##### 



UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-Q
 (Mark One) ü
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended April 18, 2004 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from __________________ to ___________. Commission file number 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 üwhether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90
days. Yes üNo Indicate by üwhether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes            No ü Number of shares of common stock outstanding: 10,820. 1




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##### 



PART I  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands) Sixteen Weeks Ended
    
    Sixteen Weeks EndedApril 18, 2004
    
    April 20, 2003REVENUES:Food sales
    
    $
    98,755
    
    
    $
    93,732Franchise and other revenue
    
    
    6,362
    
    
    
    6,257Total Revenues
    
    
    105,117
    
    
    
    99,989COSTS AND EXPENSES:Cost of sales
(excluding depreciation shown below):Food cost
    
    
    28,237
    
    
    
    26,439Labor and benefits
    
    
    34,474
    
    
    
    33,870Operating expenses
    
    
    20,026
    
    
    
    19,964General and administrative
    
    
    10,194
    
    
    
    8,917Depreciation and amortization
    
    
    5,165
    
    
    
    5,760Interest, net
    
    
    4,928
    
    
    
    5,270Provision for disposition of assets
    
    
    363
    
    
    
    2Asset write-down
    
    
    446
    
    
    
    Other, net
    
    
    (158
    )
    
    
    (162
    )Total Costs and Expenses
    
    
    103,675
    
    
    
    100,060Income (loss) before income taxes
    
    
    1,442
    
    
    
    (71
    )(Provision for) benefit from income taxes
    
    
    (488
    )
    
    
    14NET INCOME (LOSS)
    
    $
    954
    
    
    $
    (57
    )
 The accompanying notes are an integral part of these consolidated statements. 2




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##### 



THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands) April 18,2004
    
    December 28,(Unaudited)
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    10,834
    
    
    $
    4,962Restricted cash
    
    
    5,655
    
    
    
    4,808Receivables, less allowance for
doubtful accounts of $1,041 and $1,003
    
    
    9,855
    
    
    
    10,647Inventories, at the lower of first-in, first-out cost or market
    
    
    6,446
    
    
    
    6,199Prepaid expenses and other current assets
    
    
    2,054
    
    
    
    1,597Deferred income taxes
    
    
    2,219
    
    
    
    2,219Total current assets
    
    
    37,063
    
    
    
    30,432PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization
    
    
    115,775
    
    
    
    118,848GOODWILL
    
    
    27,035
    
    
    
    27,035INTANGIBLE ASSETS, net of accumulated
amortization of $5,462 and $5,265
    
    
    3,856
    
    
    
    4,053DEFERRED INCOME TAXES
    
    
    9,097
    
    
    
    9,097OTHER ASSETS
    
    
    6,658
    
    
    
    6,857$
    199,484
    
    
    $
    196,322
 The accompanying notes are an integral part of these consolidated balance sheets. 3




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##### 



THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par and Share Amounts) April 18,2004
    
    December 28,(Unaudited)
    
    2003LIABILITIES AND STOCKHOLDERS INVESTMENTCURRENT LIABILITIES:Current maturities of long-term debt and capital lease obligations
    
    $
    370
    
    
    $
    466Accounts payable
    
    
    8,336
    
    
    
    11,133Franchise advertising contributions
    
    
    3,966
    
    
    
    4,093Accrued expenses
    
    
    26,101
    
    
    
    21,164Total current liabilities
    
    
    38,773
    
    
    
    36,856CAPITAL LEASE OBLIGATIONS, less
current maturities
    
    
    821
    
    
    
    869LONG-TERM DEBT
    
    
    148,009
    
    
    
    148,009OTHER LIABILITIES
    
    
    7,643
    
    
    
    7,299STOCKHOLDERS INVESTMENT:Common stock, $.01 par value, 100,000 shares authorized,
10,820 issued and outstanding
    
    
    1
    
    
    
    1Other comprehensive income
    
    
    37
    
    
    
    42Accumulated earnings
    
    
    4,200
    
    
    
    3,246Total stockholders investment
    
    
    4,238
    
    
    
    3,289$
    199,484
    
    
    $
    196,322
 The accompanying notes are an integral part of these consolidated balance sheets. 4




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##### 



THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands) Sixteen Weeks Ended
    
    Sixteen Weeks EndedApril 18, 2004
    
    April 20, 2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    954
    
    
    $
    (57
    )Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    5,165
    
    
    
    5,760Accretion of Senior Discount Notes
    
    
    
    
    
    
    7Other non-cash income and expense items
    
    
    223
    
    
    
    135Provision for disposition of assets
    
    
    363
    
    
    
    2Asset write-down
    
    
    446
    
    
    
    Net changes in operating assets and liabilities
    
    
    1,531
    
    
    
    1,440Total adjustments
    
    
    7,728
    
    
    
    7,344Net cash provided by operating activities
    
    
    8,682
    
    
    
    7,287CASH FLOWS FROM INVESTING ACTIVITIES:Cash paid for property and equipment
    
    
    (3,197
    )
    
    
    (2,169
    )Proceeds from sale of assets held for disposition
    
    
    486
    
    
    
    10Payments on notes receivable
    
    
    45
    
    
    
    201Net cash used in investing activities
    
    
    (2,666
    )
    
    
    (1,958
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payments on long-term debt
    
    
    
    
    
    
    (2,000
    )Principal payments under capital lease obligations
    
    
    (144
    )
    
    
    (200
    )Net cash used in financing activities
    
    
    (144
    )
    
    
    (2,200
    )Net increase in cash and cash equivalents
    
    
    5,872
    
    
    
    3,129CASH AND CASH EQUIVALENTS:Balance, beginning of period
    
    
    4,962
    
    
    
    5,813Balance, end of period
    
    $
    10,834
    
    
    $
    8,942
 The accompanying notes are an integral
    part of these consolidated statements. 5




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##### 



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 and Perkins Finance Corp. RHCs principal stockholders are
Donald N. Smith (Mr. Smith), TRCs Chairman and Chief Executive Officer,
and BancBoston Ventures, Inc. (BBV). Mr. Smith is also the Chairman of
Friendly Ice Cream Corporation (FICC), which operates and franchises
approximately 544 restaurants, located primarily in the northeastern
United States. Basis of Presentation The accompanying unaudited consolidated financial statements of TRC have
been prepared in accordance with the instructions to Form 10-Q and
therefore do not include all information and notes necessary for complete
financial statements in conformity with generally accepted accounting
principles. The results for the periods indicated are unaudited but
reflect all adjustments (consisting only of normal recurring adjustments)
which management considers necessary for a fair presentation of the
operating results. Results of operations for the interim periods are not
necessarily indicative of a full year of operations. The notes to the
financial statements contained in the 2003 Annual Report on Form 10-K
should be read in conjunction with these statements. Certain prior year amounts have been reclassified to conform to current
year presentation. Accounting Reporting Period The Companys fiscal calendar year consists of thirteen four-week periods
ending on the last Sunday in December. The first quarter each year will
include four four-week periods. The first quarter ended April 18, 2004.
The second, third and fourth quarters of 2004 will end on July 11, October
3 and December 26, respectively. Contingencies The Company is a party to various legal proceedings in the ordinary course
of business. Management does not believe it is likely that these
proceedings, either individually or in the aggregate, will have a material
adverse effect on the Companys financial position or results of
operations. On June 9, 2000, the Company entered into an agreement to guarantee fifty
percent of borrowings up to a total guarantee of $1,500,000 for use by a
franchisee to remodel and upgrade existing restaurants. As of April 18,
2004, there was $3,000,000 in borrowings outstanding under this agreement
of which the Company guaranteed $1,500,000. The franchisee continues to
attempt to refinance the indebtedness, at which time the Companys
obligation under the current agreement would terminate. Under the
provisions of FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, this guarantee has been determined by the
Company not to be a variable interest in the franchisee. 6




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##### 



Provision for Disposition of Assets and Asset Write-Down During the first sixteen weeks of 2004, the Company sold one property and
recorded a net loss on the sale of approximately $7,000. The Company also
entered into a contract to sell one additional property, which is expected to
close during the second quarter. Based on the terms of the contract, the
Company accrued an estimated loss on the sale of this property of approximately
$356,000 in the first quarter. During the first sixteen weeks of 2004, the Company determined that impairment
existed with respect to two Company-operated restaurants. This determination
was made based on the Companys projections that the future cash flows of these
restaurants would not exceed the present carrying value of the assets.
Accordingly, the Company recorded an impairment charge of $446,000 to adjust
the assets of these restaurants to net realizable value. Supplemental Cash Flow Information The increase or decrease in cash and cash equivalents due to changes in
operating assets and liabilities for the sixteen weeks ended April 18 and April
20, consists of the following (in thousands): Sixteen Weeks Ended
    
    Sixteen Weeks EndedApril 18, 2004
    
    April 20, 2003(Increase) Decrease in:Receivables
    
    $
    519
    
    
    $
    1,234Inventories
    
    
    (247
    )
    
    
    (725
    )Prepaid expenses and
other current assets
    
    
    (457
    )
    
    
    (1,001
    )Other assets
    
    
    198
    
    
    
    296Increase (Decrease) in:Accounts payable
    
    
    (2,797
    )
    
    
    (5,524
    )Accrued expenses
    
    
    3,970
    
    
    
    7,251Other liabilities
    
    
    345
    
    
    
    (91
    )$
    1,531
    
    
    $
    1,440
 7




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##### 



Other supplemental cash flow information is as follows (in thousands): Sixteen Weeks Ended
    
    Sixteen Weeks EndedApril 18, 2004
    
    April 20, 2003Cash paid for interest
    
    $
    166
    
    
    $
    197Income taxes paid
    
    
    1,688
    
    
    
    75Income tax refunds received
    
    
    1
    
    
    
    36


Segment Reporting The following presents revenue and other financial information by business
segment for the sixteen weeks ended April 18 and April 20 (in thousands): Restaurants
    
    Franchise
    
    Manufacturing
    
    Other
    
    TotalsSixteen weeks ended
April 18, 2004Revenue fromexternal customers
    
    $
    89,092
    
    
    $
    6,361
    
    
    $
    9,664
    
    
    $
    
    
    
    $
    105,117Intersegment revenue
    
    
    
    
    
    
    
    
    
    
    2,716
    
    
    
    
    
    
    
    2,716Segment profit (loss)
    
    
    9,347
    
    
    
    5,513
    
    
    
    1,658
    
    
    
    (15,564
    )
    
    
    954Sixteen weeks ended
April 20, 2003Revenue fromexternal customers
    
    $
    84,855
    
    
    $
    6,122
    
    
    $
    8,877
    
    
    $
    135
    
    
    $
    99,989Intersegment revenue
    
    
    
    
    
    
    
    
    
    
    3,234
    
    
    
    
    
    
    
    3,234Segment profit (loss)
    
    
    5,895
    
    
    
    5,410
    
    
    
    1,955
    
    
    
    (13,317
    )
    
    
    (57
    )
 8




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##### 



A reconciliation of other segment loss is as follows (in thousands): Sixteen Weeks Ended
        
        Sixteen Weeks EndedApril
          18, 2004
        
        April
          20, 2003General and administrative
            expenses
        
        $
        8,719
        
        
        $
        7,378Depreciation and
            amortization expenses
        
        
        757
        
        
        
        903Interest expense
        
        
        4,928
        
        
        
        5,270Provision for disposition
            of assets
        
        
        363
        
        
        
        2Asset write-down
        
        
        446
        
        
        
        Income tax (benefit) expense
        
        
        488
        
        
        
        (14
        )Other
        
        
        (137
        )
        
        
        (222
        )$
        15,564
        
        
        $
        13,317
 Perkins Marketing Fund The Company has maintained a Marketing Fund to pool the resources of the
Company and its franchisees for advertising purposes and to promote the Perkins
brand in accordance with the systems advertising policy. Effective with the
third quarter of 2003, the Company consolidated the Marketing Fund with TRC.
Accordingly, the Company has recorded $5,655,000 of restricted cash on its
balance sheet that represents the funds contributed by TRC and the franchisees
specifically for the purpose of advertising. The Company has also recorded
liabilities of approximately $1,205,000 for accrued advertising, which is
included in accrued expenses on the accompanying balance sheet, and
approximately $3,966,000, which represents franchisee contributions for
advertising services not yet provided. The results of operations of the
Marketing Fund primarily consist of general and administrative expenses and
interest income, both of which are immaterial to the Company as a whole. Revolving Credit Agreement As of April 18, 2004, the Company has a secured $25,000,000 revolving line of
credit facility (the Credit Facility) with a sub-limit for up to $5,000,000
of letters of credit. All amounts under the Credit Facility bear interest at
floating rates based on the agents base rate or Eurodollar rates as defined in
the agreement. All indebtedness under the Credit Facility is collateralized by
a first priority lien on substantially all of the assets of the Company. As of
April 18, 2004, there were no borrowings and approximately $4,993,000 of
letters of credit outstanding under the Credit Facility. At April 20, 2003, we failed to meet the criteria of one of the financial
covenants of the Credit Facility. On May 14, 2003, the Company executed an
amendment to the Credit Facility that waived the April 20, 2003 covenant
violation, reduced the requirements of the financial covenants and lowered the
total amount available under the Credit Facility from $40,000,000 to
$25,000,000. The Company executed an amendment to the Credit Facility on March
25, 2004 that reduced the requirements of the financial covenants at the end of
the first quarter 2004 and thereafter. As of April 18, 2004, the Company was
in compliance with the requirements of the financial covenants. 9




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE FIRST QUARTER ENDED APRIL 18, 2004 RESULTS OF OPERATIONS Overview: The Company is a leading operator and franchisor of mid-scale restaurants
located in 34 states and five Canadian provinces. As of April 18, 2004, the
Company owned and operated 156 and franchised 332 Perkins Restaurants. Both
the Company-operated and franchised Perkins Restaurants operate under the names
Perkins Restaurant and Bakery, Perkins Family Restaurant, Perkins Family
Restaurant and Bakery, or Perkins Restaurant and the mark Perkins. The
Company also offers cookie doughs, muffin batters, pancake mixes, pies and
other food products for sale to our Company-operated and franchised restaurants
and bakery and food service distributors through Foxtail Foods (Foxtail) our
manufacturing division. The business of Perkins was founded in 1958, and since
then Perkins has continued to adapt its menus, product offerings, building
designs and decor to meet changing consumer preferences. Perkins is a highly
recognized brand in the geographic areas it serves. The Companys revenues are derived primarily from the operation of
Company-owned restaurants, the sale of bakery products produced by Foxtail and
franchise royalties. In order to ensure consistency and availability of
Perkins proprietary products to each unit in the system, Foxtail offers cookie
doughs, muffin batters, pancake mixes, pies and other food products to
Company-operated and franchised restaurants through food service distributors.
Sales to Company-operated restaurants are eliminated in the accompanying
statements of operations. For the quarter ended April 18, 2004, revenues from
Company-operated restaurants, Foxtail, and franchise and other accounted for
84.8%, 9.2% and 6.0% of total revenue, respectively. 10




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##### 



A summary of the Companys results for the sixteen week period ended
April 18, 2004 and April 20, 2003 are presented in the following table.
All revenues, costs and expenses are expressed as a percentage of total
revenues. Sixteen Weeks Ended
    
    Sixteen Weeks EndedApril 18, 2004
    
    April 20, 2003Revenues:Food sales
    
    
    94.0
    %
    
    
    93.7
    %Franchise and other revenue
    
    
    6.0
    
    
    
    6.3Total Revenues
    
    
    100.0
    
    
    
    100.0Costs and Expenses:Cost of sales (excluding
depreciation shown below):Food cost
    
    
    26.9
    
    
    
    26.4Labor and benefits
    
    
    32.8
    
    
    
    33.9Operating expenses
    
    
    19.0
    
    
    
    20.0General and administrative
    
    
    9.7
    
    
    
    8.9Depreciation and amortization
    
    
    4.9
    
    
    
    5.8Interest, net
    
    
    4.7
    
    
    
    5.3Provision for disposition of assets
    
    
    0.3
    
    
    
    Asset write-down
    
    
    0.4
    
    
    
    Other, net
    
    
    (0.1
    )
    
    
    (0.2
    )Total Costs and Expenses
    
    
    98.6
    
    
    
    100.1Income (loss) before income taxes
    
    
    1.4
    
    
    
    (0.1
    )Provision for income taxes
    
    
    (0.5
    )
    
    
    Net Income (Loss)
    
    
    0.9
    %
    
    
    (0.1)
    %
 Net Income for the first quarter of 2004 was $954,000 versus a net loss of
$57,000 for the first quarter of 2003. 11




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##### 



Revenues: Total revenues for the first
quarter of 2004 increased 5.1% from the prior year
first quarter. This increase is primarily due to higher comparable restaurant
sales. Same store comparable sales in Company-operated restaurants increased 3.7% for
the first quarter due to an increase in the average guest check of 5.0% offset
by a decrease of 1.3% in comparable guest visits. Approximately one-half of
the increase in average guest check is due to favorable product mix while the
remainder is primarily due to selective menu price increases. Revenues from Foxtail
increased approximately 8.9% from the prior year and
constituted approximately 9.2% of the Companys total revenues. The increase
is primarily due to an increase in sales to customers outside the Perkins
system. Franchise revenue, composed primarily of franchise royalties, increased 3.9%
over the first quarter of 2003 primarily due to an estimated 5.0% increase in
franchise restaurant comparable sales partially offset by a decrease in the
average number of franchise restaurants. Since the first quarter of 2003, the
Companys franchisees have opened 8 restaurants and have closed 16 restaurants. Costs and Expenses: Food cost:
In terms of total revenues, food cost increased 0.5 percentage points over the
first quarter of 2003. Restaurant food cost, as a percentage of restaurant
sales, decreased 0.4 percentage points primarily due to selective menu price
increases, decreased discounting and efficiencies gained from the
implementation of our new menu during the first quarter of 2003. These
efficiencies were partially offset by increases in commodity costs, primarily
beef, pork, dairy and eggs. As a percentage of Foxtail sales, Foxtail food
cost increased 2.8 percentage points for the first quarter primarily due to
increases in the costs of raw materials, particularly eggs, milk and other
dairy products. Labor and benefits:
Labor and benefits expense, as a percentage of total revenues, decreased 1.1
percentage points from the first quarter of 2003. The decrease is primarily
due to increased labor productivity at Company-operated restaurants partially
offset by an increase in incentives, employee insurance and average wage rates. Federal and state minimum wage laws impact the wage rates of the Companys
hourly employees. Certain states do not allow tip credits for servers which
results in higher payroll costs as well as greater exposure to increases in
minimum wage rates. In the past, the Company has been able to offset increases
in labor costs through selective menu price increases and improvements in labor
productivity. However, there is no assurance that future increases can be
mitigated through raising menu prices. Operating expenses:
Expressed as a percentage of total revenues, operating expenses decreased 1.0
percentage points from the first quarter of 2003. The decrease as compared to
the prior year is primarily due to decreases in the usage of restaurant
supplies and in administrative expenses at Company-operated restaurants. General and administrative:
General and administrative expenses, as a percentage of total revenues,
increased 0.8 percentage points over the first quarter of 2003 primarily due to
increased incentive costs. 12




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##### 



Depreciation and amortization:
Depreciation and amortization expense decreased from 5.8 percent of sales to
4.9 percent of sales over the first quarter of 2003. This decrease is primarily
due to the Companys reduction in capital spending since 2001. Provision for Disposition of Assets and Asset Write-Down:
During the first sixteen weeks of 2004, the Company sold one property and
recorded a net loss on the sale of approximately $7,000. The Company also
entered into a contract to sell one additional property, which is expected to
close during the second quarter. Based on the terms of the contract, the
Company accrued an estimated loss on the sale of this property of approximately
$356,000 in the first quarter. During the first sixteen weeks of 2004, the Company determined that impairment
existed with respect to two Company-operated restaurants. This determination
was made based on the Companys projections that the future cash flows of these
restaurants would not exceed the present carrying value of the assets.
Accordingly, the Company recorded an impairment charge of $446,000 to adjust
the assets of these restaurants to net realizable value. Interest, net:
Interest expense, as a percentage of total revenue, decreased 0.6 percentage
points from the prior year first quarter primarily due to a reduction in the
overall borrowings by the Company. Other, net:
Other income, as a percentage of total revenue, increased 0.1 percentage points
compared to the first quarter of 2003. 13




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##### 



CAPITAL RESOURCES AND LIQUIDITY The Companys primary sources of funding during the quarter were cash flows
from operating activities and proceeds from the sale of property and equipment.
The principal uses of cash during the quarter were capital lease payments and
capital expenditures. Capital expenditures for the first quarter of 2004 were
$3,197,000 compared to $2,169,000 for the first quarter of 2003. Capital
expenditures in 2004 consisted primarily of capital required to remodel and
upgrade existing restaurants and expand operations at our manufacturing
facility. The Companys capital budget for 2004 is $15.0 million and includes
plans to open no new Company-operated restaurants. The Company ordinarily operates with a working capital deficit since funds
generated by cash sales in excess of those needed to service current
liabilities are used by the Company to reduce debt and acquire capital assets.
At April 18, 2004, this working capital deficit was $1,700,000. As of April 18, 2004, the Company has a secured $25,000,000 revolving line of
credit facility (the Credit Facility) with a sub-limit for up to $5,000,000
of letters of credit. All amounts under the Credit Facility bear interest at
floating rates based on the agents base rate or Eurodollar rates as defined in
the agreement. All indebtedness under the Credit Facility is collateralized by
a first priority lien on substantially all of the assets of the Company. As of
April 18, 2004, there were no borrowings and approximately $4,993,000 of
letters of credit outstanding under the Credit Facility. At April 20, 2003, we failed to meet the criteria of one of the financial
covenants of the Credit Facility. On May 14, 2003, the Company executed an
amendment to the Credit Facility that waived the April 20, 2003 covenant
violation, reduced the requirements of the financial covenants and lowered the
total amount available under the Credit Facility from $40,000,000 to
$25,000,000. The Company executed an amendment to the Credit Facility on March
25, 2004 that reduced the requirements of the financial covenants at the end of
the first quarter 2004 and thereafter. As of April 18, 2004, the Company was
in compliance with the requirements of the financial covenants. On November 15, 2001, the Company elected to begin accruing cash interest on its
11.25% Senior Discount Notes (the Notes). Cash interest is payable
semi-annually on May 15 and November 15. On May 15, 2003 the Company paid
$8,383,000 in principal of the Notes at a redemption price of 105.625% of the
face amount of the Notes. The principal balance of the Notes on April 18, 2004
was $18,009,000. TRC is a wholly-owned subsidiary of RHC. The common shares of RHC not owned by
Mr. Smith are subject to an option to require RHC to redeem the shares at any
time after December 22, 2004 at fair market value (the Put). As of April 18,
2004, these shares represented 30% of the outstanding common stock of RHC. As
of December 28, 2003, the estimated fair market value of the Put was
$4,650,000. RHC has a management fee agreement dated as of December 22, 1999,
with BBV whereby BBV provides certain consulting services to RHC. In
consideration for these services, a fee of $250,000 accrues annually and is
payable by RHC on December 22, 2004. Additionally, RHC issued 50,000 shares of non-voting preferred stock on
December 22, 1999. The preferred stock is mandatorily redeemable for $1,000 per
share (the Liquidation Value) plus all accrued but unpaid dividends, if any,
on December 22, 2006. Preferred dividends of 8% per annum of the Liquidation
Value of each share are payable quarterly. As of April 18, 2004, approximately
$20,408,000 of in-kind dividends had been paid through the issuance of
additional shares of preferred stock. Assuming a continuation of in-kind
dividends, the redemption price on December 22, 2006 is estimated to be
$87,044,000. The holders of preferred stock are entitled to be paid in cash the
Liquidation Value of each share of preferred stock before any payments are made
to any holders of common stock. The preferred stock is redeemable at the option
of the Company at any time prior to the mandatory redemption date at the
Liquidation Value. 14




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RHC has no material assets other than its investment in TRC. The ability of TRC
to pay dividends to or make distributions to RHC in order to redeem common or
preferred shares or pay the management fee to BBV is restricted under its
senior notes indenture and the Credit Facility Agreement. The Companys ability to make scheduled payments of principal of, or to pay the
interest or liquidated damages, if any, on, or to refinance, its indebtedness,
or to fund planned capital expenditures, or to meet its or RHCs other
liquidity needs will depend on the Companys future performance, which, to a
certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond control of the
Company. Based upon the current level of operations, management believes that
cash flow from operating activities and available cash, together with available
borrowings under the Credit Facility, will be adequate to meet the Companys
liquidity needs in the normal course of its operations. There can be no
assurance that the Company will generate sufficient cash flow from operations,
have access to capital markets or that future borrowings will be available in
an amount sufficient to enable the Company to service its indebtedness or to
fund its other liquidity needs. In addition, there can be no assurance that the
Company will be able to effect any necessary recapitalization or refinancing on
commercially reasonable terms or at all. SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to adopt accounting policies and make significant judgments and
estimates to develop amounts reflected and disclosed in the financial
statements. In many cases, there are alternative policies or estimation
techniques that could be used. We maintain a thorough process to review the
application of our accounting policies and to evaluate the appropriateness of
the estimates that are required to prepare the financial statements of a
corporation. However, even under optimal circumstances, estimates routinely
require adjustment based on changing circumstances and the receipt of new or
better information. Revenue Recognition: Revenue at Company-operated restaurants is recognized as customers pay for
products at the time of sale. The earnings reporting process is covered by our
system of internal controls and generally does not require significant
management judgments and estimates. However, estimates are inherent in the
calculation of franchisee royalty revenue. We calculate an estimate of royalty
income each period and adjust royalty income when actual amounts are reported
by franchisees. Historically, these adjustments have not been material. Concentration of Credit Risk: Financial instruments, which potentially expose the Company to concentrations
of credit risk, consist principally of franchisee and Foxtail accounts
receivable. We perform ongoing credit evaluations of our customers and
generally require no collateral to secure accounts receivable. The credit
review is based on both financial and non-financial factors. Based on this
review, we provide for estimated losses for accounts receivable that are not
likely to be collected. Although we maintain good relationships with our
franchisees, if average sales or the financial health of significant
franchisees were to deteriorate, we may have to increase our reserves against
collection of franchise revenues. 15




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Insurance Reserves: We are self-insured up to certain limits for costs associated with workers
compensation claims, property claims and benefits paid under employee health
care programs. At April 18, 2004 and December 28, 2003, we had total
self-insurance accruals reflected in our balance sheet of approximately $5.1
million and $4.7 million, respectively. The measurement of these costs required the consideration of historical loss
experience and judgments about the present and expected levels of cost per
claim. We account for these costs primarily through actuarial methods, which
develop estimates of the undiscounted liability for claims incurred, including
those claims incurred but not reported. These methods provide estimates of
future ultimate claim costs based on claims incurred as of the balance sheet
date. Other acceptable methods of accounting for these accruals include
measurement of claims outstanding and projected payments. We believe the use of actuarial methods to account for these liabilities
provides a consistent and effective way to measure these highly judgmental
accruals. However, the use of any estimation technique in this area is
inherently sensitive given the magnitude of claims involved and the length of
time until the ultimate cost is known. We believe that our recorded
obligations for these expenses are consistently measured on a conservative
basis. Nevertheless, changes in health care costs, accident frequency and
severity and other factors can materially affect the estimate for these
liabilities. Long-Lived Assets: The restaurant industry is capital intensive. We have approximately 60% of our
total assets invested in property and equipment. We capitalize only those
costs that meet the definition of capital assets under generally accepted
accounting principles. Accordingly, repairs and maintenance costs that do not
extend the useful life of the asset are expensed as incurred. The depreciation of our capital assets over their estimated useful lives, and
the determination of any salvage values, requires management to make judgments
about future events. Because we utilize many of our capital assets over
relatively long periods (20  30 years for our restaurant buildings), we
periodically evaluate whether adjustments to our estimated lives or salvage
values are necessary. The accuracy of these estimates affects the amount of
depreciation expense recognized in a period and, ultimately, the gain or loss
on the disposal of the asset. Historically, gains and losses on the
disposition of assets have not been significant. However, such amounts may
differ materially in the future based on restaurant performance, technological
obsolescence, regulatory requirements and other factors beyond our control. Due to the fact that we have invested a significant amount in the construction
or acquisition of new restaurants, we have risks that these assets will not
provide an acceptable return on our investment and an impairment of these
assets may occur. The accounting test for whether an asset held for use is
impaired involves first comparing the carrying value of the asset with its
estimated future undiscounted cash flows. If these cash flows do not exceed
the carrying value, the asset must be adjusted to its current fair value. We
periodically perform this test on each of our restaurants to evaluate whether
impairment exists. Factors influencing our judgment include the age of the
restaurant (new restaurants have significant start up costs which impede a
reliable measure of cash flow), estimation of future restaurant performance and
estimation of restaurant fair value. Due to the fact that we can specifically
evaluate impairment on a restaurant-by-restaurant basis, we have historically
been able to identify impaired restaurants and record the appropriate
adjustment. We utilize operating leases to finance a significant number of our restaurant
properties. Over the years, we have found these leasing arrangements to be
favorable from a cash flow and risk management standpoint. Such arrangements
typically shift the risk of loss on the residual value of the assets at the end
of the lease period to the lessor. 16




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The future commitments for operating leases are not reflected as a liability in
our balance sheet because the leases do not meet the accounting definition of
capital leases. The determination of whether a lease is accounted for as a
capital lease or an operating lease requires management to make estimates
primarily about the fair value of the asset and its estimated economic useful
life. We believe that we have a well-defined and controlled process for making
this evaluation. We have approximately $31 million of intangible assets on our balance sheet
resulting from the acquisition of businesses. New accounting standards adopted
in 2002 require that we review these intangible assets for impairment on an
annual basis and cease all goodwill amortization. The adoption of these new
rules did not result in an impairment of our recorded intangible assets. The
annual evaluation of intangible asset impairment requires the use of estimates
about the future cash flows of each of our reporting units to determine their
estimated fair values. Changes in forecasted operations and changes in
discount rates can materially affect these estimates. However, once an
impairment of intangible assets has been recorded, it cannot be reversed. Deferred Income Taxes: We record income tax liabilities utilizing known obligations and estimates of
potential obligations. A deferred tax asset or liability is recognized
whenever there are future tax effects from existing temporary differences and
operating loss and tax credit carryforwards. We record a valuation allowance
to reduce deferred tax assets to the balance that is more likely than not to be
realized. In evaluating the need for a valuation allowance, we must make
judgments and estimates on future taxable income, feasible tax planning
strategies and existing facts and circumstances. When we determine that
deferred tax assets could be realized in greater or lesser amounts than
recorded, the asset balance and income statement reflect the change in the
period such determination is made. We believe that the valuation allowance
recorded is adequate for the circumstances. However, changes in facts and
circumstances that affect our judgments or estimates in determining the proper
deferred tax assets or liabilities could materially affect the recorded
amounts. SEASONALITY Company revenues are subject to seasonal fluctuations. Customer counts (and
consequently revenues) are highest in the summer months and lowest during the
winter months because of the high proportion of restaurants located in states
where inclement weather adversely affects guest visits. FORWARD-LOOKING STATEMENTS This discussion contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are based on current expectations that are subject to known and
unknown risks, uncertainties and other factors that could cause actual results
to differ materially from those contemplated by the forward-looking statements.
Such factors include, but are not limited to, the following: general economic
conditions, competitive factors, consumer taste and preferences and adverse
weather conditions. The Company does not undertake to publicly update or
revise the forward-looking statements even if experience or future changes make
it clear that the projected results expressed or implied therein will not be
realized. 17




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the quantitative and qualitative market
risks of the Company since the prior reporting period. ITEM 4. CONTROLS AND PROCEDURES As of April 18, 2004, an evaluation was performed under the supervision
and with the participation of the Companys management, including the Chief
Executive Officer (CEO) and the Chief Financial Officer (CFO), of the
effectiveness of the design and operation of the Companys disclosure controls
and procedures (as defined in Rule 13a  15(e) under the Exchange Act). Based
on that evaluation, the Companys CEO and CFO concluded that the Companys
disclosure controls and procedures were effective as of April 18, 2004. 18




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PART II  OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - 31.1
    
    
    Principal Executive Officer Certification Pursuant to
Sarbanes-Oxley Act of 2002, Section 302.31.2
    
    
    Principal Financial Officer Certification Pursuant to
Sarbanes-Oxley Act of 2002, Section 302.
 (b) Reports on Form 8-K   The Company did not file any reports on Form
8-K during the quarter ended April 18, 2004. 19




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Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. THE RESTAURANT COMPANYDATE:
            June 2, 2004
        
        BY: /s/ Michael P. Donahoe
          Michael P. Donahoe
          Executive Vice President,
          Chief Financial Officer and Director
 20