<PAGE> 1
CONFORMED COPY
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
--------------------------
OR
[ ] 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 38119-4709
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(901) 766-6400
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by X whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PERKINS FAMILY RESTAURANTS, L.P.
STATEMENTS OF INCOME
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -------------------------
1999 1998 1999 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Food sales $ 77,351 $ 72,798 $ 219,546 $ 203,980
Franchise revenues 5,615 5,832 16,062 16,152
-------- -------- --------- ---------
Total Revenues 82,966 78,630 235,608 220,132
-------- -------- --------- ---------
COSTS AND EXPENSES:
Cost of sales:
Food cost 21,368 20,251 60,680 57,607
Labor and benefits 26,482 25,553 76,895 70,974
Operating expenses 14,597 14,282 42,509 40,366
General and administrative 7,699 7,514 22,669 21,463
Depreciation and amortization 5,431 5,138 15,775 14,947
Interest, net 3,594 3,690 10,749 10,891
(Gain)/Loss on disposition of assets, net -- -- (427) 400
Asset write-down -- -- 420 500
Other, net (353) (350) (1,212) (1,028)
-------- -------- --------- ---------
Total Costs and Expenses 78,818 76,078 228,058 216,120
-------- -------- --------- ---------
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 4,148 2,552 7,550 4,012
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- -- (528) --
-------- -------- --------- ---------
NET INCOME $ 4,148 $ 2,552 $ 7,022 $ 4,012
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
PERKINS FAMILY RESTAURANTS, L.P.
BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(Unaudited) 1998
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,504 $ 2,257
Receivables, less allowance for
doubtful accounts of $869 and $495 7,858 7,150
Inventories, at the lower of first-
in, first-out cost or market 5,493 5,375
Prepaid expenses and other current assets 1,683 1,989
-------- --------
Total current assets 17,538 16,771
-------- --------
PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization 133,163 131,271
NOTES RECEIVABLE, less allowance for
doubtful accounts of $164 and $161 1,476 748
INTANGIBLE AND OTHER ASSETS, net of
accumulated amortization of $32,129
and $30,415 52,330 53,760
-------- --------
$204,507 $202,550
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE> 4
PERKINS FAMILY RESTAURANTS, L.P.
BALANCE SHEETS
(In Thousands, Except Unit Amounts)
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(Unaudited) 1998
------------- -----------
<S> <C> <C>
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ 1,044 $ 1,229
Accounts payable 12,603 11,469
Accrued expenses 22,543 22,254
-------- --------
Total current liabilities 36,190 34,952
-------- --------
CAPITAL LEASE OBLIGATIONS, less
current maturities 4,443 5,767
LONG-TERM DEBT, less current maturities 131,500 134,000
OTHER LIABILITIES 4,396 3,114
PARTNERS' CAPITAL:
General partner 280 247
Limited partners (5,463,924 issued and outstanding) 27,698 24,470
-------- --------
Total partners' capital 27,978 24,717
-------- --------
$204,507 $202,550
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
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PERKINS FAMILY RESTAURANTS, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,148 $ 2,552 $ 7,022 $ 4,012
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,431 5,138 15,775 14,947
(Gain)/Loss on disposition of assets, net -- -- (427) 400
Asset write-down -- -- 420 500
Change in accounting principle -- -- 528 --
Other non-cash income and expense items 182 300 496 723
Changes in other operating assets and liabilities 2,799 2,611 (286) 370
-------- -------- -------- --------
Total adjustments 8,412 8,049 16,506 16,940
-------- -------- -------- --------
Net cash provided by operating activities 12,560 10,601 23,528 20,952
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment (5,906) (6,488) (15,860) (18,260)
Proceeds from sale of property and equipment -- 8 -- 20
Payments on notes receivable 66 218 190 427
Distribution from/(investment in) joint venture 200 -- 200 (110)
-------- -------- -------- --------
Net cash used in investing activities (5,640) (6,262) (15,470) (17,923)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under (payments on) line of credit (4,500) (3,500) (2,500) 4,000
Principal payments under capital lease obligations (311) (322) (1,508) (1,010)
Deferred financing costs -- -- -- (536)
Repurchase of limited partnership units (10) (55) (42) (16,296)
Distributions to partners (1,667) (1,295) (3,761) (1,726)
-------- -------- -------- --------
Net cash used in financing activities (6,488) (5,172) (7,811) (15,568)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 432 (833) 247 (12,539)
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS:
Balance, beginning of period 2,072 2,454 2,257 14,160
-------- -------- -------- --------
Balance, end of period $ 2,504 $ 1,621 $ 2,504 $ 1,621
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The accompanying unaudited financial statements of Perkins Family Restaurants,
L.P. (the "Company") have been prepared in accordance with the instructions to
Form 10-Q and therefore do not include all information and notes necessary for
complete financial statements in conformity with generally accepted accounting
principles. The results for the periods indicated are unaudited but reflect all
adjustments (consisting only of normal recurring adjustments) which management
considers necessary for a fair presentation of the operating results. Results of
operations for the interim periods are not necessarily indicative of a full year
of operations. The notes to the financial statements contained in the 1998
Annual Report on Form 10-K should be read in conjunction with these statements.
Certain prior year amounts have been reclassified to conform to current year
presentation.
Going Private Transaction
The Company is a limited partnership that currently is indirectly wholly-owned
(including its general partner's interest) by The Restaurant Company ("TRC").
Until December 1997, the Company's Units were traded on the New York Stock
Exchange under the symbol "PFR." On December 17, 1997, the Company, TRC and a
subsidiary of TRC completed a series of transactions pursuant to which the
Company's operating subsidiary was eliminated through a merger, the Company
became an indirect wholly-owned subsidiary of TRC, and the approximately 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").
Loss of a Significant Franchisee
On February 4, 1999, Denny's (a subsidiary of Advantica Restaurant Group) was
the prevailing bidder in the court-supervised auction sale of 30 restaurants of
Perk Development Corporation ("Perk"), the Company's upstate New York
franchisee. These restaurants ceased operating as Perkins Family Restaurants on
February 28, 1999. The Company received approximately $1,783,000 in royalties
from Perk during 1998. The Company continues to recruit new franchise
restaurants with higher average sales volumes to replace this revenue stream.
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<PAGE> 7
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.
A franchisee of the Company which operated 20 restaurants as of September 30,
1999, filed a petition for reorganization under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of Ohio on October 27, 1999. Management believes it is likely that the majority
of these restaurants will remain in the Perkins system either by successful
restructure of the franchisee's obligations or acquisition of the franchisee's
operations by the Company or a third party. During 1998, the Company earned
royalties from these restaurants totaling approximately $948,000. As of
September 30, 1999, the franchisee was delinquent in its royalty obligations in
the amount of approximately $238,000. Although these delinquencies are
personally guaranteed by three principals of the franchisee, collection under
the guarantees is uncertain and the obligations are fully reserved.
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 the funds borrowed. At
September 30, 1999, there were approximately $2,795,000 in borrowings
outstanding under these programs. The Company has guaranteed $824,000 of these
borrowings. No additional borrowings are available under these programs. The
Company has also entered into a separate two year limited guaranty, which
expires on February 26, 2000, of $1,200,000 in borrowings of a franchisee which
were used to construct a new franchise restaurant. As of September 30, 1999, the
outstanding balance on the loan was $1,200,000.
The Company entered into an agreement to loan up to $775,000 to a franchisee to
be used in remodeling and upgrading existing restaurants. These funds are
primarily being used for improvements to sites owned or leased by the Company
which are being leased to the franchisee. The principal and interest will be
paid by the franchisee over a five year period beginning upon completion of the
remodels and equipment upgrades. As of September 30, 1999, there was $706,000
outstanding under the loan agreement.
7
<PAGE> 8
Supplemental Cash Flow Information
The increase or decrease in cash and cash equivalents due to changes in
operating assets and liabilities for the three and nine months ended September
30, consisted of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(Increase) Decrease in:
Receivables $(1,068) $ (58) $(2,023) $ (736)
Inventories (172) (352) (118) (767)
Prepaid expenses and
other current assets 17 108 (234) (481)
Other assets (100) (126) (1,098) (206)
Increase (Decrease) in:
Accounts payable 1,304 788 1,134 1,677
Accrued expenses 2,612 2,868 544 1,932
Other liabilities 206 (617) 1,509 (1,049)
------- ------- ------- -------
$ 2,799 $ 2,611 $ (286) $ 370
======= ======= ======= =======
</TABLE>
The Company paid interest of $194,000 and $361,000 during the third quarters of
1999 and 1998, respectively and paid $7,449,000 and $7,249,000 for the nine
months ended September 30, 1999 and 1998, respectively.
Federal Income Taxation
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. The Company paid $3,761,000 to its partners in the first
nine months of 1999 to satisfy taxable income allocations.
8
<PAGE> 9
Preopening Expenses
In April 1998, The American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which the Company adopted in 1999. SOP 98-5 requires the costs of
start-up activities to be expensed as incurred. Upon adoption of SOP 98-5, the
Company recorded a cumulative effect of a change in accounting principle of
$528,000 to expense unamortized preopening costs. Prior to 1999, the Company
capitalized new store opening costs and expensed these costs over the 12 months
following the opening of the restaurant.
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Segment Reporting
The following presents revenues and other financial information by business
segment for the three month and nine month periods ended September 30 (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended:
September 30, 1999:
Restaurant Franchise Manufacturing Other Totals
---------- --------- -------------- --------- --------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $69,221 $5,625 $8,028 $ 92 $82,966
Intersegment revenues -- -- 2,352 -- 2,352
Segment profit (loss) 8,613 4,932 1,765 (11,162) 4,148
<CAPTION>
September 30, 1998:
Restaurant Franchise Manufacturing Other Totals
---------- --------- -------------- --------- --------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $65,468 $5,817 $7,127 $ 218 $78,630
Intersegment revenues -- -- 2,133 -- 2,133
Segment profit (loss) 7,484 5,016 1,361 (11,309) 2,552
<CAPTION>
Nine Months Ended:
September 30, 1999:
Restaurant Franchise Manufacturing Other Totals
---------- --------- -------------- --------- --------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $198,280 $16,005 $20,847 $ 476 $235,608
Intersegment revenues -- -- 6,774 -- 6,774
Segment profit (loss) 22,690 13,879 4,313 (33,860) 7,022
<CAPTION>
September 30, 1998:
Restaurant Franchise Manufacturing Other Totals
---------- --------- -------------- --------- --------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $184,325 $16,097 $18,890 $ 820 $220,132
Intersegment revenues -- -- 5,719 -- 5,719
Segment profit (loss) 20,027 14,107 3,796 (33,918) 4,012
</TABLE>
10
<PAGE> 11
A reconciliation of other segment loss is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
General and administrative expenses $ 6,536 $ 6,480 $ 19,614 $ 18,675
Depreciation and amortization expenses 1,552 1,630 4,629 4,940
Interest expense 3,594 3,690 10,749 10,891
Change in accounting principle -- -- 528 --
(Gain)/Loss on disposition of assets -- -- (427) 400
Asset write-down -- -- 400 500
Other (520) (491) (1,633) (1,488)
======== ======== ======== ========
$ 11,162 $ 11,309 $ 33,860 $ 33,918
======== ======== ======== ========
</TABLE>
Deferred Compensation
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. The total amount held in trust
as of September 30, 1999 was $1,623,000 and is included in other assets and
other liabilities in the accompanying balance sheets of the Company.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1999
RESULTS OF OPERATIONS
Overview:
The Company is a leading operator and franchisor of full-service mid-scale
restaurants located in 35 states and 5 Canadian provinces. As of September 30,
1999, Perkins owned and operated 140 full-service restaurants and franchised 331
full-service restaurants. The Company also manufactures and distributes bakery
products which are sold to Company-operated restaurants, franchisees,
third-party bakers and food distributors. The business of Perkins was founded in
1958, and since then Perkins has continued to adapt its menus, product
offerings, building designs and decor to meet changing consumer preferences.
Perkins is a highly recognized brand in the geographic areas it serves.
The Company's revenues are derived primarily from the operation of full-service
restaurants, the sale of bakery products produced by its manufacturing division,
Foxtail Foods ("Foxtail"), and franchise fees. Foxtail offers cookie dough,
muffin batters, pancake mixes, pies and other food products to 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, Foxtail manufactures certain proprietary and
non-proprietary products for sale to non-Perkins operations. Sales to
Company-operated restaurants are eliminated in the accompanying statements of
operations. In the nine months ended September 30, 1999, revenues from
Company-operated restaurants, Foxtail and franchise fees accounted for 84.4%,
8.8% and 6.8% of total revenues, respectively.
12
<PAGE> 13
A summary of the Company's results for the third quarter and nine months ended
September 30 are presented in the following table. All revenues, costs and
expenses are expressed as a percentage of total revenues. Certain prior year
amounts have been reclassified to conform to current year presentation.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- ------------------
1999 1998 1999 1998
------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Food sales 93.2% 92.6% 93.2% 92.7%
Franchise revenues 6.8 7.4 6.8 7.3
----- ----- ----- -----
Total Revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs and Expenses:
Cost of sales:
Food cost 25.8 25.8 25.8 26.2
Labor and benefits 31.9 32.5 32.6 32.2
Operating expenses 17.6 18.2 18.0 18.3
General and administrative 9.3 9.6 9.6 9.8
Depreciation and amortization 6.5 6.5 6.7 6.8
Interest, net 4.3 4.6 4.6 5.0
(Gain)/Loss on disposition of assets, net -- -- (0.2) 0.1
Asset write-down -- -- 0.2 0.2
Other, net (0.4) (0.4) (0.5) (0.4)
----- ----- ----- -----
Total Costs and Expenses 95.0 96.8 96.8 98.2
----- ----- ----- -----
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 5.0 3.2 3.2 1.8
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE -- -- (0.2) --
----- ----- ----- -----
NET INCOME 5.0% 3.2% 3.0% 1.8%
===== ===== ===== =====
</TABLE>
Net income for the third quarter of 1999 was $4,148,000 versus net income of
$2,552,000 for the same period in 1998. For the nine months ended September 30,
1999 net income was $7,022,000 compared to $4,012,000 in the prior year.
13
<PAGE> 14
Revenues:
Total revenues for the third quarter and first nine months of 1999 increased
5.5% and 7.0% over the same periods last year due primarily to higher comparable
restaurant sales, sales from stores which were not open during 1998, and
increased Foxtail sales.
The increase in restaurant revenue is primarily due to same store comparable
sales increases of 4.9% and 4.8% over the third quarter and first nine months of
1998, respectively. Additionally, six new Company-operated restaurants added in
1998 and three restaurants added in the first nine months of 1999 contributed to
the increase. Same store comparable sales increased due to selective menu price
increases in 1998 and guest trends toward higher-priced entrees. For the
quarter, a 0.5% increase in comparable customer counts contributed to the
increase in comparable sales. Year to date comparable guest counts decreased
0.7%. The shift in customer preference to higher-priced entrees can be
attributed to the Company's development and promotion of higher-priced menu
items. These increases were partially offset by the closing of two
Company-operated restaurants during 1998 and three stores during 1999.
Revenues from Foxtail increased approximately 12.6% and 10.4% over the three and
nine months ended September 30, 1998, and constituted approximately 9.7% and
8.8%, respectively, of the Company's revenues. The increase for the quarter is
due to bakery promotions throughout the Perkins system. The year to date
increase is due to additional sales of non-Perkins products combined with bakery
promotions throughout the system. The company continues to focus on developing
sales outside the Perkins system in order to maximize plant utilization.
Franchise revenues, which consist primarily of franchise royalties and sales
fees, decreased 3.7% over the third quarter of 1998 and 0.6% over the first nine
months of 1998. The decrease in revenue is due to fewer franchise openings in
1999, reducing the amount of revenue recognized for initial franchise fees.
Three franchise units opened in the third quarter of 1999 versus nine in 1998.
Fourteen franchise units opened in the first nine months of 1999 versus
twenty-five in the first nine months of 1998. The decrease in initial franchise
fees was partially offset by increased royalty revenue. The loss of royalties
from thirty-nine restaurants closed since January 1, 1999 has been replaced by
new restaurants with higher average sales generating higher royalties per store.
Costs and Expenses:
Food cost:
In terms of total revenues, food cost for the three months ended September 30,
1999 was equal to food cost for the same period in the prior year. Food cost for
first nine months decreased 0.4 percentage points over the 1998 period.
Food cost for the quarter was impacted favorably by lower commodity costs for
certain menu items and increased menu prices. Increased food cost related to
changes in menu items sold and bakery promotions offset these positive
variances. For the year, food cost decreased due to selective menu price
increases in 1998 and lower commodity costs. The decreases were partially offset
by the increased costs associated with product upgrades on certain key items.
Additionally, as Foxtail's revenues have increased as a percent of total
revenues, the relatively higher food cost percentages on Foxtail products has
impacted the Company's food cost percentages.
14
<PAGE> 15
Labor and benefits:
Labor and benefits expense, as a percentage of total revenues, decreased 0.6 and
increased 0.4 percentage points for the third quarter and nine months ended
September 30, 1999, respectively. The impact of an increased average guest check
on labor and increased productivity in the company's restaurants combined with
improved productivity at Foxtail more than offset average wage rate increases in
the quarter.
Year to date, increases in group health insurance costs, lower productivity and
an increase in average wage rates drove the negative variance versus prior year.
The Company made significant changes to its group health insurance plan in July
1999, which the Company believes will mitigate future increases in certain
employee insurance costs.
The wage rates of the Company's hourly employees are impacted by Federal and
state minimum wage laws. Certain states do not allow tip credits for servers
which results in higher payroll costs as well as greater exposure to increases
in minimum wage rates. In the past, the Company has been able to offset
increases in labor costs through selective menu price increases and improvements
in labor productivity. The Company anticipates that it can offset future
increases in the Federal minimum wage rate through selective menu price
increases. However, there is no assurance that future increases can be mitigated
through raising menu prices.
Operating expenses:
Operating expenses, expressed as a percentage of total revenues, decreased 0.6
and 0.3 percentage points compared to the three and nine months ended September
30, 1998. The elimination of certain outside service expenses and the impact of
an increased guest check average on fixed expenses were the primary reasons for
the decreases from 1998 periods. The decreases were partially offset by
increases in Foxtail distribution costs and increased franchise operating costs.
General and administrative:
General and administrative expenses increased 2.5% and 5.6% over the three and
nine months ended September 30, 1999. This increase is due to higher incentive
costs associated with continued growth in Company performance and the higher
cost of administrative support.
Depreciation and amortization:
Depreciation and amortization expense for the three and nine months ended
September 30, 1999 increased 5.7% and 5.5% over the same periods last year due
primarily to the addition of new Company-operated restaurants and the upgrade
and maintenance of existing restaurants.
Interest, net:
Interest expense for the three and nine months ended September 30, 1999,
decreased 2.6% and 1.3%, respectively, over the same periods last year due to
decreased interest expense related to capital leases, lower average borrowings
and lower interest rates for borrowings on the Company's revolving line of
credit facility.
Other:
The Company recognized a gain in the second quarter of 1999 totaling $427,000
related to the early termination of a lease obligation. Losses for asset
write-downs totaled $420,000. This loss primarily relates to a property for
which the lease expired in September 1999 for which the Company did not exercise
an available lease option. As a result, the related leasehold improvements were
written off when the decision was made not to renew the lease. In addition,
development of two prospective restaurant sites was discontinued.
15
<PAGE> 16
Results of operations for the nine months ended September 30, 1999 reflect a
charge of $528,000 for a cumulative effect of change in accounting principle
related to the adoption of SOP 98-5 "Reporting on the Costs of Start-Up
Activities," which requires the costs of start-up activities to be expensed as
incurred. Prior to 1999, the Company deferred new store preopening costs and
amortized them over the twelve months following the opening of the restaurant.
Results of operations for the nine months ended September 30, 1998 reflect a
$500,000 non-cash charge against earnings related to the write-down of certain
assets impaired under SFAS No. 121. In addition, the Company recorded a net loss
in the prior year of $400,000 related to the disposition of assets; this amount
included a loss of approximately $845,000 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.
16
<PAGE> 17
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. A review of computer systems and software, including
non-information technology systems, has been completed. No material costs
associated with achieving Year 2000 compliance internally have been experienced
or 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
have been developed to address the Year 2000 issue. The returned questionnaires
have been assessed by the Company. Based on these responses, the Company has no
reason to believe that significant business risks exist; however, the responses
do not provide any guarantees that unidentified failures by critical vendors
will not occur.
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 has been assessed and, although the Company
cannot provide assurance as to their readiness, no significant risks have been
identified. However, failures by significant franchisees could result in a
material adverse effect on the Company's operations. To mitigate exposure for
both Company-owned and franchised restaurants, the Company is developing
contingency plans to assist restaurant personnel in providing for quick response
and, if necessary, limited service in those restaurants that do experience
interruptions of service from critical vendors.
Unless public suppliers of water, electricity and natural gas are disrupted for
a substantial period of time (in which case the Company's business will 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.
17
<PAGE> 18
CAPITAL RESOURCES AND LIQUIDITY
Principal uses of cash during the third quarter and first nine months ended
September 30, 1999, were capital expenditures and net payments on the Company's
revolving line of credit, and distributions to partners to pay taxable income
allocations. Capital expenditures consisted primarily of development costs for
new Company-operated restaurants and costs related to remodels and maintenance
of existing restaurants. One new restaurant was opened in the third quarter of
1999 and four sites were under development as of September 30, 1999, three of
which are expected to open before December 31, 1999. The Company's primary
source of funding was cash provided by operations.
The following table summarizes capital expenditures for each of the years in the
three-year period ended December 31, 1998 and the nine months ended September
30, 1999 and 1998, respectively (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31 SEPTEMBER 30
----------------------- ------------
1998 1997 1996 1999 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Maintenance $ 4,141 $ 3,453 $ 2,987 3,492 2,590
New sites 12,845 6,193 1,947 6,667 8,805
Manufacturing 1,152 714 651 699 980
Remodeling and Reimaging 4,144 2,790 4,064 3,316 2,785
Other 2,864 1,936 2,209 1,686 3,100
------- ------- ------- ------- -------
Total Capital Expenditures $25,146 $15,086 $11,858 $15,860 $18,260
======= ======= ======= ======= =======
</TABLE>
The Company's capital budget for 1999 is $28.0 million. The Company plans to add
up to three additional Company-operated restaurants during the fourth quarter of
1999. The remaining capital budget will be primarily applied to remodels of
existing restaurants, restaurant maintenance, and improvements to the Company's
infrastructure equipment. The primary source of funding for these projects is
expected to be cash provided by operations and borrowings under the Company's
revolving credit facility. Capital spending could vary significantly from
estimated amounts as certain of these expenditures are discretionary in nature.
The Company maintains 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 Credit Facility bear interest at
floating rates based on the agent's base rate or Eurodollar rates as defined in
the agreement. All indebtedness under the Credit Facility is secured by a first
priority lien on substantially all of the assets of the Company. As of September
30, 1999, $1,500,000 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 Company's Senior Notes and the Credit Facility otherwise limit the
Company's ability to pay distributions to its partners.
18
<PAGE> 19
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 its Senior Notes on or
prior to maturity. There can be no assurance that the Company will generate
sufficient cash flow from operations, or that future borrowings will be
available under the Credit Facility in an amount sufficient to enable the
Company to service its indebtedness or to fund its other liquidity needs. In
addition, there can be no assurance that the Company will be able to effect any
such refinancing on commercially reasonable terms or at all.
TRC is exploring the possibility of acquiring all of the outstanding stock of
TRC not owned by Donald N. Smith for approximately $47.2 million. Any such
transaction would be subject to TRC's ability to finance the transaction which
it would do through a combination of the issuance of additional equity
securities and debt. Any such transaction also would be subject to the terms of
the Credit Facility and bond indentures of the Company and TRC.
SEASONALITY
Company 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.
FORWARD-LOOKING STATEMENTS
This discussion and the discussion following contain 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,
adverse weather conditions, group health insurance costs, minimum wage rate
increases, availability and costs of commodities, interest rates and credit
availability. 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.
19
<PAGE> 20
ITEM 2A. 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 $1,500,000 outstanding under the line of credit facility at
September 30, 1999. While changes in market interest rates would affect the cost
of funds borrowed in the future, the Company believes that the effect, if any,
of reasonably possible near-term changes in interest rates on the Company's
consolidated financial position, results of operations or cash flows would not
be material.
Commodity Price Risk.
Many of the food products purchased by the Company are affected by commodity
pricing and are therefore subject to price volatility caused by weather,
production problems, delivery difficulties and other factors which are outside
the control of the Company. The majority of 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, vegetable oils, wheat products and corn products. The Company
believes it will be able to pass through increased commodity costs by adjusting
menu or product pricing in most cases. Additionally, the Company's product
offerings and marketing events are relatively diverse. Therefore the company has
the flexibility to adjust its product mix to take advantage of or limit exposure
to commodity cost fluctuations. The Company believes that any reasonably
possible near-term changes in commodity pricing which cannot be offset by
changes in pricing, or other product delivery strategies, would not be material.
20
<PAGE> 21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Reference is made to the Index of Exhibits attached hereto as
page 22 and made a part hereof.
(b) Reports on Form 8-K - None
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERKINS FAMILY RESTAURANTS, L.P.
BY: PERKINS MANAGEMENT COMPANY, INC.,
GENERAL PARTNER
DATE: November 12, 1999 BY: /s/ Steven R. McClellan
------------------- -----------------------------------
Steven R. McClellan
Executive Vice President and
Chief Financial Officer
BY: /s/ Louis C. Jehl
-----------------------------------
Louis C. Jehl
Vice President, Controller
21
<PAGE> 22
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <C>
27 Financial Data Schedule
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND FROM THE STATEMENT OF OPERATIONS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,504
<SECURITIES> 0
<RECEIVABLES> 9,334
<ALLOWANCES> 1,033
<INVENTORY> 5,493
<CURRENT-ASSETS> 17,538
<PP&E> 256,656
<DEPRECIATION> 123,493
<TOTAL-ASSETS> 204,507
<CURRENT-LIABILITIES> 36,190
<BONDS> 135,943
0
0
<COMMON> 0
<OTHER-SE> 27,978
<TOTAL-LIABILITY-AND-EQUITY> 204,507
<SALES> 219,546
<TOTAL-REVENUES> 235,608
<CGS> 60,680
<TOTAL-COSTS> 180,084
<OTHER-EXPENSES> 47,974
<LOSS-PROVISION> 488<F1>
<INTEREST-EXPENSE> 10,749
<INCOME-PRETAX> 7,550
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,550
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (528)
<NET-INCOME> 7,022
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>The provision for doubtful accounts and notes is presented within operating
expenses in the accompanying financial statements and is included in total
costs above.
</FN>
</TABLE>
