10-Q 1 frs-20121211x10q.htm 10-Q FRS-2012.12.11-10Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________ 
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
FOR QUARTERLY PERIOD ENDED DECEMBER 11, 2012
COMMISSION FILE NUMBER 001-7323
________________________________ 
FRISCH’S RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
 
OHIO
 
31-0523213
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
2800 Gilbert Avenue, Cincinnati, Ohio
 
45206
(Address of principal executive offices)
 
(Zip Code)
 
 
 
Registrant’s telephone number, including area code
 
513-961-2660
Not Applicable
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x     NO  ¨
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 (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ¨
    
Accelerated filer  x
 
 
Non-accelerated filer  ¨
    
Smaller reporting company  ¨
(Do not check if a smaller reporting company)
    
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  ¨ NO  x
There were 5,062,455 shares outstanding of the issuer’s no par common stock, as of December 11, 2012
 






TABLE OF CONTENTS
 
 
 
Page
 
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements:
 
 
 
 
 
 
 
 
 
 
 
 
 
5 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
26 
 
 
 
Item 3.
 
 
 
Item 4.
37 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 





Frisch’s Restaurants, Inc. and Subsidiaries
Consolidated Statement of Earnings
(Unaudited)
 
 
28 weeks ended
 
12 weeks ended
 
December 11,
2012
 
December 13,
2011
 
December 11,
2012
 
December 13,
2011
Sales
$
109,147,808

 
$
111,298,919

 
$
48,522,512

 
$
49,937,574

Cost of sales
 
 
 
 
 
 
 
Food and paper
36,434,812

 
37,610,174

 
16,159,451

 
16,772,119

Payroll and related
38,086,452

 
39,237,286

 
16,634,413

 
17,334,058

Other operating costs
22,859,201

 
23,469,335

 
9,736,416

 
9,995,369

 
97,380,465

 
100,316,795

 
42,530,280

 
44,101,546

 
 
 
 
 
 
 
 
Gross profit
11,767,343

 
10,982,124

 
5,992,232

 
5,836,028

 
 
 
 
 
 
 
 
Administrative and advertising
7,414,127

 
7,581,915

 
3,021,002

 
3,101,623

Franchise fees and other revenue
(750,917
)
 
(693,600
)
 
(322,445
)
 
(304,392
)
Loss on sale of assets
13,550

 

 
2,451

 

Impairment of long-lived assets
70,500

 

 

 

 
 
 
 
 
 
 
 
Operating profit
5,020,083

 
4,093,809

 
3,291,224

 
3,038,797

 
 
 
 
 
 
 
 
Interest expense
549,706

 
807,956

 
228,840

 
350,974

 
 
 
 
 
 
 
 
Earnings from continuing operations before income taxes
4,470,377

 
3,285,853

 
3,062,384

 
2,687,823

 
 
 
 
 
 
 
 
Income taxes
1,512,000

 
767,000

 
1,062,000

 
629,000

 
 
 
 
 
 
 
 
Earnings from continuing operations
$
2,958,377

 
$
2,518,853

 
$
2,000,384

 
$
2,058,823

 
 
 
 
 
 
 
 
(Loss) earnings from discontinued operations, net of tax
$
(157,705
)
 
$
(2,005,030
)
 
$

 
$
729,283

 
 
 
 
 
 
 
 
NET EARNINGS
$
2,800,672

 
$
513,823

 
$
2,000,384

 
$
2,788,106

 
 
 
 
 
 
 
 
Basic net earnings per share:
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.59

 
$
0.51

 
$
0.40

 
$
0.42

(Loss) earnings from discontinued operations
$
(0.03
)
 
$
(0.41
)
 
$

 
$
0.15

Basic net earnings per share
$
0.56

 
$
0.10

 
$
0.40

 
$
0.57

 
 
 
 
 
 
 
 
Diluted net earnings per share:
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.59

 
$
0.51

 
$
0.39

 
$
0.42

(Loss) earnings from discontinued operations
$
(0.03
)
 
$
(0.41
)
 
$

 
$
0.14

Diluted net earnings per share
$
0.56

 
$
0.10

 
$
0.39

 
$
0.56



The accompanying notes are an integral part of the consolidated financial statements.
3




Frisch’s Restaurants, Inc. and Subsidiaries
Consolidated Statement of Comprehensive Income
(Unaudited)
 
 
28 weeks ended
 
12 weeks ended
 
December 11,
2012
 
December 13,
2011
 
December 11,
2012
 
December 13,
2011
Net earnings
$
2,800,672

 
$
513,823

 
$
2,000,384

 
$
2,788,106

 
 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
 
 
Amortization of amounts included in net periodic pension expense
918,064

 
552,370

 
393,456

 
236,730

Tax effect
(312,142
)
 
(187,805
)
 
(133,775
)
 
(80,488
)
Total other comprehensive income (1)
605,922

 
364,565

 
259,681

 
156,242

 
 
 
 
 


 


Comprehensive income
$
3,406,594

 
$
878,388

 
$
2,260,065

 
$
2,944,348


(1) Approximately $61,000 and $26,000 respectively, of the other comprehensive income was attributable to Golden Corral during the 28 and 12 week periods ended December 13, 2011.


The accompanying notes are an integral part of the consolidated financial statements.
4




Frisch’s Restaurants, Inc. and Subsidiaries
Consolidated Balance Sheet
ASSETS
 
December 11,
2012
 
May 29,
2012
 
(unaudited)
 
 
Current Assets
 
 
 
Cash and equivalents
$
3,747,300

 
$
45,962,546

Restricted cash

 
3,492,803

Trade and other accounts receivable
1,564,618

 
1,683,123

Inventories
6,010,209

 
5,589,553

Prepaid expenses, sundry deposits and property held for sale
1,174,703

 
708,440

Prepaid and deferred income taxes
1,035,760

 
2,300,995

Current assets of discontinued operations
115,236

 
190,120

Total current assets
13,647,826

 
59,927,580

 
 
 
 
Property and Equipment
 
 
 
Land and improvements
45,708,378

 
44,473,068

Buildings
73,496,717

 
72,218,910

Equipment and fixtures
79,979,790

 
77,935,903

Leasehold improvements and buildings on leased land
16,808,093

 
16,609,854

Capitalized leases
2,501,334

 
2,311,565

Construction in progress
1,463,836

 
1,414,514

 
219,958,148

 
214,963,814

Less accumulated depreciation and amortization
117,449,194

 
112,825,024

Net property and equipment
102,508,954

 
102,138,790

 
 
 
 
Other Assets
 
 
 
Goodwill and other intangible assets
776,183

 
777,420

Investments in land
3,168,564

 
3,390,886

Property held for sale
5,799,899

 
8,093,084

Deferred income taxes
3,362,493

 
3,149,367

Other long term assets
2,680,527

 
2,491,654

Total other assets
15,787,666

 
17,902,411

 
 
 
 
Total assets
$
131,944,446

 
$
179,968,781


The accompanying notes are an integral part of the consolidated financial statements.
5




LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
December 11,
2012
 
May 29,
2012
 
(unaudited)
 
 
Current Liabilities
 
 
 
Long-term obligations due within one year
 
 
 
Long-term debt
$
5,508,910

 
$
6,592,637

Obligations under capitalized leases
171,204

 
162,683

Self insurance
723,306

 
972,915

Accounts payable
7,975,393

 
6,293,007

Accrued expenses
7,966,116

 
7,341,718

Income taxes

 
128,490

Current liabilities of discontinued operations
185,508

 
683,336

Total current liabilities
22,530,437

 
22,174,786

 
 
 
 
Long-Term Obligations
 
 
 
Long-term debt
11,433,596

 
14,445,869

Obligations under capitalized leases
1,619,379

 
1,526,244

Self insurance
1,331,095

 
1,268,667

Underfunded pension obligation
14,740,505

 
14,785,312

Deferred compensation and other
4,152,439

 
4,043,068

Total long-term obligations
33,277,014

 
36,069,160

 
 
 
 
Commitments

 

 
 
 
 
Shareholders’ Equity
 
 
 
Capital stock
 
 
 
Preferred stock - authorized, 3,000,000 shares without par value; none issued

 

Common stock - authorized, 12,000,000 shares without par value; issued, 7,586,764 and 7,586,764 shares - stated value - $1.00
7,586,764

 
7,586,764

Additional contributed capital
69,171,845

 
65,909,780

 
76,758,609

 
73,496,544

 
 
 
 
Accumulated other comprehensive loss
(8,400,280
)
 
(9,006,202
)
Retained earnings
47,719,253

 
95,289,648

 
39,318,973

 
86,283,446

 
 
 
 
Less cost of treasury stock (2,524,309 and 2,648,158 shares)
39,940,587

 
38,055,155

Total shareholders’ equity
76,136,995

 
121,724,835

 
 
 
 
Total liabilities and shareholders’ equity
$
131,944,446

 
$
179,968,781


The accompanying notes are an integral part of the consolidated financial statements.
6




Frisch’s Restaurants, Inc. and Subsidiaries
Consolidated Statement of Shareholders’ Equity
28 weeks ended December 11, 2012 and December 13, 2011
(Unaudited)
 
Common stock at $1 per share - Shares and amount
 
Additional
contributed
capital
 
Accumulated
other
comprehensive
income (loss)
 
Retained
earnings
 
Treasury
shares
 
Total
Balance at May 31, 2011
$
7,586,764

 
$
65,535,634

 
$
(5,726,555
)
 
$
96,249,483

 
$
(38,117,434
)
 
$
125,527,892

Net earnings for 28 weeks

 

 

 
513,823

 

 
513,823

Other comprehensive income, net of tax

 

 
364,565

 

 

 
364,565

Stock options exercised

 
15,080

 

 

 
71,770

 
86,850

Excess tax benefit from stock options exercised

 
3,800

 

 

 

 
3,800

Issuance of restricted stock

 
(334,903
)
 

 

 
334,903

 

Stock based compensation cost

 
436,155

 

 

 
248,132

 
684,287

Treasury shares acquired

 

 

 

 
(640,140
)
 
(640,140
)
Other treasury shares re-issued

 
8,886

 

 

 
21,247

 
30,133

Employee stock purchase plan

 
7,978

 

 

 

 
7,978

Cash dividends - $0.31 per share

 

 

 
(1,528,116
)
 

 
(1,528,116
)
Balance at December 13, 2011
7,586,764

 
65,672,630

 
(5,361,990
)
 
95,235,190

 
(38,081,522
)
 
125,051,072

Net earnings for 24 weeks

 

 

 
1,634,388

 

 
1,634,388

Other comprehensive (loss) income, net of tax

 

 
(3,644,212
)
 

 

 
(3,644,212
)
Stock options exercised

 
15,525

 

 

 
28,741

 
44,266

Issuance of restricted stock

 

 

 

 

 

Stock-based compensation cost

 
254,218

 

 

 

 
254,218

Treasury shares acquired

 

 

 

 
(2,374
)
 
(2,374
)
Employee stock purchase plan

 
(32,593
)
 

 

 

 
(32,593
)
Cash dividends - $0.32 per share

 

 

 
(1,579,930
)
 

 
(1,579,930
)
Balance at May 29, 2012
7,586,764

 
65,909,780

 
(9,006,202
)
 
95,289,648

 
(38,055,155
)
 
121,724,835

Net earnings for 28 weeks

 

 

 
2,800,672

 

 
2,800,672

Other comprehensive income, net of tax

 

 
605,922

 

 

 
605,922

Stock options exercised

 
2,859,881

 

 

 
4,607,582

 
7,467,463

Issuance of restricted stock

 
(257,550
)
 

 

 
257,550

 

Excess tax benefit from stock options exercised

 
364,165

 

 

 

 
364,165

Stock-based compensation cost

 
257,035

 

 

 
69,694

 
326,729

Treasury shares acquired

 

 

 

 
(6,826,858
)
 
(6,826,858
)
Other treasury shares re-issued

 
5,793

 

 

 
6,600

 
12,393

Employee stock purchase plan

 
32,741

 

 

 

 
32,741

Special cash dividend - $9.50 per share

 

 

 
(47,962,754
)
 

 
(47,962,754
)
Cash dividends - $0.48 per share

 

 

 
(2,408,313
)
 

 
(2,408,313
)
Balance at December 11, 2012
$
7,586,764

 
$
69,171,845

 
$
(8,400,280
)
 
$
47,719,253

 
$
(39,940,587
)
 
$
76,136,995




The accompanying notes are an integral part of the consolidated financial statements.
7




Frisch’s Restaurants, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
28 weeks ended December 11, 2012 and December 13, 2011
(unaudited)
 
28 weeks ended
 
December 11,
2012
 
December 13,
2011
Cash flows provided by (used in) operating activities:
 
 
 
Net earnings
$
2,800,672

 
$
513,823

Less: loss from discontinued operations
(157,705
)
 
(2,005,030
)
Earnings from continuing operations
2,958,377

 
2,518,853

Adjustments to reconcile net earnings to net cash from operating activities:
 
 
 
Depreciation and amortization
5,533,916

 
5,473,611

Loss on disposition of assets, including abandonment losses
37,385

 
64,178

Impairment of long-lived assets
70,500

 

Stock-based compensation expense
326,729

 
684,287

Net periodic pension cost
1,748,257

 
1,233,066

Contributions to pension plans
(875,000
)
 
(1,050,000
)
 
9,800,164

 
8,923,995

Changes in assets and liabilities:
 
 
 
Trade and other receivables
118,505

 
565,859

Inventories
(420,656
)
 
(921,387
)
Prepaid expenses, sundry deposits and other
(466,263
)
 
(315,946
)
Other assets
(958
)
 
(61,159
)
Prepaid, accrued and deferred income taxes
975,643

 
2,043,255

Excess tax benefit from stock options exercised
(364,165
)
 
(3,800
)
Accounts payable
872,393

 
(189,415
)
Accrued expenses
615,934

 
125,960

Self insured obligations
(187,181
)
 
244,305

Deferred compensation and other liabilities
109,371

 
(285,500
)
 
1,252,623

 
1,202,172

Net cash provided by continuing operations
11,052,787

 
10,126,167

Net cash (used in) provided by discontinued operations
(580,649
)
 
2,671,840

Net cash provided by operating activities
10,472,138

 
12,798,007

Cash flows provided by (used in) investing activities:
 
 
 
Additions to property and equipment
(5,780,952
)
 
(8,081,700
)
Proceeds from disposition of property
2,481,720

 
5,289

Change in restricted cash
3,492,803

 

Change in other assets
(185,672
)
 
189,731

Net cash provided by (used in) continuing investing activities
7,899

 
(7,886,680
)
Net cash (used in) discontinued investing activities

 
(917,012
)
Net cash provided by (used in) investing activities
7,899

 
(8,803,692
)
Cash flows provided by (used in) financing activities:
 
 
 
Proceeds from borrowings

 
2,000,000

Payment of long-term debt and capital lease obligations
(4,184,113
)
 
(4,639,621
)
Cash dividends paid
(1,598,320
)
 
(1,528,116
)
Special cash dividend paid
(47,962,754
)
 

Proceeds from stock options exercised
7,467,463

 
86,850

Excess tax benefit from stock options exercised
364,165

 
3,800

Treasury shares acquired
(6,826,858
)
 
(640,140
)
Treasury shares re-issued
12,393

 
30,133

Employee stock purchase plan
32,741

 
7,978

Net cash (used in) financing activities
(52,695,283
)
 
(4,679,116
)
 
 
 
 

The accompanying notes are an integral part of the consolidated financial statements.
8




 
 
 
 
Net decrease in cash and equivalents
(42,215,246
)
 
(684,801
)
Cash and equivalents at beginning of year
45,962,546

 
2,315,948

Cash and equivalents at end of quarter
$
3,747,300

 
$
1,631,147

 
 
 
 
Supplemental disclosures:
 
 
 
Interest paid
$
613,787

 
$
893,781

Income taxes paid
695,130

 
519,240

Dividends declared but not paid
809,993

 

Lease transactions capitalized (non-cash)
189,769

 


The accompanying notes are an integral part of the consolidated financial statements.
9


Frisch’s Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Second Quarter Fiscal 2013, Ended December 11, 2012

NOTE B - DISCONTINUED OPERATIONS (CONTINUED)

 
NOTE A - ACCOUNTING POLICIES AND BASIS OF PRESENTATION

Description of the Business
Frisch’s Restaurants, Inc. and Subsidiaries (Company) is a regional company that operates full service family-style restaurants under the name “Frisch’s Big Boy.”All 94 Frisch's Big Boy restaurants operated by the Company as of December 11, 2012 are located in various regions of Ohio, Kentucky and Indiana. The Company owns the trademark “Frisch’s” and has exclusive, irrevocable ownership of the rights to the “Big Boy” trademark, trade name and service marks in the states of Kentucky and Indiana, and in most of Ohio and Tennessee. All of the Frisch’s Big Boy restaurants also offer “drive-thru” service. The Company also licenses 25 Frisch's Big Boy restaurants to other operators, which are located in certain parts of Ohio, Kentucky and Indiana. In addition, the Company operates a commissary and food manufacturing plant near its headquarters in Cincinnati, Ohio that services all Frisch's Big Boy restaurants operated by the Company, and is available to supply restaurants licensed to others.
Interim Financial Statements and Principles of Consolidation
The accompanying interim consolidated financial statements (unaudited) include the accounts of the Company, prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) have been condensed or omitted as permitted under such rules and regulations. However, management believes that the disclosures made are adequate to make the information not misleading when read in conjunction with the consolidated financial statements and the notes thereto that were included in the Company's Annual Report on Form 10-K for the year ended May 29, 2012.
Significant inter-company accounts and transactions have been eliminated in consolidation. In the opinion of management, these interim consolidated financial statements include all adjustments (all of which were normal and recurring) necessary for a fair presentation of the Company's financial position as of December 11, 2012, the results of its operations for the 28 week periods (First Half) and 12 week periods (Second Quarter) ended December 11, 2012 and December 13, 2011, and cash flows for the 28 week periods ended December 11, 2012 and December 13, 2011.
Reclassifications
Certain amounts reported in prior years have been reclassified to conform to the current year presentation.
At the beginning of Fiscal Year 2012 (defined below), the Company operated a second business segment, which consisted of 35 Golden Corral restaurants (Golden Corral) that were licensed to the Company by Golden Corral Corporation (GCC). Six of the Golden Corrals were closed in August 2011 due to under performance. In May 2012, the remaining 29 Golden Corrals were sold to GCC. Results of Golden Corral for the 28 weeks ended December 13, 2011 (First Half Fiscal 2012) and 12 week period ended December 13, 2011 (Second Quarter Fiscal 2012) are presented as discontinued operations (see NOTE B - DISCONTINUED OPERATIONS).
Fiscal Year
The Company’s fiscal year is the 52 week (364 days) or 53 week (371 days) period ending on the Tuesday nearest to the last day of May. The first quarter of each fiscal year contains 16 weeks. Each of the last three quarters normally contains 12 weeks. As it becomes necessary every fifth or sixth year, an additional week is added to the fiscal calendar, which results in a 53 week year with a 13 week fourth quarter. The current fiscal year will end on Tuesday, May 28, 2013 (Fiscal Year 2013), a period of 52 weeks. The year that ended May 29, 2012 (Fiscal Year 2012) was also a 52 week year.
Use of Estimates and Critical Accounting Policies
The preparation of financial statements in conformity with US GAAP requires management to use estimates and assumptions to measure certain items that affect the amounts reported. These judgments are based on knowledge and experience about past and current events, and assumptions about future events. Although management believes its estimates are reasonable and adequate, future events affecting them may differ markedly from current judgment. Significant estimates and assumptions are used to measure self-insurance liabilities, deferred executive compensation obligations, net periodic pension cost and future pension obligations, income taxes, the carrying values of property held for sale and for long-lived assets including property and equipment, goodwill and other intangible assets. Management considers the following accounting policies to be critical accounting policies

10

Frisch’s Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Second Quarter Fiscal 2013, Ended December 11, 2012
 
NOTE A — ACCOUNTING POLICIES AND BASIS OF PRESENTATION (CONTINUED)


because the application of estimates to these policies requires management’s most difficult, subjective or complex judgments: self-insurance liabilities, net periodic pension cost and future pension obligations, income taxes and the carrying values of long-lived assets.
Impairment of Long-Lived Assets
Non-cash pretax impairment charges totaling $70,000 were recorded during the 28 weeks ended December 11, 2012 (in the First Quarter) to lower previous estimates of the fair values of two former Frisch's Big Boy restaurants. One of the two impaired restaurant properties ($47,000 of the $70,000 total impairment charge) was sold for its approximate fair value in October 2012 during the 12 weeks ended December 11, 2012. Impairment of long-lived assets, recorded as observable inputs (Level 2 under the fair value hierarchy), is summarized below (for the remaining restaurant property) for the 28 weeks ended December 11, 2012:
 
Fair Value Measurements Using
 
 
 
(in thousands)
28 weeks ended December 11, 2012
Level 1
 
Level 2
 
Level 3
 
Gains (Losses)
 
 
 
 
 
 
 
 
One former Frisch's Big Boy restaurant
$

 
$
259

 
$

 
$
(23
)
No impairment losses from continuing operations were recorded during the 28 week period ended December 13, 2011 (also see NOTE B - DISCONTINUED OPERATIONS).
 
Property Held for Sale
Surplus property that is no longer needed by the Company and for which the Company is committed to a plan to sell the property is classified as “Property held for sale” in the consolidated balance sheet. As of December 11, 2012, “Property held for sale” consisted of two former Frisch's Big Boy restaurants ($541,000), three former Golden Corral restaurants ($3,055,000) and eight other surplus pieces of land ($2,204,000). All of the surplus property is stated at the lower of its cost or fair value, less cost to sell. The stated value of any property for which a viable sales contract is pending at the balance sheet date - zero at December 11, 2012 - is reclassified to current assets.
Goodwill and Other Intangible Assets
 
An analysis of Goodwill and Other Intangible Assets follows:

 
December 11,
2012
 
May 29,
2012
 
(in thousands)
Goodwill
$
741

 
$
741

Other intangible assets not subject to amortization
22

 
22

Other intangible assets subject to amortization - net
13

 
14

Total goodwill and other intangible assets
$
776

 
$
777


New Store Opening Costs
New store opening costs consist of new employee training costs, the cost of a team to coordinate the opening and the cost of certain replaceable items such as uniforms and china. New store opening costs are charged as incurred to “Other operating costs” in the consolidated statement of earnings. New store opening costs for the 28 week periods ended December 11, 2012 and December 13, 2011 were $277,000 and $398,000 respectively. New Store opening costs for the 12 week periods ended December 11, 2012 and December 13, 2011 were $73,000 and $115,000 respectively.



11

Frisch’s Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Second Quarter Fiscal 2013, Ended December 11, 2012
 
NOTE A — ACCOUNTING POLICIES AND BASIS OF PRESENTATION (CONTINUED)


Benefit Plans
The executive officers of the Company and certain other “highly compensated employees” (HCE’s) are disqualified from participation in the Company's Employee 401(k) Savings Plan (the Salaried Savings Plan (defined contribution plan)). A non-qualified savings plan - Frisch’s Executive Savings Plan (FESP) - provides a means by which the HCE’s may continue to defer a portion of their compensation. FESP allows deferrals of up to 25 percent of a participant’s compensation into a choice of mutual funds or common stock of the Company.
Although the Company owns the mutual funds of the FESP until the retirement of the participants, the funds are invested at the direction of the participants. FESP assets are the principal component of “Other long-term assets” in the consolidated balance sheet. The common stock is a “phantom investment” that may be paid in actual shares or in cash upon retirement of the participant. The FESP liability to the participants is included in “Deferred compensation and other” long term obligations in the consolidated balance sheet.
The mutual funds and the corresponding liability to FESP participants were increased $157,000 (due to market gains) during the 28 week period ended December 11, 2012, and were decreased $285,000 (due to market losses) during the 28 week period ended December 13, 2011. The changes were minimal for both the 12 week periods ended December 11, 2012 and December 13, 2011. All of these changes were effected through offsetting investment income or loss and charges (market gains) or credits (market losses) to deferred compensation expense, which is included within administrative and advertising expense in the consolidated statement of earnings.
Self-Insurance
The Company self-insures its Ohio workers’ compensation claims up to $300,000 per claim. Initial self-insurance liabilities are accrued based on prior claims history, including an amount developed for incurred but unreported claims. Management performs a comprehensive review each fiscal quarter and adjusts the self-insurance liabilities as deemed appropriate based on claims experience, which continues to benefit from active claims management and post accident drug testing. Below is a summary of decreases (increases) to the self-insurance liabilities that were credited to or (charged against) earnings:

 
28 weeks ended
 
12 weeks ended
 
December 11, 2012
 
December 13, 2011
 
December 11, 2012
 
December 13, 2011
 
 
 
(in thousands)
 
 
 
$
131

 
$
(33
)
 
$
175

 
$
(12
)
 
 
 
 
 
 
 
 
Income Taxes
The effective tax rate was estimated at 33.8% percent for the 28 week period ended December 11, 2012 and 34.7% percent for the 12 week period ended December 11, 2012. The rate was approximately 23% percent in both the 28 week period ended December 13, 2011 and the 12 week period ended December 13, 2011. This year's higher rates are primarily due to changes in tax credits and a valuation allowance (VA) placed on certain state deferred taxes amounting to $81,000. Management periodically assesses the realization of net deferred tax assets based on historical, current and future (expected) operating results. A VA is recorded if management believes the Company's net deferred tax assets will not be realized. In addition, management monitors the realization of the VA and may consider its release in the future based on any positive evidence that may become available.
The Internal Revenue Service is currently examining the Company's tax return for Fiscal Year 2011, which was filed in February 2012.
New Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 was issued to amend Accounting Standards Codification Topic 220, “Comprehensive Income.” Under ASU 2011-05, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or

12

Frisch’s Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Second Quarter Fiscal 2013, Ended December 11, 2012
 
NOTE A — ACCOUNTING POLICIES AND BASIS OF PRESENTATION (CONTINUED)


in two separate but consecutive statements. In both choices, the presentation must show each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity, which has been the Company’s historical presentation. The amendment did not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.
ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” was issued in December 2011 to defer the effective date of the guidance in ASU 2011-05 relating to the presentation of reclassification adjustments. All other requirements of ASU 2011-05 are not affected by the issuance of ASU 2011-12, including the requirement to report income either in a single continuous financial statement or in two separate but consecutive financial statements, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted the provisions of ASU 2011-05 on May 30, 2012 (the first day of the fiscal year that will end May 28, 2013). See the Consolidated Statement of Comprehensive Income that immediately follows the Consolidated Statement of Earnings in the Consolidated Financial Statements.
The Company reviewed all other significant newly issued accounting pronouncements and concluded that they are either not applicable to the Company’s business or that no material effect is expected on the financial statements as a result of future adoption.

NOTE B - DISCONTINUED OPERATIONS

On May 16, 2012, the Company closed on the sale of its Golden Corral restaurant operations to Golden Corral Corporation, from which the Company had previously been granted licenses to operate the 29 restaurants that comprised the assets that were sold in the transaction. A pretax loss on the sale of $5,590,000 was recorded in Fiscal Year 2012.

The Company had previously closed six under performing Golden Corral restaurants in August 2011. As a result, a non-cash pretax asset impairment charge (with related closing costs) of $4,000,000 was recorded during the 28 weeks ended December 13, 2011 - zero during the 12 week period ended December 13, 2011. The impairment charge lowered the carrying values of the six restaurant properties (all owned in fee simple title) to their estimated fair values, which in the aggregate amounted to approximately $6,909,000. The total impairment charge included $69,000 for impaired intangible assets and $180,000 for certain other costs.

The impairments of long lived assets were recorded as significant unobservable inputs (level 3 under the fair value hierarchy), which are summarized below:

 
Fair Value Measurements Using
 
 
 
(in thousands)
28 weeks ended December 13, 2011
Level 1
 
Level 2
 
Level 3
 
Gains (Losses)
 
 
 
 
 
 
 
 
Six former Golden Corral restaurants
$

 
$

 
$
6,909

 
$
(4,000
)

Additional non-cash pretax impairment charges of $388,000 were subsequently recorded during Fiscal Year 2012: a) $94,000 in the third quarter ended March 6, 2012 based on a contract that was accepted for less than the original estimate of fair value and b) $294,000 in the fourth quarter to reflect revised opinions of value from real estate brokers.












13

Frisch’s Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Second Quarter Fiscal 2013, Ended December 11, 2012

NOTE B - DISCONTINUED OPERATIONS (CONTINUED)


Results of Golden Corral for the 28 and 12 weeks ended December 13, 2011 are presented as discontinued operations in the consolidated financial statements. Income tax expense presented in discontinued operations in the 28 weeks ended the December 11, 2012 represents adjustments to tax related balance sheet accounts recorded in the First Quarter Fiscal 2013.
 
28 weeks ended
 
12 weeks ended
 
December 11, 2012
 
December 13, 2011
 
December 11, 2012
 
December 13, 2011
 
(in thousands)
Sales
$

 
$
51,171

 
$

 
$
20,804

 
 
 
 
 
 
 
 
Food and paper

 
19,613

 

 
7,994

Payroll and related

 
14,923

 

 
6,031

Other operating costs

 
13,724

 

 
5,490

 

 
48,260

 

 
19,515

 
 
 
 
 
 
 
 
Gross profit

 
2,911

 

 
1,289

 
 
 
 
 
 
 
 
Administrative and advertising

 
1,585

 

 
658

Impairment of long-lived assets

 
4,000

 

 

 
 
 
 
 
 
 
 
(Loss) earnings from discontinued operations before income taxes

 
(2,674
)
 

 
631

 
 
 
 
 
 
 
 
Income tax expense (benefit)
158

 
(669
)
 

 
(98
)
 
 
 
 
 
 
 
 
(Loss) earnings from discontinued operations, net of tax
$
(158
)
 
$
(2,005
)
 
$

 
$
729



























14

Frisch’s Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Second Quarter Fiscal 2013, Ended December 11, 2012

NOTE B - DISCONTINUED OPERATIONS (CONTINUED)


Assets and liabilities related to discontinued operations consisted of:
 
December 11, 2012

 
May 29, 2012

 
(in thousands)
Assets
 
 
 
Cash and equivalents
$

 
$

Trade and other receivables
115

 
190

Inventories

 

Prepaid expenses and sundry deposits

 

Prepaid and deferred income taxes

 

Total current assets
115

 
190

 
 
 
 
Net property and equipment

 

Other intangible assets

 

Assets of discontinued operations
$
115

 
$
190

 
 
 
 
Liabilities
 
 
 
Accounts payable
$
37

 
$
47

Accrued expenses
149

 
636

Total current liabilities
186

 
683

 
 
 
 
Deferred other

 

Deferred income taxes

 

Liabilities of discontinued operations
$
186

 
$
683


In addition, three of the six Golden Corral restaurants that closed in August 2011 had yet to be sold as of December 11, 2012. The aggregate fair value of the three restaurants ($3,055,000) is carried in the consolidated balance sheet as "Property held for sale" as of December 11, 2012 (four restaurants - $4,136,000 at May 29, 2012). (See "Property Held for Sale" in NOTE A - ACCOUNTING POLICIES AND BASIS OF PRESENTATION.)

 
NOTE C — LONG-TERM DEBT
 
December 11, 2012
 
May 29, 2012
 
Payable
within
one year
 
Payable
after
one  year
 
Payable
within
one year
 
Payable
after
one  year
 
(in thousands)
Construction Loan —
 
 
 
 
 
 
 
Construction Phase
$

 
$

 
$

 
$

Term Loans
4,407

 
10,751

 
5,423

 
13,241

Revolving Loan

 

 

 

Stock Repurchase Loan
135

 
683

 
132

 
762

2009 Term Loan
967

 

 
1,038

 
443

 
$
5,509

 
$
11,434

 
$
6,593

 
$
14,446




15

Frisch’s Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Second Quarter Fiscal 2013, Ended December 11, 2012
 
NOTE C — LONG-TERM DEBT (CONTINUED)



The portion payable after one year matures as follows:
 
December 11,
2012
 
May 29,
2012
 
(in thousands)
Annual period ending in 2014
$
4,128

 
$
4,846

2015
3,141

 
3,652

2016
1,914

 
2,721

2017
1,483

 
1,654

2018
741

 
1,235

Subsequent to 2018
27

 
338

 
$
11,434

 
$
14,446

The Company has four unsecured loans in place, all with the same lending institution. The Second Amended and Restated Loan Agreement (2012 Loan Agreement), under which the Company may not assume or permit to exist any other indebtedness, governs the four loans. The 2012 Loan Agreement (effective April 10, 2012) amended and restated the prior loan agreement (2010 Loan Agreement). The 2012 Loan Agreement renewed credit facilities for the Construction Loan and the Revolving Loan, permitting additional borrowing through October 15, 2013. The 2012 Loan Agreement did not renew borrowing capacity under the Stock Repurchase Loan, but it continues to govern the prior amount borrowed to finance stock that was repurchased, as well as a separate 2009 Term Loan.
Construction Loan
The Construction Loan is an unsecured draw credit line intended to finance construction and opening and/or the refurbishing of restaurant operations. The 2012 Loan Agreement made $15,000,000 available to be borrowed for its intended purpose when it went into effect in April 2012. No funds have been borrowed since the 2012 Loan Agreement went into effect.
As of December 11, 2012, the aggregate outstanding balance under the Construction Loan was $15,158,000, which consisted entirely of Term Loans; no balance was in the Construction Phase awaiting conversion. All of the outstanding Term Loans are subject to fixed interest rates, the weighted average of which is 4.84% percent, all of which are being repaid in 84 equal monthly installments of principal and interest aggregating $468,000, expiring in various periods ranging from January 2013 through February 2019.
Any outstanding amount in the Construction Phase that has not been converted into a Term Loan shall mature and be payable in full on October 15, 2013, unless the 2012 Loan Agreement is renewed sooner.
Revolving Loan
The Revolving Loan provides an unsecured credit line that allows for borrowing of up to $5,000,000 to fund temporary working capital needs. Amounts repaid may be re-borrowed so long as the amount outstanding does not exceed $5,000,000 at any time. The Revolving Loan, none of which was outstanding as of December 11, 2012, will mature and be payable in full on October 15, 2013, unless the 2012 Loan Agreement is renewed sooner. It is subject to a 30 consecutive day out-of-debt period each fiscal year.
Stock Repurchase Loan
The unsecured Stock Repurchase Loan originated in July 2011 when $1,000,000 that had been borrowed earlier (to finance repurchases of the Company's stock) was converted to a Term Loan. The Stock Repurchase Loan, the outstanding balance of which was $818,000 as of December 11, 2012, requires 84 equal installments of $13,000 including principal and interest at a fixed 3.56% percent interest rate, which matures in July 2018.
2009 Term Loan
The unsecured 2009 Term Loan originated in September 2009 when $4,000,000 was borrowed to fund the acquisition of five Frisch's Big Boy restaurants from the landlord of the facilities. The 2009 Term Loan, the outstanding balance of which was $967,000

16

Frisch’s Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Second Quarter Fiscal 2013, Ended December 11, 2012
 
NOTE C — LONG-TERM DEBT (CONTINUED)


as of December 11, 2012, requires 48 monthly installments of $89,000 including principal and interest at a fixed 3.47% percent interest rate. The final payment of the loan is due October 21, 2013.
Loan Covenants
The 2012 Loan Agreement contains covenants relating to cash flows, debt levels, lease expense, asset dispositions, investments and restrictions on pledging certain restaurant operating assets. The Company was in compliance with all loan covenants as of December 11, 2012. Compensating balances are not required under the terms of the 2012 Loan Agreement.
Fair Values
The fair values of the fixed rate Term Loans within the Construction Loan as shown in the following table are based on fixed rates that would have been available at December 11, 2012 if the loans could have been refinanced with terms similar to the remaining terms under the present Term Loans. The carrying value of substantially all other long-term debt approximates its fair value.
 
Carrying Value
 
Fair Value
 
(in thousands)
Term Loans under the Construction Loan
$
15,158

 
$
15,826



NOTE D - ACCRUED EXPENSES

Accrued expenses in the consolidated balance sheet consisted of the following:

 
December 11, 2012
 
May 29, 2012
 
(in thousands)
Salaries, wages and related expenses
$
5,598

 
$
4,976

Accrued property taxes
1,721

 
1,787

Other accrued expenses
647

 
579

Total accrued expenses
$
7,966

 
$
7,342


NOTE E — SHAREHOLDERS' EQUITY/ CAPITAL STOCK
The Company has three equity compensation plans adopted respectively in 1993, 2003 and 2012.
2003 and 2012 Stock Option and Incentive Plans
Shareholders approved the 2012 Stock Option and Incentive Plan (2012 Plan) in October 2012. The 2012 Plan made material, substantive changes to the 2003 Stock Option and Incentive Plan (as amended) (collectively the 2003 Plan), as reflected in the 2012 Plan.
Under the 2003 Plan, up to 800,000 shares were originally authorized for awards. Shareholder approval of the 2012 Plan canceled 483,410 shares that remained available to be awarded under the 2003 Plan. The authorization under the 2012 Plan has been set at 500,000 shares that may be awarded (subject, however, to proportionate and equitable adjustments determined by the Compensation Committee of the Board of Directors (the Committee) as deemed necessary following the event of any equity restructuring that may occur). The 2003 Plan limited the amount that can be awarded to an individual during a fiscal year to 80,000 shares. The 2012 Plan reduced the annual limit to 50,000 shares, but retained the maximum annual dollar limit of $1,000,000 for awards denominated in dollars, granted to any one individual during any fiscal year if the awards are intended to qualify as performance based compensation. No awards were permitted to be granted under the 2003 Plan after the tenth anniversary of its approval (October 6, 2013). The 2012 Plan will remain in effect until all shares subject to the Plan have been awarded or issued according to the Plan's provisions, unless terminated earlier by the Board of Directors.

17

Frisch’s Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Second Quarter Fiscal 2013, Ended December 11, 2012
 
NOTE E — SHAREHOLDERS' EQUITY/CAPITAL STOCK (CONTINUED)

All other provisions of the 2012 Plan mirror those of the 2003 Plan, including continuance to provide for several forms of awards including stock options, stock appreciation rights, stock awards including restricted and unrestricted awards of stock, and performance awards. Employees of the Company and non-employee members of the Board of Directors are eligible to be selected to participate in the 2012 Plan. Participation is based on selection by the Committee.
Options to purchase shares of the Company’s common stock (stock options) permit the holder to purchase a fixed number of shares at a fixed price. When options are granted, the Committee determines the number of shares subject to the option, the term of the option, which may not exceed 10 years, the time or times when the option will become exercisable and the price per share that a participant must pay to exercise the option. No option will be granted with an exercise price that is less than 100 percent of fair market value on the date of the grant. The option price and obligatory withholding taxes may be paid pursuant to a “cashless” exercise/sale procedure involving the simultaneous sale by a broker of shares covered by the option.
Stock appreciation rights (SAR’s) are rights to receive payment, in cash, shares of common stock or a combination of the two, equal to the excess of (1) the fair market value of a share of common stock on the date of exercise over (2) the price per share of common stock established in connection with the grant of the SAR (the reference price). The reference price must be at least 100 percent of the common stock’s fair market value on the date the SAR is granted. SAR’s may be granted by the Committee in its discretion to any participant, and may have terms no longer than 10 years.
Stock awards are grants of shares of common stock that may be restricted (subject to a holding period or other conditions) or unrestricted. The Committee determines the amounts, vesting, if any, terms and conditions of the awards, including the price to be paid, if any, for restricted awards and any contingencies related to the attainment of specified performance goals or continued employment or service.
The Committee may also grant performance awards to participants. Performance awards are the right to receive cash, common stock or both, at the end of a specified performance period, subject to satisfaction of the performance criteria and any vesting conditions established for the award.
Restricted Stock Awards under the 2012 Plan
On October 3, 2012, each non-employee member of the Board of Directors was granted a restricted stock award under the 2012 Plan equivalent to $40,000 in shares of the Company's common stock. The aggregate award amounted to 14,245 shares granted, which resulted in 2,035 shares being issued to each non-employee director, based on the October 3, 2012 market value of the Company's stock. Pursuant to the terms of his employment contract, on October 3, 2012, the CEO was granted a restricted stock award in the same amount (2,035 shares) and subject to the same conditions as the restricted stock granted to non-employee directors on that same day.
These restricted stock awards were re-issued from the Company’s treasury and vest in full on the first anniversary of the grant date. Full voting and dividend rights are provided prior to vesting. Vested shares must be held until board service ends, except that enough shares may be sold to satisfy tax obligations attributable to the grant.
No other awards — stock options, stock appreciation rights, stock awards including unrestricted awards of stock, or performance awards — have been granted under the 2012 Plan.
Unrestricted Stock Awards under the 2003 Plan
On June 13, 2012, the Committee granted unrestricted stock awards to the executive officers (excluding the CEO) and other key employees. Pursuant to the awards, 4,850 shares of the Company's common stock were re-issued from the Company's treasury. The total value of the awards amounted to $127,000, for which the Company recorded a pretax charge against administrative and advertising expense in the consolidated statement of earnings during the 28 week period ended December 11, 2012 (during the First Quarter Fiscal 2013). In connection with the awards, 1,349 shares were immediately surrendered to the Company's treasury to cover the withholding tax obligation on the compensation.
On June 15, 2011, the Committee granted an unrestricted stock award to the CEO. Pursuant to the award, 17,364 shares of the Company’s common stock were re-issued to the CEO from the Company’s treasury. The total value of the award amounted to $371,000, for which the Company recorded a pretax charge against administrative and advertising expense in the consolidated statement of earnings during the 28 week period ended December 13, 2011 (during the First Quarter Fiscal 2012). In connection with the award, the CEO immediately surrendered 7,998 shares to the Company’s treasury to cover the withholding tax obligation on the compensation. Also on June 15, 2011, an option to purchase 40,000 shares of the Company’s common stock that belonged to the CEO was terminated. The option was originally granted to the CEO on July 11, 2001 at a strike price of $13.70 per share.

18

Frisch’s Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Second Quarter Fiscal 2013, Ended December 11, 2012
 
NOTE E — SHAREHOLDERS' EQUITY/CAPITAL STOCK (CONTINUED)

Restricted Stock Awards under the 2003 Plan
Each non-employee member of the Board of Directors was granted a restricted stock award on October 5, 2011 equivalent to $40,000 in shares of the Company’s common stock. The aggregate award amounted to 14,560 shares granted, which resulted in 2,080 shares being issued to each non-employee director, based upon the October 5, 2011 market value of the Company’s common stock. Pursuant to the terms of his employment contract, the CEO was granted a restricted stock award on October 5, 2011 in the same amount (2,080 shares) and subject to the same conditions as the restricted stock granted to non-employee directors on that day. In connection with these awards, certain members of the Board of Directors surrendered a total of 1,456 shares to the Company's treasury on the October 5, 2012 vesting date to satisfy their tax obligations.
On June 15, 2011, the Committee granted restricted stock awards to the executive officers (excluding the CEO) and other key employees. Pursuant to the awards, 7,141 shares were re-issued from the Company's treasury. The aggregate award amounted to $150,000, based on the June 15, 2011 market value of the Company's stock. In connection with these awards, a total of 1,342 shares were surrendered to the Company's treasury on the June 15, 2012 vesting date to cover withholding tax obligations.
All restricted stock awards under the 2003 Plan were re-issued from the Company’s treasury and vested in full on the first anniversary of the grant date. Full voting and dividend rights were provided prior to vesting. Vested shares must be held until board service or employment ends, except that enough shares may be sold to satisfy tax obligations attributable to the grant.
Performance Awards under the 2003 Plan
Under the CEO's three year employment agreement that was effective May 30, 2012 (the first day of Fiscal Year 2013), the Committee will consider the CEO for the grant of a Performance Award as permitted by the 2003 Plan. The Committee granted a Performance Award to the CEO on May 30, 2012, which is intended to govern the CEO's incentive compensation for Fiscal Year 2013, if any, based on the achievement of certain goals.
Stock Option Awards under the 2003 Plan
As of December 11, 2012, options to purchase 333,250 shares had been cumulatively granted under the Plan. No stock options were awarded during the 28 week period ended December 11, 2012. There were 68,169 options outstanding as of December 11, 2012.

Final Reconciliation of Shares Awarded under the 2003 Plan

 
No. of
shares

Original authorization
800,000

Stock options cumulatively granted
(333,250
)
Options cumulatively forfeited
74,253

 
541,003

Unrestricted stock awarded
(22,214
)
Restricted stock cumulatively awarded
(35,817
)
Restricted stock cumulatively forfeited
438

Authorization canceled
483,410

1993 Stock Option Plan
Approved by the shareholders in October 1993, the 1993 Stock Option Plan (1993 Plan) authorized the grant of stock options for up to 562,432 shares (as adjusted for subsequent changes in capitalization from the original authorization of 500,000 shares) of the common stock of the Company for a 10 year period beginning in May 1994.
Options to purchase 556,228 shares were cumulatively granted under the 1993 Plan before granting authority expired on October 4, 2008. As of December 11, 2012, 7,834 shares granted remained outstanding. All outstanding options under the 1993 Plan were granted at fair market value and expire 10 years from the date of grant. Final expirations will occur in June 2014.

19

Frisch’s Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Second Quarter Fiscal 2013, Ended December 11, 2012
 
NOTE E — SHAREHOLDERS' EQUITY/CAPITAL STOCK (CONTINUED)

Outstanding and Exercisable Options
The changes in outstanding and exercisable options under both the 1993 Plan and the 2003 Plan are shown below as of December 11, 2012:
 
No. of
shares
 
Weighted avg.
price per share
 
Weighted avg.
Remaining
Contractual Term
 
Aggregate
Intrinsic Value
(in thousands)
Outstanding at beginning of year
399,586

 
$
23.96

 
 
 
 
Granted

 
$

 
 
 
 
Exercised
(320,417
)
 
$
23.31

 
 
 
 
Forfeited or expired
(3,166
)
 
$
22.94

 
 
 
 
Outstanding at end of quarter
76,003

 
$
18.25

 
4.66
years 
$
183

Exercisable at end of quarter
67,834

 
$
19.11

 
4.32
years 
$
121

 
The intrinsic value of stock options exercised during the 28 weeks ended December 11, 2012 and December 13, 2011 was $2,779,000 and $16,000, respectively. Options exercised during the 28 weeks ended December 11, 2012 included 136,000 by the CEO, the intrinsic value of which amounted to $1,278,000. Excess tax benefits of $364,000 were recorded in additional paid in capital from the exercise of stock options during the 28 weeks ended December 11, 2012. All shares exercised during the 28 weeks ended December 11, 2012 were re-issued from the Company's treasury.
Stock options outstanding and exercisable as of December 11, 2012 for the 1993 Plan and the 2003 Plan are shown below:
Range of Exercise Prices per Share
No. of
shares
 
Weighted average
price per share
 
Weighted average
remaining life in years
Outstanding:
 
 
 
 
 
$10.05 to $15.90
27,669

 
$
13.19

 
4.70
$15.91 to $24.20
41,500

 
$
19.66

 
5.16
$24.21 to $30.13
6,834

 
$
30.13

 
1.50
$10.05 to $30.13
76,003

 
$
18.25

 
4.66
Exercisable:
 
 
 
 
 
$10.05 to $15.90
19,500

 
$
14.08

 
3.53
$15.91 to $24.20
41,500

 
$
19.66

 
5.16
$24.21 to $30.13
6,834

 
$
30.13

 
1.50
$10.05 to $30.13
67,834

 
$
19.11

 
4.32
As a result of a change in the capitalization of the Company resulting from a special $9.50 per share dividend (see Dividends described elsewhere in NOTE E — SHAREHOLDERS' EQUITY/ CAPITAL STOCK), the Compensation Committee of the Board of Directors took action on August 22, 2012 to adjust downward the strike prices for outstanding options granted under the 2003 Plan (as provided for in the 2003 Plan) by $9.50 for each option, effective September 17, 2012. Outstanding options granted under the 1993 Plan were not affected by this action, as the 1993 Plan does not require or provide for such an action. No additional compensation cost was required to be recognized as a result of the modification.






20

Frisch’s Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Second Quarter Fiscal 2013, Ended December 11, 2012
 
NOTE E — SHAREHOLDERS' EQUITY/CAPITAL STOCK (CONTINUED)

Restricted Stock Awards
The changes in restricted stock awards are shown below as of December 11, 2012:
 
No. of
shares
 
Weighted average
price per share
Non-vested at beginning of year
22,277

 
$
19.69

Awarded
16,280

 
$
19.65

Vested
(22,277
)
 
$
19.69

Forfeited

 
$

Non-vested at end of quarter
16,280

 
$
19.65

Employee Stock Purchase Plan
Shareholders approved the Employee Stock Option Plan (elsewhere referred to as Employee Stock Purchase Plan) in October 1998. The Plan provides employees who have completed 90 days of continuous service with an opportunity to purchase shares of the Company’s common stock through payroll deduction. Immediately following the end of each semi-annual offering period, participant account balances are used to purchase shares of stock measured at 85% percent of the fair market value of shares at the beginning of the offering period or at the end of the offering period, whichever is lower. The Plan authorizes a maximum of 1,000,000 shares that may be purchased on the open market or from the Company’s treasury. As of October 31, 2012 (latest available data), 190,589 shares had been cumulatively purchased through the Plan. Shares purchased through the Plan are held by the Plan’s custodian until withdrawn or distributed. As of October 31, 2012, the custodian held 50,443 shares on behalf of employees.
 
Frisch’s Executive Savings Plan
Common shares totaling 58,492 (as adjusted for subsequent changes in capitalization from the original authorization of 50,000 shares) were reserved for issuance under the non-qualified Frisch’s Executive Savings Plan (FESP) (see Benefit Plans in NOTE A - ACCOUNTING POLICIES AND BASIS OF PRESENTATION) when it was established in 1993. As of December 11, 2012, 38,553 shares remained in the FESP reserve, including 20,149 shares allocated but not issued to participants.
Other Outstanding Options, Warrants or Rights
There are no other outstanding options, warrants or rights.
Treasury Stock
On July 25, 2012, the Board of Directors authorized the Company to purchase over a three year period, on the open market and in privately negotiated transactions, up to 450,000 shares of its common stock representing approximately 9 percent of the Company's total outstanding shares. During the 28 week period ended December 11, 2012 (all in the First Quarter Fiscal 2013), the Company acquired 212,929 shares under the program at a cost of $6,708,000, which includes 32,000 shares that were beneficially owned by the Chief Executive Officer and 180,929 shares re-acquired in connection with the exercise of "cashless" stock options that normally settle through a broker on the open market.
Separate from the repurchase program, the Company’s treasury acquired 5,227 (2,536 in the 12 weeks ended December 11, 2012) shares of its common stock during the 28 week period ended December 11, 2012 at a cost of $119,000 ($47,000 in the 12 weeks ended December 12, 2012) to cover the withholding tax obligations in connection with restricted and unrestricted stock awards.
Dividends
Regular quarterly cash dividends paid to shareholders during the 28 week period ended December 11, 2012 amounted to $1,598,000 or $0.32 per share. In addition, a $0.16 per share dividend was declared on November 30, 2012. Its payment of $810,000 on December 21, 2012 (included in accounts payable at December 11, 2012) was the 208th consecutive quarterly cash dividend (a period of 52 years) paid by the Company.

21

Frisch’s Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Second Quarter Fiscal 2013, Ended December 11, 2012
 
NOTE E — SHAREHOLDERS' EQUITY/CAPITAL STOCK (CONTINUED)

On July 25, 2012, the Board of Directors declared a special one-time cash dividend of $9.50 per share payable September 14, 2012 to shareholders of record on August 31, 2012. The total for the special dividend that was paid on September 14, 2012 amounted to $47,963,000, which was based on 5,048,711 shares outstanding on August 31, 2012.
Earnings Per Share
Basic earnings per share (EPS) calculations are based on the weighted average number of outstanding common shares during the period presented. Diluted EPS includes the effect of common stock equivalents, which assumes the exercise and conversion of dilutive stock options.
 
Used to Calculate Basic EPS
 
Stock
equivalents
 
Used to Calculate Diluted EPS
28 weeks ended:
Weighted average
shares outstanding
 
Weighted average
shares outstanding
 
 
 
 
 
 
December 11, 2012
5,003,972

 
24,243

 
5,028,215

December 13, 2011
4,931,154

 
7,819

 
4,938,973

 
 
 
 
 
 
12 weeks ended:
 
 
 
 
 
December 11, 2012
5,060,528

 
9,961

 
5,070,489

December 13, 2011
4,934,464

 
2,178

 
4,936,642

 
 
 
 
 
 

Excluded from the calculations above (because the effect was anti-dilutive), were stock options to purchase 7,000 shares during the 28 week period ended December 11, 2012 and 284,000 during the 28 week period ended December 13, 2011. Stock options to purchase 36,000 shares during the 12 week period ended December 11, 2012 and 342,000 the 12 weeks ended December 13, 2011 were also excluded from the calculations above because the effect was anti-dilutive.
Share-Based Payment (Compensation Cost)
The fair value of restricted stock issued and stock options granted is recognized as compensation cost on a straight-line basis over the vesting periods of the awards. The fair value of unrestricted stock is recognized entirely during the period granted. Compensation costs arising from all share-based payments are charged to administrative and advertising expense in the consolidated statement of earnings.
 
28 weeks ended
 
12 weeks ended
 
December 11,
2012
 
December 13,
2011
 
December 11,
2012
 
December 13,
2011
 
 
 
 
 
 
 
 
Stock options granted
$
28

 
$
90

 
$
14

 
$
40

Restricted stock issued
172

 
223

 
74

 
95

Unrestricted stock issued
127

 
371

 

 

Share-based compensation cost, pretax
327

 
684

 
88

 
135

Tax benefit
(111
)
 
(233
)
 
(30
)
 
(46
)
Share-based compensation cost, net of tax
$
216

 
$
451

 
$
58

 
$
89

Effect on basic earnings per share
$
0.04

 
$
0.09

 
$
0.01

 
$
0.02

Effect on diluted earnings per share
$
0.04

 
$
0.09

 
$
0.01

 
$
0.02

As of December 11, 2012, there was $27,000 of total unrecognized pretax compensation cost related to non-vested stock options, which is expected to be recognized over a weighted average period of 0.4 years. Unrecognized pretax compensation cost related to restricted stock awards amounted to $272,000 as of December 11, 2012, which is expected to be recognized over a weighted average period of 0.85 years.

22

Frisch’s Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Second Quarter Fiscal 2013, Ended December 11, 2012
 
NOTE E — SHAREHOLDERS' EQUITY/CAPITAL STOCK (CONTINUED)

Compensation cost is also recognized in connection with the Company’s Employee Stock Purchase Plan (described elsewhere in NOTE E — SHAREHOLDERS' EQUITY/ CAPITAL STOCK). Compensation costs related to the Employee Stock Purchase Plan are determined at the end of each semi-annual offering period – October 31 and April 30, which amounted to $122,000 and $24,000 respectively, during the 28 week periods ended December 11, 2012 and December 13, 2011.
NOTE F — PENSION PLANS
The Company has historically sponsored two qualified defined benefit pension plans (DB Plans) plus an unfunded non-qualified Supplemental Executive Retirement Plan (SERP) for “highly compensated employees” (HCE’s). A merger of the DB Plans was completed on May 29, 2012. Net periodic pension cost for the retirement plans is shown in the table that follows:
 
 
28 weeks ended
 
12 weeks ended
Net periodic pension cost components
 
December 11, 2012
 
December 13, 2011
 
December 11, 2012
 
December 13, 2011
 
 
(in thousands)
Service cost
 
$
971

 
$
1,034

 
$
416

 
$
443

Interest cost
 
934

 
1,009

 
401

 
433

Expected return on plan assets
 
(1,075
)
 
(1,112
)
 
(461
)
 
(477
)
Amortization of prior service (credit) cost
 
(4
)
 
1

 
(2
)
 

Recognized net actuarial loss
 
922

 
471

 
395

 
202

Settlement loss
 

 
80

 

 
34

Net periodic pension cost (a)
 
$
1,748

 
$
1,483

 
$
749

 
$
635

 
 
 
 
 
 
 
 
 
(a) Amount for Golden Corral included in discontinued operations
 

 
$
250

 

 
$
108

 
 
 
 
 
 
 
 
 
Weighted average discount rate
 
4.25
%
 
5.25
%
 
4.25
%
 
5.25
%
Weighted average rate of compensation increase
 
4.00
%
 
4.00
%
 
4.00
%
 
4.00
%
Weighted average expected long-term rate of return on plan assets
 
7.50
%
 
7.50
%
 
7.50
%
 
7.50
%
Net periodic pension cost for fiscal year 2013 is currently expected in the range of $3,200,000 to $3,300,000. Net periodic pension cost for fiscal year 2012 was $2,746,000. Most of the anticipated increase in net periodic pension cost is due to the reduction of 100 basis points in the discount rate. Approximately $135,000 is added to annualized net periodic pension cost for each decrement of 25 basis points in the discount rate.
The preliminary minimum required contribution to the merged DB Plan for the plan year ending May 31, 2013 is currently projected to be $1,800,000. The Company currently anticipates contributing up to $2,394,000 over the course of fiscal year 2013, including $875,000 that was contributed during 28 weeks ended December 11, 2012. Obligations to participants in the SERP are satisfied in the form of a lump sum distribution upon retirement of the participants. No lump sums were paid from the SERP during the 28 weeks ended December 11, 2012.

Future funding of the DB Plan largely depends upon the performance of investments that are held in trusts that have been established for the plan. Equity securities comprise 70 percent of the target allocation of plan assets. Although the market for equity securities has made significant rebounds, the market declines experienced in fiscal year 2009 continue to adversely affect funding requirements, and combined with low bond rates will likely require the continued recognition of significantly higher net periodic pension costs than had been incurred prior to 2009.
The “Underfunded pension obligation” included in “Long-Term Obligations” in the consolidated balance sheet represents projected benefit obligations in excess of the fair value of plan assets. The change in underfunded status is re-measured at the end of each fiscal year, effected through an increase or decrease in “Accumulated other comprehensive loss” in the equity section of the consolidated balance sheet. The projected benefit obligation, which includes a projection of future salary increases, was measured at the end of the fiscal year 2012 using a weighted average discount rate of 4.25 percent, which was a reduction of 100 basis points from the end of the prior year. The projected benefit obligation increases approximately $1,250,000 for each decrease of 25 basis points in the discount rate.

23

Frisch’s Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Second Quarter Fiscal 2013, Ended December 11, 2012

NOTE F — PENSION PLANS (CONTINUED)

A Non Deferred Cash Balance Plan (NDCBP) has been in place since 2000. The NDCBP provides comparable retirement type benefits to the HCE’s in lieu of future accruals under the DB Plan and the SERP. The comparable benefit amount is determined each year and converted to a lump sum (reported as W-2 compensation) from which taxes are withheld and the net amount is deposited into the HCE’s individual trust account. Compensation expense (not included in the net periodic pension cost described above) relating to the NDCBP is equal to amounts contributed, or expected to be contributed, to the trusts established for the benefits of certain HCE's - $365,000 and $276,000 respectively, for the 28 weeks ended December 11, 2012 and December 13, 2011, and was $220,000 and $132,000 respectively, for the 12 weeks ended December 11, 2012 and December 13, 2011. No NDCBP expense was associated with Golden Corral in the prior year. The total NDCBP expense as described above also includes accruals for additional required contributions that are due when the present value of lost benefits under the DB Plan and the SERP exceeds the value of the assets in the HCE's trust accounts when a participating HCE retires or is otherwise separated from service with the Company. The additional accruals included in the NDCBP expense amounted to $172,000 and $77,000 respectively, during the 28 week periods ended December 11, 2012 and December 13, 2011, and was $138,000 and $46,000 respectively during the 12 week periods ended December 11, 2012 and December 13, 2011.
In addition, the incentive compensation provisions of the President and Chief Executive Officer's (CEO) employment agreement calls for additional annual contributions to be made to the trust established for the benefit of the CEO under the NDCBP when certain levels of annual pretax earnings are achieved.
The Company sponsors two 401(k) defined contribution plans. In the 28 week periods ended December 11, 2012 and December 13, 2011, matching contributions to the 401(k) plans amounted to $134,000 and $152,000 (including $24,000 for Golden Corral reported in discontinued operations) respectively, and were $57,000 and $68,000 (including $11,000 for Golden Corral reported in discontinued operations), in the 12 week periods ended December 11, 2012 and December 13, 2011.
A non-qualified Executive Savings Plan (FESP) is in place for certain HCE’s who have been disqualified from participation in the 401(k) plans (see Benefit Plans in NOTE A - ACCOUNTING POLICIES AND BASIS OF PRESENTATION). In the 28 weeks ended December 11, 2012 and December 13, 2011, matching contributions to FESP were $18,000 and $19,000 respectively, and were $6,000 and $7,000 respectively, during the 12 weeks ended December 11, 2012 and December 13, 2011.
The Company does not sponsor post retirement health care plans.

NOTE G — LITIGATION AND CONTINGENCIES
Litigation
Employees, customers and other parties bring various claims and suits against the Company from time to time in the ordinary course of business. Claims from customers are covered by general liability insurance, but subject to coverage limits. Exposure to loss contingencies from pending or threatened litigation is continually evaluated by management, which presently believes that the resolution of claims currently outstanding, whether or not covered by insurance, will not result in a material adverse effect upon the Company's earnings, cash flows or financial position. Management presently believes that adequate provisions for expected losses not covered by insurance are already included in the consolidated financial statements.
On September 18, 2012, a former employee (plaintiff) filed a collective action under the Fair Labor Standards Act and class action under the Ohio Minimum Fair Wage Standards Act for allegations of off-the-clock work, unpaid overtime, and minimum wage violations as a result of alleged improper application of the Tip Credit. As part of the collective action, the plaintiff seeks recovery for all individuals who worked as a server at any Frisch's Big Boy restaurant operated by the Company during the three year period, September 18, 2009 through September 18, 2012. The class action is limited to servers who worked for the Company at Frisch's Big Boy restaurants located in Ohio during the last three years. On December 4, 2012, the Company filed a motion to dismiss and compel arbitration. The motion is expected to be decided by the Court by the end of January 2013. The Company intends to continue defending the matter vigorously, including efforts to certify the class.
If successful on these claims, the plaintiff and any class members would be entitled to unpaid wages, liquidated damages, and attorneys' fees. Although employee unfair practice claims are not covered by insurance, no loss provision has been made in the consolidated financial statements for amounts that would be payable by the Company as management has not fully evaluated the merits of the claim.
Other Contingencies
The Company self-insures a significant portion of expected losses under its workers’ compensation program in the state of Ohio. Insurance coverage is purchased from an insurance company for individual claims that may exceed $300,000 (see Self Insurance

24

Frisch’s Restaurants, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Second Quarter Fiscal 2013, Ended December 11, 2012

NOTE G — LITIGATION AND CONTINGENCIES (CONTINUED)



in NOTE A - ACCOUNTING POLICIES AND BASIS OF PRESENTATION). Insurance coverage is maintained for various levels of casualty and general and product liability.
Outstanding letters of credit maintained by the Company totaled $100,000 as of December 11, 2012.
As of December 11, 2012, the Company operated 14 restaurants on non-owned properties, including one lease that provides for contingent rental payments based on a percentage of the leased restaurant’s sales in excess of a fixed amount.
The Company remains contingently liable under certain ground lease agreements relating to land on which seven of the Company's former Golden Corral restaurant operations are situated. The seven restaurant operations were sold to Golden Corral Corporation (GCC) in May 2012 (See NOTE B - DISCONTINUED OPERATIONS), at which time the seven operating leases were simultaneously assigned to GCC, with the Company contingently liable in the event of default by GCC. The amount remaining under contingent lease obligations totaled $7,227,000 as of December 11, 2012, for which the aggregate average annual lease payments approximate $650,000 in each of the next five years. The Company is also contingently liable for the performance of a certain ground lease that was assigned to a third party in 2000; the annual obligation of the lease approximates $48,000 through 2020.
Since there is no reason to believe that either of these third party assignees are likely to default, no provision has been made in the consolidated financial statements for amounts that would be payable by the Company. In addition, the Company generally has the right to re-assign the leases in the event of the third party’s default.
NOTE H — RELATED PARTY TRANSACTIONS

In a private transaction that occurred on August 30, 2012, the Company's treasury repurchased a total of 32,000 shares of the Company's common stock that were beneficially owned by the Chief Executive Officer either as the Trustee of four separate Trusts or as the Executor of the Estate of Blanche F. Maier (see below). The total cost of the 32,000 shares amounted to $1,034,000 ($759,000 was paid to the four Trusts for 23,500 shares and $275,000 was paid to the Estate for 8,500 shares).


25



ITEM 2. MANAGEMENT’S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS
SAFE HARBOR STATEMENT under the PRIVATE SECURITIES LITIGATION REFORM ACT of 1995
Forward-looking statements are contained in this Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A). Such statements may generally express management’s expectations with respect to its plans, or its assumptions and beliefs concerning future developments and their potential effect on the Company. There can be no assurances that such expectations will be met or that future developments will not conflict with management’s current beliefs and assumptions, which are inherently subject to risks and other uncertainties. Factors that could cause actual results and performance to differ materially from anticipated results that may be expressed or implied in forward-looking statements are included in, but not limited to, the discussion in "Risk Factors" found in this Form 10-Q under Part II, Item 1A. and as set forth in Part I, Item 1A. of the Company's Annual Report on Form 10-K for the fiscal year ended May 29, 2012.
Sentences that contain words such as “should,” “would,” “could,” “may,” “plan(s),” “anticipate(s),” “project(s),” “believe(s),” “will,” “expect(s),” “estimate(s),” “intend(s),” “continue(s),” “assumption(s),” “goal(s),” “target(s)” and similar words (or derivatives thereof) are generally used to distinguish “forward-looking statements” from historical or present facts.
All forward-looking information in this MD&A is provided by the Company pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of all risk factors. Except as may be required by law, the Company disclaims any obligation to update any of the forward-looking statements that may be contained in this MD&A.
This MD&A should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this Form 10-Q and in the Company's Annual Report on Form 10-K for the year ended May 29, 2012. The Company has no off-balance sheet arrangements other than operating leases that are entered from time to time in the ordinary course of business. The Company does not use special purpose entities.
CORPORATE OVERVIEW
Frisch’s Restaurants, Inc. and Subsidiaries (Company) is a regional company that operates full service family-style restaurants under the name "Frisch's Big Boy." As of December 11, 2012, 94 Frisch's Big Boy restaurants were owned and operated by the Company, located in various regions of Ohio, Kentucky and Indiana. The Company also licenses 25 Frisch's Big Boy restaurants to other operators who pay franchise and other fees to the Company.
The Company’s Second Quarter of Fiscal 2013 consists of the 12 weeks ended December 11, 2012. It compares with the 12 weeks ended December 13, 2011, which constituted the Second Quarter of Fiscal 2012. The First Half of Fiscal 2013 consists of the 28 week period that ended December 11, 2012, and compares with the 28 week period that ended December 13, 2011, which constituted the First Half of Fiscal 2012.
The first half of the Company's fiscal year normally accounts for a disproportionate share of annual revenue and net earnings because it contains 28 weeks, whereas the second half of the year normally contains only 24 weeks. The upcoming 12 week third quarter can particularly be a disproportionately smaller share of annual revenue and net earnings because it spans most of the winter season from mid December through early March. Winter storms can adversely affect results of operations, which are particularly vulnerable if severe winter weather should develop over a prolonged period.
References to Fiscal Year 2013 refer to the 52 week year that will end on May 28, 2013. References to Fiscal Year 2012 refer to the 52 week year that ended May 29, 2012.
At the beginning of Fiscal Year 2012, the Company operated a second business segment, which consisted of 35 grill buffet style "Golden Corral" restaurants that were licensed to the Company by Golden Corral Corporation (GCC). The Company closed six of the Golden Corral restaurants in August 2011 due to issues with under performance, which resulted in a pretax charge of $4,000,000 for impairment of long-lived assets that was recorded in the First Quarter of Fiscal 2012. In May 2012, the remaining 29 Golden Corrals were sold to GCC. Results for the Golden Corral segment for the Second Quarter and First Half of Fiscal 2012 are presented as discontinued operations.






26



The following table recaps the earnings or loss components of the Company's consolidated statements of earnings.
 
Second Quarter
 
First Half
 
2013
 
2012
 
2013
 
2012
 
(in thousands, except per share data)
 
(in thousands, except per share data)
Earnings from continuing operations before income taxes
$
3,062

 
$
2,688

 
$
4,470

 
$
3,286

Earnings from continuing operations
$
2,000

 
$
2,059

 
$
2,958

 
$
2,519

Diluted EPS from continuing operations
$
0.39

 
$
0.42

 
$
0.59

 
$
0.51

Earnings (loss) from discontinued operations, net of tax
$

 
$
729

 
$
(158
)
 
$
(2,005
)
Diluted EPS (loss) from discontinued operations
$

 
$
0.14

 
$
(0.03
)
 
$
(0.41
)
Net earnings
$
2,000

 
$
2,788

 
$
2,801

 
$
514

Diluted net EPS
$
0.39

 
$
0.56

 
$
0.56

 
$
0.10

 
 
 
 
 
 
 
 
Weighted average diluted shares outstanding
5,070

 
4,937

 
5,028

 
4,939

Factors having a notable effect on earnings from continuing operations before income taxes when comparing the Second Quarter of Fiscal 2013 with the Second Quarter of Fiscal 2012:
Consolidated restaurant sales were $48,523,000 in the Second Quarter of Fiscal 2013 versus $49,938,000 in the Second Quarter of Fiscal 2012. The decrease is due to the effect of the permanent closure of certain restaurants and a same store sales decrease of 1.7 percent.
Gross profit increased $156,000, or 2.7 percent, to $5,992,000 in the Second Quarter of Fiscal 2013 from $5,836,000 in the Second Quarter of Fiscal 2012.
As a percentage of sales:
-
Food and Paper Costs were 33.3 percent in the Second Quarter of Fiscal 2013, down from 33.6 percent in the Second Quarter of Fiscal 2012.
-
Payroll and Related Costs were 34.3 percent in the Second Quarter of Fiscal 2013, down from 34.7 percent in the Second Quarter of Fiscal 2012.
-
Other Operating Costs were 20.1 percent in the Second Quarter Fiscal 2013, up from 20.0 percent in the Second Quarter of Fiscal 2012.
Interest expense was $229,000 in the Second Quarter of Fiscal 2013 versus $351,000 in the Second Quarter of Fiscal 2012.
Factors having a notable effect on earnings from continuing operations before income taxes when comparing the First Half of Fiscal 2013 with the First Half of Fiscal 2012:
Consolidated restaurant sales were $109,148,000 in the First Half of Fiscal 2013 versus $111,299,000 in the First Half of Fiscal 2012. The decrease is due to the effect of the permanent closure of certain restaurants and a same store sales decrease of 0.8 percent.    
Gross profit increased $785,000, or 7.1 percent, to $11,767,000 in the First Half of Fiscal 2013 from $10,982,000 in the First Half of Fiscal 2012.
As a percentage of sales:
-
Food and Paper Costs were 33.4 percent in the First Half of Fiscal 2013, down from 33.8 percent in the First Half of Fiscal 2012.
-
Payroll and Related Costs were 34.9 percent in the First Half of Fiscal 2013, down from 35.3 percent in the First Half of Fiscal 2012.
-
Other Operating Costs were 20.9 percent in the First Half of Fiscal 2013, down from 21.1 percent in the First Half of Fiscal 2012.
Share based compensation costs were $327,000 in the First Half of Fiscal 2013 versus $684,000 in the First Half of Fiscal 2012.
Interest expense was $550,000 in the First Half of Fiscal 2013 versus $808,000 in the First Half of Fiscal 2012.

27



RESULTS of OPERATIONS
Except as where noted, the discussion of Results of Operations presented in this MD&A excludes the results from discontinued operations.
Sales
The Company’s sales are primarily generated through the operation of Frisch's Big Boy restaurants. Sales also include wholesale sales from the Company’s commissary to Frisch's Big Boy restaurants that are licensed to other operators and the sale of Frisch's signature brand tartar sauce to grocery stores. Same store sales comparisons are a key metric that management uses in the operation of the business. Same store sales are affected by changes in customer counts and menu price increases. Changes in sales also occur as new restaurants are opened and older restaurants are closed. Below is the detail of consolidated restaurant sales:
 
Second Quarter
 
First Half
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
 
(in thousands)
Frisch's Big Boy restaurants operated by the Company
$
46,076

 
$
47,443

 
$
103,504

 
$
105,608

Wholesale sales to licensees
2,216

 
2,235

 
5,110

 
5,143

Wholesale sales to groceries
231

 
260

 
534

 
548

Total sales
$
48,523

 
$
49,938

 
$
109,148

 
$
111,299

Frisch's Big Boy restaurant sales shown in the above table include a same store sales decrease of 1.7 percent in the Second Quarter of Fiscal 2013 (on a customer count decrease of 4.0 percent) and a decrease of 0.8 percent in the First Half of Fiscal 2013 (on a 3.2 percent decrease in customer counts). The same store sales comparison includes the effect of three menu price increases, implemented respectively in September 2011 (1.5 percent), February 2012 (1.2 percent) and September 2012 (0.9 percent). Another menu price increase will likely be implemented in February 2013.
The Company operated 94 Frisch's Big Boy restaurants as of December 11, 2012. The count of 94 includes the following changes since the beginning of Fiscal 2012 (June 2011), when 95 Frisch's Big Boy restaurants were in operation:
July 2011 — opened restaurant near Cincinnati, Ohio
October 2011 — opened restaurant in Highland Heights, Kentucky (Cincinnati market)
October 2011 — closed restaurant in Ft. Thomas, Kentucky (Cincinnati market)
December 2011 — closed restaurant in Columbus, Ohio
May 2012 — closed restaurant in Cincinnati, Ohio
May 2012 — closed restaurant in Elizabethtown, Kentucky (Louisville market)
August 2012 — opened restaurant near Cincinnati, Ohio
One more new Frisch's Big Boy restaurant is expected to be added in Fiscal Year 2013, which is currently under construction and scheduled to open in March 2013 (Dayton market).

















28



Gross Profit
The determination of gross profit is shown with operating percentages in the following table. The table is intended to supplement the cost of sales discussion that follows. Cost of sales is comprised of food and paper costs, payroll and related costs, and other operating costs.
 
Second Quarter
 
First Half
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Sales
100.0%
 
100.0%
 
100.0%
 
100.0%
Food and Paper
33.3%
 
33.6%
 
33.4%
 
33.8%
Payroll and Related
34.3%
 
34.7%
 
34.9%
 
35.3%
Other Operating Costs
20.1%
 
20.0%
 
20.9%
 
21.1%
Gross Profit
12.3%
 
11.7%
 
10.8%