<PAGE>
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant / /
Filed by a Party other than the Registrant /X/
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14-11(c) or Section
240.14a-12
PERKINS FAMILY RESTAURANTS, L.P.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
PERKINS MANAGEMENT COMPANY, INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Depositary Units Representing Limited Partnership Interests in the
Registrant
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
5,444,495
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$14.00 Per Unit (Amount of cash to be received for each Unit in the
merger)
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$76,222,930.00
-----------------------------------------------------------------------
(5) Total fee paid:
$15,245.00
-----------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
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<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
SPECIAL MEETING OF UNITHOLDERS
MERGER PROPOSED - YOUR
VOTE IS VERY IMPORTANT
You are cordially invited to attend a meeting of the partners of Perkins Family
Restaurants, L.P. (the Partnership) at which you will be asked to vote on a
proposed merger. The Restaurant Company holds approximately 48.1% of the limited
partnership interests and is the parent of the Partnership's general partner. As
a result of the merger, The Restaurant Company would indirectly own all of the
outstanding equity interests in the Partnership and your entire investment in
the Partnership would be acquired for $14.00 per unit in cash. The merger will
be taxable to you unless you are exempt from tax.
Because the board of directors of the Partnership's general partner has
concluded that the merger is fair to, and in the best interests of, the public
holders of units, the board has unanimously approved the merger. The board
considered the opinion of Morgan Keegan & Company, Inc. that the cash to be paid
in the merger is fair to the public unitholders from a financial point of view.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THE MERGER AND THE RELATED
MERGER AGREEMENT.
If the merger is completed, the Partnership's final quarterly distribution to
public unitholders will be the $0.325 per unit cash distribution paid to
unitholders of record on September 30, 1997.
At the meeting, you will be asked to approve the merger and the merger
agreement. The general partner's board of directors did not form a special
independent committee to represent your interests in this transaction. However,
the merger must be approved by the holders of a majority of the units voting
that are held by persons other than The Restaurant Company, its subsidiaries and
their officers, directors and key employees. THE MERGER CANNOT BE COMPLETED
UNLESS THE PUBLIC UNITHOLDERS WHOSE UNITS ARE REPRESENTED AT THE MEETING APPROVE
IT.
The date, time and place of the meeting is:
December 15, 1997
9:00 a.m. (EST)
388 Greenwich Street
New York, New York
This proxy statement provides you with detailed information about the proposed
merger. In addition, you may obtain information about the Partnership from
documents filed with the Securities and Exchange Commission. The action to be
taken at the meeting is of great importance and I urge you to read this entire
document carefully.
Whether or not you plan to attend the meeting in person, please complete, sign
and date the enclosed proxy card and mail it as soon as possible in the envelope
provided.
If you have any questions or need assistance in voting your units, please call
our proxy solicitors D.F. King & Co., Inc. toll-free at (800) 207-2014.
Very truly yours,
[LOGO]
DONALD N. SMITH
Chairman of the Board and Chief Executive Officer
Perkins Management Company, Inc.
General Partner
The Securities and Exchange Commission has not approved or disapproved of this
transaction and has not passed upon the fairness or merits of this transaction
nor upon the accuracy or adequacy of the information contained in this proxy
statement. Any representation to the contrary is unlawful.
PROXY STATEMENT DATED NOVEMBER , 1997, AND FIRST MAILED TO UNITHOLDERS ON
NOVEMBER , 1997.
<PAGE>
PERKINS MANAGEMENT COMPANY, INC.
GENERAL PARTNER OF PERKINS FAMILY RESTAURANTS, L.P.
6075 POPLAR AVENUE, SUITE 800
MEMPHIS, TN 38119-4709
(888) 279-4542
NOTICE OF SPECIAL MEETING OF UNITHOLDERS
TO BE HELD ON DECEMBER 15, 1997
To: The Holders of Units Representing Limited Partner
Interests of Perkins Family Restaurants, L.P.
A special meeting of the holders ("Unitholders") of units representing
limited partner interests ("Units") of Perkins Family Restaurants, L.P. (the
"Partnership") will be held at 9:00 a.m. (Eastern Standard Time) on December 15,
1997 at 388 Greenwich Street, New York, New York (the "Special Meeting"), to
consider and approve a Second Amended and Restated Agreement and Plan of Merger
by and among the Partnership, The Restaurant Company ("TRC") and Perkins
Acquisition Corp. ("MergerCo.") dated as of September 11, 1997 (the "Merger
Agreement") and the merger contemplated thereby (the "Merger"). In the Merger,
MergerCo. will be merged with and into the Partnership and the Partnership will
become an indirect wholly-owned subsidiary of TRC.
The close of business on October 28, 1997, has been fixed as the record date
for determination of Unitholders entitled to notice of and to vote at the
Special Meeting or any adjournments or postponements thereof.
The Board unanimously recommends that Unitholders vote "FOR" approval of the
Merger, the Merger Agreement and the transactions contemplated thereby which are
described in detail in the accompanying Proxy Statement.
Whether or not you plan to attend the Special Meeting in person and
regardless of the number of Units you own, you are urged to sign and date the
enclosed proxy card and mail it as soon as possible in the postage-paid return
envelope provided, so that your Units will be represented and voted at the
Special Meeting.
By order of the Board of Directors of
Perkins Management Company, Inc.
General Partner
[SIGNATURE]
Donald F. Wiseman
Secretary
November , 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER..................................................................... 1
SUMMARY.................................................................................................... 2
The Parties Involved..................................................................................... 2
Reasons for the Merger................................................................................... 2
Recommendation to Unitholders............................................................................ 2
Record Date; Units Entitled to Vote; Quorum.............................................................. 2
Vote Required............................................................................................ 3
The Merger............................................................................................... 3
What Unitholders Will Receive in the Merger.............................................................. 3
Summary of Federal Income Tax Consequences of the Merger................................................. 3
Interests of Certain Persons in the Merger............................................................... 3
Fairness of the Transaction; Recommendations............................................................. 4
Fairness Opinion......................................................................................... 4
Terms of the Merger...................................................................................... 4
Conditions of the Merger................................................................................. 4
Effective Time........................................................................................... 5
Sources of Funds; Financing of the Merger................................................................ 5
Market Prices of the Units............................................................................... 5
No Appraisal Rights...................................................................................... 5
Accounting Treatment of the Merger....................................................................... 5
Litigation Relating to the Merger........................................................................ 5
THE MERGER................................................................................................. 7
Background of and Reasons for the Merger................................................................. 7
Litigation Relating to the Merger........................................................................ 11
Fairness of the Merger; Recommendation of the Board of Directors of the General Partner.................. 12
Fairness Opinion......................................................................................... 13
Report of Smith Barney................................................................................... 18
Appraisal................................................................................................ 20
Certain Projections of the Partnership................................................................... 21
Structure of the Merger.................................................................................. 28
Interests of Certain Persons in the Merger; Conflicts of Interest........................................ 28
Relationships Between the Parties........................................................................ 29
Plans for the Partnership After the Merger............................................................... 30
Certain Effects of the Merger............................................................................ 30
Federal Income Tax Consequences.......................................................................... 30
Accounting Treatment of the Merger....................................................................... 31
Regulatory Approvals and Filings......................................................................... 31
Expenses of the Merger................................................................................... 32
THE PROXY SOLICITATION..................................................................................... 32
Voting and Proxy Procedures.............................................................................. 32
Solicitation of Proxies.................................................................................. 33
No Appraisal Rights...................................................................................... 34
Conduct of the Special Meeting........................................................................... 34
THE MERGER AGREEMENT....................................................................................... 34
General.................................................................................................. 34
Effective Time........................................................................................... 34
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Financing of the Merger.................................................................................. 34
Conditions to the Merger................................................................................. 35
Termination.............................................................................................. 36
Payment for Units........................................................................................ 36
Issuance of Units to TRC and its Affiliates and Payment of Expenses by TRC Prior to Effective Time....... 37
Operating Partnership Merger............................................................................. 37
BUSINESS................................................................................................... 38
Competitive Strengths.................................................................................... 38
Business Strategy........................................................................................ 40
Concept.................................................................................................. 40
Franchise Operations..................................................................................... 42
Quality Control.......................................................................................... 44
Other Financial Arrangements............................................................................. 44
Purchasing............................................................................................... 45
Patents, Trademarks and Other Intellectual Property...................................................... 45
Competition.............................................................................................. 45
Properties............................................................................................... 46
Employees................................................................................................ 47
Government Regulation.................................................................................... 47
Legal Proceedings........................................................................................ 47
Beneficial Ownership of Units and Transactions In Units By Certain Persons............................... 48
SUMMARY FINANCIAL DATA..................................................................................... 49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1996........................................................................................ 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THIRD QUARTER
AND NINE MONTHS ENDED SEPTEMBER 30, 1997................................................................. 56
AUDITED FINANCIAL STATEMENTS............................................................................... 62
RESPONSIBILITY FOR FINANCIAL STATEMENTS.................................................................... 80
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................... 80
INTERIM FINANCIAL STATEMENTS............................................................................... 81
MARKET FOR PARTNERSHIP'S UNITS; DISTRIBUTIONS.............................................................. 87
WHERE YOU CAN FIND MORE INFORMATION........................................................................ 87
SCHEDULE I................................................................................................. S-1
ANNEX A--THE MERGER AGREEMENT.............................................................................. A-1
ANNEX B--OPINION OF MORGAN KEEGAN & COMPANY, INC........................................................... B-1
</TABLE>
ii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY IS TRC PROPOSING THE MERGER?
A: Under federal tax laws, if the Partnership remains a publicly-traded
partnership it will become taxable as a corporation or have to pay a 3.5% tax on
its gross income beginning in 1998. Because of the adverse tax consequences of
being taxed as a corporation or paying a 3.5% tax on gross income, it is
unlikely that the Partnership would continue paying distributions at its
historic levels. Also, the merger is expected to eliminate the expenses
associated with the Partnership's being a publicly-traded partnership, as well
as the possible conflicts of interest between the Partnership and TRC.
Q: WHEN IS THE SPECIAL MEETING?
A: The special meeting will take place at 9:00 a.m. (Eastern Standard Time) on
December 15, 1997.
Q: WHERE IS THE SPECIAL MEETING BEING HELD?
A: The special meeting will be held at 388 Greenwich Street, New York, New
York.
Q: WHAT DO I NEED TO DO NOW?
A: Please mail your signed proxy card in the enclosed return envelope as soon
as possible, so that your units may be represented at the special meeting. In
addition, you may attend the special meeting in person and vote.
Q: IF TRC OWNS MORE THAN 48% OF THE OUTSTANDING UNITS, WHY DOES MY VOTE MAKE A
DIFFERENCE?
A: Your vote is very important. TRC has agreed that the merger will not take
place unless at least a majority of the publicly-held units voting at the
special meeting are voted in favor of the merger. As a result, if only a small
number of publicly-held units are voted at the meeting, the outcome could be
determined by a relatively small number of unitholders.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: Just send in a later-dated, signed proxy card before the special meeting or
attend the meeting in person and vote.
Q: IF MY UNITS ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
UNITS FOR ME?
A: Your broker will vote your units only if you provide instructions on how to
vote. You should instruct your broker to vote your units, following the
directions provided by your broker. Without instructions, your units will not be
voted.
Q: SHOULD I SEND IN MY UNITS NOW?
A: No. If the merger is completed, we will send you written instructions for
exchanging your units. You should wait until you receive those written
instructions. For the time being, you should just mail your signed proxy card in
the enclosed return envelope.
Q: WILL I OWE ANY FEDERAL INCOME TAX AS A RESULT OF THE MERGER?
A: The merger will be taxable to you unless you are exempt from tax. You will
be treated as if you sold your units for the cash received in the merger. The
gain or loss will be capital gain or loss for most unitholders. Depending on
when you acquired your units, up to $1.25 per unit of the gain or loss will be
recharacterized as ordinary income. This is because you must recapture your
share of depreciation and other tax benefits that the Partnership claimed while
you owned your units.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working toward completing the merger as quickly as possible. We hope
to complete the merger before the end of calendar year 1997, but we cannot be
sure we will do so.
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SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY STATEMENT AND
MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND
THE MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE
MERGER, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE DOCUMENTS TO
WHICH WE HAVE REFERRED YOU. WE HAVE INCLUDED PAGE REFERENCES IN PARENTHESES TO
DIRECT YOU TO A MORE COMPLETE DESCRIPTION OF THE TOPICS PRESENTED IN THIS
SUMMARY.
THE PARTIES INVOLVED
PERKINS FAMILY RESTAURANTS, L.P.
6075 Poplar Avenue
Suite 800
Memphis, TN 38119-4709
The Partnership is an operator and franchisor of full-service mid-scale
restaurants which operate under the names "Perkins Family
Restaurant"-Registered Trademark- and "Perkins Family Restaurant and
Bakery."-Registered Trademark- The Partnership's units are traded on the New
York Stock Exchange under the symbol "PFR."
PERKINS MANAGEMENT COMPANY, INC.
6075 Poplar Avenue
Suite 800
Memphis, TN 38119-4709
PMC's only business is to serve as the sole general partner of the Partnership
with a 1% general partnership interest and as the sole general partner of the
Partnership's operating subsidiary, Perkins Restaurants Operating Company, L.P.
THE RESTAURANT COMPANY
1 Pierce Place
Suite 100 E
Itasca, IL 60143
TRC's principal businesses are to provide management services to its affiliates
and the management of its indirect interests in the Partnership and PMC. TRC
indirectly owns 100% of PMC and 48.1% of the Partnership's outstanding units.
PERKINS RESTAURANTS, INC.
1 Pierce Place
Suite 100 E
Itasca, IL 60143
PRI is a wholly-owned subsidiary of TRC. PRI's principal business is the holding
of its 100% interest in PMC and its interest in the Partnership.
REASONS FOR THE MERGER
TRC is the party initiating, supporting and structuring the terms of the merger.
TRC has proposed the merger mainly for three reasons. First, if the Partnership
remains a publicly-traded partnership, it will become a taxable entity for
federal tax purposes or will have to pay a tax equal to 3.5% of its gross income
beginning January 1, 1998. Either choice of tax treatment would subject the
Partnership to federal taxes where it presently is not. This would make it very
unlikely that the Partnership would continue paying distributions to you at its
historic level. Second, TRC believes that the expense, both in terms of costs
and time and attention required of management to maintain the Partnership as a
publicly traded partnership can be eliminated through the merger. Third,
potential conflicts of interest between the Partnership and TRC and parties
related to TRC will not exist after the merger.
To review the reasons for the merger in greater detail, see page 7.
RECOMMENDATION TO UNITHOLDERS
THE BOARD OF DIRECTORS OF PMC UNANIMOUSLY RECOMMENDS THAT UNITHOLDERS VOTE "FOR"
APPROVAL OF THE MERGER AGREEMENT AND THE MERGER.
RECORD DATE; UNITS ENTITLED TO VOTE; QUORUM
You are entitled to vote at the special meeting if you owned units as of the
close of business on October 28, 1997, the record date.
On the record date, there were 10,487,495 units entitled to vote at the special
meeting. You will have one vote at the special meeting for each unit you owned
on the record date.
The presence in person or by proxy of PMC and the holders of a majority of all
outstanding units,
2
<PAGE>
including those owned by TRC, is necessary to constitute a quorum at the special
meeting.
VOTE REQUIRED
There are two separate voting requirements which must be met to complete the
merger:
- - Approval of the merger will require the favorable vote of a majority of the
total voting interests in the Partnership. Including PMC's general partner
interest, TRC and its subsidiaries hold approximately 48.6% of the total
voting interests in the Partnership.
- - Though not required under the Partnership's partnership agreement, the merger
also has been conditioned upon the favorable vote of a majority of the public
units voting at the meeting. We will not count the votes of TRC, its
subsidiaries and their, officers, directors and key employees toward
satisfaction of this condition.
THE MERGER
THE MERGER AGREEMENT (ANNEX A) IS ATTACHED AT THE BACK OF THIS PROXY STATEMENT.
WE ENCOURAGE YOU TO READ THE MERGER AGREEMENT AS IT IS THE PRIMARY LEGAL
DOCUMENT THAT GOVERNS THE MERGER.
WHAT UNITHOLDERS WILL RECEIVE IN THE MERGER (SEE PAGE 34)
If the merger is approved, you will have the right to receive $14.00 in cash for
each unit you own. The Partnership's final quarterly distribution to you will be
the $0.325 per unit cash distribution paid to unitholders of record on September
30, 1997.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
(SEE PAGE 30)
The merger will be a taxable transaction to you if you are not exempt from tax.
You generally will recognize capital gain or loss equal to the difference
between your adjusted tax basis in your units and the cash received in the
merger. However, any such capital gain will be reduced or any such capital loss
will be increased by ordinary income you will be required to recognize from the
recapture of certain tax benefits (for example, depreciation recapture) you
received while you held your units. Depending on when you acquired your units,
you will recognize up to $1.25 of ordinary income per unit as a result of such
recapture. Some unitholders may realize both ordinary income and capital loss as
a result of the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
(SEE PAGE 28)
In proposing and structuring the terms of the merger, TRC primarily considered
its own interests and not yours. No one was retained to represent your interests
with respect to the merger or the merger agreement, and no committee or member
of the board attempted to represent your interests. Neither TRC nor PMC
approached any unaffiliated persons or entities about acquiring the Partnership
or any of its assets.
As of September 30, 1997, 154,605 (or approximately 1.5%) of the units were
owned by officers and directors of TRC or PMC other than Donald N. Smith. See
page 45. If the merger is consummated, these persons will receive cash in the
amount of $14.00 per unit. TRC and PMC believe these persons will vote their
units "FOR" approval of the merger.
As of September 30 , 1997, 5,043,000 (or approximately 48.1%) of the units were
owned by TRC, through its wholly owned subsidiary PRI. See page 46. TRC is
interested in the outcome of the merger because, following the merger, TRC and
its direct and indirect subsidiaries will be the sole owners of the Partnership
and will enjoy all of the benefits of that ownership.
Mr. Smith, who is Chairman and CEO of both PMC and TRC and who has been involved
in structuring the merger, owns 33.2% of the outstanding stock of TRC. D.
Michael Meeks and Charles A. Ledsinger, who are directors of PMC, and who have
been involved in structuring the merger, each has a substantial investment in
Harrah's, which is in turn the indirect owner of approximately 33.2% of the
outstanding stock of TRC.
3
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PMC and the senior management of the Partnership also have certain other
interests that may present them with actual or potential conflicts of interest.
Among these are that:
- - PMC is indirectly wholly owned by TRC,
- - PMC is expected to remain in its current role subsequent to the merger, and
- - the current members of the senior management of PMC are expected to remain in
their positions following the merger.
FAIRNESS OF THE MERGER; RECOMMENDATIONS (SEE PAGE 12)
Because TRC, PMC and the members of the board have interests in the proposed
merger which conflict, or may be perceived to conflict, with your interests, the
board hired Morgan Keegan & Company, Inc. to give the board an opinion as to the
fairness to the public unitholders of the cash to be received in the merger from
a financial point of view. The board also required, in light of the conflicts of
interest, that the merger be approved by the holders of a majority of the units
voting held by public unitholders, even though such approval is not required
under Delaware law or the partnership agreement.
The board concluded that the merger is fair to, and in the best interests of,
the public unitholders, and has approved the merger agreement. The boards of
directors of TRC, PRI and MergerCo. have also concluded that the merger is fair
to, and in the best interests of, the public unitholders.
FAIRNESS OPINION
(SEE PAGE 13)
Morgan Keegan is an investment banking firm with experience in the food and
restaurant industry. Morgan Keegan has delivered an opinion to the board that
the cash to be received in the merger is fair to the public unitholders from a
financial point of view. The full text of the Morgan Keegan opinion, updated as
of the date of this proxy statement, is attached as Annex B to this proxy
statement. We urge you to read the Morgan Keegan opinion carefully.
TERMS OF THE MERGER
When the merger is effective:
- - each issued and outstanding unit, other than those held by TRC or its direct
and indirect subsidiaries, will be converted into the right to receive $14.00
in cash, without interest;
- - each general or limited partnership interest which is owned by TRC or its
subsidiaries will remain a general or limited partnership interest of the
Partnership and no payment will be made for those interests.
As a result of the merger, the Partnership will become wholly owned by TRC and
its direct or indirect subsidiaries and the public unitholders will cease to be
limited partners of the Partnership.
If the merger takes place, the Partnership's final quarterly distribution to
unitholders will be the $0.325 per unit cash distribution paid to persons who
were unitholders of record on September 30, 1997.
CONDITIONS TO THE MERGER
(SEE PAGE 35)
The merger is subject to, among other things:
- - satisfaction of the voting requirements discussed above;
- - Morgan Keegan having not withdrawn its fairness opinion;
- - no event having occurred which has a materially adverse effect on the
Partnership's business or its assets;
- - no actions or proceedings by any person being pending or threatened against
the parties challenging or seeking to obtain damages against any person as a
result of the merger;
- - no law, regulation or court order having been made or enforced which affects
the merger; and
- - financing for sufficient funds being available to pay the $14.00 per unit to
which you will become entitled and to pay all related fees and expenses.
4
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EFFECTIVE TIME
(SEE PAGE 34)
We expect that the merger will occur on or prior to December 31, 1997. The
transfer books for the units will be closed as of the close of business on the
date on which the merger occurs. If the merger cannot be concluded by February
28, 1998, the parties to the merger agreement may terminate the merger
agreement.
SOURCES OF FUNDS; FINANCING OF THE MERGER
(SEE PAGE 34)
The Partnership plans to raise a significant portion of the required financing
through a private placement of debt securities and from the proceeds of a new
bank credit facility. TRC and the Partnership currently plan to complete the
financing at the same time as the closing of the merger.
MARKET PRICES OF THE UNITS
(SEE PAGE 87)
The units have been traded on the New York Stock Exchange since 1986. During the
second quarter of 1997, the closing prices of the units on the New York Stock
Exchange ranged from $13.625 to $10.375 per unit. The closing price per unit
increased from $10.875 on August 1, 1997 to a closing price of $13.00 on August
4, 1997, the date of announcement of TRC's merger proposal. On September 10,
1997, immediately before the announcement of the signing of the merger
agreement, the high and low sales prices of the units on the New York Stock
Exchange were $13.00 and $12.875, respectively, and the closing price was
$12.875. On September 12, 1997, the day after the execution of the original
merger agreement was announced, daily trading volume in the units was 135,400
units and the closing price per unit was $13.75.
NO APPRAISAL RIGHTS
You will not be entitled to appraisal rights under Delaware law or the
partnership agreement in connection with the merger.
ACCOUNTING TREATMENT OF THE MERGER
The merger will be accounted for as an acquisition of minority ownership
interests of a subsidiary in accordance with the purchase method of accounting.
Representatives of Arthur Andersen LLP, the independent auditors for the
Partnership, are expected to be present at the special meeting and will be
available to respond to appropriate questions.
LITIGATION RELATING TO THE MERGER
(SEE PAGE 11)
Two class-action lawsuits, purportedly on behalf of unitholders, were filed on
August 5, 1997 in the Delaware Chancery Court in Wilmington, Delaware relating
to TRC's initial proposal regarding a possible transaction. The lawsuits allege
breaches of fiduciary duties and seek to stop the merger or to get money
damages. The plaintiffs and defendants have entered into a settlement agreement
regarding these lawsuits, which is subject to court approval.
5
<PAGE>
The following is a summary of some important financial information about the
Partnership.
PERKINS FAMILY RESTAURANTS, L.P.
SUMMARY OF IMPORTANT FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED FOR THE YEAR ENDED DECEMBER 31,
SEPTEMBER 30, 1997 ----------------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 1992
------------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCOME DATA:
Revenues......................... $ 199,672 $ 252,793 $ 245,751 $ 221,902 $ 212,634 $ 195,151
Net Income....................... $ 11,770 $ 13,522 $ 9,796 $ 12,008 $ 12,602 $ 15,353
Net Income Per Unit.............. $ 1.13 $ 1.30 $ 0.94 $ 1.16 $ 1.21 $ 1.48
Cash Distribution Declared Per
Unit............................ $ 0.975 $ 1.30 $ 1.30 $ 1.30 $ 1.30 $ 1.30
Book Value Per Unit
(Unaudited)..................... $ 6.06 $ 5.87 $ 5.83 $ 6.24 $ 6.37 $ 6.45
BALANCE SHEET DATA:
Total Assets..................... $ 156,204 $ 155,656 $ 161,829 $ 150,407 $ 131,709 $ 125,972
Long-Term Debt................... $ 43,026 $ 48,244 $ 57,850 $ 39,875 $ 22,600 $ 17,875
Capital Leases................... $ 7,434 $ 8,573 $ 8,810 $ 10,862 $ 13,194 $ 15,321
</TABLE>
6
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THE MERGER
BACKGROUND OF AND REASONS FOR THE MERGER
RELATIONSHIP BETWEEN TRC AND THE PARTNERSHIP. The Partnership was formed in
1986 to succeed to and conduct the business and operations of PRI, a wholly
owned subsidiary of TRC. PRI owned and operated 102 family style restaurants and
was the franchisor of an additional 222 restaurants in 1986. Simultaneously with
an initial public offering of 5,043,000 units representing limited partner
interests ("Units") to the public at a price of $13.00 per Unit in October 1986,
PRI sold property and equipment to the Partnership and contributed to the
Partnership substantially all of its other assets and business (including its
franchise rights and all rights of PRI in the trademarks used in connection with
the operation of the restaurants), subject to certain liabilities, in exchange
for (i) 5,043,000 Units, (ii) cash in an amount equal to the net tangible book
value of its property and equipment, and (iii) the general partner interests of
the Partnership's general partner, Perkins Management Company, Inc. ("PMC" or
the "General Partner"). After the initial public offering, PRI owned 50% of the
Units and the General Partner owned a 1% general partner interest in the
Partnership.
COSTS OF MAINTAINING THE PARTNERSHIP AS A PUBLIC PARTNERSHIP. Under federal
law, the Partnership, if it remains a publicly-traded partnership, will be taxed
as a corporation beginning January 1, 1998, unless the Partnership elects to
retain its status as a partnership for tax purposes under the Taxpayer Relief
Act of 1997 (the "Taxpayer Relief Act"). If the Partnership were taxed as a
corporation, the Partnership would itself pay taxes on its income, and cash
distributions, if any, would be taxed in the year in which received by holders
of Units ("Unitholders"). For example, had the Partnership been taxed as a
corporation in 1996, it would have paid federal and state corporate income taxes
of approximately $5.5 million and each Unitholder receiving a distribution would
have been liable for taxes in an amount equal to his individual marginal tax
rate times the total distribution received.
The Taxpayer Relief Act includes a grandfather extension for a
publicly-traded partnership to retain its status as a partnership for federal
income tax purposes provided an election to pay 3.5% tax on its gross income is
made. This gross income tax would not be deductible by either the partnership or
its partners, nor would it be reduced by any income tax credits. In addition,
the partners would still be taxed on their share of partnership income. PMC
management's analysis indicates that had this election been in effect in 1996,
the Partnership's federal tax liability would have been approximately $6.5
million, rendering the alternative of making an election under the Taxpayer
Relief Act less favorable than being taxed as a corporation for this period. PMC
management believes that an election under the Taxpayer Relief Act would
probably also be less attractive than being taxed as a corporation in 1998.
Being taxed as a corporation or paying the new tax under the Taxpayer Relief
Act would reduce the amount of cash available to the Partnership by the amount
of the taxes it would be required to pay and, in the absence of increased
borrowings, would reduce by such amount the cash available to the Partnership
for capital expenditures, prepayment of outstanding indebtedness, cash
distributions or other purposes. This change in the Partnership's tax liability
and reduction in the cash available to it would make it very unlikely that the
Partnership would continue paying distributions at its historic level. TRC
believes that many of the Unitholders made their investment with a view toward
receiving substantial distributions and would appreciate the opportunity to
receive cash for their Units at a premium to recent market trading prices if
those distributions will no longer be forthcoming.
In addition, TRC believes that the expenses both in terms of actual costs
and time and attention required of management with respect to maintaining the
Partnership as a publicly traded partnership, as well as potential conflict of
interest situations between the Partnership and TRC and its affiliates, can be
eliminated through the Merger.
ALTERNATIVE TRANSACTIONS. In addition to the proposed transaction, TRC and
the General Partner considered the possibility of converting the Partnership to
a corporation. At a special meeting of the board of directors of PMC (the
"Board" or the "PMC Board") on March 1, 1996, the directors of PMC met with
representatives from an investment bank (the "First Investment Banker") to
receive a presentation on the
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advisability of converting the Partnership from its current form of organization
to a corporate form of organization on or before January 1, 1998, the date on
which, absent an election under the Taxpayer Relief Act, the Partnership would
begin to be taxed as a corporation regardless of whether it remained organized
as a partnership for state law purposes. The First Investment Banker's
representatives discussed the process by which the conversion could be effected,
possible structures for the transaction and the effect of a conversion on
returns to investors assuming various levels of growth for the Partnership.
Management continued to consider the alternatives available to the
Partnership over the next several months and invited representatives of the
First Investment Banker to the regular meeting of the Board on November 20, 1996
to make a second presentation to determine whether PMC would engage the First
Investment Banker to study the alternatives available to the Partnership. The
directors unanimously resolved to engage the First Investment Banker as the
Board's advisor for the purpose of assessing the Partnership's current position,
recommending alternatives and presenting the results of its analysis and
recommendations to the Board at a later meeting.
The First Investment Banker reported the results of its analysis to the
Board at a special meeting of the Board on December 18, 1996. Among the
transactions analyzed in its report were (i) a simple conversion to corporate
form (the "Simple Conversion Transaction"), (ii) a conversion to corporate form
followed by a merger with TRC, PRI and PMC (the "Single Company Transaction"),
(iii) an exchange transaction, whereby shareholders of TRC and holders of Units
other than TRC, its direct and indirect subsidiaries and their respective
officers, directors and key employees ("Public Unitholders") would exchange
their shares of TRC common stock and their Units of the Partnership,
respectively, for shares of stock in a newly formed corporation and TRC would
become a subsidiary of that corporation (the "Exchange Transaction"); (iv)
strategic options, including acquisitions or a sale to a strategic buyer, (v) a
leveraged buyout, (vi) a recapitalization and (vii) real estate financing
alternatives. The First Investment Banker's representatives concluded that the
most appropriate alternative for increasing Unitholder value would be a
conversion to corporate form through one of the methods outlined in the report.
Of the conversion alternatives proposed by the First Investment Banker, the
Exchange Transaction was considered to be the best alternative by TRC and the
Board. TRC favored a transaction that would allow TRC's shareholders to improve
the liquidity of their investment by immediately exchanging their shares in TRC
on a tax-free basis for a publicly-traded security. Neither the Simple
Conversion Transaction nor the Single Company Transaction would have achieved
these goals.
The Board continued to study the Exchange Transaction alternative and, on
February 4, 1997, again met with representatives of the First Investment Banker,
who stated that, in order to be fair and successful, a transaction should result
in no ownership or earnings dilution to the Public Unitholders. Over the next
several months, management and the First Investment Banker worked to determine
whether an appropriate Exchange Transaction could be accomplished. During
February 1997, TRC also began to consider a buyout of the publicly-held Units
and continued to consider other alternatives to the Exchange Transaction.
On March 31, 1997, PMC's management contacted the Securities and Exchange
Commission (the "SEC") to discuss the accounting treatment of the Exchange
Transaction and to urge that "pooling of interests" accounting treatment would
be appropriate. In a letter dated April 14, 1997, the SEC responded that
"purchase accounting" would be required for the transaction. The impact of the
use of purchase accounting for the transaction would be the creation of
incremental goodwill amortization and depreciation expense for the newly formed
corporation, resulting in a reduction in earnings per share. On May 15, 1997,
the First Investment Banker's representatives met with TRC and the Board to
explain that the use of purchase accounting would result in earnings per share
dilution to the newly formed corporation, which would require a reduction in the
exchange ratio for the TRC shares in order for the public to maintain a fair
level of consideration. TRC determined that the reduction in the exchange ratio
and the resulting ownership dilution to the TRC shareholders was unacceptable
and decided to consider possible alternatives to the Exchange Transaction.
From May 15 through July, 1997, TRC and PMC considered alternatives to the
Exchange Transaction, including the desirability and feasibility of, and the
availability of financing for, a buyout of the outstanding
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Units not owned directly or indirectly by TRC. In July 1997, the First
Investment Banker indicated that it would not be willing to provide bridge
financing for such a transaction, and PMC and the First Investment Banker
mutually agreed that The First Investment Banker's engagement would be
terminated. On July 21, 1997, the Board of Directors of TRC (the "TRC Board")
received presentations from representatives of two investment banking firms,
including Smith Barney Inc. ("Smith Barney"), to discuss the qualifications of
their firms to act as financial advisor to TRC in structuring and financing such
a transaction.
On July 28, 1997, the TRC Board met to discuss the possibility of TRC making
an offer to PMC to acquire through a merger all of the outstanding Units not
owned indirectly by TRC for $13.00 per Unit. At the meeting, the TRC Board
discussed the procedural steps that might be employed to ensure that the Public
Unitholders were given the benefit of a fair price and a fair process. Counsel
discussed the advisability of requiring the merger to be approved or disapproved
by a majority of the Public Unitholders voting at the Special Meeting. Counsel
also discussed the possibility of recommending to PMC that it establish a
committee of its directors who were not also affiliated with TRC to negotiate
the terms of the merger on behalf of the Public Unitholders. Counsel advised the
directors that Donald N. Smith, Charles L. Atwood and Steven L. Ezzes would be
disqualified because of their affiliation with TRC or ownership of TRC stock and
that Lee N. Abrams would be disqualified because of the representation by his
law firm of TRC and its affiliates. As to the two remaining directors of PMC,
Mr. Smith stated his concern that because of a consulting arrangement between D.
Michael Meeks and PMC, Charles Ledsinger's recent executive employment with
Harrah's Entertainment, Inc. ("Harrah's") (which indirectly owns 33.2% of TRC)
and the significant portion of each of Mr. Meeks' and Mr. Ledsinger's net worth
that is invested in Harrah's, it might not be possible for Mr. Meeks and Mr.
Ledsinger to represent the Public Unitholders without creating an appearance of
impropriety. The TRC Board decided that the decision whether to appoint an
independent committee should be further discussed with the PMC Board and the TRC
Board also resolved to retain Smith Barney as TRC's lead financial advisor if an
offer were made.
A special meeting of the PMC Board was held later on July 28 to discuss a
possible buyout proposal by TRC and whether it would be advisable to establish
an independent committee consisting of Mr. Meeks and Mr. Ledsinger to negotiate
on behalf of the Public Unitholders. Because Mr. Meeks and Mr. Ledsinger
expressed doubt that they would be considered independent, it was agreed that no
further action would be taken until Mr. Meeks and Mr. Ledsinger could consult
with legal counsel of their choosing concerning their qualifications to serve on
an independent committee.
TRC INITIAL PROPOSAL. Shortly before a PMC Board Meeting on August 4, 1997,
Mr. Smith talked with Mr. Meeks and Mr. Ledsinger, who advised Mr. Smith that
they had consulted with legal counsel and did not believe that it was
appropriate for them to serve on an independent committee. On August 4, TRC made
an offer to PMC that proposed the acquisition through a merger of all of the
Units not directly or indirectly owned by TRC for $13.00 per Unit, subject to
(i) receipt by the Board of a fairness opinion that the merger is fair to the
Public Unitholders from a financial point of view; (ii) the approval of a
majority of the Public Units voting on the Merger, and (iii) the obtaining of
adequate financing (the "Initial Proposal"). The Initial Proposal did not
address whether the Partnership's recent historical quarterly distributions of
$0.325 per Unit would continue to be paid for the third and fourth quarters of
1997.
Later on August 4, the PMC Board met to review the Initial Proposal. Mr.
Smith informed the PMC Board that he had been advised by Mr. Meeks and Mr.
Ledsinger that they had consulted with legal counsel and did not believe that it
was appropriate for them to serve on an independent committee, and that for this
reason TRC's proposal did not contemplate an independent committee. After
consulting with legal counsel, the Board decided not to appoint an independent
committee and authorized Steven R. McClellan, the Executive Vice President and
Chief Financial Officer of PMC, Mr. Smith, and Richard K. Arras, the President
and Chief Operating Officer of PMC, to retain on the Board's behalf an
investment banking firm having no prior relationship to TRC, PMC, the
Partnership or their affiliates to render an opinion as to the fairness from a
financial point of view of TRC's proposal. Later that day the Partnership issued
a press release describing the Initial Proposal.
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On August 6, 1997, TRC formally retained Smith Barney to act as TRC's
financial advisor with respect to, and to assist in the financing of, a buyout
of the Units not already owned directly or indirectly by TRC.
CONSIDERATION AND NEGOTIATION OF TERMS OF THE MERGER. Messrs. McClellan,
Smith and Arras received proposals from five separate investment banking firms
to provide an opinion as to whether the proposed merger was fair from a
financial point of view to the Public Unitholders, and investigated several
other potential candidates. They reduced the number of candidates to two, and
each made presentations with respect to its capabilities and experience with the
restaurant industry, as well as with respect to the scope and methodology of its
proposed services. Messrs. McClellan, Smith and Arras then decided to retain
Morgan Keegan to provide to the Board its opinion as to the fairness to the
Company's Public Unitholders, from a financial point of view, of the
consideration to be paid to them in connection with any proposed acquisition by
TRC of all of the Units that it did not already indirectly own. An engagement
letter with Morgan Keegan was executed on August 21, 1997. The Board selected
Morgan Keegan for several reasons, including primarily its independence from
TRC, PMC or any of their respective affiliates, the reputation of the firm and
its experience with the restaurant industry.
Morgan Keegan began its review of the financial aspects of the Initial
Proposal shortly after it was retained. On September 5, 1997, Morgan Keegan
orally advised Mr. McClellan that based on work completed through that date, its
preliminary conclusion was that the price contemplated by the Initial Proposal
was at the low end of the range of fairness. While Morgan Keegan advised Mr.
McClellan that, as of that date, it could issue an opinion that the price was
fair from a financial point of view to the Public Unitholders, it also noted
that it might be unable to issue an updated opinion if market conditions
affecting the equity securities of the Partnership and other restaurant
companies changed even slightly.
On September 8, 1997, Mr. Smith and Mr. Atwood, two of the three TRC
directors, met by telephone with Mr. McClellan and representatives of Smith
Barney and were informed by Mr. McClellan of Morgan Keegan's preliminary
conclusions. The Smith Barney representatives advised Mr. Smith and Mr. Atwood
that, given the facts that the Partnership's stock price since August 4 had
frequently been higher than $13.00 per Unit and that restaurant stocks were
trading at a higher multiple of earnings than they had been in early August, TRC
should consider raising its offer to increase the chances of obtaining approval
of a merger by the holders of a majority of the Public Units voting, to increase
the chances of obtaining an updated fairness opinion and to increase the
likelihood that the Delaware Litigation (as defined below) would be resolved
favorably. Mr. Smith and Mr. Atwood also discussed with counsel and the Smith
Barney representatives the desirability of settling the Delaware Litigation. Mr.
Smith and Mr. Atwood authorized counsel to explore whether the Delaware
Litigation could be settled by an increase in the price offered. Later in the
day, Mr. Ezzes, the third TRC director, approved the actions proposed by the
other members of the TRC Board.
Between September 8 and September 10, 1997, counsel for plaintiffs and
counsel for defendants negotiated about a possible settlement. After several
proposals and counterproposals were made and rejected, on September 10, 1997,
counsel for defendants proposed, subject to approval by the TRC and PMC Boards,
to settle the Delaware Litigation by increasing the price offered to Unitholders
to $14.00 per Unit with the understanding that, if the Merger were consummated,
the Partnership's final distribution to Public Unitholders would be $0.325 per
Unit in cash for the third quarter of 1997 (the "Revised Proposal"). Counsel for
plaintiffs have agreed to settle the Delaware Litigation on the basis of the
Revised Proposal, subject to court approval and the consummation of the Merger
(the "Litigation Settlement").
On September 11, 1997, the TRC Board approved the Revised Proposal, the
entry by TRC into the original Merger Agreement dated as of September 11, 1997
(the "Original Merger Agreement") by and among the Partnership, TRC and Perkins
Acquisition Corp., a wholly-owned subsidiary of PMC ("MergerCo.") and the
Litigation Settlement.
Later that same day, the PMC Board met to discuss the Revised Proposal, the
Original Merger Agreement and the Litigation Settlement. Morgan Keegan was
present at the meeting and presented its
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analysis of the $14.00 per Unit price. The Board decided to adjourn the meeting
and reconvene later that evening to give the Board members additional time to
consider the Revised Proposal and Morgan Keegan additional time to consider the
terms of the Original Merger Agreement. Later that evening, the Board
reconvened. Morgan Keegan gave the Board its oral opinion (subsequently
confirmed in writing) that, based upon the considerations and subject to the
assumptions and limitations set forth in its opinion, the consideration to be
received by the Public Unitholders in the merger of MergerCo. with and into the
Partnership (the "Merger") is fair to the Public Unitholders from a financial
point of view. The Board then unanimously approved the Original Merger Agreement
and the Litigation Settlement.
Later on September 11, the Partnership issued a press release announcing the
terms of the Revised Proposal.
On October 1, 1997, the Original Merger Agreement was amended and restated
in its entirety (as so amended, the "First Amended Merger Agreement") to provide
for an amendment of the Partnership Agreement beginning on the date the Merger
is consummated. This amendment was needed to effectuate a provision in the
Original Merger Agreement that would give TRC the tax benefit for funding the
payment for certain expenses connected with the Merger. See "The Merger
Agreement--Issuance of Units to TRC and its Affiliates and Payment of Expenses
by TRC Prior to the Effective Time."
On November 6, 1997, the First Amended Merger Agreement was amended and
restated in its entirety again (as so amended, the "Merger Agreement") to
provide that, prior to the Effective Time, Perkins Restaurants Operating
Company, L.P., a Delaware limited partnership (the "Operating Partnership")
would be merged with and into the Partnership. The Partnership currently
conducts its business through the Operating Partnership and this amendment was
deemed desirable to eliminate the unnecessary complexity and potential financing
and tax inefficiencies of continuing to maintain this multiple layered
structure.
LITIGATION RELATING TO THE MERGER
Two lawsuits were filed on August 5, 1997 in the Delaware Chancery Court in
Wilmington, Delaware in response to the announcement of the Initial Proposal.
The suits, which were consolidated into a single proceeding entitled IN RE
PERKINS FAMILY RESTAURANTS, L.P. SHAREHOLDERS LITIGATION, consolidated Civil
Action No. 15853 (the "Delaware Litigation"), requested the court to certify the
litigation as a class action. The plaintiffs sought to enjoin the proposed
merger, alleging that the Partnership, TRC and PMC, and the individual
defendants, as officers and directors of PMC, violated their fiduciary duties to
the Public Unitholders by agreeing to such a merger. In the alternative, the
plaintiffs sought rescission of the merger and rescissory and compensatory
damages, together with costs and expenses, including attorneys' and experts'
fees.
On September 3, 1997, counsel for the plaintiffs, along with their financial
expert, met with counsel for defendants, presented an analysis prepared by the
financial expert and stated that, based on the publicly-available information
that they had received, they believed that the price for the publicly-held Units
should be in excess of $13.00 per Unit. Between September 8 and September 10,
1997, counsel for plaintiffs and counsel for defendants negotiated about a
possible settlement. During the course of the negotiations, plaintiffs were
furnished with additional information concerning the Partnership, including
projections. See "--Certain Projections of the Partnership." On September 10,
1997, counsel for defendants proposed, subject to approval by the TRC and PMC
Boards, to settle the Delaware Litigation by increasing the price offered to
Unitholders to $14.00 per Unit with the understanding that if the Merger were
consummated the cash distribution of $0.325 per Unit paid for the third quarter
of 1997 would be the final distribution paid to Public Unitholders. Attorneys
for the plaintiffs agreed to settle the litigation on this basis, subject to
court approval and the consummation of the Merger, and on October 10, 1997
executed a Stipulation and Agreement of Compromise, Settlement and Release with
the defendants to that effect (the "Stipulation"). In connection with the
Stipulation, the defendants have agreed to pay attorneys'
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fees of no more than $1,350,000 and expenses of no more than $85,000 if awarded
by the Chancery Court, although the defendants intend to contest the amount of
such fees and expenses. Such fees and expenses will not be deducted from the
consideration to be paid to the Public Unitholders in the Merger. Under the
Merger Agreement, TRC's and MergerCo.'s obligation to consummate the Merger is
conditioned on there being no pending or threatened actions or proceedings by
any person against the Partnership, TRC, the General Partner, MergerCo., or any
of their subsidiaries or any, director, officer or employee thereof challenging
the Merger in any way or seeking to obtain any damages against any person as a
result of the Merger. A hearing to finally approve the proposed settlement has
been scheduled in the Delaware Chancery Court for December 5, 1997.
FAIRNESS OF THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS OF THE GENERAL
PARTNER
As noted above, on September 11, 1997, the Board determined that the Merger
Agreement was fair to and in the best interests of the Public Unitholders,
approved the Merger Agreement and recommended that the Public Unitholders
approve the Merger Agreement. The Board placed significant weight on Morgan
Keegan's opinion, delivered to the Board on September 11, 1997, that the
consideration to be received by the Public Unitholders in connection with the
Merger is fair from a financial point of view to such holders (the "Fairness
Opinion"). The Board also placed significant weight on the related written and
oral presentations made by Morgan Keegan to the Board in connection with its
consideration of the Initial Proposal and the Revised Proposal. A copy of the
Fairness Opinion updated as of the date of this Proxy Statement is attached to
this Proxy Statement as Annex B. The Public Unitholders are urged to read the
Fairness Opinion in its entirety. See "--Fairness Opinion." TRC, PRI and
MergerCo. also believe that the Merger is fair to and in the best interests of
the Public Unitholders.
In reaching the conclusion that the Revised Proposal is fair to and in the
best interests of the Public Unitholders, the Board and TRC considered the
following factors (some of which were discussed prior to September 11, 1997),
which they deemed to be material:
PROCEDURAL FAIRNESS. The Board and TRC recognized that the Merger is
subject to satisfaction of the Public Unitholder Approval Requirement, which
assures that the Merger cannot be consummated against the wishes of the holders
of a majority of the Public Units voted. The Board and TRC also recognized that
because of the conflicting interests, or what might be perceived as conflicting
interests, of all of the directors of the General Partner, it would have been
problematic for the Board to appoint a committee of independent directors to
negotiate the terms of the Merger solely on behalf of the Public Unitholders.
The Board and TRC believe that the Public Unitholder Approval Requirement
provides adequate procedural fairness in connection with the Merger.
VALUATION ANALYSES. The Board considered the valuation methods used by
Morgan Keegan in rendering the Fairness Opinion and in valuing the Partnership,
including analyses based on comparable companies, premiums paid in other
acquisition transactions, tangible book value and discounted cash flows. In
addition, the Board considered the substantive factors considered by Morgan
Keegan in rendering its opinion, including, among others, the prior trading
history of the Units, the historical financial condition and performance of the
Partnership, the projected financial expectations of the Partnership, and the
performance and condition of public companies which are comparable to the
Partnership. Morgan Keegan did not perform, and the Board did not consider, a
liquidation value analysis of the Partnership. PMC and Morgan Keegan believe
that a liquidation value analysis would not be material because the Partnership
is a going concern and a liquidation value analysis, if performed, would be
likely to indicate an unreasonably low valuation for the Partnership.
PREMIUM TO MARKET. The Board and TRC recognized that the price of $14.00
per Unit represented a substantial premium to recent market trading prices for
the Units.
ADVANTAGES TO TRC. The Board recognized that the Merger would be
advantageous to TRC and its affiliates, which would collectively own all of the
Units following the Merger. TRC probably will be able to
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achieve significant benefits as a result of the Merger, including realizing all
of the benefits of improvements in the Partnership's business or increases in
the Partnership's value, eliminating the need to recognize fiduciary obligations
to the Public Unitholders and eliminating the costs of maintaining the
Partnership's status as a publicly-traded partnership under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Merger may also have
the effect of preventing, following the effectiveness of the Merger, any Public
Unitholders from having standing to sue the Partnership for damages based on a
derivative claim of a breach of fiduciary duty.
OTHER FACTORS. In addition to the factors listed above, the Board and TRC
considered the following factors in their evaluation of the Merger:
(i) the fact that the tax treatment of the Partnership under federal tax
laws makes it very unlikely that the Partnership will continue to pay
substantial distributions to Unitholders;
(ii) the Partnership's existing equity capital structure;
(iii) the all-cash nature of the $14.00 per Unit cash consideration to be
received by Public Unitholders in the Merger (the "Merger Consideration");
(iv) the intense and increasing competition in the restaurant industry;
(v) the opportunity for Unitholders to sell Units without the cost and
commissions normally associated with a sale;
(vi) the terms and conditions of the Merger Agreement, taken as a whole;
and
(vii) the lawsuits with respect to the Initial Proposal, the allegations
contained therein, discussions between defendants' counsel and plaintiffs'
counsel and the agreement of such counsel that they would recommend that the
Delaware Chancery Court approve a settlement based upon the Revised
Proposal.
WEIGHING OF FACTORS. In view of the variety of factors considered in its
evaluation of the Merger, neither the Board nor TRC found it practicable to, and
did not, quantify or otherwise assign precise relative weights to the individual
items described above. Among the most important factors considered by the Board
and TRC were the Fairness Opinion and presentations, the fact that the Merger is
subject to the Public Unitholder Approval Requirement through which TRC has
neutralized its vote and the fact that plaintiffs' counsel in the lawsuits
involving TRC's Initial Proposal have recommended that the Delaware Chancery
Court approve a settlement based upon the Revised Proposal.
In reaching the conclusion that the Merger is fair to and in the best
interests of the Public Unitholders, the Boards of Directors of PRI and
MergerCo. took note of and expressly adopted each of the factors considered and
conclusions reached by the Board and TRC.
FAIRNESS OPINION
On August 21, 1997, the Board of Directors of PMC retained Morgan Keegan &
Company, Inc. ("Morgan Keegan") to render an opinion to the Board of Directors
concerning the fairness, from a financial point of view, to the Public
Unitholders, of the consideration to be paid pursuant to the Merger Agreement.
Morgan Keegan was retained by PMC on the basis of, among other things, its
experience and expertise and familiarity with the restaurant industry. As part
of its investment banking business, Morgan Keegan is customarily engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and estate planning purposes.
Morgan Keegan's engagement was limited to rendering the opinion described
herein to the Board. Morgan Keegan did not provide any services to any other
party to the proposed Merger.
Representatives of Morgan Keegan attended both September 11, 1997 meetings
of the Board at which the Directors considered the proposed merger and approved
the Original Merger Agreement. At such
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meetings, representatives of Morgan Keegan made presentations and reviewed
various aspects of the Merger, including the financial terms and conditions of
the Merger.
At the second September 11, 1997 meeting of the Board, Morgan Keegan
rendered its oral opinion to the Board to the effect that, as of that date, the
consideration to be paid in connection with the Merger was fair, from a
financial point of view, to the Public Unitholders. That opinion was
subsequently confirmed in writing. Morgan Keegan provided the Board with an
updated opinion on the date of this Proxy Statement. The full text of Morgan
Keegan's opinion dated as of the date of this Proxy Statement is attached as
Annex B to this Proxy Statement and is incorporated herein by reference. The
description of the opinion set forth herein is qualified in its entirety by
reference to Annex B. Holders of the Units are urged to read the opinion in its
entirety for a description of the procedures followed, qualifications made,
matters considered and limitations undertaken by Morgan Keegan. The assumptions
that Morgan Keegan made for purposes of conducting its analysis are described
below.
MORGAN KEEGAN'S OPINION IS DIRECTED TO THE BOARD AND ADDRESSES ONLY THE
FAIRNESS, FROM A FINANCIAL POINT OF VIEW, TO THE PARTNERSHIP'S PUBLIC
UNITHOLDERS OF THE CONSIDERATION TO BE PAID PURSUANT TO THE MERGER AGREEMENT.
THE OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY UNITHOLDER AS TO HOW
SUCH UNITHOLDER SHOULD VOTE AT THE SPECIAL MEETING.
In connection with rendering its opinion, Morgan Keegan: (i) held
discussions with various members of management and representatives of PMC and
the Partnership concerning the Partnership's historical and current operations,
financial condition and prospects; (ii) reviewed historical consolidated
financial and operating data that was publicly-available or furnished to Morgan
Keegan by PMC and the Partnership; (iii) reviewed internal financial analyses,
financial and operating forecasts, reports and other information prepared by
officers and representatives of PMC and the Partnership; (iv) reviewed certain
publicly-available information concerning the trading of, and the trading
markets for, the Units; (v) reviewed certain other companies that it believed to
be comparable to the Partnership and the trading markets for certain of such
other companies' securities; (vi) reviewed certain publicly-available
information concerning the nature and terms of certain other transactions that
Morgan Keegan deemed relevant to its inquiry; and (vii) reviewed a September 9,
1997 draft of the Original Merger Agreement (and, in connection with its updated
opinion, the Merger Agreement).
Morgan Keegan assumed and relied upon the accuracy and completeness of all
of the financial and other information provided to it for purposes of its
opinion and assumed and relied upon the accuracy and completeness of the
representations and warranties contained in the Merger Agreement. Morgan Keegan
was not engaged to, and did not independently attempt to, verify any of such
information. With respect to the financial and operational forecasts made
available to Morgan Keegan by the management of PMC and the Partnership and used
in its analysis, Morgan Keegan assumed that such financial and operational
forecasts, including those relating to new store economics, new store
development and new franchised store plans were reasonably prepared on bases
reflecting the best currently available estimates and judgments of management as
to the matters covered thereby. Morgan Keegan was not engaged to assess the
achievability of such projections or the assumptions on which they were based
and expressed no view as to such projections or assumptions. Morgan Keegan did
not conduct an independent evaluation or appraisal of the assets and liabilities
of the Partnership. In connection with its updated opinion, Morgan Keegan was
furnished with and reviewed a letter from American Appraisal Associates stating
the results of its appraisal of certain assets of the Partnership. See "The
Merger--Appraisal." Morgan Keegan also assumed that the conditions to the Merger
as set forth in the Merger Agreement would be satisfied and that the Merger
would be consummated on a timely basis in the manner contemplated by the Merger
Agreement.
Morgan Keegan assumed, for purposes of its analysis, that the Partnership's
historical quarterly distribution would not be paid with respect to the quarter
ending December 31, 1997, and considered this fact in evaluating the fairness,
from a financial point of view, of the Merger Consideration of $14.00 per Unit
to be received by the Public Unitholders.
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<PAGE>
In its analyses, Morgan Keegan used closing stock prices as of September 9,
1997. In rendering its fairness opinion at the second PMC Board meeting on the
evening of September 11, 1997, however, Morgan Keegan took account of closing
stock prices on September 11.
The following is a summary of analyses presented by Morgan Keegan to the
Board of Directors on September 11, 1997 (the "Morgan Keegan Report") in
connection with its opinion.
COMPARABLE COMPANY ANALYSIS. Morgan Keegan compared selected historical and
projected market value multiples of two groups of publicly-traded restaurant
companies that it deemed to be comparable to the Partnership. The first group
included six restaurant companies that Morgan Keegan considered most comparable
to the Partnership in terms of operational characteristics (the "Peer Group").
This group consisted of Bob Evans Farms, Inc., DenAmerica Corp., Frisch's
Restaurants, Inc., IHOP Corp., Shoney's, Inc. and VICORP Restaurants, Inc. The
second group included the companies in the Peer Group, as well as seven
additional restaurant companies serving the family dining segment (the "Family
Dining Group"). The additional companies included in the Family Dining Group
were Buffets, Inc., Cracker Barrel Old Country Store, Inc., Flagstar Companies,
Inc., Luby's Cafeterias, Inc., Morrison Restaurants Inc., Piccadilly Cafeterias,
Inc. and Ryan's Family Steak Houses, Inc. No company used in Morgan Keegan's
analysis was identical to the Partnership. Accordingly, Morgan Keegan considered
the market multiples for the composite of comparable companies to be more
relevant than the market multiples of any single company.
Morgan Keegan calculated a range of implied values based upon the market
multiples of companies in the Peer Group and applied them to the historical and
projected results of the Partnership in order to determine a range of implied
values for the Partnership's Units. Morgan Keegan calculated the multiples of
adjusted market value (i.e., equity market capitalization plus debt less cash)
to latest twelve months ("LTM") revenues, Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA"), Earnings Before Interest and Taxes
("EBIT") and multiples of market value (equity market capitalization) to net
income and projected net income (based on published third party estimates) for
calendar 1997 and 1998 for each of the companies in the Peer Group. Morgan
Keegan applied the multiples of the Peer Group companies to the Partnership's
LTM revenues, EBITDA, EBIT and net income (pro forma at an assumed 40% tax
rate), and to management's projected calendar 1997 and 1998 net income (assuming
a 40% tax rate). The companies in the Peer Group had multiples ranging from
0.41x to 2.54x LTM revenues, 4.7x to 9.3x LTM EBITDA, 10.0x to 13.9x LTM EBIT,
and 13.0x to 42.2x LTM net income, with median multiples of 0.65x LTM revenue,
5.9x LTM EBITDA, 11.6x LTM EBIT and 19.8x LTM net income. Morgan Keegan
conducted an identical analysis with respect to the companies included in the
Family Dining Group. The companies in the Family Dining Group had market values
ranging from 0.18x to 2.54x LTM revenues, 2.4x to 12.8x LTM EBITDA, 4.8x to
16.3x LTM EBIT, and 11.1x to 42.2x LTM net income, with median multiples of
0.66x LTM revenues, 5.9x LTM EBITDA, 10.2x LTM EBIT and 19.3x LTM net income.
While less meaningful because of the Partnership's entity status, Morgan Keegan
also examined market value multiples of tangible book value for the companies in
the Peer Group and the Family Dining Group. Those multiples ranged from 1.1x to
2.9x for the Peer Group and 1.0x to 3.4x for the Family Dining Group, with
median multiples of 1.6x and 1.9x, respectively.
Application of the median Peer Group multiples to the Partnership resulted
in an implied price per Unit of $10.00 based on LTM revenues, $13.95 based on
LTM EBITDA, $15.65 based on LTM EBIT, $16.34 based on LTM net income, $12.70
based on projected 1997 net income, $13.68 based on projected 1998 net income
and $5.36 based on tangible book value. Application of the median Family Dining
Group multiples to the Partnership resulted in an implied price per Unit of
$10.29 based on LTM revenues, $14.06 based on LTM EBITDA, $13.13 based on LTM
EBIT, $15.92 based on LTM net income $12.07 based on projected 1997 net income,
$12.90 based on projected 1998 net income and $6.30 based on tangible book
value.
PREMIUM ANALYSIS. Morgan Keegan reviewed publicly-available information
concerning premiums paid in various categories of acquisition transactions and
derived an implied price per Unit based on the median premiums paid in these
transactions. Morgan Keegan reviewed the premiums paid by controlling persons to
acquire non-control positions in 124 transactions completed since January 1,
1992 or currently
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pending. Morgan Keegan then calculated the median premiums represented by the
offer price in those transactions over the market price of the securities four
weeks, one week and one day prior to the public announcement of the proposed
transaction. The median premiums represented by the purchase prices paid in the
acquisitions of non-controlling positions reviewed by Morgan Keegan were 21.0%
(four weeks prior to announcement), 19.1% (one week prior to announcement) and
17.3% (one day prior to announcement). The implied price resulting from the
application of these median premiums to the Partnership ranged from $12.76 to
$13.18 per Unit, as compared to the Merger Consideration of $14.00 per Unit.
Because of TRC's ownership interest in the Partnership and the General
Partner's authority under the Partnership Agreement, Morgan Keegan believed that
the analysis of the premiums paid to acquire non-controlling interests was the
most relevant premium analysis in the context of the proposed Merger. However,
Morgan Keegan also reviewed publicly-available information concerning premiums
paid in 113 acquisition transactions completed since January 1, 1996 involving a
purchase price of between $50 million and $200 million. The median premiums over
market prices paid in these transactions were 31.9% (four weeks prior to
announcement), 29.9% (one week prior to announcement) and 23.1% (one day prior
to announcement). In addition, Morgan Keegan examined 21 of these transactions
in which all cash consideration was paid, and determined that the median
premiums over market paid in all-cash transactions involving a purchase price of
between $50 million and $200 million were 31.8% (four weeks prior to
announcement), 31.8% (one week prior to announcement) and 26.1% (one day prior
to announcement). Morgan Keegan's analysis of the median premiums paid in all of
the acquisition transactions involving a purchase price of between $50 million
and $200 million indicated an implied value for the Partnership ranging from
$13.38 to $14.37 per Unit. Its analysis of the transactions involving all-cash
consideration indicated an implied value for the Partnership ranging from $13.71
to $14.58 per Unit.
DISCOUNTED CASH FLOW ANALYSIS. Morgan Keegan performed a discounted cash
flow analysis to calculate the Partnership's implied price per Unit based on
management's projections through December 31, 2000. Using this information,
Morgan Keegan calculated the net present value of free cash flows the
Partnership could generate through December 31, 2000 using discount rates
ranging from 17.0% to 25.0%. Morgan Keegan also calculated the terminal value of
the Partnership in the year 2000 based on multiples ranging from 5.5x to 7.0x
EBITDA and discounted these terminal values using discount rates ranging from
17.0% to 25.0%. Morgan Keegan's judgment concerning the risks associated with
the cash flows was a key factor in its determination of an appropriate discount
rate to use in its analysis. Among the factors contributing to Morgan Keegan's
conclusions about an appropriate discount rate were the anticipated improvement
in new store economics and the increased growth in new store and new franchised
store development reflected in management's projections. The sum of the present
value of the free cash flows and terminal values less outstanding debt (net of
cash) yielded an implied price per Unit ranging from $9.43 to $17.33.
Inherent in any discounted cash flow valuation are the use of a number of
assumptions, including the accuracy of management's projections, and the
subjective determination of an appropriate terminal value and discount rate to
apply to the projected cash flows of the entity under examination. Variations in
any of these assumptions or judgments could significantly alter the results of a
discounted cash flow analysis.
OTHER ANALYSES. In rendering its opinion, Morgan Keegan considered certain
other factors and conducted certain other analyses. These analyses, which are
described below, did not directly focus on the Merger Consideration, but were
undertaken to provide contextual data and comparative market data to assist in
assessing the Merger and the market's valuation of the Partnership's Units. In
order to assess market pricing for restaurant acquisitions, Morgan Keegan
identified 30 acquisition transactions in the restaurant industry completed
since January 1, 1996 or currently pending. Morgan Keegan analyzed the range of
revenue, EBITDA, EBIT, net income and book value multiples represented by the
purchase price paid in the restaurant transactions it reviewed. This analysis
revealed dramatic variations in transaction multiples. Due to the wide variation
in transaction multiples resulting from, among other things, differences in
pre-transaction operating performance, intangible or other assets associated
with a target's
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business and not reflected in historical operating performance and/or other
transaction specific factors (such as the strategic nature of particular
acquisitions), Morgan Keegan did not rely on the restaurant acquisition
transactions analysis set forth above in rendering its opinion. Morgan Keegan
reviewed the historical trading prices and volumes for the Units and the
relationship between movements in the price of the Units and movements in the
stock prices for various broad based market indices and for the companies
included in the Peer Group and the Family Dining Group. Morgan Keegan also
performed a Leveraged Buyout Analysis, which evaluated the purchase price to be
paid and hypothetical financing arrangements for the proposed transaction from
the perspective of an unaffiliated financial buyer. Morgan Keegan also
considered the ownership interest of TRC and its affiliates in the Partnership
and the rights provided to PMC as general partner under the terms of the
Partnership Agreement.
No company or transaction used in the above analyses for comparative
purposes is identical to the Partnership. Accordingly, an analysis of the
results of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors. Mathematical analysis (such as determining the
average or median) is not, in itself, a meaningful method of using comparable
company or transaction data.
The summary of the Morgan Keegan Report set forth above describes all
material analyses performed by Morgan Keegan. A copy of the Morgan Keegan Report
has been filed as an exhibit to the Schedule 13E-3 filed with the Securities and
Exchange Commission (the "Commission") with respect to the Merger, and may be
inspected and copied by mail from the Commission as set forth in "Where You Can
Find More Information." The preparation of a fairness opinion is not necessarily
susceptible to partial analysis or summary description. Morgan Keegan believes
that its analyses and the summary set forth above must be considered as a whole
and that selecting portions of its analyses, without considering all analyses,
or the above summary, without considering all factors and analyses, would create
an incomplete view of the process underlying the analyses set forth in the
Morgan Keegan Report and the Fairness Opinion. In addition, Morgan Keegan may
have deemed various assumptions more or less probable than other assumptions, so
that the ranges of valuations resulting from any particular analysis described
above should not be taken to represent the actual value of the Partnership.
In performing its analyses, Morgan Keegan made numerous assumptions with
respect to industry performance and general business and economic conditions.
Morgan Keegan assumed that long-term growth rates in the restaurant industry and
in the family dining segment of that industry would not deviate significantly
from historic levels, that industry practices with respect to pricing
adjustments relating to changes in the minimum wage, food prices and other costs
would remain consistent with historic practices, that the United States economy
would continue to experience a moderate rate of growth over the long-term, that
any recession would not be more severe or of longer duration than that
experienced in 1991-1992, and that inflation and interest rates would remain
within the ranges experienced over the past five years. Many of these factors
are beyond the control of the Partnership. The analyses performed by Morgan
Keegan are not necessarily indicative of actual values or actual future results,
which may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as part of Morgan Keegan's analysis
of the fairness of the consideration to be paid pursuant to the Merger and were
provided to the Board in connection with the delivery of the Fairness Opinion.
The analyses do not purport to be appraisals or to reflect the prices at which a
company might actually be sold or the prices at which any securities may trade
at the present time or at any time in the future. In addition, as described
above, the Fairness Opinion and presentation to the Board was one of many
factors taken into consideration by the Board in making its determination to
approve the Merger Agreement.
Morgan Keegan has expressed no opinion as to the prices at which Units may
trade following the date of its opinion.
PMC has agreed to pay Morgan Keegan a fee of $200,000 for its services
pursuant to an engagement letter between PMC and Morgan Keegan. An aggregate of
$50,000 was paid upon execution of the engagement letter. An additional $100,000
was payable upon the delivery of the Fairness Opinion. The balance of the fee
became payable when Morgan Keegan updated the Fairness Opinion. No portion of
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<PAGE>
Morgan Keegan's fee is contingent upon the closing of the transaction or whether
Morgan Keegan gave a favorable opinion with respect to a proposed transaction.
PMC also has agreed to reimburse Morgan Keegan for its reasonable out-of-pocket
expenses and to indemnify Morgan Keegan against certain liabilities, including
liabilities under the federal securities laws.
REPORT OF SMITH BARNEY
TRC engaged Smith Barney to act as TRC's financial advisor in connection
with the Merger. Smith Barney was retained by TRC to act solely as TRC's
financial advisor (and not as the advisor to the Partnership or the Board) to
assist TRC in evaluating financial and strategic alternatives and to advise TRC
with respect to, and if requested by TRC, to assist in negotiating the terms of,
the proposed Merger. Smith Barney was not retained to, and was not expected to,
render any advice or opinion as to the fairness, from a financial point of view,
of the consideration to be received by the Public Unitholders in the Merger.
In connection with its engagement as TRC's financial advisor, Smith Barney:
(i) reviewed the publicly available business and historical financial
information relating to the Partnership; (ii) reviewed the financial forecasts
provided to Smith Barney by the Partnership; (iii) conducted discussions with
members of senior management of the Partnership with respect to the business,
operations and prospects of the Partnership; (iv) reviewed the historical market
trading prices and volumes of the Units; and (v) reviewed publicly available
financial and stock market data with respect to other restaurant companies that
Smith Barney believed were comparable to the Partnership.
On September 8, 1997, Smith Barney furnished the TRC Board with a written
report summarizing the types of analysis performed by Smith Barney (the "Smith
Barney Report") and met with the TRC Board by telephone to discuss the capital
market implications of the Merger. The data contained in the Smith Barney Report
was intended solely to provide additional market information to the TRC Board in
connection with its formulation of the Revised Merger Proposal and was not
intended to provide a recommendation or opinion. A copy of the Smith Barney
Report has been filed as an exhibit to the Schedule 13E-3 filed with the
Commission with respect to the Merger and may be inspected and copied by mail
from the Commission as set forth in "Where You Can Find More Information."
The following is a summary of the various types of market information
furnished to the TRC Board in the Smith Barney Report:
COMPARISON OF ALTERNATIVES. Smith Barney compared the value to be received
by the TRC unitholders in an Exchange Transaction (as previously defined) and a
leverage buyout scenario whereby all public units would be purchased by TRC. In
performing both scenarios, Smith Barney assumed enterprise values of $205.0
million, $215.0 million and $225.0 million. In the Exchange Transaction, Smith
Barney assumed an exchange ratio pursuant to which TRC's ownership interest in
the newly formed corporation would be 42.5%, the middle of an assumed range of
40% to 45%. In performing the leveraged buyout analysis, Smith Barney assumed
unit purchase prices of $13.00, $15.00 and $17.00.
RETURNS ANALYSIS AND CAPITALIZATION SUMMARY. Smith Barney calculated the
compounded annual return to TRC for the purchase of the Units held by persons
other than TRC assuming purchase prices in the range of $13.00 to $17.00 per
Unit. The returns to TRC were calculated using two different methods to
determine TRC's beginning basis in its investment in the Partnership: (i) a
fixed basis equal to $14.00 per Unit and (ii) a basis which corresponds to the
per Unit purchase prices shown in the analysis. For each method, Smith Barney
analyzed returns through the year 2001 based on exit multiples of 6.0x to 8.0x
projected EBITDA in 2001 and 11.0x to 15.0x projected net income in 2002.
Smith Barney also provided the TRC Board with an analysis of various
financial ratios concerning the Partnership assuming Unit purchase prices in the
range of $13.00 to $17.00. These ratios include debt to EBITDA, EBITDA to
interest expense and EBITDA minus capital expenditures to interest expense.
Smith Barney's analyses of potential returns and financial ratios was solely
intended to provide the TRC Board with additional information concerning the
impact on TRC and the Partnership of the
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proposed Merger under various scenarios and was not intended as a recommendation
of any particular price to the TRC Board.
UNIT TRADING HISTORY. Smith Barney reviewed the historical trading volume
and market prices for the Units and analyzed the percentage of outstanding Units
traded within various price ranges. For the one-year period between September 5,
1996 and September 4, 1997, the highest percentage of Units (33.83%) were traded
in the price range of $13.00 to $14.00 per Unit, with the second highest
percentage of Units (24.51%) traded in the price range of $12.00 to $13.00 per
Unit. For the one-month period between August 4, 1997, the date on which TRC
issued a press release announcing its proposal to acquire the outstanding Units
not already owned by TRC and its direct and indirect subsidiaries for $13.00 per
Unit, and September 4, 1997, the highest percentage of Units (46.19%) traded in
the price range of $13.15 to $13.20 per Unit, with the second highest percentage
of Units traded in the price range of $12.95 to $13.00 per Unit.
COMPARABLE COMPANY ANALYSIS. Smith Barney reviewed publicly-available
historical financial information for three groups of restaurant companies
considered by Smith Barney to be reasonably comparable to the Partnership. The
first group included four family dining companies: Bob Evans Farms, Inc., IHOP
Corporation, Shoney's, Inc. and VICORP Restaurants, Inc. (the "Family Dining
Companies"). The second group included five other family-oriented restaurant
companies: Buffets, Inc., Luby's Cafeterias, Inc., Morrison Restaurants Inc.,
Piccadilly Cafeterias, Inc. and Ryan's Family Steak Houses, Inc. (the "Family
Oriented Companies"). The third group consisted of other casual dining
companies: Applebee's International, Inc., Apple South, Inc., Brinker
International, Inc., Darden Restaurants, Inc., Lone Star Steakhouse & Saloon,
Inc., O'Charley's Inc., Outback Steakhouse, Inc. and Rock Bottom Restaurants,
Inc. (the "Casual Dining Companies"). Although the companies in the three groups
were comparable to the Partnership based on certain characteristics of their
businesses, none of these companies possessed characteristics identical to those
of the Partnership. Smith Barney noted that the companies in the three groups
varied significantly in several areas, including but not limited to, (i) status
as franchisor, franchisee and operator of an owned restaurant concept, and
combinations thereof, (ii) mix of owned versus leased restaurants, (iii) status
as a single or multi-concept restaurant operator and (iv) inclusion of
non-restaurant businesses within the company. No adjustments were made to the
comparable company analysis to reflect any of these factors.
For each of the three groups, Smith Barney calculated, among other things,
the multiples of sales, EBITDA and EBIT, as well as price/earnings ("P/E")
multiples for the latest four quarters, calendar 1997 and calendar 1998 net
income. For the lastest four quarters, the companies in the Family Dining Group
had median multiples of 0.81x sales, 7.4x EBITDA, 11.4x EBIT and P/E multiples
of 18.9x, 16.1x and 13.7x for the latest four quarters, calendar 1997 and
calendar 1998 net income, respectively. The Family Oriented Group had median
multiples of 0.69x sales, 6.5x EBITDA, 10.4x EBIT and P/E multiples of 15.2x,
13.9x and 12.3x for the lastest four quarters, calendar 1997 and calendar 1998
net income, respectively. The Casual Dining Group had median multiples of 1.07x
sales, 7.2x EBITDA, 12.3x EBIT and P/E multiples of 16.8x, 15.6x and 13.3x for
the latest four quarters, calendar 1997 and calendar 1998 net income,
respectively. Smith Barney also provided the TRC Board with selected operating
statistics, market capitalization, income statement data and recent price
changes for each of the comparable companies.
The foregoing summarizes all material analyses performed by Smith Barney in
connection with the Smith Barney Report. The Smith Barney Report is filed as an
exhibit to the Schedule 13E-3. Smith Barney believes that its analysis and the
summary set forth above must be considered as a whole and that selecting
portions of its analysis, without considering all factors and analyses, could
create an incomplete view of the process underlying the analyses set forth in
the Smith Barney Report. The Smith Barney Report was prepared solely for the
purposes discussed above and does not purport to be an appraisal or necessarily
reflect the prices at which businesses or securities actually may be sold.
Analyses based upon projected future results are not necessarily indicative of
actual future results, which may be significantly more or less favorable than
suggested by such analyses. Because such analyses are inherently subject to
uncertainty, as they are based upon numerous factors or events beyond the
control of the parties or their respective
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advisors, none of TRC, the Partnership or the General Partner or any other
person assumes responsibility if the future results are materially different
from those projected.
Smith Barney's engagement was formalized in an engagement letter with TRC
dated August 6, 1997. Pursuant to such engagement letter, Smith Barney was paid
a retainer of $250,000 and will be entitled to an additional fee of $1,000,000
for its services upon the consummation of the Merger and to reimbursement for
its reasonable expenses, including the fees and expenses of its legal counsel.
Pursuant to the engagement letter, Smith Barney has a right to be engaged as
lead manager in connection with any public offering or private placement of debt
securities in the high yield market (the "Qualified High Yield Financing") in
connection with the Merger. If Smith Barney acts as the sole lead book-running
manager for the Qualified High Yield Financing within 12 months of the closing
of the Merger, the aggregate $1,250,000 fee payable to Smith Barney under the
engagement letter will be reduced by up to $375,000. Smith Barney has the right
of first refusal during the term of the engagement and for 12 months thereafter
to (i) act as TRC's and the Partnership's exclusive agent and/or lead manager in
connection with any private placement, public offering or other financing that
may be undertaken by TRC, whether or not related to the Merger, and (ii) to
provide all or a portion of any bridge financing for the Merger. Termination of
Smith Barney's engagement will not affect the right of first refusal of Smith
Barney. In addition, TRC has agreed to indemnify Smith Barney against certain
liabilities.
APPRAISAL
The Partnership retained American Appraisal Associates ("AAA") to conduct an
appraisal of certain of the Partnership's assets in connection with the
allocation of the total purchase price deemed paid in the Merger for accounting
and financial statement presentation purposes. This was deemed appropriate by
the Partnership because the Merger is being accounted for under the purchase
method of accounting.
AAA delivered its appraisal (the "Appraisal") to the Partnership on November
14, 1997. AAA did not make a personal inspection of each of the restaurants and
instead performed the Appraisal based essentially on records and other
information furnished by the Partnership. For purposes of the Appraisal, land
was valued on the basis of recent acquisitions made by the Partnership for its
own restaurants. Using multiple correlation analysis for such factors as sales
volume, operating profit, land size, building size and seating capacity for each
of the recently erected restaurants for which the land value was known, AAA
extrapolated the value of the land to the other restaurants.
The other real property, consisting of buildings, land improvements,
improvements to leased properties, as well as personal property consisting of
restaurants fixtures and equipment, and office furniture and equipment were
appraised using appropriate indices to produce a current cost of reproduction
new. Depreciation factors were then applied to reflect the fair market value of
the depreciable assets. A second approach for the owned restaurants' assets was
a modeling technique. The costs of constructing the several standard floor plans
developed by the Partnership, together with their usual complements of
furnishings, were used to check the reasonableness of the indexed cost of
replacement new.
The franchises were appraised by analysis of the remaining term of each
contract and any renewal options, together with the present worth of the net
contribution each franchisee makes to the Partnership through its fee, net of
all costs required to provide the services contained in the franchise contract.
The average remaining life of the franchise agreements is 16 years.
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Based upon such analysis, AAA opined that, as of October 15, 1997, the fair
market value of the specified assets of the Partnership is reasonably
represented in the amount $154,043,000, distributed generally as follows:
<TABLE>
<S> <C>
Land.......................................................... $30,158,000
Land Improvements............................................. 6,742,000
Buildings and Improvements to Leased Property................. 69,133,000
Personal Property............................................. 27,010,000
Franchises.................................................... 21,000,000
-----------
Total Fair Market Value of Specified Assets................... $154,043,000
-----------
-----------
</TABLE>
The full text of the Appraisal is filed as an exhibit to the Schedule 13E-3.
The Appraisal was not considered by the Board, TRC, PMC, PRI or Acquisition in
connection with reaching their determinations regarding the fairness of the
Merger to the Public Unitholders. The Appraisal did not take into consideration
any of the Partnership's liabilities and does not purport to be a valuation of
the Partnership taken as a whole.
AAA is experienced in the appraisal of assets similar to the Partnership's
assets. In connection with rendering the Appraisal, AAA will be paid a fee of
approximately $45,000, plus expenses. In addition, the Partnership has agreed to
indemnify AAA against certain liabilities.
CERTAIN PROJECTIONS OF THE PARTNERSHIP
The Partnership provided TRC, Smith Barney and Morgan Keegan with certain
projected financial data for the years 1997 through 2002. The projected
financial data were not prepared with a view to public disclosure or compliance
with published guidelines of the Commission or the guidelines established by the
American Institute of Certified Public Accountants regarding projections and are
included in this Proxy Statement only because they were made available to TRC,
Smith Barney and Morgan Keegan. These projections initially were prepared as of
June 16, 1997 and were based upon management's expectations regarding new store
openings as of that date. None of Morgan Keegan, Smith Barney, TRC, MergerCo.,
the General Partner nor the Partnership's independent auditors, Arthur Andersen
LLP, examined, compiled or applied any procedures with respect to the projected
financial data or expressed any opinion or provided any kind of assurance
thereon. None of Morgan Keegan, Smith Barney, TRC, the Partnership, the General
Partner, MergerCo. nor any of their respective affiliates or advisors assumes
any responsibility for the reasonableness or completeness of the projected
financial data. While presented with numerical specificity, the projected
financial data are based on a variety of assumptions relating to the business of
the Partnership that, although considered appropriate by the Partnership at the
time, may not be realized. Moreover, the projected financial data, and the
assumptions upon which they are based, are subject to significant uncertainties
and contingencies, many of which are beyond the control of the Partnership.
Consequently, the projected financial data and the underlying assumptions are
necessarily speculative in nature and inherently imprecise, and there can be no
assurance that projected financial results will be realized. It is expected that
there will be differences between actual and projected results and actual
results are likely to vary materially from those shown, and such variance will
likely increase over time. None of Morgan Keegan, Smith Barney, TRC, the
Partnership, the General Partner, MergerCo. nor any of their respective
affiliates or advisors intends to update or otherwise revise the projected
financial data. The inclusion of the projected financial data herein should not
be regarded as an indication that Morgan Keegan, Smith Barney, TRC, the
Partnership, the General Partner, MergerCo. or any of their respective
affiliates or advisors considers it an accurate prediction of future results.
Unitholders are cautioned not to place undue reliance on the projections, which
should be read together with the information relating to the business, assets
and financial condition of the Partnership included herein. See "Business" and
"Summary Financial Data."
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These projections contain forward-looking information based on the
Partnership's current expectations and are subject to a number of risks
including those described below and elsewhere in this Proxy Statement. These
risks could cause actual results in the future to differ significantly from
results expressed or implied in any projections made by the Partnership.
A number of factors could affect whether the Partnership will in fact
realize the results assumed in the projections. The Partnership's business is
subject to intense competition from local as well as national competitors. See
"Business--Competition." Changes in customer preferences and the effects of
aggressive competition could have a material adverse effect on the Partnership's
ability to realize the revenue results assumed in the projections. The
Partnership's business is also subject to fluctuations in the general economy
and, since the Partnership's locations are concentrated in the Midwest, Florida
and the Northeast, a downturn in the general economy or these regional economies
could have a negative impact on customers' decisions to dine out at the
Partnership's restaurants. In addition, many of the Partnership's restaurants
are dependent upon leisure travelers whose travel and dining plans may be more
sensitive to any downturn in the economy. Bad weather, especially major weather
events such as hurricanes or floods, could also have a negative impact on the
Partnership's ability to realize the results assumed in the projections. The
projections include assumptions regarding new restaurant openings. The success
of new locations can vary depending on a number of factors including the quality
of the site on which they are located. See "Business--Development of
Restaurants." The ability of the Partnership to find qualified franchisees could
have a negative impact on its ability to open new franchised locations. The
financial and operational performance of existing franchisees can also have a
negative impact on the Partnership's results. At September 30, 1997, the
Partnership's largest franchisee was delinquent in its royalty obligations to
the Partnership. See "Business--Franchise Operations." The Partnership's
business is sensitive to fluctuations in food costs. The Partnership's results
of operations are particularly sensitive to coffee prices which are subject to
substantial fluctuations. Fluctuations in the price of dairy products, meats and
produce can also have a material adverse effect on the Partnership's results of
operations. Labor costs have a significant impact on the Partnership's results.
The Partnership's labor costs are affected by increases in minimum wage laws,
including state minimum wage laws. See "Business--Regulation." For example,
Minnesota minimum wage laws have resulted in significantly higher labor costs
for the Partnership's restaurants which are located in that state. The
availability of labor can also have a negative impact on the Partnership's
operations as scarce labor and/or competitive markets result in higher wages.
These factors and others affecting the Partnership's business should be
considered in evaluating the projections presented below. For a general
discussion of factors affecting the Partnership's business, see "Business"
below.
INITIAL PROJECTIONS. Set forth below is a summary of the initial projected
financial data (the "Initial Projections") prepared by the Partnership as of
June 16, 1997 and provided to TRC, Morgan Keegan and Smith Barney prior to the
execution of the Original Merger Agreement.
The Initial Projections presented below are based on numerous assumptions,
including the following material assumptions. The Initial Projections assumed
that the Partnership would open three new Partnership-operated restaurants in
1997, six new Partnership-operated restaurants in 1998, seven new
Partnership-operated restaurants in 1999 and eight new Partnership-operated
restaurants in 2000. The Initial Projections also assumed that the Partnership
would open 30 new franchised restaurants in 1997, 30 new franchised restaurants
in 1998, 35 new franchised restaurants in 1999 and 40 new franchised restaurants
in 2000. The Initial Projections assumed that Partnership-operated restaurants
opened in 1994 or before would realize average sales increases of 4.7%, 3.7%,
3.9% and 3.9% in the years ending December 31, 1997, 1998, 1999 and 2000,
respectively, and that franchised restaurants opened in 1994 or before would
realize average sales increases of 1.2%, 2.5%, 2.5% and 2.5% in the years ending
December 31, 1997, 1998, 1999 and 2000, respectively. The Initial Projections do
not assume any effects of the Merger. There can be no assurance that actual
results for the periods covered will not be materially different than the Inital
Projections contemplate.
22
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
PROJECTED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
(PROJECTED)
(IN THOUSANDS)
----------------------------------------------
<S> <C> <C> <C> <C>
1997 1998 1999 2000
---------- ---------- ---------- ----------
REVENUES
Food Sales..................................................... $ 248,097 $ 264,222 $ 286,878 $ 312,982
Franchise revenues............................................. 20,354 22,370 25,112 28,293
---------- ---------- ---------- ----------
Total Revenues................................................... 268,451 286,592 311,990 341,275
COSTS AND EXPENSES
Cost of Sales
Food cost...................................................... 72,894 77,939 85,043 93,253
Labor and benefits............................................. 83,632 88,215 95,566 104,008
Operating expenses............................................. 51,503 54,960 59,254 63,983
General and administrative....................................... 26,595(1) 25,529 26,350 27,202
Depreciation and amortization(2)................................. 16,296 18,063 18,736 18,782
Interest, net.................................................... 4,839 5,477 4,649 3,646
Other(2)......................................................... (1,240) (2,202) (1,810) (523)
---------- ---------- ---------- ----------
Total Costs and Expenses......................................... 254,519 267,981 287,788 310,351
---------- ---------- ---------- ----------
Earnings before Income Taxes..................................... 13,932 18,611 24,202 30,924
Income Taxes..................................................... 0 7,400 9,631 12,317
---------- ---------- ---------- ----------
Net Income....................................................... 13,932 11,211 14,571 18,607
Interest, net.................................................... 4,839 5,477 4,649 3,646
Income Taxes..................................................... 0 7,400 9,631 12,317
---------- ---------- ---------- ----------
EBIT............................................................. 18,771 24,088 28,851 34,570
Depreciation and Amortization(2)................................. 16,296 18,063 18,736 18,782
---------- ---------- ---------- ----------
EBITDA(2)........................................................ $ 35,067 $ 42,151 $ 47,587 $ 53,352
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) Includes $1,500 of estimated expenses related to evaluating possible
alternatives to becoming a tax paying entity.
(2) The Initial Projections contain a misclassification which resulted in
depreciation and amortization expense being overstated in each of the years
ending December 31, 1998 through 2000 by $1,575, $1,408 and $1,242,
respectively. In each year, this overstatement is offset by a corresponding
overstatement in the line above entitled "Other." Accordingly, the
misclassification has no impact on net income or EBIT as shown above. The
misclassification does, however, lead to an overstatement of EBITDA as shown
above by $1,575, $1,408 and $1,242 in each of the years ending December 31,
1998 through 2000, respectively.
23
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
PROJECTED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(PROJECTED)
(IN THOUSANDS)
----------------------------------------------
<S> <C> <C> <C> <C>
1997 1998 1999 2000
---------- ---------- ---------- ----------
ASSETS
CURRENT ASSETS
Cash & cash equivalents.......................................... $ 1,540 $ 995 $ 963 $ 1,765
Receivables, net of allowances................................... 6,285 6,285 6,285 6,285
Inventories...................................................... 4,234 4,234 4,234 4,234
Prepaid expenses and other....................................... 1,552 1,552 1,552 1,552
---------- ---------- ---------- ----------
Total current assets............................................. 13,611 13,066 13,034 13,836
PROPERTY & EQUIPMENT, NET........................................ 118,564 122,064 126,328 132,904
NOTES RECEIVABLE, NET............................................ 705 605 505 405
INTANGIBLE AND OTHER ASSETS...................................... 23,823 22,712 21,618 20,599
---------- ---------- ---------- ----------
$ 156,703 $ 158,447 $ 161,485 $ 167,744
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Current maturities of long-term debt............................. $ 4,674 $ 4,824 $ 5,049 $ 5,199
Current maturities of capital lease obligations.................. 1,408 1,299 1,037 1,066
Accounts Payable................................................. 8,128 8,128 8,128 8,128
Accrued Expenses................................................. 13,520 13,520 13,520 13,520
Distributions payable............................................ 0 0 0 0
---------- ---------- ---------- ----------
Total current liabilities........................................ 27,730 27,771 27,734 27,913
CAPITAL LEASE OBLIGATIONS........................................ 7,152 5,853 4,816 3,750
LONG-TERM DEBT................................................... 55,570 48,746 39,697 29,498
OTHER LIABILITIES................................................ 4,629 3,244 1,834 571
PARTNERS' CAPITAL................................................ 61,622 72,833 87,404 106,012
---------- ---------- ---------- ----------
$ 156,703 $ 158,447 $ 161,485 $ 167,744
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
24
<PAGE>
UPDATED PROJECTIONS. The Partnership updates its current year forecast on a
monthly basis and in the normal course of business updates its long range
projections as business conditions warrant to reflect its most current estimates
of future performance. In accordance with this policy and in conjunction with
syndication of the Financing, the Partnership prepared updated projections (the
"Updated Projections") to reflect operating results and trends as of September
30, 1997. The Updated Projections were provided to potential lenders, Morgan
Keegan, Smith Barney and to the attorneys for the plaintiffs in the Delaware
Litigation.
The Updated Projections are based on numerous assumptions, including the
following material assumptions: (i) the Partnership will open three new
Partnership-operated restaurants in 1997, six new partnership-operated
restaurants in 1998, seven new Partnership-operated restaurants in 1999, eight
new Partnership-operated restaurants in 2000 and nine new Partnership-operated
restaurants in both of 2001 and 2002; (ii) the Partnership's franchisees will
open 17 new restaurants in 1997 and 40 new restaurants in each of the years 1998
through 2002; (iii) Partnership-operated restaurants opened in 1994 or before
will realize sales increases of 5.5% and 3.7% in the years ending December 31,
1997 and 1998, respectively, and 3.9% in each of the years ending December 31,
1999 through 2002; and (iv) franchised restaurants will realize average sales
increases of 1.2% in the year ending December 31, 1997 and 2.5% in each of the
years ending December 31, 1998 through 2002.
In addition to the changes in the operating assumptions detailed above, the
Updated Projections assume the consummation of the Merger and the other
transactions contemplated by the Merger Agreement while the Initial Projections
did not assume consummation of such transactions. The transaction assumptions in
the Updated Projections had the following effects: (i) an increase in
depreciation and amortization expense due to a write-up in the value of property
and equipment and intangibles caused by the application of the purchase method
of accounting, (ii) an increase in interest expense due to an increase in
long-term debt to be incurred in connection with the Merger and (iii) a decline
in income tax expense as a result of the significant increase in interest
expense.
Set forth below is a summary of the Updated Projections. The Updated
Projections are subject to the uncertainties and cautionary statements that are
described on pages 21 and 22 above. There can be no assurance that actual
results for the periods covered by the Updated Projections will not be
materially different than the Updated Projections contemplate.
25
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
PROJECTED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
(PROJECTED)
(IN THOUSANDS)
----------------------------------------------------------------------
1997 1998 1999 2000 2001 2002
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Food sales............................ $ 247,984 $ 271,788 $ 295,404 $ 321,730 $ 351,227 $ 382,932
Franchise revenues.................... 19,709 22,352 25,449 28,646 32,025 35,573
---------- ---------- ---------- ---------- ---------- ----------
Total Revenues.......................... 267,693 294,140 320,853 350,376 383,252 418,505
COSTS AND EXPENSES
Cost of Sales
Food cost............................. 71,657 79,303 86,778 95,016 104,154 113,935
Labor and benefits.................... 84,019 92,384 100,289 109,176 118,870 129,355
Operating expenses.................... 50,924 55,744 60,045 64,831 70,888 77,271
General and administrative.............. 31,143 25,652 26,401 27,252 28,130 29,038
Depreciation and amortization(1)........ 16,245 19,187 20,004 20,225 21,184 21,723
Interest, net(1)........................ 4,731 13,882 13,367 12,590 11,685 10,442
Other................................... (1,447) (618) (279) 435 (58) 161
---------- ---------- ---------- ---------- ---------- ----------
Total Costs and Expenses................ 257,272 285,534 306,605 329,525 354,853 381,925
---------- ---------- ---------- ---------- ---------- ----------
Earnings before GP Interest & Taxes..... 10,421 8,606 14,248 20,851 28,399 36,580
GP Interest & Taxes(1).................. 104 4,175 6,676 9,118 12,105 15,031
---------- ---------- ---------- ---------- ---------- ----------
Net Income.............................. $ 10,317 $ 4,431 $ 7,572 $ 11,733 $ 16,294 $ 21,549
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Transaction Expenses.................... 5,682 0 0 0 0 0
Interest, net(1)........................ 4,731 13,882 13,367 12,590 11,685 10,442
GP Interest & Taxes..................... 104 4,175 6,676 9,118 12,105 15,031
---------- ---------- ---------- ---------- ---------- ----------
EBIT(2)................................. 20,834 22,488 27,615 33,441 40,084 47,022
Depreciation & Amortization(1).......... 16,245 19,187 20,004 20,225 21,184 21,723
---------- ---------- ---------- ---------- ---------- ----------
EBITDA(2)............................... $ 37,079 $ 41,675 $ 47,619 $ 53,666 $ 61,268 $ 68,745
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) In the years after 1997, these amounts are materially affected by the
application of the purchase method of accounting to the Merger, the
transactions contemplated by the Merger Agreement and the contemplated
financing of the transactions. As a result of the write-up in the value of
Property and Equipment and Intangibles, annual depreciation and amortization
expenses increase significantly. As a result of the increase in long-term
debt to finance the Merger, interest expense increases significantly. The
increase in interest expense reduces taxable income and, accordingly, income
tax expense.
(2) Excluding estimated expenses included in general and administrative expenses
related to the Merger and related financing of $5,682 in 1997.
The Initial Projections, the Updated Projections and the historical
financial information included elsewhere herein are all of the material
projections and financial information prepared by the Partnership and provided
to Morgan Keegan, Smith Barney or the attorneys for the plaintiffs in the
Delaware Litigation in connection with the Merger and the other transactions
contemplated by the Merger Agreement.
26
<PAGE>
COMPARISON OF INITIAL PROJECTIONS AND UPDATED PROJECTIONS. The following
factors caused revenues and resulting earnings in the Updated Projections to
differ from the Initial Projections: (i) 13 fewer franchise openings in 1997, 10
more franchise openings in 1998 and 5 more franchise openings in 1999 and (ii)
an increase in 1997 comparable store sales growth for the Partnership-operated
restaurants opened before 1994 from 4.7% in the Initial Projections to 5.5% in
the Updated Projections.
In addition to the revenue assumptions detailed above, two primary factors
caused EBITDA (earnings before interest, taxes, depreciation and amortization)
to change from the Initial Projections to the Updated Projections. First,
general and administrative expenses in the Initial Projections included $1.5
million of transaction expenses which were not added back when computing EBITDA
whereas transaction expenses of $5,682,000 included in general and
administrative expenses in the Updated Projections were added back when
computing EBITDA. Second, the Initial Projections contained a misclassification
which overstated depreciation and amortization expense in each of the years
ending December 31, 1998 through 2000 by $1,575,00, $1,408,000 and $1,242,000,
respectively, which was offset by a corresponding overstatement in the line of
the Initial Projections entitled "Other." The overstatement in depreciation and
amortization expense led to a corresponding overstatement of EBITDA in the
Initial Projections. The foregoing has been disclosed to Morgan Keegan, Smith
Barney and the attorneys for the plaintiffs in the Delaware Litigation. The
Updated Projections do not contain this misclassification.
The following table shows the necessary adjustments to EBITDA to make the
two sets of projections comparable:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
(IN THOUSANDS)
------------------------------------------
1997 1998 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
EBITDA--Initial Projections........................................... $ 35,067 $ 42,151 $ 47,587 $ 53,352
Transaction expense add-back.......................................... 1,500 -- -- --
Adjustment for overstatement of depreciation and amortization in
Initial Projections.................................................. -- (1,575) (1,408) (1,242)
--------- --------- --------- ---------
Adjusted EBITDA--Initial Projections.................................. 36,567 40,576 46,179 53,352
EBITDA--Updated Projections........................................... 37,079 41,675 47,619 53,666
</TABLE>
In addition to the factors explained above, EBIT (earnings before interest
and taxes) and net income were affected by certain Merger related transaction
assumptions (see footnote (1) to the Updated Projections).
27
<PAGE>
STRUCTURE OF THE MERGER
At the effective time of the Merger (the "Effective Time"), (i) each issued
and outstanding Unit, other than those held by TRC or its direct or indirect
subsidiaries, will be canceled, extinguished and retired and will be converted
into the right to receive $14.00 in cash, without interest; (ii) each Unit held
in the treasury of the Partnership will be canceled, extinguished and retired
and no payment shall be made with respect thereto; (iii) each general or limited
partnership interest which is owned by TRC or its direct and indirect
subsidiaries will be and remain a general or limited partnership interest of the
Partnership and no payment shall be made with respect thereto; (iv) each share
of common stock, par value $0.01 per share, of MergerCo. will be converted into
and exchanged for a corresponding limited partner interest in the Partnership;
and (v) MergerCo. will cease to exist. As a result of the Merger, the
Partnership will become wholly owned by TRC and its affiliates and the Public
Unitholders will cease to be limited partners of the Partnership. Because no
Units will be publicly held after the Merger, the Units will be delisted and
will no longer trade on the New York Stock Exchange. The Partnership has been
informed by TRC that, following the Merger, it intends to retain the
Partnership's current management and continue to manage the Partnership as an
ongoing business in the same general manner as it is now being conducted.
Immediately after the Effective Time, the Partnership will redeem, for
$14.00 per Unit, all Units received by PMC in connection with the conversion of
MergerCo.'s common stock in the Merger.
If the Merger is consummated, the Partnership's final quarterly distribution
to Public Unitholders will be the $0.325 per Unit cash distribution for the
third quarter of the Partnership's fiscal year paid to persons who were
Unitholders of record on September 30, 1997.
Closing of the Merger is subject, among other things, to: (i) the favorable
vote of (A) a majority of the total voting interests in the Partnership (the
"Majority Vote Requirement") and (B) a majority of the Units held by Public
Unitholders that are voted at the Special Meeting (the "Public Unitholder
Approval Requirement"); (ii) Morgan Keegan's fairness opinion not being
withdrawn; (iii) unless waived by TRC, no event having occurred or being
reasonably expected to occur which is, or is reasonably expected to be,
materially adverse to the business, operations, properties, condition (financial
or otherwise), assets or liabilities (including, without limitation, contingent
liabilities), results of operations or prospects of Perkins; (iv) unless waived
by TRC, no actions or proceedings by any person being pending or threatened
against the Partnership, TRC, the General Partner, MergerCo., or any of their
subsidiaries or any director, officer or employee thereof challenging or in any
way seeking to obtain damages against any person as a result of the Merger; (v)
no law, rule, regulation, executive order, decree, injunction or other order
having been enacted, issued, promulgated, enforced or entered by any court or
governmental authority which prohibits, restrains, enjoins or restricts the
consummation of the Merger; and (vi) financing for sufficient aggregate funds
being available to satisfy the obligations of TRC, PMC, the Partnership and
MergerCo., including, without limitation, the obligation to pay the Merger
Consideration and to pay all related fees and expenses payable by TRC, PMC, the
Partnership and MergerCo. in connection with the Merger and other related
transactions. See "The Merger Agreement."
INTERESTS OF CERTAIN PERSONS IN THE MERGER; CONFLICTS OF INTEREST
Unitholders should be aware that management and certain persons associated
with the General Partner have certain interests which may present them with
actual or potential conflicts of interest in connection with the Merger.
As of September 30, 1997, 5,043,000 (48.1%) of the Units were beneficially
owned by TRC, through its wholly owned subsidiary PRI. See "The
Partnership--Beneficial Ownership of Units and Transactions in Units By Certain
Persons." TRC is interested in the outcome of the Merger in that, following the
Merger, TRC and its direct and indirect subsidiaries would be the sole owners of
the Partnership. As sole owners, TRC and its direct and indirect subsidiaries
would bear the total risk of the Partnership's operations but would also receive
the entire benefit, if any, arising from pursuit of the various opportunities
described
28
<PAGE>
under "--Background and Reasons for the Merger." If ownership interests in the
Partnership or its assets were sold to an unrelated third party, TRC would
obtain exclusively the benefits of such a sale while, if the current ownership
structure were maintained, TRC would share any such benefits with the Public
Unitholders.
Various management personnel are common to PMC, PRI and TRC. Each of the
directors and officers of PRI serves in the same capacity for PMC, and three of
the directors and three of the officers of PMC serve as directors and officers
of TRC. Donald N. Smith serves as Chairman of the Board and Chief Executive
Officer of PMC, PRI and TRC and owns 33.2% of the outstanding common stock of
TRC. Michael P. Donahoe serves as Vice President and Controller of each of PMC,
PRI and TRC and Donald F. Wiseman serves as Secretary of PMC, PRI and TRC.
Steven L. Ezzes and Charles L. Atwood serve as directors of PMC, PRI and TRC.
Mr. Ezzes serves on the Boards of each of PMC, PRI and TRC. Mr. Atwood, who
serves on the Boards of each of PMC, PRI and TRC, is a stockholder and an
employee of Harrah's, which indirectly owns 33.2% of the outstanding common
stock of TRC.
The other directors of PMC, although they are not officers or directors of
TRC or its subsidiaries, have certain other relationships with TRC and its
affiliates that may give rise to actual or perceived conflicts of interest. Lee
N. Abrams is a director of PMC and is a senior partner of a law firm that has
represented and is representing TRC and certain of its affiliates in connection
with the Merger and other matters. D. Michael Meeks is a director of PMC and
under a consulting arrangement, Mr. Meeks assists Perkins in identifying and
negotiating franchise agreements with potential franchisees in the hotel
industry. Mr. Meeks' compensation consists of a per diem of $1,000 (with a
maximum of $3,000 per potential franchisee), a commission of $15,000 for each
new franchised restaurant opened and the reimbursement of reasonable
out-of-pocket travel expenses. Mr. Meeks is also a former employee of, and a
significant portion of his net worth is invested in, Harrah's, which indirectly
owns approximately 33.2% of the outstanding stock of TRC. Charles A. Ledsinger
is the former Chief Financial Officer of Harrah's and a significant portion of
his net worth is invested in Harrah's. To the extent that the Merger were to
ultimately prove beneficial to TRC and to positively affect the value of TRC
stock, Mr. Smith and Harrah's, as well as all other TRC stockholders, would
benefit from the Merger. Mr. Meeks and Mr. Ledsinger, as stockholders of
Harrah's, would also benefit indirectly from the Merger to the extent that any
such positive effect on the stock of TRC might in turn have a positive effect on
the stock of Harrah's.
The General Partner and the senior management of the Partnership have
certain other interests that may present them with actual or potential conflicts
of interest. Among these are that (i) the General Partner is controlled by TRC,
(ii) the current General Partner is expected to remain in its current role
subsequent to the Merger, and (iii) the current members of the senior management
of the Partnership and the General Partner are expected to remain in their
positions following the Merger. Under the Partnership Agreement, whenever a
conflict of interest exists or arises between the General Partner or any of its
affiliates, on the one hand, and the Partnership, any limited partner or any
Unitholder, on the other hand, the General Partner may resolve such conflict of
interest, take such action or provide such terms considering, in each case, the
relative interests of each party to such conflict, agreement, transaction or
situation and the benefits and burdens relating to such interests any customary
or accepted industry practices and any applicable generally accepted accounting
practices or principles. The Partnership Agreement provides that, in the absence
of bad faith by the General Partner, the actions of the General Partner shall
not constitute a breach of the Partnership Agreement or any other agreement
contemplated therein.
RELATIONSHIPS BETWEEN THE PARTIES
Except as set forth in this Proxy Statement, there are no past, present or
proposed material contracts, arrangements, understandings, relationships,
negotiations or transactions between the Partnership, on the one hand, and TRC
and its affiliates, on the other hand, concerning a merger, consolidation or
acquisition, a tender offer or other acquisition of securities, or sale or other
transfer of a material amount of assets of the Partnership. However, in the
future, the Partnership's management may review additional information
29
<PAGE>
about the Partnership and, upon completion of any such review, may propose or
develop additional or new plans or proposals or may propose the acquisition,
disposition or refinancing of assets or other changes in the Partnership's
business, structure, capitalization, management or distribution policy which
they consider to be in the best interests of the Partnership and its owners.
PLANS FOR THE PARTNERSHIP AFTER THE MERGER
The Partnership has been informed by TRC that, following the Merger, TRC
intends to cause the business and operations of the Partnership to continue to
be conducted by the Partnership substantially as they are currently being
conducted. TRC will, however, continue to evaluate the business and operations
of the Partnership after the consummation of the Merger and will continue to
take such actions as are deemed appropriate by TRC and its affiliates, under the
circumstances then existing, to maximize the profitability of the Partnership.
Except for the Merger and as otherwise described in this Proxy Statement,
none of TRC, the General Partner or their affiliates has any present plans or
proposals which relate to or would result in an extraordinary transaction, such
as a merger, reorganization, liquidation, relocation of any operations of the
Partnership or sale or transfer of a material amount of assets involving the
Partnership or any other change in the Partnership's structure or business or
the composition of its management. However, in the future TRC, its affiliates
and the Partnership's management will continually review additional information
about the Partnership and, upon completion of any such review, may propose or
develop additional or new plans or proposals or may propose the acquisition,
disposition or refinancing of assets, including, without limitation, general or
limited partnership interests in one or more partnership subsidiaries of the
Partnership, real estate assets held by one or more of such partnership
subsidiaries and property management or asset management and related contracts
in respect of properties controlled by the Partnership, one of its partnership
subsidiaries or an affiliate of the Partnership (the "Properties"), the
repositioning of certain of the Properties or other changes in the Partnership's
business, structure, capitalization, management or distribution policy which
they consider to be in the best interests of the Partnership and its surviving
partners.
CERTAIN EFFECTS OF THE MERGER
In the Merger, all of the Units outstanding immediately prior to the
Effective Time (other than Units held by TRC and its direct and indirect
subsidiaries) will be converted into the right to receive $14.00 in cash per
Unit and the Public Unitholders will cease to have any interest in the
Partnership and will therefore not share in future earnings and growth of the
Partnership, if any. As a result of the Merger, TRC and its affiliates will hold
the entire equity interest in the Partnership, including the entire interest in
the Partnership's net earnings and book value.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of the material federal income tax rules
applicable to the Merger. The summary does not discuss all of the federal income
tax consequences that may be relevant to a particular Unitholder or to certain
Unitholders subject to special treatment under the federal income tax laws (for
example, foreign persons, tax-exempt entities, life insurance companies or S
corporations). The discussion also assumes that the Units are held as capital
assets. The discussion set forth below is based upon the Internal Revenue Code,
regulations and announcements promulgated thereunder and published rulings and
court decisions, all as in effect on the date hereof. All of the foregoing are
subject to change, possibly with retroactive effect. DUE TO THE INDIVIDUAL
NATURE OF TAX CONSEQUENCES, EACH UNITHOLDER IS URGED TO CONSULT HIS OR HER OWN
TAX ADVISOR TO DETERMINE THE SPECIFIC FEDERAL INCOME TAX CONSEQUENCES OF
RECEIVING CASH IN THE MERGER IN EXCHANGE FOR UNITS, AS WELL AS THE EFFECTS OF
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
30
<PAGE>
GAIN OR LOSS. A Unitholder who receives cash in the Merger in exchange for
Units will be treated as though his or her Units were redeemed by the
Partnership for cash and generally will recognize capital gain or loss to the
extent of the difference between the amount of cash received and his or her
adjusted tax basis in the Units exchanged (as explained below). In addition,
certain Unitholders will recognize ordinary income related to the recapture of
certain tax benefits pursuant to section 751(b) of the Internal Revenue Code
(e.g., depreciation recapture). Depending on when the Unitholders acquired their
Units, the ordinary income component is expected to be no more than $1.25 per
Unit. Any ordinary income recognized pursuant to section 751(b) will reduce the
capital gain or increase the capital loss otherwise recognized on the exchange
of the Units. Any remaining capital gain or loss will be long term capital gain
or loss if the Unitholder's holding period in the Units is more than 18 months
on the date of the Merger and will be taxed as "mid-term" gain if the
Unitholder's holding period in the Units is more than 12 months and up to 18
months. Capital losses generally are deductible only to the extent of capital
gains plus, in the case of non-corporate Unitholders, up to $3,000 of ordinary
income. Capital losses realized upon the sale of Units may be utilized to offset
capital gains from other sources and may be carried forward, subject to
applicable limitations.
Under the recently enacted Taxpayer Relief Act, non-corporate taxpayers are
taxed at a maximum rate of 20% for long term capital gains and a maximum rate of
28% for mid-term gains. The Taxpayer Relief Act gives the Internal Revenue
Service ("IRS") the authority to apply the Taxpayer Relief Act's new rules on
taxation of capital gains to sales of interests in pass-through entities,
including partnerships. It is possible that the regulations could provide that
the type of capital gain could be determined by looking through the partnership.
Thus, for example, the long term rate could only apply to the extent the gain is
attributable to assets held by the Partnership for more than 18 months. No
guidance has been issued by the IRS regarding how these rules might be applied.
Such guidance, if and when issued, could have retroactive effect.
Generally, the adjusted tax basis of a Unitholder's Units will be equal to
the cost of the Units to such Unitholder, increased by the Unitholder's share of
Partnership income (including any income for the year of the Merger) and
decreased by the Unitholder's share of Partnership distributions, credits and
losses (including any losses for the year of the Merger).
PARTNERSHIP INCOME OR LOSS FOR YEAR OF MERGER. Unitholders will be required
to include in income their allocated share of Partnership items listed in
section 702(a) of the Internal Revenue Code for the taxable year in which the
Merger occurs. Certain expenses connected with the Merger that are funded by TRC
and its affiliates will be specially allocated to the entity funding those
expenses. See "The Merger Agreement-- Issuance of Units to TRC and its
Affiliates and Payment of Expenses by TRC Prior to Effective Time."
ACCOUNTING TREATMENT OF THE MERGER
The acquisition by TRC of the Units will be accounted for as an acquisition
of minority ownership interests of a subsidiary in accordance with the purchase
method of accounting.
REGULATORY APPROVALS AND FILINGS
Certain regulatory requirements must be complied with before the Merger is
consummated. The Partnership and TRC are not aware of any other governmental
consents or approvals that are required prior to the consummation of the Merger
other than those described below. It is presently contemplated that if such
additional governmental consents and approvals are required, such consents and
approvals will be sought. There can be no assurance, however, that any such
additional consents or approvals will be obtained.
HSR ACT. The Merger is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the rules
and regulations thereunder, which provide that certain acquisition transactions
may not be consummated until certain information has been furnished
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to the Antitrust Division of the Department of Justice (the "Antitrust
Division") and the Federal Trade Commission (the "FTC") and until certain
waiting periods have been terminated or have expired. On October 14, 1997, the
Notification and Report Forms for the Merger required pursuant to the HSR Act
were filed by the Partnership and TRC. The FTC granted early termination of the
waiting period under the HSR Act on October 28, 1997.
SCHEDULE 13E-3. TRC, PRI, PMC and MergerCo. have filed with the Commission
a Schedule 13E-3 pursuant to the Exchange Act, furnishing certain information
with respect to the Merger in addition to the information contained in this
Proxy Statement, and they may file amendments to the Schedule 13E-3. As
permitted by the rules and regulations of the Commission, this Proxy Statement
omits certain information contained in the Schedule 13E-3. For further
information pertaining to the Partnership, reference is made to the Schedule
13E-3 and the exhibits and amendments thereto. See "Where You Can Find More
Information."
EXPENSES OF THE MERGER
The Merger Agreement provides that all fees, costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
will be paid by the party incurring such fees, costs and expenses. No such fees,
costs or expenses will affect the Merger Consideration of $14.00 per Unit or the
final distribution of $0.325 per Unit paid for Unitholders of record on
September 30, 1997 for the third quarter of the Partnership's 1997 fiscal year.
It is estimated that, if the Merger is consummated, the fees, costs and expenses
incurred in connection with the Merger will be approximately as set forth below:
<TABLE>
<CAPTION>
THE
TRC PARTNERSHIP
------------- ------------
<S> <C> <C>
Investment banking fees and expenses............................. $ 850,000 $ 225,000(1)
Financing/Refinancing Fees and Expenses.......................... 7,640,000 0
Legal fees and expenses (2)...................................... 1,835,000 0
Accounting fees and expenses..................................... 110,000 0
Filing fees...................................................... 90,000 0
Solicitation, printing and mailing fees.......................... 130,000 0
Miscellaneous (3)................................................ 465,000 0
------------- ------------
Total............................................................ $ 11,120,000 $ 225,000
------------- ------------
------------- ------------
</TABLE>
- ------------------------
(1) Includes the fees and estimated expenses of Morgan Keegan (see "The
Merger--Fairness Opinion").
(2) Includes the estimated fees and estimated expenses of counsel to TRC,
MergerCo. and PMC and $1,435,000, the maximum in fees and expenses payable
to the plaintiffs' lawyers in the Delaware Litigation. Defendants in the
Delaware Litigation intend to contest the amount of such fees and expenses.
(3) Includes paying agent fees for processing transmittals and payments to
holders of Units.
THE PROXY SOLICITATION
VOTING AND PROXY PROCEDURES
A proxy enables a Unitholder to be represented at a meeting or any
adjournments, postponements or reschedulings thereof at which he would otherwise
be unable to participate. The proxy card accompanying this Proxy Statement is
solicited because each Unitholder is entitled, as a limited partner of the
Partnership, to vote on matters scheduled to come before the Special Meeting.
Units eligible to be voted and for which a proxy card in the accompanying
form is properly signed, dated and returned in sufficient time to permit the
necessary examination and tabulation of the proxy
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before a vote is taken will be voted in accordance with any choice specified.
The proxy card permits a specification of approval, disapproval or abstention as
to the proposal described in this Proxy Statement. Unitholders are urged to
specify their choice by marking an (x) or other mark in the appropriate box on
the proxy card, but where no choice is specified, eligible Units will be voted
for approval of the Merger Agreement and the Merger.
If any matters not specified in this Proxy Statement come before the Special
Meeting or any adjournments, postponements or reschedulings thereof, eligible
Units will be voted in accordance with the best judgment of the persons named
therein as proxies. At the time this Proxy Statement was printed, management of
the General Partner was not aware of any other matters to be voted upon. Only
procedural matters may come before the Special Meeting since the only
substantive matters which may be considered are those with respect to which
prior notice is given.
The proxy may be revoked at any time before it is exercised by submitting a
written revocation or a later-dated proxy or proxy card, attention Secretary, to
Perkins Family Restaurants, L.P., 6075 Poplar Avenue, Suite 800, Memphis, TN
38119-4709, or by attending the Special Meeting in person and so notifying the
meeting inspectors.
The presence in person, or by properly executed proxy, of the holders of
more than 50% of the aggregate Percentage Interests (as hereinafter defined) of
all partners is necessary to constitute a quorum at the Special Meeting.
"Percentage Interest" means (a) as to the General Partner, 1%, and (b) as to any
Unitholder, the product of (i) 99% multiplied by (ii) the number of Units held
by such Unitholder, divided by the total of all Units outstanding. Each holder
of record of Units on the Record Date is entitled to cast one vote per Unit on
each proposal properly submitted for the vote of the holders of the Units.
Pursuant to the Partnership Agreement, approval of the Merger Agreement will
require the affirmative vote of a majority of the aggregate Percentage Interests
of all partners entitled to vote thereon, including Units held by TRC and its
direct and indirect subsidiaries (the "Majority Vote Requirement").
Additionally, although not required by the Partnership Agreement, approval of
the Merger Agreement has been conditioned upon the affirmative vote of a
majority of the Units held by Public Unitholders that are voted at the Special
Meeting (the "Public Unitholder Approval Requirement"). The votes of TRC, its
direct and indirect subsidiaries and their respective officers, directors and
key employees will not count toward satisfaction of the Public Unitholder
Approval Requirement. Therefore, the Merger will not be consummated without the
approval of the holders of a majority of the Units held by Public Unitholders
and voted at the Special Meeting.
Abstentions and any unvoted positions in brokerage accounts will be counted
toward the calculation of a quorum, but are not treated as either a vote for or
against the proposal. Abstentions and unvoted Units will be treated as unvoted
Units in determining whether the Public Unitholder Approval Requirement has been
satisfied. TRC has informed the General Partner that it intends to vote its
interest in the Partnership (which includes the General Partner's interest as
well as the Units over which it has voting control), representing approximately
48.6% of the Percentage Interests, "FOR" approval of the Merger if the Public
Unitholder Approval Requirement is satisfied. Thus, if the Public Unitholder
Approval Requirement is satisfied, the Majority Vote Requirement is very likely
to be satisfied as well.
SOLICITATION OF PROXIES
Solicitation of proxies from the Unitholders will be made by the General
Partner and will be undertaken principally by use of the United States Postal
Service. The cost of any such solicitation, including the cost of preparing and
mailing proxy materials, returning the proxies and reimbursing brokerage houses
and nominees for forwarding proxy materials to beneficial owners, will be borne
by the Partnership. D.F. King & Co., Inc. will assist in the solicitation of
proxies by the General Partner for an aggregate anticipated fee of $5,000 plus
reasonable out-of-pocket expenses.
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NO APPRAISAL RIGHTS
Under the Delaware Revised Uniform Limited Partnership Act, the only
appraisal rights available to Unitholders are those accorded by contract.
Neither the Partnership Agreement nor the Merger Agreement provide such
appraisal rights to the Public Unitholders in connection with the Merger.
CONDUCT OF THE SPECIAL MEETING
An agenda will be distributed at the Special Meeting, and the meeting will
be conducted in accordance with the agenda. The presiding officer's rules will
govern the meeting.
THE MERGER AGREEMENT
The following is a summary of the material provisions of the Merger
Agreement, which is attached as Annex A to this Proxy Statement. Such summary is
qualified in its entirety by reference to the Merger Agreement.
GENERAL
The Merger Agreement provides that, at the Effective Time and subject to the
satisfaction of certain other conditions, MergerCo. will be merged with and into
the Partnership. Following the Merger, the Partnership will continue as the
surviving partnership and the separate existence of MergerCo. will cease. In the
Merger, (i) each issued and outstanding Unit (including restricted Units held by
participants in the Partnership's Restricted Limited Partnership Unit Plan of
October 2, 1987), other than those held by TRC or its direct or indirect
subsidiaries, will be canceled, extinguished and retired and will be converted
into the right to receive $14.00 in cash, without interest; (ii) each Unit held
in the treasury of the Partnership will be canceled, extinguished and retired
and no payment shall be made with respect thereto; (iii) each general or limited
partnership interest which is owned by TRC or its direct or indirect
subsidiaries will be and remain a general or limited partnership interest, as
applicable, of the Partnership and no payment will be made with respect thereto;
(iv) each share of common stock, par value $0.01 per share, of MergerCo. will be
converted into and exchanged for a corresponding limited partner interest in the
Partnership; and (v) MergerCo. will cease to exist.
The Merger Agreement also provides that, if the Merger is consummated, the
Partnership's final quarterly distribution to Public Unitholders will be the
$0.325 per Unit cash distribution for the third quarter of the Partnership's
fiscal year to persons who were Unitholders of record on September 30, 1997.
EFFECTIVE TIME
The Merger will become effective at the time of the filing by the
Partnership with the Secretary of State of the State of Delaware of a
certificate of merger in accordance with the Delaware Revised Uniform Limited
Partnership Act and the Delaware General Corporation Law. It is presently
anticipated that such filing will be made on or before December 31, 1997,
although there can be no assurance in this regard. Such filing will be made,
however, only upon satisfaction or waiver, where permissible, of the conditions
set forth in the Merger Agreement. See "--Conditions to the Merger."
FINANCING OF THE MERGER
Under the Merger Agreement, TRC's obligation to consummate the Merger is
subject to the availability of sufficient funds to satisfy the obligations of
TRC, the General Partner, the Partnership and MergerCo., including the
obligation to pay the amount to which the Unitholders, other than TRC and its
direct and indirect subsidiaries, will become entitled at the Effective Time
upon surrender of their Units and to pay all related fees and expenses payable
by TRC, PMC, the Partnership and MergerCo. in
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connection with the Merger and other related transactions (the "Financing"). The
Merger Agreement requires TRC and the Partnership to use their reasonable best
efforts to obtain the Financing.
Approximately $88 million will be required to consummate the Merger and to
pay related fees and expenses. On September 30, 1997, TRC entered into a
commitment agreement with a bank to provide the Partnership with a combination
of term loan facilities (the "Term Loans") and a new $50,000,000 revolving line
of credit facility (the "Line") (together, the "Facilities") which are intended
to finance the acquisition of the Public Units and refinance the Partnership's
existing credit facilities. The Term Loans consist of two separate facilities in
the amounts of $50,000,000 ("Term Loan A") and $80,000,000 ("Term Loan B").
Term Loan A matures five years from the date of closing and is to be repaid
in eighteen consecutive quarterly installments, commencing in the third quarter
after the closing date. Term Loan B matures eight years from the date of closing
and is to be repaid in thirty consecutive quarterly installments, also
commencing in the third quarter after the closing date. The Line matures five
years from the date of closing and contains a $5,000,000 sublimit for letters of
credit.
Although the Facilities are available to finance the Merger, the Partnership
plans to raise a significant portion of the required financing through a private
placement of debt securities. As currently contemplated, Term Loan B would be
eliminated and the combined amounts of Term Loan A and the Line would be reduced
by the net amount of funds raised through a private placement. TRC and the
Partnership plan to complete the closings of the Facilities and the private
placement concurrently with the consummation of the Merger.
CONDITIONS TO THE MERGER
The respective obligations of the Partnership, TRC and MergerCo. to effect
the Merger are subject to the satisfaction at or prior to the Effective Time of
the following conditions: (i) the satisfaction of the Majority Vote Requirement
and the Public Unitholder Approval Requirement; (ii) no law, rule, regulation,
executive order, decree injunction or other order having been enacted, issued,
promulgated, enforced or entered by any court or governmental authority which
prohibits, restrains, enjoins or restricts the consummation of the Merger; (iii)
any waiting period applicable to the consummation of the Merger under the HSR
Act having expired or been terminated and (iv) Morgan Keegan having provided and
not withdrawn the Fairness Opinion, updated as of the date of this Proxy
Statement.
The obligations of TRC and MergerCo. to effect the Merger are further
subject to the satisfaction or waiver by TRC and MergerCo. of the following
conditions: (i) the representations and warranties of the Partnership contained
in the Merger Agreement being true and correct in all material respects when
made and on and as of the Effective Time, except for changes contemplated by the
Merger Agreement, with the same force and effect as if made on and as of the
Effective Time, except for any representation or warranty made or given as of a
specified time, which shall have been true and correct in all material respects
as of such time; (ii) the Partnership having performed or complied in all
material respects with all agreements and covenants required by the Merger
Agreement to be performed or complied with by the Partnership on or prior to the
Effective Time; (iii) unless waived by TRC, no event having occurred or being
reasonably expected to occur which is, or is reasonably expected to be,
materially adverse to the business, operations, properties, condition (financial
or otherwise), assets or liabilities (including, without limitation, contingent
liabilities), results of operations or prospects of Perkins; (iv) unless waived
by TRC, no actions or proceedings having been pending or threatened by any
person against the Partnership, TRC, the General Partner, MergerCo. or any of
their subsidiaries or any director, officer or employee thereof challenging or
in any way or in any manner seeking to restrict or prohibit the Merger or any
other Transaction or seeking to obtain any damages against any person as a
result of the Merger or any other Transaction; and (v) financing for sufficient
aggregate funds being available to satisfy the obligations of TRC, PMC, the
Partnership and MergerCo., including, without limitation, the obligation to pay
the Merger Consideration
35
<PAGE>
and to pay all related fees and expenses payable by TRC, PMC, the Partnership
and MergerCo. in connection with the Merger and other related transactions.
In addition, the obligations of the Partnership to effect the Merger are
further subject to the satisfaction or waiver of the following conditions: (i)
the representations and warranties of TRC and MergerCo. contained in the Merger
Agreement being true and correct in all material respects when made and on and
as of the Effective Time, except for changes contemplated by the Merger
Agreement, with the same force and effect as if made on and as of the Effective
Time, except for any representation or warranty made or given as of a specified
time, which shall have been true and correct in all material respects as of such
time; and (ii) TRC and MergerCo. having performed or complied in all material
respects with all agreements and covenants required by the Merger Agreement to
be performed or complied with by them on or prior to the Effective Time.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned
notwithstanding approval of the Merger by the Public Unitholders or the General
Partner, at any time prior to the Effective Time, by mutual written consent of
the Boards of Directors of MergerCo., TRC and the General Partner. The Merger
Agreement may also be terminated by either TRC or the Partnership in the event
that (i) the Effective Time has not occurred on or before February 28, 1998
(except that the right to so terminate the Merger Agreement will not be
available to any party whose failure to fulfill any obligation under the Merger
Agreement caused or resulted in the failure of the Effective Time to occur on or
before such date) or (ii) any court of competent jurisdiction or other
governmental authority has issued an order, decree or ruling or taken any action
restraining, enjoining or otherwise prohibiting the Merger and such order,
decree, ruling or other action has become final and nonappealable. Further, the
Merger Agreement may be terminated by the Partnership if the Board determines
that it has a fiduciary duty to withdraw its approval or recommendation of the
Merger Agreement or the Merger and by TRC if the Board has withdrawn or modified
in a manner adverse to TRC its approval or recommendation of the Merger
Agreement or the Merger.
PAYMENT FOR UNITS
Prior to the Effective Time, TRC will designate a bank or trust company to
act as agent (the "Paying Agent") for the holders of Units to receive the Merger
Consideration. Promptly after the Effective Time, the Partnership will cause to
be mailed to each person who was, at the Effective Time, a holder of record of
Units entitled to receive the Merger Consideration, a form of letter of
transmittal and instructions for surrendering depositary receipts representing
the Units ("Receipts") pursuant to such letter of transmittal. Upon surrender to
the Paying Agent of a Receipt, together with such letter of transmittal, duly
completed and validly executed in accordance with the instructions thereto, and
such other documents as may be required pursuant to such instructions, the
holder of such Receipt will be entitled to receive $14.00 in cash per Unit,
without interest. All Units so surrendered will then be canceled. When and as
needed, TRC or MergerCo. will deposit, or cause to be deposited, in trust with
the Paying Agent the cash to which the holders of Units will be entitled at the
Effective Time.
At any time following the sixth month after the Effective Time, the
Partnership will be entitled to require the Paying Agent to deliver to it any
funds which had been made available to the Paying Agent and not disbursed to
holders of Units (including, without limitation, all interest and other income
received by the Paying Agent in respect of all funds made available to it), and
thereafter such holders may look to the Partnership (subject to abandoned
property, escheat and other similar laws) only as general creditors thereof for
amounts payable upon due surrender of the Receipts held by them.
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ISSUANCE OF UNITS TO TRC AND ITS AFFILIATES AND PAYMENT OF EXPENSES BY TRC PRIOR
TO EFFECTIVE TIME
In order to prevent a termination of the Partnership for federal income tax
purposes, the Merger Agreement provides that TRC and its affiliates will
contribute cash in the amount of $4,410,000 to acquire newly issued Units of the
Partnership prior to the Effective Time. If the Merger is not consummated for
any reason, TRC or the affiliate making such contribution, as applicable, may
withdraw such capital contribution and the Partnership will promptly repay such
capital contribution upon notice from TRC or such affiliate.
The Merger Agreement also provides that TRC and its affiliates will be
entitled to contribute any amount necessary to pay any costs incurred by Perkins
in connection with the repayment of Perkins' existing indebtedness or in
connection with any other transaction connected with the Merger and that payment
of such expenses will be specially allocated to the party paying such expense in
order to satisfy the "substantial economic effect" requirement of section 704(b)
of the Internal Revenue Code. In order to effectuate the provision in the
Original Merger Agreement that would give TRC the tax benefit for funding such
expenses, the Original Merger Agreement was amended on October 1, 1997 (as so
amended, the "First Amended Merger Agreement") to provide for an amendment of
the Partnership Agreement beginning on the Effective Date. As so amended, the
Partnership Agreement provides that if any amount is contributed or deemed to be
contributed to the Partnership or its affiliates to pay expenses incurred by the
Partnership or its affiliates in connection with the repayment of debt or any
other transaction connected with the Merger, such expenses shall be specially
allocated to the partner making such contribution or deemed contribution in
accordance with section 704(b) of the Internal Revenue Code. Prior to such
amendment, the tax benefit of some of these expenses might have been allocated
to all of the partners of the Partnership, including the Public Unitholders. The
Public Unitholders therefore will not receive any tax benefit as a result of the
contribution by TRC and its affiliates to the Partnership of amounts for payment
of expenses in connection with the Merger.
OPERATING PARTNERSHIP MERGER
The First Amended Merger Agreement was amended and restated in its entirety
again on November 6, 1997 to provide that, prior to the Effective Time, the
Operating Partnership would be merged with and into the Partnership with the
Partnership being the surviving partnership in that merger. The Partnership
currently conducts its business through the Operating Partnership and this
amendment was deemed desirable to eliminate the unnecessary complexity and
potential financing and tax inefficiencies of continuing to maintain this
multiple layered structure.
37
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BUSINESS
The Partnership is an operator and franchisor of full-service, mid-scale
restaurants located primarily in the Midwest, Pennsylvania, upstate New York and
central Florida. The Partnership's restaurants operate under the names Perkins
Family Restaurant-Registered Trademark- and Perkins Family Restaurant and
Bakery-Registered Trademark-. Perkins restaurants offer a full menu assortment
of breakfast, lunch, dinner, snack and dessert items and many are open 24 hours
a day. The business of Perkins was founded in 1958 and since then Perkins has
continued to adapt its menus, product offerings, building designs and decor to
meet changing consumer preferences. A substantial majority of
Partnership-operated restaurants and franchised restaurants have added in-store
bakeries which offer a premium line of freshly prepared baked goods including
muffins, cookies and pies. As of September 30, 1997, the Partnership operated
135 full-service restaurants and franchised 333 full-service restaurants located
in 32 states and four provinces of Canada. For the twelve months ended September
30, 1997, system-wide revenues (including franchised restaurants), Partnership
revenues and Partnership earnings before interest, taxes, depreciation and
amortization ("EBITDA") were $701.4 million, $262.8 million and $35.5 million,
respectively. Partnership-operated restaurants have achieved comparable
restaurant sales increases in each of the last 25 quarters.
Perkins restaurants are primarily located in free-standing buildings with
approximately 90 to 250 seats. Recently, the Partnership and its franchisees
have begun to test the Perkins concept in various non-traditional locations
including travel plazas, malls, hotels and airports. The Partnership and its
franchisees operate three alternative formats, including limited menu
restaurants and a stand-alone bakery, in addition to full-service stand-alone
restaurants. These alternative formats are operated under the names Perkins Cafe
and Bakery-Registered Trademark-, Perkins Bakery-Registered Trademark- and
Perkins Express-Registered Trademark-.
The Partnership continues to focus on growing its number of franchised
restaurants which provide a higher margin of cash flow relative to the required
capital investment and create an additional sales outlet for the products of the
Partnership's Foxtail Foods ("Foxtail") food manufacturing division. From 1988
to 1996, the average annual royalties per franchised restaurant grew from
approximately $38,500 to approximately $55,100 as the number of franchised
restaurants increased from 227 to 329.
In addition to operating and franchising Perkins restaurants, the
Partnership operates Foxtail and is a partner in a joint venture for the
development of Jack Astor's Bar and Grill-Registered Trademark-. Foxtail
provides cookie dough, muffin batter, pancake mixes, pies and other bakery
products to Partnership-operated restaurants, franchisees and third parties.
During 1996, Foxtail accounted for 8.5% of Partnership revenues. During 1997,
the Partnership entered into a joint venture with a Canadian casual dining
operator for the development of a minimum of three Jack Astor's Bar and
Grill-Registered Trademark- restaurants. Jack Astor's Bar and Grill is a casual
themed dining concept with a high-energy fun atmosphere offering chicken, pasta,
hamburgers and alcoholic beverages. The first restaurant opened in Greensboro,
North Carolina on October 6, 1997.
COMPETITIVE STRENGTHS
ESTABLISHED, HIGH-VALUE RESTAURANT BRAND. Perkins is a highly recognized
brand in the geographic areas it serves as well as in locations connected to
existing markets by travel routes. Perkins offers its guests a wide variety of
over 140 reasonably priced menu items, including fresh bakery products served in
a warm and comfortable dining environment with the convenience of extended
operating hours. As of September 30, 1997, entrees served in
Partnership-operated restaurants ranged in price from $2.99 to $8.99 for
breakfast, $4.29 to $8.99 for lunch and $5.99 to $8.99 for dinner. The
Partnership operates a 3,000 square foot test kitchen in Memphis, Tennessee
which develops and tests new menu items. Menus are updated at least three times
per year and supplemented with special menus for holiday and promotional events.
STRONG FRANCHISE NETWORK. The Partnership has 111 franchisees which operate
333 restaurants in 30 states and four Canadian provinces, representing over 70%
of the Perkins system. In addition to providing the Partnership with substantial
royalty revenues ($18.6 million for the twelve months ended September 30, 1997),
the franchise network allows the Partnership to significantly expand the Perkins
system without
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corresponding capital investment by the Partnership. The Partnership believes
that it enjoys good relations with its franchisees.
UPDATED, MODERN RESTAURANTS. The Partnership 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. An accelerated program to upgrade existing Partnership-operated
restaurants began in 1995 and continues today. The current remodel package
features a modern, distinctive interior and exterior layout that enhances
operating efficiencies and guest appeal. As of September 30, 1997, approximately
86% of Partnership-operated restaurants had either been remodeled or initially
constructed since January 1, 1994.
To promote a consistent and current image throughout the Perkins system, the
Partnership is encouraging its franchise operators to remodel their restaurants
by providing financial incentives and third-party capital programs. Twenty-two
franchise restaurants were remodeled in 1996 and approximately 35 additional
restaurants are expected to be remodeled in 1997, of which 19 were completed by
September 30, 1997.
MANAGEMENT EXPERTISE. The Partnership has a talented management team with
extensive restaurant experience. Management's average tenure with the
Partnership is over seven years and management averages 20 years of restaurant
industry experience. Donald N. Smith, PMC's Chief Executive Officer, has over 30
years of restaurant experience, over 12 of which have been with PMC. Richard K.
Arras, PMC's President, has 18 years of restaurant experience, all of which have
been with PMC.
EFFICIENT OPERATIONS. The Partnership uses a combination of current
technology, on-going operational analyses, hourly employee performance programs
and the operating experience of both its own field management and that of its
franchisees to continuously improve the quality, efficiency and execution of its
operating systems. For example, the Partnership-operated restaurants recently
implemented programs to improve labor efficiency, lower food cost and improve
facility utilization during peak periods.
DAYPART BALANCE. Perkins has successfully evolved over the last 39 years
from its origins as a breakfast-oriented pancake house by developing significant
lunch, dinner and late night product offerings. The flexibility of Perkins'
multi-daypart offerings allows each location to meet the needs of its trading
area. During 1996, the revenue breakdown by daypart for Partnership-operated
restaurants was 25% breakfast, 29% lunch, 32% dinner and 14% late night (10:00
p.m. to 6:00 a.m.), although breakfast items (which are served around the clock)
continue to account for slightly more than half of the entrees sold in the
Partnership's restaurants.
COMMITMENT TO GUEST SATISFACTION. The Partnership is focused on continually
improving guest satisfaction. The Partnership regularly surveys customers to
determine their overall satisfaction with their dining experience, conducts
extensive service quality training programs and operates a toll free number to
monitor guest dining experience.
MANAGEMENT INFORMATION SYSTEMS. The Partnership's information systems not
only provide detailed monthly financial statements for each restaurant but daily
operating statistics such as sales, labor, guest check and average table turns.
The system also generates weekly restaurant profit and loss statements and food
and labor variance analysis. The Partnership has also developed a labor
scheduling system which calculates the amount of labor necessary to provide
optimal guest service. The Partnership's systems are year 2000 compliant.
PURCHASING LEVERAGE. The Partnership aggregates the purchasing requirements
of all of its Partnership-operated restaurants and over 90% of its franchised
restaurants to obtain purchasing economies of scale for food items, cleaning
supplies, equipment, maintenance services, and regional distribution agreements.
In addition, the Partnership utilizes outside consultants for information
regarding purchases
39
<PAGE>
of commodity items and supports significant purchases of commodity products,
such as sirloin steak or shrimp, which provide the basis for several
product-driven marketing programs throughout the year.
BUSINESS STRATEGY
INCREASE FRANCHISE REVENUES. The Partnership plans to continue to add
franchised units in existing and new geographic markets. In addition, management
will continue to encourage franchisees to remodel and renovate restaurants where
appropriate. Management believes its franchisees will open 17 new restaurants in
1997, of which ten had been opened as of September 30 and seven were under
construction. Management believes its franchisees will open 40 new franchised
restaurants during 1998. During 1996, ten franchised restaurants closed and, in
1997, six franchised restaurants had been closed as of September 30.
SELECTIVELY DEVELOP NEW PARTNERSHIP-OPERATED RESTAURANTS. The Partnership
will continue to develop and operate new restaurants based upon its current
prototype. Management believes the development of successful
Partnership-operated restaurants supports the continued development of the
Perkins franchise system. The Partnership currently plans to add three new
Partnership-operated full-service restaurants in 1997, of which one was open as
of September 30 and two were under construction. The Partnership plans to add
six new Partnership-operated restaurants in 1998.
EXPAND NON-TRADITIONAL LOCATIONS AND ALTERNATIVE FORMATS. The Partnership
and its franchisees have built, on a limited test basis, restaurants within
non-traditional sites including hotels, airports, travel plazas and strip
shopping centers. Within these non-traditional locations, the Partnership has
recently opened restaurants with alternative formats such as limited menu
restaurants and a stand-alone bakery, in addition to full-service, stand-alone
restaurants. The Partnership intends to continue testing non-traditional
locations and further develop alternative formats in conjunction with its
franchisees, in cases where appropriate for the Perkins brand and where
financial returns are acceptable.
PURSUE COMPLEMENTARY ACQUISITIONS. The Partnership continually evaluates
potential acquisition opportunities of existing franchised Perkins restaurants
and other restaurant chains. The Partnership does not currently have any
agreements or understanding to make any acquisitions.
CONCEPT
The Perkins concept is designed to serve a variety of demographically and
geographically diverse customers for a wide range of dining occasions which are
appropriate for the entire family. The Perkins concept appeals to a wide range
of markets and customer tastes with its large comfortable dining rooms, flexible
kitchens, broad menu, moderate pricing, extended operating hours, table service
and bakery specialties.
MENU. Each Perkins restaurant offers a diverse menu of high quality,
moderately priced food and beverage items consisting of traditional favorites
and seasonal specialties. Each Perkins restaurant offers guests a core menu
consisting of certain required menu items that each Partnership-operated and
franchised restaurant must offer, providing the consistency necessary to support
the Perkins brand. Additional items are offered to meet regional and local
tastes. All menu items served in franchised restaurants must be approved by the
Partnership's research and development department. Menu offerings continually
evolve to meet changing consumer tastes.
The menu currently features over 140 items comprised of a broad selection of
breakfast, lunch, dinner and bakery products. Signature breakfast items include
premium omelettes, buttermilk pancakes and traditional egg dishes. Breakfast
entrees generally range in price from $2.99 to $8.99. Signature lunch items
include bread bowl salads, melt sandwiches and specialty burgers generally
ranging in price from $4.29 to $8.99. Signature dinner items include chicken
puff pastry pie, country fried steak, New York Strip steak and
Butterball-Registered Trademark- turkey and dressing. Price points for dinner
entrees generally range from $5.99 to $8.99. Entree selections are complemented
by appetizers and dessert products. Coffee, iced tea and soft drinks
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<PAGE>
are served as "Bottomless Beverages"-TM- with free refills. Perkins restaurants
do not generally serve alcoholic beverages.
Most Perkins restaurants have an in-store bakery, with bakery products
offered both for in-house consumption and for carry-out. Bakery breakfast
products include freshly baked Mammoth Muffins-Registered Trademark-, cinnamon
rolls and sticky buns. Bakery desserts include freshly prepared cookies,
brownies, eclairs and pies.
RESTAURANT DESIGN. In 1993, the Partnership began testing a major prototype
redesign which features a series of expandable and differentiated dining rooms
set around a central kitchen and pantry area. This design reduces the distance
servers travel from food pick-up to guest tables. The interior decor package,
which was introduced in 1995 with related but distinct decor for each dining
area, can be utilized in traditional rectangular buildings and other building
designs. Management believes the new prototype and related decor packages add
significantly to the value perceptions of its guests. In addition, the
Partnership has developed an exterior design which updates its restaurants while
maintaining an identifiable Perkins look. By selectively modifying key concept
identifiers, such as entry construction, roof lines and window treatments, the
Partnership can upgrade older restaurants, convert existing buildings used for
other purposes into Perkins restaurants, and modify non-traditional locations
such as shopping center locations into easily recognizable, modern Perkins
restaurants.
RESTAURANT OPERATIONS AND TRAINING. All restaurants are operated in
accordance with uniform operating standards and specifications relating to the
quality and preparation of menu items, selection of menu items, maintenance and
cleanliness of facilities and employee conduct. The Partnership's operating
standards are based upon the Perkins Promise-Registered Trademark-, a guarantee
of 100% guest satisfaction. This operating and training system utilizes employee
empowerment and feedback to ensure the delivery of a satisfactory dining
experience to all guests. All standards and specifications are developed by the
Partnership, with input from franchisees, and applied on a system-wide basis.
The Partnership has an extensive eight to twelve week Management Development
Program for general managers, kitchen managers and other salaried restaurant
managers. This 44-module program consists of in-store task-oriented training and
formal administrative, customer service and financial training. Upon completion
of this program, management candidates attend Perkins Leadership Institute, a
two-week in-store internship where they can practice skills in a certified
training restaurant. Certified trainers conduct hands-on training for all hourly
restaurant employees using the Foundations Training Program. This
state-of-the-art program utilizes both printed material and video and is
designed to improve the confidence, productivity and skill level of new
employees. The Partnership provides on-going training for its restaurant
employees on new products and other important topics such as food sanitation and
customer and employee relations.
ADVERTISING. The Partnership focuses its advertising and marketing efforts
on six to eight food-specific promotions each year. Each promotion features a
specific theme or product. Several commodity buys each year enable the
Partnership to offer attractive price points on popular products such as steak
and eggs or fried shrimp. Two of the Partnership's most popular recent
promotions have been the Summer Menu featuring eight new entrees and a new line
of "Dill Melt" sandwiches. The Partnership advertises on a regional and local
basis, utilizing primarily television, radio and print media. In 1996, the
Partnership spent approximately 4.0% of Partnership-operated restaurants' net
revenues on advertising, of which 3.1% was contributed to the system advertising
fund which develops and funds the specific system-wide promotions. Substantially
all franchisees are also required to contribute 3.0% of their gross revenues to
the advertising fund. The remainder of the Partnership's advertising
expenditures were focused on local advertising in areas with
Partnership-operated restaurants.
AVERAGE CHECK. For the nine months ended September 30, 1997, the average
guest check for Partnership-operated restaurants was $5.53.
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<PAGE>
UNIT ECONOMICS. Since January 1, 1996, the Partnership has opened six
full-service Perkins restaurants, each of which is based upon the Partnership's
current prototype building design. The average investment, excluding land and
pre-opening expenses, was approximately $1.1 million. The Partnership purchased
five of the sites for these six restaurants at an average cost of approximately
$472,000. The sixth site was acquired under a ground lease. Management believes
the average investment for new Partnership-operated units scheduled to be built
during the remainder of 1997 and 1998 will range from $1.1 to $1.3 million and
land cost will range from $300,000 to $450,000 in cases in which the Partnership
purchases the site. Pre-opening expenses consist principally of non-recurring
costs, such as hourly employee recruiting and training, meals, lodging and
travel. Pre-opening costs are amortized over 12 months beginning in the month
the restaurant opens. Average annual revenues for 1996 for all
Partnership-operated restaurants were approximately $1.6 million.
FRANCHISE OPERATIONS
The majority of the Partnership's new franchised restaurants are opened by
the Partnership's existing franchisees. Of the 30 new franchised restaurants
opened since January 1996, 22 were opened by existing franchisees. In order to
attract new franchisees, the Partnership employs direct mail, attends trade
shows such as those for hotel operators, and places print advertising in
industry-specific publications, and receives some referrals. Applicants are
screened for financial stability and relevant management experience, and undergo
training programs of between 8 and 12 weeks, depending on prior experience. In
selected markets with candidates of proven experience and ability, the
Partnership may enter into area development agreements requiring the applicant
to open a specified number of restaurants during the term of the agreement,
which is usually 5 years or less. the Partnership currently has 6 existing area
development agreements covering 21 restaurants through 2002.
As of September 30, 1997, the Partnership had 336 franchised restaurants
(including alternative formats) operated by 111 franchisees. The Partnership
actively seeks experienced multi-unit restaurant operators as franchisees and
requires each franchisee to satisfactorily complete the Partnership's extensive
training program. Seven of the 111 franchisees operate a total of 143
full-service Perkins restaurants. The remaining franchisees each currently
operate ten or fewer units.
As of September 30, 1997, the Partnership's three largest franchisees
operated a total of 93 restaurants. The respective distribution of restaurants
operated by such franchisees was: 41 restaurants primarily in upstate New York;
31 restaurants in Pennsylvania, Ohio and New York; and 21 restaurants in Ohio
and Kentucky. During 1996, the Partnership received net royalties and license
fees of approximately $1.5 million, $2.0 million and $1.0 million, respectively,
from these franchisees.
DEFAULTS BY LARGEST FRANCHISEE. The Partnership's largest franchisee
operates 41 restaurants, 37 of which are leased from unaffiliated lessors,
pursuant to a temporary license agreement expiring December 31, 1997. The
temporary agreement was entered into as a result of negotiations following the
franchisee's defaults in its payments and certain other obligations under its
prior agreements with the Partnership and in order to give the franchisee an
opportunity to seek permanent financing in an amount sufficient to permit it to
refinance its existing obligations to its creditors, including the Partnership,
and to remodel its restaurants. Although the franchisee has represented to the
Partnership that it is in discussions with possible financing sources, the
Partnership believes that if the franchisee is ultimately unsuccessful and loses
control of its properties, a majority of the restaurants can continue to be
operated as Perkins Family Restaurants pursuant to arrangements between the
Partnership and the owners of the properties. During 1996, the franchisee's net
royalty payments to the Partnership were approximately $1.5 million and at
October 31, 1997, the franchisee was delinquent in its royalty obligations in
the amount of approximately $450,000.
FRANCHISE ARRANGEMENTS. Franchised restaurants operate pursuant to license
agreements generally having an initial term of 20 years, and pursuant to which
each franchisee pays the Partnership a royalty fee
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<PAGE>
(usually 4.0% of gross sales) and an advertising contribution (typically 3.0% of
gross sales). New franchisees currently pay a non-refundable license fee of
$35,000 per restaurant. Franchisees opening their third and subsequent
restaurants pay a non-refundable license fee of $25,000 per restaurant.
Beginning in 1998, these fees will be increased to $40,000 and $30,000,
respectively. 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, although franchisees
typically apply for and receive new license agreements at the end of existing
contract terms.
DEVELOPMENT OF RESTAURANTS. The Partnership makes available to franchisees
prototype plans and specifications for a typical restaurant which the franchisee
and its architect adapt to each site. The Partnership retains the right to
approve all final plans and specifications. Each franchisee, with assistance
from the Partnership, is responsible for selecting the site for each restaurant
within its territory, subject to Partnership approval. The Partnership conducts
a physical inspection, reviews any proposed lease or purchase agreements and
makes available demographic studies. A Partnership real estate representative
assists franchisees in identifying possible sites and trade areas, managing
broker relationships and preparing site packages for submission to the
Partnership for approval.
DESIGN AND CONSTRUCTION. The Perkins Construction Management Program is
available for a fee to assist franchisees in coordinating the design,
construction and equipping of their restaurants. In conjunction with this
program, the Partnership provides advice on critical design and contracting
decisions and oversees day-to-day construction work, providing comprehensive
support during all phases of construction.
FINANCING. The Partnership currently sponsors financing programs on
competitive terms designed to provide its franchisees with access to financing
options to support the remodeling of existing restaurants. The financing is
provided by two financial services companies with extensive experience in
franchise and cash flow based lending. These programs were designed to allow
each franchisee's request for financing to be evaluated solely on the basis of
the financial performance of the franchisee without support from the
Partnership. However, under both programs, the Partnership has the option to
extend differing levels of support in its sole discretion, if it determines that
such support will have a positive strategic impact on the future growth of the
Partnership. Although not specifically part of the current programs, both
financial services companies are also offering competitive financing options to
both new and existing franchisees for equipment and real estate financing
outside of the current remodel initiative.
In the past, the Partnership has sponsored financing programs offered by
certain lending institutions to help its franchisees obtain funds for the
construction of new franchised restaurants and to purchase and install in-store
bakeries. The Partnership provided a limited guaranty of the funds borrowed for
such purposes. As of September 30, 1997, there were approximately $3,739,000 in
borrowings outstanding under these programs. The Partnership has guaranteed
$1,246,000 of these borrowings. No additional borrowings are available under
these programs.
RESTAURANT OPENING. Thirteen-member New Store Opening Teams ("NSOT") assist
franchisees in opening their first two stores. For approximately six weeks, team
members train staff, help operate the restaurant and help franchisees establish
control over labor and food costs. The NSOT arrives prior to a restaurant
opening to help ensure a successful opening. The only expense to franchisees for
the NSOT services for their first two restaurants is the cost of travel, lodging
and local transportation for the team members during their days on site. For
each additional restaurant opening in which the franchisee utilizes the services
of the NSOT, the franchisee is required to pay $10,000.
TRAINING. Central to the Perkins system is a comprehensive and continually
evolving training system. All aspects of the program incorporate
state-of-the-art, easy-to-use materials designed to facilitate self teaching
whenever possible and to gain maximum guest impact from time spent on training.
Training is provided for all restaurant positions.
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<PAGE>
FRANCHISE ADVISORY COUNCIL. The Franchise Advisory Council (the "Council")
consists of representatives of 15 franchisees who represent a broad cross
section of the franchise organization from both a size and geographic
perspective. The Council meets three times per year along with the Partnership's
senior management to review and discuss numerous issues that affect the
franchise system. The Council advises the Partnership with respect to matters
such as menu development, restaurant design and product and equipment
purchasing.
REPORTING AND ROYALTY COLLECTIONS. Franchisees are required to report
monthly sales and other operating information, including monthly profit and loss
statements to the Partnership. Franchisees make monthly royalty payments based
on sales for the previous month. Payments for royalties are typically received
at the Partnership's corporate headquarters while the advertising fees are paid
directly to a lockbox account.
ACCOUNTING. The Partnership provides optional accounting services to
franchisees for a monthly fee. These services include the processing of payroll
and accounts payable and the preparation of monthly financial statements.
QUALITY CONTROL
The Partnership maintains a high level of quality standards and emphasizes
the importance of these standards in all aspects of its purchasing, training and
management development systems. These systems are promoted not only within
Partnership-operated restaurants but also throughout the franchise system. The
quality standards of the restaurants as well as Foxtail are monitored by the
Partnership's research and development and quality assurance staffs. The system
standards are detailed in The Confidential Management and Operating Systems
Manual maintained in all Partnership-operated and franchised restaurants and are
reinforced through on-going training programs at both the salaried and hourly
employee levels.
The Partnership utilizes several systems to ensure that its quality
standards are being upheld in the restaurants. All Partnership-operated and
franchised restaurants are reviewed periodically throughout the year in quality
assurance audits conducted by multi-unit management level personnel.
Additionally, guest and employee comments are collected through toll-free
telephone lines specifically dedicated to employee and guest feedback. Outside
providers also conduct guest service surveys in each Partnership-operated
restaurant and a separate formal quarterly consumer tracking study covering both
Partnership-operated and franchised restaurants is monitored closely by
management. Aspects of each of these programs are utilized in performance
evaluation and incentive compensation determination for all levels of field
management personnel.
OTHER FINANCIAL ARRANGEMENTS
The Partnership's predecessors entered into several agreements with
different persons under which specified payments are to be made by the
Partnership based on a percentage of gross sales from certain restaurants and
for new restaurants opened within certain geographic regions. During 1996, the
Partnership paid an aggregate of $3,177,000 under such agreements. In 1997, the
Partnership terminated two such agreements. Had such agreements been terminated
at the beginning of 1996, payments by the Partnership during 1996 would have
been $1,841,000.
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<PAGE>
PURCHASING
The Partnership negotiates directly with suppliers for food and beverage
products and raw materials to ensure consistent quality and freshness of
products and to obtain competitive prices. Essential restaurant supplies and
products are available from several sources and the Partnership is not dependent
upon any one source for its supplies and products. The Partnership has not
experienced any significant delays in receiving restaurant products, supplies
and equipment. The Partnership allows its franchisees to benefit from the
purchasing economies it receives by providing and administering purchasing
programs and passing through purchasing rebates to franchisees. All of the
Partnership-operated restaurants are supplied through two national distributors.
PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
The Partnership believes that its trademarks and service marks, especially
the mark "Perkins-Registered Trademark-," 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 Partnership has copyrighted architectural drawings
for Perkins restaurants and claims copyright protection for most of its manuals,
menus, advertising and promotional materials. Perkins does not have any patents.
COMPETITION
The Partnership'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 Partnership 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 Perkins and have
substantially greater capital resources at their disposal.
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PROPERTIES
The following table lists the location of each of the Partnership-operated
and franchised restaurants and bakeries as of September 30, 1997 (excluding
alternative formats):
<TABLE>
<CAPTION>
PARTNERSHIP
OPERATED FRANCHISED TOTAL
--------------- ------------- -----
<S> <C> <C> <C>
Arizona................................................ -- 8 8
Arkansas............................................... -- 4 4
Colorado............................................... -- 16 16
Delaware............................................... -- 1 1
Florida................................................ 20 21 41
Idaho.................................................. -- 8 8
Illinois............................................... 8 -- 8
Indiana................................................ -- 5 5
Iowa................................................... 16 1 17
Kansas................................................. 4 3 7
Kentucky............................................... -- 4 4
Maryland............................................... -- 2 2
Michigan............................................... 5 1 6
Minnesota.............................................. 40 30 70
Mississippi............................................ -- 1 1
Missouri............................................... 11 1 12
Montana................................................ -- 7 7
Nebraska............................................... 5 2 7
New Jersey............................................. -- 7 7
New York............................................... -- 45 45
North Carolina......................................... -- 4 4
North Dakota........................................... 3 5 8
Ohio................................................... -- 55 55
Oklahoma............................................... 3 -- 3
Pennsylvania........................................... 6 42 48
South Carolina......................................... -- 1 1
South Dakota........................................... -- 10 10
Tennessee.............................................. 1 11 12
Virginia............................................... -- 1 1
Washington............................................. -- 7 7
Wisconsin.............................................. 13 14 27
Wyoming................................................ -- 4 4
Canada................................................. -- 12 12
--- --- ---
Total.................................................. 135 333 468
--- --- ---
--- --- ---
</TABLE>
The following table sets forth certain information regarding
Partnership-operated restaurants and other properties, as of September 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF
PROPERTIES(1)(4)
------------------------
USE OWNED LEASED TOTAL
- --------------------------------------------------------------- ----------- ----------- -----
<S> <C> <C> <C>
Offices and Manufacturing Facilities(2)........................ 1 8 9
Restaurants(3)................................................. 55 80 135
</TABLE>
- ------------------------
(1) In addition, the Partnership leases 26 properties, 22 of which are subleased
to others (6 of which are subleased to franchisees), one of which is vacant,
and three of which are held for future development.
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<PAGE>
The Partnership also owns 15 properties, 13 of which are leased to others
(11 of which are leased to franchisees) and two of which are held for future
development.
(2) The Partnership's principal office is located in Memphis, TN, and currently
comprises 53,340 square feet of floor area under a lease expiring on May 31,
2003, subject to renewal by the Partnership for a maximum of 60 months. In
addition, the Partnership 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 for use as
manufacturing facilities.
(3) The average term of the remaining leases is six years, excluding renewal
options. The longest lease term will mature in 44 years and the shortest
lease term will mature in approximately four years, assuming the exercise of
all renewal options.
(4) The Partnership currently leases space in three malls which is used to
operate Perkins Cafe and Bakeries. These leases are not included in the
totals shown.
EMPLOYEES
As of September 30, 1997 the Partnership employed approximately 9,500
persons, of whom approximately 310 were administrative and manufacturing
personnel and the balance were restaurant personnel. Approximately 70% of the
restaurant personnel are part-time employees. The Partnership competes in the
job market for qualified restaurant management and operational employees. The
Partnership maintains ongoing restaurant management training programs and has on
its staff full-time restaurant training managers and a training director. The
Partnership believes that its restaurant management compensation and benefits
package compares favorably with those offered by its competitors. Management
believes its employee relations are good. None of Partnership's employees are
represented by a union.
GOVERNMENT REGULATION
The Partnership 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 and employment. No material amounts have been or
are expected to be expensed to comply with environmental protection regulations.
The Partnership 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. The Partnership must also adhere to Federal Trade Commission
regulations governing disclosures in the sale of franchises.
The wage rates of the Partnership's hourly employees are affected by federal
and state minimum wage rate laws. Future increases in these rates could
materially affect the Partnership's cost of labor.
LEGAL PROCEEDINGS
The Partnership 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 Partnership's financial position or results of operations.
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BENEFICIAL OWNERSHIP OF UNITS AND TRANSACTIONS IN UNITS BY CERTAIN PERSONS
The following table sets forth information as of September 30, 1997 with
respect to persons who are known to the Partnership (based on statements filed
with the Commission pursuant to Section 13(d) or 13(g) of the Exchange Act) to
be the beneficial owner of more than five percent of any class of the
Partnership's voting securities.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS
- ---------------------------------------------- ---------------------------------- ------------------ -------------
<S> <C> <C> <C>
Depositary Units Representing Limited Perkins Restaurants, Inc. 5,043,000) 48.1%
Partnership Interests in the Partnership 1 Pierce Place (direct
Suite 100 E
Itasca, IL 60143
</TABLE>
The General Partner is wholly owned by PRI, which is in turn wholly owned by
TRC. TRC is principally owned by Harrah's (33.2%), Donald N. Smith (33.2%) and
Equitable (28.1%). Pursuant to the terms of a certain Stockholders Agreement
dated November 21, 1985 (the "Stockholders Agreement") among TRC's stockholders,
the voting and disposition of the shares of TRC are subject to numerous
restrictions. Significant stockholder and director actions (including certain
transactions in TRC's assets and the disposition of TRC's indirect investment in
Perkins), as defined in the By-Laws of TRC, PRI and PMC, must be approved by a
unanimous vote of the Board of Directors of the company proposing to take any
such action and by stockholders owning at least 95% of the outstanding shares of
TRC.
The following table sets forth the number of Units beneficially owned either
directly or indirectly on September 30, 1997 by certain directors and the
executive officers of the Partnership, including all directors and officers as a
group:
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENT OF
OF BENEFICIAL OF BENEFICIAL CLASS
TITLE OF CLASS OWNER (2) OWNERSHIP(1) (* LESS THAN 1%)
- -------------------------------------------- ------------------------------ ------------------ -------------------
<S> <C> <C> <C>
Depositary Units Representing Limited Lee N. Abrams 10,900 *
Partnership Interests in the Partnership
" Richard K. Arras 34,560 *
" Charles L. Atwood 0 *
" Steven L. Ezzes 500 *
" Michael D. Kelly 12,040 *
" Charles A. Ledsinger 500 *
" Steven R. McClellan 10,000 *
" D. Michael Meeks 1,000 *
" Donald N. Smith 1,674,276 15.9%
" Jack W. Willingham 10,840 *
" Donald F. Wiseman 8,580 *
" All Directors and Officers as 1,828,881 17.4%
a group
</TABLE>
- ------------------------
(1) Mr. Smith's Units are owned indirectly through Mr. Smith's 33.2% ownership
of TRC, the sole shareholder of PRI. All other Units are owned directly.
(2) The business address of each of these persons is c/o Perkins Family
Restaurants, L.P., 6075 Poplar Avenue, Suite 800, Memphis, TN 38119-4709.
None of PMC, PRI or TRC or their respective affiliates has purchased,
transferred or sold any Units within the past 60 days.
For certain information concerning the directors and executive officers of
PMC, PRI and TRC, see Schedule I to this Proxy Statement.
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<PAGE>
SUMMARY FINANCIAL DATA
Set forth below is a summary of certain financial and operating data with
respect to the Partnership. More comprehensive financial information is included
elsewhere in this Proxy Statement. See "Audited Financial Statements" and
"Interim Financial Statements."
PERKINS FAMILY RESTAURANTS, L.P.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER UNIT DATA AND RATIO OF EARNINGS TO FIXED CHARGES)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED FOR THE YEAR ENDED DECEMBER 31,
SEPTEMBER 30, 1997 ----------------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 1992
------------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCOME DATA:
Revenues.................................. $ 199,672 $ 252,793 $ 245,751 $ 221,902 $ 212,634 $ 195,151
Net Income (a)............................ $ 11,770 $ 13,522 $ 9,796 $ 12,008 $ 12,602 $ 15,353
Net Income Per Unit (a)................... $ 1.13 $ 1.30 $ 0.94 $ 1.16 $ 1.21 $ 1.48
Weighted Average Equivalent Units
Outstanding............................. 10,338 10,289 10,269 10,275 10,274 10,258
Cash Distribution Declared Per Unit....... $ 0.975 $ 1.30 $ 1.30 $ 1.30 $ 1.30 $ 1.30
Book Value Per Unit (Unaudited)........... $ 6.06 $ 5.87 $ 5.83 $ 6.24 $ 6.37 $ 6.45
Ratio of Earnings to Fixed Charges
(Unaudited) (b)......................... 3.16x 2.79x 2.32x 2.94x 3.22x 4.15x
BALANCE SHEET DATA:
Total Assets.............................. $ 156,204 $ 155,656 $ 161,829 $ 150,407 $ 131,709 $ 125,972
Long-Term Debt............................ $ 43,026 $ 48,244 $ 57,850 $ 39,875 $ 22,600 $ 17,875
Capital Leases............................ $ 7,434 $ 8,573 $ 8,810 $ 10,862 $ 13,194 $ 15,321
</TABLE>
- ------------------------
(a) Excluding non-recurring items, net income for 1995 and 1994 would have been
$12,092,000 or $1.17 per unit and $13,868,000 or $1.34 per unit,
respectively.
(b) The ratio of earnings to fixed charges is computed by dividing (i) the sum
of pre-tax income (equivalent to net income as the Partnership is not
subject to federal income taxes), minority interest, amortization of
previously capitalized interest and fixed charges (excluding capitalized
interest) by (ii) fixed charges. Fixed charges consist of total interest
incurred, amortization of debt financing costs and the portion of rental
expense on operating leases considered to represent interest cost.
49
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
BALANCE SHEETS
(IN THOUSANDS EXCEPT UNIT AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
------------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 2,054 $ 2,737
Receivables, less allowance for doubtful accounts of $604
and $430.................................................. 7,446 6,285
Inventories, at the lower of first-in, first-out cost or
market.................................................... 4,150 4,234
Prepaid expenses and other current assets................... 1,886 1,551
-------- ------------
Total current assets........................................ 15,536 14,807
PROPERTY AND EQUIPMENT, at cost, net of accumulated
depreciation and amortization............................. 114,312 115,086
NOTES RECEIVABLE, less allowance for doubtful accounts of $6
and $10................................................... 558 805
INTANGIBLE AND OTHER ASSETS, net of accumulated amortization
of $27,324 and $26,451.................................... 25,798 24,958
-------- ------------
$ 156,204 $ 155,656
-------- ------------
-------- ------------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current maturities of long-term debt........................ $ 4,624 $ 4,356
Current maturities of capital lease obligations............. 1,430 1,683
Accounts payable............................................ 12,546 8,878
Accrued expenses............................................ 14,932 14,235
Distributions payable....................................... 3,478 3,479
-------- ------------
Total current liabilities................................... 37,010 32,631
CAPITAL LEASE OBLIGATIONS, less current maturities.......... 7,434 8,573
LONG-TERM DEBT, less current maturities..................... 43,026 48,244
OTHER LIABILITIES........................................... 5,192 4,651
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
General partner............................................. 636 615
Limited partners (10,487,495 and 10,492,930 Units issued and
outstanding).............................................. 64,556 63,220
Deferred compensation related to restricted units........... (1,650) (2,278)
-------- ------------
Total Partners' Capital..................................... 63,542 61,557
-------- ------------
$ 156,204 $ 155,656
-------- ------------
-------- ------------
</TABLE>
50
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEAR ENDED DECMBER 31, 1996
RESULTS OF OPERATIONS
OVERVIEW:
A summary of the Partnership's results for the three years ended December 31
are presented in the following table. All revenues, costs and expenses are
expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Food sales......................................................... 92.6% 92.9% 92.7%
Franchise revenues................................................. 7.4 7.1 7.3
--------- --------- ---------
Total revenues....................................................... 100.0 100.0 100.0
--------- --------- ---------
Costs and expenses:
Cost of sales:
Food cost........................................................ 27.1 26.9 26.1
Labor and benefits............................................... 31.2 32.1 32.0
Operating expenses............................................... 19.1 19.4 19.2
General and administrative......................................... 9.4 9.1 9.8
Depreciation and amortization...................................... 6.2 5.9 5.5
Interest, net...................................................... 2.0 2.0 1.5
Asset write-down (SFAS No. 121).................................... -- 0.8 --
Loss/Provision for disposition of assets........................... -- 0.2 0.4
Benefit/Provision for litigation costs............................. -- (0.1) 0.5
Other, net......................................................... (0.3) (0.3) (0.4)
--------- --------- ---------
Total costs and expenses............................................. 94.7 96.0 94.6
--------- --------- ---------
Net income........................................................... 5.3% 4.0% 5.4%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Net income for 1996 was $13,522,000 or $1.30 per Limited Partnership Unit
versus $9,796,000 or $.94 per unit in 1995 and $12,008,000 or $1.16 per unit in
1994. Net income for 1995 included a $1,900,000 charge related to the adoption
of Statement of Financial Accounting Standards ("SFAS") No. 121, a loss of
$609,000 related to a store disposition and cancelled development projects, and
a $190,000 benefit from a legal dispute reserved for in 1994. Net income for
1994 included a $1,079,000 provision for legal expenses associated with two
lawsuits against the Partnership and a $800,000 charge to further reserve for
certain underperforming properties originally reserved for in 1993. Without
these charges, 1995 income would have been $12,092,000 or $1.17 per unit and
1994 income would have been $13,868,000 or $1.34 per unit.
1996 VS 1995
REVENUES:
Total revenues increased 2.9% over 1995 due primarily to increased
restaurant food sales, increased sales at Foxtail Foods ("Foxtail") the
Partnership's manufacturing operations, and increased franchise royalties.
Increased restaurant food sales can be primarily attributed to the addition of
three new stores in 1996 and ten new stores in 1995, partially offset by the
closing of four Partnership-operated restaurants and refranchising of three
Partnership-operated restaurants. Same store comparable sales increased
approximately 2.6% over 1995 due primarily to selective price increases and an
increase in comparable guest visits of .8%.
Revenues from Foxtail increased approximately 5.8% over 1995 and constituted
approximately 8.5% of the Partnership's total 1996 revenues. Foxtail offers
cookie doughs, muffin batters, pancake mixes, pies
51
<PAGE>
and other food products to Partnership-operated and franchised restaurants
through food service distributors in order to ensure consistency and
availability of Perkins' proprietary products to each unit in the system.
Additionally, it produces a variety of proprietary and non-proprietary products
for sale in various retail markets. Sales to Partnership-operated restaurants
are eliminated in the accompanying income statements. The increase in revenue
for 1996 can be attributed primarily to increased bakery sales at franchise
stores to which Foxtail sells various mixes, doughs, and pies.
Franchise revenues, which consist primarily of franchise royalties and sales
fees, increased 6.5% over the prior year due primarily to the addition of
nineteen new franchised restaurants partially offset by a decrease in sales for
franchised restaurants open for more than one year. Ten franchised units were
closed during 1996 and three Partnership-operated restaurants began operations
as franchise units during the year.
COSTS AND EXPENSES:
FOOD COSTS:
In terms of total revenues, food cost increased .2 percentage points over
1995. Restaurant division food cost expressed as a percentage of restaurant
division sales, remained relatively constant as compared to 1995. Slight
decreases in commodity costs were partially offset by changes in the menu mix
due to promotions such as steak and eggs, shrimp, and turkey. Additionally, the
costs of certain product enhancements were offset by selective menu price
increases. Promotional discounts remained relatively constant as compared with
1995.
The cost of Foxtail sales, in terms of total Foxtail revenues increased
approximately 1.7 percentage points from 1995, due primarily to certain
commodity cost and packaging increases. As a manufacturing operation, Foxtail
typically has higher food costs as a percent of revenue than the Partnership's
restaurants. Although the restaurants provide the majority of the Partnership's
revenue, as Foxtail becomes a more significant source of revenues to the
Partnership, management expects total food cost to increase as a percent of
revenue.
LABOR AND BENEFITS:
Labor and benefits, as a percentage of total revenues, decreased .9
percentage points from 1995, primarily due to improved productivity in the
Partnership's restaurants and pie manufacturing facility. These expenses also
benefited from reduced claims cost associated with the Partnership's group
health and workers' compensation programs. As a percentage of revenue, Foxtail
labor and benefit charges are significantly lower than the Partnership's
restaurants. As Foxtail becomes a more significant component of the
Partnership's total operations, labor and benefits expense, expressed as a
percent of total revenue, should decrease.
The wage rates of the Partnership's hourly employees are impacted by Federal
and state minimum wage laws. The recent legislation raising the Federal minimum
wage rate is expected to have a material impact on the Partnership's labor
costs. In the past, the Partnership has been able to offset increases in labor
costs through selective menu price increases and improvements in productivity.
The Partnership anticipates that it can offset the majority of the current
increase through selective menu price increases. However, there is no guarantee
that future wage increases can be mitigated through raising menu prices.
OPERATING EXPENSES:
Operating expenses, expressed as a percentage of total revenues, decreased
.3 percentage points from 1995 to 1996. Decreases in direct operating and
pre-opening expenses, as a percent of restaurant division sales, were partially
offset by an increase in repairs and maintenance expense. A decrease in Foxtail
operating expenses, as a percentage of Foxtail revenue, was primarily due to
decreases in net freight costs, repairs and maintenance and advertising expenses
offset by higher promotional cost.
52
<PAGE>
GENERAL AND ADMINISTRATIVE:
General and administrative expenses increased approximately 6.7% over 1995,
which is primarily the result of an increase in incentive costs due to the
Partnership's positive operating results in 1996. Additional factors
contributing to this increase were increased administrative support related to
growth at Foxtail and an increase in the Partnership's match of 401(k)
contributions from 25% in 1995 to 50% in 1996.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization increased approximately 9.4% over 1995 due to
the addition of three new Partnership-operated restaurants and recent
refurbishments to upgrade and improve existing restaurants.
INTEREST, NET:
Interest expense was approximately 5% higher than 1995 primarily as the
result of a higher average debt balance. This increase was partially offset by a
decrease in the interest expense associated with capital lease obligations.
OTHER:
Other income increased approximately $354,000 during 1996 due primarily to
rental income on four restaurant properties which were leased to franchisees and
one property leased to another restaurant chain in late 1995 and 1996.
Depreciation expense associated with these five properties totaling $324,000 is
included in depreciation and amortization expense.
1995 VS 1994
REVENUES:
Total revenues increased 10.7% over 1994 due primarily to the addition of
new Partnership-operated and franchised restaurants, increased comparable store
sales and increased Foxtail sales.
Increased restaurant food sales can be primarily attributed to the addition
of ten new stores in 1995 and an approximate 1% increase in same store
comparable sales. Same store comparable sales increased due primarily to
selective menu price increases, a shift in sales to higher-priced entrees and
decreased promotional discounting, partially offset by a decline in comparable
guest visits.
Revenues in 1995 from Foxtail increased 12.5% over 1994. The increase in
Foxtail's revenue can be primarily attributed to increased production at the pie
plant opened in July 1993 as well as the addition of in-store bakeries at
franchised stores, to which Foxtail sells various mixes, doughs, and pies. Sales
to parties outside of the Perkins system increased approximately 11% over 1994.
Franchise revenues, which consist primarily of franchise royalties and sales
fees, increased 7.8% over the prior year due to the addition of twenty-three new
franchised restaurants and bakeries partially offset by slightly lower sales in
franchised restaurants open for more than one year. Five franchised units were
closed during 1995 and one Partnership-operated restaurant was converted to a
franchised restaurant.
COSTS AND EXPENSES:
FOOD COST:
In terms of total revenues, food cost increased .8 percentage points over
1994. Restaurant division food cost increased .7 percentage points over 1994 due
primarily to the higher cost of certain commodities, particularly coffee and
fresh produce, as well as selective product upgrades. Additionally, marketing
promotions during the year, which impact food cost percentages by reducing net
revenue generated, were heavily concentrated on certain entrees that carry
higher food cost percentages. Selective menu price
53
<PAGE>
increases partially negated the increases in food cost. The addition of new
Partnership-operated restaurants during the year also adversely impacted food
cost as new restaurants typically generate higher food cost percentages due to
sales in these restaurants being weighted more heavily toward higher percentage
cost dinner items.
The cost of Foxtail's sales, in terms of total Foxtail revenues increased
approximately .3 percentage points from 1994, due primarily to certain commodity
cost increases that were not completely passed on to customers.
LABOR AND BENEFITS:
Labor and benefits, as a percentage of total revenues, increased .1
percentage point over 1994. This increase can primarily be attributed to
increased production at Foxtail's pie manufacturing facility which requires
significantly higher labor and benefit costs than the division's other two
manufacturing facilities. Additionally, significantly higher workers
compensation costs in the state in which all of Foxtail manufacturing facilities
are located also contributed to the increase.
While total restaurant division labor and benefits expense as a percentage
of total revenues and restaurant sales did not increase between 1994 and 1995,
wage rate inflation due to continued low unemployment, a shrinking labor pool
and increased competition for employees combined with lower than average
productivity in the Partnership's new restaurants increased labor costs as
percentage of restaurant sales by .4 percentage points. Programs in place to
control group health insurance and restaurant division workers compensation
insurance costs and a reduction in the Partnership's match of 401(k)
contributions from 50% of employee contributions in 1994 to 25% in 1995 offset
this increase.
OPERATING EXPENSES:
Operating expenses, expressed as a percentage of total revenues, increased
.2 percentage points over 1994. Opening costs related to new franchised
restaurants, pre-opening expenses for new Partnership-operated restaurants and
the cost of paper supplies increased as a percentage of total revenues. These
increases were offset by lower repairs and maintenance expense and efficiencies
gained due to increased production at Foxtail.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses increased 2.2% over 1994, which
primarily reflects the impact of inflation combined with increased
administrative support related to growth at Foxtail Foods. Reduced outside
services and legal expenses related to non-recurring projects in 1994 and a
reduction in the Partnership's match of 401(k) contributions from 50% in 1994 to
25% in 1995 partially offset these increases.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization increased approximately 19% over 1994 due to
the addition of new Partnership-operated restaurants. Significant remodels of
older stores undertaken to maintain consistency of appearance within the chain
also contributed to the increase.
INTEREST, NET:
Interest expense was approximately 48% higher than 1994 due to a higher
average debt balance stemming from the Partnership's expansion during the year.
This increase was partially offset by a decrease in interest expense associated
with capital lease obligations.
54
<PAGE>
OTHER:
Results of operations for 1995 reflect a $1,900,000 non-cash charge against
earnings as a result of the adoption of SFAS No. 121.
In 1995, the Partnership recorded losses totaling $609,000 primarily related
to the disposition of an underperforming property and the write-off of
predevelopment costs for cancelled restaurant locations that were estimated to
provide less than acceptable returns.
Net income for the year also included a benefit as a result of a litigation
settlement associated with a lawsuit brought by a former employee. This lawsuit
was settled for $190,000 less than the original reserve expensed in 1994.
CAPITAL RESOURCES AND LIQUIDITY
Principal uses of cash during the year were cash distributions to
unitholders, capital expenditures, and a net reduction in long-term debt.
Capital expenditures consisted primarily of remodels and refurbishments to
existing restaurants and acquisition of building and equipment for new
Partnership-operated units. The Partnership's primary source of funding was cash
provided by operations.
The Partnership maintains a $40,000,000 revolving line of credit facility
and a $10,000,000 term loan agreement with three banks. The revolving line of
credit contains a $6,000,000 sublimit for letters of credit and expires on June
30, 1997, at which time all amounts outstanding become payable. As of December
31, 1996, $13,000,000 in borrowings and approximately $3,276,000 in letters of
credit were outstanding under the line of credit facility. The borrowings under
the term loan agreement are due in quarterly installments through June 30, 1998.
As of December 31, 1996, $5,000,000 was outstanding under this agreement.
On March 18, 1997, the Partnership entered into a commitment agreement with
its agent bank to provide a credit facility of up to $60,000,000. This is
composed of a $40,000,000 reducing revolving credit facility, a $15,000,000
revolving growth facility, and a $5,000,000 standby letter of credit facility.
The reducing revolving credit facility matures on March 31, 2002, and will
reduce $2,000,000 per year commencing on September 30, 1998. This facility will
initially be used to repay amounts outstanding under the Partnership's existing
revolving credit agreement and term loan. The revolving growth facility, which
may only be used for the acquisition of existing restaurants, converts to a term
loan on March 31, 2000, and amortizes in equal quarterly installments with final
maturity on March 31, 2004. The standby letter of credit facility matures on
March 31, 2002, and contains terms and conditions similar to the Partnership's
current agreement.
During the fourth quarter of 1995, the Partnership issued $20,000,000 of
7.19% Unsecured Senior Notes due December 13, 2005 to an insurance company. The
proceeds were used to repay outstanding borrowings under the Partnership's
revolving line of credit. The agreement also provides for a $15,000,000 Private
Shelf Note Facility which expires on December 13, 1997.
The Partnership estimates that total capital expenditures for 1997 will be
approximately $18,640,000 which includes approximately $17,100,000 for new
Partnership-operated restaurants, remodels to existing restaurants and upgrades
of restaurant technology. The Partnership anticipates that it will be able to
fund these capital expenditures, as well as its quarterly cash distributions to
unitholders, with cash provided by operations. The Partnership has additional
credit available under the revolving line of credit which could be used to
finance capital expenditures and distributions to unitholders as well. In order
to remain competitive in the industry, the Partnership expects to make
significant additional capital expenditures in the future. Alternatives for the
financing of such future expenditures will be continuously evaluated.
On December 31, 1996, the Partnership had a working capital deficit of
$17,824,000, which was primarily the result of utilizing available cash for
capital expenditures and distributions to unitholders. Operating with a working
capital deficit is common in the restaurant industry and does not impair the
Partnership's short-term liquidity as its revenues are derived primarily from
cash transactions.
55
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997
RESULTS OF OPERATIONS
OVERVIEW:
The Partnership is a leading operator and franchisor of full-service
mid-scale restaurants located primarily in the Midwest, Pennsylvania, upstate
New York, and central Florida. As of September 30, 1997, Perkins owns and
operates 135 full-service restaurants, franchises 333 full-service restaurants
and manufactures and distributes bakery products which are sold to
Partnership-operated restaurants, franchisees, third-party bakers and food
distributors. The business of Perkins was founded in 1958, and since then
Perkins has continued to adapt its menus, product offerings, building designs
and decor to meet changing consumer preferences. Perkins is a highly recognized
brand in the geographic areas it serves.
The Partnership's revenues are derived primarily from the operation of
full-service restaurants, the sale of bakery products produced by its
manufacturing division, Foxtail Foods ("Foxtail"), and franchise fees. Foxtail
offers cookie dough, muffin batters, pancake mixes, pies and other food products
to Partnership-operated and franchised restaurants through food service
distributors in order to ensure consistency and availability of Perkins'
proprietary products to each unit in the system. Additionally, Foxtail
manufactures certain proprietary and non-proprietary products for sale to
non-Perkins operations. Sales to Partnership-operated restaurants are eliminated
in the accompanying income statements. In the twelve months ended September 30,
1997, revenues from Partnership-operated restaurants, Foxtail Foods and
franchise fees accounted for 84.0%, 8.7% and 7.3% of total revenues,
respectively.
Since January 1, 1996, the Partnership has opened six full-service Perkins
restaurants, each of which is based on the Partnership's current prototype
building design. The average investment, excluding land and pre-opening
expenses, was approximately $1.1 million. The Partnership purchased five of the
sites for these six restaurants at an average cost of approximately $472,000.
The sixth site was acquired under a ground lease. Management believes the
average investment for new Partnership-operated units scheduled to be built
during the remainder of 1997 and 1998 will range from $1.1 to $1.3 million and
land cost will range from $300,000 to $450,000 in cases in which the Partnership
purchases the site. Pre-opening expenses consist principally of non-recurring
costs such as hourly employee recruiting and training, meals, lodging and
travel. Pre-opening costs are amortized over twelve months beginning in the
month the restaurant opens. Average annual revenues for 1996 for all
Partnership-operated restaurants were approximately $1.6 million.
The Partnership has an on-going program of prototype development, testing
and remodeling to maintain operationally efficient, cost-effective and unique
facility design and decor. An accelerated program to remodel existing
Partnership-operated restaurants began in 1995 and continues today. The current
remodel package features a modern, distinctive interior and exterior layout that
enhances operating efficiencies and guest appeal. As of September 30, 1997,
approximately 86% of Partnership-operated restaurants had either been remodeled
or initially constructed since January 1, 1994.
During 1997, the Partnership entered into a joint venture with a Canadian
casual dining operator for the development of a minimum of three Jack Astor's
Bar and Grill-Registered Trademark- restaurants. Jack Astor's Bar and Grill is a
casual theme dining concept with a high-energy fun atmosphere offering chicken,
pasta, hamburgers and alcoholic beverages. The first restaurant opened in
Greensboro, North Carolina on October 6, 1997.
The Partnership's revenues have increased steadily over the last five years.
System-wide sales have increased 29.1% from $543,272,000 in 1992 to $701,443,000
for the twelve months ended September 30, 1997. Revenues from
Partnership-operated restaurants have increased 29.2% from $170,765,000 to
$220,666,000 and franchise revenues have increased 37.2% from $14,079,000 to
$19,318,000, over the same period. Average revenue per Partnership-operated
restaurant has increased 16.1%, from $1,418,000 to $1,646,000 over the same
period. Earnings before interest, taxes, depreciation, and amortization for the
56
<PAGE>
same periods were $28,532,000 and $35,472,000, representing a 24.3% increase.
Partnership-operated restaurants have achieved comparable restaurant sales
increases in each of the last twenty-five quarters.
A summary of the Partnership's results for the years ended December 31 and
the third quarter and nine months ended September 30 are presented in the
following table. All revenues, costs and expenses are expressed as a percentage
of total revenues. Certain prior year amounts have been reclassified to conform
to current year presentation.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED
DECEMBER 31 SEPTEMBER 30 SEPTEMBER 30
------------------------------- -------------------- --------------------
1994 1995 1996 1996 1997 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Food sales.......................................... 92.7% 92.9% 92.6% 92.6% 92.7% 92.7% 92.7%
Franchise revenues.................................. 7.3 7.1 7.4 7.4 7.3 7.3 7.3
--------- --------- --------- --------- --------- --------- ---------
Total revenues........................................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0
--------- --------- --------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales:
Food cost........................................... 26.1 26.9 27.1 27.3 26.8 27.0 26.6
Labor and benefits.................................. 32.0 32.1 31.2 30.2 31.0 31.3 31.4
Operating expenses.................................. 19.2 19.4 19.1 18.7 18.2 19.1 18.6
General and administrative............................ 9.8 9.1 9.4 8.9 9.4 9.3 9.8
Depreciation and amortization......................... 5.5 5.9 6.2 6.0 5.6 6.2 6.0
Interest, net......................................... 1.5 2.0 2.0 1.9 1.6 2.0 1.8
Tax related reorganization costs...................... -- -- -- -- -- -- 0.3
Other, net............................................ 0.5 0.6 (0.3) (0.4) (0.3) (0.4) (0.3)
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses.............................. 94.6 96.0 94.7 92.6 92.3 94.5 94.2
--------- --------- --------- --------- --------- --------- ---------
Net income............................................ 5.4% 4.0% 5.3% 7.4% 7.7% 5.5% 5.8%
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
Net income for the third quarter of 1997 was $5,581,000 or $.53 per limited
partnership unit versus $4,872,000 or $.47 per unit for the same period in 1996.
For the nine months ended September 30, 1997, net income was $11,770,000 or
$1.13 per unit compared to $10,499,000 or $1.01 per unit in the prior year.
Excluding tax related reorganization costs, net income for the nine months ended
September 30, 1997, was $12,414,000 or $1.20 per unit.
57
<PAGE>
OTHER SUPPLEMENTAL DATA:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
System-wide restaurant sales
Partnership-operated (1)........................... $ 187,711 $ 208,057 $ 212,787 $ 160,482 $ 167,843
Franchised......................................... 425,812 440,446 465,172 350,912 367,025
---------- ---------- ---------- ---------- ----------
Total............................................ 613,523 648,503 677,959 511,394 534,868
Number of restaurants at end of period
Partnership-operated (1)......................... 132 139 134 134 135
Franchised (1)................................... 300 317 329 324 333
---------- ---------- ---------- ---------- ----------
Total............................................ 432 456 463 458 468
Average restaurant sales (2)......................... 1,535 1,535 1,576 1,185 1,254
Increases in average restaurant sales (2)............ 3.9% 0.0% 2.7% 2.2% 5.8%
Comparable restaurant sales increase (2)............. 0.8% 0.9% 2.6% 2.1% 5.9%
Average guest check (2).............................. $ 5.16 $ 5.29 $ 5.36 $ 5.35 $ 5.53
---------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) Excludes alternative concepts
(2) For Partnership-operated restaurants
REVENUES:
Total revenues for the third quarter and first nine months of 1997 increased
approximately 8.1% and 5.3% respectively, over the same periods last year due
primarily to higher comparable restaurant sales. Same store comparable
restaurant sales for Partnership-operated restaurants increased approximately
7.7% and 5.9% over the third quarter of 1996 and first nine months of 1996,
respectively, due primarily to selective menu price increases, guest preferences
for higher-priced entrees, and an increase in comparable restaurant guest
visits. The shift in customer preference to higher-priced entrees can be
attributed to the Partnership's development and promotion of higher-priced menu
items. Management believes remodeling of Partnership restaurants, increased
promotional events, and implementation of new products resulted in increased
guest visits.
Revenues from Foxtail increased 10.8% and 9.1% for the three and nine months
ended September 30, 1997 and comprised approximately 9.1% and 8.4% of the
Partnership's revenues for both periods, respectively. The increase in Foxtail
revenues can be primarily attributed to price increases effective in August of
1996 and January of 1997, increased sales outside the Perkins system, and
increased number of franchise restaurants. The increase in outside sales is due
to the Partnership's greater sales efforts in order to maintain plant capacity
during slower production periods.
Franchise revenues, which consist primarily of franchise royalties and
initial license fees, increased 6.5% over the third quarter and 5.0% over the
first nine months of 1996. Although comparable franchise restaurant sales
remained constant with the prior year, revenues of franchise stores opened
during 1995 and 1996 averaged 16% higher than the franchise system average
resulting in overall greater franchise revenues. Additionally, 18 new franchised
restaurants have opened since September 30, 1996. Revenues from these openings
were partially offset by the closing of 11 under-performing franchised units.
58
<PAGE>
COSTS AND EXPENSES:
FOOD COST:
As a percentage of total revenues, food cost for the three months ended
September 30, 1997, decreased .5 percentage points over the same period in 1996.
Restaurant food cost decreased due to selective menu price increases and the
decline in the costs of certain commodities which include eggs and dairy
products. This decrease was partially offset by higher food cost associated with
poultry products.
Food cost for the nine months ended September 30, decreased .4 percentage
points as a percent of total revenues. Restaurant food costs decreased due to
selective menu price increases and a decline in the costs of certain commodities
which include eggs and frozen products. The decrease was partially offset by
higher food costs associated with pork and poultry products.
LABOR AND BENEFITS:
Labor and benefits expense, as a percentage of total revenues, increased .8
and .1 percentage points for the three and nine months ended September 30, 1997,
respectively. This increase is primarily due to increased hourly labor costs in
the Partnership's restaurants.
The wage rates of the Partnership's hourly employees are impacted by Federal
and state minimum wage laws. Legislation which raised the Federal minimum wage
rate in 1996 and has further increased the minimum wage rate in 1997 has had an
impact on the Partnership's labor costs. Certain states do not allow tip credits
for servers which results in higher payroll costs as well as greater exposure
for increases in minimum wage rates. In the past, the Partnership has been able
to offset increases in labor costs through selective menu price increases and
improvements in productivity. The Partnership anticipates that it can offset the
majority of the current increases through selective menu price increases.
However, there is no guarantee that future increases can be mitigated through
raising menu prices.
OPERATING EXPENSES:
Operating expenses for the third quarter and first nine months of 1997,
decreased as a percentage of total revenues by .5 percentage points. The modest
increase in operating expenses such as utilities and local store marketing costs
fell below the rate of increases in revenue; therefore, operating expenses
decreased as a percent of sales.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses, as a percentage of total revenues,
increased .5 percentage points for the third quarter and nine months ended
September 30, 1997. The difference was due to increases in compensation costs,
restaurant development costs, training costs, and promotional expenses for
Foxtail.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization for the three months ended September 30, 1997,
decreased .6% compared to the same period last year. This is primarily due to
certain buildings and equipment becoming fully depreciated during the third
quarter. Depreciation and amortization increased 1.3% for the nine months ended
September 30, 1997 over the same period last year due primarily to
refurbishments made to upgrade existing restaurants as well as the addition of
new Partnership-operated restaurants.
INTEREST:
Interest expense for the three months and nine months ended September 30,
1997, decreased 11.3% and 7.4% over the same period last year due primarily to
lower debt outstanding during the period caused
59
<PAGE>
by the Partnership paying down debt. In addition, interest expense associated
with capital lease obligations has decreased.
TAX RELATED REORGANIZATION COSTS:
Tax related reorganization costs of approximately $650,000 were incurred
during 1997 associated with analyzing the alternatives to becoming a tax-paying
entity beginning January 1998.
CAPITAL RESOURCES AND LIQUIDITY
Principal uses of cash during the third quarter and first nine months ended
September 30, 1997, were distributions paid to Unitholders, capital
expenditures, and a net reduction in long-term debt. Capital expenditures
consisted primarily of land, building and equipment purchases for new
Partnership-operated restaurants, maintenance capital, and costs related to
remodels of existing restaurants. Remodels and unit upgrades constituted
approximately 24% of the capital expenditures during the first nine months of
1997. The Partnership's primary source of funding was cash provided by
operations. The Partnership's capital budget for 1997 is $18,640,000, and
management expects that total capital expenditures for the year will be
approximately $16,300,000.
As is typical in the restaurant industry, the Partnership ordinarily
operates with a working capital deficit since the majority of its sales are for
cash, while credit is received from its suppliers. Therefore, operating with a
working capital deficit does not impair the Partnership's short-term liquidity.
At September 30, 1997, this deficit amounted to $21,474,000, which was primarily
the result of utilizing available cash for capital expenditures, repayment of
debt, and distributions to Unitholders.
The following table summarizes capital expenditures for the years ended
December 31 and the nine months ended September 30, 1997.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------- ------------
1994 1995 1996 1997
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Maintenance capital expenditures.............. $ 2,130 $ 3,435 $ 2,987 $ 2,673
Restaurant renovation......................... 4,118 8,431 4,064 2,486
New restaurants............................... 20,908 12,626 1,947 3,324
Manufacturing................................. 809 859 651 328
Other......................................... 2,834 3,580 2,209 1,503
--------- --------- --------- ------------
Total capital expenditures.................... $ 30,799 $ 28,931 $ 11,858 $ 10,314
--------- --------- --------- ------------
--------- --------- --------- ------------
</TABLE>
The Partnership expects its capital budget in 1998 to be approximately
$21,944,000. The Partnership plans to add six new Partnership-operated
restaurants in 1998. The remaining capital budget will be applied to remodels of
existing restaurants and upgrades of restaurant technology. The primary source
of funding for these projects will be cash provided by operations. Capital
spending could vary significantly from planned amounts as certain of these
expenditures are discretionary in nature.
On June 25, 1997, the Partnership obtained a $40,000,000 revolving line of
credit facility and a $15,000,000 growth loan agreement with four banks. An
additional facility for up to $5,000,000 of letters of credit was arranged with
one of the four banks in order to secure the Partnership's workers' compensation
obligation as is consistent with restaurant industry practice. The revolving
credit and letter of credit facilities mature on March 31, 2002, at which time
all amounts become payable. The growth loan facility is earmarked for the
acquisition of existing restaurant properties. The loan facility matures on
March 31, 2000, at which time all amounts outstanding convert to a term loan.
The principal of the term loan, if any, will be repaid in sixteen consecutive
equal quarterly payments. Subject to certain conditions, all three facilities
may be extended annually for an additional period of one year beyond their
then-current maturity
60
<PAGE>
dates. As of September 30, 1997, $14,250,000 in borrowings were outstanding
under the revolving credit facility and approximately $2,802,000 was outstanding
under the letter of credit facility. No amounts were outstanding under the
growth loan facility.
The Partnership has decided not to retain its status as a partnership for
tax purposes and pay a new tax on its gross income under the Taxpayer Relief Act
of 1997. The Partnership will either begin being taxed as a corporation January
1, 1998, or complete the merger with TRC as described in "Contingencies" and
remain a nontaxable entity for income tax purposes. If the merger with TRC takes
place, the Partnership will be responsible for funding the tax liability of TRC
caused by ownership of the Partnership, as well as financing of the merger
costs. The amount of cash available to the Partnership will be reduced by the
amount of cash necessary to pay these taxes and merger costs. The Partnership
has obtained a commitment agreement from a bank to provide the Partnership with
a combination of term loan facilities totalling $130,000,000 and a new
$50,000,000 revolving line of credit facility which are intended to finance the
acquisition of Units in the merger, merger costs, and refinance the
Partnership's existing credit facilities.
The Partnership's largest franchisee operates 41 restaurants, 37 of which
are leased from unaffiliated lessors, pursuant to a temporary license agreement
expiring December 31, 1997. The temporary agreement was entered into as a result
of negotiations following the franchisee's defaults in its payments and certain
other obligations under its prior agreements with the Partnership and in order
to give the franchisee an opportunity to seek permanent financing in an amount
sufficient to permit it to refinance its existing obligations to its creditors,
including the Partnership, and to remodel its restaurants. Although the
franchisee has represented to the Partnership that it is in discussions with
possible financing sources, the Partnership believes that if the franchisee is
ultimately unsuccessful and loses control of its properties, a majority of the
restaurants can continue to be operated as Perkins Family Restaurants pursuant
to arrangements between the Partnership and the owners of the properties. In the
event such restaurants cannot continue to be operated as Perkins Family
Restaurants, the Partnership would no longer receive the revenues paid by the
franchisee. During 1996, the franchisee's net royalty payments to the
Partnership were approximately $1.5 million and at September 30, 1997, the
franchisee was delinquent in its royalty obligations in the amount of
approximately $545,000.
61
<PAGE>
AUDITED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Perkins Family Restaurants, L.P.:
We have audited the accompanying balance sheets of PERKINS FAMILY
RESTAURANTS, L.P. (a Delaware limited partnership) as of December 31, 1996 and
1995, and the related statements of income, changes in partners' capital and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Perkins Family Restaurants,
L.P. as of December 31, 1996 and 1995 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note 13 to the financial statements, in 1995 the Partnership
adopted Statement of Financial Accounting Standards No. 121, and in connection
therewith, recorded an impairment loss of $1,900,000 for certain long-lived
assets.
Arthur Andersen LLP
Memphis, Tennessee,
March 27, 1997.
62
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
BALANCE SHEETS
DECEMBER 31
(IN THOUSANDS, EXCEPT UNIT AMOUNTS)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 2,737 $ 1,825
Receivables, less allowance for doubtful accounts of $430 and $481...................... 6,285 8,683
Inventories, at the lower of first-in, first-out cost or market......................... 4,234 4,318
Prepaid expenses and other current assets............................................... 1,551 1,505
---------- ----------
Total current assets................................................................ 14,807 16,331
---------- ----------
PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation and amortization......... 115,086 117,435
NOTES RECEIVABLE, less allowance for doubtful accounts of $10 and $14..................... 805 1,883
INTANGIBLE AND OTHER ASSETS, net of accumulated amortization of $26,451 and $25,259....... 24,958 26,180
---------- ----------
$ 155,656 $ 161,829
---------- ----------
---------- ----------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current maturities of long-term debt.................................................... $ 4,356 $ 3,575
Current maturities of capital lease obligations......................................... 1,683 1,984
Accounts payable........................................................................ 8,878 7,525
Accrued expenses........................................................................ 14,235 13,099
Distributions payable................................................................... 3,479 3,475
---------- ----------
Total current liabilities........................................................... 32,631 29,658
---------- ----------
CAPITAL LEASE OBLIGATIONS, less current maturities........................................ 8,573 8,810
LONG-TERM DEBT, less current maturities................................................... 48,244 57,850
OTHER LIABILITIES......................................................................... 4,651 4,415
COMMITMENTS AND CONTINGENCIES
(Notes 4 and 10)
PARTNERS' CAPITAL:
General partner......................................................................... 615 611
Limited partners (10,492,930 and 10,481,370 Units issued and outstanding)............... 63,220 63,373
Deferred compensation related to restricted units....................................... (2,278) (2,888)
---------- ----------
Total Partners' Capital............................................................. 61,557 61,096
---------- ----------
$ 155,656 $ 161,829
---------- ----------
---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
63
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT UNIT AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Food sales................................................................. $ 234,164 $ 228,259 $ 205,675
Franchise revenues......................................................... 18,629 17,492 16,227
---------- ---------- ----------
Total Revenues............................................................... 252,793 245,751 221,902
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of Sales:
Food cost................................................................ 68,456 66,204 57,975
Labor and benefits....................................................... 78,970 78,916 71,113
Operating expenses....................................................... 48,284 47,678 42,615
General and administrative................................................. 23,741 22,251 21,779
Depreciation and amortization.............................................. 15,748 14,401 12,107
Interest, net.............................................................. 5,066 4,826 3,266
Provision for (Benefit from) litigation costs.............................. -- (190) 1,079
Provision for disposition of assets........................................ -- 609 800
Asset write-down (SFAS No. 121)............................................ -- 1,900 --
Other, net................................................................. (994) (640) (840)
---------- ---------- ----------
Total Costs and Expenses..................................................... 239,271 235,955 209,894
---------- ---------- ----------
NET INCOME................................................................... $ 13,522 $ 9,796 $ 12,008
---------- ---------- ----------
---------- ---------- ----------
WEIGHTED AVERAGE EQUIVALENT UNITS............................................ 10,289 10,269 10,275
---------- ---------- ----------
NET INCOME PER UNIT.......................................................... $ 1.30 $ 0.94 $ 1.16
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
64
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
----------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1993.................................................... $ 663 $ 65,592 $ 66,255
Net income for 1994........................................................... 120 11,888 12,008
Capital contribution.......................................................... 1 -- 1
Cash distributions declared ($1.30 per Unit).................................. (136) (13,509) (13,645)
Issuance of 30,600 restricted Units........................................... -- 545 545
Retirement of 20,830 restricted Units......................................... -- (341) (341)
Changes in deferred compensation related to restricted Units.................. -- 123 123
Repurchase of 16,800 Units.................................................... -- (168) (168)
----- ---------- ----------
Balance at December 31, 1994.................................................... 648 64,130 64,778
----- ---------- ----------
Net income for 1995........................................................... 98 9,698 9,796
Capital contribution.......................................................... 3 -- 3
Cash distributions declared ($1.30 per Unit).................................. (138) (13,631) (13,769)
Issuance of 126,970 restricted Units.......................................... -- 1,604 1,604
Retirement of 24,725 restricted Units......................................... -- (390) (390)
Changes in deferred compensation related to restricted Units.................. -- (926) (926)
----- ---------- ----------
Balance at December 31, 1995.................................................... 611 60,485 61,096
----- ---------- ----------
Net income for 1996........................................................... 135 13,387 13,522
Capital contribution.......................................................... 7 -- 7
Cash distributions declared ($1.30 per Unit).................................. (138) (13,633) (13,771)
Issuance of 44,250 restricted Units........................................... -- 544 544
Retirement of 32,690 restricted Units......................................... -- (451) (451)
Changes in deferred compensation related to restricted Units.................. -- 610 610
----- ---------- ----------
Balance at December 31, 1996.................................................... $ 615 $ 60,942 $ 61,557
----- ---------- ----------
----- ---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
65
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 13,522 $ 9,796 $ 12,008
Adjustments to reconcile net income to net cash provided by operating
activities:
Asset write-down (SFAS No. 121)........................................... -- 1,900 --
Depreciation and amortization............................................. 15,748 14,401 12,088
Provision for (Benefit from) litigation costs............................. -- (190) 1,079
Provision for disposition of assets....................................... -- 609 800
Other non-cash income and expense items................................... 1,795 1,498 1,533
Changes in other operating assets and liabilities......................... 4,180 (2,737) (2,747)
---------- ---------- ----------
Total adjustments....................................................... 21,723 15,481 12,753
---------- ---------- ----------
Net cash provided by operating activities............................... 35,245 25,277 24,761
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment........................................ (11,858) (28,931) (30,799)
Proceeds from sale of property and equipment................................ 573 889 389
Other investing activities, net............................................. 1,755 723 687
---------- ---------- ----------
Net cash used in investing activities................................... (9,530) (27,319) (29,723)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt................................................ 16,250 59,125 34,801
Payments on long-term debt.................................................. (25,075) (41,000) (15,301)
Principal payments under capital lease obligations.......................... (2,074) (1,981) (2,367)
Distributions to partners................................................... (13,904) (13,870) (13,780)
Cash paid to repurchase Partnership Units................................... -- -- (168)
Other financing activities, net............................................. -- -- (125)
---------- ---------- ----------
Net cash provided by (used in) financing activities..................... (24,803) 2,274 3,060
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.................... 912 232 (1,902)
CASH AND CASH EQUIVALENTS:
Balance, beginning of year.................................................. 1,825 1,593 3,495
---------- ---------- ----------
Balance, end of year........................................................ $ 2,737 $ 1,825 $ 1,593
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
66
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
The operations of Perkins Family Restaurants, L.P., ("PFR"), a Delaware
limited partnership, are conducted through Perkins Restaurants Operating
Company, L.P. ("PROC"), a Delaware limited partnership. PFR is the sole limited
partner and owns 99% of PROC. The combined activities of PFR and PROC are
referred to herein as activities of the "Partnership." The Partnership is
managed by Perkins Management Company, Inc. ("PMC"). PMC, a wholly owned
subsidiary of Perkins Restaurants, Inc. ("PRI"), is the sole general partner and
owns 1% of both PROC and PFR. PRI owns approximately 48% of the Limited
Partnership Units ("Units") of PFR. PRI is a wholly owned subsidiary of The
Restaurant Company ("TRC").
As general partner of the Partnership, PMC does not receive any compensation
other than distributions attributable to its 1% general partner's interest in
each of PROC and PFR. The Partnership reimburses PMC for all of its direct and
indirect costs (principally general and administrative costs) allocable to the
Partnership.
The activities of the Partnership are governed by the terms of the
partnership agreements (the "Agreements"). The significant provisions of the
Agreements not described elsewhere are that the general partner has sole and
complete discretion in determining the consideration, terms and conditions with
respect to any future issuance of Units and no preemptive rights to acquire
additional Units exist.
The Partnership owns and franchises family-style restaurants which serve a
wide variety of high quality, moderately priced breakfast, lunch, and dinner
entrees, snacks and bakery products. 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 32
states with the largest number in Minnesota, Ohio, New York, Pennsylvania, and
Florida. There are twelve franchised restaurants located in Canada. The
Partnership also offers cookie doughs, muffin batters, pancake mixes, pies and
other food products for sale to Partnership-operated and franchised restaurants
and bakery and food service distributors through Foxtail Foods, the
Partnership's manufacturing division.
BASIS OF PRESENTATION
The financial statements include the combined accounts of PFR and PROC after
elimination of all material intercompany amounts. Revenues and expenses are
allocated to the general and limited partners on the basis of their respective
ownership interests.
Certain prior year amounts have been reclassified to conform to current year
presentation.
ESTIMATES
The presentation of financial statements in conformity with generally
accepted accounting principles 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.
67
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH EQUIVALENTS
The Partnership considers highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
FRANCHISE REVENUE
Franchisees are required to pay an initial fee to the Partnership when each
franchise is granted. These fees are not recognized as income until the
restaurants open. The Partnership 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.
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.
PREOPENING COSTS
New store preopening costs are deferred and amortized over twelve months,
starting when the restaurant opens.
INCOME TAXES
For state and Federal income tax purposes, the Partnership is not a
taxpaying entity. As a result, the taxable income, which may vary substantially
from income reported for financial reporting purposes, is includable in the
state and Federal tax returns of the individual partners. Accordingly, no
current provision for income taxes is reflected in the accompanying financial
statements. The tax returns of the Partnership are subject to examination by
state and Federal taxing authorities. If such examinations result in changes to
taxable income, the tax liability of the partners would be changed accordingly.
The net income of publicly traded limited partnerships, such as the Partnership,
is considered portfolio income to their partners and is not available to offset
passive losses of the partners for tax years after 1986.
On December 22, 1987, tax legislation was enacted which will have the effect
of taxing the Partnership as a corporation for tax years beginning after 1997.
The Partnership could be subject to corporate income taxes earlier than 1998 if
it adds a substantial new line of business.
When the Partnership begins being taxed as a corporation on January 1, 1998,
the amount of cash available to the Partnership will be reduced by the amount of
cash necessary to pay taxes.
CASH DISTRIBUTIONS
The Partnership recognizes cash distributions payable to its partners as of
the declaration dates. Cash distributions of $1.30 per Unit were declared during
1996 and 1995 ($.325 per Unit during each quarter). As a limited partner, PRI
received approximately 48% of these total distributions.
68
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
NET INCOME PER UNIT
Net income per Unit is computed based on the weighted average number of
Units outstanding (adjusted for equivalent Units) after deducting the general
partner's 1% interest from Partnership earnings.
(2) 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>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(Increase) Decrease in:
Receivables.................................................. $ 1,726 $ (877) $ (2,395)
Inventories.................................................. 84 (239) (688)
Prepaid expenses and other current assets.................... (739) (1,032) (1,159)
Other assets................................................. 190 157 (82)
Increase (Decrease) in:
Accounts payable............................................. 1,353 (341) 1,228
Accrued expenses............................................. 1,294 (545) (153)
Other liabilities............................................ 272 140 502
--------- --------- ---------
$ 4,180 $ (2,737) $ (2,747)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Partnership paid interest of $5,443,000 in 1996, $5,621,000 in 1995 and
$3,637,000 in 1994.
The Partnership entered into a master capital lease agreement during 1996
primarily to obtain restaurant equipment. The payment terms for each lease
schedule under the master lease provides for 72 monthly payments at interest
rates which vary from 7.1% to 8.9%.
The capital lease obligations of two properties targeted for disposition in
1993 were terminated during 1994 in accordance with the related lease buyout
agreements. The payments required by the agreements are included in principal
payments under capital lease obligations in the Statements of Cash Flows. Losses
on these terminations were charged to the reserve established specifically for
this purpose.
69
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
(3) PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Owned:
Land and land improvements.......................................... $ 28,202 $ 27,065
Buildings........................................................... 65,873 61,543
Leasehold improvements.............................................. 29,743 27,560
Equipment........................................................... 54,387 51,812
Construction in progress............................................ 1,657 3,501
---------- ----------
179,862 171,481
Less--Accumulated depreciation and amortization....................... (70,932) (60,766)
---------- ----------
108,930 110,715
---------- ----------
Leased:
Buildings........................................................... 24,945 25,304
Equipment........................................................... 1,564 --
Less--Accumulated amortization...................................... (20,353) (18,584)
---------- ----------
6,156 6,720
---------- ----------
$ 115,086 $ 117,435
---------- ----------
---------- ----------
</TABLE>
Depreciation and amortization for financial reporting purposes is computed
using the straight-line method based on the shorter of either the estimated
useful lives or the lease terms of the property, as follows:
<TABLE>
<CAPTION>
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>
(4) LEASES:
As of December 31, 1996, there were 134 restaurants operated by the
Partnership, as follows:
<TABLE>
<S> <C>
69 with both land and building leased
54 with both land and building owned
11 with the land leased and building owned
</TABLE>
70
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
(4) LEASES: (CONTINUED)
As of December 31, 1996, there were 35 restaurants either leased or
subleased to others by the Partnership as follows:
<TABLE>
<S> <C>
19 with both land and building leased
11 with both land and building owned
5 with the land leased and building owned
</TABLE>
Most of the 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.
Future minimum payments related to leases that have initial or remaining
lease terms in excess of one year as of December 31, 1996 were as follows (in
thousands):
<TABLE>
<CAPTION>
LEASE OBLIGATIONS
----------------------
CAPITAL OPERATING
--------- -----------
<S> <C> <C>
1997.................................................................... $ 2,685 $ 5,809
1998.................................................................... 2,241 5,602
1999.................................................................... 1,989 5,296
2000.................................................................... 1,599 4,695
2001.................................................................... 1,518 4,308
Thereafter.............................................................. 4,820 21,077
--------- -----------
Total minimum lease payments 14,852 $ 46,787
-----------
-----------
Less:
Amounts representing interest......................................... (4,596)
---------
Capital lease obligations............................................. $ 10,256
---------
---------
</TABLE>
Capital lease obligations have effective interest rates ranging from 7.1% to
16.1% and are payable in monthly installments through 2011. Maturities of such
obligations at December 31, 1996 for the years 1997 through 2001 and thereafter
were $1,686,000, $1,408,000, $1,299,000, $1,036,000, $1,066,000 and $3,761,000,
respectively.
71
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
(4) LEASES: (CONTINUED)
Future minimum gross rental receipts as of December 31, 1996, were as
follows (in thousands):
<TABLE>
<CAPTION>
AMOUNTS RECEIVABLE AS
----------------------
LESSOR SUBLESSOR
--------- -----------
<S> <C> <C>
1997.................................................................. $ 952 $ 1,761
1998.................................................................. 959 1,575
1999.................................................................. 969 1,347
2000.................................................................. 980 1,081
2001.................................................................. 941 1,053
Thereafter............................................................ 7,945 4,236
--------- -----------
Total minimum lease rentals........................................... $ 12,746 $ 11,053
--------- -----------
--------- -----------
</TABLE>
The net rental expense included in the accompanying financial statements for
operating leases was as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Minimum rentals................................................. $ 5,341 $ 5,064 $ 5,144
Contingent rentals.............................................. 1,114 1,004 1,007
Less sublease rentals........................................... (1,041) (982) (918)
--------- --------- ---------
$ 5,414 $ 5,086 $ 5,233
--------- --------- ---------
--------- --------- ---------
</TABLE>
(5) INTANGIBLE AND OTHER ASSETS:
Intangible and other assets, net of accumulated amortization, were as
follows as of December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Excess of cost over fair value of net assets acquired, being amortized
evenly over 30 to 40 years............................................ $ 23,627 $ 24,618
Present value of estimated future royalty fee income of acquired
companies, being amortized evenly over the remaining lives of the
franchise agreements.................................................. 423 574
Other................................................................... 908 988
--------- ---------
$ 24,958 $ 26,180
--------- ---------
--------- ---------
</TABLE>
The Partnership 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 franchise restaurants.
72
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
(6) ACCRUED EXPENSES:
Accrued expenses consisted of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Payroll and benefits.................................................... $ 7,543 $ 5,451
Property, real estate and sales taxes................................... 2,006 2,093
Insurance............................................................... 1,232 1,475
Rent.................................................................... 1,165 1,025
Advertising............................................................. 530 521
Other................................................................... 1,759 2,534
--------- ---------
$ 14,235 $ 13,099
--------- ---------
--------- ---------
</TABLE>
(7) LONG-TERM DEBT:
Long-term debt consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Unsecured Senior Notes:
7.19%, due in quarterly installments beginning December 13, 1997
through December 13, 2005........................................... $ 20,000 $ 20,000
8.6%, due in quarterly installments through July 1, 2002.............. 10,650 11,850
6.99%, due in quarterly installments through July 1, 2003............. 3,950 4,325
Revolving credit agreement, due June 30, 1997........................... 13,000 18,250
Term loan, due in quarterly installments through June 30, 1998.......... 5,000 7,000
--------- ---------
52,600 61,425
Less current maturities................................................. (4,356) (3,575)
--------- ---------
$ 48,244 $ 57,850
--------- ---------
--------- ---------
</TABLE>
On March 18, 1997, the Partnership entered into a commitment agreement with
its agent bank to provide a credit facility of up to $60,000,000. This is
composed of a $40,000,000 reducing revolving credit facility, a $15,000,000
revolving growth facility, and a $5,000,000 standby letter of credit facility.
The reducing revolving credit facility matures on March 31, 2002, and will
reduce $2,000,000 per year commencing on September 30, 1998. This facility will
initially be used to repay amounts outstanding under the Partnership's existing
revolving credit agreement and term loan. The revolving growth facility, which
may only be used for the acquisition of existing restaurants, converts to a term
loan on March 31, 2000, and amortizes in equal quarterly installments with final
maturity on March 31, 2004. The standby letter of credit facility matures on
March 31, 2002, and contains terms and conditions similar to the Partnership's
current agreement.
All amounts outstanding under this agreement bear interest at either the
Base Rate or LIBOR rates as defined in the agreement. Other terms and conditions
are similar to the Partnership's existing agreement. As a result of this
commitment, the Partnership has classified $13,000,000 as long-term debt.
73
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
During the fourth quarter of 1995, the Partnership issued $20,000,000 of
7.19% Unsecured Senior Notes due December 13, 2005 to an insurance company. The
proceeds were used to repay outstanding borrowings under the Partnership's
revolving line of credit. The note agreement also provides for a $15,000,000
Private Shelf Note Facility which expires December 13, 1997.
During the second quarter of 1994, the Partnership refinanced the
outstanding borrowings under its existing line of credit by entering into a
$40,000,000 revolving line of credit facility and a $10,000,000 term loan
agreement with three banks. The revolving line of credit contains a $6,000,000
sublimit for letters of credit and expires on June 30, 1997, at which time all
amounts become payable. At December 31, 1996, approximately $3,276,000 in
letters of credit were outstanding under the line of credit facility. The
borrowings under the term loan agreement are due in quarterly installments
through June 30, 1998. Pursuant to the revolving line of credit and term loan
facilities, all amounts outstanding under these agreements initially bear
interest at either the Base Rate or Euroloan Rates, as defined in the applicable
agreement.
In order to manage interest costs, the Partnership entered into an interest
rate swap agreement in 1994 with its lender that effectively fixes interest for
the term loan at 7.63%. The notional amount protected by this transaction
decreases as quarterly installments of principal are made, and the LIBOR
component is adjusted quarterly. The agreement expires June 30, 1998.
The Partnership also entered into a participating interest rate swap and cap
agreement that protects the first $10,000,000 of borrowings outstanding under
the revolving line of credit facility. The first $5,300,000 is effectively fixed
at 8.25%, while the next $4,700,000 floats at either the Base Rate or the
Euroloan Rate pursuant to the terms of the line of credit facility, but is
capped at 8.25%. The swap and cap agreement is effective through June 30, 1997,
and the LIBOR component is adjusted quarterly.
These derivative financial instruments have an inherent element of risk that
the counterparties may be unable to meet the terms of the agreements. The
Partnership has minimized such risk exposure by limiting the counterparties to
major financial institutions.
Based on the borrowing rates currently available for debt with similar terms
and maturities, the approximate fair market value of the Partnership's long-term
debt as of December 31 was as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
7.19% Unsecured Senior Notes............................................ $ 19,412 $ 20,000
8.6% Unsecured Senior Notes............................................. 10,842 12,398
6.99% Unsecured Senior Notes............................................ 3,830 4,300
Interest Rate Swap Agreement............................................ 126 154
Participating Interest Rate Swap and Cap Agreement...................... 51 156
</TABLE>
The values associated with the interest rate swaps represent the estimated
contract values as reported to the Partnership by the commercial bank that is
the counterparty to these agreements.
Because the terms of the Partnership's revolving line of credit and term
loan facilities provide that borrowings outstanding under those agreements bear
interest at current market rates, management believes that the related
liabilities reflected in the accompanying balance sheets approximate fair market
value.
74
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Pursuant to both the Unsecured Senior Notes and revolving line of credit
agreements, the Partnership must maintain a minimum tangible net worth and other
specified financial ratios, and is subject to certain restrictions which limit
additional indebtedness. At December 31, 1996, the Partnership was in compliance
with all such requirements.
Aggregate annual maturities of long-term debt subsequent to December 31,
1996 were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997............................................................................... $ 4,356
1998............................................................................... 7,674
1999............................................................................... 4,824
2000............................................................................... 5,049
2001............................................................................... 5,199
Thereafter......................................................................... 25,498
---------
$ 52,600
---------
---------
</TABLE>
Interest expense capitalized in connection with the Partnership's
construction activities amounted to approximately $136,000, $153,000 and
$331,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
(8) LIMITED PARTNERSHIP UNITS:
Limited Partnership Units issued and outstanding were as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Units issued and outstanding, beginning of year................... 10,481,370 10,379,125
Issuance of restricted Units...................................... 44,250 126,970
Retirement of restricted Units.................................... (32,690) (24,725)
------------ ------------
Units issued and outstanding, end of year......................... 10,492,930 10,481,370
------------ ------------
------------ ------------
</TABLE>
(9) INCOME TAXES:
As of January 1, 1993, the Partnership recorded the cumulative effect of
adopting SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the
Partnership to recognize deferred tax assets and liabilities for the expected
future tax consequences of existing temporary differences between the carrying
amounts and the tax bases of assets and liabilities that are projected to
reverse after January 1, 1998, the date after which the Partnership will become
a taxable entity. As of December 31, 1996, the Partnership had deferred tax
assets that equaled or exceeded deferred tax liabilities. The deferred tax
assets and liabilities are related to existing temporary differences that are
projected to reverse after January 1, 1998. Management believes that a
conclusion as to the realizability of these assets based upon current
circumstances is highly subjective, and has therefore established a valuation
allowance. Accordingly, no deferred provision for income taxes has been
reflected in the accompanying financial statements.
75
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(9) INCOME TAXES: (CONTINUED)
The components of the Partnership's net deferred tax assets as of December
31 were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Depreciation............................................................. $ (1,505) $ (1,670)
Capitalized leases....................................................... 1,303 1,240
Reserves................................................................. 372 795
Other, net............................................................... 230 210
--------- ---------
Total deferred tax assets................................................ 400 575
Valuation allowance...................................................... (400) (575)
--------- ---------
Net deferred tax assets.................................................. $ -- $ --
--------- ---------
--------- ---------
</TABLE>
(10) CONTINGENCIES:
During 1996, a lawsuit filed in 1995 by two former employees in the U.S.
District Court for the District of North Dakota alleging sexual harassment and
related claims was resolved after a trial in favor of Perkins as to one
plaintiff and a judgment against Perkins as to the other plaintiff of $3,500.
In 1994, the Partnership recorded a provision of $1,079,000 for damages
associated with two separate lawsuits brought against the Partnership. During
the second quarter of 1995, the Partnership settled one of the suits for
$190,000 less than the original provision and the excess accrual was reversed.
The second suit was settled in October 1995 for the amount originally accrued.
The Partnership 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 Partnership's financial position or results of operations.
The Partnership has sponsored financing programs offered by certain lending
institutions to help its franchisees procure funds for the construction of new
franchised restaurants and to purchase and install the Perkins in-store bakery.
The Partnership provides a limited guaranty of the funds borrowed. At December
31, 1996, there were approximately $2,746,000 in borrowings outstanding under
these programs. The Partnership has guaranteed $965,000 of these borrowings
which represents its minimum commitments under these agreements. The Partnership
does not anticipate its guaranties will exceed these minimums in the future.
During 1995, the Partnership entered into a separate agreement with one of
the lending institutions to assist a franchisee in obtaining lease financing to
install in-store bakeries in 28 existing restaurants operated by the franchisee.
Pursuant to the agreement, the Partnership will provide a declining limited
guaranty to the lender for payment of the franchisee's obligations between the
lender and the franchisee, not to exceed $1,350,000. The Partnership's current
maximum liability if the maximum lease commitment is funded would be $945,000.
At December 31, 1996, there were approximately $547,000 in borrowings
outstanding under the program, of which the Partnership has guaranteed
approximately $383,000.
The majority of the Partnership'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
76
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(10) CONTINGENCIES: (CONTINUED)
material impact on the results of the Partnership's operations. As of December
31, 1996, three franchisees owned 94 of the 331 restaurants franchised by
Perkins. During 1996, the Partnership received net royalties and license fees of
approximately $1,505,000, $1,955,000 and $1,033,000 from these franchisees.
While the exit of one of these franchisees from the system would have a material
impact on the future revenues of the Partnership, such an occurrence would not
disrupt the normal functioning of the Partnership.
(11) UNIT PLAN:
The Perkins Family Restaurants, L.P. Restricted Limited Partnership Unit
Plan ("Unit Plan") was initially adopted in October 1987. At December 31, 1996 a
total of 450,000 Units were authorized for issuance under the Unit Plan.
Awards of restricted Units under the Unit Plan may be made to officers and
key employees of PMC, PRI and their affiliates as well as certain members of
PMC's Board of Directors. A committee composed of those non-employee directors
of PMC (the "Committee") has been appointed to administer the Unit Plan. At the
time of each award, the Committee determines the applicable award restrictions,
including, without limitation, (i) a restricted period (not to exceed ten years)
during which the Units cannot be sold, transferred or pledged and (ii) the
date(s) on which restrictions on all or a portion of the Units awarded lapse. To
the extent declared, cash distributions are paid on all Units awarded under the
Unit Plan even during the restricted period.
At December 31, 1996, there were 423,730 Units issued and outstanding under
the Unit Plan. The expense related to the Unit Plan is recognized over the
periods in which the restrictions on the Units lapse. As of December 31, 1996,
restrictions had lapsed on 214,910 of the 423,730 Units issued under the Unit
Plan. On January 2, 1997 and February 4, 1997, the Board of Directors removed
restrictions on an additional 13,690 and 32,862 Units respectively. The
unamortized amount of $2,278,000 related to the remaining 162,268 Units is
reflected as deferred compensation in the accompanying balance sheets.
(12) 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, of PROC and of any Participating Company,
as defined. At December 31, 1996, Participating Companies were PMC, PFR, TRC
Realty and TRC.
All participating employees at December 31, 1991 remained eligible to
participate in the Plan as amended and restated January 1, 1992. All other
employees of the Partnership and Participating Companies 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 1,000 Hours of
Service.
Participants may elect to defer from 1% to 15% of their annual eligible
compensation subject to legal maximums. PROC and Participating Companies 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 their Boards
of Directors. During 1995, the Partnership, PMC, and TRC Realty matched
contributions at a rate of 25%, up to the first 6% deferred by each participant.
During 1996, the Partnership and PMC elected to match contributions at a rate of
50% up to the first 6% deferred by each participant. Neither PFR nor
77
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(12) EMPLOYEE BENEFITS: (CONTINUED)
TRC had employees participating in the Plan at any time during 1996, 1995 or
1994. TRC Realty had no participating employees during 1994.
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.
A participant may apply for a loan from his or her salary deferral and
rollover accounts. Generally, loans are made for a period of five years (ten
years if for the purchase of the principal residence of the participant) subject
to certain restrictions. The interest rate is fixed at the Prime Rate at the
time of the loan plus two percent.
The trust established under the Plan is intended to qualify under the
appropriate section of the Internal Revenue Code (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 amendment to the Plan, adopted in 1995, will
be submitted for determination at a later date. The Partnership's management and
legal counsel believe that the adoption of the aforementioned amendment to the
Plan does 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.
(13) ASSET WRITE-DOWN (SFAS NO. 121):
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." SFAS No. 121 requires companies to evaluate the recoverability
of assets (including intangibles) based upon their related undiscounted
estimated future cash flows. Perkins adopted SFAS No. 121 in 1995.
In adopting SFAS No. 121, the Partnership evaluated all material asset
groups, including intangibles associated with specific Partnership-operated
properties and specific franchise agreements. As a result of this review, the
Partnership identified three 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 estimated
fair market values, based on the Partnership's experience in disposing of
similar under-performing properties, negotiations with lessors of the subject
properties and historical industry lease rates for similarly performing real
estate. The resulting non-cash charge reduced 1995 net income by $1,900,000 of
which $1,290,000 was related to assets to be disposed of. The remaining
78
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(13) ASSET WRITE-DOWN (SFAS NO. 121): (CONTINUED)
amounts were due to write-downs of long-term assets deemed by the Partnership to
be impaired. The major components of the SFAS No. 121 charge were as follows (in
thousands):
<TABLE>
<S> <C>
Reduction of the carrying values of operating assets to fair market
values............................................................ $ 1,428
Net present value of noncancelable lease commitments, less estimated
sublease income................................................... 367
Other disposal costs, including commissions......................... 105
---------
$ 1,900
---------
---------
</TABLE>
Management is aggressively pursuing subleasing one of the properties. Based
on the expected sublease rental income on this property, the carrying amounts of
all owned and leased assets related to this property were concluded to have no
fair market value. A provision for future losses was recorded to reflect the net
present value of the future lease payments less estimated sublease income on
this property. The Partnership's results of operations include losses related to
this property of $197,000, $277,000 and $229,000 for the years ended December
31, 1996, 1995, and 1994, respectively.
During 1994, a provision of $800,000 was recorded to further reduce the
carrying value of assets related to certain underperforming stores which had
been targeted for disposition in 1993. As of December 31, 1995, the Partnership
had substantially completed the disposition of these properties.
There were no additional write-downs during 1996. Management believes that
estimates used in evaluating the adoption of SFAS No. 121 were reasonable.
However, actual expenses and cash flows could differ from these estimates.
79
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
CASH
DISTRIBUTIONS
OPERATING NET NET INCOME DECLARED
1996 REVENUES INCOME INCOME PER UNIT PER UNIT
- ---------------------------------------------------- ---------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1st Quarter......................................... $ 59,973 $ 8,935 $ 2,275 $ 0.22 $ 0.325
2nd Quarter......................................... 63,516 10,548 3,352 0.32 0.325
3rd Quarter......................................... 66,217 11,791 4,872 0.47 0.325
4th Quarter......................................... 63,087 10,061 3,023 0.29 0.325
---------- ----------- --------- ----- ------
$ 252,793 $ 41,335 $ 13,522 $ 1.30 $1.30
---------- ----------- --------- ----- ------
---------- ----------- --------- ----- ------
</TABLE>
<TABLE>
<CAPTION>
CASH
DISTRIBUTIONS
OPERATING NET NET INCOME DECLARED
1995 REVENUES INCOME INCOME PER UNIT PER UNIT
- ----------------------------------------------------- ---------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1st Quarter.......................................... $ 56,913 $ 8,658 $ 2,200 $ 0.21 $ 0.325
2nd Quarter.......................................... 60,843 9,460 2,912 0.28 0.325
3rd Quarter.......................................... 66,334 10,883 4,200 0.40 0.325
4th Quarter.......................................... 61,661 7,042 484 0.05 0.325
---------- ----------- --------- ----- ------
$ 245,751 $ 36,043 $ 9,796 $ 0.94 $1.30
---------- ----------- --------- ----- ------
---------- ----------- --------- ----- ------
</TABLE>
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The Partnership's management is responsible for the preparation, accuracy
and integrity of the financial statements.
These statements have been prepared in accordance with generally accepted
accounting principles consistently applied, in all material respects, and
reflect estimates and judgments by management where necessary.
The Partnership 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.
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.
The adequacy of the Partnership's internal accounting controls is under the
review of the Audit Committee of the Board of Directors.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no changes in, or disagreements with, accountants during 1996.
80
<PAGE>
INTERIM FINANCIAL STATEMENTS
PERKINS FAMILY RESTAURANTS, L.P.
STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- ----------------------
1996 1997 1996 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Food sales..................................................... $ 61,330 $ 66,400 $ 175,792 $ 185,069
Franchise revenues............................................. 4,887 5,203 13,914 14,603
--------- --------- ---------- ----------
Total Revenues..................................................... 66,217 71,603 189,706 199,672
--------- --------- ---------- ----------
COSTS AND EXPENSES:
Cost of Sales:
Food cost...................................................... 18,061 19,165 51,247 53,099
Labor and benefits............................................. 20,013 22,200 59,290 62,645
Operating expenses............................................. 12,351 13,033 36,147 37,081
General and administrative......................................... 5,914 6,763 17,655 19,593
Depreciation and amortization...................................... 4,001 3,979 11,748 11,898
Interest, net...................................................... 1,271 1,127 3,841 3,558
Tax related reorganization costs................................... -- -- -- 650
Other, net......................................................... (266) (245) (721) (622)
--------- --------- ---------- ----------
Total Costs and Expenses........................................... 61,345 66,022 179,207 187,902
--------- --------- ---------- ----------
NET INCOME......................................................... $ 4,872 $ 5,581 $ 10,499 $ 11,770
--------- --------- ---------- ----------
--------- --------- ---------- ----------
WEIGHTED AVERAGE UNITS OUTSTANDING................................. 10,289 10,338 10,289 10,338
NET INCOME PER UNIT................................................ $ 0.47 $ 0.53 $ 1.01 $ 1.13
CASH DISTRIBUTION DECLARED PER UNIT................................ $ 0.325 $ 0.325 $ 0.975 $ 0.975
</TABLE>
The accompanying notes are an integral part of these financial statements.
81
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT UNIT AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------ SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 2,737 $ 2,054
Receivables, less allowance for doubtful accounts of $430 and $604................ 6,285 7,446
Inventories, at the lower of first-in, first-out cost or market................... 4,234 4,150
Prepaid expenses and other current assets......................................... 1,551 1,886
------------ -------------
Total current assets............................................................ 14,807 15,536
------------ -------------
PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation and
amortization.................................................................... 115,086 114,312
NOTES RECEIVABLE, less allowance for doubtful accounts of
$10 and $6...................................................................... 805 558
INTANGIBLE AND OTHER ASSETS, net of accumulated amortization of $26,451 and
$27,324......................................................................... 24,958 25,798
------------ -------------
$ 155,656 $ 156,204
------------ -------------
------------ -------------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current maturities of long-term debt.............................................. $ 4,356 $ 4,624
Current maturities of capital lease obligations................................... 1,683 1,430
Accounts payable.................................................................. 8,878 12,546
Accrued expenses.................................................................. 14,235 14,932
Distributions payable............................................................. 3,479 3,478
------------ -------------
Total current liabilities....................................................... 32,631 37,010
------------ -------------
CAPITAL LEASE OBLIGATIONS, less current maturities.................................. 8,573 7,434
LONG-TERM DEBT, less current maturities............................................. 48,244 43,026
OTHER LIABILITIES................................................................... 4,651 5,192
PARTNERS' CAPITAL:
General partner................................................................... 615 636
Limited partners (10,492,930 and 10,487,495 Units issued and outstanding)......... 63,220 64,556
Deferred compensation related to restricted Units................................. (2,278) (1,650)
------------ -------------
Total partners' capital......................................................... 61,557 63,542
------------ -------------
$ 155,656 $ 156,204
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
82
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- ------------------------
1996 1997 1996 1997
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 4,872 $ 5,581 $ 10,499 $ 11,770
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 4,001 3,979 11,748 11,898
Other noncash income and expense items........................ 448 566 1,444 1,254
Changes in other operating assets and liabilities............. (527) 3,979 1,866 977
--------- ---------- ----------- -----------
Total adjustments........................................... 3,922 8,524 15,058 14,129
--------- ---------- ----------- -----------
Net cash provided by operating activities......................... 8,794 14,105 25,557 25,899
--------- ---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment.............................. (2,277) (4,893) (9,282) (10,314)
Proceeds from sales of property and equipment..................... 190 -- 573 --
Investment in/advances to joint venture........................... -- (400) -- (400)
Payments on notes receivable...................................... 84 88 1,671 889
--------- ---------- ----------- -----------
Net cash used in investing activities............................. (2,003) (5,205) (7,038) (9,825)
--------- ---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt...................................... -- 4,750 13,550 34,100
Payments on long-term debt........................................ (4,700) (7,900) (21,575) (39,050)
Principal payments under capital lease obligations................ (512) (391) (1,553) (1,379)
Distributions to partners......................................... (3,475) (3,475) (10,428) (10,428)
--------- ---------- ----------- -----------
Net cash used in financing activities............................. (8,687) (7,016) (20,006) (16,757)
--------- ---------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.............. (1,896) 1,884 (1,487) (683)
--------- ---------- ----------- -----------
CASH AND CASH EQUIVALENTS:
Balance, beginning of period...................................... 2,234 170 1,825 2,737
--------- ---------- ----------- -----------
Balance, end of period............................................ $ 338 $ 2,054 $ 338 $ 2,054
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
83
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited financial statements of Perkins Family
Restaurants, L.P. (the "Partnership") have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include all information and notes
necessary for complete financial statements in conformity with generally
accepted accounting principles. The results for the periods indicated are
unaudited but reflect all adjustments (consisting only of normal recurring
adjustments) which management considers necessary for a fair presentation of the
operating results. Results of operations for the interim periods are not
necessarily indicative of a full year of operations. The notes to the financial
statements contained in the 1996 Annual Report to Unitholders should be read in
conjunction with these statements.
Certain prior year amounts have been reclassified to conform to current year
presentation.
The Partnership is managed by Perkins Management Company, Inc. ("PMC"). PMC
is also the general partner of Perkins Restaurants Operating Company, L.P.
("PROC"), the entity through which the operations of the Partnership are
conducted. As general partner of the Partnership and PROC, PMC does not receive
any compensation other than amounts attributable to its 1% general partner's
interest in each of the Partnership and PROC. The Partnership reimburses PMC for
all of its direct and indirect costs (principally general and administrative
costs) allocable to the Partnership.
NET INCOME PER UNIT
Net Income Per Unit is computed as follows (in thousands, except per unit
amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income as reported............................ $ 4,872 $ 5,581 $ 10,499 $ 11,770
Less: 1% general partner's interest............... (49) (56) (105) (118)
--------- --------- --------- ---------
Net income applicable to units.................... $ 4,823 $ 5,525 $ 10,394 $ 11,652
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average units outstanding................ 10,289 10,338 10,289 10,338
Net income per unit............................... $ 0.47 $ 0.53 $ 1.01 $ 1.13
</TABLE>
WEIGHTED AVERAGE UNITS OUTSTANDING
Weighted average units outstanding are computed as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average units............................ 10,284 10,284 10,284 10,284
Weighted average equivalent units................. 5 54 5 54
--------- --------- --------- ---------
Weighted average units outstanding................ 10,289 10,338 10,289 10,338
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
84
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONTINGENCIES
In the past, the Partnership has sponsored financing programs offered by
certain lending institutions to assist its franchisees procure funds for the
construction of new franchised restaurants and to purchase and install in-store
bakeries. The Partnership provides a limited guaranty of the funds borrowed. At
September 30, 1997, there were approximately $3,739,000 in borrowings
outstanding under these programs. The Partnership has guaranteed $1,246,000 of
these borrowings. No additional borrowings are available under these programs.
The Partnership's largest franchisee operates 41 restaurants, 37 of which
are leased from unaffiliated lessors, pursuant to a temporary license agreement
expiring December 31, 1997. The temporary agreement was entered into as a result
of negotiations following the franchisee's defaults in its payments and certain
other obligations under its prior agreements with the Partnership and in order
to give the franchisee an opportunity to seek permanent financing in an amount
sufficient to permit it to refinance its existing obligations to its creditors,
including the Partnership, and to remodel its restaurants. Although the
franchisee has represented to the Partnership that it is in discussions with
possible financing sources, the Partnership believes that if the franchisee is
ultimately unsuccessful and loses control of its properties, a majority of the
restaurants can continue to be operated as Perkins Family Restaurants pursuant
to arrangements between the Partnership and the owners of the properties. In the
event such restaurants cannot continue to be operated as Perkins Family
Restaurants, the Partnership would no longer receive the revenues paid by the
franchisee. During 1996, the franchisee's net royalty payments to the
Partnership were approximately $1.5 million and at September 30, 1997, the
franchisee was delinquent in its royalty obligations in the amount of
approximately $545,000.
Two lawsuits were filed on August 5, 1997 in the Delaware Chancery Court in
Wilmington, Delaware in response to the announcement of the initial proposal of
The Restaurant Company ("TRC") to acquire through a merger all of the
outstanding Units of the Partnership owned by public unitholders. See further
description of such at Part II Item 5. The suits, which were consolidated into a
single proceeding entitled IN RE PERKINS FAMILY RESTAURANTS, L.P. SHAREHOLDERS
LITIGATION, consolidated Civil Action No. 15853 (the "Delaware Litigation"),
requested the court to certify the litigation as a class action. The plaintiffs
sought to enjoin the proposed merger, alleging that the Partnership, TRC and
PMC, and the individual defendants, as officers and directors of PMC, violated
their fiduciary duties to the public unitholders by agreeing to such a merger.
In the alternative, the plaintiffs sought rescission of the merger and
rescissory and compensatory damages, together with costs and expenses, including
attorneys' and experts' fees.
On September 11, 1997, the plaintiffs and defendants entered into an
agreement settling the Delaware litigation, subject to court approval. The
defendants have agreed to pay attorneys' fees of no more than $1,350,000 and
expenses of no more than $85,000 if awarded by the court, although the
defendants intend to contest the amount of such fees and expenses. It is
expected that a hearing to finally approve the proposed settlement will occur in
early December 1997.
The Partnership is a party to various other 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 materially
adverse effect on the Partnership's financial position or results of operations.
85
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CASH FLOW INFORMATION
The increase or decrease in cash and cash equivalents due to changes in
operating assets and liabilities for the three and nine months ended September
30, consisted of the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(Increase) Decrease in:
Receivables..................................... $ 774 $ (1,193) $ 1,774 $ (2,158)
Inventories..................................... (248) 85 199 84
Prepaid expenses and other current assets....... 86 192 (926) (473)
Other assets.................................... 32 (297) 250 (1,380)
Increase (Decrease) in:
Accounts payable................................ 274 4,941 274 3,668
Accrued expenses................................ (1,870) (94) (111) 697
Other liabilities............................... 425 345 406 539
--------- --------- --------- ---------
$ (527) $ 3,979 $ 1,866 $ 977
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The Partnership paid interest of $1,303,000 and $1,115,000 during the third
quarters of 1996 and 1997, respectively, and $4,179,000 and $3,646,000 for the
nine months ended September 30, 1996, and 1997, respectively.
86
<PAGE>
MARKET FOR PARTNERSHIP'S UNITS; DISTRIBUTIONS
Units of the Partnership are traded on the New York Stock Exchange under the
symbol PFR.
The following table sets forth the range of high and low closing prices of
Units for each full quarterly period for the two most recent years, as reported
by the New York Stock Exchange.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED HIGH LOW
- ------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
March 31, 1995................................................................. 13 1/2 10 1/4
June 30, 1995.................................................................. 13 11
September 30, 1995............................................................. 12 3/4 11 1/2
December 31, 1995.............................................................. 12 3/8 11
March 31, 1996................................................................. 13 1/8 11 3/8
June 30, 1996.................................................................. 12 3/4 11 7/8
September 30, 1996............................................................. 12 7/8 11 3/4
December 31, 1996.............................................................. 13 1/2 12 1/8
March 31, 1997................................................................. 14 7/8 12 5/8
June 30, 1997.................................................................. 13 5/8 10 3/8
September 30, 1997............................................................. 13 7/8 10 1/4
</TABLE>
As of September 30, 1997, the Partnership had approximately 10,487,495 Units
and as of September 30, 1997, approximately 1,436 Unitholders of record.
In the past two years, the Partnership has paid regular quarterly
distributions to Unitholders of $0.325 per Unit. If the Merger is consummated,
the Partnership's final quarterly distribution to Public Unitholders will be the
$0.325 per Unit cash distribution for the third quarter of the Partnership's
fiscal year paid to persons who were Unitholders of record on September 30,
1997. If the Merger is not consummated, no decision has been made as to whether
the Partnership would pay a distribution respecting the fourth quarter of the
Partnership's 1997 fiscal year. For periods beginning after December 31, 1997,
further distributions by the Partnership will be reduced and may be eliminated
if the Merger is not consummated.
WHERE YOU CAN FIND MORE INFORMATION
The Partnership files annual, quarterly and special reports and other
information with the SEC. You may read and copy any reports, statements or other
information we file at the SEC's public reference rooms in Washington, D.C., New
York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. Our SEC filings are also
available to the public from commercial document retrieval services and at the
web site maintained by the SEC at "http:// www.sec.gov."
TRC and its related entities filed a "Rule 13e-3 Transaction Statement" on
Schedule 13E-3 with the SEC in connection with the Merger. As allowed by SEC
rules, this Proxy Statement does not contain all the information you can find in
the Schedule 13E-3 or its exhibits.
Unitholders may obtain the Schedule 13E-3 and any exhibits thereto by
requesting them in writing or by telephone from Perkins Family Restaurants,
L.P., 6075 Poplar Avenue, Suite 800, Memphis, TN 38119-4709, Attn.: Investor
Relations, telephone (888) 279-4542.
If you would like to request documents from us, please do so by December 8,
1997 to receive them before the Special Meeting.
You should rely only on the information contained in this Proxy Statement to
vote on the Merger Agreement and the Merger. We have not authorized anyone to
provide you with information that is different from what is contained in this
Proxy Statement. You should not assume that the information contained in the
Proxy Statement is accurate as of any date other than the date of this Proxy
Statement and nothing should create any implication to the contrary.
87
<PAGE>
SCHEDULE I
THE PARTNERSHIP AND THE GENERAL PARTNER.
Set forth below is the name, citizenship, current business address,
principal occupation and employment history for at least the past five years of
each director and executive officer of the General Partner of the Partnership.
Except where otherwise indicated, the business address of each of the following
persons is c/o the Partnership, 6075 Poplar Avenue, Suite 800, Memphis, TN
38119-4709 and each of the following persons is a citizen of the United States.
DONALD N. SMITH
Donald N. Smith has been Chairman of the Board and Chief Executive Officer
of PMC, PRI and TRC since 1986. Mr. Smith has also been Chairman of the Board,
Chief Executive Officer and President of Friendly Ice Cream Corporation ("FICC")
since 1988. Prior to joining TRC, Mr. Smith was President and Chief Executive
Officer for Diversifoods, Inc. from 1983 to October 1985. From 1980 to 1983, Mr.
Smith was Senior Vice President, PepsiCo., Inc. and was President of its Food
Service Division. He was responsible for the operations of Pizza Hut Inc. and
Taco Bell Corp., as well as North American Van Lines, Lee Way Motor Freight,
Inc., PepsiCo. Foods International and La Petite Boulangerie. Prior to 1980, Mr.
Smith was President and Chief Executive Officer of Burger King Corporation and
Senior Executive Vice President and Chief Operations Officer for McDonald's
Corporation.
LEE N. ABRAMS
Lee N. Abrams was elected a Director of PMC in September 1986 and appointed
Chairman of the Audit Committee for PMC in October 1986. He is a senior partner
in the Chicago, Illinois law firm of Mayer, Brown & Platt. He has been
associated with that firm since his graduation from the University of Michigan
Law School in 1957. He specializes in franchise and antitrust law. He is also a
Certified Public Accountant. Mr. Abrams' business address is Mayer, Brown &
Platt, 190 South LaSalle Street, Chicago, IL 60603-3441
CHARLES L. ATWOOD
Charles L. Atwood was elected a Director of PMC, PRI and TRC in July 1997.
He has been employed by Harrah's and its predecessors as Vice President and
Treasurer and in various other financial related positions for more than the
past five years. Mr. Atwood also serves on the board of directors of Interactive
Entertainment, Ltd.
STEVEN L. EZZES
Steven L. Ezzes was elected a Director of PMC, PRI, TRC and FICC and became
a member of Perkins Restricted Limited Partnership Unit Plan Committee in
February 1996. Since October 1996, Mr. Ezzes has been a Managing Director of
Scotia Capital Markets (U.S.A.), Inc. From January 1995 to October 1996, Mr.
Ezzes was a private investor and from May 1992 to January 1995, Mr. Ezzes was a
Managing Director of Lehman Brothers, Inc. Mr. Ezzes previously served as a
Director of PMC, PRI, TRC and FICC from January 1991 to May 1992. Mr. Ezzes is a
director of OzEmail, a company that provides internet telephony in Australia and
New Zealand.
CHARLES A. LEDSINGER, JR.
Charles A. Ledsinger, Jr. was elected a Director of PMC in October 1991. He
is also a member of Perkins Restricted Limited Partnership Unit Plan Committee.
Since May 1997, Mr. Ledsinger has served as Senior Vice President and Chief
Financial Officer of St. Joe Corporation. From June 1995 until
S-1
<PAGE>
May 1997, Mr. Ledsinger was Senior Vice President and Chief Financial Officer of
Harrah's Entertainment, Inc. For more than three years prior, Mr. Ledsinger
served as Senior Vice President and Chief Financial Officer of The Promus
Companies Incorporated, Harrah's former parent. Mr. Ledsinger is also a director
of FICC and TBC Corporation, a company specializing in the distribution and sale
of tires.
D. MICHAEL MEEKS
D. Michael Meeks was elected a Director of PMC and became a member of the
Audit Committee for PMC in August 1996. Mr. Meeks has been a private investor
for more than the past five years. Mr. Meeks previously served as a director of
PMC, PRI, TRC and FICC from December 1987 to October 1991.
RICHARD K. ARRAS
Richard K. Arras has been President and Chief Operating Officer of PMC since
November 1988 and has held varying positions with Perkins since 1979.
MICHAEL D. KELLY
Michael D. Kelly was elected Executive Vice President, Marketing, of PMC in
March 1993. From January 1991 to February 1993, Mr. Kelly was Vice President,
Marketing, for FICC.
STEVEN R. MCCLELLAN
Steven R. McClellan has served as Executive Vice President and Chief
Financial Officer of PMC since September 1996. From June 1994 to September 1996
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. For more than two years prior, he was Senior Vice President of
NationsBank.
JACK W. WILLINGHAM
Jack W. Willingham was elected Executive Vice President, Restaurant
Development of PMC in April 1994. From July 1991 to April 1994, Mr. Willingham
served as Vice President, Corporate Development, of PMC.
JAMES F. BARRASSO
James F. Barrasso has been Vice President, Foodservice Development of PMC
since February 1994. For more than two years prior, he served as Vice President,
Operations Administration of PMC.
MICHAEL P. DONAHOE
Michael P. Donahoe has been Vice President, Controller of PMC since October
1993. He has also been Vice President, Controller and Treasurer of TRC and PRI
since January 1986 and November 1988, respectively. From May 1989 to October
1993, he was Vice President, Chief Financial Officer and Treasurer of PMC. He is
a Certified Public Accountant.
WILLIAM S. FORGIONE
William S. Forgione was elected Vice President, Human Resources of PMC
effective August 11, 1997. From 1994 to August 1997, he was Vice President,
Human Resources of UT Medical Group, Inc. and from 1992 to 1994, Worldwide
Program Manager for Digital Equipment Corporation.
S-2
<PAGE>
CLYDE J. HARRINGTON
Clyde J. Harrington was elected Vice President, Operations Services of PMC
in September 1996. From August 1995 to September 1996 he was Director, Systems
Operations of the Partnership and from March 1995 to August 1995 he served as
Director in Training for the Operating Partnership. From November 1992 to March
1995 Mr. Harrington served as Director, Operations for the Restaurant Division
of PepsiCo., Inc. and from March 1992 to November 1992 he served as Director of
Delivery Development for Pizza Hut, Inc.
PATRICK W. ORTT
Patrick W. Ortt was elected Vice President, Operations--Eastern Division of
PMC in September 1996. From March 1993 to September 1996, Mr. Ortt served as
Director, Systems Operations of the Operating Partnership. For more than two
years prior, he was Vice President, Operations of Pasta Lovers Trattoria, Inc.
STEVEN J. PAHL
Steven J. Pahl was elected Vice President, Operations--Western Division of
PMC in September 1996. From November 1988 to September 1996, Mr. Pahl served as
Director, System Operations of the Operating Partnership.
ANTHONY C. SETA
Anthony C. Seta was elected Vice President, Research and Development of PMC
in April 1994. From August 1992 to April 1994, he served as Vice President, Food
and Beverage for Blackeyed Pea Restaurants, Inc. For more than a year prior, he
was the owner and chef of an independent restaurant. Mr. Seta also acted as a
consultant to Kenny Rogers Roasters from January 1992 to August 1992.
ROBERT J. WINTERS
Robert J. Winters was elected Vice President, Franchise Development of PMC
in October 1996. From March 1993 to October 1996, he served as Senior Director,
Franchise Development of PMC. For more than a year prior, he was Director,
Training and Development of PMC.
DONALD F. WISEMAN
Donald F. Wiseman has been Vice President, General Counsel and Secretary of
PMC since December 1991 and the Secretary of TRC and PRI since September 1997.
Members of PMC's Board of Directors serve until such time as their
successors are elected and qualified. Officers serve at the pleasure of the
Board of Directors.
PERKINS RESTAURANTS, INC. AND THE RESTAURANT COMPANY
Set forth below is the name, citizenship, principal occupation and
employment history for at least the past five years of each director and officer
of PRI and TRC. The principal executive offices of PRI and TRC are located at
One Pierce Place, Suite 100 East, Itasca, IL 60143-2615 and each of the
following persons is a citizen of the United States.
DONALD N. SMITH
Donald N. Smith has been the Chairman of the Board and Chief Executive
Officer of PMC, PRI and TRC since 1986. He has been the Chairman of the Board
and Chief Executive Officer of FICC since 1988. He is also a member of Perkins
Restricted Limited Partnership Unit Plan Committee.
S-3
<PAGE>
STEVEN L. EZZES
Steven L. Ezzes was elected a Director of PMC, PRI, TRC and FICC and became
a member of Perkins Restricted Limited Partnership Unit Plan Committee in
February 1996. Since October 1996, Mr. Ezzes has been a Managing Director of
Scotia Capital Markets (U.S.A.), Inc. From January 1995 to October 1996, Mr.
Ezzes was a private investor and from May 1992 to January 1995, Mr. Ezzes was a
Managing Director of Lehman Brothers, Inc. Mr. Ezzes previously served as a
Director of PMC, PRI, TRC and FICC from January 1991 to May 1992. Mr. Ezzes is a
director of OzEmail, a company that provides internet telephony in Australia and
New Zealand.
CHARLES L. ATWOOD
Charles L. Atwood was elected a Director of PMC, PRI and TRC in July, 1997.
He has been employed by Harrah's and its predecessors as Vice President and
Treasurer and in various other financial related positions for more than the
past five years. Mr. Atwood also serves on the board of directors of Interactive
Entertainment, Ltd.
LARRY W. BROWNE
Larry W. Browne has served as Executive Vice President, Corporate Finance,
General Counsel and Secretary of TRC and PRI since November 1985. From 1988
until December 1996, Mr. Browne served as Senior Vice President, Corporate
Finance of the Partnership. Since October 1988, Mr. Browne has served as
Executive Vice President, Corporate Finance, General Counsel and Clerk of FICC.
MICHAEL P. DONAHOE
Michael P. Donahoe has been Vice President, Controller of PMC since October
1993. He has also been Vice President, Controller and Treasurer of TRC and PRI
since January 1986 and November 1988, respectively. From May 1989 to October
1993, he was Vice President, Chief Financial Officer and Treasurer of PMC. He is
a Certified Public Accountant.
DONALD F. WISEMAN
Donald F. Wiseman has been Vice President, General Counsel and Secretary of
PMC since December 1991 and the Secretary of TRC and PRI since September 1997.
S-4
<PAGE>
ANNEX A
SECOND AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMONG
THE RESTAURANT COMPANY,
PERKINS ACQUISITION CORP.
AND
PERKINS FAMILY RESTAURANTS, L.P.
DATED AS OF SEPTEMBER 11, 1997
<PAGE>
TABLE OF CONTENTS
ARTICLE I
THE MERGER
<TABLE>
<S> <C>
SECTION 1.01 The Merger.............................................................. A-3
SECTION 1.02 Effective Time; Closing................................................. A-3
SECTION 1.03 Effect of the Merger.................................................... A-3
SECTION 1.04 Agreement of Limited Partnership........................................ A-4
SECTION 1.05 Conversion of Securities; Merger Consideration.......................... A-4
SECTION 1.06 Surrender of Units...................................................... A-4
SECTION 1.07 Restricted Limited Partnership Unit Plan................................ A-5
SECTION 1.08 Redemption.............................................................. A-5
SECTION 1.09 PROC Merger............................................................. A-5
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PERKINS
SECTION 2.01 Organization and Qualification.......................................... A-5
SECTION 2.02 Capitalization.......................................................... A-6
SECTION 2.03 Authority Relative to this Agreement.................................... A-6
SECTION 2.04 No Conflict; Required Filings and Consents.............................. A-6
SECTION 2.05 Compliance.............................................................. A-7
SECTION 2.06 Litigation.............................................................. A-7
SECTION 2.07 SEC Filings; Financial Statements....................................... A-7
SECTION 2.08 Proxy Statement......................................................... A-7
SECTION 2.09 Brokers................................................................. A-8
SECTION 2.10 Fairness Opinion........................................................ A-8
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MERGERCO. AND TRC
SECTION 3.01 Corporate Organization.................................................. A-8
SECTION 3.02 Authority Relative to this Agreement.................................... A-8
SECTION 3.03 No Conflict; Required Filings and Consents.............................. A-8
SECTION 3.04 Proxy Statement......................................................... A-9
SECTION 3.05 Brokers................................................................. A-9
ARTICLE IV
ADDITIONAL AGREEMENTS
SECTION 4.01 Meeting of Unitholders.................................................. A-9
SECTION 4.02 Proxy Statement and Schedule 13E-3...................................... A-9
SECTION 4.03 Further Action; Reasonable Best Efforts................................. A-10
SECTION 4.04 Public Announcements.................................................... A-10
SECTION 4.05 Financing............................................................... A-10
SECTION 4.06 Updated Fairness Opinion................................................ A-10
SECTION 4.07 Distributions........................................................... A-10
SECTION 4.08 Capital Contributions................................................... A-10
ARTICLE V
CONDITIONS TO THE MERGER
SECTION 5.01 Conditions to Each Party's Obligation to Effect the Merger.............. A-10
SECTION 5.02 Additional Conditions to Obligations of TRC and MergerCo. to Effect the
Merger.............................................................................. A-11
SECTION 5.03 Additional Conditions to Obligation of Perkins to effect the Merger..... A-11
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C>
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER
SECTION 6.01 Termination............................................................. A-12
SECTION 6.02 Effect of Termination................................................... A-12
SECTION 6.03 Fees and Expenses....................................................... A-12
SECTION 6.04 Amendment............................................................... A-12
SECTION 6.05 Waiver.................................................................. A-12
ARTICLE VII
GENERAL PROVISIONS
SECTION 7.01 Non-Survival of Representations, Warranties and Agreements.............. A-12
SECTION 7.02 Notices................................................................. A-13
SECTION 7.03 Certain Definitions..................................................... A-13
SECTION 7.04 Severability............................................................ A-14
SECTION 7.05 Entire Agreement; Assignment............................................ A-14
SECTION 7.06 Parties in Interest..................................................... A-14
SECTION 7.07 Specific Performance.................................................... A-14
SECTION 7.08 Governing Law........................................................... A-14
SECTION 7.09 Headings................................................................ A-14
SECTION 7.10 Counterparts............................................................ A-14
</TABLE>
A-2
<PAGE>
SECOND AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of
September 11, 1997 (this "AGREEMENT") among The Restaurant Company, a Delaware
corporation ("TRC"), Perkins Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of Perkins Management Company, Inc. ("MERGERCO."), and
Perkins Family Restaurants, L.P., a Delaware limited partnership ("PERKINS").
WHEREAS, the Board of Directors (the "BOARD") of Perkins Management Company,
Inc. ("PMC" or in its capacity as the sole general partner of Perkins, the
"GENERAL PARTNER"), has (A) determined that this Agreement and the transactions
contemplated hereby (the "TRANSACTIONS") are fair to and in the best interests
of holders (other than TRC, its affiliates and the officers, directors and key
employees of TRC and its affiliates) of depositary units ("UNITS") representing
limited partners' interests in Perkins (the "PUBLIC UNITHOLDERS"), (B) approved
and adopted this Agreement and the Transactions, including the merger of
MergerCo. with and into Perkins (the "MERGER") in accordance with the Delaware
General Corporation Law (the "DGCL") and the Delaware Revised Uniform Limited
Partnership Act ("DRULPA") and upon the terms and subject to the conditions set
forth herein, and (C) recommended that the Public Unitholders approve and adopt
this Agreement and the Transactions; and
WHEREAS, Morgan Keegan & Company, Inc. ("MORGAN KEEGAN") has delivered to
the Board a written opinion that the consideration to be received by the Public
Unitholders pursuant to the Merger is fair to the Public Unitholders from a
financial point of view (the "MORGAN KEEGAN OPINION"); and
WHEREAS, the Boards of Directors of MergerCo. and TRC have each determined
that this Agreement and the Transactions, including the Merger, are in the best
interests of the stockholders of MergerCo. and TRC; and
WHEREAS, in order to protect the interests of the Public Unitholders, the
Board has determined that the Merger and this Agreement require the affirmative
vote of the holders of a majority of the Units that are held by the Public
Unitholders (the "PUBLIC UNITS") actually voting on the Merger ("PUBLIC
UNITHOLDER APPROVAL");
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, TRC,
MergerCo. and the General Partner, on behalf of Perkins, hereby agree as
follows:
ARTICLE I
THE MERGER
SECTION 1.01 THE MERGER. Upon the terms and subject to the conditions set
forth in ARTICLE V, and in accordance with Section 263 of the DGCL and Section
17-211 of the DRULPA, at the Effective Time (as hereinafter defined) MergerCo.
shall be merged with and into Perkins. As a result of the Merger, the separate
corporate existence of MergerCo. shall cease and Perkins shall continue as the
surviving partnership after the Merger (the "SURVIVING PARTNERSHIP").
SECTION 1.02 EFFECTIVE TIME; CLOSING. As promptly as practicable after the
satisfaction or, if permissible, waiver of the conditions set forth in ARTICLE
V, the parties hereto shall cause the Merger to be consummated by filing a
certificate of merger with the Secretary of State of the State of Delaware (the
"CERTIFICATE OF MERGER"), in such form as is required by, and executed in
accordance with the relevant provisions of, the DGCL and the DRULPA (the date
and time of such filing being the "EFFECTIVE TIME"). Prior to such filing, a
closing shall be held at the offices of Mayer, Brown & Platt, 190 South LaSalle
Street, Chicago, Illinois, 60603, or such other place as the parties shall
agree, for the purpose of confirming the satisfaction or waiver, as the case may
be, of the conditions set forth in ARTICLE V (the "CLOSING").
SECTION 1.03 EFFECT OF THE MERGER. At the Effective Time, the effect of
the Merger shall be as provided in the applicable provisions of the DGCL and
DRULPA. Without limiting the generality of the foregoing, and subject thereto,
at the Effective Time all the property, rights, privileges, powers and
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franchises of MergerCo. and Perkins shall vest in the Surviving Partnership, and
all debts, liabilities, obligations, restrictions, disabilities and duties of
MergerCo. and Perkins shall become the debts, liabilities, obligations,
restrictions, disabilities and duties of the Surviving Partnership.
SECTION 1.04 AGREEMENT OF LIMITED PARTNERSHIP. The Agreement of Limited
Partnership of Perkins Family Restaurants, L.P. (the "PARTNERSHIP AGREEMENT")
shall be the Agreement of Limited Partnership of the Surviving Partnership and
thereafter may be amended as provided in the Partnership Agreement or by law.
This Agreement shall effect no amendment or other change whatsoever to the
Partnership Agreement except that the Partnership Agreement shall be amended as
provided in EXHIBIT 1.04.
SECTION 1.05 CONVERSION OF SECURITIES; MERGER CONSIDERATION. At the
Effective Time, by virtue of the Merger and without any action on the part of
TRC, MergerCo. or the holders of any of the following securities:
(a) Each Public Unit and each Unit held by any person other than TRC or
its direct or indirect subsidiaries, including any Units that are then
outstanding but subject to restriction and held by participants in the Unit
Plan (as hereinafter defined), shall, upon surrender in the manner provided
in SECTION 1.06 of the depositary receipt that formerly evidenced such Unit
(each a "RECEIPT"), be canceled and shall be converted automatically into
the right to receive an amount equal to $14 per Unit in cash (the "MERGER
CONSIDERATION") payable, without interest, to the holder of such Unit;
(b) Each general or limited partnership interest of Perkins owned by TRC
or any direct or indirect subsidiary of TRC immediately prior to the
Effective Time shall remain a general or limited partnership interest of the
Surviving Partnership and no payment or distribution shall be made with
respect thereto;
(c) Each Unit held in the treasury of Perkins immediately prior to the
Effective Time shall be canceled and retired and no payment shall be made
with respect thereto; and
(d) Each share of Common Stock, par value $.01 per share, of MergerCo.
issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one Unit in the Surviving Partnership.
SECTION 1.06 SURRENDER OF UNITS. (a) Prior to the Effective Time, TRC
shall designate a bank or trust company to act as agent (the "PAYING AGENT") for
the holders of Units to receive the funds to which they shall become entitled
pursuant to SECTION 1.05(A). Promptly after the Effective Time, the Surviving
Partnership shall cause to be mailed to each person who was, at the Effective
Time, a holder of record of Units entitled to receive the Merger Consideration
pursuant to SECTION 1.05(A) a form of letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the Receipts
shall pass, only upon proper delivery of the Receipts to the Paying Agent) and
instructions for use in effecting the surrender of the Receipts pursuant to such
letter of transmittal. Upon surrender to the Paying Agent of a Receipt, together
with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, and such other documents as may be
required pursuant to such instructions, the holder of such Receipt shall be
entitled to receive in exchange therefor the Merger Consideration for each Unit
formerly evidenced by such Receipt, and such Receipt shall then be canceled. No
interest shall accrue or be paid on the Merger Consideration payable upon the
surrender of any Receipt for the benefit of the holder of such Receipt. If
payment of the Merger Consideration is to be made to a person other than the
person in whose name the surrendered Receipt is registered on the books of the
depositary, it shall be a condition of payment that the Receipt so surrendered
shall be endorsed properly or otherwise be in proper form for transfer and that
the person requesting such payment shall have paid all transfer and other taxes
required by reason of the payment of the Merger Consideration to a person other
than the registered holder of the Receipt surrendered or shall have established
to the satisfaction of the Surviving Partnership that such taxes either have
been paid or are not applicable.
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(b) When and as needed, TRC, MergerCo. or Perkins shall deposit, or
cause to be deposited, in trust with the Paying Agent the Merger
Consideration to which the holders of Units shall be entitled at the
Effective Time pursuant to SECTION 1.05(A) hereof.
(c) The Merger Consideration shall be invested by the Paying Agent;
PROVIDED, that such investments shall be limited to direct obligations of
the United States of America, obligations for which the full faith and
credit of the United States of America is pledged to provide for the payment
of principal and interest, commercial paper rated of the highest quality by
Moody's Investors Services, Inc. or Standard & Poor's, or certificates of
deposit issued by a commercial bank having at least $1,000,000,000 in
assets; and PROVIDED, FURTHER, that no loss on investment made pursuant to
this SECTION 1.06(C) shall relieve TRC or MergerCo. of its obligation to pay
the Merger Consideration pursuant to SECTION 1.05(A).
(d) At any time following the sixth month after the Effective Time, the
Surviving Partnership shall be entitled to require the Paying Agent to
deliver to it any funds which had been made available to the Paying Agent
and not disbursed to holders of Units (including, without limitation, all
interest and other income received by the Paying Agent in respect of all
funds made available to it), and thereafter such holders shall be entitled
to look to the Surviving Partnership (subject to abandoned property, escheat
and other similar laws) only as general creditors thereof with respect to
any Merger Consideration that may be payable upon due surrender of the
Receipts held by them. Notwithstanding the foregoing, neither the Surviving
Partnership nor the Paying Agent shall be liable to any holder of a Unit for
any Merger Consideration delivered in respect of such Unit to a public
official pursuant to any abandoned property, escheat or other similar law.
(e) After the close of business on the day of the Effective Time, there
shall be no further registration of transfers of Units on the records of the
depositary for the Units. From and after the Effective Time, the holders of
Units outstanding immediately prior to the Effective Time shall cease to
have any rights with respect to such Units except as otherwise provided
herein or by applicable law.
SECTION 1.07 RESTRICTED LIMITED PARTNERSHIP UNIT PLAN. After the date of
this Agreement, Perkins shall not issue any Units pursuant to its Restricted
Limited Partnership Unit Plan of October 22, 1987 (the "UNIT PLAN") and shall
terminate the Unit Plan, effective as of the Effective Date.
SECTION 1.08 REDEMPTION. Immediately after the Effective Time, the
Surviving Partnership shall redeem, for $14 per Unit, all Units received by PMC
in connection with the conversion of MergerCo.'s common stock in the Merger.
SECTION 1.09 PROC MERGER. Prior to the Effective Time, Perkins will, and
TRC will cause PMC to, cause Perkins Restaurants Operating Company, L.P.
("PROC") to be merged with and into Perkins with Perkins being the surviving
partnership in such merger, on such terms as Perkins, TRC and PMC may determine.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PERKINS
Perkins hereby represents and warrants to MergerCo. and TRC that:
SECTION 2.01 ORGANIZATION AND QUALIFICATION. Perkins and each partnership
controlling, controlled by or under common control with Perkins (an "AFFILIATED
PARTNERSHIP"), including, without limitation, PROC, is a partnership duly
organized, validly existing and in good standing under Delaware law and has the
requisite power and authority and all necessary governmental approvals to own,
lease and operate its properties and to carry on its business as it is now being
conducted, except where the failure to be so organized, existing or in good
standing or to have such power, authority and governmental approvals would not,
individually or in the aggregate, have a Material Adverse Effect (as defined
below). Each of Perkins
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and its Affiliated Partnerships is duly qualified to do business, is in good
standing and has obtained all necessary licenses and approvals in all
jurisdictions where the character of the properties owned, leased or operated by
it or the nature of its business makes such qualification or licensing
necessary, except for such failures to be so qualified or licensed and in good
standing that would not, individually or in the aggregate, have a Material
Adverse Effect. When used in connection with Perkins or any Affiliated
Partnership, the term "MATERIAL ADVERSE EFFECT" means any change or effect that
is or is reasonably likely to be materially adverse to the business, operations,
properties, condition (financial or otherwise), assets or liabilities
(including, without limitation, contingent liabilities), results of operations
or prospects of Perkins and its Affiliated Partnerships taken as a whole. A true
and complete list of all Affiliated Partnerships, together with the jurisdiction
of organization of each Affiliated Partnership and the percentage of ownership
in each Affiliated Partnership owned by Perkins, is set forth in SECTION 2.01 of
the Disclosure Schedule to this Agreement previously delivered by Perkins to TRC
(the "DISCLOSURE SCHEDULE"). Except as disclosed in such SECTION 2.01, Perkins
does not directly or indirectly own any equity or similar interest in, or any
interest convertible into or exchangeable or exercisable for, any equity or
similar interest in, any corporation, partnership, joint venture or other
business association or entity.
SECTION 2.02 CAPITALIZATION. As of the date hereof, (i) 10,487,495 Units
are issued and outstanding, (ii) 5,043,000 Units are held by Perkins
Restaurants, Inc., a wholly owned subsidiary of TRC, (iii) 5,268,410 Units are
held by the Public Unitholders and (iv) 176,085 Units are held by employees of
TRC and its affiliates. Perkins owns a 99% limited partner's interest in PROC,
the entity through which the operations of Perkins are conducted. PMC, a wholly
owned subsidiary of Perkins Restaurants, Inc., a wholly owned subsidiary of TRC,
is the sole general partner of Perkins and PROC. PMC owns a 1% general partner's
interest in each partnership. Except as set forth in SECTION 4.08, there are no
options, warrants or rights, agreements, arrangements or commitments of any
character relating to the issued or unissued Units of Perkins or any Affiliated
Partnership or obligating Perkins or any Affiliated Partnership to issue or sell
any Units, or other partnership interests in, Perkins or any Affiliated
Partnership. Except as set forth in SECTION 1.08, there are no outstanding
contractual obligations of Perkins or any Affiliated Partnership to repurchase,
redeem or otherwise acquire any Units or any partnership interests of any
Affiliated Partnership.
SECTION 2.03 AUTHORITY RELATIVE TO THIS AGREEMENT. The General Partner has
all necessary partnership power and authority to execute and deliver this
Agreement on behalf of Perkins. The execution and delivery of this Agreement by
the General Partner, on behalf of Perkins, and the consummation by Perkins and
the General Partner of the Transactions have been duly and validly authorized by
all necessary partnership action and no other partnership proceedings on the
part of Perkins or the General Partner are necessary to authorize this Agreement
or to consummate the Transactions (other than, with respect to the Merger, (i)
the approval and adoption of this Agreement by a Majority Interest (as defined
in the Partnership Agreement), (ii) Public Unitholder Approval as required by
the terms of this Agreement, and (iii) the filing and recordation of appropriate
merger documents as required by the DGCL and DRULPA). This Agreement has been
duly and validly executed and delivered by the General Partner, on behalf of
Perkins, and, assuming the due authorization, execution and delivery by
MergerCo. and TRC, constitutes a legal, valid and binding obligation of Perkins,
enforceable against Perkins in accordance with its terms.
SECTION 2.04 NO CONFLICT; REQUIRED FILINGS AND CONSENTS. (a) The execution
and delivery of this Agreement by the General Partner, on behalf of Perkins, do
not, and the performance of this Agreement by Perkins will not, (i) conflict
with or violate the organizational documents of Perkins or any Affiliated
Partnership, (ii) conflict with or violate any law, rule, regulation, order,
judgment or decree applicable to Perkins or any Affiliated Partnership or by
which any property or asset of Perkins or any Affiliated Partnership is bound or
affected, or (iii) result in any breach of or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any right of termination, amendment, acceleration or cancellation
of, or result in the creation of a lien or other encumbrance on any property or
asset of Perkins or any Affiliated Partnership pursuant to, any note, bond,
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mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Perkins or any Affiliated Partnership is
a party or by which Perkins or any Affiliated Partnership or any of their
respective properties is bound or affected except, in the case of this clause
(iii), for breaches, defaults, rights, liens and encumbrances which would not
individually or in the aggregate have a Material Adverse Effect.
(b) The execution and delivery of this Agreement by the General Partner, on
behalf of Perkins, do not, and the performance of this Agreement by Perkins will
not, require any consent, approval, authorization or permit of, or filing with
or notification to, any governmental or regulatory authority, domestic or
foreign, except (i) for applicable requirements, if any, of the Securities and
Exchange Act of 1934, as amended (the "EXCHANGE ACT"), the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR ACT"), state securities
or "blue sky" laws ("BLUE SKY LAWS") and state takeover laws, and filing and
recordation of appropriate merger documents as required by the DGCL and the
DRULPA and (ii) where failure to obtain such consents, approvals, authorizations
or permits, or to make such filings or notifications, would not prevent or delay
consummation of the Merger, or otherwise prevent Perkins from performing its
obligations under this Agreement, and would not, individually or in the
aggregate, have a Material Adverse Effect.
SECTION 2.05 COMPLIANCE. Neither Perkins nor any Affiliated Partnership is
in conflict with, or in default or violation of, (i) any law, rule, regulation,
order, judgment or decree applicable to Perkins or any Affiliated Partnership or
by which any property or asset of Perkins or any Affiliated Partnership is bound
or affected, or (ii) any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to which
Perkins or any Affiliated Partnership is a party or by which Perkins or any
Affiliated Partnership or any property or asset of Perkins or any Affiliated
Partnership is bound or affected, except for any such conflicts, defaults or
violations that would not, individually or in the aggregate, have a Material
Adverse Effect.
SECTION 2.06 LITIGATION. Except as set forth in the SEC Filings (as
hereinafter defined) or SECTION 2.06 of the Disclosure Schedule, there are no
actions, suits, claims, investigations or proceedings pending or threatened
against, relating to, involving or otherwise affecting Perkins or any Affiliated
Partnership or any of their respective properties or assets before any court,
governmental agency, commission, or administrative or regulatory authority
which, if adversely decided, in the aggregate, would have a Material Adverse
Effect or would affect the consummation of the Transactions.
SECTION 2.07 SEC FILINGS; FINANCIAL STATEMENTS. As of their respective
dates, none of the reports, statements and registration statements filed by
Perkins with the SEC since January 1, 1994 (including, without limitation,
Perkins' (i) Annual Report on Form 10-K for the year ended December 31, 1996,
and (ii) Quarterly Reports on Form 10-Q for the three months ended March 31,
1997 and the six months ended June 30, 1997 (the "SEC FILINGS") contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of Perkins included in the SEC Filings
present fairly the financial position and the results of operations and cash
flows of Perkins as of the dates or for the periods indicated therein in
conformity with generally accepted accounting principles applied on a consistent
basis (except as otherwise indicated in such financial statements or the notes
thereto), subject, in the case of unaudited interim consolidated financial
statements, to normal recurring year-end adjustments.
SECTION 2.08 PROXY STATEMENT. The proxy statement to be sent to the
holders of Units (such proxy statement, as amended or supplemented, being
referred to herein as the "PROXY STATEMENT"), shall not, at the date the Proxy
Statement (or any amendment or supplement thereto) is first mailed to the
holders of Units, at the time of the Unitholders' Meeting (as hereinafter
defined) and at the Effective Time, be false or misleading with respect to any
material fact, or omit to state any material fact required to be stated therein
or necessary in order to make the statements made therein, in the light of the
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circumstances under which they are made, not misleading or necessary to correct
any statement in any earlier communication with respect to the solicitation of
proxies for the Unitholders' Meeting which shall have become false or
misleading. The Proxy Statement shall comply in all material respects as to form
with the requirements of the Exchange Act and the rules and regulations
thereunder.
SECTION 2.09 BROKERS. No broker, finder or investment banker (other than
Morgan Keegan) is entitled to any brokage, finder's or other fee or commission
in connection with the Transactions based upon arrangements made by or on behalf
of Perkins. Perkins has heretofore furnished to TRC a complete and correct copy
of all agreements between Perkins and Morgan Keegan pursuant to which such firm
would be entitled to any payment relating to the Transactions.
SECTION 2.10 FAIRNESS OPINION. The Board has received from Morgan Keegan
the Morgan Keegan Opinion.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MERGERCO. AND TRC
MergerCo. and TRC hereby, jointly and severally, represent and warrant to
Perkins that:
SECTION 3.01 CORPORATE ORGANIZATION. Each of MergerCo. and TRC is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has the requisite power and authority and all
necessary governmental approvals to own, lease and operate its properties and to
carry on its business as it is now being conducted, except where the failure to
be so organized, existing or in good standing or to have such power, authority
and governmental approvals would not, individually or in the aggregate, have a
TRC Material Adverse Effect (as defined below). When used in connection with
MergerCo. or TRC, the term "TRC MATERIAL ADVERSE EFFECT" means any change or
effect that is reasonably likely to be materially adverse to the business,
operations, properties, condition (financial or otherwise), assets or
liabilities (including, without limitation, contingent liabilities), results of
operations or prospects of MergerCo. or TRC and their respective subsidiaries
taken as a whole.
SECTION 3.02 AUTHORITY RELATIVE TO THIS AGREEMENT. Each of MergerCo. and
TRC has all necessary corporate power and authority to execute and deliver this
Agreement, to perform its obligations hereunder and to consummate the
Transactions. The execution and delivery of this Agreement by MergerCo. and TRC
and the consummation by MergerCo. and TRC of the Transactions have been duly and
validly authorized by all necessary corporate action and no other corporate
proceedings on the part of MergerCo. or TRC are necessary to authorize this
Agreement or to consummate the Transactions (other than, with respect to the
Merger, the filing and recordation of appropriate merger documents as required
by the DGCL and DRULPA). This Agreement has been duly and validly executed and
delivered by MergerCo. and TRC and, assuming the due authorization, execution
and delivery by Perkins, constitutes a legal, valid and binding obligation of
each of MergerCo. and TRC enforceable against each of MergerCo. and TRC in
accordance with its terms.
SECTION 3.03 NO CONFLICT; REQUIRED FILINGS AND CONSENTS. (a) The execution
and delivery of this Agreement by MergerCo. and TRC do not, and the performance
of this Agreement by MergerCo. and TRC will not, (i) conflict with or violate
the articles of incorporation or by-laws or similar organizational documents of
either MergerCo. or TRC, (ii) conflict with or violate any law, rule,
regulation, order, judgment or decree applicable to MergerCo. or TRC or by which
any property or asset of either of them is bound or affected, or (iii) result in
any breach of or constitute a default (or an event which with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or other encumbrance on any property or asset of MergerCo. or
TRC pursuant to, any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to which
MergerCo. or TRC is a party or by which MergerCo. or TRC or any property or
asset of either of them is bound or affected,
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except for any such breaches, defaults or other occurrences which would not,
individually or in the aggregate, have a TRC Material Adverse Effect.
(b) The execution and delivery of this Agreement by MergerCo. and TRC do not,
and the performance of this Agreement by MergerCo. and TRC will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental or regulatory authority, domestic or foreign, except (i)
for applicable requirements, if any, of the Exchange Act, the HSR Act, Blue Sky
Laws and state takeover laws and filing and recordation of appropriate merger
documents as required by the DGCL and the DRULPA and (ii) where failure to
obtain such consents, approvals, authorizations or permits, or to make such
filings or notifications, would not prevent or delay consummation of the Merger,
or otherwise prevent MergerCo. or TRC from performing their respective
obligations under this Agreement.
SECTION 3.04 PROXY STATEMENT. The information supplied by TRC for
inclusion in the Proxy Statement will not, on the date the Proxy Statement (or
any amendment or supplement thereto) is first mailed to the holders of Units, at
the time of the Unitholders' meeting and at the Effective Time, contain any
statement which, at such time and in light of the circumstances under which it
is made, is false or misleading with respect to any material fact, or omits to
state any material fact required to be stated therein or necessary in order to
make the statements therein not false or misleading or necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies in connection with the Unitholders' Meeting which shall have become
false or misleading. Notwithstanding the foregoing, MergerCo. and TRC make no
representation or warranty with respect to any information supplied by Perkins
or any of its representatives which is contained in any of the foregoing
documents.
SECTION 3.05 BROKERS. No broker, finder or investment banker (other than
Smith Barney, Inc.) is entitled to any brokerage, finder's or other fee or
commission in connection with the Transactions based upon arrangements made by
or on behalf of MergerCo. or TRC.
ARTICLE IV
ADDITIONAL AGREEMENTS
SECTION 4.01 MEETING OF UNITHOLDERS. (a) The General Partner shall, in
accordance with applicable law and the Partnership Agreement, (i) duly call,
give notice of, convene and hold a meeting of the holders of Units as soon as
practicable following the date hereof for the purpose of considering and taking
action on this Agreement and the Transactions (the "UNITHOLDERS' MEETING") and
(ii) subject to its fiduciary duties under applicable law, (A) include in the
Proxy Statement the recommendation of the General Partner that the Public
Unitholders approve and adopt this Agreement and the Transactions and (B) use
its reasonable best efforts to obtain such approval and adoption. At the
Unitholders' Meeting, TRC shall, if Public Unitholder Approval is obtained,
cause all Units and general partners' interests then owned by it and its direct
and indirect wholly owned subsidiaries to be voted in favor of the approval and
adoption of this Agreement and the Transactions.
SECTION 4.02 PROXY STATEMENT AND SCHEDULE 13E-3. (a) Perkins shall file
the Proxy Statement with the SEC under the Exchange Act, and shall use its
reasonable best efforts to have the Proxy Statement cleared by the SEC. TRC and
Perkins shall cooperate with each other in the preparation of the Proxy
Statement, and each of Perkins, TRC and MergerCo. agrees to use its reasonable
best efforts, after consultation with the other parties hereto, to respond
promptly to all comments of and requests by the SEC and to cause the Proxy
Statement and all required amendments and supplements thereto to be mailed to
the holders of Units at the earliest practicable time.
(b) TRC and Perkins shall together prepare and file with the SEC a Transaction
Statement on Schedule 13E-3 (the "SCHEDULE 13E-3") under the Exchange Act at the
time of filings made in connection with the Proxy Statement, and shall file with
the SEC appropriate amendments to the Schedule 13E-3. The
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Schedule 13E-3 will comply as to form in all material respects with the Exchange
Act and the rules and regulations promulgated thereunder.
SECTION 4.03 FURTHER ACTION; REASONABLE BEST EFFORTS. Upon the terms and
subject to the conditions hereof, each of the parties hereto shall use its
reasonable best efforts to take, or cause to be taken, all appropriate action,
and to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
Transactions, including, without limitation, making and facilitating a prompt
filing under the HSR Act and using its reasonable best efforts to obtain all
licenses, permits, consents, approvals, authorizations, qualifications and
orders of governmental authorities and parties to contracts with Perkins and its
Affiliated Partnerships as are necessary for the consummation of the
Transactions and to fulfill the conditions to the Merger. In case at any time
after the Effective Time any further action is necessary or desirable to carry
out the purposes of this Agreement, the proper officers and directors of each
party to this Agreement shall use their reasonable best efforts to take all such
action.
SECTION 4.04 PUBLIC ANNOUNCEMENTS. TRC and Perkins shall consult with each
other before issuing any press release or otherwise making any public statements
with respect to this Agreement or any Transaction and shall not issue any such
press release or make any such public statement prior to such consultation,
except as may be required by law.
SECTION 4.05 FINANCING. TRC shall use its reasonable best efforts to
obtain financing for aggregate funds sufficient to satisfy the obligations of
TRC, PMC, Perkins and MergerCo. hereunder, including, without limitation, the
obligation to pay the Merger Consideration pursuant to SECTION 1.05(A) and to
pay all related fees and expenses payable by TRC, PMC, Perkins and MergerCo. in
connection with the Merger and the other Transactions (the "FINANCING"). Perkins
shall use its reasonable best efforts to facilitate the Financing and at the
Closing shall be the borrower thereunder at TRC's request.
SECTION 4.06 UPDATED FAIRNESS OPINION. The Parties shall use their
reasonable best efforts to obtain from Morgan Keegan a written fairness opinion,
dated as of the date of the Proxy Statement, and otherwise substantially the
same as the Morgan Keegan Opinion (the "UPDATED MORGAN KEEGAN OPINION").
SECTION 4.07 DISTRIBUTIONS. Perkins shall make a final cash distribution
of $0.325 per Unit to Unitholders of record, as of September 30, 1997, for the
third quarter of Perkins' fiscal year, payable on or before November 20, 1997,
and between the date of such distribution and the Effective Time shall cease
making distributions.
SECTION 4.08 CAPITAL CONTRIBUTIONS. In order to prevent a "termination" of
the partnership for federal income tax purposes, TRC or one of its affiliates
agrees to contribute cash to Perkins in the amount of $4.410 million to acquire
newly issued Units of Perkins prior to the Effective Time and shall be entitled
to contribute any amount necessary to pay any costs incurred by Perkins or the
Affiliated Partnerships in connection with the repayment of their existing
indebtedness or any other transaction connected with the Merger; PROVIDED,
HOWEVER, that if the Merger is for any reason not consummated, such capital
contribution may be withdrawn and shall be repaid by Perkins promptly upon
notice from TRC or such affiliate. Any expense paid by TRC or its affiliates
pursuant to this SECTION 4.08 shall be specially allocated to the party paying
such expense in order to satisfy the "substantial economic effect" requirement
of Section 704(b) of the Internal Revenue Code of 1986, as amended.
ARTICLE V
CONDITIONS TO THE MERGER
SECTION 5.01 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligations of each party to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
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(a) This Agreement and the Transactions, including the Merger, shall
have been approved and adopted by a Majority Interest (as defined in the
Partnership Agreement) and by the affirmative vote of a majority of the
Public Units actually voting on the Merger;
(b) No governmental authority or other agency or commission or court of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any law, rule, regulation, executive order, decree, injunction or
other order (whether temporary, preliminary or permanent) which is then in
effect and has the effect of making the acquisition of Units by MergerCo. or
TRC or any affiliate of either of them illegal or otherwise restricting,
preventing or prohibiting consummation of the Transactions;
(c) Any waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated; and
(d) Morgan Keegan shall have provided and not withdrawn the Updated
Morgan Keegan Opinion.
SECTION 5.02 ADDITIONAL CONDITIONS TO OBLIGATIONS OF TRC AND MERGERCO. TO
EFFECT THE MERGER. The obligations of TRC and MergerCo. to effect the Merger
are further subject to the satisfaction or waiver of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Perkins contained in this Agreement shall be true and correct in all
material respects when made and on and as of the Effective Time, except for
changes contemplated by this Agreement, with the same force and effect as if
made on and as of the Effective Time, except for any representation or
warranty made or given as of a specified time, which shall have been true
and correct in all material respects as of such time;
(b) AGREEMENTS AND COVENANTS. Perkins shall have performed or complied
in all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the
Effective Time;
(c) NO MATERIAL ADVERSE EFFECT. Since the date of this Agreement, no
event shall have occurred or shall be reasonably expected to occur which
has, or is reasonably expected to have, a Material Adverse Effect;
(d) LITIGATION, ETC. There shall be no pending or threatened actions or
proceedings by any person against Perkins or its Affiliated Partnerships,
TRC, the General Partner, MergerCo., or any of their subsidiaries or any
director, officer or employee thereof challenging or in any way or in any
manner seeking to restrict or prohibit the Merger or any other Transaction
or seeking to obtain any damages against any person as a result of the
Merger or any other Transaction; and
(e) FINANCING. The Financing shall be available on terms satisfactory to
TRC.
SECTION 5.03 ADDITIONAL CONDITIONS TO OBLIGATION OF PERKINS TO EFFECT THE
MERGER. The obligation of Perkins to effect the Merger is further subject to
the satisfaction or waiver of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of TRC and MergerCo. contained in this Agreement shall be true and correct
in all material respects when made and on and as of the Effective Time,
except for changes contemplated by this Agreement, with the same force and
effect as if made on and as of the Effective Time, except for any
representation or warranty made or given as of a specified time, which shall
have been true and correct in all material respects as of such time; and
(b) AGREEMENTS AND COVENANTS. TRC and MergerCo. shall have performed or
complied in all material respects with all agreements and covenants required
by this Agreement to be performed or complied with by them on or prior to
the Effective Time.
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<PAGE>
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER
SECTION 6.01 TERMINATION. This Agreement may be terminated and the Merger
and the other Transactions may be abandoned at any time prior to the Effective
Time, notwithstanding any requisite approval and adoption of this Agreement and
the Transactions by the Public Unitholders:
(a) By mutual written consent duly authorized by the Boards of Directors
of MergerCo., TRC and the General Partner; or
(b) By either TRC or Perkins if (i) the Effective Time shall not have
occurred on or before February 28, 1998; PROVIDED, HOWEVER, that the right
to terminate this Agreement under this SECTION 6.01(B) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before such date or (ii) any court of
competent jurisdiction or other governmental authority shall have issued an
order, decree or ruling or taken any action restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or other
action shall have become final and nonappealable; or
(c) By Perkins if the Board shall have determined that it has a
fiduciary duty to withdraw its approval or recommendation of this Agreement,
the Merger or any other Transaction.
(d) By TRC if the Board shall have withdrawn or modified in a manner
adverse to TRC its approval or recommendation of this Agreement or the
Merger.
SECTION 6.02 EFFECT OF TERMINATION. In the event of the termination of
this Agreement pursuant to SECTION 6.01, this Agreement shall forthwith become
void, and there shall be no liability on the part of any party hereto except as
set forth in SECTIONS 6.03 and 7.01; PROVIDED, HOWEVER, that neither anything
herein nor the termination of this Agreement shall relieve any party from
liability for any breach hereof.
SECTION 6.03 FEES AND EXPENSES. All fees, costs and expenses incurred in
connection with this Agreement and the Transactions shall be paid by the party
bearing such cost.
SECTION 6.04 AMENDMENT. This Agreement may be amended by the parties
hereto by action taken by or on behalf of the Boards of Directors of TRC,
MergerCo. and the General Partner at any time prior to the Effective Time;
PROVIDED, HOWEVER, that after the approval and adoption of this Agreement and
the Transactions by the Public Unitholders, no amendment may be made which would
reduce the amount or change the type of consideration to which each Public
Unitholder shall be entitled upon consummation of the Merger. This Agreement may
not be amended except by an instrument in writing signed by the parties hereto.
SECTION 6.05 WAIVER. At any time prior to the Effective Time, any party
hereto may (i) extend the time for the performance of any obligation or other
act of any other party hereto, (ii) waive any inaccuracy in the representations
and warranties contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any agreement or condition contained herein. Any
such extension or waiver shall be valid if set forth in an instrument in writing
signed by the party or parties to be bound thereby.
ARTICLE VII
GENERAL PROVISIONS
SECTION 7.01 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. The representations, warranties and agreements in this Agreement
shall terminate at the Effective Time or upon the termination of this Agreement
pursuant to SECTION 6.01, as the case may be, except that the agreements set
forth in
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<PAGE>
Article I and SECTION 4.08 shall survive the Effective Time indefinitely and
those set forth in SECTION 6.02 and SECTION 6.03 shall survive termination
indefinitely.
SECTION 7.02 NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by cable,
telecopy, telegram or telex or by registered or certified mail (postage prepaid,
return receipt requested) to the respective parties at the following addresses
(or at such other address for a party as shall be specified in a notice given in
accordance with this SECTION 7.02):
if to TRC or MergerCo.:
Michael P. Donahoe
The Restaurant Company
One Pierce Place
Suite 100E
Itasca, IL 60143
Facsimile: (630) 250-0382
if to Perkins:
Steven R. McClellan
Perkins Family Restaurants, L.P.
6075 Poplar Avenue
Memphis, TN 38119
Facsimile: (901) 766-6482
SECTION 7.03 CERTAIN DEFINITIONS. For purposes of this Agreement, the
term:
(a) "AFFILIATE" of a specified person means a person who directly or
indirectly through one or more intermediaries controls, is controlled by, or
is under common control with, such specified person;
(b) "BENEFICIAL OWNER" with respect to any Units means a person who
shall be deemed to be the beneficial owner of such Units (i) which such
person or any of its affiliates or associates (as such term is defined in
Rule 12b-2 promulgated under the Exchange Act) beneficially owns, directly
or indirectly, (ii) which such person or any of its affiliates or associates
has, directly or indirectly, (A) the right to acquire (whether such right is
exercisable immediately or subject only to the passage of time), pursuant to
any agreement, arrangement or understanding or upon the exercise of
consideration rights, exchange rights, warrants or options, or otherwise, or
(B) the right to vote pursuant to any agreement, arrangement or
understanding or (iii) which are beneficially owned, directly or indirectly,
by any other persons with whom such person or any of its affiliates or
associates or person with whom such person or any of its affiliates or
associates has any agreement, arrangement or understanding for the purpose
of acquiring, holding, voting or disposing of any Units;
(c) "BUSINESS DAY" means any day on which the principal offices of the
SEC in Washington D.C. are open to accept filings, or, in the case of
determining a date when any payment is due, any day on which banks are not
required or authorized to close in the City of New York;
(d) "CONTROL" (including the terms "CONTROLLED BY" and "UNDER COMMON
CONTROL WITH") means the possession, directly or indirectly or as trustee or
executor, of the power to direct or cause the direction of the management
and policies of a person, whether through the ownership of voting
securities, as trustee or executor, by contract or credit arrangement or
otherwise;
(e) "PERSON" means an individual, corporation, partnership, limited
partnership, syndicate, person (including, without limitation, a "person" as
defined in Section 13(d)(3) of the Exchange Act),
A-13
<PAGE>
trust, association or entity or government, political subdivision, agency or
instrumentality of a government; and
(f) "SUBSIDIARY" or "SUBSIDIARIES' of Perkins, MergerCo., TRC, the
Surviving Partnership or any other person means an affiliate controlled by
such person, directly or indirectly, through one or more intermediaries.
SECTION 7.04 SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the Transactions is not affected in any manner materially adverse
to any party. Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the Transactions be consummated as originally contemplated to the
fullest extent possible.
SECTION 7.05 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement constitutes the
entire agreement among the parties with respect to the subject matter hereof and
supersedes all prior agreements and undertakings, both written and oral, among
the parties, or any of them, with respect to the subject matter hereof. This
Agreement shall not be assigned by operation of law or otherwise, except that
TRC and MergerCo. may assign all or any of their rights and obligations
hereunder to any affiliate of TRC provided that no such assignment shall relieve
the assigning party of its obligations hereunder if such assignee does not
perform such obligations.
SECTION 7.06 PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement, other than Article I (which, solely from and after the Effective
Time, is intended to be for the benefit of the Public Unitholders).
SECTION 7.07 SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or equity.
SECTION 7.08 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware applicable to
contracts executed in and to be performed in that State.
SECTION 7.09 HEADINGS. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.
SECTION 7.10 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
A-14
<PAGE>
IN WITNESS WHEREOF, TRC, MergerCo. and Perkins have caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
<TABLE>
<S> <C> <C>
THE RESTAURANT COMPANY
By: /s/ MICHAEL P. DONAHOE
------------------------------------------
Title: Vice President
PERKINS ACQUISITION CORP.
By: /s/ STEVEN R. MCCLELLAN
------------------------------------------
Title: President
PERKINS FAMILY RESTAURANTS, L.P.
By: PERKINS MANAGEMENT COMPANY, INC.
its General Partner
By: /s/ DONALD F. WISEMAN
------------------------------------------
Title: Vice President
</TABLE>
A-15
<PAGE>
ANNEX B
Morgan Keegan & Company, Inc.
Morgan Keegan Tower
Fifty Front Street
Memphis, Tennessee 38103
901/524-4100 Telex 69-74324
WATS 800/366-7426
Members New York Stock Exchange, Inc.
November , 1997
Board of Directors
Perkins Management Company, Inc.
6075 Poplar Ave., Suite 800
Memphis, TN 38119-4709
Gentlemen:
The Board of Directors of Perkins Management Company, Inc. ("PMC"), the general
partner of Perkins Family Restaurants, L.P. ("Perkins" or the "Company"), has
requested our opinion as to the fairness, from a financial point of view, to the
Company's public unitholders of the consideration to be paid in connection with
the proposed acquisition by The Restaurant Company ("TRC") of all of the
Company's limited partnership units (the "Units") that it does not already own
for $14 per Unit in cash (the "Transaction").
You have advised us that, as currently proposed, the Transaction would be
effected through the merger of a wholly-owned subsidiary of PMC (which is a
wholly-owned, indirect subsidiary of TRC) with and into the Company. Upon
consummation of the proposed merger, all of the equity interest in the Company
would be owned by TRC or its direct or indirect wholly-owned subsidiaries, the
public unitholders would no longer own units and the public unitholders would
become entitled to receive in exchange for their Units a cash payment of $14 per
Unit. For purposes of our analysis, we have assumed that the Company's
historical quarterly distribution of $0.325 per Unit will not be paid with
respect to the quarter ending December 31, 1997, and we have considered this
fact in evaluating the consideration to be paid to the public unitholders
pursuant to the Transaction.
Morgan Keegan & Company, Inc. ("Morgan Keegan"), as part of its investment
banking business, is regularly engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for various purposes.
In connection with our opinion, we have (1) held discussions with various
members of management and representatives of PMC and the Company concerning the
Company's historical and current operations, financial condition and prospects;
(2) reviewed historical consolidated financial and operating data that was
publicly available or furnished to us by PMC and the Company; (3) reviewed
internal financial analyses, financial and operating forecasts, reports and
other information prepared by officers and representatives of PMC and the
Company; (4) reviewed certain publicly available information concerning the
trading of, and the trading market for, the Company's Units; (5) reviewed
certain publicly available information with respect to certain other companies
that we believe to be comparable to the Company and the trading markets for such
other companies' securities; (6) reviewed certain publicly available information
concerning the terms of certain other transactions that we deemed relevant to
our inquiry; and
B-1
<PAGE>
(7) reviewed the Second Amended and Restated Agreement and Plan of Merger dated
as of September 11, 1997 among TRC, Perkins Acquisition Corp. and Perkins (the
"Agreement").
In our review and analysis and in arriving at our opinion, we have assumed and
relied upon the accuracy and completeness of all of the financial and other
information provided us or publicly available and have assumed and relied upon
the accuracy and completeness of the representations and warranties contained in
the Agreement. We have not been engaged to, and have not independently attempted
to, verify any of such information. With respect to the financial and
operational forecasts made available to us by the management of PMC and the
Company and used in our analysis, we have assumed that such financial and
operational forecasts, including those relating to new store economics, new
store development and new franchised store plans have been reasonably prepared
on bases reflecting the best currently available estimates and judgments of
management as to the matters covered thereby. We have not been engaged to assess
the achievability of such projections or the assumptions on which they were
based and express no view as to such projections or assumptions. In addition, we
have not conducted a physical inspection or appraisal of any of the assets,
properties or facilities of the Company. We have been provided with and have
reviewed a letter from American Appraisal Associates dated November 14, 1997
stating the results of that firm's appraisal of certain assets of the
Partnership.
It should be noted that this opinion is based on economic and market conditions
and other circumstances existing on, and information made available as of, the
date hereof and does not address any matters subsequent to such date, including
the prices at, or trading range within which, the Company's Units may trade
following the date of this letter. In addition, our opinion is, in any event,
limited to the fairness, as of the date hereof, from a financial point of view,
of the consideration to be paid to the Company's public unitholders pursuant to
the Transaction and does not address the underlying business decision to effect
the Transaction or any other terms of the Transaction. We have also assumed that
the conditions to the Transaction as set forth in the Agreement would be
satisfied and that the Transaction would be consummated on a timely basis in the
manner contemplated by the Agreement.
Our services in connection with the Transaction have been limited to the
rendering of this opinion to the Board of Directors of PMC, and we have not
provided financial advisory or other services to any other party to the
Transaction. We will receive a fee for our services in rendering this opinion,
and PMC also had agreed to indemnify us under certain circumstances.
Our opinion is directed to the Board of Directors of PMC and does not constitute
a recommendation to any unitholder of the Company as to how such unitholder
should vote at any proposed unitholders' meeting held in connection with the
Transaction.
Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that, as of the date hereof, the
consideration to be paid in connection with the Transaction is fair, from a
financial point of view, to the Company's public unitholders.
Yours very truly,
/s/ MORGAN KEEGAN & COMPANY, INC.
- -------------------------------------------
MORGAN KEEGAN & COMPANY, INC.
B-2
<PAGE>
PERKINS FAMILY RESTAURANTS, L.P.
THIS PROXY IS SOLICITED ON BEHALF OF
PERKINS FAMILY RESTAURANTS, L.P.
AND
PERKINS MANAGEMENT COMPANY, INC.
SPECIAL MEETING OF UNITHOLDERS--DECEMBER 15, 1997
The undersigned Unitholder of Perkins Family Restaurants, L.P. (the
"Partnership") acknowledges receipt of the Proxy Statement of the Partnership
and Perkins Management Company, the general partner of the Partnership (the
"General Partner"), dated November 14, 1997, and the undersigned revokes all
prior proxies and appoints Steven R. McClellan, Donald F. Wiseman and Michael P.
Donahoe, and each of them individually and with full powers of substitution and
resubstitution, proxies for the undersigned to vote all units of limited partner
interest ("Units") of the Partnership that the undersigned would be entitled to
vote at the Special Meeting of Unitholders to be held at 10:00 a.m. (Eastern
Standard Time) on December 15, 1997 at 388 Greenwich Street, New York, New York
and any adjournments, postponements or reschedulings thereof, on those matters
referred to in the Proxy Statement.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATIONS MADE. IF NO
SPECIFICATIONS ARE MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSALS REFERRED TO
IN (1) AND (2) BELOW PROVIDED THAT YOU HAVE SIGNED AND DATED THE PROXY CARD.
IN THEIR DISCRETION, THE PROXIES ARE, UNLESS OTHERWISE INDICATED BELOW,
AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE
MEETING, AND ANY ADJOURNMENTS, POSTPONEMENTS OR RESCHEDULINGS THEREOF, ON BEHALF
OF THE UNDERSIGNED.
PLEASE MARK, SIGN AND DATE THIS PROXY CARD ON THE REVERSE SIDE AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE.
(CONTINUED ON REVERSE SIDE)
<PAGE>
(CONTINUED FROM FACE OF CARD)
/X/ PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE
THE GENERAL PARTNER OF THE PARTNERSHIP RECOMMENDS A VOTE "FOR" PROPOSAL 1.
1. THE MERGER. TO APPROVE AND ADOPT THE SECOND AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER, DATED AS OF SEPTEMBER 11, 1997, BY AND AMONG THE
PARTNERSHIP, THE RESTAURANT COMPANY AND PERKINS ACQUISITION CORP., A WHOLLY
OWNED SUBSIDIARY OF PERKINS MANAGEMENT COMPANY, AND THE MERGER CONTEMPLATED
UNDER THAT AGREEMENT AS DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT.
/ / FOR / / AGAINST / / ABSTAIN
2. OTHER BUSINESS. TO TRANSACT SUCH OTHER MATTERS AS MAY PROPERLY COME
BEFORE THE SPECIAL MEETING OR ANY ADJOURNMENTS, POSTPONEMENTS OR RESCHEDULINGS
THEREOF.
/ / AUTHORIZED / / NOT AUTHORIZED
DATED:
----------------------------------------------------------------------,
1997
----------------------------------
SIGNATURE OF UNITHOLDER (TITLE, IF
ANY)
----------------------------------
SIGNATURE OF UNITHOLDER (IF HELD
JOINTLY)
PLEASE SIGN EXACTLY AS YOUR NAME OR NAMES APPEAR HEREON. IF UNITS ARE HELD
JOINTLY, EACH UNITHOLDER SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH.
IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR AUTHORIZED
OFFICERS. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED
PERSON. PLEASE MARK, SIGN, DATE AND MAIL THIS PROXY CARD PROMPTLY, USING THE
ENCLOSED POSTAGE-PAID ENVELOPE.
