Attached files
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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R
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended October 3, 2010
OR
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£
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _____________ to ____________.
Commission file number 333-57925
Perkins & Marie Callender’s Inc.
(Exact name of registrant as specified in its charter)
Delaware
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62-1254388
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. employer identification no.)
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6075 Poplar Avenue, Suite 800, Memphis, TN
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38119
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(Address of principal executive offices)
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(Zip code)
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(901) 766-6400
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(Registrant’s telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes R No 0
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer £
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Accelerated filer £
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Non-accelerated filer R (Do not check if a smaller reporting company)
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Smaller reporting company £
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £ No R
Number of shares of common stock outstanding as of November 17, 2010: 10,820.
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Ex-31.1 Section 302 Certification of the CEO
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Ex-31.2 Section 302 Certification of the CFO
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Ex-32.1 Section 906 Certification of the CEO
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Ex-32.2 Section 906 Certification of the CFO
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PERKINS & MARIE CALLENDER’S INC.
(Unaudited)
(In thousands)
Quarter
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Quarter
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Year-to-Date
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Year-to-Date
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|||||||||||||
Ended
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Ended
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Ended
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Ended
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|||||||||||||
October 3,
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October 4,
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October 3,
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October 4,
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|||||||||||||
2010
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2009
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2010
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2009
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|||||||||||||
REVENUES:
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||||||||||||||||
Food sales
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$ | 102,296 | 109,086 | 357,184 | 385,024 | |||||||||||
Franchise and other revenue
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6,404 | 6,384 | 21,474 | 21,575 | ||||||||||||
Total revenues
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108,700 | 115,470 | 378,658 | 406,599 | ||||||||||||
COSTS AND EXPENSES:
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||||||||||||||||
Cost of sales (excluding depreciation shown below):
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||||||||||||||||
Food cost
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25,999 | 28,058 | 90,715 | 101,333 | ||||||||||||
Labor and benefits
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37,535 | 39,474 | 129,743 | 135,703 | ||||||||||||
Operating expenses
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32,587 | 33,183 | 108,856 | 110,956 | ||||||||||||
General and administrative
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9,515 | 10,313 | 34,456 | 34,531 | ||||||||||||
Settlement with former owner
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4,555 | - | 4,555 | - | ||||||||||||
Depreciation and amortization
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4,818 | 5,498 | 16,783 | 18,411 | ||||||||||||
Interest, net
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10,336 | 10,260 | 34,200 | 34,005 | ||||||||||||
Asset impairments and closed store expenses
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642 | 187 | 2,747 | 1,395 | ||||||||||||
Other, net
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(41 | ) | (392 | ) | (399 | ) | (3,069 | ) | ||||||||
Total costs and expenses
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125,946 | 126,581 | 421,656 | 433,265 | ||||||||||||
Loss before income taxes
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(17,246 | ) | (11,111 | ) | (42,998 | ) | (26,666 | ) | ||||||||
Benefit from (provision for) income taxes
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4,888 | (142 | ) | 4,888 | (142 | ) | ||||||||||
Net loss
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(12,358 | ) | (11,253 | ) | (38,110 | ) | (26,808 | ) | ||||||||
Less: net (loss) earnings attributable to
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||||||||||||||||
non-controlling interests
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(9 | ) | (5 | ) | (2 | ) | 74 | |||||||||
Net loss attributable to Perkins & Marie
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||||||||||||||||
Callender's Inc.
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$ | (12,349 | ) | (11,248 | ) | (38,108 | ) | (26,882 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
2
PERKINS & MARIE CALLENDER’S INC.
(In thousands)
October 3,
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December 27,
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|||||||
2010
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2009
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|||||||
ASSETS
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(Unaudited)
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|||||||
CURRENT ASSETS:
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Cash and cash equivalents
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$ | 9,397 | 4,288 | |||||
Restricted cash
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5,696 | 8,110 | ||||||
Receivables, less allowances for doubtful accounts of $1,028
and $829 in 2010 and 2009, respectively
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15,945 | 18,125 | ||||||
Inventories
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12,195 | 11,062 | ||||||
Prepaid expenses and other current assets
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2,180 | 1,864 | ||||||
Assets held for sale, net
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310 | - | ||||||
Total current assets
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45,723 | 43,449 | ||||||
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $159,073 and $156,898 in
2010 and 2009, respectively
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61,717 | 75,219 | ||||||
INVESTMENT IN UNCONSOLIDATED PARTNERSHIP
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19 | 50 | ||||||
GOODWILL
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23,100 | 23,100 | ||||||
INTANGIBLE ASSETS, net of accumulated amortization of
$20,983 and $20,179 in 2010 and 2009, respectively
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145,375 | 147,013 | ||||||
OTHER ASSETS
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14,064 | 16,074 | ||||||
TOTAL ASSETS
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$ | 289,998 | 304,905 | |||||
LIABILITIES AND DEFICIT
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CURRENT LIABILITIES:
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Accounts payable
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15,085 | 14,657 | ||||||
Accrued expenses
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44,453 | 41,605 | ||||||
Franchise advertising contributions
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5,696 | 4,327 | ||||||
Current maturities of long-term debt and capital lease obligations
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340 | 503 | ||||||
Total current liabilities
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65,574 | 61,092 | ||||||
LONG-TERM DEBT, less current maturities
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338,434 | 326,042 | ||||||
CAPITAL LEASE OBLIGATIONS, less current maturities
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13,205 | 11,054 | ||||||
DEFERRED RENT
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18,992 | 17,092 | ||||||
OTHER LIABILITIES
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24,736 | 22,277 | ||||||
DEFERRED INCOME TAXES
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45,457 | 45,457 | ||||||
DEFICIT:
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Common stock, $.01 par value; 100,000 shares authorized;
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10,820 issued and outstanding
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1 | 1 | ||||||
Additional paid-in capital
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150,870 | 150,870 | ||||||
Accumulated other comprehensive income
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54 | 45 | ||||||
Accumulated deficit
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(367,441 | ) | (329,333 | ) | ||||
Total Perkins & Marie Callender's Inc. stockholder's deficit
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(216,516 | ) | (178,417 | ) | ||||
Non-controlling interests
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116 | 308 | ||||||
Total deficit
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(216,400 | ) | (178,109 | ) | ||||
TOTAL LIABILITIES AND DEFICIT
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$ | 289,998 | 304,905 |
The accompanying notes are an integral part of these consolidated financial statements.
3
PERKINS & MARIE CALLENDER’S INC.
(Unaudited)
(In thousands)
Year-to-Date
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Year-to-Date
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|||||||
Ended
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Ended
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October 3,
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October 4,
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|||||||
2010
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2009
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net loss
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$ | (38,110 | ) | (26,808 | ) | |||
Adjustments to reconcile net loss to net cash
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used in operating activities:
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Depreciation and amortization
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16,783 | 18,411 | ||||||
Asset impairments
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2,489 | 571 | ||||||
Amortization of debt discount
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1,352 | 1,184 | ||||||
Other non-cash income items
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(177 | ) | (2,427 | ) | ||||
Loss on disposition of assets
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258 | 824 | ||||||
Equity in net loss of unconsolidated partnership
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31 | 25 | ||||||
Net changes in operating assets and liabilities
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14,804 | 3,383 | ||||||
Total adjustments
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35,540 | 21,971 | ||||||
Net cash used in operating activities
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(2,570 | ) | (4,837 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES:
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Purchases of property and equipment
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(3,790 | ) | (5,941 | ) | ||||
Proceeds from sale of assets
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1,007 | 494 | ||||||
Net cash used in investing activities
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(2,783 | ) | (5,447 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES:
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Proceeds from revolving credit facilities
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24,684 | 26,501 | ||||||
Repayment of revolving credit facilities
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(13,644 | ) | (16,726 | ) | ||||
Repayment of capital lease obligations
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(373 | ) | (318 | ) | ||||
Repayment of other debt
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(15 | ) | (15 | ) | ||||
Debt financing costs
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- | (142 | ) | |||||
Distributions to non-controlling interest holders
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(190 | ) | (104 | ) | ||||
Net cash provided by financing activities
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10,462 | 9,196 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
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5,109 | (1,088 | ) | |||||
CASH AND CASH EQUIVALENTS:
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Balance, beginning of period
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4,288 | 4,613 | ||||||
Balance, end of period
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$ | 9,397 | 3,525 |
The accompanying notes are an integral part of these consolidated financial statements.
4
PERKINS & MARIE CALLENDER’S INC.
(Unaudited)
(1) Organization
Perkins & Marie Callender’s Inc. (together with its consolidated subsidiaries collectively the “Company”, “PMCI”, “we” or “us”), is a wholly-owned subsidiary of:
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Perkins & Marie Callender’s Holding Inc., which is a wholly-owned subsidiary of
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P&MC’s Holding Corp, which is a wholly-owned subsidiary of
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·
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P&MC’s Real Estate Holding LLC, which is a wholly-owned subsidiary of
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P&MC’s Holding LLC, which is principally owned by affiliates of Castle Harlan, Inc.
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The Company is the sole equity holder of Wilshire Restaurant Group, LLC (“WRG”), which owns 100% of the outstanding common stock of Marie Callender Pie Shops, Inc. (“MCPSI”). MCPSI owns and operates restaurants and has granted franchises under the names Marie Callender’s and Marie Callender’s Grill. MCPSI also owns 100% of the outstanding common stock of M.C. Wholesalers, Inc., which operates a commissary that produces bakery goods. MCPSI also owns 100% of the outstanding common stock of FIV Corp., which owns and operates one restaurant under the name East Side Mario’s.
The Company operates two restaurant concepts: (1) full-service family dining restaurants located primarily in the Midwest, Florida and Pennsylvania under the name Perkins Restaurant and Bakery (“Perkins”) and (2) mid-priced, casual-dining restaurants, specializing in the sale of pies and other bakery items, located primarily in the western United States under the name Marie Callender’s Restaurant and Bakery (“Marie Callender’s”).
Through our bakery goods manufacturing segment (“Foxtail”), we also offer pies, muffin batters, cookie doughs, pancake mixes, and other food products for sale to our Perkins and Marie Callender’s Company-operated and franchised restaurants and to unaffiliated customers, such as food service distributors.
(2) Basis of Presentation
The consolidated interim financial statements included in this report have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America and have not been subject to audit. In the opinion of the Company’s management, all adjustments, including all normal recurring items, necessary for a fair presentation of the results of operations are reflected in these consolidated interim financial statements. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The most significant estimates and assumptions underlying these financial statements and accompanying notes generally involve royalty revenue recognition and provisions for related uncollectible accounts, asset impairments, self-insurance accruals and valuation allowances for income taxes.
The results of operations for the interim period ended October 3, 2010 are not necessarily indicative of operating results for the full year. The consolidated interim financial statements contained herein should be read in conjunction with the audited consolidated financial statements and notes contained in the Company’s 2009 Form 10-K/A, filed with the Securities and Exchange Commission on June 7, 2010.
(3) Accounting Reporting Period
Our financial reporting is based on thirteen four-week periods ending on the last Sunday in December. The first quarter each year includes four four-week periods, and the second, third and fourth quarters each typically include three four-week periods. The first, second and third quarters of 2010 ended on April 18, July 11 and October 3, respectively, and the first, second and third quarters of 2009 ended on April 19, July 12 and October 4, respectively. The fourth quarter of 2010 will end December 26.
(4) Operations, Financial Position and Liquidity
Our principal sources of liquidity include cash, available borrowings under our $26,000,000 revolving credit facility (the “Revolver”) and cash generated by operations. Our principal uses of liquidity are costs and expenses associated with our restaurant and manufacturing operations, debt service payments and capital expenditures. At October 3, 2010, we had a negative working capital balance of $19,851,000 and total PMCI stockholder’s deficit of $216,516,000. Furthermore, at October 3, 2010, we had $9,397,000 in unrestricted cash and $2,206,000 of borrowing capacity under our Revolver.
Over the last three years, we have experienced continued declines in comparable restaurant sales and profitability that have adversely impacted our liquidity position. We believe that this continued decline is primarily attributed to increased competition, the ongoing weakness in the economy, high unemployment levels, continued depressed residential real estate values, especially in some of our larger markets, and the level of home foreclosures, which have adversely affected our guest counts and, in turn, our sales and operating results.
Our operations and liquidity needs are seasonal in nature. Historically, we have generated a significant portion of our operating cash flow in the first and fourth quarters, with these two quarters in total contributing 60% and 63% of our annual operating cash flows in 2008 and 2009. The fourth quarter is typically our strongest income generating quarter due to substantial holiday traffic and seasonal pie sales. In anticipation of these sales and guest traffic, we increase personnel and inventories, and therefore liquidity is normally at its lowest point at the end of the third quarter.
Our ability to fund our operations and service our debt through 2011will depend, in large part, on our ability to improve profitability and liquidity. Management has initiated actions to improve its profitability and liquidity by reducing overall planned capital expenditures, managing the timing of payments of certain operating expenses, eliminating certain employee benefits, and reducing certain general and administrative expenses. Management has recently implemented advertising and promotional programs at both restaurant brands, in an effort to improve comparable restaurant sales and profitability. In addition, management is working to increase profits at Foxtail, by replacing less profitable contracts that were terminated in 2009, with more profitable sales contracts. In addition, we are carefully reviewing menu prices at our restaurants, and we will increase menu prices, where feasible. There can be no assurance, however, that such actions will result in improved profitability and liquidity.
In September 2010, the controlling equity holder of P&MC’s Holding LLC, our indirect parent, finalized an agreement with a third party whereby the third party provided a new letter of credit of approximately $8,635,000 for the benefit of an insurance company that provides workers’ compensation insurance for the Company. The new letter of credit was guaranteed by one of the equity holder’s affiliates, and the Company signed an agreement to reimburse the affiliate for any amounts paid under the guaranty. This new letter of credit has been renewed through December 9, 2011, and contains certain renewal provisions for extension beyond that date. Prior to the new letter of credit, the Company had an existing letter of credit in place under its Revolver for the benefit of this same insurance company. When this new letter of credit agreement was put in place, the Company cancelled the existing letter of credit provided under its Revolver, thereby increasing our incremental borrowing capacity by approximately $8,635,000 to fund our liquidity needs.
The cancelled letter of credit and the new letter of credit that replaced it are not drawn down unless the Company fails to pay its workers’ compensation claims in the ordinary course of business. In the event the Company fails to make payments due on its workers’ compensation claims and the new letter of credit is drawn upon, the guarantor of the letter of credit will reimburse the third party letter of credit provider, and the Company has agreed to reimburse the guarantor for such amounts. However, there has never been a draw on the letters of credit provided for our workers’ compensation plans, and the Company does not expect that there will be a draw on the new letter of credit.
Management expects the initiatives discussed above combined with the Company’s cash provided by operations and borrowing capacity under the Revolver (which includes the additional availability as a result of the new letter of credit agreement) to provide sufficient liquidity for at least the next twelve months. However, there can be no assurance as to whether these or other actions will enable us to improve our profitability and liquidity in the fourth quarter and through 2011, and therefore, we may not be able to fund our operations and service our debt without accessing outside sources of additional liquidity. Alternate sources of liquidity may include additional borrowings or capital contributions. However, the Company currently has no such commitments or plans, and there can be no assurance that the Company will be able to access acceptable alternative financing.
(5) Gift Cards and Perkins Marketing Fund
The Company issues gift cards and, prior to March 2005, also issued gift certificates (collectively, “gift cards”), both of which contain no expiration dates or inactivity fees. The Company recognizes revenue from gift cards when they are redeemed by the customer. The Company recognizes income from unredeemed gift cards (“gift card breakage”) when there is sufficient historical data to support an estimate, the likelihood of redemption is remote and there is no legal obligation to remit the unredeemed gift card balances to the state tax authorities under applicable escheat regulations. Gift card breakage is determined based on historical redemption patterns and is included in other, net in the consolidated statements of operations. The initial recognitions of breakage income in the first and second quarters of 2009 included amounts related to gift cards sold since the inception of our gift card programs in 2005. For the quarter and year-to-date periods ended October 3, 2010, we recorded $109,000 and $444,000, respectively, of breakage income for both our Perkins and Marie Callender’s gift cards. As of October 3, 2010 and December 27, 2009, the Company held approximately $2,088,000 and $3,324,000, respectively, of net gift card proceeds received from Perkins’ Company-owned and franchise locations. As of December 27, 2009, those funds were classified as restricted cash based on the Company's intent to restrict the use of these funds. However, as of October 3, 2010, it is no longer the Company's intention to restrict these funds and, accordingly, they are classified as cash and cash equivalents on the consolidated balance sheet.
The Company maintains a marketing fund (the “Marketing Fund”) to pool the resources of the Company and its Perkins franchisees for advertising purposes and to promote the Perkins brand in accordance with the system’s advertising policy. As of October 3, 2010 and December 27, 2009, the Company held approximately $5,696,000 and $4,786,000, respectively, in the Marketing Fund. These funds are classified as restricted cash with a corresponding liability for franchise advertising on the consolidated balance sheets as the use of these funds is contractually limited to specific uses.
(6) Commitments, Contingencies and Concentrations
We are a party to various legal proceedings in the ordinary course of business. We do not believe it is likely that these proceedings, either individually or in the aggregate, will have a material adverse effect on our consolidated financial statements.
The majority of our franchise revenues are generated from franchisees owning individually less than five percent (5%) of total franchised restaurants, and, therefore, the loss of any one of these franchisees would not have a material impact on our results of operations.
As of October 3, 2010, three Perkins franchisees otherwise unaffiliated with the Company owned 87, or 27%, of the 319 franchised Perkins restaurants, consisting of 39, 27 and 21 restaurants, respectively. As of October 4, 2009, these same franchisees owned 40, 27 and 21 restaurants, respectively. The following table presents a summary of the royalty and license fees provided by these three franchisees:
Quarter
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Year-to-Date
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Quarter
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Year-to-Date
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|||||||||||||||||||
# of
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Ended
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Ended
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# of
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Ended
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Ended
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Restaurants
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October 3,
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October 3,
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Restaurants
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October 4,
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October 4,
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(2010) | 2010 | 2010 | (2009) | 2009 | 2009 | |||||||||||||||||
39 | $ | 439,000 | $ | 1,402,000 | 40 | $ | 447,000 | $ | 1,446,000 | |||||||||||||
27 | 354,000 | 1,141,000 | 27 | 337,000 | 1,100,000 | |||||||||||||||||
21 | 344,000 | 1,080,000 | 21 | 346,000 | 1,123,000 |
As of October 3, 2010, three Marie Callender’s franchisees otherwise unaffiliated with the Company owned 12, or 32%, of the 37 franchised Marie Callender’s restaurants, consisting of four restaurants each. As of October 4, 2009, these same franchisees owned four restaurants each. The following table presents a summary of the royalty and license fees provided by these three franchisees:
Quarter
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Year-to-Date
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Quarter
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Year-to-Date
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|||||||||||||||||||
# of
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Ended
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Ended
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# of
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Ended
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Ended
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|||||||||||||||||
Restaurants
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October 3,
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October 3,
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Restaurants
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October 4,
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October 4,
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|||||||||||||||||
(2010) | 2010 | 2010 | (2009) | 2009 | 2009 | |||||||||||||||||
4 | $ | 79,000 | $ | 266,000 | 4 | $ | 60,000 | $ | 280,000 | |||||||||||||
4 | 44,000 | 233,000 | 4 | 78,000 | 279,000 | |||||||||||||||||
4 | 61,000 | 209,000 | 4 | 64,000 | 202,000 |
The Company has three arrangements with different parties to whom territorial rights were granted. The Company makes specified payments to those parties based on a percentage of gross sales from certain Perkins restaurants and for new Perkins restaurants opened within those geographic regions. During the third quarters of 2010 and 2009, we paid an aggregate of $631,000 and $643,000, respectively, and during the year-to-date periods of 2010 and 2009, we paid an aggregate of $1,983,000 and $2,064,000, respectively, under such arrangements. Of these arrangements, one expires in the year 2075, one expires upon the death of the beneficiary and one remains in effect as long as we operate Perkins restaurants in certain states.
(7) Supplemental Cash Flow Information
Cash and cash equivalents were impacted by the following changes (in thousands) in operating assets and liabilities in the statements of cash flows for the year-to-date periods ended October 3, 2010 and October 4, 2009:
Year-to-Date
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Year-to-Date
|
|||||||
Ended
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Ended
|
|||||||
October 3,
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October 4,
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|||||||
2010
|
2009
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|||||||
Decrease (increase) in:
|
||||||||
Restricted cash
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$ | 2,414 | 2,100 | |||||
Receivables
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1,900 | 3,900 | ||||||
Inventories
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(1,133 | ) | 894 | |||||
Prepaid expenses and other current assets
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(316 | ) | (1,474 | ) | ||||
Other assets
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2,326 | 1,055 | ||||||
Increase (decrease) in:
|
||||||||
Accounts payable
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2,403 | (2,518 | ) | |||||
Accrued expenses and other current liabilities
|
2,851 | (4,345 | ) | |||||
Other liabilities
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4,359 | 3,771 | ||||||
Net changes in operating assets and liabilities
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$ | 14,804 | 3,383 |
(8) Goodwill and Intangible Assets
Goodwill
Goodwill of $23,100,000 at both October 3, 2010 and December 27, 2009 was attributable solely to the restaurant operations segment.
Intangible Assets
The components of our identifiable intangible assets are as follows (in thousands):
October 3,
|
December 27,
|
|||||||
2010
|
2009
|
|||||||
Amortizing intangible assets:
|
||||||||
Franchise agreements
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$ | 35,000 | 35,000 | |||||
Customer relationships
|
10,000 | 10,000 | ||||||
Acquired franchise rights
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10,758 | 10,758 | ||||||
Design prototype
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- | 834 | ||||||
Subtotal
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55,758 | 56,592 | ||||||
Less — accumulated amortization
|
(20,983 | ) | (20,179 | ) | ||||
Net amortizing intangible assets
|
34,775 | 36,413 | ||||||
Non-amortizing intangible asset:
|
||||||||
Tradenames
|
110,600 | 110,600 | ||||||
Total intangible assets
|
$ | 145,375 | 147,013 |
(9) Accrued Expenses
Accrued expenses consisted of the following (in thousands):
October 3,
|
December 27,
|
|||||||
2010
|
2009
|
|||||||
Payroll and related benefits
|
$ | 13,159 | 15,423 | |||||
Interest
|
6,606 | 6,065 | ||||||
Gift cards and gift certificates
|
3,756 | 5,090 | ||||||
Property, real estate and sales taxes
|
6,397 | 4,267 | ||||||
Insurance
|
2,233 | 2,219 | ||||||
Advertising
|
985 | 792 | ||||||
Other
|
11,317 | 7,749 | ||||||
Total accrued expenses
|
$ | 44,453 | 41,605 |
(10) Segment Reporting
We have three reportable segments: restaurant operations, franchise operations and Foxtail. The restaurant operations include the operating results of Company-operated Perkins and Marie Callender’s restaurants. The franchise operations include revenues and expenses directly attributable to franchised Perkins and Marie Callender’s restaurants. Foxtail’s operations consist of three manufacturing plants: one in Corona, California and two in Cincinnati, Ohio.
Our restaurants operate principally in the U.S. within the family dining and casual dining industries, providing similar products to similar customers. Revenues from restaurant operations are derived principally from food and beverage sales to external customers. Revenues from franchise operations consist primarily of royalty income earned on the revenues generated at franchisees’ restaurants and initial franchise fees. Revenues from Foxtail are generated by the sale of food products to both Company-operated and franchised Perkins and Marie Callender’s restaurants as well as to unaffiliated customers. Foxtail’s sales to Company-operated restaurants are eliminated for reporting purposes. The revenues in the “other” segment are primarily licensing revenues.
The following table presents revenues and other financial information by business segment (in thousands):
Quarter
|
Quarter
|
Year-to-Date
|
Year-to-Date
|
|||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
October 3,
|
October 4,
|
October 3,
|
October 4,
|
|||||||||||||
Revenues
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Restaurant operations
|
$ | 95,527 | 99,781 | 336,093 | 355,501 | |||||||||||
Franchise operations
|
5,243 | 5,259 | 17,202 | 17,507 | ||||||||||||
Foxtail
|
10,594 | 13,362 | 34,961 | 43,868 | ||||||||||||
Intersegment revenue
|
(3,825 | ) | (4,057 | ) | (13,869 | ) | (14,345 | ) | ||||||||
Other
|
1,161 | 1,125 | 4,271 | 4,068 | ||||||||||||
Total
|
$ | 108,700 | 115,470 | 378,658 | 406,599 | |||||||||||
Segment income (loss) attributable to PMCI | ||||||||||||||||
Restaurant operations
|
578 | 2,252 | 9,406 | 16,664 | ||||||||||||
Franchise operations
|
4,725 | 4,786 | 15,592 | 16,055 | ||||||||||||
Foxtail
|
1,034 | 903 | 2,608 | 2,226 | ||||||||||||
Other
|
(18,686 | ) | (19,189 | ) | (65,714 | ) | (61,827 | ) | ||||||||
Total
|
$ | (12,349 | ) | (11,248 | ) | (38,108 | ) | (26,882 | ) | |||||||
October 3,
|
December 27,
|
|||||||||||||||
Segment assets
|
2010 | 2009 | ||||||||||||||
Restaurant operations
|
122,427 | 132,611 | ||||||||||||||
Franchise operations
|
100,366 | 101,672 | ||||||||||||||
Foxtail
|
31,662 | 31,754 | ||||||||||||||
Other
|
35,543 | 38,868 | ||||||||||||||
Total
|
$ | 289,998 | 304,905 |
|
The components of other segment loss are as follows (in thousands):
Quarter
|
Quarter
|
Year-to-Date
|
Year-to-Date
|
|||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
October 3,
|
October 4,
|
October 3,
|
October 4,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
General and administrative expenses
|
$ | 8,482 | 9,271 | 31,156 | 30,500 | |||||||||||
Settlement with former owner
|
4,555 | - | 4,555 | - | ||||||||||||
Depreciation and amortization expenses
|
703 | 786 | 2,380 | 2,607 | ||||||||||||
Interest expense, net
|
10,336 | 10,260 | 34,200 | 34,005 | ||||||||||||
Loss on disposition of assets, net
|
426 | 48 | 258 | 823 | ||||||||||||
Asset impairments
|
216 | 139 | 2,489 | 572 | ||||||||||||
Provision for (benefit from) income taxes
|
(4,888 | ) | 142 | (4,888 | ) | 142 | ||||||||||
Net (loss) earnings attributable to
non-controlling interests
|
(9 | ) | (5 | ) | (2 | ) | 74 | |||||||||
Licensing revenue
|
(1,115 | ) | (1,081 | ) | (4,105 | ) | (3,889 | ) | ||||||||
Other
|
(20 | ) | (371 | ) | (329 | ) | (3,007 | ) | ||||||||
Total other segment loss
|
$ | 18,686 | 19,189 | 65,714 | 61,827 |
(11) Long-Term Debt
Secured Notes and 10% Senior Notes
On September 24, 2008, the Company issued $132,000,000 of 14% senior secured notes (the "Secured Notes"). The Secured Notes were issued at a discount of $7,537,200, which is being accreted using the interest method over the term of the Secured Notes. The Secured Notes will mature on May 31, 2013, and interest is payable semi-annually on May 31 and November 30 of each year.
In September 2005, the Company issued $190,000,000 of 10% senior unsecured notes (the “10% Senior Notes”). The 10% Senior Notes were issued at a discount of $2,570,700, which is being accreted using the interest method over the term of the 10% Senior Notes. The 10% Senior Notes will mature on October 1, 2013, and interest is payable semi-annually on April 1 and October 1 of each year. All consolidated subsidiaries of the Company that are 100% owned provide joint and several, full and unconditional guarantees of the 10% Senior Notes. There are no significant restrictions on the Company’s ability to obtain funds from any of the guarantor subsidiaries in the form of a dividend or a loan. Additionally, there are no significant restrictions on a guarantor subsidiary’s ability to obtain funds from the Company or its direct or indirect subsidiaries.
The indentures for the Secured Notes and the 10% Senior Notes contain various customary events of default, including, without limitation: (i) nonpayment of principal or interest; (ii) cross-defaults with certain other indebtedness; (iii) certain bankruptcy related events; (iv) invalidity of guarantees; (v) monetary judgment defaults; and (vi) certain change of control events. In addition, any impairment of the security interest in the Secured Notes collateral will constitute an event of default under the indenture for the Secured Notes.
Revolver
On September 24, 2008, the Company entered into the Revolver. The Revolver, which matures on February 28, 2013, is guaranteed by Perkins & Marie Callender's Holding Inc. and certain of the Company's existing and future subsidiaries. The Revolver is secured by a first priority perfected security interest in all of the Company's property and assets and the property and assets of each guarantor. Subject to the satisfaction of the conditions contained therein, up to $26,000,000 may be borrowed under the Revolver from time to time. The Revolver includes a sub-facility for letters of credit in an amount not to exceed $15,000,000.
Amounts outstanding under the Revolver bear interest, at the Company’s option, at a rate per annum equal to either: (i) the base rate, as defined in the Revolver, plus an applicable margin or (ii) a LIBOR-based equivalent, plus an applicable margin. Both the base rate and the LIBOR-based options are subject to minimum levels. For the foreseeable future, the base rate minimum of 5.0% and the LIBOR-based minimum of 3.25% are expected to apply and the applicable margins are expected to be 325 basis points for base rate loans and 425 basis points for LIBOR loans. As of October 3, 2010, the average annual interest rate on aggregate borrowings under the Revolver was 7.9%, and the Revolver permitted additional borrowings of approximately $2,206,000 (after giving effect to $22,210,000 in borrowings and $1,584,000 in letters of credit outstanding). The letters of credit are primarily utilized in conjunction with our workers’ compensation insurance programs.
On September 10, 2010, a letter of credit issued under the Revolver amounting to $8,635,000 was cancelled and replaced with a new letter of credit described below in “Guaranteed Letter of Credit”, thereby reducing the outstanding letters of credit and increasing the borrowing capacity under the Revolver by $8,635,000 at that date.
The Revolver contains various affirmative and negative covenants, including, but not limited to a financial covenant for the Company to maintain at least $30,000,000 of trailing 13-period EBITDA, as defined in the Revolver, and limits the Company’s ability to make capital expenditures.
The average interest rate on aggregate borrowings of the Company’s long-term debt for the year-to-date period through October 3, 2010 was 11.5% compared to the average interest rate on aggregate borrowings for the year-to-date period through October 4, 2009 of 11.6%.
Our debt agreements place restrictions on the Company’s ability and the ability of its subsidiaries to: (i) incur additional indebtedness or issue certain preferred stock; (ii) repay certain indebtedness prior to stated maturities; (iii) pay dividends or make other distributions on, redeem or repurchase capital stock or subordinated indebtedness; (iv) make certain investments or other restricted payments; (v) enter into transactions with affiliates; (vi) issue stock of subsidiaries; (vii) transfer, sell or consummate a merger or consolidation of all, or substantially all, of the Company's assets; (viii) change lines of business; (ix) incur dividend or other payment restrictions with regard to restricted subsidiaries; (x) create or incur liens on assets to secure debt; (xi) dispose of assets; (xii) restrict distributions from subsidiaries; (xiii) make certain acquisitions; (xiv) make capital expenditures; or (xv) amend the terms of the Secured Notes and the 10% Senior Notes. As of October 3, 2010 we were in compliance with the covenants contained in our debt agreements.
Guaranteed Letter of Credit
On September 10, 2010, the Company’s letter of credit amounting to $8,635,000 issued under the Revolver for the benefit of its workers’ compensation provider was cancelled and replaced with a new letter of credit to the same provider for the same amount under a credit facility entered into and guaranteed by an affiliate of the Company’s controlling equity holder. This new letter of credit will be in force through December 9, 2011 and contains certain renewal provisions for extension beyond that date.
The new letter of credit may only be drawn down if the Company fails to pay its workers’ compensation claims in the ordinary course of business. The prior letter of credit had the same draw-down condition. In the event the Company fails to make payments due on its workers’ compensation claims and the new letter of credit is drawn upon, the affiliated guarantor of the letter of credit will reimburse the third party letter of credit provider, and the Company has agreed to reimburse the affiliated guarantor for such amounts. There has never been a draw on the letters of credit provided for our workers' compensation plans, and the Company does not expect that there will be a draw on the new letter of credit.
(12) Income Taxes
The effective income tax rates for the third quarters ended October 3, 2010 and October 4, 2009 were 28.3% and (1.3)% 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 the third quarter and year-to-date period ended October 3, 2010 reflects $4,950,000 of current federal tax benefit and $67,000 of current state tax expense. In addition, the income tax rate reflects $32,000 of state tax benefit, $28,000 of state interest benefit and $55,000 of state tax penalty on uncertain tax positions for both the third quarter and the year-to-date period ended October 3, 2010. Tax legislation enacted in 2009 allowed the Company to elect a carry back of certain net operating losses up to five years rather than the previous two year carry back period. In the third quarter ended October 3, 2010 the Company recognized a $4,724,000 current federal tax benefit as a result of this election, which is discussed further in Note 13, “P&MC’s Holding LLC Equity Plan and Other Related Party Transactions” below.
A reconciliation of the change in the gross unrecognized tax benefits from December 28, 2009 to October 3, 2010 is as follows (in thousands):
2010
|
||||
Unrecognized tax benefit - beginning of fiscal year
|
$ | 1,153 | ||
Additions for tax positions of prior years
|
- | |||
Reductions for tax positions of prior years
|
- | |||
Additions for tax positions of current year
|
- | |||
Reductions due to settlements
|
- | |||
Reductions for lapse of statute of limitations
|
(513 | ) | ||
Unrecognized tax benefit - as of October 3, 2010
|
$ | 640 |
As of October 3, 2010 and December 27, 2009 the Company had approximately $466,000 and $943,000 respectively of unrecognized tax benefits that, if recognized, would impact the Company’s effective tax rate except for approximately $0 and $160,000 respectively that was subject to tax indemnification from the predecessor owner. As of October 3, 2010 and December 27, 2009 the Company had $472,000 and $805,000 respectively of unrecognized tax benefits reducing federal and state net operating loss carry forwards and federal credit carry forwards that, if recognized, would be subject to a valuation allowance. The Company estimates that the total amount of its gross unrecognized tax benefits will decrease between $540,000 and $640,000 within the next 12 months due to federal and state settlements and expiration of statutes.
(13) P&MC’s Holding LLC Equity Plan and Other Related Party Transactions
Equity Plan
Effective April 1, 2007, P&MC’s Holding LLC established a management equity incentive plan (the “Equity Plan”) for the benefit of key Company employees. The Equity Plan provides the following two types of equity ownership in P&MC’s Holding LLC: (i) Strip Subscription Units, which consist of Class A Units and Class C Units and (ii) Incentive Units, which consist of time vesting Class C Units.
Stock-based compensation expense for the quarterly and year-to-date periods ended October 3, 2010 and October 4, 2009 was not significant.
If an employee is employed as of the date of the occurrence of certain change in control events, as defined in the Equity Plan, the employee’s outstanding but unvested Incentive Units vest simultaneously with the consummation of the change in control event. Upon termination of employment, unvested Incentive Units are forfeited and vested Incentive Units and Strip Subscription Units are subject to repurchase, at a price not to exceed fair value, pursuant to the terms of P&MC’s Holding LLC’s unitholders agreement.
Other Related Party Transactions
P&MC’s Real Estate Holding LLC
In September 2009, P&MC’s Real Estate Holding LLC (“RE Holding”), the indirect parent of the Company, purchased a building in California that was being leased by the Company for the operation of a Marie Callender’s restaurant. As part of the transaction, RE Holding assumed the obligation under the existing ground lease (the “Ground Lease”), and the Company’s existing sublease of the premises was terminated. As a result, the related capital lease asset and capital lease liability were derecognized, and the Company recognized the $1,019,000 difference between these amounts as a credit to additional paid-in capital. RE Holding allowed the Company to continue to use the premises for one year and deferred collection of $20,000 of monthly building rent as long as the Company continued to pay the rent due under the Ground Lease.
Effective September 1, 2010, the Company and RE Holding entered into a new sublease agreement whereby the Company will pay RE Holding $30,000 monthly rent for the building through May 2042 (the “Building Lease”), and the Company will continue to pay the monthly rent due under the Ground Lease. Both the Building Lease and the Ground Lease expire in May 2042. The Ground Lease is accounted for as an operating lease.
The Building Lease is being accounted for as a capital lease with an initial asset and related liability of $2,375,000. As of October 3, 2010, future minimum payments under the Building Lease and the Ground Lease were approximately $11,370,000 and $6,181,000, respectively. Amounts representing future interest under the capital lease at a rate of approximately 15.2% total approximately $9,023,000.
Settlement with Former Owner
On August 25, 2010, P&MC’s Holding LLC, the Company’s indirect parent, and affiliates of Castle Harlan reached an agreement involving a lawsuit with a member of P&MC’s Holding LLC and former owner of the direct parent of the Company. As part of this settlement, an affiliate of Castle Harlan purchased the member’s units in P&MC’s Holding LLC, and P&MC’s Holding Corp., an indirect parent of the Company, agreed to file for approximately $4,724,000 of tax refunds (the “Refunds”) with respect to the tax period ended September 21, 2005 to utilize certain net operating losses (“NOLs”) of P&MC’s Holding Corp., made possible by recent changes in the tax code.
Under the terms of the 2005 purchase and sale agreement pursuant to which P&MC’s Holding Corp. acquired the stock of the Company’s direct parent (the “2005 Purchase Agreement”), P&MC’s Holding Corp. is not obligated to carry back its NOLs; however, if P&MC’s Holding Corp. elected to carry back its NOLs to any period prior to P&MC’s Holding Corp.’s acquisition of the Company, it is required under the terms of the 2005 Purchase Agreement to turn over any resulting refunds to the former owners of the Company’s direct parent. As a part of the settlement, certain indemnities under the 2005 Purchase Agreement were modified and the Company’s indirect parent agreed to file for the Refunds and remit the $4,724,000 to the former owners.
Prior to the settlement, the Company and its direct parent had no intention of filing for the Refunds because they were neither required to do so nor entitled to retain the Refunds. Additionally, there was no expectation that any of the NOLs would otherwise benefit the Company. A full valuation allowance had been recorded for these NOLs. Accordingly, the settlement does not have an adverse impact on the Company’s cash flows or financial position.
On August 30, 2010, the Company and P&MC’s Holding Corp. filed for the tax refunds and the net refund amount of approximately $4,724,000 was received on September 20, 2010. The associated income tax benefit for the realization of these previously reserved NOLs have been reflected in the Company’s statements of operations for the quarter ended October 3, 2010.
After deducting certain expenses, the Company was required to pay approximately $4,555,000 to the former owners, which is reported in the accompanying consolidated statements of operations as Settlement with Former Owner. The related liability, which was paid to the former owners on October 4, 2010, is included in accrued expenses in the accompanying consolidated balance sheets.
Guaranteed Letter of Credit
On September 10, 2010, the Company's workers' compensation provider was given a new letter of credit under a credit facility entered into and guaranteed by an affiliate of the Company’s controlling equity. This letter of credit is more fully discussed in Note 11, “Long-Term Debt” above.
(14) Deficit
A summary of the changes in deficit for the year-to-date periods ended October 3, 2010 and October 4, 2009 is provided below (in thousands):
Year-to-Date Ended October 3, 2010
|
||||||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||||||
Additional
|
Other
|
Total PMCI
|
||||||||||||||||||||||||||
Common
|
Paid-in
|
Accumulated
|
Comprehensive
|
Stockholder's
|
Non-controlling
|
Total
|
||||||||||||||||||||||
Stock
|
Capital
|
Deficit
|
Income
|
Deficit
|
Interests
|
Deficit
|
||||||||||||||||||||||
Balance, December 27, 2009
|
$ | 1 | 150,870 | (329,333 | ) | 45 | (178,417 | ) | 308 | (178,109 | ) | |||||||||||||||||
Distributions to non-controlling interest holders
|
- | - | - | - | - | (190 | ) | (190 | ) | |||||||||||||||||||
Net loss
|
- | - | (38,108 | ) | - | (38,108 | ) | (2 | ) | (38,110 | ) | |||||||||||||||||
Currency translation adjustment
|
- | - | - | 9 | 9 | - | 9 | |||||||||||||||||||||
Total comprehensive loss
|
(38,101 | ) | ||||||||||||||||||||||||||
Balance, October 3, 2010
|
$ | 1 | 150,870 | (367,441 | ) | 54 | (216,516 | ) | 116 | (216,400 | ) | |||||||||||||||||
Year-to-Date Ended October 4, 2009
|
||||||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||||||
Additional
|
Other
|
Total PMCI
|
||||||||||||||||||||||||||
Common
|
Paid-in
|
Accumulated
|
Comprehensive
|
Stockholder's
|
Non-controlling
|
Total
|
||||||||||||||||||||||
Stock
|
Capital
|
Deficit
|
Income (Loss)
|
Deficit
|
Interests
|
Deficit
|
||||||||||||||||||||||
Balance, December 28, 2008
|
$ | 1 | 149,851 | (293,114 | ) | (4 | ) | (143,266 | ) | 215 | (143,051 | ) | ||||||||||||||||
Lease termination by related party (non-cash)
|
- | 1,019 | - | - | 1,019 | - | 1,019 | |||||||||||||||||||||
Distributions to non-controlling interest holders
|
- | - | - | - | - | (104 | ) | (104 | ) | |||||||||||||||||||
Net (loss) earnings
|
- | - | (26,882 | ) | - | (26,882 | ) | 74 | (26,808 | ) | ||||||||||||||||||
Currency translation adjustment
|
- | - | - | 49 | 49 | - | 49 | |||||||||||||||||||||
Total comprehensive loss
|
(26,759 | ) | ||||||||||||||||||||||||||
Balance, October 4, 2009
|
$ | 1 | 150,870 | (319,996 | ) | 45 | (169,080 | ) | 185 | (168,895 | ) |
(15) Condensed Consolidated Financial Information
The 10% Senior Notes and Secured Notes were issued subject to a joint and several, full and unconditional guarantee by all of the Company’s 100% owned domestic subsidiaries. There are no significant restrictions on the Company’s ability to obtain funds from any of the guarantor subsidiaries in the form of a dividend or loan. Additionally, there are no significant restrictions on the guarantor subsidiaries’ ability to obtain funds from the Company or its direct or indirect subsidiaries.
The following consolidating statements of operations, balance sheets and statements of cash flows are provided for the parent company and all subsidiaries. The information has been presented as if the parent company accounted for its ownership of the guarantor and non-guarantor subsidiaries using the equity method of accounting.
Consolidating Statement of Operations for the Quarter ended October 3, 2010 (unaudited; in thousands):
|
||||||||||||||||||||
Non-
|
Consolidated
|
|||||||||||||||||||
Issuer
|
Guarantor
|
Guarantors
|
Eliminations
|
PMCI
|
||||||||||||||||
REVENUES:
|
||||||||||||||||||||
Food sales
|
$ | 66,063 | 31,274 | 4,959 | - | 102,296 | ||||||||||||||
Franchise and other revenue
|
4,600 | 1,804 | - | - | 6,404 | |||||||||||||||
Total revenues
|
70,663 | 33,078 | 4,959 | - | 108,700 | |||||||||||||||
COSTS AND EXPENSES:
|
||||||||||||||||||||
Cost of sales (excluding depreciation shown below):
|
||||||||||||||||||||
Food cost
|
16,285 | 8,424 | 1,290 | - | 25,999 | |||||||||||||||
Labor and benefits
|
22,909 | 12,730 | 1,896 | - | 37,535 | |||||||||||||||
Operating expenses
|
19,121 | 11,310 | 2,156 | - | 32,587 | |||||||||||||||
General and administrative
|
8,276 | 1,239 | - | - | 9,515 | |||||||||||||||
Settlement with former owner
|
4,555 | - | - | - | 4,555 | |||||||||||||||
Depreciation and amortization
|
3,599 | 1,049 | 170 | - | 4,818 | |||||||||||||||
Interest, net
|
10,254 | 82 | - | - | 10,336 | |||||||||||||||
Asset impairments and closed store expenses
|
15 | 624 | 3 | - | 642 | |||||||||||||||
Other, net
|
(62 | ) | 21 | - | - | (41 | ) | |||||||||||||
Total costs and expenses
|
84,952 | 35,479 | 5,515 | - | 125,946 | |||||||||||||||
Loss before income taxes
|
(14,289 | ) | (2,401 | ) | (556 | ) | - | (17,246 | ) | |||||||||||
Benefit from income taxes
|
4,888 | - | - | - | 4,888 | |||||||||||||||
Net loss
|
(9,401 | ) | (2,401 | ) | (556 | ) | - | (12,358 | ) | |||||||||||
Less: net earnings (loss) attributable to non-controlling interests
|
- | 1 | (10 | ) | - | (9 | ) | |||||||||||||
Equity in loss of subsidiaries
|
(2,957 | ) | - | - | 2,957 | - | ||||||||||||||
Net loss attributable to Perkins & Marie Callender's Inc.
|
$ | (12,358 | ) | (2,402 | ) | (546 | ) | 2,957 | (12,349 | ) |
Consolidating Statement of Operations for the Quarter ended October 4, 2009 (unaudited; in thousands):
|
||||||||||||||||||||
Non-
|
Consolidated
|
|||||||||||||||||||
Issuer
|
Guarantor
|
Guarantors
|
Eliminations
|
PMCI
|
||||||||||||||||
REVENUES:
|
||||||||||||||||||||
Food sales
|
$ | 70,456 | 33,602 | 5,028 | - | 109,086 | ||||||||||||||
Franchise and other revenue
|
4,570 | 1,814 | - | - | 6,384 | |||||||||||||||
Total revenues
|
75,026 | 35,416 | 5,028 | - | 115,470 | |||||||||||||||
COSTS AND EXPENSES:
|
||||||||||||||||||||
Cost of sales (excluding depreciation shown below):
|
||||||||||||||||||||
Food cost
|
18,074 | 8,728 | 1,256 | - | 28,058 | |||||||||||||||
Labor and benefits
|
24,080 | 13,428 | 1,966 | - | 39,474 | |||||||||||||||
Operating expenses
|
19,784 | 11,368 | 2,031 | - | 33,183 | |||||||||||||||
General and administrative
|
8,805 | 1,508 | - | - | 10,313 | |||||||||||||||
Depreciation and amortization
|
3,995 | 1,362 | 141 | - | 5,498 | |||||||||||||||
Interest, net
|
10,022 | 238 | - | - | 10,260 | |||||||||||||||
Asset impairments and closed store expenses
|
3 | 191 | (7 | ) | - | 187 | ||||||||||||||
Other, net
|
(308 | ) | (84 | ) | - | - | (392 | ) | ||||||||||||
Total costs and expenses
|
84,455 | 36,739 | 5,387 | - | 126,581 | |||||||||||||||
Loss before income taxes
|
(9,429 | ) | (1,323 | ) | (359 | ) | - | (11,111 | ) | |||||||||||
Provision for income taxes
|
(142 | ) | - | - | - | (142 | ) | |||||||||||||
Net loss
|
(9,571 | ) | (1,323 | ) | (359 | ) | - | (11,253 | ) | |||||||||||
Less: net loss attributable to non-controlling interests
|
- | - | (5 | ) | - | (5 | ) | |||||||||||||
Equity in loss of subsidiaries
|
(1,682 | ) | - | - | 1,682 | - | ||||||||||||||
Net loss attributable to Perkins & Marie Callender's Inc.
|
$ | (11,253 | ) | (1,323 | ) | (354 | ) | 1,682 | (11,248 | ) |
Consolidating Statement of Operations for the Year-to-Date Period ended October 3, 2010 (unaudited; in thousands):
|
||||||||||||||||||||
Non-
|
Consolidated
|
|||||||||||||||||||
Issuer
|
Guarantor
|
Guarantors
|
Eliminations
|
PMCI
|
||||||||||||||||
REVENUES:
|
||||||||||||||||||||
Food sales
|
$ | 225,181 | 114,188 | 17,815 | - | 357,184 | ||||||||||||||
Franchise and other revenue
|
14,812 | 6,661 | 1 | - | 21,474 | |||||||||||||||
Total revenues
|
239,993 | 120,849 | 17,816 | - | 378,658 | |||||||||||||||
COSTS AND EXPENSES:
|
||||||||||||||||||||
Cost of sales (excluding depreciation shown below):
|
||||||||||||||||||||
Food cost
|
55,461 | 30,545 | 4,709 | - | 90,715 | |||||||||||||||
Labor and benefits
|
78,614 | 44,594 | 6,535 | - | 129,743 | |||||||||||||||
Operating expenses
|
63,653 | 38,120 | 7,083 | - | 108,856 | |||||||||||||||
General and administrative
|
30,385 | 4,071 | - | - | 34,456 | |||||||||||||||
Settlement with former owner
|
4,555 | - | - | - | 4,555 | |||||||||||||||
Depreciation and amortization
|
12,412 | 3,807 | 564 | - | 16,783 | |||||||||||||||
Interest, net
|
33,957 | 243 | - | - | 34,200 | |||||||||||||||
Asset impairments and closed store expenses
|
891 | 1,847 | 9 | - | 2,747 | |||||||||||||||
Other, net
|
(423 | ) | 24 | - | - | (399 | ) | |||||||||||||
Total costs and expenses
|
279,505 | 123,251 | 18,900 | - | 421,656 | |||||||||||||||
Loss before income taxes
|
(39,512 | ) | (2,402 | ) | (1,084 | ) | - | (42,998 | ) | |||||||||||
Benefit from income taxes
|
4,888 | - | - | - | 4,888 | |||||||||||||||
Net loss
|
(34,624 | ) | (2,402 | ) | (1,084 | ) | - | (38,110 | ) | |||||||||||
Less: net loss attributable to non-controlling interests
|
- | - | (2 | ) | - | (2 | ) | |||||||||||||
Equity in loss of subsidiaries
|
(3,486 | ) | - | - | 3,486 | - | ||||||||||||||
Net loss attributable to Perkins & Marie Callender's Inc.
|
$ | (38,110 | ) | (2,402 | ) | (1,082 | ) | 3,486 | (38,108 | ) |
Consolidating Statement of Operations for the Year-to-Date Period ended October 4, 2009 (unaudited; in thousands):
|
||||||||||||||||||||
Non-
|
Consolidated
|
|||||||||||||||||||
Issuer
|
Guarantor
|
Guarantors
|
Eliminations
|
PMCI
|
||||||||||||||||
REVENUES:
|
||||||||||||||||||||
Food sales
|
$ | 244,047 | 122,183 | 18,794 | - | 385,024 | ||||||||||||||
Franchise and other revenue
|
14,961 | 6,614 | - | - | 21,575 | |||||||||||||||
Total revenues
|
259,008 | 128,797 | 18,794 | - | 406,599 | |||||||||||||||
COSTS AND EXPENSES:
|
||||||||||||||||||||
Cost of sales (excluding depreciation shown below):
|
||||||||||||||||||||
Food cost
|
63,837 | 32,612 | 4,884 | - | 101,333 | |||||||||||||||
Labor and benefits
|
81,825 | 46,922 | 6,956 | - | 135,703 | |||||||||||||||
Operating expenses
|
65,562 | 38,344 | 7,050 | - | 110,956 | |||||||||||||||
General and administrative
|
29,885 | 4,646 | - | - | 34,531 | |||||||||||||||
Depreciation and amortization
|
13,449 | 4,492 | 470 | - | 18,411 | |||||||||||||||
Interest, net
|
33,318 | 687 | - | - | 34,005 | |||||||||||||||
Asset impairments and closed store expenses
|
827 | 486 | 82 | - | 1,395 | |||||||||||||||
Other, net
|
(1,409 | ) | (1,660 | ) | - | - | (3,069 | ) | ||||||||||||
Total costs and expenses
|
287,294 | 126,529 | 19,442 | - | 433,265 | |||||||||||||||
Income (loss) before income taxes
|
(28,286 | ) | 2,268 | (648 | ) | - | (26,666 | ) | ||||||||||||
Provision for income taxes
|
(142 | ) | - | - | - | (142 | ) | |||||||||||||
Net income (loss)
|
(28,428 | ) | 2,268 | (648 | ) | - | (26,808 | ) | ||||||||||||
Less: net earnings attributable to non-controlling interests
|
- | - | 74 | - | 74 | |||||||||||||||
Equity in earnings of subsidiaries
|
1,620 | - | - | (1,620 | ) | - | ||||||||||||||
Net (loss) income attributable to Perkins & Marie Callender's Inc.
|
$ | (26,808 | ) | 2,268 | (722 | ) | (1,620 | ) | (26,882 | ) |
Consolidating Balance Sheet as of October 3, 2010 (unaudited; in thousands):
|
||||||||||||||||||||
Non-
|
Consolidated
|
|||||||||||||||||||
Issuer
|
Guarantor
|
Guarantors
|
Eliminations
|
PMCI
|
||||||||||||||||
ASSETS
|
||||||||||||||||||||
CURRENT ASSETS:
|
||||||||||||||||||||
Cash and cash equivalents
|
$ | 7,893 | 936 | 568 | - | 9,397 | ||||||||||||||
Restricted cash
|
5,696 | - | - | - | 5,696 | |||||||||||||||
Receivables, less allowances for
doubtful accounts
|
10,905 | 5,033 | 7 | - | 15,945 | |||||||||||||||
Inventories
|
7,968 | 4,040 | 187 | - | 12,195 | |||||||||||||||
Prepaid expenses and other current assets
|
1,889 | 287 | 4 | - | 2,180 | |||||||||||||||
Assets held for sale, net
|
310 | - | - | - | 310 | |||||||||||||||
Total current assets
|
34,661 | 10,296 | 766 | - | 45,723 | |||||||||||||||
PROPERTY AND EQUIPMENT, net
|
41,040 | 18,615 | 2,062 | - | 61,717 | |||||||||||||||
INVESTMENT IN
UNCONSOLIDATED PARTNERSHIP
|
- | 10 | 9 | - | 19 | |||||||||||||||
GOODWILL
|
23,100 | - | - | - | 23,100 | |||||||||||||||
INTANGIBLE ASSETS, net
|
145,392 | (17 | ) | - | - | 145,375 | ||||||||||||||
INVESTMENTS IN SUBSIDIARIES
|
(82,465 | ) | - | - | 82,465 | - | ||||||||||||||
DUE FROM SUBSIDIARIES
|
81,291 | - | - | (81,291 | ) | - | ||||||||||||||
OTHER ASSETS
|
12,724 | 1,130 | 210 | - | 14,064 | |||||||||||||||
TOTAL ASSETS
|
$ | 255,743 | 30,034 | 3,047 | 1,174 | 289,998 | ||||||||||||||
LIABILITIES AND DEFICIT
|
||||||||||||||||||||
CURRENT LIABILITIES:
|
||||||||||||||||||||
Accounts payable
|
8,987 | 5,607 | 491 | - | 15,085 | |||||||||||||||
Accrued expenses
|
35,154 | 8,188 | 1,111 | - | 44,453 | |||||||||||||||
Franchise advertising contributions
|
5,696 | - | - | - | 5,696 | |||||||||||||||
Current maturities of long-term debt and
capital lease obligations
|
166 | 174 | - | - | 340 | |||||||||||||||
Total current liabilities
|
50,003 | 13,969 | 1,602 | - | 65,574 | |||||||||||||||
LONG-TERM DEBT, less current
maturities
|
338,434 | - | - | - | 338,434 | |||||||||||||||
CAPITAL LEASE OBLIGATIONS, less
current maturities
|
7,987 | 5,218 | - | - | 13,205 | |||||||||||||||
DEFERRED RENT
|
14,324 | 4,612 | 56 | - | 18,992 | |||||||||||||||
OTHER LIABILITIES
|
16,054 | 8,682 | - | - | 24,736 | |||||||||||||||
DEFERRED INCOME TAXES
|
45,457 | - | - | - | 45,457 | |||||||||||||||
DUE TO PARENT
|
- | 79,427 | 1,864 | (81,291 | ) | - | ||||||||||||||
DEFICIT:
|
||||||||||||||||||||
Common stock
|
1 | - | - | - | 1 | |||||||||||||||
Preferred stock
|
- | 64,296 | - | (64,296 | ) | - | ||||||||||||||
Capital in excess of par
|
- | 9,338 | - | (9,338 | ) | - | ||||||||||||||
Additional paid-in capital
|
150,870 | - | - | - | 150,870 | |||||||||||||||
Treasury stock
|
- | (137 | ) | - | 137 | - | ||||||||||||||
Accumulated other comprehensive income
|
54 | - | - | - | 54 | |||||||||||||||
Accumulated deficit
|
(367,441 | ) | (155,371 | ) | (591 | ) | 155,962 | (367,441 | ) | |||||||||||
Total Perkins & Marie Callender's Inc.
stockholder's deficit
|
(216,516 | ) | (81,874 | ) | (591 | ) | 82,465 | (216,516 | ) | |||||||||||
Non-controlling interests
|
- | - | 116 | - | 116 | |||||||||||||||
Total deficit
|
(216,516 | ) | (81,874 | ) | (475 | ) | 82,465 | (216,400 | ) | |||||||||||
TOTAL LIABILITIES AND DEFICIT
|
$ | 255,743 | 30,034 | 3,047 | 1,174 | 289,998 |
Consolidating Balance Sheet as of December 27, 2009 (in thousands): | ||||||||||||||||||||
Non-
|
Consolidated
|
|||||||||||||||||||
Issuer
|
Guarantor
|
Guarantors
|
Eliminations
|
PMCI
|
||||||||||||||||
ASSETS
|
||||||||||||||||||||
CURRENT ASSETS:
|
||||||||||||||||||||
Cash and cash equivalents
|
$ | 2,013 | 1,293 | 982 | - | 4,288 | ||||||||||||||
Restricted cash
|
8,110 | - | - | - | 8,110 | |||||||||||||||
Receivables, less allowances for
doubtful accounts
|
11,070 | 7,048 | 7 | - | 18,125 | |||||||||||||||
Inventories
|
8,038 | 2,793 | 231 | - | 11,062 | |||||||||||||||
Prepaid expenses and other current assets
|
1,613 | 248 | 3 | - | 1,864 | |||||||||||||||
Total current assets
|
30,844 | 11,382 | 1,223 | - | 43,449 | |||||||||||||||
PROPERTY AND EQUIPMENT, net
|
52,217 | 20,530 | 2,472 | - | 75,219 | |||||||||||||||
INVESTMENT IN
UNCONSOLIDATED PARTNERSHIP
|
- | 41 | 9 | - | 50 | |||||||||||||||
GOODWILL
|
23,100 | - | - | - | 23,100 | |||||||||||||||
INTANGIBLE ASSETS, net
|
146,889 | 124 | - | - | 147,013 | |||||||||||||||
INVESTMENTS IN SUBSIDIARIES
|
(78,981 | ) | - | - | 78,981 | - | ||||||||||||||
DUE FROM SUBSIDIARIES
|
81,493 | - | - | (81,493 | ) | - | ||||||||||||||
OTHER ASSETS
|
14,321 | 1,543 | 210 | - | 16,074 | |||||||||||||||
TOTAL ASSETS
|
$ | 269,883 | 33,620 | 3,914 | (2,512 | ) | 304,905 | |||||||||||||
LIABILITIES AND EQUITY (DEFICIT)
|
||||||||||||||||||||
CURRENT LIABILITIES:
|
||||||||||||||||||||
Accounts payable
|
$ | 7,946 | 6,074 | 637 | - | 14,657 | ||||||||||||||
Accrued expenses
|
30,628 | 9,635 | 1,342 | - | 41,605 | |||||||||||||||
Franchise advertising contributions
|
4,327 | - | - | - | 4,327 | |||||||||||||||
Current maturities of long-term debt and
capital lease obligations
|
186 | 317 | - | - | 503 | |||||||||||||||
Total current liabilities
|
43,087 | 16,026 | 1,979 | - | 61,092 | |||||||||||||||
LONG-TERM DEBT, less current
maturities
|
326,042 | - | - | - | 326,042 | |||||||||||||||
CAPITAL LEASE OBLIGATIONS, less
current maturities
|
8,085 | 2,969 | - | - | 11,054 | |||||||||||||||
DEFERRED RENT
|
12,263 | 4,765 | 64 | - | 17,092 | |||||||||||||||
OTHER LIABILITIES
|
13,366 | 8,911 | - | - | 22,277 | |||||||||||||||
DEFERRED INCOME TAXES
|
45,457 | - | - | - | 45,457 | |||||||||||||||
DUE TO PARENT
|
- | 80,421 | 1,072 | (81,493 | ) | - | ||||||||||||||
EQUITY (DEFICIT):
|
||||||||||||||||||||
Common stock
|
1 | - | - | - | 1 | |||||||||||||||
Preferred stock
|
- | 64,296 | - | (64,296 | ) | - | ||||||||||||||
Capital in excess of par
|
- | 9,338 | - | (9,338 | ) | - | ||||||||||||||
Additional paid-in capital
|
150,870 | - | - | - | 150,870 | |||||||||||||||
Treasury stock
|
- | (137 | ) | - | 137 | - | ||||||||||||||
Accumulated other comprehensive income
|
45 | - | - | - | 45 | |||||||||||||||
Accumulated (deficit) earnings
|
(329,333 | ) | (152,969 | ) | 491 | 152,478 | (329,333 | ) | ||||||||||||
Total Perkins & Marie Callender's Inc.
stockholder's (deficit) investment
|
(178,417 | ) | (79,472 | ) | 491 | 78,981 | (178,417 | ) | ||||||||||||
Non-controlling interests
|
- | - | 308 | - | 308 | |||||||||||||||
Total equity (deficit)
|
(178,417 | ) | (79,472 | ) | 799 | 78,981 | (178,109 | ) | ||||||||||||
TOTAL LIABILITIES AND EQUITY (DEFICIT)
|
$ | 269,883 | 33,620 | 3,914 | (2,512 | ) | 304,905 |
Consolidating Statement of Cash Flows for the Year-to-Date Period ended October 3, 2010 (unaudited; in thousands):
|
||||||||||||||||||||
Non-
|
Consolidated
|
|||||||||||||||||||
Issuer
|
Guarantor
|
Guarantors
|
Eliminations
|
PMCI
|
||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||||||||||
Net loss
|
$ | (38,110 | ) | (2,402 | ) | (1,084 | ) | 3,486 | (38,110 | ) | ||||||||||
Adjustments to reconcile net (loss) income to net cash
|
||||||||||||||||||||
(used in) provided by operating activities:
|
||||||||||||||||||||
Equity in earnings of subsidiaries
|
3,486 | - | - | (3,486 | ) | - | ||||||||||||||
Depreciation and amortization
|
12,412 | 3,807 | 564 | - | 16,783 | |||||||||||||||
Asset impairments
|
727 | 1,753 | 9 | - | 2,489 | |||||||||||||||
Amortization of debt discount
|
1,352 | - | - | - | 1,352 | |||||||||||||||
Other non-cash income items
|
(104 | ) | (73 | ) | - | - | (177 | ) | ||||||||||||
Loss on disposition of assets
|
164 | 94 | - | - | 258 | |||||||||||||||
Equity in net loss of unconsolidated partnership
|
- | 31 | - | - | 31 | |||||||||||||||
Net changes in operating assets and liabilities
|
16,169 | (1,023 | ) | (342 | ) | - | 14,804 | |||||||||||||
Total adjustments
|
34,206 | 4,589 | 231 | (3,486 | ) | 35,540 | ||||||||||||||
Net cash (used in) provided by operating activities
|
(3,904 | ) | 2,187 | (853 | ) | - | (2,570 | ) | ||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||||||||||
Purchases of property and equipment
|
(2,342 | ) | (1,285 | ) | (163 | ) | - | (3,790 | ) | |||||||||||
Proceeds from sale of assets
|
1,002 | 5 | - | - | 1,007 | |||||||||||||||
Net cash used in investing activities
|
(1,340 | ) | (1,280 | ) | (163 | ) | - | (2,783 | ) | |||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||||||
Proceeds from revolving credit facilities
|
24,684 | - | - | - | 24,684 | |||||||||||||||
Repayment of revolving credit facilities
|
(13,644 | ) | - | - | - | (13,644 | ) | |||||||||||||
Repayment of capital lease obligations
|
(118 | ) | (255 | ) | - | - | (373 | ) | ||||||||||||
Repayment of other debt
|
- | (15 | ) | - | - | (15 | ) | |||||||||||||
Distributions to non-controlling interest holders
|
- | - | (190 | ) | - | (190 | ) | |||||||||||||
Intercompany financing
|
202 | (994 | ) | 792 | - | - | ||||||||||||||
Net cash provided by (used in) financing activities
|
11,124 | (1,264 | ) | 602 | - | 10,462 | ||||||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
5,880 | (357 | ) | (414 | ) | - | 5,109 | |||||||||||||
CASH AND CASH EQUIVALENTS:
|
||||||||||||||||||||
Balance, beginning of period
|
2,013 | 1,293 | 982 | - | 4,288 | |||||||||||||||
Balance, end of period
|
$ | 7,893 | 936 | 568 | - | 9,397 |
Consolidating Statement of Cash Flows for the Year-to-Date Period ended October 4, 2009 (unaudited; in thousands):
|
||||||||||||||||||||
Non-
|
Consolidated
|
|||||||||||||||||||
Issuer
|
Guarantor
|
Guarantors
|
Eliminations
|
PMCI
|
||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||||||||||
Net (loss) income
|
$ | (26,808 | ) | 2,268 | (648 | ) | (1,620 | ) | (26,808 | ) | ||||||||||
Adjustments to reconcile net (loss) income to net cash
|
||||||||||||||||||||
provided by (used in) operating activities:
|
||||||||||||||||||||
Equity in loss of subsidiaries
|
(1,620 | ) | - | - | 1,620 | - | ||||||||||||||
Depreciation and amortization
|
13,449 | 4,492 | 470 | - | 18,411 | |||||||||||||||
Asset impairments
|
137 | 352 | 82 | - | 571 | |||||||||||||||
Amortization of debt discount
|
1,184 | - | - | - | 1,184 | |||||||||||||||
Other non-cash income items
|
(1,035 | ) | (1,392 | ) | - | - | (2,427 | ) | ||||||||||||
Loss on disposition of assets
|
690 | 134 | - | - | 824 | |||||||||||||||
Equity in net loss of unconsolidated partnership
|
- | 25 | - | - | 25 | |||||||||||||||
Net changes in operating assets and liabilities
|
4,021 | (514 | ) | (124 | ) | - | 3,383 | |||||||||||||
Total adjustments
|
16,826 | 3,097 | 428 | 1,620 | 21,971 | |||||||||||||||
Net cash (used in) provided by operating activities
|
(9,982 | ) | 5,365 | (220 | ) | - | (4,837 | ) | ||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||||||||||
Purchases of property and equipment
|
(2,918 | ) | (2,312 | ) | (711 | ) | - | (5,941 | ) | |||||||||||
Proceeds from sale of assets
|
487 | 7 | - | - | 494 | |||||||||||||||
Net cash used in investing activities
|
(2,431 | ) | (2,305 | ) | (711 | ) | - | (5,447 | ) | |||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||||||
Proceeds from revolving credit facilities
|
26,501 | - | - | - | 26,501 | |||||||||||||||
Repayment of revolving credit facilities
|
(16,726 | ) | - | - | - | (16,726 | ) | |||||||||||||
Repayment of capital lease obligations
|
(130 | ) | (188 | ) | - | - | (318 | ) | ||||||||||||
Repayment of other debt
|
- | (15 | ) | - | - | (15 | ) | |||||||||||||
Debt financing costs
|
(142 | ) | - | - | - | (142 | ) | |||||||||||||
Distributions to non-controlling interest holders
|
- | - | (104 | ) | - | (104 | ) | |||||||||||||
Intercompany financing
|
2,320 | (3,158 | ) | 838 | - | - | ||||||||||||||
Net cash provided by (used in) financing activities
|
11,823 | (3,361 | ) | 734 | - | 9,196 | ||||||||||||||
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
(590 | ) | (301 | ) | (197 | ) | - | (1,088 | ) | |||||||||||
CASH AND CASH EQUIVALENTS:
|
||||||||||||||||||||
Balance, beginning of period
|
2,155 | 1,662 | 796 | - | 4,613 | |||||||||||||||
Balance, end of period
|
$ | 1,565 | 1,361 | 599 | - | 3,525 |
GENERAL
The following discussion and analysis should be read in conjunction with and is qualified in its entirety by reference to the consolidated financial statements of the Company and accompanying notes included elsewhere in this Form 10-Q. Except for historical information, the discussions in this section contain forward-looking statements that involve risks and uncertainties. Future results could differ materially from those discussed below. See “Information Concerning Forward-Looking Statements.”
OUR COMPANY
References to the “Company,” “us” or “we” refer to Perkins & Marie Callender’s Inc. and its consolidated subsidiaries.
The Company operates two restaurant concepts: (1) full-service family dining restaurants located primarily in the Midwest, Florida and Pennsylvania under the name Perkins Restaurant and Bakery (“Perkins”); and (2) mid-priced, casual dining restaurants, specializing in the sale of pies and other bakery items, located primarily in the western United States under the name Marie Callender’s Restaurant and Bakery (“Marie Callender’s”).
Perkins Restaurant & Bakery
Perkins, founded in 1958, serves a variety of demographically and geographically diverse customers for a wide range of dining occasions that are appropriate for the entire family. Perkins continually adapts its menu, product offerings and building décor to meet changing consumer preferences. As of October 3, 2010, Perkins offered a full menu of over 90 assorted breakfast, lunch, dinner, snack and dessert items ranging in price from $3.89 to $11.99, with an average guest check of $8.88 at our Company-operated Perkins restaurants. Perkins’ signature menu items include our omelettes, secret-recipe real buttermilk pancakes, Mammoth Muffins, the Tremendous Twelve platter, salads, melt sandwiches and Butterball® turkey entrees. Breakfast items, which are available throughout the day, account for approximately half of the entrees sold in our Perkins restaurants.
Perkins is a leading operator and franchisor of full-service family dining restaurants. As of October 3, 2010, we franchised 319 restaurants to 109 franchisees in 31 states and 5 Canadian provinces, and we operated 161 restaurants. The footprint of our Company-operated Perkins restaurants extends over 13 states, with a significant number of restaurants in Minnesota and Florida. For the trailing fifty-two weeks ended October 3, 2010, our Company-operated Perkins restaurants generated average annual revenues of $1,653,000 per restaurant.
Perkins’ franchised restaurants operate pursuant to license agreements generally having an initial term of 20 years and requiring both a royalty fee (4% of gross sales) and an advertising contribution (3% of gross sales). Franchisees pay a non-refundable license fee of between $25,000 and $50,000 per restaurant depending on the number of existing franchises and the level of assistance provided by us in opening each restaurant. Typically, franchisees may terminate license agreements upon a minimum of 12 months prior notice and upon payment of specified liquidated damages. Franchisees do not typically have express renewal rights.
For the quarters ended October 3, 2010 and October 4, 2009, average royalties earned per franchised Perkins restaurant were approximately $14,400. The following numbers of Perkins’ license agreements have expiration dates in the following periods: 2010 —nineteen; 2011 — thirteen; 2012 — five; 2013 — eight; and 2014 — eighteen. Upon the expiration of their license agreements, franchisees typically apply for and receive new license agreements. Franchisees pay a license agreement renewal fee of $5,000 to $7,500 depending on the length of the renewal term.
Marie Callender’s Restaurant and Bakery
Marie Callender’s is a mid-priced casual dining concept. Founded in 1948, it has one of the longest operating histories within the full-service dining sector. Marie Callender’s is known for serving quality food in a warm, pleasant atmosphere and for its premium pies that are baked fresh daily. As of October 3, 2010, the Company offered a full menu of over 50 items ranging in price from $4.99 to $18.29. Marie Callender’s signature menu items include pot pies, quiches, a plentiful salad bar and Sunday brunch.
Marie Callender’s operates primarily in the western United States. As of October 3, 2010, we franchised 37 restaurants to 25 franchisees located in four states and Mexico, and we operated 90 Marie Callender’s restaurants. The footprint of our Company-operated Marie Callender’s restaurants extends over nine states with 61 restaurants located in California. For the trailing fifty-two weeks ended October 3, 2010, our Company-operated Marie Callender’s restaurants generated average annual revenues of $1,985,000 per restaurant.
The following table presents the concept name and number of Marie Callender’s restaurants operated by the Company and our franchisees:
Company-
|
||||||||||||||||
Restaurant Name
|
operated
|
Partnerships
|
Franchised
|
Total
|
||||||||||||
Marie Callender's
|
75 | 12 | 36 | 123 | ||||||||||||
Marie Callender's Grill
|
- | - | 1 | 1 | ||||||||||||
Callender's Grill
|
2 | - | - | 2 | ||||||||||||
East Side Mario's
|
1 | - | - | 1 | ||||||||||||
Total
|
78 | 12 | 37 | 127 |
The Company has an ownership interest in the 12 Marie Callender’s restaurants under partnership agreements, with a non-controlling interest in two of the partnership restaurants and a 57% to 95% ownership interest in the remaining ten locations.
Marie Callender’s franchised restaurants operate pursuant to franchise agreements generally having an initial term of 15 years and requiring both a royalty fee (normally 5% of gross sales) and, in most agreements, a specified level of marketing expenditures (currently at 1.5% of gross sales). Franchisees pay a non-refundable initial franchise fee of $25,000 and a training fee of $35,000 prior to opening a restaurant. Franchisees typically have the right to renew the franchise agreement for two terms of five years each.
For the quarters ended October 3, 2010 and October 4, 2009, average royalties earned per franchised restaurant were approximately $17,400 and $17,500, respectively. The following numbers of Marie Callender’s franchise agreements have expiration dates in the following periods: 2010 — two; 2011 — one; 2012 — four; 2013— one; and 2014 — none. Upon the expiration of their franchise agreements, franchisees typically apply for and receive new franchise agreements and pay a franchise agreement renewal fee of $2,500.
Manufacturing
Foxtail manufactures pies, pancake mixes, cookie doughs, muffin batters and other bakery products for both our in-store bakeries and unaffiliated customers. One manufacturing facility in Corona, California produces pies and other bakery products to primarily supply the Marie Callender’s restaurants, and two facilities in Cincinnati, Ohio produce pies, pancake mixes, cookie doughs, muffin batters and other bakery products for the Perkins restaurants and various third-party customers.
KEY FACTORS AFFECTING OUR RESULTS
The key factors that affect our operating results are general economic conditions, competition, our comparable restaurant sales, which are driven by our comparable customer counts and our guest check average, restaurant openings and closings, commodity prices, energy prices, our ability to manage operating expenses, such as food cost, labor and benefits, weather and governmental legislation. Comparable restaurant sales and comparable customer counts are measures of the percentage increase or decrease of the sales and customer counts, respectively, of restaurants open at least fifteen months prior to the start of the comparative year. We do not use new restaurants in our calculation of comparable restaurant sales until they are open for at least fifteen months in order to allow a new restaurant’s operations time to stabilize and provide more comparable results.
The results of the franchise operations are mainly impacted by the same factors as those impacting our restaurant segments, excluding the operating cost factors since franchise segment profit is earned primarily through royalty income.
Like much of the restaurant industry, we view comparable restaurant sales as a key performance metric at the individual restaurant level, within regions and throughout our Company. With our information systems, we monitor comparable restaurant sales on a daily, weekly and period basis on a restaurant-by-restaurant basis. The primary drivers of comparable restaurant sales performance are changes in the average guest check and changes in the number of customers, or customer count. Average guest check is primarily affected by menu price changes and changes in the mix of items purchased by our customers. We also monitor entree count, which we believe is indicative of overall customer traffic patterns. To increase restaurant sales, we focus marketing and promotional efforts on increasing customer visits and sales of particular products. Restaurant sales performance is also affected by other factors, such as food quality, the level and consistency of service within our restaurants and franchised restaurants, the attractiveness and physical condition of our restaurants and franchised restaurants, as well as local, regional and national competitive and economic factors.
Marie Callender’s food cost percentage is traditionally higher than Perkins food cost percentage primarily as a result of a greater portion of sales that are derived from lunch and dinner items, which typically carry higher food costs than breakfast items.
The operating results of Foxtail are impacted mainly by the following factors: sales of our Company-operated and franchise restaurants, orders from our external customer base, general economic conditions, labor and employee benefit expenses, production efficiency, commodity prices, energy prices, Perkins and Marie Callender’s restaurant openings and closings, governmental regulation and food safety requirements.
In comparison to the third fiscal quarter of 2009, comparable sales at Perkins’ Company-operated restaurants decreased by 2.8% and comparable sales at Marie Callender’s Company-operated restaurants decreased by 4.1%. The business environment since the second half of 2008 has been challenging for the family and casual dining segments of the restaurant industry due to prevailing macroeconomic factors. Largely as a result of a decline in guest counts, we experienced a decrease in comparable sales for both Perkins and Marie Callender’s in the quarters ended October 3, 2010 and October 4, 2009. We believe that ongoing uncertainties in the economy and high unemployment levels have continued to adversely affect our guest counts and, in turn, our operating results, cash flows from operations and profitability. We anticipate that these market conditions will continue to affect our business as consumers are expected to remain cautious in the currently suppressed economic environment.
OPERATIONS, FINANCIAL POSITION AND LIQUIDITY
Our principal sources of liquidity include cash, available borrowings under our $26,000,000 revolving credit facility (the “Revolver”) and cash generated by operations. Our principal uses of liquidity are costs and expenses associated with our restaurant and manufacturing operations, debt service payments and capital expenditures. At October 3, 2010, we had a negative working capital balance of $19,851,000 and total PMCI stockholder’s deficit of $216,516,000. Furthermore, at October 3, 2010, we had $9,397,000 in unrestricted cash and $2,206,000 of borrowing capacity under our Revolver.
Over the last three years, we have experienced continued declines in comparable restaurant sales and profitability that have adversely impacted our liquidity position. We believe that this continued decline is primarily attributed to increased competition, the ongoing weakness in the economy, high unemployment levels, continued depressed residential real estate values, especially in some of our larger markets, and the level of home foreclosures, which have adversely affected our guest counts and, in turn, our sales and operating results.
Our operations and liquidity needs are seasonal in nature. Historically, we have generated a significant portion of our operating cash flow in the first and fourth quarters, with these two quarters in total contributing 60% and 63% of our annual operating cash flows in 2008 and 2009. The fourth quarter is typically our strongest income generating quarter due to substantial holiday traffic and seasonal pie sales. In anticipation of these sales and guest traffic, we increase personnel and inventories, and therefore liquidity is normally at its lowest point at the end of the third quarter.
Our ability to fund our operations and service our debt through 2011will depend, in large part, on our ability to improve profitability and liquidity. Management has initiated actions to improve its profitability and liquidity by reducing overall planned capital expenditures, managing the timing of payments of certain operating expenses, eliminating certain employee benefits, and reducing certain general and administrative expenses. Management has recently implemented advertising and promotional programs at both restaurant brands, in an effort to improve comparable restaurant sales and profitability. In addition, management is working to increase profits at Foxtail, by replacing less profitable contracts that were terminated in 2009, with more profitable sales contracts. In addition, we are carefully reviewing menu prices at our restaurants, and we will increase menu prices, where feasible. There can be no assurance, however, that such actions will result in improved profitability and liquidity.
In September 2010, the controlling equity holder of P&MC’s Holding LLC, our indirect parent, finalized an agreement with a third party whereby the third party provided a new letter of credit of approximately $8,635,000 for the benefit of an insurance company that provides workers’ compensation insurance for the Company. The new letter of credit was guaranteed by one of the equity holder’s affiliates, and the Company signed an agreement to reimburse the affiliate for any amounts paid under the guaranty. This new letter of credit has been renewed through December 9, 2011, and contains certain renewal provisions for extension beyond that date. Prior to the new letter of credit, the Company had an existing letter of credit in place under its Revolver for the benefit of this same insurance company. When this new letter of credit agreement was put in place, the Company cancelled the existing letter of credit provided under its Revolver, thereby increasing our incremental borrowing capacity by approximately $8,635,000 to fund our liquidity needs.
The cancelled letter of credit and the new letter of credit that replaced it are not drawn down unless the Company fails to pay its workers’ compensation claims in the ordinary course of business. In the event the Company fails to make payments due on its workers’ compensation claims and the new letter of credit is drawn upon, the guarantor of the letter of credit will reimburse the third party letter of credit provider, and the Company has agreed to reimburse the guarantor for such amounts. However, there has never been a draw on the letters of credit provided for our workers’ compensation plans, and the Company does not expect that there will be a draw on the new letter of credit.
Management expects the initiatives discussed above combined with the Company’s cash provided by operations and borrowing capacity under the Revolver (which includes the additional availability as a result of the new letter of credit agreement) to provide sufficient liquidity for at least the next twelve months. However, there can be no assurance as to whether these or other actions will enable us to improve our profitability and liquidity in the fourth quarter and through 2011, and therefore, we may not be able to fund our operations and service our debt without accessing outside sources of additional liquidity. Alternate sources of liquidity may include additional borrowings or capital contributions. However, the Company currently has no such commitments or plans, and there can be no assurance that the Company will be able to access acceptable alternative financing.
RESULTS OF OPERATIONS
Seasonality
Sales fluctuate seasonally and the Company’s fiscal quarters do not all have the same time duration. Specifically, the first quarter has an extra four weeks compared to the other quarters of the fiscal year. Historically, our average weekly sales are highest in the fourth quarter (approximately October through December), resulting primarily from holiday pie sales at both Perkins and Marie Callender’s restaurants and Thanksgiving feast sales at Marie Callender’s restaurants. Therefore, the quarterly results are not necessarily indicative of results that may be achieved for the full fiscal year. Factors influencing relative sales variability, in addition to the holiday impact noted above, include the frequency and popularity of advertising and promotions, the relative sales levels of new and closed restaurants, other holidays and weather.
Quarter Ended October 3, 2010 Compared to the Quarter Ended October 4, 2009
The following table reflects certain data for the quarter ended October 3, 2010 compared to the quarter ended October 4, 2009. The consolidated information is derived from the accompanying consolidated statements of operations. Data from the Company’s segments – restaurant operations, franchise operations, Foxtail and other – is included for comparison. The ratios presented reflect the underlying dollar values expressed as a percentage of the applicable revenue amount (food cost as a percentage of food sales; labor and benefits and operating expenses as a percentage of total revenues in the restaurant operations and franchise operations segments and as a percentage of food sales in the Foxtail segment). The food cost ratio in the consolidated results reflects the elimination of intersegment food cost of $3,825,000 and $4,057,000 in the third quarters of 2010 and 2009, respectively.
Consolidated Results
|
Restaurant Operations
|
Franchise Operations
|
||||||||||||||||||||||
Quarter Ended
|
Quarter Ended
|
Quarter Ended
|
||||||||||||||||||||||
October 3,
|
October 4,
|
October 3,
|
October 4,
|
October 3,
|
October 4,
|
|||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||
Food sales
|
$ | 106,121 | 113,143 | 95,527 | 99,781 | - | - | |||||||||||||||||
Franchise and other revenue
|
6,404 | 6,384 | - | - | 5,243 | 5,259 | ||||||||||||||||||
Intersegment revenue
|
(3,825 | ) | (4,057 | ) | - | - | - | - | ||||||||||||||||
Total revenues
|
108,700 | 115,470 | 95,527 | 99,781 | 5,243 | 5,259 | ||||||||||||||||||
Food cost
|
25.4 | % | 25.7 | % | 25.4 | % | 24.4 | % | - | - | ||||||||||||||
Labor and benefits
|
34.5 | % | 34.2 | % | 37.8 | % | 37.8 | % | - | - | ||||||||||||||
Operating expenses
|
30.0 | % | 28.7 | % | 32.4 | % | 31.3 | % | 9.9 | % | 9.0 | % | ||||||||||||
Segment (loss) income
|
$ | (12,349 | ) | (11,248 | ) | 578 | 2,252 | 4,725 | 4,786 | |||||||||||||||
Foxtail (a)
|
Other (b)
|
|||||||||||||||||||||||
Quarter Ended
|
Quarter Ended
|
|||||||||||||||||||||||
October 3,
|
October 4,
|
October 3,
|
October 4,
|
|||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||
Food sales
|
$ | 10,594 | 13,362 | - | - | |||||||||||||||||||
Franchise and other revenue
|
- | - | 1,161 | 1,125 | ||||||||||||||||||||
Intersegment revenue
|
(3,825 | ) | (4,057 | ) | - | - | ||||||||||||||||||
Total revenues
|
6,769 | 9,305 | 1,161 | 1,125 | ||||||||||||||||||||
Food cost
|
52.9 | % | 57.9 | % | - | - | ||||||||||||||||||
Labor and benefits
|
12.8 | % | 12.5 | % | 5.8 | % | 6.0 | % | ||||||||||||||||
Operating expenses
|
10.4 | % | 11.4 | % | - | - | ||||||||||||||||||
Segment (loss) income
|
$ | 1,034 | 903 | (18,686 | ) | (19,189 | ) |
(a)
|
The percentages for food cost, labor and benefits and operating expenses, as presented above, represent manufacturing costs at Foxtail. Foxtail’s selling, general and administrative expenses are included in general and administrative expenses in the consolidated statements of operations and in the Foxtail segment income or loss presented above.
|
(b)
|
Licensing revenue of $1,115,000 and $1,081,000 for the third quarters of 2010 and 2009, respectively, is included in the other segment revenues. The other segment loss includes corporate general and administrative expenses, interest expense and other non-operational expenses. For details of the other segment loss, see Note 10, “Segment Reporting” in the Notes to Consolidated Financial Statements.
|
Overview
Our revenues are derived primarily from restaurant operations, franchise royalties and the sale of bakery products produced by Foxtail. Sales from Foxtail to Company-operated restaurants are eliminated in the accompanying consolidated statements of operations. Segment revenues as a percentage of total revenues were as follows:
Percentage of Total Revenues
|
||||||||
Quarter
|
Quarter
|
|||||||
Ended
|
Ended
|
|||||||
October 3,
|
October 4,
|
|||||||
2010
|
2009
|
|||||||
Restaurant operations
|
87.9 | % | 86.4 | % | ||||
Franchise operations
|
4.8 | % | 4.6 | % | ||||
Foxtail
|
6.2 | % | 8.1 | % | ||||
Other
|
1.1 | % | 0.9 | % | ||||
Total revenues
|
100.0 | % | 100.0 | % |
Restaurant Operations Segment
The operating results of the restaurant segment are impacted mainly by the following factors: general economic conditions, competition, our comparable store sales, which are driven by our comparable customer counts and our guest check average, restaurant openings and closings, commodity prices, energy prices, our ability to manage operating expenses such as food cost, labor and benefits, weather and governmental legislation.
Total restaurant segment revenues decreased by approximately $4,254,000 in the third quarter of 2010 as compared to the third quarter of 2009, due primarily to lower comparable restaurant sales. Comparable sales for the third quarter of 2010 decreased by 2.8% at Company-operated Perkins restaurants and by 4.1% at Company-operated Marie Callender’s restaurants. These declines in comparable sales resulted primarily from a decrease in comparable guest counts due to changes in consumer spending habits resulting from continuing economic uncertainties. Since the end of the third quarter of 2009, the Company has closed two Marie Callender’s restaurants and two Perkins Restaurants.
Restaurant segment profit decreased by $1,674,000 in the third quarter of 2010 compared to the third quarter of 2009. The decrease was primarily due to the decrease in comparable sales and higher food costs.
Franchise Operations Segment
The operating results of franchise operations are mainly impacted by the same factors as those impacting the Company’s restaurant segment, excluding the operating cost factors since franchise segment profit is earned primarily through royalty income.
Franchise revenues decreased by approximately $16,000 in the third quarter of 2010 compared to the third quarter of 2009, primarily due to decreases in franchise fees and renewal fees during the third quarter of 2010.
Franchise segment profit decreased by $61,000 in the third quarter of 2010 compared to the prior year due primarily to the decrease in revenues and an increase in operating expenses. This increase in operating expenses was driven by an increase in bad debt expense, partially offset by lower store opening support expenses.
Since the end of the third quarter of 2009, Perkins’ franchisees have opened five restaurants and closed one restaurant. Over the same time period, two franchised Marie Callender’s restaurants have closed.
Foxtail Segment
The operating results of Foxtail are impacted mainly by the following factors: bakery sales at Perkins and Marie Callender’s restaurants, orders from external customers, general economic conditions, labor and employee benefit expenses, production efficiency, commodity prices, energy prices, Perkins and Marie Callender’s restaurant openings and closings, governmental legislation and food safety requirements.
Foxtail’s revenues, net of intercompany sales, decreased by $2,536,000 compared to the third quarter of 2009 due primarily to a difference in the timing of seasonal sales to franchised Perkins and Marie Callender’s restaurants which historically have been made during the third quarter but will be made during the fourth quarter of 2010 and discontinued sales to two external customers whose purchases typically resulted in lower-than-average margins to Foxtail. The segment had income of $1,034,000 in the third quarter of 2010 compared to income of $903,000 in the third quarter of 2009 due principally to higher sales margins and lower administrative expenses.
Revenues
Consolidated total revenues decreased by $6,770,000 in the third quarter of 2010 compared to the third quarter of 2009. The decrease was due to decreases in sales of $4,254,000 in the restaurant segment, decreases in franchise revenues of $16,000 and a $2,536,000 decrease in sales in the Foxtail segment. These decreases were partially offset by a $36,000 increase in licensing and other revenues. Total revenues of approximately $108,700,000 in the third quarter of 2010 were 5.9% lower than total revenues of approximately $115,470,000 in the third quarter of 2009.
Restaurant segment sales of $95,527,000 and $99,781,000 in the third quarters of 2010 and 2009, respectively, accounted for 87.9% and 86.4% of total revenues, respectively. Due to the decline in total revenues, total restaurant segment sales increased as a percentage of total revenues, despite an overall 3.3% decrease in comparable sales at Company-operated Perkins and Marie Callender’s restaurants.
Franchise segment revenues of $5,243,000 and $5,259,000 in the third quarters of 2010 and 2009, respectively, accounted for 4.8% and 4.6% of total revenues, respectively. The $16,000 decline in revenues during the third quarter of 2010 was primarily due to a decline in franchise fees and renewal fees.
Foxtail revenues, net of intercompany sales, of $6,769,000 and $9,305,000 in the third quarters of 2010 and 2009, respectively, accounted for 6.2% and 8.1% of total revenues, respectively. The decline in revenues was primarily due to a difference in the timing of seasonal sales to franchised Perkins and Marie Callender’s restaurants which historically have been made during the third quarter but will be made during the fourth quarter of 2010 and discontinued sales to two external customers, whose purchases typically resulted in lower-than-average margins to Foxtail.
Costs and Expenses
Food Cost
Consolidated food cost was 25.4% and 25.7% of food sales in the third quarters of 2010 and 2009, respectively. Restaurant segment food cost was 25.4% and 24.4% of food sales in the third quarters of 2010 and 2009, respectively, while food cost in the Foxtail segment was 52.9% and 57.9% of food sales in the third quarters of 2010 and 2009, respectively. The increase of 1.0 percentage point in the restaurant segment is primarily due to higher sugar, pork, coffee, dairy, seafood and egg costs. The decrease of 5.0 percentage points in the Foxtail segment is primarily due to higher sales margins and improved pie manufacturing efficiencies.
Labor and Benefits Expenses
Consolidated labor and benefits expenses were 34.5% and 34.2% of total revenues in the third quarters of 2010 and 2009, respectively. Restaurant segment labor and benefits, as a percentage of total revenues, remained constant at 37.8% in the third quarter of 2010. In the Foxtail segment, labor and benefits, as a percentage of food sales, increased by 0.3 percentage points to 12.8% from 12.5% for the third quarters of 2010 and 2009, respectively. This increase was due primarily to the impact of fixed labor and benefit costs on a lower sales base as labor and benefits expenses for this segment decreased by approximately $314,000 during the third quarter of 2010.
Operating Expenses
Total operating expenses of $32,587,000 in the third quarter of 2010 decreased by $596,000 as compared to the third quarter of 2009. The most significant components of operating expenses were rent, utilities and advertising expenses. Total operating expenses, as a percentage of total sales, were 30.0% and 28.7% in the third quarters of 2010 and 2009, respectively. Approximately 95.0% and 94.0% of total operating expenses in the third quarters of 2010 and 2009, respectively, were incurred in the restaurant segment. In the restaurant segment, operating expenses, as a percentage of total revenues, increased from 31.3% to 32.4% primarily due to a decline in revenues and increases in advertising expenses and utilities. Operating expenses in the Foxtail segment decreased by 1.0 percentage point as a percentage of Foxtail sales due primarily to the decrease in Foxtail segment revenues.
General and Administrative Expenses
The most significant components of general and administrative (“G&A”) expenses were corporate labor and benefits, occupancy costs, audit fees and legal fees. Consolidated G&A expenses were 8.8% and 8.9% of total revenues in the third quarters of 2010 and 2009, respectively. This decrease is primarily due to lower incentive compensation accruals and legal costs.
Settlement with Former Owner
In the third quarter of 2010, we expensed a $4,555,000 payment to the former owners of the Company’s direct parent as part of an agreement involving a lawsuit commenced by a member of P&MC’s Holding LLC and former owner of the direct parent of the Company. This settlement is discussed in detail in Note 13, “P&MC’s Holding LLC Equity Plan and Other Related Party Transactions” in the Notes to Consolidated Financial Statements and did not have an adverse impact on the Company’s cash flows or financial position.
Depreciation and Amortization
Depreciation and amortization expense was $4,818,000 and $5,498,000 in the third quarters of 2010 and 2009, respectively.
Interest, net
Interest, net was $10,336,000 (9.5% of total revenues) in the third quarter of 2010, compared to $10,260,000 (8.9% of total revenues) in the third quarter of 2009. This expense increased due to an approximate $9,245,000 increase in the average debt outstanding during the third quarter of 2010 as compared to the third quarter of 2009.
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 the third quarters of 2010 and 2009, we recorded expenses of $642,000 and $187,000, respectively, for asset impairment and store closures.
During the third quarter of 2010, we closed two company-operated restaurants as a result of lease terminations. Additionally, one restaurant was closed and the location is being offered for sub-lease. The future sublease rentals are expected to exceed the future minimum rents under the building lease. Only one restaurant was closed in the prior year. The Company currently plans to close a minimum of eight restaurants over the next year as a result of lease expirations and one restaurant which the Company plans to offer for sublease. In addition, leases on five properties that are either vacant or sub-leased to third parties are scheduled to expire within the next twelve months.
Other, net
Other, net included income of $41,000 in the third quarter of 2010 compared to income of $392,000 in the third quarter of 2009. The decrease in income is due primarily to a decrease in investment gains on the Company’s deferred compensation plan and an increase in excess property costs.
Taxes
The effective income tax rates for the third quarters ended October 3, 2010 and October 4, 2009 were 28.3% and (1.3)% 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 the third quarter ended October 3, 2010 reflects $4,950,000 of current federal tax benefit and $67,000 of current state tax expense. In addition, the income tax rate reflects $32,000 of state tax benefit, $28,000 of state interest benefit and $55,000 of state tax penalty on uncertain tax positions for the third quarter ended October 3, 2010. Tax legislation enacted in 2009 allowed the Company to elect a carry back of certain net operating losses up to five years rather than the previous two year carry back period. In the third quarter ended October 3, 2010 the Company recognized a $4,724,000 current federal tax benefit as a result of this election, which is discussed further in Note 13, “P&MC’s Holding LLC Equity Plan and Other Related Party Transactions” in the Notes to Consolidated Financial Statements.
Year-to-Date Period Ended October 3, 2010 Compared to the Year-to-Date Period Ended October 4, 2009
The following table reflects certain data for the year-to-date period ended October 3, 2010 compared to the year-to-date period ended October 4, 2009. The consolidated information is derived from the accompanying consolidated statements of operations. Data from the Company’s segments – restaurant operations, franchise operations, Foxtail and other – is included for comparison. The ratios presented reflect the underlying dollar values expressed as a percentage of the applicable revenue amount (food cost as a percentage of food sales; labor and benefits and operating expenses as a percentage of total revenues in the restaurant operations and franchise operations segments and as a percentage of food sales in the Foxtail segment). The food cost ratio in the consolidated results reflects the elimination of intersegment food cost of $13,869,000 and $14,345,000 in the year-to-date periods of 2010 and 2009, respectively.
Consolidated Results
|
Restaurant Operations
|
Franchise Operations
|
||||||||||||||||||||||
Year-to-Date Ended
|
Year-to-Date Ended
|
Year-to-Date Ended
|
||||||||||||||||||||||
October 3,
|
October 4,
|
October 3,
|
October 4,
|
October 3,
|
October 4,
|
|||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||
Food sales
|
$ | 371,053 | 399,369 | 336,093 | 355,501 | - | - | |||||||||||||||||
Franchise and other revenue
|
21,474 | 21,575 | - | - | 17,202 | 17,507 | ||||||||||||||||||
Intersegment revenue
|
(13,869 | ) | (14,345 | ) | - | - | - | - | ||||||||||||||||
Total revenues
|
378,658 | 406,599 | 336,093 | 355,501 | 17,202 | 17,507 | ||||||||||||||||||
Food cost
|
25.4 | % | 26.3 | % | 25.5 | % | 25.3 | % | - | - | ||||||||||||||
Labor and benefits
|
34.3 | % | 33.4 | % | 37.2 | % | 36.5 | % | - | - | ||||||||||||||
Operating expenses
|
28.7 | % | 27.3 | % | 30.7 | % | 29.5 | % | 9.4 | % | 8.3 | % | ||||||||||||
Segment (loss) income
|
$ | (38,108 | ) | (26,882 | ) | 9,406 | 16,664 | 15,592 | 16,055 | |||||||||||||||
Foxtail (a)
|
Other (b)
|
|||||||||||||||||||||||
Year-to-Date Ended
|
Year-to-Date Ended
|
|||||||||||||||||||||||
October 3,
|
October 4,
|
October 3,
|
October 4,
|
|||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||
Food sales
|
$ | 34,961 | 43,868 | - | - | |||||||||||||||||||
Franchise and other revenue
|
- | - | 4,271 | 4,068 | ||||||||||||||||||||
Intersegment revenue
|
(13,869 | ) | (14,345 | ) | - | - | ||||||||||||||||||
Total revenues
|
21,092 | 29,523 | 4,271 | 4,068 | ||||||||||||||||||||
Food cost
|
53.8 | % | 58.5 | % | - | - | ||||||||||||||||||
Labor and benefits
|
13.1 | % | 13.1 | % | 5.5 | % | 5.9 | % | ||||||||||||||||
Operating expenses
|
11.7 | % | 10.4 | % | - | - | ||||||||||||||||||
Segment (loss) income
|
$ | 2,608 | 2,226 | (65,714 | ) | (61,827 | ) |
(a)
|
The percentages for food cost, labor and benefits and operating expenses, as presented above, represent manufacturing costs at Foxtail. Foxtail’s selling, general and administrative expenses are included in general and administrative expenses in the consolidated statements of operations and in the Foxtail segment income or loss presented above.
|
(b)
|
Licensing revenue of $4,105,000 and $3,889,000 for the year-to-date periods of 2010 and 2009, respectively, is included in the other segment revenues. The other segment loss includes corporate general and administrative expenses, interest expense and other non-operational expenses. For details of the other segment loss, see Note 10, “Segment Reporting” in the Notes to Consolidated Financial Statements.
|
Overview
Our revenues are derived primarily from restaurant operations, franchise royalties and the sale of bakery products produced by Foxtail. Sales from Foxtail to Company-operated restaurants are eliminated in the accompanying consolidated statements of operations. Segment revenues as a percentage of total revenues were as follows:
Percentage of Total Revenues
|
||||||||
Year-to-Date
|
Year-to-Date
|
|||||||
Ended
|
Ended
|
|||||||
October 3,
|
October 4,
|
|||||||
2010
|
2009
|
|||||||
Restaurant operations
|
88.8 | % | 87.4 | % | ||||
Franchise operations
|
4.5 | % | 4.3 | % | ||||
Foxtail
|
5.6 | % | 7.3 | % | ||||
Other
|
1.1 | % | 1.0 | % | ||||
Total revenues
|
100.0 | % | 100.0 | % |
Restaurant Operations Segment
Total restaurant segment revenues decreased by approximately $19,408,000 in the year-to-date period ended October 3, 2010 as compared to the year-to-date period ended October 4, 2009, due primarily to lower comparable restaurant sales. Comparable sales for the year-to-date period of 2010 decreased by 4.7% at Company-operated Perkins restaurants and by 6.5% at Company-operated Marie Callender’s restaurants. These declines in comparable sales resulted primarily from a decrease in comparable guest counts due to changes in consumer spending habits resulting from continuing economic uncertainties. Since the end of the third quarter of 2009, the Company has closed two Marie Callender’s restaurants and two Perkins Restaurants.
Restaurant segment profit decreased by $7,258,000 in the year-to-date period of 2010 compared to a year ago. The decrease was primarily due to the decrease in comparable sales.
Franchise Operations Segment
Franchise revenues decreased approximately $305,000 in the year-to-date period of 2010 compared to the same period in the prior year. During the year-to-date period ended October 3, 2010, royalty revenue decreased by $396,000 due to a decline in comparable customer counts resulting from changes in consumer spending habits due to continuing economic uncertainties. This decrease in royalty revenues was partially offset by a $91,000 increase in franchise fees and renewal fees.
Franchise segment profit decreased by $463,000 in the year-to-date period of 2010 compared to the prior year due primarily to the decrease in royalty revenues and an increase in operating expenses, which were partially offset by an increase in transfer and renewal fees. The increase in franchise segment operating expenses was driven by the cost of opening support for five new franchise restaurants.
Since the end of the third quarter of 2009, Perkins’ franchisees have opened five restaurants and closed one restaurant. Over the same time period, two franchised Marie Callender’s restaurants have closed.
Foxtail Segment
Foxtail’s revenues, net of intercompany sales, decreased by $8,431,000 compared to the year-to-date period of 2009 due primarily to discontinued sales to two external customers, whose purchases typically resulted in lower-than-average margins to Foxtail. The segment had income of $2,608,000 in 2010 compared to income of $2,226,000 in 2009. The increase in segment profit resulted primarily from higher sales margins and lower administrative costs.
Revenues
Consolidated total revenues decreased by $27,941,000 in the year-to-date period ended October 3, 2010 compared to the year-to-date period ended October 4, 2009. The decrease was due to decreases in sales of $19,408,000 in the restaurant segment, decreases in franchise revenues of $305,000 in the franchise segment and an $8,431,000 decrease in sales in the Foxtail segment. These decreases were partially offset by a $203,000 increase in licensing and other revenues. Total revenues of approximately $378,658,000 in the year-to-date period of 2010 were 6.9% lower than total revenues of approximately $406,599,000 in the year-to-date period of 2009.
Restaurant segment sales of $336,093,000 and $355,501,000 in the year-to-date periods of 2010 and 2009, respectively, accounted for 88.8% and 87.4% of total revenues, respectively. Due to the decline in total revenues, total restaurant segment sales increased as a percentage of total revenues, despite an overall 5.4% decrease in comparable sales at Company-operated Perkins and Marie Callender’s restaurants.
Franchise segment revenues of $17,202,000 and $17,507,000 in the year-to-date periods of 2010 and 2009, respectively, accounted for 4.5% and 4.3% of total revenues, respectively. During the year-to-date period of 2010, royalty revenue decreased by $396,000 due to a decline in comparable customer counts at franchised restaurants, while franchise fees and renewal fees increased by $91,000.
Foxtail revenues, net of intercompany sales, of $21,092,000 and $29,523,000 in 2010 and 2009, respectively, accounted for 5.6% and 7.3% of total revenues, respectively. The decline in revenues was primarily due to discontinued sales to two external customers, whose purchases typically resulted in lower-than-average margins to Foxtail.
Costs and Expenses
Food Cost
Consolidated food cost was 25.4% and 26.3% of food sales in the year-to-date periods of 2010 and 2009, respectively. Restaurant segment food cost was 25.5% and 25.3% of food sales in the year-to-date periods of 2010 and 2009, respectively, while food cost in the Foxtail segment was 53.8% and 58.5% of food sales in the year-to-date periods of 2010 and 2009, respectively. The decrease of 4.7 percentage points in the Foxtail segment is primarily due to higher sales margins and improved pie manufacturing efficiencies.
Labor and Benefits Expenses
Consolidated labor and benefits expenses were 34.3% and 33.4% of total revenues in the year-to-date periods of 2010 and 2009, respectively. Restaurant segment labor and benefits, as a percentage of total revenues, increased by 0.7 percentage points in 2010 due primarily to the decline in revenues. Actual labor and benefits costs dropped by approximately $4,773,000. In the Foxtail segment, labor and benefits, as a percentage of food sales, remained constant at 13.1% for the year-to-date periods of 2010 and 2009, respectively.
Operating Expenses
Total operating expenses of $108,856,000 in the year-to-date period of 2010 decreased by $2,100,000 as compared to the year-to-date period 2009. The most significant components of operating expenses were rent, utilities and advertising expenses. Total operating expenses, as a percentage of total sales, were 28.7% and 27.3% in the year-to-date periods of 2010 and 2009, respectively. Approximately 94.8% and 94.6% of total operating expenses in the year-to-date periods of 2010 and 2009, respectively, were incurred in the restaurant segment. In the restaurant segment, operating expenses, as a percentage of total revenues, increased from 29.5% to 30.7% primarily due to the drop in sales combined with increases in real estate taxes and common area maintenance costs. Operating expenses in the Foxtail segment increased by 1.3 percentage points in 2010 as a percentage of Foxtail sales due primarily to the decrease in Foxtail segment revenues, as operating expenses for this segment decreased by 10.9% in 2010.
General and Administrative Expenses
The most significant components of general and administrative (“G&A”) expenses were corporate labor and benefits, occupancy costs, audit fees and legal fees. Consolidated G&A expenses were 9.1% and 8.5% of total revenues in the year-to-date periods of 2010 and 2009, respectively. This increase of 0.6 percentage points in 2010 is primarily due to the decrease in revenues, as G&A expenses decreased by $75,000 year-over-year.
Settlement with Former Owner
In 2010, we expensed a $4,555,000 payment to the former owners of the Company’s direct parent as part of an agreement involving a lawsuit commenced by a member of P&MC’s Holding LLC and former owner of the direct parent of the Company. This settlement is discussed in detail in Note 13, “P&MC’s Holding LLC Equity Plan and Other Related Party Transactions” in the Notes to Consolidated Financial Statements and did not have an adverse impact on the Company’s cash flows or financial position.
Depreciation and Amortization
Depreciation and amortization expense was $16,783,000 and $18,411,000 in the year-to-date periods of 2010 and 2009, respectively.
Interest, net
Interest, net was $34,200,000 (9.0% of total revenues) in the year-to-date period of 2010, compared to $34,005,000 (8.4% of total revenues) in the year-to-date period of 2009. This expense increased due primarily to an approximate $7,080,000 increase in the average debt outstanding.
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 the year-to-date periods of 2010 and 2009, we recorded expenses of $2,747,000 and $1,395,000, respectively, for asset impairment and store closures.
During 2010, we closed three company-operated restaurants as a result of lease terminations. Additionally, one restaurant was closed and the location is being offered for sub-lease. The future sublease rentals are expected to exceed the future minimum rents under the building lease. Only two restaurants were closed in the prior year. The Company currently plans to close a minimum of eight restaurants over the next year as a result of lease expirations and one restaurant which the Company plans to offer for sublease. In addition, leases on five properties that are either vacant or sub-leased to third parties are scheduled to expire within the next twelve months.
Other, net
Other, net was net income of $399,000 in 2010 compared to income of $3,069,000 in 2009. The income in 2009 primarily represents cumulative gift card breakage at Marie Callender’s of $1,576,000, which was recognized during the second quarter of 2009, and cumulative gift card breakage at Perkins of $865,000, which was recognized during the first quarter of 2009. Both gift card programs commenced in 2005.
Taxes
The effective income tax rates for the fiscal year-to-date periods ended October 3, 2010 and October 4, 2009 were 11.4% and (0.5)% 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 the year-to-date period ended October 3, 2010 reflects $4,950,000 of current federal tax benefit and $67,000 of current state tax expense. In addition, the income tax rate reflects $32,000 of state tax benefit, $28,000 of state interest benefit and $55,000 of state tax penalty on uncertain tax positions for the year-to-date period ended October 3, 2010. Tax legislation enacted in 2009 allowed the Company to elect a carry back of certain net operating losses up to five years rather than the previous two year carry back period. In the year-to-date period ended October 3, 2010 the Company recognized a $4,724,000 current federal tax benefit as a result of this election, which is discussed further in Note 13, “P&MC’s Holding LLC Equity Plan and Other Related Party Transactions” in the Notes to Consolidated Financial Statements.
CAPITAL RESOURCES AND LIQUIDITY
Our principal liquidity requirements are to service our debt and meet our working capital and capital expenditure needs. At October 3, 2010, we had $9,397,000 in unrestricted cash and cash equivalents and $2,206,000 of borrowing capacity under our Revolver.
Secured Notes and 10% Senior Notes
On September 24, 2008, the Company issued $132,000,000 of 14% senior secured notes (the "Secured Notes"). The Secured Notes were issued at a discount of $7,537,200, which is being accreted using the interest method over the term of the Secured Notes. The Secured Notes will mature on May 31, 2013, and interest is payable semi-annually on May 31 and November 30 of each year.
In September 2005, the Company issued $190,000,000 of unsecured 10% Senior Notes. The 10% Senior Notes were issued at a discount of $2,570,700, which is accreted using the interest method over the term of the 10% Senior Notes. The 10% Senior Notes will mature on October 1, 2013, and interest is payable semi-annually on April 1 and October 1 of each year. All consolidated subsidiaries of the Company that are 100% owned provide joint and several, full and unconditional guarantee of the 10% Senior Notes. There are no significant restrictions on the Company’s ability to obtain funds from any of the guarantor subsidiaries in the form of a dividend or a loan. Additionally, there are no significant restrictions on a guarantor subsidiary’s ability to obtain funds from the Company or its direct or indirect subsidiaries.
The indentures for the Secured Notes and the 10% Senior Notes contain various customary events of default, including, without limitation: (i) nonpayment of principal or interest; (ii) cross-defaults with certain other indebtedness; (iii) certain bankruptcy related events; (iv) invalidity of guarantees; (v) monetary judgment defaults; and (vi) certain change of control events. In addition, any impairment of the security interest in the Secured Notes collateral shall constitute an event of default under the Secured Notes indenture.
Revolver
On September 24, 2008, the Company entered into the Revolver. The Revolver, which matures on February 28, 2013, is guaranteed by Perkins & Marie Callender's Holding Inc. and certain of the Company's existing and future subsidiaries. The Revolver is secured by a first priority perfected security interest in all of the Company's property and assets and the property and assets of each guarantor. Subject to the satisfaction of the conditions contained therein, up to $26,000,000 may be borrowed under the Revolver from time to time. The Revolver includes a sub-facility for letters of credit in an amount not to exceed $15,000,000.
Amounts outstanding under the Revolver bear interest, at the Company’s option, at a rate per annum equal to either: (i) the base rate, as defined in the Revolver, plus an applicable margin or (ii) a LIBOR-based equivalent, plus an applicable margin. For the foreseeable future, the base rate minimum of 5.0% and the LIBOR-based minimum of 3.25% are expected to apply and the applicable margins are expected to be 325 basis points for base rate loans and 425 basis points for LIBOR loans. As of October 3, 2010, the average annual interest rate on aggregate borrowings under the Revolver was 7.9%, and the Revolver permitted additional borrowings of approximately $2,206,000 (after giving effect to $22,210,000 in borrowings and $1,584,000 in letters of credit outstanding). The letters of credit are primarily utilized in conjunction with our workers’ compensation insurance programs.
On September 10, 2010, a letter of credit amounting to $8,635,000 was cancelled and replaced with a new letter of credit described below in “Guaranteed Letter of Credit”, thereby reducing the outstanding letters of credit and increasing the borrowing capacity under the Revolver by $8,635,000.
The Revolver contains various affirmative and negative covenants, including, but not limited to a financial covenant for the Company to maintain at least $30,000,000 of trailing 13-period EBITDA, as defined in the Revolver, and limits the Company’s ability to make capital expenditures.
The average interest rate on aggregate borrowings of the Company’s long-term debt for the year-to-date period through October 3, 2010 was 11.5% compared to the average interest rate on aggregate borrowings for the year-to-date period through October 4, 2009 of 11.6%.
Our debt agreements place restrictions on the Company’s ability and the ability of its subsidiaries to: (i) incur additional indebtedness or issue certain preferred stock; (ii) repay certain indebtedness prior to stated maturities; (iii) pay dividends or make other distributions on, redeem or repurchase capital stock or subordinated indebtedness; (iv) make certain investments or other restricted payments; (v) enter into transactions with affiliates; (vi) issue stock of subsidiaries; (vii) transfer, sell or consummate a merger or consolidation of all, or substantially all, of the Company's assets; (viii) change lines of business; (ix) incur dividend or other payment restrictions with regard to restricted subsidiaries; (x) create or incur liens on assets to secure debt; (xi) dispose of assets; (xii) restrict distributions from subsidiaries; (xiii) make certain acquisitions; (xiv) make capital expenditures; or (xv) amend the terms of the Secured Notes and the 10% Senior Notes. As of October 3, 2010, we were in compliance with the covenants contained in our debt agreements.
Guaranteed Letter of Credit
On September 10, 2010, the Company’s letter of credit amounting to $8,635,000 under the Revolver for the benefit of its workers’ compensation provider was cancelled and replaced with a new letter of credit to the same provider for the same amount under a credit facility that is guaranteed by an affiliate of the Company’s controlling equity holder. This new letter of credit will be in force through December 9, 2011, and will contain certain renewal provisions for extension beyond that date.
The new letter of credit may only be drawn upon if the Company fails to pay its workers’ compensation claims in the ordinary course of business. The cancelled letter of credit had the same draw-down condition. In the event the Company fails to make such payments and the new letter of credit is drawn upon, the guarantor of the letter of credit will reimburse the third party letter of credit provider, and the Company has agreed to reimburse the guarantor for such amounts. There has never been a draw on the letters of credit provided for our workers’ compensation plans, and the Company does not expect that there will be a draw on the new letter of credit.
See Note 4, “Operations, Financial Condition and Liquidity,” in the Notes to Consolidated Financial Statements for additional information concerning the Guaranteed Letter of Credit.
Working Capital and Cash Flows
At October 3, 2010, we had a negative working capital balance of $19,851,000. Like many other restaurant companies, the Company is able to, and does more often than not, operate with negative working capital. We are able to operate with a substantial working capital deficit because (1) restaurant revenues are received primarily on a cash or near-cash basis with a low level of accounts receivable, (2) rapid turnover results in a limited investment in inventories and (3) accounts payable for food and beverages usually become due after the receipt of cash from the related sales.
The following table sets forth summary cash flow data for the year-to-date periods ended October 3, 2010 and October 4, 2009 (in thousands):
Year-to-Date
|
Year-to-Date
|
|||||||
Ended
|
Ended
|
|||||||
October 3,
|
October 4,
|
|||||||
2010
|
2009
|
|||||||
Cash flows used in operating activities
|
$ | (2,570 | ) | (4,837 | ) | |||
Cash flows used in investing activities
|
(2,783 | ) | (5,447 | ) | ||||
Cash flows provided by financing activities
|
10,462 | 9,196 |
Operating Activities
Cash flows used in operating activities decreased by $2,267,000 for the year-to-date period ended October 3, 2010 compared to the year-to-date period ended October 4, 2009, due primarily to a larger net operating loss and larger increases in inventory balances, which were offset by increases in accounts payable and accrued expenses. The increase in accrued expenses is related to the liability resulting from an agreement involving a lawsuit with a member of P&MC’s Holding LLC and former owner of the direct parent of the Company. This settlement is discussed in more detail in Note 13, “P&MC’s Holding LLC Equity Plan and Other Related Party Transactions” in the Notes to Consolidated Financial Statements.
Investing Activities
Cash flows used in investing activities for the year-to-date period ended October 3, 2010 were $2,783,000 compared to $5,447,000 for the year-to-date period ended October 4, 2009. Substantially all cash flows used in investing activities were used for capital expenditures.
Capital expenditures consisted primarily of restaurant improvements, restaurant remodels and manufacturing plant improvements. The following table summarizes capital expenditures for each year-to-date period presented (in thousands):
Year-to-Date
|
Year-to-Date
|
|||||||
Ended
|
Ended
|
|||||||
October 3,
|
October 4,
|
|||||||
2010
|
2009
|
|||||||
New restaurants
|
$ | - | 156 | |||||
Restaurant improvements
|
2,873 | 3,559 | ||||||
Restaurant remodeling and reimaging
|
332 | 1,227 | ||||||
Manufacturing plant improvements
|
306 | 560 | ||||||
Other
|
279 | 439 | ||||||
Total capital expenditures
|
$ | 3,790 | 5,941 |
Our capital expenditure forecast for the full year of 2010 is approximately $4,200,000 and does not include plans to open any new Company-operated Perkins or Marie Callender’s restaurants. The principal source of funding for 2010’s capital expenditures is expected to be cash provided by operations and borrowings under our Revolver.
Financing Activities
Cash flows provided by financing activities for the year-to-date period ended October 3, 2010 were $10,462,000 compared to cash flows provided by financing activities of $9,196,000 for the year-to-date period ended October 4, 2009. The primary cash flows for financing activities in the year-to-date periods of 2010 and 2009 represent net borrowings under the Revolver.
IMPACT OF INFLATION
We do not believe that our operations are affected by inflation to a greater extent than others within the restaurant industry. Certain significant items that are historically subject to price fluctuations are beef, pork, poultry, dairy products, wheat products, corn products and coffee. In most cases, we historically have been able to pass through a substantial portion of the increased commodity costs by adjusting menu pricing.
CASH CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Cash Contractual Obligations
Our cash contractual obligations presented in the Company’s 2009 Form 10-K/A have not changed materially during the year-to-date period ended October 3, 2010.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements, written, oral or otherwise made, may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should” or “will,” or the negative thereof or other variations thereon or comparable terminology.
We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors affecting these forward-looking statements include, among others, the following:
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•
|
macroeconomic conditions, consumer preferences and demographic patterns, both nationally and 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 forward-looking statements. The forward-looking statements included in this Form 10-Q are made only as of the date hereof. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments.
We are subject to changes in interest rates, foreign currency exchange rates and certain commodity prices.
Interest Rate Risk
Our primary market risk is interest rate exposure with respect to our floating rate debt. As of October 3, 2010, our Revolver permitted additional borrowings of approximately $2,206,000 (after giving effect to $22,210,000 in borrowings and $1,584,000 in letters of credit outstanding). Borrowings under the Revolver are subject to variable interest rates. A 100 basis point change in interest rates (assuming $26,000,000 was outstanding under the Revolver) would impact us by approximately $260,000. In the future, we may decide to employ a hedging strategy through derivative financial instruments to reduce the impact of adverse changes in interest rates. We do not plan to hold or issue derivative instruments for trading purposes.
Foreign Currency Exchange Rate Risk
We conduct foreign operations in Canada and Mexico. As a result, we are subject to risk from changes in foreign exchange rates. These changes result in cumulative translation adjustments, which are included in accumulated and other comprehensive income (loss). As of October 3, 2010, we do not consider the potential loss resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates to be material.
Commodity Price Risk
Many of the food products and other operating essentials purchased by us are affected by commodity pricing and are, therefore, subject to price volatility caused by weather, changes in global demand, production problems, delivery difficulties and other factors that are beyond our control. Our supplies and raw materials are available from several sources, and we are not dependent upon any single source for these items. If any existing suppliers fail or are unable to deliver in quantities required by us, we believe that there are sufficient other quality suppliers in the marketplace such that our sources of supply can be replaced as necessary. At times, we enter into purchase contracts of one year or less or purchase bulk quantities for future use of certain items in order to control commodity-pricing risks. Certain significant items that are historically subject to price fluctuations are beef, pork, poultry, dairy products, wheat products, corn products and coffee. In most cases, we historically have been able to pass a substantial portion of the increased commodity costs to our customers through periodic menu price adjustments. We do not hedge against fluctuations in commodity prices. We do not use hedging agreements or alternative instruments to manage the risks associated with securing sufficient supplies or raw materials.
Disclosure Controls and Procedures. We have established disclosure controls and procedures to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within time periods specified in the Securities and Exchange Commission rules and forms and that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to the officers who certify our financial reports and to other members of senior management and the board of directors to allow timely decisions regarding required disclosure.
In connection with the restatement of our prior financial results, which is more fully described in Note 19 to our Consolidated Financial Statements in our Form 10-K/A filed on June 7, 2010, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we reevaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that reevaluation and in light of the restatement of our financial results, we identified a material weakness in our internal control over financial reporting with respect to the determination and review of differences between the income tax bases and financial reporting bases of certain assets and liabilities. Solely as a result of this material weakness, we concluded that our disclosure controls and procedures were not effective.
We have implemented improvements in our internal control over financial reporting to address the material weakness in accounting for income taxes. These improvements include, among other things, improved documentation and analysis regarding the determination and periodic review of deferred income tax amounts and enhancing the documentation around conclusions reached in the implementation of the applicable generally accepted accounting principles. We are in the process of testing the effectiveness of these improvements in our internal control over financial reporting and plan to complete such evaluation by the end of the current fiscal year.
Changes in Internal Control over Financial Reporting. Other than those related to accounting for income taxes, there have not been any changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) that occurred during the third fiscal quarter of 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As reported in the Company’s Form 10-K for the fiscal year ended December 27, 2009, we are party to various legal proceedings in the ordinary course of business. There have been no material developments with regard to these proceedings, either individually or in the aggregate, that are likely to have a material adverse effect on the Company’s financial position or results of operations.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Form 10-K for the fiscal year ended December 27, 2009, which could materially affect our business, financial condition or future results. The risks described in this report and in our Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
None.
None.
None.
31.1
|
Chief Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 302.
|
31.2
|
Chief Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 302.
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32.1
|
Chief Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 906.
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32.2
|
Chief Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 906.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PERKINS & MARIE CALLENDER’S INC.
|
||
DATE: November 17, 2010
|
BY: /s/ Fred T. Grant, Jr.
|
|
Fred T. Grant, Jr.
|
||
Chief Financial Officer
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43