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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, 2000
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 333-57925
THE RESTAURANT COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 62-1254388
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6075 Poplar Ave. Suite 800 Memphis, TN 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
-------------------
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. [ ]
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PART I
ITEM 1. BUSINESS.
GENERAL. The Restaurant Company (the "Company," "Perkins," or "TRC") is a
wholly-owned subsidiary of The Restaurant Holding Corporation ("RHC"). TRC
conducts business under the name "Perkins Restaurant and Bakery". TRC is also
the sole stockholder of TRC Realty LLC, The Restaurant Company of Minnesota
("TRCM") and Perkins Finance Corp. RHC is owned by Donald N. Smith ("Mr.
Smith"), TRC's Chairman and Chief Executive Officer, and BancBoston Ventures,
Inc. Mr. Smith is also the Chairman and Chief Executive Officer of Friendly Ice
Cream Corporation ("FICC"), which operates and franchises approximately 600
restaurants, located primarily in the northeastern United States. Mr. Smith owns
9.3% of the common stock of FICC.
THE RECAPITALIZATION. Prior to December 13, 1999, TRC was the sole stockholder
of Perkins Restaurants Inc. ("PRI") which was a limited partner and indirect
owner of 100% of Perkins Family Restaurants, L.P. ("PFR") and the parent of
PFR's general partner, Perkins Management Company, Inc. ("PMC"). On December 13,
1999, PMC was merged into PRI. On December 15, 1999, PRI was merged into TRC. As
a result of these mergers, PFR, which had been an indirect wholly-owned
subsidiary of TRC, became a direct wholly-owned subsidiary of TRC, and TRC
became the general partner of PFR.
On December 22, 1999, through a series of transactions, TRC repurchased all of
its outstanding shares other than those owned by Mr. Smith. Mr. Smith
contributed all of his shares in TRC to RHC, and PFR was merged into TRC. As a
result, TRC became a 100% owned subsidiary of RHC. No change in the Company's
management or business strategy has occurred as a result of the
Recapitalization.
THE REORGANIZATION. On May 7, 1998, TRC and Harrah's Entertainment, Inc.
("Harrah's") entered into an agreement whereby TRC redeemed 100% of Harrah's
interest in the Company ("the Reorganization"). The closing of the
Reorganization occurred on May 18, 1998. As a result of the Reorganization,
TRC's common stock was owned 50.0% by Mr. Smith, 42.3% by The Equitable Life
Assurance Society of the United States ("Equitable") and 7.7% by others.
OPERATIONS. The Company operates and franchises mid-scale restaurants which
serve a wide variety of high quality, moderately-priced breakfast, lunch and
dinner entrees. 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. As of December 31, 2000, entrees served in
Company-operated restaurants ranged in price from $3.59 to $11.49 for breakfast,
$4.99 to $11.54 for lunch and $6.59 to $11.99 for dinner. On December 31, 2000,
there were 490 full-service restaurants in the Perkins' system, of which 145
were Company-operated restaurants and 345 were franchised restaurants. Both the
Company-operated restaurants and franchised restaurants operate under the names
"Perkins Restaurant and Bakery," "Perkins Family Restaurant," "Perkins Family
Restaurant and Bakery," or "Perkins Restaurant" and the mark "Perkins". The
restaurants are located in 35 states with the largest number in Minnesota,
Pennsylvania, Ohio, Florida and Wisconsin (see Significant Franchisees). Perkins
has 15 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 and is currently utilized in approximately 75% of franchised
restaurants.
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The Company 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"), the
Company's manufacturing division. During 2000, sales of products from this
division to Perkins franchisees and outside third parties constituted
approximately 9.7% 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. Franchisees pay a non-refundable license fee of $40,000 for the opening of
new restaurants. Franchisees opening their third and subsequent restaurants pay
a license fee of between $25,000 and $50,000 depending on the level of
assistance provided by the Company in opening the restaurant. 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 2000, average annual royalties paid by franchisees
were approximately $64,000. The following number of license agreements are
scheduled to expire in the years indicated: 2001 - eight; 2002 - seven; 2003 -
seventeen; 2004 - twenty-three; 2005 - nine. 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. The current prototype packages feature modern,
distinctive interior and exterior layouts that enhance operating efficiencies
and guest appeal. As of December 31, 2000, a significant majority of the
restaurants meet the Company's current prototype for remodels.
To promote a consistent and current image throughout the Perkins system, the
Company encourages its franchisees to remodel their restaurants. Fifty-seven
franchised restaurants were remodeled in 1999 and an additional thirty-two
restaurants were remodeled in 2000.
SYSTEM DEVELOPMENT. The Company opened two stores in Orlando, FL, one store in
Ft Myers, FL and one store in Bethlehem, PA in 2000. Five formerly franchised
stores located in Cape Coral, Fl (2), Port Charlotte, FL, Detroit Lakes, MN and
Jonesboro, AR were converted to Company-operated stores. Twenty-five new
franchised Perkins restaurants opened during the year, and seven new franchise
owners joined the system.
RESEARCH AND DEVELOPMENT. Each year, the Company 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 square foot test
kitchen in Memphis, new products undergo extensive operations and consumer
testing to determine acceptance. While this effort is an integral part of the
Company's overall operations, it was not a material expense in 2000. In
addition, no material amounts were spent to conduct consumer research in 2000.
SIGNIFICANT FRANCHISEES. As of December 31, 2000, three franchisees, otherwise
unaffiliated with the Company, owned 89 of the 345 franchised restaurants and
bakeries. These franchisees operated 38, 29 and 22 restaurants, respectively.
Thirty-five of these restaurants were located in Pennsylvania, 27 were located
in Ohio and the remaining 27 were located across Wisconsin, Nebraska, Florida,
Tennessee, New Jersey, Minnesota, South Dakota, Maryland, Kentucky, New York,
Virginia, North Dakota, South Carolina and Michigan. During 2000, Perkins earned
net royalties and license fees of $2,081,000, $1,759,000 and $1,637,000,
respectively, from these franchisees.
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A franchisee of the Company which operated 19 restaurants as of December 31,
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. Sixteen of these restaurants remain in the Perkins
system, and were acquired effective June 9, 2000, by an existing Perkins
franchisee. The remaining three restaurants closed during 2000.
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, 2000, there were approximately $1,827,000 in
borrowings outstanding under these programs. The Company has guaranteed $800,000
of these borrowings. No additional borrowings are available under these
programs.
During 1999, 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 March 1, 2000.
As of December 31, 2000, there was $696,000 outstanding under the loan
agreement.
During 2000, the Company entered into a separate agreement to guarantee fifty
percent of borrowings up to a total guarantee of $1,500,000 for use by a
franchisee to remodel and upgrade existing restaurants. As of December 31, 2000,
there were $1,428,000 in borrowings outstanding under this agreement of which
$714,000 were guaranteed by the Company.
SERVICE FEE AGREEMENTS. The Company's predecessors entered into arrangements
with several different parties which have reserved territorial rights under
which specified payments are to be made by the Company based on a percentage of
gross sales from certain restaurants and for new restaurants opened within
certain geographic regions. During 2000, the Company paid an aggregate of
$2,582,000 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 Restaurants and Bakeries 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. The Company 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. The Company has
copyrighted architectural drawings for Perkins restaurants and claims copyright
protection for certain manuals, menus, advertising and promotional materials.
The Company does not have any patents.
SEASONALITY. The Company's revenues are subject to seasonal fluctuations.
Customer counts (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.
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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,
2000, this working capital deficit was $13.9 million.
COMPETITION. The Company's business and the restaurant industry in general are
highly competitive and are often affected by changes in consumer tastes and
eating habits, by local and national economic conditions and by population and
traffic patterns. The Company 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 the Company 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. The Company and its management may
engage in other businesses which may compete with the business of Perkins.
EMPLOYEES. As of February 22, 2001, the Company employed approximately 9,700
persons. Approximately 400 of these were administrative and manufacturing
personnel and the balance were restaurant personnel. Approximately 60% of the
restaurant personnel are part-time employees. The Company competes in the job
market for qualified restaurant management and operational employees. The
Company maintains ongoing restaurant management training programs and has on its
staff full-time restaurant training managers and a training director. The
Company believes that its restaurant management compensation and benefits
package compares favorably with those offered by its competitors. None of the
Company's employees are represented by a union.
REGULATION. The Company 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.
The Company 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 the Company's hourly employees are impacted by Federal and
state minimum wage rate laws. Future increases in these rates could materially
affect the Company's cost of labor.
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ITEM 2. PROPERTIES.
The following table lists the location of each of the Company-operated and
franchised restaurants as of December 31, 2000 (excluding two alternative
concepts):
Number of Restaurants and Bakeries
Company
Operated Franchised Total
-------- ---------- -----
Alabama -- 1 1
Arizona -- 9 9
Arkansas 1 4 5
Colorado -- 17 17
Delaware -- 1 1
Florida 31 19 50
Georgia -- 3 3
Idaho -- 9 9
Illinois 6 1 7
Indiana -- 9 9
Iowa 17 2 19
Kansas 4 4 8
Kentucky -- 6 6
Maryland -- 4 4
Michigan 5 3 8
Minnesota 38 35 73
Mississippi -- 2 2
Missouri 9 -- 9
Montana -- 8 8
Nebraska 4 4 8
New Jersey -- 11 11
New York -- 5 5
North Carolina -- 5 5
North Dakota 3 5 8
Ohio -- 51 51
Oklahoma 3 -- 3
Pennsylvania 8 46 54
South Carolina -- 3 3
South Dakota -- 10 10
Tennessee 1 13 14
Utah -- 1 1
Virginia -- 3 3
Washington -- 6 6
Wisconsin 15 26 41
Wyoming -- 4 4
Canada -- 15 15
----- ---- ----
Total 145 345 490
===== ==== ====
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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The following table sets forth certain information regarding Company-operated
restaurants and other properties, as of December 31, 2000:
Number of Properties(1)
-----------------------
Use Owned Leased Total
----- ------ -----
Offices and Manufacturing Facilities(2) 1 9 10
Perkins Restaurant and Bakery(3) 62 83 145
(1) In addition, TRC leases 13 properties, 11 of which are subleased to
others and 2 of which are vacant. TRC also owns 14 properties, 12 of
which are leased to others and 2 of which are vacant.
(2) TRC's 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 the Company for a maximum of 60
months. The Company also 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 9 years, excluding renewal
options. The longest lease term will mature in 40 years and the
shortest lease term will mature in approximately 1 year, assuming the
exercise of all renewal options.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to various legal proceedings in the ordinary course of
business. Management does not believe that these proceedings, either
individually or in the aggregate, are likely to have a material adverse effect
on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS.
As the Company's equity securities are not publicly traded, this item is not
applicable.
[INTENTIONALLY LEFT BLANK]
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) Market information
No established public market exists for the Company's equity securities.
(b) Holders
As of March 20, 2001, there was 1 Stockholder of record.
(c) Dividends
A dividend of $626,000 was paid to RHC in 2000. There were no dividends declared
or paid during 1999.
[INTENTIONALLY LEFT BLANK]
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ITEM 6. SELECTED FINANCIAL DATA.
THE RESTAURANT COMPANY AND SUBSIDIARIES
SELECTED FINANCIAL AND OPERATING DATA
(In Thousands, Except Number of Restaurants)
2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Income Data:
Revenues $336,244 $315,700 $299,423 $270,161 $ 253,335
Net Income (Loss) $ 4,034 $ 7,442 $ 1,109 $ (291) $ 5,021
Balance Sheet Data:
Total Assets $210,512 $200,564 $195,638 $208,062 $ 162,849
Long-Term Debt and
Capital Lease Obligations (a) $171,149 $164,480 $159,101 $136,999 $ 62,317
Statistical Data:
Restaurants and Bakeries in
Operation at End of Year:
Company-Operated (b) 145 141 140 136 134
Franchised (b) 345 333 356 337 331
- ---------------------------------------------------------------------------------------------------------------
Total 490 474 496 473 465
Average Annual Sales Per
Company-Operated Restaurant (b) $ 1,937 $ 1,899 $ 1,816 $ 1,682 $ 1,576
Average Annual Royalties Per
Franchised Restaurant (b) $ 63.8 $ 61.8 $ 58.7 $ 56.9 $ 55.2
Total System Sales (b) $819,804 $790,391 $776,164 $710,962 $ 677,959
EBITDA (c) $ 48,361 $ 45,864 $ 41,489 $ 36,043 $ 34,180
(a) Net of current maturities.
(b) Excluding alternative concepts.
(c) Excludes benefit from/provision for disposition of assets, asset
write-downs, recapitalization costs, loss due to bankruptcy of
franchisee, going private transaction expenses, discontinued
operations, minority interest in earnings of subsidiaries and
cumulative effect of change in accounting principle. These amounts
totaled $1,547, $1,200, $3,848, $15,160 and $7,457 for the years 2000,
1999, 1998, 1997 and 1996, respectively.
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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.
[INTENTIONALLY LEFT BLANK]
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OVERVIEW:
A summary of the Company's results for the three years ended December 31 is
presented in the following table. All revenues, costs and expenses are expressed
as a percentage of total revenues.
2000 1999 1998
---- ---- ----
Revenues:
Food sales 93.1% 93.1% 92.5%
Franchise revenues and other 6.9 6.9 7.5
----- ----- -----
Total revenues 100.0 100.0 100.0
----- ----- -----
Costs and expenses:
Cost of sales:
Food cost 26.0 25.8 26.2
Labor and benefits 32.5 32.9 32.4
Operating expenses 18.5 17.9 18.2
General and administrative 9.1 9.4 9.8
Depreciation and amortization 6.8 6.7 6.6
Interest, net 5.4 5.4 5.4
Provision for (Benefit from) disposition of assets, net 0.1 (0.2) 0.1
Asset write-down 0.4 0.2 1.1
Recapitalization costs -- 0.3 --
Loss due to bankruptcy of franchisee -- -- 0.2
Other, net (0.6) (0.6) (0.5)
----- ----- -----
Total costs and expenses 98.2 97.8 99.5
----- ----- -----
Income from continuing operations before income taxes and
cumulative effect of change in accounting principle 1.8 2.2 0.5
(Provision for) Benefit from income taxes (0.6) 0.3 (0.1)
----- ----- -----
Net income before cumulative effect of change
in accounting principle 1.2 2.5 0.4
Cumulative effect of change in accounting principle,
net of income tax benefit -- (0.1) --
----- ----- -----
Net income 1.2% 2.4% 0.4%
===== ===== =====
Net income for 2000 was $4,034,000 versus net income of $7,442,000 in 1999 and
net income of $1,109,000 in 1998. Pre-tax income for 2000 included a loss of
$1,547,000 related to asset dispositions and write-downs. Pre-tax income for
1999 included a net loss of $25,000 related to asset dispositions and
write-downs and a charge of $835,000 incurred as a result of the
Recapitalization. Net income for 1999 also includes a charge of $340,000, net of
income tax benefit, related to the adoption of Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities." Pre-tax income for 1998
included a net loss of $422,000 on disposition of assets, $3,373,000 in asset
impairment charges and $475,000 in write-offs related to the bankruptcy of a
significant franchisee.
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YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUES:
Total revenues increased 6.5% over 1999 due primarily to increased restaurant
food sales and sales at Foxtail.
The increase in restaurant food sales can be primarily attributed to the net
addition of four Company-operated restaurants in 2000 and an increase in
comparable restaurant sales of 1.5%. The increase in comparable restaurant sales
was due to menu price increases, increased pricing on promotional items and
sales mix shifts. These factors resulted in an increase in average guest check
of 5.5%, which was partially offset by a 4.0% decrease in comparable guest
visits. The estimated impact of menu price increases was 2.5%.
Revenues from Foxtail increased approximately 13.1% over 1999 and constituted
approximately 9.7% of the Company's total 2000 revenues. In order to ensure
consistency and availability of Perkins' proprietary products to each unit in
the system, Foxtail offers cookie doughs, muffin batters, pancake mixes, pies
and other food products to Company-operated and franchised restaurants through
food service distributors. 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 in Foxtail revenues is attributable to increased sales
to parties outside the Perkins system and an increase in the number of stores
within the Perkins system.
Franchise and other revenues, which consist primarily of franchise royalties and
initial license fees, increased 6.5% over the prior year. The increase is
primarily due to higher average sales volumes in new restaurants. In addition,
25 franchised stores opened in 2000 versus 22 in 1999, resulting in higher
initial license fees.
COSTS AND EXPENSES:
FOOD COST:
In terms of total revenues, food cost increased 0.2 percentage points from 1999.
Restaurant division food cost expressed as a percentage of restaurant division
sales increased 0.5 percentage points. The current year increase was primarily
due to higher commodity costs for pork and red meat, higher costs associated
with promotional items and a menu mix shift to dinner entrees.
The cost of Foxtail sales, in terms of total Foxtail revenues, decreased
approximately 2.7 percentage points from 1999, due primarily to favorable
commodity costs on certain core items and a sales shift to higher gross margin
products. As a manufacturing operation, Foxtail typically has higher food costs
as a percent of revenues than the Company's restaurants.
LABOR AND BENEFITS:
Labor and benefits expense, as a percentage of total revenues, decreased 0.4
percentage points from 1999. Employee insurance costs have decreased compared to
the prior year due to several effective plan design changes made in July 1999
and January 2000. Labor costs declined slightly due to increases in average
guest check partially offset by an increase in average wage rate and a decrease
in productivity.
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. 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.
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OPERATING EXPENSES:
Operating expenses, expressed as a percentage of total revenues, increased 0.6
percentage points from 1999 to 2000.
Restaurant division operating expenses expressed as a percentage of restaurant
sales, increased 0.3 percentage points. Utilities expense increased due to the
rising cost of natural gas and higher usage due to colder winter weather than
the previous year. Higher credit card processing costs negatively impacted
operating expenses as well.
Foxtail expenses, expressed as a percentage of Foxtail revenue, increased 1.6
percentage points. The majority of this increase is due to increased utilization
of outside distribution and warehousing services as the Company has increased
sales volumes.
Franchise division operating expenses, expressed as a percentage of franchise
revenues, increased 2.4 percentage points. Franchise opening costs increased due
to the opening of four additional restaurants during the year compared to 1999.
An increase in franchise service fees and investment spending for advertising in
franchised markets also contributed to this variance.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses decreased to 9.1% of total revenues from
9.4% of total revenues in 1999. This decrease is primarily attributable to lower
incentive compensation costs.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization increased approximately 8.2% over 1999 due to the
Company's continuing program to upgrade and maintain existing restaurants and
the net addition of four Company-operated restaurants during the year.
BENEFIT FROM/PROVISION FOR DISPOSITION OF ASSETS:
The Company realized a net loss of $10,000 related to the disposal of a property
during the fourth quarter of 2000.
INTEREST, NET:
Net interest expense was approximately 5.5% higher than 1999. Higher average
borrowings on the Company's revolving line of credit facility and increased
interest on the Senior Discount Notes resulted in this increase. Interest
accretes on the Senior Discount Notes on a compounding basis. Interest expense
associated with capital lease obligations has decreased.
ASSET WRITE-DOWN:
$1,537,000 in charges related to the write-down of certain assets were recorded
in 2000. These charges are primarily attributable to three properties that were
identified for disposal during the year. Two of these properties were no longer
operating as Perkins at the end of the year. Operations were discontinued during
January 2001 for the third property.
OTHER:
Other income decreased approximately $305,000. Other income for 1999 includes a
legal recovery related to a subleased property and a gain associated with the
termination of an aircraft lease by TRC Realty LLC.
BENEFIT FROM/PROVISION FOR INCOME TAXES:
The provision for income taxes in 2000 was $1,884,000. This compares to a
benefit from income taxes of $992,000 in 1999. As a result of the
Recapitalization in 1999, the Company recorded a deferred tax benefit related to
an adjustment of the Company's tax basis of its assets. Excluding this benefit,
the 1999 net tax provision would have been $2,341,000.
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YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES:
Total revenues increased 5.4% over 1998 due primarily to increased restaurant
food sales and sales at Foxtail, partially offset by reduced franchise fee
income.
The increase in restaurant food sales can be primarily attributed to an increase
in comparable sales of 4.2% and the net addition of one new restaurant in 1999.
The increase in comparable restaurant sales was due to menu price increases,
higher price points on promotional items and guest trends toward higher priced
menu items. These factors resulted in an increase in average guest check of
5.1%, which was partially offset by a 0.5% decrease in comparable guest visits.
Revenues from Foxtail increased approximately 4.1% over 1998 and constituted
approximately 9.1% of the Company's total 1999 revenues. The increase in Foxtail
revenues is attributable to increased 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, decreased 1.8% from the prior year. The decrease is the result of
the closing of 45 franchised restaurants during the year, 30 of which related to
the loss of a single franchisee in February 1999 due to a bankruptcy
liquidation. Twenty-two franchised restaurants were opened during 1999. The
impact of franchised restaurant closings was offset by higher average sales
volume in the new restaurants, as well as an increase in sales in existing
franchised restaurants. In addition, 22 franchised stores opened in 1999 versus
35 in 1998, resulting in lower initial license fees.
COSTS AND EXPENSES:
FOOD COST:
In terms of total revenues, food cost decreased 0.4 percentage points from 1998.
Restaurant division food cost expressed as a percentage of restaurant division
sales also decreased 0.4 percentage points. The current year decrease was
primarily due to lower commodity costs on eggs, pork and poultry products, menu
price increases and improved margins on promotional items. These factors were
partially offset by increased costs for red meat and frozen foods due to product
upgrades.
The cost of Foxtail sales, in terms of total Foxtail revenues, decreased
approximately 0.8 percentage points from 1998, due primarily to favorable
commodity costs on certain core items, price increases and reduction of waste
obtained through equipment and process upgrades.
LABOR AND BENEFITS:
Labor and benefits expense, as a percentage of total revenues, increased 0.5
percentage points from 1998. Employee insurance costs rose over the prior year
due to increased overall healthcare costs, increased employee participation and
increased utilization among the participants. Labor costs increased over the
prior year due to higher wage rates, a highly competitive labor market and
slightly lower productivity.
OPERATING EXPENSES:
Operating expenses, expressed as a percentage of total revenues, decreased 0.3
percentage points from 1998 to 1999.
Restaurant division operating expenses expressed as a percentage of restaurant
sales, decreased 0.7 percentage points due to the termination of a service
contract with an outside vendor to perform store maintenance. The impact of
increased comparable store sales on relatively fixed occupancy costs also
contributed to this variance.
Foxtail expenses, expressed as a percentage of Foxtail revenue, increased 0.6
percentage points. The majority of this increase is due to increased utilization
of outside distribution and warehousing services as the Company has increased
sales volumes. An increase in repairs and maintenance expenses also contributed
to this variance.
14
15
Franchise division operating expenses, expressed as a percentage of franchise
revenues, decreased 0.1 percentage point. Thirteen fewer franchise store
openings in 1999 versus 1998, and the related costs associated with these
openings drove the difference between the two years.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses decreased to 9.4% of total revenues from
9.8% of total revenues in 1998. Controlled increases in administrative support
costs led to this decrease.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization increased approximately 5.8% over 1998 due to the
Company's continuing program to upgrade and maintain existing restaurants and
the addition of four new Company-operated restaurants.
INTEREST, NET:
Net interest expense was approximately 6.9% higher than 1998. The increase is
primarily the result of a full year's interest expense on the debt incurred in
May 1998 to consummate the Reorganization. Interest expense associated with
capital lease obligations decreased.
BENEFIT FROM/PROVISION FOR DISPOSITION OF ASSETS:
During 1999, the Company recorded a gain of $567,000 related to the early
termination of two leases for properties which had been previously reserved. The
Company was able to terminate the leases for less than originally estimated.
ASSET WRITE-DOWN:
$592,000 in charges related to the write-down of certain assets were recorded in
1999. These charges were primarily attributable to properties that were disposed
of during the year and exit costs associated with a joint venture in which the
Company was a participant.
OTHER:
Other income increased approximately $325,000 due to a legal recovery related to
a subleased property and a gain associated with the termination of an aircraft
lease by TRC Realty LLC.
BENEFIT FROM/PROVISION FOR INCOME TAXES:
The benefit from income taxes in 1999 was $992,000. This compares to a provision
for income taxes of $160,000 in 1998. As a result of the Recapitalization, the
Company recorded a deferred tax benefit related to an adjustment of the
Company's tax basis in certain of its assets. Excluding this benefit, the 1999
net tax provision would have been $2,341,000.
CAPITAL RESOURCES AND LIQUIDITY
Principal uses of cash during the year were capital expenditures and interest
payments on the Company's Senior Notes. Capital expenditures consisted primarily
of land, building and equipment purchases for new Company-operated restaurants,
acquisition of franchised restaurants, maintenance capital and costs related to
remodels of existing restaurants. The Company's primary sources of funding were
cash provided by operations and borrowings under the Company's line of credit.
15
16
The following table summarizes capital expenditures for each of the years in the
three-year period ended December 31, 2000 (in thousands).
YEARS ENDED DECEMBER 31
----------------------------------------
2000 1999 1998
------- ------- -------
Maintenance $ 4,367 $ 4,778 $ 4,141
New sites 6,561 10,100 12,845
Acquisitions of franchise restaurants 6,158 -- --
Manufacturing 633 792 1,152
Remodeling and reimaging 8,904 5,095 4,144
Other 3,212 2,730 2,864
------- ------- -------
Total Capital Expenditures $29,835 $23,495 $25,146
======= ======= =======
The Company's capital budget for 2001 is $28.7 million and includes plans to
open nine new Company-operated restaurants. The primary source of funding for
these projects is expected to be cash provided by operations and borrowings
under the Company's line of credit. 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, 2000, this working
capital deficit was $13.9 million.
The Company has outstanding $130,000,000 of 10.125% Unsecured Senior Notes (the
"Notes") due December 15, 2007. Interest on the Notes is payable semi-annually
on June 15 and December 15.
The Company has 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 was amended on March 31, 2000 to modify covenant
requirements to reflect the Recapitalization and extend the maturity date to
January 1, 2005. As a result of extending the maturity date and covenant
modifications, borrowing rates were increased to current market rates. 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, 2000,
$13,750,000 in borrowings and approximately $1,065,000 of letters of credit were
outstanding under the facility.
On May 18, 1998, the Company issued $31,100,000 of 11.25% Senior Discount Notes
(the "Discount Notes") maturing on May 15, 2008. The Discount Notes were issued
at a discount to their principal amount at maturity and generated gross proceeds
to TRC of $18,009,000. The proceeds were used to purchase the shares of TRC
owned by Harrah's and pay expenses relative to the Reorganization.
Cash interest will not accrue or be payable on the Discount Notes prior to May
15, 2003, provided that on any semi-annual accrual date prior to May 15, 2003,
TRC may elect to begin accruing cash interest on the Discount Notes (the "Cash
Interest Election"). Cash interest on the Discount Notes will accrue at a rate
of 11.25% per annum from the earlier of May 15, 2003 or the semi-annual accrual
date with respect to which the Cash Interest Election is made and will be
payable thereafter on each May 15 and November 15. Under provisions of the
Credit Facility, TRC is limited in its ability to make the Cash Interest
Election. Due to these limitations, the Company is unable to make the Cash
Interest Election, nor does it currently anticipate being able to prior to May
15, 2003.
16
17
Prior to the earlier of May 15, 2003, or the semi-annual accrual date with
respect to which the Cash Interest Election is made, interest on the Discount
Notes will accrue at a rate of 11.25% per annum on each semi-annual accrual date
and the principal amount of each Discount Note will accrete by the amount of
such accrued interest (the "Accreted Value"). On May 15, 2003, TRC will be
required to pay all accrued but unpaid interest on the Discount Notes by
redeeming an amount per note equal to the Accreted Value of such Discount Note
on May 15, 2003, less the issue price of such Discount Note, at a redemption
price of 105.625% of the amount redeemed. Assuming the Company does not make the
Cash Interest Election, the aggregate Accreted Value of the Discount Notes on
May 15, 2003 will be $31,100,000 and the amount required to be redeemed will be
$13,091,000.
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,
or to fund planned capital expenditures will depend on the Company's 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 Discount Notes and
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 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.
BANKRUPTCY OF A SIGNIFICANT FRANCHISEE
A franchisee of the Company which operated 19 restaurants as of December 31,
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. Sixteen of these restaurants were acquired on June
9, 2000, by a third party and remain in the Perkins system. The remaining three
restaurants closed during 2000.
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 Restaurant and
Bakeries 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 representing the
estimated present value of future royalty income from the franchisee. The
Company recognized as income approximately $1,925,000 in royalties from Perk
during 1998. No subsequent amounts have been recorded relative to Perk.
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SYSTEM DEVELOPMENT
The Company plans to open nine new Company-operated restaurants in 2001. The
Company expects to open up to 22 franchised restaurants in 2001. 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.
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 adopted 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 recorded a
cumulative effect of a change in accounting principle of $340,000, net of income
tax benefit, to write off unamortized preopening costs that existed on the
balance sheet at December 31, 1998.
Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
SFAS No. 133," is required to be implemented for fiscal years beginning after
June 15, 2000. The Company has evaluated the effects of adopting this statement
and has determined that it does not have a material effect on the Company's
financial statements.
IMPACT OF INFLATION
The Company does not believe that its operations are 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. The Company is subject to various
other regulatory requirements from Federal, State and local organizations. The
Occupational Safety and Health Administration, the Food and Drug Administration,
the Environmental Protection Agency and other governmental agencies all maintain
regulations with which the Company is required to comply.
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.
CHANGE IN ACCOUNTING REPORTING PERIOD
Effective January 1, 2001, the Company converted its financial reporting from a
calendar year basis to thirteen four-week periods ending on the last Sunday in
December. The first quarter will include four four-week periods. The first,
second and third quarters of 2001 will end April 22, July 15, and October 7,
respectively.
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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 the Notes and Discount Notes because the interest
rates are fixed. The Company has in place a $50,000,000 line of credit facility
which matures on January 1, 2005. All borrowings under the facility bear
interest at floating rates based on the agent's base rate or Eurodollar rates.
The Company had $13,750,000 outstanding under the line of credit facility at
December 31, 2000. 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 and other operating essentials
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, dairy products, 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.
[INTENTIONALLY LEFT BLANK]
19
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
(In Thousands)
2000 1999 1998
--------- --------- ---------
REVENUES:
Food sales $ 313,045 $ 293,907 $ 276,935
Franchise revenues and other 23,199 21,793 22,488
--------- --------- ---------
Total Revenues 336,244 315,700 299,423
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales:
Food cost 87,581 81,460 78,576
Labor and benefits 109,161 103,989 96,827
Operating expenses 62,083 56,389 54,597
General and administrative 30,491 29,736 29,347
Depreciation and amortization 22,790 21,054 19,905
Interest, net 18,106 17,160 16,045
Provision for (Benefit from) disposition of assets, net 10 (567) 422
Asset write-down 1,537 592 3,373
Recapitalization costs -- 835 --
Loss due to bankruptcy of franchisee -- -- 475
Other, net (1,433) (1,738) (1,413)
--------- --------- ---------
Total Costs and Expenses 330,326 308,910 298,154
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND CUMULATIVE EFFECTIVE OF CHANGE
IN ACCOUNTING PRINCIPLE 5,918 6,790 1,269
(PROVISION FOR) BENEFIT FROM INCOME TAXES (1,884) 992 (160)
--------- --------- ---------
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 4,034 7,782 1,109
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF INCOME TAX BENEFIT OF $188 -- (340) --
--------- --------- ---------
NET INCOME $ 4,034 $ 7,442 $ 1,109
========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
20
21
THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(In Thousands, Except Share Amounts)
2000 1999
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,361 $ 2,908
Receivables, less allowance for doubtful accounts of $563 and $990 8,376 7,699
Inventories, at the lower of first-in, first-out cost or market 5,096 5,513
Prepaid expenses and other current assets 1,508 1,193
Deferred income taxes 775 635
--------- ---------
Total current assets 21,116 17,948
--------- ---------
PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization 140,036 135,659
INTANGIBLE ASSETS, net of accumulated amortization of $34,830 and $32,456 34,566 34,175
NOTES RECEIVABLE 1,064 2,462
DEFERRED INCOME TAXES 4,925 2,170
OTHER ASSETS 8,805 8,150
--------- ---------
$ 210,512 $ 200,564
========= =========
LIABILITIES AND STOCKHOLDER'S INVESTMENT
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ 971 $ 942
Accounts payable 13,039 15,510
Accrued expenses 20,990 20,065
--------- ---------
Total current liabilities 35,000 36,517
========= =========
CAPITAL LEASE OBLIGATIONS, less current maturities 3,069 4,064
LONG-TERM DEBT 168,080 160,416
OTHER LIABILITIES 6,115 4,727
COMMITMENTS AND CONTINGENCIES (Notes 6 and 12)
STOCKHOLDER'S INVESTMENT:
Common stock, $.01 par value, 100,000 shares authorized,
10,820 issued and outstanding 1 1
Accumulated deficit (1,753) (5,161)
--------- ---------
(1,752) (5,160)
--------- ---------
$ 210,512 $ 200,564
========= =========
The accompanying notes are an integral part of
these consolidated balance sheets.
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THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
(In Thousands)
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
-------- -------- ----------- --------
Balance at December 31, 1997 $ 1 $ 18,252 $ (6,185) $ 12,068
Net income -- -- 1,109 1,109
Repurchase and retirement of stock -- (17,282) -- (17,282)
Other -- (1) 2 1
-------- -------- -------- --------
Balance at December 31, 1998 1 969 (5,074) (4,104)
-------- -------- -------- --------
Net income -- -- 7,442 7,442
Issuance of stock -- 38,750 -- 38,750
Repurchase and retirement of stock -- (39,719) (7,529) (47,248)
-------- -------- -------- --------
Balance at December 31, 1999 1 1 (5,161) (5,160)
-------- -------- -------- --------
Net income -- -- 4,034 4,034
Distribution -- -- (626) (626)
-------- -------- -------- --------
Balance at December 31, 2000 $ 1 $ -- $ (1,753) $ (1,752)
======== ======== ======== ========
The accompanying notes are an integral part of
these consolidated statements.
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THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(In Thousands)
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,034 $ 7,442 $ 1,109
Adjustments to reconcile net income
to net cash provided by operating activities :
Depreciation and amortization 22,790 21,054 19,905
Change in accounting principle -- 340 --
Provision for (Benefit from) disposition of assets 10 (567) 197
Asset write-down 1,537 592 3,373
Other non-cash income and expense items, net 452 580 1,656
Net changes in other operating assets and liabilities (2,214) (973) (1,959)
-------- -------- --------
Total adjustments 22,575 21,026 23,172
-------- -------- --------
Net cash provided by operating activities 26,609 28,468 24,281
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment (23,677) (23,495) (25,146)
Cash paid for acquisition of franchised restaurants (6,158) -- --
Proceeds from sale of property and equipment 1,419 -- 1,095
Payments on notes receivable 226 227 1,249
Other, net -- 200 (110)
-------- -------- --------
Net cash used in investing activities (28,190) (23,068) (22,912)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from long-term debt 5,000 4,750 22,009
Principal payments under capital lease obligations (966) (1,821) (1,304)
Deferred financing costs -- -- (1,266)
Purchase of minority interest -- (73) (16,403)
Issuance of stock -- 38,750 --
Repurchase of stock -- (47,248) (17,282)
-------- -------- --------
Net cash provided by (used in) financing activities 4,034 (5,642) (14,246)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,453 (242) (12,877)
CASH AND CASH EQUIVALENTS:
Balance, beginning of year 2,908 3,150 16,027
-------- -------- --------
Balance, end of year $ 5,361 $ 2,908 $ 3,150
======== ======== ========
The accompanying notes are an integral part of
these consolidated statements.
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THE RESTAURANT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION --
The Restaurant Company ("TRC", "Perkins" or the "Company") is a Delaware
corporation and is a wholly-owned subsidiary of The Restaurant Holding
Corporation ("RHC"). RHC is owned by Donald N. Smith ("Mr. Smith") and
BancBoston Ventures, Inc., a subsidiary of Fleet Boston Financial Corp., who own
70.0% and 30.0%, respectively.
Mr. Smith is also the Chairman and Chief Executive Officer of Friendly Ice Cream
Corporation ("FICC"), which operates and franchises approximately 600
restaurants, located primarily in the northeastern United States. Mr. Smith owns
9.3% of the common stock of FICC.
TRC operates and franchises mid-scale restaurants which serve a wide variety of
high quality, moderately priced breakfast, lunch, and dinner entrees, snacks and
bakery products. TRC and its franchisees operate under the names "Perkins
Restaurant and Bakery," "Perkins Family Restaurant," "Perkins Family Restaurant
and Bakery" and "Perkins Restaurant." Perkins restaurants provide table service,
and many are open 24 hours a day, seven days a week (except Christmas day). The
restaurants are located in 35 states with the largest number in Minnesota,
Pennsylvania, Ohio, Florida and Wisconsin. There are fifteen franchised
restaurants located in Canada. TRC also offers cookie doughs, muffin batters,
pancake mixes, pies and other food products for sale to restaurants operated by
TRC and its franchisees and bakery and food service distributors through Foxtail
Foods ("Foxtail"), TRC's manufacturing division.
TRC REALTY LLC --
TRC Realty LLC is a 100% owned subsidiary of TRC. TRC Realty LLC's sole purpose
is the operation of an airplane which is used for business purposes of TRC and
FICC.
PERKINS FINANCE CORP. --
Perkins Finance Corp. ("PFC") is a wholly-owned subsidiary of TRC, and was
created solely to act as the co-issuer of its 10.125% Senior Notes. PFC has no
operations of any kind and does not have any revenues.
THE RESTAURANT COMPANY OF MINNESOTA--
On September 30, 2000, the Company contributed all of the restaurant, office and
related assets owned by the Company and used in its operations in Minnesota and
North Dakota and all of the Company's trademarks and service marks to The
Restaurant Company of Minnesota ("TRCM"), a newly created, wholly-owned
subsidiary of the Company. TRCM was formed to conduct the Company's operations
in Minnesota and North Dakota as well as manage the rights and responsibilities
related to the contributed trademarks and service marks. TRCM granted TRC a
license to use, and the right to license others to use, the trademarks and
service marks used in the Perkins system.
BASIS OF PRESENTATION --
The accompanying financial statements include the consolidated results of TRC
and subsidiaries for the fiscal years ended December 31, 2000, 1999 and 1998.
All material intercompany transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to current year
presentation.
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25
CHANGE IN ACCOUNTING REPORTING PERIOD --
Effective January 1, 2001, the Company converted its financial reporting from a
calendar year basis to thirteen four-week periods ending on the last Sunday in
December. The first quarter will include four four-week periods. The first,
second and third quarters of 2001 will end April 22, July 15, and October 7,
respectively.
ESTIMATES --
The presentation of financial statements in conformity with accounting
principles generally accepted in the United States 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 all investments with an original maturity of three months
or less to be cash equivalents.
FRANCHISE REVENUE --
Franchisees of TRC are required to pay an initial fee to TRC when each franchise
is granted. These fees are not recognized as income until the restaurants open.
TRC also receives franchise royalties ranging from one to six percent of the
gross sales of each franchised restaurant. These royalties are recorded as
income monthly.
ADVERTISING --
TRC expenses the costs of advertising. Net advertising expense was $13,205,000,
$12,288,000 and $11,644,000 for the fiscal years 2000, 1999 and 1998,
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.
INCOME TAXES --
Deferred income taxes are provided for the tax effect of temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements. The Company uses the liability method to account for
income taxes, which requires deferred taxes to be recorded at the statutory rate
expected to be in effect when the taxes are paid.
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 adopted
in 1999. SOP 98-5 requires the costs of start-up activities to be expensed as
incurred. Upon adoption of SOP 98-5 in 1999, the Company recorded a charge of
$340,000, after income tax benefit, for the cumulative effect of a change in
accounting principle to write off the unamortized preopening costs that existed
on the balance sheet as of December 31, 1998.
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.
25
26
(2) THE RECAPITALIZATION:
Prior to December 13, 1999, TRC was the sole stockholder of Perkins Restaurants,
Inc. ("PRI") which was a limited partner and indirect owner of 100% of Perkins
Family Restaurants, L.P. ("PFR") and the parent of PFR's general partner,
Perkins Management Company, Inc. ("PMC"). On December 13, 1999, PMC was merged
into PRI. On December 15, 1999, PRI was merged into TRC. As a result of these
mergers, PFR, which had been an indirect wholly-owned subsidiary of TRC, became
a direct wholly-owned subsidiary of TRC, and TRC became the general partner of
PFR.
On December 22, 1999, through a series of transactions, TRC repurchased all of
its outstanding shares other than those owned by Mr. Smith. Mr. Smith
contributed all of his shares in TRC to RHC, and PFR was merged into TRC. As a
result, TRC became a 100% owned subsidiary of RHC. The Company expensed $835,000
in connection with the Recapitalization which is reflected in the accompanying
Consolidated Statements of Income for the year ended December 31, 1999. No
change in the Company's management or business strategy has occurred as a result
of the Recapitalization.
(3) THE REORGANIZATION:
Prior to May 18, 1998, TRC's principal stockholders were Harrah's Operating
Company, a subsidiary of Harrah's Entertainment, Inc. ("Harrah's"), Mr. Smith
and The Equitable Life Assurance Society of the United States ("Equitable").
Harrah's and Mr. Smith each owned approximately 33.3% of TRC and Equitable owned
28.2%.
On May 18, 1998, the Company redeemed 100% of Harrah's interest in the Company
(the "Reorganization"). Approximately $18.0 million was required to consummate
the Reorganization and pay related expenses. The Reorganization was funded by
the issuance of $18.0 million of 11.25% Senior Discount Notes due 2008 with an
aggregate original amount at maturity of $31.1 million. Subsequent to the
transaction, Mr. Smith and Equitable owned 50.0% and 42.3% of the Company,
respectively.
(4) 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):
2000 1999 1998
------- ------- -------
(Increase) Decrease in:
Receivables $(1,130) $(1,921) $ (253)
Inventories 417 (138) (1,139)
Prepaid expenses and other current assets (455) 266 (702)
Other assets (3,549) (4,673) 795
Increase (Decrease) in:
Accounts payable (2,470) 3,944 155
Accrued expenses 925 (630) 2,992
Other liabilities 4,048 2,179 (3,807)
------- ------- -------
$(2,214) $ (973) $(1,959)
======= ======= =======
Other supplemental cash flow information for the years ended December 31
consisted of the following (in thousands):
2000 1999 1998
------- ------- -------
Cash paid for interest $14,297 $13,792 $13,398
Income taxes paid 5,023 3,693 3,121
Income tax refunds received 146 181 721
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(5) PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following as of December 31 (in
thousands):
2000 1999
---------- ----------
Owned:
Land and land improvements $ 38,576 $ 36,701
Buildings 92,506 84,240
Leasehold improvements 45,826 41,929
Equipment 84,792 75,625
Construction in progress 1,904 2,780
---------- ----------
263,604 241,275
Less - accumulated depreciation and amortization (125,940) (108,697)
---------- ----------
137,664 132,578
---------- ----------
Leased:
Buildings 20,609 21,068
Equipment 1,532 1,532
---------- ----------
22,141 22,600
---------- ----------
Less - accumulated amortization (19,769) (19,519)
---------- ----------
2,372 3,081
---------- ----------
$ 140,036 $ 135,659
========== ==========
Depreciation and amortization for financial reporting purposes is computed
primarily using the straight-line method based on the shorter of either the
estimated useful lives or the lease terms of the property, as follows:
Years
-------
Owned:
Land improvements 3 - 20
Buildings 20 - 30
Leasehold improvements 7 - 20
Equipment 3 - 7
Leased:
Buildings 20 - 25
Equipment 6
27
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(6) LEASES:
As of December 31, 2000, there were 145 full-service restaurants operated by the
Company as follows:
66 with both land and building leased
62 with both land and building owned
17 with the land leased and building owned
As of December 31, 2000, there were 23 properties either leased or subleased to
others by the Company as follows:
8 with both land and building leased
12 with both land and building owned
3 with the land leased and building owned
Most of the Company's 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.
In October 1999, TRC Realty LLC terminated its lease of an aircraft with GE
Capital Corporation which was scheduled to expire in May 2004. In November 1999,
TRC Realty LLC entered into a lease with GE Capital Corporation for a new
aircraft expiring in November 2009.
Future minimum payments related to leases that have initial or remaining lease
terms in excess of one year as of December 31, 2000 were as follows (in
thousands):
Lease Obligations
-----------------------------
Capital Operating
------- ---------
2001 1,340 $ 7,821
2002 1,311 6,828
2003 866 5,154
2004 575 4,194
2005 398 3,366
Thereafter 590 23,216
------- -------
Total minimum lease payments 5,080 $50,579
=======
Less
Amounts representing interest (1,040)
-------
Capital lease obligations $ 4,040
=======
The Company's capital lease obligations have effective interest rates ranging
from 7.1% to 16.1% and are payable in monthly installments through 2008.
28
29
Future minimum gross rental receipts as of December 31, 2000, were as follows
(in thousands):
Amounts Receivable As
------------------------
Lessor Sublessor
2001 1,145 $1,011
2002 1,114 896
2003 1,114 652
2004 1,119 619
2005 1,120 548
Thereafter 5,357 1,356
------- ------
Total minimum lease rentals $10,969 $5,082
======= ======
The net rental expense included in the accompanying Consolidated Statements of
Income for operating leases was as follows for the years ended December 31 (in
thousands):
2000 1999 1998
------- ------- -------
Minimum rentals $ 7,869 $ 6,861 $ 6,756
Contingent rentals 1,778 1,746 1,570
Less - sublease rentals (928) (1,092) (1,225)
------- ------- -------
$ 8,719 $ 7,515 $ 7,101
======= ======= =======
(7) INTANGIBLE ASSETS:
Intangible assets, net of accumulated amortization, were as follows as of
December 31 (in thousands):
2000 1999
-------- --------
Excess of cost over fair value of net assets acquired,
being amortized evenly over 30 to 40 years $ 27,773 $ 26,265
Present value of estimated future royalty fee income
being amortized evenly over the remaining lives of
the franchise agreements 6,793 7,910
-------- --------
$ 34,566 $ 34,175
======== ========
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.
29
30
(8) ACCRUED EXPENSES:
Accrued expenses consisted of the following as of December 31 (in thousands):
2000 1999
-------- --------
Payroll and related benefits $ 10,322 $ 10,138
Property, real estate and sales taxes 2,631 2,436
Insurance 416 424
Rent 1,637 1,532
Other 5,984 5,535
-------- --------
$ 20,990 $ 20,065
======== ========
(9) LONG-TERM DEBT:
Long-term debt consisted of the following at December 31 (in thousands):
2000 1999
--------- ---------
10.125% Unsecured Senior Notes, due December 15, 2007 $ 130,000 $ 130,000
11.25% Unsecured Senior Discount Notes, due May 15, 2008 24,330 21,666
Revolving credit agreement, due January 1, 2005 13,750 8,750
--------- ---------
168,080 160,416
Less current maturities -- --
--------- ---------
$ 168,080 $ 160,416
========= =========
The Company has outstanding $130,000,000 of 10.125% Unsecured Senior Notes ("the
Notes") due December 15, 2007. Interest on the notes is payable semi-annually on
June 15 and December 15.
The Company has 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 was amended on March 31, 2000 to modify covenant
requirements to reflect the Recapitalization and extend the maturity date to
January 1, 2005. As a result of extending the maturity date and covenant
modifications, borrowing rates were increased to current market rates. 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, 2000,
$13,750,000 in borrowings and approximately $1,065,000 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. The unamortized
balance of these costs was $3,520,000 as of December 31, 2000.
30
31
On May 18, 1998, the Company issued $31,100,000 of 11.25% Senior Discount Notes
(the "Discount Notes") maturing on May 15, 2008. The Discount Notes were issued
at a discount to their principal amount at maturity and generated gross proceeds
to TRC of $18,009,000. The proceeds were used to purchase the shares of TRC
owned by Harrah's and pay expenses related to the Reorganization.
Cash interest will not accrue or be payable on the Discount Notes prior to May
15, 2003, provided that on any semi-annual accrual date prior to May 15, 2003,
TRC may elect to begin accruing cash interest on the Discount Notes (the "Cash
Interest Election"). Cash interest on the Discount Notes will accrue at a rate
of 11.25% per annum from the earlier of May 15, 2003 or the semi-annual accrual
date with respect to which the Cash Interest Election is made, and will be
payable thereafter on each May 15 and November 15. Under provisions of the
Credit Facility, TRC is limited in its ability to make the Cash Interest
Election. Due to these limitations, the Company is unable to make the Cash
Interest Election, nor does it currently anticipate being able to prior to May
15, 2003.
Prior to the earlier of May 15, 2003 or the semi-annual accrual date with
respect to which the Cash Interest Election is made, interest on the Discount
Notes will accrue at a rate of 11.25% per annum on each semi-annual accrual date
and the principal amount of each Discount Note will accrete by the amount of
such accrued interest (the "Accreted Value"). On May 15, 2003, TRC will be
required to pay all accrued but unpaid interest on the Disount Notes by
redeeming an amount per note equal to the Accreted Value of such Disount Note on
May 15, 2003, less the issue price of such Discount Note at a redemption price
of 105.625% of the amount redeemed. Assuming TRC does not make the Cash Interest
Election, the aggregate Accreted Value of the Discount Notes on May 15, 2003
will be $31,100,000 and the amount required to be redeemed will be $13,091,000.
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):
2000 1999
---------- ----------
10.125% Unsecured Senior Notes $ 119,600 $ 127,400
11.25% Unsecured Senior Discount Notes 22,384 21,233
Because the Company's revolving line of credit borrowings outstanding at
December 31, 2000, bear interest at current market rates, management believes
that the related liabilities reflected in the accompanying balance sheets
approximated fair market value.
Pursuant to the Notes, the Discount 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, 2000, the Company was in
compliance with all such requirements.
The Notes, the Discount 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 pay dividends or distributions as follows:
1. if at the time of such dividend or distribution the payor
would have been allowed to incur at least $1.00 of additional
indebtedness under fixed charge coverage ratio tests as defined in the
11.25% Senior Discount Note Indenture and the 10.125% Senior Note
Indenture (the "Indentures").
2. under the Discount Notes, if such dividend or distribution is
less than the sum of 50% of consolidated net income from July 1, 1998
through the end of the most recent fiscal quarter plus 100% of any
contribution to or net proceeds from issuance of its common equity.
31
32
3. under the Notes, 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.
4. additional dividends not to exceed $5 million after the date
of the respective Indenture.
These available amounts are reduced by dividends paid as well as certain other
restricted payments as defined in the Indentures.
Interest expense capitalized in connection with the Company's construction
activities equalled approximately $200,000, $133,000 and $198,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
(10) INCOME TAXES:
TRC and its subsidiaries file a consolidated Federal income tax return. As a
result of the Recapitalization, TRC's consolidated group ceased to exist. TRC
does not file a consolidated tax return with its parent, RHC. For state
purposes, each subsidiary generally files a separate return.
The following is a summary of the components of the benefit from/provision for
income taxes for the years ended December 31 (in thousands):
2000 1999 1998
-------- -------- --------
Current:
Federal $ 3,470 $ 2,533 $ 2,726
State and local 1,310 726 995
-------- -------- --------
4,780 3,259 3,721
-------- -------- --------
Deferred:
Federal (2,566) (3,555) (2,867)
State and local (330) (696) (694)
-------- -------- --------
(2,896) (4,251) (3,561)
-------- -------- --------
$ 1,884 $ (992) $ 160
======== ======== ========
A reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate is as follows:
2000 1999 1998
------ ------ ------
Federal 34.2% 34.0% 34.0%
Federal income tax credits (17.1) (15.3) (74.4)
State income taxes, net of Federal taxes 4.4 2.5 6.1
Amortization of goodwill 7.2 6.7 32.8
Nondeductible expenses and other 3.1 6.6 14.1
Non-recurring item (Recapitalization) -- (49.1) --
------ ------ ------
31.8% (14.6)% 12.6%
====== ====== ======
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33
The following is a summary of the significant components of the Company's
deferred tax position as of December 31 (in thousands):
2000 1999
---------------------------------- -------------------------------
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
Capital leases $ -- $ 662 $ -- $ 770
Inventory 249 -- 171 --
Accrued expenses and reserves 526 727 464 796
Depreciation and amortization -- 3,765 -- 1,185
Deferred compensation -- 1,771 -- 1,379
------- ------- ------- -------
Deferred tax assets 775 6,925 635 4,130
------- ------- ------- -------
Other -- (2,000) -- (1,960)
------- ------- ------- -------
Deferred tax liabilities -- (2,000) -- (1,960)
------- ------- ------- -------
$ 775 $ 4,925 $ 635 $ 2,170
======= ======= ======= =======
As a result of the Recapitalization, PFR was merged into TRC. For federal and
state income tax purposes, TRC's outside basis in PFR exceeded PFR's basis in
its assets. Accordingly, TRC's outside basis was allocated among the assets of
PFR, resulting in a favorable step up of tax basis. This created a deferred tax
asset of $3,333,000 which reduced the income tax provision for 1999.
(11) RELATED PARTY TRANSACTIONS:
TRC had a revolving loan agreement with Mr. Smith, the terms of which were
modified during 2000. As a result, $626,000 of Mr. Smith's obligation,
representing accrued interest on the original principal amount, was forgiven
effective August 22, 2000 through a dividend to RHC. The remaining balance as of
December 31, 2000 was $266,500 and is to be paid in two equal installments on
June 30, 2001, and June 30, 2002.
FICC leases and subleases certain land, buildings and equipment from the
Company. During the years ended December 31, 2000, 1999, and 1998 lease and
sublease income was $343,000, $331,000 and $328,000, respectively.
TRC Realty LLC leases an aircraft for use by both FICC and TRC. The operating
lease expires in November 2009. FICC and TRC pay 40% and 60%, respectively, to
TRC Realty LLC for generally fixed expenses. In addition, FICC and TRC incur
actual variable usage costs. Total expense reimbursed by FICC for the years
ended December 31, 2000, 1999 and 1998 was $581,000, $471,000 and $617,000,
respectively.
FICC purchases certain food products used in the normal course of business from
Foxtail. For the years ended December 31, 2000, 1999, and 1998, purchases were
$759,000, $967,000 and $945,000, respectively.
33
34
(12) COMMITMENTS AND 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 consolidated financial statements of the Company.
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, 2000, there were approximately $1,827,000 in borrowings outstanding under
these programs. The Company has guaranteed $800,000 of these borrowings. No
additional borrowings are available under these programs.
During 2000, the Company entered into a separate agreement to guarantee fifty
percent of borrowings up to a total guarantee of $1,500,000 for use by a
franchisee to remodel and upgrade existing restaurants. As of December 31, 2000,
there were $1,428,000 in borrowings outstanding under this agreement of which
$714,000 was guaranteed by the Company.
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, 2000, three franchisees owned 89 of
the 345 restaurants franchised by the Company. During 2000, the Company earned
net royalties and license fees of approximately $2,081,000, $1,759,000 and
$1,637,000 from these franchisees. While the exit of one of these franchisees
from the system would have a material impact on the revenues of the Company,
such an occurrence would not in itself impair the ability of the Company to
maintain its operations.
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 and the Discount Notes), or to fund planned capital
expenditures will depend on the Company's 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 and the Discount 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.
(13) LONG-TERM INCENTIVE PLANS:
The Company's 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 are payable in cash over 3 year periods
at 33.3% per year, except for certain initial Long-Term Incentive Awards which
are payable in cash 50% in year one, 33% in year two and 17% in year three.
Long-Term Incentive Award payments are dependent upon TRC 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.
34
35
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 $5,100. Amounts deferred are excluded from the
participants' taxable income and are held in trust with a bank, where the funds
are invested at the direction of each participant. As of December 31, 2000,
$3,642,000 is held in trust under the plan and is included in other long-term
assets and liabilities in the accompanying consolidated balance sheets.
Investment income on the invested funds is taxable to the Company, and the
Company is eligible for a deduction for compensation expense when the funds are
distributed to the participants at retirement, cessation of employment or other
specified events.
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 over a 3 year period at 33.3% per year. Upon exercise,
up to 50% of vested award values may be transferred to the participant's
Deferred Compensation Plan account. Unexercised awards expire on the tenth
anniversary of grant.
The Company's Supplemental Executive Retirement Income Plan ("the SERP") was
established on July 1, 1999. Under the SERP, a contribution is made each year on
behalf of one executive of the Company. The executive immediately vests in 33.3%
of the contribution while vesting in the remaining 66.7% is discretionary based
on the attainment of certain performance criteria.
(14) 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.All participating employees at December 31,
1991 remained eligible to participate in the Plan. All other employees of TRC
and TRC Realty LLC 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 Internal Revenue Code ("IRC") regulated maximums. The
Company 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 the Board of Directors. During 2000, 1999 and 1998, the Company 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
2000, 1999 and 1998 were $772,000, $792,000 and $720,000, respectively.
Participants are always 100% vested in their salary deferral accounts and
qualified rollover accounts. Vesting in the employer matching account is based
on qualifying Years of Service. A participant vests 60% in the employer matching
account after three years, 80% after four years and 100% after five years.
The trust established under the Plan is intended to qualify under the
appropriate section of the 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.
35
36
(15) ASSET WRITE-DOWN (SFAS NO. 121):
During 2000, the Company identified three restaurant properties which were not
expected to generate undiscounted future cash flows sufficient to cover the
carrying value of the underlying assets related to these properties. Two of
these properties are held for disposal, neither of which continues to operate as
a restaurant. Restaurant operations in the third property were discontinued in
January 2001. 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. The resulting non-cash charges reduced 2000 pre-tax
income by $1,537,000.
During 1999, the Company identified five 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. One of
these properties was held for disposal as of December 31, 1999, and was
subsequently disposed of in February 2000. The Company wrote off the capitalized
costs associated with the discontinuation of development of two prospective
restaurant sites. Additionally, the Company recorded a charge to reduce to net
realizable value the assets associated with a joint venture that the company
exited during the year. All of the non-cash charges recorded in 1999 in
accordance with SFAS No. 121 were to reduce the carrying value of assets to
their estimated fair market value and totalled $592,000.
During 1998, the Company wrote down to their fair market value 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. Three of these properties are held for disposal, of which two
continue to operate as restaurants. In addition, the Company wrote off
intangibles related to future royalty income of a significant franchisee which
went bankrupt. The resulting non-cash charge for the above items, reduced 1998
pre-tax income by $3,373,000. The components of the charge were as follows (in
thousands):
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
======
The Company's results of operations included losses related to the five
properties held for disposal of $360,000, $161,000 and $392,000 for the years
ended December 31, 2000, 1999 and 1998, respectively. As of December 31, 2000,
these properties had a remaining net book value of $2,652,000.
36
37
(16) 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 includes
Foxtail.
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.
The following presents revenues and other financial information by business
segment (in thousands):
2000:
Restaurants Franchise Manufacturing Other Totals
----------- --------- ------------- ---------- ----------
Revenues from
external customers $ 280,499 $ 22,618 $ 32,546 $ 581 $ 336,244
Intersegment revenues -- -- 10,064 -- 10,064
Interest expense, net -- -- -- 18,106 18,106
Depreciation and
Amortization 15,522 236 918 6,114 22,790
Segment profit (loss) 29,494 19,120 7,189 (51,769) 4,034
Segment assets 124,662 7,751 12,628 65,471 210,512
Expenditures for
segment assets 28,203 -- 633 999 29,835
1999:
Restaurants Franchise Manufacturing Other Totals
----------- --------- ------------- ---------- ----------
Revenues from
external customers $ 264,682 $ 21,394 $ 28,767 $ 857 $ 315,700
Intersegment revenues -- -- 9,509 -- 9,509
Interest expense, net -- -- -- 17,160 17,160
Depreciation and
amortization 14,003 255 864 5,932 21,054
Segment profit (loss) 29,728 18,561 6,101 (46,948) 7,442
Segment assets 116,808 9,014 14,019 60,723 200,564
Expenditures for
segment assets 21,615 -- 792 1,088 23,495
37
38
1998:
Restaurants Franchise Manufacturing Other Totals
----------- --------- ------------- ---------- ----------
Revenues from
external customers $ 248,302 $ 21,799 $ 27,626 $ 1,696 $ 299,423
Intersegment revenues -- -- 8,394 -- 8,394
Interest expense, net -- -- -- 16,045 16,045
Depreciation and
amortization 12,506 190 795 6,414 19,905
Segment profit (loss) 27,085 18,955 5,409 (50,340) 1,109
Segment assets 114,780 9,317 13,459 58,082 195,638
Expenditures for
segment assets 23,260 -- 1,152 734 25,146
The Company evaluates the performance of its segments based primarily on
operating profit before corporate general and administrative expenses, interest
expense, amortization of goodwill and income taxes.
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):
2000 1999 1998
--------- --------- ---------
General and administrative expenses $ 25,913 $ 25,812 $ 25,409
Depreciation and amortization expenses 6,114 5,932 6,414
Interest expense 18,106 17,160 16,045
Recapitalization costs -- 835 --
Asset write-down 1,537 592 3,373
Provision for (Benefit from) disposition of assets, net 10 (567) 422
Cumulative effect of change in accounting principle -- 340 --
Provision for (Benefit from) income taxes 1,884 (992) 160
Other (1,795) (2,164) (1,483)
--------- --------- ---------
$ 51,769 $ 46,948 $ 50,340
========= ========= =========
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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 accounting principles
generally accepted in the United States 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
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.
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40
Report of Independent Public Accountants
To The Restaurant Company:
We have audited the accompanying consolidated balance sheets of The Restaurant
Company (a Delaware corporation) and subsidiaries as of December 31, 2000 and
1999, and the related consolidated statements of income, stockholders'
investment and cash flows for each of the three years in the period ended
December 31, 2000. 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 auditing standards generally accepted
in the United States. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Restaurant
Company and subsidiaries as of December 31, 2000 and 1999, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
Arthur Andersen LLP
Memphis, Tennessee,
February 15, 2001
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41
THE RESTAURANT COMPANY AND SUBSIDIARIES
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
(In Thousands)
Gross Profit
2000 Revenues (a) Net Income
------------- ------------------------------------------------
1st Quarter $ 80,905 $ 18,062 $ 209
2nd Quarter 83,474 18,956 1,004
3rd Quarter 88,141 21,214 1,636
4th Quarter 83,724 19,187 1,185
------------------------------------------------
$ 336,244 $ 77,419 $ 4,034
================================================
Gross Profit
1999 Revenues (a) Net Income
------------- ------------------------------------------------
1st Quarter $ 73,489 $ 16,014 $ (511)
2nd Quarter 79,400 18,983 1,529
3rd Quarter 83,089 20,167 2,317
4th Quarter 79,722 18,698 4,107
------------------------------------------------
$ 315,700 $ 73,862 $ 7,442
================================================
(a) Represents total revenues less cost of sales.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no changes in, or disagreements with, accountants during 2000.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following individuals are currently serving as directors and executive
officers of TRC:
Name Age Position with TRC
- ---- --- -----------------
Donald N. Smith 60 Chairman of the Board, Chief Executive Officer and
Chief Operating Officer
Craig H. Deery 53 Director
Hollis W. Rademacher 65 Director
Steven R. McClellan 45 Executive Vice President,
Chief Financial Officer and Director
Donald F. Wiseman 54 Vice President, General Counsel,
Secretary and Director
James F. Barrasso 50 Executive Vice President, Foodservice Development
Michael D. Kelly 54 Executive Vice President, Marketing
Jack W. Willingham 55 Executive Vice President, Restaurant Development
Richard J. Estlin 57 Vice President, Strategic Coordination
John A. Flaherty II 41 Vice President, Research and Development
William S. Forgione 47 Vice President, Human Resources
Clyde J. Harrington 42 Vice President, Operations Administration
Louis C. Jehl, Jr. 39 Vice President, Controller
Patrick W. Ortt 54 Vice President, Operations - Eastern Division
Steven J. Pahl 45 Vice President, Operations - Western Division
Robert J. Winters 49 Vice President, Franchise Development
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43
DONALD N. SMITH
Donald N. Smith has been the Chairman of the Board and Chief Executive Officer
of TRC since its organization in November 1985 and has been Chairman of the
Board and Chief Executive Officer of RHC since its organization in December
1999. Mr. Smith has been Chief Operating Officer of TRC since September 1998 and
was previously the Chief Operating Officer from November 1985 through November
1988. In August 2000, Mr. Smith was elected a Director and President of TRCM.
Mr. Smith also has been the Chairman of the Board and Chief Executive Officer of
FICC since September 1988.
CRAIG H. DEERY
Craig H. Deery was elected a Director of TRC and RHC in December 1999. Since
1986, Mr. Deery has been a Managing Director of BancBoston Capital, Inc. and
BancBoston Ventures, Inc., wholly-owned private equity subsidiaries of Fleet
Boston Financial.
HOLLIS W. RADEMACHER
Hollis W. Rademacher was elected a Director of TRC and RHC in June 2000. For
more than the past five years Mr. Rademacher has been a Principal of Hollis W.
Rademacher & Company, a private consulting and investment company. Mr.
Rademacher also serves on the Boards of Directors of Wintrust Financial
Corporation, UC Television Network Corporation and Schawk, Inc.
STEVEN R. MCCLELLAN
Steven R. McClellan was elected a Director of TRC and RHC in December 1999. Mr.
McClellan has been Executive Vice President and Chief Financial Officer of TRC
since September 1996 and has been Executive Vice President and Chief Financial
Officer of RHC since December 1999. Mr. McClellan has also served as a Director,
Senior Vice President and Treasurer of TRCM since August 2000. For more than a
year prior, 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.
DONALD F. WISEMAN
Donald F. Wiseman has been a Director of TRC and RHC since December 1999. Mr.
Wiseman has been Vice President, General Counsel and Secretary of TRC since
December 1991 and has been Vice President, General Counsel and Secretary of RHC
since December 1999. Mr. Wiseman has also served as a Director, Senior Vice
President and Secretary of TRCM since August 2000.
JAMES F. BARRASSO
James F. Barrasso has been Executive Vice President, Foodservice Development of
TRC since February 1999. For more than four years prior he was Vice President,
Foodservice Development for TRC. Mr. Barrasso has served in various executive
positions with TRC since September 1983.
MICHAEL D. KELLY
Michael D. Kelly has been Executive Vice President, Marketing of TRC since March
1993.
JACK W. WILLINGHAM
Jack W. Willingham has been Executive Vice President, Restaurant Development of
TRC since April 1994. Mr. Willingham served as Vice President, Corporate
Development from July 1991 to April 1994.
RICHARD J. ESTLIN
Richard J. Estlin has been Vice President, Strategic Coordination of TRC since
September 1997. He has also been Vice President, Strategic Coordinator of RHC
and Vice President of TRCM since December 1999 and August 2000, respectively. In
May 1997, Mr. Estlin retired as Vice President, Chief Financial Officer of
UNO-VEN Company, a position that he held for more than two years prior.
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44
JOHN A. FLAHERTY II
John A. Flaherty II was elected Vice President, Research and Development of TRC
in July 2000. From January 1993 to July 2000, Mr. Flaherty served as Vice
President, Research and Development of FICC.
WILLIAM S. FORGIONE
William S. Forgione has been Vice President, Human Resources of TRC since August
1997. For more than two years prior, he was Vice President, Human Resources of
College Affiliated Medical Practice Group.
CLYDE J. HARRINGTON
Clyde J. Harrington has been Vice President, Operations Administration of TRC
since September 1996. Mr. Harrington served as Director, Systems Operations from
March 1995 to September 1996.
LOUIS C. JEHL, JR.
Louis C. Jehl, Jr. was elected Vice President, Controller of TRCM in August
2000. He has also been Vice President, Controller of TRC and RHC since May 1999
and December 1999, respectively. From February 1999 to May 1999 he served as
Controller of TRC. Mr. Jehl served as Director, Treasury and Planning from
November 1996 to February 1999 and as Director, Accounting and Planning from
June 1995 to November 1996. Mr. Jehl has held varying positions in accounting
and finance with the Company since March 1987. He is a Certified Public
Accountant.
PATRICK W. ORTT
Patrick W. Ortt has been Vice President, Operations - Eastern Division of TRC
since September 1996. He served as Director, Systems Operations of TRC from
March 1993 until September 1996.
STEVEN J. PAHL
Steven J. Pahl was elected Vice President, Operations of TRCM in August 2000.
Since September 1996 Mr. Pahl has served as Vice President, Operations - Western
Division of TRC. From November 1988 to September 1996, he served as Director,
System Operations of TRC. Mr. Pahl has served in various operations positions
with the Company since December 1986.
ROBERT J. WINTERS
Robert J. Winters has been Vice President, Franchise Development of TRC since
October 1996. He served as Senior Director, Franchise Development from March
1993 to October 1996.
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45
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes all compensation paid or accrued for services
rendered to the Company in all capacities during each of the three years in the
period ended December 31, 2000 with respect to the Chief Executive Officer and
the four most highly compensated executive officers whose total annual salary
and bonus exceeded $100,000.
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------------------- ------------ ALL OTHER
LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS OTHER PAYOUTS SATION
- ------------------------------------------------------------------------------------------------------------------------------------
DONALD N. SMITH 2000 $ 472,305 $ 518,063 $ 5,850(1) -- --
Chairman & Chief 1999 455,976 450,000 5,850(1) -- --
Executive Officer 1998 274,661 200,000 3,150(1) -- --
STEVEN R. MCCLELLAN 2000 $ 252,128 $ 63,800 $ 9,000(1) $ 100,700 $ 5,200(2)
Exec. Vice President & 1999 205,822 205,800 9,000(1) 95,000 4,900(2)
Chief Financial Officer 1998 186,892 103,425 9,000(1) -- 5,000(2)
MICHAEL D. KELLY 2000 $ 208,249 $ 49,800 $ 10,371(1) $ 100,942 $ 5,200(2)
Exec. Vice President, 1999 208,622 77,200 9,000(1) 93,700 4,900(2)
Marketing 1998 191,246 94,000 9,000(1) -- 5,000(2)
JACK W. WILLINGHAM (3) 2000 $ 194,930 $ 47,400 $ 9,000(1) $ 92,877 $ 46,033(3)
Exec. Vice President, 1999 195,305 70,500 9,000(1) 87,620 127,400(3)
Restaurant Development 1998 179,141 79,500 9,000(1) -- 3,708(3)
DONALD F. WISEMAN 2000 $ 194,410 $ 42,300 $ 9,000(1) $ 66,355 $ 5,200(2)
Vice President, General 1999 181,392 120,050 9,000(1) 66,800 4,900(2)
Counsel and Secretary 1998 166,535 71,600 9,000(1) -- 4,983(2)
- ---------------
(1) Includes auto allowance paid to the named executive officers. The year 2000
also includes a relocation expense in the amount of $1,371 for Mr. Kelly.
(2) Includes Perkins' discretionary matching contributions allocated to the
named executive officers under the Perkins Retirement Savings Plan and the
Deferred Compensation Plan.
(3) Mr. Willingham is eligible for benefits payable annually after retirement
through a supplemental defined contribution retirement plan agreement between
the Company and Mr. Willingham. The total amount available to be contributed to
such plan on his behalf each year is $122,500. $40,833 is guaranteed with the
remaining $81,667 being discretionary subject to Mr. Willingham meeting specific
performance goals set by Mr. Smith. The contribution on Mr. Willingham's behalf
was $122,500 and $40,833 for fiscal 1999 and 2000, respectively. In addition,
Mr. Willingham received matching contributions to the Perkins Retirement Savings
Plan and Deferred Compensation Plan of $5,200, $4,900 and $3,708 in 2000, 1999
and 1998, respectively.
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46
COMPENSATION OF DIRECTORS.
Hollis Rademacher is paid $2,500 for each Board Meeting of TRC he attends.
Mr. Rademacher was paid for two meetings of the board in 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
The following table sets forth the number of shares beneficially owned
indirectly on March 20, 2001 by BancBoston Ventures, Inc.
Amount and
Nature of
Beneficial Percent
Title of Class Name of Beneficial Owner Ownership of Class
- -------------- ------------------------ ---------- --------
Common Stock BancBoston Ventures, Inc. 3,246(1) 30.0%
100 Federal Street
Boston, MA 02110
(1) Owned indirectly through BancBoston Ventures, Inc.'s ownership of RHC,
the sole owner of TRC.
(B) SECURITY OWNERSHIP OF MANAGEMENT.
The following table sets forth the number of shares beneficially owned either
directly or indirectly on March 20, 2001 by all directors and the executive
officers named in the Executive Compensation Table above, including all
directors and officers as a group:
Amount and
Nature of
Beneficial Percent
Title of Class Name of Beneficial Owner Ownership of Class
- -------------- ------------------------ --------- --------
Common Stock Donald N. Smith 7,574(1) 70.0%
- ---------------
(1) Owned indirectly through Mr. Smith's 70.0% ownership of RHC, the sole
shareholder of TRC. Mr. Smith is the sole member of management who is
also a stockholder.
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47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(A) TRANSACTIONS WITH MANAGEMENT AND OTHERS.
During 2000 and 1999, FICC purchased layer cakes and muffin and pancake mixes
from the Company for which the Company was paid approximately $759,000 and
$967,000, respectively. The Company believes that the prices paid to the Company
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.
The Company has subleased certain land, building and equipment to FICC. During
2000 and 1999, the Company received approximately $343,000 and $331,000,
respectively, related to those subleases. The Company believes that the terms of
these subleases are no less favorable to the Company than could be obtained if
the transactions were entered into with an unaffiliated third party.
TRC Realty LLC leases an aircraft for use by both FICC and TRC. The operating
lease expires in November 2009. FICC and TRC pay 40% and 60%, respectively, to
TRC Realty LLC for generally fixed expenses. In addition, FICC and TRC incur
actual usage costs (such as fuel and maintenance). Total expense reimbursed by
FICC for the years ended December 31, 2000 and 1999 was $581,000 and $471,000,
respectively.
(B) CERTAIN BUSINESS RELATIONSHIPS.
Lee N. Abrams served as a Director of PMC and chairman of the Audit Committee of
PMC until December 1999. Mr. Abrams is a senior partner in the Mayer, Brown &
Platt law firm. Mayer, Brown & Platt represented the Company and its affiliates
in several matters during 1998 and 1999, including the Reorganization and the
Recapitalization.
(C) INDEBTEDNESS OF MANAGEMENT.
TRC had a revolving loan agreement with Mr. Smith, the terms of which were
modified during 2000. As a result, $626,000 of Mr. Smith's obligation,
representing accrued interest on the original principal amount, was
constructively forgiven effective August 22, 2000 through a dividend to RHC. The
remaining balance as of December 31, 2000 was $266,500 and is to be paid in two
equal installments on June 30, 2001, and June 30, 2002.
In June 2000, James F. Barrasso, Executive Vice President, Foodservice
Development, obtained a loan from TRC in the original principal amount of
$65,000 with interest at the prime rate. The outstanding principal balance at
December 31, 2000 was $65,000.
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48
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.
Consolidated Statements of Income for Each of the Three Years Ended
December 31, 2000.
Consolidated Balance Sheets at December 31, 2000 and 1999.
Consolidated Statements of Stockholders' Investment for Each of the
Three Years Ended December 31, 2000.
Consolidated Statements of Cash Flows for Each of the Three Years Ended
December 31, 2000.
2. THE FOLLOWING FINANCIAL STATEMENT SCHEDULES FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998 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 49):
Exhibit No.
-----------
3.1 Certificate of Incorporation of The Restaurant Company.*
3.2 By-Laws of The Restaurant Company.*
3.3 Amendment to Certificate of Incorporation of RHC.*
4.1 Indenture dated as of May 18, 1998 among the Issuer and the Trustee named therein.*
4.2 Form of 11 1/4% Series B Senior Discount Notes due 2008 (included in Exhibit 4.1).*
4.3 Joinder and Amendment No. 2 dated as of December 22, 1999 to Credit Agreement dated as of
December 22, 1997.*
10.1 Guaranty by Perkins Restaurant and Bakery, L.P. and Perkins Restaurant and Bakery Operating
Company, L.P. in favor of BancBoston Leasing, Inc. dated as of May 1, 1994. *
10.2 Guaranty dated July 5, 1995 among Perkins Restaurants Operating Company, L.P. and BancBoston
Leasing, Inc.*
48
49
10.3 Revolving Credit Agreement, by and among Perkins Restaurant and Bakery, 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.*
10.4 Registration Rights Agreement dated as of May 18, 1998 among the Issuer and the Initial
Purchasers named therein.*
10.5 10 1/8% Senior Notes Indenture dated as of December 22, 1997 among Perkins Restaurant and
Bakery, L.P., Perkins Finance Corp. and the Trustee named therein.*
10.6 Form of 10 1/8% Senior Notes due 2007 (included in Exhibit 10.5).*
10.7 (a) Lease agreement between TRC Realty LLC and General Electric Capital Corporation dated
November 9, 1999 for an aircraft and related guaranty.*
10.8 Reimbursement Agreement between TRC Realty LLC and Friendly Ice Cream Corporation for use
of a leased plane.*
10.9 Revolving Loan Note made by Donald N. Smith payable to the order of The Restaurant Company
dated July 20, 1998, providing for a loan of up to $1,500,000.*
21 Subsidiaries of the Registrant.*
24 Power of Attorney (Included on Page II-12).*
99.1 Stockholder's Agreement dated as of December 22, 1999, among RHC, BBV and DNS.*
- ---------------
* Previously filed.
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50
TRADEMARK NOTICE.
The following trademarks are used in this report to identify products
and services of The Restaurant Company: Perkins, Perkins Family
Restaurant, Perkins Restaurant and Bakery, Perkins Family Restaurant
and Bakery, Perkins Express and Bakery and Perkins Bakery.
[INTENTIONALLY LEFT BLANK]
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51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, on this 30th day of March,
2001.
THE RESTAURANT COMPANY
By: /s/ Donald N. Smith
--------------------------------------
Its: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities indicated on this 30th day of March, 2001.
Signature Title
- --------- -----
/s/ Donald N. Smith Chairman of the Board, Chief Executive Officer
- ------------------------------------
Donald N. Smith
/s/ Craig H. Deery Director
- ------------------------------------
Craig H. Deery
/s/ Hollis W. Rademacher Director
- ------------------------------------
Hollis W. Rademacher
/s/ Steven R. McClellan Executive Vice President, Chief Financial
- ------------------------------------ Officer and Director
Steven R. McClellan
/s/ Donald F. Wiseman Vice President, General Counsel,
- ------------------------------------ Secretary and Director
Donald F. Wiseman
/s/ Louis C. Jehl Vice President and Controller
- ------------------------------------
Louis C. Jehl
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52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To The Restaurant Company:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of The Restaurant Company
and subsidiaries included in this Form 10-K, and have issued our report thereon
dated February 15, 2001. 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,
February 15, 2001.
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53
SCHEDULE II
THE RESTAURANT COMPANY
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
- --------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------
Additions
Balance at --------------------
Beginning Charged Charged Deductions Balance
of to Costs & to Other from at Close
Description Period Expenses Accounts Reserves of Period
- --------------------------------------------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31, 2000
Allowance for Doubtful Accounts $1,159 $ 469 $ -- $ (811)(a) $ 817
====== ====== ====== ====== ======
Reserve for Disposition of Assets $ 156 $ -- $ -- $ -- $ 156
====== ====== ====== ====== ======
FISCAL YEAR ENDED DECEMBER 31, 1999
Allowance for Doubtful Accounts $ 656 $ 628 $ -- $ (125)(a) $1,159
====== ====== ====== ====== ======
Reserve for Disposition of Assets $ 654 $ -- $ -- $ (498) $ 156
====== ====== ====== ====== ======
FISCAL YEAR ENDED DECEMBER 31, 1998
Allowance for Doubtful Accounts $ 852 $ 672 $ -- $ (868)(a) $ 656
====== ====== ====== ====== ======
Reserve for Disposition of Assets $ -- $ 654 $ -- $ -- $ 654
====== ====== ====== ====== ======
- ----------
(a) Represents uncollectible accounts written off, net of recoveries, and
net costs associated with direct financing sublease receivables for
which a reserve was established.
S-1