<PAGE>
CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
(Amendment No. 1)
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-9214
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Perkins Family Restaurants, L.P.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 62-1283091
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6075 Poplar Avenue, Suite 800, Memphis, Tennessee 38119-4709
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(Address of principal executive offices) (Zip code)
(901) 766-6400
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(Registrant's telephone number, including area code)
Indicate by X whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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.
2
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PERKINS FAMILY RESTAURANTS, L.P.
BALANCE SHEETS
(In Thousands, Except Unit Amounts)
September 30,
December 31, 1997
1996 (Unaudited)
------------ -----------
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
------- -------
------- -------
The accompanying notes are an integral part of these balance sheets.
3
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PERKINS FAMILY RESTAURANTS, L.P.
BALANCE SHEETS
(In Thousands, Except Unit Amounts)
September 30,
December 31, 1997
1996 (Unaudited)
------------ -------------
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
-------- --------
-------- --------
The accompanying notes are an integral part of these balance sheets.
4
<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.
5
<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):
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
1996 1997 1996 1997
-------- -------- -------- --------
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
6
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WEIGHTED AVERAGE UNITS OUTSTANDING
Weighted average units outstanding are computed as follows (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1996 1997 1996 1997
------ ------ ------ ------
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
------ ------ ------ ------
------ ------ ------ ------
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.
7
<PAGE>
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.
8
<PAGE>
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):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1996 1997 1996 1997
-------- --------- -------- --------
(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
-------- --------- -------- --------
-------- --------- -------- --------
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.
9
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FEDERAL INCOME TAXATION
Under the Partnership's current form of taxation, the distributions paid by the
Partnership are not taxable to its partners. Instead, each partner must pay tax
on his or her allocable share of the Partnership's net income. 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
Partnership will be taxed as a corporation. Had the Partnership been taxed as a
corporation in 1996, it would have paid Federal and state corporate income taxes
of approximately $5,500,000. Under corporate tax principles, the Partnership
must itself pay taxes on its income, and cash distributions, if any, would be
taxed in the year in which received by the stockholder. Thus, had the
Partnership been taxed as a corporation in 1996, in addition to the income taxes
payable by the Partnership, 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.
On August 5, 1997, President Clinton signed the Taxpayer Relief Act of 1997,
which includes an 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 gross income is made by the partnership. This gross income tax
is not deductible by either the partnership or its partners, nor is it reduced
by any income tax credits. In addition, the partners would still be taxed on
the partnership's income. Management's analysis indicates that had this
election been in effect in 1996, the Partnership's federal tax liability would
have been approximately $6,500,000.
Being taxed as a corporation or paying the new tax under the Taxpayer Relief Act
of 1997 will reduce the amount of cash available to the Partnership by the
amount of the taxes it must pay and, in the absence of increased borrowings,
will reduce by such amount the cash available to the Partnership for capital
expenditures, prepayment of outstanding indebtedness, cash distributions or
other corporate purposes.
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 partnership for income tax purposes.
As of September 30, 1997 and December 31, 1996, the Partnership had deferred
tax assets related to existing temporary differences that are projected to
reverse after January 1, 1998. However, management believes that a conclusion
as to the realizability of certain of those assets based upon current
circumstances is highly subjective, and has therefore established valuation
allowances as appropriate. Accordingly, no deferred provision for income taxes
has been reflected in the accompanying financial statements.
10
<PAGE>
ITEM 2. 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 12
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.
11
<PAGE>
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 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>
Year Ended Three Months Ended Nine Months 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 5.5 5.9 6.2 6.0 5.6 6.2 6.0
amortization
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.
12
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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.
13
<PAGE>
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.
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.
14
<PAGE>
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 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.
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The following table summarizes capital expenditures for the years ended December
31 and the nine months ended September 30, 1997.
Nine
Months
Ended
September
Year Ended December 31 30
------------------------------- --------
1994 1995 1996 1997
-------- -------- -------- --------
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
-------- -------- -------- --------
-------- -------- -------- --------
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 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 TRC to acquire through a merger all of the outstanding Units of the
Partnership. See 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.
ITEM 5. OTHER INFORMATION
On August 4, 1997, TRC made an offer to acquire through a merger all of the
Units not directly or indirectly owned by TRC for $13 per Unit. On September
11, 1997, the proposal was increased to $14 per Unit in cash and a merger
agreement was entered into.
TRC indirectly owns PMC and the approximately 48 percent of the outstanding
units of limited partnership interest not owned by public unitholders. The
proposed transaction is subject to receipt of an opinion from an investment
banking firm that the transaction is fair from a financial point of view, the
affirmative vote of a majority of the units held by public unitholders
casting votes and financing for sufficient funds being available.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - Reference is made to the Index of Exhibits attached hereto as
page 19 and made a part hereof.
(b) Report on Form 8-K dated September 17, 1997
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERKINS FAMILY RESTAURANTS, L.P.
BY: PERKINS MANAGEMENT COMPANY, INC.,
GENERAL PARTNER
DATE: November 19, 1997 BY: /s/ Steven R. McClellan
------------------------ --------------------------
Steven R. McClellan
Executive Vice President,
Chief Financial Officer
BY: /s/ Michael P. Donahoe
---------------------------
Michael P. Donahoe
Vice President, Controller
Chief Accounting Officer
18
