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EX-31.2 - EX-31.2 SECTION 302 CERTIFICATION OF THE CFO - PERKINS & MARIE CALLENDER'S INCex_31-2.htm
EX-31.1 - EX-31.1 SECTION 302 CERTIFICATION OF THE CEO - PERKINS & MARIE CALLENDER'S INCex_31-1.htm
EX-32.1 - EX-32.1 SECTION 906 CERTIFICATION OF THE CEO - PERKINS & MARIE CALLENDER'S INCex_32-1.htm
EX-32.2 - EX-32.2 SECTION 906 CERTIFICATION OF THE CFO - PERKINS & MARIE CALLENDER'S INCex_32-2.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
(Mark One)
 
R
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
   
 
For the fiscal year ended December 27, 2009
OR
   
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from                                                                 to                                                          
 
Commission File Number 333-131004

PERKINS & MARIE CALLENDER’S INC.
    (Exact name of Registrant as specified in its charter)  
 
Delaware
62-1254388
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
   
6075 Poplar Ave. Suite 800 Memphis, TN
38119
(Address of principal executive offices)
(Zip Code)
(901) 766-6400
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class 
Name of each exchange on which registered 
None
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes £ No R

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes £ No R
 
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 £
 
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes £ No £
 
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. R
 
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer £
Accelerated filer £
Non-accelerated filer R
Smaller reporting company £
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R
 
As of  July 12, 2009, the last business day of our most recently ended second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $___based on the closing sale price as reported on the (applicable exchange). Not Applicable
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practical date.
Class: Common Stock, $.01 par value per share
Outstanding as of March 29, 2010: 10,820 shares
Documents incorporated by reference: None
 
 
 
 

 


PART I
 
3
9
18
19
20
20
PART II
 
21
22
23
42
42
78
78
79
PART III
 
80
81
90
91
92
PART IV
 
93
95
96
Ex-31.1 Section 302 Certification
 
Ex-31.2 Section 302 Certification
 
Ex-32.1 Section 906 Certification
 
Ex-32.2 Section 906 Certification
 


PART I


General.  Perkins & Marie Callender’s Inc. (together with its consolidated subsidiaries collectively the “Company”, “PMCI”, “we” or “us”), is a wholly-owned subsidiary of:

·  
Perkins & Marie Callender’s Holding Inc., which is a wholly-owned subsidiary of
·  
P&MC’s Holding Corp, which is a wholly-owned subsidiary of
·  
P&MC’s Real Estate Holding LLC, which is a wholly-owned subsidiary of
·  
P&MC’s Holding LLC, which is principally owned by affiliates of Castle Harlan, Inc. (“Castle Harlan”).

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.

Formation and History of Perkins & Marie Callender’s Inc.  On September 21, 2005, P&MC’s Holding Corp, an affiliate of Castle Harlan Partners IV, L.P. (“CHP IV”), a New York-based private equity fund also managed by Castle Harlan, purchased all of the outstanding capital stock of Perkins & Marie Callender’s Holding Inc. (the “Acquisition”). Since the closing of the Acquisition, the capital stock has been 100% owned by P&MC’s Holding Corp., whose capital stock is 100% owned by P&MC’s Real Estate Holding LLC, whose capital stock is 100% owned by P&MC’s Holding LLC. Castle Harlan Partners III, L.P. and CHP IV are under the common control of Castle Harlan.

On May 3, 2006, pursuant to a stock purchase agreement (the “Stock Purchase Agreement”), the Company purchased all of the outstanding stock of WRG, and the shareholders of WRG received equity interests in P&MC’s Holding LLC in exchange for their WRG stock. As a result of the purchase, WRG became a direct wholly-owned subsidiary of the Company.  From September 21, 2005 through May 3, 2006, both the Company and WRG were portfolio companies under the common control of Castle Harlan; therefore, the financial statements of both entities are presented retroactively on a consolidated basis, in a manner similar to a pooling of interest, from September 21, 2005, the first date at which both companies were under common control (the “Combination”).

Financial Statement Presentation. The accompanying consolidated financial statements include the financial results of the Company for fiscal years 2009, 2008 and 2007.  Intercompany transactions have been eliminated in consolidation.

Operations. The Company operates two primary 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 pie and other bakery items, located primarily in the western United States under the name Marie Callender’s Restaurant and Bakery (“Marie Callender’s”).

The Company also operates a bakery goods manufacturing segment (“Foxtail”), which manufactures 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 food service distributors.



Perkins Restaurant and 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 has continued to adapt its menu, product offerings and building décor to meet changing consumer preferences. As of December 27, 2009, Perkins offered a full menu of over 90 assorted breakfast, lunch, dinner, snack and dessert items ranging in price from $3.89 to $13.99, with an average guest check of $8.81 at our Company-operated Perkins restaurants.  Perkins’ signature menu items include our omelettes, secret-recipe real buttermilk pancakes, Mammoth Muffins, the Tremendous Twelve platters, salads, melt sandwiches and Butterball turkey entrees. Breakfast items, which are available throughout the day, accounted for over half of the entrees sold in our Perkins restaurants during fiscal year 2009.

Perkins is a leading operator and franchisor of full-service family dining restaurants. As of December 27, 2009, we franchised 315 restaurants to 108 franchisees in 31 states and in 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, Wisconsin and Florida. Our Company-operated Perkins restaurants generated average annual revenues of $1,715,000 for the year ended December 27, 2009.

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 years ended December 27, 2009, December 28, 2008 and December 30, 2007, average annual royalties earned per franchised restaurant were approximately $60,000, $62,000 and $64,000, respectively. The following number of Perkins license agreements are scheduled to expire in the years indicated: 2010 — twenty-one; 2011 — thirteen; 2012 — six; 2013 — eight and 2014 — seventeen. Upon the expiration of license agreements, franchisees typically apply for and receive new license agreements and 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 December 27, 2009, the Company offered a full menu of over 50 items ranging in price from $5.89 to $17.99. Marie Callender’s signature menu items include pot pies, quiches, a plentiful salad bar and Sunday brunch. During fiscal year 2009, breakfast sales accounted for approximately 12% of total sales, and the remaining sales were split approximately evenly between the lunch and dinner day parts.

Marie Callender’s operates primarily in the western United States. As of December 27, 2009, we operated 92 Marie Callender’s restaurants and franchised 39 restaurants to 26 franchisees located in four states and Mexico.  The footprint of our Company-operated Marie Callender’s restaurants extends over nine states, with 62 restaurants located in California. Our existing Company-operated restaurants generated average annual revenues of $2,079,000 for the year ended December 27, 2009.  As of December 27, 2009, 127 restaurants were operated under the “Marie Callender’s” name, one under the “Marie Callender’s Grill” name, two under the “Callender’s Grill” name and one under the “East Side Mario’s” name. The Company owns and operates 77 Marie Callender’s restaurants, two Callender’s Grill restaurants, and the East Side Mario’s restaurant (a mid-priced Italian restaurant operating in Lakewood, California).  The Company also has an ownership interest in 12 Marie Callender’s restaurants under partnership agreements, with a noncontrolling interest in two of the partnership restaurants and a 57% to 95% ownership interest in the remaining ten locations.  Franchisees own and operate 38 Marie Callender’s restaurants and the Marie Callender’s Grill.


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 years ended December 27, 2009, December 28, 2008 and December 30, 2007, average annual royalties earned per franchised restaurant were approximately $86,000, $98,000 and $102,000, respectively.  The following number of Marie Callender’s franchise agreements have expiration dates occurring during the next five years: 2010 — two; 2011 — one; 2012 — four; 2013 — one and 2014 — zero. 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.

Foxtail Manufacturing

Foxtail manufactures pies, pancake mixes, cookie doughs, muffin batters and other bakery products for both our in-store bakeries and third-party customers. One manufacturing facility in Corona, California produces pies and other bakery products principally for Marie Callender’s restaurants, and two facilities in Cincinnati, Ohio produce pies, pancake mixes, cookie doughs, muffin batters and other bakery products to supply Perkins restaurants and various third-party customers.   Sales of bakery products to our Company-operated and franchised restaurants accounted for 36.0% and 28.2% of Foxtail’s revenues, respectively, during fiscal year 2009, compared to 29.0% and 30.4% of Foxtail’s revenues, respectively, during fiscal year 2008. Sales of bakery products to third-party customers accounted for the remainder, or 35.8% and 40.6%, respectively, of Foxtail’s sales during fiscal years 2009 and 2008.

Working Capital. 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 several days after the receipt of cash from the related sales.

Restaurant Design & Development. Our Perkins restaurants are primarily located in freestanding buildings that generally seat between 90 and 250 customers. Our Marie Callender’s restaurants are also primarily located in freestanding buildings that generally seat between 70 and 385 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.

The following table lists the development activities for each of our full-service restaurant brands for each of the last three years:
 
   
Perkins Restaurants
   
Marie Callender's Restaurants
 
   
Company-Operated
   
Franchised
   
Company-
Operated
   
Franchised
 
                         
Restaurants at December 31, 2006
    155       322       92       46  
                                 
New restaurants
    7       8       0       0  
Restaurants acquired from franchisees
    3       (3)       1       (1)  
Closed restaurants
    (3)       (4)       (1)       (1)  
Restaurants at December 30, 2007
    162       323       92       44  
                                 
New restaurants
    2       2       0       1  
Closed restaurants
    0       (8)       (1)       (3  
Restaurants at December 28, 2008
    164       317       91       42  
                                 
New restaurants
    0       1       0       0  
Restaurants acquired from franchisees
    0       0       1       (1)  
Closed restaurants
    (1)       (4)       0       (2)  
Restaurants at December 27, 2009
    163       314       92       39  

Research and Development. Each year, we develop and test a wide variety of products for the Perkins brand in our 5,600 square foot test kitchen in Memphis, Tennessee. We also employ an executive chef for the development of Marie Callender’s products. New products undergo extensive development and consumer testing to determine acceptance in the marketplace. While this effort is an integral part of our overall operations, it was not a material expense in 2009, 2008 or 2007. We spent approximately $106,000, $114,000 and $155,000 conducting consumer research in 2009, 2008 and 2007, respectively.

Significant Franchisees.  As of December 27, 2009, three Perkins franchisees otherwise unaffiliated with the Company owned 88, or 28%, of the 314 franchised Perkins restaurants, consisting of 40, 27 and 21 restaurants, respectively.  As of December 28, 2008, these same franchisees owned 41, 27 and 21 restaurants, respectively.  The following table presents a summary of the royalty and license fees provided by these three franchisees:
 
# of
   
Year-to-Date
   
# of
   
Year-to-Date
 
Restaurants
   
Ended
   
Restaurants
   
Ended
 
  (2009)    
December 27, 2009
      (2008)    
December 28, 2008
 
                         
  40     $ 1,861,000       41     $ 1,926,000  
  27       1,420,000       27       1,452,000  
  21       1,427,000       21       1,500,000  




As of December 27, 2009, three Marie Callender’s franchisees otherwise unaffiliated with the Company owned 12, or 31%, of the 39 franchised Marie Callender’s restaurants, consisting of four restaurants each.  As of December 28, 2008, 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
   
Year-to-Date
   
# of
   
Year-to-Date
 
Restaurants
   
Ended
   
Restaurants
   
Ended
 
  (2009)    
December 27, 2009
      (2008)    
December 28, 2008
 
                         
  4     $ 371,000       5     $ 542,000  
  4       389,000       4       465,000  
  4       283,000       4       312,000  

Significant Licensees. The Company has license agreements with certain parties to distribute and market Marie Callender’s branded products. The most significant of these agreements are with ConAgra, Inc., which distributes frozen entrees and dinners to supermarkets and club stores throughout the United States, and American Pie, LLC, which distributes primarily frozen pies throughout most of the country. Both agreements are in effect in perpetuity.  The licensor has the right to terminate each agreement if specified sales levels are not achieved (both licensees have achieved the required annual sales levels in fiscal 2009), and each licensee has the right to terminate upon 180 days notice. License income under these two agreements totaled approximately $5,288,000, $4,865,000 and $4,336,000 in 2009, 2008 and 2007, respectively.

Territorial Rights. The Company has arrangements with several different parties to whom territorial rights were granted in exchange for specified payments. 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 2009, 2008 and 2007, we paid an aggregate of $2,592,000, $2,718,000 and $2,762,000, respectively, 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 in certain states.

Purchasing and Sourcing of Materials. We negotiate directly with suppliers for food and beverage products and raw materials to ensure consistent quality and freshness of products and to obtain competitive prices. The principal products and raw materials used in our products include beef, pork, poultry, coffee, eggs, dairy products, wheat products and corn products. 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.  Additionally, we offer diverse menus, which we believe further mitigates our exposure to commodity risk.  In fiscal year 2009, no single commodity accounted for over 8% of our purchases.  We have a contract with U.S. Foodservice, Inc. (“U.S. Foodservice”) for the distribution of most of the food and other supplies used by our Company-operated restaurants and certain of our franchisees.  During fiscal year 2009, U.S. Foodservice accounted for approximately 95% of our total purchases of food and other supplies.

All franchisees have the opportunity to benefit from our purchasing economies of scale, and we aggregate the purchasing requirements of all of our Company-operated restaurants and the majority of franchised restaurants to obtain better prices for food items, cleaning supplies, equipment and maintenance services.  All of our Company-operated and franchised restaurants source most of their bakery goods, including pies, cookie doughs, muffin batters and pancake mixes from Foxtail.  However, we do not require franchisees to purchase their requirements through us.

Trademarks and Other Intellectual Property. We believe that our trademarks and service marks, especially the marks “Perkins” and “Marie Callender’s,” 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 and Marie Callender’s 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. The restaurant industry is highly competitive and fragmented. The number, size and strength of our competitors vary widely by city and region and are often affected by changes in consumer tastes and eating habits, local and national economic conditions, 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 menu price points, quality of food products, customer service, reputation, menu selection, convenience, name recognition and restaurant location. We consider our principal competitors to be full-service, family-dining operators, including national and regional chains such as Bakers Square, Bob Evans, Cracker Barrel, Denny’s, IHOP, Mimi’s Cafe and Village Inn, and, to a lesser extent, Country Kitchen and Waffle House. We also face competition from independents and local establishments. Some of our competitors are much larger than us and have substantially greater capital resources at their disposal.

Employees. As of December 27, 2009, we employed approximately 13,700 persons. Approximately 8,800 were employed at Perkins restaurants, approximately 4,400 were employed at Marie Callender’s restaurants and approximately 500 were employed as administrative and manufacturing personnel. Approximately 48% of our 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 employ full-time restaurant training managers and a director of training. We believe that our restaurant management compensation and benefits package is competitive within the industry. None of our employees are represented by a union.

Seasonality. The Company’s sales fluctuate seasonally and the Company’s fiscal quarters do not all have the same time duration.  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.  Factors influencing relative sales variability, in addition to the holiday impact noted above, include, but are not limited to, the frequency and popularity of advertising and promotions, the relative sales levels of new and closed locations, other holidays and weather.

Regulation. Our Company-operated and franchised restaurants are subject to extensive federal, state and local governmental regulations, including those relating to the preparation and sale of food, building and zoning requirements and access for the disabled, including the Americans with Disabilities Act. For example, on January 1, 2010, legislation took effect in California that prohibits the use of trans fats in food establishments, including casual dining restaurants. The trans fat ban includes oil, shortening and margarine used in spreads or for frying. Public interest groups have also focused attention on the marketing of high-fat and high-sodium foods to children in a stated effort to combat childhood obesity, and legislators in the United States have proposed replacing the self-regulatory Children’s Advertising Review Board with formal governmental regulation under the Federal Trade Commission. In addition, certain jurisdictions have adopted regulations that require chain restaurants to include calorie information on their menu boards and make other nutritional information available on printed menus which must be plainly visible to consumers at the point of ordering.

We and our franchisees also are subject to licensing and regulation by state and local departments relating to health, sanitation and safety standards and liquor licenses (with respect to our 103 restaurants that serve alcoholic beverages) and to laws governing our relationships with employees, including minimum wage requirements, overtime, working conditions and citizenship requirements. The inability to obtain or maintain such licenses or publicity resulting from actual or alleged violations of such regulations could have an adverse effect on us.

We also are subject to Federal Trade Commission regulations and various state and foreign laws which govern the offer and sale of franchises. Some states require that certain materials be registered before franchises can be offered or sold in that state. We also must comply with a number of state and foreign laws that regulate some substantive aspects of the franchisor-franchisee relationship. These laws may limit a franchisor’s ability to: terminate or not renew a franchise without good cause; interfere with the right of free association among franchisees; enforce noncompetition provisions in its franchise agreements; disapprove the transfer of a franchise; discriminate among franchisees with regard to charges, royalties and other fees; or place new restaurants near existing restaurants.


In addition, as is the case with any owner or operator of real property, we are subject to a variety of federal, state and local governmental regulations relating to the use, storage, discharge, emission and disposal of hazardous materials. We do not have environmental liability insurance and no material amounts have been or are expected to be incurred to comply with environmental protection regulations.

Segment Information. We have three reportable segments: restaurant operations, franchise operations and Foxtail. See Note 16 of the Notes to Consolidated Financial Statements for financial information regarding each of our segments.

Available Information. Additional information may be found on our websites, www.perkinsrestaurants.com and www.mcpies.com. We make available on our websites our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all exhibits and amendments to those reports free of charge as soon as reasonably practicable after they are electronically filed or furnished to the Securities and Exchange Commission (the “SEC”). Our internet websites and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.


Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under our indebtedness.
 
As of December 27, 2009, we had approximately $337.6 million of total debt and capital lease obligations outstanding, of which approximately $148.7 million is secured. Subject to restrictions in our indentures and our credit agreement, we may incur additional indebtedness.
 
Our substantial indebtedness could have important consequences and significant effects on our business. For example, it could:
 
·  
make it more difficult for us to satisfy our obligations with respect to our indebtedness and our other financial obligations;
·  
increase our vulnerability to general adverse economic and industry conditions;
·  
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
·  
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
·  
restrict us from making strategic acquisitions or exploiting business opportunities;
·  
place us at a competitive disadvantage compared to our competitors that have less debt; and
·  
limit our ability to borrow additional funds.
 
In addition, our indentures and our credit agreement contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness.
 
Furthermore, based on our level of indebtedness or other factors affecting our business, one or more suppliers could require more restrictive payment terms before shipping products to us, which could adversely affect our liquidity.
 
Borrowings under our credit agreement bear interest at variable rates. If these rates were to increase significantly, our ability to borrow additional funds may be reduced and the risks related to our substantial indebtedness would intensify. While we may enter into agreements limiting our exposure to higher interest rates, such agreements may not offer complete protection for this risk.


Ongoing macroeconomic conditions and changes in consumer preferences are adversely impacting our business, financial position and results of operations and are expected to continue to do so.

Purchases at our restaurants are discretionary for our customers, and, therefore, we are susceptible to economic slowdowns. Changes in consumer discretionary spending as a result of ongoing national and regional economic conditions have adversely affected our sales. As a result, we have experienced a decline in comparable restaurant sales and declining profits in our restaurants in both 2009 and 2008. A further decline in general economic conditions or negative economic sentiment could further affect our operating performance. In addition, if we choose to offer menu price discounts and/or promotions in response to these macroeconomic conditions, our margins could be reduced.  As a result, we may suffer further losses and be unable to generate sufficient cash flow to fund our operations or service our substantial debt. Economic conditions that have adversely affected and could continue to adversely affect consumer discretionary spending include, without limitation, unemployment levels, investment returns, residential home foreclosures, residential mortgage interest rates and residential real estate prices, energy costs (especially gasoline prices), price inflation affecting other goods and services and the general consumer perception of economic conditions of the country or any of the markets in which we operate.
 
We have experienced a decline in comparable restaurant sales and declining profits in our restaurants in both 2009 and 2008.  The recent turmoil in the economy has adversely affected our guest counts and, in turn, our operating results and cash generated by operations.  The Company expects to incur a net loss in 2010.  In order to improve the cash flows in our business, we have introduced a new breakfast program at our Marie Callender’s restaurants, improved systems to more effectively manage our food and labor costs, upgraded our management staff and certain equipment in our Foxtail division to drive higher operating efficiencies and reduced overall planned capital expenditures for 2010.  We continually review general and administrative expenditures to identify and implement potential cost-saving measures.  Management expects these initiatives together with the Company’s cash provided by operations and borrowing capacity under the Revolver to provide sufficient liquidity through 2010.  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.

We also may be adversely affected by changes in consumer tastes, demographic trends and the impact on consumer eating habits of new information regarding diet, nutrition and health. Our success depends in part on our ability to anticipate and respond to changing economic conditions and consumer preferences and tastes. If we change our concept and/or menu to respond to changes in economic conditions and consumer tastes or dining patterns, we may lose customers who do not prefer the new concept and/or menu, and may not be able to attract a sufficient new customer base to produce the revenue needed to make our restaurants profitable.

We depend upon frequent deliveries of food and other supplies from our suppliers, and their failure to deliver the necessary products in a timely fashion could harm our business; additionally, supplier payment terms may affect our liquidity.
 
Our ability to maintain consistent quality throughout our Company-owned and franchised restaurants depends in part upon our ability to acquire fresh food products and related items from reliable sources in accordance with our specifications. We have a contract with U.S. Foodservice for the distribution of most of the food and other supplies used by our restaurants and certain of our franchisees. During fiscal year 2009, U.S. Foodservice accounted for approximately 95% of our total purchases of food and other supplies.
 
Under the terms of our contract, U.S. Foodservice may unilaterally establish and revise credit terms based on our perceived credit worthiness, including reducing the amount of time permitted between invoice and payment for new orders.
 
If any of our suppliers do not perform adequately or otherwise fail to distribute products or supplies to our restaurants, we may be unable to replace the supplier in a short period of time on acceptable terms. Factors that could result in the failure of a supplier to deliver supplies on a timely basis include unanticipated demand, supply shortfalls, inclement weather, strikes and financial issues affecting the supplier, including bankruptcy.
 


Although we have alternative sources of supply available to our restaurants, our inability to replace a supplier in a short period of time on acceptable terms could increase our costs and/or could cause shortages at our restaurants of food and other items that may cause us to remove certain items from a restaurant’s menu. If we temporarily remove popular items from a restaurant’s menu, that restaurant may experience a significant reduction in revenue during the time affected by the shortage or thereafter, as our customers may change their dining habits as a result.
 
We may not be able to compete successfully with other restaurants.

The restaurant industry is intensely competitive with respect to quality of food products, customer service, reputation, restaurant location, attractiveness and maintenance of properties, name recognition and price of meals and beverages. We consider our principal competitors to be mid-priced family dining venues and casual dining operations, including other national and regional chains, as well as locally-owned restaurants. Some of our competitors may be better established in certain of the markets where our restaurants and franchised restaurants are or may be located.  In addition, as a result of current economic conditions, some of our competitors are offering aggressive menu price discounts and promotions. Some of our competitors also have substantially greater financial, marketing and other resources than we do. We also compete with other restaurants for experienced management personnel and hourly employees and with other restaurants and retail establishments for quality restaurant sites. If our restaurants and franchised restaurants are unable to compete successfully with other restaurants in new and existing markets, or if we choose to offer menu price discounts and/or promotions in response to actions of our competitors, our margins could be adversely affected, and, as a result, we may not be able to generate sufficient cash flow to service our debt obligations.  Furthermore, new competitors may emerge at any time. To the extent that one of our existing or future competitors offers items that are better priced, more appealing to consumer tastes or operate in more desirable locations than our restaurants, it could materially adversely affect our revenues.

Inflation in the prices of food could adversely affect us.
 
In the past, we have experienced, and may experience in the future, inflation in the prices of certain of our key food ingredients, which depend on a variety of factors, many of which are beyond our control. Fluctuations in weather, supply and demand, energy and transportation costs, general inflationary trends and other economic conditions could adversely affect the cost, availability and quantity of one or more of our products and raw ingredients. Significant items that could be subject to price fluctuations include beef, pork, poultry, coffee, eggs, dairy products, wheat products and corn products.
 
We currently do not engage in futures contracts or other financial risk management strategies with respect to potential price fluctuations in the cost of food and other supplies, which we purchase at prevailing market or contracted prices. Our inability to obtain requisite quantities of high-quality ingredients on favorable terms would adversely affect our ability to provide the menu items that are central to our business, and the highly competitive nature of our industry may limit our ability to pass increased costs on to our guests, which could reduce our gross margins. If we were to raise our prices due to inflation, we could lose customers.

Increased energy costs could negatively impact the cost structure of our business.

We purchase electricity, oil and natural gas to operate our restaurants, and suppliers purchase fuel in connection with the transportation of food and other supplies to us. Any significant increase in energy costs could adversely affect our business through higher rates charged by providers of electricity, oil and natural gas and the imposition of fuel surcharges by our suppliers.  We may not be able to pass all or part of any future increases to our customers.


Because a significant portion of our Perkins bakery products are produced at facilities in the same city, we are vulnerable to natural disasters and other disruptions.

We depend on Foxtail’s ability to reliably produce our bakery products, which include pies, cookies, muffins, mixes and syrups, and deliver them to restaurants and foodservice distributors on a regular schedule. We currently produce a significant portion of our bakery products in two manufacturing facilities in Cincinnati, Ohio. As a result, Foxtail is vulnerable to damage or interruption from fire, severe drought, flood, power loss and energy shortages, telecommunications failure, break-ins, snow and ice storms and similar events. Any such damage or failure could disrupt some or all of our Foxtail operations and result in the loss of sales and current and potential customers if we are unable to quickly recover from such events. Our business interruption insurance may not be adequate to compensate us for our losses if any of these events occur. In addition, business interruption insurance may not be available to us in the future on acceptable terms or at all. Even if we carry adequate insurance, such events could have a material adverse impact on us.

Many Marie Callender’s restaurants are equipped with pie production facilities, while the remaining Marie Callender’s restaurants rely on a pie production facility in Corona, California. Although Marie Callender’s is less vulnerable than Perkins with respect to the impact of a disruption at its production plant, significant incremental costs would be incurred to supply bakery products to those restaurants without production equipment in the event they are unable to obtain pies from the Corona  facility on a timely basis.

Our operations are concentrated in six states.
 
For the year ended December 27, 2009, approximately 59% of the total number of our Company-operated and franchised restaurants were located in the states of California, Florida, Minnesota, Ohio, Pennsylvania and Wisconsin. Given our geographic concentrations, particularly in California and Florida, regional occurrences such as earthquakes, hurricanes, snow and ice storms or other natural disasters, unfavorable economic conditions, government regulations, reduced tourism, negative publicity, terrorist attacks or other events, conditions and occurrences specific to these states may materially adversely affect our revenues.

Labor shortages could slow our growth and adversely impact existing restaurants.

Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including restaurant managers, kitchen staff and servers necessary to meet the needs of our existing restaurants as well as accommodate further expansion. A sufficient number of qualified individuals of the requisite caliber to fill these positions may be in short supply in some areas. Any future inability to recruit and retain qualified individuals may delay the planned openings of new restaurants and could adversely impact our existing Company-operated restaurants and franchised restaurants. Any such delays, any material increases in employee turnover rates in existing restaurants or any widespread employee dissatisfaction could have a material adverse effect on us. Additionally, competition for qualified employees could require us to pay higher wages, which could result in higher labor costs.  Higher labor costs may have an adverse effect on our operating performance and accordingly, we may generate insufficient cash flow to service our debt obligations.

Increased labor and benefit costs could adversely affect our future operating performance.

We have a substantial number of employees who are paid wage rates at or slightly above the minimum wage. As federal and state minimum wage rates increase, we may be required to increase not only the wages of our minimum wage employees but also the wages paid to employees whose wage rates are above minimum wage. If competitive pressures or other factors prevent us from offsetting the increased costs by increases in prices, our profitability may decline. In addition, various proposals that would require employers to provide health insurance for all of their employees are considered from time-to-time in the U.S. Congress and various states. The imposition of any requirement that we provide health insurance to all employees on terms materially different from our existing programs could have an adverse effect on our operating performance.


One or more current restaurant locations may cease to be economically viable, and we may decide to close one or more restaurants.

We have in the past closed, and may in the future close, certain of our restaurants. If a current location ceases to be economically viable, we may close the restaurant in that location. The decision to close a restaurant generally involves an analysis of revenue and earnings trends, competitive ability, strategic factors and other considerations. Closing a restaurant would reduce the sales that such restaurant would have contributed to our revenues, and could subject us to various costs, including severance, legal costs and the write-down of leasehold improvements, equipment, furniture and fixtures.

All of our restaurant locations are leased. We may be locked into long-term and non-cancelable leases that we want to cancel and may be unable to renew leases that we want to extend at the end of their terms.
 
Many of our current leases are non-cancelable and typically have an initial term ranging from 15 to 20 years and renewal options for terms ranging from five to 20 years. The average remaining life of our current leases is approximately nine years. Leases that we enter into in the future likely will also be long-term and non-cancelable and have similar renewal options. If we close a restaurant, we may remain committed to perform our obligations under the applicable lease, which would include, among other things, payment of the base rent for the balance of the lease term. Additionally, the potential losses associated with our inability to cancel leases may result in our keeping open restaurant locations that perform significantly below targeted levels. As a result, ongoing lease operations at closed or underperforming restaurant locations could impair our results of operations.
 
In addition, at the end of the lease term and any renewal period for a restaurant, we may be unable to renew the lease without substantial additional cost, if at all. As a result, we may be required to close or relocate a restaurant, which could subject us to construction and other costs and risks, and may have an adverse effect on our operating performance.
 
A majority of our restaurants are owned and operated by independent franchisees over whom we do not have as much control as our Company-operated restaurants, and as a result the financial performance of franchisees could adversely affect our future operating performance.
 
As of December 27, 2009, 354 of our 609 restaurants were owned and operated by franchisees. As a result, we rely in part on our franchisees and the manner in which they operate their locations to develop and promote our business. Franchise royalties and fees represented approximately 4.2% of our revenues and contributed 41.9% of the segment income of our three reportable segments during fiscal 2009. While we try to ensure that the quality of our brand is maintained by all of our franchisees, there is a risk that franchisees will take actions that adversely affect the value of our intellectual property or reputation.

Our franchisees may not operate their locations in accordance with, or may object to, our policies, and we may experience disputes or other conflicts. In addition, although we have developed criteria to evaluate and screen prospective franchisees, there can be no assurance that franchisees will have the business acumen or financial resources necessary to operate successful franchises in their franchise areas. Franchisees may not be able to find suitable sites on which to develop restaurants. In addition, franchisees may not be able to negotiate acceptable lease or purchase terms for the sites, obtain the necessary permits and government approvals or meet construction schedules. Any of these problems could slow our growth and reduce our franchise revenues. State franchise laws may limit our ability to terminate or modify these franchise arrangements.

Additionally, many of our franchisees depend on financing from banks and other financial institutions in order to construct and open new restaurants.   Some of our franchisees are highly leveraged, and if they are unable to service their indebtedness, such failure could adversely affect their ability to maintain their operations and/or meet their contractual obligations to us, which may have a material adverse effect on our operating performance.


As of December 27, 2009, three Perkins’ franchisees, otherwise unaffiliated with the Company, owned 88 of the 354 franchised restaurants operating 40, 27 and 21 restaurants, respectively. If any of these franchisees were to experience financial difficulties our business could be adversely affected. In addition, a majority of our franchises can terminate their agreements with us on twelve months notice without cause. The failure of franchisees to operate franchised restaurants successfully or to the extent a significant number of franchisees elect to terminate their agreements with us could have a material adverse effect on us, our reputation, our brand and our ability to attract prospective franchisees.

The failure to enforce and maintain our intellectual property rights could adversely affect our ability to maintain brand awareness.

The success of our business strategy depends on our continued ability to use our existing trade names, trademarks and service marks. We have registered the names Perkins, Perkins Restaurant & Bakery, Marie Callender’s and certain other names used by our restaurants as trade names, trademarks or service marks with the United States Patent and Trademark Office and in Canada. However, our trademarks could be imitated in ways that we cannot prevent. In addition, we rely on trade secrets, proprietary know-how, concepts and recipes. Our methods of protecting this information may not be adequate and others could independently develop similar know-how or obtain access to our trade secrets, know-how, concepts and recipes.

Moreover, we may face claims of misappropriation or infringement of third parties’ rights that could interfere with our use of our proprietary know-how, concepts, recipes or trade secrets. Defending these claims may be costly and, if we are unsuccessful, may prevent us from continuing to use this proprietary information in the future and may result in an injunction restraining future use or monetary damages.

Our business is partially dependent upon our advertising and promotional programs, and our competitors’ advertising and promotional activities may reduce the effectiveness of our initiatives.
 
Our sales are heavily influenced by marketing and advertising. If we do not advertise or run promotions for our products, or if our marketing and advertising programs are not successful, we may experience a loss or reduction in sales, fail to attract new guests or be unable to retain existing guests. In addition, our competitors’ advertising and promotions, including any increase in the amount and/or frequency thereof, may reduce the effectiveness of our initiatives. As a result of current economic events, some of our competitors have significantly increased their use of promotions.  Furthermore, we may be adversely affected by an increase in the cost of television, radio, print or other forms of media advertising.

We depend on the services of key executives, the loss of who may adversely affect our future operating performance.

Some of our senior executives are important to our success because they have been instrumental in setting our strategic direction, operating our business, identifying, recruiting and training key personnel, identifying expansion opportunities and arranging necessary financing. Losing the services of any of these individuals may have an adverse effect on our business and operating performance and accordingly, we may generate insufficient cash flow to service our debt obligations until a suitable replacement could be found.



Additional expansion presents risks.

We review additional sites for potential future restaurants on an ongoing basis. After a new restaurant is opened, there is a “ramp-up” period of time before we expect to achieve our targeted level of profitability. This is due to higher operating costs caused by start-up and other temporary inefficiencies associated with opening new restaurants, such as a lack of market familiarity, consumer acceptance when we enter a new market and training of staff. Furthermore, our ability, and our franchisees’ ability, to open new restaurants is dependent upon a number of factors, many of which are beyond our and our franchisees’ control, including, but not limited to, the ability to:

 
find quality locations;
 
reach acceptable agreements regarding the lease or purchase of locations;
 
comply with applicable zoning, land use and environmental regulations;
 
raise or have available an adequate amount of money for construction and opening costs;
 
timely hire, train and retain the skilled management and other employees necessary to meet staffing needs;
 
obtain, for an acceptable cost, required permits and approvals;
 
efficiently manage the amount of time and money used to build and open each new restaurant; and
 
general economic conditions.
 
We may enter new markets in which we have limited or no operating experience. These new markets may have different demographic and competitive conditions, consumer tastes and discretionary spending patterns than our existing markets and may not be able to attract enough customers because potential customers may be unfamiliar with our brands or the atmosphere or menu of our restaurants might not appeal to them. As a result, the revenue and profit generated at new restaurants may not equal the revenue and profit generated at our existing restaurants. New restaurants may even operate at a loss, which would have an adverse effect on our overall profits. In addition, opening a new restaurant in an existing market could reduce the revenue of our existing restaurants in that market.

Food-borne illness incidents, claims of food-borne illness and adverse publicity could adversely affect our future operating performance.

Claims of illness or injury relating to food quality or food handling are common in the food service industry, and a number of these claims may exist at any given time. We cannot guarantee that our internal operational controls and training will be effective in preventing all food-borne illnesses. Some food-borne illness incidents could be caused by third-party food suppliers and transporters outside of our control. New illnesses resistant to our current precautions may develop in the future, or diseases with long incubation periods could arise, such as e-coli, that could give rise to claims or allegations on a retroactive basis. We could be adversely affected by negative publicity resulting from food quality or handling claims at one or more of our restaurants. Food-borne illnesses spread at restaurants have generated significant negative publicity at other restaurant chains in the past, which has had a negative impact on their results of operations. One or more instances of food-borne illness in one of our restaurants could negatively affect our restaurants’ image and sales. These risks exist even if it is later determined that an illness was wrongly attributed to one of our restaurants.

In addition, the impact of adverse publicity relating to one of our restaurants may extend beyond that restaurant to affect some or all of our other restaurants. We believe that the risk of negative publicity is particularly great with respect to our franchised restaurants because we have limited ability to control their operations, especially on a real-time basis. A similar risk may exist with respect to unrelated food service businesses if customers mistakenly associate them with our operations.


We face risks of litigation and negative publicity from restaurant customers, suppliers and other parties.
 
We are subject to a variety of claims arising in the ordinary course of our business brought by or on behalf of our customers or employees, including personal injury claims, contract claims, discriminatory claims and employment-related claims. In recent years, a number of restaurant chains have been subject to lawsuits, and a number of these lawsuits have resulted in the payment of substantial damages by chains. These lawsuits include class action lawsuits alleging violations of U.S. federal or state law regarding workplace or employment conditions and similar matters. Class action lawsuits could also be filed alleging, among other things, that restaurants have failed to disclose the health risks associated with high-fat foods and that our marketing practices have targeted children and encouraged obesity.

In addition, 12 of our Company-operated Perkins restaurants located in Florida, one Company-operated Perkins restaurant located in Minnesota and 90 Company-operated Marie Callender’s restaurants serve alcoholic beverages. These restaurants may be subject to state “dram shop” laws, which allow a person to sue us if that person was injured by a legally intoxicated person who was wrongfully served alcoholic beverages at one of our restaurants. A judgment against us under a dram shop law could exceed our liability insurance coverage policy limits and could result in substantial liability for us and may have an adverse effect on our operating performance and, accordingly, we may generate insufficient cash flow to service our debt obligations.

Regardless of whether any claims against us are valid or whether we are ultimately determined to be liable, claims may be expensive to defend and may divert time and money away from our operations. In addition, any adverse publicity about these allegations could adversely affect us, regardless of whether the allegations are true, by discouraging customers from buying our products. A judgment also could be significantly in excess of our insurance coverage for any claims and we may not be able to continue to maintain such insurance, or to obtain comparable insurance at a reasonable cost, if at all. If we suffer losses, liabilities or loss of income in excess of our insurance coverage or if our insurance does not cover such loss, liability or loss of income, there could be a material adverse effect on our results of operations or financial condition.
 
We are subject to extensive government regulations.
 
Our Company-operated and franchised restaurants are subject to extensive federal, state and local governmental regulations, including those relating to the preparation and sale of food, those relating to building and zoning requirements and those relating to access for the disabled, including the Americans with Disabilities Act, and failure to comply with these regulations could adversely affect us. For example, on January 1, 2010, legislation took effect in California that prohibits the use of trans fats in food establishments, including casual dining restaurants.  The trans fat ban covers oil, shortening and margarine used in spreads or for frying. Public interest groups have also focused attention on the marketing of high-fat and high-sodium foods to children in a stated effort to combat childhood obesity and legislators in the United States have proposed replacing the self-regulatory Children’s Advertising Review Board with formal governmental regulation under the Federal Trade Commission. In addition, certain jurisdictions have adopted regulations requiring that chain restaurants include calorie information on their menu boards and make other nutritional information available on printed menus which must be plainly visible to consumers at the point of ordering. There may also be increased regulation of and opposition to the industrialized production of food products, which could force us to use alternative food supplies. The cost of complying with these regulations could increase our expenses and may cause our food items to be less popular, and the negative publicity arising from such legislative initiatives could reduce our sales.
 


We and our franchisees also are subject to licensing and regulation by state and local departments relating to health, sanitation and safety standards and liquor licenses (with respect to our 103 restaurants that serve alcoholic beverages) and to laws governing our relationships with employees, including minimum wage requirements, overtime, working conditions and citizenship requirements. The inability to obtain or maintain such licenses or publicity resulting from actual or alleged violations of such regulations could have an adverse effect on us. Furthermore, changes in, and the cost of compliance with, governmental regulations could have an adverse effect on us.
 
We also are subject to Federal Trade Commission regulations and various state and foreign laws which govern the offer and sale of franchises. Some states require that certain materials be registered before franchises can be offered or sold in that state. We also must comply with a number of state and foreign laws that regulate some substantive aspects of the franchisor-franchisee relationship. These laws may limit a franchisor’s ability to: terminate or not renew a franchise without good cause; interfere with the right of free association among franchisees; enforce noncompetition provisions in its franchise agreements; disapprove the transfer of a franchise; discriminate among franchisees with regard to charges, royalties and other fees; or place new restaurants near existing restaurants. The failure to obtain or retain licenses or approvals to sell franchises could adversely affect our financial condition.
 
In addition, as is the case with any owner or operator of real property, we are subject to a variety of federal, state and local governmental regulations relating to the use, storage, discharge, emission and disposal of hazardous materials. Failure to comply with environmental laws could result in the imposition of severe penalties or restrictions on operations by governmental agencies or courts of law, which could adversely affect us. We do not have environmental liability insurance, and no material amounts have been or are expected to be expensed to comply with environmental protection regulations.

Rises in interest rates could adversely affect our financial condition.

Amounts we borrow under our credit agreement with Wells Fargo Foothill, LLC bear interest at a variable base rate plus an applicable margin. Therefore, an increase in prevailing interest rates would have an effect on the interest rates charged on any borrowings outstanding under our credit agreement. If prevailing interest rates result in higher interest rates on any debt we incur under the credit agreement, the increased interest expense could adversely affect our cash flow and our ability to service our debt.

Our controlling stockholder may take actions that conflict with the interests of others.

Affiliates of Castle Harlan control the power to elect our directors, to appoint members of management and to approve all actions requiring the approval of the holders of our common stock, including adopting amendments to our certificate of incorporation and approving mergers, acquisitions, sales of all or substantially all of our assets, debt incurrences and other significant corporate transactions.  The interests of our controlling stockholder could conflict with the interests of others.  In addition, Castle Harlan is in the business of making investments in companies and may, from time to time, acquire interests in businesses that compete directly or indirectly with us.  Castle Harlan also may pursue, for its own account, acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us.



Our compliance with Sarbanes-Oxley requires significant resources and results in additional costs.

We are subject to the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), including Section 404 thereunder, and, beginning with our fiscal 2010 annual report on Form 10-K, an attestation report of our auditors on our internal control over financial reporting will be required. Compliance with Sarbanes-Oxley places additional obligations on our systems and resources and requires us to incur additional costs. In order to maintain the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight is required, as we need to devote additional time and personnel to legal, financial and accounting activities to ensure our ongoing compliance with the public company reporting requirements. In future years, if we fail to timely complete our assessment of the effectiveness of our internal control over financial reporting, or if our auditors cannot timely issue their attestation report, we may cease to be in compliance with our reporting requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and could suffer a loss of public confidence in our internal controls, either of which could adversely affect our ability to access the capital markets.


Not applicable.




The following table lists the number of full-service Company-operated and franchised restaurants, by state or country, as of December 27, 2009. The Company-operated restaurants of Marie Callender’s include wholly-owned restaurants, East Side Mario’s and those restaurants operated under various partnership agreements. The table excludes one limited service Perkins Express located in Utah.
 
   
Perkins Restaurants
   
Marie Callender's Restaurants
 
   
Company-Operated
   
Franchise
   
Total
   
Company-Operated
   
Franchise
   
Total
 
                                     
Arizona
    -       1       1       7       -       7  
Arkansas
    -       2       2       -       -       -  
California
    -       -       -       62       33       95  
Colorado
    8       4       12       -       1       1  
Delaware
    -       1       1       -       -       -  
Florida
    44       15       59       -       -       -  
Georgia
    -       1       1       -       -       -  
Idaho
    -       8       8       1       -       1  
Illinois
    7       -       7       -       -       -  
Indiana
    -       5       5       -       -       -  
Iowa
    16       4       20       -       -       -  
Kansas
    3       4       7       -       -       -  
Kentucky
    -       3       3       -       -       -  
Maryland
    -       2       2       -       -       -  
Michigan
    7       3       10       -       -       -  
Minnesota
    39       37       76       -       -       -  
Missouri
    7       1       8       -       -       -  
Montana
    -       9       9       -       -       -  
Nebraska
    -       9       9       -       -       -  
Nevada
    -       -       -       4       3       7  
New Jersey
    -       17       17       -       -       -  
New York
    -       15       15       -       -       -  
North Carolina
    -       2       2       -       -       -  
North Dakota
    4       4       8       -       -       -  
Ohio
    -       36       36       -       -       -  
Oklahoma
    2       -       2       2       -       2  
Oregon
    -       -       -       4       1       5  
Pennsylvania
    6       47       53       -       -       -  
South Carolina
    -       4       4       -       -       -  
South Dakota
    -       11       11       -       -       -  
Tennessee
    4       8       12       -       -       -  
Texas
    -       -       -       4       -       4  
Utah
    -       -       -       5       -       5  
Virginia
    -       4       4       -       -       -  
Washington
    -       6       6       3       -       3  
West Virginia
    -       2       2       -       -       -  
Wisconsin
    16       27       43       -       -       -  
Wyoming
    -       5       5       -       -       -  
Canada
    -       17       17       -       -       -  
Mexico
    -       -       -       -       1       1  
Total
    163       314       477       92       39       131  
 
 


All of our restaurant locations are leased.  Our typical Perkins restaurant is approximately 5,000 square feet in size and is located in a free-standing building, with seating capacity generally ranging between 90 and 250. Marie Callender’s restaurants average 8,000 square feet in size and are primarily located in free-standing buildings, with a seating capacity generally ranging between 70 and 385. We have an ongoing program of prototype development, testing and remodeling to maintain operationally efficient, cost-effective and inviting interior and exterior facility design and décor. Over the last five years, we have invested over $15 million remodeling certain of our Company-operated stores. In addition, across our restaurant base, we have spent an average of $7.1 million per year over the last five years on maintenance capital expenditures to maintain an attractive dining experience. Among our Company-operated stores, approximately 62% of Perkins’ and 36% of Marie Callender’s are either new or have been remodeled within the past five years.

The following table sets forth certain information regarding Company-operated restaurants and other properties, as of December 27, 2009:
 
 
 
Number of Properties (1)
 
Use
 
Owned
   
Leased
   
Total
 
Offices and Manufacturing Facilities (2)
          8       8  
Perkins Restaurant and Bakery (3)
          163       163  
Marie Callender’s Restaurant and Bakery (4,5)
          92       92  
____________

(1)
In addition to the properties noted in the schedule above, we lease fifteen properties and own two other properties which are vacant or leased to others.

(2)
Our principal office is located in Memphis, Tennessee, and currently comprises approximately 43,000 square feet under a lease expiring on May 31, 2013, subject to a renewal by us for a maximum of 60 months. We also lease an office which comprises approximately 6,300 square feet in Mission Viejo, California, with a lease term through April 30, 2013, and no renewal option.  In addition to the two office locations, we lease two properties in Cincinnati, Ohio, consisting of 36,000 square feet and 120,000 square feet, and lease one property in Corona, California, consisting of 29,600 square feet, for use as manufacturing facilities.

(3)
The average term of the remaining leases is approximately 11 years, excluding renewal options. The longest lease term will mature in approximately 19 years and the shortest lease term will mature in less than one year, excluding renewal options.

(4)
Includes two Callender’s Grill restaurants and the East Side Mario’s restaurant.

(5)
The average term of the remaining leases is approximately five years, excluding renewal options. The longest lease term will mature in approximately 32 years and the shortest lease term will mature in less than one year, excluding renewal options.


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




PART II


Market Information.

No established public trading market exists for our equity securities.

Holders.

As of December 27, 2009, there was one stockholder of record.

Dividends.

No dividends or distributions were declared or paid during 2009, 2008 or 2007. The Company’s credit agreement and the indentures governing our debt securities restrict our ability to pay dividends or distributions to our equity holders.

Securities Authorized for Issuance Under Equity Compensation Plans.

      Not applicable.

Purchases of Equity Securities.

      Not applicable.



PERKINS & MARIE CALLENDER’S INC.
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 consolidated financial statements and data included elsewhere in this Annual Report on Form 10-K.

As a result of the Combination, the financial statements of the Company and WRG are presented on a consolidated basis as of September 21, 2005, the first date on which both companies were under common control, and include the combined results of operations of each company for all periods presented after such date. Prior to September 21, 2005, the Consolidated Financial Statements and data presented include WRG only.

 
 
2009
   
2008
   
2007
   
2006
   
2005
 
Statement of Operations Data:
                             
Revenues
  $ 536,068       581,970       587,886       594,190       321,473  
Net loss
    (36,219 )     (52,953 )     (16,335 )     (9,372 )     (15,231 )
Balance Sheet Data (at year end):
                                       
Total assets
    291,641       323,508       362,942       346,845       346,276  
Long-term debt and capital lease
obligations (a)
     337,096       330,249       309,996       292,628       300,077  
Statistical Data:
                                       
Full-service restaurants in operation at end of year:
                                       
Company-operated Perkins
    163       164       162       155       151  
Franchised Perkins (b)
    314       317       323       322       331  
Total Perkins
    477       481       485       477       482  
                                         
Company-operated Marie Callender’s
    91       90       91       91       92  
Company-operated East Side Mario’s
    1       1       1       1       1  
Franchised Marie Callender’s
    39       42       44       46       47  
Total Marie Callender’s
    131       133       136       138       140  
Average annual sales per Company-operated Perkins restaurant
  $  1,715       1,840       1,890       1,944       1,866  
Average annual royalties per franchised Perkins restaurant
     60       62       64       66       64  
Average annual sales per Company-operated Marie Callender’s restaurant
     2,079       2,217       2,339       2,369       2,298  
Average annual royalties per franchised Marie Callender’s restaurant
     86       98       102       105       107  
____________

(a)
Excluding current maturities of $503, $382, $9,464, $1,706 and $3,311, respectively.

(b)
Excludes one franchised Perkins Express.



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 and accompanying notes of the Company included elsewhere in this Form 10-K. Except for historical information, the discussions in this section contain forward-looking statements that involve risks and uncertainties, as indicated in “Information Concerning Forward-Looking Statements” below.  Except as otherwise indicated references to “years” mean our fiscal year ended December 27, 2009, December 28, 2008 or December 30, 2007.

Information Concerning Forward-Looking Statements.  This annual report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of 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 statements. Factors affecting these statements include, among others, the following:

 
general economic conditions, consumer preferences and demographic patterns, either nationally or in particular regions in which we operate;

 
our substantial indebtedness;

 
our liquidity and capital resources;

 
competitive pressures and trends in the restaurant industry;

 
prevailing prices and availability of food, labor, raw materials, supplies and energy;

 
a failure to obtain timely deliveries from our suppliers or other supplier issues;

 
our ability to successfully implement our business strategy;

 
relationships with franchisees and the financial health of franchisees;

 
legal proceedings and regulatory matters; and

 
our development and expansion plans.

Given these risks and uncertainties, you are cautioned not to place undue reliance on such statements. The forward-looking statements included in this Form 10-K 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.

Our Company.  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, 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.


The Company also operates a bakery goods manufacturing segment under the name Foxtail, which manufactures 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 food service distributors.

Key Factors Affecting our Business.  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 regulation. 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 income 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 monthly 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, dinner and bakery 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 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.
 
Fiscal 2008 and 2009 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 annual sales for both Perkins and Marie Callender’s in 2008 and 2009. We believe continuing decreases in residential real estate values, especially in some of our larger markets, the high unemployment levels, the spread of the H1N1 influenza virus, the level of home foreclosures, the decrease in investment values and the consequent pressures on consumer sentiment and spending have reduced household discretionary spending, which has adversely affected our revenues. At the same time, our costs have increased, and 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 year ended December 28, 2008, Perkins’ Company-operated restaurants comparable sales decreased by 6.6% and Marie Callender’s Company-operated restaurants comparable sales decreased by 6.4% during 2009.  These declines 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 adverse economic conditions that are impacting the restaurant industry, particularly in Florida for our Perkins restaurants and in California for our Marie Callender’s restaurants.
 
Operations, Financial Position and Liquidity.  At December 27, 2009, we had a negative working capital balance of $17,643,000 and a total stockholder’s deficit of $145,916,000.  We had $4,288,000 in unrestricted cash and cash equivalents and $4,605,000 of borrowing capacity under our Revolver.


Our principal sources of liquidity include unrestricted cash, available borrowings under our credit agreement and cash generated by operations.  We also have from time to time received capital contributions from our parent company, including a $12,500,000 capital contribution received in 2008.  We have also engaged in other capital transactions.  Our principal uses of liquidity are costs and expenses associated with our restaurant and manufacturing operations, debt service payments and capital expenditures.

We have experienced declines in comparable restaurant sales and declining profits in our restaurants in both 2009 and 2008.  The ongoing turmoil in the economy has adversely affected our guest counts and, in turn, our operating results and cash generated by operations.  The Company expects to incur a net loss in 2010.  In order to improve the cash flows in our business, we continue to rollout a new breakfast program at our Marie Callender’s restaurants, have improved systems to more effectively manage our food and labor costs, have upgraded our management staff and certain equipment in our Foxtail division to drive higher operating efficiencies and have reduced overall planned capital expenditures for 2010.  We continually review general and administrative expenditures to identify and implement cost-saving measures.  Management expects these initiatives together with the Company’s cash provided by operations and borrowing capacity under the Revolver 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 substantial debt.

Summary of Significant and Critical 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 process for reviewing the application of our accounting policies and for evaluating the appropriateness of the estimates that are required to prepare the financial statements of our Company. 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 our restaurants is recognized when customers pay for products at the time of sale. This revenue 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.  A $1,000,000 change in estimated franchise sales would impact royalty revenue by $40,000 to $50,000.  Historically, these adjustments have not been material.

Sales Taxes

Sales taxes collected from customers are excluded from revenues. The obligation is included in accrued expenses until the taxes are remitted to the appropriate taxing authorities.

Advertising

We recognize advertising expense in the operating expenses of the restaurant segment. Those advertising costs are expensed as incurred.  Advertising expense was approximately $26,712,000, $24,016,000 and $21,130,000 for fiscal years 2009, 2008 and 2007, respectively.

Leases

Future commitments for operating leases are not reflected as a liability on our Consolidated Balance Sheets. The determination of whether a lease is accounted for as a capital lease or as an operating lease requires management to make estimates primarily about the fair value of the asset, its estimated economic useful life and the incremental borrowing rate.



Rent expense for the Company’s operating leases, many of which have escalating rent amounts due over the term of the lease, is recorded on a straight-line basis over the lease term. The lease term begins when the Company has the right to control the use of the leased property, which may occur before rent payments are due under the terms of the lease.  The difference between rent expense and rent paid is recorded as deferred rent on our Consolidated Balance Sheets.
 
Preopening Costs

We expense the costs of start-up activities as incurred.

Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Perkins Marketing Fund and Gift Cards

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. The Company has classified approximately $4,786,000 and $6,912,000 as of December 27, 2009 and December 28, 2008, respectively, as restricted cash on its Consolidated Balance Sheets related to the Marketing Fund.  These amounts represent funds contributed by franchisees specifically for the purpose of advertising. The Company has also recorded liabilities of approximately $4,327,000 and $5,316,000 as of December 27, 2009 and December 28, 2008, respectively, which are included in franchise advertising contributions on the accompanying Consolidated Balance Sheets and represents franchisee contributions for advertising services not yet provided.

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 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 fiscal year ended December 27, 2009, we recorded $2,811,000 of breakage income of which we consider $2,195,000 to be a non-recurring cumulative adjustment.  As of December 27, 2009 and December 28, 2008, the Company had approximately $3,324,000 and $3,228,000, respectively, of net gift card proceeds received from Perkins’ franchisees reflected as restricted cash and accrued expenses on its Consolidated Balance Sheets.

Concentration of Credit Risk

Financial instruments, which potentially expose us to concentrations of credit risk, consist principally of franchisee and Foxtail accounts receivable. We perform ongoing credit evaluations of our franchisees 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 maintain reserves 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 franchises were to deteriorate, we might have to increase our reserves against collection of franchise receivables.

Additional financial instruments that potentially subject us to a concentration of credit risk are cash and cash equivalents. At times, cash balances may be in excess of Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any losses with respect to bank balances in excess of government provided insurance.



Long Lived Assets

Major renewals and betterments are capitalized; replacements and maintenance and repairs that do not extend the lives of the assets are charged to operations as incurred. Upon disposition, both the asset and the accumulated depreciation amounts are relieved, and the related gain or loss is credited or charged to the statement of operations. Depreciation and amortization is computed primarily using the straight-line method over the estimated useful lives unless the assets relate to leased property, in which case, the amortization period is the lesser of the useful lives or the lease terms. A summary of the useful lives is as follows:

   
Years
 
Land improvements
    3 — 20  
Buildings
    20 — 30  
Leasehold improvements
    3 — 20  
Equipment
    1 — 7  

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 require management to make judgments about future events. Because we utilize many of our capital assets over relatively long periods, 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 significant funds required for 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. Our assets are typically grouped at the restaurant level for such purposes. The accounting test for whether an asset group held for use is impaired involves first comparing the carrying value of the asset group with its estimated future undiscounted cash flows. If these cash flows do not exceed the carrying value, the asset group must be adjusted to its current fair value. We perform this test on each of our long lived assets periodically as indicators arise to evaluate whether impairment exists. Factors influencing our judgment include the age of the assets, estimation of future cash flows from long lived assets, lease renewals and estimation of fair value.  Asset fair value is generally determined using discounted cash flow models, including residual proceeds and other factors that may impact the ultimate return of our investment in the long lived assets.

Goodwill and Intangible Assets

As of December 27, 2009 and December 28, 2008, we had approximately $156,849,000 and $160, 683,000, respectively, of goodwill and intangible assets on our Consolidated Balance Sheets primarily resulting from the Acquisition. We account for our goodwill and other intangible assets in accordance with ASC 350, “Intangibles-Goodwill and Other”, which provides guidance regarding the recognition and measurement of intangible assets, eliminates the amortization of certain intangibles and requires assessments for impairment of intangible assets that are not subject to amortization at least annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Our annual evaluation, performed as of year-end or on an interim basis if circumstances warrant, requires the use of estimates about the future cash flows of each of our reporting units and non-amortizing intangibles to determine their estimated fair values. Fair values of the goodwill reporting units are calculated using discounted future cash flows and market-based comparative values.  We estimate the fair values of our non-amortizing intangible assets, principally tradenames, using a relief from royalty cash flow method. Changes in forecasted operations and changes in discount rates can materially affect these estimates. However, once an impairment of goodwill or intangible assets has been recorded, it cannot be reversed.



In 2009, the Company recorded a non-cash charge of $1,496,000 to dispose of a customer relationship intangible asset resulting from the termination of a customer contract at Foxtail.  As of December 27, 2009, we conducted our annual impairment test of goodwill and non-amortizing intangible assets and determined that no additional impairment charge was required.  Due to the decrease in the Company’s operating results during 2008 compared to 2007 and the decline in general economic conditions impacting the restaurant industry, management conducted an interim goodwill and non-amortizing intangible assets impairment evaluation during the quarter ended October 5, 2008. Because the carrying values of the reporting units in both the franchise and Foxtail reporting units exceeded their respective estimated fair values, the Company completed step two of the goodwill test and concluded that the goodwill of both reporting units was fully impaired as of October 5, 2008.  Accordingly, the Company recorded a non-cash goodwill impairment charge of $20,202,000 in the quarter ended October 5, 2008, which represents the cumulative impairments of goodwill recorded by the Company.  See Note 7 of the Notes to our Consolidated Financial Statements included in this Form 10-K.

Deferred Income Taxes and Income Tax Uncertainties

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 carry forwards.  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 related to future taxable income and feasible tax planning strategies and consider existing facts and circumstances.  When we determine that deferred tax assets could be realized in greater or lesser amounts than recorded, the assets’ recorded amount is adjusted and the income statement is either credited or charged, respectively, in the period during which the determination is made.  We believe that the valuation allowance recorded at December 27, 2009 is adequate for the circumstances.  However, subsequent 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 balances.

The Company’s accounting for uncertainty in income taxes prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return.  For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.  The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

Insurance Reserves

We are self-insured up to certain limits for costs associated with workers’ compensation claims, general liability claims, property claims and benefits paid under employee health care programs. At December 27, 2009 and December 28, 2008, we had total self-insurance accruals reflected in our Consolidated Balance Sheets of approximately $9,697,000 and $8,803,000, 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 workers’ compensation costs primarily through actuarial methods, which develop estimates of the discounted 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 dates. We account for benefits paid under employee health care programs using historical claims information as the basis for estimating expenses incurred as of the balance sheet dates. We believe the use of these 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, including discount rates, can materially affect estimates for these liabilities.




Subsequent Event.  On March 15, 2010, Pete M. Pascuzzi tendered his resignation as the Executive Vice President and Chief Operating Officer of Perkins & Marie Callender’s Inc., effective as of March 28, 2010.

 Results of Operations.

Financial Statement Presentation

The accompanying audited Consolidated Financial Statements include the financial results of the Company for fiscal years 2009, 2008 and 2007.  Intercompany transactions have been eliminated in consolidation.

Our financial reporting is based on thirteen four-week periods ending on the last Sunday in December. Fifty-two weeks of operations are included in fiscal years 2009, 2008 and 2007.

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, but are not limited to, the frequency and popularity of advertising and promotions, the relative sales levels of new and closed locations, other holidays and weather.

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 Ended
   
Year Ended
   
Year Ended
 
   
December 27, 2009
   
December 28, 2008
   
December 30, 2007
 
                   
Restaurant operations
    87.7 %     86.5 %     86.9 %
Franchise operations
    4.2 %     4.1 %     4.4 %
Foxtail
    7.0 %     8.5 %     7.8 %
Other
    1.1 %     0.9 %     0.9 %
Total revenues
    100.0 %     100.0 %     100.0 %




The following table reflects certain data for the year ended December 27, 2009 compared to the preceding two fiscal years. This 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 $21,052,000, $20,088,000 and $19,826,000 in 2009, 2008 and 2007, respectively.

   
Consolidated Results
   
Restaurant Operations
   
Franchise Operations
 
   
2009
   
2008
   
2007
   
2009
   
2008
   
2007
   
2009
   
2008
   
2007
 
                                                       
Food sales
  $ 528,815       572,550       576,816       470,346       503,242       510,863       -       -       -  
Franchise and other revenue
28,305       29,508       30,896       -       -       -       22,532       24,141       25,982  
Intersegment revenue
    (21,052 )     (20,088 )     (19,826 )     -       -       -       -       -       -  
Total revenues
    536,068       581,970       587,886       470,346       503,242       510,863       22,532       24,141       25,982  
                                                                         
Food cost
    26.0 %     29.2 %     28.5 %     25.4 %     26.9 %     27.1 %     n/a       n/a       n/a  
Labor and benefits
    33.1 %     32.4 %     32.2 %     36.1 %     35.5 %     35.3 %     n/a       n/a       n/a  
Operating expenses
    27.2 %     26.2 %     25.4 %     29.3 %     28.3 %     27.6 %     8.3 %     8.3 %     8.5 %
                                                                         
Segment (loss) profit
  $ (36,219 )     (52,953 )     (16,335 )     24,551       26,806       32,459       20,665       3,603       23,774  
                                                                         
   
Foxtail (a)
   
Other (b)
       
      2009       2008       2007       2009       2008       2007                          
                                                                         
Food sales
  $ 58,469       69,308       65,953       -       -       -                          
Franchise and other revenue
-       -       -       5,773       5,367       4,914                          
Intersegment revenue
    (21,052 )     (20,088 )     (19,826 )     -       -       -                          
Total revenues
    37,417       49,220       46,127       5,773       5,367       4,914                          
                                                                         
Food cost
    56.8 %     65.9 %     60.9 %     n/a       n/a       n/a                          
Labor and benefits
    12.6 %     13.5 %     13.1 %     n/a       n/a       n/a                          
Operating expenses
    10.5 %     11.0 %     9.7 %     n/a       n/a       n/a                          
                                                                         
Segment (loss) profit
  $ 4,162       (4,500 )     3,687       (85,597 )     (78,862 )     (76,255 )                        

(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 profit or loss presented above.
(b)
Licensing revenue of $5,505,000, $5,125,000 and $4,564,000 for fiscal 2009, 2008 and 2007, 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 16, “Segment Reporting” in the Notes to Consolidated Financial Statements.

Year Ended December 27, 2009 Compared to the Year Ended December 28, 2008

Segment Overview

Restaurant Operations Segment

The operating results of the restaurant segment were 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, labor and benefits, weather and governmental regulation.



Perkins comparable restaurant sales decreased by 6.6% and Marie Callender’s comparable restaurant sales decreased by 6.4% in 2009 as compared to 2008. The decrease in comparable sales resulted primarily from a decrease in comparable guest counts due to macro-economic conditions. Total restaurant segment revenues decreased approximately $32,896,000 in 2009, due primarily to the decrease in comparable restaurant sales.  During 2009, the Company closed one Perkins restaurant and purchased one Marie Callender’s restaurant from a franchisee.

Restaurant segment profit decreased approximately $2,255,000 in 2009 compared to a year ago. The decrease was primarily due to the decrease in comparable sales, partially offset by lower food cost.

Franchise Operations Segment

The operating results of the franchise segment were mainly impacted by the same factors as those impacting the Company’s restaurant segment, excluding the operating cost factors since franchise segment income is earned primarily through royalty income.

Franchise revenues decreased approximately $1,609,000 in 2009 compared to a year ago.  During 2009, royalty revenue decreased by $1,537,000 due principally to a decline in comparable customer counts resulting from macro-economic conditions and by $72,000 due to lower franchise fees and renewal fees resulting from a smaller number of new franchises and the non-renewal by some of our existing franchises.

Franchise segment profit increased by $17,062,000 in 2009 compared to 2008 due primarily to a non-cash goodwill impairment charge of $18,538,000 in 2008.  Excluding the impairment charge, franchise segment profit decreased by $1,476,000 due primarily to the decrease in royalty revenue.  See Note 7 of the Notes to our Consolidated Financial Statements included in this Form 10-K for a discussion of goodwill impairment charges.

During 2009, franchisees opened one Perkins restaurant, closed four Perkins restaurants, sold one Marie Callender’s restaurant to the Company and closed two Marie Callender’s restaurants.

Foxtail Segment

The operating results of Foxtail were impacted mainly by the following factors: 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.

Foxtail’s revenues, net of intercompany sales, decreased approximately $11,803,000 compared to the prior year. The decrease was primarily due to a decrease in sales to external customers resulting primarily from macro-economic conditions.  The segment profit of approximately $4,162,000 in 2009 represented an increase of approximately $8,662,000 as compared to the segment loss of $4,500,000 in the prior year.  The increase was primarily due to a non-cash goodwill impairment charge of $1,664,000 in the third quarter of 2008 and lower commodity and marketing costs in fiscal 2009.

Revenues

Consolidated total revenues decreased approximately $45,902,000 in 2009 compared to 2008.  The decrease was due primarily to a decrease of $32,896,000 in restaurant segment sales, a decrease of $1,609,000 in the franchise segment revenues and a decrease of $11,803,000 in the Foxtail segment sales.  These decreases were partially offset by an increase in licensing and other revenues of $406,000 in the other segment.  Total revenues of approximately $536,068,000 in 2009 were 7.9% lower than total revenues of approximately $581,970,000 in 2008.

Restaurant segment sales of $470,346,000 and $503,242,000 in 2009 and 2008, respectively, accounted for 87.7% and 86.5% 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 6.5% decrease in comparable sales at Company-operated Perkins and Marie Callender’s restaurants.

Franchise segment revenues of $22,532,000 and $24,141,000 in 2009 and 2008, respectively, accounted for 4.2% and 4.1% of total revenues, respectively. During 2009, royalty revenue decreased $1,537,000 due principally to a decline in comparable customer counts and by $72,000 due to lower franchise fees and renewal fees.


Foxtail revenues of $37,417,000 and $49,220,000 in 2009 and 2008, respectively, accounted for 7.0% and 8.5% of total revenues respectively. The decrease of $11,803,000 was primarily due to a decline in sales to external customers due to macro-economic conditions, with an approximate $2,114,000 decrease in sales to one particular customer.

Costs and Expenses

Food Cost

Consolidated food cost was 26.0% and 29.2% of food sales in 2009 and 2008, respectively. Restaurant segment food cost was 25.4% and 26.9% of food sales in 2009 and 2008, respectively, while food cost in the Foxtail segment was 56.8% and 65.9% of food sales in 2009 and 2008, respectively. The decrease in the restaurant segment is primarily due to lower commodity costs, particularly costs of red meat, produce, dairy products and eggs. The decrease of 9.1 percentage points in the Foxtail segment is primarily due to lower commodity costs, particularly fruit and eggs, increases in selling prices over all major product lines during the second half of 2008 and improved pie manufacturing efficiencies.

Labor and Benefits Expenses

Consolidated labor and benefits expenses were 33.1% and 32.4% of total revenues in 2009 and 2008, respectively. The labor and benefits ratio increased by 0.6% in the restaurant segment due to a greater impact from fixed store management costs and higher employee insurance costs, while the Foxtail segment labor and benefits expense decreased from 13.5% in 2008 to 12.6% in 2009. The decrease of 0.9 percentage points in the Foxtail segment is due primarily to a decrease in production labor, which was driven by an improvement in production efficiencies despite the lower production volumes.

Operating Expenses

Total operating expenses of $145,630,000 in 2009 decreased by $6,630,000 as compared to 2008. The most significant components of operating expenses were rent, utilities and advertising expenses. Total operating expenses, as a percentage of total sales, were 27.2% and 26.2% in 2009 and 2008, respectively. Approximately 94.5% and 93.7% of total operating expenses in 2009 and 2008, respectively, were incurred in the restaurant segment, and restaurant segment operating expenses, as a percentage of restaurant sales, were 29.3% and 28.3% in 2009 and 2008, respectively.  The 1.0 percentage point increase in operating expenses as a percentage of revenues in the restaurant segment resulted primarily from the decline in revenues. Operating expenses in the Foxtail segment, as a percentage of segment food sales, decreased 0.5% or $1,509,000 due primarily to lower repairs and maintenance, energy, transportation and warehouse costs.

General and Administrative Expenses

The most significant components of general and administrative (“G&A”) expenses were corporate labor and benefits, occupancy costs and legal fees. Consolidated G&A expenses represented 8.6% and 8.2% of sales in 2009 and 2008, respectively. The percentage increase resulted from the decrease in total revenues, as overall G&A expenses declined by $1,676,000 due primarily to lower marketing program costs and allowances at Foxtail.

Depreciation and Amortization

Depreciation and amortization expense was $24,041,000 and $24,699,000 in 2009 and 2008, respectively.

Interest, net

Interest, net was $44,120,000 or 8.2% of revenues in 2009 compared to $36,689,000 or 6.3% of revenues in 2008. This increase was primarily due to an increase in the average effective interest rate to 11.6% from 10.1% and an approximate $14,100,000 increase in the average debt outstanding during 2009 as compared to 2008.



Asset Impairments and Closed Store Expenses

Asset impairments and closed store expenses consist primarily of the write-down to fair value for impaired stores and adjustments to the reserve for closed stores. During 2009 and 2008, we recorded expenses of $5,997,000 and $1,797,000, respectively, for asset impairment and store closures.

Goodwill Impairment

Due to the decrease in the Company’s operating results during 2008 compared to 2007 and the decline in general economic conditions impacting the restaurant industry, management conducted an interim goodwill impairment evaluation during the quarter ended October 5, 2008. Fair values of the reporting units were calculated using discounted future cash flows and market-based comparative values.  Because the carrying values of the reporting units for both the franchise and Foxtail reporting units exceeded their respective estimated fair values, the Company completed step two of the goodwill test and concluded that the goodwill of those reporting units was impaired as of October 5, 2008. Accordingly, in the quarter ended October 5, 2008, the Company recorded a non-cash goodwill impairment charge of $20,202,000, of which $18,538,000 was charged to the franchise segment and $1,664,000 was charged to the Foxtail segment.  No impairment charge was required for the goodwill associated with the restaurant reporting unit or the Company’s non-amortizing intangibles.  In 2009, the Company recorded a non-cash charge of $1,496,000 to dispose of a customer relationship intangible asset resulting from the termination of a customer contract at Foxtail.   As of December 27, 2009, we conducted our annual impairment test of goodwill and non-amortizing intangible assets and determined that no additional impairment charge was required.

Loss on Extinguishment of Debt

In connection with the September 2008 refinancing transaction (see “Capital Resources and Liquidity” below), we terminated our pre-existing credit agreement and consequently incurred a $2,952,000 loss due to the write-off of deferred financing costs related to that agreement.

Taxes

The effective federal and state income tax rates were (0.5)% and 3.2% in 2009 and 2008, respectively. Our rates differ from the statutory rate primarily due to a valuation allowance against deferred tax deductions, losses and credits.  The effective income tax rate for 2009 primarily reflects state tax expense related to gross receipts taxes and the net benefit and interest on prior year, settled and expired uncertain tax positions.

Year Ended December 28, 2008 Compared to the Year Ended December 30, 2007

Segment Overview

Restaurant Operations Segment

Perkins comparable restaurant sales decreased by 2.8% and Marie Callender’s comparable restaurant sales decreased by 6.5% in 2008 as compared to 2007. The decrease in comparable sales resulted primarily from a decrease in comparable guest counts due to macro-economic conditions. Total restaurant segment revenues decreased approximately $7,621,000 in 2008, also due primarily to the decrease in comparable guest counts resulting from macroeconomic conditions.  During 2008, the Company opened two Perkins restaurants and closed one Marie Callender’s restaurant.

Restaurant segment income decreased approximately $5,653,000 in 2008 compared to a year ago. The decrease was primarily due to the decrease in comparable restaurant sales, which was partially offset by a decline in restaurant segment food cost.




Franchise Operations Segment

Franchise revenues decreased approximately $1,841,000 in 2008 compared to a year ago.  During 2008, royalty revenue decreased by $1,468,000 due principally to a decline in comparable customer counts resulting from macro-economic conditions and by $373,000 due to lower franchise fees and renewal fees resulting from a smaller number of new franchises and the non-renewal of some of our existing franchises.

Franchise segment profit decreased by $20,171,000 in 2008 compared to 2007 due primarily to a non-cash goodwill impairment charge of $18,538,000.  Excluding the impairment charge, franchise segment profit decreased by $1,633,000 due primarily to the decrease in royalty revenue.  See Note 7 of the Notes to our Consolidated Financial Statements contained herein.

During 2008, franchisees opened two Perkins restaurants, closed eight Perkins restaurants, opened one Marie Callender’s restaurant and closed three Marie Callender’s restaurants.

Foxtail Segment

Foxtail’s revenues, net of intercompany sales, increased approximately $3,093,000 compared to the prior year. The increase was primarily due to increases in selling prices over all major product lines partially offset by decreases in sales volumes resulting primarily from macro-economic conditions.  The segment loss of approximately $4,500,000 in 2008 represented a decline of approximately $8,187,000 as compared to the segment income of $3,687,000 in the prior year.  The decline was primarily due to increased raw materials costs, primarily the result of increases in commodity prices, a non-cash goodwill impairment charge of $1,664,000 in the third quarter of 2008, a decrease in contribution margin attributable to an approximate 5.5% decrease in sales volume, in addition to increases of approximately $1,250,000 in outside services and $800,000 in marketing programs and allowances.

Revenues

Consolidated total revenues decreased approximately $5,916,000 in 2008 compared to 2007.  The decrease was due primarily to a $7,621,000 decrease in sales in the restaurant segment and a decrease in revenues of $1,841,000 in the franchise segment, partially offset by increases in sales of $3,093,000 in the Foxtail segment and licensing and other revenues of $453,000 in the other segment.  Total revenues of approximately $581,970,000 in 2008 were 1.0% lower than total revenues of approximately $587,886,000 in 2007.

Restaurant segment sales of $503,242,000 and $510,863,000 in 2008 and 2007, respectively, accounted for 86.5% and 86.9% of total revenues, respectively. Total restaurant segment sales decreased as a percentage of total revenues due an overall 4.4% decrease in comparable sales at Company-operated Perkins and Marie Callender’s restaurants and the increase in Foxtail segment sales.

Franchise segment revenues of $24,141,000 and $25,982,000 in 2008 and 2007, respectively, accounted for 4.1% and 4.4% of total revenues, respectively. During 2008, royalty revenue decreased $1,468,000 due principally to a decline in comparable customer counts and by $373,000 due to lower franchise fees and renewal fees.

Foxtail revenues of $49,220,000 and $46,127,000 in 2008 and 2007, respectively, accounted for 8.5% and 7.8% of total revenues respectively. The increase of $3,093,000 was primarily due to increases in selling prices over all major product lines, partially offset by decreases in sales volume.

Costs and Expenses

Food Cost

Consolidated food cost was 29.2% and 28.5% of food sales in 2008 and 2007, respectively. Restaurant segment food cost was 26.9% and 27.1% of food sales in 2008 and 2007, respectively, while food cost in the Foxtail segment was 65.9% and 60.9% of food sales in 2008 and 2007, respectively. This increase of 5.0 percentage points in the Foxtail segment is primarily due to higher commodity costs, particularly dairy and flour prices.



Labor and Benefits Expenses

Consolidated labor and benefits expenses were 32.4% and 32.2% of total revenues in 2008 and 2007, respectively. The labor and benefits ratio increased by 0.2 percentage points in the restaurant segment, while the Foxtail segment labor and benefits expense increased from 13.1% in 2007 to 13.5% in 2008. The increase in labor and benefits as a percentage of revenues in the restaurant segment is primarily due to higher restaurant manager compensation.  The increase of 0.4 percentage points in the Foxtail segment is due primarily to an increase in contract production labor as well as higher administrative and maintenance compensation.

Operating Expenses

Total operating expenses of $152,260,000 in 2008 increased by $2,823,000 as compared to 2007. The most significant components of operating expenses were rent, utilities, advertising, restaurant supplies, repair and maintenance and property taxes. Total operating expenses, as a percentage of total sales, were 26.2% and 25.4% in 2008 and 2007, respectively. Approximately 93.7% and 94.2% of total operating expenses in 2008 and 2007, respectively, were incurred in the restaurant segment, and restaurant segment operating expenses, as a percentage of restaurant sales, were 28.3% and 27.6% in 2008 and 2007, respectively.  The increase of 0.7 percentage points in operating expenses as a percentage of revenues in the restaurant segment resulted primarily from the decline in revenues and increases in utilities costs and marketing expenses, which were partially offset by a decrease in pre-opening expenses for new stores. Operating expenses in the Foxtail segment, as a percentage of segment food sales, increased 1.3 percentage points or $1,232,000 due primarily to higher custodial services.

General and Administrative Expenses

The most significant components of general and administrative (“G&A”) expenses were corporate labor and benefits, occupancy costs and outside services. Consolidated G&A expenses represented 8.2% and 7.6% of sales in 2008 and 2007, respectively. The increase is primarily due to consulting costs of approximately $1,700,000 (or 0.3%) to design and implement improved operating and accounting systems at Foxtail and higher marketing costs at Foxtail.

Transaction Costs

The Company has classified certain expenses incurred in fiscal 2007 and 2006 as transaction costs on its Consolidated Statements of Operations.  Transaction costs include expenses directly attributable to the Acquisition in September 2005 and the Combination and certain non-recurring expenses incurred as a result of the Acquisition and the Combination.  There were no transaction costs for 2008. Transaction costs were $1,013,000 for 2007. The direct expenses consisted of administrative, consultative and legal expenses.

Depreciation and Amortization

Depreciation and amortization expense was $24,699,000 and $24,822,000 in 2008 and 2007, respectively.

Interest, net

Interest, net was $36,689,000 or 6.3% of revenues in 2008 compared to $31,180,000 or 5.3% of revenues in 2007. This increase was primarily due to an increase in the average effective interest rate to 10.1% from 8.7% and an approximate $13,700,000 increase in the average debt outstanding during 2008 as compared to 2007.

Asset Impairments and Closed Store Expenses

Asset impairments and closed store expenses consist primarily of the write-down to fair value for impaired stores and adjustments to the reserve for closed stores. During 2008 and 2007, we recorded expenses of $1,797,000 and $2,463,000, respectively for asset impairment and store closures.



Goodwill Impairment

At December 30, 2007, the Company had $30,038,000 of goodwill, of which $9,836,000 was attributable to restaurant operations, $18,538,000 was attributable to franchise operations and $1,664,000 was attributable to the Foxtail segment. The goodwill originated from the acquisition of the Company in September 2005. Due to the decrease in the Company’s operating results during 2008 compared to 2007 and the decline in general economic conditions impacting the restaurant industry, management conducted an interim goodwill impairment evaluation during the quarter ended October 5, 2008. Fair values of the reporting units were calculated using discounted future cash flows and market-based comparative values.  Because the carrying values of the reporting units for both the franchise and Foxtail reporting units exceeded their respective estimated fair values, the Company completed step two of the goodwill test and concluded that the goodwill of those reporting units was impaired as of October 5, 2008. Accordingly, in the quarter ended October 5, 2008, the Company recorded a non-cash goodwill impairment charge of $20,202,000, of which $18,538,000 was charged to the franchise segment and $1,664,000 was charged to the Foxtail segment.  No impairment charge was required for the goodwill associated with the restaurant reporting unit or the Company’s non-amortizing intangibles.  As of December 28, 2008, we conducted our annual impairment test of goodwill and non-amortizing intangible assets and determined that no additional impairment charge was required.

Loss on Extinguishment of Debt

In connection with the September 2008 refinancing transaction (see “Capital Resources and Liquidity” below), we terminated our pre-existing credit agreement and consequently incurred a $2,952,000 loss due to the write-off of deferred financing costs related to that agreement.

Taxes

The effective federal and state income tax rates were 3.2% and (10.5)% in 2008 and 2007, respectively. Our rates differ from the statutory rate primarily due to a valuation allowance against deferred tax deductions, losses and credits.  The effective income tax rate for 2008 reflects current and deferred tax benefit of losses and credits and the net benefit and interest on settled and expired uncertain tax positions.  The write-down of goodwill was not a tax-deductible item and consequently reduced the Company’s effective income tax rate by (12.6)%.

CAPITAL RESOURCES AND LIQUIDITY

On September 24, 2008, we issued $132,000,000 of 14% senior secured notes (the "Secured Notes") and entered into a $26,000,000 revolving credit facility (the “Revolver”) in connection with the refinancing of our then existing $100,000,000 term loan and $40,000,000 revolver.  In connection with this transaction, we recognized a loss of $2,952,000, representing the write-off of previously deferred financing costs related to the terminated credit agreements.

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 mature on May 31, 2013, and interest is payable semi-annually on May 31 and November 30 of each year.



The Secured Notes are fully and unconditionally guaranteed (the "Secured Notes Guarantees") on a senior secured basis by the Company's parent, Perkins & Marie Callender's Holding Inc., and each of the Company's existing and future domestic wholly-owned subsidiaries (the “Secured Notes Guarantors”).  The Secured Notes and the Secured Notes Guarantees are the Company’s and the Secured Notes Guarantors’ senior secured obligations and rank equal in right of payment to all of the Company’s and the Senior Notes Guarantors’ existing and future senior indebtedness.  The Secured Notes and the Secured Notes Guarantees are secured by a lien on substantially all of the Company’s and the Secured Notes Guarantors’ existing and future assets, subject to certain exceptions.  Pursuant to the terms of an intercreditor agreement, the foregoing liens are contractually subordinated to the liens that secure the Revolver.

Prior to May 31, 2011, the Company may redeem up to 35% of the aggregate principal amount of the Secured Notes with the net cash proceeds of certain equity offerings at a premium specified in the indenture pertaining to the Secured Notes (the “Secured Notes Indenture”).  Prior to May 31, 2011, the Company also may redeem all or part of the Secured Notes at a “make whole” premium specified in the Secured Notes Indenture.  On or after May 31, 2011, the Company may redeem the Secured Notes at a 7% premium that decreases to a 0% premium on May 31, 2012.  If the Company experiences a change of control, the holders have the right to require the Company to repurchase its Secured Notes at 101% of the principal amount.  If the Company sells assets and does not use the net proceeds for specified purposes, it may be required to use the net proceeds to offer to repurchase the Secured Notes at 100% of the Notes’ principal amount.  Any redemption or repurchase also requires the payment of any accrued and unpaid interest through the redemption or repurchase date.

10% Senior Notes

In September 2005, the Company issued $190,000,000 of unsecured 10% Senior 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 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 Company may redeem the 10% Senior Notes at a 5% premium that steps down to a 2.5% premium on October 1, 2010 and a 0% premium on October 1, 2011 (and thereafter).  If the Company experiences a change of control, the holders have the right to require the Company to repurchase its 10% Senior Notes at 101% of the principal amount.  If the Company sells assets and does not use the net proceeds for specified purposes, it may be required to use the net proceeds to offer to repurchase the 10% Senior Notes and certain other existing pari-passu indebtedness of the Company at 100% of the principal amount thereof.  Any redemption or repurchase also requires the payment of any accrued and unpaid interest through the redemption or repurchase date.

With respect to the 10% Senior Notes, the Company has certain covenants that restrict our ability to pay dividends or distributions to our equity holders (“Restricted Payments”). If no default or event of default exists or occurs as a result of such Restricted Payments, we are generally allowed to make Restricted Payments subject to the following restrictions:

1.
The Company would, at the time of such Restricted Payments and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional indebtedness pursuant to the fixed charge coverage ratio tests as defined in the indenture.



2.
Such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company after September 21, 2005, is less than the sum, without duplication, of (i) 50% of the consolidated net income of the Company for the period from the beginning of the first full fiscal quarter commencing after the date of the indenture to the end of the Company’s most recent ended fiscal quarter for which internal financial statements are available at the time of the Restricted Payment; (ii) 100% of the aggregate net proceeds received by the Company since the date of the indenture as a contribution to its equity capital or from the sale of equity interests of the Company or from the conversion of interests or debt securities that have been converted to equity interests; and (iii) to the extent that any Restricted Investment, as defined, that was made after the date of the indenture is sold for cash, the lesser of (a) the cash return of capital or (b) the aggregate amount of such restricted investment that was treated as a Restricted Payment when made.

The Secured Notes Indenture and the indenture pertaining to the 10% Senior Notes (“the Senior Note Indenture”) 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

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 December 27, 2009, the average interest rate on aggregate borrowings under the Revolver was 8.25%, and the Revolver permitted additional borrowings of approximately $4,605,000 (after giving effect to $11,171,000 in borrowings and $10,224,000 in letters of credit outstanding).  The letters of credit are primarily utilized in conjunction with our workers’ compensation programs.

The Company is required to make mandatory prepayments under the Revolver with, subject to certain exceptions (as defined in the Revolver): (i) the net cash proceeds from certain asset sales or dispositions; (ii) the net cash proceeds of any debt issued by the Company or its subsidiaries; (iii) 50% of the net cash proceeds of any equity issuance by the Company, its parent or its subsidiaries; and (iv) the extraordinary receipts received by the Company or its subsidiaries, consisting of proceeds of judgments or settlements, certain indemnity payments and purchase price adjustments received in connection with any purchase agreement.  Any of the foregoing mandatory prepayments will result in a corresponding permanent reduction in the maximum Revolver amount.

The Revolver contains various affirmative and negative covenants, including, but not limited to a financial covenant to maintain at least $30,000,000 of trailing 13-period EBITDA, as defined in the Revolver, and a covenant that limits the Company’s capital expenditures.

The average interest rate on aggregate borrowings of the Company’s long-term debt during fiscal 2009 was 11.6% compared to 10.1% during fiscal 2008.

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 its line 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 Company's outstanding notes.  As of December 27, 2009, we were in compliance with the financial covenants contained in our debt agreements.


Working Capital and Cash Flows

At December 27, 2009, we had a negative working capital balance of $17,643,000. 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.

We have experienced a decline in comparable restaurant sales and declining profits in our restaurants in both 2009 and 2008.  The ongoing turmoil in the economy has adversely affected our guest counts and, in turn, our operating results and cash generated by operations.  The Company expects to incur a net loss in 2010.  In order to improve the cash flows in our business, we continue to rollout a new breakfast program at our Marie Callender’s restaurants, improved systems to more effectively manage our food and labor costs, upgraded our management staff and certain equipment in our Foxtail division to drive higher operating efficiencies, reduced overall planned capital expenditures for 2010, and we continually review general and administrative expenditures.  Management expects these initiatives together with the Company’s cash provided by operations and borrowing capacity to provide sufficient liquidity through 2010.  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.

The following table sets forth summary cash flow data for the years ended December 27, 2009, December 28, 2008 and December 30, 2007 (in thousands):
 
 
 
Year Ended
   
Year Ended
   
Year Ended
 
   
December 27, 2009
   
December 28, 2008
   
December 30, 2007
 
Cash flows provided by (used in) operating activities
  $ 621       (9,489 )     15,479  
Cash flows used in investing activities
    (8,239 )     (17,649 )     (31,526 )
Cash flows provided by financing activities
    7,293       12,719       26,010  

Operating activities

Cash provided by operating activities increased by $10,110,000 for 2009 compared to 2008. Cash used in operating activities increased by $24,968,000 for 2008 compared to 2007.  The increase in cash provided in 2009 compared to 2008 was primarily due to lower accounts receivable and inventory, partially offset by lower accounts payable, all consistent with 2009’s lower sales volumes.  The increase in cash used in 2008 compared to 2007 was primarily due to lower earnings, net of non-cash charges, and cash uses resulting from higher accounts receivable and lower accounts payable balances.

Investing activities

Cash flows used in investing activities were $8,239,000, $17,649,000 and $31,526,000 for 2009, 2008 and 2007, respectively. Substantially all cash flows used in investing activities were used for capital expenditures.



Capital expenditures consisted primarily of restaurant improvements, manufacturing plant improvements, restaurant remodels, and equipment packages for new restaurants. The following table summarizes capital expenditures for each of the past three years (in thousands):

   
Year Ended
   
Year Ended
   
Year Ended
 
 
 
 
December 27, 2009
   
December 28, 2008
   
December 30, 2007
 
New restaurants (including restaurants acquired from franchisees)
  $ 155       2,302       15,255  
Restaurant improvements
    5,876       6,650       8,675  
Restaurant remodeling and reimaging
    1,421       3,165       4,920  
Manufacturing plant improvements
    727       4,710       1,476  
Other
    554       1,509       1,221  
Total capital expenditures
  $ 8,733       18,336       31,547  

Our capital expenditure forecast for 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.

Financing activities

Cash flows provided by financing activities were $7,293,000, $12,719,000 and $26,010,000 for 2009, 2008 and 2007, respectively.  The financing cash flows in 2009 primarily included net proceeds of $7,987,000 from the Revolver.  In September 2008, we refinanced our pre-existing bank debt utilizing proceeds of $124,463,000 from the Secured Notes, $4,804,000 from the Revolver and a $12,500,000 capital contribution from our sole shareholder to repay $127,500,000 of outstanding debt under the terminated credit agreement.  The remaining proceeds were used to pay fees and interest related to the pre-existing debt and debt financing costs.  The decrease in net borrowings in 2008 results from the high cash balances in place at the beginning of 2008 and the decrease in 2008 capital expenditures.  During 2007, the primary cash flows included $20,000,000 of net receipts from our then-existing credit agreement and $6,107,000 received from various landlords as reimbursements for building and leasehold improvements at new store locations.

Impact of Inflation.  We do not believe that our operations are affected by inflation to a greater extent than other companies 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

The following table represents our contractual commitments associated with our debt and other obligations as of December 27, 2009 (in thousands):

 
 
 
Fiscal
2010
   
Fiscal
2011
   
Fiscal
2012
   
Fiscal
2013
   
Fiscal
2014
   
Thereafter
   
Total
 
Contractual Obligations (1)
                                         
10% Senior Notes
                      190,000                   190,000  
Secured Notes
                      132,000                   132,000  
Revolver
                      11,171                   11,171  
Capital lease obligations
    1,581       1,406       1,374       1,381       1,403       16,178       23,323  
Operating leases
    36,631       34,266       32,578       29,919       27,308       229,667       390,369  
Interest on indebtedness (2)
    38,148       38,148       38,148       23,601                   138,045  
Purchase commitments (3)
    47,546       1,581       730       449       449       898       51,653  
Management fee (4)
                      22,524                   22,524  
Total contractual obligations
  $ 123,906       75,401       72,830       411,045       29,160       246,743       959,085  
____________

(1)
In addition to the contractual obligations disclosed in this table, we have unrecognized tax benefits with respect to which, based on uncertainties associated with the items, we are unable to make reasonably reliable estimates of the period of potential cash settlements, if any, with taxing authorities. (See Note 10 of the Notes to our Consolidated Financial Statements).

(2)
Represents interest expense using the interest rate of 10.0% on the $190,000,000 of 10% Senior Notes, 14.0% on the $132,000,000 of Secured Notes and 8.25% on the outstanding balance of $11,171,000 under the Revolver at December 27, 2009. Interest obligations exclude interest on capital lease obligations and fees on any letters of credit that may be issued under our new credit agreement.

(3)
Primarily represents commitments to purchase food products for the restaurant and manufacturing segments.

(4)
The Company is obligated for management fees due to Castle Harlan; however, as long as the Company’s current debt agreements are in place, the Company is limited as to the amount that can be paid each year.  As of December 27, 2009, $10,383,000 of past due management fees were accrued in other liabilities and fees will continue to accrue quarterly at an annual rate of 3% of equity contributed by Castle Harlan and affiliates.

As of December 27, 2009, there were borrowings of $11,171,000 and approximately $10,224,000 of letters of credit outstanding under the Revolver. These letters of credit are primarily utilized in conjunction with our workers’ compensation program.

Additionally, the Company has arrangements with several different parties to whom territorial rights were granted in exchange for specified payments. 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 year ended December 27, 2009, we paid an aggregate of approximately $2,592,000 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 in certain states.

Off-Balance Sheet Arrangements

As of December 27, 2009, the Company had no off-balance sheet arrangements.

RECENT ACCOUNTING PRONOUNCEMENTS

Information regarding new accounting pronouncements is included in Note 3 of the Notes to our Consolidated Financial Statements.




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 December 27, 2009, the Revolver permitted borrowings of up to approximately $4,605,000 (after giving effect to $11,171,000 in borrowings and $10,224,000 in letters of credit outstanding). Borrowings under the Revolver are subject to variable interest rates. For the twelve months ended December 27, 2009, a 100 basis point change in interest rates (assuming $26,000,000 was outstanding under the Revolver) would have impacted 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 December 27, 2009, we do not consider the potential loss resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates to be material.  We do not use derivative financial instruments to reduce our net exposure to currency fluctuations.

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.


RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS

Our management is responsible for the preparation, accuracy and integrity of the consolidated financial statements.

These consolidated statements have been prepared in accordance with accounting principles generally accepted in the United States of America consistently applied, in all material respects, and reflect estimates and judgments by management where necessary.

We maintain a system of internal accounting control that is adequate to provide reasonable assurance that transactions are executed and recorded in accordance with management’s authorization and that assets are safeguarded.


Report of Independent Registered Public Accounting Firm

To the Board of Directors of Perkins & Marie Callender’s Inc.:

We have audited the accompanying consolidated balance sheets of Perkins & Marie Callender’s Inc. and subsidiaries (the “Company”) as of December 27, 2009 and December 28, 2008, and the related consolidated statements of operations, stockholder’s deficit, and cash flows for each of the three years in the period ended December 27, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Perkins & Marie Callender’s Inc. and subsidiaries as of December 27, 2009 and December 28, 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 27, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 3 to the consolidated financial statements, effective December 29, 2008, the Company changed its method of accounting for noncontrolling interests and retrospectively adjusted all years presented in the accompanying consolidated financial statements.


/s/Deloitte & Touche LLP

Memphis, Tennessee
March 29, 2010








PERKINS & MARIE CALLENDER’S INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands)

   
Year Ended
   
Year Ended
   
Year Ended
 
   
December 27,
   
December 28,
   
December 30,
 
   
2009
   
2008
   
2007
 
REVENUES:
                 
Food sales
  $ 507,763       552,462       556,990  
Franchise and other revenue
    28,305       29,508       30,896  
   Total revenues
    536,068       581,970       587,886  
COSTS AND EXPENSES:
                       
Cost of sales (excluding depreciation shown below):
                 
    Food cost
    131,765       161,103       158,708  
    Labor and benefits
    177,672       188,431       189,307  
    Operating expenses
    145,630       152,260       149,437  
General and administrative
    46,153       47,829       44,874  
Transaction costs
    -       -       1,013  
Depreciation and amortization
    24,041       24,699       24,822  
Interest, net
    44,120       36,689       31,180  
Asset impairments and closed store expenses
    5,997       1,797       2,463  
Goodwill impairment
    -       20,202       -  
Loss on extinguishments of debt
    -       2,952       -  
Other, net
    (3,460 )     446       228  
    Total costs and expenses
    571,918       636,408       602,032  
Loss before income taxes
    (35,850 )     (54,438 )     (14,146 )
Benefit from (provision for) income taxes
    (171 )     1,769       (1,482 )
Net loss
    (36,021 )     (52,669 )     (15,628 )
Less: net earnings attributable to
                       
    non-controlling interests
    198       284       707  
Net loss attributable to Perkins & Marie
                       
    Callender's Inc.
  $ (36,219 )     (52,953 )     (16,335 )















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


PERKINS & MARIE CALLENDER’S INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except in par value)

   
December 27,
   
December 28,
 
   
2009
   
2008
 
ASSETS
           
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 4,288       4,613  
Restricted cash
    8,110       10,140  
Receivables, less allowances for doubtful accounts of $829
    and $954 in 2009 and 2008, respectively
    18,125       21,386  
Inventories
    11,062       12,300  
Prepaid expenses and other current assets