<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
-----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- ------------------
Commission file number 333-57925
---------
The Restaurant Company
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
Delaware 62-1254388
- --------------------------------------------------------------------------------
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION OF INCORPORATION IDENTIFICATION NO.)
OR ORGANIZATION)
</TABLE>
1 Pierce Place, Suite 100 East, Itasca, Illinois 60341
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(901) 766-6400
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by [X] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------
1999 1998
-------- --------
<S> <C> <C>
REVENUES:
Food sales $ 68,364 $ 62,774
Franchise revenues and other 5,125 5,174
-------- --------
Total Revenues 73,489 67,948
-------- --------
COSTS AND EXPENSES:
Cost of sales:
Food cost 19,339 18,136
Labor and benefits 24,251 21,628
Operating expenses 13,885 13,077
General and administrative 7,449 6,745
Depreciation and amortization 5,062 4,739
Interest, net 4,283 3,625
Loss on/Provision for disposition of assets, net -- 400
Asset writedown (SFAS No. 121) -- 500
Other, net (503) (334)
-------- --------
Total Costs and Expenses 73,766 68,516
-------- --------
Loss from operations before income taxes and
cumulative effect of change in accounting principle (277) (568)
Benefit from income taxes 106 283
-------- --------
Loss from operations before cumulative effect
of change in accounting principle (171) (285)
Cumulative effect of change in accounting
principle, net of income tax benefit of $188 (340) --
-------- --------
NET LOSS $ (511) $ (285)
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE> 3
THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
March 31,
1999 December 31,
(Unaudited) 1998
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,582 $ 3,150
Receivables, less allowance for
doubtful accounts of $644 and $495 6,905 7,178
Inventories, at the lower of first-
in, first-out cost or market 4,827 5,375
Prepaid expenses and other current assets 1,782 1,999
Deferred income taxes 209 209
----------- -----------
Total current assets 17,305 17,911
----------- -----------
PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization 130,095 131,283
INTANGIBLE AND OTHER ASSETS, net of
accumulated amortization of $30,752 and $30,147 47,781 46,444
----------- -----------
$ 195,181 $ 195,638
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE> 4
THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
March 31,
1999 December 31,
(Unaudited) 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ 1,201 $ 1,229
Accounts payable 11,309 11,568
Accrued expenses 22,069 23,228
------------ ------------
Total current liabilities 34,579 36,025
------------ ------------
CAPITAL LEASE OBLIGATIONS, less
current maturities 4,912 5,767
LONG-TERM DEBT 154,894 153,334
DEFERRED INCOME TAXES AND OTHER 5,411 4,616
STOCKHOLDERS' INVESTMENT:
Common stock $.01 par value, 100,000 shares authorized,
11,640 issued and outstanding 1 1
Additional paid-in capital 969 969
Accumulated deficit (5,585) (5,074)
------------ ------------
Total stockholders' deficit (4,615) (4,104)
------------ ------------
$ 195,181 $ 195,638
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
4
<PAGE> 5
THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (511) $ (285)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,062 4,739
Change in accounting principle 340 --
Loss on/Provision for disposition of assets, net -- 400
Asset writedown (SFAS No. 121) -- 500
Other non cash income and expense items 179 (417)
Net changes in other operating assets and liabilities (2,168) 1,910
-------- --------
Total adjustments 3,413 7,132
-------- --------
Net cash provided by operating activities 2,902 6,847
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment (3,238) (3,989)
Proceeds from sale of property and equipment -- 12
Payments on notes receivable 76 41
Investment in/Advances to joint venture -- (110)
-------- --------
Net cash used in investing activities (3,162) (4,046)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 10,750 11,500
Payments on long-term debt (9,750) (8,500)
Principal payments under capital lease obligations (296) (343)
Repurchase of common stock -- (282)
Purchase of minority interest (12) (15,787)
Deferred financing costs -- (536)
-------- --------
Net cash provided by (used in) financing activities 692 (13,948)
-------- --------
Net increase (decrease) in cash and cash equivalents 432 (11,147)
-------- --------
CASH AND CASH EQUIVALENTS:
Balance, beginning of period 3,150 16,027
-------- --------
Balance, end of period $ 3,582 $ 4,880
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 6
THE RESTAURANT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Organization
The Restaurant Company ("TRC" or the "Company") is a holding company whose
primary subsidiary is Perkins Family Restaurants, L.P. ("PFR"), which is
indirectly wholly-owned by TRC. TRC is the sole stockholder of Perkins
Restaurants, Inc. ("PRI"), which is a limited partner and the indirect owner of
100% of PFR and the parent corporation of PFR's general partner, Perkins
Management Company ("PMC"). TRC is also the sole stockholder of TRC Realty Co.
TRC has no significant assets other than its direct and indirect equity
interests in its subsidiaries. Except as the context otherwise requires,
references to the "Company" refer to TRC together with its subsidiaries,
including, without limitation, PFR.
Basis of Presentation
The accompanying unaudited consolidated financial statements of TRC have been
prepared in accordance with the instructions to Form 10-Q and therefore do not
include all information and notes necessary for complete financial statements in
conformity with generally accepted accounting principles. The results for the
periods indicated are unaudited but reflect all adjustments (consisting only of
normal recurring adjustments) which management considers necessary for a fair
presentation of the operating results. Results of operations for the interim
periods are not necessarily indicative of a full year of operations. The notes
to the financial statements contained in the 1998 Annual Report on Form 10-K
should be read in conjunction with these statements.
Certain prior year amounts have been reclassified to conform to current year
presentation.
Going Private Transaction
Prior to December 22, 1997, PFR was a limited partnership 48.6% indirectly owned
(including its general partner's interest) by TRC. The remainder of the limited
partnership units ("Units") were traded on the New York Stock Exchange under the
symbol "PFR". The Company's business was conducted through Perkins Restaurants
Operating Company, L.P. ("PROC"), a Delaware limited partnership. PFR was the
sole limited partner and owned 99% of PROC, and PMC was the sole general partner
and owned the remaining 1% of PROC. Upon a majority vote of the holders of the
publicly traded Units, 5.44 million Units held by persons other than TRC and its
subsidiaries were converted into the right to receive $14.00 in cash per Unit
(the "Going Private Transaction"). Additionally, PROC was merged into PFR, and
PMC's 1% general partnership interest in PROC was converted into a limited
partnership interest in PFR. Upon consummation of the Going Private Transaction
on December 22, 1997, PFR became an indirect wholly-owned subsidiary of TRC.
The Reorganization
On May 18, 1998, TRC redeemed 100% of Harrah's Entertainment, Inc. ("Harrah's")
interest in the Company ("the Reorganization"). As a result of the
Reorganization, TRC's common stock is owned 50.0% by Donald N. Smith, the
Company's Chairman and Chief Executive Officer, 42.3% by The Equitable Life
Assurance Society of the United States and 7.7% by others.
6
<PAGE> 7
Loss of a Significant Franchisee
On February 4, 1999, Denny's (a subsidiary of Advantica Restaurant Group) was
the prevailing bidder in the court-supervised auction sale of 30 restaurants of
Perk Development Corporation ("Perk"), the Company's upstate New York
franchisee. These restaurants ceased operating as Perkins Family Restaurants on
February 28, 1999. The Company received approximately $1,783,000 in royalties
from Perk during 1998. Management expects to replace this revenue stream in
future years through the recruiting of new franchisees.
Contingencies
The Company is a party to various legal proceedings in the ordinary course of
business. Management does not believe it is likely that these proceedings,
either individually or in the aggregate, will have a material adverse effect on
the Company's financial position or results of operations.
In the past, PFR has sponsored financing programs offered by certain lending
institutions to assist its franchisees in procuring funds for the construction
of new franchised restaurants and to purchase and install in-store bakeries. PFR
provides a limited guaranty of the funds borrowed. At March 31, 1999, there were
approximately $2,920,000 in borrowings outstanding under these programs. PFR has
guaranteed $847,000 of these borrowings. No additional borrowings are available
under these programs. Additionally, PFR has entered into a separate two year
limited guaranty, which expires on February 26, 2000, of $1,200,000 in
borrowings of a franchisee which were used to construct a new franchise
restaurant. As of March 31, 1999, the outstanding balance on the loan was
$1,200,000.
Additionally, as of March 31, 1999, the Company had guaranteed $207,000 of
borrowings for Perk which had been used to install in-store bakeries. This
liability was fully reserved in December 1998.
TRC is a holding company which has no significant assets other than its direct
and indirect equity interest in its subsidiaries. Accordingly, TRC must rely
entirely upon distributions from its subsidiaries to generate the funds
necessary to meet its obligations. The ability of PFR to distribute funds to TRC
is restricted by PFR's Senior Notes Indenture and revolving credit agreement.
7
<PAGE> 8
Supplemental Cash Flow Information
The increase or decrease in cash and cash equivalents due to changes in
operating assets and liabilities for the three months ended March 31, consisted
of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1999 1998
------- -------
<S> <C> <C>
(Increase) Decrease in:
Receivables $ 95 $ 734
Inventories 548 84
Prepaid expenses and
other current assets (311) (528)
Other assets (675) (473)
Increase (Decrease) in:
Accounts payable (262) 401
Accrued expenses (1,053) 1,185
Other liabilities (510) 507
------- -------
$(2,168) $ 1,910
======= =======
</TABLE>
Other supplemental cash flow information was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Cash paid for interest $ 279 $ 210
Income taxes paid 196 71
Income tax refunds received 65 690
</TABLE>
8
<PAGE> 9
Segment Reporting
The following presents revenues and other financial information by business
segment for the periods ended March 31 (in thousands):
<TABLE>
<CAPTION>
1999:
Restaurant Franchise Manufacturing Other Totals
-------------- -------------- --------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $ 62,324 $ 4,985 $ 5,877 $ 303 $ 73,489
Intersegment revenues - - 2,053 - 2,053
Segment profit (loss) 6,236 4,273 1,003 (12,023) (511)
<CAPTION>
1998:
Restaurant Franchise Manufacturing Other Totals
-------------- -------------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $ 57,369 $ 4,994 $ 5,102 $ 483 $ 67,948
Intersegment revenues - - 1,846 - 1,846
Segment profit (loss) 5,570 4,311 1,051 (11,217) (285)
</TABLE>
A reconciliation of other segment loss is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
General and administrative expenses $ 6,655 $ 5,928
Depreciation and amortization expenses 1,478 1,545
Interest expense 4,283 3,625
Change in accounting principle 340 -
Provision for disposition of assets - 400
Asset write-down (SFAS No. 121) - 500
Other (733) (781)
-------------- --------------
$ 12,023 $ 11,217
============== ==============
</TABLE>
9
<PAGE> 10
Preopening Expenses
In April 1998, The American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which the Company adopted in 1999. SOP 98-5 requires the costs of
start-up activities to be expensed as incurred. Upon adoption of SOP 98-5, the
Company recorded a cumulative effect of a change in accounting principle of
$340,000 net of income taxes of $188,000. Prior to 1999, the Company capitalized
new store opening costs and expensed these costs over the 12 months following
the opening of the restaurant.
Deferred Compensation
Effective January 1, 1999, the Company established a Deferred Compensation Plan
under which officers and key employees of the Company may defer specified
percentages of their salaries, annual incentives and long-term compensation
payments. The Company also makes matching contributions of the lesser of 3% of
eligible compensation or $4,800. Amounts deferred are excluded from the
participant's taxable income and are held in trust with a bank, where the funds
are invested at the direction of the participant. The total amount held in trust
as of March 31, 1999 was $1,138,000 and is included in other assets and other
liabilities in the accompanying balance sheets of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE FIRST QUARTER ENDED MARCH 31, 1998
RESULTS OF OPERATIONS
Overview:
The Company through its primary subsidiary, PFR, is a leading operator and
franchisor of full-service mid-scale restaurants located in 35 states and 5
Canadian provinces. As of March 31, 1999, the Company owned and operated 140
full-service restaurants and franchised 326 full-service restaurants. The
Company also manufactures and distributes bakery products which are sold to
Company-operated restaurants, franchisees, third-party bakers and food
distributors. The business of Perkins was founded in 1958, and since then
Perkins has continued to adapt its menus, product offerings, building designs
and decor to meet changing consumer preferences. Perkins is a highly recognized
brand in the geographic areas it serves.
The Company's revenues are derived primarily from the operation of full-service
restaurants, the sale of bakery products produced by its manufacturing division,
Foxtail Foods ("Foxtail"), and franchise fees. Foxtail offers cookie dough,
muffin batters, pancake mixes, pies and other food products to Company-operated
and franchised restaurants through food service distributors in order to ensure
consistency and availability of Perkins' proprietary products to each unit in
the system. Additionally, Foxtail manufactures certain proprietary and
non-proprietary products for sale to non-Perkins operations. Sales to
Company-operated restaurants are eliminated in the accompanying statements of
operations. In the three months ended March 31, 1999, revenues from
Company-operated restaurants, Foxtail and franchise fees accounted for 85.0%,
8.0% and 6.8% of total revenues, respectively.
TRC leases an executive aircraft through TRC Realty Co. The aircraft is operated
for the benefit of, and all operating costs are reimbursed by, PFR and Friendly
Ice Cream Corporation.
10
<PAGE> 11
A summary of the Company's results for the first quarter ended March 31 are
presented in the following table. All revenues, costs and expenses are expressed
as a percentage of total revenues. Certain prior year amounts have been
reclassified to conform to current year presentation.
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------
1999 1998
--------------------
<S> <C> <C>
Revenues:
Food sales 93.0% 92.4%
Franchise revenues 7.0 7.6
-------- --------
Total Revenues 100.0 100.0
-------- --------
Costs and Expenses:
Cost of sales:
Food cost 26.3 26.7
Labor and benefits 33.0 31.9
Operating expenses 18.9 19.2
General and administrative 10.1 9.9
Depreciation and amortization 6.9 7.0
Interest, net 5.8 5.3
Loss on/Provision for disposition of assets, net -- 0.6
Asset writedown (SFAS No. 121) -- 0.7
Other, net (0.7) (0.5)
-------- --------
Total Costs and Expenses 100.3 100.8
-------- --------
Loss from operations before income taxes and
cumulative effect of change in accounting principle (0.3) (0.8)
Benefit from income taxes 0.1 0.4
-------- --------
Loss from operations before cumulative effect
of change in accounting principle (0.2) (0.4)
Cumulative effect of change in accounting
principle, net of income taxes (0.5) --
-------- --------
Net Loss (0.7)% (0.4)%
======== ========
</TABLE>
Net loss for the first quarter of 1999 was $511,000 versus net loss of $285,000
for the same period in 1998.
11
<PAGE> 12
Revenues:
Total revenues for the first quarter of 1999 increased 8.2% over the same period
last year due primarily to higher comparable restaurant sales, sales from seven
stores which were not open for the full first quarter of 1998 and increased
Foxtail sales.
Same store comparable sales increased approximately 4.8% due primarily to
selective menu price increases in 1998 and guest trends toward higher-priced
entrees partially offset by a 1.6% decrease in comparable guest visits. The
shift in customer preference to higher-priced entrees can be attributed to the
Company's development and promotion of higher-priced menu items. These increases
were partially offset by the closing of two Company-operated restaurants during
1998. Favorable weather in 1998 led to increased comparable guest visits of 5.8%
over the corresponding period in 1997 and contributed to the decrease in
comparable guest visits in the current year.
Revenues from Foxtail increased approximately 15.2% over the three months ended
March 31, 1998, and constituted approximately 8.0% of the Company's revenues.
The increase in sales is primarily due to additional sales to customers outside
the Perkins system. The company has focused on developing sales outside the
Perkins system in order to maximize plant utilization.
Franchise revenues, which consist primarily of franchise royalties and sales
fees, decreased 0.2% versus the first quarter of 1998. Four franchised
restaurants opened in 1999 compared to ten openings in 1998 which resulted in
decreased franchise sales fees. Franchise royalty income increased in 1999 due
to the opening of forty new franchised restaurants since January 1, 1998 offset
by the closing of 16 restaurants in 1998 and 34 restaurants in 1999 including 31
Perk restaurants which closed February 28, 1999.
Costs and Expenses:
Food cost:
In terms of total revenues, food cost for the three months ended March 31, 1999,
decreased 0.4 percentage points over the same period in 1998. Food costs
decreased during the current year due primarily to selective menu price
increases and decreased commodity costs on pork and poultry. The decrease in
restaurant food cost percentage was partially offset by higher ingredient costs
percentages at Foxtail.
Labor and benefits:
Labor and benefits expense, as a percentage of total revenues, increased 1.1
percentage points for the three months ended March 31, 1999. Expected increases
in employee benefit costs were the primary components of the increase.
The wage rates of the Company's hourly employees are impacted by Federal and
state minimum wage laws. Certain states do not allow tip credits for servers
which results in higher payroll costs as well as greater exposure to increases
in minimum wage rates. In the past, the Company has been able to offset
increases in labor costs through selective menu price increases and improvements
in labor productivity. The Company anticipates that it can offset future
increases in the Federal minimum wage rate through selective menu price
increases. However, there is no assurance that future increases can be mitigated
through raising menu prices.
12
<PAGE> 13
Operating expenses:
Operating expenses, expressed as a percentage of total revenues for the period
decreased 0.3 percentage points. This decrease is primarily due to the
elimination of certain outside service expenses, reduced preopening amortization
costs, the impact of increased comparable sales and lower franchise opening
costs due to a decrease in new franchise store openings. These increases were
partially offset by increased Foxtail distribution costs.
General and administrative:
General and administrative expenses increased 0.2 percentage points. This
increase is primarily due to higher incentive compensation costs and
administrative support related to both the growth at Foxtail and anticipated
growth in the number of Company-operated and franchised restaurants expected to
open in 1999.
Depreciation and amortization:
Depreciation and amortization expense increased approximately 6.8% over the same
period last year due primarily to the addition of new Company-operated
restaurants and the Company's continuing refurbishment program to upgrade and
maintain existing restaurants.
Interest, net:
Interest expense increased 18.2% over the same period last year primarily as the
result of debt incurred in May 1998 which was used to consummate the
Reorganization. Additionally, average borrowings during the
first quarter of 1998 were below typical levels due to the delay in Unitholders
redeeming their Units as a result of the Going Private Transaction on December
22, 1997.
Other:
Results of operations for the three months ended March 31, 1999 reflect a
$340,000 cumulative effect of change in accounting principle charge against
earnings, net of income taxes, related to the adoption of SOP 98-5 "Reporting on
the Costs of Start-Up Activities," which requires the costs of start-up
activities to be expensed as incurred. Prior to 1999, the Company deferred new
store preopening costs and amortized them over the twelve months following the
opening of the restaurant.
Results of operations for the three months ended March 31, 1998 reflect a
$500,000 non-cash charge against earnings related to the write-down of certain
assets impaired under SFAS No. 121. In addition, the Company recorded a net loss
in the prior year of $400,000 related to the disposition of assets; this amount
included a loss of approximately $845,000 on the disposal of two properties and
the recognition of a previously deferred gain of approximately $445,000 under
SFAS No. 66, "Accounting for Sales of Real Estate," related to the sale of
property in 1994.
13
<PAGE> 14
CAPITAL RESOURCES AND LIQUIDITY
Principal uses of cash during the quarter ended March 31, 1999, were capital
expenditures and payment of 1998 incentive compensation awards. Capital
expenditures consisted primarily of equipment purchases for new Company operated
restaurants and costs related to remodels of existing restaurants. Although no
new restaurants were opened in the first quarter of 1999, four sites were under
development. The Company's primary sources of funding were revolving credit
borrowings and cash provided by operations.
The following table summarizes capital expenditures for each of the years in the
three-year period ended December 31, 1998 and the three months ended March 31,
1999 and 1998 respectively (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31 MARCH 31
----------------------------- -----------------
1998 1997 1996 1999 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Maintenance $ 4,141 $ 3,453 $ 2,987 $ 387 $ 387
New sites 12,845 6,193 1,947 1,085 1,646
Manufacturing 1,152 714 651 217 443
Remodeling and Reimaging 4,144 2,790 4,064 974 858
Other 2,864 1,952 2,212 575 655
------- ------- ------- ------- -------
Total Capital Expenditures $25,146 $15,102 $11,861 $ 3,238 $ 3,989
======= ======= ======= ======= =======
</TABLE>
The Company's capital budget for 1999 is $28.0 million. The Company plans to add
six to eight new full-service Company-operated restaurants in 1999. The
remaining capital budget will be primarily applied to remodels of existing
restaurants, restaurant maintenance and improvements to the Company's
infrastructure equipment. The primary source of funding for these projects is
expected to be cash provided by operations. Capital spending could vary
significantly from planned amounts as certain of these expenditures are
discretionary in nature.
On December 22, 1997, PFR issued $130,000,000 of 10.125% Unsecured Senior Notes
(the "Notes") due December 15, 2007. The proceeds were used to repay outstanding
senior notes and borrowings under PFR's revolving line of credit, purchase Units
from the public and pay expenses relative to PFR's Going Private Transaction.
On December 22, 1997, PFR obtained a secured $50,000,000 revolving line of
credit facility (the "Credit Facility") with a sublimit for up to $5,000,000 of
letters of credit. The Credit Facility is guaranteed by TRC, PRI, PMC and
Perkins Finance Corp., a wholly-owned subsidiary of PFR, and matures on January
1, 2003, at which time all amounts become payable. All amounts under the
facility will bear interest at floating rates based on the agent's base rate or
Eurodollar rates as defined in the agreement. All indebtedness under the Credit
Facility is secured by a first priority lien on substantially all of the assets
of PFR. As of March 31, 1999, $5,000,000 in borrowings and approximately
$1,600,000 of letters of credit were outstanding under the facility.
14
<PAGE> 15
On May 18, 1998, TRC issued $31,100,000 of 11.25% Senior Discount Notes (the
"TRC Notes") maturing on May 15, 2008. The TRC Notes were issued at a discount
to their principal amount at maturity and generated gross proceeds to TRC of
approximately $18,009,000. The proceeds were used to purchase the shares of TRC
owned by Harrah's and pay expenses relative to the Reorganization.
Cash interest will not accrue or be payable on the TRC Notes prior to May 15,
2003, provided that on any semi-annual accrual date prior to May 15, 2003, TRC
may elect to begin accruing cash interest on the TRC Notes (the "Cash Interest
Election"). Cash interest on the TRC Notes will accrue at a rate of 11.25% per
annum from the earlier of May 15, 2003 or the semi-annual accrual date with
respect to which the Cash Interest Election is made, and will be payable
thereafter on each May 15 and November 15.
Prior to the earlier of May 15, 2003 or the semi-annual accrual date with
respect to which the Cash Interest Election is made, interest on the TRC Notes
will accrue at a rate of 11.25% per annum on each semi-annual accrual date and
the principal amount of each TRC Note will accrete by the amount of such accrued
interest (the "Accreted Value"). On May 15, 2003, TRC will be required to pay
all accrued but unpaid interest on the TRC Notes by redeeming an amount per note
equal to the Accreted Value of such TRC Note on May 15, 2003, less the issue
price of such TRC Note at a redemption price of 105.625% of the amount redeemed.
Assuming TRC does not make the Cash Interest Election, the aggregate Accreted
Value of the TRC Notes on May 15, 2003 will be $31,100,000 and the amount
required to be redeemed will be approximately $13,091,000.
Prior to the consummation of the Going Private Transaction, PFR had paid regular
quarterly cash distributions to its holders of units of limited partnership
interest. PFR expects to pay distributions to its general partner and limited
partners sufficient to satisfy estimated tax liabilities of its partners arising
out of the allocation of taxable income or gain from PFR and to pay interest on
the TRC Notes.
The Notes and the Credit Facility restrict the ability of PFR to pay dividends
or distributions to its equity holders. For the three months ended March 31,
1999, PFR made Tax Distributions totaling approximately $1,238,000 to its equity
holders, all of whom are direct or indirect wholly-owned subsidiaries of TRC.
The TRC Notes restrict the ability of TRC to pay dividends or distributions to
its equity holders as well.
TRC's and PFR's ability to make scheduled payments of principal of, or to pay
the interest or liquidated damages, if any, on, or to refinance, their
respective indebtedness, or to fund planned capital expenditures will depend on
the Company's future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond their control. Based upon the current level of
operations, management believes that cash flow from operations and available
cash, together with available borrowings under the Credit Facility, will be
adequate to meet the Company's liquidity needs for the foreseeable future. PFR
and TRC may, however, need to refinance all or a portion of the principal of the
TRC Notes and the Notes on or prior to maturity. There can be no assurance that
the Company will generate sufficient cash flow from operations, or that future
borrowings will be available under the Credit Facility in an amount sufficient
to enable TRC and PFR to service their respective indebtedness or to fund their
other liquidity needs. In addition, there can be no assurance that TRC and PFR
will be able to effect any such refinancing on commercially reasonable terms or
at all.
15
<PAGE> 16
All significant operations of TRC are conducted through PFR. TRC's ability to
meet its obligations as they mature is primarily dependent on PFR's ability to
make distributions to TRC. Management currently believes that the distributions
allowed under the Credit Facility and the 10.125% Senior Note Indenture will be
adequate to allow TRC to meet its obligations for the foreseeable future.
However, there can be no assurance that PFR's future income will be sufficient
to allow for distributions in an amount required to meet all future obligations
of TRC.
SEASONALITY
Company revenues are subject to seasonal fluctuations. Customer traffic, and
consequently revenues, are highest in the summer months and lowest during the
winter months because of the high proportion of restaurants located in states
where inclement weather adversely affects guest visits.
YEAR 2000
The Year 2000 presents a critical business issue due to the possibility that
many computerized systems will not be able to process information including
dates beginning in the Year 2000. In recent years, the Company has upgraded
computer hardware and software in the normal course of business to Year 2000
compliant technology. The Company has established a plan to assess its readiness
for the Year 2000. A review of computer systems and software, including
non-information technology systems, has been substantially completed. No
material costs associated with achieving Year 2000 compliance internally are
anticipated based on this review.
The nature of the Company's business is such that the ability of outside vendors
to supply the Company's restaurants with food and related products and
preparedness of the Company's franchisees to appropriately assess and address
Year 2000 business risks represent the primary risks to the Company from third
parties. In response to these risks, questionnaires have been sent to all of the
Company's primary vendors to obtain reasonable assurances that adequate plans
are being developed to address the Year 2000 issue. The returned questionnaires
are being assessed by the Company, and are being categorized based upon
readiness for the Year 2000 issues and prioritized in order of significance to
the business of the Company. In the case of outside vendors which provide
inadequate assurance of their readiness to handle Year 2000 issues, appropriate
contingency plans will be developed. The Company's franchisees have been
provided with information regarding the potential business risks associated with
the Year 2000 issue. The Year 2000 readiness of significant franchisees is being
assessed and action plans will be created to address the identified risks.
Unless public suppliers of water, electricity and natural gas are disrupted for
a substantial period of time (in which case the Company's business may be
materially adversely affected), based on information currently available,
management believes the most reasonably likely worst case scenario related to
Year 2000 compliance would not have a material impact on its financial position
or results of operations. However, unanticipated failures by critical vendors or
franchisees, as well as unidentified internal failures, could result in a
material adverse effect on the Company's operations. As a result, management
cannot reasonably predict what impact, if any, Year 2000 issues will have on the
Company.
16
<PAGE> 17
FORWARD-LOOKING STATEMENTS
This discussion contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are based on current expectations that are subject to known and
unknown risks, uncertainties and other factors that could cause actual results
to differ materially from those contemplated by the forward-looking statements.
Such factors include, but are not limited to, the following: general economic
conditions, competitive factors, consumer taste and preferences and adverse
weather conditions. The Company does not undertake to publicly update or revise
the forward-looking statements even if experience or future changes make it
clear that the projected results expressed or implied therein will not be
realized.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company currently has market risk sensitive instruments related to interest
rates. The Company is not subject to significant exposure for changing interest
rates on the Notes or the TRC Notes because the interest rates are fixed. The
Company has in place a $50,000,000 line of credit facility which matures on
January 1, 2003. All borrowings under the facility bear interest at floating
rates based on the agent's base rate or Eurodollar rates. The Company had
$5,000,000 outstanding under the line of credit facility at March 31, 1999.
While changes in market interest rates would affect the cost of funds borrowed
in the future, the Company believes that the effect, if any, of reasonably
possible near-term changes in interest rates on the Company's consolidated
financial position, results of operations or cash flows would not be material.
Commodity Price Risk
Many of the food products purchased by the Company are affected by commodity
pricing and are, therefore, subject to price volatility caused by weather,
production problems, delivery difficulties and other factors which are outside
the control of the Company. The Company's supplies and raw materials are
available from several sources and the Company is not dependent upon any single
source for these items. If any existing suppliers fail, or are unable to deliver
in quantities required by the Company, the Company believes that there are
sufficient other quality suppliers in the marketplace that its sources of supply
can be replaced as necessary. At times, the Company enters into purchase
contracts of one year or less or purchases bulk quantities for future use of
certain items in order to control commodity pricing risks. Certain significant
items that could be subject to price fluctuations are beef, pork, coffee, eggs,
wheat products and corn products. The Company believes it will be able to pass
through increased commodity costs by adjusting menu pricing in most cases.
Additionally, the Company's product offerings and marketing events are
relatively diverse. Therefore the company has the flexibility to adjust its
product mix to take advantage of or limit exposure to commodity cost
fluctuations. The Company believes that any changes in commodity pricing which
cannot be offset by changes in menu pricing, or other product delivery
strategies, would not be material.
17
<PAGE> 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Reference is made to the Index of Exhibits attached hereto
as page 19 and made a part hereof.
(b) Reports on Form 8-K - None
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE RESTAURANT COMPANY
DATE: May 14, 1999 BY: /s/ Steven R. McClellan
------------- -----------------------
Steven R. McClellan
Vice President,
Chief Financial Officer
18
<PAGE> 19
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 AND FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,582
<SECURITIES> 0
<RECEIVABLES> 7,624
<ALLOWANCES> 807
<INVENTORY> 6,905
<CURRENT-ASSETS> 17,305
<PP&E> 249,208
<DEPRECIATION> 119,113
<TOTAL-ASSETS> 195,181
<CURRENT-LIABILITIES> 34,579
<BONDS> 159,806
0
0
<COMMON> 1
<OTHER-SE> (4,615)
<TOTAL-LIABILITY-AND-EQUITY> 195,181
<SALES> 68,364
<TOTAL-REVENUES> 73,489
<CGS> 19,339
<TOTAL-COSTS> 57,475
<OTHER-EXPENSES> 16,291
<LOSS-PROVISION> 179<F1>
<INTEREST-EXPENSE> 4,283
<INCOME-PRETAX> (277)
<INCOME-TAX> 106
<INCOME-CONTINUING> (171)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (340)
<NET-INCOME> (511)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>THE PROVISION FOR DOUBTFUL ACCOUNTS AND NOTES IS PRESENTED WITHIN OPERATING
EXPENSES IN THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS AND IS INCLUDED
IN TOTAL COSTS ABOVE.
</FN>
</TABLE>
