PERKINS FAMILY RESTAURANTS LP, 10-K, 1998-03-31

PERKINS FAMILY RESTAURANTS LP
10-K, 1998-03-31
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<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the fiscal year ended December 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from to
-------- ---------

Commission File Number 1-9214

PERKINS FAMILY RESTAURANTS, L.P.
(Exact name of Registrant as specified in its charter)

Delaware 62-1283091
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

6075 Poplar Avenue, Suite 800, Memphis, Tennessee 38119
(Address of principal executive offices) (Zip Code)

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

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

Title of each class Name of each exchange
------------------- on which registered
---------------------
Depositary Units Representing Limited
Partnership Interests in the Registrant None

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

None

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---

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

<PAGE> 2

PART I

ITEM 1. BUSINESS.

GENERAL. Perkins Family Restaurants, L.P. ("Perkins", "Partnership", or "PFR"),
is a Delaware limited partnership. Perkins Management Company, Inc. ("PMC"), a
wholly-owned subsidiary of Perkins Restaurants, Inc. ("PRI"), a wholly-owned
subsidiary of The Restaurant Company ("TRC"), formerly known as Tennessee
Restaurant Company, is the sole general partner of Perkins. PMC owns a 1%
general partner's interest in the Partnership. The sole business of PMC is to
act as the general partner of Perkins. The principal shareholders of TRC are
Donald N. Smith, PMC's Chairman and Chief Executive Officer, Harrah's
Entertainment, Inc. ("Harrah's"), and The Equitable Life Assurance Society of
the United States ("Equitable"). Mr. Smith is also the Chairman and Chief
Executive Officer of Friendly Ice Cream Corporation ("FICC"), which operates and
franchises approximately 700 full-service restaurants, located primarily in the
northeastern United States. Mr. Smith owns 10.3% of the common stock of FICC.
Unless the context otherwise requires, all references to Perkins with respect to
the ownership and operation of its business also include references to PMC .

OPERATIONS. Perkins operates and franchises family-style restaurants which serve
a wide variety of high quality, moderately-priced breakfast, lunch and dinner
entrees. Perkins Family Restaurants provide table service, and many are open 24
hours a day (except Christmas day and certain late night hours in selected
markets), seven days a week. As of December 31, 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. On December
31, 1997, there were 473 full service restaurants in the Perkins' system, of
which 136 were Partnership-operated restaurants and 337 were franchised
restaurants. Both the Partnership-operated restaurants and franchised
restaurants operate under the names "Perkins Family Restaurant," "Perkins Family
Restaurant and Bakery," or "Perkins Restaurant" and the mark "Perkins." The
full-service Partnership-operated restaurants and franchised restaurants are
located in 33 states with the largest number in Minnesota, Ohio, Pennsylvania,
New York and Florida. Perkins has thirteen franchised restaurants in Canada.

Perkins restaurants are primarily located in free-standing buildings with
between approximately 90 to 250 seats. Recently, the Partnership and its
franchisees have begun to test the Perkins concept in various non-traditional
locations such as 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," "Perkins Bakery" and "Perkins Express".

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

Perkins also offers cookie doughs, muffin batters, pancake mixes, pies and other
food products for sale to its Partnership-operated and franchised restaurants
and bakery and food service distributors through Foxtail Foods, Perkins'
manufacturing division. During 1997, sales of products from this division to
Perkins franchisees and outside third parties constituted approximately 8.9% of
total revenues of the Partnership.

2
<PAGE> 3

Franchised restaurants operate pursuant to license agreements generally having
an initial term of 20 years, and pursuant to which a royalty fee (usually 4% of
gross sales) and an advertising contribution (typically 3% of gross sales) are
paid. Effective January 1, 1998, franchisees pay a non-refundable license fee of
$40,000 for the opening of new restaurants. Franchisees opening their third and
subsequent restaurants pay a license fee of $30,000. 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. During 1997, franchised restaurants paid average annual
royalties in the amount of approximately $56,700. During each of the five years
ending December 31, 2002, seventeen, fifteen, twelve, thirteen and seven license
agreements, excluding alternative concepts, have terms which will expire.
Franchisees typically apply for and receive new license agreements.

In the past, the Partnership has sponsored financing programs offered by certain
lending institutions to assist its franchisees in procuring funds for the
construction of new franchised restaurants and to purchase and install in-store
bakeries. The Partnership provides a limited guaranty of funds borrowed. At
December 31, 1997, there were approximately $3,640,000 in borrowings outstanding
under these programs. The Partnership has guaranteed $1,200,000 of these
borrowings. No additional borrowings are available under these programs.

In early 1998, the Partnership entered into a separate two year limited
guarantee of $1,200,000 in borrowings of a franchisee which were used to
construct a new franchise restaurant.

DESIGN DEVELOPMENT. 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 modern,
distinctive interior and exterior layouts that enhance operating efficiencies
and guest appeal. As of December 31, 1997, approximately 87% of
Partnership-operated restaurants were either new or remodeled since January 1,
1994.

To promote a consistent and current image throughout the Perkins system, the
Partnership encourages its franchisees to remodel their restaurants by providing
financial incentives and third-party capital programs. Twenty-two franchised
restaurants were remodeled in 1996 and an additional 39 restaurants were
remodeled in 1997. Franchise restaurants that were either new or remodeled since
1994 represent approximately 46.6% of the total franchise system.

SYSTEM DEVELOPMENT. Perkins opened three new Partnership-operated full-service
restaurants in 1997 in Osseo, MN, Onalaska, WI and Allentown, PA. Thirteen new
franchised Perkins restaurants opened during the year and three new franchise
owners joined the system.

In 1997, Perkins continued refinement of its Perkins Cafe and Bakery (formerly
Perkins Express and Bakery) and Perkins Bakery concepts. Perkins Cafe and Bakery
offers a streamlined menu of Perkins' signature items in a quick-service format.
Perkins Bakery is a stand-alone bakery featuring Perkins' popular fresh baked
products. Both concepts are designed for walk-up traffic and are located in
places where Perkins' traditional full-service restaurants cannot be built, such
as malls, airports, universities and hospitals.

3
<PAGE> 4

Four Partnership-operated Cafe and Bakeries were opened in mall locations during
1997. These included, University Mall in Tampa, FL, Wolfchase Galleria in
Memphis, TN, Fashion Square Mall in Orlando, FL and Mall of America in
Minneapolis, MN. During February 1998, the Partnership closed the Orlando
location and is currently negotiating to terminate the lease agreement in Tampa.
Additional development and testing of the alternative concept restaurants is
anticipated in 1998. The Partnership will develop final plans for mall locations
during that period of time.

RESEARCH AND DEVELOPMENT. Each year, Perkins develops and tests a wide variety
of products with potential to enhance variety and appeal of its menu. In
addition to evaluations conducted in the Partnership's 3,000 sq. ft. test
kitchen in Memphis, new products undergo extensive operations and consumer
testing to determine acceptance. While this effort is an integral part of
Perkins overall operations, it was not a material expense in 1997. In addition,
no material amounts were spent to conduct consumer research in 1997.

SIGNIFICANT FRANCHISEES. As of December 31, 1997, three franchisees, otherwise
unaffiliated with Perkins, owned 93 of the 337 full-service franchised
restaurants and bakeries. The respective distribution of restaurants operated by
such franchisees is: 41 restaurants primarily in upstate New York; 31
restaurants in Pennsylvania, Ohio and New York; and 21 restaurants in Ohio and
Kentucky. During 1997, Perkins received net royalties and license fees of
approximately $2,224,000, $1,681,000 and $1,239,000 respectively, from these
franchisees.

The Partnership's largest franchisee operates 41 restaurants, 37 of which are
leased from unaffiliated lessors, pursuant to a temporary license agreement
expiring March 31, 1998, but which the Partnership expects to extend for an
additional 90 days. The temporary license 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. While the franchisee
has represented to creditors, including the Partnership, that it is currently in
discussions with possible financing sources and a possible buyer for its
business, 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 new
arrangements between the Partnership and the owners of the properties. During
the past three years, the franchisee's average net royalty payments to the
Partnership were approximately $1.8 million. At December 31, 1997, the
franchisee was delinquent in its royalty obligations in the amount of
approximately $250,000, net of reserve for loss of $300,000.

ROYALTY ARRANGEMENTS. Perkins' predecessors entered into arrangements under
which specified payments are to be made by Perkins based upon a percentage of
gross sales from certain restaurants. During 1997, Perkins paid an aggregate of
$2,455,000 under such arrangements. During 1997, the Partnership terminated two
such agreements. Had such agreements been terminated at the beginning of 1997,
payments by the Partnership would have been $1,938,000.

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

4
<PAGE> 5

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

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

WORKING CAPITAL. As is typical in the restaurant industry, Perkins generally
operates with a working capital deficit as the Partnership's revenues are
primarily derived from cash sales while restaurant inventories are purchased on
credit and rapidly converted to cash.

COMPETITION. Perkins' 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. Perkins 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. In addition, in some markets,
primarily in the northeastern United States, Perkins and FICC operate
restaurants which compete with each other. PRI, TRC, other affiliates of PMC and
their management may engage in other businesses which may compete with the
business of Perkins.

EMPLOYEES. As of March 23, 1998, Perkins employed approximately 9,500 persons,
of whom approximately 310 were administrative and manufacturing personnel and
the balance were restaurant personnel. Approximately 69% of the restaurant
personnel are part-time employees. Perkins competes in the job market for
qualified restaurant management and operational employees. Perkins maintains
ongoing restaurant management training programs and has on its staff full-time
restaurant training managers and a training director. Perkins believes that its
restaurant management compensation and benefits package compares favorably with
those offered by its competitors. None of Perkins' employees are represented by
a union.

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

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

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

5
<PAGE> 6

GOING PRIVATE TRANSACTION. The Partnership is a limited partnership that
currently is indirectly owned (including its general partner's interest) by TRC.
Until December 1997, the Partnership's Units were traded on the New York Stock
Exchange under the symbol "PFR." In September 1997, the Partnership, TRC and a
subsidiary of TRC entered into an Agreement and Plan of Merger (as amended, the
"Merger Agreement") pursuant to which the Partnership's operating partnership
subsidiary was eliminated through a merger. A series of transactions were
consummated on December 22, 1997 whereby the Partnership became an indirect
wholly-owned subsidiary of TRC and the 5.44 million Units held by persons other
than TRC and its subsidiaries were converted into the right to receive $14.00 in
cash per Unit. Such transactions consummated on December 22, 1997 are
collectively referred to as the "Going Private Transaction." No change in the
Partnership's management or business strategy is anticipated as a result of the
consummation of the Going Private Transaction.

Concurrently with the Going Private Transaction, the Partnership entered into a
new $50 million secured revolving line of credit facility with a group of banks
and issued $130 million principal amount of its 10.125% Senior Notes due 2007
(the "Notes"). Approximately $137 million was required to (i) consummate the
Going Private Transaction, (ii) repay existing indebtedness and (iii) pay
related fees and expenses. Such funds were obtained from the proceeds of the
Notes and internally generated funds.

[INTENTIONALLY LEFT BLANK]

6
<PAGE> 7

ITEM 2. PROPERTIES.

The following table lists the location of each of the Partnership-operated and
franchised restaurants and bakeries as of December 31, 1997 (excluding
alternative formats):

Number of Restaurants and Bakeries
----------------------------------
<TABLE>
<CAPTION>
Partnership
Operated Franchised Total
----------- ---------- -----
<S> <C> <C> <C>
Arizona -- 10 10
Arkansas -- 4 4
Colorado -- 16 16
Delaware -- 1 1
Florida 20 19 39
Georgia -- 1 1
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 39 31 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 7 43 50
South Carolina -- 1 1
South Dakota -- 10 10
Tennessee 1 11 12
Virginia -- 1 1
Washington -- 7 7
Wisconsin 14 14 28
Wyoming -- 4 4
Canada -- 13 13
--- --- ---

Total 136 337 473
=== === ===
</TABLE>

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

7
<PAGE> 8

The following table sets forth certain information regarding
Partnership-operated restaurants and other properties, as of December 31, 1997:

Number of Properties(1)
-----------------------
Use Owned Leased Total
- --- ----- ------ -----
<S> <C> <C> <C>
Offices and Manufacturing Facilities(2) 1 8 9
Perkins Family Restaurants(3) 56 80 136
Alternative Concepts (4) -- 4 4
</TABLE>

(1) In addition, Perkins leases 23 properties, 19 of which were
subleased to others, 2 of which are vacant and 2 held for future
development. Perkins also owns 13 properties, all of which are leased
to others.

(2) Perkins' principal office is located in Memphis, TN, and currently
comprises 53,340 square feet under a lease expiring on May 31, 2003,
subject to renewal by Perkins for a maximum of 60 months. In addition,
Perkins owns a 25,149 square-foot manufacturing facility in Cincinnati,
OH, and leases two other properties in Cincinnati, OH, consisting of
36,000 square feet and 60,000 square feet, respectively, for use as
manufacturing facilities.

(3) The average term of the remaining leases is 8 years, excluding
renewal options. The longest lease term will mature in 43 years and the
shortest lease term will mature in approximately 3 years, assuming the
exercise of all renewal options.

(4) Perkins leases 5 properties, 4 of which are operating as Cafe and
Bakeries and 1 is under construction. The average term of the leases is
8 years, excluding renewal options. The longest lease term will mature
in 17 years and the shortest lease term will mature in approximately 4
years, assuming the exercise of all renewal options.

ITEM 3. LEGAL PROCEEDINGS.

Perkins 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 Perkins' financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF UNITHOLDERS.

At a special meeting of Unitholders held on December 15, 1997, the holders of
units of limited partnership interest approved the Going Private Transaction.
7,491,376 ballots were cast in favor of the transaction, and 268,556 ballots
were cast against the transaction. There were 24,609 abstentions. As a result of
the favorable vote, the Going Private Transaction was consummated on December
22, 1997.

8
<PAGE> 9

PART II

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

(a) Market information.

In conjunction with the Going Private Transaction, effective December 22, 1997,
all units of limited partnership interest ("Units") not held by TRC or one of
TRC's subsidiaries were converted to the right to receive $14.00 per Unit.
Subsequent to the Going Private Transaction, the Units were no longer listed on
the New York Stock Exchange.

The closing high and low sales prices for the Units for the quarterly period
indicated below are as follows:

<TABLE>
<CAPTION>
1997 High Low
---- ---- ---
<S> <C> <C>
1st Quarter 14 7/8 12 5/8
2nd Quarter 13 5/8 10 3/8
3rd Quarter 13 7/8 10 3/8
4th Quarter 14 12 7/8

1996 High Low
---- ---- ---
1st Quarter 13 1/8 11 3/8
2nd Quarter 12 3/4 11 7/8
3rd Quarter 12 7/8 11 3/4
4th Quarter 13 1/2 12 1/8
</TABLE>

(b) Unitholders.

As of March 23, 1998, there were 2 Unitholders of record.

Cash distributions of $0.975 and $1.30 per Unit were declared to Perkins'
limited partners during 1997 and 1996, respectively. Following the consummation
of the Going Private Transaction, the Partnership does not expect to pay
distributions to its general or limited partners except distributions sufficient
to satisfy any tax liabilities of its partners arising out of the allocation of
taxable income or gain from the Partnership. The terms of the Partnership's new
secured line of credit facility and Senior Note Indenture limit its ability to
pay distributions to its partners.

9
<PAGE> 10

ITEM 6. SELECTED FINANCIAL DATA.

PERKINS FAMILY RESTAURANTS, L.P.
SELECTED FINANCIAL AND OPERATING DATA
(In Thousands, Except Per Unit Data and Number of Restaurants)

<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Data:

Revenues $269,526 $252,793 $245,751 $221,902 $212,634
Net Income (a) $ 8,200 $ 13,522 $ 9,796 $ 12,008 $ 12,602
Cash Distributions Declared
Per Unit $ 0.975 $ 1.30 $ 1.30 $ 1.30 $ 1.30

Balance Sheet Data:

Total Assets $214,324 $155,656 $161,829 $150,407 $131,709
Long-Term Debt(b) $130,000 $ 48,244 $ 57,850 $ 39,875 $ 22,600
Capital Leases(b) $ 6,999 $ 8,573 $ 8,810 $ 10,862 $ 13,194

Statistical Data:

Restaurants and Bakeries in
Operation at End of Year:
Partnership-Operated(c) 136 134 139 132 127
Franchised (c) 337 331 319 300 298
- -----------------------------------------------------------------------------------------------------------------------
Total 473 465 458 432 425

Average Annual Sales Per
Partnership-Operated
Restaurant $ 1,682 $ 1,576 $ 1,535 $ 1,535 $ 1,478
Average Annual Royalties Per
Franchised Restaurant $ 56.9 $ 55.2 $ 55.0 $ 53.3 $ 51.6
</TABLE>

(a) Excluding non-recurring items, net income for 1997, 1995 and 1994 would
have been $16,050, $12,092, and $13,868, respectively.

(b) Net of current maturities

10
<PAGE> 11

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

RESULTS OF OPERATIONS

Forward-Looking Statements
This discussion contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are based on current expectations that are subject to known and
unknown risks, uncertainties and other factors that could cause actual results
to differ materially from those contemplated by the forward-looking statements.
Such factors include, but are not limited to the following: general economic
conditions, competitive factors, consumer taste and preferences and adverse
weather conditions. The Partnership does not undertake to publicly update or
revise the forward-looking statements even if experience or future changes make
it clear that the projected results expressed or implied therein will not be
realized.

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>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Revenues:
Food sales 92.8% 92.6% 92.9%
Franchise revenues 7.2 7.4 7.1
------ ------ ------
Total revenues 100.0 100.0 100.0
------ ------ ------

Costs and expenses:
Cost of sales:
Food cost 26.9 27.1 26.9
Labor and benefits 31.2 31.2 32.1
Operating expenses 18.8 19.1 19.4
General and administrative 9.8 9.4 9.1
Depreciation and amortization 5.9 6.2 5.9
Interest, net 1.8 2.0 2.0
Benefit from litigation costs -- -- (0.1)
Provision for disposition of assets -- -- 0.2
Asset write-down (SFAS No. 121) -- -- 0.8
Other, net (0.1) (0.3) (0.3)
------ ------ ------
Total costs and expenses 94.3 94.7 96.0
------ ------ ------
Income before extraordinary item 5.7 5.3 4.0
Extraordinary item (2.7) -- --
------ ------ ------
Net income 3.0% 5.3% 4.0%
====== ====== ======
</TABLE>

11
<PAGE> 12

Net income for 1997 was $8,200,000 versus $13,522,000 in 1996 and $9,796,000 in
1995. Net income for 1997 included $7,200,000 in extraordinary expenses incurred
in connection with the Going Private Transaction and $650,000 in non-recurring
tax reorganization costs. Without these charges, 1997 income would have been
$16,050,000. 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 canceled development projects,
and a $190,000 benefit from a legal dispute reserved for in 1994. Without these
charges, 1995 income would have been $12,092,000.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Revenues:

Total revenues increased 6.6% over 1996 primarily due to higher comparable
restaurant sales, the net addition of five new franchised restaurants and two
new Partnership-operated restaurants and increased sales at Foxtail Foods
("Foxtail" ), the Partnership's manufacturing operation.

Comparable sales for Partnership-operated restaurants increased approximately
6.6% due to a 3.7% increase in average guest check and a 2.9% increase in
customer counts. As a comparison, 1996 results include an additional day because
of leap year. The increase in average guest check was the result of selective
menu price increases and guest preferences for higher-priced entrees. 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-operated restaurants, increased promotional
events and implementation of new products resulted in the increased customer
counts.

In 1997, Foxtail revenues increased 11.7% over 1996 and constituted
approximately 8.9% of the Partnership's total revenues. Foxtail offers cookie
doughs, 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, it produces a
variety of non-proprietary products for sale in various retail markets. Sales to
Partnership-operated restaurants are eliminated in the accompanying income
statements. The increase in Foxtail's revenue can be attributed primarily to
price increases effective in August 1996 and January 1997, increased sales
outside the Perkins system and an increase in franchised restaurants' sales. The
increase in outside sales is due to the Partnership developing external sales in
order to maintain plant utilization during slower production periods.

Franchise revenues, which consist primarily of franchise royalties and initial
license fees, increased 3.8% over the prior year. Although comparable franchised
restaurant sales only increased 1.5% over the prior year, revenues of franchised
restaurants opened during 1995 and 1996 averaged 6.1% higher than the franchise
system average. This performance resulted in the overall improvement in
franchise revenues. Additionally, 13 new franchised restaurants opened during
the year, and one Partnership-operated restaurant was converted to a franchised
restaurant. Revenues from these openings were partially offset by the closing of
8 under-performing franchised restaurants, 2 of which reopened in late 1997, and
a decrease in franchise license fees due to fewer openings in 1997.

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<PAGE> 13

Costs and Expenses:

Food cost:
In terms of total revenues, food cost decreased 0.2 percentage points over 1996.
Restaurant division food cost expressed as a percentage of restaurant division
sales, decreased 0.3 percentage points. This decrease resulted from selective
menu price increases and a decline in the costs of certain commodities including
eggs and breads. This decrease was partially offset by higher food costs
associated with pork and poultry products.

Labor and benefits:
Labor and benefits, as a percentage of total revenues, remained consistent to
1996. Worker's compensation and group insurance claims costs decreased; however,
hourly labor costs in the Partnership's restaurants rose due to mandated
increases in minimum wage rates and wage rate pressures from low levels of
unemployment. As a percentage of revenues, 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. Legislation which raised the Federal minimum wage rate
in 1996 and has further increased the minimum wage rate in 1997 had an impact on
the Partnership's labor costs. These increases have resulted in the Federal
minimum wage rate increasing from $4.25 per hour to $4.75 on October 1, 1996 to
$5.15 per hour as of September 1, 1997 to the present date. Certain states do
not allow tip credits for servers which results in higher payroll costs as well
as greater exposure to increases in minimum wage rates. In the past, the
Partnership has been able to offset increases in labor costs through selective
menu price increases and improvements in labor productivity. The Partnership
anticipates that it can offset the majority of the current increases through
selective menu price increases. However, there is no assurance that future
increases can be mitigated through raising menu prices.

Operating expenses:
Operating expenses, expressed as a percentage of total revenues, decreased 0.3
percentage points over 1996. Fees payable under royalty arrangements decreased
as a percentage of total revenues due to termination of two such agreements, and
utilities expense decreased due to milder winter weather than experienced in the
previous year. These decreases were partially offset by increased bad debt
expense.

General and administrative:
General and administrative expenses increased 10.3% over 1996, primarily due to
increased incentive compensation costs as a result of the Partnership's improved
performance and due to increased administrative support related to both the
growth at Foxtail and anticipated growth in the number of Partnership-operated
and franchised restaurants expected to open in 1998.

Depreciation and amortization:
Depreciation and amortization increased approximately 1.8% over 1996 due
primarily to the continuing refurbishment program to upgrade and maintain
existing restaurants as well as the addition of new Partnership-operated
restaurants.

Interest, net:
Interest expense was approximately 4% lower than 1996 due to lower average debt
balances and decreased capital lease obligations.

Other:
In 1997, the Partnership incurred approximately $650,000 in reorganization costs
associated with analyzing the alternatives to becoming a tax-paying entity
beginning January 1998.

13
<PAGE> 14

Extraordinary item:
During 1997, after Unitholder approval, all Units held by persons other than TRC
and its subsidiaries were converted into the right to receive $14.00 in cash per
Unit. In connection with the Going Private Transaction, the Partnership expensed
$7,200,000 of extraordinary costs.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

Revenues:

Total revenues increased 2.9% over 1995 due primarily to increased restaurant
food sales, sales at Foxtail and increased franchise royalties. The increase in
restaurant food sales can be primarily attributed to the addition of three new
restaurants in 1996 and ten new restaurants in 1995, partially offset by the
closing of four Partnership-operated restaurants and refranchising of three
Partnership-operated restaurants. Comparable restaurant sales increased
approximately 2.6% over 1995 due primarily to selective price increases and an
increase in comparable guest visits of 0.8%. Revenues from Foxtail increased
approximately 5.8% over 1995 and constituted approximately 8.5% of the
Partnership's total 1996 revenues. This increase can be attributed primarily to
increased bakery sales at franchised restaurants to which Foxtail sells various
mixes, doughs and pies.

Franchise revenues increased 6.5% over the prior year due primarily to the
addition of nineteen new franchised restaurants. The increase was partially
offset by a decrease in sales for franchised restaurants open for more than one
year. Ten franchised restaurants were closed during 1996 and three
Partnership-operated restaurants began operations as franchised restaurants
during the year.

Costs and Expenses:

Food Cost:
In terms of total revenues, food cost increased 0.2 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.

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 revenues than the Partnership's
restaurants.

Labor and benefits:
Labor and benefits expense, as a percentage of total revenues, decreased 0.9
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 costs associated with the Partnership's group
health and workers compensation programs.

Operating expenses:
Operating expenses, expressed as a percentage of total revenues, decreased 0.3
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.

14
<PAGE> 15

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 refurbishments to
upgrade and improve existing restaurants.

Interest, net:
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 in
late 1995 and 1996 and one property leased to another restaurant chain in 1996.
Depreciation expense associated with these five properties totaling $324,000 is
included in depreciation and amortization expense.

CAPITAL RESOURCES AND LIQUIDITY

Principal uses of cash during the year were payments on long-term debt, cash
outlays related to the Going Private Transaction, including repurchase of Units
and the Going Private Transaction expenses, capital expenditures and cash
distributions to Unitholders. 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. The
Partnership's primary sources of funding were the issuance of debt and cash
provided by operations.

The following table summarizes capital expenditures for each of the years in the
three-year period ended December 31, 1997.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Maintenance $ 3,453 $ 2,987 $ 3,435
Renovation 2,790 4,064 8,431
New restaurant development 6,193 1,947 12,626
Manufacturing 714 651 859
Other 1,936 2,209 3,580
------- ------- -------
Total Capital Expenditures $15,086 $11,858 $28,931
======= ======= =======
</TABLE>

15
<PAGE> 16

The Partnership's capital budget for 1998 is $21.4 million. The Partnership
plans to add seven new full-service Partnership-operated restaurants in 1998.
The remaining capital budget will be primarily applied to remodels of existing
restaurants and restaurant maintenance. The primary source of funding for these
projects is expected to be cash provided by operations. Capital spending could
vary significantly from planned amounts as certain of these expenditures are
discretionary in nature.

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
December 31, 1997, this deficit was $19,878,000.

On December 22, 1997, the Partnership issued $130,000,000 of 10.125% Unsecured
Senior Notes (the "Notes") due December 15, 2007. The proceeds were used to
repay outstanding senior notes and borrowings under the Partnership's revolving
line of credit, purchase Units from the public and pay expenses relative to the
Partnership's Going Private Transaction.

On December 22, 1997, the Partnership obtained a secured $50,000,000 revolving
line of credit facility (the "New Credit Facility") with a sublimit for up to
$5,000,000 of letters of credit. The New Credit Facility matures on January 1,
2003, at which time all amounts become payable. All amounts under the facility
will bear interest at floating rates based on the agent's base rate or
Eurodollar rates as defined in the agreement. As of December 31, 1997, no
borrowings and approximately $3,050,000 of letters of credit were outstanding
under the facility.

Prior to the fourth quarter of 1997, the Partnership had paid regular quarterly
cash distributions to Unitholders. Following the consummation of the Going
Private Transaction, the Partnership does not expect to pay distributions to its
general partner or limited partner except distributions sufficient to satisfy
any tax liabilities of its partners arising out of the allocation of taxable
income or gain from the Partnership. The Senior Note Indenture and the New
Credit Facility limit the Partnership's ability to pay distributions to its
partners.

The Partnership's ability to make scheduled payments of principal of, or to pay
the interest or liquidated damages, if any, on, or to refinance, its
indebtedness (including the Notes), or to fund planned capital expenditures will
depend on its future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond its control. Based upon the current level of operations,
management believes that cash flow from operations and available cash, together
with available borrowings under the New Credit Facility, will be adequate to
meet the Partnership's liquidity needs for the foreseeable future. The
Partnership may, however, need to refinance all or a portion of the principal of
the Notes on or prior to maturity. There can be no assurance that the
Partnership will generate sufficient cash flow from operations, or that future
borrowings will be available under the New Credit Facility in an amount
sufficient to enable the Partnership to service its indebtedness, including the
Notes, or to fund its other liquidity needs. In addition, there can be no
assurance that the Partnership will be able to effect any such refinancing on
commercially reasonable terms or at all.

SYSTEM DEVELOPMENT

The Partnership plans to open seven new full-service Partnership-operated
restaurants in 1998. The Partnership expects to aggressively grow its franchised
restaurants. In recent years, the Partnership has been issuing area development
agreements in selected markets where both new and existing franchisees are
qualified to open multiple locations within three to five years. These
development agreements are expected to complement continued growth among
franchisees who prefer to open a limited number of restaurants in existing and
smaller markets.

16
<PAGE> 17

FEDERAL INCOME TAXATION

For state and Federal income tax purposes, the Partnership is not a taxpaying
entity. 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.

NEW ACCOUNTING PRONOUNCEMENTS

The Partnership will adopt SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in the first quarter of fiscal 1998. The
Partnership is still evaluating the effects of adopting this statement, but does
not expect the adoption to have a material effect on the Partnership's
consolidated financial statements.

IMPACT OF INFLATION

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

IMPACT OF GOVERNMENTAL REGULATION

A majority of the Partnership's employees are paid hourly rates as determined by
Federal and state minimum wage rate laws. Future increases in these rates could
materially affect the Partnership's cost of labor.

SEASONALITY

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

YEAR 2000

The Partnership has analyzed its computer systems and has determined that these
systems are substantially year 2000 compliant. Future costs associated with year
2000 compliance are not expected to be material.

17
<PAGE> 18

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

PERKINS FAMILY RESTAURANTS, L.P.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
(In Thousands)
<TABLE>
<CAPTION>

1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Food sales $ 250,193 $ 234,164 $ 228,259
Franchise revenues 19,333 18,629 17,492
--------- --------- ---------
Total Revenues 269,526 252,793 245,751
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales:
Food cost 72,559 68,456 66,204
Labor and benefits 84,027 78,970 78,916
Operating expenses 50,645 48,284 47,678
General and administrative 26,187 23,741 22,251
Depreciation and amortization 16,029 15,748 14,401
Interest, net 4,862 5,066 4,826
Benefit from litigation costs -- -- (190)
Provision for disposition of assets -- -- 609
Asset write-down (SFAS 121) -- -- 1,900
Other, net (183) (994) (640)
--------- --------- ---------
Total Costs and Expenses 254,126 239,271 235,955
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 15,400 13,522 9,796
EXTRAORDINARY ITEM, Going Private
Transaction 7,200 -- --
--------- --------- ---------
NET INCOME $ 8,200 $ 13,522 $ 9,796
========= ========= =========
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

18
<PAGE> 19

PERKINS FAMILY RESTAURANTS, L.P.
BALANCE SHEETS
DECEMBER 31
(In Thousands, Except Unit Amounts)

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 14,160 $ 2,737
Receivables, less allowance for doubtful accounts of $846 and $430 7,719 6,285
Inventories, at the lower of first-in, first-out cost or market 4,232 4,234
Prepaid expenses and other current assets 1,823 1,551
-------- --------
Total current assets 27,934 14,807
-------- --------

PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization 127,392 115,086
NOTES RECEIVABLE, less allowance for
doubtful accounts of $6 and $10 983 805
INTANGIBLE AND OTHER ASSETS, net of
accumulated amortization of $27,591 and $26,451 58,015 24,958
-------- --------
$214,324 $155,656
======== ========
</TABLE>

The accompanying notes to financial statements are an integral part of these
balance sheets.

19
<PAGE> 20

PERKINS FAMILY RESTAURANTS, L.P.
BALANCE SHEETS
DECEMBER 31
(In Thousands, Except Unit Amounts)

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
LIABILITIES AND PARTNERS' CAPITAL

CURRENT LIABILITIES:
Current maturities of long-term debt $ -- $ 4,356
Current maturities of capital lease obligations 1,301 1,683
Accounts payable 10,563 8,878
Accrued expenses 35,948 14,235
Distributions payable -- 3,479
-------- --------
Total current liabilities 47,812 32,631
-------- --------

CAPITAL LEASE OBLIGATIONS, less current maturities 6,999 8,573

LONG-TERM DEBT, less current maturities 130,000 48,244

OTHER LIABILITIES 4,312 4,651

COMMITMENTS AND CONTINGENCIES
(Notes 5 and 10)

PARTNERS' CAPITAL:
General partner 252 615
Limited partners (5,463,924 and 10,492,930 Units
issued and outstanding) 24,949 60,942
-------- --------

Total Partners' Capital 25,201 61,557
-------- --------
$214,324 $155,656
======== ========
</TABLE>

The accompanying notes to financial statements are an integral part of these
balance sheets.

20
<PAGE> 21

PERKINS FAMILY RESTAURANTS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(In Thousands, Except Unit Data)

<TABLE>
<CAPTION>
Limited
Partnership General Limited
Units Partner Partners Total
----------- ------- -------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 10,379,125 $ 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 restricted Units 126,970 -- 1,604 1,604
Retirement of restricted Units (24,725) -- (390) (390)
Changes in deferred compensation
related to restricted Units -- -- (926) (926)
----------- --------- -------- --------
Balance at December 31, 1995 10,481,370 611 60,485 61,096
----------- --------- -------- --------
Net income for 1996 -- 135 13,387 13,522
Capital contribution -- 7 -- 7
Cash distributions declared ($1.30 per Unit) -- (138) (13,633) (13,771)
Issuance of restricted Units 44,250 -- 544 544
Retirement of restricted Units (32,690) -- (451) (451)
Changes in deferred compensation
related to restricted Units -- -- 610 610
----------- --------- -------- --------
Balance at December 31, 1996 10,492,930 615 60,942 61,557
----------- --------- -------- --------
Net income for 1997 -- 82 8,118 8,200
Capital contribution -- 28 -- 28
Cash distributions declared ($.975 per Unit) -- (103) (10,220) (10,323)
Issuance of restricted Units 13,750 -- 166 166
Retirement of restricted Units (20,413) -- (279) (279)
Changes in deferred compensation
related to restricted Units -- -- 2,278 2,278
Going Private Transaction (5,442,067) -- (36,677) (36,677)
Issuance of Units to PRI and PMC 420,924 -- 639 639
Other (1,200) (370) (18) (388)
----------- --------- -------- --------
Balance at December 31, 1997 5,463,924 $ 252 $ 24,949 $ 25,201
=========== ========= ======== ========
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

21
<PAGE> 22

PERKINS FAMILY RESTAURANTS, L.P.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(In Thousands)

<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 8,200 $ 13,522 $ 9,796
Adjustments to reconcile net income to net cash
provided by operating activities:
Asset write-down (SFAS 121) -- -- 1,900
Depreciation and amortization 16,029 15,748 14,401
Extraordinary item 7,200 -- --
Other non-cash income and expense items 1,941 1,795 1,917
Changes in other operating assets and liabilities 1,524 4,180 (2,682)
--------- -------- --------
Total adjustments 26,694 21,723 15,536
--------- -------- --------
Net cash provided by operating activities 34,894 35,245 25,332
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:

Cash paid for property and equipment (15,086) (11,858) (28,931)
Proceeds from sale of property and equipment 1,513 573 889
Payments on notes receivable 1,154 1,755 723
Investment in/Advances to joint venture (850) -- --
--------- -------- --------
Net cash used in investing activities (13,269) (9,530) (27,319)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from long-term debt 192,000 16,250 59,125
Payments on long-term debt (114,600) (25,075) (41,000)
Principal payments under capital lease obligations (1,956) (2,074) (1,981)
Distributions to partners (13,906) (13,904) (13,870)
Deferred financing costs (5,474) -- (55)
Repurchase of limited partnership units (66,266) -- --
--------- -------- --------
Net cash provided by (used in) financing activities (10,202) (24,803) 2,219
--------- -------- --------
Net increase in cash and cash equivalents 11,423 912 232

CASH AND CASH EQUIVALENTS:

Balance, beginning of year 2,737 1,825 1,593
--------- -------- --------
Balance, end of year $ 14,160 $ 2,737 $ 1,825
========= ======== ========
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

22
<PAGE> 23

PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Organization --

Perkins Family Restaurants, L.P., (the "Partnership" or "PFR"), is a Delaware
limited 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 2.9% of PFR including a 1% general
partner interest and a 1.9% limited partner interest. PRI owns approximately
98.1% of the Limited Partnership Units ("Units") of PFR. PRI is a wholly-owned
subsidiary of The Restaurant Company ("TRC"). 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
agreement (the "Agreement"). The significant provisions of the Agreement 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 operates 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 full-service restaurants are
located in 33 states with the largest number in Minnesota, Ohio, Pennsylvania,
New York, and Florida. There are thirteen 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 --
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.

Cash Equivalents --
The Partnership considers highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.

23
<PAGE> 24

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.

Advertising --
The Partnership expenses the costs of producing and communicating advertising.
Net advertising expense was $10,784,000, $10,629,000 and $10,462,000 for the
fiscal years 1997, 1996 and 1995, respectively.

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

Preopening Costs --
New store preopening costs are deferred and amortized over twelve months,
starting when the restaurant opens.

Impairment of Long-Lived Assets --
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Partnership evaluates the recoverability of assets
(including intangibles) when events and circumstances indicate that assets might
be impaired. For such assets, the Partnership determines impairment by comparing
the undiscounted future cash flows estimated to be generated by these assets to
their respective carrying amounts.

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 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.

On December 22, 1987, tax legislation was enacted which had the effect of taxing
publicly traded partnerships as corporations for tax years beginning after 1997.
However, as a result of the Going Private Transaction as described in Note 2,
the Partnership remained a nontaxable partnership for state and Federal income
tax purposes.

Cash Distributions --
The Partnership recognizes cash distributions payable to its partners as of the
declaration dates. Cash distributions of $0.975 and $1.30 per Unit were declared
during 1997 and 1996, respectively.

24
<PAGE> 25

(2) THE GOING PRIVATE TRANSACTION:

Prior to December 22, 1997, the Partnership was a limited partnership 48.6%
indirectly owned (including its general partner's interest) by TRC. The
remainder of the Units were traded on the New York Stock Exchange under the
symbol "PFR". The Partnership's business was conducted through Perkins
Restaurants Operating Company, L.P. ("PROC"), a Delaware limited partnership.
PFR was the sole limited partner and owned 99% of PROC, and PMC was the sole
general partner and owned the remaining 1% of PROC. Upon a majority vote of the
holders of the publicly traded Units, 5.44 million Units held by persons other
than TRC and its subsidiaries were converted into the right to receive $14.00 in
cash per Unit (the "Going Private Transaction"). Additionally, PROC was merged
into PFR, and PMC's 1% general partnership interest in PROC was converted into a
limited partnership interest in PFR. Upon consummation of the Going Private
Transaction on December 22, 1997, PFR became an indirect wholly-owned subsidiary
of TRC.

TRC's treatment of the transaction as an acquisition of a minority interest of a
subsidiary resulted in "push down" accounting adjustments in accordance with the
purchase method of accounting as a step acquisition. The effect of these
adjustments is summarized as follows:

<TABLE>
<S> <C>
Total purchase price of Units (including direct costs of $1,569) $ 77,758
Less: Minority interest in PFR (36,677)
--------
Total $ 41,081
========

Allocation of step-up of assets:
Property and equipment $ 13,830
Franchise agreements 10,630
Goodwill 16,621
--------
Total $ 41,081
========
</TABLE>

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

As the Going Private Transaction occurred on December 22, 1997, the "push down"
accounting adjustments did not have a material impact on the results of
operations for the year ended December 31, 1997. Expenses of $7,200,000 incurred
in connection with the Going Private Transaction are reflected as an
extraordinary item in the accompanying Statements of Income.

25
<PAGE> 26

The following unaudited proforma results of operations for 1997 and 1996 give
effect to the Going Private Transaction, excluding the $7,200,000 extraordinary
item, as if it had occurred at the beginning of those periods. This proforma
information does not necessarily represent what the results would have been had
the Going Private Transaction occurred at the beginning of each period
presented.

<TABLE>
<CAPTION>
(Unaudited)
---------------------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues $ 269,526 $ 252,793
Net income $ 3,806 $ 2,102
</TABLE>

(3) 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>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
(Increase) Decrease in:

Receivables $(2,675) $ 1,726 $ (877)
Inventories 2 84 (239)
Prepaid expenses and other
current assets (534) (739) (1,032)
Other assets (787) 190 212

Increase (Decrease) in:

Accounts payable 1,685 1,353 (341)
Accrued expenses 3,540 1,294 (545)
Other liabilities 293 272 140
------- ------- -------
$ 1,524 $ 4,180 $(2,682)
======= ======= =======
</TABLE>

The Partnership paid interest of $5,036,000 in 1997, $5,443,000 in 1996 and
$5,621,000 in 1995.

During 1996, the Partnership acquired property, primarily restaurant equipment,
through a master capital lease agreement, totaling $1,565,000.

26
<PAGE> 27

(4) PROPERTY AND EQUIPMENT:

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

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Owned:

Land and land improvements $ 34,469 $ 28,202
Buildings 73,109 65,873
Leasehold improvements 33,942 29,743
Equipment 62,704 54,387
Construction in progress 1,472 1,657
--------- ---------
205,696 179,862
Less - accumulated depreciation and amortization (83,052) (70,932)
--------- ---------
122,644 108,930
--------- ---------
Leased:

Buildings 23,972 24,945
Equipment 1,532 1,564
--------- ---------
25,504 26,509
Less - accumulated amortization (20,756) (20,353)
--------- ---------
4,748 6,156
--------- ---------
$ 127,392 $ 115,086
========= =========
</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>

27
<PAGE> 28
(5) LEASES:

As of December 31, 1997, there were 136 full-service restaurants operated by
the Partnership, as follows:

68 with both land and building leased
56 with both land and building owned
12 with the land leased and building owned

As of December 31, 1997, there were 33 restaurants either leased or subleased
to others by the Partnership as follows:

15 with both land and building leased
13 with both land and building owned
4 with the land leased and building owned

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, 1997 were as follows (in
thousands):

<TABLE>
<CAPTION>
Lease Obligations
--------------------------
Capital Operating
------------ ---------
<S> <C> <C>
1998 $ 2,110 $ 6,268
1999 1,905 5,962
2000 1,549 5,357
2001 1,468 4,977
2002 1,205 4,225
Thereafter 3,600 17,448
-------- -------
Total minimum lease payments 11,837 $44,237
=======
Less:
Amounts representing interest (3,537)
--------
Capital lease obligations $ 8,300
========
</TABLE>

28
<PAGE> 29

Capital lease obligations have effective interest rates ranging from 7.1% to
16.1% and are payable in monthly installments through 2011.

Future minimum gross rental receipts as of December 31, 1997, were as follows
(in thousands):

<TABLE>
<CAPTION>
Amounts Receivable As
---------------------
Lessor Sublessor
-------- ---------
<S> <C> <C>
1998 $ 1,059 $ 1,446
1999 1,069 1,295
2000 1,080 1,051
2001 1,041 1,053
2002 925 937
Thereafter 7,603 3,216
-------- -------
Total minimum lease rentals $ 12,777 $ 8,998
======== =======
</TABLE>

The net rental expense included in the accompanying financial statements for
operating leases was as follows (in thousands):

<TABLE>
<CAPTION>
1997 1996 1995
------- ---------- ---------
<S> <C> <C> <C>
Minimum rentals $ 5,710 $ 5,341 $ 5,064
Contingent rentals 1,280 1,114 1,004
Less - sublease rentals (992) (1,041) (982)
------- --------- -------
$ 5,998 $ 5,414 $ 5,086
======= ========= =======
</TABLE>

(6) INTANGIBLE AND OTHER ASSETS:

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

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Excess of cost over fair value of net assets acquired,
being amortized evenly over 30 to 40 years $ 39,256 $ 23,627
Present value of estimated future royalty fee income
being amortized evenly over the remaining lives of
the franchise agreements 10,909 423
Deferred financing costs being amortized over
the remaining life of the debt agreements 5,793 127
Other 2,057 781
-------- --------
$ 58,015 $ 24,958
======== ========
</TABLE>

29
<PAGE> 30
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.

(7) ACCRUED EXPENSES:

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

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Payroll and related benefits $ 9,006 $ 7,543
Property, real estate and sales taxes 2,427 2,006
Insurance 1,093 1,232
Rent 1,407 1,165
Unredeemed Units and Going Private Transaction costs 17,801 -
Franchise equipment deposits 1,428 -
Advertising 572 530
Other 2,214 1,759
--------- ---------
$35,948 $14,235
========= =========
</TABLE>

[INTENTIONALLY LEFT BLANK]

30
<PAGE> 31

(8) LONG-TERM DEBT:

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

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Unsecured Senior Notes:
10.125%, interest payable semi-annually,
due December 15, 2007 $ 130,000 $ -

7.19%, due in quarterly installments beginning
December 13, 1997 through December 13, 2005 - 20,000

8.60%, due in quarterly installments through
July 1, 2002 - 10,650

6.99%, due in quarterly installments through
July 1, 2003 - 3,950

Revolving credit agreement, due June 30, 1997 - 13,000

Term loan, due in quarterly installments through
June 30, 1998 - 5,000
---------- ----------
$ 130,000 52,600
Less current maturities - (4,356)
---------- ----------
$ 130,000 $ 48,244
========== ==========
</TABLE>

On December 22, 1997, the Partnership issued $130,000,000 of 10.125% Unsecured
Senior Notes ("the Notes") due December 15, 2007. The proceeds were used to
repay outstanding senior notes and borrowings under the Partnership's revolving
line of credit, purchase Units from the public and pay related expenses
relative to the Going Private Transaction.

On December 22, 1997, the Partnership obtained a $50,000,000 secured revolving
line of credit facility (the "New Credit Facility") with a sublimit for up to
$5,000,000 of letters of credit. The New Credit Facility matures on January
1, 2003, at which time all amounts become payable. Any amounts borrowed under
the New Credit Facility will bear interest at floating rates based on the
agent's base rate or Eurodollar rates as defined in the agreement. As of
December 31, 1997, no borrowings and approximately $3,050,000 of letters of
credit were outstanding under the New Credit Facility.

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

31
<PAGE> 32

In order to manage interest costs, the Partnership entered into an interest rate
swap agreement in 1994. The notional amount protected by this transaction
decreases quarterly and the LIBOR component is adjusted quarterly. The agreement
expires June 30, 1998. The Partnership also maintained a participating interest
rate swap and cap agreement. The swap and cap agreement expired on June 30,
1997.

The remaining derivative financial instrument has an inherent element of risk
that the counterparties may be unable to meet the terms of the agreement. 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>
1997 1996
--------- --------
<S> <C> <C>
10.125% Unsecured Senior Notes $ 130,000 $ -
7.19% Unsecured Senior Notes - 19,412
8.6% Unsecured Senior Notes - 10,842
6.99% Unsecured Senior Notes - 3,830
Interest Rate Swap Agreement 11 126
Participating Interest Rate Swap
and Cap Agreement - 51
</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 Partnership's revolving line
of credit and term loan borrowings outstanding at December 31, 1996 bore
interest at current market rates, management believes that the related
liabilities reflected in the accompanying balance sheets approximated fair
market value.

Pursuant to both the Notes and the New Credit Facility, the Partnership must
maintain specified financial ratios and is subject to certain restrictions
which limit additional indebtedness. At December 31, 1997, the Partnership was
in compliance with all such requirements.

Interest expense capitalized in connection with the Partnership's construction
activities amounted to approximately $78,000, $136,000 and $153,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.

32
<PAGE> 33

(9) INCOME TAXES:

As a result of the Going Private Transaction as described in Note 2, the
Partnership remained a nontaxable partnership for state and Federal income tax
purposes. Under the Partnership's form of taxation, the distributions paid by
the Partnership are not taxable to its partners. Instead, the Partnership's
taxable income, which may vary substantially from income reported for financial
purposes, is included in the state and Federal income tax returns of its
partners. Accordingly, no provision for income taxes has been reflected in the
accompanying financial statements.

Beginning after the Going Private Transaction, the Partnership will pay
distributions to its partners from available cash flow in amounts sufficient to
satisfy any tax liabilities of the partners arising out of the allocation of
taxable income or gain from the Partnership.

(10) CONTINGENCIES:

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.

In the past, the Partnership has sponsored financing programs offered by
certain lending institutions to assist its franchisees in procuring funds for
the construction of new franchised restaurants and to purchase and install
in-store bakeries. The Partnership provides a limited guaranty of funds
borrowed. At December 31, 1997, there were approximately $3,640,000 in
borrowings outstanding under these programs. The Partnership has guaranteed
$1,200,000 of these borrowings. No additional borrowings are available under
these programs.

In early 1998, the Partnership entered into a separate two year limited
guarantee of $1,200,000 in borrowings of a franchisee which were used to
construct a new franchise restaurant.

The Partnership's largest franchisee operates 41 restaurants, 37 of which are
leased from unaffiliated lessors, pursuant to a temporary license agreement
expiring March 31, 1998, but which the Partnership expects to extend for an
additional 90 days. The temporary license 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. While
the franchisee has represented to creditors, including the Partnership, that it
is currently in discussions with possible financing sources and a possible
buyer for its business, 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 new arrangements between the Partnership and the owners of the properties.
During the past three years, the franchisee's average net royalty payments to
the Partnership were approximately $1.8 million. At December 31, 1997, the
franchisee was delinquent in its royalty obligations in the amount of
approximately $250,000, net of reserve for loss of $300,000.

33
<PAGE> 34

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 material impact on
the results of the Partnership's operations. As of December 31, 1997, three
franchisees owned 93 of the 337 restaurants franchised by the Partnership.
During 1997, the Partnership received net royalties and license fees of
approximately $2,224,000, $1,681,000 and $1,239,000 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. Awards of restricted
Units under the Unit Plan were 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") was
appointed to administer the Unit Plan. At the time of each award, the Committee
determined the applicable award restrictions, including, without limitation,
(i) a restricted period (not to exceed ten years) during which the Units could
not be sold, transferred or pledged and (ii) the date(s) on which restrictions
on all or a portion of the Units awarded would lapse. To the extent declared,
cash distributions were paid on all Units awarded under the Unit Plan even
during the restricted period.

In conjunction with the Going Private Transaction, all Units under the Unit
Plan, including those Units for which the restrictions had not lapsed, were
repurchased by the Partnership and the Unit Plan was eliminated.

(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, 1997, 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.

34
<PAGE> 35

Participants may elect to defer from 1% to 15% of their annual eligible
compensation subject to legal maximums. 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 1997 and 1996, the Partnership and PMC elected to match
contributions at a rate of 50% up to the first 6% deferred by each participant.
TRC had no employees participating in the Plan at any time during 1997, 1996
or 1995. Partnership matching contributions to the Plan for each of the years
1997, 1996 and 1995 were $615,000, $554,000 and $243,000, respectively.

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

The trust established under the Plan is intended to qualify under the
appropriate section of the 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 and fifth amendments to the Plan, adopted in
1995 and 1996, will be submitted for determination at a later date. The
Partnership's management and legal counsel believe that the adoption of the
aforementioned amendments to the Plan do not hinder the Plan's ability to
operate in compliance with all applicable provisions of the IRC and that a
favorable determination will be received.

[INTENTIONALLY LEFT BLANK]

<PAGE> 36

(13) ASSET WRITE-DOWN (SFAS 121):

During 1995, 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 fair market values as
estimated 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, as identified on the accompanying
financial statements, reduced 1995 net income by $1,900,000 of which $1,290,000
was related to assets to be disposed of. The remaining amounts were due to
write-downs of long-term assets deemed by the Partnership to be impaired. The
major components of the 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 continuing to pursue subleasing one of the properties. 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 $185,000, $197,000 and
$277,000 for the years ended December 31, 1997, 1996, and 1995, respectively.

[INTENTIONALLY LEFT BLANK]

36
<PAGE> 37

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. The Audit Committee of the Board of Directors reviews the
adequacy of the Partnership's internal accounting controls.

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

37
<PAGE> 38

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, 1997 and 1996, 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, 1997. 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, 1997 and 1996 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.

Arthur Andersen LLP

Memphis, Tennessee,
January 30, 1998.

38
<PAGE> 39

PERKINS FAMILY RESTAURANTS, L.P.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In Thousands, Except Per Unit Data)

<TABLE>
<CAPTION>
Cash
Net Distributions
Gross Income Declared
1997 Revenues Profit(a) (Loss) per Unit
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
1st Quarter $ 61,481 $ 13,875 $ 2,725 $ 0.325
2nd Quarter 66,588 15,767 3,464 0.325
3rd Quarter 71,603 17,205 5,581 0.325
4th Quarter 69,854 15,448 (3,570) --
- --------------------------------------------------------------------
$269,526 $ 62,295 $ 8,200 $ 0.975
====================================================================
</TABLE>

<TABLE>
<CAPTION>
Cash
Distributions
Gross Net Declared
1996 Revenues Profit(a) Income per Unit
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
1st Quarter $ 59,973 $ 12,761 $ 2,275 $ 0.325
2nd Quarter 63,516 14,469 3,352 0.325
3rd Quarter 66,217 15,792 4,872 0.325
4th Quarter 63,087 14,061 3,023 0.325
- --------------------------------------------------------------------
$252,793 $ 57,083 $ 13,522 $ 1.30
====================================================================
</TABLE>

(a) Represents total revenues less cost of sales.

39
<PAGE> 40

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no changes in, or disagreements with, accountants during 1997.

[INTENTIONALLY LEFT BLANK]

40
<PAGE> 41

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

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

<TABLE>
<CAPTION>
Name Age Position with PMC
- ------------------------- --- --------------------------
<S> <C> <C>
Donald N. Smith 57 Chairman of the Board and
Chief Executive Officer

Lee N. Abrams 63 Director

Charles L. Atwood 49 Director

Steven L. Ezzes 51 Director

Charles A. Ledsinger, Jr. 48 Director

D. Michael Meeks 55 Director

Richard K. Arras 46 President and Chief Operating Officer

Michael D. Kelly 51 Executive Vice President, Marketing

Steven R. McClellan 42 Executive Vice President, Chief Financial Officer

Jack W. Willingham 52 Executive Vice President, Restaurant Development

James F. Barrasso 47 Vice President, Foodservice Development

Michael P. Donahoe 47 Vice President, Controller

William S. Forgione 44 Vice President, Human Resources

Clyde J. Harrington 39 Vice President, Operations Services

Patrick W. Ortt 51 Vice President, Operations - Eastern Division

Steven J. Pahl 42 Vice President, Operations - Western Division

Anthony C. Seta 50 Vice President, Research and Development

Robert J. Winters 46 Vice President, Franchise Development

Donald F. Wiseman 51 Vice President, General Counsel and Secretary
</TABLE>

41
<PAGE> 42

DONALD N. SMITH
Donald N. Smith has been the Chairman of the Board and Chief Executive Officer
of PMC, PRI and TRC, since 1986. Mr. Smith also has been the Chairman of the
Board and Chief Executive Officer of FICC since 1988. Prior to joining TRC,
Mr. Smith was President and Chief Executive Officer of Diversifoods, Inc. from
1983 to October 1985. From 1980 to 1983, Mr. Smith was a Senior Vice President
of PepsiCo, Inc. and was President of its Food Service Division. Mr. Smith 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.

CHARLES L. ATWOOD
Charles L. Atwood was elected a Director of PMC and TRC in July 1997 and was a
director of FICC from July 1997 to November 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 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, PRI and TRC in October
1991. Since February 1998, Mr. Ledsinger has served as President and Chief
Operating Officer of St. Joe Corporation. From May 1997 until February 1998,
Mr. Ledsinger served as Senior Vice President and Chief Financial Officer of
St. Joe Corporation. From June 1995 until May 1997, Mr. Ledsinger was Senior
Vice President and Chief Financial Officer of Harrah's and from August 1996 to
October 1996, Mr. Ledsinger served as Treasurer of Harrah's. For more than
three years prior, Mr. Ledsinger also 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 of TBC Corporation, a company
specializing in the production and sale of tires and batteries.

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. Prior to
being named to his current position, Mr. Arras was Vice President of Operations.
He has also served as a Director of Operations and as a regional manager for
Perkins restaurants in Minnesota.

42
<PAGE> 43

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. Prior to that, Mr. Kelly was Executive Vice President of
Marketing for Bakers Square for four years. He has also held positions at Pizza
Hut, Inc., Weight Watchers, Stouffers and Fuddruckers.

STEVEN R. MCCLELLAN
Steven R. McClellan has served as an 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 a 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. Mr.
Donahoe served as Vice President and Assistant Secretary of Friendly's Holding
Company from December 1988 to October 1995. He is a Certified Public
Accountant.

WILLIAM S. FORGIONE
William S. Forgione was elected Vice President, Human Resources of PMC
effective August 1997. From July 1994 to August 1997, he was Vice President,
Human Resources of UT Medical Group, Inc. and from July 1993 to July 1994,
Worldwide Program manager for Digital Equipment Corporation.

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 PROC. 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 PROC. 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 PROC.

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.

43
<PAGE> 44

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.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

Officers and Directors surrendered Units related to the Going Private
Transaction effective December 22, 1997 as follows: Richard K. Arras, President
and Chief Operating Officer - 34,560 Units; Lee N. Abrams, Director of PMC -
10,900 Units; Steven L. Ezzes, Director of PMC - 500 Units; James F. Barrasso,
Vice President, Foodservice Development - 11,280 Units; Michael P. Donahoe,
Vice President and Controller - 14,680 Units; William S. Forgione, Vice
President, Human Resources - 5,000 Units; Clyde J. Harrington, Vice President,
Operations Services - 5,000 Units; Michael D. Kelly, Executive Vice President,
Marketing - 12,040 Units; Charles A. Ledsinger, Jr., Director of PMC - 500
Units; Steven R. McClellan, Executive Vice President and Chief Financial
Officer - 10,000 Units; D. Michael Meeks, Director of PMC - 1,000 Units;
Patrick W. Ortt, Vice President - Eastern Division - 7,080 Units; Steven J.
Pahl, Vice President Operations - Western Division - 5,905 Units; Anthony C.
Seta, Vice President, Research and Development - 8,580 Units; Jack W.
Willingham, Executive Vice President, Restaurant Development - 10,840 Units;
Robert J. Winters, Vice President, Franchise Development - 8,160 Units; and
Donald F. Wiseman, Vice President, General Counsel and Secretary - 8,580 Units.
Each surrender was disclosed on a separate Form 4 filed late by each of the
aforementioned Officers and Directors on February 18, 1998.

44
<PAGE> 45

ITEM 11. EXECUTIVE COMPENSATION.

The following table summarizes all compensation paid or accrued for services
rendered to Perkins in all capacities during each of the three years in the
period ended December 31, 1997 with respect to the Chief Executive Officer of
PMC and the four most highly compensated executive officers of PMC whose total
annual salary and bonus exceeded $100,000.

LONG-TERM
---------
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
RESTRICTED ALL OTHER
UNITS COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS OTHER AWARDS(4) SATION
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DONALD N. SMITH 1997 $267,126 $160,000 $ 3,150 (2) -- --
Chairman & Chief 1996 212,912 110,000 8,832 (1)(2) -- 550 (5)
Executive Officer 1995 205,319 -- 8,832 (1)(2) -- 550 (5)

RICHARD K. ARRAS 1997 $249,171 $143,000 $ 9,000 (2) -- $4,750 (6)
President & Chief 1996 226,788 99,000 18,097 (1)(2) -- 6,490 (5)(6)
Operating Officer 1995 216,269 -- 17,529 (1)(2) $ 97,335 3,448 (5)(6)

STEVEN R. MCCLELLAN 1997 $207,001 $ 83,875 $10,055 (2)(3) -- $4,750 (6)
Exec. Vice President & 1996 42,500 39,650 30,715 (1)(2)(3) $ 120,000 298 (5)
Chief Financial Officer 1995 -- -- -- -- --

MICHAEL D. KELLY 1997 $181,836 $ 78,000 $ 9,000 (2) -- $4,750 (6)
Exec. Vice President, 1996 176,287 60,000 12,726 (1)(2) -- 4,808 (5)(6)
Marketing 1995 166,250 -- 11,848 (1)(2) $ 64,890 2,772 (5)(6)

JACK W. WILLINGHAM 1997 $172,481 $ 59,250 $ 9,000 (2) -- $4,750 (6)
Exec. Vice President, 1996 161,582 56,500 15,135 (1)(2) -- 7,630 (5)(6)
Restaurant Development 1995 153,538 -- 14,345 (1)(2) $ 64,890 5,190 (5)(6)
</TABLE>
- -------------------------------------

(1) Includes premiums paid for medical and disability insurance during 1996 for
the named executive officers in the following amounts: Mr. Smith - $6,312; Mr.
Arras - $10,447; Mr. McClellan - $767; Mr. Kelly - $5,076; and Mr. Willingham -
$7,485. Premiums paid on behalf of the named executive officers during 1995
were: Mr. Smith - $6,312; Mr. Arras - $10,329; Mr. Kelly - $4,648; and Mr.
Willingham - $7,145.

(2) Includes auto allowance paid to the named executive officers during 1997 in
the following amounts: Mr. Smith - $3,150; Mr. Arras - $9,000; Mr. McClellan -
$9,000; Mr. Kelly - $9,000; and Mr. Willingham - $9,000. During 1996, Mr. Smith
received an auto allowance of $2,520; Mr. Arras - $7,650; Mr. McClellan -
$2,550; Mr. Kelly - $7,650; and Mr. Willingham - $7,650. During 1995, Mr.
Smith received an auto allowance of $2,520; Mr. Arras - $7,200; Mr. Kelly -
$7,200; and Mr. Willingham - $7,200.

(3) Includes relocation expenses in the amount of $1,055 and $27,398 for 1997
and 1996, respectively for Mr. McClellan.

(4) The restricted period applicable to each award of Units under Perkins
Family Restaurants, L.P. Restricted Limited Partnership Unit Plan (the "Plan")
was established by the Plan Committee (the "Committee") and could not exceed
ten (10) years. The Plan was eliminated during 1997 and all restricted Units
were repurchased by the Partnership in conjunction with the Partnership's Going
Private Transaction. Therefore, as of December 31, 1997 no restricted Units
were outstanding. Cash payments related to repurchased restricted Units during
December 1997 were: Mr. Arras - $118,272; Mr. McClellan - $131,810; Mr. Kelly
- - $126,448; and Mr. Willingham - $101,248.

45
<PAGE> 46

(5) Includes premiums paid for group term life insurance. Premiums paid during
1996 for the named executive officers were: Mr. Smith - $550; Mr. Arras -
$1,740; Mr. McClellan - $298; Mr. Kelly - $58; and Mr. Willingham - $2,880.
Premiums paid on behalf of the named executive officers for 1995 were as
follows: Mr. Smith - $550; Mr. Arras - $1,138; Mr. Kelly - $1,232; and Mr.
Willingham - $2,880.

(6) Includes Perkins' discretionary matching contributions allocated to the
named executive officers for the period January 1, 1997 through December 31,
1997 under Perkins Retirement Savings Plan as follows: Mr. Arras - $4,750; Mr.
McClellan - $4,750; Mr. Kelly - $4,750; and Mr. Willingham - $4,750. For the
period January 1, 1996 through December 31, 1996 the contributions were as
follows: Mr. Arras - $4,750; Mr. Kelly - $4,750; and Mr. Willingham - $4,750.
For the period January 1, 1995 through December 31, 1995, matching
contributions allocated to the named executives were: Mr. Arras - $2,310; Mr.
Kelly - $1,540; and Mr. Willingham - $2,310.

COMPENSATION OF DIRECTORS.

Lee N. Abrams, D. Michael Meeks, Charles A. Ledsinger, Jr. and Steven L. Ezzes
are paid $5,000 for each Board Meeting they attend. Messrs. Abrams, Meeks,
Ledsinger and Ezzes were paid for five meetings of the board in 1997. Also,
these directors participated in a telephone board meeting for which they were
paid a fee of $1,500.

Mr. Abrams, Mr. Meeks, Mr. Ezzes and Mr. Ledsinger each received awards of 500
restricted Units on February 4, 1997 under the Unit Plan valued at $7,000 on
the date of the grant. On December 22, 1997, all Units owned by each director
were redeemed in the Going Private Transaction at $14.00 per Unit resulting in
Mr. Abrams receiving $152,600 (10,900 Units), Mr. Ezzes $7,000 (500 Units), Mr.
Ledsinger $7,000 (500 Units) and Mr. Meeks $14,000 (1,000 Units).

[INTENTIONALLY LEFT BLANK]

46
<PAGE> 47

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

(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.

<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address Beneficial Percent
Title of Class of Beneficial Owner Ownership of Class
--------------------- ----------------------- ---------- --------
<S> <C> <C> <C>
Depositary Units Rep- Perkins Restaurants, 5,358,000 98.06%
resenting Limited Inc., 1 Pierce Place,
Partnership Interests Suite 100 E, Itasca, IL
in the Registrant 60143

Depositary Units Rep- Perkins Management 105,924 1.94%
resenting Limited Company, Inc.
Partnership Interests 6075 Poplar Avenue
in the Registrant Memphis, TN 38119
</TABLE>

Following consummation of the Going Private Transaction, PRI and PMC own all of
the outstanding Units and the Partnership is a wholly-owned indirect subsidiary
of TRC. TRC's outstanding common stock is owned 33.3%, 33.3% and 28.2% by Mr.
Smith, Harrah's and Equitable, respectively and 5.2% by others. Pursuant to
the terms of a Stockholders Agreement (the "Stockholders Agreement") among
TRC's stockholders and the Bylaws of TRC, 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 the Partnership), as defined in the
Stockholders Agreement and 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 at least 75% of shareholders.

TRC and Harrah's have entered into discussions which could lead to the
redemption by TRC of Harrah's interest in TRC, but have reached no agreement on
the terms of such a transition. Should Harrah's interest in TRC be redeemed,
Mr. Smith's ownership would be 50%, Equitable's ownership would be 42.3% and
others would own 7.7%.

(B) SECURITY OWNERSHIP OF MANAGEMENT.

The following table sets forth the number of Units beneficially owned either
directly or indirectly on March 23, 1998 by all directors and the executive
officers named in the Executive Compensation Table above, including all
directors and officers as a group:

<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent
Title of Class Name of Beneficial Owner Ownership of Class
- ----------------------------- ------------------------ ------------ ---------
<S> <C> <C> <C>
Depositary Units Representing Donald N. Smith 1,821,126 (1) 33.33%
Limited Partnership Interests
in the Registrant

" All Directors and Officers
of Registrant as a group 1,821,126 33.33%
</TABLE>

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

(1) Owned indirectly through Mr. Smith's 33.33% ownership of TRC, the sole
shareholder of PRI.

47
<PAGE> 48

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

(A) TRANSACTIONS WITH MANAGEMENT AND OTHERS.

During 1997 and 1996, FICC purchased layer cakes and muffin and pancake mixes
from Perkins for which Perkins was paid approximately $975,000 and $1,425,000,
respectively. PMC believes that the prices paid to Perkins for these products
were no less favorable than the prices that would have been paid for the same
products by a non-affiliated party in an arm's length transaction.

Perkins has subleased certain land, building and equipment to FICC. During
1997 and 1996, Perkins received approximately $322,000 and $328,000,
respectively, related to those subleases.

In 1997, PMC made payments to TRC Realty Co., a subsidiary of TRC, totaling
$504,000 related to the use of an aircraft leased by TRC Realty Co. PMC's use
of this aircraft is solely for Partnership related purposes, and the
Partnership reimburses PMC for all airplane expenses paid. Pursuant to an
agreement expiring April 14, 2004, the Partnership is obligated to reimburse
monthly an amount equal to 50% of the fixed costs of the aircraft (consisting
principally of lease payments, pilot salaries, insurance and hangar rental) and
its proportionate share of variable expenses (such as fuel and maintenance)
based on PMC's actual usage of the aircraft.

The Partnership reimburses TRC for its out-of-pocket expenses related to
management services provided to the Partnership, including a portion of
employee compensation and office related expenses and related expenses. In
addition, TRC reimburses the Partnership for certain tax and accounting
services. Excluding Mr. Smith's compensation and expenses, during 1997, the
payments due to the Partnership exceeded the payments the Partnership owed TRC
by $142,000.

(B) CERTAIN BUSINESS RELATIONSHIPS.

Lee N. Abrams, a director of PMC and chairman of the Audit Committee of PMC, is
a senior partner in the Mayer, Brown & Platt law firm. Mayer, Brown & Platt
represented the Partnership and its affiliates in several matters during 1996
and 1997, including the Going Private Transaction.

In December 1992, Jack W. Willingham, Executive Vice President, Restaurant
Development, obtained a loan from PFR in the original principal amount of
$70,000 with interest at the prime rate. This loan, as renegotiated effective
July 1, 1995, was secured by his principal residence and required yearly
interest payments through January 2000, on which date the entire unpaid
principal balance and all accrued interest were due and payable. The highest
outstanding principal balance during 1997 was $63,746 and the remaining
principal balance at December 31, 1997 was zero.

48
<PAGE> 49

PART IV

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

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

Report of Independent Public Accountants.
Statements of Income for Each of the Three Years Ended December 31,
1997.
Balance Sheets at December 31, 1997 and 1996.
Statements of Changes in Partners' Capital for Each of the Three Years
Ended December 31, 1997.
Statements of Cash Flows for Each of the Three Years Ended December 31,
1997.

2. THE FOLLOWING FINANCIAL STATEMENT SCHEDULES FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995 ARE INCLUDED:

No.
---
Report of Independent Public Accountants on Schedule.
II. Valuation and Qualifying Accounts.

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

3. EXHIBITS (FOOTNOTES APPEAR ON PAGE 51):

Exhibit No.
-----------
<S> <C>
1 Purchase Agreement dated as of December 17, 1997 among the Issuers and
the Initial Purchasers named therein *

3.1(a) Certificate of Incorporation of Perkins Management Company, Inc.(8)

3.1(b) Certificate of Amendment of Certificate of Incorporation of Perkins
Management Company, Inc.(8)

3.2 Certificate of Incorporation of Perkins Finance Corp.

3.3 By-Laws, as amended, of Perkins Management Company, Inc.(7)

3.4 By-Laws of Perkins Finance Corp.

3.5 Certificate of Limited Partnership of Perkins Family Restaurants,
L.P.(9)

4.1(a) Agreement of Limited Partnership of Perkins Family Restaurants,
L.P.(5)

4.1(b) Amended and Restated Agreement of Limited Partnership of Perkins
Family Restaurants, L.P.(5)

4.2 Indenture dated as of December 22, 1997 among the Issuers and the
Trustee named therein.*
</TABLE>

49
<PAGE> 50

<TABLE>
<S> <C>
4.3 Form of 10.125% Series B Senior Notes due 2007
(included in Exhibit 4.2)

5 Opinion of Mayer, Brown & Platt*

10.1 Lease Agreement dated January 18, 1988 between
The Crescent Center, Ltd. and Perkins Restaurants Operating
Company, L.P.(6)

10.2 Modification and Ratification of Lease dated
December 21, 1992 between The Travelers Insurance Company,
successor of interest to the Crescent Center, Ltd., and
Perkins Restaurants Operating Company, L.P.(2)

10.3 Finance Program Agreement dated September 14, 1993 among Bell
Atlantic TriCon Leasing Corporation, d/b/a Bell Atlantic
Capital Corporation, Perkins Restaurants Operating Company,
L.P. and Perkins Family Restaurants L.P.(1)

10.4 Guaranty by Perkins Family Restaurants, L.P. and
Perkins Family Restaurants Operating Company, L.P. in favor of
BancBoston Leasing, Inc. dated as of May 1, 1994.(10)

10.5 Guaranty dated July 5, 1995 among Perkins Restaurants Operating
Company, L.P. and BancBoston Leasing, Inc.(5)

10.6 Third Amended and Restated Agreement and Plan of Merger dated
as of September 11, 1997.*

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

10.8 Registration Rights Agreement dated as of December 22, 1997
among the Issuers and the Initial Purchasers named therein.*

21 Subsidiaries of the Registrant*

23 Consent of Arthur Andersen

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

25 Statement of Eligibility of Trustee*

27 Financial Data Schedule (for SEC use only).

99.1 Certificate of Incorporation of The Restaurant Company.(8)

99.2 Certificate of Amendment of Certificate of Incorporation of The
Restaurant Company. (8)

99.3 By-Laws of The Restaurant Company.(4)

99.4 Articles of Incorporation, as amended, of Perkins Restaurants,
Inc.(7)
</TABLE>

50
<PAGE> 51
<TABLE>
<S> <C>
99.5 By-Laws of Perkins Restaurants, Inc.(9)

99.6 Stockholders Agreement, dated as of November 21, 1985, among The
Restaurant Company, Holiday Inns, Inc., Bass Investment Limited
Partnership, Donald N. Smith, et al.(9)

99.7 Pledge Agreement dated September 2, 1988 between
Perkins Restaurants, Inc. and The First National Bank of
Boston.(6)

99.8 Form of Letter of Transmittal*
</TABLE>

- ------------------------
(1) Incorporated herein by reference to Registrant's Current Report on
Form 8-K/A dated November 1, 1993.

(2) Incorporated herein by reference to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992.

(3) Incorporated herein by reference to Registrant's Current Report on
Form 8-K dated May 29, 1992.

(4) Incorporated herein by reference to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.

(5) Incorporated herein by reference to Registrant's Quarterly Report on
Form 10-Q for the quarterly period ending September 30, 1995.

(6) Incorporated herein by reference to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1988.

(7) Incorporated herein by reference to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1987.

(8) Incorporated herein by reference to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1986.

(9) Incorporated herein by reference to Registrant's Form S-1,
Registration No. 33-7333 dated July 17, 1986.

(10) Incorporated herein by reference to Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1994.

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

(B) NO REPORTS ON FORM 8-K WERE FILED DURING THE FOURTH QUARTER OF 1997.

51
<PAGE> 52

TRADEMARK NOTICE

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

[INTENTIONALLY LEFT BLANK]

52
<PAGE> 53

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, on this 30th day of March,
1998.

PERKINS FAMILY RESTAURANTS, L.P.
BY: PERKINS MANAGEMENT COMPANY, INC.,
GENERAL PARTNER

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on this 30th day of March, 1998.

<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ Donald N. Smith Chairman of the Board, Chief Executive
- ----------------------------- Officer and Director
Donald N. Smith

/s/ Lee N. Abrams Director
- -----------------------------
Lee N. Abrams

/s/ Charles L. Atwood Director
- -----------------------------
Charles L. Atwood

/s/ Steven L. Ezzes Director
- -----------------------------
Steven L. Ezzes

/s/ Charles A. Ledsinger, Jr. Director
- -----------------------------
Charles A. Ledsinger, Jr.

/s/ D. Michael Meeks Director
- -----------------------------
David Michael Meeks

/s/ Steven R. McClellan Executive Vice President, Chief Financial Officer,
- ----------------------------- Principal Financial Officer
Steven R. McClellan

/s/ Michael P. Donahoe Vice President, Controller, Principal Accounting
- ----------------------------- Officer
Michael P. Donahoe
</TABLE>

<PAGE> 54

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

To the Partners of Perkins Family Restaurants, L.P.:

We have audited in accordance with generally accepted auditing standards, the
financial statements of Perkins Family Restaurants, L.P. included in this Form
10-K, and have issued our report thereon dated January 30, 1998. Our audit was
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule listed in Item 14.(a)2. is the responsibility
of the Partnership's management and is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

Arthur Andersen LLP

Memphis, Tennessee,
January 30, 1998.

<PAGE> 55
PERKINS FAMILY RESTAURANTS, L.P.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------
Additions
--------------------
Balance at Charged Charged Deductions Balance
Beginning of to Costs & to Other from at Close
Description Period Expenses Accounts Reserves of Period
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1997

Allowance for Doubtful Accounts $ 440 $727 $ - $ (315)(a) $ 852
====== ==== ==== ======= ======
Allowance for Income Taxes $ 400 $ - $ - $ (400) $ -(c)
====== ==== ==== ======= ======

FISCAL YEAR ENDED DECEMBER 31, 1996

Allowance for Doubtful Accounts $ 495 $299 $ - $ (354)(a) $ 440
====== ==== ==== ======= ======
Reserve for Disposition of Assets $1,061 $ - $ - $(1,061)(b) $ -
====== ==== ==== ======= ======
Allowance for Income Taxes $ 575 $ - $ - $ (175) $ 400(c)
====== ==== ==== ======= ======

FISCAL YEAR ENDED DECEMBER 31, 1995

Allowance for Doubtful Accounts $ 380 $295 $ 22 $ (202)(a) $ 495
====== ==== ==== ======= ======
Reserve for Disposition of Assets $2,347 $335 $ - $(1,621)(b) $1,061
====== ==== ==== ======= ======
Allowance for Income Taxes $1,080 $ - $ - $ (505) $ 575(c)
====== ==== ==== ======= ======
</TABLE>

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

(b) Represents disposal of assets included in the reserve.

(c) Represents the valuation allowance necessary to reduce to zero the net
deferred tax assets realized in connection with the adoption of Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes"
due to the uncertainty of their realizability.

S-1

<PAGE> 1

EXHIBIT 23
CONSENT OF INDEPENDENT
PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation by
reference of our reports, included in or made a part of this Form 10-K, into
the Partnership's previously filed Registration Statement No. 333-45147 on
Form S-4.

Arthur Andersen LLP

Memphis, Tennessee,
March 24, 1998.

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
BALANCE SHEET AS OF DECEMBER 31, 1997 AND FROM THE STATEMENT OF INCOME FOR THE
YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,160
<SECURITIES> 0
<RECEIVABLES> 8,702
<ALLOWANCES> 852
<INVENTORY> 4,232
<CURRENT-ASSETS> 27,934
<PP&E> 231,200
<DEPRECIATION> 103,808
<TOTAL-ASSETS> 214,324
<CURRENT-LIABILITIES> 47,812
<BONDS> 136,999
0
0
<COMMON> 0
<OTHER-SE> 25,201
<TOTAL-LIABILITY-AND-EQUITY> 214,324
<SALES> 250,193
<TOTAL-REVENUES> 269,526
<CGS> 72,559
<TOTAL-COSTS> 207,231
<OTHER-EXPENSES> 46,895
<LOSS-PROVISION> 727
<INTEREST-EXPENSE> 4,862
<INCOME-PRETAX> 15,400
<INCOME-TAX> 0
<INCOME-CONTINUING> 15,400
<DISCONTINUED> 0
<EXTRAORDINARY> 7,200
<CHANGES> 0
<NET-INCOME> 8,200
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
The provision for doubtful accounts and notes is presented within operating
expenses in the accompanying financial statements and is included in total
costs above.
</FN>

</TABLE>