UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

OR

Commission File Number 333-57925

THE RESTAURANT COMPANY

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

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

None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x      No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

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

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

Documents incorporated by reference: None.

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Table of Contents

PART I

Item 1. Business.

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

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

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

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

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

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Design Development. Our restaurants are primarily located in freestanding buildings seating between 90 and 250 customers. We employ an on-going system of prototype development, testing and remodeling to maintain operationally efficient, cost-effective and unique interior and exterior facility design and decor. The current prototype packages feature modern, distinctive interior and exterior layouts that enhance operating efficiencies and customer appeal.

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

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

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

Franchise Guarantees. During 2000, the Company entered into an agreement to guarantee fifty percent of borrowings up to a total guarantee of $1,500,000 for use by a franchisee to remodel and upgrade existing restaurants. As of December 26, 2004, $3,000,000 in borrowings was outstanding under this agreement of which the Company guaranteed $1,500,000. Under the provisions of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, this guarantee has been determined by the Company not to be a variable interest in the franchisee.

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

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

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Patents, Trademarks and Other Intellectual Property. We believe that our trademarks and service marks, especially the mark “Perkins,” are of substantial economic importance to our business. These include signs, logos and marks relating to specific menu offerings in addition to marks relating to the Perkins name. Certain of these marks are registered in the U.S. Patent and Trademark Office and in Canada. Common law rights are claimed with respect to other menu offerings and certain promotions and slogans. We have copyrighted architectural drawings for Perkins restaurants and claim copyright protection for certain manuals, menus, advertising and promotional materials. We do not have any patents.

Competition. Our business and the restaurant industry in general are highly competitive and are often affected by changes in consumer tastes and eating habits, by local and national economic conditions and by population and traffic patterns. We compete directly or indirectly with all restaurants, from national and regional chains to local establishments, based on a variety of factors, which include price, quality, service, menu selection, convenience and location. Some of our competitors are corporations that are much larger than us and have substantially greater capital resources at their disposal. In addition, in some markets, primarily in the northeastern United States, Perkins and FICC operate restaurants that compete with each other.

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

Regulation. We are subject to various federal, state and local laws affecting our business. Restaurants generally are required to comply with a variety of regulatory provisions relating to zoning of restaurant sites, sanitation, health and safety. No material amounts have been or are expected to be expensed to comply with environmental protection regulations.

We are subject to a number of state laws regulating franchise operations and sales. Those laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises and, in certain cases, also apply substantive standards to the relationship between franchisor and franchisee. We must also adhere to Federal Trade Commission regulations governing disclosures in the sale of franchises.

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

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

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Item 2. Properties.

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

Number of Restaurants

Most of the restaurants feature a distinctively styled brick or stucco building. Our restaurants are predominantly single-purpose, one-story, free-standing buildings averaging approximately 5,000 square feet, with a seating capacity of between 90 and 250 customers.

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The following table sets forth certain information regarding Company-operated restaurants and other properties, as of December 26, 2004:

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

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

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

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

Item 3. Legal Proceedings.

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

Item 4. Submission of Matters to Vote of Shareholders.

Not applicable.

[Intentionally Left Blank]

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PART II

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

     Market information.

No established public market exists for our equity securities.

     Holders.

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

     Dividends.

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

     Purchases of Equity Securities.

Not applicable.

[Intentionally Left Blank]

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Item 6. Selected Financial Data.

THE RESTAURANT COMPANY AND SUBSIDIARIES
SELECTED FINANCIAL AND OPERATING DATA
(In Thousands, Except Number of Restaurants)

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

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

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

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

(c)

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

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

GENERAL

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

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

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

RESTATEMENT OF FINANCIAL STATEMENTS

Restatement of Previously Issued Consolidated Financial Statements –

Lease Accounting

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

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

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

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

Discontinued Operations

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

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

SIGNIFICANT ACCOUNTING POLICIES

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

Revenue Recognition:

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

Concentration of Credit Risk:

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

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Insurance Reserves:

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

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

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

Long-Lived Assets:

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

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

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

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

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

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

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

Deferred Income Taxes:

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

ACQUIRED RESTAURANT OPERATIONS

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

SYSTEM DEVELOPMENT

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

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MANAGEMENT’S OUTLOOK

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

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

RESULTS OF OPERATIONS

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

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

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

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

Revenues:

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

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

Revenues from Foxtail increased approximately 12.6% over 2003 and constituted 11.3% of our total 2004 revenues. In order to ensure consistency and availability of our proprietary products to each restaurant in the system, Foxtail offers cookie doughs, muffin batters, pancake mixes, pies and other food products to Company-operated and franchised restaurants through food service distributors. Additionally, it produces a variety of non-proprietary products for sale in various retail markets. Sales to Company-operated restaurants are eliminated in the accompanying statements of operations. The increase noted above can be attributed to growth in sales outside of the Perkins system.

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

Costs and Expenses:

Food cost:

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

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

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Labor and benefits:

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

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

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

Operating expenses:

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

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

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

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

General and administrative:

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

Depreciation and amortization:

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

Provision for/Benefit from disposition of assets:

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

Asset write-down:

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

Interest, net:

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

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Provision for income taxes:

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

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

Revenues:

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

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

Revenues from Foxtail increased approximately 0.6% over 2002 and constituted 10.3% of our total 2003 revenues. In order to ensure consistency and availability of our proprietary products to each restaurant in the system, Foxtail offers cookie doughs, muffin batters, pancake mixes, pies and other food products to Company-operated and franchised restaurants through food service distributors. Additionally, it produces a variety of non-proprietary products for sale in various retail markets. Sales to Company-operated restaurants are eliminated in the accompanying statements of operations. The increase noted above can be attributed to growth in sales outside of the Perkins system.

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

Costs and Expenses:

Food cost:

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

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

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Labor and benefits:

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

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

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

Operating expenses:

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

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

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

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

General and administrative:

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

Depreciation and amortization:

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

Provision for/Benefit from disposition of assets:

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

Lease termination:

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

Asset write-down:

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

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

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

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

CAPITAL RESOURCES AND LIQUIDITY

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

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

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

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

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

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

We have outstanding $130 million of 10.125% Unsecured Senior Notes (the “Notes”) due December 15, 2007. Interest on the Notes is payable semi-annually on June 15 and December 15. The Notes may be redeemed at any time at a redemption price of 101.688% through December 15, 2005, at which time the Notes may be redeemed at par.

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

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

CASH CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

Cash Contractual Obligations:

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