UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended October 3, 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
ITEM 1. FINANCIAL STATEMENTS
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

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)
(Unaudited)

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 544 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.

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, second and third quarters ended on April 18, July 11 and October 3, respectively. The fourth quarter of 2004 will end on December 26.

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

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Provision for Disposition of Assets and Asset Write-Down

During the quarter ended October 3, 2004, four separate hurricanes struck Florida where the Company has a significant concentration of stores. The Company recorded a provision for the disposition of assets of $38,000, which represents the net book value of specifically identifiable assets destroyed during the hurricanes. All other costs associated with the hurricanes, including repairs and capital replacements, are estimated to be approximately $300,000. Of this amount, the Company estimates that approximately $160,000 consists of capital items that will be included in 2004 capital spending. The remaining costs were expensed to the income statement during the third quarter.

Also, during the quarter, the Company entered into a contract to sell one restaurant property. This sale closed on October 15, 2004. The Company will record a net gain of approximately $400,000 on the sale during the fourth quarter.

During the second quarter, 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 recognized in the first quarter.

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 forty weeks ended October 3 and October 5, consists of the following (in thousands):

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Other supplemental cash flow information is as follows (in thousands):

Year-to-date, the Company has converted approximately $283,000 of accounts receivable to long-term notes receivable.

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Segment Reporting

The following presents revenue and other financial information by business segment for the twelve and forty weeks ended October 3 and October 5 (in thousands):

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

Revolving Credit Agreement

As of October 3, 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 the Lender to extend the term of the Credit Facility, which the Company anticipates completing before expiration of the Credit Facility. As of October 3, 2004, there were no borrowings and approximately $5,968,000 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 October 3, 2004, the Company was in compliance with the requirements of the financial covenants.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PERIOD ENDED OCTOBER 3, 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 October 3, 2004, the Company owned and operated 154 and franchised 333 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 October 3, 2004, revenues from Company-operated restaurants, Foxtail, and franchise and other accounted for 81.2%, 12.1% and 6.7% of total revenue, respectively.

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A summary of the Company’s results for the twelve and forty weeks ended October 3, 2004 and October 5, 2003 are presented in the following table. All revenues, costs and expenses are expressed as a percentage of total revenues.

Net Income for the third quarter of 2004 was $1,741,000 versus net income of $1,176,000 for the third quarter of 2003. For the year-to-date period ended October 3, 2004, net income was $4,539,000 compared to $2,557,000 for the year-to-date period ended October 5, 2003.

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Revenues:

Total revenues for the third quarter of 2004 increased 1.7% from the prior year third quarter. Year-to-date total revenues increased 2.6% over the prior year-to-date period. This increase is primarily due to increased restaurant sales.

Same store comparable sales in Company-operated restaurants increased approximately 0.4% for the third quarter and increased approximately 1.4% year-to-date. The increase for the quarter is attributable to an increase in the average guest check of 4.3% offset by a decrease of 3.9% in comparable guest visits . The year-to-date increase is attributable to a 4.1% increase in the average guest check offset by a decrease of 2.7% in comparable guest visits. The calculation of same store comparable sales excludes days that stores were closed due to the series of hurricanes in Florida.

Revenues from Foxtail increased approximately 18.9% from the prior year quarter and increased 7.8% over the prior year-to-date period and constituted approximately 12.1% and 10.2%, respectively, of the Company’s total revenues.

Franchise revenue, composed primarily of franchise royalties, decreased 0.2% over the third quarter of 2003 and increased 1.0% year-to-date. Royalty revenues increased for the year-to-date period primarily due to an estimated 1.7% increase in franchise restaurant comparable sales partially offset by a decrease in the average number of franchise restaurants. Since the third quarter of 2003, the Company’s franchisees have opened 8 restaurants and have closed 13 restaurants.

Costs and Expenses:

Food cost:

In terms of total revenues, food cost increased 1.2 percentage points from the third quarter of 2003 and increased 0.5 percentage points over the previous year-to-date period. Restaurant food cost, as a percentage of restaurant sales, decreased 0.9 and 0.6 percentage points for the quarter and year-to-date periods, respectively, primarily due to selective menu price increases and decreased discounting. 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 9.9 and 5.0 percentage points for the quarter and year-to-date periods, respectively, primarily due to production inefficiencies related to the plant expansion completed earlier this year as well as 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 1.2 percentage points from the third quarter of 2003 and decreased 0.8 percentage points for the year-to-date period ended October 3, 2004. The decrease is primarily due to increased labor productivity at Company-operated restaurants partially offset by an increase in employee insurance, average wage rates and Foxtail labor costs, which increased 2.1% for the quarter as a percentage of Foxtail sales.

Federal and state minimum wage laws impact the wage rates of the Company’s hourly employees. Certain states do not allow tip credits for servers which results in higher payroll costs as well as greater exposure to increases in minimum wage rates. In the past, the Company has been able to offset increases in labor costs through selective menu price increases and improvements in labor productivity. However, there is no assurance that future increases can be mitigated through raising menu prices or improvements in labor productivity.

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Operating expenses:

Expressed as a percentage of total revenues, operating expenses were flat compared to the third quarter of 2003 and decreased 0.3 percentage points for the year-to-date period. The decrease for the year-to-date period is primarily due to decreases in the usage of restaurant supplies and in administrative expenses at Company-operated restaurants.

General and administrative:

General and administrative expenses, as a percentage of total revenues, increased 0.1 percentage points compared to the third quarter of 2003 and increased 0.3 percentage points over the year-to-date period. The increase is primarily due to increased incentive costs, partially offset by reduced home office expenses.

Depreciation and amortization:

Depreciation and amortization expense decreased from 5.2 percent of sales in the third quarter of 2003 to 4.9 percent of sales in 2004 and decreased from 5.5 percent of sales to 4.9 percent of sales for the year-to-date period ended October 3, 2004 as compared to the same period in 2003. This decrease is primarily due to the Company’s reduction in capita