<PAGE> 1
CONFORMED COPY
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 June 30, 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 JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1 Pierce Place, Suite 100 East, Itasca, Illinois 60341
- -----------------------------------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(901) 766-6400
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark, whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
1
<PAGE> 2
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 Six Months Ended
June 30 June 30
--------------------- -----------------------
1999 1998 1999 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Food sales $ 73,831 $ 68,408 $ 142,195 $ 131,182
Franchise revenues and other 5,569 5,466 10,694 10,640
-------- -------- --------- ---------
Total Revenues 79,400 73,874 152,889 141,822
-------- -------- --------- ---------
COSTS AND EXPENSES:
Cost of sales:
Food cost 19,973 19,220 39,312 37,356
Labor and benefits 26,162 23,793 50,413 45,421
Operating expenses 14,282 13,338 28,167 26,415
General and administrative 7,606 7,319 15,055 14,064
Depreciation and amortization 5,151 4,939 10,213 9,678
Interest, net 4,240 4,013 8,523 7,638
(Gain)/Loss on disposition of assets, net (427) -- (427) 400
Asset write-down 420 -- 420 500
Other, net (357) (344) (860) (678)
-------- -------- --------- ---------
Total Costs and Expenses 77,050 72,278 150,816 140,794
-------- -------- --------- ---------
Income from operations before income taxes and
cumulative effect of change in accounting principle 2,350 1,596 2,073 1,028
Provision for income taxes (821) (636) (715) (353)
-------- -------- --------- ---------
Income from operations before cumulative effect
of change in accounting principle 1,529 960 1,358 675
Cumulative effect of change in accounting
principle, net of income tax benefit of $188 -- -- (340) --
-------- -------- --------- ---------
NET INCOME $ 1,529 $ 960 $ 1,018 $ 675
======== ======== ========= =========
</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>
June 30,
1999 December 31,
(Unaudited) 1998
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,640 $ 3,150
Receivables, less allowance for
doubtful accounts of $722 and $495 7,891 7,178
Inventories, at the lower of first-
in, first-out cost or market 5,321 5,375
Prepaid expenses and other current assets 1,707 1,999
Deferred income taxes 209 209
-------- --------
Total current assets 17,768 17,911
-------- --------
PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization 131,954 131,283
INTANGIBLE AND OTHER ASSETS, net of
accumulated amortization of $31,357 and $30,147 47,203 46,444
-------- --------
$196,925 $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>
June 30,
1999 December 31,
(Unaudited) 1998
----------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ 1,144 $ 1,229
Accounts payable 11,439 11,568
Accrued expenses 21,530 23,228
--------- ---------
Total current liabilities 34,113 36,025
--------- ---------
CAPITAL LEASE OBLIGATIONS, less
current maturities 4,654 5,767
LONG-TERM DEBT 156,470 153,334
DEFERRED INCOME TAXES AND OTHER 4,775 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 (4,057) (5,074)
--------- ---------
Total stockholders' deficit (3,087) (4,104)
--------- ---------
$ 196,925 $ 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 Six Months Ended
June 30 June 30
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,529 $ 960 $ 1,018 $ 675
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,151 4,939 10,213 9,678
Change in accounting principle -- -- 340 --
(Gain)/Loss on disposition of assets, net (427) -- (427) 400
Asset write-down 420 -- 420 500
Other noncash income and expense items 135 (57) 314 (474)
Net changes in other operating assets and liabilities (1,746) (3,340) (3,914) (1,430)
-------- -------- -------- --------
Total adjustments 3,533 1,542 6,946 8,674
-------- -------- -------- --------
Net cash provided by operating activities 5,062 2,502 7,964 9,349
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment (6,717) (7,817) (9,955) (11,806)
Proceeds from sale of property and equipment -- -- -- 12
Payments on notes receivable 48 168 124 209
Investment in/Advances to joint venture -- -- -- (110)
-------- -------- -------- --------
Net cash used in investing activities (6,669) (7,649) (9,831) (11,695)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 12,500 36,059 23,250 47,559
Payments on long-term debt (11,500) (13,550) (21,250) (22,050)
Principal payments under capital lease obligations (315) (345) (611) (688)
Repurchase of common stock -- (17,000) -- (17,282)
Purchase of minority interest (20) (454) (32) (16,241)
Deferred financing costs -- (487) -- (1,023)
-------- -------- -------- --------
Net cash provided by (used in) financing activities 665 4,223 1,357 (9,725)
-------- -------- -------- --------
Net decrease in cash and cash equivalents (942) (924) (510) (12,071)
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS:
Balance, beginning of period 3,582 4,880 3,150 16,027
-------- -------- -------- --------
Balance, end of period $ 2,640 $ 3,956 $ 2,640 $ 3,956
======== ======== ======== ========
</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, the Company has sponsored financing programs offered by certain
lending institutions to assist its franchisees in procuring funds for the
construction of new franchised restaurants and to purchase and install in-store
bakeries. The Company provides a limited guaranty of the funds borrowed. At June
30, 1999, there were approximately $2,868,000 in borrowings outstanding under
these programs. The Company has guaranteed $837,000 of these borrowings. No
additional borrowings are available under these programs. The Company has also
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 June 30, 1999, the outstanding balance on the
loan was $1,200,000.
During the second quarter of 1999, the Company entered into an agreement to loan
up to $775,000 to a franchisee to be used in remodeling and upgrading existing
restaurants. These funds are primarily being used for improvements to sites
owned or leased by the Company which are being leased to the franchisee. The
principal and interest will be paid by the franchisee over a five year period
beginning upon completion of the remodels and equipment upgrades. As of June 30,
1999, there was $195,000 outstanding under the loan agreement.
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 and six months ended June 30,
consisted of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
(Increase) Decrease in:
Receivables $(1,098) $(1,608) $(1,003) $ (874)
Inventories (494) (495) 54 (411)
Prepaid expenses and
other current assets 75 142 (236) (386)
Other assets (1,184) 370 (1,859) (103)
Increase (Decrease) in:
Accounts payable 135 (336) (127) 65
Accrued expenses (1,742) (1,497) (2,795) (312)
Other liabilities 2,562 84 2,052 591
------- ------- ------- -------
$(1,746) $(3,340) $(3,914) $(1,430)
======= ======= ======= =======
</TABLE>
Other supplemental cash flow information was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------- -----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Cash paid for interest $6,975 $6,679 $7,255 $6,889
Income taxes paid 342 865 538 936
Income tax refunds received 82 690 1,083 1,380
</TABLE>
8
<PAGE> 9
Segment Reporting
The following presents revenues and other financial information by business
segment for the periods ended June 30 (in thousands):
Three Months Ended:
June 30, 1999:
<TABLE>
<CAPTION>
Restaurant Franchise Manufacturing Other Totals
---------- --------- ------------- -------- -------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $66,735 $5,414 $6,942 $ 309 $79,400
Intersegment revenues -- -- 2,369 -- 2,369
Segment profit (loss) 7,841 4,673 1,544 (12,529) 1,529
</TABLE>
June 30, 1998:
<TABLE>
<CAPTION>
Restaurant Franchise Manufacturing Other Totals
---------- --------- ------------- -------- -------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $61,487 $5,287 $6,661 $ 439 $73,874
Intersegment revenues -- -- 1,740 -- 1,740
Segment profit (loss) 6,973 4,780 1,385 (12,178) 960
</TABLE>
Six Months Ended:
June 30, 1999:
<TABLE>
<CAPTION>
Restaurant Franchise Manufacturing Other Totals
---------- --------- ------------- -------- -------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $129,059 $10,380 $12,819 $ 631 $152,889
Intersegment revenues -- -- 4,422 -- 4,422
Segment profit (loss) 14,077 8,947 2,548 (24,554) 1,018
</TABLE>
June 30, 1998:
<TABLE>
<CAPTION>
Restaurant Franchise Manufacturing Other Totals
---------- --------- ------------- -------- -------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $118,857 $10,280 $11,763 $ 922 $141,822
Intersegment revenues -- -- 3,586 -- 3,586
Segment profit (loss) 12,543 9,091 2,435 (23,394) 675
</TABLE>
9
<PAGE> 10
A reconciliation of other segment loss is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
General and administrative expenses $ 6,508 $ 6,382 $ 13,163 $ 12,310
Depreciation and amortization expenses 1,467 1,634 2,946 3,179
Interest expense 4,240 4,013 8,523 7,638
Change in accounting principle -- -- 340 --
(Gain)/Loss on disposition of assets (427) -- (427) 400
Asset write-down 420 -- 420 500
Provision for income taxes 1,529 960 1,358 675
Other (1,208) (811) (1,769) (1,308)
-------- -------- -------- --------
$ 12,529 $ 12,178 $ 24,554 $ 23,394
======== ======== ======== ========
</TABLE>
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 June 30, 1999 was $1,319,000 and is included in other assets and other
liabilities in the accompanying balance sheets of the Company.
10
<PAGE> 11
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 June 30, 1999, the Company owned and operated 140
full-service restaurants and franchised 331 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 six months ended June 30, 1999, revenues from
Company-operated restaurants, Foxtail, and franchise fees and other accounted
for 84.6%, 8.4% and 7.0% 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.
11
<PAGE> 12
A summary of the Company's results for the first quarter ended June 30 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 Six Months Ended
June 30 June 30
-------------------- --------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Food sales 93.0% 92.6% 93.0% 92.5%
Franchise revenues 7.0 7.4 7.0 7.5
----- ----- ----- -----
Total Revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs and Expenses:
Cost of sales:
Food cost 25.2 26.0 25.7 26.3
Labor and benefits 32.9 32.2 33.0 32.1
Operating expenses 18.0 18.1 18.4 18.6
General and administrative 9.6 9.9 9.8 9.9
Depreciation and amortization 6.5 6.7 6.7 6.8
Interest, net 5.3 5.4 5.6 5.4
(Gain)/Loss on disposition of assets, net (0.5) -- (0.3) 0.3
Asset write-down 0.5 -- 0.3 0.4
Other, net (0.4) (0.5) (0.6) (0.5)
----- ----- ----- -----
Total Costs and Expenses 97.1 97.8 98.6 99.3
----- ----- ----- -----
Income from operations before income taxes and
cumulative effect of change in accounting principle 2.9 2.2 1.4 0.7
Provision for income taxes (1.0) (0.9) (0.5) (0.2)
----- ----- ----- -----
Income from operations before cumulative effect
of change in accounting principle 1.9 1.3 0.9 0.5
Cumulative effect of change in accounting
principle, net of income taxes -- -- (0.2) --
----- ----- ----- -----
Net Income 1.9% 1.3% 0.7% 0.5%
===== ===== ===== =====
</TABLE>
Net income for the second quarter of 1999 was $1,529,000 versus net income of
$960,000 for the same period in 1998. For the six months ended June 30, 1999 net
income was $1,018,000 compared to $675,000 in the prior year.
12
<PAGE> 13
Revenues:
Total revenues for the second quarter and first six months of 1999 increased
7.5% and 7.8% over the same periods last year due primarily to sales from stores
which were not open during 1998, higher comparable restaurant sales, and
increased Foxtail sales.
The increase in restaurant revenue is primarily due to the addition of six
Company-operated full service restaurants in 1998 and two restaurants in the
second quarter of 1999. Additionally, same store comparable sales increased
approximately 4.8% over the second quarter and first six months of 1998 due
primarily to selective menu price increases in 1998 and guest trends toward
higher-priced entrees. 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 and two stores during 1999. Decreases
in comparable guest visits of 0.9% and 1.2% for the quarter and six months,
respectively, partially offset increases in average guest check.
Revenues from Foxtail increased approximately 4.2% and 9.0% over the three and
six months ended June 30, 1998, and constituted approximately 8.7% and 8.4%
respectively of the Company's revenues. These increases in sales are 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 and other revenues, which consist primarily of franchise royalties and
sales fees, increased 1.9% over the second quarter of 1998 and 0.5% over the
first six months of 1998. Franchise royalty revenue increased in 1999 due to the
opening of forty-seven new franchised restaurants since January 1, 1998. The
revenue from these new restaurants was offset by the closing of 52 lower volume
restaurants during the same period. Eleven franchised restaurants opened in 1999
compared to sixteen openings in 1998 which resulted in decreased franchise sales
fees.
Costs and Expenses:
Food cost:
In terms of total revenues, food cost for the three and six months ended June
30, 1999, decreased 0.8 and 0.6 percentage points, respectively, over the same
periods in 1998. Food costs decreased during the current year due to selective
menu price increases in 1998 and lower commodity costs. The decreases were
partially offset by the increased costs associated with product upgrades on
certain key items.
Labor and benefits:
Labor and benefits expense, as a percentage of total revenues, increased 0.7 and
0.9 percentage points for the second quarter and six months ended June 30, 1999,
respectively. Increases in group health insurance costs and lower productivity
per labor hour were the primary components of the increase. Effective in July
1999, the Company made significant changes to its group health insurance plan
design which are expected to mitigate future increases in these costs.
13
<PAGE> 14
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.
Operating expenses:
Operating expenses, expressed as a percentage of total revenues decreased 0.1
and 0.2 percentage points for the three and six months ended June 30, 1998,
respectively. This decrease is primarily due to the elimination of certain
outside service expenses and the impact of increased comparable sales. These
decreases are partially offset by increases in Foxtail distribution costs and
increased franchise operating costs associated with new store openings.
General and administrative:
General and administrative expenses increased 3.9% and 7.1% over the three and
six months ended June 30, 1999. This increase is due to higher incentive costs
associated with continued growth in Company performance and the higher cost of
administrative support.
Depreciation and amortization:
Depreciation and amortization expense for the three and six months ended June
30, 1999 increased 4.3% and 5.5% over the same periods last year due primarily
to the addition of new Company-operated restaurants and the upgrade and
maintenance of existing restaurants.
Interest, net:
Interest expense for the three and six months ended June 30, 1999, increased
5.7% and 11.6%, respectively, over the same periods last year primarily as the
result of debt incurred in May 1998 which was used to consummate the
Reorganization. This increase was partially offset by decreased interest expense
related to capital leases and lower interest rates for borrowings on the
Company's revolving line of credit facility.
Other:
The Company recognized a gain in the second quarter of 1999 totaling $427,000
related to the early termination of a lease obligation. Losses for asset
write-downs totaled $420,000. This loss primarily relates to a property for
which the lease will expire in 1999 without exercising an available lease
option. As a result, the related leasehold improvements were written off. In
addition, development of two prospective restaurant sites was discontinued.
Results of operations for the six months ended June 30, 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.
14
<PAGE> 15
Results of operations for the six months ended June 30, 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.
CAPITAL RESOURCES AND LIQUIDITY
The principal use of cash during the second quarter and first six months ended
June 30, 1999, was capital expenditures. Capital expenditures consisted
primarily of development costs for new Company-operated restaurants and costs
related to remodels of existing restaurants. Two new restaurants were opened in
the second quarter of 1999 and four sites were under development as of June 30,
1999. 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 six months ended June 30, 1999
and 1998, respectively (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31 JUNE 30
--------------------------------- -------------------
1998 1997 1996 1999 1998
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Maintenance $ 4,141 $ 3,453 $ 2,987 $1,936 $ 1,546
New sites 12,845 6,193 1,947 3,860 5,817
Manufacturing 1,152 714 651 574 609
Remodeling and Reimaging 4,144 2,790 4,064 2,446 2,491
Other 2,864 1,952 2,212 1,139 1,343
------- ------- ------- ------ -------
Total Capital Expenditures $25,146 $15,102 $11,861 $9,955 $11,806
======= ======= ======= ====== =======
</TABLE>
The Company's capital budget for 1999 is $28.0 million. The Company plans to add
up to four additional full-service Company-operated restaurants in the remainder
of 1999. The remaining capital budget will be primarily applied to remodels of
existing restaurants, restaurant maintenance, future site acquisitions, 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.
15
<PAGE> 16
PFR maintains 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 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 June 30, 1999,
$6,000,000 in borrowings and approximately $1,600,000 of letters of credit were
outstanding under the facility.
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 and six months ended June
30, 1999, PFR made Tax Distributions totaling approximately $856,000 and
$2,094,000, respectively, 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
16
<PAGE> 17
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.
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.
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 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
have been developed to address the Year 2000 issue. The returned questionnaires
have been assessed by the Company. Based on these responses, the Company has no
reason to believe that significant business risks exist, however, the responses
do not provide any guarantees that unidentified failures by critical vendors
will not occur.
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. To mitigate exposure for both
Company-owned and franchised restaurants, the Company is developing contingency
plans to assist restaurant personnel in providing for quick response and, if
necessary, limited service in those restaurants that do experience interruptions
of service from critical vendors.
Unless public suppliers of water, electricity and natural gas are disrupted for
a substantial period of time (in which case the Company's business will 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.
17
<PAGE> 18
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.
Forward-Looking Statements
This discussion and the discussion following contain 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,
adverse weather conditions, group health insurance costs, minimum wage rate
increases, availability and costs of commodities, interest rates and credit
availability. 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.
18
<PAGE> 19
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. PFR
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. PFR had $6,000,000 outstanding under
the line of credit facility at June 30, 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 majority of 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, vegetable oils, 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 reasonably possible
near-term changes in commodity pricing which cannot be offset by changes in menu
pricing, or other product delivery strategies, would not be material.
19
<PAGE> 20
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 21 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: August 16, 1999 BY: /s/ Steven R. McClellan
---------------- -------------------------------
Steven R. McClellan
Vice President,
Chief Financial Officer
20
<PAGE> 21
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND FROM THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,640
<SECURITIES> 0
<RECEIVABLES> 7,891
<ALLOWANCES> 900
<INVENTORY> 5,321
<CURRENT-ASSETS> 17,768
<PP&E> 253,372
<DEPRECIATION> 121,418
<TOTAL-ASSETS> 196,925
<CURRENT-LIABILITIES> 34,113
<BONDS> 161,124
0
0
<COMMON> 1
<OTHER-SE> (3,088)
<TOTAL-LIABILITY-AND-EQUITY> 196,925
<SALES> 142,195
<TOTAL-REVENUES> 152,889
<CGS> 39,312
<TOTAL-COSTS> 117,892
<OTHER-EXPENSES> 32,924
<LOSS-PROVISION> 307<F1>
<INTEREST-EXPENSE> 8,523
<INCOME-PRETAX> 2,073
<INCOME-TAX> (715)
<INCOME-CONTINUING> 1,358
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (340)
<NET-INCOME> 1,018
<EPS-BASIC> 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>
