtail increased approximately 9.7% and 19.1% over the quarter
and year-to-date periods ended June 30, 2000, and constituted approximately
10.0% and 9.3%, respectively, of the Companys total revenues. Foxtails
increased revenue for the second quarter is attributable to sales to customers
outside of the Perkins system. The year-to-date increase is primarily due to a
greater number of days in 2001 and an increase in sales to customers outside of
the Perkins system.

Franchise and other revenues decreased 5.9% compared to the second quarter of
2000 and increased 10.1% year-to-date. The decrease in revenues for the quarter
is due to the fewer number of days in the second quarter of 2001 and a decrease
in franchise restaurant comparable sales similar to the decrease experienced by
Company-operated restaurants. During 2001, six new franchised restaurants
opened, five formerly Company-operated restaurants were converted to franchise
restaurants and three franchised restaurants closed. Since June 30, 2000,
twenty-one new franchised restaurants have opened, four 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 increased 0.3 percentage points over the
second quarter of 2000 and was flat compared to the previous
year-to-date period.
For the restaurant division, the decrease for the quarter was due to lower
percentage food cost on current year promotions and reduced commodity costs for
certain refrigerated products. Foxtails food cost decreased as a result of
stable commodity costs and an increase in sales of higher gross margin products.

Labor and benefits:

Labor and benefits expense, as a percentage of total revenues, decreased 0.8
percentage points for both the second quarter and year-to-date periods. In
Company-operated restaurants, lower group insurance costs coupled with a higher
average guest check were partially offset by an increase in the average wage
rate. Controlled hourly labor favorably impacted labor costs year-to-date. Labor
for Foxtail remained stable as increased labor rates were offset by the
production of higher margin products and improvements in productivity.

12



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##### Table of Contents



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.

Operating expenses:

Operating expenses, expressed as a percentage of total revenues increased 0.9
and 1.2 percentage points, respectively, for the second quarter and year-to-date
periods. The increases for both
the quarter and year-to-date are primarily due to the impact of higher natural
gas costs and investment spending for advertising in select franchise markets.

General and administrative:

General and administrative expenses, as a percentage of total revenues increased
2.0 and 0.6 percentage points over the second quarter and year-to-date periods
last year. The increases for both periods were impacted by
non-recurring charges related to changes in executive personnel and
administrative costs incurred related to the test of a new restaurant concept.

Depreciation and amortization:

As a result of the decline in comparable restaurant sales, the addition of new
Company-operated restaurants and continued investment in restaurant imagery,
depreciation and amortization expense, as a percentage of total revenues,
increased 0.4 percentage points over both the second quarter and year-to-date
periods last year. Four Company-operated restaurants have been opened
since June 30, 2000.

Interest, net:

Interest expense, as a percentage of revenues, increased 0.1 percentage point
over the prior year periods. The
increases are the result of the compounding of interest on the Senior
Discount Notes. Increased average borrowings on the
Companys revolving line of credit were offset by a decline in average interest rates
on short-term borrowings.

Other:

The Company recognized gains in the second quarter of 2001 totaling $1,169,000
relating to the sale of six properties, five of which were operating properties
converted to franchise restaurants. Proceeds from the five operating properties
that were sold will specifically be used to acquire land, buildings and
equipment for future restaurant sites. Under Internal Revenue Code Section 1031,
the transaction is classified as a like-kind exchange, and the associated gain
is not recognized currently for federal tax purposes. The Company recorded an asset write-down under Statement of
Financial Accounting Standards No. 121 totaling $600,000 during the second
quarter of 2000.

CAPITAL RESOURCES AND LIQUIDITY

The principal uses of cash during the second quarter and year-to-date periods
ended July 15, 2001, were capital expenditures and interest payments on the
Companys Senior Notes. 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.

13



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##### Table of Contents



The following table
summarizes capital expenditures for the periods ending July 15,
2001 and June 30, 2000 (in thousands):

|                           |  |          |        |          |  |   |        | 
|-------------------------- |  | -------- | ------ | -------- |  | - | ------ | 
|                           |  | 196 days |        | 182 days
|                           |  | ended    |        | ended   
|                           |  | July 15, |        | June 30,
|                           |  | 2001     |        | 2000    
|                           |  |          |        |         
|New restaurants            |  | $        | 5,879  |          |  | $ | 10,276 | 
|                          
|                          
|                          
|                          
|Maintenance                |  |          | 2,405  |          |  |   | 1,911  | 
|                          
|                          
|                          
|                          
|Remodeling and reimaging   |  |          | 1,616  |          |  |   | 4,792  | 
|                          
|                          
|                          
|                          
|Manufacturing              |  |          | 327    |          |  |   | 275    | 
|                          
|                          
|                          
|                          
|Other                      |  |          | 1,115  |          |  |   | 1,902  | 
|                           |  |          |        |          |  |   |        | 
|Total Capital Expenditures |  | $        | 11,342 |          |  | $ | 19,156 | 
|                           |  |          |        |          |  |   |        | 

The Companys capital budget for 2001 is $28.7 million, which includes plans to
open seven additional Company-operated restaurants 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, proceeds from the sale of five restaurants 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 $50,000,000 revolving line of credit facility (the
Credit Facility) with a sublimit for up to $5,000,000 of letters of credit.
All amounts under the facility will bear interest at floating rates based on the
agents base rate or Eurodollar rates as defined in the agreement. All
indebtedness under the Credit Facility is secured by a first priority lien on
substantially all of the assets of the Company. As of July 15, 2001, $14,750,000
in borrowings and approximately $1,065,000 of letters of credit were outstanding
under the facility.

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.

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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 $50,000,000 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 $14,750,000 outstanding
under the line of credit facility at July 15, 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 8-K

(a)  Exhibits  None

(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: August 29, 2001 |  | BY: /s/ Steven R. McClellanSteven R. McClellan
Executive Vice President, Chief
Financial Officer and Director
|                     
|                      |  | BY: /s/ Louis C. JehlLouis C. Jehl
Vice President and Controller