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



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 3, 2010

OR

 
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to ____________.

Commission file number 333-57925

Perkins & Marie Callender’s Inc.

(Exact name of registrant as specified in its charter)

Delaware
62-1254388
(State or other jurisdiction of incorporation or organization)
(I.R.S. employer identification no.)
6075 Poplar Avenue, Suite 800, Memphis, TN
38119
(Address of principal executive offices)
(Zip code)
   
(901) 766-6400
(Registrant’s telephone number, including area code)

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  £
Accelerated filer £
Non-accelerated filer  R (Do not check if a smaller reporting company)
Smaller reporting company  £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes        £      No       R
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
 
 
 
Ex-31.2 Section 302 Certification of the CFO
 
 
Ex-32.1 Section 906 Certification of the CEO
 
 
Ex-32.2 Section 906 Certification of the CFO
 




PERKINS & MARIE CALLENDER’S INC.
(Unaudited)
(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
 
REVENUES:
                       
Food sales
  $ 102,296       109,086       357,184       385,024  
Franchise and other revenue
    6,404       6,384       21,474       21,575  
    Total revenues
    108,700       115,470       378,658       406,599  
COSTS AND EXPENSES:
                               
Cost of sales (excluding depreciation shown below):
                         
    Food cost
    25,999       28,058       90,715       101,333  
    Labor and benefits
    37,535       39,474       129,743       135,703  
    Operating expenses
    32,587       33,183       108,856       110,956  
General and administrative
    9,515       10,313       34,456       34,531  
Settlement with former owner
    4,555       -       4,555       -  
Depreciation and amortization
    4,818       5,498       16,783       18,411  
Interest, net
    10,336       10,260       34,200       34,005  
Asset impairments and closed store expenses
    642       187       2,747       1,395  
Other, net
    (41 )     (392 )     (399 )     (3,069 )
    Total costs and expenses
    125,946       126,581       421,656       433,265  
Loss before income taxes
    (17,246 )     (11,111 )     (42,998 )     (26,666 )
Benefit from (provision for) income taxes
    4,888       (142 )     4,888       (142 )
Net loss
    (12,358 )     (11,253 )     (38,110 )     (26,808 )
Less: net (loss) earnings attributable to
                               
    non-controlling interests
    (9 )     (5 )     (2 )     74  
Net loss attributable to Perkins & Marie
                               
    Callender's Inc.
  $ (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,
   
December 27,
 
   
2010
   
2009
 
ASSETS
 
(Unaudited)
       
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 9,397       4,288  
Restricted cash
    5,696       8,110  
Receivables, less allowances for doubtful accounts of $1,028
    and $829 in 2010 and 2009, respectively
    15,945       18,125  
Inventories
    12,195       11,062  
Prepaid expenses and other current assets
    2,180       1,864  
Assets held for sale, net
    310       -  
     Total current assets
    45,723       43,449  
                 
PROPERTY AND EQUIPMENT, net of accumulated
   depreciation and amortization of $159,073 and $156,898 in
   2010 and 2009, respectively
    61,717       75,219  
INVESTMENT IN UNCONSOLIDATED PARTNERSHIP
    19       50  
GOODWILL
    23,100       23,100  
INTANGIBLE ASSETS, net of accumulated amortization of
   $20,983 and $20,179 in 2010 and 2009, respectively
    145,375       147,013  
OTHER ASSETS
    14,064       16,074  
TOTAL ASSETS
  $ 289,998       304,905  
                 
 LIABILITIES AND DEFICIT
               
                 
CURRENT LIABILITIES:
               
Accounts payable
    15,085       14,657  
Accrued expenses
    44,453       41,605  
Franchise advertising contributions
    5,696       4,327  
Current maturities of long-term debt and capital lease obligations
    340       503  
     Total current liabilities
    65,574       61,092  
                 
LONG-TERM DEBT, less current maturities
    338,434       326,042  
CAPITAL LEASE OBLIGATIONS, less current maturities
    13,205       11,054  
DEFERRED RENT
    18,992       17,092  
OTHER LIABILITIES
    24,736       22,277  
DEFERRED INCOME TAXES
    45,457       45,457  
                 
DEFICIT:
               
Common stock, $.01 par value; 100,000 shares authorized;
               
     10,820 issued and outstanding
    1       1  
Additional paid-in capital
    150,870       150,870  
Accumulated other comprehensive income
    54       45  
Accumulated deficit
    (367,441 )     (329,333 )
     Total Perkins & Marie Callender's Inc. stockholder's deficit
    (216,516 )     (178,417 )
Non-controlling interests
    116       308  
     Total deficit
    (216,400 )     (178,109 )
TOTAL LIABILITIES AND DEFICIT
  $ 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
   
Year-to-Date
 
   
Ended
   
Ended
 
   
October 3,
   
October 4,
 
   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (38,110 )     (26,808 )
Adjustments to reconcile net loss to net cash
               
 used in operating activities:
               
  Depreciation and amortization
    16,783       18,411  
  Asset impairments
    2,489       571  
  Amortization of debt discount
    1,352       1,184  
  Other non-cash income items
    (177 )     (2,427 )
  Loss on disposition of assets
    258       824  
  Equity in net loss of unconsolidated partnership
    31       25  
  Net changes in operating assets and liabilities
    14,804       3,383  
  Total adjustments
    35,540       21,971  
Net cash used in operating activities
    (2,570 )     (4,837 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property and equipment
    (3,790 )     (5,941 )
Proceeds from sale of assets
    1,007       494  
Net cash used in investing activities
    (2,783 )     (5,447 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from revolving credit facilities
    24,684       26,501  
Repayment of revolving credit facilities
    (13,644 )     (16,726 )
Repayment of capital lease obligations
    (373 )     (318 )
Repayment of other debt
    (15 )     (15 )
Debt financing costs
    -       (142 )
Distributions to non-controlling interest holders
    (190 )     (104 )
Net cash provided by financing activities
    10,462       9,196  
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    5,109       (1,088 )
                 
CASH AND CASH EQUIVALENTS:
               
  Balance, beginning of period
    4,288       4,613  
  Balance, end of period
  $ 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:

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

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
   
Year-to-Date
         
Quarter
   
Year-to-Date
 
# of
   
Ended
   
Ended
   
# of
   
Ended
   
Ended
 
Restaurants
   
October 3,
   
October 3,
   
Restaurants
   
October 4,
   
October 4,
 
  (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
   
Year-to-Date
         
Quarter
   
Year-to-Date
 
# of
   
Ended
   
Ended
   
# of
   
Ended
   
Ended
 
Restaurants
   
October 3,
   
October 3,
   
Restaurants
   
October 4,
   
October 4,
 
  (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
   
Year-to-Date
 
   
Ended
   
Ended
 
   
October 3,
   
October 4,
 
   
2010
   
2009
 
Decrease (increase) in:
           
  Restricted cash
  $ 2,414       2,100  
  Receivables
    1,900       3,900  
  Inventories
    (1,133 )     894  
  Prepaid expenses and other current assets
    (316 )     (1,474 )
  Other assets
    2,326       1,055  
                 
Increase (decrease) in:
               
  Accounts payable
    2,403       (2,518 )
  Accrued expenses and other current liabilities
    2,851       (4,345 )
  Other liabilities
    4,359       3,771  
Net changes in operating assets and liabilities
  $ 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
  $ 35,000       35,000  
Customer relationships
    10,000       10,000  
Acquired franchise rights
    10,758       10,758  
Design prototype
    -       834  
Subtotal
    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:

 
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.
32.1
Chief Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 906.
32.2
Chief Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 906.




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
 
 
 

 
43