RESTAURANT CO, 10-K, 2000-03-30

RESTAURANT CO
10-K, 2000-03-30
EATING PLACES

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<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended
December 31, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period ________ from to ________

Commission File Number 333-57925

THE RESTAURANT COMPANY
(Exact name of Registrant as specified in its charter)

Delaware 62-1254388
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

6075 Poplar Ave. Suite 800 Memphis, TN 38119
(Address of principal executive offices) (Zip Code)

(901) 766-6400
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange
------------------- on which registered
-------------------

None

Securities registered pursuant to Section 12(g) of the Act:

None

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

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

<PAGE> 2

PART I
ITEM 1. BUSINESS.

GENERAL. The Restaurant Company ("the Company," "Perkins," or "TRC") is a
wholly-owned subsidiary of The Restaurant Holding Company ("RHC"). TRC conducts
business under the name "Perkins Restaurant and Bakery". TRC is also the sole
stockholder of TRC Realty LLC and Perkins Finance Corp. RHC is owned by Donald
N. Smith ("Mr. Smith"), TRC's Chairman and Chief Executive Officer, and
BancBoston Ventures, Inc. Mr. Smith is also the Chairman and Chief Executive
Officer of Friendly Ice Cream Corporation ("FICC"), which operates and
franchises approximately 600 restaurants, located primarily in the northeastern
United States. Mr. Smith owns 8.5% of the common stock of FICC.

THE RECAPITALIZATION. Prior to December 13, 1999, TRC was the sole stockholder
of Perkins Restaurants Inc. ("PRI") which was a limited partner and indirect
owner of 100% of Perkins Family Restaurants, L.P. ("PFR") and the parent of
PFR's general partner, Perkins Management Company, Inc. ("PMC"). On December
13, 1999, PMC was merged into PRI. On December 15, 1999, PRI was merged into
TRC. As a result of these mergers, PFR, which had been an indirect wholly-owned
subsidiary of TRC, became a direct wholly-owned subsidiary of TRC, and TRC
became the general partner of PFR.

THE REORGANIZATION. On May 7, 1998, TRC and Harrah's Entertainment, Inc.
("Harrah's") entered into an agreement whereby TRC redeemed 100% of Harrah's
interest in the Company ("the Reorganization"). The closing of the
Reorganization occurred on May 18, 1998. As a result of the Reorganization,
TRC's common stock was owned 50.0% by Mr. Smith, 42.3% by The Equitable Life
Assurance Society of the United States ("Equitable") and 7.7% by others.

THE 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.

OPERATIONS. The Company operates and franchises mid-scale restaurants which
serve a wide variety of high quality, moderately-priced breakfast, lunch and
dinner entrees. Perkins restaurants provide table service, and many are open 24
hours a day (except Christmas day and certain late night hours in selected
markets), seven days a week. As of December 31, 1999, entrees served in
Company-operated restaurants ranged in price from $3.39 to $9.59 for breakfast,
$4.69 to $9.59 for lunch and $6.29 to $9.59 for dinner. On December 31, 1999,
there were 474 full-service restaurants in the Perkins' system, of which 141
were Company-operated restaurants and 333 were franchised restaurants. Both the
Company-operated restaurants and franchised restaurants operate under the names
"Perkins Restaurant and Bakery," "Perkins Family Restaurant," "Perkins Family
Restaurant and Bakery," or "Perkins Restaurant" and the mark "Perkins." The
restaurants are located in 35 states with the largest number in Minnesota,
Ohio, Pennsylvania, Florida and Wisconsin (see Significant Franchisees).
Perkins has 16 franchised restaurants in Canada.

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<PAGE> 3

Perkins offers its guests a "core menu" consisting of certain required menu
offerings that each Company-operated and franchised restaurant must offer.
Additional items are offered to meet regional and local tastes. All menu items
at franchised restaurants must be approved by Perkins. Menu offerings
continually evolve to meet changing consumer tastes. Perkins buys television,
radio, outdoor and print advertisements to encourage trial, to promote product
lines and to increase guest traffic. Perkins has also installed a computerized
labor scheduling and administrative system called PRISM in all Company-operated
restaurants to improve Perkins' operating efficiency. PRISM is also available
to franchisees and is currently utilized in approximately 74% of franchised
restaurants.

The Company also offers cookie doughs, muffin batters, pancake mixes, pies and
other food products for sale to its Company-operated and franchised restaurants
and bakery and food service distributors through Foxtail Foods ("Foxtail"), the
Company's manufacturing division. During 1999, sales of products from this
division to Perkins franchisees and outside third parties constituted
approximately 9.1% of total revenues of the Company.

Franchised restaurants operate pursuant to license agreements generally having
an initial term of 20 years, and pursuant to which a royalty fee (usually 4% of
gross sales) and an advertising contribution (typically 3% of gross sales) are
paid. Franchisees pay a non-refundable license fee of $40,000 for the opening
of new restaurants. Franchisees opening their third and subsequent restaurants
pay a license fee of between $25,000 and $50,000 depending on the level of
assistance provided by the Company in opening the restaurant. License
agreements are typically terminable by franchisees on 12 to 15 months prior
notice and upon payment of specified liquidated damages. Franchisees do not
typically have express renewal rights. In 1999, average annual royalties paid
by franchisees were approximately $61,800. The following number of license
agreements are scheduled to expire in the years indicated: 2000 - seven; 2001 -
eight; 2002 - nine; 2003 - nineteen; 2004 - twenty-five. Franchisees typically
apply for and receive new license agreements.

DESIGN DEVELOPMENT. Company restaurants are primarily located in free-standing
buildings with between approximately 90 to 250 seats. The Company employs an
on-going system of prototype development, testing and remodeling to maintain
operationally efficient, cost-effective and unique interior and exterior
facility design and decor. The current prototype packages feature modern,
distinctive interior and exterior layouts that enhance operating efficiencies
and guest appeal. As of December 31, 1999, approximately 97% of
Company-operated restaurants were either new or remodeled since January 1,
1994.

To promote a consistent and current image throughout the Perkins system, the
Company encourages its franchisees to remodel their restaurants. Forty-six
franchised restaurants were remodeled in 1998 and an additional fifty-seven
restaurants were remodeled in 1999. Franchised restaurants that were either new
or remodeled since 1994 represent approximately 91% of the total franchise
system.

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<PAGE> 4

SYSTEM DEVELOPMENT. The Company opened four new Company-operated restaurants in
1999. Three of these restaurants were located in the Tampa, FL area, and one was
located in Lady Lakes, FL. Twenty-two new franchised Perkins restaurants opened
during the year, and six new franchise owners joined the system.

RESEARCH AND DEVELOPMENT. Each year, the Company develops and tests a wide
variety of products with potential to enhance variety and appeal of its menu.
In addition to evaluations conducted in the Company's 3,000 square foot test
kitchen in Memphis, new products undergo extensive operations and consumer
testing to determine acceptance. While this effort is an integral part of the
Company's overall operations, it was not a material expense in 1999. In
addition, no material amounts were spent to conduct consumer research in 1999.

SIGNIFICANT FRANCHISEES. As of December 31, 1999, four franchisees, otherwise
unaffiliated with the Company, owned 88 of the 333 franchised restaurants and
bakeries. These franchisees operated 29, 20, 20 and 19 restaurants,
respectively. Forty-nine of these restaurants were located in Pennsylvania, and
the remaining 39 were located across Wisconsin, Tennessee, Florida, Nebraska,
Minnesota, Ohio and Kentucky. During 1999, Perkins earned net royalties and
license fees of $1,825,000, $1,560,000, $1,515,000 and $865,000 respectively
from these franchisees.

A franchisee of the Company which operated 19 restaurants as of December 31,
1999, filed a petition for reorganization under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of Ohio on October 27, 1999. Management believes it is possible that the
majority of these restaurants will remain in the Perkins system through
acquisition of the franchisee's operations by a third party. During 1999, the
Company earned royalties from these restaurants totaling approximately
$865,000. As of December 31, 1999, the franchisee owed the Company $392,000 in
pre-petition royalty fees. Additionally, the franchisee owed the Company
$169,000 in post-petition royalties. Although the franchisee's obligations to
the Company are guaranteed by the principals of the franchisee, collection
under the guarantees is uncertain and, therefore, the pre-petition obligations
are fully reserved.

FRANCHISE GUARANTEES. 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 funds
borrowed. At December 31, 1999, there were approximately $2,759,000 in
borrowings outstanding under these programs. The Company has guaranteed
$824,000 of these borrowings. No additional borrowings are available under
these programs.

In early 1998, the Company entered into a separate two year limited guarantee
of $1,200,000 in borrowings of a franchisee which were used to construct a new
franchised restaurant. As of December 31, 1999, the outstanding balance on the
loan was $1,187,000. The guarantee expired on February 26, 2000.

During 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 March 1, 2000.
As of December 31, 1999, there was $709,000 outstanding under the loan
agreement.

SERVICE FEE AGREEMENTS. The Company's predecessors entered into arrangements
with several different parties which have reserved territorial rights under
which specified payments are to be made by the Company based on a percentage of
gross sales from certain restaurants and for new restaurants opened within
certain geographic regions. During 1999, the Company paid an aggregate of
$2,402,000 under such arrangements. Three of such agreements are currently in
effect. Of these, one expires upon the death of the beneficiary, one expires in
the year 2075 and the remaining agreement remains in effect as long as the
Company operates Perkins Restaurants and Bakeries in certain states.

4
<PAGE> 5

SOURCE OF MATERIALS. Essential supplies and raw materials are available from
several sources, and Perkins is not dependent upon any one source for its
supplies and raw materials.

PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY. The Company believes that
its trademarks and service marks, especially the mark "Perkins," are of
substantial economic importance to its business. These include signs, logos and
marks relating to specific menu offerings in addition to marks relating to the
Perkins name. Certain of these marks are registered in the U.S. Patent and
Trademark Office and in Canada. Common law rights are claimed with respect to
other menu offerings and certain promotions and slogans. The Company has
copyrighted architectural drawings for Perkins restaurants and claims copyright
protection for certain manuals, menus, advertising and promotional materials.
The Company does not have any patents.

SEASONALITY. The Company's revenues are subject to seasonal fluctuations.
Customer counts (and consequently revenues) are highest in the summer months
and lowest during the winter months because of the high proportion of
restaurants located in states where inclement weather adversely affects guest
visits.

WORKING CAPITAL. As is typical in the restaurant industry, the Company
ordinarily operates with a working capital deficit since the majority of its
sales are for cash, while credit is received from its suppliers. Funds
generated by cash sales in excess of those needed to service short-term
obligations are used by the Company to reduce debt and acquire capital assets.
At December 31, 1999, this working capital deficit was $18.6 million.

COMPETITION. The Company's business and the restaurant industry in general are
highly competitive and are often affected by changes in consumer tastes and
eating habits, by local and national economic conditions and by population and
traffic patterns. The Company competes directly or indirectly with all
restaurants, from national and regional chains to local establishments. Some of
its competitors are corporations that are much larger than the Company and have
substantially greater capital resources at their disposal. In addition, in some
markets, primarily in the northeastern United States, Perkins and FICC operate
restaurants which compete with each other. The Company and its management may
engage in other businesses which may compete with the business of Perkins.

EMPLOYEES. As of March 20, 2000, the Company employed approximately 9,800
persons. Approximately 350 of these were administrative and manufacturing
personnel and the balance were restaurant personnel. Approximately 60% of the
restaurant personnel are part-time employees. The Company competes in the job
market for qualified restaurant management and operational employees. The
Company maintains ongoing restaurant management training programs and has on
its staff full-time restaurant training managers and a training director. The
Company believes that its restaurant management compensation and benefits
package compares favorably with those offered by its competitors. None of the
Company's employees are represented by a union.

REGULATION. The Company is subject to various Federal, state and local laws
affecting its business. Restaurants generally are required to comply with a
variety of regulatory provisions relating to zoning of restaurant sites,
sanitation, health and safety. No material amounts have been or are expected to
be expensed to comply with environmental protection regulations.

The Company is subject to a number of state laws regulating franchise
operations and sales. Those laws impose registration and disclosure
requirements on franchisors in the offer and sale of franchises and, in certain
cases, also apply substantive standards to the relationship between franchisor
and franchisee. Perkins must also adhere to Federal Trade Commission
regulations governing disclosures in the sale of franchises.

The wage rates of the Company's hourly employees are impacted by Federal and
state minimum wage rate laws. Future increases in these rates could materially
affect the Company's cost of labor.

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<PAGE> 6

ITEM 2. PROPERTIES.

The following table lists the location of each of the Company-operated and
franchised restaurants and bakeries as of December 31, 1999 (excluding two
alternative formats):

Number of Restaurants and Bakeries

<TABLE>
<CAPTION>
Company
Operated Franchised Total
-------- ---------- -----

<S> <C> <C> <C>
Alabama -- 1 1
Arizona -- 9 9
Arkansas -- 5 5
Colorado -- 16 16
Delaware -- 1 1
Florida 25 20 45
Georgia -- 3 3
Idaho -- 9 9
Illinois 7 1 8
Indiana -- 8 8
Iowa 17 1 18
Kansas 5 4 9
Kentucky -- 4 4
Maryland -- 4 4
Michigan 5 1 6
Minnesota 39 33 72
Mississippi -- 2 2
Missouri 9 -- 9
Montana -- 8 8
Nebraska 5 3 8
New Jersey -- 9 9
New York -- 5 5
North Carolina -- 6 6
North Dakota 3 5 8
Ohio -- 54 54
Oklahoma 3 -- 3
Pennsylvania 7 46 53
South Carolina -- 3 3
South Dakota -- 10 10
Tennessee 1 13 14
Utah -- 1 1
Virginia -- 1 1
Washington -- 6 6
Wisconsin 15 21 36
Wyoming -- 4 4
Canada -- 16 16

Total 141 333 474
</TABLE>

Most of the restaurants feature a distinctively styled brick or stucco
building. Perkins restaurants are predominantly single-purpose, one-story,
free-standing buildings averaging approximately 5,000 square feet, with a
seating capacity of between 90 and 250 customers.

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<PAGE> 7

The following table sets forth certain information regarding Company-operated
restaurants and other properties, as of December 31, 1999:

<TABLE>
<CAPTION>
Number of Properties(1)
---------------------------
Use Owned Leased Total
--- ----- ------ -----

<S> <C> <C> <C>
Offices and Manufacturing Facilities(2) 1 9 10
Perkins Restaurant and Bakery(3) 61 80 141
</TABLE>

- ---------

(1) In addition, TRC leases 16 properties, 13 of which are subleased
to others and 3 of which are vacant. TRC also owns 13 properties, 12
of which are leased to others and 1 of which is vacant.

(2)TRC's principal office is located in Memphis, Tennessee, and
currently comprises approximately 53,500 square feet under a lease
expiring on May 31, 2003, subject to renewal by the Company for a
maximum of 60 months. In addition, the Company owns a 25,149
square-foot manufacturing facility in Cincinnati, OH, and leases two
other properties in Cincinnati, OH, consisting of 36,000 square feet
and 60,000 square feet, respectively, for use as manufacturing
facilities.

(3) The average term of the remaining leases is 8 years, excluding
renewal options. The longest lease term will mature in 41 years and
the shortest lease term will mature in approximately 1 year, assuming
the exercise of all renewal options.

ITEM 3. LEGAL PROCEEDINGS.

The Company is a party to various legal proceedings in the ordinary course of
business. Management does not believe that these proceedings, either
individually or in the aggregate, are likely to have a material adverse effect
on the Company's financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS.

As the Company's equity securities are not publicly traded, this item is not
applicable.

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<PAGE> 8

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

(a) Market information.

No established public market exists for the Company's equity securities.

(b) Holders.

As of March 20, 2000, there was 1 Stockholder of record.

There were no dividends declared during 1998 or 1999.

INTENTIONALLY LEFT BLANK

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ITEM 6. SELECTED FINANCIAL DATA.

THE RESTAURANT COMPANY AND SUBSIDIARIES
SELECTED FINANCIAL AND OPERATING DATA
(In Thousands, Except Per Share Data and Number of Restaurants)

1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Data:
Revenues $ 315,700 $ 299,423 $ 270,161 $ 253,335 $ 247,534
Net Income (Loss) $ 7,442 $ 1,109 $ (291) $ 5,021 $ 3,530
Cash Distributions Declared
Per Share $ - $ - $ - $ - $ -

Balance Sheet Data:
Total Assets $ 200,564 $ 195,638 $ 208,062 $ 162,849 $ 167,520
Long-Term Debt and
Capital Lease Obligations (a) $ 164,480 $ 159,101 $ 136,999 $ 62,317 $ 67,713

Statistical Data:

Restaurants and Bakeries in
Operation at End of Year:

Company-Operated (b) 141 140 136 134 139

Franchised (b) 333 356 337 331 319
- -------------------------------------------------------------------------------------------------------------------
Total 474 496 473 465 458
Average Annual Sales Per
Company-Operated Restaurant $ 1,899 $ 1,816 $ 1,682 $ 1,576 $ 1,535

Average Annual Royalties Per
Franchised Restaurant $ 61.8 $ 58.7 $ 56.9 $ 55.2 $ 55.0

Total System Sales (b) $ 790,391 $ 776,164 $ 710,962 $ 677,959 $ 648,503
</TABLE>

(a) Net of current maturities

(b) Excluding alternative concepts.

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<PAGE> 10

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

RESULTS OF OPERATIONS

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.

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<PAGE> 11

Overview:

A summary of the Company's results for the three years ended December 31 is
presented in the following table. All revenues, costs and expenses are
expressed as a percentage of total revenues.

1999 1998 1997
------ ------ ------

<S> <C> <C> <C>
Revenues:
Food sales 93.1% 92.5% 92.6%
Franchise revenues and other 6.9 7.5 7.4
----- ----- -----
Total revenues 100.0 100.0 100.0
----- ----- -----

Costs and expenses:
Cost of sales:
Food cost 25.8 26.2 26.8
Labor and benefits 32.7 32.1 31.0
Operating expenses 18.1 18.5 19.0
General and administrative 9.4 9.8 9.9
Depreciation and amortization 6.7 6.6 6.0
Interest, net 5.4 5.4 1.8
(Benefit from) Provision for disposition of assets, net (0.2) 0.1 --
Asset write-down 0.2 1.1 --
Going Private Transaction -- -- 2.7
Recapitalization costs 0.3 -- --
Loss due to bankruptcy of franchisee -- 0.2 --
Other, net (0.6) (0.5) (0.1)
----- ----- -----
Total costs and expenses 97.8 99.5 97.1
----- ----- -----

Operating income 2.2 0.5 2.9
Minority interest in net earnings of subsidiaries -- -- (3.0)
----- ----- -----
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principle 2.2 0.5 (0.1)

Benefit from (provision for) income taxes 0.3 (0.1) (0.1)
----- ----- -----
Income (loss) from continuing operations 2.5 0.4 (0.2)

Discontinued operations:
Income from operation of discontinued division,
net of income taxes -- -- 0.1
----- ----- -----
Net income (loss) before cumulative effect of change
in accounting principle 2.5 0.4 (0.1)
Cumulative effect of change in accounting principle,
net of income tax benefit (0.1) -- --
----- ----- -----
Net income (loss) 2.4% 0.4% (0.1)%
===== ===== =====
</TABLE>

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<PAGE> 12

Net income for 1999 was $7,442,000 versus net income of $1,109,000 in 1998 and
net loss of $291,000 in 1997. Pre-tax income for 1999 included a net loss of
$25,000 related to asset dispositions and write-downs and a charge of $835,000
incurred as a result of the Recapitalization. Net income for 1999 also includes
a charge of $340,000, net of income tax benefit, related to the adoption of
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities."
Pre-tax income for 1998 included $422,000 in loss on/provision for disposition
of assets, $3,373,000 in asset impairment charges and $475,000 in write-offs
related to the bankruptcy of a significant franchisee. Pre-tax income for 1997
included $7,200,000 in expenses incurred in connection with the Going Private
Transaction and $650,000 in non-recurring tax reorganization costs.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

Revenues:

Total revenues increased 5.4% over 1998 due primarily to increased restaurant
food sales and sales at Foxtail, partially offset by reduced franchise fee
income.

The increase in restaurant food sales can be primarily attributed to an
increase in comparable sales of 4.2% and the net addition of one new restaurant
in 1999. The increase in comparable restaurant sales was due to menu price
increases, higher price points on current year promotions and guest trends
toward higher priced menu items. These factors resulted in an increase in
average guest check of 5.1%, which was partially offset by a 0.5% decrease in
comparable guest visits.

Revenues from Foxtail increased approximately 4.1% over 1998 and constituted
approximately 9.1% of the Company's total 1999 revenues. In order to ensure
consistency and availability of Perkins' proprietary products to each unit in
the system, Foxtail offers cookie doughs, muffin batters, pancake mixes, pies
and other food products to Company-operated and franchised restaurants through
food service distributors.Additionally, it produces a variety of
non-proprietary products for sale in various retail markets. Sales to
Company-operated restaurants are eliminated in the accompanying income
statements. The increase in Foxtail revenues is attributable to increased sales
outside the Perkins system in order to maintain plant utilization during slower
production periods.

Franchise revenues, which consist primarily of franchise royalties and initial
license fees, decreased 1.8% from the prior year. The decrease is primarily due
to the closing of 45 franchised restaurants during the year, 30 of which
related to the loss of a single franchisee in February 1999 due to a bankruptcy
liquidation. Twenty-two franchised restaurants were opened during 1999. The
impact of franchised restaurant closings was offset by higher average sales
volume in the new restaurants, as well as an increase in sales in existing
franchised restaurants. In addition, 22 franchised stores opened in 1999 versus
35 in 1998, resulting in lower initial license fees.

Costs and Expenses:

Food cost:

In terms of total revenues, food cost decreased 0.4 percentage points from
1998. Restaurant division food cost expressed as a percentage of restaurant
division sales also decreased 0.4 percentage points. The current year decrease
was primarily due to lower commodity costs on eggs, pork and poultry products,
menu price increases and improved margins on promotional items. These factors
were partially offset by increased costs for red meat and frozen foods due to
product upgrades.

The cost of Foxtail sales, in terms of total Foxtail revenues, decreased
approximately 0.8 percentage points from 1998, due primarily to favorable
commodity costs on certain core items, price increases and reduction of waste
obtained through equipment and process upgrades. As a manufacturing operation,
Foxtail typically has higher food costs as a percent of revenues than the
Company's restaurants.

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<PAGE> 13

Labor and benefits:

Labor and benefits expense, as a percentage of total revenues, increased 0.6
percentage points from 1998. Employee insurance costs rose over the prior year
due to increased overall healthcare costs, increased employee participation and
increased utilization among the participants. The Company instituted several
plan design changes in July 1999 and January 2000 to mitigate future increases.
Labor costs have increased over the prior year due to higher wage rates, a
highly competitive labor market and slightly lower productivity.

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. However, there is no assurance that future
increases can be mitigated through raising menu prices.

As a percentage of revenues, Foxtail labor and benefit charges are
significantly lower than the Company's restaurants. As Foxtail becomes a more
significant component of the Company's total operations, labor and benefits
expense, expressed as a percent of total revenue, should decrease.

Operating expenses:

Operating expenses, expressed as a percentage of total revenues, decreased 0.4
percentage points from 1998 to 1999.

Restaurant division operating expenses expressed as a percentage of restaurant
sales, decreased 0.7 percentage points due to the termination of a service
contract with an outside vendor to perform store maintenance. The impact of
increased comparable store sales on relatively fixed occupancy costs also
contributed to this variance.

Foxtail expenses, expressed as a percentage of Foxtail revenue, increased 0.6
percentage points. The majority of this increase is due to increased
distribution and warehousing expenses incurred as the Company has increased
sales volumes. An increase in repairs and maintenance expenses also contributed
to this variance.

Franchise division operating expenses, expressed as a percentage of franchise
revenues, decreased 0.1 percentage point. Thirteen fewer franchise store
openings in 1999 versus 1998, and the related costs associated with these
openings drove the difference between the two years.

General and administrative:

General and administrative expenses decreased to 9.4% of total revenues from
9.8% of total revenues in 1998. Controlled increases in administrative support
costs were combined with leveraged increases in 1998 to limit expense growth.

Depreciation and amortization:

Depreciation and amortization increased approximately 5.8% over 1998 due to the
Company's continuing program to upgrade and maintain existing restaurants and
the addition of four new Company-operated restaurants.

Interest, net:

Net interest expense was approximately 6.9% higher than 1998. The increase is
primarily the result of a full year's interest expense on the debt incurred in
May 1998 to consummate the Reorganization. In addition, interest accretes on
the Senior Discount Notes on a compounding basis. Interest expense associated
with capital lease obligations has decreased.

13
<PAGE> 14

Benefit from/ Provision for disposition of assets:

During 1999, the Company recorded a gain of $567,000 related to the early
termination of two leases for properties which had been previously reserved.
The Company was able to terminate the leases for less than originally
estimated.

Asset write-down:

$592,000 in charges related to the write-down of certain assets were recorded
in 1999. These charges are primarily attributable to properties that were
disposed of during the year and exit costs associated with a joint venture in
which the Company was a participant.

Other:

Other income increased approximately $325,000 due to a legal recovery related
to a subleased property and a gain associated with the termination of an
aircraft lease by TRC Realty LLC.

Benefit from/ Provision for income taxes:

The benefit from income taxes in 1999 was $992,000. This compares to a
provision for income taxes of $160,000 in 1998. As a result of the
Recapitalization, the Company recorded a deferred tax benefit related to an
adjustment of the Company's tax basis in certain of its assets. Excluding this
benefit, the 1999 net tax provision would have been $2,341,000.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

Revenues:

Total revenues increased 10.8% over 1997 due primarily to increased restaurant
food sales, sales at Foxtail and increased franchise royalties.

The increase in restaurant food sales can be primarily attributed to an
increase in comparable sales of 7.8% and the net addition of four new
restaurants in 1998. The increase in comparable restaurant sales was due to an
increase in comparable guest visits of 2.8% and selective price increases
resulting in an increase in average guest check of 5.2%.

Revenues from Foxtail increased approximately 15.6% over 1997 and constituted
approximately 9.2% of the Company's total 1998 revenues. This increase can be
attributed to growth in the number of stores in the Perkins system and
increased external sales. The increase in outside sales is due to the Company
developing external sales in order to maintain plant utilization during slower
production periods.

Franchise revenues increased 13.1% over the prior year due primarily to the net
addition of nineteen new franchised restaurants. The increase was also impacted
by an increase in sales for existing franchised restaurants.

14
<PAGE> 15

Costs and Expenses:

Food Cost:

In terms of total revenues, food cost decreased 0.6 percentage points from
1997. Restaurant division food cost, expressed as a percentage of restaurant
division sales, decreased 0.7 percentage points. These decreases were primarily
due to menu price increases effective in January, May and August 1998. Lower
commodity costs on pork, coffee and red meat contributed to the decrease in
food cost percentage as well.

The cost of Foxtail sales, in terms of total Foxtail revenues, decreased
approximately 1.7 percentage points from 1997 due primarily to certain
commodity cost decreases and price increases.

Labor and benefits:

Labor and benefits expense, as a percentage of total revenues, increased 1.1
percentage points from 1997. Labor costs increased over the prior year due to
higher minimum wage rates, a highly competitive labor market and slightly lower
productivity. Employee insurance costs rose over the prior year due to a change
in the provider network effective October 1, 1997. Many health care providers
within the network began to withdraw during the year, depriving the Company of
anticipated discounts. Effective October 1, 1998, the Company changed provider
networks in an effort to control these costs.

Operating expenses:

Operating expenses, expressed as a percentage of total revenues, decreased 0.5
percentage points from 1997 to 1998. The decrease is primarily due to the
impact of menu price increases and lower franchise service fees partially
offset by increased franchise opening costs and higher external distribution
and storage costs at Foxtail. Franchise service fees decreased due to the
termination of two service fee agreements during 1997. Franchise opening costs
increased due to the opening of 19 additional restaurants during the year
compared to 1997. Foxtail external distribution and storage costs increased due
to the use of outside warehousing, allowing increased efficiency within the
plants and more timely availability of goods for customers.

General and administrative:

General and administrative expenses increased approximately 9.2% over 1997.
This increase is primarily due to higher incentive compensation costs,
restaurant development costs, field administration costs, human resources costs
and administrative costs at Foxtail. In addition, payroll expense for corporate
administrative staff increased over the prior year. These were planned
increases deemed necessary as the Company emphasized increasing the number of
new and remodeled franchised and Company-operated restaurants.

Depreciation and amortization:

Depreciation and amortization increased approximately 24.2% over 1997 due to
the write-up of fixed assets and intangibles resulting from accounting
adjustments recorded in December 1997 in connection with the Going Private
Transaction. Additionally, the Company's continuing refurbishment program to
upgrade and maintain existing restaurants and the addition of four new
Company-operated restaurants contributed to this increase.

Interest, net:

Net interest expense was approximately 223% higher than 1997 primarily as the
result of debt incurred in December 1997 and May 1998 which was used to
consummate the Going Private Transaction and the Reorganization, respectively.
Interest expense associated with capital lease obligations decreased.

15
<PAGE> 16

Benefit from/Provision for disposition of assets:

During 1998, the Company recorded a net loss of $422,000 related to the loss
on/provision for disposition of assets; this amount includes a loss of
approximately $773,000 on the disposal of two properties and the recognition of
a previously deferred gain of approximately $445,000 under Statement of
Financial Accounting Standards ("SFAS") No. 66, "Accounting for Sales of Real
Estate," related to the sale of property in 1994.

Asset write-down:

Results of operations for the twelve months ended December 31, 1998, reflect a
$3,373,000 charge against earnings related to the write-down of certain assets
impaired under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." This charge includes the write-off
of an intangible asset of $689,000 which related to future royalty income of a
franchisee which became disaffiliated with the Perkins system.

Loss due to bankruptcy of franchisee:

Due to the bankruptcy of a significant franchisee, the Company recorded charges
of $250,000 related to debt guaranteed by the Company and $225,000 in
unreserved accounts receivable.

Other:

Other income increased approximately $1,075,000 during 1998 due primarily to
$650,000 in reorganization costs incurred in 1997 associated with analyzing the
alternatives to PFR's becoming a tax paying entity beginning January 1998 and
increased rental income on properties leased or subleased by the Company.

Benefit from/Provision for income taxes:

The provision for income taxes in 1998 was $160,000. This compares to a
provision for income taxes of $153,000 in 1997. The Company experienced an
increase in Work Opportunity Tax Credits and credits for excess payroll taxes
paid on employee cash tips, which was partially offset by an increase of
nondeductible goodwill amortization related to the Going Private Transaction.
In addition, for 1997, the Company incurred significant nondeductible,
non-recurring expenses related to the Going Private Transaction.

Income from operations of discontinued division:

Income from operations of discontinued division represents the income, net of
income tax expense, of Restaurant Insurance Corporation ("RIC"). RIC was sold
on March 19, 1997.

CAPITAL RESOURCES AND LIQUIDITY

Principal uses of cash during the year were cash outlays related to the
repurchase of outstanding stock from Equitable and other minority shareholders
and capital expenditures. Capital expenditures consisted primarily of land,
building and equipment purchases for new Company-operated restaurants,
maintenance capital and costs related to remodels of existing restaurants. The
Company's primary sources of funding were the sale of stock to RHC, cash
provided by operations and borrowings under the Company's line of credit.

16
<PAGE> 17

The following table summarizes capital expenditures for each of the years in
the three-year period ended December 31, 1999. Years Ended December 31

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
------ ------ ------

<S> <C> <C> <C>
Maintenance $ 4,778 $ 4,141 $ 3,453
New sites 10,100 12,845 6,193
Manufacturing 792 1,152 714
Remodeling and Reimaging 5,095 4,144 2,790
Other 2,730 2,864 1,952
------- ------- -------
Total Capital Expenditures $23,495 $25,146 $15,102
======= ======= =======
</TABLE>

The Company's capital budget for 2000 is $41.6 million and includes plans to
open eight new Company-operated restaurants and purchase four restaurants
operated by franchisees. The primary source of funding for these projects is
expected to be borrowings under the Company's line of credit and cash provided
by operations. Capital spending could vary significantly from planned amounts
as certain of these expenditures are discretionary in nature.

As is typical in the restaurant industry, the Company ordinarily operates with
a working capital deficit since the majority of its sales are for cash, while
credit is received from its suppliers. Funds generated by cash sales in excess
of those needed to service short term obligations are used by the Company to
reduce debt and acquire capital assets. At December 31, 1999, this working
capital deficit was $18.6 million.

On December 22, 1997, the Company 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 the Company's revolving
line of credit, purchase Units from the public and pay expenses relative to the
Company's Going Private Transaction.

On December 22, 1997, the Company 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 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 the
Company. As of December 31, 1999, $8,750,000 in borrowings and approximately
$1,253,000 of letters of credit were outstanding under the facility.

On May 18, 1998, the Company 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 $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.

17
<PAGE> 18

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 the Company 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 $13,091,000.

The Company's ability to make scheduled payments of principal of, or to pay the
interest or liquidated damages, if any, on, or to refinance, its indebtedness,
or to fund planned capital expenditures 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 its 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. The Company 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 the
Company to service its indebtedness or to fund its other liquidity needs. In
addition, there can be no assurance that the Company will be able to effect any
such refinancing on commercially reasonable terms or at all.

BANKRUPTCY OF A SIGNIFICANT FRANCHISEE

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 Restaurant and
Bakeries on February 28, 1999. For the year ended December 31, 1998, the
Company recorded a reserve for debt of the franchisee guaranteed by the Company
of $250,000, a write-off of $225,000 for unreserved accounts receivable and a
non-cash charge of $689,000 to write-off an intangible asset representing the
estimated present value of future royalty income from the franchisee. The
Company recognized as income approximately $1,925,000 in royalties from Perk
during 1998.

18
<PAGE> 19

SYSTEM DEVELOPMENT

The Company plans to open eight new Company-operated restaurants in 2000 and
purchase four existing restaurants operated by franchisees. The Company expects
to open between 25 and 35 franchised restaurants in 2000. In recent years, the
Company has been issuing area development agreements in selected markets where
both new and existing franchisees are qualified to open multiple locations
within three to five years. These development agreements are expected to
complement continued growth among franchisees who prefer to open a limited
number of restaurants in existing and smaller markets.

NEW ACCOUNTING PRONOUNCEMENTS

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. Historically, new store
preopening costs have been deferred and amortized over twelve months starting
when the restaurant opens. Upon adoption of SOP 98-5, the Company recorded a
cumulative effect of a change in accounting principle of $340,000, net of
income tax benefit, to write off unamortized preopening costs that existed on
the balance sheet at December 31, 1998.

Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
SFAS No. 133," is required to be implemented for fiscal years beginning after
June 15, 2000. The Company is currently evaluating the effects of adopting this
statement, but does not expect the adoption to have a material effect on the
Company's financial statements.

IMPACT OF INFLATION

The Company does not believe that its operations are affected by inflation to a
greater extent than are the operations of others within the restaurant
industry. In the past, the Company has generally been able to offset the
effects of inflation through selective periodic menu price increases.

IMPACT OF GOVERNMENTAL REGULATION

A majority of the Company's employees are paid hourly rates as determined by
Federal and state minimum wage rate laws. Future increases in these rates could
materially affect the Company's cost of labor. The Company is subject to
various other regulatory requirements from Federal, State and local
organizations. The Occupational Safety and Health Administration, the Food and
Drug Administration, the Environmental Protection Agency and other governmental
agencies all maintain regulations with which the Company is required to comply.

SEASONALITY

The Company's revenues are subject to seasonal fluctuations. Customer counts
(and consequently revenues) are higher in the summer months and lower during
the winter months because of the high proportion of restaurants located in
northern states where inclement weather adversely affects guest visits. v v

19
<PAGE> 20

ITEM 7A 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 and 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 $8,750,000 outstanding under the line of credit facility at
December 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, dairy products, 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. However, 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.

[INTENTIONALLY LEFT BLANK]

20
<PAGE> 21

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
(In Thousands)

<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------

<S> <C> <C> <C>
REVENUES:
Food sales $ 293,907 $ 276,935 $ 250,193
Franchise revenues and other 21,793 22,488 19,968
--------- --------- ---------
Total Revenues 315,700 299,423 270,161
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales:
Food cost 81,460 78,576 72,559
Labor and benefits 103,173 96,011 84,027
Operating expenses 57,205 55,413 51,212
General and administrative 29,736 29,347 26,871
Depreciation and amortization 21,054 19,905 16,031
Interest, net 17,160 16,045 4,963
(Benefit from) Provision for disposition of assets, net (567) 422 --
Asset write-down 592 3,373 --
Going Private Transaction -- -- 7,200
Recapitalization Costs 835 -- --
Loss due to bankruptcy of franchisee -- 475 --
Other, net (1,738) (1,413) (338)
--------- --------- ---------
Total Costs and Expenses 308,910 298,154 262,525
--------- --------- ---------
OPERATING INCOME 6,790 1,269 7,636

MINORITY INTEREST IN NET EARNINGS OF SUBSIDIARIES -- -- (7,867)
--------- --------- ---------

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE

INCOME TAXES AND CUMULATIVE EFFECTIVE OF CHANGE
IN ACCOUNTING PRINCIPLE 6,790 1,269 (231)

BENEFIT FROM (PROVISION FOR) INCOME TAXES 992 (160) (153)
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS 7,782 1,109 (384)
DISCONTINUED OPERATIONS:
Income from discontinued operations of discontinued
division, net of income taxes of $50 -- -- 93

--------- --------- ---------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 7,782 1,109 (291)

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING

PRINCIPLE, NET OF INCOME TAX BENEFIT OF $188 (340) -- --
--------- --------- ---------
NET INCOME (LOSS) $ 7,442 $ 1,109 $ (291)
========= ========= =========
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

21
<PAGE> 22

THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(In Thousands, Except Share Amounts)

<TABLE>
<CAPTION>
1999 1998
--------- ---------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,908 $ 3,150
Receivables, less allowance for doubtful accounts of $990 and $495 7,699 7,178
Inventories, at the lower of first-in, first-out cost or market 5,513 5,375
Prepaid expenses and other current assets 1,193 1,999
Deferred income taxes 635 209
--------- ---------
Total current assets 17,948 17,911
--------- ---------

PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization 135,659 131,283
INTANGIBLE ASSETS, net of accumulated amortization of $32,456 and $30,147 34,175 36,341
NOTES RECEIVABLE 2,462 1,853
DEFERRED INCOME TAXES 2,170 --
OTHER ASSETS 8,150 8,250
--------- ---------
200,564 $ 195,638
========= =========

LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ 942 $ 1,229
Accounts payable 15,510 11,568
Accrued expenses 20,065 23,228
--------- ---------
Total current liabilities 36,517 36,025
--------- ---------

CAPITAL LEASE OBLIGATIONS, less current maturities 4,064 5,767
LONG-TERM DEBT 160,416 153,334
DEFERRED INCOME TAXES AND OTHER 4,727 4,616
COMMITMENTS AND CONTINGENCIES (Notes 7 and 13)
STOCKHOLDERS' INVESTMENT:
Common stock, $.01 par value, 100,000 shares authorized,
10,820 and 11,640 issued and outstanding 1 1
Additional paid-in capital - 969
Accumulated deficit (5,161) (5,074)
--------- ---------
(5,160) (4,104)
========= =========
$ 200,564 $ 195,638
========= =========

</TABLE>

The accompanying notes are an integral part of these consolidated
balance sheets.

22
<PAGE> 23

THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
(In Thousands)

<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
--------- ---------- ----------- ---------

<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 1 $ 18,252 $ (5,894) $ 12,359
Net loss -- -- (291) (291)
--------- --------- --------- ---------
Balance at December 31, 1997 1 18,252 (6,185) 12,068
--------- --------- --------- ---------
Net income -- -- 1,109 1,109

Repurchase and retirement of stock -- (17,282) -- (17,282)

Other -- (1) 2 1
--------- --------- --------- ---------
Balance at December 31, 1998 1 969 (5,074) (4,104)

Net income -- -- 7,442 7,442

Issuance of stock -- 38,750 -- 38,750

Repurchase and retirement of stock -- (39,719) (7,529) (47,248)

--------- --------- --------- ---------
Balance at December 31, 1999 $ 1 $ -- $ (5,161) $ (5,160)
========= ========= ========= =========
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

23
<PAGE> 24

THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(In Thousands)

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------

<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 7,442 $ 1,109 $ (291)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Depreciation and amortization 21,054 19,905 16,031
Going Private Transaction expenses -- -- 7,200
Change in accounting principle 340 -- --
(Benefit from) Provision for disposition of assets (567) 197 --
Asset write-down 592 3,373 --
Minority interest in net earnings of subsidiaries -- -- 7,867
Other non-cash income and expense items, net 580 1,656 974
Earnings from discontinued operations -- -- (93)
Net changes in other operating assets and liabilities (973) (1,959) 1,412
-------- -------- --------
Total adjustments 21,026 23,172 33,391
-------- -------- --------
Net cash provided by operating activities 28,468 24,281 33,100
-------- -------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment (23,495) (25,146) (15,102)
Proceeds from sale of property and equipment -- 1,095 1,513
Proceeds from the sale of Restaurant Insurance Corporation -- -- 2,300
Payments on notes receivable 227 1,249 1,154
Other, net 200 (110) (920)
-------- -------- --------
Net cash used in investing activities (23,068) (22,912) (11,055)
-------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from long-term debt 4,750 22,009 70,848
Principal payments under capital lease obligations (1,821) (1,304) (1,956)
Distributions to unitholders of Perkins Family Restaurants, L.P. -- -- (7,040)
Deferred financing costs -- (1,266) (5,474)
Purchase of minority interest (73) (16,403) (66,266)
Issuance of stock 38,750 -- --
Repurchase of stock (47,248) (17,282) --
-------- -------- --------
Net cash used in financing activities (5,642) (14,246) (9,888)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (242) (12,877) 12,157

CASH AND CASH EQUIVALENTS:
Balance, beginning of year 3,150 16,027 3,870
-------- -------- --------
Balance, end of year $ 2,908 $ 3,150 $ 16,027
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

24
<PAGE> 25
THE RESTAURANT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Organization --
The Restaurant Company ("TRC", "Perkins" or the "Company") is a Delaware
corporation and is a wholly-owned subsidiary of The Restaurant Holding
Corporation ("RHC"). RHC is owned by Donald N. Smith ("Mr. Smith") and
BancBoston Ventures, Inc., a subsidiary of Fleet Boston Financial Corp., who
own 70.0% and 30.0%, respectively.

Mr. Smith is also the Chairman and Chief Executive Officer of Friendly Ice
Cream Corporation ("FICC"), which operates and franchises approximately 600
restaurants, located primarily in the northeastern United States. Mr. Smith
owns 8.5% of the common stock of FICC.

TRC operates and franchises mid-scale restaurants which serve a wide variety of
high quality, moderately priced breakfast, lunch, and dinner entrees, snacks
and bakery products. TRC and its franchisees operate under the names "Perkins
Restaurant and Bakery," "Perkins Family Restaurant," "Perkins Family Restaurant
and Bakery" and "Perkins Restaurant." Perkins restaurants provide table
service, and many are open 24 hours a day (except Christmas day and certain
late night hours in selected markets), seven days a week. The restaurants are
located in 35 states with the largest number in Minnesota, Ohio, Pennsylvania,
Florida and Wisconsin. There are sixteen franchised restaurants located in
Canada. TRC also offers cookie doughs, muffin batters, pancake mixes, pies and
other food products for sale to restaurants operated by TRC and its franchisees
and bakery and food service distributors through Foxtail Foods ("Foxtail"),
TRC's manufacturing division.

TRC Realty LLC --
TRC Realty LLC is a 100% owned subsidiary of TRC. TRC Realty LLC's sole purpose
is the operation of an airplane which is used for business purposes of TRC and
FICC.

Perkins Finance Corp.--
Perkins Finance Corp. ("PFC") is a wholly-owned subsidiary of TRC, and was
created solely to act as the co-issuer of its 10.125% Senior Notes. PFC has no
operations of any kind and does not have any revenues.

Restaurant Insurance Corporation--
Restaurant Insurance Corporation ("RIC"), formerly a wholly-owned subsidiary of
TRC, was incorporated on May 24, 1993 to reinsure 100% of the risk from the
insurer of FICC up to $500,000 per occurrence on policies relating to FICC's
operations. Types of coverage reinsured included workers' compensation,
employer's liability and auto liability. RIC was sold in March 1997 and is
accounted for in the accompanying financial statements as a discontinued
operation. See Note 16.

Basis of Presentation --
The accompanying financial statements include the consolidated results of TRC
and subsidiaries for the fiscal years ended December 31, 1999, 1998 and 1997.
All material intercompany transactions have been eliminated in consolidation.

Certain prior year amounts have been reclassified to conform to current year
presentation.

25
<PAGE> 26

Estimates --
The presentation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Cash Equivalents --
The Company considers all investments with an original maturity of three months
or less to be cash equivalents.

Franchise Revenue --
Franchisees of TRC are required to pay an initial fee to TRC when each
franchise is granted. These fees are not recognized as income until the
restaurants open. TRC also receives franchise royalties ranging from one to six
percent of the gross sales of each franchised restaurant. These royalties are
recorded as income monthly.

Advertising --
TRC expenses the costs of advertising. Net advertising expense was $12,288,000,
$11,644,000 and $10,784,000 for the fiscal years 1999, 1998 and 1997,
respectively.

Property and Equipment --
Major renewals and betterments are capitalized; replacements and maintenance
and repairs which do not extend the lives of the assets are charged to
operations as incurred.

Income taxes--
Deferred income taxes are provided for the tax effect of temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements. The Company uses the liability method to account for
income taxes, which requires deferred taxes to be recorded at the statutory
rate expected to be in effect when the taxes are paid.

Preopening Costs --
Historically, new store preopening costs have been deferred and amortized over
twelve months starting when the restaurant opens. 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 charge
of $340,000, after income tax benefit, for the cumulative effect of a change in
accounting principle to write off the unamortized preopening costs that existed
on the balance sheet as of December 31, 1998.

Impairment of Long-Lived Assets --
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," the Company evaluates the recoverability of assets
(including intangibles) when events and circumstances indicate that assets
might be impaired. For such assets, the Company determines impairment by
comparing the undiscounted future cash flows estimated to be generated by these
assets to their respective carrying amounts. Where an indication of impairment
exists, the Company generally estimates undiscounted future cash flows at the
level of individual restaurants or manufacturing facilities. In the case of
certain intangible assets related to the acquisition of area development rights
and acquisition of groups of restaurants, undiscounted future cash flows are
evaluated based on an appropriate grouping of the related properties' cash
flows. In the event an impairment exists, a loss is recognized based on the
amount by which the carrying value exceeds the fair value of the asset.

26
<PAGE> 27

(2) THE RECAPITALIZATION:

Prior to December 13, 1999, TRC was the sole stockholder of Perkins Restaurants
Inc. ("PRI") which was a limited partner and indirect owner of 100% of Perkins
Family Restaurants, L.P. ("PFR") and the parent of PFR's general partner,
Perkins Management Company, Inc. ("PMC"). On December 13, 1999, PMC was merged
into PRI. On December 15, 1999, PRI was merged into TRC. As a result of these
mergers, PFR, which had been an indirect wholly-owned subsidiary of TRC, became
a direct wholly-owned subsidiary of TRC, and TRC became the general partner of
PFR.

On December 22, 1999, through a series of transactions, TRC repurchased all of
its outstanding shares other than those owned by Mr. Smith. Mr. Smith
contributed all of his shares in TRC to RHC, and PFR was merged into TRC. As a
result, TRC became a 100% owned subsidiary of RHC. The Company expensed
$835,000 in connection with the Recaptialization which is reflected in the
accompanying Consolidated Statements of Operations for the year ended December
31, 1999. No change in the Company's management or business strategy has
occurred as a result of the Recapitalization.

(3) THE REORGANIZATION:

Prior to May 18, 1998, TRC's principal stockholders were Harrah's Operating
Company, a subsidiary of Harrah's Entertainment, Inc. ("Harrah's"), Mr. Smith
and The Equitable Life Assurance Society of the United States ("Equitable").
Harrah's and Mr. Smith each owned approximately 33.3% of TRC and Equitable
owned 28.2%.

On May 18, 1998, the Company redeemed 100% of Harrah's interest in the Company
(the "Reorganization"). Approximately $18.0 million was required to consummate
the Reorganization and pay related expenses. The Reorganization was funded by
the issuance of $18.0 million of 11.25% Senior Discount Notes due 2008 with an
aggregate original amount at maturity of $31.1 million. Subsequent to the
transaction, Mr. Smith and Equitable owned 50.0% and 42.3% of the Company,
respectively.

(4) THE 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 owned by the public and traded on the
New York Stock Exchange under the symbol "PFR". PFR'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.

27
<PAGE> 28

TRC's treatment of the Going Private Transaction as an acquisition of a
minority interest of a subsidiary resulted in accounting adjustments in
accordance with the purchase method of accounting as a step acquisition.
The effect of these adjustments is summarized as follows (in thousands):

<TABLE>

<S> <C>
Total purchase price of Units (including direct costs of $1,569) $ 77,758
Less: Minority interest in PFR (36,677)
---------
Total $ 41,081
=========
Allocation of step-up of assets:
Property and equipment $ 13,830
Franchise agreements 10,630
Goodwill 5,909
Deferred taxes 10,712
---------
Total $ 41,081
=========
</TABLE>

Franchise agreements are amortized using the straight-line method over the
remaining life of each specific franchise agreement (generally 1 to 20 years).
Goodwill is amortized using the straight-line method over 40 years.

The Going Private Transaction accounting adjustments resulted in additional
depreciation and amortization expense of approximately $2,373,000 in 1999 and
$2,750,000 in 1998. As the Going Private Transaction occurred on December 22,
1997, there was no material impact on the results of operations for the year
ended December 31, 1997. Expenses of $7,200,000 incurred in connection with the
Going Private Transaction are reflected in the accompanying Consolidated
Statements of Operations for the year ended December 31, 1997.

The following unaudited proforma results of operations for 1997 give effect to
the Going Private Transaction, excluding the $7,200,000 in Going Private
Transaction expenses, as if it had occurred at the beginning of 1997. This
proforma information does not necessarily represent what the results would have
been had the Going Private Transaction occurred at the beginning of 1997.

<TABLE>
<CAPTION>
(Unaudited)
(in thousands)
------------------
1997
------------------
<S> <C>
Revenues $ 270,161
Net income $ 2,136
</TABLE>

28
<PAGE> 29

(5) SUPPLEMENTAL CASH FLOW INFORMATION:

The increase or decrease in cash and cash equivalents due to changes in
operating assets and liabilities for the years ended December 31 consisted of
the following (in thousands):

<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
(Increase) Decrease in:
Receivables $ (1,921) $ (253) $ (3,359)
Inventories (138) (1,139) 4
Prepaid expenses and other current assets 266 (702) (126)
Other assets (4,673) 795 (427)

Increase (Decrease) in:
Accounts payable 3,944 155 2,063
Accrued expenses (630) 2,992 3,461
Other liabilities 2,179 (3,807) (204)
--------- --------- ---------
$ (973) $ (1,959) $ 1,412
========= ========= =========
</TABLE>

Other supplemental cash flow information for the years ended December 31
consisted of the following (in thousands):

<TABLE>
<CAPTION>
1999 1998 1997
------------ -------------- ------------
<S> <C> <C> <C>
Cash paid for interest $ 13,792 $ 13,398 $ 5,294
Income taxes paid 3,693 3,121 2,159
Income tax refunds received 181 721 354
</TABLE>

29
<PAGE> 30

(6) PROPERTY AND EQUIPMENT:

Property and equipment consisted of the following as of December 31 (in
thousands):

<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Owned:
Land and land improvements $ 36,701 $ 34,770
Buildings 84,240 76,099
Leasehold improvements 41,929 40,195
Equipment 75,625 68,892
Construction in progress 2,780 1,465
---------- ----------
241,275 221,421
Less - accumulated depreciation and amortization (108,697) (93,911)
---------- ----------
132,578 127,510
---------- ----------
Leased:
Buildings 21,068 23,654
Equipment 1,532 1,532
---------- ----------
22,600 25,186
Less - accumulated amortization (19,519) (21,413)
---------- ----------
3,081 3,773
---------- ----------
$ 135,659 $ 131,283
========== ==========
</TABLE>

Depreciation and amortization for financial reporting purposes is computed
primarily using the straight-line method based on the shorter of either the
estimated useful lives or the lease terms of the property, as follows:

Years
-----
<S> <C>
Owned:
Land improvements 3 - 20
Buildings 20 - 30
Leasehold improvements 7 - 20
Equipment 3 - 7
Leased:
Buildings 20 - 25
Equipment 6
</TABLE>

30
<PAGE> 31

(7) LEASES:

As of December 31, 1999, there were 141 full-service restaurants operated by
the Company as follows:

65 with both land and building leased
61 with both land and building owned
15 with the land leased and building owned

As of December 31, 1999, there were 25 restaurants either leased or subleased
to others by the Company as follows:

10 with both land and building leased
12 with both land and building owned
3 with the land leased and building owned

Most of the Company's restaurant leases have a primary term of 20 years and
generally provide for two to four renewals of five years each. Certain leases
provide for minimum payments plus a percentage of sales in excess of stipulated
amounts.

In October 1999, TRC Realty LLC terminated its lease of an aircraft with GE
Capital Corporation which originally expired in May 2004. In November 1999, TRC
Realty LLC entered into a lease with GE Capital Corporation for a new aircraft
expiring in November 2009.

Future minimum payments related to leases that have initial or remaining lease
terms in excess of one year as of December 31, 1999 were as follows (in
thousands):

<TABLE>
<CAPTION>
Lease Obligations
----------------------------
Capital Operating
------- ---------
<S> <C> <C>
2000 $ 1,426 $ 7,234
2001 1,340 6,689
2002 1,311 5,614
2003 866 3,911
2004 575 3,103
Thereafter 992 19,385
------- -------
Total minimum lease payments 6,510 $45,936
=======
Less:

Amounts representing interest (1,504)
-------
Capital lease obligations $ 5,006
=======
</TABLE>

The Company's capital lease obligations have effective interest rates ranging
from 7.1% to 16.1% and are payable in monthly installments through 2011.

31
<PAGE> 32

Future minimum gross rental receipts as of December 31, 1999, were as follows
(in thousands):

<TABLE>
<CAPTION>
Amounts Receivable As
--------------------------
Lessor Sublessor
----------- ----------
<S> <C> <C>
2000 $ 1,080 $ 991
2001 1,041 1,000
2002 925 884
2003 925 654
2004 930 621
Thereafter 5,747 1,904
----------- ----------
Total minimum lease rentals $ 10,648 $ 6,054
=========== ==========
</TABLE>

The net rental expense included in the accompanying Consolidated Statements of
Operations for operating leases was as follows for the years ended December 31
(in thousands):

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Minimum rentals $ 6,861 $ 6,756 $ 6,116
Contingent rentals 1,746 1,570 1,280
Less - sublease rentals (1,092) (1,225) (1,195)
-------- -------- --------
$ 7,515 $ 7,101 $ 6,201
======== ======== ========
</TABLE>

(8) INTANGIBLE ASSETS:

Intangible assets, net of accumulated amortization, were as follows as of
December 31 (in thousands):

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Excess of cost over fair value of net assets acquired,
being amortized evenly over 30 to 40 years $ 26,265 $ 27,404
Present value of estimated future royalty fee income
being amortized evenly over the remaining lives of
the franchise agreements 7,910 8,937
-------- --------
$ 34,175 $ 36,341
======== ========
</TABLE>

The Company periodically reevaluates the realizability of its excess cost over
fair value of net assets acquired by comparing the unamortized balance with
projected undiscounted cash flows from operations. The realizability of
intangible assets related to future royalty fee income is also assessed
periodically based on the performance of the applicable franchised restaurants.
In the event an impairment exists, a loss is recognized based on the amount by
which the carrying value exceeds the fair value of the asset.

32
<PAGE> 33

(9) ACCRUED EXPENSES:

Accrued expenses consisted of the following as of December 31 (in thousands):

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Payroll and related benefits $ 10,138 $ 12,660
Property, real estate and sales 2,436 2,401
taxes
Insurance 424 686
Rent 1,532 1,595
Other 5,535 5,886
-------- --------
$ 20,065 $ 23,228
======== ========
</TABLE>

(10) LONG-TERM DEBT:

Long-term debt consisted of the following at December 31 (in thousands):

<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
10.125% Unsecured Senior Notes due December 15, 2007 $ 130,000 $ 130,000

11.25% Unsecured Senior Discount Notes, due May 15, 2008 21,666 19,334

Revolving credit agreement, due January 1, 2003 8,750 4,000
--------- ---------
160,416 153,334
Less current maturities -- --
========= =========
$ 160,416 $ 153,334
========= =========
</TABLE>

On December 22, 1997, the Company 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 the Company's revolving
line of credit, purchase Units from the public and pay expenses related to the
Going Private Transaction. Interest on the notes is payable semi-annually on
June 15 and December 15.

33
<PAGE> 34

On December 22, 1997, the Company obtained a $50,000,000 secured revolving line
of credit facility (the "Credit Facility") with a sublimit for up to $5,000,000
of letters of credit. The Credit Facility matures on January 1, 2003, at which
time all amounts become payable. Any amounts borrowed under the Credit Facility
bear interest at floating rates based on the agent's base rate or Eurodollar
rates as defined in the agreement. All indebtedness under the Credit Facility
is secured by a first priority lien on substantially all of the assets of the
Company. As of December 31, 1999, $8,750,000 in borrowings and approximately
$1,253,000 of letters of credit were outstanding under the Credit Facility.

In connection with the issuance of the Notes and obtaining the Credit Facility,
the Company incurred deferred financing costs of approximately $6,028,000 which
are being amortized over the terms of the debt agreements.

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 $13,091,000.

Based on the borrowing rates currently available for debt with similar terms
and maturities, the approximate fair market value of the Company's long-term
debt as of December 31 was as follows (in thousands):

<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
10.125% Unsecured Senior Notes $ 127,400 $ 138,000
11.25% Unsecured Senior Discount Notes 21,233 20,565
</TABLE>

Because the Company's revolving line of credit borrowings outstanding at
December 31, 1999, bear interest at current market rates, management believes
that the related liabilities reflected in the accompanying balance sheets
approximated fair market value.

Pursuant to the Notes, the TRC Notes and the Credit Facility, the Company must
maintain specified financial ratios and is subject to certain restrictions
which limit additional indebtedness. At December 31, 1999, the Company was in
compliance with all such requirements.

34
<PAGE> 35

The Notes, the TRC Notes and the Credit Facility restrict the ability of the
Company to pay dividends or distributions to its equity holders. If no default
or event of default exists, these restrictions generally allow the Company to
pay dividends or distributions as follows:

1. if at the time of such dividend or distribution the payor would have been
allowed to incur at least $1.00 of additional indebtedness under fixed
charge coverage ratio tests as defined in the 11.25% Senior Discount Note
Indenture and the 10.125% Senior Note Indenture (the "Indentures").

2. under the TRC Notes, if such dividend or distribution is less than the sum
of 50% of consolidated net income from July 1, 1998 through the end of the
most recent fiscal quarter plus 100% of any contribution to or net
proceeds from issuance of its common equity.

3. under the Notes, in an aggregate amount after December 22, 1997 equal to
50% of positive net income, after tax distributions, from January 1, 1998
through the end of the most recently ended fiscal quarter.

4. additional dividends not to exceed $5 million after the date of the
respective Indenture.

These available amounts are reduced by dividends paid as well as certain other
restricted payments as defined in the Indentures.

Interest expense capitalized in connection with the Company's construction
activities equalled approximately $133,000, $198,000 and $78,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.

35
<PAGE> 36

(11) INCOME TAXES:

TRC and its subsidiaries file a consolidated Federal income tax return. As a
result of the Recapitalization, TRC's consolidated group ceased to exist. TRC
does not file a consolidated tax return with its parent, RHC. For state
purposes, each subsidiary generally files a separate return. PFR was not a
tax-paying entity; therefore, TRC included its allocable share of PFR's taxable
income in its income tax return. After December 22, 1997, TRC's allocable share
was 100%.

The following is a summary of the components of the benefit from/provision for
income taxes for the years ended December 31 (in thousands):

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 2,533 $ 2,726 $ 1,123
State and local 726 995 (129)
-------- -------- --------
3,259 3,721 994
-------- -------- --------
Deferred:
Federal (3,555) (2,867) (767)
State and local (696) (694) (74)
-------- -------- --------
(4,251) (3,561) (841)
-------- -------- --------
$ (992) $ 160 $ 153
======== ======== ========
</TABLE>

A reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate is as follows:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Federal 34.0 % 34.0 % (34.0)%
Federal income tax credits (15.3) (74.4) (4.9)
State income taxes, net of Federal taxes 2.5 6.1 0.5
Amortization of goodwill 6.7 32.8 --
Nondeductible expenses and other 6.6 14.1 3.9
Non-recurring item (Recapitalization) (49.1) -- --
Non-recurring item (Going Private Transaction) -- -- 100.7
-------- -------- --------
(14.6)% 12.6 % 66.2 %
======== ======== ========
</TABLE>

36
<PAGE> 37

The following is a summary of the significant components of the Company's
deferred tax position as of December 31 (in thousands):

<TABLE>
<CAPTION>
1999 1998
-------------------------- ---------------------------
Current Noncurrent Current Noncurrent
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Capital leases $ -- $ 770 $ -- $ 1,227
Inventory 171 -- 157 --
Accrued expenses and reserves 464 796 52 696
Depreciation and amortization -- 1,185 -- --
Deferred compensation -- 1,379 -- 726
--------- --------- --------- ---------
Deferred tax assets 635 4,130 209 2,649
--------- --------- --------- ---------
Depreciation and amortization -- -- -- (2,411)
Other -- (1,960) -- (2,081)
--------- --------- --------- ---------
Deferred tax liabilities -- (1,960) -- (4,492)
--------- --------- --------- ---------
$ 635 $ 2,170 $ 209 $ (1,843)
========= ========= ========= =========
</TABLE>

As a result of the Recapitalization, PFR was merged into TRC. For federal and
state income tax purposes, TRC's outside basis in PFR exceeded PFR's basis in
its assets. Accordingly, TRC's outside basis was allocated among the assets of
PFR, resulting in a favorable step up of tax basis. This created a deferred tax
asset of $3,333,000 which reduced the income tax provision for 1999.

(12) RELATED PARTY TRANSACTIONS:

TRC has a revolving loan agreement with Mr. Smith. The agreement provides for a
maximum loan from TRC to Mr. Smith of $1,500,000, with interest at the prime
rate. Accrued interest is payable on the last day of each calendar year, and
the principal and accrued but unpaid interest are payable on December 31, 2001.
As of December 31, 1999, there was $1,025,000 outstanding under this agreement.

FICC subleases certain land, buildings and equipment from the Company. During
the years ended December 31, 1999, 1998, and 1997 sublease income was $331,000,
$328,000 and $322,000, respectively.

TRC Realty LLC leases an aircraft for use by both FICC and TRC. The operating
lease expires in November 2009. FICC and TRC pay 40% and 60%, respectively, to
TRC Realty LLC for generally fixed expenses. In addition, FICC and TRC incur
actual variable usage costs. Total expense reimbursed by FICC for the years
ended December 31, 1999, 1998 and 1997 was $471,000, $617,000 and $565,000,
respectively.

FICC purchases certain food products used in the normal course of business from
Foxtail. For the years ended December 31, 1999, 1998, and 1997, purchases were
$967,000, $945,000 and $975,000, respectively.

In 1997, TRC provided FICC with certain management services for which TRC was
reimbursed $824,000. These services were not provided in 1998 or 1999.

37
<PAGE> 38

(13) COMMITMENTS AND 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 consolidated financial statements of the Company.

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 funds borrowed. At
December 31, 1999, there were approximately $2,795,000 in borrowings
outstanding under these programs. The Company has guaranteed $824,000 of these
borrowings. No additional borrowings are available under these programs.

The majority of the Company's franchise revenues are generated from franchisees
owning less than 5% of total franchised restaurants and, therefore, the loss of
any one of these franchisees would not have a material impact on the results of
the Company's operations. As of December 31, 1999, four franchisees owned 88 of
the 333 restaurants franchised by the Company. During 1999, the Company earned
net royalties and license fees of approximately $1,825,000, $1,560,000,
$1,515,000 and $865,000 from these franchisees. While the exit of one of these
franchisees from the system would have a material impact on the revenues of the
Company, such an occurrence would not in itself impair the ability of the
Company to maintain its operations.

The Company's ability to make scheduled payments of principal of, or to pay the
interest or liquidated damages, if any, on, or to refinance, its indebtedness
(including the Notes and the TRC Notes), 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 its 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. The Company may, however, need to refinance all or a
portion of the principal of the Notes and the TRC 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 the Company to service
its indebtedness or to fund its other liquidity needs. In addition, there can
be no assurance that the Company will be able to effect any such refinancing on
commercially reasonable terms or at all.

38
<PAGE> 39

(14) LONG-TERM INCENTIVE PLANS:

The Company's Executive Long-Term Incentive Plan (the "LTI Plan") was
established for the benefit of officers and selected key employees of the
Company as of January 1, 1998. Annual awards are based on an executive's
position within the Company and are earned by participants based on Minimum,
Target, and Maximum performance in earnings before interest, taxes,
depreciation and amortization ("EBITDA") criteria determined by the Board of
Directors each fiscal year. Long-Term Incentive Awards are payable in cash over
3 year periods at 33.3% per year, except for the initial Long-Term Incentive
Award which is payable in cash 50% in year one, 33% in year two and 17% in year
three. Long-Term Incentive Award payments are dependent upon TRC meeting
specific EBITDA goals from year to year. The LTI Plan is designed to retain and
reward officers and selected key employees of the Company and to compete with
publicly held companies in the retention of top management.

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
participants' taxable income and are held in trust with a bank, where the funds
are invested at the direction of each participant. As of December 31, 1999,
$2,115,000 is held in trust under the plan and is included in other long-term
assets and liabilities in the accompanying consolidated balance sheets.

Investment income on the invested funds is taxable to the Company, and the
Company is eligible for a deduction for compensation expense when the funds are
distributed to the participants at retirement, cessation of employment or other
specified events.

Effective January 1, 1998, the Company established a Performance Unit Grant
Plan under which a select group of key employees of the Company may receive
awards of Performance Units based on financial performance criteria established
by the Board of Directors at the time of grant. The Performance Unit Grant Plan
is designed to retain and reward selected key employees of the Company by tying
Performance Unit valuation to Company growth valuation criteria. Each award is
payable in cash and vests over a 3 year period at 33.3% per year. Upon
exercise, award values may be transferred to the participant's Deferred
Compensation Plan account. Unexercised awards expire on the tenth anniversary
of grant.

The Company's Supplemental Executive Retirement Income Plan ("the SERP") was
established on July 1, 1999. Under the SERP, a contribution is made each year
on behalf of one executive of the Company. The executive immediately vests in
33.3% of the contribution while vesting in the remaining 66.7% is discretionary
based on the attainment of certain performance criteria.

(15) EMPLOYEE BENEFITS:

The Perkins Retirement Savings Plan (the "Plan") as amended and restated
effective January 1, 1992, was established for the benefit of all eligible
employees, both hourly and salaried. The Plan gives all eligible employees the
opportunity to invest from 1% to 15% of their annual compensation subject to
Internal Revenue Code ("IRC") regulated maximums.

All participating employees at December 31, 1991 remained eligible to
participate in the Plan. All other employees of TRC and TRC Realty LLC who have
satisfied the participation requirements are eligible for participation in the
Plan provided they (i) have attained the age of 21 and (ii) have completed one
Year of Service, as defined, during which they have been credited with a
minimum of 1,000 Hours of Service.

Participants may elect to defer from 1% to 15% of their annual eligible
compensation subject to IRC regulated maximums. The Company may make a matching
contribution equal to a percentage of the amount deferred by the participant or
a specified dollar amount as determined each year by the Board of Directors.
During 1999, 1998 and 1997, the Company elected to match contributions at a
rate of 50% up

39
<PAGE> 40

to the first 6% deferred by each participant. Company matching contributions to
the Plan for each of the years 1999, 1998 and 1997 were $792,000, $720,000 and
$615,000, respectively.

Participants are always 100% vested in their salary deferral accounts and
qualified rollover accounts. Vesting in the employer matching account is based
on qualifying Years of Service. A participant vests 60% in the employer
matching account after three years, 80% after four years and 100% after five
years.

The trust established under the Plan is intended to qualify under the
appropriate section of the IRC as exempt from Federal income taxes. The Plan
has received a favorable determination by the Internal Revenue Service with
regard to the qualification of the Plan. The favorable determination applies to
the original Plan as well as all amendments adopted prior to 1995. The fourth,
fifth and sixth amendments to the Plan, adopted during 1995 through 1997, will
be submitted for determination at a later date. The Company's management and
legal counsel believe that the adoption of the aforementioned amendments to the
Plan do not hinder the Plan's ability to operate in compliance with all
applicable provisions of the IRC and that a favorable determination will be
received.

(16) DISCONTINUED OPERATIONS:

On March 19, 1997, the Company sold its restaurant insurance operations, RIC,
for $1,300,000 in cash and a note receivable of $1,000,000. The gain on sale
was immaterial.

Summarized results of discontinued operations were as follows (in thousands):

<TABLE>
<CAPTION>
1997
--------
<S> <C>
Net revenues $ 1,186

Operating expenses 1,043
--------
Income before income taxes 143

Provision for income taxes 50
--------
Net income from discontinued operations $ 93
========
</TABLE>

(17) ASSET WRITE-DOWN (SFAS NO. 121):

During 1999, the Company identified five restaurant properties which were not
expected to generate undiscounted future cash flows sufficient to cover the
carrying value of the underlying assets related to these properties. As
required under SFAS No. 121, the carrying amounts of the assets associated with
these restaurant properties were written down to their fair market values as
estimated based on the Company's experience in disposing of similar
under-performing properties and negotiations relating to the disposal of the
subject properties. One of these properties was held for disposal as of
December 31, 1999, and was subsequently disposed of in February 2000. The
Company wrote off the capitalized costs associated with the discontinuation of
development of two prospective restaurant sites. Additionally, the Company
recorded a charge to reduce to net realizable value the assets associated with
a joint venture that the company exited during the year.

All of the non-cash charges recorded in 1999 in accordance with SFAS No. 121
were to reduce the carrying value of assets to their estimated fair market
value and totalled $592,000.

During 1998, the Company wrote down to their fair market value twelve
restaurant properties which were not expected to generate undiscounted future
cash flows sufficient to cover the carrying value of the underlying assets
related to these properties. Three of these properties are held for disposal,
of which, two continue to operate as restaurants. In addition, the Company
wrote off intangibles related to future royalty income of a significant
franchisee which went bankrupt. These intangibles had been recorded in

40
<PAGE> 41

conjunction with accounting adjustments related to the Going Private
Transaction. The resulting non-cash charge for the above items, reduced 1998
pre-tax income by $3,373,000. The components of the charge were as follows (in
thousands):

<TABLE>

<S> <C>
Reduction of the carrying values of operating assets
to estimated fair market values $ 2,030

Estimated disposal costs, including commissions 654

Write-off of intangible asset relating to future royalty income 689
---------
$ 3,373
=========
</TABLE>

The Company's results of operations included losses related to the four
properties held for disposal of $1,000, $287,000 and $289,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. As of December 31, 1999,
these properties had a remaining net book value of $1,750,000.

41
<PAGE> 42

(18) SEGMENT REPORTING:

The Company has three primary operating segments: restaurants, franchise and
manufacturing. The restaurant operating segment includes Company-operated
restaurants. The franchise operating segment includes revenues and expenses
directly allocable to franchised restaurants. The manufacturing segment only
includes Foxtail Foods.

Revenues for the restaurant segment result from the sale of menu products at
restaurants operated by the Company. Revenues for the franchise segment consist
primarily of initial franchise fees and royalty income earned as a result of
operation of franchise restaurants. Revenues for the manufacturing segment are
generated by the sale of food products to restaurants operated by the Company
and franchisees, as well as customers outside the Perkins system. Foxtail's
sales to Company-operated restaurants are eliminated for external reporting
purposes.

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

1999:
Restaurants Franchise Manufacturing Other Totals
----------- --------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $264,682 $21,394 $28,767 $ 857 $315,700
Intersegment revenues -- -- 9,509 -- 9,509
Interest expense, net -- -- -- 17,160 17,160
Depreciation and
amortization 14,003 255 864 5,932 21,054
Segment profit (loss) 29,728 18,561 6,101 (46,948) 7,442
Segment assets 116,808 9,014 14,019 60,723 200,564
Expenditures for
segment assets 21,615 -- 792 1,088 23,495
</TABLE>

<TABLE>
<CAPTION>
1998:
Restaurants Franchise Manufacturing Other Totals
----------- --------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $248,302 $21,799 $27,626 $ 1,696 $299,423
Intersegment revenues -- -- 8,394 -- 8,394
Interest expense, net -- -- -- 16,045 16,045
Depreciation and
amortization 12,506 190 795 6,414 19,905
Segment profit (loss) 27,085 18,955 5,409 (50,340) 1,109
Segment assets 114,780 9,317 13,459 58,082 195,638
Expenditures for
segment assets 23,260 -- 1,152 734 25,146
</TABLE>

42
<PAGE> 43

<TABLE>
<CAPTION>
1997:
Restaurants Franchise Manufacturing Other Totals
----------- --------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $225,486 $19,257 $23,888 $ 1,530 $270,161
Intersegment revenues -- -- 8,042 -- 8,042
Interest expense, net -- -- -- 4,963 4,963
Depreciation and
amortization 11,616 108 691 3,616 16,031
Segment profit (loss) 24,569 16,536 4,611 (46,007) (291)
Segment assets 110,373 11,041 11,740 74,908 208,062
Expenditures for
segment assets 13,982 -- 714 406 15,102
</TABLE>

The Company evaluates the performance of its segments based primarily on
operating profit before corporate general and administrative expenses, interest
expense, depreciation and amortization incurred as a result of the Going Private
Transaction, amortization of goodwill, minority interest in net earnings of
subsidiary and income taxes.

Although depreciation and amortization related to the Going Private Transaction
are not allocated to segment profit, the "push down" accounting adjustments
related to assets have been included in the totals for each respective operating
segment. Assets not allocated to specific operating segments primarily include
cash, corporate accounts receivable and goodwill.

A reconciliation of other segment loss is as follows (in thousands):

1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
General and administrative expenses $ 25,812 $ 25,409 $ 23,631
Depreciation and amortization expenses 5,932 6,414 3,616
Interest expense 17,160 16,045 4,963
Recapitalization costs 835 -- --
Going Private Transaction -- -- 7,200
Asset write-down 592 3,373 --
(Benefit from) Provision for disposition of assets, net (567) 422 --
Cumulative effect of change in accounting principle 340 -- --
Minority interest in net earnings of subsidiaries -- -- 7,867
Benefit from (Provision for) income taxes (992) 160 153
Other (2,164) (1,483) (1,423)
--------
======== ========
$ 46,948 $ 50,340 $ 46,007
======== ======== ========
</TABLE>

43
<PAGE> 44

RESPONSIBILITY FOR FINANCIAL STATEMENTS

The Company's management is responsible for the preparation, accuracy and
integrity of the financial statements.

These statements have been prepared in accordance with accounting principles
generally accepted in the United States consistently applied, in all material
respects, and reflect estimates and judgments by management where necessary.

The Company maintains a system of internal accounting control which is adequate
to provide reasonable assurance that transactions are executed and recorded in
accordance with management's authorization and that assets are safeguarded. The
Board of Directors reviews the adequacy of the Company's internal accounting
controls.

Arthur Andersen LLP, independent public accountants, performs a separate
independent audit of the financial statements. This includes an assessment of
selected internal accounting controls to determine the nature, timing and extent
of audit tests and other procedures they deem necessary to express an opinion on
the fairness of the financial statements.

44
<PAGE> 45

Report of Independent Public Accountants

To The Restaurant Company:

We have audited the accompanying consolidated balance sheets of The Restaurant
Company (a Delaware corporation) and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
investment and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Restaurant
Company and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.

Arthur Andersen LLP

Memphis, Tennessee,
February 4, 2000.

45
<PAGE> 46

THE RESTAURANT COMPANY AND SUBSIDIARIES
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
(In Thousands)

<TABLE>
<CAPTION>
Net
Gross Income
1999 Revenues Profit (a) (Loss)
---------------------------------------------------------------

<S> <C> <C> <C>
1st Quarter $ 73,489 $16,014 $ (511)
2nd Quarter 79,400 18,983 1,529
3rd Quarter 83,089 20,520 2,317
4th Quarter 79,722 18,345 4,107
---------------------------------------------------------------
$315,700 $73,862 $ 7,442
===============================================================

</TABLE>

<TABLE>
<CAPTION>
Net
Gross Income
1998 Revenues Profit (a) (Loss)
---------------------------------------------------------------

<S> <C> <C> <C>
1st Quarter $ 67,948 $14,984 $ (285)
2nd Quarter 73,874 17,369 960
3rd Quarter 78,786 18,542 1,273
4th Quarter 78,815 18,528 (839)
---------------------------------------------------------------
$299,423 $69,423 $ 1,109
===============================================================
</TABLE>

(a) Represents total revenues less cost of sales.

46
<PAGE> 47

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

There were no changes in, or disagreements with, accountants during 1999.

PART III

Item 10. Directors and Executive Officers of the Registrant.

The following individuals are currently serving as directors and executive
officers of TRC:

Name Age Position with TRC
--- -----------------
<S> <C> <C>
Donald N. Smith 59 Chairman of the Board and Chief Executive Officer

Craig H. Deery 52 Director

Theresa A. Nibi 34 Director

Steven R. McClellan 44 Executive Vice President,
Chief Financial Officer and Director

Donald F. Wiseman 53 Vice President, General Counsel
and Secretary and Director

James F. Barrasso 49 Executive Vice President, Foodservice Development

Michael D. Kelly 53 Executive Vice President, Marketing

Jack W. Willingham 54 Executive Vice President, Restaurant Development

Richard J. Estlin 56 Vice President, Strategic Coordination

Stephen J. Flynn 37 Vice President, Research and Development

William S. Forgione 46 Vice President, Human Resources

Clyde J. Harrington 41 Vice President, Operations Administration

Louis C. Jehl, Jr. 38 Vice President, Controller

Patrick W. Ortt 53 Vice President, Operations - Eastern Division

Steven J. Pahl 44 Vice President, Operations - Western Division

Robert J. Winters 48 Vice President, Franchise Development
</TABLE>

47
<PAGE> 48

DONALD N. SMITH

Donald N. Smith has been the Chairman of the Board and Chief Executive Officer
of the Company since its organization in November 1985 and has been Chairman of
the Board and Chief Executive Officer of RHC since its organization in December
1999. Mr. Smith has been Chief Operating Officer of the Company since September
1998 and was previously the Chief Operating Officer from November 1985 through
November 1988. Mr. Smith also has been the Chairman of the Board and Chief
Executive Officer of FICC since September 1988.

CRAIG H. DEERY

Craig H. Deery was elected a Director of TRC and RHC in December 1999. Since
1986, Mr. Deery has been a Managing Director of BancBoston Capital, Inc. and
BancBoston Ventures, Inc., wholly-owned private equity subsidiaries of Fleet
Boston Financial. Mr. Deery is also a Director of Synthetic Industries, Inc., a
company specializing in industrial textile manufacturing.

THERESA A. NIBI

Theresa A. Nibi was elected a Director of TRC and RHC in December 1999. Since
June 1999, Ms. Nibi has been a director of BancBoston Capital, Inc. and
BancBoston Ventures, Inc., wholly-owned private equity subsidiaries of Fleet
Boston Financial. Ms. Nibi served as Vice President of BancBoston Capital, Inc.
and BancBoston Ventures, Inc. from August 1994 to June 1999.

STEVEN R. MCCLELLAN

Steven R. McClellan was elected a Director of TRC and RHC in December 1999. Mr.
McClellan has been Executive Vice President and Chief Financial Officer of the
Company since September 1996 and has been Executive Vice President and Chief
Financial Officer of RHC since December 1999. For more than two years prior, Mr.
McClellan was Executive Vice President and General Banking Group Head of First
Union National Bank of South Carolina, a subsidiary of First Union Corporation.

DONALD F. WISEMAN

Donald F. Wiseman has been a Director of TRC and RHC since December 1999. Mr.
Wiseman has been Vice President, General Counsel and Secretary of the Company
since December 1991 and has been Vice President, General Counsel and Secretary
of RHC since December 1999.

JAMES F. BARRASSO

James F. Barrasso has been Executive Vice President, Foodservice Development of
the Company since February 1999. For more than four years prior he was Vice
President, Foodservice Development for the Company. Mr. Barrasso has served in
various executive positions with the Company since September 1983.

MICHAEL D. KELLY

Michael D. Kelly has been Executive Vice President, Marketing of the Company
since March 1993.

JACK W. WILLINGHAM

Jack W. Willingham has been Executive Vice President, Restaurant Development of
the Company since April 1994. Mr. Willingham served as Vice President, Corporate
Development from July 1991 to April 1994.

RICHARD J. ESTLIN

Richard J. Estlin has been Vice President, Strategic Coordination of TRC since
September 1997 and was elected Vice President, Strategic Coordinator of RHC in
December 1999. In May 1997, Mr. Estlin retired as Vice President, Chief
Financial Officer of UNO-VEN Company, a position that he held for more than two
years prior.

STEPHEN J. FLYNN

Stephen J. Flynn has been Vice President, Research and Development of the
Company since October 1999. From December 1997 to October 1999, Mr. Flynn served
as Director, Research and Development and Executive Chef for ConAgra Poultry
Foods, Inc. d/b/a Pierce Foods and from September 1993 to October 1997, he was
Director, Research and Development and Executive Chef for Cousins Foods, Inc.

48
<PAGE> 49

WILLIAM S. FORGIONE

William S. Forgione has been Vice President, Human Resources of the Company
since August 1997. For more than two years prior, he was Vice President, Human
Resources of College Affiliated Medical Practice Group.

CLYDE J. HARRINGTON

Clyde J. Harrington has been Vice President, Operations Administration of the
Company since September 1996. Mr. Harrington served as Director, Systems
Operations from March 1995 to September 1996. For more than a year prior, he
served as Director, Operations for the Restaurant Division of PepsiCo., Inc.

LOUIS C. JEHL, JR.

Louis C. Jehl, Jr. was elected Vice President, Controller of RHC in December
1999. Mr. Jehl has been Vice President, Controller of the Company since May
1999. From February 1999 to May 1999 he served as Controller of the Company. Mr.
Jehl served as Director, Treasury and Planning from November 1996 to February
1999 and as Director, Accounting and Planning from June 1995 to November 1996.
Mr. Jehl has held varying positions in accounting and finance with the Company
since March 1987. He is a Certified Public Accountant.

PATRICK W. ORTT

Patrick W. Ortt has been Vice President, Operations - Eastern Division of the
Company since September 1996. He served as Director, Systems Operations of the
Company from March 1993 until September 1996.

STEVEN J. PAHL

Steven J. Pahl has been Vice President, Operations - Western Division of the
Company since September 1996. From November 1988 to September 1996, he served as
Director, System Operations of the Company. Mr. Pahl has served in various
operations positions with the Company since December 1986.

ROBERT J. WINTERS

Robert J. Winters has been Vice President, Franchise Development of the Company
since October 1996. He served as Senior Director, Franchise Development from
March 1993 to October 1996 and as Director, Training and Development from
October 1990 to March 1993.

49
<PAGE> 50

ITEM 11. EXECUTIVE COMPENSATION.

The following table summarizes all compensation paid or accrued for services
rendered to the Company in all capacities during each of the three years in the
period ended December 31, 1999 with respect to the Chief Executive Officer and
the four most highly compensated executive officers whose total annual salary
and bonus exceeded $100,000.

LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------------- ------------
ALL OTHER
LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS OTHER PAYOUTS (2) SATION
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DONALD N. SMITH 1999 $455,976 $450,000 $ 5,850 (1) -- --
Chairman & Chief 1998 274,661 200,000 3,150 (1) -- --
Executive Officer 1997 267,126 160,000 3,150 (1) -- --

STEVEN R. MCCLELLAN 1999 $205,822 $205,800 $ 9,000 (1) $95,000 $4,900 (3)
Exec. Vice President & 1998 186,892 103,425 9,000 (1) -- 5,000 (3)
Chief Financial Officer 1997 207,001 83,875 10,055 (1) -- 4,600 (3)

MICHAEL D. KELLY 1999 $208,622 $77,200 $ 9,000 (1) $93,700 $4,900 (3)
Exec. Vice President, 1998 191,246 94,000 9,000 (1) -- 5,000 (3)
Marketing 1997 181,836 78,000 9,000 (1) -- 4,750 (3)

JACK W. WILLINGHAM (4) 1999 $195,305 $70,500 $ 9,000 (1) $87,620 $4,900 (3)
Exec. Vice President, 1998 179,141 79,500 9,000 (1) -- 3,708 (3)
Restaurant 1997 172,481 59,250 9,000 (1) -- 4,750 (3)
Development

DONALD F. WISEMAN 1999 $181,392 $120,050 $ 9,000 (1) $66,800 $4,900 (3)
Vice President, General 1998 166,535 71,600 9,000 (1) -- $4,983 (3)
Counsel and Secretary 1997 156,199 74,200 9,000 (1) -- 4,750 (3)
</TABLE>

- -----------------------
(1) Includes auto allowance paid to the named executive officers during
1999,1998 and 1997 in the following amounts: During 1999, Mr. Smith - $5,850,
Mr. McClellan - $9,000, Mr. Kelly - $9,000, Mr. Willingham - $9,000, and Mr.
Wiseman - $9,000. During 1998 and 1997, Mr. Smith - $3,150; Mr. McClellan -
$9,000; Mr. Kelly - $9,000; Mr. Willingham - $9,000; and Mr. Wiseman - $9,000.

(2) Cash payments related to the Perkins Restaurant and Bakery, L.P. Executive
Long-Term Incentive Plan during 1999 were: Mr. McClellan - $95,000; Mr. Kelly -
$93,700; Mr. Willingham - $87,620; and Mr. Wiseman - $66,800.

(3) Includes Perkins' discretionary matching contributions allocated to the
named executive officers for the period January 1, 1999 through December 31,
1999, under Perkins Retirement Savings Plan as follows: Mr. McClellan - $4,900;
Mr. Kelly - $4,900, Mr. Willingham - $4,900; and Mr. Wiseman - $4,900. For the
period January 1, 1998 through December 31, 1998 the contributions were as
follows: Mr. McClellan - $5,000; Mr. Kelly - $5,000; Mr. Willingham - $3,708;
and Mr. Wiseman - $4,983. For the period January 1, 1997 through December 31,
1997 the contributions were as follows: Mr. McClellan - $4,600; Mr. Kelly -
$4,750; Mr. Willingham - $4,750; and Mr. Wiseman - $4,750.

(4) In addition to the compensation described above, Mr. Willingham is entitled
to supplemental retirement plan benefits payable annually after retirement, the
amount being determined by Mr. Willingham meeting specific performance goals set
by Mr. Smith.

50
<PAGE> 51

COMPENSATION OF DIRECTORS.

Prior to the Recapitalization, PMC paid its former independent directors, Lee N.
Abrams, D. Michael Meeks and Steven L. Ezzes $5,000 for each meeting attended.
Mr. Abrams and Mr. Meeks were paid for four meetings attended in 1999, and Mr.
Ezzes was paid for two meetings attended in 1999. No compensation is paid to
Directors of TRC.

51
<PAGE> 52

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.

The following table sets forth the number of shares beneficially owned
indirectly on March 20, 2000 by BancBoston Ventures, Inc.

Amount and
Nature of
Beneficial Percent
Title of Class Name of Beneficial Owner Ownership of Class
------------------------ ---------- --------
<S> <C> <C> <C>
Common Stock BancBoston Ventures, Inc. 3,246(1) 30.0%
100 Federal Street
Boston, MA 02110
</TABLE>

(1) Owned indirectly through BancBoston Ventures, Inc.'s ownership of RHC, the
sole owner of TRC.

(B) SECURITY OWNERSHIP OF MANAGEMENT.

The following table sets forth the number of shares beneficially owned either
directly or indirectly on March 20, 2000 by all directors and the executive
officers named in the Executive Compensation Table above, including all
directors and officers as a group:

Amount and
Nature of
Beneficial Percent
Title of Class Name of Beneficial Owner Ownership of Class
------------------------ --------- --------
<S> <C> <C> <C>
Common Stock Donald N. Smith 7,574 (1) 70.0%

Common Stock All Directors and Officers
of Registrant as a group 7,574 70.0%
</TABLE>

- -----------------------------

(1) Owned indirectly through Mr. Smith's 70.0% ownership of RHC, the sole
shareholder of TRC.

52
<PAGE> 53

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

(A) TRANSACTIONS WITH MANAGEMENT AND OTHERS.

During 1999 and 1998, FICC purchased layer cakes and muffin and pancake mixes
from the Company for which the Company was paid approximately $967,000 and
$945,000, respectively. The Company believes that the prices paid to the Company
for these products were no less favorable than the prices that would have been
paid for the same products by a non-affiliated party in an arm's length
transaction.

The Company has subleased certain land, building and equipment to FICC. During
1999 and 1998, the Company received approximately $331,000 and $328,000,
respectively, related to those subleases. The Company believes that the terms of
these subleases are no less favorable to the Company than could be obtained if
the transactions were entered into with an unaffiliated third party.

TRC Realty LLC leases an aircraft for use by both FICC and TRC. The operating
lease expires in November 2009. FICC and TRC pay 40% and 60%, respectively, to
TRC Realty LLC for generally fixed expenses. In addition, FICC and TRC incur
actual usage costs (such as fuel and maintenance). Total expense reimbursed by
FICC for the years ended December 31, 1999 and 1998 was $471,000 and $617,000,
respectively.

(B) CERTAIN BUSINESS RELATIONSHIPS.

Lee N. Abrams served as a Director of PMC and chairman of the Audit Committee of
PMC until December 1999. Mr. Abrams is a senior partner in the Mayer, Brown &
Platt law firm. Mayer, Brown & Platt represented the Company and its affiliates
in several matters during 1998 and 1999, including the Going Private
Transaction, the Reorganization, and the Recapitalization.

The Company has a revolving loan agreement with Donald N. Smith, Chairman of the
Board and Chief Executive Officer of the Company. The agreement provides for a
maximum loan from the Company to Mr. Smith of $1,500,000, with interest at the
prime rate. Accrued interest is payable on the last day of each calendar year,
and the principal and accrued but unpaid interest are payable on December 31,
2001. As of December 31, 1999, there was $1,025,000 outstanding under this
agreement.

53
<PAGE> 54

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(A) 1. FINANCIAL STATEMENTS (INCLUDING RELATED NOTES TO FINANCIAL
STATEMENTS) FILED AS PART OF THIS REPORT ARE LISTED BELOW:

Report of Independent Public Accountants.
Consolidated Statements of Operations for Each of the Three Years
Ended December 31, 1999.
Consolidated Balance Sheets at December 31, 1999 and 1998.
Consolidated Statements of Stockholders' Investment for Each of the
Three Years Ended December 31, 1999.
Consolidated Statements of Cash Flows for Each of the Three Years Ended
December 31, 1999

2. THE FOLLOWING FINANCIAL STATEMENT SCHEDULES FOR THE YEARS
ENDED DECEMBER 31, 1999, 1998 AND 1997 ARE INCLUDED:

No.

<S> <C>
Report of Independent Public Accountants on Schedule.
II. Valuation and Qualifying Accounts.
</TABLE>

Schedules I, III, IV and V are not applicable and have therefore been omitted.

3. EXHIBITS (FOOTNOTES APPEAR ON PAGE 54):

Exhibit No.
<S> <C>

1 Purchase Agreement dated as of May 13, 1998 among the
Issuer and the Initial Purchasers named therein.*

3.1 Certificate of Incorporation of The Restaurant
Company.*

3.2 By-Laws of The Restaurant Company.*

3.3 Amendment to Certificate of Incorporation of RHC.*

4.1 Indenture dated as of May 18, 1998 among the Issuer
and the Trustee named therein.*

4.2 Form of 11 1/4% Series B Senior Discount Notes due
2008 (included in Exhibit 4.1).*

4.3 Joinder and Amendment No. 2 dated as of December 22,
1999 to Credit Agreement dated as of December 22,
1997.*

10.1 Guaranty by Perkins Restaurant and Bakery, L.P. and
Perkins Restaurant and Bakery Operating Company, L.P.
in favor of BancBoston Leasing, Inc. dated as of May
1, 1994.*

10.15 Securities Purchase Agreement dated as of December
22, 1999.*

10.2 Guaranty dated July 5, 1995 among Perkins Restaurants
Operating Company, L.P. and BancBoston Leasing, Inc.*
</TABLE>

54
<PAGE> 55

<TABLE>
<S> <C>
10.3 Revolving Credit Agreement, by and among Perkins
Restaurant and Bakery, L.P., The Restaurant Company,
Perkins Restaurants, Inc., Perkins Finance Corp.,
BankBoston, N.A. and other financial institutions and
BankBoston N.A., as Agent and Administrative Agent
with NationsBank, N.A. as Syndication Agent and
BancBoston Securities, Inc. as Arranger dated as of
December 22, 1997.*

10.4 Registration Rights Agreement dated as of May 18,
1998 among the Issuer and the Initial Purchasers
named therein.*

10.5 10 1/8% Senior Notes Indenture dated as of December
22, 1997 among Perkins Restaurant and Bakery, L.P.,
Perkins Finance Corp. and the Trustee named therein.*

10.6 Form of 10 1/8% Senior Notes due 2007 (included in
Exhibit 10.5).*

10.7(a) Lease agreement between TRC Realty LLC and General
Electric Capital Corporation dated November 9, 1999
for an aircraft and related guaranty*

10.8 Reimbursement Agreement between TRC Realty LLC and
Friendly Ice Cream Corporation for use of a leased
plane.*

10.9 Revolving Loan Note made by Donald N. Smith payable
to the order of The Restaurant Company dated July 20,
1998, providing for a loan of up to $1,500,000.*

21 Subsidiaries of the Registrant.*

24 Power of Attorney (Included on Page II-12).*

25 Statement of Eligibility of Trustee.*

27 Financial Data Schedule (for SEC use only).

99.1 Stockholder's Agreement dated as of December 22,
1999, among RHC, BBV and DNS.*
</TABLE>

- -------------------
* Previously filed.

55
<PAGE> 56

TRADEMARK NOTICE

The following trademarks are used in this report to identify products and
services of The Restaurant Company: Perkins, Perkins Family Restaurant, Perkins
Restaurant and Bakery, Perkins Family Restaurant and Bakery, Perkins Express and
Bakery and Perkins Bakery.

[INTENTIONALLY LEFT BLANK]

56
<PAGE> 57

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on this 30th day of March,
2000.

THE RESTAURANT COMPANY

By:/s/ Donald N. Smith
-----------------------------------------
Its: Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities indicated on this 30th day of March, 2000.

Signature Title

<S> <C>
/s/ Donald N. Smith Chairman of the Board, Chief Executive Officer
- --------------------------------
Donald N. Smith

/s/ Craig H. Deery Director
- --------------------------------
Craig H. Deery

/s/ Theresa A. Nibi Director
- --------------------------------
Theresa A. Nibi

/s/ Steven R. McClellan Executive Vice President, Chief Financial
- -------------------------------- Officer and Director
Steven R. McClellan (Principal Financial Officer)

/s/ Donald F. Wiseman Vice President, General Counsel,
- -------------------------------- Secretary and Director
Donald F. Wiseman

/s/ Louis C. Jehl Vice President and Controller
- -------------------------------- (Principal Accounting Officer)
Louis C. Jehl
</TABLE>

57
<PAGE> 58

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

To The Restaurant Company:

We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of The Restaurant Company
and subsidiaries included in this Form 10-K, and have issued our report thereon
dated February 4, 2000. Our audit was made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The schedule listed in Item
14.(a)2. is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

Arthur Andersen LLP

Memphis, Tennessee,
February 4, 2000.

58
<PAGE> 59
SCHEDULE II

THE RESTAURANT COMPANY
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------
Additions
Balance at Charged Charged Deductions Balance
Beginning of to Costs & to Other from at close
Description Period Expenses Accounts Reserves of Period
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1999

Allowance for Doubtful Accounts $656 $628 $ -- $ (125)(a) $1,159
==== ==== ==== ======== ======

Reserve for Disposition of Assets $654 $ -- $ -- $ (498) $ 156
==== ==== ==== ======== ======

FISCAL YEAR ENDED DECEMBER 31, 1998

Allowance for Doubtful Accounts $852 $672 $ -- $ ( 868)(a) $ 656
==== ==== ==== ======== ======
Reserve for Disposition of Assets $ -- $654 $ -- $ -- $ 654
==== ==== ==== ======== ======

FISCAL YEAR ENDED DECEMBER 31, 1997

Allowance for Doubtful Accounts $440 $727 $ -- $ (315)(a) $ 852
==== ==== ==== ======== ======

</TABLE>

(a) Represents uncollectible accounts written off, net of recoveries, and
net costs associated with direct financing sublease receivables for
which a reserve was established.

S-1

<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND FROM THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,908
<SECURITIES> 0
<RECEIVABLES> 10,161
<ALLOWANCES> 1,159
<INVENTORY> 5,513
<CURRENT-ASSETS> 17,948
<PP&E> 263,875
<DEPRECIATION> 128,216
<TOTAL-ASSETS> 200,564
<CURRENT-LIABILITIES> 36,517
<BONDS> 164,480
0
0
<COMMON> 1
<OTHER-SE> (5,161)
<TOTAL-LIABILITY-AND-EQUITY> 200,564
<SALES> 293,907
<TOTAL-REVENUES> 315,700
<CGS> 81,460
<TOTAL-COSTS> 241,838
<OTHER-EXPENSES> 66,080
<LOSS-PROVISION> 628<F1>
<INTEREST-EXPENSE> 17,160
<INCOME-PRETAX> 6,790
<INCOME-TAX> 992
<INCOME-CONTINUING> 7,782
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 340
<NET-INCOME> 7,442
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>The provision for doubtful accounts and notes is presented within operating
expenses in the accompanying financial statements and is included in total
costs above.
</FN>

</TABLE>