UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

OR

Commission File Number 333-57925

THE RESTAURANT COMPANY

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

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

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 o

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. x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o     No x

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. Not Applicable.

Number of shares of common stock outstanding: 10,820.

Documents incorporated by reference: None.

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Table of Contents

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 principally by Donald N. Smith (“Mr. Smith”), TRC’s Chairman and Chief Executive Officer, and BancBoston Ventures, Inc. (“BBV”). Mr. Smith is also the Chairman of Friendly Ice Cream Corporation (“FICC”), which operates and franchises approximately 535 restaurants, located primarily in the northeastern United States. Additional information may be found on our website, www.perkinsrestaurants.com. We make available on our website our Annual Report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and all exhibits to those reports free of charge as soon as reasonably practicable after they are electronically filed or furnished to the Securities and Exchange Commission. Our internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. TRC was incorporated in 1985 under the laws of the State of Delaware.

Operations. We operate and franchise mid-scale full service restaurants, which serve a wide variety of high quality, moderately priced breakfast, lunch and dinner entrees. Our restaurants are open seven days a week except Christmas Day and some are open 24 hours a day. As of December 26, 2004, entrees served in Company-operated restaurants ranged in price from $2.99 to $11.99 for breakfast, $5.99 to $11.99 for lunch and $5.49 to $11.99 for dinner. On December 26, 2004, there were 486 full-service restaurants in our system, of which 153 were Company-operated restaurants and 333 were franchised restaurants. The 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 thirty-four states with the largest number in Minnesota, Florida, Pennsylvania, Ohio and Wisconsin (see Significant Franchisees). We have sixteen franchised restaurants in Canada.

We offer our customers 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. We must approve all menu items at franchised restaurants. Menu offerings continually evolve to meet changing consumer tastes. We purchase television, radio, outdoor and print advertisements to encourage trial, to promote product lines and to increase customer traffic. We maintain a computerized labor scheduling and administrative system called PRISM in all Company-operated restaurants to improve our operating efficiency. PRISM is also available to franchisees and is currently utilized in approximately 75% of franchised restaurants.

We also offer cookie doughs, muffin batters, pancake mixes, pies and other food products for sale to our Company-operated restaurants and franchised restaurants and bakery and food service distributors through Foxtail Foods (“Foxtail”), our manufacturing division. Sales of products from this division to Perkins franchisees and other third parties constituted approximately 11.3% of our total revenues in 2004, 10.3% in 2003 and 10.1% in 2002.

Franchised restaurants operate pursuant to license agreements generally having an initial term of 20 years, and pursuant to which a royalty fee (4% of gross sales) and an advertising contribution (3% of gross sales) are paid. Franchisees pay a non-refundable one-time license fee of $40,000 for each of their first two restaurants. Franchisees opening their third and subsequent restaurants pay a one-time license fee of between $25,000 and $50,000 depending on the level of assistance provided by us in opening the restaurant. Typically, franchisees may terminate license agreements upon a minimum of 12 months prior notice and upon payment of specified liquidated damages. Franchisees do not typically have express renewal rights. In 2004, average annual royalties earned per franchised restaurant were approximately $63,000. The following number of license agreements are scheduled to expire in the years indicated: 2005 — twelve; 2006 – six; 2007 – thirteen; 2008 – eleven; 2009 — fourteen. Upon the expiration of license agreements, franchisees typically apply for and receive new license agreements. Franchisees pay a license agreement renewal fee of $5,000 to $7,500.

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Design Development. Our restaurants are primarily located in freestanding buildings seating between 90 and 250 customers. We employ 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 customer appeal.

System Development. We opened no Company-operated restaurants in 2004 or 2003. Nine new franchised restaurants opened during 2004 and eight new franchised restaurants opened in 2003. During 2003, we entered into a lease agreement to operate two franchisee restaurants for a period of five years. Three Company-operated restaurants were closed in 2004 and one was closed in 2003. In addition to the two franchise restaurants operating under Company management, thirteen franchised restaurants were closed in 2004 and twelve were closed in 2003.

Research and Development. Each year, we develop and test a wide variety of products in our 3,000 square foot test kitchen in Memphis, Tennessee. New products undergo extensive development and consumer testing to determine acceptance. While this effort is an integral part of our overall operations, it was not a material expense in 2004 or 2003. In addition, we spent approximately $389,000 and $340,000 conducting consumer research in 2004 and 2003, respectively.

Significant Franchisees. As of December 26, 2004, three franchisees, otherwise unaffiliated with the Company, owned 92 of the 333 franchised restaurants. These franchisees operated 41, 29 and 22 restaurants, respectively. Thirty-eight of these restaurants are located in Pennsylvania, 26 are located in Ohio and the remaining 28 are located across Wisconsin, Nebraska, Florida, Tennessee, New Jersey, Minnesota, South Dakota, Kentucky, Maryland, New York, Virginia, North Dakota, South Carolina and Michigan. During 2004, these three franchisees provided royalties and license fees of $2,431,000, $1,561,000 and $1,476,000, respectively.

Franchise Guarantees. During 2000, the Company entered into an 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 26, 2004, $3,000,000 in borrowings was outstanding under this agreement of which the Company guaranteed $1,500,000. Under the provisions of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, this guarantee has been determined by the Company not to be a variable interest in the franchisee.

Service Fee Agreements. Our predecessors entered into arrangements with several different parties which have reserved territorial rights under which specified payments are to be made by us based on a percentage of gross sales from certain restaurants and for new restaurants opened within certain geographic regions. During 2004, we paid an aggregate of $2,656,000 under such arrangements. Three such agreements are currently in effect. Of these, one expires in the year 2075, one expires upon the death of the beneficiary and the remaining agreement remains in effect as long as we operate Perkins Restaurants and Bakeries in certain states.

Source of Materials. Essential supplies and raw materials are available from several sources, and we are not dependent upon any one source for our supplies or raw materials.

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Patents, Trademarks and Other Intellectual Property. We believe that our trademarks and service marks, especially the mark “Perkins,” are of substantial economic importance to our 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. We have copyrighted architectural drawings for Perkins restaurants and claim copyright protection for certain manuals, menus, advertising and promotional materials. We do not have any patents.

Competition. Our 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. We compete directly or indirectly with all restaurants, from national and regional chains to local establishments, based on a variety of factors, which include price, quality, service, menu selection, convenience and location. Some of our competitors are corporations that are much larger than us 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 that compete with each other.

Employees. As of December 26, 2004, we employed approximately 8,400 persons. Approximately 425 of these were administrative and manufacturing personnel and the balance were restaurant personnel. Approximately 60% of the restaurant personnel are part-time employees. We compete in the job market for qualified restaurant management and operational employees. We maintain ongoing restaurant management training programs and have on our staff full-time restaurant training managers and a training director. We believe that our restaurant management compensation and benefits package compares favorably with those offered by our competitors. None of our employees are represented by a union.

Regulation. We are subject to various federal, state and local laws affecting our 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.

We are 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. We must also adhere to Federal Trade Commission regulations governing disclosures in the sale of franchises.

Federal and state minimum wage rate laws impact the wage rates of our hourly employees. Future increases in these rates could materially affect our cost of labor.

Segment Information. We have three primary operating segments: restaurants, franchise and manufacturing. See Note 15 of Notes to Financial Statements for financial information regarding each of our segments.

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Item 2. Properties.

The following table lists the location of each of the full-service Company-operated and franchised restaurants in the Perkins system as of December 26, 2004. The table excludes one limited service Perkins Express located in Utah.

Number of Restaurants

Most of the restaurants feature a distinctively styled brick or stucco building. Our 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 26, 2004:

⁽¹⁾ In addition, we lease nine properties, all of which are subleased to others. We also own four properties, three of which are leased to others and one that is vacant.

⁽²⁾ Our principal office is located in Memphis, Tennessee, and currently comprises approximately 50,000 square feet under a lease expiring on May 31, 2013, subject to a renewal by us for a maximum of 60 months. We also own a 25,149 square-foot manufacturing facility in Cincinnati, Ohio, and lease two other properties in Cincinnati, Ohio, consisting of 36,000 square feet and 120,000 square feet, for use as manufacturing facilities.

⁽³⁾ The average term of the remaining leases is approximately eight years, excluding renewal options. The longest lease term will mature in approximately 40 years and the shortest lease term will mature in less than 1 year, assuming the exercise of all renewal options.

The Revolving Credit Facility is collateralized by a first priority lien on substantially all of the assets of the Company.

Item 3. Legal Proceedings.

We are a party to various legal proceedings in the ordinary course of business. We do not believe that these proceedings, either individually or in the aggregate, are likely to have a material adverse effect on our financial position or results of operations.

Item 4. Submission of Matters to Vote of Shareholders.

Not applicable.

[Intentionally Left Blank]

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PART II

Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities.

     Market information.

No established public market exists for our equity securities.

     Holders.

As of December 26, 2004, there was 1 Stockholder of record.

     Dividends.

A distribution of $1,250,000 was declared and paid during 2004. No dividends or distributions were declared or paid during 2003. TRC’s credit agreements and indentures governing its debt securities restrict our ability to pay dividends or distributions to our equity holders.

     Purchases of Equity Securities.

Not applicable.

[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)

The following financial and operating data should be read in conjunction with Management’s Discussion and Analysis of Financial Conditions and Results of Operations and the audited financial statements included elsewhere in this Annual Report on Form 10-K.

We have restated our previously reported consolidated financial statements for 2003 and 2002 and our Selected Financial Data for 2001 and 2000 for the adjustments discussed in Note 2 of Notes to the Consolidated Financial Statements of Item 8: Financial Statements and Supplementary Data, which is included in this Annual Report on Form 10-K.

(a)	Net of current maturities of $331, $466, $9,489, $1,030 and $971.

(b)	Excludes two Company-operated Sage Hen Cafes (closed in 2002) and one franchised Perkins Express.

(c)

The restatement described in Note 2 to the consolidated financial statements included in Item 8 herein decreased revenues, increased loss from continuing operations and decreased the benefit from income taxes in 2001 by $795, $292 and $177, respectively. In 2000, the restatement adjustments increased depreciation and rent expense, in the aggregate, by $144 and decreased the provision for income taxes by $54. The cumulative effect of the restatement resulted in a decrease to total assets of $2 and an increase in accumulated deficit of $223 at December 31, 1999.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

GENERAL

The following management’s discussion and analysis describes the principal factors affecting the results of operations, liquidity and capital resources, as well as the critical accounting policies, of TRC. This discussion should be read in conjunction with the accompanying audited financial statements, which include additional information about our significant accounting policies and practices and the transactions that underlie our financial results.

The key factors that affect our operating results are comparable restaurant sales, which are driven by comparable customer counts and check average, and our ability to manage operating expenses such as food cost, labor and benefits and other costs.

Except as otherwise indicated, references to years mean our fiscal year ended December 26, 2004, December 28, 2003 or December 29, 2002.

RESTATEMENT OF FINANCIAL STATEMENTS

Restatement of Previously Issued Consolidated Financial Statements –

Lease Accounting

We began a review of our lease accounting policies following announcements beginning in December 2004 that several restaurant companies were revising their accounting practices for leases. As a result of our review, we determined that the amortization of leasehold improvements was not in accordance with accounting principles generally accepted in the United States. In addition, we determined that there were errors in the computation of rental expense and deferred rents, which were primarily caused by the improper determination of the commencement date of certain lease terms and improper straight-line rentals of certain restaurants.

We identified certain situations where leasehold improvements were being amortized over their useful life rather than the shorter of the lease term, as defined in FAS 13, as amended, or their useful life. The lease term includes the non-cancelable term of the lease plus any renewal options where renewals are reasonably assured of exercise as determined at inception of the lease. Renewals are reasonably assured of exercise if failure to renew the lease would impose an economic penalty to the lessee. As the Company has determined that in most cases renewals are not reasonably assured of exercise, the initial non-cancelable lease term, generally 20 years, represent the lease term, as defined. Historically, the Company maintained a policy for recognizing straight-line rentals over the initial lease term commencing when rental payments were due. The Company corrected its accounting to report rental expense over the lease term commencing on the date that the Company obtains control over the asset to be leased. The restatement adjustments correct (i) the depreciation expense for the applicable period and accumulated depreciation on the balance sheet to reflect the amortization of the lease related assets over the shorter of their useful life or the lease term and (ii) the determination of rental expense over the lease term commencing when the Company has control over the property to be leased.

As a result of our review of lease accounting, we revalued the assumed liabilities at the date of the purchase accounting date (December 22, 1997) related to lease obligations. The Company had incorrectly recorded the deferred rent liability, as recorded on the acquiree’s financial statements, rather than eliminating this liability. The impact of these restatement adjustments reduced goodwill and increased accumulated deficit by $503,000.

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The restatement adjustments correct our historical accounting for leases and had no impact on revenues, comparable store sales or net operating cash flows. The impact of the restatement adjustments, net of tax effects, reduced net income by $161,000, $167,000, and $90,000 for 2003, 2002, and 2000, respectively and increased net loss by $86,000 in 2001. We have restated our consolidated balance sheet at December 28, 2003 and the consolidated statements of income, stockholder’s equity and cash flows for the years ended December 28, 2003 and December 29, 2002. The effects of the restatement adjustments are included in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Discontinued Operations

Additionally, we restated our 2002 and 2003 financial statements to correctly classify the closure of two Sage Hen restaurants as discontinued operations. Previously, the Company had presented the disposition of these components within income from continuing operations. The effect of this restatement is to reclassify as discontinued operations the operations of the two Sage Hen restaurants as well as the charges associated with closing the restaurants in 2002. In 2003, the Company recorded an additional charge to discontinued operations, which represents a change in estimate related to the continuing lease obligation for one of the restaurants. This change in estimate had previously been reflected within continuing operations and has been restated to be classified within discontinued operations. These restatement adjustments reclassify revenues and expenses between continuing operations and discontinued operations and have no impact on reported net income for 2002 and 2003. Note 18 of Notes to Consolidated Financial Statements in Item 8 of this report provides additional information regarding discontinued operations.

We did not amend our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the restatement adjustments.

SIGNIFICANT ACCOUNTING POLICIES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the estimates that are required to prepare the financial statements of a corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information.

Revenue Recognition:

Revenue at Company-operated restaurants is recognized as customers pay for products at the time of sale. The earnings reporting process is covered by our system of internal controls and generally does not require significant management judgments and estimates. However, estimates are inherent in the calculation of franchisee royalty revenue. We calculate an estimate of royalty income each period and adjust royalty income when actual amounts are reported by franchisees. Historically, these adjustments have not been material.

Concentration of Credit Risk:

Financial instruments, which potentially expose the Company to concentrations of credit risk, consist principally of franchisee and Foxtail accounts receivable. We perform ongoing credit evaluations of our franchisee and Foxtail customers and generally require no collateral to secure accounts receivable. The credit review is based on both financial and non-financial factors. Based on this review, we provide for estimated losses for accounts receivable that are not likely to be collected. Although we maintain good relationships with our franchisees, if average sales or the financial health of significant franchisees were to deteriorate, we may have to increase our reserves against collection of franchise revenues.

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Insurance Reserves:

We are self-insured up to certain limits for costs associated with workers’ compensation claims, property claims and benefits paid under employee health care programs. At December 26, 2004 and December 28, 2003, we had total self-insurance accruals reflected in our balance sheet of approximately $5.7 million and $4.7 million, respectively.

The measurement of these costs required the consideration of historical loss experience and judgments about the present and expected levels of cost per claim. We account for the worker’s compensation costs primarily through actuarial methods, which develop estimates of the undiscounted liability for claims incurred, including those claims incurred but not reported. These methods provide estimates of future ultimate claim costs based on claims incurred as of the balance sheet date. We account for benefits paid under employee health care programs using historical lag information as the basis for estimating expenses incurred as of the balance sheet date.

We believe the use of actuarial methods to account for these liabilities provides a consistent and effective way to measure these highly judgmental accruals. However, the use of any estimation technique in this area is inherently sensitive given the magnitude of claims involved and the length of time until the ultimate cost is known. We believe that our recorded obligations for these expenses are consistently measured on an appropriate basis. Nevertheless, changes in health care costs, accident frequency and severity and other factors can materially affect the estimate for these liabilities.

Long-Lived Assets:

The restaurant industry is capital intensive. We have approximately 55% of our total assets invested in property and equipment. We capitalize only those costs that meet the definition of capital assets under generally accepted accounting principles. Accordingly, repairs and maintenance costs that do not extend the useful life of the asset are expensed as incurred.

The depreciation of our capital assets over their estimated useful lives (or in the case of leasehold improvements, the lesser of their estimated useful lives or lease term), and the determination of any salvage values, requires management to make judgments about future events. Because we utilize many of our capital assets over relatively long periods (20 – 30 years for our restaurant buildings), we periodically evaluate whether adjustments to our estimated lives or salvage values are necessary. The accuracy of these estimates affects the amount of depreciation expense recognized in a period and, ultimately, the gain or loss on the disposal of the asset. Historically, gains and losses on the disposition of assets have not been significant. However, such amounts may differ materially in the future based on restaurant performance, technological obsolescence, regulatory requirements and other factors beyond our control.

Due to the fact that we have invested a significant amount in the construction or acquisition of new restaurants, we have risks that these assets will not provide an acceptable return on our investment and an impairment of these assets may occur. The accounting test for whether an asset held for use is impaired involves first comparing the carrying value of the asset with its estimated future undiscounted cash flows. If these cash flows do not exceed the carrying value, the asset must be adjusted to its current fair value. We periodically perform this test on each of our restaurants to evaluate whether impairment exists. Factors influencing our judgment include the age of the restaurant (new restaurants have significant start up costs which impede a reliable measure of cash flow), estimation of future restaurant performance and estimation of restaurant fair value. Due to the fact that we can specifically evaluate impairment on a restaurant-by-restaurant basis, we have historically been able to identify impaired restaurants and record the appropriate adjustment.

During 2004, we determined that impairment existed with respect to three company owned restaurants. This determination was made based on our projections that the future cash flows of these restaurants would not exceed the present carrying value of the assets. Accordingly, we recorded an impairment charge of approximately $604,000 to adjust the assets of these restaurants to fair value. Additionally, we recorded an impairment charge of $136,000 related to intangible assets on specifically identifiable franchise locations that are no longer in operation.

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We utilize operating leases to finance a significant number of our restaurant properties. Over the years, we have found these leasing arrangements to be favorable from a cash flow and risk management standpoint. Such arrangements typically shift the risk of loss on the residual value of the assets at the end of the lease period to the Lessor. As discussed in “Capital Resources and Liquidity” and in Note 5 to the accompanying audited financial statements, at December 26, 2004, we had approximately $70 million (on an undiscounted basis) of future commitments for operating leases.

The future commitments for operating leases are not reflected as a liability in our balance sheet because the leases do not meet the accounting definition of capital leases. The determination of whether a lease is accounted for as a capital lease or an operating lease requires management to make estimates primarily about the fair value of the asset and its estimated economic useful life. We believe that we have a well-defined and controlled process for making this evaluation.

We have approximately $30 million of intangible assets on our balance sheet resulting from the acquisition of businesses. New accounting standards adopted in 2002 require that we review these intangible assets for impairment on an annual basis and cease all goodwill amortization. The adoption of these new rules did not result in an impairment of our recorded intangible assets. The annual evaluation of intangible asset impairment, performed in the period following our year end, requires the use of estimates about the future cash flows of each of our reporting units to determine their estimated fair values. Changes in forecasted operations and changes in discount rates can materially affect these estimates. However, once an impairment of intangible assets has been recorded, it cannot be reversed.

Deferred Income Taxes:

We record income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carryforwards. We record a valuation allowance to reduce deferred tax assets to the balance that is more likely than not to be realized. In evaluating the need for a valuation allowance, we must make judgments and estimates on future taxable income, feasible tax planning strategies and existing facts and circumstances. When we determine that deferred tax assets could be realized in greater or lesser amounts than recorded, the asset balance and income statement reflect the change in the period such determination is made. We believe that the valuation allowance recorded is adequate for the circumstances. However, changes in facts and circumstances that affect our judgments or estimates in determining the proper deferred tax assets or liabilities could materially affect the recorded amounts.

ACQUIRED RESTAURANT OPERATIONS

Effective December 1, 2003, we leased two restaurants from a franchisee in Florida for a period of five years. These restaurants’ operations for 2004 and the last four-week period of 2003 are included in the accompanying financial statements. Also effective December 1, 2003, we entered into a management contract to operate one franchisee restaurant located in Florida for a period of one year. This contract was renewed during 2004 for an additional one-year period. In accordance with the contract, we will operate the store and are responsible for the profit or loss generated by the store. This contract did not meet the accounting requirements for consolidation into our financial statements. Therefore, only our management fee income or expense related to this restaurant’s profit or loss is recorded in the Franchise segment of our financial statements.

SYSTEM DEVELOPMENT

We opened no new Company-operated restaurants and nine franchised restaurants in 2004. We plan to open one new Company-operated restaurant and up to thirteen franchised restaurants in 2005.

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MANAGEMENT’S OUTLOOK

We believe that the overall economy will continue a period of sustained growth in 2005. We expect the economic environment to have a positive impact on our guest visits and our overall profitability. Consistent with 2004, we will continue focusing on managing restaurant costs and providing quality food and service on a consistent basis. It is our belief that the above factors will allow us to begin to expand our number of restaurants over the next several years.

On March 21, 2005, RHC announced that it had retained an investment bank to help RHC explore and evaluate a variety of financial and strategic alternatives for the Perkins Restaurant and Bakery chain. We believe that consummating a strategic transaction will best allow us to take advantage of our full potential.

RESULTS OF OPERATIONS

Overview:
Our 2004 results reflect improved overall performance that was consistent with the recovery in the economy. However, we still face continued challenges due to the slower economic recovery in certain Midwest states and increased competition in certain key markets. Over the past year, our available cash has increased through our continued focus on cost control and restaurant management efforts. We believe that this strategy will allow us to begin to expand our number of restaurants once the economy, particularly the tourism and hospitality sectors, experiences sustained growth. The following table sets forth all revenues, costs and expenses as a percentage of total revenues for the periods indicated for revenue and expense items included in the consolidated statements of operations.

1)	We have restated our previously reported financial statements as discussed in Note 2 to the Consolidated Financial Statements of Item 8: Financial Statements and Supplementary Data,which is included in this Annual Report on Form 10-K.

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Income from continuing operations for 2004 was $6.8 million versus $3.5 million in 2003 and $3.2 million in 2002. Pre-tax income from continuing operations for 2004 included a net loss of $0.6 million related to asset dispositions and write-downs. Pre-tax income from continuing operations for 2003 included a net loss of $1.6 million related to asset dispositions, write-downs and a lease termination. Pre-tax income from continuing operations for 2002 included a net loss of $0.9 million related to asset dispositions and write-downs.

Year Ended December 26, 2004 Compared to Year Ended December 28, 2003

Revenues:

Total revenues increased 2.6% over 2003 due primarily to increased restaurant food sales and increased Foxtail sales outside the Perkins system.

Food sales at Company-operated restaurants increased 1.6%. The increase can be attributed to an increase in comparable restaurant sales of 1.0%. Comparable restaurant sales increased primarily due to a 3.9% increase in check average, partially offset by a decrease in comparable customer visits of 2.9%. Slower than expected economic recovery in key Midwestern states and increased competition in certain key markets contributed to the decrease in comparable customer visits. The decrease in comparable customer visits was partially offset by an increase in the guest check average due to menu mix shifts and cumulative price increases.

Revenues from Foxtail increased approximately 12.6% over 2003 and constituted 11.3% of our total 2004 revenues. In order to ensure consistency and availability of our proprietary products to each restaurant 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 statements of operations. The increase noted above can be attributed to growth in sales outside of the Perkins system.

Franchise revenues, which consist primarily of franchise royalties and initial license fees, increased 1.3% from the prior year. Royalty revenues increased due to an increase in comparable sales, partially offset by a decline in the average number of franchise restaurants by 6.7 restaurants. Initial franchise license fees increased as a result of nine franchise restaurants opening in 2004 versus eight in 2003.

Costs and Expenses:

Food cost:

In terms of total revenues, food cost increased 0.5 percentage points from 2003. Restaurant division food cost expressed as a percentage of restaurant division sales decreased 0.7 percentage points. The current year decrease was primarily due to the impact of selective menu price increases and decreased discounting, which was partially offset by increased commodity costs. Commodity costs during 2004 increased 1.3 percentage points over 2003, primarily due to increases in beef, pork, dairy and eggs. Overall menu price increases realized during 2004 were approximately 3.2%, which positively impacted food cost by 0.8 percentage points.

The cost of Foxtail sales, in terms of total Foxtail revenues, increased approximately 4.5 percentage points, as a result of production inefficiencies associated with the start up of the expanded pie plant and continued increases in raw materials costs. As a manufacturing operation, Foxtail typically has higher food costs as a percent of revenues than the Company’s restaurants.

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Labor and benefits:

Labor and benefits expense, as a percentage of total revenues, decreased 0.8 percentage points over 2003. Increased productivity partially offset by an increase in wage rates and employee insurance costs favorably impacted restaurant labor and benefits. Foxtail labor and benefits increased 1.7% from 2003 primarily due to production inefficiencies associated with the start up of the expanded pie plant.

Federal and state minimum wage laws impact the wage rates of the Company’s hourly employees. 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 or productivity improvements.

As a percentage of revenues, Foxtail labor and benefit charges are significantly lower than the Company’s restaurants. If Foxtail’s third party business were to become a more significant component of the Company’s total operations, labor and benefits expense, expressed as a percent of total revenue, likely would decrease.

Operating expenses:

Operating expenses, expressed as a percentage of total revenues, decreased 0.4 percentage points from 2003.

Restaurant division operating expenses expressed as a percentage of restaurant sales decreased 0.5 percentage points, primarily the result of a decrease in restaurant supplies, repairs and maintenance and local store marketing expenses.

Foxtail expenses, expressed as a percentage of Foxtail revenue, increased 1.2 percentage points, primarily due to increased utility costs.

Franchise division operating expenses, expressed as a percentage of franchise revenues, decreased 1.5 percentage points compared to the prior year. Reduced expenses under franchise service fee agreements, investment spending for advertising in select franchised markets and other franchise related spending contributed to the decrease.

General and administrative:

General and administrative expenses increased to 9.1% of total revenues in 2004 from 8.7% of total revenues in 2003. The increase is primarily attributable to increased incentive costs.

Depreciation and amortization:

Depreciation and amortization decreased approximately 7.4% from 2003 due to the Company’s continued reduction in capital spending since 2001.

Provision for/Benefit from disposition of assets:

During 2004, the Company recorded a net gain of $109,000 related to the disposition of assets.

Asset write-down:

During 2004, we determined that impairment existed with respect to three company owned restaurants. This determination was made based on our projections that the future cash flows of these restaurants would not exceed the present carrying value of the assets. Accordingly, we recorded an impairment charge of approximately $604,000 to adjust the assets of these restaurants to net realizable value. Additionally, we recorded an impairment charge of $136,000 related to intangible assets on specifically identifiable franchise locations that ceased operations.

Interest, net:

Net interest expense decreased from 4.9% to 4.7% of revenues. The decrease is the result of reduced average borrowings by the Company during 2004.

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Provision for income taxes:

The provision for income taxes in 2004 was $2.6 million. Our effective tax rate attributable to continuing operations was 27.8% in 2004 and 17.1% in 2003. The effective tax rate in 2004 was higher than in 2003 because federal income tax credits were relatively flat as compared to 2003 yet 2004 operating income was higher than in 2003. The 2004 effective tax rate was favorably impacted primarily by credits resulting from excess FICA taxes paid on server tip income that exceeds minimum wage. The effective tax rate is lower than the statutory U.S. federal tax rate primarily due to the utilization of these credits. For 2005, we expect the effective tax rate to be approximately 28.0%. The actual rate, however, will depend on a number of factors, including the amount and source of operating income.

Year Ended December 28, 2003 Compared to Year Ended December 29, 2002

Revenues:

Total revenues decreased 1.4% over 2002 due primarily to decreased restaurant food sales.

Food sales at Company-operated restaurants decreased 1.6%. The decrease can be attributed to a decline in comparable restaurant sales of 2.9%. Comparable restaurant sales decreased primarily due to a decrease in comparable customer visits of 6.4%, partially offset by a 3.5% increase in check average. Economic weakness prevalent throughout 2003 and increased competition in certain key markets contributed to the decrease in comparable customer visits. The decrease in comparable customer visits was partially offset by an increase in the guest check average due to a menu mix shift and cumulative price increases. The menu mix shift resulted from the introduction of a new menu with a focus on lunch and dinner items, which have a higher menu price than breakfast items.

Revenues from Foxtail increased approximately 0.6% over 2002 and constituted 10.3% of our total 2003 revenues. In order to ensure consistency and availability of our proprietary products to each restaurant 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 statements of operations. The increase noted above can be attributed to growth in sales outside of the Perkins system.

Franchise revenues, which consist primarily of franchise royalties and initial license fees, decreased 1.9% from the prior year. Royalty revenues decreased due to a decrease in comparable sales and a decline in the average number of franchise restaurants by 5.3 restaurants. Initial franchise license fees decreased as a result of eight franchise restaurants opening in 2003 versus seventeen in 2002.

Costs and Expenses:

Food cost:

In terms of total revenues, food cost increased 1.0 percentage points from 2002. Restaurant division food cost expressed as a percentage of restaurant division sales increased 1.1 percentage points. The current year increase was primarily due to increased commodity costs and the introduction of a new menu which resulted in a menu mix shift to higher food cost lunch and dinner items. These increases were partially offset by the impact of selective menu price increases. Commodity costs during 2003 increased 0.9 percentage points over 2002, primarily due to increases in eggs, red meat, oils and pork. The introduction of a new menu during 2003 negatively impacted food costs by 0.4 percentage points as compared to 2002. Overall price increases realized during 2003 were approximately 1.8%, which positively impacted food cost by 0.4 percentage points.

The cost of Foxtail sales, in terms of total Foxtail revenues, increased approximately 0.4 percentage points, as a result of continued increases in raw materials costs. As a manufacturing operation, Foxtail typically has higher food costs as a percent of revenues than the Company’s restaurants.

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Labor and benefits:

Labor and benefits expense, as a percentage of total revenues, increased 0.4 percentage points over 2002. Increased employee insurance and workers’ compensation costs, a moderate increase in wage rates and a drop in productivity impacted restaurant labor and benefits. Foxtail labor and benefits were flat compared to 2002.

Federal and state minimum wage laws impact the wage rates of the Company’s hourly employees. 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 or productivity improvements.

As a percentage of revenues, Foxtail labor and benefit charges are significantly lower than the Company’s restaurants. If Foxtail’s third party business were to become a more significant component of the Company’s total operations, labor and benefits expense, expressed as a percent of total revenue, likely would decrease.

Operating expenses:

Operating expenses, expressed as a percentage of total revenues, decreased 0.2 percentage points from 2003 to 2002.

Restaurant division operating expenses expressed as a percentage of restaurant sales increased 0.1 percentage points. The increase is primarily the result of increased utility cost due to the rise in natural gas prices. This increase is partially offset by a slight decrease in administrative costs and store marketing expenses.

Foxtail expenses, expressed as a percentage of Foxtail revenue, decreased 1.5 percentage points. The decrease is primarily due to decreased freight, plant maintenance and utility costs.

Franchise division operating expenses, expressed as a percentage of franchise revenues, decreased 2.8 percentage points compared to the prior year. Franchise opening costs decreased due to the opening of nine fewer restaurants than in the prior year. Reduced expenses under franchise service fee agreements, investment spending for advertising in select franchised markets and other franchise related spending also contributed to the decrease.

General and administrative:

General and administrative expenses declined to 8.7% of total revenues in 2003 from 9.1% of total revenues in 2002. The decrease is primarily attributable to reductions in corporate home office expenses and decreased incentive costs.

Depreciation and amortization:

Depreciation and amortization decreased approximately 14.9% from 2002 due to the Company’s continued reduction in capital spending since 2001.

Provision for/Benefit from disposition of assets:

During 2003, the Company recorded a net loss of $336,000 related to the disposition of assets, including $190,000 related to the termination of the lease on the corporate aircraft.

Lease termination:

The Company recorded a net loss of $761,000 on the termination of the lease related to the corporate aircraft.

Asset write-down:

The Company recorded charges totaling $455,000 to write down the carrying value of two Company-operated restaurants to their estimated fair values.

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Interest, net:
Net interest expense decreased from 5.3% to 4.9% of revenues. The decrease is the result of reduced average borrowings by the Company during 2003, primarily due to the payment of $8.4 million of accreted interest on the Discount Notes (defined below) at a redemption price of 105.625% and reduced borrowings on the Credit Facility.

Other:
Other income decreased approximately $100,000. This decrease is due primarily to a reduction in rental income from properties subleased to others.

Provision for/Benefit from income taxes:
The provision for income taxes attributable to continuing operations in 2003 was $715,000. Our effective tax rate attributable to continuing operations was 17.1% in 2003 and 12.7% in 2002. The 17.1% effective tax rate in 2003 was higher than in 2002 due to the fact that 2003 operating income was higher and federal income tax credits were relatively flat as compared to 2002. Also, we experienced a $140,000 reduction in state deferred tax assets due to jurisdiction tax changes. The 2003 effective tax rate was favorably impacted primarily by credits resulting from excess FICA taxes paid on server tip income that exceeds minimum wage. The effective tax rate is lower than the statutory U.S. federal tax rate and the 2002 effective tax rate primarily due to the utilization of these credits.

CAPITAL RESOURCES AND LIQUIDITY

Our primary sources of funding during 2004 were cash provided by operations and proceeds from the sale of property and equipment. The principal uses of cash during the year were capital expenditures and a distribution to RHC. Capital expenditures consisted primarily of equipment purchases for Foxtail, capital improvements and costs related to remodels of existing restaurants.

The following table summarizes capital expenditures for each of the past three years (in thousands).

Our capital budget for 2005 is $12.6 million and includes plans to open one new Company-operated restaurant. The primary source of funding for these expenditures is expected to be cash provided by operations. Capital spending could vary significantly from planned amounts as certain of these expenditures are discretionary in nature.

RHC’s principal source of liquidity is dividends and other distributions from TRC. RHC is subject to a Put option, which may require a significant distribution in 2005, to the extent permitted. For additional details, please see the Cash Contractual Obligations and Off-Balance Sheet Arrangements section below.

The Company has a secured $25,000,000 revolving line of credit facility (the “Credit Facility”) with a sub-limit for up to $7,500,000 of letters of credit. All amounts under the Credit Facility bear interest at floating rates based on the agent’s base rate or Eurodollar rates as defined in the agreement. All indebtedness under the Credit Facility is collateralized by a first priority lien on substantially all of the assets of the Company. As of December 26, 2004, there were no borrowings and approximately $5,968,000 of letters of credit outstanding under the Credit Facility. The letters of credit are primarily utilized in conjunction with our workers’ compensation programs.

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At April 20, 2003, we failed to meet the criteria of one of the financial covenants of the Credit Facility. On May 14, 2003, the Company executed an amendment to the Credit Facility that waived the April 20, 2003 covenant violation, reduced the requirements of the financial covenants and lowered the total amount available under the Credit Facility from $40,000,000 to $25,000,000. The Company executed an amendment to the Credit Facility on March 25, 2004 that reduced the requirements of the financial covenants at the end of the first quarter 2004 and thereafter. Effective December 20, 2004, the Company executed an amendment to extend the maturity of the Credit Facility to January 12, 2006 and to simplify the financial covenants. At December 26, 2004, the Company was in compliance with the requirements of the financial covenants.

We have outstanding $130 million 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 Notes may be redeemed at any time at a redemption price of 101.688% through December 15, 2005, at which time the Notes may be redeemed at par.

We have outstanding $18 million of 11.25% Senior Discount Notes (the “Discount Notes”) maturing on May 15, 2008. On November 15, 2001, we elected to begin accruing cash interest on the Discount Notes. Cash interest is payable semi-annually on May 15 and November 15. On May 15, 2003, we redeemed $8.4 million in accreted interest of the Discount Notes at a redemption price of 105.625%. The Discount Notes may be redeemed at any time at a redemption price of 103.750% through May 15, 2005. On May 15, 2005, the redemption price decreases to 101.875%, and after May 15, 2006, the Discount Notes may be redeemed at par.

Our ability to make scheduled payments of principal, or to pay the interest or liquidated damages, if any, on, or to refinance, our indebtedness, or to fund planned capital expenditures will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based upon the current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under the Credit Facility, will be adequate to meet our liquidity needs for the foreseeable future. We 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 we will generate sufficient cash flow from operations, or that future borrowings will be available under the Credit Facility in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. In addition, there can be no assurance that we will be able to effect any such refinancing on commercially reasonable terms or at all.

CASH CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

Cash Contractual Obligations:

The following represents the contractual obligations and commercial commitments of the Company as of December 26, 2004 (in thousands):

Additionally, we have $5,968,000 of letters of credit outstanding under the Credit Facility. The letters of credit are primarily utilized in conjunction with our workers’ compensation programs. The letters of credit expire on December 28, 2005. It is our intent to reissue the letters of credit upon expiration.

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Off-Balance Sheet Arrangements:

In accordance with the definition under Securities and Exchange Commission rules, the following qualify as off-balance sheet arrangements:

	•	Any obligation under certain guarantees or contracts;
	•	A retained or contingent interest in assets transferred to an unconsolidated entity or similar entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;
	•	Any obligation under certain derivative instruments;
	•	Any obligation under a material variable interest held by the registrant in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging or research and development services with the registrant.

Based on the above, the following represents the off-balance sheet arrangements for our Company.

In 1999, TRC Realty LLC leased an aircraft for use by both FICC and TRC. The operating lease expires in November 2009. During the third quarter of 2003, TRC Realty terminated its lease for the corporate aircraft. In accordance with the terms of the lease, TRC Realty was required to pay a Termination Value to the lessor upon termination of the lease. As a result, we incurred a loss of approximately $950,000 on the termination of the lease and disposal of assets related to the aircraft. Concurrently, TRC Realty entered into a new lease for a smaller and less expensive aircraft, which will be used solely by us.

During 2000, the Company entered into an 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 26, 2004, there was $3,000,000 in borrowings outstanding under this agreement of which the Company guaranteed $1,500,000. Under the provisions of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, this guarantee has been determined by the Company not to be a variable interest in the franchisee.

Our predecessors entered into arrangements with several different parties which have reserved territorial rights under which specified payments are to be made by us based on a percentage of gross sales from certain restaurants and for new restaurants opened within certain geographic regions. During 2004, we paid an aggregate of $2,656,000 under such arrangements. Three such agreements are currently in effect. Of these, one expires in the year 2075, one expires upon the death of the beneficiary and the remaining agreement remains in effect as long as we operate Perkins Restaurants and Bakeries in certain states.

We are a wholly owned subsidiary of RHC. On March 21, 2005, RHC announced that it had retained an investment bank to help RHC explore and evaluate a variety of financial and strategic alternatives for the Perkins Restaurant and Bakery chain. The outstanding common shares of RHC not owned by Mr. Smith (the “Minority Shares”) are subject to an option to require RHC to redeem such shares at any time after December 22, 2004 at fair market value (the “Put”). As of December 31, 2004, the Minority Shares represented 30% of the outstanding common stock of RHC. By letter agreement, dated as of March 18, 2005, the holders of the Minority Shares agreed that they will not exercise the Put while RHC was exploring its strategic alternatives; however, if an agreement relating to a strategic transaction is not entered into by September 11, 2005 or a strategic transaction is not consummated by January 9, 2006, the holder’s right to exercise the Put will be reinstated. Under such letter agreement, RHC has agreed that if no strategic transaction is consummated within such time period and the holders of the Minority Shares exercise their Put rights thereafter, then RHC will, pursuant to the terms of the Put, complete the purchase of the Minority Shares put by the holders. RHC has waived its right under the terms of the Put to commence a sale of the company to complete such purchase, but this waiver would apply only to the first time the holders of Minority Shares exercise their Put rights.

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RHC has a management fee agreement dated as of December 22, 1999, with BancBoston Ventures, Inc. (BBV) whereby BBV provides certain consulting services to RHC. In consideration for these services, a fee of $250,000 accrued annually through 2004 and $1,250,000 was paid by RHC on December 22, 2004. During 2004, we declared and paid a dividend to RHC in the amount of $1,250,000 for the purpose of paying the management fee to BBV. Our payment of this dividend was in compliance with the dividend restrictions under the Notes, the Discount Notes and the Credit Facility.

Additionally, RHC issued 50,000 shares of non-voting preferred stock on December 22, 1999. The preferred stock is mandatorily redeemable for $1,000 per share (the “Liquidation Value”) plus all accrued but unpaid dividends, if any, on December 22, 2006. Preferred dividends of 8% per annum of the Liquidation Value of each share are payable quarterly. As of December 26, 2004, approximately $24,357,000 of in-kind dividends had been paid through the issuance of additional shares of preferred stock. Assuming a continuation of in-kind dividends, the redemption price on December 22, 2006 is estimated to be $87,044,000. The holders of preferred stock are entitled to be paid in cash the Liquidation Value of each share of preferred stock before any payments are made to any holders of common stock. The preferred stock is redeemable at RHC’s option at any time prior to the mandatory redemption date at the Liquidation Value plus a redemption premium as specified in RHC’s Charter. The redemption premium was 3% through December 21, 2002 after which the preferred stock is redeemable at par plus accrued and unpaid dividends.

RHC has no material assets other than its investment in us. Our ability to pay dividends to or make distributions to RHC in order to redeem common or preferred shares is restricted under the Notes, Discount Notes and the Credit Facility. Therefore, we may need to recapitalize or refinance all or a portion of our obligations on or prior to maturity or mandatory redemption date.

NEW ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. This statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal.” In addition, the statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The statement is effective for fiscal years beginning after June 15, 2005. The Company does not believe that the implementation of this statement will have a material effect on the financial position or results of operations of the Company.

In December 2004, FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. This statement addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. This statement specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this statement shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 and shall be applied on a prospective basis. The Company has evaluated the impact of implementing SFAS No. 153 and has concluded that implementation of the statement will not have a material effect on the financial position or results of operations of the Company.

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In December 2004, the FASB issued SFAS No. 123, Share Based Payments (revised 2004). This statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. It requires entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees, except for equity instruments held by employee share ownership plans. However, this statement provides certain exceptions to that measurement method if it is not possible to reasonably estimate the fair value of an award at the grant date. A nonpublic entity also may choose to measure its liabilities under share-based payment arrangements at intrinsic value. The statement also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from nonemployees in share-based payment transactions. This statement is effective for the Company with the beginning of the 2006 fiscal year. Currently, the Company does not anticipate that the implementation of the statement will have a material effect on the financial position or results of operations of the Company.

IMPACT OF INFLATION

We do not believe that our operations are affected by inflation to a greater extent than are the operations of others within the restaurant industry. In the past, we have generally been able to offset the effects of inflation through selective menu price increases.

IMPACT OF GOVERNMENTAL REGULATION

A majority of our employees are paid hourly rates as determined by federal and state minimum wage rate laws. Future increases in these rates could materially affect our cost of labor. We are 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 we are required to comply.

ACCOUNTING REPORTING PERIOD

Our financial reporting is based on thirteen four-week periods ending on the last Sunday in December. The first quarter includes four four-week periods. The first, second, third and fourth quarters of 2004 ended April 18, July 11, October 3, and December 26, respectively.

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. We do 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.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk. We currently have market risk-sensitive-instruments related to interest rates. We have no significant exposure for changing interest rates on the Notes and Discount Notes because the interest rates are fixed. We have outstanding long-term debt (exclusive of capital leases) of $148 million at December 26, 2004 and December 28, 2003. Market risk for fixed-rate, long-term debt is estimated as the potential decrease in fair value resulting from a hypothetical 10% increase in interest rates and amounts to approximately $3.9 million as of December 26, 2004 and $4.8 million as of December 28, 2003. The underlying fair values of our long-term debt were estimated based on quoted market prices or on the current rates offered for debt with similar terms and maturities. Currently, derivative instruments are not used to manage interest rate risk.

We have in place a $25 million line of credit facility that matures on January 12, 2006. All borrowings under the facility bear interest at floating rates based on the agent’s base rate or Eurodollar rates. We had no amounts outstanding under the line of credit facility at December 26, 2004. While changes in market interest rates would affect the cost of funds borrowed in the future, we believe that the effect, if any, of reasonably possible near-term changes in interest rates on our 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 us are affected by commodity pricing and are, therefore, subject to price volatility caused by weather, production problems, delivery difficulties and other factors that are beyond our control. Our supplies and raw materials are available from several sources and we are not dependent upon any single source for these items. If any existing suppliers fail, or are unable to deliver in quantities required by us, we believe that there are sufficient other quality suppliers in the marketplace that our sources of supply can be replaced as necessary. At times we enter into purchase contracts of one year or less or purchase 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. We believe that we will be able to pass through increased commodity costs by adjusting menu pricing in most cases. However, we believe that any changes in commodity pricing that cannot be offset by changes in menu pricing or other product delivery strategies would not be material.

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Item 8. Financial Statements and Supplementary Data.

RESPONSIBILITY FOR FINANCIAL STATEMENTS

Our 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 of America consistently applied, in all material respects, and reflect estimates and judgments by management where necessary.

We maintain a system of internal accounting control that 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 our internal accounting controls.

PricewaterhouseCoopers LLP, our independent registered public accounting firm, performs an audit of the financial statements. This includes consideration of certain components of our internal control over financial reporting in determining 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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Report of Independent Registered Public Accounting Firm

To the Board of Directors of The Restaurant Company:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholder’s investment and of cash flows present fairly, in all material respects, the financial position of The Restaurant Company and subsidiaries (the “Company”) at December 26, 2004 and December 28, 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 26, 2004 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with the standards of the Public Company Accounting Oversight Board (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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As described in Note 2 to the consolidated financial statements, the Company has restated its 2003 and 2002 financial statements.

PricewaterhouseCoopers LLP /s/
Memphis, Tennessee

May 25, 2005

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THE RESTAURANT COMPANY AND SUBSIDIARIES

The accompanying notes are an integral part of these consolidated balance sheets.

26

THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)

The accompanying notes are an integral part of these consolidated balance sheets.

27

THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S INVESTMENT
(In Thousands)

The accompanying notes are an integral part of these consolidated statements.

28

THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

The accompanying notes are an integral part of these consolidated statements.

29

THE RESTAURANT COMPANY AND SUBSIDIARIES

(1) ORGANIZATION:

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”), BancBoston Ventures, Inc. (“BBV”), a subsidiary of Fleet Boston Financial Corp., and others who own 70.0%, 21.0% and 9.0%, respectively.

Mr. Smith is also the Chairman of Friendly Ice Cream Corporation (“FICC”), which operates and franchises approximately 535 restaurants, located primarily in the northeastern United States.

We operate and franchise mid-scale restaurants that serve a wide variety of high quality, moderately priced breakfast, lunch, and dinner entrees 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.” Our restaurants provide table service and are open seven days a week. The restaurants are located in 34 states with the largest number in Minnesota, Florida, Pennsylvania, Ohio, and Wisconsin. There are sixteen franchised restaurants located in Canada. We also offer cookie doughs, muffin batters, pancake mixes, pies and other food products for sale to restaurants operated by us and our franchisees and bakery and food service distributors through Foxtail Foods (“Foxtail”), our 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 that is used for business purposes of TRC.

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 our 10.125% Senior Notes. PFC has no operations and does not have any revenues or assets.

The Restaurant Company of Minnesota —

On September 30, 2000, we contributed all of the restaurant, office and related assets owned by us and used in our operations in Minnesota and North Dakota and all of our trademarks and service marks to The Restaurant Company of Minnesota (“TRCM”), a newly created, wholly-owned subsidiary. TRCM was formed to conduct our operations in Minnesota and North Dakota as well as manage the rights and responsibilities related to the contributed trademarks and service marks. TRCM granted us 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 2004, 2003 and 2002. All material intercompany transactions have been eliminated in consolidation.

Certain prior year amounts have been reclassified to conform to current year presentation.

Accounting Reporting Period —

Our financial reporting is based on thirteen four-week periods ending on the last Sunday in December. The first quarter includes four four-week periods. The first, second, third and fourth quarters of 2004 ended April 18, July 11, October 3, and December 26, respectively.

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(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Restatement of Previously Issued Consolidated Financial Statements –

Lease Accounting

We began a review of our lease accounting policies following announcements beginning in December 2004 that several restaurant companies were revising their accounting practices for leases. As a result of our review, we determined that the amortization of leasehold improvements was not in accordance with accounting principles generally accepted in the United States. In addition, we determined that there were errors in the computation of rental expense and deferred rents, which were primarily caused by the improper determination of the commencement date of certain lease terms and improper straight-line rentals of certain restaurants.

We identified certain situations where leasehold improvements were being amortized over their useful life rather than the shorter of the lease term, as defined in FAS 13, as amended, or their useful life. The lease term includes the non-cancelable term of the lease plus any renewal options where renewals are reasonably assured of exercise as determined at inception of the lease. Renewals are reasonably assured of exercise if failure to renew the lease would impose an economic penalty to the lessee. As the Company has determined that in most cases renewals are not reasonably assured of exercise, the initial non-cancelable lease term, generally 20 years, represent the lease term, as defined. Historically, the Company maintained a policy for recognizing straight-line rentals over the initial lease term commencing when rental payments were due. The Company corrected its accounting to report rental expense over the lease term commencing on the date that the Company obtains control over the asset to be leased. The restatement adjustments correct (i) the depreciation expense for the applicable period and accumulated depreciation on the balance sheet to reflect the amortization of the lease related assets over the shorter of their useful life or the lease term and (ii) the determination of rental expense over the lease term commencing when the Company has control over the property to be leased.

As a result of our review of lease accounting, we revalued the assumed liabilities at the date of the purchase accounting date (December 22, 1997) related to lease obligations. The Company had incorrectly recorded the deferred rent liability as recorded on the acquiree’s financial statements rather than eliminating this liability. The impact of these restatement adjustments reduced goodwill and increased accumulated deficit by $503,000.

The restatement adjustments correct our historical accounting for leases and had no impact on revenues, comparable store sales or net operating cash flows. The impact of the restatement adjustments, net of tax effects, reduced net income by $161,000 and $167,000 for 2003 and 2002. We have restated our consolidated balance sheet at December 28, 2003 and the consolidated statements of income, stockholder’s equity and cash flows for the years ended December 28, 2003 and December 29, 2002. The impact of the restatement adjustments on periods prior to 2002 has been reflected as a cumulative effect adjustment as a reduction to accumulated deficit of $401,000 as of December 30, 2001 in the accompanying statements of stockholder’s investment.

Discontinued Operations

Additionally, we restated our 2002 and 2003 financial statements to correctly classify the closure of two Sage Hen restaurants as discontinued operations. Previously, the Company had presented the disposition of these components within income from continuing operations. The effect of this restatement is to reclassify as discontinued operations the operations of the two Sage Hen restaurants as well as the charges associated with closing the restaurants in 2002. In 2003, the Company recorded an additional charge to discontinued operations which represents a change in estimate related to the continuing lease obligation for one of the restaurants. This change in estimate had previously been reflected within continuing operations and has been restated to be classified within discontinued operations. These restatement adjustments reclassify revenues and expenses between continuing operations and discontinued operations and have no impact on reported net income for 2002 and 2003. Note 18 provides additional information regarding discontinued operations.

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We did not amend our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the restatement adjustments. The effects of our restatement on previously reported Consolidated Financial Statements as of December 28, 2003 and for the years ended December 28, 2003 and December 29, 2002 are shown in the following tables. The footnotes included elsewhere herein have also been restated for these items as applicable.

The following table reflects the effect of the restatement adjustments on the Consolidated Statements of Income (in thousands):

     (a) Change related to the Sage Hen discontinued operations restatement adjustments

     (b) Change related to the Lease Accounting restatement adjustments

The following table reflects the effect of the restatement adjustments on the Consolidated Balance Sheets (in thousands):

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The following table reflects the effect of the restatement adjustments on the Consolidated Statements of Cash Flows (in thousands):

Estimates —
The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

Concentration of Credit Risk —
Financial instruments that potentially subject us to a concentration of credit risk are cash and cash equivalents. At times, cash balances may be in excess of FDIC insurance limits. The Company has not experienced any losses with respect to bank balances in excess of government provided insurance.

Cash Equivalents —
We consider all investments with an original maturity of three months or less to be cash equivalents.

Revenue Recognition —
Revenue at Company-operated restaurants is recognized as customers pay for products at the time of sale. Revenue recognition at Foxtail occurs upon the shipment of product to the distributor.

Our franchisees are required to pay an initial fee to us when each franchise is granted. These fees are not recognized as income until the restaurants open. We also receive franchise royalties ranging from one to six percent of the gross sales of each franchised restaurant. These royalties are recorded as income in the period earned.

Advertising —
We include the costs of advertising in operating expenses as incurred. Advertising expense was $12,006,000, $13,053,000 and $13,853,000 for the fiscal years 2004, 2003 and 2002, respectively.

Property and Equipment —
Major renewals and betterments are capitalized; replacements and maintenance and repairs that do not extend the lives of the assets are charged to operations as incurred. Upon disposition, both the asset and the accumulated depreciation amounts are relieved, and the related gain or loss is credited or charged to the income statement.

Goodwill and Intangible Assets —
As of December 31, 2001, we adopted Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Other Intangible Assets. Under SFAS 142, goodwill is no longer amortized but is tested for impairment using a fair value approach, at the “reporting unit” level. A reporting unit is the operating segment, or a business one level below that operating segment (the “component” level) if discrete financial information is prepared and regularly reviewed by management at the component level. We have determined that our operating segments are our reporting units under the provisions of SFAS 142.

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SFAS 142 requires a two-step process for testing impairment. First, the fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. The fair value of each reporting unit is determined using a discounted cash flow analysis and comparative market multiples. If an impairment is indicated, then the fair value of the reporting unit’s goodwill is determined by allocating the unit’s fair value to its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The amount of impairment for goodwill and other intangible assets is measured as the excess of its carrying value over its fair value. As required by SFAS No. 142, we completed a transitional impairment test for goodwill as of December 30, 2001 and also an impairment test as of December 26, 2004, December 28, 2003 and December 29, 2002. As a result of these tests, we did not record any impairment of our goodwill.

We amortize the cost of other intangibles over their estimated useful lives unless such lives are deemed indefinite. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested for impairment and written down to fair value as required.

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. We use the asset and 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. We record a valuation allowance to reduce deferred tax assets to the balance that is more likely than not to be realized.

Preopening Costs —
In accordance with the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 98-5, “Reporting on the Costs of Start-Up Activities,” we expense the costs of start-up activities as incurred.

Impairment of Long-Lived Assets —
Pursuant to SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” we evaluate the recoverability of assets (including intangibles) when events and circumstances indicate that assets might be impaired. For such assets, we determine 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, we generally estimate undiscounted future cash flows at the level of individual restaurants or manufacturing facilities. 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. Assets held for disposition are valued at the lower of historical cost, net of accumulated depreciation, or fair market value less disposition cost.

Insurance Accruals —
We are self-insured up to certain limits for costs associated with workers’ compensation claims, property claims and benefits paid under employee health care programs. At December 26, 2004 and December 28, 2003, we had total self-insurance accruals reflected in our balance sheet of approximately $5.7 million and $4.7 million, respectively.

We account for the worker’s compensation costs primarily through actuarial methods, which develop estimates of the undiscounted liability for claims incurred, including those claims incurred but not reported. These methods provide estimates of future ultimate claim costs based on claims incurred as of the balance sheet date. We account for benefits paid under employee health care programs using historical lag information as the basis for estimating expenses incurred as of the balance sheet date.

Operating Leases –
Rent expense for the Company’s operating leases, some of which have escalating rentals over the term of the lease, is recorded on a straight-line basis over the lease term, as defined in SFAS No. 13, “Accounting for Leases, as amended”. The lease term begins when the Company has the right to control the use of the leased property, which may occur before rent payments are due under the terms of the lease. The difference between rent expense and rent paid is recorded as deferred rent and is included in accrued expenses in the consolidated balance sheets.

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Perkins Marketing Fund –
The Company has maintained a Marketing Fund to pool the resources of the Company and its franchisees for advertising purposes and to promote the Perkins brand in accordance with the system’s advertising policy. Effective with the third quarter of 2003, the Company consolidated the Marketing Fund with TRC. Accordingly, the Company has recorded $5,853,000 and $4,808,000 as of December 26, 2004 and December 28, 2003, respectively, of restricted cash on its balance sheet that represents the funds contributed by TRC and the franchisees specifically for the purpose of advertising. The Company has also recorded liabilities of approximately $1,442,000 and $1,392,000 as of December 26, 2004 and December 28, 2003, respectively, for accrued advertising, which is included in accrued expenses on the accompanying balance sheet, and approximately $3,851,000 and $4,093,000 as of December 26, 2004 and December 28, 2003, respectively, which represents franchisee contributions for advertising services not yet provided. The results of operations of the Marketing Fund primarily consist of general and administrative expenses and interest income, both of which are immaterial to the Company as a whole.

New Accounting Pronouncements –
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. This statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal.” In addition, the statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The statement is effective for fiscal years beginning after June 15, 2005. The Company does not believe that the implementation of this statement will have a material affect on the financial position or results of operations of the Company.

In December 2004, FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. This statement addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. This statement specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this statement shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 and shall be applied on a prospective basis. The Company has evaluated the impact of implementing SFAS No. 153 and has concluded that implementation of the statement will not have a material affect on the financial position or results of operations of the Company.

In December 2004, the FASB issued SFAS No. 123, Share Based Payments (revised 2004). This statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. It requires entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees, except for equity instruments held by employee share ownership plans. However, this statement provides certain exceptions to that measurement method if it is not possible to reasonably estimate the fair value of an award at the grant date. A nonpublic entity also may choose to measure its liabilities under share-based payment arrangements at intrinsic value. The statement also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from nonemployees in share-based payment transactions. This statement is effective for the Company with the beginning of the 2006 fiscal year. Currently, the Company does not anticipate that the implementation of the statement will have a material effect on the financial position or results of operations of the Company.

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(3) SUPPLEMENTAL CASH FLOW INFORMATION:

The decrease in cash and cash equivalents due to changes in operating assets and liabilities for the past three years consisted of the following (in thousands):

Other supplemental cash flow information for the past three years consisted of the following (in thousands):

During 2004, the Company has converted approximately $97,000 of accounts receivable to long-term notes receivable.

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(4) PROPERTY AND EQUIPMENT:

Property and equipment consisted of the following for the past two years (in thousands):

Depreciation and amortization is computed primarily using the straight-line method over the estimated useful lives unless the assets relate to leased property, in which case, the amortization period is the shorter of the useful lives or the lease terms. A summary of the useful lives is as follows:

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As of December 26, 2004, we owned one property held for disposal with a total carrying value of $461,000. This property is currently vacant. The assets are reflected in the accompanying balance sheet at the lower of historical cost, net of accumulated depreciation, or fair market value less disposition costs. Depreciation is not recorded on assets held for sale. Related to this property, our results of operations include a loss of $58,000 for 2004, income of $32,000 for 2003 and a loss of $9,000 for 2002.

(5) LEASES:

As of December 26, 2004, we operated 153 full-service restaurants as follows:

70 with both land and building leased
67 with both land and building owned
16 with only the land leased

As of December 26, 2004, we either leased or subleased thirteen properties to others as follows:

6 with both land and building leased
4 with both land and building owned
3 with only the land leased

Most of our restaurant leases have an initial term of 20 years and generally provide for two to four renewals of five years each. Certain leases provide for minimum payments plus a percentage of sales in excess of stipulated amounts.

Future minimum payments related to non-cancelable leases that have initial or remaining lease terms in excess of one year as of December 26, 2004 were as follows (in thousands):

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Future minimum gross rental revenue as of December 26, 2004, were as follows (in thousands):

The net rental expense included in the accompanying Consolidated Statements of Income for operating leases was as follows for the past three years (in thousands):

Sublease rentals are recorded in other expenses in the accompanying Consolidated Statements of Income.

(6) GOODWILL AND INTANGIBLE ASSETS:

The following schedule presents the carrying amount of goodwill attributable to each reportable operating segment and changes therein:

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In connection with adopting SFAS No. 142, we also reassessed the useful lives and the classification of our identifiable intangible assets other than goodwill and determined that they continue to be appropriate. The components of our intangible assets are as follows (in thousands):

Additionally, during 2004 we recorded an impairment charge of $136,000 related to intangible assets on specifically identifiable franchise locations that ceased operations.

Amortization expense for intangible assets was $649,000, $684,000 and $930,000 for 2004, 2003 and 2002, respectively. Estimated amortization expense for the five succeeding fiscal years is as follows (in thousands):

(7) ACCRUED EXPENSES:

Accrued expenses consisted of the following (in thousands):

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(8) LONG-TERM DEBT:

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

We have 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 Notes may be redeemed at any time at a redemption price of 101.688% through December 15, 2005. After December 15, 2005, the Notes may be redeemed at par.

We have a secured $25,000,000 revolving line of credit facility (the “Credit Facility”) with a sub-limit for up to $7,500,000 of letters of credit. All amounts under the Credit Facility bear interest at floating rates based on the agent’s base rate or Eurodollar rates as defined in the agreement. All indebtedness under the Credit Facility is collateralized by a first priority lien on substantially all of the assets of the Company. As of December 26, 2004, there were no borrowings and approximately $5,968,000 of letters of credit outstanding under the Credit Facility.

At April 20, 2003, we failed to meet the criteria of one of the financial covenants of the Credit Facility. On May 14, 2003, we executed an amendment to the Credit Facility that waived the April 20, 2003 covenant violation, reduced the requirements of the financial covenants and lowered the total amount available under the Credit Facility from $40,000,000 to $25,000,000. We executed an amendment to the Credit Facility on March 25, 2004 that reduced the requirements of the financial covenants at the end of the first quarter 2004 and thereafter. Effective December 20, 2004, we executed an amendment to extend the maturity of the Credit Facility to January 12, 2006 and to simplify the financial covenants. At December 26, 2004, we were in compliance with the requirements of the financial covenants.

We have outstanding $18,009,000 of 11.25% Senior Discount Notes (the “Discount Notes”) maturing on May 15, 2008. On November 15, 2001, we elected to begin accruing cash interest on the Discount Notes. Cash interest is payable semi-annually on May 15 and November 15. On May 15, 2003, we redeemed $8,383,000 in principal on the Discount Notes at a redemption price of 105.625%. The Discount Notes may be redeemed at any time at a redemption price of 103.750% through May 15, 2005. On May 15, 2005, the redemption price decreases to 101.875%, and after May 15, 2006, the Discount Notes may be redeemed at par.

In connection with the issuance of the Notes, the Discount Notes and obtaining the Credit Facility, we incurred deferred financing costs of approximately $6,836,000 that are being amortized over the terms of the debt agreements. The unamortized balance of these costs was $1,487,000 as of December 26, 2004. Amortization of deferred financing costs of $662,000, $633,000 and $940,000 for 2004, 2003 and 2002, respectively, are included in interest, net in the accompany Consolidated Statements of Income.

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

Because our revolving line of credit borrowings bear interest at current market rates, we believe that any related liabilities reflected in the accompanying balance sheets approximated fair market value.

Pursuant to the Notes, the Discount Notes and the Credit Facility, we are subject to certain restrictions which limit additional indebtedness. Additionally, among other restrictions, the Credit Facility limits our capital expenditures and additional indebtedness and requires us to maintain specified financial ratios and a minimum level of annual earnings before interest, taxes, depreciation and amortization. At December 26, 2004, we were in compliance with all such requirements. A continuing default under the Credit Facility could result in a default under the Notes and the Discount Notes. In the event of such a default and under certain circumstances, the trustee or the holders of the Notes or the Discount Notes could then declare the respective notes due and payable immediately.

The Notes, the Discount Notes and the Credit Facility restrict our ability to pay dividends or distributions to our equity holders. If no default or event of default exists, we are generally allowed to pay dividends or distributions subject to all of the following restrictions:

1. if at the time of such dividend or distribution we 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 our common equity plus additional dividends not to exceed $5 million after the date of the Indenture.

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 plus additional dividends not to exceed $5 million after the date of the Indenture.

These available amounts are reduced by dividends paid as well as certain other restricted payments as defined in the Indentures.

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We are a wholly owned subsidiary of RHC. On March 21, 2005, RHC announced that it had retained an investment bank to help RHC explore and evaluate a variety of financial and strategic alternatives for the Perkins Restaurant and Bakery chain. The outstanding common shares of RHC not owned by Mr. Smith (the “Minority Shares”) are subject to an option to require RHC to redeem such shares at any time after December 22, 2004 at fair market value (the “Put”). As of December 31, 2004, the Minority Shares represented 30% of the outstanding common stock of RHC. By letter agreement, dated as of March 18, 2005, the holders of the Minority Shares agreed that they will not exercise the Put while RHC was exploring its strategic alternatives; however, if an agreement relating to a strategic transaction is not entered into by September 11, 2005 or a strategic transaction is not consummated by January 9, 2006, the holder’s right to exercise the Put will be reinstated. Under such letter agreement, RHC has agreed that if no strategic transaction is consummated within such time period and the holders of the Minority Shares exercise their Put rights thereafter, then RHC will, pursuant to the terms of the Put, complete the purchase of the Minority Shares put by the holders. RHC has waived its right under the terms of the Put to commence a sale of the company to complete such purchase, but this waiver would apply only to the first time the holders of Minority Shares exercise their Put rights.

RHC has a management fee agreement dated as of December 22, 1999, with BancBoston Ventures, Inc. (BBV) whereby BBV provides certain consulting services to RHC. In consideration for these services, a fee of $250,000 accrued annually through 2004 and $1,250,000 was paid by RHC on December 22, 2004. During 2004, we declared and paid a dividend to RHC in the amount of $1,250,000 for the purpose of paying the management fee to BBV. Our payment of this dividend was in compliance with the dividend restrictions under the Notes, the Discount Notes and the Credit Facility.

Scheduled annual principal maturities of long-term debt for the five years subsequent to December 26, 2004, are as follows:

No interest expense was capitalized in connection with our construction activities during 2004 and 2003. Interest expense capitalized equaled approximately $28,000 for the year ended December 29, 2002.

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(9) INCOME TAXES:

We file a consolidated Federal income tax return with RHC. For state purposes, each subsidiary generally files a separate return.

The following is a summary of the components of the provision for income taxes attributable to continuing operations for the past three years (in thousands):

A reconciliation of the statutory Federal income tax rate to the Company’s effective income tax rate attributable to continuing operations is as follows:

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The following is a summary of the significant components of our deferred tax position (in thousands):