##### Table of Contents



CONFORMED COPY  UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended July 11, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from ______________________ to ___________________. Commission file number 333-57925 The Restaurant Company  (Exact name of registrant as specified in its charter)
 Delaware
    
    62-1254388(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. employer identification no.)
 6075 Poplar Avenue, Suite 800, Memphis, TN
    
    38119(Address of principal executive offices)
    
    (Zip code)
 (901) 766-6400  (Registrants telephone number, including area code)
 Indicate by 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 ü No 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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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONCONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSPART II  OTHER INFORMATIONEX-10.14 AMENDMENT NO.7 TO REVOLVING CREDIT AGREEMENTEX-31.1 SECTION 302 CERTIFICATION OF THE PEOEX-31.2 SECTION 302 CERTIFICATION OF THE PFO    Table of Contents  
 PART I  FINANCIAL INFORMATION 
 
  
 Twelve
    
    Twelve
    
    Twenty-Eight
    
    Twenty-EightWeeks Ended
    
    Weeks Ended
    
    Weeks Ended
    
    Weeks EndedJuly 11, 2004
    
    July 13, 2003
    
    July 11, 2004
    
    July 13, 2003REVENUES:Food sales
    
    $
    72,500
    
    
    $
    72,286
    
    
    $
    171,255
    
    
    $
    166,018Franchise and other revenue
    
    
    5,172
    
    
    
    5,338
    
    
    
    11,534
    
    
    
    11,595Total Revenues
    
    
    77,672
    
    
    
    77,624
    
    
    
    182,789
    
    
    
    177,613COSTS AND EXPENSES:Cost of sales (excluding depreciation shown below):Food cost
    
    
    20,707
    
    
    
    20,814
    
    
    
    48,944
    
    
    
    47,253Labor and benefits
    
    
    25,098
    
    
    
    25,152
    
    
    
    59,572
    
    
    
    59,022Operating expenses
    
    
    15,061
    
    
    
    14,941
    
    
    
    35,087
    
    
    
    34,905General and administrative
    
    
    6,718
    
    
    
    6,870
    
    
    
    16,911
    
    
    
    15,787Depreciation and amortization
    
    
    3,884
    
    
    
    4,162
    
    
    
    9,050
    
    
    
    9,921Interest, net
    
    
    3,675
    
    
    
    3,774
    
    
    
    8,603
    
    
    
    9,044Provision for (benefit from) disposition of assets
    
    
    (81
    )
    
    
    53
    
    
    
    282
    
    
    
    55Asset write-down
    
    
    8
    
    
    
    150
    
    
    
    455
    
    
    
    150Other, net
    
    
    (109
    )
    
    
    (126
    )
    
    
    (268
    )
    
    
    (287
    )Total Costs and Expenses
    
    
    74,961
    
    
    
    75,790
    
    
    
    178,636
    
    
    
    175,850Income before income taxes
    
    
    2,711
    
    
    
    1,834
    
    
    
    4,153
    
    
    
    1,763Provision for income taxes
    
    
    (867
    )
    
    
    (396
    )
    
    
    (1,355
    )
    
    
    (382
    )NET INCOME
    
    $
    1,844
    
    
    $
    1,438
    
    
    $
    2,798
    
    
    $
    1,381
 The accompanying notes are an integral part of these consolidated statements. 2




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THE RESTAURANT COMPANY AND SUBSIDIARIES 
   July 11,2004
    
    December 28,(Unaudited)
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    7,895
    
    
    $
    4,962Restricted cash
    
    
    5,212
    
    
    
    4,808Receivables, less allowance for
doubtful accounts of $1,139 and $1,003
    
    
    9,267
    
    
    
    10,647Inventories, net
    
    
    7,359
    
    
    
    6,199Prepaid expenses and other current assets
    
    
    1,772
    
    
    
    1,597Deferred income taxes
    
    
    2,219
    
    
    
    2,219Total current assets
    
    
    33,724
    
    
    
    30,432PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization
    
    
    115,232
    
    
    
    118,848GOODWILL
    
    
    27,035
    
    
    
    27,035INTANGIBLE ASSETS, net of accumulated
amortization of $5,611 and $5,265
    
    
    3,707
    
    
    
    4,053DEFERRED INCOME TAXES
    
    
    9,097
    
    
    
    9,097OTHER ASSETS
    
    
    7,252
    
    
    
    6,857$
    196,047
    
    
    $
    196,322
 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 Par and Share Amounts) July 11,2004
    
    December 28,(Unaudited)
    
    2003LIABILITIES AND STOCKHOLDERS INVESTMENTCURRENT LIABILITIES:Current maturities of long-term debt and capital lease obligations
    
    $
    366
    
    
    $
    466Accounts payable
    
    
    7,348
    
    
    
    11,133Franchise advertising contributions
    
    
    4,296
    
    
    
    4,093Accrued expenses
    
    
    21,339
    
    
    
    21,164Total current liabilities
    
    
    33,349
    
    
    
    36,856CAPITAL LEASE OBLIGATIONS, less
current maturities
    
    
    717
    
    
    
    869LONG-TERM DEBT
    
    
    148,009
    
    
    
    148,009OTHER LIABILITIES
    
    
    7,886
    
    
    
    7,299STOCKHOLDERS INVESTMENT:Common stock, $.01 par value, 100,000 shares authorized,
10,820 issued and outstanding
    
    
    1
    
    
    
    1Other comprehensive income
    
    
    41
    
    
    
    42Accumulated earnings
    
    
    6,044
    
    
    
    3,246Total stockholders investment
    
    
    6,086
    
    
    
    3,289$
    196,047
    
    
    $
    196,322
 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 
  
 Twelve
    
    Twelve
    
    Twenty-Eight
    
    Twenty-EightWeeks Ended
    
    Weeks Ended
    
    Weeks Ended
    
    Weeks EndedJuly 11, 2004
    
    July 13, 2003
    
    July 11, 2004
    
    July 13, 2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,844
    
    
    $
    1,438
    
    
    $
    2,798
    
    
    $
    1,381Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    3,884
    
    
    
    4,162
    
    
    
    9,050
    
    
    
    9,921Accretion of Senior Discount Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7Other non-cash income and expense items
    
    
    150
    
    
    
    107
    
    
    
    373
    
    
    
    243Provision for (benefit from) disposition of assets
    
    
    (81
    )
    
    
    53
    
    
    
    282
    
    
    
    55Asset write-down
    
    
    8
    
    
    
    150
    
    
    
    455
    
    
    
    150Net changes in operating assets and liabilities
    
    
    (5,609
    )
    
    
    (1,174
    )
    
    
    (4,078
    )
    
    
    266Total adjustments
    
    
    (1,648
    )
    
    
    3,298
    
    
    
    6,082
    
    
    
    10,642Net cash provided by operating activities
    
    
    196
    
    
    
    4,736
    
    
    
    8,880
    
    
    
    12,023CASH FLOWS FROM INVESTING ACTIVITIES:Cash paid for property and equipment
    
    
    (4,403
    )
    
    
    (2,820
    )
    
    
    (7,602
    )
    
    
    (4,989
    )Proceeds from sale of assets held for disposition
    
    
    1,284
    
    
    
    
    
    
    
    1,770
    
    
    
    10Payments on notes receivable
    
    
    92
    
    
    
    28
    
    
    
    137
    
    
    
    229Net cash used in investing activities
    
    
    (3,027
    )
    
    
    (2,792
    )
    
    
    (5,695
    )
    
    
    (4,750
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from long-term debt
    
    
    
    
    
    
    3,750
    
    
    
    
    
    
    
    3,750Payments on long-term debt
    
    
    
    
    
    
    (8,853
    )
    
    
    
    
    
    
    (10,853
    )Principal payments under capital lease obligations
    
    
    (108
    )
    
    
    (149
    )
    
    
    (252
    )
    
    
    (349
    )Net cash used in financing activities
    
    
    (108
    )
    
    
    (5,252
    )
    
    
    (252
    )
    
    
    (7,452
    )Net (decrease) increase in cash and cash equivalents
    
    
    (2,939
    )
    
    
    (3,308
    )
    
    
    2,933
    
    
    
    (179
    )CASH AND CASH EQUIVALENTS:Balance, beginning of period
    
    
    10,834
    
    
    
    8,942
    
    
    
    4,962
    
    
    
    5,813Balance, end of period
    
    $
    7,895
    
    
    $
    5,634
    
    
    $
    7,895
    
    
    $
    5,634
 The accompanying notes are an integral part of these consolidated statements. 5




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THE RESTAURANT COMPANY AND SUBSIDIARIES 
   Organization The Restaurant Company (the Company, Perkins, or TRC) is a
wholly-owned subsidiary of The Restaurant Holding Corporation (RHC).
TRC conducts business under the name Perkins Restaurant and Bakery. TRC
is also the sole stockholder of TRC Realty LLC, The Restaurant Company of
Minnesota and Perkins Finance Corp. RHCs principal stockholders are
Donald N. Smith (Mr. Smith), TRCs Chairman and Chief Executive Officer,
and BancBoston Ventures, Inc. (BBV). Mr. Smith is also the Chairman of
Friendly Ice Cream Corporation (FICC), which operates and franchises
approximately 546 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 and second quarters ended on
April 18 and July 11, respectively. The third and fourth quarters of 2004
will end on 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 July 11,
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. Provision for Disposition of Assets and Asset Write-Down During the quarter ended July 11, 2004, the Company sold one property and
recorded a net gain of $81,000. The Company also completed the sale of one
property that was under contract on April 18, 2004. A loss of $356,000 on this
property was accrued in the first quarter. 6




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##### Table of Contents



During the first quarter of 2004, the Company sold one property and recorded a
net loss on the sale of approximately $7,000. Also, the Company determined
that impairment existed with respect to two Company-operated restaurants. This
determination was made based on the Companys projections that the future cash
flows of these restaurants would not exceed the present carrying value of the
assets. Accordingly, the Company recorded an impairment charge of $446,000 to
adjust the assets of these restaurants to net realizable value. Supplemental Cash Flow Information The increase or decrease in cash and cash equivalents due to changes in
operating assets and liabilities for the twelve and twenty-eight weeks ended
July l1 and July 13, consists of the following (in thousands): Twelve
    
    Twelve
    
    Twenty-Eight
    
    Twenty-EightWeeks Ended
    
    Weeks Ended
    
    Weeks Ended
    
    Weeks EndedJuly 11, 2004
    
    July 13, 2003
    
    July 11, 2004
    
    July 13, 2003(Increase) Decrease in:Receivables
    
    $
    3
    
    
    $
    (292
    )
    
    $
    522
    
    
    $
    941Inventories
    
    
    (913
    )
    
    
    93
    
    
    
    (1,160
    )
    
    
    (632
    )Prepaid expenses and
other current assets
    
    
    282
    
    
    
    283
    
    
    
    (175
    )
    
    
    (202
    )Other assets
    
    
    (247
    )
    
    
    (60
    )
    
    
    (48
    )
    
    
    236Increase (Decrease) in:Accounts payable
    
    
    (988
    )
    
    
    3,173
    
    
    
    (3,785
    )
    
    
    (2,351
    )Accrued expenses
    
    
    (3,989
    )
    
    
    (4,670
    )
    
    
    (19
    )
    
    
    2,065Other liabilities
    
    
    243
    
    
    
    299
    
    
    
    587
    
    
    
    209$
    (5,609
    )
    
    $
    (1,174
    )
    
    $
    (4,078
    )
    
    $
    266
 In addition, the Company converted $347,000 of accounts receivable to long-term
notes receivable during the quarter. Other supplemental cash flow information is as follows (in thousands): Twelve
    
    Twelve
    
    Twenty-Eight
    
    Twenty-EightWeeks Ended
    
    Weeks Ended
    
    Weeks Ended
    
    Weeks EndedJuly 11, 2004
    
    July 13, 2003
    
    July 11, 2004
    
    July 13, 2003Cash paid for interest
    
    $
    7,683
    
    
    $
    8,192
    
    
    $
    7,848
    
    
    $
    8,389Income taxes paid
    
    
    897
    
    
    
    42
    
    
    
    2,586
    
    
    
    117Income tax refunds received
    
    
    96
    
    
    
    23
    
    
    
    97
    
    
    
    59
 7




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Segment Reporting The following presents revenue and other financial information by business
segment for the twelve and twenty-eight weeks ended July 11 and July 13 (in
thousands): Restaurants
    
    Franchise
    
    Manufacturing
    
    Other
    
    TotalsTwelve weeks ended July 11, 2004:Revenue from
external customers
    
    $
    64,963
    
    
    $
    5,173
    
    
    $
    7,536
    
    
    $
    
    
    
    $
    77,672Intersegment revenue
    
    
    
    
    
    
    
    
    
    
    2,056
    
    
    
    
    
    
    
    2,056Segment profit (loss)
    
    
    6,867
    
    
    
    4,320
    
    
    
    1,329
    
    
    
    (10,672
    )
    
    
    1,844Twelve weeks ended July 13, 2003:Revenue from
external customers
    
    $
    64,373
    
    
    $
    5,236
    
    
    $
    7,913
    
    
    $
    102
    
    
    $
    77,624Intersegment revenue
    
    
    
    
    
    
    
    
    
    
    2,089
    
    
    
    
    
    
    
    2,089Segment profit (loss)
    
    
    5,578
    
    
    
    4,457
    
    
    
    1,964
    
    
    
    (10,561
    )
    
    
    1,438
 Restaurants
    
    Franchise
    
    Manufacturing
    
    Other
    
    TotalsTwenty-eight weeks ended July 11, 2004:Revenue from
external customers
    
    $
    154,055
    
    
    $
    11,534
    
    
    $
    17,200
    
    
    $
    
    
    
    $
    182,789Intersegment revenue
    
    
    
    
    
    
    
    
    
    
    4,772
    
    
    
    
    
    
    
    4,772Segment profit (loss)
    
    
    16,214
    
    
    
    9,833
    
    
    
    2,987
    
    
    
    (26,236
    )
    
    
    2,798Twenty-eight weeks ended July 13, 2003:Revenue from
external customers
    
    $
    149,228
    
    
    $
    11,358
    
    
    $
    16,790
    
    
    $
    237
    
    
    $
    177,613Intersegment revenue
    
    
    
    
    
    
    
    
    
    
    5,323
    
    
    
    
    
    
    
    5,323Segment profit (loss)
    
    
    11,473
    
    
    
    9,867
    
    
    
    3,919
    
    
    
    (23,878
    )
    
    
    1,381
 8




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##### Table of Contents



A reconciliation of other segment loss is as follows (in thousands): Twelve
    
    Twelve
    
    Twenty-Eight
    
    Twenty-EightWeeks Ended
    
    Weeks Ended
    
    Weeks Ended
    
    Weeks EndedJuly 11, 2004
    
    July 13, 2003
    
    July 11, 2004
    
    July 13, 2003General and administrative expenses
    
    $
    5,747
    
    
    $
    5,765
    
    
    $
    14,466
    
    
    $
    13,143Depreciation and amortization expenses
    
    
    554
    
    
    
    678
    
    
    
    1,311
    
    
    
    1,581Interest expense, net
    
    
    3,675
    
    
    
    3,774
    
    
    
    8,603
    
    
    
    9,044Provision for (benefit from) disposition of assets
    
    
    (81
    )
    
    
    53
    
    
    
    282
    
    
    
    55Asset write-down
    
    
    8
    
    
    
    150
    
    
    
    455
    
    
    
    150Provision for income taxes
    
    
    867
    
    
    
    396
    
    
    
    1,355
    
    
    
    382Other
    
    
    (98
    )
    
    
    (255
    )
    
    
    (236
    )
    
    
    (477
    )$
    10,672
    
    
    $
    10,561
    
    
    $
    26,236
    
    
    $
    23,878
 Revolving Credit Agreement As of July 11, 2004, the Company has a secured $25,000,000 revolving line of
credit facility (the Credit Facility) with a sub-limit for up to $7,500,000
of letters of credit. All amounts under the Credit Facility bear interest at
floating rates based on the agents base rate or Eurodollar rates as defined in
the agreement. All indebtedness under the Credit Facility is collateralized by
a first priority lien on substantially all of the assets of the Company. The
maturity date of the Credit Facility is January 1, 2005. Currently, the
Company is negotiating with several financial institutions to replace the
Credit Facility. The Company anticipates that these negotiations will be
completed before expiration of the Credit Facility. As of July 11, 2004, there
were no borrowings and approximately $5,481,000 of letters of credit
outstanding under the Credit Facility. At April 20, 2003, the Company failed to meet the criteria of one of the
financial covenants of the Credit Facility. On May 14, 2003, the Company
executed an amendment to the Credit Facility that waived the April 20, 2003
covenant violation, reduced the requirements of the financial covenants and
lowered the total amount available under the Credit Facility from $40,000,000
to $25,000,000. The Company executed an amendment to the Credit Facility on
March 25, 2004 that reduced the requirements of the financial covenants at the
end of the first quarter 2004 and thereafter. Effective June 16, 2004, the
Company executed an amendment to the Credit Facility that increased the
sub-limit of letters of credit from $5,000,000 to $7,500,000. As of July 11,
2004, the Company was in compliance with the requirements of the financial
covenants. Subsequent Event During the weekend of August 14, 2004, hurricane Charley struck central Florida
where the Company has a large concentration of stores. Currently, the Company
is compiling damage assessments from the storm. As of August 24,
2004, the Company estimates that the extent of property damage and
the loss of business income, net of any potential insurance
recoveries, will be approximately $250,000 to $300,000. 9




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##### Table of Contents



ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE PERIOD ENDED JULY 11, 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 July 11, 2004, the
Company owned and operated 155 and franchised 331 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 July 11, 2004, revenues from
Company-operated restaurants, Foxtail, and franchise and other accounted for
83.6%, 9.7% and 6.7% of total revenue, respectively. 10




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##### Table of Contents



A summary of the Companys results for the twelve and twenty-eight weeks ended
July 11, 2004 and July 13, 2003 are presented in the following table. All
revenues, costs and expenses are expressed as a percentage of total revenues. Twelve
    
    Twelve
    
    Twenty-Eight
    
    Twenty-EightWeeks Ended
    
    Weeks Ended
    
    Weeks Ended
    
    Weeks EndedJuly 11, 2004
    
    July 13, 2003
    
    July 11, 2004
    
    July 13, 2003Revenues:Food sales
    
    
    93.3
    %
    
    
    93.1
    %
    
    
    93.7
    %
    
    
    93.5
    %Franchise and other revenue
    
    
    6.7
    
    
    
    6.9
    
    
    
    6.3
    
    
    
    6.5Total Revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Costs and Expenses:Cost of sales (excluding depreciation shown below):Food cost
    
    
    26.7
    
    
    
    26.8
    
    
    
    26.8
    
    
    
    26.6Labor and benefits
    
    
    32.3
    
    
    
    32.4
    
    
    
    32.6
    
    
    
    33.2Operating expenses
    
    
    19.4
    
    
    
    19.2
    
    
    
    19.2
    
    
    
    19.7General and administrative
    
    
    8.6
    
    
    
    8.9
    
    
    
    9.3
    
    
    
    8.9Depreciation and amortization
    
    
    5.0
    
    
    
    5.4
    
    
    
    5.0
    
    
    
    5.6Interest, net
    
    
    4.7
    
    
    
    4.9
    
    
    
    4.7
    
    
    
    5.1Provision for (benefit from) disposition of assets
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    0.2
    
    
    
    Asset write-down
    
    
    
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.1Other, net
    
    
    (0.1
    )
    
    
    (0.3
    )
    
    
    (0.2
    )
    
    
    (0.2
    )Total Costs and Expenses
    
    
    96.5
    
    
    
    97.6
    
    
    
    97.8
    
    
    
    99.0Income before income taxes
    
    
    3.5
    
    
    
    2.4
    
    
    
    2.2
    
    
    
    1.0Provision for income taxes
    
    
    (1.1
    )
    
    
    (0.5
    )
    
    
    (0.7
    )
    
    
    (0.2
    )Net Income
    
    
    2.4
    %
    
    
    1.9
    %
    
    
    1.5
    %
    
    
    0.8
    %
 Net Income for the second quarter of 2004 was $1,844,000 versus net income of
$1,438,000 for the second quarter of 2003. For the year-to-date period ended
July 11, 2004, net income was $2,798,000 compared to $1,381,000 for the
year-to-date period ended July 13, 2003. 11




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Revenues: Total revenues for the second quarter of 2004 increased 0.1% from the prior
year second quarter. Year-to-date total revenues increased 2.9% over the prior
year-to-date period. This increase is primarily due to increased restaurant
sales. Same store comparable sales in Company-operated restaurants decreased
approximately 0.5% for the second quarter and increased approximately 1.9%
year-to-date. The decrease for the quarter is attributable to a decrease of
3.5% in comparable guest visits offset by an increase in the average guest
check of 3.0%. The year-to-date increase is attributable to a 4.1% increase in
the average guest check offset by a decrease of 2.2% 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 decreased approximately 4.8% from the prior year quarter
and increased 2.4% over the prior year-to-date period and constituted
approximately 9.7% and 9.4%, respectively, of the Companys total revenues.
The decrease for the quarter is primarily due to a decrease in sales to
customers within the Perkins system. Franchise revenue, composed primarily of franchise royalties, decreased 1.2%
over the second quarter of 2003 and increased 1.5% year-to-date. Royalty
revenues increased for the year-to-date period primarily due to an estimated
2.6% increase in franchise restaurant comparable sales partially offset by a
decrease in the average number of franchise restaurants. Since the second
quarter of 2003, the Companys franchisees have opened 8 restaurants and have
closed 20 restaurants. Costs and Expenses: Food cost: In terms of total revenues, food cost decreased 0.1 percentage points from the
second quarter of 2003 and increased 0.2 percentage points over the previous
year-to-date period. Restaurant food cost, as a percentage of restaurant sales,
decreased 0.5 percentage points for both the quarter and year-to-date periods
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 2.5 and 2.6 percentage points for
the quarter and year-to-date periods, respectively, 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 0.1
percentage points from the second quarter of 2003 and decreased 0.6 percentage
points for the year-to-date period ended July 11, 2004. 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 or improvements in labor productivity. 12




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Operating expenses: Expressed as a percentage of total revenues, operating expenses increased 0.2
percentage points for the second quarter and decreased 0.5 percentage points
for the year-to-date period. The increase for the quarter is primarily due to increases in operating
expenses at Foxtail. The decrease for the year-to-date period is primarily due
to decreases in the usage of restaurant supplies and in administrative expenses
at Company-operated restaurants. General and administrative: General and administrative expenses, as a percentage of total revenues,
decreased 0.3 percentage points compared to the second quarter of 2003 and
increased 0.4 percentage points over the year-to-date period. The decrease
during the quarter is primarily due to reduced home office expenses. The
year-to-date increase is primarily due to increased incentive costs. Depreciation and amortization: Depreciation and amortization expense decreased from 5.4 percent of sales in
the second quarter of 2003 to 5.0 percent of sales in 2004 and decreased from
5.6 percent of sales to 5.0 percent of sales for the year-to-date period ended
July 11, 2004 as compared to the same period in 2003. This decrease is
primarily due to the Companys reduction in capital spending since 2001. Interest, net: Interest expense, as a percentage of total revenue, decreased 0.2 and 0.4
percentage points compared to the second quarter and year-to-date periods of
2003, respectively, primarily due to a reduction in the overall borrowings by
the Company. Provision for Disposition of Assets and Asset Write-Down: During the quarter ended July 11, 2004, the Company sold one property and
recorded a net gain of $81,000. The Company also completed the sale of one
property that was under contract on April 18, 2004. A loss of $356,000 on this
property was accrued in the first quarter. During the first quarter of 2004, the Company sold one property and recorded a
net loss on the sale of approximately $7,000. Also, the Company determined
that impairment existed with respect to two Company-operated restaurants. This
determination was made based on the Companys projections that the future cash
flows of these restaurants would not exceed the present carrying value of the
assets. Accordingly, the Company recorded an impairment charge of $446,000 to
adjust the assets of these restaurants to net realizable value. Other, net: Other income, as a percentage of total revenue, decreased slightly compared to
the second 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 second quarter of 2004 were
$4,403,000 compared to $2,820,000 for the second quarter of 2003. Capital
expenditures in 2004 consisted primarily of capital required to remodel and
upgrade existing restaurants and expand operations at our manufacturing
facility. The Companys capital budget for 2004 is $15.0 million and includes plans to
open no new Company-operated restaurants. As of July 11, 2004, the Company has a secured $25,000,000 revolving line of
credit facility (the Credit Facility) with a sub-limit for up to $7,500,000
of letters of credit. All amounts under the Credit Facility bear interest at
floating rates based on the agents base rate or Eurodollar rates as defined in
the agreement. All indebtedness under the Credit Facility is collateralized by
a first priority lien on substantially all of the assets of the Company. The
maturity date of the Credit Facility is January 1, 2005. Currently, the
Company is negotiating with several financial institutions to replace the
Credit Facility. The Company anticipates that these negotiations will be
completed before expiration of the Credit Facility. As of July 11, 2004, there
were no borrowings and approximately $5,481,000 of letters of credit
outstanding under the Credit Facility. At April 20, 2003, we failed to meet the criteria of one of the financial
covenants of the Credit Facility. On May 14, 2003, the Company executed an
amendment to the Credit Facility that waived the April 20, 2003 covenant
violation, reduced the requirements of the financial covenants and lowered the
total amount available under the Credit Facility from $40,000,000 to
$25,000,000. The Company executed an amendment to the Credit Facility on March
25, 2004 that reduced the requirements of the financial covenants at the end of
the first quarter 2004 and thereafter. Effective June 16, 2004, the Company
executed an amendment to the Credit Facility that increased the sub-limit of
letters of credit from $5,000,000 to $7,500,000. As of July 11, 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 July 11, 2004
was $18,009,000. TRC is a wholly-owned subsidiary of RHC. The common shares of RHC not owned by
Mr. Smith are subject to an option requiring RHC to redeem the shares at any
time after December 22, 2004 at fair market value (the Put). As of July 11,
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 July 11, 2004, approximately
$21,700,000 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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##### Table of Contents



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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##### Table of Contents



Insurance Reserves: We are self-insured up to certain limits for costs associated with workers
compensation claims, property claims and benefits paid under employee health
care programs. At July 11, 2004 and December 28, 2003, we had total
self-insurance accruals reflected in our balance sheet of approximately $4.8
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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##### Table of Contents



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




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the quantitative and qualitative market
risks of the Company since the prior reporting period. ITEM 4. CONTROLS AND PROCEDURES As of July 11, 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 July 11, 2004. There have been no
significant changes in the Companys internal controls or in other factors that
could significantly affect internal controls subsequent to the date the Company
carried out its evaluation. 18




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##### Table of Contents



PART II  OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - 10.14
    
    
    Amendment No. 7 to Revolving Credit
Agreement, by and among The Restaurant Company, Fleet National Bank
and other lending institutions, Fleet National Bank as agent and
administrative agent and Bank of America, N.A. as syndication agent.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 July 11, 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: August 24, 2004
    
    BY: /s/ Michael P. Donahoe
Michael P. Donahoe
Executive Vice President,
Chief Financial Officer and Director
 20