UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q




(Mark One)





R
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the quarterly period ended October 5,
2008





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





Perkins
& Marie Callender’s Inc.





(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 Rwhether 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             R       No              0





Indicate
by R
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. Check one:





Large
      accelerated filer  £
              Accelerated
      filer £Non-accelerated
      filer  R (Do not
      check if a smaller reporting company)
              Smaller
      reporting company  £





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes             £       No              R





Number of
shares of common stock outstanding as of November 17, 2008: 10,820.













TABLE OF CONTENTS





PART I — FINANCIAL INFORMATION
                  PageItem 1. Financial Statements:Consolidated Statements of Operations (Unaudited) – Third
      Quarters and Year-to-Date PeriodsEnded October 5, 2008 and October 7, 2007
                  2Consolidated Balance Sheets – October 5, 2008 (Unaudited) and
      December 30, 2007
                  3Consolidated Statements of Cash Flows (Unaudited) –
      Year-to-Date Periods Ended October 5,2008  and October 7, 2007
                  5Consolidated Statements of Stockholder’s Investment (Unaudited)
      – For the Period from December31, 2006 through October 5, 2008
                  6Notes to Consolidated Financial Statements
      (Unaudited)
                  7Item 2. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
                  25Item 3. Quantitative and Qualitative Disclosures about
      Market Risk
                  46Item 4. Controls and Procedures
                  47PART II — OTHER INFORMATIONItem 1. Legal Proceedings
                  48Item 1a. Risk Factors
                  48Item 6. Exhibits
                  48SIGNATURE
                  49Ex-31.1 Section 302 Certification of the
      CEO
                    Ex-31.2 Section 302 Certification of the
      CFO
                    Ex-32.1 Section 906 Certification of the
      CEO
                    Ex-32.2 Section 906 Certification of the
      CFO





Table of Contents





PART I — FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS





PERKINS & MARIE CALLENDER’S INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)


(In
thousands)





Third
      Quarter
                                                  
                                                  
                                                  Third
      Quarter
                                                  
                                                  
                                                  Year-to-Date
                                                  
                                                  
                                                  Year-to-DateEnded
                                                  
                                                  
                                                  Ended
                                                  
                                                  
                                                  Ended
                                                  
                                                  
                                                  EndedOctober
      5, 2008
                                                  
                                                  
                                                  October
      7, 2007
                                                  
                                                  
                                                  October
      5, 2008
                                                  
                                                  
                                                  October
      7, 2007REVENUES:Food
      sales
                                                  
                                                  $
                                                  121,210
                                                  
                                                  
                                                  
                                                  124,031
                                                  
                                                  
                                                  
                                                  418,632
                                                  
                                                  
                                                  
                                                  415,621Franchise
      and other revenue
                                                  
                                                  
                                                  6,691
                                                  
                                                  
                                                  
                                                  7,281
                                                  
                                                  
                                                  
                                                  22,635
                                                  
                                                  
                                                  
                                                  24,087Total
      revenues
                                                  
                                                  
                                                  127,901
                                                  
                                                  
                                                  
                                                  131,312
                                                  
                                                  
                                                  
                                                  441,267
                                                  
                                                  
                                                  
                                                  439,708COSTS
      AND EXPENSES:Cost
      of sales (excluding depreciation shown below):Food
      cost
                                                  
                                                  
                                                  35,867
                                                  
                                                  
                                                  
                                                  35,379
                                                  
                                                  
                                                  
                                                  123,428
                                                  
                                                  
                                                  
                                                  116,387Labor
      and benefits
                                                  
                                                  
                                                  41,417
                                                  
                                                  
                                                  
                                                  42,700
                                                  
                                                  
                                                  
                                                  144,105
                                                  
                                                  
                                                  
                                                  143,069Operating
      expenses
                                                  
                                                  
                                                  34,240
                                                  
                                                  
                                                  
                                                  34,693
                                                  
                                                  
                                                  
                                                  115,361
                                                  
                                                  
                                                  
                                                  111,377General
      and administrative
                                                  
                                                  
                                                  10,612
                                                  
                                                  
                                                  
                                                  8,675
                                                  
                                                  
                                                  
                                                  35,727
                                                  
                                                  
                                                  
                                                  33,575Transaction
      costs
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  261
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,013Depreciation
      and amortization
                                                  
                                                  
                                                  5,741
                                                  
                                                  
                                                  
                                                  6,051
                                                  
                                                  
                                                  
                                                  19,111
                                                  
                                                  
                                                  
                                                  18,941Interest,
      net
                                                  
                                                  
                                                  8,568
                                                  
                                                  
                                                  
                                                  7,189
                                                  
                                                  
                                                  
                                                  26,871
                                                  
                                                  
                                                  
                                                  23,887Asset
      impairments and closed store expenses
                                                  
                                                  
                                                  61
                                                  
                                                  
                                                  
                                                  472
                                                  
                                                  
                                                  
                                                  614
                                                  
                                                  
                                                  
                                                  481Goodwill
      impairment
                                                  
                                                  
                                                  20,202
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  20,202
                                                  
                                                  
                                                  
                                                  -Loss
      on extinguishment of debt
                                                  
                                                  
                                                  2,952
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  2,952
                                                  
                                                  
                                                  
                                                  -Other,
      net
                                                  
                                                  
                                                  (27
                                                  )
                                                  
                                                  
                                                  (37
                                                  )
                                                  
                                                  
                                                  (117
                                                  )
                                                  
                                                  
                                                  277Total
      costs and expenses
                                                  
                                                  
                                                  159,633
                                                  
                                                  
                                                  
                                                  135,383
                                                  
                                                  
                                                  
                                                  488,254
                                                  
                                                  
                                                  
                                                  449,007Loss
      before income taxes and minority
      interest
                                                  
                                                  
                                                  (31,732
                                                  )
                                                  
                                                  
                                                  (4,071
                                                  )
                                                  
                                                  
                                                  (46,987
                                                  )
                                                  
                                                  
                                                  (9,299
                                                  )Benefit
      from (provision for) income taxes
                                                  
                                                  
                                                  1,260
                                                  
                                                  
                                                  
                                                  (109
                                                  )
                                                  
                                                  
                                                  938
                                                  
                                                  
                                                  
                                                  (109
                                                  )Minority
      interests
                                                  
                                                  
                                                  (5
                                                  )
                                                  
                                                  
                                                  (165
                                                  )
                                                  
                                                  
                                                  (81
                                                  )
                                                  
                                                  
                                                  (409
                                                  )NET
      LOSS
                                                  
                                                  $
                                                  (30,477
                                                  )
                                                  
                                                  
                                                  (4,345
                                                  )
                                                  
                                                  
                                                  (46,130
                                                  )
                                                  
                                                  
                                                  (9,817
                                                  )














The
accompanying notes are an integral part of these consolidated financial
statements.
 2
 Table of Contents





PERKINS & MARIE CALLENDER’S INC.


CONSOLIDATED
BALANCE SHEETS


(In
thousands)











October
      5,
                          
                          
                          December
      30,2008
                          
                          
                          2007ASSETS
                          
                          (Unaudited)CURRENT
      ASSETS:Cash
      and cash equivalents
                          
                          $
                          3,232
                          
                          
                          
                          19,032Restricted
      cash
                          
                          
                          7,594
                          
                          
                          
                          10,098Receivables,
      less allowances for doubtful accounts of $800
                            and
      $1,542 in 2008 and 2007, respectively
                          
                          
                          19,479
                          
                          
                          
                          17,221Inventories
                          
                          
                          15,676
                          
                          
                          
                          13,239Prepaid
      expenses and other current assets
                          
                          
                          6,007
                          
                          
                          
                          5,732Total
      current assets
                          
                          
                          51,988
                          
                          
                          
                          65,322PROPERTY
      AND EQUIPMENT, net of accumulated
                            depreciation
      and amortization of $121,990 and $109,441 in
                            2008
      and 2007, respectively
                          
                          
                          96,594
                          
                          
                          
                          99,311INVESTMENT
      IN UNCONSOLIDATED PARTNERSHIP
                          
                          
                          36
                          
                          
                          
                          53GOODWILL
                          
                          
                          9,836
                          
                          
                          
                          30,038INTANGIBLE
      ASSETS, net of accumulated amortization of
                            $19,393
      and $17,494 in 2008 and 2007, respectively
                          
                          
                          151,417
                          
                          
                          
                          153,316DEFERRED
      INCOME TAXES
                          
                          
                          535
                          
                          
                          
                          242OTHER
      ASSETS
                          
                          
                          19,283
                          
                          
                          
                          14,660TOTAL
      ASSETS
                          
                          $
                          329,689
                          
                          
                          
                          362,942











The
accompanying notes are an integral part of these consolidated financial
statements.
 3
 Table of Contents





PERKINS
& MARIE CALLENDER’S INC.


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except par and share amounts)











October
      5,
                        
                        
                        December
      30,2008
                        
                        
                        2007LIABILITIES
      AND STOCKHOLDER'S INVESTMENT
                        
                        (Unaudited)CURRENT
      LIABILITIES:Accounts
      payable
                        
                        $
                        24,065
                        
                        
                        
                        25,559Accrued
      expenses
                        
                        
                        37,678
                        
                        
                        
                        52,621Accrued
      income taxes
                        
                        
                        80
                        
                        
                        
                        -Franchise
      advertising contributions
                        
                        
                        5,675
                        
                        
                        
                        5,940Current
      maturities of long-term debt and capital lease obligations
                        
                        
                        379
                        
                        
                        
                        9,464Total
      current liabilities
                        
                        
                        67,877
                        
                        
                        
                        93,584CAPITAL
      LEASE OBLIGATIONS, less current maturities
                        
                        
                        13,801
                        
                        
                        
                        11,987LONG-TERM
      DEBT, less current maturities
                        
                        
                        321,601
                        
                        
                        
                        298,009DEFERRED
      RENT
                        
                        
                        14,921
                        
                        
                        
                        13,467OTHER
      LIABILITIES
                        
                        
                        15,247
                        
                        
                        
                        15,520MINORITY
      INTERESTS IN CONSOLIDATED PARTNERSHIPS
                        
                        
                        156
                        
                        
                        
                        333STOCKHOLDER'S
      INVESTMENT:Common
      stock, $.01 par value; 100,000 shares authorized;10,820
      issued and outstanding
                        
                        
                        1
                        
                        
                        
                        1Additional
      paid-in capital
                        
                        
                        150,146
                        
                        
                        
                        137,923Accumulated
      other comprehensive income
                        
                        
                        37
                        
                        
                        
                        86Accumulated
      deficit
                        
                        
                        (254,098
                        )
                        
                        
                        (207,968
                        )Total
      stockholder's investment
                        
                        
                        (103,914
                        )
                        
                        
                        (69,958
                        )TOTAL
      LIABILITIES AND STOCKHOLDER'S INVESTMENT
                        
                        $
                        329,689
                        
                        
                        
                        362,942














The
accompanying notes are an integral part of these consolidated financial
statements.
 4
 Table of Contents





PERKINS & MARIE CALLENDER’S INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


(In
thousands)





Year-to-Date
                      
                      
                      Year-to-DateEnded
                      
                      
                      EndedOctober
      5, 2008
                      
                      
                      October
      7, 2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                      
                      $
                      (46,130
                      )
                      
                      
                      (9,817
                      )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Depreciation
      and amortization
                      
                      
                      19,111
                      
                      
                      
                      18,941Asset
      impairment costs
                      
                      
                      987
                      
                      
                      
                      638Amortization
      of debt discount
                      
                      
                      291
                      
                      
                      
                      248Other
      non-cash income and expense items
                      
                      
                      (134
                      )
                      
                      
                      629Gain
      on disposition of assets
                      
                      
                      (373
                      )
                      
                      
                      (157
                      )Goodwill
      impairment
                      
                      
                      20,202
                      
                      
                      
                      -Loss
      on extinguishment of debt
                      
                      
                      2,952
                      
                      
                      
                      -Minority
      interests
                      
                      
                      81
                      
                      
                      
                      409Equity
      in net loss of unconsolidated partnership
                      
                      
                      17
                      
                      
                      
                      90Net
      changes in operating assets and liabilities
                      
                      
                      (16,043
                      )
                      
                      
                      (12,364
                      )Total
      adjustments
                      
                      
                      27,091
                      
                      
                      
                      8,434Net
      cash used in operating activities
                      
                      
                      (19,039
                      )
                      
                      
                      (1,383
                      )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                      
                      
                      (15,596
                      )
                      
                      
                      (22,554
                      )Proceeds
      from sale of assets
                      
                      
                      515
                      
                      
                      
                      3Net
      cash used in investing activities
                      
                      
                      (15,081
                      )
                      
                      
                      (22,551
                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from (repayment of) terminated revolver, net
                      
                      
                      (20,000
                      )
                      
                      
                      15,300Proceeds
      from New Revolver
                      
                      
                      8,604
                      
                      
                      
                      -Proceeds
      from Secured Notes, net of $7,537 discount
                      
                      
                      124,463
                      
                      
                      
                      -Repayment
      of Term Loan
                      
                      
                      (98,750
                      )
                      
                      
                      (750
                      )Repayment
      of capital lease obligations
                      
                      
                      (330
                      )
                      
                      
                      (549
                      )Proceeds
      from (repayment of) other debt
                      
                      
                      (15
                      )
                      
                      
                      1,925Debt
      financing costs
                      
                      
                      (9,903
                      )
                      
                      
                      -Lessor
      financing of new restaurants
                      
                      
                      2,286
                      
                      
                      
                      2,915Distributions
      to minority partners
                      
                      
                      (258
                      )
                      
                      
                      (228
                      )Contributions
      from parent and affiliates
                      
                      
                      12,500
                      
                      
                      
                      1,792Repurchase
      of equity ownership units in P&MC Holding LLC
                      
                      
                      (277
                      )
                      
                      
                      -Net
      cash provided by financing activities
                      
                      
                      18,320
                      
                      
                      
                      20,405NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                      
                      
                      (15,800
                      )
                      
                      
                      (3,529
                      )CASH
      AND CASH EQUIVALENTS:Balance,
      beginning of period
                      
                      
                      19,032
                      
                      
                      
                      9,069Balance,
      end of period
                      
                      $
                      3,232
                      
                      
                      
                      5,540








The
accompanying notes are an integral part of these consolidated financial
statements.
 5
 Table of Contents





PERKINS & MARIE CALLENDER’S INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDER’S INVESTMENT


(Unaudited)


(In
thousands)








AccumulatedAdditional
                                
                                
                                OtherCommon
                                
                                
                                Paid-in
                                
                                
                                Comprehensive
                                
                                
                                AccumulatedStock
                                
                                
                                Capital
                                
                                
                                Income
                                
                                
                                Deficit
                                
                                
                                TotalBalances
      at December 31, 2006
                                
                                $
                                1
                                
                                
                                
                                136,131
                                
                                
                                
                                13
                                
                                
                                
                                (191,816
                                )
                                
                                
                                (55,671
                                )Cumulative
      adjustment for adoption of FIN48
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                183
                                
                                
                                
                                183Capital
      contribution
                                
                                
                                -
                                
                                
                                
                                1,792
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,792Net
      loss
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (16,335
                                )
                                
                                
                                (16,335
                                )Currency
      translation adjustment
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                73
                                
                                
                                
                                -
                                
                                
                                
                                73Total
      comprehensive loss
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (16,262
                                )Balances
      at December 30, 2007
                                
                                
                                1
                                
                                
                                
                                137,923
                                
                                
                                
                                86
                                
                                
                                
                                (207,968
                                )
                                
                                
                                (69,958
                                )Capital
      contribution
                                
                                
                                -
                                
                                
                                
                                12,500
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                12,500Distribution of
      equity ownership units inP&MC Holding
      LLC
                                
                                
                                -
                                
                                
                                
                                (277
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (277
                                )Net
      loss
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (46,130
                                )
                                
                                
                                (46,130
                                )Currency
      translation adjustment
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (49
                                )
                                
                                
                                -
                                
                                
                                
                                (49
                                )Total
      comprehensive loss
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (46,179
                                )Balances
      at October 5, 2008
                                
                                $
                                1
                                
                                
                                
                                150,146
                                
                                
                                
                                37
                                
                                
                                
                                (254,098
                                )
                                
                                
                                (103,914
                                )








The
accompanying notes are an integral part of these consolidated financial
statements.
 6
 Table of Contents


PERKINS & MARIE CALLENDER’S INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)




(1)
Organization





Perkins
& Marie Callender’s Inc., together with its consolidated subsidiaries
(collectively, the “Company”, “we” or “us”), is a wholly-owned subsidiary of
Perkins & Marie Callender’s Holding Inc. Perkins & Marie Callender’s
Holding Inc. is a wholly-owned subsidiary of Perkins & Marie Callender’s
Holding Corp., which is a wholly-owned subsidiary of Perkins & Marie
Callender’s Holding LLC (“P&MC Holding LLC”), which is principally owned by
affiliates of castle Harlan, Inc. The Company is the sole equity holder of
Wilshire Restaurant Group, LLC.





The
Company operates two primary restaurant concepts: (1) full-service family dining
restaurants located primarily in the Midwest, Florida and Pennsylvania under the
name Perkins Restaurant and Bakery (“Perkins”) and (2) mid-priced, casual-dining
restaurants, specializing in the sale of pie and other bakery items, located
primarily in the western United States under the name Marie Callender’s
Restaurant and Bakery (“Marie Callender’s”).





Through
our bakery goods manufacturing segment (“Foxtail”), we also offer pies, muffin
batters, cookie doughs, pancake mixes, and other food products for sale to our
Perkins and Marie Callender’s Company-operated and franchised restaurants and to
food service distributors.





Wilshire
Restaurant Group, LLC owns 100% of the outstanding common stock of Marie
Callender Pie Shops, Inc. (“MCPSI”), a California corporation. MCPSI owns and
operates restaurants and has granted franchises under the name Marie Callender’s
and Marie Callender’s Grill. MCPSI also owns 100% of the outstanding common
stock of M.C. Wholesalers, Inc., a California corporation. M.C. Wholesalers,
Inc. operates a commissary that produces bakery goods. MCPSI also owns 100% of
the outstanding common stock of FIV Corp., a Delaware corporation that owns and
operates one restaurant under the name East Side Mario’s.





(2)
Basis of Presentation





The
consolidated interim financial statements included in this report have been
prepared by the Company without audit in accordance with U.S. generally accepted
accounting principles. In the opinion of the Company’s management, all
adjustments consisting only of normal recurring items necessary for a fair
presentation of the results of operations are reflected in these consolidated
interim financial statements. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. The most significant
estimates and assumptions underlying these financial statements and accompanying
notes generally involve royalty revenue recognition and provisions for related
uncollectible accounts, asset impairments, self-insurance accruals and valuation
allowances for income taxes.





The
results of operations for the interim period ended October 5, 2008 are not
necessarily indicative of operating results for the full year. The consolidated
interim financial statements contained herein should be read in conjunction with
the audited consolidated financial statements and notes contained in the
Company’s 2007 Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on March 27, 2008.





(3)
Accounting Reporting Period





Our
financial reporting is based on thirteen four-week periods ending on the last
Sunday in December. The first quarter each year includes four four-week periods,
and the second, third and fourth quarters each typically include three four-week
periods.  The first, second and third quarters of 2008 ended on April
20, July 13 and October 5, respectively.  The fourth quarter of 2008
will end on December 28.





(4)
Commitments, Contingencies and Concentrations





We are a
party to various legal proceedings in the ordinary course of business. We do not
believe it is likely that these proceedings, either individually or in the
aggregate, will have a material adverse effect on our consolidated financial
statements.


7
 Table of Contents








The
majority of our franchise revenues are generated from franchisees owning
individually less than five percent (5%) of total franchised restaurants, and,
therefore, the loss of any one of these franchisees would not have a material
impact on our results of operations.





As of
October 5, 2008, three Perkins franchisees otherwise unaffiliated with the
Company owned 91, or 29%, of the 317 franchised Perkins restaurants, consisting
of 43, 27 and 21 restaurants, respectively.  During the third quarter
of 2008, these three Perkins franchisees provided royalties and license fees of
$462,000, $348,000 and $359,000, respectively.  During the
year-to-date period ended October 5, 2008, these same three franchisees provided
royalties and license fees of $1,517,000, $1,131,000 and $1,179,000,
respectively.





As of
October 5, 2008, three Marie Callender’s franchisees otherwise unaffiliated with
the Company owned 13, or 31%, of the 42 franchised Marie Callender’s
restaurants, consisting of five, four and four restaurants, respectively. During
the third quarter of 2008, these three Marie Callender’s franchisees provided
royalties and license fees of $121,000, $101,000 and $72,000,
respectively.   During the year-to-date period ended October 5,
2008, these same three franchisees provided royalties and license fees of
$434,000, $369,000 and $244,000, respectively.





The
Company has arrangements with several different parties to whom territorial
rights were granted in exchange for specified payments. The Company makes
specified payments to those parties based on a percentage of gross sales from
certain Perkins restaurants and for new Perkins restaurants opened within those
geographic regions. During the third quarters of 2008 and 2007, we paid an
aggregate of $678,000 and $699,000, respectively, and during the year-to-date
periods of 2008 and 2007, we paid an aggregate of $2,160,000 and $2,185,000,
respectively, under such arrangements. Three such agreements are currently in
effect. Of these, one expires in the year 2075, one expires upon the death of
the beneficiary and the remaining agreement remains in effect as long as we
operate Perkins restaurants in certain states.





(5)
Supplemental Cash Flow Information





The
increase or decrease in cash and cash equivalents due to changes in operating
assets and liabilities for the year-to-date periods ended October 5, 2008 and
October 7, 2007 consists of the following (in thousands):








Year-to-Date
                        
                        
                        Year-to-DateEnded
                        
                        
                        EndedOctober
      5, 2008
                        
                        
                        October
      7, 2007Decrease
      (increase)  in:Receivables
                        
                        $
                        (2,176
                        )
                        
                        
                        (3,123
                        )Inventories
                        
                        
                        (2,437
                        )
                        
                        
                        (3,788
                        )Prepaid
      expenses and other current assets
                        
                        
                        (275
                        )
                        
                        
                        (1,710
                        )Other
      assets
                        
                        
                        2,071
                        
                        
                        
                        1,001Increase
      (decrease) in:Accounts
      payable
                        
                        
                        (1,538
                        )
                        
                        
                        5,114Accrued
      expenses and other current liabilities
                        
                        
                        (11,036
                        )
                        
                        
                        (9,908
                        )Other
      liabilities
                        
                        
                        (652
                        )
                        
                        
                        50Net
      changes in operating assets and liabilities
                        
                        $
                        (16,043
                        )
                        
                        
                        (12,364
                        )











8
 Table of Contents





(6)
Goodwill and Intangible Assets


Goodwill





We
account for our goodwill and other intangible assets in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and
Other Intangible Assets”(“SFAS No. 142”), which provides guidance regarding the recognition and
measurement of intangible assets, eliminates the amortization of certain
intangibles and requires assessments for impairment of intangible assets that
are not subject to amortization at least annually, or more frequently if events
or changes in circumstances indicate that the asset might be
impaired.





The
Company reviews the carrying amounts of goodwill at the reporting unit level. At
December 30, 2007, the Company had $30,038,000 of goodwill, of which $9,836,000
was attributable to restaurant operations, $18,538,000 was attributable to
franchise operations and $1,664,000 was attributable to the Foxtail
segment. The goodwill originated from the acquisition of the Company by
affiliates of Castle Harlan, Inc. in September 2005. Due to the decrease in
the Company’s operating results during 2008 compared to 2007 and the
decline in general economic conditions impacting the restaurant industry,
management conducted an interim goodwill impairment evaluation during the
quarter ended October 5, 2008. Fair values of the reporting
units were calculated using discounted future cash flows and market-based
comparative values.  Because the carrying values of the reporting
units in both the franchise and Foxtail segments exceeded their respective
fair values, the Company completed step two of the goodwill test and concluded
that goodwill was impaired as of October 5, 2008. Accordingly, in the
quarter ended October 5, 2008, the Company recorded a non-cash goodwill
impairment charge of $20,202,000, of which $18,538,000 was charged to the
franchise segment and $1,664,000 was charged to the Foxtail
segment.





The
following schedule presents the carrying amount of goodwill attributable to each
reportable operating segment and changes therein.





Restaurant
                            Operations
                          
                          
                          Franchise
                            Operations
                          
                          
                          Foxtail
                          
                          
                          Total
                            CompanyBalance
      as of December 30, 2007
                          
                          $
                          9,836
                          
                          
                          
                          18,538
                          
                          
                          
                          1,664
                          
                          
                          
                          30,038Goodwill
      impairment charge
                          
                          
                          —
                          
                          
                          
                          (18,538
                          )
                          
                          
                          (1,664
                          )
                          
                          
                          (20,202
                          )Balance
      as of October 5, 2008
                          
                          $
                          9,836
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          9,836





Intangible
Assets





Based on
the same indicators noted above, we reviewed all identifiable intangible assets
during the quarter ended October 5, 2008, and, based on the results of this
interim review, no intangible assets were considered impaired at October 5,
2008.





The
components of our identifiable intangible assets are as follows (in
thousands):





October
      5,
                              2008
                            
                            
                            December
      30,
                              2007Amortizing
      intangible assets:Franchise
      agreements
                            
                            $
                            35,000
                            
                            
                            
                            35,000Customer
      relationships
                            
                            
                            13,300
                            
                            
                            
                            13,300Acquired
      franchise rights
                            
                            
                            11,076
                            
                            
                            
                            11,076Design
      prototype
                            
                            
                            834
                            
                            
                            
                            834Subtotal
                            
                            
                            60,210
                            
                            
                            
                            60,210Less
      — accumulated amortization
                            
                            
                            (19,393
                            )
                            
                            
                            (17,494
                            )Total
      amortizing intangible assets
                            
                            
                            40,817
                            
                            
                            
                            42,716Nonamortizing
      intangible asset:Tradenames
                            
                            
                            110,600
                            
                            
                            
                            110,600Total
      intangible assets
                            
                            $
                            151,417
                            
                            
                            
                            153,316








9
 Table of Contents





(7)
Accrued Expenses





Accrued
expenses consisted of the following (in thousands):








October
      5,
                              2008
                            
                            
                            December
      30,
                              2007Payroll
      and related benefits
                            
                            $
                            13,981
                            
                            
                            
                            16,016Interest
                            
                            
                            997
                            
                            
                            
                            6,310Gift
      cards and gift certificates
                            
                            
                            5,221
                            
                            
                            
                            7,099Property,
      real estate and sales taxes
                            
                            
                            5,301
                            
                            
                            
                            4,325Management
      fees
                            
                            
                            894
                            
                            
                            
                            4,065Insurance
                            
                            
                            2,357
                            
                            
                            
                            1,539Advertising
                            
                            
                            780
                            
                            
                            
                            937Other
                            
                            
                            8,147
                            
                            
                            
                            12,330Total
      accrued expenses
                            
                            $
                            37,678
                            
                            
                            
                            52,621





(8)
Segment Reporting





We have
three reportable segments: restaurant operations, franchise operations, and
Foxtail. The restaurant operations include the operating results of
Company-operated Perkins and Marie Callender’s restaurants. The franchise
operations include revenues and expenses directly attributable to franchised
Perkins and Marie Callender’s restaurants. Foxtail’s operations consist of three
manufacturing plants: one in Corona, California and two in Cincinnati,
Ohio.





Restaurant
operations operate principally in the U.S. within the family dining and casual
dining industries, providing similar products to similar
customers.  Revenues from restaurant operations are derived
principally from food and beverage sales to external
customers.  Perkins and Marie Callender’s operations exhibit similar
operating characteristics, including food and labor costs which result in
similar long-term average gross margins.  Revenues from franchise
operations consist primarily of royalty income earned on the revenues generated
at franchisees’ restaurants and initial franchise fees.   The
revenue and cost structure of our Perkins and Marie Callender’s franchise
operations exhibit similar long-term operating
characteristics.  Revenues from Foxtail are generated by the sale of
food products to both Company-operated and franchised Perkins and Marie
Callender’s restaurants as well as to unaffiliated customers. Foxtail’s sales to
Company-operated restaurants are eliminated for reporting
purposes.  The revenues in the “other” segment are primarily licensing
revenues.








10
 Table of Contents





The
following table presents revenues and other financial information by business
segment (in thousands):


Third
      Quarter
                                
                                
                                Third
      Quarter
                                
                                
                                Year-to-Date
                                
                                
                                Year-to-DateEnded
                                
                                
                                Ended
                                
                                
                                Ended
                                
                                
                                EndedRevenues
                                
                                October
      5, 2008
                                
                                
                                October
      7, 2007
                                
                                
                                October
      5, 2008
                                
                                
                                October
      7, 2007Restaurant
      operations
                                
                                $
                                108,374
                                
                                
                                
                                112,376
                                
                                
                                
                                381,761
                                
                                
                                
                                381,624Franchise
      operations
                                
                                
                                5,631
                                
                                
                                
                                6,200
                                
                                
                                
                                18,800
                                
                                
                                
                                20,433Foxtail
                                
                                
                                16,133
                                
                                
                                
                                15,290
                                
                                
                                
                                49,599
                                
                                
                                
                                47,491Intersegment
      revenue
                                
                                
                                (3,297
                                )
                                
                                
                                (3,635
                                )
                                
                                
                                (12,728
                                )
                                
                                
                                (13,494
                                )Other
                                
                                
                                1,060
                                
                                
                                
                                1,081
                                
                                
                                
                                3,835
                                
                                
                                
                                3,654Total
                                
                                $
                                127,901
                                
                                
                                
                                131,312
                                
                                
                                
                                441,267
                                
                                
                                
                                439,708Segment net income (loss)Restaurant
      operations
                                
                                
                                4,639
                                
                                
                                
                                5,074
                                
                                
                                
                                18,244
                                
                                
                                
                                24,061Franchise
      operations
                                
                                
                                (13,411
                                )
                                
                                
                                5,579
                                
                                
                                
                                (1,327
                                )
                                
                                
                                18,525Foxtail
                                
                                
                                (2,901
                                )
                                
                                
                                901
                                
                                
                                
                                (4,786
                                )
                                
                                
                                3,441Other
                                
                                
                                (18,804
                                )
                                
                                
                                (15,899
                                )
                                
                                
                                (58,261
                                )
                                
                                
                                (55,844
                                )Total
                                
                                $
                                (30,477
                                )
                                
                                
                                (4,345
                                )
                                
                                
                                (46,130
                                )
                                
                                
                                (9,817
                                )


October 5,
                                              
                                              
                                              December
      30,Segment
      assets
                                              
                                              2008
                                              
                                              
                                              2007Restaurant
      operations
                                              
                                              
                                              133,510
                                              
                                              
                                              
                                              140,848Franchise
      operations
                                              
                                              
                                              103,119
                                              
                                              
                                              
                                              121,199Foxtail
                                              
                                              
                                              50,113
                                              
                                              
                                              
                                              42,329Other
                                              
                                              
                                              42,947
                                              
                                              
                                              
                                              58,566Total
                                              
                                              $
                                              329,689
                                              
                                              
                                              
                                              362,942






The
components of the other segment loss are as follows (in thousands):




Third
      Quarter
                                  
                                  
                                  Third
      Quarter
                                  
                                  
                                  Year-to-Date
                                  
                                  
                                  Year-to-DateEnded
                                  
                                  
                                  Ended
                                  
                                  
                                  Ended
                                  
                                  
                                  EndedOctober
      5, 2008
                                  
                                  
                                  October
      7, 2007
                                  
                                  
                                  October
      5, 2008
                                  
                                  
                                  October
      7, 2007General
      and administrative expenses
                                  
                                  $
                                  8,711
                                  
                                  
                                  
                                  7,679
                                  
                                  
                                  
                                  29,812
                                  
                                  
                                  
                                  29,807Depreciation
      and amortization expenses
                                  
                                  
                                  781
                                  
                                  
                                  
                                  1,173
                                  
                                  
                                  
                                  2,565
                                  
                                  
                                  
                                  3,218Interest
      expense, net
                                  
                                  
                                  8,568
                                  
                                  
                                  
                                  7,189
                                  
                                  
                                  
                                  26,871
                                  
                                  
                                  
                                  23,887Loss
      (gain) on disposition of assets, net
                                  
                                  
                                  (409
                                  )
                                  
                                  
                                  228
                                  
                                  
                                  
                                  (373
                                  )
                                  
                                  
                                  (157
                                  )Asset
      write-down
                                  
                                  
                                  470
                                  
                                  
                                  
                                  244
                                  
                                  
                                  
                                  987
                                  
                                  
                                  
                                  638Loss
      on extinguishment of debt
                                  
                                  
                                  2,952
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,952
                                  
                                  
                                  
                                  -Transaction
      costs
                                  
                                  
                                  -
                                  
                                  
                                  
                                  261
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,013Provision
      for (benefit from) income taxes
                                  
                                  
                                  (1,260
                                  )
                                  
                                  
                                  109
                                  
                                  
                                  
                                  (938
                                  )
                                  
                                  
                                  109Minority
      interests
                                  
                                  
                                  5
                                  
                                  
                                  
                                  165
                                  
                                  
                                  
                                  81
                                  
                                  
                                  
                                  409Licensing
      revenue
                                  
                                  
                                  (1,006
                                  )
                                  
                                  
                                  (1,052
                                  )
                                  
                                  
                                  (3,626
                                  )
                                  
                                  
                                  (3,374
                                  )Other
                                  
                                  
                                  (8
                                  )
                                  
                                  
                                  (97
                                  )
                                  
                                  
                                  (70
                                  )
                                  
                                  
                                  294Total
      other segment loss
                                  
                                  $
                                  18,804
                                  
                                  
                                  
                                  15,899
                                  
                                  
                                  
                                  58,261
                                  
                                  
                                  
                                  55,844





11
 Table of Contents





(9)
Long-Term Debt





Refinancing
Transaction





On
September 24, 2008, the Company issued $132,000,000 of 14% senior secured notes
(the "Secured Notes") and entered into a new $26,000,000 revolving credit
facility (the “New Revolver”) in connection with the refinancing of its then
existing $100,000,000 term loan and $40,000,000 revolver.  The
pre-existing credit agreement terminated upon the consummation of the
refinancing.  In connection with this transaction, we recognized a
loss of $2,952,000, representing the write-off of previously deferred financing
costs related to the terminated credit agreement.





Secured
Notes and 10% Senior Notes





The
Secured Notes were issued at a discount of $7,537,200, which will be accreted
using the interest method over the term of the Secured Notes.  The
Secured Notes will mature on May 31, 2013, and interest is payable semi-annually
on May 31 and November 30 of each year, commencing on May 31, 2009.




The
Secured Notes are fully and unconditionally guaranteed (the "Secured Notes
Guarantees") on a senior secured basis by the Company's parent, Perkins &
Marie Callender's Holding Inc., and each of the Company's existing and future
domestic wholly-owned subsidiaries (the “Secured Notes
Guarantors”).  The Secured Notes and the Secured Notes Guarantees are
the Company’s and the Secured Notes Guarantors’ senior secured obligations and
rank equal in right of payment to all of the Company’s and the Senior Notes
Guarantor’s existing and future senior indebtedness.  The Secured
Notes and the Secured Notes Guarantees are secured by a lien on substantially
all of the Company's and the Secured Notes Guarantors’ existing and future
assets, subject to certain exceptions.  Pursuant to the terms of an
intercreditor agreement, the foregoing liens are contractually subordinated to
the liens that secure the New Revolver.




Prior to
May 31, 2011, the Company may redeem up to 35% of the aggregate principal amount
of the Secured Notes with the net cash proceeds of certain equity offerings at a
premium specified in the indenture pertaining to the Secured Notes (the “Secured
Notes Indenture”).  Prior to May 31, 2011, the Company also may redeem
all or part of the Secured Notes at a “make whole” premium specified in the
Secured Notes Indenture.  On or after May 31, 2011, the Company may
redeem the Secured Notes at a 7% premium that decreases to a 0% premium on May
31, 2012.  If the Company experiences a change of control, the holders
have the right to require the Company to repurchase its Secured Notes at 101% of
the principal amount.  If the Company sells assets and does not use
the net proceeds for specified purposes, it may be required to use the net
proceeds to offer to repurchase the Secured Notes at 100% of the Notes principal
amount.  Any redemption or repurchase also requires the payment of any
accrued and unpaid interest through the redemption or repurchase
date.




In
September 2005, the Company issued $190,000,000 of unsecured 10% Senior Notes
(the “10% Senior Notes”). The 10% Senior Notes were issued at a discount of
$2,570,700, which is accreted using the interest method over the term of the 10%
Senior Notes. The 10% Senior Notes will mature on October 1, 2013, and interest
is payable semi-annually on April 1 and October 1 of each year. All consolidated
subsidiaries of the Company that are 100% owned provide joint and several, full
and unconditional guarantee of the 10% Senior Notes. There are no significant
restrictions on the Company’s ability to obtain funds from any of the guarantor
subsidiaries in the form of a dividend or a loan. Additionally, there are no
significant restrictions on a guarantor subsidiary’s ability to obtain funds
from the Company or its direct or indirect subsidiaries.




The
Secured Notes have not been registered for resale under the Securities Act of
1933, as amended (the "Securities Act"), or the securities laws of any
jurisdiction.  This Quarterly Report shall not constitute an offer to
sell or the solicitation of an offer to buy the Secured Notes.




Prior to
October 1, 2009, the Company may redeem all or part of the 10% Senior Notes at a
“make whole” premium specified in the indenture pertaining to the 10% Senior
Notes (the "10% Senior Indenture").  On or after October 1, 2009, the
Company may redeem the 10% Senior Notes at a 5% premium that steps down to a
2.5% premium on October 1, 2010 and a 0% premium on October 1, 2011 (and
thereafter).  If the Company experiences a change of control, the
holders have the right to require the Company to repurchase its 10% Senior Notes
at 101% of the principal amount.  If the Company sells assets and does
not use the net proceeds for specified purposes, it may be required to use the
net proceeds to offer to repurchase the 10% Senior Notes and certain other
existing pari-passu indebtedness of the Company at 100% of the principal amount
thereof.  Any redemption or repurchase also requires the payment of
any accrued and unpaid interest through the redemption or repurchase
date.


12
 Table of Contents




The
Secured Notes Indenture and the 10% Notes Indenture contain various customary
events of default, including, without limitation:  (i) nonpayment of
principal or interest; (ii) cross-defaults with certain other indebtedness;
(iii) certain bankruptcy related events; (iv) invalidity of guarantees; (v)
monetary judgment defaults; and (vi) certain change of control
events.  In addition, any impairment of the security interest in the
Secured Notes collateral shall constitute an event of default under the Secured
Notes Indenture.




New
Revolver




The New
Revolver, which matures on February 28, 2013, is guaranteed by Perkins &
Marie Callender's Holding Inc. and certain of the Company's existing and future
subsidiaries.  The New Revolver is secured by a first priority
perfected security interest in all of the Company's property and assets, and the
property and assets of each guarantor.  Subject to the satisfaction of
the conditions contained therein, up to $26,000,000 may be borrowed under the
New Revolver from time to time.  The New Revolver includes a
sub-facility for letters of credit in an amount not to exceed
$15,000,000.




Amounts
outstanding under the New Revolver bear interest, at the Company’s option, at a
rate per annum equal to either:  (i) the base rate, as defined in the
New Revolver, plus an applicable margin or (ii) a LIBOR-based equivalent, plus
an applicable margin.  For the foreseeable future, margins are
expected to be 325 basis points for base rate loans and 425 basis points for
LIBOR loans.  As of October 5, 2008, the average interest rate on
aggregate borrowings under the New Revolver was 8.25% and the New Revolver
permitted additional borrowings of approximately $6,571,000 (after giving effect
to $8,604,000 in borrowings and $10,825,000 in letters of credit
outstanding).  The letters of credit are primarily utilized in
conjunction with our workers’ compensation programs.




The
Company is required to make mandatory prepayments under the New Revolver with,
subject to certain exceptions: (i) the net cash proceeds from certain asset
sales or dispositions; (ii) the net cash proceeds of any debt issued by the
Company or its subsidiaries; (iii) 50% of the net cash proceeds of any equity
issuance by the Company, its parent or its subsidiaries; and (iv) the
extraordinary receipts received by the Company or its subsidiaries, consisting
of proceeds of judgments or settlements, certain indemnity payments and purchase
price adjustments received in connection with any purchase
agreement.  Any of the foregoing mandatory prepayments will result in
a corresponding permanent reduction in the maximum New Revolver
amount.




The New
Revolver contains various affirmative and negative covenants, including, but not
limited to a financial covenant to maintain at least $30,000,000 of trailing
13-period EBITDA, as defined in the New Revolver, and limits the Company’s
capital expenditures.




The
average interest rate on aggregate borrowings on October 5, 2008 was 11.6%
compared to the average interest rate on aggregate borrowings on October 7, 2007
of 9.4%.  The average interest rate on aggregate borrowings
outstanding during the quarter ended October 5, 2008 was 11.9% compared to the
average interest rate on aggregate borrowings outstanding during the quarter
ended October 7, 2007 of 10.3%.


Our debt
agreements place restrictions on the Company’s ability and the ability of its
subsidiaries to: (i) incur additional indebtedness or issue certain preferred
stock; (ii) repay certain indebtedness prior to stated maturities; (iii) pay
dividends or make other distributions on, redeem or repurchase capital stock or
subordinated indebtedness; (iv) make certain investments or other restricted
payments; (v) enter into transactions with affiliates; (vi) issue stock of
subsidiaries; (vii) transfer, sell or consummate a merger or consolidation of
all, or substantially all, of the Company's assets; (viii) change its line of
business; (ix) incur dividend or other payment restrictions with regard to
restricted subsidiaries; (x) create or incur liens on assets to secure debt;
(xi) dispose of assets; (xii) restrict distributions from subsidiaries; (xiii)
make certain acquisitions; (xiv) make capital expenditures; or (xv) amend the
terms of the Company's outstanding notes.  As of October 5, 2008, we
are in compliance with the financial covenants contained in our debt
agreements.


13
 Table of Contents





(10)
Income Tax





The
effective income tax rates for the third quarters ended October 5, 2008 and
October 7, 2007 were 4.0% and -2.7%, respectively.  Our rates differ
from the statutory rate primarily due to a valuation allowance against deferred
tax deductions, losses and credits.  At December 30, 2007 and October
5, 2008, the Company maintained a valuation allowance for substantially all of
its net deferred tax assets.  The effective income tax rate for the third
quarter and year-to-date period ended October 5, 2008 reflects $539,000 of
federal current and deferred tax benefit and $150,000 of state deferred tax
benefit offset by $25,000 of state current tax expense that cannot be offset by
losses and credits.  In addition, the income tax rate reflects the net
benefit of $261,000 and $336,000 of tax and interest, respectively, on expired
uncertain tax positions.





In March
2008, the Company filed a request with the Internal Revenue Service to resolve
$1.9 million of uncertain tax positions with respect to Marie Callender’s
historical taxable revenue and expense recognition; this request effectively
settled these uncertain tax positions.  There was no income statement
impact to the Company as a result of this settlement as any now-recognizable tax
benefits are fully offset by a valuation allowance.





Additionally,
in May 2008, the Company paid approximately $395,000 to the Internal Revenue
Service to settle certain other income tax positions taken on prior
filings.  The settlement and related payments had no impact to the
Company’s 2008 tax provision.





As of
October 5, 2008 and December 30, 2007 the Company had approximately $1,334,000
and $4,092,000, respectively, of unrecognized tax benefits that, if recognized,
would impact the Company’s effective tax rates.  In addition, as of
October 5, 2008 and December 30, 2007 the Company had $968,000 and $3,010,000,
respectively, of unrecognized tax benefits reducing federal and state net
operating loss carry forwards and federal credit carry forwards that, if
recognized, would be subject to a valuation allowance.  The Company
expects that the total amount of its gross unrecognized tax benefits will
decrease between $663,000 and $1,263,000 within the next 12 months due to
federal and state settlements and expiration of statutes.




(11)  P&MC
Holding LLC Equity Plan and Other Equity Transactions
 
 Equity
Plan
  Effective
April 1, 2007, P&MC Holding LLC established a management equity incentive
plan (the “Equity Plan”) for the benefit of key Company
employees.  The Equity Plan provides the following two types of equity
ownership in P&MC Holding LLC: (i) Strip Subscription Units, and (ii)
Incentive Units.
  Strip
Subscription Units:  During 2007, Strip Subscription Units aggregating
$1,768,000 were purchased from P&MC Holding LLC by certain Company
executives at fair value under the Equity Plan.  During 2008, the
Company repurchased certain units from Company executives at their then fair
value of $277,000.
  Incentive
Units:  During 2007, pursuant to the Equity Plan, Incentive Units were
granted to key employees. Incentive Units represent a subordinated unit interest
in P&MC Holding LLC.  The Incentive Units generally vest over four
years of continuous service and have no contractual term.  The Company
has determined the estimated fair value of the Incentive Units to be $0.01 at
their grant date after review and consideration of relevant information,
including discounted cash flow analyses, comparable market multiples and the
Company’s own estimates.
  Stock-based
employee compensation expense is charged by the Company based on the recognition
and measurement provisions of SFAS No. 123 (revised 2004), “Share-Based
Payment” and related interpretations.  Compensation expense related to
the units for the third quarter and year-to-date period ended October 5, 2008
was not material.
  If
the employee is employed as of the date of the occurrence of certain change in
control events, as defined in the Equity Plan, the employee’s outstanding, but
unvested Incentive Units shall vest simultaneously with the consummation of the
change in control event.  Upon termination of employment, unvested
Incentive Units are forfeited and vested Incentive Units and Strip Subscription
Units may be repurchased, at a price not to exceed fair value, pursuant to the
terms of P&MC Holding LLC’s unitholders agreement.
 14
 Table of Contents
  Other
Equity Transactions
  During
the quarter ended October 5, 2008, certain affiliates of Castle Harlan, Inc.
made a $4,000,000 payment to the lenders under our pre-existing revolving credit
facility in satisfaction of their guarantee under the March 2008 amendment to
the term loan. This amount became a subordinated obligation of the Company and,
immediately prior to the consummation of the refinancing, the obligation was
converted to equity. Also, during the quarter, we received an equity
contribution of $8,500,000 from our indirect parent, P&MC Holding
Corp.


(12)
Recent Accounting Pronouncements




The
following are recent accounting standards adopted or issued that could have an
impact on our Company:





Accounting
Principles Hierarchy





In
May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS
162”). SFAS 162 identifies the sources of accounting principles and the
framework for selecting the principles used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
GAAP. SFAS 162 is effective November 17, 2008. The Company anticipates that
the adoption of SFAS 162 will not have a material impact on its consolidated
financial statements.





Intangible
Assets





In April
2008, the FASB issued FASB Staff Position (“FSP”) 142-3, “Determination of the
Useful Life of Intangible Assets,” (“FSP No. 142-3”) which amends the factors
that should be considered in developing renewal or extension assumptions used in
determining the useful life of a recognized intangible asset. The requirement
for determining useful lives must be applied prospectively to intangible assets
acquired after the effective date and the disclosure requirements applied
prospectively to all intangible assets recognized as of, and subsequent to, the
effective date. FSP No. 142-3 is effective for fiscal years beginning after
December 15, 2008, which will require the Company to adopt these provisions
in the first quarter of 2009. The Company has reviewed this pronouncement and
does not anticipate that the adoption of FSP No. 142-3 will materially
impact its financial statements.





Business
Combinations





In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”
(“SFAS No. 141(R)”).  SFAS No. 141(R) establishes principles and
requirements for how an acquiring entity in a business combination recognizes
and measures the assets acquired and liabilities assumed in the transaction;
establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; and sets the disclosure requirements
regarding the information needed to evaluate and understand the nature and
financial effect of the business combination. This statement will be effective
prospectively for business combinations closing on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
Company is currently evaluating the provisions of this statement.




Noncontrolling
Interests in Consolidated Financial Statements





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No. 51.” This statement clarifies that a noncontrolling (minority) interest in a
subsidiary is an ownership interest in the entity that should be reported as
equity in the consolidated financial statements. It also requires consolidated
net income to include the amounts attributable to both the parent and
noncontrolling interest, with disclosure on the face of the consolidated income
statement of the amounts attributed to the parent and to the noncontrolling
interest. This statement will be effective prospectively for fiscal years
beginning after December 15, 2008, with presentation and disclosure
requirements applied retrospectively to comparative financial statements. The
Company is currently evaluating the provisions of this statement.





15
 Table of Contents




Fair
Value Measurement





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
("SFAS 157") which provides a single definition of fair value, together with a
framework for measuring it and requires additional disclosures about the use of
fair value to measure assets and liabilities. It also emphasizes that fair value
is a market-based measurement, not an entity-specific measurement, and sets out
a fair value hierarchy with the highest priority being quoted prices in active
markets. In February 2008, the FASB released FSP No. 157-2, “Effective Date of
FASB Statement No. 157,” (“FSP 157-2”) which delays the effective date of
SFAS 157 for all non-financial assets and non-financial liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually) to fiscal years beginning after
November 15, 2008. In accordance with FSP 157-2, we adopted SFAS 157 on January
1, 2008 only with respect to financial assets and liabilities. The adoption of
SFAS 157 did not have a material impact on our financial position, results of
operations or cash flows.  Our financial instruments, which are
reported at fair value, consist of long-term investments in marketable
securities that are held in trust for payment of non-qualified deferred
compensation.  Fair value for these investments is based on readily
available market prices.





(13)
Condensed Consolidated Financial Information





The
Company’s 10% Senior Notes and its Secured Notes were issued subject to a joint
and several, full and unconditional guarantee by all of the Company’s 100% owned
domestic subsidiaries. There are no significant restrictions on the Company’s
ability to obtain funds from any of the guarantor subsidiaries in the form of a
dividend or loan. Additionally, there are no significant restrictions on the
guarantor subsidiaries’ ability to obtain funds from the Company or its direct
or indirect subsidiaries.





The
following consolidating statements of operations, balance sheets and statements
of cash flows are provided for the parent company and all subsidiaries. The
information has been presented as if the parent company accounted for its
ownership of the guarantor and non-guarantor subsidiaries using the equity
method of accounting.





16
 Table of Contents








Consolidating
      Statement of Operations for the Third Quarter ended October 5, 2008
      (unaudited; in thousands):Parent
                                    
                                    
                                    Guarantor
                                    
                                    
                                    Non-
                                    
                                    
                                    
                                    
                                    
                                    ConsolidatedIssuer
                                    
                                    
                                    WRG
                                    
                                    
                                    Guarantors
                                    
                                    
                                    Eliminations
                                    
                                    
                                    PMCIREVENUES:Food
      sales
                                    
                                    $
                                    78,655
                                    
                                    
                                    
                                    37,068
                                    
                                    
                                    
                                    5,487
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    121,210Franchise
      and other revenue
                                    
                                    
                                    4,867
                                    
                                    
                                    
                                    1,824
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    6,691Total
      revenues
                                    
                                    
                                    83,522
                                    
                                    
                                    
                                    38,892
                                    
                                    
                                    
                                    5,487
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    127,901COSTS
      AND EXPENSES:Cost
      of sales (excluding depreciation shown below):Food
      cost
                                    
                                    
                                    23,373
                                    
                                    
                                    
                                    11,044
                                    
                                    
                                    
                                    1,450
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    35,867Labor
      and benefits
                                    
                                    
                                    25,766
                                    
                                    
                                    
                                    13,673
                                    
                                    
                                    
                                    1,978
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    41,417Operating
      expenses
                                    
                                    
                                    20,994
                                    
                                    
                                    
                                    11,112
                                    
                                    
                                    
                                    2,134
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    34,240General
      and administrative
                                    
                                    
                                    9,653
                                    
                                    
                                    
                                    959
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    10,612Depreciation
      and amortization
                                    
                                    
                                    4,151
                                    
                                    
                                    
                                    1,408
                                    
                                    
                                    
                                    182
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    5,741Interest,
      net
                                    
                                    
                                    8,328
                                    
                                    
                                    
                                    240
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    8,568Asset
      impairments and closed store expenses
                                    
                                    
                                    (246
                                    )
                                    
                                    
                                    286
                                    
                                    
                                    
                                    21
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    61Goodwill
      impairment
                                    
                                    
                                    20,202
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    20,202Loss
      on extinguishment of debt
                                    
                                    
                                    2,952
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,952Other,
      net
                                    
                                    
                                    (27
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (27
                                    )Total
      costs and expenses
                                    
                                    
                                    115,146
                                    
                                    
                                    
                                    38,722
                                    
                                    
                                    
                                    5,765
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    159,633Income
      (loss) before income taxes and
                                      minority
      interests
                                    
                                    
                                    (31,624
                                    )
                                    
                                    
                                    170
                                    
                                    
                                    
                                    (278
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (31,732
                                    )Benefit
      from income taxes
                                    
                                    
                                    1,260
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,260Minority
      interests
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (5
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (5
                                    )Equity
      in (loss) earnings of subsidiaries
                                    
                                    
                                    (113
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    113
                                    
                                    
                                    
                                    -NET
      (LOSS) INCOME
                                    
                                    $
                                    (30,477
                                    )
                                    
                                    
                                    170
                                    
                                    
                                    
                                    (283
                                    )
                                    
                                    
                                    113
                                    
                                    
                                    
                                    (30,477
                                    )








17
 Table of Contents








Consolidating
      Statement of Operations for the Third Quarter ended October 7, 2007
      (unaudited; in thousands):Parent
                            
                            
                            Guarantor
                            
                            
                            Non-
                            
                            
                            
                            
                            
                            ConsolidatedIssuer
                            
                            
                            WRG
                            
                            
                            Guarantors
                            
                            
                            Eliminations
                            
                            
                            PMCIREVENUES:Food
      sales
                            
                            $
                            77,629
                            
                            
                            
                            40,489
                            
                            
                            
                            5,913
                            
                            
                            
                            -
                            
                            
                            
                            124,031Franchise
      and other revenue
                            
                            
                            5,203
                            
                            
                            
                            2,078
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            7,281Total
      revenues
                            
                            
                            82,832
                            
                            
                            
                            42,567
                            
                            
                            
                            5,913
                            
                            
                            
                            -
                            
                            
                            
                            131,312COSTS
      AND EXPENSES:Cost
      of sales (excluding depreciation shown below):Food
      cost
                            
                            
                            21,873
                            
                            
                            
                            11,893
                            
                            
                            
                            1,613
                            
                            
                            
                            -
                            
                            
                            
                            35,379Labor
      and benefits
                            
                            
                            26,507
                            
                            
                            
                            14,123
                            
                            
                            
                            2,070
                            
                            
                            
                            -
                            
                            
                            
                            42,700Operating
      expenses
                            
                            
                            20,817
                            
                            
                            
                            11,939
                            
                            
                            
                            1,937
                            
                            
                            
                            -
                            
                            
                            
                            34,693General
      and administrative
                            
                            
                            7,853
                            
                            
                            
                            822
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            8,675Transaction
      costs
                            
                            
                            157
                            
                            
                            
                            104
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            261Depreciation
      and amortization
                            
                            
                            4,298
                            
                            
                            
                            1,618
                            
                            
                            
                            135
                            
                            
                            
                            -
                            
                            
                            
                            6,051Interest,
      net
                            
                            
                            6,946
                            
                            
                            
                            243
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            7,189Asset
      impairments and closed store expenses
                            
                            
                            (21
                            )
                            
                            
                            492
                            
                            
                            
                            1
                            
                            
                            
                            -
                            
                            
                            
                            472Other,
      net
                            
                            
                            (37
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (37
                            )Total
      costs and expenses
                            
                            
                            88,393
                            
                            
                            
                            41,234
                            
                            
                            
                            5,756
                            
                            
                            
                            -
                            
                            
                            
                            135,383Income
      (loss) before income taxes and
                              minority
      interests
                            
                            
                            (5,561
                            )
                            
                            
                            1,333
                            
                            
                            
                            157
                            
                            
                            
                            -
                            
                            
                            
                            (4,071
                            )Provision
      for income taxes
                            
                            
                            (109
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (109
                            )Minority
      interests
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (165
                            )
                            
                            
                            -
                            
                            
                            
                            (165
                            )Equity
      in earnings (loss) of subsidiaries
                            
                            
                            1,325
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (1,325
                            )
                            
                            
                            -NET
      (LOSS) INCOME
                            
                            $
                            (4,345
                            )
                            
                            
                            1,333
                            
                            
                            
                            (8
                            )
                            
                            
                            (1,325
                            )
                            
                            
                            (4,345
                            )
   18
 Table of Contents







Consolidating
      Statement of Operations for the Year-to-Date Period ended October 5, 2008
      (unaudited; in thousands):Parent
                            
                            
                            Guarantor
                            
                            
                            Non-
                            
                            
                            
                            
                            
                            ConsolidatedIssuer
                            
                            
                            WRG
                            
                            
                            Guarantors
                            
                            
                            Eliminations
                            
                            
                            PMCIREVENUES:Food
      sales
                            
                            $
                            265,576
                            
                            
                            
                            132,772
                            
                            
                            
                            20,284
                            
                            
                            
                            -
                            
                            
                            
                            418,632Franchise
      and other revenue
                            
                            
                            15,742
                            
                            
                            
                            6,893
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            22,635Total
      revenues
                            
                            
                            281,318
                            
                            
                            
                            139,665
                            
                            
                            
                            20,284
                            
                            
                            
                            -
                            
                            
                            
                            441,267COSTS
      AND EXPENSES:Cost
      of sales (excluding depreciation shownbelow):Food
      cost
                            
                            
                            77,739
                            
                            
                            
                            40,150
                            
                            
                            
                            5,539
                            
                            
                            
                            -
                            
                            
                            
                            123,428Labor
      and benefits
                            
                            
                            88,779
                            
                            
                            
                            48,194
                            
                            
                            
                            7,132
                            
                            
                            
                            -
                            
                            
                            
                            144,105Operating
      expenses
                            
                            
                            69,820
                            
                            
                            
                            38,363
                            
                            
                            
                            7,178
                            
                            
                            
                            -
                            
                            
                            
                            115,361General
      and administrative
                            
                            
                            31,688
                            
                            
                            
                            4,039
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            35,727Depreciation
      and amortization
                            
                            
                            13,672
                            
                            
                            
                            4,874
                            
                            
                            
                            565
                            
                            
                            
                            -
                            
                            
                            
                            19,111Interest,
      net
                            
                            
                            26,008
                            
                            
                            
                            863
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            26,871Asset
      impairments and closed store expenses
                            
                            
                            73
                            
                            
                            
                            490
                            
                            
                            
                            51
                            
                            
                            
                            -
                            
                            
                            
                            614Goodwill
      impairment
                            
                            
                            20,202
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            20,202Loss
      on extinguishment of debt
                            
                            
                            2,952
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            2,952Other,
      net
                            
                            
                            (117
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (117
                            )Total
      costs and expenses
                            
                            
                            330,816
                            
                            
                            
                            136,973
                            
                            
                            
                            20,465
                            
                            
                            
                            -
                            
                            
                            
                            488,254Income
      (loss) before income taxes and
                              minority
      interests
                            
                            
                            (49,498
                            )
                            
                            
                            2,692
                            
                            
                            
                            (181
                            )
                            
                            
                            -
                            
                            
                            
                            (46,987
                            )Benefit
      from income taxes
                            
                            
                            938
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            938Minority
      interests
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (81
                            )
                            
                            
                            -
                            
                            
                            
                            (81
                            )Equity
      in earnings (loss) of subsidiaries
                            
                            
                            2,430
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (2,430
                            )
                            
                            
                            -NET
      (LOSS) INCOME
                            
                            $
                            (46,130
                            )
                            
                            
                            2,692
                            
                            
                            
                            (262
                            )
                            
                            
                            (2,430
                            )
                            
                            
                            (46,130
                            )








19
 Table of Contents








Consolidating
      Statement of Operations for the Year-to-Date Period ended October 7, 2007
      (unaudited; in thousands):Parent
                            
                            
                            Guarantor
                            
                            
                            Non-
                            
                            
                            
                            
                            
                            ConsolidatedIssuer
                            
                            
                            WRG
                            
                            
                            Guarantors
                            
                            
                            Eliminations
                            
                            
                            PMCIREVENUES:Food
      sales
                            
                            $
                            256,391
                            
                            
                            
                            138,259
                            
                            
                            
                            20,971
                            
                            
                            
                            -
                            
                            
                            
                            415,621Franchise
      and other revenue
                            
                            
                            16,670
                            
                            
                            
                            7,417
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            24,087Total
      revenues
                            
                            
                            273,061
                            
                            
                            
                            145,676
                            
                            
                            
                            20,971
                            
                            
                            
                            -
                            
                            
                            
                            439,708COSTS
      AND EXPENSES:Cost
      of sales (excluding depreciation shown below):Food
      cost
                            
                            
                            70,547
                            
                            
                            
                            40,019
                            
                            
                            
                            5,821
                            
                            
                            
                            -
                            
                            
                            
                            116,387Labor
      and benefits
                            
                            
                            87,125
                            
                            
                            
                            49,032
                            
                            
                            
                            6,912
                            
                            
                            
                            -
                            
                            
                            
                            143,069Operating
      expenses
                            
                            
                            66,443
                            
                            
                            
                            37,829
                            
                            
                            
                            7,105
                            
                            
                            
                            -
                            
                            
                            
                            111,377General
      and administrative
                            
                            
                            29,293
                            
                            
                            
                            4,282
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            33,575Transaction
      costs
                            
                            
                            772
                            
                            
                            
                            241
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,013Depreciation
      and amortization
                            
                            
                            13,437
                            
                            
                            
                            4,683
                            
                            
                            
                            821
                            
                            
                            
                            -
                            
                            
                            
                            18,941Interest,
      net
                            
                            
                            23,061
                            
                            
                            
                            826
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            23,887Asset
      impairments and closed store expenses
                            
                            
                            (403
                            )
                            
                            
                            858
                            
                            
                            
                            26
                            
                            
                            
                            -
                            
                            
                            
                            481Other,
      net
                            
                            
                            (73
                            )
                            
                            
                            350
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            277Total
      costs and expenses
                            
                            
                            290,202
                            
                            
                            
                            138,120
                            
                            
                            
                            20,685
                            
                            
                            
                            -
                            
                            
                            
                            449,007Income
      (loss) before income taxes and
                              minority
      interests
                            
                            
                            (17,141
                            )
                            
                            
                            7,556
                            
                            
                            
                            286
                            
                            
                            
                            -
                            
                            
                            
                            (9,299
                            )Provision
      for income taxes
                            
                            
                            (109
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (109
                            )Minority
      interests
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (409
                            )
                            
                            
                            -
                            
                            
                            
                            (409
                            )Equity
      in earnings (loss) of subsidiaries
                            
                            
                            7,433
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (7,433
                            )
                            
                            
                            -NET
      (LOSS) INCOME
                            
                            $
                            (9,817
                            )
                            
                            
                            7,556
                            
                            
                            
                            (123
                            )
                            
                            
                            (7,433
                            )
                            
                            
                            (9,817
                            )








20
 Table of Contents




Consolidating
      Balance Sheet as of October 5, 2008 (unaudited; in
    thousands):Parent
                            
                            
                            Guarantor
                            
                            
                            Non-
                            
                            
                            
                            
                            
                            ConsolidatedIssuer
                            
                            
                            WRG
                            
                            
                            Guarantors
                            
                            
                            Eliminations
                            
                            
                            PMCIASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                            
                            $
                            2,415
                            
                            
                            
                            2,981
                            
                            
                            
                            (2,164
                            )
                            
                            
                            -
                            
                            
                            
                            3,232Restricted
      cash
                            
                            
                            7,594
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            7,594Receivables,
      less allowances for
                              doubtful
      accounts
                            
                            
                            13,293
                            
                            
                            
                            6,150
                            
                            
                            
                            36
                            
                            
                            
                            -
                            
                            
                            
                            19,479Inventories
                            
                            
                            10,759
                            
                            
                            
                            4,716
                            
                            
                            
                            201
                            
                            
                            
                            -
                            
                            
                            
                            15,676Prepaid
      expenses and other current assets
                            
                            
                            4,757
                            
                            
                            
                            1,239
                            
                            
                            
                            11
                            
                            
                            
                            -
                            
                            
                            
                            6,007Total
      current assets
                            
                            
                            38,818
                            
                            
                            
                            15,086
                            
                            
                            
                            (1,916
                            )
                            
                            
                            -
                            
                            
                            
                            51,988PROPERTY
      AND EQUIPMENT, net
                            
                            
                            67,616
                            
                            
                            
                            26,772
                            
                            
                            
                            2,206
                            
                            
                            
                            -
                            
                            
                            
                            96,594INVESTMENT
      IN
                              UNCONSOLIDATED
      PARTNERSHIP
                            
                            
                            -
                            
                            
                            
                            27
                            
                            
                            
                            9
                            
                            
                            
                            -
                            
                            
                            
                            36GOODWILL
                            
                            
                            9,836
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            9,836INTANGIBLE
      ASSETS, net
                            
                            
                            151,230
                            
                            
                            
                            187
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            151,417INVESTMENTS
      IN SUBSIDIARIES
                            
                            
                            (90,310
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            90,310
                            
                            
                            
                            -DUE
      FROM SUBSIDIARIES
                            
                            
                            94,554
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (94,554
                            )
                            
                            
                            -DEFERRED
      INCOME TAXES
                            
                            
                            535
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            535OTHER
      ASSETS
                            
                            
                            17,860
                            
                            
                            
                            1,213
                            
                            
                            
                            210
                            
                            
                            
                            -
                            
                            
                            
                            19,283TOTAL
      ASSETS
                            
                            $
                            290,139
                            
                            
                            
                            43,285
                            
                            
                            
                            509
                            
                            
                            
                            (4,244
                            )
                            
                            
                            329,689LIABILITIES
      AND STOCKHOLDER'S INVESTMENTCURRENT
      LIABILITIES:Accounts
      payable
                            
                            
                            16,136
                            
                            
                            
                            7,670
                            
                            
                            
                            259
                            
                            
                            
                            -
                            
                            
                            
                            24,065Accrued
      expenses
                            
                            
                            25,711
                            
                            
                            
                            10,696
                            
                            
                            
                            1,271
                            
                            
                            
                            -
                            
                            
                            
                            37,678Accrued
      income taxes
                            
                            
                            80
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            80Franchise
      advertising contributions
                            
                            
                            5,675
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            5,675Current
      maturities of long-term debt and
                              capital
      lease obligations
                            
                            
                            165
                            
                            
                            
                            214
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            379Total
      current liabilities
                            
                            
                            47,767
                            
                            
                            
                            18,580
                            
                            
                            
                            1,530
                            
                            
                            
                            -
                            
                            
                            
                            67,877CAPITAL
      LEASE OBLIGATIONS, less
                              current
      maturities
                            
                            
                            8,307
                            
                            
                            
                            5,494
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            13,801LONG-TERM
      DEBT, less currentmaturities
                            
                            
                            321,580
                            
                            
                            
                            21
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            321,601DEFERRED
      RENT
                            
                            
                            9,659
                            
                            
                            
                            5,185
                            
                            
                            
                            77
                            
                            
                            
                            -
                            
                            
                            
                            14,921OTHER
      LIABILITIES
                            
                            
                            6,740
                            
                            
                            
                            8,507
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            15,247DUE
      TO PARENT
                            
                            
                            -
                            
                            
                            
                            96,133
                            
                            
                            
                            (1,579
                            )
                            
                            
                            (94,554
                            )
                            
                            
                            -MINORITY
      INTERESTS IN
                              CONSOLIDATED
      PARTNERSHIPS
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            156
                            
                            
                            
                            -
                            
                            
                            
                            156-STOCKHOLDER'S
      INVESTMENT:Common
      stock
                            
                            
                            1
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1Preferred
      stock
                            
                            
                            -
                            
                            
                            
                            63,277
                            
                            
                            
                            -
                            
                            
                            
                            (63,277
                            )
                            
                            
                            -Capital
      in excess of par
                            
                            
                            -
                            
                            
                            
                            9,338
                            
                            
                            
                            -
                            
                            
                            
                            (9,338
                            )
                            
                            
                            -Additional
      paid-in capital
                            
                            
                            150,146
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            150,146Treasury
      stock
                            
                            
                            -
                            
                            
                            
                            (137
                            )
                            
                            
                            -
                            
                            
                            
                            137
                            
                            
                            
                            -Accumulated
      other comprehensive income
                            
                            
                            37
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            37Accumulated
      (deficit) earnings
                            
                            
                            (254,098
                            )
                            
                            
                            (163,113
                            )
                            
                            
                            325
                            
                            
                            
                            162,788
                            
                            
                            
                            (254,098
                            )Total stockholder's investment
                            
                            
                            (103,914
                            )
                            
                            
                            (90,635
                            )
                            
                            
                            325
                            
                            
                            
                            90,310
                            
                            
                            
                            (103,914
                            )TOTAL
      LIABILITIES AND
                              STOCKHOLDER'S
      INVESTMENT
                            
                            $
                            290,139
                            
                            
                            
                            43,285
                            
                            
                            
                            509
                            
                            
                            
                            (4,244
                            )
                            
                            
                            329,689


21
 Table of Contents




Consolidating
      Balance Sheet as of December 30, 2007 (in thousands):Parent
                            
                            
                            Guarantor
                            
                            
                            Non-
                            
                            
                            
                            
                            
                            ConsolidatedIssuer
                            
                            
                            WRG
                            
                            
                            Guarantors
                            
                            
                            Eliminations
                            
                            
                            PMCIASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                            
                            $
                            19,391
                            
                            
                            
                            428
                            
                            
                            
                            (787
                            )
                            
                            
                            -
                            
                            
                            
                            19,032Restricted
      cash
                            
                            
                            10,098
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            10,098Receivables,
      less allowances for
                              doubtful
      accounts
                            
                            
                            12,000
                            
                            
                            
                            5,180
                            
                            
                            
                            41
                            
                            
                            
                            -
                            
                            
                            
                            17,221Inventories
                            
                            
                            8,108
                            
                            
                            
                            4,839
                            
                            
                            
                            292
                            
                            
                            
                            -
                            
                            
                            
                            13,239Prepaid
      expenses and other current assets
                            
                            
                            5,053
                            
                            
                            
                            679
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            5,732Total
      current assets
                            
                            
                            54,650
                            
                            
                            
                            11,126
                            
                            
                            
                            (454
                            )
                            
                            
                            -
                            
                            
                            
                            65,322PROPERTY
      AND EQUIPMENT, net
                            
                            
                            66,956
                            
                            
                            
                            29,530
                            
                            
                            
                            2,825
                            
                            
                            
                            -
                            
                            
                            
                            99,311INVESTMENT
      IN
                              UNCONSOLIDATED
      PARTNERSHIP
                            
                            
                            -
                            
                            
                            
                            43
                            
                            
                            
                            10
                            
                            
                            
                            -
                            
                            
                            
                            53GOODWILL
                            
                            
                            30,038
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            30,038INTANGIBLE
      ASSETS, net
                            
                            
                            153,077
                            
                            
                            
                            239
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            153,316INVESTMENTS
      IN SUBSIDIARIES
                            
                            
                            (92,739
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            92,739
                            
                            
                            
                            -DUE
      FROM SUBSIDIARIES
                            
                            
                            89,283
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (89,283
                            )
                            
                            
                            -DEFERRED
      INCOME TAXES
                            
                            
                            242
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            242OTHER
      ASSETS
                            
                            
                            12,777
                            
                            
                            
                            (497
                            )
                            
                            
                            2,380
                            
                            
                            
                            -
                            
                            
                            
                            14,660TOTAL
      ASSETS
                            
                            $
                            314,284
                            
                            
                            
                            40,441
                            
                            
                            
                            4,761
                            
                            
                            
                            3,456
                            
                            
                            
                            362,942LIABILITIES
      AND STOCKHOLDER'S INVESTMENTCURRENT
      LIABILITIES:Accounts
      payable
                            
                            
                            16,369
                            
                            
                            
                            8,420
                            
                            
                            
                            770
                            
                            
                            
                            -
                            
                            
                            
                            25,559Accrued
      expenses
                            
                            
                            33,569
                            
                            
                            
                            17,221
                            
                            
                            
                            1,831
                            
                            
                            
                            -
                            
                            
                            
                            52,621Franchise
      advertising contributions
                            
                            
                            5,940
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            5,940Current
      maturities of long-term debt and
                              capital
      lease obligations
                            
                            
                            9,134
                            
                            
                            
                            330
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            9,464Total
      current liabilities
                            
                            
                            65,012
                            
                            
                            
                            25,971
                            
                            
                            
                            2,601
                            
                            
                            
                            -
                            
                            
                            
                            93,584CAPITAL
      LEASE OBLIGATIONS, less
                              current
      maturities
                            
                            
                            6,147
                            
                            
                            
                            5,840
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            11,987LONG-TERM
      DEBT, less current
                              maturities
                            
                            
                            297,972
                            
                            
                            
                            37
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            298,009DEFERRED
      RENT
                            
                            
                            7,827
                            
                            
                            
                            5,556
                            
                            
                            
                            84
                            
                            
                            
                            -
                            
                            
                            
                            13,467OTHER
      LIABILITIES
                            
                            
                            7,284
                            
                            
                            
                            8,235
                            
                            
                            
                            1
                            
                            
                            
                            -
                            
                            
                            
                            15,520DUE
      TO PARENT
                            
                            
                            -
                            
                            
                            
                            92,192
                            
                            
                            
                            (2,909
                            )
                            
                            
                            (89,283
                            )
                            
                            
                            -MINORITY
      INTERESTS IN
                              CONSOLIDATED
      PARTNERSHIPS
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            333
                            
                            
                            
                            -
                            
                            
                            
                            333-STOCKHOLDER'S
      INVESTMENT:Common
      stock
                            
                            
                            1
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1Preferred
      stock
                            
                            
                            -
                            
                            
                            
                            63,277
                            
                            
                            
                            -
                            
                            
                            
                            (63,277
                            )
                            
                            
                            -Capital
      in excess of par
                            
                            
                            -
                            
                            
                            
                            (177
                            )
                            
                            
                            9,515
                            
                            
                            
                            (9,338
                            )
                            
                            
                            -Additional
      paid-in capital
                            
                            
                            137,923
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            137,923Treasury
      stock
                            
                            
                            -
                            
                            
                            
                            (137
                            )
                            
                            
                            -
                            
                            
                            
                            137
                            
                            
                            
                            -Accumulated
      other comprehensive income
                            
                            
                            86
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            86Accumulated
      (deficit) earnings
                            
                            
                            (207,968
                            )
                            
                            
                            (160,353
                            )
                            
                            
                            (4,864
                            )
                            
                            
                            165,217
                            
                            
                            
                            (207,968
                            )Total
      stockholder's investment
                            
                            
                            (69,958
                            )
                            
                            
                            (97,390
                            )
                            
                            
                            4,651
                            
                            
                            
                            92,739
                            
                            
                            
                            (69,958
                            )TOTAL
      LIABILITIES AND
                              STOCKHOLDER'S
      INVESTMENT
                            
                            $
                            314,284
                            
                            
                            
                            40,441
                            
                            
                            
                            4,761
                            
                            
                            
                            3,456
                            
                            
                            
                            362,942


22
 Table of Contents




Consolidating
      Statement of Cash Flows for the Year-to-Date Period ended October 5, 2008
      (unaudited; in thousands):Parent
                                                    
                                                    
                                                    Guarantor
                                                    
                                                    
                                                    Non-
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    ConsolidatedIssuer
                                                    
                                                    
                                                    WRG
                                                    
                                                    
                                                    Guarantors
                                                    
                                                    
                                                    Eliminations
                                                    
                                                    
                                                    PMCICASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
                                                    
                                                    $
                                                    (46,130
                                                    )
                                                    
                                                    
                                                    2,692
                                                    
                                                    
                                                    
                                                    (262
                                                    )
                                                    
                                                    
                                                    (2,430
                                                    )
                                                    
                                                    
                                                    (46,130
                                                    )Adjustments
      to reconcile net (loss) income to net cashused in operating activities:Equity
      in the earnings of subsidiaries
                                                    
                                                    
                                                    (2,430
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    2,430
                                                    
                                                    
                                                    
                                                    -Depreciation
      and amortization
                                                    
                                                    
                                                    13,672
                                                    
                                                    
                                                    
                                                    4,874
                                                    
                                                    
                                                    
                                                    565
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    19,111Asset
      impairment costs
                                                    
                                                    
                                                    445
                                                    
                                                    
                                                    
                                                    491
                                                    
                                                    
                                                    
                                                    51
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    987Amortization
      of debt discount
                                                    
                                                    
                                                    291
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    291Other
      non-cash income and expense items
                                                    
                                                    
                                                    (206
                                                    )
                                                    
                                                    
                                                    72
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (134
                                                    )Gain
      on disposition of assets
                                                    
                                                    
                                                    (372
                                                    )
                                                    
                                                    
                                                    (1
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (373
                                                    )Goodwill
      impairment
                                                    
                                                    
                                                    20,202
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    20,202Loss
      on extinguishment of debt
                                                    
                                                    
                                                    2,952
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    2,952Minority
      interests
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    81
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    81Equity
      in net loss of unconsolidated partnership
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    17
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    17Net
      changes in operating assets and liabilities
                                                    
                                                    
                                                    (6,421
                                                    )
                                                    
                                                    
                                                    (8,956
                                                    )
                                                    
                                                    
                                                    (666
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (16,043
                                                    )Total
      adjustments
                                                    
                                                    
                                                    28,133
                                                    
                                                    
                                                    
                                                    (3,503
                                                    )
                                                    
                                                    
                                                    31
                                                    
                                                    
                                                    
                                                    2,430
                                                    
                                                    
                                                    
                                                    27,091Net
      cash used in operating activities
                                                    
                                                    
                                                    (17,997
                                                    )
                                                    
                                                    
                                                    (811
                                                    )
                                                    
                                                    
                                                    (231
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (19,039
                                                    )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                                                    
                                                    
                                                    (13,031
                                                    )
                                                    
                                                    
                                                    (2,343
                                                    )
                                                    
                                                    
                                                    (222
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (15,596
                                                    )Proceeds
      from sale of assets
                                                    
                                                    
                                                    515
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    515Net
      cash used in investing activities
                                                    
                                                    
                                                    (12,516
                                                    )
                                                    
                                                    
                                                    (2,343
                                                    )
                                                    
                                                    
                                                    (222
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (15,081
                                                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Repayment
      of terminated revolver, net
                                                    
                                                    
                                                    (20,000
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (20,000
                                                    )Proceeds
      from New Revolver
                                                    
                                                    
                                                    8,604
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    8,604Repayment
      of Term Loan
                                                    
                                                    
                                                    (98,750
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (98,750
                                                    )Repayment
      of capital lease obligations
                                                    
                                                    
                                                    (115
                                                    )
                                                    
                                                    
                                                    (215
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (330
                                                    )Proceeds
      from Secured Notes, net of $7,537 discount
                                                    
                                                    
                                                    124,463
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    124,463Proceeds
      from (repayment of) other debt
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (15
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (15
                                                    )Debt
      financing costs
                                                    
                                                    
                                                    (9,903
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (9,903
                                                    )Lessor
      financing of new restaurants
                                                    
                                                    
                                                    2,286
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    2,286Distributions
      to minority partners
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (258
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (258
                                                    )Intercompany
      financing
                                                    
                                                    
                                                    (5,271
                                                    )
                                                    
                                                    
                                                    10,001
                                                    
                                                    
                                                    
                                                    (4,730
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Contributions
      from parent and affiliates
                                                    
                                                    
                                                    12,500
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    12,500Repurchase
      of equity ownership units
                                                    
                                                    
                                                    (277
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (277
                                                    )Net
      cash provided by (used in) financing activities
                                                    
                                                    
                                                    13,537
                                                    
                                                    
                                                    
                                                    9,771
                                                    
                                                    
                                                    
                                                    (4,988
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    18,320Net
      (decrease) increase in cash and cash equivalents
                                                    
                                                    
                                                    (16,976
                                                    )
                                                    
                                                    
                                                    6,617
                                                    
                                                    
                                                    
                                                    (5,441
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (15,800
                                                    )CASH
      AND CASH EQUIVALENTS:Balance,
      beginning of period
                                                    
                                                    
                                                    19,391
                                                    
                                                    
                                                    
                                                    428
                                                    
                                                    
                                                    
                                                    (787
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    19,032Balance,
      end of period
                                                    
                                                    $
                                                    2,415
                                                    
                                                    
                                                    
                                                    7,045
                                                    
                                                    
                                                    
                                                    (6,228
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    3,232





23
 Table of Contents






Consolidating
      Statement of Cash Flows for the Year-to-Date Period ended October 7, 2007
      (unaudited; in thousands):Parent
                                          
                                          
                                          Guarantor
                                          
                                          
                                          Non-
                                          
                                          
                                          
                                          
                                          
                                          ConsolidatedIssuer
                                          
                                          
                                          WRG
                                          
                                          
                                          Guarantors
                                          
                                          
                                          Eliminations
                                          
                                          
                                          PMCICASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
                                          
                                          $
                                          (9,817
                                          )
                                          
                                          
                                          7,556
                                          
                                          
                                          
                                          (123
                                          )
                                          
                                          
                                          (7,433
                                          )
                                          
                                          
                                          (9,817
                                          )Adjustments
      to reconcile net (loss) income to net cashprovided by (used in) operating activities:Equity
      in the earnings of subsidiaries
                                          
                                          
                                          (7,433
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          7,433
                                          
                                          
                                          
                                          -Depreciation
      and amortization
                                          
                                          
                                          13,437
                                          
                                          
                                          
                                          4,683
                                          
                                          
                                          
                                          821
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          18,941Asset
      impairment costs
                                          
                                          
                                          144
                                          
                                          
                                          
                                          468
                                          
                                          
                                          
                                          26
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          638Amortization
      of debt discount
                                          
                                          
                                          248
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          248Other
      non-cash income and expense items
                                          
                                          
                                          487
                                          
                                          
                                          
                                          142
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          629Gain
      on disposition of assets
                                          
                                          
                                          (547
                                          )
                                          
                                          
                                          390
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (157
                                          )Minority
      interests
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          409
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          409Equity
      in net loss of unconsolidated partnerships
                                          
                                          
                                          -
                                          
                                          
                                          
                                          90
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          90Net
      changes in operating assets and liabilities
                                          
                                          
                                          (2,862
                                          )
                                          
                                          
                                          (9,078
                                          )
                                          
                                          
                                          (424
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (12,364
                                          )Total
      adjustments
                                          
                                          
                                          3,474
                                          
                                          
                                          
                                          (3,305
                                          )
                                          
                                          
                                          832
                                          
                                          
                                          
                                          7,433
                                          
                                          
                                          
                                          8,434Net
      cash (used in) provided by operating activities
                                          
                                          
                                          (6,343
                                          )
                                          
                                          
                                          4,251
                                          
                                          
                                          
                                          709
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (1,383
                                          )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                                          
                                          
                                          (18,272
                                          )
                                          
                                          
                                          (3,555
                                          )
                                          
                                          
                                          (727
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (22,554
                                          )Proceeds
      from sale of assets
                                          
                                          
                                          -
                                          
                                          
                                          
                                          3
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          3Net
      cash used in investing activities
                                          
                                          
                                          (18,272
                                          )
                                          
                                          
                                          (3,552
                                          )
                                          
                                          
                                          (727
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (22,551
                                          )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from terminated revolver, net
                                          
                                          
                                          15,300
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          15,300Repayment
      of Term Loan
                                          
                                          
                                          (750
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (750
                                          )Repayment
      of capital lease obligations
                                          
                                          
                                          (128
                                          )
                                          
                                          
                                          (421
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (549
                                          )Proceeds
      from (repayment of) other debt
                                          
                                          
                                          1,940
                                          
                                          
                                          
                                          (15
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,925Lessor
      financing of new restaurants
                                          
                                          
                                          2,915
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          2,915Distributions
      to minority partners
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (228
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (228
                                          )Intercompany
      financing
                                          
                                          
                                          5,077
                                          
                                          
                                          
                                          (4,816
                                          )
                                          
                                          
                                          (261
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Capital
      contribution
                                          
                                          
                                          1,792
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,792Net
      cash provided by (used in) financing activities
                                          
                                          
                                          26,146
                                          
                                          
                                          
                                          (5,252
                                          )
                                          
                                          
                                          (489
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          20,405Net
      increase (decrease) in cash and cash equivalents
                                          
                                          
                                          1,531
                                          
                                          
                                          
                                          (4,553
                                          )
                                          
                                          
                                          (507
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (3,529
                                          )CASH
      AND CASH EQUIVALENTS:Balance,
      beginning of period
                                          
                                          
                                          3,333
                                          
                                          
                                          
                                          7,158
                                          
                                          
                                          
                                          (1,422
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          9,069Balance,
      end of period
                                          
                                          $
                                          4,864
                                          
                                          
                                          
                                          2,605
                                          
                                          
                                          
                                          (1,929
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          5,540









24
 Table of Contents











ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





GENERAL





The
following discussion and analysis should be read in conjunction with and is
qualified in its entirety by reference to the consolidated financial statements
and accompanying notes of the Company included elsewhere in this Form 10-Q.
Except for historical information, the discussions in this section contain
forward-looking statements that involve risks and uncertainties. Future results
could differ materially from those discussed below. See “Information Concerning
Forward-Looking Statements.”





OUR
COMPANY





References
to the “Company,” “us” or “we” refer to Perkins & Marie Callender’s Inc. and
its consolidated subsidiaries.





The
Company operates two restaurant concepts: (1) full-service family dining
restaurants located primarily in the Midwest, Florida and Pennsylvania under the
name Perkins Restaurant and Bakery (“Perkins”), and (2) mid-priced,
casual-dining restaurants, specializing in the sale of pies and other bakery
items, located primarily in the western United States under the name Marie
Callender’s Restaurant and Bakery (“Marie Callender’s”).





Perkins
Restaurant & Bakery





Perkins,
founded in 1958, serves a variety of demographically and geographically diverse
customers for a wide range of dining occasions that are appropriate for the
entire family. Perkins has continued to adapt its menu, product offerings and
building décor to meet changing consumer preferences. As of October 5, 2008,
Perkins offered a full menu of over 90 assorted breakfast, lunch, dinner, snack
and dessert items ranging in price from $3.69 to $13.69, with an average guest
check of $8.67 at our Company-operated Perkins restaurants.  Perkins’
signature menu items include our omelettes, secret-recipe real buttermilk
pancakes, Mammoth Muffins, the Tremendous Twelve platter, salads, melt
sandwiches and Butterball turkey entrees. Breakfast items, which are available
throughout the day, account for approximately half of the entrees sold in our
Perkins restaurants.





Perkins
is a leading operator and franchisor of full-service family dining restaurants.
As of October 5, 2008, we operated 164 restaurants and franchised 317
restaurants to 106 franchisees in 31 states and in 5 Canadian provinces. The
footprint of our Company-operated Perkins restaurants extends over 13 states,
with a significant number of restaurants in Minnesota and Florida. Our
Company-operated Perkins restaurants generated average annual revenues of
$1,860,000, based on the trailing thirteen four-week periods ended October 5,
2008.





Perkins’
franchised restaurants operate pursuant to license agreements generally having
an initial term of 20 years and requiring both a royalty fee (4% of gross sales)
and an advertising contribution (3% of gross sales). Franchisees pay a
non-refundable license fee of $40,000 for each of their first two restaurants.
Franchisees opening their third and subsequent restaurants pay a license fee of
between $25,000 and $50,000 per restaurant depending on the level of assistance
provided by us in opening each restaurant. Typically, franchisees may terminate
license agreements upon a minimum of twelve months prior notice and upon payment
of specified liquidated damages. Franchisees do not typically have express
renewal rights.





For the
third quarters ended October 5, 2008 and October 7, 2007, average royalties
earned per franchised Perkins restaurant were approximately $15,100 and $15,700,
respectively.  The following number of Perkins’ license agreements
have expiration dates occurring during the next five years: 2008 — twelve; 2009
— twelve; 2010 —seventeen; 2011 — thirteen; and 2012 — six. Upon the expiration
of their license agreements, franchisees typically apply for and receive new
license agreements. Franchisees pay a license agreement renewal fee of $5,000 to
$7,500 depending on the length of the renewal term.








25
 Table of Contents





Marie
Callender’s Restaurant and Bakery





Marie
Callender’s is a mid-priced casual dining concept. Founded in 1948, it has one
of the longest operating histories within the full-service dining sector. Marie
Callender’s is known for serving quality food in a warm, pleasant atmosphere,
and for its premium pies that are baked fresh daily. As of October 5, 2008, the
Company offered a full menu of over 50 items ranging in price from $5.69 to
$17.99. Marie Callender’s signature menu items include pot pies, quiches, a
plentiful salad bar and Sunday brunch. Sales by day part are split evenly
between lunch and dinner.





Marie
Callender’s operates primarily in the western United States. As of October 5,
2008 we operated 91 Marie Callender’s restaurants and franchised 42 restaurants
to 25 franchisees located in four states and Mexico.  The footprint of
our Company-operated Marie Callender’s restaurants extends over nine states with
61 restaurants located in California. Our existing Company-operated restaurants
generated average annual revenues of $2,274,000, based on the trailing thirteen
four-week periods ended October 5, 2008. As of October 5, 2008, 129 restaurants
were operated under the “Marie Callender’s” name, one under the “Marie
Callender’s Grill” name, two under the “Callender’s Grill” name and one under
the “East Side Mario’s” name. The Company owns and operates 76 Marie Callender’s
restaurants, two Callender’s Grill restaurants, and the East Side Mario’s
restaurant (a mid-priced Italian restaurant operating in Lakewood,
California).  The Company also has an ownership interest in 12 Marie
Callender’s restaurants under partnership agreements, with a minority interest
in two of the partnership restaurants and a 57% to 95% ownership interest in the
remaining ten locations.  Franchisees owned and operated 41 Marie
Callender’s restaurants and the Marie Callender’s Grill.





Marie
Callender’s franchised restaurants operate pursuant to franchise agreements
generally having an initial term of 15 years, and requiring both a royalty fee
(normally 5% of gross sales) and, in most agreements, an advertising
contribution (normally 1% of gross sales).  Franchisees pay a
non-refundable initial franchise fee of $25,000 and a training fee of $35,000
prior to opening a restaurant. Franchisees typically have the right to renew the
franchise agreement for two terms of five years each. For the third quarters
ended October 5, 2008 and October 7, 2007, average royalties earned per
franchised restaurant were approximately $18,200 and $22,000,
respectively.  The following number of Marie Callender’s franchise
agreements have expiration dates occurring during the next five years: 2008 —
four; 2009 — none; 2010 — two; 2011 — one; and 2012 — four. Upon the expiration
of their franchise agreements, franchisees typically apply for and receive new
franchise agreements and pay a franchise agreement renewal fee of
$2,500.





Manufacturing





Foxtail
manufactures pies, pancake mixes, cookie doughs, muffin batters and other bakery
products for both our in-store bakeries and third-party
customers.  One manufacturing facility in Corona, California produces
pies and other bakery products to supply the Marie Callender’s restaurants, and
two facilities in Cincinnati, Ohio produce pies, pancake mixes, cookie doughs,
muffin batters and other bakery products to supply the Perkins
restaurants.  In recent years, less than ten percent (10%) of the
sales from the Corona, California plant have been to third-party customers,
whereas approximately fifty percent (50%) of the sales from the two Cincinnati,
Ohio plants have been to third-party customers.





KEY
FACTORS AFFECTING OUR RESULTS





The key
factors that affect our operating results are comparable restaurant sales, which
are described below, and our ability to manage operating expenses, such as food
cost, labor and benefits. Comparable restaurant sales is a measure of the
percentage increase or decrease of the sales at restaurants open at least
fifteen four-week periods. We do not use new restaurants in our calculation of
comparable restaurant sales until they are open at least fifteen periods in
order to allow a new restaurant’s operations time to stabilize and provide more
meaningful results.








26
 Table of Contents





Like much
of the restaurant industry, we view comparable restaurant sales as a key
performance metric, at the individual restaurant level, within regions and
throughout our Company. With our information systems, we monitor comparable
restaurant sales on a daily, weekly and monthly basis on a
restaurant-by-restaurant basis. The primary drivers of comparable restaurant
sales performance are changes in the average guest check and changes in the
number of customers, or customer count. Average guest check is primarily
affected by menu price changes and changes in the mix of items purchased by our
customers. We also monitor entree count, which we believe is indicative of
overall customer traffic patterns. To increase restaurant sales, we focus
marketing and promotional efforts on increasing customer visits and sales of
particular products. Restaurant sales performance is also affected by other
factors, such as food quality, the level and consistency of service within both
our Company-operated and franchised restaurants, the attractiveness and physical
condition of both our Company-operated and franchised restaurants, as well as
local and national competitive and economic factors.





In
comparison to the third quarter of 2007,  Perkins’ Company-operated
restaurants’ comparable sales decreased by 3.7% and Marie Callender’s
Company-operated restaurants’ comparable sales decreased by 8.6% during the
third quarter of 2008.  In comparison to the year-to-date period ended
October 7, 2007, Perkins’ Company-operated restaurants’ comparable sales
decreased by 2.4% and Marie Callender’s Company-operated restaurants’ comparable
sales decreased by 5.6% during the year-to-date period ended October 5,
2008.  These declines in comparable sales resulted primarily from
decreases in comparable guest counts at both concepts.  Management
believes the decline in comparable guest counts for both concepts is
attributable primarily to adverse economic conditions that are impacting the
restaurant industry, particularly in Florida for Perkins restaurants and in
California for Marie Callender’s restaurants.




SUMMARY
OF CRITICAL 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 for reviewing the application of our accounting
policies and for evaluating the appropriateness of the estimates that are
required to prepare the financial statements of our Company. 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 our restaurants is recognized when customers pay for products at the time of
sale. This revenue 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.  A $1,000,000 change in estimated franchise sales would
impact royalty revenue by $40,000 to $50,000.  Historically, these
adjustments have not been material.





Insurance
Reserves





We are
self-insured up to certain limits for costs associated with workers’
compensation claims, property claims and benefits paid under employee health
care programs. At October 5, 2008 and December 30, 2007, we had total
self-insurance accruals reflected in our consolidated balance sheets of
approximately $8,068,000 and $7,952,000, 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 the
workers’ compensation costs primarily through actuarial methods, which develop
estimates of the discounted 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 dates. We
account for benefits paid under employee health care programs using historical
claims information as the basis for estimating expenses incurred as of the
balance sheet dates. We believe the use of these 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 an appropriate basis.
Nevertheless, changes in health care costs, accident frequency and severity and
other factors, including discount rates, can materially affect estimates for
these liabilities.








27
 Table of Contents





Long-Lived
Tangible Assets





The
restaurant industry is capital intensive. We capitalize the cost of improvements
that extend the useful life of an asset. Repairs and maintenance costs that do
not extend the useful life of an asset are expensed as incurred.





The
depreciation of our capital assets over their estimated useful lives (or in the
case of leasehold improvements, the lesser of their estimated useful lives or
lease term) and the determination of any salvage values require management to
make judgments about future events. Because we utilize many of our capital
assets over relatively long periods, 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 significant amounts required for 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 perform this test on each of our
restaurants periodically and as indicators arise 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.





Leases





Future
commitments for operating leases are not reflected as a liability on our
consolidated balance sheets. The determination of whether a lease is accounted
for as a capital lease or as an operating lease requires management to make
estimates primarily about the fair value of the asset, its estimated economic
useful life and the incremental borrowing rate. We believe that we have a
well-defined and controlled process for making this evaluation.





Goodwill
and Intangibles





As of
October 5, 2008, we had approximately $161,253,000 of goodwill and intangible
assets on our consolidated balance sheet primarily resulting from an acquisition
in September 2005. We account for our goodwill and other intangible assets in
accordance with SFAS No. 142,“Goodwill and
Other Intangible Assets”, which provides guidance
regarding the recognition and measurement of intangible assets, eliminates the
amortization of certain intangibles and requires assessments for impairment of
intangible assets that are not subject to amortization at least annually, or
more frequently if events or changes in circumstances indicate that the asset
might be impaired. Our annual evaluation, performed as of year-end, or interim
evaluations when circumstances warrant, 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.




Due to
the decrease in the Company’s operating results during 2008 compared to 2007 and
the decline in general economic conditions impacting the restaurant industry,
management conducted an interim goodwill impairment evaluation during the
quarter ended October 5, 2008. Fair values of the reporting units were
calculated using discounted future cash flows and market-based comparative
values.  Because the carrying values of the reporting
units in both the franchise and Foxtail segments exceeded their respective
fair values, the Company completed step two of the goodwill test and concluded
that goodwill was impaired as of October 5, 2008. Accordingly, the Company
recorded a non-cash goodwill impairment charge of $20,202,000 in the quarter
ended October 5, 2008.   See Note 6 to the consolidated financial
statements included in this Form 10-Q.








28
 Table of Contents





Deferred
Income Taxes and Income Tax Uncertainties





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 carry forwards.  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 assets’ recorded amount is adjusted and the income statement is
either credited or charged, respectively, in the period during which the
determination is made.  We believe that the valuation allowance
recorded at October 5, 2008 is adequate for the
circumstances.  However, subsequent 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
balances.





The
Company’s accounting for uncertainty in income taxes prescribes a recognition
threshold and a measurement attribute for the financial statement recognition
and measurement of tax positions taken or expected to be taken in a tax
return.  For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing
authorities.  The amount recognized is measured as the largest amount
of benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement.








RESULTS
OF OPERATIONS





Seasonality





Sales
fluctuate seasonally and the Company’s fiscal quarters do not all have the same
time duration.  Specifically, the first quarter has an extra four weeks
compared to the other quarters of the fiscal year.  Historically, our
average weekly sales are highest in the fourth quarter (approximately October
through December), resulting primarily from holiday pie sales at both
Perkins and Marie Callender’s restaurants and Thanksgiving feast sales at Marie
Callender’s restaurants.  Therefore, the quarterly results are not
necessarily indicative of results that may be achieved for the full fiscal
year.  Factors influencing relative sales variability, in addition to
the holiday impact noted above, include the frequency and popularity of
advertising and promotions, the relative sales levels of new and closed
locations, other holidays and weather.





Overview





Our
revenues are derived primarily from restaurant operations, franchise royalties
and the sale of bakery products produced by Foxtail. Sales from Foxtail to
Company-operated restaurants are eliminated in the accompanying statements of
operations. Segment revenues as a percentage of total revenues were as
follows:











Percentage
      of Total RevenuesThird
      Quarter
                        
                        
                        Third
      Quarter
                        
                        
                        Year-to-Date
                        
                        
                        Year-to-DateEnded
                        
                        
                        Ended
                        
                        
                        Ended
                        
                        
                        EndedOctober
      5, 2008
                        
                        
                        October
      7, 2007
                        
                        
                        October
      5, 2008
                        
                        
                        October
      7, 2007Restaurant
      operations
                        
                        
                        84.8
                        %
                        
                        
                        85.6
                        %
                        
                        
                        86.5
                        %
                        
                        
                        86.8
                        %Franchise
      operations
                        
                        
                        4.4
                        %
                        
                        
                        4.7
                        %
                        
                        
                        4.3
                        %
                        
                        
                        4.7
                        %Foxtail
                        
                        
                        10.0
                        %
                        
                        
                        8.9
                        %
                        
                        
                        8.3
                        %
                        
                        
                        7.7
                        %Other
                        
                        
                        0.8
                        %
                        
                        
                        0.8
                        %
                        
                        
                        0.9
                        %
                        
                        
                        0.8
                        %Total
      revenues
                        
                        
                        100.0
                        %
                        
                        
                        100.0
                        %
                        
                        
                        100.0
                        %
                        
                        
                        100.0
                        %





29
 Table of Contents





The
following table reflects certain data for the third quarter ended October 5,
2008 compared to the comparable quarter ended October 7, 2007.  The
consolidated information is derived from the accompanying consolidated
statements of operations.  Data from the Company’s segments –
restaurant operations, franchise operations, Foxtail and other is included for
comparison.  The ratios presented reflect the underlying dollar values
expressed as a percentage of the applicable revenue amount (food cost as a
percentage of food sales; labor and benefits and operating expenses as a
percentage of total revenues in the restaurant operations and franchise
operations segments and as a percentage of food sales in the Foxtail
segment).  The food cost ratio in the consolidated results reflects
the elimination of intersegment food cost of $3,297,000 and $3,635,000 in the
third quarters of 2008 and 2007, respectively.








Consolidated
      Results
                              
                              
                              Restaurant
      Operations
                              
                              
                              Franchise
      OperationsThird
      Quarter Ended
                              
                              
                              Third
      Quarter Ended
                              
                              
                              Third
      Quarter EndedOctober
      5, 2008
                              
                              
                              October
      7, 2007
                              
                              
                              October
      5, 2008
                              
                              
                              October
      7, 2007
                              
                              
                              October
      5, 2008
                              
                              
                              October
      7, 2007Food
      sales
                              
                              $
                              124,507
                              
                              
                              
                              127,666
                              
                              
                              
                              108,374
                              
                              
                              
                              112,376
                              
                              
                              
                              -
                              
                              
                              
                              -Franchise
      and other revenue
                              
                              
                              6,691
                              
                              
                              
                              7,281
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              5,631
                              
                              
                              
                              6,200Intersegment
      revenue
                              
                              
                              (3,297
                              )
                              
                              
                              (3,635
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Total
      revenues
                              
                              
                              127,901
                              
                              
                              
                              131,312
                              
                              
                              
                              108,374
                              
                              
                              
                              112,376
                              
                              
                              
                              5,631
                              
                              
                              
                              6,200Food
      cost
                              
                              
                              29.6
                              %
                              
                              
                              28.5
                              %
                              
                              
                              26.2
                              %
                              
                              
                              26.5
                              %
                              
                              
                              0.0
                              %
                              
                              
                              0.0
                              %Labor
      and benefits
                              
                              
                              32.4
                              %
                              
                              
                              32.5
                              %
                              
                              
                              36.1
                              %
                              
                              
                              36.3
                              %
                              
                              
                              0.0
                              %
                              
                              
                              0.0
                              %Operating
      expenses
                              
                              
                              26.8
                              %
                              
                              
                              26.4
                              %
                              
                              
                              29.3
                              %
                              
                              
                              28.8
                              %
                              
                              
                              9.0
                              %
                              
                              
                              10.0
                              %Segment
      (loss) profit
                              
                              $
                              (30,477
                              )
                              
                              
                              (4,345
                              )
                              
                              
                              4,639
                              
                              
                              
                              5,074
                              
                              
                              
                              (13,411
                              )
                              
                              
                              5,579Foxtail
      (a)
                              
                              
                              Other
      (b)Third
      Quarter Ended
                              
                              
                              Third
      Quarter EndedOctober
      5, 2008
                              
                              
                              October
      7, 2007
                              
                              
                              October
      5, 2008
                              
                              
                              October
      7, 2007Food
      sales
                              
                              $
                              16,133
                              
                              
                              
                              15,290
                              
                              
                              
                              -
                              
                              
                              
                              -Franchise
      and other revenue
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,060
                              
                              
                              
                              1,081Intersegment
      revenue
                              
                              
                              (3,297
                              )
                              
                              
                              (3,635
                              )
                              
                              
                              -
                              
                              
                              
                              -Total
      revenues
                              
                              
                              12,836
                              
                              
                              
                              11,655
                              
                              
                              
                              1,060
                              
                              
                              
                              1,081Food
      cost
                              
                              
                              66.7
                              %
                              
                              
                              60.8
                              %
                              
                              
                              0.0
                              %
                              
                              
                              0.0
                              %Labor
      and benefits
                              
                              
                              14.0
                              %
                              
                              
                              12.9
                              %
                              
                              
                              7.0
                              %
                              
                              
                              -3.0
                              %Operating
      expenses
                              
                              
                              12.6
                              %
                              
                              
                              11.5
                              %
                              
                              
                              0.0
                              %
                              
                              
                              0.0
                              %Segment
      (loss) profit
                              
                              $
                              (2,901
                              )
                              
                              
                              901
                              
                              
                              
                              (18,804
                              )
                              
                              
                              (15,899
                              )





(a)
            The
      percentages for food cost, labor and benefits, and operating expenses, as
      presented above, represent manufacturing costs at
      Foxtail.  Foxtail’s selling, general and administrative expenses
      are included in general and administrative expenses in the Consolidated
      Statements of Operations and in the Foxtail segment profit or loss
      presented above.





(b)
            Licensing
      revenue of $1,006,000 and $1,052,000 for the third quarters of 2008 and
      2007, respectively, is included in the other segment revenues. The other
      segment loss includes corporate general and administrative expenses,
      interest expense and other non-operational expenses. For details of the
      other segment loss, see Note 8, “Segment Reporting” in the Notes to
      Consolidated Financial Statements.









30
 Table of Contents





The
following table reflects certain data for the year-to-date period ended October
5, 2008 compared to the comparable year-to-date period ended October 7,
2007.  The consolidated information is derived from the accompanying
consolidated statements of operations.  Data from the Company’s
segments – restaurant operations, franchise operations, Foxtail and other is
included for comparison.  The ratios presented reflect the underlying
dollar values expressed as a percentage of the applicable revenue amount (food
cost as a percentage of food sales; labor and benefits and operating expenses as
a percentage of total revenues in the restaurant operations and franchise
operations segments and as a percentage of food sales in the Foxtail
segment).  The food cost ratio in the consolidated results reflects
the elimination of intersegment food cost of $12,728,000 and $13,494,000 for the
year-to-date periods of 2008 and 2007, respectively.








Consolidated
      Results
                              
                              
                              Restaurant
      Operations
                              
                              
                              Franchise
      OperationsYear-to-Date
      Ended
                              
                              
                              Year-to-Date
      Ended
                              
                              
                              Year-to-Date
      EndedOctober
      5, 2008
                              
                              
                              October
      7, 2007
                              
                              
                              October
      5, 2008
                              
                              
                              October
      7, 2007
                              
                              
                              October
      5, 2008
                              
                              
                              October
      7, 2007Food
      sales
                              
                              $
                              431,360
                              
                              
                              
                              429,115
                              
                              
                              
                              381,761
                              
                              
                              
                              381,624
                              
                              
                              
                              -
                              
                              
                              
                              -Franchise
      and other revenue
                              
                              
                              22,635
                              
                              
                              
                              24,087
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              18,800
                              
                              
                              
                              20,433Intersegment
      revenue
                              
                              
                              (12,728
                              )
                              
                              
                              (13,494
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Total
      revenues
                              
                              
                              441,267
                              
                              
                              
                              439,708
                              
                              
                              
                              381,761
                              
                              
                              
                              381,624
                              
                              
                              
                              18,800
                              
                              
                              
                              20,433Food
      cost
                              
                              
                              29.5
                              %
                              
                              
                              28.0
                              %
                              
                              
                              26.9
                              %
                              
                              
                              26.8
                              %
                              
                              
                              0.0
                              %
                              
                              
                              0.0
                              %Labor
      and benefits
                              
                              
                              32.7
                              %
                              
                              
                              32.5
                              %
                              
                              
                              35.9
                              %
                              
                              
                              35.7
                              %
                              
                              
                              0.0
                              %
                              
                              
                              0.0
                              %Operating
      expenses
                              
                              
                              26.1
                              %
                              
                              
                              25.3
                              %
                              
                              
                              28.4
                              %
                              
                              
                              27.4
                              %
                              
                              
                              8.5
                              %
                              
                              
                              9.3
                              %Segment
      (loss) profit
                              
                              $
                              (46,130
                              )
                              
                              
                              (9,817
                              )
                              
                              
                              18,244
                              
                              
                              
                              24,061
                              
                              
                              
                              (1,327
                              )
                              
                              
                              18,525Foxtail
      (a)
                              
                              
                              Other
      (b)Year-to-Date
      Ended
                              
                              
                              Year-to-Date
      EndedOctober
      5, 2008
                              
                              
                              October
      7, 2007
                              
                              
                              October
      5, 2008
                              
                              
                              October
      7, 2007Food
      sales
                              
                              $
                              49,599
                              
                              
                              
                              47,491
                              
                              
                              
                              -
                              
                              
                              
                              -Franchise
      and other revenue
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              3,835
                              
                              
                              
                              3,654Intersegment
      revenue
                              
                              
                              (12,728
                              )
                              
                              
                              (13,494
                              )
                              
                              
                              -
                              
                              
                              
                              -Total
      revenues
                              
                              
                              36,871
                              
                              
                              
                              33,997
                              
                              
                              
                              3,835
                              
                              
                              
                              3,654Food
      cost
                              
                              
                              67.3
                              %
                              
                              
                              58.0
                              %
                              
                              
                              0.0
                              %
                              
                              
                              0.0
                              %Labor
      and benefits
                              
                              
                              13.4
                              %
                              
                              
                              13.7
                              %
                              
                              
                              6.7
                              %
                              
                              
                              8.1
                              %Operating
      expenses
                              
                              
                              11.0
                              %
                              
                              
                              10.6
                              %
                              
                              
                              0.0
                              %
                              
                              
                              0.0
                              %Segment
      (loss) profit
                              
                              $
                              (4,786
                              )
                              
                              
                              3,441
                              
                              
                              
                              (58,261
                              )
                              
                              
                              (55,844
                              )





(a)
            The
      percentages for food cost, labor and benefits, and operating expenses, as
      presented above, represent  manufacturing costs at
      Foxtail.  Foxtail’s selling, general and administrative expenses
      are included in general and administrative expenses in the Consolidated
      Statements of Operations and in the Foxtail segment profit or loss
      presented above.





(b)
            Licensing
      revenue of $3,626,000 and $3,374,000 for the year-to-date periods of 2008
      and 2007, respectively, is included in the other segment revenues. The
      other segment loss includes corporate general and administrative expenses,
      interest expense and other non-operational expenses. For details of the
      other segment loss, see Note 8, “Segment Reporting” in the Notes to
      Consolidated Financial Statements.





31
 Table of Contents





Quarter
Ended October 5, 2008 Compared to the Quarter Ended October 7, 2007





Restaurant
Operations Overview





The
operating results of the restaurant segment are impacted mainly by the following
industry-wide factors: competition, comparable store sales and guest counts,
restaurant openings and closings, labor and employee benefit expenses, commodity
prices, energy prices, governmental legislation, the general economy and
weather.





Total
restaurant segment revenues decreased by $4,002,000 in the third quarter of
2008, due primarily to comparable sales declines at both Perkins and Marie
Callender’s restaurants.  Since the end of the third quarter of 2007,
the Company has opened six new Perkins restaurants, acquired one Perkins
restaurant from a franchisee and closed two Perkins restaurants. The Company has
also closed two Marie Callender’s restaurants during the same time
period.





Perkins
restaurants’ comparable sales decreased by 3.7% and Marie Callender’s
restaurants’ comparable sales decreased by 8.6% in the third quarter of 2008 as
compared to the third quarter of 2007. These declines in comparable sales
resulted primarily from a decrease in comparable guest counts at both
concepts.  Management
believes the decline in comparable guest counts for both concepts is
attributable primarily to adverse economic conditions that are impacting the
restaurant industry, particularly in Florida for Perkins restaurants and in
California for Marie Callender’s restaurants.





Restaurant
segment income decreased by $435,000 in the third quarter of 2008 compared to a
year ago, primarily due to decreases in comparable store sales and guest counts
and increases in commodity costs, utilities and advertising expenses. Food cost,
as a percentage of food sales, decreased due primarily to better cost controls
and higher menu prices. Labor and benefits, as a percentage of total revenues,
decreased from 36.3% to 36.1% due to lower employee medical insurance costs.
Advertising expense increased due to increased local and regional marketing
efforts.





Franchise
Operations Overview





The
results of the franchise operations are mainly impacted by the same factors as
those impacting the Company’s restaurant segment, excluding the operating cost
factors since franchise segment income is earned primarily through royalty
revenues.




Franchise
revenues decreased by $569,000 in the third quarter of 2008 compared to the
prior year’s third quarter. During the third quarter of 2008, royalty revenue
decreased by $497,000 due to a decline in comparable customer counts and by
$72,000 due to lower franchise fees and renewal fees.




Franchise
segment profit decreased by $18,990,000 in the third quarter of 2008 compared to
the prior year’s third quarter due primarily to a non-cash goodwill impairment
charge of $18,538,000.  See Note 6 to our consolidated financial
statements contained herein.





Since the
end of the third quarter of 2007, Perkins’ franchisees have opened three
restaurants, closed eight restaurants and sold one restaurant to the Company.
Over the same time period, Marie Callender’s franchisees have opened one new
restaurant and closed four restaurants.





Foxtail
Overview





The
operating results of Foxtail are primarily impacted by the following factors:
external customer demand, labor and employee benefit expenses, commodity prices,
energy prices, governmental legislation, Perkins and Marie Callender’s
restaurant openings and closings, food safety requirements and the general
economy.





Foxtail’s
net revenues for the third quarter of 2008 increased $1,181,000 compared to the
third quarter of 2007 due primarily to sales to a new customer.  The
segment had a net loss of $2,901,000 in the third quarter of 2008 compared to a
$901,000 net profit in the third quarter of 2007, resulting primarily from
higher commodity costs, labor costs and sales allowances.




Foxtail
segment profit decreased by $3,802,000 in the third quarter of 2008 compared to
the prior year’s third quarter due primarily to a non-cash goodwill impairment
charge of $1,664,000 and increases in commodity and labor costs.  See
Note 6 to our consolidated financial statements contained
herein.





32
 Table of Contents




Revenues





Total
revenues decreased by $3,411,000 in the third quarter of 2008 compared to the
third quarter of 2007. The decrease was primarily due to decreases in sales of
$4,002,000 in the restaurant segment and $569,000 in the franchise segment
partially offset by a $1,181,000 increase in sales in the Foxtail
segment.





Restaurant
segment revenues of $108,374,000 and $112,376,000 in the third quarters of 2008
and 2007, respectively, accounted for 84.8% and 85.6% of total revenues,
respectively. The decrease in revenues resulted primarily from an overall 5.7%
decrease in comparable sales at Company-operated Perkins and Marie Callender’s
restaurants, partially offset by the operations of six new Perkins
Company-operated restaurants.





Franchise
segment revenues of $5,631,000 and $6,200,000 in the third quarters of 2008 and
2007, respectively, accounted for 4.4% and 4.7% of total revenues, respectively.
During the third quarter of 2008, royalty revenue decreased $497,000 due to a
decline in comparable customer counts and by $72,000 due to lower franchise fees
and renewal fees.





Foxtail’s
net revenues of $12,836,000 and $11,655,000 in the third quarters of 2008 and
2007, respectively, accounted for 10.0% and 8.9% of total revenues,
respectively.





Costs and
Expenses





Food
Cost





Consolidated
food cost was 29.6% and 28.5% of food sales in the third quarters of 2008 and
2007, respectively. This increase of 1.1% was due primarily to higher prices of
beef, pork, poultry, dairy products and flour.





Restaurant
segment food cost was 26.2% and 26.5% of food sales in the third quarters of
2008 and 2007, respectively, as the impact of higher commodity costs were fully
offset by menu price increases and improved store-level controls. In the Foxtail
segment, food cost increased to 66.7% from 60.8% of food sales in the third
quarters of 2008 and 2007, respectively, primarily due to higher dairy and
flour prices.





Labor
and Benefits Expenses





Consolidated
labor and benefits expenses were 32.4% and 32.5% of total revenues in the third
quarters of 2008 and 2007, respectively. Restaurant segment labor and benefits
decreased by 0.2% in 2008 due to lower employee medical insurance
costs.  Labor and benefits in the Foxtail segment increased by 1.1% in
2008 due primarily to higher seasonal contract labor costs.





Operating
Expenses





Total
operating expenses of $34,240,000 in the third quarter of 2008 decreased by
$453,000 as compared to the third quarter of 2007. However, due to the decrease
in total revenues, total operating expenses increased, as a percentage of total
revenues, to 26.8% from 26.4% in the third quarters of 2008 and 2007,
respectively.  Approximately 92.6% and 93.2% of total operating
expenses in the third quarters of 2008 and 2007, respectively, were incurred in
the restaurant segment. The most significant components of operating expenses
were rent, utilities, advertising, restaurant supplies, repair and maintenance
and property taxes. In the restaurant segment, operating expenses, as a
percentage of restaurant food sales, increased by 0.5% in the third quarter of
2008 due primarily to increased utilities costs. Operating expenses in the
Foxtail segment increased by approximately $277,000, due
primarily to higher custodial services costs resulting from a 2008 outsourcing
arrangement and from higher repairs and maintenance costs.





General
and Administrative Expenses





The most
significant components of general and administrative (“G&A”) expenses were
corporate labor and benefits, occupancy costs and outside services. G&A
expenses were 8.3% and 6.6% of total revenues in the third quarters of 2008 and
2007, respectively.  The
increase in 2008 is due primarily to higher marketing costs at Foxtail and
increased consulting costs.





33
 Table of Contents




Transaction
Costs





The
Company has classified certain expenses directly attributable to prior
acquisitions and combinations and certain non-recurring expenses incurred as a
result of prior acquisitions and combinations as transaction costs on the
consolidated statements of operations. There were no transaction costs incurred
in the third quarter of 2008. In the third quarter of 2007, there was $261,000
of transaction costs.





Depreciation
and Amortization





Depreciation
and amortization expense was $5,741,000 and $6,051,000 in the third quarters of
2008 and 2007, respectively.




Interest,
net





Interest,
net was $8,568,000 (6.7% of total revenues) in the third quarter of 2008
compared to $7,189,000 (5.5% of total revenues) in the third quarter of 2007.
This increase was primarily due to an increase in the average effective interest
rate to 11.9% from 10.3% and an approximate $8,400,000 increase in the average
debt outstanding during the third quarter of 2008 as compared to the third
quarter of 2007.





Loss
on extinguishment of debt





In
connection with the September 2008 refinancing transaction (see “Capital
Resources and Liquidity”), we terminated our pre-existing credit agreement and
consequently incurred a $2,952,000 loss resulting from the write-off of deferred
financing costs related to that agreement.





Goodwill
and Intangible Asset Impairment




The
Company reviews the carrying amounts of goodwill at the reporting unit level. At
December 30, 2007, the Company had $30,038,000 of goodwill, of which $9,836,000
was attributable to restaurant operations, $18,538,000 was attributable to
franchise operations and $1,664,000 was attributable to the Foxtail
segment. The goodwill originated from the acquisition of the Company by
affiliates of Castle Harlan, Inc. in September 2005. Due to the decrease in
the Company’s operating results during 2008 compared to 2007 and the decline in
general economic conditions impacting the restaurant industry management
conducted an interim goodwill impairment evaluation during the quarter ended
October 5, 2008. Fair values of the reporting units were calculated using
discounted future cash flows and market-based comparative
values.  Because the carrying values of the reporting units in both
the franchise and Foxtail segments exceeded their respective fair values, the
Company completed step two of the goodwill test and concluded that goodwill was
impaired as of October 5, 2008. Accordingly, in the quarter ended October
5, 2008, the Company recorded a non-cash goodwill impairment charge of
$20,202,000, of which $18,538,000 was charged to the franchise segment and
$1,664,000 was charged to the Foxtail segment.




We also
reviewed all identifiable intangible assets and based on the results of our
interim review, no intangible assets were considered impaired at October 5,
2008.





See Note
6 to our consolidated financial statements contained herein.





Taxes





The
effective income tax rates for the third quarters ended October 5, 2008 and
October 7, 2007 were 4.0% and -2.7%, respectively.  Our rates differ
from the statutory rate primarily due to a valuation allowance against deferred
tax deductions, losses and credits.  The effective income tax rate for
the third quarter ended October 5, 2008 reflects current and deferred tax
benefit of losses and credits and the net benefit of tax and interest on settled
and expired uncertain tax positions.





34
 Table
of Contents




Year-to-Date
Period Ended October 5, 2008 Compared to the Year-to-Date Period Ended October
7, 2007





Restaurant
Operations Overview





Total
restaurant segment revenues increased by $137,000 in the year-to-date period of
2008, due primarily to the sales from new Perkins restaurants, which was offset
substantially by comparable sales declines at both Perkins and Marie Callender’s
restaurants.  Since the end of the third quarter of 2007, the Company
has opened six new Perkins restaurants, acquired one Perkins restaurant from a
franchisee and closed two Perkins restaurants. The Company also closed two Marie
Callender’s restaurants during the same time period.





Perkins
restaurants’ comparable sales decreased by 2.4% and Marie Callender’s
restaurants’ comparable sales decreased by 5.6% in the year-to-date period of
2008 as compared to the similar year-to-date period of 2007. These declines in
comparable sales resulted primarily from a decrease in comparable guest counts
at both concepts.  Management
believes the decline in comparable guest counts for both concepts is
attributable primarily to adverse economic conditions that are impacting the
restaurant industry, particularly in Florida for Perkins restaurants and in
California for Marie Callender’s restaurants.




Restaurant
segment income decreased by $5,817,000 in the year-to-date period of 2008
compared to the same period a year ago, primarily due to lower comparable store
sales and higher commodity costs, labor and benefits, utilities, rent and
advertising expenses. Labor and benefits, as a percentage of total revenues,
increased from 35.7% to 35.9% as lower sales volumes decreased labor efficiency.
Advertising expense increased due to increased local and regional marketing
efforts.





Franchise
Operations Overview





Franchise
revenues decreased by $1,633,000 in the year-to-date period of 2008 compared to
the prior year-to-date period. During the year-to-date period of 2008, royalty
revenue decreased by $1,258,000 due to a decline in comparable customer counts
and by $375,000 due to lower franchise fees and renewal fees.




Franchise
segment profit decreased by $19,852,000 in the year-to-date period of 2008
compared to the corresponding period of the prior year due primarily to a
non-cash goodwill impairment charge of $18,538,000.  See Note 6 to our
consolidated financial statements contained herein.





Since the
end of the third quarter of 2007, Perkins’ franchisees have opened three
restaurants, closed eight restaurants and sold one restaurant to the Company.
Over the same time period, Marie Callender’s franchisees have opened one new
restaurant and closed four restaurants.





Foxtail
Overview





Foxtail’s
net revenues increased by $2,874,000 from the prior year-to-date period due
primarily to higher pie and muffin sales volumes and sales prices, including an
approximately $680,000 increase in pie sales to one contractual customer. The
segment had a net loss of $4,786,000 in the year-to-date period of 2008 compared
to a $3,441,000 net profit in the year-to-date period of 2007, resulting
primarily from higher commodity costs, labor costs and sales
allowances.




Foxtail
segment profit decreased by $8,227,000 in the year-to-date period of 2008
compared to the corresponding period of the prior year.  The decline
in 2008 results primarily from higher commodity and labor costs and from a
non-cash goodwill impairment charge of $1,664,000.  See Note 6 to our
consolidated financial statements contained herein.





Revenues





Total
revenues increased by $1,559,000 in the year-to-date period of 2008 compared to
the year-to-date period of 2007. The increase was primarily due to a $2,874,000
increase in sales in the Foxtail segment and was partially offset by a
$1,633,000 decrease in revenues in the franchise segment.





Restaurant
segment revenues of $381,761,000 and $381,624,000 in the year-to-date periods of
2008 and 2007, respectively, accounted for 86.5% and 86.8% of total revenues,
respectively. The percentage decrease in revenues resulted primarily from an
overall 3.7% decrease in comparable sales at Company-operated Perkins and Marie
Callender’s restaurants.


35
 Table of Contents




Franchise
segment revenues of $18,800,000 and $20,433,000 in the year-to-date periods of
2008 and 2007, respectively, accounted for 4.3% and 4.7% of total revenues,
respectively. During the year-to-date period of 2008, royalty revenue decreased
$1,258,000 due to a decline in comparable customer counts and by $375,000 due to
lower franchise fees and renewal fees.


Foxtail’s
net revenues increased by $2,874,000 from the prior year-to-date period due
primarily to higher pie and muffin sales volumes and sales prices, including an
approximately $680,000 increase in pie sales to one contractual
customer.





Costs and
Expenses





Food
Cost





Consolidated
food cost was 29.5% and 28.0% of food sales in the year-to-date periods of 2008
and 2007, respectively.  This increase of 1.5% was due primarily to higher
prices of beef, pork, poultry, dairy products and flour.




Restaurant
segment food cost was 26.9% and 26.8% of food sales in the year-to-date periods
of 2008 and 2007, respectively, as the impact of higher commodity costs were
partially offset by menu price increases. In the Foxtail segment, food cost
increased to 67.3% from 58.0% of food sales in the year-to-date periods of 2008
and 2007, respectively, primarily due to higher prices of dairy products and
flour.





Labor
and Benefits Expenses





Consolidated
labor and benefits expenses were 32.7% and 32.5% of total revenues in the
year-to-date periods of 2008 and 2007, respectively. Restaurant segment labor
and benefits increased by 0.2% in 2008 due primarily to higher average wage
rate, which were impacted by federal and state minimum wage legislation.
However, this additive factor was partially offset by improved labor cost
controls and lower employee medical insurance and workers’ compensation
costs.  Labor and benefits in the Foxtail segment decreased by 0.3% in
2008 due primarily to headcount reductions.





Operating
Expenses





Total
operating expenses of $115,361,000 in the year-to-date period of 2008 increased
by $3,984,000 as compared to the year-to-date period of 2007. Total operating
expenses, as a percentage of total revenues, were 26.1% and 25.3% in the
year-to-date periods of 2008 and 2007, respectively.  Approximately
93.9% and 93.8% of total operating expenses in the year-to-date periods of 2008
and 2007, respectively, were incurred in the restaurant segment. The most
significant components of operating expenses were rent, utilities, advertising,
restaurant supplies, repair and maintenance and property taxes. In the
restaurant segment, operating expenses, as a percentage of restaurant food
sales, increased by 1.0% in the year-to-date period of 2008 due primarily to
increased utilities, rent and advertising expense, partially offset by lower
pre-opening expenses.  Advertising expense increased due to increased
local and regional marketing efforts.  Operating expenses in the
Foxtail segment increased by approximately $419,000, due primarily to higher
custodial services costs resulting from a 2008 outsourcing arrangement and from
higher repairs and maintenance costs.





General
and Administrative Expenses





The most
significant components of G&A expenses were corporate labor and benefits,
occupancy costs and outside services. G&A expenses were 8.1% and 7.6% of
total revenues in the year-to-date periods of 2008 and 2007, respectively. 
The increase in 2008 is due primarily to higher marketing costs at Foxtail and
increased consulting costs.




Transaction
Costs





The
Company has classified certain expenses directly attributable to prior
acquisitions and combinations and certain non-recurring expenses incurred as a
result of prior acquisitions and combinations as transaction costs on the
consolidated statements of operations. There were no transaction costs incurred
in the year-to-date period of 2008. In the year-to-date period of 2007, there
was $1,013,000 of transaction costs.


36
 Table of Contents




Depreciation
and Amortization




Depreciation
and amortization expense was $19,111,000 and $18,941,000 in the year-to-date
periods of 2008 and 2007, respectively. This increase is primarily due to the
depreciation of asset additions resulting from new Company-owned Perkins
restaurants.




Interest,
net




Interest,
net was $26,871,000 (6.1% of total revenues) in the year-to-date period of 2008
compared to $23,887,000 (5.4% of total revenues) in the year-to-date period of
2007. This increase was primarily due to an increase in the average effective
interest rate to 11.3% from 10.4% and an approximate $10,500,000 increase in the
average debt outstanding during the year-to-date period of 2008 as compared to
the year-to-date period of 2007.




Loss
on extinguishment of debt




In
connection with the September 2008 refinancing transaction (see “Capital
Resources and Liquidity”), we terminated our pre-existing credit agreement and
consequently incurred a $2,952,000 loss resulting from the write-off of deferred
financing costs related to that agreement.




Goodwill
and Intangible Asset Impairment





As
discussed above, due to the decrease in the Company’s operating results during
2008 compared to 2007 and the decline in general economic conditions impacting
the restaurant industry, management conducted an interim goodwill impairment
evaluation during the quarter ended October 5, 2008. Fair values of the
reporting units were calculated using discounted future cash flows and
market-based comparative values.  Because the carrying values of the
reporting units in both the franchise and Foxtail segments exceeded their
respective fair values, the Company completed step two of the goodwill test and
concluded that goodwill was impaired as of October 5, 2008. Accordingly, in
the quarter ended October 5, 2008, the Company recorded a non-cash goodwill
impairment charge of $20,202,000, of which $18,538,000 was charged to the
franchise segment and $1,664,000 was charged to the Foxtail
segment.




We
also reviewed all identifiable intangible assets and based on the results of our
interim review, no intangible assets were considered impaired at October 5,
2008.  See
Note 6 to our consolidated financial statements contained herein.


Taxes




The
effective income tax rates for the year-to-date periods of 2008 and 2007 were
2.0% and -1.2%, respectively.  Our rates differ from the statutory
rate primarily due to a valuation allowance against deferred tax deductions,
losses and credits.  The effective income tax rate for the
year-to-date period ended October 5, 2008 reflects current and deferred tax
benefit of losses and credits and the net benefit of tax and interest on settled
and expired uncertain tax positions.


37
 Table of Contents





CAPITAL
RESOURCES AND LIQUIDITY





Our
principal liquidity requirements are to service our debt and meet our working
capital and capital expenditure needs. On September 24, 2008, the Company issued
$132,000,000 of Secured Notes and entered into the $26,000,000 New Revolver in
connection with the refinancing of its then existing $100,000,000 term loan and
$40,000,000 revolver.  The pre-existing credit agreement terminated
upon the consummation of the refinancing.  In connection with this
transaction, we recognized a loss of $2,952,000, representing the write-off of
previously deferred financing costs related to the terminated credit
agreement.





Secured
Notes and 10% Senior Notes





The
Secured Notes will mature on May 31, 2013, and interest is payable semi-annually
on May 31 and November 30 of each year, commencing on May 31,
2009.  The Secured Notes were issued at a discount of $7,537,200,
which will be accreted using the interest method over their term.




The
Secured Notes are fully and unconditionally guaranteed (the "Secured Notes
Guarantees") on a senior secured basis by the Company's parent, Perkins &
Marie Callender's Holding Inc., and each of the Company's existing and future
domestic fully-owned subsidiaries (the “Secured Notes
Guarantors”).  The Secured Notes and the Secured Notes Guarantees are
the Company’s and the Secured Notes Guarantors’ senior secured obligations and
rank equal in right of payment to all of the Company’s and the Senior Notes
Guarantor’s existing and future senior indebtedness.  The Secured
Notes and the Secured Notes Guarantees are secured by a lien on substantially
all of the Company's and the Secured Notes Guarantors’ existing and future
assets, subject to certain exceptions.  Pursuant to the terms of an
intercreditor agreement, the foregoing liens are contractually subordinated to
the liens that secure the New Revolver.




Prior to
May 31, 2011, the Company may redeem up to 35% of the aggregate principal amount
of the Secured Notes with the net cash proceeds of certain equity offerings at a
premium specified in the indenture pertaining to the Secured Notes (the “Secured
Notes Indenture”).  Prior to May 31, 2011, the Company also may redeem
all or part of the Secured Notes at a “make whole” premium specified in the
Secured Notes Indenture.  On or after May 31, 2011, the Company may
redeem the Secured Notes at a 7% premium that decreases to a 0% premium on May
31, 2012.  If the Company experiences a change of control, the holders
have the right to require the Company to repurchase its Secured Notes at 101% of
the principal amount.  If the Company sells assets and does not use
the net proceeds for specified purposes, it may be required to use the net
proceeds to offer to repurchase the Secured Notes at 100% of the Notes principal
amount.  Any redemption or repurchase also requires the payment of any
accrued and unpaid interest through the redemption or repurchase
date.




The
Secured Notes have not been registered for resale under the Securities Act of
1933, as amended (the "Securities Act"), or the securities laws of any
jurisdiction.  This Quarterly Report shall not constitute an offer to
sell or the solicitation of an offer to buy the Secured Notes.




In
September 2005, the Company issued $190,000,000 of unsecured 10% Senior Notes
(the “10% Senior Notes”). The 10% Senior Notes were issued at a discount of
$2,570,700, which is accreted using the interest method over the term of the 10%
Senior Notes. The 10% Senior Notes will mature on October 1, 2013, and interest
is payable semi-annually on April 1 and October 1 of each year. All consolidated
subsidiaries of the Company that are 100% owned provide joint and several, full
and unconditional guarantee of the 10% Senior Notes. There are no significant
restrictions on the Company’s ability to obtain funds from any of the guarantor
subsidiaries in the form of a dividend or a loan. Additionally, there are no
significant restrictions on a guarantor subsidiary’s ability to obtain funds
from the Company or its direct or indirect subsidiaries.




38
 Table of Contents




Prior to
October 1, 2009, the Company may redeem all or part of the 10% Senior Notes at a
“make whole” premium specified in the indenture pertaining to the 10% Senior
Notes (the "10% Senior Indenture").  On or after October 1, 2009, the
Company may redeem the 10% Senior Notes at a 5% premium that steps down to a
2.5% premium on October 1, 2010 and a 0% premium on October 1, 2011 (and
thereafter).  If the Company experiences a change of control, the
holders have the right to require the Company to repurchase its 10% Senior Notes
at 101% of the principal amount.  If the Company sells assets and does
not use the net proceeds for specified purposes, it may be required to use the
net proceeds to offer to repurchase the 10% Senior Notes and certain other
existing pari-passu indebtedness of the Company at 100% of the principal amount
thereof.  Any redemption or repurchase also requires the payment of
any accrued and unpaid interest through the redemption or repurchase
date.




The
Secured Notes Indenture and the 10% Notes Indenture contain various customary
events of default, including, without limitation:  (i) nonpayment of
principal or interest; (ii) cross-defaults with certain other indebtedness;
(iii) certain bankruptcy related events; (iv) invalidity of guarantees; (v)
monetary judgment defaults; and (vi) certain change of control
events.  In addition, any impairment of the security interest in the
Secured Notes collateral shall constitute an event of default under the Secured
Notes Indenture.




New
Revolver




The New
Revolver, which matures on February 28, 2013, is guaranteed by Perkins &
Marie Callender's Holding Inc. and certain of the Company's existing and future
subsidiaries.  The New Revolver is secured by a first priority
perfected security interest in all of the Company's property and assets, and the
property and assets of each guarantor.  Subject to the satisfaction of
the conditions contained therein, up to $26,000,000 may be borrowed under the
New Revolver from time to time.  The New Revolver includes a
sub-facility for letters of credit in an amount not to exceed
$15,000,000.




Amounts
outstanding under the New Revolver will bear interest, at the Company’s option,
at a rate per annum equal to either:  (i) the base rate, as defined in
the New Revolver, plus an applicable margin, or (ii) a LIBOR-based equivalent,
plus an applicable margin.  For the foreseeable future, margins are
expected to be 325 basis points for base rate loans and 425 basis points for
LIBOR loans.  The average interest rates on aggregate borrowings under
the New Revolver were 8.25% on October 5, 2008 and 8.30% under the pre-existing
credit agreement on October 7, 2007.  As of October 5, 2008, the New
Revolver permitted additional borrowings of approximately $6,571,000 (after
giving effect to $8,604,000 in borrowings and $10,825,000 in letters of credit
outstanding).  The letters of credit are primarily utilized in
conjunction with our workers’ compensation programs.




The
Company is required to make mandatory prepayments under the New Revolver with,
subject to certain exceptions: (i) the net cash proceeds from certain asset
sales or dispositions; (ii) the net cash proceeds of any debt issued by the
Company or its subsidiaries; (iii) 50% of the net cash proceeds of any equity
issuance by the Company, its parent or its subsidiaries; and (iv) the
extraordinary receipts received by the Company or its subsidiaries, consisting
of proceeds of judgments or settlements, certain indemnity payments and purchase
price adjustments received in connection with any purchase
agreement.  Any of the foregoing mandatory prepayments will result in
a corresponding permanent reduction in the maximum New Revolver
amount.




The New
Revolver contains various affirmative and negative covenants, including, but not
limited to a financial covenant to maintain at least $30,000,000 of trailing
13-period EBITDA, as defined in the New Revolver, and limits the Company’s
capital expenditures.








39
 Table of Contents





Our debt
agreements place restrictions on the Company’s ability and the ability of its
subsidiaries to (i) incur additional indebtedness or issue certain preferred
stock; (ii) repay certain indebtedness prior to stated maturities; (iii) pay
dividends or make other distributions on, redeem or repurchase capital stock or
subordinated indebtedness; (iv) make certain investments or other restricted
payments; (v) enter into transactions with affiliates; (vi) issue stock of
subsidiaries; (vii) transfer, sell or consummate a merger or consolidation of
all, or substantially all, of the Company's assets; (viii) change its line of
business; (ix) incur dividend or other payment restrictions with regard to
restricted subsidiaries; (x) create or incur liens on assets to secure debt;
(xi) dispose of assets; (xii) restrict distributions from subsidiaries; (xiii)
make certain acquisitions; (xiv) make capital expenditures; or (xv) amend the
terms of the Company's outstanding notes.  Currently, we are in
compliance with the financial covenants contained in our debt
agreements.





Working
Capital and Cash Flows





At
October 5, 2008, we had a negative working capital balance of $15.9 million.
Like many other restaurant companies, the Company is able to, and does more
often than not, operate with negative working capital. We are able to operate
with a substantial working capital deficit because (1) restaurant revenues are
received primarily on a cash or near-cash basis with a low level of accounts
receivable, (2) rapid turnover results in a limited investment in inventories
and (3) accounts payable for food and beverages usually become due after the
receipt of cash from the related sales.





The
following table sets forth summary cash flow data for the year-to-date periods
ended October 5, 2008 and October 7, 2007 (in thousands):




Year-to-Date
                      Ended
                      October 5, 2008
                    
                    
                    Year-to-Date
                      Ended
                      October 7, 2007Cash
      flows used in operating activities
                    
                    $
                    (19,039
                    )
                    
                    
                    (1,383
                    )Cash
      flows used in investing activities
                    
                    
                    (15,081
                    )
                    
                    
                    (22,551
                    )Cash
      flows provided by financing activities
                    
                    
                    18,320
                    
                    
                    
                    20,405





Operating
activities





Cash
flows used in operating activities increased by $17,656,000 for the year-to-date
period ended October 5, 2008 compared to the year-to-date period ended October
7, 2007. This increase was primarily due to the net loss of $46,130,000 in the
year-to-date period ended October 5, 2008 compared to a net loss of $9,817,000
in the year-to-date period ended October 7, 2007.  In determining cash
flows used in operating activities, the net loss in the current year was
partially offset by adjustments of $20,202,000 for the non-cash goodwill
impairment charge and $2,952,000 for the non-cash loss on extinguishment of debt
in the third quarter of 2008.








40
 Table of Contents





Investing
activities
 
 Cash
flows used in investing activities for the year-to-date period ended October 5,
2008 decreased to $15,081,000 compared to $22,551,000 for the year-to-date
period ended October 7, 2007. Substantially all cash flows used in investing
activities were used for capital expenditures.




Year-to-Date
                    Ended
                    October 5, 2008
                  
                  
                  Year-to-Date
                    Ended
                    October 7, 2007New
      restaurants
                  
                  $
                  2,208
                  
                  
                  
                  10,237Restaurant
      improvements
                  
                  
                  5,455
                  
                  
                  
                  6,422Restaurant
      remodeling and reimaging
                  
                  
                  2,556
                  
                  
                  
                  3,133Manufacturing
      plant improvements
                  
                  
                  4,237
                  
                  
                  
                  1,329Other
                  
                  
                  1,140
                  
                  
                  
                  1,433Total
      capital expenditures
                  
                  $
                  15,596
                  
                  
                  
                  22,554





Our
capital expenditure forecast for 2008 is approximately $18,500,000. For the
year-to-date period ended October 5, 2008, we have opened two Company-operated
Perkins restaurants and do not plan to open any additional restaurants during
the remainder of 2008.  The source of funding for these expenditures
was borrowings under our revolving credit facility.





Financing
activities





Cash
flows provided by financing activities for the year-to-date period ended October
5, 2008 were $18,320,000 compared to cash flows provided by financing activities
of $20,405,000 for the year-to-date period ended October 7, 2007. During the
year-to-date period of 2008, the Company received a $12,500,000 capital
contribution from its sole shareholder that was offset by $9,903,000 in
debt financing costs related to the refinancing transaction.  The
remaining $15,723,000 of cash flows provided by financing activities in 2008
essentially represents net borrowing proceeds from the Company’s various credit
facilities and is comparable in origin to the $20,405,000 of cash flows provided
by financing activities in 2007.   The $4,700,000 decrease in net
borrowings in 2008 results from the high cash balances in place at the beginning
of 2008 and the decrease in 2008 capital expenditures.









41
 Table of Contents




CASH
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS





Cash
Contractual Obligations





The cash
contractual obligations, originally presented in the Company’s 2007 Annual
Report on Form 10-K, have changed.  Obligations that have changed
significantly are presented in the table below.





Fiscal
                        
                        
                        Fiscal
                        
                        
                        Fiscal
                        
                        
                        Fiscal
                        
                        
                        Fiscal2009
                        
                        
                        2010
                        
                        
                        2011
                        
                        
                        2012
                        
                        
                        2013
                        
                        
                        Thereafter
                        
                        
                        TotalContractual
      Obligations10%
      Senior Notes
                        
                        $
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        190,000
                        
                        
                        
                        -
                        
                        
                        
                        190,000Secured
      Notes
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        132,000
                        
                        
                        
                        -
                        
                        
                        
                        132,000New
      Revolver
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        8,604
                        
                        
                        
                        -
                        
                        
                        
                        8,604Interest
      on indebtedness  (1)
                        
                        
                        41,633
                        
                        
                        
                        38,190
                        
                        
                        
                        38,190
                        
                        
                        
                        38,190
                        
                        
                        
                        22,068
                        
                        
                        
                        -
                        
                        
                        
                        178,271Total
                        
                        $
                        41,633
                        
                        
                        
                        38,190
                        
                        
                        
                        38,190
                        
                        
                        
                        38,190
                        
                        
                        
                        352,672
                        
                        
                        
                        -
                        
                        
                        
                        508,875





(1)
                  Represents
      interest expense using the interest rate of 10.0% on the $190,000,000 of
      10% Senior Notes, 14.0% on the $132,000,000 Secured Notes and 8.25% on the
      outstanding balance of $8,604,000 on the New Revolver at October 5, 2008.
      Interest Obligations exclude interest on capital lease obligations and
      fees on any letters of credit that may be issued under our new credit
      agreement.











42
 Table of Contents





RECENT
ACCOUNTING PRONOUNCEMENTS





The
following are recent accounting standards adopted or issued that could have an
impact on our Company:





Accounting
Principles Hierarchy





In
May 2008, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with GAAP. SFAS 162 is
effective November 17, 2008. The Company anticipates that the adoption of
SFAS 162 will not have a material impact on its consolidated financial
statements.





Intangible
Assets





In April
2008, the FASB issued FASB Staff Position (“FSP”) 142-3, “Determination of the
Useful Life of Intangible Assets,” (“FSP No. 142-3”) which amends the factors
that should be considered in developing renewal or extension assumptions used in
determining the useful life of a recognized intangible asset. The requirement
for determining useful lives must be applied prospectively to intangible assets
acquired after the effective date and the disclosure requirements applied
prospectively to all intangible assets recognized as of, and subsequent to, the
effective date. FSP No. 142-3 is effective for fiscal years beginning after
December 15, 2008, which will require the Company to adopt these provisions
in the first quarter of 2009. The Company has reviewed this pronouncement and
does not anticipate that the adoption of FSP No. 142-3 will materially
impact its financial statements.





Business
Combinations





In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”
(“SFAS No. 141(R)”).  SFAS No. 141(R) establishes principles and
requirements for how an acquiring entity in a business combination recognizes
and measures the assets acquired and liabilities assumed in the transaction;
establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; and sets the disclosure requirements
regarding the information needed to evaluate and understand the nature and
financial effect of the business combination. This statement will be effective
prospectively for business combinations closing on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
Company is currently evaluating the provisions of this statement.





Noncontrolling
Interests in Consolidated Financial Statements





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No. 51.” This statement clarifies that a noncontrolling (minority) interest in a
subsidiary is an ownership interest in the entity that should be reported as
equity in the consolidated financial statements. It also requires consolidated
net income to include the amounts attributable to both the parent and
noncontrolling interest, with disclosure on the face of the consolidated income
statement of the amounts attributed to the parent and to the noncontrolling
interest. This statement will be effective prospectively for fiscal years
beginning after December 15, 2008, with presentation and disclosure
requirements applied retrospectively to comparative financial statements. The
Company is currently evaluating the provisions of this statement.








43
 Table of Contents





Fair
Value Measurement





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
("SFAS 157") which provides a single definition of fair value, together with a
framework for measuring it and requires additional disclosures about the use of
fair value to measure assets and liabilities. It also emphasizes that fair value
is a market-based measurement, not an entity-specific measurement, and sets out
a fair value hierarchy with the highest priority being quoted prices in active
markets. In February 2008, the FASB released FSP No. 157-2, “Effective Date of
FASB Statement No. 157,” (“FSP 157-2”) which delays the effective date of
SFAS 157 for all non-financial assets and non-financial liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually) to fiscal years beginning after
November 15, 2008. In accordance with FSP 157-2, we adopted SFAS 157 on January
1, 2008 only with respect to financial assets and liabilities. The adoption of
SFAS 157 did not have a material impact on our financial position, results of
operations or cash flows.  Our financial instruments, which are
reported at fair value, consist of long-term investments in marketable
securities that are held in trust for payment of non-qualified deferred
compensation.  Fair value for these investments is based on readily
available market prices.








IMPACT
OF INFLATION





We do not
believe that our operations are affected by inflation to a greater extent than
are the operations of others within the restaurant industry. Certain significant
items that are historically subject to price fluctuations are beef, pork,
poultry, dairy products, wheat products, corn products and coffee.  In
most cases, we historically have been able to pass through a substantial portion
of the increased commodity costs by adjusting menu pricing.











44
 Table of Contents





INFORMATION
CONCERNING FORWARD-LOOKING STATEMENTS





This
quarterly report on Form 10-Q contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
These statements, written, oral or otherwise made, may be identified by the use
of forward-looking terminology such as “anticipate,” “believe,” “continue,”
“could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,”
“predict,” “should” or “will,” or the negative thereof or other variations
thereon or comparable terminology.





We have
based these forward-looking statements on our current expectations, assumptions,
estimates and projections. While we believe these expectations, assumptions,
estimates and projections are reasonable, such forward-looking statements are
only predictions and involve known and unknown risks and uncertainties, many of
which are beyond our control. These and other important factors may cause our
actual results, performance or achievements to differ materially from any future
results, performance or achievements expressed or implied by these
forward-looking statements. Factors affecting these forward-looking statements
include, among others, the following:




•
  •
  •
  •
  •
  •
  •
  •
  •
  •
   Given
these risks and uncertainties, you are cautioned not to place undue reliance on
such forward-looking statements. The forward-looking statements included in this
Form 10-Q are made only as of the date hereof. We do not undertake and
specifically decline any obligation to update any such statements or to publicly
announce the results of any revisions to any of such statements to reflect
future events or developments.





45
 Table of Contents





ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





We are
subject to changes in interest rates, foreign currency exchange rates and
certain commodity prices.





Interest
Rate Risk





Our
primary market risk is interest rate exposure with respect to our floating rate
debt. As of October 5, 2008, our New Revolver permitted borrowings of up to
approximately $6,571,000 (after giving effect to $8,604,000 in borrowings and
$10,825,000 in letters of credit outstanding). Borrowings under the New Revolver
are subject to variable interest rates. For the twelve months ended October 5,
2008, a 100 basis point change in interest rates (assuming $26,000,000 was
outstanding under the New Revolver) would have impacted us by approximately
$260,000.  In the future, we may decide to employ a hedging strategy
through derivative financial instruments to reduce the impact of adverse changes
in interest rates. We do not plan to hold or issue derivative instruments for
trading purposes.





Foreign
Currency Exchange Rate Risk





We
conduct foreign operations in Canada. As a result, we are subject to risk from
changes in foreign exchange rates. These changes result in cumulative
translation adjustments, which are included in accumulated and other
comprehensive income (loss). As of October 5, 2008, we do not consider the
potential loss resulting from a hypothetical 10% adverse change in quoted
foreign currency exchange rates to be material.





Commodity
Price Risk








46
 Table of Contents





ITEM 4.
CONTROLS AND PROCEDURES





Disclosure Controls and
Procedures.  Our principal executive officer and principal
financial officer have evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act, as of October 5, 2008. Based on such evaluation, they have
concluded that as of such date, our disclosure controls and procedures are
effective and designed to ensure that information required to be disclosed by us
in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in
applicable Securities and Exchange Commission's rules and forms,
and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.





Changes in Internal Control
over Financial Reporting.  There have not been any changes in
our internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f)) that occurred during the third fiscal quarter of 2008 that have
materially affected,  or are reasonably likely to materially affect,
our internal control over financial reporting.





47
 Table of Contents





PART II — OTHER INFORMATION





ITEM 1.
Legal Proceedings





As
reported in the Company’s Form 10-K for the fiscal year ended December 30, 2007,
we are party to various legal proceedings in the ordinary course of business.
There have been no material developments with regard to these proceedings,
either individually or in the aggregate, that are likely to have a material
adverse effect on the Company’s financial position or results of
operations.





ITEM 1A.
Risk Factors





The
additional risk factor presented below should be considered in addition to the
risk factors previously discolosed in our Form 10-K for the fiscal year ended
December 30, 2007.




Recent economic events have adversely impacted our
business and results of operations and may continue to do so.




The
restaurant industry is affected by macro economic factors, including changes in
international, national, regional, and local economic conditions, employment
levels and consumer spending patterns. The recent disruptions in the overall
economy and financial markets and the related reduction in consumer confidence
in the economy have negatively affected guest traffic and results of operations
throughout large segments of our industry, including our segment, and are
expected to continue to do so until economic conditions
improve.  Continued weakness in or a further worsening of the economy
generally or in a number of our markets could be harmful to our financial
position and results of operations, cause us to reduce the number and frequency
of new restaurant openings, slow our remodeling of existing locations and or
adversely affect our ability to comply with the covenants under our debt
agreements.





ITEM 2.
Unregistered Sales of Equity Securities and Use of
Proceeds







ITEM 3. Defaults Upon Senior
Securities





None.





ITEM 4. Submission of
Matters to a Vote of Security Holders.





Not
applicable.





ITEM 5. Other
Information





None.





ITEM 6.
Exhibits





31.1
            Chief
      Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002,
      Section 302.31.2
            Chief
      Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002,
      Section 302.32.1
            Chief
      Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002,
      Section 906.32.2
            Chief
      Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002,
      Section 906.








48
 Table of Contents





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.





PERKINS
      & MARIE CALLENDER’S INC.DATE:
      November 19, 2008
            BY:/s/ Fred T. Grant, Jr.Fred
      T. Grant, Jr.Chief
      Financial Officer