Attached files
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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R
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended July 11, 2010
OR
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£
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _____________ to ____________.
Commission file number 333-57925
Perkins & Marie Callender’s Inc.
(Exact name of registrant as specified in its charter)
Delaware
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62-1254388
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. employer identification no.)
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6075 Poplar Avenue, Suite 800, Memphis, TN
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38119
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(Address of principal executive offices)
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(Zip code)
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(901) 766-6400
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(Registrant’s telephone number, including area code)
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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 R No 0
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes 0 No 0
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer £
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Accelerated filer £
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Non-accelerated filer R (Do not check if a smaller reporting company)
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Smaller reporting company £
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £ No R
Number of shares of common stock outstanding as of August 25, 2010: 10,820.
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Ex-31.1 Section 302 Certification of the CEO
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Ex-31.2 Section 302 Certification of the CFO
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Ex-32.1 Section 906 Certification of the CEO
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Ex-32.2 Section 906 Certification of the CFO
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PERKINS & MARIE CALLENDER’S INC.
(Unaudited)
(In thousands)
Quarter
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Quarter
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Year-to-Date
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Year-to-Date
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|||||||||||||
Ended
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Ended
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Ended
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Ended
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|||||||||||||
July 11, 2010
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July 12, 2009
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July 11, 2010
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July 12, 2009
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|||||||||||||
REVENUES:
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||||||||||||||||
Food sales
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$ | 107,573 | 115,061 | 254,888 | 275,938 | |||||||||||
Franchise and other revenue
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6,580 | 6,815 | 15,070 | 15,191 | ||||||||||||
Total revenues
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114,153 | 121,876 | 269,958 | 291,129 | ||||||||||||
COSTS AND EXPENSES:
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||||||||||||||||
Cost of sales (excluding depreciation shown below):
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||||||||||||||||
Food cost
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27,434 | 30,301 | 64,716 | 73,275 | ||||||||||||
Labor and benefits
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38,846 | 40,904 | 92,208 | 96,229 | ||||||||||||
Operating expenses
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32,534 | 32,072 | 76,269 | 77,773 | ||||||||||||
General and administrative
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10,835 | 10,129 | 24,941 | 24,218 | ||||||||||||
Depreciation and amortization
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5,059 | 5,557 | 11,965 | 12,913 | ||||||||||||
Interest, net
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10,299 | 10,130 | 23,864 | 23,745 | ||||||||||||
Asset impairments and closed store expenses
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440 | 346 | 2,105 | 1,208 | ||||||||||||
Other, net
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(140 | ) | (1,716 | ) | (358 | ) | (2,677 | ) | ||||||||
Total costs and expenses
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125,307 | 127,723 | 295,710 | 306,684 | ||||||||||||
Loss before income taxes
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(11,154 | ) | (5,847 | ) | (25,752 | ) | (15,555 | ) | ||||||||
Benefit from (provision for) income taxes
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- | - | - | - | ||||||||||||
Net loss
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(11,154 | ) | (5,847 | ) | (25,752 | ) | (15,555 | ) | ||||||||
Less: net (loss) earnings attributable to
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||||||||||||||||
non-controlling interests
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(1 | ) | 33 | 7 | 79 | |||||||||||
Net loss attributable to Perkins & Marie
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||||||||||||||||
Callender's Inc.
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$ | (11,153 | ) | (5,880 | ) | (25,759 | ) | (15,634 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
2
PERKINS & MARIE CALLENDER’S INC.
(In thousands)
July 11,
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December 27,
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|||||||
2010
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2009
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|||||||
ASSETS
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(Unaudited)
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|||||||
CURRENT ASSETS:
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Cash and cash equivalents
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$ | 2,263 | 4,288 | |||||
Restricted cash
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7,462 | 8,110 | ||||||
Receivables, less allowances for doubtful accounts of $859
and $829 in 2010 and 2009, respectively
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15,141 | 18,125 | ||||||
Inventories
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10,383 | 11,062 | ||||||
Prepaid expenses and other current assets
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3,676 | 1,864 | ||||||
Assets held for sale, net
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1,304 | - | ||||||
Total current assets
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40,229 | 43,449 | ||||||
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $156,381 and $156,898 in
2010 and 2009, respectively
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62,987 | 75,219 | ||||||
INVESTMENT IN UNCONSOLIDATED PARTNERSHIP
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33 | 50 | ||||||
GOODWILL
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23,100 | 23,100 | ||||||
INTANGIBLE ASSETS, net of accumulated amortization of
$21,257 and $20,179 in 2010 and 2009, respectively
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145,935 | 147,013 | ||||||
OTHER ASSETS
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14,690 | 16,074 | ||||||
TOTAL ASSETS
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$ | 286,974 | 304,905 | |||||
LIABILITIES AND DEFICIT
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||||||||
CURRENT LIABILITIES:
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Accounts payable
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14,383 | 14,657 | ||||||
Accrued expenses
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40,886 | 41,605 | ||||||
Franchise advertising contributions
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5,265 | 4,327 | ||||||
Current maturities of long-term debt and capital lease obligations
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379 | 503 | ||||||
Total current liabilities
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60,913 | 61,092 | ||||||
LONG-TERM DEBT, less current maturities
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331,303 | 326,042 | ||||||
CAPITAL LEASE OBLIGATIONS, less current maturities
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10,906 | 11,054 | ||||||
DEFERRED RENT
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18,478 | 17,092 | ||||||
OTHER LIABILITIES
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23,951 | 22,277 | ||||||
DEFERRED INCOME TAXES
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45,457 | 45,457 | ||||||
DEFICIT:
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||||||||
Common stock, $.01 par value; 100,000 shares authorized;
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10,820 issued and outstanding
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1 | 1 | ||||||
Additional paid-in capital
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150,870 | 150,870 | ||||||
Accumulated other comprehensive income
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47 | 45 | ||||||
Accumulated deficit
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(355,092 | ) | (329,333 | ) | ||||
Total PMCI stockholder's deficit
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(204,174 | ) | (178,417 | ) | ||||
Non-controlling interests
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140 | 308 | ||||||
Total deficit
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(204,034 | ) | (178,109 | ) | ||||
TOTAL LIABILITIES AND DEFICIT
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$ | 286,974 | 304,905 |
The accompanying notes are an integral part of these consolidated financial statements.
3
PERKINS & MARIE CALLENDER’S INC.
(Unaudited)
(In thousands)
Year-to-Date
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Year-to-Date
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|||||||
Ended
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Ended
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|||||||
July 11, 2010
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July 12, 2009
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net loss
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$ | (25,752 | ) | (15,555 | ) | |||
Adjustments to reconcile net loss to net cash provided by
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||||||||
(used in) operating activities:
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Depreciation and amortization
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11,965 | 12,913 | ||||||
Asset impairments
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2,273 | 434 | ||||||
Amortization of debt discount
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946 | 829 | ||||||
Other non-cash income items
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(232 | ) | (2,344 | ) | ||||
(Gain) loss on disposition of assets
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(168 | ) | 774 | |||||
Equity in net loss of unconsolidated partnership
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17 | 8 | ||||||
Net changes in operating assets and liabilities
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7,625 | (493 | ) | |||||
Total adjustments
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22,426 | 12,121 | ||||||
Net cash used in operating activities
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(3,326 | ) | (3,434 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES:
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Purchases of property and equipment
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(2,572 | ) | (4,316 | ) | ||||
Proceeds from sale of assets
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5 | 490 | ||||||
Net cash used in investing activities
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(2,567 | ) | (3,826 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES:
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Proceeds from revolving credit facilities
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17,759 | 18,248 | ||||||
Repayment of revolving credit facilities
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(13,444 | ) | (12,719 | ) | ||||
Repayment of capital lease obligations
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(262 | ) | (223 | ) | ||||
Repayment of other debt
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(10 | ) | (10 | ) | ||||
Debt financing costs
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- | (142 | ) | |||||
Distributions to non-controlling interest holders
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(175 | ) | (71 | ) | ||||
Net cash provided by financing activities
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3,868 | 5,083 | ||||||
NET DECREASE IN CASH AND CASH EQUIVALENTS
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(2,025 | ) | (2,177 | ) | ||||
CASH AND CASH EQUIVALENTS:
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Balance, beginning of period
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4,288 | 4,613 | ||||||
Balance, end of period
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$ | 2,263 | 2,436 |
The accompanying notes are an integral part of these consolidated financial statements.
4
PERKINS & MARIE CALLENDER’S INC.
(Unaudited)
(1) Organization
Perkins & Marie Callender’s Inc. (together with its consolidated subsidiaries collectively the “Company”, “PMCI”, “we” or “us”), is a wholly-owned subsidiary of:
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Perkins & Marie Callender’s Holding Inc., which is a wholly-owned subsidiary of
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·
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P&MC’s Holding Corp, which is a wholly-owned subsidiary of
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·
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P&MC’s Real Estate Holding LLC, which is a wholly-owned subsidiary of
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·
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P&MC’s Holding LLC, which is principally owned by affiliates of Castle Harlan, Inc.
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The Company is the sole equity holder of Wilshire Restaurant Group, LLC (“WRG”), which owns 100% of the outstanding common stock of Marie Callender Pie Shops, Inc. (“MCPSI”). MCPSI owns and operates restaurants and has granted franchises under the names Marie Callender’s and Marie Callender’s Grill. MCPSI also owns 100% of the outstanding common stock of M.C. Wholesalers, Inc., which operates a commissary that produces bakery goods. MCPSI also owns 100% of the outstanding common stock of FIV Corp., which owns and operates one restaurant under the name East Side Mario’s.
The Company operates two restaurant concepts: (1) full-service family dining restaurants located primarily in the Midwest, Florida and Pennsylvania under the name Perkins Restaurant and Bakery (“Perkins”) and (2) mid-priced, casual-dining restaurants, specializing in the sale of pies and other bakery items, located primarily in the western United States under the name Marie Callender’s Restaurant and Bakery (“Marie Callender’s”).
Through our bakery goods manufacturing segment (“Foxtail”), we also offer pies, muffin batters, cookie doughs, pancake mixes, and other food products for sale to our Perkins and Marie Callender’s Company-operated and franchised restaurants and to unaffiliated customers, such as food service distributors.
(2) Basis of Presentation
The consolidated interim financial statements included in this report have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America and have not been subject to audit. In the opinion of the Company’s management, all adjustments, including all normal recurring items, necessary for a fair presentation of the results of operations are reflected in these consolidated interim financial statements. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The most significant estimates and assumptions underlying these financial statements and accompanying notes generally involve royalty revenue recognition and provisions for related uncollectible accounts, asset impairments, self-insurance accruals and valuation allowances for income taxes.
The results of operations for the interim period ended July 11, 2010 are not necessarily indicative of operating results for the full year. The consolidated interim financial statements contained herein should be read in conjunction with the audited consolidated financial statements and notes contained in the Company’s 2009 Form 10-K/A, filed with the Securities and Exchange Commission on June 7, 2010.
(3) Accounting Reporting Period
Our financial reporting is based on thirteen four-week periods ending on the last Sunday in December. The first quarter each year includes four four-week periods, and the second, third and fourth quarters each typically include three four-week periods. The first and second quarters of 2010 ended on April 18 and July 11, respectively, and the first and second quarters of 2009 ended on April 19 and July 12, respectively. The third and fourth quarters of 2010 will end October 3 and December 26, respectively.
(4) Operations, Financial Position and Liquidity
Our principal sources of liquidity include cash, available borrowings under our $26,000,000 revolving credit facility (the “Revolver”) and cash generated by operations. Our principal uses of liquidity are costs and expenses associated with our restaurant and manufacturing operations, debt service payments and capital expenditures. At July 11, 2010, we had a negative working capital balance of $20,684,000 and total PMCI stockholder’s deficit of $204,174,000. Furthermore, at July 11, 2010, we had $2,263,000 in unrestricted cash and $296,000 of borrowing capacity under our Revolver.
The controlling equity holder of P&MC’s Holding LLC, our indirect parent, is in the process of finalizing the terms of an agreement with a third party, which would be entered into by the Company and guaranteed by one of the equity holder’s affiliates. Under this agreement, the third party will provide a new letter of credit of approximately $8.6 million for the benefit of an insurance company that provides workers’ compensation insurance for the Company. The Company expects the new letter of credit and the related guarantee to be entered into by September 15, 2010. This new letter of credit will be in force through December 9, 2010, and will contain certain renewal provisions for extension beyond that date. The Company currently has an existing letter of credit in place under its Revolver for the benefit of this insurance company. While this new letter of credit agreement is in place, the Company will not need to maintain the letter of credit provided under its Revolver, and will therefore have, under its Revolver, incremental borrowing capacity of approximately $8.6 million to fund its current seasonal liquidity needs. Based on our current expectations, we do not expect that we will need the additional liquidity support provided by the new letter of credit after its expiration date. However, prior to the expiration, we will be reviewing our liquidity position with our controlling equity holder to determine if they will extend the new letter of credit.
The existing letter of credit and the new letter of credit that will replace it are provided to the insurance company and are not drawn down unless the Company fails to pay its workers’ compensation claims in the ordinary course of business. In the event the Company fails to make payments due on its workers’ compensation claims and the new letter of credit is drawn upon, the guarantor of the letter of credit will reimburse the third party letter of credit provider, and the Company has agreed to reimburse the guarantor for such amounts. However, there has never been a draw on the existing letter of credit and the Company does not expect that there will be a draw on the new letter of credit.
We believe that the ongoing weakness in the economy, high unemployment levels, continued depressed residential real estate values, especially in some of our larger markets, and the level of home foreclosures has adversely affected our guest counts and, in turn, our sales and operating results. Over the last three years, we have experienced continued declines in comparable restaurant sales and profitability that have adversely impacted our liquidity position.
Our operations and liquidity needs are seasonal in nature. Historically, we have generated a significant portion of our operating cash flow in the first and fourth quarters, with these two quarters in total contributing 60% and 63% of our annual operating cash flows in 2008 and 2009. The fourth quarter is typically our strongest income generating quarter due to substantial holiday traffic and seasonal pie sales. As we increase personnel and inventories at the end of the third quarter for this seasonal activity, liquidity is normally at its lowest point. In light of this and because we have two significant interest payments due on October 1 and November 30, we intend to continue to reduce our capital expenditures and carefully manage payment of certain operating expenses in the third and fourth quarters.
Our ability to fund our operations and service our debt through 2011 and beyond will depend, in large part, on our ability to improve sales and profitability. We believe we will accomplish this improvement through the successful execution of our recently implemented advertising and promotional programs at both restaurant brands and also through our renewed focus at Foxtail to increase higher profit sales to third-party customers, replacing low profitability contracts terminated in 2009. Management expects these initiatives together with the Company’s cash provided by operations and borrowing capacity under the Revolver (which includes the additional availability as a result of the new letter of credit agreement) to provide sufficient liquidity for at least the next twelve months. However, there can be no assurance as to whether these or other actions will enable us to generate sufficient cash flow to fund our operations and service our debt.
If we are unable to finalize and enter into the agreement for the new letter of credit, there can be no assurance that we will have sufficient liquidity to enable us to fund our operations and service our debt without accessing outside sources of additional liquidity. Alternate sources of liquidity may include additional borrowings or capital contributions. However, the Company currently has no such commitments or plans, and there can be no assurance that the Company will be able to access acceptable alternative financing.
(5) Gift Cards and Perkins Marketing Fund
The Company issues gift cards and, prior to March 2005, also issued gift certificates (collectively, “gift cards”), both of which contain no expiration dates or inactivity fees. The Company recognizes revenue from gift cards when they are redeemed by the customer. The Company recognizes income from unredeemed gift cards (“gift card breakage”) when there is sufficient historical data to support an estimate, the likelihood of redemption is remote and there is no legal obligation to remit the unredeemed gift card balances to the state tax authorities under applicable escheat regulations. Gift card breakage is determined based on historical redemption patterns and is included in other, net in the consolidated statements of operations. Management concluded in the first quarter of 2009 that it had sufficient evidence to estimate the gift card breakage rate on Perkins gift cards and recorded $865,000 of gift card breakage. Management concluded in the second fiscal quarter of 2009 that it had sufficient evidence to estimate the gift card breakage rate on Marie Callender’s gift cards and recorded $1,576,000 of gift card breakage. These initial recognitions of breakage income in the first and second quarters of 2009 include amounts related to gift cards sold since the inception of our gift card programs in 2005. For the quarter and year-to-date periods ended July 11, 2010, we recorded $143,000 and $335,000, respectively, of breakage income for both our Perkins and Marie Callender’s gift cards. As of July 11, 2010 and December 27, 2009, the Company held approximately $2,197,000 and $3,324,000, respectively, of net gift card proceeds received from Perkins’ Company-owned and franchise locations as restricted cash on its consolidated balance sheets.
The Company maintains a marketing fund (the “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. As of July 11, 2010 and December 27, 2009, the Company held approximately $5,265,000 and $4,786,000, respectively, in the Marketing Fund.
Funds related to the gift card program and the Marketing Fund are classified as restricted cash on the consolidated balance sheet. The use of these funds is not contractually limited to specific uses and a portion of these funds has in the past been temporarily used for other corporate purposes. However, it is the Company’s intention to restrict the use of these funds in the future as described above.
(6) Commitments, Contingencies and Concentrations
We are a party to various legal proceedings in the ordinary course of business. We do not believe it is likely that these proceedings, either individually or in the aggregate, will have a material adverse effect on our consolidated financial statements.
The majority of our franchise revenues are generated from franchisees owning individually less than five percent (5%) of total franchised restaurants, and, therefore, the loss of any one of these franchisees would not have a material impact on our results of operations.
As of July 11, 2010, three Perkins franchisees, otherwise unaffiliated with the Company, owned 87, or 27%, of the 319 franchised Perkins restaurants, consisting of 39, 27 and 21 restaurants, respectively. As of July 12, 2009, these same franchisees owned 40, 27 and 21 restaurants, respectively. The following table presents a summary of the royalty and license fees provided by these three franchisees:
# of
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Quarter
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Year-to-Date
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# of
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Quarter
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Year-to-Date
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|||||
Restaurants
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Ended
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Ended
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Restaurants
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Ended
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Ended
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|||||
(2010)
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July 11, 2010
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July 11, 2010
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(2009)
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July 12, 2009
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July 12, 2009
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|||||
39
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$430,000
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$963,000
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40
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$449,000
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$999,000
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|||||
27
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348,000
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787,000
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27
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337,000
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763,000
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|||||
21
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323,000
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736,000
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21
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342,000
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777,000
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As of July 11, 2010, three Marie Callender’s franchisees otherwise unaffiliated with the Company each owned four, for a total of 12, or 32%, of the 37 franchised Marie Callender’s restaurants. As of July 12, 2009, these same franchisees owned five, four and four restaurants, respectively. The following table presents a summary of the royalty and license fees provided by these three franchisees:
# of
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Quarter
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Year-to-Date
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# of
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Quarter
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Year-to-Date
|
|||||
Restaurants
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Ended
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Ended
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Restaurants
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Ended
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Ended
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|||||
(2010)
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July 11, 2010
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July 11, 2010
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(2009)
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July 12, 2009
|
July 12, 2009
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|||||
4
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$77,000
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$187,000
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5
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$70,000
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$220,000
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|||||
4
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74,000
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189,000
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4
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84,000
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201,000
|
|||||
4
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66,000
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148,000
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4
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57,000
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138,000
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The Company has three arrangements with different parties to whom territorial rights were granted. The Company makes specified payments to those parties based on a percentage of gross sales from certain Perkins restaurants and for new Perkins restaurants opened within those geographic regions. During the second quarters of 2010 and 2009, we paid an aggregate of $612,000 and $643,000, respectively, and during the year-to-date periods of 2010 and 2009, we paid an aggregate of $1,352,000 and $1,421,000, respectively, under such arrangements. Of these arrangements, one expires in the year 2075, one expires upon the death of the beneficiary and one remains in effect as long as we operate Perkins restaurants in certain states.
(7) Supplemental Cash Flow Information
Cash and cash equivalents were impacted by the following changes (in thousands) in operating assets and liabilities in the statements of cash flows for the year-to-date periods ended July 11, 2010 and July 12, 2009:
Year-to-Date
|
Year-to-Date
|
|||||||
Ended
|
Ended
|
|||||||
July 11, 2010
|
July 12, 2009
|
|||||||
Decrease (increase) in:
|
||||||||
Restricted cash
|
$ | 648 | 2,100 | |||||
Receivables
|
2,885 | 4,874 | ||||||
Inventories
|
679 | (138 | ) | |||||
Prepaid expenses and other current assets
|
(1,812 | ) | (2,189 | ) | ||||
Other assets
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1,694 | 854 | ||||||
Increase (decrease) in:
|
||||||||
Accounts payable
|
(274 | ) | (5,287 | ) | ||||
Accrued expenses and other current liabilities
|
745 | (3,181 | ) | |||||
Other liabilities
|
3,060 | 2,474 | ||||||
Net changes in operating assets and liabilities
|
$ | 7,625 | (493 | ) |
(8) Goodwill and Intangible Assets
Goodwill
Goodwill of $23,100,000 at both July 11, 2010 and December 27, 2009 was attributable solely to the restaurant operations segment.
Intangible Assets
The components of our identifiable intangible assets are as follows (in thousands):
July 11,
|
December 27,
|
|||||||
2010
|
2009
|
|||||||
Amortizing intangible assets:
|
||||||||
Franchise agreements
|
$ | 35,000 | 35,000 | |||||
Customer relationships
|
10,000 | 10,000 | ||||||
Acquired franchise rights
|
10,758 | 10,758 | ||||||
Design prototype
|
834 | 834 | ||||||
Subtotal
|
56,592 | 56,592 | ||||||
Less — accumulated amortization
|
(21,257 | ) | (20,179 | ) | ||||
Net amortizing intangible assets
|
35,335 | 36,413 | ||||||
Non-amortizing intangible asset:
|
||||||||
Tradenames
|
110,600 | 110,600 | ||||||
Total intangible assets
|
$ | 145,935 | 147,013 |
(9) Accrued Expenses
Accrued expenses consisted of the following (in thousands):
July 11,
|
December 27,
|
|||||||
2010
|
2009
|
|||||||
Payroll and related benefits
|
$ | 14,376 | 15,423 | |||||
Interest
|
7,505 | 6,065 | ||||||
Gift cards and gift certificates
|
3,004 | 5,090 | ||||||
Property, real estate and sales taxes
|
5,294 | 4,267 | ||||||
Insurance
|
2,383 | 2,219 | ||||||
Advertising
|
1,042 | 792 | ||||||
Other
|
7,282 | 7,749 | ||||||
Total accrued expenses
|
$ | 40,886 | 41,605 |
(10) Segment Reporting
We have three reportable segments: restaurant operations, franchise operations and Foxtail. The restaurant operations include the operating results of Company-operated Perkins and Marie Callender’s restaurants. The franchise operations include revenues and expenses directly attributable to franchised Perkins and Marie Callender’s restaurants. Foxtail’s operations consist of three manufacturing plants: one in Corona, California and two in Cincinnati, Ohio.
Our restaurants operate principally in the U.S. within the family dining and casual dining industries, providing similar products to similar customers. Revenues from restaurant operations are derived principally from food and beverage sales to external customers. Revenues from franchise operations consist primarily of royalty income earned on the revenues generated at franchisees’ restaurants and initial franchise fees. Revenues from Foxtail are generated by the sale of food products to both Company-operated and franchised Perkins and Marie Callender’s restaurants as well as to unaffiliated customers. Foxtail’s sales to Company-operated restaurants are eliminated for reporting purposes. The revenues in the “other” segment are primarily licensing revenues.
The following table presents revenues and other financial information by business segment (in thousands):
Quarter
|
Quarter
|
Year-to-Date
|
Year-to-Date
|
|||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
Revenues
|
July 11, 2010
|
July 12, 2009
|
July 11, 2010
|
July 12, 2009
|
||||||||||||
Restaurant operations
|
$ | 100,961 | 106,495 | 240,566 | 255,723 | |||||||||||
Franchise operations
|
5,288 | 5,305 | 11,959 | 12,249 | ||||||||||||
Foxtail
|
10,901 | 12,942 | 24,366 | 30,504 | ||||||||||||
Intersegment revenue
|
(4,289 | ) | (4,376 | ) | (10,044 | ) | (10,289 | ) | ||||||||
Other
|
1,292 | 1,510 | 3,111 | 2,942 | ||||||||||||
Total
|
$ | 114,153 | 121,876 | 269,958 | 291,129 | |||||||||||
Segment income (loss) attributable to PMCI
|
||||||||||||||||
Restaurant operations
|
3,259 | 5,335 | 8,829 | 14,411 | ||||||||||||
Franchise operations
|
4,742 | 4,840 | 10,867 | 11,269 | ||||||||||||
Foxtail
|
933 | 1,164 | 1,574 | 1,323 | ||||||||||||
Other
|
(20,087 | ) | (17,219 | ) | (47,029 | ) | (42,637 | ) | ||||||||
Total
|
$ | (11,153 | ) | (5,880 | ) | (25,759 | ) | (15,634 | ) | |||||||
Segment assets
|
July 11,
2010
|
December 27, 2009
|
||||||||||||||
Restaurant operations
|
122,740 | 132,611 | ||||||||||||||
Franchise operations
|
101,359 | 101,672 | ||||||||||||||
Foxtail
|
29,175 | 31,754 | ||||||||||||||
Other
|
33,700 | 38,868 | ||||||||||||||
Total
|
$ | 286,974 | 304,905 |
|
The components of other segment loss are as follows (in thousands):
Quarter
|
Quarter
|
Year-to-Date
|
Year-to-Date
|
|||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
July 11, 2010
|
July 12, 2009
|
July 11, 2010
|
July 12, 2009
|
|||||||||||||
General and administrative expenses
|
$ | 9,993 | 9,079 | 22,674 | 21,229 | |||||||||||
Depreciation and amortization expenses
|
721 | 784 | 1,677 | 1,821 | ||||||||||||
Interest expense, net
|
10,299 | 10,130 | 23,864 | 23,745 | ||||||||||||
Loss (gain) on disposition of assets, net
|
(102 | ) | 114 | (168 | ) | 774 | ||||||||||
Asset impairments
|
542 | 232 | 2,273 | 434 | ||||||||||||
Net earnings attributable to non-controlling interests
|
(1 | ) | 33 | 7 | 79 | |||||||||||
Licensing revenue
|
(1,258 | ) | (1,448 | ) | (2,990 | ) | (2,808 | ) | ||||||||
Other
|
(107 | ) | (1,705 | ) | (308 | ) | (2,637 | ) | ||||||||
Total other segment loss
|
$ | 20,087 | 17,219 | 47,029 | 42,637 |
(11) Long-Term Debt
Secured Notes and 10% Senior Notes
On September 24, 2008, the Company issued $132,000,000 of 14% senior secured notes (the "Secured Notes"). The Secured Notes were issued at a discount of $7,537,200, which is being accreted using the interest method over the term of the Secured Notes. The Secured Notes will mature on May 31, 2013, and interest is payable semi-annually on May 31 and November 30 of each year.
In September 2005, the Company issued $190,000,000 of 10% senior unsecured notes (the “10% Senior Notes”). The 10% Senior Notes were issued at a discount of $2,570,700, which is being accreted using the interest method over the term of the 10% Senior Notes. The 10% Senior Notes will mature on October 1, 2013, and interest is payable semi-annually on April 1 and October 1 of each year. All consolidated subsidiaries of the Company that are 100% owned provide joint and several, full and unconditional guarantees of the 10% Senior Notes. There are no significant restrictions on the Company’s ability to obtain funds from any of the guarantor subsidiaries in the form of a dividend or a loan. Additionally, there are no significant restrictions on a guarantor subsidiary’s ability to obtain funds from the Company or its direct or indirect subsidiaries.
The indentures for the Secured Notes and the 10% Senior Notes contain various customary events of default, including, without limitation: (i) nonpayment of principal or interest; (ii) cross-defaults with certain other indebtedness; (iii) certain bankruptcy related events; (iv) invalidity of guarantees; (v) monetary judgment defaults; and (vi) certain change of control events. In addition, any impairment of the security interest in the Secured Notes collateral will constitute an event of default under the indenture for the Secured Notes.
Revolver
On September 24, 2008, the Company entered into the Revolver. The Revolver, which matures on February 28, 2013, is guaranteed by Perkins & Marie Callender's Holding Inc. and certain of the Company's existing and future subsidiaries. The Revolver is secured by a first priority perfected security interest in all of the Company's property and assets and the property and assets of each guarantor. Subject to the satisfaction of the conditions contained therein, up to $26,000,000 may be borrowed under the Revolver from time to time. The Revolver includes a sub-facility for letters of credit in an amount not to exceed $15,000,000.
Amounts outstanding under the Revolver bear interest, at the Company’s option, at a rate per annum equal to either: (i) the base rate, as defined in the Revolver, plus an applicable margin or (ii) a LIBOR-based equivalent, plus an applicable margin. For the foreseeable future, margins are expected to be 325 basis points for base rate loans and 425 basis points for LIBOR loans. As of July 11, 2010, the average annual interest rate on aggregate borrowings under the Revolver was 7.8%, and the Revolver permitted additional borrowings of approximately $296,000 (after giving effect to $15,485,000 in borrowings and $10,219,000 in letters of credit outstanding). The letters of credit are primarily utilized in conjunction with our workers’ compensation programs.
The Revolver contains various affirmative and negative covenants, including, but not limited to a financial covenant for the Company to maintain at least $30,000,000 of trailing 13-period EBITDA, as defined in the Revolver, and limits the Company’s ability to make capital expenditures.
The average interest rate on aggregate borrowings of the Company’s long-term debt for the year-to-date period through July 11, 2010 was 11.6% compared to the average interest rate on aggregate borrowings for the year-to-date period through July 12, 2009 of 11.5%.
Our debt agreements place restrictions on the Company’s ability and the ability of its subsidiaries to: (i) incur additional indebtedness or issue certain preferred stock; (ii) repay certain indebtedness prior to stated maturities; (iii) pay dividends or make other distributions on, redeem or repurchase capital stock or subordinated indebtedness; (iv) make certain investments or other restricted payments; (v) enter into transactions with affiliates; (vi) issue stock of subsidiaries; (vii) transfer, sell or consummate a merger or consolidation of all, or substantially all, of the Company's assets; (viii) change lines of business; (ix) incur dividend or other payment restrictions with regard to restricted subsidiaries; (x) create or incur liens on assets to secure debt; (xi) dispose of assets; (xii) restrict distributions from subsidiaries; (xiii) make certain acquisitions; (xiv) make capital expenditures; or (xv) amend the terms of the Secured Notes and the 10% Senior Notes. As of July 11, 2010 we were in compliance with the covenants contained in our debt agreements.
(12) Income Taxes
The effective income tax rates for the second quarters ended July 11, 2010 and July 12, 2009 were 0.0%. Our rates differ from the statutory rate primarily due to a valuation allowance against deferred tax deductions, losses and credits.
A reconciliation of the change in the gross unrecognized tax benefits from December 28, 2009 to July 11, 2010 is as follows (in thousands):
2010
|
||||
Unrecognized tax benefit - beginning of fiscal year
|
$ | 1,153 | ||
Additions for tax positions of prior years
|
- | |||
Reductions for tax positions of prior years
|
- | |||
Additions for tax positions of current year
|
- | |||
Reductions due to settlements
|
- | |||
Reductions for lapse of statute of limitations
|
- | |||
Unrecognized tax benefit - as of July 11, 2010
|
$ | 1,153 |
As of July 11, 2010 and December 27, 2009 the Company had approximately $943,000 of unrecognized tax benefits that, if recognized, would impact the Company’s effective tax rate, except for approximately $160,000 which is subject to tax indemnification from the predecessor owner. As of July 11, 2010 and December 27, 2009 the Company had $805,000 of unrecognized tax benefits reducing Federal and state net operating loss carry forwards and Federal credit carry forwards that, if recognized, would be subject to a valuation allowance. The Company expects that the total amount of its gross unrecognized tax benefits will decrease between $32,000 and $432,000 within the next 12 months due to Federal and state settlements and expiration of statutes.
(13) P&MC’s Holding LLC Equity Plan and Other Related Party Transactions
Equity Plan
Effective April 1, 2007, P&MC’s Holding LLC established a management equity incentive plan (the “Equity Plan”) for the benefit of key Company employees. The Equity Plan provides the following two types of equity ownership in P&MC’s Holding LLC: (i) Strip Subscription Units, which consist of Class A Units and Class C Units and (ii) Incentive Units, which consist of time vesting Class C Units.
Stock-based compensation expense for the quarterly and year-to-date periods ended July 11, 2010 and July 12, 2009 was not material.
If an employee is employed as of the date of the occurrence of certain change in control events, as defined in the Equity Plan, the employee’s outstanding but unvested Incentive Units vest simultaneously with the consummation of the change in control event. Upon termination of employment, unvested Incentive Units are forfeited and vested Incentive Units and Strip Subscription Units are subject to repurchase, at a price not to exceed fair value, pursuant to the terms of P&MC’s Holding LLC’s unitholders agreement.
Other Related Party Transactions
In September 2009, P&MC’s Real Estate Holding LLC, the indirect parent of the Company, purchased a building in California that was being leased by the Company for the operation of a Marie Callender’s restaurant and assumed the Company’s obligations under the related ground lease. In connection with the purchase of the building, the Company’s existing building lease was terminated. P&MC’s Real Estate Holding LLC has agreed to allow the Company to use the building and defer collection of building rent at this time. The Company will continue to operate the Marie Callender’s restaurant in the building and will pay the underlying ground lease. As a result of these transactions, the Company has imputed rent of $18,500 per period, based on the fair value of the building and local rental rate, and is accruing this amount in deferred rent on its consolidated balance sheets.
(14) Recent Accounting Developments
Subsequent Events
In May 2009, the FASB issued ASC 855, “Subsequent Events,” which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance was effective for interim and annual periods ending after June 15, 2009.
In February 2010, the FASB issued ASU 2010-09, which amends ASC 855 to address certain implementation issues related to performing and disclosing subsequent events procedures. The Company included the requirements of this guidance in the preparation of the accompanying financial statements.
(15) Deficit
A summary of the changes in deficit for the year-to-date periods ended July 11, 2010 and July 12, 2009 is provided below (in thousands):
Year-to-Date Ended July 11, 2010
|
||||||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||||||
Additional
|
Other
|
Total PMCI
|
||||||||||||||||||||||||||
Common
|
Paid-in
|
Accumulated
|
Comprehensive
|
Stockholder's
|
Non-controlling
|
Total
|
||||||||||||||||||||||
Stock
|
Capital
|
Deficit
|
Income
|
Deficit
|
Interests
|
Deficit
|
||||||||||||||||||||||
Balance, December 27, 2009
|
$ | 1 | 150,870 | (329,333 | ) | 45 | (178,417 | ) | 308 | (178,109 | ) | |||||||||||||||||
Distributions to non-controlling interest holders
|
- | - | - | - | - | (175 | ) | (175 | ) | |||||||||||||||||||
Net (loss) earnings
|
- | - | (25,759 | ) | - | (25,759 | ) | 7 | (25,752 | ) | ||||||||||||||||||
Currency translation adjustment
|
- | - | - | 2 | 2 | - | 2 | |||||||||||||||||||||
Total comprehensive loss
|
(25,750 | ) | ||||||||||||||||||||||||||
Balance, July 11, 2010
|
$ | 1 | 150,870 | (355,092 | ) | 47 | (204,174 | ) | 140 | (204,034 | ) | |||||||||||||||||
Year-to-Date Ended July 12, 2009
|
||||||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||||||
Additional
|
Other
|
Total PMCI
|
||||||||||||||||||||||||||
Common
|
Paid-in
|
Accumulated
|
Comprehensive
|
Stockholder's
|
Non-controlling
|
Total
|
||||||||||||||||||||||
Stock
|
Capital
|
Deficit
|
Income (Loss)
|
Deficit
|
Interests
|
Deficit
|
||||||||||||||||||||||
Balance, December 28, 2008
|
$ | 1 | 149,851 | (293,114 | ) | (4 | ) | (143,266 | ) | 215 | (143,051 | ) | ||||||||||||||||
Distributions to non-controlling interest holders
|
- | - | - | - | - | (71 | ) | (71 | ) | |||||||||||||||||||
Net (loss) earnings
|
- | - | (15,634 | ) | - | (15,634 | ) | 79 | (15,555 | ) | ||||||||||||||||||
Currency translation adjustment
|
- | - | - | 24 | 24 | - | 24 | |||||||||||||||||||||
Total comprehensive loss
|
(15,531 | ) | ||||||||||||||||||||||||||
Balance, July 12, 2009
|
$ | 1 | 149,851 | (308,748 | ) | 20 | (158,876 | ) | 223 | (158,653 | ) |
(16) Condensed Consolidated Financial Information
The 10% Senior Notes and Secured Notes were issued subject to a joint and several, full and unconditional guarantee by all of the Company’s 100% owned domestic subsidiaries. There are no significant restrictions on the Company’s ability to obtain funds from any of the guarantor subsidiaries in the form of a dividend or loan. Additionally, there are no significant restrictions on the guarantor subsidiaries’ ability to obtain funds from the Company or its direct or indirect subsidiaries.
The following consolidating statements of operations, balance sheets and statements of cash flows are provided for the parent company and all subsidiaries. The information has been presented as if the parent company accounted for its ownership of the guarantor and non-guarantor subsidiaries using the equity method of accounting.
Consolidating Statement of Operations for the Quarter ended July 11, 2010 (unaudited; in thousands):
|
||||||||||||||||||||
Non-
|
Consolidated
|
|||||||||||||||||||
Issuer
|
Guarantor
|
Guarantors
|
Eliminations
|
PMCI
|
||||||||||||||||
REVENUES:
|
||||||||||||||||||||
Food sales
|
$ | 66,759 | 35,379 | 5,435 | - | 107,573 | ||||||||||||||
Franchise and other revenue
|
4,571 | 2,009 | - | - | 6,580 | |||||||||||||||
Total revenues
|
71,330 | 37,388 | 5,435 | - | 114,153 | |||||||||||||||
COSTS AND EXPENSES:
|
||||||||||||||||||||
Cost of sales (excluding depreciation shown below):
|
||||||||||||||||||||
Food cost
|
16,378 | 9,604 | 1,452 | - | 27,434 | |||||||||||||||
Labor and benefits
|
23,276 | 13,573 | 1,997 | - | 38,846 | |||||||||||||||
Operating expenses
|
18,709 | 11,692 | 2,133 | - | 32,534 | |||||||||||||||
General and administrative
|
9,569 | 1,266 | - | - | 10,835 | |||||||||||||||
Depreciation and amortization
|
3,739 | 1,150 | 170 | - | 5,059 | |||||||||||||||
Interest, net
|
10,221 | 78 | - | - | 10,299 | |||||||||||||||
Asset impairments and closed store expenses
|
51 | 389 | - | - | 440 | |||||||||||||||
Other, net
|
(235 | ) | 95 | - | - | (140 | ) | |||||||||||||
Total costs and expenses
|
81,708 | 37,847 | 5,752 | - | 125,307 | |||||||||||||||
Loss before income taxes
|
(10,378 | ) | (459 | ) | (317 | ) | - | (11,154 | ) | |||||||||||
Benefit from (provision for) income taxes
|
- | - | - | - | - | |||||||||||||||
Net loss
|
(10,378 | ) | (459 | ) | (317 | ) | - | (11,154 | ) | |||||||||||
Less: net loss attributable to non-controlling interests
|
- | - | (1 | ) | - | (1 | ) | |||||||||||||
Equity in earnings (loss) of subsidiaries
|
(776 | ) | - | - | 776 | - | ||||||||||||||
Net (loss) income attributable to Perkins & Marie Callender's Inc.
|
$ | (11,154 | ) | (459 | ) | (316 | ) | 776 | (11,153 | ) |
Consolidating Statement of Operations for the Quarter ended July 12, 2009 (unaudited; in thousands):
|
||||||||||||||||||||
Non-
|
Consolidated
|
|||||||||||||||||||
Issuer
|
Guarantor
|
Guarantors
|
Eliminations
|
PMCI
|
||||||||||||||||
REVENUES:
|
||||||||||||||||||||
Food sales
|
$ | 71,865 | 37,443 | 5,753 | - | 115,061 | ||||||||||||||
Franchise and other revenue
|
4,608 | 2,207 | - | - | 6,815 | |||||||||||||||
Total revenues
|
76,473 | 39,650 | 5,753 | - | 121,876 | |||||||||||||||
COSTS AND EXPENSES:
|
||||||||||||||||||||
Cost of sales (excluding depreciation shown below):
|
||||||||||||||||||||
Food cost
|
18,918 | 9,265 | 2,118 | - | 30,301 | |||||||||||||||
Labor and benefits
|
24,278 | 15,136 | 1,490 | - | 40,904 | |||||||||||||||
Operating expenses
|
18,407 | 11,511 | 2,154 | - | 32,072 | |||||||||||||||
General and administrative
|
8,732 | 1,397 | - | - | 10,129 | |||||||||||||||
Depreciation and amortization
|
4,018 | 1,402 | 137 | - | 5,557 | |||||||||||||||
Interest, net
|
9,915 | 215 | - | - | 10,130 | |||||||||||||||
Asset impairments and closed store expenses
|
63 | 274 | 9 | - | 346 | |||||||||||||||
Other, net
|
(139 | ) | (1,577 | ) | - | - | (1,716 | ) | ||||||||||||
Total costs and expenses
|
84,192 | 37,623 | 5,908 | - | 127,723 | |||||||||||||||
Profit (loss) before income taxes
|
(7,719 | ) | 2,027 | (155 | ) | - | (5,847 | ) | ||||||||||||
Benefit from (provision for) income taxes
|
- | - | - | - | - | |||||||||||||||
Net profit (loss)
|
(7,719 | ) | 2,027 | (155 | ) | - | (5,847 | ) | ||||||||||||
Less: net earnings attributable to non-controlling interests
|
- | - | 33 | - | 33 | |||||||||||||||
Equity in earnings (loss) of subsidiaries
|
1,872 | - | - | (1,872 | ) | - | ||||||||||||||
Net (loss) income attributable to Perkins & Marie Callender's Inc.
|
$ | (5,847 | ) | 2,027 | (188 | ) | (1,872 | ) | (5,880 | ) |
Consolidating Statement of Operations for the Year-to-Date Period ended July 11, 2010 (unaudited; in thousands):
|
||||||||||||||||||||
Non-
|
Consolidated
|
|||||||||||||||||||
Issuer
|
Guarantor
|
Guarantors
|
Eliminations
|
PMCI
|
||||||||||||||||
REVENUES:
|
||||||||||||||||||||
Food sales
|
$ | 159,118 | 82,915 | 12,855 | - | 254,888 | ||||||||||||||
Franchise and other revenue
|
10,212 | 4,857 | 1 | - | 15,070 | |||||||||||||||
Total revenues
|
169,330 | 87,772 | 12,856 | - | 269,958 | |||||||||||||||
COSTS AND EXPENSES:
|
||||||||||||||||||||
Cost of sales (excluding depreciation shown below):
|
||||||||||||||||||||
Food cost
|
39,176 | 22,121 | 3,419 | - | 64,716 | |||||||||||||||
Labor and benefits
|
55,705 | 31,864 | 4,639 | - | 92,208 | |||||||||||||||
Operating expenses
|
44,532 | 26,810 | 4,927 | - | 76,269 | |||||||||||||||
General and administrative
|
22,109 | 2,832 | - | - | 24,941 | |||||||||||||||
Depreciation and amortization
|
8,813 | 2,759 | 393 | - | 11,965 | |||||||||||||||
Interest, net
|
23,703 | 161 | - | - | 23,864 | |||||||||||||||
Asset impairments and closed store expenses
|
876 | 1,223 | 6 | - | 2,105 | |||||||||||||||
Other, net
|
(361 | ) | 3 | - | - | (358 | ) | |||||||||||||
Total costs and expenses
|
194,553 | 87,773 | 13,384 | - | 295,710 | |||||||||||||||
Loss before income taxes
|
(25,223 | ) | (1 | ) | (528 | ) | - | (25,752 | ) | |||||||||||
Benefit from (provision for) income taxes
|
- | - | - | - | - | |||||||||||||||
Net loss
|
(25,223 | ) | (1 | ) | (528 | ) | - | (25,752 | ) | |||||||||||
Less: net earnings attributable to non-controlling interests
|
- | - | 7 | - | 7 | |||||||||||||||
Equity in earnings (loss) of subsidiaries
|
(529 | ) | - | - | 529 | - | ||||||||||||||
Net (loss) income attributable to Perkins & Marie Callender's Inc.
|
$ | (25,752 | ) | (1 | ) | (535 | ) | 529 | (25,759 | ) |
Consolidating Statement of Operations for the Year-to-Date Period ended July 12, 2009 (unaudited; in thousands):
|
||||||||||||||||||||
Non-
|
Consolidated
|
|||||||||||||||||||
Issuer
|
Guarantor
|
Guarantors
|
Eliminations
|
PMCI
|
||||||||||||||||
REVENUES:
|
||||||||||||||||||||
Food sales
|
$ | 173,591 | 88,582 | 13,765 | - | 275,938 | ||||||||||||||
Franchise and other revenue
|
10,391 | 4,800 | - | - | 15,191 | |||||||||||||||
Total revenues
|
183,982 | 93,382 | 13,765 | - | 291,129 | |||||||||||||||
COSTS AND EXPENSES:
|
||||||||||||||||||||
Cost of sales (excluding depreciation shown below):
|
||||||||||||||||||||
Food cost
|
45,763 | 23,884 | 3,628 | - | 73,275 | |||||||||||||||
Labor and benefits
|
57,745 | 33,494 | 4,990 | - | 96,229 | |||||||||||||||
Operating expenses
|
45,778 | 26,977 | 5,018 | - | 77,773 | |||||||||||||||
General and administrative
|
21,080 | 3,138 | - | - | 24,218 | |||||||||||||||
Depreciation and amortization
|
9,454 | 3,130 | 329 | - | 12,913 | |||||||||||||||
Interest, net
|
23,296 | 449 | - | - | 23,745 | |||||||||||||||
Asset impairments and closed store expenses
|
824 | 295 | 89 | - | 1,208 | |||||||||||||||
Other, net
|
(1,101 | ) | (1,576 | ) | - | - | (2,677 | ) | ||||||||||||
Total costs and expenses
|
202,839 | 89,791 | 14,054 | - | 306,684 | |||||||||||||||
Profit (loss) before income taxes
|
(18,857 | ) | 3,591 | (289 | ) | - | (15,555 | ) | ||||||||||||
Benefit from (provision for) income taxes
|
- | - | - | - | - | |||||||||||||||
Net profit (loss)
|
(18,857 | ) | 3,591 | (289 | ) | - | (15,555 | ) | ||||||||||||
Less: net earnings attributable to non-controlling interests
|
- | - | 79 | - | 79 | |||||||||||||||
Equity in earnings (loss) of subsidiaries
|
3,302 | - | - | (3,302 | ) | - | ||||||||||||||
Net (loss) income attributable to Perkins & Marie Callender's Inc.
|
$ | (15,555 | ) | 3,591 | (368 | ) | (3,302 | ) | (15,634 | ) |
Consolidating Balance Sheet as of July 11, 2010 (unaudited; in thousands):
|
||||||||||||||||||||
Non-
|
Consolidated
|
|||||||||||||||||||
Issuer
|
Guarantor
|
Guarantors
|
Eliminations
|
PMCI
|
||||||||||||||||
ASSETS
|
||||||||||||||||||||
CURRENT ASSETS:
|
||||||||||||||||||||
Cash and cash equivalents
|
$ | 1,458 | 204 | 601 | - | 2,263 | ||||||||||||||
Restricted cash | 7,462 | - | - | - | 7,462 | |||||||||||||||
Receivables, less allowances for
doubtful accounts
|
9,940 | 5,196 | 5 | - | 15,141 | |||||||||||||||
Inventories
|
7,446 | 2,749 | 188 | - | 10,383 | |||||||||||||||
Prepaid expenses and other current assets
|
2,909 | 761 | 6 | - | 3,676 | |||||||||||||||
Assets held for sale, net
|
1,304 | - | - | - | 1,304 | |||||||||||||||
Total current assets
|
30,519 | 8,910 | 800 | - | 40,229 | |||||||||||||||
PROPERTY AND EQUIPMENT, net
|
43,549 | 17,280 | 2,158 | - | 62,987 | |||||||||||||||
INVESTMENT IN
UNCONSOLIDATED PARTNERSHIP
|
- | 24 | 9 | - | 33 | |||||||||||||||
GOODWILL
|
23,100 | - | - | - | 23,100 | |||||||||||||||
INTANGIBLE ASSETS, net
|
145,841 | 94 | - | - | 145,935 | |||||||||||||||
INVESTMENTS IN SUBSIDIARIES
|
(79,517 | ) | - | - | 79,517 | - | ||||||||||||||
DUE FROM SUBSIDIARIES
|
79,204 | - | - | (79,204 | ) | - | ||||||||||||||
OTHER ASSETS
|
13,354 | 1,126 | 210 | - | 14,690 | |||||||||||||||
TOTAL ASSETS
|
$ | 256,050 | 27,434 | 3,177 | 313 | 286,974 | ||||||||||||||
LIABILITIES AND EQUITY (DEFICIT)
|
||||||||||||||||||||
CURRENT LIABILITIES:
|
||||||||||||||||||||
Accounts payable
|
9,202 | 4,742 | 439 | - | 14,383 | |||||||||||||||
Accrued expenses
|
31,844 | 7,898 | 1,144 | - | 40,886 | |||||||||||||||
Franchise advertising contributions
|
5,265 | - | - | - | 5,265 | |||||||||||||||
Current maturities of long-term debt and
capital lease obligations
|
162 | 217 | - | - | 379 | |||||||||||||||
Total current liabilities
|
46,473 | 12,857 | 1,583 | - | 60,913 | |||||||||||||||
LONG-TERM DEBT, less current
maturities
|
331,303 | - | - | - | 331,303 | |||||||||||||||
CAPITAL LEASE OBLIGATIONS, less
current maturities
|
8,026 | 2,880 | - | - | 10,906 | |||||||||||||||
DEFERRED RENT
|
13,749 | 4,671 | 58 | - | 18,478 | |||||||||||||||
OTHER LIABILITIES
|
15,216 | 8,735 | - | - | 23,951 | |||||||||||||||
DEFERRED INCOME TAXES
|
45,457 | - | - | - | 45,457 | |||||||||||||||
DUE TO PARENT
|
- | 77,764 | 1,440 | (79,204 | ) | - | ||||||||||||||
EQUITY (DEFICIT):
|
||||||||||||||||||||
Common stock
|
1 | - | - | - | 1 | |||||||||||||||
Preferred stock
|
- | 64,296 | - | (64,296 | ) | - | ||||||||||||||
Capital in excess of par
|
- | 9,338 | - | (9,338 | ) | - | ||||||||||||||
Additional paid-in capital
|
150,870 | - | - | - | 150,870 | |||||||||||||||
Treasury stock
|
- | (137 | ) | - | 137 | - | ||||||||||||||
Accumulated other comprehensive income
|
47 | - | - | - | 47 | |||||||||||||||
Accumulated (deficit) earnings
|
(355,092 | ) | (152,970 | ) | (44 | ) | 153,014 | (355,092 | ) | |||||||||||
Total PMCI stockholder's (deficit) investment
|
(204,174 | ) | (79,473 | ) | (44 | ) | 79,517 | (204,174 | ) | |||||||||||
Non-controlling interests
|
- | - | 140 | - | 140 | |||||||||||||||
Total equity (deficit)
|
(204,174 | ) | (79,473 | ) | 96 | 79,517 | (204,034 | ) | ||||||||||||
TOTAL LIABILITIES AND EQUITY (DEFICIT)
|
$ | 256,050 | 27,434 | 3,177 | 313 | 286,974 |
Consolidating Balance Sheet as of December 27, 2009 (in thousands): | ||||||||||||||||||||
Non-
|
Consolidated
|
|||||||||||||||||||
Issuer
|
Guarantor
|
Guarantors
|
Eliminations
|
PMCI
|
||||||||||||||||
ASSETS
|
||||||||||||||||||||
CURRENT ASSETS:
|
||||||||||||||||||||
Cash and cash equivalents
|
$ | 2,013 | 1,293 | 982 | - | 4,288 | ||||||||||||||
Restricted cash
|
8,110 | - | - | - | 8,110 | |||||||||||||||
Receivables, less allowances for
doubtful accounts
|
11,070 | 7,048 | 7 | - | 18,125 | |||||||||||||||
Inventories
|
8,038 | 2,793 | 231 | - | 11,062 | |||||||||||||||
Prepaid expenses and other current assets
|
1,613 | 248 | 3 | - | 1,864 | |||||||||||||||
Total current assets
|
30,844 | 11,382 | 1,223 | - | 43,449 | |||||||||||||||
PROPERTY AND EQUIPMENT, net
|
52,217 | 20,530 | 2,472 | - | 75,219 | |||||||||||||||
INVESTMENT IN
UNCONSOLIDATED PARTNERSHIP
|
- | 41 | 9 | - | 50 | |||||||||||||||
GOODWILL
|
23,100 | - | - | - | 23,100 | |||||||||||||||
INTANGIBLE ASSETS, net
|
146,889 | 124 | - | - | 147,013 | |||||||||||||||
INVESTMENTS IN SUBSIDIARIES
|
(78,981 | ) | - | - | 78,981 | - | ||||||||||||||
DUE FROM SUBSIDIARIES
|
81,493 | - | - | (81,493 | ) | - | ||||||||||||||
OTHER ASSETS
|
14,321 | 1,543 | 210 | - | 16,074 | |||||||||||||||
TOTAL ASSETS
|
$ | 269,883 | 33,620 | 3,914 | (2,512 | ) | 304,905 | |||||||||||||
LIABILITIES AND EQUITY (DEFICIT)
|
||||||||||||||||||||
CURRENT LIABILITIES:
|
||||||||||||||||||||
Accounts payable
|
$ | 7,946 | 6,074 | 637 | - | 14,657 | ||||||||||||||
Accrued expenses
|
30,628 | 9,635 | 1,342 | - | 41,605 | |||||||||||||||
Franchise advertising contributions
|
4,327 | - | - | - | 4,327 | |||||||||||||||
Current maturities of long-term debt and
capital lease obligations
|
186 | 317 | - | - | 503 | |||||||||||||||
Total current liabilities
|
43,087 | 16,026 | 1,979 | - | 61,092 | |||||||||||||||
LONG-TERM DEBT, less current
maturities
|
326,042 | - | - | - | 326,042 | |||||||||||||||
CAPITAL LEASE OBLIGATIONS, less
current maturities
|
8,085 | 2,969 | - | - | 11,054 | |||||||||||||||
DEFERRED RENT
|
12,263 | 4,765 | 64 | - | 17,092 | |||||||||||||||
OTHER LIABILITIES
|
13,366 | 8,911 | - | - | 22,277 | |||||||||||||||
DEFERRED INCOME TAXES
|
45,457 | - | - | - | 45,457 | |||||||||||||||
DUE TO PARENT
|
- | 80,421 | 1,072 | (81,493 | ) | - | ||||||||||||||
EQUITY (DEFICIT):
|
||||||||||||||||||||
Common stock
|
1 | - | - | - | 1 | |||||||||||||||
Preferred stock
|
- | 64,296 | - | (64,296 | ) | - | ||||||||||||||
Capital in excess of par
|
- | 9,338 | - | (9,338 | ) | - | ||||||||||||||
Additional paid-in capital
|
150,870 | - | - | - | 150,870 | |||||||||||||||
Treasury stock
|
- | (137 | ) | - | 137 | - | ||||||||||||||
Accumulated other comprehensive income
|
45 | - | - | - | 45 | |||||||||||||||
Accumulated (deficit) earnings
|
(329,333 | ) | (152,969 | ) | 491 | 152,478 | (329,333 | ) | ||||||||||||
Total PMCI stockholder's (deficit) investment
|
(178,417 | ) | (79,472 | ) | 491 | 78,981 | (178,417 | ) | ||||||||||||
Non-controlling interests
|
- | - | 308 | - | 308 | |||||||||||||||
Total equity (deficit)
|
(178,417 | ) | (79,472 | ) | 799 | 78,981 | (178,109 | ) | ||||||||||||
TOTAL LIABILITIES AND EQUITY (DEFICIT)
|
$ | 269,883 | 33,620 | 3,914 | (2,512 | ) | 304,905 |
Consolidating Statement of Cash Flows for the Year-to-Date Period ended July 11, 2010 (unaudited; in thousands):
|
||||||||||||||||||||
Non-
|
Consolidated
|
|||||||||||||||||||
Issuer
|
Guarantor
|
Guarantors
|
Eliminations
|
PMCI
|
||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||||||||||
Net (loss) income
|
$ | (25,752 | ) | (1 | ) | (528 | ) | 529 | (25,752 | ) | ||||||||||
Adjustments to reconcile net (loss) income to net cash
|
||||||||||||||||||||
(used in) provided by operating activities:
|
||||||||||||||||||||
Equity in earnings (loss) of subsidiaries
|
529 | - | - | (529 | ) | - | ||||||||||||||
Depreciation and amortization
|
8,813 | 2,759 | 393 | - | 11,965 | |||||||||||||||
Asset impairments
|
997 | 1,270 | 6 | - | 2,273 | |||||||||||||||
Amortization of debt discount
|
946 | - | - | - | 946 | |||||||||||||||
Other non-cash income items
|
(144 | ) | (88 | ) | - | - | (232 | ) | ||||||||||||
Gain on disposition of assets
|
(121 | ) | (47 | ) | - | - | (168 | ) | ||||||||||||
Equity in loss of unconsolidated partnership
|
- | 17 | - | - | 17 | |||||||||||||||
Net changes in operating assets and liabilities
|
9,348 | (1,363 | ) | (360 | ) | - | 7,625 | |||||||||||||
Total adjustments
|
20,368 | 2,548 | 39 | (529 | ) | 22,426 | ||||||||||||||
Net cash (used in) provided by operating activities
|
(5,384 | ) | 2,547 | (489 | ) | - | (3,326 | ) | ||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||||||||||
Purchases of property and equipment
|
(1,692 | ) | (795 | ) | (85 | ) | - | (2,572 | ) | |||||||||||
Proceeds from sale of assets
|
- | 5 | - | - | 5 | |||||||||||||||
Net cash used in investing activities
|
(1,692 | ) | (790 | ) | (85 | ) | - | (2,567 | ) | |||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||||||
Proceeds from revolving credit facilities
|
17,759 | - | - | - | 17,759 | |||||||||||||||
Repayment of revolving credit facilities
|
(13,444 | ) | - | - | - | (13,444 | ) | |||||||||||||
Repayment of capital lease obligations
|
(83 | ) | (179 | ) | - | - | (262 | ) | ||||||||||||
Repayment of other debt
|
- | (10 | ) | - | - | (10 | ) | |||||||||||||
Distributions to non-controlling interest holders
|
- | - | (175 | ) | - | (175 | ) | |||||||||||||
Intercompany financing
|
2,289 | (2,657 | ) | 368 | - | - | ||||||||||||||
Net cash provided by (used in) financing activities
|
6,521 | (2,846 | ) | 193 | - | 3,868 | ||||||||||||||
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
(555) | (1,089 | ) | (381 | ) | - | (2,025 | ) | ||||||||||||
CASH AND CASH EQUIVALENTS:
|
||||||||||||||||||||
Balance, beginning of period
|
2,013 | 1,293 | 982 | - | 4,288 | |||||||||||||||
Balance, end of period
|
$ | 1,458 | 204 | 601 | - | 2,263 |
Consolidating Statement of Cash Flows for the Year-to-Date Period ended July 12, 2009 (unaudited; in thousands):
|
||||||||||||||||||||
Non-
|
Consolidated
|
|||||||||||||||||||
Issuer
|
Guarantor
|
Guarantors
|
Eliminations
|
PMCI
|
||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||||||||||
Net (loss) income
|
$ | (15,555 | ) | 3,591 | (289 | ) | (3,302 | ) | (15,555 | ) | ||||||||||
Adjustments to reconcile net (loss) income to net cash
|
||||||||||||||||||||
provided by (used in) operating activities:
|
||||||||||||||||||||
Equity in (loss) earnings of subsidiaries
|
(3,302 | ) | - | - | 3,302 | - | ||||||||||||||
Depreciation and amortization
|
9,454 | 3,130 | 329 | - | 12,913 | |||||||||||||||
Asset impairments
|
131 | 214 | 89 | - | 434 | |||||||||||||||
Amortization of debt discount
|
829 | - | - | - | 829 | |||||||||||||||
Other non-cash income items
|
(982 | ) | (1,362 | ) | - | - | (2,344 | ) | ||||||||||||
Loss on disposition of assets
|
693 | 81 | - | - | 774 | |||||||||||||||
Equity in net loss of unconsolidated partnership
|
- | 8 | - | - | 8 | |||||||||||||||
Net changes in operating assets and liabilities
|
941 | (1,268 | ) | (166 | ) | - | (493 | ) | ||||||||||||
Total adjustments
|
7,764 | 803 | 252 | 3,302 | 12,121 | |||||||||||||||
Net cash (used in) provided by operating activities
|
(7,791 | ) | 4,394 | (37 | ) | - | (3,434 | ) | ||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||||||||||
Purchases of property and equipment
|
(2,126 | ) | (1,628 | ) | (562 | ) | - | (4,316 | ) | |||||||||||
Proceeds from sale of assets
|
483 | 7 | - | - | 490 | |||||||||||||||
Net cash used in investing activities
|
(1,643 | ) | (1,621 | ) | (562 | ) | - | (3,826 | ) | |||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||||||
Proceeds from revolving credit facilities
|
18,248 | - | - | - | 18,248 | |||||||||||||||
Repayment of revolving credit facilities
|
(12,719 | ) | - | - | - | (12,719 | ) | |||||||||||||
Repayment of capital lease obligations
|
(91 | ) | (132 | ) | - | - | (223 | ) | ||||||||||||
Repayment of other debt
|
- | (10 | ) | - | - | (10 | ) | |||||||||||||
Debt financing costs
|
(142 | ) | - | - | - | (142 | ) | |||||||||||||
Distributions to non-controlling interest holders
|
- | - | (71 | ) | - | (71 | ) | |||||||||||||
Intercompany financing
|
3,701 | (4,244 | ) | 543 | - | - | ||||||||||||||
Net cash provided by (used in) financing activities
|
8,997 | (4,386 | ) | 472 | - | 5,083 | ||||||||||||||
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
(437 | ) | (1,613 | ) | (127 | ) | - | (2,177 | ) | |||||||||||
CASH AND CASH EQUIVALENTS:
|
||||||||||||||||||||
Balance, beginning of period
|
2,155 | 1,662 | 796 | - | 4,613 | |||||||||||||||
Balance, end of period
|
$ | 1,718 | 49 | 669 | - | 2,436 |
(17) SUBSEQUENT EVENTS:
In August 2010, P&MC’s Holding LLC, the Company’s indirect parent, and affiliates of Castle Harlan reached an agreement involving a lawsuit with a member of P&MC’s Holding LLC and former owner of the direct parent of the Company. As part of this settlement, an affiliate of Castle Harlan has agreed to purchase the member’s units in P&MC’s Holding LLC, and P&MC’s Holding Corp., an indirect parent of the Company, has agreed to file for approximately $4.7 million of tax refunds (the “Refunds”) with respect to the tax period ended September 21, 2005 to utilize certain net operating losses (“NOLs”) of P&MC’s Holding Corp., made possible by recent changes in the tax code.
Under the terms of the 2005 purchase and sale agreement pursuant to which P&MC’s Holding Corp. acquired the stock of the Company’s direct parent (the “2005 Purchase Agreement”), P&MC’s Holding Corp. was not obligated to utilize its NOLs for the benefit of the former owners of the Company’s direct parent; however, if P&MC's Holding Corp. had elected to utilize the NOLs it would have been required under the terms of the 2005 Purchase Agreement to turn over the Refunds to the former owners of the Company’s direct parent. As a part of the settlement, certain indemnities under the 2005 Purchase Agreement were modified and the Company’s indirect parent agreed to file for the Refunds and remit the $4.7 million to the former owners.
As of the end of the second quarter of 2010, the Company and P&MC’s Holding Corp. had no intention of filing for the Refunds because they were neither required to do so nor entitled to retain the Refunds. Additionally, they had no expectation that any of the NOLs would otherwise benefit the Company. Accordingly, a full valuation allowance was recorded for these NOLs. The Company expects that the effects of the settlement and any related adjustments will be recorded in its 2010 third quarter financial statements. The settlement does not have an adverse impact on the Company’s cash flows or financial position.
GENERAL
The following discussion and analysis should be read in conjunction with and is qualified in its entirety by reference to the consolidated financial statements of the Company and accompanying notes included elsewhere in this Form 10-Q. Except for historical information, the discussions in this section contain forward-looking statements that involve risks and uncertainties. Future results could differ materially from those discussed below. See “Information Concerning Forward-Looking Statements.”
OUR COMPANY
References to the “Company,” “us” or “we” refer to Perkins & Marie Callender’s Inc. and its consolidated subsidiaries.
The Company operates two restaurant concepts: (1) full-service family dining restaurants located primarily in the Midwest, Florida and Pennsylvania under the name Perkins Restaurant and Bakery (“Perkins”); and (2) mid-priced, casual dining restaurants, specializing in the sale of pies and other bakery items, located primarily in the western United States under the name Marie Callender’s Restaurant and Bakery (“Marie Callender’s”).
Perkins Restaurant & Bakery
Perkins, founded in 1958, serves a variety of demographically and geographically diverse customers for a wide range of dining occasions that are appropriate for the entire family. Perkins continually adapts its menu, product offerings and building décor to meet changing consumer preferences. As of July 11, 2010, Perkins offered a full menu of over 90 assorted breakfast, lunch, dinner, snack and dessert items ranging in price from $3.89 to $11.99, with an average guest check of $8.93 at our Company-operated Perkins restaurants. Perkins’ signature menu items include our omelettes, secret-recipe real buttermilk pancakes, Mammoth Muffins, the Tremendous Twelve platter, salads, melt sandwiches and Butterball turkey entrees. Breakfast items, which are available throughout the day, account for approximately half of the entrees sold in our Perkins restaurants.
Perkins is a leading operator and franchisor of full-service family dining restaurants. As of July 11, 2010, we franchised 319 restaurants to 109 franchisees in 31 states and 5 Canadian provinces, and we operated 163 restaurants. The footprint of our Company-operated Perkins restaurants extends over 13 states, with a significant number of restaurants in Minnesota and Florida. For the trailing fifty-two weeks ended July 11, 2010, our Company-operated Perkins restaurants generated average annual revenues of $1,664,000 per restaurant.
Perkins’ franchised restaurants operate pursuant to license agreements generally having an initial term of 20 years and requiring both a royalty fee (4% of gross sales) and an advertising contribution (3% of gross sales). Franchisees pay a non-refundable license fee of between $25,000 and $50,000 per restaurant depending on the number of existing franchises and the level of assistance provided by us in opening each 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.
For the quarters ended July 11, 2010 and July 12, 2009, average royalties earned per franchised Perkins restaurant were approximately $14,100 and $14,500, respectively. The following numbers of Perkins’ license agreements have expiration dates in the following periods: 2010 —nineteen; 2011 — thirteen; 2012 — five; 2013 — eight; and 2014 — eighteen. Upon the expiration of their license agreements, franchisees typically apply for and receive new license agreements. Franchisees pay a license agreement renewal fee of $5,000 to $7,500 depending on the length of the renewal term.
Marie Callender’s Restaurant and Bakery
Marie Callender’s is a mid-priced, casual dining concept. Founded in 1948, it has one of the longest operating histories within the full-service dining sector. Marie Callender’s is known for serving quality food in a warm, pleasant atmosphere and for its premium pies that are baked fresh daily. As of July 11, 2010, the Company offered a full menu of over 50 items ranging in price from $5.99 to $18.29. Marie Callender’s signature menu items include pot pies, quiches, a plentiful salad bar and Sunday brunch.
Marie Callender’s operates primarily in the western United States. As of July 11, 2010, we franchised 37 restaurants to 25 franchisees located in four states and Mexico, and we operated 91 Marie Callender’s restaurants. The footprint of our Company-operated Marie Callender’s restaurants extends over nine states with 61 restaurants located in California. For the trailing fifty-two weeks ended July 11, 2010, our Company-operated Marie Callender’s restaurants generated average annual revenues of $2,000,000 per restaurant.
The following table presents the concept name and number of Marie Callender’s restaurants operated by the Company and our franchisees:
Company-
|
||||||||||||||||
Restaurant Name
|
operated
|
Partnerships
|
Franchised
|
Total
|
||||||||||||
Marie Callender's
|
76 | 12 | 36 | 124 | ||||||||||||
Marie Callender's Grill
|
- | - | 1 | 1 | ||||||||||||
Callender's Grill
|
2 | - | - | 2 | ||||||||||||
East Side Mario's
|
1 | - | - | 1 | ||||||||||||
Total
|
79 | 12 | 37 | 128 |
The Company has an ownership interest in the 12 Marie Callender’s restaurants under partnership agreements, with a non-controlling interest in two of the partnership restaurants and a 57% to 95% ownership interest in the remaining ten locations.
Marie Callender’s franchised restaurants operate pursuant to franchise agreements generally having an initial term of 15 years and requiring both a royalty fee (normally 5% of gross sales) and, in most agreements, a specified level of marketing expenditures (currently at 1.5% of gross sales). Franchisees pay a non-refundable initial franchise fee of $25,000 and a training fee of $35,000 prior to opening a restaurant. Franchisees typically have the right to renew the franchise agreement for two terms of five years each.
For the quarters ended July 11, 2010 and July 12, 2009, average royalties earned per franchised restaurant were approximately $19,200 and $17,400, respectively. The following numbers of Marie Callender’s franchise agreements have expiration dates in the following periods: 2010 — two; 2011 — one; 2012 — four; 2013— one; and 2014 — none. Upon the expiration of their franchise agreements, franchisees typically apply for and receive new franchise agreements and pay a franchise agreement renewal fee of $2,500.
Manufacturing
Foxtail manufactures pies, pancake mixes, cookie doughs, muffin batters and other bakery products for both our in-store bakeries and unaffiliated customers. One manufacturing facility in Corona, California produces pies and other bakery products to primarily supply the Marie Callender’s restaurants, and two facilities in Cincinnati, Ohio produce pies, pancake mixes, cookie doughs, muffin batters and other bakery products for the Perkins restaurants and various third-party customers.
KEY FACTORS AFFECTING OUR RESULTS
The key factors that affect our operating results are general economic conditions, competition, our comparable restaurant sales, which are driven by our comparable customer counts and our guest check average, restaurant openings and closings, commodity prices, energy prices, our ability to manage operating expenses, such as food cost, labor and benefits, weather and governmental legislation. Comparable restaurant sales and comparable customer counts are measures of the percentage increase or decrease of the sales and customer counts, respectively, of restaurants open at least fifteen months prior to the start of the comparative year. We do not use new restaurants in our calculation of comparable restaurant sales until they are open for at least fifteen months in order to allow a new restaurant’s operations time to stabilize and provide more comparable results.
The results of the franchise operations are mainly impacted by the same factors as those impacting our restaurant segments, excluding the operating cost factors since franchise segment profit is earned primarily through royalty income.
Like much of the restaurant industry, we view comparable restaurant sales as a key performance metric at the individual restaurant level, within regions and throughout our Company. With our information systems, we monitor comparable restaurant sales on a daily, weekly and period basis on a restaurant-by-restaurant basis. The primary drivers of comparable restaurant sales performance are changes in the average guest check and changes in the number of customers, or customer count. Average guest check is primarily affected by menu price changes and changes in the mix of items purchased by our customers. We also monitor entree count, which we believe is indicative of overall customer traffic patterns. To increase restaurant sales, we focus marketing and promotional efforts on increasing customer visits and sales of particular products. Restaurant sales performance is also affected by other factors, such as food quality, the level and consistency of service within our restaurants and franchised restaurants, the attractiveness and physical condition of our restaurants and franchised restaurants, as well as local, regional and national competitive and economic factors.
Marie Callender’s food cost percentage is traditionally higher than Perkins food cost percentage primarily as a result of a greater portion of sales that are derived from lunch and dinner items, which typically carry higher food costs than breakfast items.
The operating results of Foxtail are impacted mainly by the following factors: sales of our Company-operated and franchise restaurants, orders from our external customer base, general economic conditions, labor and employee benefit expenses, production efficiency, commodity prices, energy prices, Perkins and Marie Callender’s restaurant openings and closings, governmental regulation and food safety requirements.
The latter half of fiscal 2008, fiscal 2009 and the first half of fiscal 2010 have been challenging for the family and casual dining segments of the restaurant industry. Largely as a result of the ongoing economic downturn, we experienced a decrease in comparable sales for both Perkins and Marie Callender’s in the quarters ended July 11, 2010 and July 12, 2009. We believe that the ongoing uncertainty in the economy, the high unemployment levels, continued depressed residential real estate values, especially in some of our larger markets, and the level of home foreclosures has adversely affected our guest counts and, in turn, our operating results and cash flows from operations. Consequently, we have experienced declining profits. If the current economic conditions persist or worsen, our revenues are likely to continue to suffer and our losses could increase.
In comparison to the second fiscal quarter of 2009, comparable sales at Perkins’ Company-operated restaurants decreased by 5.1% and comparable sales at Marie Callender’s Company-operated restaurants decreased by 5.6%. These declines in comparable sales resulted primarily from decreases in comparable guest counts at both concepts. Management believes the decline in comparable guest counts for both concepts is attributable primarily to changes in consumer spending habits due to continuing adverse economic conditions that are impacting the restaurant industry, especially in some of our larger markets.
OPERATIONS, FINANCIAL POSITION AND LIQUIDITY
Our principal sources of liquidity include cash, available borrowings under our $26,000,000 revolving credit facility (the “Revolver”) and cash generated by operations. Our principal uses of liquidity are costs and expenses associated with our restaurant and manufacturing operations, debt service payments and capital expenditures. At July 11, 2010, we had a negative working capital balance of $20,684,000 and total PMCI stockholder’s deficit of $204,174,000. Furthermore, at July 11, 2010, we had $2,263,000 in unrestricted cash and $296,000 of borrowing capacity under our Revolver.
The controlling equity holder of P&MC’s Holding LLC, our indirect parent, is in the process of finalizing the terms of an agreement with a third party, which would be entered into by the Company and guaranteed by one of the equity holder’s affiliates. Under this agreement, the third party will provide a new letter of credit of approximately $8.6 million for the benefit of an insurance company that provides workers’ compensation insurance for the Company. The Company expects the new letter of credit and the related guarantee to be entered into by September 15, 2010. This new letter of credit will be in force through December 9, 2010, and will contain certain renewal provisions for extension beyond that date. The Company currently has an existing letter of credit in place under its Revolver for the benefit of this insurance company. While this new letter of credit agreement is in place, the Company will not need to maintain the letter of credit provided under its Revolver, and will therefore have, under its Revolver, incremental borrowing capacity of approximately $8.6 million to fund its current seasonal liquidity needs. Based on our current expectations, we do not expect that we will need the additional liquidity support provided by the new letter of credit after its expiration date. However, prior to the expiration, we will be reviewing our liquidity position with our controlling equity holder to determine if they will extend the new letter of credit.
The existing letter of credit and the new letter of credit that will replace it are provided to the insurance company and are not drawn down unless the Company fails to pay its workers’ compensation claims in the ordinary course of business. In the event the Company fails to make payments due on its workers’ compensation claims and the new letter of credit is drawn upon, the guarantor of the letter of credit will reimburse the third party letter of credit provider, and the Company has agreed to reimburse the guarantor for such amounts. However, there has never been a draw on the existing letter of credit and the Company does not expect that there will be a draw on the new letter of credit.
We believe that the ongoing weakness in the economy, high unemployment levels, continued depressed residential real estate values, especially in some of our larger markets, and the level of home foreclosures has adversely affected our guest counts and, in turn, our sales and operating results. Over the last three years, we have experienced continued declines in comparable restaurant sales and profitability that have adversely impacted our liquidity position.
Our operations and liquidity needs are seasonal in nature. Historically, we have generated a significant portion of our operating cash flow in the first and fourth quarters, with these two quarters in total contributing 60% and 63% of our annual operating cash flows in 2008 and 2009. The fourth quarter is typically our strongest income generating quarter due to substantial holiday traffic and seasonal pie sales. As we increase personnel and inventories at the end of the third quarter for this seasonal activity, liquidity is normally at its lowest point. In light of this and because we have two significant interest payments due on October 1 and November 30, we intend to continue to reduce our capital expenditures and carefully manage payment of certain operating expenses in the third and fourth quarters.
Our ability to fund our operations and service our debt through 2011 and beyond will depend, in large part, on our ability to improve sales and profitability. We believe we will accomplish this improvement through the successful execution of our recently implemented advertising and promotional programs at both restaurant brands and also through our renewed focus at Foxtail to increase higher profit sales to third-party customers, replacing low profitability contracts terminated in 2009. Management expects these initiatives together with the Company’s cash provided by operations and borrowing capacity under the Revolver (which includes the additional availability as a result of the new letter of credit agreement) to provide sufficient liquidity for at least the next twelve months. However, there can be no assurance as to whether these or other actions will enable us to generate sufficient cash flow to fund our operations and service our debt.
If we are unable to finalize and enter into the agreement for the new letter of credit, there can be no assurance that we will have sufficient liquidity to enable us to fund our operations and service our debt without accessing outside sources of additional liquidity. Alternate sources of liquidity may include additional borrowings or capital contributions. However, the Company currently has no such commitments or plans, and there can be no assurance that the Company will be able to access acceptable alternative financing.
RESULTS OF OPERATIONS
Seasonality
Sales fluctuate seasonally and the Company’s fiscal quarters do not all have the same time duration. Specifically, the first quarter has an extra four weeks compared to the other quarters of the fiscal year. Historically, our average weekly sales are highest in the fourth quarter (approximately October through December), resulting primarily from holiday pie sales at both Perkins and Marie Callender’s restaurants and Thanksgiving feast sales at Marie Callender’s restaurants. Therefore, the quarterly results are not necessarily indicative of results that may be achieved for the full fiscal year. Factors influencing relative sales variability, in addition to the holiday impact noted above, include the frequency and popularity of advertising and promotions, the relative sales levels of new and closed restaurants, other holidays and weather.
Quarter Ended July 11, 2010 Compared to the Quarter Ended July 12, 2009
The following table reflects certain data for the quarter ended July 11, 2010 compared to the quarter ended July 12, 2009. The consolidated information is derived from the accompanying consolidated statements of operations. Data from the Company’s segments – restaurant operations, franchise operations, Foxtail and other – is included for comparison. The ratios presented reflect the underlying dollar values expressed as a percentage of the applicable revenue amount (food cost as a percentage of food sales; labor and benefits and operating expenses as a percentage of total revenues in the restaurant operations and franchise operations segments and as a percentage of food sales in the Foxtail segment). The food cost ratio in the consolidated results reflects the elimination of intersegment food cost of $4,289,000 and $4,376,000 in the second quarters of 2010 and 2009, respectively.
Consolidated Results
|
Restaurant Operations
|
Franchise Operations
|
||||||||||||||||||||||
Quarter Ended
|
Quarter Ended
|
Quarter Ended
|
||||||||||||||||||||||
July 11, 2010
|
July 12, 2009
|
July 11, 2010
|
July 12, 2009
|
July 11, 2010
|
July 12, 2009
|
|||||||||||||||||||
Food sales
|
$ | 111,862 | 119,437 | 100,961 | 106,495 | - | - | |||||||||||||||||
Franchise and other revenue
|
6,580 | 6,815 | - | - | 5,288 | 5,305 | ||||||||||||||||||
Intersegment revenue
|
(4,289 | ) | (4,376 | ) | - | - | - | - | ||||||||||||||||
Total revenues
|
114,153 | 121,876 | 100,961 | 106,495 | 5,288 | 5,305 | ||||||||||||||||||
Food cost
|
25.5 | % | 26.3 | % | 25.5 | % | 25.2 | % | - | - | ||||||||||||||
Labor and benefits
|
34.0 | % | 33.6 | % | 37.1 | % | 36.8 | % | - | - | ||||||||||||||
Operating expenses
|
28.5 | % | 26.3 | % | 30.4 | % | 28.9 | % | 10.4 | % | 8.8 | % | ||||||||||||
Segment (loss) income
|
$ | (11,153 | ) | (5,880 | ) | 3,259 | 5,335 | 4,742 | 4,840 | |||||||||||||||
Foxtail (a)
|
Other (b)
|
|||||||||||||||||||||||
Quarter Ended
|
Quarter Ended
|
|||||||||||||||||||||||
July 11, 2010
|
July 12, 2009
|
July 11, 2010
|
July 12, 2009
|
|||||||||||||||||||||
Food sales
|
$ | 10,901 | 12,942 | - | - | |||||||||||||||||||
Franchise and other revenue
|
- | - | 1,292 | 1,510 | ||||||||||||||||||||
Intersegment revenue
|
(4,289 | ) | (4,376 | ) | - | - | ||||||||||||||||||
Total revenues
|
6,612 | 8,566 | 1,292 | 1,510 | ||||||||||||||||||||
Food cost
|
55.0 | % | 57.6 | % | - | - | ||||||||||||||||||
Labor and benefits
|
12.2 | % | 13.4 | % | 5.2 | % | 4.7 | % | ||||||||||||||||
Operating expenses
|
12.1 | % | 10.5 | % | - | - | ||||||||||||||||||
Segment (loss) income
|
$ | 933 | 1,164 | (20,087 | ) | (17,219 | ) |
(a)
|
The percentages for food cost, labor and benefits and operating expenses, as presented above, represent manufacturing costs at Foxtail. Foxtail’s selling, general and administrative expenses are included in general and administrative expenses in the consolidated statements of operations and in the Foxtail segment income or loss presented above.
|
(b)
|
Licensing revenue of $1,258,000 and $1,448,000 for the second quarters of 2010 and 2009, respectively, is included in the other segment revenues. The other segment loss includes corporate general and administrative expenses, interest expense and other non-operational expenses. For details of the other segment loss, see Note 10, “Segment Reporting” in the Notes to Consolidated Financial Statements.
|
Overview
Our revenues are derived primarily from restaurant operations, franchise royalties and the sale of bakery products produced by Foxtail. Sales from Foxtail to Company-operated restaurants are eliminated in the accompanying consolidated statements of operations. Segment revenues as a percentage of total revenues were as follows:
Percentage of Total Revenues
|
||||||||
Quarter
|
Quarter
|
|||||||
Ended
|
Ended
|
|||||||
July 11, 2010
|
July 12, 2009
|
|||||||
Restaurant operations
|
88.5 | % | 87.4 | % | ||||
Franchise operations
|
4.6 | % | 4.4 | % | ||||
Foxtail
|
5.8 | % | 7.0 | % | ||||
Other
|
1.1 | % | 1.2 | % | ||||
Total revenues
|
100.0 | % | 100.0 | % |
Restaurant Operations Segment
The operating results of the restaurant segment are impacted mainly by the following factors: general economic conditions, competition, our comparable store sales, which are driven by our comparable customer counts and our guest check average, restaurant openings and closings, commodity prices, energy prices, our ability to manage operating expenses such as food cost and labor and benefits, weather and governmental legislation.
Total restaurant segment revenues decreased by approximately $5,534,000 in the second quarter of 2010 as compared to the second quarter of 2009, due primarily to lower comparable restaurant sales. Comparable sales for the second quarter of 2010 decreased by 5.1% at Company-operated Perkins restaurants and 5.6% at Company-operated Marie Callender’s restaurants. These declines in comparable sales resulted primarily from a decrease in comparable guest counts due to changes in consumer spending habits resulting from continuing adverse economic conditions impacting the restaurant industry, especially in some of our larger markets. Since the end of the second quarter of 2009, the Company has closed one Marie Callender’s restaurant.
Restaurant segment profit decreased by $2,076,000 in the second quarter of 2010 compared to the second quarter of 2009. The decrease was primarily due to the decrease in comparable sales.
Franchise Operations Segment
The operating results of franchise operations are mainly impacted by the same factors as those impacting the Company’s restaurant segment, excluding the operating cost factors since franchise segment profit is earned primarily through royalty income.
Franchise revenues decreased by approximately $17,000 in the second quarter of 2010 compared to the second quarter of 2009. During the second quarter of 2010, royalty revenue decreased by $71,000 due to a decline in comparable customer counts resulting from changes in consumer spending habits due to continuing adverse economic conditions impacting the restaurant industry, especially in some of our larger markets. This decrease in royalty revenues was partially offset by a $54,000 increase in franchise fees and renewal fees during the second quarter of 2010.
Franchise segment profit decreased by $98,000 in the second quarter of 2010 compared to the prior year due primarily to the decrease in royalty revenues and an increase in operating expenses, which were partially offset by an increase in transfer and renewal fees. The increase in franchise segment operating expenses was driven by the cost of opening support for four new franchise restaurants.
Since the end of the second quarter of 2009, Perkins’ franchisees have opened five restaurants and closed two restaurants. Over the same time period, three franchised Marie Callender’s restaurants have closed.
Foxtail Segment
The operating results of Foxtail are impacted mainly by the following factors: bakery sales at Perkins and Marie Callender’s restaurants, orders from external customers, general economic conditions, labor and employee benefit expenses, production efficiency, commodity prices, energy prices, Perkins and Marie Callender’s restaurant openings and closings, governmental legislation and food safety requirements.
Foxtail’s revenues, net of intercompany sales, decreased by $1,954,000 compared to the second quarter of 2009 due primarily to discontinued sales to two external customers whose purchases typically resulted in lower-than-average margins to Foxtail. The segment had a net profit of $933,000 in the second quarter of 2010 compared to a $1,164,000 net profit in the second quarter of 2009. The discontinued sales were partially offset by higher sales margins and lower manufacturing and administrative expenses.
Revenues
Consolidated total revenues decreased by $7,723,000 in the second quarter of 2010 compared to the second quarter of 2009. The decrease was due to decreases in sales of $5,534,000 in the restaurant segment, decreases in franchise revenues of $17,000 in the franchise segment, a $1,954,000 decrease in sales in the Foxtail segment and a $218,000 decrease in licensing and other revenues. Total revenues of approximately $114,153,000 in the second quarter of 2010 were 6.3% lower than total revenues of approximately $121,876,000 in the second quarter of 2009.
Restaurant segment sales of $100,961,000 and $106,495,000 in the second quarters of 2010 and 2009, respectively, accounted for 88.5% and 87.4% of total revenues, respectively. Due to the decline in total revenues, total restaurant segment sales increased as a percentage of total revenues, despite an overall 5.3% decrease in comparable sales at Company-operated Perkins and Marie Callender’s restaurants.
Franchise segment revenues of $5,288,000 and $5,305,000 in the second quarters of 2010 and 2009, respectively, accounted for 4.6% and 4.4% of total revenues, respectively. During the second quarter of 2010, royalty revenue decreased by $71,000 due to a decline in comparable customer counts at franchised restaurants, while franchise fees and renewal fees increased by $54,000.
Foxtail revenues, net of intercompany sales, of $6,612,000 and $8,566,000 in the second quarters of 2010 and 2009, respectively, accounted for 5.8% and 7.0% of total revenues, respectively. The decline in revenues was primarily due to discontinued sales to two external customers, whose purchases typically resulted in lower-than-average margins to Foxtail.
Costs and Expenses
Food Cost
Consolidated food cost was 25.5% and 26.3% of food sales in the second quarters of 2010 and 2009, respectively. Restaurant segment food cost was 25.5% and 25.2% of food sales in the second quarters of 2010 and 2009, respectively, while food cost in the Foxtail segment was 55.0% and 57.6% of food sales in the second quarters of 2010 and 2009, respectively. The increase of 0.3 percentage points in the restaurant segment is primarily due to higher dairy, coffee and seafood costs. The decrease of 2.6 percentage points in the Foxtail segment is primarily due to higher sales margins and improved pie manufacturing efficiencies.
Labor and Benefits Expenses
Consolidated labor and benefits expenses were 34.0% and 33.6% of total revenues in the second quarters of 2010 and 2009, respectively. Restaurant segment labor and benefits, as a percentage of total revenues, increased by 0.3 percentage points in the second quarter of 2010 due primarily to the decline in revenues. In the Foxtail segment, labor and benefits, as a percentage of food sales, decreased by 1.2 percentage points to 12.2% from 13.4% for the second quarters of 2010 and 2009, respectively. This decrease was due primarily to improved production efficiencies, which resulted in lower production wages.
Operating Expenses
Total operating expenses of $32,534,000 in the second quarter of 2010 increased by $462,000 as compared to the second quarter of 2009. The most significant components of operating expenses were rent, utilities and advertising expenses. Total operating expenses, as a percentage of total sales, were 28.5% and 26.3% in the second quarters of 2010 and 2009, respectively. Approximately 94.3% and 96.0% of total operating expenses in the second quarters of 2010 and 2009, respectively, were incurred in the restaurant segment. In the restaurant segment, operating expenses, as a percentage of total revenues, increased from 28.9% to 30.4% primarily due to a decline in revenues and increases in rent, real estate taxes and utilities. Operating expenses in the Foxtail segment increased by 1.6 percentage points as a percentage of Foxtail sales due primarily to the decrease in food sales in the Foxtail segment, as operating expenses for this segment decreased by 3.2% during the second quarter of 2010.
General and Administrative Expenses
The most significant components of general and administrative (“G&A”) expenses were corporate labor and benefits, occupancy costs, audit fees and legal fees. Consolidated G&A expenses were 9.5% and 8.3% of total revenues in the second quarters of 2010 and 2009, respectively. The percentage increase is primarily due to decreased revenues, higher incentive compensation accruals and legal costs, which were partially offset by lower audit fees.
Depreciation and Amortization
Depreciation and amortization expense was $5,059,000 and $5,557,000 in the second quarters of 2010 and 2009, respectively.
Interest, net
Interest, net was $10,299,000 (9.0% of total revenues) in the second quarter of 2010, compared to $10,130,000 (8.3% of total revenues) in the second quarter of 2009. This expense increased due to an approximate $7,091,000 increase in the average debt outstanding during the second quarter of 2010 as compared to the second quarter of 2009.
Other, net
Other, net included income of $140,000 in the second quarter of 2010 compared to income of $1,716,000 in the second quarter of 2009. The income in 2009 primarily represents income from gift card breakage of $1,576,000, which represents amounts related to Marie Callender’s gift cards sold since the inception of the gift card program in 2005.
Taxes
The effective income tax rate for the quarters ended July 11, 2010 and July 12, 2009 was 0.0%. Our rates differ from the statutory rate primarily due to a valuation allowance against deferred tax deductions, losses and credits.
Year-to-Date Period Ended July 11, 2010 Compared to the Year-to-Date Period Ended July 12, 2009
The following table reflects certain data for the year-to-date period ended July 11, 2010 compared to the year-to-date period ended July 12, 2009. The consolidated information is derived from the accompanying consolidated statements of operations. Data from the Company’s segments – restaurant operations, franchise operations, Foxtail and other – is included for comparison. The ratios presented reflect the underlying dollar values expressed as a percentage of the applicable revenue amount (food cost as a percentage of food sales; labor and benefits and operating expenses as a percentage of total revenues in the restaurant operations and franchise operations segments and as a percentage of food sales in the Foxtail segment). The food cost ratio in the consolidated results reflects the elimination of intersegment food cost of $10,044,000 and $10,289,000 in the year-to-date periods of 2010 and 2009, respectively.
Consolidated Results
|
Restaurant Operations
|
Franchise Operations
|
||||||||||||||||||||||
Year-to-Date Ended
|
Year-to-Date Ended
|
Year-to-Date Ended
|
||||||||||||||||||||||
July 11, 2010
|
July 12, 2009
|
July 11, 2010
|
July 12, 2009
|
July 11, 2010
|
July 12, 2009
|
|||||||||||||||||||
Food sales
|
$ | 264,931 | 286,227 | 240,566 | 255,723 | - | - | |||||||||||||||||
Franchise and other revenue
|
15,071 | 15,191 | - | - | 11,959 | 12,249 | ||||||||||||||||||
Intersegment revenue
|
(10,044 | ) | (10,289 | ) | - | - | - | - | ||||||||||||||||
Total revenues
|
269,958 | 291,129 | 240,566 | 255,723 | 11,959 | 12,249 | ||||||||||||||||||
Food cost
|
25.4 | % | 26.6 | % | 25.6 | % | 25.7 | % | - | - | ||||||||||||||
Labor and benefits
|
34.2 | % | 33.1 | % | 36.9 | % | 36.0 | % | - | - | ||||||||||||||
Operating expenses
|
28.3 | % | 26.7 | % | 30.0 | % | 28.8 | % | 9.1 | % | 8.0 | % | ||||||||||||
Segment (loss) income
|
$ | (25,759 | ) | (15,634 | ) | 8,829 | 14,411 | 10,867 | 11,269 | |||||||||||||||
Foxtail (a)
|
Other (b)
|
|||||||||||||||||||||||
Year-to-Date Ended
|
Year-to-Date Ended
|
|||||||||||||||||||||||
July 11, 2010
|
July 12, 2009
|
July 11, 2010
|
July 12, 2009
|
|||||||||||||||||||||
Food sales
|
$ | 24,366 | 30,504 | - | - | |||||||||||||||||||
Franchise and other revenue
|
- | - | 3,111 | 2,942 | ||||||||||||||||||||
Intersegment revenue
|
(10,044 | ) | (10,289 | ) | - | - | ||||||||||||||||||
Total revenues
|
14,322 | 20,215 | 3,111 | 2,942 | ||||||||||||||||||||
Food cost
|
54.2 | % | 58.8 | % | - | - | ||||||||||||||||||
Labor and benefits
|
13.2 | % | 13.4 | % | 5.4 | % | 5.9 | % | ||||||||||||||||
Operating expenses
|
12.2 | % | 10.0 | % | - | - | ||||||||||||||||||
Segment (loss) income
|
$ | 1,574 | 1,323 | (47,029 | ) | (42,637 | ) |
(a)
|
The percentages for food cost, labor and benefits and operating expenses, as presented above, represent manufacturing costs at Foxtail. Foxtail’s selling, general and administrative expenses are included in general and administrative expenses in the consolidated statements of operations and in the Foxtail segment income or loss presented above.
|
(b)
|
Licensing revenue of $2,990,000 and $2,808,000 for the year-to-date periods of 2010 and 2009, respectively, is included in the other segment revenues. The other segment loss includes corporate general and administrative expenses, interest expense and other non-operational expenses. For details of the other segment loss, see Note 10, “Segment Reporting” in the Notes to Consolidated Financial Statements.
|
Overview
Our revenues are derived primarily from restaurant operations, franchise royalties and the sale of bakery products produced by Foxtail. Sales from Foxtail to Company-operated restaurants are eliminated in the accompanying consolidated statements of operations. Segment revenues as a percentage of total revenues were as follows:
Percentage of Total Revenues
|
||||||||
Year-to-Date
|
Year-to-Date
|
|||||||
Ended
|
Ended
|
|||||||
July 11, 2010
|
July 12, 2009
|
|||||||
Restaurant operations
|
89.1 | % | 87.8 | % | ||||
Franchise operations
|
4.4 | % | 4.2 | % | ||||
Foxtail
|
5.3 | % | 7.0 | % | ||||
Other
|
1.2 | % | 1.0 | % | ||||
Total revenues
|
100.0 | % | 100.0 | % |
Restaurant Operations Segment
The operating results of the restaurant segment are impacted mainly by the following factors: general economic conditions, competition, our comparable store sales, which are driven by our comparable customer counts and our guest check average, restaurant openings and closings, commodity prices, energy prices, our ability to manage operating expenses such as food cost and labor and benefits, weather and governmental legislation.
Total restaurant segment revenues decreased by approximately $15,157,000 in the year-to-date period ended July 11, 2010 as compared to the year-to-date period ended July 12, 2009, due primarily to lower comparable restaurant sales. Comparable sales for the year-to-date period of 2010 decreased by 5.5% at Company-operated Perkins restaurants and 7.4% at Company-operated Marie Callender’s restaurants. These declines in comparable sales resulted primarily from a decrease in comparable guest counts due to changes in consumer spending habits resulting from continuing adverse economic conditions impacting the restaurant industry, especially in some of our larger markets. Since the end of the second quarter of 2009, the Company has closed one Marie Callender’s restaurant.
Restaurant segment profit decreased by $5,582,000 in the year-to-date period of 2010 compared to a year ago. The decrease was primarily due to the decrease in comparable sales.
Franchise Operations Segment
The operating results of franchise operations are mainly impacted by the same factors as those impacting the Company’s restaurant segment, excluding the operating cost factors since franchise segment profit is earned primarily through royalty income.
Franchise revenues decreased approximately $290,000 in the year-to-date period of 2010 compared to the same period in the prior year. During the year-to-date period ended July 11, 2010, royalty revenue decreased by $398,000 due to a decline in comparable customer counts resulting from changes in consumer spending habits due to continuing adverse economic conditions impacting the restaurant industry, especially in some of our larger markets. This decrease in royalty revenues was partially offset by a $108,000 increase in franchise fees and renewal fees.
Franchise segment profit decreased by $402,000 in the year-to-date period of 2010 compared to the prior year due primarily to the decrease in royalty revenues and an increase in operating expenses, which were partially offset by an increase in transfer and renewal fees. The increase in franchise segment operating expenses was driven by the cost of opening support for five new franchise restaurants.
Since the end of the second quarter of 2009, Perkins’ franchisees have opened five restaurants and closed two restaurants. Over the same time period, three franchised Marie Callender’s restaurants have closed.
Foxtail Segment
The operating results of Foxtail are impacted mainly by the following factors: bakery sales at Perkins and Marie Callender’s restaurants, orders from external customers, general economic conditions, labor and employee benefit expenses, production efficiency, commodity prices, energy prices, Perkins and Marie Callender’s restaurant openings and closings, governmental legislation and food safety requirements.
Foxtail’s revenues, net of intercompany sales, decreased by $5,893,000 compared to the year-to-date period of 2009 due primarily to discontinued sales to two external customers, whose purchases typically resulted in lower-than-average margins to Foxtail. The segment had a net profit of $1,574,000 in 2010 compared to a $1,323,000 net profit in 2009. The improvement resulted primarily from higher sales margins and lower manufacturing and administrative expenses, which offset lower external sales.
Revenues
Consolidated total revenues decreased by $21,171,000 in the year-to-date period ended July 11, 2010 compared to the year-to-date period ended July 12, 2009. The decrease was due to decreases in sales of $15,157,000 in the restaurant segment, decreases in franchise revenues of $290,000 in the franchise segment and a $5,893,000 decrease in sales in the Foxtail segment. These decreases were partially offset by a $169,000 increase in licensing and other revenues. Total revenues of approximately $269,958,000 in the year-to-date period of 2010 were 7.3% lower than total revenues of approximately $291,129,000 in the year-to-date period of 2009.
Restaurant segment sales of $240,566,000 and $255,723,000 in the year-to-date periods of 2010 and 2009, respectively, accounted for 89.1% and 87.8% of total revenues, respectively. Due to the decline in total revenues, total restaurant segment sales increased as a percentage of total revenues, despite an overall 6.2% decrease in comparable sales at Company-operated Perkins and Marie Callender’s restaurants.
Franchise segment revenues of $11,959,000 and $12,249,000 in the year-to-date periods of 2010 and 2009, respectively, accounted for 4.4% and 4.2% of total revenues, respectively. During the year-to-date period of 2010, royalty revenue decreased by $398,000 due to a decline in comparable customer counts at franchised restaurants, while franchise fees and renewal fees increased by $108,000.
Foxtail revenues, net of intercompany sales, of $14,322,000 and $20,215,000 in 2010 and 2009, respectively, accounted for 5.3% and 7.0% of total revenues, respectively. The decline in revenues was primarily due to discontinued sales to two external customers, whose purchases typically resulted in lower-than-average margins to Foxtail.
Costs and Expenses
Food Cost
Consolidated food cost was 25.4% and 26.6% of food sales in the year-to-date periods of 2010 and 2009, respectively. Restaurant segment food cost was 25.6% and 25.7% of food sales in the year-to-date periods of 2010 and 2009, respectively, while food cost in the Foxtail segment was 54.2% and 58.8% of food sales in the year-to-date periods of 2010 and 2009, respectively. The decrease of 4.6 percentage points in the Foxtail segment is primarily due to higher sales margins and improved pie manufacturing efficiencies.
Labor and Benefits Expenses
Consolidated labor and benefits expenses were 34.2% and 33.1% of total revenues in the year-to-date periods of 2010 and 2009, respectively. Restaurant segment labor and benefits, as a percentage of total revenues, increased by 0.9 percentage points in 2010 due primarily to the decline in revenues. Actual labor and benefits costs dropped by approximately $3,100,000. In the Foxtail segment, labor and benefits, as a percentage of food sales, decreased slightly to 13.2% from 13.4% for the year-to-date periods of 2010 and 2009, respectively.
Operating Expenses
Total operating expenses of $76,269,000 in the year-to-date period of 2010 decreased by $1,504,000 as compared to the year-to-date period 2009. The most significant components of operating expenses were rent, utilities and advertising expenses. Total operating expenses, as a percentage of total sales, were 28.3% and 26.7% in the year-to-date periods of 2010 and 2009, respectively. Approximately 94.7% and 94.8% of total operating expenses in the year-to-date periods of 2010 and 2009, respectively, were incurred in the restaurant segment. In the restaurant segment, operating expenses, as a percentage of total revenues, increased from 28.8% to30.0% primarily due to the drop in sales combined with increases in real estate taxes and common area maintenance costs. Operating expenses in the Foxtail segment increased by 2.2 percentage points as a percentage of Foxtail sales due primarily to the decrease in food sales in the Foxtail segment, as operating expenses for this segment decreased by 2.2% during the year-to-date period of 2010.
General and Administrative Expenses
The most significant components of general and administrative (“G&A”) expenses were corporate labor and benefits, occupancy costs, audit fees and legal fees. Consolidated G&A expenses were 9.2% and 8.3% of total revenues in the year-to-date periods of 2010 and 2009, respectively. The percentage increase is primarily due to the drop in consolidated total revenues and higher incentive compensation accruals and legal costs, partially offset by lower audit fees.
Depreciation and Amortization
Depreciation and amortization expense was $11,965,000 and $12,913,000 in the year-to-date periods of 2010 and 2009, respectively.
Interest, net
Interest, net was $23,864,000 (8.8% of total revenues) in the year-to-date period of 2010, compared to $23,745,000 (8.2% of total revenues) in the year-to-date period of 2009. This expense increased due primarily to an approximate $6,152,000 increase in the average debt outstanding.
Other, net
Other, net was income of $358,000 in 2010 compared to income of $2,677,000 in 2009. The income in 2009 primarily represents cumulative gift card breakage at Marie Callender’s of $1,576,000, which was recognized during the second quarter of 2009, and cumulative gift card breakage at Perkins of $865,000, which was recognized during the first quarter of 2009. Both gift card programs commenced in 2005.
Taxes
The effective income tax rate for the year-to-date periods ended July 11, 2010 and July 12, 2009 was 0.0%. Our rates differ from the statutory rate primarily due to a valuation allowance against deferred tax deductions, losses and credits.
CAPITAL RESOURCES AND LIQUIDITY
Our principal liquidity requirements are to service our debt and meet our working capital and capital expenditure needs. At July 11, 2010, we had $2,263,000 in unrestricted cash and cash equivalents and $296,000 of borrowing capacity under our Revolver.
Secured Notes and 10% Senior Notes
On September 24, 2008, the Company issued $132,000,000 of 14% senior secured notes (the "Secured Notes"). The Secured Notes were issued at a discount of $7,537,200, which is being accreted using the interest method over the term of the Secured Notes. The Secured Notes will mature on May 31, 2013, and interest is payable semi-annually on May 31 and November 30 of each year.
In September 2005, the Company issued $190,000,000 of unsecured 10% Senior Notes. The 10% Senior Notes were issued at a discount of $2,570,700, which is accreted using the interest method over the term of the 10% Senior Notes. The 10% Senior Notes will mature on October 1, 2013, and interest is payable semi-annually on April 1 and October 1 of each year. All consolidated subsidiaries of the Company that are 100% owned provide joint and several, full and unconditional guarantee of the 10% Senior Notes. There are no significant restrictions on the Company’s ability to obtain funds from any of the guarantor subsidiaries in the form of a dividend or a loan. Additionally, there are no significant restrictions on a guarantor subsidiary’s ability to obtain funds from the Company or its direct or indirect subsidiaries.
The indentures for the Secured Notes and the 10% Senior Notes contain various customary events of default, including, without limitation: (i) nonpayment of principal or interest; (ii) cross-defaults with certain other indebtedness; (iii) certain bankruptcy related events; (iv) invalidity of guarantees; (v) monetary judgment defaults; and (vi) certain change of control events. In addition, any impairment of the security interest in the Secured Notes collateral shall constitute an event of default under the Secured Notes indenture.
Revolver
On September 24, 2008, the Company entered into the Revolver. The Revolver, which matures on February 28, 2013, is guaranteed by Perkins & Marie Callender's Holding Inc. and certain of the Company's existing and future subsidiaries. The Revolver is secured by a first priority perfected security interest in all of the Company's property and assets and the property and assets of each guarantor. Subject to the satisfaction of the conditions contained therein, up to $26,000,000 may be borrowed under the Revolver from time to time. The Revolver includes a sub-facility for letters of credit in an amount not to exceed $15,000,000.
Amounts outstanding under the Revolver bear interest, at the Company’s option, at a rate per annum equal to either: (i) the base rate, as defined in the Revolver, plus an applicable margin or (ii) a LIBOR-based equivalent, plus an applicable margin. For the foreseeable future, margins are expected to be 325 basis points for base rate loans and 425 basis points for LIBOR loans. As of July 11, 2010, the average annual interest rate on aggregate borrowings under the Revolver was 7.8%, and the Revolver permitted additional borrowings of approximately $296,000 (after giving effect to $15,485,000 in borrowings and $10,219,000 in letters of credit outstanding). The letters of credit are primarily utilized in conjunction with our workers’ compensation programs.
The Revolver contains various affirmative and negative covenants, including, but not limited to a financial covenant for the Company to maintain at least $30,000,000 of trailing 13-period EBITDA, as defined in the Revolver, and limits the Company’s ability to make capital expenditures.
The average interest rate on aggregate borrowings of the Company’s long-term debt for the year-to-date period through July 11, 2010 was 11.6% compared to the average interest rate on aggregate borrowings for the year-to-date period through July 12, 2009 of 11.5%.
Our debt agreements place restrictions on the Company’s ability and the ability of its subsidiaries to: (i) incur additional indebtedness or issue certain preferred stock; (ii) repay certain indebtedness prior to stated maturities; (iii) pay dividends or make other distributions on, redeem or repurchase capital stock or subordinated indebtedness; (iv) make certain investments or other restricted payments; (v) enter into transactions with affiliates; (vi) issue stock of subsidiaries; (vii) transfer, sell or consummate a merger or consolidation of all, or substantially all, of the Company's assets; (viii) change lines of business; (ix) incur dividend or other payment restrictions with regard to restricted subsidiaries; (x) create or incur liens on assets to secure debt; (xi) dispose of assets; (xii) restrict distributions from subsidiaries; (xiii) make certain acquisitions; (xiv) make capital expenditures; or (xv) amend the terms of the Secured Notes and the 10% Senior Notes. As of July 11, 2010, we were in compliance with the covenants contained in our debt agreements.
Working Capital and Cash Flows
At July 11, 2010, we had a negative working capital balance of $20,684,000. Like many other restaurant companies, the Company is able to, and does more often than not, operate with negative working capital. We are able to operate with a substantial working capital deficit because (1) restaurant revenues are received primarily on a cash or near-cash basis with a low level of accounts receivable, (2) rapid turnover results in a limited investment in inventories and (3) accounts payable for food and beverages usually become due after the receipt of cash from the related sales.
The following table sets forth summary cash flow data for the year-to-date periods ended July 11, 2010 and July 12, 2009 (in thousands):
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Year-to-Date
Ended
July 11, 2010
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Year-to-Date
Ended
July 12, 2009
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Cash flows used in operating activities
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$ | (3,326 | ) | (3,434 | ) | |||
Cash flows used in investing activities
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(2,567 | ) | (3,826 | ) | ||||
Cash flows provided by financing activities
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3,868 | 5,083 |
Operating Activities
Cash flows used in operating activities decreased by $108,000 for the year-to-date period ended July 11, 2010 compared to the year-to-date period ended July 12, 2009. A larger net operating loss was almost fully offset by an increase in non-cash expenses and a larger increase in accounts payable and accrued expenses.
Investing Activities
Cash flows used in investing activities for the year-to-date period ended July 11, 2010 were $2,567,000 compared to $3,826,000 for the year-to-date period ended July 12, 2009. Substantially all cash flows used in investing activities were used for capital expenditures.
Capital expenditures consisted primarily of restaurant improvements, restaurant remodels and manufacturing plant improvements. The following table summarizes capital expenditures for each year-to-date period presented (in thousands):
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Year-to-Date
Ended
July 11, 2010
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Year-to-Date
Ended
July 12, 2009
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New restaurants
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$ | - | 156 | |||||
Restaurant improvements
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1,766 | 2,261 | ||||||
Restaurant remodeling and reimaging
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304 | 1,084 | ||||||
Manufacturing plant improvements
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268 | 440 | ||||||
Other
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234 | 375 | ||||||
Total capital expenditures
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$ | 2,572 | 4,316 |
Our capital expenditure forecast for the full year of 2010 is approximately $4,200,000 and does not include plans to open any new Company-operated Perkins or Marie Callender’s restaurants. The principal source of funding for 2010’s capital expenditures is expected to be cash provided by operations and borrowings under our Revolver.
Financing Activities
Cash flows provided by financing activities for the year-to-date period ended July 11, 2010 were $3,868,000 compared to cash flows provided by financing activities of $5,083,000 for the year-to-date period ended July 12, 2009. The primary cash flows for financing activities in the year-to-date periods of 2010 and 2009 represent net borrowings on the Company’s Revolver.
IMPACT OF INFLATION
We do not believe that our operations are affected by inflation to a greater extent than others within the restaurant industry. Certain significant items that are historically subject to price fluctuations are beef, pork, poultry, dairy products, wheat products, corn products and coffee. In most cases, we historically have been able to pass through a substantial portion of the increased commodity costs by adjusting menu pricing.
CASH CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Cash Contractual Obligations
Our cash contractual obligations presented in the Company’s 2009 Form 10-K/A have not changed materially during the year-to-date period ended July 11, 2010.
RECENT ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 14 of the Notes to Consolidated Financial Statements.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements, written, oral or otherwise made, may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should” or “will,” or the negative thereof or other variations thereon or comparable terminology.
We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors affecting these forward-looking statements include, among others, the following:
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macroeconomic conditions, consumer preferences and demographic patterns, either nationally or in particular regions in which we operate;
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our substantial indebtedness;
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our liquidity and capital resources;
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•
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competitive pressures and trends in the restaurant industry;
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prevailing prices and availability of food, labor, raw materials, supplies and energy;
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•
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a failure to obtain timely deliveries from our suppliers or other supplier issues;
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•
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our ability to successfully implement our business strategy;
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•
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relationships with franchisees and the financial health of franchisees;
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legal proceedings and regulatory matters; and
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our development and expansion plans.
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Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Form 10-Q are made only as of the date hereof. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments.
We are subject to changes in interest rates, foreign currency exchange rates and certain commodity prices.
Interest Rate Risk
Our primary market risk is interest rate exposure with respect to our floating rate debt. As of July 11, 2010, our Revolver permitted additional borrowings of approximately $296,000 (after giving effect to $15,485,000 in borrowings and $10,219,000 in letters of credit outstanding). Borrowings under the Revolver are subject to variable interest rates. A 100 basis point change in interest rates (assuming $26,000,000 was outstanding under the Revolver) would impact us by approximately $260,000. In the future, we may decide to employ a hedging strategy through derivative financial instruments to reduce the impact of adverse changes in interest rates. We do not plan to hold or issue derivative instruments for trading purposes.
Foreign Currency Exchange Rate Risk
We conduct foreign operations in Canada and Mexico. As a result, we are subject to risk from changes in foreign exchange rates. These changes result in cumulative translation adjustments, which are included in accumulated and other comprehensive income (loss). As of July 11, 2010, we do not consider the potential loss resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates to 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, changes in global demand, 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 such 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 are historically subject to price fluctuations are beef, pork, poultry, dairy products, wheat products, corn products and coffee. In most cases, we historically have been able to pass a substantial portion of the increased commodity costs to our customers through periodic menu price adjustments. We do not hedge against fluctuations in commodity prices. We do not use hedging agreements or alternative instruments to manage the risks associated with securing sufficient supplies or raw materials.
Disclosure Controls and Procedures. We have established disclosure controls and procedures to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within time periods specified in the Securities and Exchange Commission rules and forms and that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to the officers who certify our financial reports and to other members of senior management and the board of directors to allow timely decisions regarding required disclosure.
In connection with the restatement of our prior financial results, which is more fully described in Note 19 to our Consolidated Financial Statements in our Form 10-K/A filed on June 7, 2010, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we reevaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of July 11, 2010. Based upon that reevaluation and particularly in light of the restatement of our financial results, we identified a material weakness in our internal control over financial reporting with respect to the determination and review of differences between the income tax bases and financial reporting bases of certain assets and liabilities. Solely as a result of this material weakness, we concluded that our disclosure controls and procedures were not effective as of July 11, 2010.
We have implemented improvements in our internal control over financial reporting to address the material weakness in accounting for income taxes. These improvements include, among other things, improved documentation and analysis regarding the determination and periodic review of deferred income tax amounts and enhancing the documentation around conclusions reached in the implementation of the applicable generally accepted accounting principles. We plan to test the effectiveness of these improvements in our internal control over financial reporting during the remainder of 2010, depending on the frequency or occurrence of the revised controls.
Changes in Internal Control over Financial Reporting. Other than those related to accounting for income taxes, there have not been any changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) that occurred during the second fiscal quarter of 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As reported in the Company’s Form 10-K for the fiscal year ended December 27, 2009, we are party to various legal proceedings in the ordinary course of business. There have been no material developments with regard to these proceedings, either individually or in the aggregate, that are likely to have a material adverse effect on the Company’s financial position or results of operations.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Form 10-K for the fiscal year ended December 27, 2009, which could materially affect our business, financial condition or future results. The risks described in this report and in our Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
None.
None.
None.
31.1
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Chief Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 302.
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31.2
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Chief Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 302.
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32.1
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Chief Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 906.
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32.2
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Chief Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 906.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PERKINS & MARIE CALLENDER’S INC.
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DATE: August 30, 2010
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BY: /s/ Fred T. Grant, Jr.
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Fred T. Grant, Jr.
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Chief Financial Officer
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