PERKINS FAMILY RESTAURANTS LP, 10-K, 1999-03-31

PERKINS FAMILY RESTAURANTS LP
10-K, 1999-03-31
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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
For the fiscal year ended December 31, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to _______

Commission File Number 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," "Company" or "PFR"), is a
Delaware limited partnership. The Company 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 the
remaining 98.1% of the Limited Partnership Units ("Units") of PFR. PRI is a
wholly-owned subsidiary of The Restaurant Company ("TRC"). The Company
reimburses PMC for all of its direct and indirect costs (principally general and
administrative costs) allocable to the Company. Perkins Finance Corp. ("PFC") is
a wholly-owned subsidiary of PFR and was created solely to act as the co-issuer
of PFR's 10.125% Senior Notes. PFC has no substantial operations of any kind and
does not have any revenues.

The principal shareholders of TRC are Donald N. Smith, PMC's Chairman and Chief
Executive Officer, 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 9.5% 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.

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

OPERATIONS. 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, 1998, entrees served in
Company-operated restaurants ranged in price from $3.99 to $9.49 for breakfast,
$4.65 to $9.49 for lunch and $6.19 to $9.49 for dinner. On December 31, 1998,
there were 496 full service restaurants in the Perkins' system, of which 140
were Company-operated restaurants and 356 were franchised restaurants. Both the
Company-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 Company-operated
restaurants and franchised restaurants were located in 35 states with the
largest number in Minnesota, Ohio, Pennsylvania, Florida and New York (See
Significant Franchisees). Perkins has sixteen franchised restaurants in Canada.

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

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<PAGE> 3

Perkins also offers cookie doughs, muffin batters, pancake mixes, pies and other
food products for sale to its Company-operated and franchised restaurants and
bakery and food service distributors through Foxtail Foods ("Foxtail"), Perkins'
manufacturing division. During 1998, sales of products from this division to
Perkins franchisees and outside third parties constituted approximately 9.2% of
total revenues of the Company.

Franchised restaurants operate pursuant to license agreements generally having
an initial term of 20 years, and pursuant to which a royalty fee (usually 4% of
gross sales) and an advertising contribution (typically 3% of gross sales) are
paid. 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 have the option to pay a license fee of only $30,000 if
limited assistance in opening the restaurant is provided by Perkins. License
agreements are typically terminable by franchisees on 12 to 15 months prior
notice and upon payment of specified liquidated damages. Franchisees do not
typically have express renewal rights. In 1998, average annual royalties paid by
franchisees were approximately $58,700. The following number of license
agreements are scheduled to expire in the years indicated: 1999 - ten; 2000 -
eight; 2001 - ten; 2002 - ten; 2003 - eight. Franchisees typically apply for and
receive new license agreements.

DESIGN DEVELOPMENT. Perkins restaurants are primarily located in free-standing
buildings with between approximately 90 to 250 seats. The Company employs an
on-going system of prototype development, testing and remodeling to maintain
operationally efficient, cost-effective and unique interior and exterior
facility design and decor. An accelerated program to upgrade existing
Company-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, 1998,
approximately 91% of Company-operated restaurants were either new or remodeled
since January 1, 1994.

To promote a consistent and current image throughout the Perkins system, the
Company encourages its franchisees to remodel their restaurants. Thirty-nine
franchised restaurants were remodeled in 1997 and an additional 46 restaurants
were remodeled in 1998. Franchise restaurants that were either new or remodeled
since 1994 represent approximately 63% of the total franchise system.

SYSTEM DEVELOPMENT. Perkins opened six new Company-operated full-service
restaurants in 1998 in St. Louis Park, MN, Orange City, FL, Orlando, FL, West
Des Moines, IA, Stanley, KS and Appleton, WI. One restaurant was reopened in
Bloomington, MN during 1998 after being razed and reconstructed as a new Perkins
Cafe Bakery. Thirty-five new franchised Perkins restaurants opened during the
year and twelve new franchise owners joined the system.

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 Company'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 1998. In addition, no material
amounts were spent to conduct consumer research in 1998.

SIGNIFICANT FRANCHISEES. As of December 31, 1998, three franchisees, otherwise
unaffiliated with Perkins, owned 81 of the 356 full-service franchised
restaurants and bakeries. The respective distribution of restaurants operated by
such franchisees was: 31 restaurants primarily in upstate New York; 30
restaurants in Pennsylvania, Ohio and New York; and 20 restaurants in Ohio and
Kentucky. During 1998, Perkins received net royalties and license fees of
approximately $1,783,000, $1,739,000 and $1,103,000 respectively, from these
franchisees.

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<PAGE> 4

On February 4, 1999, Denny's (a subsidiary of Advantica Restaurant Group) was
the successful bidder in the court-supervised auction sale of 30 restaurants of
Perk Development Corporation ("Perk"), the Company's upstate New York
franchisee. These restaurants ceased operating as Perkins Family Restaurants on
February 28, 1999. For the year ended December 31, 1998, the Company recorded a
reserve for debt of the franchisee guaranteed by the Company of $250,000, a
write-off of $225,000 for unreserved accounts receivable and a non-cash charge
of $689,000 related to the write-off of an intangible asset related to future
royalty income from the franchisee. The Company received approximately
$1,783,000 in royalties from Perk during 1998. Management expects to replace
this revenue stream in future years through the recruiting of new franchisees.

FRANCHISE GUARANTEES. In the past, the Company has sponsored financing programs
offered by certain lending institutions to assist its franchisees in procuring
funds for the construction of new franchised restaurants and to purchase and
install in-store bakeries. The Company provides a limited guaranty of funds
borrowed. At December 31, 1998, there were approximately $3,370,000 in
borrowings outstanding under these programs. The Company has guaranteed
$1,118,000 of these borrowings. No additional borrowings are available under
these programs.

On February 4, 1999, Denny's (a subsidiary of Advantica Restaurant Group) was
the successful bidder in the court-supervised auction sale of 30 restaurants of
Perk Development Corporation, a franchisee of the Company. These restaurants
ceased operating as Perkins Family Restaurants on February 28, 1999. As a
result, the Company recorded a reserve for debt of the franchisee guaranteed by
the Company of $250,000 for the year ended December 31, 1998. After
consideration of this reserve, $2,998,000 and $858,000 in borrowings and
guarantees, respectively, remain under the financing programs above.

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

SERVICE FEE AGREEMENTS. Perkins' predecessors entered into arrangements with
several different parties which have reserved territorial rights under which
specified payments are to be made by Perkins based on a percentage of gross
sales from certain restaurants and for new restaurants opened within certain
geographic regions. During 1998, Perkins paid an aggregate of $2,181,000 under
such arrangements. Three of such agreements are currently in effect. Of these,
one expires upon the death of the beneficiary, one expires in the year 2075 and
the remaining agreement remains in effect as long as the Company operates
Perkins Family Restaurants in certain states.

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

PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY. 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.

4
<PAGE> 5

WORKING CAPITAL. As is typical in the restaurant industry, the Company
ordinarily operates with a working capital deficit since the majority of its
sales are for cash, while credit is received from its suppliers. Funds generated
by cash sales in excess of those needed to service short term obligations are
used by the Company to reduce debt and acquire capital assets. At December 31,
1998, this working capital deficit was $18.2 million.

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, 1999, Perkins employed approximately 10,500 persons,
of whom approximately 360 were administrative and manufacturing personnel and
the balance were restaurant personnel. Approximately 67% 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.

INTENTIONALLY LEFT BLANK

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<PAGE> 6

ITEM 2. PROPERTIES.

The following table lists the location of each of the Company-operated and
franchised restaurants and bakeries as of December 31, 1998 (excluding
alternative formats):

<TABLE>
<CAPTION>
Number of Restaurants and Bakeries
----------------------------------

Company
Operated Franchised Total
-------- ---------- -----
<S> <C> <C> <C>
Alabama -- 1 1
Arizona -- 10 10
Arkansas -- 5 5
Colorado -- 16 16
Delaware -- 1 1
Florida 21 22 43
Georgia -- 2 2
Idaho -- 9 9
Illinois 8 1 9
Indiana -- 6 6
Iowa 17 1 18
Kansas 5 4 9
Kentucky -- 3 3
Maryland -- 2 2
Michigan 5 1 6
Minnesota 40 33 73
Mississippi -- 2 2
Missouri 10 1 11
Montana -- 8 8
Nebraska 5 2 7
New Jersey -- 9 9
New York -- 35 35
North Carolina -- 5 5
North Dakota 3 5 8
Ohio -- 58 58
Oklahoma 3 -- 3
Pennsylvania 7 44 51
South Carolina -- 3 3
South Dakota -- 10 10
Tennessee 1 12 13
Utah -- 1 1
Virginia -- 1 1
Washington -- 7 7
Wisconsin 15 16 31
Wyoming -- 4 4
Canada -- 16 16
--- --- ---

Total 140 356 496
=== === ===
</TABLE>

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

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<PAGE> 7

The following table sets forth certain information regarding Company-operated
restaurants and other properties, as of December 31, 1998:

<TABLE>
<CAPTION>
Number of Properties(1)
--------------------
Use Owned Leased Total
- --- ----- ------ -----
<S> <C> <C> <C>
Offices and Manufacturing Facilities(2) 1 8 9
Perkins Family Restaurants(3) 58 82 140
Alternative Concepts(4) - 3 3
</TABLE>

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

(1) In addition, Perkins leases 19 properties, 16 of which are
subleased to others and 3 of which are vacant. Perkins also owns 14
properties, 12 of which are leased to others, 1 of which is vacant and
1 held for future development.

(2) Perkins' principal office is located in Memphis, Tennessee, and
currently comprises approximately 53,500 square feet under a lease
expiring on May 31, 2003, subject to renewal by 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 42 years and the
shortest lease term will mature in approximately 2 years, assuming the
exercise of all renewal options.

(4) Perkins leases 3 properties, 2 of which are operating as Cafe and
Bakeries and 1 is closed and held for disposal. The average term of the
leases is 7 years, excluding renewal options. The longest lease term
will mature in 15 years and the shortest lease term will mature in
approximately 7 years, assuming the exercise of all renewal options.
The Company is currently negotiating termination of these leases.

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.

Since all publicly traded Units were repurchased in conjunction with the Going
Private Transaction on December 22, 1997, this item is not applicable.

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PART II

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

(a) Market information.

Subsequent to the Going Private Transaction, no established public market exists
for the Company's equity securities.

(b) Unitholders.

As of March 23, 1999, there were 2 Unitholders of record.

Cash distributions totaling $3,468,000 were paid to Perkins' general partner and
limited partners in 1998. These distributions were made to satisfy estimated
income taxes of its partners arising out of the allocation of taxable income
from the Company. The terms of the Company's secured line of credit facility and
Senior Note Indenture otherwise limit its ability to pay distributions to its
partners.

Cash distributions of $0.975 per Unit were declared to Perkins' limited partners
during 1997.

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<PAGE> 9

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>
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Data:
Revenues $298,806 $269,526 $252,793 $245,751 $221,902
Net Income (a) $ 2,984 $ 8,200 $ 13,522 $ 9,796 $ 12,008
Cash Distributions Declared
Per Unit $ N/A $ 0.975 $ 1.30 $ 1.30 $ 1.30

Balance Sheet Data:
Total Assets $202,550 $214,324 $155,656 $161,829 $150,407
Long-Term Debt (b) $134,000 $130,000 $ 48,244 $ 57,850 $ 39,875
Capital Leases (b) $ 5,767 $ 6,999 $ 8,573 $ 8,810 $ 10,862

Statistical Data:

Restaurants and Bakeries
in Operation at End of Year:
Company-Operated (c) 140 136 134 139 132
Franchised (c) 356 337 331 319 300

- -----------------------------------------------------------------------------------------------------
Total 496 473 465 458 432
Average Annual Sales Per
Company-Operated Restaurant $ 1,816 $ 1,682 $ 1,576 $ 1,535 $ 1,535
Average Annual Royalties Per
Franchised Restaurant $ 58.7 $ 56.9 $ 55.2 $ 55.0 $ 53.3

(a) Excluding unusual items, net income for 1998, 1997, 1995 and 1994 would have been $7,254,
$16,050, $12,092 and $13,868, respectively.

(b) Net of current maturities.

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<PAGE> 10

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

RESULTS OF OPERATIONS

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

Overview:
A summary of the Company'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>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Revenues:
Food sales 92.7% 92.8% 92.6%
Franchise revenues 7.3 7.2 7.4
----- ----- -----
Total revenues 100.0 100.0 100.0%
----- ----- -----

Costs and expenses:
Cost of sales:
Food cost 26.3 26.9 27.1
Labor and benefits 32.1 31.2 31.2
Operating expenses 18.4 18.8 19.1
General and administrative 9.7 9.8 9.4
Depreciation and amortization 6.7 5.9 6.2
Interest, net 4.8 1.8 2.0
Loss on/Provision for disposition of assets 0.2 -- --
Asset write-down (SFAS No. 121) 1.1 -- --
Going Private Transaction -- 2.7 --
Loss due to bankruptcy of franchisee 0.2 -- --
Other, net (0.5) (0.1) (0.3)
----- ----- -----
Total costs and expenses 99.0 97.0 94.7
----- ----- -----
Net income 1.0% 3.0% 5.3%
===== ===== =====
</TABLE>

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<PAGE> 11

Net income for 1998 was $2,984,000 versus $8,200,000 in 1997 and $13,522,000 in
1996. Net income for 1998 included $422,000 in loss on/provision for disposition
of assets, $3,373,000 in asset impairment charges under SFAS No. 121 and
$475,000 in write-offs related to the bankruptcy of a significant franchisee.
Net income for 1997 included $7,200,000 in expenses incurred in connection with
the Going Private Transaction and $650,000 in non-recurring tax reorganization
costs. Without these charges, 1998 and 1997 income would have been $7,254,000
and $16,050,000, respectively.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Revenues:

Total revenues increased 10.9% over 1997 due primarily to increased restaurant
food sales, sales at Foxtail, and increased franchise royalties.

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

Revenues from Foxtail increased approximately 15.6% over 1997 and constituted
approximately 9.2% of the Company's total 1998 revenues. Foxtail offers cookie
doughs, muffin batters, pancake mixes, pies and other food products to
Company-operated and franchised restaurants through food service distributors in
order to ensure consistency and availability of Perkins' proprietary products to
each unit in the system. Additionally, it produces a variety of non-proprietary
products for sale in various retail markets. Sales to Company-operated
restaurants are eliminated in the accompanying income statements. The increase
noted above can be attributed to growth in the number of stores in the Perkins
system and increased external sales. The increase in outside sales is due to the
Company pursuing sales outside the Perkins system in order to maintain plant
utilization during slower production periods.

Franchise revenues, which consist primarily of franchise royalties and initial
license fees, increased 13.1% over the prior year due primarily to the net
addition of nineteen new franchised restaurants. The increase was also impacted
by an increase in sales for franchised restaurants open for more than one year
of approximately 1.7%.

Costs and Expenses:

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

The cost of Foxtail sales, in terms of total Foxtail revenues, decreased
approximately 1.7 percentage points from 1997, due primarily to certain
commodity cost decreases and pricing increases. As a manufacturing operation,
Foxtail typically has higher food costs as a percent of revenues than the
Company's restaurants.

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<PAGE> 12

Labor and benefits:
Labor and benefits expense, as a percentage of total revenues, increased 0.9
percentage points from 1997. Labor costs have increased over the prior year due
to higher minimum wage rates, a highly competitive labor market and slightly
lower productivity. Employee insurance costs rose over the prior year due to a
change in the provider network effective October 1, 1997. Many health care
providers within the network began to withdraw during the year depriving the
Company of anticipated discounts. Effective October 1, 1998, the Company changed
provider networks in an effort to control these costs.

The wage rates of the Company's hourly employees are impacted by Federal and
state minimum wage laws. Legislation enacted during 1996 which raised the
Federal minimum wage rate in 1996 and 1997 has had an impact on the Company's
labor costs. These increases have resulted in the Federal minimum wage rate
increasing from $4.25 per hour in 1996 to $5.15 per hour today. Certain states
do not allow tip credits for servers which results in higher payroll costs as
well as greater exposure to increases in minimum wage rates. In the past, the
Company has been able to offset increases in labor costs through selective menu
price increases and improvements in labor productivity. The Company believes
that it has been able to offset the majority of the recent increases through
selective menu price increases. However, there is no assurance that future
increases can be mitigated through raising menu prices.

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

Operating expenses:
Operating expenses, expressed as a percentage of total revenues, decreased 0.4
percentage points from 1997 to 1998. The decrease is primarily due to the impact
of menu price increases and lower franchise service fees partially offset by
increased franchise opening costs and higher external distribution and storage
costs at Foxtail. Franchise service fees decreased due to the termination of two
service fee agreements during 1997. Franchise opening costs increased due to the
opening of 19 additional restaurants during the year compared to 1997. Foxtail
external distribution and storage costs increased due to the use of outside
warehousing allowing increased efficiency within the plants and more timely
availability of goods for customers.

General and administrative:
General and administrative expenses increased approximately 11.2% over 1997.
This increase is primarily due to higher incentive compensation costs,
restaurant development costs, field administration costs, human resources costs
and administrative costs at Foxtail. In addition, payroll expense for corporate
administrative staff has increased over the prior year. These were planned
increases deemed necessary as the Company continues to increase the number of
franchise and Company-operated restaurants.

Depreciation and amortization:
Depreciation and amortization increased approximately 25.8% over 1997 due to the
write-up of fixed assets and intangibles resulting from "push-down" accounting
adjustments recorded in December 1997 in connection with the Going Private
Transaction. Additionally, the Company's continuing refurbishment program to
upgrade and maintain existing restaurants and the addition of four new
Company-operated restaurants contributed to this increase.

Interest, net:
Net interest expense was approximately 194.4% higher than 1997 primarily as the
result of debt incurred in December 1997 which was used to consummate the Going
Private Transaction. Interest expense associated with capital lease obligations
has decreased.

12
<PAGE> 13

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

Asset writedown (SFAS No. 121):
Results of operations for the twelve months ended December 31, 1998, reflect a
$3,373,000 charge against earnings related to the writedown of certain assets
impaired under SFAS No. 121. This charge includes the write-off of an intangible
asset of $689,000 which related to future royalty income of a franchisee which
became disaffiliated with the Perkins system.

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

Other:
Other income increased approximately $1,230,000 during 1998 due primarily to
$650,000 in reorganization costs incurred in 1997 associated with the Company
analyzing the alternatives to becoming a tax paying entity beginning January
1998, increased rental income on properties leased/subleased by the Company and
elimination of the 1% minority interest in Company operations due to the Going
Private Transaction.

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 Company-operated restaurants and increased sales at Foxtail.

Comparable sales for Company-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 Company's
development and promotion of higher-priced menu items. Management believes
remodeling of Company-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 Company's total revenues. 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
Company developing external sales in order to maintain plant utilization during
slower production periods.

Franchise revenues 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 Company-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.

13
<PAGE> 14
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 Company's restaurants rose due to mandated increases
in minimum wage rates and wage rate pressures from low levels of unemployment.

Operating expenses:
Operating expenses, expressed as a percentage of total revenues, decreased 0.3
percentage points over 1996. Fees payable under service fee 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 Company's improved
performance and due to increased administrative support related to both the
growth at Foxtail and anticipated growth in the number of Company-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 Company-operated
restaurants.

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

Going Private Transaction:
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 Company expensed
$7,200,000 of related costs.

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

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 Company-operated restaurants,
maintenance capital and costs related to remodels of existing restaurants. The
Company's primary sources of funding were the issuance of debt and cash provided
by operations.

14
<PAGE> 15

The following table summarizes capital expenditures for each of the years in the
three-year period ended December 31, 1998 (in thousands).

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------

1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Maintenance $ 4,141 $ 3,453 $ 2,987
New sites 12,845 6,193 1,947
Manufacturing 1,152 714 651
Remodeling and Reimaging 4,144 2,790 4,064
Other 2,864 1,936 2,209
------- ------- -------
Total Capital Expenditures $25,146 $15,086 $11,858
======= ======= =======
</TABLE>

The Company's capital budget for 1999 is $28.0 million and includes plans to add
eight new Company-operated restaurants. The Company may increase the capital
budget if it concludes accelerating its development plans would be in its best
interest. 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 Company ordinarily operates with a
working capital deficit since the majority of its sales are for cash, while
credit is received from its suppliers. Funds generated by cash sales in excess
of those needed to service short term obligations are used by the Company to
reduce debt and acquire capital assets. At December 31, 1998, this working
capital deficit was $18.2 million.

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

On December 22, 1997, the Company obtained a secured $50,000,000 revolving line
of credit facility (the "Credit Facility") with a sublimit for up to $5,000,000
of letters of credit. The Credit Facility matures on January 1, 2003, at which
time all amounts become payable. All amounts under the facility will bear
interest at floating rates based on the agent's base rate or Eurodollar rates as
defined in the agreement. All indebtedness under the Credit Facility is secured
by a first priority lien on substantially all of the assets of the Company. As
of December 31, 1998, $4,000,000 in borrowings and approximately $1,573,000 of
letters of credit were outstanding under the facility.

Prior to the consummation of the Going Private Transaction the Company had paid
regular quarterly cash distributions. The Company expects to pay distributions
to its general partner and limited partners sufficient to satisfy estimated tax
liabilities arising out of the allocation of taxable income or gain from the
Company. The Senior Note Indenture and the Credit Facility otherwise limit the
Company's ability to pay distributions to its partners.

15
<PAGE> 16

The Company's ability to make scheduled payments of principal of, or to pay the
interest or liquidated damages, if any, on, or to refinance, its indebtedness
(including the Notes), 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 Credit Facility, will be adequate to meet the
Company's liquidity needs for the foreseeable future. The Company may, however,
need to refinance all or a portion of the principal of the Notes on or prior to
maturity. There can be no assurance that the Company will generate sufficient
cash flow from operations, or that future borrowings will be available under the
Credit Facility in an amount sufficient to enable the Company to service its
indebtedness, including the Notes, or to fund its other liquidity needs. In
addition, there can be no assurance that the Company will be able to effect any
such refinancing on commercially reasonable terms or at all.

LOSS OF A SIGNIFICANT FRANCHISEE

SYSTEM DEVELOPMENT

The Company plans to add eight new Company-operated restaurants in 1999. The
Company expects to open between 30 and 35 franchised restaurants in 1999. In
recent years, the Company has been issuing area development agreements in
selected markets where both new and existing franchisees are qualified to open
multiple locations within three to five years. These development agreements are
expected to complement continued growth among franchisees who prefer to open a
limited number of restaurants in existing and smaller markets.

FEDERAL INCOME TAXATION

For state and Federal income tax purposes, the Company is not a taxpaying
entity. Accordingly, no current provision for income taxes is reflected in the
accompanying financial statements. The tax returns of the Company 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.

16
<PAGE> 17

NEW ACCOUNTING PRONOUNCEMENTS

In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which the Company is adopting in 1999. SOP 98-5 requires the costs
of start-up activities to be expensed as incurred. Historically, new store
preopening costs have been deferred and amortized over twelve months starting
when the restaurant opens. Upon adoption of SOP 98-5, the Company will be
required to record a cumulative effect of a change in accounting principle to
write off any unamortized preopening costs that exist on the balance sheet at
that date. As of December 31, 1998, the Company had unamortized preopening costs
of approximately $523,000 which will be expensed during the first quarter of
1999.

Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," is required to be implemented
for fiscal years beginning after June 15, 1999. The Company is currently
evaluating the effects of adopting this statement, but does not expect the
adoption to have a material effect on the Company's financial statements.

IMPACT OF INFLATION

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

IMPACT OF GOVERNMENTAL REGULATION

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

SEASONALITY

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

17
<PAGE> 18

YEAR 2000

The Year 2000 presents a critical business issue due to the possibility that
many computerized systems will not be able to process information including
dates beginning in the Year 2000. In recent years, the Company has upgraded
computer hardware and software in the normal course of business to Year 2000
compliant technology. The Company has established a plan to assess its readiness
for the Year 2000. A review of computer systems and software, including
non-information technology systems, has been substantially completed. No
material costs associated with achieving Year 2000 compliance internally are
anticipated based on this review.

The nature of the Company's business is such that the ability of outside vendors
to supply the Company's restaurants with food and related products and
preparedness of the Company's franchisees to appropriately assess and address
Year 2000 business risks represent the primary risks to the Company from third
parties. In response to these risks, questionnaires have been sent to all of the
Company's primary vendors to obtain reasonable assurances that adequate plans
are being developed to address the Year 2000 issue. The returned questionnaires
are being assessed by the Company, and are being categorized based upon
readiness for the Year 2000 issues and prioritized in order of significance to
the business of the Company. In the case of outside vendors which provide
inadequate assurance of their readiness to handle Year 2000 issues, appropriate
contingency plans will be developed. The Company's franchisees have been
provided with information regarding the potential business risks associated with
the Year 2000 issue. The Year 2000 readiness of significant franchisees will be
assessed and action plans will be created to address the identified risks.

Unless public suppliers of water, electricity and natural gas are disrupted for
a substantial period of time (in which case the Company's business may be
materially adversely affected), based on information currently available,
management believes the most reasonably likely worst case scenario related to
Year 2000 compliance would not have a material impact on its financial position
or results of operations. However, unanticipated failures by critical vendors or
franchisees, as well as unidentified internal failures, could result in a
material adverse effect on the Company's operations. As a result, management
cannot reasonably predict what impact, if any, Year 2000 issues will have on the
Company.

18
<PAGE> 19

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK. The Company currently has market risk sensitive instruments
related to interest rates. The Company is not subject to significant exposure
for changing interest rates on its $130,000,000 Unsecured Senior Notes because
the interest rate is fixed at 10.125%. The Company has in place a $50,000,000
line of credit facility which matures on January 1, 2003. All borrowings under
the facility bear interest at floating rates based on the agent's base rate or
Eurodollar rates. The Company had $4,000,000 outstanding under the line of
credit facility at December 31, 1998. While changes in market interest rates
would affect the cost of funds borrowed in the future, the Company believes that
the effect, if any, of reasonably possible near-term changes in interest rates
on the Company's consolidated financial position, results of operations or cash
flows would not be material.

COMMODITY PRICE RISK. Many of the food products purchased by the Company are
affected by commodity pricing and are, therefore, subject to price volatility
caused by weather, production problems, delivery difficulties and other factors
which are outside the control of the Company. The Company's supplies and raw
materials are available from several sources and the Company is not dependent
upon any single source for these items. If any existing suppliers fail, or are
unable to deliver in quantities required by the Company, the Company believes
that there are sufficient other quality suppliers in the marketplace that its
sources of supply can be replaced as necessary. At times the Company enters into
purchase contracts of one year or less or purchases bulk quantities for future
use of certain items in order to control commodity pricing risks. Certain
significant items that could be subject to price fluctuations are beef, pork,
coffee, eggs, wheat products and corn products. The Company believes it will be
able to pass through increased commodity costs by adjusting menu pricing in most
cases. However, the Company believes that any changes in commodity pricing which
cannot be offset by changes in menu pricing or other product delivery
strategies, would not be material.

19
<PAGE> 20

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Food sales $ 276,935 $ 250,193 $ 234,164
Franchise revenues 21,871 19,333 18,629
--------- --------- ---------
Total Revenues 298,806 269,526 252,793
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales:
Food cost 78,576 72,559 68,456
Labor and benefits 96,011 84,027 78,970
Operating expenses 54,779 50,645 48,284
General and administrative 29,120 26,187 23,741
Depreciation and amortization 20,167 16,029 15,748
Interest, net 14,312 4,862 5,066
Loss on/Provision for disposition of assets, net 422 -- --
Asset write-down (SFAS No. 121) 3,373 -- --
Going Private Transaction -- 7,200 --
Loss due to bankruptcy of franchisee 475 -- --
Other, net (1,413) (183) (994)
--------- --------- ---------
Total Costs and Expenses 295,822 261,326 239,271
--------- --------- ---------
NET INCOME $ 2,984 $ 8,200 $ 13,522
========= ========= =========
</TABLE>

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

20
<PAGE> 21

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

<TABLE>
<CAPTION>
1998 1997
-------- --------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,257 $ 14,160
Receivables, less allowance for doubtful accounts of $495 and $846 7,150 7,719
Inventories, at the lower of first-in, first-out cost or market 5,375 4,232
Prepaid expenses and other current assets 1,989 1,823
-------- --------
Total current assets 16,771 27,934
-------- --------

PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization 131,271 127,392
NOTES RECEIVABLE, less allowance for
doubtful accounts of $161 and $6 748 983
INTANGIBLE AND OTHER ASSETS, net of
accumulated amortization of $30,415 and $27,591 53,760 58,015
-------- --------
$202,550 $214,324
======== ========
</TABLE>

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

<PAGE> 22

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

<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current maturities of long-term debt $ -- $ --
Current maturities of capital lease obligations 1,229 1,301
Accounts payable 11,469 10,563
Accrued expenses 22,254 35,948
-------- --------
Total current liabilities 34,952 47,812
-------- --------

CAPITAL LEASE OBLIGATIONS, less current maturities 5,767 6,999

LONG-TERM DEBT, less current maturities 134,000 130,000

OTHER LIABILITIES 3,114 4,312

COMMITMENTS AND CONTINGENCIES
(Notes 5 and 10)

PARTNERS' CAPITAL:
General partner 247 252
Limited partners (5,463,924 Units issued and outstanding) 24,470 24,949
-------- --------
Total Partners' Capital 24,717 25,201
-------- --------
$202,550 $214,324
======== ========
</TABLE>

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

<PAGE> 23

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, 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 ($0.975 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
----------- ----- -------- --------
Net income for 1998 -- 30 2,954 2,984
Tax distributions -- (35) (3,433) (3,468)
----------- ----- -------- --------
Balance at December 31, 1998 5,463,924 $ 247 $ 24,470 $ 24,717
=========== ===== ======== ========
</TABLE>

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

23
<PAGE> 24

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

1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,984 $ 8,200 $ 13,522
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 20,167 16,029 15,748
Going Private Transaction -- 7,200 --
Loss on/Provision for disposition of assets 197 -- --
Asset writedown (SFAS No. 121) 3,373 -- --
Other non-cash income and expense items 1,697 1,941 1,795
Changes in other operating assets and liabilities 302 1,524 4,180
-------- --------- --------
Total adjustments 25,736 26,694 21,723
-------- --------- --------
Net cash provided by operating activities 28,720 34,894 35,245
-------- --------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment (25,146) (15,086) (11,858)
Proceeds from sale of property and equipment 1,095 1,513 573
Payments on notes receivable 1,249 1,154 1,755
Investment in/Advances to joint venture (110) (850) --
-------- --------- --------
Net cash used in investing activities (22,912) (13,269) (9,530)
-------- --------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 43,800 192,000 16,250
Payments on long-term debt (39,800) (114,600) (25,075)
Principal payments under capital lease obligations (1,304) (1,956) (2,074)
Distributions to partners (3,468) (13,906) (13,904)
Deferred financing costs (536) (5,474) --
Repurchase of limited partnership units (16,403) (66,266) --
-------- --------- --------
Net cash used in financing activities (17,711) (10,202) (24,803)
-------- --------- --------
Net increase (decrease) in cash and cash equivalents (11,903) 11,423 912

CASH AND CASH EQUIVALENTS:
Balance, beginning of year 14,160 2,737 1,825
-------- --------- --------
Balance, end of year $ 2,257 $ 14,160 $ 2,737
======== ========= ========
</TABLE>

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

24
<PAGE> 25

PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Organization --

Perkins Family Restaurants, L.P., ("Perkins," "Company" or "PFR"), is a Delaware
limited partnership. The Company 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 Company reimburses PMC for all of its
direct and indirect costs (principally general and administrative costs)
allocable to the Company. Perkins Finance Corp. ("PFC") is a wholly-owned
subsidiary of PFR and was created solely to act as the co-issuer of PFR's
10.125% Senior Notes. PFC has no substantial operations of any kind and does not
have any revenues.

The activities of the Company 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 Company 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 35 states with the largest number in Minnesota, Ohio, Pennsylvania, Florida
and New York (See Note 16). There are sixteen franchised restaurants located in
Canada. The Company also offers cookie doughs, muffin batters, pancake mixes,
pies and other food products for sale to Company-operated and franchised
restaurants and bakery and food service distributors through Foxtail Foods
("Foxtail"), the Company'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 Company considers highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.

Franchise Revenue --
Franchisees are required to pay an initial fee to the Company when each
franchise is granted. These fees are not recognized as income until the
restaurants open. The Company 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.

25
<PAGE> 26
Advertising --
The Company expenses the costs of advertising. Net advertising expense was
$11,644,000, $10,784,000 and $10,629,000 for the fiscal years 1998, 1997 and
1996, 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 --
Historically, new store preopening costs have been deferred and amortized over
twelve months starting when the restaurant opens. In April 1998, the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-5, "Reporting on the Costs of Start-Up Activities," which the Company is
adopting in 1999. SOP 98-5 requires the costs of start-up activities to be
expensed as incurred. Upon adoption of SOP 98-5, the Company will be required to
record a cumulative effect of a change in accounting principle to write off any
unamortized preopening costs that exist on the balance sheet at that date. As of
December 31, 1998, the Company had unamortized preopening costs of approximately
$523,000 which will be expensed during the first quarter of 1999.

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

Income Taxes --
For state and Federal income tax purposes, the Company 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 Company 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.

Cash Distributions --
Cash distributions totaling $3,468,000 were paid to Perkins' general partner and
limited partners in 1998 to satisfy estimated income taxes of the partners
arising out of the allocation of taxable income from the Company. Cash
distributions of $0.975 per Unit were declared to Perkins' limited partners
during 1997.

New Accounting Pronouncements --
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," is required to be implemented
for fiscal years beginning after June 15, 1999. The Company is currently
evaluating the effects of adopting this statement, but does not expect the
adoption to have a material effect on the Company's financial statements.

<PAGE> 27

(2) THE GOING PRIVATE TRANSACTION:

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

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 (in thousands):

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

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

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

The Going Private Transaction "push down" accounting adjustments resulted in
additional depreciation and amortization expense of approximately $3,000,000 in
1998. As the Going Private Transaction occurred on December 22, 1997, there was
no material impact on the results of operations for the year ended December 31,
1997. Expenses of $7,200,000 incurred in connection with the Going Private
Transaction are reflected in the accompanying Statements of Income for the year
ended December 31, 1997.

<PAGE> 28

The following unaudited proforma results of operations for 1997 and 1996 give
effect to the Going Private Transaction, excluding the $7,200,000 in Going
Private Transaction expenses, as if it had occurred at the beginning of 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)
(in thousands)
-----------------------------
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>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
(Increase) Decrease in:
$ (699) $(2,675) $ 1,726
Receivables
Inventories (1,143) 2 84
Prepaid expenses and other current assets (916) (534) (739)
Other assets 1,051 (787) 190

Increase (Decrease) in:
Accounts payable 907 1,685 1,353
Accrued expenses 2,300 3,540 1,294
Other liabilities (1,198) 293 272
------- ------- -------
$ 302 $ 1,524 $ 4,180
======= ======= =======
</TABLE>

The Company paid interest of $13,398,000 in 1998, $5,036,000 in 1997 and
$5,443,000 in 1996.

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

28
<PAGE> 29

(4) PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following as of December 31 (in
thousands):

<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Owned:
Land and land improvements $ 34,770 $ 34,469
Buildings 76,099 73,109
Leasehold improvements 40,195 33,942
Equipment 68,880 62,704
Construction in progress 1,465 1,472
--------- ---------
221,409 205,696
Less - accumulated depreciation and amortization (93,911) (83,052)
--------- ---------
127,498 122,644
--------- ---------
Leased:
Buildings 23,654 23,972
Equipment 1,532 1,532
--------- ---------
25,186 25,504
Less - accumulated amortization (21,413) (20,756)
--------- ---------
3,773 4,748
--------- ---------
$ 131,271 $ 127,392
========= =========
</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>

29
<PAGE> 30

(5) LEASES:

As of December 31, 1998, there were 140 full-service restaurants operated by the
Company, as follows:

68 with both land and building leased
58 with both land and building owned
14 with the land leased and building owned

As of December 31, 1998, there were 28 restaurants either leased or subleased to
others by the Company as follows:

13 with both land and building leased
12 with both land and building owned
3 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, 1998 were as follows (in
thousands):

<TABLE>
<CAPTION>
Lease Obligations
-----------------------
Capital Operating
------- ---------
<S> <C> <C>
1999 $ 1,904 $ 6,332
2000 1,549 5,767
2001 1,469 5,378
2002 1,206 4,542
2003 970 2,901
Thereafter 2,628 14,115
------- -------

Total minimum lease payments 9,726 $39,035
========

Less:
Amounts representing interest (2,730)
-------

Capital lease obligations $6,996
======
</TABLE>

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

30
<PAGE> 31

Future minimum gross rental receipts as of December 31, 1998, were as follows
(in thousands):

<TABLE>
<CAPTION>
Amounts Receivable As
-------------------------
Lessor Sublessor
--------- ---------
<S> <C> <C>
1999 $ 1,069 $ 1,242
2000 1,080 998
2001 1,041 1,000
2002 925 884
2003 925 654
Thereafter 6,678 2,537
--------- ---------
Total minimum lease rentals $ 11,718 $ 7,315
========= =========
</TABLE>

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

1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Minimum rentals $ 6,350 $ 5,710 $ 5,341
Contingent rentals 1,570 1,280 1,114
Less - sublease rentals (1,022) (992) (1,041)
------- ------- -------
$ 6,898 $ 5,998 $ 5,414
======= ======= =======
</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>
1998 1997
------- -------
<S> <C> <C>
Excess of cost over fair value of net assets acquired,
being amortized evenly over 30 to 40 years $37,849 $39,256
Present value of estimated future royalty fee income
being amortized evenly over the remaining lives of
the franchise agreements 8,937 10,909
Deferred financing costs being amortized over
the remaining life of the debt agreements 5,036 5,793
Other 1,938 2,057
------- -------
$53,760 $58,015
======= =======
</TABLE>

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

31
<PAGE> 32

(7) ACCRUED EXPENSES:

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

1998 1997
------- -------
<S> <C> <C>
Payroll and related benefits $12,660 $ 9,006
Property, real estate and sales taxes 2,401 2,427
Insurance 686 1,139
Rent 1,595 1,407
Unredeemed Units and Going Private Transaction costs 252 17,801
Franchise equipment deposits -- 1,428
Other 4,660 2,740
------- -------
$22,254 $35,948
======= =======
</TABLE>

(8) LONG-TERM DEBT:

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

<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Unsecured Senior Notes:
10.125%, interest payable semi-annually,
due December 15, 2007 $130,000 $130,000

Revolving credit agreement, due January 1, 2003 4,000 --
-------- --------
134,000 130,000
Less current maturities -- --
-------- --------
$134,000 $130,000
======== ========
</TABLE>

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

On December 22, 1997, the Company obtained a $50,000,000 secured revolving line
of credit facility (the "Credit Facility") with a sublimit for up to $5,000,000
of letters of credit. The Credit Facility matures on January 1, 2003, at which
time all amounts become payable. Any amounts borrowed under the Credit Facility
will bear interest at floating rates based on the agent's base rate or
Eurodollar rates as defined in the agreement. All indebtedness under the Credit
Facility is secured by a first priority lien on substantially all of the assets
of the Company. As of December 31, 1998, $4,000,000 in borrowings and
approximately $1,573,000 of letters of credit were outstanding under the Credit
Facility.

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

In order to manage interest costs, the Company entered into an interest rate
swap agreement in 1994. The agreement expired June 30, 1998.

32
<PAGE> 33

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

<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
10.125% Unsecured Senior Notes $ 138,000 $ 130,000
Interest Rate Swap Agreement -- 11

</TABLE>

The value associated with the interest rate swap represents the estimated
contract value as reported to the Company by the commercial bank that was the
counterparty to these agreements. Because the Company's revolving line of credit
borrowings outstanding at December 31, 1998 bear 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 Credit Facility, the Company must maintain
specified financial ratios and is subject to certain restrictions which limit
additional indebtedness. At December 31, 1998, the Company was in compliance
with all such requirements.

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

1. sufficient to pay its equity holders' estimated federal, state and
local income taxes on the holders' share of the taxable income of the
Company (Tax Distributions).

2. in an aggregate amount after December 22, 1997 equal to 50% of positive
net income, after Tax Distributions, from January 1, 1998 through the
end of the most recently ended fiscal quarter.

3. up to an aggregate of $5 million after December 22, 1997.

As of December 31, 1998, the Company had made tax distributions to its equity
holders of $3,468,000.

Interest expense capitalized in connection with the Company's construction
activities amounted to approximately $198,000, $78,000 and $136,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.

(9) INCOME TAXES:

The Company is a nontaxable partnership for state and Federal income tax
purposes. Under the Company's form of taxation, the distributions paid by the
Company are not taxable to its partners. Instead, the Company'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.

Since the Going Private Transaction, the Company pays distributions to its
partners from available cash flow in amounts sufficient to satisfy estimated tax
liabilities of the partners arising out of the allocation of taxable income or
gain from the Company.

33
<PAGE> 34

(10) CONTINGENCIES:

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

In the past, the Company has sponsored financing programs offered by certain
lending institutions to assist its franchisees in procuring funds for the
construction of new franchised restaurants and to purchase and install in-store
bakeries. The Company provides a limited guaranty of funds borrowed. At December
31, 1998, there were approximately $3,370,000 in borrowings outstanding under
these programs. The Company has guaranteed $1,118,000 of these borrowings. No
additional borrowings are available under these programs.

On February 4, 1999, Denny's (a subsidiary of Advantica Restaurant Group) was
the successful bidder in the court-supervised auction sale of 30 restaurants of
Perk Development Corporation, a franchisee of the Company. These restaurants
ceased operating as Perkins Family Restaurants on February 28, 1999. As a
result, the Company recorded a reserve for debt of the franchisee guaranteed by
the Company of $250,000 for the year ended December 31, 1998. After
consideration of this reserve, $2,998,000 and $858,000 in borrowings and
guarantees, respectively, remain under the financing programs above.

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

The majority of the Company's franchise revenues are generated from franchisees
owning less than 5% of total franchised restaurants and, therefore, the loss of
any one of these franchisees would not have a material impact on the results of
the Company's operations. As of December 31, 1998, three franchisees owned 81 of
the 356 restaurants franchised by the Company. During 1998, the Company received
net royalties and license fees of approximately $1,783,000, $1,739,000 and
$1,103,000 from these franchisees (See Note 16).

(11) LONG TERM INCENTIVE PLANS:

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.

34
<PAGE> 35

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 Company and the Unit Plan was eliminated.

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

Effective January 1, 1999, the Company established a Deferred Compensation Plan
under which officers and key employees of the Company may defer specified
percentages of their salaries, annual incentives and long-term compensation
payments. The Company also makes matching contributions of the lesser of 3% of
eligible compensation or $4,800. Amounts deferred are excluded from the
participant's taxable income and are held in trust with a bank, where the funds
are invested at the direction of the participant.

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

(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 PFR and of any Participating Company, as
defined. At December 31, 1998, Participating Companies were PMC, TRC and TRC
Realty.

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 Company 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 a minimum of
1,000 Hours of Service.

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 1998, 1997 and 1996, the Company and PMC elected to match
contributions at a rate of 50% up to the first 6% deferred by each participant.
Company matching contributions to the Plan for each of the years 1998, 1997 and
1996 were $720,000, $615,000 and $554,000, 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.

35
<PAGE> 36

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, fifth and sixth amendments to the Plan,
adopted during 1995 through 1997, will be submitted for determination at a later
date. The Company's management and legal counsel believe that the adoption of
the aforementioned amendments to the Plan do not hinder the Plan's ability to
operate in compliance with all applicable provisions of the IRC and that a
favorable determination will be received.

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

During 1998, the Company identified twelve restaurant properties which were not
expected to generate undiscounted future cash flows sufficient to cover the
carrying value of the underlying assets related to these properties. As required
under SFAS No. 121, the carrying amounts of the assets associated with these
restaurant properties were written down to their fair market values as estimated
based on the Company's experience in disposing of similar under-performing
properties and negotiations relating to the disposal of the subject properties.
Nine of these properties are held for disposal, of which, seven continue to
operate as restaurants. In addition, the Company wrote off intangibles related
to future royalty income of a significant franchisee which went bankrupt. These
intangibles had been recorded in conjunction with "push down" accounting
adjustments related to the Going Private Transaction. The resulting non-cash
charge for the above items, reduced 1998 net income by $3,373,000. The
components of the charge were as follows (in thousands):

<TABLE>
<S> <C>
Reduction of the carrying values of operating assets
to estimated fair market values $2,030
Estimated disposal costs, including commissions 654
Write-off of intangible asset relating to future royalty income 689
------
$3,373
======
</TABLE>

The Company's results of operations included losses related to the nine
properties held for disposal of $838,000, $559,000 and $442,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. As of December 31, 1998,
these properties had a remaining net book value of $985,000.

(14) SEGMENT REPORTING:

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

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

36
<PAGE> 37

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

1998:
<TABLE>
<CAPTION>

Restaurants Franchise Manufacturing Other Totals
----------- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $248,302 $21,799 $27,626 $ 1,079 $298,806
Intersegment revenues -- -- 8,394 -- 8,394
Interest expense, net -- -- -- 14,312 14,312
Depreciation and
amortization 12,506 190 795 6,676 20,167
Segment profit (loss) 27,085 18,955 5,409 (48,465) 2,984
Segment assets 114,780 9,317 13,459 64,994 202,550
Expenditures for
segment assets 23,994 -- 1,152 -- 25,146

1997:
Restaurants Franchise Manufacturing Other Totals
----------- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $225,486 $19,257 $23,888 $ 895 $269,526
Intersegment revenues -- -- 8,042 -- 8,042
Interest expense, net -- -- -- 4,862 4,862
Depreciation and
amortization 11,616 108 691 3,614 16,029
Segment profit (loss) 24,569 16,536 4,611 (37,516) 8,200
Segment assets 110,373 11,041 11,740 81,170 214,324
Expenditures for
segment assets 14,372 -- 714 -- 15,086

</TABLE>

37
<PAGE> 38

1996:

<TABLE>
<CAPTION>
Restaurants Franchise Manufacturing Other Totals
----------- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $212,788 $18,591 $21,376 $ 38 $252,793
Intersegment revenues -- -- 7,406 -- 7,406
Interest expense, net -- -- -- 5,066 5,066
Depreciation and
amortization 11,385 77 617 3,669 15,748
Segment profit (loss) 20,603 15,744 4,005 (26,830) 13,522
Segment assets 98,463 696 9,707 46,790 155,656
Expenditures for
segment assets 11,207 -- 651 -- 11,858
</TABLE>

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

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

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

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
General and administrative expenses $ 25,182 $ 22,947 $ 20,989
Depreciation and amortization expenses 6,676 3,614 3,669
Interest expense 14,312 4,862 5,066
Going Private Transaction -- 7,200 --
Asset write-down (SFAS No. 121) 3,373 -- --
Other (1,078) (1,107) (2,894)
-------- -------- --------
$ 48,465 $ 37,516 $ 26,830
======== ======== ========
</TABLE>

38
<PAGE> 39

(15) RELATED PARTY TRANSACTIONS:

Donald N. Smith is PMC's Chairman and Chief Executive Officer. 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.

FICC purchased certain food products used in the normal course of business from
Foxtail. For the years ended December 31, 1998, 1997 and 1996, purchases were
$945,000, $975,000 and $1,425,000, respectively.

Perkins has subleased certain land, building and equipment to FICC. During 1998,
1997 and 1996, Perkins received approximately $328,000, $322,000 and $328,000,
respectively, related to those subleases.

In 1998, 1997 and 1996, PMC made payments to TRC Realty Co., a subsidiary of
TRC, totaling $573,000, $501,000 and $467,000, respectively related to the use
of an aircraft leased by TRC Realty Co. PMC's use of this aircraft is solely for
Company related purposes, and the Company reimburses PMC for all airplane
expenses paid. Pursuant to an agreement expiring April 14, 2004, the Company 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.

(16) SUBSEQUENT EVENT:

On February 4, 1999, Denny's (a subsidiary of Advantica Restaurant Group) was
the successful bidder in the court-supervised auction sale of 30 restaurants of
Perk Development Corporation ("Perk"), the Company's upstate New York
franchisee. These restaurants ceased operating as Perkins Family Restaurants on
February 28, 1999. For the year ended December 31, 1998, the Company recorded a
reserve for debt of the franchisee guaranteed by the Company of $250,000, a
write-off of $225,000 for unreserved accounts receivable and a non-cash charge
of $689,000 to write-off an intangible asset related to future royalty income
from the franchisee. The Company received approximately $1,783,000 in royalties
from Perk during 1998. Management expects to replace this revenue stream in
future years through the recruiting of new franchisees.

39
<PAGE> 40

RESPONSIBILITY FOR FINANCIAL STATEMENTS

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

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

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

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

40
<PAGE> 41

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, 1998 and 1997, 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, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with 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, 1998 and 1997 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.

Arthur Andersen LLP

Memphis, Tennessee,
March 25, 1999.

41
<PAGE> 42

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

<TABLE>
<CAPTION>
Cash
Net Distributions
Gross (a) Income Declared
1998 Revenues Profit (Loss) per Unit
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1st Quarter $ 67,784 $15,112 $ (487) $ --
2nd Quarter 73,718 17,529 1,947 --
3rd Quarter 78,630 18,544 2,552 --
4th Quarter 78,674 18,255 (1,028) --
- ---------------------------------------------------------------------------------------------
$298,806 $69,440 $ 2,984 $ --
=============================================================================================

<CAPTION>
Cash
Net Distributions
Gross (a) Income Declared
1997 Revenues Profit (Loss) per Unit
- ---------------------------------------------------------------------------------------------
<C> <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>

(a) Represents total revenues less cost of sales.

42
<PAGE> 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

There were no changes in, or disagreements with, accountants during 1998.

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 58 Chairman of the Board, Chief Executive
Officer and President

Lee N. Abrams 64 Director

Steven L. Ezzes 52 Director

Basil P. Livanos 45 Director

D. Michael Meeks 56 Director

James F. Barrasso 48 Executive Vice President, Foodservice Development

Michael D. Kelly 52 Executive Vice President, Marketing

Steven R. McClellan 43 Executive Vice President, Chief Financial Officer

Jack W. Willingham 53 Executive Vice President, Restaurant Development

William S. Forgione 45 Vice President, Human Resources

Clyde J. Harrington 40 Vice President, Operations Administration

Patrick W. Ortt 52 Vice President, Operations - Eastern Division

Steven J. Pahl 43 Vice President, Operations - Western Division

Anthony C. Seta 51 Vice President, Research and Development

Robert J. Winters 47 Vice President, Franchise Development

Donald F. Wiseman 52 Vice President, General Counsel and Secretary
</TABLE>

43
<PAGE> 44

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.

STEVEN L. EZZES
Steven L. Ezzes was elected a Director of PMC, PRI, TRC and FICC in February
1996. Mr. Ezzes resigned as a director of TRC in October 1998. Since June 1998
Mr. Ezzes has been a Managing Director of S.G. Cowen Securities Corporation, a
subsidiary of Societe General Securities Corp. From October 1996 to June 1998,
Mr. Ezzes was a Managing Director of Scotia Capital Markets (U.S.A.), Inc. and
from January 1995 to October 1996, Mr. Ezzes was a private investor. For more
than a year prior, Mr. Ezzes was a Managing Director of Lehman Brothers, Inc.
Mr. Ezzes is a director of OZEMail, a company that provides internet telephony
in Australia and New Zealand.

BASIL P. LIVANOS
Basil P. Livanos was elected Director of PMC and TRC in October 1998. Mr.
Livanos has served as Senior Vice President of Albion Alliance, L.L.C. since
August 1996 and as Vice President of Alliance Capital since July 1993. Mr.
Livanos has also served as an Investment Officer of The Equitable Life Assurance
Society of the United States since August 1980.

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.

JAMES F. BARRASSO
James F. Barrasso was elected Executive Vice President, Foodservice Development
of PMC in February 1999. From January 1994 to February 1999, he was Vice
President Foodservice Development of PMC.

MICHAEL D. KELLY
Michael D. Kelly has served as Executive Vice President, Marketing of PMC since
March 1993.

STEVEN R. MCCLELLAN
Steven R. McClellan has served as Executive Vice President and Chief Financial
Officer of PMC since September 1996. Mr. McClellan has also served as Vice
President and Chief Financial Officer of TRC and PRI since May 1998. 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 a year prior, he was a Senior Vice
President of NationsBank.

44
<PAGE> 45

JACK W. WILLINGHAM
Jack W. Willingham was elected Executive Vice President, Restaurant Development
of PMC in April 1994. For more than a year prior, Mr. Willingham served as Vice
President, Corporate Development of PMC.

WILLIAM S. FORGIONE
William S. Forgione was elected Vice President, Human Resources of PMC effective
August 1997. From July 1994 to August 1997, Mr. Forgione was Vice President,
Human Resources of College Affiliated Medical Practice Group and for more than a
year prior, he was Worldwide Program Manager for Digital Equipment Corporation.

CLYDE J. HARRINGTON
Clyde J. Harrington was elected Vice President, Operations Administration of PMC
in September 1996. From August 1995 to September 1996, he was Director, Systems
Operations of the Company and from March 1995 to August 1995, he served as
Director in Training for the Company. For more than two years prior, Mr.
Harrington served as Director, Operations, for the Restaurant Division of
PepsiCo., Inc.

PATRICK W. ORTT
Patrick W. Ortt was elected Vice President, Operations - Eastern Division of PMC
in September 1996. From March 1993 to September 1996, Mr. Ortt served as
Director, Systems Operations of the Company.

STEVEN J. PAHL
Steven J. Pahl was elected Vice President, Operations - Western Division of PMC
in September 1996. From November 1988 to September 1996, Mr. Pahl served as
Director, System Operations of the Company.

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.

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 the Company.

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.

45
<PAGE> 46

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, 1998 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.

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------------------------------------- -------------
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 1998 $274,661 $200,000 $ 3,150 (2) -- --
Chairman & Chief 1997 267,126 160,000 3,150 (2) -- --
Executive 1996 212,912 110,000 8,832 (1)(2) -- $ 550 (5)
Officer

STEVEN R. MCCLELLAN 1998 $186,892 $103,425 $ 9,000 (2) -- $5,000 (6)
Exec. Vice President & 1997 207,001 83,875 10,055 (2)(3) -- 4,750 (6)
Chief Financial Officer 1996 42,500 39,650 30,715 (1)(2)(3) $120,000 298 (5)

MICHAEL D. KELLY 1998 $191,246 $ 94,000 $ 9,000 (2) -- $5,000 (6)
Exec. Vice President, 1997 181,836 78,000 9,000 (2) -- 4,750 (6)
Marketing 1996 176,287 60,000 12,726 (1)(2) -- 4,808 (5)(6)

JACK W. WILLINGHAM 1998 $179,141 $ 79,500 $ 9,000 (2) -- $3,708 (6)
Exec. Vice President, 1997 172,481 59,250 9,000 (2) -- 4,750 (6)
Restaurant Development 1996 161,582 56,500 15,135 (1)(2) -- 7,630 (5)(6)

DONALD F. WISEMAN 1998 $166,535 $ 71,600 $ 9,000 (2) -- $4,983 (6)
Vice President, General 1997 156,199 74,200 9,000 (2) -- 4,750 (6)
Counsel and Secretary 1996 143,654 43,500 14,366 (1)(2) -- 7,630 (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.
McClellan - $767; Mr. Kelly - $5,076; Mr. Willingham - $7,485; and Mr. Wiseman -
$6,716.

(2) Includes auto allowance paid to the named executive officers during 1998 and
1997 in the following amounts: Mr. Smith - $3,150; Mr. McClellan - $9,000; Mr.
Kelly - $9,000; Mr. Willingham - $9,000; and Mr. Wiseman - $9,000. During 1996,
Mr. Smith received an auto allowance of $2,520; Mr. McClellan - $2,550; Mr.
Kelly - $7,650; Mr. Willingham - $7,650; and Mr. Wiseman - $7,650.

(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 Company in conjunction with the Company's Going Private
Transaction. Therefore, as of December 31, 1998 no restricted Units were
outstanding. Cash payments related to repurchased restricted Units during
December 1997 were: Mr. McClellan - $131,810; Mr. Kelly - $126,448; Mr.
Willingham - $101,248; and Mr. Wiseman - $87,136.

(5) Includes premiums paid for group term life insurance. Premiums paid during
1996 for the named executive officers were: Mr. Smith - $550; Mr. McClellan -
$298; Mr. Kelly - $58; Mr. Willingham - $2,880; and Mr. Wiseman - $2,880.

46
<PAGE> 47

(6) Includes Perkins' discretionary matching contributions allocated to the
named executive officers for the period January 1, 1998 through December 31,
1998 under Perkins Retirement Savings Plan as follows: Mr. McClellan - $5,000;
Mr. Kelly - $5,000; Mr. Willingham - $3,708; and Mr. Wiseman - $4,983. For the
period January 1, 1997 through December 31, 1997 the contributions were as
follows: Mr. McClellan - $4,600; Mr. Kelly - $4,750; Mr. Willingham - $4,750;
and Mr. Wiseman - $4,750. For the period January 1, 1996 through December 31,
1996 the contributions were as follows: Mr. Kelly - $4,750; Mr. Willingham -
$4,750; and Mr. Wiseman - $4,750.

COMPENSATION OF DIRECTORS.

Lee N. Abrams, D. Michael Meeks and Steven L. Ezzes are paid $5,000 for each
Board Meeting they attend. Messrs. Abrams and Meeks were paid for four meetings
of the board in 1998. Mr. Ezzes was paid for two meetings of the board in 1998.

47
<PAGE> 48

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 Company is a wholly-owned
indirect subsidiary of TRC. TRC's outstanding common stock is owned 50.0% and
42.3% by Mr. Smith and Equitable, respectively and 7.7% 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 Company), 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.

(B) SECURITY OWNERSHIP OF MANAGEMENT.

The following table sets forth the number of Units beneficially owned either
directly or indirectly on March 23, 1999 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 2,731,962 (1) 50.0%
Limited Partnership Interests
in the Registrant

" All Directors and Officers
of Registrant as a group 2,731,962 50.0%
</TABLE>

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

(1) Owned indirectly through Mr. Smith's 50.0% ownership of TRC, the sole
shareholder of PRI.

48
<PAGE> 49

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

(A) TRANSACTIONS WITH MANAGEMENT AND OTHERS.

During 1998 and 1997, FICC purchased layer cakes and muffin and pancake mixes
from Perkins for which Perkins was paid approximately $945,000 and $975,000,
respectively. PMC believes that the prices paid to Foxtail 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 1998
and 1997, Perkins received approximately $328,000 and $322,000, respectively,
related to those subleases.

In 1998, PMC made payments to TRC Realty Co., a subsidiary of TRC, totaling
$573,000 related to the use of an aircraft leased by TRC Realty Co. PMC's use of
this aircraft is solely for Company related purposes, and the Company reimburses
PMC for all airplane expenses paid. Pursuant to an agreement expiring April 14,
2004, the Company 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 Company reimburses TRC for its out-of-pocket expenses related to management
services provided to the Company, including employee compensation and office
related expenses and related expenses. In addition, TRC reimburses the Company
for certain tax and accounting services. Excluding Mr. Smith's compensation and
expenses, during 1998, the payments due to TRC exceeded the payments TRC owed
the Company by $67,500.

(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 Company and its affiliates in several matters during 1997 and
1998, including the Going Private Transaction.

There was no outstanding indebtedness of management during 1998 requiring
disclosure.

49
<PAGE> 50

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,
1998.
Balance Sheets at December 31, 1998 and 1997.
Statements of Changes in Partners' Capital for Each of the Three Years
Ended December 31, 1998.
Statements of Cash Flows for Each of the Three Years Ended December
31, 1998.

2. THE FOLLOWING FINANCIAL STATEMENT SCHEDULES FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996 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 52):

<TABLE>
<CAPTION>
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.*

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

50
<PAGE> 51
<TABLE>
<S> <C>
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 TrCon 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)

10.7 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.*

10.9(a) Deferred Compensation Plan

10.9(b) Trust under the Perkins Family Restaurants, L.P. Deferred Compensation Plan

21 Subsidiaries of the Registrant*

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

25 Statement of Eligibility of Trustee*

27 Financial Data Schedule (for SEC use only)

99.1 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)

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)
</TABLE>

51
<PAGE> 52
<TABLE>
<S> <C>

99.7 Pledge Agreement dated September 2, 1988 between Perkins Restaurants, Inc. and The First
National Bank of Boston.(6)
</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) Report on Form 8-K dated October 2, 1998 disclosing the resignation of
Richard K. Arras, President and Chief Operating Officer of Perkins
Management Company, Inc.

52
<PAGE> 53

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]

53
<PAGE> 54

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 31st day of March,
1999.

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 31st day of March, 1999.

<TABLE>
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/ Steven L. Ezzes Director
- ------------------------------------
Steven L. Ezzes

/s/ Basil P. Livanos Director
- ------------------------------------
Basil P. Livanos

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

/s/ Steven R. McClellan Executive Vice President and Chief Financial Officer,
- ------------------------------------ (Principal Financial and Accounting Officer)
Steven R. McClellan
</TABLE>

54
<PAGE> 55

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 March 25, 1999. Our audit was
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule listed in Item 14.(a)2. is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

Arthur Andersen LLP

Memphis, Tennessee,
March 25, 1999
<PAGE> 56
SCHEDULE II

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, 1998

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

FISCAL YEAR ENDED DECEMBER 31, 1997

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

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)
====== ==== === ======= ====
</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 10.9 (A)

PERKINS FAMILY RESTAURANTS, L.P.
DEFERRED COMPENSATION PLAN

<PAGE> 2

PERKINS FAMILY RESTAURANTS, L.P.
DEFERRED COMPENSATION PLAN

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Section Page
<S> <C> <C>
ARTICLE 1 Definitions................................................................ 1
1.1 Account.................................................................... 1
1.2 Administrator.............................................................. 1
1.3 Beneficiary................................................................ 1
1.4 Board...................................................................... 1
1.5 Bonus...................................................................... 1
1.6 Code....................................................................... 1
1.7 Compensation............................................................... 2
1.8 Deferrals.................................................................. 2
1.9 Deferral Election.......................................................... 2
1.10 Disability................................................................. 2
1.11 Discretionary Contribution................................................. 2
1.12 Effective Date............................................................. 2
1.13 Eligible Employee.......................................................... 2
1.14 Employee................................................................... 2
1.15 Employer................................................................... 2
1.16 Enrollment Period.......................................................... 2
1.17 Investment Fund or Funds................................................... 3
1.18 Long Term Incentive Bonus.................................................. 3
1.19 Matching Contribution...................................................... 3
1.20 Participant................................................................ 3
1.21 Plan....................................................................... 3
1.22 Plan Year.................................................................. 3
1.23 Retirement................................................................. 3
1.24 Salary..................................................................... 3
1.25 Trust...................................................................... 3
1.26 Trustee.................................................................... 4
1.27 Years of Service........................................................... 4

ARTICLE 2 Participation.............................................................. 4
2.1 Designation as Eligible Employee........................................... 4
2.2 Commencement of Participation.............................................. 4
2.3 Loss of Eligible Employee Status .......................................... 5

ARTICLE 3 Contributions.............................................................. 5
3.1 Deferrals.................................................................. 5
3.2 Matching Contribution...................................................... 6
</TABLE>

<PAGE> 3

<TABLE>
<CAPTION>
Section Page
<S> <C> <C>
3.3 Discretionary Contribution................................................. 6
3.4 Time of Contributions...................................................... 7
3.5 Form of Contributions...................................................... 7

ARTICLE 4 Vesting.................................................................... 7
4.1 Vesting of Deferrals....................................................... 7
4.2 Vesting of Matching and Discretionary Contributions........................ 8
4.3 Amounts Not Vested......................................................... 8
4.4 Change in Control.......................................................... 8

ARTICLE 5 Accounts................................................................... 9
5.1 Accounts................................................................... 9
5.2 Investments, Gains and Losses.............................................. 10
5.3 Forfeitures................................................................ 11

ARTICLE 6 Distributions.............................................................. 11
6.1 Distribution Election...................................................... 11
6.2 Payment Options............................................................ 11
6.3 Commencement of Payment upon Death, Disability or Termination.............. 13
6.4 Minimum Distribution....................................................... 13
6.5 Early Distribution and Penalty............................................. 13

ARTICLE 7 Beneficiaries.............................................................. 14
7.1 Beneficiaries.............................................................. 14
7.2 Lost Beneficiary........................................................... 14

ARTICLE 8 Funding.................................................................... 15
8.1 Prohibition Against Funding................................................ 15
8.2 Deposits in Trust.......................................................... 15
8.3 Indemnification of Trustee................................................. 15
8.4 Withholding of Employee Contributions...................................... 16

ARTICLE 9 Claims Administration...................................................... 16
9.1 General.................................................................... 16
9.2 Claim Review............................................................... 16
9.3 Right of Appeal............................................................ 17
9.4 Review of Appeal........................................................... 17
9.5 Designation................................................................ 17
9.6 Arbitration................................................................ 17

ARTICLE 10 General Provisions......................................................... 17
10.1 Administrator.............................................................. 17
10.2 No Assignment.............................................................. 18
10.3 No Employment Rights....................................................... 19
10.4 Incompetence............................................................... 19
</TABLE>

<PAGE> 4

<TABLE>
<CAPTION>
Section Page
<S> <C> <C>
10.5 Identity................................................................... 19
10.6 Other Benefits............................................................. 19
10.7 No Liability............................................................... 19
10.8 Expenses................................................................... 20
10.9 Insolvency................................................................. 20
10.10 Amendment and Termination.................................................. 20
10.11 Employer Determinations.................................................... 20
10.12 Construction............................................................... 21
10.13 Governing Law.............................................................. 21
10.14 Severability............................................................... 21
10.15 Headings................................................................... 21
10.16 Terms...................................................................... 22
</TABLE>

<PAGE> 5

PERKINS FAMILY RESTAURANTS, L.P.
DEFERRED COMPENSATION PLAN

Perkins Family Restaurants, L.P., a Delaware Limited Partnership, or
its successor (the "Employer"), hereby adopts the Perkins Family Restaurants,
L.P. Deferred Compensation Plan (the "Plan") for the benefit of a select group
of management or highly compensated employees. This Plan is an unfunded
arrangement and is intended to be exempt from the participation, vesting,
funding, and fiduciary requirements set forth in Title I of the Employee
Retirement Income Security Act of 1974, as amended. This Plan is effective
December 30, 1998.

ARTICLE 1
DEFINITIONS

1.1 ACCOUNT. The bookkeeping account established for each Participant as
provided in Section 5.1 hereof.

1.2 ADMINISTRATOR. Administrator or Plan Administrator means the individual
or committee appointed to administer the Plan pursuant to Section 10.1.

1.3 BENEFICIARY. The person, persons, trust or other entity a Participant
designates by written revocable designation filed with the
Administrator to receive payments in event of his or her death.

1.4 BOARD. The Board of Directors of the General Partner.

1.5 BONUS. Compensation which is designated as such by the Employer and
which relates to services performed by an Eligible Employee in addition
to his or her Salary and Long Term Incentive Bonus, including any
pretax elective deferrals from said Bonus to any Employer sponsored
plan that includes amounts deferred under a Deferral Election or a
qualified cash or deferred arrangement under Code Section 401(k) or
cafeteria plan under Code Section 125.

1.6 CODE. The Internal Revenue Code of 1986, as amended.

1
<PAGE> 6

1.7 COMPENSATION. The Participant's earned income, including Salary, Bonus,
Long Term Incentive Bonus and other remuneration from the Employer.

1.8 DEFERRALS. The portion of Compensation that a Participant elects to
defer in accordance with Section 3.1 hereof.

1.9 DEFERRAL ELECTION. The separate written agreement, submitted to the
Administrator, by which an Eligible Employee agrees to participate in
the Plan and make Deferrals thereto. The Deferral Election will specify
the amount or percentage of Compensation that a Participant chooses to
defer.

1.10 DISABILITY. Any medically determinable physical or mental disorder that
renders a Participant incapable of continuing in the employment of the
Employer in his or her regular duties of employment, as determined by
the Administrator in its sole discretion.

1.11 DISCRETIONARY CONTRIBUTION. An Employer Contribution as described in
Section 3.3 hereof.

1.12 EFFECTIVE DATE. January 1, 1999.

1.13 ELIGIBLE EMPLOYEE. Each Employee designated by the Administrator
pursuant to Section 2.1 as eligible to participate in the Plan.

1.14 EMPLOYEE. Any person employed by the Employer.

1.15 EMPLOYER. Perkins Family Restaurants, L.P., and its affiliates or
successors.

1.16 ENROLLMENT PERIOD

A. For individuals who are Eligible Employees prior to the
commencement of a given Plan Year, Enrollment Period means the
period set by the Administrator which ends prior to the first
day of a Plan Year.

B. With respect to an Eligible Employee designated as such by the
Employer effective as of any day after the first day of a Plan
Year, Enrollment Period

2
<PAGE> 7

means the period beginning with the date of his/her
designation as an Eligible Employee, and ending prior to the
first day such Eligible Employee's participation in the Plan
commences.

1.17 INVESTMENT FUND OR FUNDS. Each investment(s) which serves as a means to
measure value, increases or decreases with respect to a Participant's
Accounts.

1.18 LONG TERM INCENTIVE BONUS. Compensation which is designated as such by
the Employer and which relates to services performed by an Eligible
Employee during an incentive period defined according to the Employer's
Long Term Incentive Plan in addition to his or her Salary and Bonus,
including any pretax elective deferrals from said Bonus to any Employer
sponsored plan that includes amounts deferred under a Deferral Election
or a qualified cash or deferred arrangement under Code Section 401(k)
or cafeteria plan under Code Section 125.

1.19 MATCHING CONTRIBUTION. An Employer contribution as described in Section
3.2 hereof.

1.20 PARTICIPANT. An Eligible Employee who is a Participant as provided in
Article 2.

1.21 PLAN. The Perkins Family Restaurants Deferred Compensation Plan.

1.22 PLAN YEAR. January 1 through December 31.

1.23 RETIREMENT. Retirement means the termination of the Participant's
employment with the Employer for any reason other than death or
Disability (i) at any time after attaining the age of sixty-five (65),
or (ii) if the Participant has at least five (5) Years of Service with
the Employer, at any time after attaining age fifty-five (55).

1.24 SALARY. An Eligible Employee's base salary rate or rates in effect at
any time during a Plan Year, including any pretax elective deferrals
from Salary to any Employer sponsored plan that includes amounts
deferred under a Deferral Election or a qualified cash or deferred
arrangement under Code Section 401(k) or cafeteria plan under Code
Section 125.

3
<PAGE> 8

1.25 TRUST. The agreement between the Employer and the Trustee under which
the assets of the Plan are held, administered and managed, which shall
conform to the terms of Rev. Proc. 92-64.

1.26 TRUSTEE. Union Planter's Trust Department, or such other successor that
shall become trustee pursuant to the terms of the Plan.

1.27 YEARS OF SERVICE. A Participant's "Years of Service" shall be measured
by the total number of full twelve (12) month periods that an
individual has been an Employee.

ARTICLE 2
PARTICIPATION

2.1 DESIGNATION AS ELIGIBLE EMPLOYEE. The Administrator shall from time to
time specify one or more persons from a select group of management or
highly compensated employees as Eligible Employees provided, however,
the Employer shall not discriminate against any Employee becoming
eligible under this provision on any basis prohibited by law. Such
specification shall be in writing, with a copy delivered to the
Employer and the person designated as eligible, and shall set the date
as of when the person becomes eligible.

For the initial Plan Year, and for subsequent Plan Years until the
Administrator otherwise directs, an Eligible Employee shall mean each
Employee who is designated as such by the Employer and holds a position
as Officer, Director, Regional Manager, or Franchise Consultant.

An individual's designation as an Eligible Employee may be revoked at
any time upon written notice of the Administrator to such individual.

2.2 COMMENCEMENT OF PARTICIPATION. Each Eligible Employee shall become a
Participant at the earlier of the first day of the Plan Year or the
date on which his or her Deferral Election first becomes effective.

4
<PAGE> 9

2.3 LOSS OF ELIGIBLE EMPLOYEE STATUS.

(a) A Participant who is no longer an Eligible Employee shall not
be permitted to submit a Deferral Election and all Deferrals
for such Participant shall cease as of the end of the Plan
Year in which such Participant is determined to no longer be
an Eligible Employee.

(b) Amounts credited to the Account of a Participant described in
subsection (a) shall continue to be held pursuant to the terms
of the Plan and shall be distributed as provided in Article 6.

(c) A Participant who is no longer an Eligible Employee shall
continue to receive quarterly statements, and shall retain the
right to make changes in investment selection according to
Section 5.2.

ARTICLE 3
CONTRIBUTIONS

3.1 DEFERRALS.

(a) On an annual basis, each Participant may authorize the
Employer to reduce his/her future Compensation by an amount or
percentage not to exceed an amount allowed for the Plan Year
as established by the Employer, and to have a corresponding
amount credited to his/her Accounts, in accordance with
Article 5, by filing a Deferral Agreement with the
Administrator during his/her initial Enrollment Period or any
subsequent Enrollment Period preceding the Plan Year during
which such Compensation will be earned.

(b) Each Eligible Employee shall deliver an annual Deferral
Election to the Employer before any Deferrals can become
effective. Such Deferral Election shall be void with respect
to any Deferral unless submitted before the beginning of the
Plan Year during which the amount to be deferred will be
earned; provided, however, that in the year in which the Plan
is first adopted or an Employee is first eligible to
participate, such Deferral Election shall be filed within
thirty (30) days of the date on which the Plan is adopted or
the

5
<PAGE> 10

date on which an Employee is first eligible to participate,
respectively, with respect to Compensation earned during the
remainder of the calendar year.

(c) The Deferral Election shall, subject to the limitation set
forth in Section 3.1(a) hereof, designate the amount or
percentage of Compensation deferred by each Participant, the
beneficiary or beneficiaries of the Participant and such other
items as the Administrator may prescribe. Such Deferral
Elections shall remain effective for the Plan Year.

(d) The minimum amount of Compensation that may be deferred each
Plan Year is one thousand dollars ($1,000).

(e) The maximum amount of Compensation that may be deferred each
Plan Year is fifty percent (50%) of the Participant's Salary,
seventy-five percent (75%) of the Participant's Bonus, and
fifty percent (50%) of the Participant's Long Term Incentive
Bonus.

3.2 MATCHING CONTRIBUTION. At its sole and absolute discretion, the
Employer may elect to make a Matching Contribution to the Accounts of
some or all of the Participants. The amount of the Matching
Contribution, if any, shall be determined by the Employer annually and
communicated to all Eligible Employees. For the initial Plan Year and
for subsequent Plan Years until the administrator otherwise directs,
the Matching Contribution shall equal $1.00 for every dollar of
Compensation that the Participant elects to defer under Section 3.1 (a)
above up to three percent (3%) of the Participant's Compensation
deferred under Section 3.1 (a) above. Notwithstanding, for the initial
year of the plan there shall be a maximum Matching Contribution per
Participant determined as up to 3% of the limit set forth under
Internal Revenue Code Section 401(a)(17). Thereafter, the Employer
shall establish an annual maximum Matching Contribution. Such Matching
Contribution shall be allocated to the Participant's Accounts at such
Participant's election made in accordance with Section 5.1.

3.3 DISCRETIONARY CONTRIBUTION. At its sole and absolute discretion, the
Employer may elect to make a Discretionary Contribution to the Account
of some or all of the Participants. Nothing in this Plan, however,
shall obligate the Employer to make Discretionary Contributions for the
benefit of Plan Participants in any Plan Year, nor

6
<PAGE> 11

to make identical Discretionary Contributions for the benefit of Plan
Participants in any Plan Year. The Employer expressly reserves the
right to make Discretionary Contributions to such Plan Participants in
such amount or such proportions as it deems warranted or appropriate;
provided, however, the Employer shall not discriminate against any Plan
Participant in making Contributions under this provision on any basis
prohibited by law. Discretionary Contributions shall be allocated to
the Participant's Accounts at such Participant's election made in
accordance with Section 5.1. Nothing in this Plan or any other
agreement or document shall represent or be construed to represent an
obligation or promise of the Employer to make Discretionary
Contributions on behalf of a Participant at any time.

3.4 TIME OF CONTRIBUTIONS.

(a) Deferrals and Matching Contributions shall be transferred to
the Trust as soon as administratively feasible following the
end of each month. The Employer shall also transmit at that
time any necessary instructions regarding the allocation of
such amounts among the Accounts of Participants.

(b) Discretionary Contributions shall be transferred to the Trust
at such time as the Employer shall determine. The Employer
shall also transmit at that time any necessary instructions
regarding the allocation of such amounts among the Accounts of
Participants.

3.5 FORM OF CONTRIBUTIONS. All Deferrals, Matching Contributions and
Discretionary Contributions to the Trust shall be made in the form of
cash or cash equivalents of US currency.

ARTICLE 4
VESTING

4.1 VESTING OF DEFERRALS. A Participant shall have a vested right to the
portion of his or her Account attributable to Deferrals and any
earnings or losses on the investment of such Deferrals.

7
<PAGE> 12

4.2 VESTING OF MATCHING AND DISCRETIONARY CONTRIBUTIONS.

(a) Prior to the completion of three (3) years of service with the
Employer, Participants shall have a zero percent (0%) vested
right to the portions of his or her Account attributable to
Matching Contributions. Upon completion of three years of
service, Participants shall have a sixty percent (60%) vested
right to the portions of his or her Account attributable to
Matching Contributions. Upon completion of four (4) years of
service, Participants shall have an eighty percent (80%)
vested right to the portions of his or her Account
attributable to Matching Contributions. Participants shall
have a one hundred percent (100%) vested right to the portions
of his or her Account attributable to Matching Contributions
only after completion of five (5) years of service with the
Employer.

(b) At the time any Discretionary Contributions may be determined
by the Administrator, the Administrator shall also determine
any necessary instructions regarding the vesting of such
amounts.

4.3 AMOUNTS NOT VESTED. Any amounts credited to a Participant's Account
that are not vested at the time of his or her termination of employment
with the Employer shall be forfeited.

4.4 CHANGE IN CONTROL. Upon a Change in Control, non-vested amounts shall
immediately vest in full and accounts may be paid out in full within
one (1) year immediately following the date of the Change in Control at
the Participant's option.

(a) "Change in Control" of the Employer shall mean the first to
occur of any of the following:

(i) Any transaction or series of transactions with any
person or persons, including, but not limited to, any
sale, exchange, or transfer, merger, consolidation,
liquidation or other transaction which, upon the
consummation thereof, results in the Employer or its
shareholders on the date of the adoption of the Plan
(taken as a single owner) owning,

8
<PAGE> 13

directly or indirectly, less than 50% of the
outstanding voting securities of the Employer; or

(ii) Any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of
all, or substantially all (meaning greater than 50%),
of the assets of the Employer, other than any sale,
lease, exchange or other transfer to any entity where
the Employer or its shareholders on the date of the
adoption of the Plan (taken as a single owner) owns,
directly or indirectly, at least 50% of the
outstanding voting securities of such entity after
any such transfer, provided however, that a Change in
Control shall not include the public offering by the
Employer, or its equity owners, of equity interests
of the Employer pursuant to a registration statement
filed with the Securities and Exchange Commission; or

(iii) At any point in time that Donald N. Smith is no
longer Chairman of the Board and Chief Executive
Officer of the Employer;

ARTICLE 5
ACCOUNTS

5.1 ACCOUNTS. The Administrator shall establish and maintain a bookkeeping
account in the name of each Participant. The Administrator shall also
establish subaccounts, as provided in subsection (a), (b), and/or (c),
below, as elected by the Participant pursuant to Article 3.

(a) A Retirement Account shall be established for each
Participant. His or her Retirement Account shall be credited
with Deferrals (as specified in the Participant's Deferral
Election), any Matching and Discretionary Contributions
allocable thereto and the Participant's allocable share of any
earnings or losses on the foregoing. Each Participant's
Account shall be reduced by any distributions made plus any
federal, state and/or local tax withholding and any social
security withholding tax as may be required by law.

9
<PAGE> 14

(b) A Participant may elect to establish one or more Education
Accounts by designating a year in which the Education Account
is to commence payments at the time the account is initially
established. Each Participant's Education Account shall be
credited with Deferrals (as specified in the Participant's
Deferral Election), any Matching and Discretionary
Contributions allocable thereto and the Participant's
allocable share of any earnings or losses on the foregoing.
Each Participant's Account shall be reduced by any
distributions made plus any federal, state and/or local tax
withholding and any social security withholding tax as may be
required by law.

(c) A Participant may elect to establish one or more Fixed Period
Accounts by designating a year of payout at the time the
account is initially established. The minimum initial deferral
period for Fixed Period subaccounts shall be three (3) years.
Each Participant's Fixed Period Account shall be credited with
Deferrals (as specified in the Participant's Deferral
Election), any Matching and Discretionary Contributions
allocable thereto and the Participant's allocable share of any
earnings or losses on the foregoing. Each Participant's
Account shall be reduced by any distributions made plus any
federal, state and/or local tax withholding and any social
security withholding tax as may be required by law.

(d) The maximum combined number of Education and/or Fixed Period
subaccounts that a Participant may have at one time will be
ten (10).

5.2 INVESTMENTS, GAINS AND LOSSES.

(a) Trust assets shall be invested by the Trustee in accordance
with written directions from the Employer. Such directions
shall provide Trustee with the investment discretion to invest
the above-referenced amounts within broad guidelines
established by Trustee and Employer as set forth therein.

(b) The Administrator shall adjust the amounts credited to each
Participant's Account to reflect Deferrals, Matching
Contributions, Discretionary Contributions, investment
experience, distributions and any other appropriate
adjustments. Such adjustments shall be made as frequently as
is administratively feasible.

10
<PAGE> 15

(c) A Participant may direct that his or her Retirement Account,
Education Account and or Fixed Period Account established
pursuant to Section 5.1 may be valued as if they were invested
in one or more Investment Funds in multiples of one percent
(1%) of the balance in an Account. A Participant may change
his or her selection of Investment Funds no more than six (6)
times each Plan Year. An election shall be effective as soon
as administratively feasible following the date of the change
as indicated in writing by the Participant to the
Administrator and communicated to the Trustee.

5.3 FORFEITURES. Any forfeitures from a Participant's Account shall
continue to be held in the Trust, and shall be used at the Employer's
discretion to reduce the Employer's future Matching and Discretionary
Contributions and /or administrative expenses under the Plan. If no
such further contributions will be made, then such forfeitures shall be
returned to the Employer.

ARTICLE 6
DISTRIBUTIONS

6.1 DISTRIBUTION ELECTION. Each Participant shall designate on his or her
Deferral Election the timing of his or her distribution by indicating
the type of account as described under Section 5.1. A Participant may
not modify, alter, amend or revoke such designation for a Plan Year
after such Plan year begins. Further, amounts in one Account cannot be
transferred to another Account. Each Participant shall also designate
the manner in which Retirement Account payments shall be made from the
choices available under Section 6.2 (a) hereof.

6.2 PAYMENT OPTIONS.

(a) Retirement Account payments shall commence as soon as
administratively feasible immediately after the Participant's
Retirement. The Participant may elect any one of the following
forms of payment so long as the election is made in writing,
delivered to the Administrator at least one year prior to the
year in which the Participant's benefit becomes payable.

11
<PAGE> 16

(i) The normal form of payment of benefits hereunder, and
the form of payments to be used if no other election
is made, shall be a single lump-sum distribution of
the value of the Participant's Retirement Account.

(ii) A Participant entitled to a benefit hereunder may
elect to receive his/her Retirement Account in
substantially equal annual installments over a period
not to exceed five (5) years.

The amount of the substantially equal payments
described above shall be determined by multiplying
the Participant's Retirement Account by a fraction,
the denominator of which in the first year of payment
equals the number of years over which benefits are to
be paid, and the numerator of which is one (1).

The amounts of the payments for each succeeding year
shall be determined by multiplying the Participant's
Retirement Account as of the applicable anniversary
of the Participant's Retirement Date by a fraction,
the denominator of which equals the number of
remaining years over which benefits are to be paid,
and the numerator of which is one (1).

(iii) A Participant entitled to a benefit hereunder may
elect to defer commencement of any distribution of
his/her Retirement Account for a period not to exceed
three (3) years after retirement. Amounts credited to
the Retirement Account of a Participant in this
subsection shall continue to be held pursuant to the
terms and conditions of this Plan.

(b) Education Account payouts shall be paid in four annual
installments commencing June 30 (or as soon as
administratively feasible) of the calendar year selected by
the Participant and the three (3) anniversaries thereof in the
following amounts:

<TABLE>
<S> <C>
Year 1 25% of the account balance
Year 2 33% of the account balance
Year 3 50% of the account balance
Year 4 100% of the account balance
</TABLE>

12
<PAGE> 17

(c) Fixed Period Account payouts shall be paid in one lump sum
payment on January 31 (or as soon as administratively
feasible) of the calendar year selected by the Participant on
his or her Deferral Election.

(d) If a Participant's employment is terminated for any reason
(including Disability) other than Retirement and such
Participant has a balance in his/her Fixed Account and/or
Education Account, such balance shall be transferred to
his/her Retirement Account and distributed as soon as
administratively feasible in one lump sum payment.

6.3 COMMENCEMENT OF PAYMENT UPON DEATH, DISABILITY OR TERMINATION.

(a) Upon the death of a Participant, all vested and non-vested
amounts credited to his or her Account(s) shall be paid, as
soon as administratively feasible, to his or her Beneficiary
or Beneficiaries, as determined under Article 7 hereof, in a
lump sum.

(b) Upon the Disability of a Participant, all vested and
non-vested amounts credited to his or her Account(s) shall be
paid to the Participant in a lump-sum payment.

(c) Upon the termination of employment of a Participant, all
vested amounts credited to his or her Account(s) shall be paid
to the Participant in a lump-sum payment, as soon as
administratively feasible.

6.4 MINIMUM DISTRIBUTION.

(a) Notwithstanding any provision to the contrary, if the vested
balance of a Participant's Account at the time of a
termination due to Retirement is less than $10,000, then the
Participant shall be paid his or her benefits as a single lump
sum as soon as administratively feasible following
termination.

13
<PAGE> 18

(b) Notwithstanding any provision to the contrary, if the balance
of a Participant's Education Account at the time benefit
payments are to commence is less than $4,000, then the
Participant shall be paid such Education Account benefits as a
single lump sum as soon as administratively feasible following
commencement date.

6.5 EARLY DISTRIBUTION AND PENALTY. A Participant may elect to receive a
distribution of up to ninety percent (90%) of the vested amounts in his
or her Account on a date prior to that established under the Plan. If
such an early distribution is requested, the Plan Administrator shall
deduct from the Participant's account an additional ten percent (10%)
of the vested amount withdrawn. This additional amount withdrawn by the
Plan Administrator shall be considered an early distribution penalty,
and shall be treated as forfeited by the Participant.

ARTICLE 7
BENEFICIARIES

7.1 BENEFICIARIES. Each Participant may from time to time designate one or
more persons (who may be any one or more members of such person's
family or other persons, administrators, trusts, foundations or other
entities) as his or her Beneficiary under the Plan. Such designation
shall be made on a form prescribed by the Administrator. Each
Participant may at any time and from time to time, change any previous
Beneficiary designation, without notice to or consent of any previously
designated Beneficiary, by amending his or her previous designation on
a form prescribed by the Administrator. If no person shall be
designated by the Participant as a Beneficiary, or if the designated
Beneficiary shall not survive the Participant, payment of his/her
interest shall be made to the Participant's estate. If more than one
person is the beneficiary of a deceased Participant, each such person
shall receive a pro rata share of any death benefit payable unless
otherwise designated on the applicable form.

14
<PAGE> 19

7.2 LOST BENEFICIARY.

(a) All Participants and Beneficiaries shall have the obligation
to keep the Administrator informed of their current
address(es) until such time as all benefits due have been
paid.

(b) If a Participant or Beneficiary cannot be located by the
Administrator exercising due diligence, then, in its sole
discretion, the Administrator may presume that the Participant
or beneficiary is deceased for purposes of the Plan and all
unpaid amounts (net of due diligence expenses, including but
not limited to the retention of a locator / search firm) owed
to the Participant or beneficiary shall be paid accordingly
or, if a Beneficiary cannot be so located, then such amounts
may be forfeited. Any such presumption of death shall be
final, conclusive and binding on all parties. Notwithstanding
the foregoing, if any such Beneficiary is located within five
years from the date of any such forfeiture, such Beneficiary
shall be entitled to receive the amount previously forfeited.

ARTICLE 8
FUNDING

8.1 PROHIBITION AGAINST FUNDING. Should any investment be acquired in
connection with the liabilities assumed under this Plan, it is
expressly understood and agreed that the Participants and Beneficiaries
shall not have any right with respect to, or claim against, such assets
nor shall any such purchase be construed to create a trust of any kind
or a fiduciary relationship between the Employer and the Participants,
their Beneficiaries or any other person. Any such assets shall be and
remain a part of the general, unpledged, unrestricted assets of the
Employer, subject to the claims of its general creditors. It is the
express intention of the parties hereto that this arrangement shall be
unfunded for tax purposes and for purposes of Title I of the Employee
Retirement Income Security Act of 1974, as amended. Each Participant
and beneficiary shall be required to look to the provisions of this
Plan and to the Employer itself for enforcement of any and all benefits
due under this Plan, and to the extent any such person acquires a right
to receive payment under this Plan, such right shall be no greater than
the right of any unsecured general creditor of the Employer. The

15
<PAGE> 20

Employer or the Trust shall be designated the owner and beneficiary of
any investment acquired in connection with its obligation under this
Plan.

8.2 DEPOSITS IN TRUST. Notwithstanding paragraph 8.1, or any other
provision of this Plan to the contrary, the Employer may deposit into
the Trust any amounts it deems appropriate to pay the benefits under
this Plan. The amounts so deposited may include all contributions made
pursuant to a Deferral Election by a Participant along with any
Matching and Discretionary Contributions.

8.3 INDEMNIFICATION OF TRUSTEE.

(a) The Trustee shall not be liable for the making, retention, or
sale of any investment or reinvestment made by it, as herein
provided, nor for any loss to, or diminution of, the Trust
assets, unless due to its own negligence, willful misconduct
or lack of good faith.

(b) Such Trustee shall be indemnified and saved harmless by the
Employer from and against all personal liability to which it
may be subject by reason of any act done or omitted to be done
in its official capacity as Trustee in good faith in the
administration of the Plan and Trust, including all expenses
reasonably incurred in its defense in the event the Employer
fails to provide such defense upon the request of the Trustee.
The Trustee is relieved of all responsibility in connection
with its duties hereunder to the fullest extent permitted by
law, short of breach of duty to the beneficiaries.

8.4 WITHHOLDING OF EMPLOYEE CONTRIBUTIONS. The Administrator is authorized
to make any and all necessary arrangements with the Employer in order
to withhold the Participant's Deferrals under Section 3.1 hereof from
his or her Compensation. The Administrator shall determine the amount
and timing of such withholding.

16
<PAGE> 21

ARTICLE 9
CLAIMS ADMINISTRATION

9.1 GENERAL. If a Participant, Beneficiary or his/her representative is
denied all or a portion of an expected Plan benefit for any reason and
the Participant, Beneficiary or his/her representative desires to
dispute the decision of the Administrator, he/she must file a written
notification of his/her claim with the Administrator.

9.2 CLAIM REVIEW. Upon receipt of any written claim for benefits, the
Administrator shall be notified and shall give due consideration to the
claim presented. If the claim is denied to any extent by the
Administrator, the Administrator shall furnish the claimant with a
written notice setting forth:

(a) the specific reason or reasons for denial of the claim;

(b) a specific reference to the Plan provisions on which the
denial is based;

(c) a description of any additional material or information
necessary for the claimant to perfect the claim and an
explanation of why such material or information is necessary;
and

(d) an explanation of the provisions of this Article.

9.3 RIGHT OF APPEAL. A claimant who has a claim denied under Section 9.2
may appeal to the Administrator for reconsideration of that claim. A
request for reconsideration under this section must be filed by written
notice within sixty (60) days after receipt by the claimant of the
notice of denial under Section 9.2.

9.4 REVIEW OF APPEAL. Upon receipt of an appeal the Administrator shall
promptly take action to give due consideration to the appeal. Such
consideration may include a hearing of the parties involved, if the
Administrator feels such a hearing is necessary. In preparing for this
appeal the claimant shall be given the right to review pertinent
documents and the right to submit in writing a statement of issues and
comments. After consideration of the merits of the appeal the
Administrator shall issue a written decision which shall be binding on
all parties subject to Section 9.6 below. The decision shall
specifically state its reasons and pertinent Plan provisions on which
it relies. The Administrator's decision shall be issued within sixty
(60) days after the appeal is filed, except that if a hearing is held
the decision may be issued within one hundred twenty (120) days after
the appeal is filed.

17
<PAGE> 22

9.5 DESIGNATION. The Administrator may designate any other person of its
choosing to make any determination otherwise required under this
Article.

9.6 ARBITRATION. A claimant whose appeal has been denied under Section 9.4
shall have the right to submit said claim to final and binding
arbitration in the State of Tennessee pursuant to the rules of the
American Arbitration Association. Any such requests for arbitration
must be filed by written demand to the American Arbitration Association
within sixty (60) days after receipt of the decision regarding the
appeal. The costs and expenses of arbitration, including the fees of
the arbitrators, shall be borne by the losing party. The prevailing
party shall recover as expenses all reasonable attorney's fees incurred
by it in connection with the arbitration proceeding or any appeals
therefrom.

ARTICLE 10
GENERAL PROVISIONS

10.1 ADMINISTRATOR.

(a) Appointment of Administrator. The Company shall appoint an
individual or a committee to serve as Administrator of the
Plan. The Administrator may be removed by the Company at any
time, and any individual may resign as Administrator at any
time by submitting his/her resignation in writing to the
Company. A new Administrator shall be appointed by the Company
as soon as practicable in the event of a removal or
resignation. Any person so appointed shall signify his/her
acceptance by filing a written acceptance with the Company.

(b) The Administrator is expressly empowered to limit the amount
of compensation that may be deferred; to deposit amounts into
trust in accordance with Section 8.2 hereof; to interpret the
Plan, and to determine all questions arising in the
administration, interpretation and application of the Plan; to
employ actuaries, accountants, counsel, and other persons it
deems necessary in connection with the administration of the
Plan; to request any information from the Employer it deems
necessary to determine whether the Employer would be
considered insolvent or subject to a proceeding in

18
<PAGE> 23

bankruptcy; and to take all other necessary and proper actions
to fulfill its duties as Administrator.

(c) The Administrator shall not be liable for any actions by it
hereunder, unless due to its own negligence, willful
misconduct or lack of good faith.

(d) The Administrator shall be indemnified and saved harmless by
the Employer from and against all personal liability to which
it may be subject by reason of any act done or omitted to be
done in its official capacity as Administrator in good faith
in the administration of the Plan and Trust, including all
expenses reasonably incurred in its defense in the event the
Employer fails to provide such defense upon the request of the
Administrator. The Administrator is relieved of all
responsibility in connection with its duties hereunder to the
fullest extent permitted by law, short of breach of duty to
the beneficiaries.

10.2 NO ASSIGNMENT. No benefit under the Plan shall be subject in any manner
to anticipation, alienation, sale, transfer, assignment, pledge
encumbrance or charge, and any such action shall be void for all
purposes of the Plan. No benefit shall in any manner be subject to the
debts, contracts, liabilities, engagements or torts of any person, nor
shall it be subject to attachments or other legal process for or
against any person, except to such extent as may be required by law.

10.3 NO EMPLOYMENT RIGHTS. Participation in this Plan shall not be construed
to confer upon any Participant the legal right to be retained in the
employ of the Employer, or give a Participant or beneficiary, or any
other person, any right to any payment whatsoever, except to the extent
of the benefits provided for hereunder. Each Participant shall remain
subject to discharge to the same extent as if this Plan had never been
adopted.

10.4 INCOMPETENCE. If the Administrator determines that any person to whom a
benefit is payable under this Plan is incompetent by reason of physical
or mental disability, the Administrator shall have the power to cause
the payments becoming due to such person to be made to another
individual for the Participant's benefit without responsibility of the
Administrator or the Employer to see to the application of such
payments. Any payment made pursuant to such power shall, as to such
payment, operate as a complete discharge of the Employer, the
Administrator and the Trustee.

19
<PAGE> 24

10.5 IDENTITY. If, at any time, any doubt exists as to the identity of any
person entitled to any payment hereunder or the amount or time of such
payment, the Administrator shall be entitled to hold such sum until
such identity or amount or time is determined or until an order of a
court of competent jurisdiction is obtained. The Administrator shall
also be entitled to pay such sum into court in accordance with the
appropriate rules of law. Any expenses incurred by the Employer,
Administrator, and Trust incident to such proceeding or litigation
shall be charged against the Account of the affected Participant.

10.6 OTHER BENEFITS. The benefits of each Participant or beneficiary
hereunder shall be in addition to any benefits paid or payable to or on
account of the Participant or beneficiary under any other pension,
disability, annuity or retirement plan or policy whatsoever.

10.7 NO LIABILITY. No liability shall attach to or be incurred by any
manager of the Employer, Trustee or any Administrator under or by
reason of the terms, conditions and provisions contained in this Plan,
or for the acts or decisions taken or made thereunder or in connection
therewith; and as a condition precedent to the establishment of this
Plan or the receipt of benefits thereunder, or both, such liability, if
any, is expressly waived and released by each Participant and by any
and all persons claiming under or through any Participant or any other
person. Such waiver and release shall be conclusively evidenced by any
act or participation in or the acceptance of benefits or the making of
any election under this Plan.

10.8 EXPENSES. All expenses incurred in the administration of the Plan,
whether incurred by the Employer or the Plan, shall be paid by the
Employer.

10.9 INSOLVENCY. Should the Employer be considered insolvent (as defined by
the Trust), the Employer, through its Board and chief executive
officer, shall give immediate written notice of such to the
Administrator of the Plan and the Trustee. Upon receipt of such notice,
the Administrator or Trustee shall cease to make any payments to
Participants who were Employees of the Employer or their beneficiaries
and shall hold any and all assets attributable to the Employer for the
benefit of the general creditors of the Employer.

20
<PAGE> 25

10.10 AMENDMENT AND TERMINATION.

(a) Except as otherwise provided in this section, the Employer
shall have the sole authority to modify, amend or terminate
this Plan; provided, however, that any modification or
termination of this Plan shall not reduce, without the written
consent of a Participant, a Participant's right to any amounts
already credited to his or her Account, or lengthen the time
period for a payout from an established Account, on the day
before the effective date of such modification or termination.
Following such termination, payment of such credited amounts
may be made in a single sum payment if the Employer so
designates. Any such decision to pay in a single sum shall
apply to all Participants.

(b) A Participant shall have a vested right to his or her Account
in the event of the termination of the Plan pursuant to
section (a), above.

(c) Any funds remaining in the Trust after termination of the Plan
and satisfaction of all liabilities to Participants and
others, shall be returned to the Employer.

10.11 EMPLOYER DETERMINATIONS. Any determinations, actions or decisions of
the Employer (including but not limited to, Plan amendments and Plan
termination) shall be made by the Board in accordance with its
established procedures or by such other individuals, groups or
organizations that have been properly delegated by the Board to make
such determination or decision.

10.12 CONSTRUCTION. All questions of interpretation, construction or
application arising under or concerning the terms of this Plan shall be
decided by the Administrator, in its sole and final discretion, whose
decision shall be final, binding and conclusive upon all persons.

10.13 GOVERNING LAW. This Plan shall be governed by, construed and
administered in accordance with the applicable laws of the State of
Tennessee.

10.14 SEVERABILITY. Should any provision of the Plan or any regulations
adopted thereunder be deemed or held to be unlawful or invalid for any
reason, such fact shall not adversely affect the other provisions or
regulations unless such invalidity shall render impossible or
impractical the functioning of the Plan and, in such case, the
appropriate parties shall

21
<PAGE> 26

immediately adopt a new provision or regulation to take the place of
the one held illegal or invalid.

10.15 HEADINGS. The Article headings contained herein are inserted only as a
matter of convenience and for reference and in no way define, limit,
enlarge or describe the scope or intent of this Plan nor in any way
shall they affect this Plan or the construction of any provision
thereof.

22
<PAGE> 27

10.16 TERMS. Capitalized terms shall have meanings as defined herein.
Singular nouns shall be read as plural, masculine pronouns shall be
read as feminine, and vice versa, as appropriate.

IN WITNESS WHEREOF, PERKINS FAMILY RESTAURANTS, L.P., has caused this
instrument to be executed by its duly authorized officer, effective as of this
30th day of December, 1998.

<TABLE>
<S> <C>
PERKINS FAMILY RESTAURANTS, L.P.
By: Perkins Management Company, Inc., General Partner

By:
---------------------------------------------------
Title:
------------------------------------------------

ATTEST:

By:
---------------------------------------------------
Title:
------------------------------------------------
</TABLE>

<PAGE> 1
EXHIBIT 10.9 (B)

TRUST UNDER THE PERKINS FAMILY RESTAURANTS, L.P.
DEFERRED COMPENSATION PLAN

This Agreement made as of this 1st day of January 1999, by and between
Perkins Family Restaurants, L.P. (Hereinafter referred to as the "Employer") and
Union Planters Bank, N.A., a Tennessee corporation (hereinafter referred to as
the "Trustee");

WHEREAS, the Employer has adopted the nonqualified Perkins Family
Restaurants, L.P. Deferred Compensation Plan and such other plans as may, by
agreement of the parties, be set forth in Appendix A (hereinafter referred to
collectively as the "Plan").

WHEREAS, the Employer has incurred or expects to incur liability under
the terms of such Plan with respect to the individuals participating in such
Plan;

WHEREAS, the Employer wishes to establish a trust (hereinafter referred
to as the "Trust") and to contribute to the Trust assets that shall be held
therein, subject to the claims of the Employer's creditors in the event of the
Employer's Insolvency, as herein defined, until paid to the Plan participants
and their beneficiaries in such manner and at such times as specified in the
Plan;

WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plan
as an unfunded plan maintained for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
for purposes of Title I of the Employee Retirement Income Security Act of 1974,
as amended;

WHEREAS, it is the intention of the Employer to make contributions to
the Trust to provide itself with a source of funds to assist it in meeting its
liabilities under the Plan;

NOW, THEREFORE, the parties do hereby establish the Trust and agree
that the Trust shall be comprised, held and disposed of as follows:

1
<PAGE> 2

1. ESTABLISHMENT OF TRUST.

(a) The Employer hereby deposits with the Trustee in trust one
dollar ($1.00), which shall become the principal of the Trust
to be held, administered and disposed of by the Trustee as
provided in this Trust.

(b) The Trust hereby established shall be irrevocable.

(c) The Trust is intended to be a grantor trust, of which the
Employer is the grantor, within the meaning of subpart E, part
I, subchapter J, chapter 1, Subtitle A of the Internal Revenue
Code of 1986, as amended, and shall be construed accordingly.

(d) The principal of the trust, and any earnings thereon shall be
held separate and apart from other funds of the Employer and
shall be used exclusively for the uses and purposes of Plan
participants and general creditors as herein set forth. Plan
participants and their beneficiaries shall have no preferred
claim on, or any beneficial ownership interest in, any assets
of the Trust. Any rights created under the Plan and this Trust
shall be mere unsecured contractual rights of Plan
participants and their beneficiaries against the Employer. Any
assets held by the Trust will be subject to the claims of the
Employer's general creditors under federal and state law in
the event of Insolvency, as defined in section 3(a) hereof.

(e) The Employer, in its sole discretion, may be any time, or from
time to time, make additional deposits of cash or other
property in trust with the Trustee to augment the principal to
be held, administered and disposed of by the Trustee as
provided in this Trust Agreement. Neither the Trustee nor any
Plan participant or beneficiary shall have any right to compel
such additional deposits.

2. PAYMENTS TO PLAN PARTICIPANTS AND BENEFICIARIES.

(a) The Employer shall deliver to the Trustee the schedule (the
"Payment Schedule") that indicates the amounts payable with
respect to each Plan participant (and his or her
beneficiaries), that provides a formula or other instructions
acceptable to the Trustee for determining the amounts so
payable, the form in which such amount is to be paid (as
provided for or available under the Plan), and the time of
commencement for payment of such amounts. Except as otherwise
provided herein, the Trustee shall make payments to the Plan
participants and their beneficiaries in accordance with

2
<PAGE> 3

such Payment Schedule. The Trustee shall make provision for
the reporting and withholding of any federal, state or local
taxes that may be required to be withheld with respect to the
payment of benefits pursuant to the terms of the Plan and
shall pay amounts withheld to the appropriate taxing
authorities or determine that such amounts have been reported,
withheld and paid by the Employer.

(b) The entitlement of a Plan participant or his or her
beneficiaries to benefits under the Plan shall be determined
by the Employer or such party as it shall designate under the
Plan, and any claim for such benefits shall be considered an
reviewed under the procedures set out in the Plan.

(c) The Employer may make payment of benefits directly to Plan
participants or their beneficiaries as they become due under
the terms of the Plan. The Employer shall notify the Trustee
of its decision to make payment of benefits directly prior to
the time amounts are payable to participants or their
beneficiaries. In addition, if the principal of the Trust, and
any earnings thereon, are not sufficient to make payments of
benefits in accordance with the terms of the Plan, the
Employer shall make the balance of each such payment as it
falls due. The Trustee shall notify the Employer where
principal and earnings are not sufficient.

3. Trustee Responsibility Regarding Payments to the Trust Beneficiary When
Employer is Insolvent.

(a) The Trustee shall cease payment of benefits to Plan
participants and their beneficiaries if the Employer is
Insolvent. The Employer shall be considered "Insolvent" for
purposes of this Trust if:

(i) the Employer is unable to pay its debts as they
become due; or

(ii) the Employer is subject to a pending proceeding as a
debtor under the United States Bankruptcy Code.

(b) At all times during the continuance of this Trust, as provided
in section 1(d) hereof, the principal and income of the Trust
shall be subject to claims of general creditors of the
Employer under federal and state law as set forth below:

3
<PAGE> 4

(i) The Board of Directors and the Chief Executive
Officer (or, if there is no Chief Executive Officer,
the highest ranking officer of the Employer) of the
Employer shall have the duty to inform the Trustee in
writing of the Employer's Insolvency. If a person
claiming to be a creditor of the Employer alleges in
writing to the Trustee that the Employer has become
Insolvent, the Trustee shall determine whether the
Employer is Insolvent and, pending such
determination, the Trustee shall discontinue payment
of benefits to Plan participants or their
beneficiaries.

(ii) Unless the Trustee has actual knowledge of the
Employer's Insolvency, or has received notice from
the Employer or a person claiming to be a creditor
alleging that the Employer is Insolvent, the Trustee
shall have no duty to inquire where the Employer is
Insolvent. The Trustee may in all events rely on such
evidence concerning the Employer's solvency as may be
furnished to the Trustee and that provides the
Trustee with a reasonable basis for making a
determination concerning the Employer's solvency.

(iii) If at any time the Trustee has determined that the
Employer is Insolvent, the Trustee shall discontinue
payments to Plan participants or their beneficiaries
and shall hold the assets of the Trust for the
benefit of the Employer's general creditors. Nothing
in this Trust shall in any way diminish any rights of
Plan participants or their beneficiaries to pursue
their rights as general creditors of the Employer
with respect to benefits due under the Plan or
otherwise.

(iv) The Trustee shall resume the payment of benefits to
Plan participants or their beneficiaries in
accordance with section 2 of this Trust only after
the Trustee has determined that the Employer is not
Insolvent (or is no longer Insolvent).

(c) Provided that there are sufficient assets, if the Trustee
discontinues the payment of benefits from the Trust pursuant
to section 3(b) hereof and subsequently resumes such payments,
the first payment following such discontinuance shall include
the aggregate amount of all payments due to Plan participants
or their beneficiaries under the terms of the Plan for the
period of such discontinuance, less the aggregate amount of
any payments made to Plan participants or their beneficiaries
by the Employer in lieu of the payments provided for hereunder
during any such period of discontinuance.

4
<PAGE> 5

4. PAYMENTS TO EMPLOYER. Except as provided in section 3 hereof, after the
Trust has become irrevocable, the Employer shall have no right or power
to direct the Trustee to return to the Employer or to divert to others
any of the Trust assets before all payment of benefits have been made
to Plan participants and their beneficiaries pursuant to the terms of
the Plan.

5
<PAGE> 6

5. INVESTMENT AUTHORITY.

(a) The Trustee may invest in securities (including stock or
rights to acquire stock) or obligations issued by the
Employer. All rights associated with assets of the Trust shall
be exercised by the Trustee or the person designated by the
Trustee and shall in no event be exercisable by or rest with
Plan participants. Voting rights with respect to Trust assets
will be exercised by the Employer.

(b) The Employer shall direct the investments of the Trust, if
any; provided, however, the Employer, in its sole discretion,
may, from time to time, delegate such investment authority to
any other person(s) or entity(ies).

6. DISPOSITION OF INCOME. During the term of this Trust, all income
received by the Trust, net of expenses and taxes, shall be accumulated
and reinvested.

7. ACCOUNTING BY TRUSTEE. The Trustee shall keep accurate and detailed
records of all investments, receipts, disbursements, and all other
transactions required to be made, including such specific records as
shall be agreed upon in writing between the Employer and the Trustee.
Within sixty (60) days following the close of calendar year and within
sixty (60) days after the removal or resignation of the Trustee, the
Trustee shall deliver to the Employer a written account of its
administration of the Trust during such year or during the period from
the close of the last preceding year to the date of such removal or
resignation, setting forth all investments, receipts, disbursements and
other transactions effected by it, including a description of all
securities and investments purchased and sold with the cost or net
proceeds of such purchases or sales (accrued interest paid or
receivable being shown separately), and showing all cash, securities
and other property held in the Trust at the end of such year or as of
the date of such removal or resignation as the case may be.

8. RESPONSIBILITY OF TRUSTEE.

(a) The Trustee shall act with the care, skill, prudence and
diligence under the circumstances then prevailing that a
prudent person acting a like capacity and familiar with such
matters would use in the conduct of an enterprise of a like
character and with like aims, provided, however, that the
Trustee shall incur no liability to any person for any action
taken pursuant to a direction, request or approval given by
the Employer which is contemplated by, and in conformity with,
the terms of the Plan or

6
<PAGE> 7

this Trust and is given in writing by the Employer. In the
event of dispute between the Employer and a party, the Trustee
may apply to a court of competent jurisdiction to resolve the
dispute.

(b) If the Trustee undertakes or defends any litigation arising in
connection with this Trust, the Employer agrees to indemnify
the Trustee against Trustee's costs, expenses and liabilities
(including, without limitation, attorneys' fees and expenses)
relating thereto and to be primarily liable for such payments.
If the Employer does not pay such costs, expenses and
liabilities in a reasonably timely manner, the Trustee may
obtain payment from the Trust.

(c) The Trustee may consult with legal counsel (who may also be
counsel for the Employer generally) with respect to any of its
duties or obligations hereunder.

(d) The Trustee may hire agents, accountants, actuaries,
investment advisors, financial consultants or other
professionals to assist it in performing any of its duties or
obligations hereunder.

(e) The Trustee shall have, without exclusion, all powers
conferred on trustees by applicable law, unless expressly
provided otherwise herein, provided, however, that if an
insurance policy is held as an asset of the Trust, the Trustee
shall have no power to name a beneficiary of the policy other
than the Trust, to assign the policy (as distinct from
conversion if the policy to a different form) other than to a
successor Trustee, or to loan to any person the proceeds of
any borrowing against such policy.

(f) However, notwithstanding the provisions of section 8(e) above,
the Trustee may loan to the Employer the proceeds of any
borrowing against an insurance policy held as an asset of the
Trust.

(g) Notwithstanding any powers granted to the Trustee pursuant to
this Trust or to applicable law, the Trustee shall not have
any power that could give this Trust the objective of carrying
on a business and dividing the gains therefrom, within the
meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the
Internal Revenue Code.

9. COMPENSATION AND EXPENSES OF THE TRUSTEE. The Employer shall pay all
administrative and Trustee's fees and expenses. If not so paid, the
fees and expenses shall be paid from the trust.

7
<PAGE> 8

10. RESIGNATION AND REMOVAL OF TRUSTEE.

(a) The Trustee may resign at any time by written notice to the
Employer, which shall be effective thirty (30) days after
receipt of such notice unless the Employer and the Trustee
agree otherwise.

(b) The Trustee may be removed by the Employer upon thirty (30)
days notice or upon shorter notice accepted by the Trustee.

(c) Upon resignation or removal of the Trustee and appointment of
a successor Trustee, all assets shall subsequently be
transferred to the successor Trustee. The transfer shall be
completed within sixty (60) days after receipt of notice of
resignation, removal or transfer, unless the Employer extends
the time limit.

(d) If the Trustee resigns or is removed, a successor shall be
appointed, in accordance with section 11 hereof, by the
effective date of the resignation or removal under paragraph
(a) or (b) of this section. If no such appointment as been
made, the Trustee may apply to a court of competent
jurisdiction for appointment of a successor or for
instructions. All expenses of the Trustee in connection with
the proceeding shall be allowed as administrative expenses of
the Trust.

11. APPOINTMENT OF SUCCESSOR.

(a) If the Trustee resigns (or is removed) in accordance with
section 10(a) or (b) hereof, the Employer may appoint any
third party, such as a bank trust department or other party
that may be granted corporate trustee powers under state law,
as a successor to replace the Trustee upon resignation or
removal. The appointment shall be effective when accepted in
writing by the new Trustee, who shall have all of the rights
and powers of the form trustee. The former Trustee shall
execute any instrument necessary or reasonably requested by
the Employer or the successor Trustee to evidence the
transfer.

(b) The successor Trustee need not examine the records and acts of
any prior Trustee and may retain or dispose of existing Trust
assets, subject to sections 7 and 8 hereof. The successor
Trustee shall not be responsible for and the Employer shall
indemnify and defend the successor Trustee from any claim or
liability resulting from any action or

8
<PAGE> 9

inaction of any prior Trustee or from any other past event, or
any condition existing at the time it becomes successor
Trustee.

12. AMENDMENT OR TERMINATION.

(a) This Trust may be amended by a written instrument executed by
the Trustee and the Employer. Notwithstanding the foregoing,
no such amendment shall conflict with the terms of the Plan or
shall make the Trust revocable after it has become irrevocable
in accordance with section 1(b) hereof.

(b) The Trust shall not terminate until the date on which Plan
participants and their beneficiaries are no longer entitled to
benefits pursuant to the terms of the Plan. Upon termination
of this Trust any assets remaining in this Trust shall be
returned to the Employer.

(c) Upon written approval of participants or beneficiaries
entitled to payment of benefits pursuant to the terms of the
Plan, the Employer may terminate this Trust prior to the time
all benefit payments under the Plan have been made. All assets
in the Trust at termination shall be returned to the Employer.

13. MISCELLANEOUS.

(a) Any provision of this Trust prohibited by law shall be
ineffective to the extent of any such prohibition, without
invalidating the remaining provisions hereof.

(b) Benefits payable to Plan participants and their beneficiaries
under this Trust may not be anticipated, assigned (either at
law or in equity), alienated, pledged, encumbered or subjected
to attachment, garnishment, levy, execution or other legal or
equitable process.

14. EFFECTIVE DATE. The effective date of this Trust shall be January 1,
1999.

9
<PAGE> 10

Attest: PERKINS FAMILY RESTAURANTS, L.P.
By: Perkins Management Company, Inc.
General Partner
- ----------------------------------
Secretary
By:
-----------------------------------
William S. Forgione
Vice President

UNION PLANTERS BANK , N.A.

By:
-----------------------------------
Name and Title

<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
BALANCE SHEET AS OF DECEMBER 31, 1998 AND FROM THE STATEMENT OF INCOME FOR THE
YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS. PERKINS FAMILY RESTAURANTS, L.P.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,257
<SECURITIES> 0
<RECEIVABLES> 7,898
<ALLOWANCES> 656
<INVENTORY> 5,375
<CURRENT-ASSETS> 16,771
<PP&E> 246,595
<DEPRECIATION> 115,324
<TOTAL-ASSETS> 202,550
<CURRENT-LIABILITIES> 34,952
<BONDS> 139,767
0
0
<COMMON> 0
<OTHER-SE> 24,717
<TOTAL-LIABILITY-AND-EQUITY> 202,550
<SALES> 276,935
<TOTAL-REVENUES> 298,806
<CGS> 78,576
<TOTAL-COSTS> 229,366
<OTHER-EXPENSES> 66,456
<LOSS-PROVISION> 672<F1>
<INTEREST-EXPENSE> 14,312
<INCOME-PRETAX> 2,984
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,984
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,984
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>THE PROVISION FOR DOUBTFUL ACCOUNTS AND NOTES IS PRESENTED WITHIN OPERATING
EXPENSES IN THE ACCOMPANYING FINANCIAL STATEMENTS AND IS INCLUDED IN TOTAL
COSTS ABOVE.
</FN>

</TABLE>