CONFORMED COPY

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended July 11, 2004

OR

For the transition period from ______________________ to ___________________.

Commission file number 333-57925

The Restaurant Company

(901) 766-6400

Indicate by ü 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 ü No

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

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

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Table of Contents

PART I — FINANCIAL INFORMATION

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

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THE RESTAURANT COMPANY AND SUBSIDIARIES

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

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

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

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THE RESTAURANT COMPANY AND SUBSIDIARIES

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

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THE RESTAURANT COMPANY AND SUBSIDIARIES

Organization

The Restaurant Company (the “Company,” “Perkins,” or “TRC”) is a wholly-owned subsidiary of The Restaurant Holding Corporation (“RHC”). TRC conducts business under the name “Perkins Restaurant and Bakery”. TRC is also the sole stockholder of TRC Realty LLC, The Restaurant Company of Minnesota and Perkins Finance Corp. RHC’s principal stockholders are Donald N. Smith (“Mr. Smith”), TRC’s Chairman and Chief Executive Officer, and BancBoston Ventures, Inc. (“BBV”). Mr. Smith is also the Chairman of Friendly Ice Cream Corporation (“FICC”), which operates and franchises approximately 546 restaurants, located primarily in the northeastern United States.

Basis of Presentation

The accompanying unaudited consolidated financial statements of TRC have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and notes necessary for complete financial statements in conformity with generally accepted accounting principles. The results for the periods indicated are unaudited but reflect all adjustments (consisting only of normal recurring adjustments) which management considers necessary for a fair presentation of the operating results. Results of operations for the interim periods are not necessarily indicative of a full year of operations. The notes to the financial statements contained in the 2003 Annual Report on Form 10-K should be read in conjunction with these statements.

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

Accounting Reporting Period

The Company’s fiscal calendar year consists of thirteen four-week periods ending on the last Sunday in December. The first quarter each year will include four four-week periods. The first and second quarters ended on April 18 and July 11, respectively. The third and fourth quarters of 2004 will end on October 3 and December 26, respectively.

Contingencies

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

On June 9, 2000, the Company entered into an agreement to guarantee fifty percent of borrowings up to a total guarantee of $1,500,000 for use by a franchisee to remodel and upgrade existing restaurants. As of July 11, 2004, there was $3,000,000 in borrowings outstanding under this agreement of which the Company guaranteed $1,500,000. The franchisee continues to attempt to refinance the indebtedness, at which time the Company’s obligation under the current agreement would terminate. Under the provisions of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, this guarantee has been determined by the Company not to be a variable interest in the franchisee.

Provision for Disposition of Assets and Asset Write-Down

During the quarter ended July 11, 2004, the Company sold one property and recorded a net gain of $81,000. The Company also completed the sale of one property that was under contract on April 18, 2004. A loss of $356,000 on this property was accrued in the first quarter.

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During the first quarter of 2004, the Company sold one property and recorded a net loss on the sale of approximately $7,000. Also, the Company determined that impairment existed with respect to two Company-operated restaurants. This determination was made based on the Company’s projections that the future cash flows of these restaurants would not exceed the present carrying value of the assets. Accordingly, the Company recorded an impairment charge of $446,000 to adjust the assets of these restaurants to net realizable value.

Supplemental Cash Flow Information

The increase or decrease in cash and cash equivalents due to changes in operating assets and liabilities for the twelve and twenty-eight weeks ended July l1 and July 13, consists of the following (in thousands):

In addition, the Company converted $347,000 of accounts receivable to long-term notes receivable during the quarter. Other supplemental cash flow information is as follows (in thousands):

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Segment Reporting

The following presents revenue and other financial information by business segment for the twelve and twenty-eight weeks ended July 11 and July 13 (in thousands):

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

Revolving Credit Agreement

As of July 11, 2004, the Company has a secured $25,000,000 revolving line of credit facility (the “Credit Facility”) with a sub-limit for up to $7,500,000 of letters of credit. All amounts under the Credit Facility bear interest at floating rates based on the agent’s base rate or Eurodollar rates as defined in the agreement. All indebtedness under the Credit Facility is collateralized by a first priority lien on substantially all of the assets of the Company. The maturity date of the Credit Facility is January 1, 2005. Currently, the Company is negotiating with several financial institutions to replace the Credit Facility. The Company anticipates that these negotiations will be completed before expiration of the Credit Facility. As of July 11, 2004, there were no borrowings and approximately $5,481,000 of letters of credit outstanding under the Credit Facility.

At April 20, 2003, the Company failed to meet the criteria of one of the financial covenants of the Credit Facility. On May 14, 2003, the Company executed an amendment to the Credit Facility that waived the April 20, 2003 covenant violation, reduced the requirements of the financial covenants and lowered the total amount available under the Credit Facility from $40,000,000 to $25,000,000. The Company executed an amendment to the Credit Facility on March 25, 2004 that reduced the requirements of the financial covenants at the end of the first quarter 2004 and thereafter. Effective June 16, 2004, the Company executed an amendment to the Credit Facility that increased the sub-limit of letters of credit from $5,000,000 to $7,500,000. As of July 11, 2004, the Company was in compliance with the requirements of the financial covenants.

Subsequent Event

During the weekend of August 14, 2004, hurricane Charley struck central Florida where the Company has a large concentration of stores. Currently, the Company is compiling damage assessments from the storm. As of August 24, 2004, the Company estimates that the extent of property damage and the loss of business income, net of any potential insurance recoveries, will be approximately $250,000 to $300,000.

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ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PERIOD ENDED JULY 11, 2004

RESULTS OF OPERATIONS

Overview:

The Company is a leading operator and franchisor of mid-scale restaurants located in 34 states and five Canadian provinces. As of July 11, 2004, the Company owned and operated 155 and franchised 331 Perkins Restaurants. Both the Company-operated and franchised Perkins Restaurants operate under the names “Perkins Restaurant and Bakery,” “Perkins Family Restaurant,” “Perkins Family Restaurant and Bakery,” or “Perkins Restaurant” and the mark “Perkins”. The Company also offers cookie doughs, muffin batters, pancake mixes, pies and other food products for sale to our Company-operated and franchised restaurants and bakery and food service distributors through Foxtail Foods (“Foxtail”), our manufacturing division. The business of Perkins was founded in 1958, and since then Perkins has continued to adapt its menus, product offerings, building designs and decor to meet changing consumer preferences. Perkins is a highly recognized brand in the geographic areas it serves.

The Company’s revenues are derived primarily from the operation of Company-owned restaurants, the sale of bakery products produced by Foxtail and franchise royalties. In order to ensure consistency and availability of Perkins’ proprietary products to each unit in the system, Foxtail offers cookie doughs, muffin batters, pancake mixes, pies and other food products to Company-operated and franchised restaurants through food service distributors. Sales to Company-operated restaurants are eliminated in the accompanying statements of operations. For the quarter ended July 11, 2004, revenues from Company-operated restaurants, Foxtail, and franchise and other accounted for 83.6%, 9.7% and 6.7% of total revenue, respectively.

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A summary of the Company’s results for the twelve and twenty-eight weeks ended July 11, 2004 and July 13, 2003 are presented in the following table. All revenues, costs and expenses are expressed as a percentage of total revenues.

Net Income for the second quarter of 2004 was $1,844,000 versus net income of $1,438,000 for the second quarter of 2003. For the year-to-date period ended July 11, 2004, net income was $2,798,000 compared to $1,381,000 for the year-to-date period ended July 13, 2003.

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Revenues:

Total revenues for the second quarter of 2004 increased 0.1% from the prior year second quarter. Year-to-date total revenues increased 2.9% over the prior year-to-date period. This increase is primarily due to increased restaurant sales.

Same store comparable sales in Company-operated restaurants decreased approximately 0.5% for the second quarter and increased approximately 1.9% year-to-date. The decrease for the quarter is attributable to a decrease of 3.5% in comparable guest visits offset by an increase in the average guest check of 3.0%. The year-to-date increase is attributable to a 4.1% increase in the average guest check offset by a decrease of 2.2% in comparable guest visits. Approximately one-half of the increase in average guest check is due to favorable product mix while the remainder is primarily due to selective menu price increases.

Revenues from Foxtail decreased approximately 4.8% from the prior year quarter and increased 2.4% over the prior year-to-date period and constituted approximately 9.7% and 9.4%, respectively, of the Company’s total revenues. The decrease for the quarter is primarily due to a decrease in sales to customers within the Perkins system.

Franchise revenue, composed primarily of franchise royalties, decreased 1.2% over the second quarter of 2003 and increased 1.5% year-to-date. Royalty revenues increased for the year-to-date period primarily due to an estimated 2.6% increase in franchise restaurant comparable sales partially offset by a decrease in the average number of franchise restaurants. Since the second quarter of 2003, the Company’s franchisees have opened 8 restaurants and have closed 20 restaurants.

Costs and Expenses:

Food cost:

In terms of total revenues, food cost decreased 0.1 percentage points from the second quarter of 2003 and increased 0.2 percentage points over the previous year-to-date period. Restaurant food cost, as a percentage of restaurant sales, decreased 0.5 percentage points for both the quarter and year-to-date periods primarily due to selective menu price increases, decreased discounting and efficiencies gained from the implementation of our new menu during the first quarter of 2003. These efficiencies were partially offset by increases in commodity costs, primarily beef, pork, dairy and eggs. As a percentage of Foxtail sales, Foxtail food cost increased 2.5 and 2.6 percentage points for the quarter and year-to-date periods, respectively, primarily due to increases in the costs of raw materials, particularly eggs, milk and other dairy products.

Labor and benefits:

Labor and benefits expense, as a percentage of total revenues, decreased 0.1 percentage points from the second quarter of 2003 and decreased 0.6 percentage points for the year-to-date period ended July 11, 2004. The decrease is primarily due to increased labor productivity at Company-operated restaurants partially offset by an increase in incentives, employee insurance and average wage rates.

Federal and state minimum wage laws impact the wage rates of the Company’s hourly employees. Certain states do not allow tip credits for servers which results in higher payroll costs as well as greater exposure to increases in minimum wage rates. In the past, the Company has been able to offset increases